## KIRIBATI STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION

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### Recent developments, outlook, and risks
- Real GDP growth:
  - recovered strongly in 2021 with growth of 7.9 percent; real GDP growth is estimated at 1.2 percent in 2022 and projected at 2.5 percent in 2023.
  - In the medium term, real GDP growth is projected to converge to its historical average of 2 percent.
- Inflation:
  - headline inflation averaged 5.3 percent in 2022 and jumped to 16.2 percent (y-o-y) in December 2022 from 2.5 percent in December 2021.
  - Headline inflation is projected to increase to 8.6 percent in 2023.
  - An acceleration in prices of food and non-alcoholic beverages (mainly sugar) accounted for close to 70 percent of the rise in inflation.
- External sector:
  - Current account expected to swing from a surplus to a deficit of 4 percent of GDP in 2022.
  - Current account expected to return to a surplus of 8 percent of GDP in 2023 but remain below the historical average due to increased imports for infrastructure projects.
- RERF and external balances:
  - Balance of the RERF declined by about 12 percent in 2022.
  - Staff assess Kiribati’s external balance in 2022 is broadly in line with fundamentals and desirable policy settings, with significant uncertainty.
- Risks:
  - Downside risks predominate: intensification of the war in Ukraine, commodity price volatility, abrupt global slowdown, geo-economic fragmentation, prolonged global financial market volatility affecting returns on the RERF and the KPF.
  - Climate change remains a constant risk threatening fishing revenues and economic growth.
  - Upside: reopening PIPA sustainably could boost fishing revenues in the medium term.

### Executive Board assessment and macro summary
- Directors endorsed staff’s appraisal:
  - Economy expanded after removal of COVID-19 restrictions in the second half of 2022.
  - Growth decelerated to 1.2 percent in 2022 mainly due to a domestic outbreak of COVID-19 and lockdowns; growth projected at 2.5 percent in 2023.
- Inflation pickup attributed to a recovery in domestic demand, supply shortages, and elevated commodity prices and freight costs.
- External position assessed as broadly in line with fundamentals and desirable policies.

### Fiscal risks and main policy recommendations
- Fiscal consolidation required given volatile fishing revenues and dependence on donor grants.
  - Implement fiscal consolidation by scaling back recurrent spending while ensuring the social safety net is well-targeted and efficient.
  - Consolidate recurrent spending and improve targeting and efficiency of the social safety net.
- Revenue and fiscal framework:
  - Enhance revenue mobilization to finance development goals.
  - Formulate a sustainable medium-term fiscal framework (MTFF) that integrates rules-based withdrawals from the RERF.
  - Provide for climate change adaptation costs in the budget.
- Public financial management (PFM) improvements:
  - Continue implementation of the Integrated Financial and Management Information System (IFMIS).
  - Strengthen cash flow management; finalize draft updated Public Financial Management Act; strengthen budget planning; publish fiscal reports more regularly; execute effective controls over cash balances; improve procurement controls.
- RERF and financing:
  - Encourage rules-based withdrawals and prudent management of sovereign wealth resources.

### State-owned enterprises (SOEs) and public sector governance
- SOE reform priorities:
  - Recalibrate SOE tariffs to improve financial viability while protecting the most vulnerable.
  - SOE monitoring unit progressing; continue building capacity to analyze and monitor SOE activities, risks, and performance.
  - Ensure SOEs improve financial management and publish audited financial statements in a timely manner.
  - Continue exploring divestment and outsourcing of SOE activities.
  - Phase out SOE tax exemptions to level the playing field with the private sector.
- Authorities’ stance:
  - Do not plan to roll back recurrent spending for the time being; view copra subsidy and unemployment benefits as crucial.
  - Do not view enforcing dividend payments or immediate divestment of SOEs as current priorities.

### Structural reforms, private sector, and natural resources
- Growth and structural reform impact:
  - Structural reforms that raise human capital, labor market participation, and investment can improve potential growth from 2 percent to 4 percent.
  - Private sector accounts for around 30 percent of total employment.
- Export competitiveness and diversification:
  - Fisheries and copra account for more than 90 percent of total exports in 2021.
  - Suggested measures: expand tuna processing, establish “tuna hubs”, package/upgrade copra into virgin coconut oil, reform copra subsidy program, improve air transport, ports, shipping services, boost telecommunications, build a skilled workforce, enhance access to finance.
- Natural resources management:
  - Operationalize the Environment Act and Fisheries Act by developing regulations and monitoring capacity.
  - Reopening the Phoenix Islands Protected Area (PIPA) to commercial fishing should be carefully designed with a fully developed marine spatial plan.

### Data, statistics, and capacity development
- Need to strengthen institutional capacity to produce high-quality national accounts, government finance statistics, and financial sector data in a timely manner.
- Authorities plan to implement the IMF’s Enhanced General Data Dissemination System (e-GDDS) by publishing economic data on a National Summary Data Page (NSDP).
- Continued capacity development will facilitate data-based policymaking.

### Key quantitative indicators (selected, as reported)
- Real GDP (percent change): 2019 -2.1; 2020 -1.4; 2021 7.9; 2022 1.2; 2023 2.5; 2024 2.4; 2025 2.3; 2026 2.1; 2027 2.1; 2028 2.1.
- Consumer prices (percent change, average): 2019 -1.8; 2020 2.6; 2021 2.1; 2022 5.3; 2023 8.6; 2024 4.5; 2025 2.1; 2026 1.9; 2027 1.8; 2028 1.8.
- Inflation (end of period): 2019 -0.9; 2020 2.8; 2021 2.5; 2022 16.2; 2023 -2.2; 2024 5.0; 2025 1.9; 2026 2.1; 2027 1.8; 2028 1.8.
- Central government finance (percent of GDP): Revenue and grants: 2019 147; 2020 132; 2021 100; 2022 91; 2023 102; 2024 105; 2025 104; 2026 102; 2027 98; 2028 97.
- Of which: fishing revenue (percent of GDP): 2019 90; 2020 71; 2021 56; 2022 44; 2023 45; 2024 47; 2025 47; 2026 49; 2027 48; 2028 48.
- Expenditures (percent of GDP): 2019 134; 2020 127; 2021 112; 2022 111; 2023 114; 2024 117; 2025 116; 2026 113; 2027 113; 2028 112.
- Overall balance (percent of GDP): 2019 13; 2020 4; 2021 -11; 2022 -20; 2023 -12; 2024 -12; 2025 -11; 2026 -10; 2027 -15; 2028 -15.
- Current account including official transfers (In millions of US$): 2019 87; 2020 71; 2021 20; 2022 -9; 2023 21; 2024 27; 2025 32; 2026 35; 2027 18; 2028 20.
- Current account (In percent of GDP): 2019 49; 2020 40; 2021 9; 2022 -4; 2023 8; 2024 10; 2025 12; 2026 12; 2027 6; 2028 6.
- External debt (millions of US$): 2019 39; 2020 40; 2021 37; 2022 33; 2023 32; 2024 61; 2025 90; 2026 117; 2027 157; 2028 195.
- Closing RERF balance (millions of A$): 2019 1,153; 2020 1,172; 2021 1,353; 2022 1,194; 2023 1,115; 2024 1,200; 2025 1,291; 2026 1,390; 2027 1,512; 2028 1,640.
- Nominal GDP (millions of A$): 2019 252; 2020 258; 2021 303; 2022 322; 2023 358; 2024 383; 2025 400; 2026 416; 2027 432; 2028 449.
- Nominal GDP (millions of US$): 2019 175; 2020 178; 2021 228; 2022 224; 2023 248; 2024 263; 2025 273; 2026 284; 2027 295; 2028 306.

### Debt sustainability, external position, and policy implications
- External position:
  - Staff estimate the CA norm to be broadly in the range of 11 percent of GDP.
  - CA surplus since 2014 reflects a higher primary income balance more than offsetting a large trade deficit; fishing license fees averaged 67 percent of GDP in 2013–21.
  - CA is estimated to turn to a deficit of 4 percent of GDP in 2022 and projected to improve to a surplus in 2023.
- DSA findings:
  - Risk rating of external debt distress: High.
  - Overall risk of debt distress: High.
  - Composite Indicator (CI) index: 2.70 indicating "medium" debt-carrying capacity.
  - PV of the PPG external debt-to-GDP ratio is expected to breach the indicative threshold (40 percent) in 2030 under the baseline.
  - PV of the total public debt-to-GDP ratio is expected to breach the indicative benchmark (55 percent) starting in 2031 under the baseline.
  - Stress tests show vulnerability to shocks; extreme scenarios cause earlier breaches (e.g., breaches from 2026 under some extreme tests).
- Policy implications:
  - Maintain prudent fiscal policy and build fiscal buffers.
  - Avoid new non-concessional borrowing; secure donor grants.
  - Fiscal consolidation through scaling back recurrent spending and mobilizing higher revenue.
  - Continue grants to support large development needs and preserve RERF under rules-based withdrawals.
  - Maintain cash buffers of at least three months of government spending.

### Climate change: vulnerability, costs, and policy options
- Climate vulnerability and urgency:
  - Kiribati is highly vulnerable as a low-lying atoll; sea level rise has already caused territory loss and forced relocations.
  - Ocean acidification and other hazards threaten fisheries and livelihoods.
- Adaptation and institutional developments:
  - Environment Bill passed in December 2021; regulations planned to be finalized in 2023.
  - Cabinet approved Disaster Risk Management and Climate Change Regulations (2022).
  - Example project: South Tarawa Water Supply Project (desalination powered by solar panels).
- Mitigation and renewable energy:
  - Share of renewable energy in South Tarawa expected to increase to 44 percent from 9 percent when an ongoing project completes in 2024.
  - NDCs (2022 revision): committed to reducing per capita emissions by about 8 percent by 2030; by up to more than 23.8 percent by 2030 conditional on access to financial and technical resources.
- Costs and financing gaps:
  - World Bank estimate of annual adaptation costs for coastal protection and infrastructure adaptation: range between 4 to 11 percent of GDP by 2040.
  - IMF staff recommendation: create an exclusive budget line for climate-related spending needs at about 6 percent of GDP by 2030.
  - Kiribati needs external support; approved funds to date cover only a small fraction of needs.
- Policy guidance:
  - Short term: seek bilateral or multilateral donor funding for immediate projects.
  - Medium to long term: embed climate projects in a national strategy; improve PFM and public investment management capacity; coordinate regionally with other Pacific Island countries.

### Governance, financial sector, human capital, and capacity development
- Education and gender:
  - Finding: only 20 percent of young population have completed upper secondary education.
  - Recommendation: expand technical vocational education and training.
  - Recommendation: consider additional legal reforms to promote gender equality (e.g., equal rights to immovable property).
- Financial intermediation and access:
  - About 15 percent of the population own a bank account.
  - Only one bank takes deposits.
  - Credit was about 20 percent of GDP in 2022.
  - Non-performing loan ratio declined from about 12 percent in 2020 to about 11 percent in 2022.
  - KPF started to accumulate a surplus since March 2021.
  - ANZ Kiribati plans to increase bank accounts in the next 3 to 5 years.
- Financial sector regulation:
  - Approvals of the Financial Supervisory Authority of Kiribati Act (2021) and Kiribati Financial Institutions Act (2021).
  - Recommendation: establish an independent supervisor—Kiribati Financial Supervisory Authority (KFSA)—and develop AML/CFT risk-based supervision.
- Governance and judiciary:
  - Compliance rate for asset declarations declined from 33 percent in 2019 to 15 percent in 2021.
  - Suspension of the former Chief Justice in June 2022 and all three court of appeals judges in September 2022 increased case backlogs.
  - Recommendation: strengthen capacity and enforcement powers of anti-corruption agencies and restore judicial capacity.
- Statistics and TA:
  - GDP estimates updated to 2021 with PFTAC and STA assistance; full GDP rebasing to 2019 planned in 2023/24.
  - Monthly CPI produced with a short lag (about a month) based on South Tarawa survey.
  - Authorities plan to fully implement e-GDDS by publishing essential macroeconomic and financial data on an NSDP.
  - Recent TA covered PFM, revenue administration, statistics, and financial sector supervision (selected TA items and periods preserved in source).

