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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program Update 2005-2006: Federated States of Micronesia
III. Implementation of the Country Strategy and ProgramA. Progress in Poverty Reduction16. ADB provided assistance to the government in conducting a poverty assessment between November 2003 and January 2004 under TA 6047-REG: Preparation of National Poverty Reduction Strategies for PDMCs, including (i) a comprehensive quantitative analysis of available poverty indicators and (ii) a Participatory Assessment of Hardship (PAH) conducted in selected communities. The assessment shows a per capita GDP that is high by Pacific regional standards; this masks a gap between per-capita incomes of those working in the formal public sector, those living in Kosrae and Yap states, and those in the rural areas and the outer islands of Pohnpei and Chuuk states. People in rural areas and the outer islands found it difficult to earn enough for food and living expenses. In more urban areas, families with low incomes and limited access to subsistence activities found it extremely difficult to maintain satisfactory standards of living. The government’s current priority and ADB’s proposed assistance program emphasize poverty reduction. The government requested ADB to provide a TA to help prepare a national hardship reduction strategy. B. Progress in the Country Strategy and Program Focus Areas1. Private Sector Development17. The government dominates the economy. The formal private sector is small, inexperienced, locally focused, and relatively isolated from international opportunities. Economic constraints include an environment that is not conducive for business, poor public infrastructure, a poorly functioning collateral framework, poor skills, ineffective and often inconsistent investment policies for both local and foreign investors, and state-owned enterprises that provide unreliable, expensive services while crowding out private-sector initiatives. 18. Loans 1873/74-FSM (SF): Private Sector Development Program and Project (PSDP)6, effective in April 2003, are now helping the government create an enabling environment for the private sector by (i) establishing a secured transaction system, (ii) building institutional capacity for land administration and management, (iii) improving financial services for small- and medium-sized enterprises (SMEs), and (iv) strengthening business development services to SMEs. Privatization or other forms of transformation of state-owned enterprises (SOEs) is a tranche release condition for the PSDP program loan. 19. SOEs represent a critical impediment for the private sector. They are: (i) often badly managed or subject to political interference, resulting in high factor costs for businesses; (ii) preventing access to affordable and reliable services and products; (iii) often involved in semi commercial activities, competing with and crowding out private sector activity; and (iv) often a burden on fiscal budgets while diverting public funds from badly needed social expenditures. Progress in this area is very slow because of poor political commitment. 2. Social Services Development20. Social sector development and reforms continue to play an important role in FSM’s overall development, with emphasis on the outer islands to help improve basic social services delivery. Increased allocation and better utilization of resources will be an important factor in expanding access to essential services. 21. Loan 1816-FSM (SF): Basic Social Services (BSS) Project7 commenced in January 2003 to design and introduce essential reforms in health and education. The project also aimed to develop human resources in a sustainable manner and permit long-term social and economic development, with the participation of the national government and the states of Pohnpei, Kosrae, and Yap. Chuuk state has also expressed its interest in participating. The project aims to develop a framework for education and health service delivery systems that are accountable to community requirements and deliver satisfactory, cost-efficient services. The project is now trying to introduce incentives to encourage efficiency, community involvement particularly in maintaining facilities, and improved management of education and health services. It also aims to support initiatives for sustainable financing. 22. FSM has made reasonable progress toward meeting the relevant MDGs for water and sanitation services. More than 80% of households have access to improved water supplies and approximately 25% to improved sanitation. As in other countries, however, these statistics can be misleading. For example, improved water sources may not actually be safe, and supply may be limited during droughts. Sanitation may improve household conditions but pollute adjacent areas. These services are often provided from government funds or by heavily subsidized utilities, so they are often neither operated nor maintained in a sustainable fashion, Pohnpei being the notable exception. Poor solid waste management is evidenced by the fact that there are no engineered waste disposal facilities in any of the states. Collection of wastes varies. Ad hoc disposal of solid waste and the resulting environmental degradation is visually evident. Issues relating to the poor access to safe water and sanitation facilities will continue to be addressed under the proposed Omnibus Infrastructure Development Project (OIDP). 