- The energy shock emanating from the war in the Middle East is weighing on the Marshall Islands' economic activity and adding to existing cost-of-living pressures through higher fuel and electricity costs.
- The authorities' swift response has provided near-term relief. Any additional support should be temporary, well targeted, and consistent with fiscal sustainability and energy conservation.
- Reform priorities include successfully implementing the comprehensive tax reform, improving the targeting and efficiency of social spending, operationalizing the monetary authority, and strengthening supervisory, governance, and AML/CFT regimes.
Majuro, Republic of the Marshall Islands: An International Monetary Fund (IMF) staff team led by Ms. Ghada Fayad visited Majuro during September 14-17, 2026, to discuss recent economic developments, the outlook, and policy priorities. At the conclusion of the visit, Ms. Fayad issued the following statement:
"The energy shock emanating from the war in the Middle East is weighing on the Marshall Islands' economy and adding to existing cost-of-living pressures. Marshall Islands' heavy dependence on imported fuel as well as limited storage capacity leaves the economy highly exposed to commodity price shocks. Soaring diesel prices, driven by wider refining margins, have increased electricity tariffs. Growth is projected at 3.1 percent in FY2026, supported by an expansionary fiscal stance, reflecting higher social spending and measures to cushion the impact of elevated fuel prices. Inflation is expected to rise to 8.5 percent. Risks remain tilted to the downside, including further increases in energy prices and climate-related shocks."
"The authorities responded promptly by declaring a state of economic emergency and introducing energy conservation and fiscal measures to support households and the energy sector. While these measures have provided near-term relief, broad-based support is costly and may weaken incentives for energy conservation. Any additional support should therefore be temporary and well targeted toward vulnerable households, while preserving appropriate price signals for energy conservation and safeguarding fiscal sustainability."
"Completing tax reform remains critical to modernize the tax system, strengthen domestic revenue mobilization, and support long-term fiscal sustainability. As implementation enters a critical phase, priority should be given to finalizing remaining regulations, completing taxpayer registration, and strengthening compliance capacity. Additional support may be needed to ensure that post-launch arrangements are aligned with administrative capacity and taxpayer readiness, including through enhanced taxpayer communication. Sustained implementation momentum will be critical to realizing the reform's gains."
"Social transfers, subsidies, and public employment have expanded significantly in recent years, increasing fiscal costs and highlighting the need for a more integrated approach to social protection and fiscal policy. While these programs provide important support to households and communities, their growing scale underscores the importance of improving targeting, transparency, and efficiency. Assessing these policies within a unified framework would allow for a better evaluation of their fiscal, macroeconomic, and distributional impacts. Priorities include gradually reducing reliance on distortionary subsidies and better targeting social assistance, while avoiding expansions that would heighten macro-fiscal risks and increase trade-offs with large development needs."
"The financial sector remains stable, supported by adequate bank capital and liquidity buffers. Nonetheless, financial intermediation remains weak, and reliance on a single correspondent banking relationship remains an important vulnerability. Bringing the Monetary Authority of the Marshall Islands fully into operation, alongside continued implementation of the AML/CFT framework, would help strengthen financial resilience and safeguard correspondent banking relationships."
"Work continues on the supporting infrastructure and investor outreach for USDM1, the tokenized sovereign digital bond backed by short-term U.S. Treasury securities. While the current investor base is predominantly domestic, the prospect of external issuance remains a key source of concern. USDM1's contribution to domestic financial inclusion and revenues remains uncertain, given digital infrastructure gaps, adoption constraints, questionable demand, and market competition. At the same time, it carries significant risks, including to financial integrity, that could outweigh the expected benefits, particularly given limited capacity. Continued strengthening of supervisory, governance, and AML/CFT regimes remains critical to ensure the capacity to identify, assess, and mitigate associated risks."
"The IMF team thanks the authorities and other counterparts in public enterprises, the private sector, and development partners for the open and constructive discussions and looks forward to continuing its close engagement with the Republic of the Marshall Islands."
