## 1kirea2026001 ## Source details **Canonical URL:** [1kirea2026001](https://www.imf.org/-/media/files/publications/cr/2026/english/1kirea2026001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2026/english/1kirea2026001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2026/english/1kirea2026001.pdf.json) --- ### Recent developments — growth, inflation, and fiscal outcomes - Growth and output: - Real GDP: 2022: 5.0; 2023: 3.3; 2024: 4.6; 2025: 4.3. - Nominal GDP growth revised up from 2024 onward. - Major projects: Outer Island Infrastructure Program: AUD 44.9 million (domestically financed); South Tarawa Sanitation Project: AUD 21 million (World Bank); South Tarawa Water Supply Project: AUD 15 million (ADB). - Prices and wages: - Inflation: 2025: 6.5 percent; January 2025 reforms included a 50 percent increase in electricity tariffs and a 64 percent increase in fuel prices. - Public sector salary adjustment: 40 percent increase in 2024. - Fiscal outcomes: - Overall fiscal deficit: 2025: 14 percent of GDP (broadly unchanged from 2024). - Revenue composition 2025: - Fishing license fees: 38 percent of GDP (down from 40 percent of GDP in 2024; pre-COVID average 62 percent of GDP). - Tax revenues: 19 percent of GDP in 2025 (up from 18 percent of GDP in 2024). - Budget support grants increased and more than offset declines in fishing and other nontax revenue. - Expenditure 2025: - Total current expenditure: 66 percent of GDP (up from 63 percent in 2024); copra subsidy rose from 6 to 9 percent of GDP. - Development expenditure: 23 percent of GDP (stable). - RERF activity: annual return 2025: 10 percent; authorities withdrew AUD 80 million in 2025 and plan AUD 75 million in 2026 (about 13 percent of GDP). - Public debt: External public debt: 2024: 9 percent of GDP; end-2025: 8 percent of GDP. Domestic public and publicly guaranteed debt: 0.1 percent of GDP in 2025 (would rise to 0.7 percent of GDP with new guarantees in 2026). - Joint Venture (JV) entities disclosed external debt of about 190 percent of GDP accumulated since 2019 (authorities report no explicit guarantees). - Assessment: Public and publicly guaranteed debt sustainable but risk of debt distress is high due to climate vulnerabilities and implicit contingent liabilities including JV debt. ### External sector, reserves, and exchange rate - External balances: - Current account deficit: 2024: 17 percent of GDP; 2025: 19 percent of GDP (estimated). - REER: appreciated by 4.2 percent in 2025; REER appreciation contributed to weak export competitiveness. - NIIP: highly positive and stable, buoyed by favorable global asset valuations; NIIP: 381.8 percent of GDP in 2025; gross assets: 415.2 percent of GDP; gross liabilities: 33.4 percent of GDP. - Reserves and RERF: - Reserve assets reported for 2024: AUD 1,782 million (approximately USD 1,173 million) comprising RERF balance AUD 1,600 million and cash balance AUD 182 million. - RERF balance projected to reach AUD 1,694 million in 2025 (Table 1 reports 2025 Est.: 1,677 and other series showing projections to 2031). - Reserve coverage: around 23 months’ import coverage; official international reserves estimated at 321.3 percent of GDP in 2025. - Assessment: external position in 2025 substantially weaker than level implied by fundamentals and desirable policies despite large NIIP and adequate reserves. ### Financial sector and supervision - Financial system: broadly sound with low systemic risks; credit-to-GDP declining since 2019; nonperforming loans increased modestly but remain low relative to total assets. - Largest bank ANZ regulated by Australian Prudential Regulation Authority; Australian 2025 Pacific Banking Guarantee Bill supports ANZ’s Pacific operations. - Shortcomings: supervisory architecture and data reporting gaps limit comprehensive monitoring and risk assessment; monetary statistics unavailable while KFSA not yet fully operational. ### Social outcomes - Social spending and poverty: - Government spending during 2021–2025: about 27 percent of GDP on salaries and an additional 21 percent of GDP on subsidies and benefits (including social assistance, copra subsidy, and leave grants). - Poverty: fell from about 22 percent in 2019 to 5.5 percent in 2024, lifting around 19,000 people (close to 15 percent of the population) out of poverty. - Gini coefficient: fell from 28 to about 25 (NSO, 2025). - Efficiency concerns: - Copra subsidy distorted production and favored higher‑income rural households; recommendation to align copra prices with market levels while protecting vulnerable households through targeted social assistance. - In 2023/24 nearly 95 percent of the population lived in a household receiving unemployment benefits; broad coverage suggests poverty reduction could have been achieved at lower fiscal cost. - Staff analysis: higher unemployment benefits associated with increased spending on tobacco, alcohol, and kava, especially among richer households; recommended excise increases on alcohol and tobacco and introduction of an excise on kava with excise revenues on kava earmarked for health spending. --- ### Outlook and risks — baseline projections and downside scenario - Baseline macro projections (key series): - Global assumption: baseline assumes global commodity prices will increase by about 21 percent in 2026 and only gradually decrease over the medium term. - Real GDP growth: 2026: 3.1 percent; medium-term convergence to around 2 percent potential growth. - Inflation: 2026: 4.5 percent; projected to decline to about 1.8 percent by end of medium term and 2031: 1.8 percent. - Current account deficit: 2026: 17.7 percent of GDP; medium term: around 15 percent of GDP. - Fiscal deficit: expected to widen to about 17 percent of GDP in 2026; elevated fiscal deficits around 15 percent of GDP expected to continue over the medium term. - Baseline fiscal-financing and RERF: - Overall fiscal balance: Table shows Overall balance 2025: -14 (percent of GDP); 2026: -17; 2027: -15; 2028: -13; 2029: -15. - Total revenue and grants 2025 Est.: A$399 million; revenue A$316 million; fishing revenue A$205 million; total expenditure A$478 million. - RERF withdrawals: AUD 80 million in 2025; AUD 75 million planned for 2026; staff recommend annual withdrawal caps of around 3–5 percent of the RERF balance to safeguard long‑term value while noting withdrawals up to about 5 percent of RERF balance could be sustained in staff analysis. - Downside risks (tilted to the downside): - Key downside shocks: protracted war in the Middle East, escalation of geopolitical tensions, prolonged commodity price increases and volatility, trade disruptions raising shipping and import prices, global financial market volatility, climate-related natural disasters reducing fishing license revenues, decline in international aid. - Downside scenario (Protracted War in the Middle East) potential impacts: - Elevated commodity prices and shipping disruptions raise import costs and inflation. - Supply disruptions delay and raise costs of construction projects. - Reduced real incomes weigh on domestic services demand. - Global financial correction lowers RERF returns constraining RERF‑financed infrastructure spending. - Lower external demand reduces fishing revenue, forcing further fiscal consolidation and weighing on growth. - Possible contingent policy responses: temporary increase in social benefits to protect vulnerable households; adopt a balance‑based RERF withdrawal rule embedded in an MTFF. --- ### Debt, sustainability, and RERF governance - Debt stock and composition: - Public and publicly guaranteed (PPG) debt: end-2025: 8.0 percent of GDP. - External public debt (end-2025): AUD 42.6 million (about 7.8 percent of GDP); domestic debt (guaranteed loans): AUD 0.62 million (0.1 percent of GDP). - All existing external debt concessional; no new external debt since 2014. - Planned new guarantees in 2026 would increase domestic public and publicly guaranteed debt to 0.7 percent of GDP. - Joint venture debt and contingent liabilities: - JVs disclosed external debt of about 190 percent of GDP since 2019 (reported as US$670 million in some tables); staff treat large JV borrowing as an implicit contingent liability in stress tests (combined contingent liabilities shock includes 55 percent of GDP for JV loans net of estimated collateral). - Stress-test results: PV of PPG external debt-to-GDP ratio expected to breach indicative threshold of 40 percent starting in 2038 under baseline; PV of total public debt-to-GDP ratio expected to breach 55 percent benchmark starting in 2044. - Under extreme contingent-liability or growth shock scenarios breaches occur earlier (e.g., 2027 for contingent-liability extreme test; 2034 for combined contingent liabilities/growth shocks per text). - RERF role and recommendations: - RERF balance about AUD 1.68 billion (310 percent of GDP) at end-2025; long-term average returns 2011–2024: about 8 percent; 2025 return: 10 percent. - Staff recommend adopting a balance‑based RERF withdrawal rule embedded in an MTFF to enable countercyclical policy and protect climate adaptation investment, with suggested caps on annual withdrawals of around 3–5 percent of the RERF balance (staff analysis notes withdrawals up to about 5 percent of RERF balance could likely be sustained if needed). - RERF should not be used as collateral for borrowing. --- ### Fisheries sector, joint ventures, and revenue policy - Fisheries revenue dynamics: - Fishing license fees averaged about 41 percent of GDP during 2021–2025 (67 percent of government revenue), down from around 62 percent of GDP during 2013–2019. - Despite increased fishing activity since opening of PIPA in 2021 (doubling longline vessel licensing and tripling tuna catch since 2021), fishing revenue and value of fishing exports have not increased in official statistics. - Purse seine Vessel Day Scheme (VDS) provides about 90 percent of Kiribati fishing revenues (MFMRD, 2024); number of purse seine vessels licensed has stagnated with reports of unsold VDS days. - Longline fishing effort more than doubled since 2019 but longline license revenue limited due to affordable pricing for local JVs. - Official statistics show fishing exports low relative to reported tuna catch (underreporting): 2024 FFA estimate value of tuna catch in Kiribati waters USD 189 million (over 50 percent of GDP) vs official fish exports AUD 3.6 million. - JVs and incentives: - New JV investment: over AUD 300 million (about AUD 160 million as FDI) primarily to build new Kiribati‑flagged fishing vessels; JV entities contracted about US$670 million in debt since 2019 (22 purse‑seine vessels and hotel renovation projects referenced). - Authorities report no legal government participation in JV loan arrangements; staff highlight implicit contingent liabilities and recommend increased JV transparency. - Tax incentives and exemptions (10‑year tax holidays, VAT/corporate tax exemptions, preferential licensing/pricing) likely created substantial foregone revenue; recommendation for regular JV financial reporting and transparent review of tax expenditures. - SEZ on Kiritimati Island approved by Cabinet; staff recommend that incentives be well‑targeted, time‑bound, and regularly reviewed with rules-based mechanisms. --- ### Public financial management, institutional capacity, and recommendations - PFM and MTFF: - PFM capacity lags Pacific peers per last PEFA assessment; recommendation to sequence reforms prioritizing macro-fiscal credibility through a strong MTFF, transparent reporting, and improved SOE/JV governance. - MTFF should align multi‑year fiscal targets with policy objectives, better integrate fiscal risks, and incorporate RERF withdrawals. - Revenue administration and tax policy: - Implementation of Income Tax Act (2023) and VAT (Amendment) Act (2025) expected to enhance tax administration and broaden base; VAT to transition from FOB to CIF basis in 2026. - Near‑term priorities: replace legacy revenue management system; advance digitalization. - Medium‑term priorities: strengthen monitoring of foregone revenues from JV tax holidays; improve large-taxpayer compliance; introduce risk‑based audits; enhance taxpayer services. - Debt management and transparency: - Introduce a public debt management framework; require annual reporting from SOEs and JVs; establish Debt Advisory Committee review process for new guarantees/borrowing. - Ensure new borrowing consistent with development objectives and debt sustainability; continue to rely primarily on grants and highly concessional financing for public investment. - Financial sector supervision: - Immediate priorities: build supervisory capacity (staff recruitment/training); establish regular reporting and payments regulation; implement bank licensing framework consistent with KFSA objectives; implement