## 1. Australia–Tuvalu Falepili Union Treaty ## Source details **Canonical URL:** [1. Australia–Tuvalu Falepili Union Treaty](https://www.imf.org/-/media/files/publications/cr/2025/english/1tuvea2025001-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1tuvea2025001-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1tuvea2025001-source-pdf.pdf.json) --- ### Context - Tuvalu’s economy contracted a cumulative 15 percent during 2020-22 and has been rebounding since reopening at end-2022; Real GDP has not yet reached its pre-pandemic level. - Classification and vulnerabilities: - Tuvalu is classified as a Fragile and Conflict-Affected State. - Small size and remoteness: population of around 10,000 on nine atolls and reef islands (total land area of 26 square kilometers); average height about two meters above sea-level, highest elevation less than 5 meters. - High cost of living and doing business, narrow domestic production base, heavy dependency on imports, dominance of the public sector. - Fiscal and external positions heavily affected by volatile fishing license fees and grants. - Outward emigration provides remittance benefits but increases labor shortages and capacity constraints. - High vulnerability to climate change and natural disasters; rising sea levels imply most islands could be at threat of being underwater by 2050. - Government priorities (new government formed in early 2024): enhancing climate resilience, maintaining fiscal stability, promoting sustainable and inclusive development. - Policy Reform Matrix (FY2025-27) identifies policy actions that trigger payments of budget support by development partners upon completion. - Australia–Tuvalu Falepili Union Treaty (signed November 2023; entered into force August 2024) — key economic elements: - Australia committed over AUD 150 million, equivalent to approximately 175 percent of 2024 Tuvalu GDP, in total financial assistance under the Falepili Union, including: - AUD 38 million for the Tuvalu Coastal Adaptation Project (TCAP). The second phase of TCAP started in 2024 and is expected to be completed in mid-2026. - AUD 50 million (in 2024-25) for Tuvalu’s first undersea telecommunications cable. - AUD 40 million to improve Tuvalu's aviation sector and enhance connectivity. - AUD 10 million in budget support (over 2023-24 and 2024-25), contributions to the Tuvalu Trust Fund, and support for critical reforms. - AUD 15 million for a National Security Coordination Centre; support also for education and health. - Special Emigration Pathway: allocation for the first year is 280 visas (around 3 percent of Tuvalu’s population), allocated through a random ballot. The Treaty ballot opened between June 16 and July 18, 2025, and over 80 percent of Tuvalu’s population registered for the ballot. *Source: 1. Australia–Tuvalu Falepili Union Treaty.* ### Recent developments: growth, inflation, fiscal, external, and financial sector - Growth and output: - GDP growth in 2024 is estimated at 3.1 percent (4.0 percent in 2023). - Recovery supported by reopening and major infrastructure projects including coastal adaptation, maritime transportation, and renewable energy. - Inflation: - Inflation peaked at 14.2 percent in 2022Q3, averaged 7.2 percent in 2023, and declined to 1.2 percent in 2024. - Since 2024Q3, moderation driven mainly by decline in food prices. - Tuvalu’s inflation is highly correlated with import prices and shipping costs. - Fiscal developments: - Overall fiscal deficit of 14.6 percent of GDP in 2022 reversed to a surplus of 15.3 percent of GDP in 2023 (grants over 35 percent of GDP). - For 2024, overall expenditure-to-GDP ratio fell; tax revenue and income from Tuvalu’s internet domain increased in 2024, but overall fiscal balance turned to a deficit of 8.2 percent of GDP due to a decline of grants from the high level of 2023 and lower fishing license fees. - Tuna migration due to climate conditions including the El Nino Southern Oscillation is considered a contributing factor to lower fishing license fees. - External and reserves: - Current account surplus surged to 40 percent of GDP in 2023 and is estimated to have declined to 7.3 percent of GDP in 2024. - External position for 2024 estimated broadly in line with medium-term fundamentals and desirable policies. - Gross reserves: import cover of 11 months in 2024. - Financial sector and payments: - Credit expanded by 7.8 percent (y/y) in 2024. - Tuvalu launched its first-ever Automatic Teller Machines (ATMs) and Point of Sales equipment (POS). - Correspondent banking relationship concentration risk remains: only the National Bank of Tuvalu maintains CBRs for international payments. - ATMs currently accessible via prepaid cards; plans to introduce Tuvalu-issued debit cards and eventually international card functionality. ### Outlook and risks (growth, inflation, fiscal, external) - Growth and inflation projections: - Projected growth: 3 percent in 2025 and 2.6 percent in 2026. - Medium-term growth projected to moderate gradually to below 2 percent. - Inflation expected to remain contained at around 2 percent in 2025 and rise gradually to 2.5 percent over the medium term. - Fiscal projections and financing: - Fiscal balance projected to shift to a small surplus of 0.6 percent of GDP in 2025, supported by grants increasing by over 15 percent of GDP reflecting higher committed budget support from Australia, the World Bank, and the Asian Development Bank. - Over the medium term, grants and fishing license fees projected to grow slower than nominal GDP; fiscal balance expected to deteriorate gradually to -6 percent of GDP by 2030. - Foreign financing required starting in 2026: returns from the Tuvalu Trust Fund (TTF) and Consolidated Investment Fund (CIF) would not suffice to fully finance projected fiscal deficits; financing gaps expected to be financed by foreign financing on concessional terms starting in 2026. - Tuvalu assessed to remain at a high risk of debt distress. - External sector outlook: - Current account expected to remain in surplus in near term supported by higher grants, but projected to turn to deficits from 2027 as primary and secondary income decline and trade deficits remain elevated. - Reserve coverage expected to decline from 11 months in 2024 to 10 months by 2030. - Key downside risks: - Heightened global uncertainty; under-performance of public corporations; further loss of CBRs; acceleration of outward migration; increased frequency and intensity of extreme climate events; global trade and geopolitical tensions. - Upside risks: - Higher than expected fishing license fees; additional or faster disbursements of grants; greater structural reform momentum. ### Authorities’ views - Authorities broadly agreed with staff’s assessments of the economic outlook and risks. - They were somewhat more optimistic about medium-term growth, expecting further financial support from development partners beyond the current project pipeline. - Authorities stressed addressing the high cost of living as a key government priority and broadly agreed with staff’s external sector assessment. ### Downside scenario and contingent policies (Box 2) - Scenario: prolonged global trade tensions and heightened policy uncertainty (calibrated from April 2025 WEO Box 1.1). - Transmission channels: lower fiscal revenue from internet domain and fishing licenses; lower or delayed financial assistance; lower remittances; lower returns of the TTF and CIF. - Macroeconomic impact: higher fiscal deficits, weaker external balances, lower growth. - Contingent policy priorities: targeted support to vulnerable groups; increasing expenditure efficiency; safeguarding financial stability through prudential policy; accelerating structural reforms. ### Fiscal policy recommendations and consolidation scenario - Policy objective: balance fiscal sustainability and resources for development. - Key fiscal strategy elements: - Gradually reduce fiscal deficits, enhance spending efficiency, mobilize domestic revenue. - Increase spending for human capital, infrastructure, and climate resilience. - Appropriately use fiscal buffers to stabilize fiscal accounts and cushion shocks. - Staff simulation targets (selected exact figures preserved): - Reduce the fiscal deficit gradually to around 2 percent of GDP by 2030 (compared to 6 percent of GDP in the baseline). - Domestic current balance would improve to -45 percent of GDP by 2045 under the consolidation scenario. - Value of the buffer fund (CIF) would stabilize at the current level of around 40 percent of GDP. - Contextual fiscal needs and shocks: - Tuvalu’s annual investment needs for climate-resilient infrastructure are estimated at around 30 percent of GDP. - Cyclone Pam in 2015 caused economic damages of more than 25 percent of GDP. - The COVID-19 pandemic resulted in a 15 percent decline of GDP. - Illustrative revenue and expenditure measures under consolidation scenario (In Percent of GDP; exact series preserved): - 2017-19 Average revenue: 125.7 - 2025 revenue: 122.9 - 2030 Baseline revenue: 110.4 - 2030 Consolidation revenue: 110.9 (Consolidation - Baseline: 0.5) - 2017-19 Average Tax revenue: 15.0 - 2025 Tax revenue: 17.1 - 2030 Baseline Tax revenue: 17.4 - 2030 Consolidation Tax revenue: 17.9 (Consolidation - Baseline: 0.5) - 2017-19 Average Expense: 79.0 - 2025 Expense: 111.7 - 2030 Baseline Expense: 105.0 - 2030 Consolidation Expense: 98.3 (Consolidation - Baseline: -6.7) - Staffing: 2017-19 Average 31.8; 2025 36.4; 2030 Baseline 35.0; 2030 Consolidation 34.4 (-0.6) - Medical treatment scheme: 2017-19 Average 8.3; 2025 13.0; 2030 Baseline 12.3; 2030 Consolidation 11.1 (-1.2) - Scholarship: 2017-19 Average 7.0; 2025 7.7; 2030 Baseline 7.7; 2030 Consolidation 7.1 (-0.6) - Purchase of goods and services: 2017-19 Average 21.7; 2025 39.3; 2030 Baseline 35.2; 2030 Consolidation 31.9 (-3.2) - Other expenses: 2017-19 Average 10.2; 2025 15.1; 2030 Baseline 14.8; 2030 Consolidation 13.7 (-1.0) - Net acquisition of nonfinancial assets: 2017-19 Average 20.8; 2025 10.7; 2030 Baseline 11.5; 2030 Consolidation 14.6 (+3.1) - Overall fiscal balance: 2017-19 Average 10.4; 2025 0.6; 2030 Baseline -6.0; 2030 Consolidation -1.9 (+4.1) - Domestic current balance: 2017-19 Average -40.7; 2025 -74.2; 2030 Baseline -64.5; 2030 Consolidation -57.3 (+7.2) - Planned TA and assessments: - A TA mission on Tax Policy Review by IMF Fiscal Affairs Department scheduled for early 2026. - A PEFA assessment conducted by PFTAC in September 2024. ### Financial sector policies: structure, risks, and recommended actions - System structure and recent performance: - Financial sector comprises two state-owned banks: NBT and Development Bank of Tuvalu (DBT), and the Tuvalu National Provident Fund (TNPF). - NBT is the only commercial bank; accounts for over 95 percent of the combined assets of the two banks. - DBT faces continuous losses; NBT NPL ratio fell from 32.6 percent in 2019 to 21.2 percent in 2024, with provisioning coverage at 153.5 percent. - Capital adequacy ratio of the banking sector remained at a high level of around 120 percent at end-2024. - The government allocated AUD 1.0 million to support DBT in the 2025-26 budget (about 1/3 of DBT’s total assets). - Urgent regulatory and supervisory priorities (from IMF TA): - Enforce timely submission of prudential returns and completion of financial statement audits by banks and TNPF. - Finalize and issue proposed consolidated prudential standard; BCT should consult banks and conduct an impact study. - Enhance institutional set up of financial supervision by strengthening the statutory role of the Banking Commission and expanding supervisory perimeter to cover TNPF. - AML/CFT and CBRs: - Tuvalu joined APG in July 2023; completing amendments to the Proceeds of Crime Act will clarify FIU responsibilities. - Joining the World Bank Pacific CBR project and outreach to foreign regulators recommended to maintain CBRs. - Financial inclusion and modernization: - Modernize banking services; improve financial literacy; establish a national digital ID; create a centralized credit registry; introduce risk-based loan pricing, a collateral framework, and a resolution regime. - Ensure digital services preserve financial integrity given limited supervisory capacity. ### Structural reforms, connectivity, and climate resilience - Priority structural reforms: - Develop reclaimed land with local communities: over 7.3 hectares of reclaimed land from TCAP first phase handed over in October 2024; TCAP second phase expected completed mid-2026. - Leverage internet connectivity: Tuvalu Vaka Cable landed in December 2024; Starlink services started January 2025. - Ensure maintenance of transport and utilities, including renewable energy. - Strengthen SOE governance and performance; review utility pricing