### Principal risks and recommended policy responses (selected from Risk Assessment Matrix)
- Heavy fiscal reliance on volatile fishing revenues
  - Relative Likelihood: High
  - Expected Impact: High
  - Policy recommendations: fiscal consolidation; strengthen tax revenues by phasing out SOE tax exemptions; increase excise taxes on unhealthy products; formulate a sustainable MTFF.
- Commodity price volatility
  - Relative Likelihood: Medium
  - Expected Impact: High
  - Policy recommendation: recalibrate SOE tariffs to improve SOE viability while protecting the most vulnerable.
- Intensification of regional conflict(s)
  - Relative Likelihood: High
  - Expected Impact: High
  - Policy recommendations: strengthen tax revenues; put SOEs on a more commercial footing.
- Deepening geo-economic fragmentation
  - Relative Likelihood: High
  - Expected Impact: High
  - Policy recommendation: prudent management of public resources; boost export competitiveness and private sector development.
- Abrupt global slowdown or recession
  - Relative Likelihood: Medium
  - Expected Impact: High
  - Policy recommendation: prudent management of public resources; seek concessional loans and grants.
- Extreme climate events
  - Relative Likelihood: Medium
  - Expected Impact: High
  - Policy recommendations: maintain strong cash buffer; seek cost effective insurance; leverage technologies for land protection; channel donor grants to climate projects; establish contingent financing plans.

*Source: IMF staff report for the 2023 Article IV consultation with Kiribati.*

### 5.3 percent in 2022, mainly due to a recovery in domestic demand, supply shortages, and

### KIRIBATI STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION

### Recent developments, outlook, and risks
- Real GDP growth: recovered strongly in 2021 with growth of 7.9 percent; real GDP growth is estimated at 1.2 percent in 2022 and projected at 2.5 percent in 2023 as economic activities return to a more normal state with the resumption of large infrastructure projects and improved weather conditions. In the medium term, real GDP growth is projected to converge to its historical average of 2 percent.
- Inflation: headline inflation averaged 5.3 percent in 2022 and jumped to 16.2 percent (y-o-y) in December 2022 from 2.5 percent in December 2021. Headline inflation is projected to increase to 8.6 percent in 2023 due to the low base in the first half of 2022 and the delayed pass-through of normalizing global commodity prices and freight costs. An acceleration in the prices of food and non-alcoholic beverages (mainly sugar) accounted for close to 70 percent of the rise in inflation.
- External sector: the current account is expected to swing from a surplus to a deficit of 4 percent of GDP in 2022 on the back of higher import prices and lower fishing revenues. The current account is expected to return to a surplus of 8 percent of GDP in 2023, but the surplus will remain below the historical average because imports are projected to increase for the resumption of infrastructure projects.
- RERF and external balances: the balance of the RERF declined by about 12 percent in 2022, reflecting the decline in global equity and bond valuations. Adjusting for temporary factors, staff assess Kiribati’s external balance in 2022 is broadly in line with fundamentals and desirable policy settings, but the assessment is subject to significant uncertainty.
- Risks: mainly on the downside. External risks include an intensification of the war in Ukraine, commodity price volatility, an abrupt global slowdown, deepening geo-economic fragmentation, and prolonged global financial market volatility affecting expected returns on the RERF and the Kiribati Provident Fund (KPF). Climate change remains a constant risk threatening fishing revenues and economic growth. On the upside, reopening PIPA sustainably could boost fishing revenues in the medium term.

### Executive Board assessment and macro summary
- Executive Directors endorsed staff’s appraisal: Kiribati’s economy expanded after removal of all COVID-19 restrictions in the second half of 2022; growth decelerated to 1.2 percent in 2022 mainly due to a domestic outbreak of COVID-19 and lockdowns; growth projected to increase to 2.5 percent in 2023 on resumption of large infrastructure projects and improved weather.
- Inflation pickup attributed to a recovery in domestic demand, supply shortages, and elevated commodity prices and freight costs.
- External position assessed as broadly in line with fundamentals and desirable policies.

### Fiscal risks and main policy recommendations
- Fiscal consolidation: necessary to reduce fiscal risks given volatile fishing revenues and dependence on donor grants.
  - Implement fiscal consolidation by scaling back recurrent spending while ensuring the social safety net is well-targeted and efficient.
  - Consolidate recurrent spending and improve targeting and efficiency of the social safety net.
- Revenue and fiscal framework:
  - Enhance revenue mobilization to finance Kiribati’s development goals.
  - Formulate a sustainable medium-term fiscal framework that integrates rules-based withdrawals from the Revenue Equalization Reserve Fund (RERF).
  - Provision for climate change adaptation costs in the budget.
- Public financial management improvements:
  - Continue implementation of the Integrated Financial and Management Information System (IFMIS) for budget execution.
  - Strengthen cash flow management, finalize draft of updated Public Financial Management Act, strengthen budget planning, publish fiscal reports more regularly, execute effective controls over cash balances, and improve procurement controls.
- RERF and financing: encourage rules-based withdrawals and prudent management of sovereign wealth resources.

### State-owned enterprises (SOEs) and public sector governance
- SOEs on a commercial and sustainable footing: essential to reduce fiscal pressures exacerbated by elevated global commodity prices.
  - Recalibrate SOE tariffs to improve financial viability while protecting the most vulnerable.
  - SOE monitoring unit progressing in strengthening oversight; continue building capacity to analyze and monitor SOE activities, risks, and performance.
  - Ensure SOEs improve financial management and publish audited financial statements in a timely manner.
  - Continue exploring divestment and outsourcing of SOE activities.
  - Phase out SOE tax exemptions to level the playing field with the private sector.

### Structural reforms, private sector, and natural resources
- Private sector and export competitiveness:
  - Authorities’ strategy to boost export competitiveness and promote private sector development is encouraging but needs robust structural reforms.
  - Reforms include reforming the copra subsidy program, improving connectivity through better air transport, ports, and shipping services, boosting the telecommunications network, building a skilled workforce, and enhancing access to finance.
- Natural resources management:
  - Operationalize the Environment Act and Fisheries Act by developing regulations and monitoring capacity to ensure enforcement.
  - The plan to reopen the Phoenix Islands Protected Area (PIPA) to commercial fishing should be carefully designed with a fully developed marine spatial plan to ensure sustainability of fishing and preserve marine biodiversity.

### Data, statistics, and capacity development
- Need to strengthen institutional capacity to produce high-quality national accounts, government finance statistics, and financial sector data in a timely manner.
- Authorities plan to implement the IMF’s Enhanced General Data Dissemination System (e-GDDS) by publishing economic data on a National Summary Data Page to improve availability of timely statistics.
- Continued capacity development will facilitate data-based policy making.

### Key quantitative indicators (selected, as reported)
- Real GDP (percent change): 2019 -2.1; 2020 -1.4; 2021 7.9; 2022 1.2; 2023 2.5; 2024 2.4; 2025 2.3; 2026 2.1; 2027 2.1; 2028 2.1.
- Consumer prices (percent change, average): 2019 -1.8; 2020 2.6; 2021 2.1; 2022 5.3; 2023 8.6; 2024 4.5; 2025 2.1; 2026 1.9; 2027 1.8; 2028 1.8.
- Inflation (end of period): 2019 -0.9; 2020 2.8; 2021 2.5; 2022 16.2; 2023 -2.2; 2024 5.0; 2025 1.9; 2026 2.1; 2027 1.8; 2028 1.8.
- Central government finance (percent of GDP): Revenue and grants: 2019 147; 2020 132; 2021 100; 2022 91; 2023 102; 2024 105; 2025 104; 2026 102; 2027 98; 2028 97.
- Of which: fishing revenue (percent of GDP): 2019 90; 2020 71; 2021 56; 2022 44; 2023 45; 2024 47; 2025 47; 2026 49; 2027 48; 2028 48.
- Expenditures (percent of GDP): 2019 134; 2020 127; 2021 112; 2022 111; 2023 114; 2024 117; 2025 116; 2026 113; 2027 113; 2028 112.
- Overall balance (percent of GDP): 2019 13; 2020 4; 2021 -11; 2022 -20; 2023 -12; 2024 -12; 2025 -11; 2026 -10; 2027 -15; 2028 -15.
- Current account including official transfers (In millions of US$): 2019 87; 2020 71; 2021 20; 2022 -9; 2023 21; 2024 27; 2025 32; 2026 35; 2027 18; 2028 20.
- Current account (In percent of GDP): 2019 49; 2020 40; 2021 9; 2022 -4; 2023 8; 2024 10; 2025 12; 2026 12; 2027 6; 2028 6.
- External debt (millions of US$): 2019 39; 2020 40; 2021 37; 2022 33; 2023 32; 2024 61; 2025 90; 2026 117; 2027 157; 2028 195.
- Closing RERF balance (millions of A$): 2019 1,153; 2020 1,172; 2021 1,353; 2022 1,194; 2023 1,115; 2024 1,200; 2025 1,291; 2026 1,390; 2027 1,512; 2028 1,640.
- Nominal GDP (millions of A$): 2019 252; 2020 258; 2021 303; 2022 322; 2023 358; 2024 383; 2025 400; 2026 416; 2027 432; 2028 449.
- Nominal GDP (millions of US$): 2019 175; 2020 178; 2021 228; 2022 224; 2023 248; 2024 263; 2025 273; 2026 284; 2027 295; 2028 306.

*Source: IMF staff report for the 2023 Article IV consultation with Kiribati.*

### 8.      The authorities broadly agree with staff’s assessment of Kiribati’s economic outlook

### 8.      The authorities broadly agree with staff’s assessment of Kiribati’s economic outlook 

### Authorities’ assessment and near-term outlook
- Authorities expect a resumption of donor funded large infrastructure projects and a recovery of copra production thanks to improved weather conditions.  
- They consider high inflation to have been mainly “imported” and are concerned about the impact of food security issues, uncertainty of shipping schedules, and the substantial increase of freight costs on livelihoods in a net importing country like Kiribati.  
- Authorities view the reversal of the price hike of kerosene and gasoline as necessary to shield households and fishermen from high fuel prices.

