## 1tuvea2023001 - 11.5 percent in 2022 in the context of higher global inflationary pressures, an increase in ## Source details **Canonical URL:** [1tuvea2023001 - 11.5 percent in 2022 in the context of higher global inflationary pressures, an increase in](https://www.imf.org/-/media/files/publications/cr/2023/english/1tuvea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1tuvea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1tuvea2023001.pdf.json) --- ### Recent developments and macro context - COVID containment and vaccination - "98 percent of the eligible population being fully vaccinated." - Containment measures lifted in December 2022 after limited negative health consequences. - Growth and public investment - Real GDP growth: -4.3 percent in 2020; 1.8 percent in 2021; staff estimate 0.7 percent in 2022. - Public capital expenditures estimated at 21 percent of GDP for 2022, halving from 2019 levels. - Inflation drivers and impacts - Consumer price inflation (period average): 1.9 percent in 2020; 6.2 percent in 2021; 11.5 percent in 2022. - 2021: higher non-food prices and rising transportation costs. - 2022: further inflation driven by rising global food prices following Russia’s invasion of Ukraine. - Food imports represent 19 percent of GDP; agriculture represents 10 percent of GDP. - Drought led to a national state of emergency in November 2022; policy responses included untargeted "inflation mitigation payouts" totaling AUD 400,000 (AUD 40 dollars per eligible household) and expanding price controls. ### Outlook, projections, and key statistics - Growth and inflation projections - Growth projected at 3.9 percent in 2023. - Inflation projected at 5.9 percent in 2023. - Medium-term real GDP growth: 2023 3.9; 2024 3.5; 2025 2.4; 2026 2.2; 2027 2.1; 2028 2.0. - Consumer price inflation (period average): 2023 5.9; 2024 3.7; 2025 3.4; 2026 3.2; 2027 2.9; 2028 2.8. - Fiscal outlook and financing - Fiscal surplus expected to reduce to 1.1 percent of GDP in 2023, from 8.8 percent in 2022. - Fiscal spending in 2023 supported by strong grant flows, estimated at 40 percent of GDP in 2023 (including additional one-off flows). - Revenue and grants (percent of GDP): 2022 119.8; 2023 110.5; 2024 107.0; 2025 101.4; 2026 100.5; 2027 100.2; 2028 99.8. - Revenue (percent of GDP): 2022 89.0; 2023 67.9; 2024 72.9; 2025 71.0; 2026 71.1; 2027 71.2; 2028 71.2. - Fishing license fees (percent of GDP): 2022 45.6; 2023 38.6; 2024 43.6; 2025 41.7; 2026 41.8; 2027 41.9; 2028 42.0. - Grants (percent of GDP): 2022 30.7; 2023 42.6; 2024 34.2; 2025 30.4; 2026 29.4; 2027 28.9; 2028 28.6. - Total expenditure (percent of GDP): 2022 111.0; 2023 109.3; 2024 105.9; 2025 104.7; 2026 104.3; 2027 104.6; 2028 104.7. - Overall balance (percent of GDP): 2022 8.8; 2023 1.1; 2024 1.1; 2025 -3.3; 2026 -3.8; 2027 -4.4; 2028 -4.9. - Tuvalu Trust Fund (percent of GDP): 2022 224.5; 2023 214.8; 2024 206.1; 2025 199.5; 2026 193.7; 2027 188.8; 2028 184.3. - Consolidated Investment Fund (percent of GDP): 2022 43.5; 2023 39.8; 2024 37.6; 2025 31.5; 2026 29.8; 2027 28.3; 2028 26.9. - Gross reserves (A$ million): 2022 114.2; 2023 119.3; 2024 129.5; 2025 121.2; 2026 123.3; 2027 122.5; 2028 124.4. - Gross public debt (percent of GDP): 2022 10.1; 2023 8.0; 2024 6.8; 2025 5.8; 2026 9.3; 2027 13.2; 2028 17.4. - Nominal GDP (A$ million): 2022 85.2; 2023 93.8; 2024 100.9; 2025 107.4; 2026 113.5; 2027 119.6; 2028 125.6. ### Risks, vulnerabilities, and external position - Major downside risks - Delays in donor grants pose large risks to the fiscal outlook and the economy. - Loss of correspondent banking relationships could create severe balance of payments problems. - Lack of effective financial supervision creates contingent fiscal risks via the financial sector. - Higher global commodity prices could raise inflation and fiscal expenditure pressures. - Natural disasters and climate change threaten fishing license revenues, human and physical capital, and food and water security. - Structural vulnerabilities - High dependency on grants; fishing license revenues are volatile and represent around half of revenues. - Current expenditures at 98 percent of GDP versus current revenues (excluding grants, fishing, capital) at 42 percent of GDP. - Domestic current balance deteriorated to -58.9 percent of GDP in 2022 (excluding fishing revenue, grants, and capital expenditure). - External position and current account - Current account balance estimated at 4.7 percent of GDP for 2022 (12.3 percent average over 2020-2022). - Goods: export base very small (around 1 percent of GDP for goods, less than 20 percent for services); imports can exceed GDP in some years. - Reserve coverage: 12.5 months of next year estimated imports as of end-2022; expected to fall to 9.4 months by 2028. - NIIP and foreign assets/liabilities (2022, percent of GDP): NIIP 467%; Tuvalu Trust Fund 224.5%; Gross Assets 484%; Gross Liabilities 16.6%. ### Fiscal and spending dynamics in 2021–2022 - Expenditure pressures - Current expenditure rose to 98.2 percent of GDP in 2022. - Capital expenditure was 20.9 percent of GDP in 2022. - Purchases of goods and services rose by nearly 90 percent y/y in nominal terms in 2021. - TOMRS and scholarships estimated at 16.6 percent of GDP in 2022, up from 12.6 percent pre-pandemic. - Subsidies rose to 16 percent of GDP in 2022, from 11 percent in 2021. - Revenue developments - Fishing license revenues: 59 percent of GDP in 2020; estimated 46 percent of GDP in 2022. - Tax revenues broadly stable; increased excise tax revenues following a new information management system offset weakness in personal income tax revenues. - Overall fiscal surplus over 2020-2022 amounted to around 3 percent despite capital spending cuts. ### Policy recommendations and IMF/Board views - Fiscal policy and sustainability - Gradual fiscal consolidation necessary to ensure sustainability and build buffers against downside risks. - Consolidation via rationalizing expenditures and mobilizing domestic revenues. - Suggested fiscal anchor and consolidation path: - Gradual adjustment commencing in 2023 with a consolidation of 1 percent of GDP relative to the baseline. - Achieve a domestic current deficit of 48 percent by 2026 and 40 percent of GDP by 2039. - This path would raise fiscal buffers (Tuvalu Survival Fund and CIF combined) to close to 60 percent of GDP and stabilize debt. - Revenue mobilization measures - Increase the VAT statutory rate in line with peers. - Increase tax compliance, especially among large taxpayers; ensure an adequately-staffed tax authority. - Improve corporate income tax efficiency: update taxpayer registry; enforce on-time filing; roll out e-payment and filing; include tax expenditures in budget documents. - Expenditure rationalization measures - Link the wage bill with inflation and performance. - Gradually unwind the sharp increase in goods and services spending. - Rationalize TOMRS costs and overseas scholarships; review subsidies and replace untargeted ones with means-tested transfers while phasing out price controls. - Public Financial Management (PFM) and climate finance - Continue PFM reforms to support access to climate finance: strengthen integration of climate and disaster resilience in PFM; use climate tagging in the budget; improve financial reporting, budget credibility, and audit controls. - Financial sector reforms and connectivity - Strengthen financial regulation and supervision; ensure supervisory authority adequately staffed. - Encourage loan pricing reflecting borrower risk; create a digitalized centralized credit registry; introduce a resolution regime for NPLs; improve financial literacy. - Increase resilience and connectivity to the global payments system; pursue APG membership and further AML/CFT reforms with technical assistance. - Pursue digitalization plans cautiously to avoid exacerbating correspondent banking relationship pressures. - Structural and resilience measures - Strengthen disaster resilience: revamp the Disaster Risk Management Act; enforce building codes; adopt nature-based solutions; implement water use efficiency. - Increase trade integration and diversification: PACER Plus ratified in January 2022. - Align overseas scholarships with domestic needs to promote human capital. - Capacity development - Strengthen capacity through technical assistance and training from the Fund and other partners; improve data collection and statistical capabilities. - Board procedural note - Next Article IV consultation with Tuvalu expected to be held on the current 24-month cycle. ### Climate exposure, adaptation plans, and costs - Climate exposure and impacts - Tuvalu highly exposed: seawater flooding, coastal erosion, infrastructure and cultural asset loss, contamination of water supplies, threats to food security and energy supply, migration pressure. - Migration projections (UNU survey): internal migration projected to rise by 70 percent by 2055; international trips projected to double by 2055. - Temperature projections: rise by less than 1°C by 2030; increase more than 2.5°C by 2090 under a high-emission scenario. - Sea level rise under RCP8.5: 40 centimeters by 2050; one meter by 2100. - Funafuti tidal inundation under RCP8.5: one-half of Funafuti’s land area covered by daily tidal waters by 2050; 95 percent by 2100. - National adaptation planning and major projects - L-TAP (Te Lafiga o Tuvalu) goals: raised safe land and staged relocation; safe drinking water; renewable energy; climate-resilient infrastructure; space for civic/commercial areas; improved food security. - TCAP details: - Fogafale lagoon shore land reclamation design: 710 meters long, extend 100 meters seaward, require approximately 250,000m3 of suitable fill material to a height at least two meters above the highest measured sea level. - TCAP financing: Green Climate Fund grant US$36m; Government of Tuvalu co-financing US$2.9m; total cost representing 63.8 percent of 2022 GDP. - TCAP requires an investment of 64 percent of 2022 GDP and expected to be finalized by 2024. - TCAP expected to strengthen resilience of 35 percent high-value vulnerable coastline (2.7km) and directly benefit 3,100 people or 29 percent of Tuvalu’s population. - L-TAP Phase II contingent on Phase I relocations; Phase II likely to require substantially more resources than Phase I. ### Public Financial Management, accreditation, and unlocking climate finance (Appendix IV) - Need for external finance - Climate investments "outstrip the country’s domestic fiscal space" and "require substantial external finance." - Green Climate Fund (GCF) is principal fund but access impeded by PFM and PIM capacity gaps. - PFM requirements for GCF access (selected) - Corporate Governance, Financial Reporting, Budget Credibility, Internal & External Audit, Robust Internal Controls, Procurement, Transparency and Accountability. - Progress and recommended reforms - 2022 improvements: FMIS integration with accounts receivable module; monthly dashboards for expenditure and receipts. - Recommended reforms: re-introduce monthly budget execution reporting; resolve data quality issues; employ Chart of Accounts to map to GFS; improve cash forecasting; strengthen internal and external audit; clear backlog of bank reconciliations; adopt Treasury Single Account; implement FMIS commitment control module. - PIM gaps and accreditation constraints - No PIMA; PEFA assessment planned for June 2023. - Ministry of Finance and Economic Development has Direct Access to GCF but is not an Accredited Entity; accreditation needed to manage projects to retain national control and reduce scope/cost erosion. - Priorities: project proposal preparation, project oversight, data gathering, monitoring and evaluation, coordination, and budget support for reporting requirements. ### Debt Sustainability Analysis (DSA) — key findings and scenarios - Risk ratings and horizon - Risk of External Debt Distress: High. - Overall Risk of Debt Distress: High. - Projection horizon extended to 20 years to capture impact of natural disasters and climate change. - Baseline and stress outcomes - Under baseline, PV of both external and public debt breach indicative thresholds by 2036. - Mechanical external and overall risk rating moderate for first 11 years; final external and overall risk of debt distress assessed high as PV debt-to-GDP ratios breach thresholds from 2036 onward. - Selected baseline macro assumptions - Real GDP: 2020 -4.3 percent; 2021 1.8 percent; 2022 0.7 percent; 2023 3.9 percent; 2024 3.5 percent; long-term: slightly below 2 percent. - CPI inflation: 11.5 percent in 2022; GDP deflator inflation 5.5 percent in 2022; GDP deflator expected to rise to 6 percent in 2023. - Fishing license revenues projected to plateau at 42 percent of GDP in the medium term. - Government borrowing strategy: use CIF transfers first (leave at least 16 percent of TTF maintained value in CIF); when insufficient, borrow externally on concessional terms; adhere to zero non-concessional borrowing per IDA SDFP. - Alternative and stress scenarios (selected) - Adjustment scenario: pursue fiscal anchor of "40 percent deficit for the domestic current balance"; outcome raises