## 1. Overview of Copra Support Price in Kiribati

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---

### A. Background and objectives
- The copra subsidy is implemented as a minimum support price and has been in place since the mid-1990s.
- Objectives:
  - transfer resources to the outer islands,
  - stem migration to the capital (Tarawa),
  - act as an unemployment benefit by enabling copra cutting as alternative income,
  - function as a conditional cash transfer / social welfare mechanism.
- Implementing entities:
  - Kiribati Coconut Development Limited (KCDL) disburses payments in the outer islands;
  - Kiribati National Shipping Line Limited (KNSL) provides most shipping services.

### B. Scale and fiscal cost
- Support price: AUD 4/kg (current price after doubling in 2022).
- Recent increases: support price doubled in mid-2016 and doubled again to AUD 4/kg in 2022.
- Fiscal cost:
  - subsidy raised to 9 percent of government expenditure (8 percent of GDP) in 2022 versus 5 percent in 2021.
- Export and GDP shares:
  - between 2010 and 2021, copra accounted on average for 8 percent of Kiribati’s exports and broader coconut products for 45 percent of exports.
- Household engagement:
  - around 40 percent of households produce copra for sale or exchange;
  - participation up to 87 percent of households in the outer islands.
- Comparative production requirement:
  - producing virgin coconut oil (VCO) competitively requires an equivalent copra price of around AUD 1.50/kg.

### C. Market price gap and measured losses
- International market price: around USD 1/kg (international market prices fluctuated around this level).
- Price gap consequence:
  - estimated loss of AUD 6,400 (about US$4,300) for every ton of exported crude coconut oil due to the price differential (before processing and labor costs).
- Aggregate implied loss:
  - applying the per-ton figure to 2021 export volumes implies a loss of AUD 19 million, equivalent to 5 percent of GDP.
- Historical pattern:
  - increases in the subsidy have generally not translated into higher production or exports of coconut products.

### D. Implementation inefficiencies and operational issues
- Payment timing: agents are paid the support price as soon as copra is weighed on outer islands (not upon receipt in Tarawa), creating incentives for diversion/theft.
- Storage and shipping constraints:
  - storage facilities often exposed to extreme weather;
  - shipping services are irregular and unreliable;
  - private shipping outside KNSL is limited.
- Labor incentive mismatch:
  - government payments for loading/unloading cargo are far below the support price, causing labor to prefer cutting copra over handling transport, increasing storage times.

### E. Distortions and economic effects
- Reduced diversification:
  - the high support price discourages diversification to other products (for example, seaweed and aquaculture);
  - coconut products accounted for nearly 50 percent of annual exports by value since 2010, increasing export concentration risk.
- Inhibited value-added upgrading:
  - high copra support price raises input costs for firms aiming to produce higher value-added coconut products (e.g., VCO).
- Inequality effects:
  - subsidy disproportionately benefits households with higher production capacity (more land, typically male-headed households).
  - Survey responses (2019–20 HIES Report, authorities’ results):
    - 48 percent of male-headed households reported a large increase in income from the increased copra subsidy.
    - 33 percent of female-headed households reported a large increase.
    - 48 percent of households in the highest expenditure quintile reported a large increase in income (higher than for poorer households).
- Overproduction and productivity decline:
  - reports indicate declining copra production quality, slow replanting, and premature cutting; these outcomes are linked to overproduction after the 2022 doubling (drought may have also contributed).

### F. Comparative context in Pacific Island Countries (PICs)
- Other PICs operate minimum support price schemes; many recently raised support prices.
- Examples:
  - Vanuatu approved a subsidy in September 2022 (mechanism described in source).
  - Papua New Guinea increased copra support price in January 2023 from US$0.3/kg to U$0.6/kg.
- Kiribati’s copra support price is by far the most generous among peers (Kiribati price far exceeds peer-country support prices).

