IMF Executive Board Concludes 2013 Article IV Consultation with Kiribati

Public Information Notice (PIN) No. 13/65
June 6, 2013

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2013 Article IV Consultation with Kiribati is also available.

On May 29, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kiribati.1

Background

Kiribati’s key policy challenges include reducing structural fiscal imbalances and increasing medium-term growth potential. Growth in 2012 reached 2.8 percent, reflecting implementation of donor projects, higher than average fishing license fees, and remittances. Airport and seaport projects in particular boosted construction activities. Nevertheless, inflation remained negative on account of lower prices of rice and some other staples. The revenue from fishing licenses was much higher than average in 2012, and is expected to decline in the period ahead.

The current account deficit widened slightly in 2012 to 31 percent of GDP mostly because of an increase in imports of equipment associated with infrastructure projects, which was partially offset by high fishing license fees. Remittances, which are dominated by transfers from seamen, declined somewhat, due to the slowdown in the global shipping activity.

Fiscal imbalances remain large. The 2013 budget implies a current fiscal deficit at about 18 percent of GDP, assuming conservative projections for fishing license revenue.2 High fiscal deficits resulted in large financing demands on its sovereign wealth fund (Revenue Equalization Reserve Fund, or RERF). In 2012, the RERF balance stood at 3½ times GDP, down from 5¾ times GDP in 2000. In constant per capita terms, the RERF assets were almost half of its amount in 2000.

The government has embarked on a broad range of reforms supported by development partners to address its fiscal and structural challenges. In 2012, the government cleared most of the overdraft facilities following the IMF advice and technical assistance, thereby reducing its interest cost. Ongoing reforms cover various areas: public financial management, tax system, State-Owned Enterprises (SOEs), and the private sector. Recently, the parliament passed an SOE bill establishing a strengthened legal framework for governance, financial reporting, and management of SOEs.

Although formal financial intermediation and access to credit for the private sector remains limited, there was an increase in credit to households from banking institutions in 2011–12. In addition, a small lending scheme introduced by the Kiribati Provident Fund contributed to private sector lending. Although the loans are mostly collateralized, the non-performing loan ratios at the Development Bank of Kiribati remained high.

Executive Board Assessment

Executive Directors viewed Kiribati’s key policy challenges as reducing structural fiscal imbalances and increasing medium-term growth potential. Directors concluded that the successful implementation of reforms will improve Kiribati’s growth prospects, promote private sector development, enhance fiscal sustainability, and strengthen resilience to external shocks.

Directors underscored that a key policy objective is to reduce structural fiscal imbalances and ensure the long term sustainability of the Revenue Equalization Reserve Fund (RERF). They agreed that restoring fiscal sustainability by stabilizing the value of the RERF in real per capita terms is a challenging task that requires significant fiscal effort across a broad front. Directors stressed in particular the need for comprehensive tax reforms, improved tax compliance, and decisive steps to strengthen public financial management. In this context, they welcomed the authorities’ intention to adopt the value added tax, and stressed that achieving sufficient growth of fishing license fees is important for revenue prospects. On the expenditure side, Directors suggested that curbing the growth of current expenditure, including the public wage bill, will be important to accommodate the need for social spending and infrastructure development, as well as to address challenges from climate change. Directors also noted that improving the efficiency of subsidies will enhance incentives and reduce risks to the budget.

Directors noted that sound public financial management is essential to ensure a sustainable fiscal framework. They commended the authorities for ongoing efforts to strengthen revenue and expenditure projections, and encouraged them to adopt a prudent debt management policy. Directors welcomed the close collaboration with the donor community and encouraged the authorities to avoid nonconcessional borrowing.

Directors welcomed the government’s progress in state-owned enterprise (SOE) reform, noting that these reforms have already resulted in a decrease in budget costs, and encouraged the authorities to continue addressing performance issues in the Public Utilities Board and other SOEs.

Expanding the role of the private sector in the economy is critical for increasing growth and employment, and reducing fiscal imbalances. Directors saw the local marine sector as having great potential to broaden employment opportunities, create value added, and increase tax revenue. In this context, Directors encouraged the authorities to adopt the National Fisheries Policy that is currently being developed. Other sectors also hold promise, in particular increasing tourism and overseas employment. Improving the business climate is also necessary to help the private sector grow.

