## cr1926-kiribati

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### Context
- Population of about 112,000 lives on 21 islands, spread over an ocean area of 3.5 million square kilometers.
- Geography raises the cost of public service delivery, leading to an infrastructure gap.
- Economic activity primarily consists of fisheries and copra.
- Weaknesses in governance, business regulations, and access to credit exacerbate geographical challenges.
- Long-run prospects clouded by climate change: low-lying atolls vulnerable to rising sea levels; storm surge, coastal erosion, and saltwater intrusion threaten resources; higher ocean surface temperatures may disrupt the tuna fishery through impacts on migration and spawning patterns.

### Recent developments, outlook, and risks
- Growth performance:
  - Economy grew at an average annual pace of 5¼ percent in 2015–17, compared to 1½ percent in 2000–14.
  - Growth in 2018 is estimated at 2¼ percent as fishing volumes normalize.
- Inflation:
  - Inflation remained subdued; expected to remain around 2 percent in 2018 and increase in the medium term to 2½ percent.
  - Very low inflation reading in 2017 (0.4 percent annual average) largely attributable to a reduction in electricity tariffs.
- Fiscal and public finances:
  - Strong fishing revenue and donor-financed infrastructure investment drove stronger growth and improved fiscal position.
  - For the fifth year in a row, the recurrent balance registered a surplus in 2017, reaching 12 percent of GDP.
  - Fishing revenue windfall amounted to 26 percent of GDP in 2017.
  - Current spending overruns included 12 percent of GDP appropriated for the outer islands development program and copra subsidies exceeding projections by 2 percent of GDP.
  - Balance of the Revenue Equalization Reserve Fund (RERF) was 386 percent of GDP at end-2017.
  - Cash reserves reached 77 percent of GDP, and public debt stood at 23 percent of GDP.
  - Government net financial worth rose to 440 percent of GDP (RERF + cash reserves − public debt).
  - Government committed to no drawdowns from the RERF until a target balance of A$1 billion (about 400 percent of GDP) is reached; RERF stood at A$994 million as of November 2018.
  - Cash reserves are more than four times staff’s recommended buffer (three months of recurrent spending); about half in a non-interest-bearing account with the local branch of ANZ; program approved to transfer a component to an interest-bearing account with State Street.
- External sector:
  - Current account surplus estimated at 14 percent of GDP in 2017.
  - Real effective exchange rate tracked weakening of the Australian dollar against the US dollar since early 2018 but remained within historical norms.
  - Staff assesses underlying external position in 2017 to be broadly in line with medium-term fundamentals and desirable policies, with substantial uncertainty.
- Near- and medium-term projections:
  - Current account surplus projected to narrow as fishing license fees decline and imports related to development spending remain high.
  - With supplementary spending incorporated (including aircraft acquisition upfront costs for Air Kiribati Limited), overall balance would register a deficit of 20 percent in 2018 and 23 percent in 2019.
  - In the medium run, recurrent and capital expenditures projected to decline from 2016–18 peaks but remain high at 69 percent and 38 percent of GDP, respectively.
  - With conservative assumptions on fishing revenues and grant rollover, overall deficit projected to be around 11 percent of GDP by 2025, causing net financial worth to decline from its 2018 peak.
  - Staff’s DSA indicates Kiribati remains at high risk of debt distress; large size of RERF relative to external debt limits immediate risks but RERF could be significantly depleted in downside scenarios to fishing revenue.
- Risks (skewed to the downside):
  - Favorable weather conditions underpinning strong fishing catches have lasted unusually long; a cyclical reversal could threaten revenues and affect fiscal balance and current account.
  - Tighter global financial conditions could adversely affect the economy through the exposure of the RERF.
  - High reliance on imported goods makes Kiribati vulnerable to commodity price shocks and exchange rate volatility, with outsized impacts on imports, inflation, and growth.
  - Lack of regularly-reported, system-wide financial data hinders financial sector analysis.

### Key statistics (selected figures)
- Real GDP (percent change): 2013: 4.2; 2014: -0.7; 2015: 10.4; 2016: 5.1; 2017 Est.: 0.3; 2018 Proj.: 2.3; 2019 Proj.: 2.3.
- Real GNI (percent change): 2013: 14; 2014: 14; 2015: 19; 2016: -7.8; 2017 Est.: 6.0; 2018 Proj.: -0.5; 2019 Proj.: -3.8.
- Consumer prices (percent change, average): 2013: -1.5; 2014: 2.1; 2015: 0.6; 2016: 1.9; 2017 Est.: 0.4; 2018 Proj.: 2.1; 2019 Proj.: 2.3.
- Central government finance (percent of GDP), Revenue and grants: 2013: 104; 2014: 158; 2015: 151; 2016: 118; 2017 Est.: 131; 2018 Proj.: 123; 2019 Proj.: 114.
- Total domestic revenue (percent of GDP): 2013: 64; 2014: 89; 2015: 109; 2016: 84; 2017 Est.: 92; 2018 Proj.: 91; 2019 Proj.: 72.
  - Of which: fishing revenue (percent of GDP): 2013: 47; 2014: 72; 2015: 91; 2016: 66; 2017 Est.: 72; 2018 Proj.: 70; 2019 Proj.: 51.
- External Grants (percent of GDP): 2013: 39; 2014: 69; 2015: 42; 2016: 34; 2017 Est.: 38; 2018 Proj.: 32; 2019 Proj.: 42.
- Expenditures (percent of GDP): 2013: 91; 2014: 113; 2015: 102; 2016: 115; 2017 Est.: 119; 2018 Proj.: 143; 2019 Proj.: 137.
  - Current expenditures (percent of GDP): 2013: 55; 2014: 60; 2015: 60; 2016: 69; 2017 Est.: 88; 2018 Proj.: 88; 2019 Proj.: 76.
  - Development expenditures (percent of GDP): 2013: 36; 2014: 53; 2015: 42; 2016: 46; 2017 Est.: 31; 2018 Proj.: 55; 2019 Proj.: 61.
- Domestic recurrent balance 1/ (percent of GDP): 2013: -38; 2014: -43; 2015: -41; 2016: -51; 2017 Est.: -68; 2018 Proj.: -66; 2019 Proj.: -55.
- Recurrent fiscal balance (incl. budget grants) (percent of GDP): 2013: 12; 2014: 34; 2015: 52; 2016: 19; 2017 Est.: 12; 2018 Proj.: 9; 2019 Proj.: 1.
- Overall balance 2/ (percent of GDP): 2013: 13; 2014: 45; 2015: 49; 2016: 3; 2017 Est.: 12; 2018 Proj.: -20; 2019 Proj.: -23.
- RERF closing balance (in millions of A$): 2013: 661; 2014: 679; 2015: 756; 2016: 868; 2017 Est.: 934; 2018 Proj.: 994; 2019 Proj.: 1030.
- RERF per capita value (in 2006 A$): 2013: 5,118; 2014: 5,062; 2015: 5,482; 2016: 6,132; 2017 Est.: 6,382; 2018 Proj.: 6,533; 2019 Proj.: 6,496.
- Cash reserve buffer closing balance (in millions of A$): 2015: 133; 2016: 145; 2017 Est.: 188; 2018 Proj.: 234; 2019 Proj.: 180.
  - In excess of 3-months of current spending (millions of A$): 2015: 99; 2016: 103; 2017 Est.: 134; 2018 Proj.: 178; 2019 Proj.: 130.
- Balance of payments, current account including official transfers (millions of US$): 2013: 36; 2014: 96; 2015: 79; 2016: 36; 2017 Est.: 26; 2018 Proj.: 25; 2019 Proj.: 16.
  - (In percent of GDP): 2013: 19; 2014: 53; 2015: 46; 2016: 20; 2017 Est.: 14; 2018 Proj.: 13; 2019 Proj.: 8.
- External debt (in millions of US$): 2013: 14; 2014: 14; 2015: 33; 2016: 42; 2017 Est.: 43; 2018 Proj.: 42; 2019 Proj.: 47.
  - (In percent of GDP): 2013: 8; 2014: 9; 2015: 20; 2016: 24; 2017 Est.: 23; 2018 Proj.: 22; 2019 Proj.: 23.
- External debt service (millions of US$): 2013: 3; 2014: 8; 2015: 1; 2016: 1; 2017 Est.: 1; 2018 Proj.: 1; 2019 Proj.: 2.
  - (In percent of exports of goods and services): 2013: 12; 2014: 37; 2015: 4; 2016: 4; 2017 Est.: 6; 2018 Proj.: 3; 2019 Proj.: 7.
- Exchange rate (A$/US$ period average): 2013: 1.0; 2014: 1.1; 2015: 1.3; 2016: 1.3; 2017 Est.: 1.3.
- Real effective exchange rate (period average): 2013: 105; 2014: 100; 2015: 93; 2016: 93; 2017 Est.: 96.
- Memorandum: Nominal GDP (millions of A$): 2013: 192; 2014: 199; 2015: 228; 2016: 240; 2017 Est.: 242; 2018 Proj.: 253; 2019 Proj.: 264.
- Memorandum: Nominal GDP (millions of US$): 2013: 186; 2014: 180; 2015: 178; 2016: 186; 2017 Est.: 193; 2018 Proj.: 200; 2019 Proj.: 210.

