## 1tuvea2021001 - 2021. Full resumption of travel in 2022, continued high public spending, and further

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### Context and structural vulnerabilities
- Tuvalu: fragile South Pacific micro-state; expanded on average by 6.3 percent between 2017-2019 driven by high public spending on infrastructure and elevated public sector wage bill.
- Key structural challenges:
  - Vulnerability to rising sea levels and natural disasters; need for climate-proofing infrastructure.
  - Very small size (26 square km) and remoteness, raising the cost of doing business and hindering private sector diversification from SOEs.
  - Narrow revenue base; dependence on fishing license fees and donors.
  - Scarce employment opportunities; threats to tuna stock from changing weather patterns.
  - Uncertainty around donor commitments complicates fiscal planning.
- Authorities’ policy framework: National Strategy for Sustainable Development 2021-2030, Te Kete.

### COVID-19 impact, outlook, and risks
- Health and containment:
  - Tuvalu remained COVID-free as of June 25, 2021 due to swift containment measures (State of Emergency, travel bans, mandatory two-week quarantine for repatriation).
- Economic impact and outlook:
  - Real GDP growth: 2019 = 13.9; 2020 = 1.0; 2021 (forecast) = 2.5; 2022 (forecast) = 3.5.
  - Consumer price inflation (period average): 2019 = 3.5; 2020 = 1.6; 2021 (expected) = 2.2; 2022 (expected) = 2.4.
  - Economy avoided a recession in 2020 due to buoyant fishing revenues and donor grants; expected to expand by 2.5 percent in 2021 supported by fiscal expenditures and resumption of infrastructure projects.
- Risks to outlook (high and tilted to the downside):
  - Prolonged containment measures delaying infrastructure projects and private sector recovery.
  - Government revenues falling short of projections.
  - Continued lack of effective financial supervision of banks and weak SOE balance sheets creating contingent fiscal risks and impeding credit intermediation.
  - Loss of correspondent banking relationship endangering ability to process international payments.
  - Heavy exposure to climate change and natural disasters.

### Fiscal developments and medium-term outlook
- 2020 fiscal outcomes:
  - Fishing license revenues: 55.6 percent of revenue and 56 percent of GDP in 2020.
  - International COVID-related donor support: AUD6.8 million (or 8.6 percent of GDP).
  - 2020 fiscal balance: surplus of 5.0 percent of GDP.
  - Total public debt in 2020: 5.5 percent of GDP (external debt); gross public debt 7.3 percent of GDP.
- 2021 pressures and drivers:
  - 2021 fiscal balance projected: deficit of 7.0 percent of GDP after the supplementary budget.
  - Drivers: large increases in recurrent spending on goods and services and public sector wage bill; higher capital spending largely due to planned national airline (AUD13mln or 16 percent of GDP).
  - Fishing revenues projected to plateau at 40 percent of GDP medium term; .tv fees projected to fall; foreign grants projected to fall.
  - Elevated spending on public sector wages, TMTS, and overseas scholarships projected to widen general government deficit to 4.6 percent of GDP by 2026 and crowd out capital expenditure.
- Selected government finance indicators (percent of GDP; nominal GDP in $A million):
  - Revenue and grants: 2020 = 121.5; 2021 = 122.3; 2022 = 107.3.
  - Revenue: 2020 = 89.6; 2021 = 86.7; 2022 = 74.7.
  - Fishing license fees (of revenue): 2020 = 55.6; 2021 = 43.5; 2022 = 41.5.
  - Grants: 2020 = 31.9; 2021 = 35.7; 2022 = 32.6.
  - Total expenditure: 2020 = 116.5; 2021 = 129.4; 2022 = 110.1.
  - Current expenditure: 2020 = 75.0; 2021 = 88.0; 2022 = 89.0.
  - Capital expenditure: 2020 = 41.5; 2021 = 41.4; 2022 = 21.1.
  - Overall balance: 2020 = 5.0; 2021 = -7.0; 2022 = -2.9.
  - Overall balance (excl. grants): 2020 = -26.9; 2021 = -42.7; 2022 = -35.4.
  - Domestic current balance: 2020 = -41.0; 2021 = -55.7; 2022 = -55.9.
  - Tuvalu Trust Fund (in percent of GDP): 2020 = 241.4; 2021 = 232.8; 2022 = 217.8.
  - Consolidated Investment Fund (in percent of GDP): 2020 = 54.4; 2021 = 52.2; 2022 = 48.3.
  - Tuvalu Survival Fund (in percent of GDP): 2020 = 6.3; 2021 = 7.2; 2022 = 6.8.
  - Gross public debt: 2020 = 7.3; 2021 = 6.1; 2022 = 5.0.
  - External debt: 2020 = 5.5; 2021 = 4.5; 2022 = 3.6.
  - Domestic SOE debt: 2020 = 1.8; 2021 = 1.5; 2022 = 1.3.
  - Nominal GDP (in $A million): 2020 = 79.6; 2021 = 83.4; 2022 = 88.7.

### Fiscal anchor, scenarios, and consolidation impact
- Proposed fiscal anchor:
  - Domestic current fiscal balance (current revenues excluding grants and fishing license fees less current expenditures).
  - Target: domestic current deficit of around 40 percent of GDP through expenditure restraint and revenue mobilization.
  - Purpose: reduce need for rapid adjustment after shocks; build buffers via CIF and Tuvalu Survival Fund; protect government’s net financial worth.
- Scenario outcomes (staff’s numbers):
  - Scenario 1: Gradual adjustment to achieve a current deficit of 40 percent by 2041 would raise fiscal buffers to over 70 percent of GDP and eliminate debt; buffers would cover shocks including a sharp fall in fishing revenues (40 percent of GDP) and a natural disaster (30 percent of GDP).
  - Scenario 2: Structural reforms maintaining 3 percent average growth post 2027 (ten-year average, ¾ percentage points above baseline) combined with adjustment would allow quicker attainment of the 40 percent deficit target.
- Measures to achieve consolidation (selected):
  - Expenditure-side: review public sector wage bill; lower TMTS spending via prevention and tracking; rationalize overseas scholarships; review SOE subsidies; analyze commercial viability and legal framework for planned airline (realistic budgetary provisions; limit public liability).
  - Revenue-side: eliminate tax exemptions (including for development partner projects); improve tax compliance (noting only 2 out of 21 registered large taxpayers pay corporate taxes, constituting around 80 percent of total tax revenue); strengthen revenue administration and taxpayer services; consider a comprehensive tax review.

### External sector and reserves
- Current account balance (percent of GDP): 2020 = 3.8 (surplus); 2021 = -4.1; 2022 = -4.1.
- Goods and services balance: 2020 = -115.3; 2021 = -105.8; 2022 = -101.5.
- Capital and financial account balance: 2020 = -8.9; 2021 = 4.4; 2022 = 12.7.
- Overall balance: 2020 = 2.0; 2021 = 0.2; 2022 = 8.7.
- Gross reserves (in $A million): 2020 = 90.9; 2021 = 91.1; 2022 = 98.9 (other tables list 2022 = 98.8 or 98.9 depending on table).
- Reserves in months of prospective imports of goods and services: 2020 = 11; 2021 = 11; 2022 = 11.
- Assessment: External position in 2020 assessed broadly in line with fundamentals and desirable policy settings.

### Financial sector vulnerabilities and reform priorities
- Key vulnerabilities:
  - Lack of effective prudential regulation and supervision.
  - Weak balance sheets of SOEs.
  - Risk of losing correspondent banking relationships (NBT lost CBR with Australian banks in April 2020; established relationship with BRED bank in Fiji and maintained CBR with Bank of Hawaii).
  - Need to enhance AML/CFT framework and establish a domestic Financial Intelligence Unit (FIU).
- Financial sector structure and indicators:
  - Three financial institutions: National Bank of Tuvalu (NBT), Development Bank of Tuvalu (DBT), Tuvalu National Provident Fund (TNPF).
  - Credit growth (percent change): 2020 = -0.5; 2021 = 1.1; 2022 = 2.9.
  - NBT (2020 assets): AUD128 million (160 percent of GDP); loan portfolio small; NPLs 15 percent of total loans in 2020.
  - DBT assets: 3 percent of GDP in 2020; provisioning covered around a quarter of NPLs in 2020; operating expenses to gross income averaged 100 percent over past five years.
  - TNPF assets: AUD80 million (100 percent of GDP) in 2020; over 7000 registered members, 4800 actively contributing; over 80 percent of assets invested offshore; personal loans 7 percent; Funafuti Lagoon hotel and cash 10 percent.
- Recommendations to improve intermediation and access to credit:
  - Establish a centralized credit registry with reporting by all three lending institutions.
  - Require model-based underwriting and risk-based loan pricing.
  - Codify collateral rules and MoU between financial institutions; review rule barring banks from accessing TNPF balances of defaulting members until retirement.
  - Develop bankruptcy legislation for households and firms.
  - Modernize digital banking: DBT three-stage digitalization (view balance online implemented May 2021; online applications by end July 2021; online money transfer by 2022); NBT exploring online banking, ATM, debit, and credit cards; government allocated AUD1 million to support NBT initiatives.
  - Include TNPF under supervisory framework given its role in extending credit.

### Fintech, digital strategy, and implementation guidance
- Proposed comprehensive fintech/digital strategy elements:
  - Strengthen technological infrastructure (inclusive affordable access to high-speed internet and devices).
  - Improve IT and finance expertise in labor market.
  - Enhance financial literacy.
  - Develop a secured and easy-to-access digital national identity system.
- Priority applications: (i) mobile money; (ii) cross-border payments; (iii) internet banking.
- Implementation guidance:
  - Select private partners with proven track record; base on cost-benefit including maintenance and technical support.
  - Ensure open technological architecture to avoid vendor lock-in.
  - Develop regulations in parallel for operational risks, cybersecurity, customer fund security, data management, and consumer rights.
- Box on Digital ID technology:
  - Two technology approaches: permissionless DLT (e.g., Bitcoin SV, Ethereum) and permissioned DLT; permissionless DLT has sovereignty, legal/privacy, and energy-consumption risks; most countries opting for permissioned DLT; short-term alternatives include encrypted databases and MOSIP.
  - Sequencing: conduct business requirements and market assessment before technology selection; adapt processes and cybersecurity; procure via call-for-tenders requiring bidders to prove track record.

### Diversification, SOE reform, and private sector development
- Diversification needs:
  - Exports minimal: 0.2 percent of GDP in 2020; reliance on imports nearly 70 percent of GDP.
  - Policy options: support small-scale production for local consumption; develop subsistence agriculture; niche tourism (small cruise eco-tourism); sustainable Blue Economy; consider citizenship-by-investment following best practices.
  - Infrastructure priorities: international runway and domestic air service in Priority Infrastructure and Investment Plan 2020-2025.
- SOE performance and reforms:
  - Non-financial SOEs repeatedly report losses and rely on government support.
  - Recent reforms: clarified legal status, regulated director appointments, prepared corporate plans (not by all SOEs), improved financial reporting, steps toward performance-based management.
  - Next steps: finalize corporate plans for all SOEs; implement tiered electricity tariffs for cost recovery; introduce pre-payment options for electricity; competitive bidding for fuel suppliers; implement solar energy program; monitor joint ventures under NAFICOT; enforce timely corporate reporting and audits; adopt rules-based CSO allocation and reduce CSO amounts over time.
- Net profits/losses of selected SOEs (In percent of GDP; series provided in source):
  - Tuvalu Electricity Corporation (TEC): -3.2, -0.4, 3.4, 0.7, 0.0, -0.6, 2.1, 0.2
  - National Bank of Tuvalu (NBT): 6.6, 2.5, 2.9, 4.0, 3.7, 3.1, 7.7, 3.4
  - Development Bank of Tuvalu (DBT): -1.1, -1.4, 0.1, 0.2, 0.2, 0.4, -0.1, -0.2

### Social sectors, infrastructure needs, and climate finance
- Estimated additional spending needs to reach selected SDGs (as percent of 2030 GDP):
  - Energy: 1.2 percent of 2030 GDP.
  - Roads: 1.0 percent of 2030 GDP.
  - WASH: 0.1 percent of 2030 GDP.
- Example project co-financing: around 6 percent of 2019 GDP for the Tuvalu Coastal Adaptation Project by the Green Climate Fund.
- Reconstruction cost after 2015 cyclone Pam: over 30 percent of GDP.
- Trust funds and buffers:
  - TTF market value at end-2020: AUD192 million, or 241 percent of GDP.
  - CIF: target minimum balance of 16 percent of TTF maintained value; government goal to save at least 2 percent of GDP into CIF annually; during 2016-2020 government saved on average 6.6 percent of GDP into CIF.
  - Tuvalu Survival Fund (TSF) balance end-2020: AUD5 million (6.3 percent of GDP).
- Institutional recommendations:
  - Accreditation with Adaptation Fund (achieved 2019) should facilitate accreditation with other climate finance facilities and fast-track Green Climate Fund accreditation.
  - Establish a Climate Finance Unit by June 2022 under the Ministry of Finance to coordinate project proposal preparation.
  - Explore multilateral risk-sharing mechanisms such as the Pacific Island Insurance Facility.

### Statistical capacity, data gaps, and capacity development
- Data shortcomings impair surveillance: most serious in national accounts and monetary statistics.
- National accounts: rebased to 2016 and updated to 2019; further capacity building needed.
- CPI: only price index compiled; quarterly CPI of reasonable quality but long lags and poor dissemination.
- GFS: Tuvalu neither compiles nor publishes GFS data; new FMIS using GFS classification to be implemented around July 2021.
- Balance of payments: BOP compiled to 2019 after April 2021 TA mission; IIP and BOP now submitted in BPM6 format to STA in April 2021 for first time.
- Recommendations: hire essential statistical personnel, ensure training and succession planning, continue close cooperation with PFTAC and other TA providers.

### Debt Sustainability Analysis (DSA) highlights
- Tuvalu remains at a high risk of debt distress (unchanged from 2018 DSA).
- Debt levels and composition:
  - Total debt: 2018 = 13.1 percent of GDP; 2019 = 12.8 percent of GDP; 2020 = 7.3 percent of GDP.
  - Total public and publicly guaranteed debt: 2018 = 9.6 percent of GDP; 2019 = 10.6 percent of GDP; 2020 = 5.5 percent of GDP.
  - SOE debt (implicitly guaranteed): total SOE debt 2018 = 3.5; 2019 = 2.2; 2020 = 1.4 (percent of GDP).
- Baseline macro-fiscal assumptions used in DSA:
  - Real GDP growth: 2020: 1; 2021: 2.5; peak at 4 in 2024; long-term moderation to 2.
  - From 2027, baseline incorporates cost of natural disasters and climate change at 1 percent of GDP on average.
  - Fishing license revenues projected to stabilize at 40 percent of GDP (ten-year average).
  - DotTv fees projected to fall; foreign grants projected to decline.
  - General government deficit projected to widen to 4.6 percent of GDP in the medium term and 6.0 percent of GDP by 2041 under baseline dynamics (staff projections).
- Stress tests and scenarios:
  - One standard deviation shock to export growth would cause external debt-to-GDP to breach indicative threshold in 2023.
  - One-time 30 percent decline in prices of agricultural commodities would cause public debt-to-GDP breach in 2025 and remain above threshold.
  - Natural disaster scenario: cyclone similar to 2015 Pam in 2022 causing 30 percent of GDP damage; recovery over five years would widen fiscal deficit to 11 percent of GDP in 2031 under assumed donor response.
  - Positive grant shock (grants remain at 30 percent of GDP) would keep debt-to-GDP well below thresholds.
- Policy implications:
  - Use CIF transfers prudently while maintaining at least 16 percent of TTF maintained value in CIF.
  - Prioritize efficiency-enhancing reforms: reduce TMTS and scholarship spending, align wage growth with productivity, continue SOE reform.
  - Rely on concessional external borrowing when CIF insufficient; avoid domestic borrowing given lack of domestic markets.

