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---

### 1. Climate change and Te Kakeega III (TKIII)
- TKIII theme: “Protect and Save Tuvalu.”
- Context and vulnerabilities:
  - Population of some 10,000 people living on 11 low-lying atolls on a total land area of 26 square kilometers.
  - 57 percent of the population lives on Funafuti atoll.
  - Average land height: less than 3 meters above sea level; sea water flooding occurs frequently and is expected to become more frequent and extensive.
  - Tuvalu classified as a fragile state in the context of projected sea level rise.
  - EEZ: 900,000 square kilometers.
  - Per capita income: US$3,800.
- TKIII climate and energy targets:
  - 100 percent renewable energy by 2025.
  - Reducing total greenhouse gas emissions from energy consumption to 60 percent below 2010 levels by 2025.
  - Climate mitigation cost cited in TKIII: about 2 percent of GDP annually to build adaptive capacity.
- Institutional responses and financing:
  - Establishment of a “Climate Change and Disaster Policy Unit” within the Office of the Prime Minister.
  - Climate finance avenues under consideration: Green Climate Fund, Adaptation Fund, Least Developed Country Fund, Special Climate Change Fund, Global Environment Facility.
  - Tuvalu’s share of global greenhouse gas emissions: 0.000005 percent.

### 2. Recent shock, outlook, and risks
- Cyclone Pam (March 2015):
  - Affected 40 percent of the population.
  - Damages and losses estimated at A$14 million, or around 33 percent of GDP.
  - Immediate fiscal response funded by development partner grants and drawing on buffers including the Consolidated Investment Fund (CIF).
- Near-term macro outlook:
  - Real GDP growth: 2.6 percent in 2015 (estimate).
  - Projected Real GDP growth: 4 percent in 2016; medium-term around 2 percent.
  - Inflation: 3.2 percent in 2015; expected 3.5 percent in 2016; medium-term expected in the 2-3 percent range.
- Long-term risks:
  - Rising sea levels, droughts, ocean acidification may damage infrastructure, erode coastlines, and reduce output potential.

### 3. Fiscal developments, revenue composition, and projections
- Key revenue drivers (2015 figures and shares):
  - Fishing license fees: record A$26.5 million in 2015 (60 percent of GDP, and over half of total revenues).
  - “.tv” internet domain license fees: about 15 percent of GDP.
  - Donor grants: 18 percent of GDP in 2015.
  - Tax revenue: around 19 percent of total revenue.
- Fiscal outcome and projections:
  - Fiscal surplus in 2015: staff estimates a surplus amounting to 7¼ percent of GDP after transfers to the Tuvalu Development Fund (TDF).
  - 2016 fiscal position: staff projects a deficit of around 2¾ percent of GDP (smaller than the budgeted deficit of 13 percent).
  - Drivers of 2016 deficit: one-off Cyclone Pam recovery expenditures (5 percent of GDP), spending of accumulated project balances in TDF, one-off A$5 million Tuvalu Survival Fund (TSF) allocation, and strong growth of recurrent expenditures.
  - Fishing license fees projected around A$25 million in 2016; expected to moderate to around A$20 million starting in 2017.
  - With fishing license revenues returning to recent averages and elevated recurrent spending, the budget is projected to remain in deficit over the medium term.
- Selected fiscal series (percent of GDP, 2012–2016 Est./Proj. row unless otherwise stated):
  - Revenue and grants: 84.3, 107.5, 123.1, 123.5, 124.5.
  - Tax revenue: 15.0, 19.0, 18.0, 19.4, 17.1.
  - Fishing license fees: 21.8, 45.4, 32.0, 60.9, 53.2.
  - ".tv" license fees: 9.6, 11.0, 10.9, 14.4, 13.8.
  - Grants: 27.8, 24.6, 49.0, 18.0, 32.9.
  - Expenditures: 75.0, 81.1, 86.8, 116.3, 127.3.
  - Wages and salaries: 31.9, 32.2, 36.1, 37.4, 43.2.
  - Transfers (TMTS, scholarships, CSO, grants and subsidies): 16.3, 19.9, 19.7, 37.1, 32.1.
  - Special development expenditures: 6.2, 7.4, 9.2, 13.3, 23.9.
  - Overall balance: 9.3, 26.3, 36.3, 7.2, -2.7.

### 4. Tuvalu Trust Fund (TTF), CIF, TSF, and external sector
- TTF and CIF:
  - TTF value in 2015: around A$148 million (340 percent of GDP), exceeding the Fund’s “maintained value” by A$5 million.
  - CIF balance at end-2015: A$26 million, above the target CIF balance of 16 percent of the maintained value of the TTF.
  - TTF investment allocation: defensive 40 percent; diversified 30 percent; growth 30 percent.
  - Withdrawal rules: capital not drawn down in 29 years of operation; transfers above “maintained value” deposited into CIF.
- Tuvalu Survival Fund (TSF) and GCF:
  - TSF established to finance recovery and rehabilitation from climate change impacts and adaptation projects; 2016 budget included A$5 million allocation to TSF (around 10 percent of GDP).
  - GCF application approved for improving outer-island coastal protection: long-term US$36 million grant and estimated US$3 million government contribution; disbursement schedule under discussion.
- External sector and reserves:
  - Gross reserves covered around 7 months of imports in 2015 and expected to remain comfortable in 2016.
  - Current account surplus: reached 7½ percent of GDP in 2015; small current account deficit expected in 2016.
  - Reserve coverage ratio expected to decline over the medium term as government deficits rise.

### 5. Financial sector: structure, risks, and reform priorities
- Financial sector structure:
  - Two banks: National Bank of Tuvalu (NBT) with around 90 percent of total banking sector assets and Development Bank of Tuvalu (DBT), plus Tuvalu National Provident Fund (TNPF).
  - Banking Commission Act of 2011 amended to allow Minister of Finance to be de-facto Banking Commissioner; oversight delegated to Permanent Secretary for Finance (with PFTAC advice).
- Non-performing loans and provisioning:
  - Around half of the lending portfolio is nonperforming, primarily related to state-owned enterprises and a failed housing loan scheme.
  - DBT provisions amount to 58 percent of gross loans.
  - NBT has fully provisioned for bad loans.
  - Accurate bank capital adequacy estimates impeded by absence of on-site supervision.
- Profitability and capital needs:
  - NBT has a long track record of profitability and capital appears adequate.
  - DBT may need additional capital; upper range for DBT’s capital need perhaps in the 2 percent of GDP range (subject to detailed review).
- TNPF role:
  - Invests social security contributions and can extend credit to members (not exceeding 30 percent of the balance).
  - Provides financial education to members approaching retirement age.
- Staff financial-sector recommendations:
  - Banking Commissioner should conduct on-site examinations and a non-performing asset review, with PFTAC assistance.
  - Promote financial literacy and strengthen banking supervision.
  - Authorities interested in cooperation with a foreign bank to facilitate international banking services.

### 6. Baseline and adjustment fiscal scenarios (Box 2)
- Baseline scenario (summary):
  - Moderating fishing revenues and continued elevated recurrent spending pressures result in persistent budget deficits over the medium term.
  - Baseline includes continued climate change mitigation investment of 2 percent of GDP annually.
  - Under baseline, CIF expected to decline to below the 16 percent sustainable floor; DSA (2016-36) indicates Tuvalu remains at high risk of debt distress, with a breach of indicative thresholds towards the end of the projection period.
- Adjustment scenario (summary and measures):
  - Target a small structural fiscal surplus (around 1 percent of GDP) over the medium-to-long term.
  - Cautious fishing license fee assumption: realistic A$20 million range.
  - Spending restraint measures:
    - align wage growth to productivity gains;
    - public enterprise reforms to limit budget subsidies;
    - increased efficiency of recurrent spending including better targeting and tracking of TMTS and scholarships.
  - Outcomes: maintain CIF above sustainable threshold, allow re-investment of TTF distributions to build towards A$200 million by 2020, reduce longer-term borrowing and debt distress risks.
  - Suggested technical rule: adjust baseline assumption for license fees using a six-year moving average (t-4 to t+1).
- Selected fiscal figures (In percent of GDP) — Fiscal Adjustment Scenario table (preserve numbers exactly):
  - Total Expenditure: 86.8 116.3 123.2 112.6 111.1 109.4 109.0 107.7
  - o/w Wages and salaries: 36.1 37.4 39.9 39.7 39.0 38.4 38.1 37.8
  - Purchases of goods and services: 20.6 26.0 25.5 25.5 25.2 24.7 24.4 24.2
  - Transfers (TMTS, scholarships, CSO, grants and subsidies)1/: 19.7 37.1 31.5 31.5 31.0 30.4 30.1 29.8
  - SDE (including climate change mitigation expenditure): 9.2 13.3 23.9 13.5 13.5 13.5 13.5 13.5
  - Fiscal Balance (Adjustment): 36.3 7.2 1.4 0.7 0.4 0.8 0.4 1.5
  - Fiscal Balance (Baseline): 36.3 7.2 -2.7 -4.2 -5.3 -5.6 -5.7 -4.4
  - Consolidated Investment Fund (Adjustment)2/: 24.3 30.8 30.8 30.4 30.4 29.8 29.8 29.5
  - Consolidated Investment Fund (Target balance): 22.4 23.5 24.0 24.6 25.3 25.9 26.5 27.2
  - Notes: 1/ Includes Cyclone Pam-related spending (estimated at 5 percent of GDP in 2015). 2/ Includes unspent balances in 2015 tranferred to the Tuvalu Development Fund.
- Box 2 conclusions:
  - Baseline: CIF balance falls below 16 percent maintained value of TTF; reserves coverage below 6 months of imports; DSA indicates high risk of debt distress.
  - Adjustment: recurrent expenditure restraint to maintain space for climate resilient investment; target small structural surplus (~1 percent of GDP); less external borrowing and reduced debt distress risk.

