Report and Recommendation of the President to the Board of Directors

Project Number: 54358-001 November 2020

Proposed Countercyclical Support Facility Grant Republic of the Marshall Islands: Health Expenditure and Livelihoods Support Program

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CURRENCY EQUIVALENTS

The currency unit of Marshall Islands is the United States dollar.

ABBREVIATIONS

ADB – Asian Development Bank COVID-19 – coronavirus disease CPRO – COVID-19 Pandemic Response Option CTF – Compact Trust Fund DSA – debt sustainability analysis GDP – gross domestic product HEALS – Health Expenditure and Livelihoods Support IMF – International Monetary Fund MOF – Ministry of Finance MOHHS – Ministry of Health and Human Services NDC – National Disaster Committee PFM – public financial management PNA – Parties to the Nauru Agreement PPE – personal protective equipment RMI – Republic of the Marshall Islands TA – technical assistance US – United States WHO – World Health Organization

NOTES

(i) The fiscal year (FY) of the Government of the Marshall Islands and its agencies ends on 30 September. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2020 ends on 30 September 2020.

(ii) In this report, “$” refers to United States dollars.

Vice-President Ahmed M. Saeed, Operations 2 Director General Leah C. Gutierrez, Pacific Department (PARD) Deputy Director Emma M. Veve, PARD General Director Ananya Basu, Director, Social Sectors and Public Sector Management Division (PASP), PARD

Team leader Rommel F. Rabanal, Public Sector Economist, PASP, PARD Team members Tahmeen Ahmad, Financial Management Specialist, Public Financial Management Division, Procurement, Portfolio and Financial Management Department Katherine M. Barrameda, Operations Coordination Officer, Office of the Director General (PAOD), PARD Md. Abul Basher, Natural Resources and Agriculture Specialist, Rural Development & Food Security (Agriculture) Thematic Group, Sustainable Development and Climate Change Department (SDCC) Cindy Bryson, Safeguards Specialist, Portfolio, Results, and Quality Control Unit (PAOD-PRQ), PARD Ninebeth S. Carandang, Senior Social Development Specialist, PASP, PARD Lisette Cipriano, Senior Digital Technology Specialist, Finance Sector Group, SDCC Paul Curry, Principal Operations Coordination Specialist, PAOD, PARD Joana E. Custoias, Counsel, Office of the General Counsel Maria Ava Golda Destura, Safeguards Analyst, Portfolio, Results, and Quality Control Unit, PARD Haidy Ear-Dupuy, Senior Social Development Specialist (Core Labor Standards), Safeguards Division (SDSS), SDCC Taniela Faletau, Safeguards Specialist, PAOD-PRQ, PARD Anna Fink, Economist (Regional Cooperation), Regional Cooperation and Integration Thematic Group, SDCC Jan Hansen, Senior Planning and Policy Economist, Operations Planning and Coordination Division, Strategy, Policy and Partnerships Department Belinda Hewitt, Disaster Risk Management Specialist, Climate Change & Disaster Risk Management Division, SDCC Denise T. Jack, Senior Operations Assistant, Republic of the Marshall Islands Pacific Country Office, PARD Prabhjot Rehan Khan, Social Development Specialist (Gender and Development), Gender Equity Thematic Group, SDCC Lady Diane T. Kuizon, Operations Assistant, PASP, PARD Ki Fung Kelvin Lam, Young Professional, PASP, PARD Hyung Chan Lee, Financial Sector Specialist (Capital Markets), Finance Sector Group, SDCC Mairi MacRae, Social Development Specialist (Gender and Development), PASP, PARD Christopher Morris, Principal Social Development Specialist (NGO and Civil Society Center), NGO and Civil Society Center, SDCC

Kaukab Naqvi, Senior Economist, Economic Analysis and Operational Support Division, Economic Research and Regional Cooperation Department Felix Oku, Senior Social Development Specialist (Safeguards), SDSS, SDCC Ellen Paul, Senior Country Officer, Republic of the Marshall Islands Pacific Country Office, PARD Francesco Ricciardi, Environment Specialist, SDSS, SDCC Maria Carina A. Tinio, Economics and Statistics Analyst, PASP, PARD Samuel Tumiwa, Advisor (Conflict-Afflicted Situations), Office of the Cluster Head, SDTC, SDCC Michiel Van Der Auwera, Senior Financial Sector Specialist (Social Security), Public Management, Financial Sector, & Trade Division, Central and West Asia Department Geoffrey Wilson, Senior Water Resources Specialist, Water Sector Group, SDCC Peer reviewer David Robinett, Senior Public Management Specialist (State Owned Enterprise Reforms), Governance Thematic Group, SDCC

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page PROGRAM AT A GLANCE I. THE PROPOSAL 1 II. PROGRAM AND RATIONALE 2 A. Background and Development Constraints 2 B. Proposed Program, Impacts, and ADB’s Value Addition 7 C. Development Financing Needs, Budget Support, and Debt Sustainability 9 D. Implementation Arrangements 11 III. DUE DILIGENCE 11 IV. ASSURANCES 13 V. RECOMMENDATION 13

APPENDIXES 1. Design and Monitoring Framework 14 2. List of Linked Documents 17 3. Development Policy Letter 18 4. Assessment of Compliance with Access Criteria for the Countercyclical Support Facility and COVID-19 Pandemic Response Option Access Criteria 21

Project Classification Information Status: Complete

PROGRAM AT A GLANCE 1. Basic Data Project Number: 54358-001 Project Name Health Expenditure and Livelihoods Department/Division PARD/PASP Support Progam Country Marshall Islands, Republic of Executing Agency Ministry of Finance Recipient Government of the Marshall Islands Country Economic Indicators https://www.adb.org/Documents/LinkedD ocs/?id=54358-001-CEI Portfolio at a Glance https://www.adb.org/Documents/LinkedD ocs/?id=54358-001-PortAtaGlance 2. Sector Subsector(s) ADB Financing ($ million) Public sector management Public expenditure and fiscal management 3.00 Social protection initiatives 7.00 Health Disease control of communicable disease 3.00 Health system development 3.00 Total 16.00

3. Operational Priorities Climate Change Information Addressing remaining poverty and reducing inequalities GHG reductions (tons per annum) 0 Accelerating progress in gender equality Climate Change impact on the Low Strengthening governance and institutional capacity Project ADB Financing Adaptation ($ million) 0.00 Mitigation ($ million) 0.00

Cofinancing Adaptation ($ million) 0.00 Mitigation ($ million) 0.00 Sustainable Development Goals Gender Equity and Mainstreaming SDG 1.5, 1.a Effective gender mainstreaming (EGM) SDG 2.1 SDG 3.8, 3.d Poverty Targeting SDG 5.c Household Targeting SDG 8.1 SDG 10.4 4. Risk Categorization: Low . 5. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C . 6. Financing Modality and Sources Amount ($ million) ADB 16.00 Sovereign COVID19 Pandemic Response Option: Asian Development Fund 16.00 Cofinancing 0.00 None 0.00 Counterpart 0.00 None 0.00 Total 16.00 Currency of ADB Financing: US Dollar

Source: Asian Development Bank This document must only be generated in eOps. 05102020091556821589 Generated Date: 04-Nov-2020 12:57:15 PM

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed grant to the Republic of the Marshall Islands (RMI) for the Health Expenditure and Livelihoods Support (HEALS) Program under the Countercyclical Support Facility COVID-19 Pandemic Response Option (CPRO).1

2. The HEALS program will support the government’s response to the potentially catastrophic health and economic impacts of the coronavirus disease (COVID-19), anchored by its $45.8 million COVID-19 Preparedness and Response Plan.2 The government is implementing a comprehensive response package that covers (i) strengthening the health system’s capacity for enhanced surveillance, infection control, and potential case management; (ii) providing economic relief and recovery assistance to businesses adversely affected by the prevailing travel restrictions; and (iii) mitigating impacts on the RMI’s most vulnerable communities, all within the context of a sound and sustainable fiscal framework. The RMI meets all the access criteria for the CPRO as summarized in Table 1 (detailed in Appendix 4).

