## 1kirea2024001 ## Source details **Canonical URL:** [1kirea2024001](https://www.imf.org/-/media/files/publications/cr/2024/english/1kirea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1kirea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1kirea2024001.pdf.json) --- ### Recent developments - Growth and activity - Real GDP growth estimated at 4.2 percent in 2023, up from 3.9 percent in 2022, supported by the resumption of infrastructure projects, improved weather conditions, supportive fiscal measures, and a recovery in international arrivals. - Per capita GDP (2022): US$2,199. - Population (2022): 123,375. - Inflation - Headline inflation peaked at 25.1 percent y-o-y in January 2023 and decelerated to -2.1 percent y-o-y in December 2023. - External sector and sovereign wealth fund - Current account estimated surplus of 10.2 percent of GDP in 2023. - Revenue Equalization Reserve Fund (RERF) balance reached 330 percent of GDP at end-2023 after a strong annual return of 16.4 percent. - Structural context and social indicators - Highly vulnerable to climate change; limited access to finance (only one commercial bank, ANZ Kiribati). - Life expectancy at birth (2020): 67.3. - Poverty (2019): Below $2.15 a day: 1.7; Below the national poverty line: 21.9. - Inequality (2019, income shares): Top 10 percent: 22.9; Bottom 20 percent: 9.5. ### Outlook and risks - Growth projections - Real GDP growth projected at 5.8 percent in 2024, primarily driven by higher consumption following a 38 percent increase in civil service wages. - Medium-term projections: 2025: 4.1 percent; 2026: 3.3 percent; 2027: 2.5 percent; 2028: 2.1 percent; 2029: 2.1 percent. - Inflation projections (consumer prices) - Average: 2023: 9.3; 2024: 4.5; 2025: 3.0; 2026: 2.5; 2027: 2.0; 2028: 1.9; 2029: 1.8. - End of period: 2023: -2.1; 2024: 4.8; 2025: 2.5; 2026: 2.0; 2027: 1.9; 2028: 1.8; 2029: 1.8. - External sector outlook - Current account including official transfers (percent of GDP): 2023: 10.2; 2024: 9.7; 2025: 9.2; 2026: 8.4; 2027: 8.1; 2028: 8.0; 2029: 7.9. - Key risks (tilted to the downside) - Intensification of regional conflicts, deepening geo-economic fragmentation, abrupt global slowdown, commodity price volatility, higher demand-driven inflation from the wage increase, climate change. - High uncertainty due to volatility of fishing revenue, volatility of external grants, and data gaps/quality issues. ### Fiscal position, financing, and RERF use - Fiscal aggregates (central government, percent of GDP unless noted) - Revenue and grants: 2020: 105; 2021: 72; 2022: 69; 2023: 101; 2024: 103; 2025: 92; 2026: 82; 2027: 91; 2028: 88; 2029: 87. - Total domestic revenue: 2020: 75; 2021: 64; 2022: 56; 2023: 71; 2024: 65; 2025: 63; 2026: 63; 2027: 62; 2028: 62; 2029: 62. - Fishing revenue (component): 2020: 57; 2021: 44; 2022: 36; 2023: 51; 2024: 46; 2025: 44; 2026: 43; 2027: 42; 2028: 42; 2029: 41. - Expenditures: 2020: 101; 2021: 83; 2022: 87; 2023: 102; 2024: 126; 2025: 107; 2026: 95; 2027: 104; 2028: 103; 2029: 103. - Development expenditures: 2020: 39; 2021: 16; 2022: 21; 2023: 31; 2024: 53; 2025: 35; 2026: 25; 2027: 36; 2028: 35; 2029: 35. - Overall balance2/: 2020: 4; 2021: -11; 2022: -18; 2023: -1; 2024: -22; 2025: -15; 2026: -13; 2027: -14; 2028: -15; 2029: -16. - Financing and buffers - Financing (percent of GDP): 2020: -4; 2021: 11; 2022: 18; 2023: 1; 2024: 22; 2025: 15; 2026: 13; 2027: 14; 2028: 15; 2029: 16. - RERF closing balance (millions of A$): 2020: 1,172; 2021: 1,353; 2022: 1,194; 2023: 1,389; 2024: 1,414; 2025: 1,475; 2026: 1,529; 2027: 1,579; 2028: 1,642; 2029: 1,714. - Per capita value (in 2006 A$): 2020: 7,264; 2021: 8,018; 2022: 6,530; 2023: 7,080; 2024: 6,835; 2025: 6,803; 2026: 6,772; 2027: 6,717; 2028: 6,710; 2029: 6,729. - Cash reserve buffer closing balance (millions of A$): 2020: 278; 2021: 216; 2022: 200; 2023: 192; 2024: 164; 2025: 157; 2026: 157; 2027: 157; 2028: 157; 2029: 157. - Public and external debt - External debt (US$, millions): 2020: 39; 2021: 36; 2022: 32; 2023: 30; 2024: 28; 2025: 43; 2026: 57; 2027: 78; 2028: 105; 2029: 135. - External debt (percent of GDP): 2020: 16; 2021: 13; 2022: 13; 2023: 11; 2024: 9; 2025: 13; 2026: 17; 2027: 22; 2028: 28; 2029: 35. - External debt service (US$, millions): 2020: 1.9; 2021: 2.1; 2022: 2.3; 2023: 2.3; 2024: 2.2; 2025: 2.2; 2026: 2.3; 2027: 2.5; 2028: 2.7; 2029: 2.9. - External debt service (percent of exports of goods and services): 2020: 1.3; 2021: 1.0; 2022: 0.9; 2023: 0.9; 2024: 0.8; 2025: 0.7; 2026: 0.7; 2027: 0.8; 2028: 0.8; 2029: 0.9. ### 2023 fiscal outcomes and 2024 budget drivers - 2023 outcomes - Fishing revenue increased by 15 percentage points of GDP in 2023 compared to 2022 (an increase of 52 percent in nominal terms). - Overall fiscal deficit estimated to have declined from 18 percent of GDP in 2022 to 1 percent of GDP in 2023. - Domestic recurrent deficit (excluding fishing revenue and grants) rose to 51 percent of GDP in 2023 from 47 percent in 2022. - Public debt stood at 12 percent of GDP at end-2023. - Cash reserve buffer about 46 percent of GDP at end-September 2023. - 2024 budget specifics - 38 percent increase in civil service wages relative to 2023 levels, equivalent to 9.4 percent of projected 2024 GDP. - Civil service wages allocation projected at 34 percent of GDP. - Planned withdrawal of AUD80 million (17 percent of GDP, the maximum permitted under the 2020 withdrawal rule) from the RERF included in the 2024 budget. - Fiscal deficit expected to widen to 22 percent of GDP in 2024 (accounting for RERF withdrawals as a financing item). ### Policy recommendations — fiscal consolidation and revenue mobilization - Fiscal consolidation - Initiate an ambitious consolidation to safeguard fiscal and debt sustainability; recommendation to reduce recurrent spending by about 3 percentage points of GDP each year on average starting from 2024 to reach a recurrent deficit of 3 percent of GDP (excluding budget support). - Specific measures: - Freeze the wage bill for three years till 2027 in nominal terms to generate 1 percent of GDP in savings; subsequently maintain wages constant in real terms with future adjustments guided by job evaluation and fiscal affordability. - Conduct payroll audits to ensure accurate counts of active employees and pay grades. - Rationalize the copra subsidy and unwind inefficient social protection spending, such as the leave grants for the private sector. - Revenue mobilization measures - Enact accompanying regulations to the new Income Tax Act (ITA) approved by the Cabinet in February 2024. - Amend Value-Added Tax (VAT) Act: shift VAT base from "free on board" (FOB) to “cost, insurance, and freight” (CIF) and remove tax exemptions for SOEs. - Additional measures to raise revenue by 3 to 5 percentage points of GDP: - Eliminate VAT and excise tax exemptions for SOEs; - Refrain from reducing the VAT rate following the shift from FOB to CIF; - Increase excise taxes on tobacco products, alcoholic beverages, and sugary drinks; introduce excise taxes on kava; regularly review other excise rates; - Consolidate corporate income tax (CIT) rates from three progressive rates into one. - Note: shift from FOB to CIF estimated to raise about 0.5 percent of GDP. ### RERF withdrawal rule — concerns, backtesting, and recommended alternative - Concern with 2024 Cabinet decision - Lowered annual RERF withdrawal threshold from 5 percent of real returns to 2 percent of nominal returns and removed cap on annual withdrawals; raises risk of gradual depletion and undermines fiscal discipline. - Backtesting of withdrawal rules (key outcomes) - Under the new rule (12 percent nominal return threshold), the final value of the fund would have been 73.5, equivalent to an annual growth rate of -0.8 percent. - Under the previous rule (5 percent real return threshold), backtesting shows a final value of 445, equivalent to an annual growth rate of 4 percent. - High-water mark rule yields a final portfolio value of 631, equivalent to an annual growth rate of 5 percent. - Constant maximum withdrawal of 3 percent of the balance yields the highest ultimate value over the specified period: 719, equivalent to an annual growth rate of 5.3 percent. - Frequency and amounts of withdrawals (backtest results) - Since 1985: new rule authorized withdrawals in 76 percent of the years; 5 percent real return rule allowed withdrawals in 53 percent of the years; high-water mark allowed withdrawals in 47 percent of the years. - Total amounts withdrawn (numeric totals as presented): Maximum 3 percent balance: (459); High water mark: (357); 5 percent real return threshold: (328); 12 percent nominal return threshold: (319). - Staff and World Bank recommended alternative (two-pronged) - Use withdrawals to finance high-quality development spending and exclude recurrent items (copra subsidy, unemployment benefits, leave grants for the private sector) from development financing. - Set a cap on annual withdrawals as a fixed share of the RERF balance to keep the real per capita value constant; staff estimates cap around 3 percent of the RERF balance. - Review rule every 5 years and subject the RERF withdrawal rule to more legislative scrutiny. ### Fiscal scenario analysis (Box 1 highlights) - Baseline recurrent spending (percent of GDP): 2024: 72.9; 2025: 72.4; 2026: 69.8; 2027: 68.4; 2028: 68.4; 2029: 68.3; 2030: 68.3. - Proposed recurrent spending (percent of GDP): 2024: 69.9; 2025: 69.4; 2026: 66.8; 2027: 65.4; 2028: 65.4; 2029: 65.3; 2030: 65.3. - Consolidation needed for recurrent spending: 3.0 (each year 2024–2030). - Contribution from wage freeze (percent of GDP): 2024: 0.0; 2025: 1.1; 2026: 1.1; 2027: 1.1; 2028: 1.1; 2029: 1.0; 2030: 1.0. - Contribution from streamlining subsidies (percent of GDP): 2024: 3.0; 2025: 1.9; 2026: 1.9; 2027: 1.9; 2028: 1.9; 2029: 2.0; 2030: 2.0. ### Debt sustainability, stress tests, and DSA conclusions - DSA risk ratings (April 15, 2024) - Risk rating of external debt distress: High. - Overall risk of debt distress: High. - Key DSA findings and projections - PV of PPG external debt-to-GDP ratio expected to breach the indicative threshold (40 percent) in 2036 under the baseline. - PV of total public debt-to-GDP ratio expected to remain below the indicative benchmark (55 percent) under baseline. - Stress tests (including a tailored natural disaster shock) show vulnerability: breaches of external and total public debt thresholds under severe scenarios, and high sensitivity to exports and growth shocks. - Tailored natural disaster stress test - One-off extreme natural disaster in year 2 cuts real GDP growth by 1.5 ppts and exports by 3.5 ppts. - Climate-related adaptation costs assumed to rise: climate adaptation and maintenance costs assumed to increase from 3 percent of GDP per year in 2025 to the target of 6 percent of GDP by 2032. - Mitigating factors - Grant-only status for MDB financing and likely continued access to highly concessional financing. - Large cash buffers and RERF resources; recommendation to maintain cash buffers of at least three months of government spending. - Policy implications from DSA - Prudent RERF withdrawal rule, ambitious fiscal consolidation, scale back recurrent spending, improve revenue mobilization, strengthen PFM, place SOEs on commercial footing, continue securing grants for development needs. ### Institutional, administrative, and structural reform priorities - Tax administration and RMS - Existing RMS is outdated and unsupported; need to update or replace RMS to comply with new ITA and prevent tax collection disruptions. - Supporting measures: ensure stable electricity and internet for online filing; strengthen compliance follow-up; separate tax auditors and collectors. - Public Financial Management and IFMIS - IFMIS procured in June 2022; Phase I rolled out July 2023. - Bank reconciliation