### 7. Public enterprise reform and PEs’ financials
- Challenges and priorities:
  - PEs hampered by below-cost tariffs, payment arrears, weak management capacity; majority require annual subsidies and capital injections.
  - Public Enterprise Reform Management Unit suffers vacancies and high turnover.
  - Reform priorities: improve corporate governance; clean up balance sheets on sound accounting; clear unpaid taxes; define and cost remaining social responsibilities.
  - Sale of Vaiaku Lagi Hotel progressing; TCS deterioration with arrears around 4 percent of GDP.
- Consolidated 2014 PE financial snapshot (In thousands of Australian dollars):
  - Revenue: 11,418
  - Profit/(Loss): 486
  - Assets: 53,493
  - Debt: 35,635
  - Equity: 11,086
  - Equity Ratio: 21%
- TEC losses (without subsidies):
  - $1.37 million in 2012
  - $1.80 million in 2013
  - $1.41 million in 2014

### 8. Fisheries sector (Annex I)
- Resource importance:
  - EEZ about 900,000 square kilometers (almost 28,000 times land area).
  - Tuna resources abundant and boosted during El Nino-Southern Oscillation.
  - Fish constitute a large share of exports and important source of food.
- Vessel Day Scheme (VDS) and revenues:
  - PNA VDS established in 2010; access fees increased; fishing license fees reached 60 percent of GDP in 2015.
- U.S. Treaty and fishing-day returns:
  - Revised treaty in principle expects returns of over US$14,000 per fishing day (compared to just over US$11,000 per fishing day in 2016) and last six years—subject to formal endorsement; planned to come into effect from 2017.
- Risks and constraints:
  - Fishing license fees volatile; market conditions, climate change, regional cooperation failures, and overfishing could reduce revenues.
  - Limited domestic value-adding due to transport, storage, private sector capacity, access to credit, and technical constraints.

### 9. Climate change investment (Annex II)
- Physical trends:
  - Annual change in sea levels accelerated from around 1mm per year in the 1980s to an estimated 5mm per year since the early 1990s.
- Current measures and spending:
  - In 2015, authorities spent an estimated 2.2 percent of GDP (roughly A$1m) on climate-change infrastructure projects (budgetary expenditures only).
  - World Bank estimates climate-proofing costs at 2 percent of GDP per year over the long term, mostly capital expenditures.
- Financing implications:
  - Near term financing will draw down CIF and TSF.
  - Donor financing expected to average more than 20 percent of GDP over 2022-2036.
  - Under the baseline scenario: fiscal balance projected to fall to an average deficit of 6 percent of GDP in 2016-2036; public sector debt to rise from 58 percent of GDP in 2015 to 70 percent in 2036.
- Institutional developments:
  - Asset Management Framework and Climate Change and Disaster Policy Unit to track and coordinate investments.

### 10. Debt, DSA, and stress tests
- Debt stock and composition (end-2015):
  - Total public and publicly guaranteed debt: US$19 million, equivalent to 58.2 percent of GDP.
  - External debt: US$17.8 million (54.5 percent of GDP).
  - Domestic debt: US$1.2 million (3.8 percent of GDP).
- DSA conclusions:
  - Tuvalu remains at high risk of debt distress.
  - Baseline: budget moves into deficit from 2016; public and external debt-to-GDP fall below thresholds in medium term as buffers drawn down but breach thresholds again in long run.
  - Adjustment scenario targeting small structural surplus lowers the risk of debt distress and allows buffers to remain above prudent levels.
- Stress-test findings:
  - One-time 30 percent nominal depreciation and shocks to growth/exports would cause external debt indicators to breach thresholds for prolonged periods.
  - Two spikes in debt service profile in 2021 and 2027 related to one-off repayments for the Korean joint venture fishing vessel and a DBT equity injection.
  - Selected stress-test series and indicators preserved exactly as reported in source (numerical series and table excerpts included in source).

### 11. External sector, exchange rate, and competitiveness
- REER and reserves:
  - REER has depreciated by about 12 percent since peak in early 2013, mainly due to weakening of the Australian dollar.
  - Reserves (sum of CIF and liquid foreign assets held by NBT) increased to 7-8 months of imports in 2013-15; projected to decline to below 6 months in the medium term under baseline.
- Exchange system:
  - Tuvalu is an Article XIV member but does not maintain exchange restrictions; authorities considering Article VIII obligations.
  - Use of the Australian dollar as legal tender remains appropriate.
- Competitiveness constraints:
  - Remoteness, high transportation costs, lack of scale, weak human capital, and limited private sector lead to weak competitiveness.
  - Real exchange rate plays a limited role in current account developments, which are driven by fishing and internet licensing fees and donor flows.

### 12. Public financial management, statistics, and technical assistance
- PFM reforms and achievements:
  - Revenue and Expenditure Review Committee established; Fiscal Ratios approved by Cabinet; revised Financial Instructions endorsed to regulate CIF target of 16 percent of TTF maintained value.
  - Centralized commitment control procedures introduced; improved oversight of fisheries revenues.
- Data gaps and statistics:
  - National accounts, GFS, and monetary statistics remain weak; CPI quarterly and of reasonable quality.
  - Tuvalu began participating in GDDS in 2013 and joined e-GDDS in May 2015.
  - Monetary and financial statistics are not produced; balance sheets from NBT and DBT used by mission.
- Technical assistance:
  - PFTAC and ADB provided TA across revenue administration, national accounts, PFM, and banking supervision.
  - Authorities requested further PFTAC assistance for on-site bank review and improved reporting.

### 13. Authorities’ views and policy priorities
- Authorities broadly agree with staff’s outlook and risks; view A$18-20 million projection for fishing license fees as conservative but prudent and see upside risks.
- Authorities aim for A$200 million in TTF by 2020 (380 percent of projected 2020 GDP).
- Policy priorities:
  - Public enterprise reform and revival of Tuvalu Cooperative Society (TCS).
  - Sustaining climate change investment.
  - Strengthening fiscal sustainability and fiscal frameworks.
  - Improving access to global climate financing and meeting accreditation and fiduciary standards.

### 14. Key statistics and projections (selected figures preserved exactly)
- Population (2014): 9,893
- Poverty rate (2010): 26.3 percent
- Per capita GDP (2014 est.): US$3,827
- Life expectancy (2014): 66 years
- Primary school enrollment (2006): 100 percent
- Secondary school enrollment (2001): 79.5 percent
- Real GDP growth (2012–2017): 2012: 0.2; 2013: 1.3; 2014: 2.2; 2015: 2.6; 2016: 4.0; 2017: 2.3
- Consumer price inflation (2012–2017): 2012: 1.4; 2013: 2.0; 2014: 1.1; 2015: 3.2; 2016: 3.5; 2017: 2.9
- Fishing license fees (percent of GDP): 2012: 21.8; 2013: 45.4; 2014: 32.0; 2015: 60.9; 2016: 53.2; 2017: 43.0
- Tuvalu Trust Fund (A$ million): 2012: 131; 2013: 141; 2014: 144; 2015: 149; 2016: 151; 2017: 155
- Consolidated Investment Fund (A$ million): 2012: 4.5; 2013: 12.2; 2014: 24.3; 2015: 30.8; 2016: 28.9; 2017: 26.2
- Gross official reserves (millions): 2012: 27.5; 2013: 37.9; 2014: 41.0; 2015: 46.4; 2016: 42.7; 2017: 41.3
- Current account balance (percent of GDP): 2012: 6.6; 2013: 0.5; 2014: 8.0; 2015: 3.3; 2016: -1.8; 2017: -2.7
- Public debt (gross, percent of GDP): 2012: 25.9; 2013: 57.2; 2014: 64.4; 2015: 58.2; 2016: 53.7; 2017: 44.3
- Banking sector (assets A$ million, selected): 2007: 38.4; 2008: 46.0; 2009: 41.4; 2010: 41.1; 2011: 42.8; 2012: 44.3; 2013: 50.4; 2014: 54.2; 2015: 55.3
- Banking sector (loans and advances gross A$ million, selected): 2007: 23.7; 2008: 27.0; 2009: 19.8; 2010: 20.7; 2011: 20.8; 2012: 19.5; 2013: 18.1; 2014: 15.5; 2015: 15.8

*Source: IMF staff report chapter on Tuvalu (content unit: _cr16323).*

### 1. Climate Change and Te Kakeega III - Tuvalu’s New National Strategy for Sustainable

### 1. Climate Change and Te Kakeega III - Tuvalu’s New National Strategy for Sustainable Development, 2016-2020

### Context: small, remote, and climate-vulnerable
- Population of some 10,000 people living on 11 low-lying atolls on a total land area of 26 square kilometers.
- Majority of population: 57 percent lives on Funafuti atoll.
- Average land height: less than 3 meters above sea level; sea water flooding occurs frequently and is expected to become more frequent and extensive.
- Tuvalu classified as a fragile state in the context of projected sea level rise under the United Nations Framework Convention on Climate Change.
- Exclusive Economic Zone (EEZ): 900,000 square kilometers; contains substantial tuna fish stocks (renewable but subject to sustainability conditions).
- Per capita income: US$3,800.
- Key constraints: absence of a central bank, use of Australian dollar as legal tender, limited policy space (fiscal policy is the only macro policy lever), small domestic market limiting private sector development, high cost of providing basic government services to a dispersed population.

### Te Kakeega III (TKIII) — development priorities and climate focus
- TKIII theme: “Protect and Save Tuvalu.”
- Builds on TKII (2005-15) and aligns with the UN Sustainable Development Agenda toward meeting development goals by 2030.
- New priority areas include: climate change; environment; urbanization and migration; oceans and seas.
- Policy Reform Matrix (PRM): formulated with development partners; first three phases (2012-15) concluded; progress to be evaluated and new targets formulated during 2016.
- Institutional response: establishment of a “Climate Change and Disaster Policy Unit” within the Office of the Prime Minister to integrate climate change resilience into national policies, contingency planning, early warning systems and communication protocols.
- Climate mitigation cost cited in TKIII: about 2 percent of GDP annually to build adaptive capacity by climate-proofing critical infrastructure, adopting better early-warning systems, and policy planning.
- TKIII notes climate adaptation measures will involve infrastructure projects with large up-front capital and long-term maintenance costs.
- Tuvalu energy policy targets:
  - 100 percent renewable energy by 2025;
  - reducing total greenhouse gas emissions from energy consumption to 60 percent below 2010 levels by 2025;
  - further reductions from other sectors such as agriculture conditional on access to needed technology and finance.
- Climate finance avenues under consideration: Green Climate Fund, Adaptation Fund, Least Developed Country Fund, Special Climate Change Fund, Global Environment Facility.
- Tuvalu’s share of global greenhouse gas emissions: 0.000005 percent (statistically insignificant).