### Executive Board views and key policy recommendations
- Directors welcomed Kiribati’s strong economic performance and improved fiscal position, but noted significant challenges from remoteness, climate change vulnerability, and a narrow production and export base. Directors encouraged maintenance of strong policies to ensure inclusive and sustainable growth.
- Reinforcing the fiscal framework:
  - Focus on the controllable portion of the budget by abstracting from volatile, exogenous components (fishing revenue and grants, plus associated capital spending) to promote expenditure stability and medium-term planning.
  - Adopt a rules-based, transparent mechanism that reflects social preferences and adjusts to structural changes to govern withdrawals from the RERF.
  - Limit increases in the public wage bill and copra subsidies; avoid a supplementary budget and evaluate projects in a comprehensive medium-term framework.
  - Include an explicit provision for climate change adaptation in the budget to mobilize resources more effectively, including from donors.
- Creating an environment for a dynamic private sector:
  - Strengthen the commercial mandate of SOEs and continue divesting and outsourcing activities.
  - Further infrastructure investment to improve connectivity.
  - Enhance human capital with training opportunities and employment possibilities through diversification into infrastructure maintenance, renewable energy, and tourism.
  - Facilitate private sector access to credit by improving land registration and dispute resolution; strengthen supervision and risk management in public financial institutions.
  - Technical assistance from the Fund and other donors important for implementing reforms and enhancing data and statistics compilation.
- Enhancing governance:
  - Address governance deficiencies to improve efficiency, reduce corruption vulnerabilities, and catalyze donor support.
  - Prioritize public investment projects based on socio-economic returns; implement PIMA recommendations prior to approving a surge in public investment projects.
  - Improve transparency on fisheries management and streamline regulatory practices and trade facilitation; make the rulemaking process more transparent and consultative.

### Box 2 (2017 Article IV) — Fiscal scenario and policy guidance
- Risks and outlook:
  - Risks to the outlook are substantial and skewed to the downside (Annex II).
  - Cyclical reversal in fishing catches could threaten revenues, with implications for the fiscal balance and the current account.
  - Tighter global financial conditions could adversely affect the economy through the exposure of the RERF.
  - Commodity price shocks and exchange rate volatility could have an outsized impact on imports, inflation, and growth.
- A. Reinforcing the fiscal framework — findings and illustrative scenario:
  - Use the domestic recurrent balance as an operational target to focus on the controllable portion of the budget.
  - Illustrative consolidation scenario:
    - Government reduces the domestic recurrent deficit by ½ percent of GDP each year until 2028.
    - Under this scenario the domestic recurrent deficit would stabilize around 44 percent of GDP compared to 49 percent in the baseline.
    - Net financial worth would be maintained at 321 percent of GDP in 2030, providing an additional buffer over the 291 percent forecast in the baseline.
    - This buffer would be sufficient to roughly cover one year of climate change adaptation costs (estimated to gradually increase and reach 12 percent of GDP by 2040) and a sharp decline in fishing revenue (21 percent of GDP, corresponding to one standard deviation in the 2012–17 period), while keeping the RERF balance as a percent of GDP constant.
  - Recommendations on fiscal management:
    - Avoid issuing a supplementary budget in the event of a surge in fishing revenue; evaluate windfalls in a comprehensive framework.
    - Meet short-run revenue shortfalls with transfers from the cash reserve buffer.
    - Withdrawals from the RERF should be governed by a rules-based, transparent mechanism reflecting social preferences on intergenerational redistribution and adjusting to structural changes.
- Climate change fiscal considerations:
  - Medium-term budget should include an explicit provision for climate change adaptation, up to 2 percent of GDP annually to cover recurrent costs.
  - Longer-run plans should provide for further increase to reach 6 percent of GDP (the remaining half of annual costs is assumed to be financed by development partners).
  - To ensure fiscal room for climate change adaptation, limit increases in public wages and copra subsidies, including replacing them with targeted social transfers where necessary.
  - Pursue financing from multilateral platforms such as the Green Climate Fund and the Adaptation Fund.
- Cash and investment management:
  - Formalize the cash management strategy and better coordinate it with the investment strategy.
  - Establish a cash management committee that sets clear benchmarks in coordination with the investment unit at the Ministry of Finance.
- Forecasting and revenue projection:
  - Current practice has been to conservatively forecast fishing revenue to remain constant in nominal terms roughly at its 2014 level.
  - Authorities should explore ways to improve fishing revenue projections, including through PFTAC-assisted information sharing with other countries in the region.

### Structural issues, governance, and public investment risks
- Recent anti-corruption initiatives and institutional measures:
  - Kiribati ratified the UN Convention against Corruption in 2013.
  - A regional summit on anti-corruption planned for June 2019.
  - Measures focus on PFM strengthening, anti-corruption code of conduct integration with the Public Service Act, establishment of an anti-corruption committee, and institutionalizing good governance principles.
- Governance, PFM weaknesses, and public investment risks:
  - Main weaknesses: spending and revenue outcomes, procurement, fiscal transparency, PFM controls.
  - Recommendation: make implementation of the PIMA recommendations a prerequisite for approving a surge in public investment projects.
- Transparency and regulatory reforms:
  - Fisheries management transparency needs improvement (annual fishing license fee report lacks allocation and sales details).
  - Business regulation improvements recommended: streamline construction permits and property registration; establish a national customs website; simplify and automate trade procedures.
- Data gaps and capacity constraints:
  - Survey-based fiscal transparency indicators not available.
  - Authorities should strengthen institutional capacity to report accurate and timely statistics.

### Boxed case findings and sectoral notes
- Air connectivity (Box 1):
  - In 2017, a Dash 8 aircraft was purchased by the government for the Gilberts and Tuvalu route, costing roughly 3 percent of GDP.
  - In October 2018, Cabinet approved purchase of two brand-new Embraer E190-E2 jets for delivery in December 2019 and March 2020.
  - Funds for the down payment (8½ percent of GDP) have been appropriated in supplementary budgets.
  - Capex funding over 2019–20 is likely to reach 20 percent of GDP per year.
  - AKL incurred operating losses amounting to A$3 million over 2014–17.
  - AKL reported positive equity of A$10.5 million at end-2017, but only through aircraft provided by the government being accounted as equity.
  - Staff estimates annual fiscal costs to be around 1 percent of GDP, if none of the downside risks materialize; there is great uncertainty surrounding this estimate.
- Fisheries (Box 2):
  - Fishing revenue now provides about three-quarters of total domestic fiscal revenue.
  - In 2014, Kiribati waters supplied one quarter of the global tuna catch.
  - Fisheries Amendment Act of 2017 defines IUU fishing and raises penalties for serious offenses.
- Export concentration (Box 3):
  - Fish and coconut products make up almost the entirety of Kiribati’s exports in the latest available UN COMTRADE data.
  - Thailand accounted for 70 percent of exports by destination.
  - Quality of fish exports: average index value of 0.52 from 1990 to 2010, down from 0.67 in the 1970s and 1980s.

### Economic diversification and sectoral opportunities (Box 3 continued)
- Product and export opportunities:
  - Copra and other coconut products such as coconut oil score relatively high in the quality index: 0.98 and 0.87, respectively.
  - Further leveraging coconuts could involve launching a quality-focused marketing campaign; European and Latin American markets could be explored.
- Services and tourism development:
  - Tourism can target high-end travelers with activities linked to the atolls’ natural and cultural history.
  - KV20 supports investment in eco-tourism, training for hospitality, and improved infrastructure and connectivity.
  - Options include targeted campaigns for the Phoenix Islands Protected Area (PIPA) and facilities for sports fishing.
- Renewable energy and technology niches:
  - Heavy reliance on imported fossil fuels is costly.
  - Ocean thermal energy conversion (OTEC) plants could generate power, supply cold ocean water for refrigeration or aquaculture, and provide desalinated water.
  - Authorities, with the Korea Research Institute of Ships and Ocean Engineering, plan to deploy a plant in 2019–21.

