## _cr1146

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---

### I. Introduction: economic setting and politics
- Economic performance has been volatile and largely determined by offshore earnings and government expenditure.
- Offshore earnings sources: Tuvalu Trust Fund (TTF) established in 1987; fees from fishing licenses; “.tv” internet domain name lease; workers’ remittances; and grants.
- Tuvalu has no central bank; the Australian dollar is the country’s legal tender.
- Access to basic health services and formal education is almost universal.
- Climate change and rising sea levels are identified as a major challenge.
- Political context:
  - A new government was formed in late December after the previous government formed in late September 2010 was brought down through a motion of no confidence by eight votes to seven.
  - There are no organized political parties in Tuvalu.
  - The government was preparing the 2011 budget to be discussed in Parliament in March.

### II. Recent developments: growth, fiscal, public debt, financial sector, external position
- Growth and inflation
  - Staff estimates zero growth in GDP in 2010, after the economy contracted by about 2 percent in 2009.
  - Major construction projects (wharf and power station) have been completed.
  - Seafarer employment is weak; seafarers’ remittances now 6 percent of GDP (sharp decline from about 10 percent of GDP).
  - Annual inflation negative since mid-2009: -1¾ percent in November 2010 due to lower global food prices and the strong Australian dollar.
- Fiscal performance
  - Parliament passed three supplementary appropriation bills in 2010, totaling about 10 percent of GDP.
  - Fiscal deficit estimated to increase sharply from 4 percent of GDP in 2009 to almost 30 percent of GDP in 2010 owing to weak domestic revenue and offshore income and increased spending.
  - Fund available for budget financing declined to about 20 percent of GDP from 45 percent in 2009.
- Public debt and public enterprises
  - Public debt has declined in the last two years but remains high by regional standards at about 44 percent of GDP.
  - External public debt is over 30 percent of GDP, mostly on concessional terms.
  - The government might have an additional external debt of US$10 million (about 30 percent of GDP) relating to joint ventures with foreign fishing companies.
  - Most public enterprises are financially weak; only the NBT remains profitable.
  - Total debt of the public enterprise sector (excluding the two banks) rose from 19 percent of GDP in 2004 to 42 percent in 2007.
  - Very low tariff structures, government arrears, and structural inefficiencies impede sound balance sheets.
- Financial sector
  - Financial sector underdeveloped and lending constrained after rapid credit growth in the early 2000s.
  - Nonperforming loans are high at around 40 percent of total loans.
  - Banking sector consists of the National Bank of Tuvalu (NBT) and one development bank, both government owned.
  - Tuvalu National Provident Fund (TNPF) had about 6,800 members and total assets amounted to 97 percent of GDP ($A34 million) at end-2009; TNPF loans to members ≈ 20 percent of its total assets at end-2009.
  - Since September 2009, employee contributions to TNPF required at 13 percent of salaries and employers contribute 10 percent.
  - Interest rates on lending have changed little, reflecting limited competition.
- External position
  - Staff estimates a current account deficit of almost 25 percent of GDP in 2010 due to low income and grants.
  - Tuvalu exports little and depends heavily on imports.
  - Gross official reserves, including the SDR allocation, declined substantially in 2010 but remain high at about eight months of imports of goods and services.

### III. Outlook and risks
- Outlook
  - Growth projected to be zero or even turn negative in 2011 and remain low at below 2 percent over the medium term.
  - Inflation expected to remain low over the medium term given projected global food and fuel prices.
  - Current account projected to improve in line with fiscal tightening and higher investment income.
- Medium-term scenario (selected series, exact figures preserved)
  - Real GDP (annual percent change): 2008 7.0; 2009 -1.7; 2010 0.2; 2011 0.0; 2012 0.6; 2013 1.1; 2014 1.6; 2015 1.7.
  - Consumer prices (period average): 2008 10.5; 2009 -0.3; 2010 -1.9; 2011 1.2; 2012 1.6; 2013 2.0; 2014 2.2; 2015 2.2.
  - Total revenue and grants (percent of GDP): 2008 77.4; 2009 89.8; 2010 69.0; 2011 71.9; 2012 69.2; 2013 69.4; 2014 69.6; 2015 69.7.
  - Total expenditure (percent of GDP): 2008 82.7; 2009 93.5; 2010 97.8; 2011 97.7; 2012 88.1; 2013 80.8; 2014 80.8; 2015 80.6.
  - Overall balance (percent of GDP): 2008 -5.3; 2009 -3.7; 2010 -28.7; 2011 -10.9; 2012 -12.6; 2013 -11.6; 2014 -11.2; 2015 -10.9.
  - Current account balance (incl. grants, percent of GDP): 2008 -10.2; 2009 -5.2; 2010 -24.1; 2011 6.3; 2012 -3.4; 2013 1.0; 2014 3.3; 2015 5.1.
  - Current account balance (excl. grants, percent of GDP): 2008 -50.6; 2009 -49.3; 2010 -54.9; 2011 -37.6; 2012 -33.2; 2013 -28.0; 2014 -24.7; 2015 -22.0.
- Risks
  - Domestic: the fund available for budget financing could be depleted in 2011 without fiscal adjustment, forcing big sudden cuts and sharp decline in growth.
  - External: weaker external environment could reduce investment income and remittances.
  - Natural disasters and climate change: major vulnerability given rising sea levels.
  - Tuvalu is rated as extremely vulnerable on the region’s Environmental Vulnerability Index (EVI).

