Tuvalu: Strengthened Fiscal Sustainability Program

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Lessons

Setting policy reforms as conditions for fund releases provides a useful incentive for advance reform actions.

The grant release conditions put forward by the program were realistic and effective in encouraging the government to implement several specific procurement, public enterprise, and fiscal management reforms sooner than might have occurred without the incentives created by the grant conditions. These, along with

the ongoing technical assistance (TA) for the institutional strengthening of the executing agency, made the program perform well in contributing to the overall impacts sought—good governance, macroeconomic growth, and improved fiscal stability.

TA enhances the sustainability of the reform process.

The stand−alone TA for the strengthening Tuvalu’s Ministry of Finance and Economic Development was timely in that it both preceded the grant release and continued after the grant release, adding to the sustainability of the reform process. Similar TA is likely to be required if additional policy actions in public finance management are formulated. Such TA will also assist in making further progress with respect to strengthening public procurement and reorienting and restructuring Tuvalu’s Public Works Department.

Grants are particularly useful in providing immediate fiscal relief to small and fragile economies.

The program grant, together with parallel, collaborative cofinancing from development partners, was a useful modality in that it directly provided immediate fiscal relief to Tuvalu and consequently contributed to the replenishment of the country’s fiscal buffer, the Consolidated Investment Fund. It also acted as a valuable leverage in expediting reforms. Benefits were enhanced by the adoption of a multiyear approach and the agreement among donor partners to combine their respective interests and work together in a single reform matrix.

Background

Tuvalu, a fragile microstate and the smallest member of the Asian Development Bank (ADB), has a small and narrowly based economy that is highly dependent on external sources of income and imports. Following the 2008 global economic crisis, it experienced 3 consecutive years of contraction, which led to budget deficits of 22.5% in 2010 and 9.0% in 2011, compared to 1.5% in 2008 and 3.2% in 2009. These deficits spurred unsustainable drawdowns from the country’s Consolidated Investment Fund (CTF) that, in the absence of transfers from the Tuvalu Trust Fund (TTF), caused the CTF funds to shrink. By 2012, CIF cash reserves had declined to 1.1% of gross domestic product (GDP) from 9.2% in 2008. The government also incurred new debt, amounting to 30% of GDP, predominantly to finance capital investment.

To address the situation, the government adopted in 2012 a medium−term policy reform matrix (PRM) that outlines 3 phases of time−bound reforms, each one supported by development partners and implemented through technical assistance and a coordinated program of budget support. The PRM targets a sustainable fiscal framework through reforms in 6 areas: public financial management, fiscal policy, public administration, public enterprise performance and rationalization, and health and education management. Reforms achieved under phases 1 and 2 had triggered around $8 million budget support from ADB and other development partners.

Moving onto phase 3, ADB approved in September 2015 a $2 million grant for the Strengthened Fiscal Sustainability Program. Parallel, collaborative grant cofinancing was provided by the World Bank, the Government of Australia, and the Government of New Zealand. Overall, the program aimed to contribute to good governance, macroeconomic growth, and improved fiscal stability. Its intended outcome was strengthening of Tuvalu’s fiscal position. It had 3 planned outputs: (i) public procurement strengthened, (ii) commercial orientation for public enterprises and private sector development strengthened, and (iii) sustainability of the fiscal buffer strengthened.

All policy actions, comprising grant release conditions, were achieved. An annual procurement reporting system has been carried out. A government procurement website is now operational. The Public Enterprise Reform Plan, which aims to strengthen the commercial orientation, financial soundness, and transparency and accountability of public enterprises and encourage private sector development, has been implemented. The Vaiaku Lagi Hotel sale, which improved government finances, was consummated. The Public Works Department rationalization, while constrained by several factors, is making headway in reviewing the Tuvalu Building Act and technical specifications of the department’s mandate. Moreover, changes had been made in the financial instructions governing CTF operation to better insulate the budget and the economy from external shocks.

Implementation of the policy actions enabled the government to achieve an overall surplus of A$4.6 million in 2015—further improving the CIF balance. Furthermore, the government was able to increase recurrent and nonrecurrent spending and invest A$3.0 million back to the TTF, although this was made possible largely by revenue increases particularly from fishing licenses.

ADB’s Pacific Department rated the program successful. Tuvalu’s Ministry of Finance and Economic Development (MFED) was the executing agency. Several ministries teamed up with the MFED to implement the program.

Project Information

Project Name:

Strengthened Fiscal Sustainability Program

Report Date:

May, 2017

Main Sector:

Public Sector Management

Country:

Tuvalu

Project Number:

47318-001

Themes: