Kiribati: Staff Concluding Statement of the 2023 Article IV Mission

IMF News, February 8, 2023

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Kiribati: Staff Concluding Statement of the 2023 Article IV Mission

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• Published: February 8, 2023

Economic outlook and risks

• Recent performance and drivers
  • Real GDP grew 7.9 percent in 2021 after a contraction of 1.4 percent in 2020, supported by fiscal stimulus and recovery from COVID-19.
  • COVID-19 lockdowns in the first half of 2022 delayed large infrastructure projects and limited mobility; subsequent removal of restrictions and border reopening in August 2022 boosted activity.
  • A severe drought negatively affected the agricultural sector in 2022.
  • Real GDP growth in 2022 is estimated at 1.2 percent.
  • Inflation averaged 5.3 percent in 2022, driven by recovery in domestic demand, supply shortages, and a surge in global commodity prices.
  • The current account surplus is expected to turn into a deficit of 4 percent of GDP in 2022 because of higher import prices and lower fishing revenues.

• Projections
  • Real GDP is projected at 2.5 percent in 2023 as activity normalizes with resumption of large infrastructure projects and improved weather.
  • Medium-term real GDP growth is projected to converge to the historical average of 2 percent.
  • Headline inflation is expected to remain elevated at 8.6 percent in 2023 due to a low base in the first half of 2022 and delayed pass-through from normalizing global prices.
  • The current account is expected to return to a surplus of 9 percent of GDP in 2023, though below the historical average because of increased imports for infrastructure.

• Risks (mainly downside)
  • External: intensified Russia–Ukraine war causing food and fuel shocks; global economic slowdown; deepening geo-economic fragmentation and supply disruptions; prolonged global financial market volatility affecting returns on the Revenue Equalization Reserve Fund (RERF) and the Kiribati Provident Fund (KPF).
  • Climate change: ongoing threat to fishing revenues and economic growth; increased frequency and severity of climate events over time.
  • Domestic opportunity: reopening of the Phoenix Islands Protected Area (PIPA), if managed sustainably, could boost the fishery sector medium-term.

Fiscal policies

• Current situation and projections
  • The fiscal balance switched to a deficit in 2020 and widened to an estimated deficit of 20 percent in 2022 as recurrent spending rose while fishing revenues declined.
  • The 2023 budget maintains existing social protection spending and introduces new leave grants for private sector employees.
  • Under the staff baseline which assumes a gradual recovery in fishing revenues in 2023, the deficit is projected to be about 13 percent of GDP.

• Recommended consolidation and revenue measures
  • Rationalize the copra subsidy.
  • Improve targeting of social protection by identifying those eligible for unemployment benefits.
  • Improve efficiency of social protection delivery systems.
  • Implement the recently introduced new Income Tax Bill.
  • Eliminate tax exemptions for some SOEs.
  • Increase excise tax on tobacco and alcoholic beverages.

• Medium-term fiscal framework and RERF governance
  • Formulate a sustainable medium-term fiscal framework to better manage volatile budget components and promote recurrent expenditure stability.
  • Framework should integrate rules-based withdrawals from the RERF and include an explicit provision to cover costs of climate change adaptation.
  • Authorities should finalize drafting of the Sovereign Wealth Fund Act to strengthen governance and accountability of the RERF.

• Public financial management (PFM)
  • Continue implementation of the Integrated Financial Management Information System (IFMIS) for budget execution and strengthen cashflow management.
  • Continue publication of the Fiscal Reporting Policy and expand regular public reporting on main fiscal items.
  • Staff recommend:
  • Finalize drafting of an updated Public Financial Management Act.
  • Develop more credible budget projections by improving fishing revenue forecasts.
  • Publish fiscal reports more regularly.
  • Execute effective controls over cash balances.
  • Improve procurement controls.

• State-owned enterprises (SOEs)
  • Elevated global energy prices have worsened SOE financial difficulties; recalibrate tariffs and review tradeoffs in improving SOE financial viability while protecting vulnerable populations.
  • Strengthen SOE oversight: continue capacity building of the SOE monitoring unit to analyze and monitor SOE activities, risks, and performance.
  • Progress needed for SOEs to improve financial management and publish audited financial statements timely to enable medium-term subsidy reform.
  • Finalize a formal dividend policy to ensure SOE compliance with dividend payment obligations.
  • Explore divestment and outsourcing of SOE activities where feasible.

Structural reforms

• Objectives: boost export competitiveness, private sector investment, and inclusive growth to raise living standards and achieve the Kiribati 20-year vision.

• Priority reform areas and next steps
  • Financial sector:
  • Promulgation of the Financial Supervisory Authority of Kiribati Act (2021) and Kiribati Financial Institutions Act (2021) are important milestones.
  • Next step: establish an independent supervisor of financial institutions with adequate resources for effective regulation and supervision.
  • Export quality and diversification:
  • Potential to upgrade within existing export sectors: expand tuna processing, establish “tuna hubs”, package and upgrade copra production to coconut oil.
  • Rationalize or reform the copra subsidy/support scheme in outer islands to incentivize diversification to seaweed and aquaculture.
  • Continue investments in internet connectivity and infrastructure to boost ICT and tourism and improve government service delivery.
  • Environment and fishing:
  • Passage of the Environment Act and the new Fisheries Act in 2021 helps preserve environment while allowing sustainable resource use.
  • Next steps: develop regulations and strengthen monitoring capacity to enforce legislation.
  • Reopening PIPA to commercial fishing should be carefully designed with a fully developed marine spatial plan to ensure sustainability and preserve marine biodiversity.
  • Human capital:
  • Despite progress in primary and early childhood education, the share of young population completing upper secondary education remains low.
  • Expand technical vocational education and training to provide skills for future employment and overseas employment.
  • Anti-corruption:
  • Government established a Leadership Commission and an anti-corruption unit within the Public Service Office; progress made in investigating abuse of power.
  • Need more capacity and enforcement powers to enhance these agencies’ roles.

Capacity development

• Statistics and data
  • Priority: improve quality, timeliness, and coverage of statistics.
  • Strengthen institutional capacity to produce high-quality national accounts, government finance statistics, and financial sector data in a timely manner to support policy management.
  • Authorities plan to implement the IMF’s Enhanced General Data Dissemination System (e-GDDS) by publishing economic data on a National Summary Data Page to improve availability of timely statistics.

• IMF engagement
  • Kiribati is engaged with the IMF and development partners on economic reforms.
  • The IMF stands ready to continue supporting the government’s reform efforts through policy advice and capacity development.

The mission thanks the authorities and stakeholders for hospitality, cooperation, and constructive discussions.

Staff Concluding Statement of the 2023 Article IV Mission to Kiribati (February 8, 2023).

References

• Kiribati and the IMF
• IMF Policy Advice -- A Factsheet
• Mission Concluding Statements
• PRESS CENTER
• https://www.imf.org/en/home