The Federated States of Micronesia (FSM) is a lower middle income island nation of 104,832 in 2021, an eight percent population decline from 2019. The inhabitants live on 607 islands with a total land area of 271 square miles and an exclusive economic zone (EEZ) of over one million square miles (2.6 million square km) in a remote area of the Western Pacific Ocean. The nation is composed of distinct, separate cultures and languages organized into four states under a weak national government. The FSM is part of the former U.S.-administered Trust Territory of the Pacific Islands, gaining independence in 1986. Since independence, the United States has provided over $100 million annually to the FSM under a Compact of Free Association (Compact or COFA) with the United States. FSM uses the funds for development under the administration of the U.S. Department of Interior’s Office of Insular Affairs (DOI). The World Bank estimates FSM’s 2020 Gross Domestic Income (GDI) at $3,950 per person, a trend reflecting no growth over the previous 10 years. The national currency is the U.S. dollar.
Commercial fishing remains the key economic sector in the FSM. The country’s primary sources of income are the sale of fishing rights ($70 million in FY2020), corporate income taxes, mainly from offshore corporate registrations for captive insurance ($10 million in FY 2020), and special revenue grants ($26 million in FY2020). The FSM continues largely as a subsistence economy, except in larger towns where the economy is centered on government employment and a small commercial sector. The cash economy is primarily fueled by government salaries paid by Compact funds (70 percent of employed adults work in the public sector) and, to a much lesser degree, by family remittances and Social Security benefits paid to FSM citizens who previously worked in the United States or who are the surviving spouse of an American citizen.
Compact funding was anticipated to change in 2023 from direct funding in the form of sector grants, to the use by the FSM of proceeds derived from a trust fund developed from U.S. contributions over 20 years. (Note: The Compact of Free Association is under renegotiation as of June 2022 and it cannot be determined if the direct funding mechanism of sector grants will continue or end). As of September 2021, the balance of the Compact Fund stood at $1 billion. FSM has also created its own trust fund, contributing $17 million in FY2020, raising its overall balance to $307 million. (Note: audited balances for the FSM Trust Fund for FY2021 have not yet been published).
The FSM GDP for 2018 was $402 million, a 19.5 percent increase from 2017 at constant prices. The economy recorded a trade deficit of $125 million in goods and services for the same year. FSM government debt at $83.2 million was low, giving FSM a low 23.7 debt/GDP ratio, one of the lowest in the Pacific. Major creditors are the Asian Development Bank (52.5 percent of debt) and the U.S. Rural Utility Services (20.7 percent of debt). Despite the low levels of debt in absolute terms, the International Monetary Fund deemed FSM to be at a high level of debt stress due to the uncertainty created by looming Compact Funding reductions in 2023 and the possible need to borrow to maintain operations of state governments.
Foreign direct investment (FDI) is almost nonexistent due to prohibitions on foreign ownership of land and businesses (in specified industries), difficulties in registering companies (the process requires approvals from the state governments as well as the national government), poor private sector contract enforcement, poor protection of minority (foreign) investors’ rights, weak courts, and weak bankruptcy processes. In addition, lack of infrastructure, poor health and education systems, the scarcity of commercial flights, and high costs of imported goods and various business services also contribute to the lack of FDI.
Pohnpei State’s Legislature amended its laws in September 2018 to reduce requirements on foreign investment. The law specified the business sectors that permit FDI, with the remaining sectors available for Pohnpei citizens only. Domestic capital formation is very low. Commercial banks are classified as foreign entities and their ability to provide commercial loans, especially secured by real estate, is very limited. Banks view all credit to FSM borrowers as essentially unsecured.
