Kiribati: Staff Report For The 2011 Article IV Consultation—Informational Annex

The staff report highlights that the economy of Kiribati showed resilience from the global crisis owing to infrastructure projects financed by foreign assistance. Executive Directors stressed the importance of preserving real per capita value of the Revenue Equalization Reserve Fund to ensure fiscal sustainability and intergenerational fairness. They appreciated the multiyear budget framework, which helped in designing realistic fiscal plans. Directors noted the joint IMF-World Bank debt sustainability analysis and encouraged authorities to secure grant financing to support the country’s development needs.

Abstract

The staff report highlights that the economy of Kiribati showed resilience from the global crisis owing to infrastructure projects financed by foreign assistance. Executive Directors stressed the importance of preserving real per capita value of the Revenue Equalization Reserve Fund to ensure fiscal sustainability and intergenerational fairness. They appreciated the multiyear budget framework, which helped in designing realistic fiscal plans. Directors noted the joint IMF-World Bank debt sustainability analysis and encouraged authorities to secure grant financing to support the country’s development needs.

ANNEX I. KIRIBATI: FUND RELATIONS

(As of March 1, 2011)

Membership Status

Joined: June 3, 1986; Article VIII

General Resources Account

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SDR Department

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Outstanding Purchases and Loans

None

Financial Arrangements

None

Projected Obligations to the Fund

None.

Implementation of HIPC Initiative

Not Applicable.

Implementation of Multilateral Debt Relief

Initiative (MDRI)

Not Applicable.

Exchange Rate Arrangement

The Australian dollar circulates as legal tender.

Article IV Consultation

The 2009 Article IV consultation discussions with Kiribati were held in Tarawa during February 20–28, 2009. Kiribati is on a 24–month consultation cycle.

Technical Assistance (TA), 1995–2011

STA, LEG, MCM and PFTAC have provided TA on statistics, tax administration and policy, budget management, Revenue Equalization Reserve Fund (RERF) management, financial sector reform and supervision, and combating financial crime and financial system abuse.

Resident Representative

The resident representative office in the Pacific Islands was opened in September 2010 in Suva, Fiji. Mr. Yongzheng Yang is the Resident Representative.

ANNEX II. KIRIBATI: RELATIONS WITH THE PACIFIC FINANCIAL TECHNICAL ASSISTANCE CENTRE (PFTAC)1

(As of March, 2011)

During the current funding cycle (May 2008 to May 2011), PFTAC assistance to Kiribati has included eight advisory missions. Kiribati also sent 15 officials to regional seminars and workshops.

Tax Administration and Policy

In 2003, PFTAC recommended several reforms. These included: a value-added tax (VAT); a presumptive tax; and a single ad valorem tax on imports from non Pacific countries; simplified personal income tax (PIT); single rate of corporate income tax (CIT). A steering committee was established to manage the introduction of the reforms. In 2009, a subsequent review mission was provided to update tax recommendations.

The domestic revenue issues require to be addressed with some urgency. Compliance levels are low and the impact of trade liberalization (PICTA and the Pacific Agreement on Closer Economic Relations) is expected to reduce trade revenues by up to 15 percent. PFTAC provided support and training in customs procedures in 2009.

Although agreed to in principle little progress has been made to introduce the reforms.

However, in February 2009, the cabinet approved the introduction of legislation to treat income tax deductions from salary and wages (PAYE) as a final tax.

PFTAC stands ready to assist the authorities implement the wider reforms including introduction of automated processes once the cabinet has made a firm commitment to proceed.

Public Financial Management

AusAid maintains a long-term TA program aimed at improving public sector financial and economic management. A joint PFTAC mission with Asian Development Bank (AsDB) on public financial management reform was undertaken in August 2006. Following this mission, a multi-donor mission of AusAID, PFTAC, and AsDB visited Kiribati from December 12–15, 2006. AusAID and AsDB have taken the lead in supporting implementation of the recommendations. PFTAC is ready to provide additional technical support, such as the review of IFMIS procedures undertaken in late 2009.

