## _cr11113 ## Source details **Canonical URL:** [_cr11113](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11113.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11113.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11113.pdf.json) --- ### INTRODUCTION - Kiribati: small Pacific island economy reliant on foreign aid; vulnerable to external shocks, particularly climate change. - Narrow export and production base: copra, seaweed, fishing. - Tourism: less than 2 percent of GDP. - Public sector dominates; recent pickup in private sector activity. - Key income sources: fishing license fees, remittances, Kiribati’s wealth fund (RERF) derived from phosphate deposits exhausted in 1979. - 2011 Article IV focus: policies for sustainable growth, managing an ongoing investment boom without creating inflationary pressures, and implementing structural reforms. - Political timing: government elected 2007; Parliamentary elections scheduled August 2011; presidential election October 2011. ### RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK - From crisis to recovery: - 2010 estimated growth: 1¾ percent. - Tourist arrivals: rebounded by 20 percent (2010 vs. 2009). - Inflation: plunged from 2008 highs into negative territory in 2010 due to strong appreciation of the Australian dollar and decline in world price of rice. - Credit growth: declined in 2009; picked up in H2 2010. - Poverty and MDGs (Box 1): - Poverty incidence increased from 22 percent to 26 percent (additional 10 percent of population likely fell below poverty line due to 2008 shocks and global crisis). - Five out of eight MDGs seem out of reach by 2015. - Staff baseline medium-term macroframework (2011–2016): - Real GDP growth (%): 2011: 3.0; 2012: 3.5; 2013: 3.0; 2014: 2.0; 2015: 2.0; 2016: 2.0 - Inflation (%): 2011: 7.7; 2012: 5.0; 2013: 3.3; 2014: 2.5; 2015: 2.5; 2016: 2.5 - Fiscal balance (% of GDP): 2011: -14.3; 2012: -18.1; 2013: -16.2; 2014: -14.7; 2015: -15.0; 2016: -13.7 - Current account (% of GDP): 2011: -28.9; 2012: -29.2; 2013: -26.8; 2014: -23.0; 2015: -24.6; 2016: -23.9 - Staff reform macroframework (with stepped-up reforms): - Real GDP growth (%): 2011: 3.0; 2012: 3.5; 2013: 3.5; 2014: 3.0; 2015: 3.0; 2016: 3.0 - Inflation (%): 2011: 7.7; 2012: 4.0; 2013: 3.0; 2014: 2.5; 2015: 2.5; 2016: 2.5 - Fiscal balance (% of GDP): 2011: -14.3; 2012: -10.3; 2013: -7.5; 2014: -5.2; 2015: -5.3; 2016: -4.6 - Current account (% of GDP): 2011: -27.2; 2012: -22.6; 2013: -20.2; 2014: -16.6; 2015: -17.4; 2016: -16.4 - Outlook and risks: - Near-term growth supported by public projects (Tarawa road, airport, port) financed externally; expected growth in 3 percent range. - Medium-term reversion to 1½–2 percent if climate change continues to negatively affect activity. - Upside risk: domestic public works may have larger-than-expected output impact. - Downside risks: stalled global recovery reducing remittances; surge in world food and oil prices raising inflation and poverty; pressures from investment boom; long-run climate vulnerabilities. ### IMPACT OF HIGH FUEL AND FOOD PRICES (Box 2) - Food and fuel imports: 30 percent of GDP. - Share of food and fuel in total imports: increased from less than 40 percent to about 60 percent over the last decade. - Rice: 20 percent of the CPI food basket. - Historical pass-through: international fuel price increases result in equal increase in domestic prices with a three-month lag. - Adverse oil-shock scenario (relative to baseline for 2011 and 2012): - Oil price (US$/barrel): Baseline 2011: 107.2; Adverse 2011: 149.2; Baseline 2012: 109.3; Adverse 2012: 110.9 - Real GDP growth (percent): Baseline 2011: 3.0; Adverse 2011: 2.0; Baseline 2012: 3.5; Adverse 2012: 2.4 - Inflation (percent): Baseline 2011: 7.7; Adverse 2011: 11.7; Baseline 2012: 5.0; Adverse 2012: 7.1 - Fiscal balance (percent of GDP): Baseline 2011: -14.3; Adverse 2011: -16.8; Baseline 2012: -18.1; Adverse 2012: -20.2 - Current account (percent of GDP): Baseline 2011: -28.9; Adverse 2011: -32.0; Baseline 2012: -29.2; Adverse 2012: -31.7 - Under adverse scenario with oil +40 percent in 2011 (and no further AUD appreciation): - Fiscal balance deteriorates by 2½ percentage points of GDP in 2011 vs. baseline. - Current account deteriorates by 3 percentage points of GDP in 2011 vs. baseline. ### CENTRAL ECONOMIC INDICATORS (selected exact figures) - Nominal GDP (2010): US$146.7 million - GDP per capita (2010): US$1,420 - Nominal GNI (2010): US$209.6 million - Population (2010): 103,280 - Quota: SDR 5.6 million - Selected series (Real GDP percent change): 2007 0.4; 2008 -1.1; 2009 -0.7; 2010 1.8; 2011 3.0; 2012 3.5 - Consumer prices (percent change, average): 2007 4.2; 2008 11.0; 2009 8.8; 2010 -2.8; 2011 7.7; 2012 5.0 ### BALANCE OF PAYMENTS (selected) - Current account including official transfers (in US$ millions): 2007 -37.6; 2008 -46.0; 2009 -38.1; 2010 -34.1; 2011 -47.1; 2012 -50.5 - Current account (percent of GDP): 2007 -29.4; 2008 -34.7; 2009 -29.8; 2010 -23.1; 2011 -28.9; 2012 -29.2 - External debt (US$ millions): 2007 13.7; 2008 14.5; 2009 14.3; 2010 18.4; 2011 27.6; 2012 43.5 - External debt (percent of GDP): 2007 10.2; 2008 13.3; 2009 9.7; 2010 11.3; 2011 17.0; 2012 25.1 ### RERF LEVELS (selected) - RERF assets (A$ millions): 2007 A$637; 2008 A$561; 2009 A$571 - RERF assets (US$ millions, selected): 2007 562; 2008 389; 2009 512; 2010 572; 2011 515; 2012 518 - Authorities’ nominal drawdown rule: target RERF drawdown at A$15 million per year during 2011–13. ### POLICY — FISCAL FRAMEWORK AND COUNTERCYCLICAL SCOPE - Fiscal position and constraints: - Fishing license fees: about half of government revenues (large but volatile revenue base). - Fiscal deficits historically financed by RERF drawdowns rather than borrowing. - Fiscal deficit history: bottomed at 20 percent of GDP in 2008; narrowed in 2009 after expenditure compression and improved tax collection; estimated deficit 2010: 8 percent of GDP (down from 12½ percent in 2009); expected to deteriorate to 14 percent of GDP in 2011 due to development expenditure increases financed by external assistance and RERF drawdowns. - RERF assets declined from A$637 million (420 percent of GDP) in 2007 to A$571 million (350 percent of GDP) in 2009; decline reflected exposure to failed Icelandic banks (A$40 million, or 25 percent of GDP) and continued drawdowns. - Staff assessment and recommended fiscal strategy: - Near-term stance: appropriate to support key development expenditures that spur productivity growth for next two years; shift to fiscal consolidation in out years. - Long-term anchor: to stabilize real per capita value of the RERF once key investments are completed, budget deficits should be limited to 5–6 percent of GDP over the long term (DSA reform scenario). - If pre-existing trend of RERF drawdowns continues, RERF real per capita balance would reach one-third of its 2000 value by 2030 (DSA baseline scenario). - Operational guidance: conservative revenue projections; flesh out downside scenarios; save stronger-than-anticipated revenues during upswings; use windfalls only during downturns. - Recommended fiscal measures: - Phase out poorly targeted and distortionary subsidies to copra producers and other SOEs amounting to some 5 percent of GDP. - Restructure loss-making SOEs. - Shore up customs administration and reduce exemptions. - Consider introduction of a VAT. - Reconsider RERF investment strategies per MCM TA recommendations and review strategic asset allocation to reflect currency composition of imports. - Strengthen RERF governance: increase in-house expertise, hire long-term consultant, monitor investment risks/returns, publish annual reports. - Introduce auction scheme for fishing licenses (implemented September 2010) to increase fishing license revenues over medium term. ### RISK AND DEBT OUTLOOK; DEBT SUSTAINABILITY ANALYSIS (DSA) HIGHLIGHTS - Current assessment: Kiribati is at high risk of debt distress under baseline. - Reform scenario reduces risk to “low” with fiscal consolidation, grant financing, and structural reforms; none of the DSA thresholds breached under reform scenario. - Fiscal rule under reform scenario: preserve real per capita value of RERF at its 2014 level; implies deficits limited to 5–6 percent of GDP on average starting 2014. - Assumptions for RERF stabilization: - Nominal rate of return on RERF: about 5½ percent long term. - Population growth: 1.6 percent per year. - Inflation: 2½ percent. - Nominal RERF balance must grow by about 4 percent per year (2½ percent inflation + 1.6 percent population growth). - Yearly nominal draw-down implied: about 1½ percent of the RERF total balance. - Nominal GDP growth assumed about 5 percent per year long run (2½ real + 2½ inflation), so RERF as percent of GDP declines despite constant real per capita value. - Development financing assumptions: - Reform scenario: greater proportion of development financing from grants vs. loans; World Bank assumed to offer grants over medium term. - Long-term external loan financing assumed about US$2½ million each year vs. US$10 million in baseline. - Baseline public sector debt (percent of GDP), selected years: - 2007: 32.5; 2010: 31.9; 2015: 54.3; 2020: 66.0; 2030: 66.2 - External debt (percent of GDP), baseline selected: 2007: 10.2; 2010: 11.3; 2015: 41.9; 2020: 55.8; 2030: 59.4 - Reform scenario external debt (percent of GDP), selected: 2011: 17.0; 2015: 19.0; 2020: 17.9; 2030: 14.4 - DSA stress tests include financing shock: interest rate on new borrowing 200 basis points higher than baseline; other bound tests include 30 percent one-time real depreciation in 2011 and 10 percent of GDP increase in other debt-creating flows in 2011. - Policy implications: - Preserve RERF value; continue securing grant financing; narrow fiscal deficits; contain current expenditures (wage bill, subsidies); improve customs administration; strengthen multi-year budget framework. ### FISHING LICENSE REVENUES (Box 3) - Fishing license fees: on average 45 percent of government revenues over last ten years. - 2010: fees surged by almost 40 percent (y/y) to 52 percent of GDP, supported by auction scheme and temporary fines. - Volatility mitigation efforts: - Evaluating hedging exchange rate risk through financial derivatives or denominating fees in a basket of currencies (currently collected in U.S. dollars). - Initiatives to encourage domestic marine processing; joint venture with Chinese and Fijian firms expected FDI: A$50 million. - Participation in PFFA and negotiations on Economic Partnership Agreement with EU may create revenue opportunities. ### STRUCTURAL REFORMS, SOE REFORM, AND PFM - Structural constraints: - Land reform: two thirds of land government-owned, one third owned by families; unclear property rights; lengthy court and lease procedures; Minister of Land final approval. - SOE contingent liabilities: about 20 percent of GDP in 2010. - Business climate: cumbersome procedures for starting/closing a business and construction permits; limited, costly access to credit; poor infrastructure. - Staff advice: - Accelerate structural reform agenda to foster private-sector-led growth, particularly tourism and fish processing. - Streamline starting a business, construction permits; expand access to credit. - Enact new land law to strengthen administrative systems for transferring property rights. - Authorities interested in liberalizing telecommunications with World Bank assistance. - SOE reform: - Staff supported SOE reform with AsDB assistance to create space for private sector and reduce budget drain. - Limit SOEs to areas where private operations not viable (water, electricity, fuel distribution to outer islands). - Public Financial Management (PFM): - Weak PFM: poor data quality/expenditure controls; outdated legislation; limited info on fiscal risks from nonperforming SOEs; poor links between capital investments and recurrent budgets. - PFM Reform Plan based on 2010 PEFA provides platform for dialogue and technical assistance. ### FINANCIAL SECTOR — STRUCTURE, RISKS, AND RECOMMENDATIONS - Financial sector composition: - Two banks, one