### External sector assessment and policy implications (Appendix I)
- External sector driven by exogenous, volatile factors: fishing license fees, RERF investment income, seafarers’ remittances, and donor contributions dominate inflows; outflows largely relate to infrastructure investment financed by project grants and loans.
- Staff assessment for 2017:
  - REER stable within historical bands; REER has limited impact on the current account given narrow export base.
  - EBA external sustainability (ES) approach suggests the projected medium-term current account balance is in line with the level that would stabilize the NIIP as a share of GDP at its estimated 2017 level.
  - Staff assesses the underlying external position to be broadly in line with the level implied by medium-term fundamentals and desirable policies, with substantial uncertainty.
- Policy implications:
  - Removing structural impediments would improve competitiveness and external sustainability.
  - Closing the infrastructure gap and addressing governance weaknesses would expand export capacity.
  - Securing donor grants for development spending is critical; borrowing through concessional loans should be closely monitored.
  - Large size of the RERF relative to external debt limits immediate risks, but RERF could be significantly depleted in downside scenarios to fishing revenue.
  - Use of the Australian dollar as legal tender remains appropriate.

### Risk Assessment Matrix — selected risks and policy responses (Appendix II)
- Global risks:
  - Sharp tightening of global financial conditions — Likelihood: High; Potential Impact and Policy Response: Medium (RERF/KPF exposure to Australian markets).
  - Rising protectionism and retreat from multilateralism — Likelihood: High; Potential Impact and Policy Response: Medium.
  - Weaker-than-expected global growth — Likelihood: Medium; Potential Impact and Policy Response: Medium.
- Domestic risks:
  - Reversal in strong fishing catches — Likelihood: Medium; Potential Impact and Policy Response: High (hit to fiscal revenues; cash reserve buffer mitigation if temporary).
  - Natural disasters and climate change — Likelihood: Low/Medium; Potential Impact and Policy Response: High (contingency planning, insurance, maintaining cash buffers).
- Notes:
  - Relative likelihood definitions: “low” <10 percent; “medium” 10–30 percent; “high” 30–50 percent.
  - RAM reflects staff views as of discussions with authorities; risks may interact and materialize jointly.

### Debt sustainability and DSA findings
- DSA indicates Kiribati is at high risk of debt distress.
- Under the baseline, PVs of PPG external debt-to-GDP and of public debt-to-GDP would breach indicative thresholds during most of the projection period.
- Baseline projections and assumptions:
  - After posting an annual average of 5¼ percent in 2015–17, real GDP growth expected to decline to around 2¼ percent in 2018 and slow to 1¾ percent in the medium run and slightly above 1½ percent in the long run.
  - Population growth envisaged to average about 1.6 percent over the projection period.
  - Fishing revenue expected to stabilize around A$135 million per year over 2019–21; assumed constant in real terms from 2022 onwards.
  - Climate-change-related maintenance and contingency expenditures assumed to be less than 1 percent of GDP in 2019 and gradually reach 6 percent of GDP in 2028 and remain at that level thereafter.
  - Development expenditure assumed to decline from 55 percent of GDP in 2018 to around 20 percent in the long term; financing assumed via IDA/ADF loans (~20 percent of development expenditure), external grants until 2030, and combinations including RERF withdrawals starting in 2030.
- DSA outcomes and stress tests:
  - PV of debt-to-GDP ratio breaches indicative benchmark (40 percent) after 2022.
  - PV of external-debt-to-exports ratio breaches threshold (180 percent) at the end of the projection period.
  - Extreme test scenarios cause earlier breaches (by 2019 and 2021 for PV debt-to-GDP and PV debt-to-exports respectively).
  - Public debt dynamics mirror external debt; PV of total public-debt-to-GDP ratio projected to breach indicative benchmark (55 percent) by 2025.
  - Extreme shock scenario: public debt unsustainable — PV of public-sector-debt-to-GDP ratio breaches threshold by 2022 and triples in the following decade.
- Authorities’ fiscal strategy:
  - 2019 elements: an overall balanced budget, zero new debt, and no withdrawals from the RERF.
  - Policy stance: maintain conservative fishing revenue estimates, seek grants from bilateral donors and IFIs, and comply with non-concessional borrowing policies.

### Staff appraisal and recommended policy direction
- Staff appraisal:
  - Recent economic progress driven by higher public spending supported by record fishing revenues and donor-financed infrastructure investment.
  - Fiscal and structural reforms—most notably in SOEs—have advanced.
  - Government net financial worth rose to four times GDP.
  - Risks substantial and skewed to the downside; Kiribati remains at high risk of debt distress.
- Staff policy direction:
  - Reinforce the fiscal framework to maintain buffers and meet public spending needs sustainably.
  - Create an environment for a dynamic private sector: continued SOE reform, well-selected infrastructure projects, human capital development, and prudent financial deepening.
  - Enhance governance to improve outcomes, reduce vulnerabilities, and catalyze donor support.
- Specific staff recommendations to authorities:
  - Focus on the controllable portion of the budget to promote expenditure stability and medium-term planning.
  - Limit increases in the public wage bill and copra subsidies; replace with targeted social transfers where necessary.
  - Avoid supplementary budgets when fishing revenue surges; evaluate windfalls in a medium-term framework and use cash reserve buffer for short-run shortfalls.
  - Adopt a rules-based, transparent mechanism for RERF withdrawals reflecting intergenerational redistribution preferences and structural changes.
  - Incorporate explicit provision for climate change adaptation in the medium-term budget.

*International Monetary Fund staff report for the 2018 Article IV consultation with Kiribati (cr1926-kiribati).*

### 3.5 million square kilometers. This geography raises the cost of public service delivery, leading

### cr1926-kiribati - 3.5 million square kilometers. This geography raises the cost of public service delivery, leading

### Context
- Population of about 112,000 lives on 21 islands, spread over an ocean area of 3.5 million square kilometers.  
- Geography raises the cost of public service delivery, leading to an infrastructure gap.  
- Economic activity primarily consists of fisheries and copra.  
- Weaknesses in governance, business regulations, and access to credit exacerbate geographical challenges.  
- Long-run prospects clouded by climate change: low-lying atolls vulnerable to rising sea levels; storm surge, coastal erosion, and saltwater intrusion threaten resources; higher ocean surface temperatures may disrupt the tuna fishery through impacts on migration and spawning patterns.

### Recent developments, outlook, and risks
- Growth performance:
  - Economy grew at an average annual pace of 5¼ percent in 2015–17, compared to 1½ percent in 2000–14.
  - Growth in 2018 is estimated at 2¼ percent as fishing volumes normalize.
- Inflation:
  - Inflation remained subdued; expected to remain around 2 percent in 2018 and increase in the medium term to 2½ percent.
  - Very low inflation reading in 2017 (0.4 percent annual average) largely attributable to a reduction in electricity tariffs.
- Fiscal and public finances:
  - Strong fishing revenue and donor-financed infrastructure investment drove stronger growth and improved fiscal position.
  - For the fifth year in a row, the recurrent balance registered a surplus in 2017, reaching 12 percent of GDP.
  - Fishing revenue windfall amounted to 26 percent of GDP in 2017.
  - Current spending overruns included 12 percent of GDP appropriated for the outer islands development program and copra subsidies exceeding projections by 2 percent of GDP.
  - Balance of the Revenue Equalization Reserve Fund (RERF) was 386 percent of GDP at end-2017.
  - Cash reserves reached 77 percent of GDP, and public debt stood at 23 percent of GDP.
  - Government net financial worth rose to 440 percent of GDP (RERF + cash reserves − public debt).
  - Government committed to no drawdowns from the RERF until a target balance of A$1 billion (about 400 percent of GDP) is reached; RERF stood at A$994 million as of November 2018.
  - Cash reserves are more than four times staff’s recommended buffer (three months of recurrent spending); about half in a non-interest-bearing account with the local branch of ANZ; program approved to transfer a component to an interest-bearing account with State Street.
- External sector:
  - Current account surplus estimated at 14 percent of GDP in 2017.
  - Real effective exchange rate tracked weakening of the Australian dollar against the US dollar since early 2018 but remained within historical norms.
  - Staff assesses underlying external position in 2017 to be broadly in line with medium-term fundamentals and desirable policies, with substantial uncertainty.
- Near- and medium-term projections:
  - Current account surplus projected to narrow as fishing license fees decline and imports related to development spending remain high.
  - With supplementary spending incorporated (including aircraft acquisition upfront costs for Air Kiribati Limited), overall balance would register a deficit of 20 percent in 2018 and 23 percent in 2019.
  - In the medium run, recurrent and capital expenditures projected to decline from 2016–18 peaks but remain high at 69 percent and 38 percent of GDP, respectively.
  - With conservative assumptions on fishing revenues and grant rollover, overall deficit projected to be around 11 percent of GDP by 2025, causing net financial worth to decline from its 2018 peak.
  - Staff’s DSA indicates Kiribati remains at high risk of debt distress; large size of RERF relative to external debt limits immediate risks but RERF could be significantly depleted in downside scenarios to fishing revenue.
- Risks (skewed to the downside):
  - Favorable weather conditions underpinning strong fishing catches have lasted unusually long; a cyclical reversal could threaten revenues and affect fiscal balance and current account.  
  - Tighter global financial conditions could adversely affect the economy through the exposure of the RERF.  
  - High reliance on imported goods makes Kiribati vulnerable to commodity price shocks and exchange rate volatility, with outsized impacts on imports, inflation, and growth.  
  - Lack of regularly-reported, system-wide financial data hinders financial sector analysis.

