Kiribati: Selected Issues and Statistical Appendix

This Selected Issues paper focuses on recent developments with Kiribati’s Revenue Equalization Reserve Fund (RERF). The paper also examines fiscal aspects of climate change, and considers options for improving fishing license fees, which remain an important source of revenue. It also analyzes recent developments and the outlook for remittances to Kiribati, which is another important source of external revenue and brings important economic benefits, such as reducing poverty and stabilizing national income.

Abstract

This Selected Issues paper focuses on recent developments with Kiribati’s Revenue Equalization Reserve Fund (RERF). The paper also examines fiscal aspects of climate change, and considers options for improving fishing license fees, which remain an important source of revenue. It also analyzes recent developments and the outlook for remittances to Kiribati, which is another important source of external revenue and brings important economic benefits, such as reducing poverty and stabilizing national income.

III. Options for Improving Kiribatis Fishing License Revenues1

A. Background

1. Fishing license fees are a key income source for Kiribati. Fishing license fees, relative to total revenue or GDP, peaked in 2001 and have been on a declining trend since.2 However these remain high at above 30 percent of total revenue (excluding grants) and around 20 percent of GDP, and are among the highest in Pacific Island countries (reflecting Kiribati’s relatively large and productive Exclusive Economic Zone (EEZ)).

uA03fig01

Kiribati - Fishing License Fees

Citation: IMF Staff Country Reports 2009, 196; 10.5089/9781451821901.002.A003

Sources: Kiribati’s authorities and staff estimates.

2. Fees received by Kiribati and other Pacific Islands are not large relative to the value of fish catches. The ratio of the fees to fishing entities’ revenues is reported to be around 5 percent, while the ratio is higher in some other regions (ADB, 2003).3

3. Kiribati’s fishing license fees have also been extremely volatile. Volatility (measured by the standard deviation) of real growth in fishing license fees over the period 2000–08 is nearly five times as large as that of GDP. This volatility reflects fluctuations in fish catches (climatic conditions are an important factor in this regard) and prices,4 and exchange rate movements (fees are typically dominated in U.S. dollars).

uA03fig02

Fishing License Fees (in percent of GDP) 1/

Citation: IMF Staff Country Reports 2009, 196; 10.5089/9781451821901.002.A003

Sources: Fund staff estimates and ADB.1/ 2007 for Kiribati and Micronesia. 2003 for Marshall Is., Palau, Tonga, Tuvalu, and Vanuatu.

B. Policy Options for Increasing the Size and Stability of Fishing License Revenues

  • Collective (sub-) regional action would strengthen bargaining power of countries issuing fishing licenses. A major challenge is how to reach a within region agreement particularly on the distribution of fees (given the disparity in the distribution of marine resources)—namely one that makes every country at least as well off. The region could draw on experiences with collective action so far (for example, with the United States), which have yielded higher returns for coastal countries (ADB, 2004). An existing intra-regional organization could also be developed to pursue this.

  • Introduction of auctions could increase the fees and contract duration. Auctions can be designed quite flexibly, for example, in such a way that fees increase in line with fish prices.

Two Possible Auction Schemes Being Considered

Two possible auction schemes have been considered (ADB, 2005):

  • Fishing countries bid for access fees for a limited number of days or a limited catch per year.

  • Fishing countries bid for access fees (tons/year) plus agree to a rate of additional contributions (in line with fish prices) when fish prices exceed a certain level.

The latter has an advantage for coastal countries such as Kiribati, since they can exploit rent if there is revenue surplus for fishing countries. However, fishing countries would likely oppose this scheme (relative to the former), and a challenge is how to make an agreement with them on adoption of this scheme. Coastal countries may need to offer some benefit to fishing countries (for example, provision of tenure (ADB, 2005)).

  • Improved governance, particularly through greater transparency in licensing negotiations and decisions. Enhancing transparency can take various forms including:

    • Active involvement of an independent body: an independent committee (either country or regional level) can play a monitoring role. A more drastic approach would be to give the mandate of endorsement to the committee.

