Kiribati: 2001 Article IV Consultation--Staff Report and Public Information Notice on the Executive Discussion
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International Monetary Fund
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Publication Date:
21 Sep 2001
eISBN:
9781451927177
Language:
English
Keywords:
ISCR; CR; private sector; Kiribati; deficit; legal tender; Development expenditure; housing authority; public enterprise; k iribati authorities; balance of payments; Agroindustries; lncludes government deposit; Kiribati authorities; copra mill; government policy; government deposit; Public enterprises; Pacific Islands
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In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

I. Introduction and Background

1. Kiribati’s economic policy is deeply rooted in communally oriented values. The policy involves extensive reliance on the state for investment, employment, and service delivery. This strategy has managed to provide a stable macroeconomic environment, the build-up of substantial official external assets, and a relatively equitable intra- and inter-generational distribution of income. However, this strategy has also yielded a stagnant economy, with inefficient state-owned enterprises and a small private sector, that has been unable to raise living standards.

2. Kiribati is one of the least-developed micro-island states in the Pacific region, confronted with daunting physical and economic challenges (Box 1). Per capita GDP was around US$500 in 2000. The economy is narrowly based, highly vulnerable to external shocks, and dominated by the public sector. The productive sector is limited, and the only export is copra. The nascent tourism sector does not yet contribute significantly to economic activity. About four fifths of the population operates in the informal sector, which relies on copra production and fishing.1 Kiribati’s social indicators have improved, but present a mixed performance when compared with those of similar economies (Annex I).

3. Over the last decade, economic expansion has barely kept up with population growth. Growth faces major constraints, some arising from Kiribati’s physical disadvantages and some stemming from policy choices, including a large and ineffective public sector, barriers to investment and trade, and distortionary price controls. For the longer term, the Kiribati archipelago and its 3½ million square kilometer exclusive economic zone (the size of India’s land mass) offer growth potential through tourism and enhanced fishing and deep-sea mining, provided sufficient investment is available.

4. Kiribati is highly dependent on volatile financial inflows, but holds sizable reserves to weather external shocks. A large share of government spending and of imports is financed from fishing license fees and external grants, which have been unstable. GNP is almost twice the size of GDP, owing to large receipts from fishing license fees, investment income, and seamen’s remittances. These inflows, together with external grants, have more than sufficed to finance persistent trade deficits (averaging 60 percent of GDP during the last decade), while allowing Kiribati to accumulate sizable external assets.2 The latter are held in an overseas trust fund and could be used as a buffer in case of economic distress.

Kiribati’s Physical and Economic Challenges1

Kiribati has a population of 85,000, but spreads over an area roughly equal to that of Europe. Most of Kiribati’s area is ocean: its land mass amounts to 810 square kilometers, compared to an Exclusive Economic Zone of 3.6 million square kilometers. Kiribati has one of the highest sea-to-land ratios in the world. The vast archipelago of 33 islands reaches 4,000 kilometers from east to west and 2,000 kilometers from north to south. The population is concentrated on the Gilbert Islands, which include Tarawa, the capital island. One-third of the population lives on South Tarawa, where density reaches 1,610 people per square kilometer, while the Phoenix Islands are virtually uninhabited. Kiribati’s numerous, small, and low-lying islands heighten its environmental vulnerability, especially to sea-level rises; some islets and bird sanctuaries have already disappeared. A natural disaster on Tarawa could be devastating, as it would affect the entire population and economy.

Transport to, from, and within Kiribati is extremely limited and is primarily by boat. The nearest large markets are 4,000 kilometers away, in Honolulu and Brisbane. There are only six flights a week in and out of the country, all by small plane.2 Hence distance from and access to external and internal markets presents challenges of a magnitude faced by few other countries. Kiribati’s remoteness and dispersion have significant economic and administrative implications. Isolation means that the country is far from the major centers of commerce and finance. Foreign trade is hampered by Kiribati’s remote location and irregular supply routes. The development of even a small domestic market is constrained by distances between widely dispersed communities and infrequent internal transport services. Limited domestic market size, combined with large distances from overseas markets, results in a lack of competition; often the domestic market can support only a single supplier or producer. In addition to distance, Kiribati pays high transport costs because of the relatively small volume of cargo, small cargo units, and the need for bulk breaking. Such costs raise the price of exports, thereby reducing their competitiveness and returns. Similarly, high transport costs of imports result in consumer welfare losses.

The resource base is narrow. The arid climate and poor soil offer little potential for agricultural development, except copra. Marine resources are the mainstay of the economy— about 80 percent of households make a living or survive through fishing. The public sector dominates economic activity, while the private sector is small. These factors present challenges to the Government in determining the most appropriate pace and sequencing of policy reforms in areas such as privatization, downsizing and improving the performance of the public sector, and tax and tariff reforms. Smallness of size adds a further dimension to the development challenge when it is compounded by a population that is scattered over long distances. The Government faces diseconomies of scale in providing public goods and services resulting in a relatively larger public sector, which burdens the budget. Not surprisingly the Government relies heavily on taxing imports.

1 Based, inter alia, on “Small States: Meeting Challenges in the Global Economy” Commonwealth Secretariat/World Bank Joint Task Force, Washington, DC, USA, April 2000. 2 At the time of the mission, virtually all scheduled flights were suspended for weeks.

Comparing Kiribati and Other Small Island Economies1

With few exceptions, most Pacific Island Economies (PIEs) have experienced moderate growth with low inflation over the last few years. Virtually all PIEs were affected by the Asian crisis, with exports and real GDP slowing or contracting in 1997. Most economies recovered in 1998–99, with the exception of Fiji and the Solomon Islands. Reversals in the terms of trade during the second half of the 1990s seem to be the key factor in the relatively high volatility of output growth throughout the region. Although Kiribati’s growth rate over the past ten years has exceeded the PIEs’ average, the country’s relatively higher population growth has resulted in a similarly weak rise of income per capita. In many PIEs unclear properly rights and a communal land tenure system appear to increase transaction costs for undertaking agricultural, mining, tourism, and other activities. In some islands (including Kiribati), foreigners may not own land, and face restrictions on entering selected industries. Uncertainties regarding land ownership prevent banks from accepting land as collateral, thus hindering credit extension.

Most of the PIEs are heavily dependent on a few sources of income, and are subject to large external shocks. Financial assistance from developed countries is expected to decline over the medium term. Remittances from overseas, of considerable importance for Tonga, are subject to wide fluctuations. Most PIEs depend on a small number of exports, or related royalties/license fees, including minerals (Solomon Islands), fish (Federated States of Micronesia, Kiribati, Samoa, Solomon Islands, and Tonga), timber (Solomon Islands and Vanuatu), and agricultural commodities (e.g., copra in Kiribati, Republic of Marshall Islands, Samoa, and Vanuatu). Volatility in the price of these exports is an important source of vulnerability. While sharing many similarities with the other PIEs, Kiribati is unusual, in that it holds an exceptionally large stock of net financial assets as a proportion of GDP (Box 6).

Selected Economic Indicators of Small Island Economies, 1992–98

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Sources: Data from the national authorities; and Fund staff estimates.

