Kiribati
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
29 Jun 2000
eISBN:
9781451821895
Language:
English
Keywords:
ISCR; CR; Kiribati; Kiribati authorities; enterprise; balance
Download PDF (2.1 MB)

Kiribati is a country in the central Pacific Ocean and one of the least-developed Pacific island economies. A large share of imports and government spending is financed from external grants and fishing license fees. The key policy development has been the adoption of a medium-term strategy, which focuses on reducing the role of the public sector to promote the development of the private sector. The improvement in the current and capital account balances has led to an increase in the overall balance.

Abstract

Kiribati is a country in the central Pacific Ocean and one of the least-developed Pacific island economies. A large share of imports and government spending is financed from external grants and fishing license fees. The key policy development has been the adoption of a medium-term strategy, which focuses on reducing the role of the public sector to promote the development of the private sector. The improvement in the current and capital account balances has led to an increase in the overall balance.

I. Introduction and Summary

1. Kiribati consists of 33 atolls widely dispersed in the central Pacific Ocean and is one of the least developed Pacific island economies. Per capita GDP is low, at about US$550 in 1998, and while social indicators have improved, life expectancy remains low (at 59 years) and infant mortality high (at 64 per 1,000 births). The production base is narrow (mainly fish and copra) but significant potential exists to develop the fishing industry given that its Exclusive Economic Zone (EEZ) covers 3½ million square kilometers of the Pacific Ocean. Potential also exists in the tourism industry.

2. Growth averaged only 1¾ percent a year in the 1980s and early 1990s. Given annual population growth of about 2 percent, this led to a decline in real GDP per capita by about 5 percent over this period. The lackluster growth performance can be traced to a number of weaknesses in structural policy, many of which are common to Pacific island economies, including: a large and inefficient public sector that crowds out the private sector; an inefficient tax system; an unclear system of land titles; price controls; government subsidies (especially to public enterprises and producers of copra); limited competition in the financial sector; and complicated procedures for foreign direct investment. Other less policy-related factors have also constrained growth, such as Kiribati’s remoteness from international markets; the wide dispersion of its population over a large number of small islands; and the lack of skilled labor.

3. A large share of imports and government spending is financed from external grants and fishing license fees (based on the reported value of the catch of foreign fishing vessels in Kiribati waters). Therefore, the balance of payments and the budget are vulnerable to changes in donor support and fishing license revenue, but the sizable official external assets (at more than 8 times GDP), mainly in the country’s trust fund (the Revenue Equalization Reserve Fund (RERF)), provides a buffer against temporary revenue shocks.

4. The economy was given a temporary boost from increased spending by the new government in 1995, marking a departure from Kiribati’s history of cautious fiscal policy. As a result, real GDP growth picked up to an average of 4½ percent in the four years to 1998. Public investment and the civil service wage bill were increased sharply, financed initially by unsustainably large drawdowns from the RERF and more recently from a favorable revenue shock (due to a sharp increase in the fish catch by foreign vessels). The financial crisis in Asia had little direct impact on Kiribati.

5. In late 1997, the government adopted a new Medium-Term Strategy, which focuses on the need to reduce the role of the public sector in order to promote the development of a dynamic private sector. However, only limited progress has been made in its implementation.

6. The fiscal and external positions strengthened in 1997 and 1998 due to a temporary jump in fishing license fees to exceptionally high levels (as strong El Niñ0 climatic conditions boosted the catch in Kiribati waters), which enabled the high level of government current expenditure to be maintained The budget balance improved from an overall deficit of more than 35 percent of GDP in 1996 to a surplus of 24 percent of GDP in 1998, while the current account deficit (excluding grants) narrowed sharply to 3 percent of GDP in 1998. A large overall balance of payments surplus in 1998, together with sizable valuation gains on official external assets, led to a large increase in external assets.

7. Inflation was low in 1996 and 1997, but picked up moderately to almost 5 percent in 1998, reflecting import supply problems due to the breakdown of the crane at the main port and the depreciation of the Australian dollar (which is used as the legal tender).

8. The financial sector remains at an early stage of development. Most deposits are channeled overseas due to structural constraints on lending by the single commercial bank and the lack of domestic investment opportunities. There is no central bank or monetary authority, and financial institutions are not subject to prudential guidelines.

