Fiscal Deficits and Current Account Imbalances of the South Pacific Countries: A Case Study of Vanuatu

Abstract

Fiscal deficits experienced by the Bank's South Pacific Developing Member Countries (SPDMCs) are due to mounting recurring expenditures and stagnant or slowly growing current revenues. Generous external aid flows in the past in the forms of grants for development expenditures and technical assistance for staff support from bilateral donors have enabled SPDMCs to meet overall fiscal deficits and, as a result, have reduced current account imbalances and contributed to exchange rate stability. The paper seeks to find out the underlying causes and forces behind the fiscal deficits and domestic resource gaps for determining the resultant current account balances in the external accounts. The conclusions arising out of a case study of Vanuatu are generally applicable to all countries in the region. Specifically in the case of Vanuatu, mobilization of domestic resources based upon a more income-elastic revenue base, by shifting away from import taxes, is called for, together with greater expenditure control and long-run fiscal reforms.