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By Gaynor Dumat-ol Daleno

HAGÅTÑA, Guam (April 30, 2001 - Pacific Daily News)---The Federated States of Micronesia economy stands at a crossroads this year as it continues to negotiate for continued U.S. funding that’s key to its economy.

FSM representatives to the negotiations, which started in late 1999 and are tentatively scheduled for a third round of talks as early as a few weeks from now, take on the challenge as their government acknowledges certain aspects of a federal report that points out mistakes concerning the FSM government’s spending of previously issued money from Uncle Sam.

For two decades, through 1998, the U.S. government has provided $1.08 billion in funding to the FSM under what’s called a compact, but the FSM government doesn’t have much to show in terms of developing its private sector economy despite such infusion of federal funds, according to a U.S. General Accounting Office report submitted to the U.S. Congress last year.

An existing financial aid agreement under the compact ends this year, said FSM Consul General Samson Pretrick, who is based on Guam. In 1986, the United States government entered into a Compact of Free Association with the FSM, which allowed the United States exclusive access to the FSM for military use and the FSM to receive financial assistance to secure self-government and to become economically self-sufficient.

The federal report states that, instead of developing private-sector growth, federal compact funds were largely used for government spending, including creation of public sector jobs at high wages that created a barrier to growth of private businesses.

Guam and the neighboring Northern Mariana Islands have an interest in the FSM’s efforts to improve the economic conditions for its people back home. FSM residents in search of better economic opportunities have migrated to such U.S. jurisdictions as Guam and the Northern Mariana Islands, raising concern from host governments because of perceived strains on their public services and welfare resources. Data from 1997 show that about 7,000 FSM citizens are living on Guam, according to the FSM consul general.

The following are examples of alleged FSM spending problems mentioned in the report, and the FSM government’s responses:

· The FSM public auditor reported that, in the state of Chuuk, $1.5 million was spent on cars and boats that were simply given away to individuals for their personal use. The U.S. Embassy in the FSM described such spending as "cars and boats for votes," though a written FSM government response says that spending was not a misuse of compact funds because the boats are key to vital transportation needs and the livelihood of islanders.

· FSM Development Bank officials acknowledged they made bad-debt provisions of $12 million in likely loan losses involving compact funds in 1998, about two-thirds of the value of the bank's compact-backed loan portfolio.

· In Pohnpei, the state government spent $870,000 to develop a pepper exporting industry, an initiative that failed and drove the one successful private-sector pepper company into bankruptcy. The FSM government’s written response to the federal report was that the government pepper venture closed because of the criticism it received for competing with private enterprise.

· The FSM government, in its written response to the federal report, acknowledges there’s little doubt that a number of business ventures by the FSM government failed to live up to expectations.

However, the FSM government reasoned that during the early years of the compact, there were no defined policy guidelines for how investment programs should be carried out.

Pretrick said the FSM government, in general, admits it had "some mistakes" in the course of developing its own economy.

In the area of fisheries, for example, some FSM government fisheries projects didn’t turn out right and that was in part because of the island government’s limited expertise, he said.

"Being a young nation we have limited experience in economic development areas," Pretrick said.

As the FSM continues with the talks for fresh financial assistance from the U.S. government, it will try to drive home the message that the missteps will not happen again.

"We hope these mistakes will be used as a good lesson, particularly in fisheries," Pretrick said.

In its written response to the federal report, the FSM government points out some economic progress, stating that the FSM economy was 32 percent larger in fiscal 1999 than it was in fiscal 1987.

The FSM will have another chance to state its case during the third round of compact talks, which Pretrick said are tentatively scheduled to take place sometime next month, most likely in Honolulu, Hawai’i. The first round of talks occurred in November 1999 and the second round followed in May last year, he said.

The FSM government hopes to reach a new compact funding agreement by this year because funding under the current agreement runs out this year, Pretrick said.

Pretrick said if no agreement is reached by the end of this year, a two-year extension of the current compact funding agreement kicks in, and that will mean about $40 million annually in direct compact funds, he said.

The consul said the FSM government expects that the United States will agree to grant another package of compact funding. The question that will be ironed out at the talks is how much money should the FSM receive, Pretrick said.

The FSM entered the first round of talks with a request that the United States provide $80 million a year in compact funding for the next 20 years, plus $20 million a year for a trust fund, Pretrick said.

During the second round of talks, the federal panel came up with a counter proposal -- about $60 million to $70 million a year in compact funding and $15 million a year for the trust fund, Pretrick said.

He said the FSM government has embarked on economic reform efforts that began in 1995 and that those initiatives, which include downsizing of the size of the FSM government, continue to this day.

"We realized we need to do some changes to develop the economy while reducing the public sector (spending)," he said.

Federated States of Micronesia

Gross Domestic Product, 1999: $230 million.

Annual rate of real GDP growth: 2.5 percent.

Population estimate, 1999: 116,268.

Annual rate of population growth: 2.1 percent.

FSM government numbers stated in a U.S. General Accounting Office report.

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