STATEMENT BY HON. LEO A. FALCAM
VICE-PRESIDENT OF THE FEDERATED STATES OF MICRONESIA
to the
THIRD CONSULTATIVE GROUP OF DONORS FOR THE FSM
Tokyo, Japan, January 26, 1998
Check Against Delivery
Mr. Chairman, on behalf of the Government of the Federated
States of Micronesia and my delegation, I thank you and the Asian
Development Bank for convening this Third Consultative Group
Meeting for the FSM. I take this special opportunity to thank
the Government of Japan for so graciously hosting this important
meeting even at a time when your Government is playing a leading
and vital role in resolving the financial turmoil facing many
of the countries in the Asian region. Let me also thank each
of the Governments and institutions here represented for your
continued interest and participation in our long-term development
efforts. The CG process remains an important part of our own
efforts in adjusting to the new economic realities which we already
face and in adjusting in the long-term to reduce our young nation's
significant dependency on external assistance.
Today is a particularly important day for some represented
here- I am sure the Americans
attending are guessing that I might be referring to their Super
Bowl. In fact today, January 26th, is Australia Day.
The Australian Ambassador to the FSM was unable to attend this
meeting due to his duties in observing this day back in Micronesia.
perhaps, Mr. chairman, I could reserve a moment over lunch to
offer a toast to our Australian friends.
Before moving ahead with the substance of my presentation,
it is appropriate to introduce the members of our delegation
and to explain in some detail the special circumstance surrounding
their current status. First, let me introduce the Honorable Sebastian
Anefal, until January 1, 1998, the Secretary of our Department
of Resources and Development; and the Honorable John Ehsa, who
served as our Secretary of Finance -
and who serves as the FSM's Governor to the ADB, World Bank
and the IMF. Our delegation also includes Mr. Lorin Robert, Assistant
Secretary of Foreign Affairs for Asia, Pacific, Africa and Multi-lateral
Affairs; and two of our economists from the EMPAT team, Team
Leader Dr. Mark Sturton and Resident Advisor Mr. Kevin O'Keefe.
In my introductions you will have noticed the use of the term
"former Secretary" a number of times. Mr. Chairman,
the National Government of the FSM is currently in a state of
transition. On January 1, 1998, we implemented our Restructuring
Act. This reform has reduced the number of departments and offices
in our central Government from ten to six. The ten heads of departments
and offices have submitted their resignations, as required by
the new law, and the reduced Cabinet will be filled by six presidential
nominees. Those six nominees will then be subject to confirmation
by the FSM Congress. This restructuring will not be easy, nor
will it be perfectly smooth. We ask our partners to bear with
us through the transitional period. We are confident that this
new structure will lead to an improvement in Government performance.
More importantly for members of the CG, it will result in an
improvement in our ability to manage our economy and to efficiently
and effectively utilize the technical and financial assistance
offered by our donor partners.
While this is my first attendance at a Consultative Group
meeting, it is not by any means a new involvement for me in our
nation's overall Economic Policy Reform Program. Let me
take a brief step back to the genesis of our policy reform program.
That program was based upon the outcomes of a comprehensive,
broad-based process of consensus building through National and
State Economic Summits in late 1995 and throughout 1996. As a
member of the Congress of the FSM during that period I observed
a transformation in attitudes and understanding about the urgent
need for rigorous reforms. This transformation was evident not
only among my colleagues in National and State leadership positions,
but also among our constituents. Please do not misunderstand
my point here - I am not saying
these reforms are being accepted uniformly or without strong
opposition. The increasingly rapid pace of our reforms is somewhat
overwhelming to many individuals and their families in Micronesia.
The length of time during which we anticipate further sacrifices
to be necessary is only now becoming evident. Many had hoped
the reforms would be less pervasive and that they would be finished
sooner. Even more had believed there would be more rapid private
sector growth to offset income losses. what I can say without
reservation is that there has been a shift in public attitude
that has made our reform process feasible.
Our reform process has been thoroughly described in past submissions
to the CG meetings. In summary, the governments of the FSM have
embarked upon a two-pronged adjustment strategy that involves:
Public Sector Reforms - designed
to put our Governments and our Public Enterprise sector to an
adjustment part to sustainable finances and rational service
levels; and
Private Sector Reforms -
designed to improve the economic environment for private sector
growth, especially in those productive activities that earn dollars
from abroad.
Mr. Chairman, I can see from reviewing most of the extensive
materials related to our evolving relationship since the first
CG in October of 1995 that our reports and presentations have
moved consistently in a desirable direction. Put simply, the
FSM has moved from promises and plans to rigorous reform implementation.
