Press Release No. 22/118

IMF Staff Completes Virtual Staff Visit to the Republic of Marshall Islands

April 13, 2022

• Marshall Island’s strong containment measures have prevented a domestic COVID-19 outbreak. Accelerating vaccination rate is key to reopen the borders safely.
• The economy is slowly recovering, and growth is expected to gain strength as COVID-19 related restrictions are relaxed. But the outlook is clouded by the spillovers of the war in Ukraine and related uncertainties.
• Policies should focus on gradually consolidating the fiscal position to preserve fiscal sustainability while providing targeted support to the most vulnerable, taking a cautious approach with initiatives to adopt still developing technologies to safeguard financial stability, and accelerating critical structural reforms to achieve a green, sustainable, and inclusive growth.

Washington, DC:

An International Monetary Fund (IMF) team, led by Ms. Yong Sarah Zhou, held virtual staff-level discussions with the authorities in Marshall Islands during March 28–April 7, 2022. The discussions covered recent developments, the economic outlook, and policy priorities ahead. At the end of the visit, Ms. Zhou issued the following statement:

“After a moderate contraction of 1.6 percent, real GDP growth is projected to have recovered in FY2021, thanks to higher fishing activities as well as strong donor support. Growth in FY2022, however, is expected to be slower than previously expected as extended travel restrictions and high global commodity prices weigh on economic activities. The negative terms of trade shock together with a reduction in grants will put pressures on current account and fiscal balances. Inflation is expected to rise above 6 percent during FY2022, driven by higher food and fuel prices.

“Uncertainty about the economic outlook remains very high and risks are skewed to the downside. Key downside risks include a breakout in local transmission of COVID and/or global outbreaks of new contagious and lethal COVID variants, heightened chances of large natural disasters related to climate change, rising and volatile food and energy prices, and withdrawal of the last USD correspondent banking relationship (CBR) due to worsening AML/CFT risks. The ongoing Compact negotiations create a bimodal fiscal risk: a fiscal cliff may ensue if Compact grants are reduced in FY2023, while the potential renewal of the expiring Compact grants at favorable terms is an upside risk.

“The authorities have taken strong measures to respond to the COVID-19 pandemic—with 80 percent of the Covid support package (around 20 percent of GDP) implemented by end-March. The authorities should consult with donors on prioritizing and reallocating the remaining Covid funds as needed given the state of the economy, while continuing efforts to accelerate vaccinations. The authorities should carefully assess and prioritize spending pressures, including those arising from spillovers of the war in Ukraine, and ensure that measures are well-targeted to protect the most vulnerable. The authorities should promptly develop a gradual but credible fiscal adjustment plan to prepare for the potential expiration of Compact grants and reduce fiscal risks and protect long-term income. To achieve the fiscal adjustment, a combination of expenditure control, domestic resource mobilization and public financial management are needed. Advancing the tax policy reform should be a priority. Ensuring adequate implementation capacity in revenue administration including cementing progress already made and upgrading the IT system of the Tax agency would be important to ease the burden of taxpayer compliance and reduce administrative costs. Reforming the taxation of offshore shipping and corporate registries would support public finance and improve transparency.

“The Marshall Islands should continue to exercise caution when pursuing initiatives, such as the digital currency SOV as a second legal tender, the Digital Economic Zone (DEZRA), and the newly enacted Law on Decentralized Autonomous Organizations. These initiatives introduce potentially significant macroeconomic, financial stability, and financial integrity risks and, unless effective mitigating measures are implemented, could jeopardize the RMI’s last USD CBR, resulting in a significant drag on the economy. Strengthening the AML/CFT framework and its implementation would help safeguard financial stability.

“Climate change and natural hazards pose an existential threat to the country. Accelerating the preparation of the national adaptation plan is critical to address challenges in climate change and integrate climate adaptation investment and disaster costs in fiscal planning. Stepping up reform momentum to put SOEs on a more sustainable and commercial footing is important to help reduce fiscal pressures and improve economic efficiency.

“ Generating new sources of growth requires structural reforms and efforts to fostering private sector development. The authorities have made good efforts in developing domestic tuna-value chains. The government should also pursue additional policy initiatives, including improving: (i) land registration and land leasehold operations; (ii) infrastructure, including digital connection; (iii) education and opportunities for training and skills development; and (iv) social services. All those measures could also help in lowering migration to the U.S. and enabling higher local growth.

“We would like to appreciate RMI authorities as well as private sector representatives for fruitful discussions. We look forward to continue the dialogue during the Article IV Consultation in the first half of 2023.”