### Key statistics (selected figures from Table 1 and narrative)
- Real GDP (percent change): 2013: 4.2; 2014: -0.7; 2015: 10.4; 2016: 5.1; 2017 Est.: 0.3; 2018 Proj.: 2.3; 2019 Proj.: 2.3.  
- Real GNI (percent change): 2013: 14; 2014: 14; 2015: 19; 2016: -7.8; 2017 Est.: 6.0; 2018 Proj.: -0.5; 2019 Proj.: -3.8.  
- Consumer prices (percent change, average): 2013: -1.5; 2014: 2.1; 2015: 0.6; 2016: 1.9; 2017 Est.: 0.4; 2018 Proj.: 2.1; 2019 Proj.: 2.3.  
- Central government finance (percent of GDP), Revenue and grants: 2013: 104; 2014: 158; 2015: 151; 2016: 118; 2017 Est.: 131; 2018 Proj.: 123; 2019 Proj.: 114.  
- Total domestic revenue (percent of GDP): 2013: 64; 2014: 89; 2015: 109; 2016: 84; 2017 Est.: 92; 2018 Proj.: 91; 2019 Proj.: 72.  
- Of which: fishing revenue (percent of GDP): 2013: 47; 2014: 72; 2015: 91; 2016: 66; 2017 Est.: 72; 2018 Proj.: 70; 2019 Proj.: 51.  
- External Grants (percent of GDP): 2013: 39; 2014: 69; 2015: 42; 2016: 34; 2017 Est.: 38; 2018 Proj.: 32; 2019 Proj.: 42.  
- Expenditures (percent of GDP): 2013: 91; 2014: 113; 2015: 102; 2016: 115; 2017 Est.: 119; 2018 Proj.: 143; 2019 Proj.: 137.  
  - Current expenditures (percent of GDP): 2013: 55; 2014: 60; 2015: 60; 2016: 69; 2017 Est.: 88; 2018 Proj.: 88; 2019 Proj.: 76.  
  - Development expenditures (percent of GDP): 2013: 36; 2014: 53; 2015: 42; 2016: 46; 2017 Est.: 31; 2018 Proj.: 55; 2019 Proj.: 61.  
- Domestic recurrent balance 1/ (percent of GDP): 2013: -38; 2014: -43; 2015: -41; 2016: -51; 2017 Est.: -68; 2018 Proj.: -66; 2019 Proj.: -55.  
- Recurrent fiscal balance (incl. budget grants) (percent of GDP): 2013: 12; 2014: 34; 2015: 52; 2016: 19; 2017 Est.: 12; 2018 Proj.: 9; 2019 Proj.: 1.  
- Overall balance 2/ (percent of GDP): 2013: 13; 2014: 45; 2015: 49; 2016: 3; 2017 Est.: 12; 2018 Proj.: -20; 2019 Proj.: -23.  
- RERF closing balance (in millions of A$): 2013: 661; 2014: 679; 2015: 756; 2016: 868; 2017 Est.: 934; 2018 Proj.: 994; 2019 Proj.: 1030.  
- RERF per capita value (in 2006 A$): 2013: 5,118; 2014: 5,062; 2015: 5,482; 2016: 6,132; 2017 Est.: 6,382; 2018 Proj.: 6,533; 2019 Proj.: 6,496.  
- Cash reserve buffer closing balance (in millions of A$): 2015: 133; 2016: 145; 2017 Est.: 188; 2018 Proj.: 234; 2019 Proj.: 180.  
  - In excess of 3-months of current spending (millions of A$): 2015: 99; 2016: 103; 2017 Est.: 134; 2018 Proj.: 178; 2019 Proj.: 130.  
- Balance of payments, current account including official transfers (millions of US$): 2013: 36; 2014: 96; 2015: 79; 2016: 36; 2017 Est.: 26; 2018 Proj.: 25; 2019 Proj.: 16.  
  - (In percent of GDP): 2013: 19; 2014: 53; 2015: 46; 2016: 20; 2017 Est.: 14; 2018 Proj.: 13; 2019 Proj.: 8.  
- External debt (in millions of US$): 2013: 14; 2014: 14; 2015: 33; 2016: 42; 2017 Est.: 43; 2018 Proj.: 42; 2019 Proj.: 47.  
  - (In percent of GDP): 2013: 8; 2014: 9; 2015: 20; 2016: 24; 2017 Est.: 23; 2018 Proj.: 22; 2019 Proj.: 23.  
- External debt service (millions of US$): 2013: 3; 2014: 8; 2015: 1; 2016: 1; 2017 Est.: 1; 2018 Proj.: 1; 2019 Proj.: 2.  
  - (In percent of exports of goods and services): 2013: 12; 2014: 37; 2015: 4; 2016: 4; 2017 Est.: 6; 2018 Proj.: 3; 2019 Proj.: 7.  
- Exchange rate (A$/US$ period average): 2013: 1.0; 2014: 1.1; 2015: 1.3; 2016: 1.3; 2017 Est.: 1.3.  
- Real effective exchange rate (period average): 2013: 105; 2014: 100; 2015: 93; 2016: 93; 2017 Est.: 96.  
- Memorandum: Nominal GDP (millions of A$): 2013: 192; 2014: 199; 2015: 228; 2016: 240; 2017 Est.: 242; 2018 Proj.: 253; 2019 Proj.: 264.  
- Memorandum: Nominal GDP (millions of US$): 2013: 186; 2014: 180; 2015: 178; 2016: 186; 2017 Est.: 193; 2018 Proj.: 200; 2019 Proj.: 210.

### Executive Board views and key policy recommendations
- Executive Directors welcomed Kiribati’s strong economic performance and improved fiscal position, but noted significant challenges from remoteness, climate change vulnerability, and a narrow production and export base. Directors encouraged maintenance of strong policies to ensure inclusive and sustainable growth.
- Reinforcing the fiscal framework:
  - Focus on the controllable portion of the budget by abstracting from volatile, exogenous components (fishing revenue and grants, plus associated capital spending) to promote expenditure stability and medium-term planning.
  - Adopt a rules-based, transparent mechanism that reflects social preferences and adjusts to structural changes to govern withdrawals from the RERF.
  - Limit increases in the public wage bill and copra subsidies; avoid a supplementary budget and evaluate projects in a comprehensive medium-term framework.
  - Include an explicit provision for climate change adaptation in the budget to mobilize resources more effectively, including from donors.
- Creating an environment for a dynamic private sector:
  - Strengthen the commercial mandate of SOEs and continue divesting and outsourcing activities.
  - Further infrastructure investment to improve connectivity.
  - Enhance human capital with training opportunities and employment possibilities through diversification into infrastructure maintenance, renewable energy, and tourism.
  - Facilitate private sector access to credit by improving land registration and dispute resolution; strengthen supervision and risk management in public financial institutions.
  - Technical assistance from the Fund and other donors important for implementing reforms and enhancing data and statistics compilation.
- Enhancing governance:
  - Address governance deficiencies to improve efficiency, reduce corruption vulnerabilities, and catalyze donor support.
  - Prioritize public investment projects based on socio-economic returns; implement PIMA recommendations prior to approving a surge in public investment projects.
  - Improve transparency on fisheries management and streamline regulatory practices and trade facilitation; make the rulemaking process more transparent and consultative.

*International Monetary Fund staff report for the 2018 Article IV consultation with Kiribati.*

### Box 2 in 2017 Article IV

### Box 2 in 2017 Article IV

### Risks and outlook
- Risks to the outlook are substantial and skewed to the downside (Annex II).
- A cyclical reversal in fishing catches could threaten revenues, with implications for the fiscal balance and the current account.
- Tighter global financial conditions could adversely affect the economy through the exposure of the RERF.
- Given Kiribati's high reliance on imported goods, commodity price shocks and exchange rate volatility could have an outsized impact on imports, inflation, and growth.
- Authorities noted anticipation of the RERF balance to reduce somewhat in reflection of the global equity market correction in late 2018.
- Authorities emphasized that, despite recent strong growth, large gaps in meeting basic needs remain.

