VANUATU SERVICES SECTOR ANALYSIS Vanuatu Snapshot Capital: Port Vila Population: 245,619 (WB 2011) Currency: Vanuatu Vatu GDP (constant 2000 US$): 367,897,412.7 (WB 2011) GDP per capita: $3866.6 at PPP (WB 2011) GDP Growth: 1.4% (WB 2011) External Debt: 25.3% of GNI (WB 2011) Ease of Doing Business: 80/185 (WB 2012) Corruption Index: 73/176 (TI, 2012) 1. Overview of the Vanuatu Economy Th i s S o ut h P aci fi c i sl an d ec on om y i s b a s ed on t h e p ri ma r y se c t or s a gri c ul t ur e , f or est r y a n d f i sh i n g , w h i c h p ro vi d e a l i vi n g f or t h e ma j ori t y of V a n uat u 's p op ul at i on . Of fs h or e fin an cia l s er vi c es an d t our is m ar e ot h e r mai n st ay s of t h e ec on om y . Th e de vel op men t of V an u at u i s c on st r ai n ed b y i t s rel a t i v el y n a rr ow exp o rt b a s e . Ser vi c es , i n p a rt i c ul a r t ou ri sm , a c c o un t f or 4 0 % of t h e G DP a n d re p re s en t t h e m o st i mp ort an t s o u rc e o f i n c o me , t og et h e r w i t h r eal es t at e an d wh ol es al e a nd r et ail tr a de . M uc h o f t h e gr o w t h i n r ec en t y ear s h a s b een d ri v en b y t h e s e se c t o rs . V a n ua t u h ea vi l y i n ve st s i n s o ci al se rvi c e s , e sp ec i al l y ed ucat i on . M i n eral d ep o si t s ar e n egl i gi b l e . A s ma l l l i gh t i n d u st r y s ec t o r c a t ers t o t h e l oc a l m a rk et . Tax r ev en ue s c om e mai n l y fr o m i mp ort d ut i e s . E c on omi c de v el o p m en t i s al s o h i n der ed b y t h e v ul n er ab i l i t y t o n atur al d is as t er s , an d l on g di st an ce s f ro m mai n mar k et s an d b et w een c on st i t u en t i sl an ds . I n re sp on s e t o f orei gn c on ce r n s , t h e g ov er n m en t h a s p ro mi se d t o t i g h t en reg ul at i on o f i t s of f sh or e fi n a n c i a l c en t er . I n mi d- 20 02 , t h e go ve rn m en t st ep p e d up e ff ort s t o b o o st t o u ri s m t h r o u gh i mp r o ved a i r c on n ec t i on s , re so rt d ev el op m en t , an d c r ui s e sh i p fa c i l i t i es . Au s t ra l i a a n d N ew Zea l a n d a r e t h e mai n s up p l i er s of t o u ri st s a n d f o rei gn ai d . Th e t r en d s o f GD P a n d G DP p er c ap i t a f or t h e l a st 11 ye ar s are sh ow n i n Fi g ur e 1 a n d 2: Figur e 1: Van uat u G D P Tr end 2 0 0 0- 2 0 1 1

Starting from 2002 Vanuatu GDP has been increasing reaching a 7.3 annual % growth in 2006, to stabilize in the last years at a 1% annual growth.

Source: World Bank, Databank

Fi gur e 2 : V anu atu G D P per cap ita Tr en d 2 0 0 0- 2 0 1 1 In the last two years for which there are data available (2010, 2011) the trend of GDP per capita has been decreasing, respectively -1.5% in 2010 and -1% in 2011. In most of the Pacific Islands one of the main determinants of economic fluctuations are natural disasters such as hearth quake and tsunami and the following infrastructure spending funded by development partners Source: World Bank, Databank

