Approved by: Prepared by the staff of the International Development Association (IDA) and the Manuela Francisco and Lalita Moorty (IDA) International Monetary Fund (IMF) and Maria Gonzalez and Fabian Bornhorst (IMF) VANUATU: JOINT BANK-FUND DEBT SUSTAINABILITY ANALYSIS Risk of external debt distress High Overall risk of debt distress High Granularity in the risk rating Sustainable Application of judgment No The voluntary liquidation of the national carrier Air Vanuatu has significantly increased uncertainty around the outlook and fiscal outcomes. The immediate fallout from this development will be on tourism and growth prospects, while the longer term fiscal implications could likely be protracted, accompanied by higher public debt. In addition to lower revenue from tourism receipts and duty fees, staff envisage a mixed picture on capital spending and other expenditures related to the Air Vanuatu liquidation. Under the baseline, the Debt Sustainability Analysis (DSA) concludes that the risk of overall debt distress remains high, similar to the June 2023 DSA, and the PV of public-debt-to-GDP ratio breaches the threshold level of 55 percent from 2033 onwards, a year later than in the previous DSA. The sharp reduction in revenues from the Economic Citizenship Program (ECP) is expected to create a structural fiscal deficit into the medium term, having a significant impact on future fiscal outcomes. Under an alternate scenario with zero ECP revenues, the PV of public-debt-to-GDP breaches the threshold level from 2027 onward. The risk of external debt distress for Vanuatu has deteriorated to high (from moderate in the previous DSA), as the airline stoppage threatens service exports in the near term. The PV of external debt-to-exports ratio breaches the 1 The Composite Indicator (CI) for Vanuatu is estimated at 3.05, based on the April 2024 WEO and 2022 World Bank CPIA; given the CI score in this and previous vintages the debt carrying capacity for Vanuatu is assessed as medium. 1 >>> indicative threshold under the baseline scenario in 2024 and 2025. With the envisaged increase in external debt over the medium term, the PV of external debt-to-GDP breaches the threshold level of 40 in the later years (2033-34). Public debt is deemed sustainable given the breaches are marginal and in the later years for external debt indicators. The sustainability of public debt hinges to a large extent on the success of the Air Vanuatu restructuring, to restore its commercial viability for domestic operations, the government’s sustained ability to access highly concessional external loans, and it is anchored in the assumption of a gradually declining deficit. The deteriorating debt profile, and the high risk ratings in particular, highlights the urgent need for continued fiscal consolidation beyond what is assumed in the baseline scenario, strengthening debt management strategies and enhancing resilience against future shocks to ensure fiscal sustainability. 1. The coverage of public sector debt for this debt sustainability analysis has changed from the DSA update in June 2023, in light of the liquidation of Air Vanuatu on May 10, 2024. The debt stock covers the central government, central government guaranteed debt and central bank debt borrowed on behalf of the government. Given the high likelihood that the government will take over Air Vanuatu’s liabilities, a significant portion of the debt owed by Air Vanuatu to creditors has now been accounted for within public debt (see details in the Box below). Because of data limitations, non-guaranteed SOE debt and private external debt are not included in the analysis. 2 However, a contingent liability scenario for the SOEs is considered (see below). The DSA uses a residency-based definition of external debt. Subsectors of the public sector Sub-sectors covered 1 Central government X 2 State and local government 3 Other elements in the general government 4 o/w: Social security fund 5 o/w: Extra budgetary funds (EBFs) 6 Guarantees (to other entities in the public and private sector, including to SOEs) X 7 Central bank (borrowed on behalf of the government) X 8 Non-guaranteed SOE debt 2. The DSA includes a combined contingent liabilities stress test, similar to that in the June 2023 (most recent) DSA update.3 Given that a significant portion of Air Vanuatu’s debt is now included as part of public debt for 2024, contingent liabilities now only include the estimated debt of other non- financial SOEs. Total debt of non-financial SOEs is estimated at around 1.6 percent of GDP, so the 2 Given the limited capacity of Vanuatu’s state and local governments, other SOEs (outside Air Vanuatu), and the private sector to borrow externally, other data deficiencies are not expected to affect the external assessment. PFTAC continues to provide technical assistance to help the authorities expand the coverage of government financial statistics (GFS) from budgetary central government to general government and SOEs. 3 The June 2023 standalone IMF-World Bank Joint DSA for Vanuatu was performed at the request of the authorities following tropical cyclones Kevin and Judy in March 2023. It updated the information in the DSA included with the 2023 Article IV Consultation (published in late March 2023), and incorporated the most up-to-date information at the time of the effect of the natural disaster and the cost reconstruction efforts. 2 >>> magnitude of the shock of SOE debt has been kept at the default value of 2 percent of GDP.4 Contingent liabilities from financial markets are set at the default value of 5 percent of GDP, which represents the average cost to the government of a financial crisis in a low-income country. 3. Public and publicly guaranteed (PPG) debt is estimated at approximately 43 percent of GDP at end-2023. The end-2023 PPG debt stock in nominal terms is estimated at around VT54 billion (Table aside), compared to VT53 billion in 2022, while the composition is broadly unchanged from figures reported in the June 2023 DSA. External debt comprises over In Millions of In Millions of As % of total ¾ of total public debt, with Vatu US dollars debt bilateral lender debt making up Total Stock of Debt 54065 471.0 100.0 44 percent of total debt and External Debt 41383 360.5 76.5 multilateral creditors holding Multilateral 17827 155.3 33.0 Asian Development Bank 6497 56.6 12.0 the remaining (33 percent of International Development Association (World Bank) 11270 98.2 20.8 Multilateral Government Guarantees 60 0.5 0.1 total debt). The Export-Import Bank of China is the largest Bilateral 23556 205.2 43.6 EXIM Bank of China 16718 145.6 30.9 single creditor (31 percent of Japan International Cooperation Agency 5993 52.2 11.1 Bilateral Government Guarantees 845 7.4 1.6 total debt), and Japan International Cooperation Domestic Debt 12682 110.5 23.5 Agency (JICA) with 11 percent Domestic Government Bonds 11736 102.2 21.7 Domestic Government Guarantees 946 8.2 1.7 of total is the other main bilateral lender to the country. Sources: Ministry of Finance and Economic Management; and IMF staff estimates World Bank (21 percent) and ADB (12 percent) are the largest multilateral lenders to Vanuatu. The currency composition of the external debt portfolio is reportedly 46 percent in Chinese yuan, 21 percent in Japanese yen, 17 percent in US dollars, 13 percent in Euros and 3 percent in British pounds. Domestic debt comprises around 23.5 percent of total debt, primarily composed of domestic bonds held by domestic banks and the Vanuatu National Provident Fund (VNPF), the public pension fund. 4 The four SOEs included in the analysis are Port Vila Airport, Vanuatu Agricultural Development Bank, Vanuatu Broadcasting TV Company and Vanuatu Post Ltd. Financial reporting is poor and data for these entities is outdated. As a result, the default level of 2 percent of GDP is used for the contingent liability test. There is a likelihood that the 2 percent underestimates the true contingent liabilities of the SOEs to the government, but the lack of information precludes use of an alternate figure a t this stage. 