{
  "title": "IMF Staff Completes 2021 Article IV Mission to the Federated States of Micronesia",
  "publication": "IMF News, August 3, 2021",
  "sourceUrl": "https://www.imf.org/en/news/articles/2021/08/03/pr21242-micronesia-imf-staff-completes-2021-article-iv-mission",
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  "summary": "The IMF team held a virtual Article IV consultation with FSM authorities and private sector representatives during July 19-30, 2021.",
  "publishDate": "2021-08-03",
  "sections": [
    {
      "heading": "Mission context and headline findings",
      "content": "- The IMF team held a virtual Article IV consultation with FSM authorities and private sector representatives during July 19-30, 2021.\n- The FSM has been successful in preventing the spread of COVID-19 to date; public health measures and the economic policy response have been \"strong and broadly appropriate,\" helping mitigate the pandemic's economic impact.\n- Near-term growth outlook has \"significantly deteriorated.\"\n- Growth projections and key macro outcomes:\n  - Growth falling to -3.2 percent in FY2021.\n  - A slow recovery is projected for FY2022 driven by a gradual border reopening.\n  - Real GDP is expected to return to the pre-COVID level in FY2023, albeit with output remaining on a lower trajectory through the medium term reflecting some permanent scarring.\n  - Inflation is expected to rise in FY2021 due to higher imported prices including for commodities.\n  - Fiscal and external balances are projected to remain in surplus in FY2021.\n- Uncertainty remains high and risks are tilted to the downside."
    },
    {
      "heading": "Downside and upside scenarios, key risks",
      "content": "- Downside risks:\n  - A longer border closure or a possible domestic outbreak could prolong subpar growth and strain the domestic health system.\n  - Uncertainty around the expiration of financial and services support under the Compact Agreement with the United States could undermine investor confidence and weigh on medium-term prospects, particularly the FSM’s capacity to cope with a possible fiscal cliff post-FY2023.\n  - Climate change-induced natural disasters remain a key downside risk given geographic dispersion and isolation.\n- Upside scenarios:\n  - Renewal of financial and services support provisions under the Compact Agreement would boost confidence.\n  - Prompt implementation of fiscal and structural reforms could lift potential growth and ensure budget self-sufficiency and fiscal sustainability."
    },
    {
      "heading": "Near-term policy recommendations",
      "content": "- Maintain supportive fiscal measures until the recovery is firmly underway, prioritizing protection of the vulnerable and underpinning the recovery:\n  - Extend fiscal support provided to the unemployed, low-income households, and informal workers.\n  - Accelerate the vaccination process to achieve collective immunity as early as possible to safeguard public health and enable gradual reopening.\n  - Increase efforts to execute existing commitments on public infrastructure investment to reactivate economic activity when borders reopen.\n- Financial sector near-term support:\n  - Extend measures such as interest payment relief and debt moratorium for viable firms until the recovery is underway.\n  - Closely monitor non-performing loans and broader credit quality indicators such as restructured and doubtful loans."
    },
    {
      "heading": "Medium-term fiscal strategy and numeric adjustment guidance",
      "content": "- A comprehensive medium-term fiscal policy approach is needed to address the possible fiscal cliff and safeguard debt sustainability.\n- Once the recovery is firm, implement a gradual fiscal consolidation to rebuild longer-term fiscal resilience:\n  - A gradual fiscal adjustment of about 1-2 percent of GDP per year could be implemented over five years when growth is expected to strongly bounce back and stay above trend.\n  - Adjustment should be achieved through domestic revenue mobilization and expenditure rationalization.\n- Institutional and tax measures:\n  - The establishment of the National Tax Reform Commission to strengthen the tax system, expand the revenue base, and ensure equitable revenue sharing is welcome.\n  - Tax reforms should prioritize the introduction of a value-added tax (VAT).\n  - State support programs and purchases of goods and services could be streamlined and rationalized, while protecting social spending and public infrastructure investment.\n  - Strengthen public financial management (PFM) and public investment management (PIM)."
    },
    {
      "heading": "Structural reforms to boost private sector and resilience",
      "content": "- Key structural reforms recommended to support private sector development and diversify growth:\n  - Reduce business startup costs and time for settling disputes.\n  - Lower the regulatory burden on foreign direct investment (FDI).\n  - Improve the efficiency of the judicial process.\n  - Enhance coordination across states.\n  - Establish a national single window system for trade and FDI.\n  - Expedite ICT infrastructure investment to enhance digital connectivity, overcome geographical remoteness, and expand economic opportunities.\n- Climate resilience and green development:\n  - Swiftly develop an overarching National Adaptation Plan and disaster resilience strategy.\n  - Improve access to climate finance supported by stronger public investment implementation capacity.\n  - Note: the recent amendment of the FSM Trust Fund law mandates the fund to invest in a clean and green portfolio."
    },
    {
      "heading": "Financial sector development priorities",
      "content": "- The financial sector has so far remained resilient.\n- To facilitate longer-term financial development:\n  - Update banking laws.\n  - Adopt prudential standards for banks.\n  - Speed up structural reforms to ease bottlenecks to credit supply and demand."
    },
    {
      "heading": "Engagements and acknowledgements",
      "content": "- The IMF team met with Finance Secretary Amor; Environment, Climate Change, and Emergency Management Secretary Yatilman; Transportation, Communication, and Infrastructure Secretary Apis; senior officials of the national government and state-owned enterprises; the financial sector community; development partners; and private sector representatives.\n- The team thanked the Micronesian authorities for constructive discussions and close cooperation.\n\nSource: IMF Staff Completes 2021 Article IV Mission to the Federated States of Micronesia — Press Release No. 21/242 (August 3, 2021).\n\n---\n\n\n References\n\n- Federated States of Micronesia and the IMF\n- IMF Policy Advice -- A Factsheet\n- Press Releases\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2021/08/03/pr21242-micronesia-imf-staff-completes-2021-article-iv-mission"
    }
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    "Published: August 3, 2021",
    "The IMF team held a virtual Article IV consultation with FSM authorities and private sector representatives during July 19-30, 2021.",
    "The FSM has been successful in preventing the spread of COVID-19 to date; public health measures and the economic policy response have been \"strong and broadly appropriate,\" helping mitigate the pandemic's economic impact.",
    "Near-term growth outlook has \"significantly deteriorated.\"",
    "Growth projections and key macro outcomes:",
    "Uncertainty remains high and risks are tilted to the downside.",
    "Downside risks:",
    "Upside scenarios:",
    "Maintain supportive fiscal measures until the recovery is firmly underway, prioritizing protection of the vulnerable and underpinning the recovery:",
    "Financial sector near-term support:",
    "A comprehensive medium-term fiscal policy approach is needed to address the possible fiscal cliff and safeguard debt sustainability.",
    "Once the recovery is firm, implement a gradual fiscal consolidation to rebuild longer-term fiscal resilience:",
    "Institutional and tax measures:",
    "Key structural reforms recommended to support private sector development and diversify growth:",
    "Climate resilience and green development:",
    "The financial sector has so far remained resilient.",
    "To facilitate longer-term financial development:",
    "The IMF team met with Finance Secretary Amor; Environment, Climate Change, and Emergency Management Secretary Yatilman; Transportation, Communication, and Infrastructure Secretary Apis; senior officials of the national government and state-owned enterprises; the financial sector community; development partners; and private sector representatives.",
    "The team thanked the Micronesian authorities for constructive discussions and close cooperation.",
    "[Federated States of Micronesia and the IMF](http://www.imf.org/external/country/FSM/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Press Releases](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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