### COVID-19 fiscal package, implementation, and lessons
- 2020 fiscal stimulus: AUD23.3 million (29 percent of GDP); island communities allowed use of development grants: AUD4 million (5 percent of GDP); residents granted partial access to retirement savings.
- Implementation as of end-March 2021: around a third of planned package (11.5 percent of GDP) implemented.
- 2021 budget COVID appropriations: AUD1.1 million (or 1.3 percent of GDP).
- Composition of planned COVID-19 spending (end-2020 shares):
  - Medical goods & supplies: 54%.
  - Financial support to citizens & students: 17%.
  - Charter flights and fuel: 13%.
  - Quarantine: 7%.
  - Overtime payment, police, & labor costs: 7%.
  - DBT Lending: 2%.
- Execution details:
  - Another 20 percent of the package (AUD 4.6 million or around 5.8 percent of GDP) earmarked for repatriation and medical-supply flights and quarantine facilities; as of end-March 2021, about 75 percent of that allocation spent.
  - About 15 percent of the package (AUD 3.7 million or around 4.6 percent of GDP) allocated to direct cash transfers.
  - DFAT-financed grant AUD0.3 million (0.4 percent of GDP) to DBT for concessional lending to canteens and agricultural businesses; DBT augmented initial amount due to high demand.
- Policy implications and recommendations:
  - Maintain COVID-related fiscal measures conditional on stage of pandemic; in case of outbreak, expand support focused on vulnerable population and private sector.
  - Seek flexibility in use of remaining grants (including vaccines and medical equipment) and maintain buffers.
  - All COVID-related spending should follow procurement rules and be published; planned audit of COVID expenditures welcomed.
  - Conduct thorough social-economic assessment and review social protection system; consider expanding TNPF coverage with TA and grants.
  - Review TMTS for cost-effectiveness and focus on NCD prevention and improving on-island clinical capacity.

### Executive Directors’ assessment and authorities’ views
- Executive Directors:
  - Commended authorities for swift containment and avoiding a recession in 2020.
  - Noted risks are high and tilted to the downside (pandemic, grant uncertainty, climate change).
  - Supported targeted COVID spending and gradual fiscal consolidation once recovery secured.
  - Encouraged revenue mobilization, improved PFM, stronger financial supervision, maintenance of correspondent banking relationships, and structural reforms for private sector development and resilience.
- Authorities:
  - Broadly agreed with staff on macro outlook and risks.
  - Committed to preserving scholarship programs and TMTS while recognizing need for rationalization.
  - Committed to establishing a Climate Finance Unit and pursuing multilateral climate finance; intend to vaccinate adults and reopen borders conditional on vaccine supply.
  - Agreed on fiscal anchor (domestic current deficit ~40 percent of GDP) and on seeking Fund and PFTAC support for capacity development (statistics, PFM, supervision).
  - Decided not to incur new debt over short-to-medium term and to rely on grants for infrastructure projects.

*Italic: IMF staff report for the 2021 Article IV consultation with Tuvalu (content unit: 1tuvea2021001).*

### 2021. Full resumption of travel in 2022, continued high public spending, and further

### 1tuvea2021001 - 2021. Full resumption of travel in 2022, continued high public spending, and further

### Context
- Tuvalu is described as a fragile South Pacific micro-state that expanded on average by 6.3 percent between 2017-2019, driven by high public spending on infrastructure and an elevated public sector wage bill.
- Key structural challenges identified:
  - Vulnerability to rising sea levels and natural disasters; need for climate-proofing infrastructure.
  - Very small size (26 square km) and remoteness, raising the cost of doing business and hindering private sector diversification from SOEs.
  - Narrow revenue base; dependence on fishing license fees and donors.
  - Employment opportunities are scarce; threats to tuna stock from changing weather patterns.
  - Uncertainty around donor commitments complicates fiscal planning.
- Authorities’ policy framework: National Strategy for Sustainable Development 2021-2030, Te Kete.

### COVID-19 impact, outlook, and risks
- Health status and containment:
  - Tuvalu remained COVID-free as of June 25, 2021 due to swift containment measures (State of Emergency, travel bans, mandatory two-week quarantine for repatriation).
- Economic impact and outlook:
  - Real GDP growth: 2019 = 13.9; 2020 = 1.0; 2021 (forecast) = 2.5; 2022 (forecast) = 3.5.
  - Consumer price inflation (period average): 2019 = 3.5; 2020 = 1.6; 2021 (expected) = 2.2; 2022 (expected) = 2.4.
  - The economy avoided a recession in 2020 due to buoyant fishing revenues and donor grants and is expected to expand by 2.5 percent in 2021 supported by fiscal expenditures and resumption of infrastructure projects.
- Risks to outlook (noted as high and tilted to the downside):
  - Prolonged containment measures delaying infrastructure projects and private sector recovery.
  - Government revenues falling short of projections.
  - Continued lack of effective financial supervision of banks and weak SOE balance sheets creating contingent risks to the government and impeding credit intermediation.
  - Loss of the correspondent banking relationship endangering Tuvalu’s ability to process international payments.
  - Heavy exposure to climate change and natural disasters.

### Fiscal developments and medium-term outlook
- 2020 fiscal outcomes:
  - Fishing license revenues stood at 56 percent of GDP in 2020.
  - International COVID-related donor support: AUD6.8 million (or 8.6 percent of GDP).
  - 2020 fiscal balance: surplus of 5.0 percent of GDP.
  - Total public debt in 2020: 5.5 percent of GDP.
- 2021 and medium-term fiscal pressures:
  - 2021 fiscal balance projected: deficit of 7.0 percent of GDP after the supplementary budget.
  - Drivers of 2021 deficit: significant increases in recurrent spending on goods and services and public sector wage bill; higher capital spending, mostly due to expenditures related to a planned national airline (AUD13mln or 16 percent of GDP).
  - Fishing revenues projected to plateau at 40 percent of GDP in the medium term.
  - Fees from Tuvalu’s .tv license projected to fall.
  - Foreign grants projected to fall due to donor uncertainty.
  - Spending on public sector wages, TMTS, and overseas scholarships projected to stay elevated, widening the general government deficit to 4.6 percent of GDP by 2026 and gradually crowding out capital expenditure.
- Selected government finance indicators (percent of GDP) — exact values from Table 1:
  - Revenue and grants: 2020 = 121.5; 2021 = 122.3; 2022 = 107.3.
  - Revenue: 2020 = 89.6; 2021 = 86.7; 2022 = 74.7.
  - Fishing license fees (of revenue): 2020 = 55.6; 2021 = 43.5; 2022 = 41.5.
  - Grants: 2020 = 31.9; 2021 = 35.7; 2022 = 32.6.
  - Total expenditure: 2020 = 116.5; 2021 = 129.4; 2022 = 110.1.
  - Current expenditure: 2020 = 75.0; 2021 = 88.0; 2022 = 89.0.
  - Capital expenditure: 2020 = 41.5; 2021 = 41.4; 2022 = 21.1.
  - Overall balance: 2020 = 5.0; 2021 = -7.0; 2022 = -2.9.
  - Overall balance (excl. grants): 2020 = -26.9; 2021 = -42.7; 2022 = -35.4.
  - Domestic current balance: 2020 = -41.0; 2021 = -55.7; 2022 = -55.9.
  - Tuvalu Trust Fund (in percent of GDP): 2020 = 241.4; 2021 = 232.8; 2022 = 217.8.
  - Consolidated Investment Fund (in percent of GDP): 2020 = 54.4; 2021 = 52.2; 2022 = 48.3.
  - Tuvalu Survival Fund (in percent of GDP): 2020 = 6.3; 2021 = 7.2; 2022 = 6.8.
  - Gross public debt: 2020 = 7.3; 2021 = 6.1; 2022 = 5.0.
  - External debt: 2020 = 5.5; 2021 = 4.5; 2022 = 3.6.
  - Domestic SOE debt: 2020 = 1.8; 2021 = 1.5; 2022 = 1.3.
  - Nominal GDP (in $A million): 2020 = 79.6; 2021 = 83.4; 2022 = 88.7.

### External sector and reserves
- Current account balance (percent of GDP): 2020 = 3.8 (surplus); 2021 = -4.1; 2022 = -4.1.
- Goods and services balance: 2020 = -115.3; 2021 = -105.8; 2022 = -101.5.
- Capital and financial account balance: 2020 = -8.9; 2021 = 4.4; 2022 = 12.7.
- Overall balance: 2020 = 2.0; 2021 = 0.2; 2022 = 8.7.
- Gross reserves (in $A million): 2020 = 90.9; 2021 = 91.1; 2022 = 98.9.
- Reserves in months of prospective imports of goods and services: 2020 = 11; 2021 = 11; 2022 = 11.
- Assessment: External position in 2020 is assessed to be broadly in line with fundamentals and desirable policy settings.

### Financial sector and other vulnerabilities
- Credit growth (percent change) for banks' and pension fund lending to non-government domestic sector: 2020 = -0.5; 2021 = 1.1; 2022 = 2.9.
- Key vulnerabilities:
  - Lack of effective prudential regulation and supervision.
  - Weak balance sheets of SOEs.
  - Risk of losing correspondent banking relationships.
  - Need to enhance AML/CFT framework.

### Main policy recommendations (as stated)
- Maintain COVID-related fiscal measures conditional on the stage of the pandemic; in case of an outbreak, expand support to vulnerable population and the private sector.
- Work with development partners to procure sufficient vaccines to inoculate the entire population.
- Once the economy fully recovers, implement reforms to:
  - Achieve gradual fiscal consolidation to preserve fiscal buffers needed to guard against future shocks, especially natural disasters.
  - Fund climate adaptation and infrastructure maintenance needs.
  - Use a combination of measures to mobilize domestic revenues and raise the efficiency of public spending through improved public financial management.
- Develop effective prudential regulation and supervision of the financial system to promote health of financial institutions and improve financial intermediation.
- Continue structural reforms to encourage diversification away from the public sector and improve access to credit.
- Strengthen institutional capacity to produce high-quality statistics to improve policymaking.
- Maintain correspondent banking relationships and enhance the AML/CFT framework.
- Devise a comprehensive fintech development strategy to enhance financial depth, inclusion, and efficiency.
- Continue SOE reforms to improve performance.
- Strengthen capacity through technical assistance and training provided by the Fund and other international partners.

### Executive Directors’ assessment highlights
- Commended authorities for swift containment measures and avoiding a recession in 2020.
- Noted that risks to the outlook are high and tilted to the downside, mainly due to the pandemic, uncertainty about grant availability, and vulnerability to climate change.
- Supported targeted COVID-related spending and gradual fiscal consolidation once recovery is secured.
- Encouraged revenue mobilization, improved public financial management, stronger financial supervision, maintenance of correspondent banking relationships, and structural reforms to promote private sector development and resilience to natural disasters.
- Expected next Article IV consultation to be held on the current 24-month cycle.

*Source: IMF staff report for the 2021 Article IV consultation with Tuvalu (content unit: 1tuvea2021001).*

### 8.      The economy is expected to rebound in 2021. The vaccine rollout has started in April but

### 8.      The economy is expected to rebound in 2021. The vaccine rollout has started in April but 

### Outlook: 2021–2022
- Growth projections:
  - 2021: growth projected to raise to 2.5 percent.
  - 2022: growth forecast to increase to 3.5 percent by 2022 with full resumption of travel.
- Inflation projections:
  - 2021: inflation expected to gradually increase to 2.2 percent.
  - 2022: inflation expected to increase to 2.4 percent.
- Vaccine and border reopening assumptions:
  - Vaccine rollout started in April but securing enough vaccines to inoculate the entire population will take time.
  - Partial border reopening is expected at the end of 2021 at the earliest.

### Longer-term baseline and growth constraints
- Natural disaster and climate-change assumption:
  - Baseline assumes years 2021-26 are disaster-free; from 2027 on baseline incorporates a cost of natural disasters and climate change at 1 percent of GDP on average.
- Long-run growth:
  - Real growth projected to moderate to 2 percent in the long run.
- Structural drags on growth:
  - Dominance of inefficient public enterprises, capacity constraints, and weak external competitiveness.

### Risks to the outlook
- Risk profile: Risks are high and tilted to the downside.
- Key risk channels and examples:
  - Prolonged containment measures delaying infrastructure projects and hampering private sector activity.
  - Government revenues could fall short due to delays in agreeing reform priorities with donors.
  - Changes in weather patterns could shift tuna stocks and negatively affect fishing revenues.
  - Unforeseen drop in returns from the Tuvalu Trust Fund given uncertain global financial conditions.
  - Continued lack of effective financial supervision of banks and weak SOE balance sheets creating contingent fiscal risks and impeding credit intermediation.
  - Loss of correspondent banking relationship endangering ability to process international payments.
  - Heavy exposure to climate change and natural disasters.

### Authorities’ views (macroeconomic outlook and risks)
- Authorities broadly agreed with staff’s assessment of the macroeconomic outlook and risks.
- Noted elevated risks to growth in 2021 due to:
  - Uncertainty surrounding the path of the COVID-19 pandemic.
  - Uneven vaccination rates between countries.
  - Continued cargo shipments delays impacting construction and domestic trade.
  - Travel restrictions risking seasonal worker schemes with Australia and New Zealand, potentially impacting household incomes.
- Policy stance:
  - Comprehensive measures to keep Tuvalu COVID-free will remain in place for now.
  - Authorities hope to receive further vaccine allotments from the COVAX program and development partners to fully inoculate all eligible population in 2021 and enable opening of borders.

### Fiscal stance and COVID-related fiscal measures
- 2020 fiscal stimulus:
  - Authorities implemented a fiscal stimulus package of AUD23.3 million (29 percent of GDP).
  - Island communities allowed use of development grants: AUD4 million total (5 percent of GDP).
  - Residents granted partial access to retirement savings.
  - Around a third of the planned relief package was implemented; underspending due to suspension of universal cash payments and targeted cash assistance after first three months with no infections, lower than expected demand for repatriation flights, difficulty procuring medical equipment and supplies, and Tuvalu’s COVID-free status.
- 2021 budget COVID appropriations:
  - AUD1.1 million (or 1.3 percent of GDP) appropriations for COVID-related spending.
- Composition of planned COVID-19 spending (end-2020 total share):
  - Medical goods & supplies: 54%
  - Financial support to citizens & students: 17%
  - Charter flights and fuel: 13%
  - Quarantine: 7%
  - Overtime payment, police, & labor costs: 7%
  - DBT Lending: 2%
- Fiscal guidance:
  - Any additional fiscal support in case of an outbreak should be focused on vulnerable population and the private sector.
  - Authorities should seek flexibility in use of remaining grants (including for vaccines and medical equipment) and maintain buffers.
  - All COVID-related spending should follow procurement rules and be published on Ministry of Finance website.
  - Planned audit of COVID expenditures by INTOSAI Development Initiative, Pacific Association of Supreme Audit Institutions, and Office of the Auditor General of Tuvalu is welcomed.

