## IMF Executive Board Concludes 2023 Article IV Consultation with the Federated States of Micronesia

_IMF News, March 4, 2024_

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## Bibliographic details
- Published: March 4, 2024

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### 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).*

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## References

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- [Federated States of Micronesia and the IMF](http://www.imf.org/external/country/FSM/index.htm)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
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- [PRESS CENTER](http://presscenter.imf.org/)
- [http://www.IMF.org/external/np/sec/misc/qualifiers.htm](http://www.imf.org/external/np/sec/misc/qualifiers.htm)
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_Source: https://www.imf.org/en/news/articles/2024/03/04/pr2466-micronesia-imf-executive-board-concludes-2023-article-iv-consultation_