Tuvalu: Staff Concluding Statement of the 2021 Article IV Mission

IMF News, April 26, 2021

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Published: April 26, 2021

Key findings and context

Tuvalu avoided a recession in 2020 due to swift containment measures, limited tourism spillovers, COVID-related fiscal spending financed by fishing revenues and donor grants.
As of April 23, 2021, Tuvalu had remained COVID-free.
The economy is fragile: high vulnerability to climate change, public-sector-dominated economy, and a narrow revenue base.
Uncertainty around donor commitments complicates fiscal planning.

Economic performance and outlook

2020 growth: staff estimates growth of 1 percent in 2020 compared to 13.9 percent in 2019, with 1.6 percent inflation.
2021 projection: economy expected to expand by 2.5 percent in 2021.
2022 projection: growth expected to increase to 3.5 percent by 2022.
Inflation projections: 2.0 percent in 2021 and 2.5 percent in 2022.
Partial border reopening expected at the end of 2021 at the earliest; vaccine rollout started in April 2021 but securing full population inoculation will take time.
Total public debt: estimated 9.4 percent of percent of GDP in 2020.

Fiscal outcomes and risks

2020 fiscal outcome: estimated 4.9 percent of GDP surplus.
- Fishing license revenues estimated at 56 percent of GDP in 2020, almost 30 percent higher than budgeted.
- International donors provided AUD6.2 million (or 7.8 percent of GDP) of COVID-related support, although not all utilized.
2021 fiscal projection: staff projects a fiscal balance shifting to a 3.1 percent of GDP deficit under current policies.
- Drivers: significant increase in current spending and higher infrastructure spending including planned national airline outlay of AUD13 million (or 16 percent of GDP).
Medium-term risks: plateauing fishing and internet license revenues, elevated current spending widening the general government deficit and crowding out infrastructure spending.
Downside risks include: delays in donor reform agreements affecting grant availability; weather-related shifts in tuna stocks; uncertain returns from the Tuvalu Trust Fund; weak SOE balance sheets; lack of effective financial supervision; potential loss of correspondent banking relationship.

Policy recommendations — COVID response and near-term fiscal stance

Maintain COVID-related fiscal measures conditional on the stage of the pandemic.
Expand support to vulnerable populations and the private sector in case of an outbreak.
Work with development partners to procure sufficient vaccines to inoculate the whole population.
Continue publishing COVID-related spending details on the Ministry of Finance website and conduct planned audit of COVID expenditures.

Policy recommendations — medium-term fiscal consolidation and revenue mobilization

Once the economy fully recovers, implement gradual fiscal consolidation to preserve fiscal buffers and rebuild government’s net financial worth.
Use the domestic current fiscal balance (current revenues excluding grants and fishing license fees less current expenditures) as an anchor.
Target a domestic current deficit of around 40 percent of GDP through a combination of expenditure restraint and revenue mobilization.
Build buffers in the Consolidated Investment Fund and the Tuvalu Survival Fund to protect net financial worth and finance climate adaptation and infrastructure maintenance.

Recommended expenditure measures:

Review public sector wage bill; link wage increases to performance, fiscal revenues, and inflation.
Lower spending on the Tuvalu Medical Treatment Scheme via preventive programs, tracking expenditures, and rationalizing travel of family members.
Rationalize overseas scholarships and enforce mandatory service periods and loan repayment agreements.
Review SOE subsidies and improve control of travel budget.
Conduct detailed commercial viability analysis of the new airline and establish legal framework governing the airline.

Recommended revenue measures:

Eliminate tax exemptions, including for projects financed by development partners.
Improve tax compliance and tax arrears management through sufficient staff resources and training.
Improve taxpayer services and strengthen revenue administration using effective risk management practices.
Consider a comprehensive review of the taxation system given potential impact of PACER Plus.

Public financial management reforms

Improve budget preparation with high-quality projections of grants, tax revenues, and current and infrastructure spending; follow GFSM2014 classification and presentation.
Fully implement the new Financial Management Information System; avoid supplementary budgets.
Re-institute in-year revenue and spending controls; resume compilation and publication of quarterly budget outcomes; standardize fiscal accounts classification and report data based on GFSM2014.
Continue timely annual audits of government accounts.
Improve procurement transparency: publish annual reports by the Central Procurement Unit with bidder lists, beneficial owners, contract amounts and types; conduct periodic internal procurement audits.
Develop a medium-term infrastructure maintenance plan based on the 2017 asset register, delineating routine vs capital maintenance and linking maintenance needs to annual budget appropriations.