### Securing resources for green and sustainable growth
- Estimated additional spending needs:
  - To reach sustainable development goals in energy, roads, and WASH, Tuvalu will need to increase spending by around 2.3 percent of GDP annually until 2030.
  - Example project co-financing: around 6 percent of 2019 GDP for the Tuvalu Coastal Adaptation Project by the Green Climate Fund.
  - Reconstruction after the 2015 cyclone Pam cost over 30 percent of GDP.
- Need for buffers and climate adaptation financing emphasized.

### Fiscal anchor, scenarios, and impact of consolidation
- Proposed fiscal anchor:
  - Domestic current fiscal balance (current revenues excluding grants and fishing license fees less current expenditures).
  - Targeting a domestic current deficit of around 40 percent of GDP through expenditure restraint and revenue mobilization.
  - Purpose: reduce need for rapid adjustment after shocks; build buffers via Consolidated Investment Fund and Tuvalu Survival Fund; protect government’s net financial worth.
- Scenario outcomes (staff’s numbers):
  - Scenario 1: Gradual adjustment to achieve a current deficit of 40 percent by 2041 would raise fiscal buffers to over 70 percent of GDP and eliminate debt. Such buffers would cover shocks including a sharp fall in fishing revenues (40 percent of GDP) and a natural disaster (30 percent of GDP).
  - Scenario 2: Structural reforms maintaining 3 percent average growth post 2027 (a ten-year average, ¾ percentage points above the baseline) combined with the adjustment would allow quicker attainment of the 40 percent deficit target.

### Measures to achieve fiscal consolidation
- Need for reforms:
  - 2021 Debt Sustainability Analysis indicates Tuvalu remains at a high risk of debt distress.
- Expenditure-side measures to restrain current spending:
  - Review public sector wage bill and establish criteria linking wage increases to performance, fiscal revenues, and inflation.
  - Lower spending on Tuvalu Medical Treatment Scheme via improved preventive programs for non-communicable diseases, early care, systematic tracking by beneficiary and expense type, and rationalizing travel of family members.
  - Rationalize spending on overseas scholarships: develop a comprehensive strategy across ministries to align degrees with Tuvalu’s needs; review scholarship award criteria; monitor outcomes (completion rates, repatriation, job placement); track costs; provide incentives to complete on time and with honors; enforce mandatory service periods and loan repayment agreements.
  - Review SOE subsidies.
  - Improve cost effectiveness and control of government travel budget.
  - Conduct detailed analysis of commercial viability of planned new airline, make realistic budgetary provisions for investment and maintenance costs, and establish legal framework to limit public liability and ensure governance standards.
- Revenue-side and tax-administration measures:
  - Eliminate tax exemptions, including those for projects financed by development partners.
  - Improve tax compliance, especially among corporates (currently only 2 out of 21 registered large taxpayers pay corporate taxes, constituting around 80 percent of total tax revenue), by ensuring sufficient staff resources and training to improve tax arrears management and enable audits.
  - Improve taxpayer services.
  - Strengthen revenue administration by implementing effective risk management practices.
  - Consider a comprehensive review of the taxation system given potential impact of PACER Plus ratification.
  - Economic diversification would help raise revenues.

### Public Financial Management (PFM) reforms
- Recommended steps:
  - Complete PEFA self-assessment and adopt 2021-24 PFM Roadmap.
  - Improve budget preparation with high-quality projections of grants, tax revenues, and current and infrastructure spending; ensure classification and presentation of budgets and fiscal reports follow 2014 GFSM format.
  - Fully implement new Financial Management Information System.
  - Avoid supplementary budgets.
  - Re-institute in-year revenue and spending controls: resume compilation and publication of quarterly budget outcomes; standardize fiscal accounts classification; report data based on 2014 GFSM.
  - Continue timely annual audits of government accounts.
  - Improve procurement transparency: publish annual Central Procurement Unit reports listing successful/unsuccessful bidders and beneficial owners, amounts of awarded contracts, contract types, and undertake periodic internal procurement audits.
  - Develop medium-term infrastructure maintenance plan based on 2017 asset register; delineate routine (operating) maintenance and capital maintenance (overhaul) in accordance with 2014 GFSM; link maintenance plan to budget processes and account for high depreciation due to climate events.

### Mobilizing international climate finance and institutional arrangements
- Accreditation and capacity:
  - In 2019 Tuvalu became the second Pacific country accredited for direct access with the Adaptation Fund.
  - Accreditation with the Adaptation Fund should facilitate accreditation with other international climate finance facilities and fast-track accreditation with the Green Climate Fund.
- Institutional proposal:
  - Establish a Climate Finance Unit by June 2022 under the Ministry of Finance to coordinate project proposal preparation.
- Additional recommendations:
  - Urgent need for comprehensive approach to increase local capacity to develop prioritized climate project pipeline, navigate climate finance landscape, and ensure continuity of multi-sector and multi-year projects.
  - Continue efforts to explore multilateral risk-sharing mechanisms such as the Pacific Island Insurance Facility.

### Authorities’ views (structural policies and reforms)
- Authorities agreed with staff’s proposed structural adjustment policies and need to step up investment in physical infrastructure for inclusive and green growth.
- Actions underway or planned:
  - Implementing a new Financial Management Information System to improve budget formulation, execution, and reporting.
  - Working with PFTAC to strengthen fiscal forecasting and identify fiscal ratios for long-term planning.
  - Considering a review of public sector salary structure, potentially with World Bank assistance.
- Policy priorities and constraints:
  - Authorities wish to preserve scholarship programs and the Tuvalu Medical Treatment Scheme as key benefits, recognizing some rationalization may be warranted but difficult to implement.
  - Authorities stressed need for a domestic airline to improve inter-island connectivity and are committed to exploring international climate financing options.

### Financial sector efficiency and access to credit
- Financial sector structure and challenges:
  - Three financial institutions operate in Tuvalu; access to credit remains limited, especially for businesses.
  - National Bank of Tuvalu (NBT) (2020 assets): AUD128 million (160 percent of GDP); profitable and well capitalized but most assets held as cash and deposits with foreign banks; small lending portfolio focused on personal and housing loans and credit to SOEs; profits largely from FX transactions as NBT is only bank able to conduct international transactions.
  - Development Bank of Tuvalu (DBT): smaller, set up to lend to businesses (especially SMEs); liquidity and capitalization ratios high but lending portfolio encumbered with non-performing loans; faces challenges securing deposit funding to expand credit.
  - Tuvalu National Provident Fund (TNPF): well-managed, profitable, active in consumer lending but does not provide business loans; lending virtually risk-free as extended only to members and against their TNPF balances; TNPF has seniority over NBT and DBT in collecting TNPF balances used as collateral.

_Italic: IMF staff report content unit 1tuvea2021001 (chapter/section)._

### 23.      Going forward, Tuvaluan businesses and citizens would benefit from better access to

### Going forward, Tuvaluan businesses and citizens would benefit from better access to credit

### Improving financial intermediation and access to credit
- Upgrade credit assessment capacity of banks:
  - Establish a centralized credit registry system that collects up-to-date customer information from various sources, including income, tax payments, TNPF contributions, obligations, pledged assets, and credit history.
  - All three lending institutions should report to and have access to the registry (ideally in a digital form) and use the information to assess repayment capacity of borrowers when making credit decisions.
  - Bank supervision should require model-based underwriting practices by banks to ensure prudent lending standards.
- Introduce risk-based loan pricing and cyclical adjustment of loan rates:
  - Loan rates have remained unchanged for more than a decade despite changes in macroeconomic conditions and varying borrower-specific risks.
  - Risk-based pricing could facilitate more efficient allocation of credit and account for customers’ capacity to repay, especially for business borrowers.
  - A credit registry, together with strong loan assessment standards, could facilitate smooth transitioning to risk-based pricing.
- Introduce a collateral framework and resolution regime for non-performing loans:
  - Review and codify the existing Memorandum of Understanding (MoU) between financial institutions to establish clear rules governing collateral seniority and recourse, especially with respect to the TNPF funds.
  - Codification would allow the supervisory authority to periodically review adequacy of rules related to the debt service-to-income ratio.
  - Review the rule that bars banks from accessing TNPF balances of members with defaulted obligations until these members retire, given it exposes banks to liquidity risks.
  - Develop bankruptcy legislation for households and firms to facilitate recovery of non-performing loans in a reasonable timeframe, supplemented by customer rights protection.
- Modernize the financial system with online banking services:
  - DBT three-stage digitalization plan: allow clients to view their balance online (implemented in May 2021); facilitate online applications (by end July 2021); enable online money transfer (by 2022).
  - NBT exploring upgrades to provide online banking services and offer ATM, debit, and credit card services.
  - The government has allocated AUD1 million to support NBT’s initiatives.

### Prudential regulation, supervision, and correspondent banking
- Strengthen prudential regulation and supervision:
  - Banking Commission Act of 2011 established the Banking Commission; the Permanent Secretary of the Ministry of Finance is the Commissioner and prudential supervision authority is given to the Public Enterprise Reporting and Monitoring Unit (PERMU).
  - Supervisory framework should cover both banks and TNPF, given TNPF’s role in extending credit to the economy.
  - Improve capacity in PERMU to ensure periodic financial analysis of banks to assess financial soundness and identify vulnerabilities.
  - Simplify banks’ quarterly prudential reports and streamline submission process to the Banking Commission to facilitate timely analysis.
  - Continue close cooperation with technical assistance partners to upgrade staff skills.
- Ensure robust correspondent banking relationships (CBRs):
  - NBT lost its CBR with Australian banks in April 2020; established a new relationship with the BRED bank in Fiji and maintained the CBR with the Bank of Hawaii.
  - Loss of CBRs would hamper receipt of fishing license payments and donor grants, disrupt international commerce and remittances, and reduce NBT’s FX trading profits.
  - Authorities plan to set up a domestic Financial Intelligence Unit (FIU) and are cooperating with the Asia-Pacific Group on Anti-Money Laundering to review AML/CFT legislation; engaged with the Fiji Financial Intelligence Unit to devise possible organizational structure and job descriptions for a domestic FIU.

### Fintech, digital strategy, and implementation guidance
- Develop a comprehensive fintech and digital strategy including:
  - (i) strengthening technological infrastructure, such as inclusive and affordable access to high-speed internet and electronic devices;
  - (ii) improving IT and finance expertise in Tuvalu’s labor market;
  - (iii) enhancing financial literacy of citizens;
  - (iv) developing a secured and easy-to-access digital national identity system.
- Prioritize three high-benefit applications:
  - (i) mobile money;
  - (ii) cross-border payments;
  - (iii) internet banking.
- Develop regulations in parallel to address fintech-specific risks: operational risks such as cybersecurity, ensuring security of customer funds, sound data management practices, and consumer rights.
- Implementation guidance:
  - Select private partners with a proven record in similar countries and ability to upgrade and maintain systems.
  - Base selection on careful cost-benefit analysis that includes ongoing maintenance and technical support costs relative to the limited size of Tuvalu’s market.
  - Ensure technological architecture is open, promotes innovation, and avoids technology and vendor lock-in.
- Authorities’ current stance:
  - Work on digital solutions is in the discovery phase; conducting a feasibility study to understand benefits and challenges of different platforms, including Bitcoin SV, for a national identity system.

### Diversifying the economy, private sector development, and SOE reform
- Diversifying the growth base:
  - Tuvalu’s economy is dependent on fishing revenues and external aid.
  - Exports are very limited: 0.2 percent of GDP in 2020.
  - Reliance on imports is high: nearly 70 percent of GDP.
  - Policy recommendations include:
    - (i) supporting small-scale production of goods for local consumption as a first step toward exports diversification;
    - (ii) developing subsistence agriculture to reduce dependence on foreign food sources and increase food security;
    - (iii) developing tourism sector through niche markets, such as small cruise ships for eco-tourism;
    - (iv) supporting the sustainable use of ocean resources (“Blue Economy”);
    - (v) exploring alternative sources of revenues such as development of a citizenship-by-investment scheme, following best practices.
  - Infrastructure investment should support these policies; the revised Priority Infrastructure and Investment Plan 2020-2025 lists development of an international runway and establishment of domestic air service as two of the fourteen high-priority projects.
- Supporting private enterprises:
  - Private firms consist mainly of micro-enterprises, more than 90 percent of which are less than three years old.
  - Constraints include remoteness, limited economies of scale, and a weak business regulatory environment reflected in a low CPIA score.
  - Support needed in registering businesses, bookkeeping, business operations and management, licensing, taxation, and customs requirements; explore business incubators and labor mobility programs in sectors with pronounced skills gaps (e.g., construction, healthcare).
- SOE performance and further reforms:
  - Significant progress achieved, but non-financial SOEs repeatedly report losses and rely on government support.
  - Recent reforms: clarification of legal status of SOEs, regulation of director appointments, preparing corporate plans (though not by all SOEs), improving financial reporting, steps toward performance-based management and an informal directors’ institute.
  - Next steps:
    - Finalize SOE corporate plans for all SOEs.
    - Implement and review tiered electricity tariffs to ensure cost recovery and link to oil prices; introduce pre-payment options for electricity consumers and competitive bidding for fuel suppliers.
    - Implement the solar energy program to improve supply and reduce electricity prices.
    - Closely monitor remaining joint ventures operating under NAFICOT given history of losses.
    - Enforce timeliness of corporate reporting and audits to improve tax payments.
    - Adopt a rules-based system of allocating Community Service Obligations (CSOs), lower CSO amounts over time, and bring prices to cost recovery levels.
    - Resolve government’s outstanding payment obligations towards SOEs and mandate SOEs to repay tax arrears.

- Net profits/losses of selected SOEs (In percent of GDP):
  - Tuvalu Electricity Corporation (TEC): -3.2, -0.4, 3.4, 0.7, 0.0, -0.6, 2.1, 0.2
  - National Bank of Tuvalu (NBT): 6.6, 2.5, 2.9, 4.0, 3.7, 3.1, 7.7, 3.4
  - Development Bank of Tuvalu (DBT): -1.1, -1.4, 0.1, 0.2, 0.2, 0.4, -0.1, -0.2
  - (Source of table: Public Enterprise Reform Management Unit (PERMU); some SOE entries noted as not audited or no longer operating under the Act.)