domestic buffers to "60 percent of GDP by 2043". - Fishing license revenue shock: fishing revenues fall to "35 percent of GDP (from 42 percent) after 2031"; widens deficit by 7.3 percent of GDP in 2031 and pushes deficit to 18 percent by 2043. - Natural disaster shock: Cyclone Pam-like damage of "30 percent of GDP" in 2024; recovery five years; deficit widened to "9.5 percent of GDP in 2029" and adds "around 3 percent to the deficit in 2032-36"; PV debt-to-GDP breaches threshold by 2031. - Strong TTF returns: returns exceed Australian CPI by "1 percent"; debt falls to "below 1 percent by 2032"; TTF and CIF would be "186 and 99 percent of GDP, respectively, by 2035 (versus 164 and 21.5 percent in the baseline)." ### Technical assistance, statistics, and capacity development - Data and statistical capacity - Data shortcomings significant, especially national accounts and monetary statistics. - CPI only price index; CPI weights to be adjusted for 2024 after household income and expenditure survey. - GFS not compiled or published; MoF issues monthly fiscal statements; classification improvements needed. - Monetary and financial statistics not produced nationally; mission-produced monetary data use institutional balance sheets. - TA provided and planned (PFTAC and others) - FY2022: 109 days of PFTAC TA; FY2023 workplan includes missions on prudential standards, GDP compilation updates, quarterly budget execution reporting, tax audits and large taxpayer management. - STA and other partners provided TA on statistics; PEFA mission planned for June 2023. ### Implementation progress and authorities’ views - Authorities broadly agreed with staff assessments on pandemic effects, PACER Plus benefits, need to improve global payments connectivity, join APG, and strengthen AML/CFT framework. - Authorities highlighted benefits from new information management system boosting excise tax revenues. - Authorities project lower real GDP growth for 2023 and 2024 of around 2 percent each (more conservative than staff). - Authorities emphasize donor grants to fund current year’s fiscal deficit and to address reopening bottlenecks (repairs to shipping fleet, TOMRS arrears, Tuvalu Electricity Corporation). - Authorities committed to addressing understaffing at the supervisory authority and implementing AML/CFT reforms; expect in-person TA missions in 2023 to improve implementation. *TUVALU STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION — IMF staff assessment and related appendices as provided in the supplied content unit.* ### 11.5 percent in 2022 in the context of higher global inflationary pressures, an increase in ### 1tuvea2023001 - 11.5 percent in 2022 in the context of higher global inflationary pressures, an increase in ### Recent developments and context - COVID containment and vaccination: - Successful vaccination campaign with "98 percent of the eligible population being fully vaccinated." - Containment measures were lifted in December 2022 after limited negative health consequences. - Pandemic economic fallout: - Real GDP growth: -4.3 percent in 2020; 1.8 percent in 2021; staff estimate 0.7 percent in 2022. - Growth stagnated following the contraction at the onset of the pandemic. - Public capital expenditures estimated at 21 percent of GDP for 2022, halving from 2019 levels. - Inflation drivers and impacts: - Consumer price inflation (period average): 1.9 percent in 2020; 6.2 percent in 2021; 11.5 percent in 2022. - Inflation initially driven in 2021 by higher non-food prices and rising transportation costs. - Further inflation in 2022 driven by rising global food prices following Russia’s invasion of Ukraine. - Food imports represent 19 percent of GDP; agriculture represents 10 percent of GDP. - Drought led to a national state of emergency in November 2022 and exacerbated food- and water-security risks. - Policy responses included untargeted "inflation mitigation payouts" totaling AUD 400,000 (AUD 40 dollars per eligible household) and expanding price controls. ### Outlook and projections - Growth and inflation: - Growth projected at 3.9 percent in 2023. - Inflation projected at 5.9 percent in 2023. - Fiscal outlook: - Fiscal surplus expected to reduce to 1.1 percent of GDP in 2023, from 8.8 percent in 2022. - Fiscal spending in 2023 supported by strong grant flows, estimated at 40 percent of GDP in 2023 (including additional one-off flows). - The fiscal balance is expected to deteriorate starting in 2023 due to large increases in current expenditures and the resumption of infrastructure projects. - Medium-term projections (selected): - Real GDP growth: 2023 3.9; 2024 3.5; 2025 2.4; 2026 2.2; 2027 2.1; 2028 2.0. - Consumer price inflation (period average): 2023 5.9; 2024 3.7; 2025 3.4; 2026 3.2; 2027 2.9; 2028 2.8. - Revenue and grants (percent of GDP): 2022 119.8; 2023 110.5; 2024 107.0; 2025 101.4; 2026 100.5; 2027 100.2; 2028 99.8. - Revenue (percent of GDP): 2022 89.0; 2023 67.9; 2024 72.9; 2025 71.0; 2026 71.1; 2027 71.2; 2028 71.2. - Fishing license fees (percent of GDP): 2022 45.6; 2023 38.6; 2024 43.6; 2025 41.7; 2026 41.8; 2027 41.9; 2028 42.0. - Grants (percent of GDP): 2022 30.7; 2023 42.6; 2024 34.2; 2025 30.4; 2026 29.4; 2027 28.9; 2028 28.6. - Total expenditure (percent of GDP): 2022 111.0; 2023 109.3; 2024 105.9; 2025 104.7; 2026 104.3; 2027 104.6; 2028 104.7. - Overall balance (percent of GDP): 2022 8.8; 2023 1.1; 2024 1.1; 2025 -3.3; 2026 -3.8; 2027 -4.4; 2028 -4.9. - Overall balance (excl. grants) (percent of GDP): 2022 -22.0; 2023 -41.4; 2024 -33.0; 2025 -33.7; 2026 -33.2; 2027 -33.3; 2028 -33.5. - Domestic current balance (percent of GDP): 2022 -58.9; 2023 -56.0; 2024 -50.6; 2025 -49.3; 2026 -49.0; 2027 -49.3; 2028 -49.7. - Tuvalu Trust Fund (percent of GDP): 2022 224.5; 2023 214.8; 2024 206.1; 2025 199.5; 2026 193.7; 2027 188.8; 2028 184.3. - Consolidated Investment Fund (percent of GDP): 2022 43.5; 2023 39.8; 2024 37.6; 2025 31.5; 2026 29.8; 2027 28.3; 2028 26.9. - Gross reserves (A$ million): 2022 114.2; 2023 119.3; 2024 129.5; 2025 121.2; 2026 123.3; 2027 122.5; 2028 124.4. - Gross public debt (percent of GDP): 2022 10.1; 2023 8.0; 2024 6.8; 2025 5.8; 2026 9.3; 2027 13.2; 2028 17.4. - Nominal GDP (A$ million): 2022 85.2; 2023 93.8; 2024 100.9; 2025 107.4; 2026 113.5; 2027 119.6; 2028 125.6. ### Risks and vulnerabilities - Major downside risks identified: - Delays in donor grants pose large risks to the fiscal outlook and the economy. - Loss of correspondent banking relationships could create severe balance of payments problems. - Lack of effective financial supervision creates contingent fiscal risks via the financial sector. - Higher global commodity prices could raise inflation and fiscal expenditure pressures. - Natural disasters and climate change threaten fishing license revenues, human and physical capital, and food and water security. - Structural vulnerabilities: - High dependency on grants (grants account for large shares of revenue flows). - Fishing license revenues are volatile and represent around half of revenues. - Current expenditures at 98 percent of GDP are significantly larger than current revenues (revenues excluding grants, fishing license revenues, and capital revenues) at 42 percent of GDP. - Domestic current balance deteriorated to -59 percent of GDP in 2022 (excluding fishing revenue, grants, and capital expenditure). ### Fiscal and spending dynamics in 2021–2022 - Expenditure composition and pressures: - Current expenditure rose to 98.2 percent of GDP in 2022. - Capital expenditure was 20.9 percent of GDP in 2022. - Purchases of goods and services rose by nearly 90 percent y/y in nominal terms in 2021. - Expenditures related to the Tuvalu Overseas Medical Referral Scheme (TOMRS) and scholarships estimated at 16.6 percent of GDP in 2022, up from 12.6 percent pre-pandemic. - Subsidies rose to 16 percent of GDP in 2022, from 11 percent in 2021, driven by higher electricity subsidies. - Land-lease renegotiations contributed to expenditure increases. - Revenue developments: - Fishing license revenues: 59 percent of GDP in 2020; estimated 46 percent of GDP in 2022. - Tax revenues remained broadly stable due to increased excise tax revenues following a new information management system, offsetting weakness in personal income tax revenues. - Overall fiscal surplus over 2020-2022 amounted to around 3 percent despite capital spending cuts. ### Policy recommendations and IMF Executive Directors' views - Fiscal policy and sustainability: - Gradual fiscal consolidation necessary to ensure sustainability and build buffers against downside risks. - Consolidation can be achieved through rationalizing expenditures and mobilizing domestic revenues. - Continued Public Financial Management reforms to support access to climate finance. - Financial sector reforms: - Strengthen financial regulation and supervision. - Increase resilience and connectivity to the global payments system. - Authorities encouraged to join the Asia-Pacific Group on Money Laundering and further implement AML/CFT reforms with technical assistance. - Digitalization plans should be pursued without exacerbating correspondent banking relationship pressures. - Structural and resilience measures: - Strengthen disaster resilience via revamping the Disaster Risk Management Act and enforcing building codes. - Increase trade integration to expand exports and diversification; noted ratification of the PACER Plus agreement. - Comprehensive strategy to align overseas scholarships with domestic needs to promote human capital development. - Capacity development: - Strengthen capacity through technical assistance and training from the Fund and other international partners. - Improve data collection and statistical capabilities. - Board procedural note: - It is expected that the next Article IV consultation with Tuvalu will be held on the current 24-month cycle. *TUVALU STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION* ### 6. The external position for 2022 is estimated to have been broadly in line with the level ### 1tuvea2023001 - 6. The external position for 2022 is estimated to have been broadly in line with the level ### External position and current account - Tuvalu’s goods and services balance is structurally negative with a very small export base (of around 1 percent of GDP for goods, less than 20 percent for services) far outweighed by imports (goods and services imports combined can exceed GDP in some years). - The current account balance is estimated at 4.7 percent of GDP for 2022 (and 12.3 percent on average over 2020-2022). - The 2022 outturn would have been higher had fishing license fees not fallen by 3.6 percentage points of GDP. - A large negative balance in 2021 (-14 percent of GDP) followed by a large positive balance in 2022 (+9 percent of GDP) is primarily explained by the delay of a World Bank grant (of 13 percent of 2021 GDP) that was scheduled for 2021 but was disbursed in 2022, and by the sale of a vessel classified as capital revenues in 2022 under the authorities’ GFS 1986 recording convention. - Tuvalu ratified the Pacific Agreement on Closer Economic Relations (PACER) Plus in January 2022; the agreement will reduce to zero existing import tariffs for all countries in the agreement and contemplates additional trade-facilitating actions. - Total import duties (from all partners) currently represent 2.5 percent of GDP; the 10-year phase-in implies relatively little medium-term revenue effect. ### Connectivity to global payments and financial sector modernization - High transaction and compliance costs relative to overall transaction volumes make Tuvalu vulnerable to the loss of correspondent banking relations (CBRs). - After losing a CBR in 2020, the National Bank of Tuvalu (NBT) currently maintains three CBRs for payments in a basket of currencies (FJD, AUD, NZD, EUR, USD). - Authorities are undertaking AML/CFT reforms through a 2022-2025 Policy Reform Matrix (PRM) including: - establishment of a dedicated Anti-Money Laundering Coordination Committee (AMLCC) (already operational), - plans to join the Asia Pacific Group (APG; Tuvalu is currently an Observer), - measures to improve the legal framework. - NBT plans to establish ATMs and start online banking services by early 2024, and roll out point-of-service debit and credit cards by mid-2024. - Interest rates are mostly fixed and there continue to be no prudential standards; capacity development and TA were more challenging when delivered virtually through end 2022. ### Authorities’ views (external sector and reforms) - Authorities broadly agreed with staff’s assessment on pandemic effects, delayed infrastructure projects, impacts on trade and hospitality, and the influence of Russia’s invasion of Ukraine and the drought on inflation (higher fuel and food prices). - Authorities highlighted benefits from a new information management system in bolstering excise tax revenues. - Authorities emphasized PACER Plus ratification benefits and agreed on the need to improve global payments connectivity, join APG, set up AML Coordination Committee, and update AML/CFT legal framework. - Authorities noted continuous efforts to respond to correspondent bank