Kiribati
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
19 Dec 1995
eISBN:
9781451814354
Language:
English
Keywords:
ISCR; CR; Kiribati; price; company; Kiribati authorities; export; rate
Download PDF (3 MB)

This report describes recent economic developments in Kiribati. Developments over the decade through 1992 were characterized by a fall in real per capita income, as economic development was constrained by a shortage of skilled manpower, weak infrastructure, and remoteness from major international markets. However, inflation was held broadly in line with price increases in major trading partners. The overall external balance was in large surplus, as substantial trade deficits in part reflecting small export earnings were more than offset by service account surpluses and external grant receipts.

Abstract

This report describes recent economic developments in Kiribati. Developments over the decade through 1992 were characterized by a fall in real per capita income, as economic development was constrained by a shortage of skilled manpower, weak infrastructure, and remoteness from major international markets. However, inflation was held broadly in line with price increases in major trading partners. The overall external balance was in large surplus, as substantial trade deficits in part reflecting small export earnings were more than offset by service account surpluses and external grant receipts.

I. Introduction and Summary

Kiribati consists of 33 atolls widely dispersed in the central Pacific Ocean. Both nominal GDP and capital income are the smallest among the South Pacific Fund member countries. The production base is narrow, with the subsistence sector accounting for a substantial portion of economic activity and employment. The financial sector is at an early stage of development; the Australian dollar is used as the legal tender; there is no central bank or monetary authority; and domestic financial intermediation is limited, with the bulk of deposits transferred abroad because of the lack of investment opportunities.

Developments over the decade through 1992 were characterized by a fall in real per capita income, as economic development was constrained by a shortage of skilled manpower, weak infrastructure, and remoteness from major international markets. However, inflation was held broadly in line with price increases in major trading partners. The overall external balance was in large surplus, as substantial trade deficits in part reflecting small export earnings were more than offset by service account surpluses and external grant receipts. Official external assets, mainly held in the Revenue Equalization Reserve Fund (RERF), stood at the equivalent of more than six years of imports at end-1992. External borrowing was limited to a small amount of concessional loans and debt service was modest.

The financial stability primarily reflected prudent fiscal management. Under a policy to increase the value of the RERF on a per capita basis, current expenditure was tightly restrained so as to contain the drawdown from the fund to a fraction of its annual investment income. Development expenditure was limited almost entirely to the availability of external resources. Consequently, the overall fiscal balance, adjusted for reinvested income from the RERF, registered substantial surpluses and virtually no recourse was made to borrowing from domestic sources.

Developments in 1993-94 were broadly in line with the medium-term trend exhibited in the previous years. Real GDP growth was limited to about 1.5 percent, on average, as a recovery in copra production was partly offset by a fall in the fish catch and stagnation in commerce and tourism. Inflation was moderate, averaging slightly over 5 percent. The overall external balance remained strong, partly aided by substantial surpluses on the service account primarily reflecting high fishing license fees and investment income from the RERF. External assets increased to almost nine years of imports at end-1994, although the RERF suffered a large valuation loss in 1994 owing to an appreciation of the Australian dollar and a sharp fall in bond and equity prices. Fiscal policy remained cautious; the adjusted overall balance was in large surplus, as current and development expenditures were limited within conservative budget appropriations and available external resources, respectively. Monetary developments continued to be characterized by relatively low domestic lending, but the spread between lending and deposit rates narrowed after a marked widening in the previous years.

In 1995, the budget prepared by the new Government, which came to office in October 1994, assumed a considerably expansionary stance, marking a major departure from the past. Expenditure was budgeted to increase sharply to counter an erosion in real wages/salaries and social services as a result of the tight expenditure policy over the years, while at the same time strengthening public sector investment; the overall balance (adjusted for KERF reinvestment) was thus budgeted to shift to a deficit for the first time in recent years. The expansionary fiscal policy is projected to provide a temporary stimulus to the economy, but to generate inflationary pressures while narrowing the external surplus considerably.

II. Output and Prices

A. Production

Kiribati’s production base is narrow, with copra, fish, and seaweed representing major products, and there is little industrial activity. More than 60 percent of the labor force is employed in the subsistence sector and economic activities in the formal sector are dominated by the public sector. During the decade through 1992, real GDP growth, fluctuating widely with climatic conditions, averaged about 1 percent, falling short of the population growth of more than 2 percent.1 The decline in real per capita GDP, however, was offset by the steady growth of investment income from external assets and transfers from workers abroad, and real per capita GNP registered a positive, albeit modest, annual growth.

