## KIRIBATI (cr17386)

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### CONTEXT
- Geography and development challenges:
  - Over thirty remote islands spread over 3.5 million square kilometers of ocean.
  - Average atoll elevation: 1.8 meters.
  - Narrow production and export base: mainly fisheries and copra.
  - About a fifth of the population lives below the basic needs poverty line.
- Opportunities and assets:
  - Vast exclusive economic zone (EEZ), one of the largest in the Pacific.
  - RERF balance equivalent to 350 percent of GDP.
  - Significant development partner assistance for infrastructure; notable improvements in roads, airports, and telecommunication.
- Structural constraints:
  - High cost of infrastructure and public service delivery.
  - Weaknesses in business climate and financial intermediation.
  - Large infrastructure gap remains.

### RECENT DEVELOPMENTS, OUTLOOK AND RISKS
- Recent macro developments:
  - Fishing license fees averaged nearly 80 percent of GDP in 2014–16 compared to the historical average of 25 percent.
  - Real GDP growth: double-digit in 2015; 1.1 percent in 2016.
  - Headline inflation: picked up to nearly 2 percent in 2016; moderated somewhat in 2017.
  - RERF net capitalization value reached nearly A$900 million (around 350 percent of GDP) as of August 2017.
  - Government cash reserves about A$110 million relative to the recommended buffer of A$45 million (equivalent to three months of recurrent spending).
  - Fishing revenue exceeded the 2016 budget projection by 25 percent of GDP, offset by budget overruns including copra subsidies overspending by nearly 6 percent of GDP.
  - Budget spending likely to increase from 71 percent of GDP in 2016 to 85 percent of GDP in 2017 (historical average 55 percent of GDP before the fishing revenue boom).
  - Current account surplus: 19 percent of GDP in 2016; projected 14 percent this year.
  - REER stable for much of 2016; tracked weakening of the Australian dollar since early 2017.
- Outlook and projections:
  - Growth projected to pick up to around 3 percent in 2017 driven by construction and wholesale and retail trade.
  - Inflation projected to remain modest in 2017 and pick up to around 2.5 percent over the medium term.
- Risks and vulnerabilities:
  - Strong exposure to volatility in fishing revenue driven by weather patterns and global tuna market prices.
  - RERF and KPF exposure to global financial market turmoil (assets invested primarily in foreign markets).
  - High reliance on imported goods; commodity price shocks and exchange rate volatility can materially affect imports.
  - Long-run sustainability risks if donor grant reliance is reduced (staff DSA indicates Kiribati remains at high risk of debt distress).
  - Near-term growth risks skewed to the downside (Annex I).

### EXTERNAL SECTOR ASSESSMENT (summary)
- External balances driven by exogenous factors: fishing license fees, RERF investment income, and donor contributions dominate inflows; infrastructure outflows financed by project grants and loans.
- EBA current account model indicates 2016 current account surplus (19 percent of GDP) stronger than fundamentals, but model residuals and methodological limitations reduce applicability for Kiribati.
- REER broadly stable and in line with historical averages for most of 2016–2017.
- Use of the Australian dollar as legal tender remains appropriate given close trade and financial linkages and limited capacity for an independent monetary institution.
- Policy implication: securing donor grants for development spending is critical for long-run external sustainability.

### STRUCTURAL REFORMS AND INSTITUTIONAL DEVELOPMENTS
- Progress on structural reforms:
  - KPF: accumulated deficit reduced by 50 percent.
  - SOE reform: multi-year process in final phase; government on track to reduce the number of SOEs by almost half through privatization and mergers.
  - Kiribati secured Green Climate Fund (GCF) financing to enhance access to climate change financing.
  - Participation in overseas labor mobility schemes increased.
- Infrastructure projects and financing (selected, as reported):
  - Kiribati Road Rehabilitation Project: $17.6 million (2011–2015), Grant.
  - Kiribati Aviation Investment Project: $14.3 million (2012–2018), Grant.
  - Project for Reconstruction of Nippon Causeway: 3.8 billion yen (2016–2019), Grant.
  - Bonriki International Airport Upgrade Project: $14.7 million (2016–2019), Loan.
  - South Tarawa Sanitation Improvement Sector Project: $2.8 million (2014–2019), Grant.
  - Pacific Regional Connectivity Program Project for Kiribati: $20 million (2017–2022), Grant.

### ENHANCING SUSTAINABILITY AND POLICY CAPACITY
- Policy challenges:
  - Large volatility in fishing revenue complicates public financial management and budget planning.
  - Long-run spending pressures from infrastructure needs and climate change adaptation.
  - Repeated use of supplementary budgets since 2015 highlights risk of procyclical spending.
  - Real per capita value of the RERF still 20 percent below the peak in the 2000s despite recent replenishment.
- Staff baseline and scenario findings (Box 2):
  - Baseline assumption: fishing revenue projected to decline by about 15 percent in 2018 (subject to significant uncertainties).
  - Baseline simulation: if policy stance unchanged and fishing revenue remains around A$130 million per year in real terms, the RERF would increase gradually to around A$1.2 billion over the long run.
  - Downside simulation: if fishing revenue declines by half while public spending remains the same as in the baseline, the fiscal deficit would widen sharply leading to a depletion of the RERF in about 15 years.
- Key policy guidance:
  - Base budget decisions on prudent revenue projections, spending goals, and wealth management targets.
  - Avoid procyclical spending and repeated supplementary budgets that erode long-run wealth.
  - Secure donor support for infrastructure investment to reduce debt distress risk.
  - Strengthen macroeconomic policy capacity and public financial management to implement the Kiribati 20-Year Vision (KV20) priorities in fisheries, tourism, and inclusive growth.

### STRENGTHENED FISCAL POLICY FRAMEWORK: KEY ELEMENTS AND RECOMMENDATIONS
- Commit to a structurally balanced budget over the next three years:
  - Set an expenditure path consistent with meeting fiscal balance including donor budgetary support but excluding foreign financed capital expenditure.
  - If revenue deviates from projections, adjust expenditure gradually on a rolling basis to maintain fiscal balance by the end of the projection period, taking into account future revenue projections based on assessment of whether the revenue shock is likely temporary or permanent.
  - Limit growth of the wage bill and subsidies and grants in line with nominal GDP.
  - Correct the sharp increase in discretionary expenditure that occurred in 2016–17.
  - Bias adjustments to revenue surprises toward saving revenue overperformance while adjusting more quickly to downside surprises.
  - Refrain from borrowing non-concessional loans.
- Make efficient use of cash buffers:
  - Maintain an appropriately-sized cash reserve buffer—equivalent to three months of recurrent spending—to cope with revenue volatility and external shocks.
  - Government’s current cash reserves, including the custodian account managed by an external fund manager and the cash deposits, are well above the threshold considered adequate.
  - Transferring the excess reserves into the RERF could help strengthen fiscal discipline.
- Formulate a long-run RERF withdrawal mechanism:
  - Adjust the structural balance target over the longer run in line with a rule-based annual financing from the RERF.
  - From the intergenerational social welfare perspective, optimal annual net accumulation depends on compensating future generations for decline in per capita fishing revenue and rising non-fishing income in real per capita terms.
  - Example mechanism: keep the real per capita RERF constant, allowing an annual withdrawal from the fund by around 1 percent (assuming the real return of the fund of around 3 percent and population growth of around 2 percent), equivalent to about 3.5 percent of GDP in 2021.
  - The mechanism should be rule-based, transparent, and adjusted over time to reflect structural changes in fishing revenue, potential growth, investment spending needs, and RERF earnings.

