| Summary: | The updated DSA suggests that the external risk of debt distress for Vanuatu remains moderate with limited space to absorb shocks. All external debt indicators remain below the relevant indicative thresholds under the baseline scenario, incorporating the average long-term effects of natural disasters on growth and the fiscal and current account balances. A tailored natural disaster shock, reflecting Vanuatu's vulnerability to disasters, would cause the present value (PV) of public and publicly guaranteed (PPG) external debt-to-GDP ratio to breach the threshold from 2024 onwards. The overall risk of debt distress is assessed as moderate. Although the PV of the public-debt-to-GDP ratio remains below the 55 percent benchmark under the baseline scenario, the public-debt-to-GDP ratio would breach the authorities' debt ceiling of 60 percent by 2025. Moreover, a tailored natural disaster shock would lead to a significant deterioration in debt sustainability, breaching the benchmark. The breach of the authorities' debt ceiling and of the benchmark indicates the need for rebuilding fiscal buffers and enhancing resilience against shocks, including from natural disasters. This requires both stronger revenue mobilization measures, including an introduction of the proposed income taxes, and expenditure rationalization in the medium term. When contracting new public infrastructure projects, the authorities are encouraged to seek grants or concessional loans as much as possible to contain its debt burden
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