Vanuatu daily news digest | 2 December 2014

The Budget sitting of Parliament is over and the courts have ruled the suspended Members of the Opposition return to Parliament. The Opposition withdrew its motion against the Natuman Government.

More detail will be given tomorrow.

For the information of readers, here is the Budget Speech …

Budget Speech

Hon. Maki S. Simelum, Minister for Finance & Economic

Management

24 November 2014 Port Vila, Vanuatu

2st Ordinary Session of Parliament (24 November 2014 – 2 December 2014)

Honourable Speaker of Parliament

Honourable Prime Minister

Honourable Deputy Prime Minister

Honourable Leader of Opposition

Fellow Ministers

Members of Parliament

People of Vanuatu

MR. SPEAKER, as Minister of Finance and Economic Management it is

my privilege and honour to present to the House the Government’s

Budget for 2015. MR SPEAKER, despite going through half a decade of

economic difficulties, the region including Vanuatu is experiencing

slight economic growth. The Budget which I present before you today

continues to reaffirm the Government’s commitment to an ‘educated,

healthy and wealthy Vanuatu’

MR SPEAKER before going through the budget proper, I wish to

inform this honourable house that in 2013, we have managed to incur a

budget surplus of approximately VT 390 Million, after 3 consecutive

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years of budget deficit. These surpluses were due to improved

compliance, and tight expenditure control measures, imposed by the

Ministry of Finance and Economic Management. MR. SPEAKER, this

surplus is likely to continue into 2014. Suppose all ministries do adhere

to all the Expenditure control measures recommended by the Ministry of

finance and Economic management in the recent financial circular, then

we will expect another VT 590 million worth of surplus by year end.

The cancellation of major expenditure activities such as the ACP EU

meeting will also contribute to this surplus as well as providing that

fiscal space for the government to meet some of its financial obligations.

Global Economic Outlook

MR. SPEAKER the Vanuatu economy continues to recover, although at

a slower rate than originally anticipated, due to a general slowed down

in global economic recovery. Despite signs of economic improvement,

growth in global output has been disappointing following severe weather

conditions, financial market turbulences and political conflict. Mr

SPEAKER, these events together have contributed to the downward

revision of global growth to 3.3 per cent this year, while a slight

recovery expected for 2015 at 3.8 per cent.

MR SPEAKER, in forward looking, the International Monetary Fund

projected for global growth to pick up assisted by implementation of key

reform measures including strong commitment to containing budget

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deficits; support domestic demand conditions; restoring key

fundamentals in financial market; encourage private sector participation

that realises the benefit of free capital mobility. Among advanced

economies, growth is projected to increase, but will be slower in the

Euro area and Japan and generally faster in the United States and

elsewhere. Growth is projected to remain high in major emerging

markets with a modest slowdown in China and a pick-up in India.

Elsewhere, there are needs for continued structural reforms to allow their

economies grow at full potentials.

MR SPEAKER Vanuatu is not immune to shocks, given that our

economy is small and open. Volatility in commodity prices has direct

impact to our agriculture sector affecting the livelihood of majority of

our people. The continuous conflicts in major oil-exporting countries

have major implications for our transport sector, especially travellers.

However, the recovery in the United States has brought hope for

prosperity but the rising dollar mean increasing cost for debt repayment

for indebted countries.

MR SPEAKER These brings about major challenges to our economy

which calls for major reforms to the ways in which our decisions are

being crafted and implemented; shaped by our very own ways of doing

things. We need to design policies that are both pro-cyclical and

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counter-cyclical to ensure we built a Vanuatu that is inclusive,

sustainable and equitable.

Domestic Economic Outlook

MR SPEAKER economic growth in Vanuatu in 2013 was slow growing

by only 2 per cent. Although economic activity was weaklast year but if

comparing across time, it is a considerable improvement compared to

2012.The rebound in economic activity is attributed to rising activity in

the industry sector, particularly construction assisted by the services and

agriculture sectors. In the agriculture sector, production of major

commodities such as copra, coffee, cocoa and beef were held up

injecting a lot of liquidity into the local economy. The recent under-

supply of global copra and related bi-products has push-up prices

domestically and created opportunity for local copra producing islands

to respond by increasing copra production. Assisted by animal

production, we have seen that growth contribution of the agriculture

sector has been resilient. Meanwhile, growth in the construction sector

has been strong throughout 2013 expanding by 43.5 per cent; but was

weaken by 17.9 per cent decline in mining and quarrying sector.

