Saipan (CNMI) FSM

The Federated States of Micronesia with a total land area of only 700 kilometers squared is made up of 607 islands scattered over 3 million square kilometers of the Pacific Ocean. The country became a sovereign nation in May 1979 and is located just north of the equator in the western Pacific, approximately 5,000 kilometers west of Hawaii.

Economic Profile and Performance
Agricultural exports, receipts from fishing licenses and tourism are the three major contributors to the economy; however, the country is still heavily dependent on aid (mostly from the USA) whilst performance has been driven by public sector expenditures. In 2006, the economy contracted slightly by an estimated 0.7% despite significant per capita levels of financial grants. The slight weakness in the economy reflect partly a reduction in funding under the terms of the amended Compact and the added fiscal pressures created by stricter controls on the use of the Compact funds which will continue to be channeled into a trust fund.

Like many Pacific nations, the FSM has a persistent trade deficit because it is highly import dependent and produces few exports. Services account for about 70% of total employment while agriculture and fisheries for less than 10%. Inflation was reported at 4.9% in 2006 and external debt service indicators suggest that external debt is manageable however this will come under pressure as receipts from grants under the compact decline from 2007.

The development of exports and, more broadly, of the private sector, is also hindered by certain policy settings, in particular access to land and in restrictions on foreign investment. High costs and irregular transport also limit export potential. The regular flow of Compact funds reduces pressures to promote growth sectors and develop revenue sources, however, the National Government is expending serious efforts in working with individual State Government to review foreign investment and land leasing policies.

Economic Outlook
Policies aim to building both the skills of potential migrants and links between emigrants and their homeland may assist in the long run. Forecasted figures show low levels of growth of about 1.0 – 1.5% expected in 2007 and 2008 because of the fiscal pressures. The difficult adjustments required suggest that the economy will continue to face important budgetary and economic constraints over the medium term. Yet it will be crucial to push ahead with reforms as otherwise the private sector will remain stagnant and the economy heavily reliant on the public sector, supported by aid. Without a significant upturn it is unlikely that the economy can be self-reliant on trust fund income by 2023, given low trust fund returns received to date and a likely lack of a budget surplus to build the fund.