RECENT DEVELOPMENTS, OUTLOOK, AND RISKS

Tuvalu’s economy has experienced a strong recovery from the COVID-19 pandemic. After falling for three consecutive years in 2020-22, GDP growth rebounded strongly at 7.9 percent in 2023, driven by the resumption of construction activity, the trade recovery, and higher government spending. GDP growth in 2024 is estimated to have reached 3.3 percent, supported by the continued effects of reopening and major infrastructure projects. Since peaking at 14.2 percent in 2022Q3, inflation has been trending down and slowed to 1.2 percent in 2024, in line with global food and commodities prices and continued easing of shipping bottlenecks.

The economic recovery is expected to continue, but growth is projected to moderate gradually over the medium term. Growth in 2025 is projected at 3 percent, driven by the construction of the new phase of the Tuvalu Coastal Adaptation Project and an increase in public spending. While externally financed projects are expected to continue to support economic activities, growth is projected to decline gradually to around 1.8 percent over the medium term, due to sluggish productivity growth, increasing emigration, and vulnerability to climate events. Inflation is expected to remain below 2 percent in 2025, reflecting the negative CPI at end-2024 and lower global commodity prices, and to rise gradually to 2.5 percent over the medium term, aligning with inflation dynamics of Tuvalu’s trading partners.

The fiscal balance is projected to turn to a surplus in 2025, reflecting higher grants, but would deteriorate again starting in 2026. Higher grants are expected to more than offset the increase in expenditures and improve the fiscal balance from a deficit of 7 percent of GDP in 2024 to a surplus of 2.9 percent of GDP in 2025. Over the medium term, grants are projected to gradually decline to historical levels of around 27 percent of GDP, while current expenditure pressures would remain elevated. As a result, fiscal balances are expected to deteriorate gradually and reach -6.8 percent of GDP by 2030. Because the projected withdrawals from Tuvalu’s sovereign funds are not sufficient to fully finance the fiscal deficits, foreign financing will be required to close the financing gap. Under these baseline projections, Tuvalu is assessed to remain at a high risk of debt distress.

Downside risks to the outlook remain high. The global environment has significantly changed this year, reflecting escalated trade tensions, heightened policy uncertainty, and tighter financial conditions. While Tuvalu’s export exposure is limited, heightened global uncertainty and volatility could affect Tuvalu’s external revenues, including from its internet domain, fishing licenses, and development assistance, and significantly impact Tuvalu’s public finances, external position, and growth outlook. Global risks of heightened trade tensions and higher commodity prices could also increase inflation. A sharp downward correction in financial market returns could affect the performance of Tuvalu’s sovereign funds. Underperformance of public corporations could cause fiscal risks, and further loss of CBRs would severely disrupt cross-border payments. An acceleration of outward migration would exacerbate labor shortages. Extreme climate events and climate change remain major risks to Tuvalu’s economic outlook. Upside risks include higher fishing licenses and grants and greater structural reform momentum, which could accelerate economic growth.

FISCAL POLICY

Fiscal policy should balance ensuring fiscal sustainability and supporting Tuvalu’s development priorities. Tuvalu’s high vulnerability to external shocks requires fiscal sustainability and adequate buffers against downside risks. Meanwhile, the government faces significant near-term spending pressures in order to deliver essential public services, while also having to address medium-term climate adaptation costs and labor shortages stemming from increasing emigration.

A multi-pronged fiscal strategy is required to address these challenges. Given persistent fiscal deficits and Tuvalu’s limited fiscal space, the main elements of the strategy should include: i) gradually reducing fiscal deficits; ii) increasing spending for priority areas; and iii) appropriately using fiscal buffers to stabilize fiscal accounts, cushion against shocks, and address long-term challenges. IMF staff’s simulations show that reducing the fiscal deficit gradually to around 2.3 percent of GDP by 2030 (compared to 6.8 percent of GDP in the baseline scenario) by utilizing the returns of the Tuvalu Trust Fund and the Consolidated Investment Fund (CIF) to finance deficits would keep public debt on a downward path. The domestic current balance would provide an appropriate anchor and is expected to improve to -40 percent of GDP by 2045 under the consolidation scenario, and the value of the buffer fund (CIF) would stabilize at around 40 percent of GDP, which is needed to cover major shocks and downside risks.

The recommended fiscal strategy entails a combination of revenue mobilization, expenditure rationalization, and resource reprioritization measures. Expenditure measures should primarily focus on unwinding the recent increases in current expenditure, including containing the increase in the wage bill, implementing cost-saving measures for the Medical Referral Scheme and overseas scholarships, unwinding the increase in goods and services spending, and cutting broad-based utility subsidies. Revenue mobilization should prioritize strengthening the compliance and efficiency of tax collection, while considering reviewing tax policies and exploring options to boost tax revenue and streamline tax incentives. Part of the savings from the above measures should be redirected to areas such as targeted protection for the most vulnerable, infrastructure, human capital, and climate resilience.

Improving public financial management (PFM) can help manage revenue volatility and fiscal risks. The authorities have made progress in PFM, including introducing the new Financial Management Information System and formulating the Medium-Term Fiscal Framework. The publication of Tuvalu’s Fiscal Risk Reports is also welcome. Further efforts are needed to improve budget reliability, strengthen investment management to enhance absorption capacity, implement climate budget tagging, enhance fiscal reporting and transparency on extra-budgetary funds and SOEs, and reinforce procurement management.

FINANCIAL SECTOR POLICIES

Establishing effective regulatory and supervisory frameworks is urgently needed. Priorities include strengthening the statutory role and expanding the supervisory perimeter of the Banking Commission of Tuvalu (BCT), issuing the proposed new prudential standards, enforcing the timely submission of prudential returns, and addressing delays in the audits of the financial statements of the financial institutions. These measures should be supported through adequate resourcing of the BCT to conduct both on-site and off-site supervision.

