KIRIBATI

Country Operations Business Plan 2016–2018

STRATEGIC ANALYSIS

August 2015

CONTENTS

I. DEVELOPMENT TRENDS AND ISSUES

A. Country Background 1

B. Highlights of Previous Programming Approach 2

II. THE COUNTRY STRATEGIC PRIORITIES

A. Developing the ADB Country Strategic Priorities 3

B. Implementation Issues 3

APPENDICES TO LINKED DOCUMENT

1. Data Tables

Table 1: Progress toward the Millennium Development Goals and Targets 5

Table 2: Country Economic Indicators 6

Table 3: Country Poverty and Social Indicators 7

Table 4: Country Environment Indicators 8

Table 5: Country Performance Assessment Ratings 9

2. Development Coordination Matrix 10

3. Sector Assessments: Public Sector Management 14

4. Risk Assessment and Risk Management Plan 18

5. Country Cost-Sharing Arrangements and Eligible Expenditure Financing Parameters, 2016–2018 21

COUNTRY STRATEGIC ANALYSIS

ABBREVIATIONS

ADF Asian Development Fund

CPS country partnership strategy

DPs development partners

GDP gross domestic product

IFMP Improved Financial Management Program

IMF International Monetary Fund

MDGs millennium development goals

PFM public financial management

PRM policy reform matrix

RETA regional technical assistance

SOEs State owned enterprises

TA technical assistance

VAT value-added tax

I. DEVELOPMENT TRENDS AND ISSUES

A. Country Background

1. Kiribati is one of the most remote and geographically dispersed countries in the world, consisting of 33 islands spread over 3.5 million square kilometers of ocean—an area larger than India. The population of about 103,400 people lives on 20 coral atolls, with a total land area of less than 800 square kilometers. The capital, South Tarawa, is about 4,000 kilometers from Australia, Hawaii, and New Zealand. About 50,000 people live on South Tarawa which has a total land area of 16 square kilometers, while the islet of Betio has over 10,000 people living on a total land area of just over 1 square kilometer and as densely populated as Manila or Jakarta. 2. Kiribati is extremely vulnerable to external shocks due to its high exposure to climate change, high import dependency, and heavy reliance on income from external sources. Development of the private sector has been constrained by high costs including transport cost due to its remoteness (lack of scale economy), smallness, and geographical dispersion. Further, the public sector crowds out private sector activities because some state-owned enterprises (SOEs) operate in potentially competitive sectors. 3. Major development challenges of the country are: (i) fiscal sustainability; (ii) SOE reforms; and (iii) Climate changes. 4. Fiscal sustainability: The 2010 Public Expenditure and Financial Accountability assessment pointed to the need to strengthen PFM. While the assessment noted that the budget appeared to be credible, strengthening aggregate expenditure controls, strategic allocation of resources and procurement practices will improve PFM. Inefficient SOEs taking commercial loans with sovereign guarantee—on top of frequent bailouts of SOEs and regular subsidies—added to unsustainable high budget deficits. Over reliance on the Revenue Equalization Revenue Fund (RERF) drawdowns for deficit financing raises concern over the sustainability of the RERF. Reflecting the budgetary constraint, there are huge investment gaps in major infrastructure, such as transport, energy, water supply and sanitation. In addition, weak public financial management, including the lack of cost recovery tariffs, and easy access to subsidies, incurs additional costs in public services.

5. SOE reforms: While inefficient SOEs continue to be a major drain of scarce fiscal resources, they have continued to crowd out the private sector activities. In Kiribati, 19 SOEs operate in most sectors of the economy, including areas which could be left to the private sector such as marine services, fuel supply, insurance services, hardware retailing, boatbuilding, housing hotels, copra crushing and general stores. SOEs also include “natural monopolies” such as public utilities, telecommunications, domestic airline, port operations and development banking. 6. Climate change: The atoll environment—saltwater inundation caused by king tides and periods of increasingly heavy rainfall, presents a challenge for ADB supported infrastructure projects such as road reconstruction and sanitation projects. Lack of infrastructure maintenance is also a problem. 7. Labor is one of the few viable exports for Kiribati. The country has increased employment of its citizens on foreign merchant and fishing vessels. As a result, remittances from the seamen form an important part of household income, especially in rural areas.

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However, since the Global Financial Crisis, the number of seamen employed overseas has steadily declined. Seamen’s remittances were $5.6 million at the end of 2014 compared with $12.5 million at their peak in 2002. New Zealand’s Recognized Seasonal Employment (RSE) scheme has provided over 9,000 Pacific islanders, including over 150 from Kiribati, with opportunities to work from 2-6 months in the horticultural industry, returning home with skills and remittances averaging $4,400 per worker. Although the number of Kiribati workers under the scheme is limited, the Government is working to improve the competitiveness of Kiribati workers. 8. An analysis of the 2006 Household Income and Expenditure Survey (HIES) shows that food poverty is low, at around 5%, but basic needs poverty is relatively widespread and concentrated in the main urban center of South Tarawa. 21.8% of the population lives below the basic needs poverty line, and 24.2 % of those living in South Tarawa. The analysis further indicated that a large proportion of the population is vulnerable to falling into poverty. This is due to lack of employment opportunities and lack of propoer access to basic services such as water and sanitation. The analysis shows that female-headed households are overrepresented in poverty statistics, and that children are also more likely to experience poverty. Children living in households with older people tend to be most at risk of poverty, with a poverty rate of 25%. This analysis was subsequently updated by AusAID social protection assessment in 2012, which suggested a slightly higher poverty (basic needs poverty, 26.3%) in 2009, largely due to the impact of higher food and fuel prices. Kiribati’s development outcomes are mixed. Progress against each of the MDG goals is set out in Appendix 1 9. Total public debt is about 13.3% of GDP in 2014. Domestic medium-term debt to local commercial banks constitutes the majority of debt. External debt servicing requirements are low, equal to around 2.8% of exports (including fishing license income) but are projected to rise over time. While current external public debt level is low, the country’s limited growth prospects and the long-term threat of climate change led the IMF to classify the country as at high risk of debt distress in 2015. Kiribati is currently classified as a Group A country eligible only for ADF grants. B. Highlights of Previous Programming Approach