Table 1: HEALS Program Compliance with CPRO Access Criteria CPRO Access Criteria ADB Assessment 1. Adverse impact of ADB estimates that the RMI’s economy contracted by 5.5% in FY2020 with a further 1.4% exogenous shock decline projected for FY2021. COVID-19 entry restrictions are adversely affecting the fisheries, hotels and restaurants, and transport sectors. The government’s fiscal gap also widened to 4.7% of GDP in FY2020 from 2.2% in FY2019, with additional financing needs of 15.0% of GDP projected for FY2021. ADB projects that more than 700 jobs (about 28% held by women) will likely be lost by the end of FY2021—the largest employment reduction in more than 2 decades. The basic needs poverty rate is at risk of rising from an estimated 29.4%–31.6% of households in FY2019 to 33.8%–35.2% by end–FY2021. 2. Countercyclical In June 2020, the government first approved the RMI Coronavirus Preparedness and development Response Plan which was updated in September to cover $45.8 million (equivalent to expenditure 21.0% of GDP) in priority spending. For health care, the plan includes measures to upgrade capacities for screening and testing for COVID-19; strengthen infection prevention and control; and establish case management protocols. For economic relief and recovery, financial assistance will be provided to businesses affected by the travel restrictions. To safeguard vulnerable communities, monthly food baskets will be delivered to households along with fishing and farming tools. A gender-based violence hotline will be supported, as well as school lunches. 3. Pre-shock record The RMI recorded 5 consecutive years of growth averaging 2.9% during FY2015– of generally sound FY2019, while keeping inflation low at –0.6% per annum. The country achieved annual macroeconomic fiscal surpluses averaging 3.4% of GDP from FY2014–FY2018, with revenue collections management rising from 23.6% of GDP to 32.2% during this period. A fiscal deficit of 2.2% of GDP was recorded in FY2019 because of transfers to copra producers and the social security fund. The pre–COVID-19 FY2020 budget targeted cutting the deficit by half to contain fiscal pressures. Furthermore, the RMI has built up its Compact Trust Fund from $240.1 million in FY2014 to $518.6 million in August 2020. 4. Structural reforms The RMI has implemented preemptive COVID-19 response measures including: (i) expanded monitoring by the Health Emergency Operations Center—activated since July 2019 because of a dengue outbreak—to also include COVID-19 surveillance, following the President’s declaration of a state of health emergency on 7 February 2020; (ii) entry restrictions for travelers from affected areas in January 2020 followed by full border closure since early March; (iii) preparation of COVID-19 laboratories, isolation and quarantine sites; and (iv) continuing procurement of medical supplies and equipment. The Ministry of Health and Human Services is also preparing immunization reporting systems for post-market surveillance of a potential COVID-19 vaccine.

1 ADB. 2020. ADB’s Comprehensive Response to the COVID-19 Pandemic. Manila. 2 Government of the Marshall Islands. 2020. RMI Coronavirus Preparedness and Response Plan. Majuro. The plan was initially approved in June 2020 to cover $42.3 million in countercyclical development expenditures. It was expanded to include a school lunch program valued at $3.5 million in September 2020.

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CPRO Access Criteria ADB Assessment 5. Debt sustainability Public debt has declined from 85.2% of GDP in FY2000 to 31.5% in FY2019. Although the IMF classifies the RMI as facing a high risk of debt distress, this is primarily because of medium- to long- term fiscal pressures, including the potential impacts of disasters. With financing needs arising from the COVID-19 crisis largely filled by grants from development partners, the public debt–GDP ratio is not expected to rise. Results of the ADB debt sustainability analysis show debt to remain sustainable, particularly with expected economic recovery after FY2021. Although the risk of debt distress will remain high, this reflects medium- to long-term fiscal pressures, in line with the IMF’s assessment, and not because of unsustainable borrowing practices. 6. IMF coordination ADB is closely coordinating with the IMF on the macro-fiscal framework. The IMF Assessment Letter confirms ADB’s views on: (i) the RMI’s pre-shock record of sound macroeconomic management; and (ii) the public debt–GDP ratio resuming a downward path with economic recovery after FY2021. ADB = Asian Development Bank, COVID-19 = coronavirus disease, CPRO = COVID-19 Pandemic Response Option, FY = fiscal year, GDP = gross domestic product, HEALS = Health Expenditure and Livelihoods Support, IMF = International Monetary Fund, RMI = Republic of the Marshall Islands. Source: Asian Development Bank.

II. PROGRAM AND RATIONALE

A. Background and Development Constraints

3. Development context. The RMI is a small island developing state in the North Pacific, with a population of about 55,000 and a land area of 181.3 square kilometers. It is vulnerable to frequent disasters, including typhoons and severe drought. Climate change risks are particularly heightened, with the RMI being one of the lowest-lying atoll nations in the world. Although the RMI has only two confirmed COVID-19 cases as of 6 November 2020, it is expected to suffer economic contractions in FY2020–FY2021, with adverse socioeconomic impacts. 3

4. Preemptive measures against COVID-19. Early and decisive action has helped the RMI avoid a COVID-19 outbreak. Entry restrictions and quarantine requirements for travelers from, or transiting through, COVID-19 affected areas, as well as health screenings for all arrivals by air and sea, were implemented starting 24 January 2020. After the World Health Organization (WHO) characterized the global COVID-19 outbreak as a public health emergency at the end of January, the President of the RMI declared a state of health emergency on 7 February 2020. The declaration directed the Ministry of Health and Human Services (MOHHS) to activate its emergency operations plan. The Health Emergency Operations Center was directed to expand monitoring and implement COVID-19 preparedness and response measures to minimize the risk of importation and possible local transmission. The RMI suspended all commercial travel into the country on 8 March 2020, even before the WHO declared COVID-19 a global pandemic on 11 March 2020. 4 The MOHHS is conducting targeted on-site COVID-19 testing for those exhibiting mild symptoms of respiratory illness. The RMI recorded its first two COVID-19 cases on 28 October 2020. Both are imported cases affecting workers at the United States (US) military base in Kwajalein travelling from Hawaii, with no threat of community transmission.5

5. Fragile health care system. The RMI has two hospitals—one in Majuro and the other in Ebeye—providing primary, secondary, and limited tertiary care, plus 56 health care centers across neighboring island and atoll communities. The health care system has a total capacity of about 150 beds, with 11 intensive care unit beds, and 20 ventilators. Even pre–COVID-19, 79%

3 Both cases were expatriate staff who arrived at the Kwajalein Island military base of the United States, which were confirmed while in quarantine. 4 A twice-monthly cargo flight connection with Guam remains in operation, but visits by cruise ships are suspended. 5 WHO. 2020. Joint incident management team External Situation Report. Suva (as of 28 October 2020).

3 of women in urban areas and 94% in rural areas reported difficulties in accessing health care.6 Between March and July 2020, the MOHHS built a special ward in the Majuro hospital with eight isolation rooms with negative air flow to expand capacity for critical care. Although non-essential services have been scaled back to allow critically ill or suspected cases to receive care, the estimated requirement for hospital beds in the event of local transmission of COVID-19 remains over seven times the current capacity.7 Approximately 5% of potential hospitalizations (up to 300 cases) are expected to require ventilators, intensive care unit beds, and isolation wards. Quarantine sites near Majuro and the Kwajalein base are available for mandatory isolation of repatriated citizens. The density of skilled health professionals is low at 3.76 per 1,000 population (only 0.42 medical doctors per 1,000 population), below the Sustainable Development Goal minimum threshold of 4.45 per 1,000 population. Most of the health workforce also requires additional training for a pandemic and are at a higher risk of infection, which can rapidly deplete capacity. Women face heightened infection risk not only because they comprise a majority of frontline health workers, but also due to caring responsibilities. The RMI ranks 191st out of 195 economies on the Global Health Security Index, indicating severe limitations in the capacity to manage epidemics or pandemics. The WHO rates the country’s preparedness and response status as Level 2 (on a scale of 1 to 5, with 5 as the best) with a high risk of importing the virus.

