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The Republic of Vanuatu is located 1,750 kilometers east of Australia in the South Pacific. It is made up of 83 islands of which 68 are inhabited. Ten islands make up 90% of the total land area. Vanuatu covers about 12,189 km2 of land and 450,000 km2 of ocean within its 200-mile exclusive economic zone. The natural resources in Vanuatu are among the best in the Pacific Islands. About 45% of the total land area is considered to be arable land. Only 17% of this land area, however, is currently being used. The climate and the soil in Vanuatu is very conducive to the development of arable land and to animal husbandry. Areas which do not qualify as arable land have potential for forestry. Eighty percent of the population relies on agriculture, ranging from subsistence farming to small-holder farming of cash crops. Agriculture accounts for 20% of GDP. Copra makes up over 35% of the country's exports and the economy relies heavily on its success. Since there is 450,000 km2 of ocean which can be used as a natural resource, Vanuatu has great potential for development of its fishing industry. Currently, the total catch is about 3,000 to 3,500 tons a year. Under the Pacific Forum Fisheries Agency arrangement, Vanuatu exports tuna to the United States. Taiwan also pays an annual license fee of $5,000 per vessel for tuna fishing. Overall, though, the fishing industry is quite underdeveloped and there is room for growth. Little is known about the area's ocean bed mineral resources. The land based mineral resources include manganese, pozzuolana and construction materials such as limestone. Exploration is currently underway to determine the extent of potential deposits of copper, gold and silver. Aside from the abundance of natural resources, Vanuatu also enjoys the status of an offshore tax haven. The financial regime in Vanuatu is highly liberal. About 2,300 institutions are registered in Vanuatu and offer banking, investment, legal, accounting, insurance and trust-company services. The people of Vanuatu, ni-Vanuatu, live mainly in rural areas, with only 18% of the population living in urban areas. Since so much of the population relies on agriculture the economy in Vanuatu is heavily influenced by changes in the climate, and prices and production of its crops. Vanuatu is rated as a lower-middle income country. Its small size and narrow resource base make Vanuatu dependent on foreign aid for its development projects. Australia, Japan, the United Kingdom, New Zealand, France and China are Vanuatu's main donors. Vanuatu is a member of the United Nations, the Commonwealth, the Agence de Cooperation Culturelle et Technique, the South Pacific Forum Secretariat, the South Pacific Commission, the World Bank, the International Monetary Fund, and the Asian Development Bank. Recently, the government went through a period of instability which had a negative effect on public finances and economic growth. The ruling coalition eventually agreed to put aside political differences in order to focus on restoring stability and confidence in the economy. In 1997, the Asian Development Bank and the government worked out a plan for restructuring the economy with particular emphasis placed on growth in the private sector. In June 1997, the government introduced the Comprehensive Reform Program (CRP) which sets economic strategies and policies for Vanuatu's future.
II. ECONOMIC TRENDS AND OUTLOOK Although the first half of the 1990s were marked by political instability and the resulting effects of mismanagement on the economy, the government has begun to focus on economic development. In accordance with a reform program introduced by the Asian Development Bank, the government acknowledged economic weaknesses and now encourages growth while initiating tax reforms and human resources development policy. There was a sharp 10% growth in the economy in 1993. Growth has averaged 3% a year since then. Inflation has been low and the currency has been stable. Policy trends are unlikely to change. Currently the government encourages foreign investment and does not plan to introduce policy which would restrict the flow of funds in or out of the country. Foreign investors are also free to invest in any type of establishment including a branch operation, a new company or the acquisition of an existing company. The two main growth sectors in Vanuatu are agriculture and services. Agriculture is mainly in the form of subsistence farming but the government is encouraging an increase in production in small farms, rural development and privatization. There is significant room for growth as only 20% of cultivable land is being used. Currently, 75% of exports are agricultural with copra, cocoa and squash being the main exports, followed by beef and timber. The second major area for growth is in services, mainly associated with tourism and finance. Tourists come mainly from Australia and New Zealand. There are a number of attractions and activities available to tourists as well as a variety of restaurants and accommodations with new developments planned. Vanuatu's status as an offshore tax haven creates a very liberal financial regime. In 1994 offshore company registration contributed to 5% of government domestic revenue. Government Role in the Economy Recently the government of Vanuatu, working with the Asian Development Bank, introduced the Comprehensive Reform Program (CRP) which outlines their vision and strategies for economic and social development. The role of the government described in the CRP is to provide stable conditions necessary for private investment and emphasizes growth led by the private sector. This includes removing its presence from business and providing efficient public services. The aim of the government is to build and promote a faster growing economy. The traditional gap between exports and imports, which has usually left a trade deficit, has recently closed. A successful performance of agricultural exports in 1997, paired with slow growth of imports, resulted in an improved balance of trade (the value of exports minus the value of imports). This improvement was not expected to occur again in 1998 because of an expected growth in imports and weaker export values. A significant amount of foreign direct investment has led to a surplus in the balance of payments.