for cost recovery. - Explore diversification: increasing value-added agricultural products (coconut), eco-tourism, commercial fishery. - Climate and energy targets: - Tuvalu has set a target to reach 100 percent renewable energy generation by 2030. - Currently about 84 percent of energy generation relies on imported fossil fuels while 16 percent is from solar. - Fuel imports account for about 20 percent of GDP. ### Emigration, human capital, and labor market responses - Emigration supports remittances but intensifies labor shortages and capacity constraints. - Recommended multi-layered approach: - Improve education access and quality; enhance vocational training in healthcare, teaching, and technical skills. - Implement Labor Migrants Reintegration Strategy (LMRS) to attract returning migrants and promote skill transfer. - Facilitate female labor force participation (including through affordable childcare). - Authorities scaling up vocational training and prioritizing education and female labor participation. ### Debt sustainability, projections, and stress tests (key figures preserved) - Country classification: debt-carrying capacity "weak"; Composite Indicator (CI) 2.58. - Baseline debt projections (selected exact figures): - Public sector debt (percent of GDP): 2025: 9.0; 2029: 12.1; 2030: 15.1; 2035: 35.8; 2045: 98.9. - External debt (nominal, percent of GDP): 2025: 3.8; 2029: 7.6; 2030: 10.8; 2035: 32.0; 2045: 95.9. - PV of PPG external debt-to-GDP ratio: 2029: 2.7; 2030: 4.2; 2035: 19.1; 2045: 61.8. - PV of public debt-to-GDP ratio: 2029: 7.3; 2030: 7.0; 2035: 22.9; 2045: 64.7. - Gross external financing need (Million of U.S. dollars): 2025: 0.5; 2026: -19.9; 2027: -3.8; 2028: -8.3; 2029: -3.1; 2030: 0.4; 2035: 6.5; 2045: 14.9. - Stress tests and scenarios: - Natural disaster scenario (one-time 30 percent of GDP shock to external debt-to-GDP, one-off 2 percentage points decline in real GDP growth): would cause PV external debt-to-GDP to breach thresholds earlier (e.g., breach by 2037). - Fishing license revenue shock (from 38 to 35 percent of GDP from 2031): would worsen PV external debt-to-GDP to 80 percent by 2045. - Consolidation scenario: fiscal targets could contain PV external debt-to-GDP below the 30 percent threshold. - Strong TTF returns scenario: if TTF returns 2 percentage points higher than baseline, PV external debt-to-GDP stays below threshold until 2045. - Assessment: Tuvalu remains at high risk of debt distress though debt is considered sustainable in the near term given concessional borrowing and low debt service indicators; long-run projections breach thresholds beyond standard 10-year horizon. ### Data, capacity development, and IMF engagement - Data and statistics: - Data shortcomings hamper surveillance; IMF TA assisted in revising historical national accounts and updating estimates to 2024. - Gross official reserves by end-2024: USD 69.9 million; import coverage at end-2024: 10.8 months. - NIIP at end-2024: 514 percent of GDP; Gross Assets: 529 percent of GDP; Gross Liabilities: 15 percent of GDP. - Fund engagement and TA: - Resident Representative Office for Pacific Islands based in Suva; Mr. Neil Saker is the resident representative. - PFTAC TA: FY2024: 29 TA days; FY2025: 180 TA days; FY2026 workplan: 126 TA days planned. - FY2026 TA priorities include enhancing prudential standards, updating GDP compilation, implementing quarterly budget execution reporting, and improving tax audits and large taxpayer management. - Data provision and Fund relations: - Membership: Joined June 24, 2010; Article VIII. - Quota: 2.50; Fund holdings of currency: 1.89; Reserve Tranche Position: 0.61. - SDR net cumulative allocation: 4.08; Holdings: 3.47. - Overdue Purchases and Loans: None. Financial Arrangements: None. ### Key policy recommendations (summarized) - Fiscal policy: - Gradually reduce fiscal deficits; enhance spending efficiency; mobilize domestic revenue; save excess fishing revenue; prioritize human capital, infrastructure maintenance, and climate resilience. - Specific measures: right-size wage bill; complete civil service review; cost-saving TOMRS reforms; rationalize scholarships; unwind pandemic-era goods and services spending; target subsidies. - Strengthen PFM: better revenue forecasting, multi-year investment planning, transparency on extra-budgetary funds and SOEs, procurement reforms, Climate Budget Tagging. - External and reserves: - Pursue grant financing and highly concessional loans; maintain CIF minimum balance; preserve adequate import coverage for countercyclical policies. - Financial sector: - Strengthen legal and institutional foundations for supervision; finalize consolidated prudential standards; expand supervisory perimeter to TNPF; improve AML/CFT framework to safeguard CBRs. - Modernize payments and financial inclusion: expand ATMs/POS, upgrade core banking, consider national ID and centralized credit registry. - Structural and climate resilience: - Implement TCAP and other climate-resilient projects; pursue 100 percent renewable energy by 2030; maintain and diversify infrastructure; strengthen SOE governance. - Human capital and migration: - Scale up vocational training; implement LMRS; facilitate female labor force participation; improve education quality. - Contingent and crisis preparedness: - Prioritize targeted support to vulnerable groups in downside scenarios; use fiscal buffers appropriately; accelerate structural reforms to bolster resilience. *Source: IMF staff report excerpts and annexes from the provided PDF content.* ### 1. Australia–Tuvalu Falepili Union Treaty__________________________________________________________ 5 ### 1. Australia–Tuvalu Falepili Union Treaty ### Context - Tuvalu’s economy contracted a cumulative 15 percent during 2020-22 and has been rebounding since reopening at end-2022, driven by resumption of construction activity, recovery of the trade sector, and higher government spending. - Real GDP has not yet reached its pre-pandemic level. - Tuvalu is classified as a Fragile and Conflict-Affected State due to institutional and economic fragility. - Structural vulnerabilities: - Small size and remoteness: population of around 10,000 on nine atolls and reef islands (total land area of 26 square kilometers); average height about two meters above sea-level, highest elevation less than 5 meters. - High cost of living and doing business, narrow domestic production base, heavy dependency on imports, dominance of the public sector. - Fiscal and external positions heavily affected by volatile fishing license fees and grants. - Outward emigration provides remittance benefits but increases labor shortages and capacity constraints. - High vulnerability to climate change and natural disasters; rising sea levels imply most islands could be at threat of being underwater by 2050. - Government priorities (new government formed in early 2024): enhancing climate resilience, maintaining fiscal stability, promoting sustainable and inclusive development. - Policy Reform Matrix (FY2025-27) identifies policy actions that trigger payments of budget support by development partners upon completion. - Australia–Tuvalu Falepili Union Treaty (signed November 2023; entered into force August 2024) covers climate cooperation, security, and human mobility. Key economic elements include: - Australia committed over AUD 150 million, equivalent to approximately 175 percent of 2024 Tuvalu GDP, in total financial assistance under the Falepili Union, including: - AUD 38 million for the Tuvalu Coastal Adaptation Project (TCAP). The second phase of TCAP started in 2024 and is expected to be completed in mid-2026. - AUD 50 million (in 2024-25) for Tuvalu’s first undersea telecommunications cable. - AUD 40 million to improve Tuvalu's aviation sector and enhance connectivity. - AUD 10 million in budget support (over 2023-24 and 2024-25), contributions to the Tuvalu Trust Fund, and support for critical reforms. - AUD 15 million for a National Security Coordination Centre; support also for education and health. - Special Emigration Pathway: allocation for the first year is 280 visas (around 3 percent of Tuvalu’s population), allocated through a random ballot. The Treaty ballot opened between June 16 and July 18, 2025, and over 80 percent of Tuvalu’s population registered for the ballot. ### Recent Developments - Growth and output: - GDP growth in 2024 is estimated at 3.1 percent (4.0 percent in 2023), despite severe flooding early in the year. - Recovery supported by reopening and major infrastructure projects including coastal adaptation, maritime transportation, and renewable energy. - Inflation: - Inflation peaked at 14.2 percent in 2022Q3, averaged 7.2 percent in 2023, and declined to 1.2 percent in 2024. - Since 2024Q3, moderation driven mainly by decline in food prices. - Tuvalu’s inflation is highly correlated with import prices and shipping costs. - Fiscal developments: - Fiscal balances highly volatile: overall fiscal deficit of 14.6 percent of GDP in 2022 reversed to a surplus of 15.3 percent of GDP in 2023, driven by an increase in grants (over 35 percent of GDP) from development partners including the World Bank. - For 2024, the overall expenditure-to-GDP ratio fell due to lower spending on goods and services, Tuvalu’s Overseas Medical Referral Scheme (TOMRS), and under-execution of capital expenditure. - Tax revenue and income from Tuvalu’s internet domain increased in 2024, but overall fiscal balance turned to a deficit of 8.2 percent of GDP due to a decline of grants from the high level of 2023 and lower fishing license fees. - Tuna migration due to climate conditions including the El Nino Southern Oscillation is considered a contributing factor to lower fishing license fees. - External and reserves: - Current account surplus surged to 40 percent of GDP in 2023 and is estimated to have declined to 7.3 percent of GDP in 2024, reflecting fluctuations in fishing license fees and grants. - External position for 2024 estimated broadly in line with medium-term fundamentals and desirable policies. - Gross reserves: import cover of 11 months in 2024. - Financial sector and payments: - Credit expanded by 7.8 percent (y/y) in 2024. - Tuvalu launched its first-ever Automatic Teller Machines (ATMs) and Point of Sales equipment (POS). - Correspondent banking relationship (CBR) concentration risk remains: only the National Bank of Tuvalu maintains CBRs for international payments. - ATMs currently accessible via prepaid cards; plans to introduce Tuvalu-issued debit cards and eventually international card functionality. ### Outlook and Risks - Growth and inflation projections: - Projected growth: 3 percent in 2025 and 2.6 percent in 2026, driven by TCAP second phase construction and increased public investment. - Medium-term growth projected to moderate gradually to below 2 percent, reflecting sluggish productivity growth, increasing emigration, and vulnerability to climate events. - Inflation expected to remain contained at around 2 percent in 2025 and rise gradually to 2.5 percent over the medium term. - Fiscal projections and financing: - Fiscal balance projected to shift to a small surplus of 0.6 percent of GDP in 2025, supported by grants increasing by over 15 percent of GDP reflecting higher committed budget support from Australia, the World Bank, and the Asian Development Bank. - Over the medium term, grants and fishing license fees projected to grow slower than nominal GDP; expenditure pressures remain elevated; fiscal balance expected to deteriorate gradually to -6 percent of GDP by 2030. - Foreign financing required starting in 2026: returns from the Tuvalu Trust Fund (TTF) and Consolidated Investment Fund (CIF) would not suffice to fully finance projected fiscal deficits; financing gaps expected to be financed by foreign financing on concessional terms starting in 2026. - Tuvalu assessed to remain at a high risk of debt distress. - External sector outlook: - Current account expected to remain in surplus in near term supported by higher grants, but projected to turn to deficits from 2027 as primary and secondary income decline (lower fishing license fees and grants) and trade deficits remain elevated. - Reserve coverage expected to decline from 11 months in 2024 to 10 months by 2030. - Key downside risks: - Heightened global uncertainty. - Under-performance of public corporations including state-owned banks due to ineffective monitoring and supervision, creating fiscal risks. - Further loss of CBRs severely disrupting cross-border payments. - Acceleration of outward migration exacerbating labor shortages. - Increased frequency and intensity of extreme climate events and faster sea-level rise. - Global trade and geopolitical tensions and higher commodity prices could increase inflation. - Upside risks: - Higher than expected fishing license fees. - Additional or faster disbursements of grants from development partners relative to current commitments. - Greater structural reform momentum accelerating economic growth. ### Authorities’ Views - Authorities broadly agreed with staff’s assessments of the economic outlook and risks. - They concurred that direct impact of recent trade tensions on Tuvalu is limited and that externally-financed infrastructure projects will continue to drive near-term growth. - Authorities were somewhat more optimistic about medium-term growth, expecting further financial support from development partners beyond the current project pipeline. - They shared staff’s view that heightened global uncertainty and financial market volatility could affect external revenues and returns of sovereign wealth funds. - Authorities stressed addressing the high cost of living as a key government priority and broadly agreed with the staff’s external sector assessment. *Source: 1. Australia–Tuvalu Falepili Union Treaty.