Revenue Equalization Reserve Fund

What Is the Revenue Equalization Reserve Fund?

The term Revenue Equalization Reserve Fund refers to a sovereign wealth fund set up by the government of Kiribati, an independent republic located in the Pacific Ocean. Kiribati is part of the group of islands known as Micronesia. The fund was established in 1956 when the nation was under British rule. It was developed to help offset any volatility and budgetary constraints stemming from Kiribati's limitations in economic growth and exposure to external shocks.

Understanding the Revenue Equalization Reserve Fund

Sovereign wealth funds are state-owned investment funds developed and operated by a country's government. The purpose of these funds is to help the economy and its citizens. Funding generally comes from surplus revenues, such as trade and resource revenues, as well as government transfer payments and bank reserves.

As noted above, the Revenue Equalization Reserve Fund was established in 1956 when the country was a British colony. The island nation created the fund in order to manage earnings from the country's phosphate mining industry, which accounted for over half of the country's revenue when it was established. It was also the country's largest export at the time. By the late 1970s, the country exhausted its phosphate deposits, and the per capita gross domestic product (GDP) was cut in half between 1979 and 1981. Since that time, Kiribati has largely depended on foreign aid, tourism, and the sale of fishing rights.

According to the Sovereign Wealth Fund Institute, the Revenue Equalization Reserve Fund ranked number 71 among the world's largest sovereign wealth funds with a total of $608.52 million in assets. The Kiribati government is the sole owner, trustee, and beneficiary of the fund and has complete authority over how its money is invested and distributed. Drawdowns from the fund are limited. It relies on reinvesting its annual earnings.

Special Considerations

The Republic of Kiribati was known as the Gilbert Islands when it became a British protectorate in 1892. The country gained its independence from the United Kingdom in 1979 and was recognized by the United States in 1983. The area was an incredibly active part of the Pacific theater during World War II. The Japanese occupied Tarawa Atoll and other islands from 1941 to 1942, and the Battle of Tarawa—which took place in November 1943—was one of the bloodiest battles in U.S. Marine Corps history.

The 2020 Index of Economic Freedom ranks Kiribati as a repressed nation, ranking in the 172nd spot. The index bases its list on several factors including rule of law, government size, regulatory efficiency, and open markets. It is isolated, has a fragile environment, and limited natural resources. The site lists the population at 100,000 residents. The economic conditions are as follows:

• GDP: $0.2 billion
• Inflation: 1.9%
• Unemployment: 30.6%

According to World Bank data, the country's gross national product (GNP)—which it refers to as gross national income—was $3,350 per capita in 2019. This makes it one of the poorest countries in Oceania.

The country is also at the center of the climate change crisis and is one of the world’s lowest-lying countries. As such, the government has been considering options to evacuate all of its residents as it expects rising sea levels will cover the islands completely.