3 >>> Total Public and Publicly Guaranteed Debt Composition of PPG Debt, 2023 (In percent of GDP) Publicly Publicly 60 guaranteed guaranteed External Domestic External Debt Domestic Debt Japan 50 International 1% 2% Domestic Cooperation Government Agency Bonds 40 11% 22% 30 Asian 20 Development EXIM Bank of Bank China 12% 10 31% International 0 Development 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Association (World Bank) Sources: Vanuatu authorities, and IMF staff estimates. Sources: Vanuatu Authoerities; and IMF staff estimates. 21% 4. Preliminary estimates indicate external debt levels in 2023 have declined on the back of early repayments and reduced drawdowns on external loans. Discussion with the authorities reveal that external debt owed to multilateral and bilateral creditors declined in 2022-23, primarily due to early repayments. Outstanding debt owed to JICA is estimated to have declined by around 15 percent to around VT6 billion at end-2023. Among multilateral lenders, debt owed to IDA and ADB is estimated to have remained relatively unchanged or marginally declined in 2023, partly due to early repayments and slower- than-expected drawdown on loans due to delayed project execution. Downward revisions to the actual debt levels and external loan drawdowns, based on recent data from authorities and donors, have contributed to a declining external debt profile since 2020. 5. Domestic debt continues to grow and the government’s issuance forecast in 2024 -25 suggests that the domestic capacity for absorbing the bonds might be tested in the near-term. The government’s domestic debt is primarily held by four domestic entities, namely, the Reserve Bank of Vanuatu (RBV; that is, the central bank), the VNPF, the state-owned National Bank of Vanuatu and PNG- based BSP bank (text figure). As of 2023Q3, VNPF Holders of Domestic Government Bonds and RBV held a combined 69 percent of domestic (VUT billions, December 2023) 6 government debt, while NBV (20 percent) and BSP 5 (8 percent) held most of the remaining debt. The government’s issuance forecasts for 2024 suggest 4 that nearly VT5 billion in government bonds could 3 potentially come to the market, the largest annual 2 issuance to-date. Domestic debt is projected to rise 1 from 10 percent of GDP in 2023 to around 0 15 percent of GDP by 2030, and to 20 percent of VNPF RBV NBV BSP Others GDP by 2040. Given the relatively shallow depth of Sources: Ministry of Finance and Economic Management; and IMF Staff Estimates. the domestic debt market, absorbing the bulk of the issuance in the near-term could prove difficult for the domestic creditors and may test the boundaries of borrowing from the RBV. Currently, RBV’s holdings government debt already exceeds the threshold of 20 4 >>> percent of the government’s annual revenues. 5 Increased issuance in the domestic market could likely add to the growing reliance on monetary financing. 6. The government had developed a medium-term debt management strategy (MTDS) for 2023-26, with the overarching objective of minimizing the long-term costs to the government and supporting the functioning of the domestic government debt market. 6 The scope of the strategy includes debt of the central government and its guarantees issued to the SOEs. According to the MTDS, the average maturity of the external debt portfolio currently stands at 10.1 years, while that for the domestic portfolio is at 6.7 years. The debt redemption profile indicates that around 8-10 percent of total external debt is maturing in each of the next four years, while between 5-10 percent of the total domestic debt is expected to mature in each of the next four years. The government has indicated plans to implement the Vanuatu Central Securities Depository System (VCSDS) to improve the government bond issuance process, and develop an Investor Relations strategy including the development and publication of an Annual borrowing Plan and Issuance calendar. The RBV’s introduction of a fully automated registry for dematerialized securities, and the upcoming automated payment system, will also help improve transparency and efficiency and the development of the nascent domestic government debt market. In light of the Air Vanuatu liquidation, the government needs to urgently reassess its MTDS over 2024-27 and evaluate the likelihood and safeguards pertaining to breaching internal debt limits. 7 7. Growth had gradually been recovering up until Air Vanuatu’s voluntary liquidation. The economy likely grew by 2.2 percent y/y in 2023 and was continuing to expand in 2024 until Air Vanuatu’s voluntary liquidation in early May. The adverse impacts of sequential natural disasters in 2023 —notably the three cyclones—significantly impeded recovery efforts, particularly in the agricultural sector. Nonetheless, the resurgence in tourism, recovering growth in trade partners, sustained inflows of remittances and the authorities’ timely emergency response and recovery programs buffered the negative impact of the cyclones. 8. Inflation increased sharply during 2022H2 and through most of 2023 in contrast to global price trends. Inflation increased from 3.7 percent y/y in the second quarter of 2022 to 14.4 percent y/y in the second quarter of 2023. This spike was driven largely by food prices, which were significantly affected by the cyclones’ impact on the agricultural sector. The consumer price index (CPI) decelerated in the 5 While the original RBV Act had stipulated a limit on government bond holdings to 20 percent of average government revenue, an amendment to the Act in 2021-2022 raised this threshold to 40 percent. The government is considering reverting to the previous threshold, in line with IMF recommendations. 6 Vanuatu is required to prepare and implement Performance and Policy Actions (PPAs) under the Sustainable Development Finance Policy (SDFP) to address key debt vulnerabilities in the country. Since FY21, Vanuatu has implemented PPAs in areas of debt management and debt transparency. Over the past four years, to mitigate risks from non-concessional sources of financing, Vanuatu has also adhered to a zero-Non-Concessional Borrowing Ceiling under the SDFP. With regards to debt transparency, Vanuatu has implemented reforms to improve the timeliness and coverage of debt data through publication of quarterly debt reports. 7 The authorities have set a threshold level of 60 percent of GDP for Total Debt and 40 percent of GDP for External debt in their MTDS and use primarily as strategic targets for their internal monitoring purposes. However, there is currently no enforcement procedure in place to prevent breaching these thresholds. 5 >>> second half of 2023, led by declines in electricity and gas prices, and it fell to 7 percent y/y in 2023Q4. Despite the recent downtrend, inflation continues to exceed the 0-4 percent inflation target range of the Reserve Bank of Vanuatu (RBV), with food prices being the primary driver. 9. The government has been running deficits over the past two years and revenue outturns indicate that deficits will likely persist into the medium term under current policies. Fiscal slippage has worsened in recent years, on the back of increased discretionary spending (e.g., public wage increases, housing allowances, acquisition of vehicles, etc.) driving deficits sharply wider in 2022 and 2023.8 Budget 2024 (pre-Air Vanuatu’s liquidation) was centered around a push for higher capital expenditure for infrastructure development and increased project execution of around VT17.5 billion (14 percent of GDP) in New Policy Proposals (NPPs), targeting infrastructure and capital improvements, adding to previous outlays.9 Budget execution was already delayed by supply and execution capacity constraints, and the realism of the budget was already under question with unrealistic assumptions and forecasts.10 The authorities passed a Supplementary Budget in May 2024, which included large spending items on allowances and legal expenses. Moreover, year-to-date outturns reveal that revenues from the Economic Citizenship Program (ECP) have collapsed and appear unlikely to recover, potentially leaving a structural deficit into the medium term. The government has not yet disclosed details of expenditure rationalization needed in light of the significant expenses materializing from Air Vanuatu’s liquidation process (e.g. payments of arrears to creditors and lessors, the cost of restructuring and legal fees, and miscellaneous short-term spending needs). The recent liquidation event and loss of ECP revenues will almost certainly derail the 2024 Budget plans, although it will also offer opportunities for reprioritization and for adapting the overall spending envelope to available resources. 