Financial Sector Regulation and Supervision

In August 2003, the PFTAC advisor and an IMF legal expert visited Kiribati to conduct consultations with industry and government officials on a Financial Institutions Bill that had been drafted in July 2002. No major concerns arose from the discussions. Proposed responses to comments raised in the meeting, together with appropriately amended draft legislation, were forwarded to the authorities in December 2003 for action.

In 2005, the advisor was invited to attend a government and industry workshop to discuss aspects of the Financial Institutions Bill. The mission did not proceed. However, the advisor provided authorities with papers, which highlighted the need for such legislation. To date there has been no further progress on the draft Financial Institutions Bill or the previously drafted Anti-money Laundering Legislation. The PFTAC advisor makes periodic contact with the Ministry of Finance regarding the status of the draft legislation.

Economic and Financial Statistics

GDDS metadata was published on the IMF website in April 2004, following assistance with drafting by PFTAC. A brief mission was undertaken in August 2006 to assess TA needs. The BOP compiler benefited from training provided in regional courses in 2005 and 2010. PFTAC provided TA on balance of payments in 2008 and 2010, improving compilation methods and use of source data, as well as providing training, and helping with the transition to BPM6. PFTAC provided TA on national accounts 2008, 2009, and 2010; and assisted the authorities in making significant improvements in methodology and use of source data. The NA compiler benefited from a regional course in 2009. PFTAC also sponsored a one-month attachment for the BOP compiler with Statistics New Zealand in May 2009.

ANNEX III. KIRIBATI: BANK-FUND COLLABORATION

A. WORLD BANK-IMF COLLABORATION

The Fund Kiribati mission chief—Ms. Tumbarello—met with the World Bank team 7 in March 2010, in Tarawa, at the Development Partner Forum, to exchange views on the recent economic developments, identify macro structural challenges ahead and discuss a work plan to prepare the first joint debt sustainability analysis.

In September 2010, the IMF and World Bank teams held two phone conferences to coordinate the teams’ work plan for the period September 2010–August 2011 (see below). Since then the teams consulted very frequently, especially on issues related to the debt sustainability analysis and the economic outlook. Bank staff joined the 2011 IMF Article IV mission in February for the first time.

There has been close cooperation on the following issues:

Macroeconomic developments and economic updates. There has been close dialogue throughout the year on macro policies and economic developments with regular sharing of information.

External debt and debt sustainability analysis. The teams have engaged very closely on discussions around government plans to borrow. Despite the existence of a wealth fund, going forward the fiscal costs of climate are expected to be substantial. They produced two joint DSAs.

Structural reform. The Bank program will support reforms related to telecoms liberalization, strengthening road maintenance arrangements, improving returns from fisheries resources, the operation of the import levy fund given the liberalization of food import arrangements. The Bank agreed to update the Fund on developments in these areas as needed.

The teams agreed that Kiribati’s main macroeconomic challenges include:

Striking a balance between the need to preserve Kiribati’s wealth fund through fiscal consolidation and the need to address the large infrastructure, health and education needs;

High vulnerability to climate change and rising sea level. An important first step is to recognize the fiscal risks involved and start building a fiscal buffer—with the assistance of international donors—and to consider the implications for expenditure programs.

The teams have indentified the reform of the state-owned enterprises as s a macro-critical structural reform.

The teams agreed to continue the close cooperation going forward. The following table details the specific activities planned by the two country teams over the period September 2010–August 2011. The Fund will continue to lead on macro issues, and the Bank will continue to lead on macro critical structural reform issues. The Bank and the Fund closely cooperated in preparing a joint DSA, also in consultation with the Asian Development Bank and in the run-up of the IMF 2011 Article IV.

Kiribati: World Bank-Fund Planned Activities in Macro-critical Areas

(September 2010–August 2011)

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B. RELATIONS WITH THE WORLD BANK GROUP1

(As of March 1, 2011)

Kiribati became a member of the World Bank Group in 1986.