10. For the past three years, ADB supported the government’s efforts to achieve three outcomes as highlighted in the Kiribati Development Plan 2012-2015:

(i) Outcome 1: Improved SOE’s efficiency and effectiveness: Inefficient SOEs dominate large parts of the economy crowding entrepreneurial activity out of potentially competitive sectors and drain government fiscal resources. ADB TA projects have supported the significant SOE reform efforts undertaken by the government since 2008. These led to the passing of the SOE Act in 2013, initiation of restructuring and privatization processes for selected SOEs, and an improved oversight framework that brought about better corporate governance. (ii) Outcome 2: Improved Public Health standards in Tarawa: Almost 50% of Kiribati’s population of 103,466 lives in South Tarawa, the country’s political and economic center. South Tarawa’s main urban areas of Bairiki, Betio, and Bikenibeu have a combined population of 24,171. Rapid urbanization has resulted in an annual average population growth rate of 4.4% since 2005. The average population density in South Tarawa is 4,150 per km2, and it is as high as 10,610 per km2 in the most densely settled areas. In comparison, in 2010, Singapore had a population density of 7,126 per km2.

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Population pressures, combined with uncontrolled urban settlement, have resulted in overcrowding that has put stress on critical public infrastructure and the natural environment. The South Tarawa Water and Sanitation Project will support the government to undertake high-priority sanitation investments identified in the South Tarawa Water Supply and Sanitation Roadmap 2011-2030.

(iii) Outcome 3: Sustainable access to a safe, well-maintained road network in South Tarawa: Prolonged wet weather, storm surges from cyclone Pam in 2014 and ever heavier traffic volumes have accelerated road damage on South Tarawa in the past year and, while parts of the network were rehabilitated in 2008, the remaining sections of paved roads have reached the end of their economic life. This profoundly affects the lives of the entire population, virtually all of whom lives close to and depend in many ways on the main road. Average travel speed is reduced to 20 km per hour and vehicles are forced to navigate large, deep depressions that fill with water during the rainy season. Taxi operators have reportedly stopped services to avoid further damage to vehicles. The Kiribati Road Rehabilitation Project will rehabilitate approximately 32.5 kilometers of paved roads on South Tarawa, including sealing and construction of appropriate drainage and road safety facilities; and establish community-based road maintenance groups with the capacity to maintain the road network.

II. THE COUNTRY STRATEGIC PRIORITIES

A. Developing the ADB Country Strategic Priorities

11. The KDP focuses on six key policy areas (KPAs): KPA 1 focuses on improving literacy and numeracy at primary and secondary schools level. At the tertiary level, the focus will be on building capacity and equipping I-Kiribati for the workplace through the Marine Training Center, the fisheries training center, USP and Kiribati Teachers college, Kiribati Institute of Technology and Kiribati school of Nursing. KPA 2 will focus on expanding and diversifying government revenue base, promote private sector development, improve PFM, and improve government financial position through improving the performance of SOEs. Increasing access to (and delivery of) quality health services is the focus under KPA 3. KPA 4 focuses on promoting sustainable development by responding and mitigating the effects of climate change. KPA 5 focuses on strengthening the principles of good governance. KPA 6 focuses on the development and maintenance of infrastructure to support economic growth, trade and industrialization. B. Implementation Issues

12. Building Partnerships is an important aspect that ADB takes seriously for the success of its program in Kiribati. Some of the approaches include:

• The use of local consultants. The use of local consultants to work closely with international consultants has proven a success. The consultants local knowledge, understanding of processes and procedures and connections has helped moved forward very sensitive programs such as SOE Reform in Kiribati

• The use of a Steering Committee: To improve coordination and ensure participation of the different stakeholders, setting up of a steering committee to drive the program at the national level has proven very helpful. These steering committees are usually made up of senior officials that have the mandate to make decisions at the technical level. Cabinet decisions is required for policy decisions

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• The use of Development Coordination Office (DCO): ADB and the World Bank have set up a joint DCO in Kiribati. This is to strengthen the participatory conceptualization, design, management, and monitoring of assistance programs and the coordination of the country performance assessment processes of both organizations.

Appendix 1 5

APPENDIXES TO LINKED DOCUMENT Table 1: Progress toward the Millennium Development Goals and Targets

MDG Achievement Target Comments

MDG 1 Eradicate extreme

poverty and hunger

Mixed

Target 1A

Target of halving the proportion of people below the basic needs poverty line passed in 2006. The figure fell from 50% in 1996 to 22% in 2006. However, since the Global Financial Crisis, GDP per capita in Kiribati declined by 8% between 2007 and 2012

Target 1B

Unemployment at the 2010 Population Census was 30.6%. Youth unemployment was 54%.

Target 1C

According to the FAO, food security milestones were achieved ahead of the global 2015 deadline.

MDG 2 Achieve universal primary

education

Off Track Target

2A

Net enrolment rate for males and females in primary education declined annually from 2002 to 2013 but positive trends occurred in 2014. The proportion of student starting year 1 and reaching year 5 has risen since 2006 to 89.5% in 2012.