expected early 2024; plan to produce 2023 Annual Reports using IFMIS in May/June 2024. - Recommended next steps: finalize updated PFM Act; revise RERF Act; publish fisheries report timely; finalize cash management policy and establish cash planning management committee; explore options to earn interest on cash accounts. - State-Owned Enterprises (SOEs) - SOEMAU issued new Statement of Intent and Performance Report templates; 17 of 18 SOEs submitted 2022 financial statements. - Government support to SOEs averages about 2½ percent of GDP per year recently. - Recommended measures: build SOEMAU capacity; improve SOE financial management and audit timeliness; recalibrate tariffs for cost recovery while protecting vulnerable groups; finalize dividend policy; consider divestment and outsourcing where appropriate. - Financial sector and inclusion - Around 15 percent of the population estimated to have access to banking services. - Credit-to-GDP ratio around 15–20 percent; loans equivalent to 10 percent of banking system assets in 2023; system-wide loan-to-deposit ratio 7 percent; non-performing loan ratio 13 percent in 2023. - Recommendations: fully operationalize the Financial Supervisory Authority of Kiribati Act (2021) and the Kiribati Financial Institutions Act (2021); staff and resource KFSA promptly; expand digital financial products and credit union initiatives. - Structural reforms to boost growth - Private sector accounts for 30 percent of employment; labor force participation 47 percent. - Key initiatives: undersea internet cable landing Tarawa in 2025; online business registration in 2024; Digital Government Act (2023); ports master plan; improved air connectivity. - Export diversification priorities: aquaculture and seaweed, expand tuna processing capacity, upgrade copra production to virgin coconut oil; reform copra subsidy distortions. - Human capital and governance - Total school enrollment rose about 9 percent annually on average between 2014 and 2019; primary enrollment >95 percent; learning poverty exceeds 70 percent; upper secondary completion rate 20 percent. - Governance: Leadership Commission and anti-corruption unit established; compliance with asset declarations declined (2019: 33 percent; 2020: 9 percent; 2021: 15 percent; 2022: 10 percent). - Judicial improvements: courts closed around 40 percent of open cases in 2023 (versus 5–10 percent previously). ### Data, CPI and GDP rebasing, and statistical issues - CPI rebasing - CPI base changed from October 2006 to June 2023; new weights from 2019/20 HIES. - Outlet sample expanded to 23 outlets (from 3); number of sub-categories increased to 12 (from 10); COICOP adoption expected to improve deflators. - CPI sub-category weight comparisons preserved in source. - GDP rebasing and impacts - Real GDP series now expressed in base-year prices for 2019 (previous base year 2006). - 2021 nominal GDP is 27 percent higher under the 2019 base compared to the 2006 base. - Nominal growth rate averaged 6.2 percent under new base vs 4.8 percent under old base over 2006–21. - Real GDP growth averaged 2.1 percentage points higher under 2019 base vs 2006 base (3.9 percent versus 1.8 percent). - Statistical adequacy and priorities (As of April 1, 2024) - Data provision has shortcomings but is broadly adequate for surveillance; priority improvements include timeliness and consolidation of national accounts, external sector, government finance statistics, and financial sector statistics. - Kiribati participates in e-GDDS but does not yet disseminate through an NSDP. ### Selected key statistics and memorandum items (preserved exactly) - Nominal GDP (millions of A$): 2023: 420; 2024: 470; 2025: 501; 2026: 528; 2027: 551; 2028: 572; 2029: 595. - Nominal GDP (millions of US$): 2023: 279; 2024: 311; 2025: 329; 2026: 342; 2027: 354; 2028: 366; 2029: 382. - Exchange rate (A$/US$ period average): 2020: 1.4; 2021: 1.3; 2022: 1.4; 2023: 1.5. - Real effective exchange rate (period average): 2020: 75; 2021: 78; 2022: 78; 2023: 83. - Real GDP (percent change): 2023 = 4.2; 2024 = 5.8; 2025 = 4.1. - Current account including official transfers (percent of GDP): 2023 = 10.2 percent. - RERF closing balance (millions of A$): 2023 = 1389; 2024 = 1414; 2025 = 1475. - RERF per capita value (in 2006 A$): 2023 = 7080; 2024 = 6835; 2025 = 6803. - Cash reserve buffer, closing balance (millions of A$): 2023 = 192; 2024 = 164; 2025 = 157. - Overall balance 2/ (Table 1): 2023 = -1. *Staff report for the 2024 Article IV consultation with Kiribati, April 11, 2024.* ### 2022. With the resumption of infrastructure projects, improved weather conditions, supportive ### KIRIBATI: STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION ### Recent developments - Growth: - Real GDP growth estimated at 4.2 percent in 2023, up from 3.9 percent in 2022, supported by the resumption of infrastructure projects, improved weather conditions, supportive fiscal measures, and a recovery in international arrivals. - Inflation: - Headline inflation peaked at 25.1 percent y-o-y in January 2023 and decelerated to -2.1 percent y-o-y in December 2023, driven by moderation of global commodity prices, improved supply-side conditions, and base effects. - External sector and sovereign wealth fund: - Current account estimated surplus of 10.2 percent of GDP in 2023, buoyed by a resurgence in fishing license fees, a rise in remittances, and a decline in global commodity prices. - Revenue Equalization Reserve Fund (RERF) balance reached 330 percent of GDP at end-2023 after a strong annual return of 16.4 percent. - Structural context: - Kiribati is highly vulnerable to climate change and faces infrastructure gaps, limited access to finance (only one commercial bank, ANZ Kiribati), and dispersion-related constraints that constrain private sector development and increase import dependence. - Social and demographic snapshot: - Per capita GDP (2022): US$2,199. - Population (2022): 123,375. - Life expectancy at birth (2020): 67.3. - Poverty (2019): Below $2.15 a day: 1.7; Below the national poverty line: 21.9. - Inequality (2019, income shares): Top 10 percent: 22.9; Bottom 20 percent: 9.5. ### Outlook and risks - Growth projection: - Real GDP growth projected at 5.8 percent in 2024, primarily driven by higher consumption following a 38 percent increase in civil service wages. - Medium-term projections: 2025: 4.1 percent; 2026: 3.3 percent; 2027: 2.5 percent; 2028: 2.1 percent; 2029: 2.1 percent. - Inflation projection: - Headline inflation projected to average 4.5 percent in 2024, largely driven by increased domestic demand. - Consumer prices (percent change, average): 2023: 9.3; 2024: 4.5; 2025: 3.0; 2026: 2.5; 2027: 2.0; 2028: 1.9; 2029: 1.8. - Inflation (end of period): 2023: -2.1; 2024: 4.8; 2025: 2.5; 2026: 2.0; 2027: 1.9; 2028: 1.8; 2029: 1.8. - External sector outlook: - Current account including official transfers (in percent of GDP): 2023: 10.2; 2024: 9.7; 2025: 9.2; 2026: 8.4; 2027: 8.1; 2028: 8.0; 2029: 7.9. - Risks (tilted to the downside): - Intensification of regional conflicts, deepening geo-economic fragmentation, an abrupt global slowdown, commodity price volatility, higher demand-driven inflation, and climate change. - High uncertainty due to volatility of fishing revenue and external grants and data gaps/quality issues. ### Fiscal position and policy priorities - Fiscal dynamics and key aggregates (central government, in percent of GDP where shown): - Revenue and grants: 2020: 105; 2021: 72; 2022: 69; 2023: 101; 2024: 103; 2025: 92; 2026: 82; 2027: 91; 2028: 88; 2029: 87. - Total domestic revenue: 2020: 75; 2021: 64; 2022: 56; 2023: 71; 2024: 65; 2025: 63; 2026: 63; 2027: 62; 2028: 62; 2029: 62. - Of which: fishing revenue: 2020: 57; 2021: 44; 2022: 36; 2023: 51; 2024: 46; 2025: 44; 2026: 43; 2027: 42; 2028: 42; 2029: 41. - External grants: 2020: 30; 2021: 8; 2022: 13; 2023: 30; 2024: 39; 2025: 29; 2026: 19; 2027: 28; 2028: 26; 2029: 26. - Expenditures: 2020: 101; 2021: 83; 2022: 87; 2023: 102; 2024: 126; 2025: 107; 2026: 95; 2027: 104; 2028: 103; 2029: 103. - Current expenditures: 2020: 63; 2021: 67; 2022: 67; 2023: 71; 2024: 73; 2025: 72; 2026: 70; 2027: 68; 2028: 68; 2029: 68. - Development expenditures: 2020: 39; 2021: 16; 2022: 21; 2023: 31; 2024: 53; 2025: 35; 2026: 25; 2027: 36; 2028: 35; 2029: 35. - Domestic recurrent balance1/: 2020: -45; 2021: -47; 2022: -47; 2023: -51; 2024: -54; 2025: -53; 2026: -50; 2027: -49; 2028: -48; 2029: -48. - Recurrent fiscal balance (incl. budget support grants): 2020: 14; 2021: -2; 2022: -7; 2023: 8; 2024: -7; 2025: -4; 2026: -4; 2027: -5; 2028: -5; 2029: -6. - Overall balance2/: 2020: 4; 2021: -11; 2022: -18; 2023: -1; 2024: -22; 2025: -15; 2026: -13; 2027: -14; 2028: -15; 2029: -16. - Financing and RERF use: - Financing: 2020: -4; 2021: 11; 2022: 18; 2023: 1; 2024: 22; 2025: 15; 2026: 13; 2027: 14; 2028: 15; 2029: 16. - RERF closing balance (in millions of A$): 2020: 1,172; 2021: 1,353; 2022: 1,194; 2023: 1,389; 2024: 1,414; 2025: 1,475; 2026: 1,529; 2027: 1,579; 2028: 1,642; 2029: 1,714. - Per capita value (in 2006 A$): 2020: 7,264; 2021: 8,018; 2022: 6,530; 2023: 7,080; 2024: 6,835; 2025: 6,803; 2026: 6,772; 2027: 6,717; 2028: 6,710; 2029: 6,729. - Cash reserve buffer closing balance (in millions of A$): 2020: 278; 2021: 216; 2022: 200; 2023: 192; 2024: 164; 2025: 157; 2026: 157; 2027: 157; 2028: 157; 2029: 157. - Public debt and external debt service: - External debt (in millions of US$): 2020: 39; 2021: 36; 2022: 32; 2023: 30; 2024: 28; 2025: 43; 2026: 57; 2027: 78; 2028: 105; 2029: 135. - External debt (in percent of GDP): 2020: 16; 2021: 13; 2022: 13; 2023: 11; 2024: 9; 2025: 13; 2026: 17; 2027: 22; 2028: 28; 2029: 35. - External debt service (in millions of US$): 2020: 1.9; 2021: 2.1; 2022: 2.3; 2023: 2.3; 2024: 2.2; 2025: 2.2; 2026: 2.3; 2027: 2.5; 2028: 2.7; 2029: 2.9. - External debt service (in percent of exports of goods and services): 2020: 1.3; 2021: 1.0; 2022: 0.9; 2023: 0.9; 2024: 0.8; 2025: 0.7; 2026: 0.7; 2027: 0.8; 2028: 0.8; 2029: 0.9. - Policy priorities and Board conclusions: - Executive Directors welcomed the strong recovery and emphasized that fiscal consolidation is crucial to safeguard fiscal and debt sustainability. - Key recommendations include scaling back recurrent spending, reforming the sovereign wealth fund withdrawal rule to preserve the fund’s real value and facilitate budget planning, enhancing revenue mobilization, rationalizing recurrent expenditure (including the elevated public wage bill), streamlining the copra subsidy, and improving targeting and efficiency of social protection payments. - Directors encouraged enhancing public financial management, strengthening SOE governance and financial viability, stepping up structural reforms to expand private sector employment and investment, and investing in climate adaptation and leveraging climate finance. - Directors supported continued capacity development to improve statistics, PFM, revenue administration, and financial sector regulation, including prompt operationalization of the Kiribati Financial Supervisory Authority. ### Selected key statistics and memorandum items - Nominal GDP (in millions of A$): 2023: 420; 2024: 470; 2025: 501; 2026: 528; 2027: 551; 2028: 572; 2029: 595. - Nominal GDP (in millions of US$): 2023: 279; 2024: 311; 2025: 329; 2026: 342; 2027: 354; 2028: 366; 2029: 382. - Exchange rate (A$/US$ period average): 2020: 1.4; 2021: 1.3; 2022: 1.4; 2023: 1.5. - Real effective exchange rate (period average): 2020: 75; 2021: 78; 2022: 78; 2023: 83. *Staff report for the 2024 Article IV consultation with Kiribati, April 11, 2024.