## cr18209

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### Recent developments
- Real GDP growth rose to 3.2 percent in 2017 on large infrastructure and housing projects, in preparation for the Polynesian Leaders’ Summit in 2018 and the Pacific Forum Secretariat Summit in 2019.
- Inflation accelerated to 4.4 percent in 2017 due to higher food and transportation prices.
- Reserve coverage was broadly sufficient at 9 months of imports at end-2017.
- Lending growth slowed to 6 percent (y/y) in 2017 amid elevated non-performing loans (NPLs).
- The fiscal balance turned into a deficit of 4 percent of GDP in 2017 on lower fishing revenue and higher capital expenditure.
- Consolidated Investment Fund (CIF) balance fell to 42 percent of GDP at end-2017.
- Tuvalu Survival Fund (TSF) balance stood at 10 percent of GDP at end-2017.
- Public debt declined to 37 percent of GDP at end-2017.
- Tuvalu Trust Fund (TTF) value was broadly stable at 333 percent of GDP at end-2017.
- Government’s net financial worth fell to 14 percent of GDP at end-2017.
- Unemployment rate reached 37 percent in 2017.

### Outlook and projections
- 2018 projections:
  - Real GDP growth: 4.3 percent (Proj.) on higher fiscal expenditure and infrastructure projects.
  - Inflation: 4 percent (Proj.) on higher public wages, partly offset by moderating food prices.
  - Reserves: expected to remain sufficient at 10 months of imports at end-2018.
  - Fiscal balance: projected surplus of 6 percent of GDP in 2018, on higher fishing revenue.
- Medium-term projections:
  - Growth expected to remain robust at 4 percent.
  - Inflation projected to slow to 3 percent in the medium term.
  - Fiscal balance projected to weaken after 2018:
    - Fiscal deficit: 5 percent of GDP in the medium term, and 7 percent of GDP in the long term.
    - Domestic current deficit: 65 percent of GDP in the medium term.
    - Current spending: around 100 percent of GDP.
    - Capital spending: around 10 percent of GDP, declining gradually.
  - Balance of payments: surplus in 2018 due to strong fishing license revenue.
  - REER: expected to appreciate further in the near term, with appreciation pace declining over the medium term.

### Main risks
- Climate change and natural disasters (existential threat for low-lying atoll).
- Volatile fishing revenues.
- Reliance on external grants.
- Weak state-owned enterprises (SOEs).
- Limited financial supervision and elevated NPLs.
- Geographical remoteness, small size, and limited infrastructure.

### Executive Board assessment (selected points)
- Commended authorities for improved macroeconomic performance and progress on strengthening climate change resilience.
- Welcomed the broadly positive outlook but noted high susceptibility to external shocks (climate change effects, volatile fishing revenues, reliance on grants).
- Emphasized need for strong commitment to sound policies and structural reforms to build resilience and generate sustainable growth.
- Welcomed progress securing access to the Green Climate Fund and highlighted ensuring continuous access to multilateral climate change schemes.
- Highlighted priorities: implementing reforms under the PFM Roadmap, exploring multilateral risk-sharing mechanisms, and improving financial management of the Tuvalu Survival Fund.

### Policy recommendations and priorities
- Promote resilience to external shocks:
  - Continue to improve climate change risk management.
  - Undertake gradual fiscal consolidation to maintain buffers against shocks.
  - Strengthen the medium-term fiscal framework, contain current spending, prioritize capital spending, mobilize tax revenue, and accelerate SOE reform.
- Broaden the private-sector growth base:
  - Implement macro-structural policies to increase potential output and diversify the growth base, including developing human capital and promoting tourism.
  - Enhance bank credit intermediation by establishing a financial supervisory framework covering the banks and the pension fund.
  - Improve enforcement of existing financial regulations and develop bankruptcy legislation.
  - Improve credit risk management of the Development Bank and enforce existing financial regulations.
- Additional actions:
  - Prioritize capital spending and strengthen fishing revenue forecasts.
  - Accelerate reforms of state-owned enterprises, including raising electricity tariffs and linking them to oil price changes.
  - Continue efforts to strengthen macroeconomic statistics and leverage IMF technical assistance.

### Key statistics and indicators (selected exact figures)
- Real GDP growth: 2015 = 9.1; 2016 = 3.0; 2017 = 3.2; 2018 (Proj.) = 4.3; 2019 (Proj.) = 4.1.
- Consumer price inflation (end of period): 2015 = 4.0; 2016 = 2.6; 2017 = 4.4; 2018 (Proj.) = 4.0; 2019 (Proj.) = 3.4.
- Government finance (Revenue and grants; in $A million): 2015 = 136; 2016 = 138; 2017 = 122; 2018 (Proj.) = 161; 2019 (Proj.) = 113.
- Revenue: 2015 = 102; 2016 = 113; 2017 = 97; 2018 (Proj.) = 118; 2019 (Proj.) = 82.
- Fishing license fees (of which): 2015 = 51; 2016 = 68; 2017 = 50; 2018 (Proj.) = 80; 2019 (Proj.) = 46.
- Grants: 2015 = 34; 2016 = 25; 2017 = 25; 2018 (Proj.) = 43; 2019 (Proj.) = 32.
- Total expenditure: 2015 = 121; 2016 = 131; 2017 = 126; 2018 (Proj.) = 155; 2019 (Proj.) = 118.
- Current expenditure: 2015 = 99; 2016 = 111; 2017 = 97; 2018 (Proj.) = 103; 2019 (Proj.) = 101.
- Capital expenditure: 2015 = 22; 2016 = 19; 2017 = 29; 2018 (Proj.) = 52; 2019 (Proj.) = 17.
- Overall balance: 2015 = 15; 2016 = 7; 2017 = -4; 2018 (Proj.) = 6; 2019 (Proj.) = -4.
- Domestic current balance: 2015 = -47; 2016 = -67; 2017 = -49; 2018 (Proj.) = -65; 2019 (Proj.) = -65.
- Tuvalu Trust Fund (in percent of GDP): 2015 = 318; 2016 = 336; 2017 = 333; 2018 (Proj.) = 315; 2019 (Proj.) = 299.
- Consolidated Investment Fund (in percent of GDP): 2015 = 55; 2016 = 55; 2017 = 42; 2018 (Proj.) = 59; 2019 (Proj.) = 55.
- Tuvalu Survival Fund (in percent of GDP): 2016 = 10; 2017 = 10; 2018 (Proj.) = 14; 2019 (Proj.) = 17.
- Credit growth (percent change): 2015 = 3; 2016 = 13; 2017 = 6; 2018 (Proj.) = 6; 2019 (Proj.) = 5.
- Current account balance (in percent of GDP): 2015 = -53; 2016 = 23; 2017 = 6; 2018 (Proj.) = 5; 2019 (Proj.) = -1.
- Gross reserves (In $A million): 2015 = 57; 2016 = 70; 2017 = 73; 2018 (Proj.) = 81; 2019 (Proj.) = 85.
- Gross reserves (months of prospective imports): 2015 = 9; 2016 = 10; 2017 = 9; 2018 (Proj.) = 10; 2019 (Proj.) = 10.
- Gross public debt (percent of GDP): 2015 = 57; 2016 = 47; 2017 = 37; 2018 (Proj.) = 28; 2019 (Proj.) = 22.
- Nominal GDP (In $A million): 2015 = 47; 2016 = 49; 2017 = 53; 2018 (Proj.) = 57; 2019 (Proj.) = 61.

*Source: IMF staff report for the 2018 Article IV Consultation (Tuvalu).*

### Overall outlook and debt dynamics (conclusion)
- Net financial worth expected to fall below 50 percent of GDP by 2025 under the baseline.
- In adverse scenarios, natural disasters or a sharp fall in fishing revenue could accelerate depletion of fiscal buffers.
- Upside scenario: sustained donor grants could help keep debt-to-GDP below the indicative threshold.
- Tuvalu Trust Fund (TTF): financial performance projected to moderately exceed the fund’s maintained value, allowing continued transfers from the TTF to the CIF.

### Financial sector — status and vulnerabilities
- Banking sector comprises two public banks: National Bank of Tuvalu (NBT) and Development Bank of Tuvalu (DBT).
- Outstanding loans declined to 30 percent of GDP in 2017 from 54 percent of GDP in 2012.
- Loan-to-deposit ratio fell to 20 percent.
- NPLs constitute 41 percent of total loans, primarily to Tuvalu Electricity Corporation (TEC) and impaired housing loans.
- Constraints: high NPLs, insufficient risk management, inadequate supervisory framework, absence of bankruptcy laws, weak credit culture.
- Credit growth expected to remain moderate in the medium term.