Federated States of Micronesia, Fiji, Republic of the Marshall Islands, Samoa, Solomon Islands, Tonga, and Vanuatu.

Antigua and Barbuda, Bahamas, Barbados, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines.

Cape Verde, Maldives, and the Seychelles.

Measured as the standard deviation of real GDP growth rates. "Others" excludes Cape Verde.

“Others” excludes Seychelles.

“Pacific” excludes the Federated States of Micronesia and the Republic of the Marshall Islands.

1 See, Rosales, J., “Macroeconomic Policy and Financial Sector Stability in Pacific Island Countries,” paper presented at the Conference on Financial Sector Stability and Development, Apia, Samoa, February 2001.

Fiscal Structure in Kiribati and in Other Small Pacific Island Economies

Kiribati’s government sector accounts for an unusually large share of the economy. Even when using GNP, rather than GDP, as the base for comparison, the relative size of government spending—while similar to that of the Federated States of Micronesia (FSM) and of the Republic of the Marshall Islands (RMI)—is almost double the corresponding share in other comparable Pacific island economies.

Kiribati is highly reliant on nontax revenue (mainly fishing license fees), which accounts for more than half of total revenue. In contrast to FSM and RMI, which benefit from their association with the United States, the share of external grants in Kiribati is relatively low. With regard to tax revenue, for which domestic output (i.e., GDP) is the relevant base, revenue mobilization in Kiribati is roughly on par with those of comparator countries.

Kiribati, FSM, and RMI all have high levels of current expenditure. Spending on wages is broadly comparable in the three countries, but Kiribati’s subsidies to public enterprises are relatively larger. Conversely, Kiribati’s spending on health and education is below the regional average, while its development expenditure (even excluding net lending) is much higher than in comparator countries. However, those countries inherited larger stocks of infrastructure from their colonial period, or in connection with U.S. military operations.

Fiscal Indicators of Selected Pacific Island Economies

(As percent of GDP/GNP) 1/

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Sources: Data provided by national authorities; and Fund staff estimates, including SM/00/266 and SM/00/267.

All columns in percent of GDP, except the second column for Kiribati, which shows percentages of GNP.

Average of the latest five years, for which data are available, for Fiji, Samoa, the Solomon Islands, Tonga, and Vanuatu.

Does not include off-budget expenditure.

For “Other Pacific Islands,” average of Fiji, Samoa, and Tonga.

5. Since 1995 the authorities have pursued an activist fiscal policy, while pursuing, in principle, a medium-term strategy that aims at encouraging private sector development. This agenda was embodied in their Medium-Term Strategy for 1997–2000 (MTS), and in its successor, the National Development Strategy for 2001–03 (NDS), adopted in November 2000 (Box 4). However, progress in implementing these strategies has been limited. Given that the burden of macroeconomic adjustment falls on fiscal policy—for lack of an independent monetary policy—the mission’s recommendations focused on fiscal retrenchment, driven by current expenditure curbing, and on a sustainable levy on external official assets.

National Development Strategy for 2001–03

The National Development Strategy for 2001–03 (NDS) was prepared by the Government in the second half of 2000 and was considered by the National Assembly in November 2000. NDS aims at achieving the following medium-term objectives: a significant increase in real per capita income; steady growth in employment; enhanced human resource development; higher civil service productivity; stronger links between the public and private sectors; private sector development; and a more competitive and diversified export base.

To achieve the above goals, NDS has the following policy targets:

  • Public sector reform: implementation of output budgeting and performance-based contracts; restructuring of government ministries to focus on core functions; privatization of public enterprises, and for those remaining in the public domain, a more rigorous enforcement of commercial management and budget constraints; and prudent fiscal management;

  • Creating an enabling environment for private sector development: increased cooperation between the public and private sectors; streamlining of investment approvals and revision of incentives to make them more market friendly; strengthening of the domestic financial system to improve resource mobilization; improvement of access to land for investment and development; and continued reform of taxes and tariffs to remove distortions; and

  • Human resources development: increased emphasis on basic education, vocational technical training, and primary health care.

II. Recent Developments and Near-Term Outlook

A. Economic Developments Since End–1998

6. Kiribati’s economy stagnated and real per capita income shrank between 1998 and 2000. Real GDP growth averaged only ¼ percent per annum, whereas average population growth was almost 2 percent per annum. This outcome stemmed partly from external factors beyond the Government’s control, including adverse climatic conditions that reduced fishing; a plunge in world copra prices; and a drought that hurt copra production. The lackluster growth performance also reflected the continuing inefficiency of the public sector and inappropriate structural policies, which hampered the country’s ability to absorb adverse shocks.

uA01fig01

Output and Inflation

Citation: IMF Staff Country Reports 2001, 165; 10.5089/9781451927177.002.A001

7. Inflation remained subdued in 1999–2000 owing to the weakening of economic activity and the easing of supply problems at the main port. However, underlying inflation was somewhat higher, as price and margin controls on goods account for 28 percent of the retail price index basket.

8. The external position deteriorated in 1999–2000. Exports of new marine products (e.g., bêche-de-mer and seaweed) posted a strong increase, but traditional fish exports fell, owing to unpropitious climatic conditions in the wake of La Niña. Imports surged to supply several large domestically financed construction projects, in particular a new Parliament building and 18 junior secondary schools. Meanwhile, fishing license fees dropped by 14 percentage points of GDP (Box 5), while external grants contracted by 21 percentage points of GDP. Mirroring the above developments, the current account plummeted by 28 percentage points of GDP. As a result, the overall external balance was halved between 1998 and 2000. Public external debt remained low and on concessional terms.3

9. The fiscal position weakened significantly in 1999–2000. With the fall in fishing license fees and in external grants, total revenue and grants slumped by 34 percentage points of GDP between 1998 and 2000. Development expenditure in 2000 declined in line with lower external assistance. However, current government expenditure rose slightly in both years because of increased support to public enterprises and copra producers, and additional purchases of goods and services. Reflecting these developments, the overall budget balance swung from a surplus of 19 percent of GDP in 1998 to a deficit of 7 percent of GDP in 2000. The Government financed the deficits by drawing down deposits in the Consolidated, Development, and STABEX Funds.4

Kiribati’s Deep-Sea Fishing Sector

Kiribati is heavily dependent on fishing license fees. In 2000 they represented 51 percent of government revenue and 42 percent of GDP, and they dwarfed exports. Kiribati’s exclusive economic maritime zone is comparable to the area of the Caribbean Sea. Kiribati has no commercial fishing capability and relics on other countries for fishing in its territorial waters. The foreign fishing vessels were registered in Japan, Korea, the United States of America (USA), and Taiwan Province of China. Kiribati monitors the catch in several ways including:

  • the use of a satellite tracking system that all licensed boats must carry;

  • the placement of Kiribati observers on board randomly selected vessels;

  • surveillance flights operated by the air forces of Australia, New Zealand, and the USA; and

  • the use of a patrol boat (sponsored by Australia).

