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Tuvalu: Staff Report for the 2014 Article IV Consultation—Informational Annex

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
August 2014
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Fund Relations

(As of June 30, 2014)

Membership Status: Joined June 24, 2010; Article XIV

General Resource Account:

SDR Million% Quota
Quota1.80100.00
Fund holdings of currency (Exchange Rate)1.3776.00
Reserve Tranche Position0.4324.06

SDR Department:

SDR Million% Allocation
Net cumulative allocation1.69100.00
Holdings1.2674.40

Outstanding Purchases and Loans: None

Financial Arrangements: None

Projected Payments to the Fund: None

Exchange Arrangements:

Tuvalu’s legal tender is the Australian dollar. There is no central monetary institution. At the time of joining the Fund, Tuvalu availed itself of the transitory provisions of Article XIV, Section 2. While the exchange control regulations are quite restrictive and prescribe approval requirements from the NBT or the Finance Minister for most payments or transfers, staff’s understanding is that in practice, no approval is required and payments and transfers for current international transactions are administered liberally. Staff continues to conduct a comprehensive review of the exchange system to assess jurisdictional implications. Staff has recommended that the regulations be updated in line with current practice so that Tuvalu can accept the obligations of Article VIII, Sections 2, 3 and 4, although the authorities have indicated that they have no current plans to do so.

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.

Article IV Consultation:

The previous Article IV consultation discussions were held in Funafuti in June 2012. The staff report (IMF Country Report No. 12/259) was discussed by the Executive Board on August 3, 2012.

Technical Assistance:

The Pacific Financial Technical Assistance Centre (PFTAC) has provided assistance on tax policy and administration (2007, 2008, 2010, and 2014); and financial sector supervision (2008). The Secretariat of the Pacific Community has provided assistance on national accounts statistics (2010, 2012). The IMF has provided assistance on balance of payments and government finance statistics under the JSA Project in the Asia and Pacific Region (2012, 2013, and 2014).

Resident Representative:

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

IMF-World Bank Collaboration

The Bank and Fund country teams, currently led by Mr. Robert Utz (Lead Economist, EASPN) and Mr. Jiangyan Yu (Fund mission chief for Tuvalu), have maintained a close working relationship and dialogue on macroeconomic and structural issues. Since Tuvalu’s decision to pursue membership of the Bretton Woods institutions in 2009, the Bank team has joined all IMF missions to Tuvalu since the country’s membership mission, including Article IV missions.

The teams agree that Tuvalu’s main macroeconomic challenges are to ensure fiscal sustainability, strengthen public service delivery, and create a more supportive environment for development. Based on this shared assessment, the teams identified the following structural reform areas, all of which are also addressed in the authorities’ Policy Reform Matrix (PRM), as macro-critical:

  • i. Strengthening public financial management. In the absence of its own currency and monetary policy, a sustainable fiscal policy is key to maintaining macroeconomic stability. Rebuilding buffer assets which were nearly exhausted in the aftermath of the global financial crisis is crucial to ensuring sustainability. Maintaining adequate buffer assets will require a sound fiscal policy framework including saving of cyclical revenues. Moreover, budget reporting and monitoring need to be improved and economic and policy analysis capacity should be strengthened to better inform new spending initiatives.
  • ii. Reforming public enterprises. The government, with ADB support, has begun a comprehensive public enterprise reform program to improve current weak performance and profitability. Ensuring public enterprises are independently and professionally run, and are transparently subsidized for provision of essential but noneconomic activities will strengthen Tuvalu’s business climate and lessen the drain on public resources.
  • 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 challenging to generate domestic private sector employment. Demand for Tuvaluan seafarers on the international maritime employment market is declining, due to rising 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 overseas job opportunities and to reduce rising poverty.
  • iv. Strengthening public service delivery. The government of Tuvalu in the TKII and the medium term reform agenda identified improving service delivery in the health and education sectors as key objectives. Based on analysis from the Health and Education Medium Term Expenditure Framework and other analytical work, the authorities have begun to consider reforms to ensure appropriate allocation between primary and tertiary service delivery, and maximizing returns on scare resources.
  • v. The teams expect to sustain the close cooperation going forward. Table 1 details the specific activities implemented and planned by the two teams over the period July 2014–October 2016.
Table 1.Tuvalu: Bank and Fund Implemented/Planned Activities in Macro-Critical Areas, [July 2014–October 2016]
ProductsExpected/Actual Delivery Date
World Bank Work Program
  • Joint participation in Article IV Mission
  • Systematic Country Diagnostic
  • Country Policy Institutional Assessment
  • Tuvalu Aviation Investment Program
  • Second Budget Support Operation
  • Pacific Regional Oceanscape Project
  • Energy Project
  • Telecom TA
  • [Annual/Biennial]
  • [FY2015]
  • [Annual]
  • [FY2016]
  • [FY2015]
  • [FY2015]
  • [FY2015]
  • [FY2015]
IMF Work Program
  • PFTAC: BOP statistics TA mission
  • PFTAC: national accounts TA mission
  • PFTAC: bank supervision TA mission
  • Staff visit
  • [FY2015]
  • [FY2015]
  • [FY2015]
  • June 2015

