## IMF Staff Completes 2021 Article IV Mission to the Federated States of Micronesia _IMF News, August 3, 2021_ ## Source details **Canonical URL:** [IMF Staff Completes 2021 Article IV Mission to the Federated States of Micronesia](https://www.imf.org/en/news/articles/2021/08/03/pr21242-micronesia-imf-staff-completes-2021-article-iv-mission) ## Other formats - [Markdown version](/en/news/articles/2021/08/03/pr21242-micronesia-imf-staff-completes-2021-article-iv-mission/index.md) - [Structured JSON version](/en/news/articles/2021/08/03/pr21242-micronesia-imf-staff-completes-2021-article-iv-mission/index.json) - [Bundle manifest](/en/news/articles/2021/08/03/pr21242-micronesia-imf-staff-completes-2021-article-iv-mission/bundle-manifest.json) ## Bibliographic details - Published: August 3, 2021 --- ### Mission context and headline findings - 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: - Growth falling to -3.2 percent in FY2021. - A slow recovery is projected for FY2022 driven by a gradual border reopening. - 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. - Inflation is expected to rise in FY2021 due to higher imported prices including for commodities. - Fiscal and external balances are projected to remain in surplus in FY2021. - Uncertainty remains high and risks are tilted to the downside. ### Downside and upside scenarios, key risks - Downside risks: - A longer border closure or a possible domestic outbreak could prolong subpar growth and strain the domestic health system. - 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. - Climate change-induced natural disasters remain a key downside risk given geographic dispersion and isolation. - Upside scenarios: - Renewal of financial and services support provisions under the Compact Agreement would boost confidence. - Prompt implementation of fiscal and structural reforms could lift potential growth and ensure budget self-sufficiency and fiscal sustainability. ### Near-term policy recommendations - Maintain supportive fiscal measures until the recovery is firmly underway, prioritizing protection of the vulnerable and underpinning the recovery: - Extend fiscal support provided to the unemployed, low-income households, and informal workers. - Accelerate the vaccination process to achieve collective immunity as early as possible to safeguard public health and enable gradual reopening. - Increase efforts to execute existing commitments on public infrastructure investment to reactivate economic activity when borders reopen. - Financial sector near-term support: - Extend measures such as interest payment relief and debt moratorium for viable firms until the recovery is underway. - Closely monitor non-performing loans and broader credit quality indicators such as restructured and doubtful loans. ### Medium-term fiscal strategy and numeric adjustment guidance - 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: - 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. - Adjustment should be achieved through domestic revenue mobilization and expenditure rationalization. - Institutional and tax measures: - The establishment of the National Tax Reform Commission to strengthen the tax system, expand the revenue base, and ensure equitable revenue sharing is welcome. - Tax reforms should prioritize the introduction of a value-added tax (VAT). - State support programs and purchases of goods and services could be streamlined and rationalized, while protecting social spending and public infrastructure investment. - Strengthen public financial management (PFM) and public investment management (PIM). ### Structural reforms to boost private sector and resilience - Key structural reforms recommended to support private sector development and diversify growth: - Reduce business startup costs and time for settling disputes. - Lower the regulatory burden on foreign direct investment (FDI). - Improve the efficiency of the judicial process. - Enhance coordination across states. - Establish a national single window system for trade and FDI. - Expedite ICT infrastructure investment to enhance digital connectivity, overcome geographical remoteness, and expand economic opportunities. - Climate resilience and green development: - Swiftly develop an overarching National Adaptation Plan and disaster resilience strategy. - Improve access to climate finance supported by stronger public investment implementation capacity. - Note: the recent amendment of the FSM Trust Fund law mandates the fund to invest in a clean and green portfolio. ### Financial sector development priorities - The financial sector has so far remained resilient. - To facilitate longer-term financial development: - Update banking laws. - Adopt prudential standards for banks. - Speed up structural reforms to ease bottlenecks to credit supply and demand. ### Engagements and acknowledgements - 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. *Source: IMF Staff Completes 2021 Article IV Mission to the Federated States of Micronesia — Press Release No. 21/242 (August 3, 2021).* --- ## References - [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) _Source: https://www.imf.org/en/news/articles/2021/08/03/pr21242-micronesia-imf-staff-completes-2021-article-iv-mission_