This paper analyzes recent economic developments in the Federated States of Micronesia. Real GDP grew by a modest 1 percent in 1995, well below the average growth rate recorded during 1991–94, according to tentative estimates prepared by the IMF staff. The overall fiscal balance of the national government has registered surpluses for the past several years. Total revenue and grants have increased, mainly reflecting higher nontax revenue from fishing license fees from Korea and Taiwan, Province of China, and higher non-Compact grants.

Abstract

This paper analyzes recent economic developments in the Federated States of Micronesia. Real GDP grew by a modest 1 percent in 1995, well below the average growth rate recorded during 1991–94, according to tentative estimates prepared by the IMF staff. The overall fiscal balance of the national government has registered surpluses for the past several years. Total revenue and grants have increased, mainly reflecting higher nontax revenue from fishing license fees from Korea and Taiwan, Province of China, and higher non-Compact grants.

I. Introduction

The Federated States of Micronesia is a confederation of four independent states: Chuuk, Kosrae, Pohnpei and Yap, comprising 607 volcanic islands and coral atolls in the Northern Pacific covering a total land area of 270 square miles and an exclusive economic zone of over 1 million square miles. Each state is headed by a Governor and guided by its own constitution which determines the relative balance of powers between the executive, the legislative and the judiciary, as well as between the state and municipal levels of government. The national executive is headed by the President elected from among the 14 members of the unicameral National Congress, which comprises ten senators representing districts apportioned by population and one senator from each of the four states. The population is 106,000 of which 54,000 live on Chuuk and 34,000 on Pohnpei. Rapid population growth of 3 percent per annum has been mitigated in the last few years by migration, mostly to the United States.

The Federated States of Micronesia was part of the United Nations Trust Territory of the Pacific Islands, under U.S. administration during 1947-86. A Compact of Free Association with the United States came into effect in 1986 for a 15-year period to 2000/2001,1 under which the United States retains authority and responsibility for security and defense matters in exchange for financial assistance, presently equivalent to 50 percent of GDP. This support includes annual block grants of $60 million for the first five years, $51 million for the next five years, and $40 million for the final five years, as well as amounts for special projects, all subject to a partial annual inflation adjustment. U.S. federal agencies also provide grants for specified purposes, including health, education, and marine surveillance.

II. Output and Prices

A. Output

Real GDP grew by a modest 1 percent in 1995, well below the average growth rate recorded during 1991-94, according to tentative estimates prepared by the staff (Table 1). Analysis of output developments is hampered by the absence of official national accounts and aggregate production indicators but partial information points to sluggish activity in fisheries, agriculture, and tourism.

Table 1.

Federated States of Micronesia: Gross Domestic Product, 1991-95

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Sources: Data provided by the Micronesian authorities; and staff estimates.

Includes depreciation and self-employment income.

Staff estimates based on trends in the Marshall Islands CPI and U.S. GDP deflator.

Commercial fishing is centered on the export of skipjack and yellow-eye tuna. Substantial investments have been made in fleets, shore facilities, and processing plants in recent years by government-owned enterprises, spearheaded by the National Fisheries Corporation. Purse seiner joint venture operations undertaken with the states of Chuuk, Pohnpei, and Yap and private investors proved unprofitable and both companies were placed under receivership. However, transshipment operations in Chuuk and Yap, which include airfreighting services for tuna to Guam and onward export to Japan, and food and fuel services for fishing vessels appear to have become profitable. The facilities in Chuuk were recently upgraded through a large grant from Japan, although the newly completed commercial port is presently underutilized.

Production of copra, the main cash crop, has been on a long-term downward trend, partly owing to an aging tree stock. The national government continues to subsidize copra production through the Coconut Development Authority, which handles purchasing and exporting. Some diversification of agricultural production has occurred into pepper, bananas, betel nuts, and citrus products. Tourism activity continues to be limited to niche markets, including ecotourism and ship-wreck diving in Chuuk and Yap. Growth remains hampered by the lack of infrastructure and distance from potential markets, while the development of resorts is hindered by the complex land tenure system and environmental concerns. Activity in the garment sector, including a Pohnpei-based company producing buttons from trochus shells and a factory on Yap, has not expanded in recent years.

