Press Release No. 21/58

IMF Staff Concludes Virtual Staff Visit to Federated States of Micronesia

March 4, 2021

• The Federated States of Micronesia (FSM) has been successful in preventing the spread of COVID-19 to date and the policy response has helped mitigate the negative impact on the economy.
• As borders will remain shut for some time, the economic contraction is likely to deepen in FY2021.
• Near-term policies should prioritize measures to protect the vulnerable and underpin the economic recovery.

Washington, DC: An International Monetary Fund (IMF) team led by Piyaporn Sodsriwiboon held virtual meetings with the FSM authorities during February 22-March 3, 2021, to discuss recent economic developments and the outlook in the context of its regular surveillance activities. At the end of the visit, Ms. Sodsriwiboon issued the following statement:

“The Federated States of Micronesia (FSM) has been successful in preventing the spread of COVID-19 to date. Nevertheless, the pandemic and related containment policies are putting strains on the economy. Domestic services such as hospitality, transportation, and construction have contracted sharply. Planned large investment projects have been delayed, caused by restrictions on the movement of personnel and materials.

“As borders will remain shut for some time, the economic contraction is likely to deepen in FY2021 with a projected real GDP growth rate of -3.7 percent. Real GDP is estimated to have shrunk by -1.6 percent in FY2020. Uncertainty around the growth outlook is high, subject to the pace of vaccination in the FSM and elsewhere. Risks are still tilted to the downside.

“The pandemic has weakened the near-term fiscal position. Notwithstanding higher donor grants, the fiscal balance is projected to have shifted to a small deficit, amid tax revenue shortfalls, a temporary decline in fishing license fees, and higher expenditure from the pandemic response. The external current account balance is expected to register a small surplus, reflecting subdued imports and large inflows of donor grants.

“The policy response to the ongoing pandemic has been appropriate. Given the limited capacity of the healthcare system, the government is rightly prioritizing the response to address the health emergency. Measures to support vulnerable households, the unemployed, and businesses affected by the pandemic have helped mitigate the adverse impact on the population and economy. Until the border re-opens and the economic recovery takes hold, it is essential to sustain relief to workers, firms, and vulnerable populations.

“Looking ahead, tackling fiscal and structural challenges will be more critical than ever to set the stage for a robust recovery and pursue sustainable and inclusive growth. With access to the annual U.S. Compact grants set to expire in FY2023, a comprehensive approach to medium-term fiscal policy will be needed to cope with the expected fiscal cliff and safeguard debt sustainability. The FSM’s resilience to climate change should be strengthened by speeding up adaptation efforts and developing a disaster resilience strategy. Promoting private sector development will require increasing access to finance, improving the business and investment climate, and reducing impediments to doing business. These issues will be further discussed in the upcoming 2021 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 hospitality and the very productive and open discussions.”