Relations with the Asian Development Bank

Partnerships

The Asian Development Bank (ADB) has partnered with the Government of Tuvalu since 1993. As of 31 December 2013, three loans with a total value of US$7.82 million, two policy-based grants for US$5.59 million, and over 20 technical assistance projects totaling US$6.51 million have been approved, largely supporting education and public sector management.

ADB’s approach and operations in Tuvalu are aligned to the National Strategy for Sustainable Development, Te Kakeega 2005–2015, objectives of good governance and macroeconomic growth and stability.

ADB, together with development partners, remain committed to supporting government’s roadmap for improving the management of public resources, exercising prudent public expenditure and fiscal management, strengthening corporate governance, and delivering better public services to the people of Tuvalu.

ADB participates as a team member of the International Monetary Fund Article IV Mission to Tuvalu, and liaises closely with the Pacific Financial Technical Assistance Centre—particularly on macroeconomic management and fiscal conditions.

ADB observes the biannual meetings of the Tuvalu Trust Fund Board and cooperates with civil society organizations in Tuvalu to strengthen the effectiveness, quality, and sustainability of its services.

ADB is also committed to undertaking joint missions with development partners to improve coordination and lessen demands on country capacity.

ADB Supported Projects and Programs

ADB’s strategic directions in Tuvalu remains focused on strengthening public financial management, including public expenditure and fiscal management, corporate governance, and public enterprise reforms.

From November 1999 to July 2001, ADB worked closely with the government to implement the Island Development Program loan and technical assistance program. This focused on improving governance and economic management, enhancing employment opportunities through skills development, and improving services on the outer islands. The loan was closed in 2001 and rated successful. ADB also completed the upgrade of the Tuvalu Maritime Training Institute in 2010. Rated partly successful, the new structures and training facilities enable the institute to remain accredited with the International Maritime Organization, and will improve the education and skills of Tuvaluan seafarers so that they can compete for jobs overseas.

Tuvalu has benefitted from a number of ADB regional projects in the areas of economic management, governance, environment, renewable energy, private sector development, and education. Ongoing support for economic analyses is available under the Pacific Economic Management technical assistance with revenue and statistics technical support provided by the Pacific Financial Technical Assistance Centre. Regional cooperation offers many benefits and the collective efforts towards increased aviation safety and security requirements under the ADB-financed Pacific Aviation Safety Office and the Pacific Regional Audit Initiative are good examples of its potential.

Developing effective fiscal management to complement private sector development has been a long-standing goal of ADB to Tuvalu. The Improved Financial Management Program grant for $3.24 million was approved in December 2008 and disbursed in 2009 and 2011. The second program grant of $2.35 million, approved in November 2012 and disbursed in March 2013, achieved key public financial management objectives outlined in government’s policy reform matrix.

ADB’s technical assistance helped build the government’s capacity to meet commitments under both programs. Overall, the performance of public enterprises has improved, however developing and implementing a more robust policy reform matrix and building on past successes is important for sustainable economic growth and more efficient and effective public services for the people of Tuvalu.

