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Kiribati: Staff Report for the 2013 Article IV Consultation—Informational Annex

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
June 2013
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Fund Relations

(As of March 31, 2013)

Membership Status: joined June 3, 1986; accepted Article VIII.

General Resources Account:

SDR MillionPercent Quota
Quota5.60100.00
Fund holdings of currency5.60100.02
Reserve position in Fund0.000.08

SDR Department:

SDR MillionPercent Allocation
Net cumulative allocation5.32100.00
Holdings5.35100.52

Outstanding Purchases and Loans: None.

Financial Arrangements: None.

Projected Obligations to Fund: None.

Implementation of HIPC Initiative: Not Applicable.

Implementation of Multilateral Debt Relief Initiative (MDRI): Not Applicable.

Exchange Rate Arrangement: The Australian dollar circulates as legal tender.

Article IV Consultation:

The 2011 Article IV consultation discussions with Kiribati were held in Tarawa during February 15–23, 2011.)

Technical Assistance (TA), 1995–2011:

STA, LEG, MCM, FAD, and PFTAC have provided TA on statistics, tax administration and policy, budget management, Revenue Equalization Reserve Fund (RERF) and Pension Fund (KPF) management, financial sector reform and supervision, and combating financial crime and financial system abuse.

Resident Representative: The resident representative office in the Pacific Islands was opened in September 2010 in Suva, Fiji. Mr. Yongzheng Yang is the Resident Representative.

Relations with the Pacific Financial Technical Assistance Centre (PFTAC)1

(As of April, 2013)

During the current funding cycle (May 2011 to May 2014), PFTAC assistance to Kiribati has included advisory missions. Kiribati also sent 11 officials to regional seminars and workshops.

Tax Administration and Policy

In 2003, PFTAC recommended several reforms. These included: a value-added tax (VAT); a presumptive tax; and a single ad valorem tax on imports from non Pacific countries; simplified personal income tax (PIT); single rate of corporate income tax (CIT). A steering committee was established to manage the introduction of the reforms. In 2009, a subsequent review mission was provided to update tax recommendations.

In February 2009, the cabinet approved the introduction of legislation to treat income tax deductions from salary and wages (PAYE) as a final tax. This change has now been implemented, but further TA may be necessary to ensure that the change operates effectively.

Cabinet has also given approval “in principle” to implementation new regimes for VAT and excise tax and revenue administration. PFTAC has provided TA to prepare the draft legislation and will provide TA to assist in implementation. Cabinet has reviewed the legislation and the first reading of the Bill is anticipated in late April 2013. Cabinet had indicated that the VAT would commence in January 2014, but this dependant on safe passage of the bill through Parliament no later than August 2013.

PFTAC stands ready to continue to assist the authorities with VAT implementation; reviewing existing income tax business process; and implementing new automated business processing (Revenue Management System v7).

Public Financial Management (PFM)

An August 2011 mission to Kiribati assisted the Ministry of Finance in prioritizing its PFM reform activities, and provided a framework for the current joint AusAid/AsDB long-term TA. Prior to the inception of that TA, two PFTAC/IMF missions worked with the Ministry of Finance officials to modify their chart-of-accounts to capture more information on donor-funded projects, to improve the integration of planning and budgeting, and to provide options for better cash and debt management. In addition, PFTAC’s PFM Advisors participated in the August 2012 AsDB/AusAid Technical Assistance inception mission, and a concurrent donor forum.

PFTAC is ready to provide additional technical support on budget preparation, cash/debt management, and other aspects of budget execution. Officials from Kiribati have regularly participated in PFTAC’s regional PFM events, including the November 2011 MTB workshop, the July 2012 PEFA Workshop, the Strategic Development Program Workshops (with Australia DOFD), and the PIFMA Heads meetings.

Financial Sector Regulation and Supervision

In August 2003, the PFTAC advisor and an IMF legal expert visited Kiribati to conduct consultations with industry and government officials on a Financial Institutions Bill that had been drafted in July 2002. Responses to comments raised by the authorities, together with appropriately amended draft legislation, were forwarded to the authorities in December 2003 for action.

