Micronesia [FSM] - Economy

Economic activity consists largely of subsistence farming and fishing, and government, which employs two-thirds of the adult working population and receives funding largely - 58% in 2013 – from Compact of Free Association assistance provided by the US. The islands have few commercially valuable mineral deposits. The potential for tourism is limited by isolation, lack of adequate facilities, and limited internal air and water transportation.

The country's medium-term economic outlook appears fragile because of dependence on US assistance and lackluster performance of its small and stagnant private sector.

Under the terms of the original Compact, the US provided $1.3-$2.0 billion in grants and aid from 1986 to 2001. The US and the Federated States of Micronesia (FSM) negotiated a second (amended) Compact agreement in 2002-03 that took effect in 2004. The amended Compact runs for a 20-year period to 2023; during which the US will provide roughly $2.1 billion to the FSM.

The amended Compact's financial terms were renegotiated with the aim of encouraging sustainable development. The United States will provide almost $100 million in direct assistance every year until 2023, which includes the systematic reallocation of a portion of the direct aid to a jointly managed Trust Fund. The amended Compact also develops a Trust Fund for the FSM that will provide a comparable income stream beyond 2024 when Compact grants end.

Additional federal grants to the FSM total approximately $35 million annually. Assistance under the Amended Compact is distributed by grants in response to a transparent FSM budget process, focusing on the following six sectors: education, health, infrastructure, public sector capacity building, private sector development, and the environment. The U.S. Department of the Interior is responsible for monitoring and implementing the Amended Compact.

The FSM government sector plays a central role in the economy as recipient and domestic administrator of Compact funds. The national and state-level governments employ over half of the country's workers, with government services accounting for more than 40% of GDP. Real wages nationwide have been flat for the past decade, as has the number of jobs in the economy (about 15,500.) Private sector jobs pay about half as much as public sector jobs.

The fishing industry is highly important. Foreign commercial fishing fleets pay over $16.985 million annually for the right to operate in FSM territorial waters. These licensing fees account for 28% of the national government revenues. Exports of marine products, mainly to Japan, account for nearly 85% of export revenues.

Visitor attractions include scuba diving, surfing, World War II battle sites, eco-tourism, and the ancient ruined city of Nan Madol on Pohnpei. The islands have more than 22,000 tourists and visitors each year. However, the tourist industry has been hampered by a lack of infrastructure, limited commercial air connections, and a severely restrictive foreign investment climate. The Asian Development Bank has identified tourism as one of FSM's highest potential growth industries.

Agriculture is mainly subsistence farming. The principal crops are breadfruit, coconuts, bananas, betel nuts, cassava, taro, and kava. Less than 10% of the formal labor force and less than 7% of export revenue come from the agricultural sector.

The large inflow of official assistance to the FSM allows it to run a substantial trade deficit--imports outstrip exports by a seven-to-one ratio--and to have a much lighter tax burden than other states in the region (11% of GDP in FSM compared to 18%-25% elsewhere). The government borrowed against future Compact disbursements in the early 1990s, yielding a significant external debt, close to $60 million. In 2005, the FSM Government and Congress took positive steps toward establishing a nationwide tax system to improve collections and more fairly distribute the tax burden.