information requests and agreed on the scope for improving risk-assessment capacity of the financial supervisor, including increased staffing. ### Outlook and risks (growth, inflation, fiscal and external projections) - Growth projections: - 2023: 3.9 percent - 2024: 3.5 percent - Medium to long term: projected to decline to below 2 percent - Inflation projections: - 2023: 5.9 percent - Long run: slowly converge to 2 percent - Fiscal balance: - 2022 overall surplus: 8.8 percent of GDP - 2023 overall surplus projected to fall to 1.1 percent of GDP - Domestic current balance expected to improve marginally to -56 percent in ratio to GDP (text states domestic current balance is expected to improve marginally to -56 percent in ratio to GDP) - Key fiscal expenditure and revenue assumptions for 2023: - Current expenditures envisaged to increase by 10 percent y/y in 2023. - Wages and salaries projected to rise by 17 percent y/y in 2023. - Subsidies expected to decline modestly to 15 percent of GDP in 2023 from 16 percent of GDP in 2022. - Capital expenditures expected to increase by 26.4 percent y/y in 2023. - Tuvalu Development Fund (TDF) budget for 2023: A$31 million; expected to support A$12 million worth of capital projects in 2023. - Non-capital revenues expected to weaken in 2023 in ratio to GDP, driven by weaker non-tax revenues (primarily fishing licenses). - Medium-term fiscal outlook: - Fiscal accounts projected to remain in deficit from 2025 onward. - Overall deficit expected to hover around 7 percent of GDP. - Domestic current deficit projected to be around 50 percent of GDP. - Projections assume grants decrease gradually toward 28 percent of GDP by the end of this decade and 22 percent by 2043. - Assumes fishing license revenues remain at around 42 percent by 2028. - Tuvalu Trust Fund (TTF) and Consolidated Investment Fund (CIF): - TTF grew by 12.2 percent in 2021 but declined by 7 percent in 2022, leaving market value at A$191 million. - CIF balance at end-2022: A$37.6 million, or 18 percent of the market value of the TTF. - Government target for CIF: 16 percent of the maintained value of the TTF. - Projections assume net foreign financing of 4 percent of GDP starting in 2026, then hovering around an average of 6 percent of GDP. - Under these projections, Tuvalu is assessed to remain at a high risk of debt distress. - Current account outlook: - Expected to turn negative by 2024 as goods and services deficit widens. - Reserve coverage: 12.5 months of next year estimated imports as of end-2022; expected to fall to 9.4 months by 2028. - Downside risks identified: - Delays in donor grants. - Loss of Tuvalu’s CBRs causing severe balance of payments problems. - Lack of timely data on SOE performance and ineffective financial supervision creating contingent risks. - Higher global commodity prices leading to higher inflation and fiscal pressures. - Natural disasters and climate change impacts (including on fishing license revenues and human/physical capital losses). ### Authorities’ views on outlook and fiscal pressures - Authorities project lower real GDP growth for 2023 and 2024 of around 2 percent each year (more conservative than staff). - Authorities agree inflation will ease but remain elevated; concur on main risks including downside risks, contingent liabilities from loss-making SOEs, renewed global inflationary pressures, threats from climate change, and potential volatility in fishing license revenues. - Authorities noted newly agreed increases in recurring and one-off grants to fund the current year’s fiscal deficit and address reopening bottlenecks (repairs to shipping fleet, arrears relating to TOMRS and Tuvalu Electricity Corporation). - Authorities view pandemic-related increases in goods and services expenditures in 2021 and the public wage bill increase in 2023 as largely one-off measures to retain key specialists and limit human capital loss. - Authorities acknowledged poor TTF returns might challenge maintenance of a healthy buffer account or cash reserves. ### Policy recommendations to reduce uncertainty and achieve sustainable growth - Fiscal policy should pursue dual goals: ensuring sustainability and meeting climate adaptation needs; fiscal consolidation is necessary to build buffers against downside risks. - Significant donor support will be required for climate-adaptation investments given narrow domestic revenue base and lack of access to debt markets; reforms to facilitate access to climate funds are needed. - Medium-term macro-fiscal sustainability requires reducing reliance on volatile revenue sources and consolidation in current expenditures. - Suggested fiscal anchor and consolidation path: - Gradual adjustment commencing in 2023 with a consolidation of 1 percent of GDP relative to the baseline. - Achieve a domestic current deficit of 48 percent by 2026 and 40 percent of GDP by 2039. - This path would raise fiscal buffers (Tuvalu Survival Fund and CIF combined) to close to 60 percent of GDP and stabilize debt. - Structural reforms that raise medium-term growth by 1 percentage point would allow quicker attainment of the deficit target. *Source: IMF staff assessment as presented in the provided content unit.* ### 21. Consolidation can be achieved through a combination of expenditure and revenue ### 21. Consolidation can be achieved through a combination of expenditure and revenue measures ### Expenditure rationalization — findings and recommendations - Key expenditure rationalization measures recommended: - Link the wage bill with inflation and performance. - Gradually unwind the sharp increase in goods and services spending. - Rationalize spending on the TOMRS, where spending doubled the budgeted amount in 2022, including by: - exploring options to reduce the costs of overseas treatments; - minimizing patient wait times abroad; - improving preventive programs; - tracking expenditures; - strengthening supply chain management; and - planning procurement for key pharmaceuticals and medical supplies. - Rationalize overseas scholarships, and enforce conditions of medical scholarships to ensure the return of health professionals to the country. - Review all subsidies, replacing untargeted ones with means-tested transfers while phasing out price controls. ### Revenue mobilization — findings and recommendations - Measures to mobilize revenues: - Increase the VAT statutory rate in line with peers. - Push ahead with plans to increase tax compliance, especially among large taxpayers, and ensure an adequately-staffed tax authority. - Improve corporate income tax efficiency by: - updating the taxpayer registry; - enforcing on-time filing; - tax awareness activities, assistance and education; - reminder notices; - developing indicators to monitor performance; and - rolling out e-payment and filing. - Include tax expenditures in budget documents and cost-effective phasing out of tax exemptions. - Enforce timely corporate reporting and audits of financial statements of SOEs to improve tax payments. ### Public Financial Management (PFM) and climate finance - 2022 improvement: integration of the new Financial Management Information System (FMIS) to include an accounts receivable module and use of FMIS for bank reconciliation (supported by Fund technical assistance). - Further PFM reforms to facilitate access to climate finance include: - strengthen integration of climate and disaster resilience in the PFM system; - use climate tagging in the budget; - improvements in financial reporting, budget credibility, and audit controls; - introduce climate budget tagging (in line with authorities’ plans). - Public Investment Management (PIM) improvements recommended around capital budgeting, project reporting, and development of project proposals. ### Authorities’ views on fiscal measures - Authorities agreed on fiscal sustainability importance and emphasised plans to increase tax compliance. - Authorities noted limited scope to introduce measures that could burden consumers given the current inflationary environment and high import dependence for most goods and almost all food items. - Authorities described some current expenditure increases as exceptional (e.g., land-lease renegotiation and public sector wage restructuring) and expect lower expenditure growth going forward. - Government plans to focus on tax efficiency, auditing, and compliance, especially for large taxpayers, and to review fees and administrative burdens affecting firms to improve the business environment. - Authorities agreed on benefits from continued PFM reforms to facilitate access to external funding. ### Financial sector reforms — regulation, supervision, and connectivity - Need to accompany financial deepening and modernization with strengthened regulation and supervision. - Current context: financial stability risks currently contained given banks’ high capital adequacy ratios and levels of provisioning (Table 5), but accelerated credit expansion could pose significant risks given weak monitoring capacity. - Recommended regulatory and supervisory measures: - Encourage loan pricing that is a function of borrowers’ credit risk and the economic cycle. - Upgrade credit assessment capacity across Tuvalu’s three financial institutions through creation of a digitalized centralized credit registry. - Introduce a resolution regime for non-performing loans to facilitate NPL collections and reduce borrowers’ incentive to default. - Improve financial literacy for private firms to present financial information and for the financial sector to produce timely and accurate financial reports. - Ensure the supervisory perimeter covers not only banks but also Tuvalu’s National Pension Fund (TNPF) due to its role in extending credit. - Strengthen off-site supervision based on standardized, timely reporting and analysis, combined with on-site supervision, to enable supervisory ratings. - Urgently ensure the supervisory authority is adequately staffed to enhance Technical Assistance effectiveness and supervision capacity. - Connectivity to global payments system: - Support for authorities’ plan to join the APG (a FATF-style regional body) to unlock technical assistance and support AMLCC reforms. - Continue efforts to develop and expand correspondent banking relationships (CBR) to reduce cost of doing business and risk of disconnection from the global payment system. - Pursue digitalization plans carefully to avoid exacerbating CBR pressures, by considering AML/CFT risk assessments, FATF standards, and supervisory capacities. ### Authorities’ views on financial sector reforms and AML/CFT - Authorities welcomed modernization of financial services and agreed on close monitoring of financial risks. - Authorities noted efficiency gains from basic modern financial services (e.g., debit cards, ATMs) as the economy moves away from cash. - Authorities acknowledged constraints on credit growth from high probability of loans becoming non-performing and businesses’ inability to provide relevant financial information. - Authorities committed to addressing understaffing at the supervisory authority and to implementing planned AML/CFT reforms guided by APG gap analysis, and to pursue APG membership to access technical assistance. ### Structural reforms to promote diversification and growth - Reforms to promote private sector activity alongside climate resilience, fiscal sustainability, and safe credit expansion: - Increase trade integration and reduce external vulnerabilities: - Ratification of PACER Plus offers opportunities to expand exports. - Pursue niche tourism markets and expand participation in the fishing value chain. - Support small-scale food production (e.g., coconut industry) and enhance resilience of coastal fisheries to reduce food security risks and promote health. - Strengthen disaster resilience: - Enforce building codes across all nine islands. - Address climate risk in spatial planning and develop risk maps that guide resilient infrastructure investment. - Revamp the Disaster Risk Management Act to modernize preparedness and response. - Adopt nature-based solutions for coastal erosion. - Implement water use efficiency and enhance water security. - Enhance human capital: - Adopt a comprehensive strategy across ministries on overseas scholarships to ensure alignment with Tuvalu’s needs. - Strengthen the legal framework on patient privacy to connect health data with personal characteristics. - Deepen measures against tobacco, salt, and sugar through possible risk control actions. - Adopt legislation to support remotely delivered health services from offshore sources. ### State-owned enterprises (SOEs) — issues and recommendations - Current SOE subsidy level: subsidies to SOEs currently stand at 1.5 percent of GDP. - A significant increase in subsidies is expected for the Tuvalu Electricity Corporation to address arrears and cover the gap between the tariff and costs of fuel. - Staff recommendations for SOE reforms: - Align prices with recovery levels by phasing out Community Service Obligations (and replacing them with targeted subsidies where needed). - Enhance performance-based management. - Improve fiscal risk management by producing a plan