Continued efforts are needed to strengthen Tuvalu’s connectivity to the global payment system and improve financial inclusion. Tuvalu’s membership of the Asia/Pacific Group on Money Laundering is a welcome step, and the authorities should continue to strengthen the legal framework and compliance. Efforts to address Correspondent Banking Relationship pressures should also take into account a potentially low ML/TF risk environment in Tuvalu and focus on the outreach to the key foreign regulatory authorities, including a corridor risk assessment. The ongoing efforts to modernize banking services, including the recent launch of Tuvalu’s first ATMs, can help overcome geographical barriers and improve efficiency. Improving financial literacy and establishing a reliable national digital ID system are also crucial for financial inclusion. Meanwhile, introducing digital services should consider supervisory capacities and ensure financial integrity.

STRUCTURAL REFORMS

Structural reforms need to be carefully prioritized, focusing on addressing development bottlenecks and attaining higher growth potential. Priorities should include: i) collaborating with local communities to effectively develop the reclaimed land; ii) improving internet connectivity and leveraging IT technology to deliver more public services; iii) ensuring proper maintenance of key infrastructure assets, particularly transportation and utilities including renewable energy; iv) strengthening SOE governance and performance, accompanied by reviewing utility pricing to ensure cost recovery; and v) exploring economic diversification in sectors with higher potential, including agricultural products such as coconut, eco-tourism, and commercial fishery.

Mitigating the impact of emigration and enhancing climate resilience are crucial. While outward emigration has supported remittances and consumption, measures to enhance both human capital and labor supply are required to address labor shortage issues. The authorities should focus on improving education access and quality, enhancing training, attracting returning migrants, and promoting skill transfer. Facilitating female labor force participation could help bridge significant gender gaps in employment, while alleviating labor shortages. Tuvalu should continue to engage with development partners to secure climate financing and implement major climate-resilient projects. In addition, the authorities need to further enhance disaster management through the enforcement of amended building codes, the use of risk maps to inform planning, and the strengthening of community disaster preparedness. Accelerating renewable energy production can lower Tuvalu’s energy costs, reduce its external sector vulnerability, and enhance energy security.

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The currency union has provided a strong anchor for macroeconomic stability. In 2024, strong tourism performance and continued infrastructure investments have supported robust growth of 3.9 percent, and inflation moderated to below 2 percent in tune with global trends. This has facilitated a moderate reduction in the currency union’s fiscal and external imbalances, although public debt remains high at above 71 percent of GDP, and the post-pandemic trend of narrowing sizable current account deficits has stalled. The ECCB’s stable reserves underpin a strong currency backing ratio. The ECCU financial system has remained stable, though exhibiting legacy asset quality and credit condition weaknesses.

The union’s recent growth momentum is projected to wane. Increasing constraints to tourism capacity and completion of major infrastructure projects are set to slow real GDP growth to around 2½ percent over the medium term. Modest growth prospects reflect weak productivity and local investment, as well as headwinds from ageing populations, a shrinking labor force, and constrained fiscal space for public investment in most union members. Fiscal and external imbalances are projected to narrow over the medium term, reflecting in part the completion of import-intensive public investment projects.

Risks to the outlook remain mostly on the downside amid a highly uncertain external environment. As reported in the April World Economic Outlook, the escalation of trade tensions and high levels of policy uncertainty are a major negative shock to global economic activity. For ECCU economies, increased global trade and geopolitical tensions could give rise to disruptions to tourism and FDI inflows and renewed inflationary pressures. High public debt, persistent current account deficits, and weaknesses in the local financial system amplify vulnerability to recurrent ND shocks alongside the uncertain outlook for future citizenship-by-investment inflows.

Executive Board Assessment

The ECCU has achieved a strong rebound from successive adverse shocks. Strong tourism performance and continued infrastructure investments have supported robust post‑pandemic growth, while inflation has moderated in tune with global trends. This has facilitated a moderate reduction in the currency union’s fiscal and external imbalances, although public debt levels and current account deficits remain high in several members. The ECCU’s external position is assessed as weaker than implied by fundamentals and desirable policies, but the current account deficits remain fully financed, and the stability of the ECCB’s reserves underpins a strong currency backing ratio. The financial system has remained stable, albeit exhibiting continued asset quality and credit condition weaknesses. 

Growth momentum is nonetheless projected to wane, and risks to the outlook remain mostly on the downside. Increasing constraints to tourism capacity and the completion of major infrastructure projects are set to slow growth to around 2½ percent over the medium term. This modest growth potential reflects weak productivity and local investment, as well as headwinds from ageing populations, a shrinking labor force, and constrained fiscal space for public investment in most union members. Downside risks to the outlook are significant amid a highly uncertain external environment, where increased trade and geopolitical tensions could give rise to renewed inflationary pressures and disruptions to tourism and FDI inflows. High public debt, persistent current account deficits, and weaknesses in the local financial system amplify vulnerability to recurrent natural disaster (ND) shocks alongside the uncertain outlook for future Citizenship-by-Investment (CBI) inflows.

Achieving more robust, resilient, and inclusive long-term growth would support the currency union’s fiscal and external sustainability and raise living standards. To support this objective, common regional policies should be anchored in building economic, fiscal, and financial resilience and addressing supply bottlenecks that underpin the recent decades’ downward trend in the region’s growth potential.

A key policy priority is alleviating the region’s structural growth impediments, which calls for a coordinated, multipronged approach. Addressing frictions to employment and skills development requires a renewed effort to attune human capital to economic needs and development priorities through vocational training and modernized education systems, complemented by active labor market policies and improved access to child and elderly care. Common policies can also enhance the scale, resilience, and efficiency of the region’s capital stock by helping to accelerate energy transition to local renewables, optimize the CBI funding model, and increase ND preparedness. Substantial productivity gains may also be achieved through cooperative efforts to address bottlenecks to innovation and allocative efficiency, including by digitalizing key services, streamlining licensing and administrative processes, and strengthening financial intermediation.

Fiscal policies should remain closely focused on rebuilding buffers, reducing public debt consistent with the regional debt anchor, and improving resilience to shocks. Region‑wide adoption of strong medium-term fiscal frameworks (MTFFs) embedded with well-designed fiscal rules and credible policy plans would support sustainability objectives and create policy space for growth-enhancing social and resilience investment. Comprehensive fiscal resilience strategies, including adequate disaster-financing frameworks, can help alleviate periodic ND disruptions to debt sustainability and support the region’s growth resilience. Strengthening the fiscal management of uncertain CBI revenues can similarly alleviate risks and facilitate fiscal planning. These efforts can be supported by more institutionalized regional oversight and continued strengthening of national fiscal institutions.

