IMF Executive Board Concludes 2019 Article IV Consultation with the Federated States of Micronesia
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
06 Sep 2019
eISBN:
9781513513263
Language:
English
Keywords:
ISCR; CR; Micronesia; FSM authorities; IMF-World Bank Climate Change Policy Assessment; debt; resilience to climate change; employment growth; tax policy reform; Climate change; Extra-budgetary funds
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2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Federated States of Micronesia

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Federated States of Micronesia

On August 28, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Federated States of Micronesia (FSM).

The FSM economy has performed well in recent years. GDP growth has remained higher than its historical average, albeit slowing from 2.4 percent in FY2017 (ending September 2017) to 1.2 percent in FY2018 due to a contraction in construction. Employment growth has also remained higher than the historical average. Inflation remained low owing to the use of the U.S. dollar as legal tender. Fiscal and external current account balances recorded large surpluses in FY2017–18, reflecting the authorities’ prudent policy to save windfall tax revenues. Over the medium term, growth is projected to converge to its potential rate, estimated at 0.6 percent, in line with the performance over the last two decades, while inflation is projected to stay at 2 percent over the medium term.

Risks to the outlook are tilted to the downside. Unless economic supports under the Compact Agreement with the United States are renewed, the FSM is expected to lose access in 2023 to U.S. Compact grants, banking sector oversight by the Federal Deposit Insurance Corporation, and post-disaster rehabilitation assistance by U.S. federal agencies, resulting in substantial macroeconomic uncertainty. On the upside, decisive progress in pro-growth structural reforms can raise potential growth, and renewal of the economic supports under the Compact Agreement would reduce downside risks.

The FSM economy is highly vulnerable to climate change. Rising sea levels and temperatures threaten livelihoods, particularly on low-lying islands, and are compounded by the rising frequency and intensity of natural disasters, constituting significant downside risks. In this context, a Climate Change Policy Assessment (CCPA) was conducted as an integral part of the Article IV Consultation. The CCPA is a joint IMF and World Bank initiative to assist small states to understand and manage the expected economic impact of climate change, while safeguarding long-run fiscal and external sustainability.

Executive Board Assessment2

Executive Directors welcomed Micronesia’s strong economic performance and improved fiscal and external positions. Directors noted, however, that significant challenges remain related to the expected expiration of the U.S. Compact Agreement, climate change, and weak private sector activity. Against this backdrop, Directors emphasized the need for steadfast policy actions and reforms to reduce uncertainty and risks, strengthen resilience, and promote private sector-led growth.

Directors welcomed the authorities’ commitment to building fiscal buffers by saving revenue windfalls. In light of the uncertainty regarding the continuation of the Compact grants, they recommended a gradual fiscal adjustment through domestic revenue mobilization and improved expenditure efficiency. In particular, Directors encouraged implementation of growth-friendly tax policy reforms, including the introduction of a value added tax (VAT), and limiting wage bill growth and nonessential expenditures, while safeguarding priority spending on education, healthcare, and climate-resilient infrastructure. Ongoing efforts to improve public financial management would also contribute to fiscal sustainability.

Noting the vulnerability of Micronesia’s economy to natural disasters and climate change, Directors welcomed the joint IMF-World Bank Climate Change Policy Assessment. They agreed that Micronesia’s resilience to climate change could be strengthened by closing gaps in preparedness, developing a disaster resilience strategy, and through a greater focus on adaptation. Directors encouraged greater use of disaster risk transfer mechanisms, including disaster insurance.

Directors urged the authorities to strengthen their banking regulation and supervision capacity given the possible reduction in FDIC oversight in 2023. They underscored the need to update banking laws, adopt prudential banking regulations, and develop a reform roadmap to strengthen the Banking Board’s supervision of commercial banks.

Directors emphasized the importance of vitalizing the private sector to shore up potential growth. In this regard, they emphasized the importance of improving the business and investment climate, including by lowering business startup costs, digitalizing the land registry, and reducing undue regulatory burdens on FDI.

Directors commended the authorities for their efforts to strengthen data provision and encouraged continued use of technical assistance for revenue administration, public financial management, financial sector supervision, and macroeconomic statistics.

Table. Micronesia: Selected Economic Indicators, FY2015–24 1/

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Sources: FSM authorities and IMF staff estimates and calculations.

Fiscal year ends on September 30.

Excludes contributions to the Compact Trust Fund.

Compact Trust Fund and FSM Trust Fund.

Calendar year. 2010=100.

1

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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Cover IMF Staff Country Reports
Federated States of Micronesia: 2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Federated States of Micronesia
Author: International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2019: Issue 288
Publisher:
International Monetary Fund
ISBN:
9781513513263
ISSN:
1934-7685
Pages:
78
DOI:
https://doi.org/10.5089/9781513513263.002