### Risks to the outlook (additional highlights)
- Tropical Cyclone Pam in 2015 caused damage worth 33 percent of GDP.
- Fishing revenue increased to 50 percent of GDP in 2017 from 15 percent of GDP in 2011 and accounts for 60 percent of total fiscal revenue.
- One-off payment from a sub-regional pooling scheme expected to raise fishing revenue to 80 percent of GDP in 2018.
- Authorities broadly concur with staff’s macroeconomic outlook and risks; note need to contain current spending and limited monetary policy tools.

### Climate change resilience and TCAP
- Coastal protection projects estimated cost: 84 percent of GDP.
- Tuvalu secured access to the Green Climate Fund in 2017.
- Tuvalu Coastal Adaptation Project (TCAP): runs through 2025 with total cost of 74 percent of GDP and government co-financing of 6 percent of GDP.
- TCAP expected to cover 86 percent of GDP of identified coastal protection costs under the Infrastructure and Investment Plan for 2016-25.
- TCAP program modality: annual funding allocations contingent on a 70 percent completion rate of specified annual targets.
- TCAP outputs and timing:
  - Output 1: Strengthening institutions and capacity — on track to be completed by June 2018.
  - Output 2: Implementing coastal protection projects — accounts for 70 percent of total project costs; commence in June 2018.
  - Output 3: Establishing sustainable financing mechanism — requires integration of island-specific climate risks into plans and budgets.
  - Output 4: Project management (administrative spending).

### Fiscal framework and consolidation scenario
- Recommendation: use the domestic current balance as the operational target.
- Adjustment scenario:
  - Government reduces domestic current deficit by ½ percentage point of GDP each year until 2030.
  - Domestic current deficit would narrow by 6 percentage points over the decade and fall to 59 percent of GDP in 2030 (compared to 65 percent of GDP under baseline).
  - In 2031, fiscal balance would reach a surplus of 1 percent of GDP and be maintained thereafter.
  - Gradual consolidation projected to help maintain government’s net financial worth at around 70 percent of GDP in the long term.
  - This buffer level would be sufficient to buffer most shocks, including a sharp decline in fishing revenue (40 percent of GDP) or natural disasters (20-30 percent of GDP).

### Fiscal consolidation — spending priorities
- Current spending:
  - Contain rising current spending and improve efficiency.
  - Keep public wage bill in check with development partners’ assistance.
  - Control rising official travel costs; develop cost-effective capacity-building strategies.
  - Healthcare: overseas medical treatment program increased 7 times relative to GDP in the past decade and accounts for half of total healthcare spending.
    - Policy priority: monitor and evaluate overseas spending, rationalize medical travel benefits, invest in prevention and early care, and introduce a healthcare information system.
  - Scholarships: adopt merit-based selection, tighter completion requirements, mandatory service periods under penalty of full repayment.
- Capital spending:
  - Align scale and pace with absorption capacity.
  - Prioritize high-impact projects: climate resilience, transport, water and waste management.
  - Improve medium-term budgeting and PFM framework:
    - Introduce competitive tendering under a centralized procurement unit.
    - Ensure adequate maintenance spending on capital assets.
    - Standardize fiscal account classification between the Treasury and the Budget Office.
    - Improve monthly fiscal reporting reliability.
    - Consider multi-year rolling budget for capital investment with rigorous project selection and evaluation.

### Mobilize tax revenue
- Drivers of tax decline:
  - High Personal Income Tax threshold at 3 times per capita GDP after threshold increases in 2014 and 2016.
  - Of six large corporates, only two pay CIT due to a high threshold (2 percent of GDP).
  - Firms with profit below 0.2 percent of GDP exempt from Consumption Tax.
  - Tax arrears by SOEs weakened tax revenue; outstanding tax arrears declined to 2 percent of GDP at end-2017 from 3 percent of GDP at end-2016.
- Authorities’ target: increase tax revenue to 20 percent of GDP.
- Recommendations:
  - Eliminate exemptions and broaden tax base.
  - Limit loss carry-forward to a fixed period (e.g., 5 years).
  - Re-evaluate thresholds for CIT and Consumption Tax.
  - Reduce tax arrears, enhance tax administration capacity, and develop a taxation module on the e-government platform.

### Strengthen fishing revenue forecasts and management
- Fishing revenue dynamics and drivers:
  - Fishing revenue: 50 percent of GDP in 2017 (15 percent of GDP in 2011); accounts for 60 percent of total fiscal revenue.
  - Expected to reach 80 percent of GDP in 2018 with a one-off sub-regional pooling payment.
  - PNA set around 45,000 days TAE in 2018 and allocated Tuvalu around 2,100 days PAE in 2018 (up from 877 days in 2011).
  - Minimum benchmark price increased to $8,000 per vessel day in 2018 from $5,000 in 2012.
- Recommendations:
  - Strengthen coordination between Ministry of Finance (MoF) and Ministry of Natural Resources (MNR) for forecasts and transparency.
  - Establish models to forecast fishing revenues in the budget and increase MoF access to fishing revenue information.
  - Improve financial management of fishing license schemes and continue regional cooperation to sustain fishing revenue.

### SOEs: fiscal dependence, risks, and reform measures
- Fiscal support for SOEs projected to increase to 4 percent of GDP in the medium term.
- Only the National Bank pays CIT and disburses dividends among SOEs.
- SOEs’ tax arrears roughly equal government’s outstanding payment obligations to SOEs (2 percent of GDP).
- NAFICOT’s outstanding debt: 24 percent of GDP; staff recommend inclusion in official government debt data and close monitoring.
- Net profits/losses (selected SOEs, in percent of GDP, 2012–2017 series):
  - Telecommunications Corporation (TTC): -0.8, -0.5, -0.3, -0.1, -0.6, 0.2.
  - Tuvalu Electricity Corporation (TEC): -0.1, 0.1, 0.8, 0.3, 0.5, 0.1.
  - National Bank of Tuvalu (NBT): 2.5, 6.8, 2.6, 3.0, 4.5, 2.7.
  - Development Bank of Tuvalu (DBT): -3.0, -1.2, -1.4, 0.1, 0.2, -0.1.
- Electricity tariffs:
  - Current average electricity tariff: A$ 0.65 per kWh; breakeven level: A$ 0.8 per kWh.
  - Recommendations: raise tariffs and link to oil price changes, introduce differential tariffs, competitive fuel supplier bidding, contain salary expenses, and increase renewable power generation.

### Banking sector linkages and supervision
- NBT:
  - Posted a profit in 2017 and appears to have adequate capital, but faces elevated credit risk.
  - NPLs: 40 percent of total loans (sufficiently provisioned and slightly declined).
  - NBT slowed lending since 2011 and increased deposits in overseas banks.
  - Monopolistic position in foreign exchange services.
- DBT:
  - After NPL write-offs, half of the bank’s loans still NPLs with insufficient provisioning.
  - Performance among the weakest in the region; reliant on financial support and government guarantees.
  - Considering concessional loan from the European Investment Bank.
- TNPF:
  - Member loans expanded to 18 percent of GDP.
  - Total borrowing at 17 percent of retirement balances; pension fund limits borrowing to 30 percent of total retirement benefit balance.
- Supervision gaps:
  - 2011 Banking Commission Act not implemented.
  - Authorities agreed to hire an external financial supervisor and develop a 3-year supervision strategy with PFTAC assistance.
  - Pension fund should be included in supervision framework; bankruptcy legislation needed.
- Macroprudential recommendation:
  - Consider codifying the MOU limiting debt-to-income below 40 percent into regulation and regularly review threshold adequacy.

### Private sector, human capital, and diversification
- Private sector constraints:
  - Unemployment rate: 37 percent.
  - Private activity limited to fishing and agriculture.
  - Tourism receipts low due to poor connectivity, infrastructure, and amenities.
- Policy options:
  - Improve business environment; use World Bank Doing Business assessment to identify reforms.
  - Develop a national tourism strategy, host cruise ships for eco-tourism.
  - Ratification of PACER Plus to support export development and funding.
  - Water resource management (e.g., desalination) to support tourism and business expansion.
  - Consider partial privatization of non-essential government functions.
- Human capital:
  - Strengthen Institute of Technology and professional certifications.
  - Improve secondary education quality and vocational training (including TMTI).
  - Promote gender equality in decision-making and business.

### Data, technical assistance, and authorities’ stance
- Data shortcomings: strengthen institutional capacity for macroeconomic data production and succession planning.
- PFTAC plans continued technical assistance on public financial management, macroeconomic programming, and revenue administration.
- Authorities broadly concur with staff’s analysis; committed to containing current expenditure, strengthening SOE monitoring, and collaborating with PFTAC on financial supervision.

