Vanuatu - Economy

Economy

The four mainstays of the economy are agriculture, tourism, offshore financial services, and raising cattle. There is substantial fishing activity, although this industry does not bring in much foreign exchange. Exports include copra, kava, beef, cocoa, and timber, and imports include machinery and equipment, foodstuffs, and fuels. In contrast, mining activity is unsubstantial. While manganese mining halted in 1978, there was an agreement in 2006 to export manganese already mined but not yet exported. The country has no known petroleum deposits. A small light-industry sector caters to the local market. Tax revenues come mainly from import duties and a 12.5 percent VAT on goods and services. Economic development is hindered by dependence on relatively few commodity exports, vulnerability to natural disasters, and long distances between constituent islands and from main markets.

Agriculture is used for consumption as well as for export. It provides a living for 65% of the population. In particular, production of copra and kava create substantial revenue. Many farmers have been abandoning cultivation of food crops, and use earnings from kava cultivation to buy food. Kava has also been used in ceremonial exchanges between clans and villages. Cocoa is also grown for foreign exchange. In 2007, the number of households engaged in fishing was 15,758, mainly for consumption (99%), and the average number of weekly fishing trips was 3. The tropical climate enables growing of a wide range of fruits and vegetables and spices, including banana, garlic, cabbage, peanuts, pineapples, sugarcane, taro, yams, watermelons, leaf spices, carrots, radishes, eggplants, vanilla (both green and cured), pepper, cucumber, and many others. In 2007, the value (in terms of millions of vatu – the official currency of Vanuatu), for agricultural products, was estimated for different products: kava (341 million vatu), copra (195), cattle (135), crop gardens (93), cocoa (59), forestry (56), fishing (24), coffee (12).

Tourism brings in much-needed foreign exchange. Vanuatu is widely recognized as one of the premier vacation destinations for scuba divers wishing to explore coral reefs of the South Pacific region. Tourism increased 17% from 2007 to 2008 to reach 196,134 arrivals, according to one estimate. The 2008 total is a sharp increase from 2000, in which there were only 57,000 visitors (of these, 37,000 were from Australia, 8,000 from New Zealand, 6,000 from New Caledonia, 3,000 from Europe, 1,000 from North America, 1,000 from Japan. (Note: figures rounded to the nearest thousand). Tourism has been promoted, in part, by Vanuatu being the site of several reality-TV shows. The ninth season of the reality TV series Survivor was filmed on Vanuatu, entitled Survivor: Vanuatu—Islands of Fire. Two years later, Australia's Celebrity Survivor was filmed at the same location used by the U.S. version. In mid-2002, the government stepped up efforts to boost tourism.

Financial services are an important part of the economy. Vanuatu is a tax haven that until 2008 did not release account information to other governments or law-enforcement agencies. International pressure, mainly from Australia, influenced the Vanuatu government to begin adhering to international norms to improve transparency. In Vanuatu, there is no income tax, withholding tax, capital gains tax, inheritance tax, or exchange control. Many international ship-management companies choose to flag their ships under the Vanuatu flag, because of the tax benefits and favourable labour laws (Vanuatu is a full member of the International Maritime Organization and applies its international conventions). Vanuatu is recognized as a "flag of convenience" country. Several file-sharing groups, such as the providers of the KaZaA network of Sharman Networks and the developers of WinMX, have chosen to incorporate in Vanuatu to avoid regulation and legal challenges. In response to foreign concerns the government has promised to tighten regulation of its offshore financial centre. Vanuatu receives foreign aid mainly from Australia and New Zealand.

Raising cattle leads to beef production for export. One estimate in 2007 for the total value of cattle heads sold was 135 million vatu; cattle were first introduced into the area from Australia by British planter James Paddon. On average, each household has 5 pigs and 16 chickens, and while cattle are the "most important livestock", pigs and chickens are important for subsistence agriculture as well as playing a significant role in ceremonies and customs (especially pigs). There are 30 commercial farms (sole proprietorships (37%), partnerships (23%), corporations (17%), with revenues of 533 million vatu and expenses of 329 million vatu in 2007.

Earthquakes can negatively affect economic activity on the island nation. A severe earthquake in November 1999, followed by a tsunami, caused extensive damage to the northern island of Pentecost, leaving thousands homeless. Another powerful earthquake in January 2002 caused extensive damage in the capital, Port Vila, and surrounding areas, and was also followed by a tsunami. Another earthquake of 7.2 struck on 2 August 2007.

The Vanuatu National Statistics Office (VNSO) released their 2007 agricultural census in 2008. According to the study, agricultural exports make up about three-quarters (73%) of all exports; 80% of the population lives in rural areas where "agriculture is the main source of their livelihood"; and of these households, almost all (99%) engaged in agriculture, fisheries and forestry. Total annual household income was 1,803 millions of vatu. Of this income, agriculture grown for their own household use was valued at 683 million vatu, agriculture for sale at 561, gifts received at 38, handicrafts at 33, fisheries (for sale) at 18. The largest expenditure by households was food 300 million vatu, followed by household appliances and other necessities (79 million vatu), transportation (59), education and services (56), housing (50), alcohol and tobacco (39), clothing and footwear (17). Exports were valued at 3,038 million vatu, and included copra (485), kava (442), cocoa (221), beef (fresh and chilled) (180), timber (80), fish (live fish, aquarium, shell, button) (28). Total imports of 20,472 million vatu included industrial materials (4,261), food and drink (3,984), machinery (3,087), consumer goods (2,767), transport equipment (2,125), fuels and lubricants (187) and other imports (4,060). There are substantial numbers of crop gardens – 97,888 in 2007 – many on flat land (62%), slightly hilly slope (31%), and even on steep slopes (7%); there were 33,570 households with at least one crop garden, and of these, 10.788 households sold some of these crops over a twelve month period.

The economy grew about 6% in the early 2000s. This is higher than in the 1990s, when GDP rose less than 3%, on average.

One report from the Manila-based Asian Development Bank about Vanuatu's economy gave mixed reviews. It noted the economy was "expanding", noting that the economy grew at an impressive 5.9% rate from 2003 to 2007, and lauded "positive signals regarding reform initiatives from the government in some areas" but described certain binding constraints such as "poor infrastructure services". Since a private monopoly generates power, "electricity costs are among the highest in the Pacific" among developing countries. The report also cited "weak governance and intrusive interventions by the State" which reduced productivity.

Vanuatu was ranked the 173rd safest investment destination in the world in the March 2011 Euromoney Country Risk rankings.