Public Information Notice No. 11/56

Public Information Notice: IMF Executive Board Concludes 2011 Article IV Consultation with Kiribati

May 17, 2011

On May, 2, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kiribati.¹

Background

Kiribati has been affected by the global crisis through a fall in remittances and large decline in the value of its wealth and pension funds—the Revenue Equalization Reserve Fund (RERF) and the Kiribati Provident Fund. The spike in food and fuel prices in 2008 has already taken a toll on economic activity. Vulnerabilities to climate change, including coastline erosion, have also worsened.

After two years of contraction, the economy recovered in the second half of 2010 and inflation pressure dissipated. It is estimated to have grown by 1¾ percent for the year. Despite a weather-related drop in copra production, private sector activity appears to have picked up, especially in retail. Tourist arrivals rebounded by 20 percent compared to 2009, although from a very low base. Despite the rise in world food and fuel prices, inflation has bounced from 2008 crisis-highs into negative territory, reflecting the strong appreciation of the Australian dollar, which is used as the domestic currency, and a decline in the world price of rice. Credit growth in the overall economy declined in 2009 as economic activity stalled. But it started to pick up in the second half of 2010 as the recovery gained traction.

Fiscal policy has supported the economy during the economic downturn. Copra subsidies and civil servant wages have increased and have helped mitigate the impact of the output contraction on households. The fiscal deficit bottomed out at 20 percent of GDP in 2008, but narrowed substantially the following year as a result of expenditure compression and improved tax collection, with the introduction of a withholding tax at the source in March 2009. However, the RERF suffered substantial losses, with its assets declining from 420 percent of GDP in 2007 to 350 percent of GDP in 2009.

In 2010, the fiscal position strengthened and budget planning improved. The estimated fiscal deficit is 8 percent of GDP, down from 12½ percent in 2009. The narrowing deficit reflects a large increase in fishing licenses fees, as a result of an auction scheme introduced in September 2010. The authorities introduced a three-year budget framework with the 2010 budget. Structural reform momentum, especially in privatizing SOEs gained traction at end 2010.

The Development Bank of Kiribati’s (DBK) non-performing loans (NPLs) have been reduced by 2 percentage points as a share of total loans in the last two years, but they remain high. A new lending scheme was introduced by the Provident Fund in July 2010 to ease access to credit.

Executive Board Assessment

Executive Directors noted that the economy has recovered from the global crisis and that growth in the next few years is expected to strengthen owing to key public infrastructure projects financed by foreign assistance. Nevertheless, as a small island economy, Kiribati faces many policy challenges and is also vulnerable to external shocks, particularly climate change. A further escalation of food and fuel prices could result in higher inflation and erode past gains in poverty reduction. Directors concurred that ensuring sustainable growth and poverty reduction over the medium term and bolstering the economy’s resilience necessitates timely implementation of comprehensive structural reforms.

Directors stressed the importance of preserving the real per capita value of the Revenue Equalization Reserve Fund to ensure fiscal sustainability and intergenerational fairness. Once key public projects in the pipeline are completed, the focus should shift to fiscal consolidation, with a view to rebuilding fiscal space and addressing the long-term spending pressures arising from climate change.

Directors commended the authorities for introducing a multi-year budget framework, which should help in designing realistic fiscal plans. They looked forward to further strengthening of the medium-term fiscal framework to facilitate public planning and help guard against pro-cyclical policies.

Directors stressed that accelerating structural reforms, especially reforming the state-owned enterprises and developing the private sector are critical to ensure sustainable growth and reduce the drain on the budget. Welcoming the steps taken by the authorities to boost competition, Directors called for further efforts toward enhancing the business climate and increasing competition in the banking sector. Strengthening bank regulation and supervision and introducing a new law to improve access to land and collateral recovery are also important.

Directors noted the joint IMF-World Bank debt sustainability analysis and encouraged the authorities to continue to secure grant financing to support the country’s large development needs. They also noted that containing fiscal deficits will be essential for maintaining external stability.

Directors encouraged the authorities to continue improving the quality of macroeconomic data.