Kiribati – 2014 Article IV Consultation Concluding Statement of the IMF Mission

March 14, 2014

Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

March 14, 2014

The IMF mission visited Tarawa for an annual Article IV consultation, and continued policy dialog centering around the government-led reform program. The mission was joined by a World Bank and AsDB teams which discussed the next steps for the budget support operation. This statement contains the mission’s preliminary views and policy recommendations following discussions with the Kiribati authorities, development partners and the private sector representatives.

1. Donor projects and pickup in private sector activity underpinned the 2.9 percent growth estimated for 2013. Growth for 2014 and 15 is expected to average at about 3.0 percent as construction associated with the major donor-financed road project intensifies, providing an impetus for increased domestic retail, wholesale and service-related activities. While annually lower rice and sugar prices accounted for the 0.8 percent year-end 2013 inflation outcome, sizeable expenditures on the donor-funded infrastructure underscore the 2½ percent inflation projection for 2014-15.

Fiscal Policy

Key policy challenges in the fiscal area include the implementation of the planned reforms that would help improve fiscal outcomes and fiscal frameworks. Ensuring the sustainability of the Revenue Equalization Reserve Fund RERF needs to remain among the main objectives. On the structural front, lifting growth prospects through improving the business climate and implementation of remaining SOE reforms are key. Improving access to finance for viable business projects, while maintaining adequate financial risk management is also important.

2. The fiscal outcome in 2013 was helped by high fishing license revenues. While the second consecutive year of high fishing license receipts yielded a current fiscal surplus of 10.1 percent of GDP for 2013, other categories of tax revenue underperformed as nonperforming SOEs and weak compliance undermined government’s tax collections. Overruns on subsidies for copra and nonperforming SOEs put pressure on the expenditure side. For 2014, the government incorporated into the budget community service obligations (CSOs) in the amount of 1.7 percent of GDP to account for SOE-related budget costs. Performance of fishing license fees is a key area of uncertainty about the fiscal outcome this year. Next year, with the planned national elections, spending restraint will become even more important.

3. We commend government’s commitment to the reform program supported by the donor community to address fiscal and structural challenges. Significant progress has been made in SOE reform and work is underway to implement the recently-approved fisheries policy, and improve cash and debt management. Based on this reform progress, the World Bank has provided budget support for 2014 and further donor budget support is envisaged based on the robust implementation of reforms. Nevertheless, key aspects surrounding the reporting of fishing license revenues to the Ministry of Finance need to be improved and strengthened, in order to facilitate effective national budget planning and cash flow management, and management of risks. In addition, restructuring the copra subsidy scheme and improving operational efficiency at the Public Utilities Board (PUB) remain key outstanding issues. We welcome the government’s work in this area with the assistance of the World Bank and other donors.

4. We encourage the authorities to finalize preparation to the planned introduction of the Value Added Tax (VAT) in the beginning of April. Government’s planned introduction of the VAT was premised on increasing government’s tax revenues. Changes to any country’s tax regimes yields both increases and declines of prices to various goods/services categories, that may become revenue generating in the long run overall. The required documentation for submitting VAT returns may yield additional revenue benefits through strengthening compliance. In this regard, the authorities are encouraged to continue to make the relevant technological investment and training to allow for an easing into this transitionary phase.

5. Strengthening mechanisms around generation and use of sustainable high fishing license fees is important. Higher-than-budgeted fishing license revenues allowed the government to shore up the value of the RERF in 2013, apart from improving the current account balance. Nevertheless, they remain volatile and the adequate provision of information about the performance of the various components of fishing license revenues to the Ministry of Finance is critical to promote effective budget planning and cash management.