II. Recent Policy Developments

9. The key policy development in recent years was the government’s adoption of a Medium-Term Strategy in 1997, which focuses on the need to reduce the role of the public sector in order to promote the development of a dynamic private sector (Box 1). Only limited progress, however, has been made in its implementation. An important slippage was the failure to implement the planned freeze on civil service recruitment, with the number of civil servants increasing by 2 percent in 1998 and budgeted to increase by a further 3 percent in 1999. As a result, the level of recurrent government spending remains very high (at 71½ percent of GDP or 42½ percent of GNP in 1999). In other areas, some reform measures have been taken. Importantly, a decision has been made to improve the accountability of public enterprises (by requiring better reporting of their performance and the preparation of strategic plans before budgetary support is provided), but few enterprises have begun to operate on a commercial basis and there has been no privatization. In addition, some progress has been made toward clarifying land titles. The government’s review of the Medium-Term Strategy in February 1999 acknowledged the slow progress and highlighted the need for further action to implement the strategy fully.

III. Output and Prices

A. Production

10. Economic activity and formal employment are dominated by the public sector. The estimated value-added of the government administration sector alone comprised almost one-third of GDP in 1998, while public enterprises were especially dominant in the service sectors (e.g., commerce and hotels, transport and communications, and finance and insurance) which comprised a large share of GDP (Table 1). The production base remained narrow, with copra and fish representing the major products, and there was little industrial activity.

Table 1.

Kiribati: Current Price Gross Domestic Product by Economic Activity, 1992-98

(In millions of Australian dollars at current prices)

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

The Government’s Medium-Term Economic Strategy

In response to a history of stagnant per capita incomes, together with concerns that the fiscal expansion in the mid-1990s was unsustainable, the government adopted a medium-term strategy in 1997 to generate sustainable growth. It was presented at a Consultative Group meeting in January 1998 and received broad endorsement by donors. The strategy aims to encourage private sector-led growth by:

  • Reducing the relative size of the public sector by containing the level and improving the quality of government expenditure, including through medium-term output-based budgeting, voluntary redundancy schemes for civil servants, and a freeze on new recruitment;

  • Reforming public enterprises, through commercialization or privatization;

  • Providing a sound physical and regulatory infrastructure, including by: improving basic education and health services; preserving the environment; liberalizing trade and investment; removing monopoly privileges; promoting a foreign investment friendly environment; and clarifying land titles.

11. Real GDP growth picked up from low rates in the early 1990s to average 4½ percent in the past four years, reflecting a temporary boost from the expansion of government spending (Table 2 and Figure 1). Public investment and the civil service wage bill were increased sharply in the mid-1990s, financed initially by unsustainably large drawdowns from the RERF and more recently from a favorable revenue shock (due to a sharp increase in the fish catch by foreign vessels) and higher external grants. The impact of the fiscal expansion was directly reflected in the production side measure of GDP1 as an increase in activity in the construction and government administration sectors (which together contributed about 7¾ percentage points of the 18½ percent increase in real GDP over the period 1995-98, Table 3). The increase in the civil service wage bill also increased household disposable incomes and consumption, which was reflected in increased activity in a number of sectors (including the commerce and hotel sector) and in a higher contribution to GDP from indirect taxes.

Table 2.

Kiribati: Gross Domestic Product by Economic Activity, 1992-98

(In millions of Australian dollars at 1991 constant prices)

article image
Sources: Data provided by the Kiribati authorities; and Fund staff estimates
Table 3.

Kiribati: Contributions to GDP Growth, 1992-98

(Change in percent of previous year’s total GDP)

article image
Sources: Data provided by the Kiribati authorities; and Fund staff estimates.
Figure 1
Figure 1

Kiribati OUTPUT, PRICES, AND EXCHANGE RATES, 1990-99

Citation: IMF Staff Country Reports 1999, 079; 10.5089/9781451821895.002.A001

Sources: Data provided by Kiribati authorities; IMF, Information Notice System; and Fund staff estimates.

12. Kiribati’s GNP is about twice the level of GDP, reflecting the sizable income from fishing license fees, external assets, and seamen’s remittances (Table 4). Real GNP grew by 30 percent in 1997 and 16 percent in 1998, well in excess of real GDP growth, because of the temporary jump in fishing license fees to double normal levels (in the wake of strong El Niñ0 climatic conditions that boosted the catch in Kiribati waters).

Table 4.

