## _cr14138

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---

### Seamen Employment and Remittances: key findings
- As of December 2013, there were about 1008 Kiribati seamen on board, compared to 1452 in 2006.
- Over the period, seamen remittances fell by about 4 percent of GDP, and stood at 6 percent of GDP in 2013.
- The depreciation of the U.S. dollar over the past few years has had a negative impact on the Australian dollar value of seamen remittances.
- Structural factors limiting recovery in seamen employment:
  - Shipping industry low profitability and overcapacity.
  - Increasing ship size and automation reducing demand for seamen.
  - Kiribati seamen are trained at the Kiribati Marine Training Center, regarded as one of the best vocational training institutes in the region.
  - Competitiveness challenges: higher transport costs and longer visa processing times versus South and South-east Asian competitors.

### Policy implication (seamen sector)
- Address transport-cost and visa-processing obstacles to help maintain seafaring as a source of employment, training, and national income.

### Fiscal context and recent developments
- Fishing license fees revenues have been volatile and unusually high in the last two years; these revenues dominated fiscal outcomes.
- Government cleared expensive commercial debt in 2012.
- Problematic SOEs and overruns on copra subsidy payments remain a drag on the budget.
- Non-compliance has dented tax revenue collections despite high fishing license fees allowing the government to bolster the Revenue Equalization Reserve Fund (RERF) in 2013.
- The RERF real per capita value is now significantly below its 2000 level due to large and excessive current fiscal deficits historically.
- In 2014 the government incorporated CSO subsidies of 1.7 percent of GDP into the budget to account more transparently for SOE-related budget costs.
- The VAT has been introduced on April 1 (initial implementation phase expected to involve some challenges).

### Fiscal policy recommendations and actions
- Save excess revenues from fishing license fees in the medium term while maintaining essential expenditures and investments in infrastructure, health, and education.
- Continue fiscal adjustment: budget consolidation and strengthening public financial management.
- Improve timely exchange of information on fishing license revenue performance between key ministries and the Ministry of Finance to strengthen budget planning and cash management.
- Restructure the copra subsidy scheme and improve operational efficiency at the Public Utilities Board (PUB); enhance revenue collections via modern meter equipment and improved operations of the PUB with World Bank assistance.
- Maintain policy of avoiding non-concessional debt financing of the recurrent budget.

### Government reform progress and external support
- Significant progress made in SOE reform; fisheries policy approved and implementation underway.
- Work underway to improve cash and debt management.
- World Bank provided budget support for 2014; further donor budget support envisaged conditional on reform progress.
- IMF and PFTAC provided TA in public financial management, RERF and KPF management, national accounts, government finance, and external statistics.

### Box 2 — Baseline and high-fee scenarios (fiscal sustainability)
- Baseline scenario assumptions:
  - Fishing license fees return to levels of about 22 percent of GDP for 2014.
  - Incorporates recent introduction of value added and excise taxes and authorities’ current commitments to reform.
  - Donor budget support of A$25 million under the reform program in 2014–16.
  - Current expenditures grow more slowly than nominal GDP in the medium and longer term.
- Baseline outcomes:
  - Current fiscal deficit reduced from 22⅔ percent of GDP in 2014 to 11.8 percent of GDP in 2019 and stabilize at this level in the longer run.
  - RERF drawdown reduced from 14½ percent of GDP to 11.8 percent of GDP correspondingly.
  - RERF per capita value does not stabilize and declines by more than 40 percent by 2030 compared to the projected 2014 level.
- Stabilizing variant:
  - To stabilize RERF per capita values by 2023–24 at about A$3,900 in constant terms, the current fiscal deficit must narrow to about 3.8 percent of GDP on average in 2023–30.
  - Requires narrowing the current fiscal deficit by more than 8 percent of GDP in the long run.
- High fishing license fees scenario assumptions:
  - Fishing license fees remain high at close to 2012–13 levels.
  - Some fiscal measures are applied to stabilize RERF per capita values.
- High-fee outcomes:
  - Stabilizing RERF per capita values by 2023–24 at about A$4,500 in constant terms.
  - Required fiscal consolidation smaller than in baseline: current fiscal deficit narrowing to 4.2 percent of GDP in the long run.
- Cross-scenario risk:
  - Under all scenarios, Kiribati is projected to remain at high risk of external debt distress due to projected shift from grant to debt financing for large infrastructure needs.

### Box 3 — Government sector linkages and fiscal multipliers (2013)
- Government sector size and role:
  - Total government current spending accounted close to 60 percent of GDP.
  - Government sector accounted for more than 28 percent of GDP.
  - Government employees represented 21.5 percent of total employment and 42 percent of formal employment.
- Fiscal multiplier estimates (impact multipliers ∆Y(t)/∆G(t)):
  - Positive nominal public wage shock impact multiplier = 0.44.
  - Positive public expenditure shock impact multiplier = 0.47.
  - Development expenditure impact multiplier estimated at 0.05–0.1.
- Interpretation:
  - High import shares in household consumption and government expenditure limit domestic stimulus effects; fiscal multipliers are relatively low.
- Growth projections using multipliers:
  - Projected GDP growth: 3.0 in 2014 and 2.7 in 2015.

### Box 4 — Regional Arrangement for Fishing License Fees (PNA and VDS)
- Fishing license fees increased significantly since 2011, at an average rate above 30 percent during 2011–13.
- PNA members: Kiribati, the Marshall Islands, Micronesia, Nauru, Palau, Papua New Guinea, Solomon Islands, and Tuvalu.
- Vessel Day Scheme (VDS) features:
  - Limits total number of fishing days rather than only number of vessels.
  - Members jointly allocate a fixed number of transferable fishing days for combined EEZs.
  - Allocation apportioned according to EEZ sizes and historical catch.
  - Fishing companies pay a flat fee per vessel per day with adjustment for vessel size; large vessels pay 1.5 times the standard fee.
- Minimum fee revisions:
  - Minimum fee set at US$5,000 effective in 2012.
  - Minimum fee raised to US$6,000 effective January 2014.
- Policy observations for Kiribati:
  - Proceeds from access to Kiribati’s fishing waters continue to be a large part of national income; value of fish caught far exceeds fishing license fees and total Kiribati GDP.
  - Staff recommendation: continue to encourage investment in onshore marine processing.
  - Staff guidance: seek to boost fishing license fees above the conservative baseline and save additional receipts to replenish the RERF.

### Risk Assessment Matrix — major risks, likelihood, and impact
- Fiscal sustainability risks
  - Likelihood: Medium
  - Potential Impact: High
  - Channels: declining reform momentum, lack of tax/expenditure reform leading to unsustainable deficits and RERF depletion.
- External growth slowdown (advanced and emerging economies)
  - Likelihood: Medium (except Europe); High (Europe)
  - Potential Impact: Medium
  - Channels: lower global returns impacting RERF, lower fishing license fees and seamen’s remittances if global demand slows.
- Financial risks
  - Likelihood: Medium
  - Potential Impact: Medium
  - Channels: potential re-emergence of Euro area stress; declines in global asset valuations affecting RERF.
- Fluctuations in commodity prices
  - Likelihood: Medium
  - Potential Impact: Low
  - Channels: commodity price declines reduce import costs (favorable); increases work opposite.
- Geopolitical risks
  - Likelihood: Low
  - Potential Impact: Low
  - Channels: East Asia disruptions could affect fishing license fees and shipping.

