Kiribati - Overview of economy

The Gilbert Islands were granted self-rule by the United Kingdom in 1971 and complete independence in 1979 under a new name, Kiribati. The United States relinquished all claims to the sparsely inhabited Phoenix and Line Island groups in a 1979 treaty of friendship with Kiribati, thus giving the island nation its present geographic composition. The economy of Kiribati is small, and growth prospects are limited by the nation's remote location, poor infrastructure , poor soil, unskilled labor force , and lack of natural resources. Marine resources offer the greatest potential for the development of an independent, sustainable economy. Interest earned from the phosphate reserve fund is the nation's main source of foreign exchange. Prior to independence, it was realized that the phosphate resources of Kiribati were limited, and instead of using the royalty revenues from phosphate mining for immediate expenditures, they were placed in a trust fund, the Revenue Equalization Reserve Fund (RERF). The interest income from the investment of this trust fund has

been available for expenditure by the Kiribati government since independence in 1979. Commercially viable phosphate deposits were exhausted by the time of independence. Other sources of foreign exchange include some commodity exports (copra [coconut meat], seaweed, and fish), licensing income from fishing, and remittances from Kiribati citizens working for international shipping lines. The financial sector is at an early stage of development, as are private initiatives in other sectors. Economic development is constrained by a shortage of skilled workers, weak infrastructure, and remoteness from international markets.

Kiribati has a modest income level that places it among the poorer countries in the world's lower middle-income group. The agricultural base, including subsistence production, is narrow and generated 14 percent of GDP in 1996. Copra is the only important cash crop , and commercial fishing (mainly tuna) is undertaken by the small fleet of the national fishing company. The agriculture sector (including fishing) is the occupation of the majority of the working population and accounted for 71 percent of employment in 1990, though most of this employment was self-employment on small family farms. The industrial sector contributed 7 percent of GDP in 1996 (of which manufacturing was 1 percent) and the services sector contributed 79 percent. The main service activity is the government sector, with trade and hotels accounting for 14 percent of GDP. Tourism remains underdeveloped, although it has the potential to become the second largest sector after fisheries. Kiribati's extremely limited export base and dependence on imports for almost all essential commodities result in a permanent (and widening) trade deficit , which is in most years only partially offset by revenues from fishing license fees, interest earned on the RERF, and remittances from Kiribati working overseas.

The government has earmarked Christmas and Fanning islands in the Line group and Canton Island in the Phoenix group as prime areas for future development. There is little open unemployment in the sense of people being unable to find some gainful employment if they so wish, and unemployment is estimated at around 2 percent of the workforce. However, there is evidence of underemployment , with the workforce engaged for perhaps only 30 percent of the hours that might be considered normal in a working week.

Foreign financial aid is a critical supplement to GDP, equal to 25 to 50 percent of GDP since independence in 1979. Initially the United Kingdom was the largest aid donor, but has now been overtaken by some of Kiribati's Pacific Ocean neighbors. Grants from principal donors amounted to an estimated US$20.7 million in 1998, of which US$5.7 million was from Japan, US$4.5 million from Australia, and US$4.3 million from New Zealand. The country is particularly reliant on foreign assistance for its development budget. Remittances from workers abroad account for more than US$5 million each year.

The government is involved in all aspects of the economy—its spending accounts for 71.5 percent of GDP—and it is taking measures to expand the private sector and develop the fledgling industrial sector. The poor performance of most public enterprises burdens the budget and adversely effects economic efficiency. Unfortunately, little progress has been made in implementing the government's Medium Term Strategy, which focuses on reducing the role of the public sector by freezing civil service recruitment, reducing government spending, improving the accountability of public enterprises, and introducing privatization .

The sale of fishing licenses to foreign fleets provides an important source of income. Revenues from the sale of fishing licenses amounted to more than half of GDP in 1998. Mining of phosphate rock on the island of Banaba (which ceased in 1979) formerly provided some 80 percent of earnings. As well as providing foreign exchange, interest from the phosphate reserve fund, RERF, continues to be an important source of budgetary income. The value of the fund was put at US$380 million at the end of 1998, and generates around US$20 million a year in revenues from interest.

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