IMF Executive Board Concludes 2010 Article IV Consultation with Tuvalu

Public Information Notice (PIN) No. 11/16
February 2, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On January 28, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the 2011 Article IV consultation with Tuvalu.1

Background

Despite its geographic remoteness, Tuvalu has not been immune to the global financial crisis. Even with higher government spending, the economy is expected to have almost no growth in 2010 after contracting by about 2 percent in 2009. Major construction projects to build a wharf and a power station have been completed, and seafarer employment—Tuvalu’s main foreign exchange earning source for the private sector—is weak. Annual inflation has been negative since mid-2009 (-1¾ percent in November 2010) due to lower global food prices and the strong Australian dollar.

In response to the global crisis, the government continued to support the economy by increasing spending. The large spending increases in the last few years have resulted in a sharp increase in the fiscal deficit from 4 percent of GDP in 2009 to almost 30 percent of GDP in 2010, as domestic revenue, offshore income, and grants fell. The large deficit has led to a rapid decline in the fund available for budget financing to about 20 percent of GDP from 45 percent in 2009. Total spending relative to GDP has increased by 20 percentage points since 2005, mainly due to sharp increases in subsidies, transfers and capital spending.

The current account deficit is estimated to increase sharply to almost 25 percent of GDP in 2010 due to low income and grants. Tuvalu exports little and depends heavily on imports. Gross official reserves have declined substantially in 2010, but still remain high at about 8 months of imports of goods and services. External public debt is at over 30 percent of GDP, but mostly on concessional terms, resulting in low debt servicing obligations. However, total public debt remains high by regional standards at about 44 percent of GDP.

The financial sector is underdeveloped and lending constrained, following rapid credit growth in the early 2000s. Nonperforming loans are high at around 40 percent of total loans. Banks have started addressing high nonperforming loans by sharing borrowers’ information and tightening lending standards, including lowering the maximum debt service to income ratio from 50 to 40 percent for all personal loans. Interest rates on lending have changed little in recent years, reflecting limited competition in the financial system.

The growth outlook remains clouded. Growth is projected to be zero or even turn negative in 2011, led by lower government spending, and remain low over the medium term. The outlook is subject to risks related to a delay in fiscal adjustment and the pace of the global recovery. Moreover, Tuvalu is vulnerable to natural disasters and climate change will be a major challenge in light of rising sea levels.

Executive Board Assessment

Executive Directors welcomed the opportunity to discuss this first Article IV consultation with Tuvalu. Directors recognized that Tuvalu faces tremendous challenges because of its remote location, limited land area, lack of resources, serious capacity constraints and the potential impact of climate change. The uncertain global recovery is adding to the country’s vulnerabilities. In light of the difficult near and medium-term prospects of the economy, Directors emphasized the need for resolute fiscal adjustment and structural reforms. Noting the limited domestic job opportunities, they agreed that the authorities should promote overseas employment opportunities, which would generate income and help reduce poverty.

Directors urged the authorities to cut spending, given that the Consolidated Investment Fund (CIF) available for budget financing will be depleted soon at the current pace of spending. They called for a front-loaded adjustment mainly through cuts in capital spending, and subsidies and transfers, which increased rapidly in recent years. Freezing wages and reducing travel costs will also be important.

Directors agreed that to ensure fiscal sustainability, it will also be necessary to increase domestic revenue, particularly by boosting efforts to increase tax compliance. At the same time, saving any windfall revenue from offshore earnings into the CIF and formulating a medium-term budget framework will strengthen fiscal management.

Directors agreed that use of the Australian dollar as Tuvalu’s currency is appropriate. They underscored however that fiscal adjustment will be key to maintaining external stability.

Directors commended the authorities for their structural reform efforts. They welcomed the ongoing public enterprise reform and looked forward to further progress in regularization of government’s financial relations with the public enterprises. Directors stressed that continued improvements in the banking sector and credit culture will help support private-sector development. Noting the steps being taken to address the high level of nonperforming loans, they urged the authorities to accelerate progress on putting in place the supervisory and prudential requirements. Improving the country’s statistical capacity will be critical for policy analysis and formulation.


Tuvalu: Selected Social and Economic Indicators, 2006–2011
 
I. Social and Demographic Indicators

GDP (2009):

 

   Poverty rate (2010)

24.8

U.S. dollars (millions)

27.1

Life expectancy at birth (years, 2008)

64.0

   Per capita

2,447

Total fertility rate (births per woman, 2008)

3.2
   

Infant mortality rate (per 1,000 live births, 2008)

30

Population:

 

Births attended by skilled personnel (percent, 2007)

98

Total (thousands, 2009)

11.1

   Adult literacy rate (2002)

99.0

Urban population (percent of total, 2008)

49.0

Unemployment rate (2004)

16.3
 
II. Economic Indicators 1/
  2006 2007 2008 2009 2010 2011
 

 

 

 

  Est. Proj.
 
