The Marshall Islands needs to be putting $9 million a year more into its national trust fund to prevent an economic crisis when a Compact of Free Association with the U.S. ends in 2023, said Stephan Danninger, Deputy Division Chief for the IMF’s Asia and Pacific Department.
This is the message Danninger and an IMF team, after meeting with government and business leaders, presented to President Jurelang Zedkaia and his cabinet and to other officials last week.
The IMF team, that conducts regular economic assessments for its member countries, recommended that the government save $2 million this fiscal year, $4 million next year and so on until it meets the $9 million annual target — and invest this money every year into the trust fund through 2023.
The Marshall Islands is facing a $16 million shortfall once Compact grant funding ends in 2023, said Danninger. If the Marshall Islands start immediately adding extra money to the trust fund it can solve the problem, he said.
The government’s trust fund, at $87.7 million at the end of August, lost about 25 percent of its value in the global financial meltdown last year. It is part of a U.S. aid exit strategy for this western Pacific nation it has financed since taking it from Japan in World War II. Funding from Washington accounts for 60 percent of this year’s national budget of $137 million in this nation of 53,000. U.S. grant funding is on a downward slide every year to 2023, when the Compact ends.
Danninger, who is based in Washington, said some responded to this recommendation that “only bad options are available (for reducing spending to save this level of money). But the options are worse if you wait.”
The timing of the IMF report coincides with the delivery to Cabinet this week of two locally prepared reports calling for major cuts in government spending and an overhaul of the tax system, which Danninger said offered excellent recommendations.
“The economy is running on a one cylinder engine (U.S. grants) and the cylinder is getting weaker each year,” he said. “The economy needs a second cylinder.”
