Abstract
Tuvalu is one of the smallest and most isolated countries in the world. With a population of some 11,000 people living on 26 square kilometers, Tuvalu is more than 3,000 kilometers away from its nearest major external market (New Zealand). The country faces tremendous challenges stemming from its remoteness, lack of scale economies, weak institutional capacity, and, above all, climate change and rising sea levels, which threaten the country’s very existence. (Appendix III)
On behalf of the Tuvaluan authorities, we would like to thank staff for their constructive policy discussions and a well-written report. This is the third Article IV consultation between staff and the authorities since Tuvalu joined the Fund in 2010. The authorities are broadly in line with staff assessments, including policy actions for securing fiscal sustainability, financial stability, and structural reforms. We would like to express the authorities’ deep appreciation to the Fund and development partners for their assistance. The authorities look forward to continued close engagement with the Fund and development partners.
Tuvalu is the smallest and the least populous member country in the Fund, with the population of slightly above ten thousand and comprised of nine reef atoll islands. Its unique features of smallness and remoteness, like other Pacific island countries, as well as the absence of natural resources apart from tuna in the territorial waters impose severe constraints on Tuvalu’s development. As part of the global community, its economy is not immune to global economic shocks such as food and oil prices. Tuvalu is one of the most vulnerable countries due to its lack of economies of scale and limited infrastructure and capabilities. As low-lying islands at no more than 15 feet above sea level, Tuvalu is particularly susceptible to climate change. Despite these challenges, the authorities will continue their efforts to build adequate policy buffers for enhancing economic resilience to achieve sustainable growth, along with continued assistance from the international community.
Economic Outlook
The economic growth of Tuvalu has been showing moderate recovery. In 2013, GDP is estimated to have increased by 1.3 percent, which is slightly higher than the growth in 2012, mainly due to the increases of revenues in the fisheries sector1 and grants from development partners. GDP is expected to further increase by over 2 percent with the implementation of large infrastructure projects, including upgrading airport runaways, financed by development partners over the medium term.
Inflation has stabilized below 2 percent over the last years benefiting from lower global food and fuel prices but there are signs of slight upward pressures. The 2013 price inflation was 2 percent, but it is expected to pick up with the increase of government expenditures and weakening Australian dollar, which is Tuvalu’s legal tender.
Balance of payment has improved but is subject to large uncertainties. In 2013, the current account surplus is estimated to be 25 percent of GDP and gross official reserves are expected to reach around 8 months of imports. However, there remain uncertainties over current account surplus, given Tuvalu’s heavy dependence on its uncertain sources of fishing exports, fishing license fees and foreign aid.
Fiscal policy
Tuvalu achieved its second consecutive fiscal surplus of AUS$ 10.5 million, around 26 percent of GDP, in 2013. For the first time since 2002, total domestic revenue excluding grants exceeded total expenditure. This positive fiscal performance has strengthened the government’s financial position. The Consolidated Investment Fund (CIF), which serves as a fiscal buffer, increased to AUS$ 19.9 million, around 48 percent of GDP as of March 2014. At this level, the CIF would be able to assist the authorities to finance unexpected budget financing gaps for several years.
The authorities agree that ensuring fiscal sustainability is crucial. While the 2014 total government expenditure has increased about 20 percent from the 2013 level, total revenue is also expected to increase, targeting fiscal surplus in 2014. The authorities are aware of the fiscal risks given the bumpy revenue streams and will continue their effort to rein in expenditure and broaden tax base.
Wages have increased by 25 percent in 2014, but this is the first increase since 2010 and the increase is about AUS$ 720/year for 900 government employees, who make up about two thirds of employees in the formal labor market. The authorities will make efforts to establish the proper wage-setting mechanism to avoid a sharp increase of wages.
Under the Tuvalu Scholarship Program, about 30 students receive scholarships each year. Extending their studies has resulted in an increase of its cost, and the authorities will enhance the monitoring of the performance so as to ensure the effectiveness of the program.
Because of the limited medical facilities in Tuvalu, the authorities have sent patients to Fiji, India, and New Zealand under the Tuvalu Medical Treatment System. The authorities are aware of the risk of its potential overspending and will continue to make efforts to improve its cost effectiveness through establishing a comprehensive database in addition to limiting referrals within available budget funds.
The Tuvalu Cooperative Society (TCS) is the main wholesaler and retailer in Tuvalu and the authorities are considering the re-starting of assistance to the TCS to provide basic foods to the outer islands. The authorities would carefully seek the most cost effective way to achieve the goal of ensuring food security.
The authorities have strengthened their audit program for tax collection since the arrival of a tax advisor in 2012. Implementation of audit on public enterprises contributed to the increase of tax compliance in 2013. The authorities plan to start audit on the private sector in 2014 and enhance their enforcement capacity.
The authorities welcome staff’s proposal of introducing a medium term fiscal framework targeting a structural fiscal surplus. The main purpose of establishing the Tuvalu Trust Fund (TTF) in 1987 is to have a rainy day fund for Tuvalu. The authorities believe that the current TTF and CIF scheme has served Tuvalu well, but they also consider that combining the operation of the TTF with a medium term fiscal framework could help build fiscal buffers and ensure fiscal sustainability. The authorities would be open to further discussion with staff.
Strengthening public financial management will continue to be one of the main policy priorities in Tuvalu. A Central Procurement Unit has been established to oversee the purchases of goods and services. The new procurement rules would ensure the efficient use of budget and promote transparency of the procurement process.
Banking Sector
The authorities agree with staff that supervisory and regulatory framework in the banking sector needs to be strengthened. The authorities are in the process of setting up the Banking Commission, which will play a role of ensuring financial stability. The authorities will also make efforts to improve the prudence of the banking system. Given the limited infrastructure in the banking sector, financial services are restricted to a small number of people and access of outer islanders is constrained. The authorities are mindful of capacity constraints and would be grateful of technical or financial assistance from the Fund and development partners to strengthen the financial system.
Structural Reforms
The authorities are committed to further strengthening public enterprise reform. All of civil servants have resigned from Board positions in public enterprises (PEs). Recruiting process is under way for staffing the Public Enterprise Reform and Management Unit. The authorities are also working with the Asian Development Bank on public enterprise reform to improve governance, administration and profitability of PEs. Given the lack of economies of scale in Tuvalu, it is to some extent inevitable for PEs to bear a part of burden in providing their services. Moreover, it is hard to distinguish between commercial activities and social responsibilities. The authorities will continue to explore ways to improve efficiency of PEs.
The Tuvaluan authorities will continue their well-known reform efforts. Tuvalu’s National Strategy for Sustainable Development for 2005 to 2015, Te Kakeega II, was set focusing on the eight strategic areas including good governance, macroeconomic growth and stability and social development. The second phase of Policy Reform Matrix has been complete and the third phase is scheduled to start in the second half of this year, integrated with the government’s 2013 reform roadmap. Tuvalu’s development achievement has been acknowledged in the areas of strengthened budgetary management and improved school attendance. The authorities will put renewed focus on increased government investment in primary education and health services in addition to gender equality.
In 2013, fishing license fees increased to AUS$ 18 million (45 percent of GDP) from AUS$ 8 million in 2012. The authorities expect this high level of fishing license fees would be maintained over the next 3 or 4 years thanks to El Niño.