Most national political power is delegated to the four states by the FSM Constitution, including regulation of foreign investment and restrictions on leases. Thus, investors must navigate nationwide between five different sets of regulations and licenses. U.S. citizens can live and work in the FSM indefinitely without visas under the Compact but cannot own property on most FSM islands. FSM voters select national legislators (senators). The national senators then caucus to select the president and vice-president from among the four at-large senators. There are no political parties. On May 11, 2019, Senators selected David Panuelo and Yosiwo George as president and vice president, respectively, for four-year terms. The most recent elections for Congress were held March 1, 2021.
The FSM federal government closed its borders in March 2020 in response to the COVID-19 pandemic and did not allow any repatriations until May 2021. Since that time, it has repatriated citizens and essential workers intermittently via a single flight per month into the country. The shut-down has adversely affected the FSM’s tourism industry and the ability of the international community to implement infrastructure programs needed to support investment. Recently, flights have increased in frequency and quarantine has been reduced, with plans to fully reopen in August 2022.
Only Yap State has undertaken any green energy initiatives with a single pilot wind project. It has also implemented several small-scale solar projects on outer islands.
|TI Corruption Perceptions Index||2018||44 of 100(Regional)||http://www.transparency.org/research/cpi/overview|
|Global Innovation Index||N/A||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2012||$30||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2020||$3,950||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
3. Legal Regime
4. Industrial Policies
5. Protection of Property Rights
6. Financial Sector
7. State-Owned Enterprises
The FSM has established state monopolies and maintains state-owned enterprises (SOEs) in the areas of fuel distribution, telecommunications, and copra production. These companies are Vital Energy (the parent of FSM Petroleum Corporation, FSMPC), the FSM Telecommunications Corporation, the FSM Telecommunications Cable Corporation, and the FSM Coconut Development Authority, which was folded into Vital Energy in 2014. Legislation passed in 2016 opened the telecom market to private companies to qualify for World Bank funding for broadband development, including a submarine fiber optic cable to Yap and Palau. Other prominent SOEs include the National Fisheries Corporation, the FSM Development Bank, the College of Micronesia, and Caroline Islands Air, Inc.
FSM does not currently adhere to the convention on the Organization of Economic Cooperation and Development (OECD) guidelines on corporate governance of SOEs.
8. Responsible Business Conduct
There is little awareness or definition of responsible business conduct (RBC) in the FSM. However, most local businesses are small and generally responsive to the community in which they operate. The two U.S.-based companies in the FSM generally follow RBC principles. The host government does not promote RBC or factor it into evaluations for public contracts, nor does the country adhere to the convention on OECD guidelines for multinational enterprises.
The FSM has laws prohibiting corruption and there are penalties for corrupt acts. The National Office of the Public Auditor, with support from the Department of Justice, is the entity most active in anti-corruption activities. Several senior ex-FSM Government officials were convicted of corruption under the FSM Financial Management Act, usually involving procurement fraud. An FSM government transportation official pled guilty April 3, 2019, in U.S. District Court to conspiring to launder bribe money he accepted from a U.S.-citizen president of a Honolulu civil engineering company. The official was then-FSM President Christian’s son-in-law who served 18 months in prison in the United States and was subsequently deported back to the FSM in 2021. Corruption is not a predicate offense under the money laundering statute. Bribery is punishable by imprisonment for not more than 10 years in addition to disqualification from holding any government position. Traditional custom permits a lawbreaker to ask and receive forgiveness by paying a fine to those victimized. Given many FSM national, state, and municipal government officials also own businesses, there exists significant potential for conflicts of interest.
The degree to which government officials accept direct bribes is unknown but believed to be commonplace, especially deriving from state actors. Pohnpei State and Yap State are currently prosecuting corruption cases. The Yap State governor and lieutenant governor reported receiving cash envelopes in inauguration presents which they promptly handed to Yap State’s Acting Attorney General who conducted an investigation. The FSM has not signed or ratified the UN Convention on Corruption or the OECD Convention on Combating Bribery.