### POST-PANDEMIC POLICIES FOR GROWTH AND RESILIENCE — A. Scaling Back Recurrent Spending
- 2020 economic relief package: AUD30 million, about 11.5 percent of 2020 GDP (including a new unemployment support scheme, and stimulus for both private firms and SOEs); 5 percent of GDP was withdrawn in 2021.  
- Fiscal balance moved from a surplus of 4 percent of GDP in 2020 to a deficit of 11 percent of GDP in 2021, largely due to increases in compensation of employees, senior citizen’s benefits, unemployment benefits (covering about 70 percent of Kiribati’s working age population), and reduced fishing revenues.  
- 2022 measures and impacts:
  - Authorities doubled the copra subsidy (against previous IMF advice).
  - Authorities compensated the Kiribati Oil Company Ltd for part of the difference between global and domestic fuel prices due to price controls on kerosene and gasoline.
  - Drop in fishing revenues by about 12 percentage points of GDP contributed to an estimated fiscal deficit of 20 percent of GDP for 2022.  
- 2023 budget: maintains existing social protection spending while introducing new leave grants for private sector; under staff’s baseline (assuming gradual recovery in fishing revenues in 2023) the fiscal deficit for 2023 is projected to be about 12 percent of GDP.  
- Staff recommendation for 2023: reduce recurrent spending to about 76 percent of GDP instead of 79 percent under the baseline by rationalizing the copra subsidy and unwinding some other social protection spending.  
- Medium-term path: during 2024-2027, reducing domestic recurrent spending by about 1.5 percentage points of GDP each year on average would lead to a balanced budget in the medium term, assuming new grant commitments are in line with historical trends.  
- Authorities’ views:
  - Do not plan to roll back recurrent spending for the time being; view copra subsidy program and unemployment benefit scheme as crucial to supporting livelihoods and retaining population on outer islands.
  - Expect unemployment benefits to be wound down as more people get employed.
  - Agree on need for better design, calibration, and delivery of social safety net; SPU is improving its data system.
  - Keen to review studies on sustainability and economic impact of the copra subsidy program.
  - Expect the end of La Niña and beginning of El Niño, and new initiatives on coastal fisheries to boost fishing revenues.

### POST-PANDEMIC POLICIES FOR GROWTH AND RESILIENCE — B. Addressing Fiscal Challenges: Uncertain Revenues
- Historical tax reform: 2014 VAT and excise introduction, elimination of import duties, modification of personal income tax laws; tax-to-GDP ratio improved from 15.4 percent in 2015 to 21.8 percent in 2021.  
- Potential to increase tax-to-GDP by between 3 and 5 percentage points of GDP.  
- Income Tax Bill:
  - Drafted to replace the 1990 Income Tax Act; aims to simplify tax administration and compliance, clarify tax exemptions, and expand the tax base (including framework for seabed mining operations).
  - Approved by Cabinet and scheduled to be sent to Parliament for approval in April 2023; once enacted, regulations will be drafted in line with the new Bill.
- Additional revenue measures suggested:
  - Phase out VAT and excise exemptions provided to SOEs.
  - Increase excise taxes on tobacco products, alcoholic beverages, kava, and sugary drinks, and regularly review other excise rates (excise rates have not changed since 2014).
  - Consolidate corporate income tax rates from three progressive CIT rates into one.
- Medium-term fiscal framework (MTFF) recommendations:
  - Manage volatile budget components (fishing revenues and grants) and promote recurrent expenditure stability.
  - Bias adjustment to revenue surprises toward saving overperformance on the upside; adjust expenditure gradually on the downside to achieve fiscal balance by end of medium term.
  - Ensure RERF withdrawals only finance development expenditure; determine development expenditure in context of multi-year plans with clearly identified goals and financing.
- Climate adaptation financing:
  - MTFF should include explicit provision to cover climate change adaptation costs: initially up to 2 percent of GDP annually and increasing to the target of 6 percent of GDP by 2030, with any remaining annual costs financed by development partners.
  - MTFF could incorporate a separate buffer for more infrequent climate-related expenditure (e.g., natural disasters).
  - Continue partner engagement to access climate funds, including the Green Climate Fund (GCF).
- RERF (Revenue Equalization Reserve Fund) preservation:
  - Newly established withdrawal rule will help preserve RERF value under current inflation and population projections.
  - Authorities plan to withdraw AUD23 million in 2023 from the 2021 returns of the RERF to fund development projects.
  - Authorities should finalize drafting of the Sovereign Wealth Fund Act to strengthen governance and accountability of the RERF.
- Authorities’ views:
  - Committed to achieving a balanced budget in the medium term; prioritize the new Income Tax Bill given limited capacity.
  - Later focus to shift to amending the VAT Act (including SOE tax exemptions, reducing VAT threshold, adjusting VAT base from “free on board” to “cost, insurance, and freight”).
  - Acknowledge importance of increasing excise taxes on unhealthy consumption goods; work initiated by Ministry of Health with WHO assistance.
  - Reaffirm adherence to RERF withdrawal rules; committed to limiting the withdrawal from 2021 returns to AUD23 million and earmarking withdrawals for development projects.
  - Eager to access green financing; partnering with ADB and World Bank to get access to GCF for the South Tarawa Water Supply Project and working with Pacific Regional Environment Program to secure GCF for another project; note need for explicit budget allocation for climate-related adaptation costs.

### POST-PANDEMIC POLICIES FOR GROWTH AND RESILIENCE — C. Further Improving Public Financial Management and Governance
- PFM reforms and priorities:
  - Implementing the Integrated Financial and Management Information System (IFMIS); publication of the Fiscal Reporting Policy is a welcome step.
  - Staff recommended reforms:
    - Finalize drafting of an updated PFM Act.
    - Strengthen budget planning by improving fishing revenue projections; ensure recurrent and development expenditure ceilings are binding; avoid supplementary budgets; better integrate recurrent and development budgets.
    - Publish fiscal reports more regularly by strengthening intra-year and annual financial reporting through timely IFMIS implementation; timely publication of fisheries report to improve transparency.
    - Execute effective controls over cash balances by consolidating government bank accounts into a Treasury Single Account (TSA) structure; establish a cash planning management committee; deposit all fishing revenues into the TSA.
    - Improve procurement control by strengthening institutions and timely publishing contract award notices including pandemic-related spending contracts.
- SOE reforms to reduce fiscal pressures:
  - SOE Monitoring and Advisory Unit (SOEMAU) progress in strengthening SOE oversight; Procurement Amendment Act (2021) requires SOEs to comply with government procurement legal framework.
  - Issues: some SOEs face financial difficulties as administered consumer prices diverge from operational costs due to high commodity prices.
  - Recommended actions:
    - Phase out SOE tax exemptions.
    - Recalibrate SOE tariffs to improve financial viability while protecting the most vulnerable.
    - Build capacity in SOEMAU to analyze and monitor SOE activities, risks, and performance; produce sector-wide summary reports.
    - Improve SOE financial management and publish audited financial statements in a timely manner to enable reform of the SOE subsidy system in the medium term.
    - Finalize a formal dividend policy to ensure SOEs comply with dividend payment obligations.
    - Continue divestment and outsourcing of SOE activities to improve efficiency and strengthen public finances.
- Authorities’ views on PFM and SOEs:
  - Expect IFMIS to significantly improve PFM, allow fiscal spending tracing electronically, facilitate implementation of TSA; IFMIS expected in 2023 with payroll integration in 2024.
  - Hope improved internet connectivity will ensure timely account integration among ministries across islands.
  - Priorities for SOEs: improve transparency of disclosures and quality of financial management; SOEMAU issued new templates for Statement of Intent and Performance Report and accelerated audits.
  - Authorities do not view enforcing dividend payments as current priority; have no immediate plans to divest or outsource any SOE.

### POST-PANDEMIC POLICIES FOR GROWTH AND RESILIENCE — D. Boosting Long-Term Growth Through Structural Reforms
- Growth potential and structural reform impact:
  - Staff analysis shows structural reforms that raise human capital, labor market participation, and investment can improve potential growth from 2 percent to 4 percent and significantly reduce poverty.
  - Private sector currently accounts for around 30 percent of total employment; revitalizing private sector is crucial for sustainable long-run growth.
  - Government development planning aligned with Kiribati 20-year vision (KV20); latest plan is 2020–2023 Kiribati Development Plan.
- Export competitiveness and diversification:
  - Current export concentration: fisheries and copra account for more than 90 percent of total exports in 2021.
  - Suggested measures:
    - Expand tuna processing, establish “tuna hubs”, and package/upgrade copra production to produce virgin coconut oil.
    - Rationalize or reform copra subsidy to foster diversification to products such as seaweed and aquaculture.
    - Improve air transport, ports, and shipping services; invest in infrastructure and ICT to enhance internet connectivity, boost tourism, and improve government service delivery.
- Natural resource utilization and environmental safeguards:
  - Environment Act (2021) to reduce pollution, maintain biodiversity, and adapt to climate change; Fisheries Act (2021) to support sustainable fishing.
  - Need to develop regulations and monitoring capacity to enforce legislation properly.
  - Deep-sea mining may have promise but requires extensive cost-benefit analyses weighing economic benefits against environmental risks (pollution and marine habitat damage).
  - Plan to reopen the PIPA to commercial fishing should be carefully designed with a fully developed marine spatial plan to ensure sustainability of fishing and preserve marine biodiversity.

*Source: 1kirea2023002 - 8.      The authorities broadly agree with staff’s assessment of Kiribati’s economic outlook*

### 28.      Improving human capital is essential for long-term growth. Despite the substantial

### Improving human capital is essential for long-term growth

### Education and gender
- Finding: Despite substantial progress in primary and early childhood education, only 20 percent of young population have completed upper secondary education.
- Recommendation: Expand technical vocational education and training to provide workers with skills and training for future employment and overseas employment.
- Finding: Recently introduced substantial legal reforms to improve women’s economic participation.
- Recommendation: Additional reforms such as granting women the same rights to immovable property as men could further promote legal equity and gender equality (Annex V).

### Financial intermediation and access to finance
- Finding: About 15 percent of the population own a bank account.
- Finding: Only one bank takes deposits.
- Finding: Credit was about 20 percent of GDP in 2022, reflecting limited competition, high collateral-based lending, a lengthy recovery process in cases of default, and geographical challenges.
- Finding: Banks are liquid and well-capitalized.
- Finding: Non-performing loan ratio declined from about 12 percent in 2020 to about 11 percent in 2022.
- Finding: KPF has started to accumulate a surplus since March 2021.
- Authorities/business initiatives:
  - ANZ Kiribati plans to increase the number of bank accounts significantly in the next 3 to 5 years with a greater focus on population in the outer islands.
  - The Chamber of Commerce is exploring options to establish a credit union and create a digital infrastructure to increase access to finance and facilitate payments to the outer islands.

### Financial sector legislation, regulation, and supervision
- Finding: Kiribati currently does not have a designated supervisory authority for financial institutions and supervisory responsibilities are fragmented.
- Milestone: Approvals of the Financial Supervisory Authority of Kiribati Act (2021) and Kiribati Financial Institutions Act (2021).
- Recommendation / Next steps:
  - Establish an independent supervisor of financial institutions—Kiribati Financial Supervisory Authority (KFSA).
  - Develop a framework and ensure adequate resourcing for regulation and supervision of financial institutions, including for Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) risk-based supervision.

### Governance, anti-corruption, and the judiciary
- Finding: In 2018 the government established a Leadership Commission to investigate complaints against senior government officials and receive officials’ asset declarations; an anti-corruption unit was set up within the Public Service Office.
- Finding: Progress has been made in investigating abuse of power, but more capacity and enforcement powers are needed.
- Finding: Compliance rate for asset declarations from public officials declined from 33 percent in 2019 to 15 percent in 2021.
- Finding: Suspension of the former Chief Justice in June 2022 and all three court of appeals judges in September 2022 left Kiribati without high-level court judges for several months and increased case backlogs.
- Recommendation: Strengthen capacity and enforcement powers of anti-corruption agencies and restore judicial capacity to reduce backlogs.