### G. Theoretical modeling of economic impacts
- Models used: three theoretical two-good model variants (not fully calibrated due to micro-data limitations) to illustrate welfare and distributional impacts.
  - Model 1 — Horizontal diversification:
    - two goods produced by two domestic firms;
    - finding: higher subsidy on copra diverts labor and production toward copra, reduces production of the non-subsidized good, and lowers overall income (sum of revenues from both goods); the reduction in income increases uniformly with a higher subsidy.
  - Model 2 — Vertical diversification:
    - intermediate-good/ final-good structure where one firm’s output is an input for the second;
    - finding: subsidy on the intermediate good (copra) increases labor allocation to the intermediate good, lowers resources for final good production, and reduces overall income derived from the final good.
  - Model 3 — Inequality model:
    - two producers with asymmetric input endowments;
    - finding: the subsidy disproportionately benefits producers with greater capacity to produce the subsidized good, consistent with survey evidence showing larger gains for wealthier and male-headed households.

### H. Policy proposals and fiscal implications
- Reform options highlighted:
  - Lower the support price to AUD 2/kg.
  - Cap the existing subsidy at the poverty rate and channel a portion of the savings to a social assistance program.
- Expected effects of reforms:
  - these measures could yield meaningful fiscal savings and improve debt sustainability while retaining the subsidy’s poverty-reduction benefits.

### 12. The inequality model shows how a subsidy disproportionately benefits those

### Inequality model: core finding
- A subsidy on a good disproportionately benefits individuals with a greater comparative advantage in producing the subsidized good, widening wealth and gender gaps.
- The producer endowed with a greater relative ability to produce the subsidized good receives a higher income boost from the subsidy; a producer who is wealthier before the subsidy becomes wealthier still, exacerbating inequality.
- This reallocation of income occurs even if the subsidy itself is not distortive in aggregate (that is, even if the overall income level in the economy is unchanged relative to a scenario without a subsidy).

### Fiscal impact of potential reforms — scenarios considered
- Scenario 1: Reduce wastage.
  - Assumes removing inefficiencies along the subsidy payment chain yields annual cost savings of 5 percent.
  - Example measures: reducing delays between shipping collections, reimbursing KCDL based on the copra received (and processed) in Tarawa as opposed to the amount weighed in the outer islands.
- Scenario 2: Cut support price by half to AUD 2/kg, reversing the doubling of the subsidy in 2022 and bringing the local price closer to international market prices.
- Scenario 3: Cut support price by half to AUD 2/kg, channel savings to social assistance program.
  - The savings generated are channeled to a poverty-targeted social assistance program.
  - Forecast poverty reduction from 21.9 percent of households to 6.1 percent (World Bank, 2023).
  - In contrast, the doubling of the subsidy is simulated to reduce national poverty to 18.1 percent.
- Scenario 4: Cut support price by half to AUD 2/kg, channel part of the savings to a social assistance program.
  - The fraction of savings diverted is calibrated to achieve the same level of poverty reduction as the AUD 4/kg subsidy (World Bank, 2023).
- Scenario 5: Cap subsidy at the poverty rate.
  - Retain AUD 4/kg support price, but total payments at the subsidized price are capped at AUD 142/month, corresponding to the national poverty line in Kiribati.
  - Associated savings of about AUD 13 million per year are based on a (forthcoming) World Bank analysis on the copra subsidy.
  - The scenario assumes that farmers are paid the market price for any additional copra sold beyond the AUD 142/month threshold.

### Fiscal results and sensitivity
- Subsidy reforms could lower the deficit by up to 3 percentage points of GDP annually.
- Scenario 2 (cut support price to AUD 2/kg) creates the greatest reduction in deficit and debt.
- Scenario 4 generates around 2-3 percentage points in annual deficit reduction while retaining the current subsidy’s poverty reduction benefits.
- Scenario 5 (cap at AUD 142/month) generates almost identical fiscal benefits as scenario 4 while maintaining AUD 4/kg support price.
- All scenarios are sensitive to assumptions such as efficiency gains and GDP multipliers.
  - Example sensitivity: in scenario 1, a larger reduction in wastage could lower public debt in the forecast years even further.

