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Tuvalu: Staff Report for the 2014 Article IV Consultation—Debt Sustainability Analysis

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

1. Being one of the smallest and most isolated countries in the world, Tuvalu faces tremendous challenges. With a population of some 11,000 people living on 26 square kilometers, Tuvalu is more than 3,000 kilometers away from its nearest major external market. Despite substantial, albeit volatile, foreign aid and a boom in the fisheries sector, growth prospects are hampered by weak competitiveness and capacity, with remoteness causing high transportation cost and isolation, and the lack of scale increasing transaction cost.

2. The authorities are cognizant of the challenges and have developed a broad reform agenda. A development strategy and reform package, which were formulated in consultation with development partners, have been fleshed out in an effort to enhance governance and social development, facilitate private sector growth, and safeguard macroeconomic stability.

3. The budget achieved a substantial surplus for the second consecutive year in 2013, but a dramatic increase of budget spending in 2014 has called into question its fiscal sustainability. The fiscal surplus reached 26.3 percent of GDP, reflecting record high fishing license fees and higher than expected tax revenue and foreign aid. Nevertheless, the 2014 budget targets a more than 20 percent expansion of spending, which would be financed by a large temporary increase of foreign grants and transfers. The substantial fiscal expansion would result eventually in a depletion of fiscal buffers and accumulation of foreign debt.

4. Meanwhile, the government’s external assets have risen markedly. The Consolidated Investment Fund (CIF), which serves as a fiscal buffer and is fully controlled by the government of Tuvalu, has been built up to more than $A 15 million (38 percent of GDP). The Tuvalu Trust Fund (TTF), which was capitalized by development partners in 1987, has grown from $A130 million in 2012 to more than $A 140 million in 2013 (356 percent of GDP). The TTF is not fully sovereign and is owned instead by Tuvalu, Australia, and New Zealand, amongst others countries. It cannot be drawn down freely: when its market value exceeds a “maintained value” indexed to Australian CPI, the TTF Board—representing both development partners and Tuvalu government—can decide to transfer the funds in excess of the target income to the CIF. This DSA analyzes gross public debt because of the limited conditional access to the TTF.

5. Since the previous DSA conducted in 2012, public and publicly guaranteed (PPG) debt has continued to decline, but is expected to rise as a result of public enterprise borrowing in the near term. As of end-2013, total PPG debt stood at US$ 14.6 million, equivalent to 41 percent of GDP. External debt was US$ 12.5 million (35 percent of GDP), and domestic debt—owed to domestic banks—stood at US$ 2.1 million (6 percent of GDP). Bilateral development partners provide only grant assistance, while multilateral institutions, most notably the Asian Development Bank, provided concessional loans to the government. Meanwhile, loans contracted at nonconcessional terms by two fishing joint ventures established by the National Fishing Corporation of Tuvalu (NAFICOT) and Asian companies account for a significant share of public debt. These loans are largely guaranteed by the government, and constitute contingent government liabilities. 1 Recently, one joint venture has been working on a new loan agreement to finance the expansion of its fishing capacity, which implies a large addition of public debt in the near term—most likely in 2014 or 2015.

Tuvalu: Public Debt, End-2013
CreditorOutstanding amount (US$ million)Outstanding amount (Percent of GDP)Concessional
External Debt12.535.3
Central Government DebtADB6.217.4Yes
Development Bank DebtEIB1.43.8No
Fishing Joint Venture DebtCommercial bank5.014.1No
Domestic debt2.15.8No

6. This DSA is built on a baseline macroeconomic framework that assumes an accommodative and procyclical fiscal policy. Without a timely action to cut back the spending envelope from the 2014 budget level, the fiscal balance would shift into a deficit from 2015 onwards, which would be financed initially by drawing down the CIF, and later, when the CIF is fully depleted in 2021, by concessional borrowing. This would cause debt-to-GDP ratio to decline over the medium term as the current debt is amortized, and build up again as new borrowing occurs. Although weaknesses in the banks and public enterprises could pose large liabilities to the government, these costs are not assumed in the baseline because of the lack of reliable data—the cost of addressing banking fragilities needs to be assessed on the basis of a prudent regulation and resolution framework, while the fiscal cost associated with public enterprise weaknesses should be estimated in the context of a comprehensive public enterprise reform package.