### Recent developments, outlook, and risks
- Cyclone Pam (March 2015): affected 40 percent of the population; damages and losses estimated at A$14 million, or around 33 percent of GDP (post-cyclone rapid assessment covered agriculture, fisheries and infrastructure).
- Immediate fiscal response prioritized: food security, recovery and reconstruction spending funded by development partner grants and drawing on buffers including the Consolidated Investment Fund (CIF).
- Macroeconomic outlook near-term:
  - Real GDP growth estimated at 2.6 percent in 2015.
  - Real GDP growth projected to rise to 4 percent in 2016 due to large government-funded infrastructure projects (Viaiku Lagi waterfront reclamation and school improvements) and recovery spending.
  - Inflation: 3.2 percent in 2015; expected to rise to 3.5 percent in 2016.
  - Medium-term real growth projected to moderate to around 2 percent.
  - Medium-term inflation expected to remain in the 2-3 percent range.
- Long-term risks: rising sea levels, droughts, ocean acidification may damage infrastructure, erode coastlines, and reduce output potential.
- Literature on natural disasters and long-run growth: mixed evidence; cited references include Cabezon et al. (2015) and Cavallo and Noy (2010) (descriptions provided in text).

### Fiscal developments and projections
- Fiscal surplus in 2015: staff estimates a surplus amounting to 7¼ percent of GDP after accounting for transfers of unspent budget allocations to the Tuvalu Development Fund (TDF).
- Key revenue drivers in recent years:
  - Fishing license fees: record A$26.5 million in 2015 (60 percent of GDP, and over half of total revenues).
  - “.tv” internet domain license fees: about 15 percent of GDP (contracted in U.S. dollars).
  - Donor grants: 18 percent of GDP in 2015.
  - Tax revenue: around 19 percent of total revenue.
- Factors supporting fishing license revenue: introduction of the regional Vessel Day Scheme (VDS) under the Nauru Agreement in mid-2012; El Niño conditions attracted tuna migration; depreciation of the Australian dollar (real effective exchange rate depreciated by over 10 percent in the past two years) increased A$ revenue converted from U.S. dollar contracts.
- Expenditure pressures:
  - Reconstruction spending after Cyclone Pam elevated 2015 spending.
  - Recurrent expenditures rising: Tuvalu Medical Treatment Scheme (TMTS), overseas education scholarships, and civil service wages.
  - TMTS and demographics: TMTS expenses increased as overseas referrals rose, linked to an aging population; UNFPA projects share of population over 60 to rise from 9 to 13 percent between 2015-25.
  - Education scholarships spending increased from 5 percent of GDP in 2012 to 8½ percent of GDP in 2015.
  - Civil service wage bill increased from 32 percent of GDP to 37½ percent of GDP.
  - Subsidies for public enterprises: around 2 percent of GDP in 2015.
  - Special development expenditures (including capital investment) estimated at 13 percent of GDP in 2015; staff estimate around 2 percent of capital spending in 2015 related to climate change mitigation.
- Fiscal projections:
  - 2016 fiscal position: expected to turn into a small deficit; staff projects a deficit of around 2¾ percent of GDP in 2016 (smaller than the budgeted deficit of 13 percent owing to under-spending on special development expenditure).
  - Drivers of 2016 deficit: one-off Cyclone Pam recovery expenditures (5 percent of GDP), spending of accumulated project balances in TDF, one-off A$5 million Tuvalu Survival Fund (TSF) allocation, and strong growth of recurrent expenditures.
  - Fishing license fees projected around A$25 million in 2016.
  - Fishing license revenue expected to moderate to around A$20 million starting in 2017 as El Niño wanes; this level aligns with recent historical averages since the VDS introduction and is recommended as prudent budgeting in TKIII.
  - With fishing license revenues returning to recent averages and elevated recurrent spending, the budget is projected to remain in deficit over the medium term.
- Specific fiscal table excerpts (percent of GDP), 2012–2016 (selected items):
  - Revenue and grants: 84.3, 107.5, 123.1, 123.5, 124.5 (for 2012–2016 Est./Proj. row).
  - Of which: Tax revenue: 15.0, 19.0, 18.0, 19.4, 17.1.
  - Of which: Fishing license fees: 21.8, 45.4, 32.0, 60.9, 53.2.
  - Of which: ".tv" license fees: 9.6, 11.0, 10.9, 14.4, 13.8.
  - Of which: Grants: 27.8, 24.6, 49.0, 18.0, 32.9.
  - Expenditures: 75.0, 81.1, 86.8, 116.3, 127.3.
  - Of which: Wages and salaries: 31.9, 32.2, 36.1, 37.4, 43.2.
  - Purchases of goods and services: 20.1, 21.3, 20.6, 26.0, 25.8.
  - Transfers (TMTS, scholarships, CSO, grants and subsidies): 16.3, 19.9, 19.7, 37.1, 32.1.
  - Special development expenditures: 6.2, 7.4, 9.2, 13.3, 23.9.
  - Overall balance: 9.3, 26.3, 36.3, 7.2, -2.7.

### Tuvalu Trust Fund, CIF, TSF, and external sector
- Tuvalu Trust Fund (TTF) value in 2015: around A$148 million (340 percent of GDP), exceeding the Fund’s “maintained value” by A$5 million.
- Consolidated Investment Fund (CIF) balance at end-2015: A$26 million, above the target CIF balance of 16 percent of the maintained value of the TTF.
- Tuvalu Survival Fund (TSF): established to finance recovery and rehabilitation from climate change impacts and adaptation projects; governance structure and disbursement procedures still under discussion; 2016 budget included A$5 million allocation to TSF (around 10 percent of GDP).
- Green Climate Fund (GCF) application: government application for improving outer-island coastal protection was approved; disbursement schedule under discussion; project involves a long-term US$36 million grant and an estimated US$3 million government contribution.
- Balance of payments and reserves:
  - Strong fishing license fees and donor inflows contributed to gross reserves covering around 7 months of imports and expected to remain comfortable in 2016.
  - Current account surplus: reached 7½ percent of GDP in 2015.
  - Small current account deficit expected in 2016 due to increased government consumption.
  - Reserve coverage ratio expected to decline over the medium term as government deficits rise.
- Labor market: Tuvalu’s merchant seamen labor market collapsed in recent years due to increased international competition, limiting remittance income.

*Tuvalu — International Monetary Fund.*

### 11.      The financial sector remains saddled with substantial non-performing loans. Owing to

### _cr16323 - 11.      The financial sector remains saddled with substantial non-performing loans. Owing to

### Financial sector overview and key findings
- Financial sector structure:
  - Two banks: National Bank of Tuvalu (NBT) with around 90 percent of total banking sector assets and the smaller Development Bank of Tuvalu (DBT), plus the Tuvalu National Provident Fund (TNPF).
  - Resource and capacity constraints have prevented establishment of an independent Banking Commission; the Banking Commission Act of 2011 was amended to allow the Minister of Finance to be the de-facto Banking Commissioner, with oversight delegated to the Permanent Secretary for Finance (with PFTAC advice).
- Non-performing loans and provisioning:
  - Both NBT and DBT remain saddled with a large share of non-performing loans (around half of the lending portfolio is nonperforming), primarily related to state-owned enterprises and a failed housing loan scheme.
  - DBT provisions amount to 58 percent of gross loans.
  - NBT has fully provisioned for bad loans.
  - An accurate estimate of bank capital adequacy is impeded by the absence of on-site supervision.
- Profitability and capital:
  - Reflecting money transfer operations, NBT has a long track record of profitability and capital appears adequate.
  - DBT will need additional capital to increase lending; subject to a detailed review, the upper range for DBT’s capital need is perhaps in the 2 percent of GDP range.
- TNPF:
  - Invests social security contributions and can extend credit to members (not exceeding 30 percent of the balance).
  - TNPF provides financial education to members approaching retirement age and is a key source of financial access.

### Risks to the outlook
- External and revenue risks:
  - Projections of fishing license fees are highly uncertain; tuna is migratory and population changes can sharply affect revenues.
  - Recent sharp increase in fishing license fees may be transitory; revenues could decline further than assumed in the baseline scenario or remain stronger than recent averages.
  - Increased volatility in Australia’s asset markets (where the TTF is invested) could imply large swings in market value and reduce transfers to Tuvalu’s budget.
  - Other external risks: donor aid volatility and further declines in remittances.
- Domestic contingent liabilities and climate risks:
  - Loss-making public enterprises and gaps in bank regulation pose contingent liabilities to the budget.
  - Climate change related risks are expected to accumulate in the longer term.
- Debt sustainability alternative:
  - In an alternative scenario, the Debt Sustainability Analysis (DSA) suggests the risk of debt distress can be reduced by targeting a small structural surplus over the medium term.

### Authorities’ views (summarized)
- Broad agreement with staff’s outlook and risks.
- Noted Cyclone Pam and establishment of the TSF created large one-off spending contributing to elevated expenditures in 2015-16 and large swings in macro aggregates.
- Health cost containment measures have not materialized due to high incidence of non-communicable diseases and difficulties recruiting specialized doctors.
- TKIII continues focus on education and scholarships; government will remain the driver of the economy given small private sector.
- Authorities view an A$18-20 million projection range for fishing license fees as conservative but prudent, and view risks skewed to the upside.
- Authorities aim to reach a balance of A$200 million (380 percent of projected 2020 GDP) in the TTF by 2020.
- Authorities recognize challenges in reducing health and wage costs and emphasize high cost of living influencing wages.
- Public enterprise reform and revival of the Tuvalu Cooperative Society (TCS) are policy priorities; a high-level working group has been established for TCS.

### Fiscal policy, public financial management, and climate change mitigation
- Overall challenge:
  - Fiscal challenges revolve around revenue volatility and long-term costs of climate change; climate change mitigation is a key policy priority.
- Staff recommended forward-looking, multi-pillar approach:
  - (i) risk assessment and risk reduction;
  - (ii) sustaining fiscal buffers;
  - (iii) international risk sharing.
- Climate change costs and planning:
  - TKIII recognizes estimated annual cost of 2 percent of GDP for climate resilience investment.
  - Integration responsibilities assigned to the Climate Change and Disaster Policy Unit within the Office of the Prime Minister.
  - The Tuvalu Infrastructure Strategy Investment Plan provides a long-term road map; establishment of an infrastructure asset register is underway.
  - The recently established Tuvalu Survival Fund (TSF) is intended to assist in climate change mitigation and recovery, though governance structure not yet specified.
- Public financial management gaps:
  - Public Expenditure and Financial Accountability self-assessment found substantial progress in accounting and financial reporting, but weaknesses remain in procurement and expenditure arrears.
  - Recommendation: clearer classification between recurrent and capital expenditures and a long-term capital budgeting framework.