I f t h e re c en t ec on o mi c p er f or man c e of V an uat u h a sn ’t b e en i mp r es si ve , f o rec a st s p re di ct a de c i si ve i n c re as e i n t h e GD P i n 20 13 a n d 2 01 4 ; se e fi g ure 3 w h er e t h e ec on omi c p erf o rm an ce o f V an u at u i s c o mp ar ed t o t h e on e o f ot h er Paci fi c I sl a n d s . Th e mai n re as on f or t h e f or ec a st ed ec on omi c e xp a n si on i s t h e in cr e as e in to ur is t ar r i vals a nd for ei gn dir e ct i n ves tm en ts , a s i t w i l l b e p o i n t o ut i n t h e n ext s ect i on s . S om e of t h e gr ow t h h as b e en sp e c ul a t i v e i n n a t u re , t h e gr ow t h i n re a l e st a t e a n d t o a c ert ai n ext en t l an d sp e c ul at i o n i s a r es ul t of si mi l a r p ra c t i c es a n d a l s o l a rg e p ri ce di ff er en t i al s w i t h n ei gh b o uri n g c o un t ri e s s uch as Au st ral i a an d New Zeal an d . Figur e 3: G D P gr o wth in t he Pa ci fi c Is lan d s

Source: Asian Development Bank

V an u a t u st i l l p art si t u at i on a c c o un t

1

w a s a dmi t t ed t o t h e gr o up of L eas t D e ve lo pe d C ou ntr i es i n 19 85 . T od a y i t i s o f t h i s gr o u p al t h o ug h i t s p e r- c a p i t a G DP exc ee ds t h e LD C t h r e sh ol d s . Th i s i s d ue t o t h e ad j ust m en t b a s ed on t h e ‘ v ul n era b i l i t y i n dex ’ 1, w h i c h t a k es i n t o t h e v ul n era b i l i t y o f V an u at u ’s e c on o m y t o n a t ur a l di sa st er s .

th

The country strategy and National Indicative Programme: Vanuatu, 10 EDF Programme of the European Commission (20082013)

2 . R ol e o f S er vi c es i n Van uat u E co no m y The evolution of the weight of the Services Sector in terms of value added (% GDP) in Vanuatu economy, with respect to the primary and secondary sectors, is shown in Figure 3. The trends depicted in Figure 3 are not surprising because as already mentioned the economic growth of Vanuatu is mainly driven by the Services Sector. The Services Sector is dominant in terms of value-added (see Figure 4) but its growth has been very unstable (see Figure 5) and in terms of labour it involves only the 30% of the population; the 60% of Vanuatu population still works agriculture. It would be important to understand how the Services Sector can become more labour intensive so that its growth can have a bigger impact on local population and on poverty reduction. Fig ur e 3 : Va nua tu S er vi ces Se ct or e v ol ut ion , 2 0 0 0- 2 0 1 1

Source: World Bank, Databank

Figure 4: Vanuatu Economy Breakdown, 2011

Source: World Bank, Databank

Figure 5: Services Sector % Annual Growth

Source: World Bank, Databank

Th e S er vi c es E xp ort B rea kd ow n (F i g ur e 6 ) c a n h el p un de rst a n d w h i c h a re t h e Se r vi ce s mo re r el e va n t t o V a n uat u ec on o m y an d w h ere t h e i n ve st m en t s s h o ul d b e di r ect e d . Figure 6: Vanuatu Services Sector Breakdown, 2011

Source: Trade Map, ITC

T o uri sm c o un t s f o r al m ost 80 % of V an uat u S er vi ce s E xp or t ; as sh ow n i n Fi g u re 7 Au st ral i a i s t h e l arg e st p r o vi d er o f vi si t or s . Figur e 7: T our is ts ’ or i gin c ou ntr i es

Source: Asian Development Bank

As already highlighted tourism is one of the most promising economic sectors for Vanuatu’s future development and it is mentioned as a priority sector in the “Priority and Action Agenda 2006-2015”. It offers great potential as a source of foreign exchange as well as creating employment and fostering development of the outer islands. Growth in the tourism sector is now underpinning growth in the economy as it accounts for around 40% of GDP. The decision in late 2003 to adopt an “open sky policy” encouraged the introduction of Pacific Blue Company into the Vanuatu market in late 2004. This has boosted visitor numbers and provided healthy competition to Air Vanuatu. Tourism still faces some serious constraints. These include: • The inadequacy of existing accommodation in terms of quality, size of units and limited distribution around the country including a lack of boutique resorts to attract high income tourists; • Lack of adequate infrastructure for international air passengers and cruise ship passengers as well as poor roads on the main resort islands and air services between the islands; • International and domestic air services are underdeveloped and unnecessarily expensive; • The land on beachfronts for building tourist facilities is insecure; • Lack of effective and targeted marketing and promotion of Vanuatu and its unique tourist attractions particularly in niche markets such as adventure, diving, game fishing, nature tourism and other special activities; • Lack of community awareness of tourism developments and the benefits that can accrue to the local community; • Absence of a systematic training program for tourism personnel at all levels 2.