### Risk Assessment Matrix (selected scenarios and impacts)
- Climate change:
  - Likelihood: High; Potential impact: High.
  - Cyclone Pam cost: 33 percent of GDP in 2015.
  - Recommended actions: strengthen fiscal buffers; increase adaptation capacity; build institutional capacity and PFM framework.
- Natural disaster shock (scenario):
  - Hypothetical big cyclone in 2028 with damage near 30 percent of GDP.
  - Under scenario, fiscal deficit widens to 10 percent of GDP in 2028 (vs. 6 percent baseline).
- Fishing revenue shock (scenario):
  - Assumed fall in fishing revenue to 40 percent of GDP (average of three recent years), widening fiscal deficit to 15 percent of GDP.
- Positive grant shock (scenario):
  - Grants remain at 18 percent of GDP from 2019 onwards; effect: debt-to-GDP remains well below threshold.
- Fiscal projections (baseline and later years):
  - Fiscal deficit increases to 12 percent of GDP in 2029 and 11 percent of GDP in 2030 under adverse infrastructure repair scenario.
  - Donor grants projected to decline to zero by 2032 under baseline.

### Debt sustainability and DSA conclusions
- DSA conclusion: Tuvalu remains at a high risk of debt distress, consistent with 2016 DSA.
- External debt breached several thresholds as of 2017 (present value of debt-to-GDP, present value of debt-to-exports, debt service-to-exports).
- Baseline:
  - Debt-to-GDP projected to decline in medium term on amortization and limited borrowing; long run breach as fiscal buffers deplete and concessional borrowing increases.
  - New borrowing expected to be external due to weak domestic banking sector.
- Key baseline assumptions and figures:
  - PPG at end-2017: 37 percent of GDP.
  - TTF at end-2017: 333 percent of GDP; TTF market value A$175 million at end-2017.
  - CIF at end-2017: 42 percent of GDP.
  - Real GDP growth projections: 4.3 percent (this year), 4 percent (medium term), 2 percent (long run).
  - Natural disaster average cost: 1 percent of GDP per year (baseline assumption).
  - Inflation projections: 4 percent (this year), 3 percent (medium term), 2 percent (long run).
  - Current account (medium term): deficit of 10 percent of GDP.
  - Fishing license fees (medium term average): 46 percent of GDP (50 percent in 2017).
  - Fiscal deficit projections: 5 percent of GDP (medium term), 7 percent (long term).
  - Domestic current deficit (excl. fishing, grants, capital): 65 percent of GDP.

### Additional numeric and contextual highlights
- Population (2016 est.): 10,879.
- Per capita GDP (2016 est.): US$3,157.
- Poverty rate (2017): 26 percent.
- Life expectancy (2016): 67 years.
- Tuvalu Trust Fund (stock, $A million): 2015 = 150; 2016 = 165; 2017 = 175; projections 2018–2023: 179, 182, 186, 190, 194, 197.
- CIF stock (A$ million): 2015 = 26; 2016 = 27; 2017 = 22.
- Gross reserves (In $A million): 2015 = 57; 2016 = 70; 2017 = 73; 2018 = 81; 2019 = 85.
- Gross public debt (percent of GDP): 2015 = 57; 2016 = 47; 2017 = 37; 2018 (Proj.) = 28; 2019 (Proj.) = 22.
- Population rounded in another table: 11,000.
- Total atoll area: 26 square kilometers.
- Average island height: 2 meters above sea level.
- TTF target by authorities: increase TTF to A$200 million from A$175 million.
- World Bank estimate for climate resilience investment need: around 2 percent of GDP annually.

*Source: Staff report for the 2018 Article IV Consultation (Tuvalu).*

### 3.2 percent in 2017 on large infrastructure and housing projects, in preparation for the

### cr18209 - 3.2 percent in 2017 on large infrastructure and housing projects, in preparation for the

### Recent developments
- Real GDP growth rose to 3.2 percent in 2017 on large infrastructure and housing projects, in preparation for the Polynesian Leaders’ Summit in 2018 and the Pacific Forum Secretariat Summit in 2019.
- Inflation accelerated to 4.4 percent in 2017 due to higher food and transportation prices.
- Reserve coverage was broadly sufficient at 9 months of imports at end-2017.
- Lending growth slowed to 6 percent (y/y) in 2017 amid elevated non-performing loans (NPLs).
- The fiscal balance turned into a deficit of 4 percent of GDP in 2017 on lower fishing revenue and higher capital expenditure in preparation for the two regional summits.
- The Consolidated Investment Fund (CIF) balance fell to 42 percent of GDP at end-2017.
- The Tuvalu Survival Fund (TSF) balance stood at 10 percent of GDP at end-2017.
- Public debt declined to 37 percent of GDP at end-2017.
- The Tuvalu Trust Fund (TTF) value was broadly stable at 333 percent of GDP at end-2017.
- Government’s net financial worth fell to 14 percent of GDP at end-2017.
- The unemployment rate reached 37 percent in 2017.

### Outlook and projections
- 2018 projections:
  - Real GDP growth projected to accelerate to 4.3 percent on higher fiscal expenditure and infrastructure projects.
  - Inflation expected to reach 4 percent on higher public wages, partly offset by moderating food prices.
  - Reserves expected to remain sufficient at 10 months of imports at end-2018.
  - Fiscal balance projected to turn into a surplus of 6 percent of GDP in 2018, on higher fishing revenue.
- Medium-term projections:
  - Growth expected to remain robust at 4 percent, factoring in implementation of infrastructure projects funded by development partners, including the Green Climate Fund.
  - Inflation projected to slow to 3 percent in the medium term, moving closer to the Australian inflation rate.
  - Fiscal balance projected to weaken in the medium term following a surplus in 2018:
    - Fiscal deficit projected to widen to 5 percent of GDP in the medium term, and 7 percent of GDP in the long term.
    - Domestic current deficit projected to remain wide at 65 percent of GDP in the medium term.
    - Current spending projected to remain elevated at around 100 percent of GDP.
    - Capital spending projected at around 10 percent of GDP, declining gradually.
  - Balance of payments projected to remain in a surplus in 2018 due to strong fishing license revenue.
  - REER expected to appreciate further in the near term due to relatively high inflation, with appreciation pace declining over the medium term.

### Main risks
- Climate change and natural disasters (existential threat for low-lying atoll).
- Volatile fishing revenues.
- Reliance on external grants.
- Weak state-owned enterprises.
- Limited financial supervision and elevated NPLs.
- Geographical remoteness, small size, and limited infrastructure.

### Executive Board assessment (selected points)
- Commended authorities for improved macroeconomic performance and progress on strengthening climate change resilience.
- Welcomed the broadly positive outlook but noted high susceptibility to external shocks (climate change effects, volatile fishing revenues, reliance on grants).
- Emphasized need for strong commitment to sound policies and structural reforms to build resilience and generate sustainable growth.
- Welcomed progress securing access to the Green Climate Fund and highlighted ensuring continuous access to multilateral climate change schemes.
- Highlighted priorities: implementing reforms under the PFM Roadmap, exploring multilateral risk-sharing mechanisms, and improving financial management of the Tuvalu Survival Fund.

### Policy recommendations and priorities
- Promote resilience to external shocks:
  - Continue to improve climate change risk management.
  - Undertake gradual fiscal consolidation to maintain buffers against shocks.
  - Strengthen the medium-term fiscal framework, contain current spending, prioritize capital spending, mobilize tax revenue, and accelerate SOE reform.
- Broaden the private-sector growth base:
  - Implement macro-structural policies to increase potential output and diversify the growth base, including developing human capital and promoting tourism.
  - Enhance bank credit intermediation by establishing a financial supervisory framework covering the banks and the pension fund.
  - Improve enforcement of existing financial regulations and develop bankruptcy legislation.
  - Improve credit risk management of the Development Bank and enforce existing financial regulations.
- Additional actions:
  - Prioritize capital spending and strengthen fishing revenue forecasts.
  - Accelerate reforms of state-owned enterprises, including raising electricity tariffs and linking them to oil price changes.
  - Continue efforts to strengthen macroeconomic statistics and leverage IMF technical assistance.

