IMF Executive Board Concludes 2018 Article IV Consultation with the Republic of the Marshall Islands

September 10, 2018

On September 5, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with the Republic of the Marshall Islands.

The Republic of the Marshall Islands (RMI) is a small and remote country in the Northern Pacific with a dispersed population. RMI is vulnerable to climate change because of its low elevation, and it has experienced natural disasters such as droughts and floods repeatedly. The RMI economy is highly dependent on external aid.

Growth in the Marshallese economy is estimated to have accelerated to about 3½ percent in FY2017 (ending September 30) with a strong pick-up in fisheries and construction, with the latter due to the resumption of infrastructure projects. Consumer prices started to rise again in mid-2017, with annual CPI inflation at 1.1 percent in 2017Q4. Despite rising fishing license fee revenue, the overall fiscal surplus is estimated to have narrowed to 3 percent of GDP in FY2017 because of continued increases in recurrent spending.

Growth is expected to remain robust at about 2½ percent in FY2018 and about 1½ percent over the medium term, underpinned by further increases in infrastructure spending. Inflation is expected to rise gradually to around 2 percent over the medium term. The fiscal surplus is projected to narrow further to 1¾ percent of GDP in FY2018 and turn into a deficit of 1½ percent by FY2023, as government spending is expected to continue growing strongly while fishing license revenues remain stable in nominal terms.

The RMI’s only domestic commercial bank is at risk of losing its last U.S. dollar correspondent banking relationship (CBR) with a U.S.-based bank as a result of heightened due diligence by banks in the U.S. In addition, RMI plans to issue a decentralized digital currency as a second legal tender in addition to the U.S. dollar and the relevant law was enacted in February 2018.

Executive Board Assessment[2]

Executive Directors welcomed the rebound of economic activity but noted that Republic of the Marshall Islands continues to face significant challenges, including those arising from the scheduled decline in the U.S. Compact grants and weather-related events. Directors underscored the importance of sound macroeconomic policies to safeguard financial stability, ensure long-term fiscal sustainability, reduce vulnerabilities, and promote sustainable growth.

Directors encouraged the authorities to be cautious about issuing a decentralized digital currency as a second legal tender and carefully consider the macroeconomic and financial stability risks. They noted that the potential benefits from revenue gains could be considerably smaller than the potential costs arising from economic, reputational, and governance risks. Directors commended the progress made in addressing correspondent banking relations risks. They emphasized the need for additional steps to strengthen the AML/CFT framework, including the successful completion of the national risk assessment and the subsequent development of an action plan. In addition, they recommended that the AML/CFT framework should be compliant with the FATF standards and cover the offshore and maritime registries. Directors also called for further steps to enhance the banking supervision framework.

Directors emphasized that fiscal consolidation over the medium term is key to reduce risks to long-term fiscal sustainability. They recommended a multi-pronged strategy, including reversing the recent increase in recurrent spending and improving revenue administration and implementing tax reform. Directors noted that accelerating the pace in implementing reforms of the medium-term fiscal framework and public financial management will help in achieving the needed fiscal adjustment.

Directors emphasized the need for continued efforts to adapt to climate change, including by strengthening the early disaster warning system and improving coastal protection and planning. They noted that the explicit budgeting of climate-change adaptation costs would help ensure continuity in project implementation.

Directors emphasized that structural reforms are needed to promote sustainable growth. They recommended implementing the planned state-owned enterprises (SOEs) reform, in particular reducing subsidies to SOEs that are not justified by the provision of the essential community services. This would help the fiscal consolidation efforts and could free up resources for other purposes.

Marshall Islands: Selected Economic Indicators, FY2014–2023 1/

Nominal GDP for FY2016 (in millions of U.S. dollars): 196.3

Population (2016): 54,153

GDP per capita for FY2016 (in U.S. dollars): 3624.3

Quota: SDR 3.5 million

FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

FY2020

FY2021

FY2022

FY2023

Est.

Proj.

Real sector

Real GDP (percent change)

-0.5

-0.6

2.0

3.6

2.5

2.3

2.2

2.0

1.8

1.6

Consumer prices (percent change)

1.1

-2.2

-1.5

0.0

1.4

1.5

1.7

1.8

1.9

2.0

Central government finances (in percent of GDP)

Revenue and grants

52.6

59.9

62.3

68.0

64.0

64.1

64.1

63.7

63.5

63.4

Total domestic revenue

23.6

27.5

32.2

38.4

31.0

30.5

29.9

29.4

29.0

28.7

Grants

29.1

32.4

30.1

29.6

33.0

33.6

34.1

34.2

34.5

34.7

Expenditure

49.4

57.0

58.4

65.1

62.2

63.1

63.9

64.1

64.3

64.6

Expense

46.5

53.2

55.2

57.4

53.8

53.8

53.9

53.7

53.6

53.6

Net acquisition of nonfinancial assets

2.9

3.8

3.1

7.6

8.4

9.3

10.0

10.4

10.7

11.1

Net lending/borrowing

3.2

2.8

4.0

3.0

1.8

1.0

0.1

-0.4

-0.8

-1.3

Compact Trust Fund (in millions of US$; end of period)

240.1

247.1

294.5

356.9

393.7

432.9

474.5

518.6

565.5

615.3

Balance of payments (in percent of GDP)

Current account balance 2/

-1.2

15.0

7.6

-0.3

-0.6

-1.0

-1.9

-2.7

-3.0

-3.1

Good and service balance

-58.3

-55.5

-56.3

-56.5

-56.2

-56.2

-56.3

-56.3

-56.1

-55.9

Primary income

26.5

38.3

33.2

29.6

29.8

29.6

29.1

28.6

28.3

28.0

o/w fishing license fee

8.9

13.4

12.3

11.5

11.1

10.8

10.4

10.1

9.8

9.6

Secondary income

30.6

32.2

30.7

26.6

25.9

25.6

25.3

25.0

24.9

24.7

o/w compact current grants

15.7

18.3

16.4

14.7

14.5

14.0

13.6

13.1

12.7

12.4

o/w other budget and off-budget grants

13.4

13.0

13.6

11.0

10.9

11.2

11.4

11.6

11.9

12.2

Current account excluding current grants

-30.3

-16.3

-22.4

-25.9

-25.9

-26.2

-26.9

-27.4

-27.6

-27.7

External PPG debt (in millions of US$; end of period) 3/

94.6

89.0

83.5

78.4

73.4

67.5

65.4

63.8

63.0

63.4

(In percent of GDP)

51.1

49.1

42.5

35.2

31.9

28.4

26.6

25.1

24.2

23.7

Exchange rate

Real Effective Exchange Rate (2010 =100)

102.7

102.2

99.9

98.8

…

…

…

…

…

…

Memorandum Item:

Nominal GDP (in millions of US$)

185.2

181.3

196.3

222.3

229.9

237.7

245.8

253.8

260.7

267.4

Sources: RMI authorities; and IMF staff estimates and projections.

1/ Fiscal year ending September 30.

2/ Includes current grants.

3/ In this table, it is assumed that RMI will continue to benefit from its grant-only status. On the other hand, in the LIC-DSA, for World Bank (IDA) and other MDBs, regular credit terms on all lending is assumed for all years in the projection period for which grant finance has not already been committed. This is because the DSA serves to test a country’s capacity to take on WB and ADB financing on credit terms.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Ting Yan

Phone: +1 202 623-7100Email: MEDIA@IMF.org