On March 1, 2011, the World Bank’s Board of Executive Directors discussed the first Country Assistance Strategy (CAS) for Kiribati, which had previously been covered by a Pacific Islands Regional Engagement Framework. The CAS is structured around the themes of: (i) addressing the existential threat posed by climate change; and, (ii) mitigating the effects of geographic isolation.

The CAS anticipates a significantly expanded program of advisory and financial support for Kiribati. Consistent with Kiribati’s limited repayment capacity highlighted in the DSA, it is anticipated that IDA financing will be provided on 100-percent grant terms. IDA grants and trust fund investments of as much as US$50 million are anticipated over the four year CAS period from FY11 to FY14. Such a program of investments is intended to build a foundation for the World Bank to play a more substantive role, in close collaboration with the IMF and other donor partners, in a coordinated economic policy dialogue with the Government of Kiribati.

Key components of proposed World Bank Group engagement include:

  • Climate change adaptation and building resilience against shocks is at the core of Bank engagement in Kiribati. The Bank, with trust fund financing, has been supporting climate change mitigation since 2003 through the Kiribati Adaptation Program (KAP). Staff anticipates seeking Board agreement in mid-2011 to enlarge and extend activities under KAP Phase 3. Trust fund financing of US$7–10 million has been agreed in principle for KAP 3 from GEF, GFDRR, Australia, and, potentially, New Zealand. This will involve a significant scale up compared to previous phases. Activities will focus on seawalls, mangrove planting, and water conservation and supply. In addition to KAP, the Bank is proposing to work with the government and other donors to consider options for an integrated program in the water sector, which is the key issue where the climate change and development agendas intersect in Kiribati. Kiribati’s already limited supply of fresh water adversely affects development outcomes, and population growth and the impact of climate change is likely to put further pressure on this critical resource. Beyond climate change adaptation, the Bank is committed to accelerating efforts to address wider issues of vulnerability in Kiribati, including accessing trust fund resources to improve renewable energy generation to reduce reliance on volatile imported diesel, and to support the transport of food to remote outer islands.

  • Mitigating the effects of geographic isolation. Given Kiribati’s remoteness, the Bank anticipates scaling up support for climate friendly infrastructure investments. A South Tarawa road improvement investment of US$24m in IDA and TF financing—to be undertaken jointly with the AsDB—was approved by the Board on March 1, 2011, with the Kiribati CAS. The Bank is also considering options, in collaboration with New Zealand and other partners, to help bring Kiribati airports – a vital link with the outside world – up to international safety standards.

  • Supporting economic reform and regional integration. An expanded program of investments will provide a foundation for a more substantive engagement by the Bank Group in a coordinated economic policy dialogue in Kiribati. Bank staff, for instance, joined the IMF Article IV mission in 2011 for the first time. Reform of the large and inefficient state owned enterprise sector will be especially important to improve services and to reduce the fiscal costs to the budget from such enterprises. The AsDB, with support from Australia, has to date led efforts to support the government to develop a legal and regulatory framework for reforming SOEs. Building on this, the Bank Group anticipates supporting government efforts to open the telecoms market to new private investments. As well as the direct benefits, telecoms reform has elsewhere in the Pacific proven to be especially successful in building public support and momentum for reform more broadly. The Bank and IFC will cooperate closely in supporting telecoms reform, in providing advisory services more broadly, and on other potential SOE transactions. As well as domestic reform, the Bank Group continues to support efforts by Kiribati and other Pacific Island Countries to gain benefits from greater regional integration, including participation in temporary labor migration schemes established by New Zealand and Australia and anticipated analytical support to help countries improve management and returns from the pelagic fishery.

ANNEX IV. KIRIBATI: RELATIONS WITH THE ASIAN DEVELOPMENT BANK 1

(As of February, 2011)

The Asian Development Bank has approved seven project loans to Kiribati amounting to US$27.14 million, all from Asian Development Fund (ADF) resources since Kiribati joined the AsDB in 1974. In addition, TA amounting to US$13.9 million has been provided for 41 projects. The latest AsDB loan to Kiribati, for a road rehabilitation project, was approved in December 2010. The AsDB most recently approved an US$0.85 million TA grant for Tarawa Sanitation Improvement in October 2009 and a supplementary of US$0.2 million for the same TA in December 2010.