The authorities formulated a medium-term reform program in the second half of 1995, in anticipation of the step-down in U.S. Compact grants, that is designed to make the economy more resilient by changing the balance away from the dominant public sector toward the productive private sector, especially fisheries, agriculture, and tourism. The broad strategy was endorsed by the National Economic Summit in November 1995 and by the donor community during the first Consultative Group meeting organized by the Asian Development Bank (AsDB) in December 1995. Separate summits held during the first half of 1996 in each state, except Chuuk, discussed possible implementation timetables and outlines of public sector investment programs.

Both the national and state governments recognize the potential for foreign investment to play an important role in expanding and diversifying the productive base. A number of incentives are available to attract foreign direct investment, including duty-free access to the U.S. market for most products. The authorities offer exemptions from income tax, gross revenue taxes, and import duties. However, in practice, the approval of both the national and state governments is required for each project, which may result in considerable delays in the processing of applications, while incentives are granted on a case-by-case basis and are not known in advance. The weak legal infrastructure and limitations on land ownership and use also constitute impediments to potential investors.

B. Prices, Employment, and Wages

It is estimated that retail prices increased by 4 percent in 1995, the same as in 1994. There is no official consumer price index or GDP deflator, but the authorities estimate price movements based on price changes in the main trading partners, tariff levels, transportation costs, and the limited competition at the wholesale and retail levels. In general, the inflation rate has largely followed that of the United States and the Marshall Islands.

The total number of public sector employees rose by 2 percent in 1995, the same rate of growth as in 1994 (Table 2). The largest increase was recorded in Yap where the public sector workforce increased by over 8 percent, following a 9 percent increase in 1994. Increases in employment levels of the national government and the other three states were modest in these two years, mainly as a result of stricter hiring policies. The total number of private sector employees rose by 2 percent in 1994, although no information is available for 1995. Data are not collected on unemployment.

Table 2.

Federated States of Micronesia: Public Sector Employment and Wages, 1992-95 1/

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Sources: Data provided by the Micronesian authorities; and staff estimates.

National and state governments; excluding municipal employees.

Public sector nominal wages increased by 6 percent in 1995, primarily because of merit increases and seniority-based progressive wage scales. The average public sector wage of national government employees was well above that in each of the states. Public sector employees continue to benefit from much higher wages and salaries than private sector employees. There is no national minimum wage policy, although minimum wages are applied in Chuuk and Pohnpei, currently set at $0.85 per hour and $1.35 per hour, respectively.

C. Environmental Issues

Traditionally high birth rates, limited land, and migration to state capitals have contributed to growing environmental problems. The availability and access to safe and reliable drinking water has deteriorated. An inadequate and poorly maintained waste management system-under 50 percent of the urban population is connected to sewerage systems--has led to waterborne diseases. Encroachment by homesteaders seeking firewood and crop lands has resulted in deforestation and depletion of vital watershed areas. While fisheries and tourism are crucial growth sectors, policies to limit pollution, effectively manage coastal water resources, and conserve the country’s biodiversity have yet to be developed. Adequate national and state environmental regulations exist but enforcement is hampered by limited institutional capacity; a planned national environment board has not yet been established.

III. Public Finance

The formulation of a consistent national fiscal policy is hindered by the structure of relations between the national and state authorities. The national government is responsible for policy coordination, but state authorities have a high degree of autonomy in the implementation of budgetary policies. They have the power to levy a wide range of taxes--including sales taxes and excises on tobacco, cigarettes, fuel, alcohol, beer, soft drinks, car rentals, and hotel accommodations--and all forms of fees and licenses, and to determine the level and composition of expenditure. While the national government imposes taxes on imports and income, 80 percent of the fuel import tax and 50 percent of other import and income taxes accrue to the treasury of the state where they are collected. U.S. Compact grants are automatically redistributed to the states according to set formulas and, as a result, the national government acts only as an administrator of such flows and cannot alter their terms or uses.