6. Fiscal adjustment should continue while essential expenditures and investments in infrastructure, health, and education need to be maintained at sufficient levels. If fishing license revenues return to historical levels at about 22 percent of GDP for 2014, the repayment of guaranteed debt from nonperforming SOEs and higher CSOs, combined with other factors1 implies a deficit of more than 20 percent of GDP and another year of drawing down on the RERF (valued at 370 percent of GDP). Should fishing license fees continue to be high, multi-year structural adjustments would still be needed to reduce deficits and eventually stabilize the RERF on a real per capita basis. In the event fishing license receipts remain high at close to 2012–13 levels, the authorities should use the higher proceeds to strengthen fiscal balances and replenish the RERF. Essentially, it would be important to save these windfall license revenues to strengthen RERF balances, rather than using them to finance additional spending.

Fostering Employment and Growth Opportunities

7. Remoteness, dispersion, and lack of scale present major constraints for growth in Kiribati. They result in high transport costs and lack of proximate markets. Weak basic infrastructure and shortcomings in business climate exacerbates the problems. Doing business indicators—while overall on par with Pacific Island peers—significantly lag those of dynamic economies elsewhere. Climate change brings about additional risk and costs. The private sector is small, with major activities focused on retail trade, fisheries, tourism, and copra. Given Kiribati’s vast marine resources, developing fisheries further and promoting tourism appear to be most promising. In this regard, Government’s planned development of Christmas Island, with a particular focus on fisheries, should raise job opportunities and help promote increased private sector activities. Major infrastructure investments to road, airport, public utility systems and maritime links should promote increased private sector activity and government service delivery.

8. Unemployment remains stubbornly high, exceeding 30 percent and efforts to reduce it should be among priorities. The government is a major formal employer, with more than 4,000 employees. Formal sector jobs are scarce and even graduates with post-secondary education face difficulties finding employment. Kiribati seamen employment has been flat, reflecting high transport costs and the technological improvements to ships that have cut into the demand for seafarers. The assistance of regional governments is being sought to increase opportunities to work abroad, including through seasonal worker schemes; Positive developments include the upgrade of training to officer level at the local marine training college and the planned outsourcing of recruitment into the seasonal worker scheme to the private sector that should introduce competition. The ongoing road project has seen the recruitment of local laborers and a few skilled workers. The planned development on Christmas Island to be funded by European Union may improve infrastructure and expand job opportunities on the island.

9. Improvements to the business climate will support private sector activity and reduce unemployment. Recent investments by the local telecommunications company have improved communications and bode well for the business, household and public sectors. Preparations for privatization of TSKL are ongoing, with the assistance of the World Bank. The Government is encouraged to address the difficulties surrounding the current regular airline services provider and to help scale back red tape associated with the need for multiple permits from town councils and various government agencies, including by simplifying and standardizing business applications procedures.

Financial Sector Issues

10. The country’s only commercial bank increased its private sector lending to offset the decline in its government and SOE business. Efforts are underway to improve customer service delivery and provide additional investment in equipment/building. Nevertheless, access to credit by the private sector continues to be difficult, complicated by unclear land titling and poor accounting and record-keeping by potential clients. The Development Bank of Kiribati (DBK) continues to carry a sizeable amount of nonperforming loans and is therefore encouraged to strengthen its lending framework and enhance risk management. We welcome the government’s interest for technical assistance in this area,

11. Ensure the sustainability of the pension fund’s operations is anchored in its eventual return to a positive funding position and strengthening its capacity to evaluate investment strategies. The KPF’s small loans scheme continues to grow and currently totals A$11 million. Last year, the KPF’s overseas investment income performed resiliently. Even so, the government is encouraged to continue to monitor the growth of its loan scheme and avoid setting the rates of return on member balances in excess of its rates of return on investment. The KPF also must monitor vigilantly its financing of acquisition of physical assets by SOEs, given the past poor track record of SOEs.

The IMF team thanks the authorities for constructive discussions and their warm hospitality and will continue its work with the government and development partners to provide macroeconomic and policy assessments and assist in the implementation of reforms in Kiribati.

1 The introduction of the Value Added Tax (VAT) in April 1 will accrue only 9 months of collection for this category and associated changes to income tax will lead to lower personal income tax receipts.


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