Nature of Political Relationship with the United States Beginning in 1977, Vanuatu received just under $3 million a year in aid from the United States Agency for International Development for ten years. Cutbacks forced the regional USAID office in Fiji to close in 1994. Since then, however, the United States continues to contribute financially to international organizations which support Vanuatu such as The World Health Organization, the World Bank, the Asian Development Bank, UNICEF and the UN Fund for Population Archives. In 1989, the United States signed a Peace Corps agreement with Vanuatu. Currently, there are thirty volunteers in Vanuatu, who have all been warmly received. The US also provides military training to a para-military branch of Vanuatu's police force. Major Political Issues Affecting the Business Climate The economy in Vanuatu has been greatly influenced by the instability in the government. In the early 1990s the economy was neglected to the point that public servants went on strike between 1993 and 1994. There have also been reports of mismanagement and corruption in the government. In 1997, however, the government adopted the Asian Development Bank's 'rescue package', the CRP. Since its adoption, the economy has indeed become more stable. The Republic of Vanuatu became independent in 1980 after being under the joint rule of Britain and France. The government, a parliamentary democracy, is composed of a legislative, an executive and a judiciary branch. There is a 52 member Parliament. General elections for Parliament are held every four years. The executive branch consists of the Prime Minister and the Council of Ministers, who are all members of Parliament. The judiciary branch consists of a Chief Justice and three judges. The President of the Republic is the Head of State and is elected every five years by an electoral college made up of the members of Parliament and the Presidents of the Regional Councils. The Government is advised by a National Council of Chiefs, composed of Custom Chiefs. They advise on custom, tradition, and the preservation of the country's culture. There are thirteen central government Ministries including the Minister of Trade and Business Development and the Minister of Foreign Affairs and the Comprehensive Reform Program. Orientation of Major Political Parties Political parties and political coalitions in Vanuatu are traditionally complicated and unstable. One of the major parties, the Vanua'aku (VP) was formed in 1987 by Father Walter Lini. The VP mainly represented anglophile voters. The francophone community was represented by the Union of Moderate Parties (UMP). In 1988, the VP split and the Melanesian Progressive Party was formed by Barak Sope. After losing the VP presidency in 1991 to Donald Kalpokas, Father Lini formed the National United Party (NUP). With the first member of the French speaking community as Prime Minister, Maxime Carlot Korman, the NUP joined a coalition government with the UMP. In 1993 Father Lini declared the coalition invalid and the members of the NUP who chose to remain in the government formed the People's Democratic Party. After the 1995 elections, Carlot and Serge Vohor, both from the UMP party each held the position of Prime Minister for short periods of time. When Voher regained the position in 1996, he formed a coalition with the VP. In 1998, the NUP-UMP coalition ended when the VP gained power and Donald Kalpokas became Prime Minister. Instead of parties, prominent political figures tend to represent political power in Vanuatu. Lately the ombudsman, Marie-Noelle Ferrieux has been quite powerful and has exposed corruption and scandals involving politicians in the government.