The information collected on the location of vessels is fed into a control room in Tarawa, where it is processed for surveillance purposes almost on a real-time basis. The authorities consider that the surveillance is effective and do not think that illegal fishing is a serious problem. For the monitoring of fish stocks, Kiribati relies on the surveillance of the South Pacific Forum’s Fishing Agency. In order to manage fish resources in a sustainable manner, the International Western Pacific Management Committee determines quotas for individual states. In 2000, the catch in Kiribati waters slightly exceeded the fishing quota.

Licenses are granted for two months to one year. Under the agreement with the USA, which is negotiated on a multilateral basis with other Pacific Island States in the region, an annual lump sum fee of US$18 million is paid for all fishing activity. Of this amount 15 percent is shared equally between the participating states and 85 percent is shared according to where the fishing boats operate. Kiribati gets a total of US$4–5 million a year on average. Fees under bilateral agreements represent 5 percent of the reported value of the catch (moving average of the previous three years’ catch), although a recent agreement negotiated with a European Union member country provides for fees of 6 percent of the catch. The outlook for fishing fees in Kiribati in the medium term is somewhat less favorable than in the recent past, owing to the expected return of normal weather conditions. Annual fees are projected by staff to range from $A 25 million to $A 28 million based on the average of the last five significant years and the need to avoid possible overfishing. The authorities’ estimate for 2001 is smaller, in line with their traditionally conservative fishing revenue projection stance. Over a thousand I-Kiribati work on board foreign fishing boats, an opportunity that provides much-needed employment and remittances (about $A 12 million a year, exceeding total annual exports).

10. Despite the external and fiscal deterioration, official international reserves remain comfortable. Kiribati’s reserves stood at $A 677 million at end–2000 (equivalent to seven years of imports or nine times GDP). They are mainly held in the Revenue Equalization Reserve Fund (RERF—Box 6), which amounted to $A 658 million at the same time. Notwith-standing the fiscal deterioration, the Government contributed $A 5 million to the RERF in 1999 and has made no drawdowns since 1997.5

uA01fig02

RERF Developments

Citation: IMF Staff Country Reports 2001, 165; 10.5089/9781451927177.002.A001

11. The depreciation of the Australian dollar—Kiribati’s legal tender—since mid–1997 has improved external competitiveness somewhat. Kiribati’s real effective exchange rate (REER) index in 2000 was 13 percent below the average for 1994—97. There are no data on unit labor costs, but public sector salary scales have remained broadly unchanged since 1995. However, since the major items in the balance of payments (i.e., fishing license fees, external grants, and investment income) are not sensitive to price competitiveness, the impact of changes in the REER is limited.

B. Near-Term Outlook

12. The outlook for 2001 is continued slow growth and low inflation (albeit with a modest uptick). Economic growth is projected to be modest, at 1½ percent. The continuation of unfavorable fishing conditions is expected to be offset by increased government spending, particularly on wages; higher public investment associated with the commencement of several foreign-financed projects; the coming on stream of the new wharf in Betio port; and an improvement in copra production. Inflation is expected to creep up to 2½ percent, as the petroleum price hike is passed through domestically.

Revenue Equalization Reserve Fund

  • Origins: 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 I-Kiribati, anticipating the depletion of the deposits. In 1979, when Kiribati gained independence and the phosphate mine closed, the value of the fund was $A 68 million. At end–2000, the fund had grown to $A 658 million (US$360 million, or nine times GDP).

  • Purpose: The fund’s main objective is to provide sustainable financing of government expenditure for the benefit of current and future generations. The Government’s declared policy is to maintain the real per capita value of the RERF in Australian dollars. The National Assembly approves the annual authorized maximum drawdown in the context of the budget debate.

  • Administration: The fund is administered by a committee of senior government officials who are required to file quarterly reports on the fund’s operations with the National Assembly.

  • Management: The fund is managed by two brokerage firms, which are monitored by a custodian. Comprehensive audits are held periodically. The fund is well diversified, with investments in 22 currencies (25 percent in U.S. dollars, 33 percent in Australian dollars, and 19 percent in both Japanese yen and euros), and evenly split between equities and bonds. During the last five years, the nominal yield of the fund in Australian dollars increased significantly, in part owing to the appreciation of the U.S. dollar. From 1987 to 2000, the financial performance of the fund and the government policy of reinvesting the profits led the per capita value of the fund to grow by 63 percent (in terms of 1995 Australian dollars) and by 25 percent (in terms of 1995 U.S. dollars).

Kiribati: Financial Indicators of the RERF, 1987–2000

(In percent, unless otherwise indicated; all figures are averages)

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

Includes interest and dividends.

Includes interest, dividends, management fees, and valuation gains.

Australian 10-year maturity government bonds

Base year: 1995.

13. The external and fiscal positions are expected to deteriorate further in 2001. Fishing activity is projected to remain below the high levels of 1997–98, when El Niño boosted the catch in Kiribati’s waters. Hence, the current account and the overall balance of payments are projected to worsen, the latter turning negative for the first time in eight years. The budget deficit is expected to exceed 29 percent of GDP, reflecting lower fishing fees and external grants, higher domestically financed development expenditure, and larger subsidies and net lending to public enterprises. The deficit is expected to be financed by depleting the Consolidated, Development, and STABEX Funds (all together, $A 19 million) and by drawing on the RERF ($A 3 million, or 3¾ percent of projected 2001 GDP).6

14. The Government’s already dominant role in the economy is set to expand. State-owned enterprises (SOEs) dominate economic activity, but their performance has generally been poor. In contrast, two enterprises jointly owned by the Government and foreign enterprises—Bank of Kiribati (BOK—51 percent owned by an Australian bank) and Telecommunications Services of Kiribati Ltd. (TSKL—49 percent owned by an Australian telecommunications company)—have been profitable. However, the two enterprises’ foreign partners are slated to withdraw in 2001. The authorities have identified a new foreign partner for BOK, but intend to take over the foreign partner’s share in TSKL and thus to bring the company back to full government ownership. Meanwhile, the Government is planning several new ventures for 2001, including the leasing of an airplane to expand Air Kiribati’s operations; the setting up of a copra processing mill; an expansion of the state-owned fishing company’s operations; and an extension of telephone links to the outer islands.

III. Policy Discussions

15. The discussions focused on the key policy challenge—the achievement of lasting improvements in living standards, In light of the dim near-term prospects, the mission urged the authorities to rein in the public sector to unfetter the private sector, which is the best vehicle for medium-term sustainable growth. The mission noted that this policy advice was consistent with the Government’s own general development strategy, as stated in the newly adopted NDS. While reiterating the policy directions laid out in the NDS, the authorities insisted on the need to implement them cautiously. They were loath to privatize SOEs and to downsize the civil service, citing concerns of political uncertainty and increased unemployment. The comfortable level of international reserves, and still sizable—albeit declining—official development assistance have reduced the authorities’ perceived urgency for reform.

A. The Reform Strategy

16. Fiscal and structural policies are of central importance in Kiribati, given the absence of domestic monetary policy. Accordingly, discussions centered on the fiscal and structural reforms needed to promote sustainable development and to enhance the economy’s resilience to external shocks. The mission broadly endorsed the NDS’s focus on public sector reform and prudent fiscal management, and stressed that its timely implementation was critical, noting that progress with the previous MTS had been limited. The Minister of Finance had espoused the same strategy in his 2001 budget speech, but acknowledged to the mission that there were differences of opinions within the Government and Parliament on the appropriate pace of reform.

