Republic of the Marshall Islands: Staff Report for the 2009 Article IV Consultation—Informational Annex

This 2009 Article IV Consultation highlights that the economy of the Marshall Islands is on a path to recovery. A gradual expansion with growth reaching 0.5 percent in 2010 is supported by further growth in the fish processing industry and additional foreign grant assistance. Rising prices could stoke inflation and stifle domestic demand. Executive Directors have encouraged the authorities to continue to strengthen the statistical base, especially the coverage and timeliness of fiscal and balance of payments data, in order to improve policy analysis and decision-making.

Abstract

This 2009 Article IV Consultation highlights that the economy of the Marshall Islands is on a path to recovery. A gradual expansion with growth reaching 0.5 percent in 2010 is supported by further growth in the fish processing industry and additional foreign grant assistance. Rising prices could stoke inflation and stifle domestic demand. Executive Directors have encouraged the authorities to continue to strengthen the statistical base, especially the coverage and timeliness of fiscal and balance of payments data, in order to improve policy analysis and decision-making.

Annex I. Marshall Islands: Fund Relations

(As of November 30, 2009)

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 2009 Article IV Consultation discussions were held during November 10–18, 2009. The Executive Board discussed the staff report and concluded the consultation on February 3, 2010.

IX. Technical Assistance: As indicated below.

X. Resident Representative: None.

Marshall Islands: Technical Assistance from Headquarters, 1992–20091

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Annex II. Marshall Islands: Relations with the World Bank1

Since becoming a World Bank Group member in May 1992, the Marshall Islands 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 United Nations Development Program (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, among 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.

As part of a broader effort to deepen engagement with the Republic of the Marshall Islands and other World Bank Group members in the North Pacific, the World Bank has recently assigned a Senior Economist based in Washington, D.C. to work with the government and to outline a substantive program of technical assistance. In addition, the World Bank is also exploring a artnership with the Overseas Development Institute (ODI), a leading independent think-tank on development and humanitarian issues based in the United Kingdom, under which the Institute might assign postgraduate economists under its Fellowship scheme. Fellows would provide valuable in-country support the public sectors of the Marshall Islands and other clients in the North Pacific and serve as a point of contact with the World Bank Group and other development partners throughout the fellowship period. The Director of the ODI Fellows program is expected to undertake a scoping mission to the North Pacific in early 2010.

In March 2009, senior World Bank management held consultations with the government and World Bank staff participated in November 2009 in the International Monetary Fund (IMF) Article IV consultation mission. Acknowledging the impacts of the food, fuel and global financial crises, the World Bank is currently responding to government requests for technical assistance with the objective of reducing the country’s vulnerability to petroleum price volatility, improving energy efficiency, and increasing use of renewable energy and access to reliable energy supplies. In September 2009, World Bank Technical Staff also participated in an analysis of the performance and prospects for the Marshalls Energy Company (MEC), the state-owned enterprise that provides generation and distribution services on Majuro. In recognition of this increased demand for development assistance in the Marshall Islands in the current environment–the scope of which is currently constrained by the country’s IBRD status–the World Bank is also exploring the possibility that the country could obtain exceptional access to concessional IDA resources.

  • Doing Business 2010: Comparing Regulation in 183 Countries, September 2009;

  • 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.

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

The country strategy of the Asian Development Bank (AsDB) for the Republic of the Marshall Islands (RMI) is set out in “Pacific Strategy 2005 to 2009: Responding to the Priorities of the Poor.” The country strategy has been updated regularly in a participatory manner engaging representatives of civil society as well as the government. A new AsDB’s strategy for the RMI covering the period 2010–12 will be available in early 2010. The report lays out planned technical assistance (TA) projects and focuses on raising 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 concentrates on achieving measurable results in the short term.

Since joining the AsDB in April 1990, the RMI has received 11 loans totaling $78.1 million. AsDB loans have covered education, fisheries, health, water, and transport, and support for public sector reform and structural adjustment (see table). One loan assisted emergency typhoon rehabilitation. Since 2002, AsDB’s program for the RMI has increasingly focused on grant TA rather than loans. All AsDB loans to the RMI have now been closed. As of end December 2008 TA grants totaling almost $18.9 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 AsDB 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 program to 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. Its completion is scheduled for December 2009.