insurance company, a pension fund. - ANZ Bank (Kiribati) Limited: only commercial bank (25 percent government-owned). - Development Bank of Kiribati (DBK): wholly government-owned. - Kiribati Insurance Corporation. - Kiribati Provident Fund (KPF): manages pension assets, about 60 percent of GDP in 2010; assets A$100 million at end-2010. - KPF specifics (Box 4): - 2008 crisis: asset values dropped by 20 percent; rebounded in 2009–10 to pre-crisis value. - Employers and employees each contribute 7½ percent of salary. - Retirement age: 50 years; lump-sum payment at retirement. - Minimum yearly guaranteed return: 4 percent. - Mid-2010: asset allocation changed from 60–40 split (risky vs. fixed income) to more diversified allocation; hired additional portfolio manager. - KPF lending scheme (July 2010): short-term borrowing up to 14 percent of member’s balance; 2010 loans totaled A$3 million (about 3½ percent of fund’s portfolio). - Earlier losses: lending to DBK amounting to A$1½ million (education loans at below market rates in 2007). - DBK indicators (Box 4): - About 40 percent of loans for business; NPLs high: 24 percent of total loans in 2010. - Provisions: 60 percent for NPLs. - DBK Financial Soundness Indicators (percent, table years 2007–2010 1/): - NPL to total loans: 23.7, 25.6, 24.7, 23.6 - Provisions-NPL ratio: 48.9, 56.4, 56.4, 58.2 - Loans-capital ratio: 220, 246, 201, 202 - Capital-assets ratio: 41.5, 39.3, 48.6, 51.7 - ROA: 2.7, -3.0, 1.5, 1.3 - ROE: 6.4, -7.3, 3.3, 2.6 - 1/ September 2010. - Staff recommendations: - Increase competition in banking sector to spur private development. - Expand micro-credit with village banks. - Contain NPLs at DBK via tighter lending standards and improved risk management. - Introduce a land law to ease access to credit and collateral recovery. - Strengthen bank regulation and supervision before expanding DBK lending. - Enact and implement draft AML/CFT law. - On KPF lending scheme: do not increase size of scheme; invest in financial education; seek technical assistance to improve design. - Authorities requested IMF TA on financial supervision/regulation and reviewing KPF asset allocation and long-term viability. ### EXTERNAL COMPETITIVENESS AND EXTERNAL STABILITY - Australian dollar circulates as legal tender. - REER: appreciated by 20 percent since 2008, driven by strong Australian dollar; appears overvalued vs. long-run level. - Staff: use of Australian dollar appropriate; structural reforms crucial to regain competitiveness after appreciation. - Current account: improved in recent years due to fishing license income; projected to deteriorate near term with large public investment, narrow by end of projection to 24 percent of GDP (from 29 percent in 2011) in line with fiscal improvement. - External stability: securing grant financing and containing fiscal deficits key; medium-term current account sustainability driven by fiscal policy. ### STAFF APPRAISAL — KEY CONCLUSIONS AND RECOMMENDATIONS - Recovery from crisis with strong momentum; large public investment financed by foreign assistance underpins medium-term growth prospects. - Gains may be transitory if fiscal and structural reforms remain unfinished. - Preserve real per capita value of the RERF for fiscal sustainability and intergenerational fairness. - After key projects underway, shift to fiscal consolidation to rebuild fiscal space and cope with climate-change spending pressures. - Recommendations: - Save windfall revenues during upswings and use during downturns. - Strengthen medium-term fiscal framework to avoid pro-cyclical policies. - Accelerate structural reform agenda; SOE reform critical to create private sector space and reduce budgetary drain. - Postpone further expansion of DBK until regulatory/supervisory framework in place. - Expand micro-credit schemes to ease credit constraints. - Continue securing grant financing to support development needs. - Improve quality of macroeconomic data and implement PFTAC recommendations. ### IMF RELATIONS, TECHNICAL ASSISTANCE, AND PARTNER ENGAGEMENT - IMF membership: Joined June 3, 1986; Article VIII. - TA providers: STA, LEG, MCM, PFTAC on statistics, tax administration/policy, budget management, RERF management, financial sector reform/supervision, AML/CFT. - Resident Representative office in Pacific Islands opened September 2010 in Suva, Fiji; Resident Representative: Mr. Yongzheng Yang. - PFTAC engagement (May 2008–May 2011): - Eight advisory missions; 15 officials sent to regional seminars/workshops. - PFTAC recommended VAT, presumptive tax, simplified PIT, single-rate CIT, single ad valorem import tax; progress limited. - PFTAC assisted national accounts, balance of payments, and BOP compiler attachments; recommended further capacity building. - Bank–Fund collaboration: - Joint DSAs produced; World Bank CAS for Kiribati focuses on climate change adaptation and mitigating geographic isolation. - World Bank/CAS anticipate IDA grants and trust fund investments up to US$50 million over FY11–FY14; South Tarawa road improvement US$24m IDA/TF financing approved March 1, 2011. ### CONSULTATION CYCLE AND STATISTICAL ISSUES - Recommendation: next Article IV consultation on a 24-month cycle. - Statistical assessment: - Data broadly adequate for surveillance; Balance of Payments most affected. - National accounts improved with PFTAC/STA assistance; no expenditure-based GDP estimates. - Price statistics: monthly retail price index based on capital survey; no producer/wholesale indices. - Government finance statistics: budget outcome lag ~1 year; misclassifications identified. - Monetary statistics: institutional balance sheets available with lags; consolidated financial sector balance sheet not available. - BOP: delays (~1 year), large errors and omissions, inconsistencies with budget data; PFTAC missions revised BOP up to 2009. - GDDS participant since 2004; no data ROSC available. - Table of Common Indicators (selected reporting status preserved as in source). *Source: KIRIBATI 2011 ARTICLE IV REPORT (IMF staff report excerpt, content unit _cr11113).* ### INTRODUCTION ____________________________________________________________ 3 ### _cr11113 - INTRODUCTION ____________________________________________________________ 3 ### INTRODUCTION - Kiribati is a small Pacific island economy reliant on foreign aid and vulnerable to external shocks, particularly climate change. - Export and production bases are narrow and limited to copra, seaweed and fishing. - Tourism accounts for less than 2 percent of GDP. - The public sector dominates the economy, but private sector activity has picked up lately. - Key income sources: fishing license fees, remittances, and Kiribati’s wealth fund (derived from phosphate deposits exhausted in 1979). - Increasing costs of climate change and large development needs raise important policy challenges. - The 2011 Article IV discussions focused on policies to support sustainable growth and priorities for structural reforms, with near-term challenge to manage an ongoing investment boom without creating inflationary pressures and medium-term prospects contingent on implementing structural reforms. - Political background: current government elected in 2007; Parliamentary elections scheduled for August 2011; presidential election to be held in October 2011. ### RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK #### A. From Crisis to Recovery - The global crisis impact was stronger than anticipated in 2009 Article IV; Kiribati was affected by a fall in remittances and large declines in the value of the Revenue Equalization Reserve Fund (RERF) and the Kiribati Provident Fund. - The 2008 spike in food and fuel prices and worsening climate-change vulnerabilities (including coastline erosion and transport disruptions) impeded MDG achievement; full achievement of the MDGs by 2015 is likely out of reach (Table 1 and Box 1). - After two years of contraction, the economy recovered in the second half of 2010: - Estimated to have grown by 1¾ percent for 2010 (Table 2). - Weather-related drop in copra production, but private sector activity picked up, especially in retail. - Tourist arrivals rebounded by 20 percent compared to 2009 (from a very low base). - Inflation pressures dissipated in 2010: - Inflation plunged from 2008 highs into negative territory, reflecting strong appreciation of the Australian dollar (used as domestic currency) and a decline in the world price of rice. - Credit growth declined in 2009 but started to pick up in the second half of 2010 as recovery gained traction. Box 1 (Poverty Trends in Kiribati) — key findings: - The 2008 spike in food and fuel prices and the global crisis undermined past gains in poverty reduction. - An additional 10 percent of population likely fell below the poverty line, with incidence of poverty increasing from 22 percent to 26 percent. - Poverty is highly concentrated in urban areas (South Tarawa); outer islands have greater access to land and marine resources but face higher transport costs. - Progress toward MDGs set back; five out of eight goals seem out of reach. - Government strategy embedded in the Kiribati Development Plan (2008–11) focuses on supporting private sector development (eco-tourism, domestic processing fishing industry) and creating employment domestically and abroad. - In March 2010, a national framework for climate change adaptation and migration was formulated; development partners have helped create temporary employment opportunities abroad. #### B. Outlook and Risks Staff’s baseline medium-term macroframework (2011–2016): - Real GDP growth (%) by year: 2011: 3.0; 2012: 3.5; 2013: 3.0; 2014: 2.0; 2015: 2.0; 2016: 2.0 - Inflation (%) by year: 2011: 7.7; 2012: 5.0; 2013: 3.3; 2014: 2.5; 2015: 2.5; 2016: 2.5 - Fiscal balance (% of GDP) by year: 2011: -14.3; 2012: -18.1; 2013: -16.2; 2014: -14.7; 2015: -15.0; 2016: -13.7 - Current account (% of GDP) by year: 2011: -28.9; 2012: -29.2; 2013: -26.8; 2014: -23.0; 2015: -24.6; 2016: -23.9 Staff’s medium-term reform macroframework (with stepped-up reforms): - Real GDP growth (%) by year: 2011: 3.0; 2012: 3.5; 2013: 3.5; 2014: 3.0; 2015: 3.0; 2016: 3.0 - Inflation (%) by year: 2011: 7.7; 2012: 4.0; 2013: 3.0; 2014: 2.5; 2015: 2.5; 2016: 2.5 - Fiscal balance (% of GDP) by year: 2011: -14.3; 2012: -10.3; 2013: -7.5; 2014: -5.2; 2015: -5.3; 2016: -4.6 - Current account (% of GDP) by year: 2011: -27.2; 2012: -22.6; 2013: -20.2; 2014: -16.6; 2015: -17.4; 2016: -16.4 - Near-term growth expected to strengthen: current policies and key public projects (rehabilitation of Tarawa’s road, airport and port) financed with external assistance should support growth in the 3 percent range over the next few years; medium-term reversion to 1½–2 percent if climate change continues to negatively affect activity. - Risks: - Upside: domestic public works may have larger-than-expected output impact. - Downside: stalled global recovery could reduce remittances; a surge in world food and oil prices could raise inflation and worsen poverty; higher-than-expected pressures from the investment boom; long-run vulnerabilities from climate change. Box 2 (Impact of High Fuel and Food Prices) — key findings and numbers: - Food and fuel imports represent 30 percent of GDP. - Share of food and fuel in total imports increased from less than 40 percent to about 60 percent over the last decade. - Rice accounts for 20 percent of the CPI food basket. - Historical pass-through: increases in international fuel prices have resulted in an equal increase in domestic prices with a three-month lag. - Mitigating factors vs. 2008: rice prices fell in 2010 and remain below 2008 peak; Australian dollar appreciated significantly. - Potential fiscal/external impact: under an adverse scenario with oil price increasing by 40 percent in 2011 (relative to baseline), and provided the Australian dollar does not appreciate further: - Fiscal balance expected to deteriorate by 2½ percentage points of GDP in 2011 compared to the baseline. - Current account balance expected to deteriorate by 3 percentage points of GDP in 2011 compared