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Annual Report 2001

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Federated States of Micronesia

Economic performance

Following 3 years of negative growth from FY1996 (ending 30 September) to FY1998, the Federated States of Micronesia’s economy grew at 1.1% in FY1999 and 2.5% in FY2000. The real GDP is expected to have grown by 0.9% in FY2001. Growth potential was significantly constrained due to the uncertain investment climate, resulting from the uncertainty about the level of assistance beyond FY2004 under the Compact of Free Association with the US. Inflation remained moderate. The annual inflation rate (only for Pohnpei State) was 2.6% in 2001.

Pohnpei and Yap states have maintained medium-term fiscal balance and constrained recurrent expenditure increases. However, fiscal management in Chuuk and Kosrae has generally been weak. The national Government maintained a large structural surplus; however, revenue shortfalls due to reduced fishing fee revenues of $4 million and low investment returns put significant pressure on the national fiscal position in the short term.

ADB operations

Operational strategy: Emphasis on public sector reform needs to be shifted to the state level. Recognizing the four states as key players,

long-term improvement in efficiency, effectiveness, and accountability in the Government must start at the state level. Capacity building is required. ADB technical assistance will help build capacity at the state level. In social sector reforms, emphasis will be on the outer islands to help improve basic social services delivery, consistent with ADB’s poverty reduction strategy. Increased allocation and better use of resources will be important in expanding access to essential services. The Basic Social Services Project provides the start in improving health and education services delivery. Subsequently, the needs of this sector will be addressed through Compact funding, with ADB providing the necessary aid coordination.

Policy dialogue: The Federated States of Micronesia now faces serious challenges in adjusting to an expected change in Compact funding. So far, sustainable productive investment, critical to ensuring a reasonable living standard for all citizens, has been insufficient. Most citizens have been reached by the public sector, resulting in an unsustainable level of government recurrent expenditure beyond 2001 and a dualistic society. Public expenditure will have to be reduced substantially to match current domestic revenue.

Loans and technical assistance: In 2001, ADB approved two loans totaling $13.0 million for a private sector development program. ADB also approved two advisory technical assistance grants totaling $1.2 million for strengthening capacity of economic policy reform and implementing performance-based budget management.

Project implementation: Since joining ADB in 1990, the Federated States of Micronesia has received six loans, of which five were active at the end of 2001. Contract awards totaled $920,000, bringing the cumulative figure to $30.4 million. The contract award ratio was 4.7%, lower than the ADB-wide average of 14.8%. Disbursements during the year totaled $2.5 million, bringing cumulative disbursements to $29.8 million. The disbursement ratio was 46.6%, higher than the ADB-wide average of 20.5%.

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