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Republic of the Marshall Islands: Selected Issues and Statistical Appendix

Author(s):
International Monetary Fund
Published Date:
June 2008
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II. Strengthening the Tax Regime in the Marshall Islands1

1. The Republic of the Marshall Islands (RMI) needs to tackle fiscal consolidation given the steady decline in Compact grants and increasing external debt service payments. Compact grants will decline by $0.5 million per year (expiring in 2023) and debt services on external debts will increase steadily, peaking in 2019. RMI’s heavy reliance on the public sector makes cutting expenditure difficult, leaving the improvement of revenue collections a critical step toward the required fiscal consolidation. A comprehensive tax reform is vital to raise additional revenue, which will help achieve the necessary fiscal adjustment.

2. The authorities have recently shown renewed interest in tax reform. Prior to this impetus, tax reform lingered despite a detailed action plan developed by the Pacific Financial Technical Assistance Center (PFTAC). Lately the authorities have strengthened the tax audit unit and are aggressively pursuing non-compliant entities. In addition, the authorities are working together with key stakeholders in the process. Nevertheless, the tax reform is in the initial stage that requires ongoing efforts to obtain its intended results.

3. This chapter reviews the current tax regime, and outlines steps toward a comprehensive tax reform. Section A describes RMI’s current tax structure, and compares it to other Pacific island countries (PICs). Section B examines some weaknesses in the current tax regime, section C highlights actions that the government has recently undertaken. Section D proposes changes to address the shortcomings in tax regime. It argues that comprehensive tax reform should address the weaknesses in both tax administration and tax policy. Section E concludes that RMI should implement tax reform as soon as possible, focusing initially on tax administration matters.

A. Tax Revenue in RMI

4. RMI’s revenue composition is similar to other PICs that receive large external grants. In most PICs domestic revenues usually come mainly from import duties and sales taxes, while corporate taxes contribute a much smaller share of tax revenue. RMI receives external grants amounting to 40 percent of GDP, the second highest among the PICs (after Kiribati).

Fiscal Position In PICs

(Average 2002-07; in percent of GDP)

Source: Fund staff estmates

5. The tax revenue in RMI comes from three major sources (Box II.1).2 The largest tax component is from wages and salaries, which is over $11 million and contributes about 40 percent of tax revenue. The second largest component is import duties at about $8 million, contributing about one-third of total tax revenue. Gross revenue tax (GRT), at $5 million in FY2007, accounts for about 17 percent of total tax revenue. Domestic revenue in RMI has been stable at an average of 17 percent of GDP since FY2000, but has increased in nominal terms to $27 million in FY 2007.

Fiscal Position in RMI

(In percent of GDP)

Source: RMI government.

Sources of Domestic Tax Revenue

(In millions of U.S. dollars)

Source: RMI government.

B. Weaknesses in the Current Tax Regime

6. The tax policy on the three main taxes contains weaknesses, which hamper revenue collections. These include:

  • Tax on wages and salaries. The tax on wages and salaries raises the concerns of equity and efficiency. Deductibles on income tax are applicable to the low-income class and is eliminated once income exceeds a certain threshold (at $5,260 per year), leading to a sharp increase in the marginal tax rate on additional wages and salaries.
  • Import duties. Tax rates on imported goods are not uniform, and sometimes levied on a per-unit instead of a value basis. As a result, similar type of imported goods may carry different duties without an objective customs valuation.
  • Gross revenue tax (GRT). GRT is levied on a revenue basis, instead of a net profit basis that is widely used in other countries. Although the current GRT schedule is uniform across businesses, the effective tax rates on net profit vary significantly depending on their operating scales. It does not take into account the production and operation costs in the businesses, and tends to favor those that operate at a low turnover, but high profit margin. The GRT also discourages the replacement or reinvestment in capital equipment and human capital for the long-term benefits.

Box II.1.Marshall Islands: Tax Regime

The three main sources of tax revenue are wages and salaries tax, import duties, and GRT. Together they account for more than 90 percent of annual tax revenue. Other types of taxes include property tax, hotel and resort tax, and non-resident gross income tax. Some local governments also impose a general sales tax in addition to the taxes of the national government. The tax rates on different categories are listed below.1

Tax categoryTax rate2
Wages and salaries tax8 percent upon first $10,400 and 12 percent for any amount over. Full exemptions given for income not exceeding $5,200.
Gross revenue tax (GRT)$80 tax on amount not exceeding $10,000 per year; and 3 percent on gross revenue exceeding that.
Import duties8 percent on most imported goods, with a lower rate of 5 percent on foodstuff. A selected number of goods (cars, tobacco products, and alcoholic and carbonated beverages etc) are subject to an excise tax levied at ad-valorem or specific rates that range from 2 percent to 150 percent.
Fuel taxTax on gasoline is at 25 cents per gallon; diesel at 8 cents per gallon.
Immovable property tax3 percent on gross income or rent from property leased.
Hotel and resort tax8 percent on daily room rate on hotel and resort facilities.
Non-resident gross income tax10 percent on the gross income earned by non-resident.
Local government sales taxGeneral sales tax on goods at 4 percent in Majuro local government; sales tax of 10 percent at the wholesale level in Kwajalein Atoll local government.3
1 Ministry of Finance (2008) and Andic (2005).2 On a per annum basis.3 Both local governments also impose a tax on gasoline, alcoholic beverages, and hotel rooms that vary with the sales tax listed above.