MDG 3 Promote gender

equality and empower women

Mixed Target

3A

Gender parity achieved in primary education but an increasing gulf between the proportion of boys and girls attending secondary school. Female cash workers (outside of agriculture) are on par with males. High proportion f women in the public sector with a high proportion of females in executive positions. Female Parliamentarian numbers are low. High rates of domestic violence.

MDG 4 Reduce child

mortality Off Track

Target 4A

2015 target for child mortality rate is 30. 38.8 was achieved in 2010 but the current rate (2013) is 52.9. Proportion of children immunized against measles rose from 56% in 2004 to 91% in 2013.

MDG 5 Improve Maternal Health

Off Track

Target 5A

The number of deaths climbed in 2014 with a maternal mortality rate of 150.6, well above the target of 25. However other trends (proportion of skilled birth attendant deliveries) suggest that there has been significant improvement.

Target 5B

Contraceptive prevalence rate in low (22.3% in 2009)

MDG 6 Combat

HIV/AIDS, malaria and

other diseases

Mixed Target

6A

New cases of HIV/AIDS have fallen in recent years with none reported in 2010, 2011 or 2012. One was reported in 2013 and two in 2014.

Target

6B Universal access is available for all HIV/AIDs cases.

Target

6C

Tuberculosis and non-communicable diseases are at alarmingly high levels

6 Appendix 1

Table 2: Country Economic Indicators

Item 2011 2012 2013 2014e 2015p

A. Income and growth

1. GDP per capita ($, current) 1,653.9 1,642.5 1,560.1 1,500.7 1,396.8

2. GDP growth (% pa, constant market prices) 2.7 3.4 2.4 3.8 3.0

a. Agriculture … … … … …

b. Industry … … … … …

c. Services … … … … …

B. Savings and investment (current and market prices, % of GDP)

1. Gross domestic investment … … … … …

2. Gross national savings … … … … …

C. Money and inflation (annual % change)

1. Consumer price index 1.5 (3.0) (1.5) 2.6 1.0

2. Total liquidity (M2) … … … … …

D. Government finance (% of GDP)

1. Revenue and grants 62.1 90.4 112.8 83.8 84.1

2. Expenditure and onlending 83.3 97.2 102.6 109.7 104.5

3. Overall fiscal surplus(deficit) (21.2) (6.8) 10.3 (25.8) (20.3)

E. Balance of payments

1. Merchandise trade balance (% of GDP) (48.2) (58.0) (58.2) (58.8) (56.6)

2. Current account balance (% of GDP) (32.3) (26.3) (27.3) (53.2) (53.0)

3. Merchandise export ($) growth (annual % change) 121.8 (17.8) (1.1) (0.5) (1.6)

4. Merchandise import ($) growth (annual % change) 25.2 18.3 (2.6) (0.6) (8.1)

F. External indicators

1. Gross official reserves (including gold, $ million in months of current

year's imports of goods) … … … … …

2. External debt service (% of exports of goods & services) 2.8 3.3 2.8 2.8 3.5

3. Total external debt (% of GDP) 8.2 8.1 8.0 11.2 16.7

G. Memorandum items

1. GDP (current prices, $, million) 172.7 175.1 169.8 166.8 158.5

2. Exchange rate (A$/$, average) 1.0 1.0 1.0 1.1 1.2

3. Population (million) 0.1 0.1 0.1 0.1 0.1

...=no available data; %=percent; $=United States dollar; A$=Australian dollar, e=estimate; GDP=gross domestic product; M2=money

supply; p=projectionSource: Asian Development Outlook database; International Monetary Fund Article IV Consultation Staff Reports (various years);

Kiribati Ministry of Finance and Economic Development; Kiribati National Statistics Office.

Kiribati Economic Indicators

Appendix 1 7

Selected Economic Indicators (2010–2014) and Projections (2015–2016)

Indicator 2010 2011 2012 2013 2014 2015 2016

GDP growth (%) -0.5 2.7 3.4 2.4 3.0 1.5 1.5 Inflation (average, %) -3.9 1.5 -3.0 -1.5 2.6 1.0 1.5 Current account balance (% of GDP) -16.7 -32.3 -26.3 -27.3 -53.2 -53.0 -48.4

Table 3: Country Poverty and Social Indicators

Indicator Latest OECD average

Population living on less than $1.25 a day (%) … … … Population below national poverty line (%) 21.8 2006 … Underweight children under 5 years old (%) 23.1 2009 … Net enrolment ratio in primary education (%) Total 82.0 2011 96.6 2012 Female 83.0 2011 96.8 2012 Male 80.0 2011 96.5 2012 Adult literacy (%) … … … … Maternal mortality ratio (per 100,000 live births) 130.0 2013 21.0 2013 Infant mortality rate (below 1 year/per 1,000 live births)

45.1 2013 6.5 2013

Life expectancy at birth (years) 68.5 2012 80.0 2012 CO2

emissions (metric tons of CO2 per capita) 0.6 2010 10.2 2010 Population with access to safe water (%) 66.8 2012 99.1 2012 Population with access to sanitation (%) 39.7 2012 97.8 2012 Human Development Indexf 0.607 2013 0.874 2013 (Rank) (133) (22) CO2 = carbon dioxide, GDP = gross domestic product, GNI = gross national income, PPP = purchasing power parity, PRC = People’s Republic of China,… = data not available a Preliminary.

b Refers to central government.

c Current account includes official transfers.

d In real terms.

e Refers to merchandise trade only.

f Simple averages of values and ranks for the OECD countries. Sources: Asian Development Bank (ADB). 2014. Key Indicators for Asia and the Pacific. Manila; ADB. Asian Development Outlook database; International Monetary Fund. World Economic Outlook database; Secretariat of the Pacific Community. National Minimum Development Indicators database; United Nations Commodity Trade Statistics database. United Nations Development Programme. 2013, Human Development Report. Manila; World Bank. World Development Indicators. USA; Pacific developing member countries' statistics offices and central banks; and ADB estimates.