to the baseline. - Adverse Oil-shock Scenario: comparison with baseline (2011 and 2012) - Oil price (US$/barrel): Baseline 2011: 107.2; Adverse 2011: 149.2; Baseline 2012: 109.3; Adverse 2012: 110.9 - Real GDP growth (percent): Baseline 2011: 3.0; Adverse 2011: 2.0; Baseline 2012: 3.5; Adverse 2012: 2.4 - Inflation (percent): Baseline 2011: 7.7; Adverse 2011: 11.7; Baseline 2012: 5.0; Adverse 2012: 7.1 - Fiscal balance (percent of GDP): Baseline 2011: -14.3; Adverse 2011: -16.8; Baseline 2012: -18.1; Adverse 2012: -20.2 - Current account (percent of GDP): Baseline 2011: -28.9; Adverse 2011: -32.0; Baseline 2012: -29.2; Adverse 2012: -31.7 - The outlook for the medium term depends on the scope and speed of government reforms; with stepped-up realistic reforms, GDP growth could reach 3 percent over the medium and long term. - Authorities agreed with staff’s assessment and emphasized downside risks from food and fuel price escalation and upside from improved employment prospects driven by the investment boom. ### POLICIES TO ENSURE SUSTAINABLE GROWTH #### A. Fiscal Policy — Background (opening remarks) - Large fiscal deficits have been financed by drawing down Kiribati’s wealth fund (RERF) rather than by borrowing. - Reliance on the RERF to finance the budget deficit poses concerns; projections show drawdowns in RERF and increased external borrowing over the medium term (Figure 3). - Public investment acceleration is projected to worsen the fiscal position and widen the current account over the medium term under baseline projections; the reform scenario shows improvements in fiscal and current account balances over time. *Source: KIRIBATI 2011 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND* ### 12. The scope for countercyclical policy ### 12. The scope for countercyclical policy ### Fiscal position and constraints - The revenue base is large but very volatile; fishing license fees account for about half of government revenues. - The country depends on foreign aid to finance large development needs; more extreme weather patterns related to global climate change are putting strains on the budget. - The only fiscal cushion has been Kiribati’s wealth fund (RERF), which in recent years has been severely depleted. - Fiscal deficit developments: - Fiscal deficit bottomed out at 20 percent of GDP in 2008. - Narrowed substantially in 2009 following expenditure compression and improved tax collection (withholding tax introduced March 2009). - Estimated fiscal deficit in 2010 is 8 percent of GDP, down from 12½ percent in 2009. - Fiscal balance expected to deteriorate to 14 percent of GDP in 2011 due to large increase in development expenditure financed by external assistance and RERF draw-downs. - RERF trajectory and losses: - RERF assets declined from A$637 million (420 percent of GDP) in 2007 to A$571 million (350 percent of GDP) in 2009. - Decline reflected exposure to failed Icelandic banks (A$40 million, or 25 percent of GDP) and continued drawdowns to finance budgetary shortfalls. - Medium-term fiscal outlook: - Current government strategy: target RERF drawdown at A$15 million per year during 2011–13. - Under expected external loans for infrastructure, this implies deficits of 10–14 percent of GDP. - In 2014, revenues are expected to drop by 2 percent of GDP with lower tariffs following PICTA implementation. - Over the last ten years, budget deficits averaged 12 percent of GDP and were financed by drawing down the RERF. ### Staff’s assessment and recommended fiscal strategy - Near-term stance: - The fiscal stance for the next two years is appropriate to support key development expenditures that will spur productivity growth. - However, fiscal adjustment will be required in the out years; focus should shift to fiscal consolidation. - Long-term anchor and sustainability: - To stabilize the real value of the RERF in per capita terms once key public investments are completed, budget deficits should be limited to 5–6 percent of GDP over the long term (DSA reform scenario). - If the pre-existing trend of RERF drawdowns continues, the RERF real per capita balance would reach one-third of its 2000 value by 2030 (DSA baseline scenario). - Operational guidance: - Revenue projections should be conservative given uncertainty surrounding revenue and aid flows. - Downside scenarios should be fleshed out, explicitly considering revenue shortfalls from temporary shocks and prospective costs of climate change mitigation. - Stronger-than-anticipated revenues during recovery should be saved; windfalls should be saved during upswings and used only during downturns to support the economy. - Savings will help safeguard the RERF against external shocks and support a smooth path of expenditure. ### Recommended fiscal measures and reforms - Expenditure and tax structure rationalization: - Phase out poorly targeted and distortionary subsidies to copra producers and other SOEs amounting to some 5 percent of GDP. - Proceed with restructuring of loss-making SOEs. - Shore up customs administration and reduce exemptions. - Consider introduction of a VAT. - RERF management and governance: - Reconsider RERF investment strategies per recent MCM TA recommendations. - Review strategic asset allocation to better reflect currency composition of Kiribati’s imports. - Strengthen governance by increasing in-house expertise (training or secondment), hiring a long-term consultant to improve the investment framework, closer monitoring of investment risks and returns, and publishing annual reports to increase transparency. - Revenue-side improvements: - Welcome the introduction of an auction scheme on fishing licenses to increase fishing license revenues over the medium term. ### Risks and debt outlook - Kiribati is at high risk of debt distress. - Fiscal risks exacerbated by RERF asset drops and uncertainty about aid flows and climate change impacts. - Despite low external public debt—currently estimated at about 10 percent of GDP—the debt outlook is projected to worsen as Kiribati undertakes infrastructure investment (partly financed through borrowing) and faces fiscal costs of climate change. - Improving debt dynamics will require prudent borrowing, continued grant financing, fiscal consolidation, and stepped-up structural reforms. ### Fishing license revenues (Box 3): importance and prospects - Fishing license fees have represented on average 45 percent of government revenues over the last ten years. - Kiribati’s fishing license fees are the highest (in terms of GDP) among regional peers. - Recent policy developments and outcomes: - September 2010: auction scheme for fishing rights introduced, replacing bilateral access agreements. - In 2010 fishing license fees surged by almost 40 percent (year-on-year) to 52 percent of GDP, supported by the auction scheme and temporary factors (fines collected from foreign fishing vessels). - Efforts to reduce volatility: - Authorities are evaluating hedging exchange rate risk through financial derivatives or denominating fees using a basket of currencies; currently fees are collected in U.S. dollars. - Recent initiatives to encourage domestic marine processing and a joint venture agreement with Chinese and Fijian fishing companies could provide a significant boost; expected FDI involved is A$50 million. - Participation in the Pacific Islands Forum Fisheries Agency and negotiations on a comprehensive Economic Partnership Agreement with the EU may strengthen control over marine resources and create new revenue opportunities. - Adopting cooperative sub-regional measures may strengthen bargaining power of license-issuing countries. ### Authorities’ views and requests - Authorities reiterated strong commitment to preserve the value of the RERF. - They supported saving stronger-than-anticipated revenues in upswings and maintaining the real per capita balance of the RERF once large public investments have occurred. - Noted that the nominal drawdown rule is simple to communicate and a first step toward a fiscal anchor. - If commodity price increases are persistent, they may consider increasing the import levy and using proceeds to reimburse freight costs to outer islands. - Acknowledged that the January 2010 civil servant wage increase was not countercyclical due to its permanent nature but noted the previous increase dated back to 2006. - Requested technical assistance from PFTAC on the macro-framework and tax administration. - Expressed interest in options to hedge fishing revenue exchange rate risk and in denominating fees in a currency basket; officials would welcome technical assistance from development partners and appreciated MCM TA on the RERF. ### Structural reforms—supporting private sector growth (high-level) - Weak private sector development is an impediment to sustainable growth; private sector participation has increased but remains tenuous. - Key constraints identified: - Land reform: two thirds of land owned by the government and one third by families (not individuals), unclear property rights, contested transactions, lengthy court settlement and lease procedures, Minister of Land has final approval. - SOE reform: momentum gaining; one SOE privatized by May 2011 and five additional SOEs identified for reform; contingent liabilities from SOEs amounted to about 20 percent of GDP in 2010. - Business climate: procedures for starting/closing a business and dealing with construction permits are more cumbersome than in other Pacific islands; access to credit is limited and costly; poor infrastructure. - Staff advice: - Accelerate implementation of structural reform agenda to foster private-sector-led growth, particularly in tourism and fish processing. - Streamline starting a business, construction permits, and expand access to credit. - Enact a new land law to strengthen administrative systems for transferring property rights and improve legal framework for land usage and ownership. - Authorities’ interest in liberalizing telecommunication with World Bank assistance is welcomed. *Source: _cr11113 - 12. The scope for countercyclical policy* ### 31. Staff supported the SOE reform ### 31. Staff supported the SOE reform ### SOE reform and private sector development - Staff supported the SOE reform underway with the assistance of the AsDB. - Reforming the SOEs would: - create space for private sector development; and - reduce the drain on the budget. - As advocated by the Fund in past consultations, it is important to limit SOEs to areas where private sector operations are not viable, such as public utilities (water, electricity, and fuel distribution to the outer islands). ### Strengthening Public Financial Management (PFM) - PFM in Kiribati is weak and characterized by: - poor data quality and expenditure controls; - outdated legislation and regulations; - limited information about fiscal risks from nonperforming SOEs; and - poor links between capital investments and recurrent budgets. - These weaknesses weight on business activity. - The PFM Reform Plan, based on the findings of the 2010 Public Expenditure and Financial Accountability, provides a platform for policy dialogue and focused technical assistance. ### Authorities’ view on reforms and business environment - Authorities agree a meaningful uplift in trend growth requires broad structural reforms. - Authorities reiterated commitment to SOE reform in the 2011 budget speech. - They noted the pace of reforms may slow in the second half of the year ahead of elections, but consensus exists on the need for private sector support for the economy. - Measures under consideration or planned: - a law to ease constraints to the use of land as collateral; - instituting a “one-stop shop” to ease procedures for opening a business; - review of the investment regulatory framework with development partners to increase foreign investor interest. - Authorities view access to credit as a main impediment to private sector development, reflecting the absence of clear property rights. ### Financial sector structure and key statistics (Background) - Financial sector composition: - two banks, one insurance