* ### Box 2. Downside Scenario and Contingent Policies ### Box 2. Downside Scenario and Contingent Policies ### Downside scenario: calibration and transmission to Tuvalu - Scenario calibrated based on Box 1.1 of the April 2025 World Economic Outlook: prolonged global trade tensions and heightened policy uncertainty. - Key transmission channels for Tuvalu: - i) lower fiscal revenue from Tuvalu’s internet domain and fishing licenses due to lower global growth and consumption; - ii) lower or delayed financial assistance due to the growth slowdown in key development partners and increasing challenges to international cooperation; - iii) lower remittances reflecting lower growth and productivity of sourcing countries; - iv) lower returns of the TTF and CIF due to the decline in global asset prices. - Expected macroeconomic impact: higher fiscal deficits, weaker external balances, and a lower growth path relative to the baseline. - Recommended contingent policy priorities: targeted support to vulnerable groups, increasing expenditure efficiency, safeguarding financial stability through prudential policy, and accelerating structural reforms. ### A. Fiscal policy — enhancing fiscal sustainability and supporting development needs - Policy objective: balance ensuring fiscal sustainability and providing resources for development priorities in a highly externally vulnerable economy with limited fiscal space. - Key fiscal strategy elements: - i) gradually reducing fiscal deficits through unwinding the increase in current expenditure since the pandemic, enhancing spending efficiency, and mobilizing domestic revenue; - ii) increasing spending for priority areas including human capital, infrastructure, and climate resilience; - iii) appropriately using fiscal buffers to stabilize fiscal accounts, cushion against shocks, and address long-term challenges. - Staff simulations and targets: - reduce the fiscal deficit gradually to around 2 percent of GDP by 2030 (compared to 6 percent of GDP in the baseline); - the domestic current balance would improve to -45 percent of GDP by 2045 under the consolidation scenario; - the value of the buffer fund (CIF) would stabilize at the current level of around 40 percent of GDP. - Contextual fiscal needs and shock examples: - Tuvalu’s annual investment needs for climate-resilient infrastructure are estimated at around 30 percent of GDP. - Cyclone Pam in 2015 caused economic damages of more than 25 percent of GDP. - The COVID-19 pandemic resulted in a 15 percent decline of GDP. - Expenditure-side measures (rationalize current spending; reallocate to priorities): - timely completion of the planned civil service review; contain the overall wage bill through right-sizing the workforce; use targeted wage increases for essential positions with recruitment and retention issues; - implement cost-saving measures based on the recent review of TOMRS, including enhancing local healthcare capacity, streamlining the scheme’s operational guidelines, and improving its governance; - rationalize overseas scholarships by better aligning them with Tuvalu’s development needs and enforcing mandatory service requirements upon return; - continue to unwind the increase in goods and services spending; - cut broad-based utility subsidies and replace them with targeted protection for the most vulnerable. - Part of the savings should be redirected to infrastructure maintenance, human capital development, and climate resilience. - Revenue-side and PFM measures: - prioritize strengthening compliance and efficiency of tax collection, focusing on large taxpayers and those liable for Tuvalu Consumption Tax (TCT); - enforce the TCT’s late filing penalty introduced in July 2024 where applicable; - develop approved forms for taxes administered by Tuvalu Revenue and Customs Department and document procedures for risk-based tax audit practices; - establish information exchanges with other government agencies and financial institutions over time to support compliance and recovery of unpaid taxes; - consider reviewing tax policies (including on the TCT, Personal Income Tax, and Corporate Income Tax) and exploring further options to boost tax revenue and streamline tax incentives. - Public Financial Management (PFM) reform priorities: - improve budget reliability via better revenue forecasting, incorporating known costs, effective execution monitoring, and transparent in-year budget adjustments; - strengthen public investment management: improve project identification, costing, monitoring, multi-year investment planning with prioritization and sequencing to strengthen implementation and timely grant disbursements; - enhance fiscal reporting and transparency on extra-budgetary funds, project financing, and SOEs; enforce data submission, analyze submitted data, and publish statistics and insights; - reinforce procurement management: explore open competitive bidding when feasible, strengthen compliance with procurement regulations, develop an e-procurement system, and enhance transparency of procurement information; - strengthen integration of climate resilience in PFM through Climate Budget Tagging (CBT). - Illustrative revenue and expenditure measures under the consolidation scenario (In Percent of GDP): - 2017-19 Average revenue: 125.7 - 2025 revenue: 122.9 - 2030 Baseline revenue: 110.4 - 2030 Consolidation revenue: 110.9 (Consolidation - Baseline: 0.5) - 2017-19 Average Tax revenue: 15.0 - 2025 Tax revenue: 17.1 - 2030 Baseline Tax revenue: 17.4 - 2030 Consolidation Tax revenue: 17.9 (Consolidation - Baseline: 0.5) - 2017-19 Average Expense: 79.0 - 2025 Expense: 111.7 - 2030 Baseline Expense: 105.0 - 2030 Consolidation Expense: 98.3 (Consolidation - Baseline: -6.7) - Staffing: 2017-19 Average 31.8; 2025 36.4; 2030 Baseline 35.0; 2030 Consolidation 34.4 (-0.6) - Medical treatment scheme: 2017-19 Average 8.3; 2025 13.0; 2030 Baseline 12.3; 2030 Consolidation 11.1 (-1.2) - Scholarship: 2017-19 Average 7.0; 2025 7.7; 2030 Baseline 7.7; 2030 Consolidation 7.1 (-0.6) - Purchase of goods and services: 2017-19 Average 21.7; 2025 39.3; 2030 Baseline 35.2; 2030 Consolidation 31.9 (-3.2) - Other expenses: 2017-19 Average 10.2; 2025 15.1; 2030 Baseline 14.8; 2030 Consolidation 13.7 (-1.0) - Net acquisition of nonfinancial assets (1/ Infrastructure expenditure for 2017-2019 Average): 2017-19 Average 20.8; 2025 10.7; 2030 Baseline 11.5; 2030 Consolidation 14.6 (+3.1) - Overall fiscal balance: 2017-19 Average 10.4; 2025 0.6; 2030 Baseline -6.0; 2030 Consolidation -1.9 (+4.1) - Domestic current balance: 2017-19 Average -40.7; 2025 -74.2; 2030 Baseline -64.5; 2030 Consolidation -57.3 (+7.2) - Footnotes and planned technical assistance: - A TA mission on Tax Policy Review by IMF Fiscal Affairs Department has been scheduled for early 2026. - A Public Expenditure and Financial Accountability (PEFA) assessment was conducted by the Pacific Financial Technical Assistance Centre (PFTAC) in September 2024. ### Authorities’ views on fiscal recommendations - Authorities concurred with staff’s recommendation to ensure fiscal sustainability while supporting development needs. - Authorities noted elevated spending pressures to deliver essential public services but indicated recommended expenditure measures align with their fiscal objectives. - Authorities plan to adopt cost-saving measures and are considering the feasibility of a health insurance scheme to contain TOMRS spending. - Authorities anticipated purchases of goods and services would moderate with lower inflation and agreed subsidies should be better targeted. - They emphasized increased allocation for capital expenditure in the FY2025-26 budget but recognized capacity constraints for investment execution. - On revenue, authorities highlighted efforts to increase fishing license revenue through new bilateral agreements and reflagging of foreign vessels and agreed with recommendations on enhancing tax compliance and further revenue mobilization through a tax policy review. - Authorities agreed on the importance of continued PFM reforms and plan to adopt a sequenced and prioritized action plan based on PFTAC TA on the PFM roadmap. ### B. Financial sector policies — regulation, supervision, and inclusion - System structure and recent performance: - Financial sector comprises two state-owned banks: NBT and Development Bank of Tuvalu (DBT), and the Tuvalu National Provident Fund (TNPF). - The NBT is the only commercial bank; foreign exchange transactions are its major income source. - The NBT accounts for over 95 percent of the combined assets of the two banks. - The DBT faces continuous losses, reflecting its lending portfolio and weak credit assessment; most of DBT’s loans focus on households and small and micro businesses in Tuvalu’s outer islands. - Capital adequacy ratio of the banking sector remained at a high level of around 120 percent at end-2024. - NPL ratio of the NBT fell from 32.6 percent in 2019 to 21.2 percent in 2024, with the provisioning coverage at 153.5 percent. - The government allocated AUD 1.0 million to support the operation of the DBT (about 1/3 of DBT’s total assets) in the 2025-26 budget. - Access to credit and financial services remains challenging due to limited collateral forms, lack of robust credit information, absence of a national ID, and low levels of financial literacy. - Urgent regulatory and supervisory priorities (as identified by recent IMF TA): - enforce timely submission of prudential returns and completion of financial statement audits by banks and TNPF; BCT should enforce timely submission of prudential returns, continue financial risk analysis, and take appropriate supervisory measures supported by adequate resourcing and training for on-site and off-site supervision; - finalize and issue the proposed consolidated prudential standard (covering governance, general risk management, capital adequacy, credit risk management, forex risk management, liquidity risk management and operational risk management); BCT should consult banks, conduct an impact study, and timely issue regulations; - enhance institutional set up of financial supervision by strengthening the statutory role of the Banking Commission (BCT) and separating it from the Public Enterprise Reform and Monitoring Unit; expand the supervisory perimeter to cover Tuvalu’s National Provident Fund given its credit role. - AML/CFT and correspondent banking relationships (CBRs): - Tuvalu joined the membership of the Asian-Pacific Group on Money Laundering (APG) in July 2023 and should continue engagement with the APG to assess AML/CFT risks and strengthen legal framework and compliance. - Completing amendments of the Proceeds of Crime Act will establish legal status and clarify responsibility of the Financial Intelligence Unit (FIU). - These initiatives should help maintain continued CBRs; Tuvalu has joined the World Bank Pacific CBR project to mitigate risks of further loss of CBRs. - Efforts should account for the relatively low ML/TF risk environment and focus on outreach to key foreign regulatory authorities, including a corridor risk assessment. - Financial inclusion and modernization: - Continue modernizing banking services to overcome geographical barriers and improve efficiency. - Improve financial literacy and establish a reliable national digital ID system. - Create the planned centralized credit registry to improve credit risk assessment and access to credit. - Introduce risk-based loan pricing, a collateral framework, and a resolution regime to facilitate NPL recovery and efficient credit allocation. - Ensure introduction of digital services preserves financial integrity given limited supervisory capacity. ### Authorities’ views on financial sector recommendations - Authorities acknowledged the need for effective financial regulation and supervision and concurred on the importance of PFM and financial sector reforms. - Authorities support measures to improve financial stability, supervision capacity, and financial inclusion. *Source: Box 2. Downside Scenario and Contingent Policies, 1tuvea2025001-source-pdf.