Tuvalu: 2018 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Tuvalu
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International Monetary Fund. Asia and Pacific Dept
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Publication Date:
05 Jul 2018
eISBN:
9781484366264
ISBN:
9781484366264
Language:
English
Keywords:
ISCR; CR; government; debt; Tuvaluan authorities; deficit; Tuvalu; banking sector; asset growth; balance of payments; national bank; credit risk; Agroindustries; Capital spending; Climate change; Pacific Islands
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Tuvalu is a fragile micro state. The country's remoteness, narrow production base, and weak banking sector constrain private sector activity.

Abstract

Tuvalu is a fragile micro state. The country's remoteness, narrow production base, and weak banking sector constrain private sector activity.

Context

1. Tuvalu is a fragile micro state, facing existential threats from climate change. As a low-lying atoll, Tuvalu is one of the most vulnerable countries to the effects of climate change and natural disasters. Rising sea levels threaten to greatly diminish Tuvalu’s arable land area. Building climate change resilience through infrastructure investment while simultaneously strengthening resilience against external shocks through strong fiscal balances is essential for sustainable growth in the long run.

2. Since joining the Fund in 2010, Tuvalu’s macroeconomic performance has improved. The fiscal deficit has narrowed, and fiscal buffers have been replenished partly on strong fishing revenue. The authorities have made progress in strengthening climate change resilience and improving public financial management.

3. Nonetheless, Tuvalu continues to face significant challenges. The economy remains susceptible to external shocks, including those stemming from natural disasters and high dependence on volatile fishing revenue and donor grants. Rising public expenditure also threatens fiscal sustainability. While public expenditure is the main growth driver, private sector activity is limited due to the economy’s narrow production base and banks’ constrained lending. The unemployment rate reached 37 percent in 2017, revealing challenges in generating employment opportunities.

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Tuvalu Among Most Vulnerable

(Economic Vulnerability Index, 2018 1/)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: United Nations - Committee for Development Policy, 2018 triennial review.1/ The index is a composition of eight indicators, including population, remoteness, export concentration, impact of natural disasters, etc.

4. Discussions focused on policies to promote resilience to external shocks. This requires (1) strengthening the medium-term fiscal framework to maintain buffers and improve climate change risk management and (2) macro-structural policies that increase potential output and diversify the growth base, which in turn include developing human capital, promoting tourism, and improving financial intermediation and supervision.

Recent Developments, Outlook, and Risks

5. Recent developments

  • Real GDP growth is estimated to have risen to 3.2 percent in 2017 on large infrastructure and housing projects, in preparation for the Polynesian Leaders’ Summit in 2018 and the Pacific Forum Secretariat Summit in 2019.

  • Inflation accelerated to 4.4 percent in 2017 due to higher food and transportation prices.

  • The balance of payments was estimated to be in a surplus in 2017, partly due to increased donor grants, although data constraints hamper analysis of balance of payments developments, as the last official data are from 2012. Tuvalu uses the Australian dollar as a legal tender. Tuvalu’s Real Effective Exchange Rate (REER) appreciated in recent few years due to inflationary pressures related to higher food prices, transportation costs, and expansionary fiscal policy. Reserve coverage is broadly sufficient at 9 months of imports at end-2017. Staff assesses that Tuvalu’s external position in 2017 was broadly in line with medium-term fundamentals and desirable policies (Appendix II).

    uA01fig02

    Tuvalu’s REER Appreciated Due to Relatively High Inflation

    (Index, 2010 = 100)

    Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

    Sources: IMF WEO database; and IMF staff calculations.

  • Lending growth slowed to 6 percent (y/y) in 2017 amid elevated non-performing loans (NPLs) constraining banks’ lending capacity.

  • The fiscal balance turned into a deficit of 4 percent of GDP in 2017 on lower fishing revenue and higher capital expenditure in preparation for the two regional summits. The deficit was financed by the Consolidated Investment Fund (CIF), bringing its balance down to 42 percent of GDP. The balance of the Tuvalu Survival Fund (TSF), which finances climate change programs, stood at 10 percent of GDP. Public debt declined to 37 percent of GDP. As a result, the government’s net financial worth—consisting of the CIF, the TSF, and public debt—fell to 14 percent of GDP at end-2017. The value of the Tuvalu Trust Fund (TTF) was broadly stable at 333 percent of GDP. The TTF, which is funded mainly by donors, makes distributions to the CIF when the TTF’s balance exceeds its “maintained value”—a baseline that is adjusted in line with the Australian CPI (Appendix III).

Government’s Net Financial Worth (In percent of GDP)

article image

Consists of the Consoliated Invesment Fund (CIF), the Tuvalu Survival Fund (TSF), and public debt; and excludes the TTF, as it is not fully sovereign and cannot be drawn freely.

Established to finance climate change related programs.

6. Outlook

  • In 2018, growth is projected to accelerate to 4.3 percent on higher fiscal expenditure and infrastructure projects. Inflation is expected to reach 4 percent on higher public wages to compensate increased living costs and retain staff in the public administration, partly offset by moderating food prices. In the medium term, growth is expected to remain robust at 4 percent, factoring in the implementation of infrastructure projects funded by development partners, including the Green Climate Fund. The projection also incorporates the average cost of natural disasters at around 1 percent of GDP per year. Inflation is projected to slow to 3 percent in the medium term, moving closer to the Australian inflation rate.

  • The fiscal balance is projected to weaken in the medium term following a surplus in 2018.

    1. ➢ The fiscal balance is projected to turn into a surplus of 6 percent of GDP in 2018 due to higher fishing revenue. Parliament passed a supplementary budget in April 2018. The revised budget includes a one-off receipt of fishing revenue from a sub-regional pooling scheme accumulated since 2012 (34 percent of GDP), increased capital expenditure (15 percent of GDP), and a reserve build-up in the CIF (19 percent of GDP). The domestic current deficit— which excludes fishing revenue, grants, and capital expenditure—is projected to widen to 65 percent of GDP in 2018 from 35 percent of GDP in 2013 due to rising current spending. The government’s net financial worth is projected at 44 percent of GDP at end-2018 due to the replenished CIF balance.
    2. ➢ In the medium term, the fiscal deficit is projected to widen to 5 percent of GDP, and 7 percent of GDP in the long term. Key drivers are moderating fishing revenues with the waning of the El Nino cycle and declining grant allocations based on conservative assumptions. Current spending is projected to remain elevated at around 100 percent of GDP. Capital spending is projected at around 10 percent of GDP, but would decline gradually due to limited fiscal space. The domestic current deficit is projected to remain wide at 65 percent of GDP in the medium term.

  • The balance of payments is projected to remain in a surplus in 2018 due to strong fishing license revenue. The REER is expected to appreciate further due to relatively high inflation, with the pace of appreciation declining over the medium term as inflation moderates. Reserves are expected to remain sufficient at 10 months of imports at end-2018.

    uA01fig03

    Net Financial Worth is Projected to Decline Under Baseline

    (Net financial worth, in percent of GDP)

    Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

    Sources: IMF staff estimates.1/ For details, see paragraph 11.2/ For details, see DSA.

  • Public debt. The Debt Sustainability Analysis (DSA) suggests that Tuvalu remains at a high risk of debt distress, in line with the 2016 DSA conclusion. A persistent fiscal deficit is projected to cause the debt-to-GDP level to breach the DSA’s indicative threshold for a high-risk rating in the long run. Net financial worth is expected to fall below 50 percent of GDP by 2025 under the baseline. In adverse scenarios, natural disasters or a sharp fall in fishing revenue could accelerate the depletion of fiscal buffers. In an upside scenario, sustained donor grants could help keep the debt-to-GDP level below the indicative threshold (see the accompanying DSA).