17. The authorities broadly agreed with the mission’s recommendations on fiscal policy but cited constraints in proceeding with structural reforms. In particular, they remained skeptical of downsizing the public sector and of reducing subsidies to SOEs and copra cutters, stressing the need to maintain social cohesion. They emphasized the following considerations: (i) the social importance of subsidies (especially for copra producers) and of the public provision of goods and services, especially in the outer islands; (ii) the possible unemployment that could result from downsizing and privatization, given the limited absorptive capacity of the small private sector, which might not be able to generate immediately sufficient jobs; and (iii) the key role of the state in promoting investment through the creation of commercial enterprises, which could eventually be privatized. More generally, the authorities insisted on the importance of social cohesion, which required that they build social consensus before proceeding with reforms. These reforms would therefore be undertaken at a pace more suited to Kiribati’s cultural environment.

B. Medium-Term Outlook

18. The mission presented two medium-term scenarios. The baseline scenario shows that a continuation of the current policy mix would lead to slow growth and to a decline in real GDP per capita (Annex II); would run against inter-generational equity considerations; and would result in a rapid rise in external debt in terms of GDP. The reform scenario illustrates that, with timely implementation of the reform agenda, real growth of at least 3 percent a year could be achieved over the medium term, implying real GDP per capita growth of 1 percent a year. Owing to the small size of the private sector, growth performance would be initially similar under both scenarios. However, under the reform scenario, growth would not peter out after 2002 (despite the completion of major construction projects), owing to (i) the expansion in private sector activity that would take over skilled workers from the state and deliver products and services more efficiently; and (ii) the positive impact on supply capacity from higher and more productive development expenditure (stemming from redirected current expenditure). Private, rather than publicly owned, enterprises in the marine industry would become the major contributors to growth, and with increased business activity, domestic credit would pick up. Foreign direct investment would also flow in, as a result of reforms in the investment and legal environments and enhanced business opportunities. The authorities broadly agreed with the reform scenario but reiterated the social constraints on reforms.

C. Fiscal Policy and the Revenue Equalization Reserve Fund

19. The authorities’ three-year budget projections for 2001–03 are not consistent with fiscal retrenchment. Current expenditure would remain at its recent level of 72 percent of GDP, and development expenditure, at around 44 percent of GDP—in anticipation that sufficient external grants will materialize (see table below). As a result, budget deficits averaging 21 percent of GDP are projected, to be financed by greater drawdowns from the RERF and by concessional loans. The contemplated level of RERF drawdowns would be close to the approved ceiling in the 2001 budget, but would exceed the maximum long-term sustainable level, as estimated by the mission (see Paragraph 24). The authorities noted that projections beyond 2001 were indicative and could be revised for possible policy changes.

20. The authorities concurred with the mission that taxes and expenditure should be reduced over the medium term to promote private sector growth. This recommendation is consistent with the authorities’ goal of current fiscal balance, which the mission endorsed as a prudent medium-term stance in the face of volatile revenue and the need to use external grants and RERF financing for productive development projects. On the revenue side, the authorities intend to move in the proposed direction, with a planned reduction in personal and company taxes. In order to regain a sustainable fiscal position, and with external grants expected to continue to decline, the mission emphasized that it would be important to start curbing current expenditure, particularly the wage bill and subsidies and net lending to SOEs, and raising more concessional loans for the development budget. Considering these recommendations, and with the aim of serving Kiribati’s development needs better, the mission proposed a different medium-term fiscal framework, as shown in the table below (column “Staff Target”) and detailed in the reform scenario in Annex II.7

21. The authorities’ desire to reduce tax and tariff rates further requires a comprehensive tax policy overhaul. The tax base is narrow, with the bulk of tax revenue arising from tariffs. Tariff rates are already high (up to 80 percent) and will need to be reduced if Kiribati is to become a member of the Pacific Area Regional Trade Agreement (PARTA).8 Tariff reductions would benefit the economy by increasing allocative efficiency and helping to attract foreign investment in export-oriented industries (especially nontraditional exports). In these circumstances, the mission made two proposals. First, to broaden the tax base, the authorities should consider a single-rate sales or value-added tax. Second, to lower tariff rates, the authorities should change the import tariff base from an f.o.b. to a c.i.f. basis, in line with world practice and conducive to less scope for tax evasion.9 The authorities indicated that they would consider these recommendations in the context of possible tax and tariff reforms.

Kiribati: Budget Composition, 1995–2006

(In percent of GDP)

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Consolidated, Development, and STABEX Funds.

22. The mission supported the authorities’ expenditure focus on education and health. Although expenditure on education and health increased as a proportion of GDP over the last four years, the efficiency of such expenditure needs to be improved. In the face of scarce financial resources, the mission advised continued scrutiny of public expenditure, with a view to making it more efficient and cost-effective, in line with the World Bank’s 1998 Public Expenditure Review. In light of serious coastal erosion and solid waste disposal concerns, the mission concurred with the authorities that well-targeted outlays for environmental protection ought to be augmented in the coming years.

23. Progress has been made in increasing the accountability and transparency of fiscal management. The authorities indicated that, with donor assistance, they were implementing performance-based budgeting, so as to enhance public expenditure effectiveness. Thus, the 2000 and 2001 budgets included output and performance standards. They recognized, however, that reporting compliance under this scheme had not been satisfactory. The mission suggested that, considering limited administrative capacity, the authorities first concentrate their budget management efforts on selected expenditures and associated performance outcomes, when proceeding with the implementation of performance-based contracts.

24. The mission commended the authorities for their continued prudent management of the RERF. It suggested that the authorities consider bringing in private sector representatives to the RERF Management Committee, which currently comprises only Ministry of Finance officials. Upon the authorities’ request, the mission performed an analysis of the long-term maximum sustainable use of the RERF, and recommended that RERF financing of the expected budget deficits not exceed 9 percent of GDP (Annex III). The authorities noted that the authorized level in the budget was higher, but said that they would consider the mission’s recommendation. Although larger drawdowns might be envisaged to finance well-designed development projects with high returns, the mission pointed out that concessional loans would likely be available for such projects, which would enable Kiribati to reduce its opportunity costs.

D. Structural Reforms

Civil service reform

25. The mission urged the authorities to start civil service reform in earnest. The authorities intend to raise the incomes of civil servants—for the first time since 1995— through higher salaries and/or reduced tax rates. The mission proposed that such a move proceed hand in hand with civil service reform, including a downsizing—possibly involving a voluntary departure program.10 In this connection, the AsDB-sponsored civil service census had shown that not all of the authorized budgetary posts were filled, or were instead filled with temporary staff. The mission argued that in this context new recruitment could be frozen, and once a clear civil service rationalization plan was elaborated and initiated, the envisaged wage increase and tax cuts could be implemented. The authorities indicated that public administration reform was a long-term process and that civil servants’ incomes urgently needed to be improved.