7. There are further weaknesses in the tax regime, which include:

  • Cascading tax effect. The tax rates are cascading towards the final consumers, as the duties on imported goods cannot be deducted from the GRT or the sales tax imposed by the local governments. A large portion of tax burden is likely to transfer to the final consumers under the small market structure in RMI.
  • Membership in regional trade arrangements.3 RMI’s commitment to regional trade arrangements poses an additional challenge by introducing more complex tariff structures as different rates could apply to the same goods depending on the origin of the goods (within or outside the region). When all agreements come into effect, the associated customs revenue could eventually decline.4

8. The present tax administration also has limited enforcement capacity. This leads to a low compliance across all type of taxes, hampering the authorities’ ability to generate sufficient revenue at the present tax rates. Some weaknesses in tax administration are as follows:

  • Low tax compliance. The non-compliance rate is estimated to be 25–50 percent. Based on this rate, it is calculated that improving compliance could generate about $7-8 million in additional tax revenue (Box II.2).
  • Weak administration in customs. There is no objective valuation of imports and the procedure in levying duties is inefficient. Mis-reporting and undervaluation tend to be common (McNeill (2007) and PITAA (2006)).
  • Lack of coordination between revenue collection agencies. RMI currently has three revenue collection agencies: national government, local governments, and social security administration. They run parallel collection and auditing units with duplicating efforts. Reported inconsistencies are not uncommon across agencies.
  • Arrears from the local governments. Some local governments have built up tax arrears to the national government.

Box II.2.Marshall Islands: Estimates of Tax Revenue Loss from Non-Compliance

Non-compliance is estimated to be about 25–50 percent, and remains one of the key issues in RMI’s tax reform.1 Previous studies suggest that the informal sector (mostly consisting of low-income individuals and mom-and-pop businesses) is more likely not to comply.2 The example below illustrates the additional tax revenue that could have been collected under different scenarios. Several assumptions for the calculations are taken:

  • Calculations are shown for non-compliance rates at 25, 35 and 50 percent respectively. The range of 25–50 percent is estimated by PFTAC experts.
  • The taxable income of the non-compliers as compared to tax compliers is assumed to be 30–70 percent smaller. This assumption takes into consideration that the operating scale or personal income for non-compliers is generally smaller than those that file tax.
  • The issue of under-reporting for the compliers is abstracted in the calculations.

Given data limitations, a benchmark estimate was calculated to quantify the problem of non-compliance. The figure below shows the additional tax revenue that could have been collected under full compliance based on the estimated tax revenue in 2007. The range varies significantly given the non-compliance rate and the difference in taxable income between compliers and non-compliers. However, a reasonable estimate would be about $7 to 8 million per year, assuming a 35 percent non-compliance rate, with the non-compliers’ income 30–40 percent smaller than that of compliers. The results suggest that the tax revenue loss arising from compliance is large, and measures to enhance compliance are critical in the tax reform.

Tax Revenue Arising From Non-compliance

(In millions of U.S. dollars)

Source: Fund Staff estimates

1 Estimates are from PFTAC and are consistent with Ministry of Finance (MoF) estimates. The non-compliance rates are similar across different type of taxes. Other issues related to under-reporting, and tax accruals and arrears further complicate the progress in the tax reform.2Robles (2007) suggested the informal sector is about 30–40 percent smaller than the formal sector.

C. Reform Efforts

9. Tax reform efforts lingered for many years. In 2003, PFTAC designed a modernization strategy and action plan for customs, including improvements to the Customs Act, automation, and compliance units. The FY2006 Budget Statement also outlined many changes to tax regime, including unifying import duties and changing the income tax structure. There was, however, limited follow-up action on these initiatives.

10. Since the publication of the FY2006 Budget Statement, tax reform action has taken the form of:

  • Changes in tax policy. Fuel tax on gasoline and diesel was adjusted to 25 cents and 8 cents per gallon respectively.
  • Improvements in tax administration. A number of measures to strengthen the tax collection were initiated and a dialogue with key stakeholders has been established (Ministry of Finance (2006 and 2007)).