The national congress plays an important role in determining the spending of the proceeds from fish licensing fees, the major source of revenue accruing to the national government.

A. Consolidated Budgetary Developments in 1993/94 and 1994/95

Though the overall balance of the consolidated general government improved from a deficit of 0.5 percent of GDP in 1993/94 to a surplus of 1.6 percent of GDP in 1994/95, an estimated $17 million in domestic payments arrears were accumulated by the state government of Chuuk (Table 3). In addition, domestic revenues fell and progress in reducing current expenditure was limited.

Table 3.

Federated States of Micronesia: Consolidated General Government Finances, 1990/91-1994/95

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Sources: Data provided by the Micronesian authorities; and staff estimates.

Includes net lending.

Revenue and external grants were equivalent to 80 percent of GDP in 1994/95, a decline of 4 percentage points over the two preceding years, which entirely reflected lower domestic revenue. Tax receipts fell to under 10 percent of GDP, mostly owing to reduced state tax receipts; the tax effort remained very low in comparison with other Pacific island economies.2 Taxes on income and imports imposed by the national government represented just under 40 percent of total tax revenue, while sales taxes, excises, and other miscellaneous revenue collected locally by states represented 20 percent of the total. Fishing license fees, which represented over a third of total domestic revenue, fell slightly in 1994/95, after rising sharply in the previous years. External grants rose slightly in nominal terms, owing in large part to additional U.S. federal grants for public works and repairing Yap airport (Table 4).

Table 4.

Federated States of Micronesia: U.S. Grants Under the Compact of Free Association, 1991/92-1995/96

(In millions of U.S. dollars)

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Source: Data provided by the Micronesian authorities.

Section 217 states that the amounts provided in Sections 211, 212, 214, and 215 shall be adjusted for each fiscal year by the percent that equals two thirds of the percentage change in the U.S. GNP implicit price deflator, or 7 percent, whichever is less in any one year.

Total grants are higher than those shown in Table 3 as not all non-U.S. grants are channeled through the national or state governments.

Current expenditure was equivalent to 65 percent of GDP in 1994/95, a fell of only 2 percentage points over the two preceding years. Most of the decline was attributable to lower interest payments on external debt, as well as some reduction in subsidies and transfers to public utilities and fishing enterprises. Wages and salaries remained at 29 percent of GDP, despite more restrictive hiring policies, reflecting the automatic step increases in wages for civil servants, which averaged 5 percent. Purchases of goods and services increased in both years relative to GDP. Capital expenditure was held to 14 percent of GDP in 1994/95, a decline of 6 percentage points over the two previous years, following the near completion of the harbor project in Chuuk and a reduction in the number of new investment projects.

B. National Government Finances

The overall fiscal balance of the national government has registered surpluses for the past several years (Table 5). Total revenue and grants have increased, mainly reflecting higher nontax revenue from fishing license fees from Korea and Taiwan, Province of China, and higher non-Compact grants. However, current expenditure has not been contained because of continued growth in the wage bill and increases in purchases of goods and services. Budgeted capital expenditure has been relatively small, but a detailed breakdown of the composition of spending is not available and some public investment may be classified as current expenditure.

Table 5.

Federated States of Micronesia: National Government Finances, 1990/91-1994/95

(In millions of U.S. dollars)

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Sources: Data provided by the Micronesian authorities; and staff estimates.

Includes net lending.

C. Fiscal Developments in Chuuk

The state government of Chuuk recorded overall fiscal deficits averaging 3 percent of GDP in 1992/93 and 1993/94, as a result of several years of failing to meet optimistic revenue projections and higher-than-appropriated expenditures (Table 6). Domestic payments arrears of $12 million were accumulated as the government failed to make payments to suppliers, local commercial banks, social security contributions for employees, and providers of medical services in Guam and Hawaii. The underlying position deteriorated further in 1994/95 and domestic payments arrears reached $17 million at year-end.

Table 6.

Federated States of Micronesia: Chuuk Government Finances, 1990/91-1994/95

(In millions of U.S. dollars)

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Sources: Data provided by the Micronesian authorities; and staff estimates.