  • The financial performance of the Tuvalu Trust Fund (TTF) is projected to moderately exceed the fund’s maintained value, allowing continued transfers from the TTF to the Consolidated Investment Fund (CIF).

7. Financial sector. The banking sector’s performance is weak, and credit growth provides only modest support to growth. Tuvalu’s banking sector comprises two public banks – the National Bank of Tuvalu (NBT) and the Development Bank of Tuvalu (DBT). Outstanding loans declined to 30 percent of GDP in 2017 from 54 percent of GDP in 2012, with the loan-to-deposit ratio falling to 20 percent. Banks’ lending is constrained by high NPLs and insufficient risk management due to an inadequate supervisory framework. NPLs constitute 41 percent of total loans, primarily to the Tuvalu Electricity Corporation (TEC) and impaired housing loans. The absence of bankruptcy laws undermines NPL write-off, while a weak credit culture further dampens banks’ willingness to lend. Against this backdrop, credit growth is expected to remain moderate in the medium term.

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Declining Loans Indicate Weak Credit Intermediation

(Banks’ assets and liabilities, in percent of GDP)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: Country authorities; and IMF staff calculations.

8. Risks to the outlook. The economy is highly susceptible to the effects of climate change and natural disasters. Tropical Cyclone Pam in 2015 caused damage worth 33 percent of GDP. The government’s revenue base is also facing uncertainties stemming from volatile fishing revenues and reliance on grants. The lack of financial supervision and weak balance sheets of the state-owned enterprises (SOEs) create risks to the fiscal accounts and impede banks’ credit intermediation. On the upside, grants could remain substantial, supporting the fiscal accounts and accelerating infrastructure development (Appendix I).

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Fishing Revenue Among Higest

(Fishing license fees in percent of GDP, 2017)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: Country authorities, and IMF staff estimates.
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Grants Among Highest

(Grants in percent of GDP, 2017)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: Country authorities; and IMF, World Economic Outlook.

Authorities’ Views.

9. The authorities broadly concur with staff’s macroeconomic outlook and risks. They noted that continuous capital investment will support economic growth in the coming years, but containing current spending is necessary. With the monetary policy lever absent, they see only limited scope to contain inflation, which is driven by supply-side factors, such as global food prices. They agreed on the risk factors facing the economy.

Building Resilience Against Climate Change and other External Shocks

A. Enhance the Policy Framework to Mitigate Climate Change Effects

10. The authorities have made progress in strengthening climate change resilience. The cost of coastal protection projects is estimated at 84 percent of GDP. To finance these projects, the government has mobilized multilateral financing schemes. Tuvalu is the first Pacific economy that secured access to the Green Climate Fund in 2017. The Tuvalu Costal Adaptation Project (TCAP) will run through 2025 with a total cost of 74 percent of GDP (Box 1). The Tuvalu Infrastructure and Investment Plan for 2016-25 has also prioritized climate change resilience. To strengthen implementation capacity, the government has adopted the Public Financial Management (PFM) Roadmap 2017–21. Policy coordination has improved with the establishment of the National Advisory Council on Climate Change (NACCC), which reports directly to the Cabinet.

11. Given its substantial cost, it is critical to build climate change resilience in a fiscally sustainable manner. The priority is to ensure continuous access to multilateral climate change schemes, while making sure those funds are used efficiently. Strengthening the PFM framework by implementing reforms under the PFM Roadmap 2017-21 will support the quality of capital expenditure and facilitate continuous access to international financing schemes. The authorities could explore multilateral risk-sharing mechanisms, such as the Pacific Island Insurance Facility (PIFIC). There is room to improve the investment management of the Tuvalu Survival Fund (TSF), currently deposited at the National Bank.

Tuvalu Coastal Adaptation Project (TCAP)

Overview. The Tuvalu Coastal Adaptation Project (TCAP), financed by the Green Climate Fund (GCF), runs through 2025 with a total cost of 74 percent of GDP and the government’s co-financing of 6 percent of GDP. It is expected to cover the majority of coastal protection costs (86 percent of GDP) identified under the Infrastructure and Investment Plan for 2016-25. The UNDP manages the fund and projects, with GCF funds disbursed directly to suppliers engaged in the project through an international bidding process.

Program modality. Annual funding allocations under the GCF are contingent on a 70 percent completion rate of specified annual targets. The program comprises three main output categories:

  • Output 1: Strengthening institutions and building capacity for resilient coastal management. This includes recruiting environmental experts, developing a shoreline monitoring platform, and hosting environmental awareness sessions. Long-term capacity building includes scholarship programs for areas pertinent to the project, like civil engineering and geo-spatial science. Output 1 is on track to be completed by June 2018, which will unlock the disbursement of the next tranche for Output 2.

  • Output 2: Implementing coastal protection projects. This accounts for 70 percent of the total project costs. Output 2 aims to reduce vulnerabilities of coastal infrastructure against damage resulting from climate change effects. It also includes coastal protection design, site-specific assessments, and environmental and social impact assessments in all islands in a participatory manner. Output 2 will commence in June 2018.

  • Output 3: Establishing a sustainable financing mechanism for long-term adaptation efforts. This requires all island strategic plans and annual budgets to integrate island-specific climate risks. This will help strengthen the capacity of local administrations and communities for monitoring progress in adaptation investments as an integral element of island strategic plans.

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Tuvalu Coastal Adaptation Project (TCAP) is Substantial

(TCAP under GCF, in percent of GDP)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: UNDP; and IMF staff estimates.1/ Administrative spending.
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TCAP is Critical for Population Living on Atoll Islands

(Percent of population in low elevated costal zones, 2018)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: United Nations - Committee for Development Policy, 2018 triennial review.

B. Strengthen the Medium-Term Fiscal Policy Framework and Fiscal Buffers

12. The projected widening of the fiscal deficit over the medium term calls for gradual consolidation to maintain buffers.

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Adjustment Scenario Projects Sufficient Net Financial Worth

(Government’s financial worth in percent of GDP 1/)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: IMF staff estimates.1/ Consists of Consolidated Investment Fund, Tuvalu Survival Fund, and Public Debt.2/ Assumes fiscal consolidation of domestic current balance of 0.5 percentage point of GDP each year until 2027.3/ Domestic current balance is the overall balance minus fishing licens fees and grants, plus capital expenditure.

  • Given uncertain fishing revenue and grants and the potential costs of natural disasters, it is critical to strengthen the fiscal framework and maintain sufficient buffers. For Tuvalu, the domestic current balance would be a useful operational target because it abstracts from volatile, exogenous components of the fiscal accounts. This approach also promotes expenditure stability and focuses on items directly within the government’s control.

  • Under staff’s adjustment scenario, the government sets the domestic current balance as the operational target to maintain a sustainable fiscal position. The government gradually reduces the domestic current deficit by ½ percentage point of GDP each year until 2030. The domestic current deficit would narrow by 6 percentage points in the next decade and fall to 59 percent of GDP in 2030, compared to 65 percent of GDP under the baseline. In 2031, the fiscal balance would reach a surplus of 1 percent of GDP, which would be maintained thereafter. This gradual consolidation is projected to help maintain the government’s net financial worth at around 70 percent of GDP in the long term. This level would be sufficient to buffer most shocks, including a sharp decline in fishing revenue (40 percent of GDP) or natural disasters (20-30 percent of GDP).