In May 2006, the AsDB approved an advisory technical assistance program to support the collaborative design and society-endorsed delivery of initial pilot personnel performance audits for the Ministry of Education. The intent was to improve employee productivity. The TA also supported more effective delivery of youth-at-risk welfare services through continued outsourcing to civil society organizations. The TA was completed 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 initiative aims to strengthen the RMI’s statistics generation and analytical capacities to monitoring and manage country development results. This will provide support through to 31 December 2009.

Recently, the AsDB provided support for domestic public sector reform initiatives by deploying technical experts to address human resource, energy, and public finance matters. Such support has been provided in close coordination with other donor partners, including the United States, IMF/PFTAC, Australia, Japan, and European Union.

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, 2008)

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

The Pacific Financial Technical Assistance Centre (PFTAC)’s assistance to the RMI during the past years has focused on financial supervision, public expenditure management, and tax administration policy through numerous missions, which RMI officials attended regional seminars and workshops. PFTAC also organized one secondment for staff in banking supervision.

Public Financial Management

In the last three years PFM activity in RMI has increased significantly. A peripatetic consultant was fielded by PFTAC to work on fiscal forecasting and again 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. The PFTAC advisor visited RMI again in May 2009 to provide training. PFTAC is meanwhile developing a commitment control manual for RMI and a commitment control system may be installed, and training provided once the government’s feedback of the draft commitment control manual is received.

PFTAC also carried out an assessment of the IFMIS systems in RMI in December 2009 with a view to recommend next steps to improve the operation of the system.

Tax Administration and Policy

In 2008, the Minister of Finance set up the Tax and Revenue Reform Modernization Commission (TRRMC) to make recommendations to reform the revenue collection system and to strengthen the capabilities and effectiveness of the Division of Revenue and Taxation (DRT). The TRRMC is required to make recommendations to the Minister of Finance early in 2010. The PFTAC Revenue Advisor is an advisor to the TRRMC

PFTAC has carried out five missions since 2007. The earlier missions focused on revenue administration including (a) the amalgamation of local and central government revenue administrations, and (b) the setting up of the TRRMC.

The most recent mission in September 2009 made revenue policy (reform) recommendations for the TRRMC to consider when making its report and recommendations to the Minister of Finance. 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 visited the Commission in July 2008. The focus of the mission was to strengthen the capacity of the authorities to conduct off-site surveillance of banks with a number of revisions recommended to the prudential reporting requirements for banks and expansion of the off-site monitoring database. The mission also included training in the analysis of financial statements to assess a borrower’s credit risk.

At the request of the Commission, a follow-up visit is planned for late-January 2010 to assist and provide training to the Commission in conducting a full-scope CAMELS examination and the application of financial statement analysis in assessing credit risk and asset quality.

Economic and Financial Statistics

The Economic Policy, Planning and Statistics Office (EPPSO) received significant training since 2005 on balance of payments and national accounts statistics, including through participation on a PFTAC regional national accounts statistics course conducted in Pohnpei, Federated States of Micronesia in 2006. Despite the extensive training, these statistics continued to be compiled by external consultants. The previous PFTAC Statistics Advisor provided some technical backstopping to the national accounts consultant, and in July 2007 visited RMI to assist with the improvement and compilation of their Balance of Payments (BOP) statistics. The mission was carried out in conjunction with the two consultants who are funded by the U.S. Department of Interior to update the Annual Compact Report.

In November 2008, the current PFTAC Advisor undertook a joint BOP and national accounts statistics mission to RMI to continue development work on BOP and NA sources and methods, as well as to assist in updating BOP and NA estimates. The EPPSO counterpart left in early 2009 and there is currently no statistics staff at EPPSO. As a result, two consultants funded by the U.S. Department of Interior visited RMI in mid-2009 and updated the BOP and national accounts statistics for inclusion in the Annual Compact Report.

Annex V. Marshall Islands—Statistical Issues

As of December 03, 2009

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Marshall Islands: Table of Common Indicators Required for Surveillance

As of December 16, 2009

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Any reserve assets that are pledged of otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means, as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Annual data is prepared for inclusion in the Annual Compact Report, The Banking Commissioner provided three-quarter FY2009 data for the mission.

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.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

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

1

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

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 TA 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.