### Economic trade-offs and quantitative context
- The copra subsidy:
  - Transfers economic resources to the outer islands and helps prevent migration to the capital.
  - Consumes a high and growing fraction of government expenditures.
  - After its increase to AUD 4/kg in 2022, the support price is currently triple the international market price and double the level in the next highest PIC.
- Theoretical model results:
  - Increased subsidy can reduce export competitiveness and increase inequality.
  - Rationalizing the subsidy — by reversing its recent increase or imposing a cap at the poverty line — could lower the fiscal deficit by up to 3 percentage points of GDP annually and improve debt sustainability while retaining poverty-reduction gains.

### Policy recommendations
- Boost subsidy efficiency by improving incentives along the payment chain (e.g., reduce wastage and delays in payments).
- Replace the universal copra subsidy with a poverty-targeted social assistance program to achieve larger poverty reductions (example: reducing poverty from 21.9 percent to 6.1 percent when channeling savings).
- Alternatively, impose a cap on subsidy payments (e.g., AUD 142/month) to retain social protection while freeing fiscal space.
- Development partners, including the IMF and the World Bank, stand ready to provide support in both improving targeting and implementing reforms.

### Appendix: model summaries (conceptual)
- Model 1 (Horizontal diversification):
  - A subsidy on copra diverts labor and production toward copra, raising the post-subsidy price of copra and altering labor allocation (ℓ1 = 훼(1+휏)L/(1+훼휏), ℓ2 = (1−훼)L/(1+훼휏)).
- Model 2 (Vertical diversification):
  - Copra as an input into a higher value-added good; subsidy raises input costs for the final good and reduces labor allocated to the higher value-added final good (ℓ1 = 훼(1+휏)L/(1+훼휏), ℓ2 = (1−훼)L/(1+훼휏); p1_subsidy = [expression with (1+휏)^훼]).
- Model 3 (Inequality):
  - Two producers with differing endowments; subsidy on good 1 increases income of the producer with higher relative endowment of good 1 (훾>0.5), thereby increasing inequality. Government budget balanced by taxing good 2 (휏2 set so that 휏 p1 ω1 = 휏2 p2 ω2).

*International Monetary Fund — Kiribati country chapter (content unit 1kirea2024002).*

### 1. Overview of Copra Support Price in Kiribati ________________________________________ 3

### 1. Overview of Copra Support Price in Kiribati

### A. Background and objectives of the copra subsidy
- The copra subsidy is implemented as a minimum support price and has been in place since the mid-1990s.
- Objectives: transfer resources to the outer islands, stem migration to the capital (Tarawa), act as an unemployment benefit by enabling copra cutting as alternative income, and function as a conditional cash transfer / social welfare mechanism.
- Implementing entities: Kiribati Coconut Development Limited (KCDL) disburses payments in the outer islands; Kiribati National Shipping Line Limited (KNSL) provides most shipping services.

### B. Scale and fiscal cost
- Support price: AUD 4/kg (current price after doubling in 2022).
- Recent increases: support price doubled in mid-2016 and doubled again to AUD 4/kg in 2022.
- Fiscal cost: subsidy raised to 9 percent of government expenditure (8 percent of GDP) in 2022 versus 5 percent in 2021.
- Export and GDP shares: between 2010 and 2021, copra accounted on average for 8 percent of Kiribati’s exports and broader coconut products for 45 percent of exports.
- Household engagement: around 40 percent of households produce copra for sale or exchange; participation up to 87 percent of households in the outer islands.
- Comparative production requirement: producing virgin coconut oil (VCO) competitively requires an equivalent copra price of around AUD 1.50/kg.

### C. Market price gap and measured losses
- International market price: around USD 1/kg (international market prices fluctuated around this level).
- Price gap consequence: estimated loss of AUD 6,400 (about US$4,300) for every ton of exported crude coconut oil due to the price differential (before processing and labor costs).
- Aggregate implied loss: applying the per-ton figure to 2021 export volumes implies a loss of AUD 19 million, equivalent to 5 percent of GDP.
- Historical pattern: increases in the subsidy have generally not translated into higher production or exports of coconut products.

### D. Implementation inefficiencies and operational issues
- Payment timing: agents are paid the support price as soon as copra is weighed on outer islands (not upon receipt in Tarawa), creating incentives for diversion/theft.
- Storage and shipping constraints: storage facilities often exposed to extreme weather; shipping services are irregular and unreliable; private shipping outside KNSL is limited.
- Labor incentive mismatch: government payments for loading/unloading cargo are far below the support price, causing labor to prefer cutting copra over handling transport, increasing storage times.