11. Recently, however, the authorities have shown renewed interest in tax regime reforms. They have sought guidance from PFTAC on the tax policy front, and have taken several steps on the tax administration front. In particular, the authorities have enhanced coordination among the revenue collection agencies in tax filing matters. They also attempted to strengthen the tax audit unit, and pursued more aggressively the non-compliant businesses.5 They have begun the issuing of public notices in attempt to strengthen tax enforcement, and plan to conduct an island-wide survey in increasing the public awareness of the tax reform.6 Nevertheless, the tax reform is in the beginning stage that requires on going efforts to achieve its intended results.

D. The Way Forward

12. A comprehensive tax reform should address the weaknesses in both tax policy and tax administration. At least initially, the authorities should consider implementing many of the proposed changes spelled out in the 2006 Budget Speech. Further measures that are consistent with those outlined by PFTAC should be adopted, as they are necessary to achieve fiscal consolidation.7

13. In designing and introducing the new tax regime, the authorities should adhere to several key principles. These principles are generally applicable regardless of specific tax policy or administration structure.

  • Simplicity and Fairness. The new tax regime should contain simple features that provide a level playing field among individuals and businesses. Tax exemptions or non-compliance should be kept to a minimum.
  • Low compliance cost. The tax reform should attempt to reduce the compliance cost for individuals and business. The cost of complying with the new tax rules need to be low enough to avoid non-filings from the taxpayers.
  • Broad tax base. Given the non-compliance issue, the current tax regime has a concentrated tax base with relatively high tax rates to generate sufficient tax revenue. The tax reform may broaden the tax base with improved compliance rate.
  • Minimal distortions. The new tax regime should only contain minimal distortions on trade and investment opportunities.

14. The authorities should revise the tax policy in accordance to the key design principles:

  • Gross revenue tax. The authorities should adopt a corporate tax on the basis of net profit, as the existing GRT tends to violate the above principles of fairness and minimal distortions. The corporate net profit tax would take into account the production cost and other relevant expenses.
  • Import duties. A uniform structure based on the value would be preferable once the customs develop an objective valuation procedure and method.
  • Tax on wages and salaries. Deductibles on personal income should be applicable to every employee to achieve fairness and avoid a sharp rise in marginal tax rate.

15. The authorities should take additional steps in enhancing tax administration, including:

  • Improving tax compliance from individuals and businesses. Given a low tax compliance rate, the authorities should further strengthen the audit units and increase the penalty for repeated non-compliant cases.8 Aligning foreign business to RMI’s tax laws would be important to avoid unfair treatments among domestic and foreign businesses. The customs collection of import duties should be improved by shortening the clearance procedures, using a consistent valuation method, and introducing reliable technology. The authorities may learn from the successful experience of the Social Security Administration in addressing non-compliance issues.
  • Harmonizing tax collection of national and local governments. It is necessary to eliminate the dual and duplicate efforts running parallel across various revenue collection agencies. Harmonization in tax collection also improves the credibility to address the non-compliance. Information sharing and coordination beyond the measures undertaken would be necessary.

16. In the long run, a consumption-based tax regime could benefit the economy and might secure revenue sources, but there are downside risks. Several PICs have introduced the value-added tax (VAT) regime as part of a comprehensive tax reform.9 The efficiency of the VAT is generally high across the PICs (Grandcolas (2004, 2005)). However, there would be downside risks if the tax reform was not accompanied with a strong political commitment, a simple regime with minimum exemptions, and a detailed preparation on the implementation plan.

E. Conclusions

17. RMI should implement tax reforms as soon as possible to help it face the challenges ahead. In light of declining external grants and current weaknesses in the tax regime, the authorities need to continue their determined efforts in tax reform. Tax reform is a crucial element in the required fiscal consolidation to achieve budgetary self-sufficiency. It is important that the new tax regime is designed to be simple and fair, easy to implement, with relatively low compliance costs, and with minimal distortions on investments.

18. Several issues should be noted in designing and introducing a new regime. The authorities need to address the high non-compliance and harmonize tax collection across government agencies. They have taken initial measures to involve the key stakeholders during the process of the tax reform. It is important to extend their determined efforts on the remaining weaknesses of the current tax regime. Effective tax policy, coupled with strong enforcement, would improve the revenue collections towards the required fiscal consolidation.

References

    AndicFuat2005“Tax Policy and Administration in the Republic of the Marshall Islands”Asian Development Bank.

    GrandcolasChristopher2004“VAT in the Pacific Islands”Asia-Pacific Tax BulletinJanuary/February2004.

    GrandcolasChristopher2005“The Occasional Failure in VAT Implementation: Lessons for the Pacific”Asia-Pacific Tax BulletinJanuary/February2005.

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    • Export Citation

    International Monetary Fund2007“Selected Issues – Strengthening Kiribati’s Tax System” IMF 2007 Article IV Consultation with Kiribati.

    • Search Google Scholar
    • Export Citation

    McNeillCarlson2007“Communique—Roundtable meeting on Tax Reform”Pacific Financial Technical Assistance CenterDecember2007.