### Fiscal dynamics, RERF, and revenue structure — key figures (selected exact values)
- Fishing license fees (percent of GDP or in table units): 29.5, 41.7, 29.1, 58.8, 88.6, 42.2, 43.3, 44.3, 45.4, 46.6, 47.7 (from Table 2 nontax revenue breakdown).
- RERF closing balance (millions of US$): 512, 576, 586, 607, 600, 587, 580 (Table 1).
- RERF closing balance (millions of A$): 571, 581, 579, 581, 668, 666, 668 (Table 1).
- RERF per capita value (in 2006 A$): 5,209; 5,040; 4,759; 4,592; 5,058; 4,837; 4,643 (Table 1).
- Nominal GDP (2011): US$172.7 million; GDP per capita (2011): US$1,670; Nominal GNI (2011): US$236.1 million; Population (2011): 103,365.
- Real GDP (percent change) 2009–2015: -0.7, -0.5, 2.7, 2.8, 2.9, 3.0, 2.7.
- Consumer prices (percent change, average) 2009–2015: 9.8, -3.9, 1.5, -3.0, -1.5, 2.5, 2.5.
- Central government finance (percent of GDP) selected series:
  - Revenue and grants: 70.9, 72.5, 62.0, 90.4, 112.9, 83.9, 84.1.
  - Total domestic revenue 1/: 42.7, 47.8, 37.0, 54.0, 69.9, 39.1, 40.9.
  - Grants: 28.1, 24.7, 25.0, 36.4, 43.0, 44.8, 43.2.
  - Expenditure and net lending: 82.8, 85.2, 83.3, 97.2, 102.6, 109.7, 104.5.
  - Current: 54.7, 58.0, 58.0, 61.0, 59.8, 61.7, 56.7.
  - Development: 28.1, 27.1, 25.2, 36.2, 42.8, 48.0, 47.8.
  - Current balance 2/: -12.0, -10.2, -21.0, -6.9, 10.1, -22.6, -15.8.
  - Overall balance: -12.0, -12.7, -21.2, -6.7, 10.3, -25.8, -20.4.
- Selected Table 2 series (percent of GDP): total revenue and grants 115.4, 119.0, 103.7, 152.8, 197.9, 155.2, 163.9, 161.6, 152.5, 145.7, 146.4; fishing license fees 29.5, 41.7, 29.1, 58.8, 88.6, 42.2, 43.3, 44.3, 45.4, 46.6, 47.7; current fiscal balance 3/: -19.5, -16.8, -35.1, -11.7, 17.7, -41.8, -30.8, -29.6, -29.1, -28.6, -27.9.

### Medium-term projections and RERF per capita trajectories (selected exact figures)
- Real GDP historical and projected series (2009–2019): -0.7, -0.5, 2.7, 2.8, 2.9, 3.0, 2.7, 2.5, 2.4, 2.3, 2.1.
- RERF per capita balance (in 2006 A$) examples from scenario tables: 459, 250, 584, 837, 4,643, 4,472, 4,326, 4,192, 4,075, 3,960, 3,847, 3,734, 3,622, 3,511, 3,398, 3,286, 3,171, 3,054, 2,934, 2,810, 2,684, 2,556, 2,425, 2,291.

### Balance of Payments highlights (selected series)
- Current account balance (percent of GDP) examples: -28.6, -32.3, -37.9, -27.6, -53.9, -44.5, -48.1, -98.9, -104.0, -101.0, -88.7, -79.7, -74.7.
- Trade balance (percent of GDP) examples: -71.5, -79.1, -80.9, -75.4, -80.6, -98.0, -102.1, -108.9, -110.3, -105.4, -95.3, -84.9, -79.0.
- Exports, f.o.b. series examples: 12.1, 8.8, 8.0, 4.2, 8.3, 6.8, 7.2, 7.7, 8.4, 9.1, 9.8, 10.7, 11.6.
- Imports, f.o.b. series examples: 83.6, 87.9, 88.9, 79.7, 88.9, 104.8, 109.2, 116.6, 118.7, 114.5, 105.1, 95.6, 90.6.
- Fishing license fees series in one Table 4 format: 25.4, 32.2, 29.5, 41.7, 29.1, 58.8, 88.6, 42.2, 43.3, 44.3, 45.4, 46.6, 47.7.

### Debt Sustainability Analysis — key findings and baseline assumptions
- Conclusion: Kiribati continues to be at high risk of debt distress.
- Fiscal context:
  - Fishing license fees made up about 60 percent of government revenues during 2003–13.
  - Large overall fiscal deficits over the last decade (about 13 percent of GDP on average) resulted in substantial drawdowns of the RERF.
  - RERF assets dropped to 380 percent of GDP in 2013 from 565 percent of GDP in 2000.
- Public debt levels (end-2013):
  - Public domestic debt accounted for 4⅔ percent of GDP.
  - Gross public external debt estimated at about 8⅓ percent of GDP.
  - As of end-2013, all external public debt consisted of concessional loans.
- Baseline macro assumptions (Box 1):
  - Economy expected to grow at about 2½ percent in the medium term (until 2019).
  - Growth moderated to 1.9 percent over the longer term (until 2034 and thereafter).
  - Population growth expected to moderate from 2.2 percent in 2011 to 1.8 percent in the long run.
  - Fishing license fees projected conservatively at around A$42 million in 2014 and to remain constant in real terms.
  - Grants expected to decline from 44 percent of GDP in 2014 to around 22 percent of GDP in 2019 and to about 20 percent in the longer term.
  - New external loan disbursements assumed to average about 5 percent of GDP over the medium and long terms.
  - Overall fiscal deficit reduced gradually to around 17 percent of GDP by 2019 and to 14 percent of GDP in the long run.
  - RERF nominal annual return assumed to be 5⅓ percent in the long term.
- High fishing license fees scenario implications:
  - Fishing license fees A$60 million in 2014 and growing at 2½ percent afterwards could stabilize real per capita RERF at about A$4,500 in 2034.
  - Even under this scenario, debt distress risk remains high; PV of total public debt projected to increase to around 35 percent of GDP over the long term.
- Stress tests:
  - PV of external debt-to-GDP ratio will increase from 5⅓ percent of GDP in 2013 to 30 percent of GDP in 2026 under the baseline.
  - Under extreme stress (real GDP growth one standard deviation lower temporarily in next two years), PV of debt reaches about 55 percent of GDP by 2024 and 77 percent of GDP by 2034, breaching the 40 percent threshold in 2020.

### Policy-relevant priorities and recommendations (from DSA, conclusions, and Executive Board)
- Continue to secure grants to support large development needs.
- Implement fiscal and structural reform agenda to ensure fiscal sustainability and raise long-term growth.
- Pursue fiscal consolidation by containing and improving quality of expenditures and through revenue enhancing measures.
- Prudent financing: secure concessional financing and limit nonconcessional borrowing.
- Continue statistical capacity building to improve national accounts, balance of payments, and government finance statistics.
- Preserve the real per capita value of the RERF as an appropriate fiscal anchor: staff projections suggest withdrawals from the RERF should be limited to less than 12 million AUD annually to stabilize the RERF over a period of 8-9 years.
- Save any fishing license receipts above the conservative baseline to replenish the RERF.
- Strengthen tax administration and public financial management.
- Continue SOE reforms, including privatization or commercialization where feasible, and limit fiscal risks from SOEs.
- Adopt centralized debt management guidelines and avoid non-concessional borrowing.
- Strengthen financial sector oversight to reduce non-performing loans and improve institutional balance sheets.
- Deepen structural reforms to improve competitiveness, private sector development, and labor market opportunities.

### Technical assistance, donor cooperation, and capacity building (selected items)
- Resident representative office in the Pacific Islands opened September 2010 in Suva, Fiji; Mr. Yongzheng Yang is the Resident Representative.
- PFTAC assistance (May 2011–May 2014) included 28 advisory missions and training seminars; ongoing support for VAT implementation and RMS IT system.
- VAT implemented on April 1st 2014; RMS implemented in December 2013.
- World Bank provided budget support and infrastructure investments; joint Fund-Bank technical work on PFM, debt management, and RERF.
- AsDB engagements include South Tarawa Sanitation Improvement Sector project and Road Rehabilitation Project; AsDB TA for SOE reform.

### Project and infrastructure notes (selected)
- 32.5 kilometers of main roads and about 8 kilometers of feeder roads cofinanced by the Government of Australia, the World Bank and the Pacific Regional Infrastructure Facility to improve socioeconomic conditions for the people of South Tarawa.
- Kiribati: Loan, grant and TA approvals (2007–2013) include loan approvals in 2010 (US$12m) and 2012 (US$7.56m); TA approvals in various years totaling several small grants.