Enhancing financial system resilience and reducing persistent credit frictions can support a more conducive environment for growth-supporting local investment. Regional policy priorities include reducing vulnerabilities from legacy bank balance sheet weaknesses, mitigating risks from rapid credit union expansion, building readiness to manage risks from high dependency on global reinsurance, and strengthening national AML/CFT frameworks. Common minimum NBFI regulatory standards under the planned Eastern Caribbean Financial Stability Board (ECFSB) will be an important step toward their more unified oversight, although a more centralized supervisory structure would better facilitate management of regional stability risks. Coordinated efforts to reduce institutional frictions in local credit markets and support small ECCU businesses’ bankability can help address structural challenges in financial intermediation, revive local credit and investment, and foster the development of a more vibrant private sector.

Strengthening economic data could significantly improve regional policy design and risk management. Priorities include addressing shortcomings in coverage, quality, and timeliness of key national and external accounts and reducing significant blind spots in areas such as the regional labor markets and CBI flows. Greater leveraging of synergies in regional data compilation and processing could help address persistent resource and capacity gaps.

Sources: Country authorities and IMF staff estimates and projections.1/ Includes all eight ECCU members unless otherwise noted. ECCU consumer price aggregates are calculated as weighted averages of individual country data. Other ECCU aggregates are calculated by adding individual country data. The staff report projections are based on the information available as of March 31, 2025. It, therefore, does not reflect the impact of the escalation of trade tensions on and after April 2, 2025.2/ Projections include expected fiscal costs of natural disasters.3/ Excludes Anguilla and Montserrat.

