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p. 54 of 77 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions 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 Republic of Palau Papua New Guinea Samoa Solomon Islands Democratic Republic of Timor-Leste Tonga Tuvalu Vanuatu III. Promoting competition for long-term development Statistical appendix

Asian Development Outlook 2005 : II. Economic trends and prospects in developing Asia

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Kiribati

Economic growth in 2004 was lower than in the previous year, when growth was marked by the presidential election. Inflation remained low, and earnings from the Revenue Equalization Reserve Fund increased. For the next few years, effective implementation of the National Development Strategy will be key to sustainable economic growth.

Macroeconomic assessment of 2004

The domestic economy is estimated to have grown by 1.8% in 2004, a slowdown from 2.5% a year earlier when economic growth was driven by the presidential election and some large construction projects. Modest GDP growth in 2004 was backed by high copra prices and reasonable fish exports. Economic growth is limited by a shortage of skilled workers and a narrow production base consisting largely of subsistence agriculture, copra, and fish. Weak infrastructure is also an issue, especially since all islands are very remote from international markets.

Inflation has been low, owing to Kiribati’s use of Australian dollars as its currency and the effective use of the Revenue Equalization Reserve Fund (RERF). Indeed, among the Pacific island countries, only Kiribati and Tuvalu have successfully managed to increase the real per capita value of their trust funds.

Kiribati’s external sector is characterized by a large merchandise trade deficit; virtually all manufactured goods are imported. In 2003, this deficit came to US$69.5 million, and in 2004, US$51.1 million. Despite this, official reserves remain substantial, amounting to an estimated US$359.6 million or an equivalent of 4.7 years of import cover.

ANZ bank owns the only retail banking operation in the country. Foreign financial aid is a critical supplement to GDP. Japan and Australia, the country’s two major donor countries, provided assistance valued at US$8.8 million and US$7.3 million, respectively, in 2002. Remittances from i-Kiribati are also sizable: receipts from those working on foreign fishing vessels or in foreign countries reached almost US$6.3 million in 2003.

Since Kiribati has a vast exclusive economic zone of about 3.5 million square kilometers, a major source of foreign income is fishing license fees. These fees were estimated to be equivalent to 35.2% of GDP in 2003, though they had started to decline in 2002.

Earnings from the RERF are an additional large source of income. The RERF was valued at A$513.3 million at end-2003, a figure that has been growing steadily since the new Government came into office on 10 July 2003. Due to its large foreign holdings in the RERF, Kiribati is a net creditor nation, and enjoys a strong international financial position. The large income from the RERF makes it possible for the Government to buffer year-to-year movements of the current account and to cover deficits on the fiscal balance. Investment income from the RERF, together with fishing license income and workers’ remittances, makes GNP almost double GDP.

Most economic activities involve subsistence agriculture. Traditional land tenure, poor soil, and frequent droughts prevent the i-Kiribati from engaging in large-scale agriculture. Services dominate GDP at 84%. Vocational schools train commercial seafarers and fishers, though opportunities for occupational training as well as employment for women are limited. Due to minimal employment opportunities on the outer islands, many people have migrated to South Tarawa, which is congested and polluted.

Macroeconomic policy developments

The Government met with its development partners on 24-25 August 2004 to discuss its development strategies and project funding requirements contained in the National Development Strategy 2004-2007, which was released in November 2003. The strategy contains six key policy areas: economic growth, fair distribution, public sector performance, equipping people to manage change, conservation of physical assets, and sustainable use of financial reserves by the ministries.

Fiscal policy has remained firm and conservative (Figure 2.27). As formulated in the National Development Strategy, private sector development is a key area. In general, donors share much concern over a lack of government support for competitive private sector development, a poorly performing public service, and a heavily subsidized, inefficient, and extensive SOE sector. Economic development policy needs to be prioritized and focused for Kiribati to realize its domestic potential.

Outlook for 2005-2007 and medium-term trends

Prospects for sustainable economic growth are greatly hampered by overdependence on the Government and on inefficient SOEs, by lack of private sector development, and by pressures of population growth and the associated sparse youth employment opportunities. There are few signs that these factors will be improved immediately, and low per capita GDP growth and dependency on the Government will likely continue in the medium term. Short-term prospects for economic activity and employment are determined by externally funded public sector projects.

GDP is projected to grow by 1.5% in 2005, which is roughly equivalent to the rate of population growth. Increasing youth unemployment is likely. Growth in GNP will continue to depend heavily on receipts from fishing licensing fees and the RERF.

Donors are interested in Christmas Island (Kiritimati), where game fishing and bird watching have been attracting tourists, as a potential economic growth center. In a different context, Japan is contributing to the development of Christmas Island: in 1999, its former National Space Development Agency, superseded by the Japan Aerospace Exploration Agency, announced that it would lease land there for 20 years to build a spaceport. According to the agreement, Japan will spend US$12.9 million over 13 years from 1999. In addition, the Japanese Government has announced that it will aid Kiribati’s fishing industry by funding the construction of a new storage and handling area at Christmas Island’s fishing port from January 2005.

Kiribati’s potential for sustainable economic growth is constrained by its traditional land tenure, by weak policy and institutions, and by lack of resources. Policies for private sector development, as formulated in the National Development Strategy, need to be implemented for people to move away from overdependence on government-led projects and economic activities. New employment, especially for the younger generation, and new investment opportunities are badly needed.

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