* ### 26. The authorities acknowledged the need to establish effective financial regulation and ### The authorities acknowledged the need to establish effective financial regulation and supervision ### Financial regulation and supervision: findings and recommendations - The financial sector is assessed as "overall stable" but effectiveness of financial supervision is hampered by "limited supervisory capacity and institutional constraints." - The financial performance of the DBT reflects its "development mandate to support remote areas and underserved population." - Authorities agreed to: - Review the streamlined prudential standards. - Strengthen financial reporting and credit risk management of all three financial institutions. - Staff recommendations: - Strengthen the legal and institutional foundations for supervision, including clarifying the statutory responsibilities of the supervisory authority and broadening its oversight to all credit-providing entities. - Timely issuance of consolidated prudential standards, enforcement of regular financial reporting, and enhanced risk monitoring. ### AML/CFT, correspondent banking relationships (CBRs), and financial inclusion - Authorities reaffirmed commitments to improving AML/CFT and enhancing financial inclusion. - Key actions underway: - Collaboration with the APG to strengthen AML/CFT requirements and elevate the role of the FIU, with a formal mutual assessment expected for 2027. - Expressed interest in participating in the Fund’s Regional Safe Payments Corridor G20 initiative to address concentration risks of CBRs. - Financial inclusion and payments modernization: - Recent progress in modernizing banking services; plan to expand ATMs and POS to outer islands. - NBT is upgrading its core banking system to improve connectivity to the international payment system. - Considering establishment of a centralized credit registry and a national ID system; progress contingent on available resources. - Staff advice: - Continue efforts to improve connectivity to the global payment system and promote financial inclusion. - Strengthen the AML/CFT legal framework, consider joining the World Bank Pacific CBR project and the Fund Safety Payment Corridor Initiative. - Further modernize financial services and enhance credit infrastructure, calibrated to Tuvalu’s supervisory capacity and risk environment. ### Structural reforms: priorities to tackle development bottlenecks and enhance growth potential - Reform priorities should be carefully prioritized given "significant capacity and financing constraints" and aligned with macroeconomic and structural conditions. - Priority areas identified: - Collaborate with local communities to develop reclaimed land to provide space for housing, infrastructure, and essential services. - Over 7.3 hectares of reclaimed land from the first phase on TCAP was handed over to the government in October 2024, and the second phase of TCAP is expected to be completed in mid-2026. - Leverage recent improvements in internet connectivity and IT to enhance access and efficiency of public services, including Telehealth and e-Learning to outer islands. - Tuvalu’s first international undersea cable (Tuvalu Vaka Cable) landed in December 2024, and Starlink internet services started in January 2025. - Ensure proper maintenance of key infrastructure assets, particularly transportation and utilities including renewable energy, to prevent pre-deterioration and enhance resilience to climate disasters and change. - Strengthen SOE governance and performance, accompanied by reviewing utility pricing to ensure cost recovery. - Explore economic diversification in higher-potential sectors, including increasing value-added content of agricultural products (such as coconut), eco-tourism, and commercial fishery. - Authorities’ views: - Developing land use policy for reclaimed land; expect improved internet connectivity to facilitate digital public service delivery. - Ongoing SOE review to identify governance and performance improvements. - Scaling up local vocational training programs to upskill the workforce. - Agreed that increasing infrastructure investments and maintenance would support diversification. ### Emigration, labor shortages, and human capital measures - Emigration has supported remittances and consumption but intensified labor shortages and capacity constraints. - Recommended multi-layered approach to mitigate emigration pressures: - Improve education access and quality to build a skilled and productive workforce. - Enhance training in occupations in demand, including healthcare, teaching, and technical vocational skills. - Implement Tuvalu’s Labor Migrants Reintegration Strategy (LMRS) to attract returning migrants and promote skill transfer. - Facilitate female labor force participation (including through affordable childcare services) to bridge significant gender gaps in labor market participation and employment and help alleviate labor shortages. - Authorities’ views: - Investing in quality education and enhancing female labor participation are seen as crucial. - Authorities are scaling up vocational training programs. ### Climate resilience, disaster preparedness, and energy transition - Enhancing resilience to climate change and natural disasters is a crucial priority (Annex II). - Recommended actions: - Continue engagement with development partners to secure climate financing and implement major climate-resilient projects as in national adaptation plans. - Further enhance disaster management through enforcement of amended building codes and use of risk maps to inform planning; strengthen community disaster preparedness. - Accelerate renewable energy production to lower energy costs, reduce external vulnerability, and enhance energy security. - Tuvalu has set a target to reach 100 percent renewable energy generation by 2030. - Currently, about 84 percent of energy generation relies on imported fossil fuels while 16 percent is from solar. - Fuel imports account for about 20 percent of GDP. - Authorities’ views: - Pursuing additional financing assistance for new phases of TCAP. - Committed to achieving 100 percent renewable energy by 2030 and anticipate that ongoing and planned solar panel projects will bring renewables closer to the target; expect transition to lower electricity cost and enhance reliability. ### Capacity development, data gaps, and statistical strengthening - IMF capacity development (CD) has supported tax administration, macroeconomic statistics, PFM, and financial sector supervision. - Data issues: - Data provided to the Fund have shortcomings that hamper surveillance (Annex VII), though there has been progress in enhancing statistics capacity and data compilation. - IMF TA assisted in revising historical national accounts data and updating estimates to 2024 based on improved source data on public corporations, government non-market production, and the consumption tax. - Recommended institutional actions: - Strengthen institutional capacity by increasing statistics personnel, improving knowledge management to address high staff turnover, and implementing IMF TA recommendations. - Authorities’ views: - Agreed with CD priorities and committed to improving economic statistics. - Aim to enhance capacity through increasing staffing and training for Tuvalu’s Central Statistics Division; welcomed continued IMF TA support. ### Staff appraisal: macroeconomic outlook, fiscal risks, and policy priorities - Near-term outlook: - Tuvalu is "gradually recovering from the COVID-19 pandemic." - Growth momentum expected to continue in the near term, supported by externally-financed projects and public spending. - Inflation has eased from its pandemic peak, in line with global commodity prices and trading partners’ inflation dynamics. - The external position in 2024 is assessed to be broadly in line with the level implied by medium-term fundamentals and desirable policies. - Risks and structural challenges: - Tuvalu faces "significant structural challenges and downside risks" due to geographic characteristics, narrow domestic production base, heavy import dependency, and external revenue reliance. - Rising emigration intensifies labor shortages and capacity constraints. - Recent trade tensions and global uncertainty increase downside risks to the outlook. - Fiscal stance and recommendations: - Fiscal policy should ensure fiscal sustainability while supporting development priorities. - Fiscal balances are expected to deteriorate over the medium term, reflecting high spending pressures and volatile fiscal revenue. - Tuvalu is assessed to remain at a "high risk of debt distress." - A multi-pronged fiscal strategy is needed to reduce fiscal deficits, increase spending for priority areas, and maintain adequate fiscal buffers. - Implementation requires revenue mobilization, expenditure rationalization, and resource reprioritization; continued improvement in public financial management is important to manage volatility and fiscal risks. - Financial sector and inclusion priorities reiterated: - Establish an effective regulatory and supervisory framework to maintain financial sector stability. - Improve access to credit constrained by limited collateral, lack of credit information, and low financial literacy. - Continue efforts to improve connectivity to global payment systems and promote financial inclusion, calibrated to supervisory capacity and risk environment. *Source: IMF staff report excerpt.* ### 43. It is recommended that the next Article IV consultation take place on the current 24- ### 43. It is recommended that the next Article IV consultation take place on the current 24-month cycle. ### The Setting in a Cross-Country Context - Tuvalu is among the least populated countries in the world. - Population and GDP per capita in 2024: - Population (In Thousand in Lhs): Tuvalu shown among regional peers (chart labels include Fiji, Solomon Islands, Vanuatu, Samoa, Kiribati, Tonga, Micronesia, Marshall Islands, Palau, Tuvalu). - GDP per capita (Thousand of US Dollars in Rhs): Tuvalu placed relative to peers (chart context only). - Share of population living in low elevated coastal zones (In Percent of Population): Tuvalu is among high shares relative to regional peers (chart labels include Kiribati, Tuvalu, Marshall Islands, Nauru, Palau, Micronesia, Fiji, Solomon Islands, Tonga, Vanuatu, Samoa, Papua New Guinea, Pacific Island countries median). - Human Development Index in 2023 (Index 0-1): Tuvalu is characterized by medium development among regional peers (chart labels include Palau, Tonga, Marshall Islands, Fiji, Samoa, Nauru, Tuvalu, Kiribati, Vanuatu, Micronesia, Solomon Islands, Papua New Guinea, Pacific Islands countries average). - Government expenditure and grants in 2024 (In Percent of GDP): The public sector, which relies on grants from development partners, dominates the economy (chart places Tuvalu at high grants share). - Remoteness and connectivity: - Overall Remoteness Index (Index 0-100): Tuvalu has the highest remoteness among listed peers. - Liner Shipping Connectivity Index in 2024 (All Countries Average = 100): Tuvalu shows the weakest connectivity to global liner shipping networks in the region. ### Recent Economic Developments (Figure 2) - Real GDP growth: - After a significant drop during the pandemic, GDP growth recovered in 2023 and remained slightly above historical average in 2024. - Real GDP growth (In Percent) series shown 2010–2024 with pre-pandemic historical average (2001-19) as reference. - Real GDP level by main sector (2019=100): Agriculture and Fishing, Construction and Real Estate, Trade, Public Administration, GDP tracked 2019–2024. - Cost of Living (CPI Level) (2019=100): Headline, Food, Housing, Others indexed 2019–2024. - Inflation: "Inflation has stabilized after the pandemic, driven by lower food prices." - Consumer price inflation (period average): - 2022: 12.2 - 2023: 7.2 - 2024: 1.2 - 2025–2030 projections: 2.1; 2.3; 2.5; 2.5; 2.5; 2.5 - Imports of goods (Value) (In Million of AUD): Chart shows categories and time series; "Imports of goods increased in 2023 after reopening." - Gross Reserves 1/ (In Percent of GDP in Lhs; and in Months of Prospective Imports in Rhs): - Defined as the sum of foreign assets of the National Bank of Tuvalu, Consolidated Investment Fund, and SDR holdings. - Reserves are estimated to remain adequate as of end-2024. - Bank loans and deposits (In Percent of GDP in Lhs; and in Percent in Rhs): "Lending growth is recovering." ### Fiscal Developments (Figure 3 and Table 2 series) - Fiscal balance dependent on grants; tax revenues, including personal income tax, have been recovering. - Fishing license revenue is moderate in 2024. The market value of the TTF has been recovering. - Tuvalu Trust Fund (TTF) market and maintained values (In Millions of Australian Dollars): - Note: Updated as of March 2024. - TTF Market Value and TTF Maintained Value shown 2013–2024; TTF Market Value (in percent of GDP, RHS) and TTF Maintained Value (in percent of GDP, RHS). - Consolidated Investment Fund (CIF): - Stock of the CIF (In Millions of Australian Dollars) and Tuvalu Trust Fund (TTF) transfers to CIF shown 2013–2024. - Note: Updated as of April 2024. - Public debt (In Millions of Australian Dollars): External debt, Domestic debt, Total debt/GDP (RHS) shown 2013–2024; "Public debt in percent of GDP has been slowly declining." Selected fiscal aggregates (Table 1; Table 2a; Table 2b) - Key country facts: - Population (2024 est.): 9,853 - Poverty rate (2017): 26 percent - Per capita GDP (2024 est.): AU$8,680 - Life expectancy (2023): 65 years - Main export: Fish - Primary school enrollment (2022, gross): 98 percent - Key export markets: Australia, Fiji, and New Zealand - Secondary school enrollment (2022, gross): 91 percent - Government finance (selected percent of GDP series, 2022–2030 projections from Table 1): - Real GDP growth 1/: -11.8 (2022), 4.0 (2023), 3.1 (2024), 3.0 (2025), 2.6 (2026), 2.7 (2027), 2.3 (2028), 2.0 (2029), 1.8 (2030) - Revenue (percent of GDP): 100.7 (2022), 154.1 (2023), 110.2 (2024), 122.9 (2025), 118.3 (2026), 114.8 (2027), 113.1 (2028), 111.7 (2029), 110.4 (2030) - Non-grants revenue: 82.0; 100.7; 82.3; 79.0; 80.6; 79.6; 78.7; 78.0; 77.4 (2022–2030) - Fishing license fees: 48.4; 57.6; 44.6; 41.6; 40.5; 39.3; 38.4; 37.6; 36.9 (2022–2030) - Grants: 18.7; 53.4; 27.8; 43.9; 37.7; 35.2; 34.4; 33.7; 33.0 (2022–2030) - Expenditure: 115.3; 138.8; 118.4; 122.3; 121.3; 119.1; 118.0; 117.2; 116.4 (2022–2030) - Expense: 104.9; 127.7; 111.3; 111.7; 109.9; 107.6; 106.6; 105.7; 105.0 (2022–2030) - Net lending/borrowing: -14.6; 15.3; -8.2; 0.6; -3.0; -4.3; -4.9; -5.5; -6.0 (2022–2030) - Net lending/borrowing excl. grants: -33.3; -38.1; -36.1; -43.3; -40.6; -39.5; -39.3; -39.2; -39.0 (2022–2030) - Domestic Current balance 2/: -71.3; -84.6; -73.6; -74.2; -69.8; -67.3; -66.2; -65.3; -64.5 (2022–2030) - Tuvalu Trust Fund (In AU$ million): 234.6 (2022); 266.5 (2023); 297.7 (2024); 288.6 (2025); 281.2 (2026); 273.7 (2027); 267.2 (2028); 261.8 (2029); 257.1 (2030) - Consolidated Investment Fund (In AU$ million): 48.1; 51.6; 42.6; 43.5; 45.9; 43.5; 41.7; 40.7; 40.0 (2022–2030) - Gross public debt (percent of GDP): 11.5; 11.0; 11.1; 7.7; 7.5; 7.4; 8.5; 11.0; 14.1 (2022–2030) - External: 6.3; 5.8; 4.2; 2.5; 2.5; 2.5; 3.9; 6.5; 9.7 (2022–2030) - Domestic and SOE debt: 5.2; 5.2; 6.9; 5.3; 5.1; 4.9; 4.7; 4.5; 4.4 (2022–2030) - Nominal GDP (In AU$ million): 78.1; 76.1; 85.5; 90.0; 94.6; 99.7; 104.7; 109.6; 114.4 (2022–2030) - Table 2a highlights detailed fiscal itemization (In millions of Australian dollars and In percent of GDP) for 2022–2030, including: - Revenue, Tax revenue, Personal income tax, Corporate income tax, Consumption tax, Nontax revenue, Fishing license fees, License fees for .TV domain, Grants, Expenditure, Expense, Wages and salaries, Goods and services purchases, Medical treatment scheme, Scholarship programs, Interest payments, Net acquisition of nonfinancial assets, Net lending/borrowing, and memorandum items: External public debt, TTF market value, Stock of CIF, Nominal GDP. ### Balance of Payments (Table 3) - Current account balance including official grants (In percent of GDP): -0.3 (2022); 40.0 (2023); 7.3 (2024); 14.9 (2025); 5.5 (2026); -0.4 (2027); -2.4 (2028); -3.9 (2029); -5.1 (2030) - Current account balance excluding official grants: -26.5; -21.5; -28.7; -37.1; -40.3; -43.7; -44.9; -45.6; -46.3 (2022–2030) - Goods and services balance: -101.6; -112.8; -107.0; -109.8; -112.7; -115.4; -116.4; -117.1; -117.5 (2022–2030) - Goods balance: -47.2; -68.9; -61.2; -61.4; -61.6; -61.9; -62.2; -62.6; -63.0 - Exports of goods, f.o.b.: 0.3; 0.6; 0.6; 0.9; 0.9; 0.9; 0.9; 0.9; 0.9 - Imports of goods, f.o.b.: 47.6; 69.4; 61.8; 62.2; 62.5; 62.8; 63.1; 63.4; 63.8 - Services balance: -54.4; -44.0; -45.8; -48.4; -51.1; -53.5; -54.2; -54.5; -54.5 - Exports of services: 3.8; 20.2; 20.4; 20.4; 20.5; 20.9; 21.3; 21.8; 22.4 - Imports of services: 58.2; 64.2; 66.2; 68.2; 71.6; 74.4; 75.5; 76.3; 77.0 - Primary income balance: 77.5; 94.7; 79.2; 73.3; 72.7; 71.6; 71.0; 70.7; 70.2 - Inflows: 78.0; 95.2; 79.7; 74.0; 73.2; 72.1; 71.5; 71.1; 70.7 - Fishing license fees: 48.4; 57.6; 44.6; 41.6; 40.5; 39.3; 38.4; 37.6; 36.9 - Secondary income balance: 23.8; 58.1; 35.0; 51.3; 45.5; 43.4; 43.0; 42.6; 42.2 - Official inflows: 28.5; 64.1; 38.6; 54.9; 49.1; 47.0; 46.5; 46.1; 45.8 - Grants on budget (component of official inflows): 18.7; 53.4; 27.8; 43.9; 37.7; 35.2; 34.4; 33.7; 33.0 - Private inflows (including remittances): private inflows and remittances series provided. - Capital account balance: 10.6; 3.4; 6.0; 10.7; 11.2; 11.6; 12.2; 12.7; 13.3 - Net lending/borrowing (Current+Capital accounts): 10.3; 43.4; 13.3; 25.6; 16.7; 11.2; 9.8; 8.9; 8.1 - Financial account balance (assets - liabilities): 29.9; 22.2; 32.2; 4.3; 10.9; 11.2; 9.5; 7.8; 6.8 - Gross official reserves 2/ (In AU$ million): - 111.7 (2022); 123.7 (2023); 105.8 (2024); 127.8 (2025); 137.5 (2026); 137.5 (2027); 138.0 (2028); 139.2 (2029); 140.7 (2030) - In months of imports of goods and services: 13.2; 13.6; 10.8; 12.1; 12.1; 11.4; 10.8; 10.4; 10.1 - Defined as sum of foreign assets of the National Bank of Tuvalu, the Consolidated Investment Fund, and SDR holdings. ### Financial Soundness Indicators (Table 4) - Capital Adequacy (based on NBT and DBT data only, selected series): - Capital to Risk Weighted Assets (CAR) 2/: 168.7 (2019); 169.8 (2020); 159.6 (2021); 164.3 (2022); 138.4 (2023); 119.4 (2024) - Capital to Deposits: 33.5; 18.7; 23.7; 25.7; 36.4; 35.8 (2019–2024) - Capital to Total Assets: 24.9; 15.6; 18.9; 20.3; 26.4; 25.7 (2019–2024) - Asset Quality (based on NBT data only): - Gross NPLs to Gross Loans 3/: 32.6; 33.2; 29.4; 24.8; 21.2; 21.2 (2019–2024) - Provisions to NPLs 3/: 173.5; 195.1; 215.9; 208.7; 198.4; 153.5 (2019–2024) - Provisions to Gross Loans: 31.9; 32.9; 31.1; 26.3; 22.3; 22.2 (2019–2024) - Earnings & Profitability (based on NBT data only): - Return on Equity (ROE): 16.1; 19.9; 24.3; 19.8; 12.5; 17.4 (2019–2024) - Return on Assets (ROA): 3.9; 3.0; 4.5; 4.0; 3.3; 4.5 (2019–2024) - Interest margin to gross income: 22.3; 19.5; 20.1; 20.4; 35.7; 41.4 (2019–2024) - Non-interest expenses to gross income: 42.6; 40.5; 40.2; 31.0; 37.4; 30.6 (2019–2024) - Liquidity (based on NBT and DBT data only): - Liquid Assets to Total Assets: 81.5; 88.2; 84.3; 83.6; 68.7; 45.2 (2019–2024) - Liquid Assets to Total Deposits: 109.8; 105.3; 105.7; 106.0; 94.7; 62.9 (2019–2024) - Total Loans to Total Deposits: 27.3; 15.3; 19.8; 19.5; 28.4; 23.7 (2019–2024) - Credit annual growth rate (includes lending by TNPF): - (6.9) (2019); 2.6 (2020); 10.6 (2021); 20.3 (2022); 16.2 (2023); 7.8 (2024) - In percent of GDP: 27.9; 29.0; 29.9; 37.7; 45.0; 43.1 (2019–2024) *International Monetary Fund, Tuvalu — selected tables and figures from the source PDF.* ### Annex I. Country Engagement Strategy ### Annex I. Country Engagement Strategy ### A. Fragility of Tuvalu and Its Drivers - Tuvalu is one of the smallest and most remote countries in the world with high economic and environmental vulnerability. - Comprises three reef islands and six coral atolls scattered over 500,000 km2 of the western Pacific Ocean. - Total land area is 26 km2 (fourth smallest country by land area). - Population of around 10,000 people. - Categorized as a Middle-Income Country based on income per capita (US$ 6,830) and one of the 44 Least Developed Countries designated by the United Nations. - Characterized by the World Bank as a Fragile and Conflict-Affected State (FCS) due to institutional and social fragility. - Key fragility drivers and implications for economic outcomes: - Small size and lack of economies of scale: - Narrow domestic production base and limited space for development. - Highly dependent on imports, with imports of goods and services above 100 percent of GDP. - Economy dominated by the public sector; fiscal revenue heavily reliant on volatile external sources such as fishing license fees and grants. - Remoteness and limited connectivity: - About 4,000 km from Australia and over 1,000 km from Fiji. - Geographical isolation, logistical disadvantages, and high import dependence (including food and fuel) expose Tuvalu to international price shocks and shipping disruptions, raising cost of living and challenging food and energy security. - Natural disasters and climate change risks: - Average elevation about 2 meters above sea level; highest point less than 5 meters. - Most of the population lives on land less than one meter above sea level. - Vulnerable to cyclones, storm surges, and frequent high tides causing significant economic and social damage. - Weak institutional and technical capacity: - Political stability exists, but structural challenges arise from a small labor force, limited human capital, and outward emigration. - Capacity constraints hamper administrative efficiency, service delivery, and policy and reform implementation. ### B. Constraints to Reform and Policies to Address the Sources of Fragility - Constraints: - Geography, weak institutional capacity, and limited financial resources hinder effective delivery of public services, implementation of economic policies and reforms, and investment to improve infrastructure and climate resilience. - Policy priorities to address fragility: - Enhancing fiscal sustainability and strengthening public financial management (PFM): - Revenue mobilization, strengthening tax compliance, rationalizing current spending, and reorienting resources to development needs. - Improving PFM to enhance transparency, accountability, and efficiency and support access to climate financing. - Establishing effective financial oversight while supporting connectivity to the global payment system: - Establish financial regulatory and supervisory frameworks to enhance financial stability. - Modernize banking services (introducing ATMs, bank cards, and online banking) to overcome geographic barriers and promote financial inclusion. - Strengthen the AML/CFT framework to support correspondent banking relationships. - Promoting growth through improving infrastructure and economic diversification: - Priorities: upgrading transport infrastructure and internet connectivity. - Diversification into sectors with higher potential, including agricultural products (such as coconut), eco-tourism, and commercial fishery. - Enhancing human capital: - Improve efficiency of education, enhance vocational training and skills development, promote labor participation, attract returning migrants, and enhance skill transfer to address labor shortages and capacity issues. - Strengthening climate adaptation and resilience to natural disasters: - Continue working with development partners to secure climate financing and implement major climate-resilient projects. - Enhance disaster risk preparedness and management through risk maps, enforcing amended building codes, and improving coordination for disaster response, relief, and recovery operations. ### C. Fund Engagement, Capacity Development Priorities, and Cooperation with Development Partners - Recent Fund engagement: - Focus on surveillance and capacity development (CD) via Article IV consultations and regular staff visits. - Major IMF recommendations: build fiscal buffers and enhance fiscal sustainability; advance PFM reforms to access climate finance; strengthen financial regulation; deepen structural reforms for climate resilience and growth. - Fund Technical Assistance (TA) delivered mainly by the Pacific Financial Technical Assistance Centre (PFTAC) and focused missions from Fund headquarters. - Capacity development principles and recent CD areas: - Effective CD delivery benefits from multi-year planning, early and close engagement with authorities, and tailoring TA to limited capacity. - Recent CD activities and priorities: - Revenue mobilization and tax administration: assistance to improve revenue compliance management and modernize tax administration systems. - Public Financial Management: AgilePEFA assessment undertaken; PFTAC assisting in formulating a PFM roadmap to coordinate development partner support. - Financial sector supervision: TA on establishing regulatory framework and prudential standards; ongoing assistance to improve oversight and prudential supervision. - Macroeconomic Analysis/Modelling: development of a Macro-Fiscal Model for analyzing real and fiscal sector trends and planned further training on macroeconomic modeling. - Macroeconomic statistics: support to produce data on national accounts, the external sector, and government financial statistics. - Cooperation with development partners: - Close coordination with the World Bank, Asian Development Bank (ADB), United Nations agencies, the European Union, and bilateral partners is essential. - Collaboration with partners, particularly those with permanent local presence, can enhance resource efficiency, foster synergies, and ensure coordinated responses to fragility drivers. - Risks to achievement and sustainability of Fund engagement: - High vulnerability to external shocks, including climate-related disasters and volatile global commodity prices, could affect macroeconomic stability and strain public finances. - Frequent turnover of government officials and weak institutional and technical capacity may hinder policy implementation and slow economic reforms. *Prepared by IMF staff as described in the source content.