6. Narrow-based economy centered on fisheries. Economic performance is largely driven by fisheries-related activities, which permeates across sectors. Domestic commercial purse seine tuna fishing—plus smaller operations of local producers for home consumption and sale in the Majuro fishing market, and of exporters of aquarium fish—provide direct value-added in the fisheries sector. A tuna loining plant in Majuro also contributes most of total manufacturing output. Majuro is the world’s busiest tuna transshipment port, boosting the transport services sector, and providing ancillary services such as fish containerization, supplies provisioning, and net repair to 400–500 purse seiners per year pre-pandemic. On the demand side, there has been a sharp rise in fishing license revenues. Since the full implementation in 2012 of a vessel day scheme in the exclusive economic zones of the Parties to the Nauru Agreement (PNA), the RMI’s collections of fishing license fees have increased to an average of $20.6 million (9.9% of gross domestic product [GDP]) during FY2012–FY2019 from $1.6 million (1.1% of GDP) during FY2004–FY2011.8

7. Sound macroeconomic management. Supported by strong fisheries performance, the RMI recorded 5 consecutive years of growth averaging 2.9% during FY2015–FY2019, following a slight contraction of 0.9% in FY2014. Increased construction activity, amid scaled-up operations of the Asian Development Bank (ADB) and the World Bank, also supported growth. The government achieved annual fiscal surpluses averaging 3.4% of GDP from FY2014 to FY2018, in preparation for the scheduled expiration of the economic provisions of the RMI’s Compact of Free Association with the US after FY2023. Aided by recent surpluses, the RMI’s Compact Trust Fund (CTF) has grown from $240.1 million in FY2014 to $518.6 million by August 2020. Pre–COVID-19 trends indicate that the CTF will likely reach a level that can generate sufficient annual investment earnings to offset expiring compact grants after FY2023, but this is still subject to market volatilities. 9 The recent sharp increases in fishing license revenues

6 Government of the Marshall Islands, Ministry of Culture and Internal Affairs and Economic Policy, Planning, and Statistics Office. 2018. Gender Equality: Where Do We Stand? Republic of the Marshall Islands. Majuro. 7 Projections based on the RMI’s estimated 2020 population of 54,993; and assumptions that the infection rate is 10% with preparedness measures; 20% of the infected require hospitalization; and 5% of hospitalizations need ventilators. 8 The combined waters of the Parties to the Nauru Agreement—the Federated States of Micronesia, Kiribati, Nauru, Palau, Papua New Guinea, the RMI, Solomon Islands, and Tuvalu—yield about 30% of the global tuna catch by weight. The shift to a vessel day scheme from previous volume-based regulation of distant water fishing fleets promotes sustainability of tuna stocks by limiting fishing while increasing revenues for participating countries. 9 In August 2019, the United States announced the commencement of negotiations to extend the compact, although any grants associated with this remain subject to negotiation.

4 contributed the most to a substantial improvement in domestic resource mobilization. On the expenditure side, progress has been made in controlling the public sector wage bill, which has declined to an average of 21.6% of GDP during FY2015–FY2019 from 23.0% during FY2005– FY2014. ADB’s regional technical assistance (TA) that supported procurement of a human resource management information system for the Public Service Commission helped facilitate payroll control.10 Inflation was kept low at –0.6% per annum during FY2015–2019, with current account surpluses averaging 11% of GDP, reflecting inflows of grants and fishing license fees.

8. COVID-19 impacts fisheries. Strict travel restrictions and quarantine requirements have been effective in keeping the RMI free of COVID-19 for more than 6 months since the pandemic was declared, but these have also damaged economic activity. 11 Ships that have transited through COVID-19-affected countries were prohibited from entering the RMI’s ports particularly during the early stages of global travel restrictions, disrupting the fisheries supply chain. Estimates show that both domestic purse seine fishing and tuna loining operations were reduced by about 30% in FY2020 and are expected to remain below pre–COVID-19 levels in FY2021 (footnote 11). A requirement for fishing and carrier vessels to spend at least 14 days at sea (including travel) prior to entry is limiting transshipment activity in Majuro port. For example, transshipment services associated with the export of sashimi-grade tuna are trending lower by 50%. Although fishing license revenues are estimated to have achieved the pre-pandemic projection of $30 million (14% of GDP) in FY2020, the potential adverse impact of prolonged travel restrictions on demand for vessel days is projected to reduce fishing license fee collections by 13% in FY2021.

9. Other transmission channels. Despite having a small tourism base relative to most of its Pacific peers, the pause in international arrivals has translated to declines of 95% in hotel occupancy, 90% in car rentals, and 50% in restaurant demand, with flow-through impacts on retail trade. Handicraft retailers have reported sales declines of up to 70% year-on-year. 12 The reduction in international passenger flights from eight per week to only two per month also means subdued aviation fuel sales, with wholesale fuel operations estimated to have fallen 45%.

10. Outlook of successive economic contractions. With a prolonged period of restricted travel, and a return to normal movement of people likely pushed back to late-2021, successive economic contractions are projected for the RMI. An independent assessment acknowledged by the Government of the Marshall Islands projects economic contractions of 5.5% in FY2020 and 1.4% in FY2021 (footnote 11).13 Disruptions to fisheries are expected to be most substantial, estimated at –1.6 percentage points through this 2-year period. Declines are also projected for hotels and restaurants (–1.2 percentage points), wholesale and retail trade (–1.2 percentage points), and transport through reduced transshipment operations (–1.1 percentage points).

11. Substantial economic losses. The projected cumulative economic contractions for FY2020–FY2021 are on par with the decline in FY2008 amid the global food and fuel price spike. They could roll back 3 years of economic gains and push real per capita incomes below the FY2017 level. Shipping delays have also resulted in spoilage of imported fruits, vegetables, dairy products, and other perishables, affecting food security. The Ministry of Natural Resources and Commerce estimates that about 80% of the RMI’s food supply and up to 99% of other consumer

10 ADB. 2020. Technical Assistance Report: Strengthening Public Sector Management in the North Pacific. Manila. 11 Graduate School USA. 2020. Assessing the Impact of COVID-19 on the Marshall Islands Economy. Economic Monitoring and Analysis Program (EconMAP) Technical Note. Honolulu. 12 RMI National Disaster Committee. 2020. Impact of COVID-19 on the RMI Economy. Majuro. 13 This aligns with ADB’s latest assessment in ADB. 2020. Asian Development Outlook 2020 Update: Wellness in Worrying Times. Manila.

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items are imported. Inventories of essential items, including food and sanitation supplies, as of mid-March, fell short of levels needed to ensure food security during the pandemic (footnote 12).

12. Reductions in employment. The projected economic losses are expected to translate to the loss of between 417 and 716 full-time jobs (or 3.6% to 6.1% of formal employment) by the end of FY2021.14 The largest employment impacts are expected in the hotels and restaurants sector (up to 36% of total job losses) followed by transport and trade (28%). At the tuna loining plant, which employed 137 workers as of FY2018, 60 people were already laid off by the early stages of travel restrictions as supply chain disruptions led to scaled back operations. There have been immediate job losses among fishing boat observers, who are tasked with independently monitoring vessels’ compliance with the PNA’s vessel day scheme regulations and other conservation measures. To minimize potential COVID-19 transmission, the PNA decided to withdraw all observers, while ramping up technology-based monitoring, resulting in the temporary unemployment of 44 Marshallese observers. As of 2017, social security data suggest that women comprise 32% of formal employment in the RMI, with 93% of employed women in the services sector including hotels and restaurants, as well as wholesale and retail trade (footnote 6). More than 200 jobs lost due to the COVID-19 crisis affect women.

13. The RMI Coronavirus Preparedness and Response Plan. Approved by the cabinet in June 2020, then updated in September, the plan details interventions to strengthen capacities for health surveillance, infection prevention and control, clinical management of cases, while mitigating the pandemic’s economic and social impacts.15 The $45.8 million (21.0% of GDP) plan allocates funding across three primary areas: (i) $21.1 million to strengthen health systems; (ii) $12.4 million to provide assistance to businesses; and (iii) $8.3 million to safeguard the well- being of vulnerable communities and households, particularly those in the neighboring islands and atolls. An additional $4.0 million is budgeted toward ensuring the continuity of essential services and for consular assistance for citizens abroad. Implementation of the plan started in FY2020 and will continue in FY2021, with seven sector clusters activated to coordinate national agencies’ responses.16 Grants from the RMI’s development partners—ADB, the European Union, the International Organization for Migration, the World Bank, along with Japan, Taipei,China, and the US—have been identified to finance expenditure needs.

14. Health sector capacity for COVID-19 preparedness and response ($21.1 million). The largest share of the plan’s budget is directed toward activities and investments to strengthen health surveillance and provide surge capacity for health care. As of September 2020, the government has spent about $9.5 million for medical equipment and supplies, including personal protective equipment (PPE), and facilities upgrades. In addition to the new isolation ward in Majuro hospital (para. 5), new COVID-19 testing laboratories have been installed in Majuro and Ebeye and a third quarantine facility has been prepared on Gugeegue Island near Ebeye. The MOHHS is also preparing immunization reporting systems for post-market surveillance of a potential COVID-19 vaccine. To safeguard ports of entry and eventually facilitate less restricted shipping activity, the plan supports providing training and materials for infection prevention and control (e.g., proper use of PPE, decontamination, waste management) as well as building temporary quarantine shelters at Majuro and Ebeye ports. For neighboring island and atoll communities, the plan allocates funding for: (i) adding storage units to 65 health dispensaries; (ii) COVID-19 preparedness mobile teams to conduct facility assessments and trainings on health

14 Estimates are based on references in footnotes 11 and 12. 15 Social protection aspects of the plan are summarized in Summary of Social Protection Measures in Government’s COVID-19 Response Package (accessible from the list of linked documents in Appendix 2). 16 The seven sector clusters under the plan are: agriculture and food security; education; gender and protection; health; infrastructure; shelter; and water, sanitation, and hygiene.