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Adjustment Scenario Requires Gradual Fiscal Consolidation

(Annual changes in domestic current balance in percent of GDP)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: IMF staff estimates.
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Adjustment Scenario Leads to Small Fiscal Surplus in The Long Run

(Fiscal balance in percent of GDP)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: IMF staff estimates.

13. Improving the fiscal balance requires containing current spending and prioritizing capital spending.

  • Current spending. The authorities should curb rising current spending, while improving spending efficiency. The authorities should keep the public wage bill in check with development partners’ assistance (e.g., the World Bank’s wage bill modeling). The authorities should control rising official travel costs and develop a more cost-effective strategy to build institutional capacity.

    1. ➢ Healthcare costs. The authorities need to reform the overseas medical treatment program, which increased 7 times relative to GDP in the past decade and accounts for half of total healthcare spending. The policy priority is to closely monitor and evaluate overseas spending and rationalize medical travel benefits. A medium-term strategy should include introducing a healthcare information system and investing more in prevention and early care.
      uA01fig12

      Current Spending is Substantial

      (Fiscal expenditure in percentof GDP)

      Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

      Sources: IMF staff estimates.
    2. ➢ Scholarships. A merit-based selection process, tighter requirements for study completion, and mandatory service periods under penalty of full repayment would ensure that the benefits of the scholarship programs are shared more equitably across the economy.
      uA01fig13

      Public Spending on Health is High

      (Public health expenditure in percent of government expenditure)

      Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

      Notes: 2014 data for all countries.Sources: World Bank, World Development Indicators.
      uA01fig14

      Health Expenditure Per Capita Among Highest

      (Health expenditure per capita in current USD)

      Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

      Notes: 2014 data for all countries.Sources: World Bank, World Development Indicators.

  • Capital spending. Tuvalu needs capital investment to improve its growth potential, but the scale and pace should align with the economy’s absorption capacity. The authorities need to prioritize high-impact projects, strengthen medium-term budgeting, and improve the PFM framework:

    1. ➢ Priority investment. As the Tuvalu Infratructure Strategy and Investment Plan for 2016-25 lays out, the priorities should be to build resilience to climate change, improve transport, and enhance water and waste management, which would also help catalyze private sector activity.
    2. ➢ The medium-term budget framework (MTBF) can be improved with better revenue and spending forecasting methodologies, which would help improve the credibility of the annual budget process. The authorities are considering a multi-year rolling budget for capital investment. This could help complete approved projects, but requires a rigorous project selection process and continouos evaluation to succeed.
    3. ➢ PFM reform priorities include introducing competitive tendering for procurement under a centralized unit, ensuring adequate maintenance spending on capital assets, and standardizing fiscal account classification between the Treasury and the Budget Office. The authorities also need to improve the reliability of monthly fiscal reporting. Aligning these priorities with program grants of development partners would help accelerate key reforms.

14. The authorities should mobilize tax revenue.

  • Tax revenue has declined due to tax exemptions and weak compliance. The threshold of the Personal Income Tax stands high at 3 times per capita GDP after increases in the threshold in 2014 and 2016, which have eroded the tax base. Of the six large corporates in Tuvalu, only two corporations pay Corporate Income Tax (CIT) due to a high threshold (2 percent of GDP). Firms with less than a threshold profit (0.2 percent of GDP) are also exempt from Consumption Tax. Tax arrears by SOEs have weakened tax revenue, although outstanding tax arrears declined to 2 percent of GDP at end-2017 from 3 percent of GDP at end-2016. In a bid to increase tax revenue to 20 percent of GDP, the authorities have focused on improving tax compliance.

    uA01fig15

    Tax Revenue Declined Due to Personal and Corporate Income Tax

    (Tax revenue in percent of GDP)

    Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

    Sources: Country authorities; and IMF staff estimates.
    uA01fig16

    Low Tax Revenue Compared to Peers

    (Tax revenue in percent of GDP, 2017)

    Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

    Sources: WEO Database and IMF staff estimates.

  • The government should increase tax revenue. The priority is to eliminate exemptions and broaden the tax base, while continuing to improve compliance. The loss carry-forward, which is now allowed for indefinite periods, should be limited to a fixed period (e.g., 5 years). The government needs to re-evaluate the thresholds for CIT and Consumption Tax. The government also should continue to reduce tax arrears, enhance tax administration capacity, and develop a taxation module on the e-government platform to reduce compliance costs.

15. The authorities should strengthen fishing revenue forecasts. Close coordination between the Ministry of Finance (MoF) and the Ministry of Natural Resources (MNR) is critical to strengthen revenue forecasts and transparency. Fishing revenues are driven by annual allocations of vessel days under regional agreements, which are complicated to forecast (Box 2). There are no established models to forecast fishing revenues in the government budget, and the MoF has limited access to the fishing revenue information that the MNR controls. Improved financial management of the fishing license schemes will facilitate fiscal planning and help increase fishing revenue. Continuing regional cooperation to strengthen the region’s negotiating power will help sustain fishing revenue in the medium term.

Drivers of Fishing License Revenue

Fishing revenue increased substantially over the past several years to 50 percent of GDP in 2017 from 15 percent of GDP in 2011, and accounts for 60 percent of total fiscal revenue. With the recent receipt of a one-off payment from a sub-regional pooling scheme, fishing revenue is expected to reach 80 percent of GDP in 2018. Fishing revenue remains a volatile income source, although the volatility has slightly decreased in recent years.

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Fishing Revenue Remains Volatile, Albeit to a Lesser Degree

(Fishing revenue to GDP ratio, year-on-year change in percent)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: Parties to the Nauru Agreement; Tuvalu authorities, and IMF staff estimates.
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High Dependency on Fishing Revenue Compared to Peers

(Fishing revnue in percent of GDP)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: Countries authorities; and IMF staff estimates.

The increase in fishing revenue has been due to increased vessel days from the Parties to the Nauru Agreement (PNA). The PNA is a regional agreement among eight countries1 accounting for around 30 percent of the world’s tuna supply. The PNA implemented the Vessel Day Scheme (VDS) in 2007 to boost fishing revenue. The PNA sets Total Allowable Effort (TAE) each year—total fishing days in the PNA countries—and allocates each country Party Allowable Effort (PAE)—fishing days each country—based on its historical trends and zonal biomass. The PNA has set around 45,000 days TAE in 2018 and has allocated Tuvalu around 2,100 days PAE in 2018, which increased from 877 days in 2011, reflecting favorable fish moves in Tuvaluan waters under El-Nino effects. Countries can trade or pool their PAEs with other country members. Another contributing factor has been an increase in the minimum benchmark price to $8,000 per vessel day in 2018 from $5,000 in 2012.

The Tuvaluan authorities allocate the PAE to licensing categories with different prices. The major licensing categories include bilateral auctions, the US Treaty pool2, trading among the PNA countries, the FSM Agreement pool3, and a sub-regional pooling. The one-off large increase in fishing revenue in 2018 stemmed from accumulated revenue from the sub-regional pool where five countries4 formed a sub-regional group in 2012 to collectively auction remaining vessel days in a year.

