Resilience and Growth in the Small States of the Pacific
Chapter

Appendix 2. Kiribati

Author(s):
Hoe Khor, Roger Kronenberg, and Patrizia Tumbarello
Published Date:
August 2016
Share
  • ShareShare
Show Summary Details

Kiribati’s 33 atoll islands are spread among three groups: the Gilbert Islands, the Phoenix Islands, and the Line Islands. Most of the population lives in the Gilbert Islands, two-thirds of them in the capital, South Tarawa. Although the land area is relatively small, the country’s exclusive economic zone covers a vast 3 million square kilometers. Climate change poses significant challenges for this low-lying island group.

Kiribati gained independence from the United Kingdom in 1979. The president is elected and is both the head of state and head of the government. Parliament has one chamber with 46 elected members.

Sources of Growth and Economic Profile

Main sources of growth. Growth on the expenditure side is driven by public sector spending (financed to a large extent by fishing license fees and drawdowns from the country’s sovereign wealth fund), remittances, and development grants. By sector, the main contributors to growth are agriculture and fishing, the government sector, retail and wholesale trade, and tourism.

Production, employment, exports, and imports. Real GDP growth was below 2 percent a year on average over 2006–11 and this has been the trend since 1991. Growth has also been quite choppy because of the volatile output of some sectors, including agriculture, fisheries, and construction. In recent years, however, it has picked up as a result of record fishing license revenues and higher development grants. Even so, Kiribati’s production opportunities are limited by lack of scale, remoteness, high transport costs, and insufficient infrastructure. Because of these constraints the private sector is small. The government sector is a major formal employer and plays a dominant role in the economy. The agricultural sector consists mainly of subsidized copra production and subsistence farming. Tourism, also small and constrained by the same issues holding back production opportunities, is dominated by niche game fishing. Merchandise exports are small (estimated at 5.1 percent of GDP in 2015) and largely limited to fish and copra. Given the narrow production base, Kiribati depends heavily on imports, which exceed 50 percent of GDP, and the country is highly exposed to fluctuations in world commodity prices.

External income. The major sources of external income are remittances, fishing license fees, and investment income from the country’s sovereign wealth fund. The major share of remittances is from seamen working on foreign ships, averaging 6 percent of GDP in 2007–14. But these remittances have been on a declining trend. Fishing license fees, which averaged 20 percent of GDP over 2000–11, have been volatile. Thanks to the enforcement of the Parties to Nauru Agreement, fees increased from 16.8 percent of GDP in 2011 to a record high of 68.4 percent in 2014. Kiribati’s sovereign wealth fund, the Revenue Equalization Reserve Fund, was established in 1956 and capitalized using phosphate mining royalties until the minerals were exhausted in 1979. The fund represented about 3.5 times GDP in 2013, but its real per capita value has declined significantly, from above $A9,350 in 2000 to about $A5,000 in 2013 in constant 2006 prices. This is mainly because of high withdrawals to finance the fiscal deficit (averaging 14 percent of GDP over 2007–12), but the global financial crisis also had an effect. In recent years, the fund’s position has started to improve with the help of government reforms and income from fishing license fees.

Development aid. Kiribati is a large recipient of financial aid and technical assistance from multilateral and bilateral development partners, with aid accounting for about 34 percent of GDP on average in 2007–14. Most aid is provided as grants and directed at infrastructure, communication, energy, and climate adaptation projects, as well as education and training, and health. Technical assistance is provided in various areas, including public financial management, the fishing sector, and telecommunications.

Public finances. Current government expenditure (excluding grants) accounts for about 55 percent of GDP, after growing about 5 percent annually over 2007–14. Notwithstanding the fiscal surplus achieved from high fishing revenues in 2014, structural fiscal imbalances are significant and stem from insufficient tax revenue growth as well as expenditure pressures from significant infrastructure needs and nonperforming public enterprises. Fiscal adjustment is needed to reduce these imbalances and ensure the sustainability of the Revenue Equalization Reserve Fund.

Financial sector. The formal financial sector consists of a single foreign-owned commercial bank, a government-owned development bank, a provident fund, and an insurance company. Formal financial intermediation and access to credit for the private sector are very limited. Communal land and cumbersome access procedures restrict the use of land as collateral. That said, private sector credit as a percent of GDP has risen sharply since 2011, albeit from very low levels.

Investment and business climate. Infrastructure and business climate shortcomings curtail private and foreign direct investment. Improving infrastructure and communications is therefore essential. Enhancing regulations and training in the fishing sector will help expand the local fishing industry and better utilize Kiribati’s vast marine resources. But accessing land and obtaining the necessary licenses are among the biggest impediments to starting a business. At the same time, enforcing business contracts can be quite a lengthy process. Better enforcement of land and other property rights and speedier resolution of court settlement procedures, in particular for those relating to land, should help strengthen the business and legal environment and promote private sector activity. Recent reforms to state-owned enterprises have improved transparency, though opportunities for private sector involvement need to continue.