Future Directions

Tuvalu’s growth strategy is set out in the National Strategy for Sustainable Development, Te Kakeega, 2005–2015. The strategy recognizes that strengthening public sector management and improving the private sector are key drivers for change in Tuvalu. This is consistent with the focus of ADB’s Pacific Approach 2010–2014, approved in November 2009, as well as ADB’s country operations business plan (COBP) 2014–2016 for Tuvalu, approved in July 2013.

ADB’s operational strategy for 2014-2016 focuses on improving public financial management and supporting the process of public enterprise reform, with specific objectives to improve their governance, administration, and profitability.

A policy-based grant of US$2.2 million in 2015 and supporting technical assistance of $300,000 per annum is planned to help Tuvalu build on previous programs and ensure that the reform momentum created by earlier programs is sustained.1

Tuvalu will continue to benefit from regional projects in the areas of economic management and governance, climate change, education, and support from the Pacific Infrastructure Advisory Center in the energy and utilities sectors.

Pftac Country Strategy 2012–2014

Background

Tuvalu has faced a difficult macroeconomic environment in recent times which has resulted in pressures on fiscal sustainability. Growth has remained weak despite improved performance in the fishing and private retail sectors. Large revenue from fishing licenses, together with substantial donor financial support, facilitated a sizable budget surplus in 2013 but also an expansionary budget in 2014. The short-term outlook appears stable on the back of large donor-financed investments expected in the period ahead, but the balance of risk tilts towards the downside. Vulnerabilities in the SOE and financial sectors continue to pose challenges to macro stability.

Development partner budget support has enabled operations to continue while the authorities work with partners to develop a joint policy matrix to underpin future budget support. Tuvalu became an IMF and World Bank member in 2009.

PFTAC TA has been moderate and concentrated in the revenue and statistics sectors. Recent PFTAC TA has been focused on assisting the authorities achieve the gains planned from revenue reforms through on-the-job assistance in revenue administration following the completion of an ADB project that supported the PFTAC-designed reforms. There has also been significant assistance in developing national accounts and balance of payments statistics, in part to allow Tuvalu to meet the requirements of IMF membership. PFTAC provided TA in 2012 to develop a PFM Reform Roadmap.

Strategy 2012–2014

PFTAC’s TA strategy is guided by the APD regional strategy note and is planned within the results framework for the current PFTAC funding cycle.1

PFTAC TA aims to support the authorities sustain progress on improving fiscal sustainability. PFTAC will continue to work closely with the broader development partner group to ensure coherence and will aim to support implementation of actions in the authorities’ shared policy matrix. Development of a PFM Roadmap and enhancement of national accounts statistics are expected to be the main focus.

In the Public Financial Management area, PFTAC provided support in 2012 to develop a PFM roadmap to prioritize the strengthening of PFM weaknesses identified in the 2011 PEFA (1.2). Support to implementation of specific elements will also be available, in coordination with other development partners and in particular the AusAID-supported budget and treasury advisors. Officials from Tuvalu have regularly attended PFTAC’s PFM workshops, including the annual 2 week Strategic Development Workshop jointly sponsored by PFTAC and the Australian Department of Finance at ANU in Canberra. PFTAC would look to assist the authorities implement a follow-up PEFA assessment, probably in 2015 (1.1).

In the revenue area, the main focus will be continuing support in the enforcement of SOE tax obligations through an enhanced compliance improvement program. It is anticipated that this program will roll out to include large corporate and individual business enterprises during 2014/15. The IT operating system was re-established in 2013/14 after data base issues were resolved and maintenance and effective use of the system will be an important tool in improving compliance. PFTAC plans a support Mission in May 2014 with a follow up support mission in early 2015.

In statistics, PFTAC will resume providing regular assistance on national accounts compilation (4.1), taking over from SPC which has been doing this since 2010. Training will also be provided to increase capacity in the statistics office so that ultimately broader measures of national income and saving (4.3) can be regularly produced. PFTAC has been providing support on balance of payments compilation (4.6, 4.9) but this has been taken over by the JSA Project on the Improvement of External Sector Statistics in the Asia and Pacific Region.