### AUTHORITIES’ VIEWS ON FISCAL FRAMEWORK
- Authorities welcomed staff’s recommendations and noted the long-standing aim of having a balanced budget over the medium term.
- Committed to limiting use of the RERF’s principal to finance budget deficits while allowing the RERF to function as an endowment fund for both short and long run development.
- Agreed there may be efficiency gains to move excess cash deposit to the custodian account or the RERF.
- Disagreed that spending has been procyclical, noting Supplementary Budgets relate to Statutory Expenditure, unexpected increase in the cost of copra subsidies, and one-off spending for outer island development.

### IMPROVING CAPACITY DEVELOPMENT: PRIORITIES AND ACTIONS
- Immediate actions needed in the next 12 months to improve budget reporting and control, to establish a strategy by the Cabinet to guide future budget development.
- Push forward structural fiscal reforms to address institutional weakness identified in recent PFTAC-led technical assistance on VAT administration and public financial management.
- Implement the overarching modernization plan of the Kiribati Taxation Division (KTD).
- Strengthen institutional framework for public investment:
  - Government has allocated funding equivalent to 12 percent of GDP for outer island development and plans to scale up investment in transportation service.
  - Review public investment policy framework to identify deficiencies in project planning, allocation and implementation.
  - Improved framework could catalyze more donor support if the country can absorb additional infrastructure financing efficiently.
- Climate change and disaster management:
  - Staff’s analysis suggests climate change alone is likely to cause a reduction in annual growth by 0.1 percentage point per year over the long run.
  - Budget should include an explicit provision up to 3 percent of GDP annually to cover recurrent cost of coastal protection, soil desalinization, and infrastructure maintenance.
  - Cash reserve buffer can serve as contingency plan, backstopped by the RERF as a last-resort measure.
- Financial sector supervision and public funds:
  - A comprehensive banking supervision and regulation framework is needed.
  - Consider commercialization of the DBK into a deposit taking institution only after careful assessment.
  - Investment strategies of public funds should be aligned with institutional roles:
    - Cash reserves are currently 40 percent of GDP; transfer some deposits to the RERF while ensuring ample liquidity for cash management.
    - KPF may adopt a more conservative investment strategy.
    - Monitor KPF’s exposures to domestic assets, including Small Loans Scheme (SLM) exposures to KPF members.
  - Recent reviews of the RERF custodial arrangements are welcomed.
- Copra subsidy program efficiency:
  - Program currently 12 percent of GDP; continue efforts to reduce leakages and consider improving incentive structure to avoid over-harvesting and foster diversification.

### IMPROVING SOFT INFRASTRUCTURE AND PRIVATE SECTOR DEVELOPMENT
- Private sector contribution goal under KV20:
  - Increase private sector’s contribution to GDP from the current 48 percent to 65 percent by 2036.
- Business environment and infrastructure:
  - Reform business legislation to streamline business licensing and registration.
  - Further develop air transportation and shipping services and promote private sector participation.
  - Conduct thorough feasibility analyses to assess economic and social benefits of public investment in transportation versus long-run costs.
- Financial deepening:
  - Reduce cost of financing (currently around 10 percent for small business loans) by improving financial education, land access procedures, dispute resolution, and loan recovery processes.
  - Promote mobile banking leveraging recent ICT investment.
  - Recent regional withdrawal of correspondent banking relations has had limited impact, though compliance costs reportedly increased.
- SOE reforms and human capital:
  - Continue downsizing and rationalizing SOEs; focus on placing SOEs on a more commercial footing.
  - Improve SOE auditing and contingent liability management; phase out VAT exemptions for SOEs.
  - Prioritize education and vocational training: develop synergies between private sector and educational institutions for marine services and hospitality; enhance scholarships and overseas labor mobility participation.

### AUTHORITIES’ VIEWS ON CAPACITY DEVELOPMENT AND PRIVATE SECTOR MEASURES
- Authorities broadly shared staff’s assessment on capacity development priorities.
- Emphasized sustainable implementation of public financial management reform, coordinated across government agencies and aligned with new financial management information system.
- Interested in technical assistance through a Public Investment Management Assessment (PIMA).
- Agreed on need to enhance banking sector regulatory oversight and improve returns on cash reserve funds.
- Noted measures to address leakages in the copra subsidy program and expressed need to ensure sustainability of copra production and incentivize diversification.
- Government is seeking increased access to climate financing and noted international support is critical.

### STAFF APPRAISAL: OUTLOOK, PROGRESS, AND POLICY PRIORITIES
- Economic outlook and risks:
  - Real GDP growth declined to 1.1 percent in 2016, and is projected to pick up to about 3 percent this year driven by construction and wholesale and retail trade.
  - Inflation has remained subdued in line with prices of imported goods.
  - Donor-financed infrastructure projects are in the pipeline and fishing revenue projected to remain robust over the medium term, but risks are substantial and skewed to the downside due to large volatility of fishing revenue.
- Progress on reforms:
  - Implemented important reforms to improve governance and management of the RERF and replenished the fund from cash reserves.
  - Steps taken to address funding gap of the Kiribati Provident Fund (KPF), improve connectivity and transportation services, and enhance access to global climate change financing.
  - Participation in overseas labor mobility schemes increased from a low base.
- Key policy priority:
  - Prudent management of public resources remains the key policy priority given long run spending pressure.
  - Strengthened fiscal policy framework: set rolling, multi-year expenditure paths consistent with a balanced budget target in the medium term and institutionalize the RERF as an endowment fund, including implementing a rule-based withdrawal mechanism.
- Institutional and structural priorities:
  - Strengthen macroeconomic management capacity by addressing weaknesses in tax administration and public financial management, and improving institutional framework for public investment.
  - Other priorities: enhance climate change adaptation capacity; establish comprehensive banking regulation and supervision framework; better align investment strategies of public funds with their institutional roles.

### PRIVATE SECTOR DYNAMISM AND SOE REFORMS (extracts)
- Soft infrastructure priorities:
  - Promoting better infrastructure and connectivity; improving business registration and licensing; enhancing financial deepening.
- SOE measures:
  - Continue SOE divestment and outsourcing; strengthen commercial mandate; phase out VAT exemptions for SOEs.
- Human capital and labor mobility:
  - Further develop specialized certified education in marine services and hospitality; increase scholarship offerings; promote participation in overseas labor mobility programs.
- Administrative timing recommendation:
  - Next Article IV consultation recommended on the standard 12-month cycle.

