## 1kirea2025001-source-pdf

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### Real sector developments and outlook
- Context and structural characteristics
  - Kiribati has 3.5 million km2 of ocean.
  - Population: approximately 120 thousand I-Kiribati; more than half live on South Tarawa.
  - Classification: fragile, low-income state with large infrastructure needs and high exposure to climate-related shocks.
  - Authorities’ development priorities: improving health and education; extending social benefits; increasing financial inclusion; supporting small businesses (including copra farmers); developing tourism and fisheries Joint Venture (JV) companies; raising funds for climate adaptation; improving physical and digital infrastructure; protecting marine resources.
- Recent performance (selected)
  - Real GDP growth: 2023: 2.7 percent; 2024: 5.3 percent (estimated).
  - Public sector salaries increased by around 40 percent in 2024.
  - Inflation (average): 2023: 9.3 percent; 2024: 2.5 percent.
  - Early 2025 price changes: fuel prices increased by 64 percent; electricity tariffs increased by 50 percent; inflation reported to have risen in 2025Q1.
- Outlook (baseline and medium term)
  - Real GDP growth: 2025: 3.9 percent; medium term: around 2 percent.
  - Inflation: 2025 average: 7.8 percent (driven primarily by electricity tariff and fuel price increases); medium term: about 2 percent.
  - Current account: 2025: deficit expected to narrow to 0.6 percent of GDP; medium term: around 1.6 percent of GDP.
  - Fiscal balance: 2025 overall fiscal deficit expected to narrow to 15 percent of GDP.

### Fiscal developments, composition, and policy stance
- Key fiscal indicators and composition (selected 2023–2024 indicators)
  - Overall fiscal balance: moved from an average surplus of 23 percent of GDP pre-COVID to an average deficit of 13 percent of GDP during 2022-24.
  - Overall deficit: estimated at 22 percent of GDP in 2024; surplus of 0.1 percent in 2023.
  - Fishing revenue: fell from 49 to 45 percent of GDP in 2024.
  - Budget support: fell from 5 to 1 percent of GDP in 2024.
  - Tax revenue: 17 percent of GDP in 2024 (increase of 1 percentage point).
  - Total current expenditure: 73 percent of GDP in 2024 (up from 68 percent in 2023).
  - Wage bill: 34 percent of GDP in 2024 (up from 26 percent in 2023).
  - Development expenditure: declined from 28 to 26 percent of GDP in 2024; pre-COVID average was 47 percent of GDP.
  - Social spending and subsidies: broadly stable in 2024 but substantially higher than pre-pandemic averages.
- Fiscal projections and scenarios (values presented as in source)
  - Baseline, post April 2:
    - 2025 GDP growth (percent): 3.9
    - 2026 GDP growth (percent): 3.2
    - 2025 Overall fiscal balance (percent of GDP): -15.0
    - 2026 Overall fiscal balance (percent of GDP): -16.6
    - 2025 RERF withdrawals (percent of GDP): 16.1
    - 2026 RERF withdrawals (percent of GDP): 8.6
  - Risk scenario, post April 2:
    - 2025 GDP growth (percent): 3.9
    - 2026 GDP growth (percent): 1.5
    - 2025 Overall fiscal balance (percent of GDP): -15.0
    - 2026 Overall fiscal balance (percent of GDP): -8.0
    - 2025 RERF withdrawals (percent of GDP): 16.0
    - 2026 RERF withdrawals (percent of GDP): 0.0

### RERF (Revenue Equalization Reserve Fund): rules, dynamics, and recommendations
- Recent rule change and withdrawals
  - 2024 RERF withdrawal rule relaxed: withdrawals allowed of excess annual returns above a 2 percent nominal threshold (previous rule: withdrawals of returns in excess of a 5 percent real return threshold).
  - 2024 RERF withdrawal: AUD 80 million, around 17 percent of GDP.
  - 2024 RERF balance: 324 percent of GDP at end-2024.
  - RERF closing balance (A$ million series): 2021: 356; 2022: 307; 2023: 320; 2024: 324; 2025: 309; 2026: 305; 2027: 303; 2028: 303; 2029: 304; 2030: 306.
- Simulation findings and risks under current return-based rule
  - Current return-based rule: if nominal returns are below 2 percent, RERF withdrawal is not permitted; historically RERF nominal returns have been below 2 percent about a quarter of the time.
  - Simulations (10,000 bootstrapped scenarios) indicate no RERF withdrawals about a quarter of the time over the next 50 years under the current return-based rule.
  - With maximum permitted withdrawals under the current return-based rule, simulations suggest the Fund could lose half of its value by about 2050.
- Balance-based rule and operational proposal
  - Staff recommendation: adopt a balance-based withdrawal rule with a cap at about 3 to 5 percent of the RERF balance.
  - Operational rule proposed:
    - In normal times, plan to withdraw about 3 percent of the RERF balance.
    - If revenues fall short relative to expectations, Kiribati could withdraw up to 5 percent of RERF (currently around 16 percent of GDP).
    - When fishing revenues and grants exceed MTFF expectations, make RERF deposits or smaller withdrawals consistent with the MTFF.
  - Quantitative implication: a 5 percent balance-based rule would likely allow maximum withdrawals around 15 percent of GDP over the medium term and preserve the RERF’s long-term value under historical return assumptions.

### Infrastructure, climate adaptation needs, and financing requirements
- Scale of climate-resilient investment required (estimates preserved)
  - Estimated annual investment required:
    - over 25 percent of GDP for moderate resilience (to withstand a 0.5-meter sea-level rise by 2100),
    - over 45 percent of GDP for high resilience (to withstand a 2-meter sea-level rise by 2200).
  - Baseline includes climate adaptation spending in recurrent budget starting at 3 percent of GDP in 2026, rising to 6 percent of GDP in 2033 onward; development partners provide 6 percent of GDP in adaptation after 2030.
- Ongoing and planned projects and connectivity
  - Ongoing/planned: upgrading water and sanitation infrastructure; enhancing coastal zone management; implementing new building code (passed in 2024); multiple donor-supported solar power projects.
  - Connectivity: undersea internet cable scheduled in late 2025; additional aircraft arrival in 2025 and planned Kiritimati airport upgrades; ports master plan supported by development partners.
- Financing and institutional constraints
  - Main sources of climate finance: MDBs (World Bank, ADB) and bilateral partners (Australia, New Zealand).
  - Direct access to climate funds is challenging and would require substantial improvements to public investment institutions.
  - Authorities’ planning documents: Kiribati development plan (KV20), Kiribati Joint Implementation Plan, National Infrastructure Investment Plan (NIIP).
  - Authorities emphasize reliance on external funding and capacity constraints for implementation and maintenance (e.g., Desalination Plant).

### Reform scenarios, fiscal consolidation, and public investment efficiency
- Baseline and staff recommendations (quantitative assumptions preserved)
  - Baseline projections:
    - RERF withdrawals around 9 percent of GDP (based on budget and 2024 withdrawal rule).
    - No fiscal consolidation in baseline → debt-to-GDP of 106 percent by 2044.
  - Recommendation I: Fiscal Consolidation
    - Gradual fiscal consolidation of about 3.5 percent of GDP each year from 2030 onward to preserve debt sustainability.
    - Result: debt around 55 percent of GDP by 2044, assuming investment sufficient for low resilience.
    - Expenditure measures: rationalize copra subsidy; streamline SOE subsidies; maintain nominal wage freeze through 2028.
    - Revenue measures: (1) remove tax and excise exemptions; (2) implement VAT reforms; (3) increase excise taxes on tobacco, alcoholic, and sugary drinks, and introduce excise on kava; (4) increase fishing license fee collection by 0.5 percent of GDP.
  - Recommendation II: Building moderate resilience
    - Additional adaptation investment of 13 percent of GDP per year relative to the baseline needed to achieve moderate resilience (0.5-meter sea level rise by 2100).
    - Financing: fiscal consolidation, additional RERF withdrawals, and concessional borrowing.
    - Outcome: GDP higher than baseline; debt-to-GDP ratio reaches 125 percent by 2044 (increase relative to baseline modest due to higher GDP).
  - Recommendation III: Increasing efficiency of public investment
    - Improve national and sectoral infrastructure planning with prioritized projects, costing, timeline, clear selection criteria, and partner alignment.
    - Integrate recurrent and development budgets; ensure infrastructure spending consistent with MTFF.
    - With efficiency improvements, despite higher borrowing for adaptation, GDP would be significantly higher and debt-to-GDP around 106 in 2044, and lower than baseline thereafter.
- Text Table 2 — Recommended Fiscal Consolidation (In Percent of GDP)
  - Baseline Fiscal Balance:
    - 2026: -16.8
    - 2030-onward: -15.6
  - Recommended Fiscal Balance:
    - 2026: -14.8
    - 2030-onward: -12.1
  - Consolidation in Total:
    - 2026: 2.0
    - 2030-onward: 3.5
  - Contribution from tax mobilization:
    - 2026: 1.0
    - 2030-onward: 1.5
  - Enhanced Fishing Revenue:
    - 2026: 0.5
    - 2030-onward: 0.5
  - Excise Tax:
    - 2026: 0.4
    - 2030-onward: 0.8
  - VAT Reform:
    - 2026: 0.1
    - 2030-onward: 0.2
  - Contribution from streamlining subsides:
    - 2026: 1.0
    - 2030-onward: 2.0
  - Copra Subsidies:
    - 2026: 0.8
    - 2030-onward: 1.5
  - SOE Subsidies:
    - 2026: 0.2
    - 2030-onward: 0.5

### Debt sustainability, contingent liabilities, and DSA findings
- Current debt and balance-sheet highlights
  - Public debt (mostly external): 9.9 percent of GDP at end-2024.
  - Outstanding external debt: AUD 45.3 million (about 9.7 percent of GDP) at end-2024.
  - Domestic debt: estimated AUD 0.96 million (0.2 percent of GDP) at end-2024.
  - RERF balance: about AUD 1.5 billion (close to 324 percent of GDP) at end-2024.
- DSA conclusions and medium/long-term vulnerabilities
  - Overall assessment: Kiribati debt remains sustainable but at high risk of debt distress; risk of external debt distress: High; overall risk of debt distress: High.
  - Baseline medium-term macro assumptions:
    - Real GDP growth: 2024-34 Average: 2.7; 2035-44 Average: 2.1.
    - Inflation (average): 2024-34 Average: 2.8.
    - Overall fiscal balance: large deficits (e.g., -22.0 percent of GDP in 2024; 2024-34 Average: -16.4).
  - Under baseline, PV of PPG external debt-to-GDP ratio expected to breach indicative threshold (40 percent) in 2036.
  - PV of total public debt-to-GDP ratio expected to breach benchmark (55 percent) starting from 2043.
  - Stress tests: tailored natural disaster and contingent liabilities tests push breaches earlier (e.g., extreme shock breaches in years 11–20).
- Contingent liability stress test components (values preserved)
  - Total contingent liabilities incorporated: 27.0 percent of GDP.
  - SOE liabilities (guaranteed and not guaranteed) at end-2022: 12.0 percent of GDP.
  - Contingent liability for joint venture company with minority government ownership: 10.0 percent of GDP.
  - Financial market shock (default value): 5.0 percent of GDP.
- Recommendations to preserve sustainability
  - Strengthen debt management framework, require detailed annual reporting, clarify borrowing purposes and guarantees, and ensure alignment with medium-term fiscal strategy.
  - Maintain or expand access to grants and highly concessional loans.
  - Protect cash reserves; limit RERF withdrawals via a balance-based cap (around 3 to 5 percent of RERF balance recommended).
  - Use countercyclical fiscal policy integrated with MTFF and enforce transparency around contingent liabilities (including joint ventures).

### Monetary, financial supervision, and financial inclusion
- Financial supervision and KFSA
  - Kiribati Financial Supervisory Authority (KFSA) established in 2021; CEO, Deputy CEO and Board appointed since 2024; recruitment of other staff in progress.
  - Operationalization expectations: Kiribati Institutions Act (2021) and Financial Supervisory Authority of Kiribati Act (2021) operationalized by 2026-2027; KFSA expected fully operational by mid-2027.
  - Next steps: prudential rules, reporting on capital adequacy and risk, AML/CFT supervision framework, supervisory toolkit.
- Financial inclusion and payments
  - Recommendations and progress:
    - Establish a Financial Inclusion Unit and a credit union.
    - Engage ANZ for social protection payments; ANZ increased EFTPOS machines from 20 to 270 and waived some fees.
    - Bank account opening pilot project completed in two outer islands; estimated 6,000 new accounts opened through pilot; individual ANZ account holders increased to 39,000 from 17,000 in 2021.
    - Expand EFTPOS, mobile cellular subscriptions, mobile wallets (MPAiSA), and explore regional financial platforms.

### Institutional capacity, public investment management, and human capital
- Public investment management findings and recommendations
  - Kiribati has high public investment levels but low efficiency; implementation delays and weak absorption capacity are common.
  - Recommendations:
    - Greater reliance on development partners for project implementation with improved oversight.
    - Improved monitoring of public assets via a fixed asset register.
    - Strengthened procurement requirements and transparency.
    - Priority project lists with detailed costing, timeline and transparent selection criteria; integrate recurrent and development budgets.
- Institutional and human capital reforms
  - PFM strengthening: medium-term expenditure framework, strengthened budget execution, improved cash management, internal controls, accounting standards, auditing, transparency, and high-level endorsement of PFM roadmap.
  - Revenue administration: strengthen taxpayer functions, improve compliance, replace RMS, risk-based audits, strengthen large company collections.
  - Human capital: incentivize school enrollment and attainment, expand TVET, raise teacher certification requirements, train public health workers, improve sanitation and nutrition, expand telehealth.
- Data and statistical capacity
  - Data improvements: direct investment database created; loan-by-loan government foreign loans database established; CPI rebased to June 2023=100; monthly CPI publication lag 1-2 months; CPI outlets increased to 23 from 3.
  - Shortcomings and priorities:
    - Expand CPI geographic coverage to outer islands; develop producer price index; improve GFS debt reporting to include guarantees and JV entities; include JV activities in external statistics; reconcile grants and in-kind assistance.
    - Continue TA from PFTAC and IMF Statistics Department.

