Life after Compact
For Marshall Islands, achieving fiscal sustainability is a challenge upon expiration of the U.S. grants
In October, the U.S. Office of Insular Affairs remitted nearly $17 million to the Compact Trust Fund for the People of the Republic of the Marshall Islands. Such funding provision was in addition to $9 million in partial payment provided separately to Pacific nation for the use of Kwajalein Atoll, the site of the Ronald Reagan Ballistic Missile Defense Test Site, a key installation in the U.S. missile defense network.
“These funds represent the ongoing commitment of the U.S. government to the people of the Marshall Islands now and in the future under the Compact of Free Association,” U.S. Assistant Secretary for Insular Areas Doug Domenech said. “The funds were transferred as soon as possible in the new fiscal year to ensure timely opportunities for investment and maximum growth.”
As of June 30, the Trust Fund was valued at $341.6 million, a preliminary and unaudited figure for fiscal year 2017, according to Trust Fund Chairman and Office of Insular Affairs Director Nik Pula. The Trust Fund was established under the Compact of Free Association to contribute to the economic advancement and long-term budgetary self-reliance of Marshall Islands when annual grant assistance under the Compact expires after 2023. In return, the Marshall Islands provides the United States with unlimited and exclusive access to its land and waterways for strategic purposes.
But considering its heavy reliance on external development assistance, the Marshall Islands is poised to face the challenge of achieving fiscal sustainability upon expiration of the Compact grants.
The Asian Development Bank recently approved a $2 million grant to help strengthen public financial management in the Marshall Islands by enhancing the institutional capacity of the Ministry of Finance to effectively implement public financial management and state-owned enterprise reforms.
The grant approval came amid a recent report about the illegal withdrawal of nearly $1 million from Marshall Islands’ Trust Fund. Officials have found a series of 12 unauthorized withdrawals totaling $982,265 from the fund at Boston’s State Street Bank to bank accounts in Ireland and Malaysia in June and July. According to local media reports, the withdrawals of $273,883 to Ireland were recovered but the $708,382 to accounts in Malaysia has yet to be returned.
Although the ADB grant was unrelated to the illegal removal of funds, Ananya Basu, principal economist from ADB’s Pacific Department, underscores the need for fiscal reforms in Marshall Islands. “Strong management of public finances and the improved performance of state-owned enterprises will strengthen the fiscal position,” Basu says.
ADB said the Public Financial Management Project is consistent with its Pacific Approach 2016-2020, aimed at helping the Ministry of Finance prioritize and implement the Marshall Islands’ public financial management’s reform roadmap. “Specifically, the project will establish a Reform Coordination Unit (RCU), consisting of national and international consultants reporting to the secretary for finance,” ADB says. “The RCU will strengthen the Ministry of Finance’s capacity to implement the roadmap through advice and training, in close coordination with development partners.”
The grant will also provide operational support to SOE reforms through the appointment of two experts who will concentrate on reforming inefficient SOEs by streamlining subsidies to match public service delivery costs. An SOE monitoring unit within the Ministry of Finance will be established by the project.
ADB has been working with the Government of the Marshall Islands since 1990 and has approved 14 loans for $92.63 million, six grants for $11.26 million, and 52 technical assistance projects worth $22.17 million.