7. Compared to the previous DSA, the main features of the current macroeconomic framework can be summarized as follows:

  • Growth. Real GDP is projected to grow by an average of 2.2 percent per annum over the medium term and 2 percent over the long run, compared to a constant of 1.2 percent in the previous DSA.
  • Inflation. Inflation is projected to reach about 3 percent in the near term and gradually moderate to below 2 percent in the long run, which is similar to the previous DSA.
  • Balance of payments. Exports of goods and services are projected to remain stable at 60 percent of GDP over the medium and long run compared to just above 10 percent in the previous DSA, with the difference reflecting revision to the data to account for large exports by fishing joint ventures following a recent technical assistance on external account statistics. Imports of goods and services would peak at 168 percent of GDP in the medium term and moderate to 115 percent of GDP over the long run; in the previous DSA, imports would peak at 151 percent of GDP over the medium term, and moderate to 112 percent of GDP over the long run. The current account deficit would widen to 37 percent of GDP over the medium term, and then narrow to 4.4 percent of GDP by the end of the projection period, a level close to the last DSA.
  • Fiscal. Revenue is slightly higher than in the last DSA over the medium term, reflecting buoyant fishing license fees. However, it is expected to fall to 45 percent of GDP towards the end of the projection period, compared to 56 percent in the last DSA. Grants as a share of GDP will also fall over time, reaching 13 percent of GDP by 2034 compared to 17 percent of GDP in the previous DSA. Expenditures are projected to decline from 100 percent of GDP in 2014 to 62 percent in 2034, while the last DSA projected expenditure to be broadly stable at above 80 percent of GDP.
  • Discount rate. The discount rate has been increased from 3 percent in the last DSA to 5 percent, reflecting the most recent DSA guidelines.
Tuvalu: Key Macroeconomic Assumptions(In percent)
2012 DSA2014 DSA
2012-2017 AVG2014-2019 AVG
Real GDP growth1.22.2
Inflation (GDP deflator)1.92.1
Current account balance/ GDP0.5−11.9
Revenue excluding grants/ GDP58.560.0
Grants/GDP13.724.4
Expenditure/GDP81.087.0
Fiscal Balance/GDP−8.8−2.2

8. Risks to the baseline scenario are on the downside. Vulnerabilities in state-owned banks and public enterprises imply large government liabilities. Uncertainties within the fisheries sector could pose additional risks to revenue and fiscal soundness. Moreover, a slowdown in advanced and emerging economies, including China, could undermine activity and reduce job opportunities in the Pacific region, which would weaken the demand for Tuvaluan seafarers and seasonal workers, adversely affecting Tuvalu’s growth prospects.

Debt Sustainability

A. External Debt

9. Under the baseline scenario, external debt breaches the indicative threshold of debt-to-GDP ratio for prolonged periods. The threshold for PV of Debt to GDP is determined by the CPIA index, a measure of the country’s institutional capacity. While the trajectory shows a decline in debt levels from 52 percent of GDP to just above 20 percent over the medium term, reflecting amortization of existing loans and no new borrowing in the medium term, increased borrowing only in the outer years, leading to the full depletion of CIF buffers by 2021. This implies that the debt trajectory begins to rise again and breaches the threshold by 2029. (Figure 1) The PV of debt-to-GDP ratio starts at a much higher level than the last DSA, but converges to the level as the last DSA toward the end of the projection period. The negative contribution of residuals (table 1 and 2) to the debt trajectory throughout the medium-term horizon is largely driven by withdrawing from external assets under the CIF.

