Public Information Notices

Kiribati and the IMF

Free Email Notification

Receive emails when we post new items of interest to you.

Subscribe or Modify your profile




Public Information Notice (PIN) No. 03/82
July 7, 2003
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2003 Article IV Consultation with Kiribati

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On June 16, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kiribati.1

Background

GDP grew by less than 2 percent annually in 2001 and 2002, below the estimated increase in population. GNP grew significantly in 2001, due to an increase in revenues from fishing license revenues, but fell back in 2002. GDP growth has been held back in part by poor performance of agriculture, especially declines in copra production. Growth was also slowed by continued infrastructure problems and lack of progress in creating an enabling environment for private sector investment. There has been almost no foreign direct investment since 2000.

Inflation in most recent years has been modest, reflecting Kiribati's use of the Australian dollar as its domestic currency. Inflation was 7.3 percent in 2001, due mostly to the pass-through effects of a depreciation of the Australian dollar against other currencies but fell to about 1 percent in 2002.

Budget revenues and grants have been strong in recent years, but Kiribati is vulnerable to reductions in fishing license fees or external grants. Tax revenue has fallen slightly over the last two years (by about 2 ½ percent of GDP, to 25 percent of GDP). Total revenue including grants increased by about 20 percent of GDP in 2001, to 122 percent of GDP, due to record revenues from fishing license fees which amounted to over 50 percent of GDP, and increased further in 2002 to 135 percent of GDP, due to an increase in grants equivalent to about 25 percent of GDP that more than offset a small decline in fishing license fees.

Government expenditure increased significantly in 2001 and remained at a high level in 2002. Current spending increased by over 35 percent in 2001, due to increased personnel costs following an increase in both public sector wages and the workforce, higher subsidies to public enterprises, and higher expenditure on government services. Development expenditure increased by over 85 percent, and total government spending in 2001 amounted to 139 percent of GDP. Spending was cut to 136 percent of GDP in 2002, with further increases in development spending being offset by cuts in current spending on services.

About one-third of the fiscal deficit of 17 percent of GDP in 2001 was financed by external loans, with the remainder being financed by use of income from the Revenue Equalization Reserve Fund (RERF), Kiribati's main external reserve fund. In 2002, the deficit was cut by to less than 1 percent of GDP, financed by external loans, as more of development expenditure was covered by external grants.

The current account worsened in 2001 to near balance for the first time in several years, in line with the higher fiscal deficit, but improved in 2002 to a surplus of 8 percent of GDP. The current account deterioration in 2001 occurred despite higher income from fishing licenses and was largely a result of increased imports related to development expenditure. In 2002, the trade deficit increased further to 88 percent of GDP, but the current account improved due to continued high income from fishing licenses and to higher transfers to the government (33 percent of GDP). The stock of external debt was 17 percent of GDP at the end of 2002. External borrowing is entirely on concessional terms, mostly from the Asian Development Bank (AsDB). Debt service remained low, at around 2 percent of exports of goods and services in 2002.

Progress on structural reform has been limited in recent years. New legislation on procurement and the environment was enacted in 2002, and the government's investments in education began to bear fruit, with completion of the junior secondary schools. However, the new Environment Act has not been enforced yet, and little progress has been made in translating into action the government's intention to promote private sector development, as expressed in the National Development Strategies for 2000-2003. Majority ownership of the Bank of Kiribati (BOK) was transferred to the private sector, but TSKL, the telecommunications company, reverted to a wholly owned government corporation, and government activity increased in the agriculture sector (construction of a publicly operated copra mill) and in transport (leasing of a new jet by Air Kiribati). Inadequate and poorly maintained infrastructure remains a significant constraint on development and growth.

Executive Board Assessment

Recognizing the particular challenges facing Kiribati as a small island economy, Directors commended the authorities for maintaining macroeconomic stability, and noted that poverty is virtually nonexistent in the country, owing to the strong traditional culture that provides social stability and promotes family welfare. However, Directors observed that there had been a slight decline in real per capita income over the last three years. They noted that the weak growth performance came despite a significant increase in government spending, which led to a substantial budget deficit in 2001, and a corresponding worsening of the external balance. They welcomed the return to a balanced fiscal position in 2002, and stressed the need to limit spending in the remainder of 2003 to avoid a large increase in the deficit. Directors encouraged the authorities to undertake structural reforms to promote growth, especially by creating, over time, an enabling environment for private sector development.

Directors considered that the draft 2003 budget would have led to a significant rundown of government funds, and encouraged the new government to prepare a more prudent budget for the remainder of the year. Overall, expenditures should be limited to what could be financed from revenues, external grants and concessional loans, and any use of the Revenue Equalization and Reserve Fund (RERF) to finance the budget should be approached with caution. Current expenditure could be reduced by cutting subsidies to public enterprises and avoiding salary increases, while the revenue base could be widened by implementing a value-added or general sales tax, with technical assistance from the Pacific Financial Technical Assistance Center (PFTAC). Given the country's limited resources, improving the governance and efficiency of the public sector should also be a priority.