### Main assessment (Conclusions)
- Kiribati continues to be at high risk of debt distress.
- To narrow fiscal imbalances and stabilize the real per capita RERF value in the context of pressing capital investment needs, authorities must pursue fiscal consolidation through revenue measures and improving the quality of expenditure.
- Structural reforms to improve the business climate and promote private sector growth are critical to reduce the fiscal burden.
- Authorities broadly agreed with the assessment and indicated commitment to preserving the value of the RERF through fiscal and structural reform programs supported by donors.

*IMF staff report excerpts and tables as presented in the provided content unit.*

### 1. Seamen Employment and Remittances __________________________________________________________5

### 1. Seamen Employment and Remittances

### Seamen employment and remittances: key findings
- As of December 2013, there were about 1008 Kiribati seamen on board, compared to 1452 in 2006.
- Over the period, seamen remittances fell by about 4 percent of GDP, and stood at 6 percent of GDP in 2013.
- The depreciation of the U.S. dollar over the past few years has had a negative impact on the Australian dollar value of seamen remittances.
- Structural factors limiting recovery in seamen employment:
  - Shipping industry low profitability and overcapacity.
  - Increasing ship size and automation reducing demand for seamen.
  - Kiribati seamen are trained at the Kiribati Marine Training Center, regarded as one of the best vocational training institutes in the region.
  - Competitiveness challenges: higher transport costs and longer visa processing times versus South and South-east Asian competitors.

### Policy implications (seamen sector)
- Address transport-cost and visa-processing obstacles to help maintain seafaring as a source of employment, training, and national income.

### Related indicators and dynamics (from figures referenced)
- Seamen remittances and seamen-on-board indices show declines since 2006 (index base 2006=100).
- Movements in global shipping indicators (e.g., Baltic Dry Index) and exchange-rate effects have contributed to remittance movements.

---

### A. Fiscal Policy: fiscal context and measures

### Fiscal context and recent developments
- Fishing license fees revenues have been volatile and unusually high in the last two years; these revenues dominated fiscal outcomes.
- Government cleared expensive commercial debt in 2012.
- Problematic SOEs and overruns on copra subsidy payments remain a drag on the budget.
- Non-compliance has dented tax revenue collections despite high fishing license fees allowing the government to bolster the Revenue Equalization Reserve Fund (RERF) in 2013.
- The RERF real per capita value is now significantly below its 2000 level due to large and excessive current fiscal deficits historically.
- In 2014 the government incorporated CSO subsidies of 1.7 percent of GDP into the budget to account more transparently for SOE-related budget costs.
- The VAT has been introduced on April 1 (initial implementation phase expected to involve some challenges).

### Fiscal policy recommendations and actions
- Save excess revenues from fishing license fees in the medium term while maintaining essential expenditures and investments in infrastructure, health, and education.
- Continue fiscal adjustment: budget consolidation and strengthening public financial management.
- Improve timely exchange of information on fishing license revenue performance between key ministries and the Ministry of Finance to strengthen budget planning and cash management.
- Restructure the copra subsidy scheme and improve operational efficiency at the Public Utilities Board (PUB); enhance revenue collections via modern meter equipment and improved operations of the PUB with World Bank assistance.
- Maintain policy of avoiding non-concessional debt financing of the recurrent budget.

### Government reform progress and external support
- Significant progress made in SOE reform; fisheries policy approved and implementation underway.
- Work underway to improve cash and debt management.
- World Bank provided budget support for 2014; further donor budget support envisaged conditional on reform progress.
- IMF and PFTAC provided TA in public financial management, RERF and KPF management, national accounts, government finance, and external statistics.

---

### Box 2 — Ensuring Fiscal Sustainability: scenarios and projections

### Baseline scenario (conservative fishing license revenues)
- Assumptions:
  - Fishing license fees return to levels of about 22 percent of GDP for 2014.
  - Incorporates recent introduction of value added and excise taxes and authorities’ current commitments to reform.
  - Donor budget support of A$25 million under the reform program in 2014–16.
  - Current expenditures grow more slowly than nominal GDP in the medium and longer term.
- Outcomes:
  - Current fiscal deficit reduced from 22⅔ percent of GDP in 2014 to 11.8 percent of GDP in 2019 and stabilize at this level in the longer run.
  - RERF drawdown reduced from 14½ percent of GDP to 11.8 percent of GDP correspondingly.
  - Despite narrowing the current fiscal deficit by more than 10 percent of GDP, the RERF per capita value does not stabilize and declines by more than 40 percent by 2030 compared to the projected 2014 level.
- Stabilizing variant:
  - To stabilize RERF per capita values by 2023–24 at about A$3,900 in constant terms, the current fiscal deficit must narrow to about 3.8 percent of GDP on average in 2023–30.
  - This requires narrowing the current fiscal deficit by more than 8 percent of GDP in the long run and would be difficult to achieve.

### High fishing license fees scenario
- Assumptions:
  - Fishing license fees remain high at close to 2012–13 levels.
  - Some fiscal measures are applied to stabilize RERF per capita values.
- Outcomes:
  - Stabilizing RERF per capita values by 2023–24 at about A$4,500 in constant terms.
  - Required fiscal consolidation smaller than in baseline: current fiscal deficit narrowing to 4.2 percent of GDP in the long run.
- Policy note:
  - If windfall license fees materialize, it is important to save them to strengthen RERF balances rather than finance additional spending.

### Cross-scenario risk assessment
- Under all scenarios, Kiribati is projected to remain at high risk of external debt distress due to projected shift from grant to debt financing for large infrastructure needs.

---

### Box 3 — Government sector linkages, growth and fiscal multipliers

### Government sector size and role (2013)
- Total government current spending accounted close to 60 percent of GDP.
- Government sector accounted for more than 28 percent of GDP.
- Government employees represented 21.5 percent of total employment and 42 percent of formal employment.

### Fiscal multiplier framework and estimates
- Framework: GDP divided into government GDP (mainly wages) and private GDP (augmented Cobb-Douglas); model calibrated to local data.
- Impact multipliers (∆Y(t)/∆G(t)):
  - Positive nominal public wage shock impact multiplier = 0.44.
  - Positive public expenditure shock impact multiplier = 0.47.
  - Development expenditure impact multiplier estimated at 0.05–0.1 (lower because most development expenditure is spent on imported goods and services); long-term multiplier could be higher if development expenditure increases productivity.
- Interpretation:
  - High import shares in household consumption and government expenditure limit domestic stimulus effects; fiscal multipliers are relatively low compared with economies with more developed domestic industries.
  - Expansionary fiscal policy’s stimulus effect on GDP growth is limited in Kiribati.

### Growth projections using multipliers
- Projected GDP growth: 3.0 in 2014 and 2.7 in 2015 (as shown in the SEI table).

---

*IMF staff report excerpt: Kiribati — Seamen Employment and Remittances; fiscal policy, scenarios, and fiscal multipliers (from the provided source content).*

### Box 4. Regional Arrangement for Fishing License Fees

### Box 4. Regional Arrangement for Fishing License Fees

### Overview
- Fishing license fees are a major source of revenue for several Pacific microstates, in particular Kiribati, Micronesia, Marshall Islands, and Tuvalu.
- Since 2011, fishing license revenue has increased significantly, at an average rate above 30 percent during 2011–13.
- A large share of this increment is attributed to the implementation of minimum fishing license fees under the Parties to the Nauru Agreement (PNA).

### Parties to the Nauru Agreement and the Vessel Day Scheme (VDS)
- The PNA is a regional agreement among member countries to coordinate the management of marine resources; initially established in 1982 among eight Pacific island countries.
- The members of the Nauru Agreement are: Kiribati, the Marshall Islands, Micronesia, Nauru, Palau, Papua New Guinea, Solomon Islands, and Tuvalu.
- In 2007, PNA members introduced the vessel day scheme (VDS) with these key features:
  - Limits the total number of fishing days (thus limiting both number of days and number of vessels) rather than only the number of vessels.
  - Members jointly allocate a fixed number of transferable fishing days for their combined Exclusive Economic Zones (EEZs).
  - Allocation of fishing days is apportioned to members according to the individual sizes of their EEZs and historical catch.
  - Fishing companies pay a flat fee per vessel per day with adjustment for the size of the vessel; large vessels pay a price of 1.5 times the standard fee.