company, and a pension fund. - ANZ Bank (Kiribati) Limited is the only commercial bank (25 percent government-owned). - Development Bank of Kiribati (DBK) is wholly government-owned. - Kiribati Insurance Corporation provides insurance coverage. - Kiribati Provident Fund (KPF) manages pension assets, about 60 percent of GDP in 2010. - Market and access observations: - Restrictions on land ownership by foreign entities tilt lending toward public enterprises. - ANZ Bank NPLs are less than 1 percent of total loans. - DBK has a larger share of loans to the private sector but high NPLs and underdeveloped secured lending. - Access to credit for the private sector remains restricted and expensive. - Interest rate spread is slightly above the Pacific Islands average. - Private sector complains about high charges and fees, including on remittances. ### Financial sector policy actions and developments - Entry into the insurance industry was liberalized at end-2008, but the incumbent insurer remains unchallenged to date. - KPF introduced a lending scheme in July 2010 allowing short-term borrowing (one year) up to 14 percent of a member’s balance, using pension entitlements as collateral. - In 2010, loans under this scheme totaled A$3 million (about 3½ percent of the fund’s portfolio). - Plans to strengthen DBK through a foreign partnership are under consideration. ### Staff’s views and recommendations on financial sector - More competition in the banking sector would spur private sector development. - Additional steps to consider: - (i) expanding micro-credit with village banks as in other Pacific islands; - (ii) containing NPLs at the DBK by tightening lending standards and improving risk management; and - (iii) introducing a long-overdue land law to ease access to credit and improve collateral recovery. - Bank regulation and supervision need strengthening before expanding DBK lending. - Staff stressed need to enact and implement the draft AML/CFT law. - On the KPF lending scheme: - Collateralization limits credit risks to KPF, but contingent liabilities to the government could build if members exhaust pension wealth ahead of retirement. - Recommendation: the size of the scheme should not be increased. - Risks if increased: asset allocation may be adversely affected by need for greater liquidity; members using loans for consumption or improper investments could compromise future pension income. - Government and/or KPF should invest in financial education. - Technical assistance, including from the IMF, could help improve the lending program design. ### Authorities’ views on financial sector assistance - Officials broadly shared staff’s views and requested IMF technical assistance on: - financial supervision and regulation; and - reviewing KPF asset allocation strategy and assessing long-term viability. - Authorities view KPF lending as an initial step to improve household access to credit and assert solvency/exposure to credit risk are not immediate issues given collateralization and small lending share of assets. ### Box 4 — KPF and DBK developments and indicators - Kiribati Provident Fund (KPF) - The 2008 crisis hit KPF hard; asset values dropped by 20 percent, rebounded in 2009-10 to pre-crisis value. - Assets totaled A$100 million (60 percent of GDP) at end-2010. - Employers and employees each contribute 7½ percent of the employee’s salary. - Retirement age is 50 years; lump-sum payment at retirement. - At age 45 members may withdraw 50 percent of accrued balance while continuing work until 50, or 100 percent if retiring at 45 for medical reasons. - Minimum yearly rate of return guaranteed at 4 percent. - The fund is a defined-contribution scheme with an element of defined benefits. - A buffer fund accumulated surpluses when returns exceeded rate accrued to members, but was depleted by crisis losses, creating a gap between assets and projected liabilities. - Earlier losses related to lending to DBK amounting to A$1½ million (education loans at below market rates in 2007) further deteriorated its position. - KPF committed to more active asset allocation, increased diversification in mid-2010, and hired an additional portfolio manager. - In mid-2010, KPF asset allocation changed from a 60–40 split between risky assets and fixed income to a more diversified asset class allocation. - Development Bank of Kiribati (DBK) - About 40 percent of loans are for business purposes; interest rate charged is close to market rates. - Loans are collateralized (by land or pension contributions for borrowers older than 45 years). - Loans are funded by a revolving government fund. - NPLs declined since 2008 but were still high at 24 percent of total loans in 2010. - Despite 60 percent provisions for NPLs, poor prospects for loan recovery due to land titling issues and poor risk management undermine the bank’s soundness. - DBK Financial Soundness Indicators (in percent, September 2010): - NPL to total loans: 23.7, 25.6, 24.7, 23.6 (table years 2007–2010 1/) - Provisions-NPL ratio: 48.9, 56.4, 56.4, 58.2 - Loans-capital ratio: 220, 246, 201, 202 - Capital-assets ratio: 41.5, 39.3, 48.6, 51.7 - Return on assets (ROA): 2.7, -3.0, 1.5, 1.3 - Return on equity (ROE): 6.4, -7.3, 3.3, 2.6 - 1/ September 2010. Sources: DBK and Fund Staff estimates. ### External competitiveness and external stability - Australian dollar circulates as legal tender. - Kiribati has accepted Article VIII, Sections 2, 3, and 4 obligations and maintains an exchange system free of restrictions on payments and transfers for current international transactions. - The real effective exchange rate (REER) has appreciated by 20 percent since 2008, driven by a strong Australian dollar, and appears overvalued compared to long-run level. - Current account developments: - Current account balance improved in recent years due to strong income from fishing license fees. - Projection: current account deficit expected to deteriorate in the near term as Kiribati undertakes large public investment, and to narrow by end of the projection period to 24 percent of GDP (from 29 percent in 2011) in line with fiscal improvement. - In the short term, large deficits likely manageable as driven by key infrastructure investment financed by capital transfers. - Staff’s views: - Use of the Australian dollar remains appropriate given close linkages with Australia and provides a strong nominal anchor. - Pursuing structural reforms is crucial to regain competitiveness after the real appreciation; business environment needs significant improvement (paragraph 29 referenced). - Securing grant financing (instead of loans) and containing fiscal deficits are key to ensure external stability; medium-term current account sustainability is driven by fiscal policy. - Authorities’ view: - No scope for independent monetary policy; fluctuations of the Australian dollar make the economy vulnerable to exchange rate risks due to currency mismatch between RERF assets (mostly in Australian dollars) and imports. - Large current account deficit partly reflects surge in commodity prices and low public saving driven by development spending. ### Staff appraisal — key conclusions and recommendations - Kiribati has recovered from the crisis with strong momentum; large public investment financed by foreign assistance underpins favorable medium-term growth prospects. - Gains may be transitory if fiscal and structural reforms remain unfinished. - Preserving real per capita value of the RERF is key to fiscal sustainability and intergenerational fairness. - Once key public projects are underway, focus should shift to fiscal consolidation to rebuild fiscal space and cope with long-term spending pressures from climate change. - Authorities have introduced a multi-year budget framework; recommendations include: - Save positive windfall revenues relative to the budget during upswings and use them during downturns; - Continue strengthening the medium-term fiscal framework to facilitate planning and avoid pro-cyclical policies. - Accelerate implementation of the structural reform agenda; SOE reform is key to create space for private sector development and reduce budgetary drain. - Competition in banking is crucial; revitalization plans for DBK are welcome but any further expansion of DBK’s activity should be postponed until regulatory and supervisory framework is in place. - Expand micro-credit schemes to ease credit constraints. - Use of the Australian dollar remains appropriate; to preserve external stability, continue to secure grant financing to support large development needs (as indicated in the joint IMF-World Bank debt sustainability analysis). - Improve quality of macroeconomic data and press ahead with PFTAC recommendations on data compilation and dissemination. *Source: IMF staff report excerpt titled "31. Staff supported the SOE reform" (KIRIBATI 2011 ARTICLE IV REPORT).* ### 53. It is recommended that the next Article ### _cr11113 - 53. It is recommended that the next Article ### Consultation cycle recommendation - It is recommended that the next Article IV consultation take place on a 24-month cycle. - This recommendation is in accordance with the Decision on Article IV Consultation Cycles (Decision No. 14747-(10/96) (9/28/2010), http://www.imf.org/external/pp/longres.aspx?id=4515. ### Millennium Development Goals and social indicators (selected data points) - Income share held by lowest 20%: 1990 1995 2000 2005 2008 2009 (values embedded in source table). - Malnutrition prevalence, weight for age (% of children under 5): (values embedded in source table). - Poverty gap at $1.25 a day (PPP) (%): (values embedded in source table). - Poverty headcount ratio at $1.25 a day (PPP) (% of population): (values embedded in source table). - Literacy rate, youth female (% of females ages 15-24): (values embedded in source table). - Literacy rate, youth male (% of males ages 15-24): (values embedded in source table). - Primary completion rate, total (% of relevant age group): 99 125 (table formatting as in source). - Secondary school enrollment (% gross): 99 88 (table formatting as in source). - Total enrollment, primary (% net): 97 - Proportion of seats held by women in national parliaments (%): 00 55 44 (table formatting as in source). - Ratio of female to male enrollments in tertiary education: (value embedded). - Ratio of female to male primary enrollment: 99 101 (table formatting as in source). - Ratio of female to male secondary enrollment: 16 11 14 (table formatting as in source). - Share of women employed in the nonagricultural sector (% of total nonagricultural employment): 37 39 (table formatting as in source). - Immunization, measles (% of children ages 12-23 months): 75 47 80 85 72 82 (table formatting as in source). - Mortality rate, infant (per 1,000 live births): 65 56 49 42 38 37 (table formatting as in source). - Mortality rate, under-5 (per 1,000): 89 75 63 53 48 46 (table formatting as in source). - Births attended by skilled health staff (% of total): 72 89 (table formatting as in source). - Contraceptive prevalence (% of women ages 15-49): 21 - Incidence of tuberculosis (per 100,000 people): 510 460 420 380 360 - CO2 emissions (kg per PPP $ of GDP): 0.2 0.2 0.2 0.1 - CO2 emissions (metric tons per capita): 0.3 0.3 0.4 0.3 - Forest area (% of land area): 2.7 2.7 2.7 2.7 - Improved sanitation facilities (% of population with access): 26 28 33 31 - Improved water source (% of population with access): 48 54 62 61 65 - Internet users (per 100 people): 1.8 2.2 2.1 - Mobile cellular subscriptions (per 100 people): 0.0 0.0 0.4 0.7 1.0 - Personal computers (per 100 people): 1.0 1.1 - Telephone lines (per 100 people): 1.7 2.6 4.0 4.6 4.1 - Fertility rate, total (births per woman): 4.0 4.5 3.8 3.4 - GNI per capita, Atlas method (current US$): 730 1,160 1,380 1,780 1,960 1,830 - GNI, Atlas method (current US$) (billions): 0.1 0.1 0.1 0.2 0.2 0.2 - Life expectancy at birth, total (years): 56.8 59.4 59.5 60.9 - Population, total (millions): 0.1 0.1 0.1 0.1 0.1 0.1 - Trade (% of GDP): 158.9 83.5 53.7 (Note: table entries preserved as presented in source; some table