* ### 7. The overall fiscal deficit narrowed in 2023, largely due to a recovery in fishing revenue. ### 7. The overall fiscal deficit narrowed in 2023, largely due to a recovery in fishing revenue. ### Fiscal outcomes in 2023 - Fishing revenue increased by 15 percentage points of GDP in 2023 compared to 2022 (an increase of 52 percent in nominal terms), more than compensating for: - introduction of leave grants for the private sector (equivalent to 2¼ percent of GDP), and - payments to the Kiribati Provident Fund (KPF) to cover a loan guarantee (equivalent to 2¾ percent of GDP). - Overall fiscal deficit estimated to have declined from 18 percent of GDP in 2022 to 1 percent of GDP in 2023. - Domestic recurrent deficit (excluding fishing revenue and grants) estimated to have increased to 51 percent of GDP in 2023 from 47 percent of GDP in 2022. - Public debt stood at 12 percent of GDP at end-2023, mainly composed of external debt to the Asian Development Bank (ADB) and Taiwan Province of China. - Kiribati’s cash reserve buffer was about 46 percent of GDP at end-September 2023. ### Outlook and macroeconomic projections - Growth: - Projected to accelerate to 5.8 percent in 2024, primarily driven by higher consumption following a 38 percent increase in civil service wages. - Real GDP growth projected to decelerate towards 2 percent over the medium term. - Inflation: - Average inflation projected to be 4.5 percent in 2024. - Inflation expected to gradually converge to slightly below 2 percent over the medium term. - Current account: - Projected current account surplus of 9.7 percent of GDP in 2024. - Over the medium term, surplus expected to remain below its historical average due to increased imports for domestic consumption and infrastructure projects, and a gradual decline in fishing license fees (as a percent of GDP) due to climate change. - Fiscal balance and fiscal stance: - Fiscal deficit expected to widen to 22 percent of GDP in 2024 (accounting for RERF withdrawals as a financing item). - Drivers of the 2024 fiscal widening: the wage increase, a decline in budget support from development partners, and an increase in development spending. - The 2024 budget includes a 38 percent increase in civil service wages relative to the 2023 levels, equivalent to 9.4 percent of projected 2024 GDP. - Civil service wages allocation projected at 34 percent of GDP. - SOEs account for about 15 percent of total public sector employment; loss-making SOEs are expected to request additional subsidies. - Planned withdrawal of AUD80 million (17 percent of GDP, the maximum permitted amount under the 2020 withdrawal rule) from the RERF is included in the 2024 budget. - Medium-term fiscal outlook: - Fiscal deficits expected to persist from 2025 onwards due to elevated recurrent spending, narrow domestic revenue base, and gradual decline in fishing revenue as a percent of GDP. - Baseline assumptions for staff forecasts include: - Development spending largely financed by development partners and RERF withdrawals; - Recurrent spending gradually declines as a share of GDP; - Fishing revenue declines gradually as a share of GDP; - Budget grants projected to decline to one percent of GDP in 2027 and onwards to exclude uncommitted grants; - Climate adaptation and maintenance costs assumed to increase from 3 percent of GDP per year in 2025 to the target of 6 percent of GDP by 2032. - Under these projections, Kiribati is assessed to remain at a high risk of debt distress under the low-income country debt sustainability framework (LIC DSF). ### Risks - Downside global risks: - Intensification of regional conflicts, deepening geo-economic fragmentation, and an abrupt global slowdown could reduce the price for fishing licenses and affect RERF returns. - Commodity price volatility could rekindle inflationary pressures and weaken the current account balance. - Climate change risks: - Constant threat to the economy, including adverse impact on fishing revenue, and food and water security. - Domestic risks: - Higher demand-driven inflation as the civil service wage increase could spill over to private sector salaries. - Annex and staff notes: - Risks are tilted to the downside (Annex IV). ### Authorities’ views (summary) - Broad agreement with staff’s assessment; highlight vulnerability to external shocks given heavy reliance on imports for food and fuel. - Note that increases in social protection payments and remittances have bolstered purchasing power and economic activity. - Argue recent wage increase was long overdue since 2018, aligns with performance-based job evaluation, and helps retain staff. - Emphasize that SOEs operating at a loss would not get subsidies for salary increases. ### Policy recommendations — Fiscal policy to ensure sustainability and resilience - Reduce recurrent spending and strengthen the fiscal policy framework: - Recommendation: reduce recurrent spending by about 3 percentage points of GDP each year on average starting from 2024 to reach a recurrent deficit of 3 percent of GDP (excluding budget support). - Specific measures: - Freeze the wage bill for three years till 2027 in nominal terms to generate 1 percent of GDP in savings; subsequently maintain wages constant in real terms with future adjustments guided by job evaluation and fiscal affordability. - Conduct payroll audits to ensure accurate counts of active employees and pay grades. - Rationalize the copra subsidy and unwind inefficient social protection spending, such as the leave grants for the private sector. - Mobilize revenue to generate more stable fiscal resources: - Accompanying regulations to the new Income Tax Act (ITA) approved by the Cabinet in February 2024. - Amendments to the Value-Added Tax (VAT) Act under review; changes include shifting VAT base from "free on board" (FOB) to “cost, insurance, and freight” (CIF) and removing tax exemptions for the SOEs. - Additional revenue measures to unlock potential for a 3 to 5 percentage points of GDP increase in tax revenues: - Eliminate VAT and excise tax exemptions for SOEs; - Refrain from reducing the VAT rate following the shift from FOB to CIF; - Increase excise taxes on tobacco products, alcoholic beverages, and sugary drinks; introduce excise taxes on kava; regularly review other excise rates; - Consolidate corporate income tax (CIT) rates from three progressive rates into one. - Note: the shift from FOB to CIF estimated to raise about 0.5 percent of GDP in additional revenue. - Formulate a sustainable fiscal framework: - Manage volatile/exogenous budget components (fishing revenue and grants) and prevent temporary surges in fishing revenue from feeding unsustainable spending increases. - Save revenue overperformance on the upside and adjust recurrent expenditure gradually on the downside. - Use large government cash balances as a buffer while recognizing that a permanent revenue decline would require further consolidation. ### RERF withdrawal rule — concerns and alternative - Concern: 2024 Cabinet decision lowered annual RERF withdrawal threshold from 5 percent of real returns to 2 percent of nominal returns, and removed the cap on annual withdrawals; this raises concerns about fiscal discipline and risk of gradual depletion of the RERF. - Joint IMF–World Bank recommended two-pronged alternative: - Use withdrawals to finance high-quality development spending (complementing development partners) and exclude copra subsidy, unemployment benefits, and leave grants for the private sector from development financing. - Set a cap on annual withdrawals as a fixed share of the RERF balance (not the return) to keep the real per capita value of the RERF constant; staff estimates indicate the cap should be around 3 percent of the RERF balance. - Review the rule every 5 years to consider returns and sustainability. - Subject the RERF withdrawal rule to more legislative scrutiny. ### Box 1 — Fiscal scenario analysis (key figures) - Baseline and proposed recurrent spending (In percent of GDP): - Baseline recurrent spending: 2024: 72.9; 2025: 72.4; 2026: 69.8; 2027: 68.4; 2028: 68.4; 2029: 68.3; 2030: 68.3 - Proposed recurrent spending: 2024: 69.9; 2025: 69.4; 2026: 66.8; 2027: 65.4; 2028: 65.4; 2029: 65.3; 2030: 65.3 - Consolidation needed for recurrent spending: 3.0 (each year 2024–2030) - Contribution from wage freeze: 2024: 0.0; 2025: 1.1; 2026: 1.1; 2027: 1.1; 2028: 1.1; 2029: 1.0; 2030: 1.0 - Contribution from streamlining subsidies: 2024: 3.0; 2025: 1.9; 2026: 1.9; 2027: 1.9; 2028: 1.9; 2029: 2.0; 2030: 2.0 ### Institutional and administrative capacity recommendations - Improve efficiency and targeting of social protection payments: - Social Protection Unit progress: reconciled unemployment benefits over 2020–22, addressed backlog, harmonized operations manuals. - MFED project with ANZ Kiribati to open bank accounts for benefit payments is advancing slowly. - Next steps: explore mobile wallets and other technical options to enhance delivery and targeting. - Over the medium term, review the social protection system to better define government objectives and incorporate recurrent operational and maintenance costs of donor-funded projects into budget planning. *Source: IMF staff estimates.* ### 20. Recent legislative changes and additional tax policy reforms need to be accompanied ### Recent legislative changes and additional tax policy reforms need to be accompanied by improved tax administration processes ### Tax administration and Revenue Management System (RMS) - The existing Revenue Management System (RMS) is outdated, lacks essential features (such as the ability to adjust tax rates and international transportation rates), and is no longer supported by software providers. - To comply with the new ITA and prevent disruption in tax collection, there is a crucial need to either update or replace the RMS. - Supporting measures to facilitate compliance and online filing: - Ensure an uninterrupted and stable supply of electricity and internet connectivity to facilitate online tax filing. - Strengthen compliance efforts by incentivizing tax officers to follow up on returned tax payment checks. - Introduce a degree of separation between tax auditors and collectors. ### Public Financial Management (PFM) reforms and IFMIS rollout - Key timeline and operational points: - An Integrated Financial and Management Information System (IFMIS) and a service provider were procured in June 2022. - Phase I of the IFMIS (budget preparation, management, execution, cash management, and procurement) was rolled out in July 2023. - The bank reconciliation process is expected to be completed in early 2024. - The plan is to produce the 2023 Annual Reports using the IFMIS in May/June 2024. - A PFM reform roadmap is expected to be submitted to the Cabinet in April, and an action plan matrix for sequencing reforms and milestones for 2024 will be rolled out. - Main operational challenges: - IFMIS is cloud-based and necessitates continuous online link, which is a challenge especially in the outer islands. - Need to align account structures of projects (supported by development partners) with the IFMIS chart of accounts. - Recommended next steps (with TA from IMF and other development partners): - Finalize drafting of an updated PFM Act. - Revise the RERF Act to define the RERF’s legal status and objectives, and subject its withdrawal rule to more legislative scrutiny, such as parliamentary approval. - Publish the fisheries report in a timely manner to enhance transparency. - Execute effective controls over cash balances by finalizing the cash management policy and establishing a cash planning management committee to provide the Treasury with regular updates on expected cash flows. - Explore options to earn interest on cash accounts (e.g., through a formal arrangement with ANZ Kiribati or an alternative investment strategy). ### State-Owned Enterprises (SOEs): accountability and fiscal risks - Current status and risks: - The SOE Monitoring and Advisory Unit (SOEMAU) within MFED has issued new templates of the Statement of Intent and Performance Report