Public sector retrenchment

26. The mission stressed the need to rein in the public commercial sector. The mission argued that the public sector should aim at providing core public services, instead of competing with the private sector, especially in commercial or trade activities. The mission welcomed the long-awaited launching of the Private Sector Consultative Committee and urged the authorities to undertake concrete action by, inter alia, publishing an initial list of SOEs to be privatized. With the greater competition among private retail outlets in Tarawa, government retail activities could be privatized there, and margin and price controls, gradually phased out. The mission also suggested to start privatizing the large public house stock, rather than to allow an increasing number of government-owned houses to fall into ruin every year for lack of maintenance. The mission also urged the authorities to find a new foreign partner for the telecommunications company, TSKL, given the highly technology-intensive nature of its operations. The authorities pointed out that government-owned commercial outlets and margin controls had contributed to supply affordable basic goods in South Tarawa, but also noted that the private sector was now increasingly able to fulfill this role. The housing authority was interested in the suggestion of privatizing some publicly owned dwellings in the framework of its forthcoming supplemental budget request for maintenance. The authorities considered that they had the technical expertise to continue to manage TSKL successfully and that, in order to provide the outer islands with telecommunications infrastructure, it was easier to deal with a public enterprise.

27. The mission recommended that the authorities review government support to the copra sector. The mission had extensive discussions with the authorities on the copra sector and noted its sensitive nature, as copra production is one of the few commercial activities practiced on some of the outer islands. Nevertheless, the continued low levels of world copra prices put a sizable burden on the budget, as subsidies to copra cutters are projected to represent 5 percent of GDP in 2001.11 Thus, the mission recommended that the guaranteed copra price be gradually brought in line with world prices. This step would produce budgetary savings and would also create an incentive for alternative activities on the outer islands, such as seaweed or black pearl farming. The mission also emphasized that the contemplated new copra mill should be privately owned and operated, as this was a typical commercial venture for which the private sector was better equipped. The authorities responded that subsidizing the copra sector was a social rather than an economic decision. As for the copra mill, they intended to hire an experienced foreign miller and to privatize the mill, once it was operating satisfactorily.

Private sector promotion

28. Low foreign direct investment highlighted the need for reducing existing barriers to investment. The major barrier is the prohibition on foreign ownership of land. The mission encouraged the authorities to explore innovative solutions, such as creating zones where foreign investors could own or lease land for, say, 99 years. More generally, procedures for approving foreign investment needed to be streamlined and made more transparent and predictable. The mission welcomed the passage of new land legislation, which clarified land ownership rules in South Tarawa and promoted secure land transactions.

29. The legal environment needs to be developed to promote private sector activity. The mission recommended that the authorities update or develop a coherent body of commercial laws (including draft laws on property rights, contracts, secured transactions, payments, and bankruptcy). The authorities noted that the Private Sector Consultative Committee would monitor the business environment and review legislation that affects the private sector.

E. Financial Sector Policy

30. The mission supported the continued use of the Australian dollar as legal tender, as it had strengthened macroeconomic discipline, maintained low inflation, and provided for a liberal exchange regime.

31. The mission stressed the need to ease obstacles to financial intermediation. The bulk of deposits with the two main financial institutions—BOK and Kiribati Provident Fund (KPF—a government-owned pension fund)—are invested overseas, owing to the restriction on foreign ownership of land, which prevents BOK from holding land as collateral, or from redeeming mortgaged buildings on land it cannot own.12 The mission urged the authorities to explore creative means to alleviate this restriction, including allowing foreign banks to hold land in trust long enough to be able to foreclose it through sale to another local entity. Another major impediment to credit expansion is the lack of domestic investment opportunities. The mission advised against providing partial government guarantees to spur credit, as this could create moral hazard and lead to high fiscal costs. Instead, credit creation should be fostered through structural reforms that promote private sector activity and commercially viable investment projects. The authorities observed that such reforms and transformations would take time.

32. The mission emphasized that a sound financial system was key to Kiribati’s stability. While BOK is financially sound, as it abides in practice by Australian banking regulations, Development Bank of Kiribati (DBK) and KPF should be strengthened.

  • The mission welcomed progress in finding a new majority partner for BOK and the authorities’ decision to reduce the Government’s share from 49 percent to 25 percent. The mission urged the authorities to wrap up negotiations speedily with the incoming partner to allow for a smooth transition. The mission appreciated the fact that BOK would continue to be managed by a reputable foreign bank on a commercial and fully independent basis.

  • The mission noted that the average volume of DBK’s loan approvals in 1999–2000 was double the level in 1997–98, reflecting higher lending to the outer islands. However, DBK’s nonperforming loan rate had also risen from 7½ percent of its assets in 1998 to around 10 percent in 2000. The mission suggested that DBK could benefit as well from bringing in a foreign partner, to provide expertise, inter alia, in credit risk assessment. The mission recommended that government equity injection into DBK in 1999–2000 be considered sufficient and the DBK be free from interference in its lending activities.

  • The mission concurred with KPF’s reduction of its guaranteed rate of return from 13½ percent to 11 percent, retroactive to January 1, 1998, which averted the depletion of its reserves. However, KPF’s guaranteed rate of return remained unduly high (compared to the return on its assets) and put the onus of keeping KPF afloat on the next generation or on the Government. Accordingly, the mission recommended that KPF’s payouts be linked to the actual rate of return on its assets.

33. Financial institution legislation could help strengthen DBK and KPF, and possibly attract another commercial bank. Although such legislation—focusing on licensing, supervision, and prudential regulation—was not currently a priority for the authorities, as they had focused on obtaining a new partner for BOK, the mission reminded them that they could request technical assistance from the Pacific Financial Technical Assistance Center (PFTAC) on developing such legislation.13

F. Data, Technical Assistance, and Other Issues

34. Fund surveillance of Kiribati has been hampered by weaknesses in virtually all macroeconomic data categories and the lack of regular reporting of core data. The mission urged the authorities to increase the resources of the National Statistics Office and to request technical assistance (Annex IV). In particular, PFTAC staff had conducted an appraisal mission in September 2000 (Annex V) and had made a number of specific recommendations. The authorities recognized that policy design was more difficult in the absence of macroeconomic data, and they undertook to report core data regularly to the Fund, as had been agreed during the 1999 consultation. Once this reporting is effective, General Data Dissemination Standards could be considered for the reporting of official reserves, for which the basic data seem available and adequate.

35. The mission recommended that the authorities continue to avail themselves of the technical assistance offered by donors and multilateral organizations. The mission indicated that the Fund stood ready to consider requests for technical assistance in banking legislation, as well as in tax and tariff policy reform. The Minister of Finance said that the authorities would take this recommendation under advisement.

36. The authorities consented to the Fourth Amendment to the Fund’s Articles of Agreement during the mission and indicated that they would consider authorizing the publication of the 2001 Article TV consultation documents. The mission invited them to notify the Fund accordingly at their earliest convenience.

IV. Staff Appraisal

37. Kiribati’s economic policies reflect the country’s communally oriented values that favor social cohesion over individual self-reliance and the “rough and tumble” of the market economy. This policy involves heavy dependence on the state for investment, employment, and service delivery, and extensive participation of the public in decision making. This strategy has produced a stable macroeconomic environment and the build-up of sizable external assets. However, it has failed to deliver high growth, thus keeping the country one of the least developed among the Pacific Island States.