### Key statistics and indicators (selected exact figures)
- Real GDP growth: 2015 = 9.1; 2016 = 3.0; 2017 = 3.2; 2018 (Proj.) = 4.3; 2019 (Proj.) = 4.1.
- Consumer price inflation (end of period): 2015 = 4.0; 2016 = 2.6; 2017 = 4.4; 2018 (Proj.) = 4.0; 2019 (Proj.) = 3.4.
- Government finance (Revenue and grants; in $A million): 2015 = 136; 2016 = 138; 2017 = 122; 2018 (Proj.) = 161; 2019 (Proj.) = 113.
- Revenue: 2015 = 102; 2016 = 113; 2017 = 97; 2018 (Proj.) = 118; 2019 (Proj.) = 82.
- Fishing license fees (of which): 2015 = 51; 2016 = 68; 2017 = 50; 2018 (Proj.) = 80; 2019 (Proj.) = 46.
- Grants: 2015 = 34; 2016 = 25; 2017 = 25; 2018 (Proj.) = 43; 2019 (Proj.) = 32.
- Total expenditure: 2015 = 121; 2016 = 131; 2017 = 126; 2018 (Proj.) = 155; 2019 (Proj.) = 118.
- Current expenditure: 2015 = 99; 2016 = 111; 2017 = 97; 2018 (Proj.) = 103; 2019 (Proj.) = 101.
- Capital expenditure: 2015 = 22; 2016 = 19; 2017 = 29; 2018 (Proj.) = 52; 2019 (Proj.) = 17.
- Overall balance: 2015 = 15; 2016 = 7; 2017 = -4; 2018 (Proj.) = 6; 2019 (Proj.) = -4.
- Domestic current balance: 2015 = -47; 2016 = -67; 2017 = -49; 2018 (Proj.) = -65; 2019 (Proj.) = -65.
- Tuvalu Trust Fund (in percent of GDP): 2015 = 318; 2016 = 336; 2017 = 333; 2018 (Proj.) = 315; 2019 (Proj.) = 299.
- Consolidated Investment Fund (in percent of GDP): 2015 = 55; 2016 = 55; 2017 = 42; 2018 (Proj.) = 59; 2019 (Proj.) = 55.
- Tuvalu Survival Fund (in percent of GDP): 2016 = 10; 2017 = 10; 2018 (Proj.) = 14; 2019 (Proj.) = 17.
- Credit growth (percent change): 2015 = 3; 2016 = 13; 2017 = 6; 2018 (Proj.) = 6; 2019 (Proj.) = 5.
- Current account balance (in percent of GDP): 2015 = -53; 2016 = 23; 2017 = 6; 2018 (Proj.) = 5; 2019 (Proj.) = -1.
- Gross reserves (In $A million): 2015 = 57; 2016 = 70; 2017 = 73; 2018 (Proj.) = 81; 2019 (Proj.) = 85.
- Gross reserves (months of prospective imports): 2015 = 9; 2016 = 10; 2017 = 9; 2018 (Proj.) = 10; 2019 (Proj.) = 10.
- Gross public debt (percent of GDP): 2015 = 57; 2016 = 47; 2017 = 37; 2018 (Proj.) = 28; 2019 (Proj.) = 22.
- Nominal GDP (In $A million): 2015 = 47; 2016 = 49; 2017 = 53; 2018 (Proj.) = 57; 2019 (Proj.) = 61.

*Source: IMF staff report for the 2018 Article IV Consultation (Tuvalu).*

### conclusion. A persistent fiscal deficit is projected

### conclusion. A persistent fiscal deficit is projected

### Overall outlook and debt dynamics
- Net financial worth is expected to fall below 50 percent of GDP by 2025 under the baseline.
- In adverse scenarios, natural disasters or a sharp fall in fishing revenue could accelerate the depletion of fiscal buffers.
- In an upside scenario, sustained donor grants could help keep the debt-to -GDP level below the indicative threshold.

### Tuvalu Trust Fund (TTF)
- The financial performance of the Tuvalu Trust Fund (TTF) is projected to moderately exceed the fund’s maintained value, allowing continued transfers from the TTF to the Consolidated Investment Fund (CIF).

### Financial sector
- The banking sector comprises two public banks: the National Bank of Tuvalu (NBT) and the Development Bank of Tuvalu (DBT).
- Outstanding loans declined to 30 percent of GDP in 2017 from 54 percent of GDP in 2012.
- Loan-to-deposit ratio fell to 20 percent.
- Nonperforming loans (NPLs) constitute 41 percent of total loans, primarily to the Tuvalu Electricity Corporation (TEC) and impaired housing loans.
- Constraints: high NPLs, insufficient risk management, inadequate supervisory framework, absence of bankruptcy laws, and a weak credit culture.
- Credit growth is expected to remain moderate in the medium term.

### Risks to the outlook
- High susceptibility to climate change and natural disasters: Tropical Cyclone Pam in 2015 caused damage worth 33 percent of GDP.
- Revenue base uncertainties from volatile fishing revenues and reliance on grants.
- Lack of financial supervision and weak SOE balance sheets create fiscal risks and impede banks’ credit intermediation.
- Upside risk: grants could remain substantial, supporting fiscal accounts and accelerating infrastructure development.

### Authorities’ views
- Authorities broadly concur with staff’s macroeconomic outlook and risks.
- They noted continuous capital investment will support growth but emphasized the need to contain current spending.
- With monetary policy lever absent, they see limited scope to contain inflation, which is driven by supply-side factors such as global food prices.

### Building resilience to climate change and external shocks — policy framework
- Coastal protection projects estimated cost: 84 percent of GDP.
- Tuvalu secured access to the Green Climate Fund in 2017.
- Tuvalu Coastal Adaptation Project (TCAP) runs through 2025 with a total cost of 74 percent of GDP and the government’s co-financing of 6 percent of GDP.
- TCAP is expected to cover the majority of coastal protection costs (86 percent of GDP) identified under the Infrastructure and Investment Plan for 2016-25.
- The government adopted the Public Financial Management (PFM) Roadmap 2017–21 and established the National Advisory Council on Climate Change (NACCC).
- Recommendations:
  - Ensure continuous access to multilateral climate change schemes and efficient use of funds.
  - Strengthen PFM framework via PFM Roadmap 2017-21 to support quality of capital expenditure and access to international financing.
  - Explore multilateral risk-sharing mechanisms such as the Pacific Island Insurance Facility (PIFIC).
  - Improve investment management of the Tuvalu Survival Fund (TSF), currently deposited at the National Bank.

### Tuvalu Coastal Adaptation Project (TCAP) — program modality and outputs
- TCAP financed by GCF, runs through 2025, total cost 74 percent of GDP; government co-financing 6 percent of GDP.
- Program modality: annual funding allocations contingent on a 70 percent completion rate of specified annual targets.
- Outputs:
  - Output 1: Strengthening institutions and building capacity for resilient coastal management — on track to be completed by June 2018.
  - Output 2: Implementing coastal protection projects — accounts for 70 percent of total project costs; commence in June 2018.
  - Output 3: Establishing a sustainable financing mechanism for long-term adaptation efforts — requires integration of island-specific climate risks into strategic plans and budgets.
  - Output 4: Project management (administrative spending).

### Strengthen the medium-term fiscal policy framework and fiscal buffers
- Projected widening of fiscal deficit calls for gradual consolidation to maintain buffers.
- Recommendation: use the domestic current balance as the operational target because it abstracts from volatile, exogenous components.
- Adjustment scenario:
  - Government gradually reduces the domestic current deficit by ½ percentage point of GDP each year until 2030.
  - The domestic current deficit would narrow by 6 percentage points in the next decade and fall to 59 percent of GDP in 2030, compared to 65 percent of GDP under the baseline.
  - In 2031, the fiscal balance would reach a surplus of 1 percent of GDP, which would be maintained thereafter.
  - This gradual consolidation is projected to help maintain the government’s net financial worth at around 70 percent of GDP in the long term.
  - This level would be sufficient to buffer most shocks, including a sharp decline in fishing revenue (40 percent of GDP) or natural disasters (20-30 percent of GDP).

### Fiscal consolidation — spending priorities
- Current spending:
  - Contain rising current spending and improve spending efficiency.
  - Keep the public wage bill in check with development partners’ assistance.
  - Control rising official travel costs and develop a more cost-effective strategy to build institutional capacity.
  - Healthcare costs: overseas medical treatment program increased 7 times relative to GDP in the past decade and accounts for half of total healthcare spending.
    - Policy priority: closely monitor and evaluate overseas spending, rationalize medical travel benefits, invest in prevention and early care, and introduce a healthcare information system.
  - Scholarships: adopt merit-based selection, tighter requirements for study completion, and mandatory service periods under penalty of full repayment.
- Capital spending:
  - Align scale and pace of capital investment with absorption capacity.
  - Prioritize high-impact projects: resilience to climate change, transport, water and waste management.
  - Improve medium-term budgeting and PFM framework:
    - Introduce competitive tendering for procurement under a centralized unit.
    - Ensure adequate maintenance spending on capital assets.
    - Standardize fiscal account classification between the Treasury and the Budget Office.
    - Improve reliability of monthly fiscal reporting.
    - Consider multi-year rolling budget for capital investment, requiring rigorous project selection and continuous evaluation.
  - Align PFM priorities with program grants of development partners to accelerate reforms.