In financial sector supervision, PFTAC will be available to provide strategic support should the authorities begin implementing the financial institutions act passed in 2010. Given the lack of in country capacity, establishing a basic on and off site supervision program (3.1 and 3.4) will require TA resources well in excess of PFTAC’s availability. As in other sectors though, PFTAC would be able to provide strategic oversight to the process if other partners were able to provide resources for on the job support.

No direct macroeconomic support is currently envisaged, with the TTFAC and ADB’s PEM TA currently taking the lead in these areas.

Statistical Issues

(As of July 1, 2014)

I. Assessment of Data Adequacy for Surveillance
General: Data have shortcomings that hamper surveillance. Shortcomings are most serious in the national accounts and monetary statistics. The Pacific Financial Technical Assistance Centre (PFTAC) and the Statistics Department (STA) have provided technical assistance (TA) to the Central Statistics Division (CSD) of the Ministry of Finance to help compiling statistics for surveillance and the authorities’ own policy analysis and formulation. The CSD will need to train additional staff to improve data provisioning.
National accounts: With PFTAC assistance, the compilation methodology for the national accounts is gradually improving. 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 were revised in 2011, based on the 2010 Household Income and Expenditure Survey.
Government finance statistics (GFS): 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. GFS data are not reported to STA. The authorities are participating in the Japan Administered Account for Selected IMF Activities (JSA)-funded three-year regional GFS capacity building project. It is anticipated that a total of three missions to Tuvalu will be conducted under this project, the first two of which occurred in April 2012 and April 2013. Staff resource levels continue to be an impediment to an efficient and effective GFS data compilation.
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, which were used to produce the monetary data on the two banks.
Balance of payments and International Investment Position (IIP): The IMF has been providing TA to Tuvalu under the JSA Project on the Improvement of External Sector Statistics (ESS) in the Asia and Pacific Region. Three TA missions have been conducted since April 2013. Important progress has been made in improving coverage and classification of the ESS. Moreover, capacity has been developed and the CSD compiler has taken ownership of most of the compilation process. However, shortcomings remain in the coverage of FDI, exports, and debt-related transactions and positions. There is also a high risk of sudden disruption of the compilation process and deterioration of data quality as the CSD has only one ESS compiler, who also compiles other macroeconomic statistics.
II. Data Standards and Quality
Tuvalu began participating in the General Data Dissemination System in 2013.No data ROSC are available.
III. Reporting to STA
Annual balance of payments and IIP statements, both in BPM6 format, were submitted to STA in May 2014 for the first time (data are currently under review). Other statistics are currently not being reported to STA.
Tuvalu: Table of Common Indicators Required for Surveillance(As of July 1, 2014)
Date of

Latest

Observation
Date

Received
Frequency

of

Data7
Frequency

of

Reporting7
Frequency

of

Publication7
Exchange rates17/1/147/1/14DNANA
International reserve assets and reserve liabilities of the monetary authorities204/201405/2014MINA
Reserve/base moneyNANANANANA
Broad moneyNANANANANA
Central bank balance sheetNANANANANA
Consolidated balance sheet of the banking system04/201405/2014MINA
Interest rates04/201405/2014MINA
Consumer price index03/201405/2014QQNA
Revenue, expenditure, balance and composition of financing3—general government4NANANANANA
Revenue, expenditure, balance and composition of financing3—central government04/201405/2014MMM
Stocks of central government and central government-guaranteed debt504/201405/2014AANA
External current account balance12/201205/2014AAA
Exports and imports of goods and services12/201205/2014AAA
GDP/GNP12/201205/2014AANA
Gross external debt12/201305/2014AANA
International investment position 612/201205/2014AAA

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 so 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 so 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

As a Category A country, Tuvalu is eligible for grant assistance from the Asian Development Fund (ADF). The country allocation is indicative and is subject to a revised estimate of ADF commitment authority, country performance assessment outcomes, and the country’s risk of debt distress.

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