Marshall Islands initiates move to monetary authority

BY GIFF JOHNSON
Marshall Islands Correspondent

MAJURO, Marshall Islands — After decades of challenges presented by correspondent banking relationships and many years of conversation within government about a central bank, the Marshall Islands minister of finance announced in late August an initiative to establish the country’s first monetary authority.

The primary aim is to stabilize the financial industry and end the dependence by local banks on correspondent banking relations with U.S. banks that can be terminated based on perceived risk by U.S. banks. Currently, the only link to the U.S. Treasury that the Marshall Islands has is through the Bank of Marshall Islands correspondent relationship with First Hawaiian Bank.

While the Compact of Free Association treaty provides authority for the Marshall Islands and other freely associated states to use U.S. currency, there is no mechanism in the Compact for the Marshall Islands to link with the U.S. Treasury for the provision of U.S. currency or for other financial transactions.

In a move to address the situation, David Paul, minister of Finance, Banking, and Postal Services; issued a government White Paper in August for the establishment of a monetary authority in Marshall Islands.

The paper begins a formal consultation process on the government’s plans for the Marshall Islands Monetary Authority. The plan is for Paul to introduce plans to the ongoing session of the Nitijela (parliament) before it adjourns at the end of September or in October.

Paul pointed out that the “underdeveloped financial system and vulnerable financial linkages to the international financial system as a result of global de-risking was a major constraint to increased prosperity” in the country. He said government intervention in the form of the Marshall Islands Monetary Authority was needed to respond to the increasing vulnerability of the domestic financial system.

“The global impact of correspondent banking relationship withdrawals on our domestic banks and an underdeveloped financial system has left the government with no choice but to intervene and commit in establishing the appropriate public authority to address the many financial sector challenges that continue to impede economic development in the country,” he said.

“The Marshall Islands Monetary Authority will need to make sure a long-term correspondent banking relationship solution is adopted, and a modern payment system developed with direct account arrangements with the U.S. Federal Reserve that will guarantee regular and adequate supply of U.S. dollar banknotes for everyday transactions to licensed banks.”

The nation needs a financial system that meets the financing needs of government, businesses, and households, Paul said. He also said the Marshall Islands needs a financial system that “is diversified, open to digital innovation, and stable.”

Paul, who is in his third term representing Kwajalein Atoll in parliament, is a staunch advocate for digital currency.

While the Office of the Banking Commission “has served us well,” Paul said its mandate under law is “too limited. We need a monetary authority to provide core central banking services and act as an integrated financial sector regulator.”

Although the government is moving ahead with the process of establishing a monetary authority, Paul said there are no plans to issue a national currency to replace the U.S. dollar at this stage, but he noted that the U.S. dollar as legal tender had implications for domestic price stability. The Marshall Islands economic interests might be better served by a national currency in the future, he said.

Work on establishing a Marshall Islands Monetary Authority is being led by the Monetary Authority Establishment Taskforce comprised of five members including Banking Commissioner Sultan Korean, who is chairman of the Taskforce.

The other members are central bank expert Peter Dirou, Assistant Commissioner of the Banking Commission Marilyn Lakabung, banking industry representative Cindy Mares, and legal counsel Divine Waiti. The Monetary Authority Establishment Taskforce was endorsed and established by the cabinet in March.

Advice provided during this development process has come from the International Monetary Fund’s Monetary and Capital Market and Legal Departments that provided comprehensive guidance on the responsibilities and structure of a monetary authority, including guidance on a governing law, Korean said. This and other expert advice “laid a solid foundation for the White Paper and establishing an internationally credible Marshall Islands Monetary Authority,” he said. mbj