### Strengthen policy making through capacity development and staff appraisal
- Enhance statistical capacity to improve decision-making:
  - Data shortcomings prevalent in real sector and balance of payments statistics, government finance, and financial sector data.
  - Agencies compiling data are often understaffed; IMF TA will continue to play a supplementary role.
  - Strengthen institutional capacity by hiring essential statistical personnel, ensuring their training, and succession planning given frequent turnover.
  - Continue close cooperation with PFTAC and other technical assistance providers.
- Staff appraisal and near-term policy guidance:
  - The authorities’ swift policy response helped prevent a COVID-19 outbreak and cushioned economic impact; growth is expected to rebound in 2021 and beyond, driven by resumption of infrastructure projects and elevated fiscal spending, but adverse risks remain.
  - Further fiscal support should remain conditional on the stage of the pandemic; in case of an outbreak, additional fiscal support should focus on the vulnerable population and private sector.
  - Continue close cooperation with development partners to secure flexible use of remaining grants and procure vaccinations and medical equipment.
  - Once the economy fully recovers, implement reforms to:
    - (i) achieve gradual fiscal consolidation to preserve fiscal buffers against future shocks, especially natural disasters;
    - (ii) fund climate adaptation and infrastructure maintenance needs.
  - Enhance multi-year budget planning by targeting the domestic current fiscal balance and mobilize international resources for climate-related projects.
  - Continue public financial management reforms to raise efficiency of public spending.
  - Include TNPF under supervisory framework given its role in extending credit.
  - Develop a national strategy for financial literacy and education to promote financial inclusion and prudent financial decisions.
- Authorities’ views:
  - Authorities recognized need to strengthen the financial sector and improve banking supervision; domestic labor shortages impede hiring qualified personnel for supervision duties.
  - Intend to collaborate closely with PFTAC to build capacity in the financial supervision unit in PERMU.
  - Acknowledge fintech can increase financial sector efficiency; identification of digital needs should precede choice of technology.
  - Work on digital solutions is in the discovery phase; conducting a feasibility study on platforms including Bitcoin SV for a national identity system.
  - Authorities support proposed structural reforms to promote private sector development and diversify the growth base; two aviation projects (a domestic airline and a new international runway) are seen as strategic priorities.

*Source: Public Enterprise Reform Management Unit (PERMU) and IMF staff appraisal.*

### 41.      Continued efforts to enhance statistical capacity are needed to improve the decision-

### 1tuvea2021001 - 41.      Continued efforts to enhance statistical capacity are needed to improve the decision-

### Statistical capacity and institutional recommendations
- Continued efforts to enhance statistical capacity are needed to improve the decision-making process and ensure timely policy responses to changing economic circumstances.
- Strengthening institutional capacity through hiring of essential statistical personnel, ensuring their training, and succession planning given frequent turnover is needed.
- Continued close cooperation with PFTAC and other agencies providing technical assistance will be essential in this regard.

### Article IV consultation cycle
- It is recommended that the next Article IV consultation take place on the current 24-month cycle.

### Cross-country context and structural vulnerabilities (Figure 1 summary)
- Tuvalu is among the least populated countries in the world.
- Its population is entirely located in coastal areas, vulnerable to climate change.
- The population is characterized by low human capital.
- The country relies heavily on grants from development partners, which are high compared to Pacific peers.
- The public sector is large and dominates the economy.
- Private sector development is hampered by weak connectivity to global shipping networks.

### Economic developments (Figure 2 summary)
- After a few years of rapid growth, economic activity slowed in 2020.
- Public sector, construction, and trade continued to dominate the economy.
- The current account is driven by imports, income from fishing revenues, and grants by development partners.
- Fishing license revenue increased in recent years, reflecting favorable weather patterns and a new regional agreement.
- Gross international reserves remain high.
- Despite a significant increase in banks’ liquidity, lending has continued to decline.

### Fiscal developments (Figure 3 summary)
- In 2020, fiscal balance registered a surplus.
- Non-tax revenue, driven by high fishing revenue and .tv fees, remains a dominant source of income.
- Fiscal expenditures remain elevated.
- Good performance of TTF investment allowed for a positive contribution to CIF and, together with fiscal surplus, helped raise CIF balance.
- Public debt continued to decline.

### Key social and economic indicators (selected from Table 1)
- Population (2021 est.): 11,093
- Poverty rate (2017): 26 percent
- Per capita GDP (2021 est.): AU$6537
- Life expectancy (2021): 68 years
- Main export: Fish
- Primary school enrollment (2019, gross): 109 percent
- Secondary school enrollment (2018, net): 67 percent
- Key export markets: Fiji, China, Australia, Japan, New Zealand

### Selected macro and fiscal figures, 2017–2022 (from Table 1; values in percent of GDP unless otherwise indicated)
- Real GDP growth: 2017: 3.4; 2018: 1.6; 2019: 13.9; 2020: 1.0; 2021: 2.5; 2022 Est.: 3.5
- Consumer price inflation (period average): 2017: 4.1; 2018: 2.2; 2019: 3.5; 2020: 1.6; 2021: 2.2; 2022 Est.: 2.4
- Total revenue and grants: 2017: 108.6; 2018: 156.1; 2019: 111.7; 2020: 121.5; 2021: 122.3; 2022 Est.: 107.3
- Revenue: 2017: 86.6; 2018: 118.1; 2019: 82.9; 2020: 89.6; 2021: 86.7; 2022 Est.: 74.7
- Fishing license fees: 2017: 44.1; 2018: 79.8; 2019: 48.9; 2020: 55.6; 2021: 43.5; 2022 Est.: 41.5
- Grants: 2017: 21.9; 2018: 38.0; 2019: 28.9; 2020: 31.9; 2021: 35.7; 2022 Est.: 32.6
- Total expenditure: 2017: 106.5; 2018: 125.8; 2019: 112.8; 2020: 116.5; 2021: 129.4; 2022 Est.: 110.1
- Overall balance: 2017: 2.1; 2018: 30.3; 2019: -1.1; 2020: 5.0; 2021: -7.0; 2022 Est.: -2.9
- Overall balance (excl. grants): 2017: -19.8; 2018: -7.7; 2019: -29.9; 2020: -26.9; 2021: -42.7; 2022 Est.: -35.4
- Domestic Current balance: 2017: -41.5; 2018: -43.6; 2019: -36.8; 2020: -41.0; 2021: -55.7; 2022 Est.: -55.9
- Tuvalu Trust Fund (in percent of GDP): 2017: 292.8; 2018: 279.9; 2019: 237.0; 2020: 241.4; 2021: 232.8; 2022 Est.: 217.8
- Consolidated Investment Fund (in percent of GDP): 2017: 47.2; 2018: 55.6; 2019: 47.3; 2020: 54.4; 2021: 52.2; 2022 Est.: 48.3
- Tuvalu Survival Fund (in percent of GDP): 2017: 8.5; 2018: 7.8; 2019: 6.4; 2020: 6.3; 2021: 7.2; 2022 Est.: 6.8
- Gross reserves (In $A million): 2017: 78.2; 2018: 86.4; 2019: 89.4; 2020: 90.9; 2021: 91.1; 2022 Est.: 98.8
- Gross public debt (percent of GDP): 2017: 12.0; 2018: 11.8; 2019: 11.5; 2020: 7.3; 2021: 6.1; 2022 Est.: 5.0
- Nominal GDP (In $A million): 2017: 59.1; 2018: 64.4; 2019: 77.9; 2020: 79.6; 2021: 83.4; 2022 Est.: 88.7
- Credit growth (percent change): 2017: 2.1; 2018: 2.0; 2019: 0.4; 2020: -0.5; 2021: 1.1; 2022 Est.: 2.9

### Medium-term baseline projections, 2017–2026 (selected from Table 2)
- Real GDP growth (percent): 2022: 3.5; 2023: 3.8; 2024: 4.0; 2025: 3.8; 2026: 3.7
- CPI inflation (period average): 2022: 2.4; 2023: 2.9; 2024: 3.0; 2025: 3.2; 2026: 3.1
- Total revenue and grants (percent of GDP): 2022: 107.3; 2023: 107.2; 2024: 106.3; 2025: 104.9; 2026: 103.8
- Total expenditure (percent of GDP): 2022: 110.1; 2023: 109.8; 2024: 109.5; 2025: 109.1; 2026: 108.3
- Overall balance (including grants, percent of GDP): 2022: -2.9; 2023: -2.6; 2024: -3.2; 2025: -4.1; 2026: -4.6
- Current account (percent of GDP): 2022: -4.1; 2023: -3.2; 2024: -3.1; 2025: -3.0; 2026: -2.9
- Gross reserves ($A million): 2022: 98.8; 2023: 102.0; 2024: 94.6; 2025: 82.1; 2026: 68.9
- Tuvalu Trust Fund (percent of GDP): 2022: 217.8; 2023: 207.1; 2024: 196.4; 2025: 186.8; 2026: 178.7
- Consolidated Investment Fund (percent of GDP): 2022: 48.3; 2023: 44.0; 2024: 38.7; 2025: 32.7; 2026: 26.8
- Credit growth (y/y percent change): 2022: 2.9; 2023: 3.4; 2024: 3.9; 2025: 4.2; 2026: 4.1

### Summary operations of the general government (selected from Table 3)
- Total revenue and grants (percent of GDP): 2022: 107.3; 2023: 107.2; 2024: 106.3; 2025: 104.9; 2026: 103.8
- Revenue (percent of GDP): 2022: 74.7; 2023: 73.7; 2024: 73.7; 2025: 73.7; 2026: 73.7
- Tax revenue (percent of GDP): 2022: 17.0; 2023: 17.5; 2024: 17.5; 2025: 17.5; 2026: 17.5
  - Personal income tax: 2022: 5.3; 2023: 5.8; 2024: 5.8; 2025: 5.8; 2026: 5.8
  - Corporate income tax: 2022: 4.7; 2023: 4.7; 2024: 4.7; 2025: 4.7; 2026: 4.7
  - Consumption tax: 2022: 2.3; 2023: 2.3; 2024: 2.3; 2025: 2.3; 2026: 2.3
- Nontax revenue (percent of GDP): 2022: 57.6; 2023: 56.1; 2024: 56.1; 2025: 56.1; 2026: 56.1
  - Fishing license fees (percent of GDP): 2022: 41.5; 2023: 40.0; 2024: 40.0; 2025: 40.0; 2026: 40.0
  - License fees for .TV domain (percent of GDP): 2022: 8.5; 2023: 8.5; 2024: 8.5; 2025: 8.5; 2026: 8.5
- Grants (percent of GDP): 2022: 32.6; 2023: 33.5; 2024: 32.6; 2025: 31.3; 2026: 30.1
- Total expenditure (percent of GDP): 2022: 110.1; 2023: 109.8; 2024: 109.5; 2025: 109.1; 2026: 108.3
  - Current expenditure (percent of GDP): 2022: 89.0; 2023: 89.1; 2024: 89.1; 2025: 88.9; 2026: 88.4
    - Wages and salaries (percent of GDP): 2022: 32.2; 2023: 32.2; 2024: 32.2; 2025: 32.2; 2026: 32.2
  - Capital expenditure (percent of GDP): 2022: 21.1; 2023: 20.7; 2024: 20.4; 2025: 20.1; 2026: 19.9
    - Infrastructure (percent of GDP): 2022: 9.0; 2023: 8.9; 2024: 8.9; 2025: 8.8; 2026: 8.7
    - Special development expenditure (percent of GDP): 2022: 10.6; 2023: 10.4; 2024: 10.2; 2025: 10.0; 2026: 9.8
- Overall balance (incl. grants, percent of GDP): 2022: -2.9; 2023: -2.6; 2024: -3.2; 2025: -4.1; 2026: -4.6
- Overall balance (excl. grants, percent of GDP): 2022: -35.4; 2023: -36.2; 2024: -35.9; 2025: -35.4; 2026: -34.7
- Domestic current balance (percent of GDP): 2022: -55.9; 2023: -55.5; 2024: -55.4; 2025: -55.3; 2026: -54.8
- CIF (net, -=increase, percent of GDP): 2022: 3.4; 2023: 3.2; 2024: 3.4; 2025: 4.3; 2026: 4.7
- Nominal GDP ($A million): 2022: 88.7; 2023: 94.9; 2024: 102.1; 2025: 109.9; 2026: 117.6

### Balance of payments highlights (Table 4 selected values, percent of GDP)
- Current account balance including official grants: 2017: 11.5; 2018: 53.9; 2019: -16.9; 2020: 3.8; 2021: -4.1; 2022: -4.1; 2023: -3.2; 2024: -3.1; 2025: -3.0; 2026: -2.9
- Current account balance excluding official grants: 2017: -29.0; 2018: 0.2; 2019: -57.3; 2020: -38.0; 2021: -51.1; 2022: -46.9; 2023: -47.3; 2024: -46.0; 2025: -44.0; 2026: -42.3
- Goods and services balance: 2017: -107.5; 2018: -106.0; 2019: -118.8; 2020: -115.3; 2021: -105.8; 2022: -101.5; 2023: -101.2; 2024: -101.0; 2025: -99.4; 2026: -97.4
- Fishing license fees (percent of GDP, part of inflows): 2017: 44.1; 2018: 79.8; 2019: 48.9; 2020: 55.6; 2021: 43.5; 2022: 41.5
- Primary income balance: 2017: 78.2; 2018: 105.9; 2019: 61.2; 2020: 76.5; 2021: 53.6; 2022: 53.4
- Secondary income receipts (inflows, percent of GDP): 2017: 42.4; 2018: 56.5; 2019: 42.0; 2020: 43.9; 2021: 49.3; 2022: 45.3
- Net lending/borrowing (Current+Capital accounts): 2017: 31.7; 2018: 75.5; 2019: 30.5; 2020: 8.5; 2021: 0.3; 2022: 10.6
- Gross official reserves ($A million): 2017: 78.2; 2018: 86.4; 2019: 89.4; 2020: 90.9; 2021: 91.1; 2022: 98.8
- Gross official reserves (in months of imports of goods and services): 2017: 11.7; 2018: 9.7; 2019: 10.7; 2020: 11.2; 2021: 10.7; 2022: 10.9

### Financial soundness and banking (Table 5 referenced)
- Table 5 lists Tuvalu: Financial Soundness Indicators, 2014–2020 (table content not reproduced line-by-line in the source extract).

### COVID-19 response and impacts (Appendix I)
- The government’s swift reaction helped prevent an outbreak in Tuvalu.
- The pandemic affected Tuvalu’s economy by halting infrastructure investment and shutting down the already-limited tourism sector.
- A large response package of around 30 percent of GDP was necessitated by limited social and health services.
- Development partners provided around 8.6 percent of GDP in additional funds and allowed repurposing of existing grants.
- Only around a third of the package was implemented, largely due to the lack of COVID-19 cases in Tuvalu.
- Going forward, a review of the social protection system and establishment of an effective banking supervision would help Tuvalu address issues exposed by the pandemic.