    Ministry of Finance2006“Republic of the Marshall Islands FY 2006 Budget Statement,”Ministry of Finance Republic of the Marshall Islands.

    • Search Google Scholar
    • Export Citation

    Ministry of Finance2007“Republic of the Marshall Islands FY 2007 Budget Statement,”Ministry of Finance Republic of the Marshall Islands.

    • Search Google Scholar
    • Export Citation

    Ministry of Finance2008“Revenue and Taxation Public Notice 2008-1,”Ministry of Finance Republic of the Marshall IslandsJanuary2008.

    • Search Google Scholar
    • Export Citation

    PITTA2006“Third Annual Conference—Communique and Presentations”Pacific Islands Tax Administrators Association.

    RoblesL.M.2007“Aggregate Effects of Imperfect Tax Enforcement,”Mimeo The International Food Policy Research Institute.

Table 1.Marshall Islands: Gross Domestic Product, FY2003–071/
FY2003FY2004FY2005FY2006FY2007

Est.
(In thousands of U.S. dollars)
Private Enterprise36,71140,71741,68644,58847,217
Compensation of employees18,64018,53417,83419,41920,590
Operating surplus (gross)15,04917,49916,81819,64920,949
Offshore fishing surplus3,0224,6837,0345,5205,678
Public Enterprise11,77310,2528,9808,64010,021
Compensation of employees9,1809,1849,2369,2439,755
Operating surplus (gross)5,7833,5572,0031,9652,834
Less Subsidies-3,190-2,488-2,259-2,568-2,568
Finance (Banks)6,2546,6097,3668,3228,823
Compensation of employees2,2852,5182,9433,2523,448
Operating surplus (gross)3,9694,0924,4245,0705,375
Government (compensation of employees)44,30947,94551,75154,77753,420
RMI Government26,84230,38533,39637,10934,992
Government Agencies9,5399,2069,2577,4737,856
Local Government7,9288,3559,09910,19510,572
NGOs (compensation of employees)2,0522,1172,1382,1822,208
Households16,35016,99817,72218,72719,482
Mixed Income2,8243,0413,1183,1813,298
Copra production1,0271,1861,1781,1151,147
Fishing581599627667695
Handicrafts9971,0291,0761,1461,193
Other220227237253263
Subsistence6,8027,0197,3447,8188,139
Home ownership6,7246,9397,2607,7298,046
Indirect taxes less Subsidies14,09314,16616,70917,19517,895
Import and fuel taxes7,0406,6818,8308,6018,455
Other Indirect taxes3,4074,0153,8824,7785,688
Indirect taxes (Local Government)3,6463,4703,9973,8163,751
Nominal GDP (Gross)124,159131,328138,336145,559149,659
(In percent of GDP)
Private Enterprise29.631.030.130.631.5
Public Enterprise9.57.86.55.96.7
Finance (Banks)5.05.05.35.75.9
Government (compensation of employees)35.736.537.437.635.7
NGOs (compensation of employees)1.71.61.51.51.5
Households13.212.912.812.913.0
Indirect taxes less Subsidies11.410.812.111.812.0
Source: Data provided by the RMI authorities.

The fiscal year ends on September 30.

Source: Data provided by the RMI authorities.

The fiscal year ends on September 30.

Table 2.Marshall Islands: Copra Production, Producer Prices, and Export Unit Values, 2003–07
20032004200520062007

Est.
Production (in short tons)4,2834,8684,9084,6466,053
Average producer prices (in U.S. dollars per short ton)240240240240299
Total income (in thousands of U.S. dollars)1,0271,1861,1781,1151,810
Export unit value (in U.S. dollars per short ton) 1/304201536452678
Sources: Data provided by the RMI authorities and Fund staff estimates.

Export unit values are estimated by dividing the value of exports of coconut oil and copra cake by total copra production.

Sources: Data provided by the RMI authorities and Fund staff estimates.

Export unit values are estimated by dividing the value of exports of coconut oil and copra cake by total copra production.

