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Asian Development Outlook 2004 : II. Economic Trends and Prospects in Developing Asia
Tuvalu The Government needs to reestablish a broadly balanced budget and develop a coherent statement of its medium-term strategies, generally because it determines the volume of economic activity and particularly, in 2003, because its income fell sharply. Improved stability and some recovery are likely in 2004-2005, but the economy remains highly vulnerable to financial and climatic risks. Economic Assessment The level of economic activity is overwhelmingly determined by the amount and direction of government expenditures. In 2003, financial resources available to the Government were sharply reduced from the levels of the previous 3 years. The main causes were (i) climatic variations reducing exclusive economic zone fishing license revenues; (ii) contractual factors lowering receipts from the ".tv" Internet domain address; (iii)the need for the Tuvalu Trust Fund (TTF) to rebuild the maintained capital value of its investments in slowly recovering financial markets before it can resume distributions; (iv) and the continuing appreciation of the Australian dollar (Tuvalu's national currency and the TTF numeraire) against the US dollar, which reduced the domestic currency value of most of the country's foreign income. Economic growth is anticipated to have revived to about 3% in 2003 after a dip to 2% in 2002. The increase stemmed from two relatively large aid-funded projects on the capital island of Funafuti, improvements to a marine training facility, and other construction works on the outer islands. These projects stimulated the private sector. The impact flowed through to the retail sector and domestic consumption. The outer islands also benefited from growing remittances from Tuvalu seafarers, now estimated at well over A$5 million a year, or equivalent to about 20% of GDP. Total estimated government expenditures in 2003, excluding transfers to the TTF, amounted to A$25.1 million, or 38% higher than actual expenditures in 2002. The increase was primarily due to a rise in the number of civil servants and higher special and capital expenditures. Maintenance, while low by international standards at 2.9% of expenditures, was almost double that in 2002. Special development expenditures, i.e., noncore expenditures of a one-off nature, at A$1.8 million were less than half the 2002 level, reflecting the need to cut expenditures to balance the budget. The market value of the TTF at 30 September 2003, of A$75.8 million, was 6.6% less than the so-called Maintained Value. As a result, for the third year in a row the TTF did not make a distribution to the Government, and while world capital markets have improved, it is by no means certain that the TTF will make a distribution before 2006. The TTF had suffered a serious decline in capital value from 2001 to 2003. Consequently, in November 2003, as world financial markets were rallying, the TTF Board approved a restructuring to a stronger growth orientation. Also at end-September, the balance on the Government's buffer account, the Consolidated Investment Fund (CIF), which was designed to provide funds when the TTF makes no distribution, was 30% less than the minimum value required. The labor market is dominated by the public service, whose wage and salary rates impact on the private sector. In 2003, overall employment changed little and there were no general salary increases. Starting 1 January 2004, the Government has provided a 5.0% cost-of-living increase for the public service. Total estimated government revenues and grants fell by 45.4% to about A$20.7 million in 2003 from a 3-year annual average of A$41.6 million. The main contributors to the fall were decreases in .tv revenues, down by A$15.9 million, and fisheries license revenues, A$4.1 million lower. The resulting budget deficit was A$4.4 million, or 16.3% of GDP The weak US dollar has adversely impacted on Tuvalu. Fisheries license and .tv revenues both fell in Australian dollar terms. Inflation in 2003 was 2.6%, close to Australia's rate. Foreign trade statistics for Tuvalu are unavailable. Debt servicing requirements are low, amounting to less than 1% of GDP. Foreign debt is very low and is all concessional; ADB and the European Investment Bank are the two principal credit sources. Net foreign assets inclusive of the TTF, despite suffering from financial market weaknesses, still underpin a sound external position of around 5 years of import cover. Policy Developments The enforced expenditure constraint coincided with a political crisis that lasted most of the year. This was caused by the apparent loss of the Government's parliamentary majority and its refusal to hold a meeting of Parliament until its numerical supremacy was assured. The Government's ability to make policy decisions was much reduced during this period, and most issues were put on hold. The situation was resolved with a restored majority for the elected government in early November 2003. The 2004 budget stresses securing sustained growth through a sound and stable pro-investment macroeconomic climate. Historically, when revenues fall the Government cuts back on maintenance and other discretionary expenditure categories, including