IMF Staff Completes 2015 Article IV Mission to the Federated States of Micronesia

2015-03-20

An International Monetary Fund (IMF) team, led by Yasuaki Yoneyama, visited Pohnpei from March 9-20, 2015, to conduct the 2015 Article IV Consultation discussions. The team met with the Secretary of Finance and Administration and other senior officials in the Government and other public agencies and enterprises to discuss recent economic developments in the Federated States of Micronesia and the medium-term outlook. It also met with the private sector.

“The economy of the Federated States of Micronesia (FSM) stagnated in FY2014 (ending September) with real growth estimated at 0.1 percent, reflecting a slowdown in infrastructure projects. Inflation is expected to drop to 0.7 percent in FY2014 due to falling oil prices. The current account strengthened due to a one-off increase in corporate tax revenues and an increase in fishing license fees. In this context, growth is expected to improve slightly to 0.3 percent for FY2015.

“The economy is projected to grow at 0.6 percent over the medium term. However, risks to the outlook are tilted to the downside. While the authorities have recently produced the “2023 Action Plan” to better prepare for the expiration in 2023 of grants provided under the Compact of Free Association with the United States, its implementation hinges on achieving a national consensus and enacting the required legislative measures. On the upside, implementation of policy reforms included in the 2023 Action Plan could boost the economy while strengthening medium-term fiscal sustainability.

“The mission welcomes the fiscal consolidation efforts by the states under the Long-Term Fiscal Frameworks (LTFF) and the establishment of the Unified Revenue Authority (URA). However, the fiscal consolidation should be extended to the national government and further efforts are required to achieve fiscal sustainability in the post 2023-period, on both the revenue and expenditure sides. Staff welcomes the recent transfer of $30 million to the FSM Trust Fund from the exceptionally strong fiscal surplus achieved in FY2014.

“Implementing the long-debated tax reform package, in particular, the adoption of a VAT in lieu of state sales taxes, and the introduction of a net income tax on corporations instead of the Gross Revenue Tax, remains critically important. Moreover, fiscal consolidation should be accompanied by improvement in the quality of public spending, so as to safeguard priority in the social services and infrastructure investment with high development impact. Staff welcomes the authorities’ move to update the infrastructure plan of 2004, which will help expedite the release of Compact funds for infrastructure projects.

“Improving the investment climate is key to promoting private sector-led growth in the FSM. Land survey and registration should be expedited to address land tenure issues. The recent extension of the grant-financed extension of the runway at Pohnpei Airport could open the way for expanding tourism, while particular attention needs to be paid to safeguard the cultural heritage and pristine nature of the country.

“The mission supports the authorities’ efforts to strengthen regulatory framework of credit unions, including by enacting a new Credit Union Act to place them under the supervision of the Banking Board. The Fund, including through its Pacific Financial Technical Assistance Center (PFTAC), stands ready to provide further technical assistance in this area.

Source: International Monetary Fund