and has asked loss-making SOEs to formulate financial scenarios containing a path towards viability. - A draft SOE Act to strengthen SOE accountability is being finalized and expected to be submitted to the Cabinet in April/May 2024. - 17 out of the 18 SOEs have submitted the 2022 financial statements. - The pace of auditing remains slow: as of mid-February 2024, audits for 5 SOEs’ 2022 financial statements and 9 SOEs’ 2021 financial statements were completed. - The government’s support to the SOEs is largely through budget subsidies (about 2½ percent of GDP per year on average in the past five years) in the name of Community Service Obligations. - Major SOEs face financial challenges from large gaps between subsidized prices charged to consumers and import costs or operational costs; recent pressure to increase wages could worsen fiscal implications. - The assets and liabilities of the 17 SOEs accounted for 68 percent and 11 percent of GDP in 2021, respectively. - Recommended measures to enhance commercial mandate and governance: - Continue to build capacity in SOEMAU. - Improve SOE financial management and publish SOE audited financial statements in a timely manner. - Recalibrate SOE tariffs based on financial scenarios to support cost recovery while protecting the most vulnerable; design a reform of the SOE subsidy system over the medium term. - Finalize a formal dividend policy to ensure SOEs comply with dividend payment obligations to the government. - Divest and outsource SOE activities to help improve efficiency and strengthen public finances. ### Authorities’ views (tax administration, PFM, and SOEs) - Tax administration: - The tax commission has submitted a funding request to the Cabinet to update or replace the RMS and is exploring funding alternatives from development partners. - Authorities are focusing on improving compliance and observed an improvement in VAT compliance following the introduction of leave grants for the private sector (eligibility limited to employees in VAT-registered businesses). - PFM: - Authorities remain committed to phased implementation of IFMIS and anticipate IT infrastructure will facilitate timely account integration among ministries, including outer islands. - Plans to update the cash management policy and consolidate various accounts while improving returns of cash reserves, taking into consideration liquidity needs. - Plans to update the PFM Act and RERF Act, and to publish fisheries reports more regularly. - SOEs: - Observed greater compliance with reporting requirements. - SOEMAU is assessing necessary level of government support using improved financial statements and viability scenarios and is prepared to recommend adjustments to tariff increases. - Work underway to formulate a dividend policy to present to Cabinet in the near future. - SOEMAU intends to include a clause in the SOE Act requiring ministries to settle outstanding bills owed to SOEs and to establish an SOE guarantee policy. - Currently no immediate plans to divest or outsource any SOE operations. ### Boosting long-term growth through structural reforms - Rationale: - Structural reforms are needed to address fragility, improve resilience, boost long-term growth, and mitigate climate risks. - Despite periods of high growth (for example, in 2015 and 2021), GDP per capita has remained among the lowest in PICs. - Private sector and infrastructure: - Private sector accounts for only 30 percent of total employment; labor force participation rate is 47 percent. - Reforms to improve the business climate could raise private sector employment and investment, reducing pressure on fiscal resources. - Key infrastructure and digital initiatives underway: - An undersea internet cable is scheduled to land in Tarawa in 2025. - An online business registration initiative is planned for 2024. - Air connectivity has improved recently. - A master plan for updating the ports is supported by development partners. - The Digital Government Act (2023) could accelerate public sector digital transformation. - Export diversification and upgrading: - Copra, crude coconut oil, and fisheries accounted for more than 90 percent of Kiribati’s exports in 2021. - Past export of seaweed once accounted for more than 20 percent of exports in prior years. - The copra subsidy creates market distortions acknowledged by market participants. - Recommended directions: diversify into aquaculture and seaweed; expand tuna processing capacity; upgrade copra production to produce virgin coconut oil. - Natural resource utilization and environmental governance: - Important to finalize regulations to the Environment Act (2021) and Fisheries Act (2021). - Reopening of the PIPA in April 2023 presents opportunity to boost fishing revenue, but preventing illegal fishing or underreporting remains a challenge. - Authorities plan to develop a marine spatial plan to ensure sustainability of fishing. - Seabed mining legislation passed in 2017 but no licenses awarded; authorities plan a full evaluation before decisions. - Authorities plan to seek support to improve carbon reporting practices and collect broader greenhouse gas emissions data. - Human capital: - Total school enrollment increased by about 9 percent on average annually between 2014 and 2019; primary school enrollment rates exceeded 95 percent. - Learning poverty exceeds 70 percent; upper secondary school completion rate is 20 percent. - Possible measures: improve data collection and transparency on school enrollment, teaching practices, and overseas scholarships; improve teacher certifications; expand technical vocational education and training (tested at a public school in 2023); review gender equality and women development policies to enhance women’s economic empowerment. - Financial sector and inclusion: - Around 15 percent of the population is estimated to have access to banking services. - Credit-to-GDP ratio has stagnated at around 15–20 percent of GDP in recent years. - Loans were equivalent to only 10 percent of banking system assets in 2023. - System-wide loan-to-deposit ratio was 7 percent and non-performing loan ratio was 13 percent in 2023. - ANZ Kiribati’s regulatory capital adequacy ratio exceeded 30 percent in 2022. - Recommended enablers: fully operationalize the Financial Supervisory Authority of Kiribati Act (2021) and the Kiribati Financial Institutions Act (2021), establish and staff KFSA promptly and adequately, expand digital financial products and new credit union initiatives. - Climate adaptation and finance: - Kiribati’s annual adaptation costs to contain climate-related economic losses are estimated at 25 percent of GDP, the highest among PICs. - Government established a climate finance division within MFED in 2016 to coordinate access to climate funds. - Several adaptation projects underway, but approved funding covers only a fraction of estimated investment needs. - Short-term approach: obtain funding through bilateral arrangements or partnerships with accredited organizations (multilateral development banks or regional organizations) while building internal capacity for direct access over the medium term. - Governance and judicial improvements: - Leadership Commission and an anti-corruption unit within the Public Service Office have been established; compliance with filing asset declarations declined from 33 percent in 2019 to 10 percent in 2022 (compliance rates for 2020 and 2021 were 9 percent and 15 percent). - Government recruited judges for the court of appeals and is looking to appoint a permanent Chief Justice. - Authorities report courts closed around 40 percent of open cases in 2023, compared with previous years where the rate stood at 5–10 percent. - Leadership Commission plans to submit amendments to Leaders’ Code of Conduct Act to grant commissioners greater enforcement authority. ### Authorities’ views on structural reforms - Authorities acknowledge growth challenges and need for structural reforms. - Note the minimum support price for copra disincentivizes production of virgin coconut oil; expanding tuna processing is financially infeasible due to high cost of imported cans and chemicals. - Report increasing outward migration has not caused wide-scale labor shortages due to ample labor supply and active employment ministry interventions. - Continue progress on transport, renewable energy, and climate-resilient infrastructure coordinated with development partners. - Committed to enhancing financial inclusion and making the KFSA operational. - Judicial improvements include reduction in case backlogs and plans to strengthen enforcement by the Leadership Commission. ### Staff appraisal: recent performance and outlook (key statistics) - Economy size and recent growth: - Economy is estimated to be about 17 percent larger in 2023 compared to 2019. - Growth is expected to reach 5.8 percent in 2024, primarily boosted by a 38 percent increase in civil service wages. - Inflation and external position: - Inflation is projected to average 4.5 percent in 2024, mainly driven by increased domestic demand. - The current account is estimated to have shifted back to a surplus of 10.2 percent of GDP in 2023. - Risks to the outlook: - Risks are tilted to the downside, including an intensification of regional conflicts, deepening geo-economic fragmentation, an abrupt global slowdown, commodity price volatility, higher demand-driven inflation, and climate change. *Source: IMF staff report excerpt.* ### 37. Initiating an ambitious fiscal consolidation is essential to safeguard sustainability. ### 37. Initiating an ambitious fiscal consolidation is essential to safeguard sustainability. ### Fiscal consolidation: rationale and priorities - Kiribati’s fiscal position is vulnerable because of: - volatile fishing revenue, - dependence on grants from development partners, - significant climate adaptation costs. - Key priority: rationalize civil service wages given they are already elevated and their substantial increase in 2024. - Additional consolidation measures recommended: - streamline the copra subsidy, - improve targeting and efficiency of social protection payments, - enhance revenue mobilization, - formulate a sustainable fiscal framework to manage volatile and exogenous budget components. ### RERF (Revenue Equalization Reserve Fund): withdrawal rule reform - Recent Cabinet decision to lower the annual RERF withdrawal threshold increases the risk of gradual RERF depletion. - Recommended alternative: a two-pronged rule that - sets a cap on annual withdrawals, and - limits withdrawals to high-quality development spending. - Benefits of reform: facilitates budget planning by reducing volatility of return-based withdrawals and protects the RERF’s long-term real value. - Governance recommendation: subject the RERF withdrawal rule to more legislative scrutiny. ### Institutional and administrative capacity strengthening - Continue implementation of IFMIS (authorities’ efforts are commendable). - Upgrade or replace the current RMS and improve revenue administration to maximize benefits from recent tax policy reforms. - Public financial management improvements: - update the PFM Act and RERF Act, - publish the fisheries report more regularly, - more effectively control cash balances, including generating higher interest income. - Strengthen SOE governance, enhance commercial mandate, and place SOE finances on a sustainable footing. ### Structural reforms to address fragility and boost development - Continue initiatives to close infrastructure gaps and improve internet connectivity. - Priorities to raise growth potential: - raise private sector employment and investment, - update export quality and diversification, - improve infrastructure, - nurture human capital, - strengthen institutions and governance. - Investments in adaptation and leveraging climate finance are critical to tackling climate risks. ### Natural resource management and fisheries - Continue efforts to increase sustainable utilization of natural resources. - Priorities include finalizing regulations accompanying the Environment Act and Fisheries Act. - The reopening of the PIPA in April 2023 presents an opportunity to boost fishing revenue. - Authorities should proceed with plans to develop a marine spatial plan to ensure sustainability of fishing. ### Financial sector and access to finance - Enhancing access to finance is key to boosting growth. - Formation of the KFSA is a major milestone (consolidates responsibilities for supervising Kiribati’s financial sector). - Important that the KFSA is promptly and adequately resourced to effectively carry out its mandate. ### Surveillance - Recommendation: the next Article IV consultation should take place on the standard 12-month cycle. ### Selected, directly relevant statistics and indicators (preserved exactly as in source) - Per capita GDP (2022): US$2,199. - Population (2022): 123,375. - Overall balance 2/ (Table 1): 2023 = -1. - RERF closing balance (in millions of A$) (Table 1): 2023 = 1389; 2024 = 1414; 2025 = 1475. - RERF per capita value (in 2006 A$) (Table 1): 2023 = 7080; 2024 = 6835; 2025 = 6803. - Cash reserve buffer, closing balance (in millions of A$) (Table 1): 2023 = 192; 2024 = 164; 2025 = 157. - Current account including official transfers (in percent of GDP) (Table 1): 2023 = 10.2 percent. - Nominal GDP (in millions of A$) (Table 1): 2023 = 420; 2024 = 470; 2025 = 501. - Real GDP (percent change) (Table 1): 2023 = 4.2; 2024 = 5.8; 2025 = 4.1. *Source: 1kirea2024001 - 37. Initiating an ambitious fiscal consolidation is essential to safeguard sustainability.