### A. Reinforcing the fiscal framework — findings and illustrative scenario
- Use the domestic recurrent balance as an operational target to focus on the controllable portion of the budget (abstracting from fishing revenue and grants, plus associated capital spending).
- Recent deterioration in 2016 and 2017 of the domestic recurrent balance underscores potentially unsustainable increases in subsidies and wages.
- Illustrative consolidation scenario:
  - Government reduces the domestic recurrent deficit by ½ percent of GDP each year until 2028.
  - Under this scenario the domestic recurrent deficit would stabilize around 44 percent of GDP compared to 49 percent in the baseline.
  - Net financial worth would be maintained at 321 percent of GDP in 2030, providing an additional buffer over the 291 percent forecast in the baseline.
  - This buffer would be sufficient to roughly cover one year of climate change adaptation costs (estimated to gradually increase and reach 12 percent of GDP by 2040) and a sharp decline in fishing revenue (21 percent of GDP, corresponding to one standard deviation in the 2012–17 period), while keeping the RERF balance as a percent of GDP constant.
- Recommendations on fiscal management:
  - Avoid issuing a supplementary budget in the event of a surge in fishing revenue; evaluate windfalls in a comprehensive framework and consider medium-term sustainability before allocating.
  - Meet short-run revenue shortfalls with transfers from the cash reserve buffer.
  - Withdrawals from the RERF should be governed by a rules-based, transparent mechanism reflecting social preferences on intergenerational redistribution and adjusting to structural changes in returns on assets and potential growth (see Annex III in the 2017 Article IV Staff Report).
- Climate change fiscal considerations:
  - Medium-term budget should include an explicit provision for climate change adaptation, up to 2 percent of GDP annually to cover recurrent costs (including infrastructure damage repair).
  - Longer-run plans should provide for further increase to reach 6 percent of GDP (the remaining half of annual costs is assumed to be financed by development partners).
  - To ensure fiscal room for climate change adaptation, limit increases in public wages and copra subsidies, including replacing them with targeted social transfers where necessary.
  - Pursue financing from multilateral platforms such as the Green Climate Fund and the Adaptation Fund.
  - Establishment of the Climate Finance Division to coordinate climate-change-related expenditures is a welcome step; allocate adequate staff resources to it.
- Cash and investment management:
  - Formalize the cash management strategy and better coordinate it with the investment strategy.
  - A lower level of cash reserves in the non-interest-bearing account would maximize returns while ensuring healthy banking system functioning.
  - Establish a cash management committee that sets clear benchmarks in coordination with the investment unit at the Ministry of Finance.
  - Monitor and take into account credit, liquidity, and market risks when assessing financial stability implications; capacity development is required.
- Forecasting and revenue projection:
  - Current practice has been to conservatively forecast fishing revenue to remain constant in nominal terms roughly at its 2014 level.
  - Authorities should explore ways to improve fishing revenue projections, including through PFTAC-assisted information sharing with other countries in the region.

### B. Creating an environment for a dynamic private sector — findings and recommendations
- Policies to boost private sector dynamism:
  - Strengthen the commercial mandate of SOEs and develop a medium-term plan for operationally and financially sustainable delivery of electricity, water, and sanitation services.
  - Continue divestment and outsourcing of SOE activities to improve efficiency and strengthen public finances.
  - Further improve connectivity through infrastructure investment in air transportation and shipping services.
  - Build human capital by enhancing training opportunities and creating employment possibilities through improved natural resource utilization and diversification of the economy.
  - Facilitate private sector access to credit by improving land registration and dispute resolution, while strengthening financial supervision of public financial institutions.
- SOE reform priorities:
  - Articulate an overall strategy to set SOEs on a more commercial and sustainable footing.
  - Recalibrate tariffs in water and sanitation services while protecting the most vulnerable.
  - Establish formal guidelines on dividends and retention of earnings for self-funding capital expenditures.
  - Improve timeliness and quality of SOE financial reporting; transform audited statements into a database for ongoing monitoring and analysis.
  - Implement past staff advice to phase out SOE exemptions from the VAT without further delay to level the playing field.
- Outer islands development and subsidies:
  - The 2017 supplementary budget allocated 13 percent of GDP to develop periphery infrastructure without specifying projects; disbursement has been delayed due to capacity and logistical challenges.
  - The doubling of the copra subsidy has distorted incentives: virgin coconut oil (where Kiribati could be competitive without a subsidy) is now less remunerative for households than copra, potentially leading to overharvesting and threatening sustainability.
  - Consider alternatives to the copra subsidy scheme for supporting outer-island residents (for example, recalibrating other social transfer programs).
- Natural resource use and diversification:
  - Conservation measures under the Parties to the Nauru Agreement (PNA) offer benefits but also costs; premium on information sharing and cooperation is needed to combat illegal fishing.
  - Transforming the economy toward services (infrastructure maintenance, renewable energy, tourism) could open diversification opportunities and increase resilience.
  - Enhance training opportunities, including participation in overseas work schemes, to complement job creation from better resource utilization and diversification.
- Financial deepening and supervision:
  - Improve land access procedures and dispute resolution to enhance property rights and enable lending against collateral.
  - Build on donor-funded investment in ICT, mobile connectivity, and mobile banking to promote job creation and financial deepening.
  - Explore development of credit unions for lending to small borrowers.
  - Develop a comprehensive regulatory and supervisory framework providing legal powers to authorize and supervise banks with a complete suite of prudential standards.
  - Improve financial sector statistics (e.g., compile a consolidated banking system balance sheet) and strengthen institutional capacity to report statistics in a timely manner.
  - Strengthen supervision of public financial institutions:
    - Ensure the Development Bank of Kiribati (DBK) remains adequately capitalized, including a full assessment of current capital buffers against legacy nonperforming loans.
    - Improve DBK risk monitoring and liquidity management.
    - KPF progress: accumulated deficit closed from 24 percent of total net assets to 4 percent, but its investment strategy still features relatively ambitious promised returns and active fund managers.
    - Adopt a more prudent, passive strategy for KPF to reduce management costs and mitigate fiscal risk.
    - Consider explicitly tasking the investment unit at the Ministry of Finance to oversee the RERF, the KPF, and the cash reserves with a unified strategy.

### Authorities’ views (selected)
- Broad agreement with the need to maintain a prudent fiscal position.
- 2019 budget strategy pledges: balanced budget, no withdrawal from the RERF, and no new debt.
- Authorities view a balanced overall budget target as easier to communicate than the domestic recurrent balance, though they recognize the latter's analytical usefulness.
- Government is working on a new strategy for the RERF likely featuring a commitment to preserve the real value of the fund and to limit withdrawals to projects benefiting both current and future generations.
- Acknowledge capacity and political constraints that slow some reforms (for example, phasing out VAT exemptions for SOEs and alternatives to the copra subsidy).

*IMF staff — Box 2 in 2017 Article IV (excerpt).*

### 26.      Several initiatives have been launched recently as part of a national anticorruption

### Several initiatives have been launched recently as part of a national anticorruption strategy

### Recent anti-corruption initiatives and institutional measures
- Kiribati ratified the UN Convention against Corruption in 2013.
- A regional summit on anti-corruption is planned to be held in Kiribati in June 2019.
- Recent initiatives to prevent corruption focus on:
  - Implementation of measures recommended by staff and the donors to strengthen PFM.
  - Fostering the integrity and independence of institutions whose mandate is to promote good governance and eliminate corruption (including through development of an anti-corruption code of conduct and its integration with the Public Service Act).
  - Strengthening strategic partnerships and institutionalizing anti-corruption and good governance principles in the public service and education systems (including through establishment of an anti-corruption committee with an oversight role to be executed in cooperation with the appropriate agencies and in engagement with civil society).

### Governance, PFM weaknesses, and public investment risks
- Main areas of weakness consistently noted by consultations, TA missions, and the authorities’ self-assessment:
  - Spending and revenue outcomes.
  - Procurement.
  - Fiscal transparency.
  - PFM controls.
- Against an ambitious public investment agenda, priorities are:
  - Strengthen the fiscal framework so the most beneficial projects are selected.
  - Ensure execution is not disrupted by misaligned incentives.
  - Ensure fiscal sustainability and obtain the best financing terms.
- A key policy challenge: meeting public investment needs without comprehensive identification of upcoming infrastructure priorities and financing needs.
- Recommendation: consider making implementation of the PIMA recommendations—which focus on procurement, project selection, and maintenance—a prerequisite for approving a surge in public investment projects.
- Case example: planned expansion of AKL operations could improve connectivity but pose significant fiscal risks (see Box 1).

### Transparency and regulatory reforms
- Fisheries management transparency needs improvement:
  - Annual fishing license fee report published since 2014 lacks crucial information such as how many fishing days are allocated to Kiribati and how these days are sold to domestic and foreign vessels.
  - Report should include detailed information to improve stakeholders’ forecasts and boost public trust.
- Business regulation improvements recommended:
  - Streamline regulatory practices associated with getting construction permits and registering property.
  - Trade facilitation should focus on information availability (establishing a national customs website) and formalities (simplification and harmonization of documents as well as automation and streamlining of procedures).
  - Make the regulatory rulemaking process more transparent and consultative.