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Share of Party Allowable Efforts (PAE) Increased for Tuvalu

(PAE in percent of Total Allowable Efforts)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: Party to the Nauru Agreement (PNA); country authorities; and IMF staff estimates.
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VDS and US Treaty are Major Components of Fishing Revenue

(Fishing revenue by licensing catergory in percent, 2016)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: Ministry of Natural Resources, Fishery Department, 2016 Annual Report.
1/ Includes Kiribati, the Marshall Islands, Palau, Papua New Guinea, Solomon Islands, Federated States of Micronesia, and Tuvalu. 2/ The US-South Pacific Tuna Treaty provides access to US purse seine vessels in participants’ waters. 3/ Allows domestic vessels of the PNA countries to fish in the other PNA countries. 4/ Tuvalu, Nauru, Marshall Islands, Solomon Islands, and Tokelau.

16. The government should accelerate SOE reforms. Tuvaluan SOEs rely heavily on fiscal support. Among the SOEs, only the National Bank pays CIT and disburses dividends. Fiscal support for the SOEs is projected to increase to 4 percent of GDP in the medium term, given below-cost tariffs, infrastructure upgrades, and capital injections into the banking sector. Strengthening the SOEs’ financial performance is critical to contain the risk of contingent spillovers to the budget. Priorities include addressing the government’s outstanding payment obligations, improving electricity tariff schemes, strengthening the transparency of fiscal support, and monitoring the financial performance of joint ventures.

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Fiscal Support to SOEs, Mostly to TEC, Remains Substantial

(Government subsidies to SOEs in percent of GDP 1/)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: Country authorities; and IMF staff estimates.1/ Excludes capital injections to DBT.
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SOEs’ Tax Arrears Remain Large

(Tax arrears by SOEs in percent of GDP, 2017)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: Country authorities; and IMF staff estimates.

  • The government’s payment obligations. The government has been overdue on its payment obligations to SOEs, which roughly equal SOEs’ tax arrears (2 percent of GDP). The government should settle its outstanding payment obligations to SOEs, and SOEs should pay their remaining tax arrears.

  • Electricity tariffs. The government sets electricity tariffs (A$ 0.65 per kWh on average) below a breakeven level (A$ 0.8 per kWh). While households have a differential tariff, public and commercial entities pay a flat tariff. The government should raise tariffs and link them to oil price changes, while mitigating the impact on the poor (e.g., higher tariff for a high consumption bracket). Introducing a differential tariff by electricity usage for public and commercial entities will help align tariffs with production costs and save electricity usage. To reduce costs, the authorities should introduce competitive bidding for fuel suppliers and contain salary expenses in the near term, while increasing power generation from renewable energy sources in the medium term.

  • Fiscal support. The annual allocation of fiscal support to SOEs (Community Service Obligations) is ad-hoc, lacking transparency and predictability. There is room to employ a more transparent, rule-based approach to determine the annual fiscal transfers. Fiscal support should also be reduced over time. Bank recapitalization using fiscal financing should not be recurrent.

  • Joint ventures. The financial performance of the National Fishing Corporation of Tuvalu (NAFICOT) and its three joint ventures is weak and non-transparent. Staff urges the authorities to closely monitor their financial performance. NAFICOT’s outstanding debt, which currently stands at 24 percent of GDP, needs to be included in the official government debt data (staff have included it in this report’s tables and the DSA) and closely monitored.

Tuvalu: Net Profits/Losses of SOEs 1/

article image
Source: Public Enterprise Reform Management Unit (PERMU)

Net profits/losses include any tax arrears and government subsidies.

Sold to the Pension Fund (TNPF) in November 2016.

JV indicates joint venture.

Authorities’ Views.

17. The authorities broadly concurred with staff’s analysis. They noted that the volatility of fishing revenue has declined since the introduction of the Vessel Day Scheme (VDS), and fishing revenue could be considered a domestic revenue source. Although committed to containing current expenditure, the authorities noted that higher capital spending would help aid economic development and growth. They noted that scholarship spending would help strengthen human capital and growth potential. While they agree with the need to enhance medical spending efficiency, they asserted that a rise in spending is inevitable given an aging population and a high incidence of non-communicable diseases. The authorities emphasized that high public wages are necessary to retain staff, but assured staff that the World Bank’s wage bill modeling will be used to inform the adequacy of structural salary adjustments. The authorities are committed to strengthening the monitoring of SOEs.

Broadening the Private Sector Growth Base

A. Improve Financial Supervision and Financial Inclusion

18. Banks remain risk-averse in the face of high NPLs.

  • The National Bank (NBT) posted a profit in 2017 and appears to have adequate capital, but faces elevated credit risk. NPLs still account for 40 percent of total loans, although they are sufficiently provisioned and have slightly declined. Due to high NPLs, the bank has steadily slowed its lending since 2011 and increased deposits in overseas banks. As a result, interest income has been subdued, while foreign exchange income increased steadily, reflecting its monopolistic position in foreign exchange services. Also the bank—as the only commercial bank—is closely linked to the government and the SOEs as their banker and source of borrowing. The bank is required to hold a significant amount of liquid assets to mitigate the potential withdrawal of government deposits. This has further constrained its lending capacity.

    uA01fig23

    National Bank of Tuvalu (NBT) Has Large Exposure to SOEs

    (Credit to the economy by lenders in percent of total loans, as of end-2016)

    Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

    Sources: Country authorities; and IMF staff calculations.
    uA01fig24

    Foreign Exchange is a Major Income Source for NBT

    (NBT’s income structure in percent of GDP)

    Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

    Sources: National Bank of Tuvalu, Financial Reports; and IMF staff estimates.

  • The Development Bank has deleveraged, constrained by limited lending capacity due to high NPLs. After years of NPL write-offs, half of the bank’s loans are still NPLs with insufficient provisioning. The bank’s performance is among the weakest in the region, and the bank has relied on financial support and government guarantees. The high-risk profile of small business loans and weak credit risk management have also resulted in the bank taking a more stringent approach in lending, prioritizing small loan amounts. To improve its lending capacity, the bank is considering a concessional loan from the European Investment Bank.

    uA01fig25

    DBT’s Asset Growth Declined, in Contrast to Peers

    (Index of Development banks’ asset growth, 2009=100)

    Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

    Sources: Asian Development Bank, Public Enterprise Specialist April 2017 Trip Report.
    uA01fig26

    Provisioning and Write-offs Contributed to Slowed Loan Growth

    (Development banks’ provisioning and write-offs in percent of total loans)

    Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

    Sources: : Asian Development Bank, Public Enterprise Specialist April 2017 Trip Report.
    uA01fig27

    DBT’s Outstanding Loan Smallest Compared to Peers

    (Development banks’ outstanding loan in percent of GDP)

    Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

    Note: 2013 data for Fiji, 2015 data for all other countries.Sources: Asian Development Bank, Public Enterprise Specialist April 2017 Trip Report.1/ Loan balances are after provisiong for losses.
    uA01fig28

    DBT Faces Limited Lending Capacity

    (Development banks’ liability and equity position in percent of GDP 1/)

    Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

    Sources: Asian Development Bank, Public Enterprise Specialist April 2017 Trip Report.1/ 2013 data for Fiji, 2015 data for all other countries.

  • The Tuvalu National Provident Fund (TNPF) expanded member loans to 18 percent of GDP, amid the banking sector’s constrained lending. The pension fund appears sound given low NPLs and a strong capital position. This is partly due to the recourse nature of their lending, with the fund holding seniority over the other two banks in collecting the collateral—the borrower’s pension contribution. While the pension fund limits members’ borrowing to 30 percent of their total retirement benefit balance, total borrowing stands at 17 percent of retirement balances.

Tuvalu: Key Financial Indicators

article image
Source: 2017 Financial Statements for NBT, DBT, and TNPF.

NPLs are defined as impaired and overdue loans

Share capital and retained earnings over total assets

19. Limited financial supervision has contributed to banks’ high NPLs, reduced financial sector efficiency, and undermined financial inclusion.

