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Vanuatu's Hurt Locker

The Village Explainer
Vanuatu's Hurt Locker
By Dan McGarry • Issue #53 • View online
The Village Explainer is a semi-regular newsletter containing analysis and insight focusing on under-reported aspects of Pacific societies, politics and economics.
This issue takes a look at Vanuatu’s mid-year fiscal and financial report, which contains worrying language about the nation’s revenue prospects.

The hurt locker, I’ve learned, is the place you keep your greatest pain and sorrow. It’s the notional spot in your consciousness where you store the things that don’t bear contemplating.
My greatest economic and political fear right now is what will happen when—not if—the rug gets pulled out from under our citizenship by investment programmes.
Let me be clear, though: I’m not against them in principle. If it were run transparently, with modest expectations, and by a central, trustworthy authority, citizenship by investment could provide an important contribution to the public welfare.
We’ve never really been afforded the opportunity to design a programme that meets those criteria, though. From the start, it’s always been about capturing profits for key political stakeholders, either by granting agent certificates, or through the patronage and support of key brokers.
From day one, the programmes have been beset by fly-by-night operators—too many to list. Stuck in the middle, the folks who are responsible for protecting the integrity of the process have so far withstood the pressure to bend. It’s sometimes been a close-run thing.
A key facet of the stories that resulted in the government denying my right to be employed at the Daily Post was the fact that all six Chinese nationals summarily extradited in a joint Chinese/Vanuatu operation had either applied for, or received, Vanuatu citizenship.
So reports last week that the ‘first’ citizenship revocation had just occurred were not entirely accurate. This was in fact the first time that citizenship was revoked using the proper process. But it definitely happened in the past, apparently by ministerial fiat.
I’ve defended the principle of the programmes in the past, and I haven’t changed my mind about that. The revenues derived by the programmes have backstopped our economy. They have been responsibly looked after, and the money’s been used soberly and sparingly.
These funds are likely the only reason we were able to generate one of the most lavish stimulus packages in the Pacific. It was late, and slow, and subject to the vagaries of the political moment. But it put dollars into pockets. And it did it in a way that didn’t create financial problems for us down the road.
If it hadn’t been for passport revenues, I don’t know where we’d be today. Between 2019 and 2020, tax revenues tanked.
Revenues were off by nearly 19% year on year. But when you take out the first three months of 2020, when COVID had yet to bite, the number is closer to 30%.
Last week saw the release of the Department of Finance and Treasury’s mid-year financial and fiscal report. It shows that the tax situation hasn’t appreciably improved. We’re still well below where we were in 2019.
With passport revenues, we’ve coasted through with a much more modest drop in overall revenues. And we had a substantial pile of cash on hand.
That’s ending.
Also in the mid-year report is language that—for the very first time—raises a red flag over the risks arising from the way we run our passport programmes:
The future of the [citizenship by investment] program, given the issues surrounding Correspondent Banking, has been anticipated to have severe implications on national revenue for the remaining months of 2021 and the 2022 financial year. A slowdown in the receipts from this program has already been recorded so far this year. While there are other policy options currently in place to cover for any shortfall, the amount of revenue earned will certainly be insufficient to offset the fiscal gap that would occur if the program were to come to a complete stop.
In a nutshell:
We need the passport stream, but it’s already drying up. Nothing we have on hand can fill the gap.
The Finance team has consistently warned that passport money could not be treated as recurring revenue, and did their level best to keep the government from relying too heavily on it. If not for the pandemic, they might have succeeded entirely.
The National Bank of Vanuatu is the only bank authorised to handle citizenship fees. In June, the National Australian Bank closed the NBV’s last US dollar account, along with several others across the Pacific. This has dried up the flow of money into government coffers, and has made it harder for citizenship agents to remit VAT and related fees.
Finance’s warning is deeply worrying, and yet refreshing at the same time. It may be a day late and a dollar short, but they’ve finally taken this long-standing fear out of its own hurt locker and aired it frankly and honestly with everyone who needs to hear it.
It’s not just passports, of course. There have been a raft of activities by the kind of get-rich-quick schemers who wash up on our shores. They’re generally third-raters who failed to make their mark in London, the Gulf states, Bangkok, Singapore or Hong Kong, but who still dream of hitting that one big score.
And sadly, we’ve bred a generation of local operators who play these guys (they’re almost always guys) like violins, indulging their wild-eyed fantasies of a freebooting digital frontier… sucking them dry of funds in the process.
We’re not that good at it, but then again, neither are they. The ones who actually are good at it don’t need to come here. They can stay in Australia, the UK or wherever and launder billions, while we’re placed under the international microscope for what the FATF estimated was $10-41 million annually, and others claim is in the single digits.
But the facts are the facts. We’re making money from our visa-free access to the EU, and the EU doesn’t like us doing that if it means that people who would otherwise be blocked can travel in whenever they like.
And end to visa-free access to Europe and the UK will almost certainly mark the end of our passport windfall.
So now, because we’ve ignored the warnings, and hung out once too often with a questionable crowd, we’re facing the worst part* of the pandemic with the prospect of a sudden and precipitous drop in revenues.
We’ve managed to defuse similar threats in the past, so there’s a chance that we may survive this yet. But if the programmes emerging from the national hurt locker cause a sudden implosion in the government’s finances, I can’t speak for what will happen next.
This isn’t Honiara, so we’re not likely to torch the town. Nor are we likely to see a Sandline-style crisis, or a coup. That’s not how we roll here.
But times could get tough in a hurry, and although we’ll find a way through, people won’t forget the hardship this easy money created, and who got fat off it.
[* The worst part of the pandemic will begin on the day when community transmission starts here, as it inevitably will.]
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Dan McGarry

The Village Explainer is a semi-regular newsletter containing analysis and insight focusing on under-reported aspects of Pacific societies, politics and economics.

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Dan McGarry - Port Vila, Vanuatu