Tuvalu: Staff Concluding Statement of the 2025 Article IV Mission
IMF News, May 27, 2025
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- Published: May 27, 2025
Recent developments, outlook, and risks
- Economic rebound:
- GDP growth rebounded at 7.9 percent in 2023 after falling for three consecutive years in 2020-22, driven by resumption of construction activity, trade recovery, and higher government spending.
- GDP growth in 2024 is estimated to have reached 3.3 percent, supported by continued effects of reopening and major infrastructure projects.
- Inflation:
- Inflation peaked at 14.2 percent in 2022Q3 and slowed to 1.2 percent in 2024.
- Near-term and medium-term growth projections:
- Growth in 2025 is projected at 3 percent, driven by construction of the new phase of Tuvalu Coastal Adaptation Project and an increase in public spending.
- Growth is projected to decline gradually to around 1.8 percent over the medium term due to sluggish productivity growth, increasing emigration, and vulnerability to climate events.
- Inflation outlook:
- Inflation is expected to remain below 2 percent in 2025 and to rise gradually to 2.5 percent over the medium term, aligning with inflation dynamics of Tuvalu’s trading partners.
- Fiscal outlook and debt risk:
- Fiscal balance projected to turn to a surplus in 2025 due to higher grants.
- Fiscal balance projected to improve from a deficit of 7 percent of GDP in 2024 to a surplus of 2.9 percent of GDP in 2025.
- Grants are projected to gradually decline to historical levels of around 27 percent of GDP over the medium term.
- Fiscal balances expected to deteriorate gradually and reach -6.8 percent of GDP by 2030.
- Projected withdrawals from sovereign funds are not sufficient to fully finance fiscal deficits; foreign financing will be required to close the financing gap.
- Under baseline projections, Tuvalu is assessed to remain at a high risk of debt distress.
- Downside and upside risks:
- Downside risks: escalated trade tensions, heightened policy uncertainty, tighter financial conditions, volatility in external revenues (internet domain, fishing licenses, development assistance), higher commodity prices, sharp corrections in financial market returns affecting sovereign funds, under-performance of public corporations, loss of Correspondent Banking Relationships (CBRs), acceleration of outward migration, and extreme climate events.
- Upside risks: higher fishing licenses and grants, and greater structural reform momentum.
Fiscal policy — findings and recommended strategy
- Policy balance:
- Fiscal policy should balance ensuring fiscal sustainability and supporting Tuvalu’s development priorities, given high vulnerability to external shocks and significant near-term spending pressures.
- Multi-pronged fiscal strategy (main elements):
- i) gradually reducing fiscal deficits;
- ii) increasing spending for priority areas;
- iii) appropriately using fiscal buffers to stabilize fiscal accounts, cushion against shocks, and address long-term challenges.
- Staff simulations and targets:
- Reducing the fiscal deficit gradually to around 2.3 percent of GDP by 2030 (compared to 6.8 percent of GDP in the baseline scenario) by utilizing returns of the Tuvalu Trust Fund and the Consolidated Investment Fund (CIF) to finance deficits would keep public debt on a downward path.
- Domestic current balance expected to improve to -40 percent of GDP by 2045 under the consolidation scenario.
- Value of the buffer fund (CIF) would stabilize at around 40 percent of GDP to cover major shocks and downside risks.
- Recommended measures:
- Expenditure rationalization and reprioritization:
- Unwind recent increases in current expenditure, including containing the increase in the wage bill.
- Implement cost-saving measures for the Medical Referral Scheme and overseas scholarships.
- Unwind the increase in goods and services spending.
- Cut broad-based utility subsidies.
- Redirect part of savings to targeted protection for the most vulnerable, infrastructure, human capital, and climate resilience.
- Revenue mobilization:
- Strengthen compliance and efficiency of tax collection.
- Consider reviewing tax policies and exploring options to boost tax revenue and streamline tax incentives.
- Public financial management (PFM) improvements:
- Progress noted: introduction of new Financial Management Information System and formulation of the Medium-Term Fiscal Framework; publication of Tuvalu’s Fiscal Risk Reports.
- Further efforts needed: improve budget reliability; strengthen investment management to enhance absorption capacity; implement climate budget tagging; enhance fiscal reporting and transparency on extra-budgetary funds and SOEs; reinforce procurement management.
Financial sector policies — priorities and measures
- Regulatory and supervisory strengthening:
- Urgent need to establish effective regulatory and supervisory frameworks.
- Priorities: strengthen statutory role and expand supervisory perimeter of the Banking Commission of Tuvalu (BCT); issue the proposed new prudential standards; enforce timely submission of prudential returns; address delays in audits of financial institutions’ financial statements.
- Adequate resourcing of the BCT required to conduct both on-site and off-site supervision.
- Payments connectivity and financial inclusion:
- Continue efforts to strengthen Tuvalu’s connectivity to the global payment system and improve financial inclusion.
- Membership of the Asia/Pacific Group on Money Laundering is a welcome step; authorities should continue to strengthen the legal framework and compliance.
- Address Correspondent Banking Relationship pressures by taking into account potentially low ML/TF risk environment and focusing on outreach to key foreign regulatory authorities, including a corridor risk assessment.
- Modernize banking services to overcome geographical barriers and improve efficiency (recent launch of Tuvalu’s first ATMs noted).
- Improve financial literacy and establish a reliable national digital ID system to support financial inclusion.
- Introduce digital services with consideration for supervisory capacities and financial integrity.
Structural reforms — priorities and resilience measures
- Prioritized structural reforms:
- i) Collaborate with local communities to develop reclaimed land effectively.
- ii) Improve internet connectivity and leverage IT to deliver more public services.
- iii) Ensure proper maintenance of key infrastructure assets, particularly transportation and utilities including renewable energy.
- iv) Strengthen SOE governance and performance, accompanied by reviewing utility pricing to ensure cost recovery.
- v) Explore economic diversification in sectors with higher potential, including coconut agricultural products, eco-tourism, and commercial fishery.
- Addressing emigration and labor shortages:
- Enhance human capital and labor supply through improved education access and quality, enhanced training, attracting returning migrants, and promoting skill transfer.
- Facilitate female labor force participation to help bridge significant gender gaps in employment and alleviate labor shortages.
- Climate resilience and disaster preparedness:
- Continue engagement with development partners to secure climate financing and implement major climate resilient projects.
- Enhance disaster management by enforcing amended building codes, using risk maps to inform planning, and strengthening community disaster preparedness.
- Accelerate renewable energy production to lower energy costs, reduce external sector vulnerability, and enhance energy security.
Closing
- The mission thanks the Tuvaluan authorities and various stakeholders for their hospitality, cooperation, and candid discussions during the mission.
Source: Tuvalu: Staff Concluding Statement of the 2025 Article IV Mission, May 27, 2025.