Economic outlook

RMI’s economy has recovered from recession. A severe drought in 2016 affected agriculture, especially copra production, but there has since been a pick-up in construction work related to schools, hospitals and government buildings. The authorities note staff’s medium-term growth projection of around 1.5 percent. They consider climate change to be one of the main risks to the outlook, as extreme weather episodes have adversely affected the country in recent years.

Fiscal sustainability

RMI’s fiscal challenges are shaped to a large extent by the impending expiry of many current grants made under the Compact of Free Association with the United States. From 2024, these will be replaced by ongoing distributions from an investment fund – the Compact Trust Fund (CTF) – which is currently being built up through contributions from the US, Taiwan POC and the RMI itself. However, the current track for contributions, together with expected investment returns, is not enough to ensure that the CTF can replace the expiring grants each year and also maintain the Fund’s real value over time.

The authorities agree that a significant fiscal adjustment is needed ahead of 2024 and have been undertaking reforms to reduce expenditure pressures. Social security reforms adopted in 2017, for example, include an increase in the retirement age to 65 by 2025 and greater contributions by both employers and workers. Public financial management reforms are focused on accounting systems and reporting, the budgeting framework, procurement systems, tax administration and the management of non-tax revenue. To contain recurrent expenditure, the authorities are seeking Cabinet’s endorsement of expenditure ceilings before each ministry submits their budget estimate. RMI has also introduced a medium-term budget framework with a three-year horizon and will commence work on a long term fiscal framework in fiscal year 2019.

SOEs make up a significant portion of the economy but persistently make losses, in part because of the cost of providing electricity and transport services to remote islands. The authorities agree with the need to accelerate SOE reforms, in particular, to reduce overall government subsidies and make it clear where remaining subsidies exist as a result of specific community service obligations. An important step has been the establishment of an SOE monitoring unit in the Ministry of Finance, which will begin by focusing on four SOEs – the airline, shipping, copra processing, and energy companies – to improve their performance.

RMI receives a considerable amount of revenue from fishing license fees and also gets income from the provision of offshore corporate services and ship registration. Fishing license revenue has increased significantly since the introduction of the Vessel Day Scheme benchmark price. Domestic tax revenue has also risen, and tax administration has been strengthened. The authorities are grateful for the technical assistance they have received on tax reform and would appreciate more of this, including lessons from other countries on the introduction of VAT.

RMI greatly appreciates the support it receives from its international partners. It would value additional donor contributions to the CTF, as well as support for climate mitigation and adaption projects. RMI is expected to be one of the countries most affected by climate change and rising sea levels. Several climate-related projects are already underway as part of the joint national action plan for climate change adaption and disaster risk management.

Financial sector

The potential loss of the country’s remaining correspondent banking relationship remains a very significant concern to the RMI authorities. To help prevent this, the authorities have amended the Banking Act to strengthen the legal framework for AML/CFT supervision in line with international standards. A national risk assessment is in progress, helped by technical assistance from the World Bank. The Marshallese authorities have also strengthened financial supervision and regulation in the banking sector. The Banking Commission has been working with PFTAC on improving its monitoring. As a first step, off-site monitoring has been implemented based on existing manuals, including submission of financial information on a regular basis. On-site monitoring was performed for the Bank of Marshall Islands in February and is being planned for the Bank of Guam. The Banking Commission is also working on a financial sector development plan. The government is concerned about high consumer debt, low financial literacy, and consumer lending practices by banks and lenders.

Cryptocurrency

RMI intends to issue a cryptocurrency – the SOV – as a second legal tender, alongside the US dollar. It intends to do this with a foreign private sector partner, which would share the first issuance of SOV with RMI, before an initial coin offering (ICO) was undertaken. The authorities’ motivation is to take advantage of the growing enthusiasm for cryptocurrencies, together with the innovation of it being a national currency, to generate much-needed income for the government. This income would be obtained by selling half the RMI’s initial allocation of SOV in the ICO and keeping around a quarter in SOV in its trust funds. The remainder would be distributed over time to RMI resident citizens.

The Marshallese authorities are well aware that issuing a legal tender cryptocurrency puts RMI into uncharted waters, and that there are many risks involved in issuing the SOV, including reputational and CBR risks to RMI. However, they believe they can work through these issues. They have created a high-ranking committee to examine all the risks, including those raised by the IMF and the US Treasury, and those discussed during the public hearings on the legislation. Given these sorts of issues, the authorities expect it will take a few years to issue the cryptocurrency. Moreover, they will only issue the SOV once its use complies with the FATF standard and US regulations, and once its use in transactions in the US financial system has been approved by the US government.