Republic of the Marshall Islands
Selected Issues and Statistical Appendix

This Selected Issues paper outlines economic developments in the Republic of the Marshall Islands (RMI) since independence in 1986, focusing on the challenges posed by dependence on foreign grants, and progress toward achieving budgetary self-reliance. Like most other Pacific islands, the RMI faces a variety of geographical constraints, including limited land area, poor soil, the dispersion of the islands, and the remoteness from major markets. The public sector plays a dominant role in the economy, backed by external assistance. The private economy remains underdeveloped, primarily providing services to the government.

Abstract

This Selected Issues paper outlines economic developments in the Republic of the Marshall Islands (RMI) since independence in 1986, focusing on the challenges posed by dependence on foreign grants, and progress toward achieving budgetary self-reliance. Like most other Pacific islands, the RMI faces a variety of geographical constraints, including limited land area, poor soil, the dispersion of the islands, and the remoteness from major markets. The public sector plays a dominant role in the economy, backed by external assistance. The private economy remains underdeveloped, primarily providing services to the government.

I. Economic Developments Since Independence and Statistical Tables1

A. Background

1. The Republic of the Marshall Islands (RMI) consists of a group of atolls and islands in the central Pacific with a total land area of 70 square miles and 750,000 square miles of ocean. Two-thirds of the population of about 58,000 live in the two major urban centers, Majuro and Ebeye. Like other small Pacific island countries, the country is remote from major markets, and the economy is highly dependent on United States financing provided through the amended Compact of Free Association. Economic activity is dominated by the public sector and the small private sector developed largely to meet the demands of the government and its workers. Contributions also come from agriculture, fisheries, and tourism. As a result of generous external assistance, economic and social conditions are relatively favorable by regional standards with a per capita GDP of around $2,500. This chapter outlines economic developments since independence in 1986, focusing on the challenges posed by dependence on foreign grants, and progress towards achieving budgetary self-reliance.

2. In 1947, the Marshall Islands became part of the United Nations Trust Territory of the Pacific Islands, under the administration of the United States. Following increasing demands for autonomy, the country became a republic in 1979. The Compact of Free Association with the United States came into effect in October 1986, under which the RMI has full responsibility for its internal and foreign affairs, while the United States retains responsibility for defense and security. The United States also agreed to provide financial assistance totaling some $620 million over the period 1986-2001, and to create a $150 million Nuclear Trust Fund to compensate the inhabitants of the four atolls affected by U.S. nuclear tests in the 1940s and 1950s.

3. The government operates under a mixed parliamentary and presidential system, which includes a head of state, the President, and a bicameral parliament. The Council of Iroij (the upper house) is comprised of 12 tribal chiefs who advise the Presidential Cabinet and review legislation affecting customary law or any traditional practice, including land tenure. Legislative power resides in the Nitijela (the lower house), which consists of 33 senators elected by 24 electoral districts by universal suffrage of all citizens above 18 years of age. The president is elected to a four-year term and appoints cabinet ministers with the approval of the Nitijela. Although no restrictions exist against the formation of political parties, formal political parties do not exist. Instead, there are loosely formed interest groups but without party headquarters, formal platforms or party structures.

B. Structure of the Economy

4. Like most other Pacific islands, the RMI faces a variety of geographical constraints, including limited land area, poor soil, the dispersion of the islands, and the remoteness from major markets. Other obstacles include the acute shortage of skilled labor and a customary land tenure system, which severely limits the use of land as collateral in financial transactions and deters foreign investment. The outer islands operate on a semi-subsistence basis, while the urban centers of Majuro and Ebeye have a more developed cash economy, based mainly on government services and trade. The domestic production base is limited, consisting primarily of copra production, subsistence farming, fishing, and handicrafts.

5. The public sector plays a dominant role in the economy, backed by external assistance. Government current expenditure accounts for more than 70 percent of GDP, and about 50 percent of government revenue comes from external grants, mainly from the United States. Consequently, overall economic activity is highly correlated with government expenditure and external grant flows.