### Minimum Fees, Revisions, and Revenue Effects
- The PNA members strengthened the VDS in 2011 by introducing a minimum fee for fishing per vessel day:
  - The minimum fee was set at US$5,000 effective in 2012.
  - The minimum fee was raised to US$6,000 effective January 2014.
- Current practice includes revisions of total fishing days for the combined EEZs of the parties and annual revisions of the VDS minimum prices.
- The implementation of the minimum fee and the VDS contributed to the notable revenue increases for heavily dependent countries during 2011–13.

### Implications and Policy-Related Observations for Kiribati
- Proceeds from access to Kiribati’s fishing waters continue to be a large part of the country’s national income; the value of fish caught in Kiribati waters far exceeds fishing license fees and total Kiribati GDP.
- Staff recommendation: Kiribati should continue to encourage investment in onshore marine processing to fully realize the fisheries industry’s potential.
- Staff appraisal related fiscal guidance (as relevant to fisheries receipts):
  - Authorities should seek to boost fishing license fees above the current conservative baseline, with additional receipts saved to replenish the RERF.
  - In the event that fishing license fees cannot be sustained at recent high levels, authorities should explore options for further strengthening other aspects of budget performance to ensure longer-term fiscal sustainability.

*Source: _cr14138 - Box 4. Regional Arrangement for Fishing License Fees*

### 43.      It is recommended that the next Article IV consultations continue to take place on a

### _cr14138 - 43.      It is recommended that the next Article IV consultations continue to take place on a

### Article IV consultation recommendation
- It is recommended that the next Article IV consultations continue to take place on a 12-month cycle in light of ongoing structural challenges and vulnerabilities and government reforms that require close involvement of the IMF.

### Risk Assessment Matrix — major sources of risks, likelihood, and potential impact
- Fiscal sustainability risks
  - Likelihood: Medium
  - Potential Impact: High
  - Key channels described:
    - Declining reform momentum and political will would lead to delay in delivering the necessary fiscal and structural reforms and impede fiscal adjustment.
    - Lack of progress in tax and expenditure reforms would lead to continuous unsustainable deficits and eventual depletion of the RERF in the longer run.
- External growth slowdown (advanced and emerging economies)
  - Likelihood: Medium (except Europe); High (Europe)
  - Potential Impact: Medium
  - Key channels described:
    - Advanced economies: larger than expected deleveraging or negative surprises on potential growth.
    - Emerging markets: earlier maturing of the cycle and incomplete structural reforms leading to prolonged slower growth.
    - Stalled or incomplete delivery of policy commitments at the national or Euro area level, or adverse developments in some peripheral countries, could re-intensify financial stress and bank-sovereign-real economy links.
    - Decline in global returns and valuations would negatively impact RERF assets.
    - Fishing license fees and seamen’s remittances could be negatively affected if global demand for fish and shipping grows at a slower pace.
    - Adverse impact somewhat mitigated by limited direct exposure to the Euro area and proximity to the growing Asia and Pacific economies.
- Financial risks
  - Likelihood: Medium
  - Potential Impact: Medium
  - Key channels described:
    - Financial stress in the Euro area re-emerges triggered by stalled or incomplete delivery of national and euro area policy commitments.
    - Risks to financial stability from incomplete regulatory reforms: delays, dilution of reform, or inconsistent approaches (medium-term).
    - Declining growth prospects could impinge on global asset valuations and negatively affect the value of the RERF assets; adverse impact somewhat mitigated by limited direct exposure to the Euro area.
- Fluctuations in commodity prices
  - Likelihood: Medium
  - Potential Impact: Low
  - Key channels described:
    - Sustained decline in commodity prices triggered by deceleration of global demand and coming-on-stream of excess capacity (medium-term).
    - Decline in commodity prices would be favorable to Kiribati since it will reduce the value of imports; commodity price increases work in the opposite direction.
- Geopolitical risks
  - Likelihood: Low
  - Potential Impact: Low
  - Key channels described:
    - Disruptions triggered by geopolitical incidents in East Asia (financial flows and supply chain).
    - Fishing license fees may be affected by the disruption of shipping.

### Fiscal dynamics, RERF, and revenue structure (key findings)
- Fishing license revenues:
  - "Fishing license revenues amount to about half of total revenue and were high in the last two years... and have been volatile."
  - Table numbers: Fishing license fees (in percent of GDP or A$ depending on table context): examples include 29.5, 41.7, 29.1, 58.8, 88.6, 42.2, 43.3, 44.3, 45.4, 46.6, 47.7 (from Table 2 nontax revenue breakdown).
- RERF (Revenue Equalization and Reserve Fund) dynamics:
  - Closing balance (in millions of US$): 512, 576, 586, 607, 600, 587, 580 (Table 1).
  - Closing balance (in millions of A$): 571, 581, 579, 581, 668, 666, 668 (Table 1).
  - Per capita value (in 2006 A$): 5,209; 5,040; 4,759; 4,592; 5,058; 4,837; 4,643 (Table 1).
  - Projections and scenarios show RERF per capita balance trajectories and scenarios where high fishing license fees can stabilize RERF per capita balance.
- Fiscal balances and composition (selected exact figures from tables)
  - Nominal GDP (2011): US$172.7 million; GDP per capita (2011): US$1,670; Nominal GNI (2011): US$236.1 million; Population (2011): 103,365 (Table 1).
  - Real GDP (percent change) 2009–2015: -0.7, -0.5, 2.7, 2.8, 2.9, 3.0, 2.7 (Table 1).
  - Consumer prices (percent change, average) 2009–2015: 9.8, -3.9, 1.5, -3.0, -1.5, 2.5, 2.5 (Table 1).
  - Central government finance (percent of GDP) selected lines (Table 1):
    - Revenue and grants: 70.9, 72.5, 62.0, 90.4, 112.9, 83.9, 84.1.
    - Total domestic revenue 1/: 42.7, 47.8, 37.0, 54.0, 69.9, 39.1, 40.9.
    - Grants: 28.1, 24.7, 25.0, 36.4, 43.0, 44.8, 43.2.
    - Expenditure and net lending: 82.8, 85.2, 83.3, 97.2, 102.6, 109.7, 104.5.
    - Current: 54.7, 58.0, 58.0, 61.0, 59.8, 61.7, 56.7.
    - Development: 28.1, 27.1, 25.2, 36.2, 42.8, 48.0, 47.8.
    - Current balance 2/: -12.0, -10.2, -21.0, -6.9, 10.1, -22.6, -15.8.
    - Overall balance: -12.0, -12.7, -21.2, -6.7, 10.3, -25.8, -20.4.
  - Table 2 (percent of GDP series, selected years and items):
    - Total revenue and grants (2009–2019 estimates/projections): 115.4, 119.0, 103.7, 152.8, 197.9, 155.2, 163.9, 161.6, 152.5, 145.7, 146.4.
    - Revenue: 69.6, 78.4, 61.9, 91.3, 122.6, 72.4, 79.8, 82.9, 86.3, 90.0, 93.7.
    - Nontax revenue: 40.8, 50.1, 34.6, 64.0, 94.8, 48.0, 49.4, 50.7, 52.1, 53.5, 54.9.
    - Fishing license fees (in same units): 29.5, 41.7, 29.1, 58.8, 88.6, 42.2, 43.3, 44.3, 45.4, 46.6, 47.7.
    - Total expenditure (percent of GDP): 134.9, 139.7, 139.3, 164.2, 179.9, 203.0, 203.6, 201.4, 192.9, 187.3, 187.0.
    - Current expenditure (percent of GDP): 89.1, 95.2, 97.0, 103.0, 104.9, 114.2, 110.5, 112.5, 115.5, 118.5, 121.6.
    - Wages and salaries (percent of GDP): 40.2, 44.4, 45.8, 47.9, 52.1, 53.4, 54.5, 55.5, 56.7, 57.8, 58.9.
    - Development expenditure (percent of GDP): 45.8, 44.5, 42.2, 61.2, 75.0, 88.9, 83.1, 88.9, 77.4, 68.8, 65.5.
    - Current fiscal balance 3/ (percent of GDP): -19.5, -16.8, -35.1, -11.7, 17.7, -41.8, -30.8, -29.6, -29.1, -28.6, -27.9.
    - Overall balance 4/ (percent of GDP): -19.5, -20.8, -35.5, -11.4, 18.0, -47.8, -39.7, -39.8, -40.4, -41.7, -40.7.
  - Notes in tables:
    - 1/ Assumes conservative path for fishing license fees in 2014 and onwards. Higher fishing license fees at the level of A$60 million would imply a current deficit of 13 percent of GDP in 2014.
    - 2/ Current balance excludes grants and development expenditure.
    - 3/ Current balance excludes grants and development expenditure (Table 3 footnote).
    - 4/ Overall balance in the table is different from official budget because loans are classified as financing.

