IMF Executive Board Concludes 2011 Article IV Consultation with the Republic of the Marshall Islands

Public Information Notice (PIN) No. 10/148
December 2, 2011

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with the Republic of the Marshall Islands is also available.

On November 23, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of the Marshall Islands (RMI).1


The RMI’s economy is highly dependent on external aid, and the private sector growth is sluggish. A renewed Compact of Free Association agreement (“Compact”) with the United States provides a stream of stable, but declining grants aimed primarily at education, health, and infrastructure sectors. 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.

Following a severe recession in FY2008-09, the economy grew by 5.2 percent in FY2010, driven by an expansion of fishery output and exports, and moderating fuel prices. Inflation increased following the significant rise in commodity prices in early 2011, but is projected to moderate gradually.

The overall fiscal balance improved in FY2010 along with the economic recovery, but mostly as a result of unspent earmarked appropriations. Only a modest surplus of $0.4 million was recorded in the general fund for discretionary uses in FY2010. The overall surplus in FY2011 is estimated to be modest; with a 5.5 percent across-the-board cut of current expenditures and additional revenues from fishing fees partly offset by temporary tax exemptions on food and other basis consumables and increased subsidies to state-owned enterprises (SOEs) to cover operating losses. Despite a potential upside of higher fisheries revenue, the fiscal outlook will continue to be hindered by weak financial positions in the SOEs and limited budget planning. Over the medium term, fiscal balance is expected to be modest at about 1 percent of GDP.

The deterioration in the current account is expected to continue until FY2013 due to temporary factors. The widening of the deficit since FY2009 reflects increased imports under the Kwajalein land use agreements, new investments in the fisheries sector and the airport extension project, which have been financed mainly through foreign direct investment and capital grants. Once these temporary factors expire, the current account deficit beyond FY2013 is expected to decline to around 5 percent of GDP. Though external debt is relatively high at about $117 million as of end-FY2011, it is mainly on concessional terms and is expected to decline.

The recovery is likely to continue in the near term, but growth over the medium term is expected to stay low at around 1½ percent with the growth in fisheries sector partly offset by the decline in Compact grants. The economy could face stiff headwinds if the global slowdown proves severe and prolonged. Long-term risks include continued outward migration and shore erosion on local atolls from climate change.

The global financial crisis has made it more difficult to achieve long-term budgetary self-reliance and sustained growth. Under current policies, the buildup in government assets in the Compact Trust Fund is projected to fall short of replacing Compact grants expiring in FY2023. Closing the revenue gap would require a substantial fiscal adjustment over the medium term.

Executive Board Assessment

Executive Directors welcomed the economic recovery and the positive near-term outlook. However, they noted that the medium-term prospects remain weak and, like other island economies with limited natural resources and remote location, the Marshall Islands is highly vulnerable to external shocks. The key challenges are to strengthen medium- and long-term growth prospects, and to secure a sustainable fiscal position without compromising priority social and infrastructure spending as Compact grants are phased out.

Directors agreed that fiscal sustainability calls for sustained efforts to achieve higher budgetary savings and a faster build-up of assets in the Compact Trust Fund over the medium term. To this end, they urged swift implementation of fiscal and structural reforms to boost fiscal revenue and contain public spending. Key measures will include the implementation of tax reform, the containment of the public sector payroll, a reduction of subsidies to state-owned enterprises and allowances to public officials, and improvements in public financial management. Putting the social security system on a sounder financial footing will also be important.

Directors considered that the planned reforms of state-owned enterprises are essential to both fiscal adjustment and the development of the private sector. They encouraged the authorities to complement these reforms with further steps to improve the business environment, including a streamlined land registration process.

Directors took note that the banking sector is liquid, well-capitalized, and profitable. Nevertheless, they considered the high level of household indebtedness a financial risk that could be exacerbated by the development bank’s shift toward short-term consumer lending. In this context, Directors supported steps to broaden regulatory oversight, including as regards the regime against money laundering and terrorism financing, and to facilitate credit to businesses.

