IMF Executive Board Concludes 2013 Article IV Consultation with the Republic of the Marshall Islands

Press Release No. 14/41
February 3, 2014

On January 8, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Republic of the Marshall Islands.

The Republic of the Marshall Islands (RMI) is a small, isolated and disperse country, highly dependent on external aid. GDP growth picked up in fiscal year (FY) 2012 (fiscal year, ending September 30) to 3.2 percent, lifted by a surge in fishery output and higher copra and coconut oil production. In FY2013, however, growth is expected to have slowed to 0.8 percent, dragged down by delays in the implementation of infrastructure projects. Meanwhile, inflation is estimated to have eased from 4.3 percent in FY2012 to 1.6 percent in FY2013, thanks to subdued global commodity prices. The fiscal balance slipped into deficit in FY2012, and is expected to stay at -0.8 percent of GDP in FY2013, driven by large transfers to poorly performing state-owned enterprises (SOEs). The current account deficit including official transfers remained elevated at 8.1 percent of GDP in FY2012, as high imports more than offset a pickup in exports and an increase in receipts from fishing license fees. Lending conditions have remained tight, with the banking sector providing only limited credit to businesses.

Although the RMI’s economic performance is expected to strengthen in FY2014, prospects over the medium to long-term are less sanguine. In FY2014, GDP growth is projected to rebound to 3.2 percent, driven by the resumption of Compact-funded infrastructure projects. In the longer term, however, growth is expected to slow to around 1½ percent, weighted down by the scheduled reduction in Compact grants and limited private sector growth. While the fiscal deficit is expected to decline in FY2014 thanks to one-off revenues, it is projected to widen again to around 2 percent of GDP in FY2015, and persist in the medium-term, driven by high subsidies to SOEs and increased expenditures for social security contributions for public sector employees from the upcoming pension reform.

Executive Board Assessment2

Executive Directors noted that the Republic of the Marshall Islands’s recent output volatility and external imbalances reflect its narrow productive and export base, and vulnerability to external shocks. Medium-term growth prospects are constrained due to the unique challenges of small, remote island economies and the decline in Compact grants. Directors underscored the need for measures to promote fiscal and debt sustainability and foster private sector development and economic diversification.

Directors called for the implementation of a bold, but balanced fiscal consolidation strategy to secure long-term fiscal sustainability and build policy buffers. They welcomed the authorities’ plans to achieve a balanced budget in FY2014 and future surpluses through cuts in electricity and travel expenses and moderation of the public sector wage bill. They also encouraged swift approval and implementation of the pending tax reform, designed to promote efficiency and equity and boost tax compliance.

Directors stressed the need to address fiscal risks as part of a comprehensive adjustment strategy. They called for containment of subsidies to state-owned enterprises and their comprehensive restructuring with the assistance of the World Bank and Asian Development Bank. Directors also recommended parliamentary approval of the social security reform bill.

Directors welcomed the authorities’ initiatives to enhance public financial management and recommended the rapid approval and implementation of reforms to strengthen resource allocation and the medium-term budgeting framework. They looked forward to parliamentary approval of the Fiscal Responsibility and Debt Management Act.

While recognizing the challenges posed by RMI’s remoteness and small size, Directors underscored the importance of promoting diversified, inclusive growth through improvements to the regulatory framework and the business climate, including in the areas of investor protection and land reform. They recommended enhanced collaboration with development partners, the private sector and neighboring countries to upgrade both human capital and infrastructure.

Directors emphasized the need to strengthen the autonomy, capacity and supervisory authority of the Banking Commission over both bank and nonbank financial institutions, with a view to improving financial surveillance. They also called for efforts to address shortcomings in the Anti-Money Laundering/Combating the Financing of Terrorism (AML-CFT) framework.


Marshall Islands: Basic Data, FY2009–18 1/

Nominal GDP for FY2012 (in millions of U.S. dollar): 172.5

Population (2011): 53,158

GDP per capita for FY2012 (in U.S. dollar): 3,232

Quota: SDR 3.5 million

 

 

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

 

 

 

    Est. Proj.
 

