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International Monetary Fund. Asia and Pacific Dept

, underpinned by further increases in infrastructure spending. Inflation is expected to rise gradually to around 2 percent over the medium term. The fiscal surplus is projected to narrow further to 1¾ percent of GDP in FY2018 and turn into a deficit of 1½ percent by FY2023, as government spending is expected to continue growing strongly while fishing license revenues remain stable in nominal terms. The RMI’s only domestic commercial bank is at risk of losing its last U.S. dollar correspondent banking relationship (CBR) with a U.S.-based bank as a result of heightened due

International Monetary Fund. Asia and Pacific Dept
KEY ISSUES Kiribati’s key economic challenges are to reduce large structural fiscal imbalances and increase growth and employment opportunities, while facing obstacles posed by remoteness, lack of scale, vulnerabilities to external shocks and climate change. The significant fiscal consolidation envisaged by the authorities will help stabilize Kiribati’s sovereign wealth fund (the Revenue Equalization Reserve Fund, or RERF) in real per capita terms. This stabilization effort would also require that fishing license fees remain close to recent exceptionally high levels, with windfall incomes relative to the conservative budgeted baseline saved. In the event of weaker fishing license fee revenues, a more ambitious adjustment in the non-fishing budget would be needed. The small private sector share in the economy due to remoteness and weaknesses in business climate constrains growth and puts strain on public finances. Continuing the fiscal and structural reform program is essential. Climate change brings additional risks and fiscal costs. Main Recommendations: • Continue fiscal reforms designed to deliver fiscal consolidation and improved public financial management. Seek to maintain fishing license fees above the current conservative budget baseline, with windfalls saved to strengthen RERF balances. If fishing license fee windfalls cannot be sustained, explore other options to further strengthen fiscal balances. • Continue reforms of state-owned enterprises (SOEs). • Facilitate growth through improving the business climate and infrastructure, including through streamlining government services.
International Monetary Fund. Asia and Pacific Dept

balance improved slightly to 4.5 percent of GDP in FY2017 on strong fishing license revenues.

International Monetary Fund

fishing, and improving governance (such as through greater transparency or involvement of an independent committee). Options for stabilizing the revenue flows include efforts to negotiate longer license periods, and the use of currency hedging. Adoption of a medium-term budget framework would help smooth expenditure based on the trend fishing license revenues. Chapter IV discusses recent developments and the outlook for remittances to Kiribati , which are another important source of external revenue and bring important economic benefits (such as reducing poverty and

International Monetary Fund. Asia and Pacific Dept

line with the trade balance and higher project imports, while benefiting from exceptionally high fishing license revenue. The overall external balance thus recorded a substantial surplus equivalent to nearly 22 percent of GDP and reflected in the replenishment of the Revenue Equalization Reserve Fund (RERF). The high fishing license revenues in 2013 also resulted in an overall budget surplus of 10 percent of GDP despite a substantial increase of capital expenditure. Tax revenue continued to lag, however, as underperforming state-owned enterprises (SOEs) and tax

International Monetary Fund. Asia and Pacific Dept

BOXES 1. Tuvalu Coastal Adaptation Project (TCAP) 2. Drivers for Fishing License Revenue FIGURES 1. Setting in a Cross-Country Context 2. Economic Developments 3. Fiscal Developments TABLES 1. Selected Economic Indicators, 2015–19 2. Medium-Term Baseline Scenario, 2015–23 3. Summary of General Government Operations, 2013–23 4. Balance of Payments, 2013–23 5. Assets and Liabilities of Financial Institutions, 2012–17 APPENDICES I. Risk Assessment Matrix II. External Sector Assessment III. Tuvalu Trust Fund and Tuvalu

International Monetary Fund

—Supporting Private Sector Growth C. Safeguarding Financial Sector Stability ADDRESSING EXTERNAL COMPETITIVENESS AND SAFEGUARDING EXTERNAL STABILITY STAFF APPRAISAL BOXES 1. Poverty Trends in Kiribati 2. The Impact of High Fuel and Food Prices 3. Prospects for Fishing License Revenues 4. Financial Sector Developments: The Provident Fund and Kiribati Development Bank FIGURES 1. The Setting in a Cross-Country Context 2. Kiribati: From Crisis to Recovery 3. The Medium-term Outlook TABLES 1. Millennium Development Goals, 1990–2009 2. Selected Economic

International Monetary Fund. Asia and Pacific Dept

to external shocks from volatile fishing license revenues and financial exposure of its sovereign wealth and pension funds; c) Private sector involvement in the economy is small due to remoteness and weak business climate. This constrains growth and puts strain on public finances. Key Policy Recommendations : ➢ Adhere to a fiscal policy framework that achieves a sustainable drawdown of the sovereign wealth fund in the long run. To implement such a policy framework, it is essential to: a) follow up with tax reform and strengthen tax compliance; b) strengthen

International Monetary Fund. Asia and Pacific Dept

particular, to reduce overall government subsidies and make it clear where remaining subsidies exist as a result of specific community service obligations. An important step has been the establishment of an SOE monitoring unit in the Ministry of Finance, which will begin by focusing on four SOEs – the airline, shipping, copra processing, and energy companies – to improve their performance. RMI receives a considerable amount of revenue from fishing license fees and also gets income from the provision of offshore corporate services and ship registration. Fishing license

International Monetary Fund. Asia and Pacific Dept

A. Avoiding Ri