Includes transfers from the national government.

Includes net lending.

A Joint Task Force on Restructuring and Reform was formed in August 1995, comprising executive and legislative representatives from Chuuk state and the national government, to propose a solution to the financial crisis. It recommended the implementation of corrective measures by the state, including an across-the-board 20 percent cut in the state payroll; an increase in the sales tax rate from 3 percent to 5 percent applied to a broader range of goods including raw materials and a luxury tax of 10 percent; the cessation of government financing of the Chuuk Utility Corporation; a strict travel ban; and a freeze on government hiring. In return, it was proposed that the state could make a formal request to the national authorities for a financial recovery loan to be disbursed over four years in a series of tranches, the first of which would be released only after implementation of all five recommended actions.

In the event, the proposed loan arrangement failed to gain the approval of the national congress, and the Chuuk government managed to implement only the freezes on travel and government hiring. The Chuuk legislative rejected a bill to reduce wages and salaries of civil servants; neither the rates nor the base of the sales tax was increased; and the utility continued to receive substantial subsidies. As a result, no progress was made in reducing domestic payments arrears. The fiscal difficulties had not been resolved by May 1996, although the newly appointed executive was preparing a series of measures for consideration by the legislative.

D. Fiscal Developments in Other States

The overall fiscal balance of the state government of Kosrae recorded surpluses in 1993/94 and 1994/95 (Table 7). Total revenue and grants rose steadily, despite little growth in tax receipts, mainly as a result of higher transfers from the national government and increased non-Compact grants. Total expenditure was held broadly unchanged, mainly by limiting purchases of goods and services and capital spending by public enterprises. However, the wage and salary bill rose substantially in 1994/95 because of an increase awarded to all employees at the beginning of the year.

Table 7.

Federated States of Micronesia: Kosrae Government Finances, 1990/91-1994/95

(In millions of U.S. dollars)

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Sources: Data provided by the Micronesian authorities; and staff estimates.

Includes transfers from the national government.

Includes net lending.

The overall fiscal position of the state of Pohnpei was approximately in balance in 1993/94 and a small surplus was recorded in 1994/95 (Table 8). Tax revenue performance was satisfactory and external grants increased but nontax revenue dropped because of reduced interest and investment income. Little progress was made in containing current expenditure but total expenditure was reduced because of cutbacks in capital spending.

Table 8.

Federated States of Micronesia: Pohnpei Government Finances, 1990/91-1994/95

(In millions of U.S. dollars)

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Sources: Data provided by the Micronesian authorities; and staff estimates.

Includes transfers from the national government.

Includes net lending.

The overall fiscal deficit of the state of Yap showed deficits in 1993/94 and 1994/95 (Table 9). Total revenue and grants fell mainly because of much lower interest and investment income receipts, owing to the poor earnings on the government’s financial holdings. Total expenditure growth was contained partly because of smaller losses by the publicly owned fishing ventures, despite higher purchases of goods and services.

Table 9.

Federated States of Micronesia: Yap Government Finances, 1990/91-1994/95

(In millions of U.S. dollars)

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Sources: Data provided by the Micronesian authorities; and staff estimates.

Includes transfers from the national government.

Includes net lending.

E. Nonfinancial Public Enterprises

Subsidies to public utilities have been substantially reduced in several states in recent years as a result of corporatization and increases in the tariffs charged to commercial and residential consumers. The Pohnpei Utility Corporation was established in 1992 to operate power, water, and sewerage services on sound commercial principles and has markedly cut its production costs as well as raising tariffs. The Kosrae Utility Authority was corporatized in 1994 and has achieved considerable success in improving the reliability of power supplies mainly through a major catch-up repair and maintenance program; tariffs have also been raised, although the corporation continues to receive an operating subsidy. The Yap Public Services Corporation was established in early 1996 to provide electricity, water, and sewerage services under new management that is independent of the government; tariffs are already the highest in the country and the utility has been economically viable for the past several years. By contrast, steps have not yet been taken to improve the finances of the Chuuk Utility Corporation, which continues to receive large state government subsidies.

