Regions and Countries

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p. 2 of 5 BACK | NEXT 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 2005–2006: Kiribati

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II. Current Development Trends and Issues

A. Recent Political, Social, and Environmental Developments

1. Political Development

4. The presidential election took place in early July 2003 and H.E. Anote Tong was elected President. The new Government’s key policy areas are: (i) economic growth through prudent investment; (ii) equitable distribution of opportunities and wealth; (iii) more efficient public sector performance; (iv) equipping people to manage changes, especially in education, health, and cultural changes; (v) sustainable use of physical resources; and (vi) protecting and using financial reserves wisely.

2. Social Development

5. Kiribati’s population, predominantly Micronesian with some Polynesian, is estimated at 87,400 (2002) with an annual growth rate of 1.7%. The 2000 population census indicated that around 43% of the population now live on South Tarawa, due to continued urban drift (it was 37% in 1995) and where the population density on the most crowded islet of Tarawa (Betio) is now over 8,300 people per square kilometer. The rest of the population is spread over 22 other islands with total populations ranging from 61 to 5,794.

6. Over 40% of the population is under 15 years of age and demographic dynamics will increase the number of people entering the work force in the next decade by approximately 50%, from around 45,000 in 2002 to around 68,000 in 2012. The provision of education and health services for the members of this group is a large item on the family as well as national budget. These future employment needs are perhaps the most important issue facing the country. Public sector employment today accounts for around 77% of all wage employment, but offers limited scope for expansion.

7. There are great differences in cash incomes between South Tarawa and the outer islands of Kiribati, where many people follow a subsistence-based lifestyle. The 1996 household income and expenditures survey (HIES) by the Ministry of Finance on South Tarawa and two outer islands indicated that people on outer islands in the top quintile of cash expenditure were on a par with South Tarawa, while those in the lowest quintile had far less money to spend than on South Tarawa. The survey showed average expenditure per head on outer islands for the lowest quintile of A$95 per annum compared with A$309 on South Tarawa. Also, the disparity of incomes between those best off (H20) and those worst off (L20) appeared to be much wider on outer islands, with a H20/L20 ratio of 20.5 compared with 5.7 for South Tarawa.

8. There is concern over the social, economic, and health costs of South Tarawa’s overcrowding. The search for cash employment, schooling, and what is seen to be better hospital care and facilities on South Tarawa are the main factors for the urban drift. The Government plans to improve social and economic infrastructure on the outer islands through provision of funding for dedicated outer island infrastructure to stem the flow of migrants to South Tarawa.

9. The Government also aims to reduce income inequality and urban drift by strengthening infrastructure, services, and governance on the outer islands, along with support for commercial production of goods and services. A countrywide program of constructing new junior secondary schools funded under the Kiribati Education Sector Program by the Australian Agency for International Development (AusAID) is now completed. AusAID is providing further assistance on curriculum development, better ways of managing school maintenance funds, and teacher training, and the New Zealand Agency for International Development (NZAID) is providing assistance on basic and tertiary education.The Government now plans to improve the quality of education in government and church schools, strengthen systems for school maintenance and delivery of teaching materials, and extend the outreach and scope of vocational training by building up to 12 rural skills training centers on the outer islands funded by the European Union to provide formal trade training for school leavers from the junior secondary schools as well as a venue for other nonformal and community education programs.

10. Among the Pacific developing member countries (PDMCs), Kiribati has the fourth lowest human development index (HDI), of 0.515. Average life expectancy at birth of 63.6 years shows an improvement, but remains low due mainly to high infant and child mortality from respiratory diseases and diarrhea (the second highest in the PDMCs after Papua New Guinea). Sexually transmitted diseases are another significant problem, and are a risk factor in the prevalence of cervical cancer. Another issue is the rise in HIV/AIDS cases. The latest cumulative incidence reported in 2003 was 43. Tuberculosis is also on the rise at a very alarming rate and is now the highest in the Pacific region with a rate of 100 per 100,000 sputum smear positive cases at the end of 2003. Coinfections of tuberculosis-HIV/AIDS represent a major threat. A comprehensive tuberculosis and HIV program in Kiribati implemented by the Secretariat of the Pacific Community was recently endorsed by Parliament as a political priority.