During 1993-94, real GDP growth averaged about 1.5 percent, following a decline in 1992 (Table 1 and Chart 1). The improved growth performance reflected a continued recovery in copra production from the decline of 1990, which more than offset a fall in the fish catch and a limited expansion in commerce and tourism. For 1995, real GDP growth is estimated to reach 2.7 percent on account of a projected expansion in commerce, construction, and government administration in response to the 1995 budget, as well as a likely recovery in fish production.

Table 1.

Kiribati: Gross Domestic Product by Economic Activity, 1990-94 1/

(In thousands of Australian dollars at 1991 constant prices)

article image
Sources: Data provided by the Kiribati authorities; and staff estimates.

Preliminary estimates; figures may not add up to totals owing to rounding.

Chart 1
Chart 1

KIRIBATI: KEY INDICATORS FOR PRODUCTION AND INFLATION, 1987-94 1/

Citation: IMF Staff Country Reports 1995, 117; 10.5089/9781451814354.002.A001

Sources: Data provided by the Kiribati authorities; and staff estimates.1/ Figures for 1993-94 are provisional.2/ Percentage changes in the consumer price index.

The producer price for copra is set by the Kiribati Copra Cooperative Society (KCCS), the sole entity to export copra, under a price stabilization scheme designed to ensure a minimum price to producers in the face of sudden and large fluctuations in the world market prices. The producer price has been adjusted frequently, taking into account developments in the net export price 3 and the availability of the KCCS’s resources for price support, 4 and tends to be set at a level substantially above the minimum support price. 5 In 1993, the KCCS reduced the producer price from $A 350 per ton to $A 220-260 per ton, primarily in response to a precipitous fall in the net export price and the need to avoid potentially large drawdowns of its reserves (Table 3). This was followed by a significant increase during the course of 1994, reaching to $A 400 per ton by October, reflecting a major recovery in the net export price as well as the Government’s intention to stimulate copra production. 6

Among main products, the production of copra, which constitutes a principal cash crop, increased by 22 percent during 1993-94, reaching more than 12.2 thousand tons, well above the historical average (Table 2). The bulk of the increase occurred in 1994 in response to favorable weather and a sharp increase in producer prices (see below). 2 On the basis of the actual outcome during the first five months of 1995, copra production for the year is estimated to reach at least the 1994 level. A further substantial increase, however, is considered to require steps to increase productivity, including the replacement of the aging tree stocks by new hybrid seedlings and improvement in extension services.

Table 2.

Kiribati: Copra Production by Island, 1990-95

(In metric tons)

article image
Source: Data provided by the Kiribati authorities.

Preliminary actual for January-May.

Table 3.

Kiribati: Prices Paid to Growers by the Kiribati Copra Cooperative Society, 1990-95

(In thousands of Australian dollars per ton)

article image
Sources: Data provided by the Kiribati authorities; and staff estimates.

Defined as the difference between the export price (f.o.b. unit value) and domestic costs other than payments to growers (including freight, commissions, stevedoring, wharfage, and other operating costs), which is equivalent to net price received by growers in the absence of price support.

In terms of export unit value (f.o.b.).

The difference in the producer price compared with the Gilbert Island reflects differences in the average quality of copra and production costs.

Following a recovery in 1992, the commercial fish catch by Te Mautari Limited (TML), the national fishing company, declined by 47 percent in 1993 and further by 26 percent in 1994 notwithstanding favorable weather conditions and an increase in export prices (Table 4). The disappointing performance was attributable to a decline in the number of vessels in operation owing to poor maintenance and accidents. These technical problems were compounded by the continued serious financial difficulties facing the company7 which hampered the timely maintenance and repair of its vessels. The company’s financial problems have been alleviated to some extent since mid-1994 as a result of the provision of government grants totaling $A O.S million. During the first five months of 1995, the fish catch increased sharply, reflecting the resumption of operation by the grounded vessels and the favorable impact of a new incentive system introduced early in the year that links attractive bonus payments to the fish catch above a relatively low base level.

Table 4.

Kiribati: Fish Statistics, 1990-94 1/

article image
Sources: Data provided by the Kiribati authorities; and staff estimates.