to address loss-making SOEs through strengthening their commercial orientation. - Closely monitor losses from fishing joint ventures. - Make realistic budgetary provisions for the planned national airline and ensure high governance standards. ### Authorities’ views on structural reforms and SOEs - Authorities broadly agreed with structural reform recommendations and the benefits of international trade integration, highlighting PACER Plus ratification. - Authorities noted innovation in agricultural practices, increased local food and handicraft production for export, and disaster management priorities (including plans to amend the Disaster Risk Management Act by April 2023 and full application of the National Building Code to all new government buildings by August 2024). - Authorities agreed on aligning scholarships to skill gaps, the usefulness of tele-medicine, and the need to monitor SOE risks while exploring best practices for the national airline. ### Capacity development and statistics - Continued efforts needed to enhance statistical capacity; data shortcomings are prevalent, requiring IMF TA. - Virtual missions in 2021 and 2022 were less effective; resumption of in-person missions in 2023 is anticipated to improve implementation of partners’ advice. - Recommendations for statistical capacity: - Hire essential statistical personnel, ensure their training, and implement succession planning to reduce high turnover. - Allow the statistical department to use and publish preliminary data based on unaudited results to reduce publication bottlenecks. - Authorities view technical assistance from partners as key for GDP and BOP statistics production and plan to develop demand-side GDP statistics (with ADB assistance). - Authorities expect some turnover alleviation from the new public wage scheme and consider continued high-quality assistance from IMF PFTAC and other partners in PFM beneficial. ### Staff appraisal — outlook, risks, and policy priorities - Economic context and recent developments: - A successful vaccination strategy allowed Tuvalu to lift COVID containment measures at the end of 2022, but activity has not fully recovered to its pre-pandemic level. - Growth is expected to pick up in 2023 due to reopening. - Headline inflation rose amid higher global inflationary pressures, increased transportation costs, and higher global food prices following Russia’s invasion of Ukraine. - The external position temporarily strengthened, bringing the current account balance for 2022 to a level broadly in line with fundamentals and desirable policy settings. - Fiscal savings from pandemic-related reduced capital spending were partly offset by elevated current spending. - The deficit on the domestic current balance widened to 59 percent of GDP in 2022, up from 37 percent pre-pandemic. - Downside risks identified: - Delays in donor grants pose large fiscal and economic risks. - Loss of correspondent banking relationships would create severe balance of payments problems. - Lack of effective financial supervision creates contingent risks for the government via the financial sector. - Higher global commodity prices could raise inflation and fiscal pressures. - Natural disasters and climate change are latent threats. - Policy priorities: - Gradual fiscal consolidation and fiscal reforms are necessary to ensure sustainability and to build buffers against downside risks. - Narrow domestic revenue base and lack of access to local and international debt markets make climate-adaptation investments impossible without significant donor support; continued PFM reforms will facilitate access to climate funds. - Financial sector reforms should focus on strengthening regulation and supervision and supporting Tuvalu’s connectivity to the global payments system. - Specific regulatory measures advised: (i) encourage loan pricing that reflects borrowers’ credit risk, (ii) upgrade financial institutions’ credit assessment capacity, and (iii) introduce a resolution regime for non-performing loans. - Address understaffing of the supervisory authority urgently for reforms to succeed. - Support for joining the Asia-Pacific Group on Money Laundering (APG) and further AML/CFT reforms through technical assistance. - Pursue digitalization plans in a way that does not interfere with building resilient correspondent banking relationships. *Source: 1tuvea2023001 - 21. Consolidation can be achieved through a combination of expenditure and revenue* ### 37. Structural reforms would help diversify the economy and promote growth. Further ### 37. Structural reforms would help diversify the economy and promote growth. Further ### Structural reforms and economic diversification - Further diversification could be pursued through the development of niche tourism markets and expanding the country’s participation in the fishing value chain. - Given the substantial role of the public sector in the economy, reforms to improve SOE performance and delivery are important. ### Disaster resilience and infrastructure - Disaster resilience can be strengthened by: - enforcing building codes, - developing risk maps that further incentivize and guide investments in resilient infrastructure, - revamping the Disaster Risk Management Act to modernize preparedness and response. ### Human capital, health, and remote services - Human capital can be enhanced by: - adopting a comprehensive strategy on overseas scholarships to ensure alignment with Tuvalu’s needs, - strengthening the legal framework on patient privacy to connect health data with personal characteristics for better prevention, identification, and treatment, - deepening recent measures against tobacco, salt, and sugar, - adopting legislation and improving connectivity to support remotely delivered health services from offshore sources. ### Statistical capacity and technical assistance - Continued efforts to enhance statistical capacity are needed: - Strengthen institutional capacity through hiring of essential statistical personnel, - ensure their training, - implement succession planning given frequent turnover, - Continue close cooperation with PFTAC and other agencies providing technical assistance. ### Surveillance and consultations - It is recommended that the next Article IV consultation take place on the current 24-month cycle. ### Selected contextual and fiscal/economic indicators (as reported) - Population (2021 est.): 11,204 - Poverty rate (2017): 26 percent - Per capita GDP (2021 est.): AU$7,152 - Life expectancy (2021): 64 years - Main export: Fish - Primary school enrollment (2021, gross): 92 percent - Secondary school enrollment (2021, gross): 74 percent - Key export markets: Australia, Fiji, and New Zealand - Real GDP growth (selected years): 2018: 1.4; 2019: 3.8; 2020: -4.3; 2021: 1.8; 2022: 0.7; 2023 (Est./Proj): 3.9; 2024: 3.5; 2025: 2.4; 2026: 2.2; 2027: 2.1; 2028: 2.0 - Consumer price inflation (period average, selected years): 2018: 2.2; 2019: 3.5; 2020: 1.9; 2021: 6.2; 2022: 11.5; 2023: 5.9; 2024: 3.7; 2025: 3.4; 2026: 3.2; 2027: 2.9; 2028: 2.8 - Revenue and grants (percent of GDP, selected years): 2018: 156.4; 2019: 111.8; 2020: 129.4; 2021: 102.6; 2022: 119.8; 2023: 110.5; 2024: 107.0; 2025: 101.4; 2026: 100.5; 2027: 99.8; 2028: 99.8 - Revenue (percent of GDP, selected years): 2018: 118.3; 2019: 82.9; 2020: 95.6; 2021: 86.4; 2022: 89.0; 2023: 67.9; 2024: 72.9; 2025: 71.0; 2026: 71.1; 2027: 71.2; 2028: 71.2 - Fishing license fees (percent of GDP, selected years): 2018: 80.0; 2019: 49.0; 2020: 58.8; 2021: 49.2; 2022: 45.6; 2023: 38.6; 2024: 43.6; 2025: 43.6; 2026: 41.7; 2027: 41.8; 2028: 42.0 - Grants (percent of GDP, selected years): 2018: 38.1; 2019: 28.9; 2020: 33.7; 2021: 16.2; 2022: 30.7; 2023: 42.6; 2024: 34.2; 2025: 30.4; 2026: 29.4; 2027: 28.9; 2028: 28.6 - Total expenditure (percent of GDP, selected years): 2018: 126.0; 2019: 112.9; 2020: 121.2; 2021: 116.5; 2022: 111.0; 2023: 109.3; 2024: 105.9; 2025: 104.7; 2026: 104.3; 2027: 104.6; 2028: 104.7 - Overall balance (including grants, percent of GDP, selected years): 2018: 30.4; 2019: -1.1; 2020: 8.2; 2021: -13.8; 2022: 8.8; 2023: 1.1; 2024: 1.1; 2025: -3.3; 2026: -3.8; 2027: -4.4; 2028: -4.9 - Overall balance (excl. grants, percent of GDP, selected years): 2018: -7.7; 2019: -30.0; 2020: -25.6; 2021: -30.1; 2022: -22.0; 2023: -41.4; 2024: -33.0; 2025: -33.7; 2026: -33.2; 2027: -33.3; 2028: -33.5 - Tuvalu Trust Fund (in percent of GDP, selected years): 2018: 280.4; 2019: 237.3; 2020: 243.7; 2021: 258.7; 2022: 224.5; 2023: 214.8; 2024: 206.1; 2025: 199.5; 2026: 193.7; 2027: 188.8; 2028: 184.3 - Consolidated Investment Fund (in percent of GDP, selected years): 2018: 55.7; 2019: 47.4; 2020: 51.4; 2021: 46.3; 2022: 43.5; 2023: 39.8; 2024: 37.6; 2025: 31.5; 2026: 29.8; 2027: 28.3; 2028: 26.9 - Gross reserves (In $A million, selected years): 2018: 86.4; 2019: 88.2; 2020: 98.0; 2021: 126.3; 2022: 114.2; 2023: 119.3; 2024: 129.5; 2025: 121.2; 2026: 123.3; 2027: 122.5; 2028: 124.4 - Gross reserves (in months of prospective imports of goods and services, selected years): 2018: 10; 2019: 13; 2020: 14; 2021: 18; 2022: 12; 2023: 12; 2024: 12; 2025: 11; 2026: 10; 2027: 10; 2028: 9 - Current account balance (percent of GDP, selected years): 2018: 60.9; 2019: -22.2; 2020: 16.3; 2021: 24.1; 2022: 4.6; 2023: 2.3; 2024: -1.3; 2025: -4.3; 2026: -4.8; 2027: -5.3; 2028: -4.8 - Gross public debt (percent of GDP, selected years): 2018: 11.9; 2019: 11.5; 2020: 12.3; 2021: 11.5; 2022: 10.1; 2023: 8.0; 2024: 6.8; 2025: 5.8; 2026: 9.3; 2027: 13.2; 2028: 17.4 - External (percent of GDP, selected years): 2018: 8.4; 2019: 9.4; 2020: 9.2; 2021: 8.0; 2022: 6.9; 2023: 5.3; 2024: 4.4; 2025: 3.6; 2026: 7.4; 2027: 11.4; 2028: 15.8 - Domestic SOE debt (percent of GDP, selected years): 2018: 3.5; 2019: 2.2; 2020: 3.1; 2021: 3.5; 2022: 3.2; 2023: 2.7; 2024: 2.4; 2025: 2.2; 2026: 2.0; 2027: 1.8; 2028: 1.6 - Nominal GDP (In $A million, selected years): 2018: 64.3; 2019: 77.9; 2020: 75.2; 2021: 80.1; 2022: 85.2; 2023: 93.8; 2024: 100.9; 2025: 107.4; 2026: 113.5; 2027: 119.6; 2028: 125.6 ### Financial sector indicators (selected) - Credit growth (percent change, selected years): 2018: 13.3; 2019: -6.8; 2020: 4.5; 2021: 8.7; 2022: 14.2; 2023: 6.6; 2024: 4.8; 2025: 3.7; 2026: 3.4; 2027: 3.2; 2028: 3.1 - Banks' Capital to Risk Weighted Assets (CAR, selected): 2018: 159.3; 2019: 246.5; 2020: 249.4; 2021: 121.8; 2022: 173.6; 2023: 158.6; 2024: 161.9; 2025: 144.3; 2026: 138.6; 2027: 131.1; 2028: 127.3 - Gross NPLs to Gross Loans (selected): 2018: 25.1; 2019: 27.9; 2020: 25.5; 2021: 19.4; 2022: 15.9; 2023: 17.0; 2024: 18.2; 2025: 19.7; 2026: 21.3; 2027: 21.3; 2028: 21.3 *Source: IMF staff summary of content in 1tuvea2023001 - 37. Structural reforms would help diversify the economy and promote growth. Further* ### 2. As a result, Tuvalu is poised to experience the most severe consequences of global ### 1tuvea2023001 - 2. As a result, Tuvalu is poised to experience the most severe consequences of global ### Climate exposure and observed impacts - Tuvalu is considered one of the most exposed countries in the world to the adverse effects of climate change. - Major climate-related damages already experienced and expected to become more frequent and severe: - seawater flooding, coastal erosion, destruction of social and economic infrastructure and cultural assets, contamination of water supplies, threats to food security and energy supply, and migration pressure. - Migration projections (UNU survey): - internal migration within Tuvalu due to climate change is projected to rise by 70 percent by 2055; - international trips are projected to double by 2055. - Internal migration primarily to Funafuti could overwhelm resources and worsen environmental conditions; higher emigration could cause an acute shortage of skilled labor. ### Climate projections and health, environment, and food-security risks - Temperature projections: - rise by less than 1°C by 2030; - increase more than 2.5°C by 2090 under a high-emission scenario (UNDP, 2020). - Extreme rainfall: - expected on average four-to-five times per 20-year period by 2055 in a low-emission scenario; - could rise to six-to-seven times per 20-year period by 2090 in a high-emission scenario. - Expected impacts of extreme rainfall and changing precipitation: - compounded risk of flooding and saline intrusion; - contamination of water supplies and potential outbreak of waterborne illnesses; - lower agricultural production due to soil erosion and limited availability of fertile land. - Sea surface temperature rise increases risk of coral bleaching and harms marine resources, particularly fish stocks. - Drought incidence projected to decrease while rainfall intensity and frequency of extreme rainfall days are projected to rise over this century. - Rainwater is the primary source of fresh water supply in Tuvalu with limited availability of groundwater resources. ### Sea-level rise and tidal inundation projections (RCP8.5 / high-emissions) - Sea level rise around Tuvalu: - 40 centimeters by 2050 under RCP8.5; - one meter by 2100 under RCP8.5. - Projected tidal inundation in Funafuti under RCP8.5: - one-half of Funafuti’s land area would be covered by