11. Generally, the standard of health care delivery has risen over the last 3 years, with most health indicators slowly but steadily improving. Access to basic primary care has improved on many outer islands through the construction of 10 new clinics throughout the Gilbert Islands, coupled with an improvement in the nurse-to-population ratio from 1:450 to 1:375. Outer island facilities, however, are generally poorly supplied, maintained, and staffed. Many women on outer islands are isolated from maternal and infant health services. While the Government is preparing a new population policy and is maintaining good progress reviving public awareness of the value of responsible parenthood, there is much more to be done, especially to improve the delivery of public health and basic curative services and to roll back the incidence of HIV/AIDS and lifestyle diseases.

3. Environmental Development

12. The World Bank has rated Kiribati⁴ as one of the countries most vulnerable to the effects of climate change, climate variability, and sea-level rise. The atoll islands of Kiribati are characteristically low-lying with no hinterlands. This makes Kiribati highly vulnerable to changes in rainfall patterns and sea level, both from the point of freshwater availability and of land loss through erosion and inundation. In its current climatic conditions, Kiribati has high vulnerability to extreme events, particularly those leading to either drought or coastal flooding. The impacts of such events have adverse effects on socioeconomic development, as resources are diverted to support emergency response and disaster rehabilitation. The potential threat of accelerated sea-level rise due to global warming puts all shorefront development at high risk from wave erosion, and from impacts from cyclones, storms, and coastal inundation. These threaten the viability and performance of engineered facilities, as well as the economic growth and development of Kiribati, particularly in climate-sensitive sectors, such as water and sanitation, infrastructure, and inshore marine resources. The new Government is undertaking a long-term program of adaptation to climate-related risks with the support of the World Bank and bilateral funding agencies. The results from the current ADB-supported Sanitation, Public Health, and Environment Improvement (SAPHE) Project⁵ and National Water Resource Assessment and Management Project⁶ will be incorporated into the frameworks of the climate-change adaptation strategy.

B. Economic Assessment and Outlook

13. Real gross domestic product (GDP) is estimated to have grown by 2.5% in 2003, improving from the previous 2 years. This is attributed to higher consumer spending, which in turn resulted from increased government expenditures in the run-up to the national elections in late-2002 and in mid-2003, and from the employment provided by construction work on large, continuing development projects, mainly on South Tarawa. GDP growth in 2002–2003 has been held back in part by problems in the agriculture sector, especially declines in copra and seaweed production. However, small-scale production of phosphate has revived on Banaba (Ocean Island).

14. Consumer spending emanating from development projects and from the national elections also stimulated the private business sector. There has been a proliferation of microenterprises on South Tarawa (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.

15. The private sector could probably play a more significant role in the economy by improving the efficiency and effectiveness of many services presently supplied by 33 public sector enterprises. The Government is in the process of setting commercial standards for several public enterprises to improve their chances of commercialization and privatization. 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.⁷ The Government plans to encourage public sector performance through the use of awards and revision of the national conditions of service. Service agreements are to be introduced for all public enterprises on the understanding that some enterprises may be unsustainable. Public tenders are to be introduced for subsidized services. Technical assistance will be sought to test efficiency improvements for public enterprises. Sound regulation will also be needed to ensure that public monopolies do not simply become private sector monopolies, with no improvement in services.

16. Because of the narrow production base, the financial situation of Kiribati is vulnerable to external shocks but is, at the same time, buffered by its external earnings. Fishing license revenues, investment income, and seafarers’ remittances make gross national product around 70% higher than GDP. Gross national product is estimated to have decreased from A$168 million in 2002 to A$160 million in 2003, a decline of almost 5%. This was mainly due to a 22% drop in fishing license revenues from 2002 to 2003, and a decline in sales of passports to foreigners, a practice which is being phased out. While remittances from overseas employment kept pace with inflation at 2%, the income from the overseas investments of the RERF began to rebuild some of the value that had been lost in weak global financial markets in 2001–2003.