IV. MARKETING U.S. PRODUCTS AND SERVICES Use of Agents and Distributors For commodities and goods bought in one country and sold in another, Vanuatu companies can be appointed as dealers or as sales or buying agents. Under the agency agreement, the Vanuatu company would receive a commission or margin of profit on each article or transaction. An alternative, at less cost to the client would be reinvoicing (transfer pricing) which accomplishes the same objective. The Vanuatu Commodities Marketing Board was established in order to achieve greater economic stability and higher levels of income for cash crop producers. The Board implements a price equalization scheme designed to equalize the price paid to producers for copra regardless of where it came from in the country. While there is no legal requirement regarding joint ventures with private or public sector companies in Vanuatu, the government encourages foreign investors to seek local equity participation in joint ventures with private sector companies. Under the CRP, the government's role is to act only as a facilitator of foreign investment and to promote private sector growth. Joint venture partnerships should therefore be established between private sector companies only and proposals should be submitted on a commercial basis. Steps to Establishing an Office Foreign investments are usually made through the formation of a local or an exempt company. A local company is a common form of business registration within Vanuatu. It is established to conduct normal trading business in the country. Other than the need for a business license, there is no restriction on trading. An exempt company takes advantage of Vanuatu's 'tax haven' status and is the most common form of registration for offshore financial activities. An exempted company can only trade with other exempted companies or with outside businesses. Establishing an exempted company takes about four days while the establishment of a local company may take a little longer. All new businesses must get approval from the Ministry of Finance before starting an office in Vanuatu. Before establishing a business, potential investors must also apply for a business license, a work permit and a residency permit. Business licenses can be obtained at the Taxes and Rates office in the Customs Department. The holder is required to pay an annual fee for the license and an additional fee for each non-citizen employee. Work permits can be obtained from the Department of Labor. Before submitting the application the vacant position must have been sufficiently advertised in Vanuatu. The cover letter, submitted with the application for the work permit, must indicate whether any qualified Vanuatu citizens have applied for the position. There is an annual fee for each work permit. Residency permits can be obtained from the Department of Immigration and carry an annual fee. Advertising and Trade Promotion There are a number of press channels that could be used for advertising. Newspapers and radio stations in Vanuatu are:
Most goods in Vanuatu are imported. Prices are therefore heavily influenced by prices overseas. Regional currencies that have depreciated against the local currency, such as the Australian dollar, have substantially controlled import inflation. The inflation rate of major trading partners and domestic inflationary pressure affect near to medium term inflation. Prices depend heavily on the price of copra. Imports can usually be cleared by merchants although several customs and shipping agents are available in Port Vila and Luganville.
V. LEADING SECTORS FOR U.S. EXPORTS AND INVESTMENT Best Prospects for Non-Agricultural Goods and Services
Best Prospects for Agricultural Products
VI. TRADE REGULATIONS AND STANDARDS There are no specific trade barriers in Vanuatu. There is a 12.5% value added tax (VAT) levied on consumption as legislated by the Value Added Tax Act No.12 of 1998. Those who collect an annual turnover rate of VT 4 million or more in taxable activity, or those who expect to, must register for VAT with the Department of Customs and Taxes, VAT Office. Persons and organizations registered will collect VAT from their customers. Those who have taxable activity less than VT 4 million are not required to register. They may, however, register and can obtain a credit on the total VAT payable on business related expenses. A business that operates in branches must add together all of the taxable supplies of its branches to get the annual turnover rate. Non-profit bodies, clubs and associations may look at each branch separately. VAT is also applied to most agreements and dealings with land and mineral leases. For more information, contact the Vanuatu Foreign Investment Board. Import duties range from exemption to 85%. Goods imported for manufacture or process are granted an exemption from customs duty. There is a reduction on other specified imports, including goods imported for agriculture and tourism development. A reduction, to a rate of a minimum of 5%, on other specified items listed in Schedule III of the Vanuatu Custom Tariff under Section I for Economic Relief. The government also levies a 5% charge on all goods imported into the country. There are several opportunities for exemption from this cost. It is advisable to apply for import duty exemptions and reductions before beginning a project. There are few restrictions on exports from Vanuatu. Most exports, including manufactured goods, are exempt from customs duties. Two exceptions are unworked shells and wood in the rough. In these cases, permission from relevant ministries is required. Old artifacts and antiques can be exported with the approval of the Cultural Center. The Forestry Act restricts exports of unprocessed logs in order to encourage domestic processing of wood and the export of value added products. There are some exceptions where the Act allows for the export of unprocessed logs. These exceptions are made in cases where there is an absence of any local market, a demonstrated higher return to landowners and the government, or the inability to process a particular species in Vanuatu. With the permission of the Council of Ministers, up to 20% of a company's licensed volume may be exported as logs or flitches each year. For commercial shipments to Vanuatu, the documents required are the invoice document, bill of lading, and packing list. Certificates of origin, while not required, may be requested by the importer or the bank. Prohibited Imports/Reserved Investments There are few restrictions, aside from ones on drugs, quarantined items, etc., on imports into Vanuatu. Instead, government administration regarding imports is done mainly by the use of tariffs. No free trade zones exist in Vanuatu. Membership in Trade Agreements The Republic of Vanuatu is a beneficiary of three important trade agreements; The South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA), African, Caribbean, Pacific-European Community (ACP-EC) LOME IV Convention and GSP. SPARTECA is a non-reciprocal agreement between the nations of the South Pacific Forum and Australia and New Zealand. The agreement provides for duty-free access to the Australian and New Zealand markets for exports. The Lome Convention is an agreement between Africa, the Caribbean, the Pacific Island countries and the European Union. It allows for preferential access to markets in the ECU for good originating in Africa, the Caribbean or the Pacific. Under these agreements, special treatment is afforded to imports from developing countries in the form of a reduction or total waiver of customs duties on a non-reciprocal basis. These agreements are in operation with 23 donor countries including the United States, the European Community and Australia. For these agreements the 'rules of origin' must be adhered to, which means that goods must either be wholly produced or have undergone a substantial transformation in the beneficiary country. Vanuatu is a member of the Melanesian Spearhead Group (MSG) Preferential Trade Agreement which governs Vanuatu, Papua New Guinea, the Solomon Islands and Fiji. This treaty was established to foster and accelerate economic development through trade relations. The leaders of the member nations meet regularly and the agreement will likely include issues of intellectual property rights and trade in services in the near future. Vanuatu is also a member of the South Pacific Bureau of Economic Cooperation (SPEC) and the Economic Social Commission for Asia and the Pacific (ESCAP). The government has a general policy of free trade.