* ### Annex II. Rebasing of Kiribati’s CPI and GDP ### Annex II. Rebasing of Kiribati’s CPI and GDP ### Rebasing of the CPI - CPI base changed from October 2006 to June 2023. - Methodological enhancements implemented with assistance from the Statistics Department of the IMF. - New expenditure weights and updated basket of goods and services developed from the 2019/20 Household Income and Expenditure Survey (HIES). ### Coverage and classification changes - Outlet sample expanded to 23 outlets (from 3 under the previous base) across South Tarawa, with an increase in the number of price observations. - Number of sub-categories increased to 12 (from 10); items and weights within subcategories were adjusted. - Full adoption of the Classification of Individual Consumption by Purpose (COICOP) is expected to improve calculation of deflators in the national accounts. ### CPI sub-category weight comparison (October 2006 = 100 Weights vs June 2023 = 100 Weights) - All Items 100.0 — All Items 100.0 - Food 40.6 — Food and non-alcoholic beverages 40.0 - Drinks 10.6 — Alcoholic beverages, tobacco, and narcotics 11.0 - Alcohol, Tobacco 18.0 — Clothing and footwear 2.9 - Clothing 2.0 — Housing and utilities 5.3 - Transport 8.1 — Furnishings, household equipment and routine household 4.9 - Utilities 5.2 — Health 0.1 - Housing 5.0 — Transport 9.1 - Education 3.2 — Communication 5.2 - Recreation 2.0 — Recreation and culture 5.8 - Household Operation 5.3 — Education 1.1 - Restaurants and hotels 8.1 - Miscellaneous goods and services 6.5 ### Rebasing of GDP and methodology - Real GDP series now expressed in base-year prices for 2019 (previous base year was 2006). - New base-year update used results of the 2019/20 HIES. - Deflators are mainly sourced from the rebased CPI series. - Other data sources: administrative data from customs, government financial accounts, and financial accounts from SOEs. ### Impact on GDP levels and growth rates - 2021 nominal GDP is 27 percent higher under the 2019 base compared to the 2006 base. - Nominal growth rate averaged at 6.2 percent under the new base compared to 4.8 percent under the old base over the 2006–21 period. - Real GDP growth averaged 2.1 percentage points higher under the 2019 base compared to the 2006 base over the same period (i.e., 3.9 percent versus 1.8 percent). ### Future updates and geographic expansion - Findings from the forthcoming 2023/24 HIES could be used for the next CPI and GDP update. - Field testing of an updated 2023/24 HIES questionnaire has commenced (funded by the World Bank); results could update the CPI basket and weights. - An experimental price collection will be conducted on Kiritimati Island to potentially broaden CPI geographic coverage. - The Kiribati National Statistics Office aims to carry out the next revision of the CPI in 2026. *Source: Annex II. Rebasing of Kiribati’s CPI and GDP* ### 5. The reduced threshold of the new rule notably affects the fund’s long-term value. ### 5. The reduced threshold of the new rule notably affects the fund’s long-term value. ### Long-term value: backtesting results and scenarios - Under the new rule (12 percent nominal return threshold), the final value of the fund would have been 73.5, equivalent to an annual growth rate of -0.8 percent, effectively leading to the fund’s depletion over time. - Across various starting dates, under the new rule, the fund would consistently experience a decline in its capital. - Under the previous rule (5 percent real return threshold), the backtesting analysis demonstrates the fund would ultimately achieve a value of 445, equivalent to an annual growth rate of 4 percent. - A high-water mark rule yields a final portfolio value of 631, equivalent to an annual growth rate of 5 percent. - A constant maximum withdrawal of 3 percent of the balance yields the highest ultimate value over the specified time period: 719, equivalent to an annual growth rate of 5.3 percent. When backtesting starts in 2000 (a period with multiple years of negative returns), this alternative does not outperform the previous rule but still outperforms the new rule. ### Mechanisms and shortcomings of the new rule - The new rule is inadequate in safeguarding the fund’s capital because it allows substantial withdrawals that hinder accumulation needed to prepare for years of negative returns. - The single annual return-based rule overlooks financial volatility effects on long-term value. Example provided: - If the fund drops by 30 percent in one year and increases by 15 percent the next year, then despite no withdrawals in the first year, 13 percent of the balance will be withdrawn in the second year, even though the fund’s balance (prior to withdrawal) is 19 percent lower than its initial value, thereby failing to preserve capital over the long term. - The previous rule’s higher threshold mitigates the extent of volatility’s impact relative to the new rule. ### Frequency of withdrawals - Since 1985: - The new rule has authorized withdrawals in 76 percent of the years. - The 5 percent real return threshold rule allowed withdrawals in 53 percent of the years. - The high-water mark exhibits the least frequent withdrawals: - In the backtesting analysis there are 15 continuous years (2001–16) with no withdrawals authorized. - Across the 38-year span of the analysis, withdrawals are permitted in only 47 percent of the years. - The maximum 3 percent balance rule is structured to accommodate annual withdrawals and remains aligned with capital preservation objectives even amid negative calendar-year performance; it enables greater integration of fund withdrawals into budgeting and facilitates budget planning. ### Amount of withdrawals and stability - The maximum 3 percent balance rule permits the largest total withdrawal and the most stable withdrawals over time: - Initially withdrawals are smaller than other alternatives, but as the fund’s value outpaces alternatives, withdrawals increase and it accumulates the largest total withdrawals. - The new rule records the lowest cumulative withdrawals as the fund’s balance diminishes over time. - In a shorter backtesting timeframe starting in 2000, the new rule allows more withdrawals than other alternatives but at the cost of rapid depletion. ### Comparisons of Four Withdrawal Rules (ranks: 1-4) - Long-term value (ranked best to worst): - Maximum 3 percent balance: (719) rank 1 - High water mark: (631) rank 2 - 5 percent real return threshold: (445) rank 3 - 12 percent nominal return threshold: (73.5) rank 4 - Withdrawal frequency (percent of years with withdrawals; rank in parentheses): - Maximum 3 percent balance: (100) rank 1 - 12 percent nominal return threshold: (76) rank 4 - 5 percent real return threshold: (53) rank 3 - High water mark: (47) rank 4? (table shows 47 percent and rank 4 for frequency—preserve values as presented) - Total amount withdrawn (numeric totals as presented): - Maximum 3 percent balance: (459) rank 1 - High water mark: (357) rank 2 - 5 percent real return threshold: (328) rank 3 - 12 percent nominal return threshold: (319) rank 4 ### Conclusion and policy recommendation - The backtesting analysis indicates that a rule enforcing a constant maximum withdrawal of 3 percent yields the optimal performance overall. - Advantages of the maximum 3 percent balance rule: - Ensures predictability of resources for supporting infrastructure investment, independent of short-term market volatility. - Maximizes the fund’s value and ensures capital preservation compared to other alternatives. - Given the significance of setting the maximum withdrawal rate (3 percent in this analysis) to prevent fund depletion in periods of market downturn, a review over a 5-year period—taking into account past returns and expected returns—is imperative to safeguard the long-term value of the RERF. *Source: World Bank.* ### 5. Environment ### 1kirea2024001 - 5. Environment ### Fund relations and membership - Membership Status: Joined June 3, 1986; accepted Article VIII. - Quota (General Resources Account): SDR 11.20 million (100.00 percent). - Fund holdings of currency: SDR 9.80 million (87.51 percent). - Reserve tranche position: SDR 1.41 million (12.58 percent). - SDR Department net cumulative allocation: SDR 16.06 million (100.00 percent). - SDR Department holdings: SDR 14.72 million (91.64 percent). - Outstanding Purchases and Loans: None. - Latest Financial Arrangements: None. - Projected Obligations to Fund: None. - HIPC Initiative: Not Applicable. - MDRI: Not Applicable. - CCR: Not Applicable. - Exchange Arrangements: - The Australian dollar circulates as legal tender. - Exchange arrangement: exchange arrangement with no separate legal tender. - No central monetary institution; authorities do not buy or sell foreign exchange. - Australia and New Zealand (ANZ) Bank (Kiribati) Limited quotes daily rates for 15 currencies based on their rates against the Australian dollar. - Kiribati has accepted the obligations under Article VIII, Sections 2(a), 3, and 4. - Exchange system: free of restrictions on the making of payments and transfers for current international transactions and multiple currency practices. - Article IV Consultation cycle: 12-month. Previous Article IV consultation concluded on April 12, 2023 (discussions during January 27–February 8, 2023). - Technical Assistance (TA): Support provided by PFTAC and IMF HQ on: - strengthening compilation and dissemination of real sector, external sector, and government finance statistics; - strengthening revenue administration management and governance arrangements; - improving law and effective PFM institutions; - developing and strengthening supervision of the financial system. - Resident Representative: Regional Resident Representative office for Pacific Island Countries based in Suva, Fiji; opened September 2010. Mr. Neil Saker is Resident Representative since April 2022. ### Statistical issues — data adequacy and priorities (As of April 1, 2024) - Overall assessment: Data provision has shortcomings but is broadly adequate for surveillance. Priority improvements: - timely collection and dissemination of