IMF Executive Board Concludes 2018 Article IV Consultation with Kiribati
January 24, 2019
On January 11, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Kiribati.
Kiribati is one of the most remote countries in the world, which creates significant economic challenges. The population of about 112,000 lives on 21 islands, spread over an ocean area of 3.5 million square kilometers. This geography raises the cost of public service delivery, leading to an infrastructure gap. It limits opportunities for private sector development and diversification. Weaknesses in governance, business regulations, and access to credit exacerbate the geographical challenges. Long-run prospects are clouded by climate change.
Economic performance has been strong, both relative to Kiribati’s history and to its peers. The economy grew at an average annual pace of 5¼ percent in 2015–17, compared to 1½ percent in 2000–14. The stronger growth reflects in large part higher public spending financed by record-high fishing revenue, and donor-financed infrastructure investment. Inflation remained subdued, in line with low inflation in trading partners and international food prices but also reflecting one-off domestic factors. Credit to the private sector is estimated to have remained broadly stable.
The near-term outlook is expected to feature some moderation of recent trends. The economy is estimated to grow at a slower pace of 2¼ percent in 2018, as fishing volumes normalize. Inflation is expected to remain around 2 percent this year and increase in the medium term to 2½ percent—a pace consistent with major trading partners. The current account surplus is projected to narrow, as fishing license fees decline and imports related to development spending remain high.
Risks to the outlook are skewed to the downside. The favorable weather conditions underpinning strong fishing catches have lasted unusually long. A cyclical reversal could threaten revenues, with implications for the fiscal balance and the current account. Tighter global financial conditions could adversely affect the economy through the exposure of the RERF. Given Kiribati's high reliance on imported goods, commodity price shocks and exchange rate volatility could have an outsized impact on imports, inflation, and growth.
Executive Board Assessment [2]
In concluding the 2018 Article IV consultation with Kiribati, Executive Directors welcomed Kiribati’s strong economic performance, including an improved fiscal position. However, Directors noted that Kiribati faces significant challenges stemming from its geographical remoteness, vulnerability to climate change, and a narrow production and export base. Directors encouraged the authorities to maintain strong policies and leverage the recent gains to ensure inclusive and sustainable growth.
Directors underscored that reinforcing the fiscal framework is a key priority. They encouraged the authorities to focus on the controllable portion of the budget as a useful tool to promote expenditure stability, given the volatile fishing revenue. Directors also encouraged the authorities to adopt a rules‑based, transparent mechanism that reflects social preferences and adjusts to structural changes to govern withdrawals from the Revenue Equalization Reserve Fund. They underscored the importance of limiting the increase in the public wage bill and copra subsidies as well as avoiding a supplementary budget and instead evaluating projects in a comprehensive medium‑term framework.
Directors recognized the authorities’ efforts to improve Kiribati’s resilience to climate change. They highlighted that having an explicit provision for climate change adaptation in the budget would help mobilize resources more effectively, including from donors.
Directors emphasized that facilitating the development of a dynamic private sector is important for economic growth. They encouraged continued efforts to reform the state‑owned enterprises. Directors also recommended further improvement in connectivity through infrastructure investment, enhancement of human capital with training opportunities and employment opportunities through diversification of the economy. Facilitation of private sector access to credit by improving land registration and dispute resolution while strengthening supervision and risk management in public financial institutions is also critical. Directors considered that technical assistance from the Fund and other donors will be important in implementing the reforms as well as in enhancing the compilation of the needed data and statistics, taking into account capacity constraints.