Marshall Islands: Selected Economic Indicators FY2004–09 1/

Nominal GDP for FY2010 (in millions of U.S. dollar): 162.94

Population (2010): 52,371

GDP per capita for FY2010 (in U.S. dollar): 3,111.16

Quota: SDR 3.5 million

          Est. Proj.
  2007 2008 2009 2010 2011 2012

Real sector


Real GDP (percent change)

3.0 -1.9 -1.3 5.2 5.0 5.4

Consumer prices (percent change)

2.6 14.7 0.5 1.6 9.5 -0.5

Central government finances (in percent of GDP 2/


Revenue and grants

72.3 70.2 69.2 67.0 63.6 62.9

Total domestic revenue

25.8 25.6 25.0 24.7 24.1 22.9


46.5 44.5 44.3 42.3 39.5 40.0


72.0 66.4 67.8 62.4 62.1 61.9


54.9 54.3 56.7 51.7 51.6 49.0


17.2 12.1 11.2 10.7 10.5 12.9

Overall balance

0.2 3.7 1.4 4.6 1.4 1.0

Memorandum item: including the new AsDB loans to MEC 3/


Financing: gross borrowing (in USD million)

0.1 0.0 0.0 0.0 9.5 0.0

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

85.7 75.7 90.9 112.8 142.8 165.2

Commercial banks (in millions of US$)


Foreign assets

60.7 57.1 63.6 71.8 74.1

Private sector claims

49.9 58.2 62.0 63.3 61.9

Total deposits

85.5 89.0 93.3 102.1 102.6

One-year time deposit rate (in percent)

4.1 3.6 6.0 3.5 3.5

Average consumer loan rate (in percent)

18.5 18.5 13.9 14.0 14.2

Balance of payments (in millions of US$)


Trade balance

-69.6 -69.8 -73.3 -93.3 -73.7 -101.8

Net services

-39.0 -39.5 -54.0 -42.8 -45.6 -48.1

Net income

43.1 43.2 40.8 34.5 41.7 30.2

Unrequited transfers (private and official)

62.0 62.2 60.2 60.9 55.8 63.7

Current account including official current transfers 4/

-3.5 -3.9 -26.4 -40.7 -21.8 -55.9

(In percent of GDP)

-2.4 -2.6 -17.4 -25.0 -12.6 -30.3

Current account excluding budget grants 4/

-57.3 -61.2 -80.8 -96.9 -77.0 -119.0

(In percent of GDP)

-38.3 -40.1 -53.3 -59.4 -44.3 -64.6

External debt (in millions of US$; end of period) 5/

99.1 94.6 106.8 113.4 117.0 110.5

(In percent of GDP)

66.2 62.0 70.4 69.6 67.4 60.0

External debt service (in millions of US$)

16.8 7.5 7.8 9.7 9.7 10.1

(In percent of exports of goods and services)

59.4 24.7 24.8 22.2 18.4 17.1

Exchange rate


Real Effective Exchange Rate (2000 =100)

96.5 102.7 104.5 101.8 101.2

Memorandum Item:


Nominal GDP (in millions of US$)

149.7 152.6 151.6 162.9 173.7 184.3

Sources: RMI authorities and IMF staff estimates.

1/ Fiscal year ending September 30 unless otherwise stated.

2/ The central government finance numbers do not include the first tranche disbursement of $9.5 million in early FY2011 and

a projected second tranche disbursement of the new AsDB loan to t he Marshalls Energy Company.

3/ The payments by the government to MEC will be recorded as subsidy to public enterprises of $8.5 million and increase of gross

borrowing of $9.5 million in FY2011. The second tranche of $5 million is expected to be in FY2013.

4/ Official transfers include current transfers, but exclude capital transfers and Trust Fund contributions.

5/ 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:


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100