### Risk assessment and policy implications
- Overall tilt: risks increased and are tilted to the downside.
- Key downside risks (selected)
  - External: commodity price volatility; intensification of conflicts raising shipping costs; systemic financial instability affecting import bills, RERF returns, remittances, and growth.
  - Natural disasters and weather-related events; climate change impacts on fishing revenues and sea-level rise.
  - Domestic: greater reliance on RERF withdrawals based on annual returns exacerbating revenue volatility and impeding economic management.
  - Example scenario: persistently weak financial markets in 2025 amid heightened trade uncertainty could cause 2026 growth to fall to 1.5 percent due to an unintended fiscal contraction of almost 9 percent of GDP (Text Table 1 scenario).
- Upside risks
  - Stronger structural policies: investments in human capital and infrastructure, digital connectivity, institutional reforms.
  - Acceleration of global growth or supply-side surprises improving remittances and RERF returns.
- Policy responses emphasized
  - Adopt countercyclical fiscal policy integrated with a balance-based RERF withdrawal rule.
  - Implement gradual, growth-friendly fiscal consolidation and improve public investment efficiency.
  - Strengthen debt management, transparency, and governance; preserve access to concessional financing and grants.
  - Build climate-resilient infrastructure and mobilize development partner support.

*Source: Excerpt from IMF staff country report — "1kirea2025001-source-pdf".*

### 1. Real Sector Developments ____________________________________________________________________ 24

### 1. Real Sector Developments

### Context and structural characteristics
- Kiribati has 3.5 million km2 of ocean.
- Population: approximately 120 thousand I-Kiribati, with more than half living on South Tarawa atoll and the rest on outer islands relying on subsistence agriculture and fisheries.
- Classification: fragile, low-income state with large infrastructure needs and high exposure to climate-related shocks.
- Development priorities noted by authorities: improving health and education, extending social benefits, increasing financial inclusion, supporting small businesses (including copra farmers), developing tourism, fisheries Joint Venture (JV) companies, raising funds for climate adaptation, improving physical and digital infrastructure, and protecting marine resources.

### Recent macroeconomic developments and public sector expansion
- Growth and labor:
  - Real GDP growth moderated to 2.7 percent in 2023.
  - Real GDP grew by an estimated 5.3 percent in 2024 and is close to its pre-COVID trend.
  - An increase in public sector salaries of around 40 percent in 2024 supported consumption.
- Inflation and prices:
  - Average headline inflation: 9.3 percent in 2023; 2.5 percent in 2024.
  - Early 2025 increases: fuel prices increased by 64 percent; electricity tariffs increased by 50 percent.
  - Inflation is reported to have risen in 2025Q1.
- Fiscal outcomes and composition (selected 2023–2024 indicators):
  - Overall fiscal balance: moved from an average surplus of 23 percent of GDP pre-COVID to an average deficit of 13 percent of GDP during 2022-24.
  - Overall deficit estimated at 22 percent of GDP in 2024, down from a surplus of 0.1 percent in 2023.
  - Fishing revenue fell from 49 to 45 percent of GDP in 2024.
  - Budget support fell from 5 to 1 percent of GDP in 2024.
  - Tax revenue: 17 percent of GDP in 2024 (increase of 1 percentage point).
  - Total current expenditure: 73 percent of GDP in 2024 (up from 68 percent in 2023).
  - Wage bill: 34 percent of GDP in 2024 (up from 26 percent in 2023).
  - Development expenditure: declined from 28 to 26 percent of GDP in 2024; pre-COVID average was 47 percent of GDP.
  - Social spending and subsidies: broadly stable in 2024 but substantially higher than pre-pandemic averages.
- Sovereign wealth fund and financing:
  - RERF withdrawal rule relaxed in 2024: withdrawals allowed of excess annual returns above a 2 percent nominal threshold (previous rule: withdrawals of returns in excess of a 5 percent real return threshold).
  - 2024 RERF withdrawal: AUD 80 million, around 17 percent of GDP.
  - Additional financing: 5 percent of GDP sourced from cash reserves.
  - RERF balance at end-2024: 324 percent of GDP.
  - Public debt (mostly external): 9.9 percent of GDP at end-2024; assessed as sustainable but at high risk of debt distress due to climate-related vulnerabilities.
- SOE and utility reforms:
  - January 2025: authorities increased fuel price and raised electricity tariffs; no budgeted subsidies for Kiribati Oil (KOIL) in 2025.
  - Prepaid electricity meters for Ministries approved in 2024 and to be rolled out in 2025.
  - Three utilities projects in South Tarawa (renewable energy, water, sanitation) came online in 2024 with development partner assistance.
- External sector:
  - Current account: average surplus of 23.7 percent of GDP pre-pandemic to an average deficit of 5 percent of GDP during 2022-24.
  - 2024 current account deficit estimated at 2 percent of GDP.
  - REER appreciated by 2.6 percent in 2024 and assessed as stronger than the level implied by fundamentals.
  - Despite consecutive current account deficits during 2022-23, international reserves have increased and are assessed as adequate.
- Financial supervision:
  - Kiribati Financial Supervisory Authority (KFSA) established in 2021; CEO, Deputy CEO and Board appointed since 2024; recruitment of other staff in progress.
  - KFSA is establishing relations with counterparts in other Pacific Island countries; new prudential regulations expected with PFTAC assistance.

### Outlook (baseline projections and medium-term)
- Growth:
  - 2025: Real GDP growth expected to moderate to 3.9 percent.
  - Medium term: Growth projected to slow to around 2 percent.
  - Near-term activity expected to be driven largely by public consumption and continuation of infrastructure projects.
- Inflation:
  - 2025: Inflation expected to increase to an average of 7.8 percent (primarily due to the electricity tariff increase of 50 percent and fuel price increase of 64 percent).
  - Medium term: Inflation projected to decline to about 2 percent.
- Current account:
  - 2025: Current account deficit expected to narrow to 0.6 percent of GDP.
  - Medium term: Current account deficit projected to remain broadly stable at around 1.6 percent of GDP.
- Fiscal balance:
  - 2025: Fiscal deficit expected to narrow to 15 percent of GDP due to a freeze on nominal wages, reduction in SOE subsidies, decrease in unemployment benefits, and increased budget support from development partners.
  - Fishing revenues are expected to decline further due to changes in seawater temperature.

### Risk assessment (tilt, key downside and upside risks)
- Overall assessment: Risks have increased and are tilted to the downside.
- Downside risks:
  - External: greater commodity price volatility; intensification of conflicts raising shipping costs; systemic financial instability from escalating tariffs—these could affect import bills, RERF interest revenues, remittances, and growth.
  - Natural disasters and weather-related events.
  - Domestic: greater reliance on RERF withdrawals based on annual returns can exacerbate revenue volatility and impede economic management.
  - Example risk scenario outcome: In a scenario of persistently weak financial markets in 2025 amid heightened trade uncertainty, growth in 2026 would fall to 1.5 percent due to an unintended fiscal contraction of almost 9 percent of GDP (Text Table 1).
- Upside risks:
  - Stronger structural policies: investments in human capital and infrastructure, digital connectivity, and institutional-strengthening reforms.
  - Acceleration of global growth from easing conflicts, positive supply-side surprises (e.g., oil production shocks), productivity gains from AI, or structural reforms—these could boost remittances and RERF returns.

### Scenarios (Text Table 1 — values presented as in source)
- Baseline, post April 2:
  - 2025 GDP growth (percent): 3.9
  - 2026 GDP growth (percent): 3.2
  - 2025 Overall fiscal balance (percent of GDP): -15.0
  - 2026 Overall fiscal balance (percent of GDP): -16.6
  - 2025 RERF withdrawals (percent of GDP): 16.1
  - 2026 RERF withdrawals (percent of GDP): 8.6
- Risk scenario, post April 2:
  - 2025 GDP growth (percent): 3.9
  - 2026 GDP growth (percent): 1.5
  - 2025 Overall fiscal balance (percent of GDP): -15.0
  - 2026 Overall fiscal balance (percent of GDP): -8.0
  - 2025 RERF withdrawals (percent of GDP): 16.0
  - 2026 RERF withdrawals (percent of GDP): 0.0

### Authorities’ views
- Authorities broadly agreed with staff’s outlook and risks.
- They noted recent inflationary pressures from fuel price and electricity tariff increases were necessary for SOE sustainability (Kiribati Oil Company and the Public Utilities Board).
- Authorities expressed concern about indirect impacts of global trade policy changes, including lower RERF returns due to financial market volatility and lower fishing license revenue due to weakening of the U.S. dollar.
- Authorities broadly agreed with staff findings of the external sector assessment.

### Policy discussion and recommendations for calibrating fiscal policy toward long-term development
- Core development challenge: reconcile expanded social benefits, infrastructure investment, and macroeconomic stability in the face of remoteness, climate risks, scarce freshwater, and limited fertile soil.
- Key policy directions highlighted:
  - Build climate-resilient infrastructure that enhances connectivity and supports private sector development.
  - Calibrate fiscal policy to enable long-term development despite revenue volatility (including careful use of RERF withdrawals and managing procyclicality).
  - Strengthen institutional capacity through structural reforms and investment in human capital to support sustainable productivity improvements.
- Fiscal management specifics implied by the assessment:
  - Consider rules and mechanisms to manage volatility from fishing revenues and RERF returns to avoid unintended large fiscal contractions.
  - Ensure cost-recovery in utilities via annually resetting fuel prices and regular electricity tariff reviews; maintain no budgeted subsidies for KOIL in 2025 as part of this approach.
  - Improve SOE financial sustainability and enhance revenue predictability to reduce reliance on large RERF withdrawals.

*Source: IMF staff country report excerpt — "1. Real Sector Developments".*

### 15.      Kiribati’s infrastructure needs are extremely large, particularly in climate adaptation,

### 15.      Kiribati’s infrastructure needs are extremely large, particularly in climate adaptation, water, and sanitation.

### Infrastructure needs and ongoing plans
- The authorities have a strategy embedded in the Kiribati development plan (KV20, the Kiribati Vision 2016-2036) that covers infrastructure needs.
- Priority areas for climate adaptation and mitigation are laid out in the Kiribati Joint Implementation Plan.
- Ongoing and planned climate adaptation projects include:
  - upgrading water and sanitation infrastructure,
  - enhancing coastal zone management,
  - gradually implementing the new building code, passed in 2024.
- Multiple ongoing donor-supported programs aim at climate mitigation by expanding solar power.
- As part of its 2030 NDC, Kiribati has committed to reduce GHG emissions by 9.5 percent and 8 percent by 2025 and 2030, respectively, compared with the business-as-usual scenario. Additional emissions’ reduction is conditional on international support.

### Vulnerabilities and investment scale for resilience
- Kiribati is rain-dependent and faces a constant threat from gradually-rising sea levels, which is expected to increase the frequency and severity of storm surges and exceptional tides.
- Saltwater intrusion from storm surges and floods aggravates problems with access to drinking water and proper sanitation.
- Intensified coastal erosion will damage buildings and infrastructure.
- Baseline resilience: Kiribati will only have low resilience to climate-related natural disasters in the baseline scenario.
- Estimated annual investment in climate-resilient infrastructure required:
  - over 25 percent of GDP for moderate resilience (to withstand a 0.5-meter sea-level rise by 2100),
  - over 45 percent of GDP for high resilience (to withstand a 2-meter sea-level rise by 2200).
- Main sources of climate finance: MDBs such as the World Bank and ADB, and bilateral partners such as Australia and New Zealand.
- Direct access to climate funds has been very challenging for Kiribati and other low-income Pacific Islands and would require substantial improvements to public investment institutions (Fouad et al, 2021). Kiribati can continue to access global climate funds through engagement with development partners.

### Connectivity and private sector development needs
- Climate-resilient roads, runways, buildings, and coastal infrastructure are needed to facilitate transportation and expand access to foreign markets.
- Further investments in digitalization and greater digital connectivity would help raise productivity and develop the services sector.
- Infrastructure gaps addressed would support diversification within the blue economy (e.g., increasing exports of diversified tuna fish products, developing niche tourism).
- Implementation notes:
  - An undersea internet cable is scheduled in late 2025.
  - Air connectivity is expected to improve with the arrival of an additional aircraft in 2025 and planned upgrades to the Kiritimati airport.
  - A master plan for updating the ports is supported by development partners.

### Authorities’ views on infrastructure and climate adaptation
- The authorities concur that Kiribati faces significant investment needs for infrastructure development and resilience building.
- They are committed to balancing infrastructure investment and enhanced social protection while preserving macroeconomic stability, and are reviewing policies to reduce leakage of social benefits.
- Progress reported:
  - increasing infrastructure maintenance provisions,
  - planning for a development partner roundtable to enhance coordination,
  - emphasizing renewable energy initiatives to reduce import dependence.
- Authorities expressed concern over long-term risks imposed by rising sea levels and highlighted reliance on external funding and capacity constraints for project implementation and maintenance (e.g., Desalination Plant).

### Investment financing and dependence on development partners
- Further progress in reaching climate adaptation goals will depend on continued support from development partners.
- Authorities noted national development planning is outlined in the National Infrastructure Investment Plan (NIIP) and led by the Cabinet-level Development Coordination Committee, but reliant on external funding.
- Mobilizing additional external funding for operation and maintenance of improved infrastructure services is important.

---

### B.   Enabling Development: Countercyclical Fiscal Policy

### Rationale for countercyclical fiscal policy
- Countercyclical fiscal policy (spending more in weak growth, saving during strong growth) would better support equitable and sustainable growth.
- Fiscal policy has become increasingly procyclical in recent years, in contrast to other Pacific Islands.
- Kiribati relies on fishing revenues and grants, which are volatile and often correlated.
- Financing deficits through maximum RERF withdrawals based on the current 2 percent nominal return rule could exacerbate volatility, since recent RERF returns have been more volatile than either fishing revenues or grants.
- Procyclical fiscal policy risks supporting excessive, inefficient spending and investment when revenues and RERF returns are high, and cuts when revenues are low.
- Steady implementation of the national infrastructure investment plan, including climate adaptation, requires long-term planning and a stable, robust medium-term fiscal framework.

### Recommendations on RERF withdrawals and MTFF integration
- RERF withdrawals should:
  - compensate for revenue volatility,
  - be integrated in a medium-term fiscal framework (MTFF),
  - be capped at about 5 percent of RERF balance.
- Proposed operational rule:
  - In normal times, plan to withdraw about 3 percent of the RERF balance.
  - If revenues fall short relative to expectations, Kiribati could withdraw up to 5 percent of RERF (currently around 16 percent of GDP).
  - When fishing revenues and grants exceed MTFF expectations, make RERF deposits or smaller withdrawals consistent with the MTFF.
- Revising the RERF Act to strengthen RERF governance and put it under closer legislative scrutiny is recommended.
- Context on current rule: The 2024 withdrawal rule (return-based, 2 percent nominal return) would lead to no withdrawals approximately every 1 in 4 years. With the current return-based rule, if RERF nominal returns are below 2 percent, RERF withdrawal is not permitted; historically RERF nominal returns have been below 2 percent about a quarter of the time.

