IMF Executive Board Concludes 2018 Article IV Consultation with Tuvalu | WPN World People News

On June 22, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Tuvalu.

Tuvalu has maintained macroeconomic stability. 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. Reserve coverage is broadly sufficient at 9 months of imports at end-2017. 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 macroeconomic outlook is broadly positive. 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, 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. Reserves are expected to remain sufficient at 10 months of imports at end-2018. The fiscal balance is projected to turn into a surplus of 6 percent of GDP in 2018, on higher fishing revenue.

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 also made progress in strengthening climate change resilience.

Nonetheless, the economy remains susceptible to downside risks, reflecting climate change and natural disasters, volatile fishing revenues, reliance on external grants, weak state-owned enterprises, and limited financial supervision.

Executive Board Assessment

Executive Directors commended the authorities for the improved macroeconomic performance and for their work on strengthening climate change resilience. Directors welcomed the broadly positive outlook but noted that Tuvalu remains highly susceptible to external shocks, especially to climate change effects and uncertainties stemming from volatile fishing revenues and reliance on grants. The country’s geographical remoteness, small size, and limited infrastructure pose additional challenges. Directors emphasized that strong commitment to sound policies and structural reforms is necessary to build resilience to shocks and generate sustainable growth.

Directors welcomed the progress made in promoting climate change resilience, including securing access to the Green Climate Fund. Going forward, Directors highlighted the importance of ensuring continuous access to multilateral climate change schemes. They noted that the priorities are implementing reforms under the PFM Roadmap, exploring multilateral risk‑sharing mechanisms, and improving the financial management of the Tuvalu Survival Fund.

Directors underscored that strengthening the medium‑term fiscal framework is key to macroeconomic stability. They emphasized that undertaking gradual fiscal consolidation should help contain fiscal and debt pressures, and build fiscal buffers. In this context, they encouraged the authorities to mobilize tax revenue, eliminate tax exemptions, and contain current spending. Prioritizing capital spending and strengthening fishing revenue forecasts will also be important. Directors also encouraged accelerating reforms of state‑owned enterprises, including raising electricity tariffs and linking them to oil price changes.

Directors emphasized that greater financial sector oversight will help tackle the high non‑performing loans, increase financial sector efficiency, and promote financial inclusion. They stressed the need for a financial supervisory framework covering the two banks and the pension fund. Directors called for measures to improve credit risk management of the Development Bank, enforce existing financial regulations, and develop bankruptcy legislation.

Directors emphasized that structural reforms aimed at increasing potential output and diversifying the growth base are critical. They encouraged the authorities to give priority to stimulating private sector development by improving the business environment. Directors called for stepped up efforts to strengthen human capital, develop tourism and goods exports, and enhance water resource management. They noted that continued action to enhance macroeconomic statistics will assist in policy formulation and agreed that technical assistance from the Fund will be helpful.

Source: International Monetary Fund