IMF Executive Board Concludes 2016 Article IV Consultation with Kiribati | WPN World People News

On September 7, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kiribati.

Kiribati’s recent economic performance has been strong. Growth is estimated to have reached 3.5 percent in 2015, supported by record high fishing revenue, donor financed infrastructure projects and reconstruction in the aftermath of cyclone Pam. Growth is projected to moderate somewhat to around 3 percent this year, while inflation remains subdued owing to low food and commodity prices.

The fiscal position has improved markedly in recent years. High fishing revenue contributed to a recurrent fiscal balance of almost 50 percent of GDP in 2015, more than offsetting the increase in government recurrent spending of 13 percent. Public debt increased from less than 10 percent of GDP in 2014 to 23 percent of GDP at the end of 2015 owing to the commencement of the Bonriki International Airport repair and upgrade project, financed by development partner concessional loans. The current account surplus reached 40 percent of GDP in 2015, with fishing revenue and a recovery in seamen remittances more than offsetting elevated imports related to donor financed projects.

Growth is projected to weaken further over the medium term with the projected decline in fishing revenue and the completion of large infrastructure projects. Climate change can have an impact on long-run prospects given the country’s low elevation. Global financial market turmoil may feed into the domestic economy through the exposure to foreign assets of the Revenue Equalization Reserve Fund (RERF) and the Kiribati Provident Fund (KPF), the country’s two main savings vehicles.

Executive Board Assessment

Executive Directors welcomed the strengthening of Kiribati’s current account and the balance of the Revenue Equalization Reserve Fund (RERF), and commended the good progress on structural reforms. They observed, however, that Kiribati faces development challenges stemming from its geographic location, the lack of economies of scale, and its vulnerability to climate change. Directors emphasized that building fiscal buffers and continued support from development partners will be important to mitigate the risks to economic growth.

Directors underscored that prudent management of public resources in the context of a medium-term fiscal framework remains the key policy priority. They considered a balanced structural budget an appropriate fiscal anchor in light of the projected decline in fishing revenue. Directors encouraged the authorities to formulate a target-level and a rule-based withdrawal mechanism for the RERF, which would enhance its role as an endowment fund for both current and future generations. They also underscored the importance of further enhancing tax collection and public financial management to facilitate the needed growth-friendly fiscal adjustment.

Directors welcomed the authorities’ efforts to improve Kiribati’s resilience to climate change. They highlighted that explicitly recognizing climate change adaptation costs and infrastructure maintenance needs in the budget would help ensure adequate provision of resources, including from development partners.

Directors noted the need to enhance financial deepening and address deficiencies in financial supervision. They encouraged steps to facilitate private sector access to credit while safeguarding the long-run sustainability of public financial institutions, given their critical role in the financial sector.

Directors emphasized that private sector development is vital to achieving more sustained and inclusive growth. They commended the progress on state-owned enterprise reforms and encouraged the authorities to maintain the momentum. Directors recommended further improvement in infrastructure, including air transportation and shipping services, enhancing the business climate by streamlining business licensing processes and improving land registration, as well as investing in human capital to better harness Kiribati’s resources.

Source: International Monetary Fund