Mission Concluding Statement 

Kiribati: Staff Concluding Statement of the 2023 Article IV Mission

February 8, 2023

Tarawa, Kiribati:

ECONOMIC OUTLOOK AND RISKS

1. The economy continued to expand after the removal of all COVID-19 restrictions in the second half of 2022. Due to supportive fiscal policies, the economy recovered strongly in 2021, with real GDP growing 7.9 percent from a contraction of 1.4 percent in 2020. However, COVID-19 lockdown restrictions imposed during the first half of 2022 limited mobility and further delayed large infrastructure projects. The removal of these restrictions and subsequent border reopening in August 2022 have boosted growth, but a severe drought affected the agricultural sector. As a result, real GDP growth in 2022 is estimated at 1.2 percent. Inflation has increased since the reopening and averaged 5.3 percent in 2022, mainly due to a recovery in domestic demand, supply shortages, and the surge in global commodity prices. The current account surplus is expected to turn into a deficit of 4 percent of GDP in 2022 on the back of higher import prices and lower fishing revenues.

2. The recovery is expected to continue in 2023. Real GDP is projected at 2.5 percent in 2023 as economic activities return to a more normal state with the resumption of large infrastructure projects and improved weather conditions. Over the medium term, real GDP growth is projected to converge to its historical average of 2 percent. Headline inflation is expected to remain elevated at 8.6 percent, due to the low base in the first half of 2022, and the delayed pass-through of normalizing global prices. While the current account is expected to return to a surplus of 9 percent of GDP in 2023, the surplus will remain below the historical average, reflecting a projected increase in imports required for the resumption of infrastructure projects.

3. Risks to the outlook are mainly on the downside. External risks include an intensification of Russia’s war in Ukraine resulting in food and fuel price shocks, and global economic slowdown—all of which could have spillover effects on Kiribati. Deepening geo-economic fragmentation and geopolitical tensions could continue to adversely impact inflation through supply disruptions. Prolonged global financial market volatility could affect the expected return on the Revenue Equalization Reserve Fund (RERF) and the Kiribati Provident Fund (KPF), putting pressure on public finances. Climate change remains a constant risk that could further threaten fishing revenues and adversely impact economic growth, with the frequency and severity of climate events aggravated by time. Meanwhile, the reopening of the Phoenix Islands Protected Area (PIPA), if managed sustainably, could boost the fishery sector in the medium-term.

FISCAL POLICIES

4. As Kiribati’s increased recurrent spending is mainly financed by volatile fishing revenues and budget grants, fiscal consolidation would be necessary to reduce fiscal risks. The fiscal balance switched to a deficit in 2020 and widened to an estimated deficit of 20 percent in 2022, as recurrent spending increased while fishing revenues continued to decline. The 2023 budget maintains existing social protection spending while introducing new leave grants for private sector employees to incentivize private sector employment. Under the staff’s baseline scenario which assumes a gradual recovery in fishing revenues in 2023, the deficit is projected to be about 13 percent of GDP. Fiscal consolidation can be achieved by rationalizing the copra subsidy, improving the targeting of social protection spending by identifying those eligible for unemployment benefits, and improving the efficiency of the social protection delivery systems. On the revenue side, implementing the recently introduced new Income Tax Bill, eliminating tax exemptions for some SOEs, and increasing the excise tax on tobacco and alcoholic beverages will raise much needed resources to help finance Kiribati’s development goals.

5. Fiscal sustainability could be further reinforced by formulation of a sustainable medium-term fiscal framework. Such a framework would help to better manage volatile components of the budget and promote recurrent expenditure stability. It should integrate the rules-based withdrawals from the RERF and include an explicit provision to cover the costs of climate change adaptation. The authorities should finalize the drafting of the Sovereign Wealth Fund Act to strengthen the governance and accountability of the RERF.