3. Good Governance23. ADB has been helping the government improve public sector efficiency and effectiveness since 1995 through its Public Sector Reform Program as well as through a series of TAs for economic management and capacity building8. ADB continues to support the government in increasing its institutional capacity for public sector management through TA 4258-FSM: Strengthening of Public Sector Management and Administration. This TA addresses (i) Compact transition, and (ii) preparation of a long-term institutional capacity-building roadmap. 24. A transition plan will be prepared to cope with the anticipated reductions in the Compact grant funds. The plan will be based on a careful review of government revenues and expenditures, and will explore the possibility of strengthening revenue-generating efforts as well as reducing government expenditures. Tax reform will be an essential input to the overall economic transition plan. The tax regime and administration will also be carefully reviewed. 25. A roadmap will guide the government in carrying out its institutional capacity building during the Amended Compact period (2003-2023). The roadmap will also help ensure efficient and effective use of the US sector grant for capacity building. The main concerns of the roadmap are (i) economic planning, (ii) financial management, (iii) auditing, (iv) law enforcement, (v) immigration controls, (vi) the judiciary, and (vii) the compilation and analysis of appropriate statistical indicators. Human resource management and staff development issues will be thoroughly reviewed and incorporated in the roadmap. 26. Performance-based budgeting has been another area of ADB intervention in the area of governance. In particular, efforts have been made to introduce an integrated financial management information system (FMIS) in the national government and four states to increase the efficiency and accountability of public financial management. ADB is helping the government identify the specifications of the Amended Compact reporting requirements, in particular financial control, accounting, auditing, and performance-based budgeting aspects of the Compact's fiscal procedures. ADB will also support the government in building its capacity to effectively implement the new FMIS. 27. A TA to further enhance public sector governance as a cornerstone of public accountability and transparency is now being planned for 2004: Streamlining and Strengthening the Public Sector Audit Function. The TA will explore and encourage alternative audit arrangements between all governments by establishing a strong, independent office that would undertake audits of state and national governments. C. Highlights in Coordination of External Funding and Partnership Arrangements28. The Compact with the US continues to be FSM’s major source of external assistance. A wide range of federal and nonfederal US assistance services and programs are also available to FSM. The US Department of Interior (USDOI) established a Honolulu office to oversee the implementation of the Amended Compact. ADB has maintained close coordination with USDOI through frequent visits to its Honolulu office, as well as meetings in the field, to ensure ADB's assistance complements US efforts. ADB's various TAs in the governance area are supporting FSM's efforts for a smooth economic transition to the Amended Compact. A Consultative Group meeting is now being planned in late 2004 or early 2005. 29. Japan is the second largest bilateral donor, with annual grants of about $10 million equivalent. These are provided to the four states and have usually financed the construction of roads, wharves, ports, and fisheries. Japan also has a grassroots program for the environment and quality of life. The Australian Agency for International Development (AusAID) provides smaller aid programs, mainly for education, health, and training. The People’s Republic of China (PRC) provides grants for sports facilities, cargo ships, and presidential and other official residences. PRC also provides $2.5 million in grants for fiscal support. The World Bank does not currently have a program in FSM. The International Monetary Fund (IMF) only undertakes its Article IV consultations on a two-year cycle, with its next consultation mission planned for 2004. TAs concerning taxation, budget, statistics, and banking supervision are provided through the Pacific Financial Technical Assistance Centre (PFTAC), which is supported by ADB, IMF, and other assistance agencies. The United Nations Environment Programme (UNEP), World Health Organization (WHO), and other donor agencies are engaged in training and TA support. External assistance is summarized in the development coordination matrix provided in Appendix 2, Table A2.5. ____________________
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