### Mobilize tax revenue
- Tax revenue decline drivers:
  - High Personal Income Tax threshold at 3 times per capita GDP after threshold increases in 2014 and 2016.
  - Of six large corporates in Tuvalu, only two pay Corporate Income Tax (CIT) due to a high threshold (2 percent of GDP).
  - Firms with less than a threshold profit (0.2 percent of GDP) are exempt from Consumption Tax.
  - Tax arrears by SOEs weakened tax revenue; outstanding tax arrears declined to 2 percent of GDP at end-2017 from 3 percent of GDP at end-2016.
- Authorities’ target: increase tax revenue to 20 percent of GDP.
- Recommendations:
  - Eliminate exemptions and broaden the tax base.
  - Limit loss carry-forward to a fixed period (e.g., 5 years).
  - Re-evaluate thresholds for CIT and Consumption Tax.
  - Continue reducing tax arrears, enhance tax administration capacity, and develop a taxation module on the e-government platform.

### Strengthen fishing revenue forecasts and management
- Fishing revenue dynamics:
  - Fishing revenue increased to 50 percent of GDP in 2017 from 15 percent of GDP in 2011 and accounts for 60 percent of total fiscal revenue.
  - With a one-off payment from a sub-regional pooling scheme, fishing revenue is expected to reach 80 percent of GDP in 2018.
  - Fishing revenue remains volatile, though volatility has slightly decreased.
- Drivers:
  - Increased vessel days from the Parties to the Nauru Agreement (PNA).
  - PNA set around 45,000 days TAE in 2018 and allocated Tuvalu around 2,100 days PAE in 2018, up from 877 days in 2011.
  - Increase in minimum benchmark price to $8,000 per vessel day in 2018 from $5,000 in 2012.
- Licensing categories include bilateral auctions, the US Treaty pool, trading among PNA countries, the FSM Agreement pool, and sub-regional pooling.
- Recommendations:
  - Strengthen coordination between the Ministry of Finance (MoF) and the Ministry of Natural Resources (MNR) to improve fishing revenue forecasts and transparency.
  - Establish models to forecast fishing revenues in the government budget and increase MoF access to fishing revenue information.
  - Improve financial management of fishing license schemes to facilitate fiscal planning and help increase fishing revenue.
  - Continue regional cooperation to strengthen negotiating power and sustain fishing revenue.

*Source: cr18209 - conclusion. A persistent fiscal deficit is projected*

### 16.      The government should accelerate SOE reforms. Tuvaluan SOEs rely heavily on fiscal

### 16.      The government should accelerate SOE reforms. Tuvaluan SOEs rely heavily on fiscal

### SOEs: fiscal dependence, risks, and recent performance
- Fiscal support for the SOEs is projected to increase to 4 percent of GDP in the medium term, given below-cost tariffs, infrastructure upgrades, and capital injections into the banking sector.
- Among the SOEs, only the National Bank pays CIT and disburses dividends.
- Strengthening SOEs’ financial performance is critical to contain the risk of contingent spillovers to the budget.
- SOEs’ tax arrears roughly equal the government’s outstanding payment obligations to SOEs (2 percent of GDP).
- NAFICOT’s outstanding debt currently stands at 24 percent of GDP; staff have included it in this report’s tables and the DSA and recommend it be included in official government debt data and closely monitored.
- Net profits/losses (selected SOEs, in percent of GDP, as reported): 
  - Telecommunications Corporation (TTC): -0.8, -0.5, -0.3, -0.1, -0.6, 0.2 (2012–2017 series)
  - Tuvalu Electricity Corporation (TEC): -0.1, 0.1, 0.8, 0.3, 0.5, 0.1 (2012–2017 series)
  - National Bank of Tuvalu (NBT): 2.5, 6.8, 2.6, 3.0, 4.5, 2.7 (2012–2017 series)
  - Development Bank of Tuvalu (DBT): -3.0, -1.2, -1.4, 0.1, 0.2, -0.1 (2012–2017 series)
- Tuvalu Electricity Corporation (TEC) accounts for most fiscal subsidies to SOEs.

### Priorities and concrete reform measures (staff recommendations)
- Government outstanding payment obligations
  - The government should settle its outstanding payment obligations to SOEs.
  - SOEs should pay their remaining tax arrears.
- Electricity tariffs and cost containment
  - Current average electricity tariff: A$ 0.65 per kWh; breakeven level: A$ 0.8 per kWh.
  - Recommendations:
    - Raise tariffs and link them to oil price changes, while mitigating the impact on the poor (e.g., higher tariff for a high consumption bracket).
    - Introduce a differential tariff by electricity usage for public and commercial entities to better align tariffs with production costs and save electricity usage.
    - Introduce competitive bidding for fuel suppliers.
    - Contain salary expenses in the near term.
    - Increase power generation from renewable energy sources in the medium term.
- Fiscal support framework
  - Current annual Community Service Obligations (CSOs) are ad-hoc, lacking transparency and predictability.
  - Move to a more transparent, rule-based approach to determine annual fiscal transfers.
  - Reduce fiscal support over time.
  - Bank recapitalization using fiscal financing should not be recurrent.
- Joint ventures and transparency
  - Financial performance of the National Fishing Corporation of Tuvalu (NAFICOT) and its three joint ventures is weak and non-transparent.
  - Staff urges close monitoring of their financial performance.
  - Include NAFICOT’s outstanding debt (24 percent of GDP) in official government debt data and monitor closely.

### Banking sector linkages and vulnerabilities
- The National Bank of Tuvalu (NBT)
  - Posted a profit in 2017 and appears to have adequate capital, but faces elevated credit risk.
  - NPLs still account for 40 percent of total loans (sufficiently provisioned and slightly declined).
  - NBT has slowed lending since 2011 and increased deposits in overseas banks.
  - Foreign exchange income has increased steadily; NBT holds a monopolistic position in foreign exchange services.
  - NBT is closely linked to the government and SOEs as their banker and source of borrowing.
  - Bank required to hold significant liquid assets to mitigate potential withdrawal of government deposits, constraining lending capacity.
- Development Bank of Tuvalu (DBT)
  - After years of NPL write-offs, half of the bank’s loans are still NPLs with insufficient provisioning.
  - Bank performance among the weakest in the region; reliant on financial support and government guarantees.
  - High-risk profile of small business loans and weak credit risk management have constrained lending; DBT prioritizes small loan amounts.
  - Considering a concessional loan from the European Investment Bank to improve lending capacity.
- Tuvalu National Provident Fund (TNPF)
  - Expanded member loans to 18 percent of GDP.
  - Appears sound given low NPLs and a strong capital position.
  - Total borrowing stands at 17 percent of retirement balances; pension fund limits members’ borrowing to 30 percent of total retirement benefit balance.

### Financial supervision, inclusion, and macroprudential policy
- Supervision gaps and planned actions
  - No effective prudential supervision; the 2011 Banking Commission Act has not yet been implemented.
  - Authorities have agreed to hire an external financial supervisor and develop a 3-year supervision strategy with PFTAC assistance.
  - The pension fund should be included in the supervision framework.
  - Authorities need to develop bankruptcy legislation and improve enforcement of existing regulations.
- Financial institutions’ risk aversion and measures taken
  - Financial institutions have limited borrower debt-to-income ratios to below 40 percent since 2012.
  - Introduced recourse agreements, collateral seniority, and credit information sharing; borrower’s pension contributions serve as loan collateral; consumer loan obligations often deducted from salary.
- Financial inclusion constraints and opportunities
  - Lack of supervision has hampered financial inclusion; the number of depositors is limited compared to peers.
  - Absence of ATMs and credit card arrangements impedes access to private sector development.
  - Given relatively high internet usage and mobile subscriptions and recent 4G introduction, explore mobile banking, peer-to-peer payments, and fintech solutions.
- Macroprudential recommendation
  - Consider codifying the existing MOU limiting debt-to-income below 40 percent into a macroprudential regulation to regularly review the adequacy of the threshold.
  - Strengthening SOEs would help reduce NPLs, freeing up financial sources for private sector activity and mitigating macrofinancial risks.

### Broader implications for private sector growth and human capital
- Private sector constraints and labor markets
  - Unemployment rate: 37 percent; private sector activity limited to fishing and agriculture.
  - Tourism receipts low due to poor connectivity, infrastructure, and amenities.
  - Secondary education and vocational training limited; remittances from seafarers decreasing.
- Policy options to broaden private-sector base
  - Improve business environment; use World Bank Doing Business assessment to identify reform priorities; consider IFC membership.
  - Develop a national tourism strategy and improve infrastructure; host cruise ships for eco-tourism to boost tourism despite limited accommodation.
  - Ratification of PACER Plus can support export product development and funding availability.
  - Water resource management strategies (e.g., desalination) to support tourism and business expansion.
  - Consider partial privatization of non-essential government functions to foster private sector growth, balancing with vital service delivery needs.
- Human capital strengthening
  - Institute of Technology and introduction of professional certifications to enhance education output and labor mobility.
  - Improve quality of secondary education via more qualified teachers and essential learning materials.
  - Comprehensive review of vocational training, including Tuvalu Maritime Training Institute (TMTI), to adapt to changing needs.
  - Gender equality: strengthen the role of women in decision-making positions and expand their role in small business development.