daily tidal waters by 2050; - 95 percent of Funafuti’s land area would be covered by daily tidal waters by 2100. - Daily tidal inundation would cover a significant fraction of the land area of the main Funafuti atoll. ### National adaptation planning and major projects - Tuvalu’s Long Term Adaptation Plan (L-TAP), Te Lafiga o Tuvalu (“Tuvalu’s Refuge”): intended to address sea-level rise risk and provide a safe home beyond 2100. L-TAP goals include: - (i) raised, safe land with staged relocation of people and infrastructure over time; - (ii) safe drinking water supply; - (iii) renewable energy supply; - (iv) climate-resilient infrastructure; - (v) space for expanding civic and commercial areas; - (vi) improved food security. - Tuvalu Coastal Adaptation Project (TCAP): - designed to provide robust coastal protection to high-value vulnerable coastlines of Nanumaga, Nanumea and Funafuti. - Fogafale lagoon shore land reclamation design: 710 meters long, extend 100 meters seaward, require approximately 250,000m3 of suitable fill material to a height at least two meters above the highest measured sea level. - Will offer safe, flood-free raised land, additional space to ease overcrowding, and include construction of a small boat harbor for all-tide access. - TCAP will strengthen institutional and community capacity for climate-resilient coastal management and long-term adaptation. - Complementary earlier initiatives (summarized): - community-based adaptation projects (gardening activities, near-shore cage farming, aquaculture in 18 villages), coastal defense options, disaster management trainings, evacuation sites with communication and early warning systems, and a “Ridge to Reef” approach (R2R Tuvalu) to protect biodiversity and ecosystem functions. - “Future Now Project” exploratory initiatives: - digitalizing government services; - establishing digital archives of historical documents and cultural practices; - pursuing domestic, regional and international legal avenues to ensure permanency of Tuvalu’s statehood and existing maritime boundaries should territory become fully submerged. ### Costs, financing, and implementation timelines - TCAP financing and cost: - Green Climate Fund grant: US$36m; - Government of Tuvalu co-financing: US$2.9m; - total cost representing 63.8 percent of 2022 GDP; - TCAP alone requires an investment of 64 percent of 2022 GDP. - The project is being executed by the United Nations Development Program in close collaboration with the Government of Tuvalu; currently expected to be finalized by 2024. - TCAP benefits and scope: - expected to strengthen the resilience of 35 percent high-value vulnerable coastline (2.7km in length); - estimated that 3,100 people or 29 percent of Tuvalu’s population will directly benefit. - Phase II of L-TAP: - design incorporated but contingent on need and science of the day; - Phase II implementation contingent on completion of Phase I relocations; under Phase II the original island platform would be raised to act as a buffer against storm waves and rising sea levels. - Resource implications: - Phase II would likely require substantially more resources than Phase I. ### Trade monitoring and recent trade developments - AIS-based real-time trade estimation: - algorithm tracks trade flows using AIS messages and ship registry data; validation shows the trade indicator explains 89 percent of variation in available official statistics (for seven Pacific Islands). - Tuvalu import estimates: - after a tepid 2020, estimated import volumes shrank by more than 23 percent in 2021 compared with 2020; - in 2022 estimated imports started recovering gradually but remained well below pre-pandemic levels; - very early and preliminary estimates for January-February 2023 suggest imports will bounce back in 2023, reaching the highest level observed in the past five years. ### External sector assessment, key balances, and vulnerabilities - Overall assessment (2022): - external position of Tuvalu in 2022 was broadly in line with the level implied by medium term fundamentals and desirable policies, mainly explained by temporary modest fiscal savings due to government inability to execute infrastructure projects. - current account (CA) expected to turn into deficit as the economy reopens and the fiscal balance deteriorates. - reserves remain adequate but are expected to decline over time, breaching the indicative threshold by 2028. - Foreign assets and liabilities (2022, percent of GDP): - NIIP: 467%; - Tuvalu Trust Fund (TTF) representing 224.5 percent of GDP; - Gross Assets: 484%; - Debt Assets: 1.9%; - Gross Liabilities: 16.6%; - Debt Liabilities: 16.6%. - Current account (2022 and projection): - Staff estimates CA recorded a surplus of 4.6 percent of GDP in 2022, driven by trade deficit offset by grants, fishing revenues and returns of the Consolidated Investment Fund (CIF). - Government surplus of 11.3 percent of GDP in 2022 (due to inability to execute planned infrastructure projects). - CA projected to deteriorate to a 3.8 percent of GDP deficit in 2023 as government infrastructure resumes. - Staff projects continued fiscal deficits will lead to sustained CA deficits going forward. - EBA-lite model results (2022): - CA-Actual: 4.6 (percent of GDP); - Cyclical contributions (from model): (-) 0.2; - Natural disasters and conflicts: (-) 0.5; - Adjusted CA: 4.9; - CA Norm (from model): 4.3; - Adjusted CA Norm: 4.3; - CA Gap: 0.6 (percent of GDP); - REER Gap (in percent): -1.5 and -57.7 reported in table columns. - Model elasticity to REER: -0.4. - Real exchange rate movements and assessment: - REER appreciated around 4.5 percent in 2022 despite 1.6 percent depreciation of the NEER; - REER is now 3 percent below its 20-year average. - EBA-lite indicates REER is depreciated by 1.5 percent relative to the exchange rate that would close its current account gap. - Low CA elasticity to REER (-0.4) implies fiscal policy and structural reforms are the main instruments to adjust external imbalances. - Capital and financial accounts, 2022: - capital account was driven by transfers to develop climate resilience infrastructure projects: an inflow of AU$4.26 million; - financial account posted a surplus of AU$18.4 million, mainly driven by portfolio investment (19.8 percent of GDP); - Tuvalu receives virtually no FDI inflows or outflows. - Reserves and currency: - Tuvalu is fully dollarized, using the Australian dollar (AUD) as currency. - Gross official reserves decreased to US$79.33 million in 2022 from US$94.97 million in 2021; - AUD depreciated by 8.2 percent relative to the US$ in 2022; foreign reserves denominated in AUD decreased by 9.6 percent. - By end-2022, gross official reserves were equivalent to 12.5 months of prospective imports. - Reserve coverage assessed adequate for a fragile, small economy (range between 10.2 and 12.4 months of imports); projected to decline below minimum recommended level by 2028, reaching 9.7 months of prospective imports. - Structural reforms and fiscal consolidation recommended to contain expected decline in reserve coverage; executing infrastructure projects to build climate resilience will reduce the need to hold high levels of international reserves. ### Policy recommendations and reform priorities - Fiscal policy: - Fiscal consolidation will be needed starting in 2023 to increase net external savings. - Continue to pursue grant financing and highly concessional loans to reduce pressures on debt accumulation. - Maintain adequate import coverage to preserve space for countercyclical macroeconomic policies and to absorb international shocks. - External and structural policies: - Build fiscal and external buffers to draw on when climate and economic risks materialize. - Structural reforms to improve international competitiveness and reduce dependency on inflows from grants and fishing licenses. - Structural reforms to develop the private sector to facilitate foreign direct investment as a new source of external flows. - Institutional changes to reduce macroeconomic risks and to support the execution of infrastructure projects. - Climate adaptation and planning: - Proceed with implementation of TCAP and L-TAP Phase I measures; plan Phase II only after relocation to Phase I is completed and contingent on evolving science and needs. - Strengthen capacity and awareness of institutions and local communities towards climate-resilient coastal management and long-term adaptation solutions. - Explore legal and technological avenues (e.g., “Future Now Project”) to preserve territory, sovereignty and culture in worst-case scenarios. *Prepared from IMF chapter content.* ### Appendix IV. Fiscal Reforms to Unlock Enhanced Access to ### Appendix IV. Fiscal Reforms to Unlock Enhanced Access to Climate Finance ### Need for External Finance and Context - Tuvalu’s infrastructure investments required to adapt to and mitigate climate change “outstrip the country’s domestic fiscal space” and, given a lack of access to domestic debt markets, “require substantial external finance.” - The domestic current balance (i.e., fiscal revenues net of expenditures, fishing license revenues, grants and capital expenditures) is expected to “remain negative and large as a ratio to GDP.” - The Green Climate Fund (GCF) is identified as the largest and most active climate fund relevant to the region, but “a major impediment to unlocking these funds for Pacific Island Countries is building capacity in the areas of PFM and PIM via reforms.” - Tuvalu population context noted: “As a small, isolated island of 11,000 people…” ### Public Financial Management (PFM) Requirements for GCF Access - The GCF benchmark for basic PFM-related standards centers on: - Corporate Governance: “Clear and formal governance structure of the entity exists which describes the entity’s key area of responsibility, authority, and reporting lines. Organization objectives are set, measured, monitored, and reported against.” - Financial Reporting: “A financial management and accounting system that follows international good practice (including the Generally Accepted Accounting Principles) and a track record of financial statements.” - Budget Credibility: “Track record of transparent business plans, financial projections and budget preparation and execution, and ability to continuously monitor performance and expenditure against these budgets and plans.” - Internal & External Audit: “Procedures in place for internal and external audits, including: a fully functional audit committee (or comparable body); an internal audit function and an independent external audit function.” - Robust Internal Controls: “Internal financial controls to ensure that financial risks are properly managed.” - Procurement: “Formal procurement standards, guidelines, and systems in place to ensure fair and, transparent procurement processes.” - Transparency and Accountability: “A range of transparency and accountability provisions, but those that relate specifically to PFM include: a policy for disclosure of conflicts of interest; demonstrated capacity to prevent fraud, financial mismanagement, and other forms of malpractice; and an independent investigation function for investigating allegations of fraud and corruption.” ### Progress to Date in Tuvalu - Tuvalu has made significant PFM progress aligned with the Te Kete 2021-30 national strategy for sustainable development. - 2022 improvements included FMIS integration to include an accounts receivable module, extending FMIS coverage to a broader set of transactions. - Financial reporting enhancements: introduction of a monthly dashboard for expenditure and receipts; monthly, quarterly and annual financial and budget reporting data available in FMIS. - Progress was supported by remote IMF PFTAC TA missions in 2021-22 covering cash management and forecasting, budget execution and financial reporting. ### Recommended PFM Reforms to Improve Access to Climate Finance - Elevate financial reporting standards to improve transparency and accountability: - Re-introduce monthly budget execution reporting (noting that “Regular in-year budget execution reporting has been suspended for a number of years”). - Resolve data quality issues and employ the new Chart of Accounts (CoA) to map Natural Accounts to GFS economic classification to allow publication of fiscal data in line with GFS requirements. - Enhance budget credibility and implementation through improved cash flow forecasting: - “Effective cash forecasting is key to providing accurate information to set correct quarterly warrants (expenditure limits).” - Strengthen internal and external audit functions and resolve the backlog of bank reconciliations from 2016: - Priority: employ the FMIS system to perform bank reconciliation. - Develop robust internal controls: - Ensure use of a Treasury Single Account to eliminate special accounts (e.g., carryover funds). - Adopt the commitment control module in FMIS; note past reliance on “a single Excel-based commitment register” that only captured procurement-based expenditures, while “Non-procurement expenditures such as payroll, subsidies, utilities, medical treatment, are controlled only at the invoicing/voucher (Accounts Payable) or payment stage (like payroll).” ### Public Investment Management (PIM) Requirements and Gaps - PIM is a necessary complement to PFM for the implementation phase of climate investments; Tuvalu has not had a Public Investment Management Assessment (PIMA). - A PEFA assessment was last undertaken in 2011; “a PEFA assessment mission from PFTAC is planned for June 2023.” - GCF-identified PIM requirements for successful project implementation: - Project identification, preparation, and appraisal: capacity and track record to identify and design projects, state project objectives and outcomes, and incorporate technical, financial, economic, legal, environmental, social and climate change aspects at appraisal; appropriate oversight for appraisal quality and implementation follow-up. - Project oversight and control: operational systems to prepare project implementation plans (including budgets and reporting guidelines) and capacity to oversee implementation and assess project expenditure against project budgets; reporting and publication capabilities for implementation reports. - Monitoring and evaluation: monitoring to detect and assess risks relating to projects and evaluation to assess whether projects achieve objectives and contribute to Fund results; evaluation provides accountability and learning and helps detect deviations early. ### Implementation Constraints and Accreditation Issues - Ministry of Finance and Economic Development currently has Direct Access to the GCF but is not an Accredited Entity (accreditation is needed to manage projects if proposals are successful). - Lack of accreditation reduces national agency over project implementation; external partners may manage and implement projects and can “make significant adjustments to implementation such as shortening project horizons or outsourcing work to private firms – reducing the scope and raising the cost of the projects.” - Authorities identified PIM capacity needs in: - project proposal preparation, - project oversight, - data gathering, - monitoring and evaluation. - Operational constraints include: - Need for better coordination across government for climate projects. - Need for budget support to meet reporting requirements (e.g., purchasing equipment to document project progress) and resources to fill key project positions. - Transport challenges between Funafuti and outer islands that hinder data collection, and poor internet connectivity that makes online surveys of outer-island residents infeasible. ### Policy Implication Summary - Sufficient PFM reforms are a pre-condition to unlocking climate finance; complementary PIM strengthening is required to implement funded projects effectively. - Priorities include: re-establishing regular in-year reporting, improving cash flow forecasting and commitment controls, clearing audit and bank reconciliation backlogs, implementing a Treasury Single Account, carrying out a PEFA update (planned for June 2023), and initiating a PIMA. - Capacity development and accreditation support are needed to move from Direct Access toward Accredited Entity status to retain project management control and reduce costs and scope erosion from externally managed implementation. *Source: Appendix IV. Fiscal Reforms to Unlock Enhanced Access to Climate Finance (Tuvalu), IMF staff prepared material.* ### Appendix VI. Integration of Capacity Development and ### Appendix VI. Integration of Capacity Development and Surveillance ### Overview - Matrix maps surveillance recommendations against technical assistance (TA) providers: ADB, European Union, IMF - PFTAC, World Bank for FY 2022 Planned/Ongoing. - TA entries indicate whether the broad surveillance topic is covered by TA; they do not necessarily imply the TA aims to accomplish the specific Staff surveillance recommendation. - Key cross-cutting emphasis: public financial management reforms, revenue measures, financial sector strengthening, climate and disaster resilience, and statistical capacity. ### Fiscal Sector: Public Financial Management, Expenditure, Revenue - Public Financial Management - Surveillance recommendations: - Improve financial reporting, budget credibility, audit, and controls (paragraph 22). - Introduce climate budget tagging (paragraph 22). - Improve capital budgeting, project reporting and development of projects proposals (paragraph 22). - TA coverage in FY 2022: ADB Yes; IMF - PFTAC Yes; World Bank Yes; European Union Yes. - Expenditure Framework - Surveillance recommendations: - Link wage bill with inflation and performance (paragraph 21). - Unwind increase in goods and services spending of 2021 (paragraph 21). - Rationalize spending on TOMRS (paragraph 21). - Rationalize overseas scholarships (paragraph 21). - Review all subsidies; replace untargeted ones with mean-tested transfers while phasing out price controls (paragraph 21). - TA coverage in FY 2022: IMF - PFTAC Yes; World Bank Yes; European Union Yes. - Revenue Framework - Surveillance recommendations: - Increase VAT statutory rate in line with peers (paragraph 21). - Continue plans to increase tax compliance (paragraph 21). - Ensure adequately staffed authority (paragraph 21). - Improve corporate income tax efficiency (paragraph 21). - Include tax expenditures in budget documents (paragraph 21). - Enforce timely corporate reporting and audits of financial statements of SOE’s (paragraph 21). - TA coverage in FY 2022: IMF - PFTAC Yes; World Bank Yes. ### Macro-Financial Issues: Supervision, Markets, AML/CFT, Correspondent Banking - Financial Supervision and Regulation - Surveillance recommendations: - Supervisory framework should cover Tuvalu's banks and National Pension Fund (paragraph 25). - Supervisory authority should be adequately staffed (paragraph 25). - TA coverage in FY 2022: IMF - PFTAC Yes; World Bank Yes. - Financial Market Development - Surveillance recommendations: - Improve regulatory framework to encourage loan pricing depending on borrowers' credit risk and the economic cycle (paragraph 25). - Create a digitalized credit registry (paragraph 25). - Introduce a resolution regime for non-performing loans to facilitate NPL's collections (paragraph 25). - TA coverage: not indicated for FY 2022 in the matrix. - AML/CFT - Surveillance recommendations: - Continue updating the legal framework and implementing authorities' policy reform matrix regarding AML/CFT; tailor reforms to Tuvalu's development needs and FATF standards (paragraph 25). - Evaluate introduction of new digital services considering AML/CFT regulations and Tuvalu's legal frameworks and supervisory capacities (paragraph 25). - Correspondent Banking - Surveillance recommendation: - Continue efforts to develop and expand the current CBR relationship (paragraph 25). ### Macro-Structural Issues: Infrastructure, Trade, Human Capital, Governance, Climate, Disasters, Private Sector - Infrastructure - TA coverage FY 2022: ADB Yes. - Trade Integration - Surveillance recommendation: - Pursue diversification through niche tourism and greater integration into fisheries value chain (paragraph 29). - TA coverage FY 2022: IMF - PFTAC Yes. - Human Capital - Surveillance recommendations (paragraph 29): - Ensure overseas scholarships are aligned with Tuvalu’s needs. - Enforce medical scholarship conditions to ensure return of health professionals. - Strengthen legal frameworks on patient privacy to facilitate access to health and personal characteristics information for prevention, identification, and treatment. - Increase measures against Tobacco, salt, and sugar through risk control actions. - Adopt legislation to support remotely delivered health services. - Governance Issues (paragraph 30) - Surveillance recommendations: - Align SOE prices with recovery levels by phasing out Community Service Obligations. - Enhance SOEs performance-based management. - Improve fiscal risk management by a plan to address loss making SOEs. - Improve monitoring of losses from fishing joint ventures. - Make proper budgetary provisions for the planned national airlines, and limit potential public liability. - Climate Change and Environment - Surveillance recommendations (paragraph 29): - Adopt natural-based solutions to coastal erosion. - Implement water use efficiency and enhance water security. - TA coverage FY 2022: IMF - PFTAC Yes; World Bank Yes; ADB Yes. - Natural Disaster Management - Surveillance recommendations (paragraph 29): - Address climate risk in spatial planning and develop risk maps. - Revamp the Disaster Risk Management Act to modernize preparedness and response. - Enforce building codes. - TA coverage FY 2022: IMF - PFTAC Yes. - Private Sector Development - Surveillance recommendation: - Support small scale production and enhance resilience of coastal fisheries (paragraph 29). - TA coverage FY 2022: ADB Yes; IMF - PFTAC Yes. ### Financial Inclusion and Statistics - Financial Inclusion - Surveillance recommendation: - Improve financial literacy for private firms aiming to improve collection and presentation of financial information (paragraph 25). - Statistics / Data enhancement - Surveillance recommendations (paragraph 32): - Adopt a personnel strategy to reduce high turnover and its impact over workload. - Allow statistical department to use and publish preliminary figures based on unaudited results. - TA coverage FY 2022: IMF - PFTAC Yes; World Bank Yes. ### Appendix VII: Implementation of 2021 Article IV Consultation Recommendations — Key Actions Since 2021 - Fiscal policy and disaster/climate resilience - Resumption of the coastal adaptation project announced in December 2022. - Updated building regulations and building codes for new public buildings. - Amended Disaster Risk Management Act, empowering the National Disaster Management Office (NDMO) as coordinating and monitoring unit for disaster risk management. - Staff note: gradual fiscal consolidation remains important to build buffers. - Public wage bill - Public wage bill updated; restructured to address retention and retain skilled workers. - Public sector wage bill increased by 17 percent in 2023. - Recommendation: establish clear criteria linking wage increases to performance, fiscal revenues, and inflation. - Tuvalu Medical Treatment Scheme and scholarships - TMTS reviewed and revised in 2021 to Tuvalu Overseas Medical Referral Scheme (TOMRS). - Rationalizing overseas scholarships and improving travel budget cost-effectiveness remain priorities. - Tax and revenue administration - World Bank assisted authorities with tax system review. - ASYCUDA implemented in December-2021 to automate customs management. - Further improvements needed in tax compliance and taxpayer services. - Authorities requested a tax policy mission on PACER Plus within PFTAC Revenue Administration Program: "During FY 2022 4 missions were held and four more are expected during 2023." - Financial sector modernization and SOE reforms - PFTAC provided TA on supervision; three virtual missions (two in FY 2022 and one in FY 2023) to develop bank regulatory framework and train in financial risk analysis. - NBT is finishing implementation of a new system to enable ATMs and online banking services by end 2023 and roll out point-of-service debit and credit cards by 2024. - TA from Elemental Group Limited assisted draft electricity tariff structure changes; corporate plans for SOEs, timely reporting and audits, and rules-based CSO compensation remain to mitigate contingent liability risks. - Statistics capacity - STA provided TA to improve institutional capacity and reduce reporting lags; further Fund TA expected to help compile data. ### Debt Sustainability Analysis (DSA) — Key Findings and Assumptions - Risk Ratings and Horizon - Risk of External Debt Distress: High. - Overall Risk of Debt Distress: High. - Granularity in the Risk Rating: Sustainable. - Application of Judgement: Yes. The projection horizon was extended to 20 years to capture the impact of natural disasters and climate change on debt dynamics. - DSA approved June 23, 2023. - Debt dynamics and projections - Tuvalu remains at a high risk of debt distress, unchanged from the 2021 DSA. - Under current policies, projected persistent fiscal deficits and high levels of debt relative to the 2021 DSA. - Mechanical external and overall risk rating is moderate based on the first 11 years of projections since none of the debt burden indicators breach their thresholds under the baseline, and the Present Value (PV) of external and public debt-to-GDP ratio breach their thresholds under the stress tests. - Ratios projected to breach indicative thresholds under the baseline scenario in the long run, triggering a final external and overall high risk of debt distress. - Assessment of sustainability assumes continued access to external budget support on concessional terms, low debt service ratios throughout the projection horizon, and limited cash buffers in the Consolidated Investment Fund (CIF) to finance deficits. - Key risks: elevated current spending, high reliance on volatile fishing revenues and grants, and risks of natural disasters. - Public debt coverage and reporting - Public debt coverage includes concessional and commercial debt of the central government; no sub-national government structure or domestic government debt issuance. - SOE loans from NBT to non-financial SOEs stood at 3.5 percent of GDP in 2021; included in baseline public debt definition given potential government exposure. - Total public debt as of end-2022 stood at 10.1 percent of GDP, up by 2.8 percentage points since the 2021 DSA. - The ICDF loan (10-year maturity) and ADB loans (projected to mature by 2037) are included in external debt. - World Bank January 2022 Debt Reporting and Transparency Heat Map showed improvement ("Green" on four indicators); 2023 heatmap rendered "Red" on most indicators due to delays related to the pandemic; SOE debt publication was hindered by audit delays that have now been completed. - Background economic context and vulnerabilities - Tuvalu had a GDP of US$60 million in 2022 and a population of 11,792 in 2020. - Main income sources: fishing license fees, .tv internet domain licenses, trust fund investments, foreign aid, and remittances. - Public sector dominates the economy; use of the Australian dollar as legal tender; very small financial sector. - Tuvalu is highly vulnerable to climate change and natural disasters, which disrupt fiscal planning and budget outcomes. - DSA methodology notes - DSA prepared jointly by IMF and World Bank following the Guidance Note on the Bank-Fund Debt Sustainability Framework for Low Income Countries (2018). - Tuvalu’s Composite Indicator (CI) index: 2.58 (based on IMF April 2023 WEO and 2021 World Bank CPIA), indicating weak debt-carrying capacity. - Contingent liabilities stress test: SoE debt shock set to 0 percent of GDP (government-guaranteed and non-guaranteed debt captured in baseline); PPP shock set to 0 (no PPPs); financial market component default value used at 5 percent of GDP given a very limited financial sector. *Source: Appendix VI and Appendix VII, staff report content provided in the supplied PDF content unit.