July 9, 2023
PRESS OFFICER: Pemba Sherpa
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Washington, DC: The Republic of the Marshall Islands (RMI) is recovering after COVID-induced lockdowns in FY2020-21 [1]and a contraction in the fisheries sector in FY2022.Real gross domestic product (GDP) declined by 4.5 percent in FY2022, reflecting the sale of a fishing vessel by a domestic operator, which significantly reduced fishery production. Excluding the sector, real GDP expanded by 4.2 percent, signaling a recovery in domestic demand was underway, though its strength was diminished by the temporary re-imposition of lockdowns in August 2022 as well as supply chain disruptions. Inflation picked up in 2H 2022 due to higher food and fuel prices and supply chain issues, reaching 6 percent by September 2022. As a result of these developments, and a decline in COVID-related grants, the current account surplus narrowed from 22.6 percent of GDP in FY2021 to 8.2 percent in FY2022.
Growth is expected to turn positive in FY2023, with real GDP projected to increase by 3 percent. The fisheries sector continues to be impacted by the westward migration of tuna but there are tentative signs that transshipment activity is picking up: the number of vessels in Majuro port increased significantly in May 2023, almost equaling arrivals recorded between January and April. The non-fisheries sector benefited from the revival of donor-financed construction activities and investment associated with preparations for the Micronesian Games in 2024. Inflation is expected to moderate to 3 percent in FY2023 as declining global commodity prices, particularly for fuel, are expected to alleviate price pressures. However, the continuing underperformance of fisheries exports and higher import volumes are expected to offset lower import prices, causing the current account surplus to decline further to 5.1 percent of GDP.
The outlook is subject to heightened uncertainty, and risks are mostly on the downside. On the domestic front, the volatility in fishing revenues and copra output could impact economic growth and the current account. Copra production could be impacted by the onset of El Niño weather phenomenon, which is associated with lower rainfalls, particularly in the northern islands. The launch or revival of FinTech initiatives could have adverse implications for the RMI’s access to the global financial system and payments networks. On the external front, the RMI is exposed to global commodity price volatility: a sharp increase in fuel and food prices can have an immediate and significant impact on domestic inflation. A deeper-than-expected slowdown in major trading partners could adversely impact exports and the inflow of workers’ remittances while the suspension of air cargo services due to the grounding of Asia Pacific Airlines in early 2023 demonstrated the RMI’s ongoing vulnerability to sudden supply chain disruptions.
Fiscal performance in FY2023 is expected to be in line with the budget. With the economic rebound, tax collection should recover while fishing licenses and transshipment revenues are projected to improve from a low base. Despite pressures on spending owing to still-high fuel prices and subsidies to support state-owned enterprises (SOEs), overall expenditure is expected to keep pace with revenues to ensure the budget stays broadly within the balanced budget rule under the Fiscal Responsibility and Debt Management Act.
A new Compact of Free Association agreement would significantly strengthen the fiscal and external positions, but large investment needs call for an early start on fiscal reforms. Reports suggest that the RMI could benefit from a significant increase in financial support under a new Compact agreement with the United States over 20 years starting in FY2024. Nevertheless, even if a new agreement is reached, there are large financing needs, particularly to support necessary investment in infrastructure and climate adaptation, as well as to improve the provision of education and healthcare. Further, the likelihood of more frequent and severe weather events such as storms and droughts in the future call for the accumulation of fiscal buffers to support disaster management, and relief and recovery efforts.
To meet these challenges, there needs to be a reprioritization of expenditure away from recurrent spending to capital investments while increasing revenues. The subsidies provided to SOEs, some of which are intended to be channeled to households, should be gradually reduced and replaced by targeted assistance to the most vulnerable. There also needs to be strict control on other elements of current spending, particularly on administration costs. Expenditure management is expected to benefit from the modernization of the government’s financial management and information system (FMIS), which would also allow for better transparency and enable timely audits of government bodies. On the revenue side, there is an urgent need to diversify and strengthen revenue collection. The ongoing work to modernize the Customs revenue management system is welcome and has the potential to improve revenue collection and provide important and timely data on imports. Revenue administration reforms such as strengthening filling and payment activities, improving arrears collections, and improving internal processes to better identify and manage risks should make the system more efficient and improve the investment climate. We welcome the ongoing public financial management reform program, which is the overarching umbrella under which the authorities aim to make progress on many of the areas highlighted above. On tax policy, there are a number of pending reforms including setting up a revenue authority, and implementing taxes on net profits, excises and consumption that are awaiting adoption that could improve revenue performance over the medium term.
If a new Compact agreement cannot be reached, undertaking structural fiscal reforms becomes even more urgent. In the near term, the fiscal pressures from a delay in finalizing a new agreement can be managed through drawings on the Compact Trust Fund (CTF). However, this is not sustainable over the longer term given the limited resources in the CTF: under a scenario with largely static revenue collection and significant but incomplete expenditure adjustment, the fiscal balance will slip into a persistent and widening deficit, resulting in an increase in borrowing. Under this scenario, the Debt Sustainability Analysis shows that RMI will remain at high risk of debt distress—highlighting the need to contain debt, including through a more ambitious fiscal consolidation supported by structural reforms.
