Tuvalu: Staff Report for the 2018 Article IV Consultation—Informational Annex
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
05 Jul 2018
eISBN:
9781484366264
Language:
English
Keywords:
ISCR; CR; government; debt; Tuvaluan authorities; deficit; Tuvalu; PFTAC review; PFM workshop; TA strategy; central government; PFTAC resource; Government finance statistics; External sector statistics
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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.

Fund Relations

(As of April 30, 2018)

Membership Status

Joined June 24, 2010; Article VIII

General Resource Account

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SDR Department

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Outstanding Purchases and Loans: None

Financial Arrangements: None

Projected Payments to the Fund: None

Exchange Arrangements

Tuvalu’s legal tender is the Australian dollar. There is no central monetary institution. The National Bank of Tuvalu (NBT) is the only commercial bank in Tuvalu handling foreign exchange transactions. Tuvalu is an Article VIII member and does not maintain exchange restrictions or multiple currency practices subject to Fund approval under Article VIII, Sections 2(a) and 3, respectively.

Article IV Consultation

The previous Article IV consultation discussions were held in Funafuti in May 2016. The staff report (IMF Country Report No. 16/323) was discussed by the Executive Board on September 12, 2016. Tuvalu is on a 24-month consultation cycle.

Technical Assistance

Pacific Financial Technical Assistance Centre (PFTAC) has provided assistance on tax policy and administration (2007, 2008, 2010, 2016, 2017); financial sector supervision (2008, 2016, and 2017); and balance of payments and national accounts statistics (2006, 2008-10, 2012-18).

Resident Representative

The Regional Resident Representative Office for Pacific Islands is based in Suva, Fiji and was opened on September 13, 2010. The office covers Fiji, Kiribati, Marshall Islands, Micronesia, Nauru, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu. Ms. Leni Hunter is the current resident representative.

World Bank-IMF Collaboration

The Bank and the Fund teams maintain a close working relationship and have an ongoing dialogue on macroeconomic and structural issues. Since Tuvalu’s decision to pursue membership of the Bretton Woods institutions in 2009, the Bank team has regularly joined IMF Article IV missions and staff visits to Tuvalu since the country’s membership. The teams agreed that Tuvalu’s main macroeconomic challenges are to ensure fiscal sustainability, strengthening public service delivery, and create a more supportive environment for development.

Based on this shared assessment, the teams identified the following structural reform areas, all of which are also addressed in the authorities’ reform plan, as macro-critical:

  • Strengthening fiscal buffers. In the absence of its own currency and monetary policy, sound fiscal policy is key to maintaining macroeconomic stability. Maintenance of buffer assets is key to ensuring sustainability. Maintaining adequate buffer assets will require sound fiscal policy including the saving of cyclical revenues and restraining expenditures, including containing wage bill pressures. Moreover, there remains room to improve public financial management as well as strengthen public sector management to improve budget execution and the effectiveness in public resource utilization.

  • Adapting and responding to climate change. Tuvalu is one of the countries to be most affected by climate change and rising sea levels. In this context, climate change can lead to both structural and cyclical fiscal costs. To this end, explicitly recognizing the adaptation and response cost in budget will help ensure the continuity and efficiency on both spending and funding fronts. However, continued donor financing will remain important in enhancing the country’s ability to cope with natural disasters and climate change, given that the total costs may be too high for small states like Tuvalu to fully internalize by building buffers.

  • Exploring opportunities for poverty reduction, job creation, and private sector development. Tuvalu’s geographic isolation, small size, and poor land quality have made it challenging to generate domestic private sector employment. Adequate education and training needs to be provided for Tuvaluans to better realize overseas job opportunities and to reduce rising poverty. Strengthening oversight of the financial sector will also facilitate improved access to finance and private sector development.

  • Strengthening public service delivery. The Government of Tuvalu in its National Strategy for Sustainable Development (NSSD), or Te Kakeega III (TKIII), and the medium-term reform agenda identified improving service delivery in the health and education sectors as key objectives. Based on earlier analysis and sector strategic plans, the government is continuing reforms to improve allocative and technical efficiency as well as to ensure sector financing sustainability.

The teams expect to sustain the close cooperation going forward. Attachment 1 details the specific activities implemented and planned by the two teams over the period 2018 to 2020.

Tuvalu: Bank and Fund Implemented/Planned Activities in Macro-Critical Areas 2018-20

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Relations with the Asian Development Bank

A. Partnerships

The Asian Development Bank (ADB) has supported Tuvalu since 1993, approving loans and grants totaling $32.3 million and technical assistance projects worth $8.6 million, largely supporting public sector management, education, and maritime transport sectors. Cumulative disbursements to Tuvalu for lending and grants, financed by concessional ordinary capital resources, the Asian Development Fund, and other special funds amount to $15.5 million.