17. Central government revenues, including RERF, are estimated to have decreased from A$101.9 million in 2002 to A$82.3 million in 2003, primarily as a result of the decline in revenues from distant water fishing licenses, a phasing out of the sales of passports to foreigners, and a fall in tax and other nontax revenues. Central government current expenditure is estimated to have decreased from A$71 million in 2002 to A$65 million in 2003, and is projected to remain at the 2002 level in 2004–2006.

18. Under the key NDS policy area of economic growth, increased confidence in fiscal sustainability is to be achieved by forcefully implemented credible budgets, maximizing the sustainable collection of revenue from existing sources and preparing for the introduction of a value-added tax on consumption in 2005.

19. To maximize benefits from national revenue and expenditure, the Government is adopting new measures for performance reporting on the NDS, not only for statutory reporting requirements, but also to ensure that the efforts in planning are not wasted through a lack of effective monitoring and review. The Ministry of Finance and Economic Planning (MFEP) will have overall responsibility. Penalties for failing to comply with reporting requirements include reservation of part of the funds allocated to ministries and the withholding of subsidies to public enterprises.

20. Short-term prospects for economic activity and employment are dominated by existing externally funded public sector projects and the speed with which other projects in the pipeline can be mobilized. The improved performance of the RERF does not match the sharp drop in fisheries revenue, and the 2004–2005 budgets will need to draw A$14 million from the RERF to balance recurrent revenues and expenditures.

21. In April 2004, official reserves remain substantial at the equivalent of over 4 years of imports of goods and services, and public external debt is relatively low at about 10% of GDP, with no domestic debt. The momentum of past decisions to increase expenditures appears to have made substantial budget deficits in 2004–2005 unavoidable, reaching A$22 million in 2004, almost double that projected for 2005 but declining thereafter. By 2005, departmental and public enterprise activities are expected to be showing the benefits of improved coordination and performance monitoring, and the budget should be within sight of stability.

C. Implications for Country Strategy and Program

22. The new Government has also made progress in responding to national development needs, but recognizes that there is much more to be done. The Government and ADB agree that key issues to be addressed include (i) population growth outstripping capacity to provide employment, and excessive population concentration on South Tarawa; (ii) provision of sustainable water supply, sanitation, and public utilities management; and (iii) access to improved health, education, and social services, as well as wage employment, on the outer islands.

23. First, building on experience with the SAPHE Project, ADB will continue its efforts in assisting the Government to improve access to safe water supplies and sanitation through a water resource development project in the Gilbert Islands. ADB will also continue to assist in institutional capacity building for water use optimization.

24. Second, to support the Government’s strategic emphasis on growth centers, ADB, in conjunction with the United Nations Development Programme (UNDP), will provide a phased project preparatory technical assistance (PPTA) to conduct the feasibility study on growth centers called for in the NDS. This PPTA will explore the possibilities of sustainable economic growth and identify the necessary infrastructure and services development in support of private sector growth, sustainable use of natural resources, and employment generation and livelihood. Kiritimati is by far the biggest atoll in Kiribati and has the most promising potential to absorb the increasing population as well as generating the necessary jobs. Its proximity to Hawaii, abundant deep water tuna resources, adequate freshwater resources, and tourism potential, justify an innovative approach to development. However, much of this potential depends on retaining an attractive and interesting environment and ADB will attempt to raise grant funding from the Global Environment Facility for integrated ecosystem management.

25. Third, an advisory technical assistance (ADTA) will be provided to support vocational training in the tourism sector for the Line and Phoenix Islands, while another ADTA will target corporate governance training at those public enterprises slated for reform.

26. Finally, physically connecting the scattered archipelago, both internally and externally, will require upgrading airports and landing strips throughout the country. Consistent with Kiribati’s commitment to the newly established Pacific Aviation Safety Office, a contribution to ADB’s regional loan to that office is expected in 2005. To implement new safety standards and to improve services, especially with an improved east-west route, a PPTA is planned for upgrading selected priority airports.

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