IMF mis­sion holds Ar­ti­cle IV Con­sul­ta­tion with Fed­er­ated States of Mi­crone­sia

The Pak Banker - - Front Page -


This state­ment sum­ma­rizes the mis­sion’s pre­lim­i­nary views and pol­icy rec­om­men­da­tions based on dis­cus­sions in Pohn­pei1. The dis­cus­sions fo­cused on poli­cies to en­sure long-term sus­tain­abil­ity through strength­en­ing fis­cal man­age­ment and pro­mot­ing the pri­vate sec­tor. The econ­omy is ex­pected to con­tinue to ex­pand at a mod­er­ate pace, sup­ported mainly by new con­struc­tion ac­tiv­i­ties and a grow­ing fish­eries sec­tor, but faces head­winds over the medium-term from the grad­ual de­cline of Com­pact grants and the lack of a vi­brant pri­vate sec­tor. In that con­text, a com­pre­hen­sive package of a medi­umterm fis­cal con­sol­i­da­tion plan with tax re­forms and tar­geted ex­pen­di­ture cuts, as well as struc­tural re­forms to nour­ish pri­vate sec­tor growth, is es­sen­tial to se­cure fis­cal and eco­nomic sus­tain­abil­ity.

Since the last IMF Ar­ti­cle IV con­sul­ta­tion in 2010, the econ­omy con­tin­ued on a steady growth path. Fol­low­ing a re­ces­sion in FY2006-08 due to de­lays in Com­pact grants uti­liza­tion as well as high fuel and food prices, the FSM econ­omy grew by 2-2½ per­cent for FY2010 and FY2011. The ex­pan­sion was driven by new con­struc­tion ac­tiv­i­ties, such as the air­port re­newal projects funded by the US Fed­eral Avi­a­tion Author­ity (FAA), and by growth of the fish­ery sec­tor helped by good fish­ing con­di­tions and high prices. The econ­omy re­mains de­pen­dent on the large pub­lic sec­tor (40 per­cent of GDP, in­clud­ing pub­lic en­ter­prises), although there are signs of a fur­ther growth pick up in the fish­eries and agri­cul­ture sec­tors.

In­fla­tion mod­er­ated from its FY2009 peak, and fluc­tu­a­tions are largely driven by com­mod­ity prices. Af­ter reach­ing 7.8 per­cent in FY2009, in­fla­tion has de­clined to 4.6 per­cent in FY2011. How­ever, the last quar­ter of 2011 recorded a 6.5 per­cent in­crease (yearon-year) re­flect­ing the rise in in­ter­na­tional food and fuel prices, which com­pose about 46 per­cent of the con­sump­tion bas­ket.

3. The over­all fis­cal bal­ance of the con­sol­i­dated government recorded mod­est sur­pluses for three straight years through FY2011, with an un­even distri­bu­tion of out- comes across states. In FY2011, the over­all con­sol­i­dated fis­cal bal­ance was $1.9 mil­lion (0.6 per­cent of GDP) in sur­plus, helped by eco­nomic growth and fish­ing fee rev­enue. How­ever, the sur­plus of the na­tional government masks an ag­gre­gate deficit at the state government level3. While Chuuk and Yap turned in a sur­plus in FY2011 with bet­ter rev­enue ad­min­is­tra­tion, Kos­rae and Pohn­pei each recorded deficits equiv­a­lent to about 1 per­cent of state GDP.

De­spite some de­te­ri­o­ra­tion of the cur­rent ac­count bal­ance (from -12 per­cent of GDP for FY2006-8 to -18 per­cent for FY2009-11 on av­er­age), ex­ter­nal bal­ance is sus­tained by a sta­ble flow of of­fi­cial trans­fers. The ma­jor­ity of the over­all cur­rent ac­count deficit (19 per­cent of GDP in FY2011) is fi­nanced through cap­i­tal trans­fers from of­fi­cial sources (13 per­cent of GDP). Given their con­trac­tual na­ture, they can be con­sid­ered a sta­ble source of fund­ing. Sim­i­larly, im­bal­ances within the cur­rent ac­count bal­ance (a trade and ser­vices deficit of 58 per­cent of GDP) are largely off­set by a sta­ble sur­plus in the in­come and trans­fer bal­ances from Com­pact cur­rent grants and re­mit­tances (40 per­cent of GDP). Given the ded­i­cated of­fi­cial fund­ing sources, the level of gross in­ter­na­tional re­serves (about 3½ months of im­ports) is not as much a crit­i­cal in­di­ca­tor for the ex­ter­nal sus­tain­abil­ity as in other coun­tries. The cur­rent ac­count deficit widened in FY2011, with an in­crease in ex­ports (mainly fish) more than off­set by that in im­ports driven by con­struc­tion ma­te­ri­als and fu­els. Vis­i­tor ar­rivals de­clined sig­nif­i­cantly in FY2011 to 20 per­cent be­low the FY2009 peak, while higher in­fla­tion than in trad­ing part­ners has kept the real ef­fec­tive ex­change rate at an ap­pre­ci­ated level.

Fi­nan­cial con­di­tions have re­mained tight. There are large spreads be­tween de­posit rates (around 1 per­cent) and loan rates (about 14 per­cent for con­sumer loans, about 7 per­cent for com­mer­cial loans), partly re­flect­ing high risks in­volved in lend­ing in the FSM, given lim­ited avail­abil­ity of land as col­lat­eral. Com­mer­cial loan growth has been stag­nant in re­cent years, while con­sumer loans saw some pick up.

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