6. The public sector comprises the central government, local governments, trust funds, and non-financial public enterprises. The central government continues to be heavily dependent on foreign aid, while the main source of local government revenue is sales taxes. The government acts as trustee for a number of trust funds associated with the Compact, although the receipts and expenditures are largely outside the government budget. The Nuclear Trust Fund, set up to compensate inhabitants of the four atolls affected by U.S. nuclear testing, and the Kwajalein Atoll Trust Fund, which compensates land owners for the use of the atoll as a military base, are the largest of the trust funds used to administer payments under the Compact. The non-financial public enterprises, concentrated in utilities, transport, telecommunications and copra production, are important sources of employment, but their financial results have been generally weak.

7. The private economy remains underdeveloped, primarily providing services to the government. The export sector is small, consisting almost entirely of coconut oil, fish, and re-exports of diesel fuel to fishing boats. Nearly all raw materials, consumer, and capital goods are imported. With exports amounting to about 20 percent of imports, the trade balance is chronically in deficit. Owing to official transfers, however, the current account balance has generally been in surplus, or close to balance.

A01ufig01

Trade and Current Account Balances

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 097; 10.5089/9781451825923.002.A001

8. There is no central bank, as the U.S. dollar is the domestic currency and the sole legal tender. The use of the U.S. dollar has imparted monetary stability, with inflation largely mirroring that of the United States. The real effective exchange rate has remained broadly stable, reflecting a low and stable inflation differential with the United States, the largest trading partner. In terms of costs of conducting business, especially for the tourism industry, RMI is perceived as not being competitive relative to other destinations in the Pacific. The lack of competitiveness stems from geographical isolation, limited hotel facilities, and deficient waste management.

A01ufig02

Real Effective Exchange Rate Comparisons1

Citation: IMF Staff Country Reports 2006, 097; 10.5089/9781451825923.002.A001

Sources: IMF, Information Notice System; and staff calculations.1 2005 data based on January through September average.

9. The banking sector is characterized by high intermediation costs and low levels of lending. The domestic financial sector comprises two commercial banks, insurance agencies, a money remitter, and a development bank. Consumer loans account for the dominant share of loans and are primarily used for construction, travel and education. Most consumer loans are serviced directly through payroll deductions. Longer-term lending is constrained by the land tenure system, which prevents banks from using land property as collateral, as well as by the lack of viable projects. Given the limited opportunities to extend credit domestically, a substantial portion of the total assets of commercial banks are held outside the country. Remittances to the RMI from abroad are estimated to be fairly small in magnitude. When considering that the bulk of the payments to landowners of the Kwajalein atoll, estimated at around $15 million in FY2004, is transferred abroad, there may be a net outflow of remittances.

10. Employment opportunities have not expanded at the rate of population growth. Continuously reliable data on unemployment are not available. In the latest official survey, unemployment stood at around 30 percent in 1999, with youth unemployment considerably higher. While access to both primary and secondary education has improved recently, around 30 percent of children do not receive secondary education and drop out rates are high, contributing to the acute skills shortage. Owing to relatively easy emigration rules to the United States, many Marshallese (estimated at around 15,000) have emigrated.

C. Economic Developments: Period of Original Compact

11. The original Compact of Free Association with the United States, which came into effect in FY1987 (ending September 30), aimed at fostering economic development over a 15-year period. The Compact provided block grants that were partially indexed to inflation and subject to step-downs in assistance after each five-year period. The RMI also received earmarked grants and program assistance mainly for health and education, with some conditionality and oversight attached to the grants. The limited scope for monetary and exchange rate policies underscored the key role of fiscal policy.

12. Real GDP grew relatively quickly during FY1987-91, averaging 4.5 percent annually, mainly reflecting Compact-related spending. The public sector, already large as a legacy of the Trust Territory period, expanded further with the release of Compact funds. Capital spending to modernize the infrastructure picked up sharply. The private sector served mainly government demand and the growing ranks of its employees. Inflation pressures were generally contained.

A01ufig03

Real GDP

Citation: IMF Staff Country Reports 2006, 097; 10.5089/9781451825923.002.A001

Sources: IMF, World Economic Outlook; and staff estimates and projections.

13. In the first five years of the Compact, the government initially ran sizeable budget surpluses, averaging 9 percent of GDP. Faced with the first scheduled decline in grants, fiscal deficits began to appear in the early 1990s, averaging 10 percent of GDP during FY1991-95. Although the reduction in U.S. aid was largely foreseen, government expenditures were not adjusted accordingly. The government borrowed sizeable amounts abroad through medium-term notes secured by future Compact flows, for financing deficits and funding public investment. External public debt reached over 150 percent of GDP in FY1995. In addition, poor-performing public enterprises, including Air Marshall Islands and the copra processing company, necessitated subsidies and exerted further drain on government finances.