Detailed actions and financing:
- In late January (2020), authorities established a task force and prepared a pandemic response plan.
- After the first case in Fiji on March 19, a State of Emergency was declared; travel was banned except for essential items and repatriation flights (subject to a mandatory two-week quarantine). Food rationing, social distancing rules, and school and public space closures were implemented.
- On March 28, the Talaaliki Plan was released covering governance, health, food security, fuel, and education for two, four, six months and beyond.
- On April 28, 2020, the government released an economic and financial policy relief package estimated at AUD23.3 million (30 percent of GDP). Development partners planned to finance AUD12.5 million of that package.
- In 2021, the authorities announced an additional AUD 1.15 million (1 percent of GDP) for COVID-related spending in the 2021 national budget for quarantine-related activities.
- Health measures: Over half of the relief package (AUD 12.5 million or 15.8 percent of GDP) was devoted to procuring medical equipment and improving health facilities.
  - The government requested USD2.5million from the World Bank for medical equipment and fuel.
  - Tuvalu received personal protective equipment and sterilization bags from the ADB and UNICEF, COVID testing kits and PPE from the Taiwan Province of China, and New Zealand assisted with renovating and upgrading the Funafuti clinics.
  - Between March 2020 and March 2021, the government spent around AUD2.75 million on essential medical equipment and supplies and recruitment of emergency health workers, and about AUD0.3 million of the World Bank’s fuel fund.

- Health and social protection context:
  - Tuvalu has one hospital, two health clinics in Funafuti, and eight health centers on outer islands.
  - Facilities are staffed by nurses who mainly provide primary health care, dental and pharmaceutical services, and preventive services.
  - Patients needing advanced clinical care travel overseas through the Tuvalu Medical Treatment Scheme.
  - Non-communicable diseases (heart conditions, diabetes, and high blood pressure) remain the biggest health concerns.
  - Social protection consists of the Senior Citizen Scheme and financial assistance to the disabled; social insurance excludes informal economy workers.
  - The Tuvalu National Provident Fund (TNPF) collects compulsory contributions, provides retirement benefits, medical, disability and death benefits, and extends loans to members secured against contributions.

*Source: Tuvalu staff report extract.*

### 4. Another 20 percent of the package (AUD 4.6 million or around 5.8 percent of GDP) was

### 1tuvea2021001 - 4. Another 20 percent of the package (AUD 4.6 million or around 5.8 percent of GDP) was

### Support to repatriation, quarantine, and medical-supply flights
- Allocation: Another 20 percent of the package (AUD 4.6 million or around 5.8 percent of GDP) earmarked for repatriation and medical-supply flights and provision of quarantine facilities.
- Operations:
  - Repatriation flights established from Fiji and from Funafuti to outer islands to reduce transmission risk in the capital and to increase labor supply in the outer islands.
  - Returning citizens subject to mandatory two-week quarantine; facilities set up in Funafuti schools and government buildings.
- Spending status: As of end-March 2021, the government has spent about 75 percent of the allocation on these activities.
- Composition of related expenditures (as of end-2020 total spending):
  - Medical supplies: 27 percent
  - Quarantine activities: 22 percent
  - Charter flights and fuel: 20 percent

### Support to the population (direct cash transfers and social measures)
- Allocation: About 15 percent of the package (AUD 3.7 million or around 4.6 percent of GDP) allocated to direct cash transfers to the population.
- Direct cash transfers:
  - Universal entitlement conditional on alert level.
  - Alert level 3 (triggered by confirmation of COVID-19 cases in Fiji) entitled all citizens to one direct cash payout of AU$80 (estimated based on Tuvalu poverty line of AU$1.47 per day).
  - Household members of households with total earnings of below AU80 per month received second cash transfer of AUD80 in June.
  - Overseas students received limited-time financial assistance from AU$100 to AU$200 per month for two months, depending on their sponsoring status.
  - Support extended to civil servants (both on leave and on duty travel) and sports teams who could not travel back to Tuvalu from Fiji.
- Support from the Tuvalu National Provident Fund (TNPF) and banks:
  - Under alert level 3, TNPF members could withdraw up to AU$500 per month for three months from their savings accounts, depending on the extent of their income loss due to the State of Emergency.
  - Option to defer, reduce, or suspend repayments on existing loans for TNPF members.
  - Under alert level 3, customers of the National Bank of Tuvalu could apply for restructuring of their loans, to reduce and/or suspend repayments of principal and interest from May to October.

### Support to the economy (food security, concessional lending)
- DFAT-financed grant: AUD0.3 million (or 0.4 percent of GDP) transferred to the Development Bank of Tuvalu (DBT) to establish a new concessional lending facility.
- Facility purpose: Assist canteens and new agricultural businesses to improve food production in the outer islands; agricultural and food security businesses could borrow up to $7,000 per business.
- Adjustments and transfers:
  - Initial amount augmented due to high demand for concessional loans from canteens: DBT augmented the initial amount (AU$ 0.12 million) by AUD0.056 million, transferred from the allocated agricultural lending amount (AUD0.105 million).
  - DBT administration costs (AU$ 0.075 million) covered by the grant.

### Execution of the package (implementation and spending breakdown)
- Implementation pace: As of end-March 2021, around a third of the planned package, or 11.5 percent of GDP, was implemented.
- Reasons for underspending:
  - Suspension of universal cash payments and targeted cash assistance after the first few months with no infections.
  - Lower than expected demand for repatriation flights, reducing quarantine expenditures.
  - Underspending on health due to COVID-free status, translating into lower than envisaged spending on COVID-19 testing, contact tracing, isolation and hospitalization.
- Spending shares (overall):
  - Two-time direct cash transfers: 16 percent of the spending.
  - Additional wages for emergency personnel: 13 percent of the spending.
  - Medical supplies, quarantine, charter flights/fuel shares noted above.

### Policy implications and recommendations
- Effectiveness of response:
  - Tuvalu’s swift policy response allowed it to remain one of ten COVID-free countries in the world.
  - Size of the planned policy package was one of the largest among the Pacific Island Countries and was necessitated by uncertainty over the pandemic’s path and potential toll on the remote island community.
  - Government engagement with donors and effective communication (including securing public support for measures like relocating citizens out of Funafuti and terminating repatriation flights) were important to success.
- Cash transfer policy:
  - Termination of universal cash transfers was judged the right policy response given the lack of infections.
  - Tuvalu was one of the few countries where cash transfers covered the entire population; absence of a social protection scheme made universal transfers the only practical option.
- Social protection system review (recommended):
  - Conduct a review of the social protection system to ensure support to the vulnerable.
  - Observations from rapid assessment of State of Emergency impacts on Funafuti inhabitants:
    - Border closures caused income losses in 63 percent of women-owned businesses.
    - Around 30 percent of citizens reported having no income sources for their families.
    - In outer islands, residents reported lack of access to drinking water, transportation, electricity and medical supplies and clinics; women reported rising incidence of domestic violence.
    - Anecdotal evidence suggests the survey measured both pandemic impact and long-standing issues related to poverty and unemployment (at 28.5 percent in 2017, latest available data).
  - Recommendations:
    - Thorough social-economic assessment of pandemic impact and review of social protection system to ensure needs of poor and vulnerable groups are properly addressed.
    - Expand and strengthen TNPF (Tuvalu’s only insurance fund) which provides limited social insurance benefits only to formal public sector employees; program expansion could be supported via technical assistance and grants from development partners.
- Health system recommendations:
  - Review the TMTS (medical care scheme referring patients to overseas treatments) due to high cost.
  - Rationalize TMTS spending by developing early care, systematically tracking expenditure by beneficiary and expense type, and rationalizing travel of family members.
  - Focus on prevention of non-communicable diseases and improving quality of secondary care in Tuvalu as outlined in the Te Kete plan.
  - Leverage large inflow of donor grants during the COVID-19 pandemic to improve clinical and non-clinical health system capacity and reduce reliance on external treatment.
- Financial sector and prudential supervision:
  - Loan moratoria widely used elsewhere; need to establish effective prudential supervision of banks.
  - Closely monitor pandemic’s impact on banks’ asset quality.
  - Develop loan restructuring guidelines for borrowers unable to service obligations due to the pandemic and earlier defaults.

### External Sector Assessment (key findings and projections)
- 2020 external position: Broadly in line with level implied by medium-term fundamentals and desirable policies; assessment subject to substantial uncertainty due to data limitations and volatile balance of payments flows.
- Current account:
  - Staff estimates current account recorded a surplus of 3.8 percent of GDP in 2020, with the trade deficit offset by inflows from grants, fishing revenues, and returns from the Tuvalu Trust Fund (TTF) and Consolidated Investment Fund (CIF).
  - 2021 projection: CA balance projected to deteriorate to a 4.1 percent deficit as projected narrowing in trade deficit is outweighed by lower fishing revenues and investment income.
  - Medium-term: Current account deficit projected to narrow somewhat, to below 3 percent of GDP.
  - Caveat: Substantial uncertainty due to volatility of current account flows and delayed detailed balance of payments data; EBA-lite methodology not feasible.
- Real exchange rate:
  - No sign of real exchange rate misalignment.
  - REER appreciated by 16 percent between March 2020 and March 2021, and now exceeds its 20-year average level by 7 percent.
- International reserves:
  - Reserves held up in 2020 and stood at around AUD 91 million (11 months of imports) at year-end.
  - Reserve coverage considered sufficient in a dollarized economy where primary function is to prevent liquidity crises.
  - Projection: Reserves expected to decline to 9 months of imports on average in the next five years due to a widening fiscal deficit, but remain well above adequate level of one month of government spending (Wiegand, 2013).
- Fiscal policy and structural reforms:
  - Recommendation to pursue prudent fiscal policy over the medium term to maintain fiscal buffers, preserve external balance, build up government’s net worth, and pursue development and climate adaptation projects.
  - Structural weaknesses: size and remoteness drive up transportation and transaction costs; weak human capital relative to peers.
  - Tuvalu’s World Bank Human Capital Index is 9 percent below the average for its Pacific Islands peers.
  - Staff recommends building human capital, promoting private sector development, and diversification to reduce reliance on imports.
- Currency regime:
  - Use of Australian dollar as legal tender remains appropriate for Tuvalu, given limited ability to adopt an independent currency and strong links with Australia.

### Risk Assessment Matrix — selected risks, likelihoods, impacts, and policy responses
- Unexpected shifts in the Covid-19 pandemic
  - Relative likelihood: Medium
  - Expected impacts: High for asynchronous progress (prolonged border closures could disrupt projects and private sector activity); faster containment would reopen borders and normalize activity.
  - Policy responses:
    - Secure vaccines for all citizens and prepare for swift vaccinations.
    - Continue strict quarantine measures for international visitors.
    - Strengthen health security.
    - Mobilize more donor grants if needed.
- Sharp rise in global risk premia lowering TTF returns
  - Relative likelihood: Medium
  - Expected impact: High — abrupt market adjustment could reduce net asset value and returns of TTF, reducing CIF transfers to government.
  - Policy responses:
    - Increase buffers by saving transfers from TTF to CIF.
    - Ensure minimum balance target of the CIF is maintained.
    - Increase expenditure efficiency while maintaining capital expenditures.
    - Review riskiness of foreign investments.
- Higher frequency and severity of natural disasters related to climate change
  - Relative likelihood: High
  - Expected impact: High — large fiscal costs for recovery, possible depletion of reserves; recovery after cyclone Pam estimated at above 30 percent of GDP in 2015.
  - Policy responses:
    - Strengthen fiscal buffers.
    - Increase infrastructure investment to bolster resistance to rising sea levels and cyclones.
    - Build institutional capacity and strengthen the PFM framework.
- Accelerating de-globalization
  - Relative likelihood: High
  - Expected impact: Given Tuvalu’s narrow domestic production base and reliance on imports, trade disruptions and FX volatility would impact inflation and growth.
  - Policy responses:
    - Seek to diversify the economy.
    - Prudent management of tuna resources.
- Domestic risks highlighted (all with Relative likelihood: High):
  - Lack of strong commitment to PRM and poor engagement with Development Partners
    - Expected impact: High — could destabilize donor funding and impact budget execution and growth.
    - Policy responses: Strengthen accountability and transparency regarding implementation of previous PRM; work closely with DPs and continue discussions on a realistic PRM.
  - Heavy fiscal reliance on volatile fishing revenues
    - Expected impact: High — protracted decline in fishing revenues would endanger long-run fiscal sustainability.
    - Policy responses: Continue implementation of the medium-term fiscal framework and save excess fishing revenue; broaden revenue base and conduct fiscal consolidation.
  - Poor performance of state-owned banks and non-financial enterprises
    - Expected impact: High — poor governance and weak supervision could lead to high NPLs, constrained bank lending, contingent liabilities for government.
    - Policy responses: Introduce contingencies for continued subsidies; implement regulation and supervision of banks; advance SOE reforms; develop a fintech strategy.

### Appendix IV — Fiscal costs and financing options for sustainable inclusive growth and climate resilience
- Authorities’ commitment: Progress towards inclusive growth while improving resilience to climate change.
- Financing and spending needs:
  - Additional spending required on physical infrastructure and large efficiency gains in key social development sectors (health, education).
  - Pandemic offers an opportunity to re-prioritize spending in health and invest in medical infrastructure.
- Constraints and support:
  - Restricted fiscal space and limited scope to raise tax revenues.
  - Staff supports authorities’ action plan mapped out in the National Strategy for Sustainable Development (NSSD) for 2021-30 to secure increased funding from global climate financing facilities.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 1. The authorities are committed to fostering inclusive growth and progress towards

### 1. The authorities are committed to fostering inclusive growth and progress towards

### Strategic objectives and vulnerabilities
- Tuvalu aims to meet the UN Sustainable Development Goals by 2030 and advance a 10-year plan (NSSD / Te Kete) for a “peaceful, resilient and prosperous Tuvalu”.
- Classification and vulnerability:
  - In 2021, Tuvalu was one of the three Pacific Islands Countries classified by the United Nations as “Least Developed Countries”.
  - The population is entirely situated within 1 km from the coast and is highly vulnerable to natural disasters and rising sea levels.
- NSSD/Te Kete priorities (cross-cutting and mutually reinforcing):
  - Enabling environment; Economic development; Social development; Island and culture development; Infrastructure development.
  - National outcomes targeted include lifting growth and achieving sustainable fiscal and external balances (NO 6), private sector and financial development (NO 9), climate change adaptation (NO 4 and 17), improving health and education outcomes (NO 10 and 11), digital infrastructure (NO 1), clean water and sanitation (NO 20), and improving governance (NO 3).
- Monitoring and accountability gaps:
  - The plan does not yet include a clear accountability framework; ministries must develop operational plans with annual targets and defined performance indicators.
  - Te Kete actions have not been mapped into the UN SDGs; since 2015 Tuvalu recorded progress on SDG 13 and SDG 7, while negative trends exist for SDG 2, SDG 4, and SDG 5. Lack of data prevents measurement in other areas.

### Infrastructure needs and financing implications
- High cost drivers:
  - Size, remoteness, and population dispersion across islands make physical infrastructure delivery very costly.
  - Climate vulnerability raises maintenance and depreciation costs and increases the need for resilient infrastructure.
- Estimated additional annual spending required (to meet selected SDGs by 2030), expressed as percent of 2030 GDP:
  - Energy: 1.2 percent of 2030 GDP
  - Roads: 1.0 percent of 2030 GDP
  - Water, Sanitation and Hygiene (WASH): 0.1 percent of 2030 GDP
- Fiscal constraints and debt sustainability:
  - Revenue base is narrow and volatile (mostly fishing revenues and grants); limited scope to increase domestic revenue.
  - Little fiscal space for SDGs through debt financing: a simulation with an increase in infrastructure spending of 2.3 percent of 2030 GDP causes public debt-to-GDP to breach the high-risk threshold 5 years earlier than the counterfactual.
  - Staff emphasizes improving Public Financial Management (PFM) to translate public investment into productive capital.
  - Staff supports efforts to increase access to multilateral climate finance, regional insurance schemes, and climate funds such as the Green Climate Fund.