### Sustaining fiscal buffers — baseline and adjustment scenarios (Box 2 and related figures)
- Key targets and thresholds:
  - CIF sustainable target: 16 percent of the maintained value of the TTF.
  - Without policy adjustment, reserves coverage could fall to below 6 months of imports over the medium term.
  - Staff recommend targeting a small structural surplus (around 1 percent of GDP) to maintain buffers and manage climate-related risks.
- Baseline scenario (summary):
  - Moderating fishing revenues and continued elevated recurrent spending pressures (civil service wages, TMTS, scholarships, public enterprise subsidies, goods and services) result in persistent budget deficits over the medium term.
  - Baseline includes continued climate change mitigation investment of 2 percent of GDP annually.
  - Under baseline, CIF expected to decline to below the 16 percent sustainable floor; DSA (2016-36) indicates Tuvalu remains at high risk of debt distress, with a breach of indicative thresholds towards the end of the projection period.
- Adjustment scenario (summary and recommended measures):
  - Target a small structural fiscal surplus (around one percent of GDP) over the medium-to-long term.
  - Cautious assumptions on fishing license fees, with realistic assumptions based on fishing yields being in the A$20 million range (around 40 percent of GDP).
  - Spending restraint through:
    - aligning wage growth to productivity gains;
    - public enterprise reforms to limit budget subsidies;
    - increased efficiency of recurrent spending, including better targeting and tracking of spending on TMTS and scholarships.
  - Outcomes: maintain CIF above sustainable threshold, allow re-investment of TTF distributions to build towards A$200 million by 2020, reduce longer-term borrowing and debt distress risks.
  - Under the structural balance approach, positive shocks to fishing license fees are saved in the CIF; CIF drawdowns can finance temporary shortfalls.
  - Suggestion to adjust baseline assumption for license fees using a six-year moving average (t-4 to t+1).
- Selected fiscal figures (In percent of GDP) — Fiscal Adjustment Scenario table (preserve numbers exactly as in source):
  - Total Expenditure: 86.8 116.3 123.2 112.6 111.1 109.4 109.0 107.7
  - o/w Wages and salaries: 36.1 37.4 39.9 39.7 39.0 38.4 38.1 37.8
  - Purchases of goods and services: 20.6 26.0 25.5 25.5 25.2 24.7 24.4 24.2
  - Transfers (TMTS, scholarships, CSO, grants and subsidies)1/: 19.7 37.1 31.5 31.5 31.0 30.4 30.1 29.8
  - SDE (including climate change mitigation expenditure): 9.2 13.3 23.9 13.5 13.5 13.5 13.5 13.5
  - Fiscal Balance (Adjustment): 36.3 7.2 1.4 0.7 0.4 0.8 0.4 1.5
  - Fiscal Balance (Baseline): 36.3 7.2 -2.7 -4.2 -5.3 -5.6 -5.7 -4.4
  - Consolidated Investment Fund (Adjustment)2/: 24.3 30.8 30.8 30.4 30.4 29.8 29.8 29.5
  - Consolidated Investment Fund (Target balance): 22.4 23.5 24.0 24.6 25.3 25.9 26.5 27.2
  - Notes: 1/ Includes Cyclone Pam-related spending (estimated at 5 percent of GDP in 2015). 2/ Includes unspent balances in 2015 tranferred to the Tuvalu Development Fund.
- Box 2 conclusions:
  - Baseline: CIF balance falls below 16 percent maintained value of TTF; reserves coverage below 6 months of imports; DSA indicates high risk of debt distress.
  - Adjustment: recurrent expenditure restraint to maintain space for climate resilient investment; target small structural surplus (~1 percent of GDP); less external borrowing and reduced debt distress risk; increased capital spending may raise imports and current account deficits but could be offset by high import content of TMTS and scholarships.

### Public enterprise reform
- Status and challenges:
  - Public enterprises hampered by below-cost tariff structures, payment arrears, weak management capacity, requiring government subsidies to operate.
  - Public Enterprise Reform Management Unit suffers vacancies and high turnover.
  - Majority of PEs require annual subsidies and capital injections; reform priorities include improving corporate governance, cleaning up balance sheets on sound accounting, clearing unpaid taxes, and defining and costing remaining social responsibilities.
  - Sale of the main hotel – Vaiaku Lagi – is progressing.
  - Tuvalu Cooperative Society (TCS) is deteriorating: sizeable arrears to suppliers and banks amounting to around 4 percent of GDP, with rapidly accumulating interest costs; a comprehensive action plan is urgently needed.

### International risk sharing and climate financing
- Ongoing efforts:
  - Tuvalu seeking access to multilateral climate financing: GCF, Adaptation Fund, Special Climate Change Fund, Global Environment Facility.
  - Increasing capacity to meet accreditation and fiduciary standards is important for timely access.
  - Tuvalu’s application to the GCF for a long-term US$36 million project to build outer island coastal protection was recently approved.
  - Exploring options for disaster insurance could spread recovery costs, though current menu of options is limited.

### Financial sector reform and access to financial services
- Supervisory and regulatory recommendations:
  - Banking Commissioner should conduct on-site examinations and a non-performing asset review, with PFTAC assistance.
  - Effective oversight is needed given high levels of non-performing loans despite some decline over past two years.
- Access to services and constraints:
  - No foreign bank presence in Tuvalu; authorities interested in cooperation with a foreign bank to facilitate international banking services (including ATM access).
  - Access hampered by lack of effective collateral (customary land ownership) and lack of financial literacy.
  - TNPF provides access to finance (up to 1/3 of a member’s contribution) and financial education.
  - NBT has maintained key correspondent banking relationships, but access to some currency clearing services is complicated.

### External assessment and competitiveness
- Real exchange rate and competitiveness:
  - The real exchange rate is broadly in line with the long-run average (no sign of significant misalignment).
  - Competitiveness remains weak due to remoteness causing high transportation costs and lack of scale increasing fixed costs.
  - Real exchange rate plays a limited role in current account developments, which are mostly driven by fishing and internet licensing fees and donor flows.
  - Continued expansion of government spending could result in increased imports and deterioration of the external position.

*Source: IMF staff report chapter on Tuvalu (content unit: _cr16323 - 11).*

### 24.      Staff followed up on outstanding jurisdictional issues and completed the assessment of the

### _cr16323 - 24.      Staff followed up on outstanding jurisdictional issues and completed the assessment of the

### Exchange system, jurisdictional issues, and AML/CFT
- Staff followed up on outstanding jurisdictional issues and completed the assessment of the exchange system in Tuvalu.
- Tuvalu is an Article XIV member but does not maintain exchange restrictions or multiple currency practices under Article XIV or Article VIII.
- The authorities are considering whether to accept the obligations under Article VIII, but have yet to reach a decision.
- Staff encourages the authorities to accept the obligations under Article VIII, Sections 2(a), 3 and 4.
- On AML/CFT:
  - The authorities joined Asia Pacific Group (APG) as an observer in 2014 and continue to strengthen their AML/CFT framework in anticipation of a future comprehensive assessment.
  - A Transactions Tracking Unit has been established in the Tuvalu Police Force to track suspicious transactions.

### Authorities’ views and financial sector oversight
- Authorities broadly agreed with staff assessment and are cognizant of the need to strengthen the banking sector.
- Authorities highlighted the role of broader financial access to facilitate credit to small and medium sized enterprises to facilitate broader-based economic growth.
- Development of mobile banking is hampered by poor connectivity.
- Authorities are looking to strengthen banking supervision, drawing on development partner expertise, and have requested PFTAC technical assistance.
- Staff recommendations for the financial sector:
  - The Banking Commissioner should conduct on-site examinations and a non-performing asset review, with the assistance of PFTAC advisors.
  - Promote financial literacy to support wider access to financial services and stimulate private sector development.

### Near-term macroeconomic outlook and risks
- The near-term macroeconomic outlook is stable.
- Real GDP growth is picking up on account of several large infrastructure projects and recovery spending following Cyclone Pam, while inflation is expected to remain stable.
- With four years of budget surpluses, fiscal buffers have been rebuilt and remain at a comfortable level.
- Risks to the outlook include:
  - Effects of climate change.
  - Sharper-than-expected decline in fishing revenues.
  - A global financial downturn, which could affect distributions to the budget from the TTF.
- There is no sign of significant exchange rate misalignment.
- Staff note: An EBA-lite style assessment of exchange rate alignment is not feasible due to data limitations and is of limited informative value given the prominent role of exogenous factors, especially the highly volatile fishing license fees and commodity prices.
- The use of the Australian dollar as the legal tender remains appropriate, given strong trade and financial linkages and limited capacity to run an independent monetary institution.

### Fiscal position, buffers, and medium-term outlook
- Fiscal developments and recommendations:
  - With a narrow and volatile revenue base, it is essential to maintain buffers at the sustainable level.
  - Without restraining the strong growth in recurrent spending under current policies, fiscal buffers are expected to decline over the medium term.
  - An adjustment scenario entailing recurrent expenditure restraint would provide fiscal space for essential climate change capital investment and allow re-investment of TTF distributions to build up balances towards the authorities’ A$200 million target by 2020.
- Staff welcomes the establishment of the TSF, subject to effective governance covenants, as a mechanism to quickly respond to the impact of natural disasters.

### Climate change, capital budgeting, and development financing
- Tuvalu’s fiscal challenges revolve around revenue volatility and sustainably meeting the long-term costs of climate change.
- Authorities’ recent initiatives:
  - Developing a climate change risk assessment framework.
  - Incorporating disaster costs into national budget planning.
- Staff recommendations:
  - Clearer classification between recurrent and capital spending to budget and monitor climate change mitigation investment.
  - A long-term capital budgeting framework is needed for effective climate change mitigation.
  - Consistent implementation of the Tuvalu Infrastructure Strategy Investment Plan is essential.
  - Improvements in the fiscal management framework will be needed to guide the medium-term budgeting process.
  - Continued progress in public financial management reform to improve the quality of spending and support additional development partner assistance.
  - Improved access to global climate change funding, supplemented by insurance and other international risk sharing facilities, will be important; meeting accreditation and fiduciary standards with development partner help is critical for timely access to financing.

### Structural reforms and public enterprises
- Tuvalu has implemented all reforms set out through a consultative process with development partners in the PRM 2012-15.
- Remaining reform priorities include:
  - Enhancing fiscal sustainability and strengthened fiscal frameworks.
  - Sustaining climate change investment.
  - Public enterprise reform, including improving corporate governance; cleaning up balance sheets on the basis of sound accounting; clearing unpaid taxes; and clearly defining and costing remaining social responsibilities.
- Higher PE profitability in the long run will increase dividend flows and ease fiscal pressures.

### Statistics, data reporting, and next Article IV
- Statistics and data reporting, particularly national accounts and balance of payments statistics, remain weak and impede economic assessments.
- Authorities should increase statistical staffing and actively seek technical assistance from the Fund and PFTAC.
- It is recommended that the next Article IV consultation take place on the current 24-month cycle.

