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5 Year Amended Compact Review is Under Way

Palikir, Pohnpei (FSM Information Services): July 29, 2010 - On July 23, 2010, the Compact Review Committee (the "CRC"), headed by Fabian Nimea, Director of the Office of SBOC, gave an informal presentation to President Mori, Vice President Alik, and all Cabinet members, regarding the status of the 5-Year Compact Review.

"The purpose of this review," explained Nimea, "is to assess what has and has not worked, and what is needed now, and in fifteen years to come, to meet the overarching goals of the amended Compact. It is to identify what mid-course adjustments can be made that will bring us onto the best path towards those goals."

The Compact Review focuses on four status indicators: FSM's general social, political and economic conditions; the use and effectiveness of US financial, program and technical assistance in FSM; FSM's economic policy reforms; and FSM's efforts to increase investments in the country, be it private investment or Compact and non-Compact Trust Funds investment.

To date, the CRC has produced a first draft of the FSM Compact Review Report and traveled to Washington D.C. recently to discuss Compact Review matters with Anthony Babauta, Assistant Secretary of the US Department of the Interior, Nikolao Pula, Director of the US Office of Insular Affairs (OIA), and other key officials of the US Government.

The U.S. Compact Review team is led by Tom Bussanich, Director of OIA Division of Budget & Grant Management, and assisted by Wali Osman, OIA Economist, and other staff from the OIA Honolulu field office. The US Review Report, as mandated by U.S. P.L. 108-188 Section 104 (h), is to be submitted to the US Congress no later than the end of the calendar year following the first five years of the amended Compact. That Report must include the FSM Government's comments.

Nimea summarized, based on the CRC's findings, that to promote FSM's efforts for economic advancement and budgetary self-reliance, the country needs to focus on the following: the development in the areas of human resource, economic infrastructure and private sector; the institution of internal policy reforms to impose a new direction for the economy; improve funding of the Compact Trust Fund and fully adjust inflation to increase the purchasing power of each dollar of Compact grant funds received.

Regarding the overall FSM economy and private sector development, Samuel Brazys, SBOC Senior Economist, highlighted that the FSM GDP has been more or less stagnant for the past fifteen years. He explained the stagnation is the result of economic "Dutch Disease." Dutch Disease is an economic situation caused when consumers receive and spend money from external sources, triggering local businesses to shift their efforts to retail and service industries, rather than production of "tradable" goods, such as manufactured, agricultural or aquaculture products. The danger being that once the external sources of money dry up, the purchase power of local citizens may no longer be able to afford supporting the retail industry and the private sector will crash.

Brazys stressed that to develop the private sector, the country needs to create a hospitable infrastructure environment with reliable means of transportation, communications and energy ("economic infrastructure"). Brazys stressed that of the $260 million allocated to projects under the Amended Compact, 30% has gone to fund economic infrastructure, whereas 55% has gone to fund social infrastructure projects such as health and education. The CRC suggests working within both the Compact infrastructure sector grant, as well as with other financing options such as Asian Development Bank, World Bank, and foreign country donors to secure more funding for economic infrastructure projects.

Addressing Internal Policy Reforms would mean passing appropriate laws and regulations that support private sector development, such as expanding Intellectual Property Rights and Competition Policy. And as far the Compact Trust Fund is concerned, Brazys said economic data shows the Compact Trust Fund still needs annual contributions of $12.5 million to avoid a risk of recession by 2024.