national accounts, external sector data, and government finance statistics; - consolidated financial sector statistics. - National accounts: - TA mission in November 2023 to assist KNSO to update GDP estimates to 2022 and complete a full rebasing exercise. - CPI (June 2023=100) re-referenced to 2019 prices for national accounts to match 2019/20 HIES. - GDP series rebased to 2019 base year prices. - Next update should obtain and use business license, survey and VAT data. - Price statistics: - CPI rebase to June 2023=100 with updated weights based on 2019/2020 HIES. - Sample outlets expanded to 23 from just 3 previously (across South Tarawa). - Monthly CPI produced with a short lag (about a month). - No producer, wholesale, or trade price indices. - Field testing of updated 2023/24 HIES questionnaire has commenced; results to be used for next CPI update. - KNSO aims next CPI update in 2026. - Staff emphasis on capacity building; staff are skilled in MS Excel and knowledgeable of CPI methods. - Government finance statistics (GFS): - With TA coordinated through PFTAC, annual GFS compiled and disseminated in line with GFSM 2014 for general government with data available from 2011–21. - January 2023 TA mission refined data and expanded GFS coverage via satellite account for the RERF. - January–February 2024 TA mission reviewed IFMIS chart of accounts, mapping to GFSM 2014, and compilation of net investment in non-financial assets. - Monetary and financial statistics (MFS): - Some data on financial institutions shared during 2023 Article IV mission. - MFS and FSIs are not reported to STA. - Kiribati has reported data until 2013 on some FAS series, including commercial bank branches per 100,000 adults and ATMs per 100,000 adults (SDG Target 8.10 indicators). - External sector statistics (ESS): - ESS mission in April 2023 recommended: improving timeliness for quarterly BOP and IIP; review outdated estimation models; address under-coverage of grants and official aid; review coverage of direct investment and reconciliation between GFS and BOP. - Recommended a detailed one-year action plan to improve ESS. - Further work needed to comply with BPM6 and improve quarterly data compilation. - Data Standards and Quality: - Kiribati participates in the IMF Enhanced General Data Dissemination System (e-GDDS) but does not yet disseminate recommended economic data through a National Summary Data Page (NSDP). - Work on implementing data distribution through e-GDDS has been initiated. - No data ROSC is available. ### Table of Common Indicators Required for Surveillance (selected entries) - Exchange Rates: Date of latest observation 3/2024; Date received 3/2024; Frequency of data D; Frequency of reporting D; Frequency of publication D. - Consumer Price Index: Date of latest observation 12/2023; Date received 1/2024; Frequency M; Frequency of reporting M; Frequency of publication M. - Revenue, Expenditure, Balance and Composition of Financing - General Government: Date of latest observation 2022; Date received 12/2023; Frequency A; Frequency of reporting A; Frequency of publication I. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 2022; Date received 12/2023; Frequency A; Frequency of reporting A; Frequency of publication A. - External Current Account Balance: Date of latest observation Q4/2022; Date received 12/2023; Frequency Q; Frequency of reporting Q; Frequency of publication Q. - Exports and Imports of Goods and Services: Date of latest observation Q4/2022; Date received 12/2023; Frequency Q; Frequency of reporting Q; Frequency of publication Q. - GDP/GNP: Date of latest observation 2022; Date received 12/2023; Frequency A; Frequency of reporting A; Frequency of publication A. - Gross External Debt: Date of latest observation 2022; Date received 12/2023; Frequency A; Frequency of reporting A; Frequency of publication A. - International Investment Position: Date of latest observation Q4/2022; Date received 12/2023; Frequency Q; Frequency of reporting Q; Frequency of publication Q. - Many monetary and banking indicators: NA (not available). ### Debt sustainability (LIC DSA) — key findings (April 15, 2024) - Risk rating of external debt distress: High. - Overall risk of debt distress: High. - Granularity in the risk rating: Sustainable. - Application of Judgment: Yes. The projection horizon was extended to 20 years (instead of standard 10 years) to capture the impact of climate change on debt dynamics. - Main drivers and findings: - High recurrent spending amid a decline in fishing revenue led to large fiscal deficits in 2022. - Fiscal deficit in 2023 reduced due to recovery of fishing revenue and strong grants despite introduction of leave grants for private sector employees. - Increasing civil service wages while maintaining high social protection spending in the 2024 budget will lead to large fiscal deficits over the medium term. - Departure from pre-pandemic surpluses. - PV of PPG external debt-to-GDP expected to breach the indicative threshold starting in 2036 under the baseline scenario. - PV of total public debt-to-GDP expected to remain below indicative benchmark under the baseline. - Stress tests confirm vulnerability to exports and growth shocks. - Reasons the debt trajectory is assessed sustainable despite high risk: - (i) country benefits from grant-only status for MDB financing and likely to maintain access to highly concessional financing over the long term; - (ii) government has large cash buffers which can be drawn on to finance deficits in the near term; - (iii) in the baseline, breaches occur only in the long term and only for PV of external debt-to-GDP ratios, while other ratios remain well below indicative thresholds. - Risks and policy implications: - Although no immediate debt servicing risks due to high cash buffers, risks from unfavorable weather conditions or a downturn in global financial markets (which would reduce value of sovereign wealth fund) call for greater fiscal prudence. - Adhere to a prudent withdrawal rule for the sovereign wealth fund to reduce risk of gradual depletion. - Fiscal consolidation needed by scaling back recurrent spending and reducing reliance on volatile revenues. - Further structural and fiscal reforms needed: strengthen fiscal policy framework; improve public financial management; place SOEs on a commercial and sustainable footing. - Continuing grants are required to support large development needs and contain risk of debt distress. ### Public debt coverage and contingent liabilities - Public sector debt coverage: central government, central government-guaranteed debt, and social security fund. - DSA conducted on residency basis. - Data availability and timeliness issues limit debt coverage, especially lack of regularly-updated SOE balance sheets. - Ongoing and planned TA aims to improve data availability and coverage by: - compiling and disseminating annual GFS; - expanding GFS coverage via satellite accounts for the RERF; - enhanced data collection for SOEs. - Fiscal Reporting Policy published in 2022 (supported by World Bank’s FY2023 SDFP) setting new standards for public reporting on revenue, expenditure, public debt, and SOE/RERF performance. - IFMIS implementation supported by World Bank's FY24 SDFP to enhance debt and fiscal transparency. - Contingent liability stress test: - Incorporated contingent liabilities amounting to 16 percent of GDP, comprising: - 11 percent of GDP: liabilities of SOEs at end-2021; - 5 percent of GDP: standard cost to government of a financial crisis. - Notes on SOEs: - 18 SOEs operating across utilities, transportation, housing, and financial services. - Newest SOE, Tourism Authority of Kiribati (established 2018), has not produced financial statements yet. - Liabilities of 17 SOEs accounted for 11 percent of GDP in 2021 (reported in 2024 Recurrent Budget). - Contingent liability to government assumed to include all SOE non-guaranteed liabilities. - Specific default/shock assumptions used in the combined contingent liability test: - Other elements of general government not captured: 0.0 percent of GDP. - SoE's debt (guaranteed and not guaranteed): 11.0 percent of GDP. - PPP: 0.0 percent of PPP stock. - Financial market (default minimum): 5.0 percent of GDP. - Total (2+3+4+5): 16.0 percent of GDP. ### Background on debt and macro context - Geography and economy: - Small, remote state; higher costs of delivering public services; infrastructure gaps. - Narrow production and export base: mainly tuna fishing and copra. - High dependence on fishing license revenues and development partner support for infrastructure. - Sovereign wealth fund: - Revenue Equalization Reserve Fund (RERF) established in 1956. - RERF balance about AUD1.4 billion (close to 330 percent of GDP) at end-2023. - PPG debt and composition: - PPG debt at 15.7 percent of GDP at end-2022 (external debt and government guarantees). - No new external debt since 2014. - Combined outstanding external debt from ADB and Taiwan Province of China: AUD49.3 million (about 12.6 percent of GDP) at end-2022; estimated decline to AUD47.0 million (about 11.2 percent of GDP) at end-2023. - Domestic guaranteed debt: - Government guaranteed loans that KPF provided to two SOEs (Air Kiribati Limited and Development Bank of Kiribati) totaling AUD11.8 million (3 percent of GDP at end-2022). - Additional loan of AUD2.6 million owed to KPF on behalf of DBK. - In 2023, government paid KPF AUD11.6 million for loans KPF provided to AKL. - Remaining government-guaranteed SOE loans: outstanding guarantee to DBK (AUD0.35 million at end-2023). ### Background on macro forecasts - Economic activity: - Strengthened after removal of all COVID-19 restrictions in second half of 2022. - Real GDP growth: 8.5 percent in 2021; decelerated to 3.9 percent in 2022 due to first half 2022 restrictions and a severe drought affecting agriculture despite doubling of copra subsidy in 2022. - Growth estimated to have improved to 4.2 percent in 2023 due to resumption of infrastructure projects, improved weather conditions, supportive fiscal measures, and recovery in international arrivals. *Source: 1kirea2024001 - 5. Environment* ### 6. Inflation has decelerated rapidly from its recent peak. Headline inflation peaked at 25.1 percent ### 1kirea2024001 - 6. Inflation has decelerated rapidly from its recent peak. Headline inflation peaked at 25.1 percent ### Inflation developments and outlook - Headline inflation peaked at 25.1 percent y-o-y in January 2023. - Key drivers of the peak: rebound in domestic demand, supply shortages, increases in global commodity prices, and rising freight costs. - An acceleration in the prices of food and non-alcoholic beverages (mainly sugar) accounted for about 65 percent of the rise in inflation. - Inflation trended down to -2.1 percent y-o-y in December 2023. - Recent disinflation drivers: moderation of global commodity prices, improved supply-side conditions, and base effects. - Projected inflation: - Projected average inflation in 2023–33: 2.9 percent. - Inflation in 2024 is projected at 4.5 percent, mainly driven by increased domestic demand (notably the civil service wage increase). - Inflation is expected to gradually converge to slightly below 2 percent over the medium term, in line with global commodity prices and trading partners’ inflation. ### Baseline macroeconomic assumptions and growth projections (Text Table 4 highlights) - Real GDP growth (in percent) series: - Historical 2012-22 average: 8.5 3.9 4.2 5.8 4.1 3.3 2.5 2.1 2.1 5.0 2.9 2.0 - (Note: the table lists "Real GDP growth (in percent)8.53.94.25.84.13.32.52.12.15.02.92.0" as provided) - Inflation, average (change in percent) series: - "2.15.39.34.53.02.52.01.91.80.82.91.8" (as provided in Text Table 4) - Current account balance series: - "7.0-2.410.29.79.28.48.18.07.918.57.94.3" (as provided in Text Table 