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Regions and Countries Country Partnership Strategy Document
Country Strategy and Program Update 2003-2005: Tuvalu
II. Current Development Trends and IssuesA. Recent Political and Social Developments1. Political Developments6. Tuvalu has recently undergone political changes as a result of a parliamentary vote of no confidence on 6 December 2001. A new cabinet was announced on 13 December 2001. Presentation of the 2002 budget was deferred until February 2002. Tuvalu's next general election is due in August 2002. 2. Social Developments7. With a Human Poverty Index (HPI) of 7.3, Tuvalu ranks as the third least poor among the Pacific developing member countries (PDMCs). Its Human Development Index (HDI) of 0.583 is midrange by PDMC standards. The HDI and HPI scores reflect access to basic subsistence resources, relatively rapid economic growth, and increased public expenditure on health and education. However, with respect to the increased expenditures on education, salaries absorb 81% of the recurrent expenditures, and a further 9% is for housing allowances, leaving very little for operations. In addition, the pass rate in the Fiji junior secondary examination (the benchmark test) fell from 61% in 1991 to just 13% in 2001. This probably indicates deterioration in the level of English proficiency, as the tests are conducted in English, rather than a general decline in education. The Government has subsequently launched a board of inquiry, the findings of which are expected in May 2002. However, the findings have not been made public yet. 8. Tuvalu's population of around 10,350 has a reasonable standard of health by comparison with other lower-middle income countries. The infant mortality rate fell from about 43.5 per 1,000 live births in 1990 to just 13.1 in 2000. Life expectancy increased from approximately 57 years for men and 60 years for women in 1990 to 64 years for men and 70 years for women in 2000. While 85% of Tuvalu's population has access to water (most water still needs to be boiled before consumption), access to sanitation is lower at 49%, and some sanitation facilities are reported to be of poor construction, particularly in the outer islands. 9. Tuvalu developed and adopted its first formal social development policy in 2001. The policy specifies four guiding philosophies and identifies social development objectives for 12 distinct groups. The responsible ministry acknowledges that in its present form the policy document lacks detail on strategies, but it is intended that the document will act as an overall framework through which systematic integration of all activities impacting on the nation's social fabric can take place. These policies are expected to be included in the next NDS. 3. Governance10. The civil service has been subject to considerable disruption and uncertainty in recent years. Changes in government during 1997-2001 led to frequent changes of ministers and movement of senior officials, with inevitable consequences for the efficiency of policy formulation and implementation. The Government is still scattered around Funafuti in small units of rented accommodation, which has reduced the efficiency of public administration, with record keeping deteriorating markedly. Analysis of fiscal developments is hampered by the absence of reliable data. Only in early 2002 did the accountant in the Ministry of Finance return from overseas training, and only now has progress in clearing the long overdue accounts for audit been made. The 1996 and 1997 accounts have been re-presented to the Auditor General's Office with explanation of issues raised; the 1998 and 1999 accounts have also been prepared and passed to the Auditor General; and the 2000 accounts will be submitted to the Auditor General as soon as bank reconciliation is completed. The 2001 accounts are scheduled for audit later in 2002. 11. The biggest constraints facing the Government are (i) preparation of a new NDS to guide public sector project identification and annual budget preparation, as well as appropriate aid coordination; (ii) engagement of sufficiently appropriate qualified and committed personnel in the Ministry of Finance; and (iii) raising the standards of management, accountability, and efficiency in the SOEs. The lack of an NDS is apparent in the ad hoc approach of the Government to the preparation of its development budget. The reliance of only one truly qualified person to take care of the accounts leaves the Ministry of Finance extremely vulnerable; similar staff conditions are true for other ministries. B. Economic Assessment and Outlook12. Real gross domestic product (GDP) grew at an estimated average annual rate of approximately 5% from 1988 to 2001. In 2001, Tuvalu's economy grew by approximately 4%, following growth of 3% in 2000. Growth was led primary by the public sector, with public administration expanding by close to 5% in 2001, and construction continuing its recent expansion as a result of government- and aid-funded projects. Road improvement on the main island of Funafuti was the most significant of these projects. Other sectors of the economy grew at more modest rates of around 2%. The inflation rate in 2001 fell substantially to 1.8% from 5.3% in 2000, the drop reflecting falls in textile and clothing prices and in costs of miscellaneous items. 13. Real GDP per head grew at the average annual rate of 3.7% between 1988 and 2001. In 2001, it was estimated at A$1,681 (in 1988 prices), with about 22% generated by household nonmarket production. This growth was entirely attributable to expansion of the formal economy, which was concentrated on Funafuti. Between 1991 and 2001, the overall employment in the formal sector grew at an average annual rate of 2.2%. There was relatively rapid growth in employment in public corporations, modest expansion in the number of established civil service positions, and limited growth in private sector activity. 