    • Public disclosure of the negotiation process and licensing details: licensing negotiations are, in many cases, held in a secretive way and in fishing (not coastal) countries. Disclosure of minutes during the negotiations and licensing details (for example, terms and conditions, entities and vessels to which licenses are granted) would help to ensure greater transparency.

  • Utilization of expertise. An option is to hire an expert on (licensing) negotiations—formerly the Forum Fisheries Agency (FFA) provided such services. Active involvement of Ministry of Finance could benefit negotiations, taking advantage of their financial and economic expertise.

  • Separation of licensing fee agreements from development aid. Development aid is in some cases effectively linked to licensing fee negotiations, which will likely reduce bargaining power of the coastal countries. At a minimum, donors should ensure separation of negotiations on fishing licenses from aid.

  • Reduction in illegal fishing. Better coastal patrols to reduce illegal fishing could substantially increase fishing license fees and help to preserve marine resources, since a likely large volume of fish is illegally caught (some suggest this could be in the region of 50 percent of the legal catches). Cooperation with fishing countries (such as the recent agreement with the United States) is key given Kiribati’s limited resources.

  • Ownership of fishing facilities. An ultimate measure to increase revenues from marine resources is for Kiribati to own the necessary facilities (for example, ships, and processing factories) and catch fish for itself. While the costs and risk may be prohibitive for Kiribati to bear alone, together with other Pacific island countries, the authorities have started preliminary discussions of a possible joint venture.

Table III.1.

Examples of Enhanced Transparency

article image
Source: Asian Development Bank.

Stabilizing the flow of the fees

  • Continued efforts to negotiate longer license periods: the Kiribati authorities have made some progress in this direction, but collective action could also help in extending contracts.

  • Hedging currency risk can help increase the certainty of the A$ revenue. The potential contribution to revenue stability of this measure is large; give the substantial share of volatility stemming from currency movements.5

Establishing a medium-term budgeting framework

4. Revenues from fishing license fees, like other components of Kiribati’s external income, are highly volatile. A medium-term budget framework would serve to smooth and constrain expenditures based on the trend components of revenues. For example, a cyclically adjusted level of revenues for 2008 from a smoothing algorithm (a simple Hordrick-Prescott filter) suggests trend revenues of US$20.7 million in 2008.

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Kiribati-Cyclically Adjusted Fishing License Fees

(In millions of US$)

Citation: IMF Staff Country Reports 2009, 196; 10.5089/9781451821901.002.A003

Sources: Kiribati’s authorities and staff estimates.

References

  • Asian Development Bank, 2005, “On or Beyond the Horizon.”

  • Asian Development Bank, 2004, “Alternative Negotiating Arrangements to Increase Fisheries Revenues in the Pacific.”

  • Asian Development Bank, 2003, “Technical Assistance for Alternative negotiating Arrangements to Increase Fisheries Revenues in the Pacific.”

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  • Pacific Financial Technical Assistance Center, 2007, “Review of Public Financial Management in Kiribati and Proposal for Technical Assistance.”

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  • Purfield, Cartriona, 2005, “Managing Revenue Volatility in a Small Island Economy: The Case of Kiribati,” IMF Working Paper http://www.imf.org/external/pubs/ft/wp/2005/wp05154.pdf (Washington: International Monetary Fund).

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1

Prepared by Kiichi Tokuoka and Yougesh Khatri.

2

In 2008, the jump in fishing license fees in A$ terms mainly reflected the depreciation of A$ (a vast majority of the fees are paid in U.S. dollars).

3

The fees are calculated as a percentage of total revenue, not profit.

4

The El Niño tends to boost fish catches in Kiribati’s EEZ, while the La Niña tends to reduce them.

5

For example, IMF (2005) estimates that in 2004 about two thirds of the decline in fishing license fees reflected currency movements. Furthermore, an increase in fishing license fees in A$ terms in 2008 (by around 30 percent relative to the previous year) was largely due to the depreciation of A$.

Kiribati: Selected Issues and Statistical Appendix
Author: International Monetary Fund