ADB’s approach and operations in Tuvalu are aligned to Tuvalu’s eighth national development plan, the National Strategy for Sustainable Development (Te Kakeega III), 2016–2020. ADB’s operational focus over the medium term supports the Te Kakeega III’s cross-cutting objectives of Infrastructure and Support Services, the Economy, Growth and Stability, Environment, and Climate Change. These strategic priorities are in line with ADB’s corporate strategy 2020.

ADB, together with development partners, remain committed to supporting the government’s roadmap for improving the management of public resources, exercising prudent public expenditure and fiscal management, strengthening corporate governance, and delivering better public services to the people of Tuvalu.

ADB participates as a team member of the Fund’s Article IV Consultation mission to Tuvalu, and liaises closely with the Pacific Financial Technical Assistance Centre (PFTAC) —particularly on macroeconomic management and fiscal conditions.

ADB observes the biannual meetings of the Tuvalu Trust Fund Board and cooperates with civil society organizations in Tuvalu to strengthen the effectiveness, quality, and sustainability of its services.

ADB is also committed to undertaking joint missions with development partners to improve coordination and lessen demands on country capacity.

B. ADB Supported Projects and Programs

From 2012 to 2015, the government embarked on a comprehensive reform program, with technical and financial assistance from ADB, the governments of Australia and New Zealand, and the World Bank. Collaborative efforts—aimed at improved governance, social development, education and human resources, and macroeconomic growth and stability—helped mitigate the social and economic impact of the Global Financial Crisis and protect Tuvalu against future fiscal shocks.

ADB provided grants in 2008, 2012, and 2015, totaling $7.6 million and supporting sound macroeconomic and fiscal management, with improved public enterprise performance. In 2015, ADB approved a $2 million grant, which completed the final set of program reforms. These reforms have helped enhance Tuvalu’s public procurement, private sector participation, long-term macroeconomic stability, and economic self-sufficiency. ADB, in collaboration with other development partners, is working towards a subsequent suite of reforms to sustain and build on key fiscal and public financial management measures, with further policy-based programs planned.

In 2016, ADB approved $11.8 million in grant financing for the Outer Island Maritime Infrastructure Project, which will improve the safety, efficiency, and sustainability of maritime transport between the capital, Funafuti, and the outer islands. The financing includes $3 million mobilized from the Disaster Response Facility, following Tropical Cyclone Pam in March 2015, and $500,000 from the Global Environment Facility.

In December 2017, ADB Board approved the Pacific Disaster Resilience Program, which includes Tuvalu, as well as Samoa and Tonga, providing a predictable source of post-disaster financing. Tuvalu set aside $1 million in country ADF grant and leveraged additional $2 million from the ADF (grant) regional pool, totaling $3 million. This will give Tuvalu access to immediate financing for disaster recovery and reconstruction activities.

As well as providing grants for reform programs, ADB has funded technical assistance to support public financial management, governance, education, and capacity development in Tuvalu. The country has also benefitted from regional technical assistance in economic management, audit capacity, aviation safety, private sector development, infrastructure planning, climate change, and country safeguards.

C. Future Directions

ADB’s Pacific Approach 2016–2020 serves as the country partnership strategy for the 11 small Pacific island countries, including Tuvalu. The country operations business plan 2018–2020 also takes a multi-country approach and supports the three-pronged strategy of the Pacific Approach: reducing costs, managing risks, and enabling value creation. ADB’s program of assistance to Tuvalu will focus on improving outer-island port facilities, enhancing information and communication technology, building disaster resilience, increasing electricity generation from renewable energy sources, and sustaining good fiscal management.

From January 2017, ADB introduced a base annual allocation of $6 million for small developing member countries, and this has boosted the scope for ADB’s investment in Tuvalu.

ADB is seen as a strategic partner to Tuvalu in supporting the development of pipeline projects to access grant financing from the Green Climate Fund. Regional approaches to information and communication technology, energy efficiency, renewable energy, climate change, and economic infrastructure will also be explored.

Relations with Pacific Financial Technical Assistance Centre (PFTAC)

(As of April 2018)

PFTAC has provided moderate levels of technical assistance (TA) to Tuvalu in recent years commensurate with national priorities and absorptive capacities of very small administrative agencies. In FY2018, Tuvalu was only a modest recipient of PFTAC resources, with four missions delivered in country comprising 41 days in the field plus an additional 20 days of remote support from PFTAC. Two statistics missions were delivered in Government Finance Statistics and External Sector Statistics, plus short missions focused on financial sector supervision and macroeconomic programming. While no fiscal missions visited Tuvalu, significant remote assistance was provided to update the PFM roadmap.

PFTAC’s TA strategy is guided by the APD regional strategy note and is planned within the results framework for the current PFTAC funding cycle. As such, a relatively large increase in support is planned in FY2019 with more than twice as much TA as FY2018 that will elevate Tuvalu to the sixth largest recipient of PFTAC TA. In-country missions are planned in all PFTAC programs, including the fiscal areas of revenue administration and PFM.