Figure 1.Tuvalu: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2014–2034 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024. In figure b. it corresponds to a Alternative (policy adjustment) shock; in c. to a Alternative (policy adjustment) shock; in d. to a Alternative (policy adjustment) shock; in e. to a Alternative (policy adjustment) shock and in figure f. to a Alternative (policy adjustment) shock

Table 1.Tuvalu: External Debt Sustainability Framework, Baseline Scenario, 2011–2034(In percent of GDP, unless otherwise indicated)
ActualHistorical6/

Average
Standard6/

Deviation
Projections
2011201220132014201520162017201820192014-2019

Average
202420342020-2034

Average
External debt (nominal)1/40.736.435.352.044.637.932.125.520.335.668.6
of which: public and publicly guaranteed (PPG)40.736.435.352.044.637.932.125.520.335.668.6
Change in external debt−9.9−4.3−1.116.7−7.4−6.7−5.8−6.6−5.25.02.3
Identified net debt-creating flows27.2−30.1−26.9−30.134.220.116.26.88.63.41.3
Non-interest current account deficit34.7−26.9−27.9−0.723.7−29.734.720.816.97.79.65.33.44.7
Deficit in balance of goods and services98.751.763.473.4106.789.678.060.861.156.454.6
Exports37.862.862.961.961.160.560.260.059.959.959.9
Imports136.5114.4126.3135.3167.8150.1138.2120.8121.0116.2114.5
Net current transfers (negative = inflow)−37.6−52.6−45.4−45.98.4−55.5−35.8−35.3−29.3−22.9−22.6−22.9−22.5−22.8
of which: official−40.9−56.1−48.6−58.6−38.9−38.4−32.4−26.0−25.7−26.1−25.6
Other current account flows (negative = net inflow)−26.4−26.0−45.9−47.7−36.2−33.5−31.8−30.2−28.9−28.2−28.6
Net FDI (negative = inflow)0.3−4.2−1.8−1.62.3−1.8−1.8−1.8−1.8−1.8−1.8−1.8−1.8−1.8
Endogenous debt dynamics 2/−7.81.02.91.51.31.11.10.90.80.0−0.3
Contribution from nominal interest rate1.71.61.52.32.52.21.81.51.20.51.0
Contribution from real GDP growth−3.5−0.1−0.5−0.8−1.2−1.1−0.7−0.6−0.5−0.5−1.3
Contribution from price and exchange rate changes−6.1−0.51.9
Residual (3-4) 3/−37.025.725.846.8−41.6−26.8−22.0−13.4−13.81.61.0
of which: exceptional financing0.00.00.00.00.00.00.00.00.00.00.0
PV of external debt 4/34.552.945.538.833.126.621.419.938.9
In percent of exports54.985.674.464.155.044.335.833.364.9
PV of PPG external debt34.552.945.538.833.126.621.419.938.9
In percent of exports54.985.674.464.155.044.335.833.364.9
In percent of government revenues41.682.069.464.856.146.438.338.886.8
Debt service-to-exports ratio (in percent)19.411.211.612.813.212.510.711.79.41.43.1
PPG debt service-to-exports ratio (in percent)19.411.211.612.813.212.510.711.79.41.43.1
PPG debt service-to-revenue ratio (in percent)15.412.58.812.212.312.610.912.210.11.74.1
Total gross financing need (Millions of U.S. dollars)16.6−9.6−8.6−9.116.711.19.35.76.22.32.7
Non-interest current account deficit that stabilizes debt ratio44.5−22.6−26.9−46.542.127.422.714.314.80.21.1
Key macroeconomic assumptions
Real GDP growth (in percent)8.50.21.31.44.92.22.52.51.92.01.92.21.82.11.9
GDP deflator in US dollar terms (change in percent)13.61.3−4.96.69.1−1.93.30.30.61.41.10.81.51.61.6
Effective interest rate (percent) 5/4.14.04.02.71.46.45.15.14.84.84.95.21.71.62.1
Growth of exports of G&S (US dollar terms, in percent)5.468.5−3.533.846.9−1.24.51.72.03.02.82.13.43.63.5
Growth of imports of G&S (US dollar terms, in percent)27.7−15.06.410.720.37.531.2−8.1−5.6−9.73.23.12.63.63.1
Grant element of new public sector borrowing (in percent)−5.161.161.161.161.161.150.152.252.252.8
Government revenues (excluding grants, in percent of GDP)47.856.682.964.665.659.959.057.356.051.444.749.2
Aid flows (in Millions of US dollars) 7/8.311.19.419.89.09.47.47.57.511.413.9
of which: Grants8.311.19.419.89.09.47.47.57.57.99.6
of which: Concessional loans0.00.00.00.00.00.00.00.00.03.44.2
Grant-equivalent financing (in percent of GDP) 8/50.122.122.517.316.816.318.115.417.2
Grant-equivalent financing (in percent of external financing) 8/64.8100.0100.0100.0100.0100.085.685.486.1
Memorandum items:
Nominal GDP (Millions of US dollars)39.339.938.438.640.842.043.044.545.853.976.9
Nominal dollar GDP growth23.21.5−3.60.35.82.82.53.43.03.03.43.63.5
PV of PPG external debt (in Millions of US dollars)12.320.718.416.214.211.89.810.729.8
(PVt-PVt-1)/GDPt-1 (in percent)21.8−5.8−5.5−4.7−5.6−4.5−0.73.12.72.1
Gross workers’ remittances (Millions of US dollars)4.63.83.73.73.83.94.04.14.24.97.0
PV of PPG external debt (in percent of GDP + remittances)31.548.441.635.530.324.319.618.335.6
PV of PPG external debt (in percent of exports + remittances)47.674.264.555.647.738.431.128.956.3
Debt service of PPG external debt (in percent of exports + remittances)10.111.111.410.99.310.28.21.22.7
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2.Tuvalu: Public Sector Debt Sustainability Framework, Baseline Scenario, 2011–2034(In percent of GDP, unless otherwise indicated)
ActualAverage5/Standard

