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Tuvalu: Staff Report for the 2010 Article IV Consultation—Informational Annex

Author(s):
International Monetary Fund
Published Date:
February 2011
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Annex I. Tuvalu: Fund Relations

(As of November 30, 2010)

I. Membership Status: Joined June 24, 2010; Article XIV

II. General Resources Account:

SDR MillionPercent Quota
Quota1.80100.00
Reserve Tranche Position0.000.00

III. SDR Department:

SDR MillionPercent Allocation
Net Cumulative Allocation1.69100.00
Holdings1.690.00

IV. Outstanding Purchases and Loans: None

V. Financial Arrangements: None

VI. Projected Payments to Fund: None

VII. Exchange Rate Arrangement:

Tuvalu’s legal tender is the Australian dollar. There is no central monetary institution. Tuvalu avails itself of transitional arrangements under Section 2 of Article XIV and has not yet accepted the obligations under Article VIII, Sections 2, 3, and 4. The legal framework for the exchange and trade system is the Exchange Control Law of 1981 and the Exchange Control Regulations of 1983, as amended. Staff is currently conducting a comprehensive review of the exchange system to assess jurisdictional implications. While the Exchange Control Regulations are quite restrictive and prescribe approval requirements from the National Bank of Tuvalu (NBT) or the Minister of Finance for most payments or transfers, in practice, no approval is required and transactions are administered liberally.

The NBT is the only bank in Tuvalu handling foreign exchange transactions. The NBT buys and sells foreign exchange at rates determined daily by the NBT’s board on the basis of rates quoted in the international markets plus specific spreads dependent on the specific foreign currency.

VIII. Article IV Consultation:

The first Article IV consultation discussions took place during November 11–23, 2010.

IX. Technical Assistance:

The Pacific Financial Technical Assistance Centre (PFTAC) has provided assistance on tax policy and administration (2007, 2008, and 2010); financial sector supervision (2008); and balance of payments and national accounts statistics (2006, 2009, and 2010).

X. Resident Representative:

A new Resident Representative office, covering Pacific islands and based in Fiji, was established in September 2010.

Annex II. Tuvalu: World Bank-IMF Collaboration

The Bank and Fund country teams, led by Mr. Byung K. Jang (Fund mission chief for Tuvalu) and Mr. Piers Merrick (country officer, EACNQ), have maintained a close working relationship since Tuvalu’s decision to pursue membership of the Bretton Woods institutions in 2009. The Bank team joined the membership mission as well as the first Article IV consultation mission. Teams from the Asian Development Bank (ADB), AusAID, and NZAID also overlapped with the Article IV mission.

The teams agree that Tuvalu’s main macroeconomic challenge is to cut government spending to avoid looming fiscal problems and ensure fiscal sustainability over the longer term. Based on this shared assessment, the teams identified the following structural reform areas as macro-critical in view of their central role in achieving fiscal consolidation and sustained growth:

  • i. Strengthening public financial management. In the absence of its own currency and monetary policy, sound fiscal policy is key to maintaining macroeconomic stability. However, fiscal management has not been prudent in recent years, as windfall revenue from the Tuvalu Trust Fund and fishing licenses has tended to be immediately spent on major public construction projects, subsidies, and transfers. Windfall revenue needs to be saved, given the volatility of key revenue items, and a medium-term budget framework should be used to highlight the longer-term impact of current fiscal stance and new spending initiatives. Moreover, budget reporting and monitoring need to be improved and economic and policy analysis capacity should be strengthened.

  • ii. Reforming public enterprises. The ADB is undertaking a comprehensive public enterprise reform program to improve the current weak performance and profitability of public enterprises. Several public enterprises as well as business activities undertaken by line ministries are being considered for mergers, private sector participation, and possible corporatization. The ongoing reforms could reduce burdens on the budget down the road and help attract foreign direct investment.

  • iii. Exploring opportunities for poverty reduction, job creation, and private sector development. Tuvalu’s geographic isolation, small size, and poor land quality have made it extremely challenging to generate domestic private sector employment. Demand for Tuvaluan seafarers on the international maritime employment market is declining, due to more competition from other countries, and existing labor migration schemes have not been well utilized. Adequate education and training need to be provided for Tuvaluans to better utilize these overseas job opportunities and to reduce the rising poverty.

The teams expect to sustain the close cooperation going forward. Attachment 1 details the specific activities implemented and planned by the two teams over the period July 2010—October 2011. It was agreed that details of further collaboration would be determined at the technical level as the scope of engagement is further defined.

