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Mrs. Sarwat Jahan and Ke Wang

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

International Monetary Fund
Kiribati is a country in the central Pacific Ocean and one of the least-developed Pacific island economies. A large share of imports and government spending is financed from external grants and fishing license fees. The key policy development has been the adoption of a medium-term strategy, which focuses on reducing the role of the public sector to promote the development of the private sector. The improvement in the current and capital account balances has led to an increase in the overall balance.
International Monetary Fund
This 2009 Article IV Consultation highlights that inflation in Kiribati increased to about 19 percent by end-2008, largely reflecting higher food prices. The current account deficit was broadly unchanged in 2008. Structural reforms are under way, although the pace has been limited by capacity constraints. Executive Directors have welcomed the recent improvement in economic activity. They have also welcomed the planned review and reform of public enterprises as critical to promoting private sector development, and to boosting the growth potential.
International Monetary Fund
This report describes recent economic developments in Kiribati. Developments over the decade through 1992 were characterized by a fall in real per capita income, as economic development was constrained by a shortage of skilled manpower, weak infrastructure, and remoteness from major international markets. However, inflation was held broadly in line with price increases in major trading partners. The overall external balance was in large surplus, as substantial trade deficits in part reflecting small export earnings were more than offset by service account surpluses and external grant receipts.
International Monetary Fund
The staff report highlights that the economy of Kiribati showed resilience from the global crisis owing to infrastructure projects financed by foreign assistance. Executive Directors stressed the importance of preserving real per capita value of the Revenue Equalization Reserve Fund to ensure fiscal sustainability and intergenerational fairness. They appreciated the multiyear budget framework, which helped in designing realistic fiscal plans. Directors noted the joint IMF-World Bank debt sustainability analysis and encouraged authorities to secure grant financing to support the country’s development needs.
International Monetary Fund. Asia and Pacific Dept
KEY ISSUES Context. Donor-financed large infrastructure projects, increased public spending, and a pick-up in credit to households have boosted real GDP growth to close to 4 percent in 2014 and to about 3 percent in 2015. Inflation remains low, underpinned by lower food and commodity prices. Steps are being taken to reduce the many hurdles to private growth that Kiribati faces, among which are high transportation and communication costs and an increasing impact of climate change. Fiscal policy. The fiscal outlook has improved, but further efforts are needed to ensure sustainability. The recurrent balance was in large surplus in 2014 and is expected to remain positive in 2015, reflecting high revenue from license fees, and notwithstanding a large increase in expenditures. But under the historic pace of spending the sovereign wealth fund (Revenue Equalization Reserve Fund—RERF) would be depleted in about 20 years. Ensuring sustainability requires containing nominal expenditure growth to around 1½ per annum over the next five years (after accommodating climate-change-related costs), with transparent and symmetric transfers and withdrawals from the RERF around this path. Structural reforms. There is a consensus among donors that significant progress has been achieved. The State-Owned Enterprise (SOE) Reform Act is being implemented in a satisfactory way, as illustrated by the recent successful privatization of the telecommunication company. Key outstanding issues include further reforming the energy and copra sectors and improving the investment climate.
International Monetary Fund. Asia and Pacific Dept
KEY ISSUES Kiribati’s key economic challenges are to reduce large structural fiscal imbalances and increase growth and employment opportunities, while facing obstacles posed by remoteness, lack of scale, vulnerabilities to external shocks and climate change. The significant fiscal consolidation envisaged by the authorities will help stabilize Kiribati’s sovereign wealth fund (the Revenue Equalization Reserve Fund, or RERF) in real per capita terms. This stabilization effort would also require that fishing license fees remain close to recent exceptionally high levels, with windfall incomes relative to the conservative budgeted baseline saved. In the event of weaker fishing license fee revenues, a more ambitious adjustment in the non-fishing budget would be needed. The small private sector share in the economy due to remoteness and weaknesses in business climate constrains growth and puts strain on public finances. Continuing the fiscal and structural reform program is essential. Climate change brings additional risks and fiscal costs. Main Recommendations: • Continue fiscal reforms designed to deliver fiscal consolidation and improved public financial management. Seek to maintain fishing license fees above the current conservative budget baseline, with windfalls saved to strengthen RERF balances. If fishing license fee windfalls cannot be sustained, explore other options to further strengthen fiscal balances. • Continue reforms of state-owned enterprises (SOEs). • Facilitate growth through improving the business climate and infrastructure, including through streamlining government services.
International Monetary Fund. Asia and Pacific Dept
Kiribati is one of the poorest and most remote microstates in the Pacific. It is highly dependent on volatile fishing license fees, remittances, and donor assistance. The challenge is to implement fiscal and structural reforms to help ensure fiscal sustainability, promote private sector development, and increase its resilience to external shocks. Fully using its marine potential beyond fishing license fees will help to improve fiscal revenues and growth opportunities. More generally, private sector development is critical for both increasing growth and reducing fiscal pressures.
International Monetary Fund. Asia and Pacific Dept
Growth has been strong in recent years and some moderation is expected, with risks skewed to the downside. High fishing revenues improved the fiscal position, but generated pressure to increase spending. There has been progress on fiscal and structural reforms. Yet, public spending needs are large, driven by an infrastructure gap and climate adaptation costs, and the country remains at high risk of debt distress.
International Monetary Fund. Asia and Pacific Dept
This 2017 Article IV Consultation highlights that Kiribati’s economic fundamentals have strengthened in recent years. Strong fishing revenue improved the fiscal position, strengthened the current account, and boosted business confidence. After registering a double-digit rate in 2015, real GDP growth declined to 1.1 percent in 2016, but is projected to pick up to about 3 percent in 2017 driven by construction and wholesale and retail trade. The authorities have made commendable progress in structural reforms. They have implemented important reforms to improve the governance and management of the Revenue Equalization Reserve Fund and replenished the fund from the cash reserves. Despite a favorable economic outlook, risks to near-term growth are substantial and skewed to the downside.