Deviation5/
EstimateProjections
2011201220132014201520162017201820192014-19

Average
202420342020-34

Average
Public sector debt 1/45.343.041.156.948.641.233.426.721.536.569.3
of which: foreign-currency denominated40.736.435.352.044.637.932.125.520.335.668.6
Change in public sector debt−10.3−2.3−1.915.8−8.3−7.4−7.8−6.6−5.25.02.3
Identified debt-creating flows4.0−10.7−21.8−19.22.44.16.55.04.44.92.0
Primary deficit7.0−11.2−28.38.918.7−18.31.63.15.84.63.90.15.43.44.5
Revenue and grants69.084.3107.5116.087.682.476.374.072.266.157.3
of which: grants21.227.824.651.422.122.517.316.816.314.712.5
Primary (noninterest) expenditure76.073.179.197.889.285.482.178.776.271.560.6
Automatic debt dynamics−3.10.56.5−1.00.81.00.80.40.4−0.5−1.4
Contribution from interest rate/growth differential−3.41.10.71.00.50.40.40.20.2−0.6−1.6
of which: contribution from average real interest rate0.91.11.21.91.91.61.20.90.7−0.1−0.2
of which: contribution from real GDP growth−4.3−0.1−0.5−0.9−1.4−1.2−0.8−0.6−0.5−0.6−1.3
Contribution from real exchange rate depreciation0.4−0.65.8−1.90.30.70.40.20.2
Other identified debt-creating flows0.00.00.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)0.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes−14.38.419.935.0−10.6−11.5−14.4−11.7−9.60.10.3
Other Sustainability Indicators
PV of public sector debt40.357.949.642.134.327.822.620.939.6
of which: foreign-currency denominated34.552.945.538.833.126.621.419.938.9
of which: external34.552.945.538.833.126.621.419.938.9
PV of contingent liabilities (not included in public sector debt)
Gross financing need 2/14.3−3.6−19.9−9.310.611.514.311.69.66.35.2
PV of public sector debt-to-revenue and grants ratio (in percent)37.549.956.651.145.037.531.331.769.1
PV of public sector debt-to-revenue ratio (in percent)48.689.675.670.358.248.540.440.888.4
of which: external3/41.682.069.464.856.146.438.338.886.8
Debt service-to-revenue and grants ratio (in percent) 4/10.69.07.87.710.210.211.39.57.81.33.2
Debt service-to-revenue ratio (in percent) 4/15.413.510.213.813.714.114.612.210.11.74.1
Primary deficit that stabilizes the debt-to-GDP ratio17.3−8.9−26.4−34.19.910.513.611.39.20.41.0
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)8.50.21.31.44.92.22.52.51.92.01.92.21.82.11.9
Average nominal interest rate on forex debt (in percent)4.14.04.02.71.46.45.15.14.84.84.95.21.71.62.1
Average real interest rate on domestic debt (in percent)5.05.55.30.34.54.54.64.64.5
Real exchange rate depreciation (in percent, + indicates depreciation)0.7−1.315.8−0.914.2−5.4
Inflation rate (GDP deflator, in percent)1.30.91.82.11.82.72.62.32.22.01.82.21.51.61.6
Growth of real primary spending (deflated by GDP deflator, in percent)−11.7−3.69.6−21.265.326.3−6.5−1.9−2.1−2.2−1.42.00.01.00.4
Grant element of new external borrowing (in percent)−5.161.161.161.161.161.150.152.252.2
Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