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1. Dominica’s economy has continued its expansion. Real GDP grew by 3.5 percent in 2024, supported by a recovery in tourism and targeted development investment to boost economic capacity and competitiveness. Inflation has eased from its 2023 peak of 7 percent, averaging 3.1 percent in 2024. Tourism arrivals have surpassed pre-pandemic levels by roughly 32 percent, but the composition has shifted towards cruise visitors over stayovers. The current account (CA) deficit narrowed by 2 percentage points to 32¼ percent of GDP in 2024, reflecting higher tourism receipts. The labor market recovery remains uneven, however, with formal employment lagging behind overall growth.
2. Fiscal imbalances have narrowed, but public debt remains high and above pre-pandemic levels. The primary deficit narrowed to 2 percent of GDP in FY2023/24 and is projected to move into a modest surplus of 0.1 percent of GDP in FY2024/25. This improvement reflects the impact of recent tax measures—including higher excise duties on sugary drinks, alcohol, tobacco, and diesel—and expected moderation in capital expenditures mainly related to slow implementation rates and capacity constraints. While public debt has fallen in recent years after peaking at 112½ percent of GDP in FY2020/21 following successive natural disaster events and the pandemic shock, it remains high relative to its ECCU peers at around 100 percent of GDP.
3. The financial system is stable and liquid, with a mixed credit picture and vulnerabilities that require careful monitoring. Bank credit has declined further since 2023 reflecting ongoing de-risking amid persistent balance sheet challenges. Despite adequate capitalization, bank sovereign and overseas exposures remain elevated, while improvements in non-performing loans (NPLs) have been slow with levels exceeding prudential guidelines alongside still fragile provisioning. Meanwhile, the credit union (CU) sector is expanding its lending portfolio rapidly, despite weak capitalization, high NPLs, and limited provisioning—all of which breach supervisory thresholds in aggregate. The growing systemic importance of CUs—which now account for 53 percent of total private sector credit—highlights a need to close supervisory gaps by modernizing regulatory frameworks to better safeguard financial sector stability.
4. Dominica’s economy is expected to continue expanding, underpinned by ongoing development investment. The economy is projected to grow by 4¼ percent in 2025, supported by ongoing strategic investment in flagship infrastructure projects to boost capacity in tourism and transition to lower-cost geothermal energy. Growth is expected to converge towards 2 percent over the longer term, as major capital projects wind down and fiscal consolidation intensifies. The CA balance is projected to improve steadily to its norm by 2028 on the back of increased tourism, a normalization of investment imports, and reduced fuel imports with the rollout of geothermal energy. The primary balance is projected to strengthen gradually to 2.0 percent of GDP by 2030 on current policies and as capital expenditures recede amid declining CBI inflows, falling short of fiscal rule obligations. Public debt is projected to decline to 69¾ percent of GDP by 2035 yet remains at high risk of debt distress and above the prudential currency union debt benchmark.
5. Risks to the outlook are elevated and tilted to the downside. Escalating trade tensions, policy uncertainty, and commodity price volatility pose external risks to tourism, trade, and foreign direct investment (FDI). Pressure on global interest rates may lead to market losses on overseas investments, with spillovers to domestic credit and FDI. Extreme natural disaster shocks pose additional risks to growth. Domestically, fiscal underperformance, rising arrears, and shortfalls to expected CBI inflows could weaken economic activity, jeopardize flagship projects, exacerbate imbalances, and potentially trigger debt distress. Weakness in the local financial system could amplify these shocks. At the same time, better-than-expected growth dividends from ongoing flagship projects pose an upside risk to the long-term outlook.
6. More ambitious fiscal consolidation is needed to reduce economic imbalances and debt vulnerabilities, mitigate disaster risks, and help reinforce prospects for resilient growth. The economic expansion presents an opportunity to rebuild critical fiscal buffers. These include: i) achieving fiscal rule targets by maintaining a primary surplus of at least 2 percent of GDP from 2026 onward to reduce public debt below 60 percent of GDP by 2035; and ii) adequately capitalizing the Vulnerability, Risk and Resilience Fund (VRF) to help insure against natural disaster shocks.[1] Reaching these goals will require identifying an estimated EC$75 million in cumulative fiscal consolidation measures over two years to sustain 3½ percent of GDP primary surplus from FY2026/27. The consolidation strategy should focus on improving non-CBI fiscal balances while safeguarding critical social and economic investment to protect growth and the most vulnerable. Stronger fiscal consolidation would help reduce debt vulnerabilities and the financial sector’s exposure to the public sector and also facilitate external rebalancing thereby reducing external vulnerabilities.
7. A multipronged strategy is recommended to broaden revenues and rationalize expenditures to preserve vital social and economic investments for resilient growth. Revenue mobilization should build on recent initiatives to reduce the reliance on CBI inflows, including rationalizing tax incentives to curb leakage, enhancing VAT yields via a rate adjustment, pursuing levies on tourism and highways, introducing a solid waste fee, and improving tax administration and compliance. On the expenditure side, exploiting further efficiencies in goods and services spending while sustaining restraint in wages are priorities. A reprioritization of expenditure outlays is also essential, including revamping the National Employment Program (NEP) into a revolving skills training program to alleviate skills gaps within the economy, and recalibrating the housing program to provide support on a need basis through means-testing and with cost recovery mechanisms. Additionally, tariff adjustments on key public services should be pursued, thus reducing government transfers and contingent liability risks.
8. Enhancing the targeting and sustainability of social protection programs is a key part of the adjustment strategy to safeguard social inclusion and resilience. Dominica’s social protection framework is fragmented and mostly unconditional, with expenditures nearly twice that of peers with similar per capita GDP. Reducing overlap and improving targeting requires a centralized beneficiary registry and information management system to monitor support, identify gaps and duplication, and facilitate payments. To ensure pension system sustainability, further parametric reforms are needed, including higher contribution rates, lower replacement rates, and establishing a harmonized national retirement age of 65.
9. Reducing balance sheet vulnerabilities and strengthening regulatory oversight is critical. For banks, efforts should focus on stricter enforcement of provisioning and NPL standards, managing loan loss allowances, and facilitating the disposal of impaired assets, while closely monitoring sovereign and foreign investment exposures. For credit unions, the push to modernize the regulatory framework and close arbitrage opportunities by the end of 2025 is timely. Priorities should include reinforcing the operational independence of the Financial Supervisory Unit (FSU), enhancing risk-based supervision tools, updating regulatory thresholds, articulating strengthened provisioning and loan management frameworks, and bolstering enforcement tools. Broader financial stability can also be reinforced by: i) participating in the ECCB’s regional initiative to set common minimum regulatory standards for non-bank financial institutions, ii) ensuring the FSU is adequately resourced for monitoring asset quality (especially for restructured loans and forbearance measures), iii) conducting regular audits and on-site examinations, especially for larger credit unions, and iv) strengthening governance via enhanced “fit and proper” criteria for board members.
10. Addressing structural challenges that hinder financial intermediation remains a priority. Despite abundant liquidity in the banking system, businesses continue to face barriers to access financing that stem, in part, from long-standing structural deficiencies related to weak credit information, outdated collateral and foreclosure laws, and inefficient bankruptcy procedures. The upcoming launch of a regional credit bureau should streamline the lending process and improve credit quality. This should be complemented by reforms to modernize national collateral, foreclosure, and bankruptcy frameworks and efforts to streamline loan documentation processes.
11. Continued structural reforms are essential for fostering resilient and sustainable growth. Persistent structural bottlenecks have weighed on growth potential by weakening contributions from human and physical capital and eroding innovation and productivity. Eliminating gaps in education and training relative to economic needs is essential to improve labor market outcomes. Resilient infrastructure is crucial to safeguard physical capital from natural disaster shocks and the transition to geothermal power generation is pivotal to reduce external vulnerabilities and bolster prospects for resilient growth. A comprehensive policy approach is required to alleviate impediments to innovation and allocative efficiency. Efforts to redress skills gaps and improve financial intermediation should be complemented by measures to improve the business environment, including by exploiting digitalization opportunities and streamlining regulatory and administrative processes for tax compliance, business registration, licensing, and permitting.
12. Concerted efforts to bolster institutional frameworks to mitigate risks and support surveillance, economic planning, and policy execution should continue. Ongoing efforts to strengthen AML/CFT legislation and procedures in line with the Caribbean Financial Action Task Force (CFATF) mutual evaluation should help protect correspondent bank relationships. Progress to enhance coordination across regional CBI programs to improve due diligence and transparency is welcome. Dominica should maintain its strategy of proactive engagement to address concerns around its CBI regime to safeguard this critical source for development finance. Weaknesses in statistical compilation, tax administration, and public financial management (PFM) frameworks—including under-developed internal CBI reporting systems—complicate policy monitoring, development, and execution. Priorities for ongoing engagement include strengthening institutional capacity in statistical compilation and improving PFM processes across fiscal reporting, treasury operations, public investment management, and budget processes to enable full fiscal rule implementation. The IMF stands ready to build on its ongoing capacity development program with Dominica in these and other areas.

Table 1. Dominica: Selected Economic Indicators, 2020–27

Prel. Projections

Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

At market prices.

Data for fiscal years from July to June. Figures shown for a given year relate to the fiscal year beginning on July 1 of that year.

Includes estimated commitments under the Petrocaribe arrangement with Venezuela.

Includes public capital expenditure-induced imports from 2019 onwards to account for possible mitigation of natural disasters.

A positive sign means inflow.

Comprises public sector external debt, foreign liabilities of commercial banks, and other private debt. Calendar year basis.

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Context and Recent Developments

Slovenia’s economy recovered well from the pandemic, only to be hit by spillovers from the war in Ukraine. After a strong recovery in 2021, growth slowed in 2022 because of adverse energy price spillovers from the war in Ukraine and supply chain disruptions. Growth is estimated to have fallen further last year to less than 1½ percent, reflecting subdued consumption, the unwinding of inventories, and weaker growth in trading partners.

Severe floods in August 2023 pose new challenges. Although the impact on economic growth was minor, direct damage is estimated by the authorities at almost 5 percent of GDP, with the cost of upgrading infrastructure to be more climate resilient estimated to be much higher. The government adopted emergency relief legislation shortly after the floods to assist those affected and to start reconstruction efforts.

