Tuvalu – Joint World Bank-IMF Debt Sustainability Analysis

Overview & Synopsis

Tuvalu remains at a high risk of debt distress, unchanged from the 2023 Debt Sustainability Analysis (DSA). Consistent with the previous DSA, judgment was applied to extend the projection horizon to 20 years as opposed to the standard 10 years to capture Tuvalu’s vulnerability to natural disasters and the effects of climate change on debt dynamics. Tuvalu is projected to face persistent fiscal deficits going forward. The mechanical external and overall risk rating is moderate based on the first 10 years of projections since none of the debt burden indicators breach their thresholds under the baseline, while the Present Values (PV) of external and public debt-to-GDP ratio breach their thresholds under the stress tests. However, these ratios are projected to breach thresholds under the baseline scenario in the long run, making the final external and overall risk of debt distress high. Despite upward trending debt burden indicators, Tuvalu’s debt is assessed as sustainable. This assessment assumes continued access to external budget support on concessional terms from development partners, low debt service ratios throughout the projection horizon, and some cash buffers in the Consolidated Investment Fund (CIF) to finance deficits. Risks to debt sustainability remain high due to elevated current spending, high reliance on volatile fishing revenues and grants, and risks of natural disasters. This underscores the importance of reining in fiscal deficits, improving public financial management and implementing structural reforms, ensuring good cooperation with donors, and securing grants needed to fulfill the country’s large development needs and climate adaptation efforts.