While noting the importance of access to financing for private projects, Directors emphasized the need to maintain high prudential standards in financial institutions. In this context, they underscored the importance of reducing the high non-performing loan ratios in the Development Bank of Kiribati and strengthening the financial position of the Kiribati Provident Fund (KPF). Directors also encouraged the authorities to continue improving the quality of economic and financial statistics.


Kiribati: Selected Economic Indicators, 2009–14

 

Nominal GDP (2011): US$172.7 million

   

GDP per capita (2011): US$1,670

Nominal GNI (2011): US$236.1 million

   

Population (2011): 103,365

Main export products: fish and copra

   

Quota: SDR 5.6 million

 
 
  2009 2010 2011 2012 2013 2014
        Projections

Real GDP (percent change)

-0.7 -0.5 2.7 2.8 2.9 2.7

Real GNI (percent change)

-3.8 -1.3 -0.2 11.0 -7.2 4.5

Consumer prices (percent change, average)

8.4 -2.8 1.2 -1.8 2.5 2.5

Consumer prices (percent change, end of period)

0.1 -1.4 0.2 -2.9 2.5 2.5

Central government finance (percent of GDP)

           

Revenue and grants

70.9 72.5 62.0 102.2 88.3 81.7

Total domestic revenue

42.7 47.8 37.0 53.8 37.9 41.4

Grants

28.1 24.7 25.0 48.4 50.5 40.3

Expenditure and net lending

82.8 85.2 83.2 109.0 109.4 95.6

Current

54.7 58.0 58.0 60.7 56.1 54.4

Of which: wages and salaries

24.7 27.0 27.4 28.3 29.2 28.4

Development

28.1 27.1 29.5 48.3 53.3 41.2
             

Current balance 1/

-12.0 -10.2 -21.0 -6.9 -18.2 -13.0

Overall balance

-12.0 -12.7 -21.2 -6.8 -21.1 -13.9

Financing

12.0 12.7 21.2 6.8 21.1 13.9

Revenue Equalization and Reserve Fund (RERF)

11.1 10.5 11.8 22.2 15.4 10.3

Other

0.9 2.1 9.5 -15.4 5.7 3.5

RERF

           

Closing balance (in millions of U.S. dollars)

512 579 588 597 587 578

Closing balance (in millions of $A)

571 583 581 571 570 576

Per capita value (in 2006 $A)

5279 5146 4866 4604 4436 4286

Balance of payments (in millions of U.S. dollars)

           

Current account including official transfers

-29.6 -25.4 -50.4 -55.0 -79.8 -68.9

(In percent of GDP)

-23.3 -16.9 -29.2 -31.4 -43.0 -36.1

External debt (in millions of U.S. dollars)

14.3 18.4 14.2 14.0 19.1 20.6

(In percent of GDP)

9.8 11.3 8.4 7.9 10.4 10.9

External debt service (in millions of U.S. dollars)

1.0 0.6 0.6 0.5 0.5 0.6

(In percent of exports of goods and services)

4.8 3.2 2.8 2.7 2.6 2.6

Exchange rate ($A/US$ period average) 2/

1.3 1.1 1.0 1.0

Real effective exchange rate (period average) 2/

126.0 130.2 131.1 128.6

Memorandum item:

           

Nominal GDP (in millions of Australian dollars)

162.8 164.1 167.3 169.0 178.2 187.6

Nominal GDP (in millions of US dollars)

127.1 150.9 172.7 175.1 185.7 190.7
 

Sources: Data provided by the Kiribati authorities; and IMF staff estimates and projections.
1/ Current balance excludes grants and development expenditure.
2/ The Australian dollar circulated as legal tender.
3/ Index, 2005=100.

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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

2 The current fiscal deficit excludes development expenditures financed by donors and corresponding development grants on the revenue side. It is a better indicator of the fiscal stance and financing demands on Kiribati government than the overall deficit.



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