* ### 0.2 percentage points relative to the previous DSA ### 1tuvea2023001 - 0.2 percentage points relative to the previous DSA ### Debt levels and recent dynamics - External debt levels declined from a high of 21 percent of GDP in 2010 to 10.1 percent as of end-2022. - Debt levels are expected to rise faster than in the 2021 DSA due to: - Weaker real GDP growth. - A 12 percent of GDP drop in the stock of the CIF in 2023. - The CIF dynamics: - The prior CIF trajectory permitted a six-year period of drawdowns before hitting the government’s maintenance threshold; the current CIF level permits a single year of drawdown in 2025 under current projections. - Public debt composition (selected figures): - Total Debt: 9.1, 9.2, 8.6, 12.2, 11.5, 10.1 (percent of GDP) for years shown in the table. - Select creditors and instruments include ADB, ICDF, and loans in USD and SDR (detailed table entries preserved in source). ### Trust funds and fiscal buffers - Tuvalu Trust Fund (TTF): - Market value rose in 2021 by 12 percent to the highest level on record: 261 percent of GDP. - TTF value ended 2022 down by 7 percent y/y. - No distribution to the CIF can be made in 2022 given the TTF downturn if returns remain below maintenance level. - Consolidated Investment Fund (CIF): - CIF stood at 42.6 percent of GDP by end-2022. - Government targets a CIF balance of a minimum of 16 percent of TTF maintained value as a precaution. - Other funds: - Tuvalu Survival Fund (TSF) — climate adaptation fund for recovery, rehabilitation, mitigation and adaptation. - Tuvalu Development Fund (TDF) — manages donor funds for off-budget infrastructure projects. ### Baseline macroeconomic assumptions (selected projections and values) - Real GDP: - 2020: -4.3 percent - 2021: 1.8 percent - 2022: 0.7 percent - 2023: 3.9 percent - 2024: 3.5 percent - Long-term: Growth projections of slightly below 2 percent; medium-term cost of natural disasters and climate change at 0.8 percent of GDP on average. - Inflation: - CPI Inflation: 11.5 percent in 2022. - GDP deflator inflation: 5.5 percent in 2022; expected to rise to 6 percent in 2023; CPI projected to moderate to 3.7 percent by 2024 and to 2 percent in the medium term; GDP deflator expected to settle close to 2 percent in the medium term. - Balance of payments: - Current account surplus projected to decline to 3.0 percent of GDP in 2023. - Exports of goods and services (including fishing licenses) projected to remain at around 58 percent of GDP in the medium and long term. - Fiscal balance and revenues: - Primary fiscal balance improved to a surplus of 9.1 percent of GDP in 2022 (driven by a large World Bank grant expected in 2021, arriving in early 2022). - Primary fiscal surplus of 1.2 percent projected in 2023. - Fishing license revenues projected to plateau at 42 percent of GDP in the medium term. - Fees from the .tv license projected to fall to 5 percent of GDP. - Foreign grants projected to decline to around 22 percent of GDP (currently 43 percent). - Total expenditures projected to gradually decline from around 115 percent of GDP (five-year average) to around 103 percent of GDP. - General government deficit projected to widen to just under 10 percent of GDP by 2043. - Government borrowing strategy: - Deficits funded with transfers from the CIF first, subject to leaving at least 16 percent of the TTF maintained value in the CIF. - When CIF transfers are insufficient, authorities are projected to borrow externally on concessional terms. - Government adheres to zero non-concessional borrowing per IDA Sustainable Development Financing Policy (SDFP). ### Debt-carrying capacity and thresholds - Composite Indicator (CI) index: 2.59 (based on April 2023 WEO data and World Bank’s 2021 CPIA), indicating a "weak" debt-carrying capacity. - Under LIC DSA with a "weak" rating, Tuvalu is assessed against a threshold of 35 percent for the PV of total public debt-to-GDP ratio. - The PV of PPG external debt-to-exports ratio and the PPG external debt service-to-exports ratio remain well below thresholds, reflecting concessional debt and inclusion of fishing license revenues in exports. ### Debt sustainability results and risk assessment - Baseline scenario: - The PV of both external and public debt breach their indicative debt-to-GDP thresholds by 2036. - Projections extended to 20 years to account for vulnerability to natural disasters and climate change. - Despite rising debt ratios, debt service-to-revenue ratio remains very low, peaking at 3 percent (well below the 14 percent revenues-to-GDP threshold), owing to low initial debt levels and concessional borrowing. - Overall risk: - Mechanical external and overall risk rating is moderate for the first 11 years, but final external and overall risk of debt distress is assessed to be high because PV public and external debt-to-GDP ratios breach thresholds from 2036 onwards. ### Stress tests, calibrations, and scenario outcomes - Contingent liabilities stress test (text table summary): - Default settings used/mentioned: - Financial market shock: 5 percent of GDP (default minimum). - PPP: 35 percent of PPP stock — No PPP present (0.0). - SoE's debt (guaranteed and not guaranteed): default shock of 2 percent of GDP may be triggered if government-guaranteed debt not fully captured. - Total combined contingent liabilities (2+3+4+5) default shown as 5.0 (percent of GDP). - Tailored stress tests and custom scenarios: - Natural disaster stress test: - Calibrated as a one-time 30 percent of GDP shock to the external debt-to-GDP ratio, a one-off 2 percentage points decline in real GDP growth, and the standard 3.5 percentage points shock on exports growth (customized in line with the impact of Cyclone Pam in 2015). - Under this shock, the PV of Debt-to-GDP rises above the threshold of 30 percent by 2028 and remains above for the projection period; debt service levels remain below the 14 percent threshold. - Commodity price shock: - Triggered because commodity exports equal 30 percent of total exports over the previous three-year period. - Calibration corresponds to default DSA template values (one standard deviation shock from current price levels). - Public debt-to-GDP would rise above 30 percent by 2026 due to high dependence on imported fuel; debt service levels remain below the 14 percent threshold. - Exports shock (standard): - Results in a very large increase in debt-to-exports and debt service-to-exports, crossing relevant thresholds in 2024 and 2025 respectively — driven by large drops in fishing license revenues (exports definition includes fishing licenses). - Customized scenarios implemented: - Fiscal adjustment scenario. - Fishing license revenues shock. - Scenario with strong TTF returns. - Model realism and data notes: - Realism tools suggest projections are reasonable; public and external debt projected to rise faster than in 2021 DSA owing to weaker growth and lower fiscal buffers when deficits start in 2025. - New BOP data for 2013-present were issued and account for differences from the 2021 DSA. - Staff baseline assumes only a brief rebound in growth after reopening in 2023, then a return to potential just below 2 percent; persistence parameter of 0.6 applied to growth response. ### Policy implications and recommendations (drawn from the analysis) - Promoting fiscal sustainability in the medium term requires: - Building buffers by mobilizing revenues. - Rationalizing current expenditures. - Maintain CIF minimum buffer rule (leave at least 16 percent of TTF maintained value in the CIF) while using excess CIF funds to finance deficits as needed. - Continue adherence to zero non-concessional borrowing per IDA SDFP; prioritize concessional external borrowing when CIF transfers are insufficient. - Given sensitivity of debt ratios to exports, natural disasters, and commodity price shocks, policies should: - Strengthen resilience to natural disasters and climate risks. - Diversify revenue sources to reduce reliance on fishing license revenues and commodity imports. - Preserve sovereign wealth fund maintenance rules to avoid forced balance-sheet channeling that could exacerbate fiscal stress. *Source: IMF staff analysis as presented in the provided DSA chapter/section.* ### 15. Alternative scenarios are also considered to examine the impact of potential upside ### 1tuvea2023001 - 15. Alternative scenarios are also considered to examine the impact of potential upside ### Alternative scenarios and stress tests - Adjustment scenario - Authorities pursue a fiscal anchor of "40 percent deficit for the domestic current balance" through: - unwinding the sharp increase in goods and services spending of 2021; - reducing spending on the TOMRS rationalizing overseas scholarships; - reviewing all subsidies, replacing untargeted ones with means-tested transfers while phasing out price controls. - Outcome: raise domestic buffers to "60 percent of GDP by 2043". - Assessment: "Such buffers would be sufficient to cover most shocks, including a sharp fall in fishing revenues and a natural disaster shock." - Fishing licenses revenue shock - Assumption: fishing licenses revenue falls to "35 percent of GDP (from 42 percent) after 2031" to reflect climate shocks affecting tuna stocks. - Impact: "This shock would widen the deficit by 7.3 percent of GDP in 2031 and push the deficit to 18 percent by 2043." - Natural disaster shock - Assumption: a cyclone similar in scale to the "2015 Cyclone Pam" hitting the island in 2024, causing a damage of "30 percent of GDP". - Recovery and rehabilitation: projected to take "five years". - Fiscal impact: - widen the fiscal deficit to "9.5 percent of GDP in 2029" (compared to "5 percent of GDP in the baseline"); - "add around 3 percent to the deficit in 2032-36". - Consequence: higher fiscal deficits would accelerate depletion of fiscal buffers, causing the present value of debt-to-GDP to breach its threshold by 2031, resulting in "a high mechanical risk of debt distress." - Strong TTF returns scenario - Baseline: TTF performance assumed in line with Australian CPI. - Shock: TTF returns exceed that inflation benchmark by "1 percent". - Impact: - creates additional fiscal space through transfers to the CIF and reduces debt to "below 1 percent by 2032"; - the TTF and CIF are "186 and 99 percent of GDP, respectively, by 2035 (versus 164 and 21.5 percent in the baseline)". - Interpretation: strong TTF returns translate into a large sovereign fund (CIF), creating significant fiscal space. ### Risk rating and vulnerabilities — findings from the DSA - Overall risk assessment - "Tuvalu remains at high risk of debt distress," consistent with the 2021 DSA. - Under the baseline, Tuvalu would face persistent budget deficits due to elevated current spending and the need to maintain infrastructure spending while fishing revenues and grants do not grow fast enough to offset growth in expenditures. - Due to the weak performance of the TTF in 2022, "no deposit could be made into the CIF" and projected deficits would entail an "increase in concessional debt as soon as 2026." - Debt trajectory and sustainability - The debt trajectory highlights the importance of raising the domestic current balance (revenues less expenditures excluding grants, fishing