* ### 2. Australia and Fiji are the two largest source countries of Tuvalu’s imports. Around 50 ### 2. Australia and Fiji are the two largest source countries of Tuvalu’s imports. Around 50 ### Trade and import partner structure - Around 50 percent of Tuvalu’s imports are from Australia and Fiji, reflecting Tuvalu’s geographic location and economic connection with the two countries. - Fiji traditionally had the highest share in Tuvalu’s imports, but Australia’s share has increased since the late 2010s and Australia has become Tuvalu’s largest import partner in recent years. - With the entry into force of the Falepili Union between Tuvalu and Australia in August 2024, Australia’s share in Tuvalu’s imports could increase further going forward. ### Inflation transmission and drivers - Tuvalu’s inflation movements are highly correlated with those of Australia and Fiji. - Shipping costs (transportation costs) significantly influence Tuvalu’s inflation because Tuvalu is a remote island country. - Empirical estimates (staff analysis) for a one percentage point rise in partner inflation: - Change in Australia’s inflation → Tuvalu’s inflation: around 0.7-0.8 percentage-points increase with one-quarter lag. - Change in Fiji’s inflation → Tuvalu’s inflation: around 0.2 percentage-points increase with one-quarter lag. - The higher coefficient for Australia’s inflation likely reflects: - Australia’s higher share in Tuvalu’s imports. - The use of the Australian dollar as legal tender in Tuvalu. - Import bottlenecks due to shipping restrictions during the COVID-19 pandemic accelerated Tuvaluan inflation: - Including a COVID-19 pandemic dummy (representing shipping restrictions in 2020-22) indicates shipment restrictions are estimated to have accelerated inflation by over 1 percentage point. - Global supply chain tightening also caused inflationary pressures on Tuvalu. ### Regression evidence on Tuvalu inflation (summary of estimation) - Estimation methodology: OLS; Dependent variable: Inflation in Tuvalu; Sample period: 2000-24; Data frequency: Quarterly. - Key coefficient estimates (selected models): - Inflation in Tuvalu (-1): 0.80***, 0.87***, 0.79***, 0.82***, 0.88***, 0.80*** (standard errors reported in source). - Change in inflation in Australia (-1): 0.96***, 0.81***, 0.82***, 0.86***, 0.72***, 0.74***. - Change in inflation in Fiji (-1): 0.25**, 0.25**, 0.23** (in applicable models). - COVID-19 pandemic dummy: 1.23*, 1.11* (in models including dummy). - Global Supply Chain Pressure Index: 0.38*, 0.34* (in models including index). - Observations reported across models: 92, 92, 92, 91, 91, 91. - Adjusted R-squared in reported models: 0.71, 0.70, 0.72, 0.72, 0.71, 0.73. - Note: The annex states that demand-side data limitations mean the regression only includes supply-side variables; adjusted R-squared around 0.7 implies demand-side factors (including fiscal policy) might contribute up to 30 percent of Tuvalu’s inflation dynamics. ### External sector outcomes and trajectory (key statistics) - Current Account (CA): - CA in 2024: surplus of 7.3 percent of GDP. - CA projected for 2025: surplus of 14.9 percent of GDP (driven by a rebound in grants). - Assessment: EBA-lite CA model indicates adjusted CA for 2024 was 9.0 percent of GDP and the CA norm was 9.3 percent of GDP → CA gap in 2024: -0.3 percent of GDP. The CA is expected to deteriorate and turn to deficits in the medium term as imports recover and fishing revenue and grants decline. - Net International Investment Position (NIIP) and balance-sheet: - NIIP at end-2024: 514 percent of GDP. - Gross Assets: 529 percent of GDP. - Debt Assets: 2 percent of GDP. - Gross Liabilities: 15 percent of GDP. - Debt Liabilities: 15 percent of GDP. - Tuvalu Trust Fund (TTF) represents around half of the gross assets. - Capital and financial accounts: - Capital account in 2024: 6.0 percent of GDP (mainly government grants and contributions to the TTF). - Financial account surplus in 2024: 32.2 percent of GDP (mainly driven by portfolio investment). - Tuvalu receives virtually no FDI inflows or outflows. - Real Effective Exchange Rate (REER) and related assessments: - REER in 2024: depreciated by 1.6 percent and reached 11 percent (below its two-decade average). - CA elasticity to REER in the CA model: -0.4. - EBA-lite CA model indicates the REER in 2024 was overvalued by 0.9 percent relative to the exchange rate implied by its CA gap. - Reserves and FX: - Gross official reserves by end-2024: USD 69.9 million. - Import coverage at end-2024: 10.8 months of prospective imports. - Reserve coverage assessed as sufficient in 2024, above the recommended adequate level for Tuvalu (around 10-12 months of imports). - Reserve coverage expected to decrease gradually to 10 months of imports in the medium term. ### Policy implications and recommended responses - Fiscal and external balance management: - Fiscal consolidation will be needed to increase net external savings and address expected CA deterioration. - Continue to pursue grant financing and highly concessional loans to reduce pressures on debt accumulation. - Save excess fishing revenue and implement the medium-term fiscal framework to build buffers. - Structural and competitiveness policies: - Focus on improving structural obstacles to greater international competitiveness and reducing dependency on volatile inflows from grants and fishing licenses. - Structural reforms to develop the private sector and facilitate FDI to broaden external inflows. - Implement infrastructure projects to improve transport connectivity and resilience to climate events. - Reserve and buffer management: - Increase buffers by saving transfers from the TTF to the Consolidated Investment Fund (CIF). - Ensure the minimum balance target of the CIF is maintained. - Maintain adequate import coverage to preserve space for countercyclical macroeconomic policies and to absorb international shocks. - Financial sector and risk mitigation: - Strengthen regulation and supervision of banks; advance SOE reforms to reduce contingent liabilities. - Strengthen cyber infrastructure and regulatory frameworks to combat cybercrimes. - Seek expansion of correspondent banking relationships (CBR) with assistance from development partners and improve AML/CFT framework and supervision. ### Key risks, expected impacts, and priority policy responses (highlights) - Global and commodity risks: - Trade policy and investment shocks (Relative Likelihood: High) → Medium expected impact; policy responses include supporting small-scale food production, improving transport connectivity, and targeted support for vulnerable groups. - Commodity price volatility (Relative Likelihood: Medium) → High expected impact on inflation and the current account; policy responses include supporting domestic food production, improving connectivity, and targeted support for vulnerable groups. - Deepening geo-economic fragmentation (Relative Likelihood: High) → Medium expected impact; policy responses include seeking diversification, strengthening fiscal buffers, and supporting domestic food production. - Tighter financial conditions and systemic instability (Relative Likelihood: Medium) → Medium expected impact; policy responses include increasing buffers and maintaining CIF minimum balance. - Cyberthreats (Relative Likelihood: High) → High expected impact; policy responses include strengthening cyber infrastructure and awareness. - Domestic risks: - Loss of Correspondent Banking Relationship (CBR) (Relative Likelihood: High) → High expected impact; policy responses include seeking an expansion of CBRs and improving AML/CFT framework and supervision. - Heavy reliance on volatile fishing revenues and uncertain grant flows (Relative Likelihood: High) → High expected impact; policy responses include saving excess fishing revenue, broadening revenue base, and fiscal consolidation. - Poor SOE and bank performance (Relative Likelihood: High) → High expected impact; policy responses include improving supervision and advancing SOE reforms. - Acceleration of outward migration (Relative Likelihood: High) → High expected impact; policy responses include building skilled workforce and reintegration programs for returnee migrants. *Source: IMF staff estimates and analysis in the provided content.* ### Annex VII. Data Issues ### Annex VII. Data Issues ### Data Provision and Timeliness - Table of Common Indicators Required for Surveillance for Tuvalu (As of June 30, 2025) documents frequencies and timeliness using codes: “D” daily; “W” weekly; “M” monthly; “Q” quarterly; “A” annual; "SA" semiannual; "I" irregular; "NA" not available or not applicable; "NLT" not later than. - Notes: Tuvalu does not have a central bank and uses the Australian dollar as legal tender; official reserves are calculated as the sum of foreign assets of National Bank of Tuvalu and the Consolidated Investment Fund and SDR holdings. - Data source references: Summary of Observance for SDDS and SDDS Plus participants, and Summary of Dissemination Practices for e-GDDS participants, available from the IMF Dissemination Standards Bulletin Board. ### Fund Relations and Membership - Membership: Joined June 24, 2010; Article VIII. - Quota and holdings (SDR Million and % Quota): - Quota: 2.50 100.00 - Fund holdings of currency (Exchange Rate): 1.89 75.72 - Reserve Tranche Position: 0.61 24.32 - SDR Department: - Net cumulative allocation: 4.08 100.00 - Holdings: 3.47 85.04 - Outstanding Purchases and Loans: None. - Financial Arrangements: None. - Overdue Obligations and Projected Payments (SDR Million; forthcoming): - Charges/Interest: 0.01 (2025), 0.02 (2026), 0.02 (2027), 0.02 (2028), 0.02 (2029) - Total: 0.01 0.02 0.02 0.02 0.02 - Exchange rate arrangements: Legal tender is the Australian dollar; no central monetary institution; National Bank of Tuvalu (NBT) is the only commercial bank handling foreign exchange transactions. - Article IV Consultation: Previous discussions held in April 2023; staff report discussed by the Executive Board on July 10, 2023; Tuvalu is on a 24-month consultation cycle. ### Technical Assistance and Resident Representation - PFTAC technical assistance: - FY2024: 29 TA days. - FY2025: 180 TA days. - FY2026 workplan: 126 TA days planned. - FY2026 priorities include: - (i) follow up on the enhancement of prudential and risk management standard and review off-site financial risks analysis, - (ii) update GDP compilation and improve used methods and data sources, - (iii) implement quarterly budget execution reporting, - (iv) improve tax audits and revenue administration, implement and enhance compliance improvement strategy, and manage large taxpayers. - Resident Representative Office for Pacific Islands based in Suva, Fiji; opened September 13, 2010; covers Fiji, Kiribati, Marshall Islands, Micronesia, Nauru, Palau, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu. Mr. Neil Saker is the current resident representative. ### Debt Sustainability Analysis (Joint Bank-Fund DSA) - Risk ratings: - Risk of External Debt Distress: High - Overall Risk of Debt Distress: High - Granularity: Sustainable - Application of Judgement: Yes (projection horizon extended to 20 years to capture impact of natural disasters and climate change) - Rationale and assumptions: - Projection horizon extended to 20 years; mechanical rating moderate for first 10 years as no debt burden indicators breach thresholds under baseline, but PV of external and public debt-to-GDP ratios breach thresholds under stress tests. - Long-run projections show ratios breaching