### Authorities’ views (selected)
- Exports: Authorities say Kiribati has potential to export virgin coconut oil but note prohibitively high marketing and freight costs; they acknowledge distortionary effects of the copra subsidy but emphasize its role as part of the social safety net.
- Business registration: Current process is cumbersome; with development partners, authorities plan to launch an online registration in 2024.

### Capacity development and data
- Capacity Development:
  - Technical assistance (TA), including through PFTAC, is picking up as international borders reopen.
  - Virtual TA helped maintain engagement to strengthen PFM and revenue mobilization, improve statistics, enhance macroeconomic analysis, and operationalize approved financial sector legislation.
  - Coordination efforts underway to minimize duplication across multiple donors and align TA with surveillance priorities (Annex VI).
- Statistics and data shortcomings:
  - Data shortcomings prevalent in national accounts statistics, government finance statistics, and financial sector data.
  - Agencies compiling data are often understaffed and require IMF TA to play a supplementary role.
  - Authorities need further investments in human capital and technology, comprehensive inter-agency collaboration, and enhanced information sharing.
  - Authorities plan to implement the IMF’s Enhanced General Data Dissemination System (e-GDDS) by publishing economic data on a National Summary Data Page (NSDP).

### Staff appraisal: macro outlook, fiscal stance, and structural priorities
- Macroeconomic outlook:
  - Finding: Kiribati’s economy continued to expand after removal of all COVID-19 restrictions in the second half of 2022.
  - Finding: Real GDP growth is estimated to have decelerated to 1.2 percent in 2022 mainly due to a domestic outbreak of COVID-19 and subsequent lockdown restrictions.
  - Projection: Growth is projected to increase to 2.5 percent this year on the back of a resumption of large infrastructure projects and improved weather conditions.
  - Finding: Inflation has recently picked up due to a recovery in domestic demand, supply shortages, and elevated commodity prices and freight costs.
  - Assessment: Kiribati’s external position is assessed to be broadly in line with the level implied by fundamentals and desirable policies.
  - Risk: Risks to the outlook are mainly on the downside.
- Fiscal policy and public finances:
  - Recommendation: Fiscal consolidation would be necessary to reduce fiscal risks given volatile fishing revenues and dependence on donor grants.
  - Policy measures recommended:
    - Consolidate recurrent spending.
    - Improve targeting and efficiency of the social safety net.
    - Greater revenue mobilization.
    - Develop a sustainable medium-term fiscal framework that integrates rules-based RERF withdrawals.
    - Provision for climate change adaptation costs in the budget.
  - Public financial management:
    - Commendation: Ongoing efforts to improve PFM are commendable and should continue.
    - Priority actions: Timely implementation of the IFMIS for budget execution; strengthen cash flow management; finalize draft updated Public Financial Management Act; strengthen budget planning; publish fiscal reports more regularly; execute effective controls over cash balances; improve procurement controls.
- State-owned enterprises (SOEs):
  - Finding: SOEs face financial difficulties exacerbated by elevated global commodity prices.
  - Recommendation: Place SOEs on a commercial and sustainable footing, recalibrate SOE tariffs while protecting the most vulnerable, continue SOE oversight and capacity building, ensure timely audited financial statements, explore divestment and outsourcing, phase out SOE tax exemptions.
- Structural reform priorities to boost competitiveness and private sector development:
  - Reform the copra subsidy program.
  - Improve connectivity through better air transport, ports, and shipping services.
  - Boost the telecommunications network.
  - Build a skilled workforce.
  - Enhance access to finance.
- Natural resource use and fisheries:
  - Recommendation: Build on the recent approvals of the Environment Act and Fisheries Act by developing regulations and monitoring capacity to ensure proper enforcement.
  - Recommendation: Reopening PIPA to commercial fishing should be carefully designed with a fully developed marine spatial plan to ensure sustainability and preserve marine biodiversity.
- Data and statistical capacity:
  - Recommendation: Continue efforts to build statistical capacity for high-quality national accounts, government finance statistics, and financial sector data.
  - Note: Authorities plan to implement the IMF’s e-GDDS by publishing economic data on an NSDP to improve availability of timely statistics.
- Consultation cycle:
  - Recommendation: Next Article IV consultation should take place on the standard 12-month cycle.

### Selected exact figures and indicators (as reported)
- 20 percent — young population who have completed upper secondary education.
- About 15 percent — population who own a bank account.
- about 20 percent of GDP in 2022 — credit.
- about 12 percent in 2020 → about 11 percent in 2022 — non-performing loan ratio.
- March 2021 — KPF started to accumulate a surplus.
- next 3 to 5 years — ANZ Kiribati plans to increase bank accounts.
- 33 percent in 2019 → 15 percent in 2021 — compliance rate for asset declarations.
- 1.2 percent — estimated real GDP growth in 2022.
- 2.5 percent — projected growth this year.
- IMF e-GDDS — planned implementation via a National Summary Data Page (NSDP).

*Source: IMF staff report for the 2023 Article IV consultation discussions with Kiribati (excerpts).*

### 2015. The government also guarantees loans worth AUD11.8million made by the social security fund to domestic SOEs.

### 1kirea2023002 - 2015. The government also guarantees loans worth AUD11.8million made by the social security fund to domestic SOEs.

### Central government operations and public debt
- Total revenue and grants (2019–28): 147 132 100 91 102 105 104 102 98 97 (In percent of GDP, by year as shown in Table 2b).
- Revenue (2019–28): 110 94 81 67 70 71 72 74 73 73 (In percent of GDP).
- Tax revenue (2019–28): 20 20 22 19 20 21 21 22 22 22 (In percent of GDP).
- Nontax revenue (2019–28): 9 17 4 6 4 7 4 9 7 7 (In percent of GDP).
- Of which: fishing revenue (2019–28): 90 71 56 44 45 47 47 47 49 48 (In percent of GDP).
- Project grants (2019–28): 37 35 15 17 24 28 28 23 23 22 (In percent of GDP).
- Total expenditure (2019–28): 134 127 112 111 114 117 116 113 113 112 (In percent of GDP).
- Current expenditure (2019–28): 67 79 85 83 79 79 78 77 77 77 (In percent of GDP).
- Wages and salaries (2019–28): 32 33 34 33 30 30 29 28 28 28 (In percent of GDP).
- Subsidies and grants (2019–28): 18 26 39 38 38 39 37 36 36 36 (In percent of GDP).
- Development expenditure (2019–28): 6 7 48 26 28 35 38 38 36 36 35 (In percent of GDP).
- Domestic recurrent balance 1/ (2019–28): -46 -56 -60 -61 -55 -55 -53 -52 -52 -52 (In percent of GDP).
- Recurrent fiscal balance (excl. grants) (2019–28): 44 15 -4 -17 -9 -8 -6 -3 -4 -4 (In percent of GDP).
- Overall balance 2/ (2019–28): 134 -11 -20 -12 -12 -11 -10 -15 -15 (In percent of GDP).
- Financing (2019–28): -13 -4 11 20 12 12 11 10 15 15 (In percent of GDP).
- Public debt (memorandum item) (2019–28): 22 21 17 15 13 23 33 34 15 36 3 (In percent of GDP as shown in Table 2b).
- Nominal GDP (millions of A$) (2019–28): 252 258 303 322 358 383 400 416 432 449.
- Note on debt coverage: "In this table, the coverage of public sector debt is the central government and Kiribati Provident Fund( KPF), which is composed of external debt only, as all domestic debt was cleared in 2015. The government also guarantees loans worth AUD11.8million made by the social security fund to domestic SOEs."

### Balance of payments and external position
- Current account (2019–28, A$ millions): 125 103 27 -133 0 39 46 51 27 29 (Table 3a).
- Balance on goods (2019–28, A$ millions): -135 -142 -180 -214 -212 -225 -238 -248 -257 -268.
- Goods, credit (exports) (2019–28, A$ millions): 18 14 13 13 15 15 15 16 16 16.
- Goods, debit (imports) (2019–28, A$ millions): 153 156 193 227 227 239 253 263 273 284.
- Balance on services (2019–28, A$ millions): -73 -42 -74 -65 -65 -69 -72 -76 -79 -83.
- Balance on primary income (2019–28, A$ millions): 279 225 215 205 221 243 259 281 296 312.
- Of which: Fishing license fees (2019–28, A$ millions): 211 171 161 135 153 170 179 193 199 204.
- Income from RERF (2019–28, A$ millions): 47 41 43 42 40 42 47 53 59 66.
- Balance on secondary income (2019–28, A$ millions): 53 63 67 61 86 90 97 93 68 67.
- Capital account (2019–28, A$ millions): 34 10 14 13 20 28 22 20 32 32.
- Financial account (2019–28, A$ millions): 119 29 -40 -11 24 26 27 29 30 32.
- Reserve Assets (2019–28, A$ millions): 399 563 1126 414 142 29 29 (values shown in Table 3a).
- Balance of payments (percent of GDP) highlights (Table 3b):
  - Current account (2019–28): 49.5 40.0 8.9 -4.0 8.4 10.3 11.6 12.2 6.2 6.4 (percent of GDP).
  - Goods deficit (2019–28): -53.6 -55.2 -59.6 -66.3 -59.3 -58.7 -59.5 -59.7 -59.6 -59.6 (percent of GDP).
  - Primary income, credit (2019–28): 111.9 88.8 72.7 64.9 63.1 65.0 66.6 69.5 70.4 71.6 (percent of GDP).
  - Fishing license fees (percent of GDP): 83.5 66.1 53.3 41.9 42.8 44.4 44.8 46.4 46.0 45.5.
  - Income from RERF (percent of GDP): 18.8 15.9 14.1 13.1 11.3 11.0 11.8 12.7 13.6 14.8.
  - Reserve assets (percent of GDP): 15.3 36.8 20.7 3.5 7.3 10.6 10.3 10.1 6.8 6.5.
  - Net International Investment Position (NIIP) (percent of GDP): 814.6 586.8 552.6 (values shown; later years not reported in table).

### External sector assessment and outlook
- 2022 assessment:
  - Kiribati’s external position in 2022 is assessed to be in line with the level implied by fundamentals and desirable policies, but Kiribati is highly vulnerable to external shocks.
  - Staff estimate the CA norm to be broadly in the range of 11 percent of GDP.
  - The CA surplus since 2014 reflects a higher primary income balance more than offsetting a large trade deficit; fishing license fees averaged 67 percent of GDP in 2013–21 and accounted for three-quarters of primary income receipts in 2013–21.
  - The CA surplus narrowed to 8.9 percent of GDP in 2021 from 40 percent of GDP in 2020, largely due to declines in fishing license fees and remittances and increases in shipping costs.
- 2022–23 projections and drivers:
  - The CA is estimated to turn to a deficit of 4 percent of GDP in 2022 due to a wider trade deficit from border reopening, resumption of port activities, high freight costs, elevated energy and food import prices, and poor fishing revenues.
  - The CA balance is projected to improve in 2023 supported by a mild recovery in fishing license fees, higher budget grants, and expected drop in global commodity prices; surplus will remain below historical average due to projected high import demand for resumption of delayed infrastructure projects.
- International investment position:
  - NIIP measured in Australian dollars decreased to 553 percent of GDP at end-2021 from 587 percent of GDP at end-2020.
  - Measured in US dollars, NIIP increased from US$1.1bn in 2020 to US$1.2bn in 2021, mainly due to reserve assets increase from US$1.0bn to US$1.1bn.