Excludes the fish catch made by private fishermen for local sales and consumption.

Preliminary staff estimates.

To develop Kiribati’s fishery resources and make deeper inroads into international markets, consideration is currently given to restructuring the TML’s vessels from the current pole-and-line fishing to long-line fishing. In addition, a proposal has been put forward to form a joint venture with foreign partners to improve management, acquire capital, and develop infrastructure and marketing for long-line fishing. To assist local fishermen in increasing and diversifying fish production and supplement TML’s own catch for export, efforts are being made to strengthen the implementation of the Outer Islands Fisheries Project partly under donor assistance.

Seaweed has become an increasingly important commercial cash crop since the commencement of its production in 1986. Following a decline in 1993, production almost doubled to 395 tons in 1994, mainly on account of an increase in the producer price and the strengthening of staffing for procurement. Since 1992, procurement and marketing have been exclusively undertaken by the Atoll Seaweed Company (ASC), fully owned by the Government, which sets the producer price, purchases seaweed from producers, and exports all products to Denmark under a five-year contract concluded in 1993. Under the contract, the export price was initially set at $553 per ton, which was raised to $590 per ton in November 1994. Corresponding to this adjustment, the producer price was increased from $A 350 per ton to $A 400 per ton, which helped to reduce an emerging shift from seaweed to copra production as a result of the sharp increase in the producer price for copra in 1994. The ASC is currently engaged in two grant-supported projects to strengthen extension services and expand seaweed production.

Tourism remained stagnant in 1993-94, primarily reflecting infrequent air services, inadequate hotel accommodation, and limited marketing efforts. However, efforts have recently been stepped up to tap substantial potential for tourism, especially to Christmas Island. Since early 1994, air service between Christmas Island and Honolulu was improved with increased reliability in flight schedule. The Ministry of Commerce, Industry, and Tourism is in the process of preparing a national plan for tourism, with its role primarily focusing on marketing. In addition, discussions are taking place with the Governments of Marshall Islands, Nauru, and Tuvalu to provide joint air services to develop regional tourism.

B. Development Planning and Foreign Investment

The Seventh National Development Plan (1992-95) envisaged an annual real growth rate of 5.5 percent, considerably higher than the historical average. This objective was to be achieved through increased investment to develop infrastructure and encourage the expansion in key sectors, including agriculture, fisheries, and tourism. Public investment, primarily funded through external aid, was to continue to account for the principal portion of development outlays. However, the Plan envisioned greater participation by the private sector which was to be promoted through privatization, foreign investment, and increased fiscal incentives.

Available information suggests that the outcome of the Seventh National Development Plan to date has been disappointing, especially in terms of economic growth and investment. This was mainly attributable to the ambitious targets, the absence of appropriate monitoring schemes, and weak implementation capacity owing to the limited number of skilled project officers and accountants. These problems were compounded by the absence of a formal link between the National Development Plan and the annual development budget; a dominance of recurrent components in the development budget; and the endorsement of an investment program which included numerous small projects without clear priorities. To address these problems, the Government has recently decided to set up a new inter-ministerial committee in conjunction with the preparation of the Eighth National Development Plan (1996-99). The committee is to take over part of the functions currently assumed by the Development Committee and address key development policy issues to be considered in the next Plan. In addition, steps are expected to be taken to strengthen the Macroeconomic Division of the Ministry of Finance and Economic Planning so as to improve economic forecasting and better monitor the implementation of public investment projects.

Given the scarcity of capital and managerial skills, foreign investment has an important role to play, especially in developing fisheries and tourism. At present, foreign private investment is governed by the Foreign Investment Act of 1985, under- which all applications for foreign investment are required to be submitted to the Foreign Investment Commission (FIC). Under the Act, the FIC is authorized to function as a one-stop investment center and approve investments up to $A 250,000, although Cabinet approval is necessary for those exceeding this limit. Various incentives are also available to encourage foreign investment under several regulations,8 including import duty exemptions for capital goods and raw materials, tax holidays for pioneer industries, and the free repatriation of profits. However, foreign investment in Kiribati has been relatively limited thus far, reflecting not only the country’s less advantageous economic and geographical conditions but also cumbersome approval procedures in practice. The latter includes the lack of clear codification of the FIC’s practices; the de facto need for approval or consent by other ministries which nullify the FIC’s role as a one-stop investment center; and lengthy delays in approvals owing to the background checking of investors. These problems are compounded by difficulties in securing or leasing land under the customary land ownership system where boundary disputes are generally pervasive.