revenues and capital expenditures) to: - lower the risk of debt distress; - create fiscal space to maintain buffers and allow for climate adaptation efforts. - Despite the high risk rating, debt is assessed as sustainable because: - all debt is "on concessional terms"; - debt service indicators remain well below their relevant thresholds. - Timing and uncertainty: - "the debt-to-GDP threshold is only breached after 13 years." - Projections for a 20-year period are inherently uncertain, especially where data quality is low, suggesting further down weighting is appropriate for far off horizons when assessing sustainability. - Climate adaptation projects noted - Tuvalu Coastal Adaptation Project (TCAP): financed by the Green Climate Fund; a land reclamation project and raised sea wall. - Long Term Adaption Plan (L-TAP): aims to create raised, safe land, provide safe drinking water and renewable energy. - Note: higher spending efficiency and domestic revenue mobilization efforts would help. A large proportion of climate adaption expenditure is donor funded and is off-budget — funded by the TDF — estimated "between 25-50 percent of capital expenditures in a given year." ### Authorities’ views and policy actions - Agreement and risk recognition - "The authorities agreed with the DSA assessment." - Long-run risks: climate change and large natural disasters pose significant risks to debt sustainability. - Recent fiscal drivers: "no new debt has been taken on since 2019 and overall external debt has been decreasing in recent years." - Elevated domestic current deficit drivers: exceptional items such as the once-in-50-year land-lease renegotiation and the restructuring of the public sector pay in 2023. - Outlook: "Going forward current expenditure is expected to moderate and support macro-fiscal sustainability." - Policy stance and transparency measures - The authorities "do not plan to incur any new non-concessional debt over short- to medium-term in line with the IDA SDFP for FY2023." - Fiscal risk transparency: institutionalized, in "April 2023, the annual disclosure of fiscal risks" — the second FY23 Performance and Policy Action under SDFP. - Fiscal risk reports: - will be prepared using an incremental coverage approach; - will be published as a stand-alone report on the Ministry of Finance’s (MOF) website. - Initial scope: first fiscal risk report will analyze debt-related risks and contingent liabilities of two SOEs, with full coverage expected "by 2027." - Financing strategy: authorities plan to rely on grants from development partners to fund infrastructure projects to help contain fiscal risks. - Budget reforms: planned reforms to budget formulation, execution, and reporting processes should help improve fiscal planning and ensure expenditures are kept within planned budgetary allocations. *Source: Tuvalu authorities and IMF Staff calculations, as presented in the chapter.* ### 2.5 percentage points of GDP in ### 1tuvea2023001 - 2.5 percentage points of GDP in ### Fiscal adjustment and possible growth paths - Chart summary: Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show possible real GDP growth paths under different fiscal multipliers (left-hand side scale). - Multipliers shown: Baseline; Multiplier = 0.2; Multiplier = 0.4; Multiplier = 0.6; Multiplier = 0.8. - Investment scenarios indicated: Gov. Invest. - Prev. DSA; Gov. Invest. - Curr. DSA; Priv. Invest. - Prev. DSA; Priv. Invest. - Curr. DSA. - Public and private investment rate horizon labels up to 2028; contributions to Real GDP growth shown as percent, 5-year average, with Historical and Projected (Prev. DSA and Curr. DSA) series. ### External debt sustainability — Baseline scenario (selected figures and dynamics) - External debt (nominal), historical and projections (In percent of GDP): - 2020: 9.2 - 2021: 8.0 - 2022: 6.9 - 2023: 5.3 - 2024: 4.4 - 2025: 3.6 - 2026: 7.4 - 2027: 11.4 - 2028: 15.8 - 2033: 40.9 - 2043: 18.1 - Change in external debt (percent of GDP): -0.2; -1.2; -1.1; -1.6; -0.9; -0.8; 3.8; 4.1; 4.3; 5.5; -3.0 (series across years shown in table). - Identified net debt-creating flows (percent of GDP): -23.4; -35.4; -6.5; -4.5; 0.6; 6.7; 7.0; 7.5; 6.7; 6.2; 8.5; -12.4; 4.6 (series across years shown in table). - Non-interest current account deficit (percent of GDP): -23.9; -34.2; -6.7; -4.4; 0.7; 6.8; 7.0; 7.6; 6.8; 6.5; 9.0; -12.2; 4.8. - Deficit in balance of goods and services (percent of GDP): -17.8; 0.1; -12.0; 6.1; -8.9; -10.7; -14.2; -14.8; -15.7; -19.1; -20.5; -20.5; -13.9. - Net current transfers (negative = inflow, percent of GDP): -53.9; -61.4; -38.5; -71.7; -61.5; -57.1; -55.9; -55.6; -55.4; -53.3; -47.3; -51.9; -57.1. - of which: official: -56.5; -65.5; -41.7; -74.6; -64.1; -59.5; -58.2; -57.7; -57.4; -54.8; -48.1 (series). - Endogenous debt dynamics contribution (percent of GDP): 0.5; -1.2; 0.2; -0.2; -0.1; -0.1; 0.0; -0.1; -0.1; -0.3; -0.5. - Contribution from nominal interest rate: 0.1; 0.1; 0.1; 0.1; 0.1; 0.0; 0.0; 0.1; 0.1; 0.4; 0.9. - Contribution from real GDP growth: 0.4; -0.1; -0.1; -0.2; -0.2; -0.1; -0.1; -0.1; -0.2; -0.6; -1.4. - Residual (includes exceptional financing and valuation adjustments): 23.3; 34.2; 5.3; 2.9; -1.5; -7.5; -3.2; -3.4; -2.3; -0.7; -11.6; 11.2; -1.5. ### Key sustainability indicators (selected) - PV of PPG external debt-to-GDP ratio (percent): 4.9; 3.8; 3.1; 2.5; 4.1; 5.8; 7.8; 20.9; 46.5 (series shown in table across projection years). - PV of PPG external debt-to-exports ratio (percent): 6.9; 5.5; 3.6; 2.9; 4.6; 6.5; 8.6; 22.5; 49.4. - PPG debt service-to-exports ratio: 1.4; 1.4; 1.4; 1.3; 0.7; 0.7; 0.6; 0.6; 0.6; 0.5; 2.7. - PPG debt service-to-revenue ratio: 1.3; 1.1; 1.1; 1.1; 0.6; 0.6; 0.5; 0.5; 0.6; 0.5; 2.5. - Gross external financing need (Million of U.S. dollars): -11.7; -20.0; -3.4; -2.2; 0.9; 5.4; 5.8; 6.6; 6.2; 7.3; 19.1. ### Key macroeconomic assumptions (selected) - Real GDP growth (in percent): -4.3; 1.8; 0.7; 3.9; 3.5; 2.4; 2.2; 2.1; 2.0; 1.8; 1.8; 3.6; 2.3 (series across years). - GDP deflator in US dollar terms (change in percent): 0.2; 14.0; -2.4; 5.7; 3.2; 3.1; 2.5; 3.2; 3.0; 2.1; 2.3; 1.0; 3.0. - Effective interest rate (percent): 0.8; 1.2; 1.0; 1.0; 1.0; 1.0; 1.0; 1.0; 1.0; 1.0; 1.1; 1.5; 1.0. - Growth of exports of G&S (US dollar terms, in percent): -7.9; -11.5; -2.4; 6.4; 33.3; 6.1; 8.1; 5.9; 5.5; 4.1; 4.2; 18.6; 8.2. - Growth of imports of G&S (US dollar terms, in percent): -13.5; 9.3; -19.1; 39.4; 9.7; 3.8; 3.6; 5.1; 4.4; 4.0; 4.1; 16.9; 7.9. - Grant element of new public sector borrowing (in percent): 52.6 repeated across projection years shown as 52.6. - Government revenues (excluding grants, in percent of GDP): 104.9; 93.6; 97.5; 81.1; 102.9; 97.5; 99.0; 99.9; 100.7; 104.9; 102.3; 95.7; 99.4 (series). - Aid flows (Million of US dollars): 17.5; 9.8; 18.2; 27.7; 13.4; 13.6; 15.6; 15.4; 15.3; 12.0; 3.0. - Grant-equivalent financing (in percent of GDP): 42.6; 19.3; 18.6; 18.2; 16.8; 15.5; 8.2; 1.6; 17.2 (selected projection entries shown). - Grant-equivalent financing (in percent of external financing): 100.0; 100.0; 100.0; 89.7; 87.9; 87.9; 86.0; 71.3; 84.4; 87.3 (series across projections). - Nominal GDP (Million of US dollars): 52; 60; 59; 65; 69; 73; 77; 81; 85; 105; 156 (series shown). - Nominal dollar GDP growth: -4.1; 16.0; -1.8; 9.8; 6.7; 5.6; 4.8; 5.3; 5.1; 4.0; 4.1; 4.5; 5.4 (series). ### Public sector debt sensitivity analysis (high-level) - Table 3 presents sensitivity analysis for key indicators of public and publicly guaranteed external debt, 2023-2043, with scenarios and bound/tailored tests. - Baseline and multiple alternative scenarios and bound tests are reported across the projection horizon, including: - A1. Key variables at their historical averages in 2023-2033. - Bound tests B1–B6 (Real GDP growth; Primary balance; Exports; Other flows; Depreciation; Combination). - Tailored tests C1–C4 (Combined contingent liabilities; Natural disaster; Commodity price; Market Financing). - Threshold values are indicated and bold values in the table indicate breaches of thresholds. ### Technical assistance, data, and statistical capacity - Data adequacy: Data provided to the Fund have serious shortcomings that significantly hamper surveillance, with the most serious shortcomings in national accounts and monetary statistics. - National accounts: Compilation methodology has gradually improved with PFTAC assistance; GDP updated to 2021; capacity weakness and reliance on fixed ratios noted. - Price statistics: CPI is the only price index; CPI weights expected to be adjusted for 2024 following household income and expenditure survey field work completed in 2022 and reports expected in 2023. - Government Finance Statistics (GFS): Tuvalu neither compiles nor publishes GFS data; MoF issues monthly fiscal statements; classification of expenditures needs improvement; resumption of publication of debt bulletins is a priority. - Monetary and financial statistics: Not produced nationally; foreign assets of the National Bank of Tuvalu and the Consolidated Investment Fund constitute official reserves; balance sheets from National Bank, Development Bank, and Tuvalu National Provident Fund used to produce mission monetary data. - Financial sector surveillance: Tuvalu does not compile Financial Soundness Indicators (FSIs); TA mission held in March 2023 to improve external sector statistics; authorities updated external sector statistics since 2013. ### Technical assistance provided and planned (PFTAC) - PFTAC assistance areas and years: tax policy and administration (2007, 2008, 2010, 2016, 2017, 2019-2022); financial sector supervision (2008, 2016, 2017, 2019, 2020, 2022); balance of payments and national accounts statistics (2006, 2008-10, 2012-22). - FY2018 to FY2019 days of TA: rose from 61 days to 96 days; 109 days of TA provided during FY2022. - FY2023 PFTAC workplan includes missions to: (i) follow up on enhancement of prudential and risk management standards and review off-site financial risks analysis, (ii) update GDP compilation methods and data sources, (iii) implement quarterly budget execution reporting, (iv) improve tax audits and revenue administration, including compliance improvement strategy and management of large taxpayers. ### Structural challenges and policy implications - Tuvalu vulnerabilities and constraints: - Population around 12,000 and annual Gross National Income of less than US$100 million. - Geographic isolation, limited fertile land, susceptibility to climate change, inability to reap economies of scale. - Climate adaptation: - Long-Term Adaptation Plan (L-TAP) aims to ensure viability beyond 2100; estimated cost around A$2 billion or 2,000 percent of GDP. - Success of adaptation relies entirely on bilateral donors and multilateral partners given lack of creditworthiness. - Authorities express interest in capacity development components of facilities (e.g., Resilience and Sustainability Facility) rather than borrowing. - Structural reform priorities: - Infrastructure for climate mitigation and disaster resilience, internet connectivity, and contingency planning for possible relocation. - Address chronic shortage of skilled labor; recent one-off pay scale realignment to retain skilled workers. - Limitations to expanding higher value-added activities in fishing due to lack of land, fresh water, refrigeration, reliable power, shipping, and distribution networks. - Financial development and payments: - Economy based on Australian dollar cash; no internet banking, no debit cards, no ATMs. - Planned phased move to electronic payments: internet banking, debit cards, limited ATMs. - Potential future consideration of credit cards contingent on financial literacy and supervision capacity. - Aspiration to join Asia Pacific Group (APG) on Money Laundering to unlock AML/CFT TA and support correspondent banking relationships. - Development Bank of Tuvalu: supports loans targeted at women, youth, clean energy, and capacity building; these loans often loss-making and a burden to the national budget. ### Fiscal balances and debt policy guidance - Tuvalu does not have access to domestic or international debt markets and relies heavily on grants due to narrow revenue base. - Challenges with donor disbursements in non-Australian currencies: authorities request consideration of disbursements in Australian dollars to reduce conversion costs and volatility. - Recent pay-scale restructuring was a once-off realignment intended as structural reform to retain human capital. - Ongoing fiscal pressure and volatility with fixed exchange rate and no independent monetary policy; medium-term buffer is the Consolidated Investment Fund. - Official assessment: The Debt Sustainability Analysis indicates that Tuvalu remains at high risk of debt distress. - Policy implication: Most donor assistance should remain grant based and the authorities should avoid non-concessional borrowing. *Sources: Country authorities; and staff estimates and projections. Prepared by Asia and Pacific Department (IMF) — Tuvalu: Staff Report for the 2023 Article IV Consultation — Informational Annex (June 23, 2023).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1tuvea2023001.pdf_