IMF Ends 2023 Article IV Kiribati Consultation

Washington, DC: 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.

The economy continued to expand after the removal of all COVID‑19 restrictions in the second half of 2022. Due to supportive fiscal policies, the economy recovered strongly in 2021, with real GDP growing 7.9 percent from a contraction of 1.4 percent in 2020. However, a domestic outbreak of COVID‑19 and the subsequent restrictions imposed during the first half of 2022 limited mobility and further delayed large infrastructure projects. The removal of these restrictions and subsequent border reopening in August 2022 have boosted growth. However, a severe drought affected the agricultural sector, and real GDP growth in 2022 is estimated to have slowed to 1.2 percent. Inflation has increased since the reopening and averaged 5.3 percent in 2022, mainly due to a recovery in domestic demand, supply shortages, and elevated commodity prices and freight costs. The current account is expected to swing from a surplus to a deficit of 4 percent of GDP in 2022 on the back of higher import prices and lower fishing revenues.

The recovery is expected to gain momentum in 2023. Real GDP growth is projected at 2.5 percent in 2023, as economic activities return to a more normal state with the resumption of large infrastructure projects and improved weather conditions. In the medium term, real GDP growth is projected to converge to its historical average of 2 percent. Meanwhile, headline inflation is projected to increase to 8.6 percent in 2023, due to the low base in the first half of 2022, and the delayed pass‑through of normalizing global commodity prices and freight costs. While the current account is expected to return to a surplus of 8 percent of GDP in 2023, the surplus will remain below the historical average, reflecting a projected increase in imports required for the resumption of infrastructure projects.

Executive Board Assessment[2]

In concluding the 2023 Article IV consultation discussions with Kiribati, Executive Directors endorsed the staff's appraisal, as follows:

Kiribati's economy continued to expand after the removal of all COVID‑19 restrictions in the second half of 2022. After registering a strong rebound in 2021, real GDP growth is estimated to have decelerated to 1.2 percent in 2022 mainly due to a domestic outbreak of COVID‑19 and the subsequent lockdown restrictions. Growth is projected to increase to 2.5 percent this year on the back of a resumption of large infrastructure projects and improved weather conditions. Inflation has recently picked up due to a recovery in domestic demand, supply shortages, and elevated commodity prices and freight costs. Kiribati's external position is assessed to be broadly in line with the level implied by fundamentals and desirable policies. Risks to the outlook are mainly on the downside.

Fiscal consolidation would be necessary to reduce fiscal risks. Kiribati's volatile fishing revenues and dependence on donor grants underscore the importance of maintaining fiscal discipline. In this regard, the authorities should consider consolidating recurrent spending and improving the targeting and efficiency of the social safety net. Fiscal sustainability could be further reinforced by greater revenue mobilization, development of a sustainable medium‑term fiscal framework that integrates rules‑based withdrawals from the Revenue Equalization Reserve Fund (RERF), and provisioning for climate change adaptation costs in the budget.

The authorities' ongoing efforts to improve public financial management are commendable and should continue. The timely implementation of the Integrated Financial and Management Information System (IFMIS) for budget execution and strengthening cash flow management is crucial. The authorities should make continued efforts to finalize the draft of an updated Public Financial Management Act, strengthen budget planning, publish fiscal reports on a more regular basis, execute effective controls over cash balances, and improve procurement controls.

It is essential to place state-owned enterprises (SOEs) on a commercial and sustainable footing to further reduce fiscal pressures. The elevated global commodity prices have exacerbated financial difficulties faced by some SOEs, reinforcing the importance of recalibrating SOE tariffs to improve SOEs' financial viability while protecting the most vulnerable. The SOE monitoring unit is making progress in strengthening SOE oversight and should continue to build its capacity in analyzing and monitoring the activities, risks, and performance of SOEs. Progress is needed to ensure that SOEs improve their financial management and publish their audited financial statements in a timely manner. Despite challenges, efforts to divest and outsource SOE activities should continue to be explored. Phasing out SOE tax exemptions will help level the playing field with the private sector.

The authorities' strategy to boost export competitiveness and promote private sector development is encouraging and needs to be further augmented with robust structural reforms. Recent efforts to upgrade quality within the existing export sectors are commendable. However, a holistic approach to structural reform is needed to improve the overall business environment. These reforms include reforming the copra subsidy program, improving connectivity through better air transport, ports, and shipping services, boosting the telecommunications network, building a skilled workforce, and enhancing access to finance.

The authorities should continue efforts to better utilize natural resources. Building on the recent approvals of the Environment Act and Fisheries Act, the authorities should forge ahead with developing regulations and monitoring capacity to ensure that the legislations are properly enforced. The plan to reopen the Phoenix Islands Protected Area (PIPA) to commercial fishing should be carefully designed with a fully developed marine spatial plan to ensure the sustainability of fishing and preserve marine biodiversity.

Continued efforts to build statistical capacity will facilitate data‑based policy making. The authorities need to strengthen institutional capacity to produce high‑quality national accounts, government finance statistics, and financial sector data in a timely manner to support sound economic management. It is encouraging that the authorities plan to implement the IMF's Enhanced General Data Dissemination System (e-GDDS) by publishing economic data on a National Summary Data Page, which will help improve the availability of timely statistics.

[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 the Board agrees that a proposal can be considered without convening formal discussions.