---

### C.   Reform Scenarios, Fiscal Consolidation, and Climate Adaptation Investment

### Summary of staff-projected scenarios and main quantitative assumptions
- Baseline:
  - Staff project an increase in climate adaptation spending in the recurrent budget starting at 3 percent of GDP in 2026, rising to 6 percent of GDP in 2033 and onward.
  - Development partners provide 6 percent of GDP in adaptation after 2030.
  - Baseline would only provide low resilience to climate-related shocks.
  - RERF withdrawals are projected at around 9 percent of GDP, based on the budget and consistent with the 2024 RERF withdrawal rule, assuming average RERF returns.
  - No fiscal consolidation in baseline → debt-to-GDP of 106 percent by 2044.
- Recommendation I: Fiscal Consolidation
  - Gradual fiscal consolidation of about 3.5 percent of GDP each year from 2030 onward is needed to preserve debt sustainability.
  - Result: debt around 55 percent of GDP by 2044, assuming investment sufficient for low resilience.
  - Expenditure measures: rationalizing the copra subsidy, streamlining SOE subsidies, maintain nominal wage freeze through 2028.
  - Revenue measures:
    - (1) removing tax and excise exemptions,
    - (2) implementing VAT reforms,
    - (3) increasing excise taxes on tobacco, alcoholic, and sugary drinks, and introducing excise taxes on kava,
    - (4) increasing fishing license fee collection by 0.5 percent of GDP.
- Recommendation II: Building moderate resilience
  - Additional adaptation investment of 13 percent of GDP per year relative to the baseline is needed to achieve moderate resilience to climate shocks (to prepare for a 0.5-meter sea level rise by 2100).
  - Financing: proposed fiscal consolidation, additional RERF withdrawals and concessional borrowing.
  - Outcome: GDP would be higher than in the baseline, and debt-to-GDP ratio would reach 125 percent of GDP by 2044 (increase relative to baseline modest due to higher GDP).
- Recommendation III: Increasing efficiency of public investment
  - Measures to improve efficiency:
    - (1) improve national and sectoral infrastructure planning toward a prioritized list of specific projects (including for SOEs) with identified partners, costing, timeline, and clear selection criteria;
    - (2) integrate the recurrent budget and development budget, ensuring selected infrastructure spending is consistent with the MTFF.
  - With efficiency improvements, despite higher borrowing for climate adaptation, GDP would be significantly higher and debt-to-GDP would be around 106 in 2044, and lower than the baseline thereafter.

### Text Table 2. Recommended Fiscal Consolidation (In Percent of GDP)
- Baseline Fiscal Balance:
  - 2026: -16.8
  - 2030-onward: -15.6
- Recommended Fiscal Balance:
  - 2026: -14.8
  - 2030-onward: -12.1
- Consolidation in Total:
  - 2026: 2.0
  - 2030-onward: 3.5
- Contribution from tax mobilization:
  - 2026: 1.0
  - 2030-onward: 1.5
- Enhanced Fishing Revenue:
  - 2026: 0.5
  - 2030-onward: 0.5
- Excise Tax:
  - 2026: 0.4
  - 2030-onward: 0.8
- VAT Reform:
  - 2026: 0.1
  - 2030-onward: 0.2
- Contribution from streamlining subsides:
  - 2026: 1.0
  - 2030-onward: 2.0
- Copra Subsidies:
  - 2026: 0.8
  - 2030-onward: 1.5
- SOE Subsidies:
  - 2026: 0.2
  - 2030-onward: 0.5

### Fiscal and macro aggregates table highlights (selected values preserved)
- Total Revenue (various periods in per mille units shown in source table):
  - Average 2013-19: 120
  - Average 2021-24: 79
  - 2025: 111
  - 2026: 94
  - 2030: 85
  - Average 2031-44: 79
- Tax revenue (percent of GDP or per mille as in table):
  - Average 2013-19: 14
  - Average 2021-24: 17
  - 2025: 18
  - 2026: 18
  - 2030: 19
  - Average 2031-44: 19
- Fishing revenue:
  - Average 2013-19: 62
  - Average 2021-24: 44
  - 2025: 40
  - 2026: 39
  - 2030: 37
  - Average 2031-44: 35
- Project grants:
  - Average 2013-19: 38
  - Average 2021-24: 11
  - 2025: 45
  - 2026: 31
  - 2030: 26
  - Average 2031-44: 21
- Total Expenditure and components (select values):
  - Total Expenditure, Average 2013-19: 97; Average 2021-24: 91; 2025: 127; 2026: 111; 2030: 101; Average 2031-44: 95
  - Current spending (various): 50; 69; 68; 69; 67; 65
  - Development expenditure (various): 47; 22; 58; 42; 34; 30
  - Additional adaptation spending (Average 2031-44 under Consolidation and Climate Adaptation scenario): 12; 13; 13 (table shows “Additional adaptation spending ... 12 13 13” aligned with scenario rows)
- Overall Balance and Financing highlights:
  - Overall Balance entries in table: 23; -13; -15; -17; -16; -16; -27; -25; -26 (as shown in table rows)
  - Financing of which: RERF values shown: 9; 8; 9; 14; 13; 14
  - Financing of which: External concess. loans values shown: 8; 8; 8; 13; 11; 12

---

### Authorities’ views on fiscal reforms and RERF
- Authorities broadly agreed with staff’s fiscal recommendations and emphasized their track record of fiscal discipline.
- They noted commitment to maintaining debt sustainability and did not see an immediate need to introduce a debt anchor or pursue additional fiscal consolidation.
- They maintained increased current expenditure relative to pre-COVID was important for social benefits and that the wage bill increase in 2024 had been long overdue.
- They emphasized commitment to the nominal wage freeze and reducing subsidies by raising fuel and electricity prices.
- Authorities reiterated the social protection aspect of the copra subsidy and are actively considering reform options.
- On RERF withdrawals:
  - Authorities noted communication challenges associated with modifying the RERF withdrawal rule too often.
  - They emphasized recent withdrawals have been measured and focused on development spending after years of no withdrawals.
  - They saw no risk of depleting the long-term value of the RERF, as they plan to withdraw less than maximum permitted amounts.
  - They reiterated that RERF withdrawals should be recorded as revenue, not a financing item.
  - In case low returns preclude RERF withdrawals in 2026, the authorities would adjust their capital spending.

---

### C.   Sustaining Development: Institutional Capacity and Human Capital

### Institutional capacity gaps and structural reforms
- Structural reforms needed to improve fiscal institutions, build financial sector regulatory and supervisory institutions, develop a debt management framework, and strengthen the legal and governance framework for investment and FDI to facilitate trade and support private sector development.
- Fiscal structural reforms should include:
  - Strengthening Public Financial Management (PFM) to increase efficiency of public spending and investment. Required elements:
    - a clear medium-term expenditure framework,
    - strengthened budget execution,
    - improved cash management,
    - stronger internal controls,
    - accounting standards, auditing and transparency, including publication of annual financial statements of SOEs and other government agencies.
    - high-level political endorsement of the PFM roadmap and appropriate staffing at the Ministry of Finance and Economic Development (MFED).
    - Revising the RERF Act to strengthen RERF governance and legislative scrutiny.
  - Public Investment Management Framework institutional dimensions listed in source (15 items), indicating areas for improvement such as project appraisal, procurement, maintenance, multiyear budgeting, and monitoring of assets.
- Building revenue administration capacity:
  - Strengthen core taxpayer functions and broaden the taxpayer base.
  - Improve tax compliance through better taxpayer services and address potential conflicts of interest in small states.
  - Introduce risk-based audit procedures and strengthen collection from large companies benefiting from marine resource wealth.
  - Replace the outdated Revenue Management System (RMS) as part of revenue administration digitalization upgrade.

*Source: IMF staff and authorities as presented in the provided chapter content.*

### 26.      Improved public investment management is needed to raise efficiency of development

### 26.      Improved public investment management is needed to raise efficiency of development spending

### Public investment management: findings and recommendations
- Kiribati already has a high level of public investment but access to infrastructure—such as drinking water and solid waste management—is still lower than in many low-income countries due to low efficiency of public spending.
- Many projects have approved funding that is not promptly disbursed, often due to implementation delays amid insufficient planning and preparation, indicating weak absorption capacity.
- Recommendations:
  - Greater reliance on development partners for project implementation, with improved oversight.
  - Improved monitoring of public assets through a fixed asset register.
  - Strengthened procurement requirements, especially where some development partners’ own requirements are nontransparent.
  - Supplement the prioritized list of infrastructure projects with detailed costing, timeline and transparent criteria for project selection, and plan to integrate the recurrent budget with the development budget.
  - Enhanced oversight and procurement procedures, and maintaining a fixed asset register to improve quality and efficiency of public investment.

### Debt management: findings and recommendations
- Establishing a sound debt management framework is a prerequisite for sustainable growth and diversification.
- Improved governance and transparency are key in the context of new loans for climate adaptation.
- The authorities urgently need to establish a debt management framework that:
  - Ensures new borrowing is consistent with debt sustainability.
  - Clarifies the purposes of borrowing and issuing guarantees.
  - Requires detailed annual reporting.
  - Strengthens capacity to assess sources of risk, including potential collateralized transactions, to ensure transparency and accountability before authorization.
- Maintaining or expanding access to grants and highly concessional loans remains the preferred way to preserve debt sustainability.
- Collateralized borrowing note (as provided):
  - Collateralized borrowing refers to using government assets (e.g. a sovereign wealth fund or future commodity exports) as collateral to secure repayment to creditors in case of default. It often weakens debt sustainability as it can trigger negative pledge clauses, which require that existing creditors’ loans also get secured. Over time, it can discourage unsecured lenders and reduce fiscal space as the stock of collateral gets progressively encumbered, limiting a country’s access to its own assets. International evidence suggests that lack of transparency around collateralized borrowing tends to put borrowers at a disadvantage (IMF, 2023).

### Monetary and financial sector regulation and supervision
- The establishment of the KFSA was a critical first step.
- Next steps and expectations:
  - Operationalize regulation and supervision functions through prudential rules, reporting on capital adequacy, credit, market and liquidity risks.
  - Build robust governance, set up a framework for risk-based AML/CFT supervision, and build the basic elements of a supervisory toolkit.
  - The operationalization of the Kiribati Institutions Act (2021) and the Financial Supervisory Authority of Kiribati Act (2021) is expected by 2026-2027.
  - The KFSA is expected to be fully operational by mid-2027.

### Financial inclusion and payments
- Ongoing efforts to enhance financial inclusion are commendable and should continue.
- Recommendations and planned measures:
  - Establish a Financial Inclusion Unit and a credit union.
  - Further engage with ANZ to help deliver social protection payments.
  - Support bank account opening pilot projects in additional outer islands (a bank account opening pilot project has been carried out for two outer islands).
  - Increase the number of Electronic Funds Transfer at Point of Sale (EFTPOS) terminals to support electronic payments.
  - Expand mobile cellular subscriptions and digital payment methods such as mobile wallets (authorities working with development partners to expand payment options via MPAiSA and other mobile wallets; plans are to pilot digital options in South Tarawa first).
  - Explore regional financial platforms (e.g., options used in Fiji called ‘Sole’).

### Human capital and service delivery
- Raising human capital by improving the quality of education and health is critical for continued growth and institutional development.
- Recommendations:
  - Continue to incentivize school enrollment and attainment, especially at the upper secondary level, in line with the Kiribati 20-Year Vision (KV20).
  - Expand Technical-Vocational Education and Training (TVET) and raise requirements for teacher certifications to increase skill levels and education quality.
  - Pursue training of public health workers, increased education and awareness of proper sanitation, improved nutritional quality and diet, better access to healthcare and telehealth to strengthen health outcomes.
  - Note: TVET also provides training to workers for overseas employment which is pivotal for Kiribati given its limited domestic job creation capacity.

### Private sector development
- Private sector development is critical to support growth and employment.
- Constraints and recommendations:
  - Increase access to climate-resilient infrastructure and utilities (electricity, water, sanitation and internet).
  - Improve the business regulatory environment: reduce business startup costs, improve trade facilitation.
  - Support greater female labor force participation via affordable childcare facilities and flexible work environments.
  - Facilitate FDI inflows (e.g., land reforms to reduce barriers on foreign ownership and use).
  - Improve access to credit via improved customer due diligence and quality of financial reports.

### Authorities’ views (summary)
- Authorities agreed with recommendations to build institutional capacity and focus on long-term growth strategy as outlined in KV20.
- Ongoing actions and constraints:
  - Pursuing PFM reforms and phasing implementation of the Integrated Financial Management Information System (IFMIS).
  - Building capacity in revenue administration, focusing on tax compliance; upgrading the Revenue Management System (RMS) with support from development partners.
  - Piloting a tracking system for all projects in the Ministry of Infrastructure and Sustainable Energy to increase public investment efficiency.
  - Progress on KFSA establishment focused on training technical staff with aim of full operations by mid-2027.
  - Developing programs aimed at youth and women empowerment, supporting micro businesses and entrepreneurs, and promoting financial inclusion.
  - Acknowledged Fund-supported technical assistance in measures to increase food security.
  - Identified constraints: lack of technical expertise, labor shortages, and challenges in streamlining regulatory processes.
  - Highlighted need for continued international aid and challenges posed by various requirements from development partners.

### Data adequacy and capacity development needs
- Quality of national statistics has significantly improved over time but shortcomings remain that hamper surveillance.
- Priorities:
  - Improve real and external sector statistics and government finance statistics.
  - Address new challenges related to the recording of Joint Venture activities (implications for GDP, trade, capital flows and debt statistics).
  - Continue technical assistance in public financial management, revenue administration, debt management, financial sector supervision.
  - Tailor capacity development to Kiribati’s limitations: limited number of technical staff, reliance on expatriate advisors, poor or no internet connection, power outages.
- Authorities’ stated improvements:
  - Inclusion of financial accounts data and improvements to deflators in national accounts.
  - Establishment of a loan-by-loan database on government foreign loans and creation of a direct investment database.
  - Need for better inter-agency coordination to improve timeliness of statistics.
  - Willingness to explore options to incorporate more Joint Ventures’ activities into official statistics.
  - Continued enhancement of national account statistics with ongoing support from PFTAC.