### Key statistics and projections (selected figures preserved exactly as reported)
- Population (2014): 9,893
- Poverty rate (2010): 26.3 percent
- Per capita GDP (2014 est.): US$3,827
- Life expectancy (2014): 66 years
- Primary school enrollment (2006): 100 percent
- Secondary school enrollment (2001): 79.5 percent
- Real GDP growth (2012–2017, annual figures in Table 1 row "Real GDP growth"):
  - 2012: 0.2
  - 2013: 1.3
  - 2014: 2.2
  - 2015: 2.6
  - 2016: 4.0
  - 2017: 2.3
- Consumer price inflation (period average) (2012–2017):
  - 2012: 1.4
  - 2013: 2.0
  - 2014: 1.1
  - 2015: 3.2
  - 2016: 3.5
  - 2017: 2.9
- Government finance (Selected ratios in percent of GDP, Table 1 and Table 2):
  - Revenue and grants (2015–2017): 123.1; 123.5; 124.5; 113.3 (2017)
  - Fishing license fees (percent of GDP, Table 1 row "Fishing license fees"):
    - 2012: 21.8
    - 2013: 45.4
    - 2014: 32.0
    - 2015: 60.9
    - 2016: 53.2
    - 2017: 43.0
  - Grants (percent of GDP):
    - 2012: 27.8
    - 2013: 24.6
    - 2014: 49.0
    - 2015: 18.0
    - 2016: 32.9
    - 2017: 32.4
  - Overall balance (including grants), selected years (Table 1 row "Overall balance"):
    - 2012: 9.3
    - 2013: 26.3
    - 2014: 6.3
    - 2015: 7.2
    - 2016: -2.7
    - 2017: -4.2
- Tuvalu Trust Fund (stock, $A million, Table 1 and Table 2):
  - 2012: 131
  - 2013: 141
  - 2014: 144
  - 2015: 149
  - 2016: 151
  - 2017: 155
  - Medium-term projections (Table 2): 2018: 154.8; 2019: 158.6; 2020: 162.6; 2021: 166.7; 170.8 (listed)
- Consolidated Investment Fund (stock, $A million, Table 1):
  - 2012: 4.5
  - 2013: 12.2
  - 2014: 24.3
  - 2015: 30.8
  - 2016: 28.9
  - 2017: 26.2
- Tuvalu Survival Fund (stock, A$ million): 5.0 (2015 listed)
- Gross official reserves (Table 1, millions; Table 4 memorandum):
  - 2012: 27.5
  - 2013: 37.9
  - 2014: 41.0
  - 2015: 46.4
  - 2016: 42.7
  - 2017: 41.3
- Current account balance (percent of GDP, Table 2 / Table 4):
  - 2012: 6.6
  - 2013: 0.5
  - 2014: 8.0
  - 2015: 3.3
  - 2016: -1.8
  - 2017: -2.7
- Public debt (gross, percent of GDP, Table 1 and Table 2):
  - 2012: 25.9
  - 2013: 57.2
  - 2014: 64.4
  - 2015: 58.2
  - 2016: 53.7
  - 2017: 44.3
- Banking sector (selected items, Table 5, in A$ million):
  - Assets (2007–2015 samples): 2007: 38.4; 2008: 46.0; 2009: 41.4; 2010: 41.1; 2011: 42.8; 2012: 44.3; 2013: 50.4; 2014: 54.2; 2015: 55.3
  - Deposits (2007–2015 samples): 2007: 10.2; 2008: 12.8; 2009: 13.8; 2010: 14.9; 2011: 16.7; 2012: 18.0; 2013: 20.0; 2014: 23.3; 2015: 23.7
  - Loans and advances (gross) (2007–2015 samples): 2007: 23.7; 2008: 27.0; 2009: 19.8; 2010: 20.7; 2011: 20.8; 2012: 19.5; 2013: 18.1; 2014: 15.5; 2015: 15.8

*Source: IMF staff report content provided in the content unit.*

### Annex I. The Fisheries Sector in Tuvalu

### Annex I. The Fisheries Sector in Tuvalu

### Fisheries resource and economic importance
- Tuvalu’s EEZ of about 900,000 square kilometers is almost 28,000 times its land area.
- Tuna resources are abundant and “get boosted during the El Nino-Southern Oscillation.”
- Fish constitute a large share of Tuvalu’s exports and are an important source of food given limited and infertile land area.

### Vessel Day Scheme (VDS) and revenues
- The PNA (Parties to Nauru Agreement) controls the largest sustainable purse seine tuna fisheries area in the world and around half of the global supply of skipjack tuna.
- In 2010, PNA members established a VDS to limit purse seine fishing and allow transferability of vessel days among members.
- As a result of the VDS, access fees have increased and Tuvalu’s revenues from fishing license fees reached a record 60 percent of GDP in 2015.
- Use of fish aggregating devices is controversial because it can disrupt the VDS allocation mechanism (days based on historical catches and sustainability), prompting lobbying to ban their use in the PNA area totally or during spawning months.

### US Treaty and fishing-day returns
- The U.S. South Pacific Treaty (started in 1988) included economic assistance and, more recently, the VDS.
- In early 2016, the U.S. planned to withdraw due to rising costs; in June 2016 a new agreement in principle was reached with the Forum Fisheries Agency, planned to come into effect from 2017.
- The revised treaty is expected to provide returns of over US$14,000 per fishing day (compared to just over US$11,000 per fishing day in 2016) and last for six years—subject to formal endorsement by the U.S. and Pacific governments.

### Risks and long-term challenges
- Fishing license fees remain volatile and the recent surge may be unsustainable.
- Market conditions, climate change, failure in regional cooperation, and overfishing could erode fish stocks and premium license fees, affecting fiscal planning and livelihoods.
- Limited domestic value-adding: Tuvalu has joint ventures with foreign companies but little value addition occurs domestically owing to capacity constraints in transport and storage, limited private sector development, access to credit, and technical constraints related to fisheries value addition.

*Italic: Source: Annex I. The Fisheries Sector in Tuvalu (content unit).*

---

### Annex II. Climate Change Investment in Tuvalu

### Physical trends and risks
- Recent estimates indicate the annual change in sea levels accelerated from around 1mm per year in the 1980s to an estimated 5mm per year since the early 1990s.
- Rising sea levels reduce coastline resilience during tropical storms and other natural disasters.

### Current climate-proofing measures and expenditures
- Climate-proofing is a key policy in the medium-term fiscal framework and Infrastructure Strategy and Investment Plan.
- Investments begun include: fortifying coastlines of outer islands; refurbishing schools and government buildings as evacuation centers; upgrading communication systems.
- In 2015, authorities spent an estimated 2.2 percent of GDP (roughly A$1m) on climate-change infrastructure projects (budgetary expenditures only; additional donor-financed projects are off-budget).

### Financing and fiscal implications
- World Bank estimates climate-proofing costs at 2 percent of GDP per year over the long term, mostly capital expenditures.
- Near term financing will draw down existing fiscal buffers (the CIF and the Tuvalu Survival Fund).
- Donor financing is expected to average more than 20 percent of GDP over the period 2022-2036.
- Under the baseline scenario:
  - Fiscal balance, which averaged a surplus of over 14 percent of GDP between 2011-2015, is projected to fall to an average deficit of 6 percent of GDP in the years 2016-2036.
  - Public sector debt, which stood at 58 percent of GDP in 2015, will rise to 70 percent in 2036.

### Policy guidance and institutional developments
- Long-term planning and prioritization are needed to avoid implementation delays and higher costs from front-loading.
- The upcoming Asset Management Framework will estimate replacement costs and annual maintenance requirements and inform Infrastructure Strategy updates.
- Creation of the Climate Change and Disaster Policy Unit within the Office of the Prime Minister will track climate investment and coordinate donors.

*Italic: Source: Annex II. Climate Change Investment in Tuvalu (content unit).*

---

### Annex III. The Tuvalu Trust Fund and the Fiscal Framework

### Fund size, transfers, and role
- The Tuvalu Trust Fund (TTF) was created in 1987 with an original contribution of A$27 million and had grown to A$148 million (around 340 percent of GDP) in September 2015.
- When TTF’s market value exceeds the “maintained value” (indexed to Australia’s CPI), the excess is transferred to the Consolidated Investment Fund (CIF), which the government can draw to finance budget spending.
- The CIF is a buffer fund; authorities target a minimum CIF balance amounting to 16 percent to cover expected average downturns of four years.
- In 2016, the budget deficit will be funded by a drawdown of the CIF while broadly maintaining the target balance of 16 percent of the maintained value of the TTF.

### Management, investment strategy, and withdrawal rules
- TTF investment allocation: defensive (cash, bonds, fixed income instruments, 40 percent); diversified (assets with low correlation, 30 percent); and growth (equity and property, 30 percent).
- The TTF is professionally managed and audited annually by international firms.
- Withdrawal rules are rigid per the Agreement Concerning an International Trust Fund for Tuvalu; only in very exceptional circumstances would capital be drawn down by the government. In the 29 years of operation the capital has not been drawn down.

### Risks and pro-cyclicality
- TTF distributions can be pro-cyclical: government resources rise when market returns are high.
- Authorities have in many cases recapitalized the TTF during good times.
- Government, donors, and the TTF advisory committee have discussed modalities to make disbursements more regular and reduce pro-cyclicality.

*Italic: Source: Annex III. The Tuvalu Trust Fund and the Fiscal Framework (content unit).*

---

### Annex IV. Public Enterprise Reform

### Reform progress and institutional changes
- Policy and regulatory framework improvements (with ADB and other partners) include:
  - Establishment of the Public Enterprise Reform and Monitoring Unit in 2009.
  - Enactment of the Public Enterprises Act in 2009.
  - Removal of politicians and civil servants from public enterprise boards.
  - Timely submission of audited annual reports to Parliament for all public enterprises.
  - Merger of Tuvalu Philatelic Bureau, Tuvalu Post Office, and Tuvalu Travel Office into Tuvalu Post and Travel Office.
  - Progress on sale of the Vaiaku Lagi Hotel.

### Financial performance and government support
- Financial performance has improved but remains weak for many PEs; NBT is the only PE with a consistent track record of profits.
- TEC profitability depends on government support because tariffs are set lower than cost of supply. Without subsidies, TEC losses would have been:
  - $1.37 million in 2012
  - $1.80 million in 2013
  - $1.41 million in 2014
- In 2014, the government approved $2.35 million of additional equity for DBT, TEC and TTC; $2 million of this was used to pay off debt owed to NBT.
- Government settled its debt to VLHL which boosted that hotel’s profit and equity.
- With the exception of TEC, other PEs have positive equity. NBT is the only PE paying company tax.