A01ufig04

Government Finances

Citation: IMF Staff Country Reports 2006, 097; 10.5089/9781451825923.002.A001

14. In the mid-1990s, the level of public expenditures and external debt was unsustainable. Faced with the second scheduled decline in external grant assistance in the FY1996, the authorities implemented a public sector reform program. However, this consolidation, together with the impact of a drought, resulted in a large contraction in activity in the mid-1990s. Real GDP declined by 5 percent on average during FY1995-99.

A01ufig05

External Debt (% of GDP)

Citation: IMF Staff Country Reports 2006, 097; 10.5089/9781451825923.002.A001

15. After a five-year fiscal consolidation period, the economy rebounded by the turn of the century, with real GDP growth averaging 3 percent annually in FY2000-03. Adding to the rebound, during the 2002-03 negotiation of the amended Compact, the U.S. government provided so-called “bump-up” grants at the average level of the first Compact, a sizeable increase from FY2001. These funds both helped to sustain the economic expansion and brought about an improvement in the overall fiscal position, even as some of the earlier progress in government consolidation was reversed.

16. Looking back, the first Compact brought limited results in terms of real GDP growth, while fiscal and structural adjustment remained incomplete. A U.S. Government Accounting Office report in 2000 reviewed the effectiveness of Compact funds in promoting economic self-sufficiency and found that such expenditures had led to little improvement in economic development. In particular, per capita incomes, when adjusted for inflation, had fallen since the beginning of the Compact. The report also stated that funds were mainly spent to maintain high government wages and a high level of public employment that discouraged private sector growth.

17. In comparison with other Compact countries, RMI grew at a slower pace than Federated States of Micronesia and lagged well behind Palau. Tax revenue remained low due to longstanding weaknesses, and the wage bill was high. Public-sector wages, aimed at attracting qualified personnel, were increasingly out of line with private sector pay and attracted migration from the outer atolls. Moreover, there were slippages in the administration of Compact funds, including shortcomings in accountability and oversight on the part of both the RMI and U.S. governments, and misuse of funds.

A01ufig06

Nominal GDP per Capita1,2

Citation: IMF Staff Country Reports 2006, 097; 10.5089/9781451825923.002.A001

Sources: Data provided by the RMI and FSM authorities; and IMF staff estimates.1 Although reliable GDP deflators for long periods are not available, inflation in the FSM does not seem to be higher than those in the other countries for these years.2 Data for Palau are for calendar year.

D. Economic Developments: Period of Amended Compact

18. The amended Compact came into effect in May 2004 and will expire in 2023. Throughout the period, U.S. funding will remain constant in nominal terms, with annual declines in grants fully offset each year by progressively higher contributions to a Trust Fund. The Compact grants target six specific sectors: education, health care, public infrastructure, the environment, public sector capacity building, and private sector development, with priority for education and health. During the life of the amended Compact, the Trust Fund will be built up with installments from the United States, RMI, and Taiwan P.O.C. The main objective of the Trust Fund is to help achieve budgetary self-sufficiency in the post-Compact era and drawings from this fund, or its use for collateral borrowing, are not permitted until FY2024 (see Selected Issues chapter).

19. The amended Compact also contains enhanced measures of accountability and monitoring (Box 1). A U.S.-RMI Joint Economic Management and Financial Accountability Committee was established to approve grant allocations and review performance outcomes and audits. The amended compact allows for the possibility that the U.S. government could withhold funds in the case of noncompliance with grant terms and conditions. Adjusting to the enhanced accountability and monitoring of the amended Compact poses near-term challenges as capacity constraints have already led to delays in the disbursement of some Compact grants. Other provisions of the amended Compact include rental payments for U.S. military use of the Kwajalein atoll and an extension through FY2023 of some federal education and disaster management services received by RMI under the original Compact.

