The Federated States of Micronesia (FSM) is a lower middle income island nation of 104,832 in 2021, an eight percent population decline from 2019. The inhabitants live on 607 islands with a total land area of 271 square miles and an exclusive economic zone (EEZ) of over one million square miles (2.6 million square km) in a remote area of the Western Pacific Ocean. The nation is composed of distinct, separate cultures and languages organized into four states under a weak national government. The FSM is part of the former U.S.-administered Trust Territory of the Pacific Islands, gaining independence in 1986. Since independence, the United States has provided over $100 million annually to the FSM under a Compact of Free Association (Compact or COFA) with the United States. FSM uses the funds for development under the administration of the U.S. Department of Interior’s Office of Insular Affairs (DOI). The World Bank estimates FSM’s 2020 Gross Domestic Income (GDI) at $3,950 per person, a trend reflecting no growth over the previous 10 years. The national currency is the U.S. dollar.
Commercial fishing remains the key economic sector in the FSM. The country’s primary sources of income are the sale of fishing rights ($70 million in FY2020), corporate income taxes, mainly from offshore corporate registrations for captive insurance ($10 million in FY 2020), and special revenue grants ($26 million in FY2020). The FSM continues largely as a subsistence economy, except in larger towns where the economy is centered on government employment and a small commercial sector. The cash economy is primarily fueled by government salaries paid by Compact funds (70 percent of employed adults work in the public sector) and, to a much lesser degree, by family remittances and Social Security benefits paid to FSM citizens who previously worked in the United States or who are the surviving spouse of an American citizen.
Compact funding was anticipated to change in 2023 from direct funding in the form of sector grants, to the use by the FSM of proceeds derived from a trust fund developed from U.S. contributions over 20 years. (Note: The Compact of Free Association is under renegotiation as of June 2022 and it cannot be determined if the direct funding mechanism of sector grants will continue or end). As of September 2021, the balance of the Compact Fund stood at $1 billion. FSM has also created its own trust fund, contributing $17 million in FY2020, raising its overall balance to $307 million. (Note: audited balances for the FSM Trust Fund for FY2021 have not yet been published).
The FSM GDP for 2018 was $402 million, a 19.5 percent increase from 2017 at constant prices. The economy recorded a trade deficit of $125 million in goods and services for the same year. FSM government debt at $83.2 million was low, giving FSM a low 23.7 debt/GDP ratio, one of the lowest in the Pacific. Major creditors are the Asian Development Bank (52.5 percent of debt) and the U.S. Rural Utility Services (20.7 percent of debt). Despite the low levels of debt in absolute terms, the International Monetary Fund deemed FSM to be at a high level of debt stress due to the uncertainty created by looming Compact Funding reductions in 2023 and the possible need to borrow to maintain operations of state governments.
Foreign direct investment (FDI) is almost nonexistent due to prohibitions on foreign ownership of land and businesses (in specified industries), difficulties in registering companies (the process requires approvals from the state governments as well as the national government), poor private sector contract enforcement, poor protection of minority (foreign) investors’ rights, weak courts, and weak bankruptcy processes. In addition, lack of infrastructure, poor health and education systems, the scarcity of commercial flights, and high costs of imported goods and various business services also contribute to the lack of FDI.
Pohnpei State’s Legislature amended its laws in September 2018 to reduce requirements on foreign investment. The law specified the business sectors that permit FDI, with the remaining sectors available for Pohnpei citizens only. Domestic capital formation is very low. Commercial banks are classified as foreign entities and their ability to provide commercial loans, especially secured by real estate, is very limited. Banks view all credit to FSM borrowers as essentially unsecured.
Most national political power is delegated to the four states by the FSM Constitution, including regulation of foreign investment and restrictions on leases. Thus, investors must navigate nationwide between five different sets of regulations and licenses. U.S. citizens can live and work in the FSM indefinitely without visas under the Compact but cannot own property on most FSM islands. FSM voters select national legislators (senators). The national senators then caucus to select the president and vice-president from among the four at-large senators. There are no political parties. On May 11, 2019, Senators selected David Panuelo and Yosiwo George as president and vice president, respectively, for four-year terms. The most recent elections for Congress were held March 1, 2021.
The FSM federal government closed its borders in March 2020 in response to the COVID-19 pandemic and did not allow any repatriations until May 2021. Since that time, it has repatriated citizens and essential workers intermittently via a single flight per month into the country. The shut-down has adversely affected the FSM’s tourism industry and the ability of the international community to implement infrastructure programs needed to support investment. Recently, flights have increased in frequency and quarantine has been reduced, with plans to fully reopen in August 2022.
Only Yap State has undertaken any green energy initiatives with a single pilot wind project. It has also implemented several small-scale solar projects on outer islands.
|TI Corruption Perceptions Index||2018||44 of 100(Regional)||http://www.transparency.org/research/cpi/overview|
|Global Innovation Index||N/A||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2012||$30||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2020||$3,950||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|