ADB, JAPAN TO HELP FSM WITH BUDGET, PLANNING

News Release

Asian Development Bank Manila, Philippines Sept. 18, 2007

MANILA, PHILIPPINES - The Government of Japan and the Asian Development Bank (ADB) will assist the Federated States of Micronesia in improving budget and planning processes as part of the overall objective of achieving self-sustaining economic growth.

The Strengthening Economic Management and Planning Project will be implemented over a three-year period at a budget of $475,000. The Japan Special Fund will provide a $400,000 grant through ADB to support the project. The Federated States of Micronesia will provide in kind support equivalent to the balance.

The assistance was in response to the request made by the Federated States of Micronesia to ADB to help national and state governments strengthen their execution of performance-based budgeting under the Strategic Development Plan 2004-2023.

The Strategic Development Plan identifies priority activities needed to generate the growth that will enable the Federated States of Micronesia achieve self-sustainability by 2023. The ADB-backed assistance will address the problematic issues of governance and capacity in financing and implementing the Strategic Development Plan by developing long-term sustainable transition plans, boosting capacity in performance budgeting and linking budgeting and planning processes.

The Federated States of Micronesia, a federation of four states in the Pacific region, relies heavily on foreign aid, particularly from grants provided by the United States government under the Compact of Free Association approved in 1986. Overall public expenditure accounts for around 60% of gross domestic product, there is limited private sector activity and the export base is narrow.

The amended Compact of Free Association, which took effect in 2004, requires quarterly financial and performance reports and gives the United States the right to withhold or suspend funds. The 2023 scheduled end of the compact has focused attention on the need for self-sufficiency.

Assessments by ADB, the United States Government Accountability Office and the International Monetary Fund have identified unsustainable fiscal management and failure to implement key development priorities as major impediments to achieving self-sustaining economic growth.

"Aid flows, in combination with a lack of capacity, have contributed to some poor habits going unchecked – limited financial responsibility, limited monitoring of performance, reliance on the public sector, substitution of aid for raising domestic revenues, and limited demand for policy change. ADB is supporting FSM in turning around these practices," said Emma Ferguson, an Economist in ADB’s Pacific Department.

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