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ADB Loan to Vanuatu for Comprehensive Reform Program

The Asian Development Bank today approved a US$20 million concessional loan to Vanuatu to support a Comprehensive Reform Program which will address key governance, public sector as well as financial and economic reform issues.

In addition, the ADB has agreed to provide US$1.2 million as grant in technical assistance to strengthen the central government agencies that will implement the reform program.

"The CRP is a major, national-level initiative which has bipartisan political, and broad-based community support," says John Samy, the ADB's Senior Programs Officer/Economist who has been working on the project. Under the CRP, major legislative, policy, institutional and structural reforms are being effected to restore stability and confidence, and to revitalize the economy. "The reforms aim to address good governance issues and the root problems contributing to the poor performance of the economy in Vanuatu," Mr. Samy said.

Although Vanuatu has been hit less severely by the Asian financial crisis than some other Pacific island economies, confidence had been seriously eroded by structural weaknesses, low private investment, an unstable political environment and an inefficient public administration. A downturn in tourism, a steep fall in the price of copra and a sharp rise in public debt following heavy borrowing to meet withdrawals from the Vanuatu National Provident Fund by nervous investors, has brought the country to the brink of a fiscal crisis.

A key element of the governance and public sector reforms is the enactment of new legislation to redefine and separate the boundaries between the political leadership and the public sector. Other important reforms include establishing a more transparent and accountable financial management, and regulatory regime; and creating a smaller and more efficient civil service.

In restructuring the economy, the program seeks to create a broader tax base with a lower and more uniform tariff structure, more spending on social programs, especially health and education, and further opening up of the economy to attract direct foreign investment. Vanuatu is moving towards private sector-led growth with the aim of expanding output faster than population growth and of sharing the benefits of growth more equitably among the community.

The macroeconomic reform plan under the CRP draws on the analysis provided in a comprehensive report on the Vanuatu economy which the ADB completed in early 1997. "In several other Pacific island economies, government's have adopted difficult reform measures in the wake of serious fiscal and economic crisis. These countries were left with little flexibility. In Vanuatu, however, the CRP was prepared, by the middle of 1997, before the worst struck. It was intended to be a pre-emptive measure, although the country's fiscal situation has deteriorated in recent months," says the ADB's Mr. Samy.

The reform program was formulated with the involvement and participation of all sectors of the community. External donors and agencies, notably Australia, France, New Zealand, United Kingdom, UNDP, the ESCAP Pacific Operations Centre, and the European Community have been strongly supporting the government's CRP initiative. The ADB, at the request of the government, has been undertaking donor coordination for the CRP.

The loan will come from the ADB's Special Funds resources which means it is interest-free and carries a maturity of 40 years, including a grace period of 10 years, with a service charge of 1 percent per annum.

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