Federated States of Micronesia (FSM) and ADB

ADB's Work in the Federated States of Micronesia

The Federated States of Micronesia (FSM) comprises four states—Chuuk, Kosrae, Pohnpei, and Yap—spread across 607 islands in the Northwest Pacific. As a small island developing state, the FSM experiences heightened barriers to growth due to its geographic isolation, small population and capacity constraints, and exposure to natural hazards. In 2020, the FSM’s economy was significantly impacted by border closures imposed in response to the coronavirus disease (COVID-19) pandemic.

The FSM joined ADB in 1990. ADB’s programing in the country seeks to reduce costs by increasing the supply of renewable energy; manage risks by improving disaster risk financing and public financial management; and create value by delivering safe water and sanitation services, strengthening human capacity, and supporting private sector development.

Lovely beach in Chuuk. Chuuk State is one of the states in the Federated States of Micronesia.

Since 1990, ADB has committed loans of $83.5 million, grants of $66.8 million, technical assistance projects worth $26.6 million, and ADBadministered cofinancing of $8 million for the FSM.

In addition to COVID-19 response efforts, ADB is helping the FSM improve core public services and governance functions, while creating new opportunities for inclusive economic growth. Recognizing the need for capacity support in tandem with physical infrastructure, ADB’s assistance in the FSM targets improved utility and public sector performance alongside infrastructure works.

The Chuuk Water Supply and Sanitation Project, committed in December 2020, will deliver $12.8 million to enhance water and sanitation services in the state. It will improve physical sewerage and water supply assets, while helping the public utility strengthen management practices and improve its commercial performance. The project’s focus on water and sanitation will create parallel benefits in the health sector by improving community awareness of good sanitation and hygiene practices to prevent disease.

ADB has helped improve water distribution in Chuuk.

Similarly, the FSM Renewable Energy Development Project is helping install new renewable power generation assets on Kosrae and Yap, while supporting the Pohnpei Utility Corporation to implement reforms that will improve service quality and commercial performance. The combination of investment in physical assets and support for public sector management will strengthen the FSM’s overall fuel security, reduce its energy costs, and enhance the resilience of its energy sector to climatic and economic shocks.

Nonsovereign Operations

As a catalyst for private investments, ADB provides financial assistance to nonsovereign projects and financial intermediaries. Total commitments in loans and equity investments from ADB’s own funds in 2020 amounted to $1.4 billion for 38 transactions in economic and social infrastructure, finance sector, and agribusiness. ADB also actively mobilizes cofinancing from commercial and concessional sources. In 2020, ADB mobilized $1.9 billion of long-term project cofinancing and $3.3 billion of cofinancing through its Trade and Supply Chain Finance Program and Microfinance Program.

Total outstanding balances and commitments of nonsovereign transactions funded by ADB’s own resources stood at $14.3 billion as of 31 December 2020.

Financing Partnerships

Financing partnerships enable ADB’s financing partners, governments or their agencies, multilateral financing institutions, and commercial organizations to participate in financing ADB projects. The additional funds are provided in the form of loans and grants, technical assistance, and other nonsovereign cofinancing such as B loans, risk transfer arrangements, parallel loans and equity, guarantee cofinancing, and cofinancing for transactions under ADB’s Trade and Supply Chain Finance Program and Microfinance Program.

ADB began cofinancing operations in the FSM in 1992. Since then, sovereign cofinancing commitments for the FSM have amounted to $2.78 million for two investment projects and $4.31 million for seven technical assistance projects.

A summary of cofinanced projects is available at the Federated States of Micronesia: Cofinancing.

Operational Challenges

The FSM experiences both physical and governance constraints that affect the implementation of ADB development plans and projects.

As a federation, each state enjoys considerable autonomy, with responsibility for public services devolved from the central government. This structure can hamper coordination and the efficiency of development partner support. It also places fiscal pressure on state governments, which may be exacerbated as assistance is phased out under the Compact of Free Association with the United States (the Compact).

The FSM’s small population can migrate and work freely in the United States, contributing to capacity constraints in the public and private sectors. ADB and the FSM are working to strengthen collaboration between partners, and between the state and national levels, to identify and address development priorities. Ongoing support is needed to address infrastructure gaps and strengthen governance, particularly amid the COVID-19 pandemic.

Future Directions

Following the FSM’s Infrastructure Development Plan update in 2015, the United States Joint Economic Management Committee continues to closely monitor the use of the Compact infrastructure grant, which is essential to stimulate the country’s growth as it emerges from the COVID-19 pandemic.

The Government of the FSM’s Strategic Development Plan 2004–2023 provides a roadmap to address fiscal and economic challenges leading up to, and beyond, the expiration of Compact grants. To achieve fiscal consolidation, the plan stresses the need to mobilize revenue by reforming the country’s taxation system and strengthening tax administration, while highlighting the need for continued control of public expenditure.

ADB will continue to support the government’s priorities in energy, water supply and sanitation, and basic education, and provide technical assistance for public administration reforms, particularly at the state level.

Children playing during an educational activity at a daycare center in Chuuk, Federated States of Micronesia.