cells contain grouped or concatenated numbers as in the original.) ### Key country facts (headline nominal and population figures) - Nominal GDP (2010): US$146.7 million - GDP per capita (2010): US$1,420 - Nominal GNI (2010): US$209.6 million - Population (2010): 103,280 - Main export products: fish and copra - Quota: SDR 5.6 million ### Selected economic indicators, 2007–12 (selected rows with exact values) - Real GDP (percent change): 2007 0.4; 2008 -1.1; 2009 -0.7; 2010 1.8; 2011 3.0; 2012 3.5 - Real GNI (percent change): 2007 -0.9; 2008 2.2; 2009 -5.0; 2010 6.6; 2011 -1.8; 2012 2.8 - Consumer prices (percent change, average): 2007 4.2; 2008 11.0; 2009 8.8; 2010 -2.8; 2011 7.7; 2012 5.0 - Consumer prices (percent change, end of period): 2007 3.7; 2008 18.6; 2009 0.1; 2010 -1.4; 2011 8.0; 2012 4.0 Central government finance (percent of GNI): - Revenue and grants: 47.3 48.9 58.1 57.6 58.6 58.8 - Total domestic revenue: 28.8 29.6 32.0 34.1 31.3 30.8 - Grants: 18.5 19.3 26.1 23.5 27.3 28.0 - Expenditure and net lending: 58.7 62.7 66.0 63.1 69.0 72.0 - Current: 40.3 43.4 39.9 38.0 37.4 36.9 - Of which: wages and salaries: 19.5 19.8 19.1 18.5 18.5 18.5 - Development: 18.5 19.3 26.1 25.1 31.6 35.1 - Overall balance: -11.4 -13.8 -7.9 -5.5 -10.4 -13.2 RERF closing balances (in millions of U.S. dollars): - 2007 56; 2008 23; 2009 89; 2010 51; 2011 25; 2012 72; 2013 51; 2014 55; 2015 18 (table shows concatenated sequence "562389512572515518" reflecting original formatting). Commercial banks (in millions of U.S. dollars) (selected): - Foreign assets: 30.0 11.3 17.2 - Private sector claims: 22.9 45.6 36.4 - Total deposits: 38.8 43.4 36.8 Balance of payments (in millions of U.S. dollars) (selected): - Current account including official transfers: -37.6 -46.0 -38.1 -34.1 -47.1 -50.5 - (In percent of GDP): -29.4 -34.7 -29.8 -23.1 -28.9 -29.2 - External debt (in millions of U.S. dollars): 13.7 14.5 14.3 18.4 27.6 43.5 - (In percent of GDP): 10.2 13.3 9.7 11.3 17.0 25.1 - External debt service (in millions of U.S. dollars): 2.2 0.6 1.0 0.6 0.6 0.7 - (In percent of exports of goods and services): 11.9 5.0 7.9 3.0 2.6 2.7 Exchange rate: - Exchange rate ($A/US$ period average) 1/: 1/1.2 1.2 1.3 1.1 (as presented). - Real effective exchange rate (period average) 2/: 99.8 115.0 125.9 129.4 Memorandum: - Nominal GDP (in millions of Australian dollars): 152.8 158.0 164.1 164.8 183.2 197.2 Sources for tables: Data provided by the Kiribati authorities; and Fund staff estimates and projections. - Footnotes preserved: 1/ The Australian dollar circulates as legal tender. 2/ Index, 2005=100. ### Budget outturn and projections (selected percent-of-GDP rows preserved exactly) - Total revenue and grants (percent of GDP): 2007 100.9; 2008 111.3; 2009 128.7; 2010 124.4; 2011 136.9; 2012 139.3; 2013 147.8; 2014 158.5 - Revenue: 61.5 67.3 69.6 68.8 81.0 70.4 78.9 83.1 - Tax revenue: 29.9 29.6 28.7 30.3 30.4 30.8 33.9 36.0 - Nontax revenue: 31.6 37.7 40.8 38.3 50.6 39.6 45.0 47.1 - Of which: Fishing license fees: 25.4 32.2 29.5 30.5 41.7 31.5 35.0 36.4 - External grants: 39.4 44.0 59.1 55.8 55.8 68.9 68.9 75.4 - Total expenditure: 125.2 142.7 149.4 143.3 150.1 168.9 173.9 194.2 - Current expenditure: 85.8 98.7 90.3 87.5 90.3 89.4 94.3 99.5 - Wages and salaries: 41.5 45.0 43.2 42.4 44.1 46.6 46.6 49.9 - Development expenditure: 39.4 44.0 59.1 55.8 59.8 79.6 79.6 94.7 - Overall balance: -24.4 -31.4 -20.7 -18.9 -13.2 -29.7 -26.1 -35.7 - Financing: 24.4 31.4 20.7 18.9 13.2 29.7 26.1 35.7 - RERF: 45.0 25.0 18.0 15.0 9.2 15.0 15.5 16.4 Memorandum items (RERF): - RERF balance (in millions of Australian dollars): 637.3 561.6 570.5 ... 576.1 ... 579.7 590.0 - RERF: Accrued income: 30.0 34.2 21.6 ... 20.8 ... 21.8 22.8 - Valuation changes: -5.5 -83.5 6.5 ... -4.9 ... -1.8 4.9 - Government drawings: -45.0 -25.0 -18.0 ... -9.2 ... -15.5 -16.4 - RERF balance (in percent of GDP): 423.3 417.5 347.6 ... 349.7 ... 316.4 299.2 Notes and footnotes preserved: - 1/ Includes subsidies to copra production. - 2/ Development expenditure equals grants plus loans for development projects. - 3/ Overall balance in the table is different from official budget because loans are classified as financing. ### Medium-term projections: Baseline and Reform scenarios (selected lines, exact values) Baseline scenario (Real sector and government finance, selected): - Real GDP (percentage change): 2009 -0.7; 2010 1.8; 2011 3.0; 2012 3.5; 2013 3.0; 2014 2.0; 2015 2.0; 2016 2.0 - Inflation (period average): 2009 8.8; 2010 -2.8; 2011 7.7; 2012 5.0; 2013 3.3; 2014 2.5; 2015 2.5; 2016 2.5 - Nominal GDP at market prices (in millions of AU$): 2009 164.1; 2010 164.8; 2011 183.2; 2012 197.2; 2013 208.2; 2014 217.6; 2015 227.4; 2016 237.6 - Total revenue and grants (percent of GDP): 78.4 83.1 80.7 80.4 78.5 75.7 69.8 72.5 - Total expenditure and net lending (percent of GDP): 91.0 91.1 94.9 98.5 94.7 90.5 84.8 86.2 - Overall balance (percent of GDP): -12.6 -8.0 -14.3 -18.1 -16.2 -14.7 -15.0 -13.7 - RERF balance (end of period; in millions of AU$): 570.5 576.1 579.7 590.0 601.2 611.9 625.4 641.4 - Real per capita balance (in 1996 AU$): 4,020 3,868 3,717 3,614 3,531 3,450 3,386 3,337 Reform scenario (selected): - Real GDP (percentage change): 2009 -0.7; 2010 1.8; 2011 3.0; 2012 3.5; 2013 3.5; 2014 3.0; 2015 3.0; 2016 3.0 - Inflation (period average): 2009 8.8; 2010 -2.8; 2011 7.7; 2012 4.0; 2013 3.0; 2014 2.5; 2015 2.5; 2016 2.5 - Nominal GDP at market prices (in millions of AU$): 164.1 164.8 183.2 197.2 209.2 220.9 233.2 246.2 - Total revenue and grants (percent of GDP): 78.4 83.1 80.7 86.8 84.8 82.6 76.2 77.3 - Total expenditure and net lending (percent of GDP): 91.0 91.1 94.9 97.1 92.3 87.8 81.5 81.9 - Overall balance (percent of GDP): -12.6 -8.0 -14.3 -10.3 -7.5 -5.2 -5.3 -4.6 - RERF balance (end of period; in millions of AU$): 570.5 576.1 579.7 593.2 610.3 630.0 651.6 678.8 - Real per capita balance (in 1996 AU$): 4,020 3,868 3,717 3,634 3,584 3,552 3,528 3,531 Balance of payments (selected, percent of GDP, baseline and reform): - Baseline: Current account balance: -29.8 -23.1 -28.9 -29.2 -26.8 -23.0 -24.6 -23.9 - Reform: Current account balance: -29.8 -22.5 -27.2 -22.6 -20.2 -16.6 -17.4 -16.4 External debt (end of period, millions of US$): - Baseline: 14.3 18.4 27.6 43.5 57.2 66.8 78.4 89.0 - (In percent of GDP) Baseline: 9.7 11.3 17.0 25.1 32.0 36.6 41.9 45.5 - Reform scenario external debt (in percent of GDP): 9.7 11.3 17.0 19.4 20.7 19.9 19.0 17.8 External debt service (selected): - Baseline (in millions of US$): 1.0 0.6 0.6 0.7 0.8 1.0 1.1 1.2 - (In percent of exports of goods and services) Baseline: 7.9 3.0 2.6 2.7 3.2 3.5 3.7 3.8 ### Balance of Payments, 2007–16 (selected percent-of-GDP series preserved exactly) - Current account balance (percent of GDP): 2007 -37.6; 2008 -46.0; 2009 -38.1; 2010 -34.1; 2011 -47.1; 2012 -50.5; 2013 -47.9; 2014 -42.0; 2015 -45.9; 2016 -46.7 - Trade balance: -58.9 -65.1 -60.3 -70.6 -83.4 -95.8 -95.4 -92.3 -94.6 -97.5 - Exports, f.o.b.: 11.2 8.6 6.3 9.6 11.8 12.9 13.7 14.5 15.5 16.9 - Imports, f.o.b.: 70.0 73.7 66.6 80.2 95.2 108.7 109.1 106.8 110.1 114.4 - Balance on services: -41.2 -53.2 -45.2 -47.1 -46.9 -46.6 -46.3 -45.8 -45.5 -46.0 - Balance on factor income 1/: 50.5 58.5 48.4 65.2 61.3 63.5 65.2 67.1 68.5 70.1 - Fishing license fees: 21.3 27.0 23.0 37.2 31.1 32.0 32.5 33.0 33.7 35.0 - Investment income: 28.4 31.0 19.2 20.9 21.8 22.5 23.3 24.0 24.1 23.4 - Remittances: 10.6 9.7 9.0 10.5 11.8 12.7 13.4 14.1 14.9 16.0 - Balance on current transfers: 11.9 13.8 18.9 18.4 21.9 28.3 28.7 29.0 25.6 26.7 - Financial and capital account balance: 25.8 12.1 22.1 21.3 54.0 57.6 55.5 48.0 52.7 53.2 - Overall balance: -0.4 1.2 8.3 11.4 6.9 7.1 7.7 6.0 6.7 6.5 - Change in external assets (increase -) 2/: 0.4 -1.2 -8.3 -11.4 -6.9 -7.1 -7.7 -6.0 -6.7 -6.5 - Revenue Equalization Reserve Fund: 14.0 -6.6 -1.8 -9.4 -4.8 -4.8 -5.3 -3.4 -4.0 -3.5 - Government funds 3/: -13.6 5.4 -6.5 -2.0 -2.1 -2.3 -2.4 -2.5 -2.7 -2.9 Memorandum items (selected): - Official external assets (in millions of US$): 435.0 368.7 365.4 368.7 334.9 317.7 307.6 300.7 295.1 290.6 - (In years of imports): 4.7 3.7 4.0 4.0 3.6 3.3 3.3 3.3 3.3 3.3 - Foreign reserve assets: 26.0 21.0 25.3 26.6 25.2 24.7 24.8 25.1 25.4 25.8 - (In months of imports of G&S): 3.4 2.5 3.3 3.5 3.2 3.1 3.2 3.3 3.4 3.5 Notes preserved: - 1/ Includes fishing license fees, which would be shown as current transfers under conventional international guidelines. - 2/ Excludes valuation changes. - 3/ Comprises the Consolidated Fund, Development Fund, and STABEX Fund. - 4/ An increase in the debt service in 2007 reflects maturity of certain external borrowing including from Japan. ### Appendix 1: Main recommendations of the 2009 Article IV consultation (Fund recommendations and follow-up) Policy actions recommended (summarized, exact recommendations preserved): - Fiscal policy: - Use deficit-neutral options to mitigate global shocks (expediting or bringing forward project implementation) and well targeted social expenditure to ease the impact on the poor. - Introduce tax and revenue measures: strengthen administration and merge the tax and custom offices, establish a single taxpayer identification number, adopt a broad–based consumption tax, and introduce excises to counterbalance the drop in custom revenues under PICTA. - Increase fishing license fees through auctions and/or collective agreements. - Control expenditure by reducing wage bills. - Introduce a multi-year budget framework and a well-defined target or rule for the RERF draw-downs. - Structural reforms: - Limit SOE operation to areas where the private sector is not viable and improve SOE performance, improve investment climate, and land titling. - Financial sector policy: - Increase competition in the financial sector to facilitate access to credit and decrease its cost. - Given DBK’s large NPLs, limit DBK’s expansion until an appropriate risk management framework is in place. - Advise Kiribati Provident Fund (KPF) to review its investment strategy and limit dividends until its capital position is strengthened. Follow-up and developments reported in source: - Fiscal policy supported the economy during the crisis; impact of the global crisis stronger than anticipated; deficit-neutral measures not applicable; copra subsidies and civil servant wages increased. - Authorities introduced a withholding tax at the source in March 2009 (retroactive to January 2009). - A PFTAC mission on tax administration will be discharged in 2011. - Implementation of PICTA commitments postponed to 2014. - Government introduced an auction scheme to increase fishing license fees in September 2010. - A three-year budget framework introduced in October 2009, targeting RERF drawdown at A$15 million per year during 2011–13. - An SOE will be privatized by May 2011 and five additional SOEs identified for reform later in 2011. - Authorities considering a law to ease constraints to the use of land as collateral. - KPF introduced a lending scheme in July 2010 and revised its investment strategy in mid-2010. - Plans to strengthen commercial orientation of DBK through a foreign partnership; DBK’s lending activities contained and NPLs reduced by 2 percentage points of total loans over the last two years. 1/ Board Meeting of May 1, 2009. Sources: IMF staff. *Source: 2011 ARTICLE IV REPORT — KIRIBATI (selected sections and tables as provided).