To date there has been no further progress on the draft Financial Institutions Bill or the previously drafted Anti-money Laundering Legislation. The PFTAC advisor makes periodic contact with the Ministry of Finance regarding the status of the draft legislation.

Economic and Financial Statistics

GDDS metadata was first published on the IMF website in April 2004 and subsequently updated in March 2013, following assistance by PFTAC. A brief mission was undertaken in August 2006 to assess TA needs. The BOP compiler benefited from training provided in regional courses in 2005 and 2010. PFTAC provided TA on balance of payments in 2008, 2010 and 2012, improving compilation methods and use of source data, as well as providing training, and helping with the transition to BPM6.

PFTAC provided TA on national accounts (NA) in 2008, 2009, 2010, and 2013, assisting the authorities in making significant improvements in methodology and use of source data. Beginning in 2012, PFTAC is assisting with the development of an expenditure measure of GDP. The NA compiler benefited from regional courses in 2009 and 2012. PFTAC also sponsored a one-month attachment for the BOP compiler with Statistics New Zealand in May 2009.

Macroeconomic Analysis

Two missions in 2011 provided assistance in building capacity related to basic forecasting techniques, using the medium-term fiscal framework developed as part of ADB assistance, and assessing sustainable levels of drawdowns from Kiribati’s Reserve Equalization Reserve Fund. A regional financial programming workshop held jointly in 2012 by PFTAC and the Singapore Regional Training Institute provided training in financial programming techniques to two economists of the Ministry of Finance and Economic Development.

Bank-Fund Collaboration

A. World Bank-IMF Collaboration

(As of April 30, 2013)

The Fund and the Bank teams maintain close cooperation in various areas and consult frequently. During the current cycle, the Bank staff has joined the IMF missions, including IMF staff visits and the 2013 Article IV mission. The IMF staff and the World Bank staff maintained continuing closed dialogue on the economic developments and aspects and components of the government reform program.

During the current cycle, the teams have produced a Joint DSA. The IMF team provided analysis and advice on the overall macroeconomic and fiscal framework, including fiscal and RERF sustainability. The IMF and World Bank have also provided technical assistance on the government borrowing and overdraft. Using this advice, the government has cleared expensive non-concessional debt in the end of 2012 and reduced borrowing costs. The Fund also provided technical assistance on statistical issues, including Government Finance Statistics and Balance of Payments. The Bank has been engaged in various infrastructure projects, including road rehabilitation, airport improvement, solar energy, and adaptation to climate change. Bank staff provided technical assistance on government expenditures, reforms of copra subsidy and import levy fund, liberalization of telecommunication sector, management of RERF assets, and social protection issues. The Bank has worked closely with the government to identify comprehensive program of priority economic reforms, and supported coordination of donor TA around the reform agenda. Reforms identified through this process are now being supported under joint donor budget support, coordinated by the World Bank.

The IMF and World Bank teams will continue close cooperation going forward, in particular in the context of the government reform program. As agreed earlier, the Fund will continue to lead on macro issues, in particular overall macroeconomic framework, including in the medium-and-longer term, and the Bank on macro-critical structural reform issues.1 The Fund and the Bank staff will also cooperate with regard to follow up TA on the RERF management.

B. Relations with the World Bank Group2

Kiribati became a member of the World Bank Group in 1986.

On March 1, 2011, the World Bank’s Board of Executive Directors discussed the first Country Assistance Strategy (CAS) for Kiribati, which had previously been covered by a Pacific Islands Regional Engagement Framework. The CAS is structured around the themes of: (i) addressing the existential threat posed by climate change; and, (ii) mitigating the effects of geographic isolation.

The CAS anticipates a significantly expanded program of advisory and financial support for Kiribati. Consistent with Kiribati’s limited repayment capacity highlighted in the DSA, it is anticipated that IDA financing will be provided on 100-percent grant terms. IDA grants and trust fund investments of as much as US$50 million are anticipated over the four year CAS period from FY2011 to FY2014. Such a program of investments is intended to build a foundation for the World Bank to play a more substantive role, in close collaboration with the IMF and other donor partners, in a coordinated economic policy dialogue with the Government of Kiribati.

