VANUATU EXPERIENCED RECESSION IN '99: ADB REPORT

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By Winston Tarere

PORT VILA, Vanuatu (May 19, 2000 - Trading Post/PINA Nius Online)---As most of the Pacific developing member countries experienced growth in their economy, Vanuatu's economy went into recession last year, the annual Asian Development Bank (ADB) Outlook for 2000 said.

A drop in exports and natural disasters that affected the country's agricultural sector and the tourism industry caused the economic setback.

Real GDP (the economic growth indicator) fell from 0.2 per cent in 1998 to minus 2 per cent, despite a 7.6 per cent growth in industry sector production from a substantial increase in aid-funded construction.

Foreign exchange reserve was low, although it has picked up from 3.5 months in April 1998 to 6.5 months at the end of last year -- with no balance of payment pressure evident.

"It is important that Vanuatu builds up it foreign reserve to prevent any crisis. A low reserve makes a country lose its credibility with foreign investors looking to invest and countries looking at selling goods to the country.

"What the country must do now is to export more agricultural products, attract more tourists, attract more foreign investment into the country and ensure stability in the country in order to improve," said Mr. Kim, a representative of the Asian Development Bank.

Low foreign reserve and economic growth were caused by a decline in agricultural export. Service sector output, along with stagnation in tourism receipts in 1999, inflation, and growth in domestic credit were cited as major impediments to economic growth.

"Although a negative growth of GDP was expected for 1998, an increase of 0.2 per cent was mainly due to a surge in kava and copra exports," said Mr. Kim.

Agricultural export declined by 9.3 percent, with production slowed by Cyclone Dani in February of last year, which destroyed agricultural products, infrastructure and farmland.

Fourth quarter data for total 1999 exports, released by the Vanuatu Department of Statistics, show declines of 48 percent and 61percent, compared to the third quarter of 1999 and fourth quarter of 1998 respectively.

This decrease was mainly attributed to decreases in individual agricultural exports: receipts from copra exports show a decline of 73 percent; a decline of 65 percent in cocoa exports; a decline of 83 percent in timber exports; and a decline of 88 percent in kava exports, compared to fourth quarter readings for 1998.

However, the ADB's outlook says that revenue from beef and timber exports rose as export volumes increased.

Tourism was also a major factor in the country's recession. The grounding of Air Vanuatu's Boeing 737 due to a hailstorm in Sydney for more than six weeks was significantly responsible for the low number of visitor arrivals during the first half of 1999.

The crash of Vanair's Twin Otter, which killed seven people including the pilot, damaged Vanuatu's image, while competition increased from other tourist destinations such as Fiji, Tahiti and New Caledonia.

However, the frequency of flights from Australia increased in comparison with 1998, and the number of visitors began to climb in the latter half of the year.

Import expenditure dropped from the high level of 1998, as tourism and the overall level of activity fell.

The performance of the Vatu (national currency) against the U.S. dollar saw an appreciation of 0.5 percent through 1999, but it depreciated almost 6 percent against the Australian dollar, as Vanuatu's inflation rate was nearly the same as Australia's.

Restoring investor confidence is crucial for Vanuatu's economic recovery. The amendment of the Foreign Investment Act in April last year made it less restrictive for foreign investment.

However, a sudden change of government in November introduced uncertainty into the policy environment -- with the new Prime Minister indicating his intentions to review the roles of previous administrations and external funding agencies.

While launching the outlook, regional representative of the South Pacific Regional Mission of the ADB, Jeffrey Stubbs, concluded that developing member countries of the ADB need to improve on four policy priorities:

- Openness and market orientation: Further opening up the economies is needed to enable them to exploit new economic possibilities in the international economy. However, as recent experience has demonstrated, the strategy of openness and market discipline has to be supported by prudent macroeconomic policies. Maintaining stable and manageable levels of debt, inflation and exchange rates is crucial for creating an environment conducive to growth.

- Human resources and physical infrastructure: Investment in human resource, development, particularly education, healthcare and nutrition, is essential in the fight against poverty. Investment in physical infrastructure is also important to raise productivity of labor.

- Good governance: Good governance needs to be introduced to ensure more efficient and equitable public expenditure management. Good governance also leads to efficient decentralization and increased local management of public resources.

- Strengthening social protection: Social safety nets need to be more effective. The recent financial crisis has dramatically highlighted the inadequacies of current arrangements.

Pacific Islands News Association (PINA) Website: http://www.pinanius.org 

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