The Ministry of Finance and Economic Management (MFEM) has developed a strategy to manage the debt over the next four years, from 2019 to 2022, following the first one which was implemented from 2015 to 2018.
This second strategy provides updated figures of the current levels of debt and projections of the debt levels dependent on different situations for the next 20 years.
The strategy was approved by the Council of Ministers (COM) on the 18th September and was signed by the Minister for Finance and Economic Management, Gaetan Pikioune (MP) last week.
“The Government confirms its utmost commitment to prudent debt management in line with the PFEM Act. In addition, it shows the Government’s commitment to creating an evidenced-based and feasible strategy to ensure that public debt levels remain sustainable, while supporting development programs across Vanuatu to invest in our country’s future,” Minister Pikioune said.
The strategy focuses on managing the State debt at prudent and sustainable levels, while taking into account the fact the Government will have to start making repayments on the most recent loans from the year 2021.
New loans funded by external creditors should have a 35 per cent grant component, a 10-year grace period (when no repayments are made) and an economic return sufficient to cover at least the interest and repayment costs.
This strategy specifies that the value of State debt divided by Gross Domestic Product (GDP – a measure of total production in the entire country or economy) should be below 60 per cent, and the value of debt owed to external creditors divided by GDP should be below 40 per cent. This should be achieved by redefining the terms of new borrowing and carefully managing the economy. The Government hopes to continue making repayments on the debt in advance of the due date (debt prepayments) when fiscal conditions allow.
Going forward, the Government plans to rely more on domestic financing, that is through more Government bonds, making loans from external creditors if necessary as a secondary option.
This should give three benefits. First, it reduces the excess cash in the economy and secondly should ensure the Government can access funds for development projects more quickly. Government bonds are denominated in Vatu, whereas external loans are denominated in the currency of the creditor (often US dollars, Chinese yuan or Japanese Yen).
When the Vatu weakens against foreign currencies, the Government has to make higher payments in Vatu, despite the amount in the foreign currency not changing. Thirdly, having a greater proportion of Government bonds (i.e. in Vatu) rather than external loans will reduce this foreign exchange risk.
The strategy was developed by MFEM, with minor oversight from the World Bank. The Debt Management Strategy for 2019 to 2022 can be found on the Debt Management Unit section of the Department of Finance and Treasury website: https://doft.gov.vu/index.php/about-us-admin-management/treasury-division/debt-management-unit