The most profitable public enterprise is the Telecommunication Corporation, which provides domestic and international services, although it receives considerable financial assistance from the United States. Progress in reducing subsidies and corporatizing and privatizing other public sector enterprises has been limited in recent years. The national government continues to provide financial support to the National Fisheries Corporation and the Coconut Development Authority; the Pohnpei state government assists transportation, housing, and port operations; and the Yap state government subsidizes fishing and public transportation.

F. Social Security Administration

The Social Security Administration is a self-financing autonomous institution whose operations and entitlements, including old age, survivors, and disability benefits, are paid out of contributions and investment income. Revenue from contributions has persistently exceeded entitlement payments and administrative expenses (Table 10). Moreover, contribution rates, which are applied in equal proportions to employees and employers, were raised from 4 percent to 5 percent of gross salary in 1995. The financial holdings of the administration, which are mostly invested in U.S. securities, were equivalent to 4 years of benefit payments at end-March 1996.

Table 10.

Federated States of Micronesia: Social Security Administration, 1990/91-1995/96 1/

(In millions of U.S. dollars)

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Source: Data provided by the Micronesian authorities.

Years ending March 31.

IV. Financial Sector

A. Background

There is no central monetary authority and the U.S. dollar is used as the domestic currency. The financial sector consists of three commercial banks: the Bank of the Federated States of Micronesia, the only domestically-owned bank with offices in each of the four states, and two foreign banks, the Bank of Guam with offices in Pohnpei and Chuuk, and the Bank of Hawaii with offices in Pohnpei, Kosrae, and Yap; the Development Bank of the Federated States of Micronesia; six insurance companies; and four credit unions. Deposits in all three commercial banks are protected by the U.S. Federal Deposit Insurance Corporation. The only de jure restriction on capital flows is a regulation that banks should not transfer abroad more than SO percent of deposits received from local residents and domestic corporations, although in practice, this regulation has not been enforced.

Supervision of commercial banks is exercised by the Banking Board, established in the Banking Act in 1980, and headed by a Banking Commissioner. With IMF technical assistance, supervision of commercial banks is bang tightened through closer scrutiny of financial statements, on-sight inspections, and the introduction of a new call report form for the compilation and reporting of banking statistics to permit more detailed analysis for effective policy making. The Development Bank, the insurance companies, and the credit union are neither licensed by the Banking Board nor subject to reporting requirements.

Consumer loans, accounting for just under two thirds of total loans, are granted primarily to public employees and other salaried workers for travel, family celebrations, home improvements, and education costs. They are repaid through a system of automatic deductions from employer’s payrolls. Commercial loans are made to public enterprises and the private sector for working capital and equipment purchases. Long-term lending remains very limited in view of the small number of viable projects and the land tenure system which prevents banks from obtaining land as a collateral.

B. Recent Developments

Banking activity was subdued during 1995 as total commercial bank lending fell by 7 percent to $54 million (Table 11). Following the fiscal crisis in Chuuk, consumer lending was severely curtailed, falling by 11 percent. Banks refused to grant new loans to public sector employees, except on a very selected basis to employees with high seniority and specialized skills, and the refinancing of existing consumer loans was actively discouraged.

Table 11.

Federated States of Micronesia: Banking Survey, 1991-95

(In millions of U.S. dollars; end of period)

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Source: Data provided by the Micronesian authorities.

Includes reserves for possible loan losses.

Outstanding loans to commercial enterprises remained constant during the year. With total deposits unchanged, the loan-deposit ratio fell to 47 percent from 51 percent in 1994. Claims on foreign banks increased by 14 percent as banks continued to deposit excess funds abroad with head offices or correspondent banks.

There was a shift in the composition of deposits during 1995 away from demand and savings deposits, which declined by 10 percent, in favor of time deposits which rose by 14 percent. The average rate of return on time deposits rose to 3.5 percent during the year, while the average yield on savings accounts declined to 2.5 percent (Table 12). The average interest rate on consumer loan remained at about 15 percent, while the average rate on commercial loans rose by 2 percentage points to 11 percent. The relatively large interest rate spread reflects, in part, high administrative costs associated with small accounts, and the push of banks to recoup some of their losses associated with the increase in delinquent loans, which represented over 9 percent of total loans at end-1995. The equity-asset ratio has also increased in recent years, partly because of capital injections prompted by the banks’ concerns about the quality of their consumer loan portfolios.