mandatory reporting of financial sector data to the Fund promptly. - Data and statistics: - Data gaps: monetary statistics unavailable; limited financial data; underreporting of JV‑related FDI and tuna catch/value creates significant statistical discrepancies. - Specific data points: JV‑related FDI estimated about AUD 160 million not captured in GDP statistics; unit price of meat and edible offal about USD 2,580 per ton for Kiribati vs global median USD 2,200. - Capacity development needs: TA in PFM, revenue administration, debt management, financial sector reporting and supervision, and national accounts; coordinate Fund support with development partners. --- ### Staff appraisal — policy priorities and consolidated recommendations - Key judgments: - Recent performance: strong GDP growth and significant poverty reduction; inflation pressures from energy price reforms expected to moderate. - Risks: external position substantially weaker than implied by fundamentals; public debt low but risk of debt distress high given climate vulnerability and implicit contingencies. - Priority policy recommendations: - Fiscal and RERF: - Adopt a balance‑based RERF withdrawal rule and integrate it into an MTFF to enable countercyclical fiscal policy while protecting climate adaptation investment. - Pursue sustained, growth‑friendly fiscal consolidation: consolidate 2.5–3 percent of GDP over 2027–2029 and 3.5 percent of GDP over 2030–2045 to anchor public debt around 55 percent of GDP by 2045 (recommended anchor 55 percent). - Withdrawing 3–5 percent of the overall balance of the RERF annually suggested to safeguard the fund’s long‑term value and ensure access during periods of weak returns. - Revenue and expenditure: - Gradually raise fisheries revenues and reduce tax expenditures (including reviewing JV tax holidays and SEZ incentives). - Rationalize recurrent spending on subsidies and broadly‑defined social benefits if cyclical conditions allow; align copra subsidy with market levels and introduce compensatory targeted assistance. - Raise excises on alcohol and tobacco and introduce an excise on kava, earmarking kava excise for health spending. - Institutional reforms: - Strengthen fiscal institutions, PFM, debt management, SOE and JV governance, and supervisory capacity for the financial sector. - Improve statistical coverage and transparency of JV activities and implement mandatory financial sector reporting to the Fund. - Private sector and structural reforms: - Support private sector development, export diversification, and improve business environment and connectivity; caution on SEZs—benefits contingent on governance and administrative capacity. - Social protection: - Protect vulnerable households with targeted transfers while allowing domestic fuel prices to gradually adjust. - Implementation and capacity: - Authorities committed to fiscal responsibility, RERF governance improvements, SOE reporting, and legislative revenue reforms; expressed interest in TA to raise fishing revenues and strengthen MTFF and PFM. *Source: IMF staff report, “1. Recent Developments,” Kiribati country report (1kirea2026001).* ### 1. Recent Developments _________________________________________________________________________ 24 ### 1. Recent Developments ### Economic Activity and Growth - Real GDP grew at 4.6 percent in 2024, primarily driven by service sector expansion. - 2025 real GDP growth estimated at 4.3 percent, with high import levels indicating continued strong activity in services and construction. - National Statistics Office revisions: 2022 growth revised from 4.6 to 5.0 percent; 2023 growth revised from 2.7 to 3.3 percent, mainly reflecting stronger fisheries output. - Nominal GDP growth was revised up starting in 2024. - Major ongoing projects include: - Outer Island Infrastructure Program: AUD 44.9 million (domestically financed). - South Tarawa Sanitation Project: AUD 21 million (World Bank). - South Tarawa Water Supply Project: AUD 15 million (ADB). ### Inflation and Prices - Inflation rose to 6.5 percent in 2025, driven by fuel and electricity tariff reforms. - January 2025 reforms: 50 percent increase in electricity tariffs and 64 percent increase in fuel prices after more than a decade of fixed prices. - Household adjustment aided by a 40 percent public sector salary increase in 2024. - Historical inflation drivers: more external than domestic factors. ### Fiscal Developments and Public Finances - Overall fiscal deficit in 2025 was 14 percent of GDP, broadly unchanged from 2024. - Revenue developments: - Fishing license fees declined from 40 percent of GDP in 2024 to 38 percent of GDP in 2025; pre-COVID average was 62 percent of GDP. - Tax revenues increased slightly from 18 percent of GDP in 2024 to 19 percent of GDP in 2025, driven by higher excise tax collection. - Increased budget support grants more than offset decline in fishing and other nontax revenue. - Expenditure developments: - Total current expenditure reached 66 percent of GDP in 2025, up from 63 percent of GDP in 2024, driven by copra subsidy increase from 6 to 9 percent of GDP. - Development expenditure remained stable at 23 percent of GDP in 2025. - Government announced a change in copra policy so the SOE processing copra shares part of the cost. - Sovereign wealth fund (RERF): - RERF posted an annual return of 10 percent in 2025. - RERF balance was just short of the authorities’ end-2025 target of AUD 1.7 billion. - Authorities withdrew AUD 80 million in 2025 and plan to withdraw AUD 75 million in 2026 (about 13 percent of GDP) to finance outer islands roads and causeways. - Public debt: - External public debt declined from 9 percent of GDP in 2024 to 8 percent of GDP at end-2025. - Domestic public and publicly guaranteed debt was 0.1 percent of GDP in 2025 (a guaranteed SOE loan). - New guarantees in 2026 would increase domestic public and publicly guaranteed debt to 0.7 percent of GDP. - Joint Venture entities with minority government ownership disclosed external debt of about 190 percent of GDP accumulated since 2019, for which the authorities report no explicit guarantees. - Assessment: Public and publicly guaranteed debt is assessed as sustainable, but the risk of debt distress is high due to climate-related vulnerabilities and implicit contingent liabilities including those arising from JV debt. ### External Sector and Reserves - Current account deficit estimated at 19 percent of GDP in 2025, up from 17 percent of GDP in 2024, mainly due to higher goods imports and lower fishing license fees, partially offset by an increase in grants. - REER appreciated by 4.2 percent in 2025, contributing to weak export competitiveness. - NIIP remains highly positive and stable, buoyed by favorable global asset valuations. - Reserves and RERF-related figures: - Reserve assets reported for 2024: AUD 1,782 million (approximately USD 1,173 million), comprising an RERF balance of AUD 1,600 million—up from AUD 1,389 million in 2023 and projected to reach AUD 1,694 million in 2025—and a cash balance of AUD 182 million. - External position assessed as substantially weaker than the level implied by medium-term fundamentals and desirable policies. ### Financial Sector and Supervision - Financial system broadly sound with low systemic risks. - Credit-to-GDP has declined gradually since 2019; nonperforming loans increased modestly but remain low relative to total assets. - Largest financial institution ANZ is regulated by the Australian Prudential Regulation Authority. - Australian government’s 2025 Pacific Banking Guarantee Bill supports ANZ’s Pacific operations. - Shortcomings in supervisory architecture and data reporting limit comprehensive monitoring and risk assessment. ### 2. Outlook and Risks ### Baseline Outlook (Key Projections) - Global assumption: baseline assumes global commodity prices will increase by about 21 percent in 2026, and only gradually decrease over the medium term. - Real GDP growth: expected to moderate to 3.1 percent in 2026; medium-term growth projected to converge to potential growth of around 2 percent. - Inflation: projected to moderate to 4.5 percent in 2026; projected to decline to about 1.8 percent by the end of the medium term. - Current account deficit: projected to narrow to 17.7 percent of GDP in 2026; projected to remain stable at around 15 percent of GDP over the medium term. - Fiscal deficit: expected to widen to about 17 percent of GDP in 2026, reflecting increased domestically-financed development expenditure and a subsidy to temporarily offset higher oil prices for end consumers. - Elevated fiscal deficits of around 15 percent of GDP are expected to continue over the medium term, driven by high social spending and declining fishing revenues. ### Risks to the Outlook - Balance of risks tilted to the downside. - Downside risks include: - Protracted war in the Middle East, escalation of geopolitical tensions, prolonged increase in commodity prices and greater volatility. - Trade disruptions raising shipping and import prices and increased financial market volatility affecting import bill, RERF interest revenues, remittances, and growth. - Climate-related natural disasters and weather shocks that could reduce fishing license revenues. - Decline in international aid. - Reliance on RERF withdrawals based on annual returns that can hamper economic management and risk depleting the sovereign wealth fund long term. - Upside risks include: - Quick de-escalation of the war in the Middle East, positive supply-side surprises (e.g., oil production shocks), productivity gains from AI. - Stronger domestic structural policies, including investment in infrastructure, human capital, or economic diversification. ### Downside Scenario (Protracted War in the Middle East) - Potential impacts: - Elevated commodity prices and shipping disruptions raise import costs and inflation. - Supply disruptions delay construction projects and raise costs. - Reduced real incomes weigh on domestic services demand. - Global financial market correction lowers RERF returns and constrains RERF-financed infrastructure spending under the current withdrawal rule. - Lower external demand reduces fishing revenue, forcing additional fiscal consolidation and weighing on growth. - Possible contingent policy responses: - Temporary increase in social benefits to protect vulnerable households as domestic fuel prices adjust to international costs. - Adopt a balance-based RERF withdrawal rule embedded in a medium-term fiscal framework to allow countercyclical fiscal policy while protecting climate adaptation investment. ### 3. Policies: Supporting People, Promoting Development, Building Capacity ### Fiscal Policy and Revenue Management - Fiscal stance in 2025 described as broadly neutral. - Policy priorities and actions highlighted: - Need to ensure new growth initiatives (e.g., joint ventures to expand tuna catch and processing) raise rather than erode revenues. - Manage public spending on broad social benefits to leave room for large infrastructure and climate investment needs. - Implementation of the Income Tax Act (2023) and the VAT (Amendment) Act (2025) expected to enhance tax administration and broaden the tax base. - VAT will transition from FOB basis to CIF basis in 2026. - New bill increasing excise taxes on kava, tobacco, and alcohol expected to take effect in 2026; excise revenues on kava will be earmarked for health spending. - Copra subsidy policy change (2026 Budget): Kiribati Coconut Development Limited (KCDL) pays AUD 1/kg of copra (approximately the market price), Government pays additional AUD 3/kg so farmers continue to receive AUD 4/kg. ### Sovereign Wealth Fund (RERF) Management - RERF withdrawals and management: - Authorities withdrew AUD 80 million in 2025 and plan AUD 75 million in 2026 (about 13 percent of GDP) for outer island roads and causeways. - Recommendation to adopt a balance-based RERF withdrawal rule embedded in a medium-term fiscal framework to enable effective countercyclical fiscal policy while protecting climate adaptation investment. ### Fisheries, Joint Ventures, and External Risks - Fisheries sector: - Fishing license fees are primary source of government revenues. - Fishing license fees averaged about 41 percent of GDP during 2021-2025 (67 percent of government revenue), down from around 62 percent of GDP during 2013-2019. - Despite increased fishing activity since opening of PIPA in 2021, fishing revenue and value of fishing exports have not increased. - Kiribati established joint venture entities (mostly with Chinese partners) to increase tuna catch by Kiribati-flagged vessels and expand processing and higher value-added exports. - Joint Venture entities disclosed external debt of about 190 percent of GDP accumulated since 2019, with no reported explicit government guarantees; these create implicit contingent liabilities. - Policy challenge: ensure suboptimal licensing practices are addressed as the fisheries sector develops to prevent further fiscal erosion. ### Social Protection and Public Services - During 2021-2025, government spending about 27 percent of GDP on salaries and an additional 21 percent of GDP on extensive subsidies and benefits to the rest of the population, including social assistance benefits, copra subsidy, and annual leave grants for employees of all VAT-registered businesses. - Authorities use copra subsidy as social benefit for farmers on outer islands; new cost-sharing arrangement introduced in 2026 Budget. ### Institutional and Supervisory Capacity - Supervisory shortcomings and limited data reporting impede comprehensive monitoring of financial risks. - Strengthening supervisory architecture and data reporting is implied to improve risk assessment. *Source: IMF staff report, “1. Recent Developments,” Kiribati country report.