10. Macroeconomic assumptions have been revised significantly in the wake of the Air Vanuatu liquidation and the collapse in ECP revenues. Further assumptions pertaining to the Air Vanuatu impact are collated in a box later in this document. • Real GDP growth: Under the baseline scenario, assuming rapid positive outcomes with respect to the services resumption of the airlines domestic operations, real GDP growth is still expected to decelerate markedly in 2024 to 0.9 percent and recover very gradually to around 1.5 percent in 2025. • Inflation: Adverse effects from the airline situation are expected to be somewhat mitigated by the consistently strong demand for Vanuatu's exports of goods and services to its trading partners. As both internal (supply chain disruptions due to natural disasters) and external (import prices) price pressures ease, and as the fall in the tourism sector further reduces demand, staff estimate inflation 8 According to the principles of fiscal responsibilities detailed in the Public Economic and Financial Management Act (PFEM), contingent on prudent debt levels, “total overall expenditures of the State in each financial year should be less than its to tal overall receipts in the same financial year”, essentially stipulating a balanced budget. While the balanced budget rule has legal basis, the exception clause in the PFEM Act allows ample leeway to deviate from the rule. For details on Fiscal Framework in Vanuatu, refer to Annex VII of the Staff Report for the 2024 Article IV Consultation. 9 Key projects under the NPPs included: new airports and airport runway extension and facilities upgrades; building and upgrading of roadways; purchasing/leasing of new aircraft for the domestic carrier; and a water rehabilitation project. 10 For instance, the government forecast real GDP growth of 5.2 percent y/y for 2024 and 6.5 percent y/y for 2025, relative to staff’s 0.9 percent y/y and 1½ percent y/y forecasts respectively. Government revenues for 2024 assumed the strongest revenue outturns over the past three decades. 6 >>> to continue declining, to around 3.2 percent y/y by end-2024, and 2.3 percent y/y by end-2025 (inside the RBV’s inflation target). Average inflation over 2024–2034 is predicted to be 2.1 percent, compared to the previous projection of 3.3 percent. This inflation profile is consistent with the averages in the previous DSA, declining in 2024 and 2025 before stabilizing over the medium-term within the RBV’s target range of 0 to 4 percent. • Revenue forecasts are lower than the assumptions in the previous DSA, reflecting the immediate impact of the Air Vanuatu bankruptcy, ongoing recovery from three tropical cyclones in 2023 and the persistent decline in non-tax revenues associated with the ECP over the longer-term. ECP revenues were around 14 percent of GDP in 2020, but have declined to 5.4 percent of GDP in 2023. The baseline assumes ECP revenues will continue to decline, averaging around 2.5 percent of GDP in the medium- term. Further details on the fiscal assumptions are in the box below. Previous DSA Current DSA (current vs previous) 2024 2025 2024-29 2024-34 2024 2025 2024-29 2024-34 2024 2025 2024-29 2024-34 Real GDP growth, percent 2.6 3.5 2.8 2.7 0.9 1.5 1.8 1.9 -1.8 -2.0 -1.0 -0.7 Inflation (GDP deflator), percent 5.6 3.8 3.6 3.3 3.2 2.3 2.3 2.1 -2.4 -1.5 -1.3 -1.1 Nominal GDP (USD mn) 1263 1357 1483.0 1719.3 1169 1214 1297 1443 -94 -142 -186 -276 Revenue and grants 35.3 33.0 33.0 32.7 32.5 31.9 30.6 30.1 -2.8 -1.1 -2.4 -2.6 Primary expenditure 41.4 38.5 38.1 37.6 38.2 36.1 33.7 32.5 -3.1 -2.4 -4.4 -5.1 Primary balance -6.0 -5.5 -5.2 -5.0 -5.7 -4.2 -3.2 -2.4 0.3 1.3 2.0 2.5 Exports of goods and services 26.8 32.6 31.3 31.4 16.1 18.5 24.9 29.2 -10.7 -14.0 -6.3 -2.2 Imports of goods and services 60.9 60.7 60.1 60.6 49.1 50.6 53.0 55.2 -11.8 -10.1 -7.1 -5.4 Current account balance -3.8 1.5 0.7 0.5 -7.4 -6.5 -5.2 -4.7 -3.6 -8.1 -5.9 -5.2 • External borrowing and grants was expected to moderate from the highs seen in recent years, as COVID- and cyclone-related recovery and reconstruction assistance from development partners tapers, and earmarked financing for delayed large-scale infrastructure projects is slowly absorbed depending on the project completion rates. However, the fallout from the Air Vanuatu liquidation is expected to alter this trajectory (see box below). The forecast envisages an increase in budget support grants from development partners, partially helping offset the broader declining trend in grants post- COVID and post-cyclone. Budget support grants from development partners is estimated to increase in 2024-25, while that for infrastructure projects is expected to decline as the government scales back capital expenditure spending. • The current account deficit is projected to widen substantially on the back of a sharp drop in tourism receipts in 2024 and 2025 due to the airline liquidation, with exports of goods and services expected to drop to 16.1 percent of GDP in 2024 before marginally recovering to 18.5 percent in 2025 (compared to 26.8 percent and 32.6 percent respectively in the previous DSA). The average deficit is estimated to be 4.7 percent of GDP over 2024–34 compared to a marginal surplus of 0.5 percent over the same period in the previous DSA. 7 >>> • Foreign direct investment inflows are expected to average 3.6 percent of GDP over 2024–29, in line with the historical average of 3.5 percent. FDI remains key for Vanuatu’s growth and economic diversification.11 11. The effects of natural disasters and climate change over the longer term are incorporated into the baseline scenario. The scenario assumed there are no major costly disasters in 2024 –28 (beyond those already materialized), to simplify the policy discussion of the near-term outlook—a standard practice in DSAs for other small states with a similar risk profile. After 2028 the baseline incorporates the average long-term effects of natural disasters and climate change. Based on empirical evidence on the impact of natural disasters, real GDP growth is lowered by 0.5 percentage points annually, the current account balance is lowered by 1.3 percent of GDP and the fiscal deficit is increased by 0.35 percent of GDP relative to disaster-free projections. 12. Realism tools do not flag substantial risks around the forecast (Figure 4). The projected total three-year fiscal adjustment (between 2023 and 2025) indicates a large increase in the deficit, on the back of the government’s voluntary liquidation plans for Vanuatu and the loss of ECP revenues. The realism tool suggests that the pace of current consolidation is relatively weak based on the distribution and could be bolstered. The real growth forecasts for 2024 and 2025 are below the projected growth paths under the different fiscal multipliers. This likely reflects the idiosyncratic nature of the Air Vanuatu shock and the growth effects from the potential scaling back of capex plans. The realism of projections for public and private investment rates and their contribution to real GDP cannot be assessed due to data availability constraints. 