### Medium-term projections and scenarios (selected exact figures)
- Real GDP (percentage change) projections (Table 3 and Table 5):
  - Historical and projected series: -0.7, -0.5, 2.7, 2.8, 2.9, 3.0, 2.7, 2.5, 2.4, 2.3, 2.1 (2009–2019 in Table 3).
  - Scenario projections in Table 5 include multi-decade trajectories where Real GDP Growth is reported in ranges like 2.8, 2.9, 3.0, 2.7, 2.5, 2.4, 2.3, 2.1, 1.9, 1.9, 1.9, ... and multiple scenario variants (Baseline, Stabilizing RERF per capita Balance Scenario, High Fishing Licence Fees Stabilizing RERF per capita Balance Scenario) with detailed year-by-year percent-of-GDP paths.
- RERF per capita balance projections (Table 5, memorandum items)
  - RERF per capita balance (in 2006 A$) examples: 459, 250, 584, 837, 4,643, 4,472, 4,326, 4,192, 4,075, 3,960, 3,847, 3,734, 3,622, 3,511, 3,398, 3,286, 3,171, 3,054, 2,934, 2,810, 2,684, 2,556, 2,425, 2,291 (Table 5 scenario table rows vary by scenario).
- Balance of Payments (selected series from Table 4)
  - Current account balance (percent of GDP) historical/projections: -28.6, -32.3, -37.9, -27.6, -53.9, -44.5, -48.1, -98.9, -104.0, -101.0, -88.7, -79.7, -74.7.
  - Trade balance (percent of GDP) examples: -71.5, -79.1, -80.9, -75.4, -80.6, -98.0, -102.1, -108.9, -110.3, -105.4, -95.3, -84.9, -79.0.
  - Exports, f.o.b. (percent of GDP or absolute series depending on table): 12.1, 8.8, 8.0, 4.2, 8.3, 6.8, 7.2, 7.7, 8.4, 9.1, 9.8, 10.7, 11.6 (Table 4 full series).
  - Imports, f.o.b.: 83.6, 87.9, 88.9, 79.7, 88.9, 104.8, 109.2, 116.6, 118.7, 114.5, 105.1, 95.6, 90.6.
  - Balance on factor income (including fishing license fees and investment income) and Balance on current transfers detail are provided in Table 4 with exact series (e.g., Fishing license fees 25.4, 32.2, 29.5, 41.7, 29.1, 58.8, 88.6, 42.2, 43.3, 44.3, 45.4, 46.6, 47.7 in one table format; alternate percent-of-GDP presentation shows 17.2, 20.1, 18.1, 25.4, 17.4, 17.4, 17.4, 22.8, 22.2, 22.2, 21.7, 21.1, 20.2).

### Key policy-relevant implications and priorities (drawn from tables and narrative)
- Close monitoring and continued IMF engagement:
  - Recommendation for annual (12-month cycle) Article IV consultations due to ongoing structural challenges, vulnerabilities, and government reforms requiring close IMF involvement.
- Fiscal sustainability and RERF protection:
  - The heavy reliance on fishing license revenues (about half of total revenue in recent years) and their volatility imply significant risk to fiscal balances and the RERF; Assumptions of conservative fishing license fees are used in projections.
  - Higher fishing license fees (example threshold provided: A$60 million) would materially improve deficits (would imply a current deficit of 13 percent of GDP in 2014 under the note).
- Need for tax and expenditure reforms:
  - Lack of progress in tax and expenditure reforms is identified as a medium-likelihood, high-impact risk that could lead to unsustainable deficits and depletion of the RERF over the longer run.
- External shock preparedness:
  - Exposure to global asset valuation declines and potential re-emergence of Euro area financial stress highlight the need to manage financial vulnerabilities and preserve RERF assets; Kiribati’s limited direct exposure to the Euro area provides some mitigation.
- Scenario planning:
  - Tables present multiple scenarios (Baseline; Stabilizing RERF per capita Balance Scenario; High Fishing Licence Fees Stabilizing RERF per capita Balance Scenario) with year-by-year percent-of-GDP paths for revenue, expenditure, balances, and RERF outcomes to inform medium-term policy options.

*IMF Staff Report excerpts and tables as presented in the provided content unit.*

### 2014. Kiribati is on a 12-month consultation cycle.

### 2014. Kiribati is on a 12-month consultation cycle.

### Resident representative
- The resident representative office in the Pacific Islands was opened in September 2010 in Suva, Fiji.
- Mr. Yongzheng Yang is the Resident Representative.

### Technical Assistance (TA) 1995–2011 — providers and areas
- Providers: STA, LEG, MCM, FAD, and PFTAC.
- Areas of TA: statistics, tax administration and policy, budget management, Revenue Equalization Reserve Fund (RERF) and Pension Fund (KPF) management, financial sector reform and supervision, and combating financial crime and financial system abuse.

### Relations with the Pacific Financial Technical Assistance Centre (PFTAC) (As of 22 April, 2014)
- Current funding cycle: May 2011 to May 2014.
- PFTAC assistance to Kiribati during the cycle included 28 advisory missions.
- Kiribati also sent 11 officials to regional seminars and workshops.

Tax Administration and Policy
- Kiribati implemented VAT on April 1st 2014 with support from PFTAC and Australian Department of Foreign Affairs (DFAT).
- Pre-implementation: strong focus on community outreach to build relationships between tax administration and business.
- Anticipated implementation issues: some initial implementation issues likely but expected to be resolved within the first quarter of operation.
- Authorities intend to maintain a high level of community outreach in the first quarter of VAT operation to foster greater understanding and promote compliance.
- The Taxation Division implemented its new IT system, the Revenue Management System (RMS), in December 2013.
  - RMS: used widely throughout the Pacific; described as reliable and robust.
  - Key Business Users attended intensive user acceptance testing in New Zealand.
  - Effective implementation carries significant risk; data integrity should be a high priority.
- DFAT funding: continues to support Kiribati with funding for a tax adviser.
  - A new adviser will commence a two year assignment in May 2014.
  - Adviser responsibilities signaled by authorities: oversee new VAT and IT systems; lead role in developing and implementing a presumptive tax for small micro business and income tax self assessment.
- PFTAC will provide ongoing support to the authorities and the DFAT adviser.

Public Financial Management (PFM)
- August 2011 mission assisted Ministry of Finance in prioritizing PFM reform activities (RBM 1.2) and provided a framework for joint AusAid/AsDB long-term TA.
- Two PFTAC/IMF missions prior to TA inception worked to:
  - modify chart-of-accounts (RBM 1.4) to capture more information on donor-funded projects,
  - improve integration of planning and budgeting (RBM 1.5),
  - provide options for better cash and debt management (RBMs 1.3 & 1.6).
- PFTAC PFM Advisors participated in August 2012 AsDB/AusAid Technical Assistance inception mission and concurrent donor forum.
- 2013 missions included:
  - training budget analysts (RBM 1.5) in the National Economic Planning Office (NEPO),
  - supporting Team Leader of joint Australia/ADB Treasury Reform TA (RBM 1.4),
  - assisting development of improved debt/cash management policy (RBMs 1.3 & 1.6) with support from IMF’s APD and MCM Divisions.
- PFTAC PFM Advisors participated in interview/CV review teams for Australian and EU-funded TA.
- PFTAC readiness: additional technical support on budget preparation, cash/debt management, and other budget execution aspects.
- Kiribati officials regularly participated in PFTAC regional PFM events: November 2011 MTB workshop, July 2012 PEFA Workshop, Strategic Development Program Workshops (with Australia DOFD), and PIFMA Heads meetings.