Kiribati: Gross National Product, 1992-98

(In millions of Australian dollars at current prices)

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

13. Copra continues to be an important source of household income (especially on the outer islands), but its production declined from 1994 to 1997, before recovering in 1998 (Table 5). The decline in copra production in the mid-1990s occurred despite an increase in the producer price paid by the Kiribati Copra Cooperative Society from about $A 300 in the early 1990s to $A 400 per ton in the period 1995-97 (Table 6). The decline in production appears to have stemmed from the increased opportunity for income from alternative activities (especially the greater opportunity for employment in the public sector and the emergence of seaweed cultivation as a viable alternative), coupled with higher household disposable incomes from the 30 percent rise in civil service wage rates in the mid-1990s. In 1998, the producer price for copra was increased to $A 450 per ton for the Gilbert Islands (and $A 420 for the more remote Line Islands, which produce about one-eight of the output—the lower price reflects higher transport costs). This spurred a recovery in production, particularly in the Gilbert Islands.

Table 5.

Kiribati: Copra Production by Island, 1992-98

(In metric tons)

article image
Source: Data provided by the Kiribati authorities.
Table 6.

Kiribati: Prices Paid to Growers by the Kiribati Copra Cooperative Society, 1992-98

(In thousands of Australian dollars per ton)

article image
Source: Data provided by the Kiribati authorities.

Defined as the export price (f.o.b. unit value) less 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 transportation costs.

14. The producer price for copra has included a subsidy element that averaged about 1½ percent of GDP in the past four years. In 1998, the subsidy increased somewhat as the net export price2 fell to $A 254 per ton while the producer price rose to $A 450 per ton, implying a subsidy element of almost $A 200 per ton. In aggregate, the subsidy payment was about $A 2 million, or 2½ percent of GDP in 1998. The subsidy is funded from the reserves of the Kiribati Copra Cooperative Society (which stood at about $A 1 million at end-1998) and government drawings on balances in the STABEX Fund (which stood at $A 3½ million at end-1998).3 Maintenance of the current level of the subsidy would imply erosion of the reserves of the Copra Society in the next 1-2 years and a rundown of the balances in the STABEX over the next 3-5 years.

15. Fishing remains primarily a subsistence activity, other than the fishing operations of foreign-owned vessels in Kiribati waters. Domestically owned commercial fishing operations are mainly involved in the sale of fish domestically and the export of fish, seaweed, and pet fish. These activities comprised only 4 percent of GDP in 1998. Moreover, fishing output in constant prices declined in 1997-98 by about 20 percent from the recent peak in 1996. The decline was due to the scaling down of operations by the government-owned fishing venture Te Mautari Limited as it converted from pole and line fishing to long-line fishing for tuna (with cooperation from the Overseas Fisheries Corporation of Japan). Two long-line fishing boats were operated in 1998, but Te Mautari incurred a small loss, partly due to constraints on access to export markets in the absence of regular commercial air transport links.

B. Prices

16. Inflation, which had fallen to low levels in 1996 and 1997 (in line with trading partner economies), picked up moderately to almost 5 percent in 1998 (Table 7). The pickup in inflation mainly reflected import supply problems due to the breakdown of the crane at the main port, which increased handling costs as more labor-intensive methods were used to unload ships. The rise in inflation also reflected the depreciation of the Australian dollar (given that about one-half of imports originate in countries other than Australia), with Kiribati’s nominal effective exchange rate index having fallen 10 percent in 1998. As a result, prices of tradable goods such as food and clothing rose strongly (up 9 percent and 5¾ percent, respectively) while prices of nontradables such as education and recreation services fell slightly in 1998.

Table 7.

Kiribati: Tarawa Retail Price Index, 1992-98

(Annual average percentage change; 1996 = 100)

article image
Source: Data provided by the Kiribati authorities.

Items in italics represent new items following the 1996 Household Survey.

Housing and Household operations were split in 1997.

17. The retail price index weighting has been revised to reflect the 1996 Household Survey. The new index was not backdated beyond 1996 but provides a more comprehensive basis for the price index than the previous index that used 1975 weights. The index is based on a monthly survey of prices in South Tarawa only, and therefore does not reflect price developments in the outer islands.

IV. Public Finance

Developments in 1997-98

18. The budget balance improved from an overall deficit of more than 35 percent of GDP in 1996 to a surplus of 24 percent of GDP in 1998, due to the temporary jump in fishing license revenue to almost 60 percent of GDP (Table 8 and Figure 2). The revenue windfall enabled current expenditure to be maintained at more than 70 percent of GDP, about 15 percent of GDP higher than the ratio prior to the adoption of an expansionary fiscal policy in 1995. There were no drawdowns from the RERF (Box 2) in 1998, and reserves in the Consolidated and Development funds rose sharply to more than $A 30 million.