C. Prices

Inflation in Kiribati has been moderate as a result of restrained fiscal policy, a relatively open trading system, and price ceilings which are applicable to selected consumer goods.9 Reflecting a large share of import goods (about two thirds of the total) in the consumer price index, developments in consumer price inflation have tended to be closely related to price movements in major trading partners, especially Australia. In 1993, consumer prices rose by 6.1 percent, primarily reflecting the impact of an increase in customs duties on food, alcohol, and tobacco. In 1994, consumer inflation moderated to 5.1 percent, close to the historical average, as higher transportation and clothing prices were partly offset by smaller increases in food prices (Table 5).

Table 5.

Kiribati: Tarawa Retail Price Index, 1990-95

(Annual average percentage change; fourth quarter 1975 = 100)

article image
Source: Data provided by the Kiribati authorities.

III. Public Finance

A. Fiscal Developments in 1993-94

The central government budget continued to be managed prudently in 1993-94.10 Current expenditure was contained within conservative budget appropriations, while development expenditure was limited broadly to the availability of external resources (Table 6 and Chart 2). In the event, these expenditure policies were accompanied by buoyant revenues (exclusive of drawdowns from the RERF) primarily reflecting higher fishing license fees. Consequently, no recourse was made to the budgeted drawdowns of the RERF ($A 7.5 million for each year) and the overall balance, inclusive of reinvested RERF income, registered large surpluses.

Table 6.

Kiribati: Summary of Central Government Operations, 1990-95 1/

article image
Sources: Data provided by the Kiribati authorities; and staff estimates.

On the basis of official presentation; figures may not add up to totals owing to rounding.

Includes supplementary budget appropriations ($A 2.3 million).

Excludes technical assistance.

Government deposit balances for fiscal operations.

Chart 2
Chart 2

KIRIBATI: CENTRAL GOVERNMENT BUDGET, 1987-94 1/

(In millions of Australian dollars)

Citation: IMF Staff Country Reports 1995, 117; 10.5089/9781451814354.002.A001

Sources: Data provided by the Kiribati authorities; and staff estimates.1/ Figures for 1993-94 are provisional.2/ Includes reinvested income from the Revenue Equalization Reserve Fund and net transactions in the STABEX account.

1. Developments in 1993

Total revenue, exclusive of RERF drawdowns, increased by 18 percent in 1993, owing to a strong expansion in both tax and nontax revenues (Table 7). Tax revenue grew by 15 percent, reflecting revenue measures (an increase in selected customs duties by 10-25 percentage points11 and an upward adjustment of hotel tax from 5 percent to 10 percent) and higher company taxes12 aided by exceptionally large dividend and provisional tax payments;13 however, personal income tax receipts fell as a result of a change in the tax structure with a higher threshold for the zero tax bracket.14 Nontax revenue, excluding RERF drawdown, rose by 20 percent on account of an increase in fishing license fees, dividend receipts from the Bank of Kiribati, interest receipts, and NASDA user fees (fees received from Japan for its use of Christmas Island facilities to gather meteorological information.) External grants fell sharply following the completion of major projects, including the development of telecommunications and the construction of a multipurpose cargo vessel. Total expenditure declined by 12 percent, reflecting a cut in development expenditure in line with lower external grants. Current expenditure was only slightly higher than the previous year’s level, mainly owing to restraint in purchases of goods and services (Tables 8-9). With all RERF investment income reinvested, the adjusted overall balance surplus increased to $A 21 million (44 percent of GDP) from $15.6 million (35 percent of GDP) in 1992.

Table 7.

Kiribati: Central Government Revenue, 1990-95

(In thousands of Australian dollars)

article image
Sources: Data provided by the Kiribati authorities; and staff estimates.

Amounts drawn.

Excludes interest on STABEX deposits.

User fees paid by the Japanese space agency for the use of Christmas Island facilities to obtain meteorological information.

Includes extraordinary income associated with the capture and disposal of ships illegally fishing in Kiribati waters in 1990 ($A 1.9 million). Excludes a bookkeeping entry in 1991 associated with regularizing accumulated unauthorized expenditures in previous years ($A 5 million) and a bookkeeping entry in 1992 reflecting the conversion of some statutory companies into public limited companies ($A 2 million).