8 Appendix 1

Table 4: Country Environment Indicators Indicator 1990 Latest Year A. Energy Efficiency of Emissions 1. GDP/unit of energy use (PPP$/kilogram of oil

equivalent) -- --

2. Traditional fuel use (% of total energy use) -- 25 (2013) 3. Carbon dioxide emissions -- -- a. Tons -- 62 (2014) b. Tons per capita -- 0.6 (2014) B. Water Pollution: Water and Sanitation 1. % urban population with access to safe water 54 87 (2014) 2. % rural population with access to safe water 25 51 (2014) 3. % urban population with access to sanitation -- 51 (2014) C. Land Use and Deforestation 1. Forest area (million hectares) -- 0.01215 (2014) 2. Average annual deforestation -- -- a. km2 -- -- b. % change -- -- 3. Rural population density (people/km2 of arable land)

67.0 (2000) --

4. Arable land (% of total land) -- 42 (2014) 5. Permanent cropland (% of total land) 51.0 (1993) 39.5 (2014) D. Biodiversity and Protected Areas 1. Nationally protected area a. km2 267.0 (1997) 408,250 (2014) b. % of total land -- -- 2. Mammals (number of threatened species) -- 1 (2014) 3. Birds (number of threatened species) 1 (1992) 6 (2014) 4. Higher plants (number of threatened species) -- 0 (2014) 5. Reptiles (number of threatened species) -- 2 (2014) 6. Amphibians (number of threatened species) -- -- E. Urban Areas 1. Urban population a. '000 25.4 45.9 (2014) b. % of total population 35.1 44 (2014) 2. Per capita water use (liters/day) -- -- 3. Wastewater treated (%) -- -- 4. Solid waste generated per capita (kg/day) -- -- -- = not available, GDP = gross domestic product, kg = kilogram, km

2 = square kilometer, PPP = purchasing power

parity. Source: Government of Kiribati.

Appendix 1 9

Table 5: 2014 Country Performance Assessment Ratings

CRITERIA KIR Pacific Group

Aa Group

Bb A. Economic Management 3.3 3.3 3.9 4.4

1. Monetary and Exchange Rate Policies 2. Fiscal Policy 3. Debt Policy and Management

3.0 3.5 3.5

3.4 3.2 3.4

3.9 3.8 4.0

4.3 4.3 4.5

B. Structural Policies 2.7 3.2 3.7 4.2 4. Trade 5. Financial Sector 6. Business Regulatory Environment

3.0 2.5 2.5

3.8 3.0 2.8

4.2 3.4 3.7

4.4 4.1 4.2

C. Policies for Social Inclusion/Equity 3.2 3.2 3.9 4.3 7. Gender Equality 8. Equity of Public Resource Use 9. Building Human Resources 10. Social Protection and Labour 11. Policies and Institutions for Environmental

Sustainability

3.0 3.0 3.5 3.5 3.0

3.0 3.2 3.4 3.1 3.0

3.9 4.1 4.3 3.8 3.5

4.1 4.6 4.8 4.3 3.7

D. Public Sector Management and Institutions 3.0 3.3 3.7 4.1 12. Property Rights and Rules-based Governance 13. Quality of Budgetary and Financial Management 14. Efficiency of Revenue Mobilization 15. Quality of Public Administration 16. Transparency, Accountability and Corruption in the

Public Sector

3.5 2.5 3.0 3.0 3.0

3.4 3.4 3.5 3.0 3.2

3.5 3.8 4.1 3.8 3.4

4.0 4.5 4.3 3.9 3.6

E. Portfolio Performance 3.0 3.8 4.0 4.1 17. Portfolio Performance 3.5 3.8 4.0 4.1 Composite Country Performance Rating (CCPR) 9.1 11.1 14.0 17.2 a Afghanistan, Bhutan, Cambodia, Kyrgyz Republic, Lao PDR, Maldives, Nepal, Tajikistan.

b Armenia, Bangladesh, Georgia, Pakistan, Sri Lanka, Uzbekistan and Viet Nam.

Source: ADB. Country Performance Assessment. 2014

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Development Coordination Matrix

Sectors and Themes

Current ADB Strategic Focus

Other Development Partners’ Strategies and/or Main Activities

Multilateral Institutions and the UN System

Bilateral

Sector

Public Sector Management

Strengthening public sector financial management, and state-owned enterprise reform

ADB, WB, Budget and technical support for policy reforms Good governance reform support.

Australia

Budget support and non-project grant aid linked to policy reform.

Energy Considered but sector needs are being met by other development partners

WB, EU .

ICT Not a core ADB sector

WB Providing TA support for improved connectivity

Education Not a core ADB sector

EU Australia

Increased access to education, training services; competency development under the education sector program and the remote and islands education program; workforce skills development

Health Not a core ADB sector

WHO and UN

Population

Essential drug supply and maternal and child health

Australia Urban and rural infrastructure rehabilitation and

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Fund development.