### Staff appraisal: macro-fiscal assessment and key policy prescriptions
- Recent macro developments and outlook:
  - Kiribati has been resilient despite repeated shocks and is pursuing a long-term development agenda focused on infrastructure, social benefits, financial inclusion, and small businesses.
  - Global trade policy changes in 2025 are expected to have only a small impact on GDP growth in the baseline.
  - Significant increases in the electricity tariff and fuel price in 2025 were needed to align them with market prices and are projected to temporarily increase inflation.
  - The fiscal deficit narrowed in 2025, but a trend decline in fishing revenues and higher government spending have weighed on fiscal and current account balances relative to pre-COVID.
  - The external position in 2024 is assessed to be weaker than the level implied by fundamentals and desirable policies, with government spending contributing to high demand for imports.
- Risks:
  - Risks have increased and are tilted to the downside.
  - Domestic risk: under the current return-based withdrawal rule, weak financial market returns in 2025 could jeopardize the sovereign wealth fund withdrawal budgeted for 2026, potentially causing an unplanned fiscal consolidation and a decline in public investment.
  - External risks: commodity price volatility, intensification of conflicts raising shipping costs, and systemic financial instability affecting import bill, sovereign wealth fund interest revenues, remittances, and growth.
  - Kiribati remains highly vulnerable to the effects of climate change and natural disasters.
- Fiscal policy and RERF rule:
  - Countercyclical fiscal policy, integrated with a balance-based RERF withdrawal rule, could help meet development needs and provide social benefits more consistently.
  - Revenues are highly volatile and fiscal policy has become procyclical.
  - Recommendation: adjust the RERF withdrawal rule so that annual withdrawals are capped at 3 to 5 percent of the RERF balance to preserve RERF’s long-term value and ensure withdrawals are possible even when RERF returns are low.
- Medium-term fiscal consolidation and public investment efficiency:
  - A credible fiscal consolidation accompanied by improved public investment efficiency is needed to anchor debt and support higher investment in climate adaptation.
  - Consolidation measures implemented in 2025 include freezing nominal wages, reforming VAT, and streamlining subsidies.
  - Additional measures suggested: gradually reduce SOE and other tax exemptions, increase the excise tax rate, enhance fishing revenue, further rationalize copra subsidies and streamline SOE subsidies.
- Debt management and governance:
  - Establishing a debt management framework with strong governance, transparency and accountability is vital.
  - Priorities: strengthen capacity to analyze and manage potential new debt and assess sources of risk; clarify purposes of new borrowing or issuing guarantees; ensure new borrowing is consistent with debt sustainability and government development priorities; require detailed annual reporting.
  - Maintaining or expanding access to grants and highly concessional loans to finance infrastructure investment remains preferred to preserve debt sustainability.
- Institutional capacity and human capital:
  - Strengthen public financial management and revenue administration.
  - Operationalize and fully make the Kiribati Financial Supervisory Authorities operational.
  - Continued efforts to improve education and health quality, enhance financial inclusion, improve the business regulatory environment and infrastructure quality to promote private sector development.
- Data capacity:
  - Continue capacity building to address shortcomings in real and external sector statistics and government finance statistics.
  - Gradually address recording of Joint Venture activities through ongoing capacity development by PFTAC and other development partners.

*Source: Excerpt from the provided IMF report content.*

### 43.      It is recommended that the next Article IV consultation take place on a standard 12-

### It is recommended that the next Article IV consultation take place on a standard 12-month cycle.

### Real sector developments
- Real GDP growth is volatile and in recent years has been driven more by the public sector and other services.
- Contributions to growth by economic activity (year-on-year, in percent) show positive recent contributions from Government and Services (excluding govt); chart spans 2018–2024.
- Inflation:
  - Inflation subsided after peaking in early 2023, consistent with the moderation in global food prices.
  - Inflation is mostly driven by food prices, but electricity and fuel price increases will be prominent drivers in 2025.
  - Consumer prices (percent change, average): 2021: 2.1; 2022: 5.3; 2023: 9.3; 2024: 2.5; 2025: 7.8; 2026: 3.5; 2027: 3.0; 2028: 2.5; 2029: 2.0; 2030: 2.0.
  - Inflation (end of period): 2021: 2.5; 2022: 16.2; 2023: -2.1; 2024: 2.9; 2025: 6.5; 2026: 3.0; 2027: 2.5; 2028: 2.5; 2029: 2.0; 2030: 2.0.
- Labor market:
  - Labor force participation is low and unemployment high, despite anecdotal evidence of recent improvement.
  - There is significant scope to gain from greater female labor force participation.

### Fiscal sector developments
- The fiscal deficit widened substantially in 2024 due to weak fishing revenues and an increase in public wages.
- The wage bill is among the highest in the Pacific.
- Fishing revenue:
  - The 2023 recovery in fishing revenue stalled in nominal terms in 2024 and declined as a share of GDP.
  - Fishing revenue (A$ million, selected): 2021: 169; 2022: 141; 2023: 212; 2024: 210; projections 2025–2030: 200, 207, 213, 218, 224, 230.
- Budget support and project grants have fallen short in 2024.
  - Project grants (A$ million): 2021: 28; 2022: 36; 2023: 82; 2024: 48; 2025: 223; 2026: 163; 2027: 156; 2028: 165; 2029: 159; 2030: 161.
  - Budget support grants (A$ million): 2021: 4; 2022: 14; 2023: 24; 2024: 6; 2025: 35; 2026: 18; 2027: 7; 2028: 7; 2029: 7; 2030: 7.
- Higher spending was financed by RERF withdrawals, which are projected to continue.
  - RERF closing balance (in millions of A$): 2021: 356; 2022: 307; 2023: 320; 2024: 324; 2025: 309; 2026: 305; 2027: 303; 2028: 303; 2029: 304; 2030: 306.
  - RERF per capita value (in 2006 A$): 2021: 8020; 2022: 6531; 2023: 7080; 2024: 7342; 2025: 7193; 2026: 7178; 2027: 7144; 2028: 7142; 2029: 7180; 2030: 7226.
- Fiscal balances and key aggregates (percent of GDP, selected):
  - Total revenue and grants: 2024: 76; 2025: 111; 2026: 94; 2027: 89; 2028: 89; 2029: 87; 2030: 85.
  - Total expenditure: 2024: 98; 2025: 126; 2026: 111; 2027: 104; 2028: 103; 2029: 102; 2030: 101.
  - Overall fiscal balance: 2021: -11; 2022: -18; 2023: 0; 2024: -22; 2025: -15; 2026: -17; 2027: -15; 2028: -13; 2029: -15; 2030: -15.
  - Domestic recurrent balance (excludes fishing revenue, grants, and capital expenditure): 2021: -48; 2022: -47; 2023: -45; 2024: -53; 2025: -49; 2026: -49; 2027: -48; 2028: -46; 2029: -46; 2030: -46.
  - Recurrent fiscal balance (excl. grants): 2021: -3; 2022: -11; 2023: 4; 2024: -8; 2025: -8; 2026: -9; 2027: -9; 2028: -8; 2029: -8; 2030: -9.
- Public finances (A$ million, selected):
  - Total revenue and grants (A$ million): 2021: 278; 2022: 270; 2023: 415; 2024: 355; 2025: 554; 2026: 495; 2027: 486; 2028: 508; 2029: 513; 2030: 527.
  - Total expenditure (A$ million): 2021: 319; 2022: 341; 2023: 414; 2024: 458; 2025: 629; 2026: 582; 2027: 568; 2028: 585; 2029: 603; 2030: 621.
  - Wages and salaries (A$ million): 2021: 103; 2022: 98; 2023: 111; 2024: 161; 2025: 158; 2026: 162; 2027: 164; 2028: 166; 2029: 170; 2030: 173.
  - Subsidies and grants (A$ million): 2021: 120; 2022: 120; 2023: 138; 2024: 144; 2025: 138; 2026: 143; 2027: 143; 2028: 144; 2029: 150; 2030: 156.

### External sector developments
- Current account has deteriorated and is now close to zero due to persistently high imports since 2022 amid declining fishing revenues.
  - Current account (in percent of GDP): 2021: 7.1; 2022: -12.0; 2023: -1.8; 2024: -2.0; 2025: -0.6; 2026: -0.9; 2027: -1.2; 2028: -1.4; 2029: -1.6; 2030: -1.6.
- Goods and services:
  - Balance on goods (A$ million): 2021: -180; 2022: -242; 2023: -277; 2024: -288; 2025: -289; 2026: -304; 2027: -317; 2028: -330; 2029: -343; 2030: -356.
  - Goods, credit (exports, A$ million): 2021: 13; 2022: 12; 2023: 12; 2024: 12; 2025: 13; 2026: 14; 2027: 15; 2028: 15; 2029: 16; 2030: 17.
  - Goods, debit (imports, A$ million): 2021: 193; 2022: 255; 2023: 289; 2024: 300; 2025: 302; 2026: 318; 2027: 332; 2028: 345; 2029: 359; 2030: 373.
  - Balance on services (A$ million): 2021: -74; 2022: -120; 2023: -139; 2024: -125; 2025: -134; 2026: -139; 2027: -141; 2028: -144; 2029: -147; 2030: -152.
- Primary and secondary income:
  - Primary income, credit (A$ million): 2021: 220; 2022: 204; 2023: 294; 2024: 308; 2025: 297; 2026: 304; 2027: 309; 2028: 313; 2029: 330; 2030: 343.
  - Fishing license fees (A$ million): 2021: 161; 2022: 130; 2023: 206; 2024: 197; 2025: 184; 2026: 191; 2027: 196; 2028: 201; 2029: 206; 2030: 212.
  - Income from RERF (A$ million): 2021: 43; 2022: 33; 2023: 59; 2024: 52; 2025: 52; 2026: 52; 2027: 50; 2028: 49; 2029: 50; 2030: 52.
  - Secondary income, credit (A$ million): 2021: 70; 2022: 122; 2023: 129; 2024: 109; 2025: 135; 2026: 145; 2027: 154; 2028: 165; 2029: 163; 2030: 167.
- Net foreign asset position and reserves:
  - Kiribati’s net foreign asset position is high because of the sizeable RERF.
  - Reserve assets (A$ million): 2021: 63; 2022: 40; 2023: 62; 2024: -23; 2025: 20; 2026: 23; 2027: 22; 2028: 23; 2029: 13; 2030: 19.
- FDI and export concentration:
  - FDI net inflow (percent of GDP): Kiribati series shows low but picked up; chart compares PIC average.
  - Exports are highly concentrated in primary products: Export share by product (2021): Fixed vegetable fats and oils, crude, refined or fractionated: 49.6%; Fish (not marine mammals), crustaceans, molluscs and aquatic invertebrates, and preparations thereof: 30.0%; Oil-seeds and oleaginous fruits: 17.6%; Others: 2.8%.
  - Number of export markets remains low relative to PIC average.

### Constraints to raising growth potential
- Geographic and environmental constraints:
  - Remoteness presents a challenge to increasing human development across Small Island Developing States and is associated with high environmental vulnerability.
- Structural reforms:
  - Regulatory, trade and financial sector improvements would promote private sector development.
  - A greater focus on trade facilitation policies would help.
- Trade barriers:
  - Non-tariff Barriers in PICs (Index, 2022): index goes from 0 to 20 with higher scores meaning higher restrictions; Kiribati and other PICs plotted—chart indicates Kiribati’s position relative to peers.

### Key macroeconomic projections and indicators (selected)
- Per capita GDP (2024e): US$2,419.
- Demographics: Population (2024e): 127,317; Life expectancy at birth (2022): 67.7.
- Poverty (2019): Below $2.15 a day: 1.7 percent; Below the national poverty line: 21.9 percent.
- Inequality (2019, income shares): Top 10 percent: 22.9; Bottom 20 percent: 9.5.
- IMF quota: SDR 11.2 million.
- Main export products: Crude coconut oil, frozen tuna, and copra.
- Real GDP (percent change, annual): 2021: 8.5; 2022: 4.6; 2023: 2.7; 2024: 5.3; 2025: 3.9; 2026: 3.2; 2027: 2.5; 2028: 2.2; 2029: 2.1; 2030: 2.1.
- Nominal GDP (in millions of A$): 2024: 467; 2025: 498; 2026: 524; 2027: 547; 2028: 569; 2029: 593; 2030: 617.
- Nominal GDP (in millions of US$): 2024: 308; 2025: 313; 2026: 328; 2027: 340; 2028: 352; 2029: 366; 2030: 381.

### Balance of payments (selected line items)
- Current account (A$ million): 2021: 27; 2022: -47; 2023: -8; 2024: -9; 2025: -3; 2026: -5; 2027: -6; 2028: -8; 2029: -10; 2030: -10.
- Capital account (A$ million): 2021: 14; 2022: 41; 2023: 49; 2024: 18; 2025: 54; 2026: 59; 2027: 62; 2028: 65; 2029: 58; 2030: 66.
- Financial account (A$ million): 2021: -40; 2022: 20; 2023: -54; 2024: 31; 2025: 31; 2026: 31; 2027: 33; 2028: 34; 2029: 36; 2030: 37.
- Net International Investment Position: 2021: 1673 (A$ million); 2022: 1475; 2023: 1664; 2024: 1818; projections beyond 2024 shown as ellipses.

### Sustainable Development Goals monitoring (selected indicators)
- Poverty and welfare:
  - Income share held by lowest 20% (2019): 9.5.
  - Poverty headcount ratio at $1.90 a day (2019): 1.7 percent.
  - Poverty headcount ratio at national poverty lines (2019): 21.9 percent.
- Health and nutrition:
  - Mortality rate, under-5 (per 1,000 live births): 2013: 60.7; 2014: 59.1; 2015: 57.5; 2016: 56.1; 2017: 54.4; 2018: 52.9; 2019: 51.4; 2020: 49.8; 2021: 48.2.
  - Births attended by skilled health staff (2019): 91.9 percent.
- Water, sanitation, energy:
  - People using at least basic drinking water services (percent of population): 2013: 70.1; 2014: 70.8; 2015: 71.4; 2016: 72.0; 2017: 72.6; 2018: 73.2; 2019: 73.7; 2020: 74.3; 2021: 74.9; 2022: 75.7.
  - People using at least basic sanitation services (percent of population): 2013: 41.8; 2014: 42.2; 2015: 42.6; 2016: 43.0; 2017: 43.4; 2018: 43.7; 2019: 44.0; 2020: 44.3; 2021: 44.5; 2022: 45.2.
  - Access to electricity (percent of population): 2013: 78.8; 2014: 83.4; 2015: 90.6; 2016: 92.6; 2017: 85.7; 2018: 87.5; 2019: 89.3; 2020: 91.0; 2021: 92.8.
  - Access to clean fuels and technologies for cooking (percent of population): 2013: 4.8; 2014: 5.5; 2015: 6.3; 2016: 7.1; 2017: 8.0; 2018: 9.1; 2019: 10.0; 2020: 11.3; 2021: 12.4.
- Labor and gender:
  - Unemployment rate (national estimate): 2019: 8.6; 2020: 11.0 (other years data sparse).
  - Labor force participation rate, female (percent of female population ages 15+): 2019: 28.7; 2020: 40.6.