Attachment 1 Tuvalu: Bank and Fund Implemented/Planned Activities in Macro-Critical Areas July 2010—October 2011
ProductsExpected/Actual Delivery Date
World Bank Work Program
  • Joint participation in Article IV Mission

  • Poverty data gathering

  • Preliminary consultations with government on priorities for the prospective WB program

  • Preliminary consultations with development partners on opportunities for collaboration and coordination

  • Debt sustainability analysis to decide IDA eligibility (jointly with the IMF)

November 2010



November 2010



November 2010



November 2010



2011
IMF Work Program
  • PFTAC: balance of payments TA mission

  • PFTAC: national account TA mission

  • Article IV mission

  • Staff visit

July 2010



October 2010



November 2010



October 2011

Annex III. Tuvalu: Relations with the Asian Development Bank1

The Asian Development Bank (ADB) assistance to Tuvalu aims to contribute to improving the quality of Tuvalu’s human resource capital by ensuring the provision of basic education and primary health through the implementation of its national plan, Te Kakeega II. Given the lack of resources, successive governments have focused on the education and health of its people as the foundation for future opportunities. The Country Partnership Strategy (CPS) 2008–2012 therefore focuses on ensuring a credible budget that will allow increased allocations of scarce financial resources to government priority areas: primary education and preventative health care. This will be achieved through targeting improved public expenditure and financial management.

A set of five Performance Benchmark Indicators has been developed to track achievement of the stated social sector outcomes, through a focus on fiscal prudence. These benchmarks also consolidate assistance programs for ADB, AusAID, and NZAID to support the prioritized and sustainable implementation of Te Kakeega II.

To improve aid effectiveness, the government, ADB, AusAID, and NZAID signed the Development Partners Declaration (DPD) in 2009. The declaration will not only facilitate closer harmonization for improved aid effectiveness, but also ensure that implementation of specific projects do not undermine the general priority direction as agreed in the government performance benchmark indicators. The DPD remains open to other development partners.

ADB has approved 2 loans and 1 grant totaling $11.06 million from the Asian Development Fund (ADF) and 21 technical assistance (TA) totaling $5.91 million to Tuvalu since it joined ADB in 1993. In recent years, ADB operational strategy has focused on improving governance and economic management, as well as providing skills development to enhance employment opportunities. Improvement of services on the outer islands, where poor and vulnerable groups are concentrated, has also been undertaken, partly through the sustainable financing mechanisms through the establishment of the Falekaupule Trust Fund.

Active projects include a grant and a TA project. The grant which was approved in 2008 focuses on: (i) development of a strengthened governance framework for the oversight of public enterprises in Tuvalu, (ii) improved capacity for oversight on the part of the government, (iii) the capacity to respond positively to such oversight on the part of public corporations, (iv) strengthened capacity to manage debt, and (v) a reduction in government debt to the National Bank of Tuvalu (NBT). The TA directly supports the achievement of the program grant through improving government capacity and commitment to fiscal management; and addressing issues which are contributing to public enterprise non-profitability. Tuvalu also benefits from a number of ADB’s regional TA to the Pacific in areas including audit and technical and vocational education.

Tuvalu: Loan, Grant, and Technical Assistance Approvals, 2005–2009
20052006200720082009
Loan approvals
Number00000
Amount (in millions of U.S. dollar)00000
Grant approvals
Number00010
Amount (in millions of U.S. dollar)0003.240
TA approvals
Number01020
Amount (in millions of U.S. dollar)00.301.130

Annex IV. Tuvalu: Relations with the Pacific Financial Technical Assistance Centre (PFTAC)1

The Centre’s assistance to Tuvalu since 2006 has included 8 advisory missions. Tuvalu also sent eleven officials to regional seminars and workshops.

Tax administration and policy

In 2007 and 2008, PFTAC supported the ADB which took responsibility for implementing the tax policy reforms recommended by PFTAC.

A PFTAC mission visited Tuvalu in August 2010 to conduct a post implementation review of the Tuvalu Consumption Tax and changes to the personal and business income tax changes implemented in 2009. Compliance with all tax obligations in Tuvalu is poor, enforcement is limited, and skills within the tax office are low. Government departments are also noncompliant. A debt and return collection guide was developed and a cabinet note prepared for the new cabinet seeking endorsement of stricter enforcement actions.

PFTAC will liaise with the ADB to provide longer-term assistance to Tuvalu to improve compliance levels and skills within the tax office. Much of the compliance improvement is dependent on political support.

The proposed regional IT support strategy for countries with the Revenue Management Software (RMS) will also benefit Tuvalu if it signs the service contract for ongoing maintenance of its new computer system.

A Tuvalu representative has attended Pacific Islands Tax Administrators Association (PITAA) in Cook Islands, Papua New Guinea, and Vanuatu and the head of the tax office undertook an attachment to Fiji Islands Revenue & Customs Authority (FIRCA) sponsored by PFTAC.

Financial sector regulation and supervision

At the request of the ADB, a mission was conducted from July 2–7, 2008 concurrently with the ADB.

These were to: (i) assess the operating condition and performance of the National Bank of Tuvalu along with the adequacy of its lending and liquidity policies and (ii) follow-up on the status of legislation to implement a legal framework for the licensing and on-going supervision and regulation of banks.

