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FSM Economic ReviewJEMCO-JEMFAC, August 2013
Graduate School USA, Pacific & Virgin Islands Training Initiatives
1
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
FSM Presentation
Economic Performance
Economic Policy
Compact Trust Fund
2
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
REAL GDP & Per Capita GDP
3
FY03FY04
FY05FY06
FY07FY08
FY09FY10
FY11FY12
$200
$210
$220
$230
$240
$250
$260
$2,000
$2,100
$2,200
$2,300
$2,400
$2,500
$2,600
247.7 247.4
2,334
2,383
GDP at constant prices GDP per Capita
GD
P U
S$
Mill
ion
s
GD
P (
Pe
r C
ap
ita
)
-0.1% GDP Growth from FY03 to FY12
0.2% GDP Per Capita Growth
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
REAL GDP per Capita by State
Chuuk
Kosrae
Pohnpei
Yap
4
19811983
19851987
19891991
19931995
19971999
20012003
20052007
20092011
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
Chuuk Kosrae Pohnpei Yap
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
GDP per capita growthFY03-FY12
Net Migration 2003-12
Chuuk Kosrae Pohnpei Yap FSM
GDP and Migration
-7,082-1,015
-5,334-1,766 -15,197
-1.8% ANNUALLY
5
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
Average Wage Rates
6
FY03FY04
FY05FY06
FY07FY08
FY09FY10
FY11FY12
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
$11,000
Private Sector Public Sector
2.9% Average Private Wage Growth During Amended Compact Period
2.1% Average Public Wage Growth During Amended Compact Period
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
Employment by Sector
7
FY03FY04
FY05FY06
FY07FY08
FY09FY10
FY11FY12
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Private Sector Public Sector
0% Private Employment Growth During Amended Compact Period
-1.4% Public Employment Growth During Amended Compact Period
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
Revenues vs Expenditures
8
FY04FY05
FY06FY07
FY08FY09
FY10FY11
FY12$120
$130
$140
$150
$160
$170
$180
$190
$200
$210
$220
Revenues Expenditures
US
$ M
illio
ns
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
External Debt & Service
9
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY20120%
5%
10%
15%
20%
25%
30%
35%
External Debt, % of GDP Debt Service, % of National Gov. Domestic Revenues
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
Growth Scenarios (Real GDP Per Capita)
10
FY03FY04
FY05FY06
FY07FY08
FY09FY10
FY11FY12
$2,050
$2,150
$2,250
$2,350
$2,450
$2,550
$2,650
$2,750
$2,850
Sustained Scenario Dismal Scenario Actual
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
FSM Policy Issues
Public Sector Wages
Tax Reform
Long-Term Fiscal Framework
Compact Trust Fund
11
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
FSM Policy Issues
PUBLIC SECTOR WAGESTotal wage bill had been rising unsustainably from FY2004 to ~FY2010
Wage bill discipline has varied across five governments but now stabilized
Wage bill “freeze” alone had not proven to be effective—broader policy discipline has been required
12
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
Public Sector Wages
13
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
$40
$45
$50
$55
$60
$65
$70
4,000
4,500
5,000
5,500
6,000
6,500
7,000
Wage Cost Public Servants
Wa
ge
Bill
$M
illio
ns
Nu
mb
ers
of
Pu
blic
Se
rva
nts
FSM
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
Public Sector Wages
14
$10
$11
$12
$13
$14
$15
$16
$17
$18
$19
$20
1,500
1,700
1,900
2,100
2,300
2,500
2,700
2,900
Wage Bill Public Servants
Wa
ge
Bill
$M
illio
ns
Nu
mb
ers
of
Pu
blic
Se
rva
nts
Chuuk
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
Public Sector Wages
15
$4.0
$4.2
$4.4
$4.6
$4.8
$5.0
$5.2
$5.4
$5.6
$5.8
$6.0
500
550
600
650
700
750
Wage Bill Public Servants
Wa
ge
Bill
$M
illio
ns
Nu
mb
ers
of
Pub
lic S
erv
an
ts
Kosrae
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
Public Sector Wages
16
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
$12
$13
$14
$15
$16
$17
$18
1,000
1,050
1,100
1,150
1,200
1,250
1,300
1,350
1,400
1,450
1,500
Wage Bill Public Servants
