Vanuatu

Years

Targets and attainment

Classification

1981-2017

Vanuatu becomes independent July 1980 after decades of Anglo-French colonial condominium; small very open economy with limited resources, exposed to periodic cyclones; central bank set up late 1980, existing New Hebrides franc renamed vatu January 1981, bank deposits redenominated at par, vatu notes issued 1982 and coins (more slowly) from 1983, vatu is sole legal tender from April 1983; September 1981 vatu linked to SDR in place of French franc; limited banking sector, mainly foreign- or state-owned;  Finance Centre (secrecy jurisdiction) from 1970s; central bank has authority to implement various monetary instruments but limited expertise, initially sets lending rate ceilings and credit guidelines but no other monetary instruments, monetary expansion dominated by balance of payments; small revaluation vs SDR 1984, devaluations 1985 and twice in 1986, former aimed more at controlling imported inflation, latter more at keeping competitiveness (especially vs Australia); central bank takes over cheque-clearing 1985, becomes banker (but not lender) to government and holder of forex reserves 1986; credit guidelines remain but not enforced from mid-1980s; periodic problem of large fiscal deficits funded by commercial banks, but monetary-fiscal coordination is mostly sufficient to avoid large forex pressures; 1988 peg shifted to undisclosed transactions-weighted (trade and tourism receipts) basket to reduce speculative pressures; reserve requirements introduced, and central bank discount window; financial supervision remains weak; 1996-8 political tensions, economic instability and falling reserves; early 1998 government allows withdrawals from pension savings fund which lead to sharp rise in liquidity; March 1998 devaluation announced by central bank but revoked by government; wide-ranging structural reform strategy then adopted, including improvements in supervision and recapitalisation of state-owned financial institutions, reserve requirement replaced by higher prescribed reserve asset requirement (including holdings of government bonds); May 1998 central bank lending rates raised to head off forex speculation, adjustment to basket weights; 1999 new central bank standing facilities and return to reserve requirement; monetary policy remains focused on price and external stability, but becomes more active and partly indirect (primary auctions of central bank notes to absorb excess liquidity), although external regime, shallowness of financial markets and limited bancarisation mean transmission remains weak; regular central bank monetary policy statements from 2003; statistical database slowly improved and adequate from early 2000s

augmented exchange rate fix AERF