20240509-IMF-Kiribati_2024_Article_IV_Consultation-Press_Release_Staff_Report_and_Statement_by_the_Executive_Director_for_Kiribati_86页_4mb

Summary of the 2024 Article IV Consultation with Kiribati

Core Content

The IMF conducted a 2024 Article IV consultation with Kiribati, resulting in the release of a Press Release, Staff Report, and Statement by the Executive Director. The consultation aimed to assess the country's economic developments, policies, and risks, with a focus on fiscal sustainability, growth, and resilience in the face of climate change and global shocks.

Main Policy Recommendations

• Fiscal Consolidation: Initiate an ambitious fiscal consolidation effort by scaling back recurrent spending and strengthening the fiscal policy framework.
• Sovereign Wealth Fund (RERF) Reform: Reform the withdrawal rule of the Revenue Equalization Reserve Fund (RERF) to benefit both current and future generations while preserving its real value.
• Revenue Mobilization: Improve tax administration, registration, and compliance to generate more stable and sustainable fiscal resources.
• Institutional Capacity: Enhance institutional and administrative capacity by ensuring the social safety net is well-targeted and efficient, and continue reforms on public financial management (PFM) to improve efficiency and fiscal governance.
• State-Owned Enterprises (SOEs): Strengthen the accountability of SOEs, enhance their commercial mandate, and ensure their finances are on a sustainable footing.
• Structural Reforms: Implement structural reforms to increase private sector employment and investment, improve export competitiveness, close infrastructure and human capital gaps, expand financial access, better utilize natural resources, and strengthen institutions and governance.
• Climate Adaptation: Invest in climate adaptation and leverage climate finance to address the risks posed by climate change.
• Data Quality: Continue capacity development to produce high-quality statistics in a timely manner to support data-driven policy formulation.

Key Economic Indicators and Outlook

• Growth: Real GDP growth improved to 4.2% in 2023 from 3.9% in 2022, and is projected at 5.8% in 2024, primarily due to increased consumption from civil service wage increases. Over the medium term, growth is expected to moderate to around 2%.
• Inflation: Headline inflation peaked at 25.1% in 2023 but has since decelerated, reaching -2.1% in December 2023. It is projected to average 4.5% in 2024 and gradually converge to slightly below 2% over the medium term.
• Current Account: The current account is estimated to have shifted to a surplus of 10.2% of GDP in 2023, supported by increased remittances and fishing license fees. The surplus is expected to remain below its historical average in the medium term.
• Fiscal Deficit: The overall fiscal deficit is projected to widen to 22% of GDP in 2024, due to increased civil service wages and development spending. The domestic recurrent deficit is expected to increase from 47% to 51% of GDP in 2023.
• Public Debt: Public debt reached 12% of GDP in 2023, mainly composed of external debt to the Asian Development Bank (ADB) and Taiwan Province of China.
• Cash Reserve Buffer: The cash reserve buffer stood at 46% of GDP in 2023, down from 86% in 2019, due to increased spending.
• RERF: The RERF reached 330% of GDP at end-2023, with a 16.4% annual return, but its value could be affected by global financial volatility and climate change.

Risks to the Outlook

• Downside Risks: Regional conflicts, geo-economic fragmentation, and a global slowdown could reduce fishing license prices and affect RERF returns.
• Commodity Volatility: Commodity price fluctuations could reignite inflationary pressures and weaken the current account.
• Climate Change: Climate change poses a continuous threat to the economy, particularly through its impact on fishing revenue, food, and water security.
• Domestic Risks: Increased demand-driven inflation could result from the civil service wage increase spilling over to private sector salaries.

Authorities' Views

• The authorities agree with the IMF's assessment, emphasizing the impact of external factors on economic performance and risks.
• They acknowledge the need for fiscal consolidation and structural reforms to ensure long-term sustainability and resilience.
• They highlight the importance of social protection payments and remittances in boosting purchasing power and economic activity.
• They note that the recent civil service wage increase is long overdue, aligns with a performance-based job evaluation framework, and is essential for retaining staff.
• They also stress that loss-making SOEs will not receive subsidies for salary increases.

Additional Key Information

• Kiribati is a small island economy highly vulnerable to climate change and global shocks.
• The country's economy is state-dominated, with limited private sector development due to infrastructure gaps and reliance on imports.
• The IMF has provided significant capacity development support, including technical assistance in revenue administration, PFM, and the financial sector.
• Data quality and statistical capacity remain critical challenges, with ongoing efforts to improve national accounts and government finance statistics.
• The 2024 budget includes a 38% increase in civil service wages, equivalent to 9.4% of GDP, and plans to withdraw AUD80 million from the RERF to finance the increase.