Exchange rate and competitiveness. The Australian dollar circulates as legal tender. Kiribati has accepted the obligations of Article VIII and maintains an exchange system free of restrictions on payments and transfers for current international transactions. The real effective exchange rate is now close to but below its long-run average. The use of the Australian dollar as the official currency remains appropriate, as it has provided a strong nominal anchor and because of Kiribati’s close links to Australia. Enhancing infrastructure and bolstering the business climate will be crucial to improving competitiveness.

Growth Challenges, Vulnerabilities, and Spillovers

Main growth challenges. Remoteness, dispersion, and small population have led to a lack of scale and high transportation costs, constraining growth and limiting employment opportunities. Climate change is exacerbating these constraints and causing additional costs. Insufficient infrastructure, business climate weaknesses, and limited financial intermediation hinder private-sector-led growth.

Main vulnerabilities. These include climate change, the Revenue Equalization Reserve Fund’s exposure to global asset valuations, reliance on donor aid, and volatile fishing license revenues and import prices.

Global and regional economic spillovers. Australia and New Zealand have a significant impact on Kiribati’s economy through aid and through the opportunities they provide to Kiribati nationals to work abroad. Australia is also important because of the use of its currency and the Revenue Equalization Reserve Fund’s large exposure to Australian assets.

Appendix Table 2.1Kiribati: Selected Economic Indicators, 2010–15
Nominal GDP (2014): US$186.1 millionGDP per Capita (2014): US$1,656
Main Export Products: Fish, CopraPopulation (2014): 112,334
Remoteness (GDP-weighted distance): 8,210 km
Sources: Kiribati authorities; and IMF, “Kiribati: 2015 Article IV Consultation–Staff Report” (Country Report No. 15/207, Washington).Note: … = data not available; SWF = sovereign wealth fund.
1991–20002001–092010–152015
AverageAverageAverage20102011201220132014Estimate
GDP, GDP growth, employment, and prices
Real GDP (percent change)1.41.01.9−0.9−0.23.42.43.73.1
Real GDP per capita (percent change)−0.3−0.4−1.0−3.90.9−6.00.41.71.1
Real GNI (percent change)3.2−0.14.61.8−5.814.311.513.6−7.7
Consumer prices (percent change, average)3.14.0−0.6−3.91.5−3.0−1.52.11.4
Consumer prices (percent change, end of period)3.23.8−0.2−1.9−0.8−3.80.83.11.4
Unemployment (percent)
Shares in GDP (percent)
Largest sector (government)27.525.426.927.327.326.726.4
Second largest sector (agriculture and fishing)24.022.324.324.024.524.224.3
Third largest sector (wholesale and retail trade)6.36.56.57.67.26.05.2
Hotel and restaurant1.30.80.60.60.60.60.6
Agriculture
Contribution to real GDP growth (percent)
Government0.40.60.20.50.40.00.0
Agriculture and fishing0.00.50.6−0.61.11.10.7
Wholesale and retail trade0.30.2−0.50.0−0.2−1.0−0.9
Sources: Kiribati authorities; and IMF, “Kiribati: 2015 Article IV Consultation–Staff Report” (Country Report No. 15/207, Washington).Note: … = data not available; SWF = sovereign wealth fund.
Share of GDP (percent)
Private consumption and investment65.659.153.358.359.854.760.143.143.6
Public consumption and investment79.790.392.782.481.992.684.9107.6106.5
Public consumption51.157.558.156.157.659.156.559.559.7
Public investment28.632.734.626.324.333.528.448.146.8
Exports minus imports−45.3−49.4−45.9−40.7−41.7−47.4−45.0−50.7−50.2
Exports10.45.35.44.36.45.45.75.65.1
Imports−55.7−54.7−51.3−45.0−48.1−52.8−50.7−56.3−55.2
Contributions to GDP growth (percent)1
Nominal GDP growth7.73.93.70.52.64.33.17.04.6
Private consumption and investment7.00.3−1.5−4.93.1−2.87.2−14.02.6
Private consumption and investment (A$ million)64.687.798.798.9104.199.3112.486.291.3
Public consumption and investment6.74.88.02.91.614.7−5.130.23.8
Public consumption4.92.83.33.63.04.1−1.07.22.9
Public investment1.82.04.7−0.7−1.410.7−4.223.00.9
Exports minus imports−5.9−1.1−2.92.5−2.1−7.71.0−9.2−1.8
Exports−0.10.20.1−1.32.3−0.70.40.3−0.3