  • There is no effective prudential supervision. The 2011 Banking Commission Act has not yet been implemented. The authorities have agreed to hire an external financial supervisor and develop a 3-year supervision strategy with Pacific Technical Assistance Center (PFTAC) assistance.

  • In the face of credit risk and a weak credit culture, financial institutions have taken a risk averse attitude and tightened their own prudential practices. Financial institutions have limited a borrower’s debt-to-income ratio to below 40 percent since 2012. The institutions have also introduced a recourse agreement, collateral seniority, and sharing of credit information. The borrower’s pension contributions serve as loan collateral. For consumer loans, payment obligations are deducted directly from the borrower’s salary.

  • The lack of financial supervision has also hampered financial inclusion. The number of depositors is limited, compared to that of peers. The weakness of the financial sector impedes access to private sector development, as does the absence of ATMs and credit card arrangements.

uA01fig29

Depositors at Commercial Bank limited Compared to Peers

(Commercial banks’ deposit accounts per capita)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: National Bank of Tuvalu; IMF, Financial Access Survey, and staff calculations.
uA01fig30

Tuvaluans Have No Access to ATMs

(ATM access per 100,000 adults)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Notes: 2013 data for Kiribati; 2015 for Vanuatu, Tonga and PNG; 2016 for remaining countries.Sources: IMF, Financial Access Survey.

20. AML/CFT. So far Tuvalu has not experienced any significant loss of correspondent banking relationships, which are maintained by the National Bank. The bank has continued to strengthen its AML/CFT compliance by issuing identification cards to customers to comply with Know Your Customer (KYC) requirements in foreign transactions. Tuvalu has also established a Transaction Tracking Unit within the Police Department.

21. Policy Recommendations

  • It is critical to put a financial supervisory framework in place. The authorities’ efforts to introduce supervision should continue. The authorities need to develop bankruptcy legislation and improve enforcement of existing regulations. The pension fund should also be included in the supervision framework. While the pension fund’s lending standards appear to be adequate, the fund’s plan to move into large commercial loan markets could pose significant risks and should be reconsidered. Strengthening the banking sector would help increase available funding for commercial loan markets.

  • Bank credit intermediation and financial inclusion should be improved. The Development Bank should improve its credit risk management. Once this has been achieved, the bank could gradually expand its lending capacity. Once adequate financial supervision is in place, the authorities could also encourage foreign bank presence, which would help improve financial intermediation and risk management and increase competition in the banking sector. Given Tuvalu’s relatively high rate of internet usage and mobile cellular subscriptions and the recent introduction of 4G mobile services, the authorities could explore mobile banking, peer-to-peer payment, and other innovative fintech solutions.

    uA01fig31

    Tuvalu Has a Relatively High Rate of Internet Usage

    (Internet usage per 100 people, 2015)

    Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

    Notes: 2015 data for all countries.Sources: World Bank, World Development Indicators.

  • Macroprudential policy. The government should consider codifying the existing MOU between the financial institutions, which limits debt-to-income below 40 percent, into a macroprudential regulation. This will help the authorities regularly review the adequacy of the threshold to strike the right balance between containing financial sector risks and promoting financial intermediation to support the private sector. Strengthening SOEs would help reduce NPLs, freeing up financial sources for private sector activity, while mitigating macrofinancial risks.

B. Increase Potential Growth and Employment Opportunities

22. Private sector employment and business creation have been sluggish due to structural constraints. The unemployment rate is substantial at 37 percent, as private sector economic activity is limited to fishing and agriculture. Tourism receipts are low due to poor connectivity, infrastructure, and amenities. Secondary education and vocational training have also been limited, while remittances from seafarers have continued to decrease. The business regulatory environment has room for improvement (Appendix IV).

uA01fig32

Tourism Industry is Underdeveloped

(Visitor arrivals to population ratio in percent, 2016)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: South Pacific Tourism Organisation, Annual Review of Visitor Arrivals in Pacific Island Countries 2016; and IMF staff calculations.
uA01fig33

Regulatory Environment Has Room for Improvement

(CPIA property rights and rule-based governance rating 1/)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: World Bank.1/ 1 = low, 6 = high.

23. Diversifying the growth base would help the economy better absorb macroeconomic volatility and increase growth potential. A concerted government approach is important to stimulate private sector development.

  • Business environment. Improving the business environment is critical to attract foreign investment and foster sustainable growth. The World Bank’s Doing Business assessment would help identify reform priorities. The authorities could consider International Finance Corporation (IFC) membership to broaden private sector growth.

  • Tourism and goods exports. A national tourism strategy, paired with improved infrastructure, would help grow the tourism industry and increase employment. Hosting cruise ships for eco-tourism would help boost tourism while overcoming limited accommodation facilities in Tuvalu. The government is in the process of ratifying the Pacific Agreement on Closer Economic Relations Plus (PACER Plus)—a regional trade agreement between Australia, New Zealand, and eight Pacific island economies. The agreement can support export product development and funding availability.

  • Water resource management. As an atoll island, reliable water availability is critical to sustain private sector business expansion, especially tourism. An innovative strategy for water resource management, such as desalination plants, will strengthen the economy’s appeal as a tourist and business destination.

24. Strengthening human capital is critical for sustainable growth in the long run. Tuvalu’s human capital appears to be relatively strong compared to Pacific peers, but there is ample scope to strengthen human capital.

uA01fig34

Tuvalu’s Human Asset Appears to Be Relatively Strong

(Human Asset Index, 2018 1/)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: United Nations - Committee for Development Policy, 2018 triennial review.1/ The index is composed of 5 indicators grouped into a health and education subindex; maximum = 100.

  • Education. The recent establishment of the Institute of Technology and the government’s efforts to introduce professional certifications should help enhance education output and labor mobility. The authorities should improve the quality of secondary education, aided by an additional supply of qualified teachers and essential learning materials. A comprehensive review of vocational training, including seafarer training of the Tuvalu Maritime Training Institute (TMTI), would help adapt vocational training to the changing needs of Tuvalu’s and the global economy. The PACER Plus could also provide additional labor mobility options with training opportunities.

  • Private sector job creation. Given the dominance of the public sector in economic activities (estimated to account for up to 90 percent), the government should consider partial privatization of non-essential government functions, such as public maintenance work and construction. Privatization could help foster private sector growth, although the benefits of privatization should be balanced with the need for ensuring vital service delivery.

  • Gender equality. Women have been actively participating in education and the work force, including the government and small businesses. There is room to strengthen the role of women in decision-making positions, including in the government, local councils, and Parliament. Women could also play a larger role in small business development.

C. Other Issues

25. Data provision/Technical Assistance. Data provision has serious shortcomings that significantly hamper surveillance. It is critical to strengthen institutional capacity to produce essential macroeconomic data in a timely manner, including via a succession plan given frequent personnel turnover. PFTAC plans to continue to provide significant technical assistance, including on public financial management, macroeconomic programming and analysis, and revenue administration.

Authorities’ Views.

26. The authorities broadly agreed with staff’s recommendations. They recognized the need for financial supervision and are resolved to collaborate with PFTAC. The authorities noted the need for strengthening DBT’s lending capacity and are in favor of exploring concessional borrowing or equity investment options. They estimated that the debt-to-income ratio limit contributed to impeding lending growth in the past years. The authorities also understood the limitations of private sector economic activity. They plan to develop the tourism industry, strengthen human capital, and expand financial inclusion efforts. They acknowledged that limited institutional capacity hinders the production of macroeconomic data in a timely manner. They appreciated technical assistance from the Fund and anticipated continued support.

