The Republic of the Marshall Islands (RMI), scattered across an area of nearly 1 million square miles in the Central Pacific, is heavily dependent on external grants. As in past consultations, the current discussions have focused on policies to put public finances on a secure footing and improve growth prospects. Recent economic performance has been lackluster. Exports have been held back mainly by structural problems. The fiscal position has improved in FY2006, but the overall balance has been slightly negative at about ½ percent of GDP.

Abstract

The Republic of the Marshall Islands (RMI), scattered across an area of nearly 1 million square miles in the Central Pacific, is heavily dependent on external grants. As in past consultations, the current discussions have focused on policies to put public finances on a secure footing and improve growth prospects. Recent economic performance has been lackluster. Exports have been held back mainly by structural problems. The fiscal position has improved in FY2006, but the overall balance has been slightly negative at about ½ percent of GDP.

Annex I. Marshall Islands: Fund Relations

(As of March 31, 2008)

I. Membership Status: Joined May 21, 1992; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans: None

V. Financial Arrangements: None

VI. Projected Obligations to Fund: None

VII. Exchange Rate Arrangements:

The U.S. dollar is legal tender and the official currency. The Marshall Islands maintains an exchange system that is free of restrictions on the making of international payments and transfers for current and capital transactions.

VIII. Article IV Consultation:

The Marshall Islands is on a 24–month consultation cycle. The 2005 Article IV Consultation discussions were held during October 28–November 8, 2005. The Executive Board discussed the staff report and concluded the consultation on February 15, 2006.

IX. Technical Assistance: As indicated below.

X. Resident Representative: None.

Marshall Islands: Technical Assistance FROM Headquarters, 1992–20081

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Annex II. Marshall Islands: Relations with the World Bank Group1

Since becoming a World Bank Group member in May 1992, the Marshall Islands has received a grant of $150,000 from the Institutional Development Fund. The fund was approved in May 1993 to assist the Presidential Committee on the rationalization of the public service. The prepared report detailing an action plan for public sector reform was accepted by the Government, and the recommendations were implemented in joint assistance with the UNDP.

On June 12, 2007, the World Bank Board of Executive Directors approved $9.5 million provided by the Global Environment Facility to fund renewable energy electricity supplies for rural communities in Marshall Islands, amongst other Pacific Island countries. The project in the Marshall Islands is led by the International Finance Corporation (IFC), the World Bank’s private sector arm. IFC is currently advertising for a 5–year term Management Consultant to assist with the implementation of the project.

The World Bank Group has released major pieces of analytical work, some of which has led to implementation of technical assistance. Recent reports include:

  • Doing Business 2008: Comparing Regulation in 178 Countries, September 2007;

  • Opportunities to Improve Social Services: Human Development in the Pacific Islands, July 2007;

  • At Home and Away–Expanding Job Opportunities for Pacific Islanders through Labour Mobility, August 2006;

  • The Pacific Infrastructure Challenge, 2006; and

  • Not If, But When: Adapting to Natural Hazards in the Pacific Islands Region, 2006.

The Marshall Islands is an IBRD-Eligible Country.

Annex III. Marshall Islands: Relations with the Asian Development Bank1

The Asian Development Bank (AsDB) has approved twelve loans totaling $78.1 million to the Republic of the Marshall Islands (RMI) since it joined the Bank in April 1990.

ADB loans have covered education, fisheries, health, water, and transport, and support for public sector reform and structural adjustment. One loan assisted emergency typhoon rehabilitation. Since 2002, ADB’s program for the RMI has increasingly focused on grant technical assistance rather than loans. All ADB loans to the RMI have now been closed. Further lending is not envisaged at this time.

As of end December 2007, technical assistance (TA) grants totaling almost $18.8 million for 46 TA projects have been approved. These comprise both project preparatory and advisory TA. The TA program has covered a wide range of sectors and issues from support to ADB loans to building capacities in development banking, tourism management, environmental protection, economic policy formulation, as well as in privatizing state-owned enterprises, developing the private sector, and reforming the civil service.

In November 2004, the AsDB approved an advisory technical assistance to help improve the environment for private sector development. Continued assistance to the Land Registration Authority, the establishment of a Secure Transactions Agency, a study of the status and trends of land tenure, and continuation of the administrative barriers working group are all components of this TA. This is scheduled for completion in November 2009.