### Data gaps and capacity constraints
- Survey-based fiscal transparency indicators are not available.
- Data provision is broadly adequate for surveillance but has shortcomings that impair policymaking.
- Authorities should strengthen institutional capacity to report accurate and timely statistics.
- Authorities note capacity constraints in developing main macroeconomic indicators and request assistance from international institutions and donors to compile needed statistics and improve coordination to reduce duplication of data requests.

### Staff appraisal: outlook, risks, and recommendations
- Recent economic progress and outlook:
  - Growth has exceeded historical norms due to higher public spending supported by record-high fishing revenues and donor-financed infrastructure investment.
  - Fiscal and structural reforms—most notably in SOEs—have advanced.
  - The government’s net financial worth rose to four times the GDP.
- Risks to the outlook (substantial and skewed to the downside):
  - Cyclical reversal of favorable weather conditions could threaten fishing revenue, affecting the fiscal balance and the current account.
  - Tighter global financial conditions could adversely affect the economy through exposure of the RERF.
  - Commodity price shocks and exchange rate volatility could have outsized impacts on imports, inflation, and growth.
  - Kiribati remains at high risk of debt distress given volatile fishing revenue and considerable spending needs.
- Staff policy direction (paragraph 36):
  - Reinforce the fiscal framework to maintain buffers and to meet public spending needs in a sustainable way.
  - Create an environment for a dynamic private sector, with continued reform momentum, well-selected infrastructure projects, human capital development, and prudent financial deepening.
  - Enhance governance to improve outcomes, reduce vulnerabilities, and catalyze donor support.
- Authorities’ commitment to fiscal discipline could be reinforced by (paragraph 37):
  - Focusing on the controllable portion of the budget to promote expenditure stability and medium-term planning.
  - Limiting the increase in the public wage bill and in copra subsidies, and replacing them with targeted social transfers where necessary.
  - Avoiding a supplementary budget in the event of a surge in fishing revenue; instead evaluate projects in a comprehensive medium-term framework and adjust the controllable portion of the budget insofar as permanent wealth increases, while meeting any revenue shortfall by transfers from the cash reserve buffer.
  - Adopting a rules-based, transparent mechanism to govern withdrawals from the RERF that reflects social preferences on intergenerational redistribution and adjusts to structural changes in returns on assets and potential growth.
  - Incorporating the toll climate change will take on Kiribati’s finances through an explicit provision for climate change adaptation in the medium-term budget.
- Specific policies to boost the private sector (paragraph 38):
  - Further strengthen the commercial mandate of the SOEs and develop a medium-term plan for sustainable delivery of electricity, water, and sanitation services.
  - Continue divestment and outsourcing of SOE activities to improve efficiency and strengthen public finances.
  - Further improve connectivity through infrastructure investment in air transportation and shipping services, and build on donor-funded investment in ICT infrastructure.
  - Build human capital by enhancing training opportunities and creating employment possibilities through improved natural resource utilization and diversification of the economy into infrastructure maintenance, renewable energy, and tourism.
  - Facilitate private sector access to credit by improving land registration and dispute resolution while strengthening financial supervision and risk management in public financial institutions.
- Staff supports authorities’ anti-corruption initiatives and calls for further governance actions (paragraph 39):
  - Prioritize public investment projects based on expected socio-economic returns, and make implementation of the PIMA recommendations a prerequisite for approving a surge in spending.
  - Improve transparency in the fisheries report through coverage of crucial information such as fishing day allocations.
  - Streamline regulatory practices, improve trade information availability, and make the regulatory rulemaking process more transparent and consultative.
- Recommendation: next Article IV consultation to take place on the standard 12-month cycle.

### Boxed case findings and key statistics
- Air connectivity (Box 1):
  - In 2017, a Dash 8 aircraft was purchased by the government for the Gilberts and Tuvalu route, costing roughly 3 percent of GDP.
  - In October 2018, Cabinet approved purchase of two brand-new Embraer E190-E2 jets for delivery in December 2019 and March 2020.
  - Funds for the down payment (8½ percent of GDP) have been appropriated in supplementary budgets.
  - Capex funding over 2019–20 is likely to reach 20 percent of GDP per year.
  - AKL incurred operating losses amounting to A$3 million over 2014–17.
  - AKL reported positive equity of A$10.5 million at end-2017, but only through aircraft provided by the government being accounted as equity.
  - Staff estimates annual fiscal costs to be around 1 percent of GDP, if none of the downside risks materialize; there is great uncertainty surrounding this estimate.
- Fisheries (Box 2):
  - Fishing revenue now provides about three-quarters of total domestic fiscal revenue.
  - In 2014, Kiribati waters supplied one quarter of the global tuna catch.
  - Fisheries Amendment Act of 2017 defines IUU fishing and raises penalties for serious offenses; implementation should proceed swiftly.
  - Suggested options include private-sector or SOE-led expansion of the fishing fleet, exploration of transshipment and processing facilities in the periphery (e.g., Kiritimati), and negotiation of side-payment systems to complement the VDS for broader risk sharing or enforcing a quota system.
- Export concentration (Box 3):
  - Fish and coconut products make up almost the entirety of Kiribati’s exports in the latest available UN COMTRADE data.
  - Thailand accounted for 70 percent of exports by destination.
  - The quality of fish exports: average index value of 0.52 from 1990 to 2010, down from 0.67 in the 1970s and 1980s.

_International Monetary Fund staff report text provided in the source content._

### Box 3. Economic Diversification: Possible Directions (Concluded)

### Box 3. Economic Diversification: Possible Directions (Concluded)

### Product and export opportunities
- Expanding product lines into higher-value-added categories would complement upgradation efforts.
- Copra and other coconut products such as coconut oil score relatively high in the quality index: 0.98 and 0.87, respectively.
- Further leveraging Kiribati’s comparative edge on coconuts could involve launching a quality-focused marketing campaign.
- European and Latin American markets could be explored further.

### Services and tourism development
- Tourism can be developed to secure a robust share in emerging niche markets by offering activities closely linked to the atolls’ natural and cultural history to attract high-end travelers seeking unique experiences.
- KV20 takes steps in this direction, through:
  - investment in eco-tourism,
  - training opportunities for service providers in the hospitality sector with a focus on high-end travelers,
  - improved infrastructure and connectivity.
- Further options include targeted campaigns for the Phoenix Islands Protected Area (PIPA) and facilities to enable sports fishing and other water activities.

### Renewable energy and technology niches
- Heavy reliance on imported fossil fuels is costly and exposes the country to abrupt changes in external factors.
- Innovative technologies that leverage Kiribati’s natural resources to meet energy needs would support growth and increase resilience.
- Ocean thermal energy conversion (OTEC) plants could:
  - generate power,
  - supply cold ocean water for refrigeration or aquaculture,
  - provide desalinated water for drinking.
- The authorities, in cooperation with the Korea Research Institute of Ships and Ocean Engineering, plan to deploy a plant in 2019–21.
- This will be one of the first grid-connected OTEC systems in the world, creating potential to export to the onshore power grids.

### External sector assessment — key findings and policy implications (Appendix I)
- Kiribati’s external sector developments are driven by exogenous, volatile factors: fishing license fees, RERF investment income, seafarers’ remittances, and donor contributions dominate inflows; outflows largely relate to infrastructure investment financed by project grants and loans.
- Volatile flows, data limitations, and idiosyncratic characteristics make standard external assessment approaches less suitable or unfeasible.
- Staff assessment for 2017:
  - The real effective exchange rate (REER) has been stable within the bands implied by historical averages.
  - Given the narrow export base, the real exchange rate has limited impact on the current account.
  - The EBA external sustainability (ES) approach suggests the projected medium-term current account balance is in line with the level that would stabilize the net international investment position (NIIP) as a share of GDP at its estimated 2017 level.
  - Taking all factors into account and giving most weight to the ES approach, staff assesses the underlying external position to be broadly in line with the level implied by medium-term fundamentals and desirable policies.
  - There is substantial uncertainty around this assessment due to the idiosyncratic features of the Kiribati economy and data quality.

- Policy implications and recommendations:
  - Removing long-standing structural impediments would help improve competitiveness and ensure external sustainability.
  - Closing the infrastructure gap and addressing governance weaknesses would expand export capacity and increase efficiency.
  - Securing donor grants for development spending is critical; borrowing through concessional loans should be closely monitored.
  - The large size of the RERF relative to external debt limits immediate risks, but the RERF could be significantly depleted over the longer run in downside scenarios to fishing revenue.
  - The use of Australian dollar as the legal tender remains appropriate: it provides a strong nominal anchor given close trade and financial linkages with Australia (a high share of RERF assets is invested in Australian markets) and limited capacity to run an independent monetary institution.