* ### 14. The government has multiple priorities—extensive social benefits, climate-resilient ### 14. The government has multiple priorities—extensive social benefits, climate-resilient infrastructure and accelerating growth of domestic fisheries—and only limited fiscal space ### Fiscal position, RERF, and debt sustainability - Kiribati is assessed to be at high risk of debt distress given the need for significant future borrowing to adapt to rising sea levels. - Fiscal balances have deteriorated relative to the pre-COVID period, necessitating RERF withdrawals to finance needed development spending while other revenues cover current expenditures. - Recommendation: shift to a balance-based RERF withdrawal rule to ensure access to the RERF even when annual returns are low and to safeguard its long-term value (see IMF, 2025). - Debt anchor and path: - Proposed anchor: 55 percent (public debt to GDP ratio). - With recommended consolidation, public debt would be anchored at around 55 percent of GDP by 2045 (IMF staff estimates). - Note: “With an anchor of 55 percent for the public debt to GDP ratio, all debt burden indicators would most likely remain below their respective indicative thresholds and benchmark over the 20-year projection horizon.” ### Recommended fiscal consolidation - Recommended consolidation path (to begin promptly): - Consolidation of 2.5-3 percent of GDP over 2027-2029. - Consolidation of 3.5 percent of GDP over 2030-2045. - Objective: accommodate the authorities’ spending priorities while anchoring public debt at around 55 percent of GDP by 2045. - 2026 budget assessment: - The 2026 budget would achieve greater revenue gains than recommended measures in the 2025 Article IV consultation, reflecting higher projected fishing revenue and higher VAT collection. - Offsetting factor: higher spending on roads and causeways in outer islands results in a slightly larger 2026 deficit than recommended in the 2025 Article IV consultation. - Policy priority: sustain revenue gains while limiting supplementary spending amid higher commodity prices. ### Policy options to achieve consolidation (overview) - Main areas for reforms: - Reduce tax expenditures and gradually raise revenues from the fisheries sector (Section B). - Rationalize recurrent spending on subsidies and broadly-defined social benefits (Section C). - Sustain long-term growth through strengthened fiscal institutions and overall capacity development (Section D). ### Fisheries sector: recent developments and challenges - Recent developments: - Doubling longline vessel licensing and tripling associated tuna catch since 2021. - New joint-venture (JV) investment of over AUD 300 million (about AUD 160 million as FDI), primarily to build new Kiribati flagged fishing vessels. - Plans for a Special Economic Zone (SEZ) on Kiritimati Island. - Measures to increase fisheries employment and establish new value-added products (frozen fish fillets and loins, aquaculture, sea cucumbers, pilot canning facilities). - Performance and data issues: - Official statistics suggest the value of Kiribati fish exports has declined between 2015 and 2023 despite increases in volume in 2024. - Diversification concerns: number of export product categories and export destinations declined since 2015 in Kiribati (while broadly stable for other PICs). - Capacity development is needed to improve the quality of official export data. - Licensing and revenue constraints: - Purse seine Vessel Day Scheme (VDS) provides about 90 percent of Kiribati fishing revenues (MFMRD, 2024). - Number of purse seine vessels licensed in Kiribati has stagnated; reports of unsold VDS days and moderately declining purse seine fishing effort. - Longline fishing effort more than doubled since 2019, but longline license revenue has been limited because longline licenses were sold at affordable prices to local JVs. - Kiribati’s large EEZs ensure fishing license revenues are the highest among Pacific peers, but fishing revenue growth has lagged since 2013 compared to peers. - Recommendation: capacity development to design a fisheries tax regime that balances revenue objectives with fisheries sector development and fish stock sustainability. ### Joint ventures, tax expenditures, and incentives - Issue: Tax exemptions for JV entities have likely resulted in substantial foregone revenue. - Foregone revenues stem from 10-year tax holidays, exemptions for both VAT and corporate tax, non-transparent dividend arrangements between JVs and the Kiribati Government, and preferential pricing of fishing licenses. - Lack of JV reporting to the Tax Commission precludes estimation of JV-related tax expenditures, but international experience suggests they are likely substantial. - Recommendation: regular financial reporting of JVs and greater transparency around foregone revenues to increase revenue collection while supporting industry development and diversification. - SEZs and FDI: - Well-designed incentives for JVs and SEZs should be well-targeted, time-bound, and regularly reviewed. - Recommended targeted measures: near-zero tariffs only on imported production inputs; VAT refunds through suspension mechanisms; accelerated tax depreciation for qualifying investment. - Any new tax incentives should be guided by a transparent rules-based mechanism rather than decided on a case-by-case basis. ### Authorities’ views (fisheries and fiscal) - Authorities’ positions: - Strong commitment to fiscal responsibility and long-term debt sustainability; treat RERF withdrawals as revenues. - Social assistance provision, infrastructure investment, and fisheries sector development are critical to long-term objectives. - Reported success: outer island roads and causeway project financed by RERF withdrawals while also reducing external debt and expanding social benefits. - Acknowledge concerns on fish export data quality and the need for enhanced interagency communication to clarify JV dividend arrangements, JV tax holidays transparency, and measuring associated revenue losses. - View tax holidays as a strategic instrument for attracting FDI and a short-term revenue deferral aimed at long-term investment; plan SEZ regulations with cost-based tax incentives and will regularly review incentives for SEZs and JVs. - Interest in technical assistance to raise fishing revenues. ### Public expenditure, social benefits, and efficiency - Social outcomes and spending: - Social benefits have increased substantially since 2020, boosting household incomes and supporting a remarkable reduction in poverty. - Poverty fell from about 22 percent in 2019 to 5.5 percent in 2024, lifting around 19,000 people (close to 15 percent of the population) out of poverty. - Gini coefficient fell from 28 to about 25 (NSO, 2025). - Gains reflect expanded social assistance (unemployment, disability and old age benefits), copra subsidies, and leave grants for all employees in VAT-registered businesses. - Living standards improvements: greater access to education, sanitation, running water and electricity, and higher vehicle ownership. - Efficiency concerns and recommendations: - Kiribati spends the highest share of GDP and GNI on social assistance among Pacific Island Countries, in addition to copra subsidies. - Regular review of adequacy and efficiency of social benefits is needed to identify distortions, externalities, or potentially wasteful spending. - Copra subsidy issues: - Current copra subsidy sets copra prices well above market levels, distorts agricultural production, discourages production of local food and ripe coconuts, and disproportionately benefits higher-income rural households. - Recommendation: align copra prices with market levels while protecting vulnerable households through other types of social assistance. - SOE subsidies: - Reduce other SOE subsidies, including for domestic transport, with compensatory measures for low-income households as needed. - Social benefit coverage and behavioral effects: - In 2023/24, nearly 95 percent of the population lived in a household receiving unemployment benefits. - Broad coverage of non-poor households suggests poverty reduction could have been achieved at lower cost. - Staff analysis indicates higher unemployment benefits are associated with increased spending on tobacco, alcohol, and kava, especially among richer households. - Recommendation: raise excises on alcohol and tobacco and introduce an excise on kava to curb consumption and generate revenue to offset related public health costs. - Authorities’ actions and constraints: - Authorities are implementing a Social Protection Policy, rolling out a management information system, and expanding digital payments via M-PAiSA and ANZ. - Challenges: limited availability of national identification cards in outer islands, data gaps from key stakeholder ministries, and service delivery constraints due to infrastructure limitations in outer islands, complicating beneficiary verification and digital payment transitions. *Source: IMF staff estimates.* ### 32. Kiribati should continue to build institutional capacity and to implement fiscal ### 32. Kiribati should continue to build institutional capacity and to implement fiscal ### Public financial management (PFM) and medium-term fiscal framework (MTFF) - Continue improving PFM to increase spending efficiency and promote fiscal discipline. - Progress in core PFM functions is needed to support effective operation of a medium-term fiscal framework (MTFF) that: - Aligns multi-year fiscal targets with policy objectives. - Better integrates fiscal risks. - Incorporates RERF withdrawals to support countercyclical fiscal policy and improve long-term investment planning, including for climate-related infrastructure, while safeguarding fiscal sustainability (see also IMF 2025, Annex IV). - Kiribati’s PFM capacity appears to lag that of Pacific Island peers, based on the last PEFA assessment. - Recommendation: Sequence reforms to prioritize macro-fiscal credibility through a strong MTFF, transparent financial reporting, and improved governance of SOEs and joint ventures. ### Tax policy, revenue administration, and fisheries - Introduction of the VAT Act is a major milestone. - Near-term priorities: - Fully replace the legacy revenue management system. - Advance digitalization. - Medium-term priorities: - Strengthen monitoring of foregone revenues from tax holidays to JVs. - Improve large‑taxpayer compliance and introduce risk‑based audits. - Enhance taxpayer services and continue to broaden the tax base. - Fisheries tax policy: - Review tax regime in fisheries to balance revenue objectives with sector development and sustainability. - Note: Tax expenditures related to fisheries joint venture entities are likely substantial due to tax holidays and exemptions. ### Public debt management and joint-venture (JV) risks - Introduce a public debt management framework to manage fiscal risks. - Observations: - Despite declining public debt, debt of JV entities has increased and can raise implicit contingent liability risks. - JVs contracted about US$670 million in debt since 2019 to build 22 purse-seine fishing vessels and renovate a hotel in Tarawa. - Policy recommendations: - Strengthen monitoring and transparency of JV debt, similar to SOE debt. - Build capacity to analyze and manage new debt and assess sources of risk. - Ensure new borrowing is consistent with development objectives and debt sustainability. - RERF should not be used as collateral for borrowing. - Public investment should continue to be supported primarily through grants and highly concessional financing. ### Financial sector regulation and supervision - The financial system remains underdeveloped and comprises: - A single foreign commercial bank (ANZ). - A state‑owned development bank and a provident