Directors agreed that Kiribati's substantial external assets in the RERF are an important safeguard against external shocks, and encouraged the authorities to continue their prudent management of the fund. They supported the authorities' longstanding policy of aiming to preserve the real per capita value of the RERF, so that it benefited both the current and future generations. Noting that the previous government's proposal to make a substantial drawing from the RERF this year was not consistent with this goal, they cautioned that use of RERF income should be consistent with the goal of maintaining the real per capita value of the RERF.

Directors commended the authorities for their sound monetary and financial sector policies. They agreed that Kiribati's use of the Australian dollar as its currency had served the country well. Directors welcomed the planned submission of a draft Financial Institutions Act to Parliament later this year and the preparation of anti-money laundering legislation.

Directors encouraged the authorities to foster growth by maintaining a stable macroeconomic environment and promoting private sector development. They encouraged the government to reduce its activities in sectors that can be carried out by the private sector, such as in retail sales and manufacturing, and to privatize other public enterprises over the medium term. Directors also stressed that the authorities could help the private sector by improving infrastructure, simplifying investment procedures, and eliminating distortions in the tax system that discourage foreign investment.

Over the medium term, Directors saw risks but also opportunities for development and growth. External factors, especially volatile revenues from fishing licenses, posed challenges for Kiribati. Future sources of economic growth could include small-scale manufacturing for domestic consumption, microfinance institutions, tourism and marine development. Over the longer term, deep sea mining in Kiribati's large exclusive economic zone could provide an additional important income source, but it was considered important that this be a private sector initiative.

While recognizing the difficulties in collecting statistics in a geographically-dispersed country, Directors encouraged the authorities to improve the quality and timeliness of economic data by increasing resources and making more efficient use of existing resources and technical assistance in this area.



Kiribati: Selected Economic Indicators


 

1998

1999

2000

2001

2002

2003

         

Est.

Proj.


   
 

(In millions of U.S. dollars)

Output and prices

           

Nominal GDP

48.1

53.8

48.5

47.3

53.8

58.4

Nominal GNP 1/

89.7

91.5

84.1

86.5

92.1

90.4

Real GDP growth (percent change)

12.6

9.5

1.6

1.8

1.0

2.5

Real GNP growth (percent change)

15.0

-0.2

3.6

7.3

-5.6

-7.3

Inflation (percent)

4.7

0.4

1.0

7.3

1.1

2.5

             
 

(In percent of GDP)

Central government budget

           

Total revenue and grants

135.5

105.8

100.4

121.8

135.1

119.8

Total expenditure and net lending

116.7

111.6

102.5

139.3

135.7

149.9

Current expenditure

66.5

66.2

68.0

84.7

72.3

63.0

Development expenditure

50.3

44.9

30.0

51.1

60.9

86.0

Net lending

0.0

0.6

4.4

3.5

2.5

1.0

Budget balance

18.7

-5.8

-2.0

-17.5

-0.6

-30.1

             
 

(In millions of U.S. dollars)

Financial sector 2/

           

Net foreign assets

57.8

68.4

62.2

52.4

76.2

84.8

Domestic credit, net

6.2

5.2

5.9

4.8

5.5

5.8

             

Balance of payments

           

Current account balance

16.9

6.7

6.4

1.5

4.2

-12.6

(In percent of GDP)

35.2

12.4

13.3

3.2

7.7

-21.5

Trade balance

-26.8

-31.5

-36.0

-39.8

-47.2

-58.7

Exports, f.o.b.

5.9

9.1

3.6

4.5

5.2

5.8

Imports, f.o.b.

32.7

40.6

39.6

44.3

52.4

64.5

Services, net

-9.9

-12.7

-11.0

-13.7

-15.1

-17.9

Income, net

45.8

42.5

39.4

43.3

43.4

37.7

Transfers, net

7.8

8.3

14.0

11.8

23.0

26.3

Overall balance

20.5

12.4

13.9

5.8

11.5

-1.8

             

Official external assets (end of period)

367.8

411.2

380.8

340.7

344.7

351.1

(In years of imports of goods and services)

7.9

7.1

7.3

5.6

4.7

4.0

Of which:
Revenue Equalization Reserve Fund

348.0

393.2

364.5

324.7

326.1

335.7

             

Memorandum items:

           

External debt (end of period)

7.1

8.4

7.6

9.6

9.5

15.7

U.S. dollar per Australian dollar (period average)

1.59

1.55

1.72

1.93

1.82

...

Nominal effective exchange rate 3/

84

88

81

78

81

...

Real effective exchange rate 3/

93

96

86

88

91

...

             

Sources: Data provided by the Kiribati authorities; and IMF staff estimates and projections.

1/ GDP plus investment income, seamen's remittances, and fishing license fees.

2/ Comprises Bank of Kiribati, Development Bank of Kiribati, and Kiribati Provident Fund.

3/ Data from Kiribati authorities; and Information Notice System; 1990 = 100; period average.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.




IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs    Media Relations
E-mail: publicaffairs@imf.org E-mail: media@imf.org
Fax: 202-623-6278 Phone: 202-623-7100