### E. Distortions and economic effects
- Reduced diversification: the high support price discourages diversification to other products (for example, seaweed and aquaculture); coconut products accounted for nearly 50 percent of annual exports by value since 2010, increasing export concentration risk.
- Inhibited value-added upgrading: high copra support price raises input costs for firms aiming to produce higher value-added coconut products (e.g., VCO).
- Inequality effects: subsidy disproportionately benefits households with higher production capacity (more land, typically male-headed households). Survey responses (2019–20 HIES Report, authorities’ results):
  - 48 percent of male-headed households reported a large increase in income from the increased copra subsidy.
  - 33 percent of female-headed households reported a large increase.
  - 48 percent of households in the highest expenditure quintile reported a large increase in income (higher than for poorer households).
- Overproduction and productivity decline: reports indicate declining copra production quality, slow replanting, and premature cutting; these outcomes are linked to overproduction after the 2022 doubling (drought may have also contributed).

### F. Comparative context in Pacific Island Countries (PICs)
- Other PICs operate minimum support price schemes; many recently raised support prices.
- Examples: Vanuatu approved a subsidy in September 2022 (mechanism described in source) and Papua New Guinea increased copra support price in January 2023 from US$0.3/kg to U$0.6/kg.
- Kiribati’s copra support price is by far the most generous among peers (Kiribati price far exceeds peer-country support prices).

### G. Theoretical modeling of economic impacts
- Models used: three theoretical two-good model variants (not fully calibrated due to micro-data limitations) to illustrate welfare and distributional impacts.
  - Model 1 — Horizontal diversification: two goods produced by two domestic firms; shows how a subsidy on copra affects diversification to non-coconut exports.
    - Finding: higher subsidy on copra diverts labor and production toward copra, reduces production of the non-subsidized good, and lowers overall income (sum of revenues from both goods); the reduction in income increases uniformly with a higher subsidy.
  - Model 2 — Vertical diversification: intermediate-good/ final-good structure where one firm’s output is an input for the second.
    - Finding: subsidy on the intermediate good (copra) increases labor allocation to the intermediate good, lowers resources for final good production, and reduces overall income derived from the final good.
  - Model 3 — Inequality model: two producers with asymmetric input endowments.
    - Finding: the subsidy disproportionately benefits producers with greater capacity to produce the subsidized good, consistent with survey evidence showing larger gains for wealthier and male-headed households.

### H. Policy proposals and fiscal implications
- Reform options highlighted:
  - Lower the support price to AUD 2/kg.
  - Cap the existing subsidy at the poverty rate and channel a portion of the savings to a social assistance program.
- Expected effects of reforms: these measures could yield meaningful fiscal savings and improve debt sustainability while retaining the subsidy’s poverty-reduction benefits.

_Italicized source: IMF staff case study “Copra Subsidy in Kiribati: A Case Study”, April 15, 2024._

### 12.      The inequality model shows how a subsidy disproportionately benefits those

### 12.      The inequality model shows how a subsidy disproportionately benefits those

### Inequality model: core finding
- A subsidy on a good disproportionately benefits individuals with a greater comparative advantage in producing the subsidized good, widening wealth and gender gaps.
- The producer endowed with a greater relative ability to produce the subsidized good receives a higher income boost from the subsidy; a producer who is wealthier before the subsidy becomes wealthier still, exacerbating inequality.
- This reallocation of income occurs even if the subsidy itself is not distortive in aggregate (that is, even if the overall income level in the economy is unchanged relative to a scenario without a subsidy).

