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I. Country Strategy
II. Current Development Trends and Issues
III. Implementation of the Country Strategy and Program
IV. Portfolio Management Issues
V. Country Performance and Lending Level
Country Strategy and Program Update 2003-2005: Kiribati

II. Current Development Trends and Issues

A. Recent Political and Social Developments

4. Political Developments. Kiribati is a relatively young, stable, and peaceful parliamentary democracy. The Constitution provides for effective political representation and participation and protects human rights and the rule of law. The next general elections are expected in October 2002. The elections take place in two phases: first, 41 island-based constituencies vote for their members of Parliament. The President is then elected from among 3-4 members of Parliament nominated by the Parliament.6

5. On the international front, Kiribati is raising its profile. In March 2002, it opened its first overseas diplomatic mission in Suva, Fiji Islands. Meanwhile, the United Kingdom has reopened its High Commission on South Tarawa. The country is participating in the negotiations for the Pacific Island Countries Trade Agreement to establish a free trade area. Without tax and tariff reform, this could have an adverse impact on the budget, as tariffs presently account for 15% of overall government revenues.7

6. Social Developments. The National Statistics Office has recently issued the summary tables for the Population Census 2000. The tables report a total population of 84,494 in November 2000. They show that 43.5% of the population is concentrated on South Tarawa, where the population density is 2,330 persons per square kilometer. The rest of the population is spread over the other 32 islands, of which only 19 are permanently inhabited. Of the economically active population, less than 19% were employed in the cash economy, and of these, 39% worked for the central Government, 26% for public enterprises, and 12% for island councils. Thus, the aggregate portion of total employment accounted for by the public sector is no less than 77%.

7. Access to health and educational services in the outer islands is limited but improving. The Government has recently concluded a program to build junior secondary schools in all the inhabited islands of Kiribati.

B. Economic Assessment and Outlook

1. With real (1991 prices) per capita gross domestic product (GDP) of US$430 in 2001 (A$836), Kiribati is ranked 9th (up from 11th-the lowest-in 1995) among ADB's PDMCs.8 Kiribati's economy grew by an estimated 1.5% in 2001, compared with -1.7% in 2000. Real per capita GDP meanwhile fell by 0.1% in 2001. The improved GDP growth outcome in 2001 is attributed to an increase in recurrent government spending and implementation of a number of large public sector development projects (e.g., completion of a new Parliament complex, construction of new junior secondary schools in the outer islands and South Tarawa, and a water supply project on the largest island of Kiritimati).

9. GDP is projected to increase by 2-3% per year in the next 2 years. Key contributors will be major public investment projects. These include a power generation plant and sewerage project, a sports complex, a foreign satellite tracking project, a rural electrification project, a copra mill and three junior secondary schools on South Tarawa, and the outer island water supply project.

10. Although opportunities for private sector development are very limited, there has, nevertheless been a proliferation of microenterprises on South Tarawa9 (mainly small, unregulated business activities, including shops, food stalls, and transport services). These microenterprises are often financed by loans using a family member’s public sector salary as collateral. The private sector could play a much more significant role in improving the efficiency and effectiveness of many services presently supplied by public sector enterprises. The Government is in the process of setting commercial standards for several public enterprises and in formulating strategies for achieving full commercialization and privatization of these enterprises. The Bank of Kiribati is now 75% owned by ANZ Banking Corporation. The enterprises targeted include Atoll Motor Marine Services, Tarawa Biscuits, and the Otintaai and Captain Cook hotels.10 However, this commercialization/privatization process is extremely slow and not always politically supported. What is lacking is real commitment to encourage foreign investment at the individual level and without public sector involvement.11

11. Despite the narrow productive base, the financial situation of Kiribati is sound due to external assistance (equivalent to an annual average of 27% of GDP between 1996-2000), including fishing license fees (38%), remittances12 (15%), and the interest and dividend earnings of the RERF (27%), which supplement domestic income. The high level of external factor income results in the gross national product (GNP) being almost twice the level of GDP.

12. Fiscal management has tended to be conservative in Kiribati. However, a more expansionary stance has been taken in the last 3 years and is planned for the medium term. After a small deficit in 2000 of US$0.6 million (excluding RERF income), the deficit was budgeted to increase substantially in 2001 to about US$15 million13 (or the equivalent of -37.5% of GDP). In the event, record receipts from fishing license fees resulted in a small surplus of US$2.0 million (4.4% of GDP) actually being achieved. The budgeted deficit for 2002 is equivalent to US$13.1 million (31.1% of GDP), and for 2003 a deficit of a similar magnitude is projected.14 A more expansionary fiscal stance would be possible by making more productive use of RERF income, the use of which has, in the past, been limited to providing balancing finance when shortfalls of other revenues have occurred. The result has been a consistent increase in the real per capita value of the RERF but little domestic benefit being generated.

