Resilience and Growth in the Small States of the Pacific
Chapter

Appendix 11. Tuvalu

Author(s):
Hoe Khor, Roger Kronenberg, and Patrizia Tumbarello
Published Date:
August 2016
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Tuvalu, a Polynesian island nation in the Pacific, has nine small coral islands with total land area of just 26 square kilometers. It has a population of about 11,000.

GDP per capita was US$3,452 in 2014. The country is a parliamentary democracy and member of the Commonwealth of Nations. As a low-lying group of islands, Tuvalu is highly vulnerable to climate change.

Sources of Growth and Economic Profile

Main sources of growth. Growth, estimated at 2.2 percent in 2014, remains weak. Inefficient public enterprises and weak bank lending are a drag on the economy, despite increasingly competitive private retail businesses and fisheries.

Production, employment, exports, and imports. In 2014, agriculture accounted for 22 percent and industry 9 percent of output. The external sector has improved due to large fishing-related receipts and official aid, with Tuvalu registering a current account surplus of 24.3 percent of GDP in 2014, compared to a deficit of 61.3 percent of GDP in 2011. The current account is estimated to reach a surplus of about 8.2 percent of GDP in 2015.

External income. Overall, external income is estimated at more than 100 percent of GDP since 2013. Major sources of external income are fishing license fees, foreign aid, remittances, and TV Web domain license fees. Fishing license fees have more than doubled in just a few years and were at 32 percent of GDP in 2014. This income source remains volatile, however. Remittances have declined in importance since the global financial crisis. The Tuvalu Trust Fund holds most of the country’s overseas assets, which stood at about 350 percent of GDP at the end of 2014.

Development aid. Financial support and technical assistance from multilateral and bilateral development partners have played an important role in strengthening capacity and facilitating growth and poverty reduction. Budget support and off-budget project financing averaged a combined 53 percent of GDP in 2006–12. On-budget grants have focused on budget support, public enterprise reform, infrastructure upgrades, education, and health. Extensive technical assistance has been provided by development partners to enhance tax administration, public financial management, and economic statistics.

Public finances. The authorities have taken important steps to strengthen budget monitoring by publishing a budget manual, strengthening the monitoring of outer-island budget operations, and releasing monthly reports of budget execution. The overall balance achieved a substantial surplus for the third consecutive year in 2014, as fishing license fees reached a record high and amid higher-than-expected foreign grants. The 2015 budget introduced a first step toward a medium-term fiscal framework to ensure fiscal sustainability and address procyclicality, and for accumulating savings to be used in the event of severe shocks.

Financial sector. The banking sector consists of the National Bank of Tuvalu and the Development Bank of Tuvalu, both state owned. The authorities are in the process of establishing a banking commission to improve oversight of the sector. About half of the banking sector’s loan portfolio is nonperforming. While both banks have made substantial provisions, capital adequacy remains questionable given a lack of oversight. The Tuvalu National Provident Fund engages in lending to its members, with their contributions forming the collateral.

Investment and business climate. Tuvalu’s geographical remoteness, outdated infrastructure, limited financial sector lending capacity, and small population have led to high transaction costs and lack of economies of scale, which have constrained business and investment. The government is committed to improving the investment climate, boosting private sector growth, and safeguarding macroeconomic stability.

Exchange rate and competitiveness. Tuvalu’s legal tender is the Australian dollar, and there is no central monetary institution. The country has adopted transitional arrangements under Section 2 of Article XIV of the IMF’s Articles of Agreement, but has not yet accepted the obligations under Article VIII. The real effective exchange rate depreciated over the past year, but has lately returned to its 20-year average on the back of a weakening Australian dollar.

Growth Challenges, Vulnerabilities, and Spillovers

Main challenges and vulnerabilities. Tuvalu faces tremendous challenges stemming from its remoteness, lack of economies of scale, weak institutional capacity, and climate change and rising sea levels. In March 2015 Tuvalu suffered significant damage from tropical Cyclone Pam, with damages and losses estimated at one-third of GDP, primarily to outer-island infrastructure such as sea walls, but also to housing and agriculture. In the medium term, risks to fiscal sustainability and vulnerabilities in the country’s state-owned enterprise and banking sectors could cloud growth prospects.

Global and regional economic spillovers. Despite its geographical remoteness, the economy could suffer from external spillovers. The returns on the assets in the Tuvalu Trust Fund are dependent on global economic conditions, affecting the budgetary resources generated by the fund. Remittances by Tuvalu’s seafarers and seasonal workers would be weakened further if there is a protracted growth slowdown in advanced and emerging market economies. Climate change and over-fishing could undermine fishing license fees in the long term.

Appendix Table 11.1Tuvalu: Selected Economic Indicators, 2010–15
Nominal GDP (2014): US$37.3 million1GDP per capita (2014): US$3,452
Main export product: FishPopulation (2014): 10,795
Remoteness (GDP-weighted distance): 8,745 km
Sources: Tuvalu authorities; Tuvalu Trust Fund Advisory Committee; and IMF staff estimates.Note: … = data not available.

Based on period average exchange rate.

Current balance excludes grants and development (capital expenditure).

External public debt.

Index, 2005 = 100.

Share in total loans.

World Bank, Doing Business reports.

United Nations Development Programme.

