Federated States of Micronesia (FSM) and ADB

ADB's Work in the Federated States of Micronesia

The economy of the Federated States of Micronesia (FSM) continued to grow in 2019, driven largely by the fishing industry, which has attracted substantial increases in domestic revenues from fishing licenses sold to foreign fleets.

However, despite relatively consistent economic activity, significant challenges remain in the FSM. Development partner support has focused on achieving medium-term fiscal sustainability to ensure that sufficient resources are available if grants from the Compact of Free Association with the United States (the Compact) expire in 2023. The country is presently in negotiations to extend the Compact beyond 2023. Investments are also being made to stimulate the FSM’s private sector.

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

ADB has been supporting the FSM since 1990 and has committed loans of $83.5 million, grants of $35.3 million, and technical assistance projects worth $27.7 million.

In 2019, ADB committed a $15 million grant for the Renewable Energy Development Project to finance investment in renewable energy generation facilities in Kosrae and Yap States. As part of the second phase of its regional program on disaster resilience in the Pacific, ADB also committed a $6 million grant to provide contingent financing for disaster response, early recovery, and reconstruction activity. Also in 2019, ADB committed $5 million for project readiness financing to prepare the Chuuk Water Supply and Sanitation Project.

In 2018, ADB committed a regional project to improve internet connectivity for the Micronesia subregion, covering the FSM, Kiribati, and Nauru. Cofinanced by the World Bank for $36.2 million, the project will establish and operate a submarine cable system connecting the islands of Kosrae in the FSM, Tarawa in Kiribati, and Nauru to global internet links.

ADB is supporting government efforts to increase the FSM’s public sector management capacities. At the same time, loans to develop the private sector have supported the establishment of a secured transactions system and the strengthening of institutional capacity for land administration and management. ADB has also helped expand access to financial and business development services for small and medium-sized enterprises in the FSM.

ADB has helped improve water distribution in Chuuk.

The Yap Renewable Energy Development Project, with two loans totaling $9.04 million, has modernized the energy network on the island state of Yap, reducing dependency on imported diesel fuel and improving energy efficiency on the supply side of the electricity grid. Project resources were also used to support capacity development of the Yap power utility and educate local communities.

The Improving Quality of Basic Education in the North Pacific Project, with $13 million in grants from ADB and $1.8 million from the Government of Australia, is raising the standard of primary education by improving teacher training, broadening access to resources, and engaging parents and communities in education.

ADB is also devoting resources to public administration reforms at both the national and state levels within the FSM.

Children playing during an educational activity at a daycare center.

Nonsovereign Operations

As a catalyst for private investments, ADB provides financial assistance to nonsovereign projects and financial intermediaries. Total commitments from ADB’s own funds (in equity and direct loans) in 2019 amounted to $3.00 billion for 38 transactions in economic and social infrastructure, the finance sector, and agribusiness. ADB also actively mobilizes cofinancing from commercial and concessional sources. In 2019, ADB mobilized $3.28 billion of long-term cofinancing and $3.69 billion of cofinancing in trade finance, microfinance, and supply chain finance programs. Total outstanding balances and commitments of nonsovereign transactions funded by ADB’s own resources stood at $13.78 billion as of 31 December 2019.

Financing Partnerships

Financing partnerships enable ADB’s development 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 Finance Program and Supply Chain Finance 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.

Projects Cofinanced, 1 January 2014–31 December 2018

Operational Challenges

Challenges of geography are exacerbated by the FSM’s governance structure as a federation of four island states, each with its own government, policies, and identity. These physical and administrative characteristics, combined with limitations in air and sea transport, can hamper coordination between the national government and the states, constraining reform efforts and impeding the effective use of development funding.

Meanwhile, the FSM’s state governments are being increasingly constrained in the delivery of vital services because of the scheduled decrease in assistance from the Compact.

The Government of the FSM has embarked on a process to foster greater collaboration in identifying and pursuing development priorities at both the national and state levels. This countryled initiative should be complemented by long-term support to strengthen public service delivery and core public sector management functions.

Future Directions

Following the update of the FSM’s Infrastructure Development Plan in 2015, the United States Joint Economic Management Committee continues to closely monitor the use of the Compact infrastructure grant. Effective use of this grant is essential to stimulate the country’s growth in the short term.

The government’s Action Plan 2023 provides a strategy to address the fiscal and economic challenges leading up to, and beyond, the expiration of the 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. It also highlights the need for continued control of public expenditure.

ADB will continue to support the priorities in the action plan, investing in energy, water supply and sanitation, and basic education, and providing technical assistance that supports public administration reforms, particularly at the state level.

Mother and child getting vaccine at a health center.