IMF Executive Board Concludes 2023 Article IV Consultation with the Federated States of Micronesia
IMF News, March 4, 2024
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- Published: March 4, 2024
Overview
- On February 23, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Federated States of Micronesia (FSM).
- FSM experienced a short-lived recovery in 2021 from Covid, but economic activity has since stagnated because of additional shocks.
- External and fiscal positions remained robust despite stagnation and shocks.
Recent economic performance
- Real GDP:
- Growth rebounded to 3 percent in FY2021.
- Estimated to have averaged zero in FY2022-23.
- Inflation:
- Reached a decade high 6.2 percent driven by higher import prices for fuel and food, as well as supply bottlenecks.
- Labor market and structural issues:
- Significant labor shortages exacerbated by outward emigration.
- Underdeveloped private sector and deteriorating infrastructure, especially affecting health.
- Adverse impact of climate change raising food security concerns.
- Fiscal and external positions:
- Substantial fiscal surpluses in recent years contributed to a decline in public debt to 12.4 percent of GDP.
- Assets of the trust funds have risen to 323 percent of GDP.
Near-term outlook and projections
- Growth projections:
- FY2024: 1.1 percent
- FY2025: 1.7 percent
- Without significant reforms, growth likely to converge to the historical average of around 0.7 percent over time.
- Inflation:
- Expected to gradually decline to around 2 percent.
- Drivers and risks:
- Near-term boost from higher public investment and higher grants under the new Compact of Free Association (COFA) agreement with the United States (expected to be implemented starting in FY2025).
- Economy remains highly vulnerable to shocks: increase in global commodity prices, extreme climate events, and potential delays of the COFA agreement.
- Acceleration of outward migration could severely jeopardize labor supply and project implementation.
Executive Board assessment and policy recommendations
- General assessment:
- Directors positively noted the new COFA agreement with the United States and welcomed the envisaged near-term economic recovery.
- Directors highlighted medium-term challenges: vulnerabilities to climate change and natural disasters, significant structural bottlenecks, and outward emigration.
- Emphasized the need for building social consensus and ensuring policy coordination among domestic stakeholders.
- Stressed the importance of continued financial and capacity building support by the international community.
- Fiscal policy and public finance:
- In the short term, fiscal policy should remain cautious until the new COFA is implemented.
- Press ahead with the authorities’ public financial management reform roadmap.
- Develop a new fiscal framework and strengthen public investment management to enhance implementation and efficiency of public investment.
- Further initiatives to improve revenue mobilization, such as modernizing revenue administration and strengthening the tax system, will be needed over time.
- Structural reforms and private sector:
- Encourage structural reforms to improve the business environment, and investments in education and training, and digitalization.
- Prioritize land reform and reducing barriers to foreign direct investment to promote private sector development and disincentivize outward emigration.
- Improve economic statistics to enhance transparency and accountability.
- Financial sector:
- Financial sector could play a stronger role in supporting economic development.
- Welcomed overall soundness, with recommendations to enhance regulatory and supervisory frameworks to boost resilience.
- Emphasized strengthening financial deepening and inclusion, and continued progress in the AML/CFT framework.
- Climate resilience:
- Urgency to strengthen resilience to climate change and call for prompt actions to develop and implement a comprehensive National Adaptation Plan.
Key statistics and selected indicators (FY2021–FY2025)
- Nominal GDP (FY2022): US$430 million
- Population (FY2022): 94,768
- GDP per capita (FY2022): US$4,540
- IMF Quota: SDR 7.2 million
- Real sector (annual percent change):
- Real GDP: FY2021 3.0; FY2022 -0.9; FY2023 0.8; FY2024 1.1; FY2025 1.7
- Consumer prices: FY2021 1.8; FY2022 5.0; FY2023 6.2; FY2024 4.0
- Consolidated government finance (in percent of GDP):
- Revenue and grants: FY2021 71.3; FY2022 67.0; FY2023 59.4; FY2024 61.2; FY2025 65.4
- Revenue: FY2021 37.3; FY2022 41.7; FY2023 34.9; FY2024 33.1; FY2025 34.0
- Tax revenue: FY2021 15.9; FY2022 21.7; FY2023 16.5; FY2024 16.7; FY2025 16.9
- of which: corporate income tax: FY2021 2.9; FY2022 9.5; FY2023 4.6
- Non-tax revenue: FY2021 20.6; FY2022 20.0; FY2023 18.5; FY2024 17.0
- of which: Fishing license fees: FY2021 17.7; FY2022 15.4; FY2023 13.4; FY2024 14.0
- Grants 2/: FY2021 33.9; FY2022 25.3; FY2023 24.5; FY2024 28.1; FY2025 31.4
- Expenditure: FY2021 66.8; FY2022 59.2; FY2023 57.9; FY2024 60.0; FY2025 65.8
- Expense: FY2021 63.6; FY2022 55.5; FY2023 53.4; FY2024 53.3; FY2025 57.2
- Net acquisition of nonfinancial assets: FY2021 3.2; FY2022 3.7; FY2023 4.5; FY2024 6.7; FY2025 8.5
- Gross Public Investment: FY2021 9.4; FY2022 10.0; FY2023 12.0; FY2024 13.5
- Net lending/borrowing: FY2021 7.8; FY2022 1.6; FY2023 1.3; FY2024 -0.4
- Net lending/borrowing (excl. grants): FY2021 -29.5; FY2022 -17.5; FY2023 -22.9; FY2024 -26.8; FY2025 -31.8
- Public debt (outstanding stock, end of period): FY2021 14.6; FY2022 12.4; FY2023 10.6
- Balance of trust funds 3/:
- FY2021 351.5; FY2022 287.7; FY2023 323.2; FY2024 330.9; FY2025 381.0
- Commercial banks (in percentage of GDP; end of period):
- Loans /4: FY2021 13.3; FY2022 12.8; FY2023 11.1; FY2024 11.3; FY2025 11.5
- Deposits: FY2021 111.7; FY2022 99.5; FY2023 96.2; FY2024 94.2; FY2025 92.9
- Interest rates (in percent, average for FY):
- Consumer loans: FY2021 14.2; FY2022 13.7; FY2023 14.3
- Commercial loans: FY2021 5.8; FY2022 5.1; FY2023 4.8
- Balance of payments (in millions of U.S. dollars):
- Trade balance: FY2021 -161.4; FY2022 -162.4; FY2023 -169.9; FY2024 -181.0; FY2025 -203.5
- Net services and income: FY2021 22.2; FY2022 26.5; FY2023 29.3; FY2024 21.9; FY2025 26.4
- Private and official transfers: FY2021 147.7; FY2022 172.4; FY2023 155.9; FY2024 162.8; FY2025 180.9
- Current account: FY2021 36.6; FY2022 15.3; FY2023 3.8
- (in percent of GDP): FY2021 2.2; FY2022 3.3
- External debt (in millions of U.S. dollars; end of period) — Outstanding stock:
- FY2021 62.9; FY2022 54.3; FY2023 49.2; FY2024 51.3
- Memorandum items:
- Real effective exchange rate 5/: 100.9; FY2022 106.9; FY2023 114.8
- Nominal GDP (in millions of U.S. dollars): FY2021 390.0; FY2022 430.2; FY2023 460.5; FY2024 484.0; FY2025 507.1
Source: IMF Executive Board Concludes 2023 Article IV Consultation with the Federated States of Micronesia (March 4, 2024).