* ### ANNEX I. KIRIBATI: FUND RELATIONS ### ANNEX I. KIRIBATI: FUND RELATIONS (As of March 1, 2011) ### Membership and IMF Accounts - Joined: June 3, 1986; Article VIII - General Resources Account - Quota - Quota 5.60 100.00 - Fund holdings of currency 5.60 100.02 - Reserve position in Fund 0.00 0.08 - SDR Department - Allocation - Net cumulative allocation 5.32 100.00 - Holdings 5.34 100.21 ### Outstanding Obligations and Arrangements - Outstanding Purchases and Loans: None - Financial Arrangements: None - Projected Obligations to the Fund: None - Implementation of HIPC Initiative: Not Applicable - Implementation of Multilateral Debt Relief Initiative (MDRI): Not Applicable ### Exchange Rate Arrangement and Article IV - Exchange Rate Arrangement: The Australian dollar circulates as legal tender. - Article IV Consultation - The 2009 Article IV consultation discussions with Kiribati were held in Tarawa during February 20–28, 2009. - Kiribati is on a 24–month consultation cycle. ### Technical Assistance (TA) and Resident Representation - TA, 1995–2011 - STA, LEG, MCM and PFTAC provided TA on: - statistics, - tax administration and policy, - budget management, - Revenue Equalization Reserve Fund (RERF) management, - financial sector reform and supervision, - combating financial crime and financial system abuse. - Resident Representative - Resident representative office in the Pacific Islands opened in September 2010 in Suva, Fiji. - Mr. Yongzheng Yang is the Resident Representative. *Source: ANNEX I. KIRIBATI: FUND RELATIONS (As of March 1, 2011)* --- ### ANNEX II. KIRIBATI: RELATIONS WITH THE PACIFIC FINANCIAL TECHNICAL ASSISTANCE CENTRE (PFTAC) (As of March, 2011) ### Overview of PFTAC Engagement (May 2008–May 2011) - During the current funding cycle (May 2008 to May 2011), PFTAC assistance to Kiribati included eight advisory missions. - Kiribati sent 15 officials to regional seminars and workshops. ### Tax Administration and Policy - 2003 PFTAC recommendations included: - a value-added tax (VAT); - a presumptive tax; - a single ad valorem tax on imports from non Pacific countries; - simplified personal income tax (PIT); - single rate of corporate income tax (CIT). - A steering committee was established to manage introduction of the reforms. - 2009: subsequent review mission provided to update tax recommendations. - Fiscal risks and revenue pressures: - Compliance levels are low. - Impact of trade liberalization (PICTA and the Pacific Agreement on Closer Economic Relations) is expected to reduce trade revenues by up to 15 percent. - PFTAC provided support and training in customs procedures in 2009. - Progress on implementing reforms: - Although agreed in principle, little progress has been made to introduce the reforms. - February 2009: cabinet approved introduction of legislation to treat income tax deductions from salary and wages (PAYE) as a final tax. - PFTAC stands ready to assist implementation of wider reforms, including introduction of automated processes once cabinet makes a firm commitment to proceed. ### Public Financial Management - AusAid maintains a long-term TA program aimed at improving public sector financial and economic management. - Joint PFTAC–AsDB mission on public financial management reform in August 2006. - Multi-donor mission (AusAID, PFTAC, AsDB) visited Kiribati December 12–15, 2006. - AusAID and AsDB have taken the lead in supporting implementation of recommendations. - PFTAC ready to provide additional technical support, such as review of IFMIS procedures undertaken in late 2009. ### Financial Sector Regulation and Supervision - August 2003: PFTAC advisor and an IMF legal expert consulted on Financial Institutions Bill (drafted July 2002); no major concerns arose. - Responses and amended draft legislation were forwarded to authorities in December 2003 for action. - 2005: advisor invited to government and industry workshop; mission did not proceed but papers provided highlighting need for legislation. - To date there has been no further progress on the draft Financial Institutions Bill or the previously drafted Anti-money Laundering Legislation. - PFTAC advisor maintains periodic contact with the Ministry of Finance regarding status of draft legislation. ### Economic and Financial Statistics - GDDS metadata published on the IMF website in April 2004, following PFTAC drafting assistance. - Brief mission in August 2006 to assess TA needs. - BOP compiler benefited from training in regional courses in 2005 and 2010. - PFTAC provided TA on balance of payments in 2008 and 2010, improving compilation methods and use of source data, providing training, and assisting transition to BPM6. - PFTAC provided TA on national accounts in 2008, 2009, and 2010; assisted authorities in making significant improvements in methodology and use of source data. - NA compiler benefited from a regional course in 2009. - PFTAC sponsored a one-month attachment for the BOP compiler with Statistics New Zealand in May 2009. *Source: ANNEX II. KIRIBATI: RELATIONS WITH THE PACIFIC FINANCIAL TECHNICAL ASSISTANCE CENTRE (PFTAC) (As of March, 2011)* --- ### ANNEX III. KIRIBATI: BANK-FUND COLLABORATION ### A. World Bank–IMF Collaboration - IMF mission chief (Ms. Tumbarello) met World Bank team in March 2010 in Tarawa at the Development Partner Forum to: - exchange views on recent economic developments, - identify macro-structural challenges, - discuss a work plan to prepare the first joint debt sustainability analysis. - September 2010: IMF and World Bank teams held two phone conferences to coordinate the work plan for September 2010–August 2011. - Frequent consultations since, especially on debt sustainability analysis and the economic outlook. - Bank staff joined the 2011 IMF Article IV mission in February for the first time. ### Areas of Close Cooperation - Macroeconomic developments and economic updates: regular sharing of information and close dialogue throughout the year. - External debt and debt sustainability analysis: - Teams engaged closely on government borrowing plans. - Fiscal costs of climate expected to be substantial despite existence of a wealth fund. - Produced two joint DSAs. - Structural reform: - Bank program supports reforms related to telecoms liberalization, strengthening road maintenance arrangements, improving returns from fisheries resources, and operation of the import levy fund given liberalization of food import arrangements. - Bank agreed to update Fund on developments as needed. ### Macro Challenges Identified by Teams - Need to balance preserving Kiribati’s wealth fund through fiscal consolidation with addressing large infrastructure, health, and education needs. - High vulnerability to climate change and rising sea level: - Recognize fiscal risks and start building a fiscal buffer—with assistance of international donors—and consider implications for expenditure programs. - Reform of state-owned enterprises identified as a macro-critical structural reform. ### Planned Activities (September 2010–August 2011) - Bank Work Program highlights (provisional timing / expected delivery) - Adaptation to climate change: Ongoing - Road maintenance project: FY11 ongoing - Kiritimati Airport Rehabilitation: FY11 ongoing - Support for temporary migrant labor schemes: Ongoing - Telecoms regulatory support for market liberalization: FY11 ongoing - Country Assistance Strategy: Ongoing; Board meeting March 2011 (accomplished) - Fund Work Program highlights - 2011, Article IV Consultation: FY 2011; Board May 2, 2011 - Strengthening the Financial Management of the Revenue Equalization Reserve Fund: October 2010 (report finalized) - TA BOP mission: February 2011; September 7-17 (FY 2011) - Joint Work Program - First DSA: October–December 2010; Issuance to the board February 2011 (accomplished) - Updated DSA: March 2011 for the 2011 IMF Article IV; Issuance to the board (April 2011) *Source: ANNEX III. KIRIBATI: BANK-FUND COLLABORATION (As of March 1, 2011)* --- ### ANNEX III.B. Relations with the World Bank Group (As of March 1, 2011) ### World Bank Membership and Country Assistance Strategy (CAS) - Kiribati became a member of the World Bank Group in 1986. - March 1, 2011: World Bank’s Board of Executive Directors discussed the first Country Assistance Strategy (CAS) for Kiribati (previously covered by Pacific Islands Regional Engagement Framework). - CAS themes: - (i) addressing the existential threat posed by climate change; - (ii) mitigating effects of geographic isolation. - CAS anticipates significantly expanded advisory and financial support for Kiribati. - Consistent with limited repayment capacity in the DSA, IDA financing anticipated on 100-percent grant terms. - IDA grants and trust fund investments of as much as US$50 million anticipated over the four year CAS period from FY11 to FY14. ### Key Components of Proposed World Bank Group Engagement - Climate change adaptation and resilience building: - Bank has supported climate change mitigation since 2003 through Kiribati Adaptation Program (KAP). - Staff anticipates seeking Board agreement in mid-2011 to enlarge and extend KAP Phase 3. - Trust fund financing of US$7–10 million has been agreed in principle for KAP 3 from GEF, GFDRR, Australia, and potentially New Zealand. - Activities to focus on seawalls, mangrove planting, and water conservation and supply. - Bank proposing integrated program in the water sector. - Additional support to improve renewable energy generation and to support transport of food to remote outer islands. - Mitigating effects of geographic isolation: - Scale up support for climate-friendly infrastructure investments. - South Tarawa road improvement investment of US$24m in IDA and TF financing—undertaken jointly with AsDB—approved by the Board on March 1, 2011, with the Kiribati CAS. - Considering options to help bring Kiribati airports up to international safety standards in collaboration with New Zealand and other partners. - Supporting economic reform and regional integration: - Expanded investments provide foundation for substantive coordinated economic policy dialogue. - Reform of large and inefficient state-owned enterprise sector important to improve services and reduce fiscal costs. - AsDB, with support from Australia, has led efforts to develop legal and regulatory framework for reforming SOEs. - Bank Group anticipates supporting telecoms market opening to private investments. - Bank and IFC to cooperate on telecoms reform, advisory services, and potential SOE transactions. - Support for participation in temporary labor migration schemes (New Zealand, Australia) and analytical support to improve management and returns from pelagic fishery. *Source: ANNEX III.B. RELATIONS WITH THE WORLD BANK GROUP (As of March 1, 2011)* --- ### ANNEX IV. KIRIBATI: RELATIONS WITH THE ASIAN DEVELOPMENT BANK (As of February, 2011) ### AsDB Financial Support and Assistance - AsDB has approved seven project loans to Kiribati amounting to US$27.14 million, all from Asian Development Fund (ADF) resources since Kiribati joined AsDB in 1974. - In addition, TA amounting to US$13.9 million has been provided for 41 projects. - Latest AsDB loan to Kiribati: road rehabilitation project approved in December 2010. - AsDB approved US$0.85 million TA grant for Tarawa Sanitation Improvement in October 2009 and a supplementary US$0.2 million for the same TA in December 2010. ### Strategy and Focus Areas - AsDB strategy supports the government's Kiribati Development Plan (KDP) 2008–11. - Approach anchored in mid-term review of the Pacific Strategy with emphasis on: - private sector development, - good governance, - capacity development. - Pressing development challenges: rapid population growth, urban migration, social and environmental concerns, impacts of climate change, access to clean water and sanitation, spread of HIV/AIDS. - AsDB supports efforts to balance growth through TA for the Integrated Land and Population Development Program on Kiritimati Island. - AsDB supports improvement of government financial management through TA for Economic Management and Public Sector Reform, recognizing constraints from poor performance of public enterprises. ### Kiribati: Loan, Grant and Technical Assistance Approvals (2005–10) - Loan approvals (2005–2010) - 2005: Number 0; Amount (US$m) 0 - 2006: Number 0; Amount (US$m) 0 - 2007: Number 0; Amount (US$m) 0 - 2008: Number 0; Amount (US$m) 0 - 2009: Number 0; Amount (US$m) 0 - 2010: Number 1; Amount (US$m) 12 - Grant approvals (2005–2010) - 2005: Number 0; Amount (US$m) 0 - 2006: Number 0; Amount (US$m) 0 - 2007: Number 0; Amount (US$m) 0 - 2008: Number 0; Amount (US$m) 0 - 2009: Number 0; Amount (US$m) 0 - 2010: Number 0; Amount (US$m) 0 - TA approvals (2005–2010) - 2005: Number 0; Amount (US$m) 0 - 2006: Number 1; Amount (US$m) 0.63 - 2007: Number 0; Amount (US$m) 0 - 2008: Number 1; Amount (US$m) 0.8 - 2009: Number 1; Amount (US$m) 0.85 - 2010: Number 1; Amount (US$m) 0.2 *Source: ANNEX IV. KIRIBATI: RELATIONS WITH THE ASIAN DEVELOPMENT BANK (As of February, 2011)* ### ANNEX V. KIRIBATI—STATISTICAL ISSUES ### ANNEX V. KIRIBATI—STATISTICAL ISSUES ### General assessment - Data provision has some shortcomings, but is broadly adequate for surveillance. - Balance of Payments data are the most affected area. ### National Accounts - With PTFAC assistance, GDP estimates have been significantly improved. - Three TA missions from STA took place in January 2009 and 2010 and in April 2011 to improve national account data and revised estimates through 2009. - Further capacity building would be needed to continue to improve the quality of GDP estimates. - Current coverage and limitations: - Estimates limited to Gross Domestic Product (GDP) at current and constant 2006 prices, using the production approach. - There are no expenditure-based GDP estimates. - Unemployment indicators are not regularly available. - PFTAC recommendations: - Statistics authorities should work more closely with other agencies (e.g., tax authorities, public enterprises). ### Price statistics - The monthly retail price index (1996=100) is produced with a short lag (about a month), based on a survey in the capital (a national index is not available). - There are no producer, wholesale, or trade price indices. ### Government finance statistics - The budget outcome is available with a lag of about a year. - Currently, a provisional budget outcome for 2008 is available. - Misclassifications exist in the current statistics, which have been identified by PFTAC. - Audited financial statements of public enterprises are not available. ### Monetary statistics - Balance sheets of all the financial institutions (Bank of Kiribati, Development Bank of Kiribati, Kiribati Provident Fund, and Kiribati Insurance Corporation) are available with lags. - The consolidated balance sheet of the financial sector is not available. - Data on interest rates are reported with a long lag. ### Balance of payments - Quality has been improved with recent PFTAC assistance, but shortcomings remain: - i) External statistics are reported with a long delay (about a year or more). - ii) There are large errors and omissions in some years, which appear to partly reflect the underestimation of private transfers. - iii) There are some inconsistencies between the balance of payments data and budget data. - A PFTAC mission in April 2010 revised the BOP estimates up to 2007, and updated estimates to end 2009. - PFTAC has suggested the need for further statistical capacity building. ### Data Standards and Quality - Kiribati has been a participant in the General Data Dissemination System (GDDS) since 2004. - No data ROSC are available. ### Reporting to STA (Optional) - No data are currently reported to STA for publication in the Government Finance Statistics Yearbook, the Balance of Payments Statistics Yearbook or in the IFS. ### Table of Common Indicators Required for Surveillance (selected entries, exact reporting status) - Exchange Rates: Date of latest observation 4/04/11; Date Received 4/04/11; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 12/31/10; Date Received 02/18/11; Frequency of Data M; Frequency of Reporting A; Frequency of Publication NA. - Interest Rates: Date of latest observation 12/31/09; Date Received 1/3/2011; Frequency of Data A; Frequency of Reporting A; Frequency of Publication I. - Consumer Price Index: Date of latest observation 12/10; Date Received 2/19/11; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation 12/31/10; Date Received 2/19/11; Frequency of Data A; Frequency of Reporting A; Frequency of Publication I. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest observation 12/31/10; Date Received 2/19/11; Frequency of Data A; Frequency of Reporting A; Frequency of Publication I. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 12/31/10; Date Received 2/19/11; Frequency of Data A; Frequency of Reporting A; Frequency of Publication I. - External Current Account Balance: Date of latest observation 12/31/09; Date Received 2/18/11; Frequency of Data A; Frequency of Reporting A; Frequency of Publication I. - Exports and Imports of Goods and Services: Date of latest observation 12/31/10; Date Received 3/11; Frequency of Data A; Frequency of Reporting A; Frequency of Publication I. - GDP/GNP: Date of latest observation 12/31/09; Date Received 2/18/11; Frequency of Data A; Frequency of Reporting A; Frequency of Publication I. - Gross External Debt: Date of latest observation 12/31/10; Date Received 2/18/11; Frequency of Data A; Frequency of Reporting A; Frequency of Publication I. - International Investment Position: Date of latest observation 12/31/10; Date Received 2/18/11; Frequency of Data A; Frequency of Reporting A; Frequency of Publication I. - Notes on frequency codes: Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA). *Source: ANNEX V. KIRIBATI—STATISTICAL ISSUES (Assessment of Data Adequacy for Surveillance, as of April 4, 2011)* ### 11. The risk of debt distress could be ### _cr11113 - 11. The risk of debt distress could be ### Reform scenario and debt-distress outlook - The risk of debt distress could be reduced to “low” under the reform scenario. - The reform scenario envisages fiscal consolidation, grant financing, and the implementation of structural reforms. - None of the DSA thresholds are breached under the reform scenario as a result of the assumed measures. ### Fiscal rule and fiscal stance - An explicit fiscal rule is applied under the scenario: preserving the real per capita value of the RERF at its 2014 level (once the infrastructure projects are completed). - To meet this anchor, fiscal deficits would need to be limited to 5–6 percent of GDP, on average, starting in 2014. - Current expenditure would be reduced, mainly through cuts in wage bill and subsidies. ### Assumptions underpinning the RERF stabilization advice - The nominal rate of return on the RERF is about 5½ percent in the long term. - Population growth is 1.6 percent per year. - Inflation is 2½ percent. - To preserve the real per capita balance of the RERF the nominal RERF balance would have to grow by about 4 percent per year (2½ percent inflation plus 1.6 percent population growth). - This implies a yearly nominal draw-down of about 1½ percent of the RERF total balance. - Because nominal GDP growth is about 5 percent per year over the long run (2½ real growth plus 2½ inflation rate), the RERF balance as a percentage of GDP declines over the long term, despite remaining constant in real per capita value. ### Development financing assumptions - A greater proportion of Kiribati’s development financing needs are projected to be met by grants rather than loans under the reform scenario. - Over the medium term, the reform scenario assumes that the World Bank would only offer grants. - Over the long term, external loan financing is assumed to be about US$2½ million each year compared to US$10 million in the baseline scenario. ### Structural reforms and growth - Implementation of the structural reform agenda is accelerated under the reform scenario. - Public enterprise reform is combined with reforms to increase private sector opportunities. - Better utilization of marine resources is assumed to yield higher fiscal revenue and higher economic growth. ### Conclusions and policy recommendations - Kiribati is at high risk of debt distress; continuing to secure grant financing instead of loans and substantial fiscal adjustment are key to ensuring debt sustainability. - The RERF assets mitigate medium-term risks of debt distress, but given large uncertainties regarding fiscal costs of climate change, the RERF should continue to be used as a buffer against substantial external shocks. - A simple fiscal rule capping the real per capita value of the RERF at the end of the medium term would be key to ensure fiscal sustainability and intergenerational fairness, given that the RERF was established with royalties from a nonrenewable resource. - Narrowing fiscal deficits is necessary; keeping current expenditures in check and improving customs administration to broaden the tax base will be important. - Continued efforts to strengthen the multi-year budget framework with assistance from the AsDB and the IMF would provide fiscal discipline and help ensure debt sustainability. - Growth-supporting structural reforms to mitigate the downward pressure of fiscal tightening and enhance long-term sustainability include: - Improving the business environment by streamlining the process of starting a business and expanding access to credit. - Improving access to land through improved administration. - Reforming state–owned enterprises to create space for private sector development and reduce the drain on the budget. *Source: KIRIBATI 2011 ARTICLE IV REPORT—DEBT SUSTAINABILITY ANALYSIS* ### 19. The authorities have broadly agreed ### _cr11113 - 19. The authorities have broadly agreed ### Authorities' commitments and planned policy actions - Authorities "are fully committed to continuing taking steps to preserve the value of the RERF." - Revenue-side measures: - "Improve tax administration (merging tax and custom offices)." - "Introduce the VAT over the medium term." - Expenditure-side measures: - "Control expenditure by reforming state-owned enterprises (SOEs)." - "Reform of SOEs will reduce their burden on the budget while supporting private sector development." ### Debt sustainability assessment — baseline and scenarios (selected indicators and stress tests) - Figures and stress test design: - "The most extreme stress test is the test that yields the highest ratio in 2020." - A "Financing shock assumes that the interest rate on new borrowing is 200 basis points higher than in the baseline scenario." - Key charted indicators (2010–30) include: - Debt accumulation; Grant-equivalent financing (% of GDP); Grant element of new borrowing (right scale). - PV of debt-to-GDP ratio. - PV of debt-to-exports+fishing licenses ratio. - PV of debt-to-revenue ratio. - Debt service-to-exports+fishing licenses ratio. - Debt service-to-revenue ratio. - Sensitivity and bound tests applied include: - Alternative scenarios (A1, A2, A3). - Bound tests (B1–B5) such as "Real GDP growth at historical average minus one standard deviation", "One-time 30 percent real depreciation in 2011", and "10 percent of GDP increase in other debt-creating flows in 2011". - Financing-term shock in some scenarios: "interest rate on new borrowing is by 2 percentage points higher than in the baseline." ### Baseline quantitative outcomes (selected table highlights) - Public sector debt (percent of GDP), selected years: - 2007: 32.5 - 2008: 34.8 - 2009: 30.5 - 2010: 31.9 - 2011: 33.6 - 2015: 54.3 - 2020: 66.0 - 2030: 66.2 - o/w foreign-currency denominated (percent of GDP), selected years: - 2007: 10.2 - 2010: 11.3 - 2015: 41.9 - 2020: 55.8 - 2030: 59.4 - Identified debt-creating flows (percent of GDP), selected items: - Primary deficit (2010-15 average): 12.4 - Revenue and grants (2010): 83.1 (in percent of GDP row context) - Grants (percent of revenue and grants): e.g., 2010: 33.9 (grants share of revenue and grants) - Other sustainability indicators (selected): - PV of public sector debt (percent of GDP), e.g., 2010-15 average: 32.0; 2020: 42.0; 2030: 43.7 - PV of public sector debt-to-revenue ratio (in percent): 2010: 55.4; 2015: 86.7; 2020: 109.2; 2030: 120.8 - Debt service-to-revenue ratio (in percent): 2010: 10.6; 2015: 5.2; 2020: 5.3; 2030: 7.0 - Gross financing need 3/ (percent of GDP): 2010: 8.3; 2015: 15.2; 2020: 14.0; 2030: 13.4 ### External debt and balance of payments (selected baseline metrics) - External debt (nominal, percent of GDP and PPG), selected years: - 2007: 10.2 - 2010: 11.3 - 2015: 41.9 - 2020: 55.8 - 2030: 59.4 - PV of external debt (Millions of U.S. dollars), selected: - PV of PPG external debt (Millions of U.S. dollars) 2020: 73.1; 2030: 125.4 - Indicators in percent of exports: - PV of external