2

Priorities and Action Agenda 2006-2015 : An educated, healthy and wealthy Vanuatu

3 . Th e r ol e o f F or e ign D ir e ct In v es t me nt Figure 7: PNG FDI Trend, 2000-2011

FDI have been increasing in the last years reaching the 7.6% of GDP in 2001.

Source: World Bank, Databank

Th e i n cr ea si n g t r en d of F DI c an b e exp l a i n ed w i t h a v a ri et y o f i n st i t ut i on a l fa c t or s s uch a s V an u a t u ’s p a st ma c r oe c on om ic s tab ili ty a n d a l s o s om e o f t h e p ol i c i e s i mp l em e n t ed i n t h e l a st f ew y ea r s (o p e n ski e s p ol i cy , m o re op en t r ade en vi r on m en t ) . Re c en t dev el op men t a n d r evi ew s of t h e l a n d t en u re p ol i c i e s al s o h el p e d at t ract i n g fo rei gn i n ve st o rs . Ot h er i m p ort an t p ol i c y i n i t i a t i ves a t t ra c t i n g i n v est m en t i n c l ud e t h e rec en t a d op t i on of a l e gi sl at i o n c ov eri n g a l l t h e ma i n OE C D F i n a n c i a l Ac t i on Ta s k F or ce rec o mm en dat i on s i n c l u di n g t h e s et t i n g u p o f a Fi n a n c i a l I n t el l i gen c e Un i t . St i l l , a c c or di n g t o t h e I n de x of E c on o mi c Fr ee do m (s ee F i g ur e 8 ) V an u at u i s c on si d ere d as a m o st l y un- fr ee e c on om y , b ut p e rf or mi n g b et t er t h a n n ei g h b o u ri n g ec on o m y s uc h a s Pap ua N ew G ui n e a an d S ol o mo n I sl an d s . P ub l i c se ct o r i s ch ara ct eri ze d b y l ow p ro d uct i vi t y , i n v est m en t ap p r o val p r oce s s i s n on - t ran sp a ren t , admi n i st rat i ve del a y s a n d un c ert ai n t i e s re mai n . Figur e 8: De gr e e o f V anua tu E c on om ic Fr e ed om

Source: 2013 Index of Economic Freedom

4 . Tr ad e in Ser v ic es and Tr a din g P ar tn er s The share of Trade in Services for Vanuatu is far above the average for the LDCs (around 30%), in 2011: 56.7%. The value of Vanuatu Exports in Commercial Services with the world is 0% of the total world Exports as Figure 10 shows. Even if negligible in value, Figure 9 shows how the Exports of Commercial Services exceed the Imports for all the three years considered. As already mentioned tourism is counting for 80% of Services Export. Figur e 9: Van uat u Tr a de in C o mm er cia l S e r vi c es w ith t he w or ld 1

Figur e 1 0: Van uat u Tr ade i n Co m mer ci al S er vi ces wi th th e wor l d 2

Source: EU Statistics

M a i n tr a de p ar tn er s f or V an uat u a re t h e f ol l ow i n g : E xp o rt s : Thailand 57.3%, Japan 21.8% (CI A World Factbook 2011) I mp ort s : China 26.7%, Singapore 21.2%, Australia 13.6%, NZ 7.2%, Fiji 6.7%, Japan 5.4% (CI A World Factbook 2011)

5 . R egi on al I nt egr a ti on Vanuatu ratified the Pacific Island Countries Trade Agreement (PICTA) in July 2005. Vanuatu is also a member of the Melanesian Spearhead Group (MSG) whose Free Trade Agreement entered a second phase, involving tariff cuts for key traded products. Work has begun to extend both the MSG and PICTA to cover services, which has the potential to increase competition and investment in important sectors. Two other major trade agreements are the Economic Partnership Agreements (EPA) with the EU and the Pacific Agreement on Closer Economic Relations (PACER), an umbrella agreement between members of the Pacific Islands Forum with Australia and New Zealand which provides a framework for the future development of trade cooperation.