Public Information Notice No. 13/65

Public Information Notice: IMF Executive Board Concludes 2013 Article IV Consultation with Kiribati

June 6, 2013

On May 29, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kiribati.¹

Background

Kiribati’s key policy challenges include reducing structural fiscal imbalances and increasing medium-term growth potential. Growth in 2012 reached 2.8 percent, reflecting implementation of donor projects, higher than average fishing license fees, and remittances. Airport and seaport projects in particular boosted construction activities. Nevertheless, inflation remained negative on account of lower prices of rice and some other staples. The revenue from fishing licenses was much higher than average in 2012, and is expected to decline in the period ahead.

The current account deficit widened slightly in 2012 to 31 percent of GDP mostly because of an increase in imports of equipment associated with infrastructure projects, which was partially offset by high fishing license fees. Remittances, which are dominated by transfers from seamen, declined somewhat, due to the slowdown in the global shipping activity.

Fiscal imbalances remain large. The 2013 budget implies a current fiscal deficit at about 18 percent of GDP, assuming conservative projections for fishing license revenue.² High fiscal deficits resulted in large financing demands on its sovereign wealth fund (Revenue Equalization Reserve Fund, or RERF). In 2012, the RERF balance stood at 3½ times GDP, down from 5¾ times GDP in 2000. In constant per capita terms, the RERF assets were almost half of its amount in 2000.

The government has embarked on a broad range of reforms supported by development partners to address its fiscal and structural challenges. In 2012, the government cleared most of the overdraft facilities following the IMF advice and technical assistance, thereby reducing its interest cost. Ongoing reforms cover various areas: public financial management, tax system, State-Owned Enterprises (SOEs), and the private sector. Recently, the parliament passed an SOE bill establishing a strengthened legal framework for governance, financial reporting, and management of SOEs.

Although formal financial intermediation and access to credit for the private sector remains limited, there was an increase in credit to households from banking institutions in 2011–12. In addition, a small lending scheme introduced by the Kiribati Provident Fund contributed to private sector lending. Although the loans are mostly collateralized, the non-performing loan ratios at the Development Bank of Kiribati remained high.

Executive Board Assessment

Executive Directors viewed Kiribati’s key policy challenges as reducing structural fiscal imbalances and increasing medium-term growth potential. Directors concluded that the successful implementation of reforms will improve Kiribati’s growth prospects, promote private sector development, enhance fiscal sustainability, and strengthen resilience to external shocks.

Directors underscored that a key policy objective is to reduce structural fiscal imbalances and ensure the long term sustainability of the Revenue Equalization Reserve Fund (RERF). They agreed that restoring fiscal sustainability by stabilizing the value of the RERF in real per capita terms is a challenging task that requires significant fiscal effort across a broad front. Directors stressed in particular the need for comprehensive tax reforms, improved tax compliance, and decisive steps to strengthen public financial management. In this context, they welcomed the authorities’ intention to adopt the value added tax, and stressed that achieving sufficient growth of fishing license fees is important for revenue prospects. On the expenditure side, Directors suggested that curbing the growth of current expenditure, including the public wage bill, will be important to accommodate the need for social spending and infrastructure development, as well as to address challenges from climate change. Directors also noted that improving the efficiency of subsidies will enhance incentives and reduce risks to the budget.

Directors noted that sound public financial management is essential to ensure a sustainable fiscal framework. They commended the authorities for ongoing efforts to strengthen revenue and expenditure projections, and encouraged them to adopt a prudent debt management policy. Directors welcomed the close collaboration with the donor community and encouraged the authorities to avoid nonconcessional borrowing.

Directors welcomed the government’s progress in state-owned enterprise (SOE) reform, noting that these reforms have already resulted in a decrease in budget costs, and encouraged the authorities to continue addressing performance issues in the Public Utilities Board and other SOEs.

Expanding the role of the private sector in the economy is critical for increasing growth and employment, and reducing fiscal imbalances. Directors saw the local marine sector as having great potential to broaden employment opportunities, create value added, and increase tax revenue. In this context, Directors encouraged the authorities to adopt the National Fisheries Policy that is currently being developed. Other sectors also hold promise, in particular increasing tourism and overseas employment. Improving the business climate is also necessary to help the private sector grow.

While noting the importance of access to financing for private projects, Directors emphasized the need to maintain high prudential standards in financial institutions. In this context, they underscored the importance of reducing the high non-performing loan ratios in the Development Bank of Kiribati and strengthening the financial position of the Kiribati Provident Fund (KPF). Directors also encouraged the authorities to continue improving the quality of economic and financial statistics.