### KEY MACRO AND FISCAL FIGURES (selected, as reported)
- Real GDP (percent change): 2015: 10.3; 2016: 1.1; 2017: 3.1; 2018: 2.3; 2019: 2.4.
- Consumer prices (percent change, average): 2015: 0.6; 2016: 1.9; 2017: 2.2; 2018: 2.5; 2019: 2.5.
- Real GNI (percent change): 2015: 19.8; 2016: -13.0; 2017: 2.3; 2018: -2.8; 2019: 2.1.
- Nominal GDP (In millions of Australian dollars): 2015: 225.1; 2016: 244.2; 2017: 255.9; 2018: 265.6; 2019: 276.9; 2020: 288.3; 2021: 298.4; 2022: 309.3.
- Nominal GDP (2015): US$173.8 million; GDP per capita (2015): US$1,578; Nominal GNI (2015): US$453.1 million; Population (2015): 110,136.
- Central government finance (percent of GDP), selected:
  - Revenue and grants: 2015: 155.8; 2016: 116.4; 2017: 136.0; 2018: 126.1; 2019: 122.2.
  - Total domestic revenue: 2015: 110.4; 2016: 83.7; 2017: 79.1; 2018: 69.2; 2019: 68.3.
  - Fishing revenue (of which): 2015: 92.0; 2016: 65.1; 2017: 58.6; 2018: 48.9; 2019: 48.1.
  - External Grants: 2015: 45.4; 2016: 32.7; 2017: 56.9; 2018: 56.9; 2019: 53.9.
  - Expenditure and net lending: 2015: 113.2; 2016: 112.3; 2017: 145.1; 2018: 133.4; 2019: 133.0.
  - Recurrent fiscal balance (incl. budget grants): 2015: 52.2; 2016: 14.3; 2017: 1.1; 2018: 0.5; 2019: 3.3.
  - Overall balance: 2015: 42.6; 2016: 4.1; 2017: -9.2; 2018: -7.3; 2019: -10.9.
- RERF closing balance (millions of Australian dollars): 2015: 756; 2016: 868; 2017: 923; 2018: 949; 2019: 976.
- RERF per capita value (in 2006 Australian dollars): 2015: 5,481; 2016: 6,089; 2017: 6,193; 2018: 6,126; 2019: 6,056.
- Balance of payments highlights (selected):
  - Current account including official transfers (millions of US dollars): 2015: 79.1; 2016: 35.3; 2017: 27.2; 2018: 8.7; 2019: 4.8.
  - Current account (percent of GDP): 2015: 46.7; 2016: 19.4; 2017: 14.0; 2018: 4.3; 2019: 2.3.
  - External debt (millions of US dollars): 2015: 32.3; 2016: 40.9; 2017: 47.6; 2018: 53.4; 2019: 65.0.
  - Exports, f.o.b. (millions of Australian dollars): 2015: 11.6; 2016: 14.0; 2017: 11.4; 2018: 11.7; 2019: 12.2.
  - Imports, f.o.b. (millions of Australian dollars): 2015: 132.9; 2016: 143.7; 2017: 151.6; 2018: 160.3; 2019: 169.8.

### RISK ASSESSMENT (selected risks, likelihoods, and impacts)
- Tighter global financial conditions: Likelihood = High; Potential impact = Medium.
- Weaker-than-expected global growth: Likelihood = Medium/High; Potential impact = Medium.
- Reduced financial services by correspondent banks: Likelihood = High; Potential impact = Low/Medium.
- Risks to fishing license fees (domestic): Likelihood = Medium; Potential impact = High.
- Natural disasters: Likelihood assessed as less than 10 percent; potential impact = Low/High.

### DEBT SUSTAINABILITY ANALYSIS — HIGHLIGHTS AND FINDINGS
- Kiribati remains at high risk of debt distress despite improved fiscal positions and economic fundamentals.
- Debt dynamics and scenarios:
  - Baseline: PV of external debt-to-GDP ratio breaches the indicative threshold (30 percent) by 2023; PV of external-debt-to-exports ratio breaches the threshold (100 percent) by 2025.
  - Extreme test: PV of debt-to-GDP and PV of debt-to-exports ratios breach their thresholds by 2022 and 2025, respectively; PV of public-sector-debt-to-GDP breaches the threshold by 2017 under the extreme scenario.
  - Public sector debt under stress is likely to more than double in the following decade under extreme shocks.
- Public sector debt (selected strings as presented):
  - Public sector debt 1/: 17.923.825.023.027.132.036.941.746.2116.4170.6
  - PV of public sector debt: 9.712.212.211.413.516.118.621.123.661.498.1
  - External debt (nominal) 1/: 13.4 21.425.023.0 27.132.036.9 41.746.2116.4 170.6
  - PV of external debt 4/: 5.2 9.812.2 11.413.5 16.118.621.1 23.661.4 98.1
- Key macro-fiscal assumptions (selected):
  - Real GDP growth (in percent) series: 0.9 10.3 1.1 2.3 3.8 3.1 2.3 2.4 2.3 1.9 1.9 2.3 1.8 1.6 1.7 (as presented).
  - Inflation (GDP deflator, in percent) series: 1.5 2.9 7.3 3.2 2.9 1.6 1.5 1.8 1.8 1.6 1.7 1.7 2.5 2.5 2.5.
- External debt balance (as of end-2016):
  - Asian Development Bank: AUD 29,740,905.
  - International Cooperation and Development Fund, Taiwan Province of China: AUD 20,227,983.

### BASELINE SCENARIO — MACRO ASSUMPTIONS AND IMPLICATIONS
- Real GDP growth:
  - Projected to moderate to 2¼ percent over the medium term and decline further to 1.7 percent over the long run.
- Inflation:
  - Rose to 1.9 percent in 2016; projected to rise to 2.2 percent in 2017; medium to long term: rises to 2.5 percent.
- Fishing revenue:
  - Grew at an average rate of 65 percent during 2012–15; declined by over 20 percent in 2016 and projected to remain around A $150 million in 2017.
  - Baseline assumes fishing revenue will remain constant in real terms at A$130 million in the projection horizon (2018-37).
- Government fiscal position and RERF:
  - Assumed broadly balanced recurrent budget in the medium term by reining in growth of recurrent spending.
  - Long term: recurrent spending expected to increase from 70 percent of GDP to 73 percent of GDP.
  - Operating expenditure related to climate change adaptation and infrastructure maintenance rising from 3 percent of GDP to 6 percent of GDP.
  - Nominal RERF balance remains above A$1 billion over the projection horizon; real RERF balance declines by 30 percent from its end-2016 level.
- Development expenditure:
  - Expected at 60 percent of GDP in the short to medium term, thereafter falling to around 20 percent of GDP in the long term.
  - Medium term (2018-22): financed by a combination of grants and loans.
  - Long run: share of development spending financed by concessional loans assumed to increase from 10 percent to 30 percent.
- External balance:
  - Current account surplus averaged around 40 percent of GDP during 2014-16; will narrow considerably over the medium term as fisheries factor income slows as a share of GDP.

### POLICY IMPLICATIONS AND RECOMMENDATIONS (DSA and report-wide)
- Safeguard long-run fiscal sustainability by:
  - Continued effort to build fiscal buffers.
  - Securing grants to finance the country’s large infrastructure investment needs.
- Manage dependence on fishing license revenue through fiscal commitment to avoid erosion of buffers.
- Maintain prudent RERF management given projected real decline of 30 percent from end-2016 level under baseline.
- Pursue concessional financing terms for development projects to mitigate risks from increased reliance on external borrowing.
- Invest in readiness activities and project development capacity to access global climate funds.
- Continue structural and economic reforms to support fiscal consolidation and resilience.
- Continue engagement with development partners to finance infrastructure needs while safeguarding long-run debt sustainability.

*Source: cr17386 (IMF staff report for the 2017 Article IV consultation).*

### 2017. The staff team included Ding Ding (head) and

### KIRIBATI

### CONTEXT
- Geography and development challenges:
  - Over thirty remote islands spread over 3.5 million square kilometers of ocean.
  - Average atoll elevation: 1.8 meters.
  - Narrow production and export base: mainly fisheries and copra.
  - About a fifth of the population lives below the basic needs poverty line.
- Opportunities and assets:
  - Vast exclusive economic zone (EEZ), one of the largest in the Pacific.
  - RERF balance equivalent to 350 percent of GDP.
  - Significant development partner assistance for infrastructure; notable improvements in roads, airports, and telecommunication.
- Structural constraints:
  - High cost of infrastructure and public service delivery.
  - Weaknesses in business climate and financial intermediation.
  - Large infrastructure gap remains.

