IMF Staff Completes 2017 Article IV Visit to the Federated States of Micronesia

WASHINGTON, June 14 -- The International Monetary Fund issued the following news release:

An International Monetary Fund (IMF) staff team led by Serkan Arslanalp visited Pohnpei from June 5-14, 2017, to hold discussions for the 2017 Article IV Consultation. The team held constructive discussions with officials of the national government, Pohnpei state, Banking Board, Insurance Board, development partners, and private sector representatives. At the end of the visit, Mr. Arslanalp issued the following statement:

"The Micronesian economy continued its gradual recovery in FY2016 (ending September 30), after three years of contraction during FY2012-14. Real GDP is estimated to have grown by 3.0 percent in FY2016 (after 3.7 percent in FY2015), driven by increased construction activity related to infrastructure projects. Consumer prices remained broadly stable. The fiscal balance recorded an estimated surplus of 9 percent of GDP, after another year of strong revenues from fishing license fees. In FY2017, growth is expected to moderate to 2 percent, as the recovery continues at a slower pace.

"Despite the recovery, risks are tilted to the downside beyond the near term. Possible extreme weather events resulting from climate change, delays in infrastructure projects, and declining external grants could pose risks to growth. The current trajectory of the Compact Trust Fund is not on track to offset expiring U.S. grants after FY2023. The Federal States of Micronesia Trust Fund can only partially offset the shortfall. The fiscal surplus is therefore expected to turn into a deficit beyond FY2023, without fiscal reforms. Uncertainties surrounding the global economy could pose risks to trust fund returns and underscores the importance of strengthening fiscal buffers. On the upside, a decisive push for structural reforms could boost potential growth.

"Securing fiscal sustainability, building resilience to climate change, facilitating private sector development, and promoting safe financial inclusion remain the policy priorities. The IMF team encourages the implementation of measures envisaged under "Action Plan 2023" to prepare for the scheduled expiration of U.S. Compact grants. Continued efforts to adapt to climate change are recommended, including explicit recognition of fiscal costs in the budget. To facilitate private sector development, reforms should focus on reducing transportation costs, strengthening regulatory frameworks, and improving access to finance. The Banking Board's oversight should be extended to credit unions to promote safe financial inclusion.

"The team would like to thank the Micronesian authorities for their hospitality and close cooperation. The IMF Executive Board is expected to discuss the 2017 Article IV Consultation in September 2017."