In May 2006, the AsDB approved an advisory technical assistance to support the collaborative design and society-endorsed delivery of initial pilot Ministry of Education personnel performance audits. The intent is to improve employee productivity. The TA also supports more effective delivery of youth-at-risk welfare services through continued outsourcing to civil society organizations. Completion is scheduled in May 2008.

In December 2006 a $150,000 grant from the MfDR Cooperation Fund was approved for improving independent policy results-based management. This will build both RMI country statistics generation and policy analytical capacities and, at the same time, continue to strengthen country demand for an independent monitoring of, and management for, development results. This will provide support through to 31 December 2009.

The overall framework for the AsDB country strategy for the RMI is set out in Pacific Strategy, 2005 to 2009, Responding to the Priorities of the Poor. The country strategy for the RMI was updated in 2003, 2004 and then again in 2006 in a fully participatory manner engaging representatives of civil society as well as government in formulating a new strategy. ADB’s strategy in the RMI over 2007–2011 sets out planned technical assistance projects that will focus on increasing public sector productivity as a means to improve the delivery of public services, enhance the environment for private sector development, and boost governance. The strategy fosters greater community participation in development and will concentrate on achieving measurable results in the short term.

AsDB published a Pacific Island Economic Report on the RMI in 2006, known as “Juumemmej.” This thought provoking analysis of economic and social policy issues has stimulated dialogue within the RMI and among development partners on ways for moving forward. In January 2007, AsDB released a book documenting experiences, successes, and challenges of pilot testing participatory budgeting at the local level in three countries, including the RMI.

Table 1:

Asian Development Bank Loans to the Republic of the Marshall Islands by Sector

(In millions of U.S. dollars; as of December 31, 2007)

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Annex IV. Marshall Islands: Relations with the Pacific Financial Technical Assistance Centre1

The PFTAC’s assistance to the RMI during the past two years has focused on financial supervision and public expenditure management across seven missions. The RMI has sent 16 officials to regional seminars and workshops, and the PFTAC organized one secondment in banking supervision.

Public Financial Management

In the last two years, PFM activity in RMI has increased significantly. A peripatetic consultant was fielded by PFTAC to work on fiscal forecasting and another consultant is expected to visit RMI in June 2008 for one final visit to anchor the system and provide training. A cash management manual was developed by PFTAC and training provided on its operation in early 2007. A peripatetic consultant has since provided training on the operation of the system to line ministries and visited RMI in January 2008, along with the PFTAC Advisor, to provide further training and to review the system. PFTAC is meanwhile developing a commitment control manual for RMI, and training will be provided once the Government’s feedback of the draft commitment control manual is received.

Tax Administration and Policy

In July 2003, PFTAC designed a modernization strategy and action plan for customs, including improvements to the Customs Act, automation, compliance units, and training. No progress was made on those reforms. The authorities have recently shown renewed interest in tax reforms and, if requested, PFTAC will provide resources to assess the revenue system, design a tax administration modernization plan, and review exemptions.

A short PFTAC Mission took place in December 2007 and provided short-term revenue enhancing measures including integration of local and national government taxes, as well as discussions about longer-term revenue reforms to address the narrow tax base and low levels of compliance.

Financial Sector Regulation and Supervision

Following a mission by a peripatetic advisor in April 2006, the PFTAC advisor visited RMI in May 2006 and recommended that the Banking Commission expand the scope of its on-site examinations of banks to include operational and liquidity risk management. Also in 2006, the Advisor provided comments to the Commission on an application to establish a new bank in Majuro. In March 2007, the Advisor assisted the Banking Commission to conduct an on-site examination covering these areas and AML/CFT compliance at one bank. The Advisor also provided the Commission with draft prudential guidelines on operational and liquidity risk, as well as a critique of the Commission’s statistical returns. In November 2007, the Advisor assisted the Commission in conducting an on-site examination at one bank to follow up on actions taken to resolve concerns arising from the March 2007 AML/CFT examination. PFTAC also arranged and provided financial assistance in 2007 for the Assistant Banking Commissioner to be attached to the Hawaiian bank supervisory authority to participate in an on-site examination. At the request of the Commissioner, the Advisor plans a visit for July 2008. The focus of the mission will be to provide training in credit (loan) analysis and classification and off-site monitoring and surveillance of banks.