development that is not donor funded. Basic social services in the face of reduced revenues can be maintained at the cost of a larger budget deficit. The fiscal deficit would, however, more than double without the drawdowns from the CIF. The amount approved by the Government to be drawn down from the CIF for the 2004 budget is A$1.75 million, or some A$0.5 million more than the likely amount sustainable over the medium term. The Government is taking a multifaceted approach to financing the deficit. First, it intends exploring options for raising additional revenues through taxation, user charges, and privatization of certain government entities. Second, it may use reserves that amounted to A$8 million at end-2003 as a fall-back position. Third, it intends deferring certain programs or reducing current levels of services, including freezing vacant posts and salary increments, and reviewing personnel numbers. To stimulate the private sector, the Government has negotiated a soft loan for onlending by the Development Bank of Tuvalu for domestic investment. It has also boosted its equity investment in the bank. Additionally, a proposed amendment to the Tuvalu National Provident Act will allow for capital resources to be onlent for small business development. Public sector investment will also be aided through a Public Sector Investment Program for 2004-2006, which will include special development expenditures and projects to be financed by donors. Ministries will be required to submit detailed profiles on all projects to be funded by such expenditures and donors for proper appraisal. On the external side, the Government will continue negotiations to obtain a share of revenues for the use of the country's outer air space and satellite orbital slots, and is considering a fisheries licensing deal with the EU. The last National Development Strategy (1995-1998) was published 9 years ago and the Government has been planning to develop a new strategy for some time. In 2004, it intends holding a National Summit on Sustainable Development that will lead to the formulation of a Statement of Economic Strategy. This will form the foundation for developing a longer-term national development plan and associated multiyear sector plans. Outlook for 2004-2005 Short-term prospects for economic activity and employment are dominated by existing externally funded public sector projects and the speed with which others in the pipeline can be implemented. Economic growth is projected at around 3% a year in 2004-2005, provided that the end to building of the two relatively large aid-funded projects (in 2003 and mid-2004) is succeeded by further large infrastructure projects. In the short term, government expenditures will be constrained by the downturn in external revenues, in part due to the weak US dollar affecting receipts from the .tv and fisheries licenses. After 3 years of zero distribution from the TTF there is a possibility of some revenue for 2005, but it will be modest at best. Developments on the outer islands, which have been constrained by the lack of a distribution from the Falekaupule Trust Fund-a fund initiated in July 1999 with the purpose of providing a source of funds for island development-will be subject to the same factors that have affected the performance of the TTF. Remittances from Tuvalu's seafarers will continue to provide a major source of income. Major development challenges include inadequate enabling legislation for private sector development, insufficient suitably skilled and experienced personnel, lack of effective strategic planning, lack of adequate financial management information, lack of proper reporting and full accountability, insufficient working capital, and restrictive financing arrangements imposed by the Government on SOEs, except the National Bank of Tuvalu. On the positive side, benefits could emanate from government initiatives to capture some of the fees from the country's outer airspace, a possible new fisheries license agreement with the EU, and a positive outcome from legal action over .tv revenue. The outcome of the strategic planning exercise to be undertaken in 2004 should result in a better focus on the medium term. A specific focus will be on poverty reduction to ensure that the whole population has adequate provision for basic needs. In the longer term, greater emphasis on the primary and secondary education systems, which are in serious decline, could have a profound impact on the prospects for the economy.
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(Figure 2.36). Taking into account the TTF transfers reported for 2003, the budget deficit is higher at A$5.3 million, equivalent to 20% of GDP. Despite the fact that the transfers made to the TTF for 2003 were A$6.9 million lower than the level in 2002, the reduction was not enough to stave off the deficit. The CIF drawdown for 2003 is unknown, but it is likely that the drawdowns actually made may have brought the actual outcome for 2003 into an almost balanced budget. The Government borrowed heavily from the National Bank of Tuvalu in 2003 and at one point this borrowing reached a record level of A$3.5 ;million, equivalent to 13% of estimated government expenditures in 2003.
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