fund. - Smaller institutions: state‑owned insurance and home loans, credit unions, and private micro money lenders. - No credit bureau. - Immediate priorities: - Build supervisory capacity through staff recruitment and training. - Establish regular reporting and payments regulation. - Implement a bank licensing framework, consistent with KFSA’s longer-term objective of evolving into a dollarized central bank. - With KFSA not yet fully operational, monetary statistics are unavailable and financial data are limited. - Recommendation: Implement regular mandatory reporting of existing financial sector data to the Fund promptly. ### Private sector development, competitiveness, and inclusion - Continued structural reforms to support private sector development and export diversification: - Improve financial literacy and access to credit for micro and small enterprises. - Strengthen property rights and reduce business startup costs. - Provide childcare support to raise female labor force participation. - Maintain infrastructure investment to improve connectivity, utilities, and reduce transport costs. - Labor market note: - Private sector employment rose from about 30 to 40 percent of formal employment during 2019–23. - Caution on special economic zones: benefits contingent on strong governance and administrative capacity; only low‑income countries with strong fiscal policy management see sustained FDI gains following SEZ approval. ### Social spending and subsidies - Expanded social benefits have contributed to a sharp decline in poverty. - Efficiency concerns: - Broad coverage of non‑poor households suggests similar poverty outcomes could have been achieved at lower fiscal cost. - The copra subsidy should be reformed to avoid discouraging food crop production and disproportionately benefiting higher‑income households. - Recommendations: - Regularly review efficiency of social assistance. - Reduce SOE and copra subsidies that introduce market distortions while safeguarding support for vulnerable groups during global shocks. ### Data adequacy and capacity development needs - National statistics quality has improved but shortcomings remain that hamper surveillance. - JV activities have implications for GDP, trade, capital flows and debt statistics; establish regular reporting procedures to improve coverage. - Preliminary progress has been made in reporting FDI of JVs, to be incorporated in future BOP revisions. - Specific data gaps: - Monetary statistics unavailable; financial data limited. - Underreporting: value of tuna catch in Kiribati waters was over 50 percent of GDP in 2024 (USD 189 million, FFA, 2025), compared with fish exports of only AUD 3.6 million reported by official statistics. JV‑related FDI, estimated at about AUD 160 million, is not captured in GDP statistics. - Capacity development needs: - Technical assistance in public financial management, revenue administration, debt management, and financial sector reporting and supervision. - Tailor CD to local constraints: limited technical staff, reliance on expatriate advisors, and infrastructure limitations (poor or no internet connection, power outages). - Recommendation: Coordinate Fund support with development partners and implement mandatory financial sector reporting to the Fund. ### Authorities’ views (summarized from the text) - Agreed on importance of building institutional capacity for inclusive growth and fiscal sustainability, with focus on PFM. - Emphasized efforts to strengthen procurement, move towards climate and gender budget tagging, program‑based budgeting integrated in IFMIS, and develop an asset management policy. - Committed to growing the RERF, strengthening RERF governance, and safeguarding long‑term sustainability; expressed interest in advancing MTFF work that integrates RERF withdrawals and fiscal risks. - Maintained that the Government has not participated in JV loan arrangements and thus views the US$670 million in JV debt as not a contingent liability for the government, while acknowledging the need for greater transparency. - Noted progress in standardizing SOE financial reporting, broadening SOE monitoring to include JVs, and introducing a loan accountability agreement signed by SOEs. - Highlighted legislative revenue reforms underway (Value Added Tax amendments, Income Tax Act regulations, Revenue Administration Act updates) and upgrading the revenue management system. - Emphasized ongoing efforts to advance payments regulation and operationalize the Kiribati Financial Supervisory Authority and willingness to continue engagement with development partners for capacity development. ### Staff appraisal — key points and policy priorities - Recent performance: - Strong GDP growth and significant poverty reduction in recent years. - Growth remained resilient in 2025, supported by consumption, large infrastructure projects, and expanded social spending. - Inflation pressures from domestic energy price reforms expected to moderate. - Risk assessment: - Public debt declined and remains low, but risk of debt distress is assessed to be high due to climate-related vulnerabilities and implicit contingent liabilities. - External position in 2025 assessed to be substantially weaker than level implied by medium‑term fundamentals and desirable policies. - Risks tilted to the downside, including protracted war in the Middle East, persistently high commodity prices, trade disruptions, financial market volatility, and climate shocks. - In a downside scenario of a protracted war in the Middle East: growth and public investment could fall substantially; higher commodity prices would lift inflation and dampen demand. - Policy recommendations: - Protect vulnerable households with targeted transfers while allowing domestic fuel prices to gradually adjust. - Adopt a balance‑based RERF withdrawal rule and integrate it into an MTFF to enable countercyclical fiscal policy while safeguarding climate adaptation investment. - Pursue a sustained, growth‑friendly fiscal consolidation to achieve long‑term debt sustainability by: - Gradually raising fisheries revenues and reducing tax expenditures. - Strengthening fiscal institutions. - Rationalizing recurrent spending on subsidies and broadly‑defined social benefits if cyclical conditions allow. - Withdrawing 3-5 percent of the overall balance of the RERF annually to safeguard the fund’s long‑term value and ensure access during periods of weak returns. - Strengthen institutional capacity and governance to support private sector development and ensure SEZs (if used) deliver FDI gains. - Prioritize building a public debt management framework and greater transparency and monitoring of JV debt. - Continue capacity building to improve coverage and quality of statistics, including reflecting JV activities in GDP, trade, capital flows and debt statistics and promptly implementing mandatory reporting of financial sector data to the Fund. *KIRIBATI — INTERNATIONAL MONETARY FUND* ### 51. It is recommended that the next Article IV consultation take place on a standard 12- ### 1kirea2026001 - 51. It is recommended that the next Article IV consultation take place on a standard 12- ### Recent economic developments and outlook - Growth: Real GDP (percent change) — 2022: 5.0; 2023: 3.3; 2024: 4.6; 2025: 4.3; 2026: 3.1; 2027: 2.4; 2028: 2.2; 2029: 2.2; 2030: 2.1; 2031: 2.1. - Inflation (percent change, average) — 2022: 5.3; 2023: 9.3; 2024: 2.5; 2025: 6.5; 2026: 4.5; 2027: 3.1; 2028: 2.5; 2029: 2.0; 2030: 2.0; 2031: 1.8. - Inflation (end of period) — 2022: 16.2; 2023: -2.1; 2024: 2.9; 2025: 6.3; 2026: 3.3; 2027: 2.5; 2028: 2.5; 2029: 2.0; 2030: 2.0; 2031: 1.8. - Drivers: Growth in 2025 was resilient and largely driven by the service sector. Inflation rose in 2025 due to energy price reform, with higher contributions from housing and utilities and transport price inflation. - Labor: Labor force participation and unemployment are comparable to peers; recent labor market improvements noted. Labor Force Participation Rate and unemployment series and gender breakdowns are presented (data refer to 2023, with exceptions noted in source). ### Fiscal developments and public finances - Fiscal balances: The fiscal balance recorded substantial deficits consecutively in 2024 and 2025, following a civil service wage increase in 2024. - Central government finance (in percent of GDP) — selected series from Table 1: - Revenue and grants: 2022: 69; 2023: 67; 2024: 74; 2025: 100; 2026: 79; 2027: 81; 2028: 79; 2029: 77. - Total domestic revenue: 2022: 56; 2023: 71; 2024: 62; 2025: 58; 2026: 59; 2027: 58; 2028: 58; 2029: 58. - Of which: fishing revenue: 2022: 36; 2023: 48; 2024: 40; 2025: 38; 2026: 39; 2027: 38; 2028: 37; 2029: 37. - External grants: 2022: 13; 2023: 26; 2024: 10; 2025: 15; 2026: 4; 2027: 2; 2028: 2; 2029: 2. - Expenditures: 2022: 87; 2023: 94; 2024: 86; 2025: 116; 2026: 94; 2027: 93; 2028: 92; 2029: 91. - Current expenditure: 2022: 67; 2023: 67; 2024: 63; 2025: 66; 2026: 46; 2027: 61; 2028: 61; 2029: 61. - Development expenditure: 2022: 21; 2023: 27; 2024: 23; 2025: 23; 2026: 23; 2027: 23; 2028: 23; 2029: 23. - Domestic recurrent balance 1/: 2022: -47; 2023: -45; 2024: -42; 2025: -45; 2026: -43; 2027: -41; 2028: -41; 2029: -41. - Recurrent fiscal balance (incl. budget support grants): 2022: -7; 2023: 90; 2024: -1; 2025: -2; 2026: -2; 2027: -2; 2028: -2; 2029: -3. - Overall balance 2/: 2022: -18; 2023: 2; 2024: -14; 2025: -14; 2026: -17; 2027: -15; 2028: -13; 2029: -15. - Fiscal composition and pressures (Table 2a, 2025 highlights in A$ millions and percent of GDP): - Total revenue and grants (A$ millions): 2025 Est.: 399. - Revenue (A$ millions): 2025 Est.: 316. - Of which: fishing revenue (A$ millions): 205. - Project grants (A$ millions): 50; Budget support grants (A$ millions): 34. - Total expenditure (A$ millions): 2025 Est.: 478. - Wages and salaries (A$ millions): 159; Civil service wage bill in percent of GDP increased in FY2024 (chart). - Subsidies and grants (A$ millions): 156; copra subsidy (A$ millions): 47. - Development expenditure (A$ millions): 122; local contribution to development fund (LCDF) (A$ millions): 72. - Domestic recurrent balance 1/ (A$ millions): -245. - Overall fiscal balance 2/ (A$ millions): -79. - Financing and reserves: - Financing (A$ millions): 79 in 2025. - Domestic financing includes RERF withdrawals: RERF (A$ millions) contribution in 2025: 80. - Cash reserve buffer (A$ millions): closing balances shown; cash reserve buffer in percent of GDP and excess over 3-months current spending and LCDF tracked (Table 2a and 2b). - RERF and public net worth: - RERF closing balance (in millions of A$) — Table 1: 2022: 1,194; 2023: 1,389; 2024: 1,600; 2025 Est.: 1,677; projections to 2031 provided (e.g., 2031: 2,123). - RERF real per capita value (in 2006 A$) — Table 2a: 2022: 6,530; 2023: 7,078; 2024: 7,786; 2025: 7,811; 2026: 7,642; 2027: 7,617; projections through 2031 provided. - Net financial worth including RERF (in millions of A$) — 2022: 1,330; 2023: 1,560; 2024: 1,818; 2025: 1,897; projections through 2031 provided. - Net financial worth excluding RERF (in millions of A$) — 2022: 137; 2023: 171; 2024: 218; 2025: 220; projected to decline thereafter. ### External sector and balance of payments - Current account (in percent of GDP and in A$ millions): - Current account including official transfers (in millions of US$) — Table 1: 2022: -33; 2023: -5; 2024: -60; 2025: -66; 2026: -71; 2027: -70; 2028: -68; 2029: -68; 2030: -69; 2031: -71. - Current account (percent of GDP) — Table 1: 2022: -12.0; 2023: -1.8; 2024: -17.4; 2025: -18.8; 2026: -17.7; 2027: -16.8; 2028: -15.7; 2029: -15.2; 2030: -14.8; 2031: -14.8. - Balance on goods (percent of GDP) — 2022: -62.0; 2023: -63.2; 2024: -63.6; 2025: -72.2; 2026: -65.8; 2027: -64.3; 2028: -63.4; 2029: -62.4; 2030: -62.2; 2031: -62.5. - Exports (goods, credit) (percent of GDP) — 2022: 3.2; 2023: 2.8; 2024: 2.5; 2025: 4.9. - Imports (goods, debit) (percent of GDP) — 2022: 65.2; 2023: 65.9; 2024: 66.0; 2025: 77.2. - Drivers: The current account deteriorated and is expected to remain elevated due to persistently high imports since 2022 amid declining fishing revenue. - Fishing and services: - Fishing license fees (in A$ millions and percent of primary income): detailed series provided (e.g., fishing license fees in primary income, percent of GDP: 33.4 in 2022; 46.9 in 2023; 40.4 in 2024; 36.1 in 2025). - Based on official statistics, FDI inflow has picked up but remains weak: FDI net inflow (percent of GDP) — 2013–2024 chart and Table 3b: 2022: -1.6; 2023: -1.7; 2024: -2.3; 2025: -1.2; 2026: -2.0; 2027: -2.1; 2028: -2.0; 2029: -2.0; 2030: -2.0; 2031: -2.0. - External positions and reserves: - Kiribati’s net foreign asset position is high because of the sizeable RERF. RERF deposits and