IMF Staff Completes 2021 Article IV Mission with the Republic of the Marshall Islands
IMF News, March 22, 2021
Source details
- Canonical URL
- IMF Staff Completes 2021 Article IV Mission with the Republic of the Marshall Islands
Other formats
Bibliographic details
- Published: March 22, 2021
Mission and context
- Mission led virtually by Ms. Yong Sarah Zhou from March 1 to 18, 2021.
- Press Release No. 21/73 dated March 22, 2021.
- Statement conveys preliminary findings of IMF staff; views are those of IMF staff and do not necessarily represent the IMF’s Executive Board.
- The Marshall Islands implemented strong containment measures with no record of local COVID-19 transmission and is leading the Pacific’s Covid-19 vaccine rollout.
Economic performance and projections
- Real GDP estimated to have increased by around 6.5 percent in FY2019 (October 1-September 30), driven by strong fishery and construction activities.
- GDP impacts from COVID-19:
- Real GDP expected to have contracted 3.3 percent in FY2020.
- Real GDP forecast to decline by around 1.5 percent in FY2021.
- Economy expected to rebound in FY2022, assuming health restrictions ease gradually.
- Vaccination progress: first round of vaccination of over 30 percent of the total population already completed.
- Inflation: remained low pre-pandemic; projected to rise slightly reflecting higher fuel prices.
Downside risks and vulnerabilities
- High uncertainty around the economic outlook with risks tilted to the downside.
- Specific downside risks identified:
- Extended border closure from a protracted global Covid-19 pandemic could prolong weak economic activity.
- Issuance of the digital currency Sovereign (SOV) as a second legal tender would raise risks to macroeconomic and financial stability and financial integrity.
- The SOV issuance could jeopardize RMI’s last USD corresponding banking relationship (CBR).
- AML/CFT risks (including those related to the SOV) could disrupt external aid and other important financial flows.
- Climate change and related natural disasters.
- Fiscal risks:
- Increased fiscal risks of a fiscal cliff if the Compact of Free Association (COFA) with the United States expires in FY 2023.
- Potential renewal of COFA on favorable terms presents upside risks.
Key policy recommendations — three main objectives
- Objectives:
- (i) ensuring a durable economic recovery after the downturn and long-term fiscal self-reliance;
- (ii) maintaining financial stability;
- (iii) achieving green, sustainable, and inclusive growth after the pandemic.
- Short-term COVID-19 response:
- Keep the response package in place until the recovery is firmly underway while reprioritizing and reallocating spending as needed.
- Fiscal policy and consolidation:
- Post-pandemic, implement gradual fiscal consolidation to prepare for possible expiration of U.S. grants and reduce risk of a fiscal cliff.
- Even with COFA renewal, some adjustment likely needed to maintain sound public finances and reduce dependency on external grants.
- Preserve the value of the Compact Trust Fund adjusted for inflation.
- Use a combination of spending and revenue measures to achieve consolidation.
- Enact the prepared tax reform bill.
- Reform taxation of offshore shipping and corporate registries.
- Timely enactment and effective implementation of the Fiscal Responsibility and Debt Management Act is critical.
- Financial stability and digital currency:
- Staff welcome the authorities’ cautious approach toward the SOV.
- Assessment: potential cost of SOV issuance will likely outweigh expected benefits given current legal, regulatory, and institutional readiness.
- AML/CFT and correspondent banking:
- Strengthen AML/CFT legal/regulatory framework and capacity of agencies to ensure proper AML/CFT regulation of offshore sectors.
- Improve oversight of delegated public functions and the Trust Company of Marshall Islands (TCMI), which operates non-resident and shipping registries.
- Ensure timely access to accurate beneficial ownership information on entities registered with the RMI to mitigate pressures on CBRs.
- Green recovery and climate finance:
- Accelerate preparation of a national adaptation plan (NAP) to climate change; government committed to finalize the NAP in 2021.
- IMF offers support on PFM reforms to enhance RMI’s ability to access global climate funds.
- SOE reforms and social protection:
- Step up implementation of SOE reforms.
- In the medium to long term, develop direct and targeted fiscal transfers, which are more efficient in redistributing income to the poor than paying subsidies to SOEs for social services while reducing economic distortions.
- Structural reforms to support diversification and growth:
- Improve the business environment to enable private sector growth and dynamism.
- Implement land registration reforms to promote business investment.
- Improve education, training, skills development, and broaden social services to help lower migration to the U.S. and enable higher local growth.
IMF engagement and concluding remarks
- The team commends the government’s swift health preparedness measures and donor-supported mitigation of economic impacts.
- The IMF team is grateful to the government of the RMI and private sector representatives for constructive and candid discussions.
Press Release No. 21/73, March 22, 2021 — International Monetary Fund