Transport Road Rehabilitation Project

ADB, WB

ADB and the World Bank are jointly implementing the Road Rehabilitation Project, which will improve the safety and sustainability of South Tarawa’s roads.1 In 2010, a $12 million equivalent Asian Development Fund loan was approved to finance ADB’s activities under the project. World Bank activities are being funded through an International Development Assistance Grant of $20 million, while a

Australia

Korea

Road Rehabilitation Project - $5.8 million grant is being provided by the Government of Australia through the Pacific Region

Kiribati Aviation Investment project – Government of Korea and WB

Water and sanitation

South Tarawa Sanitation Improvement Project

WB, GEF, UNICEF, EU

Kiribati Adaptation Programme Phase 3 with funding from the Global Environment Fund, Global Fund for Disaster Risk Reduction, and the Government of Australia. The project is supporting a number of climate change adaptation activities

Australia Kiribati Adaptation Programme Phase 3

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across different sectors, including the water subsector, such as the promotion of rainwater harvesting, leakage detection in reticulation lines, and water resources assessment and monitoring.

Improving Water and Environmental Sanitation (regional Kiribati,

Outer Gilbert Islands Water and Sanitation Phase 1

,Policy advice and capacity development.

WB and Government f Korea - Kiribati Aviation Investment Project

Other New Zealand Urban Development Project - formerly named the Sustainable Towns Program) aims to strengthen the management and delivery of urban services in Tarawa such as waste

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collection

Themes

Capacity Development

Capacity development for core and line ministries, EAs and IAs.

ADB, WB, EU, SPC, PIF

Capacity building in economic management, public finance, infrastructure planning, climate change, environment and sustainable management, civil aviation, trade and investment policy, water supply and sanitation, aid management, parliamentary strengthening and governance at both national and local levels.

Australia

Japan

Capacity building in public sector financial management, health and education, and MDG-related planning.

Development of renewable energy and fisheries capacity, and local governance

Environment Sustainability and Climate Change

Not a core ADB sector

UNDP, SPREP Community resilience to climate change, adaptation planning and implementation, national biodiversity protection and awareness,

.. ..

ADB = Asian Development Bank, AusAID = Australian Agency for International Development, EU= European Union, NZAID = New Zealand’s International Aid &

Development Agency, PRC = People’s Republic of China.

14 Appendix 3

Sector Assessment: Public Sector Management 1. Sector Performance, Problems, and Opportunities

1. Background: Kiribati is a small remote atoll country facing special challenges and constraints to development. Vulnerability to natural disasters; small size; geographical remoteness, and limited resources (land, labor and capital) all influence the country’s growth and development potential. Economic growth although highly volatile has been positive for the last four years, reaching xx of GDP in 2014. Development indicators are poor, and frequent external shocks aggravate individual hardship and vulnerability. A general election is scheduled for September 2015.

2. Revenue Performance: The fiscal strategy of the Government is to manage expenditure prudently and provide the necessary resources to achieve sustainable economic growth. The 2015 Budget estimates that total revenue will reach $120.7 million. This compares with budgeted revenue of $78.8 million in 2014 and actual revenue in 2013 of $126.8 million. The main item of revenue will continue to be revenue from fishing licenses which is estimated at $75 million for 2015. In 2015, Taxation revenue is expected to reach $31.6 million compared with the budget of $26.9 million in 2014 and the actual figure of $29.6 million in 2013. The higher taxation revenue base in 2015 is mainly due to a full year’s collection of VAT and a rise in personal income tax through economic growth. The introduction of VAT in 2014 will not only increase the collection of revenue but lead to better compliance and improvements in the collection of Company Tax.

Figure 1: Revenue performance and composition

e = estimate, GDP = gross domestic product, p = projection, PIT = personal income tax, VAT = value-added tax. Source: International Monetary Fund (2014 Article IV Consultation).

3. Expenditure performance. Expenditure in the 2015 budget is expected to be $116.9 million which is $5.2 million lower than the revised budget estimate of $122.1 million in 2014. Personal emoluments account for 70% of Ministries’ expenditure. Loans of $8.9 million that were taken up by the Government on behalf of State Owned Enterprises (SOEs) have been fully repaid in 2014. Community Service Obligations for SOEs in 2015 will amount to $5 million. The budget surplus in 2015 is expected to reach $3.7 million, roughly 1.9 per cent of GDP.

0

20

40

60

80

100

120

2009 2010 2011 2012 2013e 2014p

% o

f G

DP

Other revenues

PIT & companytaxVAT & Excise

Import duties

Fishing licensefeesExternal grants

Tax revenue

Nontax revenue

Appendix 3 15

Figure 2: Expenditure performance and composition

e = estimate, GDP = gross domestic product, p = projection, SOE = state-owned enterprise. Source: International Monetary Fund (2014 Article IV Consultation).

4. Management of assets and liabilities. The country’s main fiscal buffer—the Revenue Equalization Reserve Fund (RERF)—was heavily drawn upon to support fiscal deficits from 2009–2012. Unsustainably high drawdowns from the RERF of 11%–22% of GDP over this period as well as losses on RERF investments during recent global economic turmoil, have almost halved the RERF balance in constant per capita terms, which severely limits the government’s ability to manage economic volatility and react to shocks. In an effort to better manage the RERF, the government set up a RERF investment committee in 2013. A debt policy approved in 2013 has prevented new non-concessional borrowing since and introduced a high level of scrutiny and oversight for other government borrowing and guarantees. At the end of February 2015, the sovereign wealth fund, the RERF, stood at $701.3 million up from $580 million in 2012.

Figure 3: Fiscal balance and financing

e = estimate, GDP = gross domestic product, p = projection, RERF = Revenue Equalization Reserve Fund. Source: International Monetary Fund (2014 Article IV Consultation).

