## Tuvalu: Staff Concluding Statement of the 2021 Article IV Mission

_IMF News, April 26, 2021_

## Source details

**Canonical URL:** [Tuvalu: Staff Concluding Statement of the 2021 Article IV Mission](https://www.imf.org/en/news/articles/2021/04/26/mcs042621-tuvalu-staff-concluding-statement-of-the-2021-article-iv-mission)

## Other formats

- [Markdown version](/en/news/articles/2021/04/26/mcs042621-tuvalu-staff-concluding-statement-of-the-2021-article-iv-mission/index.md)
- [Structured JSON version](/en/news/articles/2021/04/26/mcs042621-tuvalu-staff-concluding-statement-of-the-2021-article-iv-mission/index.json)
- [Bundle manifest](/en/news/articles/2021/04/26/mcs042621-tuvalu-staff-concluding-statement-of-the-2021-article-iv-mission/bundle-manifest.json)

## Bibliographic details
- 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*

---


## References

- [Tuvalu and the IMF](http://www.imf.org/external/country/TUV/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2021/04/26/mcs042621-tuvalu-staff-concluding-statement-of-the-2021-article-iv-mission_