### Consolidated 2014 PE financial snapshot (In thousands of Australian dollars; unless otherwise indicated)
- Revenue: 11,418
- Profit/(Loss): 486
- Assets: 53,493
- Debt: 35,635
- Equity: 11,086
- Equity Ratio: 21%
- Source: ADB (2015), Public Enterprise Specialist Report.

### Ongoing priorities
- Further progress needed to operate PEs on a commercial basis and reduce government subsidies.
- Resolve cross-liabilities (government unpaid bills to PEs and unpaid taxes by PEs).
- Contract out selected activities of the Public Works Department (PWD) and implement a rationalization strategy to improve PWD commercial and financial viability.

*Italic: Source: Annex IV. Public Enterprise Reform (content unit).*

---

### Annex V. External Sector and Exchange Rate Assessment

### Exchange rate and REER developments
- Tuvalu’s REER has depreciated by about 12 percent since its recent peak in early 2013.
- The real depreciation was mainly driven by weakening of the Australian dollar (the legal currency used in Tuvalu).
- Historically Tuvalu’s REER has moved closely with Australia’s, but has been less appreciated since the global crisis.
- There is no sign of significant exchange rate misalignment, but loose policies could increase the risk of overvaluation over the medium term.

### Reserves and import coverage
- Significant increase in the CIF from fiscal surpluses in 2013-15 pushed reserves to 7-8 months of imports.
- In the medium term, fiscal balances are expected to move into widening deficits (stagnated fishing license fees and climate-related expenditure pressures), causing the CIF to decline and imports to rise.
- As a consequence, import reserve cover is projected to decline to below 6 months in the medium term.
- Although traditional coverage suggests sufficiency, an estimate based on risk metrics suggests reserves should be kept above 7 months of imports.
- Reserves are defined as the sum of CIF and liquid foreign assets held by the National Bank of Tuvalu.

### Competitiveness and structural constraints
- Tuvalu’s competitiveness remains weak due to remoteness (high transportation cost), lack of scale (higher transaction costs), and weak human capital.
- Declining remittances point to structural weaknesses in labor market outcomes.
- Policy emphasis recommended: improve business climate, strengthen effectiveness of education and training, and take innovative approaches to explore growth opportunities.

*Italic: Source: Annex V. External Sector and Exchange Rate Assessment (content unit).*

---

### Annex VI. Tuvalu: Policy Reform Matrix (Priority Reform Areas and Progress)

### Public Financial Management (Phase I–III highlights)
- Technical assistance provided by Australia, New Zealand, ADB and IMF via PFTAC.
- Achievements (COMPLETED):
  - Public Financial Management Reform Roadmap approved.
  - Medium Term Fiscal Framework updated and maintained; Budget manual developed; Annual Budget Calendar prepared and published.
  - Monthly bank reconciliations; public accounts updated; quarterly Macroeconomic Policy Committee meetings.
  - Cabinet approval to develop a Public Procurement Policy; Procurement Policy, Procurement Act and associated regulations developed and endorsed.
  - Adherence to Tuvalu Debt Risk Management and Mitigation Policy (quarterly debt schedule and arrears update).
  - Procurement annual report for 2014 developed and Cabinet-approved.
  - Government procurement website developed and launched.

### Public Enterprise performance and private sector development (Phase I–III highlights)
- Technical assistance provided by Australia and ADB.
- Achievements (COMPLETED):
  - Community Service Obligations defined between Government and PEs with corresponding budget allocations made in National Budget.
  - All PEs except National Fishing Authority of Tuvalu completed audits and annual reports presented to Parliament.
  - Cabinet approved management contract for the Vaiaku Lagi Hotel and taskforce to finalize it; removal of public servants from PE boards (as allowed under the Public Enterprises Act 2009).
  - Cabinet approval of the PERP (Public Enterprise Reform Program) to improve commercial and financial viability of PEs and determine options (retain, absorb, privatize).
  - Cabinet approval of concession sale of the VLH, land surveyed, and preparation of sale/tender documents.
  - Cabinet approved merger of Tuvalu Philatelic Bureau, Tuvalu Post Office, and Tuvalu Travel Office.
  - Cabinet approved PWD rationalization strategy to promote contracting out of capital works to the private sector.
  - Corporate governance review of National Fishing Authority of Tuvalu and joint ventures completed, including independent review of joint venture agreements.

*Italic: Source: Annex VI. Tuvalu: Policy Reform Matrix (content unit).*

### 3. Fiscal Policy

### _cr16323 - 3. Fiscal Policy

### Fiscal policy reforms and implementation status
- Revenue and expenditure governance
  - Revenue and Expenditure Review Committee established and reports to Cabinet on the protection of social services expenditure and achievement of savings (AUS, NZL) - COMPLETED
  - Fiscal Ratios approved by Cabinet (Domestic revenue to GDP; Recurrent expenditure to GDP; Wages and salaries to domestic revenue; Tuvalu Medical Treatment Scheme to domestic revenue; Tuvalu Overseas Scholarship Scheme to domestic revenue; Primary balance to GDP; and Net Present Value of public debt to GDP) (ADB) - COMPLETED
  - The revised Financial Instructions under the Public Finance Act endorsed by Cabinet to manage, replenish, and regulate the use of the Consolidated Investment Fund (CIF), ensuring that the target CIF savings balance will be a level, which is equivalent to 16% of the maintained value of the TTF and regulated through a CIF Contributions and Savings Plan. (ADB, AUS, NZL, WB) - COMPLETED
  - Strengthened treasury commitment and expenditure control by introducing centralized commitment control procedures (WB) - COMPLETED
  - Oversight of fisheries revenues strengthened through efficient record keeping and financial reconciliation between Fisheries and Treasury Departments (WB) - COMPLETED
- Tax policy and administration
  - Increased Tuvalu Consumption Tax (TCT) compliance to 75% of TCT registered entities including 100% of public enterprises (AUS, NZL) - COMPLETED
  - Tax audit training conducted and tax audits undertaken for at least two large taxpayers (AUS, NZL, WB) - COMPLETED
  - TCT rate increased to 7% in 2013 and 10% by 2016 (4% in 2012) (AUS, NZL) - COMPLETED
- Domestic revenue and customs
  - All financial records in the customs database updated and a full reconciliation of customs revenues with Treasury records concluded (AUS, NZL) – COMPLETED

### Key public administration, health, and education measures (selected)
- Public administration
  - Public Service Reform Committee established; staff appraisal process updated; national taskforce to review wage structure established (AUS) - COMPLETED
  - Outer Island kaupule accounts updated and audited; a streamlined financial reporting framework piloted to reduce administrative burden and enable better tracking of funds (WB) - COMPLETED
- Health
  - Implementation of cost reduction measures for the Tuvalu Medical Treatment Scheme (TMTS) including accommodation and caretaker costs (AUS, NZL, WB) - COMPLETED
  - TMTS review undertaken based on analyses such as the Medium Term Expenditure Framework for Health (AUS, NZL, WB) - COMPLETED
  - Non-salary budget allocation increased on preventative health care on the 2012 outturn and 2013 budget by at least 5% (AUS, NZL) - COMPLETED
  - TMTS Policy revised, patient referral process strengthened and 2014 annual report for TMTS developed and approved (AUS, NZL) - COMPLETED
- Education
  - Ministry of Education, Youth and Sports and the Office of the Prime Minister to report to Parliament annually on the costs of implementing the scholarship programs and on adherence to the training policy (AUS, NZL, WB) - COMPLETED
  - Government limits new scholarships awards for the 2013 intake at 30 or less (AUS, NZL) - COMPLETED
  - Implementation of cost reduction measures for in-service scholarships including accompanied allowances cancellation and tighter enforcement of extensions and variations (AUS, NZL, WB) - COMPLETED
  - Non-salary budget allocation increased on primary education on the 2012 outturn and 2013 budget by at least 5% (AUS, NZL) - COMPLETED
  - Tuvalu Maritime Training Institute curriculum revised to improve employment opportunities and encourage female students (WB) - COMPLETED

### Recent debt developments and stock (end-2015)
- Total public and publicly guaranteed debt: US$19million, equivalent to 58.2 percent of GDP.
- External debt: US$17.8 million (54.5 percent of GDP).
- Domestic debt (owed to domestic banks): US$1.2 million (3.8 percent of GDP).
- Public debt by creditor (end-2015):
  - Central Government Debt — ADB: 5.2 (US$ million) / 15.8 (Percent of GDP) — Concessional: Yes
  - Development Bank Debt — EIB: 1.1 (US$ million) / 3.5 (Percent of GDP) — Concessional: No
  - Fishing Joint Venture Debt — Commercial bank: 11.5 (US$ million) / 35.2 (Percent of GDP) — Concessional: No
  - Domestic debt: 1.2 (US$ million) / 3.8 (Percent of GDP) — Concessional: No
- Tuvalu Trust Fund (TTF)
  - TTF grew from A$27 million to more than A$148 million (around 340 percent of GDP) in 2015.
  - TTF is not fully sovereign; transfers above a “maintained value” indexed to Australian CPI are decided by the TTF Board and deposited into the Consolidated Investment Fund (CIF).
  - CIF target savings balance regulated to be equivalent to 16% of the maintained value of the TTF.

### Underlying macroeconomic assumptions of the baseline
- Growth
  - Real GDP projected to grow by an average of 2.2 percent per annum over the medium term.
  - Over the long run, growth projected to average 2 percent.
- Inflation
  - Projected to reach around 3 percent in the near term and moderate to 2.2 percent in the medium run.
- Balance of payments
  - Baseline current account deficit would average around 1 percent of GDP over the medium term.
  - Fishing license fee revenues assumed to return to their historical average of roughly $A20 million.
  - Exports continue to hover around 55 percent of GDP in the medium and long term.
- Fiscal assumptions and trajectories
  - Grants will gradually decline to around 18.5 percent of GDP in the long run.
  - Expenditures compressed gradually from 116 percent of GDP in 2015 to 94 percent of GDP by 2036.
  - Overall fiscal deficit projected at 5 percent of GDP over the medium term.
  - Climate-proofing investment spending assumed around 2 percent of GDP per year over the long term.
  - Deficits financed through drawdowns of the CIF, causing balances to fall below 16 percent of the maintained value of the TTF over the medium term.