5. Structural reforms and private sector development. Large parts of the economy are dominated by SOEs, crowding out entrepreneurial activity in potentially competitive sectors. Inefficiencies result in measurable drain of fiscal resources, including through forfeiting of tax revenues. Since 2012, government has undertaken significant reform efforts, supported by

0

20

40

60

80

100

120

2009 2010 2011 2012 2013e 2014p

% o

f G

DP

Developmentexpenditure

Subsidies to SOEs

Other currentexpenditure

Wages andsalaries

Currentexpenditure

Developmentexpenditure

-30

-20

-10

0

10

20

30

2009 2010 2011 2012 2013e 2014p

% o

f G

DP

Budget support

Commercialborrowing

Project loans (net)

RERF drawdowns

Overall balance

16 Appendix 3

Asian Development Bank (ADB) technical assistance (TA)1, which led to the passing of the SOE Act 2013, initiation of restructuring and privatization processes for selected SOEs, and an improved oversight framework that led to better corporate governance. In parallel, government pursues private sector development, through a recently approved private sector development strategy, to provide a sustainable basis for growth and fiscal stabilization. This effort is supported by development partners through transport infrastructure, financial, and energy sector development; telecommunications sector liberalization; and skills development.

2. Government’s Sector Strategy

6. Public sector reform strategies. The Kiribati Development Plan (KDP) 2012–2015 provides the overarching framework to achieve fiscal sustainability and promote long-term growth in Kiribati and guides policy and strategy formulation.2 Public sector management (PSM) activities are largely covered within the economic growth and poverty reduction priority area. Macroeconomic strategies that are relevant to the implementation of the policy-based grant include (i) expanding and diversifying the government revenue base; (ii) implementing a new tax regime as well as modernizing the tax system; (iii) reviewing vocational training and tailoring courses to internal and external labor markets; (iv) accelerating private sector development; (v) improving public finance management systems; (vi) improving the government’s fiscal position by improving performance of SOEs; and (vii) improving livelihoods through effective implementation of subsidies such as copra and sea weed. The KDP 2012–2015 further identifies human resource development and governance as key priority areas. 7. Implementation of sector strategies. Implementation of the sector strategies is driven by the Kiribati Economic Reform Plan (KERP)—a medium-term, joint government and development partner effort with prioritized economic reform actions—, the Kiribati Public Financial Management (PFM) Plan 2011–2014, the SOE Reform Roadmap, and other analytical work carried out by government with support of development partners. Government agencies’ capacity to implement reform measures is severely constraint by weak management and technical expertise, a small skills pool, limited financial resources, and an infant performance management system. Sector strategies and reforms therefore need to be highly prioritized and sequenced while implementation support is required by development partner technical assistance (TA). As observed in the past, there is a risk that reform implementation stalls, despite strong political reform commitment, due to lacking internal capacities and external assistance. 8. Country Performance Assessment scores. The equal-weighted average score of the four institutional components of the Country Performance Assessment (CPA) for Kiribati gradually increased from 2.7 to 3.0 (on a scale from 0 to 6) from 2008–2013.3 Scores notably increased since 2011, coinciding with mounting government commitment and efforts to reforms.

3. ADB Sector Experience and Assistance Program

9. ADB support. In support of the KDP 2012–2015, ADB’s COBP 2016–2018 addresses Kiribati’s macroeconomic imbalances by strengthening economic and fiscal management, and alleviating the binding constraints on private-sector-led economic growth through structural

1 ADB. 2008. Economic Management and Public Sector Reform. Manila (TA 7166-KIR); and ADB. 2013. Enhancing

Economic Competitiveness through State-owned Enterprise Reform. Manila (TA8478-KIR). 2 Government of Kiribati. 2012. Kiribati Development Plan 2012–2015. Tarawa.

3 The CPA’s four institutional components cover economic management, structural policies, policies for social

inclusion, and P and institutions. The equal-weighted average referred to here does not include country portfolio performance and does not follow the composite country performance rating calculation formula.

Appendix 3 17

Figure 4: Country Performance Assessment scores

PSM = Public Sector Management. Source: Asian Development Bank (Country Performance Assessment reports, various years).

reforms.4 Recent and ongoing TA has supported the design and implementation of SOE reforms through restructuring inefficient SOEs and strengthening corporate governance (footnote 2). Further TA supported the implementation of PFM reforms, based on the Kiribati PFM Plan 2011–2014, specifically through the automation of budget execution and reporting functions within the Attaché financial management information system. In collaborative co-financing with the Government of New Zealand and the World Bank, ADB provides a policy-based program to create fiscal space for critical reforms and set incentives to keep up reform momentum, thereby reinforcing TA work to improve public sector performance. 10. Coordination of sector assistance. In addition to the alignment with national plans and priorities, ADB support is coordinated with all major development partners5, including through the Economic Working Group, comprising government and development partner representatives, as well as other fora as appropriate (annual IMF Article IV Consultations and the Development Partner Forum). It further builds upon lessons from previous ADB and partner assistance, including the need to (i) build strong political reform consensus, (ii) limit reform to few substantive areas, (iii) institutionalize a coordinated government–partner mechanism to monitor implementation of the reform process, and (iv) adopt a medium to long-term perspective in recognition of the severity of Kiribati’s challenges. Developed by the Economic Working Group, the KERP prioritizes fiscal and structural reforms, sets up the framework for budget support, and facilitates coordination of partner TA.