13. Similar to the previous DSA, the fiscal balance continues to be the main driver for public sector debt. The current account deficit is expected to widen sharply in the near-term on the back of the developments around Air Vanuatu, but subsequently normalize in the medium-term as the trade balance stabilizes. Meanwhile, the primary deficit is expected to remain high in the near-term—on the back of the Air Vanuatu grounding and weaker ECP revenues —driving public debt higher in the medium term. 14. Vanuatu’s debt carrying capacity is assessed as medium, as in the previous DSA. The debt carrying capacity determines the applicable thresholds for the PPG external and total public debt sustainability indicators used in the assessment. The composite index (CI) is 3.05 based on April 2024 World Economic Outlook (WEO) data. The composite index (CI) captures: (i) information from the 2022 World Bank Country Policy and Institutional Assessment (CPIA) score; (ii) external conditions as captured by world economic growth; and (iii) country-specific factors including import coverage of reserves. Vanuatu’s CI score of 3.05 compared to 3.02 in the previous DSA vintage (which was based on April 2023 WEO data). There is no change to Vanuatu’s classification from the Ju ne 2023 DSA. 11 A detailed breakdown FDI data is currently not available for Vanuatu . 8 >>> APPLICABLE APPLICABLE EXTERNAL debt burden thresholds TOTAL public debt benchmark PV of total public debt in PV of debt in % of percent of GDP 55 Exports 180 GDP 40 Debt service in % of Exports 15 Revenue 18 Air Vanuatu’s voluntary liquidation creates a highly uncertain outlook with prolonged and deep risks. Given ongoing developments and significant uncertainty on resolutions outcomes, staff’s preliminary estimate for economic outcomes carries higher-than-usual confidence bands. Air Vanuatu entered voluntary liquidation in May 2024, a development expected to significantly impact the tourism sector and the execution of infrastructure projects. The tourism industry is anticipated to face substantial challenges due to the increased difficulty for tourists to visit and move around the nation, which will have spillovers to other related sectors like retail trade or transportation. Furthermore, disruptions in transportation are likely to affect the availability of labor for infrastructure investments, potentially compromising its implementation. The recent transition of Air Vanuatu into liquidation poses additional risks if a timely resolution is not achieved. While multiple airlines in the region have expressed interest in expanding capacity on international routes into Vanuatu, the future of domestic connectivity remains in doubt. Macroeconomic Assumptions. Given the airline’s liquidation, while economic growth is projected to see a marginal improvement in 2025, the forecast reflects a downward revision of 2 percentage points compared to the projections made in the previous DSA. Growth over 2024-29 is projected to average 1.8 percent, 1.0 percentage point lower than in the June 2023 DSA. The growth projections in 2024-2034 (Table above) have also been revised down to an average of 1.9 percent (from 2.7 earlier) for the reasons cited above. The decline in tourism due to the airline disruption is expected to weigh heavily on travel receipts in the second half of 2024, driving the current account deficit sharply wider, to around 7½ percent in 2024, before marginally recovering to a deficit of around 6½ percent in 2025. Debt. Based on preliminary discussion with relevant stakeholders, staff estimate that contingent liabilities for the government related to Air Vanuatu could likely be around 2 percent of GDP, linked to the debt owed to secured creditors. In the DSA, it is assumed the government will honor the airline’s secured debt obligations to ensure financial stability, and assume the secured debt will be realized as part of the public debt in 2024. Further, the DSA projects that costs to restructure the airline could total around VT3 bn (2.3 percent of GDP) in 2024, and a recurring annual expense is incurred in the years ahead if the airline continues to operate. Given the government’s intentions to sustain the airline’s domestic operations, the government is assumed to likely bear some of the annual operating costs moving forward particularly those toward community service obligations of the airline, reflecting the subsidy the government will likely need to provide to encourage any potential airline partners. External borrowing. In order to finance costs related to Air Vanuatu’s liquidation, the DSA assumes the government will raise concessional external debt and rely on grant financing over the next few years from multilateral and bilateral creditors, who have been proactive in supporting the government during past crisis. The external debt profile is contingent on the specifics of the external loan the government assumes 9 >>> especially the repayment schedule. In the medium-to-long-term, the baseline assumes that external borrowing will continue to rely on grants and concessional lending, with development partners providing budget support but gradually reducing their contributions into the medium term. Fiscal. The suspended operations of the national carrier are estimated to have a notable impact on tourism and the related VAT and excise duty receipts in 2024 and subsequent years. On expenditure, the liquidation of Air Vanuatu is estimated to have immediate implications on current expenses, especially with regard to payments that need to be made to the airline’s creditors. The expenses related to the restructuring and continuing operations of the airline are projected to lead to an increase in current expenditure in 2024 and a recurring expense into the medium term. This assumption implies that the fiscal deficit widens to around 6.7 percent of GDP in 2024, before easing to 5.4 percent in 2025. Moreover, the expected downsizing of Air Vanuatu’s international operations would likely lead to scaling back capital expenditure plans related to airport infrastructure and adversely impact the associated positive externalities. Overall, this implies a deteriorating deficit path in the baseline. While the expenditures linked to infrastructure development projects are expected to decline from their current highs, the decline and persistent weakness in ECP revenues, combined with a slowdown in grants, is expected to create deficits into the medium-term. The overall deficit is expected to average around 4.0 percent of GDP between 2024–2034. 15. Similar to the earlier DSAs, staff conducted a contingent liability test for SOEs as well as a tailored stress test for a natural disaster shock given Vanuatu’s vulnerability to natural disasters. For the combined contingent liability shock, since Air Vanuatu’s debt is now included in public debt, the staff set the default level for SOE debt at 2 percent of GDP to reflect the government’s financial support to the remaining commercially viable SOEs in Vanuatu. Staff continued using the default decrease in GDP of 5 percent from financial market turbulence. For Vanuatu, the default 5 percent of GDP value of the contingent liability can be interpreted as including a capital injection to an undercapitalized domestic bank. Vanuatu, which is classified as a small developing natural-disaster-prone state in the IMF (2016) policy paper on small states, is automatically subject to the LIC-DSF standard natural disaster shock. This is a one-off shock of 10 percentage points in the debt-to-GDP ratio in the second year of the projection period (2025 for this case). Staff adjusted the default parameters by assuming a reduction of real GDP and export growth by 4 and 10 percentage points respectively. 12 1 The country's coverage of public debt The central government, central bank, government-guaranteed debt Used for the Default analysis Reasons for deviations from the default settings 2 Other elements of the general government not captured in 1. 0 percent of GDP 0.0 3 SoE's debt (guaranteed and not guaranteed by the government) 1/ 2 percent of GDP 2.0 4 PPP 35 percent of PPP stock 0.0 5 Financial market (the default value of 5 percent of GDP is the minimum value) 5 percent of GDP 5.0 Total (2+3+4+5) (in percent of GDP) 7.0 1/ The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE's debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%. 12 See the details in IMF, 2016, “Small States' Resilience to Natural Disasters and Climate Change: Role for the IMF,” IMF Policy Paper December 2016 (https://www.imf.org/en/Publications/Policy-Papers/Issues/2016/12/31/Small-States- Resilience-to-Natural-Disasters-and-Climate-Change-Role-for-the-IMF-PP5079). 