Real Sector Developments

20. Based on limited data, real output growth averaged 1¼ percent in FY2003 and FY2004. Economic activity was hampered by delays in implementing an upgraded public works program and the closure of a large privately owned tuna processing plant. Civil service employment appears to have increased, primarily as a result of increased spending on education and health in line with the amended Compact agreement. Economic activity picked up in FY2005, reflecting mainly an expansionary fiscal stance.

21. Activity in the fishing sector recovered moderately in FY2004. The total catch in 2004 amounted to 42,000 tons compared to 35,000 tons in 2003. However, the number of vessels operating the RMI economic zone declined as a result of the withdrawal of the Japanese tuna fishing fleet. Transshipment activity increased in FY2004, resulting in increased revenue by about 25 percent to $410,000. However, the domestic fishing sector was severely hampered by the closure of the tuna loining plant in August 2004.

22. A large fraction of Compact-related construction has been held up by administrative delays in the disbursement of funds. The Majuro Hospital was renovated in FY2004-05, with a grant of approximately US$5.2 million, from the government of Japan. Construction of new education facilities has been held up by the difficulties associated with land tenure. Repaving of the Majuro airport runway is scheduled to be finished in February 2006 at a cost of $16 million.

23. CPI inflation has remained subdued. Inflation picked up to 2.4 percent (year-on-year) in September 2004, and is estimated to have risen to 3.5 percent in FY2005, mainly reflecting higher energy prices.

24. Overall growth in employment continues to fall short of labor supply. While recent data are unavailable, unemployment is estimated to have remained high and broadly unchanged at over 30 percent. Outside of the public sector, wages in the private sector are estimated to have been stagnant in recent years.

External Developments

25. The current account surplus including official transfers is estimated to have decreased to $4.4 million (3.3 percent of GDP) in FY2004 and $0.5 million (0.3 percent of GDP) in FY2005. The trade deficit narrowed in FY2004 as a result of fewer imports owing to delayed implementation of import intensive capital projects. In FY2005, the trade deficit is estimated to have widened as a result of growth of imports exceeding the growth of exports.

26. The services balance deficit is estimated to have narrowed moderately by $1.9 million to $1.7 million in FY2004. Service payments in FY2004 have been reduced as a result of declining costs for outpatient services, less expenditure by Marshallese traveling abroad, and reduced freight and insurance payments associated with lower imports. However, costs associated with Air Marshall Islands’ leasing and maintenance of aircrafts have been increasing. Service receipts are estimated to be higher in FY2004 as a result of increased numbers of foreign visitors and fishing vessels. Tourism receipts are estimated to have risen to $5 million in FY2004 based on the Marshall Islands Visitors Authority’s (MIVA) visitor survey. Receipts from the tuna processing ceased in August 2004.

27. The surplus in the income balance deteriorated by 20 percent in FY2004 due to lower disbursement of Compact grants. The income balance is expected to improve slightly in FY2005 as grant disbursements are increased. Fishing rights fees are estimated to have declined to $0.9 million in FY2004 from $1.7 million in FY2003. Registration revenue from the ship registry are set at a $1 million flat fee to the government, regardless of the growth in registrations. The number of vessels registered with the Trust Company of Marshall Islands increased to 719 in 2004, up from 626 in 2003. Labor income of the roughly 1200 Marshallese working at Kwajalein Base is estimated to have declined slightly (-1 percent) in FY2004, but is expected to increase by 5 percent to $18.6 million in FY2005. Other income receipts, mainly from U.S. payments to Kwajalein land-owners, are estimated around $15 million for FY2004-05, which is roughly unchanged from FY2003. Interest payment on the external debt is estimated in the range of $2.3-2.5 million annually for the period FY2004-06. This represents a slight decrease from the $2.1 million paid in FY2003.

28. The deficit in the capital account is estimated to have worsened to $27.7 million in FY2004, which includes the government’s $25 million contribution to the Compact Trust Fund. In FY2005, the deficit is projected at $7.5 million, including a $2.5 million contribution to the Trust Fund.

29. The trade regime in the RMI is relatively open. Imports are freely allowed, other than when expressly prohibited for environmental, health or safety reasons, and there are no significant nontariff barriers to trade. The RMI does not face any difficulties in accessing export markets. The general import duty is currently 8 percent, but there are a number of exceptions: foodstuffs carry an import duty of 5 percent and a range of products are subject to rates ranging from 15 to 150 percent. The authorities have indicated their intention to unify import duties to a uniform rate of 6 percent, which will be considered in the next session of Parliament.