11. Future ADB support. Future ADB support in PSM, through policy-based lending and TA, is expected to continue reform implementation in the four major reform areas identified in the KERP (quality of expenditure, revenue performance, management of assets and liabilities, and structural reforms to create an enabling business environment). Gradual shifting of reform priorities toward inclusive growth, including a focus on public social spending and women empowerment, is expected to take place over the period from 2014–2017. Capacity development and performance management of the civil service will be targeted as cross-cutting issues throughout ADB assistance. Various activities will further be supported through regional TA, including in economic management, structural reforms, and PFM.6

4 ADB. 2010. Country Partnership Strategy: Kiribati, 2010–2014. Manila.

5 Major partners are the ADB, the Governments of Australia and New Zealand, the Pacific Financial Technical

Assistance Center, and the World Bank. 6 ADB. 2013. Pacific Economic Management (Phase 2). Manila (TA 8565-REG); and ADB. 2013. Pacific Private

Sector Development Initiative (Phase 3). Manila (TA 8378-REG).

2.3

2.5

2.7

2.9

3.1

3.3

2008 2009 2010 2011 2012 2013

Economicmanagement

Structuralpolicies

Policies forsocialinclusionPSM andinstitutions

Equal-weightedaverage

18 Appendix 4

RISK ASSESSMENT AND RISK MANAGEMENT PLAN

Risk Description Risk Assessment Mitigation Measures or Risk Management Plan

Government ownership. Political and bureaucratic ownership of the reform process and commitment to fiscal discipline weakens.

Medium The reform process builds on strong government commitment since 2012, as indicated by recent reform achievements including the deposit of the FY2013 budget surplus into the RERF. Continued reform commitment and fiscal discipline up to the elections in 2015 is outlined in the development policy letter and the post-program partnership framework. ADB will continue policy dialogue with the government and key partners through the EWG as well as with executing and implementing agencies at the administrative level.

Broad support for reforms. Parliamentary and community support for reform implementation is insufficient.

Medium A strong consensus emerged since the beginning of the government’s reform efforts in 2012 on Kiribati’s ongoing economic difficulties, the necessity of adopting serious reform measures to deal with imbalances, and the imperative that the cabinet and parliament take the lead in this reform process. Community buy-in for public sector reforms has noticeably increased since 2012 due to visible success of the SOE reform program.

a Regular and systematic policy dialogue

between government, partners, and key stakeholders, including through the EWG, will ensure broad support.

External shocks. External shocks (e.g. natural disasters, high oil and food prices) damage the economy and fiscal position.

Medium The program supports government efforts towards fiscal consolidation and stabilization of the RERF as a buffer to external shocks and the country’s increasing vulnerability to climate change. ADB, with other partners, also supports private sector development to expand the economic base and generate employment as a measure to increase resilience. However, large external shocks can disrupt reform initiatives and outcomes. ADB will continue to monitor national, regional, and global economic developments and environmental risks, and respond in a timely manner to possible government requests for assistance in case of unforeseen events.

Growth. Weak private sector response to improved economic conditions and resulting slow growth undermines fiscal consolidation and leads to a need for ongoing budget support.

Medium As natural limitations (remoteness, dispersion, market size, lack of management expertise) restrict private sector growth potential, the government promotes priority sectors (fisheries, labor migration, niche tourism) while addressing business confidence through continued economic and fiscal reform. Specific efforts to improve the business climate include (i) telecommunications sector liberalization, (ii) financial and energy and transport sector development, and (iii) skills development. ADB-supported structural reform also contributes to market development by opening up selected wholesale/retail businesses to competition.

b Private sector

uptake in those areas has been prompt and sizeable, indicative of the private sector’s willingness to do business.

a

Spending restraint. Relaxing or reversing of spending restrain undercuts fiscal consolidation

Medium The medium term fiscal framework FY2014–2016 shows continued restrain in recurrent expenditure allocations, based on conservative fishing license revenue projections. Past expenditure performance, including the deposit of the FY2013 budget surplus into the RERF, demonstrates strong government commitment to fiscal consolidation. The upgraded PFM system, completed in April 2014, introduced a

Appendix 4 19

Risk Description Risk Assessment Mitigation Measures or Risk Management Plan

efforts. commitment control system that supports the MFED to control budget execution across government. Multipartner support is available to address weaknesses in PFM.

Quality of expenditure. Weak planning–budgeting links and excessive non-priority spending undermines medium-term growth prospects.

Medium Policy actions aim at improving expenditure quality through increasing efficiency of the copra subsidy and reducing the fiscal drain from inefficient SOEs. Past policy actions have included the reduction of spending on temporary workers in non-priority ministries while the post-program partnership framework and development policy letter highlight long-term government commitment to increase priority sector allocations for social spending and infrastructure. Ongoing multipartner policy dialogue and TA will safeguard government leadership and implementation, including through PFM reform.

Use of budget support. Funding of recurrent annual costs through budget support and failure to prioritize capital works based on economic returns exacerbates future budget deficits.

Medium The program provides funding for a share of the fiscal deficit in FY 2014, which, in parts, derives from the clearance of high-interest SOE debt taken on by the government within the SOE reform process supported by ADB and the IMF.

ab This frees up

future resources that can be allocated to priority infrastructure and social spending. The program also requires implementing the government’s debt policy, which prescribes the avoidance of non-concessional debt and sets out a due process and conditions for all new borrowing and issuance of guarantees.

Public capital spending is limited. Donor-funded projects in the FY2014 budget are aligned with the KDP 2012–2015 and show positive economic returns. Nonetheless, natural limitations (market size, remoteness, dispersion) will continue to pose a risk to financial and economic sustainability.

Revenue. Tax and non-tax revenues are insufficient to achieve a basic level of fiscal sustainability.

Medium Revenue potential from marine resources, particularly tuna, is significant, if collectively managed by PICs. The government has initiated reforms in fishing license revenue management, complemented by progress on tax reform through the introduction of a VAT. The program includes policy actions in both areas to ensure continued implementation of reform efforts. TA from PFTAC, the Government of Australia and the World Bank is available to continue revenue reforms.

