medium term. In the short term, the im- pacts of COVID-19 have been relatively Key conditions and limited, thanks to the swift imposition of challenges border controls and the economy’s limited exposure to global economic conditions. Tuvalu is one of world’s smallest, remote Kiribati has been spared from severe eco- and most climate challenged countries. It nomic impacts due to the pandemic, and has near total dependence on imports for Table 1 2020 the key economic challenge currently is to food and fuel and vulnerability to climate Population, million improve the sustainability and effective- change present significant challenges to

Kiribati 0.1 2 ness of public spending. Kiribati has expe- macroeconomic performance. Fishing Nauru 0.01 rienced a fourfold increase in public reve- licenses account for around 40 percent of Tuvalu 0.01 nues from the fishing sector in the past Government revenue. Support from inter- GDP, US$, billion decade, and now receives fishing license national partners and the Tuvalu’s sover- Kiribati 0.1 9 revenues worth 66 percent of GDP on av- eign wealth funds are important cushions Nauru 0.1 2 Tuvalu 0.05 erage per year. These new revenues pre- for meeting shortfalls in the Government’s GDP per capita, current US$ sent an unprecedented opportunity to ad- budget. The Government Financial Re- Kiribati 1 678 dress the country’s severe infrastructure serves (GFR), including the Consolidated Nauru 951 6 deficit, reduce poverty and promote cli- Investment Fund, Tuvalu Development Tuvalu 41 04 mate resilience. However, Kiribati’s small Fund and Survival Fund, is valued at 105 Sources: WDI, World Bank staff estimates. public service faces significant capacity percent of GDP. The Tuvalu Trust Fund, challenges in effectively delivering high- an international donor trust fund estab- quality spending on this expanded scale. lished in 1987, represents 260 percent of The Central Pacific countries – Kiribati, Moreover, after successive years of spend- GDP. An estimated 26 percent of the pop- Nauru and Tuvalu – have been less severe- ing increases, aggregate spending levels ulation lives below the national poverty have now caught up to and surpassed Kir- line. The narrow economic base, the finan- ly affected by the pandemic than their tour- ibati’s expanded revenue envelope, seri- cial impact of climate change events and ism-dependent neighbors, thanks to their ously threatening fiscal sustainability. cost of climate-related adaptation projects relative economic isolation and the domi- Nauru is also undergoing a significant eco- pose significant macro-economic challeng- nance of the public sector in their econo- nomic transition. Public revenues and es. Tuvalu also confronts escalating fiscal mies. Looking forward, Kiribati faces sus- growth have been highly dependent on costs of meeting the health care needs of activity associated with Australia’s Region- an aging population and epidemic of non- tainability challenges from rapid expendi- al Processing Centre (RPC) for asylum- communicable diseases. ture growth, while Nauru will need to seekers, phosphate mining and fishing. adjust to a projected sharp decline in public However, the country’s phosphate re- revenues. All three countries face long-run sources have now been fully exploited, and the RPC is also expected to wind down in Recent developments challenges to growth and poverty reduc- 2021. Nauru now faces the challenge of tion from their narrow economic base and adjusting to reduced budget revenues and Kiribati’s economy is expected to have vulnerability to climate change. finding new sources of growth over the contracted by about 2 percent in 2020. On

FIGURE 1 Central Pacific Islands / Sources of revenue – FIGURE 2 Central Pacific Islands / Sovereign wealth fund projections to 2021 balances

Percent of GDP Fund balance, A$m (lines) Per capita value, A$ (bars)

200 1400 Kiribati 25000 Nauru 150 1200 Tuvalu 20000 1000 100 15000 800 50 600 10000 0 400 5000 Kiribati Nauru Tuvalu 200 Fishing license fees Regional Processing Centre .TV domain Other revenue 0 0 Grants 2016 2017 2018 2019 2020