Despite slower growth, the labor market remains tight. Unemployment is at a historic low and labor shortages have emerged in certain sectors, relieved only by net inward migration of foreign workers. Following earlier real wage declines, nominal wage growth has begun to outpace inflation.

Inflation has fallen from earlier highs. As pressures from commodity prices abated, and as tighter monetary policy fed through to prices, inflation fell noticeably in the second half of 2023, more than halving to about 4 percent in December compared to about 3 percent in the euro area.

Outlook and Risks

Growth is expected to recover and inflation to fall further this year. Despite tighter fiscal policy, growth is expected to increase to about 2 percent in 2024, led by domestic demand, including higher flood-related investment, and by higher consumption as real wages recover. Growth should return to its potential of about 2½-2¾ percent over the medium term as private consumption and euro area trading partners gather strength. Under the assumption of broadly stable commodity prices and interest rates on hold in the first half of the year, inflation is projected to decline to below 3 percent by the year and to 2 percent in 2025. The current account is expected to remain in surplus over the medium term.

Uncertainty remains high and risks appear on the downside. External risks include an intensification of regional conflicts, renewed commodity price volatility, and lower external demand. Supply chain disruptions pose additional risks but also may create opportunities for Slovenia in the event of nearshoring. Labor shortages and broader capacity constraints could affect post-flood reconstruction or undermine disinflation. Finally, new severe weather events could cause significant economic disruptions.

Fiscal Policy

A tighter fiscal stance would help reduce debt, rebuild fiscal space, and support disinflation. Given underlying increases in core public spending in recent years, age-related spending pressures, and relatively high public debt, sustained fiscal consolidation and fiscal structural reforms are needed to underpin long-term public debt sustainability. The elimination of remaining pandemic and energy measures will help such consolidation, despite additional flood-related spending. The authorities should also continue with their active debt management, which has helped to lower debt servicing costs, improve the debt profile, and allow the buildup of ample public cash buffers.

A phased and transparent approach to flood-related spending is critical. Lower-priority needs should only be addressed as labor market conditions ease. Otherwise, there is a danger of flood-related spending fueling construction cost increases rather than providing for needed rebuilding. The authorities’ transparency in handling flood-related spending—including by publishing details of publicly financed projects—is welcome given the extent of public spending.

Although ad hoc in nature, recent revenue measures to raise temporary corporate and bank taxes will help finance post-flood reconstruction. The bank tax is not ideal, including the use of bank assets as a taxation base, although the cap on the tax, set at 30 percent of banks’ pre-tax profits, is a welcome safeguard. EU grants and Slovenian Sovereign Holding profits will also support the rebuilding and upgrading of infrastructure.

Key structural fiscal reforms should be accelerated. Reforming the pension system remains a priority given the higher expected pension spending over the medium and longer term. Reforms to the retirement age, years of contributions (linked to life expectancy), and indexation would help contain pension costs. Stronger second and third pension pillars would help increase retirement savings and support capital market development. Public wage reforms—linking pay more closely to skills and performance—are also important given the high public wage bill alongside difficulties in hiring and retaining qualified staff. Reducing labor taxes while broadening the corporate and income tax bases and increasing property tax would also be helpful. Planned comprehensive reforms of the health sector should continue. Finally, building on the recommendations of the IMF’s recent Public Investment Management Assessment (PIMA), improved project preparation, evaluation, selection, and permit times would help increase public investment efficiency, which is important given the scale of public investment.

Financial Sector Policies

Banks appear in good health. Bank profitability and bank capital adequacy are strong and bank liquidity is among the strongest in the euro area. Bank of Slovenia stress test results also point to bank resilience.

Ongoing uncertainties warrant continued close monitoring of asset quality. Nonperforming loans are at historic lows, but high-interest rates increase repayment and rollover risks, particularly for firms where loans are of shorter maturity or at variable rates.

The Bank of Slovenia’s macroprudential stance is appropriate. The new positive neutral countercyclical capital buffer of one percent will help further strengthen capital buffers and strengthen the capacity of the banking system to respond to adverse shocks. The impact on financial intermediation of this measure is expected to be limited. Increased access to credit for lower-income borrowers is welcome. Finally, the reduction of the sectoral risk buffer on real estate exposures is appropriate given reduced risks in the housing market as valuation measures have softened.

Progress has been made on AML/CFT. This includes amendments to the Criminal Code; new Bank of Slovenia regulations and guidelines on related risks; guidance to banks on risk assessment; and measures to supervise virtual assets.

Structural Policies

Deeper structural reforms would help boost growth and foster greater income convergence. Convergence has slowed since the Global Financial Crisis as investment and productivity growth have fallen. Although labor contributions to growth have been strong in recent years—reflecting increased labor force participation, lower unemployment, and positive net inward migration—the limits to future such gains call for a shift to a focus on productivity growth, a key priority. Productivity would be helped by higher overall investment and by further structural reforms, supported by the EU-backed National Recovery and Resilience Plan and Cohesion policy funding. Addressing skill shortages and mismatches, improving regulatory quality, and deepening the financial sector would also help boost productivity growth.

The recent floods underscore the importance of continuing to adapt to climate change. As floods pose the highest risk, efforts should be focused on flood risk management, including zoning. On mitigation, continuing to promote investment in renewables and reducing carbon price exemptions in polluting industries would help Slovenia achieve its climate goals.

The team would like to thank the authorities for their exceptional assistance with the mission’s work and the authorities and other stakeholders for their warm hospitality and comprehensive and constructive discussions.

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

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Kristalina Georgieva, IMF Managing Director, speech extract “It’s a pleasure to be in Singapore again. And it’s an honor to join you this morning at this impressive forum to take stock of how far we’ve come and set the course for the future.

There is no better place to look into this future than Singapore — a place where fintech flourishes and where this festival brings the unlimited energy of fintech enthusiasts.

FinTech innovation has already been transformative — and will continue to be so — changing the world of finance and making it much more accessible to hundreds of millions of businesses and people who used to be cut off from it.

I am proud the IMF is part of this great community and that I am with you today. I come in the footsteps of my predecessor, Christine Lagarde, who five years ago gave a speech here encouraging policymakers to follow the “winds of change,” and embark on a digital money voyage by exploring the use of central bank digital currencies, or CBDCs, and fintech.