Table 8.

Kiribati: Summary of Central Government Operations, 1992-99

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

Includes spending from the STABEX Fund, mainly as a subsidy to the Copra Society.

Income for dividends and interest only. Capital gains are excluded.

Figure 2
Figure 2

Kiribati CENTRAL GOVERNMENT BUDGET, 1990-99

(In percent of GDP, unless otherwise noted)

Citation: IMF Staff Country Reports 1999, 079; 10.5089/9781451821895.002.A001

Sources: Data provided by Kiribati authorities; and Fund staff estimates.

Revenue Equalization Reserve Fund

Origin. The Revenue Equalization Reserve Fund (RERF) was established by the British colonial administration in 1956 to hold royalties from phosphate mining in trust for the people of Kiribati in light of the foreseeable depletion of the deposits. By 1979, when Kiribati gained independence and the phosphate mine closed, the value of the Fund had grown to $A 69 million (1¾ times GDP).

Purpose. The main objective of the Fund is to provide sustained financing of government expenditure for the benefit of both current and future generations.

Administration. The Fund is administered by a committee of senior officials which is required to file quarterly and annual reports on operations with parliament, whose approval is needed for drawdowns.

Management. The Fund is managed by two brokerage firms, which are monitored by a custodian. Comprehensive audits are made every six years, with the last audit in 1996. At end-1998, the Fund had reached $A 570 million (8 times GDP) and was well diversified, with investments in 25 currencies (one-third in U.S. dollars and one-third in Australian dollars), evenly split between equities and bonds.

A. Revenue

19. Tax revenues fell to just under 23 percent of GDP in 1998, below the average of about 25 percent of GDP for the mid-1990s, partly reflecting static import duty collection (despite a strong rise in imports, as tax exemptions eroded the base) and a fall in personal incomes taxes (Table 9). Company income taxes remained at about one-third of the total tax revenue in 1998.

Table 9.

Kiribati: Central Government Revenue, 1992-2000

(In millions of Australian dollars)

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

Excludes interest and dividends on the RERF.

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

Excluding external grants.

20. Nontax revenue increased sharply to more than 70 percent of GDP in 1998 due to the jump in fishing fees to 60 percent of GDP, but other items also rose steadily in recent years. Revenue from the government charter of an airplane to service Christmas Island4 rose to nearly $A 1½ million in 1998 (offset by costs of about the same amount) while revenue from the sale of Green passports (which give foreigners certain privileges as Kiribati nationals) rose to about $A 2½ million by 1998.

21. External grants rose steadily since the mid-1990s to reach 43 percent of GDP in 1998 and provided most of the financing for development spending (see below).

B. Expenditure

22. Total expenditure increased to 113 percent of GDP in 1998, well above the ratio of about 95 percent of GDP in the two years prior to 1995. Current expenditure rose to more than 70 percent of GDP while development expenditure reached more than 40 percent of GDP by 1998.

23. A sizable share of the increased spending went to the authorities’ priority areas of social services (Table 10). Spending on health and education rose to 38½ percent of current outlays in 1998, up from an average of 36¾ percent of current outlays in 1992-94. The World Bank’s Public Expenditure Review in June 1998 noted that health and education spending was high, but that the quality was poor with inadequate nonwage expenditure (especially on repairs and maintenance). A comparison of the level and composition of expenditure with selected Pacific island economies (see Table below), confirms that social spending was high relative to that in Fiji, Samoa, and Tonga.

Table 10.

Kiribati: Central Government Expenditure (Functional Classification), 1992-99 1/

(In millions of Australian dollars)

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

Includes supplementary budget appropriations

Table. Selected Pacific Island Economies: Expenditure Composition, Average for 1996-98

article image
Sources: Data provided by the Fiji, Kiribati, Samoa, and Tonga authorities and IMP’ staff estimates.

24. The increase in expenditure since the early 1990s was spread across a range of items, including the civil service wage bill and purchases of goods and services (Table 11). The wage bill rose by two-thirds between 1994 and 1998, with wage and salary rates across all grade levels rising by about 30 percent (Table 12). The remainder of the increase in the wage bill appears to be due to an increase in the number of civil servants.5

Table 11.

Kiribati. Central Government Expenditure (Economic Classification), 1992-99 1/

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

Includes supplementary budget appropriations.