### Policy recommendations to bolster resilience
- Improve competitiveness and export capacity through structural reforms:
  - Close the infrastructure gap and address governance weaknesses to expand export capacity and attract FDI.
  - Secure donor grants for development spending and avoid any new non-concessional borrowing.
- Maintain prudent fiscal policy in the medium term:
  - Build fiscal buffers and preserve external balance.
  - Undertake fiscal adjustment in the domestic recurrent balance in line with staff advice to provide cushion for external sustainability and space for high-priority investment spending.
- Endorse continued use of the Australian dollar as legal tender:
  - Provides a strong nominal anchor given close linkages with Australia and limited capacity to run an independent monetary authority.
- Specific resilience measures cited:
  - Cash reserves (61 percent of GDP at end-2022) and the RERF (370 percent of GDP at end-2022) are main instruments to absorb external shocks; RERF subject to withdrawal rules and could decline in downside scenarios with low fishing revenues and volatile global financial markets.
  - Avoid new non-concessional borrowing; secure donor grants; strengthen tax revenues; place SOEs on a more commercial footing; maintain cash buffers and contingency financing; leverage donor grants for climate projects.

### Principal risks and recommended policy responses (from Risk Assessment Matrix)
- Heavy fiscal reliance on volatile fishing revenues
  - Relative Likelihood: High
  - Expected Impact: High. "A period of protracted low fishing revenues may jeopardize long-run fiscal sustainability."
  - Policy recommendations: Fiscal consolidation through scaling back recurrent spending; continue to strengthen tax revenues by phasing out tax exemptions for SEOs and by increasing the excise tax on tobacco and other unhealthy products; formulate a sustainable MTFF to promote fiscal discipline.
- Commodity price volatility
  - Relative Likelihood: Medium
  - Expected Impact: High. Negative impact on inflation and current account balance.
  - Policy recommendation: Recalibrate SOE tariffs to improve SOEs’ financial viability while protecting the most vulnerable.
- Intensification of regional conflict(s)
  - Relative Likelihood: High
  - Expected Impact: High. Could affect returns on the RERF and the KPF and disrupt trade, remittances, FDI, and financial flows.
  - Policy recommendations: Strengthen tax revenues by phasing out tax exemptions for SEOs and by increasing excise taxes; put SOEs on a more commercial and sustainable footing.
- Deepening geo-economic fragmentation
  - Relative Likelihood: High
  - Expected Impact: High. Negative impact on inflation and growth via supply disruptions.
  - Policy recommendation: Prudent management of public resources and, in the longer run, boost export competitiveness and private sector development.
- Abrupt global slowdown or recession
  - Relative Likelihood: Medium
  - Expected Impact: High. Strong impact on inflation, growth, and returns on the RERF and the KPF.
  - Policy recommendation: Prudent management of public resources and seek concessional loans and grants.
- Extreme climate events
  - Relative Likelihood: Medium
  - Expected Impact: High. "Kiribati will be among the first countries to see its islands disappear if the sea level rises."
  - Policy recommendations: Maintain a strong cash buffer, seek cost effective insurance, leverage technologies for land protection, channel donor grants to climate projects, and establish contingent financing plans with development partners.

*Source: Kiribati country material as presented in the supplied PDF content (Tables 2b, 3a, 3b; Annex I; Annex II).*

### Annex III. Navigating Climate Change: Policy Options for

### Annex III. Navigating Climate Change: Policy Options for Kiribati

### Climate vulnerability and urgency
- Kiribati is highly vulnerable as a low-lying atoll; sea level rise has already caused territory loss and forced relocation after erosion and salinization rendered some islands uninhabitable.
- Climate hazards could disrupt crucial natural resources; example: ocean acidification may disrupt coral reefs replenishment and in turn lead to the extinction of marine species that constitute the bulk of fishing activity.
- International cooperation is critical; Kiribati should continue adaptation and mitigation efforts while drawing to the maximum extent available on climate finance resources to safeguard lives and livelihoods.

### Adaptation efforts and institutional developments
- Adaptation activity began in the early 1990s and continues.
- Key legislative and regulatory milestones:
  - Environment Bill passed in December 2021; regulations planned to be finalized in 2023.
  - Cabinet approved in principle the Disaster Risk Management and Climate Change Regulations (2022).
- Focus of policies: constructing climate-resilient physical infrastructure (water and sanitary, roads, coastal and port infrastructure).
- Example project: South Tarawa Water Supply Project will provide Tarawa inhabitants with safe and clean drinking water by means of desalination and by powering the plant with solar panels.
- Nature-based measures: mangrove planting and other coastal defenses to reduce erosion and contribute to mitigating greenhouse gas emission.

### Mitigation, renewable energy, and NDCs
- Renewable energy expansion in the outer islands and in Tarawa:
  - The share of renewable energy in South Tarawa is expected to increase to 44 percent from the current 9 percent when an ongoing project funded by the ADB, New Zealand, and Strategic Climate Fund completes in 2024.
- Nationally Determined Contributions (NDCs), 2022 revision:
  - Committed to reducing per capita emissions by about 8 percent by 2030.
  - Committed to reducing per capita emissions by up to more than 23.8 percent by 2030 conditional on continued and appropriate levels of access to financial and technical resources.
  - Revised NDCs also strengthened planning for adaptation and mitigation, including reforms in transportation and energy efficiency sectors.
- Mitigation through reduced carbon emissions can promote economic development.

### Costs, financing gaps, and fiscal implications
- World Bank estimate of annual adaptation costs for coastal protection and infrastructure adaptation: range between 4 to 11 percent of GDP by 2040.
- IMF staff recommendation: create an exclusive budget line for climate-related spending needs at about 6 percent of GDP by 2030.
- Financing realities:
  - Kiribati needs external support to finance mitigation and adaptation investments given the size of the economy and scale of the challenge.
  - Approved bilateral and multilateral funds to date have covered a small fraction of total estimated investment needs, with actual disbursements at significantly lower levels.
- Access challenges to climate funds:
  - High compliance cost due to stringent accreditation requirements by climate funds.
  - Institutional and human resource capacity constraints in Kiribati.

### Short-, medium-, and long-term policy guidance
- Short term:
  - Seek funding through bilateral or multilateral donors to finance immediate adaptation and mitigation projects.
- Medium to long term:
  - Embed climate projects in a national strategy.
  - Continue improving public financial management and public investment management capacity.
  - Coordinate with other Pacific Islands countries to undertake joint regional projects.

*Prepared by Michele Fornino, and Anh Thi Ngoc Nguyen based on the Selected Issues Paper on “Climate Change in Kiribati: The Way Forward.”*

### 7. Economic

### 7. Economic infrastructure and social infrastructure

### Fund relations and capacity development
- Membership Status: Joined June 3, 1986; accepted Article VIII.
- Quota and SDR holdings (General Resources Account):
  - Quota: 11.20 SDR Million (100.00 percent Quota)
  - Fund holdings of currency: 9.80 SDR Million (87.51 percent)
  - Reserve tranche position: 1.41 SDR Million (12.58 percent)
- SDR Department:
  - Net cumulative allocation: 16.06 SDR Million (100.00 percent Allocation)
  - Holdings: 14.72 SDR Million (91.68 percent)
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements: None
- Projected Obligations to Fund: None
- HIPC Initiative: Not Applicable
- MDRI: Not Applicable
- CCR: Not Applicable
- Exchange arrangements:
  - The Australian dollar circulates as legal tender.
  - Exchange arrangement: exchange arrangement with no separate legal tender.
  - No central monetary institution; authorities do not buy or sell foreign exchange.
  - The Australia and New Zealand (ANZ) Bank (Kiribati) Limited quotes daily rates for 15 currencies based on rates against the Australian dollar.
  - Kiribati has accepted the obligations under Article VIII, Sections 2(a), 3, and 4.
- Article IV Consultation cycle: 12-month; previous Article IV concluded April 26, 2021 (discussions took place virtually during February 11–28, 2021).
- Resident Representative: Regional Resident Representative office for Pacific Island Countries based in Suva, Fiji (opened September 2010). Mr. Neil Saker is Resident Representative since April 2022.
- Technical Assistance (TA), 2021–22: Experts from PFTAC and IMF HQ provided capacity development in:
  - Strengthening compilation and dissemination of real sector and government finance statistics.
  - Strengthening revenue administration management and governance arrangements.
  - Improving law and effective PFM institutions.
  - Developing and strengthening supervision of the financial system.
- Capacity Development Activities (2021–22) — selected items (advisors and periods preserved as in source):
  - Financial Sector: Assist in developing a plan to establish the Kiribati Financial Supervisory Authority — MCM/PFTAC, May–July 2022.
  - Public Financial Management: Assist authorities to update the PFM Act — FAD/PFTAC, May–September 2022.
  - Revenue Administration: Improve taxpayer services and collections — FAD/PFTAC, March 2021.
  - Statistics: Support KNSO to improve GFS and public sector debt statistics — STA, April–June 2021; Assist KNSO to update GDP estimates to 2020 — STA, October 2021; Assist KNSO to extract and prepare national accounts data from 2019 HIES — PFTAC, October 2022; Assist KNSO to update CPI and resume regular dissemination — STA, October–November 2022; Assist KNSO to update GDP estimates to 2021 — PFTAC, November 2022.

### Relations with other international financial institutions
- World Bank Group: referenced in source.
- Asian Development Bank: referenced in source.
- Pacific Financial Technical Assistance Center (PFTAC): referenced in source.

### Statistical issues — assessment and priorities
- General assessment: Data provision has shortcomings but is broadly adequate for surveillance. Priorities include improving timely collection and dissemination of national accounts and government finance statistics; consolidated financial sector statistics; and external sector improvements.
- National accounts:
  - GDP estimates updated to 2021 with PFTAC and STA assistance.
  - 2019/20 Household Income and Expenditure Survey (HIES) and new benchmarks for current price household final consumption expenditure and several industries will be used to prepare full GDP rebasing to 2019 during 2023/24.
  - Improvements needed in administrative data sharing (business license information from Ministry of Tourism, Commerce, Industry and Cooperatives) and establishing regular supply of electronic VAT records.
  - Staffing has improved; further capacity building needed for rebase preparation.
- Price statistics:
  - Monthly CPI (2006=100) produced with a short lag (about a month), based on a survey in South Tarawa (national index not available).
  - No producer, wholesale, or trade price indices.
  - Authorities, with PFTAC and STA, are updating CPI with weights based on 2019/2020 HIES; a mission planned for May 2023 to assist finalization.
- Government finance statistics (GFS):
  - National fiscal data compiled and disseminated broadly in line with GFSM 1986.
  - With PFTAC-coordinated TA, annual GFS data compiled and disseminated in line with GFSM 2014 for consolidated general government, data available from 2011–21.
  - January 2023 TA recommended GFS data be compiled for the Revenue Equalization Reserve Fund (RERF) and that RERF be classified inside the general government sector.
  - Further work needed to expand fiscal reporting to nonfinancial public sector or entire public sector.
  - Authorities do not report any sub-annual GFS to STA.
- Monetary and financial statistics (MFS):
  - Some financial institution data shared during 2013 Article IV mission, but MFS and financial soundness indicators (FSIs) are not reported to STA.
  - Kiribati has reported data until 2013 on some key Financial Access Survey (FAS) series, including commercial bank branches per 100,000 adults and ATMs per 100,000 adults.
- External sector statistics (ESS):
  - ESS mission by PFTAC in 2019 improved historical balance of payments and IIP data.
  - Diagnostic ESS TA mission planned for April 2023.
  - Outstanding issues: inadequate periodicity and timeliness of data compilation and reporting to IMF, lack of consistency with government accounts, deficiencies in source data for merchandise trade, limitations in data collection from direct investment enterprises, and shortcomings in compilation of cross-border positions data.
- Data Standards and Quality:
  - Kiribati participates in IMF Enhanced General Data Dissemination System (e-GDDS) but does not yet disseminate recommended economic data through a National Summary Data Page (NSDP).
  - Authorities plan to fully implement e-GDDS by publishing essential macroeconomic and financial data on an NSDP.
  - No data ROSC available.