Fiscal Developments

30. The fiscal position deteriorated in FY2004. This deterioration reflected, on the revenue side, a decline in grants aimed at infrastructure projects owing in part to delays in initiating projects, lower income tax collection, and volatility in non-tax revenue. Non-tax revenues in FY2004 were marked by a decline in fishing rights and other non-tax revenue (which among other things include the ship registry fees), and a large increase in fees and charges. The increase in fees an charges stemmed in part from the authorities’ decision to transfer the health fund from the social security accounts to the Ministry of Health.

A01ufig07

Fiscal Indicators

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 097; 10.5089/9781451825923.002.A001

31. Total expenditure increased with some shift in its composition from capital to current expenditure. Spending on wages and goods and services continued to rise, contributing to the worsening of the fiscal position, and reached 22½ percen of GDP in FY2004 (up from 15½ perce of GDP in FY2000). The rise in wages and salaries stemmed from increases in the number of civil servants and the harmonization of wage levels in the Ministry of Education. The number of RMI government employees has risen from 1464 in FY2000 to 1712 in FY2004. At the same time, the average annual salary rose from $10,514 to $13,776. Over the two years FY2003-04, the government made large contributions, amounting to around 10 percent of GDP each year, to the Compact Trust Fund, in line with requirements under the amended Compact.

A01ufig08

Number of Employees by Institutional Sector

Citation: IMF Staff Country Reports 2006, 097; 10.5089/9781451825923.002.A001

32. In FY2005, the government’s overall deficit is estimated at 2 percent of GDP, mainly reflecting an underperformance of revenue collection. The poor performance of domestic revenue contrasts with a large inflow of capital-related and other committed grants. The decline in domestic revenue was mainly accounted for by a decline in non tax revenue, while tax revenue remained broadly unchanged. Non-tax revenue fell primarily because of lower fees and charges and other non taxes. Although tax revenue remained unchanged, it masks a significant increase in import duties, reflecting recent measures aimed at improving customs, which was offset by a decline in gross revenue tax collection. On the expenditure side in FY2005, current expenditure was broadly unchanged, while capital expenditure rose markedly in line with the disbursement of grants. Regarding current expenditure, the slight decline in spending on wages and salaries as well as goods and services was offset by higher subsidies and transfers.

33. The FY2006 budget envisages a small overall surplus of around ¼ percent of GDP. The budget projects a dramatic rise in revenue, mainly owing to the disbursement of special grants for building infrastructure. At the same time, domestic revenues are targeted to increase by 2¼ percent of GDP, reflecting higher income tax, gross revenue tax, and one-off increase in import duties and fishing rights. Current expenditure is also projected to rise, owing to an increase in wages and salaries in relation to GDP, which is partly offset by a decline in goods and services. Capital expenditure is also expected to increase markedly as a result of large inflow of external grants earmarked for special projects, related in particular to the renovation of the Majuro airport.

34. Gross external debt has risen despite the retirement of the government’s commercial debt in FY2001. The outstanding external debt, at nearly 70 percent of GDP, is high, although about 60 percent is on concessional terms, primarily owed to the Asian Development Bank. The remaining 40 percent is mainly owed by two utility companies - the Marshall Islands Telecommunications Authority and the Marshalls Energy Company. Against the background of declining Compact grants, servicing the external debt will increasingly absorb fiscal resources. Interest payments in FY2005 rose marginally to 1.1 million from $0.8 million, but debt repayment remained marginal.

Financial Sector Developments

35. The financial sector is small and intermediation costs are high. Following the withdrawal of the Bank of Hawaii from the RMI in November 2002, two commercial banks remain in operation: the Bank of Marshall Islands (BoMI) and the Bank of Guam. In February 2005, BoMI lost its correspondent banking relationship, which leaves Bank of Guam (BoG) as the only bank with the ability to conduct external banking operation. As a result, BoG has seen significant growth in deposits.

36. Despite the withdrawal of the Bank of Hawaii, activity in the banking sector has recently been buoyant. Consumer loans have risen by 11 percent since FY2001 and deposits increased by 22 percent over the same period. Foreign assets have increased by 67 percent since FY2001 as most of the deposits are transferred abroad. Banking activity was also fueled by Marshall Island Development Bank (MIDB) lending, which has expanded its consumer and commercial loan portfolio. Owing to healthy interest margins and low levels of non-performing loans, the MIDB has incurred substantial profits in recent years.

37. The RMI was removed from the FATF money laundering list of non-cooperative countries in 2002, but remains on the OECD tax haven list. The Banking Commissioner continues to track all large transactions intermediated through the financial system, and conducts regular on- and off-site supervision of the commercial banks. The MIDB is currently unsupervised. The Financial Intelligence Unit, comprising representatives from the Banking Commission, the offices of the attorney general, tax and police, meet to review bank disclosure information.

E. Policy Challenges Ahead

38. The attainment of stable economic growth and financial independence are major policy challenges. The amended 20-year Compact agreement provides an opportunity to promote budgetary self-reliance and lessen the dependence on foreign aid. At this point, the medium term outlook remains uncertain and hinges on the authorities’ commitment to structural and fiscal reform. In the absence of structural reform to promote private sector growth and fiscal consolidation, growth is likely to falter in the medium term, owing to declining Compact grants and increasing external debt repayments. However, if fiscal consolidation and structural reform are undertaken, the illustrative scenario indicates that RMI can grow sustainably, and on par with other Pacific island countries, even after the expiration of the Compact in 2023.

Fiscal Reforms

39. Budgetary surpluses of 3 percent of GDP annually are needed to ensure fiscal sustainability over the medium term. An illustrative scenario underscores the importance of fiscal reforms. Without such actions, a small fiscal surplus would still have to be achieved, to meet debt obligations. Fiscal reserves would remain at very low levels, and only modest headway made at reducing expenditure and increasing revenue. As a result, fiscal expenditure would shrink over the medium term as grant inflows decline. The burden of adjustment would fall mostly on capital spending, including infrastructure maintenance, leading to weaker growth. At the end of the amended Compact, the RMI would likely draw the entire annual returns from the trust fund, causing the fund to begin to decline in real terms. Initially, the real GDP growth rate would be 2¼ percent per annum, but it would gradually fall to zero as government expenditure declines and private sector growth would remain anemic.

40. Under the fiscal reform scenario, it could be assumed that a medium-term fiscal adjustment would be introduced. The adjustment strategy would involve concerted expenditure control, improved tax administration and reform, and enhanced fiscal management and governance; public investment in priority areas, especially health, education, and infrastructure; and limited withdrawals from the trust fund to maintain its real value after FY2023. Despite reduced Compact inflows, the government would build sizeable reserves while maintaining capital expenditure. This would secure long-term fiscal sustainability, improve the productive capacity of the economy, and allow real GDP growth to remain steady at around 2½ percent, in line with the average of other Pacific islands.

41. Given the Trust Fund’s role in securing long-term budgetary self-reliance, it’s of key importance that it is managed in a transparent manner, including through a sound and accountable governance structure. Furthermore, any budgetary saving should be used to increase the endowment, especially in light of uncertainty on revenue performance.

Structural Reforms

42. Structural reforms need to complement fiscal reform to encourage private sector development. To promote private sector development, past and current Fund advice has focused on clarifying property and land tenure rights, changing existing minimum-wage legislation to increase wage differentiation between skill levels, trimming extensive state involvement in business through privatization, and reducing constraints on foreign investment.

  • Foreign direct investment is limited owing to uncertainty regarding land tenure rights for foreign investors and the application for expatriate labor permits is a complex and time consuming task.

  • The development of the tourism sector continues to be hampered by the distance from major markets, competition from other lower-cost destinations, limited tourism infrastructure, and infrequent air service.

  • The minimum wage is high by regional standards, skews competition for the private sector, and encourages migration from the outer atolls.

  • The government has repeatedly launched public enterprises in areas such as fisheries and outer island shipping that lost money and competed directly with private firms.

  • Bank lending continues to be limited by the difficulties of using land as collateral and of foreclosing. In order for the banking system to play a full role in the development of the economy, longer-term bank lending needs to be facilitated by improvements in the newly established land registry.