Economic and Financial Statistics

The Economic Policy, Planning and Statistics Office (EPPSO) increased its staff by one in 2005, to work on macroeconomic statistics. However, the statistics continue to be compiled by consultants, despite the staff member’s having been trained in national accounts. The PFTAC Advisor conducted a national accounts training course in Pohnpei in 2006. The Advisor has provided some technical backstopping to the national accounts consultant over the last two years, and in July 2007 visited RMI to assist with the improvement and compilation of their Balance of Payments (BOP) statistics. This mission was in conjunction with the two consultants who were funded by the US Department of Interior to update the 2007 Annual Compact Report, including the economic statistics. In July 2007, the Advisor undertook a BOP mission to update and improve estimates and methodology in conjunction with the ADB team to prepare data for the US Compact Report.

Annex V. Marshall Islands: Statistical Isues

Data provision, while adequate for surveillance, constrains policy evaluation. The authorities willingly share available data, yet deficiencies exist in nearly all areas of economic statistics. Further efforts are needed to build local capacity to produce these statistics. A new Economic Policy, Planning, and Statistics Office (EPPSO) was established in February 2003 to collect and disseminate statistics. However, EPPSO still lacks sufficient qualified statistical staff and capacity to produce timely data. It should further develop data for the balance of payments and compilation of the fiscal data in Government Financial Statistics format. The publication of the Quarterly Bulletin of Statistics was resumed in June 2003, containing mainly CPI data. Other quarterly and monthly data are not published or transmitted to the Fund. Extensive Fund technical assistance has been provided from headquarters and the Pacific Financial Technical Assistance Centre (PFTAC), but many recommendations have not been implemented. The authorities have expressed an interest in participating in the IMF General Data Dissemination System (GDDS).

Real Sector

Preliminary national income accounts (the latest data through 2004) have been prepared by an AsDB consultant on an institutional approach with data going back to 1997. Shortcomings with these data remain, especially with the deflators to compute real GDP, operating surpluses, and employment data sources, but these estimates represent an improvement over earlier ones. Previously the data were prepared on a production basis since 1991. The new consumer price index(CPI), rebased in 2003, replaced the CPI index developed in the 1980s. The updated CPI is based on the information from the Household Income and Expenditure Survey 2002, conducted with assistance from the U.S. Department of the Interior and the U.S. Census Bureau.

Government Finance

Fiscal data are regularly compiled for budget control, but they are not consolidated into a format suitable for analysis. The authorities received technical assistance on budgetary accounting in 1994 and 2001. The Marshall Islands do not report Government Finance Statistics for publication in the GFS Yearbook and IFS.

Monetary Accounts

A reporting system has been established for domestic banking institutions on the basis of monthly reporting forms and guidelines developed by the 1993 STA mission. Even though data are reported by banks to the Banking Commissioner, they are not published or reported to the Fund.

Balance of Payments

Compilation of balance of payments data has improved somewhat recently with assistance from PFTAC. Compilation of import statistics has been hampered, mainly due to backlogs in data entry, and inappropriate classification and coding. With no compulsory reporting, export statistics are incomplete. Only limited data are available on services, factor income, and private transfers, and there are no reliable data on remittances and private financial flows.

Marshall Islands: Table of Common Indicators Required for Surveillance

(As of March 31, 2008)

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Includes government financial assets deposited in commercial banks.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA); Staff visits (V).

1

Technical assistance has been provided through PFTAC since 2005–see Annex II.

1

Prepared by World Bank staff (East Asia Pacific).

1

Prepared based on input from the AsDB staff.

1

Prepared based on the input from the PFTAC staff. PFTAC, which is located in Suva, Fiji, is a multi-donor technical assistance institution, financed by the IMF, AsDB, AusAID, NZAID, Japan, and Korea, with the IMF as the Executing Agency. The Centre’s aim is to build skills and institutional capacity for effective economic and financial management that can be sustained at the national level. Member countries are: Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.