### RECENT DEVELOPMENTS, OUTLOOK AND RISKS
- Recent macro developments:
  - Fishing license fees averaged nearly 80 percent of GDP in 2014–16 compared to the historical average of 25 percent.
  - Real GDP growth: double-digit in 2015; 1.1 percent in 2016.
  - Headline inflation: picked up to nearly 2 percent in 2016; moderated somewhat in 2017.
  - RERF net capitalization value reached nearly A$900 million (around 350 percent of GDP) as of August 2017.
  - Government cash reserves about A$110 million relative to the recommended buffer of A$45 million (equivalent to three months of recurrent spending).
  - Fishing revenue exceeded the 2016 budget projection by 25 percent of GDP, offset by budget overruns including copra subsidies overspending by nearly 6 percent of GDP.
  - Budget spending likely to increase from 71 percent of GDP in 2016 to 85 percent of GDP in 2017 (historical average 55 percent of GDP before the fishing revenue boom).
  - Current account surplus: 19 percent of GDP in 2016; projected 14 percent this year.
  - Real effective exchange rate (REER) stable for much of 2016; tracked weakening of the Australian dollar since early 2017.
- Outlook and projections:
  - Growth projected to pick up to around 3 percent in 2017 driven by construction and wholesale and retail trade.
  - Inflation projected to remain modest in 2017 and pick up to around 2.5 percent over the medium term.
- Risks and vulnerabilities:
  - Strong exposure to volatility in fishing revenue driven by weather patterns and global tuna market prices.
  - RERF and KPF exposure to global financial market turmoil (assets invested primarily in foreign markets).
  - High reliance on imported goods; commodity price shocks and exchange rate volatility can materially affect imports.
  - Long-run sustainability risks if donor grant reliance is reduced (staff DSA indicates Kiribati remains at high risk of debt distress).
  - Near-term growth risks skewed to the downside (Annex I).

### EXTERNAL SECTOR ASSESSMENT (summary)
- External balances driven by exogenous factors: fishing license fees, RERF investment income, and donor contributions dominate inflows; infrastructure outflows financed by project grants and loans.
- EBA current account model indicates 2016 current account surplus (19 percent of GDP) stronger than fundamentals, but model residuals and methodological limitations reduce applicability for Kiribati.
- REER has been broadly stable and in line with historical averages for most of 2016–2017.
- Use of the Australian dollar as legal tender remains appropriate given close trade and financial linkages and limited capacity for an independent monetary institution.
- Policy implication: securing donor grants for development spending is critical for long-run external sustainability.

### STRUCTURAL REFORMS AND INSTITUTIONAL DEVELOPMENTS
- Progress on structural reforms:
  - KPF: accumulated deficit reduced by 50 percent.
  - SOE reform: multi-year process in final phase; government on track to reduce the number of SOEs by almost half through privatization and mergers.
  - Kiribati secured Green Climate Fund (GCF) financing to enhance access to climate change financing.
  - Participation in overseas labor mobility schemes increased.
- Infrastructure projects and financing (selected, as reported):
  - Kiribati Road Rehabilitation Project: $17.6 million (2011–2015), Grant.
  - Kiribati Aviation Investment Project: $14.3 million (2012–2018), Grant.
  - Project for Reconstruction of Nippon Causeway: 3.8 billion yen (2016–2019), Grant.
  - Bonriki International Airport Upgrade Project: $14.7 million (2016–2019), Loan.
  - South Tarawa Sanitation Improvement Sector Project: $2.8 million (2014–2019), Grant.
  - Pacific Regional Connectivity Program Project for Kiribati: $20 million (2017–2022), Grant.

### ENHANCING SUSTAINABILITY AND POLICY CAPACITY
- Policy challenge:
  - Large volatility in fishing revenue complicates public financial management and budget planning.
  - Long-run spending pressures from infrastructure needs and climate change adaptation.
  - Repeated use of supplementary budgets since 2015 highlights risk of procyclical spending.
  - Real per capita value of the RERF still 20 percent below the peak in the 2000s despite recent replenishment.
- Staff baseline and scenario findings (Box 2):
  - Baseline assumption: fishing revenue projected to decline by about 15 percent in 2018 (subject to significant uncertainties).
  - Baseline simulation: if policy stance unchanged and fishing revenue remains around A$130 million per year in real terms, the RERF would increase gradually to around A$1.2 billion over the long run.
  - Downside simulation: if fishing revenue declines by half while public spending remains the same as in the baseline, the fiscal deficit would widen sharply leading to a depletion of the RERF in about 15 years.
- Key policy guidance (implied by analysis and staff recommendations):
  - Base budget decisions on prudent revenue projections, spending goals, and wealth management targets.
  - Avoid procyclical spending and repeated supplementary budgets that erode long-run wealth.
  - Secure donor support for infrastructure investment to reduce debt distress risk.
  - Strengthen macroeconomic policy capacity and public financial management to implement the Kiribati 20-Year Vision (KV20) priorities in fisheries, tourism, and inclusive growth.

*International Monetary Fund staff report (2017).*

### 13.      Against this background, a strengthened fiscal policy framework is needed to

### 13.      Against this background, a strengthened fiscal policy framework is needed to

### Strengthened fiscal policy framework: key elements and recommendations
- Commit to a structurally balanced budget over the next three years:
  - Set an expenditure path consistent with meeting fiscal balance including donor budgetary support but excluding foreign financed capital expenditure.
  - If revenue deviates from projections, adjust expenditure gradually on a rolling basis to maintain fiscal balance by the end of the projection period, taking into account future revenue projections based on assessment of whether the revenue shock is likely temporary or permanent.
  - Limit growth of the wage bill and subsidies and grants in line with nominal GDP.
  - Correct the sharp increase in discretionary expenditure that occurred in 2016–17.
  - Bias adjustments to revenue surprises toward saving revenue overperformance while adjusting more quickly to downside surprises.
  - Refrain from borrowing non-concessional loans, which may entail significant currency risks, jeopardize long-run fiscal sustainability, and constrain future borrowing capacity.

- Make efficient use of cash buffers:
  - Maintain an appropriately-sized cash reserve buffer—equivalent to three months of recurrent spending—to cope with revenue volatility and external shocks.
  - The government’s current cash reserves, including the custodian account managed by an external fund manager and the cash deposits, are well above the threshold that is considered adequate to cope with revenue volatility and external shocks.
  - Transferring the excess reserves into the RERF could help strengthen fiscal discipline, as withdrawals from the RERF require more legislative scrutiny.

- Formulate a long-run RERF withdrawal mechanism:
  - Adjust the structural balance target over the longer run in line with a rule-based annual financing from the RERF to support the government’s development agenda while ensuring intergenerational equity.
  - From the intergenerational social welfare perspective, optimal annual net accumulation depends on compensating future generations for decline in per capita fishing revenue and rising non-fishing income in real per capita terms.
  - Example mechanism: keep the real per capita RERF constant, allowing an annual withdrawal from the fund by around 1 percent (assuming the real return of the fund of around 3 percent and population growth of around 2 percent), equivalent to about 3.5 percent of GDP in 2021.
  - The mechanism should be rule-based, transparent, and adjusted over time to reflect structural changes in fishing revenue, potential growth, investment spending needs, and RERF earnings.

### Authorities’ views on fiscal framework
- Authorities welcomed staff’s recommendations and noted the long-standing aim of having a balanced budget over the medium term.
- Committed to limiting the use of the RERF’s principal to finance budget deficits while allowing the RERF to function as an endowment fund for both short and long run development.
- Agreed there may be efficiency gains to move excess cash deposit to the custodian account or the RERF.
- Disagreed that spending has been procyclical, noting Supplementary Budgets relate to Statutory Expenditure, unexpected increase in the cost of copra subsidies, and one-off spending for outer island development.