The strategy of the AsDB in Kiribati directly supports the government’s Kiribati Development Plan (KDP) 2008–11. Further, AsDB’s approach is anchored in the mid-term review of the Pacific Strategy, which put a stronger emphasis on issues of supporting a conducive environment for private sector development, good governance, and capacity development. Rapid population growth and urban migration has left Kiribati with overcrowded urban areas, and its most pressing development challenges are social and environmental concerns, including the impacts of climate change, access to clean water and sanitation, and the spread of HIV/AIDS. AsDB supports the government’s efforts to balance growth more evenly throughout the country through TA for the Integrated Land and Population Development Program on Kiritimati Island. AsDB supports also efforts to improve the government’s financial management through TA for Economic Management and Public Sector Reform recognizing the sizeable constraint the poor performance of public enterprises is placing on government ability to fund needed goods and services.

Kiribati: Loan, Grant and Technical Assistance Approvals, (2005–10)

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ANNEX V. KIRIBATI—STATISTICAL ISSUES

(Assessment of Data Adequacy for Surveillance, as of April 4, 2011)

General: Data provision has some shortcomings, but is broadly adequate for surveillance. Balance of Payments data are the most affected area.

National Accounts: With PTFAC assistance, GDP estimates have been significantly improved. Three TA missions from STA took place in January 2009 and 2010 and in April 2011 to improve national account data and revised estimates through 2009. However, further capacity building would be needed to continue to improve the quality of GDP estimates. So far, estimates are limited to Gross Domestic Product (GDP) at current and constant 2006 prices, using the production approach. There are no expenditure-based GDP estimates. Also, unemployment indicators are not regularly available. PFTAC has also recommended that the statistics authorities work more closely with other agencies (e.g., tax authorities, public enterprises).

Price statistics: The monthly retail price index (1996=100) is produced with a short lag (about a month), based on a survey in the capital (a national index is not available). There are no producer, wholesale, or trade price indices.

Government finance statistics: The budget outcome is available with a lag of about a year. Currently, a provisional budget outcome for 2008 is available. There are misclassifications in the current statistics, which have been identified by PFTAC. Audited financial statements of public enterprises are not available.

Monetary statistics: The balance sheets of all the financial institutions (Bank of Kiribati, Development Bank of Kiribati, Kiribati Provident Fund, and Kiribati Insurance Corporation) are available with lags, but the consolidated balance sheet of the financial sector is not available. Data on interest rates are reported with a long lag.

Balance of payments: The quality of the data has been improved with recent PFTAC assistance. However, there still remain some shortcomings: i) external statistics are reported with a long delay (about a year or more), ii) there are large errors and omissions in some years, which appear to partly reflect the underestimation of private transfers, iii) and there are some inconsistencies between the balance of payments data and budget data. A PFTAC mission took place in April 2010. The mission revised the BOP estimates up to 2007, and updating estimates to end 2009. As in the case of GDP data, PFTAC has suggested the need for further statistical capacity building.

Data Standards and Quality

Kiribati has been a participant in the General Data Dissemination System (GDDS) since 2004.

No data ROSC are available.

Reporting to STA (Optional)

No data are currently reported to STA for publication in the Government Finance Statistics Yearbook, the Balance of Payments Statistics Yearbook or in the IFS.

Kiribati: Table of Common Indicators Required for Surveillance

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Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially-determined, including discounts rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

1

The Pacific Financial Technical Assistance Centre (PFTAC) in Suva, Fiji is a multi-donor technical assistance (TA) institution, financed by IMF, AsDB, AusAID, and NZAID, with the IMF as Executing Agency. The Centre’s aim is to build skills and institutional capacity for effective economic and financial management that can be sustained at the national level. Member countries are: Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.

7

The World Bank team was represented by Mr. Jauncey. The World Bank Country Director is Mr. Belhaj.

1

Prepared by World Bank staff.

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Prepared by Asian Development Bank Staff.