### IV. Policy discussions and recommendations
- Fiscal policy: immediate and medium-term actions
  - Developments: total spending relative to GDP increased by 20 percentage points since 2005, driven by subsidies, transfers and capital spending; subsidies and transfers rose to 25 percent of GDP in 2010 (increase of more than 10 percentage points over three years).
  - 2011 budget advice:
    - Staff advised immediate action to cut the current high level of spending as unsustainable.
    - Assuming delays in grants from ADB and EC, the CIF will be depleted in mid-2011 and a cumulative financing gap of about 40 percent of GDP will arise in 2011–12 since no distributions from the TTF to the CIF are likely in the next few years.
    - Mission proposed containing the 2011 budget deficit to about 11 percent of GDP, mainly through a cut in capital spending.
    - Recommended measures: freeze wages, reduce travel costs, cut transfers and subsidies (in particular to the medical treatment scheme), and improve tax compliance—especially for the consumption tax introduced in mid-2009.
  - Longer-term adjustments:
    - Further adjustments required over the medium term to ensure fiscal sustainability.
    - Government has not tapped the TTF since 1987; maintaining the real value of the TTF is key to fiscal discipline.
    - Government should aim to bring down total spending to about the 2005–08 level and rebuild the CIF to its targeted balance (16 percent of the TTF’s maintained value).
    - Sound fiscal policy necessary to build fiscal space for natural disasters and climate change.
  - Risks to adjustment scenario (TTF return assumptions and financing gap)
    - Assumed TTF market value increase by an annual real growth rate of 5½ percent (below the average real rate of return of 6¼ percent over the last decade).
    - About 60 percent of the TTF are invested in growth assets; remainder in fixed income instruments and others.
    - At an annual real rate of return of 3½ percent, the assumed adjustment scenario would result in a financing gap of about 11 percent of GDP ($A4½ million) during 2013–15.
    - Table: TTF real rate of return versus Financing gap in 2013-15 (In percent; financing gap)
      - 4.25 → 0.0
      - 4.0 → 3.4
      - 3.5 → 11.4
      - 3.0 → 19.5
    - Staff urged authorities to save windfall revenue and grants to prepare for these risks.
  - Public financial management:
    - Fiscal management needs urgent strengthening; windfall revenue from TTF and fishing licenses has tended to be immediately spent.
    - Mission recommended saving windfall revenue and using a medium-term budget framework.
    - Authorities need to improve budget reporting, monitoring, and economic/policy analysis capacity.
    - Staff advised clarifying the US$10 million joint venture debt and strengthening the process for government guarantees.
  - Relations with public enterprises:
    - Government has substantial arrears to public enterprises, including utility bills amounting to almost 1 percent of GDP.
    - Mission urged regularizing mutual financial obligations between government and public enterprises.
  - Authorities’ responses:
    - Authorities agreed on the need for fiscal consolidation and to establish a Revenue and Expenditure Review Committee chaired by the Minister of Finance.
    - They will consider the mission’s fiscal adjustment scenario and indicated the 2011 budget is the first step.
    - Emphasized importance of donor assistance and requested technical assistance on tax audit.
    - On the US$10 million joint venture debt, authorities believe no government guarantee was extended but will check documents and inform staff.
- Financial sector and banking supervision
  - Banking Act and supervision:
    - Passage of a Banking Act in August 2010 was welcomed.
    - Amendments submitted to Parliament in December to align with the Basel Core Principles and enhance the Bank Commissioner’s independence.
    - No progress yet in putting in place supervisory and prudential requirements such as minimum capital and loan loss provisioning.
    - Staff encouraged further efforts to recover nonperforming loans and advised that banks’ interest rates should be market determined; mission urged government to withdraw any direction to lower NBT lending rates by 1 percentage point.
    - Banks and the Provident Fund started sharing borrowers’ information and tightened lending standards, including lowering the maximum debt service to income ratio from 50 to 40 percent for all personal loans (mission supported).
  - Public enterprise reform and structural changes:
    - Mission supported the comprehensive public enterprise reform program with ADB assistance.
    - A Public Enterprise (Performance and Accountability) Act was passed in 2010 and a Public Enterprise Reform Monitoring Unit (PERMU) was established.
    - Government required to compensate public enterprises for non-profitable services (CSOs).
    - Several public enterprises and line ministry business activities being considered for mergers, private participation, and possible corporatization.
    - Reforms could reduce fiscal burdens and attract foreign direct investment; regularizing government-public enterprise financial relations is needed.
- Labor, human capital, and poverty reduction
  - Job creation constrained by limited land, poor soil, and geographic isolation.
  - Mission encouraged maximizing use of the temporary labor migration scheme in New Zealand and exploring an Australian scheme.
  - Demand for Tuvaluan seafarers is declining; adequate vocational training and better-managed Tuvalu Maritime Training Institute (TMTI) required.
  - Authorities focusing on vocational training; TMTI repairs underway with need for donor financial and technical support.
  - Poverty has risen: 2010 household income and expenditure survey indicates about 20 percent of households living in poverty (up from 14 percent in 2004), with outer islands worse affected.
  - Education and vocational training emphasized to reduce poverty.

### V. External stability, exchange regime, Article IV cycle, and statistics
- Exchange regime and external stability
  - Use of the Australian dollar is appropriate given economy size and limited monetary capacity.
  - Real effective exchange rate appreciated by 8 percent over the last year.
  - Exports minimal at about 1–2 percent of GDP; high import dependency.
  - Tourism constrained: just over 300 visitors each year; current air service only from Suva, Fiji to Funafuti with a 40-seat plane twice a week.
  - Current account deficit (excluding grants) is very high but projected to decline with fiscal adjustment.
- Article IV consultation timing
  - Staff recommends that the next Article IV consultation take place on a 24-month cycle.
  - The first Article IV consultation discussions took place during November 11–23, 2010.
- Statistics and data gaps
  - Data shortcomings most serious in national accounts and balance of payments; more staff needed in the Central Statistics Division (CSD).
  - CPI is compiled quarterly and considered timely and of reasonable quality; CPI weights to be revised in 2011 based on the 2010 Household Income and Expenditure Survey.
  - Monetary and financial statistics are not produced nationally; banking data were provided by the two banks for the mission.
  - Balance of payments statistics compilation systems developed with PFTAC assistance; underlying data have inconsistencies and errors.
  - Not a GDDS participant; no data ROSC available; no data currently reported to STA for publication.
- Selected key statistics and indicators (exact figures preserved where cited)
  - GDP (2009): U.S. dollars (millions) 27.1; Per capita 2,447.
  - Poverty rate (2010): 24.8.
  - Life expectancy at birth (2008): 64.0.
  - Total population (2009, thousands): 11.1.
  - Adult literacy rate (2002): 99.0.
  - Unemployment rate (2004): 16.3.
  - Real GDP growth (annual percent): 2006 3.3; 2007 4.8; 2008 7.0; 2009 -1.7; 2010 0.2; 2011 Est.: 0.0.
  - Consumer prices (period average): 2006 3.8; 2007 2.2; 2008 10.5; 2009 -0.3; 2010 -1.9; 2011 Est.: 1.2.
  - Gross official reserves (Aus $ millions / months of imports): 2006 17.4 (7.7 months); 2007 20.3 (7.8 months); 2008 30.7 (10.3 months); 2009 30.3 (10.0 months); 2010 25.6 (8.2 months); 2011 Est.: 23.5 (8.5 months). (Data for 2010 are as of October.)
  - TTF Market Value (millions of Aus $): 2006 304.5; 2007 323.4; 2008 262.8; 2009 276.9; 2010 308.8; projections shown for 2011–2015.
  - Total government debt (including guarantees) (percent of GDP): 2006 20.3; 2007 19.7; 2008 21.7; 2009 15.6; 2010 15.1; 2011 Est.: 12.3.
  - External public debt (percent of GDP): 2006 13.9; 2007 13.6; 2008 16.8; 2009 12.3; 2010 10.8; 2011 Proj.: 9.9.
  - Banking: National Bank of Tuvalu assets (Aus $ millions): 2006 34.7; 2007 32.7; 2008 36.8; 2009 36.6; 2010 March 36.5; June 37.4; Sept 38.4.
  - Nonperforming loans (Development Bank of Tuvalu, percent): 2010: 6.0 (series shows 6.2, 6.1, 6.1, 6.0 across years) and elsewhere nonperforming loans described around 40 percent of total loans.
- Fund relations and technical assistance
  - Membership status: Joined June 24, 2010; Article XIV.
  - Quota: 1.80 SDR million (100.00 percent).
  - SDR allocation: Net Cumulative Allocation 1.69 (100.00); Holdings 1.69 (100.00).
  - No outstanding purchases, loans, or financial arrangements; no projected payments to Fund.
  - Exchange Control Law of 1981 and Exchange Control Regulations of 1983 govern legal framework; staff recommended updating regulations to accept obligations of Article VIII, Sections 2, 3 and 4; authorities indicated they will request TA from PFTAC.
  - PFTAC assistance provided on tax policy and administration (2007, 2008, 2010), financial sector supervision (2008), and balance of payments and national accounts statistics (2006, 2009, 2010).
  - A Resident Representative office covering Pacific islands and based in Fiji was established in September 2010.

