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IMF Executive Board Concludes 2018 Article IV Consultation with Tuvalu

July 5, 2018

On June 22, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Tuvalu.

Tuvalu has maintained macroeconomic stability. Real GDP growth is estimated to have risen to 3.2 percent in 2017 on large infrastructure and housing projects, in preparation for the Polynesian Leaders’ Summit in 2018 and the Pacific Forum Secretariat Summit in 2019. Inflation accelerated to 4.4 percent in 2017 due to higher food and transportation prices. Reserve coverage is broadly sufficient at 9 months of imports at end-2017. The fiscal balance turned into a deficit of 4 percent of GDP in 2017 on lower fishing revenue and higher capital expenditure in preparation for the two regional summits.

The macroeconomic outlook is broadly positive. In 2018, growth is projected to accelerate to 4.3 percent on higher fiscal expenditure and infrastructure projects. Inflation is expected to reach 4 percent on higher public wages, partly offset by moderating food prices. In the medium term, growth is expected to remain robust at 4 percent, factoring in the implementation of infrastructure projects funded by development partners, including the Green Climate Fund. Reserves are expected to remain sufficient at 10 months of imports at end-2018. The fiscal balance is projected to turn into a surplus of 6 percent of GDP in 2018, on higher fishing revenue. 

Since joining the Fund in 2010, Tuvalu’s macroeconomic performance has improved. The fiscal deficit has narrowed and fiscal buffers have been replenished partly on strong fishing revenue. The authorities have also made progress in strengthening climate change resilience.

Nonetheless, the economy remains susceptible to downside risks, reflecting climate change and natural disasters, volatile fishing revenues, reliance on external grants, weak state-owned enterprises, and limited financial supervision.

Executive Board Assessment[2]

Executive Directors commended the authorities for the improved macroeconomic performance and for their work on strengthening climate change resilience. Directors welcomed the broadly positive outlook but noted that Tuvalu remains highly susceptible to external shocks, especially to climate change effects and uncertainties stemming from volatile fishing revenues and reliance on grants. The country’s geographical remoteness, small size, and limited infrastructure pose additional challenges. Directors emphasized that strong commitment to sound policies and structural reforms is necessary to build resilience to shocks and generate sustainable growth.

Directors welcomed the progress made in promoting climate change resilience, including securing access to the Green Climate Fund. Going forward, Directors highlighted the importance of ensuring continuous access to multilateral climate change schemes. They noted that the priorities are implementing reforms under the PFM Roadmap, exploring multilateral risk‑sharing mechanisms, and improving the financial management of the Tuvalu Survival Fund.

Directors underscored that strengthening the medium‑term fiscal framework is key to macroeconomic stability. They emphasized that undertaking gradual fiscal consolidation should help contain fiscal and debt pressures, and build fiscal buffers. In this context, they encouraged the authorities to mobilize tax revenue, eliminate tax exemptions, and contain current spending. Prioritizing capital spending and strengthening fishing revenue forecasts will also be important. Directors also encouraged accelerating reforms of state‑owned enterprises, including raising electricity tariffs and linking them to oil price changes.

Directors emphasized that greater financial sector oversight will help tackle the high non‑performing loans, increase financial sector efficiency, and promote financial inclusion. They stressed the need for a financial supervisory framework covering the two banks and the pension fund. Directors called for measures to improve credit risk management of the Development Bank, enforce existing financial regulations, and develop bankruptcy legislation.

Directors emphasized that structural reforms aimed at increasing potential output and diversifying the growth base are critical. They encouraged the authorities to give priority to stimulating private sector development by improving the business environment. Directors called for stepped up efforts to strengthen human capital, develop tourism and goods exports, and enhance water resource management. They noted that continued action to enhance macroeconomic statistics will assist in policy formulation and agreed that technical assistance from the Fund will be helpful.

Tuvalu: Selected Social and Economic Indicators, 2015–2019 1/

 

2015

2016

2017

2018

2019

 

Est.

Est.

Est.

Proj.

Proj.

Real sector

Real GDP growth

9.1

3.0

3.2

4.3

4.1

Consumer price inflation (end of period)

4.0

2.6

4.4

4.0

3.4

Government finance

Revenue and grants

136

138

122

161

113

Revenue

102

113

97

118

82

Of which: Fishing license fees

51

68

50

80

46

Grants

34

25

25

43

32

Total expenditure

121

131

126

155

118

Current expenditure

99

111

97

103

101

Capital expenditure 1/

22

19

29

52

17

Overall balance

15

7

-4

6

-4

Of which: Domestic Current balance 2/

-47

-67

-49

-65

-65

Financing

-15

-7

4

-6

4

Consolidated Investment Fund

15

7

-4

6

-4

Tuvalu Trust Fund (in percent of GDP)

318

336

333

315

299

Consolidated Investment Fund (in percent of GDP)

55

55

42

59

55

Tuvalu Survival Fund (in percent of GDP)

10

10

14

17

Monetary Sector

Credit growth (percent change) 3/

3

13

6

6

5

Balance of payments (in percent of GDP)

Current account balance

-53

23

6

5

-1

Goods and services balance

-216

-135

-141

-154

-140

Capital and financial account balance

74

5

-2

9

8

Of which: capital transfers

19

23

16

11

11

Overall balance

21

28

4

14

7

Gross reserves 4/

In $A million

57

70

73

81

85

In months of prospective imports of goods and services

9

10

9

10

10

Debt indicators

Gross public debt

57

47

37

28

22

External

53

45

37

28

22

Domestic

3

2

0

0

0

Exchange rates

Australian dollar per U.S. dollars (Period average)

1.33

1.34

1.30

Australian dollar per U.S. dollars (End-period)

1.38

1.36

1.31

Real effective exchange rate (2010=100)

104

108

113

Nominal GDP (In $A million)

47

49

53

57

61

Sources: Tuvalu authorities; PFTAC; SPC; ADB; World Bank; 2018 IMF's BOP TA; and IMF staff estimates and projections.

1/ Includes Special Development Fund and infrastructure investment.

2/ Domestic current balance excludes fishing revenue, grants, and capital expenditure.

3/ Banks' and pension fund lending to non-government domestic sector.


1. Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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