MR SPEAKER the Services sector continues to register growth in 2013

although slower by 0.1 per cent – the slowest over the last decade.

Strong growth was recorded in the information and communication

sectors together with activities in the finance and insurance sector. This

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was supported by activities in both the tourism and retail trade sectors

but was offset by rising transportation costs, leading to contracting

transport activities. There are signs that growth will be higher this year

with the current forecast being about 3.7 per cent. It is projected that the

economy will further accelerate in the coming years, if downside risks

are managed appropriately and the global economy continues to recover.

MR SPEAKER delayed project implementation continues to pause

major risks and is slowing economic growth. The current Government

will work with its donor partners, creditors and local communities to

ensure that scheduled projects do implemented as scheduled starting in

2015 and to ensure no further delays to major infrastructure projects.

These projects include the existing Port Vila Lapetsai International

Multi-Purpose wharf project, the Vanuatu Inter-Island Shipping Project,

the Port Vila Urban Development project, the South Tanna and

Malekula roads, the Luganville wharf, the Bauerfield airport and

Housing and are expected to boost growth further. These projects will

have a large direct effect on the construction sector as well as feeding

through to the other sectors of the economy such as retail and wholesale

trade, transport, finance and insurance, real estate and professional,

scientific and technical services.

MR SPEAKER the Government will remain committed to restoring

confidence and creating a sound environment for businesses to grow.

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MR SPEAKER the Government recognizes that there are a number of

constraints that are limiting our economy to realise its full potential.

These include human constraints such as a lack of highly skilled workers

and adequate road networks. The Government budget for 2015 focuses

on these two factors with more focus on money being diverted towards

the productive sector including infrastructure. MR SPEAKER, at the

same time the Government will continue to work on addressing other

constraints such as access to financial credit and issues related to land

registration.

MR SPEAKER the Government remains committed to ensuring

macroeconomic stability including prudent management of its annual

budget and debt levels. General macroeconomic stability contributes to

private sector confidence and economic growth. MR SPEAKER, we

now turn to the specific sectors of the economy; starting with the service

sector.

Service sector

MR SPEAKER, the service sector continues to be the largest sector of

our economy in terms of economic output. The service sector has a

strong projected growth for 2015 and is estimated to expand by 4.4 per

cent. Tourism is a major component of this sector and visitor arrivals are

growing robustly. This is a result of strong economic activity in

neighbouring Australia, New Zealand and New Caledonia.

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MR SPEAKER in 2013 day arrivals by cruise ship went up by 13 per

cent, while air arrivals grew more slowly, but still significant at 2 per

cent. These trends have continued into 2014 and it is anticipated that

2015 will see even more tourists coming to our country. More tourists

mean more income directly for those running tourism related businesses

such as bungalow owners and mamas in the markets near cruise ship

wharfs. There is also the benefit of significant spill over into other

sectors such as domestic transport, retail and wholesale, accommodation

and food services, real estate and finance and insurance. Eventually

money spent by tourists will be used to buy taxable products that will be

collected by the Government as revenue. An expanding tourism sector is

good for all of Vanuatu.

Agriculture sector

MR SPEAKER the agricultural sector continues to play a central role in

the lives of the majority of the people of Vanuatu. Agriculture employs

over 75 per cent of the total population. Production in the agriculture

sector expanded by 4.3 per cent owing to increasing animal production

in particular chicken production and sawn timbers. However, copra

production contracted by 58 per cent in 2013 as a result of declining

export copra prices, falling prices of coconut oil and much improved

supply conditions elsewhere. However, copra production recovered early

this year following improvements of copra price due to declining

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production in the Philippines (caused by the recent typhoon).The current

lift of the kava export ban to Europe suggests that kava production will

remain in high demand domestically and internationally in 2015.Value

adding must be central to Vanuatu’s agricultural policy. Competition for

raw agricultural goods such as copra remains tough with ageing coconut

tree and the resulting need for replanting; is unlikely to raise copra price

to historical heights. The ageing coconut is becoming an issue in the

medium and long term with lower, yearly yields.