### Adjustment scenario design and outcomes
- Key assumptions
  - Wage growth aligned to productivity gains; public enterprise reform limits budget subsidies.
  - Increased efficiency in spending on TMTS and scholarships with development partner assistance.
  - Re-investment of TTF distributions to build up balances towards the A$200 million target by 2020.
  - CIF buffers maintained above the sustainable threshold (16 percent of the maintained value of the TTF).
- Policy measures
  - Reverse part of the recent recurrent spending increases through civil service wage restraint.
  - Scale back government subsidies (TMTS, scholarships and PEs) and goods and services purchases.
  - Target a small structural surplus (around 1 percent of GDP) estimated on the basis of a moving average of fishing license fees.
- Outcomes
  - Lowered risk of debt distress while maintaining fiscal space for essential climate change capital investment.
  - CIF buffers maintained at a comfortable level; debt indicators improve significantly.

### Debt sustainability findings and risks
- Debt sustainability assessment
  - The Debt Sustainability Analysis (DSA) concludes that Tuvalu remains at a high risk of debt distress.
  - Under the baseline, fiscal position moves into a deficit from 2016 onwards as recent spending is not sufficiently scaled back while revenues normalize.
  - In the medium term, external and public debt-to-GDP are expected to fall below indicative thresholds as fiscal buffers are drawn down to amortize existing debt and finance the fiscal deficit.
  - In the long run, the debt stock is expected to once again breach the indicative thresholds as fiscal buffers fall below prudent levels and external borrowing is renewed.
  - Adjustment scenario achieving a small structural surplus lowers the risk of debt distress and allows fiscal buffers to remain above prudent levels.
- Sensitivities and stress tests
  - Two spikes in the debt service profile in 2021 and 2027 related to one-off repayments for the Korean joint venture fishing vessel and a DBT equity injection.
  - Stress tests indicate high sensitivity of debt ratios to exports and exchange rate shocks.
  - A one-time 30 percent nominal depreciation would cause the debt-to-GDP ratio to stay above the indicative threshold in most of the projection period.
  - A standard shock to exports results in a breach of the debt-to-export threshold.

### Risk Assessment Matrix — key identified risks and recommendations
- Tighter or more volatile global financial conditions
  - Likelihood: M. Medium.
  - Potential Impact: Elevated market volatilities will feed through to the market value of TTF, making TTF’s transfers to the budget more uncertain.
  - Recommendation: Save most if not all investment returns, and smooth TTF transfers to the budget by targeting a longer-horizon benchmark.
- Reduced financial services by global/regional banks ("de-risking")
  - Likelihood: H High.
  - Potential Impact: With limited existing access to international banking services, Tuvalu could be severely impacted by further loss of correspondent banking services.
  - Recommendation: Strengthening banking sector oversight.
- Weaker-than-expected growth in advanced and emerging economies
  - Likelihood: M Medium.
  - Potential Impact: Slower growth and reduced demand in the Pacific would cause remittances by seafarers and seasonal workers to fall; a weakening Australian dollar would help competitiveness.
  - Recommendation: Develop human capital; foster domestic business climate; explore foreign employment opportunities.
- Lower foreign aid
  - Likelihood: M. High.
  - Potential Impact: A decline in foreign aid will substantially affect fiscal soundness.
  - Recommendation: Establish a transparent fiscal framework; conduct fiscal consolidation and build fiscal buffers; closely engage with donors to mobilize development aid.
- Lower fishing revenue
  - Likelihood: M. Medium.
  - Potential Impact: Fishing license fees decline more than projected due to changing weather conditions.
  - Recommendation: Continue implementing a medium-term framework, saving excess fishing revenue.
- Climate change
  - Likelihood: H. High.
  - Potential Impact: Increased incidence of natural events with large recovery costs and lower potential output; short-term fluctuation in fishing revenues.
  - Recommendation: Strengthen fiscal buffers; build adaptive capacity with donors’ assistance; improve debt management capacity.
- Poor governance of public enterprises and banks
  - Likelihood: H. High.
  - Potential Impact: Weaknesses pose challenges to growth.
  - Recommendation: Adopt public enterprise reforms to enhance transparency and accountability.

*Prepared jointly by the staffs of the International Monetary Fund and the International Development Association, August 26, 2016*

### 9. The authorities broadly concurred with the overall assessment of the Debt-

### _cr16323 - 9. The authorities broadly concurred with the overall assessment of the Debt-

### Authorities' observations
- The authorities, while recognizing the volatility of fishing revenues, are more optimistic about the near-term outcome, and expect revenues to be higher than staff projection in the next few years.
- They indicated that the larger of the two fishing joint ventures has remained profitable, and the probability for the government to assume the company’s debt obligation is small.

### D. Conclusions
- Tuvalu’s DSA points to a high risk of debt distress, which is the same conclusion that was drawn in the 2014 DSA.
- Under the baseline scenario, the budget would move into a deficit from 2016 onwards as spending is not sufficiently scaled back in the context of normalizing revenues.
- In the medium term, public and external debt-to-GDP levels fall below the indicative thresholds but would breach the thresholds again in the long run once the CIF balance falls below prudent levels and external borrowing is renewed.
- The debt trajectory highlights the importance of targeting a small structural fiscal surplus to lower the risk of debt distress while maintaining fiscal space to improve climate change resilience.

* _cr16323 - 9. The authorities broadly concurred with the overall assessment of the Debt-*

### 11. Stress tests show that Tuvalu’s external and public sector debt dynamics are

### 11. Stress tests show that Tuvalu’s external and public sector debt dynamics are 

### Summary of stress-test findings
- Standard shocks in DSA, particularly one-time 30 percent nominal depreciation and slowing growth and exports, would cause certain external debt indicators to breach their respective thresholds for prolonged periods.
- Public debt indicators also worsen dramatically under bound tests.
- Figure note: "Two spikes in the debt service profile in 2021 and 2027 are related to one-off repayments for the Korean joint venture fishing vessel and a DBT equity injection, respectively."

### Major scenarios and stress tests (as described)
- Baseline scenario (projections 2016-2035): charts and tables present PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service-to-exports, debt service-to-revenue, debt accumulation, grant-equivalent financing, and grant element of new borrowing.
- Alternative scenarios and bound tests (Table 3 and Table 4):
  - A1. Key variables at their historical averages in 2015-2035.
  - A2. New public sector loans on less favorable terms in 2015-2035 (assumes interest rate on new borrowing is 2 percentage points higher than in the baseline).
  - B1. Real GDP growth at historical average minus one standard deviation in 2016-2017.
  - B2. Export value growth at historical average minus one standard deviation in 2016-2017 (exports assumed to remain permanently at the lower level, current account share of GDP returns to baseline).
  - B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-2017.
  - B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 (includes official and private transfers and FDI).
  - B5. Combination of B1-B4 using one-half standard deviation shocks.
  - B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 (depreciation defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent).
  - Table 4 Additional bound tests: B4. One-time 30 percent real depreciation in 2016; B5. 10 percent of GDP increase in other debt-creating flows in 2016.

### Key quantitative indicators (selected figures preserved exactly as in source)
- PV of external debt (selected projection cells shown in Table 1a): "......73.972.463.253.643.835.628.16.834.0"
- PV of PPG external debt in percent of exports (selected): "......129.1129.2116.6100.479.364.650.812.058.6"
- PV of PPG external debt in percent of government revenues (selected): "......99.768.669.066.255.145.436.18.949.0"
- PPG debt service-to-revenue ratio (in percent) (selected): "2.22.02.36.57.17.78.67.26.90.70.2"
- Total gross financing need (Millions of U.S. dollars) (selected): "-4.8-0.6-6.5-0.43.33.94.33.93.21.77.6"
- Nominal GDP (Millions of US dollars) (mem. items): "39.938.437.332.732.333.835.136.537.845.165.3"
- Grant-equivalent financing (in percent of GDP) (reported in Table 1a for later years): "30.423.627.6"
- Grant-equivalent financing (in percent of external financing) (Table 1a): "92.786.891.6"
- Staff macro assumptions (selected):
  - Real GDP growth (in percent): "0.21.32.22.61.94.54.02.32.32.22.02.62.12.22.1"
  - GDP deflator in US dollar terms (change in percent): "1.3-4.9-5.2-14.62.49.9-4.82.31.61.61.60.41.61.61.6"
  - Effective interest rate (percent) 5/: "1.52.30.91.81.50.41.91.92.02.22.42.12.50.01.0"
  - Growth of exports of G&S (US dollar terms, in percent): "68.5-11.0-4.3-14.232.255.7-4.33.07.73.73.92.84.73.94.0"
  - Government revenues (excluding grants, in percent of GDP): "56.682.974.1105.591.780.979.578.577.976.769.374.8"

- Public sector debt indicators (Table 2a baseline, selected):
  - Public sector debt (central government gross debt) (selected): "25.957.264.458.253.744.336.630.324.613.111.771.2"
  - PV of public sector debt (selected): "......78.576.265.253.643.835.628.112.36.834.0"
  - Gross financing need (selected): "-7.7-24.5-34.5-0.99.811.411.310.510.415.15.78.5"
  - PV of public sector debt-to-revenue ratio (in percent) (selected): "......105.972.271.166.255.145.436.115.88.949.0"
  - Debt service-to-revenue ratio (in percent) 4/ (selected): "3.93.43.67.39.110.38.67.26.914.50.70.2"

### Observations on vulnerabilities
- "Standard shocks in DSA, particularly one-time 30 percent nominal depreciation and slowing growth and exports, would cause certain external debt indicators to breach their respective thresholds for prolonged periods."
- "Public debt indicators also worsen dramatically under bound tests."

### Policy-relevant recommendations and macro-critical reform areas (from World Bank–IMF collaboration text)
- Strengthening fiscal buffers:
  - "Maintenance of buffer assets is key to ensuring sustainability."
  - "Maintaining adequate buffer assets will require sound fiscal policy including saving of cyclical revenues and expenditure restraint, including containing wage bill pressures."
  - "There remains room to improve public financial management as well as strengthen public sector management to improve budget execution and effectiveness in public resource utilization."
- Adapting and responding to climate change:
  - "In this context, climate change can lead to both structural and cyclical fiscal costs."
  - "Explicitly recognizing the adaptation and response cost in budget will help ensure the continuity and efficiency on both spending and funding fronts."
  - "Donor financing will remain important in enhancing the country’s ability to cope with natural disasters and climate change, given that the total costs may be too high for small states like Tuvalu to fully internalize by building buffers."
- Exploring opportunities for poverty reduction, job creation, and private sector development:
  - "Adequate education and training need to be provided for Tuvaluans to better utilize overseas job opportunities and to reduce rising poverty."
  - "Strengthening oversight on the financial sector will also facilitate improved access to finance and private sector activities."
- Strengthening public service delivery:
  - "The Government of Tuvalu in the Te Kakeega III and the medium term reform agenda identified improving service delivery in the health and education sectors as key objectives."
  - "The Government is continuing reforms to improve allocative and technical efficiency as well as to ensure sector financing sustainability."