### Improving capacity development: priorities and actions
- Immediate actions needed in the next 12 months to improve budget reporting and control, to establish a strategy by the Cabinet to guide future budget development.
- Push forward structural fiscal reforms to address institutional weakness identified in recent PFTAC-led technical assistance on VAT administration and public financial management.
- Implement the overarching modernization plan of the Kiribati Taxation Division (KTD) to support sequencing, prioritization and coordination of KTD reform program and yield improvement in tax revenue.
- Strengthen institutional framework for public investment given ambitious near term development spending plan:
  - Government has allocated funding equivalent to 12 percent of GDP for outer island development and plans to scale up investment in transportation service.
  - Review public investment policy framework to identify deficiencies in project planning, allocation and implementation, and build experience and capacity for project management.
  - Improved framework could catalyze more donor support if the country can absorb additional infrastructure financing efficiently.

- Climate change and disaster management:
  - Staff’s analysis suggests climate change alone is likely to cause a reduction in annual growth by 0.1 percentage point per year over the long run.
  - Budget should include an explicit provision up to 3 percent of GDP annually to cover recurrent cost of coastal protection, soil desalinization, and infrastructure maintenance.
  - Cash reserve buffer can serve as contingency plan, backstopped by the RERF as a last-resort measure.

- Financial sector supervision and public funds:
  - A comprehensive banking supervision and regulation framework is needed to safeguard financial stability.
  - Consider commercialization of the DBK into a deposit taking institution only after careful assessment of risk management capacity and capital buffers against legacy doubtful loans.
  - Investment strategies of public funds should be aligned with institutional roles:
    - Cash reserves are currently 40 percent of GDP; transfer some deposits to the RERF while ensuring ample liquidity for cash management.
    - KPF may adopt a more conservative investment strategy to protect asset value given limited financial buffers.
    - Monitor KPF’s exposures to domestic assets, including Small Loans Scheme (SLM) exposures to KPF members.
  - Recent reviews of the RERF custodial arrangements are welcomed and should lead to more transparent and cost efficient management.

- Copra subsidy program efficiency:
  - The program serves mainly as a livelihood subsidy for outer island residents; the program is currently 12 percent of GDP.
  - Continue efforts to reduce leakages to make the program more cost efficient.
  - Consider improving incentive structure to avoid over-harvesting and foster economic diversification (e.g., additional value-added usage like coconut oil; better utilization of copra byproducts such as animal feed).

### Improving soft infrastructure and private sector development
- Private sector contribution goal under KV20:
  - Increase private sector’s contribution to GDP from the current 48 percent to 65 percent by 2036 through an integrated policy framework focused on fisheries and tourism.

- Business environment and infrastructure:
  - Reform business legislation to streamline business licensing and registration.
  - Further development in air transportation and shipping services (including promoting private sector participation) could support fishing and tourism and bolster outer island development.
  - Conduct thorough feasibility analyses to assess economic and social benefits of public investment in transportation versus long-run costs.

- Financial deepening:
  - Public financial institutions provide most personal and small business loans; household borrowings often backed by provident fund savings.
  - Reduce cost of financing (currently around 10 percent for small business loans) by improving financial education, land access procedures, dispute resolution, and loan recovery processes.
  - Promote mobile banking leveraging recent ICT investment to support financial deepening and job creation.
  - Recent regional withdrawal of correspondent banking relations has had limited impact, though compliance costs reportedly increased.

- SOE reforms and human capital:
  - Continue downsizing and rationalizing SOEs; next stage focus on placing SOEs on a more commercial footing.
  - Improve SOE auditing and contingent liability management; phase out VAT exemptions for SOEs to level the playing field.
  - Continue divestment and outsourcing of SOE activities (e.g., tourism) to improve efficiency.
  - Prioritize education and vocational training: develop synergies between private sector and educational institutions for marine services and hospitality; enhance scholarships and overseas labor mobility participation.

### Authorities’ views on capacity development and private sector measures
- Authorities broadly shared staff’s assessment on capacity development priorities.
- Emphasized sustainable implementation of public financial management reform, coordinated across government agencies and aligned with new financial management information system.
- Interested in technical assistance through a Public Investment Management Assessment (PIMA).
- Agreed on need to enhance banking sector regulatory oversight and improve returns on cash reserve funds.
- Noted measures to address leakages in the copra subsidy program and expressed need to ensure sustainability of copra production and incentivize diversification.
- Government is seeking increased access to climate financing and noted international support is critical.

### Staff appraisal: outlook, progress, and policy priorities
- Economic outlook and risks:
  - Real GDP growth declined to 1.1 percent in 2016, and is projected to pick up to about 3 percent this year driven by construction and wholesale and retail trade.
  - Inflation has remained subdued in line with prices of imported goods.
  - Donor-financed infrastructure projects are in the pipeline and fishing revenue projected to remain robust over the medium term, but risks are substantial and skewed to the downside due to large volatility of fishing revenue.

- Progress on reforms:
  - Implemented important reforms to improve governance and management of the RERF and replenished the fund from cash reserves.
  - Steps taken to address funding gap of the Kiribati Provident Fund (KPF), improve connectivity and transportation services, and enhance access to global climate change financing.
  - Participation in overseas labor mobility schemes increased from a low base.

- Key policy priority:
  - Prudent management of public resources remains the key policy priority given long run spending pressure.
  - Strengthened fiscal policy framework: set rolling, multi-year expenditure paths consistent with a balanced budget target in the medium term and institutionalize the RERF as an endowment fund, including implementing a rule-based withdrawal mechanism.

- Institutional and structural priorities:
  - Strengthen macroeconomic management capacity by addressing weaknesses in tax administration and public financial management, and improving institutional framework for public investment.
  - Other priorities: enhance climate change adaptation capacity; establish comprehensive banking regulation and supervision framework; better align investment strategies of public funds with their institutional roles.

*Source: cr17386 - 13.      Against this background, a strengthened fiscal policy framework is needed to*

### 32.      A more dynamic private sector would help the implementation of the authorities’

### 32.      A more dynamic private sector would help the implementation of the authorities’

### Private sector dynamism and soft infrastructure
- Continued investment in the country’s soft infrastructure is essential to create an enabling environment for private sector growth and employment.
- Priority actions to enhance the business environment:
  - promoting better infrastructure and connectivity;
  - improving business registration and licensing;
  - enhancing financial deepening.

### State-owned enterprises (SOEs) and market level playing field
- Maintaining the momentum of SOE reforms is important to support private sector growth.
- Recommended SOE measures:
  - continue SOE divestment and outsourcing;
  - further strengthen the commercial mandate of the SOEs to promote operationally and financially sustainable delivery of public services;
  - phase out VAT exemptions for SOEs to create a level playing field.

### Human capital and labor mobility
- Building human capital, especially through vocational and technical training, would help Kiribati harness its natural resources.
- Suggested actions:
  - further develop specialized and certified education in marine services and hospitality;
  - increase scholarship offerings for local students;
  - promote Kiribati’s participation in overseas labor mobility programs.

### Administrative timing recommendation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Key cross-country and development indicators (selected)
- Kiribati has the lowest GDP per capita in the region (charts and comparisons presented).
- Connectivity and basic services metrics noted as weak relative to peers:
  - Liner Shipping Connectivity Index: Kiribati shown among the lower-ranked (index context provided; 100 is maximum).
  - Access to improved sanitation, electricity, mobile cellular subscriptions, internet usage, and ATM access all below many regional peers (chart comparisons provided).

### Recent macro developments and medium-term projections (high-level)
- Growth and inflation:
  - Real GDP (percent change): 2015: 10.3; 2016: 1.1; 2017: 3.1; 2018: 2.3; 2019: 2.4 (Table 1, Table 3).
  - Consumer prices (percent change, average): 2015: 0.6; 2016: 1.9; 2017: 2.2; 2018: 2.5; 2019: 2.5 (Table 1).
- Real GNI (percent change): 2015: 19.8; 2016: -13.0; 2017: 2.3; 2018: -2.8; 2019: 2.1 (Table 1).
- Nominal GDP (In millions of Australian dollars) projections: 2015: 225.1; 2016: 244.2; 2017: 255.9; 2018: 265.6; 2019: 276.9; 2020: 288.3; 2021: 298.4; 2022: 309.3 (Table 2, Table 3).