10 >>> 16. The PV of external debt-to-GDP and debt-to-exports ratio breach their indicative thresholds under the baseline scenario, unlike the previous DSA (Figure 1 and Table 1). The PV of external debt- to-GDP ratio breaches the threshold of 40 between 2032-2034. The PV of external debt-to-exports ratio breaches the threshold in 2024 and 2025, reflecting the sharp drop in exports expected from the fallout of Air Vanuatu’s voluntary liquidation. The external-debt-service-to-exports ratio and the external-debt- service-to-revenue ratio remain within their respective thresholds. The external debt service-to-exports and debt service-to-revenue ratios are on a declining trend until 2030 but increase thereafter based on the assumptions on the debt repayment schedule. 17. The stress tests indicate that an export shock has the largest impact on the external debt profile. Among the stress test scenarios, the export shock has the most severe impact, causing a breach to the threshold for multiple external debt metrics. The PV of external debt-to-GDP, PV of external debt- to-exports, and debt service-to-exports ratios all breach their respective thresholds at various periods of the forecast horizon. In the previous DSA, under the exports shock, the PV of debt-to-GDP had breached the threshold in 2030, while PV of debt-to-exports ratio breached the threshold from 2025 onwards. • Under the contingent liabilities scenario, which captures the government’s exposure to SOEs (excluding Air Vanuatu), the PV of external debt-to-GDP and PV of external debt-to-exports ratios breach their indicative thresholds. The PV of debt-to-GDP ratio breaches the threshold between 2029-2034, likely reflecting the backloaded external debt service schedule. The PV of external debt-to-exports breaches the threshold (180 percent) in 2024 and 2025, reflecting the sharp decline in exports expected due to the fallout from the Air Vanuatu bankruptcy. In the previous DSA, none of the indicators breached thresholds under this scenario. • Under the natural disaster scenario, the PV of external debt to-GDP and PV of external debt-to- exports ratios breach their thresholds. The PV of debt-to-GDP ratio breaches its threshold from 2025 onwards, while the PV of external debt-to-exports ratio breaches its threshold (180) between 2024-2026, while the other indicators remain within the threshold. In the previous DSA, under this scenario the debt service-to-exports ratio breached its threshold and only temporarily for 2023. 18. An alternate shock scenario, assuming zero ECP revenues, reveals significant deterioration of the external debt profile. Under the assumption of zero ECP revenues, identical to the scenario used in the previous DSA, three quarters of lost ECP revenues are projected to be replaced by non-concessional external financing, with the remaining quarter by local debt issuance. Under this scenario, the PV of external debt-to-GDP ratio would breach the threshold starting 2026 and through the remainder of the forecast horizon. The PV of external debt-to-exports ratio breaches its threshold (180 percent) between 2024-2027 and then again between 2030-2034. This scenario highlights the need for Vanuatu to diversify its revenue sources, consider broadening its tax base, and introducing income tax. In the previous DSA, under this scenario the PV of debt-to-GDP ratio breached its threshold from 2027 onward. 11 >>> 19. The PV of public-debt-to-GDP ratio breaches the threshold under the baseline scenario (Figure 2 and Table 2). The PV of public-debt-to-GDP ratio breaches the 55 threshold between 2033-2034. This is a year later than the breach in the June 2023 DSA, reflecting similar deterioration in fiscal dynamics in the medium-term. 20. Under the stress test scenarios, the PV of public debt-to-GDP metric breaches the threshold under multiple scenarios, with the growth shock having the largest impact (Figure 2 and Table 4). • Under the growth, exports and primary balance shock scenarios, the PV of debt-to-GDP ratio breaches the threshold. The PV of debt-to-GDP ratio breaches the threshold (55) starting in 2026 and remains above the threshold for the remainder of the forecast horizon. The other public debt indicators, namely the PV of debt to revenue and the PV of debt service-to-revenue ratios, remain within their thresholds. Under the natural disaster, the threshold is breached a year earlier, in 2025, and the PV of debt-to-GDP remains above the threshold for the remainder of the forecast horizon. In the previous DSA, the PV of debt-to-GDP ratio breached the threshold under the growth shock (2027 onward), primary balance shock (2030 onward) and exports shock (2028 onward) scenarios. • For the contingent liabilities shock, which captures the government’s exposure to SOEs (excluding Air Vanuatu), and the alternate scenario of zero ECP revenues, the PV of debt-to- GDP ratio breaches the threshold. Under both these scenarios, the threshold is breached starting in 2027 and the PV of debt-to-GDP remains above the threshold for the remainder of the forecast horizon. The other public debt indicators remain within their thresholds under both these scenarios. In the previous DSA, under this scenario the PV of debt-to-GDP ratio breached the threshold from 2029 onward. 21. The scenarios highlight the urgent need for rebuilding fiscal buffers to enhance resilience against escalating fiscal risks and vulnerability to shocks. The threshold breach in the baseline scenario highlights the growing fiscal risks linked to declining revenues and rising expenditures including capex spending. Effective revenue and expenditure management are essential to ensure medium-term fiscal sustainability. In particular, in addition to diversifying the revenue sources and letting cyclone-related VAT exemptions expire, the government should consider introducing a tax on personal income, to bolster the medium-term revenue prospects. On the expenditure side, continued fiscal slippage has to be avoided, especially discretionary government spending on items such as wages, allowances, travel, and vehicles, and government had to adopt strong fiscal consolidation measures. Given the sizeable capex spending proposals for the medium-term, enhancing public investment management and governance as well as bolstering capacity to effectively oversee infrastructure projects would also help maintain public debt at sustainable levels in the medium-term. 22. Vanuatu’s risk of external debt distress has deteriorated to high, from moderate in the previous DSA. The Air Vanuatu liquidation is expected to worsen the external debt dynamics and leave 12 >>> no room for absorbing future shocks. The external debt-to-exports ratio breaches the threshold under the baseline scenario, albeit only in later years, while the stress tests indicate that the multiple shocks would result in breaches of the thresholds for three of the four external debt ratios. Under the baseline the external debt-to-GDP ratio is expected to overshoot the authorities’ own ceiling of 40 in 2027. The debt trajectory highlights that external debt sustainability is at high risk and necessitates urgent fiscal consolidation measures as well as safeguards against contracting new external non-concessional debt. The sensitivity to export-related shocks suggest that Vanuatu should consider broadening its export base through diversification and build external buffers against shocks. Additionally, the ECP revenue shock also highlights the sensitivity of the debt profile to revenues, and the need to implement new revenue mobilization measures. Importantly, the contingent liabilities shock highlights the risks to the debt sustainability from SOEs that could potentially have much broader implications on the fiscal situation in the months and possibly years ahead. 