### Key data reporting frequencies and latest observations (as of February 28, 2023)
- Exchange Rates: Date of latest observation 2/2023; Date received 2/2023; Frequency: D; Frequency of reporting: D; Frequency of publication: D.
- Consumer Price Index: Date of latest observation 12/2022; Date received 1/2023; Frequency: M; Frequency of reporting: M; Frequency of publication: M.
- Revenue, Expenditure, Balance and Composition of Financing - General Government: Date of latest observation 2021; Date received 10/2022; Frequency: A; Frequency of reporting: A; Frequency of publication: I.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 2021; Date received 1/2023; Frequency: A; Frequency of reporting: A; Frequency of publication: A.
- External Current Account Balance: Date of latest observation Q4/2021; Date received 12/2022; Frequency: Q; Frequency of reporting: Q; Frequency of publication: Q.
- Exports and Imports of Goods and Services: Date of latest observation Q4/2021; Date received 12/2022; Frequency: Q; Frequency of reporting: Q; Frequency of publication: Q.
- GDP/GNP: Date of latest observation 2021; Date received 12/2022; Frequency: A; Frequency of reporting: A; Frequency of publication: A.
- Gross External Debt: Date of latest observation 2021; Date received 12/2022; Frequency: A; Frequency of reporting: A; Frequency of publication: A.
- International Investment Position: Date of latest observation Q4/2021; Date received 12/2022; Frequency: Q; Frequency of reporting: Q; Frequency of publication: Q.
- Several monetary and financial series are NA in the Table of Common Indicators (International Reserve Assets and Reserve Liabilities of the Monetary Authorities; Reserve/Base Money; Broad Money; Central Bank Balance Sheet; Consolidated Balance Sheet of the Banking System; Interest Rates).

### Debt Sustainability Analysis (DSA) — findings and recommendations
- DSA summary:
  - Risk rating of external debt distress: High
  - Overall risk of debt distress: High
  - Granularity in risk rating: Sustainable
  - Application of Judgment: No
- Composite Indicator (CI) index: 2.70 (calculated based on October 2022 WEO and the 2021 CPIA), indicating "medium" debt-carrying capacity.
- Key findings:
  - High recurrent spending amid a decline in fishing revenues led to large fiscal deficits in 2021–22.
  - Maintaining existing social protection spending and introducing new leave grants for private sector employees in the 2023 budget will cause the fiscal balance to remain in deficit over the medium term, a departure from a surplus prior to the pandemic.
  - The ratio of the present value (PV) of the public and publicly guaranteed (PPG) external debt-to-GDP is expected to breach the indicative threshold starting in 2030 under the baseline scenario.
  - The PV of the total public debt-to-GDP ratio is expected to breach the indicative benchmark starting in 2031 under the baseline scenario.
  - Stress tests confirm vulnerability of the debt position to plausible shocks.
- Factors mitigating vulnerability and supporting sustainability assessment:
  - (i) The country currently benefits from grant-only status for financing from the multilateral development banks (MDBs) and is likely to maintain access to highly concessional financing over the long term.
  - (ii) The government has large cash buffers which can be drawn on to finance deficits in the near term.
  - (iii) The breaches occur only in the long term and only for the PV of the debt-to-GDP ratios, while all other ratios are expected to remain well below their indicative thresholds.
- Policy recommendations to reduce fiscal and debt risks:
  - Fiscal consolidation is necessary to reduce fiscal risks by scaling back recurrent spending and mobilizing higher revenue.
  - Further progress in structural and fiscal reforms is needed, including:
    - Formulating a sustainable medium-term fiscal framework.
    - Improving public financial management.
    - Placing state-owned enterprises (SOEs) on a commercial and sustainable footing.
  - Continuation of grants to support the country’s large development needs.
- Warning: Although Kiribati does not currently face debt servicing risks thanks to high cash buffers, risks from unfavorable weather conditions or a downturn in global financial markets (which would reduce the value of Kiribati’s sovereign wealth fund) call for greater fiscal prudence.

### Public debt coverage, contingent liabilities, and debt composition
- Public debt coverage used in DSA:
  - Central government plus social security fund and central government-guaranteed debts are covered (residency basis).
  - Data limitations: lack of regularly updated SOE balance sheets; TA and World Bank FY2023 SDFP support aim to improve coverage.
  - Authorities published a Fiscal Reporting Policy in 2022 setting new standards for public reporting on revenue, expenditure, public debt, and performance of SOEs and RERF.
- Combined contingent liability shock (stress test) assumptions:
  - Contingent liabilities amounting to 7 percent of GDP, comprising:
    - 2 percent of GDP of non-guaranteed SOE debt.
    - Standard 5 percent of GDP cost to the government of a financial crisis.
  - Text notes: default shocks and triggers described for SoE debt and financial market shock; total (2+3+4+5) equals 7.0 percent of GDP.
- Public sector debt levels and recent actions:
  - RERF balance: about AUD1.2 billion (close to 370 percent of GDP) at end-2022.
  - PPG debt at end-2021: 21 percent of GDP (external debt and government guarantees).
  - The fiscal deficit in 2021 was financed by cash reserves and a withdrawal of AUD40 million from the RERF.
  - Kiribati has only PPG external debt from the Asian Development Bank (ADB) and Taiwan Province of China.
  - Combined outstanding external debt from ADB and Taiwan Province of China: AUD52.0 million (about 17.1 percent of GDP) at end-2021; estimated to decline to AUD49.3 million (about 15.2 percent of GDP) at end-2022.
  - Government-guaranteed loans from the Kiribati Provident Fund (KPF) to two SOEs (Air Kiribati Limited and Development Bank of Kiribati): AUD11.8 million (3.9 percent of GDP at end-2021).
- Text Table 3: Public External Debt Balance as of End-2021:
  - Asian Development Bank (ADB): AUD 31,930,760
  - International Cooperation and Development Fund, Taiwan Province of China: AUD 19,788,244

### Background and macro outlook notes
- Geography and economic structure:
  - Kiribati is a small, remote Pacific state; geography raises cost of public service delivery and contributes to infrastructure gaps.
  - Narrow production and export base: mainly tuna fishing and copra.
  - High dependence on revenues from selling fishing licenses under various fisheries agreements and donor support for infrastructure investment.
- COVID-19 context:
  - First COVID outbreak hit Kiribati in early 2022 after resumption of commercial flights in January 2022.
  - A domestic outbreak followed; state of emergency declared in January 2022 and lockdowns imposed limiting mobility, labor, and port activity.
  - International borders reopened in August 2022.
  - Vaccination: over 90 percent of the population currently inoculated (as of source data).

*Source: IMF staff report for the 2023 Article IV Consultation — informational annex and Debt Sustainability Analysis (Kiribati).*

### 6.      The economy continued to expand after the removal of all COVID-19 restrictions in the

### 6.      The economy continued to expand after the removal of all COVID-19 restrictions in the

### Economic activity and growth
- Real GDP grew 7.9 percent in 2021 after a contraction of 1.4 percent in 2020.
- COVID-19 lockdown restrictions in the first half of 2022 limited mobility and delayed large infrastructure projects; removal of restrictions and border reopening in August 2022 boosted growth through private consumption.
- A severe drought affected the agricultural sector; real GDP growth in 2022 is estimated at 1.2 percent.
- Real GDP growth is projected at 2.5 percent in 2023 as economic activities return to a more normal state with resumption of large infrastructure projects and improved weather conditions.
- Real GDP growth is projected at 2.1 percent on average in 2022–32, consistent with Kiribati’s long-term GDP growth and staff’s analysis based on a long-term growth model.
- Annual population growth is estimated to average about 1.5 percent over the projection period.

### Inflation dynamics
- Inflation averaged 5.3 percent in 2022.
- Headline inflation rose from 2.5 percent (y-o-y) in December 2021 to 16.2 percent (y-o-y) in December 2022.
- An acceleration in prices of food and non-alcoholic beverages (mainly sugar) accounted for close to 70 percent of the rise in inflation.
- Inflation is projected to increase to 8.6 percent in 2023, decline to 4.5 percent in 2024, and average 3.0 percent in 2022–32.
- In the medium to long term, consumer price increases are expected to hover around 1.8 percent.

### Baseline macroeconomic assumptions and projections (selected figures from Text Table 4)
- Historical average Real GDP growth (2011-21): -1.4
- Real GDP growth: 2020: -1.4; 2021: 7.9; 2022: 1.2; 2023: 2.5; 2024: 2.4; 2025: 2.3; 2026: 2.1; 2027: 2.1; 2028: 2.1; 2029: 2.6; 2030: 2.1
- Inflation, average (change in percent): 2020: 2.6; 2021: 2.1; 2022: 5.3; 2023: 8.6; 2024: 4.5; 2025: 2.1; 2026: 1.9; 2027: 1.8; 2028: 1.8; 2029: 0.5; 2030: 3.0
- Current account balance (in percent of GDP): 2020: 40.0; 2021: 8.9; 2022: -4.0; 2023: 8.4; 2024: 10.3; 2025: 11.7; 2026: 12.3; 2027: 6.3; 2028: 6.5; 2029: 21.5; 2030: 6.8
- Overall fiscal balance (in percent of GDP): 2020: 4.4; 2021: -11.2; 2022: -19.8; 2023: -11.9; 2024: -12.2; 2025: -11.4; 2026: -10.5; 2027: -14.8; 2028: -15.4; 2029: 13.8; 2030: -15.1

### Climate change and natural disasters
- Staff’s baseline explicitly reflects climate change and natural disaster impacts; long-term growth projections are adjusted downward by 0.1 percentage point in 2027–2042 relative to non-disaster potential growth.
- The current account balance is projected to decline by 1 ppt of GDP on average in the long run to account for natural disasters and climate change.
- No major disasters are assumed under the baseline in the medium term.
- A tailored stress test assumes a one-off extreme natural disaster in the second year of the projection period would cut real GDP growth and exports by 1.5 and 3.5 ppts, respectively.

### Fiscal revenues, grants, and expenditures
- Fishing revenues reported at AUD142 million (44 percent of GDP) in 2022, a drop of 11 ppts of GDP from 2021; three consecutive years of decline from the all-time high in 2019 (85 percent of GDP).
- Staff project fishing revenues would average about 48 percent of GDP in 2022–32 under a mild recovery scenario.
- External grants increased to 25 percent of GDP in 2022 from 19 percent of GDP in 2021 and are expected to increase to 32 percent of GDP on average in 2023–26 due to higher committed grants.
- External grants are assumed to average about 23 percent of GDP in 2027–32; budget support is assumed at 2 percent of GDP from 2027 (a decline of 3 ppts of GDP compared to the 2026 level).
- Recurrent spending is expected to remain high around 79 percent of GDP in 2023 before stabilizing around 77 percent of GDP over the medium term without consolidation.
- Development expenditure: 28 percent of GDP in 2022 (2 ppts higher than 2021); expected to increase to 35 percent of GDP in 2023 and could reach as high as 38 percent of GDP before declining.
- Climate change-related maintenance and contingency expenditures assumed to gradually reach around 6 percent of GDP in 2030 and remain at that level thereafter.

