Washington, DC:
Ms. Yong Sarah Zhou led a virtual Article IV consultation with the Republic
of the Marshall Islands (RMI) from March 1 to 18. At the conclusion of the
visit, Ms. Zhou issued the following statement:
“The Marshall Islands’ economy experienced strong growth before the
pandemic. 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. Inflation remained low, given weak commodity prices.
“As a result of strong and swift containment measures, RMI has thus far
remained one of the few countries with no record of local transmission of
COVID-19. The government has put in place a vaccination plan, supported by
the U.S. RMI is leading the Covid-19 vaccine rollout in the Pacific
Islands, with the first round of vaccination of over 30 percent of the
total population already completed.
“However, the economic impact of COVID-19 has been severe, as elsewhere.
Real GDP is expected to have contracted by 3.3 percent in FY2020 and is
forecast to decline by around 1.5 percent in FY2021, due to the
pandemic-related disruptions to production, sales, and employment,
especially in the fishery, transportation, and tourism sectors. The economy
is expected to rebound in FY2022, based on the assumption that health
restrictions on economic activity will ease gradually. Inflation is
projected to rise slightly, reflecting higher fuel prices.
“Uncertainty around the economic outlook is exceptionally high, given the
pandemic, and risks are tilted to the downside. An extended border closure
due to a more protracted Covid-19 pandemic worldwide could prolong weak
economic activity. The issuance of the digital currency SOV as a second
legal tender would raise risks to macroeconomic and financial stability as
well as financial integrity. The issuance of the SOV could jeopardize the RMI’s last USD
corresponding banking relationship (CBR). This combined with anti-money
laundering and combatting the financing of terrorism (AML/CFT) risks
(including those related to the SOV) could disrupt external aid and
other important financial flows, resulting in a significant drag on the
economy. Climate change and related natural disasters are other downside risks.
“RMI also faces important fiscal risks. Without enough fiscal
consolidation, the country will face increased fiscal risks of a fiscal
cliff if the Compact of Free Association (COFA) between RMI and the United
States expires in FY 2023. Alternatively, the potential renewal of the COFA
on favorable terms presents upside risks.
“Against this background, the team’s policy recommendations focus on three
main objectives areas: (i) ensuring a durable economic recovery after the
downturn and long-term fiscal self-reliance; (ii) maintaining financial
stability; and (iii) achieving green, sustainable, and inclusive growth
after the pandemic.
“The team commends the government’s swift measures to secure health
preparedness and mitigate the economic impact of the pandemic, building on
the support by donors. The team recommends keeping the response package in
place until the recovery is firmly underway while reprioritizing and
reallocating the spending as needed, given the uncertainty about COVID-19
developments in the global economy.
“Post-pandemic, a gradual fiscal consolidation is necessary to prepare the
possible expiration of the U.S. grants and reduce risks of a fiscal cliff.
Even if the COFA is renewed, some adjustment will likely still be needed to
maintain sound public finances and reduce the dependency on external
grants. An important element of sound public finances would be the
preservation of the value of the Compact Trust Fund adjusted for inflation.
The team recommends a combination of spending and revenue measures to
achieve the consolidation. It would be important for the government to
enact the tax reform bill that has already been prepared and to reform the
taxation of offshore shipping and corporate registries. The recent
preparation of the Fiscal Responsibility and Debt Management Act is
welcome, but timely enaction and effective implementation will be critical
for success.
“Staff welcome the authorities’ continued cautious approach towards the
digital currency Sovereign (SOV). The SOV would pose significant risks to
macroeconomic and financial stability and financial integrity. The RMI’s
legal, regulatory, and institutional framework is not yet ready to
accommodate the SOV issuance and manage associated risks. The team’s
assessment, therefore, remains that the potential cost of the SOV issuance
will likely outweigh the expected benefits.
“Another concern are financial integrity risks in the non-resident and
shipping (offshore) sectors. Progress has been made to strengthen the RMI’s
AML/CFT regime in line with recommendations made by the Asia Pacific Group
on Money Laundering but weaknesses in the legal framework and capacity
constraints among regulatory authorities might not allow for the AML/CFT
regime to effectively mitigate financial integrity risks. In particular,
timely access to accurate beneficial ownership information on entities
registered with the RMI is not ensured. Further, there is a lack of
meaningful oversight of the offshore sectors – including relating to the
Trust Company of Marshall Islands (TCMI), which has been delegated the task
of operating the non-resident and shipping registries – and insufficient
AML/CFT regulation of offshore activities. The foregoing may contribute to
pressures on correspondent banking relationships (CBRs). Staff recommend
that the Government of Marshall Islands strengthen the AML/CFT
legal/regulatory framework and the capacity of its agencies to ensure
proper AML/CFT regulation of offshore sectors, oversight of delegated
public functions and effective mitigation of financial integrity risks.
“A green and sustainable recovery requires accelerating the preparation of
a national adaptation plan (NAP) to climate change. The team welcomes the
government’s commitment to finalize the NAP in 2021 and offers support on
PFM reforms to enhance RMI’s ability to access global climate funds.
“IMF Staff recommend stepping up implementation of SOE reforms. In the
medium to long term, the government should 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.
“Staff recognize the difficult, long-standing structural challenges around
economic diversification and growth for a small and remote economy like the
RMI. Improving the business environment could play an important role in
enabling the private sector to grow and become more dynamic. Land
registration reforms would be critical step for the promotion of business
investment in the RMI. Improving education and opportunities for training
and skills development and broaden social services could help in lowering
migration to the U.S. and enabling higher local growth.
“The IMF team is grateful to the government of the RMI as well as private
sector representatives for the constructive and candid discussions.”