6 protocols; (iii) procurement of test kits, PPE, medical supplies, and disinfectants; and (iv) potential referral of patients to Majuro or Ebeye. The plan also provides for improvements in water, sanitation, and hygiene facilities, particularly in schools and community handwashing stations, to boost infection prevention and control. Funding is also allocated for purchasing cleaning supplies, sanitizers, disinfectants, and personal hygiene kits for use in quarantine and isolation facilities. To safeguard the welfare of women and girls in these facilities, provisions are made to distribute dignity kits and conduct staff training programs on the prevention of sexual harassment.

15. Economic relief for affected businesses ($12.4 million).17 In June 2020, the cabinet approved a $6 million economic relief program providing financial assistance to businesses affected by COVID-19 travel restrictions. The relief program is wide-ranging, targeting tourism- related businesses—hotels, restaurants, travel and shipping agents, and handicraft shops—but is also open to any enterprise that can show proof of adverse impacts. As of mid-October, grants have been provided to 58 local businesses, with more than 40 additional applications under review. Grant amounts have ranged from $2,000 to $50,000 and is based on the estimated adverse impact of COVID-19 travel restrictions on business turnover (as gauged from tax filings) over a 6-month period. Beneficiaries have included small and informal businesses, which are provided a flat rate of $900 for 6 months in the absence of financial documentation. The plan also allocates funds to facilitate local supply chains for fabric facemasks, hospital gowns and beddings, and virgin coconut oil that will mostly benefit women producers. A further $6.4 million is allocated to support business continuity and facilitate quicker recovery of operations. Options under consideration include support for employers to provide necessary protective equipment and transport arrangements (in line with social distancing protocols) that will allow staff to return safely to work. Also, the proposed creation of a utilities discount program and provision of guaranteed or low-interest loans to employers can help businesses stave off bankruptcy and allow for a smoother recovery in operations when travel restrictions are eventually phased out.

16. Well-being of vulnerable communities and households ($8.3 million). The plan places particular emphasis on promoting well-being across the remote and vulnerable communities in the 22 neighboring islands and atolls outside of Majuro and Kwajalein. To safeguard food security, provisions are in place to deliver monthly food baskets to about 2,380 households over at least a 6-month period. Fishing and farming implements will also be distributed to communities to support subsistence production and enable greater self-reliance. Household rapid vulnerability assessments supported by the International Organization for Migration helped identify the most vulnerable households in Majuro and Ebeye.18 The government is using the results to calibrate its response and target assistance to identified households. A new national gender-based violence telephone hotline has also been activated to help address a possible increase in cases of abuse during the current crisis. In September 2020, the plan was updated to secure sustained funding for the Ministry of Education’s feeding program that provides school lunch meals to students from poor families. The updated plan allocates an additional $3.5 million to expand the program and provide school lunches to about 11,300 children nationwide 5 days per week. Provisions for continuing children’s education (e.g., learning kits) are also prioritized.

17. Social assistance for vulnerable groups. Outside of the plan, the government has also committed to sustaining adequate funding for the RMI’s ongoing social protection programs—

17 Relief for businesses complements the provision of unemployment benefits to affected workers through the US Pandemic Unemployment Assistance and Federal Pandemic Unemployment Compensation programs. Citizens of the RMI are eligible for these programs, with US assistance coursed through the RMI Labor Division. 18 Government of the Marshall Islands. 2020. Household Rapid Vulnerability Assessment: Majuro (Preliminary Report). Majuro; and Government of the Marshall Islands. 2020. Household Rapid Vulnerability Assessment: Ebeye and Gugeegue (Preliminary Report). Majuro.

7 already in place pre–COVID-19—that specifically target vulnerable groups, including a special education program for disabled children aged 3–21 years. 19 The National Training Center provides training to unemployed youth and those seeking better paying jobs. The main target beneficiaries are vulnerable youth who lack or have very little formal education. The Life Skills Academy provides training on gardening, woodworking, sewing, food preparation, and crafts to students who are not able to continue secondary education. Funding to continue providing free maternal and reproductive health services is likewise ring-fenced. As part of the social insurance scheme in the country, employed persons in both public and private sectors are entitled to retirement benefits, disability insurance benefits, surviving spouse insurance benefits, surviving child insurance benefits, and lump-sum benefits. There has been no disruption in the regular pension, with the Marshall Islands Social Security Administration administering the funds.

18. COVID-19 preparedness and response adds to fiscal pressures. Although the RMI’s fiscal position weakened in FY2019 to a deficit equivalent to about 2.2% of GDP because of transfers to copra producers and the social security fund, the pre–COVID-19 budget for FY2020 targeted more than halving the deficit to quickly contain fiscal pressures. However, with COVID- 19, the fiscal position is projected to deteriorate further through FY2021 (Table 2). Tax collections are estimated to have declined by 4.1% in nominal terms in FY2020, as subdued business activity resulted in a substantial shortfall in gross revenue taxes. While fishing license revenues remained broadly stable in FY2020, these are projected to decline by up to $4 million in FY2021 as the demand for vessel days weakens amid prolonged travel restrictions (para. 8). On the expenditure side, an estimated $12.5 million ($10.3 million from grants) of the additional spending detailed in the updated plan was implemented in FY2020, leaving $33.3 million for execution in FY2021 to complete the plan’s 2-year implementation period (para. 13).

Table 2: Selected Fiscal and Economic Indicators (% of GDP, unless otherwise stated) Item FY2016 FY2017 FY2018 FY2019e FY2020e FY2021p Real GDP growth (% change) 1.3 4.1 3.6 3.8 (5.5) (1.4) Inflation (% annual average) (1.5) 0.0 0.8 0.1 0.3 0.5 Central government budget Total revenue 61.0 68.4 62.6 63.1 67.8 67.8 Tax revenue 14.4 14.3 14.5 18.1 18.3 18.9 Nontax revenue 17.2 23.4 17.7 12.6 14.7 12.9 Grants 29.5 30.7 30.4 32.4 34.9 35.9 Total expenditure 57.1 64.0 60.1 65.3 72.5 82.8 Recurrent 54.0 57.9 55.5 56.4 60.1 69.1 % of which wages and salaries 21.1 21.5 21.8 21.0 22.2 22.5 Capital 3.1 6.1 4.6 8.9 12.4 13.7 Fiscal balance 3.9 4.4 2.5 (2.2) (4.7) (15.0) Public debt 44.1 39.2 35.2 31.5 30.6 28.4 % of which is external debt 44.1 39.2 35.2 31.5 30.6 28.4 Nominal GDP ($ million) 200.6 212.9 221.3 230.0 218.0 216.0 ( ) = negative, e = estimate, FY = fiscal year, GDP = gross domestic product, p = projection. Sources: Asian Development Outlook database; and Graduate School USA. 2020. Assessing the Impact of COVID-19 on the Marshall Islands Economy. Economic Monitoring and Analysis Program (EconMAP) Technical Note.

B. Proposed Program, Impacts, and ADB’s Value Addition

19. The program’s impact will be: the RMI’s capability to respond to and recover from the COVID-19 pandemic’s social and economic impacts strengthened (footnote 2). The program’s outcome will be reduced adverse impacts of the pandemic on individuals and communities.

19 Existing programs that will receive continuing funding are summarized in Summary of Existing Social Protection Programs by the Government (accessible from the list of linked documents in Appendix 2).

8

The program will support the government’s COVID-19 preparedness and response through the following outputs: (i) the health system’s COVID-19 preparedness and response capacities strengthened; (ii) economic relief for adversely affected businesses and workers delivered; and (iii) the well-being of vulnerable communities and populations supported. The program will also help to ensure the continuity of essential government services and employment. The program is aligned with the focus of the Pacific Approach, 2016–2020—ADB’s country partnership strategy for the 11 small Pacific developing member countries, including the RMI—on managing risks from external shocks, including by improving health and social protection services.20 The program is also aligned with Strategy 2030’s operational priorities of addressing remaining poverty and reducing inequality, accelerating progress in gender equality, and strengthening governance and institutional capacity.21 There was due consideration for designing the assistance in a fragile context-sensitive manner to ensure strong implementation, monitoring, and reporting.