10. Stress tests show the debt ratios are highly sensitive to exports and exchange rate shocks. A one-time 30 percent nominal depreciation in 2015 would cause the debt-to-GDP ratio to stay above the indicative threshold for most of the projection period. A standard shock to exports also results in a breach of the debt-to-export threshold over the next few years. Also, the threshold for the debt service-to-exports would be breached for four years over the medium term.

B. Public Debt

11. The PV of public debt to GDP stays above the benchmark over the medium term. The PV of debt to GDP stands at 58 percent of GDP in 2014, and while declining gradually below the benchmark of 38 percent over the medium term, would rise again in outer years as new borrowing occurs after the CIF is depleted, reaching 40 percent of GDP by 2034.2 (Figure 2). Although the breaching of the benchmark is small, it needs to be interpreted with caution. Since domestic banks are struggling with large amounts of nonperforming loans and can hardly extend additional financing on a sustained basis, external borrowing will constitute the main source of public financing, and debt sustainability analysis based on external debt ratios appears more informative at this stage. The PV of debt-to-revenue ratio would rise from 50 percent in 2014 to 69 percent in 2034, while the PV of debt service-to-revenue ratio will fall from 8 percent to 3 percent.

Figure 2.Tuvalu: Indicators of Public Debt Under Alternative Scenarios, 2014–2034 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2024.

2/ Revenues are defined inclusive of grants.

12. Paths of debt indicators are sensitive to alternative assumptions and bound tests. A one-time 30 percent depreciation would push the PV of debt-to-GDP ratio to peak at 73 percent in 2015. A standard shock to growth would cause the PV of debt-to-revenue ratio to rise from 50 percent in 2014 to 194 percent in 2034.

C. External and Public DSA under Alternative Scenario

13. Under an alternative scenario where fiscal policy is anchored by an appropriate fiscal balance target, the risk of debt distress is reduced considerably. Given the volatility of fishing license fees, targeting a structural balance would help reduce procyclicality—the structural balance is estimated on the basis of a moving average of fishing license fees over a period of seven years; fishing license fees in excess of the structural level, i.e. their moving average, would be saved in the CIF, while it can be drawn down in case fishing license fees fall short of the structural level. In the case of Tuvalu, targeting a moderate structural surplus implies saving fishing revenues in the current period given the dramatic increase in fishing license fees in the past few years. Under the alternative scenario, the fiscal policy targets a structural surplus of 0.5-1 percent of GDP over the medium to long run. As a consequence, CIF buffers would be maintained at a comfortable level, and debt indicators will improve significantly—the PV of external debt-to-GDP would fall from 53 percent in 2014 to around 10 percent by 2034.

