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.
Tuvalu: IMF Article IV Mission, Concluding Statement of the IMF Mission, May 29 to June 5, 2012
The mission would like to express its sincere gratitude to our hosts in the Tuvaluan government for their hospitality, their time, and many constructive and open discussions.
Much progress has been made in addressing Tuvalu’s economic challenges. The government has taken difficult decisions regarding spending, tax compliance is rising, and the new Policy Reform Matrix (PRM) process should streamline the process by which donors help the government reach its own priorities. The banking system is moving toward health, and public enterprises’ operations have shown improvement. All these steps are commendable, but a significant agenda remains to be implemented. To secure these gains and return Tuvalu to high growth, the government should build on these successes.
A slow recovery is underway in Tuvalu, but there are important risks. GDP grew in 2011 for the first time since the global financial crisis, led by the private retail sector and education spending. We expect growth to rise slowly from 1.1 percent last year to 1.2 percent this year as the services sector continues to grow. Falling prices for imported goods such as clothing pulled inflation down to 0.5 percent in 2011, but the prices of domestically produced goods and services are also broadly stable. However, falling numbers of Tuvaluan seafarers, and the corresponding drop in their remittances, are hurting household incomes at a time when a strong, if weaker, Australian dollar is increasing imports. The possibility that seafarer income both does not recover and is not replaced by opportunities such as seasonal employment schemes is the biggest risk to long-term sustainable growth.
Even beyond employment, Tuvalu remains exposed to the difficult global environment.
Strong performance at the Tuvalu Trust Fund (TTF) has brought closer the point where it will begin to recapitalize the Consolidated Investment Fund (CIF). But a reversal could hurt the TTF, depriving the government of necessary support. Proceeds from licensing and joint ventures have improved the government’s revenue prospects, but further strengthening of the Australian dollar could negate these gains. On the other hand, a rapid weakening of the dollar could cause prices of imported goods to rise quickly. In the current fragile environment, this would present serious difficulties for Tuvaluan households.
Fiscal Policy and the Global Environment
The global crisis led to two linked problems in Tuvalu. First, high spending has drained the government’s assets just as the TTF was hit by poor returns. Second, falling seafarer employment hurt household incomes. Both have been aggravated by the strong Australian dollar, which reduced U.S. dollar-denominated earnings for seafarers and the government.
Now is the time to build on last year’s successful measures to bring the budget under control. Steps taken to bring down TMTS costs, and the decision to approve no new scholarships this year were difficult and commendable. Thanks to these steps, improved tax compliance by the private sector, and a large one-off Australian grant, the CIF will not be exhausted in 20121. But budget support next year will be tied to implementing PRM measures. Raising the TCT rate is an important step, but raising compliance among PEs – currently none of which pay TCT – will be crucial both to bring deficits down in the future and for securing budget support from donors. The next step for direct taxes is to follow through with penalties for noncompliance, including nonfinancial ones such as passport suspension. On subsidies, returning TMTS referrals to a committee of doctors should begin to bring costs down. The authorities should also continue to coordinate with donors to ensure scholarships remain at a sustainable level and bring CSOs transparently on budget. Public wage increases should also be tied more closely to inflation. Finally, new joint ventures should be signed with care, and only after verifying that market-based borrowing by NAFICOT does not endanger concessional assistance from donors.
Going forward, expenditure should be reoriented toward supporting social goals and growth. The PRM rightly focuses on primary education and streamlining health expenditure. More support for training, for example by enrolling women and broadening the curriculum at TMTI and by determining priority areas for awarding scholarships, will improve Tuvalu’s ability to send productive workers abroad, as will taking more advantage of seasonal labor schemes in Australia and New Zealand. Cuts to capital expenditure should not postpone needed infrastructure improvements, and Outer Islands projects should be clearly prioritized and financed by the FTF’s unspent balances rather than relatively scarce government resources.
These and other ongoing efforts will also help Tuvalu deal with the challenging global environment. Smaller budget deficits will allow the government’s assets to be rebuilt while better training and more opportunities for Tuvaluan workers, in New Zealand and increasingly in Australia, will help cushion the blow of declining seafarer demand. The new objective-based asset allocation of the TTF should be implemented with a strong bias toward protecting Tuvalu’s asset holdings, both of the TTF and the TNPF, from risky conditions in global financial markets.
Supporting Private Sector Growth
Raising incomes will also depend on creating a better business environment. Some results are already visible from public enterprise reform: collections at TEC are up and TMTI is on a better footing. But further improvements are undermined by overlapping arrears with the government, which PEs cite as a reason not to pay taxes. However, improvements at the banks are encouraging, as they will grant more Tuvaluans access to credit and increase capacity to support new businesses.
Continuing to implement the PE reform agenda is key to supporting growth. Addressing tax arrears and poor customer payment culture is especially challenging in small countries. Improved accounting procedures should help sort out the net position of unpaid government supplier payments to PEs and PE tax arrears, but more important in the long run will be ensuring both parties make all payments on time and transparently. The effort to commercialize PE operations is also paying off with improved risk management at the NBT and higher collections at TEC. In the long run, this will increase the flow of dividends to the government, easing fiscal pressures, and reduce PE overdrafts at the NBT, freeing capital for lending.
The financial system has made significant strides, and progress seems likely to continue. The improved focus on credit quality and financial position of the DBT and NBT are encouraging. In particular, the DBT has begun to clean its balance sheets by writing down uncollectible loans. As the NBT’s risk monitoring capabilities improve, it should begin to do the same. On the other hand, delinquencies from small loans at the TNPF are a concern of unknown magnitude: to ensure the Fund’s continued financial health, the authorities should seek to have its actuarial viability assessed, and also amend the law to encourage retirees to take annuities rather than lump-sum withdrawals.
Government interference in the economy should also be reduced. As they return to health, the DBT and NBT should gradually be allowed to set their own rates, at least in areas, such as lending to businesses, where they are already effectively in competition. Installing a new and fully professional board at TEC to ensure the company’s independence will show that Tuvalu is serious about improved PE management. Finally, the unfortunate situation at TCS presents a very difficult problem with no easy solution. Private companies are already taking over TCS’ traditional business of supplying the Outer Islands. To facilitate this transition, the government should coordinate with businesses both in Funafuti and the Outer Islands to ensure that they have sufficient credit and freight capacity to ensure all Tuvaluans have access to retail goods.