38. Since end–1998, unfavorable external conditions, fiscal slippages, and the lack of structural reforms have led to a weakening in Kiribati’s external and fiscal positions. The short-term outlook is for a continuation of slow growth with low inflation and a further deterioration in the external and fiscal balances. While the comfortable level of official external reserves can shelter Kiribati temporarily from external shocks, this buffer should not dull the authorities’ sense of urgency for reform.

39. To achieve sustainable medium-term growth, timely implementation of fiscal consolidation and structural reforms is critical. The authorities’ National Development Strategy provides an adequate framework for private sector-led growth with macroeconomic stability. However, progress in implementing the reform agenda has been limited. The authorities need to step up efforts to build a social consensus to proceed with pressing reforms.

40. To regain a sustainable fiscal position, the authorities must start reducing current expenditure and increasing its efficiency. Over the medium term, current expenditure should be reined in to offset declining external grants. Reductions in the wage bill and subsidies and net lending to state-owned enterprises and copra cutters are especially important. A curbing of such outlays would allow for tax reductions, which would unfetter the private sector. It would also accommodate additional expenditure on education, health, and environmental protection. However, increasing the efficiency of social expenditure is as critical as bigger outlays are for promoting human resource development. Meanwhile, civil service downsizing would facilitate the expenditure realignment recommended above and would release skilled workers to the private sector.

41. Kiribati’s legal tender, the Australian dollar, has depreciated since mid–1997. However, the ensuing improvement in external competitiveness has little direct economic incidence, as major foreign income items in the balance of payments are not sensitive to exchange rate changes.

42. Public enterprise reform and privatization, along with civil service rationalization, should be at the top of the reform agenda. Unprofitable state-owned enterprises constitute a burden on the budget, compete unfairly with the private sector, and lead to a misallocation of scarce resources. State-owned enterprises should either face hard budget constraints or should be privatized. The Government should refrain from new commercial ventures that would expand the already dominant role of the public sector.

43. Barriers to investment need be reduced to boost private sector activity and credit. Given the scarcity of domestic capital and technological know-how, progress in lowering such barriers is essential to facilitate the entry of foreign investment. Innovative solutions to ease the restriction on foreign ownership of land should be explored, as this restriction deters investment and hampers credit. To enhance economic efficiency, the authorities should progressively replace high tariffs by a broad-based simple indirect domestic tax, and should gradually reduce price and margin controls.

44. The weakness of the statistical data base has hampered effective macro economic policy design, implementation, and Fund surveillance. The authorities should take advantage of available technical assistance and devote adequate resources and attention to this lingering problem.

44. The authorities need to notify the Fund about their acceptance of the Fourth amendment to the Fund’s Articles of Agreement, as agreed during the discussions.

45. It is proposed that Kiribati remain on the 24-month consultation cycle.

Table 1.

Kiribati: Selected Economic and Financial Indicators, 1996–2001

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Source: Data provided by the Kiribati authorities; and Fund staff estimates and projections.

GDP plus investment income, seamen’s remittances, and fishing license fees.

Comprises Bank of Kiribati, Development Bank of Kiribati, and Kiribati Provident Fund.

Includes government deposits.

Table 2.

Kiribati: Summary of Central Government Operations, 1996–2001

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

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

Includes the financing of a new government-owned copra mill for a total cost of $A 4 million, of which three fourths are projected to be spent in 2001, and one fourth, in 2002. The Government’s budget only includes $A 0.6 million of expenditure for this project in 2001.

In 1999 includes $A 0.5 million contribution to DBK; in 2000 includes $A 1 million contribution to DBK and $A 2.7 million of additional equity in Air Kiribati; and in 2001 includes $A 3.4 million purchase of the shares of Telstra, $A 3.6 million purchase of a new airplane for Air Kiribati, and $A 3 million proceeds from the sale of additional BOK equity.

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

Table 3.

Kiribati: Balance of Payments Summary, 1996–2001

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Sources: data provided by the Kiribati authorities; and Fund staff estimates and projections.

Includes fishing license fees, which would be shown as current transfers under conventional international guidelines.

Excludes valuation changes.

Comprises the Consolidated, Development, and STABEX Funds.

On the basis of market value, excluding valuation changes.

Includes the Consolidated and Reserve Funds, and a small portion of the RERF at the discretion of the Ministry of Finance.

Includes the remaining balance of the RERF and of the STABEX Fund.

Figure 1.
Figure 1.

Kiribati: Output, Prices, and Exchange Rates, 1990–2001

Citation: IMF Staff Country Reports 2001, 165; 10.5089/9781451927177.002.A001

Sources: IMF, Information Notice System; date prowded by the Kiribati authorities; and Fund staff estimates and projections.
Figure 2.
Figure 2.

Kiribati: Central Government Budget, 1990–2001

Citation: IMF Staff Country Reports 2001, 165; 10.5089/9781451927177.002.A001

Sources: Data provided by the Kiribati authorities; and Fund staff estimates and projections.
Figure 3.
Figure 3.

Kiribati: Central Government Budget, 1990–2001

Citation: IMF Staff Country Reports 2001, 165; 10.5089/9781451927177.002.A001

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

Annex I

Kiribati: Social and Demographic Indicators, 1988–98

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Sources: Data provided by the Kiribati authorities; and World Bank, World Development Indicators, 2000.

1998 or latest available year prior to 1998.

For Kiribati, figures are for 1987 and 1996, respectively.

Annex II Kiribati: Illustrative Medium-Term Scenarios, 2001–06

This Annex presents two medium-term scenarios. First, the baseline scenario (Table II. 1) assumes that the current non reforming fiscal and structural policy stance continues over the medium term. Second, the reform scenario (Table II.2) assumes timely implementation of the authorities’ National Development Strategy for 2001–03 (NDS) and of the mission’s recommendations.

Table II.1.

Kiribati: Baseline Scenario, 2001–06

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

GDP plus investment income, seamen’s remittances, and fishing license fees.

Table II.2.

Kiribati: Reform Scenario, 2001–06

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

GDP plus investment income, seamen’s remittances, and fishing license fees.

Baseline scenario (Table II.1)

Under this scenario, major construction projects1 in 2002–03 would raise real GDP growth from 1½ percent in 2001 to around 2½ percent a year. However, this upturn would not be sustained. After the completion of the projects, growth is projected to slow to about 1 percent (only half the population growth) by 2005, as decreasing revenue constrains government spending. With private sector activity remaining subdued, there would be no stimulus to offset the post–2003 slowdown. Inflation would be around 2½ percent in 2001–06, in line with projections for Australia, the main trading partner.

Total revenue and grants are expected to decline in terms of GDP, owing to weak growth in fishing license fees and decreasing external grants. Fishing license revenue is assumed to grow in line with world prices for fish, with no significant increases in volume, while external grants are projected to fall from their current level of around 25 percent of GDP to 15 percent of GDP by 2006. Tax revenue is assumed to remain at around 27 percent of GDP. Unchanged expenditure policies would lead to current expenditure remaining at around 75 percent of GDP, with wages accounting for almost half of total current expenditure, and subsidies and net lending to public enterprises remaining high at some 7 percent. Development expenditure would fall to 21 percent of GDP by 2006, in line with lower external grants. This decline would constrain the economy’s long-term growth prospects, as the domestic component of development financing would stagnate.

