Aid agencies say many living in slum accommodation are especially at risk in the poor Pacific nation of 270,000, as well as those in remote outlying islands.
The Vanuatu Disaster Management Office issued red alerts for four provinces on Friday, advising thousands of residents to shelter in evacuation centres.
Meteorologists said Pam had hit the top category five intensity, with winds set to reach up to 230 kilometres per hour.
The cyclone is expected to track 100 kilometres off the island nation's east coast.
But Vanuatu's meteorology service says residents should still brace for winds of 165 kph along with flash flooding, landslides and "very rough to phenomenal seas".
UNICEF spokeswoman Alice Clements said Port Vila resembled a "ghost town" as people battened down.
"Tonight is really the night we're going to find out," she said. "The winds have definitely increased, the palm trees are blowing around like crazy, you're starting to get that kind of howling wind coming through."
Clements said there was little hope the cyclone might make a late change of course and largely spare Vanuatu.
"They're super unpredictable but the centre of the storm is tracking really close by, so even if it's not a direct hit there's going to be really significant impacts."
SBS reporter Jess Rich speaks with Save the Children's Vanuatu director Tom Skirrow
Save the Children's Vanuatu director Tom Skirrow said up to 50,000 children were at risk in the nation, where two-thirds of the population rely on subsistence agriculture.
"We have been going door to door in some of the poorest slum areas and I'm hugely concerned not enough is being done to make sure children and families are safe," he said.
"Thousands of families are living in makeshift, flimsy houses which will not withstand the immense winds and rain we're expecting. Families need to urgently evacuate to safe buildings or the results could be catastrophic."
Meteorologist Neville Koop from Fiji's Nadraki Weather Service said Pam's winds were capable of bringing down even well-built structures.
He said they could be more destructive than Cyclone Uma in 1987, which killed at least 30 people when it sank two ferries off Port Vila.
Foreign Minister Julie Bishop said the cyclone was predicted to pass close to the capital Port Vila on Friday afternoon.
She said it would produce hurricane-strength winds, storm surges, heavy rains, flooding and extremely rough seas.
Australians in Vanuatu should take precautions by sheltering early and following the advice of local authorities. Flights in and out of Vanuatu are likely to be affected. Australians should contact their airline directly for further information.
"We are monitoring the humanitarian impact closely and are preparing a potential response to this emergency," Ms Bishop said in a statement.
