Kiribati is challenged by geographic isolation, limited human and financial resources, and a narrow economic base. It is extremely vulnerable to economic and natural disaster shocks due to its high exposure to climate change, severe import dependency, and heavy reliance on income from external sources. Following the 2008−2009 global economic crisis, it suffered from severe economic contraction, with growth in gross domestic product (GDP) dipping to -1.6% in 2010 from 0.3% in 2009. Falling taxes, increased subsidization of inefficient state-owned enterprises (SOEs), and highly volatile fishing revenue led to high fiscal deficits, amounting to 5%–20% of GDP during 2009–2012.
To prevent the situation from deteriorating, the government embarked on the Kiribati Economic Reform Plan (KERP) in 2013. The KERP was a wide-ranging reform platform developed by the government and development partners to improve expenditure quality, revenue performance, the management of public assets and liabilities, and business environment.
In support of KERP, the Asian Development Bank (ADB) approved $3 million grant for the Strengthening Fiscal Stability Program in November 2014. The program’s anticipated impact was improved fiscal stability as prioritized in the Kiribati Development Plan. Its intended outcome was improved government capacity for fiscal stabilization. The program had 4 outputs: (i) improved quality of expenditure; (ii) improved revenue administration; (iii) improved management of public assets and liabilities; and (iv) improved structural reform implementation.
All the policy actions, which comprised grant release conditions, were successfully implemented, resulting in increased revenue streams, better quality public spending, more efficient finance and debt and assets management, and improved environment for private sector development. For example, the merger of the Kiribati Copra Cooperative Society and the Kiribati Copra Mill Limited reduced expenses and strengthened accountability in turn improving the industry income stream and facilitating the doubling of subsidies for copra farmers. Replacement of SOE subsidies with targeted assistance brought about significant government savings.
Improved value−added tax implementation and fishing revenue administration increased revenue collections. Stronger measures to ensure compliance to the Debt Policy of 2013 prevented expensive commercial borrowing, re-accumulation of overdraft balances, and inappropriate loan guarantees to SOEs and joint ventures. Management reforms in the country’s fiscal buffer, the Revenue Equalization Reserve Fund (RERF), reduced investment risks and improved portfolio performance, leading to a 12.8% increase in the real RERF per capita from 2014 to 2016. Restructuring of SOEs, including the establishment of public−private partnerships (PPPs), improved business efficiencies and incomes. Privatization of SOEs, along with the implementation of a private sector development strategy, overall stimulated private sector growth and economic activity.
While providing immediate fiscal relief and reducing RERF drawdown in 2014, the grant was also effective in triggering SOE and public finance management reforms that were crucial in enabling government to steer the country toward greater fiscal stability. A post−program partnership framework continues to help ensure the sustainability of program benefits.
Rated successful by ADB’s Pacific Department, the program was implemented by Kiribati’s MFED, the executing agency, and several other ministries and government agencies.
