Home 
Countries and Regions Country Assistance Plans Document
|
Country Assistance Plans - Marshall Islands : I. Country Performance Assessment
A. Economic Performance Assessment1. The Marshall Islands economy is estimated to have registered a growth rate of between zero and one percent in 1999. This modest recovery followed three years of recession caused by the impact of drought on agriculture and fisheries production. The reduction in output was also partly caused by the short term impact of the adjustment process initiated by the reform program and cuts in government expenditure and employment. Real gross domestic product (GDP) remained approximately 25 percent below the 1995 level. Gross National Product (GNP) and GNP per capita exceeded GDP figures by over 6 percent because of receipt of fishing license fees, which increased significantly in 1998 and remained high in 1999 (Appendix 1, page1). 2. The recovery in economic activity in 1999 reflected the direct and indirect impacts of aid-funded roadworks and construction, the private sector construction of a loining factory for tuna processing, and an increase in on-shore spending by the crews of an expanded foreign purse seiner fleet. The agriculture sector increased its production as recovery from the 1998 drought proceeded. Additionally, further planned contractions in public sector activity were forestalled, at least temporarily, by the receipt of grants from Taipei,China and optimism about the outcome of Compact funding re-negotiations that were held towards the end of the year. 3. The inflation rate continued its downward trend from almost 10 percent in 1996, to around one percent. Use of the US dollar as currency precludes an independent monetary policy, and means that the inflation rate tends to track that of the United States, which is the major source of imports. Merchandise imports are estimated to have fallen by 24 percent in current prices over the three-year period 1995-98, while exports dropped by almost 6 percent. The trade deficit therefore declined, and the current account surplus (inclusive of declining official transfers) rose from 1.5 percent of GDP in 1995 to a projected 22.2 percent in 1998. The capital account remained in deficit following the cessation of government borrowing in 1995 and the repayment of loans in 1996-98. Overall, the balance of payments was in deficit. External debt stood at $117 million at the end of 1998, equivalent to around 120 percent of GDP, and government holdings of US dollar reserves fell to three weeks of merchandise import cover. Balance of payments data for 1999 are not available, but it is likely that the current account surplus increased because of grants from Taipei,China. 4. An absence of timely, reliable and comprehensive statistical information extends to government finances. However, it is clear that there has been progress in strengthening public finances under the Policy Reform Program. Several ministries have been rationalized; and the number of government employees was reduced by 33 percent between late 1995 and March 1999. A wage freeze has remained in place from 1995, following a 5 percent pay reduction for salary brackets over $10,400 per annum. Subsidies to some state-owned enterprises have been reduced or eliminated; the tariff system has been rationalized; and there are ongoing efforts to strengthen tax and customs administration. These measures combined with a large drop in capital expenditure to move the overall budget balance into surplus in fiscal years 1996,1997, and 1998. 5. The national budget for FY2000 was passed by the Parliament in March 2000 to supercede the Interim Appropriation Act passed earlier. The estimated General Fund expenditure of $28.2 million is supported by corresponding revenues which include proceeds of a one-time sale of assets worth $5.0 million – the SAAB 2000 aircraft of Air Marshall. In the absence of this revenue source, there would have been a substantial deficit for FY2000. The sale has been effected and the proceeds of the sale will shortly be made available. In addition, the substantial shortfall in import tax revenues as a result of the lowering of import duties from 12 percent to 5 percent is seriously affecting Government’s cashflow. Income tax collections have also lagged behind and the Government is faced with some difficult fiscal choices. The current financial difficulties may impact on the Government’s ability to deliver basic services and to implement social sector programs in a timely manner. Aside from this the new Government is also saddled with financial commitments made during the first quarter of FY2000 (October-December 1999) by the previous Government, including the commitment to buy a new aircraft for Air Marshall. The financial situation is further aggravated by the steep increase in oil prices which is likely to adversely affect consumer prices and require Government to increase financial support to some of the utilities. As a result of these factors and the impact of the reduction in import duties, Government may be forced to take immediate action to raise revenue to avert financial crisis in the next few months and may have to review both gross receipts tax as well as import duties in the short run. 6. The possible sources of financial relief may be from increased revenue from fishing license fees, reduction in payroll through further reduction in number of employees and possible budget support from bilateral sources. Proper utilization of grant funding through more effective resource use and allocation could also help alleviate the present situation. 7. Interest now centers on whether a new administration will move to consolidate the gains made under the Policy Reform Program, and to complete the Program’s agenda of reform actions. A key area in this regard is public expenditure management. There were signs that fiscal discipline weakened ahead of the elections, as grants from Taipei,China became available and confidence grew in a successful outcome to Compact funding re-negotiations.The quality of economic management will be a crucial determinant of future development outcomes. Other areas requiring further attention include public service performance, public enterprise reform, and improving the environment for private sector development. Legislation on investment approval, business licensing procedures, issuance of work permits, and improved security of land leases, has been prepared and is at varying stages of consideration. Once passed, the legal framework for increased private sector activity will be in place and, if effectively implemented, will improve growth prospects.
|
RSS Feeds
Back
Top of page