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The focus of ADB's program the Strengthened Public Financial Management Program (SPFMP) is consistent with the objectives of Tuvalu's National Strategy for Sustainable Development 2005-2015, known as Te Kakeega II, and ADB's Pacific Approach 2010-2014, which aims to achieve sound macroeconomic and fiscal management, and strengthened and improved public enterprise management. The program will assist the government to address key issues affecting fiscal sustainability, specifically, weak budget credibility and poorly performing public enterprises. The SPFMP will continue ADB's support for strengthening public sector management and the environment for private sector development in Tuvalu areas of historical ADB involvement. Other development partners will focus their respective budget support programs on reforms in the health and education sectors. Appendix 1 provides basic program information.

The SPFMP will be supported by ADB technical assistance (TA) (funding of US$300,000), which is expected to be approved in June 2012. Advisors from the Pacific Economic Management (PEM) , and Private Sector Development Initiative (PSDI) regional TA projects, as well as from the IMF's Pacific Financial Technical Assistance Center (PFTAC) will also help the government to accomplish the policy actions contained in the program (and highlighted in Table 2, below).

The SPFMP builds on lessons and outcomes of the Improved Financial Management Program (IFMP), which was ADB's first budget support operation in Tuvalu (albeit a programmatic budget support operation with multiple tranches). This program was aimed at strengthening the governance framework for Tuvalu's public enterprises, improving the government's capacity for oversight, strengthening capacity to manage debt, and reducing the government's debt to the National Bank of Tuvalu (NBT). The IFMP was instrumental in helping the government to implement several substantive reform actions including:

-improved debt management capability via the approval of a debt risk management and mitigation policy and strategy;

-strengthened oversight of public enterprises via approval of a public enterprise governance reform strategic policy and the enactment of the Public Enterprise (Performance and Accountability) Act 2009; and

-strengthened management capacity in public enterprises via approval of an asset/liability management (liquidity) policy and a loan grading policy for NBT that allows timely collection of past due loans and advances of credit, and measuring, monitoring and maintaining adequate liquidity. The Banking Commission Act 2011, which provided the legal framework for the licensing and on-going supervision and regulation of banking institutions in Tuvalu based on the Basel core principles for effective banking supervision, was also approved by Parliament in 2011.

Tuvalu is a Pacific micro-state small, geographically remote, with limited resource endowments. With a total population of only 11,000, the economy is dominated by the public sector and few opportunities exist for private sector development. The economy is extremely vulnerable to external shocks due to its heavy reliance on income earned from external sources, including from the Tuvalu Trust Fund (TTF), fish licensing fees, the '.tv' internet domain, workers remittances, and grants; all of which are largely outside the government's control. Consequently, future revenue streams are difficult to accurately predict and are often volatile. Expenditure has outpaced revenue in recent years largely due to overspending on the Tuvalu medical treatment and scholarship schemes leading to widening budget deficits. For example, the deficits for 2010 and 2011 are estimated at 38.0% and 22.0% of GDP respectively, compared to 3.2% of GDP in 2009 and 1.5% in 2008.

Returns from the TTF, which have in the past provided some financial certainty, have fallen below their targeted value in recent years. As a result, there have been no distributions from the TTF to the Consolidated Investment Fund (CIF) to finance the budget since 2008. The CIF was established to provide stability to the annual budget, and receives transfers from the TTF when the fund's market value exceeds its targeted value (which is linked to the Australian consumer price index). While there have been some injections into the CIF from donors, its value has declined to around $2.1 million and according to the Tuvalu Trust Fund Advisory Committee (TTFAC), the Fund, if not carefully managed, could be exhausted by the end of 2012. On current trends, and given the ongoing uncertainty in global financial markets, distributions are unlikely to begin again until 2014.

Given the extent of the government's fiscal challenges, it is crucial that budget management is of a sufficiently high quality to ensure limited public funds are effectively spent. However, weaknesses in budget credibility and strategic allocation of resources continue to undermine the fiscal position. This is evidenced by the findings of the 2010 assessment of Tuvalu's public financial management systems based on the World Bank's public expenditure and financial accountability (PEFA) methodology. Poor budget management is further compounded by weakly performing public enterprises that are a drag on economic growth only two of Tuvalu's eleven public enterprises, the National Bank of Tuvalu and Tuvalu Electricity Corporation, are financially profitable (the latter following technical assistance provided by ADB in 2010). An assessment of the public enterprise sector undertaken by the International Monetary Fund in 2010 as part of its biennial Article IV consultations concluded that the total debt of the sector, excluding the two banks, had risen from 19% of GDP in 2004 to 42% in 2007. This poses considerable fiscal risks as the debt is partly guaranteed by the government.