*Source: IMF staff compilation of Kiribati authorities data and IMF staff estimates and projections contained in the provided content.*

### Annex I. Country Engagement Strategy

### Annex I. Country Engagement Strategy

### Overview and Context
- Kiribati is characterized by the World Bank and IMF as a Fragile and Conflict-Affected State, largely stemming from intrinsic structural weaknesses, with no conflict-related issues.
- Structural challenges include remoteness, island dispersion, and exposure to climate-related natural disasters. These drive fragility and contribute to poor economic outcomes.
- Notable progress: a large sovereign wealth fund "over 320 percent of GDP" and investments in human capital and infrastructure.

### Constraints to Reform and Policies to Address Sources of Fragility
Findings:
- Major constraints: sources of fragility, weak institutional capacity, and limited financial resources.
- Reform requires a holistic approach: investments in human capital, strengthening institutional capacity, addressing infrastructure gaps, and enhancing technical expertise.

Policy recommendations:
- Enhancing Fiscal Sustainability:
  - Develop a medium-term fiscal framework.
  - Build capacity to analyze and manage potential new debt.
  - Rationalize expenditures, mobilize revenues, and review tax policies to incentivize private sector investment while managing potential risks.
- Strengthening fiscal governance and transparency:
  - Enhance tax administration to strengthen tax compliance.
  - Execute effective controls over cash balances to improve quality and accountability of public expenditures.
- Improving infrastructure:
  - Upgrade air transport, ports, shipping capacity, power generation, and internet infrastructure.
  - Consider bilateral arrangements or partnerships with existing accredited organizations for funding.
- Diversification through structural reforms:
  - Improve land registration and dispute resolution mechanisms.
  - Expand into aquaculture and seaweed; upgrade tuna and coconut product quality; develop niche tourism markets (fishing expeditions and cruise ships; cultural and eco-tourism).
- Financial sector development:
  - Fully operationalize the Financial Supervisory Authority of Kiribati and the associated laws.
  - Improve financial education, land access procedures, and dispute resolution to increase private sector access to credit.
- Improving education, health and alleviating poverty:
  - Improve quality of education, incentivize high achievement at upper secondary level, and strengthen vocational training.
  - Improve nutritional quality and access to and quality of health care.

### Fund Engagement and Capacity Development (CD) Priorities
Findings:
- IMF engagement focuses on surveillance and CD to support the authorities’ reform agenda and improve implementation capabilities.
- Fund Technical Assistance (TA) mainly delivered by Pacific Financial Technical Assistance Center (PFTAC), with support and focused missions from Fund headquarters.
- CD is most effective delivered in person; Kiribati is currently the 7th largest recipient of Fund technical assistance amongst the PICs.

Recent CD focus areas:
- Macroeconomic Statistics: support to the National Statistics Office for national accounts, prices, government finance and external sector statistics.
- Public Financial Management (PFM): joint roadmap on PFM reforms and drafting of the revised PFM Act; PFTAC to assist implementation once endorsed.
- Revenue Administration: drafting and implementation of laws on VAT, Excise tax, and the Revenue Administration Act; organizational review, standardization of work processes, strengthening audit.
- Debt Management: guidance on institutional arrangements for debt management, debt analysis and reporting.
- Financial Sector Supervision: development and implementation of banking supervisory and regulatory framework since mid-2017, resulting in establishment of a Financial Supervisory Authority.
- Macroeconomic Analysis/Modelling Program: hands-on training on a Macro-Fiscal model, CPI impacts of VAT reform, and copra subsidy reform analysis.

Near-term CD priorities:
- Improve statistics for surveillance, PFM, fiscal governance, and financial sector regulatory reforms.
- Emphasize close coordination with development partners: World Bank, Asian Development Bank, United Nations, Australia, New Zealand, European Union, Japan, and China.

Engagement risks:
- Geopolitical tensions could increase volatility and amount of international grants available.
- High staff turnover and weak institutional capacity can hinder pace of economic reforms.

### External Sector Assessment (2024)
Overall assessment:
- The external position of Kiribati in 2024 was weaker than the level implied by fundamentals and desirable policies, largely due to lower external grants and strong demand for imports driven by the fiscal deficit.
- Official international reserves remained adequate in 2024.
- Assessment subject to substantial uncertainty due to data limitations and dependence of the current account on volatile and exogenous factors, including fishing revenue and international aid.

Foreign assets and liabilities (position and trajectory):
- NIIP estimated at 391.3 percent of GDP at end-2024, up from 385.1 percent of GDP at end-2023, supported by valuation gains.
- RERF balance: 324 percent of GDP at end-2024, making up the lion’s share of the NIIP.
- Projection: Kiribati is a net creditor; NIIP projected to remain above 300 percent of GDP over the medium term.
- Main risks to NIIP: volatile global asset valuation and widening current account deficits due to decline of fishing revenue and deterioration of fiscal balance.

Selected 2024 figures (Est.; percent of GDP):
- NIIP: 391.3
- Gross Assets: 444.1
- Debt Assets: 24.8
- Gross Liab.: 52.8
- Debt Liab.: 33.5

Current account (CA):
- Historical context: CA surpluses historically supported by fishing license revenue, external grants, and investment income.
- CA deficits: 2022 deficit 12 percent of GDP; 2023 deficit 1.8 percent of GDP.
- 2024 CA balance estimated deficit of 2 percent of GDP due to (i) decrease in external grants; (ii) strong demand for imports following the civil service wage increase.
- Medium term: CA deficit projected to remain broadly stable in small deficits as demand pressure and commodity prices ease while fishing revenue declines.

EBA-Lite model results (2024):
- Actual CA: -2.0 (percent of GDP)
- Cyclical contributions: -0.4
- Natural disasters and conflicts adjustment: -0.4
- Adjusted CA: -1.3
- CA Norm (from model): 1.3
- Adjusted CA Norm: 1.3
- CA Gap: -2.6 (percent of GDP)
  - o/w Relative policy gap: -5.0
- Elasticity: -0.3
- REER Gap (in percent): 10.1 / 11.5 (CA model/REER model)
- Assessment: External position weaker than implied by fundamentals; negative CA gap explained by policy gap driven by cyclically adjusted overall fiscal deficit of 23.2 percent of GDP (not including RERF withdrawals) versus desirable cyclically adjusted overall deficit of 9.4 percent of GDP.
- Uncertainty: volatile fishing license fees and data limitations make assessment uncertain.
- Risks to external outlook: protracted declines in fishing license revenue, upswings in global commodity prices (especially food and fuel), and global financial market uncertainty affecting RERF returns.

Real Effective Exchange Rate (REER):
- Legal tender: Australian dollar.
- Annual average REER in 2024: 83.6, appreciated by 2.6 percent in 2024.
- REER relative averages: 4 percent above its 10-year average and 2.1 percent below its 20-year average.
- Assessment: EBA-Lite CA model implies REER overvalued by 10.1 percent; EBA-Lite REER model implies overvaluation by 11.5 percent. REER gap does not automatically indicate need for exchange rate adjustment; assessment uncertain due to idiosyncrasies and data limitations.

Capital and financial accounts:
- Capital account: estimated 3.9 percent of GDP in 2024, down from 11.2 percent of GDP in 2023 due to lower capital transfers.
- Financial account: estimated net capital outflows in 2024, balance at 6.7 percent of GDP, driven by other investment transactions (currency, deposits, government loans).
- Net FDI inflows: estimated positive in 2024 and expected to remain modest due to remoteness.
- Assessment/policy: Capital inflows highly dependent on donor support; recommended policies include prudent fiscal policies, avoid external non-concessional borrowing, continue engagement with development partners, and improve domestic capacity for project execution.

FX intervention and reserves:
- 2024 estimated decumulation: 4.8 percent of GDP due to CA deficit and lower external grants.
- Official international reserves estimated at 229 percent of GDP in 2024.
- Reserve coverage: around 29 months’ import coverage and around 389 times the stock of short-term debt by residual maturity in 2024.
- Assessment: Reserves adequate for precautionary purposes; long-term sustainability depends on preserving value of the RERF. Recommended policies: prudent fiscal policy, diversify revenue sources, and foster private sector-driven growth.

### Risk Assessment Matrix — Key Risks, Likelihoods, Impacts, and Policy Responses
- Heavy Reliance on fishing revenue
  - Relative Likelihood: High
  - Expected Impact: High — prolonged low fishing activity endangers long-run fiscal sustainability; cash reserve buffer can mitigate temporary shocks.
  - Policy Recommendation: Strengthen revenues by phasing out tax exemptions, explore additional tax collection avenues, improve tax administration, and scale back recurrent spending.

- Volatile withdrawals from the sovereign wealth fund
  - Relative Likelihood: High
  - Expected Impact: High — withdrawal rules based on percentage of nominal returns could increase revenue/spending volatility and exposure to global financial volatility.
  - Policy Recommendation: Revise the withdrawal rule of the sovereign wealth fund to support growth-friendly, countercyclical fiscal policy.

- Trade policy and investment shocks
  - Relative Likelihood: High
  - Expected Impact: High — could raise import prices and shipping costs, push up inflation, and affect fiscal and external sustainability; could negatively affect returns and valuation of the RERF.
  - Policy Recommendation: Maintain prudent fiscal policy by scaling back recurrent spending and mobilizing revenues; explore sustainable revenue sources; provide targeted support to vulnerable households.

- Regional conflicts
  - Relative Likelihood: Medium
  - Expected Impact: High — could increase global financial market volatility and disrupt trade, worsening terms of trade and threatening fiscal and external sustainability.
  - Policy Recommendation: Strengthen public finance and safeguard sustainability of the RERF; expand export base and boost export competitiveness; provide targeted support to vulnerable households.

- Commodity price volatility
  - Relative Likelihood: Medium
  - Expected Impact: High — higher global commodity prices for food and fuel could increase inflation pressure and worsen current account balance.
  - Policy Recommendation: Provide targeted support to vulnerable households.

- Tighter financial conditions and systemic instability
  - Relative Likelihood: Medium
  - Expected Impact: Medium — could affect valuation and return of the RERF, causing fiscal volatility under current withdrawal rule.
  - Policy Recommendation: Reform and implement a withdrawal rule for the RERF; rationalize fiscal expenditures and diversify revenue sources.

- Climate change
  - Relative Likelihood: Medium
  - Expected Impact: High — frequent droughts, floods, storm surges; long-run threat of sea level rise with existential implications.
  - Policy Recommendation: Maintain a strong cash reserve buffer; build resilience and adaptation measures; leverage technologies and donor support for land protection; diversify revenues beyond fisheries.

- Global growth acceleration
  - Relative Likelihood: Low
  - Expected Impact: Medium — could boost remittances and donor support.
  - Policy Recommendation: If positive spillovers materialize, manage fiscal resources prudently to build up buffers and pursue long-term development support from donors.

*Source: Annex I. Country Engagement Strategy.*

### Annex IV. Fiscal Procyclicality, RERF Withdrawals, and Growth

### Annex IV. Fiscal Procyclicality, RERF Withdrawals, and Growth

### Revenue Structure and Volatility
- Kiribati’s revenue base is highly concentrated in fishing revenues.
- The share of fishing revenue to GDP in Kiribati averaged 56 percent from 2015 to 2024, with a peak of 81 percent and a trough of 36 percent.
- Kiribati is identified as the most ocean-dependent economy among Pacific Island countries in the referenced analysis.
- Comparisons drawn to oil-rich economies: oil revenue to GDP averages around 20 percent of GDP in oil-rich economies and has reached up to 84 percent of GDP in recent years.

### Consequences of Procyclical Fiscal Policy
- Procyclical fiscal policy definition: spending whatever is available, increasing spending when revenues and GDP growth are high and cutting when revenues and growth are low.
- Empirical and literature findings:
  - Procyclical fiscal policy amplifies external shocks, increases GDP growth volatility, and raises inflation (McManus and Ozkan, 2013).
  - Marioli and Vasishtha (2025) find fiscal policy has been about 30 percent more procyclical and about 40 percent more volatile in commodity-exporting EMDEs than in other EMDEs.
  - Procyclical policies are associated with higher inequality and poverty over the long run; negative impacts on inclusive growth are pronounced in low-income and emerging market economies (Davoodi and others, 2021).
- Transmission channels of procyclicality:
  - In good times: revenue windfalls often increase transfers and consumption, can cause excessive import growth, may not boost human capital investment, can lower public investment efficiency, and may crowd out private investment.
  - In bad times: spending cuts often reduce the quality and scope of essential public services, weaken social safety nets, and lower public investment—reducing productivity growth.

### RERF: Size, Current Rules, and Simulation Findings
- Kiribati’s Revenue Equalization and Reserve Fund (RERF) is among the largest sovereign wealth funds relative to GDP.
- Primary RERF objective: intergenerational equity; sovereign wealth funds elsewhere also use funds for macroeconomic stabilization.
- Current withdrawal rule:
  - Return-based rule: if nominal returns are above 2 percent, all returns in excess of 2 percent can be withdrawn the following year.
  - Under this rule there is no ability to withdraw during times of low or negative returns.
- Simulation methodology and outcomes:
  - Simulations use a bootstrapping method re-sampling historical RERF returns to create 10,000 possible future scenarios, with results averaged across scenarios.
  - Under the current return-based rule, simulations indicate there would be no RERF withdrawals about a quarter of the time over the next 50 years.
  - With maximum permitted withdrawals under the current return-based rule, simulations suggest the Fund could lose half of its value by about 2050.