Several FinTech initiatives pose risks to financial integrity of the RMI. The global understanding of, and capacity to, adequately monitor and regulate new activities such as stablecoins and new entities such as Decentralized Autonomous Organizations (DAOs) are still evolving, even in high-capacity jurisdictions. Hence, the enactment of the DAO Act and the move to start registration of DAOs, and the potential launch of a stablecoin in the RMI are especially concerning given the capacity constraints and questions regarding the understanding of the authorities to adequately regulate and supervise these initiatives. As such, it is advisable to adopt a cautious approach toward these and other FinTech initiatives. Work to identify and implement adequate safeguards for DAOs is welcome. However, these measures are likely to take time to formulate, particularly as there is not yet a consensus on best practice globally to draw from. In the interim, the authorities should consider imposing a moratorium on the registration of DAOs until the monitoring framework can be set up. While the caution in proceeding with past FinTech initiatives is welcome and has helped contain risks to the RMI’s financial integrity, the authorities are encouraged to further limit these risks by expeditiously enacting the SOV Repeal Bill and withdrawing the Digital Economic Zone for Rongelap Atoll (DEZRA) Bill.
A Monetary Authority (MA), designed with the specific needs and characteristics of the RMI in mind, can strengthen financial development and inclusion and safeguard financial stability. In the RMI context, a MA could usefully focus on strengthening oversight of the financial system, develop a domestic interbank payments and clearance system and work to improve financial inclusion. Further, a MA could act as the government’s financial agent to ensure the government is able to meet its obligations and efficiently use its resources, and hold and manage international reserves, thereby improving access external liquidity to enable international transactions to proceed smoothly. That said, even a narrowly focused MA will be challenging to set up given the capacity constraints, which underscores the need to make its policy priorities clear at the outset to reduce operational risks.
The RMI risks losing its remaining US dollar correspondent banking relationship unless risks to financial integrity framework can be effectively mitigated. Efforts should notably include strengthening the AML/CFT regime in line with recommendations issued by the Asia Pacific Group on Money Laundering upon completion of its evaluation of RMI’s AML/CFT framework and its effectiveness. In addition to caution around FinTech initiatives, the authorities should ensure that risks around the offshore services sector are adequately mitigated. Instituting a strong AML/CFT framework and ensuring its effective implementation should be complemented with efforts to strengthen the financial regulatory and supervisory regime for banks and other onshore financial institutions. These would increase the confidence of foreign financial institutions to build and maintain financial ties with the RMI.
Addressing climate-related challenges would address risks and open new opportunities for more sustainable and inclusive growth. RMI is highly vulnerable to the impacts of climate change, such as rising sea levels, ocean inundation and more frequent extreme weather events like droughts and storms. The authorities’ climate adaptation priorities, as set out in the 10-year National Strategic Plan, to improve the resilience of infrastructure, address vulnerability of built environments, and safeguard water and food supplies, are appropriate. The preparation of the National Adaptation Plan (NAP), which had been delayed due to the pandemic, should be completed in 2023 as planned. A well-articulated NAP would be important to prepare for these impacts and transition to climate resilience, identify critical climate investments and attract the needed external financing. Given the significant effort needed to prepare climate investment proposals for donors’ consideration, the authorities should aim to build a pipeline of climate projects that can be taken to donors as a package and sequentially implemented as financing is secured. Consideration should be given to setting up a dedicated climate finance unit in the government to manage the pipeline from project identification, financing through to implementation. A dedicated unit overseeing a multiyear investment program would also help the authorities recruit, train and retain the skilled staff needed to oversee project identification and implementation. Investing in renewable energy can helpfully lower fuel imports and operating costs. The deployment of smaller scale renewable energy infrastructure such as rooftop solar, together with distributed grids and storage, can also support the electrification of sparsely populated atolls, thereby spreading the fruits of economic development more widely.
Disaster preparedness remains a critical area for further work. The National Disaster Management Office has an appropriately wide-ranging mandate to provide early warnings about impending disasters, coordinate disaster response when they occur and support awareness and preparedness in quieter times. We welcome the ongoing efforts to integrate the various pieces of the legislative framework in disaster management and recovery, including the Disaster Assistance Act and the Contingency Fund Act, with a view to streamline the disaster management framework and make it more effective.
Land availability remains the most important impediment to investment and economic development. The complexity of RMI’s traditional land ownership system, which has deep cultural roots and has been codified into legislation, has made it difficult to acquire and develop land, which in turn makes it difficult for both the government and the private sector to invest. Moreover, rising sea levels, coastal erosion and inward migration has led to urban sprawl and the inefficient use of the land. As a first step, it would be useful to clarify how to designate public land in the RMI, particularly reclaimed land. Efforts to diversify the economic base, either by investing in higher value-added activities in fisheries and copra, or in exploring new industries and markets such as tourism, could boost growth and living standards. These will require access to land but also the availability of critical infrastructure including power, water, and modern telecommunications services. The National Investment Policy Statement helpfully identifies both the priority areas to promote public investment and impediments that need to be addressed. We encourage the authorities to strengthen the investment climate and to support private sector development.
The mission would like to thank the authorities and counterparts in public enterprises, the private sector and development partners for frank and engaging discussions.
[1] Fiscal year refers to the year ending September.
|
Table. Republic of the Marshall Islands—Selected Economic and Financial Indicators, FY2019—FY20281 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