13. In fact, the RERF has almost tripled in value over the past 10 years, and by the end of 2001 stood at A$635 million.15 The combination of cautious management and a sound investment strategy has ensured that the RERF has performed well. However, several assistance agencies have suggested that the Government could make more use of the RERF to finance priority domestic sectors such as health, education, and public sector asset maintenance. This would be possible and still remain consistent with the RERF's main objective of maintaining the real per capita value of the fund. The ADB-funded TA on poverty reduction strategies16 is assisting the Government in reviewing the impact of the RERF on the economy and advising how to enhance the social return of its earnings.17

14. The impact of the 11 September events resulted in a 3.5% fall in the overall value of the RERF during 2001. A global downturn, should such occur, might also adversely affect the Kiribati economy through lower remittances from overseas employment and through declining fish license revenues. These might therefore constrain the budget expenditure ambitions of the Government.

C. Implications for Country Strategy and Program

15. While the fiscal discipline of the country is commendable, more could be done to enhance the efficiency and effectiveness of the economic system and improve the conditions of the most disadvantaged.18 The limited opportunities for private sector development increase the need for the NDS outcomes to be achieved with ADB assistance: (i) good governance, (ii) inclusive social development, and (iii) pro-poor economic growth. In particular, ADB is fully engaged in assisting the Government in (i) increasing awareness of the possible role of the private sector (e.g., support to the NDS), (ii) creating a conducive environment for private sector development (PSD) (e.g., program matrix of the assistance for outer island development), (iii) identifying new opportunities for PSD (e.g. mariculture activities), and (iv) specific privatization activities (e.g., privatization of the National Bank of Kiribati). Kiribati, together with four other PDMCs, has been selected for inclusion in a forthcoming regional TA for Private Sector Development.19 Under the regional TA, a private sector assessment and strategy exercise will be conducted, focusing on the analysis of constraints to, and opportunities for, PSD in Kiribati and key conditions for a well-functioning private sector. This will include strategic directions, for both Kiribati and ADB, to enhance PSD in terms of medium-term priority interventions, reform processes, and sequencing. The results of the exercise for Kiribati are expected in early 2003.

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  1. The present President, H.E. Teburoro Tito, was reelected for his second term in November 1998. The President can serve a maximum of three terms.
  2. The ADB-financed TA on poverty reduction strategies is assisting the Government in designing tax and tariff reform in coordination with Australian assistance to the Ministry of Finance and the customs office.
  3. It should be noted, however, that the Kiribati GDP estimates do not include the full extent of the subsistence agriculture and other non-monetary sectors and, on recent Government estimates, could therefore underestimate total GDP by up to 17.5%.
  4. Apart from Kiritimati island, where the tourism sector is growing rapidly, the private sector is extremely limited on the outer islands. ADB is assisting private sector development in the outer islands through the proposed Outer Island Development Program and the project assistance for mariculture development.
  5. The Otintaai Hotel in South Tarawa now has to compete with new small hotels and guesthouses.
  6. ADB is fully engaged with the Government in a constructive dialogue to expand the role of the private sector in service delivery, and was instrumental in the reprivatization of the Bank of Kiribati.
  7. There are around 1,200 seamen working on foreign ships.
  8. In 2001, the RERF was expected to provide around 18% of the Government’s recurrent expenditures, primarily to meet the costs of higher subsidies and capital injections to the state-owned enterprises.
  9. A budget deficit of 31.1% of GDP in 2001 seems to contradict the traditional fiscal prudence of the country. However, (i) GDP is only part of the disposable income (about half of GNP), and (ii) covering the recurrent budget deficit is the main function of the interest and dividend earnings of the RERF.
  10. The RERF was created in 1956 with an initial sum of A$550,000. At independence in 1979, the RERF was valued at A$56 million; in 1990, at A$220 million; and, at the end of 2000, at A$658 million.
  11. ADB. 2001. Technical Assistance to Kiribati for Strengthening Development Strategies and Supporting Poverty Reduction. Manila.
  12. In 1999, through the Island Development Program loan, ADB assisted the Government of Tuvalu in earmarking part of the Tuvalu Trust Fund for the outer islands. A similar arrangement is presently being discussed in Kiribati with the proposed Outer Island Development Program. Meanwhile, the advisory TA to the Ministry of Finance for poverty assessment and strategies is also assisting the Government in earmarking part of the RERF earnings for basic social services and poverty reduction.
  13. ADB is helping the Government to increase the effectiveness and equitability of the economic system through the ongoing TA on poverty reduction and strategies.
  14. ADB. 2002. Technical Assistance for Private Sector Development Strategy for the Pacific. Manila.
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