IMF: MARSHALLS TRUST FUND WON’T CUT IT

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By Giff Johnson

MAJURO, Marshall Islands (Marianas Variety, Jan. 10) – An International Monetary Fund official says without more money going into the Marshall Islands government’s trust fund, there will be a huge drop in funding for this western Pacific nation when grants from the United States end in 2023.

A return on investments at six percent will make available only $24.4 million for use by the government in 2024, a shortfall of $22.5 million over the $47 million level of U.S. grants in the final year of the Compact of Free Association.

The IMF evaluation follows a similar report from the U.S. Government Accountability Office last year that said the U.S. and Taiwan-funded trust fund will not produce enough interest to replace U.S. aid.

But U.S. State Department officials have said there is no requirement that the trust fund replace the nearly $50 million in aid the U.S. will provide in 2023, and provided the trust fund produces any money at all, it will be a success. The trust fund, which stood at about $90 million late last year, is part of an exit strategy for the U.S., which aims to end grant funding in 2023 — almost 80 years after it won the islands from Japan in World War II.

Although the fund has earned at a 14.2 percent pace since it was fully invested in early 2006 by Wall Street financial giant Goldman Sachs, it earned less than three percent a year for the first two years as the U.S. was slow to approve hiring money managers for the fund.

IMF official Dmitriy Rozhkov said the Marshall Islands cannot depend on the trust fund to provide stable income replacing U.S. aid unless there are more contributions.

He recommended the government ensure budget surpluses each year, and invest the leftover money in the trust fund, which will help boost it to a higher level by 2023, and increase the chance that it will be able to replace the level of grant funding.

Marshall Islands government spokesman Sen. Gerald Zackios — the former foreign minister — called on the U.S. to extend the trust fund agreement for an additional two years to make up for the "lost" investment time in 2004-2005.

If the fund grows at eight percent a year, it could generate $47 million in 2024 — the same level of Compact grant funding in 2023. Rozhkov questioned if this can be done.

The GAO, is also skeptical, saying in a 2007 report that an "aggressive" investment strategy of splitting investments between large companies and international stocks would only produce an average annual return of six percent.

The U.S. government invested about $9.5 million in the fund this year, with Taiwan adding another $2.5 annually. The U.S. Contribution increases $500,000 a year. Taiwan has pledged to provide $50 million and has already funded about 20 percent of this total.

"With returns of six percent per annum, a lot of extra money is needed (to build the trust fund to a sustainable level)," he said.

Besides increasing the worth of the fund, budget surpluses will create a cushion in between revenues and expenditures, so that "elimination of grants in 2024 is not as painful."

Producing budget surpluses means that adjustments are made before 2024 and avoids a negative shock to the economy, he said.

Marianas Variety: www.mvariety.com

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