### Data, technical assistance, and authorities’ stance
- Data and technical assistance
  - Data provision has serious shortcomings; strengthen institutional capacity to produce essential macroeconomic data in a timely manner, including succession planning due to frequent personnel turnover.
  - PFTAC plans continued technical assistance on public financial management, macroeconomic programming and analysis, and revenue administration.
- Authorities’ views (summary)
  - Authorities broadly concurred with staff’s analysis and recommendations.
  - Noted the decline in fishing revenue volatility since VDS; consider fishing revenue a domestic revenue source.
  - Committed to containing current expenditure, but see higher capital spending as important for development and growth.
  - Emphasized scholarship spending, medical spending pressures from an aging population and high incidence of non-communicable diseases, and the necessity of high public wages to retain staff.
  - Committed to strengthening monitoring of SOEs and to collaborate with PFTAC on financial supervision.

*Source: IMF staff report excerpt.*

### 27.      Tuvalu’s macroeconomic outlook is broadly positive. Economic growth is accelerating on

### Tuvalu’s macroeconomic outlook is broadly positive

### Macroeconomic outlook and vulnerabilities
- Economic growth is accelerating on capital expenditure and infrastructure projects.
- Inflation is expected to remain somewhat elevated on robust economic activities.
- Risks to the downside remain, notably:
  - The economy is susceptible to the effects of climate change and natural disasters.
  - Fiscal revenue base uncertainties from volatile fishing revenues and reliance on grants.
  - Weak balance sheets of SOEs and limited financial supervision create risks to fiscal accounts and impede banks’ credit intermediation.
- Reflecting these risks, Tuvalu remains at high risk of debt distress.
- The external position in 2017 is judged to have been broadly in line with fundamentals, but data limitations create substantial uncertainty.

### Policy priorities
- Promote resilience to external shocks and boost potential growth:
  - Strengthen the medium-term fiscal framework to maintain buffers.
  - Continue to improve climate change risk management.
  - Develop human capital, promote tourism, and improve financial intermediation and supervision.

### Fiscal policy guidance
- Adopt gradual fiscal consolidation to maintain buffers.
  - The domestic current balance can be a useful operational target to abstract from volatile and exogenous components of the fiscal accounts.
  - Gradual fiscal consolidation in the next decade would help boost the government’s net financial worth to buffer most shocks.
- Improve fiscal balance by:
  - Containing current spending and improving spending efficiency.
  - Prioritizing capital spending to align with the economy’s absorption capacity.
  - Prioritizing high-impact projects, strengthening medium-term budgeting, and continuing to improve the PFM framework.
- Mobilize tax revenue and strengthen fishing revenue forecasts:
  - Potential to expand tax revenue by eliminating tax exemptions and broadening the tax base while improving tax compliance.
  - Review tax exemptions.
  - Close coordination between the MoF and the MNR to strengthen fishing revenue forecasts and transparency.

### SOE and public enterprise reforms
- Accelerate SOE reforms to strengthen financial performance and contain contingent spillovers to the budget.
- Policy priorities include:
  - Addressing the government’s payment obligations.
  - Improving electricity tariff schemes.
  - Strengthening transparency of fiscal support and reducing it over time.
  - Closely monitoring financial performance of joint ventures.
- NAFICOT’s outstanding debt needs to be included in official government debt data and closely monitored.

### Financial sector and banking intermediation
- Strengthen the role of bank credit intermediation:
  - Implement a supervisory framework that includes the pension fund.
  - Develop bankruptcy legislation and improve enforcement of existing regulations.
  - Development Bank should improve credit risk management; once achieved, it could bolster lending capacity to serve development objectives.

### Diversification, human capital, and infrastructure
- Diversify the economy to absorb macroeconomic volatility:
  - Implement a national tourism strategy, paired with improved infrastructure and water management.
  - Improve the business environment to develop the private sector and foster sustainable growth.
  - Enhance quality of secondary education and carry out a comprehensive review of vocational training.

### Macroeconomic statistics and monitoring
- Continue strengthening macroeconomic statistics and institutional capacity to produce essential macroeconomic data in a timely manner for effective macroeconomic surveillance.
- It is recommended that the next Article IV consultation take place on the current 24-month cycle.

### Key statistics and projections (selected figures from Tables)
- Population (2016 est.): 10,879
- Per capita GDP (2016 est.): US$3,157
- Poverty rate (2017): 26 percent
- Life expectancy (2016): 67 years
- Real GDP growth:
  - 2015: 9.1
  - 2016: 3.0
  - 2017: 3.2
  - 2018 (Proj.): 4.3
  - 2019 (Proj.): 4.1
  - Medium-term projections (2020–2023) range: 4.4, 4.2, 4.1, 3.9
- Consumer price inflation (end of period):
  - 2015: 4.0
  - 2016: 2.6
  - 2017: 4.4
  - 2018 (Proj.): 4.0
  - 2019 (Proj.): 3.4
- Government finance (Selected, in $A million):
  - Total revenue and grants 2017: 122; 2018 (Proj.): 161; 2019 (Proj.): 113
  - Revenue 2017: 97; 2018 (Proj.): 118; 2019 (Proj.): 82
  - of which: Fishing license fees 2015: 5; 2016: 16; 2017: 8; 2018 (Proj.): 50; 2019 (Proj.): 80; (Table 1 entries preserved as presented)
  - Grants 2017: 25; 2018 (Proj.): 25; 2019 (Proj.): 43
  - Total expenditure 2017: 126; 2018 (Proj.): 155; 2019 (Proj.): 118
  - Overall balance 2017: 15; 2018 (Est.): 7; 2019 (Est.): -46; 2017 in summary tables varies by presentation—see detailed tables.
- Tuvalu Trust Fund (stock, $A million):
  - 2015: 150; 2016: 165; 2017: 175; projections 2018–2023: 179, 182, 186, 190, 194, 197
- Consolidated Investment Fund (stock, $A million) 2015–2017: 26, 27, 22; projections and levels shown in tables.
- Gross reserves (In $A million):
  - 2015: 57; 2016: 70; 2017: 73; 2018: 81; 2019: 85
- Gross public debt (percent of GDP):
  - 2015: 57; 2016: 47; 2017: 37; 2018 (Proj.): 28; 2019 (Proj.): 22

### Risk Assessment Matrix (selected risks, likelihood, potential impact, and recommended actions)
- Climate change
  - Likelihood: High
  - Potential impact: High (Cyclone Pam caused a cost of 33 percent of GDP in 2015)
  - Recommended actions: Strengthen fiscal buffers; increase climate adaptation capacity with donors’ assistance; build institutional capacity and strengthen the PFM framework.
- Retreat from cross-border integration
  - Likelihood: Medium
  - Potential impact: High
  - Recommended actions: Build a transparent fiscal framework and execute the PFM roadmap; broaden the revenue base and conduct fiscal consolidation to increase fiscal buffers.
- Lower fishing revenue
  - Likelihood: Medium
  - Potential impact: High
  - Recommended actions: Continue implementing a medium-term fiscal framework and saving excess fishing revenue; broaden the revenue base and conduct fiscal consolidation.
- Tighter global financial conditions
  - Likelihood: High
  - Potential impact: Medium
  - Recommended actions: Accelerate fiscal consolidation to maintain buffers in the CIF; contain current spending; prioritize capital spending; mobilize tax revenue.
- Withdrawal of correspondent banking relationships
  - Likelihood: Medium
  - Potential impact: High
  - Recommended actions: Implement financial supervision framework; explore use of mobile banking and fintech.
- Poor governance of public enterprises and banks
  - Likelihood: High
  - Potential impact: Medium
  - Recommended actions: Implement financial supervision and advance public enterprise reform to increase accountability.

*Source: Tuvalu authorities; PFTAC; SPC; ADB; World Bank; 2018 IMF's BOP TA; and IMF staff estimates and projections.*

### Appendix I. Risk Assessment Matrix

### Appendix I. Risk Assessment Matrix

### External Sector Assessment
- Staff assesses that Tuvalu’s external position in 2017 was broadly in line with medium-term fundamentals and desirable policies, despite a moderate REER appreciation in recent years; assessment subject to substantial uncertainty due to data limitations.
- Data and reserves:
  - Latest detailed balance of payments data are for 2012.
  - Gross reserves rose slightly in 2017.
  - Reserve coverage equaled 9 months of imports.
  - Over the medium term, reserves are projected to decline moderately due to a widening fiscal deficit (Table 2).
- Exchange rate dynamics:
  - Tuvalu’s Real Effective Exchange Rate (REER) appreciated by 5 percent in 2017 due to relatively high inflation.
  - Nominal Effective Exchange Rate (NEER) depreciated due to the weakened Australian dollar.
  - Inflationary pressures stem from higher food prices, increased transportation costs, and expansionary fiscal policy.
  - Since the current account balance is driven mostly by exogenous fishing license fees and grants, the REER’s role in external sustainability is limited; nevertheless, overvaluation could weaken competitiveness and undermine private sector development.
- Policy implication:
  - Contain current spending to help contain inflationary pressure and maintain adequate exchange rate alignment.
  - Improve business climate, develop tourism, strengthen education and training effectiveness, and retain educated Tuvaluans in the labor force.
  - Continued use of the Australian dollar as legal tender remains appropriate as a strong nominal anchor given weak institutional capacity and close linkages with Australia.

