Our Tuvaluan authorities greatly appreciated Staff’s comprehensive and objective analysis of Tuvalu’s macroeconomic issues. The joint presence of the World Bank, the ADB, and other development partners was also greatly appreciated, allowing for a joint constructive exchange of views with their development partners on how to assist Tuvalu in moving forward with its development issues. Our Tuvaluan authorities underscore the benefits of becoming a member of the Fund and World Bank, with the most obvious being access to technical assistance and policy advice to help address the country’s development challenges, and not least, the potential to trigger financial assistance.
Though Tuvalu is one of the smallest and most remote countries in the world, its economic performance is still highly susceptible to developments in the global economic and financial arena. Its offshore earnings are subject to overseas asset price fluctuations and exchange rate movements. The return on the Tuvalu Trust Fund (TTF) has been below its targeted value in recent years, resulting in no distribution to the Consolidated Investment Fund (CIF). The strengthening of the Australian dollar has also affected Tuvalu’s offshore earnings from its dot.tv domain and fishing licenses, which are largely denominated in the USD. The increased competitiveness in the global labor market has seen the decline in the overseas employment of Tuvalu nationals, affecting remittances. The public sector dominates Tuvalu’s economy, which in turn is largely dependent on offshore earnings to deliver its services. In addition, Tuvalu’s lack of economies of scale, because of its remoteness, and high costs of doing business, all constrain development, whilst the climate change looms as a major fiscal, social, and indeed existential challenge.
The significant near-term challenge for Tuvalu is to ensure immediate fiscal discipline in the face of declining revenues. Over the medium term, Tuvalu will need to strengthen its fiscal management to create fiscal space for countercyclical measures and to mitigate against the volatility of offshore earnings.
The volatility of offshore earnings and the relative dominance of the public sector in the economy add significantly to the challenge of fiscal management, particularly in light of the growing demands for better social services and public infrastructure.
Notwithstanding this, the authorities agree with Staff recommendation that fiscal management needs to be strengthened immediately, and remedial actions need to be taken to address the weakening fiscal position. Whilst there has been a recent change in government, our Tuvaluan authorities wish to reassure the Board that the new government, recently appointed on December 24, has taken on board Staff recommendations and are committed to fiscal discipline. Being in office for just over a month, the government is still finalizing its plans for fiscal consolidation.
As an initial step towards fiscal consolidation, a Revenue and Expenditure Review Committee is being established, that will consider avenues to widen the revenue base and to cut high levels of spending, including the Tuvalu Medical Treatment Scheme (TMTS). The authorities’ ultimate aim for the TMTS is a gradual reduction of costs. They aim to do this through a review of the selection criteria for overseas medical referrals with a view to tighten further such criteria. In addition, they plan to consult with external providers of medical services, who are able to make regular visits and perform the required medical treatment in Tuvalu. This will have potential economies of scale benefits, bringing the medical treatment to Tuvalu that can benefit many, rather than only a few, from the overseas medical referral scheme. Over the long term, the authorities aim to seek assistance in improving and upgrading their domestic medical services. The authorities are also reviewing capital spending with a view to prioritize and scale back capital spending, given that most of the major infrastructure needs have been addressed in recent years. The authorities have also taken measures to freeze further hiring, with a view to better assess the size of the civil service.
The volatility in earnings also underscores the need to build up savings as a buffer against future macroeconomic risks. In this context, the CIF (distributable income from the TTF) has given Tuvalu a certain degree of financial security, underpinning the budget in recent years. However, the authorities concur with Staff that more will need to be done to rebuild the CIF to its targeted balance. To this effect, the Tuvaluan authorities acknowledge that fiscal consolidation is key to rebuilding fiscal space, and, whenever possible, saving windfall earnings. Understanding the need for fiscal adjustment over the medium term, our Tuvaluan authorities are seeking assistance in the formulation of a simple and credible medium-term budget framework. The authorities will also continue to seek direct financial support from their developments partners, which they consider to be a crucial buffer to the CIF, especially in times where the global and domestic economic environment is weak.
As with their predecessors, the new government also emphasizes the importance of donor assistance in supporting Tuvalu through the difficult and challenging times ahead. They are currently seeking assistance in various areas, including strengthening tax administration.
The banking sector is underdeveloped with only two banks currently serving the country. The two banks have taken measures to tighten lending standards to mitigate further increases in non-performing loans. However, the authorities concur with Staff that further progress in strengthening the banking sector and credit culture will be critical for sustained growth in the private sector. The authorities have requested technical assistance in this area.
The authorities are committed to accelerating the implementation and approval of the Amendments to the Banking Act. They aim to have it endorsed and passed by Parliament at its next sitting in early 2011.
In respect of bank interest rates, the newly appointed Minister of Finance has issued instructions to the National Bank of Tuvalu (NBT) to suspend any directions given to lower bank lending rates.
Structural Policy and Growth
The authorities agree with Staff’s assessment that most of the public enterprises face challenging financial circumstances. The Tuvaluan authorities are looking into options, such as mergers, private sector participation, as well as corporatization of public enterprises and business activities. However, our authorities want to highlight the constraints faced by the domestic private sector regarding capital and financing requirements that hinder full participation in capital-intensive ventures. In addition, limited availability of skilled managers hinders the effective and efficient operation of public enterprises on a more commercial basis. An additional challenge is the lack of required skills and capacity to monitor and operate corporatization models that depend on arms length governance.
A comprehensive public enterprise reform program is currently underway with the assistance of the ADB. One of its objectives’ aims is to regularize government’s financial relations with its public enterprises. The authorities plan to discuss further with the ADB whether the assistance can be extended to include a review of the US10 million debt related to joint ventures with foreign fishing companies.
The authorities view their human resources as a potential source of economic growth. However, they are also well aware that it is currently underdeveloped and not marketed adequately. In addition, the high-travel costs from Tuvalu to external labor markets reduce the attractiveness of hiring Tuvaluans. Nevertheless, the authorities plan to invest in technical and vocational education and training aimed at establishing a niche in the overseas labor market through the provision of high-quality services and the provision of more practical skills aimed at gaps in domestic services. They are working closely with recognized training institutions and development partners in this area. To address the fall off in revenue from seafaring, the authorities are also looking into the scope to upgrade maritime qualifications with the WB, indicating their interest in cultivating the potential of the Tuvalu Maritime Training Institution (TMTI).
Data and Staffing
The authorities acknowledge the need to strive to continuously meet the standards required by the Fund in terms of data quality and availability. Overall, the authorities understand the value of quality data to assist in their policy analysis and formulation. However, they highlight chronic shortages in the availability of qualified staff, which underscores the importance of allocating scarce human resources most effectively. Currently their efforts are being concentrated on getting the 2010 Household Income and Expenditure Survey (HIES) completed. In addition, the components of the BOP data are sourced from different arms of the government, which also require training and the upgrading of their capacity to maintain and submit quality data on a timely basis. The authorities consider sustained efforts to improve the quality of statistics staff to be vital and have requested PFTAC assistance in this regard. They also see merit in continuing assistance to update data to the minimum standard required for policy analysis until such time that the domestic statistics staff are able to fully take on this role.
This was Tuvalu’s first Article IV mission since becoming a member of the IMF, and our Tuvaluan authorities greatly appreciated the constructive policy dialogue with the Fund Staff during the mission and in the process of finalizing the report. They would like to put on record their appreciation of the contributions from the mission chief and his team. The authorities look forward to working very closely with the Fund as they work towards more sustainable growth.