Table 12.

Federated States of Micronesia: Interest Rates of Deposit Money Banks, 1991-95 1/

(In percent per annum; end of period)

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Sources: Data provided by the Micronesian authorities; and staff estimates.

Average of rates offered and charged by deposit money banks.

Deposit rates are calculated using the average savings and time deposits of each bank, divided into the total interest paid for the year for that deposit category.

The private sector loan portfolio of the Development Bank at end-1995 was $30 million, of which about one third was tourism and one third in fisheries (Table 13). Poorly performing loans represented about 12 percent of the total, dominated by investments in purse seiners in Yap and Chuuk and the failed chicken-broiler plant project in Pohnpei. In February 1996, the rate of interest on all new lending was raised to 9 percent, compared to a weighted average of 5.4 percent previously. The average term of new loans is 7 years, with a range of 1-15 years and a grace period of 0-3 years.

Table 13.

Federated States of Micronesia: Assets and Liabilities of the Federated States of Micronesia Development Bank, 1991-95 1/

(In millions of U.S. dollars; end of period)

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Source: Data provided by the Micronesian authorities.

The fiscal year changed from September to December in FY 1994.

Reflects investment abroad and Investment Development Fund (IDF) resources.

Reflects the final distribution from the Trust Territories of the Pacific Islands Economic Development Loan Fund; this is being kept as a cash reserve. In FY 1994, all funds other than the IDF and the states’ private funds were converted to stock equity by the national government and the state of Kosrae.

V. External Sector

The current account deficit, excluding official transfers, has narrowed slightly over the last few years but was still equivalent to 49 percent of GDP in 1994/95 (Table 14). substantial long-term capital inflows in the period 1990/91-1992/93, stemming from large external commercial borrowings, were replaced by capital outflows during 1993/94-1994/95 because of the absence of new borrowings and sharply higher debt repayments. Moreover, there were persistent short-term capital outflows, although the precise nature of these transactions is difficult to determine. Capital account transactions are hard to monitor as no official balance of payments statistics are complied by the authorities, in view of the use of the U.S. dollar and the absence of capital controls. The overall balance of payments position, measured by changes in the consolidated financial holdings of the government, turned sharply negative in the last two years.

Table 14.

Federated States of Micronesia: Balance of Payments, 1990/91-1994/95 1/

(In millions of U.S. dollars)

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Sources: Data provided by the Micronesian authorities; and staff estimates.

Financial year ending September 30.

Based on official statistics for the calendar year, supplemented for coverage deficiencies.

Includes social security fund investments, public enterprises’ escrow accounts, and errors and omissions.

Reflected in changes in the financial holdings of the national and state governments.

A. Merchandise Trade

Exports and re-exports were one third of GDP in 1993/94 and 1994/95, much higher than in earlier years. However, virtually all of this growth represented the re-export offish to Japan by foreign vessels in the exclusive economic zone (Table 15). Among minor exports, bananas, betel nuts, and pepper increased but garments and handicrafts remained stagnant. Imports remained very large representing over 75 percent of GDP. Imports of food and beverages averaged the largest share of the total at about 24 percent, while manufactured goods represented 18 percent (Table 16). The United States remains the dominant source of imports, accounting for just over half of all imports, followed by Japan at one third (Table 17).

Table 15.

Federated States of Micronesia: Exports by Major Product Category, 1991-94 1/

(In thousands of U.S. dollars, unless otherwise specified)

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Source: Data provided by the Micronesian authorities.

On a calendar year basis.

Table 16.

Federated States of Micronesia: Imports by Major Product Category, 1991-94 1/

(In thousands of U.S. dollars, unless otherwise specified)

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Sources: Data provided by the Micronesian authorities; and staff estimates.

