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p. 45 of 68 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asia The Pacific Cook Islands Fiji Islands Kiribati Republic of the Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Democratic Republic of Timor-Leste Tonga Tuvalu Vanuatu III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia

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Kiribati

GDP growth accelerated in 2002, supported by consumer spending stemming from increases in public sector wages, pre-election government spending, and employment at large development projects. The forecast is for growth to continue, but at a slower rate. A moderate relaxation of the country's fiscal stance will help ensure this outcome.

Macroeconomic Assessment

GDP grew by about 3% in 2002, double the previous year's level. It was supported by consumer spending, which in turn resulted from recent increases in the public sector wage bill, expenditures in the run-up to the national elections in late 2002, and the employment provided by construction work at large development projects. Much of the rise in activity took place on the main island of South Tarawa where most public servants work and where recent development projects have been concentrated.

Tourism continued to be active in the Line Islands and consisted of cruise ship vacationers visiting Fanning Island and sports-fishers flying in from Hawaii to Kiritimati. In the construction sector, the Government funded the building of a power station in South Tarawa, the replacement of much of the water and sanitation facilities in South Tarawa, the completion of smaller sanitation works on the outer islands, and a rural electrification project.

The Government also constructed a $2 million copra mill with state funds, junior secondary schools with funding from the Australian Agency for International Development, and a $5.5 million national sports complex in South Tarawa with financing from the PRC. These infrastructure projects were supplemented by new churches and schools built with church funding and a Japanese-funded commercial satellite tracking project on the outer islands.

The Bank of Kiribati, under the majority ownership of the Australia and New Zealand Banking Group, went into its first full year of operation, raising service standards and improving internal procedures. In contrast, the establishment of a new power generating plant in South Tarawa failed to produce the expected additional electricity output. A fire damaged the major existing facility and, despite the new plant, most of South Tarawa was subject to power cuts during the day in late 2002.

The private sector was stimulated by consumer spending emanating from these activities and from the national elections held in late 2002. Over the first half of the year, both the country's only commercial bank, the Bank of Kiribati, and the government-run Development Bank of Kiribati reported strong demand for credit for the start-up and expansion of small businesses.

Consumer prices rose by 5.1% during the year, slightly below the previous year's 6.0%. The rise was the result mainly of an increase in the prices of food, beverages, and transport. Kiribati uses the Australian dollar as the local currency and does not operate an independent currency system.

Central government revenues amounted to 119.1% of GDP during the year, lower than the previous year's 148.2% (Figure 2.26). Fishing revenues typically account for half of internal revenues. Income from the overseas investments of the Government's Revenue Equalization Reserve Fund (RERF), valued at $325 million, and local taxes and duties (mainly on wages and salary income, company profits, and imports) provides the other half.

The expenditure side of the national budget, on the other hand, was 125.0% of GDP in 2002, also lower than the 133.2% of the previous year. Many expenditures went into increases in the public sector wage bill. In fact, the recurrent budget, of which wages form the largest part, had risen by more than 20% in real terms over the period 2001-2002. The overall budget ended with a deficit equal to 5.9% of GDP, against the previous year's surplus of 15.0%.

Merchandise exports expanded to $4.2 million during the year, from $3.8 million in the previous year. Export products consisted of copra, live fish for aquariums, and seaweed. The price of copra, the country's main export, rose during the year, although production levels have been down since 2000, to about 7,000 tons, from a high of 12,500 tons in 1999. Live fish for aquariums as well as seaweed sold into healthy markets during the year, though the former is now facing a trend decline in stocks in some areas.

In 2002, merchandise imports rose to $35.9 million, from $31.5 million in the previous year, due to imported infrastructure components and materials, as various government projects moved from the planning to the construction phase. Improved consumer demand accounted for additional imports. With the substantial deficit in the balance of trade, along with a substantial deterioration in the net transfers balance, the current account turned negative for the first time in 8 years to reach a deficit of 6.5% of GDP.

Policy Developments

Fiscal management in Kiribati has historically been prudent and has provided for a large buildup in external reserves. During the 1990s, the only deficit was in 1996 and this was attributable to a shortfall in revenues arising from a large but temporary drop in fishing license fees. The value of the Government's overseas investments in its RERF has declined slightly in recent years as returns have eased on world stock markets, but remained high at approximately $325 million or $3,700 per person as of the end of 2002. This RERF provides both an important buffer against fluctuations in revenues and a source of funding for development expenditures. One of the major issues facing economic management is the future use of the Fund's reserves, with a good case existing for additional expenditures to improve infrastructure, and health and education services.

There are indications of the adoption of a more expansionary fiscal stance. In particular, the 2002 budget provides for substantial increases in the public sector wage bill additional to the 15% rise mandated in the 2001 budget. There is also evidence of government willingness to accept significant fiscal risks, as shown notably in the development of the copra mill and the extension into international routes of the government-owned airline.

The appointment of a new president and installation of a new Government is expected to be completed before mid-July 2003, and this resulted in the deferral of the release of the 2003 budget to early August. In this context, it will take some time for the fiscal stance of the new Government to become clear, and this is the key development to monitor over the medium term.

Concern has been expressed for some time that the absence of a second commercial bank is leading to some abuse of market power by the existing bank, with adverse consequences for service standards and interest rates. The problem is reflected in recent rates of return on equity in the order of 100%. Steps were taken during 2002 to provide the legislative framework required to allow the entry of competition. The completion of this regulatory package could do much to provide for either the entry or threat of entry of new competition. Either way, this should lower charges and/or increase deposit rates and raise the contribution of the financial sector to the economy.

Outlook for 2003-2004

The forecast is for GDP to grow at around 2.5% in 2003 and 2.3% in 2004, both lower than the 2002 growth rate. The attainment of these goals rests heavily on developments in the public sector, whose expenditures typically rise to 130% of GDP. Projections for 2003, based on official data, imply a fall in revenues to 99.7% of GDP as well as a reduction in expenditures to 112.6% of GDP. This would give rise to a fiscal deficit of 12.9% of GDP. These projections notwithstanding, recent developments suggest that internal revenues are likely to remain high, or at least not fall sharply from recent levels.

Development expenditures are also expected to remain firm over the medium term as the work on the various infrastructure projects begun in 2002 continues. Some of the activities on these projects, including those on the new national sports complex and the water and sanitation works in South Tarawa, are scheduled to last beyond 2004 and there is the prospect that work will commence on outer island rural electrification and water supply projects. This suggests that a substantial economic contraction is unlikely over the medium term. However, to minimize the impact of any contraction, the fiscal stance needs to be relaxed. This may require regular drawings from the savings held in the RERF (and not just the income that is generated from the Fund). While there is the risk that over time this may result in an undue enlargement of the public sector, increased expenditures would have a beneficial effect on economic activity over the medium term. Unfortunately, the Government's investment revenues are likely to diminish in 2003 as world stock markets weaken in reaction to risks associated with the conflict in Iraq, implying that the Government must find other, perhaps domestic, sources to sustain revenue collection.

The outlook for foreign trade is somewhat brighter than it has been. Exports are expected to increase to $5.1 million in 2003, though achieving this forecast rests heavily on developments in the copra industry. The recent improvement in world copra prices and the scheduled completion of the new copra mill in mid-2003 should help provide a somewhat improved outlook for copra in the medium term.

Imports are forecast to rise slightly to $36.6 million in 2003, with many imports related to the various infrastructure projects initiated in 2002. Still, the current account balance should post a surplus of $0.5 million, or equal to 1.1% of GDP, because of expected receipts from services.

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