*Key statistics and indicators cited in this section:*
- REER appreciation in 2017: 5 percent.
- Reserve coverage: 9 months of imports.

### Tuvalu Trust Fund (TTF), Consolidated Investment Fund (CIF), and Tuvalu Survival Fund (TSF)
- Tuvalu Trust Fund (TTF):
  - Established in 1987 by Tuvalu and development partners (Australia, New Zealand, and the United Kingdom).
  - Initial balance A$27 million in 1987; estimated market value of A$175 million (333 percent of GDP) at end-2017.
  - Major driver of increase: favorable investment returns; development partners and Tuvalu have made contributions.
  - Distribution modality: when market value exceeds the maintained value (baseline growing with Australian CPI), the difference is automatically distributed to the CIF; when market value is below maintained value, no distributions are made.
  - Financial performance:
    - Returns in the past 5 years were above 7 percent.
    - Since inception, average investment return around 7 percent.
    - In 10 out of the last 25 years there were no distributions due to weak performance.
    - Two Australian investment firms professionally manage the TTF.
- Consolidated Investment Fund (CIF):
  - Established in 1993 as a revolving buffer receiving automatic disbursements from the TTF.
  - Minimum floor for CIF balance set at 16 percent of the TTF’s maintained value, intended to fund up to 4 years of automatic distributions pauses.
  - CIF stood at 42 percent of GDP at end-2017.
- Tuvalu Survival Fund (TSF):
  - Established in 2015 to mitigate climate change impact and respond to natural disasters.
  - Government contributions from the national budget: 10 percent of GDP in 2016, and none in 2017 due to a fiscal deficit.
  - Governance structure and investment procedures established in 2017.
- Note on sovereignty:
  - TTF is not fully sovereign and cannot be drawn down freely; access to transfers depends on relationship between market value and maintained value.

*Key statistics and indicators cited in this section:*
- TTF market value at end-2017: A$175 million (333 percent of GDP).
- CIF balance at end-2017: 42 percent of GDP.
- CIF minimum floor: 16 percent of TTF’s maintained value.
- TTF investment returns in past 5 years: above 7 percent.
- TTF average investment return since inception: around 7 percent.
- TSF government contribution in 2016: 10 percent of GDP; contribution in 2017: none.

### Macrostructural Challenges
- Narrow production base and limited opportunities for economic diversification; Tuvalu highly dependent on imports.
- Tourism:
  - Largely untapped; contributes less than 1 percent of value added to GDP.
- Export development:
  - Exploration of coconut derivatives (oil, toddy, viscous coconut sugar syrup), breadfruit, pulaka (wild taro), and pandanus.
- Legal and regulatory environment:
  - Missing elements for a well-functioning business environment, including a bankruptcy law and legislation relating to customary land.
  - Enforcement of existing laws weak due to limited institutional capacity.
  - Tuvalu has not signed up for the World Bank Doing Business assessment.
- Infrastructure and internal migration:
  - Infrastructure gaps hinder development and service delivery, particularly in outer islands.
  - Likelihood of poverty in outer islands is 30 percent higher than on the main island Funafuti.
  - About half of the population has migrated primarily to Funafuti from home islands.
- Human capital:
  - Unemployment rate at end-2017: 37 percent.
  - Demand for seafarers decreased; graduates from Tuvalu Maritime Training Institute (TMTI) often take temporary construction employment.
  - Primary school enrollment high; quality of secondary education and vocational options limited.
  - Scholarships, education, and training not well matched to economy’s needs.
  - Female labor participation strong: girls outperform boys across education levels; more women entering civil service than men; active in small business development and entering traditionally male-dominated fields including politics, law enforcement, and seafaring.

*Key statistics and indicators cited in this section:*
- Tourism contribution to GDP: less than 1 percent of value added.
- Outer-island poverty likelihood: 30 percent higher than Funafuti.
- Internal migration to Funafuti: about half of the population.
- Unemployment rate at end-2017: 37 percent.

### Authorities’ Responses to Policy Advice in the 2016 Article IV Consultation
- International risk sharing against climate change:
  - Fund recommendation: increase capacity to meet accreditation and fiduciary standards for multilateral initiatives; explore disaster insurance.
  - Authority actions:
    - Adopted Public Financial Management (PFM) Roadmap 2017-21.
    - Established National Advisory Council on Climate Change (NACCC) reporting to Cabinet.
    - Secured access to the Green Climate Fund in 2017; funded Tuvalu Coastal Adaptation Project (TCAP).
- Fiscal buffers:
  - Fund recommendation: target a small structural fiscal surplus (around one percent of GDP) over medium-to-long term.
  - Authority actions:
    - No medium-term fiscal framework adopted yet.
    - Fiscal balance: surplus of 7 percent of GDP in 2016; deficit of 4 percent of GDP in 2017 due to increased capital expenditure.
- Public Financial Management (PFM):
  - Fund recommendation: improve fiscal management framework (capital budgeting and PFM) to guide medium-term budgeting.
  - Authority actions:
    - Implementation of PFM Roadmap 2017-21 improved treasury reporting, tax audit, and cash management.
    - Capital budgeting improved by consolidating Special Infrastructure and Special Development Expenditure in capital expenditure items.
    - Authorities considering a multi-year rolling budget framework for capital investment.
- Public Enterprises:
  - Fund recommendation: enhance government oversight through PERMU; urgent action plan needed to restore financial viability.
  - Authority actions:
    - Strengthened oversight; government collects quarterly reports from major public enterprises.
    - PERMU has maintained dedicated staff but remains under resourced.
    - Comprehensive review of financial conditions undertaken with ADB assistance.
- Financial supervision:
  - Fund recommendation: strengthen financial sector oversight; DBT needs additional capital; enhance financial literacy.
  - Authority actions:
    - Agreed to hire external financial supervisor and develop a 3-year supervision strategy with PFTAC assistance.
    - DBT considering concessional loan from European Investment Bank; government provided credit guarantees for DBT loans.
    - No specific measures taken to enhance financial literacy.

### Recent Debt Developments and Underlying Assumptions
- Recent debt developments:
  - Total public and publicly guaranteed debt (PPG) estimated at 37 percent of GDP as of end-2017, mostly external.
  - Bilateral donors provide grants; multilateral institutions (including ADB) have provided concessional loans and grants.
  - Loans on non-concessional terms for three fishing joint ventures account for a large share of public debt; these loans are government-guaranteed contingent liabilities.
  - TTF grew to 333 percent of GDP at end-2017; TTF transfers to CIF are conditional and thus DSA analyzes gross public debt.
- Baseline macroeconomic framework assumptions:
  - Real GDP growth:
    - Projected to reach 4.3 percent this year.
    - Projected to remain robust at 4 percent in the medium term.
    - Projected to slow to 2 percent in the long run.
    - Average cost of natural disasters estimated at 1 percent of GDP per year.
  - Inflation:
    - Projected to reach 4 percent this year on higher public wages.
    - Projected to moderate to 3 percent in the medium term.
    - Projected to reach 2 percent in the long run.
  - Balance of payments:
    - Current account projected to record a deficit of 10 percent of GDP in the medium term due to higher imports for infrastructure.
    - Revenues from fishing license fees projected at 46 percent of GDP on average in the medium term, weakening from 50 percent in 2017.
    - FDI inflows expected to remain limited.
  - Fiscal outlook:
    - Fiscal deficit projected to widen due to moderating revenue and high current spending, leading to increased concessional borrowing in the long run.
    - Fishing revenues projected to remain subdued relative to GDP with waning of El Nino cycle.
    - Grants assumed to fall steadily given donor uncertainty.
    - Current spending to remain elevated due to increases in wages, purchases of goods and services, healthcare, and scholarship programs.
    - Capital spending projected at around 10 percent of GDP on infrastructure development but expected to decline gradually.
    - Fiscal deficit expected to widen to 5 percent of GDP in the medium term, and 7 percent in the long term.
    - Domestic current deficit—excluding fishing revenues, grants, and capital expenditure—projected to remain elevated at 65 percent of GDP.

