Port Vila Municipal Council in Vanuatu has accumulated debt worth over $US12 million.
Internal Affairs Minister Moana Carcasses Kalosil has warned the Mayor and the 14 councillors to improve the financial situation by the end of the year.
He has given specific instructions to the council and appointed an advisor to train the staff on how to control its accounts.
Radio New Zealand International reports he also said the council has too many employees.
"There is too many staff," he said. "I mean for a small country like this we cannot have 68 staff. It's too much."
Mr Kalosil says if the situation is not improved by the end of the year, he will suspend the council for 12 months.
Mayor Willie Pakoa has suspended three councillors over allegations of the misuse of funds and revenue of the council.
Town Clerk Toco Mara says the financial situation is stabilising and the council is making improvements.
However, he expects it will be a few years until the debt is repaid.