Climate finance and resilience

Accreditation with the Adaptation Fund (2019) should facilitate accreditation with other climate financing facilities such as the Green Climate Fund.
Urgent need to increase capacity to navigate climate finance; establishing a Climate Finance Unit under the Planning, Budget and Aid Coordination Department is recommended.
Continue exploring multilateral risk sharing mechanisms such as the Pacific Island Insurance Facility (PIFIC).

Structural reforms to support private sector and diversification

Promote private sector development, improve access to finance, and enhance SOE efficiency to raise employment and growth.
Support micro-enterprises with business registration, bookkeeping, operations, licensing, taxation, and customs assistance.
Diversification measures: small-scale production for local consumption, support for subsistence agriculture, niche tourism (e.g., small cruise eco-tourism), vocational training in construction, fisheries, healthcare, and labor mobility plans.
Develop a national strategy for financial literacy and education.
Link Te Kete development plan actions to measurable, time-bound targets and to the Sustainable Development Goals (2030 horizon); finalize operational plans for line ministries and develop data collection processes to track progress.

State-owned enterprises (SOE) reform priorities

Finalize SOE reforms to improve performance; complete corporate plans for all SOEs and enforce timeliness of corporate reporting and audits.
Continue implementation of tiered electricity tariffs and review tariff structure to ensure cost recovery linked to oil prices; introduce pre-payment options and competitive bidding for fuel suppliers.
Monitor joint ventures under NAFICOT closely given past losses.
Adopt rules-based system for Community Service Obligations (CSOs), decrease CSO amounts over time, resolve government’s outstanding payment obligations to SOEs, and mandate SOEs to repay tax arrears.

Financial sector, correspondent banking, and payments

Securing a new correspondent banking relationship (CBR) for the National Bank of Tuvalu (NBT) is a priority to ensure receipt of fishing license payments, donor grants, remittances, and FX trading profits.
Strengthen NBT’s Know Your Customer due diligence and upgrade AML/CFT processes with cooperation from the Asia-Pacific Group on Anti-Money Laundering and the Fiji Financial Intelligence Unit.

Prudential regulation and supervision:

Improve capacity in the Public Enterprise Reporting and Monitoring Unit (PERMU) to conduct periodic financial analysis of banks and the TNPF.
Simplify banks’ quarterly prudential reports and streamline submission processes.
Continue close cooperation with technical assistance partners to upgrade staff skills.

Improving access to credit and financial intermediation:

Upgrade banks’ credit assessment capacity; develop a centralized credit registry with data on income, tax payments, TNPF contributions, obligations, pledged assets, and credit history; all three lending institutions should report to and access the registry.
Adopt risk-based loan pricing and adjust loan rates with the economic cycle.
Introduce a collateral framework and resolution regime for non-performing loans; codify MoU rules governing collateral seniority and recourse; review rule barring banks from accessing TNPF balances of members with defaulted obligations; develop bankruptcy legislation for households and firms.
Modernize the financial system and online banking services; Development Bank of Tuvalu digitalization plan milestones: view balance online (by end April 2021), online applications (by end July 2021), online money transfer (by 2022). Government allocated A$1 million to support digital initiatives.

Digitalization, fintech, and implementation guidance

Adopt digital technologies with private partners having strong implementation track records; avoid technology or vendor lock-ins.
Devise a comprehensive fintech development strategy to enhance financial depth, inclusion, and efficiency.
Select technological architecture that is open, promotes innovation, and avoids vendor lock-in; conduct careful cost-benefit analysis given Tuvalu’s market size.

Statistics and capacity development

Enhance statistical capacity through timely hiring of essential statistical personnel, training, and succession planning to address frequent turnover.
Continue close cooperation with PFTAC and other technical assistance providers.

IMF engagement

The IMF stands ready to continue supporting the government’s reform programs through policy advice and capacity development.
The IMF team expressed gratitude to the government of Tuvalu for cooperation during the virtual mission.

Tuvalu: Staff Concluding Statement of the 2021 Article IV Mission