20. ADB’s value addition. Previous and ongoing ADB operations in the RMI emphasize the critical need to promote longer-term fiscal and economic sustainability to allow for increased resilience to adverse shocks. In the aftermath of the global financial and economic crisis, a series of ADB policy-based operations provided timely budget support while also progressing some key reforms to control recurrent spending and improve the tax effort.22 Since 2017, ADB’s public financial management (PFM) project has provided sustained in-country capacity supplementation at the Ministry of Finance (MOF), particularly in refining and implementing the public sector reform agenda.23 At the sector level, a project to improve the power distribution network in Majuro also includes a component to improve the financial and operational sustainability of the energy utility.24

21. To comprehensively support the RMI’s COVID-19 preparedness and response, ADB’s assistance involves synergies across various modalities. In April 2020, ADB disbursed $370,000 in grants from the Asia Pacific Disaster Response Fund to support the immediate response, followed by another $6 million under the Pacific Disaster Resilience Program (Phase 2), shortly after the scope of contingent disaster financing instruments was expanded to cover health-related emergencies (footnote 1).25 In addition, ADB TA is funding the procurement of COVID-19 test kits, PPE, and other medical supplies amounting to about $585,000.26 The RMI received an additional $630,000 in grants from the Asia Pacific Disaster Response Fund in August following additional financing from the Government of Japan, and an additional $104,960 under an urban services project readiness facility in September to support distribution of PPE and community outreach in Ebeye. 27 ADB TA also supported refinement of the macro-fiscal framework to estimate FY2020 and FY2021 financing needs more comprehensively. 28 To safeguard against any potential disasters during this critical crisis period, ADB worked with the government to establish a new contingent disaster financing instrument. To facilitate the RMI’s recovery from the COVID-19 crisis, ADB’s assistance during FY2021–FY2023 will focus on sustaining critical capacity supplementation with additional financing for the PFM project (para.

20 ADB. 2016. Pacific Approach 2016–2020. Manila. 21 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila. 22 ADB. 2010. Republic of the Marshall Islands: Public Sector Program—Subprogram 1. Manila; and ADB. 2012. Republic of the Marshall Islands: Public Sector Program—Subprogram 2. Manila. 23 ADB. 2017. Republic of the Marshall Islands: Public Financial Management Project. Manila; and ADB. 2019. Republic of the Marshall Islands: Public Financial Management Project (Additional Financing). Manila. 24 ADB. 2017. Republic of the Marshall Islands: Majuro Power Network Strengthening Project. Manila. 25 ADB. 2019. Regional: Pacific Disaster Resilience Program (Phase 2). Manila. 26 ADB. 2020. Technical Assistance Report: Regional Support to Address the Outbreak of Coronavirus Disease 2019 and Potential Outbreaks of Other Communicable Diseases. Manila. 27 ADB. 2020. Republic of the Marshall Islands: Preparing Urban Service Improvement Projects. Manila. 28 ADB. 2019. Technical Assistance Report. Pacific Economic Management (Phase 3). Manila.

9

20); disease prevention through the next phase of a regional vaccines project; and continuing investments in critical infrastructure, including for energy and urban services.29

22. Lessons learned. The program applies lessons from ADB’s experience in providing economic recovery support programs across the Pacific during the 2008–2009 global financial and economic crisis (including footnote 22).30 These programs demonstrated the critical need to support aggregate demand while safeguarding the fiscal position through prioritized and well- targeted public expenditure programs. The HEALS Program’s focus on health aims to avoid a potential collapse in domestic demand that can occur with a direct COVID-19 outbreak in the RMI. Support for food security and assistance to affected employers will help facilitate a more rapid economic recovery, which will drive a quick return to fiscal sustainability after the crisis. The RMI is classified by ADB as a fragile situation with thin capacities for effective governance.31 Previous ADB TA in the country highlights the need to address acute capacity constraints, particularly when implementing ambitious and wide-ranging government programs (as is the case with COVID-19 preparedness and response).32 To supplement implementation capacity, particularly for targeting and monitoring of assistance, ADB is mobilizing regional TA supporting social protection and gender equality.33 ADB’s ongoing PFM project also contributes to the delivery of the government’s planned COVID-19 response package.

23. Development coordination. The program complements grant assistance contributed by development partners for the RMI’s preparedness and response plan. These include: (i) $12.3 million from the US through its Coronavirus Aid, Relief, and Economic Security Act as well as various programs under the Department of Health and Human Services and the Department of Education; (ii) $2.7 million from the European Union, mainly for food security; (iii) $2.5 million from the World Bank through an emergency assistance project that supports on- island laboratory COVID-19 testing; (iv) $1.2 million in medical supplies from Taipei,China, including polymerase chain reaction testing machines, infrared thermometers and medical masks; and (v) $0.3 million from Japan in critical medical, water and sanitation, and hygiene supplies.34 The RMI is also coordinating with the US on an eventual COVID-19 vaccination program to help reopen the economy when a vaccine becomes available. The WHO provides support to the RMI through a representative office in Fiji and a liaison office in the Federated States of Micronesia. The program is also developed in close coordination with the IMF through regular information sharing to ensure that the program helps safeguard broad macroeconomic stability during the crisis. The IMF agrees with ADB’s views on the RMI’s pre-shock record of sound macroeconomic management, as well as on a medium-term downward path for public debt–GDP with economic recovery from the current COVID-19 crisis. Further, the IMF recommends continued fiscal consolidation to preserve the CTF in real terms post-FY2023.

C. Development Financing Needs, Budget Support, and Debt Sustainability

24. The economic and fiscal impacts of COVID-19 travel restrictions are estimated to have resulted in a fiscal gap of $10.3 million (equivalent to 4.7% of GDP) in FY2020 that was bridged through grant assistance. ADB projects the government’s financing needs will rise to $32.3 million

29 ADB. 2018. Regional: Systems Strengthening for Effective Coverage of New Vaccines in the Pacific Project. Manila. 30 A summary of programs that supported five Pacific developing member countries during the global financial and economic crisis is found in ADB. 2011. Policy-Based Programs for the Pacific Islands. Manila. 31 ADB list of countries classified as fragile and conflict-affected situations. 32 ADB. 2014. Technical Assistance Completion Report: Public Sector Program—Subprogram 1. Manila. 33 ADB. 2020. Technical Assistance for Strengthening Social Protection in the Pacific. Manila; and ADB. 2020. Regional: Strengthening Gender Outcomes in Pacific COVID-19 Response and Recovery. Manila. 34 World Bank. RMI. Marshall Islands COVID-19 Emergency Response Project.

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(15.0% of GDP) in FY2021, to be filled through sustained grant assistance from the RMI’s development partners as identified in the plan (Table 3). The government has requested a grant not exceeding $16 million from ADB’s Special Funds resources (Asian Development Fund) to sustain support for its preparedness and response program in FY2021. The grant proceeds will support development financing needs, excluding ineligible items.35

Table 3: Development Financing Needs, FY2020 and FY2021 Item FY2020 FY2021 Pre-COVID-19 With COVID-19 Pre-COVID-19 With COVID-19 $ % of $ % of $ % of $ % of million GDP million GDP million GDP million GDP Revenues 152.0 61.8 147.8 67.8 150.1 59.2 146.5 67.8 Expenditures 154.2 62.7 158.1 72.5 157.9 62.2 178.9 82.8 Financing needs (2.2) (0.9) (10.3) (4.7) (7.8) (3.1) (32.3) (15.0) With COVID-19 financing plan COVID-19 grants 20.5 9.4 22.1 10.3 ADB: RMI HEALS 16.0 7.4 ADB: Other grants 7.0 3.2 United States 6.1 2.8 6.1 2.8 Other partners 7.3 3.4 Government deposits (10.2) (4.7) 10.2 4.7 ( ) = negative, ADB = Asian Development Bank, COVID-19 = coronavirus disease, FY = fiscal year, GDP = gross domestic product, HEALS = Health Expenditure and Livelihoods Support, RMI = Republic of the Marshall Islands. Notes: 1. During FY2020, the RMI received $20.5 million in COVID-19 grants and spent an estimated $10.3 million to support interventions in its Coronavirus Preparedness and Response Plan. Unspent funds amounting to $10.2 million were deposited by the government (hence the negative financing entry for FY2020) for continuing implementation of the plan during FY2021. 2. “ADB: Other grants” includes $6.0 million disbursed in April 2020 under a regional contingent disaster financing instrument and $1.0 million from the Asia Pacific Disaster Response Fund. Sources: ADB estimates based on data from Graduate School USA’s technical note on Assessing the Impact of COVID- 19 on the Marshall Islands Economy, the RMI’s COVID-19 Preparedness and Response Plan, and FY2021 Budget.