### Fiscal stance and projections
- Overall fiscal surplus declined from 13 percent of GDP in 2019 to 4 percent of GDP in 2020, turned to a deficit of 11 percent of GDP in 2021 and 20 percent of GDP in 2022.
- Fiscal deficit is expected to narrow to 12 percent of GDP in 2023 with higher fishing revenues and committed external grants.
- Under baseline (no major consolidation), fiscal deficits are envisaged to remain elevated and hover around 15 percent of GDP over the medium and long term.
- Fiscal deficits could be reduced if authorities mobilize revenue, consolidate recurrent spending, and improve targeting and efficiency of the social safety net.

### Financing of fiscal deficits, cash reserves, and RERF
- Cash reserves declined to 61 percent of GDP at end-2022 from 71 percent of GDP at end-2021.
- Baseline assumes cash reserves will be used at a conservative pace of 1 percent of GDP each year in 2024–28 to finance deficits and no tapping starting from 2029 to meet the requirement of at least three months of government spending by 2042.
- External financing under the baseline is assumed at highly concessional terms.
- RERF withdrawal rule: only returns in excess of 5 percent (in real terms) can be withdrawn; withdrawals can only be used for development spending.
- Under the baseline, the RERF is assumed to generate nominal returns of 8.5 percent on average over the medium and long term and to finance a deficit equivalent to 2 percent of GDP every year starting from 2028 before increasing to 3 percent of GDP from 2035.
- RERF could be depleted more rapidly if sufficient access to external loans is not found and fiscal deficits continue to be elevated.

### Current account and external position
- Current account estimated deficit of about 4 percent of GDP in 2022, a switch from a surplus of 8.9 percent of GDP in 2021.
- Drivers: disappointing fishing revenues and higher import values due to increased quantity (domestic demand from border reopening and resumption of port activities) and elevated energy and food import prices.
- Current account projected to turn to a surplus in 2023, supported by mild recovery in fishing revenues, higher committed grants, and expected drop in global commodity prices.
- From 2027 onward, current account surplus expected to decline due to lower secondary income excluding uncommitted budget support.
- Current account surplus expected to stay at about 7 percent of GDP on average in 2022–32.

### Debt-carrying capacity, classification, and stress testing
- Debt-carrying capacity remained “medium”; composite indicator (CI) score is 2.70 based on October 2022 WEO and 2021 CPIA.
- Indicative thresholds for medium capacity: PV of debt-to-GDP ratio 40 percent; PV of debt-to-exports ratio 180 percent; debt service-to-exports ratio 15 percent; debt service-to-revenue ratio 18 percent. Benchmark for PV of total public debt-to-GDP is 55 percent.
- Tailored natural disaster stress test incorporated as described above.

### Realism tools and debt dynamics
- Realism tools suggest projections are reasonable; primary balance expected to deteriorate in 2021–22 and remain in deficit under no fiscal reforms, with slight improvement from 2023 onward due to recovery of fishing revenues.
- Public and private investment rates remain almost the same for the projection period compared with the previous DSA in 2021.
- Large contributions of residuals to debt creation reflect use of cash reserves and RERF withdrawals to finance deficits and accumulation of cash buffers during fiscal surpluses.

*Source: IMF staff estimates and Kiribati authorities (excerpts from the provided chapter).*

### 12.      Under the baseline scenario, Kiribati’s external debt trajectory is projected to breach the

### 1kirea2023002 - 12.      Under the baseline scenario, Kiribati’s external debt trajectory is projected to breach the

### External debt outlook and projected breaches
- The PV of the PPG external debt-to-GDP ratio is expected to increase and breach the indicative threshold (40 percent) in 2030.
- The debt service-to-exports ratio will gradually increase over the projection period due to continued debt accumulation, although debt service will remain relatively contained because the bulk of projected external debt is on concessional terms according to the World Bank’s SDFP cap on non-concessional borrowing.
- Under the extreme test scenarios, the PV of the PPG external debt-to-GDP ratio will breach its threshold starting from 2026.
- The ratio of the PV of the PPG external debt-to-exports is vulnerable to shocks emanating from exports, breaching its threshold starting from 2030.

### Stress tests and vulnerabilities
- Stress tests confirm vulnerability of debt dynamics to export market developments and macroeconomic shocks.
- Other stress scenarios, including the severe natural disaster scenario and the contingent liabilities test, illustrate vulnerability of the debt trajectory to external and potential domestic shocks.
- The most extreme stress test scenario of one standard deviation shock to growth predicts that the PV of the total public debt-to-GDP ratio is expected to breach the benchmark (55 percent) starting from 2027.
- Tailored natural disaster shock and combined contingent liabilities could cause the PV of the total public debt-to-GDP ratio to breach the benchmark from 2030 and 2031, respectively.

### Public debt sustainability and drivers
- Public debt follows similar dynamics to external debt given limited domestic debt (government guarantees to SOE loans).
- Historical fiscal surpluses were largely driven by strong fishing revenues; moderation of fishing revenues and contingent liabilities from the government-managed pension fund and SOEs pose risks.
- Under the baseline scenario, the PV of the total public debt-to-GDP ratio will breach the indicative benchmark (55 percent) starting from 2031.
- The DSA indicates the overall risk of debt distress is high but debt trajectory is assessed to be sustainable given mitigating factors (grant-only MDB financing access, concessional future borrowing assumptions, large cash buffers, and resources in the RERF).
- It is important to maintain adequate cash buffers of at least three months of government spending, in line with the government’s fiscal responsibility ratio.

### Key numeric thresholds and indicators (as presented)
- PV of the PPG external debt-to-GDP threshold: 40 percent
- TOTAL public debt benchmark / PV of debt in % of GDP: 55
- PV of total public debt in percent of GDP: 55
- Exports threshold: 180
- Debt service in % of Exports: 15
- Debt service in % of Revenue: 18
- Note: For the purposes of the DSA, the exports data include fishing license fees, which would be counted as “primary income” under conventional balance-of-payments definitions.

### Policy recommendations and fiscal adjustments
- Manage the fiscal framework prudently and continue to benefit from external grants; continuation of grants is critical to contain risk of debt distress.
- Maintain no regular access to debt financing in the short to medium term to avoid rapid depletion of liquidity buffers; secure grant support from development partners to meet development needs.
- Fiscal consolidation measures recommended:
  - Further mobilize revenue, including phasing out SOE tax exemptions.
  - Consolidate recurrent spending, including rationalizing the copra subsidy.
  - Improve targeting and efficiency of the social safety net, including successful implementation of the reform agenda of the newly established Social Protection Unit.
- Structural and fiscal reforms needed:
  - Formulate a sustainable medium-term fiscal framework.
  - Improve public financial management.
  - Put SOEs on a commercial and sustainable footing.
- Maintain adequate cash buffers (at least three months of government spending) and prudent use of RERF and other liquidity resources.

### Authorities' views
- Authorities broadly agree with the non-technical aspects of the DSA assessment and commit to maintaining fiscal discipline.
- They plan to contract no new debt in the short to medium term and will continue to seek grants from bilateral donors and international financial institutions.
- Authorities express concern that reducing social protection spending could adversely affect economic growth and living standards.
- Authorities expect the PIPA reopening will help generate additional fishing revenues and improve fiscal balance.
- Authorities recognize the need to comply with non-concessional borrowing policies for securing grant support from the ADB and the World Bank.

*Source: IMF staff estimates, projections, and the DSA discussion presented in the provided content.*

### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the

### 1kirea2023002 - 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the

### Overview
- Figures and tables present Kiribati’s external and public sector debt sustainability analysis for 2019–2042, historical series through 2023, and projections through 2042.
- Key components: 3-Year Adjustment in Primary Balance (percentage points of GDP), External Debt Sustainability Framework (Table 1), Public Sector Debt Sustainability Framework (Table 2), and sensitivity analyses (Tables 3 and 4).
- The large residual in Table 1 is attributed to: quality of balance of payments data; accumulation of assets in the RERF; and the partial utilization assumption regarding IDA/ADB commitments (these enter the DSA in full, but development expenditures as reflected in the overall balance are not utilizing these funds in full).

### External Debt Sustainability — Baseline (Table 1): Key statistics and projections
- External debt (nominal), historical and projections (in percent of GDP):
  - 2019: 22.4
  - 2020: 20.6
  - 2021: 17.1
  - 2022: 15.2
  - 2023: 13.0
  - 2024: 23.4
  - 2025: 32.8
  - 2026: 41.0
  - 2027: 53.1
  - 2028: 63.5
  - 2029: 77.6
  - 2030: 90.5
  - 2031: 102.8
  - 2032: 113.8
  - 2034: 175.3
  - 2042: 12.8? (table shows fragmented sequence; source table lists many entries across 2019–2042)
- Change in external debt (percent of GDP): 0.8, -1.8, -3.5, -1.9, -2.2, 10.4, 9.4, 8.2, 12.1, 10.4, 14.1, 12.8, 12.4, 11.0, 3.4 (sequence as listed).
- Identified net debt-creating flows (percent of GDP): -47.3, -38.9, -13.0, 4.2, -8.0, -10.0, -11.7, -12.3, -6.5, -7.0, -7.5, -6.9, -6.4, -6.6, -9.7, -35.6, -7.2.
- Non-interest current account deficit (percent of GDP): -49.8, -40.3, -9.1, 3.8, -8.6, -10.5, -12.0, -12.6, -6.7, -7.0, -7.4, -6.6, -6.1, -6.1, -8.9, -24.8, -7.3.
- Exports (percent of GDP): 102.0, 78.0, 58.0, 51.5, 53.8, 55.1, 55.9, 57.5, 57.0, 56.5, 56.2, 55.8, 55.5, 55.2, 52.0.
- Imports (percent of GDP): 100.9, 83.5, 88.7, 96.1, 88.5, 87.3, 88.9, 89.2, 89.2, 89.3, 89.3, 90.0, 90.6, 91.4, 100.7.
- Net current transfers (negative = inflow, percent of GDP): -21.2, -24.3, -22.0, -19.0, -24.0, -23.5, -24.5, -22.6, -15.8, -15.1, -14.4, -13.7, -13.0, -13.0, -12.7, -24.6, -18.0.
  - of which: official transfers: -37.0, -37.9, -19.0, -24.8, -32.5, -33.9, -33.1, -29.0, -25.3, -24.2, -23.2, -22.1, -21.0, -21.0, -20.5.
- Net FDI (negative = inflow): -0.4, 1.4, 0.4, 0.5, 0.8, 0.5, 0.6, 0.6, 0.6, 0.6, 0.6, 0.6, 0.6, 0.6, 0.5, 0.2, 0.6.
- Endogenous debt dynamics contribution (percent of GDP): 2.9, 0.0, -4.2, 0.0, -0.1, -0.1, -0.3, -0.3, -0.4, -0.5, -0.6, -0.8, -1.0, -1.1, -1.4 (sequence as listed).
  - Contribution from nominal interest rate: 0.3, 0.3, 0.2, 0.2, 0.2, 0.2, 0.3, 0.4, 0.4, 0.5, 0.6, 0.8, 0.9, 1.0, 1.6.
  - Contribution from real GDP growth: 0.5, 0.3, -1.3, -0.2, -0.3, -0.3, -0.5, -0.7, -0.8, -1.1, -1.3, -1.6, -1.8, -2.1, -3.0.
- Residual 3/ (percent of GDP): 48.1, 37.1, 9.4, -6.1, 5.8, 20.5, 21.1, 20.6, 18.6, 17.4, 21.6, 19.7, 18.8, 17.6, 13.2, 34.3, 16.0.
  - of which: exceptional financing: 0.0 for most years, with one entry -0.4 in later projections.
- Sustainability indicators (selected):
  - PV of PPG external debt-to-GDP ratio (percent): 11.4, 11.1, 9.6, 14.1, 18.4, 22.3, 28.0, 33.2, 39.7, 46.2, 52.7, 58.8, 97.5 (table entries fragmented).
  - PV of PPG external debt-to-exports ratio (percent): 19.6, 21.6, 17.9, 25.6, 33.0, 38.8, 49.2, 58.7, 70.6, 82.8, 95.0, 106.6, 187.5.
  - PPG debt service-to-exports ratio: 0.8, 1.3, 1.6, 2.0, 1.7, 1.6, 1.7, 1.7, 1.8, 2.0, 2.1, 2.3, 2.5, 2.7, 8.9.
  - PPG debt service-to-revenue ratio: 0.8, 1.1, 1.1, 1.5, 1.3, 1.2, 1.3, 1.3, 1.4, 1.5, 1.6, 1.8, 1.9, 2.1, 6.8.
- Gross external financing need (Million of U.S. dollars): -86.5, -67.5, -17.7, 11.7, -17.2, -23.9, -28.6, -31.3, -15.1, -16.3, -18.1, -15.8, -14.1, -14.4, -19.3.
- Nominal GDP (Million of US dollars): 175, 178, 228, 224, 248, 263, 273, 284, 295, 306, 318, 331, 344, 357, 515.
- Memorandum: PV of external debt (percent of GDP and exports) repeats key PV figures above; PV of PPG external debt (in Million of US dollars) examples: 25.9, 24.9, 23.9, 37.1, 50.3, 63.2, 82.6, 101.5, 126.2, 152.8, 181.2, 210.0, 502.2 (table entries across years).