*Source: IMF staff summary of "Box 3. Economic Diversification: Possible Directions (Concluded)" and Appendix I from the provided content unit.*

### Appendix II. Risk Assessment Matrix

### Appendix II. Risk Assessment Matrix

### Global risks

- Sharp tightening of global financial conditions  
  - Likelihood and Transmission Channels: High  
    - A sharper-than-expected increase in U.S. interest rates (prompted by higher-than-expected inflation) or the materialization of other risks could have investors minimize exposure to Australian assets.  
  - Potential Impact and Policy Response: Medium  
    - The lion’s share of the RERF and the KPF assets is invested in the global financial markets, primarily Australian markets. This exposure constitutes a significant channel through which a disruptive event in global markets could feed into the domestic economy. Prudent public financial management would soften the impact.

- Rising protectionism and retreat from multilateralism  
  - Likelihood and Transmission Channels: High  
    - Escalating and sustained trade actions threatens the global trade system, regional integration, labor mobility, as well as international collaboration. This increases uncertainty about growth as well as financial market volatility.  
  - Potential Impact and Policy Response: Medium  
    - Given Kiribati’s high reliance on imported goods, disruptions to trade and exchange rate volatility could have an outsized impact on inflation and growth. Prudent management of public resources and, in the longer run, seeking to diversify the economy would help resilience.

- Weaker-than-expected global growth  
  - Likelihood and Transmission Channels: Medium  
    - A slowdown in major emerging markets over the medium term and/or disappointing growth in key advanced economies due to binding capacity constraints or a slowing/reversal of improvement in structural reforms.  
  - Potential Impact and Policy Response: Medium  
    - Reduced demand for Kiribati exports would be reflected in lower fishing license fees and seamen’s remittances. Negative impact on the domestic economy could also manifest through the financial channel if weak global growth is reflected in a decline in global returns, affecting RERF/KPF assets. Prudent public financial management would soften the impact.

### Domestic risks

- Reversal in strong fishing catches  
  - Likelihood and Transmission Channels: Medium  
    - Fishing license fees decline more than projected due to less favorable weather conditions.  
  - Potential Impact and Policy Response: High  
    - The hit to fiscal revenues would lead to higher deficits. If sustained, the decline in fishing revenue may jeopardize long-run fiscal sustainability. The cash reserve buffer can mitigate the shock if the decline is temporary.

- Natural disasters and climate change  
  - Likelihood and Transmission Channels: Low/Medium  
    - While the probability of occurrence of natural disaster is less than 10 percent for Kiribati, adverse effects of climate change on the country’s low-lying atolls are sizeable.  
  - Potential Impact and Policy Response: High  
    - Volatile weather conditions caused by global warming can lead to large losses and damages to production and potential growth. Contingency plans should include maintaining a strong cash buffer, seeking cost-effective insurance, and establishing contingent financing plans with development partners.

### Notes on the Risk Assessment Matrix

- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).  
- The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent).  
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

*Source: Appendix II. Risk Assessment Matrix — cr1926-kiribati*

### 1. Kiribati is a small state in the South Pacific, with limited opportunities for

### 1. Kiribati is a small state in the South Pacific, with limited opportunities for diversification and vulnerable to climate change.

### Economic structure and sovereign wealth fund (RERF)
- Narrow production/export base: mainly tuna fishing and copra; highly dependent on revenues from selling fishing licenses under various fisheries agreements and donor support.
- Sovereign wealth fund: Revenue Equalization Reserve Fund (RERF), established in 1956 from phosphate mining proceeds; mining ceased in 1979.
- RERF status:
  - Sound management has seen the RERF’s net capitalization value rise just above A$1 billion in August 2018—a target that was expected to be reached in 2020.
  - Fishing revenues in recent years have been used to replenish the fund.

### Public sector debt coverage and composition
- Coverage: central government and social security fund; data availability limits coverage (no regularly updated balance sheet for all subsectors, notably SOEs).
- Government-guaranteed debt: 6 percent of GDP (not included in the baseline).
- Public debt level: doubled since 2014 but stable around 23 percent of GDP as of end-2017.
- Definition of external/domestic debt: “residency-based”; local currency denominated debt (i.e., debt in Australian dollars, which is the legal tender in Kiribati) is held entirely by non-residents.
- Public Debt Balance as of End-2017 (Creditor — Balance):
  - Asian Development Bank AUD 32,225,287
  - International Cooperation and Development Fund, Taiwan Province of China AUD 20,227,983
- Source for balances: Kiribati Ministry of Finance, 2018 Budget.

### Debt-carrying capacity and indicative thresholds
- Composite Indicator (CI): 2.85 in both the April and the October 2018 WEOs (with an update to the CPIA index for 2017).
- Classification: upgraded to “medium” debt-carrying capacity.
- Indicative thresholds for medium category (applicable to public and publicly guaranteed external debt):
  - PV of debt-to-GDP ratio: 40 percent
  - PV of debt-to-exports ratio: 180 percent
  - Debt service-to-exports ratio: 15 percent
  - Debt service-to-revenue ratio: 18 percent
  - Benchmark for PV of total public debt: 55 percent
- Note: upgrade mainly due to a change in methodology under the new Debt Sustainability Framework.

### Baseline macroeconomic assumptions and projections
- General:
  - Assumptions consistent with macro framework based on authorities’ data and staff estimates.
  - 2018 real growth projection broadly in line with last DSA.
  - Long-term growth moderation due to lower-than-expected infrastructure implementation and worsening climate-change-related events.
  - Some near- to medium-term fiscal indicators moderately improved mainly due to upward revisions to fiscal revenues (notably further increases in fishing license fees).
  - External finance: project support from IDA and ADF revised upward, reflecting World Bank’s and ADB’s planned scale-up for Pacific Island Countries.
- Key baseline projections and assumptions (explicit wording preserved where provided):
  - Real GDP and population growth:
    - After posting a robust annual average of 5¼ percent in 2015–17, economic growth is expected to decline to around 2¼ percent in 2018 and slow down to 1¾ percent in the medium run and to slightly above 1½ percent in the long run.
    - Population growth is envisaged to average about 1.6 percent over the projection period (broadly in line with the United Nations’ World Population Prospects).
  - Inflation:
    - Fell to 0.4 percent in 2017 (period average), anticipated to rise to 2.1 percent in 2018.
    - Medium to longer terms: consumer price increases expected to remain around 2½ percent.
  - Fishing revenue:
    - Strong over past five years; grew at an average rate of 65 percent during 2012–15.
    - Declined from 2015 peak of A$207 million and expected to stabilize around A$135 million per year over 2019–21.
    - Staff projections assume fishing revenue will remain constant in real terms from 2022 onwards.
  - Fiscal outlook:
    - Fiscal position improved significantly in 2013–17; overall balance expected to weaken in medium to long term due to lower revenue and higher expenditures.
    - Primary balance expected to worsen in 2019–20 due to capex related to Air Kiribati’s acquisition of two planes.
    - Recurrent spending growth assumed to subside, with spending growing at an annual average rate of about 3 percent over the forecast horizon.
    - Climate-change-related maintenance and contingency expenditures assumed to be less than 1 percent of GDP in 2019 and gradually reach 6 percent of GDP in 2028 and remain at that level thereafter.
  - Development expenditure:
    - Assumed to gradually decline from 55 percent of GDP in 2018 to around 20 percent of GDP in the long term.
    - Financing assumed to be covered by loans from IDA and ADF (roughly 20 percent of development expenditure through the projection period), external grants until 2030, and by combinations of external grants and withdrawal of RERF resources starting in 2030.
  - Grants and current account:
    - Baseline assumes project-based grants broadly stable in near term (2018–20); grants assumed to reduce to about 15 percent of GDP in the long run (historical average about 30 percent).
    - Current account surplus averaged around 30 percent of GDP in 2013–17; expected to narrow and register an average deficit of around 1 percent of GDP in the long term.
  - Debt composition:
    - Current debt portfolio composed of external debt only; all domestic debt cleared in 2015. Baseline and alternative scenarios do not assume any domestic debt in the short, medium, and long run.

- Preserved comparative table text (as in source):
  - 2018 DSA: 2018-28 average 2017 DSA: 2017-27 average Real GDP growth (change in percent) 1.92.1 Inflation (change in percent)2.42.5 Non-interest current account deficit-3.5 -5.4 Net FDI (negative = inflow)11.2 Primary deficit15.112.4

### Realism tools and public investment effects
- Primary balance: expected to deteriorate considerably in next few years due to exceptional capex (aircraft acquisition).
- Multiplier effects: fiscal expansion not expected to substantially boost growth because spending is mainly on imports, resulting in a low multiplier.
- Public vs private investment: public investment rates higher while private investment rates unchanged compared to previous DSA.