14. The economy relies heavily on income from fishing license access fees (A$11.8 million in 2001 or 50% of total recurrent revenue), taxation (A$5.6 million), its marketing agreement of its internet domain DotTV (A$3 million), and rent from its international telecommunications dial-up code (A$0.6 million). Remittances from seamen, official transfers, and investment income from the Tuvalu Trust Fund (TTF) assets also contribute substantially to foreign exchange earnings. Remittance from Tuvaluan seafarers more than doubled during 1997-2001: in 2001, approximately 450 seafarers sent A$4.9 million home, which was equivalent to 20% of nominal GDP. Net income receivable from the overseas assets of the TTF has fluctuated from year to year, but in 1996-2001 drawdowns from the Consolidated Investment Fund (CIF)-formerly called the B account-provided 21% of the Government's total recurrent revenue. 15. Tuvalu's merchandise export base is extremely narrow, being confined to copra, stamps, and handicrafts. While copra and stamp exports have declined substantially from the levels of the 1980s, imports have risen significantly. Imports in the first three quarters of 2001 were A$10.2 million, approximately double the level of the corresponding period in 2000. The substantial trade deficit and heavy payments for freight and insurance continued to be financed by remittances, investment income, fishing and telecommunications license fees, internet domain name marketing revenue (DotTV), and official transfers. 16. The revised budget figures for 2001 show that total recurrent revenue was A$23.4 million, which was 11% above the original budget and, when added to the A$11.7 million drawn from the CIF, total revenue was A$35.1 million. Total expenditure for 2001 was A$33 million, with recurrent expenditures estimated at A$19.3 million and the remaining spent on items described as "special development." 17. The continuous high license fees for fisheries access for four years in a row (around A$10 million annually), combined with the windfall revenue in 2000 and 2002 from the DotTV agreements (A$24.9 million and A$23.7, respectively), has raised public expectations for increased government investments. The road upgrade in Funafuti and the outer island electrification project are tangible outcomes of such investments. However, this has caused the core expenditure ceiling of A$15.5 million, as defined by the Economic Research and Planning Department, to be ignored for 3 years. In addition, expenditures on operation and maintenance of government assets are consistently deferred and/or underfunded. 18. The market value of the TTF on 31 March 2002 was A$69.96 million. The TTF is 2.4% below its maintained market value - determined as its paid-in capital adjusted for inflation - and the CIF account has been drawn down to approximately half its previous level. The present Government has indicated that it will contribute A$5 million in 2002 to both accounts to compensate for the shortfalls. In view of Tuvalu's reputation for fiscal prudence, there is an urgent need to reign in expenditures, maintain government assets diligently, make realistic budgets, and clear outstanding debts. 19. As a signatory to the Pacific Island Countries Trade Agreement, Tuvalu is committed to tariff reduction. In August 2001, Tuvalu signed the Pacific Agreement on Closer Economic Relations. This will come into force in 2002, once ratified by at least six countries. Import taxes in total generated 55% of taxation revenue in the 1996-2001, and 9% of current revenue and grants. Any future tariff reform will therefore need to take into consideration the implications for government revenue. 20. The recent completion of the road upgrade on Fongafale, the capital island in the Funafuti atoll, has caused a considerable increase in cars and motorcycles, with a subsequent surge in small-scale private sector development for repairs and services. The tender for the new three-storey government building has been awarded and construction is expected to commence in 2002, and the new hospital is expected to be completed by the end of 2002. The new government building alone is calculated to consume at least 1 megawatt of electricity and, together with the emerging private sector businesses, it is clear that electricity supply will be a major constraint in Funafuti in years to come. If not appropriately addressed, this could impede further private sector development and constrain efficient governance. C. Implications for the Country Strategy and Program21. The general lack of appropriate financial and policy governance of the SOEs, and the concerns that the SOEs are not sufficiently accountable for their actions and performance, call for a more detailed examination of the governance of Tuvalu's SOEs to identify issues and problems, assess the scope for improving performance, and recommend on an appropriate strategy for better service delivery at least cost. The Ministry of Finance, therefore, requested that the earlier proposed TA for 2003 on Interisland Shipping Commercialization and Privatization be expanded to cover broadly the Governance of Public Sector Enterprises. 22. The absence of a new NDS, the general elections in July 2002, and the planned infrastructure projects in wharves and landing places by other development agencies, has made it difficult to identify an economically viable project for ADB financing for 2005. The Government of Tuvalu has therefore decided to defer the identification of a loan until the next country strategy and program update. 23. The identified future constraint of electricity supply to Funafuti is a good opportunity to analyze this particular sector for the most appropriate and environmentally benign form for electricity generation. Currently, Tuvalu is only using diesel generators, but, given its location close to equator and an average of 2,000 hours of sunshine per year, it would be logical to explore the possibilities for future hybrid generators using solar energy, fossil fuel, and other types of oils as well as cogeneration. An advisory and operational TA for $150,000 to assess future power generation options has therefore been included in the 2004 program.
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