23. Vanuatu’s overall risk of debt distress remains high, but the public debt trajectory remains sustainable. The sustainability of public debt partially hinges on the success of the Air Vanuatu restructuring, to restore its commercial viability for domestic operations, and the government’s sustained ability to access highly concessional external loans. The benchmark for the PV of external-debt-to-GDP ratio is breached under the baseline scenario, albeit in later years, and there are breaches across multiple stress test scenarios. Additionally, the public-debt-to-GDP ratio would breach the authorities’ ceiling of 60 percent by 2030. The rapidly deteriorating debt trajectory underlines the urgent need for prudent fiscal management for rebuilding fiscal buffers to address future shocks. In addition to strict safeguards against accumulating non-concessional external debt, this necessitates bolstering revenue mobilization measures, including by implementing the earlier decision to remove exemptions measures on VAT, widening the tax base and introducing income tax. Similarly, expenditure rationalization in the medium term has a crucial role to play. Importantly, the authorities should ensure a prudent approach to managing the potential liquidation of the national carrier, including limiting any future guarantees to SOEs, to safeguard debt sustainability. The Air Vanuatu situation has increased uncertainty around the fiscal outcomes, especially in the outer years of the forecast horizon. Given that the breaches of benchmark indicators are marginal and only in the later years, both external debt as well as public debt are deemed sustainable. 24. While negotiations around Air Vanuatu’s liquidation are still ongoing, the authorities have expressed a strong preference in sustaining the domestic operations of the airline. This may involve a joint venture with another airline and some form of government support, including, but not restricted to, subsidies for the community service obligations. In the event that the airline is revived with government support, the authorities have indicated that the government will allow the new airline to be operated by external management, with the government as a minority or majority stakeholder. They indicated that the government is not likely to assume the liabilities of the existing airline, but is open to considering capital injections in a new entity. 25. The authorities agreed with staff on the urgent need to secure medium term fiscal sustainability. The authorities attributed the decline of ECP revenue to AML/CFT-related delays and the 13 >>> re-activation of a cheaper program, but they are considering a revamp to allow them to keep a higher proportion of the fees. In the face of a structural decline in ECP revenue, they are evaluating the introduction of a capital gains tax. They acknowledged staff’s recommendation for an income tax, but pointed to political considerations. Given that tax reforms would take time to implement, they acknowledged the urgent need for expenditure rationalization. Authorities concurred with staff on the fiscal slippage in the recent past, especially due to discretionary government spending on items such as wages, allowances, travel, and vehicles, and are keen to pursue a “reset budget” in 2025 around fiscal consolidation. The authorities acknowledged repeated delays in passing the GBE Act, and aim to pass it this year to strengthen the management and monitoring of Vanuatu’s state owned enterprises. 26. Given the sharp decline in ECP revenues and the higher costs pertaining to Air Vanuatu this year, the authorities have also indicated that they will need to raise VT5 billion from domestic bond markets in 2024, the highest annual domestic issuance on record. This will likely involve significant purchases by the RBV, whose holdings of government debt already exceed 20 percent of average government revenues. While the authorities do not expect to take on any additional concessional external debt this year, they are open to discuss this option with development partners if the need arises. They indicated that development partners have come forward for providing additional budget support loans and grants this year, but concurred with staff’s assessment that proje ct grants will likely recede from last year’s levels. On debt sustainability, the authorities acknowledge that urgent fiscal consolidation would be essential to secure medium term debt sustainability. 14 >>> Actual Projections Average 8/ 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2044 Historical Projections External debt (nominal) 1/ 40.7 35.2 33.0 36.3 38.8 39.9 40.4 41.1 43.7 45.2 46.5 47.1 47.7 47.7 43.0 34.6 43.1 Definition of external/domestic debt Residency-based of which: public and publicly guaranteed (PPG) 40.7 35.2 33.0 36.3 38.8 39.9 40.4 41.1 43.7 45.2 46.5 47.1 47.7 47.7 43.0 34.6 43.1 Is there a material difference between the No two criteria? Change in external debt 0.3 -5.5 -2.2 3.3 2.5 1.1 0.6 0.7 2.5 1.6 1.3 0.6 0.6 0.0 -0.7 Identified net debt-creating flows 5.3 6.8 -0.9 3.7 2.4 0.1 -0.6 -0.4 0.1 -0.4 -0.3 0.3 0.6 0.3 1.7 -2.3 0.5 Non-interest current account deficit 5.5 11.9 1.8 7.0 6.1 4.1 3.6 3.5 3.8 3.2 3.3 3.7 3.9 3.5 4.0 2.3 4.2 Deficit in balance of goods and services 46.0 41.8 30.2 33.0 32.1 27.9 25.6 25.1 25.0 24.0 23.7 23.8 23.6 22.9 21.8 24.3 26.0 Exports 9.1 15.0 27.1 16.1 18.5 23.9 27.4 31.1 32.5 32.9 33.6 34.3 35.0 35.6 41.6 Debt Accumulation Imports 55.1 56.9 57.3 49.1 50.6 51.7 53.0 56.2 57.5 56.9 57.3 58.1 58.6 58.5 63.4 25.0 80 Net current transfers (negative = inflow) -22.4 -11.6 -15.5 -11.6 -11.1 -9.1 -7.7 -7.8 -7.8 -7.8 -7.8 -7.8 -7.8 -7.8 -9.4 -12.2 -8.5 of which: official -18.2 -10.7 -10.5 -9.3 -8.8 -6.7 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -5.4 -7.1 70 Other current account flows (negative = net inflow) -18.1 -18.3 -13.0 -14.4 -14.9 -14.7 -14.2 -13.8 -13.4 -13.0 -12.6 -12.3 -11.9 -11.6 -8.4 -9.9 -13.3 20.0 Net FDI (negative = inflow) -4.5 -0.9 -0.4 -3.4 -3.6 -3.8 -3.8 -3.7 -3.5 -3.4 -3.3 -3.1 -3.0 -2.9 -2.0 -3.5 -3.4 60 Endogenous debt dynamics 2/ 4.3 -4.2 -2.3 0.1 -0.1 -0.3 -0.4 -0.2 -0.2 -0.3 -0.3 -0.3 -0.3 -0.3 -0.2 Contribution from nominal interest rate 0.5 0.4 0.4 0.4 0.5 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 50 15.0 Contribution from real GDP growth 0.7 -0.7 -0.7 -0.3 -0.5 -0.8 -1.0 -0.8 -0.8 -0.9 -0.9 -0.9 -0.9 -0.9 -0.9 40 Contribution from price and exchange rate changes 3.1 -3.9 -1.9 … … … … … … … … … … … … Residual 3/ -5.0 -12.3 -1.4 -0.4 0.1 1.0 1.2 1.1 2.5 2.0 1.5 0.3 0.1 -0.4 -2.3 4.2 0.8 10.0 30 of which: exceptional financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 20 5.0 Sustainability indicators 10 PV of PPG external debt-to-GDP ratio ... ... 33.4 35.1 36.4 36.8 36.9 37.2 38.4 39.2 39.8 40.1 40.3 40.1 34.1 PV of PPG external debt-to-exports ratio ... ... 123.0 217.6 196.7 154.2 134.8 119.6 118.3 119.0 118.5 116.7 115.1 112.5 81.9 0.0 0 PPG debt service-to-exports ratio 43.4 13.5 13.8 11.9 11.7 9.9 8.5 7.3 6.0 5.3 5.4 6.2 6.4 6.4 6.4 2024 2026 2028 2030 2032 2034 PPG debt service-to-revenue ratio 13.0 8.4 14.3 9.6 10.6 11.2 10.7 10.4 9.0 7.9 8.3 9.8 10.3 10.5 12.3 Gross external financing need (Million of U.S. dollars) 45.5 135.5 57.5 64.6 56.3 34.4 28.5 28.7 32.6 23.3 28.7 44.0 52.9 51.7 119.7 Debt Accumulation Grant-equivalent financing (% of GDP) Key macroeconomic assumptions Grant element of new borrowing (% right scale) Real GDP growth (in percent) -1.6 1.9 2.2 0.9 1.5 2.1 2.5 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 1.8 1.9 GDP deflator in US dollar terms (change in percent) -7.2 10.7 5.8 3.2 2.3 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.4 2.1 Effective interest rate (percent) 4/ 1.1 1.1 1.2 1.2 1.3 1.4 1.4 1.4 1.4 1.4 1.3 1.3 1.3 1.3 1.4 1.3 1.3 External debt (nominal) 1/ Growth of exports of G&S (US dollar terms, in percent) -46.0 86.6 94.8 -38.1 19.1 34.4 20.0 18.2 8.7 5.5 6.3 6.2 6.1 6.0 5.5 7.4 8.4 of which: Private Growth of imports of G&S (US dollar terms, in percent) 1.7 16.5 8.9 -10.8 7.0 6.5 7.1 10.3 6.5 3.1 4.8 5.5 5.0 4.0 4.7 5.0 4.4 60 Grant element of new public sector borrowing (in percent) ... ... ... 45.2 44.5 45.0 44.2 44.3 48.3 51.1 50.6 49.7 48.9 50.0 48.7 ... 47.4 Government revenues (excluding grants, in percent of GDP) 30.5 24.2 26.1 20.0 20.5 21.2 21.8 21.8 21.8 21.8 21.8 21.8 21.8 21.8 21.8 26.1 21.5 50 Aid flows (in Million of US dollars) 5/ 149.9 129.5 148.0 208.8 197.0 162.6 137.2 150.3 175.7 166.8 170.4 171.9 182.0 179.2 257.1 Grant-equivalent financing (in percent of GDP) 6/ ... ... ... 15.3 13.9 11.3 9.2 9.7 10.4 10.0 9.9 9.7 9.8 9.5 9.3 ... 10.8 40 Grant-equivalent financing (in percent of external financing) 6/ ... ... ... 