Real sector

 

 

 

 

 

 

 

 

 

 

Real GDP (percent change)

-1.8 5.9 0.6 3.2 0.8 3.2 1.7 1.5 1.4 1.0

Consumer prices (percent change)

0.5 1.8 5.4 4.3 1.6 1.7 1.8 1.9 2.1 2.2

 

 

 

 

 

 

 

 

 

 

 

Central government finances (in percent of GDP)

 

 

 

 

 

 

 

 

 

 

Revenue and grants

64.3 62.0 58.5 55.0 51.4 62.9 60.2 59.3 58.5 55.7

Total domestic revenue

20.3 20.1 20.2 20.6 20.6 22.7 21.9 22.0 22.1 22.2

Grants

44.1 41.8 38.3 34.3 30.8 40.2 38.2 37.3 36.4 33.4

Expenditure

62.8 58.5 56.4 55.8 52.2 63.1 62.3 61.4 60.5 57.6

Expense

52.1 48.4 48.7 51.5 51.1 53.5 52.3 51.6 50.9 50.4

Net acquisition of nonfinancial assets

10.7 10.1 7.7 4.2 1.1 9.6 10.0 9.8 9.5 7.1

Net lending/borrowing

1.5 3.5 2.2 -0.8 -0.8 -0.2 -2.2 -2.1 -2.0 -1.9

 

 

 

 

 

 

 

 

 

 

 

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

90.9 112.8 125.2 165.6 205.8 234.6 265.9 299.8 336.5 376.3

 

 

 

 

 

 

 

 

 

 

 

Commercial banks (in millions of US$)

 

 

 

 

 

 

 

 

 

 

Foreign assets

63.6 71.8 71.9 62.1

Private sector claims

62.0 63.3 60.2 59.4

Total deposits

93.3 102.1 98.2 85.0

One-year time deposit rate (in percent)

6.0 3.5 3.5 3.5

Average consumer loan rate (in percent)

13.9 14.0 14.0 14.0

 

 

 

 

 

 

 

 

 

 

 

Balance of payments (in millions of US$)

 

 

 

 

 

 

 

 

 

 

Trade balance

-73.5 -100.8 -68.6 -66.5 -63.8 -95.9 -74.1 -74.7 -75.0 -72.8

Net services

-53.5 -41.3 -43.9 -48.1 -48.8 -50.3 -51.4 -52.6 -53.8 -54.9

Net income

40.6 35.1 38.6 41.4 42.2 47.7 49.1 49.8 50.6 51.2

Unrequited transfers (private and official)

60.0 60.1 58.6 59.3 54.1 60.8 56.0 55.9 55.7 55.5

Current account including official current transfers

-26.4 -46.9 -15.3 -13.9 -16.4 -37.7 -20.4 -21.6 -22.6 -20.9

(In percent of GDP)

-17.4 -28.8 -9.0 -8.1 -9.4 -20.6 -10.9 -11.2 -11.4 -10.3

Current account excluding budget grants

-80.7 -102.4 -69.2 -68.1 -65.6 -93.8 -72.0 -73.2 -74.3 -72.8

(In percent of GDP)

-53.2 -62.8 -40.5 -39.5 -37.4 -51.3 -38.3 -38.0 -37.6 -36.0

 

                   

External PPG debt (in millions of US$; end of period) 2/

105.9 103.2 100.7 96.4 96.4 94.2 96.0 97.7 99.2 100.6

(In percent of GDP)

69.7 63.3 58.9 55.9 55.0 51.5 51.1 50.7 50.1 49.7

 

                   

Exchange rate

                   

Real Effective Exchange Rate (2005 =100)

109.4 106.6 105.9 107.5

 

                   

Memorandum Item:

                   

Nominal GDP (in millions of US$)

151.8 163.0 170.9 172.5 175.4 182.8 187.8 192.7 197.8 202.3
 

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

1/ Fiscal year ending September 30.


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.



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