Sizable fiscal deficits (averaging 24 percent of GDP) would ensue under this scenario. With the Consolidated, Development, and STABEX Funds exhausted in 2001, these deficits would have to be financed from increased drawdowns from the Revenue Equalization Reserve Fund (RERF—15 percent of GDP) and increased external concessional loans. The RERF drawdowns would be above the level considered sustainable by the mission (see Annex III). By 2006, the external debt would exceed $A 50 million.

In 2002, the current account balance would turn into a deficit, owing to higher project-related imports, which would be offset by capital transfers and loans. Thereafter, small current account surpluses would be posted. Export growth would remain weak, as would foreign direct investment. However, over the entire period under review, the overall external balance would remain in surplus, owing to sizable inflows of factor income.

Reform scenario (Table II.2)

The reform scenario assumes timely implementation of the NDS’s goals of downsizing the public sector, promoting private sector growth, reducing barriers to trade and investment, and investing in human resources development.

Revenue, with respect to GDP, is projected to decline, partly owing to weak growth in fishing license fees, but also reflecting tax reforms aiming at stimulating the private sector. Tax revenue would gradually fall from 28 percent of GDP in 2001 to around 23 percent in 2006. Compared to the baseline scenario, nontax revenue in Australian dollar terms would be approximately the same. Under the reform scenario, it is assumed that external grants would not fall as fast and would remain at around 18½ percent of GDP during 2002–06, as external donors would be supportive of the reform measures.

It is assumed that a downsizing of the civil service starts in 2002. This would enable a steady reduction in the wage bill, from 31½ percent of GDP in 2001 to 22 percent by 2006. Public enterprise reform would also start in 2002. By 2006, subsidies and net lending to these enterprises would be less than half the 2001 level. Development expenditure would fall slightly to 30 percent of GDP in 2006, but this level would be higher than under the baseline scenario, because of higher external grants.

Budget deficits would fall steadily under this scenario to about 12 percent of GDP by 2006. Current expenditure would gradually fall in balance with revenue, while development expenditure would be financed by drawdowns from the RERF (9 percent of GDP, in line with the mission’s analysis of the sustainable long-term rate of drawdown), external grants, and concessional external loans.

Despite the completion of the major construction projects, real GDP growth is projected to be 3 percent in 2004—06, due to the growth in private sector activity and the stimulus from development expenditure. This would imply a real per capita GDP growth of 1 percent per annum. Inflation would be about 21/z percent a year (as in the baseline scenario).

Growth is expected to be led by the marine industry, given the large sea resources. Under this scenario, however, it is the private sector that would lead economic activity. Tourism and wholesale and retail trade would be significant areas for increased private sector activity. With improved business opportunities, domestic credit is expected to pick up. Foreign direct investment is anticipated to flow in, owing to reforms in the investment and regulatory environment.

Under this scenario, export growth would improve over time, as the private sector exploits profitable opportunities. Import growth would also pick up somewhat, reflecting higher growth in output and income. The overall external balance would continue to be in surplus.

ANNEX III Kiribati: Sustainable Annual Drawdowns from the Revenue Equalization Reserve Fund

This Annex presents an update of the analysis of the sustainable use of the Revenue Equalization Reserve Fund (RERF) presented in the framework of the previous consultation (SM/99/134, Annex II). Specifically, the analysis aims at determining the maximum annual drawdowns from the RERF that would ensure that both current and future generations use a similar level of the RERF’s resources (as a percentage of GDP) to finance public expenditure. This would also ensure that the per capita real value of the RERF, expressed in 1996 Australian dollars, would remain constant.

To determine maximum allowable drawdowns over the long run, projections of the real per capita value of the RERF were made out to the year 2050, based on the following conservative assumptions (although it should be borne in mind that significant uncertainty surrounds these projections):

  • The end–2000 value of the RERF is used as the starting value for the analysis.

  • An annual nominal portfolio rate of return (including interest, dividends, and trading gains) of 6 percent is used. This is somewhat lower than in the previous simulation, owing to expected lower global yields in coming years. This rate is about ½ to 1 percentage point higher than long-term bond yields in Australia and the United States in December 2000, as it includes a small premium on investment in equities (as was the case historically).

  • Population growth of 2 percent a year is used (consonant with recent census data), declining to 1½ percent a year after 2020.

  • Real GDP growth of 3 percent per annum is projected, in line with the reform scenario outlined in Annex II. (The baseline scenario has a lower long-term growth rate and would thus lead to lower sustainable drawdowns).

  • Inflation of 2½ percent per annum is used, consistent with the assumption presented in Annex II (both scenarios).

Under these assumptions, annual drawdowns equivalent to 15 percent of GDP (as approved by Parliament for the 2001 budget) over the long run would erode the real per capita value of the RERF by about 60 percent by 2050 (see “Authorities’ scenario” in the table below).

The analysis suggests that the maximum annual drawdowns from the RERF would need not to exceed about 9 percent of GDP to be sustainable over the long term. Such a level would broadly maintain the real per capita value of the RERF through 2050 (see “Sustainable scenario”).

The continuation of the historical trend since 1989 of average annual drawings of some 5 percent would result in a 45 percent increase in the real per capita value of the RERF (see “Historical trend scenario”).

Kiribati: RERF Projections, 2000–50

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uapp03fig01

Kiribati: Real Per Capita Value of the RERF, 2000–50

(In constant prices of 1996 Australian dollars)

Citation: IMF Staff Country Reports 2001, 165; 10.5089/9781451927177.002.A001

Annex IV Kiribati: Statistical Issues

Outstanding Statistical Issues

There is no country page for Kiribati in the International Financial Statistics (IFS). No data are currently provided to the Fund on a regular basis. Kiribati has few statistical publications, and weaknesses remain in the statistics on government finance, national accounts, and balance of payments. Technical assistance is needed in these areas, including from the Pacific Financial Technical Assistance Center (PFTAC).

1. Real Sector

Technical assistance in national accounts was provided by the Asian Development Bank (1989), PFTAC (1994 and 2000), and the Statistics Department (STA) (1995). Estimates of GDP at constant prices by industry are available for the period 1979 to 2000; however, the quality of the deflators and of the survey data needs further improvement. There are no expenditure-based estimates of GDP.

The monthly retail price index (1996=100) is produced with a lag of about two months, based on a survey in Tarawa. The weights were updated in 1999 to reflect the 1996 household survey. There are no producer, wholesale, or trade price indices.

2. Government Finance

Kiribati does not report any government finance statistics (GFS) data to STA for publication in the GFS Yearbook. The latest available data based on GFS classification are for 1994, with the data for 1995 under compilation. Previous missions compiled fiscal data for 1996–99. A provisional budget outcome is available for 2000.

3. Balance of Payments

The latest balance of payments statistics reported by Kiribati are for 2000. The large net errors and omissions in the balance of payments data appear to reflect the underestimation of private transfers, including seamen’s remittances and other foreign exchange receipts. Quarterly trade statistics are available with a lag of eight months, while monthly foreign reserves data are available with a lag of about one month. Consistency between the balance of payments data and budget and financial sector data needs improvement.