Net of management charges.

Table 8.

Kiribati: Central Government Expenditure (Economic Classification), 1990-95 1/

article image
Sources: Data provided by the Kiribati authorities; and staff estimates.

Includes supplementary budget appropriations.

Includes purchases of new equipment

The figure for 1995 refers to supplementary budget appropriations of $A. 2.3 million, of which $A 0.7 million is included in subsidies and purchases of goods and services.

Table 9.

Kiribati: Central Government Expenditure (Functional Classification), 1990-95 1/

(In thousands of Australian dollars)

article image
Sources: Data provided by the Kiribati authorities; and staff estimates.

Includes supplementary budget appropriations.

The figure for 1995 refers to supplementary budget appropriations.

Beginning of period.

2. Developments in 1994

The adjusted overall position registered a surplus of $A 12 million (24 percent of GDP) in 1994, more than four times larger than budgeted. This outcome was attributable to a smaller expansion in expenditure than budgeted and, more importantly, to a considerably. stronger increase in fishing license fees, which permitted the Government to forego the budgeted drawdown from the RERF. The continued rise in fishing license fees reflected the extension of a five-year multilateral fisheries treaty with the United States;15 climatic changes in the South Pacific (the £1 Nirio effect) which led to increased fishing activities by foreign vessels in Kiribati’s territorial waters; and higher fee payments by Japan and Korea under the annual fishing agreements.

In comparison with the 1993 outcome, revenue was broadly unchanged, as both tax and nontax revenues showed little increase, in part reflecting the absence of new revenue measures in the 1994 budget. With regard to tax revenue, higher import duties and a recovery in personal income tax were accompanied by a fall in company tax owing to lower dividend and provisional tax payments and retroactive tax reimbursements to companies for losses incurred in 1993. As for nontax revenue, the further substantial increase in fishing license fees was offset by a decline in dividend and interest receipts from the exceptionally high level of 1993 and lower NASDA fees. Total expenditure grew by 8 percent, primarily reflecting a 17 percent increase in current expenditure. The relatively substantial increase in current expenditure by past standards was associated with higher appropriations for goods and services (especially purchases of new equipment) and subsidies to public enterprises. Development expenditure remained broadly at the 1993 level, as a further fall in external grants was offset by higher local contributions to development projects.

B. Budget for 1995

In a major departure from the past, the 1995 budget assumed a considerably expansionary stance. Total revenue and grants were budgeted to increase by 36 percent on account of the resumption of RERF drawdowns and continued strength of other nontax revenue. However, total expenditure, inclusive of a supplementary appropriation approved in July, were budgeted to expand by 49 percent, reflecting large increases in both current and development expenditures. With reinvested RERF income projected to fall substantially, the adjusted overall balance was budgeted to shift to a deficit of $A 4 million (6 percent of GDP) for the first time in recent years.

Tax revenue was estimated to decline by 10 percent, owing to lower taxes on international trade as a result of a reduction in customs duties on rice, flour, and sugar,16 and the abolition of the 15 percent export duties on scrap iron and aluminum cans. Nontax revenue was estimated to increase by 51 percent on a premise of drawdowns from the RERF ($A 7.5 million), continued high fishing license fees, and a rebound in dividend receipts and NASDA user fees. External grants were envisioned to recover from the sharp decline of recent years.

Current expenditure was budgeted to increase by 56 percent to counter an erosion in real wages/salaries for civil servants and the prolonged neglect of maintenance and repair as a result of the tight expenditure policy over the past years. Wages and salaries were budgeted to rise by 47 percent, reflecting an upward adjustment of the salary structure ($A 2 million), an across-the-board increase in remuneration for all civil servants ($A 1.2 million), full provisions for vacancies and regrading ($A 1 million), and higher appropriations for allowances and overtime payments (Table 10). Purchases of goods and services were budgeted to increase by 59 percent, owing to higher appropriations for travel and transport, hire of vehicles and vessels, maintenance of equipment and buildings, and purchases of new equipment, especially for the education and health sectors. Subsidies to public enterprises were budgeted to increase further, albeit moderately, and larger transfers were envisaged, especially to local councils.

Table 10.

Kiribati: Central Government Salary Structure, 1989-95 1/

article image
Source: Data provided by the Kiribati authorities.