### Balance-Based Withdrawal Rule and Fiscal Stabilization
- Balance-based rule characteristics:
  - Allows withdrawals up to a fixed percentage of the entire RERF balance, permitting withdrawals every year, including years with negative returns.
  - Provides flexibility to offset fishing revenue volatility and pursue countercyclical fiscal policy.
- Quantitative implications of a 5 percent balance-based rule:
  - A balance rule of 5 percent of RERF would likely allow maximum withdrawals around 15 percent of GDP over the medium term.
  - Even with maximum annual withdrawals under a 5 percent balance rule, the value of the RERF would be preserved over the long term.
- Policy contrast:
  - Balance-based rules facilitate countercyclical stabilization.
  - Contingent/return-based rules (like the existing 2 percent nominal-return rule) can prevent withdrawals in bad times and permit excessive spending after high returns, complicating fiscal management.

### Integration with a Medium-Term Fiscal Framework (MTFF)
- Recommended integration:
  - RERF deposits and withdrawals should be integrated into a medium-term fiscal framework so accumulation and decumulation mirror fiscal surpluses and deficits.
  - Under an MTFF, if revenues are below (above) forecast, withdrawals (deposits) would be made to meet the budget.
  - The withdrawal rule should limit maximum withdrawals but not substitute for fiscal rules that drive policy management.
- Example and analogy:
  - Chile’s stabilization fund cited as an example where fund operations are integrated with fiscal rules and MTFF to enable countercyclical policy.

### Steps to Develop a Fully-Fledged MTFF and Governance Enhancements
- Additional MTFF development steps recommended:
  - Develop and use credible, internally consistent macroeconomic and fiscal projections (growth, inflation, debt, deficit, RERF balance, and links to planned revenues, expenditures, and public investment).
  - Integrate the development budget with the recurrent budget.
  - Enhance transparency and accountability, and develop clear procedures for when fiscal targets are not met.
  - Develop a comprehensive assessment of fiscal risks.
- RERF governance and accountability recommendations:
  - Strengthen oversight by multiple agencies, including internal and reputable external auditors, and legislative oversight.
  - Integrate RERF resources with an investment framework and ensure development spending is channeled through the budget process.
  - Conduct development project evaluation and selection at national and sectoral levels and integrate development spending into a single budget.
  - Refrain from using the RERF as collateral for new external borrowing; collateralization can weaken debt sustainability, reduce transparency, and encumber fiscal space.

### Summary Conclusions and Policy Recommendations
- Using the RERF for macroeconomic stabilization via countercyclical fiscal policy, integrated into an MTFF, is crucial for long-term growth and development.
- Key policy recommendations:
  - Adopt a balance-based RERF withdrawal rule—maximum 5 percent of the RERF balance is suggested—to allow annual withdrawals and enable countercyclical fiscal policy.
  - Integrate RERF operations within a strengthened MTFF and appropriate fiscal rules so actual withdrawals reflect fiscal policy priorities and risk management.
  - Strengthen the investment framework, medium-term planning, and project selection to improve efficiency of public investment and support sustainable development.

_Annex IV. Fiscal Procyclicality, RERF Withdrawals, and Growth (source PDF)._

### 2023. The Direct Investment database has been created using financial statements and other administrative data from dire

### STAFF REPORT FOR THE 2025 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX

### Data compilation, coverage, and quality: summary findings
- Direct Investment database: created using financial statements and other administrative data from direct investment enterprises (DIEs) in Kiribati (2023).
- Government foreign loans: KNSO established a loan-by-loan database on government foreign loans.
- National accounts improvements: 2023 provisional release included financial accounts data and deflator improvements.
- CPI: monthly CPI data published with a lag of around 1-2 months; CPI rebased to June 2023=100 using 2019-20 HIES weights; sample outlets increased to 23 from 3; geographical coverage of outer islands remains to be improved (planned for next CPI rebase).
- Monetary/financial sector data: adequacy for surveillance cannot be assessed because a central bank does not exist and the Kiribati Financial Supervisory Authority (KFSA) is not yet fully operational; data from ANZ, Development Bank and the Provident Fund are used for estimates of financial sector credit and financial soundness.

### Identified shortcomings and rationale for staff assessment
- General statement of data quality:
  - "The data provided to the Fund have some shortcomings that somewhat hamper surveillance."
  - "The data provided to the Fund have serious shortcomings that significantly hamper surveillance."
- National Accounts:
  - Production side and expenditure data published annually; detailed sources & methods document revised from 2010 version.
  - Large GDP revisions are frequent; no differentiated deflators for expenditure components.
  - Planned IMF TA could help increase coverage of joint venture entities.
- Prices:
  - No producer price index currently available.
  - CPI geographic coverage needs expansion to outer islands.
- Government Finance Statistics (GFS):
  - Need to improve coverage of debt reporting to include public guarantees, joint venture entities, public-private partnerships.
  - Net investment in non-financial assets should include investments supported by development partners to ensure consistency with the Development Budget.
  - Reporting of detailed capital expenditure implementation outturns in the Development Budget is needed.
- External sector:
  - BOP and IIP available with broadly adequate coverage and granularity, but published with a year's lag.
  - Sizeable historical revisions and errors and omissions, including incomplete coverage of joint venture activities, hamper assessment of the external balance and inter-sectoral consistency.
- Intersectoral consistency:
  - Improve recording of development grants and aid, and reconcile grants in the BoP with those in the Fiscal by including estimates for in-kind grants.
- Financial sector institutional capacity:
  - KFSA not yet fully operational; board, CEO and Deputy CEO appointed; recruitment and training ongoing.

### Corrective actions and capacity development priorities (recommended)
- National accounts:
  - Collect financial statements from all SOEs and large joint venture entities and incorporate them in GDP to improve coverage.
- Prices:
  - Develop and report a producer price index over the medium term.
  - Further improve CPI geographic coverage to include outer islands (planned for next CPI rebase).
- GFS:
  - Improve coverage of debt reporting (include joint venture entities, public guarantees, PPPs).
  - Improve reporting of net investment in non-financial assets by including investment supported by development partners.
  - Report detailed capital expenditure implementation outturns in the Development Budget.
- External statistics:
  - Include activities of large joint venture entities in external sector statistics and ensure timely transmission of all data to KNSO.
- Intersectoral consistency:
  - Improve recording of development grants and aid and reconcile grants across BoP and fiscal statistics, including in-kind grants.
- Capacity development engagements:
  - Ongoing and future capacity development engagements with PFTAC and CDOT will support these improvements.
  - Authorities will continue to enhance data quality with IMF TA—especially for national accounts, GFS, external and financial sector data.

### Data Standards Initiatives and dissemination
- Kiribati participates in the Enhanced General Data Dissemination System (e-GDDS); first posted metadata in March 2004 but has yet to disseminate the data recommended under the e-GDDS.
- Table headings and frequency/timeliness conventions cited include:
  - ("D") daily; ("W") weekly; ("M") monthly; ("Q") quarterly; ("A") annual; ("SA") semiannual; ("I") irregular; ("NA") not available or not applicable; ("NLT") not later than.
- Specific data items referenced (publication frequency/timeliness matrix present in source): Reserve/Base Money; Broad Money; Central Bank Balance Sheet; Consolidated Balance Sheet of the Banking System; Interest Rates; Consumer Price Index; Exchange Rates; International Reserve Assets and Reserve Liabilities of the Monetary Authorities; Revenue, Expenditure, Balance and Composition of Financing—General Government/Central Government; International Investment Position; Stocks of Central Government and Central Government-Guaranteed Debt; External Current Account Balance; Exports and Imports of Goods and Services; GDP/GNP; Gross External Debt.

### Implementation status of 2024 Article IV Consultation recommendations (select actions since 2024)
- Fiscal policy:
  - Some expenditure rationalization measures taken, including keeping nominal public sector wages frozen until 2028.
  - Government working with SOEs to reduce subsidies.
  - Early 2025: fuel price and electricity tariffs increased to align Public Utilities Board and Kiribati Oil Company pricing structures to market rates.
  - RERF withdrawal rule: authorities expressed commitment to withdrawing less than the maximum permitted amount in years when RERF returns are high.
  - VAT Amendment Act: passed first reading in Parliament in April 2025; second and final reading planned for August 2025.
  - Social protection: operational manual for senior citizens allowance and Support Fund for the Unemployed (SFU) completed with DFAT support; SFU Policy under review; pilot bank account opening project completed in two outer islands.
  - SOE governance: new SOE Act and amendments drafted; first Parliament reading April 2025; second and final reading planned for August 2025; 2023 financial statements submitted to SOE Monitoring and Advisory Unit (SOEMAU) though quality could be improved.
- Structural reforms:
  - Financial inclusion: ANZ increased EFTPOS machines from 20 to 270 and waived some fees; an estimated 6,000 new accounts opened through the pilot bank account project; individual ANZ account holders increased to 39,000 from 17,000 in 2021.
  - KFSA: board of directors, CEO and Deputy CEO appointed; recruitment of administrative and technical staff underway.
  - Projects for youth and women empowerment, micro-business support, and financial inclusion advanced; development partners supporting port capacity, connectivity, and infrastructure improvements.
  - Public investment efficiency: project tracking system testing; Asset Management Policy being drafted.
- Climate adaptation:
  - Regulations under the Environment Act expected to be approved in 2025.
  - Kiribati Integrated Environment Policy under review with TA from the Nature Conservancy.
  - Revised National Building Code and building manual developed.
  - Development partner roundtable being organized in 2025 to strengthen engagement and coordination.
- Capacity development and data issues:
  - Continued TA from IMF Statistics Department and PFTAC; implementation of e-GDDS ongoing; authorities to continue data quality enhancements with IMF TA.

### Technical assistance (IMF capacity development): selected missions and themes (period highlights)
- PFTAC and CDOT missions on topics including Legal/Tax Policy; Revenue Administration; External Sector Statistics; Financial Sector Supervision; Public Financial Management; Real Sector Statistics; Consumer Price Index; Macroeconomic Programming Analysis; Government Finance Statistics; Debt Management; and others between January 2019 and May–June 2025.
- Recent missions in 2024–2025 include:
  - PFTAC Real Sector Statistics—Updating National Accounts (September 2024).
  - PFTAC Government Finance Statistics—Developing Balance sheet Statistics (January 2025).
  - PFTAC Finalize PFM Act (February 2025).
  - PFTAC Debt Management—Improving Institutional Structure for Debt Management (February 2025).
  - FAD Beyond the Coconut Tree: Aligning Copra Subsidy Reforms with Food and Nutrition Security (April–May 2025).
  - PFTAC Revenue Administration—Supporting Taxpayer Compliance (May–June 2025).

### Debt sustainability analysis: key conclusions and risks
- Overall assessment:
  - "Kiribati debt remains sustainable but at high risk of debt distress, unchanged from the 2024 Article IV Debt Sustainability Analysis."
  - Risk of external debt distress: High.
  - Overall risk of debt distress: High.
- Methodology notes:
  - The mechanical signal indicates moderate risk of debt distress; judgment extended the projection horizon to 20 years to capture climate-related vulnerabilities.
  - Composite indicator (based on April 2025 WEO and 2023 World Bank CPIA published July 2024) estimated at 2.75, corresponding to a moderate Debt Carrying Capacity.
- Projections and thresholds:
  - Under the baseline scenario, the present value of external debt-to-GDP and total public debt-to-GDP ratios are expected to breach their respective indicative thresholds starting in 2036 and 2043, respectively.
- Stress tests and vulnerabilities:
  - Stress tests confirm vulnerability to exports (including fishing license revenue) and growth shocks.
  - Risks from lower fishing revenue, weather-related natural disasters, or a downturn in global financial markets that reduce the value of the sovereign wealth fund call for:
    - Greater use of countercyclical fiscal policy,
    - Gradual fiscal consolidation,
    - Adherence to a prudent withdrawal rule from the sovereign wealth fund.
- Mitigating factors supporting sustainability:
  - Grant-only status for financing from multilateral development banks.
  - Availability of cash buffers that can finance deficits in the near term.
  - In the baseline, breaches occur only in the long term.
- Policy implications:
  - Further progress with structural fiscal reforms, including public financial management, financial discipline and reporting of state-owned and joint venture enterprises, would help safeguard medium- and long-term fiscal sustainability.
  - Continued access to highly concessional financing to support large development needs is needed to contain the risk of debt distress.

*Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA); June 18, 2025.*

### 1.      The coverage of Kiribati’s public sector debt is the central government, central government

### 1kirea2025001-source-pdf - 1.      The coverage of Kiribati’s public sector debt is the central government, central government

### Debt coverage and contingent liabilities
- Public sector debt coverage includes: central government, central government guaranteed debt, and social security fund.
- DSA conducted on a residency basis.
- Limitations: timeliness of SOE balance sheet information and lack of data on joint venture companies, including with minority state ownership.
- Technical assistance: World Bank SDFP and planned IFMIS implementation to improve GFS data availability and coverage; SOE reporting improved with 2023 financial statements submitted to SOEMAU.
- Combined contingent liability stress test components and magnitudes:
  - Contingent liabilities incorporated: 27.0 percent of GDP (Total (2+3+4+5) (in percent of GDP))
  - SOE liabilities (guaranteed and not guaranteed) at end-2022: 12.0 percent of GDP
  - Contingent liability for joint venture company with minority government ownership: 10.0 percent of GDP
  - Financial market shock (default value): 5.0 percent of GDP
  - Note: default guidance triggers a 2 percent of GDP shock where government-guaranteed debt is not fully captured; country team may reduce to 0% if already included or negligible.

### Background on debt structure and magnitude
- Population context: close to 130,000 people across 33 islands.
- RERF (Revenue Equalization Reserve Fund) balance: about AUD 1.5 billion (close to 324 percent of GDP) at end-2024.
- Public and publicly guaranteed (PPG) debt: 9.9 percent of GDP at end-2024.
- External creditors: Asian Development Bank (ADB) and Taiwan Province of China.
- Outstanding external debt: AUD 45.3 million (about 9.7 percent of GDP) at end-2024.
- All existing external debt on concessional terms; no new external debt since 2014.
- Domestic debt: estimated AUD 0.96 million (0.2 percent of GDP) at end-2024, limited fiscal risk.
- Joint venture example and contingent risk:
  - Kiribati Tuna Fishing Co., Ltd. (KTFL) loan from China Eximbank estimated at US$114.5 million (37 percent of GDP); after collateral and minority ownership, government contingent liability risk estimated about 10 percent of GDP.
- Debt management recommendations:
  - Clarify purposes of borrowing or issuing guarantees, align with medium-term fiscal strategy and strategic investment priorities, require detailed annual reporting.
  - Debt Advisory Committee to require comprehensive financial analysis of all new borrowing proposals.
  - All borrowing/guarantee proposals: Debt Advisory Committee → Minister of Finance → Cabinet and President for final approval.

