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By Giff Johnson

MAJURO, Marshall Islands (Marianas Variety, May 5) — The International Monetary Fund warns that declining funding from the United States will make it increasingly difficult for the Marshall Islands to sustain payroll costs of its "large government sector."

The IMF report released Thursday said that the government must quickly make some tough decisions for the long-term economic health of the country.

The IMF conducts an economic review of the Marshall Islands every two years.

The IMF urged the government to take "speedy" action to reform its operations to:

• Produce a budget surplus at the end of the current fiscal year to reverse last year’s situation when the Marshall Islands ended the year with a more than $3.5 million deficit, or more than two percent of its national budget.

• Adjust budget priorities to increase contributions to a national trust fund to adequately capitalize the fund to replace U.S. grants that expire in 2023.

• Cut government payroll and enforce tighter controls on spending on goods and services.

Because spending continues to outpace local tax collections, the government in February slapped a freeze on general government spending.

Although the government’s Chief Secretary Robert Muller said recently that he hoped the spending freeze would be lifted soon, the spending halt is now in its third month.

A big government payroll has become a major funding issue for the government. The government’s payroll rose more than 50 percent from $15.4 million annually in 2000 to more than $23.5 million in 2004. Government workers account for about 40 percent of all jobs in the Marshall Islands, which has a population of 58,000.

"The government cannot provide jobs for this size of population," Carl Hacker, the director of the country’s Economic Policy, Planning and Statistics Office, told a budgeting workshop this week. "We need a fundamental reconsideration of what we’re doing, how we’re managing the economy and the government’s role in the economy."

A combination of reduced donor funding and overseas loan payments dropped per capita gross domestic product by 30 percent from 1995 to 2005, the report said. Under a Compact of Free Association with the U.S. that expires in 2023, the U.S. provides grants that decline by $500,000 annually, while contributions to a trust fund increase by the same amount. Both the IMF and the U.S. Government Accountability Office have expressed concern that the trust fund will not be able to produce adequate interest in 2023 to replace U.S. funding levels, which now amount to nearly 70 percent of this western Pacific nation’s annual budget.

The IMF report said that "after nearly a decade of growth following independence in 1986, economic activity declined markedly in the mid-1990s."

With government reforms in the late-1990s, including a big reduction in force that dropped the government workforce by 25 percent, economic growth picked up in the Marshall Islands, IMF said. But government employment has skyrocketed since 2000, reversing the situation of the late-1990s.

"With the declines in (U.S.) grant funds under the amended Compact of Free Association and the increase in debt service payments, the large government sector will become increasingly unsustainable," the IMF said.

Changes "should start immediately" if the Marshall Islands is to achieve budgetary self-reliance, the IMF said.

May 5, 2006

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