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Economic Fragmentation Threatens Kiribati’s Growth
Kiribati - The International Monetary Fund (IMF) has warned that economic fragmentation could have a devastating impact on Kiribati’s economy, leading to supply disruptions and inflation. The country is already facing significant challenges, including prolonged global financial market volatility, climate change, and donor-funded infrastructure projects.
Uncertain Economic Outlook
According to the IMF, Kiribati’s economic outlook is uncertain due to the potential risks associated with these factors. The country’s fishing revenues are expected to decline in the short term, while the reopening of the Pacific Island Private Aircraft (PIPA) could boost fish ing revenues in the medium term if managed sustainably.
Authorities Agree with IMF Assessment
The Kiribati authorities broadly agree with the IMF’s assessment of the country’s economic outlook and risks. They expect a resumption of donor-funded large infrastructure projects and a recovery of copra production due to improved weather conditions. However, they are concerned about the impact of high inflation on food security issues, uncertainty in shipping schedules, and substantial increases in freight costs.
Post-Pandemic Policies for Growth and Resilience
The IMF has recommended that Kiribati adopt post-pandemic policies to promote growth and resilience. These include:
- Scaling back recurrent spending
- Addressing fiscal challenges
- Increasing revenue mobilization
Scaling Back Recurrent Spending
The IMF estimates that Kiribati’s large fiscal deficit will widen further in 2022 before narrowing in 2023. The authorities have doubled the copra subsidy to promote copra production and transfer cash to outer islands. However, this measure is expected to increase the fiscal deficit to 20% of GDP.
Fiscal Consolidation Scenario
The IMF has proposed a fiscal consolidation scenario that would require targeted and efficient spending to protect vulnerable populations. This would involve:
- Improving the unemployment support scheme
- Enhancing the efficiency of social protection delivery systems
- Defining key performance indicators for the social protection system
Authorities’ Views
While the authorities agree on the importance of limiting recurrent spending within their means, they do not plan to roll back recurrent spending for now. They view the copra subsidy program and unemployment benefit scheme as crucial to supporting livelihoods, including those in outer islands. They expect the unemployment benefits to be wound down as more people get employed.
The authorities are keen on reviewing studies on the sustainability and economic impact of the copra subsidy program, which would facilitate future policy design. They expect the newly introduced leave grants to private sector employees will encourage employment in the formal sector and help employees maintain connections with their families in outer islands.
Addressing Fiscal Challenges: Uncertain Revenues
Increasing revenue mobilization is essential to raise much-needed resources to finance Kiribati’s development goals. The country’s tax-to-GDP ratio has improved significantly since the last major tax reform in 2014, but it still remains lower than some regional comparators and has the potential to increase further.
The IMF has recommended that Kiribati address its fiscal challenges by:
- Increasing revenue mobilization
- Addressing uncertainty in revenues
- Improving the efficiency of public expenditures
Kiribati’s economic future depends on its ability to adapt to these challenges and implement policies that promote growth, resilience, and stability.