82.0 81.8 81.9 80.1 81.5 78.5 82.2 82.5 83.1 82.3 84.3 85.3 ... 81.8 Nominal GDP (Million of US dollars) 921 1,039 1,123 1,169 1,214 1,265 1,323 1,377 1,433 1,492 1,553 1,616 1,682 1,751 2,612 Nominal dollar GDP growth -8.6 12.8 8.1 4.1 3.8 4.2 4.6 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.3 4.1 30 Memorandum items: 20 PV of external debt 7/ ... ... 33.4 35.1 36.4 36.8 36.9 37.2 38.4 39.2 39.8 40.1 40.3 40.1 34.1 In percent of exports ... ... 123.0 217.6 196.7 154.2 134.8 119.6 118.3 119.0 118.5 116.7 115.1 112.5 81.9 10 Total external debt service-to-exports ratio 43.4 13.5 13.8 11.9 11.7 9.9 8.5 7.3 6.0 5.3 5.4 6.2 6.4 6.4 6.4 PV of PPG external debt (in Million of US dollars) 374.8 410.4 442.0 465.6 488.3 512.0 550.7 584.9 618.7 647.3 677.4 702.0 889.5 0 (PVt-PVt-1)/GDPt-1 (in percent) 3.2 2.7 1.9 1.8 1.8 2.8 2.4 2.3 1.8 1.9 1.5 0.6 2024 2026 2028 2030 2032 2034 Non-interest current account deficit that stabilizes debt ratio 5.2 17.4 4.0 3.7 3.5 3.0 3.1 2.8 1.3 1.6 2.0 3.1 3.3 3.6 4.6 Sources: Country authorities; and staff estimates and projections. 0 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - ρ(1+g) + Ɛα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 15 >>> Actual Projections Average 6/ 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2044 Historical Projections Public sector debt 1/ 49.5 45.3 42.6 46.7 50.4 53.0 55.0 56.6 58.1 59.5 60.8 61.9 63.1 64.2 75.8 43.2 57.2 Residency- of which: external debt 40.7 35.2 33.0 36.3 38.8 39.9 40.4 41.1 43.7 45.2 46.5 47.1 47.7 47.7 43.0 34.6 43.1 Definition of external/domestic debt based of which: local-currency denominated 9.6 10.5 11.6 13.1 14.6 15.5 14.5 14.3 14.3 14.9 15.4 16.5 32.8 Change in public sector debt 0.6 -4.2 -2.7 4.2 3.7 2.6 2.0 1.6 1.5 1.4 1.3 1.2 1.1 1.1 1.3 Is there a material difference Identified debt-creating flows -0.2 1.7 -0.3 5.4 3.8 2.2 1.6 1.2 1.1 1.0 0.9 0.9 0.8 0.8 1.2 -0.9 1.8 No between the two criteria? Primary deficit -3.3 5.8 2.6 5.7 4.2 3.0 2.6 1.8 1.7 1.7 1.6 1.6 1.5 1.5 0.9 0.2 2.4 Revenue and grants 46.8 36.7 39.3 32.5 31.9 30.4 29.2 29.8 29.6 29.6 29.6 29.6 29.6 29.6 29.6 37.8 30.1 of which: grants 16.3 12.5 13.2 12.5 11.4 9.3 7.4 8.0 7.8 7.8 7.8 7.8 7.8 7.8 7.8 Public sector debt 1/ Primary (noninterest) expenditure 43.4 42.5 41.9 38.2 36.1 33.4 31.8 31.6 31.3 31.2 31.2 31.1 31.1 31.0 30.5 37.9 32.5 Automatic debt dynamics 3.1 -4.1 -2.9 -0.3 -0.5 -0.7 -0.9 -0.6 -0.6 -0.7 -0.7 -0.7 -0.7 -0.7 0.3 of which: local-currency denominated Contribution from interest rate/growth differential 1.2 -1.6 -1.3 -0.3 -0.5 -0.7 -0.9 -0.6 -0.6 -0.7 -0.7 -0.7 -0.7 -0.7 0.3 of which: contribution from average real interest rate 0.4 -0.7 -0.3 0.0 0.2 0.3 0.4 0.5 0.6 0.5 0.5 0.5 0.6 0.6 1.8 of which: foreign-currency denominated of which: contribution from real GDP growth 0.8 -0.9 -1.0 -0.4 -0.7 -1.1 -1.3 -1.1 -1.1 -1.2 -1.2 -1.2 -1.2 -1.3 -1.5 70 Contribution from real exchange rate depreciation 2.0 -2.5 -1.6 ... ... ... ... ... ... ... ... ... ... ... ... 60 Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 50 Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Recognition of contingent liabilities (e.g., bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 40 Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 30 Other debt creating or reducing flow (please specify) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20 Residual 0.8 -5.9 -2.4 -1.2 -0.1 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.3 0.3 0.0 3.2 0.2 10 Sustainability indicators 0 PV of public debt-to-GDP ratio 2/ ... ... 43.0 45.6 48.0 49.9 51.5 52.7 52.9 53.5 54.1 54.9 55.7 56.6 66.8 2024 2026 2028 2030 2032 2034 PV of public debt-to-revenue and grants ratio … … 109.4 140.3 150.7 164.0 176.3 177.0 179.0 180.9 183.1 185.8 188.3 191.6 226.2 Debt service-to-revenue and grants ratio 3/ 11.5 9.4 13.1 9.4 11.3 10.7 11.9 12.1 19.6 10.7 14.3 13.9 15.7 17.7 27.7 Gross financing need 4/ 2.0 9.3 7.7 8.8 7.8 6.2 6.0 5.5 7.5 4.8 5.8 5.7 6.2 6.7 9.1 of which: held by residents Key macroeconomic and fiscal assumptions of which: held by non-residents 70 Real GDP growth (in percent) -1.6 1.9 2.2 0.9 1.5 2.1 2.5 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 1.8 1.9 Average nominal interest rate on external debt (in percent) 1.1 1.1 1.2 1.2 1.3 1.4 1.4 1.4 1.4 1.4 1.3 1.3 1.3 1.3 1.4 60 1.3 1.3 Average real interest rate on domestic debt (in percent) 5.5 -4.5 -0.5 3.1 4.5 4.7 4.8 5.1 5.3 5.6 5.7 5.9 6.0 6.2 6.8 1.9 5.2 50 Real exchange rate depreciation (in percent, + indicates depreciation) 4.8 -6.3 -4.8 … ... ... ... ... ... ... ... ... ... ... ... -1.0 ... 40 Inflation rate (GDP deflator, in percent) 0.7 11.2 7.0 3.2 2.3 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 4.2 2.1 30 Growth of real primary spending (deflated by GDP deflator, in percent) 0.5 -0.2 0.8 -8.0 -4.1 -5.5 -2.5 1.6 0.9 1.9 1.9 1.9 1.9 1.9 1.3 11.3 -0.8 20 Primary deficit that stabilizes the debt-to-GDP ratio 5/ -3.9 10.0 5.3 1.6 0.6 0.4 0.5 0.2 0.2 0.3 0.4 0.4 0.4 0.4 -0.4 3.8 0.5 10 PV of contingent liabilities (not included in public sector debt) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 2024 2026 2028 2030 2032 2034 Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central government, central bank, government-guaranteed debt . Definition of external debt is Residency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 16 >>> PV of debt-to GDP ratio PV of debt-to-exports ratio 70 600 Most extreme shock: Exports Most extreme shock: Exports 60 500 50 400 40 300 30 200 20 10 100 0 0 2024 2026 2028 2030 2032 2034 2024 2026 2028 2030 2032 2034 Debt service-to-exports ratio Debt service-to-revenue ratio 30 25 25 20 20 15 15 10 10 5 5 Most extreme shock: Exports Most extreme shock: One-time depreciation 0 0 2024 2026 2028 2030 2032 2034 2024 2026 2028 2030 2032 2034 Baseline Historical scenario Most extreme shock 1/ Threshold 1 No ECP revenues Customization of Default Settings Borrowing assumptions on additional financing needs resulting from the stress tests* Size Interactions Default User defined Shares of marginal debt Standardized Tests Yes No External PPG MLT debt 100% Tailored Stress Terms of marginal debt Combined CL No Avg. nominal interest rate on new borrowing in USD 1.2% 1.2% Natural disaster No Yes USD Discount rate 5.0% 5.0% Commodity price n.a. n.a. Avg. maturity (incl. grace period) 30 30 Market financing n.a. n.a. Avg. grace period 8 8 Note: "Yes" indicates any change to the size or interactions of * Note: All the additional financing needs generated by the shocks under the stress tests are the default settings for the stress tests. "n.a." indicates that the assumed to be covered by PPG external MLT debt in the external DSA. Default terms of marginal stress test does not apply. debt are based on baseline 10-year projections. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2034. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. 2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department. 17 >>> 90 PV of Debt-to-GDP Ratio 80 70 60 50 40 30 20 10 Most extreme shock: Growth 0 2024 2026 2028 2030 2032 2034 PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio 350 30 300 25 250 20 200 15 150 10 100 50 5 Most extreme shock: Growth Most extreme shock: Growth 0 0 2024 2026 2028 2030 2032 2034 2024 2026 2028 2030 2032 2034 Baseline Most extreme shock 1/ TOTAL public debt benchmark Historical scenario 1 Loss of ECP revenue Borrowing assumptions on additional financing needs resulting from the stress Default User defined tests* Shares of marginal debt External PPG medium and long-term 69% 69% Domestic medium and long-term 31% 31% Domestic short-term 0% 0% Terms of marginal debt External MLT debt Avg. nominal interest rate on new borrowing in USD 1.2% 1.2% Avg. maturity (incl. grace period) 30 30 Avg. grace period 8 8 Domestic MLT debt Avg. real interest rate on new borrowing 5.8% 5.8% Avg. maturity (incl. grace period) 8 8 Avg. grace period 6 6 Domestic short-term debt Avg. real interest rate 2.2% 2.2% * Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2034. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. 