1991–20002001–092010–152015
AverageAverageAverage20102011201220132014Estimate
GDP, GDP growth, employment, and prices
Real GDP (percent change)1.52.0−2.78.50.21.32.22.6
Real GDP per capita (percent change)−0.71.1−4.07.1−1.10.21.82.2
Unemployment (percent)
Consumer prices (percent change, average)3.51.1−1.90.51.42.01.13.3
Shares in real GDP (percent)
Government30.032.032.731.932.832.331.530.8
Agriculture20.522.725.323.421.922.122.321.6
Finance and real estate16.418.816.616.119.720.020.120.2
Trade, hotels and restaurants9.59.18.08.39.49.49.49.9
Contributions to real GDP growth (percent)
Government1.00.60.61.81.0−0.1−0.10.1
Agriculture0.30.53.10.1−1.50.40.7−0.1
Finance and real estate0.01.00.00.83.70.60.60.6
Trade, hotels and restaurants−0.40.60.70.91.10.20.10.8
Share in GDP (percent)
Private consumption
Private investment
Public consumption
Public investment
Exports minus imports
Contributions to GDP growth (percent)
Private consumption
Private investment
Public consumption
Public investment
Exports minus imports
Public finances
Central government finance (percent of GDP)
Revenue and grants99.971.969.084.3107.5123.1130.4
Total domestic revenue71.155.547.856.682.974.1108.4
Grants28.916.421.227.824.649.021.8
Sources: Tuvalu authorities; Tuvalu Trust Fund Advisory Committee; and IMF staff estimates.Note: … = data not available.

Based on period average exchange rate.

Current balance excludes grants and development (capital expenditure).

External public debt.

Index, 2005 = 100.

Share in total loans.

World Bank, Doing Business reports.

United Nations Development Programme.

Expenditure and net lending88.895.777.975.081.186.8130.1
Current87.692.576.175.081.086.6128.3
Of which: wages and salaries34.033.831.331.932.236.134.4
Capital expenditure1.23.21.80.00.20.20.1
Current balance2−16.5−37.0−28.3−18.41.9−12.4−21.5
Overall balance11.2−23.8−8.99.326.336.30.3
Financing
Assets (Consolidated Investment Fund)−10.126.49.4−9.2−25.3−35.91.2
Debt−1.1−2.7−0.5−0.2−1.1−0.4−1.5
Of which: external−1.0−2.4−0.50.1−1.0−0.4−1.4
Of which: concessional
Other
Tuvalu Trust Fund
Closing balance ($A million)19.2132.1108.0118.7130.6140.6144.1150.8
Closing balance (percent of GDP)55.2335.2311.2311.4339.1354.3348.6346.7
Per capita value ($A)1,87312,38810,41111,29912,27513,07913,34913,914
Public-debt-to-GDP ratio (percent)50.848.655.645.343.041.158.564.1
Balance of payments (percent of GDP, unless otherwise indicated)
Current account including official transfers−11.66.1−11.3−36.525.326.424.38.2
Current account excluding official transfers−54.2−85.1−58.8−77.5−30.7−22.1−42.8−20.2
Overall balance0.28.3−9.5−4.44.922.733.90.2
External debt service (percent of exports of goods and services)7.112.77.819.411.211.611.510.7
Foreign direct investment1.01.81.7−0.34.21.81.81.8
External debt341.343.350.640.736.435.353.560.0
Main sources of external income (total)62.493.576.263.489.4107.3103.8120.9
Grants44.949.748.242.457.149.859.741.3
Fishing license fees17.633.120.614.921.845.432.064.0
TV domain license fees7.99.45.84.99.611.010.914.4
Contributions to external income growth (percent)
External income growth6.5−18.5−16.841.020.0−3.316.5
Grants3.7−2.0−11.1−7.623.1−8.29.3−17.8
Fishing license fees7.0−6.0−7.510.926.4−12.530.8
TV domain license fees1.7−0.9−1.27.41.5−0.13.4
Sources: Tuvalu authorities; Tuvalu Trust Fund Advisory Committee; and IMF staff estimates.Note: … = data not available.

Based on period average exchange rate.

Current balance excludes grants and development (capital expenditure).

External public debt.

Index, 2005 = 100.

Share in total loans.

World Bank, Doing Business reports.

United Nations Development Programme.

Exchange rate (Australian dollar to U.S. dollar period average)1.41.11.11.01.01.01.11.3
Real effective exchange rate (period average)488.299.6100.0102.5103.8102.197.391.9
(percent change)2.6−0.17.72.51.3−1.6−4.7−5.5
Money, credit, and financial sector
Broad money (percent change)
Credit to private sector (percent of GDP)44.926.227.729.025.422.7
(percent change)2.3−0.80.915.1−11.4−7.7
Bank assets (percent of GDP)118.6118.7118.5112.2115.1129.2
Short–term treasury bill interest rate
Nonperforming loan ratio50.855.1
Foreign bank market share (percent)5
Business climate indicators
Business environment rankings6
Doing business (overall)
Construction permits
Getting electricity
Enforcing contracts
Getting credit
Human development index7
Memorandum:
Nominal GDP ($A million)30.439.334.738.138.539.741.343.5
Nominal GDP (US$ million)122.136.631.939.339.938.437.332.7
Sources: Tuvalu authorities; Tuvalu Trust Fund Advisory Committee; and IMF staff estimates.Note: … = data not available.

Based on period average exchange rate.

Current balance excludes grants and development (capital expenditure).

External public debt.

Index, 2005 = 100.

Share in total loans.

World Bank, Doing Business reports.

United Nations Development Programme.

Sources: Tuvalu authorities; Tuvalu Trust Fund Advisory Committee; and IMF staff estimates.Note: … = data not available.

Based on period average exchange rate.

Current balance excludes grants and development (capital expenditure).

External public debt.

Index, 2005 = 100.

Share in total loans.

World Bank, Doing Business reports.

United Nations Development Programme.

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