22 March 2021
The Final Mission press release includes a statement by the IMF staff team delivering preliminary findings after a country visit. The views expressed in this statement are those of IMF staff and do not necessarily represent the views of the IMF Executive Board. Based on the mission’s preliminary findings, staff will prepare a report which, with management’s approval, will be presented to the IMF Executive Board for discussion and decisions.
- The Marshall Islands are taking swift and strong action to contain the Covid-19 pandemic without a record of local transmission and are currently leading the launch of the Pacific Covid-19 vaccine.
- However, the containment measures have weighed on the economy. GDP is expected to contract by 3.3 percent in FY2020 and further decrease by 1.5 percent in FY2021.
- Post-pandemic, fiscal consolidation is needed to build buffers to reduce the risk of fiscal gaps and protect long-term revenues.
Yong Sarah Zhou chaired Article IV virtual consultations with the Republic of the Marshall Islands (RMI) from March 1 to 18. At the end of the visit, Zhou issued the following statement:
“The Marshall Islands economy was experiencing strong growth before the pandemic. Real GDP is expected to increase by around 6.5 percent in FY2019 (1 October-30 September), driven by strong fishing and construction activities. Inflation remains low, given weak commodity prices.
“As a result of its strong and swift containment measures, RMI has so far remained one of the few countries that has no record of local transmission of COVID-19. The government has implemented a vaccination plan, supported by the US RMI leading the launch of the Covid-19 vaccine in the Pacific Islands, with the first round of vaccination of more than 30 percent of the total population completed.
“However, the economic impact of COVID-19 is severe, as elsewhere. Real GDP is expected to contract by 3.3 percent in FY2020 and is expected to fall by around 1.5 percent in FY2021, due to pandemic-related disruptions to production, sales and employment, particularly in the fisheries, transportation and tourism sectors. The economy is expected to recover in FY2022, based on the assumption that the health restrictions on economic activity will gradually ease. Inflation is expected to pick up slightly, reflecting higher fuel prices.
“The uncertainty surrounding the economic outlook is very high, given the pandemic, and risks are likely to fall. Extended border closings due to a more protracted Covid-19 pandemic around the world could prolong weak economic activity. The issuance of the SOV for digital currency as the second legal tender will increase the risk of macroeconomic and financial stability and financial integrity. The issuance of SOV could jeopardize the banking relationship related to RMI’s final USD (CBR). This combined with the risk of anti-money laundering and combating terrorism financing (AML / CFT) (including those linked to SOVs) could disrupt external aid and other important financial flows, resulting in significant economic constraints. Climate change and related natural disasters are another downside risk.
“RMI also faces important fiscal risks. Without sufficient fiscal consolidation, countries will face increasing fiscal risks from the fiscal gap if the Compact of Free Association (COFA) between the RMI and the United States ends in FY 2023. Alternatively, the potential for renewal of the COFA on favorable terms presents an upside risk.
“Against this backdrop, the team’s policy recommendations focus on three main objective areas: (i) ensuring a long-lasting economic recovery after a downturn and long-term fiscal independence; (ii) maintaining financial stability; and (iii) achieving green, sustainable and inclusive growth after the pandemic.
“The team lauds the government’s swift action to ensure health preparedness and reduce the economic impact of the pandemic, with support from donors. The team recommends sticking with the response package until the recovery progresses steadily while re-prioritizing and reallocating spending as needed, given the uncertainty about the development of COVID-19 in the global economy.
“Post pandemic, gradual fiscal consolidation is needed to prepare for a possible expiration of US grants and reduce the risk of fiscal gaps. Even if the COFA is renewed, some adjustments may still be needed to maintain healthy public finances and reduce reliance on external grants. An essential element of sound public finances is the preservation of the value of the Compact Trust Fund which is adjusted for inflation. The team recommends a combination of expense and income measurements to achieve consolidation. It is important for the government to enact the tax reform bill that has been prepared and to reform offshore shipping taxation and company registration. The preparation of a Fiscal Liability and Debt Management Act has recently been welcomed, but their timely enforcement and effective implementation will be critical to success.
“The staff welcomes the authorities’ continued cautious approach to the Sovereign digital currency (SOV). SOV will pose significant risks to macroeconomic and financial stability and financial integrity. RMI’s legal, regulatory and institutional framework is not ready to accommodate the issuance of SOVs and manage the associated risks. Therefore, the team’s assessment suggests that the potential costs of issuing an SOV are likely to outweigh the expected benefits.
“Another concern is the risk of financial integrity in the non-resident and shipping (offshore) sector. Progress has been made to strengthen the RMI’s AML / CFT regime in line with recommendations made by the Asia Pacific Group on Money Laundering but weaknesses in the legal framework and capacity constraints among regulatory authorities may not allow the AML / CFT regime to effectively mitigate financial integrity risks. In particular, timely access to accurate beneficial ownership information about entities registered with RMI is not guaranteed. Further, there is a lack of meaningful oversight of the offshore sector – including that of the Trust Company of Marshall Islands (TCMI), which has been delegated duties to operate non-resident registers and shipments – and inadequate AML / CFT regulation of offshore activities. . The foregoing can put pressure on correspondent banking relations (CBR). Staff recommended that the Marshall Islands Government strengthen the AML / CFT legal / regulatory framework and the capacity of its agencies to ensure proper offshore sector AML / CFT regulation, oversight of delegated public functions and effective mitigation of financial integrity risks.
“Green and sustainable recovery requires accelerated preparation of the national adaptation plan (NAP) for climate change. The team welcomes the government’s commitment to finalizing the NAP by 2021 and offers support for PFM reforms to increase RMI’s ability to access global climate funds.
“IMF staff recommends increasing the implementation of BUMN reform. In the medium and long term, the government should develop direct and targeted fiscal transfers, which are more efficient at distributing income to the poor than paying subsidies to SOEs for social services while reducing economic distortions.
“Staff are aware of the longstanding and difficult structural challenges surrounding economic diversification and growth for a small and remote economy like RMI. Improving the business environment can play an important role in enabling the private sector to grow and become more dynamic. Land registration reform will be an important step to promote business investment in RMI. Increasing education and opportunities for training and skills development and expanding social services can help reduce migration to the US and enable higher local growth.
“The IMF team would like to thank the RMI government as well as private sector representatives for constructive and honest discussions.”