Article

Lasting Growth in Marshall Islands hinges on Further Fiscal and Structural Reform

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 2006
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The Marshall Islands enjoyed a decade of expansion after independence in 1986 before seeing activity decline sharply in the mid-1990s and pick up in the late 1990s. Real output growth slowed in 2003 and 2004, hampered by delays in implementing an upgraded public works program and the closure of a privately owned tuna processing plant, which eliminated about 500 jobs, according to the IMF’s latest economic review.

The country depends heavily on external assistance. Government expenditure accounts for more than 70 percent of GDP, and about 50 percent of government revenue consists of external grants, mainly from the United States. The private economy remains underdeveloped, primarily providing services to the government, with small contributions from agriculture, fishery, and tourism. In 2004, the Compact Agreement with the United States was amended and extends U.S. financial support until 2023, with grants declining steadily. Overall, unemployment has increased, except in the civil service, as a result of increased spending on education and health in line with the amended Compact.

Marshall Islands
Est.Proj.
20022003200420052006
Real GDP (percent change)4.01.80.43.54.0
Consumer price index (percent change)-0.4-0.92.03.52.9
Revenue and grants (percent of GDP)64.265.056.258.169.6
Compact Trust Fund (million dollars, end-period)132.047.160.4
External debt (percent of GDP end-period)270.671.276.469.863.6
Note: Fiscal year ends September 30.

Assets in trust funds are treated as nonusable.

Government and government-guaranteed debt only.

Data: Marshall Islands authorities and IMF staff estimates and projections.
Note: Fiscal year ends September 30.

Assets in trust funds are treated as nonusable.

Government and government-guaranteed debt only.

Data: Marshall Islands authorities and IMF staff estimates and projections.

The country’s fiscal position deteriorated in 2004, partly because of a decline in grants for infrastructure projects, lower income tax collection, and volatile nontax revenue. Total expenditure increased, with some shift from capital to current expenditure. Spending on wages and goods and services continued to rise, exacerbating the fiscal position. In 2005, reflecting an expansionary fiscal stance and improvements in agriculture, real growth is expected to have picked up, and the government’s overall deficit is estimated at 2 percent of GDP, stemming mainly from low revenue collection.

The IMF Executive Board welcomed the authorities’ efforts to move the Marshall Islands toward lasting growth by retiring high-cost commercial debt and building reserves to meet its mandatory contribution requirement to the Compact Trust Fund. Directors commended the strengthening of the government’s institutional capacity but underscored the need for further fiscal and structural reforms, given the anticipated declines in Compact grants and prospective increases in debt-service payments. While calling for reduced outlays, especially for wages, Directors stressed the importance of protecting core expenditure.

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