4. Monetary Accounts

Kiribati does not report monetary accounts to STA. Quarterly balance sheets are available for Bank of Kiribati, while annual balance sheets are available for Development Bank of Kiribati and the Kiribati Provident Fund.

Kiribati: Core Statistical Indicators

(As of May 30, 2001)

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Proxied by total deposits with the Bank of Kiribati (sole commercial bank).

Annex V Kiribati: Fund Relations

(As of May 31, 2001)

I. Membership Status: Joined June 3, 1986; Article VIII.

II. General Resources Account

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III. SDR Department

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IV. Outstanding Purchases and Loans: None.

V. Financial Arrangements: None.

VI. Projected Obligations to the Fund: None.

VII. Exchange Rate Arrangement: The Australian dollar is legal tender and the domestic currency of Kiribati. Kiribati issues a small amount of coins.

VIII. Article IV Consultation: The 1999 Article IV consultation discussions with Kiribati were held in Tarawa during March 23-April 1, 1999. Kiribati is on a 24-month consultation cycle.

IX. Technical Assistance: Refer to attached table.

X. Resident Representative: None.

Kiribati: Technical Assistance, 1995-–2000

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Pacific Financial Technical Assistance Center.

Annex VI Kiribati: Relations with the World Bank Group1

Total commitments: None

IFC investments: None

Kiribati joined the World Bank Group on September 29, 1986. To date, the Bank has not provided any credits to Kiribati and there are no lending activities under consideration at this time. In terms of nonlending economic and sector work, the most recent activities include:

Tariff Review—1997: The review recommended a number of changes to the import tariff schedules, essentially to convert tariffs to a c.i.f. basis, to reduce the number of categories, and to rationalize the level of tariffs.

Support to the management of the Revenue Equalization Reserve Fund (RERF)—1997: A report on the RERF recommended significant changes to the management of the Fund which would enhance its the growth potential.

Education Financing and Costs Study—1998: The review examined various alternatives for development, expansion, and upgrading of the education system.

Public Expenditure Review—1998: The review assessed the development effectiveness of public expenditure and related issues of sustainable economic growth, poverty alleviation, fiscal management and expenditure control, governance, and the efficient use of foreign aid flows, and suggested appropriate improvements.

Public Islands Stakeholder Participation in Development - Kiribati—1998: The study examined the way in which I-Kiribati social fabric, cultural heritage, and traditions influence the pattern and prospects for development, particularly in terms of social change and economic decision making.

The biennial Regional Economic Report produced by the World Bank continues to provide analysis of the key issues facing Kiribati and other Pacific island member countries. The most recent Regional Economic report, produced in October 1998, focused on enhancing the role of government in Pacific Island Economies.

Annex VII Kiribati: Relations with the Asian Development Bank1

The Asian Development Bank (AsDB) has approved six project loans to Kiribati amounting to US$14 million, all from Special Fund resources. In addition, technical assistance amounting to US$7.7 million has been provided for 30 projects. The first loan for Kiribati since 1990 was approved by the AsDB on December 18, 1998 for a Sanitation, Public Health, and Environment Improvement project. The loan for US$10.2 million is expected to improve the development potential of Kiribati and the health and well being of its population through a sustained program of improvements in water supply, sewerage, solid waste disposal, and environment conservation. The loan is accompanied by two technical assistance grants, totaling US$1.5 million, to assist the Public Utilities Board (PUB) in the implementation of its restructuring plan and the Ministry of Environment and Social Development (MESD) in carrying out community development and participation initiatives in water, sanitation, and environment conservation.

The AsDB’s approach to Kiribati focuses primarily on public sector reforms, infrastructure improvements in Tarawa, and development of the outer islands. In the AsDB’s view, the government needs to show a higher commitment to poverty reduction and to more fundamental public sector reform. The AsDB’s strategy is to remain engaged in its dialogue for gradual structural changes toward a more efficient public sector and the opening up of the economy to the private sector. This is proposed to be achieved through the AsDB’s technical assistance program for strengthening financial and economic management.

Kiribati: AsDB Loan Approvals and Disbursements, 1995–2000

(In thousands of U.S. dollars)

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Source: Data provided by the AsDB.
1

Boxes 2 and 3 provide a comparison of Kiribati’s economy and fiscal structure with those of other small island states.

2

Because of the unusually large size of Kiribati’s GNP compared with its GDP, the question arises as to which is the better aggregate to express ratios in terms of economic activity. Owing to the unstable nature of external financial inflows, the use of GDP is mostly preferred in this report, except in comparisons with other island economies.

3

However, in September 2000 the Government requested that a loan from China be transformed into a grant, or at least that service payments that start to fall due in 2001 be deferred. No data were available on private debt but the authorities considered it small.

4

The Consolidated Fund is used to finance current expenditure, while the Development Fund finances development expenditure. They are both replenished when there is a budget surplus. The STABEX fund is administered under the Lomé Convention and aims, in the case of Kiribati, at stabilizing the export price of copra, within a given limit of financial assistance.

5

These reserves were reported as not encumbered.

6

Although the 2001 budget envisages an almost doubling of development expenditure (see the “Budget” column in Table 2), the authorities informed the mission that these new projects would be undertaken only if the required concessional financing was secured. The mission based its projections on discussions in Tarawa with major donors.

7

Under the recommended fiscal policy mix, current expenditure would fall to about 32 percent of GNP in 2006, broadly in line with the average of 24 percent of GDP for other comparable Pacific Islands, for which GDP is a more meaningful measure of output (Box 3).

8

With an average tariff of about 19 percent, Kiribati’s trade restrictiveness rate is three (of a maximum ten).

9

Freight is sizable in customs invoicing, given Kiribati’s remoteness.

10

The Asian Development Bank (AsDB) has supported similar programs in the region.

11

World coconut oil (the main use for copra) prices have plummeted by 40 percent since 1996, with only a slight recovery in sight.

12

Kiribati was not among the 33 “tax havens” characterized in mid–2000 by the Organization for Economic Cooperation and Development (OECD).

13

PFTAC is a multidonor-financed entity, for which the Fund serves as executing agency.

1

These are: the sanitation project financed by the Asian Development Bank; the sports stadium financed by China; and the space shuttle base financed by Japan.

1

Prepared by World Bank staff.

1

Prepared by Asian Development Bank staff.

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Cover IMF Staff Country Reports
Kiribati: 2001 Article IV Consultation--Staff Report and Public Information Notice on the Executive Discussion
Author:
International Monetary Fund
Volume/Issue:
Volume 2001: Issue 165
Publisher:
International Monetary Fund
ISBN:
9781451927177
ISSN:
1934-7685
Pages:
46
DOI:
https://doi.org/10.5089/9781451927177.002

Output and Inflation

RERF Developments
Figure 1.

Kiribati: Output, Prices, and Exchange Rates, 1990–2001
Figure 2.

Kiribati: Central Government Budget, 1990–2001
Figure 3.

Kiribati: Central Government Budget, 1990–2001

Kiribati: Real Per Capita Value of the RERF, 2000–50

(In constant prices of 1996 Australian dollars)