Country Profiles

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The government has struggled to implement economic development and public service reforms. Development is severely constrained by its dispersed and isolated atoll geography, narrow resource base and limited skills workforce. The most recent national development plan – Kiribati Development Plan 2008-2011, Enhancing economic growth for sustainable development – sets out a broad reform agenda that includes: a technical assistance facility to improve public sector performance; managing, motivating and training the public service; establishing a multi-year budgeting framework; improving financial accounting systems; reforming tax administration system; and ministerial strategic and operational planning. Although there is little political will to privatise the multitude of state owned enterprises (SOEs), recently there have been significant steps taken to bring the accounts of these organisations up to date. There remains a sense of urgency to improve the reporting and efficiency of SOEs, which continue to place a substantial drain on government budgets through alarmingly high loans and subsidies. Increasing use of the Revenue Equalisation Reserve Fund (created in 1956 to act as a store of wealth for the country’s earnings from phosphate mining) to finance annual budget deficits underminds the fund’s capacity to provide a permanent source of budget support. 

Public spending has been far exceeding government revenues, with a 25% GDP deficit in 2006 and a 21% deficit in 2007, funded by drawing down cash reserves in the Revenue Equalisation Reserve Fund (which was valued by the Ministry of Finance at USD$400m in 2008). The public sector is the main employer and the many state owned enterprises incur substantial losses and require government subsidies or government-guaranteed loans to stay liquid. Control of prices of goods and services is widespread, and the government argues that this has been reasonably successful keeping inflation at around five per cent. But the quality of good and services provided by state owned enterprises is not monitored, and there is little transparency in public enterprise accounts. Infrastructure and utilities, also government owned, provide reasonable services for the urban population and businesses, but they are loss-making and in need of investment. The overarching strategic framework is the Kiribati Development Plan 2008-2011, which is interpreted into ministerial strategic plans typically running for four years. Annual operational plans are developed each year, and from these divisional work plans. The introduction of complex, central financial management systems (PEBAM and Attache`) in the late 1990s proved difficult and were all but abandoned after a short period of use. Government agencies generally rely on paper-based record keeping or electronic spreadsheets, and the lack of systematic and harmonised data collection and analysis makes it difficult to monitor spending and progress against the national development plan. Recently, increased effort has gone into developing program budgeting and developing an information and communications technology strategy across government. In accordance with the Procurement Act, ministerial expenditure of amounts above $5,000 requires consideration by the Procurement Committee. 

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Kiribati has experienced relatively slow or at times negative growth since 2004. High population growth in this period has increased the impact of his relatively poor economic performance. The economy is dependent on external sources of revenues, including fishing license fees and remittances. The limited data available suggests that remittances have been declining as have proceeds from fishing licenses. Other factors affecting domestic revenue include rising international commodity prices, unstable returns from the Revenue Equalisation Reserve Fund due to volatile international capital markets, and losses incurred by state owned enterprises. With few natural resources, Kiribati faces enormous challenges to grow its economy. Commercially viable phosphate deposits were exhausted at the time of independence and copra and fish now represent the bulk of production and exports. Economic development is further constrined by a shortage of skilled workers, weak infrastructure and the remoteness from international markets. The Kiribati Development Plan 2008-2011 emphasises the need to develop the workforce to better equip the population in accessing international labour markets. The government considers improved access to the international markets as an essential adaptation strategy in the face of climate change. The number and range of state owned enterprises cramps the space that would otherwise be occupied by the private sector. There is an annual National Business Convention aimed at fostering private sector development. Strategic priorities agreed at the mot recent convention include improving infrastructure, reforming license fees and promoting easier access to credit. 

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The FSM Strategic Development Plan 2004-2023 articulates the country’s overarching development goals. Drawing heavily on the results of the FSM’s third economic summit held early in 2004, the plan commits to a ‘sustained growth strategy’ with six priorities: macroeconomic stability, good governance, developing an outward-oriented and private sector led economy, investing in human resource development, investing in infrastructure, and long-term sustainability (environmental, socio-cultural, and financil). Economic and public financial management remain major challenges for FSM. Despite relatively high aid inflows, the economy and total formal employment have contracted in recent years. The states of Chuuk and Kosrae have experienced dramatic fiscal crises that required drastic adjustment, including reduction in force measures. Fiscal and economic management in Pohnpei and Yap have been less problematic, but fiscal deficits remain common. Management of the funding under the Compact of Free Association with the United States of America has proven to be particularly difficult, in particular infrastructure funding. FSM’s federal structure presents unique challenges to public sector management, particularly in the areas of planning and budget coordination. FSM’s public finances and broader economy are very heavily influenced by the Compact of Free Association with the United States. Financial performance varies across the four state governments and the central government. On aggregate, FSM’s performance ratings on fiscal policy, debt policy, efficiency of revenue mobilisation, and overall quality of budgetary and financial management are slightly below regional averages. The states of Chuuk and Kosrae have experienced serious financial crises in recent years that have required fairly drastic adjustment, mostly on the expenditure side. Grants, primarily from the United States, make up over 60 percent of consolidated revenues. Ongoing tax reform aiming to raise tax collection efficiency and revenues will ultimately replace certain existing national and state taxes with the VAT and Net Profit Tax while centralising, modernising and strengthening the tax administration with the establishment of a Unified Revenue Authority, among other things. Grants under the US Compact are decreasing by US$800,000 annually and will terminate in 2023. While a Compact Trust Fund is also being capitalised over this period, earnings from which are intended to support the annual budget after 2023, there remains concern over the long-term financial stability of the country. Fiscal management in Chuuk and Kosrae have been of particular concern in recent years and the two states saw negative overall fiscal balances in four out of five years through to 2008. Pohnpei and Yap have also run deficits, but their fiscal positions have been relatively more manageable. In all four states revenues consistently fall below expenditure, suggesting room for improvement and possible challenges ahead. Subsidies and public enterprises remain a concern and are a reform priority. The discontinuation of Compact energy grants in 2003 led to some utility corporations raising prices. There is recognition that subsidies will need to be curtailed further given the fiscal outlook. FSM has followed a prudent external debt management strategy and with a debt to GDP ratio of 27 percent as of 2008, its debt level is low compared to other Pacific island countries. 