withdrawals recorded in 2024–2025 and expected to continue to finance infrastructure projects. - Reserve assets (Table 3a, A$ millions): 2022: 40; 2023: 62; 2024: -1; 2025: -8; 2026: 0; 2027: -75; 2028: -40; projections provided through 2031 (note: series include negative values in some years). - Net International Investment Position and RERF-driven investment income highlighted in Table 3a and 3b. ### Social indicators, poverty, and SDG monitoring - Per capita GDP (2024e): US$2,695. - Demographics: Population (2024e): 127,317; Life expectancy at birth (2022): 67.7. - Poverty (2023-24): Below $2.15 a day: 0.04; Below the national poverty line: 5.5. - Selected SDG and social indicators (Table 4 highlights): - Poverty headcount ratio at national poverty lines (% of population): 21.9 in earlier series; 5.5 noted for 2023. - Prevalence of undernourishment (% of population): series with values around 3.0–3.8 across years. - Access to electricity (% of population): 2013: 78.8; 2014: 83.4; 2015: 90.6; 2016: 92.6; 2017: 85.7; 2018: 87.5; 2019: 89.3; 2020: 91.0; 2021: 92.8; 2022: 94.4; 2023: 95.9. - Access to clean fuels and technologies for cooking (% of population): 2013: 4.7; 2014: 5.5; 2015: 6.3; 2016: 7.2; 2017: 8.2; 2018: 9.3; 2019: 10.5; 2020: 11.8; 2021: 13.3; 2022: 14.8. - Unemployment rate (national estimate) 1/: 9.3 (year not explicitly restated in snippet). - Individuals using the Internet (% of population): series rising from 11.5 through 39.6 to 88.0 in latest listed year. ### Key risks and fiscal policy considerations (from source content) - Fiscal risks and considerations: - Persistent deficits in 2024 and 2025 driven by wage increases and higher spending pressures. - Dependence on fishing revenue and volatility: fishing revenue has been broadly stable in nominal terms but lagged GDP growth. - RERF withdrawals have financed infrastructure and are expected to continue; strong RERF returns driven by global asset valuation bolster the fund but withdrawals reduce RERF deposits. - Budget support increased in 2025 while project grants remained below pre-COVID levels. - Policy implications (implied by presented data): - Monitoring of wage and recurrent spending pressures given rising civil service wage bill and large current expenditures. - Strengthen diversification of export markets and sources of external financing given concentrated exports and weak FDI. - Maintain transparency and sustainability of RERF withdrawals to finance infrastructure while preserving long-term RERF real per capita value. *Source: Kiribati — IMF staff estimates and projections as presented in the content unit.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overall assessment and policy implications - Overall Assessment: The external position of Kiribati in 2025 was substantially weaker than the level implied by fundamentals and desirable policies, reflecting large macroeconomic imbalances originating fundamentally in the public sector and a real exchange rate overvaluation. - Compensating factors: large and positive NIIP and an adequate level of international reserves. - Potential Policy Responses: - Fiscal consolidation, including scaling back recurrent spending. - Integrate the RERF into a medium-term fiscal framework with a balance-based RERF withdrawal rule to allow use of countercyclical fiscal policy and preserve long-term sustainability of the RERF. - Structural reforms to close infrastructure and human capital gaps, promote private sector development, and diversify the export base to enhance competitiveness and export capacity. ### Foreign assets, liabilities, and NIIP trajectory - Background: NIIP increased slightly to 382 percent of GDP at end-2025, from 368 percent of GDP at end-2024, driven by higher foreign assets (valuation gains) offset by a decline in cash reserve balances. - RERF: balance of 310 percent of GDP at end-2025 constitutes the lion’s share of the NIIP. - Assessment: Kiribati is a net creditor; NIIP projected to remain above 300 percent of GDP over the medium term despite expected large current account deficits. - Main risks to NIIP: volatile global asset valuation and widening current account deficits due to a decline of fishing revenue and deterioration of the fiscal balance. - 2025 (Est.; % GDP) figures: - NIIP: 381.8 - Gross Assets: 415.2 - Debt Assets: 13.4 - Gross Liab.: 33.4 - Debt Liab.: 16.4 ### Current account (CA): developments and model assessment - Background: - Historically substantial CA surpluses supported by fishing license revenue, external grants, and investment income. - Shift to consecutive CA deficits since 2022, driven by freight costs and, more importantly, macroeconomic imbalances originating in the public sector and more recently in the private sector. - Trend in 2025: CA deficit worsened to an estimated 18.8 percent of GDP. - Medium-term projection: CA deficit projected to remain broadly stable at around 14–15 percent of GDP, reflecting persistent fiscal deficits and strong import demand. - Assessment (EBA-Lite 3.0 methodology): - External position in 2025 assessed as significantly weaker than level implied by fundamentals and desirable policies. - EBA-Lite CA model results: - Negative CA gap of 19.0 percent of GDP in 2025. - Estimated cyclically adjusted CA deficit: -18.3 percent of GDP. - Model-based CA norm: 0.7 percent of GDP. - Negative CA gap largely explained by the policy gap driven by difference between cyclically-adjusted overall fiscal deficit (14.5 percent of GDP; not including RERF withdrawals) and desirable level (cyclically-adjusted overall deficit of 9.4 percent of GDP). - EBA-Lite REER model results: REER gap of -19.1 percent of GDP in 2025. - Uncertainty: idiosyncratic features (volatile fishing license fees and external grants) and data limitations imply substantial uncertainty around the assessment. - CA model table (in percent of GDP, Kiribati: EBA-lite Model Results, 2025): - CA-Actual: -18.8 - Cyclical contributions (from model): (-) -0.2 - Additional temporary/statistical factors: (-) none applied - Natural disasters and conflicts: (-) -0.3 - Adjusted CA: -18.3 - CA Norm (from model, cyclically adjusted, including multilateral consistency adjustments): 0.7 - Adjusted CA Norm: 0.7 - CA Gap: -19.0 - REER Gap (in percent): -19.1 - o/w Relative policy gap: -8.6 - Elasticity: -0.3 - (Additional model line items: 72.1 and 72.7 appear in the model outputs indicating REER-related statistics) ### Real effective exchange rate (REER) - Background: - Australian dollar is Kiribati’s legal tender. - Annual average REER at 85.8, appreciated 4.2 percent in 2025. - REER was 7.3 percent above its 10-year average and approximately at its 20-year average. - Structural factors: productivity constraints, large infrastructure and human capital gaps, and persistent fiscal pressures. - Assessment: - Based on EBA-Lite CA model and CA-REER elasticity (-0.), Kiribati’s REER is estimated to be overvalued by 72.1 percent. - Based on EBA-Lite REER model, REER overvalued by 72.7 percent. - Caveat: REER gap does not automatically indicate need for exchange rate adjustment and quantitative assessment is uncertain given economy idiosyncrasies and data limitations. ### Capital and financial accounts: flows and policy measures - Background: - Capital and financial account flows mainly driven by project-related capital grants and other investment transactions. - Capital account estimated at 8.2 percent of GDP in 2025, down from 8.8 percent of GDP in 2024, driven by higher government capital transfer outflows despite strong capital transfers from development partners. - Net financial account transactions estimated at 4.0 percent of GDP in 2025, indicating a reversal from net inflows in 2024—mostly driven by other investment transactions (largely outflows related to currency and deposits). - Net FDI inflows: estimated to be positive but small in 2025. - Assessment and policy advice: - Capital inflows are highly dependent on development partner support. - To leverage support and safeguard long-term external sustainability, recommend: - Implement prudent fiscal policies. - Improve cash management. - Avoid external non-concessional borrowing. - Continue close engagement with development partners. - Improve domestic capacity for project execution. ### FX intervention and reserves level - Background: - Kiribati does not have a monetary authority and uses the Australian dollar as legal tender. - Estimated reserve asset decumulation of 15 percent of GDP in 2025 due to the CA deficit. - Official international reserves estimated at 321.3 percent of GDP in 2025. - Reserve coverage: around 23 months’ import coverage; around 419 times the stock of short-term debt by residual maturity in 2025. - Assessment: - International reserves assessed as adequate for precautionary purposes. - Long-term sustainability depends on preserving the value of the RERF. - Given volatile fishing revenue, vulnerabilities to natural hazards, and significant investment needs, policy recommendations include: - Implement prudent fiscal policies. - Diversify revenue sources. - Foster private sector-driven growth. *Source: Annex I. External Sector Assessment, IMF staff calculations and country authorities.* ### 6. The analysis has clear implications for Kiribati’s exposure to global shocks, such as the ### 6. The analysis has clear implications for Kiribati’s exposure to global shocks, such as the ### Exposure to global shocks and overall inflation dynamics - Global shocks—especially global supply disturbances—explain most of the variation in domestic inflation. - Historically, increases in global oil and other commodity prices only had a limited direct impact on food and transport prices owing to domestic price controls, though pass-through from oil prices and the exchange rate has increased compared to the pre-COVID period. - Broader trade disruptions and global supply shocks can significantly raise shipping and logistics costs and, consequently, raise overall import prices. Given Kiribati’s high import dependence and sensitivity to freight costs, a protracted war in the Middle East could result in a sizable increase in domestic inflation. - The 2025 fuel and electricity tariff reforms temporarily lifted transport and utilities prices, but the impact is assessed to be one-off. ### Quantified contributions of shocks to inflation - Fiscal shocks: share increased to 7 percent in 2007-2025 from 4 percent in 2007-2019, partly reflecting the inflationary impact of procyclical fiscal policy in the post-COVID period. - Domestic demand: largest domestic contributor at around 28 percent, down from 31 percent before COVID. - Global demand, oil price, and global supply shocks are identified as key external drivers (model-based decomposition summarized in text). ### Component-level drivers (food, transport, restaurant inflation) - Food inflation - Lagged inflation in China is a statistically significant predictor. - A 1 percent increase in Chinese inflation is associated with a 2. 