Resilience and Growth in the Small States of the Pacific

Appendix 3. Marshall Islands

Hoe Khor, Roger Kronenberg, and Patrizia Tumbarello
Published Date:
August 2016
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The 29 atolls and five isolated islands of Marshall Islands are spread over 1.9 million square kilometers in the north Pacific. As a small island country with a land area of just 181 square kilometers, Marshall Islands is highly dependent on external aid, mainly from the United States. The country has few accessible resources to sustain its population of about 60,000, which is concentrated in Majuro and Ebeye, the two main urban areas. With few accessible resources and vast distances, economic and development costs are high. In addition, the country’s low elevation means that it is highly vulnerable to the effects of climate change, particularly sea level rise.

Marshall Islands achieved full sovereignty in 1986 under a Compact of Free Association with the United States. The government operates a mixed parliamentary-presidential system, with elections every four years.

Sources of Growth and Economic Profile

Main sources of growth. Public sector spending drives growth, financed to a large extent (about 60 percent) by grants from the United States under a renewed compact agreement effective since 2004. Fishing, copra production, and a limited services sector are the main economic activities. Tourism is modest, constrained by weak infrastructure and few flights.

Production, employment, exports, and imports. Growth is estimated to have declined to −1.1 percent in 2013/14 from 1.9 percent in the previous fiscal year, reflecting the earlier completion of important infrastructure projects and the postponement of some capital grants. The country’s small size and isolation limit production opportunities. Public administration, education, and social services account for over 30 percent of GDP. Copra, coconut oil, and fish are the main exports in a narrow export base. Because Marshall Islands is almost completely reliant on imports for food, fuel, and other basic needs, it suffers a chronic trade deficit, and fluctuations in commodity prices pose a substantial risk to real incomes. Public sector employment accounts for almost half of total employment, and the U.S. military base on Kwajalein and foreign embassies for nearly another 10 percent. Unemployment is estimated at 30 percent.

Sources of external income. The main sources of external income are government grants, mainly from the United States, totaling about 50 percent of income receipts. Compact grants will expire in 2022/23 and a Compact Trust Fund has been set up to replace them. Compensation of employees working for the U.S. military base, rents to landowners around the base, and fishing license fees account for nearly another 35 percent of external income inflows.

Development aid. Aid averaged nearly 50 percent of GDP during 2007–12, mostly provided by the United States and Taiwan Province of China. This is directed especially to education and health, the energy and communication sectors, and infrastructure projects. Technical assistance is provided in public financial management, statistics, and state-owned enterprise reform.

Government finance. In 2012/13 government finances recorded a surplus of almost 0.7 percent of GDP; broadly on balance in 2013/14. The fiscal outlook is hindered by the financial positions of state-owned enterprises and limited budget planning. At the onset of the amended compact, Marshall Islands adopted a medium-term framework, but so far this has made no useful contribution to annual budget preparation. Authorities recently worked with the Pacific Finance Technical Assistance Centre to produce a comprehensive Public Financial Management Reform Road Map, which calls for the introduction of a medium-term budgeting framework. The prospective end of compact funding presents a key challenge to fiscal sustainability. Starting in 2023/24 the government will be able to withdraw from the existing Compact Trust Fund an amount not exceeding compact grant flows in 2022/23.

Financial sector. The commercial banking system consists of two private banks and a public development bank, which operates outside the regulatory framework. The banking system is profitable and liquid, with a loan-to-deposit ratio of less than 75 percent. However, vulnerabilities are emerging: consumer loans represent about 70 percent of private sector credit and the average household debt-to-income ratio is more than 80 percent. The publicly owned Marshall Islands Development Bank, which is outside the Banking Commission’s oversight, is engaged in short-term consumer lending as well—an activity regarded as less risky and more profitable. Financial markets are underdeveloped and credit to the private sector is only 35 percent of GDP.

Business climate and investment. The geographic isolation and business climate shortcomings of Marshall Islands hinder private investment. Business entry is relatively easy, but the absence of a legislative framework for bankruptcy and the heavy presence of state-owned enterprises make business more difficult. Registering property appears to be particularly cumbersome, owing to complex land-ownership issues.

Monetary policy. The U.S. dollar is legal tender and Marshall Islands does not have a central bank.

Exchange rate and competitiveness. Past analysis has found no evidence of a significant misalignment in the real exchange rate.

Growth Challenges, Vulnerabilities, and Spillovers

Main growth challenges. Small size, geographic isolation, and institutional and human capacity constraints are the main obstacles to growth.