Table 3.Marshall Islands: Majuro Consumer Price Index, 2005–081/
GroupsAll

Groups
FoodAlcoholic

Beverages
Housing,

Utilities

and

Major

Appliances
ApparelTransport.Medical

Care
RecreationEducation

and

Comm.
Other

Goods

and

Services
Weights100.0035.911.6817.074.3313.732.232.326.5616.17
(2003Q1 = 100)
2005107.7106.6124.7109.3103.1114.5100.093.1113.0103.2
2006112.4109.6132.8124.1106.1126.8100.087.5115.997.2
2007115.8111.0135.0135.9104.3136.2100.085.1115.996.3
2005
March105.1105.3120.3104.8102.8107.1100.092.6111.1102.4
June106.7106.7123.5105.9102.4110.7100.095.2111.1104.2
September108.3107.3126.4107.1103.8118.4100.094.5113.8103.1
December110.8107.1128.6119.5103.5121.7100.090.3115.9103.3
2006
March111.3110.0131.7119.5104.0121.3100.091.3115.999.3
June111.6110.2133.4120.9110.0123.1100.090.0115.996.3
September113.0108.0135.6128.4106.1131.3100.083.7115.996.4
December113.7110.3130.6127.7104.3131.7100.084.9115.996.9
2007
March113.2110.6133.1127.9105.8126.3100.085.6115.996.9
June115.1112.0134.3129.9102.9138.5100.085.5115.996.8
September116.3108.8136.2142.3103.1138.6100.085.6115.994.7
December118.6112.5136.2143.5105.3141.5100.083.7115.996.7
2008
March121.9112.7137.0149.5113.1153.0100.083.7115.998.7
(Annual average change in percent)
20054.40.316.89.9-0.712.70.0-4.87.02.1
20064.32.86.513.62.910.80.0-6.12.6-5.8
20073.01.21.69.5-1.77.40.0-2.70.0-1.0
(Four-quarter percent change)
2005
March2.8-0.917.65.8-2.89.30.0-7.111.11.6
June4.10.020.76.5-1.311.60.0-5.711.13.8
September4.71.423.66.70.215.90.0-2.32.52.1
December6.20.86.920.81.013.90.0-4.24.31.1
2006
March5.94.59.514.01.213.30.0-1.34.3-3.1
June4.63.38.114.27.411.20.0-5.54.3-7.6
September4.30.67.319.92.210.80.0-11.41.8-6.4
December2.63.01.56.90.78.20.0-5.90.0-6.1
2007
March1.70.51.17.11.74.10.0-6.30.0-2.4
June3.21.70.77.4-6.512.50.0-5.00.00.5
September2.90.80.510.8-2.85.60.02.30.0-1.8
December4.31.94.412.31.07.40.0-1.40.0-0.3
2008
March7.71.92.916.86.921.10.0-2.10.01.8
Source: Data provided by the RMI authorities.

The CPI index developed in 1977 was revised. The revised CPI index, starting in 2003Q1, consists of prices of 61 goods and services collected in Majuro organized into nine groups. The CPI index is rebased to 2003Q1=100 from 1982=100.

Source: Data provided by the RMI authorities.

The CPI index developed in 1977 was revised. The revised CPI index, starting in 2003Q1, consists of prices of 61 goods and services collected in Majuro organized into nine groups. The CPI index is rebased to 2003Q1=100 from 1982=100.

Table 4.Marshall Islands: Employment by Sector, FY2003–071/
FY2003FY2004FY2005FY2006FY2007
Total9,94710,0719,5799,92010,129
Public sector employees4,1674,3174,4524,5394,638
Private sector employees5,7805,7545,1275,3815,491
Of which:
Fishing9031,003281345281
Manufacturing4841484860
Construction559499519677782
Wholesale and retail trade1,6351,7191,7651,7821,791
Average wages (in U.S. dollars)
Public Sector10,67611,47311,54311,63911,592
Private Sector6,6536,7777,6767,9757,812
Memorandum item: Estimated population2/50,96851,54152,11152,70953,338
Source: Marshall Islands Social Security Administration (MISSA).

Based on MISSA payroll data. Figures partially reflect improvements in data coverage.

Public sector employees include those employed in the public enterprise, RMI government, government agencies, and local governments.

Source: Marshall Islands Social Security Administration (MISSA).

Based on MISSA payroll data. Figures partially reflect improvements in data coverage.

Public sector employees include those employed in the public enterprise, RMI government, government agencies, and local governments.