9 percent rise in Kiribati’s food inflation in the next quarter. - Transport inflation - Contemporaneous inflation in Australia is a statistically significant predictor. - A 1 percent increase in Australian inflation is associated with a 1.87 percent rise in Kiribati’s transport inflation. - Restaurant inflation - Drivers are diverse: external drivers such as global food price, global oil price and exchange rate, and internal drivers such as GDP growth and overall balance. - A contraction of 1 percent of GDP in the overall balance is associated with lower restaurant inflation by 0.05 percent after three quarters. - Regression model diagnostics and sample - Adjusted R²: 0.72 (Food), 0.26 (Transport), 0.7 (Restaurant). - Observations: 70 (Food), 70 (Transport), 67 (Restaurant). - Year-on-year quarterly inflation data from 2007 to 2025 used for OLS regression analysis. Explanatory variables include contemporaneous and lagged terms, as well as own inflation autoregressive terms (lags t–1). - Own lagged values are statistically significant predictors for all three components. ### Price level and import-cost structure - Absolute price level remains a major concern: cost of living is relatively high compared to other Pacific Island countries due to extreme remoteness and heavy reliance on imports. - Elevated freight costs—amplified by global shipping disruptions during and after the pandemic—have significantly raised import prices. - Empirical evidence shows spikes in global shipping costs have a lasting impact on domestic prices in small island economies. - Example: Unit price of meat and edible offal averages about USD 2,580 per ton for Kiribati, compared to a global median of USD 2,200—around 17 percent higher. - Other key imports with elevated unit prices include cereals, wheat or meslin flour, transmission apparatus, and vessels. ### Policy implications and recommendations - Monitor global developments closely given heavy dependence on imports and outsized role of external forces in driving inflation. - Maintain prudent fiscal policy to mitigate rising role of domestic fiscal shocks in inflation dynamics. - Targeted import diversification toward lower-cost suppliers can help contain import costs and potentially mitigate inflationary pressures, even when affecting a small share of import categories. - Complement import diversification with improvements in logistics, customs procedures, and domestic competition to ensure lower import costs are passed through to consumer prices. ### Model and data methodology (technical summary) - Contributions of shocks estimated using a Bayesian vector autoregression (BVAR) with sign restrictions. - The model includes seven quarterly variables: global real GDP growth, global oil prices, global headline inflation, Kiribati’s real GDP growth, Kiribati’s headline inflation, Kiribati’s overall fiscal balance, and changes in the AUD/USD exchange rate. - Identification via sign restrictions on the structural impact matrix: global demand shocks raise global growth, oil prices, and global inflation; oil-price shocks raise all three global variables; global supply shocks raise global growth but lower global inflation; domestic demand shocks increase domestic growth, domestic inflation, and fiscal balance; domestic supply shocks increase domestic growth but reduce domestic inflation while improving the fiscal balance. - The one-off fuel and electricity tariff reform in 2025 is captured as a domestic supply shock. - The VAR is estimated with two lags. Impulse responses and forecast-error variance decompositions are computed over a four-quarter horizon. - Global real GDP growth and global inflation are extracted as latent common factors estimated through a dynamic factor model applied to Kiribati’s ten largest trading partners. *Source: 1kirea2026001 (IMF staff estimates; Kiribati authorities).* ### Annex IV. Table 3. Kiribati: Table of Common Indicators Required for Surveillance ### Annex IV. Table 3. Kiribati: Table of Common Indicators Required for Surveillance ### Data Provision to the Fund / National Summary Data Page - Exchange Rates - International Reserve Assets and Reserve Liabilities of the Monetary Authorities - Total Assets of Other Depository Corporations - Total Credit from Other Depository Corporations - Currency Breakdown (domestic vs. foreign currency) of Other Depository Corporations’ Total Assets and Credit Indicators (total and sectoral breakdowns) - Total Stock of General Government Debt - Sectoral Breakdown of Credit from Other Depository Corporations ### Implementation of Main Recommendations of the 2025 Article IV Consultation - Fiscal policy - Recommendation: Initiate a credible medium-term fiscal consolidation to create space for priority climate adaptation and infrastructure investment, while ensuring debt sustainability. - Action: The 2026 budget includes measures broadly in line with staff recommendations; if fully executed, would achieve larger gains than recommended. These gains are offset by higher spending on climate-resilient roads and causeways on outer islands, resulting in slightly larger overall fiscal deficit for 2026 than recommended in the 2025 Article IV consultation. The medium-term budget follows similar trends. - Recommendation: Integrate Revenue Equalization Reserve Fund (RERF) withdrawals and deposits into a medium-term fiscal framework. - Action: Authorities noted RERF returns are volatile, view RERF as a key source of revenue, reaffirm interest in TA to strengthen the medium-term fiscal framework and possibly integrate RERF deposits and withdrawals into it. - Recommendation: Amend the RERF withdrawal rule to a balance-based framework (with caps relative to the RERF balance). - Action: Authorities committed to preserving the real value of the RERF and are drafting a sovereign wealth fund bill, aiming to pass the bill by 2028. - Recommendation: Strengthen domestic revenue mobilization (increase excise taxation, enhance fishing revenue, reduce SOE and other tax exemptions). - Action: Authorities recognize need to strengthen domestic revenue mobilization; noted higher excise tax collection in 2025, efforts to increase income tax compliance and VAT registrations. VAT (Amendment) Act requires SOEs to pay VAT, but exemptions under separate SOE-specific legislation create legal inconsistencies being resolved. Plan to introduce excise tax on kava to establish a public health fund. Special Economic Zone (SEZ) on Kiritimati Island approved by Cabinet. Revenue Administration Act under review; Revenue Management System being upgraded with donor support and TA. - Financial Sector Policy - Recommendation: Operationalize financial sector regulatory and supervisory institutions, including making the Kiribati Financial Supervisory Authority fully functional. - Action: KFSA has recruited two additional staff and is recruiting one more. One of 40 planned regulations has been completed, with two additional regulations under preparation, including the Payment Systems regulation planned for approval and implementation by 2028. Accounting and reporting standards, data-reporting templates, and supervisory IT systems are not yet in place. - Structural Policies - Recommendation: Rationalize recurrent expenditure, including subsidies (copra, SOEs) and the public wage bill, while protecting well targeted social spending. - Action: Ongoing progress with the Copra Act and discussions on introducing quantity caps, particularly in the Line Islands. Efforts to contain Community Service Obligations (CSO) payments supported by recent tariff adjustments for public utilities. - Recommendation: Strengthen Public Financial Management (PFM) to improve budget credibility, cash management, transparency, expenditure control, and increase efficiency of public spending and investment. - Action: Authorities progressing with IFMIS adoption and working toward reporting of all SOEs and Joint Venture entities (JVs). Reaffirmed interest in receiving TA to strengthen the medium-term fiscal framework. - Recommendation: Establish a debt management framework with strong governance, transparency, and accountability, and develop capacity to analyze new borrowing and assess sources of risk. - Action: Authorities introduced a loan accountability agreement with all SOEs in 2025 and acknowledged the need to report JV debt. - Capacity Development and Data issues - Recommendation: Continue to improve the quality, coverage, and timeliness of macroeconomic and fiscal statistics, particularly national accounts, government finance statistics, and external sector data. - Action: Authorities continue to receive TA from IMF Statistics Department and PFTAC to improve institutional capacity and data quality. - Recommendation: Improve JV reporting, which can affect GDP, trade, capital flows and debt statistics. - Action: Authorities acknowledged need for enhanced inter-agency coordination on JVs. Initial progress: 1) reporting of FDI of JVs to be included in next compilation of BOP statistics; 2) reporting of JV debt. ### Fund Relations, Membership, and Technical Assistance - As of April 30, 2026: - Membership Status: Joined June 3, 1986; accepted Article VIII. - Quota: 11.20 SDR Million (100.00 percent) - Fund holdings of currency: 9.80 SDR Million (87.51 percent) - Reserve tranche position: 1.41 SDR Million (12.58 percent) - Net cumulative allocation (SDR Department): 16.06 SDR Million (100.00 percent) - Holdings (SDR Department): 14.71 SDR Million (91.58 percent) - Outstanding Purchases and Loans: None - Latest Financial Arrangements: None - Overdue Obligations and Projected Payments to Fund (SDR Million; based on present holdings of SDRs) - Charges/Interest: 2026: 0.03; 2027: 0.04; 2028: 0.04; 2029: 0.04; 2030: 0.04 - Total: 2026: 0.03; 2027: 0.04; 2028: 0.04; 2029: 0.04; 2030: 0.04 - Exchange Arrangements: De jure and de facto classified as no separate legal tender. The Australian dollar circulates as legal tender. No central monetary institution; authorities do not buy or sell foreign exchange. Kiribati has accepted Article VIII, Sections 2, 3, and 4. - Article IV Consultation cycle: 12-month; previous consultation concluded virtually on May 19, 2025 (discussions April 22–30, 2025). - Resident Representative: Regional Resident Representative office for Pacific Island Countries based in Suva, Fiji; opened September 2010. Mr. Giovanni Ganelli is the current Resident Representative since April 2026. - Technical Assistance (selected entries; providers and periods preserved exactly as listed): - PFTAC: Financial Sector Supervision April 2021 - PFTAC: Government Finance Statistics April – June 2021 - PFTAC/FAD: Pacific Island Countries – Third Review of Tax Reforms May 2021 - PFTAC: Real Sector Statistics – Update and Rebase National Accounts October 2021 - PFTAC: Revenue Administration November – December 2021 - PFTAC: Public Financial Management – Update PFMA May – October 2022 - PFTAC: Financial Sector Supervision – Establishing Financial Supervisory Authority May – July 2022 - ... (additional TA entries continue through January 2026 as listed in the source) ### Debt Sustainability Analysis (DSA) — Key Findings - Risk assessments: - Risk of external debt distress: High - Overall risk of debt distress: High - Granularity in the risk rating: Sustainable - Application of Judgment: Yes. The projection horizon was extended to 20 years to capture the impact of climate change on debt dynamics. - Projection outcomes: - Under the baseline scenario, the present value of PPG external debt-to-GDP and overall PPG debt-to-GDP ratios are expected to breach their respective indicative threshold/benchmark starting in 2038 and 2044. - Stress tests and vulnerabilities: - Stress tests confirm vulnerability to contingent liabilities and growth shocks. - Combined contingent liability stress test incorporates contingent liabilities amounting to 70.3 percent of GDP, comprising: - 55 percent of GDP: Joint venture loans net of estimated collateral value - 10.3 percent of GDP: SOE's debt (guaranteed and not guaranteed by the government) — total liabilities of the SOEs - 0.0 percent of GDP: PPP (no PPP in Kiribati) - 5 percent of GDP: Financial market (the default value) - Total: 70.3 percent of GDP - Text notes: The combined contingent liability stress test accounts for implicit liabilities and a potential financial market shock; it includes 55 percent of GDP of non-guaranteed debt of two joint venture companies with minority government ownership and a standard 5 percent of GDP cost to the government of a financial crisis. - Assessment of sustainability: - Despite the high risk of debt distress, Kiribati’s debt is assessed to be sustainable due to: 1. Grant-only status for financing from multilateral development banks; 2. Availability of cash buffers and sovereign wealth fund withdrawals that can finance deficits; 3. In the baseline, the breaches occur only in the long term. - Continued access to highly concessional financing is needed to contain the risk of debt distress. - Methodology note: - Composite indicator based on October 2025 WEO and 2024 World Bank CPIA data estimated at 2.73, corresponding to a medium Debt Carrying Capacity. - The DSA is prepared jointly by the IMF and World Bank in line with the Guidance Note of the Joint Bank-Fund Debt Sustainability Framework for Low Income Countries, February 2018. ### Public Debt Coverage and Data Limitations - Public debt coverage: central government, central government guaranteed debt, and social security fund. - DSA conducted on a residency basis. - Data limitations: - Timeliness of SOE balance sheet information and lack of data on joint venture companies (including minority state ownership) are limiting factors. - DSA relies on 2023 SOE financial statements; 16 out of 18 SOEs have submitted their 2024 financial statements to SOEMAU aiming to complete auditing by end-2026. - Contingent liability specifics: - The 10.3 percent of GDP figure for SOE liabilities corresponds to liabilities of 17 SOEs accounted for in 2023 Recurrent Budget; contingent liability assumes SOE non-guaranteed liabilities are contingent to the government. - There are 18 SOEs operating across utilities, transportation, housing, and financial services; the newest SOE (Tourism Authority of Kiribati, established 2018) has not produced financial statements yet. ### Background on Debt and Economic Context - Population and geography: - Close to 130,000 people across 33 remote islands and a vast section of the Pacific Ocean; geography raises cost of delivering public services and contributes to infrastructure gaps. - Economic structure: - Narrow production and export base mainly related to tuna fishing and copra; high dependence on fishing license revenues and development partner support for infrastructure investment. - Sovereign wealth fund: - Revenue Equalization Reserve Fund (RERF) established in 1956. - RERF balance about AUD 1.68 billion (310 percent of GDP) at end-2025. *Prepared by the staff of the International Monetary Fund (IMF) and the International Development Association (IDA); April 21, 2026.