During 2009–10, in response to a request from the ADB, assistance has been provided to Tuvalu in reviewing and providing comments/feedback on proposed legislation to supervise and regulate banking institutions to assure compliance with Basel core principles and best practices. In response to this assistance, the Tuvalu authorities have forwarded to PFTAC revised legislation incorporating many of the recommendations previously proposed by PFTAC. A final review of the revised legislation, however, is pending.

Economic and financial statistics

A 2006 mission assessed data needs and prepared a work plan for increasing the range of existing data to be incorporated into the national accounts and balance of payments estimates. Subsequently, some work was begun on updating the estimates by a Central Statistics Division staff member while on study leave in Fiji.

During 2009 two missions assisted the authorities to improve methodology and update the balance of payments and national accounts statistics to the 2008 year. Improvements included benchmarking the nominal national accounts estimates using recent Household Income and Expenditure Survey data, rebasing the constant price estimates, estimation of gross national disposable income, and moving the balance of payments to the latest international standard. A staff member participated in a regional national accounts seminar in Fiji in 2009. Two missions in 2010 assisted the authorities to make further data and methodology improvements and to update the balance of payments and national accounts statistics to 2009.

Annex V. Tuvalu—Statistical Issues

As of December 29, 2010

I. Assessment of Data Adequacy for Surveillance
General: Data have shortcomings that hamper surveillance. Shortcomings are most serious in the national accounts and balance of payments. The Pacific Financial Technical Assistance Centre (PFTAC) has provided technical assistance to the Central Statistics Division (CSD) of the Ministry of Finance to help start compiling those statistics for surveillance and the authorities’ own policy analysis and formulation. More staff needs to be provided to the CSD urgently.
National accounts: With PFTAC assistance in 2009 and 2010, the compilation methodology for the national accounts was improved. However, little progress had been made on previous missions’ recommendations, largely due to a lack of capacity. Attention needs to be paid to improving source data for national accounts.
Price statistics: The consumer price index (CPI) is the only price index compiled in Tuvalu. The CSD produces a quarterly CPI, which is timely and of reasonable quality. The CPI weights are expected to be revised in 2011, based on the 2010 Household Income and Expenditure Survey.
Government finance statistics: The MOF compiles the central government data for budget analysis and control. However, the classifications of some accounts, particularly on capital spending, need to be improved to be in line with international standards.
Monetary and financial statistics: Tuvalu uses the Australian dollar as its legal tender and does not have a central bank. Monetary and financial statistics are currently not produced in Tuvalu. The National Bank of Tuvalu and the Development Bank of Tuvalu provided the Article IV mission with their balance sheets and income statements, which were used to produce the monetary data on the two banks.
Balance of payments: Balance of payments statistics have been compiled by visiting PFTAC experts. A balance of payments statistics mission took place in Tuvalu during June 29-July 8, 2010. The mission assisted the authorities in developing a balance of payments compilation system to enable CSD staff to compile the balance of payments data. The mission noted that many of the underlying data have inconsistencies and errors, resulting in poor quality of the balance of payments statistics. In addition, the mission noted that the CSD needs better trained staff to produce quality balance of payments statistics.
II. Data Standards and Quality
Not a General Data Dissemination System participant.No data ROSC are available.
III. Reporting to STA
No data are currently reported to STA for publication.
Tuvalu: Table of Common Indicators Required for Surveillance(As of December 29, 2010)
Date of Latest ObservationDate ReceivedFrequency of Data7Frequency of Reporting7Frequency of Publication7
Exchange rates112/29/1012/29/10DNANA
International reserve assets and reserve liabilities of the monetary authorities210/201011/2010MINA
Reserve/base moneyNANANANANA
Broad moneyNANANANANA
Central bank balance sheetNANANANANA
Consolidated balance sheet of the banking system09/201011/2010MINA
Interest rates10/201011/2010MINA
Consumer price index11/201012/2010QQQ
Revenue, expenditure, balance and composition of financing3—general government4NANANANANA
Revenue, expenditure, balance and composition of financing3—central government200911/2010AAA
Stocks of central government and central government-guaranteed debt5200911/2010AAA
External current account balance200911/2010AANA
Exports and imports of goods and services200911/2010AANA
GDP/GNP200911/2010AANA
Gross external debt200911/2010AAA
International investment position6200911/2010AANA

Tuvalu uses the Australian dollar as its legal tender.

Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means. Tuvalu does not have a monetary authority. Foreign assets of National Bank of Tuvalu and the Consolidated Investment Fund constitute the official reserves of Tuvalu.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

Tuvalu uses the Australian dollar as its legal tender.

Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means. Tuvalu does not have a monetary authority. Foreign assets of National Bank of Tuvalu and the Consolidated Investment Fund constitute the official reserves of Tuvalu.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

Prepared by ADB staff.

Prepared by PFTAC staff. PFTAC, which is based in Suva, Fiji, is a multi-donor technical assistance institution, financed by the IMF, ADB, AusAID, NZAID, Japan, and Korea, with the IMF as executing agency. The Centre’s aim is to build skills and institutional capacity for effective economic and financial management that can be sustained at the national level. Member countries are: Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.

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