4) - Overall fiscal balance series: - "-10.6-18.3-1.3-22.4-14.8-12.8-13.8-15.4-16.011.7-14.6-14.5" (as provided in Text Table 4) - IMF staff projection highlights: - Real GDP growth projected at 2.9 percent on average in 2023–33, reflecting the short-term impact from the civil service wage increase. - Growth expected to gradually decelerate towards 2 percent over the medium to long term. - Annual population growth estimated to average about 1.6 percent over the projection period. - Risks tilted to the downside from regional conflicts, geo-economic fragmentation, abrupt global slowdown, commodity price volatility, and climate change. ### Fiscal developments, revenue composition, and spending assumptions - Fishing revenue: - Reported at AUD214 million in 2023 (51 percent of GDP). - Increase of 15 ppts of GDP from 2022. - Increase of 52 percent in nominal terms from 2022. - Staff project fishing revenue to average about 43 percent of GDP in 2023–33. - External grants: - Increased to 30 percent of GDP in 2023 from 13 percent of GDP in 2022. - Expected to remain around 29 percent of GDP on average in 2024–26. - Assumed to average about 25 percent of GDP in 2027–33. - Budget support assumed at 1 percent of GDP from 2027 (a decline of 2 ppts of GDP compared to 2026). - Fiscal expenditure: - Fiscal expenditure in 2023 is estimated to be 15 ppts of GDP higher than in 2022. - Recurrent spending elevated due to unemployment support scheme (covering 70 percent of working age population), increases in wage bill and senior citizen’s benefits in 2021, doubling of copra subsidy in 2022, and new leave grants to private sector employees in 2023. - 2024 budget increased civil service wages by AUD43.9 million (38 percent increase). - Climate change-related maintenance and contingency expenditures assumed to gradually reach around 6 percent of GDP in 2032 and remain thereafter. - Without consolidation, recurrent spending expected to increase to around 72 percent of GDP in 2025 before declining to around 68 percent of GDP over the medium term. - Development expenditure estimated to increase to 31 percent of GDP in 2023 (10 ppts higher than 2022) and to 53 percent of GDP in 2024 as large infrastructure projects are resumed, then gradually decline. - Fiscal balance trajectory: - Overall fiscal surplus declined from 11 percent of GDP in 2019 to 4 percent of GDP in 2020, then deficits of 11 percent of GDP in 2021 and 18 percent of GDP in 2022. - Fiscal deficit expected to narrow to 1 percent of GDP in 2023 (with higher fishing revenue and committed external grants). - Fiscal deficit expected to widen to 22 percent of GDP in 2024 due to the civil service wage increase (accounting for RERF withdrawals as a financing item). - Under baseline scenario, fiscal deficits envisaged to hover around 16 percent of GDP over the medium and long term absent significant consolidation. ### Financing assumptions and RERF policy - Financing mix (Text Table 5 highlights; values in percent of GDP): - Overall Deficit: 2021 -11; 2022 -18; 2023 -1; 2024 -22; 2025 -15; 2026 -13; 2027 -14; 2028 -15; 2029 -16; 2030 -15. - Financing Needs (net): 11, 18, 1, 22, 15, 13, 14, 15, 16, 15 (2021–2030). - Cash reserves financing: 11, 19, 2, 6, 1, 0, 0, 0, 0, 1 (2021–2030). - RERF withdrawals: 0, 0, 0, 17, 9, 9, 8, 8, 8, 8 (2021–2030). - External financing (net): -1, -1, -1, -1, 4, 4, 6, 7, 8, 5 (2021–2030). - Balance — Cash reserves: 56, 51, 46, 35, 31, 30, 29, 27, 26, 29 (2021–2030). - Balance — excess over the threshold 1/: 37, 32, 26, 13, 11, 10, 9, 8, 7, 9 (2021–2030). - Balance — RERF: 351, 306, 330, 301, 294, 290, 287, 287, 288, 295 (2021–2030). - Public external debt: 14, 13, 12, 10, 14, 17, 22, 28, 35, 31 (2021–2030). - Cash reserves: - Estimated to decrease to 46 percent of GDP at end-2023 from 51 percent of GDP at end-2022. - Under baseline, cash reserves used to finance LCDF needs that cannot be met by RERF due to the 3 percent cap starting from 2028, with aim to (barely) meet requirement of at least three months of government spending by 2038. - RERF withdrawals and policy change: - AUD80 million withdrawal (maximum permitted under 2020 rule) budgeted for 2024. - Annual AUD45 million withdrawal budgeted for 2025-2027. - 2024 budget lowered the RERF withdrawal threshold from 5 percent of real terms to 2 percent of nominal returns. - IMF/World Bank joint analysis recommends: - Use withdrawals to finance high-quality development spending via LCDF, excluding copra subsidy, unemployment benefits, and leave grants for the private sector (these are recurrent spending). - Set a cap on annual withdrawals as a fixed share of the RERF balance to keep the real per capita value constant. - Staff estimate the cap should be around 3 percent of the RERF balance (based on assumed long-term real rate of return and population growth). - Review the rule every 5 years and subject the withdrawal rule to more legislative scrutiny, such as parliamentary approval. - RERF nominal return assumption: - The nominal return of the RERF is assumed to be 7.5 percent on average over the medium and long term. ### Current account, external sector, and debt composition - Current account: - Estimated to shift back to a surplus of 10.2 percent of GDP in 2023. - Drivers: resurgence in fishing license fees, rise in remittances, and decline in global commodity prices. - Projected to remain in surplus in 2024 supported by favorable fishing activities with the commencement of El Niño, remittances, and international travelers. - Medium-term surplus expected to remain below historical averages due to higher imports for consumption and infrastructure and gradual decline in fishing license fees as percent of GDP. - Debt composition: - Current debt portfolio mainly composed of external debt. - Baseline and alternative scenarios do not assume any domestic debt over the short, medium, and long terms. - External financing under baseline assumed at highly concessional terms. - Public external debt balances as of end-2022 (Text Table 3 entries): - Asian Development Bank AUD30,425,604 - International Cooperation and Development Fund, Taiwan Province of China AUD18,908,767 ### Risks, climate change, and realism checks - Climate change and natural disasters: - Baseline explicitly reflects long-run impact; Kiribati’s long-term growth projections adjusted downward by 0.1 ppt compared with non-disaster potential growth. - Current account projected to decline by 1 ppt of GDP on average in the long run to account for natural disasters and climate change. - No major disasters assumed under the baseline over the medium term. - Climate change may adversely impact fishing revenue and food and water security. - Fiscal and macro risks: - Risks to downside from intensification of regional conflicts, geo-economic fragmentation, abrupt global slowdown, commodity price volatility, and climate change. - Climate change could further impact fiscal balance via affected fishing revenue and higher climate-related expenditures. - Realism tools and projections: - Realism tools suggest projections are reasonable. - Primary balance expected to improve in 2023 due to fishing revenue recovery and strong grants; projected to remain in deficit with the wage increase in 2024. - Growth outturn in 2023 exceeds scenarios under various fiscal multipliers, largely because fiscal deficit reduction was driven by a 52 percent nominal increase in fishing revenue in 2023. - Large residual contributions to debt creation reflect use of cash reserves and RERF withdrawals to finance deficits while accumulating cash buffers during surpluses. ### Debt-carrying capacity and thresholds - Debt-carrying capacity remains “medium” as in last DSA. - Current composite indicator (CI) score: 2.689 (calculated based on October 2023 WEO and 2022 CPIA). - CI score implies weak debt-carrying capacity; two consecutive “weak” assessments needed to reclassify to “weak,” so classification remains “medium.” - If CI score continues to imply weak capacity in April 2024, classification would become “weak.” - Indicative thresholds for PPG external debt under this classification: - PV of the debt-to-GDP ratio: 40 percent - PV of the debt-to-exports ratio: 180 percent - Debt service-to-exports ratio: 15 percent - Debt service-to-revenue ratio: 18 percent - Benchmark for PV of total public debt-to-GDP ratio for medium capacity: 55 percent. *Source: IMF staff estimates and country authorities as presented in the provided content.* ### 11. Given that Kiribati is vulnerable to climate change, a tailored stress test for the natural ### 11. Given that Kiribati is vulnerable to climate change, a tailored stress test for the natural ### Natural disaster stress test and climate risks - Tailored stress test incorporated a one-off extreme natural disaster in the second year of the projection period cutting: - real GDP growth by 1.5 ppts - exports by 3.5 ppts - Rationale: - Captures possibility that climate change adaptation costs may exceed those already incorporated in staff’s macroeconomic framework (Paragraph 7) if an extreme natural disaster occurs in the near term. - Climate vulnerabilities identified: - rising sea levels, storm surges, coastal erosion, saltwater intrusion - drought, loss of groundwater, high incidences of natural disasters - negative effects on agriculture and fishing - Fiscal implications: - Mitigation costs partly met by operating budget; capital projects require continued support from development partners ### Debt sustainability analysis — Overall assessment - Final judgement: Risks to debt sustainability assessed to be high - Mechanical 10-year risk rating: moderate for both external and overall debt - Staff judgement: incorporated expected long-term effects of climate change-related events and used breaches in years 11-20 to arrive at bottom-line risk assessment - Key vulnerabilities: - External public debt vulnerable to export shocks - Public debt vulnerable to growth shocks - Most stress test scenarios flag high risks; high exposure to climate change-related events supports final ratings of high risk of external and overall debt distress ### A. External debt sustainability (findings and projections) - Baseline scenario: - PV of PPG external debt-to-GDP ratio expected to increase and breach the indicative threshold (40 percent) in 2036 - Debt service will remain relatively contained because bulk of projected external debt is on concessional terms (per World Bank’s SDFP cap on non-concessional borrowing) - Debt service-to-exports ratio will gradually increase over projection period due to continued debt accumulation - Stress tests: - Under extreme test scenarios, PV of PPG external debt-to-GDP ratio breaches threshold starting from 2030 - PV of PPG external debt-to-exports ratio breaches its threshold starting from 2037 - Severe natural disaster scenario and contingent liabilities test show vulnerability to external and potential domestic shocks - Note: Exports data for DSA include fishing license fees (counted as “primary income” under conventional balance-of-payments definitions) ### B. Public debt sustainability (findings and projections) - Composition and drivers: - Limited domestic debt consists largely of government guarantees to SOE loans - Historical fiscal surpluses largely driven by strong fishing revenue; fishing revenue volatility and contingent liabilities (Provident Fund guarantee and SOEs) pose risks - Baseline scenario: - PV of total public debt-to-GDP ratio projected to remain below the indicative benchmark (55 percent) - Stress tests: - Most extreme stress test (one standard deviation shock to growth) predicts PV of total public debt-to-GDP ratio will breach the 55 percent benchmark starting from 2031 - Tailored natural disaster shock and combined contingent liabilities could cause PV of total public debt-to-GDP ratio to breach benchmark