Five years on, I’m here to provide an update on that voyage. I have four main messages. First, countries did set sail. Many are investigating CBDCs and are developing regulations to guide digital money developments. Second, we have not yet reached land. There is so much more space for innovation and so much uncertainty over use cases. Third, this is not the time to turn back. The public sector should keep preparing to deploy CBDCs and related payment platforms in the future. Fourth, these platforms should be designed from the start to facilitate cross-border payments, including with CBDCs.

We’ve left port and are now on the high seas. This calls for courage and determination. We can learn from you: entrepreneurs, business leaders, and investors. You are a sailor in the world of fintech. Every day you brave the open waters. Waves and winds are your inspiration.

If anything, we need to raise another sail to pick up speed. The world is changing faster than most imagined. Just take artificial intelligence – a key theme of this festival. Look at the number of months before various applications reached 100 million users. The average is 3 years. It took ChatGPT 2 months!“

Georgieva urged the public sector to continue preparing to deploy CBDCs and related payment platforms in the future, designed to facilitate cross-border payments, including with CBDCs. She also stressed the importance of collaboration across international institutions, central banks, and ministries of finance to guide the desirable properties of cross-border platforms from a policy standpoint.

Georgieva announced the launch of a CBDC Handbook on the IMF website, intended to collect and share knowledge on CBDCs for policymakers around the world. She also highlighted the potential benefits of AI in amplifying the benefits of CBDCs, improving financial inclusion, and providing personalized support to people with low financial literacy.

Georgieva concluded her speech by urging the fintech community to continue sailing together on the digital finance voyage, with the potential payoff of a more inclusive international financial system that meets future needs.

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The RSF will help Morocco address climate vulnerabilities, seize opportunities from decarbonization, and strengthen preparedness for natural catastrophes. It will also stimulate financing for sustainable development and reduce the country’s dependence on imported energy, thereby bolstering its external stability and attracting foreign direct investment.

According to Kenji Okamura, Deputy Managing Director and Acting Chair of the IMF, “Climate change poses a significant risk to Morocco’s development but also offers opportunities. The country’s generous endowment in renewable resources puts it in a prime position to benefit from the global decarbonization agenda, which will help put economic growth on a stronger and more resilient path.

The RSF will enable Morocco to invest in renewable energy, increase energy efficiency, tackle water scarcity, and green its financial sector. With continued support from other development partners, the RSF is expected to mobilize private financing to implement Morocco’s climate adaptation and mitigation efforts.“

In conclusion, the IMF’s approval of the RSF for Morocco is a significant step towards achieving a greener and more resilient economy, which will benefit both the country and the global community.

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The RSF arrangement will help Morocco address climate vulnerabilities, strengthen its resilience against climate change, and take advantage of opportunities arising from decarbonization. It will also assist the Moroccan authorities in improving their preparedness for natural catastrophes and promoting financing for sustainable development.

The IMF’s decision to approve the RSF arrangement coincides with the remaining 18 months of the FCL arrangement approved in April 2023. The RSF arrangement is equivalent to SDR 1 billion, which is about 112 percent of Morocco’s quota.

The IMF’s Executive Board believes that the RSF arrangement will help Morocco achieve its sustainable development goals and promote economic growth. The arrangement will also support the country’s efforts to reduce greenhouse gas emissions and mitigate the impact of climate change.

In conclusion, the IMF’s approval of the RSF arrangement for Morocco is a significant step towards achieving sustainable development and enhancing resilience against climate change. The arrangement will provide much-needed financial support to Morocco and help the country transition to a greener economy.

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· The IMF staff team and Surinamese authorities reached a staff-level agreement on the third review of the authorities’ economic recovery program supported by the Extended Fund Facility (EFF). The review is subject to approval by the IMF’s Executive Board.

· The authorities’ commitment to macroeconomic stability and fiscal discipline is starting to bear fruit. The economy is stabilizing. Pressures on the exchange rate have eased and inflation, while still high, is on a downward trend.

· The government’s near-term policy priority is to persevere with prudent fiscal policy while protecting the poor and vulnerable and supporting growth-enhancing investment.

WASHINGTON DC: An International Monetary Fund (IMF) team led by Ms. Anastasia Guscina conducted a virtual and in-person mission with the Surinamese authorities during August 7-22 to discuss policies to complete the third review of the 36-month Extended Fund Facility approved by the IMF Executive Board on December 22, 2021.

Suriname and the International Monetary Fund (IMF) have reached a staff-level agreement on the third review of the country’s economic recovery program supported by the Extended Fund Facility (EFF). The review is subject to approval by the IMF’s Executive Board.

According to the IMF, the Surinamese authorities’ commitment to macroeconomic stability and fiscal discipline is starting to bear fruit. The economy is stabilizing, and pressures on the exchange rate have eased. Inflation, while still high, is on a downward trend.

The government’s near-term policy priority is to persevere with prudent fiscal policy while protecting the poor and vulnerable and supporting growth-enhancing investment.

Upon completion of this review, Suriname will have access to SDR 39.4 million (about USD 53 million), bringing total program disbursements to date to SDR 157.6 million (about USD 212 million).

The IMF team led by Ms. Anastasia Guscina conducted a virtual and in-person mission with the Surinamese authorities from August 7-22 to discuss policies to complete the third review of the 36-month Extended Fund Facility approved by the IMF Executive Board on December 22, 2021.

The authorities’ commitment to fiscal discipline and macroeconomic stability is starting to bear fruit. Pressure on the exchange rate has eased in recent months, and inflation, while still high, is on a downward trend. Usable international reserves remain comfortable at 4.7 months of imports at end-June 2023. With strong program implementation, growth is projected to recover to 2.1 percent in 2023 and converge to 3 percent over the medium term. Fiscal and monetary tightening is expected to lead to a gradual decline in inflation to 40 percent by the end of 2023.

The authorities face important near-term policy implementation challenges reflecting both capacity constraints and a challenging socio-political environment, as well as external risks from a renewed worsening in the terms of trade. Over the long term, there are significant upside risks to growth due to the development of large new oil fields.

