Washington, DC: An International Monetary Fund (IMF) team, led by Ms. Yinqiu Lu, visited Tarawa, Kiribati for the 2024 Article IV Consultation during February 9–21, 2024. The discussions with the authorities covered recent developments, the economic outlook, and future policy priorities. At the end of the visit, Ms. Lu issued the following statement:
"Kiribati's economy rebounded strongly after the pandemic but is facing heightened risks. Economic growth is estimated to have reached 4.2 percent in 2023 after the removal of all COVID-19 restrictions in the second half of 2022. Inflation decelerated from its recent peak to -2.1 percent year-on-year in December 2023, driven by the moderation of global commodity prices, improved supply-side conditions, and base effects. The current account is estimated to have switched back to a surplus of 10.2 percent of GDP in 2023, buoyed by a resurgence of fishing license fees. The balance of Kiribati's sovereign wealth fund, i.e., the Revenue Equalization Reserve Fund (RERF), reached 330 percent of GDP at end-2023 after posting a strong annual return of 16.4 percent.
"Growth is expected to accelerate to 5.8 percent in 2024, primarily driven by higher consumption following a 38 percent increase in civil service wages. Average inflation is projected to be 4.5 percent in 2024. The fiscal deficit is expected to widen to 22 percent of GDP in 2024 (accounting for RERF withdrawals as a financing item) from 1 percent in 2023, largely due to the wage increase and a decline in budget support from development partners largely due to the operation cycles of some development partners. Risks to the outlook are tilted to the downside, and include an escalation or spread of regional conflicts, deepening geo-economic fragmentation, an abrupt global slowdown, commodity price volatility, and risks from climate change.
"Promptly initiating fiscal consolidation and strengthening the fiscal policy framework is needed to help safeguard sustainability. Fiscal consolidation could be achieved by rationalizing recurrent spending and improving the targeting and efficiency of social protection payments. While the new Income Tax Act is a welcome effort, reassessing tax exemptions for state-owned enterprises, increasing the excise tax rates on tobacco products, alcoholic beverages, and sugary drinks, and introducing excise taxes on kava will raise much needed resources to help finance Kiribati's development goals. Formulating a sustainable fiscal framework to better manage volatile, exogenous components of the budget (fishing revenues and grants) will help promote fiscal discipline, and create space to support climate change adaptation efforts. Promptly reforming the withdrawal rule of the RERF would help preserve its value for future generations.
"Fiscal sustainability could be further reinforced by enhancing institutional and administrative capacity. The authorities' efforts to implement the Integrated Financial Management Information System (IFMIS) for budget execution are commendable and should continue. An improvement in the processes for tax administration, registration, and compliance is needed to maximize the benefit from the recent tax policy reforms. Public financial management (PFM) could be further improved by finalizing the PFM roadmap, updating the PFM Act and RERF Act, publishing the fisheries report on a more regular basis, and executing effective controls over cash balances. Continued efforts are needed to strengthen the accountability, governance, and oversight of SOEs, enhancing their commercial mandate and putting their finances in sustainable footing.
"Accelerating structural reforms remains critical to Kiribati's overall development.Several new pieces of legislation related to the financial sector, environment, and fishing are commendable, and effective implementation of these reforms will support a sustainable, inclusive, and green economy. Continued efforts are needed to raise private sector employment and investment, upgrade export quality and diversification, improve infrastructure, and nurture human capital. Investments in adaptation and leveraging climate finance are critical to tackling climate risks. Improving the quality, timeliness, and coverage of statistics would help support sound policy management.
"We would like to thank the authorities and other stakeholders for productive discussions and engagement. The IMF stands ready to continue to support the government's reform efforts through policy advice and capacity development."