Main vulnerabilities. Heavy exposure to climate change, relatively high public and publicly guaranteed debt, sizable contingent liabilities from the social security system, a heavy reliance on donor aid, volatile import prices, and the Compact Trust Fund’s exposure to global asset fluctuations are the main vulnerabilities.

Regional and global economic spillovers. The United States has a significant impact through aid and because of the use of the U.S. dollar. Marshall Islands has also developed close relations with Taiwan Province of China, which provides financial support.

Appendix Table 3.1Marshall Islands: Selected Economic Indicators, 2010–15
Nominal GDP (FY2014): US$183.3 millionGDP per capita (FY2014): US$3,410
Main export products: Copra, Coconut oilPopulation (2014): 53,753
Remoteness (GDP-weighted distance): 7,895 km
Sources: Marshall Islands authorities; and IMF, World Economic Outlook database (April 2016).Note: … = data not available; SWF = sovereign wealth fund.
GDP, GDP growth, employment, and prices
Real GDP (percent change)−−1.11.0
Real GDP per capita (percent change)−−1.4
Unemployment (percent)
Consumer prices (percent change, average)−4.0
Shares in GDP (percent)
Public Administration18.115.914.814.914.714.514.714.914.8
Wholesale and retail trade and repairs13.013.812.412.813.
Contributions to GDP growth (percent, in real terms)
Public administration−
Wholesale and retail trade and repairs0.−
Share in GDP (percent)
Private consumption
Private investment
Public consumption
Public investment
Exports minus imports−79.7−71.9−64.6−83.7−60.8−56.6−65.3−61.5−59.8
Contributions to GDP growth (percent, in nominal terms)
Private consumption
Private investment
Public consumption
Public investment
Exports minus imports−1.5−1.81.1−9.718.50.4−
Public finances
General government finance (percent of GDP)
Revenue and grants65.763.955.361.657.851.454.154.552.3
Total domestic revenue25.821.220.920.020.019.321.222.822.2
Sources: Marshall Islands authorities; and IMF, World Economic Outlook database (April 2016).Note: … = data not available; SWF = sovereign wealth fund.
Expenditure and net lending59.463.
Current (excluding grants)47.752.446.845.744.645.547.249.648.1
Of which: wages and salaries17.222.321.723.021.820.921.321.721.4
Development (capital)11.710.87.412.511.
Current balance1−
Overall balance6.−
Assets (SWF, trust fund)5.2−0.3−1.6−1.8−6.62.0−2.10.0−1.1
Of which: external
Of which: concessional
Public-debt-to-GDP ratio (percent)80.244.533.236.834.530.
Sovereign wealth/trust fund
Balance of payments (percent of GDP, unless otherwise indicated)
Current account including official transfers−25.9−5.8−11.8−26.5−5.6−9.3−14.7−7.3−7.5
Current account excluding official transfers−46.5−39.2−41.9−60.3−36.8−38.6−45.3−36.5−33.9
Overall balance−3.911.83.94.811.52.9−
External debt service (percent of exports of goods and services)
Foreign direct investment1.12.65.923.
External debt103.568.454.363.958.052.551.350.150.3
Main sources of external income (total)44.659.050.555.751.948.749.849.247.4
Employee compensations14.215.310.611.610.910.110.110.310.3
Rent for U.S. military base9.810.39.910.
Contributions to external income growth (percent)
External income growth5.55.1−0.5−0.2−−3.0−3.5
Employee compensations2.10.2−0.1−1.1−0.2−
Rent for U.S. military base0.00.90.7−
Sources: Marshall Islands authorities; and IMF, World Economic Outlook database (April 2016).Note: … = data not available; SWF = sovereign wealth fund.
Exchange rate (local currency/U.S. period average)
Real effective exchange rate (period average)291.196.0100.2100.099.5100.598.9102.3
(percent change)−0.51.0−1.63.5
Money, credit, and financial sector
Broad money (percent change)
Credit to private sector (percent of GDP)29.633.835.338.634.832.235.335.3
(percent change)4.62.4−2.6−5.3−9.9−
Bank assets (percent of GDP)52.170.672.181.576.364.569.870.270.5
Short-term treasury bill interest rate
Nonperforming loan ratio2.
Foreign bank market share (percent)3
Business climate indicators
Business environment rankings4
Doing business (overall)123102112116128137140
Construction permits2556846263
Getting electricity8159616165117125
Enforcing contracts57515154586565
Getting credit74646874887179
Human development index5
Nominal GDP (US$ millions)6110.7137.2180.2163.9173.0184.4190.2186.7183.3
Sources: Marshall Islands authorities; and IMF, World Economic Outlook database (April 2016).Note: … = data not available; SWF = sovereign wealth fund.

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