### VI. Staff appraisal, Executive Board views, and authorities’ commitments
- Staff appraisal and Board views
  - Growth and inflation: minimal growth in 2010; growth projected zero in 2011; inflation expected to remain low.
  - Fiscal: Board and staff emphasized need for resolute fiscal adjustment and structural reforms; CIF depletion imminent without adjustment; recommended front-loaded cuts mainly in capital spending, subsidies and transfers; freeze wages; reduce travel costs; boost tax compliance; save windfall offshore revenue into the CIF and adopt a medium-term budget framework.
  - Financial sector and public enterprise reforms: Commended ongoing public enterprise reform; urged regularization of financial relations and acceleration of supervisory and prudential requirements for banks.
  - Statistics: improving statistical capacity critical; more staff and PFTAC support needed.
- Authorities’ intended measures (selected, exact wording preserved where cited)
  - Establish a Revenue and Expenditure Review Committee to widen the revenue base and cut high levels of spending, including reviewing the Tuvalu Medical Treatment Scheme (TMTS).
  - Prioritize and scale back capital spending; freeze further hiring to assess civil service size.
  - Aim to rebuild the CIF to its targeted balance and seek assistance in formulating a simple and credible medium-term budget framework.
  - Seek technical assistance to strengthen tax administration.
  - Commit to accelerating implementation and approval of Amendments to the Banking Act, aiming for parliamentary endorsement in early 2011.
  - Request technical assistance to strengthen banking sector and credit culture; suspend directions to lower bank lending rates.
  - Continue public enterprise reform (with ADB assistance), including options such as mergers, private sector participation, and corporatization.
  - Invest in technical and vocational education and training; explore upgrading maritime qualifications and support for Tuvalu Maritime Training Institution (TMTI).
  - Prioritize completion of the 2010 Household Income and Expenditure Survey (HIES); request PFTAC assistance and continued support to update data to minimum standards.

*Source: IMF Staff Report content provided in the supplied PDF excerpt (document identifier: _cr1146).*

### 1. Basic Economic and Institutional Features ..................................................................15

### 1. Basic Economic and Institutional Features

### I. Introduction
- Economic setting
  - Economic performance has been volatile in recent years and largely determined by offshore earnings and government expenditure.
  - Offshore earnings sources: Tuvalu Trust Fund (TTF) established in 1987; fees from fishing licenses; “.tv” internet domain name lease; workers’ remittances; and grants.
  - Tuvalu has no central bank and the Australian dollar is the country’s legal tender.
  - Access to basic health services and formal education is almost universal.
  - Climate change looms as a major challenge in light of rising sea levels.
- Politics
  - A new government was formed in late December after the previous government formed in late September 2010 was brought down through a motion of no confidence by eight votes to seven.
  - There are no organized political parties in Tuvalu.
  - The government is preparing the 2011 budget, expected to be discussed in Parliament in March.

### II. Recent Developments
- Growth and inflation
  - Staff estimates zero growth in GDP in 2010, after the economy contracted by about 2 percent in 2009.
  - Major construction projects (wharf and power station) have been completed.
  - Seafarer employment—Tuvalu’s main foreign exchange earning source for the private sector—is weak.
  - The Tuvalu Cooperative Society is facing difficult financial conditions; government extended debt guarantees equivalent to 1½ percent of GDP.
  - Annual inflation has been negative since mid-2009: -1¾ percent in November 2010 due to lower global food prices and the strong Australian dollar.
- Fiscal performance
  - Parliament passed three supplementary appropriation bills in 2010, totaling about 10 percent of GDP to pay government-guaranteed debt for an airline company and increase capital spending.
  - The fiscal deficit is estimated to increase sharply from 4 percent of GDP in 2009 to almost 30 percent of GDP in 2010 owing to weak domestic revenue and offshore income and increased spending.
  - The fund available for budget financing declined rapidly to about 20 percent of GDP from 45 percent in 2009.
- Public debt
  - Public debt has declined in the last two years but remains high by regional standards at about 44 percent of GDP.
  - External public debt is at over 30 percent of GDP, mostly on concessional terms.
  - The government might have an additional external debt of US$10 million (about 30 percent of GDP) relating to joint ventures with foreign fishing companies.
- Financial sector
  - The financial sector is underdeveloped and lending constrained following rapid credit growth in the early 2000s.
  - Nonperforming loans are high at around 40 percent of total loans.
  - Banking sector consists of the National Bank of Tuvalu (NBT) and one development bank, both government owned.
  - The Tuvalu National Provident Fund (TNPF) has about 6,800 members, more than half of the total population, and its total assets amounted to 97 percent of GDP ($A34 million) at end-2009.
  - The TNPF’s total loans to its members were about 20 percent of its total assets at end-2009; the remaining assets were invested abroad.
  - Starting September 2009, all employees are required to contribute 13 percent of their salaries, and employers contribute 10 percent of employees’ salaries.
  - Interest rates on lending have changed little in recent years, reflecting limited competition.
- External position
  - Staff estimates a current account deficit of almost 25 percent of GDP in 2010 due to low income and grants.
  - Tuvalu exports little and depends heavily on imports.
  - Gross official reserves, including the SDR allocation, declined substantially in 2010 but remain high at about eight months of imports of goods and services.
- Public enterprises
  - Most public enterprises are financially weak; only the NBT remains profitable.
  - Three public enterprises have not been profitable in the last several years.
  - Total debt of the sector, excluding the two banks, rose from 19 percent of GDP in 2004 to 42 percent in 2007, part of which is guaranteed by the government.
  - Very low tariff structures, government arrears, and structural inefficiencies impede sound balance sheets.
  - Limited availability of experienced managers and Board structures chaired by civil servants have reduced prospects for commercial operation.

### III. Outlook and Risks
- Outlook
  - Growth outlook remains clouded; weak global recovery unlikely to increase remittances and investment income substantially.
  - Given difficult fiscal situation, government spending needs to be cut and no big construction projects are in the pipeline.
  - Private sector credit is constrained due to high nonperforming loans.
  - Growth is projected to be zero or even turn negative in 2011 and remain low at below 2 percent over the medium term.
  - Given projected global food and fuel prices, inflation is expected to remain low over the medium term.
  - Current account projected to improve in line with fiscal tightening and higher investment income.
  - Medium-term scenario table (selected figures, in percent of GDP unless noted)
    - Real GDP: 2008 7.0; 2009 -1.7; 2010 0.2; 2011 0.0; 2012 0.6; 2013 1.1; 2014 1.6; 2015 1.7 (annual percent change)
    - Consumer prices (period average): 2008 10.5; 2009 -0.3; 2010 -1.9; 2011 1.2; 2012 1.6; 2013 2.0; 2014 2.2; 2015 2.2
    - Total revenue and grants: 2008 77.4; 2009 89.8; 2010 69.0; 2011 71.9; 2012 69.2; 2013 69.4; 2014 69.6; 2015 69.7
    - Total expenditure: 2008 82.7; 2009 93.5; 2010 97.8; 2011 97.7; 2012 88.1; 2013 80.8; 2014 80.8; 2015 80.6
    - Overall balance: 2008 -5.3; 2009 -3.7; 2010 -28.7; 2011 -10.9; 2012 -12.6; 2013 -11.6; 2014 -11.2; 2015 -10.9
    - Current account balance (incl. grants): 2008 -10.2; 2009 -5.2; 2010 -24.1; 2011 6.3; 2012 -3.4; 2013 1.0; 2014 3.3; 2015 5.1
    - Current account balance (excl. grants): 2008 -50.6; 2009 -49.3; 2010 -54.9; 2011 -37.6; 2012 -33.2; 2013 -28.0; 2014 -24.7; 2015 -22.0
- Risks
  - Domestic: fund available for budget financing could be depleted in 2011 without fiscal adjustment, forcing big sudden cuts and sharp decline in growth.
  - External: weaker external environment could spill into Tuvalu through investment income and remittances channels.
  - Natural disasters and climate change: major vulnerability given rising sea levels.
  - Tuvalu is rated as extremely vulnerable on the region’s Environmental Vulnerability Index (EVI).