### Public finances and RERF (selected figures)
- Nominal GDP (2015): US$173.8 million; GDP per capita (2015): US$1,578; Nominal GNI (2015): US$453.1 million; Population (2015): 110,136 (Table 1 top summary).
- Main export products: fish and copra; Quota: SDR 5.6 million (Table 1).
- Central government finance (percent of GDP), selected items:
  - Revenue and grants: 2015: 155.8; 2016: 116.4; 2017: 136.0; 2018: 126.1; 2019: 122.2 (Table 1).
  - Total domestic revenue: 2015: 110.4; 2016: 83.7; 2017: 79.1; 2018: 69.2; 2019: 68.3 (Table 1).
  - Fishing revenue (of which): 2015: 92.0; 2016: 65.1; 2017: 58.6; 2018: 48.9; 2019: 48.1 (Table 1).
  - External Grants: 2015: 45.4; 2016: 32.7; 2017: 56.9; 2018: 56.9; 2019: 53.9 (Table 1).
  - Expenditure and net lending: 2015: 113.2; 2016: 112.3; 2017: 145.1; 2018: 133.4; 2019: 133.0 (Table 1).
  - Recurrent fiscal balance (incl. budget grants): 2015: 52.2; 2016: 14.3; 2017: 1.1; 2018: 0.5; 2019: 3.3 (Table 1).
  - Overall balance: 2015: 42.6; 2016: 4.1; 2017: -9.2; 2018: -7.3; 2019: -10.9 (Table 1).
- Revenue Equalization Reserve Fund (RERF) closing balance (in millions of Australian dollars): 2015: 756; 2016: 868; 2017: 923; 2018: 949; 2019: 976 (Table 1).
- RERF per capita value (in 2006 Australian dollars): 2015: 5,481; 2016: 6,089; 2017: 6,193; 2018: 6,126; 2019: 6,056 (Table 1).

### Balance of payments highlights (selected)
- Current account including official transfers (in millions of US dollars): 2015: 79.1; 2016: 35.3; 2017: 27.2; 2018: 8.7; 2019: 4.8 (Table 1).
- Current account (percent of GDP): 2015: 46.7; 2016: 19.4; 2017: 14.0; 2018: 4.3; 2019: 2.3 (Table 1).
- External debt (in millions of US dollars): 2015: 32.3; 2016: 40.9; 2017: 47.6; 2018: 53.4; 2019: 65.0 (Table 1).
- Exports, f.o.b. (in millions of Australian dollars): 2015: 11.6; 2016: 14.0; 2017: 11.4; 2018: 11.7; 2019: 12.2 (Table 4).
- Imports, f.o.b. (in millions of Australian dollars): 2015: 132.9; 2016: 143.7; 2017: 151.6; 2018: 160.3; 2019: 169.8 (Table 4).

### Risk Assessment Matrix — selected risks, likelihoods, and potential impacts
- Tighter global financial conditions: Likelihood = High; Potential impact = Medium (RERF and KPF asset exposure to global markets, including Australian markets).
- Weaker-than-expected global growth: Likelihood = Medium/High; Potential impact = Medium (fishing license fees and seamen’s remittances could decline; negative impact on RERF assets).
- Reduced financial services by correspondent banks: Likelihood = High; Potential impact = Low/Medium (higher transaction costs for remittances; limited impact so far).
- Risks to fishing license fees (domestic): Likelihood = Medium; Potential impact = High (could lead to higher fiscal deficits; sustained decline may jeopardize long run fiscal sustainability).
- Natural disasters: Likelihood assessed as less than 10 percent; potential impact = Low/High (historical experience shows large losses possible; contingency plans recommended).

### Main recommendations from the 2016 Article IV consultation (implementation status highlights)
- Fiscal policy:
  - Commit to a structurally balanced budget based on projected fishing revenue — 2017 Budget envisaged a balanced budget; revenue overperformance likely offset by supplementary budgets.
  - Maintain appropriately-sized cash reserve buffer and transfer excess cash reserve to the RERF — authorities transferred A$70 million from cash reserves to the RERF.
  - Phase out SOE exemptions of the VAT — Not implemented.
  - Strengthen PFM framework — A PEFA self-assessment was undertaken in 2017.
- Other policies:
  - Push forward SOE reforms — Progress made to improve the performance of the Public Utilities Board (PUB).
  - Address deficiencies in financial supervision — Authorities took steps to address the financing gap of the KPF.

*Source: cr17386 - 32.      A more dynamic private sector would help the implementation of the authorities’*

### Annex III. A Rule Based RERF Withdrawal Mechanism

### Annex III. A Rule Based RERF Withdrawal Mechanism

### Model setup and basic assumptions
- Uses a standard model to calculate the optimal accumulation of Kiribati’s sovereign wealth fund.
- Notation:
  - Capitalized letters denote aggregate (real) variables. Non-capital letters denote the corresponding per capita (real) variables.
  - Balance of sovereign wealth fund at time t: S_t. Per capita term: s_t.
  - Fishing license fees at time t: E_t.
  - GDP in year t: (g n)^t y_0, where g>1 is the growth rate of per capita GDP and y_0 is GDP per capita at time zero.
  - Population: annual population growth rates are n>1. Total population at time zero is normalized to 1.
  - Net interest rate: r.
  - Per capita consumption at time t: c_t.
  - Time discount: β<1.

- National income consists of GDP (income other than fishing revenue) and fishing license fees.
- The benevolent government chooses the consumption path to maximize welfare:
  - Σ_{t≥0} (β^t) u(c_t)

- Intertemporal budget constraint (as stated):
  - Σ_{t≥0} β^t c_t / R^t = S_0 + W_0 + F_0

- Definitions for each period t:
  - W_t = Σ_{s≥t} Y_s / R^{s−t} (sum of current and future GDP discounted to time t)
  - F_t = Σ_{s≥t} E_s / R^{s−t} (fishing wealth, sum of current and future fishing income discounted to time t)
  - R denotes the nominal interest rate.

### Optimality conditions and core equations
- The optimality conditions yield (as presented):
  - Equation (1):
    - (1) () t tt tt ncn S W F β = − ++
      (as given in the source text)
  - Equation (2):
    - 1 11 () (1) () t tttt t S W F n rS W F β − −− ++ = + + +
      (as given in the source text)

- Interpretation provided in the source:
  - Equation (1) is the common annuity equation: the optimal aggregate consumption in each period should be a fixed fraction of total wealth including sovereign wealth fund and discounted value of current and future GDP and fishing income.
  - Equation (2) describes the evolution of total wealth.

- Special simplification when (1) 1 r β += :
  - Equation (3) (reduced form):
    - 1 11 t tttt t s w f s w f − −− ++ = + +
      (as given in the source text)
  - Or equivalently:
    - ∆s_t + ∆f_t + ∆w_t = 0  (Equation (4))

- Interpretation of Equation (3)/(4):
  - The optimal consumption-saving plan requires that the total wealth per capita should be kept constant.
  - The optimal accumulation of the sovereign wealth fund depends on the net change of the present values of fishing income and future GDP in real per capita terms.

### Implications and special cases (as stated)
- If aggregate fishing income is constant over time (E_t = E for all t):
  - The change of fish wealth per capita, ∆f_t = f_t − f_{t−1}, is negative due to population increase (presented as 1t tt f f − ∆ = − in source).
  - In this case, the optimal plan requires 0 t t t s w f ∆ + ∆ = −∆ > . (text as given in the source)
  - The dynamics of the optimal sovereign wealth fund per capita depends on the growth rate of GDP per capita.

