IMF: MARSHALLS ECONOMY SHOWS LITTLE PROMISE

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By Aenet Rowa

MAJURO, Marshall Islands (Yokwe, Dec. 31) - An International Monetary Fund (IMF) presentation this month in the Republic of the Marshall Islands (RMI) reiterated what other reports have warned-- the small, Pacific nation's financial status quo is not sustainable for future generations. The IMF mission addressed the need for immediate tax reform and re-examination of Trust Fund projections.

"If there is little or no attempt at fiscal reform and discipline well before 2024, future generations will inherit a bitter financial situation," said Carl Hacker, director of the RMI's Economic Policy, Planning and Statistics Office, in response to the findings.

The IMF's Article IV missions provide advice and recommendations for the government in fiscal policy. This year, the IMF team wanted to present more of its finding to a broader public. Four IMP economists spent two weeks interviewing people, collecting data and information on the fiscal health of the economy and government, as well as producing some reports describing the future - based on scenarios driven by the local data. The IMF presentations, made publicly on December 11, focused on strengthening the RMI tax system and long-term fiscal Sustainability of the Compact Trust Fund.

Strengthening the RMI tax system

Although there have been numerous studies looking at tax reform, continued weaknesses in tax administration, policies, and enforcement, hinder budgetary self-sufficiency:

Way too much is being lost, given the current needs of the government and country, said the EPPSO Director.

He pointed to the fact that the Majuro Atoll Local Government (MALGOV) was placed in financial receivership recently due to millions owed to MISSA (Marshall Islands Social Security Administration). "There are consequences for financial mismanagement and many, many chickens are coming home to roost, not just for MalGov, but for government and state-owned enterprises (SOEs), in general."

Changes in attitude toward financial management, management and organization, and getting things done in a satisfactory manner are required or the RMI itself will be the unnecessary cause of many emerging financial consequences.

At some point in time, short term fixes will crash into hard fiscal reality. "If enforcement does not improve, and improve with teeth, recovering that 30% - 40% will be a dream."

One positive move has been made recently in one RMI department. Ministry of Finance’s Customs and Revenue chief Bruce Bilimon wants to level the playing field for all businesses in Marshall Islands. He is trying to get some administrative issues under control with the introduction of new software for Customs, noted Hacker.

Compact trust fund and long-term fiscal sustainability

The IMF team presented several scenarios on the future of the Trust Fund which is designated to provide an income stream to replace Compact funding which ends in 2024. Without changes, the IMF reported that only one-half of the Compact Funding will be replaced, leaving the government with about $20 million less in 2024 versus 2023.

Established in 2004, the value is at $89 million in FY2007. By the 2023, with 6% returns and 2.5 inflation, it is estimated to be at $678.6 million. In 2024, $24.4 would be available for withdrawal. That is a shortfall of $22.5 million from the Compact funding in 2023.

Suggested tactics for the RMI include securitization of future contributions, seeking additional donors to the Trust Fund, investing for higher returns, and committing budget surpluses.

Even with an additional $20 million annually to the Trust Fund from 2010 onward, there still would be a $ 4.2 million shortfall in 2024. The IMF repeated the U.S. General Accountability Office's projections that a highly aggressive investment package would still not yield enough in returns.

Hacker put forth the following questions for consideration by the RMI government now:

What is the future? Do we need to inject more money into the Trust Fund?

Do we need to make sure there are budget surpluses for the Trust Fund?

Will there be a Compact III?

How do we factor in a larger 2024 RMI population?

Do we wait until 2023 or do we start working now for some change in the Trust Fund?

One thing is certain, he said. "The scenarios presented by the IMF show there are no easy solutions given the current situation and if there is no Compact III, then we are going to have some serious fiscal problems."

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