Wa
ge
Bill
$M
illio
ns
Nu
mb
er
of
Pu
blic
Se
rva
nts
Pohn-pei
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
Public Sector Wages
17
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
$4
$5
$6
$7
$8
$9
$10
600
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
Wage Bill Public Servants
Wa
ge
Bill
$M
illio
ns
Nu
mb
er
of
Pu
blic
Se
rva
nts
YAP
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
Public Sector Wages
18
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15
250
300
350
400
450
500
550
600
650
700
750
Wage Bill Public Servants
Wa
ge
Bill
$M
illio
ns
Nu
mb
er
of
Pu
blic
Se
rva
nts
National
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
FSM Policy Issues
TAX REFORMStatus Update: Recent progress suggests tax reform will be effective within the next ___ years
Tax reform is an important component of long-term fiscal management
Worst-case scenarios considered through the LTFF process would be mitigated in the presence of enhanced revenue efforts
20
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
Impact of Tax Reform
Real Reduction vs Tax Reform Revenue
FY13 to FY23:(A) REAL
Reduction(B) Tax Reform
Revenue (B) as % of (A)
National -$1.1 $1.9 166%
Chuuk -$4.4 $1.7 39%
Kosrae -$1.3 $0.5 40%
Pohnpei -$2.9 $5.5 189%
Yap -$1.8 $2.2 121%
FSM -$11.5 $11.8 103%
21
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
Impact of Tax Reform
Legislative Status of FSM Tax Reform
URA RAA MOU NPT Import
VAT rateGRT
Repeal VAT
National P P P R R R
Chuuk P P P
Kosrae P P P
Pohnpei R P R
Yap R P R
Passed Required Not Required
22
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
FSM Policy Issues LONG-TERM FISCAL FRAMEWORK: STATES
Exercise completed in each of the four states
Results incorporated into FY14 budgets
LTFF was designed to address decrement issue with known resources (vs uncertain policy reform efforts) through expenditure reductions
Dilution vs Strategic Consolidation (was LTFF effective?)Wage bill discipline still varied across five governments but improvingRaised awareness of the impact of the decrement over whole periodBroadly participatory; consensus-driven; priority-focused, but…Numerous technical difficulties
23
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
FSM Policy Issues LONG-TERM FISCAL FRAMEWORK: NATIONAL
National government faces a different fiscal picture: revenue buoyancy… though half of the $20 million annual increase since FY2006 is new enough to not be “settled” in national/FSM policy
National contribution to the FSM-wide LTFF will be most useful if it focuses on a gradual, long-term reallocation of resources & if it increases reserves for the benefit of each government
Sensible options include: 1. Saving for the future to reduce burden of adjustment—CTF2. Tax reform and modified revenue/grant formulas with the states (gradually)3. Investing (effectively) to reduce cost structure for state delivery of health and
education services4. Investing (effectively) in economic infrastructure to support private sector
growth
24
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
Domestic Revenue: National & States
25
FY04FY05
FY06FY07
FY08FY09
FY10FY11
FY120
5
10
15
20
25
30
35
40
45
50
$26.6
$27.1$27.3
$47.5
States National
US
$ M
illio
ns
74% Increase from 2006
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
FSM Compact Trust Fund
OBSERVATIONSManagement of the CTF further streamlined and improved; investment costs are admirably low and investment policy monitoring/updates reflect high standard of care
Annual report for FY2012 continues improvements, building on the FY2011 report
Looming need to focus on “distribution policy” per TF Agreement Article 15(1)
Projections on CTF “effectiveness” could be improved for clarity
25
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
FSM Compact Trust Fund
31
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
FSM Compact Trust Fund
34
slideGraduate School USAPacific Islands Training Initiativewww.econmap.org
FSM Compact Trust Fund
35