Imports−5.8−1.4−3.03.8−4.3−6.90.5−9.5−1.4
Public finances
Central government finance (percent of GDP)
Revenue and grants74.777.287.470.259.684.294.4128.7
Total domestic revenue50.946.956.546.235.650.365.684.9
Grants23.830.330.923.924.133.928.843.8
Expenditure and net lending78.090.984.182.480.086.079.592.3
Current (excluding grants)49.657.552.856.155.852.551.148.5
Of which: wages and salaries21.326.215.926.226.327.10.00.0
Development (capital)27.932.731.326.324.333.528.443.8
Net lending0.50.60.00.00.00.00.00.0
Current balance20.0−8.31.9−9.9−22.03.49.125.45.8
Overall balance−3.3−13.72.8−12.2−20.4−1.814.936.40.0
Financing3.313.7−2.812.220.41.8−14.9−36.40.0
Domestic assets (SWF, trust fund)3.613.92.212.511.510.5−9.5−9.2−2.4
Debt0.3−1.01.52.010.9−14.6−0.44.36.9
Domestic0.0−1.3−0.6−0.310.7−14.20.00.00.0
Of which: external0.40.32.22.30.2−0.4−0.44.36.9
Of which: concessional0.40.32.22.30.2−0.4−0.44.36.9
Other−0.60.8−6.6−2.3−2.05.9−5.0−31.4−4.5
Sources: Kiribati authorities; and IMF, “Kiribati: 2015 Article IV Consultation–Staff Report” (Country Report No. 15/207, Washington).Note: … = data not available; SWF = sovereign wealth fund.
Balance of payments (percent of GDP, unless indicated otherwise)
Current account including official transfers−0.7−8.00.91.3−9.7−1.08.69.2−3.1
Current account excluding official transfers (US$ millions)−9.6−33.9−34.0−34.0−61.9−54.6−20.1−1.6−31.7
Current account excluding official transfers−14.7−29.9−19.4−21.8−34.4−29.0−11.1−0.9−19.3
Overall balance (US$ millions)10.04.617.210.42.8−17.310.766.130.2
Overall balance15.05.65.84.51.1−6.03.620.1113
External debt service (US$ million)0.20.60.40.60.50.50.50.30.3
External debt service (percent of exports of goods and services)1.64.53.54.43.33.84.02.52.9
Foreign direct investment0.10.4−3.3−8.7−0.8−4.9−3.8−4.63.1
External Income86.268.559.848.939.853.967.983.864.7
Fishing license fees37.831.639.624.816.832.247.668.447.8
Investment income34.725.413.617.116.515.313.68.810.1
Remittances13.711.56.67.06.56.46.76.66.8
External debt (US$ million)7.212.215.414.314.314.314.314.320.8
External debt11.911.58.99.28.07.67.97.912.7
Contributions to external income growth (percent)1
External Income growth13.61.212.710.2−16.240.329.431.8−19.2
External income (A$ millions)60.273.4113.382.969.297.7126.9167.5135.3
Fishing license fees7.40.813.58.5−15.041.130.937.5−21.9
Investment income4.40.0−0.92.8−0.3−1.2−2.4−6.22.1
Remittances1.80.40.1−1.1−0.90.40.90.50.6
Exchange rate (Australian dollar to U.S. dollar period average)1.41.41.11.11.01.01.01.11.3
Real effective exchange rate (period average)366.677.397.7100.0104.2101.094.089.3
(percent change)4.7−1.81.74.2−3.1−6.9−5.0
Money, credit, and financial sector
Broad money (percent change)
Credit to private sector (percent of GDP)13.38.414.113.317.2
(percent change)16.3−35.972.2−5.134.0
Bank assets (percent of GDP)27.826.327.528.528.8
Short-term treasury bill interest rate
Nonperforming loan ratio0.30.40.20.7
Foreign bank market share (percent)480.879.981.778.2
Sources: Kiribati authorities; and IMF, “Kiribati: 2015 Article IV Consultation–Staff Report” (Country Report No. 15/207, Washington).Note: … = data not available; SWF = sovereign wealth fund.
Business climate indicators
Business environment rankings5
Doing business (overall)12198103112123143149
Construction permits8046515157135137
Getting electricity160143147159169170173
Enforcing contracts75.055.054.056.060.0113.0114
Getting credit140114122125155160162
Human development index60.60.60.60.60.60.6
Memorandum
Revenue Equalization Reserve Fund
Closing balance (A$ million)478.1604.4633.7570.9580.9578.9613.9703.3754.0
Per capita value (2006 A$)7538.66757.45011.65040.04766.84869.55017.05112.95263.6
Public sector debt (percent GDP)11.59.08.58.17.58.58.712.7
Nominal GDP (A$ million)88.0147.7186.9169.6174.0181.4187.0200.0209.2
Nominal GDP (US$ million)61.1106.5174.9155.9179.6187.9181.1180.6164.2
Sources: Kiribati authorities; and IMF, “Kiribati: 2015 Article IV Consultation–Staff Report” (Country Report No. 15/207, Washington).Note: … = data not available; SWF = sovereign wealth fund.

    Other Resources Citing This Publication