10. Political and Security Environment
FSM enjoys a stable, democratic form of government with no history of civil or political strife. The islands became part of a UN Trust Territory under U.S. administration following World War II, after periods of Spanish, German, and Japanese control. In 1979, the islands adopted a constitution, formally becoming the Federated States of Micronesia. Independence came in 1986 under a Compact of Free Association with the United States that was amended and renewed in 2004 and portions related to financial assistance currently are being renegotiated. Under this agreement, the U.S. Government guarantees the FSM’s external security.
The country’s last presidential election was held in March 2019, in which incumbent Peter Christian lost his bid for a second term to current President David W. Panuelo. The population’s main concerns during the campaign season were related to the high unemployment rate, depletion of marine resources from overfishing, corruption, and a reliance on foreign aid.
11. Labor Policies and Practices
Wages in FSM are low with minimum wage laws for government employees in all states and the federal government. Only Pohnpei has a minimum wage for the private sector at $1.75 per hour. However, employers report that they cannot hire employees for less than $3.00 per hour. Employment in the public sector is preferred because the wages are significantly higher. The minimum hourly wage for employment with the national government was $2.65. The minimum hourly wage for government workers in the individual states was: Pohnpei $2.00, Chuuk $1.25, Kosrae $1.42 and Yap $1.60. The FSM’s minimum wage was last adjusted January 1, 2015.
There are no laws regulating hours of work (although a 40-hour work week is standard practice, with 32 hours standard in Kosrae State), nor are there enforceable standards of occupational safety and health. While there was one federal regulation that required that employers provide a safe workplace, neither the Department of Health nor the Environmental Protection Agency has enforcement capability, resulting in varying working conditions. There is no law for either the public or private sector that permits workers to remove themselves from dangerous work situations without jeopardizing their continued employment.
Skilled labor in FSM is limited, with few FSM citizens trained to perform tasks of any technical nature. Foreign workers, primarily Filipinos, are typically hired to fill roles requiring technical skills. In September 2018, after having banned all Filipino workers from working in the FSM in mid-2018, the Philippine Department of Foreign Affairs revised its deployment ban on Philippine labor coming to the FSM to ban only new recruits, exempting the 2,000 Filipino workers already in country. Philippine overseas foreign workers were FSM’s main source for educated and skilled labor but, with the ban in place, this pool can no longer be replenished.
A labor dispute at a privately run hospital in Pohnpei led to the dismissal or resignation of several doctors and surgeons, all from the Philippines. As a result, service hours were cut and capacities are in doubt. The hospital is one of the embassy’s preferred medical providers, as the island’s only other hospital did not meet hygienic standards, although the medical care itself was generally adequate for non-specialized treatment. Likewise, wage disputes in Yap state resulted in the mass resignation of 40 doctors and nurses from the Yap State Hospital, triggering a state of emergency and frantic search for replacement medical personnel.
Most doctors, nurses, accountants, lawyers, engineers, construction foremen, and heavy equipment operators are overseas workers from the Philippines.
The FSM has no collective bargaining or strikes. Unemployment is high, and workers are easily replaced. There is no child labor, except in small family businesses. Occupational safety and health standards are low.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
|Host Country Statistical source*||USG or international statistical source||USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other|
|Host Country Gross Domestic Product (GDP) ($M USD)||N/A||N/A||2020||$3,950||www.worldbank.org/en/country
|Foreign Direct Investment||Host Country Statistical source*||USG or international statistical source||USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other|
|U.S. FDI in partner country ($M USD, stock positions)||2020||$1.0||2012||$30.0||https://apps.bea.gov/international/factsheet/|
|Host country’s FDI in the United States ($M USD, stock positions)||N/A||$1||BEA data available at https://www.bea.gov/international/
|Total inbound stock of FDI as % host GDP||N/A||N/A||UNCTAD data available at: https://stats.unctad.org/handbook/
Table 3: Sources and Destination of FDI
Data not available.
Table 4: Sources of Portfolio Investment
Data not available.
14. Contact for More Information
1286 U.S. Embassy Place, Kolonia, Pohnpei 96941