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 Assistance Levels

Country Strategy and Program Update 2004-2006: Tuvalu

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II. Current Development Trends and Issues

A. Recent Political and Social Developments

1. Political Developments

4. The Government which came to power in mid-2002 announced that it would continue to focus on human resource development, economic infrastructure, financial management, public sector reform, private sector development, and support for the outer islands. The Government, however, possesses only a slim majority in Parliament and faces the constant threat of losing political control.

2. Social Developments

5. 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. Despite this increase in expenditure, the pass rate in the Fiji junior secondary examination (the benchmark test) fell from 61% in 1991 to just 13% in 2001, thus prompting the establishment of a board of inquiry to examine the cause of the poor performance and to review progress in the Education for Life program. The cause of the poor performance was attributed to a number of factors, including a low financial base to deliver services, deteriorating infrastructure, a fragmented curriculum, overemphasis on higher education at the expense of primary education and a weakening of management skills and leadership in the education sector. The findings and proposed actions were reported in the National Education Forum held in August 2002 and the donor round table meeting on education in October 2002. The meeting presented actions to address the educational concerns and the external agencies involved have agreed to look at areas such as curriculum, human resource planning, early childhood education, vocational education, and infrastructure development. It appears that the education sector would benefit from the development of a program approach to the sector to allow better coordination of education assistance.

6. Preliminary results of the November 2002 Census indicate a residential population of 9,119. This represents an annual rate of population growth since the last census in 1991 of less than 0.1% per annum. Anecdotal evidence suggests this is the result of increased migration to Australia, Fiji Islands, and New Zealand, rather than a fall in the natural growth rate. While the population of the nation as a whole has been largely stagnant, the population of the island of Funafuti, the capital city, has grown from 42.5% of the national population in 1991 to 49.3% in 2002, due to continued depopulation of the outer islands. While 100% of Tuvalu’s population has access to water, most water still needs to be boiled before consumption. Access to sanitation is also 100%. But some of the sanitation facilities are reported to be of poor construction and could contaminate water supplies, particularly on the outer islands.

3. Environmental Developments

7. Tuvalu has been rated as one of the countries most vulnerable to climate change and rising sea levels. Furthermore, the coastal environment is fragile and deteriorating, particularly on Funafuti which is facing solid waste and land management problems. The problems mostly relate to congested conditions on Funafuti, resulting from the combination of increasing population, poorly planned land use, and overtaxed water, sewage, and waste disposal systems. Water shortages, lagoon pollution and sanitation problems will soon become even more prominent if migration to Funafuti continues at the current rate. In response to these concerns, the Government increased the number of staff in the Environment Unit within the Ministry of Natural Resources, Environment, and Energy. A 3-year waste management project funded by the Australian Agency for International Development (AusAID) was completed in June 2002. While the project made good progress, consolidation and extension of such progress are needed. Committed staff are addressing waste management issues, but further technical assistance is needed to build capacity, strengthen institutions, and combine water, sanitation, and waste policies into a comprehensive planning and management program. The European Union (EU) has expressed interest in expanding the waste management project to the outer islands.

4. Governance

8. The civil service has been subject to considerable disruption and uncertainty in recent years. Changes in government during 1997-2002 have led to frequent changes of ministers and movement of senior officials, with unfavorable consequences for the effectiveness of policy formulation and implementation. Analysis of fiscal developments is hampered by the absence of reliable data. Although performance–oriented output budgeting was introduced in 1995, reports consistent with effective output budgeting are yet to be prepared. There have also been long delays in ensuring that budget reports comply with legislated report requirements. Audited government financial statements for 1997–1999 were prepared by a private auditing firm on behalf of the Auditor General and only submitted to Parliament in November 2002.

9. The budget is formulated in a single-year framework, which leads to a number of adverse economic efficiency effects. The 2003 budget proposed a shift to a multiyear budget framework and improvements in the budget process. Serious consideration needs to be given to the shape of a more meaningful, usable, and effective budget framework, mindful that the framework should match institutional capability.

10. The biggest challenges in public sector management are (i) preparation of a new NSDS to guide public sector project identification, annual budget preparation, and aid coordination; (ii) improvement in basic financial management information, accounting, and reporting systems; (iii) raising the standards of management, accountability, and efficiency in the SOEs; and (iv) engagement and retention of qualified and committed personnel.