Table 5.Marshall Islands: Balance of Payments, FY2003–081/
FY2007FY2008
FY2003FY2004FY2005FY2006Est.Proj.
Trade balance-60.1-52.9-56.2-56.1-58.2-60.1
Exports, f.o.b.14.518.624.021.622.124.3
Imports, f.o.b.-74.6-71.5-80.1-77.7-80.3-84.4
Net services-5.7-8.0-11.1-8.7-7.4-6.8
Receipts14.612.811.311.812.813.9
Payments-21.2-20.3-20.8-22.4-20.5-20.2
Net income37.829.932.332.935.036.8
Receipts43.636.439.041.443.745.1
Payments-5.8-6.4-6.7-8.5-8.7-8.3
Unrequited transfers14.322.727.029.726.027.0
Private-12.5-12.0-12.2-12.4-12.6-12.9
Official26.834.739.242.038.640.0
Compact grants2/23.828.434.438.033.635.3
Other3.06.34.84.05.04.6
Current account including current official transfers 3/-13.7-8.2-7.9-2.3-4.7-3.1
(In percent of GDP)-11.1-6.3-5.7-1.6-3.1-2.0
Current account excluding official transfers-40.5-43.0-47.1-44.3-43.3-43.1
(In percent of GDP)-32.6-32.7-34.1-30.4-28.9-27.2
Capital and financial account20.1-25.80.410.510.34.6
Official Capital Grants27.814.923.540.437.829.6
Capital transfers to central government27.87.910.929.726.317.4
Trust Fund contributions0.07.012.610.711.412.2
Direct investment, net1.74.16.56.212.25.5
Short-term liabilities, net 4/-10.9-13.6-12.1-19.9-13.0-13.4
Medium-term liabilities, net1.72.3-3.52.4-6.0-0.2
Inflows5.06.11.09.812.07.6
Outflows-3.2-3.8-4.5-7.4-18.0-7.8
Other net government flows 5/-0.3-33.5-14.0-18.6-20.7-16.8
Errors and omissions-6.434.17.6-8.2-5.6-1.5
Overall balance16.4-23.5-5.3-0.7-1.6-1.4
Gross official reserves 6/34.110.65.34.63.01.6
Of which: Usable government financial assets2.94.51.63.01.3-0.1
(In months of imports of goods and services)0.40.60.20.40.20.0
Sources: Data provided by the RMI authorities; and IMF staff estimates.

Fiscal year ending September 30.

Compact funding pertaining to the Kwajalein Atoll Trust Fund and Kwajalein resident and landowner compensation Trust Fund contributions by the U.S. and Taiwan Province of China, are regarded as capital transfers.

Official transfers include current transfers but excludes capital transfers and Trust Fund contributions.

Includes changes in social security fund investments, banking system assets held overseas, and government assets held in the capital and special fund accounts.

Changes in government assets, excluding the general fund.

Including MIITF which is deposited in domestic financial institutions.

Sources: Data provided by the RMI authorities; and IMF staff estimates.

Fiscal year ending September 30.

Compact funding pertaining to the Kwajalein Atoll Trust Fund and Kwajalein resident and landowner compensation Trust Fund contributions by the U.S. and Taiwan Province of China, are regarded as capital transfers.

Official transfers include current transfers but excludes capital transfers and Trust Fund contributions.

Includes changes in social security fund investments, banking system assets held overseas, and government assets held in the capital and special fund accounts.

Changes in government assets, excluding the general fund.

Including MIITF which is deposited in domestic financial institutions.

Table 6.Marshall Islands: Exports by Product Category, 2003–07(In thousands of U.S. dollars)
Product20032004200520062007
Copra cake230209107100113
Coconut oil, crude1,0707702,5262,0003,990
Frozen fish5,1978,3589,8709,035
Reexport of diesel fuel8,1089,74512,0568,347
Other exports600700800800
Total15,20519,78125,35920,283
Source: Data provided by the RMI authorities.
Source: Data provided by the RMI authorities.
Table 7.Marshall Islands: External Debt and Debt-Service Obligations, FY2003–081/(In millions of U.S. dollars)
FY2003FY2004FY2005FY2006FY2007

Est.
FY08

Proj.
Total debt outstanding90.094.792.199.398.794.6
(in percent of GDP)72.572.166.668.265.959.7
Debt service3.94.26.24.75.05.9
(in months of exports of goods and services)1.91.82.92.11.71.9
Amortization3.23.84.56.916.27.8
Interest Payment2.12.32.53.33.63.3
Of Which:
Medium-term bond issues
Disbursements0.00.00.00.00.00.0
Outstanding principal0.00.00.00.00.00.0
Amortization0.00.00.00.00.00.0
Interest0.00.00.00.00.00.0
Asian Development Bank
Disbursements5.02.01.00.10.00.0
Outstanding principal56.060.962.663.262.561.8
Amortization0.61.21.41.61.62.2
Interest0.50.90.90.80.80.8
Other central government2/
Disbursements0.00.00.00.00.00.0
Outstanding principal1.91.91.71.51.31.1
Amortization0.00.00.20.20.20.2
Interest0.00.00.00.00.00.0
National Telecommunications Authority
Disbursements0.00.00.00.00.00.0
Outstanding principal17.617.016.315.714.914.1
Amortization1.51.51.41.51.51.5
Interest0.90.80.80.80.70.7
Marshalls Energy Company, Inc.
Disbursements0.00.00.011.412.00.0
Outstanding principal10.710.29.820.832.320.0
Amortization1.11.11.13.814.33.5
Interest0.70.60.61.72.01.6
Sources: Data provided by the RMI authorities; and Fund staff estimates.

Fiscal year ending September 30.

Includes financial assistance from the Federal Emergency Management Agency, the National Marine Fisheries Service, and Taiwan Province of China.

Sources: Data provided by the RMI authorities; and Fund staff estimates.

Fiscal year ending September 30.

Includes financial assistance from the Federal Emergency Management Agency, the National Marine Fisheries Service, and Taiwan Province of China.