* ### 4. Kiribati’s public and publicly guaranteed (PPG) debt, at 8.0 percent of GDP at end-2025, is ### 4. Kiribati’s public and publicly guaranteed (PPG) debt, at 8.0 percent of GDP at end-2025, is ### PPG debt composition and stock (end-2025) - PPG debt: 8.0 percent of GDP at end-2025. - External debt (combined outstanding): AUD 42.6 million (about 7.8 percent of GDP) at end-2025. - Domestic debt (guaranteed loans to DBK from KPF): AUD 0.62 million (0.1 percent of GDP) at end-2025. - All existing external debt is on concessional terms; no new external debt has been incurred since 2014. - Government of Kiribati (GoK) policy: committed to no new non-concessional external borrowing under the World Bank’s Sustainable Development Finance Policy (SDFP). - GoK announced planned new guarantees for SOEs’ planned borrowing in 2025 (0.7 percent of GDP in total) that are now expected in the baseline in 2026. ### External creditors and specific contingent liabilities - GoK’s external creditors: Asian Development Bank (ADB) and International Cooperation and Development Fund, Taiwan Province of China. - Text Table 3. Public External Debt Balance as of End 2025: - Asian Development Bank: AUD 26,315,866 - International Cooperation and Development Fund, Taiwan Province of China: AUD 16,270,334 - Reported private joint-venture and SOE borrowings linked to GoK exposure (as reported): - Kiribati Tuna Fish Limited (49 percent owned by GoK) reportedly contracted a 120 million USD loan in 2019. - Kiribati Blue Pacific Limited (40 percent owned by GoK) reportedly contracted two 160 million USD loans in 2023 and 2025 to build a total of 22 purse seine fishing vessels. - Kiribati Blue Pacific Limited contracted a 230 million USD loan in 2025 for land reclamation and renovation of a 3-star hotel on leased land in Tarawa. - Contingent liabilities from JVs are calculated taking into account vessel collateral value and GoK ownership share in these JVs. - Other provisional parliamentary guarantees approved in November 2025 (planned borrowing from KPF/DBK): - Kiribati Housing Corporation: 1.6 million AUD from KPF. - Kiribati Coconut Development Limited: 2.1 million AUD from KPF. - Kiribati National Shipping Line: 0.8 million AUD from Kiribati Development Bank. ### Debt management and fiscal risk recommendations - Strengthen the debt management framework, including issuance of government guarantees, to ensure fiscal risks remain limited. - Specific recommended measures: - Clarify the purposes of borrowing or issuing guarantees, and align them with the medium-term fiscal strategy and strategic investment priorities. - Require detailed annual reporting, including from SOEs and JVs. - Debt Advisory Committee to require a comprehensive financial analysis of all new borrowing proposals. - Maintain the submission and assessment process: proposals submitted to Debt Advisory Committee → short report to Minister of Finance → Cabinet and President for final approval. ### Macroeconomic background and implications for debt sustainability (2025 and medium term) - 2025 macro outcomes: - Real GDP growth in 2025: 4.3 percent. - Average headline inflation in 2025: 6.5 percent (up from 2.5 percent in 2024). - Fiscal deficit in 2025: 14.5 percent of GDP. - Baseline medium-term macro assumptions (2025–35): - Real GDP growth: projected at 2.4 percent on average in 2025–35, decelerating towards 2 percent in the long-term. - Population growth: about 1.6 percent. - Inflation: projected to average 2.7 percent in 2025–35 and gradually converge to slightly below 2 percent over the medium term. - Key revenue and expenditure projections affecting debt dynamics: - Fishing revenue: AUD 205.4 million in 2025 (38 percent of GDP; a decrease of 2 percentage points from 2024; and a decrease of 2 percent in nominal terms). Projected to remain around 36 percent of GDP in 2026–35. - Tax revenue: 2013-2023 average about 15 percent of GDP; increased to 18 percent of GDP in 2024 and 19 percent of GDP in 2025. Projected to remain around 18-19 percent over the medium term. - External grants: estimated 15 percent of GDP in 2025 (up from 10 percent of GDP in 2024); expected to increase to around 28 percent of GDP on average in 2026–28, then decline to about 20 percent of GDP in 2029-31. - Recurrent spending: 66 percent of GDP in 2025 (up from 63 percent in 2024); projected to gradually decline from 64 percent of GDP in 2026 to 62 percent of GDP in 2031, and remain around 62 percent in 2027-2031. - Development expenditure: 23 percent of GDP in 2025; expected to temporarily increase to 52 percent of GDP in 2026 due to donor-funded infrastructure project implementation. - Fiscal balance and financing: - Overall fiscal balance: -14 percent of GDP in 2025; deficits expected to average around 15 percent of GDP over 2025-35 under the baseline. - Financing sources assumed in baseline (Text Table 5 highlights): - Cash reserves: estimated at 49 percent of GDP at end-2025 (down from 51 percent at end-2024). Staff assume no use of cash reserves for deficit financing after 2026 in baseline. - RERF withdrawals: projected to provide an average of 9 percent of GDP in financing over 2025-35. AUD 80 million (15 percent of GDP) withdrawn in both 2024 and 2025; AUD 75 million projected for 2026; AUD 40 million budgeted annually for 2027-2029 (about 6-7 percent of GDP). - External financing (net): projected to become more important over the medium term; assumed on highly concessional terms in line with World Bank SDFP. - RERF policy recommendation: - Adopt a two-pronged balance-based withdrawal rule: (1) use withdrawals to finance high-quality development spending, and (2) set a cap of around 3 to 5 percent of the RERF balance on annual withdrawals to keep real per capita value approximately constant. Staff analysis suggests even annual withdrawals up to 15-16 percent of GDP (around 5 percent of RERF balance) could likely be sustained if needed without jeopardizing long-term RERF sustainability, assuming RERF returns. ### Risks and sensitivities relevant to debt and fiscal outlook - Downside risks to growth: protracted conflict in the Middle East, escalation of geopolitical tensions, prolonged increase in commodity prices and volatility, trade disruptions raising shipping and import prices, and increased financial market volatility. - Climate-related risks: natural disasters, weather shocks, and changes in ocean temperature affecting fish populations and fishing revenues. - Volatility in grants: high reliance on grants for development financing increases exposure to donor cycles and geopolitical shifts; project grant execution is subject to capacity constraints and volatility. - Policy sensitivity: failure to adhere to the recommended RERF withdrawal safeguards or to strengthen debt management could elevate fiscal risks and risk gradual depletion of RERF. *Source: Country authorities; and IMF staff estimates.* ### 7. The baseline scenario explicitly reflects the long-term impact of climate change and natural ### 1kirea2026001 - 7. The baseline scenario explicitly reflects the long-term impact of climate change and natural ### Baseline scenario and climate impacts - The baseline scenario explicitly reflects the long-term impact of climate change and natural disasters. - Compared with the non-disaster potential growth rate, Kiribati’s long term GDP growth projections in the baseline are adjusted downward by 0.1 ppt. - The current account is projected to decline by an additional 1 ppt of GDP on average in the long run due to natural disasters. - The primary balance is projected to decline annually by an additional 0.3 ppt of GDP on average in the long run due to lower fishing revenue driven by changes in seawater temperature. - The baseline scenario includes 6 percent of GDP for climate adaptation spending over the medium term. - No major disasters are assumed under the baseline scenario over the medium term. - Under the RCP 8.5 scenario, a high-emissions pathway, projections include: - global average temperature increase of roughly 4.3°C by the year 2100, relative to pre-industrial levels; - a likely range of 0.84 meters (0.61–1.10 meters) of global sea level rise. ### RERF (Revenue Equalization Reserve Fund) returns, composition, and risks - RERF benchmark portfolio initially: 50 percent Australian Government bonds and 50 percent in unhedged global equities; equity weight has increased recently given high equity returns. - Returns historically: - long-term average returns during 2011-2024: about 8 percent. - Risks and governance: - Risks to RERF sustainability increase if maximum withdrawals are made repeatedly under a return-based rule, with very large returns (e.g. more than 50 percent) of GDP happening in some years. - The RERF withdrawal rule should be subject to more legislative scrutiny, such as parliamentary approval. ### Projections realism and key projection features - Realism tools suggest projections are reasonable. - The left end of the 3-year adjustment in the primary balance reflects volatile fishing revenue and infrastructure projects underway. - Downward revision of the debt path versus the 2018 DSA reflects assumption differences (new borrowing assumed in 2018 DSA starting in 2019 vs. no new public borrowing since 2014). - Both public and private investment rates remain consistent across projection periods compared to the 2025 DSA. - Residuals contribute largely to debt creation in PPG external debt because Kiribati uses cash reserves and RERF withdrawals (when available) to finance deficits while accumulating assets and cash buffers in surplus periods. ### Country classification, composite indicator, and debt thresholds - Debt carrying capacity: “Medium” (same as last DSA). - Current composite indicator (CI) score: 2.73 (calculated based on the October 2025 WEO and the 2024 CPIA published in July 2025). - Indicative thresholds for medium debt-carrying capacity: - PV of PPG external debt-to-GDP ratio threshold: 40 percent. - PV of PPG external debt-to-exports ratio threshold: 180 percent. - Debt service-to-exports ratio threshold: 15 percent. - Debt service-to-revenue ratio threshold: 18 percent. - Benchmark for PV of total public debt-to-GDP ratio: 55 percent. - CI score components (coefficients, 10-year averages, contribution): - CPIA: coefficient 0.385; 10-year average 2.905; CI component 1.12; contribution 41%. - Real growth rate (in percent): coefficient 2.719; 10-year average 3.344; CI component 0.09; contribution 3%. - Import coverage of reserves (in percent): coefficient 4.052; 10-year average 57.963; CI component 2.35; contribution 86%. - Import coverage of reserves^2 (in percent): coefficient -3.990; 10-year average 33.597; CI component -1.34; contribution -49%. - Remittances (in percent): coefficient 2.022; 10-year average 5.167; CI component 0.10; contribution 4%. - World economic growth (in percent): coefficient 13.520; 10-year average 3.035; CI component 0.41; contribution 15%. - CI Score: 2.73; CI rating: Medium. ### Stress tests and tailored shocks - In addition to six standardized stress tests, two tailored stress tests are incorporated: contingent liabilities and natural disasters shocks. - Natural disaster tailored stress test assumptions: - one-off natural disaster in the second year of the projection period leads to additional external borrowing of 10 percent of GDP; - cuts real GDP growth by 4.6 percentage points in that year; - cuts exports growth by 12 percentage points in that year; - aligned with Kiribati-specific impacts from severe natural disasters. - Reference: the natural disaster impacts draw from “The Economic Impact of Natural Disasters in Pacific Island Countries: Adaptation and Preparedness” by Lee and others (2018). ### External debt sustainability findings - Under the baseline scenario: - PV of the PPG external debt-to-GDP ratio is expected to increase and breach the indicative threshold (40 percent) in 2038 (two years later than in the 2025 DSA). - Bulk of projected external debt, including new debt, is on concessional terms according to the World Bank’s SDFP cap on non-concessional borrowing, so debt service will remain relatively contained. - Stress test outcomes: - Under the most extreme test scenario (contingent liabilities), the PV of the PPG external debt-to-GDP ratio breaches its threshold