the population were below the national poverty line, and high shares of the pop- CENTRAL Key conditions and ulation were deprived of non-monetary needs, such as access to clean water, san- challenges PACIFIC ISLANDS itation, and electricity. Nauru faces the challenge of adjusting Until the emergence of the highly trans- to reduced fiscal revenues and finding missible Omicron variant, the Central Pa- new sources of economic growth and Table 1 2020 cific countries had been spared from se- jobs over the medium term. Economic Population, million vere health impacts due to the pandemic. growth, employment and public revenues Kiribati 0.12 However, in January 2022 an outbreak have been highly dependent on activity Nauru 0.01 took hold in Kiribati’s capital, with the associated with Australia’s Regional Pro- Tuvalu 0.01 GDP, US$, billion virus managing to evade the strict quar- cessing Centre (RPC) for asylum seekers, Kiribati 0.19 antine protocols for inbound travelers. phosphate mining and fishing. However, Nauru 0.11 Nauru and Tuvalu remain COVID-free phosphate resources have now been fully Tuvalu 0.05 thus far, but may have to grapple with exploited, and the RPC is now transi- GDP per capita, current US$ the rapid spread of the virus as they re- tioning to a new ‘enduring capability’ Kiribati 1671 open their borders. In the long term, the arrangement with Australia, which will Nauru 8867 Central Pacific faces major development see the facility continue to operate on a Tuvalu 4663 challenges due to extreme vulnerability significantly reduced scale. Sources: WDI, World Bank staff estimates. to climate change, small size, remoteness, In Tuvalu, fishing license fees are projected heavily reliance on external grants, near- to decline as the El Nino cycle wanes. total dependence on imports for foods Strengthening public financial manage- Growth rates in Kiribati, Nauru and Tu- and fuel, and limited sources of revenue. ment is a priority, in particular reining in valu remain far below pre-pandemic lev- All three countries have invested in trust the elevated fiscal costs of overseas health funds in order to stabilize volatile rev- care and improving procurement proce- els. While Tuvalu and Nauru remain enues and provide long-term develop- dures to ensure more cost-effective capital COVID-free, the fast spread of ment financing, but fiscal sustainability spending. Though no recent data on COVID-19 in Kiribati in January 2022 remains an important challenge. poverty is available, in 2010 an estimated highlighted the need to reinforce pre- In recent years, Kiribati’s growing rev- 26 percent of the population lived below enues from fisheries have allowed the the national poverty line. paredness. Higher commodity prices, ex- government to rapidly increase public acerbated by the Ukraine-Russia war, will spending to tackle the country’s high add to inflationary pressures and hold rates of poverty and deprivation. How- back growth. A narrow economic base ever, with the available fiscal space now Recent developments and vulnerability to climate change are exhausted, Kiribati will now need to fo- cus on the quality of public spending – Kiribati experienced a modest economic key challenges for growth and poverty re- rather than the quantity – in order to recovery in 2021, with estimated 1.5 per- duction in the Central Pacific. achieve further development gains. Ac- cent growth. COVID-19 border closures cording to a 2019 survey, 21.9 percent of had resulted in a 0.5 percent contraction FIGURE 1 Central Pacific Islands / Sources of revenue, FIGURE 2 Central Pacific Islands / Sovereign wealth fund 2016-2021 balances Percent of GDP Fund balance, % of GDP (lines) Per capita value, A$ (bars) 200 500 25000 450 150 400 20000 350 100 300 15000 50 250 200 10000 0 150 100 5000 50 Kiribati Nauru Tuvalu 0 0 Fishing license fees Regional Processing Centre .TV domain Other revenue 2016 2017 2018 2019 2020 Grants Kiribati Nauru Tuvalu Sources: Country authorities, and World Bank and IMF staff estimates and projec- Sources: Country authorities, and World Bank and IMF staff estimates and pro- tions. Notes: Nauru data are June years; Kiribati and Tuvalu are calendar years. jections. Notes: Nauru data are June years; Kiribati and Tuvalu are calendar years. The Nauru Trust Fund was established in 2016. MPO 1 Apr 22 in 2020, with major disruption to business school reconstruction. Buoyant fishing li- now launching a vaccine campaign for un- travel, development projects, and fresh cense revenues, the country’s main source der-18s. The highly successful vaccination fish exports. However, increased public of revenue, rose to an estimated 56 percent campaign has allowed for the gradual re- spending on social benefits in 2021 out- of GDP in 2020, much higher than expect- turn of international travel, with quaran- weighed the ongoing effects of the border ed. The fiscal deficit is expected to widen tine requirements now removed for vac- measures, and supported a modest return to 7 percent of GDP in 2021 due to a 20 per- cinated travelers from Australia. Nonethe- to growth. This included a new unemploy- cent fall in fishing license fees and an in- less, modest growth of only around 1 per- ment benefit for all 18–60-year-olds with- crease in expenditures, including addition- cent is expected in FY22, due to the ex- out a formal job. This is expected to help al COVID related spending and planned pected wind-down of RPC activity in the