Table 8.Marshall Islands: Central Government Finances, FY2003–08 1/
FY 2003FY 2004FY 2005FY 2006FY 2007

Est.
FY 2008

Proj.
(In millions of U.S. dollars)
Total revenue and grants83.376.198.3108.1103.096.0
Total domestic revenue28.733.435.536.439.136.9
Taxes23.122.524.325.127.126.4
Income12.010.610.911.111.211.5
Gross revenue3.44.03.94.85.24.7
Imports6.66.27.87.88.58.5
Other1.01.71.71.42.21.7
Nontax5.611.011.211.212.010.5
Fishing rights1.70.91.41.51.41.5
Social contributions0.06.36.26.46.75.8
Fees and charges0.81.41.41.32.12.0
Investment income0.20.10.10.10.20.1
Other2.82.12.21.81.71.2
Grants54.642.662.871.763.959.1
Of which: current grants26.834.751.955.337.641.8
Compact 2/32.720.527.635.540.942.3
Other21.922.135.236.223.016.8
Total expenditure70.176.6103.2108.7103.696.5
Current expenditure56.365.577.880.879.280.0
Wages and salaries25.630.132.834.132.133.7
Goods and services21.926.831.232.933.532.5
Interest payments0.90.80.90.91.00.8
Subsidies to public enterprises3.14.86.25.14.84.8
Other subsidies and transfers 3/5.02.96.77.87.18.1
Capital expenditure13.811.125.527.824.416.5
Current balance-0.92.79.610.8-2.6-1.3
Overall balance13.2-0.5-5.0-0.6-0.6-0.4
Financing13.26.911.916.721.717.8
Net government debt repayment-4.1-2.1-0.50.61.01.0
Principal repayment0.20.20.50.71.01.0
Gross borrowing4.32.31.00.10.00.0
Change in government financial assets17.39.012.416.120.716.8
Of which: Trust Fund17.17.516.917.322.318.3
(In percent of GDP)
Revenue and grants67.157.971.074.368.860.6
Revenue23.125.525.725.026.123.3
Grants44.032.545.449.342.737.3
Expenditure56.458.374.674.769.260.9
Current45.449.956.255.552.950.5
Wages and salaries20.623.023.723.421.521.3
Goods and services17.620.422.622.622.420.5
Capital11.18.518.419.116.310.4
Current balance-0.72.06.97.4-1.7-0.8
Overall balance10.6-0.4-3.6-0.4-0.4-0.3
(In millions of U.S. dollars)
Memorandum items:
Total expenditure excl. non-compact grants48.254.568.072.480.779.7
Total government financial assets50.059.071.487.5108.2125.0
Of which: Trust Fund31.238.252.667.990.6109.3
Usable government financial assets 4/2.94.51.63.01.3-0.1
Outstanding government debt62.464.565.765.864.863.8
Nominal GDP124.2131.3138.3145.6149.7158.4
Sources: Data provided by the RMI authorities; and Fund staff estimates.

The fiscal year ends on September 30.

Does not include Compact funds earmarked for Kwajalein rental payments and trust fund contributions.

For FY2003, transfers include operating transfers amounting 16 million to the Compact Trust Fund.

Cash and cash equivalents that are not reserved for specific uses.

Sources: Data provided by the RMI authorities; and Fund staff estimates.

The fiscal year ends on September 30.

Does not include Compact funds earmarked for Kwajalein rental payments and trust fund contributions.

For FY2003, transfers include operating transfers amounting 16 million to the Compact Trust Fund.

Cash and cash equivalents that are not reserved for specific uses.

Table 9.Marshall Islands: Central Government Current Expenditure, FY2003–081/(In millions of U.S. dollars)
FY2003FY2004FY2005FY2006FY2007

Est.
FY 2008

Proj.
Government22.215.313.97.25.28.3
President and Cabinet1.51.61.71.91.81.8
Advisory Council of High Chiefs (Iroij)0.40.40.40.40.40.4
Legislature (Nitijela)1.61.51.71.81.71.7
Commissions, agencies, and offices0.40.80.40.50.50.5
Special/Other18.410.99.72.60.83.9
Ministries34.150.263.973.774.071.7
Health and Environment7.37.417.221.118.822.0
Education7.47.219.821.826.124.9
Transportation and Communications1.72.63.62.62.21.8
Interior and Social Welfare1.92.62.52.12.52.4
Public Works1.31.21.21.31.41.4
Social Services0.00.00.00.00.00.0
Resources and Development0.71.12.00.80.80.8
Foreign Affairs2.72.93.02.52.52.8
Finance1.82.43.76.52.63.2
Justice2.52.73.73.93.94.1
Auditor General0.80.60.80.71.01.0
Chief Secretary0.60.70.70.80.70.7
Other5.418.95.79.211.56.6
Interest payments0.80.90.90.91.00.8
Subsidies to public enterprises4.84.86.25.14.84.8
Total65.569.977.880.879.280.0
Sources: Data provided by the RMI authorities; and Fund staff estimates.