The first CG meeting focused almost exclusively on our overall
strategic approach to economic adjustment -
while it was based on a seminal event, the First Economic Summit,
it was still largely a presentation of plans without a specific,
time-bound implementation schedule. Our second meeting provided
a refinement of our strategic plans and, especially in the case
of Chuuk State, a report on some of the significant reform which
had begun to be implemented by that time. For this our third
CG meeting, I would like to report almost exclusively on implementation
progress to date and, based on that experience, the needs we
have to maintain our reform momentum and to achieve the long-term
goal of shifting the balance of our economy away from public
sector dominance.
Mr. Chairman, my presentation this morning will highlight
three key areas:
First and foremost, we wish to report on the rigorous reforms
that have been implemented in the FSM as part of our overall
Economic Policy Reform Program.
Second, we want to draw our donor partners' attention
to the gradual shift in reform focus we wish to implement over
the coming 1-3 years - consolidating
our public sector reforms while accelerating reforms to our private
sector economic environment.
Third, we want to outline, and in some cases specify, the
technical and financial assistance we hope the donor community
will provide to accelerate our adjustment toward a private sector-led
economy. These will include continued donor support for the implementation
of our reform efforts, and new support to bolster public infrastructure
investment and to spur the growth of foreign direct investment.
Let me move now from my introductory remarks to a summary
of the progress the FSM has made to date in implementing our
overall Economic Policy Reform Program.
1. Report on Public Sector Reform Implementation
Mr. Chairman, before addressing some of the specific reforms
that have been implemented in the FSM, I want to discuss the
reform process under our two-pronged adjustment strategy to date
from what I will call a "big picture" perspective.
In the first two years of our adjustment program there has not
been an ideal balance between expenditure-cutting and revenue-raising
reforms; neither has there been an ideal balance between private
sector promoting reforms and public sector reforms. However,
as I am sure representatives of the IMF, the World Bank and
the ADB are keenly aware, it has been necessary for us to respond
with a sense of urgency and with fast-acting reforms to adjust
to the declining external assistance we have received in the
past year. Just as importantly, we are operating under the shadow
of uncertainty over funding levels available to our nation after
the year 2001. This has left us with no sensible alternative
but to implement a strategy which will simultaneously reduce
the costs of operating our Government services, focus our limited
public investments on improving our infrastructure, and create
an attractive economic environment for domestic and foreign investment
in private, productive activities.
Whether an ideal theoretical balance among reform areas has
been achieved or not, is just that -
a theoretical question In reality, it has been necessary to focus
heavily on the implementation of pay cuts and public service
retrenchment to balance our budgets. While we have made some
progress in improving the economic policy regime for private
sector investment and production, there have been more sweeping
and rigorous reforms affecting almost every aspect of our five
Governments and our public enterprise sector.
Mr. Chairman, it will come as no surprise to most of the members
of the CG that I was tempted to divide this portion of my presentation
into five parts - one for each
of our five Governments. The FSM is, after all, a Federation
of States - each of which holds
a considerable degree of autonomy. However, I have resisted that
temptation. Firstly, because our report to the CG donors includes
detailed reform monitoring information for each Government; and
secondly, because in a general sense the reform process has considerable
similarity across our four States and the National Government.
Instead, I will cover two areas; public sector reforms and
measures we have implemented to mitigate the negative impact
of reforms on individuals and their families.
Public Sector Reforms
The Asian Development Bank has played a critical role in the
design and implementation of the FSM's Public Sector Reform
Program (PSRP). The most important aspect of this program, and
the one for which ADB funding has been critically important is
the Early Retirement Program (ERP). The ERP began effectively
with the start of fiscal year 1998 -
on October 1st, last year. Prior to that, there had
already been significant reductions in the size of Government
through a combination of attrition, hiring freezes, termination
of temporary and contractual personnel and transition of some
employees to public enterprises (especially in the area of public
utilities). Prior to the ERP, these measures led to a reduction
of total Government workforce by about 500 positions. Since the
start of the ERP, a further 500 positions have been eliminated.
The FSM's reduction of 1000 positions to date amounts to
a 14 percent reduction in the number of Government employees.
This brings the FSM nearly 60 percent of the way to its target
reduction of approximately 1700 positions before March of 1999.
Fiscal expenditures have been significantly reduced from 1995
levels. On a consolidated basis across all five Governments,
recurrent expenditures have been cut by 19 percent in nominal
terms between FY95 and FY98. Expenditures on personnel have fallen
by an even greater amount, 21 percent, over the same period.
