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Asian Development Outlook 2004 : II. Economic Trends and Prospects in Developing Asia
Kiribati Economic growth in 2003 picked up slightly after a period of political uncertainty, but tight fiscal control as well as economic and structural reforms to promote broader-based domestic private sector activity are needed to maintain the growth momentum. Economic Assessment GDP is estimated to have grown by 2.5% in 2003, improving somewhat from the previous 2 years. Higher consumer spending-triggered by a rise in government expenditures in the run-up to two national elections (in late 2002 and mid-2003) and employment in large construction projects-contributed to this improvement. Significant development projects included the construction of secondary schools, a new power generating plant, and improved water and sanitation infrastructure, all on South Tarawa. Although higher than in previous years, GDP growth in 2003 was held back in part by poor performance in agriculture, especially a decline in copra and seaweed production. Despite the narrow production base, Kiribati's financial situation is underpinned by large external earnings. GNP is approximately 70% higher than GDP due to high external factor income from fishing license revenues, investment income, and seafarer remittances. In 2003, GNP is estimated to have fallen by 4.8% from A$168 million in 2002 mainly due to a further drop in fishing license revenues of about 22% (they were down 10.5% from 2001 to 2002) and a decline in passport sales to foreigners. As a result, the fiscal position tightened markedly in 2003 with central government current revenues, including Revenue Equalization Reserve Fund (RERF) income, decreasing from A$101.9 million in 2002 to A$82.3 million in 2003. Growth in remittances from overseas workers kept pace with inflation while income from overseas investments of the RERF began to recover some of the value lost during the weak global financial markets in 2001-2002. There was also a fall in tax and other nontax revenues, suggesting either a reduction in domestic economic activity, weaker compliance, or a combination of the two. Expansionary expenditure decisions in the lead-up to the 2003 elections with an increase in both public sector wages and workforce numbers, higher subsidies to government-owned businesses and the copra industry, and large contributions to development projects affected the fiscal position in 2003. The Government also leased an ATR-72, a medium-range aircraft for the national airline, but this arrived in mid-2003 and only started commercial operations in December, causing a net drain on resources for lease payments and operating costs. However, central government current expenditures are estimated to have subsided from A$71 million in 2002 to A$65 million in 2003. This reduction is attributable partly to election date delays and to expenditure cuts made in anticipation of lower revenues. Combined with a 19.2% reduction in current revenues in 2003 and a 48% rise in development expenditures, the overall impact was a budget deficit of A$14 million or about 13% of GDP (Figure 2.28). Inflation in 2003 was modest at about 2%, partly reflecting Kiribati's use of the Australian dollar as its domestic currency. Price indexes in the food, beverage, and transport subsectors were unchanged in 2003, reflecting both the low rates of inflation in countries where most of the imports originate (primarily Australia and New Zealand) and the degree of price control exercised over petroleum products and other "basic" commodities. The balance of payments remains vulnerable and is expected to have been in deficit by an estimated A$3.2 million, or about 3% of GDP, in 2003. The strong appreciation of the Australian dollar against the US currency in 2002-2003 and the consequent fall in the domestic currency value of most of Kiribati's foreign income over this period were areas of major concern. Despite a trade deficit of some US$58.7 million, official external assets remained substantial at the equivalent of 4 years' imports of goods and services. The RERF was valued at A$576 million as of end-2002 and A$593 million 12 months later. Public external debt was relatively low at about 23% of GDP in 2003 and had been provided on highly concessional terms. Domestic public debt is virtually nonexistent. Policy Developments On taking office, the new Government expressed its priority as "enhancing and ensuring the equitable distribution of development benefits to the people of Kiribati." It promised to pursue these aims in accordance with the principles of good governance. The key policy areas were stated as (i) economic growth through a partnership of public and private investment in infrastructure and production; (ii) equitable distribution of services and economic opportunity, particularly on the outer islands; (iii) public sector performance through improved efficiency in resource use by ministries and public enterprises; (iv) equipping people to manage social and economic change through policies in education, health, culture, and governance; (v) sustainable use of physical resources, including adaptation to climate change; and (vi) protecting and using financial reserves while making use of them to finance development, particularly through the village banks and strengthening the governance