25. Debt sustainability. The RMI’s public debt stock comprises borrowing from external creditors, including ADB and the US, mostly from the 1990s and early-2000s. Public debt has declined steadily from the equivalent of 85.2% of GDP in FY2000 to 31.5% in FY2019. An August 2018 debt sustainability analysis (DSA) by the IMF concluded that the RMI continues to face a high risk of debt distress. An updated IMF DSA, as noted in the September 2020 IMF Assessment Letter, maintains this high risk rating.36 However, the updated assessment reiterates that this risk does not stem from COVID-19 impacts or unsustainable borrowing practices but instead reflects potential fiscal pressures from the impending expiration of the economic provisions of the compact in FY2023 and the impacts of disasters over the longer term. As the government has no intention to borrow and is instead seeking grant assistance from the country’s development partners to fill financing needs arising from the COVID-19 crisis, both the IMF and ADB expect the public debt– GDP ratio to maintain its steady downward trend over the medium term. 37 Grant assistance through the proposed HEALS Program will also help the RMI forego higher-cost (even if concessional) borrowing. The ADB DSA therefore concludes that public debt will remain sustainable over the long term.38

35 List of Ineligible Items (accessible from the list of linked documents in Appendix 2). 36 IMF Assessment Letter (accessible from the list of linked documents in Appendix 2). 37 Its classification as a grant-assistance only country by ADB and the World Bank also effectively discourages the RMI from engaging in any nonconcessional borrowing, pursuant to the Sustainable Development Finance Policy adopted by multilateral development partners. 38 DSA (accessible from the list of linked documents in Appendix 2).

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D. Implementation Arrangements

26. The MOF will be the executing agency responsible for coordinating and monitoring program implementation. The National Disaster Committee (NDC), which has primary responsibility for the government’s response plan, will be the implementing agency. The National Emergency Operations Center prepares monthly situation reports and provides periodic updates to the NDC on expenditures, the number of beneficiaries served, and progress toward targets. Sex-disaggregated data of beneficiaries will also be regularly collected to report achievement of gender monitoring matrix targets.39 Program implementation will utilize the inter-governmental clusters system established by the plan to avoid duplication of efforts and maximize available capacities for delivering assistance (para. 13). As part of lessons learned and context-sensitive design, implementation capacity will be supplemented by ADB’s ongoing PFM project and regional TAs supporting the government in targeting and monitoring social protection and gender aspects of assistance (para. 22). The World Bank is also supporting capacity development in health through training for back-up health care providers, and broader PFM. The program implementation period is from June 2020 to September 2021. Grant proceeds will be withdrawn in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time).

III. DUE DILIGENCE

27. Governance. Although the RMI has a strong record of sound fiscal management (para. 7), critical PFM issues remain to be addressed. A public expenditure and financial accountability assessment in 2012 identified structural weaknesses, including: (i) significant variations between planned and actual expenditures, particularly in line ministries; (ii) large segments of public spending that are not captured in budget documents; (iii) loose linkages between planning and budgeting; (iv) systems and capacity constraints in tax administration; (v) limited availability of in- year budget execution reports; and (vi) limited follow-up of internal audit findings and recommendations.40 The findings informed the government’s RMI PFM Reform Roadmap, 2014– 2016, which covered 30 broad reform areas. 41 However, the sheer volume of public sector reforms for implementation stretched MOF capacity. Since 2017, an ADB-financed PFM project (footnote 22) has provided long-term capacity supplementation within the MOF to update the roadmap and develop a sequenced and prioritized action plan. Improvements have been made in the PFM policy and legal framework, national government budgeting and local government financial management, cash and payroll management, and oversight of state-owned enterprises. A fiscal responsibility and debt management bill has been introduced in Parliament. Once enacted into law and implemented effectively, this should help further strengthen PFM and complement ongoing governance reforms supported by ADB and other partners. Nonetheless, the RMI remains a fragile state with structural constraints and thin capacities for effective governance. Thus, further interventions in the RMI need to be anchored on lessons from ADB’s ongoing regional TA supporting effective and sustainable delivery of development results in fragile situations in the Pacific.42 ADB’s Anticorruption Policy (1998, as amended to date) was discussed with the government, including the MOF and NDC.

28. Poverty and inequality. The RMI’s level of gross national income per capita places it within the World Bank’s upper-middle income country classification, but elevated cost structures—

39 Gender Monitoring Matrix (accessible from the list of linked documents in Appendix 2). 40 Government of the Marshall Islands. 2012. Public Financial Management Performance Report and Performance Indicators. Majuro. 41 Government of the Marshall Islands. 2014. Public Financial Management Reform Roadmap, 2014–2016. Majuro. 42 ADB. 2018. Technical Assistance Report: Towards Effective and Sustainable Delivery of Development Results in Fragile Situations in the Pacific. Manila.

12 stemming from diseconomies of scale in production, limited competition, and extreme remoteness—erode households’ purchasing power. An assessment of socioeconomic vulnerability in the RMI conducted by ADB in 2015 estimated that 38.4% of the population falls below the basic needs poverty line, down from 51.1% in 2002.43 Although no recent estimate of the Gini coefficient is available, the 2011 census shows that median household incomes in Kwajalein and Majuro were more than 10 times higher than in Ebon and Lae, the poorest atoll communities mainly relying on subsistence.44 ADB estimates that a cumulative 11.7% increase in real per capita incomes during FY2015–FY2019 reduced the poverty rate further to 29.4%– 31.6% just before the COVID-19 crisis, but the projected 7.6% contraction in incomes can raise the poverty rate to 33.8%–35.2% by the end of FY2021.45 The crisis threatens to wind back the gains from recent solid economic performance. Social impacts will be most severe for households that derive income from businesses that are directly affected by prevailing travel restrictions.

29. Economic relief to businesses will provide the needed cash to maintain operations and minimize job displacement. The inclusion of small businesses and informal workers will prevent further marginalization of these groups who lack alternative sources of income. Populations in the neighboring islands have limited access to food supplies, especially during crisis. Ensuring food security through food rations and distribution of farming and fishing tools will maintain the quantity and quality of food intake. This will protect the welfare of vulnerable groups such as children, the elderly, people with disabilities, and those with preexisting health conditions. The continuation of the government’s school lunch program will help students avoid malnutrition. Training for vulnerable youth will improve their employability once the economy recovers.

30. Gender. The program is classified as effective gender mainstreaming. The COVID-19 crisis has the potential to exacerbate existing gender inequalities and risk the progress that has been made in supporting women’s economic empowerment.46 The program supports women’s health, safety, and economic empowerment. Health and safety measures include: continuation of free health care, including maternal and reproductive health; priority COVID-19 testing for frontline health workers; refresher training for frontline health workers on the use of PPE; and staff trainings on the prevention of sexual harassment in quarantine shelters.47 Economic measures include: assistance to women-owned businesses; ensuring all public servants (of which 31% are women) continue to be employed; and training predominantly women in producing fabric facemasks to support the health care system. Relief measures will also be open to informal workers who are particularly vulnerable and may not have the savings, networks, or other safety nets to support them during the downturn in business activity. To support vulnerable populations, measures include: monthly food baskets to women-headed households in neighboring island and atoll communities; distribution of dignity kits, which include locally sewn and procured reusable

43 Government of Marshall Islands, Economic Policy, Planning, and Statistics Office. 2002. Republic of the Marshall Islands Household Income and Expenditure Survey 2002: Basic Tables. Majuro. 44 Government of Marshall Islands, Economic Policy, Planning, and Statistics Office and the Secretariat of the Pacific Community. 2012. Republic of the Marshall Islands 2011 Census Report. Noumea. 45 Based on a conservative assumed growth elasticity of poverty of between –1.5 to –2.0, at the lower end of the observed developing country range of –1.5 to 5.0. 46 According to the 2011 census, women in the RMI are vastly underrepresented in formal employment, with only 26% of working-age women engaged in paid work (compared to 48% for men). A low proportion of working-age women own or run businesses (8%), but they represent 44% of business owners in the RMI. Many of the women-owned businesses operate in sectors most impacted by COVID-19 such as tourism, services, and retail. Although the gender wage gap in the RMI narrowed to 10.5% in 2017 (from 26.7% in 2011), the economic downturn from the pandemic may reverse this, potentially placing more women at greater risk of poverty and food insecurity. 47 Noncommunicable diseases remain a leading cause of death in the country. Despite improvements in recent years, there is a high teenage pregnancy rate and low numbers of women attending prenatal care appointments. This highlights the critical need to ensure that essential services, particularly maternal and reproductive health care, continue during health emergencies such as the COVID-19 pandemic.

13 menstrual products and fabric facemasks; a new national gender-based violence hotline; and new standard operating procedures developed for domestic violence services during lockdown. 48 Finally, women’s unpaid care burden is reduced by the continuation of the school lunch program.

31. Safeguards. No adverse environmental, involuntary resettlement, or indigenous peoples impacts under ADB’s Safeguard Policy Statement (2009) have been identified.49 The program is classified as Category C for environment, involuntary settlement, and indigenous peoples.