Staff Appraisal

27. Tuvalu’s macroeconomic outlook is broadly positive. Economic growth is accelerating on capital expenditure and infrastructure projects. Inflation is expected to remain somewhat elevated on robust economic activities. However, risks remain to the downside. The economy is susceptible to the effects of climate change and natural disasters. The fiscal revenue base faces uncertainties from volatile fishing revenues and reliance on grants. Weak balance sheets of SOEs and limited financial supervision create risks to the fiscal accounts and impede banks’ credit intermediation. Reflecting these risks, Tuvalu remains at high risk of debt distress. While the external position in 2017 is judged to have been broadly in line with fundamentals, data limitations create substantial uncertainty around such assessments.

28. The macroeconomic policy priorities are to promote resilience to external shocks and boost potential growth. To promote resilience, it will be important to strengthen the medium-term fiscal framework to maintain buffers and continue to improve climate change risk management. Key policies for boosting potential growth and diversifying the growth base include developing human capital, promoting tourism, and improving financial intermediation and supervision.

29. The government should adopt gradual fiscal consolidation to maintain buffers. The domestic current balance can be a useful operational target to abstract from volatile and exogenous components of the fiscal accounts. Gradual fiscal consolidation in the next decade would help boost the government’s net financial worth to buffer most shocks.

30. Improving the fiscal balance requires containing current spending and prioritizing capital spending. The authorities should curb rising current spending, while improving spending efficiency. Tuvalu needs capital investment to improve growth prospects and climate change resilience, but the scale and pace should align with the economy’s absorption capacity. The authorities should prioritize high-impact projects, strengthen the medium-term budgeting, and continue to improve the PFM framework.

31. The authorities should mobilize tax revenue and strengthen fishing revenue forecasts. Tuvalu has potential for expanding tax revenue by eliminating tax exemptions and broadening the tax base, while continuing to improve tax compliance. The authorities should review tax exemptions. To strengthen fishing revenue forecasts and transparency, close coordination between the MoF and the MNR is critical.

32. The government should accelerate SOE reforms. Strengthening the financial performance of SOEs is critical to contain the risk of contingent spillovers to the budget. Policy priorities include addressing the government’s payment obligations, improving electricity tariff schemes, strengthening the transparency of fiscal support and reducing it over time, and closely monitoring the financial performance of the joint ventures. NAFICOT’s outstanding debt needs to be included in the official government debt data and closely monitored.

33. The authorities should strengthen the role of bank credit intermediation. It is critical to implement a supervisory framework that includes the pension fund. The authorities should develop bankruptcy legislation and improve enforcement of existing regulations. The Development Bank should improve its credit risk management. Once this has been achieved, the bank could also bolster its lending capacity to better serve its development objectives.

34. Diversifying the economy would help absorb macroeconomic volatility. A national tourism strategy, paired with improved infrastructure and water management, would help grow the tourism industry and increase employment. Improving the business environment is critical to develop the private sector and foster sustainable growth. The authorities should enhance the quality of secondary education and carry out a comprehensive review of vocational training.

35. The authorities should continue strengthening macroeconomic statistics. Developing the institutional capacity to produce essential macroeconomic data in a timely manner is critical for effective macroeconomic surveillance.

36. It is recommended that the next Article IV consultation take place on the current 24-month cycle.

Figure 1.
Figure 1.

Tuvalu: Setting in a Cross-Country Context

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Figure 2.
Figure 2.

Tuvalu: Economic Developments

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Figure 3.
Figure 3.

Tuvalu: Fiscal Developments

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Table 1.

Tuvalu: Selected Economic Indicators, 2015–19

article image
Sources: Tuvalu authorities; PFTAC; SPC; ADB; World Bank; 2018 IMF’s BOP TA; and IMF staff estimates and projections.

Includes Special Development Fund and infrastructure investment.

Domestic current balance excludes fishing revenue, grants, and capital expenditure.

Banks’ and pension fund lending to non-government domestic sector.

The sum of liquid assets of the National Bank of Tuvalu, Consolidated Investment Fund, and SDR holdings.

Table 2.

Tuvalu: Medium-Term Baseline Scenario, 2015–23

article image
Sources: Data provided by the Tuvalu authorities and IMF staff estimates and projections.

In percent of exports of goods and services.

Defined as the sum of foreign assets of the National Bank of Tuvalu, Consolidated Investment Fund, and SDR holdings.

Banks’ and pension fund lending to non-government domestic sector.

Table 3.

Tuvalu: Summary of General Government Operations, 2013–23 1/

article image
Sources: Tuvalu authorities; and IMF staff estimates and projections.

TV is an internet domain.

Based on GFS 1986.

Excludes fishing license fees and grants, and capital expenditure.

Table 4.

Tuvalu: Balance of Payments, 2013–23

article image
Sources: IMF’s BOP TA (April 2018), Tuvalu authorities, PFTAC, and IMF staff estimates.

Includes government’s overseas contributions.

The sum of liquid assets of the National Bank of Tuvalu, Consolidated Investment Fund, and SDR holdings.

Table 5.

Assets and Liabilities of Financial Institutions, 2012–17

article image
Sources: National Bank of Tuvalu; and Development Bank of Tuvalu.

Gross loans and advances.

Development Bank of Tuvalu’s loans from the European Investment Bank.

Banks’ and pension fund lending to non-government domestic sector.

Appendix I. Risk Assessment Matrix1

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Appendix II. External Sector Assessment

Staff assesses that Tuvalu’s external position in 2017 was broadly in line with medium-term fundamentals and desirable policies, despite a moderate REER appreciation in recent years. However, there is substantial uncertainty around this assessment, as analysis is hampered by data limitations.

Though external sector analysis is hampered by data limitations, reserves data suggest that the external position is broadly sound. The latest detailed balance of payments data are for 2012. However, recent data on reserves and partial data for the current account suggest that the external position remains broadly sound, with gross reserves rising slightly in 2017 and reserve coverage equaling 9 months of imports. Over the medium term, reserves are projected to decline moderately due to a widening fiscal deficit (Table 2).

uA01fig35

Gross Reserves

(In millionsof Australian dollars unless otherwise specified)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

1/ Ratio of international reserves to next year’s imports of goods and services, in months.Source: Country authorities;and IMF staff estimates.

Tuvalu’s Real Effective Exchange Rate (REER) has appreciated in recent years due to higher inflation. Tuvalu’s REER continued to appreciate by 5 percent in 2017 due to relatively high inflation, while Tuvalu’s Nominal Effective Exchange Rate (NEER) depreciated due to the weakened Australian dollar. The inflationary pressures have stemmed from higher food prices, increased transportation costs, and expansionary fiscal policy. Restrained current spending would help contain inflationary pressure and maintain adequate exchange rate alignment. Since the current account balance is driven mostly by exogenous fishing license fees and grants, the REER’s role in external sustainability is limited. Nonetheless, overvaluation could weaken Tuvalu’s competitiveness and undermine private sector development.

uA01fig36

Tuvalu’s REER appreciated due to relatively high inflation

(Index, 2010 = 100)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: IMF WEO database; and IMF staff calculations.

Staff’s bottom-line assessment is that Tuvalu’s external position in 2017 was broadly in line with medium-term fundamentals and desirable policy settings. This conclusion reflects the broad stability of reserves and the estimated current account in recent years (Tables 2 and 4).1 However, this assessment is subject to substantial uncertainty given data limitations and the high volatility of external flows, such as fishing revenue and external grants. The external position could also weaken going forward, if excessive fiscal easing raises inflation and causes the REER to deteriorate further.