Financial Sector Regulation and Supervision
- August 2003: PFTAC advisor and an IMF legal expert consulted on a Financial Institutions Bill drafted in July 2002; amended draft legislation forwarded in December 2003 for action.
- No further progress to date on the draft Financial Institutions Bill or previously drafted Anti-money Laundering Legislation.
- PFTAC advisor makes periodic contact with the Ministry of Finance regarding status of draft legislation.

Economic and Financial Statistics
- GDDS metadata first published on IMF website in April 2004 and updated in March 2013 following PFTAC assistance.
- BOP compiler benefited from training in regional courses in 2005 and 2010.
- PFTAC provided TA on balance of payments in 2008, 2010 and 2012:
  - improved compilation methods and use of source data,
  - provided training,
  - assisted transition to BPM6.
- From 2012, TA on BOP provided by IMF JSA project on external sector statistics.
- PFTAC regular TA on national accounts since 2008:
  - assisted improvements in methodology and use of source data,
  - from 2012 increased TA on development of an expenditure measure of GDP and preparation of statistical procedures for incorporation of upcoming VAT data.
- Progress on statistics has been slow due to resource and capacity constraints.
- NA compiler benefited from regional courses in 2009, 2012 and 2013.
- PFTAC sponsored a one-month attachment for the BOP compiler with Statistics New Zealand in May 2009.

Macroeconomic Analysis
- Two missions in 2011 provided assistance in:
  - building capacity related to basic forecasting techniques,
  - using medium-term fiscal framework developed as part of ADB assistance,
  - assessing sustainable levels of drawdowns from Kiribati’s Reserve Equalization Reserve Fund.
- A regional financial programming workshop jointly held in 2012 by PFTAC and the Singapore Regional Training Institute provided training in financial programming techniques to two economists of the Ministry of Finance and Economic Development.

### Bank-Fund collaboration

A. World Bank-IMF Collaboration (As of April 15 2014)
- Fund and Bank teams maintain close cooperation in various areas and consult frequently.
- During the current cycle, Bank staff joined IMF missions, including IMF staff visits and the 2014 Article IV mission.
- Teams produced a Joint DSA during the current cycle.
- IMF team contributions: analysis and advice on overall macroeconomic and fiscal framework, including fiscal and RERF sustainability.
- Joint engagement: technical assistance and advice in public financial management and debt management and policy.
- Fund provided TA on pension fund and insurance company management, and on statistical issues, including Government Finance Statistics and Balance of Payments.
- World Bank engagement: infrastructure projects (road rehabilitation, airport improvement, solar energy, adaptation to climate change); technical assistance on government expenditures, copra subsidy and import levy fund reforms, liberalization of telecommunication sector, management of RERF assets, and social protection issues.
- Joint support: comprehensive program of priority economic reforms supported under joint donor budget support, coordinated by the World Bank, with the first tranche disbursed in January 2014.
- Division of lead roles going forward:
  - Fund: lead on macro issues, in particular overall macroeconomic framework, including medium-and-longer term.
  - Bank: lead on macro-critical structural reform issues.
- Continued cooperation on follow up TA, including on RERF management and public financial and debt management.

B. Relations with the World Bank Group
- Kiribati became a member of the World Bank Group in 1986.
- March 1, 2011: World Bank’s Board discussed the first Country Assistance Strategy (CAS) for Kiribati.
- CAS themes: (i) addressing the existential threat posed by climate change; and (ii) mitigating the effects of geographic isolation.
- IDA financing: anticipated to be provided on 100-percent grant terms due to limited repayment capacity highlighted in the DSA.
- IDA grants and trust fund investments of as much as US$50 million are anticipated over the four year CAS period from FY2011 to FY2014.
- World Bank Group engagement components:
  - Climate change adaptation and resilience: Kiribati Adaptation Program (KAP) since 2003, activities include seawall construction, mangrove planting, and water conservation and supply; support for renewable energy generation and transport of food to remote outer islands.
  - Mitigating geographic isolation: scaling up support for climate friendly infrastructure investments; South Tarawa road improvement investment of US$24m in IDA and TF financing approved March 1, 2011 (undertaken jointly with the AsDB); mobilized grant resources with New Zealand and other partners for airport safety upgrades.
  - Supporting economic reform and regional integration: World Bank disbursed US$5.2 million of budget support in March, 2014 in support of policy reforms in the Economic Reform Plan; second operation in programmatic series being prepared; support for opening telecoms market to private investments; IFC and Bank cooperation on SOE transactions; support for participation in temporary labor migration schemes and fisheries management.

### Relations with the Asian Development Bank (AsDB)
- Kiribati joined the AsDB in 1974.
- AsDB has approved eight project loans to Kiribati amounting to US$34.7 million, all from Asian Development Fund (ADF) resources.
- TA amounting to US$18.4 million has been provided for 40 projects.
- Latest AsDB loan at time of report: South Tarawa Sanitation Improvement Sector project approved in October 2011.
- AsDB recently approved a US$0.8 million TA grant for enhancing economic competitiveness through SOE reform in October 2013.
- ADB program objectives aligned with Kiribati Development Plan, 2012–15:
  - reduce poverty and promote economic opportunity by improving public financial management and delivering sustainable infrastructure services,
  - improve corporate governance and commercial focus of state-owned enterprises.
- Technical assistance through the Economic Management and Public Sector Reform program helped strengthen SOE governance.
- South Tarawa Sanitation Improvement Sector Project aims to improve sanitation and hygiene practices in South Tarawa and increase access to sanitation from 64 percent to 80 percent by 2019.
- Road Rehabilitation Project approved in December 2010 will rehabilitate transport infrastructure.

*Source: _cr14138 - 2014. Kiribati is on a 12-month consultation cycle.*

### 32.5 kilometers of main roads and about 8 kilometers of feeder roads. Cofinanced by the

### _cr14138 - 32.5 kilometers of main roads and about 8 kilometers of feeder roads. Cofinanced by the

### Project summary and financing
- 32.5 kilometers of main roads and about 8 kilometers of feeder roads.
- Cofinanced by the Government of Australia, the World Bank and the Pacific Regional Infrastructure Facility.
- The project will improve socioeconomic conditions for the people of South Tarawa.

### Kiribati: Loan, Grant and Technical Assistance Approvals (2007–13)
- Loan Approvals:
  - 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
  - 2012: Number 1; Amount (US$m) 7.56
  - 2013: Number 0; Amount (US$m) 0
- Grant Approvals:
  - All years 2007–2013: Number 0; Amount (US$m) 0
- TA Approvals:
  - 2007: Number 0; Amount (US$m) 0
  - 2008: Number 1; Amount (US$m) 0.8
  - 2009: Number 2; Amount (US$m) 0.85
  - 2010: Number 2; Amount (US$m) 0.2
  - 2012: Number 1; Amount (US$m) 0.8
  - 2013: Number 2; Amount (US$m) 1
- 1/ Prepared by the Asian Development Bank Staff.

