Statement of an IMF Staff Mission at the Conclusion of the 2008 Article IV Discussions with the Federated States of Micronesia

Press Release No. 08/299
November 21, 2008

The following statement was issued today in Pohnpei after the conclusion of an International Monetary Fund (IMF) staff mission to the Federated States of Micronesia (FSM) for the 2008 Article IV Consultation:

"An IMF mission led by Kenneth Kang of the Asia-Pacific Department visited Pohnpei and Yap during November 12-21, 2008 to hold Article IV consultation discussions. The mission met with a wide range of people from the government as well as the private sector to discuss the economic outlook and the policies needed to promote sustainable growth.

"In the near term, economic activity is likely to remain weak. Falling commodity prices and disbursements under the Compact should give a modest boost to growth, but the tight financial situation among the states, particularly in Chuuk, and the difficult business environment are likely to weigh heavily on the economy. Although so far shielded from the global market turmoil, the FSM faces risks from a protracted global slowdown through weaker exports, tourism, worker remittances, and its overseas investments. In this environment, policymakers face the difficult challenge of making progress in adjusting to the decline in Compact funding while advancing structural reforms to support growth.

"Budget surpluses are needed to prepare for the scheduled decline in Compact funds. The national and state governments will need to build up substantially their savings which, along with the Compact Trust Fund, will help offset the decline in external assistance. This adjustment should begin with further spending cuts aimed at reducing the size of the public sector, followed by measures to boost revenue. The mission supports the government's tax reform package comprising the value-added tax (VAT), net profits tax, and the Unified Revenue Authority which will create a more streamlined and business-friendly tax system. Delaying further these reforms is costly, as it will hold back needed business investment and revenue for the government. The authorities should also continue efforts to privatize or shut down loss-making public enterprises.

"Further reforms to improve the business environment and strengthen the financial system will help the private sector to lead growth. The priorities are to strengthen the enforcement of contracts in the courts, expand land titling, and liberalize further the foreign investment regime. There is also the need to refocus the FSM Development Bank to better support start-ups and improve the functioning of the secured transaction law for banks to expand their lending.

"The authorities recognize these challenges and are moving in the right direction. The key will be to build consensus for these reforms through closer dialogue with the public, legislative bodies, and the private sector. These conclusions will be elaborated in our annual consultation report which will be presented to the IMF Executive Board early next year.

"The IMF is an international organization consisting of 185 member countries. Its mandate is to promote financial stability and sustainable growth in a globalized world. The IMF conducts regular Article IV assessments for its member countries to help promote policies that will contribute to sustainable development. The IMF also provides technical assistance, including to the FSM, to strengthen the capacity of governments to implement sound policies."



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