JEMFAC Progress Monitoring

1. JEMFAC Progress Monitoring Presented by the RMI Government RMI-U.S. JEMFAC Meeting Honolulu, HI August 29, 2007

2. Outline of Presentation • Economic Update & Policy Reform • Priority Funding • Fiscal Year 2008 Budget • Fiscal Update & Decrement Management • Compliance Management • Education Reform Initiatives

3. Policy Framework • Maintaining Macroeconomic Stability • Improving the Business Policy Environment • Prioritizing Education & Health Sectors • Implementing Infrastructure Development Projects

4. Recent Economic Performance • Positive GDP growth continues but at a modest pace; • Real GDP in FY 2006 is estimated 1.3% increased with anticipated real GDP growth for FY 2007 at 2.0%; • Growth experienced in FY 2004 was 5.6%; • Slow growth in FY 2005 & 2006 partly due to high global energy prices; • While Government continues to be the main component of the economy, its growth has been steady but the private sector growth is gradually increasing.

5. Real Gross Domestic Product Growth 1997-2007 Trend

6. Sectoral Shares of GDP, FY 2006

7. What is influencing growth? • Construction and fisheries industries have generated significant employment growth which has been major factor in private sector contribution to the real GDP. • Government compensation of employees is still a major contributor to the GDP growth. • The difficulties with Marshall Energy Company, as a result of high fuel prices, constrained growth in FY 2005 & 2006.

8. Employment Trend Factors • Government payroll has re-absorbed the Kindergarten program with approximately 200 employees from the former Head Start program. • Employment growth is derived from the private sector while the Government is presently steady. • The opening of the new Tuna Loining Plant is expected to further increase the private sector employment growth in FY 2008.

9. Employees by Major Sectors, FY1997 - FY2007

10. Industry Developments Positive prospects for the RMI economy; • The newly formed Marshall Islands Shipping Corporation has operated with improved delivery services to the outer islands; • Japan Airlines has conducted direct chartered flights between Tokyo and Majuro, boosting the tourism industry; • A modern Dry-Dock Facility nearing final approval of securing operational site. • The Tuna Loining Plant is to re-open soon under new management. Construction is near completion with prospect of employing up to 600 workers by early 2008;

11. Improving Business Environment • Passage of Immigration and Labor Laws • Passage of Secured Transactions Law • Strengthening of the Land Registration Authority • Establishment of Public-Private RMI Economic Development Council to advise President on economic reform initiatives.

12. Public-Private Dialogue Role of the RMI Economic Development Advisory Council; The Council will: • Consult with the business community to foster public-private cooperation; • Provide advice to the President on appropriate policies to encourage private sector development including, but not limited to, regulatory reform, tax reform, public sector reform, land tenure, trade and industry policy;

13. RMI Priorities:Education & Health Sectors • Education and Health sectors continue as the RMI Government’s two top priorities; • Focus implementation of the base grant; • Direct positive impact on all other sectors and the economy, as a whole, over the medium and long-term.

14. Education & Health Spendings Recurrent spending on Education & Health have grown rapidly since FY 2003: • Education recurrent spending has increased by 125%; • Health recurrent spending has increased by 71%; • Spending on other areas has declined by 9%.

15. Education and Health Spending Recurrent Expenditure FY 2003 - FY 2008(General Fund, Compact Funds, Federal Grants and Special Revenues)

16. Fiscal Policy Framework • Adoption of Balanced Budget • Implementation of Cash Management Plan • More Aggressive Tax Collections and Tight Expenditure Controls • Restructuring Selected Public Services into Corporate Enterprises • Continuation of Performance Based Budgeting Concept

17. Factors Affecting FY 2008 Budget Formulation • Wage & Hiring Freeze Policy; • Modest assumptions of inflation and growth used for revenue estimates based on recent trends and expectations; • Utility costs to increase modestly; • ADB debt payment to increase substantially; • Slight reduction in Compact infrastructure grant to support Ministry of Health & Ministry of Education.

18. Fiscal Year 2008 Budget • FY 2008 Budget projected at $123.6 million • Slight decline from FY 2007 largely due to ROC grants from $13.0 million to $9.5 million • Revenues forecast increase slightly with aggressive collections and new agreement with Ship Registry • Federal grants forecast to be steady • Special Revenues increase due to more accurate assessment of revenues

19. FY 2008 Tentative Budget Figures

20. FY 2008 Compact sector grant allocations

21. FY 2008 Education Spending

22. FY 2008 Recurrent Education Spending by Outcomes

23. FY 2008 Health Spending

24. FY 2008 Recurrent Health Spending By Outcomes

25. Infrastructure Development • Infrastructure Development Plan is consistent with the RMI’s sectoral priorities, the Education and Health Sectors: • Elementary Schools • Majuro Hospital Redevelopment • The College of the Marshall Islands • Matching for FAA airport grants; • Infrastructure grant declines in FY 2008 to increase sector grant to Education and Health but still well above 30% requirement

26. FY 2008 Capital Infrastructure

27. FY 2008 Infrastructure Plan

28. Recent Fiscal Developments • Overall fiscal position is improving; • Tighter expenditure control measures in place to meet modest revenues collected (fuel tax); • ADB debt arrears in FY 2007 have been paid; • Marshalls Energy Company has resumed selling diesel fuel after its recent re-financing initiative and establishment of template rates in coincide with fuel costs; • Collected total tax arrears of $1.3 in FY 2006 & 2007 combined, resulting from improved enforcement and greater compliance; • New Ship Registry agreement of contribution from $1.0 million to $2.0 million per annum.

29. Decrement Management • Full inflation is critical to cope with rising costs and allow time to make fiscal adjustments; • Cost controls through hiring and wage freeze policy; • Improved tax administration - auditing division, DOI TA on tax & customs modernization systems & staff training • Broadened tax and revenue base - e.g. elimination of import tax exemptions; • Comprehensive tax review

30. Compliance Management: Audit • No. of Audit Findings: FY 2003 (33) - FY2006 (10); • No. of unauditable Component Units: 8 to 2; • Initiating DOI TA aims to assist Component Units; • Fixed Assets Finding removed after 17 years; • Total Questioned Cost is lowest ever; • RMI’s aim to achieve a clean audit by FY 2008.

31. Compliance ManagementOffice of Compact Implementation The Cabinet has approved the establishment of an Office of Compact Implementation (OCI) in the Ministry of Foreign Affairs. OCI will be responsible for coordinating, with other Offices, all Compact matters including: • Performance budgeting and monitoring • MTBIF • Infrastructure programming • Section 215 report • JEMFAC preparations • Compact Trust Fund reporting

32. Compliance Management Performance Budgeting • FY 2008 Budget includes $300,000 public sector capacity building grant for consolidating and expanding performance budgeting throughout Government; • The grant will be managed out of the newly formed Office of Compact Implementation in the Ministry of Foreign Affairs; • The intention is to phase out over time as performance budgeting becomes firmly established within the Ministries and Agencies.

33. Education - Reform Initiatives • Personnel Auditing Initiative • Improving Data Collection & Analysis • Reviewing the Current Strategic Plan • Legislative Proposed Act requiring; • Teacher Certification Process • Minimum Standard for Teacher Qualifications

34. Thank you “Kommoltata”