### Social sector spending, outcomes, and efficiency
- Current spending profile and outcomes:
  - Health and education spending (as a share of GDP) in Tuvalu is very high compared to other Pacific Island Countries and better-performing peers.
  - Despite high spending, outcomes are poor: school enrollment rates are relatively low and the World Bank’s Human Capital Index (HCI) is 9 percent below the regional average.
  - Staff estimates show health and education spending in Tuvalu are about 10 and 6 percentage points of GDP higher, respectively, than in better-performing countries globally.
- Specific spending pressures and trends:
  - Spending on Tuvalu Medical Treatment Scheme (TMTS) and on overseas education scholarships has been growing steadily.
  - Spending on TMTS and overseas scholarships reached an estimated 16 percent of GDP in 2020.
- Recommended efficiency and reprioritization measures:
  - Rationalize spending on TMTS and overseas education scholarships.
  - Improve the quality of primary and secondary education on-island.
  - Focus on non-communicable disease prevention and improve quality of secondary health care while implementing efficiency measures.

### Pandemic impacts and opportunity for PFM improvements
- COVID-19 status and fiscal response:
  - Tuvalu was among the ten countries that had not reported any COVID-19 cases at the time of the report.
  - Large inflow of external grants directed to the health sector estimated at 8.6 percent of GDP.
  - First Supplementary Budget allocated A$5.7 million (7.2 percent of GDP) to the Ministry of Health and Social Welfare; some funds aimed at investment in medical infrastructures.
- Policy implication:
  - External donor inflows provide an opportunity to strengthen health infrastructure and public financial management.

### Trust funds and fiscal buffers
- Tuvalu Trust Fund (TTF):
  - Established in 1987; administered by an international Board and the government (not fully sovereign).
  - When TTF’s value exceeds its “maintained value” (linked to the Australian CPI), excess funds are transferred to the Consolidated Investment Fund (CIF).
  - At end-2020, TTF market value: AUD192 million, or 241 percent of GDP.
  - Historical asset allocation (last 10 years, average): 45 percent defensive assets, 35 percent growth assets, 20 percent diversified assets.
  - A World Bank study finds TTF returns are lower than those achieved by funds of three other Pacific Island Countries and alternatives.
- Consolidated Investment Fund (CIF):
  - Established in 1993; under full control of the Tuvaluan government.
  - Government targets a CIF balance of a minimum of 16 percent of TTF maintained value as a precaution against sustained downturns.
  - Government goal (Te Kakeega III): save at least 2 percent of GDP into the CIF annually.
  - During 2016-2020, government saved on average 6.6 percent of GDP into the CIF.
- Tuvalu Survival Fund (TSF):
  - Established in 2015 for recovery, rehabilitation, mitigation and adaptation projects.
  - As of end-2020, TSF balance estimated at AUD5 million (6.3 percent of GDP).
- Management and governance notes:
  - TTF daily operations managed by AMP Capital and Schroders; overseen by Russell Investments.
  - Objective-based Asset Allocation (since 2012) delegates allocation decisions to asset managers.

### Financial sector structure, performance, and fintech opportunities
- Overview and gaps:
  - Financial system comprises National Bank of Tuvalu (NBT), Development Bank of Tuvalu (DBT), and Tuvalu National Provident Fund (TNPF).
  - Low financial depth, inclusion, and efficiency; all transactions conducted in cash; no ATMs; many citizens financially underserved.
  - Costly and inefficient domestic and cross-border payments; poor lending quality; banks provide limited support for private sector growth.
- National Bank of Tuvalu (NBT):
  - 2020 NBT assets: AUD128 million (160 percent of GDP).
  - Almost 90 percent of NBT assets are cash and deposits in foreign banks.
  - Loan portfolio is very small; primarily personal and housing loans and loans to SOEs; minimal exposure to private firms.
  - Funding: customer deposits (majority government deposits); given fluctuations, deposits invested in liquid assets.
  - Profitability: return on assets averaged 3 percent over the last five years.
  - Asset quality: non-performing loans (NPLs) 15 percent of total loans in 2020, up from 12 percent in 2018; almost two-thirds of NPLs past due more than one year.
  - Provisioning: bank fully provisions all NPLs and takes a cautious approach.
- Development Bank of Tuvalu (DBT):
  - DBT assets: 3 percent of GDP in 2020, down from 6 percent in 2014.
  - Around 70 percent of DBT assets are loans; primary clients are small businesses and individuals (not SOEs); borrowers concentrated in retail trade and food distribution in outer islands.
  - 2020 agricultural loans extended: AUD 300 thousand (funded by government) in response to the pandemic.
  - Historical asset quality: NPLs around 17 percent of total loans in 2018.
  - Provisioning and efficiency: in 2020 provisions covered only around a quarter of NPLs; net interest income averaged less than a quarter of gross income; operating expenses to gross income averaged 100 percent over the past five years.
  - DBT plans to offer savings deposit accounts (student savings plus, business savings) to increase liquidity sources and fund short-term business loans and personal loans.
- Fintech opportunities and regulatory needs:
  - Potential fintech solutions: mobile money, e-money and internet banking, cross-border payments.
  - Enabling measures: develop a digital national ID (with careful technology choice), create an enabling environment, and adopt prudential regulation and supervision that account for fintech to mitigate risks (operations, concentration, regulatory arbitrage, consumer rights).

### Policy recommendations (summarized)
- Increase climate finance access and prioritize external multilateral climate funds and regional insurance schemes to reduce reliance on domestic debt.
- Improve PFM to ensure public investment translates into productive capital and to manage fiscal risks from airlines and other SOEs.
- Reprioritize and improve efficiency of health and education spending:
  - Rationalize TMTS and overseas scholarships.
  - Strengthen primary and secondary education quality and focus on non-communicable disease prevention.
- Strengthen NSSD implementation:
  - Develop operational plans with annual targets and performance indicators.
  - Map Te Kete actions to UN SDGs to ease donor coordination and monitoring.
  - Develop data collection processes to track progress.
- Strengthen trust fund governance and investment performance monitoring to improve returns and protect fiscal buffers.
- Advance financial development and inclusion through fintech while establishing appropriate prudential regulation, digital ID considerations, and supervision to mitigate associated risks.

*Prepared from IMF staff content in “1tuvea2021001 - 1. The authorities are committed to fostering inclusive growth and progress towards”.*

### 6. The TNPF—Tuvalu’s pension fund—is well-managed, profitable and also active in

### The TNPF—Tuvalu’s pension fund—is well-managed, profitable and also active in consumer lending to its members

### TNPF overview and role in the financial sector
- TNPF’s assets stood at AUD80 million (100 percent of GDP) in 2020.
- The fund has above 7000 registered members, of which 4800 are actively contributing.
- Asset composition:
  - Over 80 percent of the TNPF’s assets are invested offshore.
  - Personal loans: 7 percent.
  - Funafuti Lagoon hotel, and cash: 10 percent.
- TNPF member balances are the only form of collateral in Tuvalu; TNPF’s seniority over member balances has made its loans almost free of credit risk.
- TNPF plays a key role in the financial sector because of the collateral and lending role.

*Source: IMF staff analysis.*

### Banking supervision and reporting
- Banks report to the Public Enterprise Reporting and Monitoring Unit (PERMU).
- Banking Commission Act of 2011 established the Banking Commission; the Permanent Secretary of the Ministry of Finance is the Commissioner and prudential supervision authority was given to PERMU.
- Banks report financial returns to PERMU on a quarterly basis for monitoring.
- Prudential regulation and supervision of banks has been limited.

### Financial development: dimensions and assessment
- Financial development is assessed across three dimensions: financial depth, financial inclusion, and financial efficiency.
  - Financial depth: size and liquidity of the market for financial services.
  - Financial inclusion: population’s access to financial services.
  - Financial efficiency: cost and efficiency of providing financial services to users.

### Financial depth — findings
- Total loans provided by the two banks and the TNPF reached 28 percent of GDP in 2020, down from 73 percent of GDP in 2011.
- Drivers of decline:
  - Banks cut lending by 3/4.
  - TNPF’s lending declined by around 25 percent.
- Outstanding credit to the private sector is noticeably lower than in peer countries in the region.
- Causes: risky credit environment, gaps in banks’ ability to assess borrowers’ business models and repayment capacity.

### Financial inclusion — findings
- Barriers:
  - Geographical barriers and lack of branchless services: all banking services require personal visits at bank branches.
  - Lack of alternatives to cash transactions: all transactions are done with cash; there are no card arrangements.
  - No ATMs in Tuvalu.
- Consequences:
  - Significant liquidity constraints on citizens.
  - Bank services time-consuming and difficult for residents of outer islands.
  - Lack of data precludes formal assessment; anecdotal evidence suggests the share of unbanked individuals remains high.
- Credit access issues:
  - Poor underwriting standards; verification of borrowers’ financial conditions is a challenge due to absence of an established national ID and credit history registry.
  - NBT has established an ID for each customer, but its inefficiency is reflected by high NPLs.
  - Tax ID information is not available to banks for assessing business customers, contributing to lower business lending.
  - Low financial literacy of borrowers, especially business owners, who struggle to describe business models and provide standard accounting reports.

### Financial efficiency — findings
- Indicators of low efficiency:
  - High loan-deposit spread.
  - High share of operating expenses to gross income, particularly for the DBT.
  - Poor asset quality.
  - Large share of fees and commissions in gross income of banks.
- Loan pricing is not risk-based; a flat rate is applied to a large pool of borrowers regardless of repayment capacity and collateral.
- Likely contributing factors: lack of competition, high profitability from buoyant FX income received by the NBT, public ownership and support (especially DBT), and lack of prudential regulations and supervision.
- Asset quality:
  - Substantially high NPL ratios at the NBT and the DBT but very low NPLs at the TNPF indicate insufficient borrower information at the two banks.
  - There is no central credit registry in Tuvalu.
  - No collateral registry; assets eligible as collateral are very limited; collateral recovery is inefficient.

### Cross-border transactions and trade
- FX transactions are in high demand because imports meet most needs and the public sector executes a large volume of FX transactions (grants, fishing licenses).
- NBT is currently the main institution offering FX services and a main driver of the bank’s profits.
- FX transactions are costly and time-consuming, creating friction in international trade.
- Result: almost non-existent exports; export of goods was 0.1 percent of GDP in 2020.

### Promising Fintech applications for Tuvalu — overview
- Fintech solutions could improve financial depth, inclusion, and efficiency by increasing efficiency, reducing processing time, and lowering cost of financial services.
- Fintech could especially enhance domestic payments and cross-border transactions, particularly FX transactions.
- Tuvalu should start with the most reliable fintech models and gradually integrate more sophisticated ones, accounting for limited technological skilled labor, low internet speed, and cellular network constraints.
- Three fintech models proposed: Model 1 Mobile Money, Model 2 E-money and Internet Banking, Model 3 Cross-border Payments.

### Model 1: Mobile Money — benefits and precedents
- Description: stores monetary value on a mobile phone and sends to other users via text messages; uses basic utility phone.
- Benefits:
  - Convenience of transferring funds and paying for goods and services.
  - Storage of money for savings and potential for paying salaries.
  - Reduces need for carrying cash; security via PIN access.
- International and regional precedents:
  - Kenya: mobile money raised access to formal banking services from 27 percent in 2006 to 83 percent in 2019 (Kenya 2019 FinAccess household survey); distribution of government transfers improved; associated with decline in poverty and increased occupational choice (Suri and Jack, 2016).
  - Fiji: mobile money transactions increased from 0.3 million in 2011 to 2.3 million in 2019 (Reserve Bank of Fiji).
  - Tonga and Samoa: in 2018, value of mobile money transactions reached 2.8 and 1.1 percent of GDP, respectively.

### Model 2: E-money and Internet Banking — benefits and sequencing
- Banks can automate services: account balance information, digitally provide documents, reduce need for branch visits.
- E-money: exists in banks’ computer systems; can be smart cards or network money; can be converted into fiat currency; facilitates digital payments.
- Benefits:
  - Overcomes cash handling inefficiencies; tracks historical transactions.
  - Reduces need for branch visits; always available.
  - More secure and transparent than fiat money but exposed to cybersecurity risks.
- Once widely adopted, transaction history can support data-intensive services:
  - Start with small loans to businesses and monitor performance.
  - Use digital footprints as inputs for borrower assessment.
- Mobile payments via bank accounts (e.g., QR code/SIM-based) can leverage cellular networks.

### Model 3: Cross-border Payments — benefits and AML/CFT considerations
- Digital payment solutions can reduce duration and fees of FX transactions, facilitating international trade, remittances, and international e-commerce.
- Compliance requirement:
  - Reliable KYC process is essential for international transactions and AML/CFT compliance.
  - A national digital ID could play an important role in identity verification, detection of suspicious transactions, and in developing a functioning financial intelligence unit.

### Public services and advanced fintech models
- Government can use digital payment networks to:
  - Deliver confidential, timely, and convenient cash transfers to vulnerable populations.
  - Reduce costs, increase efficiency and transparency, and enhance financial inclusion (government-to-person payments).
- Advanced models to consider once payment systems are established:
  - Digital credit (starting with small amounts and short maturity), investment, and insurance.
  - Use transaction activity data to supplement credit assessments.

### Developing an enabling environment — key elements
- Required elements: technological infrastructure, availability of IT experts, digital and financial literacy, a digital national identity, and supportive and prudent policies and regulations.
- Technological infrastructure:
  - Internet usage increased from 20 percent to 50 percent in 2019 during the past decade.
  - Mobile phone subscriptions rose from 10 percent in 2009 to 70 percent in 2019.
  - High access to electricity, covering almost all residents.
- Information technology expertise:
  - Primary education is compulsory and free; almost 100 percent literacy rate.
  - Government offers scholarships for international studies; could earmark scholarships for IT students.
  - Need skilled labor for hardware know-how, cloud services, data analytics, and cyber risk mitigation.
  - IT expertise supports fintech, e-commerce, and digital services.
- Financial and digital literacy:
  - Invest in financial and technological literacy so users understand consequences of digital financial services, implicit fees, and obligations in credit/investment/insurance contracts.
- National digital ID and credit registry:
  - A digital identity is a set of validated digital attributes and credentials for the digital environment and can facilitate AML/CFT compliance.
  - Tuvalu should carefully assess blockchain-based versus government-managed digital ID approaches and account for AML/CFT risks before issuing digital identity to non-residents.
  - Move towards establishing a secured national ID for all citizens and continue generating new IDs at birth.
  - A central data repository akin to a credit registry should be available to financial institutions to improve access to reliable credit information and support lending decisions.

