The 109-page report carried mixed news for Chuuk, Kosrae, Pohnpei and Yap and a message from Assistant Secretary, Tony Babauta.
“With only eleven years of financial assistance remaining under the current terms of the FSM Compact of Free Association, it is imperative for the leaders to be able to make informed decisions and track progress towards economic advancement and budgetary self-reliance — the stated goals of the Compact.”
The U.S.-FSM Compact underwent an amendment in 2003 that outlined a 20-year transition to financial autonomy for the four islands that included two major provisions.
The first was the establishment of a FSM trust fund that by 2023 — the last year of U.S. funding — could provide sufficient income for the islands in perpetuity.
Secondly, the U.S. pressured the FSM to reduce the size of government by switching from general budgetary support to a sector-grant approach that gradually cut-off money to support non-Compact sector operations (administration, law and order, public works and transportation).
Report results
The most devastating conclusion of the report is FSM’s 2023 estimated $265-$600 million Trust Fund shortfall of the $1.82 billion target.
Cited reasons for missing the billion-dollar fund level included FSM’s failure to deposit on schedule its required $30 million contribution, the U.S. and FSM missed the trust fund establishment date and the FSM waited 36 months to invest the fund’s assets that missed the upswing in the global stock market.
The flip side of the trust fund bad news is that FSM’s overall international investments grew 20 percent from 2009 to 2010.
Bright spots
For FSM’s 101,000 residents there is considerable good news in the report.
Large indicators of the economy’s overall health are trending upward including gross domestic product, employment, per capita income, budget surplus and a reduction of government spending.
The negative indicators include inflation, reduction in overall tourism sector dollars, population decline due to a lower birth rate and off-island migration.
Progress areas
FSM made progress in two important areas: public sector payroll reductions and tax collections.
Currently 5.7 percent of residents work for the government, down from 6.8 percent in 2009.
For comparison, the CNMI hovers in the area of 5.9 percent while the U.S. sits at 1.43 percent.
FSM 2010 tax revenues rose slightly and equated to 11.9 percent of GDP, U.S. taxes comprise between 24-26 percent of GDP and the CNMI rests at just 6.5 percent.
Island comments
The report singled out Chuuk as the worst fiscally managed of the FSM governments as it has “oscillated from one extreme to the other.”
The report goes on to explain Chuuk’s significant periods of fiscal mismanagement between windows of recovery when expenditures were cutback.
Korsae received praise for continuing reforms introduced in 2007 that included reining-in government payroll costs that helped keep wage inflation the lowest in the FSM and resulted in a small budget surplus.
Pohnpei was also lauded for its “finely balanced fiscal policy” that grew the economy by six percent, tax revenue by seven percent, held government payroll steady and shrunk the budget deficit by $400,000.
For Yap, 2010 showed major improvement in budget management that produced a significant $2.8 million increase in non-tax revenues, a decrease in spending and its first budget surplus.
Bottom line
In spite of the progress made by FSM states, the report paints a bleak future scenario.
The largest challenges they face include rising expenses as U.S. funding declines in the lead up to 2023, a habit of spending budget savings on public projects instead of depositing the money into the trust fund account, the need for major tax reform and development of the private sector including tourism.
In some ways, the CNMI could be inserted into the report in place of FSM, as several of the challenges highlighted are relevant to the Northern Marianas.
Only time will tell if it will be Micronesia or the Northern Marianas that solve their problems in time to save the economy and ensure a future for residents.
A copy of the report as well as one on the Marshall Islands is available at http://econ.pitiviti.org.
