Tuvalu: Staff Concluding Statement of the 2023 Article IV Mission
IMF News, April 25, 2023
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- Published: April 25, 2023
Economic context, outlook, and risks
- COVID containment measures were lifted at the end of 2022 following a successful vaccination strategy, but the pandemic’s economic cost has been significant.
- Growth and inflation
- Real GDP growth: "-4.3 percent" in 2020.
- Growth: "1.8 percent" in 2021.
- Growth: estimated at "0.7 percent" for 2022.
- Headline inflation: "11.5 percent" in 2022.
- Inflation projected at "5.9 percent" in 2023, slowly converging to around "2.8 percent" by 2028.
- Growth projected at "3.9 percent" in 2023.
- External position
- The external position temporarily strengthened in 2022 as COVID containment reduced import-intensive infrastructure projects, leading to a sharp increase in the current account balance; the 2022 level was broadly in line with fundamentals and desirable policy settings.
- Fiscal and domestic current balance developments
- The overall fiscal balance had an average surplus over 2020-2022 of only "around 3 percent", despite a halving of public capital expenditures from their 2019 levels.
- Purchases of goods and services rose from "19 percent of GDP" in 2019 to "31 percent" in 2022.
- Expenditures related to TOMRS and scholarships estimated at "16.6 percent of GDP" in 2022, up from "12.6 percent" before the pandemic.
- The deficit on the domestic current balance widened to "60 percent of GDP" in 2022, up from "37 percent" pre-pandemic.
- Risks
- Downside risks are high: delays in donor grants; loss of correspondent banking relationships; lack of effective financial supervision creating contingent risks; potential for higher global commodity prices increasing inflation and fiscal pressures; natural disasters and climate change affecting fishing license revenues, human and physical capital, and food and water security.
- Example cost: reconstruction after the 2015 cyclone Pam cost "over 30 percent of GDP".
Fiscal policy — recommendations and projections
- Outlook and financing
- Fiscal surplus projected to fall to "1.1 percent of GDP" in 2023 (from "8.8 percent" in 2022) due to large increases in current expenditures in the 2023 budget and the resumption of infrastructure projects.
- Domestic current balance expected to improve marginally to "-57 percent" in ratio to GDP.
- Fiscal accounts projected to move into deficit starting in 2025 and remain in deficit through to 2043 under baseline projections, implying foreign financing will eventually be required and Tuvalu is assessed to remain at a high risk of debt distress.
- Recommended fiscal framework and targets
- Staff recommend a gradual adjustment commencing in 2023 with a consolidation of "1 percent of GDP" relative to the baseline.
- Targets: achieve a current deficit of "48 percent" by 2026 and "40 percent of GDP" by 2039.
- Raise fiscal buffers (Tuvalu Survival Fund and Consolidated Investment Fund) to "6 percent of GDP" by 2043.
- Stabilize debt at "2-5 percent of GDP" from 2029 onwards.
- The domestic current balance’s endpoint in this gradual consolidation path is similar to the pre-pandemic level of "37 percent of GDP".
- Structural reforms that raise medium-term growth to "3 percent" would allow quicker attainment of the deficit target.
- Fiscal consolidation measures (expenditure and revenue)
- Expenditure measures:
- Rationalize public sector wages by linking them to performance and avoid unwarranted increases in the wage bill.
- Partially unwind the sharp increase in goods and services spending of 2021.
- Review all subsidies.
- Rationalize spending on TOMRS and overseas scholarships by exploring cost-reduction options for overseas treatments, minimizing patient wait times abroad, and enforcing scholarship conditions to ensure return of health professionals.
- Revenue measures:
- Increase the VAT statutory rate to bring it more in line with regional peers.
- Increase tax compliance, especially among large taxpayers, and ensure an adequately-staffed tax authority.
- Improve corporate income tax efficiency.
- Include tax expenditures in budget documents.
- Enforce timely corporate reporting and audits of financial statements of SOEs to improve tax payments.
Financial sector issues — recommendations
- Strengthen regulation and supervision alongside financial deepening and modernization:
- Implement regulatory measures to encourage:
- Loan pricing that is a function of borrowers’ credit risk.
- Upgrading financial institutions’ credit assessment capacity.
- Introducing a resolution regime for non-performing loans.
- Extend the perimeter of supervision to cover Tuvalu’s National Provident Fund (TNPF).
- Strengthen off-site supervision through standardized, timely reporting and analysis, with further Fund technical assistance.
- Urgently address understaffing of the supervisor.
- Payments connectivity and AML/CFT
- Support for joining the Asia-Pacific Group (APG) on Money Laundering to unlock technical assistance and support anti-money laundering efforts.
- Continue work of the Anti-Money Laundering Coordination Committee, update legal framework, and implement the authorities’ policy reform matrix to strengthen correspondent banking relationships.
- Pursue technical assistance partnerships and use the APG platform to engage other members on regional concerns.
- Digitalization plans should be pursued in a way that does not interfere with policy reform actions aimed at building resilient correspondent banking relationships.
Macro-structural and governance issues — reform priorities
- Three broad areas of focus to diversify the economy and promote growth:
- Diversification and trade:
- Build on the ratification of PACER Plus.
- Develop niche tourism markets.
- Expand participation in the fishing value chain.
- Disaster resilience and infrastructure:
- Enforce building codes across all nine islands.
- Develop risk maps to guide investments in resilient infrastructure.
- Revamp the Disaster Risk Management Act to modernize preparedness and response.
- Human capital and health:
- Adopt a comprehensive strategy on overseas scholarships aligned with Tuvalu’s needs and enforce contractual service commitments.
- Strengthen the legal framework on patient privacy to connect health data with personal characteristics for prevention, identification, and treatment.
- Deepen measures against tobacco, salt, and sugar.
- Adopt legislation and improve connectivity to support remotely delivered health services from offshore sources.
- State-owned enterprises (SOE) reforms
- Recommendations:
- Phase out Community Service Obligations, replacing them with targeted subsidies where needed, and align prices with recovery levels.
- Enhance performance-based management.
- Improve fiscal risk management by producing a plan to address loss-making SOEs and strengthen their commercial orientation.
- Closely monitor losses from fishing joint ventures.
- Expected benefits
- A more diversified economy that builds resilience to climate change should help retain Tuvaluans and reduce migration pressures by providing domestic opportunities for deployed human capital.
Tuvalu: Staff Concluding Statement of the 2023 Article IV Mission, April 25, 2023