March 4, 2024
PRESS OFFICER: Pemba Sherpa
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Washington, DC: On February 23, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] 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. Economic growth rebounded to 3 percent in FY2021, led by the fisheries sector and government support. However, economic growth is 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. FSM is also facing significant labor shortages exacerbated by outward emigration. On the other hand, the external and fiscal positions of FSM remained robust. Substantial fiscal surpluses in recent years contributed to a decline in public debt to 12.4 percent of GDP, while the assets of the trust funds have risen to 323 percent of GDP.
FSM’s near-term economic prospects will get a boost from higher public investment. Growth in FY2024 is projected at 1.1 percent before accelerating further to 1.7 percent underpinned by continued recovery in tourism, as well as higher public spending partly funded by the higher grants under the new Compact of Free Association (COFA) agreement with the United States (expected to be implemented starting in FY2025). However, without significant reforms, economic growth is likely to converge to the historical average of around 0.7 percent over time. Inflation is expected to gradually decline to around 2 percent.
The FSM economy remains highly vulnerable to shocks, such as an increase in global commodity prices, extreme climate events, and potential delays of the COFA agreement. Moreover, the acceleration of outward migration would severely jeopardize already constrained labor supply, impacting implementation of large public projects. The underdeveloped private sector remains vulnerable, and deteriorating infrastructure hinders growth and social goals, especially on health. The adverse impact of climate change is increasingly being felt raising food security concerns.
Executive Board Assessment[2]
Executive Directors positively noted the new Compact of Free Association (COFA) agreement with the United States, which presents an opportunity to adopt a transformative reform agenda, and welcomed the envisaged economic recovery in the near term. Noting the medium-term outlook challenges related to the country’s vulnerabilities to climate change and natural disasters, significant structural bottlenecks, and outward emigration, Directors underscored the need for reforms to support private sector-led growth and pursue an enhanced climate strategy. Building social consensus and ensuring policy coordination among all domestic stakeholders will be important. Directors also stressed the importance of continued financial and capacity building support by the international community.
Directors agreed that in the short term, fiscal policy should remain cautious until the new COFA is implemented and stressed the importance of pressing ahead with the authorities’ public financial management reform roadmap. They recommended developing a new fiscal framework and strengthening public investment management to enhance the implementation and efficiency of public investment. This will help promote higher sustainable growth while ensuring fiscal sustainability. Further initiatives to improve revenue mobilization, such as modernizing revenue administration and strengthening the tax system, will also be needed over time.
Directors encouraged structural reforms to improve the business environment, and investments in education and training, and digitalization. They emphasized the need to prioritize land reform and reducing barriers to foreign direct investment which is critical to promote the development of the private sector and disincentivize outward emigration. Directors also recommended further efforts to improve economic statistics to enhance transparency and accountability.
Directors agreed that financial sector could play a stronger role in supporting economic development. They welcomed its overall soundness, while noting that further enhancing the regulatory and supervisory frameworks could further boost its resilience. Directors also emphasized the importance of strengthening financial deepening and inclusion to support private sector development. Continued progress in the AML/CFT framework is also important.
Directors agreed with the urgency to strengthen the country’s resilience to climate change and called for prompt actions to develop and implement a comprehensive National Adaptation Plan.
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Table 1. Micronesia: Selected Economic Indicators, FY2021–FY2025 1/ |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