Program performance during the third review was good, with most quantitative targets met. The authorities are on track to achieve a primary central government surplus of 1.7 percent of GDP this year, in line with program commitments. The structural reform agenda continued to progress, albeit with some delays.

It remains critical that poor and vulnerable groups are sheltered from the effects of fiscal adjustment and high inflation. The government is expanding the coverage of social assistance programs and will look at ways to protect the value of payments from inflation. With the support of development partners, the government will take a comprehensive look at the efficiency and effectiveness of the existing social protection programs and develop a strategic plan to guide future reform efforts in this area.

The authorities have made progress with debt restructuring, which is a critical element in restoring debt sustainability. All negotiations with the country’s official and private creditors, except for China, have been concluded. The debt exchange with private external bondholders will be launched next week. The authorities are actively negotiating with China on a debt restructuring agreement in line with program parameters, with the goal of making more progress by the next program review. The government has concluded negotiations on the restructuring of the legacy debt owed to the central bank, balancing the government’s financial constraints and the financial health of the central bank. Domestic debt and supplier arrears are being cleared.

The monetary stance is appropriate and is increasingly reflected in market conditions. Supported by the April increase in local currency reserve requirements and the guidance to contain private sector credit growth, reserve money growth has stabilized, and private sector credit growth has slowed. Median deposit and lending rates, although negative in real terms, are gradually edging up as more banks compete for liquidity. The authorities remain committed to a flexible, market-determined exchange rate.

The central bank is taking important steps to address weaknesses in the banking system and develop modern crisis management capabilities. The central bank has finalized the assessment framework for banks’ time-bound recapitalization and restructuring plans. Banks are implementing the recommendations from the Asset Quality Review and adjusting their loan loss provisioning.

The authorities are implementing reforms to strengthen governance. The central bank is clearing the backlog of audits of financial statements and is working to normalize the auditing cycle. A recapitalization plan for the central bank is being finalized. The government is taking steps to increase transparency in public procurement, as well as strengthen anti-corruption and anti-money laundering and combating the financing of terrorism (AML/CFT) frameworks.

The IMF team thanked the authorities for a collaborative and fruitful dialogue. A wide-ranging set of meetings was held with the President of the Republic of Suriname, the Vice President, the Chairman of the National Assembly, the Minister of Finance and Planning, the Minister of Justice and Police, the Minister of Social Affairs and Housing, the Minister of Internal Affairs, the Minister of Natural Resources, the Central Bank Governor, faction leaders and members of parliament, other senior government officials, representatives of the private sector, labor unions, and development partners.

The agreement is a positive step towards Suriname’s economic recovery and will help the country to continue on the path of macroeconomic stability and fiscal discipline.

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Bahrain experienced strong growth in 2022, in line with other Gulf Cooperation Council countries. Continued fiscal reform momentum and high oil prices improved fiscal and external balances. The economy grew by 4.9 percent in 2022, driven by 6.2 percent growth in non-hydrocarbon GDP while hydrocarbon GDP contracted by 1.4 percent. Non-hydrocarbon growth was driven by public, financial, and hospitality services and manufacturing. CPI inflation accelerated from -0.6 percent, on average, in 2021 to 3.6 percent in 2022. With the economic recovery well underway, ongoing fiscal reforms, and higher oil prices, the state budget deficit declined significantly, narrowing to 1.2 percent of GDP in 2022, from 6.4 percent in 2021, while the overall fiscal deficit declined from 11 to 6.1 percent of GDP. Government debt declined to 117.6 percent of GDP in 2022 from 127.1 percent of GDP in 2021. The current account improved markedly and posted its largest surplus in decades, estimated at 15.4 percent of GDP in 2022, up from 6.6 percent of GDP surplus in 2021. The banking system remains resilient with ample buffers and has so far withstood the phasing out of COVID measures and tightening financial conditions.

Growth is projected to moderate to 2.7 percent in 2023, with non-oil GDP growing by 3.3 percent reflecting fiscal consolidation, higher interest rates, and a base effect from 2022 strong growth. Thereafter, growth is projected to stabilize at around 2.7 percent over the medium term. Nevertheless, significant uncertainty clouds the forecast, including oil price volatility, international financial turmoil and ongoing tightening, and a slowdown in global growth.

The authorities remain strongly committed to their fiscal and structural reform agenda as outlined in the Fiscal Balance Program and Economic Recovery Plan with a focus on reducing the fiscal deficit and public debt, while advancing diversification efforts, including by increasing labor market flexibility, further lifting female labor force participation, enhancing economic digital infrastructure, and addressing climate change challenges.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They commended Bahrain’s strong post-COVID growth and fiscal performance, supported by successful COVID responses, continued reform momentum, and favorable commodity prices. Noting that growth is projected to moderate and risks remain, Directors emphasized the importance of implementing a medium-term fiscal adjustment plan, safeguarding financial stability, and accelerating structural reforms.

Directors welcomed the authorities’ continued commitment to implementing reforms under the Fiscal Balance Program (FBP), including the progress so far to enhance non-hydrocarbon revenue mobilization and the continued spending restraint. They underscored that implementing the current budget in line with FBP targets and continuing with ambitious reforms in the medium term are critical to ensure fiscal and external sustainability and reduce reliance on oil revenues. Directors also highlighted the importance of embedding fiscal reforms in a credible medium-term fiscal framework. Improving debt and fiscal transparency including by gradually reducing extrabudgetary spending would be important.

Directors agreed that the exchange rate peg continues to serve Bahrain well as a monetary anchor. In this context, they stressed that fiscal consolidation and structural reforms will support the external position, while monetary policy should continue to follow the Fed. Directors emphasized the importance of freezing the government overdraft account at the central bank and developing a plan for its repayment, which will help bolster reserves and thus support the external position and the peg.

Directors welcomed the successful withdrawal of COVID support measures, noting that the banking system remains healthy with ample buffers. They underscored that continued close monitoring of financial stability risks and further strengthening of macroprudential frameworks are warranted, given headwinds from tightening financial conditions. In this context, Directors encouraged further strengthening of the regulatory, supervisory, bank resolution, and macroprudential frameworks. They also welcomed Bahrain’s leading role in the fintech agenda and encouraged a careful assessment of the benefits and risks in introducing a central bank digital currency, with Fund CD support.