### IV. Policy Discussions
- A. Fiscal Policy
  - Developments
    - Large spending increases in recent years caused a sharp increase in the fiscal deficit in 2010 as offshore revenue and grants fell to earlier levels.
    - Total spending relative to GDP increased by 20 percentage points since 2005, mainly due to sharp increases in subsidies, transfers and capital spending.
    - Subsidies and transfers to households and public enterprises rose to 25 percent of GDP in 2010, an increase of more than 10 percentage points of GDP over the last three years.
  - 2011 Budget (staff advice and projections)
    - Staff advised immediate action to cut the current high level of spending, which is unsustainable.
    - Assuming delays in receiving grants from the ADB and European Commission (EC), the CIF will be depleted in mid-2011 and a cumulative financing gap of about 40 percent of GDP will arise in 2011–12 since no distributions from the TTF to the CIF are likely in the next few years.
    - Mission proposed that the 2011 budget deficit be contained to about 11 percent of GDP, mainly through a cut in capital spending.
    - Government should aim to bring down other spending by freezing wages, reducing travel costs, and cutting transfers and subsidies, in particular to the medical treatment scheme.
    - Improve tax compliance, particularly for the consumption tax introduced in mid-2009.
  - Longer-term adjustments
    - Further adjustments required over the medium term to ensure fiscal sustainability.
    - Government has not tapped the TTF since its inception in 1987; maintaining the real value of the TTF is key to fiscal discipline.
    - Tax administration needs to be strengthened to increase domestic revenue to earlier levels.
    - Government should aim to bring down total spending further to more sustainable levels (about the 2005–08 level) and develop a longer-term plan to rebuild the CIF to its targeted balance (16 percent of the TTF’s maintained value).
    - Sound fiscal policy necessary to build fiscal space to respond to natural disasters and climate change.
  - Risks to adjustment scenario
    - Assumed TTF market value increase by an annual real growth rate of 5½ percent (somewhat below the average real rate of return of 6¼ percent over the last decade).
    - About 60 percent of the TTF are invested in growth assets; remainder in fixed income instruments and others.
    - At an annual real rate of return of 3½ percent, the assumed adjustment scenario would result in a financing gap of about 11 percent of GDP ($A4½ million) during 2013–15.
    - Table: TTF real rate of return versus Financing gap in 2013-15
      - 4.25 → 0.0 (In percent; financing gap)
      - 4.0 → 3.4
      - 3.5 → 11.4
      - 3.0 → 19.5
    - Staff urged authorities to save windfall revenue and grants to prepare for these risks.
  - Public financial management
    - Fiscal management needs urgent strengthening.
    - Windfall revenue from the TTF and fishing licenses has tended to be immediately spent on major public construction projects and subsidies and transfers.
    - Mission recommended saving windfall revenue and using a medium-term budget framework.
    - Authorities need to improve budget reporting and monitoring and strengthen economic and policy analysis capacity.
    - Staff advised clarifying the US$10 million debt related to joint ventures with foreign fishing companies and strengthening the process for providing government guarantees.
  - Relations with public enterprises
    - Government has substantial arrears to public enterprises, including utility bills amounting to almost 1 percent of GDP.
    - Public enterprises have not paid their taxes on time.
    - Mission urged resolution of these problems and honoring mutual financial obligations.
  - Authorities’ views
    - Authorities agreed on the need for fiscal consolidation and will establish a Revenue and Expenditure Review Committee chaired by the Minister of Finance.
    - They will consider the mission’s proposed fiscal adjustment scenario and indicated the 2011 budget is the first step.
    - Emphasized importance of donor assistance and requested technical assistance on tax audit.
    - On the US$10 million joint venture debt, authorities believe no government guarantee was extended but will check documents and inform staff.
- B. Financial Sector
  - Lending standards and measures
    - Banks have taken measures to address high nonperforming loans.
    - NBT remains profitable mainly due to high foreign exchange income; Development Bank continues to incur losses.
    - Starting in early 2010, the two banks and the Provident Fund started sharing borrowers’ information and tightened lending standards, including lowering the maximum debt service to income ratio from 50 to 40 percent for all personal loans (mission supported).
    - Staff encouraged further efforts to recover nonperforming loans.
    - Banks’ interest rates should be market determined; mission urged the government to withdraw the direction to lower NBT lending rates by 1 percentage point.

*IMF Staff Report: "Basic Economic and Institutional Features" (section as provided in the source PDF).*

### 20.      Bank supervision. The mission welcomed passage of a Banking Act in August 2010.

### _cr1146 - 20.      Bank supervision. The mission welcomed passage of a Banking Act in August 2010.

### Bank supervision: findings and status
- Passage of a Banking Act in August 2010 was welcomed by the mission.
- Amendments to the Act were submitted to Parliament in December to be fully in line with the Basel Core Principles, including enhancement of the Bank Commissioner’s independence.
- No progress has been made yet in putting in place supervisory and prudential requirements such as minimum capital and loan loss provisioning.
- Continued progress in strengthening the banking sector and credit culture is critical for sustained growth in the private sector.
- Banks have started addressing high nonperforming loans by sharing borrowers’ information and tightening lending standards, but further efforts are needed to recover bad loans.

### Authorities’ views on bank supervision
- Authorities noted their lack of experience in bank supervision and regulation and that it would take time to implement the new Act and they need technical assistance.
- They need to develop a proper framework for appointing the Bank Commissioner, whose job would be only part time given the size of the banking sector in Tuvalu.
- They will check whether the previous government directed the NBT to lower lending rates as claimed and rescind the direction if it was in fact given.

### Public enterprise reform and related structural changes
- The mission supported the comprehensive public enterprise reform program underway with ADB assistance to improve the performance and profitability of public enterprises.
- A Public Enterprise (Performance and Accountability) Act was passed in 2010.
- A Public Enterprise Reform Monitoring Unit (PERMU) responsible for public enterprise compliance with the Act was established.
- The government is now required to compensate public enterprises for non-profitable services—community service obligations (CSOs).
- Several public enterprises and business activities undertaken by line ministries are being considered for mergers, private sector participation, and possible corporatization.
- Ongoing reforms could reduce burdens on the budget down the road and help attract foreign direct investment.
- The government and public enterprises need to regularize their relations by honoring their financial obligations to each other.
- Very low tariff structures, government arrears, and structural inefficiencies are major impediments to sound balance sheets.

### Job creation and labor market observations
- Due to limited land area, poor soil, and geographic isolation, creating large private-sector employment opportunities domestically is difficult.
- The mission encouraged authorities to help Tuvaluans better utilize the temporary labor migration scheme available in New Zealand and to explore opportunities to participate in a similar Australian scheme.
- Demand for Tuvaluan seafarers on the international maritime employment market is declining due to more competition from other countries.
- According to studies by the World Bank and other donors, adequate training needs to be provided for seafarers and temporary seasonal workers to maintain these job opportunities for Tuvaluans.
- Authorities stated the new government is focusing more on strengthening vocational training.
- The project to upgrade the Tuvalu Maritime Training Institute (TMTI) had been badly managed; repairs to the TMTI facilities are underway and authorities stated they need donors’ financial and technical support.

### Poverty and social outcomes
- Poverty has risen in the last few years.
- The 2010 household income and expenditure survey indicates that the population living in poverty, particularly in outer islands, has increased sharply to about 20 percent of households from 14 percent in 2004.
- Given limited job opportunities and the declining number of seafarers employed, people in outer islands are facing greater hardship than in the capital city.
- This development indicates the importance of improving the quality of education and vocational training to reduce poverty in Tuvalu.