SOE reform. Progress and commitment to performance improvements is halted or reversed.

Medium SOE reform has shown remarkable progress since 2012 through SOE Act implementation and closure of selected underperforming SOEs.

a TA from ADB, complemented by

continued policy dialogue, has been and is available to implement policy actions and continue SOE reform efforts beyond program duration.

b

Crowding out of private sector. SOE support could entrench their position and crowd out private sector investment and competition.

Low SOEs are providing key goods and services, and improving their efficiency can contribute greatly to the economy and the government’s fiscal position. The associated risk of crowding out the private sector is managed by pursuing a coordinated program of SOE reform and private sector development, which focusses on opening up potentially competitive sectors and on SOE commercialization areas that are not commercially viable (due to natural economic limitations).

Institutional capacity.

Medium Government and partners jointly developed the policy reform actions, which are tailored to available government capacities.

20 Appendix 4

Risk Description Risk Assessment Mitigation Measures or Risk Management Plan

Insufficient capacity of government to implement policy reform actions.

Reform areas are highly prioritized and linked to available TA support

b, which covers capacity development for government

staff and capacity supplementation in highly specialized functions. The government shows strong commitment to assign required staff to core functions (e.g. debt policy implementation in line with policy actions). Ongoing government–partner policy dialogue—and, as part of that, the post-program partnership framework—will ensure continuation of reform implementation beyond the program duration.

Public financial management. Weak PFM systems and capacity.

Medium Past policy reform actions of the KERP included a PFM system upgrade, which was completed in April 2014 and introduced a commitment control systems allowing the MFED to control budget execution across the government. ADB TA and policy dialogue has been and is supporting the strengthening of PFM functions.

bc Other development partners

including the governments of Australia and New Zealand, PFTAC, and the World Bank are further providing TA for capacity building of government staff.

Procurement. Weak procurement capacities and controls undermine budget execution.

Medium Government procurement is undertaken according to the Procurement Act 2002, which specifies the methods of procurement and their conditions for use, and tendering procedures. The act applies to all central government bodies, statutory corporations and SOEs. However, weak government capacities and lack of procurement regulations undermine effectiveness of the act. ADB will work, jointly with other partners, to strengthen government procurement system including through capacity development as appropriate.

Anticorruption. Weak internal controls and oversight capacities lead to significant leakage of funds.

Medium Weak overall government capacities also affect the standard of controls and oversight in place. A PFM plan prioritizes support efforts by government and partners to strengthen internal controls and external oversight. Multipartner support to the PFM reform process is available. This includes support through regional ADB TA.

c

The program’s policy actions address several loopholes that have led to significant leakages in the past. This includes an increase in transparency in the management of fisheries agreements and related license fee payments; increased scrutiny in the management of public assets and liabilities; copra subsidy reform; and the strengthening of SOE governance to counter potential nepotism and misuse of funds (supported by past and ongoing ADB TA

b).

Overall Medium ADB = Asian Development Bank, EWG = Economic Working Group, FY = financial year, IMF = International Monetary Fund, KERP = Kiribati Economic Reform Plan, KDP = Kiribati Development Plan, MFED = Ministry of Finance and Economic Development, PFM = public financial management

21 Appendix 5

Country Cost-Sharing Arrangements and Eligible Expenditure Financing Parameters, 2016–2018a

Item

Parameter

Remarks/Explanation

Country Cost-Sharing Ceiling

b for Loans

(2015−2017)

Up to 99%

Individual projects may be accorded ADB financing of up to 99% of total project costs to provide maximum flexibility for the government to finance its development agenda.

Actual cost-sharing for individual projects will be based on project-specific considerations: higher financing percentages may be provided for non-income earning projects that address binding constraints to inclusive growth; and lower financing percentages may be provided for income-earning projects to encourage local ownership.

ADB will continue to seek cofinancing opportunities with other development partners.

Country Cost-sharing Ceiling

b for TA and

Other Grants

(2015−2017)

Up to 99%

TA and other grant projects may be accorded ADB financing for up to

99% of project costs. A higher percentage of financing may be

provided for projects with strong evidence of ownership and

commitment that addressing binding constraints to inclusive growth.

Under TA programs, the counterpart government agency would

normally be expected to provide in-kind facilities to support the work

of TA consultants.

Country Cost-sharing Ceiling

b for Specific

Sectors

None No sector-specific variations are proposed.

Limits on Recurrent Cost Financing

c

None

While no country limit has been set for recurrent cost financing, such

financing is not expected to be significant. The government is

encouraged to strengthen arrangements that ensure the fiscal and

operational sustainability of projects once ADB funding ceases. ADB

funding would, to the extent possible, to integrated into the budget to

mitigate fiscal sustainability risks.

Taxes and Duties

None

Local taxes and duties are considered reasonable. No taxes and duties are targeted specifically at ADB projects. Tax and duty arrangements set out in ADB’s charter are complied with.

ADB may finance taxes and duties associated with project expenditures, provided they do not constitute an excessively high share of project costs.

Notes: a ADB’s policy on cost-sharing is governed by: ADB. (2005). Cost Sharing and Eligibility of Expenditures for

Asian Development Bank Financing: A New Approach. Manila. b Country cost-sharing ceilings are financing parameters that indicate the maximum share of costs ADB will finance with respect to

an aggregate portfolio of projects in a developing member country (DMC), over the country partnership strategy period for that

DMC. c Under ADB’s policy, recurrent costs of the borrower are eligible for ADB financing. These costs must be regularly or periodically

incurred, and may include salaries and operating costs. However, only recurrent costs incurred during the implementation phase of projects will be eligible, and only up to an amount that would be in line with sound banking principles.