The FSM (with a population of about 102,000) has four states—Chuuk, Kosrae, Pohnpei, and Yap, each with its own executive and legislative bodies. Authority is highly decentralized, with state governments significantly larger than the national authority.
The fiscal year runs from October to September (for example, FY2010 covers October 2009 to September 2010).
The expenditure adjustment is on net terms after accounting for scheduled decrements of Compact grants.
In the most recent Doing Business report by the World Bank, the FSM ranks 141st out of 183 countries in the world, the lowest among Pacific Island countries in terms of the ease of doing business. The FSM fares especially poorly in such areas as registering properties (183th) and protecting investors (173th).
Captive insurance company provide insurance or reinsurance for risks of the entity or entities to which it belongs. Captive insurance activities are seen by some as a possible revenue source from licensing fees and taxes.
appendix I: Micronesia—Long-term Fiscal Sustainability
This appendix assesses the FSM’s long-term fiscal sustainability, updating the estimates in the 2008 Article IV consultation. The analysis considers implications of the expected expiry of annual Compact grants on the fiscal sustainability of FSM. It rests on a broader perspective than what the amended Compact agreement envisages in the sense that it looks at the general self-reliance of the FSM government and incorporates also a case where the Compact Trust Fund (CTF) would need to offset a possible loss of non-sector grants such as the Supplementary Education Grants (SEG) under the amended Compact.1 Fiscal sustainability is measured by the usable government’s asset position as of FY2023 that would generate an investment income large enough to supplement the expiring Compact grants without significantly disrupting public services and eroding the Trust Fund value.
The global financial turmoil has put a heavy toll on the financial performance of the CTF. Net return on assets fell by a cumulative 17 percent over FY2008—09. As a result, the market value of the CTF fell substantially, before recovering to about $168 million as of end-FY2010.
The assessment of the long-term fiscal outlook considers two scenarios. The baseline scenario features limited fiscal adjustment and structural reforms, while an alternative scenario considers comprehensive fiscal reforms, including swift implementation of tax reforms by mid-2011, structural reforms, and better utilization of Compact infrastructure grants. The alternative scenario also considers the costs of a delay in the tax reform implementation.
The Compact Trust Fund in FSM was created to contribute to the long-term budgetary self-reliance of the FSM and to provide the FSM government with an ongoing source of revenue after FY2023. The amended Compact and their subsidiary agreements contain no commitments, either express or implied, regarding the level of the revenue that will be generated by the Trust Funds, nor is there any commitment regarding the degree to which the revenue will contribute to the long-term budgetary self-reliance of the FSM.
All numbers reported here are in millions of USD based on 2010 prices, unless otherwise stated.