### Public Sector Debt — Baseline (Table 2): Key statistics and projections
- Public sector debt (percent of GDP), historical and projections (selected entries as listed):
  - 2019: 27.1
  - 2020: 25.2
  - 2021: 21.0
  - 2022: 18.9
  - 2023: 16.3
  - 2024: 26.5
  - 2025: 35.8
  - 2026: 43.9
  - 2027: 55.8
  - 2032 and beyond show high projected increases (table lists values up to 176.9 and other fragmented entries).
- Public sector external debt (percent of GDP) matches external debt figures listed in Table 1 for the “of which: external debt” line.
- Change in public sector debt (percent of GDP): 1.0, -1.9, -4.2, -2.1, -2.6, 10.2, 9.3, 8.1, 12.0, 10.9, 3.4.
- Identified debt-creating flows (percent of GDP): -11.0, -6.6, 8.6, 19.4, 11.2, 11.7, 10.7, 9.6, 13.7, 13.8, 7.8, -11.4, 13.6 (sequence as listed).
- Primary deficit (percent of GDP): -13.4, -4.4, 11.2, 19.8, 11.9, 12.2, 11.5, 10.6, 15.0, 16.9, 12.4, -17.1, 15.1.
- Revenue and grants (percent of GDP): 147.3, 131.6, 100.4, 91.4, 102.4, 105.2, 105.2, 103.2, 98.9, 91.7, 88.6, 128.9, 97.9.
  - of which: grants: 37.0, 37.9, 19.0, 24.8, 32.5, 33.9, 33.1, 29.0, 25.3, 21.0, 20.5.
- Primary (noninterest) expenditure (percent of GDP): 133.9, 127.1, 111.6, 111.2, 114.3, 117.4, 116.7, 113.8, 113.8, 108.6, 100.9, 111.9, 113.0.
- Automatic debt dynamics (percent of GDP): 2.4, -2.2, -2.6, -0.4, -0.7, -0.5, -0.8, -1.0, -1.3, -3.1, -4.6.
  - Contribution from interest rate/growth differential: 0.4, 0.3, -2.1, -0.4, -0.7, -0.5, -0.8, -1.0, -1.3, -3.1, -4.6.
  - Contribution from average real interest rate (subset): -0.1, -0.1, -0.3, -0.2, -0.3, -0.2, -0.2, -0.3, -0.4, -0.9, -1.5.
  - Contribution from real GDP growth: 0.6, 0.4, -1.8, -0.2, -0.5, -0.4, -0.6, -0.7, -0.9, -2.2, -3.1.
- Residual (percent of GDP): 12.0, 4.7, -12.8, -21.5, -13.8, -1.5, -1.4, -1.4, -1.7, -2.9, -4.4, 9.9, -5.0.
- Sustainability indicators (selected):
  - PV of public debt-to-GDP ratio (percent): 15.9, 14.4, 12.6, 16.9, 21.0, 24.8, 30.4, 61.3, 99.4 (entries across years).
  - PV of public debt-to-revenue and grants ratio: 15.8, 15.8, 12.3, 16.1, 20.0, 24.0, 30.7, 66.8, 112.2.
  - Debt service-to-revenue and grants ratio: 0.6, 0.8, 0.9, 1.1, 0.9, 0.8, 0.9, 1.0, 1.6, 5.2.
  - Gross financing need: -12.5, -3.4, 12.1, 20.9, 12.8, 13.1, 12.4, 11.6, 16.0, 18.4, 17.0 (selected entries).

### Sensitivity Analysis — Public and PPG External Debt (Table 3) and Public Debt (Table 4)
- Table 3 (PPG external debt indicators, 2022–2032) reports baseline series and a battery of alternative scenarios, bound tests, and tailored tests for indicators including: PV of debt-to-GDP ratio, PV of debt-to-exports ratio, debt service-to-exports ratio, and debt service-to-revenue ratio.
  - Baseline sequences (examples): PV of debt-to-GDP ratio baseline entries shown as 11, 10, 14, 18, 22, 28, 33, 40, 46, 53, 59 (by year 2022–2032).
  - Bound tests include shocks to Real GDP growth, Primary balance, Exports, Other flows, Depreciation, and combinations; many bound tests show values well above thresholds (Threshold values listed as 40 for several indicators; bold indicates breaches).
  - Tailored tests include Combined contingent liabilities and Natural disaster, with outputs listed (e.g., C1 and C2 sequences).
- Table 4 (Public debt sensitivity, 2022–2032) reports baseline and scenario sequences for PV of debt-to-GDP ratio and other indicators with benchmarks:
  - Baseline PV of debt-to-GDP ratio examples: 14, 13, 17, 21, 25, 30, 35, 42, 49, 55, 61 (2022–2032).
  - Bound tests and tailored tests show sizable increases under adverse scenarios (e.g., B1 Real GDP growth, B2 Primary balance, B3 Exports, B4 Other flows).
  - TOTAL public debt benchmark listed as 55 across years; several scenarios produce values exceeding this benchmark.

### Key Macroeconomic Assumptions (as reported)
- Real GDP growth (in percent): -2.1, -1.4, 7.9, 1.2, 2.5, 2.4, 2.3, 2.1, 2.1, 2.1, 2.1, 2.1, 1.8, 2.7, 2.1 (sequence as listed).
- GDP deflator in US dollar terms (change in percent): -8.7, 3.0, 18.4, -2.7, 8.1, 3.6, 1.3, 1.8, 1.8, 1.8, 1.8, 1.8, 1.8, 1.8, 0.0, 2.1 (entries fragmented).
- Effective interest rate (percent) 4/: 1.2, 1.4, 1.5, 1.3, 1.4, 1.4, 1.2, 1.1, 1.1, 1.1, 1.1, 1.0, 1.0, 1.0, 1.0, 1.2, 1.1.
- Growth of exports of G&S (US dollar terms, in percent): 22.2, -22.3, -5.0, -12.7, 15.8, 8.5, 5.2, 6.9, 3.1, 3.0, 3.2, 3.3, 3.3, 3.3, 3.0, 11.6, 3.9.
- Growth of imports of G&S (US dollar terms, in percent): 3.9, -16.0, 35.8, 6.6, 2.0, 4.7, 5.5, 4.3, 4.0, 4.1, 3.9, 4.7, 4.7, 4.8, 4.6, 3.3, 4.5.
- Grant element of new public sector borrowing (in percent): entries of 52.8, 52.8, 54.3, 54.3, 54.3, 54.3, 54.3, 54.3, etc.; one aggregated entry 54.0 appears.
- Government revenues (excluding grants, in percent of GDP): 110.3, 93.7, 81.4, 66.6, 69.9, 71.3, 72.1, 74.3, 73.5, 73.1, 71.9, 71.6, 71.2, 70.7, 68.0, 86.3, 71.5 (sequence as listed).
- Aid flows (Million of US dollars) 5/: 64.9, 67.5, 43.1, 55.5, 80.7, 120.5, 120.6, 111.0, 116.7, 114.1, 124.7, 126.7, 128.0, 129.6, 169.4.
- Grant-equivalent financing (in percent of GDP) 6/: 24.8, 32.5, 40.3, 39.1, 34.5, 33.1, 31.3, 31.9, 30.9, 29.8, 29.3, 27.3, 32.5 (entries as listed).
- Grant-equivalent financing (in percent of external financing) 6/: 100.0, 100.0, 88.1, 88.5, 88.1, 83.5, 84.0, 81.3, 80.6, 80.1, 80.7, 82.8, 86.8 (entries as listed).
- Nominal dollar GDP growth: -10.7, 1.6, 27.7, -1.6, 10.8, 6.0, 3.6, 4.0, 3.9, 3.9, 3.9, 3.9, 3.9, 3.6, 2.8, 4.2.

### Main Findings, Residuals, and Drivers (drawn from presented tables and notes)
- External and public debt indicators display sharp rises in projected years (notably mid-2020s onward) driven by identified net debt-creating flows, changes in external debt, and projections of nominal external debt as percent of GDP.
- Residuals in the external debt DSA are large in several years (e.g., 48.1, 37.1, 34.3) and staff attribute the large residual to: quality of balance of payments data; accumulation of assets in the RERF; and the partial utilization assumption regarding IDA/ADB commitments (these enter the DSA in full, but development expenditures as reflected in the overall balance are not utilizing these funds in full).
- The structure of contributions to debt dynamics shows interacting effects from nominal interest rates, real GDP growth, and price/exchange rate changes.

### Implications and Observations (as reported)
- Grant-equivalent financing constitutes a large share of external financing in the projection period (entries show high percent values, often 100.0 or in the 80s), indicating heavy reliance on concessional financing and grants in the projected financing mix.
- Several sensitivity and bound tests indicate potential breaches of debt thresholds under adverse scenarios (Tables 3 and 4: bold values indicate breaches of thresholds/benchmarks).
- The DSA notes the importance of valuation adjustments and exceptional financing items captured in residuals 3/ and discusses their roles in projections.

*Sources: Country authorities; and staff estimates and projections.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1kirea2023002.pdf_