### External stability and exchange regime
- Use of the Australian dollar as its currency is appropriate given the size of the economy and limited capacity for independent monetary and exchange rate policies.
- The real effective exchange rate has appreciated by 8 percent over the last year.
- Exports are minimal at about 1–2 percent of GDP.
- The country depends highly on imports given almost no domestic production base except subsistence farming and fishing.
- The country’s geographic remoteness and limited air services constrain tourism with just over 300 visitors each year.
- Remittances from the seafarers are now only 6 percent of GDP, a sharp decline from about 10 percent of GDP in recent years.
- There is presently air service only from Suva, Fiji to Funafuti with a 40-seat plane twice a week.
- The current account deficit (excluding grants) is very high but is projected to decline with fiscal adjustment, which is key to maintaining external stability.

### Article XIV/VIII and exchange regulations
- At the time of joining the Fund, Tuvalu availed itself of the transitory provisions of Article XIV, Section 2.
- Exchange control regulations are quite restrictive and prescribe approval requirements from the NBT or the Finance Minister for most payments or transfers; in practice, no approval is required and payments and transfers for current international transactions are administered liberally.
- Staff recommended that the regulations be updated in line with current practice so that Tuvalu can accept the obligations of Article VIII, Sections 2, 3 and 4.
- Authorities indicated they will request TA from PFTAC to update or repeal the exchange control regulations.

### Statistics and data gaps
- Data shortcomings, particularly in the national accounts and balance of payments, hamper surveillance.
- The mission urged the authorities to provide more staff to the Statistics Division to start compiling the data necessary for surveillance and their own policy analysis and formulation.
- Attention needs to be paid to improving source data for macroeconomic statistics; many underlying data have inconsistencies and errors, resulting in poor quality of the national accounts and balance of payments statistics.
- Authorities indicated they are looking for additional staff for the Statistics Division but it is not easy to find good candidates and that continued training by PFTAC would be critical.

### Staff appraisal: outlook, risks, and policy recommendations
- Growth and inflation
  - Despite geographic remoteness, Tuvalu has not been immune to the global financial crisis.
  - Even with higher government spending, the economy is expected to have almost no growth in 2010 owing to lower offshore earnings.
  - Growth is projected to be zero or even turn negative in 2011, led by lower government spending, and remain low over the medium term.
  - Given projected global food and fuel prices, inflation is expected to remain low.
  - The outlook is subject to risks related to a delay in fiscal adjustment and the pace of the global recovery.
- Fiscal adjustment and timing
  - The government needs to take immediate action to cut spending.
  - In response to the global crisis, government continued to increase spending, resulting in a large increase in the fiscal deficit and a rapid decline in the fund (CIF) available for budget financing in 2010.
  - At the current pace of spending, the CIF will be depleted in mid-2011.
  - A front-loaded adjustment would be needed and the 2011 budget deficit should be contained to about 11 percent of GDP, mainly through a cut in capital spending.
  - The government also should bring down other spending by freezing wages, reducing travel costs, and cutting social transfers and subsidies, particularly the unsustainable medical treatment scheme.
- Medium-term fiscal sustainability
  - Further adjustments would be required over the medium term to ensure fiscal sustainability.
  - Tax administration needs to be strengthened to increase domestic revenue to earlier levels, and government spending needs to be contained further.
  - The government should come up with a longer-term plan to rebuild the CIF to its targeted balance.
  - Implementing sound fiscal policy would be necessary to build fiscal space to respond to natural disasters and the impact of climate change.
- Fiscal management and governance
  - Fiscal management should be strengthened urgently.
  - Windfall revenue has tended to be immediately spent; windfall revenue needs to be saved given the volatility of key revenue items.
  - A medium-term budget framework should be used to highlight the longer-term impact of the current fiscal stance and new spending initiatives.
  - Budget reporting and monitoring need to be improved and economic and policy analysis capacity should be strengthened.
  - The process of providing government guarantees should be strengthened.
- Public enterprise and banking sector recommendations
  - Public enterprise reform should press ahead; passage of a Public Enterprise Act and related reforms with ADB assistance are welcome.
  - Several public enterprises are being considered for mergers, private sector participation, and possible corporatization.
  - Continued progress in strengthening the banking sector and credit culture is critical for sustained growth in the private sector.
  - Passage of a Banking Act is welcome, but no progress has been made yet in putting in place supervisory and prudential requirements.
- Human capital and poverty reduction
  - Education and vocational training need to be strengthened to enhance competitiveness of Tuvaluans for overseas job opportunities, including seafarer employment and the temporary labor migration scheme in New Zealand.
  - Strengthening vocational training is important to reduce poverty, which has risen in the last few years.
- Statistics and surveillance
  - Data shortcomings, particularly in the national accounts and balance of payments, hamper surveillance.
  - More staff needs to be provided to start compiling the data necessary for surveillance and the authorities’ own policy analysis and formulation.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 39.      Staff recommends that the next Article IV consultation take place on a 24-month

### _cr1146 - 39.      Staff recommends that the next Article IV consultation take place on a 24-month

### Staff recommendation
- Staff recommends that the next Article IV consultation take place on a 24-month cycle.

### Basic economic and institutional features
- Tuvalu is described as one of the smallest and most remote countries in the world and is classified as a lower middle-income country.
- Core activities: subsistence agriculture and fishing; tourism is less important than elsewhere in the region.
- Exports are negligible; import dependency is high.
- Reliance on offshore income: remittances, fishing licenses, and ODA.
- The public sector dominates the economy due to the narrow production base and barriers to private activity.
- Governance: Tuvalu overperforms on some governance indicators, but government effectiveness and regulation are weak.
- Data for Tuvalu are for 2010.

### Recent economic developments (regional context)
- Growth: In recent years, growth in Tuvalu has been low on average and among the most volatile in the region.
- Inflation: inflation has remained low, while vulnerable to external shocks.
- Current account: traditionally in deficit, driven by the trade and services deficit.
- International reserves: remain at comfortable levels.
- Fiscal outturn: erratic, reflecting volatile offshore incomes and grants.
- Overall debt: elevated, although most external debt is on concessional terms.

