IMF Executive Board Concludes 2009 Article IV Consultation with the Republic of the Marshall Islands

Public Information Notice (PIN) No. 10/30
February 23, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On February 1, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Republic of the Marshall Islands (RMI).1


Large and stable external grants have buttressed economic growth in the RMI, but this support is time limited. The 2004 Compact of Free Association with the United States (Compact) provides a 20-year stream of funding aimed at strengthening education, health services, and infrastructure projects. These grants have been a boon to social and economic growth, but have come at the expense of fostering economic dependence on foreign income. The economy is dominated by a large public sector and private businesses contribute little to growth. The banking sector is small.

The global economic turmoil hit the economy hard. The boom in commodity and food prices took a sharp toll on the economy and led in 2008 to the first recession in 10 years. The economy stabilized in 2009 (0 percent growth) helped by sharply falling domestic food and energy prices, new fishing sector activities, and reported increases of remittances. Inflation declined to 0.5 percent in 2009 after reaching 14.7 percent in 2008.

The fiscal balance recorded a small deficit of 0.2 percent of GDP in 2009, roughly unchanged from 2008. Lack of access to capital markets and limited financial assets provided little room to adjust to the large terms of trade shock. Additional grants from donors and higher non-tax income from ship registration fees offset lower tax revenue and higher spending.

Gross public debt is high, but counterbalanced by assets in the Compact Trust and social security funds. Government and government guaranteed debt reached 62 percent of GDP in 2008 and are mostly on concessional terms (40 percent of GDP owed to the Asian Development Bank). The collapse in global equity markets in 2008 led to significant losses for the Compact Trust Fund (CTF), but the value of assets recovered (63 percent of GDP in 2009). Similarly, the Social Security Fund rebounded to 46 percent of GDP in 2009, but remained below its 2007 peak.

The economy is on a path to recovery. A gradual expansion with growth reaching 0.5 percent in 2010 is supported by further growth in the fish processing industry and additional foreign grant assistance. However, the cresting of foreign grants will slow the underlying growth momentum to a medium-term growth rate of 1.5 percent. Risks to the economic outlook are tilted to the downside. The economy’s high import dependence means that fluctuations in commodity pose a substantial risk to real incomes. Rising prices could stoke inflation and stifle domestic demand. In the current, weak global economic environment, donor assistance may also be more difficult to secure, posing another downside risk to growth.

The global crisis has raised the challenge of achieving long-term budgetary self-reliance and sustained growth. Under current projections, weakened growth prospects and lower than anticipated asset values in the government’s trust fund imply a large projected revenue shortfall in 2024, when the U.S. Compact is set to expire. Closing the revenue gap would require a substantial fiscal adjustment over the medium term.

Executive Board Assessment

Executive Directors were encouraged by growing signs of economic recovery following the 2008 recession. New activities in the fishing sector and increases in remittances have stabilized the economy, and inflation has dropped from its very high levels recorded in 2008. Directors noted that the strength of the recovery depends largely on the availability of foreign grants and job creation in the private sector. In view of rising debt-service payments and the expected decline in foreign grants, fiscal consolidation and public sector reforms are of highest priority. Sustaining economic growth over the long term will require broad-based structural reforms to promote private sector development and increase the resilience of the economy to external shocks.

Directors underscored the need to begin the fiscal consolidation process in 2010 by targeting a sufficiently large fiscal surplus, with a view to increasing savings in the CTF. Given a significant revenue gap projected for 2024 after funding through the Compact of Free Association with the United States expires, it will be important to sustain a large fiscal adjustment over time. In this regard, Directors welcomed the authorities’ intention to develop a medium-term comprehensive adjustment plan, combining expenditure and revenue reform proposals to generate lasting fiscal surpluses. They suggested that consolidation begin with cuts to the public wage bill, elimination of untargeted electricity and housing allowances, and adjustment of electricity tariffs to cost-recovery levels. Directors encouraged the authorities to launch a comprehensive tax reform, focusing on replacing the general revenue tax with a net profit tax, introducing a consumption tax, reforming the income tax, and unifying tax administrations.