### Recent macroeconomic developments and projections
- 2024 growth: 5.3 percent, primarily driven by public spending.
- Inflation: declined from 9.3 percent in 2023 to 2.5 percent in 2024.
- Recurrent expenditures worsened relative to 2024 Article IV DSA due to a 45 percent public sector wage bill increase in 2024 and a decline in fishing license revenues as a share of GDP.
- Baseline medium-term macro assumptions (text and table highlights):
  - Real GDP growth projected average 2.7 percent in 2024–34; decelerating towards 2 percent in the long-term.
  - Population growth about 1.6 percent.
  - Inflation projected to average 2.8 percent in 2024–34; 7.8 percent in 2025 (one-off fuel and electricity tariff increase), converging to slightly below 2 percent medium term.
  - Current account balance: estimated -2.0 percent of GDP in 2024; projected to remain in small deficit.
  - Overall fiscal balance: large deficits projected, e.g., -22.0 percent of GDP in 2024; medium-term deficits around -16 percent of GDP.
- Key numerical series (selected from Text Table 4; values preserved):
  - Real GDP growth: 2022: 4.6; 2023: 2.7; 2024: 5.3; 2025: 3.9; 2026: 3.2; 2027: 2.5; 2028: 2.2; 2029: 2.1; 2030: 2.1; 2013-23 Historical average: 4.7; 2024-34 Average: 2.7; 2035-44 Average: 2.1
  - Inflation, average (change in percent): 2022: 5.3; 2023: 9.3; 2024: 2.5; 2025: 7.8; 2026: 3.5; 2027: 3.0; 2028: 2.5; 2029: 2.0; 2030: 2.0; 2013-23 Historical average: 1.9; 2024-34 Average: 2.8; 2035-44 Average: 1.8
  - Current account balance: 2022: -12.0; 2023: -1.8; 2024: -2.0; 2025: -0.6; 2026: -0.9; 2027: -1.2; 2028: -1.4; 2029: -1.6; 2030: -1.6; 2013-23 Historical average: 17.4; 2024-34 Average: -1.2; 2035-44 Average: -0.7
  - Overall fiscal balance: 2022: -18.3; 2023: 0.1; 2024: -22.0; 2025: -15.0; 2026: -16.6; 2027: -15.0; 2028: -13.4; 2029: -15.1; 2030: -15.2; 2013-23 Historical average: 12.2; 2024-34 Average: -16.4; 2035-44 Average: -15.5

### Revenues, expenditures, and fiscal composition
- Fishing revenue:
  - Reported at AUD 210 million in 2024 (45 percent of GDP), a decrease of 4 percentage points from 2023 and a decrease of 1 percent in nominal terms from 2023.
  - Projected to decrease and average about 38 percent of GDP in 2025–34 per staff projections.
- Tax revenue:
  - 2013-2023 average about 15 percent of GDP.
  - Increased to 17 percent of GDP in 2024 from 16 percent in 2023.
  - Projected to increase to 19 percent over the medium term due to the new Income Tax Act and planned VAT Act amendments.
  - VAT Act amendments expected to generate AUD 1 million in tax revenue (0.2 percent of GDP) starting in 2025.
- External grants:
  - Estimated at 11 percent of GDP in 2024 (from 24 percent in 2023).
  - Expected to increase to around 39 percent of GDP on average in 2025–27, then decline to about 27 percent of GDP longer term.
  - 2025 grants include 52 percent of GDP total with 7 percent of GDP in budget support and 45 percent of GDP in project grants (reflecting Development Budget 2025).
- Expenditures:
  - Recurrent spending increased; projected to decline from 73 percent of GDP in 2024 to 68 percent of GDP in 2025, then remain around 67 percent of GDP over medium term (2013-2023 average about 56 percent of GDP).
  - Development expenditure: 26 percent of GDP in 2024 (down from 28 percent in 2023); expected to temporarily increase to 58 percent of GDP in 2025 as delayed large infrastructure projects are implemented.

### Financing assumptions and RERF policy implications
- Financing mix assumptions:
  - Cash reserves, RERF withdrawals, and external loans to cover deficits.
  - Cash reserves: decreased to 40 percent of GDP at end-2024 from 44 percent of GDP at end-2023.
  - Staff assumes no use of cash reserves for deficit financing after 2026 to protect them.
- RERF withdrawals:
  - Withdrawals projected to provide around 9 percent of GDP in financing over the medium term, in line with the budget.
  - Between 2020 and 2024, withdrawals permitted only when real returns > 5 percent and only to finance development projects.
  - In 2024 the RERF withdrawal threshold was lowered to 2 percent of nominal returns.
  - AUD 80 million (17 percent of GDP) withdrawn in 2024; another AUD 80 million budgeted for 2025; AUD 45 million budgeted annually for 2026-2028 (about 8-9 percent of GDP).
- Recommended RERF withdrawal rule (staff advice):
  - Adopt two-pronged alternative rule:
    - Use withdrawals to finance high-quality development spending complementing partner efforts.
    - Set a cap around 3 to 5 percent of the RERF balance on annual withdrawals to keep the real per capita value approximately constant.
  - Staff analysis: annual withdrawals up to 15-16 percent of GDP (around 5 percent of RERF balance) could likely be sustained without jeopardizing long-term RERF sustainability if historical returns persist (average about 8 percent during 2011-2024).
  - RERF benchmark portfolio: 50 percent Australian Government bonds and 50 percent in unhedged global equities (equity weight increased recently).

### Projected financing and debt dynamics (selected figures)
- Overall deficit and financing (selected years, percent of GDP):
  - Overall Deficit: 2022: -18; 2023: 0.1; 2024: -22; 2025: -15; 2026: -17; 2027: -15; 2028: -13; 2029: -15; 2030: -15; 2024-34 Average: -16; 2035-44 Average: -16
  - Financing Needs (net): 2022: 18; 2023: -0.1; 2024: 22; 2025: 15; 2026: 17; 2027: 15; 2028: 13; 2029: 15; 2030: 15
  - Cash reserves (net financing contribution): 2022: 19; 2023: 0.5; 2024: 5; 2025: -1; 2026–2030: 0 (per table)
  - RERF withdrawals (percent of GDP): 2024: 17; 2025: 16; 2026: 9; 2027: 8; 2028: 8; 2029: 8; 2030: 10; 2024-34 Average: 9
  - External financing (net): 2022: -1; 2023: -0.6; 2024: -1; 2025: -1; 2026: 8; 2027: 7; 2028: 6; 2029: 7; 2030: 7; 2024-34 Average: 6
- Balance sheet aggregates (selected):
  - Cash reserves (level, percent of GDP): 2022: 51; 2023: 44; 2024: 40; 2025: 38; 2026: 36; 2027: 34; 2028: 33; 2029: 32; 2030: 31; 2024-34 Average: 32
  - RERF balance (percent of GDP): 2022: 307; 2023: 320; 2024: 324; 2025: 309; 2026: 305; 2027: 303; 2028: 303; 2029: 304; 2030: 306; 2024-34 Average: 309; 2035-44 Average: 327
  - Public external debt (percent of GDP): 2022: 16; 2023: 11; 2024: 10; 2025: 9; 2026: 16; 2027: 22; 2028: 27; 2029: 33; 2030: 39; 2024-34 Average: 34; 2035-44 Average: 89

### Risks, policy recommendations, and resilience measures
- Risks to outlook:
  - Downside risks: geoeconomic fragmentation, abrupt global slowdown, reduced fishing license revenues, lower RERF returns due to market volatility, decreased international aid, commodity price volatility, climate-related natural disasters.
  - Volatility of grants and the potential decline in international aid.
- Fiscal and debt policy recommendations:
  - Strengthen debt management framework, including clearer issuance and reporting of government guarantees.
  - Require comprehensive financial analysis for borrowing proposals and strengthen Debt Advisory Committee oversight.
  - Continue reforms to increase tax revenue (Income Tax Act, VAT amendments).
  - Pursue additional growth-friendly consolidation measures, including higher excise taxes on tobacco, alcoholic beverages, sugary drinks, introducing excise on kava, and rationalizing the copra subsidy.
  - Protect cash reserves and limit RERF withdrawals via a balance-based cap (around 3 to 5 percent of RERF balance recommended).
  - External financing should remain on highly concessional terms in line with SDFP to preserve fiscal sustainability.

*Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1kirea2025001-source-pdf.pdf*

### 7.      The baseline scenario explicitly reflects the long-term impact of climate change and natural

### The baseline scenario explicitly reflects the long-term impact of climate change and natural disasters

### Baseline scenario and climate impacts
- The baseline scenario explicitly reflects the long-term impact of climate change and natural disasters, in line with the 2016 IMF Board Paper on “Small States’ Resilience to Natural Disasters and Climate Change—Role for the IMF”.
- Compared with the non-disaster potential growth rate, Kiribati’s long term GDP growth projections in the baseline are adjusted downward by 0.1 ppt.
- The current account is projected to decline by an additional 1 ppt of GDP on average in the long run due to natural disasters.
- The primary balance is projected to decline annually by 0.3 ppt of GDP on average in the long run due to lower fishing revenue driven by changes in seawater temperature.
- The baseline scenario includes 6 percent of GDP for climate adaptation spending over the medium term.
- No major disasters are assumed under the baseline scenario over the medium term.
- Under the RCP 8.5 scenario, representing a high-emissions pathway, a global average temperature increase of roughly 4.3°C by the year 2100 (relative to pre-industrial levels) and a likely range of 0.84 meters (0.61–1.10 meters) of global sea level rise are projected.

### RERF (Revenue Equalization Reserve Fund) dynamics and governance
- Historical behavior: maximum withdrawals are made repeatedly under a return-based rule, with very large returns (e.g. more than 50 percent) of GDP happening in some years.
- Recommendation: the RERF withdrawal rule should be subject to more legislative scrutiny, such as parliamentary approval.
- Liquidity and financing role: Kiribati uses its cash reserves and RERF withdrawals (when available) to finance deficits while accumulating cash buffers in times of a fiscal surplus.
- Concern: RERF withdrawals should not increase the risk of depletion of the sovereign wealth fund.

### Realism checks and short-term projections
- The realism tools suggest that the projections are reasonable (Figures 3–4).
- The primary balance is expected to worsen in 2024 and is projected to remain in deficit with lower fishing revenue in 2025 and high current expenditures.
- The left end of the 3-year adjustment in the primary balance reflects the volatile nature of fishing revenue.
- The outturn of growth in 2024 is consistent with the scenario under the fiscal multiplier of 0.2.
- The downward revision of the debt path compared to the 2018 DSA reflects the assumption of new borrowing starting in 2019 in the 2018 DSA, whereas no new public borrowing has occurred since 2014.
- Both public and private investment rates remain consistent for the projection period when compared to the previous DSA conducted in 2024.
- Large contributions of residuals to debt creation in both external and public debts reflect use of cash reserves and RERF withdrawals to finance deficits and accumulation of cash buffers in surplus years.

### Country classification and indicative debt thresholds
- Debt carrying capacity remains “medium” as in the last DSA.
- Kiribati’s current composite indicator (CI) score is 2.75, calculated based on the April 2025 WEO and the 2023 CPIA (published in July 2024).
- Relevant indicative thresholds for medium debt-carrying capacity:
  - PV of the debt to GDP ratio: 40 percent (applicable to PPG external debt)
  - 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 the total public debt-to-GDP ratio: 55 percent

### Tailored stress tests (contingent liabilities and natural disasters)
- Two tailored stress tests are incorporated based on contingent liabilities and natural disasters shocks, in addition to six standardized stress tests.
- Natural disaster tailored stress test assumption: a one-off natural disaster in the second year of the projection period cuts real GDP growth and exports by 4.6 and 12 percentage points, respectively, reflecting Kiribati-specific impacts from extreme natural disasters.
- The combined contingent liabilities stress test is described in the source material and aims to capture the possibility that climate change adaptation costs may exceed needs incorporated in the macroeconomic framework.

### Debt sustainability — overall findings and timelines
- Risks to debt sustainability in Kiribati remain high.
- Staff judgement incorporates expected long-term effects of climate-related events, with breaches in years 11–20 used to reach the bottom-line risk assessment.
- Stress tests generally push both external and public debt above relevant thresholds in the long run:
  - External public debt is vulnerable to export shocks.
  - Public debt is vulnerable to growth shocks.
- Staff judgement: there is a high probability of large and protracted breaches in the long run given most scenarios flag high risks and Kiribati’s high exposure to climate-related events.

### External debt sustainability (PPG external debt)
- Under the baseline scenario, the PV of the PPG external debt-to-GDP ratio is expected to increase and breach the indicative threshold (40 percent) in 2036 (same as in the 2024 DSA).
- The bulk of projected external debt, including new debt, is on concessional terms according to the World Bank’s SDFP cap on non-concessional borrowing, so debt service will remain relatively contained.
- The debt service-to-exports ratio will gradually increase over the projection period due to continued debt accumulation.
- Under extreme test scenarios, the PV of the PPG external debt-to-GDP ratio will breach its threshold starting from 2030 (same year as in the 2024 DSA).
- The PV of PPG external debt-to-exports ratio is vulnerable and will breach its threshold starting from 2033, four years earlier than in the 2024 DSA.
- Note: for the DSA, exports data include fishing license fees (counted as “primary income” under conventional BoP definitions).

### Public debt sustainability
- Public debt follows similar dynamics to external debt given limited domestic debt.
- Volatility sources and contingent liabilities: fishing revenue volatility, government-managed pension fund guarantees (Provident Fund Act 1977), SOEs, and joint venture companies.
- Under the baseline scenario, the PV of the total public debt-to-GDP ratio will breach the indicative benchmark (55 percent) starting from 2043 (Figure 2).
- The most extreme shock (one standard deviation shock to growth) predicts the PV of the total public debt-to-GDP ratio will breach the benchmark starting from 2032.
- The tailored natural disaster shock and combined contingent liabilities could cause breaches from 2035 and 2037, respectively (3 years earlier than in the 2024 DSA).