of the RERF. The Government also developed the third statement of the National Development Strategy (NDS) covering the years 2004-2007. The NDS introduces new measures for performance reporting, not only in terms of statutory reporting, but also of ensuring effective monitoring and review of planning efforts. Penalties for failing to comply with reporting requirements include holding back some of the funds allocated to ministries and withholding subsidies to public enterprises. The NDS is closely aligned with the budget through the financial management information system and will be reviewed annually at midyear to shape the following year's budget. The annual budget is to be set in a 7-year multiyear budget framework. Increased confidence in fiscal sustainability is to be achieved by effectively implemented budgets, maximizing the sustainable collection of revenues from existing sources, and preparing for the introduction of a VAT-style consumption tax. Consultations with representatives of civil society, as well as public acceptance of a population policy and climate change adaptation policy, will help address sustainability issues. Land use planning is to be fostered through public consultation in heavily populated areas. Infrastructure, small enterprise development, and rural production (which has been declining) are to be reemphasized. Private partners for government-owned hotels are to be sought. Public sector performance is to be encouraged by a new award system and the revision of the national conditions of service. Service agreements are to be introduced for all public enterprises on the understanding that some may be unsustainable. Public tenders are to be introduced for subsidized services. In 2003, the Government introduced several financial sector reforms. A draft law on licensing supervision and regulation of financial institutions and on combating money laundering was introduced, as was a reduced guaranteed rate of return for Kiribati Provident Fund assets. Contributions to this fund were also increased. However, concerns remain over poor standards of project evaluation, increased levels of government guarantees for Bank of Kiribati loans to public enterprises, the setting up of a proposed Guarantee Corporation, and the rise in the NPL ratio at the Development Bank of Kiribati. Outlook for 2004-2005 GDP is projected to grow by 1.8% in 2004 and by 1.5% in 2005, roughly equivalent to the rate of population growth. This will mean continuing low levels of job creation, and an increase in the number of unemployed young people, particularly on South Tarawa. Growth in GNP is expected to track that of GDP, thereby keeping real income per head at about 2003 levels. Short-term prospects for economic activity and employment are determined by current and planned externally funded public sector projects. The 2004-2005 budgets will also be influenced by the better outlook for RERF earnings, which are expected to continue improving alongside a general recovery in global financial markets. Fishing license revenues are expected to remain at around 2003 levels in 2004-2005 with the help of a new licensing agreement with the EU, then return to 2001-2002 levels by 2007. In 2004, official external assets are projected to remain at the equivalent of about 5 years of imports, and public external debt at about 30% of GDP (with no domestic debt). Although the fiscal situation remains a source of concern, the 2004 budget deficit is projected to decline to A$6 million, largely due to expenditure compression. Total expenditures are projected to decline by 11.6%. In particular, the recent decision to cancel the lease of the ATR-72 removes one of the greatest threats to uncontrolled expenditure. Critical challenges include the increasing levels of unemployment, especially among the young; the deteriorating urban environment on South Tarawa; and the apparent declining educational standards, particularly among young men. The NDS recognizes the importance both of these issues and of a comprehensive population policy, which includes family planning and emigration, for reducing poverty and sustaining living standards in the country. The challenge is for the Government to deliver a consistent and strong national message, implement modernization measures, and bring about real structural change in the economy. Kiribati's potential for long-term growth is constrained by the physical limitations of its many small islands; widespread geographic distribution; and fragile, low-lying, and poor land resources. These factors, as well as the small size of the domestic market, make it difficult to exploit locally the marine resources of the country's extensive exclusive economic zone. Notwithstanding these constraints, it is essential that Kiribati both broaden and deepen the private sector component of the domestic economy. New employment and new investment opportunities are clearly needed.
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The deficit was financed by drawing down RERF surplus funds accumulated in previous years, other government funds, and external loans. The tightening fiscal position did not directly affect disposable incomes on South Tarawa, which were supported by aid-financed capital projects in education and infrastructure. Incoming foreign investment was minimal.
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