MR SPEAKER, the copra subsidy has been temporarily suspended yet

again for 2015. The Government recognized that without clear policy

guidelines in place, the subsidy was vulnerable to being used

inappropriately – not benefiting the farmers of Vanuatu. Despite the

temporary suspension of the copra subsidy the Government remains

committed to agriculture. Increasing access to agricultural extension

services is a key objective of the Government and the Budget 2015

commits money towards this vital activity, in order to support economic

development in rural areas.

Industrial sector

MR SPEAKER the industrial sector experienced a big improvement to

growth in 2013, expanding by 9.7 percent compared to a 22.1 per cent

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contraction experienced in 2012.The increasing growth was evident in

the construction sector expanding by 45.3 per cent in 2013; with activity

emerging from the private sector growing by 21.2 per cent. However,

the impact of strong growth experienced in 2013 were offset by

declining activity in the mining and quarrying sector together with

public investments.

MR SPEAKER I can report that the construction sector is recovering in

2014 and will become the main driving force for the country’s economic

expansion in 2015 and 2016. Significant expansion in this sector

happened in the past when the MCC projects were moving forward and

ended in 2010. The Government is working with its partners to ensure

that these projects begin in 2015. When they do they will significantly

increase economic growth and have considerable spill overs into non-

construction related sectors.

Monetary sector update

MR SPEAKER monetary conditions were weak for the first half of 2014

reflecting economic conditions prevailing over that period. Growth in

money supply contracted reflecting declining trends in Net Foreign

Assets and a slowdown in private sector credit. As the Reserve Bank

closely monitor the current trend of non-performing loans, there is

adequate provisions remain in the banking system. With commercial

banks liquidity remain sufficiently high; private sector credit have grown

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considerably slower this period pushing down the inflationary rate to 0.1

per cent.

MR SPEAKER inflation, which summarizes how much prices have

increased over time, remains low. Over the year to June the Consumer

Price Index rose by just 0.6 percent. This is well below the upper level

target range of the RBV of 4 percent. There is a risk that as the

construction sector recovers; there will be more pressure on the prices of

fuel and imported construction materials in 2015. These risks will need

to be appropriately managed. MR SPEAKER in addition to pressure on

prices; increased economic growth may mean a worsening of current

account deficit. As the economy grows people will demand more

consumables. Most of these things will unfortunately come from

overseas rather than home grown. MR SPEAKER Vanuatu has a limited

export base and Vanuatu has for a long time imported far more things

than it exports. Despite this Vanuatu’s overall external position is sound.

Official reserves are currently able to finance up to 6.0 months of

imports. This is comfortably above the RBV’s 4 months threshold.

2014 Budget Outruns

MR SPEAKER, moving on to the Government’s finances – in 2014 the

Government has been able to maintain an efficient fiscal position,

despite pressure from a number of unexpected legal obligations and

unplanned expenditures resulting in supplementary budgets.

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MR. SPEAKER, the budget position excluding donor financed spending,

published in the Budget 2014 predicted a surplus worth VT 591.0

million. This was an improvement from last year’s 2013,with an

increase by 51.5 per cent. MR SPEAKER, I am happy to report that for

the first 9 months of this year and excluding donor financed spending,

the Government has recorded a fiscal surplus worth VT 177.0 million

following strong revenue collections this year – which is 6 per cent

higher compared to last year’s.

This strong revenue performance reflects continue improved compliance

measures undertaken by the Department of Customs and Inland Revenue

to enhance VAT collection as well as inflows from the Hong-Kong

based Permanent Residency program. Total revenue, excluding project

grants, amounted to VT 11.4 billion at the end of September.

MR SPEAKER, the Government spent VT 11.1 billion against an annual

budget of VT 14.2 billion at the end of September 2014. The

Government has spent 78 per cent of the budget target. When including

donor funding, the government has spent VT 12.1 billion at the end of

September.

MR SPEAKER, I would like to take this opportunity to highlight some

major items that already overspent their annual budgets for 2014 at the

end of September. These include acting allowance which totalled VT

62.3 million against an annual budget of VT 0.5 million and subsistence

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allowance which totalled VT 154.9 million against a budget of VT 90.4

million. We also spent VT 290.6 million on internet and satellite

communications against a zero budget, vehicles repairs and maintenance

totalling VT 105.9 million against a budget of VT 55.6 million and

scholarship allowances which totalled to VT 345.5 million against an

annual budget of VT 162.9 million.

