GOVERNMENT OF KIRIBATI
AlNISTMY OW INANCZ & ECOCOMIC OEELOMAMT
Phone: (68(l 21806 or 21802, Address: P0 BOK 67, Tarawa, diribati
Date: 26t September, 2014
Mr. Jim Yong Kim
President
The World Bank
Washington, DC, 20433
USA
Dear President Kim
Re: Letter of Development Policy
Kiribati faces important fiscal and eco iomic challenges. Over recent years, adverse external economic conditions
have impacted Kiribati through severa channels. Declines in remittances have contributed to weak growth, price
shocks have led to periods of high infl ition, while disruption in global financial markets saw the value of Revenue
Equalization and Reserve Fund assets c ecline by nearly 20 percent.
Revenue has declined over recent year, as a consequence of weak growth, problems with tax administration, and tax
non-compliance of SOEs. Governmer t has taken decisive action to control expenditure in the face of declining
revenues. Large fiscal deficits have emi.rged, however, given Government's commitment to maintain expenditure on
basic social services. These deficits h,-tve been financed through drawdowns from the RERF, which is now being
depleted at an unsustainable rate. Winlffl fishing license revenues in 2013 led to a significant budget surplus and
were prudently used to replenish the Revenue Equalization and Reserve Fund and clear accumulated SOE debt,
assisting government towards achieverm ent of long-term fiscal sustainability.
We cannot rely on such windfall rever ues in future. The Ministry of Finance and Economic Development therefore
continues to work hard to develop sustainable solutions to current fiscal challenges. Government has developed an
'Economic Reform Plan', outlining reform priorities to improve fiscal sustainability. The plan supports the
achievement of Government's broadler development objectives as stated in the Kiribati Development Plan.
Substantial progress has already occurred against the reforms identified in the Economic Reform Plan, including
against reforms supported by the firsi World Bank development policy operation in 2013. The Economic Reform
Plan identifies priorities under three pillars.
The first pillar of the Economic Refo in Plan is increasing revenue. Government recognizes that recent declines in
revenue must be reversed if we are o reduce deficits and achieve a sustainable fiscal position. Under this pillar,
Government has recently introduced e Value-Added Tax to assist with strengthened revenue compliance. A range of
administrative measures are also unde rway, including the introduction of the RMS7 IT system, which is expected to
allow for substantial reallocation of ievenue staff resources to compliance and enforcement activities. Reforms to
processes and systems for issuing fihing licenses will also contribute to this pillar. Fishing license fees are the
largest single source of revenue for th - Government of Kiribati, and the passage of the National Fisheries Policy last
year will provide a sound policy bas- to improve the management of this vital resource to both increase revenues
and safeguard sustainability. This yea!r, we are working with the Ministry of Fisheries to improve transparency and
predictability around fishing license -evenues and have, from this year, begun publishing a report on our external
website detailing fisheries revenue performance by source. Kiribati has moved to comprehensively meet its
commitments under the Vessel Da) Scheme, administered by the Parties to the Nauru Agreement. Over time,
Government intends to further increalie the value derived from access to migratory fish stocks through increased use
of market-based mechanisms for the dlocation and utilization of fishing licenses under the Vessel Day Scheme.


The second pillar of the Economic Reform Plan is improving the management of public assets and liabilities.
Significant progress has already been achieved under this pillar, including Goverment's decision to clear all
overdraft debt using fishing license revenues in 2012. A new debt policy was agreed by Cabinet in 2013, which will
ensure that appropriate processes are applied in the contracting of any new public sector borrowing. New legislation
has been passed providing a legal framework for an ambitious program of SOE reform. New SOE legislation will
support good practices in governance, financial reporting, oversight and management of SOEs. This year,
Government is working towards implementation of key provisions of this new legislation, and has taken the
following key steps: i) ensured that all SOE Board appointments are in compliance with the SOE Act; ii) received
financial statements from the five largest SOEs within three months of the end of the fiscal year; and iii) included
community service obligations in the annual budget for the first time, providing transparency and predictability
regarding SOE subsidization for non-cost-recoverable activities. A key area of weak SOE performance is in the
copra sector, where expenditure on the copra subsidy scheme is of poor quality and frequently exceeds budgeted
limits because of administrative weaknesses in responsible SOEs. Government has now approved a roadmap for
reform of the copra sector, involving the establishment of a single agency responsible for all aspects of the scheme,
and including the merger of the Kiribati Copra Cutters Society and the Kiribati Copra Mill Limited. Government is
also moving to implement important reforms to the management of Revenue Equalization and Reserve Fund assets
to ensure a more appropriate risk exposure and investment strategies that are aligned with fund objectives. Cabinet
has approved reallocation of RERF assets to new asset managers and reorientation of RERF's portfolio towards
lower-risk instruments.
The third pillar of the Economic Reform Plan is structural reform. While Kiribati faces important constraints to
private sector development arising from geography, measures are being taken to improve the business environment
and encourage employment generation. Under this pillar, a law was passed in 2013 establishing the regulatory
framework for a liberalized telecommunication sector. We are currently working towards attracting private
investment through the liquidation and sale of our existing telecommunications utility. Invitations for expressions of
interest in purchase of TSKL have recently been evaluated by Government and prequalified firms have been invited
to submit bids. Prequalified firms are expected to soon complete due diligence, complete negotiations, and submit
bids. Over the next year, Government also hopes to issue additional licenses for mobile telephone service providers,
complementing new licenses recently issued for new private-sector internet providers. Private sector participation
and competition in the telecommunication sector is expected to lead to increased coverage, improved services, and
reduced prices, delivering a range of economic and social benefit to the people of Kiribati.
Despite the very difficult economic and fiscal situation the Government is facing, we remain firmly committed to
implementing this medium-term reform program. The Government looks forward to the continued active
engagement of the World Bank in Kiribati, and the Bank's continuing support to our reform process.
Yours sincerely
Hon. Tom Murdoch
Minister of Finance and Economic Development