Key components of proposed World Bank Group engagement include:

  • ➢ Climate change adaptation and building resilience against shocks is at the core of Bank engagement in Kiribati. The Bank, with trust fund financing, has been supporting climate change mitigation since 2003 through the Kiribati Adaptation Program (KAP). Trust fund financing of US$7–10 million has been agreed in principle for KAP 3 from GEF, GFDRR, Australia, and, potentially, New Zealand. This will involve a significant scale up compared to previous phases. Activities will focus on seawalls, mangrove planting, and water conservation and supply. In addition to KAP, the Bank is proposing to work with the government and other donors to consider options for an integrated program in the water sector, which is the key issue where the climate change and development agendas intersect in Kiribati. Kiribati’s already limited supply of fresh water adversely affects development outcomes, and population growth and the impact of climate change is likely to put further pressure on this critical resource. Beyond climate change adaptation, the Bank is committed to accelerating efforts to address wider issues of vulnerability in Kiribati, including accessing trust fund resources to improve renewable energy generation to reduce reliance on volatile imported diesel, and to support the transport of food to remote outer islands.
  • ➢ Mitigating the effects of geographic isolation. Given Kiribati’s remoteness, the Bank anticipates scaling up support for climate friendly infrastructure investments. A South Tarawa road improvement investment of US$24m in IDA and TF financing—undertaken jointly with the AsDB—was approved by the Board on March 1, 2011, with the Kiribati CAS. The Bank has also mobilized significant grant resources with New Zealand and other partners, to help bring Kiribati airports–a vital link with the outside world–up to international safety standards.
  • ➢ Supporting economic reform and regional integration. An expanded program of investments has provided a foundation for a more substantive engagement by the Bank Group in a coordinated economic policy dialogue in Kiribati. The World Bank is now preparing a budget support operation to support key public finance and structural reforms identified through the economic dialogue process. The Bank Group is supporting government efforts to open the telecoms market to new private investments. As well as the direct benefits, telecoms reform has elsewhere in the Pacific proven to be especially successful in building public support and momentum for reform more broadly. The Bank and IFC will cooperate closely in supporting other potential SOE transactions, including the introduction of private participation in the management of the Otintaai hotel. As well as domestic reform, the Bank Group continues to support efforts by Kiribati and other Pacific Island countries to gain benefits from greater regional integration, including participation in temporary labor migration schemes established by New Zealand and Australia and anticipated analytical and investment support to help countries improve management and returns from pelagic and deep-sea fishery resources.

Relations with the Asian Development Bank 1

The Asian Development Bank has approved eight project loans to Kiribati amounting to US$34.7 million, all from Asian Development Fund (ADF) resources since Kiribati joined the AsDB in 1974. In addition, TA amounting to US$18.95 million has been provided for 38 projects. The latest AsDB loan to Kiribati, for South Tarawa Sanitation Improvement Sector project, was approved in October 2011. The AsDB most recently approved an US$0.8 million TA grant for a strengthening Public Financial Management in December 2011. AusAID provided $1 million cofinancing.

The strategy of the AsDB in Kiribati directly supports the government’s Kiribati Development Plan (KDP). Further, AsDB’s approach is anchored in the mid-term review of the Pacific Strategy, which put a stronger emphasis on issues of supporting a conducive environment for private sector development, good governance, and capacity development. Rapid population growth and urban migration has left Kiribati with overcrowded urban areas, and its most pressing development challenges are social and environmental concerns, including the impacts of climate change, access to clean water and sanitation, and the spread of HIV/AIDS. The AsDB supports the government’s efforts to balance growth more evenly throughout the country through TA for the Integrated Land and Population Development Program on Kiritimati Island. The AsDB supports also efforts to improve the government’s financial management through TA for Economic Management and Public Sector Reform recognizing the sizeable constraint the poor performance of public enterprises is placing on government ability to fund needed goods and services.