VII. INVESTMENT CLIMATE Openness to Foreign Investment The government is generally very supportive of all types of foreign investment. They support investments that will have long term benefits for Vanuatu and its population. The government especially encourages investments in agriculture, fishing and forestry sectors and joint ventures with ni-Vanuatu. In order to encourage investments in Vanuatu that will improve the economy, the government grants allowances in a number of areas. Locally, there is little relationship with foreign investments and Vanuatu businesses, so local competitors' attitude towards foreign investors is not an issue. In terms of labor openness to foreign investors, there are generally no problems as long as the investor seek to train and promote ni-Vanuatu to managerial positions whenever possible. The government does, however, reserve certain investments. Reserved investments, referred to in the Business License Act, are small-scale businesses which can be run well by nationals as long as the field is not opened up. Included in this list are home manufacturers, electricians, bricklayers, carpenters, small hotel owners and Kava bars. There are also reserved occupations which are declared under section 9 of the Labor Act. These include seamen, bus drivers, drivers, machinery operators, receptionists and waiters. Conversion and Transfer Policies There are no restrictions on the transfer of funds in or out of the country. There are also no restrictions in terms of repatriating funds. Most foreign currencies can be bought and sold freely and can be held in any of Vanuatu's financial institutions. Foreign investments are, however, subject to the exchange regulations of their host countries. Investors are advised to consult their own governments before transferring funds to a country with 'tax haven' status like Vanuatu. Foreign businesses are subject to the same domestic labor laws as local businesses when settling disputes. For more information, contact the Department of Labor. Performance Requirements/Incentives Incentives offered to businesses generally depend on the project in question. The main incentive for investment is Vanuatu's status as a tax haven. There are no income taxes, corporate taxes, estate duties, gifts duties, capital gains taxes, withholding taxes, landlord taxes, tax treaties or double tax agreements. Right to Private Ownership and Establishment Other than the restricted investments described (land tour operators, passenger bus services and taxi drivers, etc.) foreign investors have almost no restrictions on the type of establishment they wish to pursue. In addition, foreign investors are permitted to have full ownership and do not need a local partner. There are also no restrictions on the purchase of property. There are no specific laws regarding patents, trademarks or copyrights. There is no regulatory legislation that restricts the movement of funds in or out of Vanuatu. Bilateral Investment Agreements Vanuatu is not a member of any bilateral investment treaties. The population of Vanuatu is mostly rural with 18% living in urban areas. The 1989 census indicated that the labor force, people aged 15 and older, was 79,669. Eighty-four percent were economically active and, of these, 75%, were working in agriculture. In the non-agriculture sector, 25% were employed in services and 5% in manufacturing, construction and transport industries. Most of the labor force is semi-skilled or unskilled. Few people are educated enough to occupy managerial positions. There are a few trade unions which are passive. Local labor is available and relatively cheap, while expatriate employees, usually necessary for managerial positions, carry a fairly high cost. Foreign workers require a work permit which costs VT 50,000. Those residing in Vanuatu also require a residency permit. Generally, employment is handled by the Department of Labor.
