Catalog

	Table of Contents
p. 47 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Central Asian Republics, Azerbaijan, and Mongolia People’s Republic of China Southeast Asia South Asia The Pacific Cook Islands Fiji Islands Kiribati Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Tonga Tuvalu Vanuatu III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia

---

Tuvalu

Real GDP grew by 3 percent in 2000. A windfall payment from the lease of the country’s Internet country domain address and buoyant returns from the Tuvalu Trust Fund were also realized during the year. However, a possible decline in such revenues and the growth of complacency pose considerable risk to future growth prospects.

Recent Trends and Prospects

Growth in real GDP in 2000 is estimated at 3 percent (see Figure 2.28). Public construction was significantly stronger than in 1999, but expenditure on public administration changed little. As a result of substantial windfall revenue from the lease of Tuvalu’s Internet country domain address (“.tv”), strong growth in returns from the Tuvalu Trust Fund, and stable revenue from fishing license fees, government revenues totaled around A$44 million in 2000.

The government budget emphasizes the difference between core (recurrent) and noncore (infrastructure and other capital item) revenues and expenditures, with specific allocations to the Tuvalu Trust Fund so that the benefits can be enjoyed in the future. Total government revenues were almost double the budget estimate for 2000 as a result of the lease of the Internet address. Total government expenditures amounted to $22 million, an increase of about $5 million, compared with 1999. Expenditures on infrastructure and other capital projects in 2000 rose to a record A$8.2 million.

In 2000, inflation rose to 5.0 percent from around 1 percent in 1999, partially due to increased costs of imports as a result of higher transport (mainly air) costs. The trade deficit remained high, due to the fact that most agricultural production is consumed domestically, and due to the absence of any significant manufacturing activity. However, the external position is sound overall because of remittances, returns from the Tuvalu Trust Fund, the Internet lease, and aid agency disbursements. Unemployment remains high with less than 20 percent of Tuvaluans employed in salaried positions; over 65 percent of the population are employed in subsistence activities.

The construction sector will see strong growth in 2001, due to the largest civil works project undertaken in the country: the Funafuti roadway will be reconstructed and the airstrip will be repaired. The large scale of these projects, in the context of Tuvalu, suggests GDP growth for 2001–2002 of 5–6 percent.

After a very strong performance in 2000, returns from the Tuvalu Trust Fund are forecast to decline to around A$3 million in 2001. This is based on the expectation that the Australian equities market will experience lower returns associated with an anticipated global slowdown in economic growth. Inflation is likely to ease in 2001 and 2002 to around 1–2 percent, reflecting lower inflation in Australia where most imports are sourced, and lower world fuel prices.

The 2001 budget includes expenditures of A$26.9 million, comprising noncore expenditures of A$8.6 million and core expenditures of A$18.3 million. Revenues are expected to be A$27.2 million, and hence the budget shows a small surplus of A$0.3 million. Also, the budget provides for additional capital projects totaling A$16.6 million, subject to the availability of development funds from aid agencies. Recurrent expenditures of A$16.9 million in 2001 represent an increase of around 20 percent over the 2000 level, due to the opening of an embassy in New York, a 100 percent increase in politicians’ salaries, and a 6.8 percent increase in the number of civil servants.

A new policy is being drafted that will lead to the signing of new licensing agreements for fishing in the country’s fishing grounds. However, after record revenues in 1999 and 2000 from fishing license fees, these revenues (when translated from other currencies) may decline if the Australian dollar rebounds.

Two further prospects, both uncertain, may also affect government revenues in 2001 or 2002. First, the Government is a significant minority shareholder of the company that leases the Internet country address, with a 20 percent holding of the company’s common stock. If the company seeks a public listing, the market value of this holding may well exceed the value of the Tuvalu Trust Fund. Listing the company is likely in either 2002 or 2003 and would clearly represent another—extremely large—windfall gain. Second, the Government is in exploratory talks with an Australian firm on setting up an international shipping registry in Tuvalu, to register merchant vessels under the Tuvalu flag. This too could result in substantial revenues.

Issues in Economic Management

Tuvalu has followed a policy of fiscal restraint in the past, accumulating a series of budget surpluses over the last decade. Although money is available through annual drawdowns from the Tuvalu Trust Fund, the Government is reluctant to rely on it for short-term needs. Each year, the Government reinvests large amounts in the Fund, so it is now the largest contributor in cumulative terms. It aims to maintain the real value of the Fund before distributing returns to the Consolidated Trust Fund account, which can be used for capital expenditure. There is, however, some concern that the more comfortable financial position of the Government over the last few years is bringing with it a greater tendency for ministries to be less stringent in the application of basic financial management principles.

There is also evidence that some core expenditure is being met through the special development expenditure item of the Tuvalu Trust Fund, despite the fact that this was established for development (noncore) activities only. Current trends in the budget are taking the Consolidated Trust Fund account balance well below the level necessary to guard against revenue shocks. The balance in 2001 is expected to fall to A$11.4 million, below the Government’s target of A$13.5 million. The Government needs to restore it to the appropriate level as soon as possible. Another concern is the timeliness of government financial reporting. The 1998 and 1999 accounts were prepared only after long delays, making fiscal management much more difficult. A regular cash-flow statement is also needed.

Policy and Development Issues

The main development issue is the devolution of administrative responsibilities to communities on the outer islands, and the improvement of infrastructure and services there. In 2000, the Government continued to devolve administrative responsibilities, including some expenditure management, to outer island councils (Falekaupule). This was in line with the medium-term development strategy’s focus on ensuring greater equality of income distribution between the capital island of Funafuti and the outer islands. The Falekaupule Trust Fund was invested with professional fund managers in Australia in February 2000 with initial capital of A$11.2 million. The island communities themselves, the Government, and the first tranche of a loan from the Asian Development Bank funded it.

As part of a program to improve facilities for outer island communities, in 2000 the Government purchased three water desalinating systems and five solar water pumps. In addition, it is renovating and expanding the water supply system and embarking on an electrification program for the outer islands. A range of issues needs to be resolved, such as the structure of electricity tariffs and the identity of the organization to manage the electricity supply. Another pressing issue for outer island communities is the availability of a regular and reliable freight service to the capital, and improved cargo handling facilities. Telecommunications is another essential service that needs improvement on the outer islands, as some of them have only a few lines.

Health and education on the outer islands are areas of concern. Island communities receive only infrequent visits from doctors, while some islands have no permanently posted doctors. Some health clinics also need to be upgraded.

Back Tonga	Next Vanuatu