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IMF Executive Board Concludes 2017 Article IV Consultation with Kiribati

          On December 8, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Kiribati, and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.[2]
          Kiribati's economic fundamentals have strengthened in recent years. Strong fishing revenue improved the fiscal position, strengthened the current account, and boosted business confidence. After registering a double-digit rate in 2015, real GDP growth declined to 1.1 percent in 2016, but is projected to pick up to about 3 percent this year driven by construction and wholesale and retail trade. Inflation has remained subdued in line with the prices of imported goods. With several donor-financed infrastructure projects in the pipeline and fishing revenue projected to remain robust over the medium term, economic prospects are broadly favorable.
          The authorities have made commendable progress in structural reforms. They have implemented important reforms to improve the governance and management of the Revenue Equalization Reserve Fund (RERF) and replenished the fund from the cash reserves. Concrete steps have been taken to address the funding gap of the Kiribati Provident Fund (KPF), improve connectivity and transportation services, and enhance access to global climate change financing. Kiribati's participation in overseas labor mobility schemes also increased, albeit from a low base.
          Despite a favorable economic outlook, risks to near-term growth are substantial and skewed to the downside. A change of the climate cycle could imply large uncertainties for fishing revenue. Potential global financial market turmoil can feed into the domestic economy through the exposure of the Revenue Equalization Reserve Fund (RERF) and the KPF, the country's two major savings vehicles. Given Kiribati's high reliance on imported goods, commodity price shocks and exchange rate volatility could swing imports in ways hard to accommodate. Support from development partners is essential to mitigate these downside risks. There are also upside risks to the long-run outlook if the planned infrastructure investment has stronger-than-expected impact on potential growth.
          Executive Board Assessment
          In concluding the 2017 Article IV consultation with Kiribati, Executive Directors endorsed the staff's appraisal, as follows:
          Kiribati's economic fundamentals have strengthened in recent years. After registering a double-digit rate in 2015, real GDP growth declined to 1.1 percent in 2016, and is projected to pick up to about 3 percent this year driven by construction and wholesale and retail trade. Inflation has remained subdued in line with the prices of imported goods. With several donor-financed infrastructure projects in the pipeline and fishing revenue projected to remain robust over the medium term, economic prospects are broadly favorable. Risks to near-term growth, however, are substantial and skewed to the downside particularly related to the large volatility of fishing revenue.
          The authorities have made commendable progress on structural reforms. They have implemented important reforms to improve the governance and management of the RERF and replenished the fund from the cash reserves. Concrete steps have been taken to address the funding gap of the Kiribati Provident Fund (KPF), improve connectivity and transportation services and enhance access to global climate change financing. Kiribati's participation in overseas labor mobility schemes also increased, albeit from a low base.
          Prudent management of public resources remains the key policy priority, especially against the considerable long run spending pressure. A strengthened fiscal policy framework would entail setting rolling, multi-year expenditure paths consistent with a balanced budget target in the medium term and a plan to institutionalize the RERF as an endowment fund, including by implementing a rule-based withdrawal mechanism.
          Strengthening macroeconomic management capacity is critical for the effective implementation of the authorities' development strategy. To this end, the authorities should push forward structural fiscal reforms by addressing weakness in tax administration and public financial management, as well as improving the institutional framework for public investment. Other priorities include enhancing climate change adaptation capacity, establishing a comprehensive banking regulation and supervision framework, and better aligning the investment strategies of the public funds with their institutional roles.
          A more dynamic private sector would help the implementation of the authorities' growth strategy and ensure inclusive economic prosperity for the nation. Continued investment in the country's soft infrastructure is essential to create an enabling environment for private sector growth and employment. These should include enhancing business environment by promoting better infrastructure and connectivity, improving business registration and licensing, and enhancing financial deepening.
          Maintaining the momentum of SOE reforms is important to support private sector growth. The authorities should continue SOE divestment and outsourcing, as well as further strengthen the commercial mandate of the SOEs to promote operationally and financially sustainable delivery of public services. To create a level playing field, the VAT exemptions for SOEs should be phased out.
          Building human capital especially through vocational and technical training would help Kiribati harness its natural resources. There is scope in further developing specialized and certified education in marine services and hospitality, increasing scholarship offerings for local students, and promoting Kiribati's participation in overseas labor mobility programs.
 
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when it is agreed by the Board that a proposal can be considered without convening formal discussions.