The Many Trust Funds of Pacific Island Economies

Kiribati Revenue Equalization Reserve Fund (1956). The fund was capitalized from phosphate mining revenue. It is entirely locally run, with the trustees consisting of the Minister of Finance (chair), the Secretary to the Cabinet, the Chief Accountant, and two others. In 1996, the fund adopted a target of maintaining a constant real per capita value. Prudent fiscal management by successive governments and sound investment policy enabled the trust’s value to increase for many years in real terms, although it has come under pressure from high government draw-downs to finance budget deficits since 2003.

Tuvalu Trust Fund (1987). The fund was initially capitalized with $A27 million, primarily by donors (United Kingdom, New Zealand, Australia Japan, and Korea), but also with a contribution from Tuvalu. The fund was created to provide budget support and to promote financial independence. The board of directors are from Tuvalu (chair), Australia, New Zealand and the United Kingdom. Sound investment decisions and limited withdrawals have helped lift the value of the fund considerably. To prevent large fluctuations in investment income from disrupting the budget, the fund established a dual account system, where one account served as a “buffer,” that accumulated reserves during periods of high returns and could be drawn down during periods of low returns. (The CTF uses a similar system, drawing on the Tuvalu experience.)

Compact Trust Fund—Palau (1994). The United States provided the initial capitalization of $70 million (1995–97), with an aim to replace the government’s reliance on U.S. grants after the Compact expires in 2044. Palauans comprise the seven-member board. The government could withdraw limited amounts starting in 1999, but chose to reinvest most of the earnings, lifting the fund to $150 million by 2004. The long-run outlook is uncertain, because the fund was based on a highly optimistic assumption of annual returns of 12½ percent during the first 15 years.

Compact Trust Fund—Republic of Marshall Islands and Federated States of Micronesia (2004). The operation of these funds are nearly identical, although the U.S. contributions are higher to Micronesia’s fund (reflecting the country’s larger size and higher Compact grant funding).

Nauru Phosphate Royalties Trust (1968). The Trust was capitalized using dividends and taxes from phosphate mining and was intended to provide income after reserves ran out. High initial revenues swelled the balance to A$1½ billion in 1990. As reserves ran out, mining contributions to both the budget and the trust fund fell, and the government borrowed heavily, using the fund as collateral. These draw-downs, along with poor investment returns and corruption, caused the fund to be virtually exhausted.

Tonga Trust Fund (1988). The fund was capitalized from the sale of passports to foreigners (primarily to residents of Hong Kong SAR) and the lease of Tongan satellite space. The Board of Trustees comprised of the Prime Minister (chair), Minister of Finance, plus one. The funds were invested in bank deposits until 1999, and the balance rose to $26 million. In 1999, the King appointed a U.S. citizen as the investment manager, who lost the entire balance by 2002.

Marshall Islands Nuclear Claims Fund (1986). The United States provided $150 million to compensate residents who suffered from U.S. nuclear testing between 1946–58. While the fund was intended to last in perpetuity, the fund fell by 15 percent in value during the 1987 stock market and never recovered, in part because of large payments to the victims of testing. The current fund balance is only around $5 million.

Source; Federated States of Micronesia: Selected Issues and Statistical Appendix, IMF