### Key statistics and indicators (selected, exact figures preserved)
- Per capita GDP (2009): presented in US dollars across region (figure referenced; individual country values shown in chart).
- Remittances, Fishing Licenses, ODA per capita (2008, U.S. dollars): Tuvalu 6.4 (Remittances), 18.7 (Fishing Licenses), 1,498 (ODA per capita).
- GDP (2009): U.S. dollars (millions) 27.1; Per capita 2,447.
- Poverty rate (2010): 24.8.
- Life expectancy at birth (years, 2008): 64.0.
- Total (thousands, 2009) population: 11.1.
- Adult literacy rate (2002): 99.0.
- Urban population (percent of total, 2008): 49.0.
- Unemployment rate (2004): 16.3.
- Real GDP growth (annual by year): 2006: 3.3; 2007: 4.8; 2008: 7.0; 2009: -1.7; 2010: 0.2; 2011 Est.: 0.0.
- Consumer prices (period average): 2006: 3.8; 2007: 2.2; 2008: 10.5; 2009: -0.3; 2010: -1.9; 2011 Est.: 1.2.
- Structure of economy (percent of GDP; select years): Agriculture 2006: 21.2; 2007: 21.7; 2008: 21.2; 2009: 22.4; 2010: 23.5.
- Government finance (percent of GDP; 2006–2011 series):
  - Revenue and grants: 2006: 68.1; 2007: 66.7; 2008: 77.4; 2009: 89.8; 2010: 69.0; 2011 Est.: 71.9.
  - Current revenue: 2006: 51.7; 2007: 49.4; 2008: 58.2; 2009: 59.4; 2010: 49.3; 2011 Est.: 54.2.
  - Grants: 2006: 16.4; 2007: 17.4; 2008: 19.2; 2009: 30.4; 2010: 19.7; 2011 Est.: 17.8.
  - Expenditure and net lending: 2006: 85.2; 2007: 80.1; 2008: 82.7; 2009: 93.5; 2010: 97.7; 2011 Est.: 82.8.
  - Overall balance: 2006: -17.1; 2007: -13.4; 2008: -5.3; 2009: -3.7; 2010: -28.7; 2011 Est.: -10.9.
- Gross official reserves (millions of Australian dollars / months of imports): 2006: 17.4 (7.7 months); 2007: 20.3 (7.8 months); 2008: 30.7 (10.3 months); 2009: 30.3 (10.0 months); 2010: 25.6 (8.2 months); 2011 Est.: 23.5 (8.5 months). (Data for 2010 are as of October.)
- Total government debt (including guarantees) (percent of GDP): 2006: 20.3; 2007: 19.7; 2008: 21.7; 2009: 15.6; 2010: 15.1; 2011 Est.: 12.3.
- External public debt (percent of GDP, Table 4): 2006: 13.9; 2007: 13.6; 2008: 16.8; 2009: 12.3; 2010: 10.8; 2011 Proj.: 9.9.
- NPV of external debt (percent of GDP, Table 4): 2010: 29.4; 2011 Proj.: 24.7; 2012 Proj.: 23.2 (series shown in Table 4).
- Exchange rates (Australian dollars per U.S. dollar):
  - Period average: 2006: 1.3; 2007: 1.2; 2008: 1.2; 2009: 1.3; 2010: 1.1.
  - End-period: 2006: 1.3; 2007: 1.1; 2008: 1.5; 2009: 1.1; 2010: 1.0.
- Tuvalu uses the Australian dollar as its currency. It has no central bank operations.

### Central government budget (2006–2011, selected figures)
- Total revenue and grants (percent of GDP): 2006: 21.2; 2007: 22.3; 2008: 27.8; 2009: 31.3; 2010: 24.9; 2011 Est.: 24.0; 2011 Budget: 25.3.
- Current revenue (percent of GDP): 2006: 16.1; 2007: 16.5; 2008: 20.9; 2009: 20.7; 2010: 18.0; 2011 Est.: 17.2; 2011 Budget: 19.1.
- Grants (percent of GDP): 2006: 5.1; 2007: 5.8; 2008: 6.9; 2009: 10.6; 2010: 7.0; 2011 Est.: 6.8; 2011 Budget: 6.3.
- Total expenditure and net lending (percent of GDP): 2006: 26.6; 2007: 26.8; 2008: 29.7; 2009: 32.6; 2010: 32.6; 2011 Est.: 34.0; 2011 Budget: 29.1.
- Wages and salaries (percent of GDP): 2006: 10.0; 2007: 9.9; 2008: 10.5; 2009: 10.9; 2010: 11.9; 2011 Est.: 11.1; 2011 Budget: 11.5.
- Overall balance (percent of GDP): 2006: -5.3; 2007: -4.5; 2008: -1.9; 2009: -1.3; 2010: -7.7; 2011 Est.: -10.0; 2011 Budget: -3.8.
- Financing breakdown (percent of GDP, select years): 2006: 1.4; 2007: 4.2; 2008: 4.3; 2009: 1.3; 2010: 7.7; 2011 Est.: 10.0; 2011 Budget: 3.8.

### Banking sector (National Bank of Tuvalu and Development Bank of Tuvalu; selected figures)
- National Bank of Tuvalu: Assets (2006–2010 series): 2006: 34.7; 2007: 32.7; 2008: 36.8; 2009: 36.6; 2010 March: 36.5; June: 37.4; Sept: 38.4 (all in millions of Australian dollars).
- Bank reserves (National Bank of Tuvalu): March 2010: 15.4; June 2010: 15.6.
- Loans and advances (gross): 2006: 14.7; 2007: 14.0; 2008: 15.1; 2009: 14.3; 2010 series around 13.5–13.0.
- Nonperforming loans (Development Bank of Tuvalu): 2010: 6.0 (percent; series shows 6.2, 6.1, 6.1, 6.0 across years).
- Development Bank of Tuvalu capital and retained earnings series presented (millions of Australian dollars).

### Balance of payments and medium-term projections (2006–2015 tables; selected figures)
- Trade balance (percent of GDP): 2006: -12.3; 2007: -13.9; 2008: -16.7; 2009: -16.0; 2010: -17.3; 2011 Proj.: -14.5; projections 2012–2015 shown (e.g., -14.6, -14.7, -14.9, -15.0).
- Services (net, percent of GDP): 2006: -19.3; 2007: -16.2; 2008: -22.0; 2009: -19.6; 2010: -16.1; 2011 Proj.: -14.8.
- Income (net, percent of GDP): 2006: 21.0; 2007: 20.0; 2008: 22.0; 2009: 19.7; 2010: 15.5; 2011 Proj.: 17.3.
- Current transfers (net, percent of GDP): 2006: 10.1; 2007: 9.5; 2008: 13.0; 2009: 14.1; 2010: 9.5; 2011 Proj.: 14.2.
- Current account balance including official grants (percent of GDP): 2006: -0.5; 2007: -0.6; 2008: -3.7; 2009: -1.8; 2010: -8.4; 2011 Proj.: 2.2; 2012–2015 projections included (e.g., -1.2, 0.4, 1.3, 2.0).
- Current account balance excluding official grants (percent of GDP): 2006: -11.6; 2007: -11.4; 2008: -18.2; 2009: -17.1; 2010: -19.1; 2011 Proj.: -13.2.
- Capital and financial accounts (percent of GDP): 2006: 10.8; 2007: 2.0; 2008: 10.1; 2009: -0.7; 2010: 0.5; 2011 Proj.: -4.3.
- Overall balance (millions of Aus $): 2006: 11.5; 2007: 2.8; 2008: 10.3; 2009: -1.4; 2010: -4.7; 2011 Proj.: -2.1.
- Change in official reserves (increase -) mirrors financing figures; detailed projections for 2011–2015 provided.
- Table 5 medium-term scenario (2007–2015) highlights:
  - Real GDP (annual percent change) series: 2007: 4.8; 2008: 7.0; 2009: -1.7; 2010: 0.2; 2011 Proj.: 0.0; 2012–2015: 0.6, 1.1, 1.6, 1.7.
  - Consumer prices (period average) series: 2007: 2.2; 2008: 10.5; 2009: -0.3; 2010: -1.9; 2011 Proj.: 1.2; 2012–2015: 1.6, 2.0, 2.2, 2.2.
  - TTF Market Value (Tuvalu Trust Fund, millions of Aus $): 2006: 304.5; 2007: 323.4; 2008: 262.8; 2009: 276.9; 2010: 308.8; projections 2011–2015 shown (e.g., 351.0, 369.4, 367.0, 363.7).
  - CIF Market Value (millions of Aus $) and trajectory provided.