B. Economic Assessment and Outlook

11. Real gross domestic product (GDP) grew at an estimated compounded average annual rate of 4.8% from 1989 to 2002. In 2002, economic growth decelerated to about 2%, following growth of around 4% in 2001. Growth in 2003 is projected to remain at about 2%. The slowdown in 2002 came in the wake of severely reduced government spending. Receiving little stimulus from the state sector, the country's production base suffered in many sectors. The construction and retail sectors recorded marginal growth in 2002, with the primary sector faring slightly better.

12. Revised government expenditures in 2002 were less than half of the original estimate, as a result of lower special development spending, capital expenditures, and transfers. Special development and maintenance expenditures were about 65% and 50%, respectively, of the original estimate. Consequently, the fiscal contraction resulted in reduced spending on infrastructure and on health and education services.

13. The continuously high license fees for fishing for several years in a row and windfall revenues from the DotTV agreements in 2000 raised public expectations for increased government investments. Big spending continued in 2001, but the expected further windfall gain for that year did not materialize, giving rise to the country’s first overall deficit (equal to 42.8% of GDP). A substantial one-off boost to revenues came in 2002 as a result of the sale of the DotTV Corporation for A$20 million, but spending was curtailed in an effort to prevent a replication of the deficit of the preceding year. The combination of expanded revenues and a significant reduction in overall government expenditures led to a very large budget surplus of around 85% of GDP.

14. The 2003 budget proposed stronger control of public financial management through reduction in overall expenditures, tighter control of special development expenditures, and improvement in financial accountability and operational performance of SOEs. These reforms have been needed to cope with the substantial declines in revenues from the Tuvalu Trust Fund (TTF) combined with the volatility in fishing license and DotTV revenues. These revenues together fund a large proportion of Government expenditures. This has resulted in a decrease in the total budget from US$31.4 million in 2002 to US$25.3 million in 2003, mainly due to decreases in special development expenditures.

15. Remittances from seafarers, official transfers, and investment income from the TTF assets also contribute substantially to foreign exchange earnings. With weakness in world equity markets, the market value of the TTF on 30 September 2002 was 10% less than the maintained value. Consequently, there was no distribution of earnings in 2002, and none is expected in 2003 and 2004. In addition, the Consolidated Investment Fund (CIF)–a buffer account that takes government surpluses and is normally used to finance deficits–was drawn down to about half of the minimum target level to finance government development projects. This led to the Government exceeding the ceiling on core expenditure for 3 years in a row and the creation of accountability and management problems associated with the budget, including improper use of advances. The Government’s cash position will need careful management if it is to help ensure macroeconomic stability in the near term.

16. Like budget reform, public enterprise reform has been underway since the mid-1990s. However, there is still a need to develop an effective governance framework to improve financial accountability and operational performance. For example, there has been a failure to comply with legislation that requires timely annual reports and financial accounts. The links between the Government and the SOEs have the potential to impact on the Government’s financial position unless these issues are addressed. The 2003 budget announced that no operating subsidies would be paid to SOEs until operating agreements have been signed with the Government, and technical assistance (TA) will seek to develop improved corporate governance arrangements. The improvement of the operational efficiency of SOEs, such as the Tuvalu Electricity Corporation, Tuvalu Maritime Training Institute (TMTI), Tuvalu Telecommunications Corporation, and the interisland shipping service (which was the subject of an unsuccessful corporatization), will help underpin private sector development.

C. Implications for the Country Strategy and Program

17. With the poor performance of major revenue sources in recent years, the Government’s reserves in its CIF are reaching critically low levels. Such poor performance, particularly as a result of the declining value of the TTF, comes in the wake of substantial windfall revenues from the marketing and sale of Tuvalu’s Internet top level domain name which led to a relaxation of the Government’s normal fiscal prudence. Increased pressure on Government’s finances appears to have prompted the need for tightening financial management. SOEs and government commercial operations require attention to reduce their impact on the Government’s budget and to improve their standards of management, accountability, and efficiency, especially since many of the services underpin economic and social service delivery to the outer islands. ADB's country strategy has therefore maintained its focus on governance, especially public financial management and corporate governance.

18. The continued problems of water and waste management on Funafuti are escalating with the increased population in the capital. The preliminary population figures indicate that overcrowding and associated problems will continue. Previous interventions in waste management have made an impact, but further work is needed.

19. Loan and technical assistance to help the Government focus its interventions in the education sector are needed to overcome the problems identified by stakeholders. Already the Government has identified as one of its priorities the creation of a secondary school that will also address nonacademic aspects of education. This is consistent with the country strategy and is an area for possible loan assistance.

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