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PALIKIR, Pohnpei, Federated States of Micronesia (Sept. 15, 2000 – FSM Information Service)---The FSM economy has made important strides in recent years. That's the conclusion made by the International Monetary Fund mission that just spent 10 days in consultation with the FSM government.

The IMF mission visited the FSM and issued a statement of praise for the nation's past economic reforms and the second FSM Economic Summit strategy developed in 1999, but the mission also recommended further reforms in several areas.

The mission, which began its bi-annual Article IV Consultation Discussions with various FSM government departments last week, divided its reporting statement into three major sections: Short-term Economic Situation, Fiscal Adjustment Over the Medium term, and Structural Reforms to Promote Private Sector Growth.

In its introduction, the IMF team recognized the difficulty the government had in adjusting to the second step-down in U.S. Compact of Free Association financing and described the nation's commitment to a difficult reform process as admirable.

Still, with economic provisions of the Compact expiring next year, "the medium-term outlook remains uncertain," wrote the team in the statement.

In the Short-term Economic Situation Section, the mission said recent developments have been favorable.

The team found that economic activity has rebounded from the recession that followed the second Compact step-down, with an increase in real Gross Domestic Product of 2 percent in Fiscal Year 1999 and 3 percent in FY 2000.

The team also welcomed increased capital spending on major infrastructure projects while still stressing the need to avoid moving the nation into an overall deficit in 2001.

In the second section, Fiscal Adjustment over the Medium-term, the team recognized the government's efforts at fiscal reduction. Although considering the peculiar geographic and demographic factors faced by the FSM, the mission members still felt that the nation needs to align itself with a government size closer to that of other small island economies. The mission members cited regional evidence linking a smaller government sector with higher rates of economic growth among small island economies.

The IMF mission expressed strong support for the continued program of fiscal and economic adjustment set out in the FSM Planning Framework, 1999-2002.

Consistent with the FSM government's proposal to the U.S. government for future Compact assistance, the IMF mission strongly supported the FSM's plan to commit fiscal surpluses throughout the period of continued Compact funding to enable the building of financial assets in a trust fund to provide investment income for the future.

However, the IMF mission pressed for tight controls of current government spending to remain, including maintaining wage costs at the current level with a goal of letting it decline gradually as a share of the overall economy.

The team felt health and education spending levels need to be maintained, "although there appears to be considerable scope for improving their efficiency."

The IMF mission noted the government's "exceptionally low" tax collections and recommended "broadening the wages and salaries tax to include non-wage income and to bringing public enterprises under the Gross Revenue Tax," according to the concluding statement. The report also supported the government's consideration of reforming the tax system, including the introduction of a Value Added Tax.

In the third segment of their statement, Structural Reforms to Promote Private Sector Growth, the mission endorsed the FSM's stated policy objective of removing obstacles in the way of private sector investment.

The mission pointed to the importance of foreign direct investment, saying "a number of well conceived projects could have a significant impact on the local economy."

In its concluding statement, the IMF mission stressed the importance of continued progress in the areas of good governance and transparency in economic policymaking.

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