D. Authorities’ View

14. The authorities broadly concurred with the overall assessment of the Debt-Sustainability Analysis, but made a couple of observations. First, the authorities, while recognizing the volatility of fishing revenues, are more optimistic about the near-term outcome, and expect revenues to be higher than staff projection in the next few years. Second, they indicated that the fishing joint venture has a favorable outlook, and the probability for the government to assume the company’s debt obligation is small.

E. Conclusions

15. The results of Tuvalu’s DSA point to a high risk of debt distress, which is the same conclusion that was drawn in the 2012 DSA. The PV of debt-to-GDP ratio is above the indicative threshold over the long run. Furthermore, a significant portion of public debt was contracted on nonconcessional terms, placing further strains on the country’s weak debt servicing capacity.

16. Stress tests show that Tuvalu’s debt dynamics are susceptible to shocks. Standard shocks in the DSA, particularly the one-time 30 percent nominal depreciation, as well as slower real GDP growth rates and lower export growth, would cause external debt indicators to breach their respective thresholds over the long run. Public debt indicators also worsen dramatically under bound tests.

17. The risk of debt distress is reduced to a moderate level under the alternative scenario where a modest fiscal structural surplus is implemented. Assuming that the government maintains a structural surplus of 0.5-1 percent of GDP over the medium and long term, all external debt indicators would decline below their indicative thresholds.

Box 1. Macroeconomic Assumptions Under Baseline Scenario

Growth and Inflation

  • Growth is expected to be boosted to about 2.5 percent in the next few years thanks to the implementation of a few large infrastructure projects financed by grants from development partners.1/ Over the long term, the growth will moderate to about 2 percent as these projects are completed. Meanwhile, the share of the public sector in the economy would gradually decline, while the private sector would play a more important role over time on the back of great potential in the fisheries sector, which is consistent with the Te Kakeega II development strategy.
  • Inflation is projected to rise to about 3 percent in 2014 as a result of increased government spending and civil servant wages as well as a weakening Australian dollar. Inflation would moderate gradually to just below 2 percent in the outer years.

Balance of Payments

  • Current account deficit will peak over the medium term at 37 percent of GDP mainly because of a spike in imports, and gradually narrow to about 4 percent of GDP over the long run. Reflecting improved capacity to tap into the marine resources by both public and private enterprises, fishing exports are expected to double in value over the next 20 years. Driven by large infrastructure projects and the purchase of fishing ships, imports would rise substantially in the next few years, and grow moderately thereafter. The trade balance will move into a deficit over the medium term, and return to a moderate surplus in 2018 and onwards.
  • FDI inflows would be minimal and mostly include reinvestment of fishing joint venture earnings. Despite efforts of the authorities to privatize certain public enterprises, there has been little success in attracting foreign investors, and therefore no significant FDI inflows associated with privatization are assumed.

Fiscal Policy and Financing

  • Fishing license fees are projected conservatively at around A$14 million in 2014-2019 and to gradually decline to A$11 million over the long run reflecting the adverse impact of overfishing and climate change.
  • Foreign grants to the budget are expected to decline gradually from 51 percent of GDP in 2014 to 13 percent of GDP by 2034. It is assumed that the government’s implementation of reforms induces continued support from development partners.
  • Given the weakening fishing license fees and foreign grants, expenditures would be compressed gradually from nearly 100 percent of GDP in 2014 to 62 percent of GDP by 2034. This decline also reflects a reduced share of the public sector in the economy, which makes space for the private sector to grow.
  • The overall fiscal deficit will hover around 5-7 percent of GDP over the medium term, and decline gradually to just above 4 percent of GDP by 2034. The convergence of fiscal deficit toward current account balance also points to the importance of maintaining a sound fiscal policy to safeguard competitiveness and economic stability. Financing of fiscal deficits would be mostly from external borrowing, while domestic banks suffer from severe asset quality problems and are not capable of providing sustainable financing over the long term.
1/ These expenditures would be extrabudgetary.
Table 3.Tuvalu: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed

External Debt, 2014–2034
(In percent)
Projections
20142015201620172018201920242034
PV of debt-to GDP ratio
Baseline5345393327212039
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/5324400000
A2. New public sector loans on less favorable terms in 2014-2034 25345393733314482
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-20165348433730242244
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/5351544943383648
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-20165348423629232242
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-20164/5346393427222039
B5. Combination of B1-B4 using one-half standard deviation shocks5344312417121035
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/5364544637302855
PV of debt-to-exports ratio
Baseline8674645544363365
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/8640700000
A2. New public sector loans on less favorable terms in 2014-2034 286746561565273137
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-20168674645544363365
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/861001261141008885113
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-20168674645544363365
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 48674655645373465
B5. Combination of B1-B4 using one-half standard deviation shocks8665413324161448
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/8674645544363365
PV of debt-to-revenue ratio2/
Baseline8269655646383987
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/8237700000
A2. New public sector loans on less favorable terms in 2014-2034 282696663585685183
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-20168273726352434497
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/82789183746771108
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-20168273706150424294
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-20164/8269655747394087
B5. Combination of B1-B4 using one-half standard deviation shocks8267514231212078
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 582979179655455122
Debt service-to-exports ratio
Baseline1313131112913
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/13131188600
A2. New public sector loans on less favorable terms in 2014-2034 213131034214
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-20161313131112913
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/13161816171446
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-20161313131112913
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/1313131112913
B5. Combination of B1-B4 using one-half standard deviation shocks131211910812
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/1313131112913
Debt service-to-revenue ratio
Baseline12121311121024
A. Alternative Scenarios
A1. Key variables at their historical averages in 2014-2034 1/12121189600
A2. New public sector loans on less favorable terms in 2014-2034 212121034216
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2015-201612131412141125
B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/12121312131136
B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-201612131412131125
B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/12121311121024
B5. Combination of B1-B4 using one-half standard deviation shocks12131311131013
B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/12171815171426
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/4343434343434343
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 4.Tuvalu: Sensitivity Analysis for Key Indicators of Public Debt 2014–2034
Projections
20142015201620172018201920242034
PV of Debt-to-GDP Ratio
Baseline5850423428232140
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages5854514541384794
A2. Primary balance is unchanged from 201458381800000
A3. Permanently lower GDP growth 1/58504438332943118
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2015-201658555450474562114
B2. Primary balance is at historical average minus one standard deviations in 2015-20165865726457525165
B3. Combination of B1-B2 using one half standard deviation shocks5861645853505995
B4. One-time 30 percent real depreciation in 20155873645648423041
B5. 10 percent of GDP increase in other debt-creating flows in 20155856484033282745
PV of Debt-to-Revenue Ratio 2/
Baseline5057514538313269
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages50626158545371161
A2. Primary balance is unchanged from 201450432100000
A3. Permanently lower GDP growth 1/50575349444063196
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2015-201650626464616092194
B2. Primary balance is at historical average minus one standard deviations in 2015-201650748884767177114
B3. Combination of B1-B2 using one half standard deviation shocks50697775706889163
B4. One-time 30 percent real depreciation in 20155083787365584572
B5. 10 percent of GDP increase in other debt-creating flows in 20155063585245394178
Debt Service-to-Revenue Ratio 2/
Baseline81010119813
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages810111311939
A2. Primary balance is unchanged from 20148101085200
A3. Permanently lower GDP growth 1/8101012109310
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2015-201681111131210411
B2. Primary balance is at historical average minus one standard deviations in 2015-2016810111614927
B3. Combination of B1-B2 using one half standard deviation shocks8111115131039
B4. One-time 30 percent real depreciation in 20158121415141236
B5. 10 percent of GDP increase in other debt-creating flows in 2015810101310824
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

1

An effectively defunct and wholly government-owned public enterprise called the National Fishing Corporation of Tuvalu (NAFICOT) is party to the two fishing joint ventures (JV). NAFICOT owns 50 percent of the JV that was established together with a company of the Taiwan Province of China, and 40 percent of the Korean one.

2

The public debt benchmark is derived on empirical basis, and varies among countries with their respective CPIA score.

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