In this context, it is crucial to contain current spending, while improving competitiveness. Improving the business climate, developing the tourism sector, and exploring innovative approaches to supporting growth is critical. This includes strengthening effectiveness of education and training, as well as retaining educated Tuvaluans in the labor force.

The use of the Australian dollar as the legal tender remains appropriate. The use of the Australian dollar provides a strong nominal anchor, given the weak institutional capacity that would hinder the establishment of an independent monetary institution. The close development, trade, and financial linkages with Australia also justify the use of the Australian dollar.

Appendix III. Tuvalu Trust Fund and Tuvalu Survival Fund

Tuvalu Trust Fund (TTF). Tuvalu and its development partners (Australia, New Zealand, and the United Kingdom) established the TTF in 1987. The fund aims to cover revenue shortfalls for current expenditure in the national budget, underpin economic development, and enhance the country’s long-term financial sustainability. The initial balance of A$27 million in 1987 has grown to an estimated market value of A$175 million (333 percent of GDP) at end-2017. The major driver for the increase in the fund’s market value was favorable investment returns. Development partners (Australia, New Zealand, Japan, and South Korea) and Tuvalu have also made annual or one-off financial contributions to the fund.

uA01fig37

Tuvalu Tiust Fund and Consoliated Investment Fund

(In millions of AU$)

Citation: IMF Staff Country Reports 2018, 209; 10.5089/9781484366264.002.A001

Sources: Country authorities; and IMF staff calculations.

  • Distribution modality. When the fund’s market value exceeds the maintained value (a baseline that grows with the Australian CPI), the difference is automatically distributed to the Consolidated Investment Fund (CIF), which the government of Tuvalu can draw upon. When the market value of the fund falls below its maintained value, no distributions are made until the fund’s market value has reverted to exceeding its maintained value.

  • Financial performance. Investment returns have been broadly favorable. Returns in the past 5 years were above 7 percent. Since the TTF’s inception, its average investment return has been around 7 percent, although in 10 out of the last 25 years there were no distributions due to weak performance. Two Australian investment firms professionally manage the TTF, while the TTF Advisory Committee monitors economic developments in Tuvalu and their impact on the fund. The TTF’s fund management has been used for the Tuvalu National Provident Fund (TNPF) and is expected to be used for the Tuvalu Survival Fund (TSF).

Consolidated Investment Fund (CIF). The CIF is a revolving buffer fund under Tuvalu’s purview. The CIF was established in 1993 to smooth out TTF contributions to current spending. The CIF receives automatic disbursements from the TTF, when the market value exceeds the maintained value of the fund. To mitigate pauses in automatic distributions from the TTF, the authorities established a minimum floor for the CIF balance at 16 percent of the TTF’s maintained value. The 16 percent target was established on the basis of the CIF being able to fund the loss of up to 4 years of automatic distributions from the TTF.

Tuvalu Survival Fund (TSF). The TSF is another buffer fund under Tuvalu’s purview. The Tuvaluan government established the TSF in 2015 to mitigate the impact of climate change and respond to natural disasters with prompt spending. The government made contributions to the TSF from the national budget (10 percent of GDP in 2016, and none in 2017 due to a fiscal deficit). The fund’s governance structure and investment procedures were established in 2017.

Appendix IV. Macrostructural Challenges

The narrow production base offers limited opportunities for economic diversification. Tuvalu is highly dependent on imports and has only limited room for widening the export base. The tourism industry is largely untapped, contributing less than 1 percent of value added to GDP. Tuvalu has been exploring export product development for coconut derivatives like oil, toddy, or viscous coconut sugar syrup, as well as breadfruit, pulaka (wild taro), and pandanus.

The legal and regulatory environment remains weak. Tuvalu’s legal infrastructure is still missing elements necessary for a well-functioning business environment, including a bankruptcy law or legislation relating to customary land. The enforcement of existing laws remains weak due to limited institutional capacity. Tuvalu has not signed up for the World Bank Doing Business assessment.

The infrastructure gap also gives rise to internal migration. The lack of, or inadequate, basic infrastructure remains a barrier to economic development and service delivery, particularly in the outer islands. In the outer islands, the likelihood of poverty is 30 percent higher than on the main island Funafuti. As a result, about half of the population of Tuvalu has migrated primarily to the main island Funafuti from their home island.

Human capital

  • Unemployment. The unemployment rate is substantial at 37 percent at end-2017. The demand for seafarers has decreased due to rising competition from regional peers. Graduates from Tuvalu Maritime Training Institute (TMTI) have been forced to take up temporary employment in construction.

  • Education. While primary school enrollment is high, the quality of secondary education and vocational schooling options are limited. Given the decrease in global demand for seafarers, long-term prospects for seafarer training at TMTI and the future of the school remain uncertain. Scholarships, education, and training are not matched well to the needs of the economy.

  • Female labor participation. Women have been actively participating in education and the labor force. Girls outperform boys across education levels, and the number of women entering the civil service workforce surpasses that of men. Women are actively engaged in small business development, particularly in handicraft and hospitality. Increasingly, women are entering traditionally male dominated fields, including politics, law enforcement, and seafaring.

Appendix V. Authorities’ Responses to Policy Advice in the 2016 Article IV Consultation

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1

EBA-lite models are not generally appropriate for Tuvalu given data limitations and the high volatility of fishing revenue and external grants.

1/

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

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Cover IMF Staff Country Reports
Tuvalu: 2018 Article IV Consultation – Press Release; Staff Report and Statement by the Executive Director for Tuvalu
Author:
International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2018: Issue 209
Publisher:
International Monetary Fund
ISBN:
9781484366264
ISSN:
1934-7685
Pages:
65
DOI:
https://doi.org/10.5089/9781484366264.002
  • View in gallery

    Tuvalu Among Most Vulnerable

    (Economic Vulnerability Index, 2018 1/)

  • View in gallery

    Tuvalu’s REER Appreciated Due to Relatively High Inflation

    (Index, 2010 = 100)

  • View in gallery

    Net Financial Worth is Projected to Decline Under Baseline

    (Net financial worth, in percent of GDP)

  • View in gallery

    Declining Loans Indicate Weak Credit Intermediation

    (Banks’ assets and liabilities, in percent of GDP)

  • View in gallery

    Fishing Revenue Among Higest

    (Fishing license fees in percent of GDP, 2017)

  • View in gallery

    Grants Among Highest

    (Grants in percent of GDP, 2017)

  • View in gallery

    Tuvalu Coastal Adaptation Project (TCAP) is Substantial

    (TCAP under GCF, in percent of GDP)

  • View in gallery

    TCAP is Critical for Population Living on Atoll Islands

    (Percent of population in low elevated costal zones, 2018)

  • View in gallery

    Adjustment Scenario Projects Sufficient Net Financial Worth

    (Government’s financial worth in percent of GDP 1/)

  • View in gallery

    Adjustment Scenario Requires Gradual Fiscal Consolidation

    (Annual changes in domestic current balance in percent of GDP)

  • View in gallery

    Adjustment Scenario Leads to Small Fiscal Surplus in The Long Run

    (Fiscal balance in percent of GDP)

  • View in gallery

    Current Spending is Substantial

    (Fiscal expenditure in percentof GDP)

  • View in gallery

    Public Spending on Health is High

    (Public health expenditure in percent of government expenditure)