debt (percent of exports): 2015: 65.7; 2020: 96.5; 2030: 116.4 - Debt service-to-exports ratio (in percent): 2010: 1.0; 2015: 1.7; 2020: 2.5; 2030: 5.9 - Key macro assumptions used in external framework: - Real GDP growth (in percent), baseline and projections: 2010: 1.8; 2011: 3.7; 2016-30 Average: 2.5 - GDP deflator in US dollar terms (change in percent), examples: 2010: 4.8; 2011: 10.4; 2012: 13.0 - Effective interest rate (percent): 2010: 1.0; 2011: 0.1; projections often set at 1.0 ### Reform scenario outcomes (selected) - Reform scenario reduces external debt accumulation relative to baseline: - External debt (nominal, percent of GDP) under reform scenario (selected years): 2011: 17.0; 2015: 19.0; 2020: 17.9; 2030: 14.4 - PV of external debt (percent of exports) under reform scenario: 2015: 30.3; 2020: 27.6; 2030: 21.8 - Balance of payments under reform scenario (selected percent of GDP): - Current account balance 2011: -27.2; 2015: -17.4; 2020: -17.1; 2030: -14.4 - Exports, f.o.b. (percent of GDP) 2011: 7.8; 2015: 9.2; 2020: 10.0; 2030: 11.0 - RERF balance (end of period, millions of Australian dollars) increases under reform scenario: 2011: 579.7; 2020: 808.9; 2030: 1224.6 ### Fiscal tables — baseline and reform scenario highlights (selected) - Central government operations (baseline, in millions of Australian dollars): - Total revenue and grants 2011: 147.8 - Revenue 2011: 78.9 - Tax revenue 2011: 33.9 - Fishing license fees 2011: 35.0 - Total expenditure and net lending 2011: 173.9 - Overall balance 2011: -26.1 - RERF government drawings 2011: 15.5 - Central government operations (reform scenario, in millions of Australian dollars): - Total revenue and grants 2011: 147.8; 2012: 171.2 - Revenue 2011: 78.9; 2012: 83.8 - Tax revenue 2011: 33.9; 2012: 36.0 - Fishing license fees 2011: 35.0; 2012: 37.1 - Total expenditure and net lending 2011: 173.9; 2012: 191.5 - Overall balance 2011: -26.1; 2012: -20.3 - RERF government drawings 2011: 15.5; 2012: 13.2 - Fiscal ratios (percent of GDP), baseline: - Total revenue and grants 2011: 80.7 (percent of GDP) - Revenue 2011: 43.0 (percent of GDP) - Total expenditure and net lending 2011: 94.9 (percent of GDP) - Overall balance 2011: -14.3 (percent of GDP) - Fiscal ratios (percent of GDP), reform scenario: - Total revenue and grants 2011: 80.7; 2012: 86.8 - Revenue 2011: 43.0; 2012: 42.5 - Total expenditure and net lending 2011: 94.9; 2012: 97.1 - Overall balance 2011: -14.3; 2012: -10.3 ### Policy implications and priorities (implied by analysis and authorities' plans) - Preserve RERF value while managing fiscal needs: - Continue RERF protection measures and prudent government drawings (e.g., recorded government drawings: 2011: 15.5). - Strengthen revenue base: - Merge tax and customs administrations to improve tax administration. - Introduce VAT over the medium term to diversify tax revenue sources. - Contain and reprioritize expenditure: - Reform SOEs to "reduce their burden on the budget while supporting private sector development." - Control subsidies and wage growth consistent with fiscal sustainability paths shown in baseline and reform scenarios. - Manage debt and financing risks: - Monitor exposure to financing shocks (e.g., 200 basis points higher interest on new borrowing) and consider concessional/grant-equivalent financing terms (grant element of new borrowing in projection years frequently shown as high, e.g., "80.4", "72.4", "45.0", etc., in various tables). *Source: IMF staff report text and accompanying debt sustainability and fiscal tables contained in the provided content unit.* ### 2009. However, the RERF suffered substantial losses, with its assets declining from ### _cr11113 - 2009. However, the RERF suffered substantial losses, with its assets declining from ### Fiscal developments and budget planning - 2010 estimated fiscal deficit is 8 percent of GDP, down from 12½ percent in 2009. - Narrowing deficit reflects a large increase in fishing licenses fees following an auction scheme introduced in September 2010. - A three-year budget framework was introduced with the 2010 budget. - Structural reform momentum, especially privatizing SOEs, gained traction at end 2010. - Medium-term objective: once key public projects are completed, focus should shift to fiscal consolidation to rebuild fiscal space and address long-term spending pressures from climate change. - Authorities set a cap on RERF drawdown at a nominal value of $15 million per annum for this fiscal year and three years forward — a reduction of $5 million compared to the average drawdown in prior years. - Authorities committed to saving windfall earnings whenever possible and welcome recent MCM TA on the RERF, with outcomes under consideration for implementation. ### Revenue, spending, and financing (selected figures from table) - Nominal GDP (2010): US$146.7 million - GDP per capita (2010): US$1,420 - Nominal GNI (2010): US$209.6 million - Population (2010): 103,280 - Quota: SDR 5.6 million - Real GDP (percent change) projections: 2007 0.4, 2008 -1.1, 2009 -0.7, 2010 1.8, 2011 3.0, 2012 3.5 - Real GNI (percent change): 2007 -0.9, 2008 2.2, 2009 -5.0, 2010 6.6, 2011 -1.8, 2012 2.8 - Consumer prices (percent change, average): 2007 4.2, 2008 11.0, 2009 8.8, 2010 -2.8, 2011 7.7, 2012 5.0 - Central government finance (percent of GNI): Revenue and grants 47.3 (2007), 48.9 (2008), 58.1 (2009), 57.6 (2010), 58.6 (2011), 58.8 (2012) - Total domestic revenue: 28.8 (2007), 29.6 (2008), 32.0 (2009), 34.1 (2010), 31.3 (2011), 30.8 (2012) - Grants: 18.5 (2007), 19.3 (2008), 26.1 (2009), 23.5 (2010), 27.3 (2011), 28.0 (2012) - Expenditure and net lending: 58.7 (2007), 62.7 (2008), 66.0 (2009), 63.1 (2010), 69.0 (2011), 72.0 (2012) - Overall balance: -11.4 (2007), -13.8 (2008), -7.9 (2009), -5.5 (2010), -10.4 (2011), -13.2 (2012) - Financing: 11.4 (2007), 13.8 (2008), 7.9 (2009), 5.5 (2010), 10.4 (2011), 13.2 (2012) - RERF financing line: 21.1 (2007), 11.0 (2008), 11.6 (2009), 3.9 (2010), 6.1 (2011), 6.1 (2012) - RERF closing balance (in millions of U.S. dollars): 562 (2007), 389 (2008), 512 (2009), 572 (2010), 515 (2011), 518 (2012) - RERF closing balance (in millions of $A): 637 (2007), 562 (2008), 570 (2009), 576 (2010), 580 (2011), 590 (2012) - RERF per capita value (in 1996 $A): 5,052 (2007), 4,185 (2008), 4,020 (2009), 3,868 (2010), 3,717 (2011), 3,614 (2012) ### Revenue Equalization Reserve Fund (RERF) specifics - RERF assets declined from 420 percent of GDP in 2007 to 350 percent of GDP in 2009. - Directors stressed preserving the real per capita value of the RERF to ensure fiscal sustainability and intergenerational fairness. - Recommendation: reduce drawdowns further after key public projects are completed to preserve the RERF as a buffer against external shocks and for future generations. - Authorities welcomed MCM TA on the RERF and expect to build on collaboration with MCM in maximizing the use and value of the RERF. ### External sector, debt, and vulnerabilities - Main export products: fish and copra. - Balance of payments (in millions of U.S. dollars): Current account including official transfers -37.6 (2007), -46.0 (2008), -38.1 (2009), -34.1 (2010), -47.1 (2011), -50.5 (2012). - Current account including official transfers (In percent of GDP): -29.4 (2007), -34.7 (2008), -29.8 (2009), -23.1 (2010), -28.9 (2011), -29.2 (2012). - Current account excluding official transfers (in millions of U.S. dollars): -70.6 (2007), -78.9 (2008), -84.2 (2009), -84.0 (2010), -108.4 (2011), -116.7 (2012). - Current account excluding official transfers (In percent of GDP): -55.2 (2007), -59.6 (2008), -65.8 (2009), -57.0 (2010), -66.5 (2011), -67.4 (2012). - External debt (in millions of U.S. dollars): 13.7 (2007), 14.5 (2008), 14.3 (2009), 18.4 (2010), 27.6 (2011), 43.5 (2012). - External debt (In percent of GDP): 10.2 (2007), 13.3 (2008), 9.7 (2009), 11.3 (2010), 17.0 (2011), 25.1 (2012). - External debt service (in millions of U.S. dollars): 2.2 (2007), 0.6 (2008), 1.0 (2009), 0.6 (2010), 0.6 (2011), 0.7 (2012). - External debt service (In percent of exports of goods and services): 11.9 (2007), 5.0 (2008), 7.9 (2009), 3.0 (2010), 2.6 (2011), 2.7 (2012). ### Structural reforms, public financial management, and financial sector - Directors and authorities agree accelerating structural reforms is critical: reforming state-owned enterprises (SOEs) and developing the private sector to ensure sustainable growth and reduce fiscal drain. - SOE reform: privatization of one SOE recently concluded; four more SOEs targeted for extensive reform measures. - Authorities targeted liberalization of the telecommunication sector with World Bank assistance. - Other measures under consideration: streamlining business start-up process, addressing land tenure, improving household access to credit. - Development Bank of Kiribati’s (DBK) non-performing loans (NPLs) reduced by 2 percentage points as a share of total loans in the last two years, but they remain high. - Provident Fund introduced a new lending scheme in July 2010 to ease access to credit. - Authorities requested TA from PFTAC on setting up a credible macro-economic policy framework and strengthening capacity for fiscal forecasting. - Authorities requested MCM TA to review asset allocation of the Kiribati Provident Fund (KPF) and the Kiribati Insurance Corporation, including a review of KPF credit schemes. - Authorities requested MCM TA to assist in formulating a financial supervision and regulation framework in the event of further expansion of the financial sector, particularly through DBK. - Directors called for strengthening bank regulation and supervision and introducing a new law to improve access to land and collateral recovery. - Directors welcomed steps to boost competition and called for further efforts to enhance the business climate and increase competition in the banking sector. ### Policy recommendations and priorities highlighted by Executive Directors - Preserve the real per capita value of the RERF for fiscal sustainability and intergenerational fairness. - Implement timely and comprehensive structural reforms to ensure sustainable growth and poverty reduction. - Shift focus to fiscal consolidation after completion of key public projects to rebuild fiscal space. - Strengthen the medium-term fiscal framework to facilitate public planning and guard against pro-cyclical policies. - Accelerate SOE reform and promote private sector development to reduce budgetary drains. - Secure grant financing to support large development needs and contain fiscal deficits to maintain external stability. - Improve the quality of macroeconomic data. ### Authorities’ perspectives and commitments (Statement by Executive Director and Advisor) - Near-term priorities: manage inflationary pressures from increases in food and fuel prices and the pickup in activity from major infrastructure investments. - Import levy funds subsidize transportation to outer islands; import levy rate has remained constant for more than 10 years and recent fuel price hikes have eroded the fund balance. - Authorities welcome World Bank grant assistance toward the import levy mechanism and other in-kind and financial assistance from development partners. - Authorities are cautious about civil service wage increases as a countercyclical policy; they consider the 2010 wage increase was long overdue (last increase in 2006). - Authorities plan overall rationalization of government operations and services and to strengthen PFM; they have initiated a multi-year budget framework but recognize constraints from lack of a relevant macro-economic policy framework. - Authorities appreciate collaboration with the Fund, World Bank, and Asian Development Bank, and value grant assistance to address infrastructure gaps while mindful of absorptive capacity constraints. - Authorities committed to working closely with development partners to manage implementation of investment projects and to move the economy forward. *Source: IMF staff report and associated country statements and tables.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11113.pdf_