On a calendar year basis.

Table 17.

Federated States of Micronesia: Imports by Country of Origin, 1991-94

(Value in millions of U.S. dollars)

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Source: Data provided by the Micronesian authorities.

B. Services and Transfers

The deficit on net services has increased over the last two years. Services receipts rose slightly in 1993/94 because of higher fishing license fees, and remained unchanged in 1994/95, as higher interest and investment income offset a subsequent decline in fishing fees. Around half of total service receipts originate from fishing access rights fees collected from foreign vessels, while interest and dividend earnings from assets held abroad account for a further 25 percent. Services payments jumped in both 1993/94 and 1994/95, following a steep increase in freight and insurance fees and interest payments on external government debt. U.S. grants under the Compact and from various federal agencies represented over 80 percent of total unrequited transfers. Non-U.S. official transfers included grants from Australia, Japan, New Zealand, and United Nations specialized agencies for health, education, population, and womens’ projects.

C. Capital Account, Overall Balance, and External Debt

The capital account consists of medium-term government borrowing and principal repayment, as well as short-term capital flows, including social security fund investments, public enterprises’ escrow accounts, and government guaranteed borrowing from the U.S. Rural Electrification Administration. The overall balance, measured by changes in the financial holdings of the national and state governments, showed a large deficit in 1993/94 and 1994/95.

The bulk of external debt originates from government borrowings made between 1990/91 and 1992/93; the total has fallen in the last two years to $120 million, equivalent to 55 percent of GDP (Table 18). Gross borrowing included medium-term bond issues of $71 million to finance portfolio investments by the Yap state government (Yap Monetization Scheme) and $43 million for fisheries-related investments; $41 million from the U.S. Rural Electrification Administration to the telecommunications corporation for the expansion of telephone services; $9 million to the Yap Fishing Corporation; and $0.3 million from the AsDB under a $6.5 million Fisheries Development Project Loan.

Table 18.

Federated States of Micronesia: External Debt and Debt-Service Obligations, 1990/91-1994/95

(In millions of U.S. dollars)

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Sources: Data provided by the Micronesian authorities; and staff estimates.

In percent of exports of goods and nonfactor services.

The loan bears 5 percent interest and has a 35-year term; 2 years’ grace was allowed before interest and amortization began in 1994.

D. Exchange and Trade System

The currency of the Federated States of Micronesia is the U.S. dollar. Under the terms of the Compact, the Federated States of Micronesia must consult with the United States if it decides to issue its own currency. There is no central monetary institution, the authorities do not buy or sell foreign exchange, and there are no exchange control regulations. Foreign exchange transactions are handled by the three commercial banks which are authorized foreign exchange dealers. The commercial banks buy and sell foreign exchange at the rates quoted in the international markets. Forward transactions may be conducted through the commercial banks without restriction. Both outward and inward payments may be settled in U.S. dollars or any other convertible currency, and there are no taxes of subsides on purchases or sales of foreign exchange. The Federated States of Micronesia accepted the obligations of Article VIII, Sections 2, 3, and 4 in June 1993.

Imports are not subject to import-licensing requirements, but importers must obtain a business license. Imports of certain products are prohibited for environmental, health, safety, or social reasons. There are no surrender requirements for export proceeds; exports are not subject to licensing requirements; and there are no taxes or quantitative restrictions on exports. The purchasing, processing, and exporting of copra and copra by-products are solely conducted by the government-owned Coconut Development Authority. There are no restrictions on payments for or receipts from invisibles.

Foreign investors must obtain a business license from the Department of Resources and Development of the national government to engage in business or acquire an interest in a business in the Federated States of Micronesia and submit an application for review by the Foreign investment Board of the state in which the investor proposes to operate (the Department of Industries and Commerce in Yap). Though a regulation was issued in late 1993 stipulating that commercial banks were prohibited from transferring abroad more than 50 percent of deposits received from local residents, including domestic corporations and the authorities, in practice this regulation has not been enforced and depositors have not been prevented from transferring their deposits abroad. There are no restrictions on other inward and outward capital transfers.