IMF Ends 2023 Article IV Consultation in Tuvalu

Washington, DC - July 21, 2023: On July 10, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Tuvalu.

A successful vaccination strategy allowed Tuvalu to lift COVID containment measures at the end of 2022, but the economic cost of the pandemic has been significant. Real GDP growth was -4.3 percent in 2020, with at-the-border containment measures leading to delays in much-needed infrastructure projects. Activity has not fully recovered to its pre-pandemic level, with growth in 2021 at 1.8 percent and estimated at 0.7 percent for 2022. Headline inflation rose to 11.5 percent in 2022 in the context of higher global inflationary pressures, an increase in transportation costs around the world, and the increase in global food prices in the wake of Russia's invasion of Ukraine. Fiscal savings from the pandemic-related reduction in public investment were partly offset by elevated spending on non-capital items.

Growth is expected to accelerate as the lifting of COVID restrictions leads to the resumption of construction activity, shipping bottlenecks ease and the trade and hospitality sectors recover. Growth is projected at 3.9 percent in 2023. Inflation is expected to decline but remain elevated at 5.9 percent in 2023, on the back of still-high global inflation and the effects of the drought on domestically produced food. The fiscal balance is expected to deteriorate starting in 2023. Large increases in current expenditures in the 2023 budget and the resumption of infrastructure projects are expected to reduce the fiscal surplus to 1.1 percent of GDP, from 8.8 percent in 2022. Fiscal spending is supported by strong grant flows, including additional one-off flows, which are estimated at 40 percent of GDP in 2023.

Downside risks to the outlook are high. Delays in donor grants pose large risks to the fiscal outlook, and therefore also to the economy. As in other small economies, a loss of correspondent banking relationships would create severe balance of payments problems. The lack of effective financial supervision creates contingent risks for the government via the financial sector. Higher global commodity prices could result in higher inflation that leads to greater fiscal expenditure pressures. Natural disasters and climate change remain latent threats to the economy-including through their possible impact on fishing license revenues, potential human and physical capital losses and food and water security.

Executive Board Assessment[2]

Executive Directors broadly agreed with the staff appraisal. They commended the Tuvaluan authorities' effective containment policy and successful vaccine rollout which prevented significant negative health outcomes and supported reopening. They noted, however, that the economic cost of the pandemic has been high with growth significantly weaker than expected in the 2021 Article IV and those challenges compounded by inflationary pressures. Directors observed that risks to the outlook are high, with very high dependency on grants, weak financial supervision, fragile correspondent banking relationships, and vulnerability to climate change.

Directors noted that a gradual fiscal consolidation will be necessary to ensure sustainability as well as to build buffers against the many downside risks. They noted that the high risk of debt distress rating in the Debt Sustainability Analysis supports such a policy. Directors considered that consolidation can be achieved through rationalizing expenditures and mobilizing domestic revenues, while continued Public Financial Management reforms would support easier access to climate finance.

Directors encouraged measures to strengthen the financial sector. They stressed the importance of reforms to strengthen financial regulation and supervision and to support Tuvalu's connectivity to the global payments system. Directors are supportive of the authorities' plan to join the Asia-Pacific Group on Money Laundering and encourage the authorities to further implement AML/CFT reforms, including through technical assistance support. Directors noted that plans to digitalize the nation should be pursued in a way that does not exacerbate correspondent banking relationship pressures.

Directors noted the importance of structural reforms that would help diversify the economy, promote growth, and improve disaster resilience. They noted the importance of measures to increase trade integration to support the expansion of exports and increase diversification, while commending the authorities on the ratification of the PACER Plus agreement. Directors were encouraged by the authorities' plans to revamp the Disaster Risk Management Act and enforce building codes to enhance disaster resilience. Directors noted that a comprehensive strategy to ensure overseas scholarships align with domestic needs would promote human capital development.

Directors highlighted that strengthening capacity, including through technical assistance and training from the Fund and other international partners, would aid in implementing the necessary policy reforms. In this context, they emphasized the importance of initiatives to improve data collection and statistical capabilities.

It is expected that the next Article IV consultation with Tuvalu will be held on the current 24-month cycle.