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Pacific Islands Development Program, East-West Center

With Support From Center for Pacific Islands Studies, University of Hawai‘i

IMF Urges Marshall Islands To Address ‘Shaky’ Economy
Recommends strengthening trust fund, reducing overall deficit

By Giff Johnson

SAIPAN, CNMI (Marianas Variety, Nov. 16, 2012) – The Marshall Islands was urged by an International Monetary Fund (IMF) team to take immediate action to improve its shaky economic situation.

In a report issued Wednesday following a weeklong visit to Majuro, the IMF team said the Marshalls has to take action to shore up its social security program that is nearing bankruptcy and to reduce subsidies to its state-owned enterprises that are draining government funds. It was also urged to halt government deficits, bring change to the banking sector, and implement a recently introduced new tax system.

The IMF pointed out that a trust fund established by the Compact of Free Association with the United States is well below levels needed to provide a smooth transition after 2023 when the Compact’s funding package expires, and the government needs to be investing larger amounts of money in the trust fund.

It estimated the FY 2011 deficit at $2 million and said not only do deficits need to be halted, a government surplus averaging $10 million a year by FY 2017 must be realized.

While the fisheries sector is growing, a $15 million U.S.-funded airport project in Majuro is moving forward after delays and a new water and sanitation project for Ebeye Island funded by Australia is soon to start, the support these projects will bring to the Marshall Islands economy "will be largely off-set by shrinking public sector demand from declining Compact grants," the report said.

The International Monetary Fund conducts regular economic assessments of its member countries, and a team visited Majuro earlier this month to gather data that led to the issuance of this report.

The need for government reform is stressed repeatedly in the short, three-page report.

Central to fixing government fiscal problems is ending the fiscal year with money in the bank. But this did not happen on September 30.

"Volatile domestic revenue, declining foreign grants, and occasional off-budget spending by ad-hoc directives pose constant threats to maintaining fiscal surpluses," the IMF said. The reason this is critical, IMF said, is that more money needs to be put away into the trust fund to ensure there is money to support government services in 2024 after Compact grant funding ends. The trust fund had a "lackluster investment performance in FY 2011 and its trajectory of asset accumulation is well below the level needed to achieve self-sufficiency," the report said. The IMF estimates that at its current level of growth, funding available to the government in 2024 will be about $11 million short of U.S. grant funding in 2023, which would put the viability of the Marshalls government into question.

The government needs to build up its fiscal surplus to six percent of gross domestic product — about $10 million by FY 2017 — and maintain this surplus annually through the end of the Compact.

The IMF supported the recently introduced tax bills introduced to parliament, saying the expected passage in January "will make the Marshall Islands economy more business friendly."

It urged the government to maintain its announced policy of controlling public wages and reducing allowances to government and other officials.

It said reform is urgently needed for state-owned enterprises, which now receive more than $8 million annually in subsidies.

The Marshall Islands Social Security Administration looms as a huge risk to the economy, the report said. "The mission encourages swift preparation of a bill to reform the social security system. Reform options could include an increase in contribution rates, a revision of benefit structure, an increase in the standard retirement age, and a lengthening of the minimum contributions period."

The IMF said the Marshall Islands faces a wide range of reform challenges and needs to communicate with the general public in order to effectively carry out the needed changes.

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