### Assessment of data adequacy for surveillance (As of April 1, 2014)
- General: 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 improved.
  - Two TA missions took place in 2013 to improve national account data and produce revised estimates through 2012.
  - Estimates limited to Gross Domestic Product (GDP) at current and constant 06 prices, using the production approach.
  - Work is ongoing on the expenditure-based GDP estimates.
- Price statistics:
  - Monthly retail price index (1996=100) produced with a short lag (about a month), based on a survey in South Tarawa (a national index is not available).
  - No producer, wholesale, or trade price indices.
- Government finance statistics:
  - GFS mission in October 2013 to set up reporting framework for budgetary central government and expand coverage.
  - Complete review of government units, statutory extra budgetary units, and SOEs completed; gap remains regarding donor-financed project funds.
- Monetary statistics:
  - Balance sheets of Bank of Kiribati, Development Bank of Kiribati, Kiribati Provident Fund, and Kiribati Insurance Corporation are available with lags.
  - Consolidated balance sheet of the financial sector is not available.
  - Data on interest rates are reported with a long lag.
- Balance of payments:
  - Quality improving; STA conducted two missions since early 2013.
  - Mission revised BOP estimates up to 2012 and implementation of IIP under BPM6.
  - Further statistical capacity building needed; shortcomings remain in non-trade external statistics collection.
- DATA STANDARDS AND QUALITY:
  - Kiribati has been a participant in the General Data Dissemination System (GDDS) since 04.
  - 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)
- Exchange Rates: Date of latest observation 4/1/14; Date received 4/1/14; Frequency of Data D; Frequency of Reporting/7 D; Frequency of publication/7 D
- Interest Rates /2: Date of latest observation 3/31/14; Date received 4/3/14; Frequency A; Frequency of Reporting A; Frequency of publication I
- Consumer Price Index: Date of latest observation 1/14; Date received 3/15/14; Frequency M; Frequency of Reporting Q; Frequency of publication Q
- Revenue, Expenditure, Balance and Composition of Financing/3 - General Government /4: Date of latest observation 12/31/13; Date received 3/10/14; Frequency A; Frequency of Reporting A; Frequency of publication I
- Stocks of Central Government and Central Government-Guaranteed Debt /5: Date of latest observation 12/31/13; Date received 3/10/14; Frequency A; Frequency of Reporting A; Frequency of publication I
- External Current Account Balance: Date of latest observation 12/31/12; Date received 3/10/14; Frequency A; Frequency of Reporting A; Frequency of publication I
- Exports and Imports of Goods and Services: Date of latest observation 12/31/12; Date received 3/10/14; Frequency A; Frequency of Reporting A; Frequency of publication I
- GDP/GNP: Date of latest observation 12/31/12; Date received 3/10/14; Frequency A; Frequency of Reporting A; Frequency of publication I
- Gross External Debt: Date of latest observation 12/31/13; Date received 3/10/14; Frequency A; Frequency of Reporting A; Frequency of publication I
- International Investment Position /6: Date of latest observation 12/31/12; Date received 3/10/14; Frequency A; Frequency of Reporting A; Frequency of publication I
- Notes:
  - 7/ Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

### Debt Sustainability Analysis — Key findings
- Conclusion: Kiribati continues to be at high risk of debt distress according to this update of the debt sustainability analysis (DSA).
- Fiscal context:
  - Fishing license fees made up about 60 percent of government revenues during 2003–13.
  - Large overall fiscal deficits over the last decade (about 13 percent of GDP on average) resulted in substantial drawdowns of the RERF.
  - RERF assets dropped to 380 percent of GDP in 2013 from 565 percent of GDP in 2000.
- Public debt levels (end-2013):
  - Public domestic debt accounted for 4⅔ percent of GDP.
  - Gross public external debt estimated at about 8⅓ percent of GDP.
  - As of end-2013, all external public debt consisted of concessional loans.
- Growth and outlook:
  - Economy estimated to have grown by about 2.9 percent in 2013.
  - Medium-term outlook: moderate growth supported by donor-financed road and airport projects.
  - Vulnerabilities: volatile fishing license revenues; financial exposure of sovereign wealth fund and pension fund.
- Baseline scenario projections and assumptions:
  - Fiscal deficit would exceed 25 percent of GDP in 2014 and gradually decline to about 14 by 2030.
  - Assumed external loans of US$6–12 million each year in the medium term and about US$15 million each year in the longer term.
  - Remaining financing gap met through drawdowns of the RERF, without additional domestic borrowing.
  - Annual drawdown from the RERF projected to be 12¾ percent of GDP on average in the medium term and about 12 percent of GDP on average during 2020–34.
  - Result: RERF real per capita balance will continue to decline.
- External debt indicators:
  - PV of external debt-to-GDP ratio will increase from 5⅓ percent of GDP in 2013 to 30 percent of GDP in 2026.
  - PV of external debt-to-exports will reach over 100 percent starting from 2026.
- Public debt stress vulnerability:
  - Under the most extreme stress test (real GDP growth one standard deviation lower temporarily in next two years), PV of debt reaches about 55 percent of GDP by 2024 and 77 percent of GDP by 2034, breaching the threshold of 40 percent in 2020.

### Box 1 — Macroeconomic assumptions under the baseline scenario
- GDP growth and population:
  - Economy expected to grow at about 2½ percent in the medium term (until 2019).
  - Growth moderated to 1.9 percent over the longer term (until 2034 and thereafter).
  - Population growth expected to moderate from 2.2 percent in 2011 to 1.8 percent in the long run.
- Fishing license fees:
  - Projected conservatively at around A$42 million in 2014 and to remain constant in real terms.
  - Note: The average of fishing license fees over 2000–10 was $41.6 million.
- Aid and grants:
  - Grants expected to decline from 44 percent of GDP in 2014 to around 22 percent of GDP in 2019 and to about 20 percent in the longer term.
  - Access to IDA-type grant financing expected to be about US$25 million per year during 2014–15.
- New external loan disbursements:
  - Assumed to average about 5 percent of GDP over the medium and long terms.
  - Government expected to access IDA-like terms at about US$8 million by 2017, increasing to US$10 million annually by 2020.
  - Other bilateral concessional loans expected to provide US$2–5 million a year.
- FDI:
  - Expected to continue at about ½ percent of GDP per year after a substantial increase in 2013.
- Fiscal deficit and RERF:
  - Overall fiscal deficit reduced gradually to around 17 percent of GDP by 2019 and to 14 percent of GDP in the long run.
  - RERF drawdowns reduced correspondingly; nominal annual return on RERF assumed to be 5⅓ percent in the long term.
- Current account:
  - Current account deficit will narrow in the medium term, reflecting a decrease in the fiscal deficit.

### High fishing license fees and RERF stabilization scenario
- Assumptions:
  - Fishing license fees A$60 million in 2014 and growing at 2½ percent afterwards.
  - Current government expenditure path similar to baseline: declining to 51 percent of GDP by 2023 and 45½ percent by 2030.
  - Rest of assumptions identical to baseline.
- Implications:
  - In the medium term, fishing license fees around 30 percent of GDP compared to 20 percent in the baseline scenario.
  - In the long run fishing license fees about 25 percent of GDP compared with 17 percent under the baseline.
  - Possible to stabilize real per capita value of the RERF at about A$4500 in 2034.
  - Despite improvements, debt distress level remains high risk; PV of total public debt projected to increase to around 35 percent of GDP over the long term.
  - External debt-to-exports improves and stays far below the threshold under this scenario.
- Caveat:
  - Likelihood of sustained high fishing license fees depends on continuation of PNA scheme and catch volume/migratory patterns.

### Stress tests and policy implications
- Stress tests:
  - Debt path vulnerable to shocks to financing terms and to exports.
  - PV of debt-to-exports and PV of debt-to-GDP thresholds breached under extreme stress test scenarios, including a 200 basis points higher interest rate on new borrowing.
- Policy recommendations and required actions (as reflected in the DSA):
  - Continue to secure grants to support large development needs.
  - Implement fiscal and structural reform agenda to ensure fiscal sustainability and raise long-term growth.
  - Pursue fiscal consolidation by containing and improving quality of expenditures and through revenue enhancing measures.
  - Prudent financing: secure concessional financing and limit nonconcessional borrowing.
  - Continue statistical capacity building to improve national accounts, balance of payments, and government finance statistics.

