IMF economist Chris Papageorgiou on Vanuatu’s economy growth, income tax and what Vanuatu could learn from Mauritius and Maldives
Chris Papageorgiou, Division Chief in the Research Department of the International Monetary Fund, who led the IMF mission visit to Port Vila earlier in 2018, in this exclusive interview for Vila Times explains why Vanuatu needs to diversify its economy, which countries can be used as role models to learn from, and talks about the introduction of income tax and outlook for GDP growth.
– Hi Chris! In the new IMF’s report on Vanuatu you pointed out that “diversification of economic activity is required” for Vanuatu. Do you see industries that could be developed in Vanuatu, other than tourism and agriculture, realistically?
Diversification of economic activities should be a priority for Vanuatu, given the low and volatile growth facing the country. Diversification within tourism entails strategically segmenting popular tourist destinations for example marketing Port Vila and Espiritu Santo as separate from one another.
Diversification outside tourism entails a greater focus on agricultural activities, for example scaling up the production of beef, which would provide an additional defense against external shocks. Strengthening linkages of tourism with agriculture can foster inclusive growth. Gradually substituting select food imports with domestic produce and promoting agri-tourism would create incentives for farmers, especially those in the outer islands, to move away from subsistence agriculture.
‘Vanuatu can learn from Maldives how to sustain fish exports’
– In the global context, which economies could be “role models” for Vanuatu?
Vanuatu is different from small states in the Caribbean or in Africa due to its geographical remoteness. Having said that, there are different lessons that it can draw from different countries. Though Fiji being a bigger country can reap higher economies of scale, its success in developing a vibrant tourism sector can be emulated to some extent. Vanuatu also needs to focus on making economic activity broad-based. In this context, the experience of Mauritius in diversifying out of sugar production, and putting in place strong institutions is often cited. Like Vanuatu, fish constitute a major export for Maldives. Given that Vanuatu is set to graduate from the status of a Least Developed Country in 2020, it can learn from Maldives how fish exports were sustained once preferential market access was withdrawn upon graduation.
‘Vanuatu government’s revenues remain low, compared to its peers in the region’
– As you probably know, the introduction of income tax in Vanuatu is seriously considered. Since this is quite a controversial move, in your opinion, what would be the effect of the introduction of income tax in a country like Vanuatu, at this stage of economic development?
The introduction of income tax needs to be viewed as part of the broader effort to reform tax policy in the Pacific Islands. Vanuatu government’s revenues remain low, compared to its peers in the region. A report on tax reforms prepared by Sapere Research Group highlights that Vanuatu is among the last few countries in the Pacific to not have business and personal income tax in place. Given the increasing risk of natural disasters stemming from climate change, additional revenue is required to invest in resilient infrastructure, and spend on health and education to ensure inclusive growth. Additionally, the increase in VAT from 12.5% to 15% which has contributed to a rise in inflation, could likely be reversed once personal and corporate tax come into effect. Greater reliance on direct taxes as opposed to indirect taxes such as VAT is understood to make the tax system more equitable.
‘Long-term, Vanuatu’s real GDP growth is expected to decline to around 3 percent due to the completion of major infrastructure projects’
– Real GDP growth is projected to be around 4 percent 2018 with the same figure last year. Would you give some rough estimate for the next several years?
GDP growth in 2018 is expected to be driven by recovery in tourism and agriculture combined with scaling-up of infrastructure. Over the long term, real GDP growth is expected to decline to around 3 percent mainly due to the completion of major infrastructure projects. However, these projects may result in positive spillovers to the overall economy, including the tourism and export sectors, thereby boosting growth.
– Vanuatu currently is in the international “financial gray list.” What are the main reasons for that, and, in your opinion, is it likely for Vanuatu to be removed from that list soon?
Vanuatu was included in the Financial Action Task Force’s (FATF) gray list in February 2016 due to shortcomings regarding anti-money laundering and countering the financing of terrorism (AML/CFT), which has caused some difficulties in cross-border payments and remittances. The recent experience of being included in the gray list, along with the strengthening of international regulation regarding AML/CFT increased the cost of the offshore financial center. While Vanuatu authorities should be commended for taking necessary steps towards improving its AML/CFT regime by the enactment of several key legislations, the important task is to continue to address the deficiencies in its AML/CFT framework to facilitate its exit from the FATF’s gray list.
‘Vanuatu has sizable potential for economic growth given – low GDP per capita, high infrastructure needs, and untapped potential in the agriculture sector’
– Among Pacific island countries, which one do you think has the potential for the most significant economic growth and why?
At the Fund, we do not create rankings amongst member countries. As far as Vanuatu is concerned, it has sizable potential for economic growth given – low GDP per capita, high infrastructure needs, and untapped potential in the agriculture sector.
‘The returns from long-term projects could be high’
– From your point of view, would it be considered a bit short-sided to invest into the long-term expensive business-projects in the Pacific at this point (of economic and social development)?
Given the substantial infrastructure gap, the returns from long-term projects could be high, and boost growth over the medium term. However, projects should be selected carefully by taking into account the country’s absorptive capacity, ability to repay, and the expected return from each project. For the economy as a whole, accumulation of public debt must be sustainable over the medium term.