reduce poverty given that more than three air service investment. The total stock of second half of the year. However, a re- quarters of Kiribati’s adult population are sovereign wealth funds for Tuvalu, com- turn to more robust growth of around 2.5 eligible to receive support, but the broad prising the Tuvalu Trust Fund (TTF), the percent in FY23 and the medium term is coverage of the program dilutes the ben- Consolidated Investment Fund (CIF), and projected, once the new port infrastruc- efits to the Bottom 40. At an annual cost the Tuvalu Survival Fund (TSF), is around ture comes online. Although the RPC of 12 percent of GDP, the benefit has also 292 percent of GDP at end-2021. wind-down will place growing pressure introduced significant fiscal pressures. on government finances over the medium Nonetheless, a 14.5 percent of GDP draw- term, a balanced budget is projected for down from the sovereign wealth fund lim- FY22. This is due to off-budget RPC in- ited the 2021 fiscal deficit to an estimated Outlook come from previous years being recog- at 3.7 percent of GDP. As of end 2021, the nized as revenues, cushioning the impact value of the sovereign wealth fund stood at In Kiribati, moderate growth of about 1.8 of the RPC wind-down, as well as strong 490 percent of GDP. percent is projected in 2022. Although a fisheries revenue performance. In Nauru, growth is projected to have lockdown in the first quarter has subdued Tuvalu, with nearly 90 percent of adults reached 1.5 percent in FY21, with stronger activity, supportive fiscal policy measures fully vaccinated, is considering options than expected activity related to the RPC and the expected gradual return of inter- for a gradual reopening of the borders and a major port redevelopment project national construction projects from the sec- with key countries, such as Fiji (the main helping to offset the effects of border clo- ond half of 2022 will help to safeguard the hub for Tuvalu). Growth is therefore pro- sures. In FY21, the fiscal cost of COVID-19 recovery. After a slow start, the double jected to rebound to 3.5 percent in 2022 amounted to 5 percent of GDP, including dose vaccination rate has now reached 77 and to climb steadily to 4 percent by funding for the vaccine rollout and subsi- percent of adults (as of 3 March 2022), 2024. The fiscal deficit will reach 2.9 per- dies to maintain vital air and sea freight opening up the possibility that quarantine cent of GDP in 2022 as expenditures fall links. However, with better-than-expected measures could be relaxed later this year. back closer to pre-COVID levels while revenues from the RPC, Nauru was still Meanwhile, inflationary pressures are ex- revenues are projected to fall by over 10 able to achieve an estimated surplus of 11 pected to build in 2022, in line with inter- percent of GDP. Fishing license fees are percent of GDP. With this surplus and a national trends in food and fuel prices. The expected to fall to 41.5 percent of GDP drawdown on cash reserves, Nauru made fiscal deficit is expected to reach 6.0 per- in 2022 from 43.5 percent in 2021. On the a contribution worth 19 percent of GDP to cent of GDP in 2022, after accounting for other hand, tuna transshipment in Funa- its Intergenerational Trust Fund in FY21, budget support grants and a 7.8 percent of futi, reinstated in February 2022 after a bringing the fund balance to 109 percent of GDP drawdown on the sovereign wealth two-year ban due to COVID-19, is expect- GDP. Meanwhile, in the first two quarters fund. Kiribati’s ample cash reserves mean ed to bring additional revenues amount- of FY22, RPC activity continued to exceed that projected deficits can be sustainably fi- ing to 2 percent of GDP. Over the medi- expectations. This, along with strong fish- nanced over the medium term, but further um-term, the fiscal deficit is projected to eries revenue receipts, has generated a fis- expenditure growth would put this assess- remain below 3 percent of GDP. cal surplus for the year to-date. ment at risk. The authorities’ fiscal anchors Risks to the Central Pacific outlook are In Tuvalu, the pandemic impacted travel on sovereign wealth fund drawdowns and substantial and include the unpredictabil- and trade but the country avoided a re- maintaining adequate cash reserves pro- ity of the pandemic; volatility in revenue cession. The economy grew an estimated vide important sustainability safeguards. flows, including budget support from de- 2.5 percent in 2021, supported by the infra- In Nauru, 96 percent of eligible adults are velopment partners; and the ever-present structure projects linked to the airport and fully vaccinated, and the government is threat of climate-related natural disasters. TABLE 2 Central Pacific Islands / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021f 2022f 2023f 2024f Real GDP growth, at constant market prices Kiribati -0.5 -0.5 1.5 1.8 2.5 2.3 Nauru 1.0 0.7 1.5 0.9 2.6 2.4 Tuvalu 13.9 1.0 2.5 3.5 3.8 4.0 a,b Lower middle-income poverty rate ($3.2 in 2011 PPP) Kiribati 16.2 17.8 17.6 17.4 17.2 16.8 Sources: World Bank and IMF. e = estimate; f = forecast. Note: Country authorities and World Bank and IMF staff estimates. Nauru data are based on the fiscal year ended June. Kiribati and Tuvalu are calendar years. a/ Calculations based on EAPPOV harmonization, using 2019-HIES. b/ Projection using neutral distribution (2019) with pass-through = 1 (High) based on GDP per capita in constant LCU. MPO 2 Apr 22