Financial Crime World

Rising Cost of Living in Tuvalu: Inflation Reaches 5%

Overview

Tuvalu, a small island nation in the Pacific, is facing a significant rise in cost of living due to inflation. According to data from the International Monetary Fund (IMF), the country’s year-on-year inflation rate has reached 5%.

Causes of Inflation

  • Sharp increase in current expenditures, including purchases of goods and services that have risen by 14%
  • Supply bottlenecks and rising prices
  • Economic fallout from the pandemic, which delayed infrastructure projects and affected trade and hospitality sectors

Taxes on International Trade

  • Tuvalu’s tax revenue from international trade has remained relatively stable over the past decade, averaging around 6% of total revenue between 2011 and 2019

Pacific Agreement on Closer Economic Relations Plus (PACER) Plus

  • Signed in January 2022 to reduce trade barriers and simplify customs procedures
  • Eliminates existing import tariffs for all member countries and contemplates additional actions to reduce trade restrictions

Connectivity to Global Payments System Limited

  • High transaction costs and compliance requirements limit connectivity to global payments system
  • Vulnerable to losing correspondent banking relationships (CBRs)
  • National Bank of Tuvalu maintains three CBRs, including FJD, AUD, NZD, EUR, and USD

Efforts to Build Effective AML/CFT Framework

  • Establishing a dedicated Anti-Money Laundering Coordination Committee (AMLCC)
  • Joining the Asia Pacific Group (APG)
  • Improving legal framework

Plans to Modernize Financial Services

  • National Bank of Tuvalu plans to:
    • Establish ATMs
    • Provide online banking services
    • Roll out point-of-service debit and credit cards
  • Interest rates in Tuvalu are mostly fixed, limiting authorities’ ability to assess risks objectively
  • No prudential standards in place

Capacity Development Efforts

  • IMF is providing technical assistance to help build capacity in Tuvalu’s financial sector
  • Challenging due to need for virtual delivery during pandemic, making it difficult to attract and retain qualified staff

Conclusion

Tuvalu faces significant challenges in maintaining macroeconomic stability, including a rising cost of living, limited connectivity to global payments systems, and efforts to modernize its financial services.