Includes central government contributions to the Kiribati Provident Fund.

Maximum of range.

Development expenditure was budgeted to increase by 40 percent in line with the projected rebound in external grants. Of the budget estimate, about 45 percent represented appropriations for new investment earmarked for the public investment program, while the remainder reflected the recurrent components of development projects implemented in the past. At the time of the budget presentation to Parliament, full funding was not secured, especially for public investment projects, and the total amount of funding identified by midyear was limited to only two thirds of the budget estimate.

C. Nonfinancial Public Enterprises

Public enterprises play a dominant role in Kiribati, engaged in a variety of economic activities. Governmental supervision is exercised through official participation in boards of directors and approval of tariffs. To encourage increased operational efficiency, government subsidies were progressively reduced through 1991. However, they have began to increase since then, reaching $A 0.9 million (about 2 percent of GDP) in 1994. Most of the increase was attributable to rental subsidies for public houses managed by the Kiribati Housing Corporation and financial assistance to operations undertaken by Te Mautari Limited and Air Tungaru (Table 11). In addition, continued government subsidies were provided to the Public Utilities Board to cover losses in sewerage and water services.17

Table 11.

Kiribati: Central Government Budgetary Subsidies to Public Enterprises, 1990-95

(In thousands of Australian dollars)

article image
Source: Data provided by the Kiribati authorities.

Appropriations provided in the supplementary budget

In recognition of the constraints on economic development resulting from extensive public ownership and management, the Government adopted in 1990 a policy framework for corporatization and privatization of selected public enterprises. Under this policy, three statutory corporations and four departmental enterprises were converted to public limited companies; two government-owned enterprises entered into private management arrangement; and about one quarter of shares in a state-owned trading company was sold to private investors and an Island Council. In 1993, 12 state-owned enterprises were examined for possible privatization under technical assistance from the Asian Development Bank and 4 enterprises were identified for privatization.18 The technical assistance study also examined legal and administrative issues to be addressed in connection with privatization, including possible redundancy payments to be made to employees, the transfer of land lease to privatized companies, and the resolution of outstanding debts owned by public enterprises. Under the new Government, however, greater emphasis is now given to corporatization and commercialization of public enterprises as the first step, with privatization to be considered after these enterprises became financially sound. To this end, a unit was established within the Ministry of Finance and Economic Planning in 1994 to review their operations, identify problems, and recommend corrective actions.

IV. Financial Sector

The financial sector consists of the Bank of Kiribati (the sole commercial bank jointly owned by the Government and Westpac Banking Corporation of Australia), the Development Bank of Kiribati, the Kiribati Provident Fund, and the Kiribati Insurance Company. There is no central bank or monetary authority and the Australian dollar is used as the legal tender. Under these circumstances, the authorities influence monetary and credit developments mainly through government participation in the operations of the Bank of Kiribati as part owner.

While broadly following movements in overseas rates (especially those in Australia) reflecting the open financial system, the level and structure of domestic interest rates set by the Bank of Kiribati (BOK) have recently undergone some noticeable changes. Domestic interest rates exhibited a marked declining trend in 1990-93 in response to a fall in overseas rates, but the reduction was substantially larger for deposit rates than lending rates, resulting in an increasing spread between them (Table 12 and Chart 3). In 1994, interest rates on large term deposits (accounts for about 90 percent of total deposits) were raised substantially in an effort to stem increasing deposit transfers to overseas; however, the rates on small deposits (mainly saving deposits) were mostly unchanged and set at levels well below overseas rates because of relatively high operating costs associated with these deposits. In contrast to the increase in the average deposit rate, key lending rates were kept unchanged at the 1993 level, reflecting administrative consideration to keep interest costs to borrowers low and encourage domestic borrowing, and the spread between deposit and lending rates narrowed substantially. To alleviate the rigidity associated with lending rates, the BOK is considering a rationalization of the level and structure of lending rates by introducing a greater differentiation according to risk premia.

Table 12.

Kiribati: Commercial Bank Interest Rates, 1990-94

(ID percent per annum)

article image
Sources: Data provided by the Kiribati authorities; and International Finance Statistics, IMF.

Minimum deposit $A 100; no restrictions on withdrawals.

Minimum deposit $A 500.

A weighted average rate of short-term loans.

A weighted average yield on 13-week treasury notes.