MR SPEAKER, I would like to highlight the issue of outstanding bills,

particular telecommunications and electricity. This Government has

taken proactive steps for the last two months of this year to ensure that

all Ministries, Departments and Constitutional Agencies are able to

spend their 2014 Budget on bills accrued in 2014.

MR SPEAKER, the Government has so far passed on two

supplementary budgets this year in April and in August. The key

expenditures met by the supplementary budget in April include a VT

29.3 million for the Vanuatu 2017 min-Games operational budget, VT

135.0 million for Bandwidth payment to Interchange Vanuatu Limited

and VT139.3 million for the Vanuatu Government contribution to the

Electrification project for Torba, Penama and Malampa. MR SPEAKER,

continuing on to the second supplementary that was held in August, the

key expenditures thereof include VT 97.3 million for the Police GRT

determination, VT 12.0 million being for the Attorney General special

skills top-up allowance, VT 7.5 million for interactive gaming, VT 31.1

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million for Tanna school fee subsidy, VT 40 million for the Health

services in Vanuatu and VT100 million being for the EU-ACP meeting –

which has now been postponed.

MR SPEAKER, in addition to the supplementary, the Government also

utilised Section 34(C) of the PFEM Act (Cap 244) to enable VT 135.0

million to be used to relieve the Financial Emergency created by

meeting a legal payment towards the Bandwidth for Interchange Limited

establishment early this year within the OGCIO at the Prime Minister’s

Office.MR SPEAKER, as discussed earlier VT 500 million of new

domestic bonds was issued during the year, in order to fund the

supplementary budget. However, despite the supplementary budgets, we

have continued to maintain a strong fiscal position and were even able to

pay out a VT 238.4 million worth of bond in April.

MR SPEAKER, I would like to briefly touch on the issue of our

domestic and external debt. As a percentage of GDP our public debt

level is forecasted to be 21 per cent at the end of 2014. This means that

the Government’s debt level is well within the internationally accepted

40 per cent threshold. MR SPEAKER, turning to external debt, after

many delays over the previous years, I am happy to announce that new

major infrastructure projects will begin next year and so we will be

expecting new drawdowns thereafter. These additional borrowings are

expected to raise our total stock of debt to some new higher level over

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the next few years. On the other hand, we are expecting to pay back VT

591 million worth of external loans this year.MR SPEAKER, the

Government expects to pay back VT 597 million in interest payments on

both external loans and domestic bonds in 2014, marginally less than the

VT 603 million budgeted for 2013. In addition, the Government has

budgeted to pay back VT 594 million in principal on external loans in

2014. This is an increase of VT 100 million from what the government

is forecasted to pay back this year; as a result of two payments per year

now required to service the Exim Bank loan for the E-Government

project.MR SPEAKER, I would like to remind the house that running a

fiscal surplus is the only way that the government will be able to reduce

its stock of public debt and free up money in future budgets to fund

service delivery rather than meet interest payments.

2015 Budget

MR SPEAKER, I will now move on to 2015 Budget. The 2015 Budget

is framed to meet the principles of responsible fiscal management

outlined in Section 22 of the Public Finance and Economic Management

Act (CAP 224). The public finance law requires the Government to

target a balanced or surplus budget over the medium term. Budget 2015

will therefore reconfirm the Government’s commitment to this

obligation.

Revenue

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MR SPEAKER, the Budget 2015 has estimated for the government to

collect VT 16,097.4 million in revenue – which is 5.5 per cent higher

than the revenue target for 2014. MR SPEAKER, I would also like to

inform the honourable house that the 2015 Budget includes no direct

budget support.

MR SPEAKER, VAT will continue to dominate the stream of tax

revenues in 2015 being forecasted to collect VT 5,775.5 million

followed by import duty and excise tax forecasted at VT 2,695.5 million

and VT 2,010.7 million respectively.

MR SPEAKER, the Government is focused to improve collections

through increasing compliance and the enforcement of existing revenue

measures. The Government will continue to work on implementing the

quick gain and medium term initiatives, which came out of the 2013

revenue forum. The Government is also committed to looking at the

long-term revenue initiatives, which have the potential to widen our tax

based. The long-term proposed initiatives have not been factored into the

2015 Budget target, but if implemented during the year, I am confident,

will assist in further boosting collections.