  • View in gallery

    Health Expenditure Per Capita Among Highest

    (Health expenditure per capita in current USD)

  • View in gallery

    Tax Revenue Declined Due to Personal and Corporate Income Tax

    (Tax revenue in percent of GDP)

  • View in gallery

    Low Tax Revenue Compared to Peers

    (Tax revenue in percent of GDP, 2017)

  • View in gallery

    Fishing Revenue Remains Volatile, Albeit to a Lesser Degree

    (Fishing revenue to GDP ratio, year-on-year change in percent)

  • View in gallery

    High Dependency on Fishing Revenue Compared to Peers

    (Fishing revnue in percent of GDP)

  • View in gallery

    Share of Party Allowable Efforts (PAE) Increased for Tuvalu

    (PAE in percent of Total Allowable Efforts)

  • View in gallery

    VDS and US Treaty are Major Components of Fishing Revenue

    (Fishing revenue by licensing catergory in percent, 2016)

  • View in gallery

    Fiscal Support to SOEs, Mostly to TEC, Remains Substantial

    (Government subsidies to SOEs in percent of GDP 1/)

  • View in gallery

    SOEs’ Tax Arrears Remain Large

    (Tax arrears by SOEs in percent of GDP, 2017)

  • View in gallery

    National Bank of Tuvalu (NBT) Has Large Exposure to SOEs

    (Credit to the economy by lenders in percent of total loans, as of end-2016)

  • View in gallery

    Foreign Exchange is a Major Income Source for NBT

    (NBT’s income structure in percent of GDP)

  • View in gallery

    DBT’s Asset Growth Declined, in Contrast to Peers

    (Index of Development banks’ asset growth, 2009=100)

  • View in gallery

    Provisioning and Write-offs Contributed to Slowed Loan Growth

    (Development banks’ provisioning and write-offs in percent of total loans)

  • View in gallery

    DBT’s Outstanding Loan Smallest Compared to Peers

    (Development banks’ outstanding loan in percent of GDP)

  • View in gallery

    DBT Faces Limited Lending Capacity

    (Development banks’ liability and equity position in percent of GDP 1/)

  • View in gallery

    Depositors at Commercial Bank limited Compared to Peers

    (Commercial banks’ deposit accounts per capita)

  • View in gallery

    Tuvaluans Have No Access to ATMs

    (ATM access per 100,000 adults)

  • View in gallery

    Tuvalu Has a Relatively High Rate of Internet Usage

    (Internet usage per 100 people, 2015)

  • View in gallery

    Tourism Industry is Underdeveloped

    (Visitor arrivals to population ratio in percent, 2016)

  • View in gallery

    Regulatory Environment Has Room for Improvement

    (CPIA property rights and rule-based governance rating 1/)

  • View in gallery

    Tuvalu’s Human Asset Appears to Be Relatively Strong

    (Human Asset Index, 2018 1/)

  • Figure 1.
    View in gallery
    Figure 1.

    Tuvalu: Setting in a Cross-Country Context

  • Figure 2.
    View in gallery
    Figure 2.

    Tuvalu: Economic Developments

  • Figure 3.
    View in gallery
    Figure 3.

    Tuvalu: Fiscal Developments

  • View in gallery

    Gross Reserves

    (In millionsof Australian dollars unless otherwise specified)

  • View in gallery

    Tuvalu’s REER appreciated due to relatively high inflation

    (Index, 2010 = 100)

  • View in gallery

    Tuvalu Tiust Fund and Consoliated Investment Fund

    (In millions of AU$)

Tuvalu Among Most Vulnerable

(Economic Vulnerability Index, 2018 1/)

Tuvalu’s REER Appreciated Due to Relatively High Inflation

(Index, 2010 = 100)

Net Financial Worth is Projected to Decline Under Baseline

(Net financial worth, in percent of GDP)

Declining Loans Indicate Weak Credit Intermediation

(Banks’ assets and liabilities, in percent of GDP)

Fishing Revenue Among Higest

(Fishing license fees in percent of GDP, 2017)

Grants Among Highest

(Grants in percent of GDP, 2017)

Tuvalu Coastal Adaptation Project (TCAP) is Substantial

(TCAP under GCF, in percent of GDP)

TCAP is Critical for Population Living on Atoll Islands

(Percent of population in low elevated costal zones, 2018)

Adjustment Scenario Projects Sufficient Net Financial Worth

(Government’s financial worth in percent of GDP 1/)

Adjustment Scenario Requires Gradual Fiscal Consolidation

(Annual changes in domestic current balance in percent of GDP)

Adjustment Scenario Leads to Small Fiscal Surplus in The Long Run

(Fiscal balance in percent of GDP)

Current Spending is Substantial

(Fiscal expenditure in percentof GDP)

Public Spending on Health is High

(Public health expenditure in percent of government expenditure)

Health Expenditure Per Capita Among Highest

(Health expenditure per capita in current USD)

Tax Revenue Declined Due to Personal and Corporate Income Tax

(Tax revenue in percent of GDP)

Low Tax Revenue Compared to Peers

(Tax revenue in percent of GDP, 2017)

Fishing Revenue Remains Volatile, Albeit to a Lesser Degree

(Fishing revenue to GDP ratio, year-on-year change in percent)

High Dependency on Fishing Revenue Compared to Peers

(Fishing revnue in percent of GDP)

Share of Party Allowable Efforts (PAE) Increased for Tuvalu

(PAE in percent of Total Allowable Efforts)

VDS and US Treaty are Major Components of Fishing Revenue

(Fishing revenue by licensing catergory in percent, 2016)

Fiscal Support to SOEs, Mostly to TEC, Remains Substantial

(Government subsidies to SOEs in percent of GDP 1/)

SOEs’ Tax Arrears Remain Large

(Tax arrears by SOEs in percent of GDP, 2017)

National Bank of Tuvalu (NBT) Has Large Exposure to SOEs

(Credit to the economy by lenders in percent of total loans, as of end-2016)

Foreign Exchange is a Major Income Source for NBT

(NBT’s income structure in percent of GDP)

DBT’s Asset Growth Declined, in Contrast to Peers

(Index of Development banks’ asset growth, 2009=100)

Provisioning and Write-offs Contributed to Slowed Loan Growth

(Development banks’ provisioning and write-offs in percent of total loans)

DBT’s Outstanding Loan Smallest Compared to Peers

(Development banks’ outstanding loan in percent of GDP)

DBT Faces Limited Lending Capacity

(Development banks’ liability and equity position in percent of GDP 1/)

Depositors at Commercial Bank limited Compared to Peers

(Commercial banks’ deposit accounts per capita)

Tuvaluans Have No Access to ATMs

(ATM access per 100,000 adults)

Tuvalu Has a Relatively High Rate of Internet Usage

(Internet usage per 100 people, 2015)

Tourism Industry is Underdeveloped

(Visitor arrivals to population ratio in percent, 2016)

Regulatory Environment Has Room for Improvement

(CPIA property rights and rule-based governance rating 1/)

Tuvalu’s Human Asset Appears to Be Relatively Strong

(Human Asset Index, 2018 1/)
Figure 1.

Tuvalu: Setting in a Cross-Country Context
Figure 2.

Tuvalu: Economic Developments
Figure 3.

Tuvalu: Fiscal Developments

Gross Reserves

(In millionsof Australian dollars unless otherwise specified)

Tuvalu’s REER appreciated due to relatively high inflation

(Index, 2010 = 100)

Tuvalu Tiust Fund and Consoliated Investment Fund

(In millions of AU$)