32. Risk and mitigating measures. Major risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.50

Table 4: Summary of Risks and Mitigating Measures Risks Mitigation Measures COVID-19 outbreak in the RMI. If community The government is building the health system’s surveillance transmission occurs, more stringent movement and response capacity by constructing new COVID-19 testing restrictions (e.g., local lockdowns) will be needed, laboratories, isolation rooms, and quarantine facilities to resulting in a sharper economic downturn. prevent community transmission of the virus. Further shocks from disasters. Given the RMI’s ADB has worked with the government to establish a new heightened vulnerability to disasters and climate contingent disaster financing instrument, through the third change, a concurrent adverse shock will phase of the regional Pacific Disaster Resilience Program. exacerbate the economic and social impacts of This will provide quick-disbursing finance during any the ongoing COVID-19 crisis. subsequent disaster or health emergency. Institutional capacities for effective Given the RMI’s classification as a fragile situation, capacity governance stretched too thin. supplementation and technical assistance from development Demands for active government response on partners are actively supplementing government capacities. several fronts can expose fragilities in public This includes ADB’s ongoing public financial management sector capacities. project and technical assistance focusing on gender equity. ADB = Asian Development Bank, COVID-19 = coronavirus disease, RMI = Republic of the Marshall Islands. Source: Asian Development Bank.

IV. ASSURANCES 33. The government has assured ADB that implementation of the program shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, financial management, and disbursement as described in detail in the grant agreement.

V. RECOMMENDATION 34. I am satisfied that the proposed grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the grant not exceeding $16,000,000 to the Republic of the Marshall Islands from ADB’s Special Funds resources (Asian Development Fund) for the Health Expenditure and Livelihoods Support Program, on terms and conditions that are substantially in accordance with those set forth in the draft grant agreement presented to the Board. Masatsugu Asakawa President 19 November 2020

48 As of 2011, female-headed households had, on average, 41% less in monthly income than male-headed households and were therefore more likely to face poverty. Increased poverty may make it difficult for women and girls to access menstrual hygiene products. One in two women in the RMI have experienced physical or sexual violence by a partner during their lifetime and the prevalence and severity of gender-based violence is likely to increase during crisis periods. 49 ADB. 2009. Safeguard Policy Statement. Manila. 50 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

14 Appendix 2

DESIGN AND MONITORING FRAMEWORKa

Country’s Overarching Development Objective The Republic of the Marshall Islands' capability to respond to and recover from COVID-19 social and economic impacts strengthened (RMI Coronavirus Preparedness and Response Plan)b

Performance Indicators with Data Sources and Results Chain Targets and Baselines Reporting Mechanisms Risks Effect of the Program By December 2021: Adverse impacts of the a. The RMI maintained a. MOHHS COVID-19 Domestic COVID-19 pandemic on record of zero community Situation Reports; WHO COVID-19 the individuals and transmissiond of COVID-19 reports (weekly) outbreaks communities reducedc (2020 baseline: 2 border occur in the cases as of October 2020) RMI, possibly through b. Less than 1% of b. Household rapid repatriation of households reported cases vulnerability overseas of food poverty or hunger assessments and follow- citizens, putting during period of COVID-19 up interviews with e further travel restrictions (2020 identified vulnerable pressure on baseline: to be established households limited through household rapid resources to vulnerability assessments) contain health, c. At least 16,500 people c. NDC reports, economic and benefit from at least one Graduate School USA social impacts form of cash or in-kind Economic Statistics support to help mitigate the A disaster adverse effects of COVID- strikes the RMI, 19, with data disaggregated exacerbating by types of program, sex, COVID-19’s age, etc. (June 2020 economic and baseline: 0) social impacts

Outputs By September 2021: 1. Health system’s 1.1. Three quarantine sites 1.1. MOHHS COVID-19 Institutional COVID-19 preparedness operational at major points Situation Reports capacities for and response capacities of international entry by sea (weekly) effective strengthened and air—through Majuro and governance Ebeye/Kwajalein—into the stretched too RMI (2020 baseline: 0) thin, as demands for 1.2. 100% of frontline health 1.2. MOHHS COVID-19 active workers, of whom about Situation Reports government 54% are women, show (weekly) response on improved understanding and several fronts skills in managing and can expose prevent spread of COVID-19 fragilities (2020 baseline: 0% of 512 frontline health workers)

1.3. Interoperability between 1.3. MOHHS routine surveillance and confirmation immunization reporting systems established in preparation for post-market surveillance (2020 baseline: not established)

Appendix 2 15

Performance Indicators with Data Sources and Results Chain Targets and Baselines Reporting Mechanisms Risks 1.4. 350 local volunteers, of 1.4. MOHHS whom 50% are women, confirmation recruited for rapid response and contact tracing for management of up to 1,000 cases (June 2020 baseline: 0)

1.5. At least 47,393 people 1.5. NDC reports or 80% of population demonstrate improved hygiene behavior due to WASH interventions, with sex-disaggregated tracking (2020 baseline: 0)

2. Economic relief for By September 2021: adversely affected 2.1. Economic relief 2.1. MOF reports businesses and workers assistance provided to at delivered least 70 private businesses, including SMEsf (of which at least 35 of which are owned by womeng) whose operations were adversely affected by COVID-19 travel restrictions (Baseline: no economic relief assistance program)

2.2. 100% of national 2.2. MOF reports

government employees

(31% of whom are women)

kept employed and providing

public services without disruption (Baseline: 100% of 2,619 national government employees are employed and paid)

3. Well-being of By September 2021: vulnerable communities 3.1. Food baskets delivered 3.1. MNRC reports and populations to 2,380 households in the supported neighboring islands and atolls—of which 25% are headed by women—every month for at least 6 months (2020 baseline: 0)

3.2. Farming tools and 3.2. MNRC reports supplies—including rapid growing seedlings, soil, fertilizers, and other gardening materials—and fishing gears provided to 65 communities in neighboring islands and atolls (2020 baseline: 0)

16 Appendix 2

Performance Indicators with Data Sources and Results Chain Targets and Baselines Reporting Mechanisms Risks 3.3. 100% of children from 3.3. MOE reports government-identified low- income families receive subsidized meals 5 days a week during School Year 2020–2021 through the MOE Feeding Program (June 2020 baseline: 100% [11.278] children from low- income families received subsidized meals support)

3.4 At least 700 dignity kits 3.4. MOCIA confirmation distributed to women and girls from vulnerable householdsh (2020 baseline:

0)

3.5. New national GBV 3.5. MOCIA confirmation telephone hotline—with supporting standard operating procedures for domestic violence services during lockdown— operational (2020 baseline: not operational)

Budget Support Asian Development Bank: $16.0 million (Asian Development Fund grant) COVID-19 = coronavirus disease, FY = fiscal year, GBV = gender-based violence, MOCIA = Ministry of Culture and Internal Affairs, MOE = Ministry of Education, MOF = Ministry of Finance, MNRC = Ministry of Natural Resources and Commerce, MOHHS = Ministry of Health and Human Services, NDC = National Disaster Committee, RMI = Republic of the Marshall Islands, SME = small and medium enterprises, USA = United States of America, WASH = water, sanitation, and hygiene. a Contribution to the ADB Corporate Results Framework will be determined after project approval. b Government of the Marshall Islands. 2020. RMI Coronavirus Preparedness and Response Plan. Majuro (June). c Community transmission is the highest level of the 4-level COVID-19 transmission classification adopted by the World Health Organization. d Due to uncertainties regarding potential further developments with the COVID-19 pandemic, it is not possible to set results targets before approval that are more specific than those presented in the DMF. Additional indicators of the expected effect of the reform that will be relevant to measure and report on by program completion include, for example, the extent of avoided contractions in GDP and resulting reductions in per capita incomes. Results for these indicators, and/or other relevant ones for which data are available, will be identified at a later stage and reported in the program completion report. e Household rapid vulnerability assessments for Majuro and Ebeye covered 2,774 and 772 households, respectively. Along with an estimated 2,380 households in neighboring islands and atolls, this places the total number of surveyable households at 5,926, of which 1% is about 593 households. f Economic relief checks are provided to enterprises based on the estimated adverse impact of COVID-19 travel restrictions on business turnover (as gauged from tax filings) over a 6-month period. g Women-owned businesses are formally defined as enterprises that are at least 51% owned, operated, and controlled on a day-to-day basis by one or more women entrepreneurs. h Household rapid vulnerability assessments identified 839 vulnerable households in Majuro and Ebeye, of which 38 are considered the most vulnerable. Dignity kits will also be distributed in quarantine and isolation facilities. Source: Asian Development Bank.