starting from 2027. - The PV of the PPG external debt-to-GDP ratio is also vulnerable to shocks from primary balance and exports, breaching its threshold starting from 2032. - The PV of PPG external debt-to-exports ratio will breach its indicative threshold in 2034 under the exports shock. - Other scenarios (other flows, current transfers and FDI, and natural disaster scenarios) illustrate vulnerability of debt trajectory to external and climate-related shocks. ### Public debt sustainability findings - Public debt dynamics follow external debt given limited domestic debt. - Risks: volatility of fishing revenue and contingent liabilities from the government-managed pension fund, SOEs, and joint venture companies. - Under the baseline: - PV of the total public debt-to-GDP ratio will breach the indicative benchmark (55 percent) starting from 2044 (one year later than the 2025 DSA). - Most extreme shock scenarios: - Growth shock (most extreme) predicts PV of total public debt-to-GDP ratio breaches the 55 percent benchmark starting from 2034. - Combined contingent liabilities shock could cause breach from 2034. - Tailored natural disaster shock could cause breach from 2037. ### Risk ratings, vulnerabilities, and mitigating factors - Risk assessments: - Risk of external debt distress: high (PV of PPG external debt-to-GDP ratio expected to breach threshold starting from 2038). - Overall risk of debt distress: high (PV of overall PPG debt-to-GDP ratio projected to breach benchmark starting from 2044). - Mitigating factors supporting debt sustainability: - Breaches occur only in the long term. - Grant-only status for MDB financing and likely long-term access to highly concessional financing. - Large government cash buffers and resources in the RERF that can be drawn to finance deficits in the near term. - Key vulnerabilities: - Budget dependence on volatile fishing revenue. - Liquidity buffers could be depleted more rapidly if access to external loans is insufficient amid continued fiscal deficits. ### Policy recommendations and reforms - Initiate gradual growth-friendly fiscal consolidation by: - Streamlining recurrent spending. - Mobilizing tax revenue. - Ensure RERF withdrawals do not increase risk of RERF depletion. - Further structural and fiscal reforms needed: - Strengthen the fiscal policy framework. - Improve targeting and efficiency of social safety nets. - Improve public financial management. - Put RERF withdrawals under legislative scrutiny. - Put SOEs on a commercial and sustainable footing. - Continue external grants to support large development needs. - Authorities’ commitments: - Preserve debt sustainability and maintain a balanced budget (treating RERF withdrawals as revenue). - Mobilize revenues, streamline subsidies, monitor fiscal risks related to SOEs and JVs. - Broaden SOE Monitoring and Advisory Unit to include JVs and improve inter-agency information sharing. - Seek technical assistance to build capacity for analyzing new borrowing and improve debt management. - Continue to seek grants from bilateral development partners and international financial institutions. - Reaffirm commitment to no new non-concessional external borrowing policies. *Source: IMF staff estimates and projections as presented in the chapter text.* ### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the ### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the ### Overview - The size of 3-year adjustment from program inception is found on the horizontal axis; the percent of sample is found on the vertical axis. - Title/labels appearing in the content: "3-Year Adjustment in Primary Balance (Percentage points of GDP)" and "Fiscal Adjustment and Possible Growth Paths 1/". ### Chart axes and labels - Horizontal axis: size of 3-year adjustment from program inception (percentage points of GDP). - Vertical axis: percent of sample. - Tick/scale values shown on horizontal axis: 0, 2, 4, 6, 8, 10, 12, 14. ### Annotated series and legends (as provided) - "Distribution 1/" - "Projected 3-yr adjustment" - "3-year PB adjustment greater than" ### Notes - The superscript footnote marker shown: "1/" - Exact phrasing preserved from source where present. *Source: 1kirea2026001 - 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the* ### 2.5 percentage points of GDP in ### 2.5 percentage points of GDP in ### Recent developments and outlook - Real GDP growth: - 2022: revised to 5.0 percent - 2023: revised to 3.3 percent - 2024: 4.6 percent - Staff estimate 2025: 4.3 percent - Inflation: - 2025: 6.5 percent - Projected 2026: around 4.5 percent - RERF performance and reserves: - RERF annual return in 2025: 10 percent - RERF balance at end-2025: about 310 percent of GDP - Cash reserves at end-2025: estimated at about 49 percent of GDP - External and current account: - Current account deficit in 2025: 19 percent of GDP (widened, reflecting higher imports related to large infrastructure projects) - Key sector—fisheries: - Total fishing revenue in 2025: AUD 205 million - Fishing revenue share of GDP: 38 percent in 2025 (declined slightly from 40 percent of GDP in 2024) - Fishing revenue exceeded authorities’ projection by AUD 18.9 million - Risks: - Significant downside risks from global shocks and climate-related events - Concern that a protracted conflict in the Middle East could raise inflation, disrupt supply chains, and weigh on real incomes - Authorities plan to delay some government activities if downside risks materialize ### Fiscal policy and public debt - Fiscal stance and outcomes: - Overall deficit broadly unchanged from 2024 at about 14 percent of GDP in 2025 - Fiscal policy in 2025: broadly neutral, supported by donor grants and strong tax revenue - Public and publicly guaranteed (PPG) debt: - Public and publicly guaranteed debt at end-2025: 8.0 percent of GDP - Most PPG debt is external and on concessional terms; no new external debt contracted since 2014 - Authorities reaffirm commitment to avoiding new non-concessional external borrowing - Under staff baseline, debt remains sustainable but risk of debt distress is high over the 20-year projection horizon due to climate-related vulnerabilities - Revenue and tax measures: - Projected tax revenue over the medium term: around 18–19 percent of GDP - 2013–23 average tax revenue: about 15 percent of GDP - Planned/amended tax measures: amendments to the Income Tax Act and VAT Act; new bill to increase excise taxes on tobacco and alcohol and introduce an excise tax on kava (expected to take effect this year) - Other fiscal measures and SOEs: - 2026 budget includes a cost-sharing arrangement with an SOE for the copra price support scheme - Electricity tariff adjustments implemented in 2025 to move toward cost recovery; fuel prices adjusted to better reflect international prices - SOE Act passed in August 2025 to strengthen SOE governance, accountability, reporting, and financial sustainability - Introduction of loan accountability agreements for SOEs with requirements for prior debt sustainability assessments, Board accountability, and quarterly reporting - Memorandum fiscal buffers: - Availability of RERF withdrawals noted as an important mitigating factor ### Debt sustainability framework and projections (selected indicators) - Public sector debt (Table 2, selected years and values in percent of GDP or as reported): - 2022: 16.2 - 2023: 11.0 - 2024: 8.8 - 2025: 8.0 - 2026: 7.7 - 2027: 15.8 - 2028: 21.2 - 2029: 28.6 - 2030: 33.2 - 2035: 61.4 - 2045: 102.9 - External debt (Table 1, external debt nominal as percent of GDP, selected years): - 2022: 12.6 - 2023: 10.4 - 2024: 8.6 - 2025: 7.8 - 2026: 7.0 - 2027: 15.2 - 2028: 20.7 - 2029: 28.3 - 2030: 33.0 - 2035: 61.4 - 2045: 102.9 - Key DSA indicators (selected): - PV of PPG external debt-to-GDP ratio (selected projected values): 6.8, 6.4, 5.3, 8.9, 11.4, 14.9, 17.2, 19.6, 22.3, 25.6, 28.8, 32.0, 57.3 - PV of PPG external debt-to-exports ratio (selected projected values): 15.1, 14.6, 12.3, 20.8, 26.7, 35.1, 40.7, 46.2, 52.5, 61.6, 69.1, 78.3, 144.8 - PPG debt service-to-exports ratio (selected projected values): 2.1, 1.5, 1.4, 1.5, 1.3, 1.2, 1.4, 1.4, 1.6, 1.6, 1.7, 1.8, 2.1, 5.4 - Gross external financing need (Million of U.S. dollars, selected): 38.6, 12.0, 69.3, 71.5, 80.6, 80.4, 78.0, 78.6, 79.9, 82.2, 84.3, 87.3, 90.8, 93.9, 141.2 - Key macroeconomic assumptions (selected): - Real GDP growth (percent): 5.0, 3.3, 4.6, 4.3, 3.1, 2.4, 2.2, 2.2, 2.1, 2.1, 2.1, 2.1, 4.9, 2.4 - GDP deflator in US dollar terms (change in percent, selected): -9.5, 3.9, 12.5, -2.4, 11.3, 1.6, 1.3, 1.5, 1.9, 1.7, 1.7, 1.7, 1.7 - Effective interest rate (percent, selected): 1.3, 1.4, 1.4, 1.4, 1.5, 1.4, 1.1, 1.1, 1.1, 1.0, 1.0, 1.0, 1.2, 1.2 - Aid flows (Million of US dollars, selected): 34.9, 74.9, 35.3, 54.0, 160.3, 121.2, 124.5, 132.1, 121.6, 120.4, 128.7, 139.2, 143.5, 147.4, 194.6 - Grant-equivalent financing (in percent of GDP, selected): 15.5, 40.0, 25.0, 25.9, 25.5, 23.3, 22.1, 22.5, 22.9, 22.8, 22.6, 22.4 - DSA commentary: - The large residual in Table 1 is attributable to data quality issues, accumulation of assets in the RERF, and the partial utilization assumption regarding IDA/ADB commitments entering the DSA in full while development expenditures are not utilizing these funds in full. ### Structural policies and development priorities - Long-term vision and priorities: - Kiribati 20-Year Vision: promote sustainable and inclusive development by leveraging natural, human, and cultural resources - Priorities: expand private sector employment and investment; diversify exports; improve infrastructure; empower outer-island communities; strengthen education and health services; enhance institutions and governance; respond to climate change - Social protection: - Authorities aim for universal, life-cycle focused, complementary, and unconditional social protection - Authorities state expanded social benefits contributed to a 75 percent reduction in poverty between 2019 and 2023 - Ongoing improvements: management information system and expanded digital payments; implementation constraints in outer islands remain significant - Infrastructure and business climate: - Major projects underway: outer-island, airport, and port improvements; transport and connectivity upgrades; renewable energy and climate-resilient investments; school and health facilities - Financing: largely concessional financing and donor grants - Plans for a Development Partner Forum to better align projects with national priorities - Climate vulnerability and adaptation needs: - Annual adaptation costs to contain climate-related economic losses estimated at 25 percent of GDP (highest among Pacific Island countries) - Bilateral and MDB financing cover only a fraction of estimated needs; capacity to directly access climate finance is a medium-term priority ### Institutional reforms, SOEs, JVs, and contingent liabilities - SOE governance and monitoring: - SOE Act passed in August 2025 to strengthen governance, accountability, reporting, and financial sustainability - Loan accountability agreements with SOEs introduced to govern government guarantees - Authorities clarifying that government has no legally binding obligation for JV debt; government has not participated in loan or debt financing for vessels or hotel investments linked to JVs referenced in the staff report - Authorities agree to broaden SOE Monitoring and Advisory Unit coverage to include JVs and improve interagency information sharing - Revenue and investment incentives: - Authorities view tax holidays and SEZ cost-based tax incentives as long-term tools to attract investment given high costs and challenging FDI environment - Authorities recognize need to clarify JV dividend arrangements, regularly review SEZ and JV incentives, and strengthen monitoring of potential revenue losses ### Capacity development and technical assistance priorities - Areas of ongoing and requested capacity development: - Strengthening MTFF and integrating RERF withdrawals and fiscal risks into medium-term budgeting - Fisheries revenue mobilization and fisheries revenue risk assessment - Fiscal risk assessment for SOEs and JVs; improving monitoring and transparency of JV activities - Project appraisal and public investment management - Debt management, revenue administration, PFM, and macroeconomic statistics - Financial sector reporting and supervision, including operationalizing the Kiribati Financial Supervisory Authority - Continued PFTAC support for statistical quality and interagency coordination *Source: Statement by Mr. Mark Blackmore, Alternate Executive Director, and Mr. Jae Woo Oh, Senior Advisor to Executive Director (May 11, 2026); Tables and projections as presented in the provided DSA material.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1kirea2026001.pdf_