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FSM has seen a decline in overall economic activity since the implementation of the amended Compact in 2004. Factors behind this include a reduction in resources, capacity constraints in fulfilling new fiscal procedures, and the need to transition out the use of capacity-building sector grants from general government operations. The government seeks to pursue a ‘sustained growth strategy’ by maintaining macroeconomic stability through the adoption of fiscally responsible policies, tax reform, adoption of a medium term expenditure framework, and through prudential external debt management. The economy depends heavily on public sector expenditures, which are heavily reliant on official transfers. The public sector (inclusive of national and state governments, and public agencies and enterprises) contributes over 50 percent of GDP and formal employment. Annual real GDP growth averaged negative 0.8 percent in the five year period through to 2008. Three of the four states (all except for Pohnpei) saw contraction over this period. Slow throughput in Compact infrastructure spending has been cited as one cause of the recent economic stagnation. FSM has historically had fairly low inflation levels, but from early 2004 prices began to grow steadily, peaking in 2008 at just over 10 percent. Higher imported food and fuel prices, utility rates, and import taxes are the primary factors for recent inflation, which has moderated since 2008. The current account has recorded high and sustained trade deficits, exceeding US$150 million for the first time in 2008. Balance of payments inflows are dominated by grants but also include fishing license revenues, dividends, tourism receipts and remittances. 

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The national social and economic priorities of the Cook Islands Government are laid out in Te Kaveinga Nui – The National Sustainable Development Plan (2007-2010). The plan has eight strategic goals that cover: governance, law and order, macroeconomic stability, education, health services, infrastructure, agriculture, outer island development, maritime resources and tourism. The Cook Islands has one of the highest per capita incomes in the Pacific, but the economy continues to face pressure from the high levels of government debt and its narrow economic base underpinned by tourism and marine resources. As such, the economy is particularly vulnerable to external shocks. After registering high economic growth rates in the late 1990s and early 2000s – at times in the double digits – growth has been low (2005-07) or contracted (2008-09). Despite the relatively high education levels, human capacity constraints are compounded by the high outward migration rates to New Zealand. A significant public sector reform program was undertaken in the late 1990s with mixed results. The fiscal, economic and social challenges facing the country have put reforms back onto the agenda.

In the 1990s a series of sweeping  economic reforms (known as the Economic Reform Program or ERP) resulted in the Ministry of Finance and Economic Management Act and the Public Expenditure Review Committee Act. These two acts laid the framework for fiscal discipline, increased accountability, and performance assessments of senior public servants. They led to tax reforms, the sale of state assets and strengthened economic and debt management. The reforms were credited with reversing the poor state of the economy in the late 1980s and early 1990s. The 2010-11 budget was delivered in the context of a tightening fiscal and challenging economic environment. Government operating revenue is estimated to increase by 1.7% to NZD 108.8 million in 2010-11, and operating expenditure is appropriated to reduce by 1.5% to NZD 101-2 million, compared to 2009-10 level. 2010-11 capital expenditure is budgeted at NZD 4.4 million, a large percentage of which will be spent on upgrading key infrastructure such as water, sanitation and roads. 

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The Cook Islands has one of the highest per capita incomes in the Pacific, the economy continues to face pressure from high levels of government debt despite recent efforts to reduce it. In June 2010, the finance minister announced that the government would not accept a NZD 37.5 million Chinese loan, removing it from the 2009-10 supplementary budget. Gross domestic product (GDP) in 2010-11 is estimated at NZD 324 million. Total gross government debt for the same period is estimated at NZD 114 million or 35.5% of GDP, up from 20% in 2006. In general, fiscal sustainability remains fragile. Threats to Cook Islands economic growth include: environmental damage compounded by climate change, infrastructure constraints, a weak policy environment, limited planning and human resource capacity and an emerging labour shortage. The economy is particularly vulnerable to extreme weather events such as cyclones and in February 2010, the island of Aitutaki was badly damaged by Cyclone Pat, causing major damage to housing and infrastructure. Tourism continues to be the mainstay of the Cook Islands economy, followed by marine resources. The narrow economic base makes the Cook Islands vulnerable to external shocks. However, the tourist industry buffered the Cook Islands from the full effects of the global financial crisis. Tourist numbers have steadily increased since 2005. The number of Australian visitors to the Cook Islands has increased significantly in recent years, particularly since a trial of direct flights from Sydney to Rarotonga began in 2010. Many Cook Islanders migrate to New Zealand and Australia in search of greater economic opportunities. Population decline presents significant development challenges for the Cook Islands. As New Zealand citizens, Cook Islanders have free access to New Zealand. It is estimated that there are at least three times as many Cook Islanders living overseas as in Cook Islands. In March 2010, the total Cook Islands population was estimated at 22,000 with a total resident population of 12,000. Despite the large numbers of Cook Islanders living overseas, remittances do not form a large part of the Cook Islands economy, as they do in Tonga and Samoa. In 2008-09 consumer price inflation was a problem for Cook Islanders, particularly those least well-off. Food prices rose 10.8% during 2009, disproportionately hitting lower income groups. 

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