Kiribati faces mounting pressure to implement drastic fiscal cuts to fund desperately needed climate adaptation measures, the International Monetary Fund warned following its annual economic review on July 9.

The Pacific island nation's economy grew 5.3% in 2024 but the IMF said procyclical spending patterns and dwindling fishing revenues have left the country dangerously exposed to climate threats and external shocks.

Growth is expected to plummet from 3.9% in 2025 to just 2% over the medium term, whilst inflation will surge to 7.8% this year following long-overdue fuel price increases and electricity tariff hikes.

The IMF slammed Kiribati's boom-and-bust fiscal approach, where spending soars when revenues are high and gets slashed when they fall short. This leaves the climate-vulnerable nation unable to consistently fund crucial infrastructure projects.

The fund demanded immediate action to preserve Kiribati's sovereign wealth fund (RERF), warning that current withdrawal rules could force unplanned spending cuts if financial markets perform poorly. Annual withdrawals should be capped at 3% to 5% of the fund's balance.

Kiribati has already frozen wages, reformed VAT and cut subsidies in 2025, but the IMF said deeper cuts are essential. The government must slash state-owned enterprise tax exemptions, hike excise taxes and streamline copra subsidies.

The warning comes as external risks mount, including commodity price volatility and potential shipping cost spikes from global conflicts that could devastate the import-dependent economy.

The IMF said Kiribati's external position is already weaker than fundamentals suggest, with government spending driving excessive import demand.

Despite pursuing an ambitious development agenda focused on infrastructure and social benefits, the country remains highly vulnerable to climate change and natural disasters.

"Kiribati remains highly vulnerable to the effects of climate change and natural disasters," the IMF said.