IMF Executive Board Concludes 2021 Article IV Consultation with the Republic of the Marshall Islands
IMF News, May 27, 2021
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- Published: May 27, 2021
Macroeconomic performance and near-term outlook
- Real GDP is estimated to have increased by around 6.5 percent in FY2019 (October 1-September 30), driven by strong fishery and construction activities.
- GDP is expected to have contracted by 3.3 percent in FY2020 due to COVID-19 travel restrictions that significantly impacted fisheries, construction, transportation, and tourism related activities.
- Economic activity is expected to continue declining in FY2021 and rebound only in FY2022:
- FY2021: Real GDP change projected at -1.5 (percent change).
- FY2022: Real GDP change projected at 3.5 (percent change).
- Medium-term growth is projected at around 1.6 percent, reflecting continued emigration to the US.
- Inflation is expected to converge to U.S. levels of around 2 percent; table shows consumer prices (percent change) projections:
- FY2019: 0.6
- FY2020: 1.1
- FY2021: 1.5
- Subsequent years shown through FY2026.
Fiscal outlook and public finances
- Fiscal and external balances expected to be in surplus in the near term, benefiting from higher grants, but expected to move to deficits from FY2023 assuming expiring Compact grants and stagnant fishing revenues.
- Executive Directors recommended gradual fiscal consolidation once recovery has firmed, emphasizing long-term fiscal self-reliance.
- Key fiscal indicators (central government finances, in percent of GDP) from table:
- Revenue and grants: FY2019 62.0; FY2020 66.5; FY2021 85.7; FY2022 71.0; FY2023 70.2; FY2024 66.9; FY2025 63.0; FY2026 64.5.
- Total domestic revenue: FY2019 31.9; FY2020 32.3; FY2021 30.4; FY2022 31.2; FY2023 31.3; FY2024 41.0; FY2025 40.7; FY2026 40.4.
- Grants: FY2019 34.2; FY2020 55.3; FY2021 39.8; FY2022 38.9; FY2023 25.8; FY2024 22.3; FY2025 24.1.
- Expenditure: FY2019 63.7; FY2020 66.4; FY2021 85.1; FY2022 72.3; FY2023 71.7; FY2024 70.1; FY2025 68.5.
- Net lending/borrowing: FY2019 0.0; FY2020 -1.3; FY2021 -3.5; FY2022 -3.9.
External sector and reserves
- Current account balance and composition (percent of GDP), selected years from table:
- Current account balance: FY2019 -25.4; FY2020 2.2; FY2021 2.6; FY2022 0.4; FY2023 -0.2.
- Goods and services balance: FY2019 -72.9; FY2020 -50.3; FY2021 -57.0; FY2022 -60.0.
- Primary income: FY2019 22.2; FY2020 27.1; FY2021 27.9; FY2022 29.0; FY2023 38.5.
- Of which: fishing license fee shown in table for selected years (e.g., FY2016 12.5; FY2019 9.5; FY2021 10.1).
- Secondary income: FY2019 25.3; FY2020 25.5; FY2021 31.7; FY2022 28.5.
- Of which: compact current grants figures included in table (e.g., FY2019 15.4).
- Current account excluding current grants: FY2019 -50.5; FY2020 -22.3; FY2021 -28.1; FY2022 -30.2; FY2023 -4.0.
- External PPG debt (Percent of GDP; end of period) entries include FY2016 41.4; FY2019 27.5; FY2021 25.1; FY2022 26.7; FY2023 28.8.
Risks and vulnerabilities
- Uncertainty around the economic outlook is exceptionally high; risks are tilted to the downside.
- Specific downside risks identified:
- Worsening of the pandemic, locally or elsewhere.
- Issuance of the digital currency SOV as a second legal tender would raise macroeconomic, financial stability, and financial integrity risks.
- Establishing a Digital Economic Zone (DEZRA) would introduce additional financial integrity risks.
- Combined SOV/DEZRA and AML/CFT risks could jeopardize the RMI’s last USD corresponding banking relationship (CBR), causing significant economic drag.
- Climate change and related natural disasters.
- Fiscal cliff risk if Compact financial provisions between RMI and the United States expire in FY2023 without sufficient fiscal consolidation.
- Upside risk: potential renewal of expiring Compact grants on favorable terms.
Executive Board assessment and policy recommendations
- Commended authorities for strong and swift containment measures that successfully prevented a domestic outbreak, and for implementing a policy package supporting the economy.
- Near-term: supportive fiscal responses should continue, complemented by governance safeguards to promote fiscal transparency.
- Medium-term: gradual fiscal consolidation necessary to support long-term fiscal self-reliance through a multipronged strategy:
- Reduce recurrent spending.
- Implement tax reforms.
- Strengthen public financial management (PFM).
- Establish a medium-term fiscal framework.
- Financial stability and integrity:
- Welcome authorities’ cautious approach on the Sovereign initiative; repeal would eliminate related risks from issuance of a decentralized digital currency as a second legal tender.
- Caution against establishing a Digital Economic Zone given potential significant financial stability and integrity risks and limited capacity to manage them.
- Emphasize strengthening the AML/CFT framework in line with international standards.
- Strengthen capacity of relevant agencies to ensure proper oversight of offshore activities and effective mitigation of related risks to financial integrity—critical to improve correspondent banking relationship.
- Climate and disaster resilience:
- Noted vulnerability to climate change shocks.
- Welcome commitment to finalize the National Adaptation Plan in 2021.
- Call for steadfast actions to address immediate disaster risks, prioritize key adaptation investments, and integrate resilience and disaster risk costs in the budget.
- Structural reforms recommended to promote sustainable and inclusive growth:
- Accelerate SOE reforms to reduce fiscal pressures and improve economic efficiency.
- Reform land registration.
- Build a skilled workforce.
- Close infrastructure gaps.
- Enhance access to finance for the private sector.
Key statistics and memoranda (selected)
- Nominal GDP: US$ million 239 (FY 2019)
- GDP per capita: US$4,073 (FY 2019)
- Population: 58,791 (FY 2019)
- Quota: SDR 3.36 million
- Compact Trust Fund (in millions of US$; end of period) sample series from table:
- FY2016 294.5; FY2017 356.9; FY2018 402.4; FY2019 434.7; FY2020 480.0; FY2021 525.7; FY2022 574.5; FY2023 626.7; FY2024 631.4; FY2025 635.7; FY2026 620.8.
- Memorandum: Fiscal year ending September 30.
- Assumption: RMI will continue to receive 100 percent of its MDBs financial assistance in the form of grants.
Press Release No. 21/142 — IMF Executive Board Concludes 2021 Article IV Consultation with the Republic of the Marshall Islands