### Policy recommendations and sequencing (implied from analysis)
- Strengthen prudential regulation and supervision of banks beyond current PERMU reporting.
- Address gaps in borrower information: establish a central credit registry and collateral registry.
- Promote branchless financial services: implement mobile money as an initial priority to improve inclusion for outer islands.
- Develop e-money and internet banking to reduce cash usage and build transaction histories for credit assessment.
- Implement reliable digital KYC and consider a national digital ID to facilitate cross-border payments and AML/CFT compliance.
- Invest in IT expertise (scholarships, training) and digital/financial literacy campaigns to support fintech uptake and mitigate cyber risks.
- Improve efficiency of cross-border FX transactions to lower costs and time, supporting trade and exports.

*Italic: IMF staff analysis based on chapter content.*

### Box 1. Using BSV for National Digital Ledger to Create Paperless Society/1

### Box 1. Using BSV for National Digital Ledger to Create Paperless Society/1

### Background
- Two main technologies for building a citizenship registry: a public “permissionless” Distributed Ledger Technology (DLT) or blockchain, and a private “permissioned” DLT.
- Examples of “permissionless” technology: Bitcoin, Bitcoin SV (BSV), Ethereum.
- Permissionless DLT characteristics:
  - Compared to a distributed database, encrypted to protect privacy.
  - Do not need any central authority to validate transactions, thanks to built-in protocols (with “Proof-of-work” noted as the most popular, and also the most controversial for its energy consumption).
  - Data is replicated; users’ transactions are verified across multiple anonymous computers (or pools of computers), called validators, which can be run by anyone anywhere in the world.
  - Described as a trustless model because no one, not even the original developers, can modify the way transactions are controlled.
  - Bitcoin is considered a first generation blockchain (limited in programmability or scalability), while Ethereum or BSV are examples of more advanced technologies.
  - BSV also allows a high number of transactions per second.
- Permissioned DLT characteristics:
  - Gives selected participants, such as a Central Bank or a Government agency, full control over the network, allowing them to see transaction details or to establish transaction rules.

### Considerations
- Both permissionless and permissioned technologies have advantages and shortcomings.
- Projects opting for “permissionless” technology (such as BSV) often aim to avoid central control by the authorities.
- “Permissioned” DLT requires higher investment cost, but eliminates some risks of not allowing any control.
- Almost all countries using blockchain as part of their digital strategy have opted for a “permissioned” DLT, rather than ”permissionless” BSV.
- Choice of technology is typically the outcome of:
  - A thorough business requirement phase (which does not involve any technology).
  - Followed by a market assessment to identify affected architectures, security requirements, stakeholders and success metrics.
- National Digital Identity project experience:
  - Several countries’ projects involve many technologies (hardly ever blockchain).
  - Countries need to adapt internal processes, cybersecurity and regulations before proceeding further.
  - Such a sequence allows governments to formulate and publish a call for tenders where bidders must prove a track record of successful implementation of digital identity projects.

### Risks
- Permissionless blockchain risks (that can be avoided by adopting a permissioned blockchain or another traditional technology):
  - Legal/privacy concerns: data privacy laws (for example, in Europe) don't allow storing private information on public blockchain because the information cannot be erased.
  - Sovereignty concerns: the sovereignty of the country's data on a “permissionless” distributed ledger should be assessed.
  - Energy consumption: BSV uses the same consensus protocol as Bitcoin, which consumes considerable energy.
    - Given Tuvalu’s well-known exposure to climate change, Tuvalu may face reputational risks when greener permissioned blockchain alternatives are available.
- Security risk specific to permissionless DLT:
  - Footnote: “An important exception exists: 51% of the validators could in theory coalesce to game the system. It has happened in several ‘permissionless’ DLT in the past, but not yet in Bitcoin nor Bitcoin SV.”

### Alternatives and Implementation Path
- DLT remains an important technology under research; standards have yet to be widely adopted.
- Short-term alternatives:
  - Traditional technologies (encrypted databases and data management models) are readily available to achieve digital identity objectives.
  - Widely used and field-tested open-source solutions, such as the Gates Foundation’s Modular Open Source Identity Platform (MOSIP), could allow rapid implementation of digital identity while DLT relevance and risk mitigation are further analyzed.

- Recommended sequencing and procurement approach implied by the assessment:
  - Conduct business requirements and market assessment before selecting technology.
  - Adapt internal processes, cybersecurity, and regulations first.
  - Use a call-for-tenders process requiring bidders to prove a track record in digital identity implementation.

- Trade-offs summarized:
  - Permissionless (e.g., BSV): potential to avoid central control, high transaction throughput, but legal, sovereignty, energy, and reputational risks.
  - Permissioned DLT: higher investment cost, but more control, lower legal/privacy exposure, and potentially greener/less reputational risk.

- Attribution and preparatory note:
  - Prepared by M. Bazarbash, S. Nunhuck, and H. Tourpe.

*International Monetary Fund — Box 1. Using BSV for National Digital Ledger to Create Paperless Society/1*

### References

### 1tuvea2021001 - References

### Fund relations and membership
- Joined June 24, 2010; Article VIII.
- Quota: SDR Million 2.50 (100.00 percent).
- Fund holdings of currency (Exchange Rate): SDR Million 1.89 (75.72 percent).
- Reserve Tranche Position: SDR Million 0.61 (24.32 percent).
- Net cumulative allocation (SDR Department): SDR Million 1.69 (100.00 percent); Holdings: SDR Million 1.08 (64.22 percent).
- Outstanding Purchases and Loans: None.
- Financial Arrangements: None.
- Projected Payments to the Fund: None.
- Article IV consultation: previous discussions held in Funafuti in May 2016; staff report discussed by the Executive Board on September 12, 2016. Tuvalu is on a 24-month consultation cycle.
- Legal tender: Australian dollar. No central monetary institution. National Bank of Tuvalu (NBT) is the only commercial bank handling foreign exchange transactions.

### Relations with other international financial institutions and PFTAC assistance
- PFTAC technical assistance days:
  - FY2019: 96 days.
  - FY2020: 89 days (May 2019 - Apr 2020).
  - FY2021: 94 days (May 2020 - Apr 2021).
- Resident Representative Office for Pacific Islands based in Suva, Fiji; opened September 13, 2010. Ms. Leni Hunter is the current resident representative.
- PFTAC recent areas of assistance: tax policy and administration (2007, 2008, 2010, 2016, 2017); financial sector supervision (2008, 2016, 2017); balance of payments and national accounts statistics (2006, 2008-10, 2012-18).
- FY2022 PFTAC workplan focuses on:
  - enhancement of prudential and risk management standards and review off-site financial risks analysis;
  - update External Sector Statistics and GDP data, and support GDP forecasting;
  - update capital spending classification, implement arrears management and commitment controls;
  - improve tax audits and revenue administration by enhancing the Computer Information System.

### Capacity development activities (selected entries)
- FY 2021 (94 days of TA, May 2020 - Apr 2021):
  - Real Sector Statistics: Rebase and update GDP(P) and train staff in National Accounts methods and data sources (PFTAC).
  - External Sector Statistics: Compile and disseminate external sector statistics for 2017-2020 (PFTAC).
  - Revenue Administration: Three separate TA missions to develop tax administration by reviewing the compliance improvement strategy and development of a Corporate Plan and Business Continuity Plans (PFTAC).
- FY 2020 (89 days of TA, May 2019 - Apr 2020):
  - Financial Sector Supervision: Develop a banking supervision framework (PFTAC).
  - Real Sector Statistics: Assist with National Accounts rebasing (PFTAC).
  - External Sector Statistics: Improve BOP coverage and methodology (PFTAC).
  - Macroeconomic Management: Support GDP forecasting (PFTAC).
  - Public Financial Management: Improve the multiyear budget process for infrastructure and capital (PFTAC/PRIF).
  - Revenue Administration: Develop tax administration and rollout of VAT audit toolbox (PFTAC).
- FY 2019 (96 days of TA, May 2018 - Apr 2019):
  - Financial Sector Supervision: Assistance to develop a banking supervision framework (PFTAC).
  - Government Finance Statistics: Compile, review and disseminate data to the IMF Statistics Department (PFTAC).
  - Real Sector Statistics: Create the Tuvalu Economic Indicators (TEI) database; update GDP estimates incorporating HIES 2016 data (PFTAC).
  - Macroeconomic Programming and Analysis: Develop GDP forecasting and enhance the medium-term fiscal framework (PFTAC).
  - Revenue Administration: Strengthen core tax functions and modernize IT systems (PFTAC).

### Statistical issues and data adequacy for surveillance
- General: Data have serious shortcomings that significantly hamper surveillance; most serious in national accounts and monetary statistics. CSD will need to train additional staff.
- National accounts:
  - GDP recently rebased to 2016 and updated to 2019.
  - Compilation methodology gradually improving with PFTAC assistance; attention needed to reduce reliance on fixed ratios and long-standing assumptions.
- Price statistics:
  - CPI is the only price index compiled; quarterly CPI of reasonable quality but with long lags and very poor dissemination.
  - CPI expenditure weights revised in 2011 based on the 2010 HIES. Next HIES not scheduled until 2021.
- Government finance statistics (GFS):
  - Tuvalu neither compiles nor publishes GFS data. MoF issues monthly fiscal statements of central government data.
  - IPSAS (cash) and IFRS (accrual) accounting standards applied for public sector entities.
  - GFS classification of current, capital and special development expenditures needs improvement to align with international standards.
  - New FMIS using GFS classification is being implemented; full operation around July 2021 could enable annual GFS compilation and quarterly GFS in the near term.
- Monetary and financial statistics:
  - No monetary authority; monetary and financial statistics are not currently produced.
  - Foreign assets of National Bank of Tuvalu and the Consolidated Investment Fund constitute the official reserves of Tuvalu.
  - The National Bank and the Development Bank provided balance sheets used to produce monetary data on the two banks.
- Financial sector surveillance:
  - Tuvalu does not compile Financial Soundness Indicators (FSIs).
- Balance of payments and IIP:
  - Prior to April 2021, CSD compiled only trade in goods and did not compile BOP. A TA mission in April 2021 compiled BOP data till 2019.
- Data standards:
  - Tuvalu began participating in the General Data Dissemination System (GDDS) in 2013 and joined the enhanced GDDS (e-GDDS) as of May 2015.
  - No Reports on the Observance of Standards and Codes (ROSC) for Tuvalu are available.
- Reporting to STA:
  - Annual balance of payments and IIP statements, both in BPM6 format, were submitted to STA in April 2021 for the first time.

### Table of Common Indicators Required for Surveillance (as of April 30, 2021) — selected entries (Date of Latest Observation / Date Received / Frequency of Data / Frequency of Reporting / Frequency of Publication)
- Exchange rates: 04/2021 / 04/2021 / D / NA / NA.
- International reserve assets and reserve liabilities of the monetary authorities: 12/2020 / 04/2020 / A / I / NA.
- Consolidated balance sheet of the banking system: 12/2020 / 04/2021 / A / I / NA.
- Consumer price index: Q1/2020 / 05/2020 / Q / Q / NA.
- Revenue, expenditure, balance and composition of financing — central government: 12/2020 / 04/2021 / Q / Q / Q.
- Stocks of central government and central government-guaranteed debt: 12/2020 / 04/2021 / A / A / NA.
- External current account balance: 12/2019 / 04/2021 / A / A / A.
- Exports and imports of goods and services: 12/2019 / 04/2021 / A / A / A.
- GDP/GNP: 12/2019 / 04/2021 / A / A / NA.
- International investment position: 12/2019 / 04/2021 / A / A / A.
- Gross external debt: 12/2021 / 04/2021 / A / A / NA.
- Notes:
  - Tuvalu uses the Australian dollar as its legal tender.
  - Tuvalu does not have a monetary authority; foreign assets of NBT and the Consolidated Investment Fund constitute official reserves.
  - Frequency codes: D (Daily); W (Weekly); M (Monthly); Q (Quarterly); A (Annually); I (Irregular); NA (Not Available).

### Debt Sustainability Analysis (DSA) — summary findings and public debt coverage
- Overall assessment:
  - Tuvalu remains at a high risk of debt distress, unchanged from the 2018 DSA.
  - While government’s fiscal position in 2020 remained in surplus, under current policies Tuvalu is projected to face persistent fiscal deficits going forward.
  - Projection horizon extended to 20 years (to adequately capture vulnerability to natural disasters and climate change) instead of the standard ten years.
  - Present Value (PV) of external and total public debt-to-GDP ratios currently remain below their respective thresholds, but are projected to breach thresholds under the baseline scenario in the long run.
  - Key risks: elevated current spending; high reliance on fishing revenues and grants; risks of natural disasters.
  - Assessment judgment: Tuvalu is at a high risk of external and public debt distress due to exposure to climate shocks. Despite upward trending debt burden indicators, Tuvalu’s debt is assessed as sustainable based on assumptions of continued access to external budget support on concessional terms, low debt service ratios throughout the projection horizon, and significant cash buffers in the Consolidated Investment Fund (CIF).
- Public debt coverage and recent developments:
  - DSA coverage: concessional debt of the central government and debt of State-Owned Enterprises (SOEs).
  - Total official public debt (incl. SOEs) stood at 7.3 percent of GDP in 2020.
  - Official public debt (excl. SOEs), consisting only of external debt with an average maturity of 29 years, stood at 5.5 percent of GDP.
  - About 60 percent of the debt is denominated in U.S. dollar (after accounting for its weight in SDR).
  - In 2020, authorities began reporting SOE debt implicitly guaranteed by the government: domestic debt to the National Bank of Tuvalu (NBT) in the form of lines of credit amounted to AUD1.4 million, or 1.8 percent of GDP.
  - SOE loans do not carry an explicit government guarantee but may be regarded as effectively guaranteed given SOEs are wholly owned by the government; included in baseline government debt rather than treated as contingent liabilities.
  - Bilateral donors provide only grant assistance; multilateral development institutions provide both grants and concessional lending.
  - No sub-government structures able to contract debt; no central bank. Coverage of public debt in the baseline is deemed complete according to staff knowledge.