18 >>> Projections 1/ 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 PV of debt-to GDP ratio Baseline 35 36 37 37 37 38 39 40 40 40 40 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 35 34 34 33 33 33 33 33 32 31 30 A2. Alternative Scenario: [Loss of ECP revenues] 35 39 41 44 46 49 52 55 57 58 60 B. Bound Tests B1. Real GDP growth 35 38 41 41 41 43 43 44 44 45 44 B2. Primary balance 35 38 40 40 41 42 43 44 44 45 45 B3. Exports 35 42 52 52 52 53 54 55 55 55 55 B4. Other flows 3/ 35 41 45 45 46 47 48 48 49 49 48 B5. Depreciation 35 46 41 41 41 43 44 45 45 45 45 B6. Combination of B1-B5 35 44 46 46 46 48 49 49 50 50 49 C. Tailored Tests C1. Combined contingent liabilities 35 39 39 40 40 41 42 43 43 44 44 C2. Natural disaster 35 42 43 43 44 46 47 48 49 50 51 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 40 40 40 40 40 40 40 40 40 40 40 PV of debt-to-exports ratio Baseline 218 197 154 135 120 118 119 118 117 115 113 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 218 185 141 122 106 102 101 99 94 89 84 A2. Alternative Scenario: [Loss of ECP revenues] 218 209 173 159 148 152 158 163 165 167 168 B. Bound Tests B1. Real GDP growth 218 197 154 135 120 118 119 118 117 115 113 B2. Primary balance 218 206 169 148 131 130 130 130 129 128 126 B3. Exports 218 372 549 479 424 416 417 413 406 400 390 B4. Other flows 3/ 218 220 190 166 147 144 145 144 142 139 136 B5. Depreciation 218 197 136 119 106 105 106 106 104 103 100 B6. Combination of B1-B5 218 279 175 236 209 206 207 205 202 199 194 C. Tailored Tests C1. Combined contingent liabilities 218 211 165 145 128 127 128 127 126 125 123 C2. Natural disaster 218 238 188 166 148 147 149 150 150 151 149 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 180 180 180 180 180 180 180 180 180 180 180 Debt service-to-exports ratio Baseline 12 12 10 9 7 6 5 5 6 6 6 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 12 12 10 8 7 6 5 5 6 6 6 A2. Alternative Scenario: [Loss of ECP revenues] 12 12 10 9 8 7 7 8 9 10 10 B. Bound Tests B1. Real GDP growth 12 12 10 9 7 6 5 5 6 6 6 B2. Primary balance 12 12 10 9 8 6 5 6 6 7 7 B3. Exports 12 20 28 25 22 18 16 16 18 19 21 B4. Other flows 3/ 12 12 10 9 8 7 6 6 7 7 8 B5. Depreciation 12 12 10 8 7 6 5 5 6 6 6 B6. Combination of B1-B5 12 15 16 14 12 10 9 9 10 10 11 C. Tailored Tests C1. Combined contingent liabilities 12 12 10 9 7 6 5 6 6 7 7 C2. Natural disaster 12 13 11 10 8 7 6 6 7 7 7 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 15 15 15 15 15 15 15 15 15 15 15 Debt service-to-revenue ratio Baseline 10 11 11 11 10 9 8 8 10 10 11 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 10 11 11 10 10 9 7 8 9 10 9 A2. Alternative Scenario: [Loss of ECP revenues] 11 12 13 13 13 13 12 14 17 18 19 B. Bound Tests 11 12 13 13 13 13 12 14 17 18 19 B1. Real GDP growth 10 11 12 12 12 10 9 9 11 11 12 B2. Primary balance 10 11 11 11 11 9 8 9 10 11 11 B3. Exports 10 11 12 12 12 11 9 10 11 12 13 B4. Other flows 3/ 10 11 12 12 11 10 9 9 10 11 12 B5. Depreciation 10 13 14 13 13 11 10 10 12 13 13 B6. Combination of B1-B5 10 11 13 12 12 10 9 10 11 12 13 C. Tailored Tests C1. Combined contingent liabilities 10 11 11 11 11 9 8 9 10 11 11 C2. Natural disaster 10 11 12 11 11 9 8 9 10 11 11 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 18 18 18 18 18 18 18 18 18 18 18 Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the threshold. 2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 3/ Includes official and private transfers and FDI. 19 >>> Projections 1/ 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 PV of Debt-to-GDP Ratio Baseline 46 48 50 51 53 53 53 54 55 56 57 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 46 44 44 43 43 41 40 39 38 37 37 A2. Alternative Scenario: [Loss of ECP revenue] 46 50 55 59 62 65 68 71 74 77 81 B. Bound Tests B1. Real GDP growth 46 51 58 61 64 66 68 71 73 75 78 B2. Primary balance 46 51 56 58 59 59 60 61 61 62 63 B3. Exports 46 52 62 64 65 65 66 66 67 68 69 B4. Other flows 3/ 46 52 58 60 61 61 62 63 63 64 65 B5. Depreciation 46 56 56 56 55 54 53 52 51 50 50 B6. Combination of B1-B5 46 49 52 51 53 53 53 54 55 55 56 C. Tailored Tests C1. Combined contingent liabilities 46 53 55 56 58 58 58 59 60 60 61 C2. Natural disaster 46 57 60 62 64 65 66 68 69 70 72 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. TOTAL public debt benchmark 55 55 55 55 55 55 55 55 55 55 55 PV of Debt-to-Revenue Ratio Baseline 140 151 164 176 177 179 181 183 186 188 192 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 140 140 146 151 147 143 139 136 134 132 130 A2. Alternative Scenario: [Loss of ECP revenue] 9 12 12 14 14 23 14 19 20 24 26 B. Bound Tests B1. Real GDP growth 140 158 183 203 209 217 224 232 240 248 257 B2. Primary balance 140 161 185 198 199 201 203 205 208 209 212 B3. Exports 140 164 204 218 218 220 222 224 227 230 232 B4. Other flows 3/ 140 164 192 205 206 208 210 212 215 217 220 B5. Depreciation 140 182 189 195 190 186 182 179 177 174 173 B6. Combination of B1-B5 140 156 170 177 177 179 181 183 186 188 190 C. Tailored Tests C1. Combined contingent liabilities 140 166 180 193 194 196 198 200 202 204 207 C2. Natural disaster 140 178 195 211 213 218 222 227 231 234 239 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Debt Service-to-Revenue Ratio Baseline 9 11 11 12 12 20 11 14 14 16 18 A. Alternative Scenarios A1. Key variables at their historical averages in 2024-2034 2/ 9 11 10 11 11 18 9 12 10 11 14 A2. Alternative Scenario: [Loss of ECP revenue] 9 12 12 14 14 23 14 19 20 24 26 B. Bound Tests B1. Real GDP growth 9 12 12 13 14 22 13 17 17 20 23 B2. Primary balance 9 11 11 13 13 21 12 15 17 20 21 B3. Exports 9 11 11 13 13 20 11 15 15 16 19 B4. Other flows 3/ 9 11 11 12 13 20 11 15 14 16 19 B5. Depreciation 9 12 13 14 14 21 12 16 16 17 19 B6. Combination of B1-B5 9 11 11 12 12 20 11 14 14 17 19 C. Tailored Tests C1. Combined contingent liabilities 9 11 11 13 13 20 11 15 17 19 18 C2. Natural disaster 9 12 12 13 14 22 13 16 20 22 21 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the benchmark. 2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. 3/ Includes official and private transfers and FDI. 20 >>> External Debt Gross Nominal PPG External Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Current DSA 20 80 Residual 25 Previous DSA proj. 15 20 70 DSA-2019 Interquartile range (25-75) Price and 10 15 60 exchange rate 10 50 5 Real GDP 5 Change in PPG growth 40 0 debt 3/ 0 30 Nominal interest rate -5 -5 20 Median -10 Current -10 10 account + FDI -15 0 -15 -20 Change in 5-year 5-year 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 PPG debt 3/ Contribution of Distribution across LICs 2/ historical projected -25 unexpected change change Public debt Gross Nominal Public Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Residual Current DSA Previous DSA proj. 30 20 DSA-2019 Interquartile 100 Other debt 15 range (25-75) creating flows 90 20 80 Real Exchange 10 rate 70 depreciation 10 5 60 Real GDP growth Change in debt 50 0 0 40 Real interest 30 rate -5 20 -10 Primary deficit -10 10 Median 0 Change in debt -15 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Distribution across LICs 2/ Contribution of -20 unexpected 1/ Difference between anticipated and actual contributions on debt ratios. 2/ Distribution across LICs for which LIC DSAs were produced. 3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation. 21 >>> 3-Year Adjustment in Primary Balance Fiscal Adjustment and Possible Growth Paths 1/ (Percentage points of GDP) 6 2 14 Distribution 1/ 4 1 12 Projected 3-yr adjustment 3-year PB adjustment greater In percentage points of GDP than 2.5 percentage points of 2 0 10 GDP in approx. top quartile In percent 8 0 -1 6 -2 -2 4 -4 -3 2 -6 -4 0 2018 2019 2020 2021 2022 2023 2024 2025 Baseline Multiplier = 0.2 Multiplier = 0.4 more -4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 Multiplier = 0.6 Multiplier = 0.8 1/ Data cover Fund-supported programs for LICs (excluding emergency financing) approved since 1990. The 1/ Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show possible real size of 3-year adjustment from program inception is found on the horizontal axis; the percent of sample is GDP growth paths under different fiscal multipliers (left-hand side scale). found on the vertical axis. 22 >>>