### Social indicators and Millennium Development Goals (selected)
- Millennium Development Goals: presented indicator series with baseline and latest where available.
  - Goal 1: Population below national poverty line (in percent): 1994: 17.2; 2010: 26.3.
  - Goal 2: Net primary enrollment ratio: 1992: 98.0; 2007: 98.1.
  - Goal 4: Under 5 mortality rate (per 1,000 live births): 1990: 53.0; 2009: 24.6.
  - Goal 5: Births attended by skilled health staff (percent): 1990: 95.0; 2007: 97.9.
- Same Region / Income group comparisons:
  - Population (millions): Tuvalu 0.011; East Asia and Pacific 1,931; Lower-Middle Income 3,702.
  - Urban (percent of total): Tuvalu 49.0; East Asia and Pacific 44.1; Lower-Middle Income 41.3.
  - GNI per capita (U.S. dollars): Tuvalu 4,386; East Asia and Pacific 2,515; Lower-Middle Income 2,015.
  - Adult literacy rate (percent ages 15+): Tuvalu 99.0; East Asia and Pacific 92.8; Lower-Middle Income 82.6.
  - Life expectancy at birth (years): Tuvalu 64.0; East Asia and Pacific 72.0; Lower-Middle Income 68.0.
  - Total fertility rate (births per woman): Tuvalu 3.2; East Asia and Pacific 1.9; Lower-Middle Income 2.5.

### Tables and notes (data sources and methodological notes)
- Primary sources cited in the annex: Tuvalu authorities, PFTAC, Asian Development Bank, UNDP, World Bank, CIA World Factbook, APDLISC, International Trade Center, and IMF staff estimates.
- Notes included in tables:
  - 1/ Tuvalu uses the Australian dollar as its currency. It has no central bank operations.
  - 2/ Data for 2011 are IMF staff proposals.
  - 3/ Data for 2010 are as of September (or October for some series).
  - 4/ Rates for personal and business loans (where applicable).
  - 5/ Defined as sum of foreign assets of the National Bank of Tuvalu, the Consolidated Investment Fund, and SDR holdings. Excludes the Tuvalu Trust Fund. Data for 2010 are as of October.
  - Additional footnotes clarify components of balances and projections (e.g., projections for 2011-15 based on outstanding debt as of 2010, assuming no new borrowings).

*Prepared by the Staff Representatives for the 2010 Consultation with Tuvalu (Informational Annex, January 12, 2011).*

### ANNEX I. TUVALU: FUND RELATIONS

### ANNEX I. TUVALU: FUND RELATIONS

### I. Membership Status
- Joined June 24, 2010; Article XIV

### II. General Resources Account
- SDR Million / % Quota
  - Quota: 1.80    100.00
  - Reserve Tranche Position: 0.00    0.00

### III. SDR Department
- SDR Million / % Allocation
  - Net Cumulative Allocation: 1.69    100.00
  - Holdings: 1.69    100.00

### IV. Outstanding Purchases and Loans
- None

### V. Financial Arrangements
- None

### VI. Projected Payments to Fund
- None

### VII. Exchange Rate Arrangement
- Tuvalu’s legal tender is the Australian dollar.
- There is no central monetary institution.
- Tuvalu avails itself of transitional arrangements under Section 2 of Article XIV and has not yet accepted the obligations under Article VIII, Sections 2, 3, and 4.
- The legal framework for the exchange and trade system is the Exchange Control Law of 1981 and the Exchange Control Regulations of 1983, as amended.
- Staff is currently conducting a comprehensive review of the exchange system to assess jurisdictional implications.
- While the Exchange Control Regulations are quite restrictive and prescribe approval requirements from the National Bank of Tuvalu (NBT) or the Minister of Finance for most payments or transfers, in practice, no approval is required and transactions are administered liberally.
- The NBT is the only bank in Tuvalu handling foreign exchange transactions.
- The NBT buys and sells foreign exchange at rates determined daily by the NBT’s board on the basis of rates quoted in the international markets plus specific spreads dependent on the specific foreign currency.

### VIII. Article IV Consultation
- The first Article IV consultation discussions took place during November 11–23, 2010.

### IX. Technical Assistance
- The Pacific Financial Technical Assistance Centre (PFTAC) assistance:
  - Tax policy and administration: 2007, 2008, and 2010
  - Financial sector supervision: 2008
  - Balance of payments and national accounts statistics: 2006, 2009, and 2010

### X. Resident Representative
- A new Resident Representative office, covering Pacific islands and based in Fiji, was established in September 2010.

*ANNEX I. TUVALU: FUND RELATIONS (As of November 30, 2010)*

### ANNEX V. TUVALU––STATISTICAL ISSUES

### ANNEX V. TUVALU––STATISTICAL ISSUES

### I. Assessment of Data Adequacy for Surveillance
- General:
  - Data have shortcomings that hamper surveillance. Shortcomings are most serious in the national accounts and balance of payments.
  - The Pacific Financial Technical Assistance Centre (PFTAC) has provided technical assistance to the Central Statistics Division (CSD) of the Ministry of Finance to help start compiling those statistics for surveillance and the authorities’ own policy analysis and formulation.
  - More staff needs to be provided to the CSD urgently.
- National accounts:
  - With PFTAC assistance in 2009 and 2010, the compilation methodology for the national accounts was improved.
  - Little progress had been made on previous missions’ recommendations, largely due to a lack of capacity.
  - Attention needs to be paid to improving source data for national accounts.
- Price statistics:
  - The consumer price index (CPI) is the only price index compiled in Tuvalu.
  - The CSD produces a quarterly CPI, which is timely and of reasonable quality.
  - The CPI weights are expected to be revised in 2011, based on the 2010 Household Income and Expenditure Survey.
- Government finance statistics:
  - The MOF compiles the central government data for budget analysis and control.
  - Classifications of some accounts, particularly on capital spending, need to be improved to be in line with international standards.
- Monetary and financial statistics:
  - Tuvalu uses the Australian dollar as its legal tender and does not have a central bank.
  - Monetary and financial statistics are currently not produced in Tuvalu.
  - The National Bank of Tuvalu and the Development Bank of Tuvalu provided the Article IV mission with their balance sheets and income statements, which were used to produce the monetary data on the two banks.
- Balance of payments:
  - Balance of payments statistics have been compiled by visiting PFTAC experts.
  - A balance of payments statistics mission took place in Tuvalu during June 29–July 8, 2010.
  - The mission assisted the authorities in developing a balance of payments compilation system to enable CSD staff to compile the balance of payments data.
  - The mission noted many underlying data have inconsistencies and errors, resulting in poor quality of the balance of payments statistics.
  - The mission noted the CSD needs better trained staff to produce quality balance of payments statistics.

### II. Data Standards and Quality
- Not a General Data Dissemination System participant.
- No data ROSC are available.

### III. Reporting to STA
- No data are currently reported to STA for publication.

### IV. Key Statistical Timelines and Availability (as of December 29, 2010)
- Exchange rates: Date of Latest Observation 12/29/10; Date Received 12/29/10; Frequency of Data D; Frequency of Reporting NA; Frequency of Publication NA.
- International reserve assets and reserve liabilities of the monetary authorities: Date of Latest Observation 10/2010; Date Received 11/2010; Frequency of Data M; Frequency of Reporting I; Frequency of Publication NA.
- Consolidated balance sheet of the banking system: Date of Latest Observation 09/2010; Date Received 11/2010; Frequency of Data M; Frequency of Reporting I; Frequency of Publication NA.
- Interest rates: Date of Latest Observation 10/2010; Date Received 11/2010; Frequency of Data M; Frequency of Reporting I; Frequency of Publication NA.
- Consumer price index: Date of Latest Observation 11/2010; Date Received 12/2010; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- Central government revenue, expenditure, balance and composition of financing: Date of Latest Observation 2009; Date Received 11/2010; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- Stocks of central government and central government-guaranteed debt: Date of Latest Observation 2009; Date Received 11/2010; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- External current account balance; Exports and imports of goods and services; GDP/GNP; Gross external debt; International investment position: Date of Latest Observation 2009; Date Received 11/2010; Frequency of Data A; Frequency of Reporting A; Frequency of Publication (varies, some NA).