Chart 3
Chart 3

KIRIBATI: FINANCIAL SECTOR, 1987-94 1/

(In millions of Australian dollars)

Citation: IMF Staff Country Reports 1995, 117; 10.5089/9781451814354.002.A001

Sources: Data provided by the Kiribati authorities: and staff estimates.1/ Figures for 1993-94 are provisional.2/ Six-month term deposits, over $A 50,000.

The movements in deposit rates exerted a substantial influence on developments in bank deposits in 1993-94. Total deposits declined by 6 percent in 1993, as major depositors transferred part of their funds overseas in search of more remunerative rates, while they recovered somewhat in 1994 in response to the upward adjustment of domestic deposit rates (Table 13). As in the past, the BOK reinvested the bulk of its deposits abroad and foreign assets remained its predominant portfolio. Domestic credit, which consisted primarily of loans to the private sector, remained relatively modest, reflecting the lack of attractive projects, the scarcity of acceptable collateral, and the generally weak credit demand. Nonetheless, the share of domestic credit to total assets increased slightly during 1994, reflecting increased lending to public enterprises. This trend was further reinforced during the first half of 1995, as a result of the extension of additional loans to public enterprises under government guarantees.19 A further rise in domestic credit is also expected in response to the planned implementation of the Government’s decision to permit members of the Kiribati Provident Fund to pledge up to 70 percent of their contribution as collateral for housing loans.

Table 13.

Kiribati: Commercial Bank Balance Sheet, 1990-94 1/

(In millions of Australian dollars; end of period)

article image
Sources: Data provided by the Kiribati authorities; and staff estimates.

The balance sheet of the Bank of Kiribati Limited, the sole commercial bank in Kiribati.

Preliminary.

Excludes STABEX deposits.

After increasing sharply to $A 3.4 million in 1992, the total assets of the Development Bank of Kiribati (DBK) remained stagnant during 1993-94, primarily owing to write-offs of nonperforming loans and an erosion in the capital base (Table 14). Beginning from 1992, steps were taken to reclassify loan portfolios and write off bad loans, while efforts were intensified to improve the collection of loans and interest due. By end-1994, $A 0.4 million of loans were written off and the amount of nonperforming loans was reduced to $A 0.3 million, of which about half is expected to be written off in 1995. General commercial and noncommercial loans, the DBK’s main portfolio, continued to consist mostly of small-scale loans averaging $A 2,000, and carried a uniform lending rate of 12 percent. It is viewed that the average size of loans is too small to generate sufficient profit margins, while the current lending rate is on a low side in view of the scarcity of credit. To put the DBK on a sounder financial footing, its operations have recently been reviewed under donor technical assistance and recommendations are to be made shortly on recapitalization, a reduction in the number of staff, a rationalization of lending rates, and a diversification in lending operations toward medium- and large-scale projects.

Table 14.

Kiribati: Assets and Liabilities of the Development Bank of Kiribati, 1990-94 1/

(In thousands of Australian dollars; end of period)

article image
Source: Data provided by the Kiribati authorities.

The National Loans Board became the Development Bank of Kiribati on August 1, 1987.

Preliminary.

The total assets of the Kiribati Provident Fund (KPF), which operates a compulsory superannuation scheme,20 increased by 15 percent in 1993-94 (Table 15). Investment in foreign assets remained the predominant form of assets, accounting for more than 90 percent of the total at end-1994. The increase in the value of foreign assets, however, moderated substantially in 1994, owing to a worldwide fall in bond prices. Reflecting this development, as well as increasing preference for equities, the relative share of equities in total investment rose further, reaching almost 55 percent by end-1994. The total value of member’s accounts increased significantly in 1993-94, partly reflecting the redistribution of accumulated reserves totaling $A 2.2 million in 1994. The annual rate of interest payments on members’ accounts was kept unchanged at 13.5 percent, well above the actual portfolio returns. In view of the less favorable outcome of foreign investment in 1994, however, consideration is being given to reducing the interest rate.

Table 15.

Kiribati: Assets and Liabilities of the Kiribati Provident Fund, 1990-94 1/

(In thousands of Australian dollars; end of period)

article image
Sources: Data provided by the Kiribati authorities; and staff estimates.

Book value, including reinvested interest income.

Preliminary.

Includes interest stabilization reserves, special death benefit reserves, accumulated surpluses, and reserves.