Our Tuvaluan authorities wish to express their appreciation to the IMF team for the candid and constructive discussions they had during the Article IV mission and for the policy advice they offered. Tuvalu has the smallest economy of any member country and a population of only 11,000. Its atolls have a total area of 26 square kilometers and there is limited arable land available for agricultural purposes. The average height of the islands is only 2 meters above sea level. The remoteness of the country, its limited business opportunities and narrow production base, and its vulnerability to natural disasters give rise to development challenges. Economic activities are necessarily dominated by the public sector, including state owned enterprises, and tourism is small and underdeveloped. Despite these challenges, the authorities are committed to pushing forward a strong development agenda, and enhancing economic resilience with continued assistance from the international community.

The authorities agree with the outlook and risks presented in the staff report. The Tuvaluan economy is expected to pick up in the near term on the back of large capital projects undertaken by the government with assistance from development partners. Inflation is expected to moderate from higher levels in 2017 to 4 percent in 2018, due mainly to falling international food prices. Most of the risks, however, are on the downside. Tuvalu regularly experiences natural disasters and is dependent on foreign aid. Tuvaluan households also consume many imported items and the country is susceptible to international food and oil price shocks. Fishing revenues – which make up around half the revenue in the budget – are volatile, giving rise to uncertainties in fiscal planning.

The authorities remain committed to sound fiscal management, alongside necessary investments in development and social programs. There is no central bank in Tuvalu and macroeconomic management depends on fiscal policy. Tuvalu has maintained fiscal surpluses over recent years, except in 2017 when there were large one-off capital expenditures associated with the construction of facilities to host Pacific leaders’ meetings. Expanding the revenue base is an ongoing priority. The Ministry of Finance and Economic Planning has started to strengthen its coordination with the Ministry of Natural Resource to improve interagency information on fisheries revenue for budget planning purposes. Given the country’s narrow revenue base, the authorities are grateful to development partners for providing general budget support as well as funding for specific projects.

The authorities have aligned their expenditure priorities with Te Kakeega III – the National Strategy for Sustainable Development 2016-2020 – which is itself aligned with the UN Sustainable Development Agenda. The key priority areas in this strategy are health and education, infrastructure, transport and communication, climate change and support to islands development. The most recent budget aimed to provide greater education opportunities for Tuvaluans by increasing funding for government scholarships, early childhood education and an e-learning system for students across Tuvalu. It also provided for ten new doctors at Princess Margaret Hospital. The Tuvalu overseas medical treatment scheme, though costly, is an important service for the elderly population. However, the authorities are determined to reduce the cost of this scheme and have strengthened the screening process and explored cheaper alternative overseas arrangements. Despite expenditure commitments, the authorities are determined to build fiscal buffers, including through the country’s trust funds. The authorities are aiming to increase the Tuvalu Trust Fund to A$200 million from the current level of A$175 million through allocations from the annual budget and unexpected windfall fisheries income.

Given the island nation’s vulnerability, climate change adaptation and resilience measures are a key priority. The World Bank has estimated that building resilience against climate change will require Tuvalu to invest annually around 2 percent of GDP. In 2015, the government established the Tuvalu Survival Fund to respond to climate change impacts and disasters, and have made contributions to this Fund from the annual budget. The authorities also welcome the US$36 million assistance from the Green Climate Fund to finance the Tuvalu Coastal Adaptation Project over a period of seven years. To raise community awareness about climate change effects, the authorities are mainstreaming climate change as a subject in the school curriculum.

The authorities agree with staff on the need to strengthen the banking sector’s supervisory framework and credit intermediation. The authorities, with the support of Pacific Financial Technical Assistance Centre (PFTAC), will develop a supervisory capacity within the Ministry of Finance and Economic Planning with the direct support of an externally-contracted supervision expert. PFTAC will also support the supervision project by providing training and institutional capacity development on supervision framework tools and processes. The Development Bank of Tuvalu is currently working on lending and policy manuals to guide its business operations, and is administering a government-backed small business guarantee scheme.

Ongoing reforms are aimed at improving public sector efficiency. The authorities have achieved some of the planned activities in the Public Financial Management Reform Roadmap Matrix 2017-2021 and will continue to attend to outstanding tasks. They will also continue to strengthen macroeconomic statistics. However, limited capacity and turnover of personnel is a major constraining factor. The authorities are pleased with the help they have received from development partners and would welcome more technical assistance to help with structural and legislative reforms and with macroeconomic data provision.