Spending

MR SPEAKER on the expenditure side, the Ministry level budget

ceilings remain largely unchanged from last year, but funding has still

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been increased in key areas. MR SPEAKER, the total estimated

expenditure for the government, including known donor support in 2015

is VT 18,162 million.

MR SPEAKER, the 2015 budget has estimated for the Government to

spend VT 15,271 million. MR SPEAKER, the 2015 budgeted expense is

7.4 per cent higher than the 2014 original budget target and will be

driven mainly by the increased costs related to Government

commitments, legal obligations, productive sectors and other specific

new policy proposals.

MR SPEAKER, I would like to enlighten the house that the wage bill of

the government continues to go up, reducing the operational budget that

can be used to provide services. There is a need for financial checks of

new structures before they are approved by the PSC. Furthermore,

management of allowances should be improved. I would like to take this

opportunity to remind public servants that they are earning public money

and as such claims and management of allowance should be made

responsibly.

New Policy Proposals

MR SPEAKER, the 2015 Budget includes additional funding for

Government commitments, legal obligations and New Policy Proposals.

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This additional funding reflects Government policies and the increasing

needs of the people of Vanuatu and allocates more funding towards the

productive sector.

MR SPEAKER, budget 2015 includes VT 300 million for severance

payment for public servants that are no longer working and those that

are working but will retire next year.

MR SPEAKER, in 2015 the Government will put more emphasis in

growing the economy. Therefore, a total funding of VT 179.8 million

has been allocated to the productive sectors including the Ministry of

Commerce, Industry and Tourism, Ministry of Lands and Ministry of

Agriculture, Livestock, Forestry, Fisheries and Biosecurity.

MR SPEAKER, the Government also acknowledges and supports the

operations of the social sectors with a total additional funding of VT

114.3 million allocated to the Ministry of Health, Ministry of Education

and Training and Ministry of Youth and Sports.

Donor Projects

MR SPEAKER, I would like to acknowledge the continued support from

our donor partners. 2015 is an important year as the construction phase

of some major public infrastructure projects are expected to kick-off.

These major projects include the Port Vila Lapetasi International Multi-

Purpose Wharf Project, the Port Vila Urban Development Project, the

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Vanuatu Inter-Island Shipping Project, the South Tanna and Malekula

road projects and the Luganville wharf.

MR SPEAKER, donor grant funding is estimated at VT 2,891.7 million

for the 2015 Budget. The donor grant funded projects for 2015 include

VT 735.6 million for the road for development program VTSSP within

the Ministry of Infrastructure and Public utilities, VT 158.8 million for

the Vanuatu Health Sector project at the Ministry of Health, VT 105.7

million for the Vanuatu women’s centre phase 6 at the Ministry of

Justice and Social welfare, VT 307.6 million for the Education support

program and VT 253.6 million for the AusAID scholarships at the

Ministry of Education and Training.

Conclusion

MR SPEAKER, to implement budget 2015, the Government will

continue to increase compliance and strengthen the administration of tax

and non-taxes revenues and at the same time continue to implement the

expenditure control measures approved by the Council of Ministers this

year. This means the Government will continue to ensure that all

agencies must be prudent in ensuring that the Government meets the

fiscal responsibility requirements as stipulated in the Public Finance and

Economic Management Act.

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MR SPEAKER I would also like to emphasise the importance of the

Public Accounts Committee to be effectively active, because then it

allows for accountability and better management of public funds.

MR SPEAKER, I would like to take this opportunity to thank all the

Ministries, the hard working staff of the Department of Finance &

Treasury and the office of the Prime Minister in putting together this

budget. May I also extend a big thank you to my colleague members of

the Ministerial Budget Committee in their tireless efforts and support in

finalising Budget 2015.

MR SPEAKER, as the Minister responsible for public Finance and

Economic Management, I therefore confirm that Budget 2015 is

consistent with the ‘Principles of Responsible Fiscal Management’ as

specified in the Public Finance and Economic Management Act. MR

SPEAKER, we reinforce today our commitment to fiscal responsibility,

not just this year but also for the years ahead. And so to the Honourable

Members of Parliament and citizens of Vanuatu, it is my honour to

commend to you Budget 2015.