Directors emphasized that addressing governance deficiencies would help improve efficiency, reduce vulnerabilities to corruption, and catalyze donor support. They underscored that public investment projects should be prioritized based on socio‑economic returns and encouraged implementation of public investment management assessment recommendations. Directors also highlighted the importance of transparency on fisheries management and of improved business regulations.
| Table 1. Kiribati: Selected Economic Indicators, 2013–19 | |||||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
|
|
Est. |
Proj. |
||||||
|
Real GDP (percent change) |
4.2 |
-0.7 |
10.4 |
5.1 |
0.3 |
2.3 |
2.3 |
|
Real GNI (percent change) |
14 |
14 |
19 |
-7.8 |
6.0 |
-0.5 |
-3.8 |
|
Consumer prices (percent change, average) |
-1.5 |
2.1 |
0.6 |
1.9 |
0.4 |
2.1 |
2.3 |
|
Central government finance (percent of GDP) |
|||||||
|
Revenue and grants |
104 |
158 |
151 |
118 |
131 |
123 |
114 |
|
Total domestic revenue |
64 |
89 |
109 |
84 |
92 |
91 |
72 |
|
Of which: fishing revenue |
47 |
72 |
91 |
66 |
72 |
70 |
51 |
|
External Grants |
39 |
69 |
42 |
34 |
38 |
32 |
42 |
|
Expenditures |
91 |
113 |
102 |
115 |
119 |
143 |
137 |
|
Current |
55 |
60 |
60 |
69 |
88 |
88 |
76 |
|
Development |
36 |
53 |
42 |
46 |
31 |
55 |
61 |
|
Domestic recurrent balance 1/ |
-38 |
-43 |
-41 |
-51 |
-68 |
-66 |
-55 |
|
Recurrent fiscal balance (incl. budget grants) |
12 |
34 |
52 |
19 |
12 |
9 |
1 |
|
Overall balance 2/ |
13 |
45 |
49 |
3 |
12 |
-20 |
-23 |
|
Financing |
-13 |
-45 |
-49 |
-3 |
-12 |
20 |
23 |
|
Of which: Revenue Equalization Reserve Fund (RERF) |
-4 |
-9 |
0 |
0 |
0 |
0 |
0 |
|
RERF |
|||||||
|
Closing balance (in millions of A$) |
661 |
679 |
756 |
868 |
934 |
994 |
1030 |
|
Per capita value (in 2006 A$) |
5,118 |
5,062 |
5,482 |
6,132 |
6,382 |
6,533 |
6,496 |
|
Cash reserve buffer 3/ |
|||||||
|
Closing balance (in millions of A$) |
… |
… |
133 |
145 |
188 |
234 |
180 |
|
In excess of 3-months of current spending (millions of A$) |
… |
… |
99 |
103 |
134 |
178 |
130 |
|
Balance of payments |
|||||||
|
Current account including official transfers (millions of US$) |
36 |
96 |
79 |
36 |
26 |
25 |
16 |
|
(In percent of GDP) |
19 |
53 |
46 |
20 |
14 |
13 |
8 |
|
External debt (in millions of US$) |
14 |
14 |
33 |
42 |
43 |
42 |
47 |
|
(In percent of GDP) |
8 |
9 |
20 |
24 |
23 |
22 |
23 |
|
External debt service (millions of US$) |
3 |
8 |
1 |
1 |
1 |
1 |
2 |
|
(In percent of exports of goods and services) |
12 |
37 |
4 |
4 |
6 |
3 |
7 |
|
Exchange rate (A$/US$ period average) |
1.0 |
1.1 |
1.3 |
1.3 |
1.3 |
… |
… |
|
Real effective exchange rate (period average) |
105 |
100 |
93 |
93 |
96 |
… |
… |
|
Memorandum item: |
|||||||
|
Nominal GDP (millions of A$) |
192 |
199 |
228 |
240 |
242 |
253 |
264 |
|
Nominal GDP (millions of US$) |
186 |
180 |
178 |
186 |
193 |
200 |
210 |
|
Sources: Data provided by the Kiribati authorities; and Fund staff estimated and projections. 1/ Domestic recurrent balance excludes fishing revenue, grants, and capital expenditure. 2/ Overall balance in the table is different from official budget because loans are classified as financing. 3/ Cash reserve buffer includes the government’s custodial and cash account. |
|||||||
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
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