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IMF Staff Completes 2018 Article IV Mission to Republic of the Marshall Islands

May 24, 2018

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

  • Growth in Marshallese economy is estimated to have accelerated to about 3½ percent in FY2017 and expected to remain robust at about 2½ percent in FY2018.
  • Overall risks to economic activity remain tilted to the downside, including the risk of losing remaining correspondent banking relationship.
  • Considering the significant risks, IMF Marshall Islands team recommends that the authorities seriously reconsider the issuance of the SOV.

An International Monetary Fund (IMF) team, led by Mr. Joong Shik Kang, visited Majuro from May 15 to 25 to conduct the 2018 Article IV Consultation.

At the conclusion of the visit, Mr. Kang issued the following statement:

“Growth in Marshallese economy is estimated to have accelerated to about 3½ percent in FY2017 with a strong pick-up in fisheries and construction activity. Going forward, growth is expected to remain robust at about 2½ percent in FY2018, driven by continued infrastructure investment, while moderating to about 1½ percent over the medium term.

“Despite improving near-term growth outlook, overall risks to economic activity remain tilted to the downside. The Republic of the Marshall Islands (RMI) remains at risk of losing its remaining correspondent banking relationship. Being cut off from the global financial system would be a significant threat to the economy. Inadequate fiscal adjustment ahead of the expiration of U.S. Compact grant in FY2023 is the main medium-term downside risk. Extreme natural disasters in the context of climate change also pose risks to the economy. On the upside, decisive state-owned enterprise (SOE) reforms, if combined with well-managed large infrastructure projects, could raise productivity and growth in the medium term.

“Against this background, the team’s recommendations focus on four main areas: (i) protecting financial stability and integrity; (ii) securing fiscal sustainability; (iii) fostering adaptation to climate change; and (iv) promoting sustainable growth.

“The team commends the authorities’ efforts to remain connected to the global financial system and reduce risks of losing the corresponding banking relationship, including the progress in strengthening the anti-money laundering and combating financing terrorism (AML/CFT) framework. Once completed, the recently started assessment of the RMI’s money laundering and terrorist financing risks should be accompanied by an action plan to mitigate the identified risks. While progress has been made in ensuring greater transparency of beneficial ownership information in the offshore and maritime sectors, further efforts are necessary to fully address the ML/TF risks related to both sectors.

“The team discussed the authorities’ plan to issue a decentralized sovereign digital currency (“the SOV”) as a second legal tender. Its assessment is that the potential benefits from the issuance would not be large enough to compensate for the potential costs resulting from the risks to economic and financial stability, to the AML/CFT track record, and to cybersecurity. In the absence of adequate AML/CFT measures in place, the digital currency can be misused for criminal purposes, and the issuance would worsen the RMI’s ML/TF risk profile, thus undermining the government’s efforts to stay connected to the global financial networks. Another major concern is that the macroeconomic policy framework and institutions are not prepared to handle the significant risks to macroeconomic and financial stability from issuance. Therefore, considering the significant risks, the team recommends that the authorities seriously reconsider the issuance of the SOV.

“The fiscal balance has posted surpluses over the last few years because of a large increase in fishing license revenues. However, the Compact Trust Fund is not expected to generate sufficient income to fully offset the expiring Compact grants on a sustainable basis. Gradual fiscal adjustment of 4 percentage points of GDP over the next five years would be needed to build adequate fiscal buffers. To achieve this, the team recommends reversing the recent strong increase in recurrent spending, improving revenue administration, and legislating tax reform. The team also encourages the government to further improve its overall public finance management framework, with the assistance of PFTAC and ADB.

“The Republic of the Marshall Islands is one of the most vulnerable countries to climate change and rising sea levels because of its low elevation. The team supports the authorities’ efforts to mitigate natural disaster risk and build resilience, and encourages the authorities to proceed with a Climate Resilience Project, with the assistance of WB, which would help strengthen early disaster warning and improve coastal protection and planning.

“Progress in the reform of SOEs has been slow despite the enactment of the SOE Act in 2015, and subsidies to SOEs have continued to rise in recent years. The team welcomes the recent establishment of the SOE monitoring unit and recommends reducing subsidies to SOEs that are not justified by the provision of the essential community services. This would help the fiscal consolidation efforts and contribute to higher growth.

“The team held constructive and candid discussions with officials in the government and other public institutions as well as private sector representatives to exchange views on recent economic developments and the outlook, economic reform progress and challenges, and policy responses. The team is grateful to the authorities for their openness, cooperation, and hospitality.”

IMF Communications Department


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