IMF Executive Board Concludes 2009 Article IV Consultation with KiribatiPublic Information Notice (PIN) No. 09/54
May 12, 2009
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On May 1, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kiribati.1
Economic activity picked up in 2008 with growth reaching 3½ percent (following a mild contraction in 2007), largely reflecting growth in agricultural and public sector activity. External sources of income (investment income, fishing license fees, and remittances) have remained critical and account for around one-third of GNP. The Australian dollar (A$) is used as the domestic currency.
Inflation increased to around 19 percent by end-2008, largely reflecting higher food prices. Administered fuel prices mean that the public sector absorbed the impact of the run-up in global fuel prices through mid-2008. The sharp depreciation of the A$ during the last quarter of 2008 has in part offset the subsequent decline in international food and fuel prices.
The fiscal deficit declined from 16 percent of GDP in 2007 to 13.3 percent of GDP in 2008. This improvement mainly reflected higher revenue from fishing license fees (in A$ terms), but also some expenditure constraint. Large fiscal deficits have necessitated large drawdowns from Revenue Equalization Reserve Fund (RERF) (A$25 million in 2008) as the RERF is the main source of deficit financing. With the large drawdowns in recent years, and the global decline in asset values, the RERF has declined substantially in real per capita terms. Furthermore, most public enterprises (PEs) have continued to operate with losses, and there have been large increases in government guaranteed loans from Bank of Kiribati to PEs. On the positive side, there has been notable progress with improving revenue administration.
The current account deficit was broadly unchanged in 2008. The stock of external debt was around 9 percent of GDP at the end of 2008, with most borrowing on concessional terms from the Asian Development Bank. External debt service is around 11 percent of exports of goods and services.
Structural reforms are underway, although the pace has been limited by capacity constraints. Plans to review and restructure the large number of loss making PEs have been announced. Kiribati’s draft Private Sector Development Strategy also addresses the key priority areas for creating an enabling environment for business. Developing Kiribati’s vast marine resources and tourism are key, but Kiribati’s remoteness and the difficulty of ensuring regular flights are major challenges.
Executive Board Assessment
Executive Directors welcomed the recent improvement in economic activity. They observed that, while Kiribati faces challenges from its remote location and vulnerability to climate change, strong policy performance would contribute to maintaining financial stability, and support Kiribati in taking advantage of its vast marine and natural resources, and growth opportunities in fishing and tourism, to sustain economic growth.
Directors considered that, in the absence of monetary policy options, fiscal policy could be used in the near term to counter the negative impacts of the global economic slowdown, including by bringing forward projects and through well-targeted social spending if necessary. They stressed, however, that over the medium-term deficits would need to be reduced in order to maintain fiscal sustainability. Directors welcomed the recent improvement in revenue administration. They indicated that, going forward, fiscal consolidation will depend on additional revenue and expenditure measures including the further strengthening of revenue administration, the introduction of consumption tax and excises, and enhanced fishing license revenues. On the expenditure side, priority should be given to controlling the public sector wage bill, and reducing subsidies and loan guarantees to public enterprises.
Directors noted the substantial decline in the Revenue Equalization Reserve Fund (RERF) due to large drawdowns and global asset prices declines, and agreed that a well-defined rule for drawdowns from the RERF and a medium-term budgetary framework could help smooth expenditure and safeguard the RERF. They also stressed the importance of improving public sector cash management given the high cost of bank overdrafts.
Directors welcomed the planned review and reform of PEs as critical to promoting private sector development, and to boosting the growth potential. The rationalization and reform of PEs by enhancing their financial management, transparency and monitoring would create fiscal space for much needed social spending and increase the scope for private sector activity. Improving the investment climate and land titling, enhancing competition, and developing further Kiribati’s marine resources and tourism would also contribute to promoting private sector development.
Directors observed that greater competition together with an enhanced regulatory and supervisory framework would strengthen the financial sector. Given the large share of non-performing loans and its plan for expansion, the Development Bank of Kiribati should improve its risk management. In light of its weak capital position, the investment strategy and dividend policy of the Kiribati Provident Fund should be reviewed.
Directors welcomed the recent improvements in national accounts and balance of payments statistics, and looked forward to further improvement in data compilation and dissemination.