slide FSM Economic Review JEMCO-JEMFAC, August 2013 Graduate School USA, Pacific & Virgin Islands Training Initiatives 1

slide Graduate School USA Pacific Islands Training Initiative FSM Presentation Economic Performance Economic Policy Compact Trust Fund 2

slide Graduate School USA Pacific Islands Training Initiative REAL GDP & Per Capita GDP % GDP Growth from FY03 to FY12 0.2% GDP Per Capita Growth

slide Graduate School USA Pacific Islands Training Initiative REAL GDP per Capita by State Chuuk Kosrae Pohnpei Yap 4

slide Graduate School USA Pacific Islands Training Initiative GDP and Migration -7,082 -1,015 -5,334 -1, , % ANNUALLY 5

slide Graduate School USA Pacific Islands Training Initiative Average Wage Rates 6 2.9% Average Private Wage Growth During Amended Compact Period 2.1% Average Public Wage Growth During Amended Compact Period

slide Graduate School USA Pacific Islands Training Initiative Employment by Sector 7 0% Private Employment Growth During Amended Compact Period -1.4% Public Employment Growth During Amended Compact Period

slide Graduate School USA Pacific Islands Training Initiative Revenues vs Expenditures 8

slide Graduate School USA Pacific Islands Training Initiative External Debt & Service 9

slide Graduate School USA Pacific Islands Training Initiative Growth Scenarios (Real GDP Per Capita) 10

slide Graduate School USA Pacific Islands Training Initiative FSM Policy Issues Public Sector Wages Tax Reform Long-Term Fiscal Framework Compact Trust Fund 11

slide Graduate School USA Pacific Islands Training Initiative FSM Policy Issues PUBLIC SECTOR WAGES Total 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

slide Graduate School USA Pacific Islands Training Initiative Public Sector Wages 13

slide Graduate School USA Pacific Islands Training Initiative Public Sector Wages 14

slide Graduate School USA Pacific Islands Training Initiative Public Sector Wages 15

slide Graduate School USA Pacific Islands Training Initiative Public Sector Wages 16

slide Graduate School USA Pacific Islands Training Initiative Public Sector Wages 17

slide Graduate School USA Pacific Islands Training Initiative Public Sector Wages 18

slide Graduate School USA Pacific Islands Training Initiative FSM Policy Issues TAX REFORM Status 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

slide Graduate School USA Pacific Islands Training Initiative Impact of Tax Reform Real Reduction vs Tax Reform Revenue 21

slide Graduate School USA Pacific Islands Training Initiative Impact of Tax Reform Legislative Status of FSM Tax Reform 22

slide Graduate School USA Pacific Islands Training Initiative 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 improving Raised awareness of the impact of the decrement over whole period Broadly participatory; consensus-driven; priority-focused, but… Numerous technical difficulties 23

slide Graduate School USA Pacific Islands Training Initiative 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—CTF 2.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 services 4.Investing (effectively) in economic infrastructure to support private sector growth 24

slide Graduate School USA Pacific Islands Training Initiative Domestic Revenue: National & States 25 74% Increase from 2006

slide Graduate School USA Pacific Islands Training Initiative FSM Compact Trust Fund OBSERVATIONS Management 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

slide Graduate School USA Pacific Islands Training Initiative FSM Compact Trust Fund 31

slide Graduate School USA Pacific Islands Training Initiative FSM Compact Trust Fund 34

slide Graduate School USA Pacific Islands Training Initiative FSM Compact Trust Fund 35