Kiribati: Loan, Grant and Technical Assistance Approvals (2007–12)
200720082009201020122012
Loan approvals
Number000110
Amount (US$m)000127.560
Grant Approvals
Number000000
Amount (US$m)000000
TA Approvals
Number012210
Amount (US$m)00.80.850.20.80

Prepared by the Asian Development Bank Staff.

Prepared by the Asian Development Bank Staff.

Statistical Issues

Assessment of Data Adequacy for Surveillance(As of May 1, 2013)
General: Data provision has some shortcomings, but is broadly adequate for surveillance. Balance of Payments data are the most affected area.
National Accounts: With PTFAC assistance GDP estimates have improved. Three TA missions took place in 2012 to improve national account data and produce revised estimates through 2011. However, further capacity building would be needed to continue to improve the quality of GDP estimates. So far, estimates are limited to Gross Domestic Product (GDP) at current and constant 06 prices, using the production approach. Work is ongoing on the expenditure-based GDP estimates.
Price statistics: The monthly retail price index (1996=100) is produced with a short lag (about a month), based on a survey in South Tarawa (a national index is not available). There are no producer, wholesale, or trade price indices.
Government finance statistics: A Government Finance Statistics mission took place in January 2013 to compile draft public sector delineation by completing work on the institutional unit classification. While a complete review of government units, statutory extra budgetary units, and state-owned enterprises (SOE) was completed, a gap still remains regarding donor-financed project funds.
Monetary statistics: The balance sheets of all the financial institutions (Bank of Kiribati, Development Bank of Kiribati, Kiribati Provident Fund, and Kiribati Insurance Corporation) are available with lags, but the consolidated balance sheet of the financial sector is not available. Data on interest rates are reported with a long lag.
Balance of payments: The quality of the data has improved with the PFTAC assistance. A PFTAC mission took place in August 2012. The mission revised the BOP estimates upto 2011, and updating estimates to end 2009. As in the case of GDP data. PFTAC has suggested the need for further statistical capacity building. There still remain some shortcomings in non-trade external statistics, which are reported with a long delay (about a year or more).
DATA STANDARDS AND QUALITY
Kiribati has been a participant in the General Data Dissemination System (GDDS) since 2004.No data ROSC are available.
REPORTING TO STA (OPTIONAL)
No data are currently reported to STA for publication in the Government Finance Statistics Yearbook, the Balance of Payments Statistics Yearbook or in the IFS.
Kiribati: Table of Common Indicators Required for Surveillance
Date of latest

observation
Date receivedFrequency of

Data
Frequency of

Reporting7
Frequency of

publication7
Exchange Rates5/1/135/1/13DDD
International Reserve Assets and Reserve Liabilities of the Monetary Authorities /11/31/133/15/13MANA
Reserve/Base MoneyNANANANANA
Broad MoneyNANANANANA
Central Bank Balance SheetNANANANANA
Consolidated Balance Sheet of the Banking SystemNANANANANA
Interest Rates /23/31/134/3/13AA1
Consumer Price Index3/134/15/13MQQ
Revenue, Expenditure, Balance and Composition of Financing/3 - General Government/412/31/122/19/13AA1
Stocks of Central Government and Central Government-Guaranteed Debt /512/31/122/19/13AA1
External Current Account Balance12/31/112/18/13AA1
Exports and Imports of Goods and Services12/31/123/31/13AA1
GDP/GNP12/31/112/18/13AA1
Gross External Debt12/31/124/18/13AA1
International Investment Position /612/31/112/18/13AA1

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.

Both market-based and officially-determined, including discounts rates, money market rates, rates on treasury bills, notes and bonds.

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).

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.

Both market-based and officially-determined, including discounts rates, money market rates, rates on treasury bills, notes and bonds.

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).

1

PFTAC in Suva, Fiji is a multi-donor TA institution, financed by IMF, AsDB, AusAID, and NZAID, 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.

1

See 2011 Article IV report, Annex III on Bank-Fund collaboration.

2

Prepared by the World Bank staff.

1

Prepared by the Asian Development Bank staff.

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