The government is working with development partners to secure external support for the reconstruction effort—primarily through grants. But some borrowing will be inevitable.
Reconstruction costs are estimated to add up to around 40 percent of GDP, of which around half will be paid by the public sector. But the country’s prudence in the past means public debt is fairly low, and the government has room to borrow.
The main challenges facing the country are restoring the country’s productive capacity, and rebuilding the social and physical infrastructure, while protecting vulnerable groups. Once reconstruction is over, the government should start rebuilding fiscal buffers by mobilizing additional revenues, and strengthening spending discipline.
Cyclone affected two-thirds of population
Category five tropical Cyclone Pam ripped through Vanuatu in March with winds of up to 250 km per hour, killing eleven people, and inflicting severe damage. The impact was particularly heavy on central and southern provinces, including the capital city of Port Vila.
The cyclone, which affected two-thirds of the population, damaged or destroyed much of the housing stock, disrupted food and water supply, cut off electricity and communication, and forced many schools and medical facilities to close.
A forceful response—helped by swift and generous assistance from development partners—averted a humanitarian crisis, but the country faces considerable challenges.
Economy expected to contract by 2 percent
The value of damaged property, and lost output is estimated at 61 percent of Vanuatu’s GDP. Even though reconstruction activity will partially offset the impact of Cyclone Pam on output, the economy is expected to contract by 2 percent this year.
The two sectors most severely affected by the cyclone—tourism and agriculture—are the main generators of export earnings. With several major hotels closed, and many crops damaged, Vanuatu’s exports of goods and services can be expected to decline substantially this year, even as domestic shortages and reconstruction spending boost imports.
As a result, the trade balance is likely to deteriorate substantially, even if temporarily, putting pressure on Vanuatu’s international reserves even though they...