Catalog

Tuvalu

Economic performance is primarily determined by trends in government expenditures and by offshore earnings. These latter come from the Tuvalu Trust Fund, fishing license fees, fees from leasing the country's ".tv" Internet domain name, remittances from overseas workers, and external grants (Figure 3.34.30). GDP in 2007 grew by an estimated 2–3%, supported by an 18.0% increase in public spending. The Trust Fund distribution to the budget fell by 15.5% and ".tv" receipts were down by 19.8%. Overall revenue levels were sustained by a 34.4% rise in fishing license fees and a 14.3% rise in external grants. Inflation was about 3%. The Australian dollar is used as domestic currency, so inflation usually tracks the trend there.

The Government raised spending on maintenance and capital projects in 2007 (the latter by an estimated 50%), although it also reduced outlays on goods and services. The net increase in spending reduced the overall budget surplus to 4.2% of GDP (Figure 3.34.31).

Net public debt was estimated at 45% of GDP at end-2005 in net present value terms and including cash holdings. Mainly due to an increase in returns from the Trust Fund (with a market value of A$110 million at end-2007), the Government had become a net lender by the end of last year. Nevertheless, the fiscal position remains volatile. There is a risk that the Government will again accumulate unpaid bills and also crowd out private sector lending by overusing its overdraft with the National Bank of Tuvalu. Improved management of the Consolidated Investment Fund, which holds drawdowns from the Trust Fund as a financial buffer, expenditure controls, and the completion of plans to introduce a broad-based consumption tax would help stabilize the fiscal position. Revenue reforms are needed to offset a progressive reduction in import duties planned for the next 10 years under Tuvalu's ratification of the Pacific Island Country Trade Agreement.

The merchandise trade deficit runs at around 50% of GDP and is balanced by income from license fees, external grants, workers' remittances, and investment income from the Trust Fund and another fund established for the outer islands. Over the years, these flows of income from abroad have fluctuated and given rise to considerable volatility in the economy.

Further moderate economic growth is expected in 2008 on an expansion in fisheries; outer island development projects; construction of a Parliament complex, new police station, and prison; and port refurbishment. A slight rise in inflation is projected in line with that in Australia. Further ahead, climate change looms as a major challenge.