Directors welcomed Bahrain’s ambitious structural reform agenda. They encouraged the authorities to continue improving labor market flexibility and empowering women, and leveraging opportunities from regional integration. Pressing ahead with climate mitigation, through a gradual phasing out of energy subsidies and further investments in renewable energy, would facilitate Bahrain’s climate transition without creating additional fiscal needs or weighing on growth.

It is expected that the next Article IV Consultation with The Kingdom of Bahrain will be held on the standard 12-month cycle.

Table 1. Bahrain: Selected Economic Indicators, 2019–24

[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of the Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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BANGKOK, THAILAND: Speech of the managing director of IMF, Kristalina Georgieva in Bangkok.

The World has Changed…

Thank you very much, Prime Minister Prayuth, for inviting me to join the APEC meeting today.

We met here in Thailand three years ago and since then the world has been changed by events none of us foresaw at that time: the COVID pandemic and the war in Ukraine.

The pandemic has caused a permanent loss of economic output equal to 5.3% of global GDP. In Asia–a very integrated region–this was even higher, a loss of 9% of GDP. In addition, the war in Ukraine caused a tremendous energy price shock.

The combined impact of these two events was an abrupt slowdown of global growth from 6.1% in 2021 to 3.1% in 2022. They also caused high inflation, high and rising debt levels, and an increase in inequality in many countries.

In other words, we have seen a profound shift: from a world that was relatively predictable, with respect for international norms, low inflation, and low-interest rates; to a world that is more volatile, more uncertain, and fragmented–especially in terms of trade, with high inflation, and high-interest rates.

The Global Economy and APEC are Slowing

Regarding 2023, we have to recognize that tougher times lie ahead. The worst is yet to come.

The IMF is projecting global growth to slip to 2.7% next year. Most APEC countries are decelerating and at least one-third of the world is going to be in recession. The three major engines of global growth — U.S., China, and Europe — are slowing down simultaneously and that is hitting the exports of emerging markets.

That said, there are a few bright spots: ASEAN is one of them. So are some of the countries benefiting from terms of trade improvements, for example, in the Gulf. But overall, we face a darker economic horizon, and downside risks predominate.

The risk of inflation is a clear and present danger, and addressing it must be a high priority. Otherwise, it will cause destabilization and will hurt poor people the most.

All this makes 2023 a much harder year for policymakers than 2020. Back then, policymakers had one common objective: to support the economy, meaning that monetary policy and fiscal policy were moving in the same direction. Now fiscal policy must be deployed very carefully to target the most vulnerable parts of the economy but without undermining monetary policy and the fight against inflation.

In other words, with monetary policy stepping on the brakes, fiscal policy should not step on the accelerator.

The current conjuncture is difficult for everybody. But it is even more difficult for emerging markets because, on top of everything else, they are experiencing negative spillovers from the tightening being undertaken by major central banks in the advanced economies. Why? Because of the depreciation of currencies and higher borrowing costs.

There are also financial stability risks, including volatile capital flows, higher debt service, and higher leverage, especially in the private sector. Banks are sound, but non-bank financial institutions that have not been regulated are a concern–the leftover business from the Global Financial Crisis. There are also concerning developments in the crypto market that we have seen recently.

We should be in a mode of alert, not alarm — and develop policies to address these risks.

Meanwhile, climate risks are also rising. For the first time this year, we have seen climate shocks across all continents, with Asia-Pacific disproportionately affected. Since 1989, 36% of climate-related disasters have occurred in this region.

We also face the risk of fragmentation: we have to be careful that we are not sleepwalking into a poorer, less secure world–and drifting away from what has made us all better off.

APEC Gains Most from Integration and Risks Losing Most from Fragmentation

APEC in particular has greatly benefitted from integration–that is 21 economies representing 60% of global GDP.

Asia has the strongest regional value chains; Latin America’s biggest trading partners are across the Pacific; two-thirds of U.S. imports come from APEC.

Over the last three decades, as a result of this integration, 1.5 billion people were lifted out of poverty and hundreds of millions entered the middle class.

IMF analysis indicates that, if the world were to divide into two distinct blocs with little or no trade between them, the output would drop by more than 1.5% of global GDP: a loss of about $1.5 trillion. In Asia, because it is so integrated, these losses would double to more than 3 percent of GDP.

In addition, there is the potential human cost of fragmentation: poverty, hunger, and social unrest.

But this need not be our future. 

Responding to Fragmentation: Stay Open, Connected, and Balanced

We have benefited from Asia hosting three Summit Meetings in recent days: ASEAN, G20, and APEC. Three summits, but one message: work together, together we are stronger.

I want to commend the clear theme and message of this APEC summit: ‘Open, Connect, Balance.’

Stay open: roll back trade restrictions, and remove non-tariff barriers.

Stay connected: support strong regional agreements like the Comprehensive and Progressive Trans-Pacific Partnership; and the Regional Comprehensive Economic Partnership. And work to make the WTO stronger. Digitalization also presents a great opportunity to shape a better-connected world and to improve people’s lives.

Stay balanced: growth must be more inclusive to protect vulnerable people and also to protect gender equality. And growth must be more sustainable–and take on the challenge of climate change.

The IMF is APEC’s Partner

For the IMF’s part, we have stepped up to lead in the effort to help our member countries navigate this world of shocks:

• emergency financing to 96 countries;
• a historic $650 billion SDR allocation;
• and a new Resilience and Sustainability Trust–long-term financing for structural transformation to address the risk of climate change.

The IMF is committed to partnering even more closely with APEC.

Facing Shocks, Building Resilience: Together

I want to conclude with this thought: we live in a more shock-prone world. That means more shocks will come.

We need to build resilience to these shocks:

• Resilient people: educated and healthy, with strong social safety nets;
• Resilient economy: with strong macroeconomic fundamentals and agile, adaptable policies; and
• Resilient planet: one that we can pass on to the next generation–the way we inherited it from our parents.

I am convinced that we can do this — together. Thank you.

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