from 2038 and 2040, respectively - Definitions/assumptions: - One standard deviation shock: Real GDP growth set to its historical average minus one standard deviation, or the baseline projection minus one standard deviation, whichever is lower for the second and third years of the projection period - Government currently explicitly guarantees obligations unable to be met by the KPF (Provident Fund Act 1977) ### Risk rating, mitigation factors, and policy recommendations - DSA conclusions: - External debt distress risk: high (PV of PPG external debt-to-GDP ratio breaches indicative threshold starting from 2036 under baseline) - Overall risk of debt distress: high (PV of public debt-to-GDP ratio increases over time but does not breach indicative benchmark under baseline) - Factors mitigating vulnerability: - Grant-only status for MDB financing and likely continued access to highly-concessional financing long term - Large cash buffers and resources in the RERF; recommend maintaining adequate cash buffers of at least three months of government spending in line with government’s fiscal responsibility ratio - Policy recommendations and required actions: - Manage fiscal framework prudently and continue to secure external grants - Initiate ambitious fiscal consolidation by scaling back recurrent spending (including rationalizing civil service wages and copra subsidy, and unwinding inefficient social protection spending such as leave grants for the private sector) - Reduce reliance on volatile revenue sources and improve revenue mobilization - Adhere to a prudent withdrawal rule for the sovereign wealth fund (RERF) to reduce depletion risk - Strengthen fiscal policy framework, improve targeting and efficiency of social safety net, and improve public financial management (including revising the RERF Act to put withdrawals under closer legislative scrutiny) - Put SOEs on a commercial and sustainable footing - Continue to obtain grants to support large development needs and contain risk of debt distress ### Authorities' views - Authorities broadly agree with DSA assessment - Policy stance and intentions: - Plan to allocate more RERF resources toward infrastructure investment - Plan to maintain a balanced budget and contract no new debt over the short to medium term - Emphasize wage increases as necessary to retain staff and social protection payments as important for living standards - Expect revenue mobilization reforms to generate additional revenues and improve fiscal balance over medium term - Will continue to seek grants from bilateral development partners and international financial institutions and comply with non-concessional borrowing policies to secure ADB and World Bank support *Source: IMF staff Debt Sustainability Analysis and tailored natural disaster stress test for Kiribati contained in the provided content.* ### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the ### 1kirea2024001 - 1990. ### Public sector debt outlook (baseline, selected figures) - Public sector debt: - 2020: 20.0 - 2021: 16.5 - 2022: 15.7 - 2023: 11.7 - 2024: 9.9 - 2025: 13.5 - 2026: 16.9 - 2027: 21.7 - 2028: 27.7 - 2033: 61.3 - 2043: 94.3 - Of which: external debt mirrors public sector totals for the sample years shown (e.g., 2020: 16.4; 2024: 9.9; 2043: 94.3). - Change in public sector debt: - 2020: -1.9 - 2021: -3.6 - 2022: -0.8 - 2023: -3.9 - 2024: -1.8 - 2025: 3.6 - 2026: 3.5 - 2027: 4.8 - 2028: 6.0 - 2033: 5.8 - 2043: 1.9 ### Identified debt-creating flows and fiscal balances (selected) - Identified debt-creating flows: - 2020: -5.6 - 2021: 8.4 - 2022: 19.0 - 2023: 0.6 - 2024: 21.7 - 2025: 14.5 - 2026: 12.6 - 2027: 13.7 - 2028: 15.3 - 2033: 14.9 - 2043: 11.2 - Primary deficit: - 2020: -3.5 - 2021: 10.6 - 2022: 18.3 - 2023: 1.3 - 2024: 22.4 - 2025: 15.0 - 2026: 13.1 - 2027: 14.2 - 2028: 15.9 - 2033: 16.5 - 2043: 13.8 - Revenue and grants (percent of GDP): - 2020: 104.7 - 2021: 72.2 - 2022: 69.0 - 2023: 100.7 - 2024: 103.2 - 2025: 93.2 - 2026: 83.8 - 2027: 93.4 - 2028: 91.0 - 2033: 85.9 - 2043: 79.7 - Of which: grants (selected years) — 2020: 30.1; 2021: 8.3; 2022: 12.9; 2023: 30.0; 2024: 38.5 - Primary (noninterest) expenditure: - 2020: 101.2 - 2021: 82.9 - 2022: 87.3 - 2023: 102.0 - 2024: 125.5 ### Automatic debt dynamics and residuals (selected) - Automatic debt dynamics (contribution): - 2020: -2.1 - 2021: -2.3 - 2022: 0.7 - 2023: -0.7 - 2024: -0.7 - 2025: -0.4 - Contribution from interest rate/growth differential: - 2020: 0.1 - 2021: -1.8 - 2022: -0.5 - 2023: -0.7 - 2024: -0.7 - Residual: - 2020: 3.7 - 2021: -11.9 - 2022: -19.8 - 2023: -4.5 - 2024: -23.5 - 2025: -11.0 - 2026: -9.1 - 2027: -9.0 - 2028: -9.4 - 2033: -9.2 - 2043: -9.3 ### Sustainability indicators and financing needs (selected) - Debt service-to-revenue and grants ratio (selected): - 2020: 0.8 - 2021: 1.0 - 2022: 1.2 - 2023: 0.8 - 2024: 0.7 - 2025: 0.7 - 2033: 1.1 - 2043: 3.1 - Gross financing need 4/: - 2020: -2.7 - 2021: 11.3 - 2022: 19.1 - 2023: 2.1 - 2024: 23.1 - 2025: 15.6 - 2026: 13.8 - 2027: 14.9 - 2028: 16.7 - 2033: 17.5 - 2043: 16.3 ### Key macroeconomic assumptions and projections (selected) - Real GDP growth (in percent): - 2020: -0.6 - 2021: 8.5 - 2022: 3.9 - 2023: 4.2 - 2024: 5.8 - 2025: 4.1 - 2026: 3.3 - 2027: 2.5 - 2028: 2.1 - 2033: 2.1 - 2043: 2.0 - Average nominal interest rate on external debt (in percent): - 2020: 1.4 - 2021: 1.4 - 2022: 1.3 - 2023: 1.4 - 2024: 1.4 - 2025: 1.4 - 2026: 1.2 - 2027: 1.2 - 2028: 1.1 - 2033: 1.0 - 2043: 1.0 - Inflation rate (GDP deflator, in percent): - 2020: 4.5 - 2021: 9.5 - 2022: -2.4 - 2023: 3.4 - 2024: 5.7 - 2025: 1.4 - 2026: 0.9 - 2027: 0.8 - 2028: 1.4 - 2033: 1.8 - 2043: 1.8 - Growth of real primary spending (deflated by GDP deflator, in percent): - 2020: -7.0 - 2021: -11.1 - 2022: 9.4 - 2023: 21.7 - 2024: 30.2 - 2025: -10.3 - 2026: -7.4 - 2027: 13.8 ### Debt-stabilizing primary deficit (selected) - Primary deficit that stabilizes the debt-to-GDP ratio 5/: - 2020: -1.7 - 2021: 14.2 - 2022: 19.1 - 2023: 5.2 - 2024: 24.2 - 2025: 11.4 - 2026: 9.6 - 2027: 9.5 ### Sensitivity analysis (public and external debt indicators, selected themes) - Baseline and alternative tests show large variance in indicators under shocks: - Baseline PV of debt-to-GDP and other indicators rise markedly over 2023–2043 (tables provided with year-by-year series). - Bound tests include shocks to Real GDP growth, Primary balance, Exports, Other flows, Depreciation, and combinations (B1–B6). - Tailored tests include combined contingent liabilities and natural disaster scenarios (C1–C2). - A bold value in tables indicates a breach of the relevant threshold or benchmark. ### Authorities’ assessment and policy stance (Statement by Executive Director and Senior Advisor) - Recent developments and outlook: - Economic recovery from the pandemic: growth estimated to have improved from 3.9 percent in 2022 to 4.2 percent in 2023, about 17 percent higher than pre-pandemic levels. - Staff project annual growth reaching 5.8 percent in 2024, largely due to higher consumption from a 38 percent increase in civil service wages as planned in the 2024 budget. - Inflation history and projection: - Headline inflation peaked to 25 percent y-o-y in January 2023. - Inflation declined to -2.1 percent y-o-y in December 2023. - Staff projects inflation to average 4.5 percent in 2024 and to gradually converge to slightly below 2 percent over the medium term. - External sector and reserves: - Fishing revenue increased by 52 percent in 2023 compared to 2022. - RERF recorded an annual return of 16.4 percent. - Current account estimated surplus: 10.2 percent of GDP in 2023; projected 9.7 percent of GDP in 2024. - Cash reserve buffer: - About 46 percent of GDP at end-September 2023. - Risk classification: - Under staff’s baseline projections, Kiribati remains at a high risk of debt distress under the debt sustainability framework for low-income countries, but does not currently face debt servicing risks given the reserve buffer. ### Fiscal policy positions and reform commitments - Fiscal developments and projections: - Fiscal deficit: narrowed from 18 percent of GDP in 2022 to 1 percent in 2023; projected to widen to 22 percent of GDP in 2024. - Drivers of widening deficit in 2024: wage increase and reduced donor budget support; increased public spending on subsidies and grants since the pandemic. - Authorities broadly concur with staff on strengthening fiscal discipline and revenue mobilization: - Follow fiscal responsibility ratios to anchor annual spending (note: departmental wage/operational cap of 50 percent of total recurrent expenditure; liquidity cash buffer at least three months of expenditure). - Priorities include amendment of the Value-Added Tax Act (removal of tax exemptions for SOEs), implementation of the new Income Tax Act, possible increases in excise taxes on tobacco and other unhealthy goods, and imposing excise taxes on kava. - Commitment to institutional and administrative capacity building: - Implement an Integrated Financial Management Information System for budget execution. - Improve tax administration and enhance SOE accountability; Tax Commission submitted a funding request and seeks development partners to improve the Revenue Management System. - SOE Monitoring and Advisory Unit requires loss-making SOEs to formulate financial scenarios and is preparing a dividend policy. - RERF withdrawal rule: - Authorities see merit in a relaxed rule to allocate more resources to infrastructure investment but will consider staff’s recommended alternative withdrawal rule to be reviewed by the RERF Investment Committee. - Capacity development and Fund engagement: - Authorities welcome Fund technical assistance on the copra sector and high-quality statistics. - Authorities expect a Country Engagement Strategy note in the next Article IV consultation. ### Structural challenges and policy priorities - Key structural constraints: - GDP per capita among the lowest in PICs; infrastructure gaps and dispersed geography limit private sector development. - Financial inclusion and access to finance limited: only one commercial bank and an estimated 15 percent of the population have access to banking services; credit-to-GDP ratio around 15 to 20 percent. - Copra sector: minimum support price discourages production of potentially competitive exports. - Climate vulnerability: - Kiribati’s annual adaptation costs estimated at 25 percent of GDP. - Policy priorities and planned initiatives: - Raise private sector employment and investment, boost export competitiveness, improve infrastructure and financial inclusion, nurture human capital, and strengthen institutions and governance. - Infrastructure initiatives to improve utilities, transport, communications, air connectivity, ports, and internet service; close coordination with development partners to minimize duplication. - Financial sector reforms: - Kiribati Financial Supervisory Authority needs adequate and prompt resourcing for full operation to enable financial sector transformation and potential entry of new banks. - Chamber of Commerce plans to launch a credit union with digital capabilities later this year. - Human capital and labor policies: - Raise secondary school completion rates, expand technical vocational education and training. - Continue seasonal worker programs to raise workers’ incomes and provide job training. - Review gender equality and women development policies to increase women’s economic participation. - Climate adaptation financing: - Important adaptation projects underway with development partners, but bilateral and MDB funding covers only a fraction of estimated needs; need to build internal capacity to access finance for climate response. *Sources: Country authorities; and staff estimates and projections.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1kirea2024001.pdf_