Resilience and Growth in the Small States of the Pacific

Appendix 4. Micronesia

Hoe Khor, Roger Kronenberg, and Patrizia Tumbarello
Published Date:
August 2016
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Micronesia’s land area covers 700 square kilometers, dispersed over more than 600 islands. The country—with a population of about 100,000—is a microstate highly dependent on external aid, especially from the United States. Though small in land mass, Micronesia’s exclusive economic zone covers an area close to the size of India and there is abundant tuna in these waters.

Micronesia’s four states are grouped under a loosely federated structure, each with its own executive and legislative bodies. A president heads the national executive and is elected by a unicameral national congress.

Sources of Growth and Economic Profile

Main sources of growth. Micronesia’s economy is largely dependent on a public sector sustained by foreign grants, mainly from the United States, and increasing revenue from fishing license fees. The private sector caters mostly to the needs of the public sector and its employees. Micronesia’s pristine nature has potential for high-end tourism that preserves the ecology and cultural heritage. However, land tenure issues, combined with lengthy reviews of inward foreign direct investment applications, hinder the development of tourism facilities.

Production, employment, exports, and imports. The public sector provides half of total employment; subsistence farming and fishing dominate the private sector. Tourism is underdeveloped, with annual tourist arrivals of just 14,800 in 2013/14 (down from a peak of 16,000 in 2006/07 and 2007/08). Micronesia has few production facilities and imports most of its needs, including food. Fish exports account for more than 85 percent of total exports of goods (excluding the reexport of petroleum products for foreign aircraft refueling at the country’s airports).

Sources of external income. Grants from abroad account for about 30 percent of GDP. Revenues from fishing license fees reached 15 percent of GDP in 2013/14, up from 6 percent in 2010/11. Remittances are quite small at 6–7 percent of GDP on a gross basis and 1–2 percent on a net basis.

Development aid. Grants from the United States are provided under its Compact of Free Association and other federal programs. Other bilateral donors include Australia and Japan. The Asian Development Bank has been providing concessional loans for investment projects, and the World Bank’s International Development Association has provided grant financing since 2013.

Government finance. To better prepare for the end of compact grants, which expire in 2022/23, Micronesia’s authorities established the Compact Trust Fund (mostly funded by the United States) and the FSM Trust Fund (funded through transfers from Micronesia’s fiscal surplus). Even though state governments recently began fiscal consolidation under the Long-Term Fiscal Frameworks, returns from the trust funds are not expected to fill the revenue gap after 2023. To address the issue, Action Plan 2023, released in February 2015, includes a tax reform package to generate additional revenue of 4 percent of GDP by introducing value-added tax and replacing the gross revenue tax on corporations with a net income tax. The plan also calls for a further review of expenditures and for structural reforms to accelerate private sector growth, including addressing land tenure issues and enhancing inward foreign direct investment in tourism. Most of the policy actions require legislative approval, a complex task under Micronesia’s loose federal structure.

Financial sector. Two commercial banks operate in the country, one of them the subsidiary of a U.S. bank. Both banks are supervised by the Banking Board and insured by the U.S. Federal Deposit Insurance Corporation. Authorities are preparing legislation to expand the Banking Board’s supervisory mandate to credit unions.

Business climate and investment. The World Bank’s Doing Business 2016 report ranks Micronesia 148th out of 189 economies globally. The difficulty of securing land leases—most property is held in family trusts and land use rights are passed from generation to generation within the extended family—has repeatedly been cited as a major hindrance to doing business in Micronesia.

Exchange rate and monetary policy. The U.S. dollar is the official currency and there is no central bank.

Growth Challenges, Vulnerabilities, and Spillovers

Main growth challenges. Disappointing economic growth has averaged just 1 percent since 2000, and the private sector remains largely dependent on the public sector. The 2023 Action Plan does include a number of policy actions to improve the business climate. But achieving a national consensus under the country’s loosely federated structure will be essential.

Main vulnerabilities. The expiration of compact grants is a major challenge as this will result in a major loss of revenue. Micronesia’s infrastructure and growth prospects are vulnerable to natural disasters. The country has been hit by five severe storms since 1980, each causing average damage of US$1.3 million (0.4 percent of GDP), and it was hit by Typhoon Maysak in 2015.

