ECONOMIC HEALTH CHECK
Surveillance Brings Tuvalu Closer to International Fold
By Graham Dwyer
IMF Survey online
May 10, 2011
- IMF’s smallest country member receives its first regular economic assessment
- Tuvalu faces major government spending cuts in short run to manage its affairs
- Country can now better tap IMF technical assistance, plans to do so
With a population of only 12,000 and a land area about one tenth the size of Washington, D.C., Tuvalu is one of the smallest—and remotest—economies in the world.
And, like many small Pacific island nations, the country faces a perennial set of challenges defined by its geographical remoteness, small size, and limited resources.
However, over the last three years Tuvalu’s tiny economy has faced an additional issue—the global financial crisis.
According to a macroeconomic assessment by IMF economists, known as the Article IV consultations, even this far-flung corner of the South Pacific has not been spared exposure to the crisis. For example, the Tuvalu Trust Fund, established by donors to provide long-term stable financing, shed value when global stock markets dived, while the demand from Europe for its seafarers—Tuvalu’s main foreign exchange earning source for the private sector—has dwindled.
IMF economists estimate almost no economic growth for Tuvalu in 2010 as major construction projects have been completed. Growth is projected to be zero or even turn negative in 2011, led by lower government spending, and remain low in the medium term.
The Article IV process, completed earlier this year and to be conducted on a two-year cycle, marked the country’s first since it joined the IMF (along with the World Bank) as its 187th—and smallest—member in June 2010.
Led by IMF Senior Economist Byung Kyoon Jang, a six-person delegation, two of which were World Bank staff, visited the islands for 12 days, where they met with government officials, representatives of the private sector, and donors based in Fiji, and worked with the authorities almost from scratch to collect the required data.
“Building the frameworks for putting data together for the first Article IV was a daunting task for not only ourselves but the authorities—our counterparts,” Jang said. “The macroeconomic data we were asking for are much more extensive than those required by any other development partners.”
Core data needs are essentially the same, whether you are dealing with an economy the size of the United States or Tuvalu, he explained. “Even if there’s just 12,000 people, they are importing and exporting, the government is collecting tax, and so on. You need data on national accounts, the balance of payments, government budgets, and banks in order to make a proper assessment of the economy,” Jang said.
“Of course, large economies need more data given the complexity of their economies, but they have well established systems and a lot of people with technical capacity to provide high-quality data. On the other hand, there is no staff in Tuvalu really responsible for compiling the national accounts and balance of payments data.”
The IMF team worked back and forth with the authorities to reduce inconsistencies and errors in the data provided by the authorities, in the face of sometimes difficult communications due to the time difference and lack of phone connectivity.
Facing many constraints, the options for Tuvalu are limited, the IMF economists say. Given large spending increases in the last few years, the government needs to take immediate action to cut spending and boost tax compliance. It also needs to strengthen fiscal management by saving windfall revenue, for instance from fishing permits and fees from leasing its “.tv” internet domain name, as well as improve budget reporting and analysis.
“As the market value of the Tuvalu Trust Fund is projected to be lower than its targeted value, no distributions from the Tuvalu Trust Fund to the budget are expected in the next few years. Thus Tuvalu will have to make some significant spending cuts in the short run to manage its affairs,” said IMF Research Officer Adil Mohommad, who was a member of the visiting team.
“Further adjustments are needed over the medium term—at least until there is a continued recovery in the global financial markets and the trust fund recovers,” Mohommad added. “This will take some time, so I think in the short term Tuvalu is faced with some pretty difficult choices.”
However, the work carried out in conducting the Article IV surveillance should help Tuvalu in the long run. “We first made an assessment of Tuvalu’s economic and fiscal situation and gave advice on fiscal consolidation—the areas where spending could be cut and how to maintain fiscal stability over the longer term,” Jang pointed out. “From that, the authorities can have a discussion with other development partners and solicit assistance, if needed.”
As an example, the European Commission made a decision to provide a grant based on the macro framework worked out by the IMF during the membership process last year.
There are other benefits to IMF membership for Tuvalu. The country can now better tap technical assistance from the Pacific Financial Technical Assistance Center in Fiji, and plans to do so in such areas as national accounts, balance of payments, tax administration, public financial management, medium-term budget framework, and bank supervision.
And as a member of the Bretton Woods family, Tuvalu can also now access World Bank assistance and attend the joint IMF-World Bank Annual Meetings, where the authorities can meet other delegations and exchange views.
“This first Article IV consultation was a long and difficult process,” said Jang. “But I think in the end the payoff should be pretty big. What the Fund has done is a public good for the donor community and the authorities alike.”