Fiscal year ending September 30.

Sources: Data provided by the RMI authorities; and Fund staff estimates.

Fiscal year ending September 30.

Table 10.Marshall Islands: Assets and Liabilities of Deposit Money Banks, FY2003–071/(In millions of U.S. dollars)
FY2003FY2004FY2005FY2006FY2007

Est.
Assets89.194.395.698.3112.8
Foreign assets48.351.053.657.660.9
Claims on central and local governments1.41.30.50.30.6
Claims on private sector40.443.443.643.253.6
Consumer36.938.538.235.240.6
Commercial3.54.95.48.013.1
Unclassified assets-1.0-1.4-2.1-2.7-3.3
Liabilities89.194.395.698.3112.8
Deposits72.274.974.375.589.6
Demand deposits23.627.026.125.725.5
Time deposits22.020.017.716.220.6
Savings deposits17.618.122.726.635.5
Central government deposits2/9.09.87.87.07.9
Foreign liabilities3.54.13.83.71.3
Capital accounts12.914.817.018.621.2
Unclassified liabilities0.50.50.50.60.7
Memorandum items:
Loan/deposit ratio (in percent)57.859.759.357.659.8
Deposits (12-month percent change)9.13.6-0.81.618.7
Loans (12-month percent change)-1.57.0-1.4-1.324.1
Consumer loans (in percent of total loans)88.486.286.681.075.6
Commercial loans (in percent of total loans)8.310.912.318.424.4
Nonperforming loans (in percent of total loans)3/1.52.02.02.02.0
Source: Data provided by the RMI authorities.

Calendar-year basis 4 quarter average to 2000. The deposit money banks comprise the Bank of Hawaii (until 2002), the Bank of Guam, and the Bank of the Marshall Islands.

Includes the deposits of social security administration and other trust funds.

Nonperforming loans are defined as those with arrears in excess of 90 days.

Source: Data provided by the RMI authorities.

Calendar-year basis 4 quarter average to 2000. The deposit money banks comprise the Bank of Hawaii (until 2002), the Bank of Guam, and the Bank of the Marshall Islands.

Includes the deposits of social security administration and other trust funds.

Nonperforming loans are defined as those with arrears in excess of 90 days.

Table 11.Marshall Islands: Interest Rates of Deposit Money Banks, 2003–071/(In percent per annum)
20032004200520062007
Deposit rates
Savings accounts2/1.51.11.21.71.7
Time deposits3/
Three months1.81.32.22.52.5
Six months2.01.62.93.23.2
One year or more2.62.13.54.04.0
Loan rates4/
Consumer loans17.717.418.518.518.5
Commercial loans9.89.711.011.011.0
Source: Banking Commission, RMI.

Year average.

Average of rates offered by deposit money banks.

Average of minimum rates offered by deposit money banks.

Average of maximum rates charged by deposit money banks.

Source: Banking Commission, RMI.

Year average.

Average of rates offered by deposit money banks.

Average of minimum rates offered by deposit money banks.

Average of maximum rates charged by deposit money banks.

1Prepared by Raphael W. Lam (ext 39327)
2In addition to the three major taxes, RMI also has immovable property tax, hotel and resort tax, non-resident gross income tax, and local governments’ sales tax (Box II.1). These accounted for less than $1.5 million on average in past years. Non-tax revenue includes fishing rights fees and ship registry fees.
3RMI participates or is negotiating a number of free trade agreements with other PICs, Australia, New Zealand, and the European Union. RMI is involved in the Pacific Agreement on Closer Economic Relations and the Pacific Islands Countries Trade Agreement. It is discussing with the European Union on a new trade arrangement under the Economic Partnership Agreement.
4The experience of low- and middle-income countries shows that trade liberalization often leads to decline in collections from customs duties (IMF 2007).
5The Customs, Treasury, Tax and Revenue Division of the Ministry of Finance has issued a public notice in January 2008 on the tax procedures and filings due dates. The tax office plans to compile and publicize a list of non-compliant entities.
6The authorities have reported that in most cases of non-compliance, a response was received after a Notice of Lien was issued.
7Ministry of Finance FY2006 and FY2007 Budget Statements and McNeill (2007).
8The authorities’ recent efforts in pursuing non-compliant cases by issuing public notices and conducting island-wide surveys have been important steps toward strengthening the tax regime.
9For example, Fiji, Samoa, Cook Islands, and Papua New Guinea introduced the VAT in the 1990s, and Tonga introduced it as recent as in 2005. The VAT across the PICs tends to be single-rate and within a 10-15 percent range, with the VAT generating about 20-50 percent of the total tax revenue.

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