Following a severe recession in FY2008–09, the economy grew by 5.2 percent in FY2010, mainly driven by an expansion in fisheries and exports and moderating fuel prices. The fiscal situation has improved somewhat, but general elections scheduled for late November add to spending pressures.
Outlook and risks. The recovery is expected to continue, but prospects over the medium term are overshadowed by the scheduled declines in foreign grants and sluggish private sector. Risks to the outlook are on the downside, stemming mainly from a protracted global slowdown. The weak financial position of some public enterprises could hinder economic activities and erode public finances. Fluctuations in fuel and food prices would also pose a substantial risk given the RMI’s high dependence on commodity imports.
Fiscal sustainability. Achieving long-term budgetary self-reliance and sustained growth remains a challenge. Under the baseline projection, sluggish growth and fiscal adjustment imply a large projected revenue shortfall in FY2023 when Compact grants are set to expire. Closing this revenue gap would require a fiscal adjustment of around 4 percent of GDP over the medium term. It would be important to start implementing reforms early to create fiscal space and address possible setbacks.
Fiscal and structural reforms. To achieve this adjustment would require comprehensive public sector and structural reforms that build on ongoing efforts to unlock private sector growth. These include: (i) swift implementation of tax reform; (ii) targeted expenditure cuts; (iii) accelerated reforms of the state-owned enterprises (SOEs), and; (iv) removal of obstacles to private sector development.
Financial sector. The banking sector remains liquid and profitable, but contributes little to growth. Credit risks from heavily-indebted households could rise. The Banking Commission’s oversight should be broadened to include the development bank and private lending institutions to safeguard financial stability.
IMF.Republic of the Marshall Islands; Staff Report for the 2011 Article IV Consultation.Published:December 02,2011.Series:Country Report No. 11/337