thresholds under the baseline, leading to final high risk. - Assessment assumes continued access to external budget support on concessional terms, low debt service ratios, and some cash buffers in the Consolidated Investment Fund (CIF). - Key risks: elevated current spending, high reliance on volatile fishing revenues and grants, natural disaster risk. - Policy implications highlighted: - Reining in fiscal deficits, - Improving public financial management, - Implementing structural reforms, - Ensuring good cooperation with donors and securing grants for development needs and climate adaptation. ### Public Debt Coverage and Reporting - Debt coverage in DSA: budgetary central government and SOEs; SOE debt included in baseline because corporations are wholly owned by the government. - Notes: - Tuvalu does not compile government finance statistics at general government level; local governments’ revenue and expenditure estimated below 5 percent of budgetary central government. - Domestic debt data sourced from National Bank of Tuvalu (NBT). - Last guaranteed loan settled in 2018; no new guarantees since then. - Improvements in debt reporting: - 2024/25 budget document includes a dedicated public debt section with creditors, currency composition, maturity structure, and debt service schedule; states no publicly guaranteed debt. - Fiscal Risk Report published and debt reporting heat map improved in 2024. - Ministerial Order on Public Enterprise Monitoring Reporting issued in 2025 with simplified SOE reporting standards. - Contingent liabilities stress test design: - SOE debt shock reduced to 0 percent of GDP (government-guaranteed and non-guaranteed debt captured in baseline). - PPP shock set to 0 (no PPPs in Tuvalu). - Financial market shock default value used: 5 percent of GDP. - Total contingent liabilities test: 5.0 percent of GDP. ### Background on Debt and Assets - Country context: - Tuvalu estimated GDP around US$65 million and population of 9,853 in 2024. - Main income sources: fishing license fees, dot TV internet domain licenses, trust fund investments, foreign aid, remittances. - High climate-change vulnerability; climate adaptation need estimated to be more than 30 percent of GDP (staff estimates based on WB CCDR). - Public funds and assets: - Tuvalu Trust Fund (TTF) market value nearly 300 percent of GDP but was below maintained value over past three years leading to restricted drawdowns. - Consolidated Investment Fund (CIF) around 40 percent of GDP; drawdowns restricted to portion above 16 percent of the TTF maintained value. - Tuvalu Survival Fund and Tuvalu Development Fund worth slightly above 10 and 20 percent of GDP respectively at end-2024. - Constraints on usable asset portions may be binding if TTF market value remains below maintained value. ### Public Debt Levels and Composition (end-2024) - Total public debt as of end-2024: 11.1 percent of GDP. - In millions of AUS$ (annual series): - Government debt to ADB (SDR): 2021 3.5, 2022 2.9, 2023 2.7, 2024 2.5 - Government debt to ICDF (US$): 2021 2.4, 2022 2.0, 2023 1.7, 2024 1.1 - Public debt to NBT (AUS$): 2021 2.8, 2022 4.1, 2023 4.0, 2024 5.9 - Total (AUS$): 2021 8.7, 2022 9.0, 2023 8.4, 2024 9.5 - In percent of GDP: - Government debt to ADB (SDR): 2021 4.3, 2022 3.7, 2023 3.6, 2024 2.9 - Government debt to ICDF (US$): 2021 2.9, 2022 2.6, 2023 2.2, 2024 1.3 - Public debt to NBT (AUS$): 2021 3.4, 2022 5.2, 2023 5.2, 2024 6.9 - Total: 2021 10.6, 2022 11.5, 2023 11.0, 2024 11.1 ### Baseline Macroeconomic Assumptions and Projections (selected) - Growth and inflation: - Real GDP growth: 2024 3.1 percent; projected 2025 3.0 percent; 2026 2.6 percent; projection average 2025-2035 2.5 percent. - GDP deflator growth: 2024 9.0 percent; 2025 2.2 percent; projection average 2025-2035 2.5 percent. - Inflation projected to converge to trading partners’ inflation at 2.5 percent over the medium term. - Fiscal aggregates (percent of GDP): - Revenue: 2024 110.3, 2025 123.3, projection average 2025-2035 112.8 - Primary expenditure: 2024 118.3, 2025 122.0, projection average 2025-2035 117.6 - Primary fiscal balance: 2024 -8.0, 2025 1.3, projection average 2025-2035 -4.8 - External sector (percent of GDP): - Imports: 2024 128.0, 2025 131.0, projection average 2025-2035 138.7 - Exports (incl. fishing licenses): 2024 65.6, 2025 62.9, projection average 2025-2035 10.7 - Current account: 2024 7.3, 2025 14.9, projection average 2025-2035 -2.2 - Narrative assumptions: - 2025 growth driven by externally financed infrastructure projects in construction and increased public spending. - Growth expected to moderate below 2 percent over the long term due to low capital investment, sluggish TFP growth, weak competitiveness, adverse climate events, and emigration pressures. - Fiscal balances projected to be around -6 percent of GDP going forward (Net lending/borrowing projection reference). *Source: Annex VII. Data Issues, Tuvalu Staff Report for the 2025 Article IV Consultation (As of June 30, 2025).* ### 2030. Although Tuvalu is expected to continue to receive sizable grants in the forecast horizon, ### 2030. Although Tuvalu is expected to continue to receive sizable grants in the forecast horizon, ### Fiscal projections and composition - Grants are expected to continue but "the amount in percent of GDP is projected to gradually decline over the medium term due to uncertainty surrounding donor commitments." - Fishing license fees are projected to "grow at a slower pace than GDP," reflecting historical levels and uncertain weather patterns. - Spending profiles: - "Purchase of goods and services and Tuvalu Overseas Medical Referral Scheme (TOMRS) are projected to decline gradually from the high levels during the pandemic." - "Expenditure on compensation of employees and government programs like scholarships is projected to remain elevated." - Capital investment: - "Capital investment is projected to remain close to 12 percent in the long term, supporting development goals and climate resilience." - Compared to the 2023 DSA: - "Both revenue and expenditure are revised upward in the near term, reflecting higher projected grants and budget allocations, but remain similar in the long run." ### Balance of payments - "The current account is estimated to remain in surplus in 2024, following a sizable surplus in 2023, reflecting the dynamics of fishing license fees and grants." - Medium term: "the current account is projected to develop a moderate deficit, in line with developments in the fiscal balances." - External flows: - "Exports of goods and services (including fishing licenses) are projected to remain stable." - "Imports are projected to remain elevated due to the ongoing infrastructure investment." - "Foreign direct investment is projected to remain limited." - Compared to the 2023 DSA: "the current account balance is revised upward in the near term, reflecting the large surplus in 2023, but remains similar in the long run." ### Government borrowing and TTF/CIF mechanics - Financing of deficits: - "The government is projected to fund fiscal deficits with transfers from the CIF first, subject to the existing rule of leaving at least 16 percent of the TTF maintained value in the CIF." - TTF assumed performance: - "The TTF market value is projected to grow at 1 percent above Australia’s inflation rate, generating a modest return to finance a part of the projected deficits." - When CIF transfers are insufficient: - "The authorities are projected to borrow externally on concessional terms from multilateral institutions, with 1.5 percent interest and 32 years of maturity after 8 years of grace period." - Policy constraint: "The government is adhering to zero non-concessional borrowing, as per the IDA Sustainable Development Financing Policy (SDFP)." - Note on terms alignment: "The terms are in line with the loans from the ADB." ### Realism checks, drivers of debt dynamics, and growth prospects - "Realism tools suggest that projections are reasonable (Figures 3 and 4)." - Public and external debt paths "are projected to rise at a similar pace as in the 2023 DSA, but the year when debt ratios start to increase is delayed." - "The current account, which is highly volatile in a small fragile economy like Tuvalu, is the main component behind unexpected changes in external debt dynamics." - Large residuals in public debt explained by "the financing of the deficit by the CIF." - Growth and fiscal balance relationships: - "GDP growth and fiscal balance may not always be linked mechanically due to a large share of off-budget investment projects in the former and a large share of non-tax external revenue sources in the latter, such as grants and fishing license fees." - Long-run growth constraints: "remoteness... low access to credit, the dominance of the public sector, and weak private sector growth." - "The rebound of government investment is projected to be modest due to capacity constraints, and on a more realistic path than in the previous DSA given the recent data points." - "Real GDP growth is expected to be driven by donor-financed projects outside of the government budget." ### Country classification and stress-test framework - Debt-carrying capacity classification: "weak." - Composite Indicator (CI): "The Composite Indicator (CI) stands at 2.58, indicating that the country’s debt-carrying capacity is weak in the LIC-DSA framework." - CI score comparison: "The CI score remains similar to the 2023 DSA." - Debt thresholds for "weak" classification: - "PV of public debt-to-GDP ratio" threshold: 35 percent - "debt-to-export ratio" threshold: 140 percent - "debt-service-to-export ratio" threshold: 10 percent - "debt-service-to-revenue ratio" threshold: 14 percent - Tailored stress tests included: - Contingent liabilities (combined stress test described earlier). - Natural disaster: calibrated as "a one-time 30 percent of GDP shock to the external debt-to-GDP ratio, a one-off 2 percentage points decline in real GDP growth, and a standard 3.5 percentage points shock on export growth." This is "customized in line with the impact of Cyclone Pam in 2015, as done in 2023 DSA." - Commodity prices: triggered "since commodity exports exceed 50 percent of total exports over the previous three-year period." Calibration "corresponds to default values generated by the DSA template." ### Debt sustainability—Baseline scenario findings - Risk ratings: "Tuvalu’s risk ratings for both external and public debt indicate a high risk of debt distress in the long term." - Projection horizon extended: "The projection horizons have been extended to 20 years, beyond the standard 10 years, to account for Tuvalu’s vulnerability to natural disasters, the effects of climate change, and emigration pressure on debt dynamics." - Timing of threshold breaches: - "Public and external debt-to-GDP ratios are projected to breach the relevant threshold by 2039 and 2038, respectively." - "Under the baseline scenario, the PVs of both the external and public debt breach their debt-to-GDP thresholds within the first 20 years but not within the standard 10-year horizon." - Debt service indicators: "As a result, the debt service-to-revenue ratio remains below the 14 percent of the revenues-to-GDP threshold." - Domestic debt: "projected to remain low and fall over time." - "The government is projected to borrow around 1 percent of GDP over the forecast horizon for liquidity management." - SOEs "are projected to pay down their loans." - All borrowing assumption: "All borrowing is external... Borrowing is assumed to be conducted on concessional terms over the entire forecast horizon." - Stress-test sensitivities: "debt ratios are highly sensitive to exports, natural disasters, and commodity price shocks." - "The PV of the external debt-to-GDP ratio can rise above the threshold of 30 percent by 2027 and remain above that level for the remainder of the projection period." - "Debt service levels... would remain below the 14 percent threshold due to current low debt levels and concessional terms for new debt." - "A standard export shock results in a large increase in debt-to-exports and debt-service-to-exports ratios, crossing the relevant thresholds in 2035 and 2042, respectively." - "A standard commodity price shock would lead the PV of the public-debt-to-GDP ratio to rise above 35 percent by 2028 due to the high dependence on imported fuel." - "External debt-service-to-revenue ratio remains below the 14 percent threshold under most extreme shocks." - Footnote on debt service increase: "The increase in debt service in 2036 reflects the expiry of the grace period of the foreign financing." ### Alternative scenarios and their implications - Consolidation scenario: - Targets assumed: keep "expense-to-GDP ratio below 60 percent," "staffing to non-grant