Kiribati has remained resilient amid a challenging external environment. Measures to secure supplies and keep domestic fuel prices unchanged during the Middle East conflict insulated consumers from higher import costs. However, this came with added pressures to fiscal and state-owned enterprises, while higher operating costs from global inflation have weighed on businesses, including fishing. Strong global equity markets have supported the Revenue Equalization Reserve Fund (RERF), but high equity exposure leaves it vulnerable to market reversals.
The authorities are making progress on essential infrastructure and institutional reforms. An operational desalination plant is strengthening water supply, and sanitation and road construction projects continue progressing. Solar plants with a combined capacity of 7.5 MW are advancing toward full operation and are expected to improve electricity supply reliability. Public financial management legislation is also moving forward, with further parliamentary input awaited.
Developments in 2026
Available evidence points to continued growth in 2026, supported by public spending and construction. Staff estimates real GDP growth at 3.0 percent, following 4.3 percent in 2025, while high operating costs and shortages of skilled workers continue to constrain businesses.
Price data through June show a marked easing of inflation in 2026. The slowdown reflects the fading annual effect of the 2025 fuel and electricity price increases, lower international prices, and the stronger Australian dollar. Reductions in administered prices for rice, sugar, and other selected food items may also have contributed. Average inflation is estimated at 2.5 percent in 2026, down from 5.9 percent in 2025, with end-year inflation estimated at 3.7 percent.
Fiscal policy is forecasted to be expansionary in 2026. On staff’s definition, the overall deficit is projected to widen by 2.8 percentage points of GDP. This reflects in part supplementary appropriations, including a land rent subsidy and additional funding for government operational costs. It also reflects staff’s assessment of KOIL’s persistently higher financing needs amid the prolonged global energy shock and elevated international oil prices. Development expenditure is estimated to remain a key growth driver at 52.0 percent of GDP and is largely financed by external grants of 40.0 percent of GDP. Fishing revenue remains volatile, and profitability has been declining because of higher intermediate costs.
Fiscal buffers remain substantial, although high financing needs and market exposure create vulnerabilities. The RERF balance is estimated to reach A$1.72 billion at end-2026, equivalent to 302.3 percent of GDP. Equities now account for more than 60 percent of the portfolio, heightening exposure to market corrections. Public external debt is estimated at 7.7 percent of GDP at year-end, but is projected to rise substantially over the medium term.
The quality of national statistics continues improving but gaps obscure the fisheries sector’s contribution to the economy and public finances. With ongoing support from the Pacific Financial Technical Assistance Center (PFTAC) and others, progress continues on improving the quality and frequency of reporting of CPI, financial sector, GDP and debt statistics. However, information remains insufficient to assess joint ventures’ production, pricing, profits and payments to government. Some joint ventures submit financial statements to the tax authority, but confidentiality restrictions limit wider access. Limited available information, together with reports of weak profitability and activity among some operators, underscores the need for better reporting and monitoring of potential fiscal risks.
Access to financial services is expanding, and supervisory capacity is advancing but remains limited. Direct payment of social benefits into bank accounts and the expansion of digital payments are supporting financial inclusion. Lending remains constrained by land-title and borrower-information gaps. Limited reporting and supervisory resources continue to hamper comprehensive monitoring of financial risks.
Risks
Risks remain tilted to the downside. Prolonged geopolitical tensions and higher commodity and shipping costs could raise import prices further, weaken activity and increase pressure on the budget and state-owned enterprises. A global market correction could reduce RERF returns and constrain financing for public investment. Lower fishing revenues, reduced development assistance and Negative effects of el Nino would further strain fiscal and external balances. Stronger productivity, successful investment in domestic fisheries activity, and a more favorable external environment could support higher growth and revenues.
Policy priorities
Fiscal policy
Recent developments reinforce the importance of gradual, growth-friendly fiscal consolidation over the medium term. Persistent fiscal pressures could increase the adjustment needed to safeguard debt sustainability, reinforcing the importance of credible plans for revenue and expenditure measures while preserving priority development and climate spending. If higher international oil prices persist, domestic fuel prices should be allowed to adjust gradually toward cost recovery, with temporary, targeted transfers protecting vulnerable households. Revenue mobilization, lower tax expenditures, and, when cyclical conditions allow, greater efficiency in recurrent spending should support consolidation. A balance-based RERF withdrawal rule integrated into a medium-term fiscal framework would help preserve the fund’s long-term value while allowing for more countercyclical fiscal policy. The higher equity share also underscores the importance of managing market and withdrawal risks in a manner that safeguards the RERF’s long-term value.
