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p. 52 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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Tuvalu

GDP expanded by 4% in 2001, led primarily by the public sector. Major policy issues include the sustainability of recent increases in public spending and public sector management. The medium-term outlook is for growth of 3%.

Macroeconomic Assessment

The economy grew by approximately 4% in 2001, following 3% expansion in 2000. Growth was led by the public sector, with public administration rising by close to 5% and construction continuing its recent expansion due to government- and donor-funded projects. Road improvement on the main island of Funafuti was the most significant of these projects and stimulated growth in mining and quarrying. Other sectors grew at more modest rates of around 2%. GNP in 2001 substantially exceeded GDP because of estimated remittances from Tuvalu’s seafarers of $2.6 million, fishing license fees of $6.1 million, telecommunications license fees of $0.31 million, and revenues from leasing out Tuvalu’s Internet domain address (“.tv”) of $1.6 million.

Prior to 2001, net income from overseas had been augmented significantly by returns from the Tuvalu Trust Fund (TTF), but these returns were smaller in 2001 due to weakness in overseas financial markets. In 2000, a windfall of $14.5 million in revenues from .tv Corporation International, the company leasing the Internet address, supported a substantial rise in government spending while maintaining the large budget surplus (Figure 2.37). The expectation of further windfall gains encouraged a 2001 budget that explicitly broke with the post-independence tradition of fiscal prudence by planning operating expenditures of $2.3 million in excess of esti- mated sustainable (or “core”) revenues. The Government’s special development expenditures were projected at $6.5 million. An estimated $5.7 million in the windfall revenues were intended to fund such special expenditures resulting in an overall budget deficit of $3.1 million. Extrabudgetary development expenditures are entirely financed by external capital grants and were projected at $6.5 million in 2001.

The actual budget outcome for 2001 was estimated to yield an overall budget surplus of $2.5 million, equivalent to about 20% of GDP. Total revenues were 11% above the original budget estimate because of unexpectedly high tax and fishing license revenues. However, revenues from interest, dividends, and telecommunications license fees were lower than the budget estimate.

Total expenditures were 44% below the estimate because of below-budget spending on all current and capital expenditure items. During the year, the Government drew down on the Consolidated Investment Fund (the B account) of the TTF and borrowed from the state-owned National Bank of Tuvalu to buy shares in Air Fiji. The opening of a permanent mission to the United Nations in New York added $370,000 to expenditures; subsidies to copra growers and public corporations also continued.

The inflation rate in 2001 fell to 1.8%, from 5.3% in 2000, reflecting falls in textiles and clothing prices, and in costs of miscellaneous items. The National Bank’s lending rates for house and personal loans were 8% and 11%, respectively. The rate on savings deposits remained at 2% and offered little incentive to potential depositors.

Imports in the first three quarters of 2001 were $5.3 million, approximately double the level of the corresponding period in 2000. The substantial trade deficit continued to be financed by remittances, investment income, fishing and telecommunications license fees, and official transfers. Net foreign assets, inclusive of the TTF, were adversely affected by weakness in global financial markets, but still underpinned a sound external position. The market value of the TTF at 30 September 2001 was $32.6 million, equivalent to around 5 years of import cover.

Policy Developments

The budget for 2002 set a core operating spending ceiling of $11.6 million, special development expenditures at $2.5 million, and capital spending at $5.6 million. Revenues and grants were projected to total $26.1 million as a result of higher interest income and dividends and $10 million from another installment on the sale of the Internet address. An overall budget surplus of $6.4 million, or 47% of GDP, was projected.

The sustainability of recent increases in government spending is a major emerging policy concern. The balance of the B account needs to be raised toward the target level of $18.9 million (as determined by the Government and external consultants) to protect public expenditures against revenue volatility and possible decline. This will require better public financial management based on timely preparation of a realistic budget, which involves line ministries, and on sound budget execution, which in turn requires good cash management and an operative accounting and reporting system.

A related policy issue is the desirability of establishing a formal, arms-length relationship between the Government and the National Bank, to minimize the risk of improper political influence on bank management and to ensure appropriate regulation of a profitable monopoly. One recommendation is that regular and independent prudential supervision be arranged with donor assistance, and that an experienced overseas bank executive be appointed as a visiting bank director.

The management of public enterprises needs to be improved to reduce the drain on the public purse and to improve service delivery, following the example of the Tuvalu Maritime School, which has been commercialized into the Tuvalu Maritime Institute.

In an effort to reduce the disparity between household income in Funafuti and the outer islands, the Government is implementing an Island Development Program. This aims to decentralize administration, improve public service delivery, promote small business development, and encourage the sustainable augmentation of financial resources for outer island development through the Falekaupule Trust Fund. In 2001, the Fund reached a capital base of $8.2 million and the first distribution of earnings of $318,000 was made to island councils for development expenditures and $104,000 was placed in a buffer account modeled on the B account of the TTF. Continued implementation of the Program and of the associated Falekaupule Trust Fund is necessary if internal migration flows to Funafuti are to be reversed.

Outlook for 2002-2003

Annual growth in 2002–2003 is projected to be around 3%, with inflation stabilizing at 1.5% in 2002 and 2.1% in 2003. Activity in the market economy will remain concentrated in Funafuti and will be dominated by the public sector. In 2002, the construction of a new $7 million government office building and a new hospital is scheduled to begin, while road reconstruction continues. New school classrooms are to be built on two of the outer islands. A slight increase in public sector employment is projected as existing vacancies are filled. These developments will stimulate private sector activity, which is otherwise constrained by remoteness from markets and poor international transport links. Given the projected state of the global economy and financial markets, no automatic distribution from the TTF is likely in either 2002 or 2003. Following the windfall gain in 2002, revenues from the marketing of the Internet address are projected to be lower in 2003, in the range of $1 million–$2 million, while fishing and telecommunications license fees are expected to be stable.

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