revenue below 40 percent," "TOMRS to non-grant revenue below 6 percent," "scholarship to non-grant revenue below 5 percent," "tax revenue to GDP above 20 percent," and "capital expenditure to GDP above 30 percent." - If fiscal variables gradually approach these targets: "Such gradual consolidation could realistically contain the PV of external debt to GDP below the threshold of 30 percent." - Strong TTF returns: - Baseline: "performance of the TTF is 1 percent above Australian CPI inflation." - Alternative: "If the TTF return is 2 percent higher than the baseline in each year of the projection horizon, i.e., 3 percent higher than Australian CPI inflation, the PV of external debt to GDP will stay below the threshold until 2045." - Fishing license revenue shock: - Scenario: "fishing license revenue falls from 38 to 35 percent of GDP to reflect climate shocks that could affect tuna stocks from 2031." - Impact: "The shock would worsen the PV of external debt to GDP to 80 percent by 2045, crossing the threshold by 2037." - Natural disaster: - Scenario: "a natural disaster shock similar to the 2015 Cyclone Pam hitting the country in 2026, reducing GDP by 30 percent." - Impact: "Such a permanent shock on the level of GDP would cause the PV of external debt to GDP to breach the threshold by 2037." ### Risk rating, vulnerabilities, and policy implications - Overall assessment: "Tuvalu remains at high risk of debt distress, similar to the conclusion of the 2023 DSA." - Drivers of high risk: "persistent fiscal deficits due to elevated current spending and the need to maintain infrastructure spending while fishing revenues and grants do not grow fast enough to offset growth in expenditures." - Climate adaptation needs: "The annual climate adaptation needs are estimated to amount to more than 30 percent of GDP." - Implication for borrowing: "Due to the weak performance of the TTF, projected deficits would entail an increase in concessional debt as soon as 2026." - Policy priorities highlighted: - "Rationalizing expenses and mobilizing domestic revenue to lower the risk of debt distress while creating a fiscal buffer and extending climate adaptation efforts." - Sustainability nuance: "Despite the risk rating, debt is assessed as sustainable, given concessional sources and low debt service burden." - Rationale: "all debt is on concessional terms, and debt service indicators remain well below their relevant thresholds." - Timing note: "the PV of the debt-to-GDP threshold is only breached after more than 10 years." - Uncertainty caveat: "Projections for a 20-year period are inherently uncertain, especially in the case where data quality is low, suggesting further down weighting is appropriate for far-off horizons when assessing sustainability." ### Authorities’ views - Agreement with assessment: "The authorities agreed with the DSA assessment." - Key concerns and positions: - "The long-run risks associated with natural disasters and climate change, including the impact on fishing license fees, pose significant risks to debt sustainability." - "No new external debt has been taken on since 2019 and overall external debt has been decreasing in recent years." - Authorities "agreed on the need for fiscal adjustment to support fiscal sustainability." - They "emphasized the importance of sustained support from development partners to meet climate resilience and development goals while ensuring debt sustainability." *Source: TUVALU — INTERNATIONAL MONETARY FUND (excerpt from provided content).* ### 20. In addition, the authorities noted that, to mitigate risks, they do not plan to incur any new ### Tuvalu: Selected Findings, Projections, and Policy Actions (excerpts) ### Debt, Fiscal Risks, and Public Enterprises - Authorities do not plan to incur any new non-concessional external debt over the short- to medium-term in line with the IDA Sustainable Development Financing Policy (SDFP) for FY25. - The authorities published the Fiscal Risk Reports in 2024 and 2025, which identified key fiscal risks and outlined mitigation strategies. - Considering significantly lagging auditing of SOEs’ financial reports, the authorities issued a Ministerial Order on Public Enterprise Monitoring Reporting, setting simplified reporting standards for monitoring public enterprises’ finances — the second FY25 Performance and Policy Action under SDFP. - The authorities agreed to publish the first public enterprise brief report based on the Ministerial Order. - Institutionalizing the use of a simplified reporting template is identified as critical to enhance fiscal transparency of public enterprises and ensure consistent publication of the annual fiscal risk reports. ### Debt Projections and Stress Tests (selected indicators, exact figures preserved) - External debt (nominal, percent of GDP): 2025: 3.8; 2029: 7.6; 2030: 10.8; 2035: 32.0; 2045: 95.9. - Of which: public and publicly guaranteed (PPG) follows same series as external debt (nominal). - Change in external debt (percent of GDP): 2025: -0.4; 2026: -0.1; 2027: 0.0; 2028: 1.3; 2029: 2.6; 2030: 3.1; 2035: 5.0; 2045: 7.3. - Identified net debt-creating flows (percent of GDP): 2025: -15.0; 2026: -5.6; 2027: 0.3; 2028: 2.3; 2029: 3.8; 2030: 5.0; 2035: 7.1; 2045: 9.4. - Gross external financing need (Million of U.S. dollars): 2025: 0.5; 2026: -19.9; 2027: -3.8; 2028: -8.3; 2029: -3.1; 2030: 0.4; 2031: 1.7; 2032: 2.7; 2033: 3.8; 2035: 6.5; 2045: 14.9. - PV of PPG external debt-to-GDP ratio (selected years): 2029: 2.7; 2030: 4.2; 2035: 19.1; 2045: 61.8. - PV of PPG external debt-to-exports ratio (selected years): 2029: 4.4; 2030: 6.9; 2035: 31.7; 2045: 102.6. - PPG debt service-to-exports ratio (selected years): 2025: 0.5; 2035: 0.8; 2045: 3.9. - Public sector debt (percent of GDP): 2025: 9.0; 2029: 12.1; 2030: 15.1; 2035: 35.8; 2045: 98.9. - PV of public debt-to-GDP ratio (selected years): 2029: 7.3; 2030: 7.0; 2035: 22.9; 2045: 64.7. - Debt service-to-revenue and grants ratio (selected year): 2035: 0.8. - The public DSA allows for domestic financing to cover additional financing needs generated by shocks under the stress tests. Default terms of marginal debt are based on baseline 10-year projections. ### Macroeconomic Outlook and Key Assumptions - Real GDP growth: 2025: 3.0 percent; 2026: 2.6 percent; medium term expected to moderate to below 2 percent. - Real GDP growth (table, broader): 2022: -11.8; 2023: 4.0; 2024: 3.1; 2025: 3.0; 2026: 2.6; 2027: 2.7; 2028: 2.3; 2029: 2.0; 2030: 1.8; 2035: 1.5; 2045: 1.5. - Inflation (GDP deflator in US dollar terms, change in percent): 2025 projected to rise gradually to 2.5 percent; table shows 2025: -2.7; 2026: 1.8; 2027: 1.9; 2028: 2.2; 2029: 2.3; 2030: 2.6; 2035: 2.5; 2045: 2.5. - Effective interest rate (percent): 2025: 1.0; 2026: 1.0; 2027: 1.0; 2028: 1.0; 2029: 1.2; 2030: 1.3; 2035: 1.5; average projections also given. - Growth of exports of G&S (US dollar terms, in percent): 2025: -3.9; 2026: 2.8; 2027: 3.5; 2028: 3.6; 2029: 3.9; 2030: 4.3; 2035: 4.0. - Growth of imports of G&S (US dollar terms, in percent): 2025: 2.6; 2026: 6.9; 2027: 7.1; 2028: 5.6; 2029: 5.3; 2030: 5.1; 2035: 4.0. - Nominal GDP (Million of US dollars, selected years): 2022: 54; 2023: 51; 2024: 56; 2025: 57; 2026: 59; 2027: 62; 2028: 65; 2029: 68; 2030: 71; 2035: 86; 2045: 128. - Government revenues (excluding grants, percent of GDP): 2025: 79.4; 2026: 81.1; 2027: 80.1; 2028: 79.2; 2029: 78.4; 2030: 77.8; 2035: 78.0; 2045: 78.5. - Aid flows (Million of US dollars): 2025: 24.9; 2026: 22.5; 2027: 22.1; 2028: 23.3; 2029: 24.8; 2030: 25.9; 2035: 31.6; 2045: 48.8. - Grant element of new public sector borrowing (in percent): values shown as 42.8 for multiple projection years. ### Fiscal Outlook and Policy Recommendations - The fiscal balance is expected to shift to a small surplus in 2025, supported by higher grants from development partners, but would gradually deteriorate thereafter as expenditure pressures remain elevated. - Fiscal deficits will continue to require foreign financing on concessional terms from 2026, as returns from the Tuvalu Trust Fund (TTF) and Consolidated Investment Fund (CIF) alone are insufficient, leaving Tuvalu at high risk of debt distress. - Planned fiscal measures and priorities: - Contain increased allocations for capital expenditure in the FY2025–26 budget, noting capacity constraints for execution. - Cost-saving measures: rationalize the Tuvalu’s Overseas Medical Referral Scheme (TOMRS) through enhanced local healthcare capacity and governance improvements; consider feasibility of a health insurance scheme; target subsidies to the most vulnerable households. - Revenue measures: increase fishing license revenues through new bilateral agreements and reflagging of foreign vessels; enhance tax compliance; mobilize additional revenue through a comprehensive tax policy review. - Public financial management (PFM) reforms: improve budget reliability via better revenue forecasting and monitoring; strengthen public investment management with multi-year planning and project prioritization; enhance fiscal reporting and transparency for extra-budgetary funds and state-owned enterprises; reinforce procurement management; integrate Climate Budget Tagging. - The government emphasized gradual unwinding of pandemic-related increases in current spending and reallocating savings toward human capital development, infrastructure maintenance, and climate resilience. - Primary deficit that stabilizes the debt-to-GDP ratio (selected years): 2025: 0.8; 2026: 2.6; 2027: 3.8; 2028: 3.3; 2029: 2.5; 2030: 2.4; 2035: 2.7; 2045: 1.7. ### Financial Sector and Regulatory Actions - The financial sector is broadly sound but faces limited supervisory capacity and institutional constraints. - Key institutions and reforms: - Development Bank of Tuvalu (DBT): operates under a development mandate supporting remote areas. - National Bank of Tuvalu (NBT): main commercial bank; ongoing upgrade of core banking systems. - Tuvalu National Provident Fund (TNPF): extends low-risk loans to members; oversight scope to be expanded. - Reviewing prudential standards, enhancing financial reporting, strengthening credit risk management across DBT, NBT, and TNPF. - Commitment to improving AML/CFT frameworks and the role of the Financial Intelligence Unit (FIU); formal APG assessment planned for 2027. - Exploring a centralized credit registry and national ID system as resources allow. - Strengthen institutional setup of the Banking Commission (BCT), separate from the Public Enterprise Reform and Monitoring Unit, expand oversight, and provide resources and training. - Emphasize timely submission of prudential returns, finalization of consolidated prudential standards, and ongoing risk analysis. ### Structural Policies, Climate Resilience, and Human Capital - Structural reforms need careful sequencing, build on existing progress, accelerate implementation, and align with macroeconomic and structural conditions. - Priorities: - Develop reclaimed land in partnership with local communities. - Leverage improved internet connectivity to expand Telehealth and e-learning to outer islands. - Diversify into value-added agriculture, ecotourism, and fisheries while maintaining transport, utilities, and renewable energy systems. - Enforce updated building codes, use risk maps in planning, and strengthen community disaster preparedness for climate resilience. - Reaffirm commitment to achieving 100 percent renewable energy by 2030 via ongoing and planned solar projects. - Human capital and labor: - Scale up local vocational training programs. - Implement a Labor Migrants Reintegration Strategy to attract returning migrants and facilitate skills transfer. - Enhance training in healthcare, teaching, and technical skills. - Promote women’s labor force participation. ### Capacity Development and Data Improvements - Continued IMF technical assistance and CD coordination prioritized in tax administration, macroeconomic statistics, PFM, and financial sector oversight. - Data and statistics actions: - Strengthen the Central Statistics Division through staff augmentation and training. - Revise historical national accounts data and update estimates through 2024 using improved source information from public corporations, government non-market production, and consumption taxes. - Expand the statistical workforce, reinforce knowledge management to mitigate high staff turnover, and implement IMF TA recommendations. - The authorities welcome the Country Engagement Strategy and value ongoing Fund engagement for surveillance and capacity development. *Source: 1tuvea2025001-source-pdf - 20. In addition, the authorities noted that, to mitigate risks, they do not plan to incur any new* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1tuvea2025001-source-pdf.pdf_