- If the growth rate of GDP per capita is zero:
  - ∆w_t will be 0 and it is optimal to keep the per capita balance of the sovereign wealth fund growing to offset the decline of fishing income per capita.

- If ∆f_t + ∆w_t = 0:
  - The optimal plan requires ∆s_t = 0, i.e., the real per capita value of the sovereign wealth fund should be kept constant.

*Source: Annex III. A Rule Based RERF Withdrawal Mechanism (staff report text provided).*

### 2014. Data are compiled quarterly in the BPM6 format. However, the quality of the data is improving only

### cr17386 - 2014. Data are compiled quarterly in the BPM6 format. However, the quality of the data is improving only

### Data standards and quality
- Data are compiled quarterly in the BPM6 format.
- Quality is improving only marginally due to capacity constraints and quality of source data.
- Shortcomings pertain to:
  - adjustments to trade data,
  - recording of investment income,
  - direct investment data,
  - foreign aid data.
- Kiribati has been a participant in the General Data Dissemination System (GDDS) since 04.
- No data ROSC are available.
- Data are reported to STA for publication in the Government Finance Statistics Yearbook, the Balance of Payments Statistics Yearbook and the IFS.

### Table of common indicators (selected entries)
- Exchange Rates — Date of latest observation: 9/22/2017; Date received: 9/22/2017; Frequency of Data: D; Frequency of Reporting/7: D; Frequency of publication/7: D
- Interest Rates /2 — Date of latest observation: 9/12/2017; Date received: 9/12/2017; Frequency of Data: A; Frequency of Reporting/7: A; Frequency of publication/7: I
- Consumer Price Index — Date of latest observation: 9/15/2017; Date received: 9/15/2017; Frequency of Data: M; Frequency of Reporting/7: Q; Frequency of publication/7: Q
- Revenue, Expenditure, Balance and Composition of Financing/3 - General Government /4 — Date of latest observation: 9/15/2017; Date received: 9/15/2017; Frequency of Data: A; Frequency of Reporting/7: A; Frequency of publication/7: I
- Stocks of Central Government and Central Government-Guaranteed Debt /5 — Date of latest observation: 9/15/2017; Date received: 9/15/2017; Frequency of Data: A; Frequency of Reporting/7: A; Frequency of publication/7: I
- External Current Account Balance — Date of latest observation: 9/15/2017; Date received: 9/15/2017; Frequency of Data: A; Frequency of Reporting/7: A; Frequency of publication/7: I
- Exports and Imports of Goods and Services — Date of latest observation: 9/15/2017; Date received: 9/15/2017; Frequency of Data: A; Frequency of Reporting/7: A; Frequency of publication/7: I
- GDP/GNP — Date of latest observation: 9/15/2017; Date received: 9/15/2017; Frequency of Data: A; Frequency of Reporting/7: A; Frequency of publication/7: I
- Gross External Debt — Date of latest observation: 9/15/2017; Date received: 9/15/2017; Frequency of Data: A; Frequency of Reporting/7: A; Frequency of publication/7: I
- International Investment Position /6 — Date of latest observation: 9/15/2017; Date received: 9/15/2017; Frequency of Data: A; Frequency of Reporting/7: A; Frequency of publication/7: I

### Background
- Kiribati is a microstate in the Pacific with a population of nearly 120,000 people and 33 coral atolls over an ocean area of 3½ million square kilometers.
- Main production and export base: tuna fishing and copra.
- High dependence on revenue from selling fishing licenses and on donor support for infrastructure investment.
- Sovereign wealth fund: Revenue Equalization Reserve Fund (RERF), established in 1956 from phosphate mining proceeds.
- As of August 2017, the RERF’s net capitalization value registered nearly A$900 million, an increase of more than 50 percent since its end-2010 balance.
- Key policy challenge: prudent management of public resources given spending needs in development and climate change adaptation.
- Climate change risks cited: drought, higher incidences of natural disasters, loss of groundwater, rising sea levels, coastal erosion, potential relocation of people.
- Capital projects require continued financial support from development partners.

### Baseline scenario — key macroeconomic assumptions
- Real GDP growth:
  - Projected to moderate to 2¼ percent over the medium term.
  - Decline further to 1.7 percent over the long run.
  - Decline driven by lower population growth (from around 2 percent to below 1.5 percent over the long run), decline in infrastructure investment as a share of GDP, and climate change impact (currently estimated to reduce long-term growth by 0.1 percentage point).
- Inflation:
  - Rose to 1.9 percent in 2016.
  - Projected to rise to 2.2 percent in 2017.
  - Medium to long term: rises to 2.5 percent in line with trading partner inflation and international food and fuel price dynamics.
- Fishing revenue:
  - Grew at an average rate of 65 percent during 2012–15.
  - Declined by over 20 percent in 2016 and is projected to remain around A $150 million in 2017.
  - Baseline assumes fishing revenue will remain constant in real terms at A$130 million in the projection horizon (2018-37).
  - Note: fishing license fee is denominated in the U.S. dollar.
- Government fiscal position:
  - Assumed to maintain a broadly balanced recurrent budget in the medium term by reining in growth of recurrent spending.
  - Long term: recurrent spending expected to increase from 70 percent of GDP to 73 percent of GDP.
  - Operating expenditure related to climate change adaptation and infrastructure maintenance rising from 3 percent of GDP to 6 percent of GDP.
  - Annual withdrawal of the RERF needed to finance the recurrent deficit as climate change adaptation costs rise.
  - Nominal RERF balance remains above A$1 billion over the projection horizon; real RERF balance declines by 30 percent from its end-2016 level.
- Development expenditure:
  - Expected at 60 percent of GDP in the short to medium term, thereafter falling to around 20 percent of GDP in the long term.
  - Over the medium term (2018-22), development spending projected to be financed by a combination of grants and loans.
  - Over the long run, share of development spending financed by concessional loans assumed to increase from 10 percent to 30 percent.
  - Assumption: major multilateral donors' project financing (currently 20 percent of total grants) is assumed to be exclusively on credit terms.
- External balance:
  - Current account surplus averaged around 40 percent of GDP during 2014-16 owing to strong fishing license fees.
  - Current account balance will narrow considerably over the medium term as fisheries factor income slows as a share of GDP.
  - Over the long run, current account balance will rise again due to envisaged decline in imports related to development spending.

### Results — debt sustainability findings
- Kiribati remains at high risk of debt distress despite improved fiscal positions and economic fundamentals.
- Debt portfolio:
  - Current debt portfolio constitutes external debt only since all domestic debt was cleared in 2015.
  - Baseline and alternative scenarios assume no domestic debt in the short, medium and long terms.
- Baseline scenario outcomes:
  - PV of external debt-to-GDP ratio breaches the indicative threshold (30 percent) by 2023.
  - PV of external-debt-to-exports ratio breaches the threshold (100 percent) by 2025.
  - Expected trend mainly due to dependence on external financing for development investment.
- Extreme test scenario outcomes:
  - PV of debt-to-GDP and PV of debt-to-exports ratios breach their thresholds by 2022 and 2025, respectively.
  - Public sector debt under extreme shock:
    - PV of public-sector-debt-to-GDP ratio breaches the threshold by 2017.
    - Under the extreme scenario, public-sector-debt-to-GDP is likely to more than double in the following decade.
    - Attribution: higher government external borrowing for project financing.
- Public sector debt downside risks:
  - Elevated due to tapering of windfall fishing license revenue unless strong fiscal commitment is shown by authorities.
  - Under the baseline scenario, PV of total public debt to GDP is projected to breach its indicative threshold (38 percent of GDP) by 2025.
- Notes on DSA tables:
  - Large residuals in the external DSA table for the outer years reflect projected sharp decline in development expenditure financed by grants; historical BOP net transfers to government are about 64 percent of pledged grants.
  - Large residual in the public sector DSA table reflects volatility of fishing revenue (and RERF withdraw/deposit); recent fiscal surpluses were largely saved in the RERF rather than used to repay government debt.