Regional and global economic spillovers. The Micronesian economy has been largely shielded from negative global spillovers, with the exception of higher imported food and fuel prices (the latter is mostly used for generating electricity and for interisland transport).

Appendix Table 4.1Micronesia: Selected Economic Indicators, 2010–15
Nominal GDP (2015): US$318 millionGDP per capita (2015): US$3,073
Main export products: Fish (tuna) and fuel (re-export) to foreign aircraftPopulation (2015): 103,441
Remoteness (GDP-weighted distance, 2003): 10,377 km
Sources: Micronesia authorities; and IMF staff estimates as of April 2016.
GDP, GDP growth, employment, and prices
Real GDP (percent change)−−0.5−3.6−3.4−0.2
Real GDP per capita (percent change)−−0.7−3.4−3.3−0.1
Consumer prices (percent change, average)−1.0
Shares in GDP (in percent)
Retail and wholesale7.
Contributions to GDP growth (percent of GDP)
Retail and wholesale0.10.1−0.20.4−0.2−0.6−0.3−0.30.0
Public finances
General government finance (percent of GDP)
Revenue and grants69.860.861.167.864.766.063.671.462.8
Total domestic revenue24.520.520.921.520.722.927.742.734.7
Expenditure and net lending69.460.260.865.763.563.859.458.758.3
Current (excluding grants)55.552.448.245.043.642.845.150.351.3
Of which: wages and salaries25.623.623.323.021.921.
Development (capital)13.97.912.620.719.921.
Current balance10.2−
Overall balance−1.2−3.3−1.40.5−
Overall balance (excluding grants)−46.5−43.6−41.6−45.8−44.7−42.4−33.1−17.5−25.1
Public-debt-to-GDP ratio (percent)41.724.628.129.228.927.727.026.126.3
Trust funds: per capita, in real terms (US$ million, 2013 prices)
Balance of payments (percent of GDP, unless otherwise indicated)
Current account including official transfers−19.1−10.8−15.3−15.0−17.8−12.6−
Current account excluding official transfers−59.5−54.2−52.6−51.9−51.2−43.7−41.1−22.6−29.4
Capital account15.013.421.629.
Sources: Micronesia authorities; and IMF staff estimates as of April 2016.
Financial account6.
External debt service (percent of exports of goods and services)
Foreign direct investment−0.2−0.10.2−0.3−0.3−0.3−0.2−0.1−0.1
External debt (stock, gross)50.124.628.129.228.927.727.026.126.3
Main sources of external income (total)49.952.249.248.845.445.248.751.256.2
Official transfers (current)40.443.537.336.933.431.131.029.330.4
Fishing license fees7.
Household remittances (gross)
Contributions to external income growth (percent)
External income growth−−−8.9
Official transfers (current)−0.64.5−1.12.9−3.5−1.5−2.1−2.81.5
Fishing license fees−1.1−0.20.7−
Household remittances (gross)
Exchange rate (local currency to U.S. dollar period average)
Real effective exchange rate (period average)2102.9101.5106.2109.9109.5112.4115.0115.1115.1
(percent change)−0.51.5−0.7−
Money, credit, and financial sector
Credit to private sector (percent of GDP)21.711.810.110.811.311.711.111.713.0
(percent change)1.8−−
Bank assets (percent of GDP)60.354.656.460.461.270.075.382.788.4
Business climate indicators
Business environment rankings3
Doing business (overall)140150145145
Construction permits19423737
Getting electricity405312530
Enforcing contracts146149162162
Getting credit1261295561
Sources: Micronesia authorities; and IMF staff estimates as of April 2016.
Human development index40.630.630.60.60.6
Nominal GDP (local currency)220.1242.9276.0295.6310.4325.8315.7318.1317.8
Nominal GDP (millions of U.S. dollars)220.1242.9276.0295.6310.4325.8315.7318.1317.8
Sources: Micronesia authorities; and IMF staff estimates as of April 2016.

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