Directors stressed the importance of attaining a growth path consistent with domestic and external stability through structural reforms aimed at fostering private sector growth and competitiveness. A key priority is the reform of state-owned enterprises to improve electricity and telecommunication services, while scaling back the operations of those involved in commercial activities. Wage and price flexibility would help maintain external stability in the context of dollarization.

Directors welcomed efforts to strengthen banking supervision, particularly plans to modernize the Banking Act. Noting the high level of household indebtedness, they considered it prudent to enhance the monitoring of lending operations by banks. Directors also saw the need to tighten the oversight of the public development bank, by bringing it under the supervision of the Banking Commission. Further efforts are necessary to facilitate the use of land as collateral through land registration, and to improve data collection and reporting.

Directors encouraged the authorities to continue to strengthen the statistical base, especially the coverage and timeliness of fiscal and balance of payments data, in order to improve policy analysis and decision-making.

Marshall Islands: Selected Economic Indicators FY2004–09 1/

          Est. Proj.
  2004 2005 2006 2007 2008 2009

Real sector


Real GDP (percent change)

4.0 0.7 2.4 3.3 -2.0 0.0

Consumer prices (percent change)

2.0 3.5 5.3 2.6 14.7 0.5

Central government finances (in percent of GDP)


Revenue and grants

57.1 70.9 74.8 71.7 70.4 67.9

Total domestic revenue

25.1 25.6 25.1 25.5 25.7 23.9


32.0 45.3 49.6 46.1 44.7 43.9


58.4 74.2 73.4 71.4 70.6 68.1


50.1 55.9 54.2 54.4 58.5 54.3


8.4 18.4 19.3 17.0 12.2 13.8

Overall balance

-1.3 -3.4 1.3 0.2 -0.2 -0.2

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

32.0 48.9 63.1 85.5 75.7 97.3

Commercial banks (in millions of US$;


end-December) 2/


Foreign assets

51.0 53.6 57.6 60.7 57.1 61.7

Private sector claims

43.4 43.6 43.2 49.9 58.2 61.2

Total deposits

74.9 74.3 75.5 85.5 89.0 91.8

One-year time deposit rate (in percent)

2.1 3.5 4.0 4.1 3.6 6.0

Average consumer loan rate (in percent)

17.4 18.5 18.5 18.5 18.5 13.9

Balance of payments (in millions of US$)


Trade balance

-59.9 -68.5 -74.6 -73.8 -74.9 -71.0

Net services

-22.1 -27.0 -27.6 -30.9 -32.1 -31.7

Net income

32.2 35.0 36.4 34.4 31.8 30.5

Unrequited transfers (private and official)

45.9 52.1 55.5 63.2 63.0 60.1

Current account including official current transfers 3/

-3.8 -8.4 -10.3 -7.1 -12.2 -12.1

(In percent of GDP)

-2.8 -6.1 -7.1 -4.7 -8.0 -7.9

Current account excluding budget grants 3/

-43.8 -54.3 -59.8 -60.7 -69.4 -66.4

(In percent of GDP)

-32.9 -39.2 -41.3 -40.2 -45.7 -43.4

External debt (in millions of US$; end of period) 4/

94.7 92.1 99.7 98.5 94.3 89.9

(In percent of GDP)

71.1 66.4 69.0 65.2 62.0 58.9

External debt service (in millions of US$)

3.8 4.5 6.9 16.2 7.8 12.2

(In percent of exports of goods and services)

15.5 16.0 36.4 72.6 31.5 59.3

Exchange rate


Real Effective Exchange Rate (1995 =100)

94.6 94.5 97.0 96.5 102.8 104.6

Memorandum Item:


Nominal GDP (in millions of US$)

133.3 138.6 144.6 151.0 152.0 152.8

Sources: Data provided by the Marshallese authorities; and IMF staff estimates.
1/ Fiscal year ending September 30 unless otherwise stated.
2/ 2009 data are the average of three quarters.
3/ Official transfers include current transfers, but exclude capital transfers and Trust Fund contributions.
4/ Includes government and government-guaranteed debts.

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. 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:


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