*Key statistics and indicators cited in this section:*
- PPG at end-2017: 37 percent of GDP.
- TTF at end-2017: 333 percent of GDP.
- CIF at end-2017: 42 percent of GDP.
- Real GDP growth projections: 4.3 percent (this year), 4 percent (medium term), 2 percent (long run).
- Natural disaster average cost: 1 percent of GDP per year.
- Inflation projections: 4 percent (this year), 3 percent (medium term), 2 percent (long run).
- Current account deficit (medium term): 10 percent of GDP.
- Fishing license fees (medium term average): 46 percent of GDP (50 percent in 2017).
- Capital spending: around 10 percent of GDP.
- Fiscal deficit projections: 5 percent of GDP (medium term), 7 percent (long term).
- Domestic current deficit (excl. fishing, grants, capital): 65 percent of GDP.

### Debt Sustainability Analysis (DSA)
- Overall conclusion:
  - DSA concludes Tuvalu remains at a high risk of debt distress, in line with the 2016 DSA conclusion.
  - External debt has breached several thresholds as of 2017, including present value of debt-to-GDP.
  - Risks to debt sustainability remain high due to elevated current spending, projected decline in fishing revenue and grants, and risks of natural disasters.
  - A persistent fiscal deficit is projected to deplete fiscal buffers and cause present value of debt-to-GDP to breach its indicative threshold in the long run.
  - Importance of containing fiscal deficit and maintaining buffers emphasized.
- Baseline scenario:
  - External debt breaches several thresholds as of 2017 (present value of debt-to-GDP, present value of debt-to-exports, and debt service-to-exports).
  - Ratios relative to exports are of limited meaning because external income is almost entirely fishing license fees rather than export receipts.
  - Medium term: debt-to-GDP projected to decline on amortization of existing loans and limited borrowing; spike in debt service profile in 2021 reflects one-off repayments for a Korean joint venture fishing vessel.
  - Government expected to finance fiscal deficits and debt payments through drawdowns of the CIF, explaining large negative residuals in DSA tables.
  - Long run: as fiscal buffers deplete, concessional borrowing increases in the early 2030s; grant element of new borrowing projected to increase sharply as authorities borrow concessional loans from development partners; several debt indicators breach thresholds as buffers fall below prudent levels.
  - New borrowing expected to be external due to weak domestic banking sector.
- Alternative scenarios analyzed:
  - Natural disaster shock:
    - Hypothetical big cyclone in 2028 with magnitude similar to Cyclone Pam; damage near 30 percent of GDP.
    - Under this scenario, recovery and rehabilitation programs widen the fiscal deficit to 10 percent of GDP in 2028, compared to a deficit of 6 percent of GDP in the baseline.
    - Increase in fiscal deficit partly mitigated by increased donor aid and drawdown of the Tuvalu Survival Fund, which is projected at 18 percent of GDP at end- (text truncated in source).
  - Other scenarios described include a sharp decline in fishing revenue and, on the upside, sustained donor support (Figure 3, Figure 4 referenced).

*Key statistics and indicators cited in this section:*
- Threshold breaches as of 2017: present value of debt-to-GDP, present value of debt-to-exports, debt service-to-exports.
- Projected fiscal deficit under natural disaster scenario in 2028: 10 percent of GDP (vs. 6 percent baseline).
- Assumed cyclone damage in natural disaster scenario: near 30 percent of GDP.
- Projected TSF level cited in scenario: 18 percent of GDP (projection truncated in source).

*Source: Staff report for the 2018 Article IV Consultation, June 7, 2018.*

### 2027. The fiscal deficit increases slightly in the following years to 12 percent of GDP in 2029 and

### cr18209 - 2027. The fiscal deficit increases slightly in the following years to 12 percent of GDP in 2029 and

### Fiscal projections and baseline developments
- The fiscal deficit increases slightly in the following years to 12 percent of GDP in 2029 and 11 percent of GDP in 2030, as the government repairs infrastructure damages.
- The higher fiscal deficits would accelerate the depletion of fiscal buffers, causing the present value of debt-to-GDP to breach its threshold earlier than in the baseline.

### Scenario: Natural disaster shock
- Natural disaster scenario (implied by infrastructure damages) increases fiscal deficits to 12 percent of GDP in 2029 and 11 percent of GDP in 2030.
- Effect: Accelerated depletion of fiscal buffers and earlier breach of the present value of debt-to-GDP threshold compared with the baseline.

### Scenario: Fishing revenue shock
- Assumption: Fishing revenue is assumed to decline sharply from 2028-32 due to changes in weather patterns.
- Assumed outcome: Fishing revenue is assumed to fall to 40 percent of GDP (the average of three recent years).
- Fiscal impact: Widening the fiscal deficit to 15 percent of GDP.
- Effect: Substantial impact—draining fiscal buffers and increasing the present value of debt-to-GDP such that it would breach its threshold earlier than in the baseline.

### Scenario: Positive grant shock
- Assumption: Grants are assumed to remain high on favorable global economic and financial conditions.
- Assumed outcome: Grants are projected to remain at 18 percent of GDP (the average of grants in the past four years in absolute amount) from 2019 onwards.
- Effect: Debt-to-GDP would remain well below its threshold.

### Vulnerabilities and risk assessment
- These scenarios show that the debt trajectory is vulnerable to fishing revenue and natural disaster shocks.
- Fishing revenue fallouts or natural disasters could accelerate the depletion of fiscal buffers, resulting in the present value of debt-to-GDP ratio breaching its threshold earlier than in the baseline.
- On the upside, continuing donor support could help contain fiscal deficits and keep debt-to-GDP below the threshold.

### Conclusions
- Tuvalu’s DSA points to a continued high risk of debt distress, in line with the 2016 DSA.

*Source: cr18209 - 2027. The fiscal deficit increases slightly in the following years to 12 percent of GDP in 2029 and*

### conclusion. Under the baseline scenario, the fiscal balance is projected to move into a deficit from

### cr18209 - conclusion. Under the baseline scenario, the fiscal balance is projected to move into a deficit from

### Fiscal outlook and debt dynamics
- Fiscal balance: projected to move into a deficit from 2019 onwards, due to moderating revenues and high current spending.
- External debt-to-GDP: projected to breach thresholds in the long run as the CIF balance declines and external borrowing increases.
- Debt-service metrics: in each scenario, debt service to exports or revenue ratios would remain well below their indicative thresholds, given concessional borrowing featuring extended grace periods, long maturity, and favorable interest rates.
- Donor grants: the baseline scenario projects a steady decline in donor grants to zero by 2032.
- Policy implication: containing the fiscal deficit is important to lower the risk of debt distress and to maintain sufficient fiscal space to withstand natural disasters or fishing revenue fallouts.

### Key vulnerabilities and risks
- Natural disasters and climate change: Tuvalu is highly vulnerable; fiscal buffers are needed to cope with shocks.
- Fishing revenue volatility: fishing revenues are volatile and can materially affect fiscal planning; fishing revenues make up around half the revenue in the budget.
- Aid dependence: continued donor financing remains important given the high potential adaptation and response costs that are difficult for a very small state to fully internalize.
- Balance-sheet characteristics: concessional terms on borrowing help keep debt-service indicators manageable despite higher debt levels.

### Numeric and contextual highlights from the report
- Fiscal deficit onset: from 2019 onwards.
- Donor grants: decline to zero by 2032.
- Population: 11,000.
- Total atoll area: 26 square kilometers.
- Average island height: 2 meters above sea level.
- Tuvalu Trust Fund target: authorities aim to increase the Tuvalu Trust Fund to A$200 million from the current level of A$175 million.
- Climate resilience investment need: World Bank estimate of around 2 percent of GDP annually to build resilience against climate change.
- Inflation: expected to moderate to 4 percent in 2018.
- Grant reliance in financing: grant-equivalent financing and high grant elements of new borrowing underpin favorable debt-service profiles (figures and tables in the report illustrate grant-equivalent financing and grant element assumptions).

### Policy recommendations and reform priorities
- Contain fiscal deficit to reduce debt-distress risk and preserve fiscal space for shocks (natural disasters, fishing revenue fallouts).
- Strengthen fiscal buffers and maintain buffer assets through sound fiscal policy, including saving cyclical revenues and restraining expenditures (including wage pressures).
- Improve public financial management and public sector management to enhance budget execution and resource utilization.
- Explicitly recognize adaptation and response costs to climate change in the budget and continue to leverage donor financing for large adaptation needs.
- Expand and stabilize the revenue base, improve coordination on fisheries revenue information for budget planning, and modernize revenue administration (addressing IT system inoperability in the Inland Revenue Department).
- Strengthen banking-sector supervision and credit intermediation capacity (development of supervisory framework with PFTAC support and an externally-contracted supervision expert).
- Continue statistical capacity building (national accounts rebasing, CPI dissemination, GFS compilation, BOP/IIP improvements) with PFTAC and partners to improve surveillance and policy formulation.

*Source: IMF staff report (Tuvalu) — conclusion and associated summary tables and statements contained in the provided content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18209.pdf_