### Fiscal impact of potential reforms to the copra subsidy — scenarios considered
- Scenario 1: Reduce wastage.
  - Assumes removing inefficiencies along the subsidy payment chain yields annual cost savings of 5 percent.
  - Example measures: reducing delays between shipping collections, reimbursing KCDL based on the copra received (and processed) in Tarawa as opposed to the amount weighed in the outer islands.
- Scenario 2: Cut support price by half to AUD 2/kg, reversing the doubling of the subsidy in 2022 and bringing the local price closer to international market prices.
- Scenario 3: Cut support price by half to AUD 2/kg, channel savings to social assistance program.
  - The savings generated are channeled to a poverty-targeted social assistance program.
  - Forecast poverty reduction from 21.9 percent of households to 6.1 percent (World Bank, 2023).
  - In contrast, the doubling of the subsidy is simulated to reduce national poverty to 18.1 percent.
- Scenario 4: Cut support price by half to AUD 2/kg, channel part of the savings to a social assistance program.
  - The fraction of savings diverted is calibrated to achieve the same level of poverty reduction as the AUD 4/kg subsidy (World Bank, 2023).
- Scenario 5: Cap subsidy at the poverty rate.
  - Retain AUD 4/kg support price, but total payments at the subsidized price are capped at AUD 142/month, corresponding to the national poverty line in Kiribati.
  - Associated savings of about AUD 13 million per year are based on a (forthcoming) World Bank analysis on the copra subsidy.
  - The scenario assumes that farmers are paid the market price for any additional copra sold beyond the AUD 142/month threshold.

### Fiscal results and sensitivity
- Subsidy reforms could lower the deficit by up to 3 percentage points of GDP annually.
- Scenario 2 (cut support price to AUD 2/kg) creates the greatest reduction in deficit and debt.
- Scenario 4 generates around 2-3 percentage points in annual deficit reduction while retaining the current subsidy’s poverty reduction benefits.
- Scenario 5 (cap at AUD 142/month) generates almost identical fiscal benefits as scenario 4 while maintaining AUD 4/kg support price.
- All scenarios are sensitive to assumptions such as efficiency gains and GDP multipliers.
  - Example sensitivity: in scenario 1, a larger reduction in wastage could lower public debt in the forecast years even further.

### Economic trade-offs and quantitative context
- The copra subsidy:
  - Transfers economic resources to the outer islands and helps prevent migration to the capital.
  - Consumes a high and growing fraction of government expenditures.
  - After its increase to AUD 4/kg in 2022, the support price is currently triple the international market price and double the level in the next highest PIC.
- Theoretical model results:
  - Increased subsidy can reduce export competitiveness and increase inequality.
  - Rationalizing the subsidy — by reversing its recent increase or imposing a cap at the poverty line — could lower the fiscal deficit by up to 3 percentage points of GDP annually and improve debt sustainability while retaining poverty-reduction gains.

### Policy recommendations
- Boost subsidy efficiency by improving incentives along the payment chain (e.g., reduce wastage and delays in payments).
- Replace the universal copra subsidy with a poverty-targeted social assistance program to achieve larger poverty reductions (example: reducing poverty from 21.9 percent to 6.1 percent when channeling savings).
- Alternatively, impose a cap on subsidy payments (e.g., AUD 142/month) to retain social protection while freeing fiscal space.
- Development partners, including the IMF and the World Bank, stand ready to provide support in both improving targeting and implementing reforms.

### Appendix: model summaries (conceptual)
- Model 1 (Horizontal diversification): A subsidy on copra diverts labor and production toward copra, raising the post-subsidy price of copra and altering labor allocation (ℓ1 = 훼(1+휏)L/(1+훼휏), ℓ2 = (1−훼)L/(1+훼휏)).
- Model 2 (Vertical diversification): Copra as an input into a higher value-added good; subsidy raises input costs for the final good and reduces labor allocated to the higher value-added final good (ℓ1 = 훼(1+휏)L/(1+훼휏), ℓ2 = (1−훼)L/(1+훼휏); p1_subsidy = [expression with (1+휏)^훼]).
- Model 3 (Inequality): Two producers with differing endowments; subsidy on good 1 increases income of the producer with higher relative endowment of good 1 (훾>0.5), thereby increasing inequality. Government budget balanced by taxing good 2 (휏2 set so that 휏 p1 ω1 = 휏2 p2 ω2).

*International Monetary Fund — Kiribati country chapter (content unit 1kirea2024002).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1kirea2024002.pdf_