6. Improving public financial management is critical for good governance and achieving development objectives. The authorities’ efforts to implement the Integrated Financial Management Information System (IFMIS) for budget execution and strengthening cashflow management are commendable and should continue. Similarly, the publication of the Fiscal Reporting Policy, which sets out new standards for regular public reporting on main fiscal items is a welcome step, but more needs to be done. In line with past IMF advice and areas of focus of development partners, staff recommend finalizing the drafting of an updated Public Financial Management Act; developing more credible budget projections by improving fishing revenue forecasts; publishing fiscal reports on a more regular basis; executing effective controls over cash balances; and improving procurement controls.

7. To further reduce fiscal pressures, it is essential to place SOEs on a commercial and sustainable footing. The elevated global energy prices have exacerbated financial difficulties faced by some SOEs, reinforcing the importance of recalibrating tariffs, and reviewing the economic tradeoffs involved in improving SOEs’ financial viability while protecting the most vulnerable. The SOE monitoring unit is making progress in strengthening SOE oversight and should continue to build capacity in analyzing and monitoring the activities, risks, and performance of SOEs. Progress is needed to ensure that SOEs improve their financial management and publish their audited financial statements in a timely manner, upon which a reform of the SOE subsidy system in the medium-term could be built. There is also a need to finalize a formal dividend policy to ensure that SOEs comply with their dividend payment obligations to the authorities. Despite challenges, efforts to divest and outsource SOE activities should be explored.

STRUCTUAL REFORMS

8. Structural reforms focused on boosting export competitiveness, private sector investment, and inclusive growth are key to raising Kiribati’s standard of living and achieving the Kiribati 20-year vision. Key areas of reforms include:

• Financial sector: The promulgation of the Financial Supervisory Authority of Kiribati Act (2021) and Kiribati Financial Institutions Act (2021) are an important milestone to safeguard the financial sector. The next step will be establishing an independent supervisor of financial institutions with adequate resources for effective regulation and supervision of financial institutions.
• Export quality and diversification: Kiribati has potential to upgrade quality within the existing export sectors including expanding tuna processing, establishing “tuna hubs”, and packaging and upgrading copra production to coconut oil. Rationalizing the copra subsidy or reforming the support scheme in the outer islands could provide incentives to diversify to other products, such as seaweed and aquaculture. Investments in internet connectivity and infrastructure should continue apace to boost the information and communication technology and tourism industries as well as improve the delivery of government services.
• Environment and fishing: The passages of the Environment Act and the new Fisheries Act in 2021 would help preserve the environment while allowing Kiribati to continue to utilize natural resources. The next step would be developing regulations and strengthening monitoring capacity to ensure that these legislations are properly enforced. The plan to reopen PIPA to commercial fishing should be carefully designed with a fully developed marine spatial plan to ensure the sustainability of fishing and preserve marine biodiversity.
• Human capital: Despite the substantial progress in primary and early childhood education, the share of young population that have completed upper secondary education remains low. Expanding technical vocational education and training is a key measure to provide workers with skills and training for future employment and overseas employment.
• Anti-corruption: The current government has recently established a Leadership Commission to investigate complaints against senior officials and set up an anti-corruption unit within the Public Service Office. Progress has been made in investigating abuse of power; however, more capacity and enforcement powers are needed to enhance the role of these agencies.

CAPACITY DEVELOPMENT

9. Improving the quality, timeliness, and coverage of statistics should be a high priority. The authorities need to strengthen the institutional capacity to produce high-quality national accounts, government finance statistics, and financial sector data in a timely manner to support sound policy management. It is encouraging that the authorities plan to implement the IMF’s Enhanced General Data Dissemination System (e-GDDS) by publishing economic data on a National Summary Data Page, which will help improve the availability of timely statistics.

10. Kiribati strives to make progress in implementing economic reforms to boost growth and income. The government is highly engaged with the IMF and other development partners, and the IMF stands ready to continue to support the government’s reform efforts through policy advice and capacity development.

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The mission would like to thank the authorities and other stakeholders for their warm hospitality, cooperation, and open and constructive discussions.