Statement by the 2010 Article IV Consultation Mission to the Federated States of Micronesia

Press Release No. 10/442
November 17, 2010

Mr. Akihiko Yoshida, chief of the International Monetary Fund (IMF) mission to the Federated States of Micronesia (FSM), issued the following statement today in Pohnpei:

“The economy of the FSM is recovering, but the growth is likely to remain weak with the risks to the downside in the near term. The economy grew for the first time in three years in FY2009 and is estimated to continue modest recovery in FY2010, but private sector activity remains weak. The growth is mainly supported by public sector infrastructure projects. With limited new private sector initiatives, however, the programmed decrements in the annual Compact grants and continued outward migration, growth in the medium term will likely to be suppressed.

“A comprehensive set of reforms are needed to secure long-term fiscal sustainability and encourage growth in the private sector. The FSM is likely to face a large revenue gap in FY2024, when the annual Compact grants are set to expire, posing a threat to the economic sustainability. To narrow the gap, the national and state governments would need to build up substantially their savings along with the Compact Trust Fund. These savings could be achieved by swift implementation of proposed tax reforms and current expenditure cuts, coupled with improved governance and structural reforms to support private sector activity. The mission encourages the authorities to start adjusting from FY2011, as its delay would increase the cost of adjustment, which would be even more challenging.

“A healthy development of private sector and a sound financial system are prerequisites for sustainable economic growth. Some of the key infrastructure projects are underway—the extension to Pohnpei airport and fiber-optic network—creating new opportunities for private sector to flourish. In this context, reforms to attract foreign investment could generate real economic benefits. Improving legislative framework, creating a skilled labor force, and further improvements in infrastructure are likely to lead to more foreign investment. The mission also sees room for further strengthening of banking and insurance sector supervision and reiterated the importance of bringing both credit unions and the Development Bank under regulation and supervision in line with the international best practices.

“The authorities recognize these challenges and are moving in the right direction, but the mission encourages the authorities to speed up the reform process. The key will be to build consensus for these reforms through closer dialogue with the public, legislative bodies, and the private sector. These conclusions will be elaborated in our annual consultation report which will be presented to the IMF Executive Board early next year.”



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