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p. 44 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asian Republics The Pacific Cook Islands East Timor Fiji Islands Kiribati Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Tonga Tuvalu Vanuatu III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia

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Kiribati

The economy strengthened during 2001 as government expenditures grew and copra production recovered. The economy is dominated by the public sector and is likely to remain reasonably stable over the medium term given the anticipated continued high level of government expenditures. Key emerging issues are the shift to an expansionary fiscal stance and an apparent change in attitude to the use of earnings of the country’s trust fund.

Macroeconomic Assessment

Kiribati’s economy grew by 1.5% in 2001, after a contraction of 1.7% in 2000. The improvement was attributed to a large increase in recurrent government spending, a recovery in copra production, implementation of a number of development projects, and increased private sector investment.

The inflation rate in 2001 rose to 7.1%, from 0.9% in 2000. Most of the increase was attributable to a depreciation of the Australian dollar (used as the domestic currency) and a delayed increase in local oil prices (in response to higher international oil prices) that fed into higher prices for food, drink, electricity, and local transport services.

The 2001 fishing season turned out much better than initially expected, and license fees reached a record level of US$22 million, representing more than half the revenues raised locally over the year.

The Revenue Equalization Reserve Fund (RERF) has almost tripled in value over the past 10 years and, by the end of 2001, stood at US$329 million. All funds are currently invested in offshore markets, and so declined in value a little during 2001 due to the downturn in world equity markets. The RERF is designed to maintain its real per capita value over time, but good returns over recent years allowed a US$7 million drawdown of income—the first since 1997—to fund government expenditures during the year.

Fiscal management has tended to be conservative in Kiribati but has now shifted to an expansionary stance (Figure 2.30). The deficit, very small in 2000, grew substantially in 2001 to 37.5% of GDP. A large part of the additional expenditure in 2001 was attributed to a higher wages and salaries bill, higher subsidies to government-owned businesses and the copra industry, payments for landing craft, and a large contribution to development projects.

Kiribati holds a small level of external debt, in the order of US$7.6 million. But the large holding of the RERF means that it has a large positive net external asset position.

The balance of payments was expected to be close to balance in 2001. Despite sizable imports and a trade deficit of some US$28 million, large inflows from fishing license fees, investment income from the RERF, and seafarers’ remittances are expected to have resulted in a small current account surplus.

During the year, ownership of the sole commercial bank, the Bank of Kiribati—changed hands. The Australia and New Zealand Banking Group now owns 75% of it, with the Government owning the rest.

Policy Developments

The Government projects public sector deficits of a similar magnitude to that seen in 2001 for the medium term, and expects to finance them by higher drawdowns from the RERF, surplus funds accumulated in previous years, and loans. Important elements in the ongoing deficits are continuing increases in the wages and salaries bill and sustained subsidies and higher contributions by the Government to development projects. The use of the Australian dollar as the local currency means that this expansionary stance will have limited effect on inflation. It is likely to be felt mainly as a slowdown in the rate of growth of the country’s external assets held in the RERF.

One of the key contributory factors to the strong growth in the value of the RERF over the 1990s was the policy of investing all funds offshore through professional investment managers. The 2002 budget speech foreshadowed a potential revision to this policy. The Government is studying the prospect of using some of the RERF to boost the performance of public and private enterprises via cofinancing or provision of capital for viable enterprises. Such a policy needs to be approached with considerable caution as it could lead to the erosion of the long-term benefits offered by the RERF. It could also see an increasing role for the Government at a time when the contrary approach, namely, of an increased role for the private sector, is being targeted through the country’s National Development Strategy.

Nearly 20% of the formally employed labor force work on foreign merchant or fishing vessels and generate a substantial amount of factor income. This is an important source of income, particularly for people from the outer islands where poverty levels are higher and opportunities for formal employment are very limited. The copra industry too provides an important source of income on the outer islands. For many years, funds from Stabex—an EU scheme to stabilize export earnings—have been used to subsidize the copra price but these funds were largely exhausted in 2000. The Government has since pledged to fund the subsidy itself, which amounted to US$2 million in 2001. In addition, it has committed US$2 million to build a copra mill. The mill, to be operated by a private firm, is intended to increase value added from Kiribati’s copra and reduce the subsidy required.

Outlook for 2002-2003

GDP is officially projected to increase by 2–3% in 2002–2003. The development of major public projects—including a power generation plant, sewerage project, sports complex, satellite project, rural electrification project, copra mill, and, potentially, an outer-island water supply project—are key components in the outlook.

However, the projected overall decline in government expenditures of almost 20% in 2002 (in real terms) will tend to weaken demand, and the full effect of this may not have been factored into the outlook. The growth outcome will ultimately depend on the actual government expenditures during the year.

A reduction in donor projects is foreshadowed in 2003 and locally financed development expenditures are projected to remain at 2002 levels. If total expenditures do fall as projected, economic activity may soften. However, the projected development budget for 2003 can be expected to build over the year as additional donor projects are committed to.

Inflation is expected to ease over 2002 due to lower oil prices.

The current account may move into deficit over the medium term due to high imports of materials and equipment for the sizable donor-funded projects scheduled for 2002. However, as they are donor funded, an offsetting capital inflow will help preserve the overall balance-of-payments position.

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