Press Release No. 19/23

IMF Staff Concludes Visit to the Federated States of Micronesia

January 30, 2019

• The Micronesian economy performed well in recent years, with GDP growth at 2.4 percent and the fiscal position recording a large surplus in FY2017.
• Over the medium term, gradual fiscal consolidation would be key to cope with the expiration of the U.S. Compact grants in FY2023.
• Building resilience to climate change and promoting private sector development remain critical for sustainable growth.

An International Monetary Fund (IMF) team led by Masahiro Nozaki visited Pohnpei during January 24–30, 2019, to review economic developments in the Federated States of Micronesia (FSM) and assess progress on the reform agenda ahead of discussions for the 2019 Article IV consultation—expected to take place in mid-2019. At the end of the visit, Mr. Nozaki issued the following statement:

“The Micronesian economy performed well in recent years. According to the latest available data, GDP growth reached 2.4 percent in FY2017 (ending September 30), supported by a pickup in public investment, while headline inflation remained very low at 0.1 percent due to a moderation in food prices. The overall fiscal balance registered a surplus of 14.6 percent of GDP, the highest level since the fiscal balance turned into surplus in FY2012, owing to a strong collection of fishing license fees and a surge in corporate taxes.

“Despite these positive developments, significant challenges remain. Most importantly, the fiscal balance is expected to turn into deficit in FY2024 after the U.S. Compact grants expire in FY2023. To cope with this, gradual fiscal consolidation through a combination of domestic revenue mobilization and expenditure reforms would be needed over the medium-term. In addition, a further buildup of fiscal reserves should provide for a much-needed cushion against fiscal risks beyond FY2023. In that spirit, we welcome the authorities’ decision to save most of the recent corporate tax windfall into the FSM Trust Fund.

“The FSM also faces the medium-term challenge of coping with climate change and weak private sector growth. Continuing efforts to adapt to climate change, including developing diverse sources for contingent natural disaster financing, would be vital. Promoting private sector development would require increasing access to finance, improving the investment climate, and reducing impediments to doing business. These issues will be further discussed in the upcoming 2019 Article IV consultation.

“The team would like to thank the Micronesian authorities and the staff of the Department of Finance and Administration, and other interlocutors, for their openness, candid discussions, and hospitality.”