The staff report for the 2004 Article IV Consultation on the Federated States of Micronesia (FSM) focuses on economic developments and policies. Fiscal and structural reforms are needed for the FSM to achieve self-sufficiency. The large government sector will be increasingly unsustainable given coming declines in grants. Fiscal adjustment will need to comprise both expenditure cuts and revenue measures. Structural reform priorities should include improvements to the legal framework for land use, foreign investment, and lending.
The Republic of Palau is a small island economy, heavily dependent on tourism and external assistance. Economic growth has been modest in the last few years and inflation is low. The authorities launched a wide range of reform initiatives since 2001, but several important ones have stalled in the legislative process. Although the banking regulatory framework still needs improvements for effective implementation, a tax reform package, a new foreign investment law, a statistics law, and proposals related to streamlining the executive and legislative branch have not yet been enacted.