Vanuatu: 2025 Article IV Consultation-Press Release; and Staff Report

The 2025 Article IV Consultation discusses that Vanuatu’s growth is expected to recover to 1.7 percent in 2025 and 2.8 percent in 2026 following recent shocks, with inflation in its target band and foreign reserves supported by external aid, remittances, and a recovery in tourism. The outlook, however, is subject to significant downside risks and structural challenges, reflecting heightened global uncertainties and domestic vulnerabilities. The financial sector remains stable, but vulnerabilities persist, including elevated non-performing loans. Uncertainty around the outlook remains high and the balance of risks is tilted to the downside. With the full impact yet to be determined, the post-earthquake recovery path and tourism sector prospects remain highly uncertain. Policies should focus on addressing immediate risks to growth and stability, followed by a renewed commitment to rebuild buffers and tackle structural issues through policy reforms. Stronger safeguards are needed to preserve financial stability. High non-performing loans, combined with low provisioning and a strong sovereign-bank nexus, raise financial stability risks. Strengthening supervisory capacity, enhancing loan recovery frameworks, and implementing a modern bank resolution framework will be critical to bolster resilience.