*Prepared by the Staff of the International Monetary Fund and the World Bank.*

### Conclusions

### Conclusions

### Main assessment
- Kiribati continues to be at high risk of debt distress.
- To narrow fiscal imbalances and stabilize the real per capita RERF value in the context of pressing capital investment needs, it is imperative for the authorities to pursue fiscal consolidation through revenue measures and improving the quality of expenditure.
- Structural reforms to improve the business climate and promoting private sector growth are critical to reduce the fiscal burden.
- The authorities broadly agreed with this assessment and indicated commitment to preserving the value of the RERF through fiscal and structural reform programs supported by the donor community.

### Fiscal policy and the RERF
- Recent policy actions:
  - Value added tax introduced on April 1, 2014.
  - Excise taxes introduced.
  - Authorities are keen to improve tax administration.
  - Commitment to control expenditure by reforming SOEs and rationalizing administrative costs and public wages.
- RERF status and objective:
  - RERF closing balance (in millions of US$): 512 (2009), 576 (2010), 586 (2011), 607 (2012), 600 (2013), 587 (2014 Est.), 580 (2015 Proj.).
  - RERF closing balance (in millions of A$): 571 (2009), 581 (2010), 579 (2011), 581 (2012), 668 (2013), 666 (2014 Est.), 668 (2015 Proj.).
  - Per capita value (in 2006 A$): 5,209 (2009), 5,040 (2010), 4,759 (2011), 4,592 (2012), 5,058 (2013), 4,837 (2014 Est.), 4,643 (2015 Proj.).
  - Staff projections: withdrawals from the RERF should be limited to less than 12 million AUD annually to stabilize the RERF over a period of 8-9 years.
- Budget outcomes and vulnerabilities:
  - High fishing license receipts in 2013 produced an overall budget surplus of 10 percent of GDP despite a substantial increase in capital expenditure.
  - The high 2013 fishing license revenue also led to a substantial external surplus equivalent to nearly 22 percent of GDP and replenishment of the RERF.
  - Directors noted that further strengthening of budget performance would be needed should fishing license fees fall below recent high levels, and recommended that any additional fishing license receipts above the current conservative baseline should be saved to replenish the RERF.

### Debt sustainability and stress scenarios
- Public sector debt (selected figures from baseline Table 1):
  - Public sector debt (2013): 13.3 (percent of GDP).
  - Public sector debt (2014-19 average): 37.8 (percent of GDP); 2024-34 average: 62.3 (percent of GDP).
  - Of which foreign-currency denominated (2014-19 average): 34.3 (percent of GDP); 2024-34 average: 60.5 (percent of GDP).
- External debt (selected figures from Table 3a):
  - External debt (nominal) series (percent of GDP): 8.4 (2011), 8.0 (2012), 8.6 (2013), 11.4 (2014), 15.6 (2015), 20.1 (2016), 24.6 (2017), 29.6 (2018), 34.3 (2019), 50.5 (2024), 60.5 (2034).
  - PV of external debt (selected): 5.4, 7.3, 9.9, 12.6, 15.1, 17.7, 20.2, 28.0, 33.4 (as shown in table rows).
  - Debt service-to-exports ratio (percent): 1.0 (2011), 0.7 (2012), 0.5 (2013), 1.0 (2014), 1.1 (2015), 1.2 (2016), 1.3 (2017), 1.4 (2018), 2.0 (2019), 4.4 (2024), 7.7 (2034).
- Sensitivity analyses and stress tests:
  - The most extreme stress tests (figures/tables) yield the highest ratio on or before 2024 and often correspond to a loan terms shock or an Exports shock (as indicated in figure notes).
  - Table 2 and Table 3b enumerate alternative scenarios and bound tests (e.g., permanently lower GDP growth, one-time 30 percent real depreciation, 10 percent of GDP increase in other debt-creating flows) and show wide ranges in PV of Debt-to-GDP, PV of Debt-to-Revenue, and Debt Service-to-Revenue ratios under those scenarios (tables list year-by-year scenario outcomes).
  - High Fishing License Fees and RERF Stabilization scenario (Table 4) shows improved debt dynamics relative to baseline: PV of public sector debt-to-revenue ratio series and lower gross financing need in projection years (Table 4 details).

### Macroeconomic outlook and key indicators
- Growth and inflation:
  - Real GDP growth: 2.7 (2011), 2.8 (2012), 2.9 (2013), projected 3.0 (2014), 2.7 (2015).
  - Inflation (GDP deflator, percent): -0.8 (2011), -1.7 (2012), 0.8 (2013), projected 2.5 (2014), 2.5 (2015).
- Fiscal and external aggregates (selected):
  - Revenue and grants (percent of GDP): 62.0 (2011), 90.4 (2012), 112.9 (2013), 83.9 (2014 Est.), 84.1 (2015 Proj.).
  - Grants (percent of GDP): 25.0 (2011), 36.4 (2012), 43.0 (2013), 44.8 (2014 Est.), 43.2 (2015 Proj.).
  - Primary (noninterest) expenditure (percent of GDP, Table 1 baseline): 103.9 (2014), 97.7 (2015), 89.1 (2016), 82.5 (2017), 78.4 (2018), 74.1 (2019).
  - Current account including official transfers (in percent of GDP): -32.2 (2011), -26.3 (2012), -27.4 (2013), projected -53.4 (2014), -53.4 (2015).
- Key sectoral and revenue facts:
  - Fishing accounted for 70 percent of revenue in 2013.
  - Fishing license revenue: 29 million AUD (2011) to 89.8 million AUD (2013).
  - Nominal GDP (2011): US$172.7 million; GDP per capita (2011): US$1,670; Nominal GNI (2011): US$236.1 million; Population (2011): 103,365.
  - Nominal dollar GDP series (millions of US$): 127.0 (2009), 150.9 (2010), 172.7 (2011), 175.1 (2012), 169.8 (2013), 164.3 (2014 Est.), 170.3 (2015 Proj.).

### Structural reforms, financial sector, and private sector development
- Reforms underway and recommended:
  - Continued public financial management reform, tax system reform, SOE reform, and private sector development measures.
  - Improve tax administration and compliance.
  - Reform or privatize/commercialize SOEs where feasible; for SOEs with social mandates, focus on effective subsidies and ensuring commercial viability.
  - Adopt centralized debt management guidelines and continue avoidance of non-concessional borrowing.
  - Strengthen public financial management to rebuild fiscal buffers, including improving operational efficiency of the copra subsidy scheme and the Public Utilities Board.
- Financial sector:
  - Formal financial sector lending remains limited, but household and private business credit has risen briskly.
  - Non-performing loan ratios in the Development Bank of Kiribati remained relatively high.
  - Directors recommended bolstering financial stability through stricter adherence to operational and lending standards, risk management practices, and reduction of non-performing loans; improve financial positions of the development bank and the Kiribati Provident Fund.
- Private sector and labor mobility:
  - Create an enabling environment for private sector investment: streamline business approval and registration, improve public service delivery, enhance access to finance through improved property rights and investor protections.
  - Encourage seasonal employment abroad through strengthened regional cooperation and appropriate education and skills training.
  - Develop the marine sector, including onshore marine processing; planned fisheries’ infrastructure on Christmas Island welcomed.
  - Authorities finalized a National Private Sector Development Strategy.
  - Marine Training Centre and technical institute align training to international standards to support labor mobility.

### Executive Board recommendations (summary)
- Continue fiscal consolidation and strengthen revenue mobilization and expenditure quality.
- Preserve the real per capita value of the RERF as an appropriate fiscal anchor.
- Save any fishing license receipts above the conservative baseline to replenish the RERF.
- Strengthen tax administration and public financial management.
- Continue SOE reforms, including privatization or commercialization where feasible, and limit fiscal risks from SOEs.
- Adopt centralized debt management guidelines and avoid non-concessional borrowing.
- Strengthen financial sector oversight to reduce non-performing loans and improve institutional balance sheets.
- Deepen structural reforms to improve competitiveness, private sector development, and labor market opportunities.

*Source: IMF staff report and Press Release No. 14/242, May 23, 2014 (Conclusions section and accompanying tables and figures).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14138.pdf_