### V. Principal Economic Findings, Projections, and Vulnerabilities (from IMF Public Information Notice and Table)
- Growth and inflation:
  - Real GDP growth: 2009: -2 percent (contracted by about 2 percent in 2009); expected almost no growth in 2010; projected 2011: 0.0.
  - Table series (Real GDP growth): 2006 3.3; 2007 4.8; 2008 7.0; 2009 -1.7; 2010 0.2; 2011 0.0.
  - Consumer prices (period average): 2006 3.8; 2007 2.2; 2008 10.5; 2009 -0.3; 2010 -1.9; 2011 1.2.
  - Annual inflation has been negative since mid-2009 (-1¾ percent in November 2010).
- Fiscal and external:
  - Fiscal deficit increased sharply from 4 percent of GDP in 2009 to almost 30 percent of GDP in 2010.
  - Fund available for budget financing declined to about 20 percent of GDP from 45 percent in 2009.
  - Total spending relative to GDP increased by 20 percentage points since 2005, mainly due to increases in subsidies, transfers and capital spending.
  - Current account deficit estimated to increase sharply to almost 25 percent of GDP in 2010.
  - Gross official reserves declined substantially in 2010 but remain about 8 months of imports of goods and services.
  - External public debt is over 30 percent of GDP (mostly concessional); total public debt about 44 percent of GDP.
- Financial sector:
  - Financial sector underdeveloped; lending constrained after rapid credit growth in early 2000s.
  - Nonperforming loans around 40 percent of total loans.
  - Banks tightened lending standards, including lowering maximum debt service to income ratio from 50 to 40 percent for all personal loans.
  - Interest rates on lending have changed little in recent years, reflecting limited competition.
- Structural and climate risks:
  - Tuvalu vulnerable to natural disasters; climate change and rising sea levels are a major challenge.
- Social and demographic snapshots (selected):
  - GDP (2009): U.S. dollars (millions) 27.1.
  - Per capita: 2,447.
  - Poverty rate (2010) 24.8.
  - Life expectancy at birth (years, 2008) 64.0.
  - Total population (thousands, 2009) 11.1.
  - Adult literacy rate (2002) 99.0.
  - Unemployment rate (2004) 16.3.
- Selected fiscal and balance indicators (Table excerpts):
  - Revenue, grants (percent of GDP): 2009 69.8; 2010 71.9.
  - Current Revenue (percent of GDP): 2009 49.3; 2010 54.2.
  - Grants (percent of GDP): 2009 19.7; 2010 17.8.
  - Expenditure and net lending (percent of GDP): 2009 97.7; 2010 82.8.
  - Capital Expenditure and net lending (percent of GDP): 2009 13.5; 2010 3.2.
  - Overall balance (percent of GDP): 2009 -28.7; 2010 -10.9.
  - Current account balance (percent of GDP): 2009 -8.4; 2010 2.2.
  - Gross official reserves (months of imports): 2006 7.7; 2007 7.8; 2008 10.3; 2009 10.0; 2010 8.2; 2011 8.5.
  - Total government debt (including guarantees) (percent of GDP): 2006 64.9; 2007 59.0; 2008 60.2; 2009 44.9; 2010 43.6; 2011 35.1.
  - Of which: External (percent of GDP): 2006 44.7; 2007 40.7; 2008 46.7; 2009 35.3; 2010 31.0; 2011 28.1.
  - NPV of external debt (percent of GDP): (selected) 2009 10.2; 2010 8.6; 2011 8.2.
  - External debt service (percent of exports of goods and services): 2006 14.1; 2007 16.1; 2008 17.2; 2009 22.8; 2010 39.4; 2011 17.9.
- Exchange rate:
  - Tuvalu uses the Australian dollar as its currency; no central bank operations.
  - Australian dollars per U.S. dollar, period average: 2006 1.3; 2007 1.2; 2008 1.2; 2009 1.3; 2010 1.1.
  - End-period: 2006 1.3; 2007 1.1; 2008 1.5; 2009 1.1; 2010 1.0.

### VI. Executive Board Views and Policy Recommendations
- Fiscal policy and consolidation:
  - Directors emphasized the need for resolute fiscal adjustment and structural reforms given difficult near- and medium-term prospects.
  - Urged authorities to cut spending, noting the Consolidated Investment Fund (CIF) available for budget financing will be depleted soon at the current pace.
  - Called for a front-loaded adjustment mainly through cuts in capital spending, and subsidies and transfers.
  - Freezing wages and reducing travel costs recommended.
  - Agreed that increasing domestic revenue—particularly by boosting tax compliance—is necessary to ensure fiscal sustainability.
  - Recommended saving any windfall revenue from offshore earnings into the CIF and formulating a medium-term budget framework.
- External and exchange rate:
  - Directors agreed that use of the Australian dollar as Tuvalu’s currency is appropriate.
  - Emphasized that fiscal adjustment will be key to maintaining external stability.
- Financial sector and structural reforms:
  - Commended ongoing public enterprise reform; urged regularization of government’s financial relations with public enterprises.
  - Stressed continued improvements in banking sector and credit culture to support private-sector development.
  - Urged authorities to accelerate progress on supervisory and prudential requirements.
  - Highlighted that improving the country’s statistical capacity is critical for policy analysis and formulation.
- Authorities’ intended measures (from Tuvalu statement):
  - Establishment of a Revenue and Expenditure Review Committee to widen the revenue base and cut high levels of spending, including reviewing the Tuvalu Medical Treatment Scheme (TMTS).
  - Plans to prioritize and scale back capital spending; freeze further hiring to assess civil service size.
  - Aim to rebuild the CIF to its targeted balance and seek assistance in formulating a simple and credible medium-term budget framework.
  - Seek technical assistance to strengthen tax administration.
  - Commit to accelerating implementation and approval of Amendments to the Banking Act, aiming for parliamentary endorsement in early 2011.
  - Request technical assistance to strengthen banking sector and credit culture; suspend directions to lower bank lending rates.
  - Continue public enterprise reform (with ADB assistance), including options such as mergers, private sector participation, and corporatization.
  - Invest in technical and vocational education and training; explore upgrading maritime qualifications and support for Tuvalu Maritime Training Institution (TMTI).
  - Acknowledge need to improve data quality and availability; prioritize completion of the 2010 Household Income and Expenditure Survey (HIES); request PFTAC assistance and continued support to update data to minimum standards.

*Source: ANNEX V. TUVALU––STATISTICAL ISSUES, As of December 29, 2010; IMF Public Information Notice No. 11/16, February 2, 2011; Table 1. Tuvalu: Selected Social and Economic Indicators, 2006–2011.*

### Conclusion

### Conclusion

### Mission context
- This was Tuvalu’s first Article IV mission since becoming a member of the IMF, and our Tuvaluan authorities greatly appreciated the constructive policy dialogue with the Fund Staff during the mission and in the process of finalizing the report.

### Authorities' response and outlook
- They would like to put on record their appreciation of the contributions from the mission chief and his team.
- The authorities look forward to working very closely with the Fund as they work towards more sustainable growth.

*Source: _cr1146 - Conclusion*

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