20240509-IMF-Kiribati_Selected_Issues_18页_954kb

Summary of the Selected Issues Paper on Kiribati

Core Content

This paper analyzes the copra subsidy in Kiribati, which is a minimum support price (MSP) mechanism. The subsidy is a significant component of the Government of Kiribati's (GoK) budget and plays a crucial role in the country's social safety net, especially in the outer islands. It aims to transfer resources to outer islands, reduce migration to the capital, and provide unemployment benefits. However, the subsidy is inefficient, costly, and distortive, consuming 8% of GDP and 9% of government expenditure in 2022, and pushing the domestic copra price far above international market prices.

Main Points

Economic Impact of Copra Subsidy

• The support price for copra was doubled to AUD 4/kg in 2022, leading to a significant price gap with international market prices (around USD 1/kg), creating distortions in export and labor markets.
• The subsidy has not led to increased production or exports of coconut products, suggesting that production is driven by supply-side factors rather than demand-side incentives.
• The subsidy has negative effects:
  • Reduces diversification to non-coconut exports (e.g., seaweed and aquaculture).
  • Inhibits production of higher value-added products like virgin coconut oil (VCO), which requires a much lower copra price.
  • Exacerbates wealth and gender inequality, as wealthier and male-headed households benefit more.

Fiscal Impact of Subsidy Reforms

• The paper proposes five reform scenarios to reduce the fiscal burden of the subsidy:

  1. Reduce wastage by improving efficiency in the subsidy payment chain, potentially saving 5% of costs.
  2. Cut the support price by half to AUD 2/kg, aligning it more closely with international market prices.
  3. Cut the support price by half and redirect savings to a social assistance program, which could reduce poverty from 21.9% to 6.1%.
  4. Cut the support price by half, allocate a portion of savings to a social assistance program to achieve the same level of poverty reduction as the current subsidy.
  5. Cap the subsidy at the poverty line (AUD 142/month), maintaining the support price but limiting the total payments.

• These reforms could reduce the fiscal deficit by up to 3 percentage points of GDP annually, improve debt sustainability, and retain poverty-reduction benefits.

Theoretical Models

• A theoretical economic model is developed to analyze the distortive effects of the subsidy on income, production, and inequality.
• Three models are used:
  • Horizontal model: Demonstrates how a subsidy on one good (copra) diverts labor and production away from the other good, reducing overall income.
  • Vertical model: Shows that a subsidy on a primary good (copra) increases its supply but reduces the production of final goods, lowering overall income.
  • Inequality model: Highlights how the subsidy benefits those with greater production capacity, increasing wealth and gender inequality.

Key Information

• Copra is a major export of Kiribati, accounting for 8% of exports and 45% of GDP.
• The subsidy has not increased production or exports, but has instead created inefficiencies in the supply chain.
• The domestic copra price is triple the international market price, worsening export competitiveness.
• Poverty reduction is a stated goal of the subsidy, but it is not effectively targeted.
• Subsidy reforms are necessary to improve fiscal sustainability, reduce inefficiencies, and enhance economic diversification.

Policy Recommendations

• Reduce the support price to align it with international market prices (e.g., AUD 2/kg).
• Redirect savings from the subsidy to a targeted social assistance program to improve poverty reduction.
• Cap the subsidy at the poverty line to limit fiscal costs while retaining its social benefits.
• Improve the efficiency of the subsidy payment chain by reducing wastage and aligning payments with actual copra received in the capital.
• Explore alternative mechanisms such as conditional cash transfers or direct social assistance to ensure that the subsidy's poverty-reduction goals are met in a more cost-effective and targeted manner.

Conclusion

The copra subsidy, while intended to support social welfare and economic stability, is costly and inefficient, with widespread distortions in the economy. The paper concludes that subsidy reforms are essential to improve fiscal sustainability, enhance economic diversification, and reduce inequality. The IMF and World Bank are prepared to support these reforms, either through efficiency improvements or alternative social programs.

Figures and Tables

• Figure 1: Shows the history of copra support prices, highlighting the doubling in 2016 and 2022.
• Figure 2: Demonstrates the concentration of Kiribati's exports in coconut products.
• Figure 3: Illustrates the increase in income for male-headed households compared to female-headed ones.
• Figure 4: Compares Kiribati's copra price with peer countries, showing it is significantly higher.
• Figure 5–7: Depict the effects of the subsidy on labor and production in different models.
• Figure 8–9: Show the fiscal impact of the reform scenarios, including deficit reduction and debt sustainability.
• Table 1: Summarizes the economic impact of MSPs in other emerging markets, showing both positive and negative outcomes.