Appendix 2 17

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=54358-001-2

1. Grant Agreement 2. Development Coordination 3. Country Economic Indicators 4. International Monetary Fund Assessment Letter 5. Summary Poverty Reduction and Social Strategy 6. Risk Assessment and Risk Management Plan 7. List of Ineligible Items 8. Debt Sustainability Analysis 9. Gender Monitoring Matrix

Supplementary Documents 10. Summary of Social Protection Measures in Government’s COVID-19 Response Package 11. Summary of Existing Social Protection Programs by the Government 12. Safeguards Assessment Matrix

18 Appendix 3

DEVELOPMENT POLICY LETTER

Appendix 3 19

20 Appendix 3

Appendix 4 21

ASSESSMENT OF COMPLIANCE WITH ACCESS CRITERIA FOR THE COUNTERCYCLICAL SUPPORT FACILITY AND COVID-19 PANDEMIC RESPONSE OPTION ACCESS CRITERIA

Access criteria ADB Staff Assessment 1. Adverse impact of exogenous The Republic of the Marshall Islands (RMI) economy is shock seen to contract by 5.5% in FY2020 (ends 30 September 2020) and a further 1.4% in FY2021. Global travel restrictions and quarantine requirements resulting from the COVID-19 pandemic are adversely affecting the fisheries (with a share of about 11% of GDP), hotels and restaurants (2%), and transport sectors (7%). Operations of a domestic fleet of purse seine fishing vessels, as well as a tuna loining plant in Majuro, are estimated to decline by about 30% in FY2020 and expected to remain subdued in FY2021. Exports of aquarium fish have also declined by half. Further, a requirement for fishing and carrier vessels to spend at least 14 days at sea (including travel) prior to entry is limiting transshipment activity in Majuro port—the world’s busiest tuna transshipment hub. Transshipment services associated with the export of sashimi-grade tuna are trending lower by 50%. Also, with no visitor arrivals since March 2020, the two main hotels have been virtually empty around half of the fiscal year, while restaurants and retail shops have seen customers decline by at least half. Government tax collections are estimated to have declined by 4.1% in FY2020. The decline in economic activity is projected to lead to a loss of over 700 jobs through to end-FY2021, with over a third of these losses likely to affect women employees. This will be, by far, the largest reduction in employment in the RMI in more than two decades. As a result, the basic needs poverty rate is at risk of increasing from its estimated FY2019 level of between 29.4% and 31.6% of households to a range of 33.8%–35.2% by end-FY2021. 2. Countercyclical development In June 2020, the government finalized the $45.8 million expenditure (equivalent to 21.0% of GDP) RMI Coronavirus Preparedness and Response Plan. It comprises a health sector component, an economic relief and recovery component, and a food security component: • The health component ($21.1 million) details and costs necessary measures primarily to upgrade capacities for screening and testing; strengthen infection prevention and control; and establish case management protocols. As of August 2020,

22 Appendix 4

Access criteria ADB Staff Assessment the government has spent about $9.5 million for medical equipment and supplies, as well as preparation of additional isolation and quarantine facilities. To safeguard the welfare of women and girls in quarantine facilities, provisions are made for distributing dignity kits and conducting staff trainings on the prevention of sexual harassment.

• For economic relief and recovery ($12.4 million), the plan provides for financial assistance to businesses in Majuro and Kwajalein affected by the travel restrictions. Further assistance measures under consideration include: provision of necessary protective equipment and safe transport arrangements for workers to ensure continuity of business activity in critical sectors including food and emergency supplies; financing low-interest business loans to local employers; and establishing a utilities discount program for affected businesses and households.

• The plan also safeguards well-being of vulnerable communities ($8.3 million), including those in the RMI’s neighboring islands and atolls, or more remote communities outside the major population centers of Ebeye and Majuro. This includes delivery of monthly food baskets to each household as well as provision of farming and fishing implements to every community. In September 2020, the plan was updated to secure sustained funding for the Ministry of Education’s feeding program that provides school lunch meals to students from poor families. The updated plan allocates a further $3.5 million for providing school lunches five days a week to about 11,300 children nationwide.

The plan also budgets $4.0 million to continue essential services, including utilities, as well as for consular assistance and possible evacuation of citizens stranded abroad. Grant financing from the RMI’s development partners—ADB ($23.0 million, inclusive of the proposed $16.0 million CPRO operation), the European Union ($2.7 million), the International Organization for Migration ($0.7 million), the World Bank ($2.5 million), and the governments of Japan ($0.3 million), Taipei,China ($1.2 million), and the United States ($12.3 million)—is already identified to supplement government’s own resources to fully finance identified expenditure needs.

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Access criteria ADB Staff Assessment 3. Pre-shock record of generally The government recorded annual fiscal surpluses sound macroeconomic averaging 3.4% of GDP from FY2014 to FY2018. Recent management sharp increases in fishing license revenue collections contributed the most to a substantial improvement in domestic resource mobilization. On the expenditure side, progress has been achieved in controlling the public sector wage bill, which has declined in proportion to GDP to an average of 21.6% during FY2015–FY2019 from 23.0% during the preceding decade. The fiscal account swung into a deficit equivalent to about 2.2% of GDP in FY2019. Contributing to the deficit were transfers to copra producers (i.e., de facto social welfare provided to individual producers through Tobolar, a state- owned copra trading company) and the social security fund (in support of a broader reform package approved in 2016 to move the fund toward a financially sustainable position), as well as increased expenditure to contain a dengue outbreak. The pre-COVID-19 budget targeted a more than halving of the deficit in FY2020 to quickly contain fiscal pressures. The original FY2020 budget targeted further growth in domestic revenue while containing recurrent expenditure, particularly transfers to the social security fund. Further, the RMI has built up its Compact Trust Fund (CTF) from $240.1 million in FY2014 to $518.6 million by August 2020. Pre-COVID-19 accumulation trends indicate that the CTF will likely reach a target level that will generate sufficient annual investment earnings to offset expiring Compact grants after FY2023 while preserving the nominal value of assets. The September 2018 assessment of the International Monetary Fund (IMF), however, recommended further fiscal consolidation to allow for preservation of the CTF in real terms post-FY2023. 4. Structural reforms The RMI has implemented pre-emptive COVID-19 response measures including: (i) expanded monitoring by the Health Emergency Operations Center—activated since July 2019 due to a dengue outbreak and later to monitor a possible measles outbreak—to also include COVID-19 surveillance, following the President’s declaration of a State of Health Emergency in early-February; (ii) travel restrictions on travelers from affected areas as early as January 2020 followed by full border closure since early-March; (iii) preparation of COVID-19 laboratories in Majuro and Ebeye, a special 8-room isolation ward at the Majuro hospital, as well as quarantine sites at the

24 Appendix 4

Access criteria ADB Staff Assessment Arrak campus of the College of Marshall Islands in Majuro and the Kwajalein military base near Ebeye; and (iv) COVID-19 awareness activities (e.g., community meetings, regular updates by the Minister of Health broadcast through television and radio, and activation of a COVID-19 hotline for Majuro). Health systems strengthening is also ongoing through the continuing procurement of personal protective equipment, test kits, as well as ventilators and other medical equipment. The Ministry of Health and Human Services is conducting targeted on-site COVID-19 testing for those exhibiting mild symptoms of respiratory illnesses. 5. Debt sustainability Public debt has declined steadily from the equivalent of 85.2% of GDP in FY2000 to 31.5% by FY2019. Although the IMF rates the RMI as facing a high risk of debt distress, this stems primarily from fiscal pressures from the impending expiration of the economic provisions of the Compact in FY2023 as well as the potential impacts of disasters over the longer-term, not from any unsustainable borrowing practices. The government has no intention to borrow and is instead seeking grant assistance from the country’s development partners to fill financing needs arising from the COVID-19 crisis, so the public debt-to-GDP ratio is seen to maintain its steady downward trend over the medium-term. Grant assistance through the proposed CPRO will help the RMI forego higher-cost (even if concessional) borrowing and the ADB DSA therefore concludes that public debt will remain sustainable over the long-term. 6. IMF coordination ADB is closely coordinating with the IMF on the macro- fiscal framework for the RMI. The IMF’s Assessment Letter will confirm ADB’s views on: (i) the RMI’s pre-shock record of generally sound macroeconomic management; and (ii) a medium-term downward path for public debt–GDP with economic recovery and given the availability of sufficient grant resources from development partners supporting the RMI Coronavirus Preparedness and Response Plan. ADB = Asian Development Bank, COVID-19 = coronavirus disease, CPRO = COVID-19 Pandemic Response Option, CTF = Compact Trust Fund, DSA = debt sustainability analysis, FY = fiscal year, GDP = gross domestic product, IMF = International Monetary Fund, RMI = Republic of the Marshall Islands. Source: Asian Development Bank.