*Sources: Country authorities; and staff estimates and projections.*

### 2012. Public procurement reforms supported by ADB have resulted in competition among suppliers,

### _cr16323 - 2012. Public procurement reforms supported by ADB have resulted in competition among suppliers,

### ADB-supported reforms, projects, and technical assistance
- Public procurement reforms supported by ADB have resulted in competition among suppliers, cost-savings, transparent procurement proceedings, and improved public confidence in the use of public finances.
- Reforms to contract out selected construction works currently undertaken by the Public Works Department and privatize the government-owned hotel aim to:
  - reduce the drain from ad hoc government subsidies on the national budget,
  - attract greater private sector participation, and
  - generate employment.
- Improvements to the management and maintenance of government’s fiscal buffer fund will help ensure long-term macroeconomic stability and economic self-sufficiency.
- ADB approved preparatory work in July 2015 for the proposed Outer Island Maritime Infrastructure Project to rehabilitate and improve maritime infrastructure in selected outer islands of Tuvalu and improve safety, efficiency, and sustainability of maritime transportation between Funafuti and the eight outer islands.
  - Project cost: likely to cost around $25 million.
  - Expected approval: late 2016.
- ADB technical assistance supported public financial management, governance, education, and capacity development in Tuvalu.
- Tuvalu also benefitted from regional technical assistance in economic management, audit capacity, aviation safety, private sector development, infrastructure planning, climate change, and safeguards.

### Future directions and financing
- Introduction of a base annual allocation from January 2015:
  - $3.0 million base annual allocation for small developing member countries from January 2015.
  - Allocation will double to $6.0 million in 2017.
  - This increase has boosted ADB’s scope for investment opportunities in Tuvalu.
- Cyclone Pam (mid-March 2015) impacts and recovery financing:
  - Cyclone Pam caused significant damage to agriculture and infrastructure, estimated at over $15.0 million.
  - The Tuvalu Recovery and Vulnerability Reduction Plan requires over $70.0 million to implement.
  - ADB will seek approval for the proposed Outer Island Maritime Infrastructure Project in 2016 to support recovery and resilience.
- Medium-term ADB focus:
  - transport sector (upgraded port facilities to improve safety and efficiency of outer island transportation),
  - strengthening public sector management to help sustain good fiscal management,
  - exploration of regional approaches to information and communication technology, disaster risk management, and climate change.

### PFTAC strategy, technical assistance, and capacity building (2012–2016)
- PFTAC TA emphasis:
  - Moderate TA concentrated in revenue and statistics sectors.
  - On-the-job assistance in revenue administration after completion of an ADB project that supported PFTAC-designed reforms.
  - Assistance to develop national accounts and balance of payments statistics to meet IMF membership requirements.
  - PFTAC provided TA in 2012 to develop a PFM Reform Roadmap.
- Public Financial Management (PFM):
  - 2012: support to develop a PFM roadmap prioritizing weaknesses identified in the 2011 PEFA (1.2).
  - 2014: PFTAC provided TA to rewrite Tuvalu's Financial Instructions.
  - 2015: PFTAC assisted Ministry of Finance officials to conduct a PEFA Self-Assessment and revise the 2011 Roadmap; Self-Assessment identified many improvements since the 2011 PEFA.
  - Ongoing collaboration anticipated with the Australia-Department of Foreign Affairs and Trade funded Budget Advisor on medium-term budget planning and forecasting, including asset repair/replacement financing.
- Revenue administration:
  - The Pacific Technical Assistance Mechanism (PACTAM) supported the Inland Revenue Department with a three year placement of a revenue advisor, reducing reliance on PFTAC TA.
  - PACTAM objectives: (a) on-the-job training in tax audit; (b) strengthening debt and returns management; (c) mentoring and advising the Director of Inland Revenue with technical tax advice.
  - PACTAM scaled down from a full-time advisor to quarterly short term expert visits as progress was made.
  - Authorities requested a PFTAC review to assess current revenue administration performance and identify future reform priorities.
- Statistics:
  - PFTAC resumed regular assistance on national accounts compilation (4.1), taking over from SPC (since 2010).
  - National accounts TA missions: February 2015 and January 2016 to incorporate major administrative and survey data sources, improve methods and build capacity.
  - Capacity hampered by staff absence; sole compiler embarking on long-term study leave, making productive outlook uncertain.
  - Balance of payments support was covered by the Japan Administered Account (JSA) Project, which concluded in October 2015; further support arrangements need scoping.
- Financial sector supervision:
  - PFTAC reviewed the Banking Commissions Act and recommended changes; the Act was amended in 2015.
  - Banking Commission and Banking Commissioner’s position remain; if no appointment, Minister of Finance or designee serves as Commissioner. The Minister appointed the Permanent Secretary who will also hold the Banking Commissioner’s position.
  - Two PFTAC TA missions in 2015 to review and assess the banking sector.
  - Given lack of in-country capacity, establishment of a basic on- and off-site supervision office will be problematic and will require TA resources.
  - PFTAC drafted a basic set of prudential reporting and held workshops with the Ministry of Finance and the local bank on implementation.
  - Next step: follow-up TA to perform an on-site review of the Bank of Tuvalu and require regular reporting of financial data.
- Macroeconomic support:
  - No direct macroeconomic support currently envisaged; TTFAC and ADB’s Public Expenditure Management TA are leading in these areas.

### Data adequacy, statistical issues, and reporting (As of August 1, 2016)
- General:
  - Data provided to the Fund have serious shortcomings that significantly hamper surveillance, most serious in national accounts and monetary statistics.
  - PFTAC and the IMF Statistics Department (STA) provided TA to the Central Statistics Division (CSD) of the Ministry of Finance; additional staff training is needed.
- National accounts:
  - Compilation methodology gradually improving with PFTAC assistance.
  - Need to improve source data for national accounts.
- Price statistics:
  - Consumer price index (CPI) is the only price index compiled; CSD produces a quarterly CPI that is timely and of reasonable quality.
  - CPI expenditure weights were revised in 2011 based on the 2010 Household Income and Expenditure Survey.
  - Ideal practice: weights should be not more than five years old.
- Government finance statistics (GFS):
  - Tuvalu neither compiles nor publishes GFS data.
  - Ministry of Finance issues monthly fiscal statements (central government) and applies IPSAS (cash) and IFRS (accrual) accounting standards for all public sector entities.
  - Classifications of some accounts, particularly capital spending, need improvement to align with international standards.
  - Previous TA compiled draft GFS and COFOG tables for budgetary central government.
  - Follow-on steps: automation within the financial accounting system and collection of source data to fill gaps in debt and aid data.
  - Staff resource levels impede efficient and effective GFS compilation.
- Monetary and financial statistics:
  - Tuvalu uses the Australian dollar as legal tender and does not have a central bank.
  - Monetary and financial statistics are currently not produced in Tuvalu.
  - Balance sheets from the National Bank of Tuvalu and the Development Bank of Tuvalu were used by the Article IV mission to produce monetary data on the two banks.
- Financial sector surveillance:
  - Tuvalu does not compile Financial Soundness Indicators (FSIs).
- Balance of payments and IIP:
  - External Sector Statistics (ESS) improved with IMF TA under the JSA Project.
  - Balance of payments and IIP data are compiled annually following BPM6.
  - Compilation irregular due to reliance on a lone CSD compiler.
  - Shortcomings remain in coverage of the nonfinancial private sector, FDI, exports, and debt-related transactions and positions.
- Data Standards and Quality:
  - Tuvalu began participating in the General Data Dissemination System (GDDS) in 2013.
  - Joined the enhanced GDDS (e-GDDS) as of May 2015.
  - No data ROSC available.
- Reporting to STA:
  - Annual balance of payments and IIP statements, both in BPM6 format, were submitted to STA in May 2014 for the first time.

### Key macroeconomic and country facts and outlook (authorities’ statement and staff assessment)
- Country characteristics:
  - Population: around 10,000.
  - Land area: 26 square km.
  - Exclusive economic zone: 900,000 square km.
  - Nine island atolls.
  - Tuvalu is one of the most remote countries in the world.
- Cyclone Pam (March 2015):
  - Estimated cost: around 33 percent of GDP.
- Short-term and medium-term outlook:
  - Short-term outlook: stable on the back of continued favorable fishing and .tv revenues and large donor-financed investments, but vulnerabilities in state owned enterprises and financial sector continue to pose challenges.
  - Expansionary fiscal policy and large infrastructure projects in 2016, including recovery spending, expected to boost growth to about 4 percent in 2016, compared to 2.6 percent in 2015.
  - Inflation: moved up from 2 percent in 2014 to over 3 percent in 2015.
  - Balance of payments: remains in surplus, driven by stronger fishing and Internet revenues.
  - Gross official reserves: expected to remain at around seven months of imports.
  - Downside risks: geographic position, heavy dependence on foreign aid and fishing revenue, and banking and fiscal vulnerabilities.
  - Upside risk identified by authorities: fishing license fees.
- Fiscal policy and reserves:
  - Tuvalu achieved its fourth consecutive year of fiscal surplus in 2015, boosting the Consolidated Investment Fund (CIF) which serves as a fiscal buffer.
  - Authorities plan to use CIF resources to finance revenue shortfalls over the next few years and will seek to contain expenditure growth.
  - Tuvalu Survival Fund (TSF) established to finance recovery and rehabilitation from climate change impacts and disasters, and investments in mitigation and adaptation projects.
  - Expected climate resilience investment need: around 2 percent of GDP annually to climate-proof critical infrastructure.
  - Authorities will continue to seek international support through mechanisms such as the Green Climate Fund.
- Structural and financial sector reforms:
  - Reform of public enterprises is a key priority to limit subsidies and increase private sector role for job creation and growth.
  - Public Sector Reform Committee working with TA to improve public sector efficiency.
  - Authorities committed to meeting international standards and strengthening AML/CFT regime.
  - Capacity constraints and shortage of qualified staff hinder improvements in the quality of statistics; authorities committed to cooperating with PFTAC and IMF staff to address this.

*Source: IMF country report content provided in the submitted document.*

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