IMF Staff Completes 2023 Article IV Mission to the Federated States of Micronesia

IMF News, December 13, 2023

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An IMF team led by Paulo Medas conducted discussions for the 2023 Article IV consultation with the Federated States of Micronesia (FSM) from November 28 to December 12.
The team exchanged views with the Finance Secretary Nakanaga, Governor Oliver of Pohnpei state, senior officials in several departments of the national government and state governments, the private sector, and development partners.
Press Release No. PR23/442.

The economy was hit by several shocks in recent years, including Covid and higher fuel and food prices, resulting in low and volatile growth.
After contracting in FY2022, the economy expanded by an estimated 0.8 percent in FY2023.
Inflation rose to 6.2 percent in FY2023 driven by higher fuel and food prices and supply bottlenecks.
FSM is experiencing significant labor shortages made worse by emigration.
The private sector remains underdeveloped, concentrated in a few sectors, and highly vulnerable to shocks.
Deteriorating infrastructure undermines growth prospects and access to basic services (e.g., clean water, sanitation).
Climate change is increasing urgency for adaptation efforts and raising concerns with food security.

After two years of large fiscal surpluses partly due to exceptional strong revenues, the fiscal surplus is estimated to have declined partly driven by a gradual recovery in investment and higher wages in the national government.
Public debt declined to 12.4 percent of GDP in FY2023.
The assets of the Compact trust fund and the FSM trust fund reached a total of 323 percent of GDP.

Growth projections:
- Growth in FY2024 is projected at 1.1 percent.
- Growth in FY2025 is projected at 1.7 percent, boosted by the implementation of COFA and associated public spending.
Key upside scenario:
- The expected renewal of the Compact of Free Association (COFA) with the United States could dramatically improve the economic outlook and debt dynamics.
Key downside risks:
- External shocks.
- A significant delay or no renewal of the COFA.
- Delays in implementing large investments would also hurt growth prospects.
Short-term prospects are expected to benefit from a boost in public spending, including accelerating public investment, but a declining workforce and limited capacity pose a significant risk.

Leverage the revised COFA (when approved) to boost living standards and create well paid jobs through a comprehensive reform effort.
Implement a set of ambitious, mutually reinforcing reforms to raise sustainable economic growth led by the private sector and tackle climate change, including:
- Build broad consensus on critical, but difficult reforms and secure support from the international community.
- Continue the ongoing work on a new strategic development plan and create a group including national and state governments and donors to monitor reform implementation.
- Strengthen public investment management to achieve larger growth dividends.
- Develop a medium-to long-term fiscal framework and public investment management capacity.
- Adopt reforms to allow for a more dynamic and entrepreneurial private sector, with pressing priorities to promote foreign direct investment and address land issues that hamper economic and social development.
- Press ahead on climate adaptation and food security with donor support and integrate climate and development strategies being developed.
- Address data weaknesses to strengthen the effectiveness of public policies and increase transparency and accountability.

The IMF team thanked the authorities for their cooperation, valuable and constructive dialogue, and warm hospitality, and looks forward to further strengthening the IMF’s close and constructive engagement with the Federated States of Micronesia.

Source: Press Release No. PR23/442, December 12, 2023.