*Source: 1tuvea2021001 - References*

### 2. Between 2018 and 2020, Tuvalu’s total debt has declined from 13.1 to 7.3

### 2. Between 2018 and 2020, Tuvalu’s total debt has declined from 13.1 to 7.3 percent of GDP.

### Debt levels and composition
- Total debt: 13.1 percent of GDP in 2018; 12.8 percent of GDP in 2019; 7.3 percent of GDP in 2020.
- Total public and publicly guaranteed debt: 9.6 percent of GDP in 2018; 10.6 percent of GDP in 2019; 5.5 percent of GDP in 2020.
- Lender-level public debt (in millions of AUD and percent of GDP):
  - ADB: 5.7; 5.2; 4.4 (8.9; 6.6; 5.5 percent of GDP for 2018; 2019; 2020 respectively)
  - EIB: 0.5; 0.0; 0.0 (0.7; 0.0; 0.0 percent of GDP)
  - ICDF (Taiwan Province of China): 0.0; 3.1; 0.0 (0.0; 4.0; 0.0 percent of GDP)
  - Total (in millions of AUD): 6.2; 8.3; 4.4 (9.6; 10.6; 5.5 percent of GDP)
- Loan currency breakdown (in millions of AUD and percent of GDP):
  - USD: 1.9; 4.7; 1.2 (3.0; 6.1; 1.5 percent of GDP)
  - EUR: 1.7; 1.1; 1.0 (2.6; 1.4; 1.2 percent of GDP)
  - RMB: 0.4; 0.4; 0.3 (0.6; 0.5; 0.4 percent of GDP)
  - JPY: 0.3; 0.3; 0.3 (0.5; 0.4; 0.3 percent of GDP)
  - GBP: 0.3; 0.3; 0.3 (0.5; 0.4; 0.3 percent of GDP)
- SOE debt (implicitly guaranteed by the government), in millions of AUD and percent of GDP:
  - Tuvalu Electric Corporation: 0.8; 0.3; 0.2 (1.3; 0.4; 0.3 percent of GDP)
  - Tuvalu Telecom Corporation: 1.3; 1.3; 1.1 (2.1; 1.7; 1.4 percent of GDP)
  - Tuvalu Philatelic: 0.1; 0.1; 0.0 (0.1; 0.1; 0.1 percent of GDP)
  - Total SOE debt: 2.2; 1.7; 1.4 (3.5; 2.2; 1.8 percent of GDP)

### External assets and Tuvalu Trust Fund (TTF) / CIF
- Market value of TTF: around 240 percent of GDP in 2020; 143 percent of GDP in 2013.
- TTF governance: administered by a Board with representatives from Tuvalu, Australia, and New Zealand; not fully sovereign.
- When TTF market value exceeds its “maintained value” (indexed to the Australian CPI), excess funds are transferred to the CIF.
- CIF is controlled by Tuvaluan authorities and is used as a cash buffer to finance fiscal expenditures.
- Since 2012 the authorities used CIF to finance budget deficit only in 2019, at AUD1.6 million (2 percent of GDP).
- CIF transfers are subject to rule of leaving at least 16 percent of the TTF maintained value in the CIF.

### Debt-carrying capacity and Country Policy and Institutional Assessment (CPIA)
- Composite Indicator (CI) score: 2.62 (CI rating: Weak).
- CI components and contributions (coefficients and 10-year averages as presented):
  - CPIA: coefficient 0.385; 10-year average 2.866; contribution 1.104 (42%)
  - Real growth rate: coefficient 2.719; 10-year average 4.160; contribution 0.114 (4%)
  - Import coverage of reserves: coefficient 4.052; 10-year average 57.588; contribution 2.338 (89%)
  - Import coverage of reserves^2: coefficient -3.990; 10-year average 33.164; contribution -1.32 (-50%)
  - Remittances: coefficient 2.022; 10-year average 0.000; contribution 0.000 (0%)
  - World economic growth: coefficient 13.520; 10-year average 2.928; contribution 0.401 (15%)
- The CI index based on the 2018 DSA vintage was 2.7 (medium debt-carrying capacity); downgraded in 2021 due to newly added variables lowering the CPIA score.

### Baseline macroeconomic and fiscal assumptions underpinning the DSA
- Real GDP growth:
  - 2020: 1 percent (pandemic-induced slowdown)
  - 2021: rebound to 2.5 percent
  - Peak at 4 percent in 2024
  - Long-term moderation to 2 percent towards end of projection horizon
  - From 2027 on, baseline includes cost of natural disasters and climate change at 1 percent of GDP per year on average.
- Inflation:
  - Projected to rise to 3.1 percent by 2026
  - Projected to moderate to 2 percent in the long run
- Balance of payments:
  - Current account: swing from an estimated 3.8 percent of GDP surplus in 2020 to a 4.1 percent of GDP deficit in 2021
  - Medium-term current account deficit projected at around 3 percent of GDP on average
  - Fishing license revenues projected to stabilize at around 40 percent of GDP (ten-year average)
  - Exports of goods and services projected at around 11 percent of GDP in medium and long term
- Fiscal balance:
  - 2020 budget closed with 5 percent of GDP surplus
  - 2021 general government balance projected to shift to a deficit of 7 percent of GDP
  - Planned national airline expenditure: AUD13mln or 16 percent of GDP (2021)
  - Long-term projections: fishing revenues plateau at 40 percent of GDP; DotTv fees projected to fall to 7 percent of GDP; foreign grants projected to decline to 22 percent of GDP
  - Total expenditures projected to decline from around 116 percent of GDP (five-year average) to around 100 percent of GDP over time
  - General government deficit projected to widen to 4.6 percent of GDP in the medium term and 6.0 percent of GDP by 2041
  - Domestic current balance projected to 54 percent of GDP by 2041 (domestic current balance excludes fishing revenues, grants, and capital expenditure)
- Deficit financing assumptions:
  - Authorities expect at least USD7.5 million in FY 2021 and 2022 in grants from ongoing IDA budget support; long-term average minimum USD5 million annually from that support
  - Average annual IDA net flows outside budget support projected around USD13 million over long-term
  - Continued support from ADB, Australia, New Zealand, and Taiwan Province of China envisaged, though total grants projected to decline as share of GDP
  - Government projected to fund fiscal deficits with transfers from the CIF first, subject to leaving at least 16 percent of TTF maintained value in CIF
  - When CIF transfers insufficient, projected borrowing initially fully on concessional terms; additional commercial borrowing assumed at end of projection horizon
  - Under baseline, no CIF transfers projected after 2031 as the Fund does not hold sufficient assets
  - No domestic borrowing envisaged

### Debt dynamics, risks, and realism tests
- Realism tools suggest projections are reasonable; differences with 2018 DSA explained by early repayment of NAFICOT and ICDF loans and changes in macro-fiscal assumptions.
- Public debt trajectory remains below 2016 DSA assumptions.
- Large residuals in public debt explained by CIF transfers financing deficits before external borrowing.
- Stress-test findings:
  - One standard deviation shock to export growth would cause external debt-to-GDP ratio to breach indicative threshold in 2023.
  - A one-time 30 percent decline in prices of agricultural commodities would cause public debt-to-GDP ratio to breach indicative threshold in 2025 and remain above it throughout projection period.
  - Debt indicators show exponential trend under shocks.
- Risk ratings:
  - Mechanical risk ratings for external and public debt: moderate.
  - Final risk of debt distress: high (staff judgement), with projection horizon extended to 20 years to account for climate and disaster risks.
  - External and public debt-to-GDP ratios projected to breach thresholds in 2038 and 2039, respectively.
  - Debt service-to-revenue and debt service-to-export ratios remain low, below DSA thresholds, as borrowing is projected concessional.

### Alternative scenarios and tailored stress tests
- Tailored stress test — commodity price decline:
  - Price of fishing license fees projected to decline by 30 percent.
- Adjustment scenarios:
  - Authorities implement reforms to increase efficiency of public spending on TMTS and overseas education scholarships, align public sector wage growth with productivity gains, and continue public enterprise reform.
  - Under adjustment scenarios, they target the current deficit of 40 percent of GDP, attaining it in 2041 (scenario 1), allowing buildup of fiscal buffers for climate infrastructure and disaster impact.
- Fishing revenue shock:
  - Fishing revenue assumed to decline to 35 percent of GDP after 2031 due to changes in weather patterns.
  - Revenue shortfall would widen fiscal deficit to 12 percent of GDP by 2041.
- Natural disaster scenario:
  - Cyclone similar to 2015 Pam in 2022 causing damage of 30 percent of GDP.
  - Recovery and rehabilitation over five years, widening fiscal deficit to 11 percent of GDP in 2031 (compared to 6 percent baseline) and adding around 1 percent to the deficit in 2032-36.
  - Donor community largely meets need for rebuilding spending, mitigating impact on deficit and debt to 10 percent of GDP.
  - Higher deficits would accelerate depletion of fiscal buffers and cause present value of debt-to-GDP to breach threshold earlier.
- Positive grant shock:
  - Grants remain high; projected to remain at 30 percent of GDP (average over the last five years).
  - Under this upside scenario, debt-to-GDP ratio would remain well below the indicative threshold.
- Alternative scenarios summary:
  - Adjustment scenarios eliminate risk of debt distress while preserving fiscal space for climate resilience.
  - Natural disaster or fishing revenue shocks cause earlier breaches of PV of debt-to-GDP threshold than baseline.
  - Higher grants improve debt outcomes.

### Policy implications and reform priorities (as presented)
- Use CIF transfers prudently while maintaining at least 16 percent of TTF maintained value in CIF as a buffer.
- Prioritize efficiency-enhancing reforms:
  - Increase efficiency of public spending on TMTS and overseas education scholarships.
  - Align public sector wage growth with productivity gains.
  - Continue public enterprise reform to reduce drag from inefficient SOEs.
- Rely on concessional external borrowing when CIF is insufficient, and avoid domestic borrowing given lack of domestic financial markets.
- Preserve fiscal space to invest in climate change resilience and disaster preparedness.
- Manage expectations about fishing revenue and DotTv license fees given projected declines.

*Sources: Tuvaluan authorities; and IMF staff estimates.*

### 13. Tuvalu remains at high risk of debt distress, unchanged from the conclusions of

### 13. Tuvalu remains at high risk of debt distress, unchanged from the conclusions of 

### Risk assessment and baseline scenario
- Tuvalu remains at high risk of debt distress, unchanged from the conclusions of the 2018 DSA.
- Under the baseline scenario:
  - Tuvalu would face persistent budget deficits due to elevated current spending and the need to maintain infrastructure spending amid declining fishing revenues and grants.
  - In the long term, existing buffers would be insufficient to finance deficits, thus necessitating external borrowing.
- The debt trajectory underscores the importance of targeting a small fiscal surplus to lower the risk of debt distress while maintaining fiscal space to:
  - preserve buffers, and
  - allow for climate adaptation efforts.
- Continuing structural reforms is important to ensure donor support in the form of grants.
- Higher spending efficiency and domestic revenue mobilization efforts would help.

### Debt sustainability and mitigating factors
- Despite the high risk rating, Tuvalu’s debt is rated as sustainable.
- Several factors mitigate Tuvalu’s debt vulnerability:
  - Tuvalu currently only receives budget support in the form of grants from development partners while the DSA assumes debt financing in the medium-term.
  - The authorities have significant cash buffers, and could, in principle, allow a drawdown of the CIF below the threshold of 16 percent of TTF.

### Authorities’ views
- Authorities’ views are presented (section heading preserved).

*Source: 1tuvea2021001 - 13. Tuvalu remains at high risk of debt distress, unchanged from the conclusions of*

### 15. The authorities agreed with the DSA assessment. They noted that, to mitigate risks,

### 15. The authorities agreed with the DSA assessment. They noted that, to mitigate risks,

### Authorities' agreement and immediate risk-mitigation measures
- Authorities concurred with the DSA assessment and decided not to incur any new debt, either in concessional or commercial terms, over short- to medium-term.
- Their latest budget included an assessment of risks stemming from explicit and implicit government guarantees.
- Authorities plan to rely on grants from development partners to fund infrastructure projects to help contain fiscal risks.
- Planned reforms to budget formulation, execution, and reporting are intended to improve fiscal planning and keep expenditures within planned budgetary allocations.

### COVID-19 response, recent developments, and outlook
- With early stringent border controls and quarantine procedures, the economy grew by 1 percent in 2020.
- As of July 1, 2021, Tuvalu has received sufficient vaccines for the entire adult population via COVAX and donations from Australia and New Zealand.
- The authorities aim to vaccinate all over-18s with a second dose of the AstraZeneca by early October 2021.
- Staff projected a 3.5 percent recovery in GDP growth in 2022; authorities agree with this projection but note downside risks from continued border closures and delayed infrastructure projects.
- All international flights were once again suspended in April this year, except for priority medical supplies.
- The COVID response alert level was elevated, the State of Emergency extended to the end of 2021, and authorities stepped up support for Tuvaluans on temporary educational and medical travel in Fiji.
- Authorities committed to work with development partners on flexible utilization of remaining COVID grants within the Talaaliki Plan, and to publish audited COVID spending on the Ministry of Finance’s and Auditor General’s websites.
- Authorities expect a small budget surplus for 2021 due to likely savings from both current and capital budgets; any shortfall in revenues will be compensated by reserves in the Consolidated Investment Fund.

### Fiscal policy stance and reforms
- Authorities agree on the need for a long-term fiscal anchor and that a domestic current deficit of 40 percent of GDP is an appropriate target to facilitate reserve accumulation.
- Committed reform areas:
  - Enhance efficiency of major spending items: wage bill, Tuvalu Medical Treatment Scheme, tertiary scholarships, SOE Community Service Obligations (CSOs), and government travel.
  - Continue domestic revenue mobilization via strengthened tax administration and compliance.
  - Adopt a revised PFM Roadmap later this year to:
    - Improve budget preparation using the 2014 Government Finance Statistics Manual (GFSM) format.
    - Support resumption of publication of quarterly budget outturns.
    - Ensure timely audits of government annual accounts.
    - Improve transparency of procurement processes.
    - Develop a medium-term infrastructure maintenance plan.

### Climate change, climate finance, and institutional measures
- Tuvalu remains critically vulnerable to climate change; authorities are aggressively pursuing multilateral climate resources for adaptation and resilience.
- A Climate Finance Unit will be established to coordinate mobilization of international climate finance.
- Authorities indicated interest in the Fund’s CCPA (now known as the CMAP), ideally within the next two years, to help integrate climate resilience into the macroeconomic framework and meet multilateral climate fund requirements.
- Authorities note geographic and physical constraints: population about 11 thousand; located around five thousand kilometers from the nearest continent; highest point on the main island is just 5 meters above sea level.

### Financial sector and payments connectivity
- Currency and monetary arrangements: Australian dollars are legal tender; Tuvalu has no central bank.
- Authorities recognize the need for effective banking supervision and value continued PFTAC engagement.
- Following the sudden loss of the National Bank of Tuvalu’s Correspondent Banking Relationship earlier this year, authorities sought assistance from the Asia Pacific Group on Anti-Money Laundering and the Fiji Financial Intelligence Unit on AML/CFT.
- Authorities seek IMF assistance on CBR challenges given the risk of being cut off from the international payments system.
- Exploring Fintech options under the national ICT policy to improve financial deepening and inclusion; considering a national digital ledger, possibly via the Bitcoin SV platform, with engagement of partners including IMF’s ITD.

### Structural reforms and public enterprises
- Structural reform agenda guided by the national development plan (Te Kete) aims to diversify the economy away from fishing revenues and budget support.
- Priorities include strengthening the domestic airline to stimulate inter-island trade and enable small-scale local production, including agriculture.
- Considering a citizenship-by-investment scheme to boost infrastructure spending, with safeguards consistent with AML/CFT requirements.
- SOE reforms: progress noted, with further work on performance-based management for General Managers and Boards, improved corporate planning and reporting, and containment of CSO-related fiscal costs via a rules-based compensation system.

### Capacity development and Fund engagement
- Authorities appreciate Fund TA and want the Fund to lead CD coordination among partners in statistics, PFM, and the financial sector.
- Requested PFTAC assistance on budget preparation, including review of fiscal ratios for long-term policy planning.
- Seek enhanced succession planning to mitigate high staff turnover in small administrations.
- Requested an annual update of staff’s macroeconomic forecasts between AIV missions to support planning and budget preparation (AIV consultations are on a 24-month cycle).

*Source: Tuvalu—2021 Article IV staff report and authorities' statement.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1tuvea2021001.pdf_