Die ups and downs of the vatu

Currency

By Patrick Declo[?]Re

It was a first in Vanuatu’s mon etary history, and probably the world: in the lapse of three days, Vanuatu’s national cur rency, the vatu, was devalued by 20

percent and then revalued almost immediately. On March 27, Reserve Bank governor Samson Ngwele announced the surprise devaluation. He justified it by a drop in Vanuatu official foreign currency reserves from a usual 40 million US dol

lars to a meagre 20 million, leaving the island state with only three months of import cover.

The devaluation rumours had been rife in the previous weeks in Port Vila’s finan cial spheres, who thrive on Vanuatu’s tax

haven status. Ngwele said the devaluation was meant to counter the damaging effects of the rumours, but also the loss of confi dence by local and overseas investors due to political instability in the past few months.

Another factor was the sudden injection into the economy of some 3.5 billion vatu (28 million US dollars) by Vanuatu’s National Provident Fund whose manage ment had to refund angry contributors after the January 12 riot in the capital.

Substantial pressure had been applied on the vatu, with an increasing number of transactions to sell vatu for sounder foreign currencies.

But after the devaluation announcement was made on that “black Friday”, strong statements were made by then Finance minister Vincent Boulekone. He “categori cally refused” to endorse the decision, say ing he was not consulted by Ngwele beforehand.

“This would create commercial, eco nomic and social problems. This would increase the prices here and reduce pur chasing power”, Boulekone said. He immediately sent faxes to all financial

institutions in Vanuatu, including commercial banks, asking them to suspend for eign exchange dealings until the Reserve Bank issued its new exchange rates the next Monday.

At the same time, he also ordered the Central bank to reverse the devaluation.

Ngwele was sacked at the week end and replaced by Michael Hililan. In these cir cumstances, all banks then froze their dealings, as a

precautionary measure.

“We don’t really know what to do now. In fact, we dealt with the Reserve Bank at the new devalued rate and now they’re asking us to freeze transactions”, a financial mar ket source said at the time. At the devalued rate, one US dol lar is worth 148.79 vatu, as opposed to around 121 before.

However, when it was reval ued, it came back with a slight difference. One now needs some 125 vatu to make a US dollar. The political context

surrounding the vatu’s hiccups was also of significance: a new Prime minister was to be elected on March 30, with no one pre pared to make the hard decision, that some financial observers thought was realistic.

“This is a political argument versus an economic argument. Maybe the outgoing finance minister is pushing for the next government to take the hard decision”, sources said. “But given Vanuatu’s eco nomic situation, it’s extremely unlikely that Vanuatu can sustain the pre-devalua

‘This is a political argument ver sus an economic argument. Maybe the outgoing finance minister is pushing for the next government to take the hard decision ’

tion rate. Even if the devaluation doesn’t help Vanuatu’s economy in the long term, at least it reduces pressure on the Reserve Bank to sell foreign currency”. They even predicted greater pressure on the vatu, if the devaluation was to be reversed. “If the devaluation is voided, on Monday morn ing, in front of the bank we’ll have a mile

long queue of people wanting to change vatu into foreign currency”. But on that one, they seem to have been wrong : the revaluation, decided by new Finance min ister Sela Molisa minutes after he was sworn in on March 30, was also accompa nied by strong fencing against any move to speculate against the vatu.

All applications for foreign currency purchases were to be lodged at least two days beforehand, and had to be related to genuine trade transactions, such as import bills settlements. Other requests for foreign currencies (for travelling purposes, for instance) were also restricted to a maxi mum of 200,000 vatu (1,600 US dollars) per head.

Commercial banks here agreed to play the game and have since applied tight mon itoring on all request, refusing those they thought could be identified as speculatory moves by individuals, especially in the small retail business sector.

We believe there’s no need to devalue at this stage”, Kalpokas said minutes after he was elected prime minister, while Molisa held his first meeting with Reserve Bank officials in his Parliament office. ■