Public Financial Management. PFTAC provided support in 2017 to revise the PFM roadmap so that there was a focus on consolidating the gains that had been made since 2012. In 2014, PFTAC provided TA to rewrite Tuvalu’s Financial Instructions, and worked with Ministry of Finance officials in 2015 to conduct a PEFA Self-Assessment as a prelude to the revision of the PFM roadmap. Officials from Tuvalu have regularly attended PFTAC’s PFM workshops including the most recently delivered (with PFTAC’s Macro-Fiscal Advisor) on forecasting and managing fishing revenues. PFTAC anticipates continuing collaboration with the Australian funded Budget Advisor to assist Tuvalu staff in their development of medium-term budget planning and forecasting, with a focus on infrastructure development budgeting.

Fiscal revenue. The Pacific Technical Assistance Mechanism (PACTAM) recently ceased its support to Tuvalu’s Inland Revenue Department (IRD). Although this assistance contributed to increasing efficiencies, more needs to be done to further modernize the organization. A key challenge currently facing IRD is the inoperability of the IT system which is negatively impacting the management of core tax functions. This issue is currently being considered by PFTAC in conjunction with the Pacific Island Tax Administrators Association to develop a regional IT support model to assist small island countries that are experiencing similar problems. The authorities have requested a PFTAC review that will be provided in FY2019 and an assessment of current revenue administration performance to help identify future reform priorities.

Statistics. PFTAC resumed the provision of regular assistance on national accounts compilation, taking over from the SPC which has been doing this since 2010. PFTAC carried out national accounts TA missions in February 2015 and January 2016 to help incorporate major administrative and survey data sources, improve methods and build capacity. Capacity losses necessitated missions in March 2017 and April 2018 to provide supplementation to produce latest draft GDP estimates, though with secondary work to enhance data and methods, including rebasing preparations.

Balance of payments (BOP) and government finance statistics (GFS). Support on BOP and GFS was covered by the Japan Administered Account (JSA 1) for Selected IMF Activities, which formally concluded in October 2015. However, a PFTAC-funded mission is scheduled for FY2019 to build on HQ-funded TA provided in April 2018. PFTAC conducted a GFS mission during March 2018 and compiled a GFS time series, 2012-2016, for budgetary central government (BCG) based on the guidelines provided through the Government Finance Statistics Manual (GFSM) 2014. Updates were made to the national chart of accounts in line with the GFSM 2014 which will facilitate the continued compilation of GFS for the BCG. Expanding coverage to the rest of the general government was also addressed. As a small National Statistics Office, the Central Statistics Division is challenged with high work volumes, increasing staff turnover and no specific statistician assigned to a specialized area of work.

Macroeconomic analysis and forecasting. PFTAC provided its first bilateral TA in macroeconomic analysis and forecasting in September 2017. Tuvalu has a relatively strong medium-term fiscal framework (MTFF) and quality fiscal data compared to regional peers. PFTAC is assisting staff at the Ministry of Finance (MoF) to develop GDP forecasting methodology and enhance cash and revenue forecasting. Next steps are to incorporate the new GFS data into the Tuvalu medium-term fiscal framework (MTFF) and compile historical fishing data to improve forecasting and management of fishing revenues.

Financial Sector Supervision work in Tuvalu has focused on the establishment of a supervision development project. In late 2017, PFTAC confirmed with the Minister of Finance and his team to proceed with a supervision project recommended in a PFTAC TA report from November 2016. It comprises a supervision strategy and technical assistance plan to develop a supervision framework undertaken at three coordinated levels:

  • Supervision Expert – engaged by the MoF under the Banking Commission Act, to undertake direct off-site and on-site supervision of the National Bank of Tuvalu (NBT) and the Development Bank of Tuvalu (DBT) and to develop MFED supervisory capacity;

  • PFTAC – assist in developing supervisory infrastructure and training of MoF staff in all aspects of prudential supervision; and assist the Supervision Expert and the MoF with enhancing off-site and on-site supervision practices;

  • MFED – Ministry staff assigned to develop supervisory skills and experience, through working with the Supervision Expert on the direct off-site and on-site supervision of the NBT and the DBT (Supervision Team), undertaking training provided by PFTAC and the Supervision Expert, and working with PFTAC on developing the supervisory infrastructure.

The project has commenced with the MoF advertising for the position of Supervision Expert in March 2018, and initial work by the Supervision Expert and PFTAC on the on-site examination of the two banks in Tuvalu is scheduled to commence in mid-2018.

Statistical Issues

(As of April 10, 2018)

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Tuvalu: Table of Common Indicators Required for Surveillance

(As of April 19, 2018)

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Tuvalu uses the Australian dollar as its legal tender.

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.

Tuvalu does not have a monetary authority. Foreign assets of National Bank of Tuvalu and the Consolidated Investment Fund constitute the official reserves of Tuvalu.

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. Data on local government operations (kaupules) are not compiled but constitute a very small portion of general government operations. For analytical purposes, central government data are a close proxy to general government operations.

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).

Same Series

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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