Marshall Islands: Comparison of Original and Amended Compact

The original Compact of Free Association (the Compact) came into effect in October 1986. The three goals for RMI of the original Compact were: (i) to secure self-government; (ii) assure certain national security rights; and (iii) assist in efforts to promote economic self-sufficiency. Under the Compact agreement, the United States provided $640 million in grants over the period 1986 to 2001 with declining block grants every five years. These funds were provided to cover general government and capital expenditures. At least 40 percent of the total grants were to be devoted to capital projects, although this was a cumulative requirement that did not have to be satisfied in any particular year. Annual reports were required on economic performance and grants usage and consultations. The Compact also contained provisions allowing citizens of the RMI to easily migrate and work in the United States. If a new funding agreement was not in place by the time of expiration of the original Compact in October 2001, a provision specified that aid would be given for an additional two years at the average level of the first 15 years ($42 million).

The amended Compact came into effect on May 1, 2004, with the aim to continue economic assistance covering FY2004-23. The total amount of $42.7 million per year (roughly 40 percent of GDP) includes grants, audit funds ($0.5 million), and trust fund contributions.

Grants target six specific sectors: education, health care, public infrastructure, the environment, public sector capacity building, and private sector development, with priority for education and health. In addition to providing sector grants, the amended compact provides for the establishment of a trust fund that is intended as a sustainable source of revenue to replace grant assistance beginning in 2024. Initially, the RMI is required to provide $30 million to set up the trust fund, while the United States’ initial contribution of $7 million will be augmented annually. Sector grants decline by $0.5 million per year in nominal terms, while the trust fund contribution is augmented by $0.5 million per year.

New procedures were introduced to enhance financial accountability and economic management. A U.S.-RMI Joint Economic Management and Financial Accountability Committee was established to approve grant allocations and review performance outcomes and audits. The amended compact allows for the possibility that the U.S. government could withhold funds in the case of noncompliance with grant terms and conditions.

Other provisions of the amended Compact include:

  • Rental payments for U.S. military use of the Kwajalein Atoll through FY2066 with the United States having the option to terminate payments as early as FY2030, with advance notice of seven years, or extend use through FY2086.

  • An extension through FY2023 of some federal education and disaster management services received by RMI under the original Compact.

  • Immigration provisions were tightened slightly, with visitors to the United States from the RMI required to show a passport.

Table I.1.

Marshall Islands: Gross Domestic Product, FY2000–05 1/

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Source: Data provided by the RMI authorities.

The fiscal year ends on September 30.

Table I.2.

Marshall Islands: Copra Production, Producer Prices, and Export Unit Values, CY2000–05

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Source: 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 I.3.

Marshall Islands: Majuro Consumer Price Index, CY2003–051/

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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 I.4.

Marshall Islands: Employment by Sector, FY2000–041/

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Source: Marshall Islands Social Security Administration (MISSA).

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

Based on the projections made in the 1999 Population Census Report.

Table I.5.

Marshall Islands: Balance of Payments, FY2000–051/

(In millions of U.S. dollars)

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

Fiscal year ending September 30.

Prior to 2004, the estimated number of vistitors to the RMI only include air arrivals.

Net payments to the National Telecommunications Authority.

Compact funding pertaining to the Kwajalein Atoll Trust Fund and Kwajalein resident and landowner compensation payments are classified as income rather than official transfers.

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.

Approximated by changes in usable government financial assets.

Table I.6.

Marshall Islands: Exports by Product Category, CY2000–05 (In thousands of U.S. dollars)

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Source: Data provided by the RMI authorities.
Table I.7.

Marshall Islands: External Debt and Debt-Service Obligations, FY2000–051/

(In millions of U.S. dollars)

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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 I.8.

Marshall Islands: Central Government Finances, FY2000–061/

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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.

Payments under early retirement and separation program (Reduction In Force) financed by an AsDB loan.

Negative sign indicates a sale.

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

Table I.9.

Marshall Islands: Central Government Current Expenditure, FY2000–041/

(In millions of U.S. dollars)

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

Fiscal year ending September 30.

Table I.10.

Marshall Islands: Assets and Liabilities of Deposit Money Banks, CY2000–051/

(In millions of U.S. dollars)

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Source: Data provided by the RMI authorities.

On a calendar-year basis. 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 I.11.

Marshall Islands: Interest Rates of Deposit Money Banks, CY2000–051/

(In percent per annum)

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Source: Data provided by the RMI authorities.

At end-December.

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.