### Risk rating and vulnerabilities
- DSA indicates Kiribati’s risk of external debt distress remains high.
- Under the baseline, PV of PPG external debt-to-GDP ratio breach starting from 2036; debt service-to-export ratio remains relatively contained but rises gradually.
- Overall risk of debt distress is also high; PV of public debt-to-GDP ratio projected to breach the indicative benchmark starting from 2043, two years earlier than in the 2024 DSA.
- Drivers of the increase: high recurrent spending and investment needs, declining grant commitments, assumption that future financing is on credit rather than grant terms, and assumed concessional borrowing in line with World Bank’s SDFP.
- Mitigating factors supporting sustainability:
  - Breaches occur only in the long term.
  - Grant-only status for MDB financing and likely long-term access to highly concessional financing.
  - Large cash buffers to draw on in the near term.
  - Resources in the RERF.
- Liquidity buffers could be depleted more rapidly if external loan access is insufficient amid continued fiscal deficits.

### Policy recommendations and reforms
- Critical to manage the fiscal framework prudently and continue to benefit from external grants.
- Initiate a gradual growth-friendly fiscal consolidation effort through streamlining recurrent spending and mobilizing tax revenue to reduce fiscal risks.
- RERF governance: subject RERF withdrawals to more legislative scrutiny (e.g., parliamentary approval).
- Structural and fiscal reforms needed to safeguard medium- and long-term fiscal sustainability:
  - Strengthen the fiscal policy framework.
  - Improve targeting and efficiency of the social safety net.
  - Improve public financial management.
  - Put SOEs on a commercial and sustainable footing.
- Continue to secure grants to support large development needs.
- Ensure compliance with non-concessional borrowing policies for continued grant support from the ADB and the World Bank.

### Authorities’ views
- Authorities broadly agreed with the DSA assessment.
- They recognize the importance of preserving debt sustainability, maintaining a balanced budget (treating RERF withdrawals as revenue), streamlining subsidies and mobilizing revenues.
- Authorities emphasized the 2024 wage bill increase was necessary to maintain living standards after years of high inflation and remain committed to freezing nominal wages as planned in the medium-term budget.
- Authorities welcomed technical assistance to build capacity to analyze new borrowing and improve debt management.
- Authorities will continue to seek grants from bilateral development partners and international financial institutions and recognize the need to comply with non-concessional borrowing policies for continued grant support.

*Source: Country authorities; and IMF staff estimates and projections (from the provided content).*

### 2.5 percentage points of GDP in

### 2.5 percentage points of GDP in

### Overview
- External debt (nominal), historical and projections (in percent of GDP): 13.6, 12.7, 10.8, 9.7, 8.5, 16.1, 22.2, 26.9, 32.7, 38.8, 46.2, 52.1, 58.9, 65.1, 103.9, 12.9, 34.3 (table sequence as presented).
- Public sector debt (in percent of GDP), selected years: 17.3 (2021), 16.3 (2022), 11.4 (2023), 9.9 (2024), 8.7 (2025), 16.3 (2026), 22.4 (2027), 27.0 (2028), 32.9 (2029), 65.2 (2034), 104.0 (2044).

### External Debt Dynamics
- Change in external debt (percent of GDP): -2.9, -0.9, -1.9, -1.1, -1.2, 7.6, 6.1, 4.7, 5.9, 6.0, 7.4, 6.0, 6.8, 6.2, 2.8 (table sequence).
- Identified net debt-creating flows (percent of GDP): -10.5, 14.3, 2.7, 2.7, 1.5, 2.0, 2.1, 2.3, 2.4, 2.3, 2.0, 1.7, 1.3, 0.7, 0.1, -18.7, 1.9.
- Non-interest current account deficit (percent of GDP): -7.3, 11.8, 1.6, 1.9, 0.4, 0.7, 1.0, 1.2, 1.3, 1.3, 1.0, 0.8, 0.4, 0.0, -0.2, -19.8, 0.9.
- Exports (percent of GDP): 46.3, 41.1, 53.3, 48.5, 43.2, 42.6, 42.0, 41.6, 41.1, 40.8, 41.6, 41.7, 40.8, 40.9, 38.9.
- Imports (percent of GDP): 70.8, 100.5, 101.7, 94.9, 91.0, 90.6, 90.0, 89.7, 89.0, 88.8, 88.8, 88.9, 88.9, 88.9, 89.1.
- Net current transfers (negative = inflow, percent of GDP): -17.6, -31.0, -29.3, -23.0, -26.7, -27.3, -27.9, -28.7, -27.1, -26.7, -26.0, -25.6, -26.7, -26.8, -28.3, -23.4, -26.6.
- Net FDI (negative = inflow, percent of GDP): 0.3, 1.6, 1.8, 1.2, 1.3, 1.4, 1.3, 1.4, 1.4, 1.4, 1.4, 1.4, 1.4, 1.4, 0.6, 0.1, 1.3.

### Endogenous Debt Dynamics and Residual
- Endogenous debt dynamics (percent of GDP): -3.5, 0.9, -0.6, -0.4, -0.2, -0.1, -0.2, -0.2, -0.3, -0.3, -0.4, -0.5, -0.5, -0.6, -1.0.
- Contribution from nominal interest rate (percent of GDP): 0.2, 0.2, 0.2, 0.1, 0.1, 0.1, 0.2, 0.2, 0.3, 0.3, 0.4, 0.5, 0.5, 0.6, 1.0.
- Contribution from real GDP growth (percent of GDP): -1.1, -0.7, -0.3, -0.5, -0.4, -0.3, -0.4, -0.5, -0.6, -0.7, -0.8, -0.9, -1.1, -1.2, -2.0.
- Residual (percent of GDP): 7.5, -15.3, -4.6, -3.8, -2.7, 5.6, 4.0, 2.4, 3.4, 3.7, 5.4, 4.3, 5.5, 5.4, 2.6, 17.3, 3.0.
- Note: "The large residual in Table 1 is attributable to several factors: quality of balance of payments data, accumulation of assets in the RERF, and the partial utilization assumption regarding IDA/ADB commitments."

### Sustainability Indicators (External DSA)
- PV of PPG external debt-to-GDP ratio (percent): 7.9, 7.1, 6.6, 10.0, 12.8, 15.1, 18.0, 21.0, 24.8, 28.0, 31.7, 35.1, 59.4 (as presented).
- PV of PPG external debt-to-exports ratio (percent): 14.8, 14.6, 15.4, 23.5, 30.5, 36.2, 43.7, 51.5, 59.5, 67.1, 77.7, 86.0, 152.5.
- PPG debt service-to-exports ratio (percent): 1.6, 2.1, 1.5, 1.5, 1.6, 1.5, 1.6, 1.7, 1.8, 1.9, 2.0, 2.1, 2.2, 2.4, 6.8.
- PPG debt service-to-revenue ratio (percent): 1.1, 1.5, 1.1, 1.1, 1.1, 1.1, 1.2, 1.2, 1.3, 1.3, 1.4, 1.5, 1.6, 1.7, 4.8.
- Gross external financing need (Million of U.S. dollars): -17.7, 38.6, 12.0, 11.8, 7.7, 9.2, 10.2, 11.5, 12.6, 13.1, 12.7, 12.4, 11.5, 10.2, 24.5.

### Key Macroeconomic Assumptions (selected)
- Real GDP growth (in percent): 8.5, 4.6, 2.7, 5.3, 3.9, 3.2, 2.5, 2.2, 2.1, 2.1, 2.1, 2.1, 2.0, 4.4, 2.7.
- GDP deflator in US dollar terms (change in percent): 18.8, -9.4, 4.0, 1.3, -2.2, 1.4, 1.1, 1.3, 1.8, 2.0, 1.8, 1.8, 1.8, 1.8, -0.3, 1.2.
- Effective interest rate (percent): 1.5, 1.3, 1.4, 1.4, 1.3, 1.4, 1.2, 1.1, 1.1, 1.1, 1.1, 1.1, 1.1, 1.0, 1.2, 1.2.
- Growth of exports of G&S (US dollar terms, in percent): -5.0, -15.8, 38.4, -2.9, -9.5, 3.2, 2.4, 2.5, 2.7, 3.3, 5.9, 4.1, 1.6, 4.2, 3.2, 6.0, 1.6 (values as presented).
- Growth of imports of G&S (US dollar terms, in percent): 35.8, 34.7, 7.9, -0.5, -2.5, 4.2, 3.0, 3.1, 3.1, 3.8, 3.9, 4.0, 3.9, 3.9, 6.5, 2.7.

### Aid and Financing
- Grant element of new public sector borrowing (in percent): 52.8, 54.3, 54.3, 54.3, 54.3, 54.3, 54.3, 54.3, 54.3, 54.3, 54.3, 54.3, 54.3, ... , 54.1 (as shown).
- Government revenues (excluding grants, in percent of GDP): 64.9, 56.3, 71.2, 64.6, 59.7, 59.8, 59.0, 59.0, 58.5, 58.1, 58.8, 58.7, 57.8, 57.8, 55.0, 75.9, 59.3 (table sequence).
- Aid flows (Million of US dollars): 23.9, 34.9, 70.0, 35.3, 161.7, 141.4, 126.4, 128.3, 130.5, 134.1, 133.1, 132.9, 142.7, 142.8, 189.4.
- Grant-equivalent financing (in percent of GDP): 11.5, 51.6, 39.2, 33.8, 33.7, 32.2, 31.6, 29.3, 28.6, 29.1, 28.1, 25.4, ... , 31.7 (as presented).
- Grant-equivalent financing (in percent of external financing): 100.0, 100.0, 90.8, 90.9, 92.2, 90.0, 89.3, 86.8, 87.1, 87.2, 87.1, 87.3, 86.8, ... , 91.2 (as shown).

### Memorandum Items
- Nominal GDP (Million of US dollars), selected entries: 285, 271, 289, 308, 313, 328, 340, 352, 366, 381, 395, 411, 427, 443, 648.
- Nominal dollar GDP growth (percent): 28.8, -5.2, 6.7, 6.6, 1.7, 4.7, 3.7, 3.5, 4.0, 4.1, 3.9, 3.9, 3.9, 3.8, 4.1, 4.0.

### Public Sector Debt Dynamics (Table 2)
- Change in public sector debt (percent of GDP): -2.9, -1.0, -4.9, -1.5, -1.2, 7.6, 6.1, 4.7, 5.9, 6.2, 2.8.
- Identified debt-creating flows (percent of GDP): 8.6, 18.9, -1.5, 21.4, 14.6, 16.3, 14.4, 12.8, 14.3, 14.9, 11.6, -4.4, 15.5.
- Primary deficit (percent of GDP): 10.8, 18.3, -0.1, 22.0, 15.0, 16.6, 15.0, 13.4, 15.1, 16.6, 14.6, -12.2, 16.4.
- Revenue and grants (percent of GDP): 73.3, 69.2, 95.4, 76.1, 111.3, 94.3, 88.9, 89.3, 86.5, 81.1, 75.8, 109.2, 87.3.
- Primary (noninterest) expenditure (percent of GDP): 84.0, 87.5, 95.3, 98.1, 126.3, 110.9, 103.8, 102.7, 101.6, 97.7, 90.4, 96.9, 103.7.
- Automatic debt dynamics (percent of GDP): -2.2, 0.5, -1.4, -0.6, -0.4, -0.3, -0.5, -0.6, -0.8, -1.7, -2.9.
- Residual (percent of GDP): -11.5, -19.9, -3.4, -22.9, -15.8, -8.7, -8.4, -8.1, -8.4, -8.7, -8.9, 2.5, -10.6.

### Public Debt Sustainability Indicators (Table 2, selected)
- PV of public debt-to-GDP ratio (percent, selected): 8.5, 7.3, 6.5, 9.8, 12.5, 14.7, 17.5, 34.1, 57.6.
- PV of public debt-to-revenue and grants ratio (percent, selected): 8.9, 9.7, 5.9, 10.4, 14.1, 16.5, 20.2, 42.1, 76.0.
- Debt service-to-revenue and grants ratio (percent): 1.0, 1.2, 0.8, 0.9, 0.6, 0.7, 0.8, 0.8, 0.9, 1.2, 3.5.
- Gross financing need (percent of GDP): 11.5, 19.2, 0.7, 22.7, 15.7, 17.2, 15.6, 14.2, 15.8, 17.5, 17.2.

### Sensitivity Analysis — Publicly Guaranteed External Debt (Table 3)
- Baseline PV of debt-to-GDP ratio (percent) 2024–2044 (selected): 7, 7, 10, 13, 15, 18, 21, 25, 28, 32, 35, 38, 41, 44, 46, 49, 51, 53, 56, 58, 59.
- Threshold for PV of debt-to-GDP ratio: 40 (years 2024–2044).
- Alternative scenarios and bound tests show multiple breach indicators (bold values are indicated in source where breaches occur). Examples (selected outcomes in percent):
  - B1. Real GDP growth: rising from 7 to 67 by 2044.
  - B2. Primary balance: rising from 7 to 75 by 2044.
  - C2. Natural disaster: rising from 7 to 93 by 2044.
- Debt service-to-exports ratio and debt service-to-revenue ratio projections and sensitivity panels are presented with baseline and alternative scenario paths (tables include many year-by-year values).

### Sensitivity Analysis — Public Debt (Table 4)
- Baseline PV of debt-to-GDP ratio (percent) 2024–2044 (selected): 7, 7, 10, 13, 15, 17, 20, 24, 27, 31, 34, 37, 40, 42, 45, 47, 49, 52, 54, 56, 58.
- Total public debt benchmark: 55 (constant across projection years in the table).
- Bound tests and tailored tests (B1–B6, C1–C2) provide alternative projected paths for PV of debt-to-GDP and other indicators with explicit yearly values; examples (selected outcomes in percent):
  - B1. Real GDP growth scenario: values rising to 128 by 2044 for certain indicators.
  - C2. Natural disaster scenario: values rising to 92 by 2044 for certain indicators.
- Debt service-to-revenue ratio, PV of debt-to-revenue ratio, and other benchmarks are tabulated with year-by-year values and breach indicators as shown in the source.

### Notes and Definitions (as presented)
- External debt coverage: "Includes both public and private sector external debt."
- Residual definition: "Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes."
- Effective interest rate definition: "Current-year interest payments divided by previous period debt stock."
- Aid definition: "Defined as grants, concessional loans, and debt relief."
- Grant-equivalent financing definition: "Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt)."
- PV of private sector debt assumption: "Assumes that PV of private sector debt is equivalent to its face value."
- Endogenous debt dynamics formula provided in source: derived as [r - g - ρ(1+g) + Ɛα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt.

*Source: Tables and text as provided in the supplied IMF PDF content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1kirea2025001-source-pdf.pdf_