  (Percent change)

Real sector

           

Real GDP growth

3.3 4.8 7.0 -1.7 0.2 0.0

Consumer prices (period average)

3.8 2.2 10.5 -0.3 -1.9 1.2
  (In percent of total)

Structure of economy

           

Agriculture

21.2 21.7 21.2 22.4 23.5

Manufacturing and construction

7.4 9.0 12.9 11.6 9.7

Services

71.4 69.3 65.9 66.0 66.8
  (In percent of GDP)

Government finance 2/

           

Revenue and grants

68.1 66.7 77.4 89.8 69.0 71.9

   Current Revenue

51.7 49.4 58.2 59.4 49.3 54.2

   Grants

16.4 17.4 19.2 30.4 19.7 17.8

Expenditure and net lending

85.2 80.1 82.7 93.5 97.7 82.8

   Current expenditure

77.0 67.7 74.7 78.0 84.3 79.6

   Capital Expenditure and net lending

8.1 12.4 8.0 15.5 13.5 3.2

Overall balance

-17.1 -13.4 -5.3 -3.7 -28.7 -10.9
  (Percent change, unless otherwise indicated)

Money and credit

           

Deposits 3/

21.2 -10.5 21.7 -9.5 7.4

Credit to non-government 3/

-2.1 4.0 14.0 -9.6 -2.0

Lending interest rate 4/

10.5 10.5 10.5 10.5 9.5
  (In millions of Australian dollars, unless otherwise indicated)

Balance of payments

           

Current account balance

-0.5 -0.6 -3.7 -1.8 -8.4 2.2

   (In percent of GDP)

-1.5 -1.9 -10.2 -5.2 -24.1 6.3

   Trade balance

-12.3 -13.9 -16.7 -16.0 -17.3 -14.5

      Exports

0.6 0.5 0.6 0.6 0.7 0.8

      Imports

-12.8 -14.4 -17.4 -16.6 -18.0 -15.3

   Services balance

-19.3 -16.2 -22.0 -19.6 -16.1 -14.8

   Income balance

21.0 20.0 22.0 19.7 15.5 17.3

   Current transfers (net)

10.1 9.5 13.0 14.1 9.5 14.2

Gross official reserves 5/

17.4 20.3 30.7 30.3 25.6 23.5

   (In months of imports of goods and services)

7.7 7.8 10.3 10.0 8.2 8.5

Debt indicators

           

Total government debt (including guarantees)

20.3 19.7 21.7 15.6 15.1 12.3

      (In percent of GDP)

64.9 59.0 60.2 44.9 43.6 35.1

   Of which: External

13.9 13.6 16.8 12.3 10.8 9.9

      (In percent of GDP)

44.7 40.7 46.7 35.3 31.0 28.1

   NPV of external debt

10.2 8.6 8.2

      (In percent of GDP)

29.4 24.7 23.2

   External debt service

0.5 0.5 0.6 0.8 1.6 0.8

(In percent of exports of goods and services)

14.1 16.1 17.2 22.8 39.4 17.9

Exchange rates

           

Australian dollars per U.S. dollar

           

   Period average 6/

1.3 1.2 1.2 1.3 1.1

   End-period 6/

1.3 1.1 1.5 1.1 1.0

Nominal effective exchange rate (2005=100) 6/

99.8 105.8 101.5 95.4 105.9

Real effective exchange rate (2005=100) 6/

101.1 106.6 107.4 100.6 108.4

Nominal GDP

31.2 33.5 36.0 34.8 34.8 35.2

Nominal GNI

52.2 53.5 58.0 54.5 50.3 52.5
 

Sources: Tuvalu authorities, PFTAC, Asian Development Bank, UNDP, CIA World Factbook, and IMF staff estimates.

1/ Tuvalu uses the Australian dollar as its currency. It has no central bank operations.

2/ Data for 2011 are IMF staff proposals.

3/ Data for 2010 are as of September.

4/ Rates for personal and business loans.

5/ Defined as sum of foreign assets of the National Bank of Tuvalu, the Consolidated Investment Fund, and SDR holdings. Excludes the Tuvalu Trust Fund. Data for 2010 are as of October.

6/ Data for 2010 are as of October.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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