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International Monetary Fund. Asia and Pacific Dept

Federated States of Micronesia (FSM) authorities thank staff for the constructive policy dialogue and useful advice that was provided during the 2012 Article IV Consultation. FSM is a small Pacific island country with a population of approximately 112,000 people and consisting of four island states, namely Yap, Chuck, Pohnpei and Kosrae, located across the Western Pacific Ocean. 1 As a small island nation, the country has relied heavily on the US grants accounting for about a third of its GDP. The Compact grant, however, is on the decline and scheduled to

International Monetary Fund. Asia and Pacific Dept

Our FSM authorities are greatly appreciative of the very productive discussions with the mission team during the virtual Article IV consultations. The authorities highly value staffs analytical work and contributions to practical policy discussions and overall agree with the thrust of the 2021 Article IV Report. The Federated States of Micronesia (FSM) is a small fragile island country spread out over the north western Pacific Ocean with more than 600 islands. The population is just over 110,000 inhabitants of four main island states – Pohnpei, Kosrae, Chuuk

International Monetary Fund

economy as a whole grew at an annual 2 percent rate. In contrast, although private nonfinancial enterprises have been heavily reliant on government, they grew at an annual 3 percent rate in these years, and their fastest growth was observed in earlier years as a cash economy emerged. Employment Source: Data provided by the FSM authorities. Private sector growth is reflected in employment . While employment in the government sector decreased, particularly after the late 1990s, private sector employment rose steadily, surpassing government employment by the

International Monetary Fund. Asia and Pacific Dept

), conducted alongside the Article IV consultation. The FSM authorities broadly agree with staff’s recommendations and are grateful for the technical assistance and training they receive from the Fund. Fiscal policy The FSM will face a fiscal cliff after 2023, with the overall balance projected to turn from a surplus of around 5 percent of GDP in 2023 to a deficit of 4–5 percent of GDP in 2024. The authorities broadly agreed with staff’s recommendation for a gradual fiscal adjustment leading up to 2023 to preserve budget space for priority areas of spending such

International Monetary Fund. Asia and Pacific Dept

.8 18.7 16.1 15.1 14.6 13.6 16.5 20.6 24.8 Memorandum items: Exchange rate regime 4/ Real effective exchange rate 5/ 105.8 107.7 106.3 ... ... ... ... ... ... Nominal GDP (in millions of U.S. dollars) 401.9 412.9 407.3 404.2 417.2 442.1 462.3 477.7 491.9 Sources: FSM authorities and IMF staff estimates and calculations. 1/ Fiscal year ends on September 30. 2/ Excludes contributions to the Compact Trust Fund. 3/ Compact

International Monetary Fund. Asia and Pacific Dept
The COVID-19 pandemic and related containment measures have put severe strains on the economy. The economic policy response has been strong and generally appropriate, helping counter the negative effects of the pandemic. Nevertheless, as the international borders remain shut, the economic contraction is likely to deepen in FY2021. A slow recovery is expected for FY2022 driven by a gradual border reopening. The FSM is facing significant medium-term uncertainty, owing to the possible expiration of grants and other assistance provided under the Compact Agreement with the United States. The FSM is also highly vulnerable to climate change-induced natural disasters.
International Monetary Fund

items are imported, mainly from the US. However, the experience in the State of Yap does indicate the benefits that can come from good financial management. Yap has the best fiscal performance of the five governments, the lowest differential between public and private sector wages and has had the greatest success in generating private sector growth and employment. The Economic Agenda for FSM The FSM authorities fully realize that under the framework of the new Compact, there will be greater expectations for self-reliance and fiscal responsibility. The last 15

International Monetary Fund

. 1/ Proj. FY2004-2008 FY2009 FY2010 FY2011 (year-on-year changes) Real GDP -1.3 0.4 0.4 0.5 Consumer price index 4.1 7.7 3.5 2.0 (in percent of GDP) Consolidated fiscal balance -5.9 1.6 0.4 0.1 Current account balance -12.2 -18.6 -18.4 -17.0 Sources: FSM authorities and Fund staff estimates. 1/ Data for FY2010 are preliminary. 4. The consolidated fiscal balance has also improved, but with differences across states . Chuuk and Kosrae have reduced

International Monetary Fund. Asia and Pacific Dept

not widespread 3 , while the disappointing growth has had some negative impact on the progress of Millennium Development Goals. Figure 1. Micronesia: Economic Developments Figure 2. Micronesia: Regional Comparison of Recent Developments Source: FSM authorities and Fund staff calculations. Geographical Dispersion: Average Sea Distance Between Two Inhabitants of the Same Country (In kilometers) Micronesia: Millenium Development Goals (MDGs) Progress MDG 1. Eradicate extreme poverty and hunger Halve between 1990 and 2015

International Monetary Fund. Asia and Pacific Dept

2018. FSM: GDP Growth (In percent) Sources: FSM authorities; and IMF staff calculations. 5. Revenue windfalls strengthened the fiscal position . The general government (comprising national and state governments) has recorded budget surpluses since 2012, with revenues from foreign grants and fishing license fees (reflecting the FSM’s large EEZ) accounting for around a half of GDP. The surplus increased to 15 percent of GDP in FY2017 and 27 percent of GDP in FY2018, owing to large-scale corporate tax payments from investment companies domiciled in the