VIII. TRADE AND PROJECT FINANCING Brief Description of Banking System The financial structure in Vanuatu consists of the Reserve Bank of Vanuatu and five commercial banks. The Reserve Bank of Vanuatu oversees the functioning of banking in Vanuatu, including the national currency. It also manages the county's external assets including foreign currency backing for the Vatu. The Reserve Bank of Vanuatu is responsible for the collection, analysis and distribution of its own policy formulation and for supporting its advisory role to the government. The commercial banks are all licensed to do business locally as well as with non-local corporations and financial institutions. The five commercial banks that operate in Vanuatu are:
The Offshore Financial Center Association provides a number of services to local and overseas clients. The services are offered through commercial banks, chartered accountants, legal firms, trust companies, and insurance entities. The services provided include:
Several international financial institutions also have offices in Port Vila. The Asian Development Bank (ADB), Caisse Cantrale de Cooperation Economique and the Center for the Development of Industry (CDI) all provide services to development projects in Vanuatu. Foreign Exchange Controls Affecting Trade There are no foreign exchange controls and the government is committed to maintaining an economic environment without exchange controls. Export Financing and Insurance The Export-Import Bank of the United States (EXIM) covers public and private sector risks. It covers short-term transactions, for which discretionary credit limits are withdrawn, medium-term transactions, and long-term transactions. Coverage is only available if it is specified in a Special Buyer Credit Limit or Issuing Bank Credit Limit endorsement, or Country Limits of Liability endorsement. In order to promote broadly based economic growth, the International Bank for Reconstruction and Development (IBRD), a member of the World Bank group, makes long-term loans at market related prices. They usually focus on structural adjustment, sector reform and individual project lending. Instead of financing a whole project, the IBRD normally finances parts of project purchases with foreign exchange, which are on typically 40% of the total project cost. Projects may cover a variety of sectors and can involve many separate contracts. In turn, these will provide export business opportunities for suppliers worldwide. The Asian Development Bank (ADB) is an international financial development bank which has its headquarters in the Philippines. In order to promote social and economic progress in its developing member countries, the ADB lent $5.5 billion in 1995. There are 56 member countries in the ADB with the United States and Japan being the largest shareholders. The largest portion of funds were lent to the energy sector followed by social infrastructure, transport, communications, agriculture and agro-industry, finance, industry and non-fuel minerals. The ADB's aims in its medium-term strategy are to reduce poverty, improve the status of women, aid in population planning, and environmental protection. The bank is taking the role of a catalyst for development and will use its financial resources along with co-financing and other techniques to attract private capital in funding the development needs of its member countries. There is a Commercial Liaison Office (CLO) in Manila at the U.S. Embassy. The CLO reports directly to the Office of Multilateral Development Banks at the U.S. Department of Commerce. It assists American suppliers and consultants in winning contracts for projects and activities funded by the Bank. The CLO includes a Senior Commercial Officer and two Commercial Specialists, one of which represents the U.S. Agency for International Development's United States-Asia Environmental Partnership. Further information is available from the U.S. Department of Commerce.
IX. BUSINESS TRAVEL There are few business or social customs which affect trade in Vanuatu. The official languages of Vanuatu are English, French and Bislama. Business is conducted mainly in English although there are French companies who conduct business in both French and English. Normal working hours are 7:30am to 4:30pm Monday through Friday. Banking hours are 8:30am to 3:00pm Monday through Friday. Most businesses, apart from some retail outlets and trading banks, close between 11:30am and 1:30pm for siesta. While most businesses are closed over the weekend, retail businesses are open on Saturday and Sunday from 8:00am to noon. Vanuatu is 11 hours ahead of Greenwich Mean Time. Daylight saving time is in effect from October to March. The attire in Vanuatu is fairly informal. Open-necked shirts and slacks for men and lightweight dresses or shorts for women is normal. Ties are rarely worn. During the cool season, from May to November, a light jacket or sweater may be needed. Several times a year there are formal balls or dinner dances for which formal attire may be necessary. Since there are few clothing shops in Vanuatu, it is advisable to bring whatever you need with you. Entry to Vanuatu for visits more than a short tourist or business visit are strictly controlled. Permits for those who wish to stay in Vanuatu are normally granted to those who can make a positive contribution to the economic development of the country. A Visitor's permit can be granted for a maximum period of four months provided that the visitor has passport and a confirmed onward or return ticket to a country where entry is authorized. Visas are not required for stays up to 30 days. Violent crime is rare in Vanuatu. Petty theft, however, does occur. The loss of a U.S. passport should be reported immediately to the police or nearest U.S. consulate.
X. APPENDICES
Appendix D - Development Assistance
U.S. and Country Contacts
Multilateral Development Bank Contacts
Government Offices (country code - 678)
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