### External debt balance (as of end-2016)
- Asian Development Bank: AUD 29,740,905
- International Cooperation and Development Fund, Taiwan Province of China: AUD 20,227,983
- Source: Kiribati Ministry of Finance, 2017 Budget.

### Key policy implications and recommendations
- Safeguard long-run fiscal sustainability by:
  - Continued effort to build fiscal buffers.
  - Securing grants to finance the country’s large infrastructure investment needs.
- Manage dependence on fishing license revenue through fiscal commitment to avoid erosion of buffers.
- Maintain prudent RERF management given projected real decline of 30 percent from end-2016 level under baseline.
- Pursue concessional financing terms for development projects to mitigate risks from increased reliance on external borrowing.

*Source: STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS (cr17386).*

### 5. The risk of debt distress remains high. The DSA results suggest that Kiribati continues to face

### cr17386 - 5. The risk of debt distress remains high. The DSA results suggest that Kiribati continues to face

### Summary findings
- The risk of debt distress remains high; the DSA results indicate limited scope for external borrowing.
- Sound fiscal buffers, a refined RERF withdrawal mechanism to fund expenditure shortfalls, and continued economic/structural reforms can aid fiscal consolidation and further lower the debt distress rating.
- Significant scope exists for Kiribati to access additional finance from global climate funds to support fiscal needs and climate adaptation projects, but this would likely require investment in readiness programs and strengthened project proposal and management capacity.
- Continued support from development partners to finance development spending is essential to address the large infrastructure gap while safeguarding long-run debt sustainability.

### Key public debt and sustainability indicators (selected, as reported)
- Public sector debt 1/: 17.923.825.023.027.132.036.941.746.2116.4170.6
- of which: foreign-currency denominated: 13.421.425.023.027.132.036.941.746.2116.4170.6
- Change in public sector debt: 3.75.91.2-2.04.14.94.94.74.58.12.9
- Identified debt-creating flows: -23.6-43.1-6.27.16.49.89.08.78.512.516.7
- Primary deficit: -25.0-43.2-4.5-1.020.28.86.6 9.510.49.59.49.39.015.821.818.3
- Revenue and grants: 142.7155.8116.4136.0126.1122.2121.3120.9120.576.670.3
- of which: grants: 53.345.432.756.956.953.953.953.953.914.014.0
- Primary (noninterest) expenditure: 117.7112.6111.9144.7133.0132.6130.8130.2129.892.592.1
- Automatic debt dynamics: 1.40.2-1.7-1.6-0.5-0.6-0.5-0.6-0.8-3.3-5.1
- Contribution from interest rate/growth differential: 0.5-1.4-0.4-0.8-0.5-0.7-0.7-0.7-0.9-2.7-4.1
- Residual, including asset changes: 27.349.07.4-9.2-2.3-4.9-4.1-4.0-4.0-4.3-13.8
- PV of public sector debt: 9.712.212.211.413.516.118.621.123.661.498.1
- Gross financing need 2/: -24.5-42.6-4.19.27.310.910.110.010.017.527.4
- PV of public sector debt-to-revenue and grants ratio (in percent): 6.87.810.58.410.713.115.317.519.680.0139.6
- PV of public sector debt-to-revenue ratio (in percent): 10.811.014.614.419.523.527.531.535.497.9174.4
- Debt service-to-revenue and grants ratio (in percent) 4/: 0.30.40.40.30.30.40.50.50.62.28.0
- Debt service-to-revenue ratio (in percent) 4/: 0.60.60.50.50.60.70.91.01.02.710.0

### External debt frame (selected, as reported)
- External debt (nominal) 1/: 13.4 21.425.023.0 27.132.036.9 41.746.2116.4 170.6
- of which: public and publicly guaranteed (PPG): 13.4 21.425.023.027.1 32.036.941.746.2 116.4170.6
- Change in external debt: 3.88.13.5 -2.0 4.1 4.9 4.9 4.7 4.5 8.1 2.9
- Identified net debt-creating flows: -52.6-47.6 -18.6-13.7 -3.9-1.9 -1.8 -0.5 0.0 -25.4-18.1
- Non-interest current account deficit: -53.7-47.0 -19.8-8.424.3 -14.5-4.8 -2.8 -2.8-1.6 -1.3 -25.9 -18.1 -21.2
- Exports: 85.4 97.669.8 66.2 57.0 56.3 55.6 55.3 54.8 52.9 46.6
- Imports: 105.4103.495.6 95.4 96.0 96.4 96.7 97.5 98.2 53.5 53.5
- Net current transfers (negative = inflow): -54.2 -32.9 -25.5 -25.4 11.1 -22.5 -22.3 -21.0 -20.8 -20.6 -20.4 -7.2 -7.2 -7.8
- PV of external debt 4/: 5.2 9.812.2 11.413.5 16.118.621.1 23.661.4 98.1
- In percent of exports: 6.110.1 17.517.2 23.728.5 33.438.243.0 115.9210.8
- PV of PPG external debt (in percent of government revenues): 5.88.9 14.614.4 19.5 23.527.5 31.535.497.9
- Debt service-to-exports ratio (in percent): 0.00.4 0.60.6 0.70.81.1 1.21.23.2 12.1
- Total gross financing need (Millions of U.S. dollars): -95.0-78.3-33.4 -25.3 -6.8 -2.8 -2.4 0.3 1.7 -66.8 -50.2

### Key macroeconomic and fiscal assumptions (selected)
- Real GDP growth (in percent): 0.910.31.12.33.83.12.32.42.31.91.92.31.81.61.7
- Average nominal interest rate on forex debt (in percent): 0.02.72.11.20.71.81.91.71.91.81.61.81.11.01.1
- Inflation rate (GDP deflator, in percent): 1.52.97.33.22.91.61.51.81.81.61.71.72.52.52.5
- Growth of real primary spending (deflated by GDP deflator, in percent): 39.25.50.66.313.233.3-6.02.11.01.41.65.61.71.5-0.5
- Grant element of new external borrowing (in percent): ...41.941.2......-7.251.651.651.751.751.641.851.649.6...

### Stress tests and sensitivity analysis (high-level signals)
- The DSA includes multiple alternative scenarios and bound tests; the most extreme stress tests cited are Terms shocks in several indicator series.
- Selected reported scenario/result strings (as presented): Table 2 baseline: 1113161921246198; A1: 852-1-5-8-17-75; A2: 40-6-11-16-21-40-120; A3: 13162024293492191.
- Table 4 sensitivity snapshot (selected strings as presented): PV of debt-to-GDP ratio baseline: 172429333843116211; A1: 303432302621144353; A2: 192836445260177349; B6 (one-time 30 percent nominal depreciation relative to the baseline in 2018): 172428333843116211.

### Policy implications and recommendations
- Maintain and strengthen fiscal buffers to reduce reliance on external borrowing and lower debt distress risk.
- Refine the RERF withdrawal mechanism to allow systematic use to fund expenditure shortfalls while protecting long-term sustainability.
- Invest in readiness activities and project development capacity to access global climate funds (grant and concessional modalities) for climate adaptation and fiscal support.
- Continue structural and economic reforms to support fiscal consolidation and resilience.
- Continue engagement with development partners to finance infrastructure needs while safeguarding long-run debt sustainability.

*Source: IMF staff estimates, projections, and the DSA material presented in the supplied content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17386.pdf_