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p. 39 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Central Asian Republics, Azerbaijan, and Mongolia People’s Republic of China Southeast Asia South Asia The Pacific Cook Islands Fiji Islands Kiribati Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Tonga Tuvalu Vanuatu III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia

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Kiribati

In 2000, GDP contracted by 4.0 percent accompanied by an increase in the government budget deficit. However, the Government reaffirmed its commitment to reforms through the National Development Strategy 2000–2003. Such reforms and private sector development remain critical for the economy’s prospects.

Recent Trends and Prospects

Real GDP contracted by 4.0 percent in 2000. This contrasts with growth of 2.3 percent in 1999 and 7.3 percent in 1998 when copra production was higher than normal. The fishing license revenue was also unusually high in 1998. With population growth estimated at 2.2 percent a year, real per capita GDP declined to US$469 in 2000, from US$554 in 1999.

The Revenue Equalization Reserve Fund (RERF), which returns investment income equal to around 33 percent of GDP, continues to underwrite government recurrent expenditure. Fishing license revenue, seamen’s remittances, and income from the RERF make up almost half of Kiribati’s national income. Consequently, the economy is open and sensitive to international influences.

Current expenditure in 2000 was A$63.8 million, while A$20.8 million was development expenditure. Revenues exceeded expectations as income from fishing licenses was considerably higher than budgeted. The budget deficit was 5.7 percent of GDP. The fiscal deficits in recent years have been financed from external concessionary loans and accumulated balances in the Consolidated Fund. However, if budget deficits grow larger, there is a risk that the real value of the RERF could deteriorate.

The trade deficit deteriorated in 2000 as copra income declined and imports grew. Exports declined by 10.1 percent, while imports increased by 0.8 percent as a result of increased activity in the construction sector. The trade deficit stood at 80.6 percent of GDP while the current account moved to a deficit of 5.0 percent of GDP from substantial surpluses in the previous two years (see Figure 2.20). International reserves are extremely healthy because of the RERF, amounting to around 10 years of import cover. External debt was equivalent to a relatively modest 20.4 percent of GDP in 2000, remaining within manageable levels.

Inflation remained at low levels in 2000, and was broadly in line with the rate in Australia, the nation’s main trading partner. General retail prices increased by less than 1 percent in 1999, although a slightly larger rise of around 2 percent was recorded in 2000, mainly as a result of the depreciation of the Australian dollar and higher world oil prices. The broad money supply grew by 5 percent in 2000.

Economic growth in 2001 and 2002 is targeted to return to a positive 2–3 percent, supported by the implementation of several significant development projects, including a sanitation, public health, and environment project of the Asian Development Bank, a sports complex, and a fisheries integration project. Income from fishing licenses is expected to remain low due to continuing normal seasonal conditions and low world tuna prices. The trade deficit is forecast to widen again in 2001 as a consequence of additional funding for development projects, while the current account is also expected to remain in deficit. External debt is set to increase significantly in 2001, but annual debt servicing will be kept within the medium-term performance target of not more than 1 percent of current revenue. Inflation is likely to continue tracking the rate in Australia, which is likely to be around 1.5 percent in 2001.

Issues in Economic Management

In line with the Government’s National Development Strategy for 2000–2003, reforms are focused on the Government’s provision of core services, and not on competing with the private sector. However, implementing the reform program and divesting public commercial enterprises need to be accelerated in line with the program of private sector development.

Recent government initiatives to improve the investment climate include the introduction of measures to speed up the investment approval process. The Government has indicated that it will further streamline the investment approval process and strengthen the investment promotion and support capacity of the Ministry of Commerce, Industry and Tourism. It also needs to strengthen the tax and tariff systems to support the growth and development of the private sector, assist in the development of a more diversified export sector, and stimulate foreign and domestic investment.

Macroeconomic management requires better data collection and analysis, including more timely economic indicators to provide data for the national accounts. Anticipated improvements to the collection and compilation of balance-of-payments aggregates will provide a valuable source of macro- economic performance data to assist in policy development.

Policy and Development Issues

The Bank of Kiribati is the sole commercial bank and, along with four other nonbank financial institutions, accounts for the bulk of assets in the financial sector. With the recent announcement that Westpac Banking Corporation of Australia intends withdrawing from its joint venture with the Bank of Kiribati, the Government is actively considering the options for providing commercial banking services in the future. The changeover to a new joint-venture partner will provide the Government with the opportunity to update its banking and financial sector legislation.

Growth in private sector credit is constrained by limited investment opportunities, and by the inability of the Bank of Kiribati to use customary land as collateral. As a result, more than three quarters of the assets of the financial sector are invested overseas. The National Development Strategy is, therefore, giving priority to strengthening the banking sector’s capacity to utilize domestic savings for private sector development. This can be done with the cooperation of the Development Bank of Kiribati and the Bank of Kiribati.

Underemployment and unemployment levels are high in Kiribati, especially among the younger age groups. Currently, less than 20 percent—8,600 people—of the working-age population are formally employed. Yet, in both the public and private sectors, many job openings remain unfilled because individuals with the appropriate training, education, or experience cannot be found. In the short run, this could mean an increase in youth unemployment as the number of school-leavers exceeds the number of new jobs created. Consequently, the Government has identified human resources development as one of the key platforms of the National Development Strategy.

Employment creation requires an attractive enabling environment for the private sector, which includes attracting foreign investment. This, however, will require a shift in attitudes about foreign ownership. The expected reform of foreign investment regulations will be a first step in this direction.

Outer island development continues to be a priority for the Government, which pushes technical training as a way to help people in those areas and to encourage young people to remain on their home islands rather than seeking employment in already crowded urban areas.

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