Sources: Country authorities, and World Bank and IMF staff estimates and Sources: Country authorities, and World Bank and IMF staff estimates and projections. projections. Nauru data are June years; Kiribati and Tuvalu are calendar years. Notes: Nauru data are June years; Kiribati and Tuvalu are calendar years. The Nauru Trust Fund was established in 2016. MPO 8 Apr 21 the supply side, border closures have other SOEs. Despite strong expenditure of GDP in new spending projected from hampered donor-financed project activity growth, Nauru achieved a fiscal surplus of 2022 onwards. The deficit is expected to and also caused some disruptions to car- 17 percent of GDP in FY20 due to much reach nearly 20 percent of GDP in 2021 go imports. Restaurant-grade fresh tuna higher than expected revenues from the and will be financed with a drawdown exports have also been affected by a lack RPC and fishing licenses. Large fiscal sur- from the sovereign wealth fund. With the of international air freight capacity and pluses in recent years have been used to deficit expected to remain elevated over weak international demand. Lack of ex- build the Nauru Trust Fund (currently at the coming years, Kiribati will quickly patriate demand has severely impacted 70 percent of GDP) and government de- erode its available cash reserves and the on hotels and restaurants, while quaran- posits (around a third of GDP). sustainability of the sovereign wealth tine measures have also affected demand In Tuvalu, early and effective response to fund could also be put at risk. for fisheries transshipment services. The the COVID-19 pandemic prevented ad- In Nauru, modest growth of around 1 authorities estimate that about 2 percent verse public health outcomes and it is one percent is expected over the medium of the labor force has been affected by of only a very few countries in the world term, with the expected closure of the border closures, including temporary with no reported cases. The global eco- RPC expected to weigh heavily on the workers abroad. nomic lockdown impacted travel and outlook. A major port construction pro- Preliminary estimates suggest a fiscal defi- trade, but fishing license revenues re- ject is expected to help offset the cit of around 5 percent of GDP in 2020. mained resilient. The economy is expected winddown in RPC-related activity, alt- The fiscal impact of COVID-19 has been to contract by 0.5 percent in 2020, moder- hough the execution of this and other relatively limited, with only slightly lower ate in comparison to other countries in the infrastructure projects may be subject to than expected revenue performance and region, but a marked downturn from av- ongoing delays due to supply chain dis- strong donor support for health spending. erage annual growth of 4.7 percent in 2015 ruptions. A balanced budget is expected Meanwhile, the authorities implemented a -2019. In March 2020, Parliament ap- in FY21, with fisheries revenues expected more than 20 percent increase in recurrent proved a supplementary COVID-19 budg- to recover from a relatively weak perfor- spending that was unrelated to the pan- et (equivalent to 30 percent of 2019 GDP) mance in the first half of the year. Howev- demic, with the launch of a new unem- and an economic recovery package in May er, given the projected sharp decline in ployment benefit and an expansion of the 2020 to provide temporary economic sup- RPC-related revenues over the medium old age pension. The new benefit schemes port. The latter included a universal cash term, the large fiscal surpluses seen in are expected to have a major poverty re- payout to every citizen. Together they recent years are unlikely to persist. duction impact, given that more than pushed the fiscal deficit to an estimated In Tuvalu growth is expected to recover three quarters of Kiribati’s adult popula- 31.3 percent of GDP financed primarily to around 3.0 percent in 2021, assuming tion are eligible to receive support. with external budget support grants. the reopening of international borders and In Nauru, the growth forecast has been easing of travel restrictions in the year. revised upwards to 0.7 percent for FY20, The 2021 budget presented as a balanced due to stronger than expected activity budget as support from international part- related to the RPC and a 17 percent in- Outlook ners remains strong. The public debt-to- crease in spending compared with FY19. GDP ratio is low (estimated at 16 percent This has helped to offset negative im- In Kiribati, a bounce back in growth of of GDP in 2019), including both direct pacts of the pandemic from border clo- around 3 percent is expected in 2021 de- Government obligations and implicit con- sures, including supply-chain disrup- spite the ongoing border closure, thanks tingent liabilities. Debt management poli- tions of construction activity and the de- to consumer demand stimulus from the cies remain prudent. The major risks to parture of expatriates. new social benefits and a public sector pay the outlook are unpredictability of the The government’s initial fiscal response to rise. Over the medium term, however, COVID-19 pandemic and prolonged shut COVID-19 amounted to 5.5 percent of there are significant risks to macroeco- down of the global economy; volatility in GDP in FY20. It focused on health nomic stability stemming from the fiscal revenue flows; an abrupt reduction in measures and financial support to the sector. The recently passed 2021 budget budget support from development part- state-owned Nauru Airlines (to ensure includes new recurrent spending of 8 per- ners; and the ever-present threat of cli- maintenance of critical services) as well as cent of GDP, with an additional 5 percent mate related natural disasters.

TABLE 2 Central Pacific Islands / Macro poverty outlook indicators (annual percent change unless indicated otherwise)

2017 2018 2019 2020f 2021f 2022f Real GDP growth, at constant market prices Kiribati 0.9 3.8 3.9 -1.9 3.0 2.6 Nauru -5.5 5.7 1.0 0.7 1.3 0.9 Tuvalu 3.2 4.3 4.1 -0.5 3.0 4.0

Sources: Country authorities and World Bank and IM F staff estimates. Notes: f = forecast. Nauru values correspond to their fiscal year ending June 30; Kiribati and Tuvalu are calendar years.

MPO 9 Apr 21