### Incorporating natural disasters and climate change
- Downside risks: drought, higher incidences of natural disasters, loss of groundwater, rising sea levels, coastal erosion.
- Financing of climate costs:
  - Operating-budget mitigation partially feasible; capital projects require continued development partner support.
  - Baseline assumes cash reserves drawn down to 5 percent of GDP before recourse to the RERF in 2030; despite withdrawals, nominal RERF balance would remain above the A$1 billion target.
- DSA treatment:
  - FY2018–23: projections assume no natural disasters to avoid complicating near-term policy discussions.
  - Long-term growth projections adjusted down by 0.1 percentage points to 1.6 percent (compared with non-disaster potential growth rate of 1.7 percent).
  - Tailored extreme natural disaster stress test: assumes a one-off extreme natural disaster would decrease real GDP growth by 1.5 percent and exports by 3.5 percentage points.
  - Climate-change-related maintenance/contingency expenditures path noted above (less than 1 percent of GDP in 2019 to 6 percent of GDP in 2028 and thereafter).
  - Literature note: World Bank (2016) estimates additional cost of coastal protection and infrastructure adaptation could amount to 12 percent of GDP annually by 2040; DSA assumes half borne by budget and half financed by development partners.

### External debt sustainability analysis
- Baseline projection outcomes:
  - PV of debt-to-GDP ratio breaches indicative benchmark (40 percent) after 2022.
  - PV of external-debt-to-exports ratio breaches threshold (180 percent) at the end of the projection period.
  - Bulk of projected external debt is on concessional terms; debt service relatively contained but debt service-to-exports ratio will gradually approach indicative threshold by end of projection period due to continued debt accumulation.
- Stress tests:
  - Extreme test scenarios: PV of debt-to-GDP and PV of debt-to-exports ratios breach thresholds by 2019 and 2021, respectively.
  - Ratios vulnerable to shocks emanating from exports (exports data in DSA include fishing license fees counted as “other primary income” under conventional balance-of-payments definitions).
  - Other stress scenarios (including severe natural disaster and contingent liabilities) illustrate vulnerability to external and potential domestic shocks.

### Public debt sustainability analysis
- Public debt dynamics mirror external debt (no domestic debt).
- Risks: tapering of windfall fishing revenue and contingent liabilities from SOEs underscore need to maintain sound fiscal position.
- Baseline projection: PV of total public-debt-to-GDP ratio projected to breach indicative benchmark (55 percent) by 2025.
- Extreme shock scenario: public debt unsustainable — PV of public-sector-debt-to-GDP ratio breaches threshold by 2022 and triples in the following decade (attributed to lower growth from reduced fishing revenues and higher government external borrowing for project financing).

### Authorities’ views and fiscal strategy
- Authorities broadly agreed with DSA assessment and committed to prudent fiscal policy.
- Main elements of authorities’ fiscal strategy for 2019:
  - An overall balanced budget
  - Zero new debt
  - No withdrawals from the RERF
- Policy stance:
  - Maintain conservative estimates of fishing revenues in the budget so expenditure is met without new debt and without RERF withdrawals.
  - Continue to seek grants from bilateral donors and international financial institutions to keep debt levels prudent.
  - Recognized need to comply with non-concessional borrowing policies to secure grant support from World Bank and ADB.

*Source: Kiribati Ministry of Finance, 2018 Budget.*

### 13. As in previous Article IV consultations, the current DSA indicates that Kiribati is at high

### 13. As in previous Article IV consultations, the current DSA indicates that Kiribati is at high

### Debt sustainability and risks
- The current DSA indicates that Kiribati is at high risk of debt distress.
- Under the baseline scenario, the PVs of PPG external debt-to-GDP and of public debt-to-GDP would breach the indicative thresholds during most of the projection period.
- Kiribati faces limited scope for external borrowing.
- Vulnerabilities are exacerbated by contingent liabilities from SOEs and by climate change.
- Vulnerability is mitigated by:
  - "the decline of external support will be gradual, sheltering the country from the risk of a sudden stop in foreign financing";
  - "the government has large cash buffers and continues to accumulate resources in the RERF, which could be used in case of temporary shocks";
  - "the country currently benefits from its grant-only status."

### Fiscal position, fishing revenue, and RERF
- Although the fiscal position has registered a large surplus in recent years thanks to strong revenue, the surplus was mainly saved in the RERF rather than used to repay government debt.
- The residual in the public sector DSA table reflects the volatility of fishing revenue (and RERF withdrawals / deposits).
- The RERF:
  - Government made an A$70 million transfer to the RERF in 2016.
  - Cabinet approved adoption of a clear set of objectives for the management of the RERF aimed to reach the KV20 target of an asset value of A$1 billion by 2020.
  - Objectives include maintaining the real value of the fund while using a portion of RERF returns to finance development projects.
- High fisheries revenue in recent years has allowed Kiribati to accumulate significant cash reserves which can replace the traditional revenue stabilization role of the RERF.
- Cabinet recently adopted a cash management policy to ensure cash reserves are managed efficiently while meeting liquidity needs of the government and the banking system.

### Fiscal framework, public spending needs, and policy stance
- Meeting significant public spending needs and reaching development goals depends on using available fiscal resources prudently and securing support from development partners.
- Public spending needs are high: Kiribati has the lowest per capita income in the region and a fifth of the population lives below the poverty line.
- Infrastructure needs are high – less than half the population has access to improved sanitation or electricity, or mobile phone and internet access.
- For 2019, the Government has committed to running at least a balanced budget.
- The Government’s approach for 2019 includes:
  - using conservative estimates of fishing revenue;
  - making no further step-change in public service salaries or copra subsidies;
  - retaining some flexibility to respond to large and unpredictable variations in fishing license revenues.
- The copra subsidy is viewed by the government as playing an important role in redistributing income and meeting basic needs for households in the outer islands.
- The authorities will carefully consider staff advice to focus on the controllable portion of the budget and limit use of supplementary budgets.

### Governance and public financial management reforms
- Authorities are committed to improving public financial management.
- Reforms and institutional changes:
  - A new Central Procurement Unit in the Ministry of Finance and Economic Development established in 2018.
  - Implementation of management reforms for the RERF including appointment of new asset managers and a new custodian through a competitive selection process.
  - Consideration of recommendations from the PIMA report and several other sets of recommendations.
- Capacity constraints noted:
  - National Economic and Planning Office is an office of 13 people with responsibilities including economic policy, compiling the Budget, monitoring expenditure and revenue, managing aid coordination, overseeing SOE performance, managing the RERF, running the Economic Reform Taskforce, and undertaking debt management.

### Climate change and related fiscal challenges
- Authorities are aware of potential climate change mitigation and adaptation costs and are working to recognize these costs in the Budget.
- A new Climate Finance Division in the Ministry of Finance is developing a strategic framework and country program and is looking at enhancing reporting of spending on climate adaptation and mitigation.

### Private sector development and human capital
- The private sector is identified as an engine of economic growth and development.
- Recent progress:
  - SOE reforms including strengthening commercial mandates and further divestment and outsourcing of SOE activities.
  - Air connectivity to be boosted by the recent purchase of two additional aircraft for Air Kiribati.
- Financial sector development is important and authorities look forward to further engagement with the Fund.
- Land registration remains a long-running challenge due to the customary land system.
- Education:
  - The Government committed to ensuring all I-Kiribati receive a high-quality education.
  - Extension of the fee-free policy to senior secondary education and the new Early Childhood Care and Education Act are highlighted as important steps.

### Key contextual and institutional facts from the authorities’ statement (January 11, 2019)
- Kiribati consists of 33 small islands spread over an area of the Pacific Ocean roughly the size of India, and is the only country situated in all four hemispheres.
- Main sources of income: fishing licenses, remittances from seafarers and copra.
- High reliance on imported fuel and food increases vulnerability to exchange rate and commodity price movements.
- Kiribati will be one of the first countries affected by rising sea levels and the tuna fishery could be affected by higher ocean surface temperatures.
- Recent economic performance:
  - Economy performed strongly owing to higher public spending supported by record fishing revenue and donor-financed infrastructure investment.
  - Fiscal position improved and the current account shifted into surplus.
- Government actions for social and infrastructure support:
  - Doubling the copra subsidy for outer islands;
  - Extended fee-free education;
  - Reduced the cost of access to electricity in South Tarawa;
  - Improved pay and working conditions for public servants;
  - Invested in transport and telecommunications links within current revenue envelope.
- Governance record: good record of stable democracy, orderly government transitions, social cohesion, and prudent economic management.
- KV20 (Kiribati Vision 20) sets out a blueprint focusing on fisheries and tourism, developing human capital, investing in infrastructure, and promoting good governance.

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1926-kiribati.pdf_