Republic of the Marshall Islands

Economic Profile and Performance

The Marshallese economy depends heavily on funds from the US under the Compact of Free Association. Compact payments have led to substantial increases in government spending in infrastructure, but have also fed into higher public sector employment and wages. GDP expanded by an estimated 3.0% in FY2006 (ended 30 September 2006), driven largely by increased government capital expenditures. Nonetheless, the continued fast rate of population growth saw GDP per capita decline by 0.53%.

The reliance on government spending is high and the private sector contribution to GDP has remained at 30 – 40% for a decade. Economic stress has been signaled over recent years by various problem, such as the end of international flights by Aloha Airlines owing to insufficient returns on the route; and cash flow difficulties at the Marshalls Energy Company. Fiscal management continues to be weak, there is little growth in domestic revenues, unmanaged expenditures (particularly in wages bills), and planned declines in compact grants. The central government overall budget was in deficit by 3.0% of GDP in FY2005. Estimates of debt sustainability put the net present value debt-to-GDP ratio at 60 – 80%. The current account surplus continued to decline in FY2006 to 4.8% of GDP and official reserves of $1.5million at end 2006 were sufficient to cover just 1 week of imports. However, a guaranteed flow of Compact funds reduces pressure on the Government to act on the external account weakness. Inflation has become a less pressing concern, slowing to 3.0% in FY2006, and is forecast to ease further to 2.4% in FY2007 because of forecasted lower global oil prices.

Economic Outlook
The growth in the economy would be strengthened and sustained by the government’s commitment to reform. Areas where improvement can be accelerated include the strengthening of public financial management, that is, to maintain prudence on expenditure and expanding tax revenues, managing infrastructure more efficiently, and developing a growth-stimulating environment for private sector. Recent private sector developments such as the establishment of a tuna-loining plant, and private investments in black pearl cultivation and niche market tourism, have created employment opportunities. Thus, private investment, particularly in the fisheries and services sectors, offer good prospects for economic growth. Economic growth in FY2007 is expected to be supported by continued high public expenditures. In FY2008, though, a decline in compact grants could damp growth.