In inflation-adjuster terms, this amounts to a reduction of more
than one-third.
In Chuuk State, the impact of reforms is even greater. While
recurrent expenditures have dropped by 22 percent since FY95,
personnel expenditures have been trimmed to a greater extent
than anywhere else in FSM. As a result of the combination of
deep cuts in workforce size and enforcement of a four-day week,
personnel expenditures have fallen by 34 percent in nominal terms - over 45 percent in inflation adjusted
terms. Thus personnel expenditures, which at the most serious
stage of Chuuk State's crisis made up over two-thirds of
current expenditure, now account for a less unreasonable 54 percent
share.
While I am still on the subject of fiscal reform in Chuuk
State, allow me to share with the CG donors a brief summary of
the FSM National Government's recent effort to support the
financial recovery process in Chuuk State. In August of last
year, the Congress appropriated money for a $5 million concessional
recovery loan to assist the State in consolidating its debt to
enable the State to pay urgent debts to domestic and international
creditors. The first tranche of the loan was recently released
when Chuuk State met the conditions set by the National Government.
Conditions included maintenance of expenditure-cutting and revenue-raising
reforms and establishment of certain controls to ensure payment
of outstanding obligations. In addition to payment of #3.8 million
of debts from the recovery loan, Chuuk state has already used
its own current year revenues to pay an additional #2 million
of prior year debts. Current projections have Chuuk State paying
off its creditors before the end of next fiscal year -
with the exception, of course, of repayment of the recovery loan,
which will be repaid to the National Government in 1999-2001.
Mr. Chairman, Kosrae State has already exceeded the total
workforce reduction targets set out in its PSRP. With a reduction
of 140 positions - 107 through
the ERP - they have achieved
a 17 percent reduction in positions. With the addition of a pay
cut of 12.5 percent, Kosrae State will see its personnel expenditures
reduced this year by 26 percent from the FY96 level. Personnel
makes up less than 50 percent of total recurrent expenditures
for the first time since the first stepdown in Compact funding
in 1992. Having exceeded its targets, the State is still very
eager to receive its second tranche drawdown from the PSRP. The
funds will support further workforce reduction and continued
implementation of their training programs for departing employees
and their remaining public servants.
Pohnpei State will see its total recurrent expenditures reduced
this year by 16 percent from FY95 levels. Personnel expenditures
will be 14 percent less than in FY95. This is due to somewhat
late start the State has had in implementing its ERP, although
it has already met its March 1998 second tranche drawdown target
of a 10 percent workforce reduction. Pohnpei State is currently
undertaking a financial review process with the support of the
National Government and EMPAT to make recommendations for accelerating
their revenue increase reforms and increasing the rigor of their
expenditure-cutting efforts. The process will lead to a series
of recommendations for action in a special session of their State
Legislative next month.
Yap State was the first to utilize the PSRP funding for its
ERP. With a reduction of 242 positions from Government, or 23
percent, Yap has exceeded its second tranche target and is about
80 percent of the way to fulfilling its commitments for the end
of the PSRP in March of next year. Recurrent expenditures will
be 17 percent less this year than they were in 1995. By FY98,
personnel will make up an FSM-low of 32 percent of recurrent
expenditures.
The most notable progress in public sector reform implementation
by our National government is the Restructuring. Our transition
process is still underway, but it is anticipated that the restructuring
alone will enable the Government to eliminate 50 positions through
consolidation and elimination of redundancies. This will be in
addition to the 40 ERP participants who have already departed
Government. Somewhat to our surprise, there has been quite a
significant voluntary component to the workforce reduction at
the national level as well. All of the initial ERP participants
were volunteers in non-essential positions. As many as 60 additional
volunteers await the second phase of our restructuring implementation
before they can be approved for ERP participation.
The National Government has also acted to improve the efficiency
of the taxation system. The new Customs Act became effective
on October 1, 1997. It is projected to increase revenues from
that tax by 35-40%. Its most important features are a shift from
free-on-board (FOB) to the more economically appropriate cost-insurance
freight (CIF) taxable base, elimination of a large exemption
for items that were declared not re re-sale, and major improvements
in the collection enforcement and penalties sections.
Having improved the structure of the Customs tax, there is
now a need to focus on more comprehensive tax reform. Over the
coming months, the Congress will consider a proposal submitted
by the executive branch to shift toward a broad-based consumption
tax and to implement a major change in the institutional structures
for tax collection in the nation. An FSM-wide Tax Authority is
being considered to consolidate the National, State and local
tax administration efforts.
While the National government faces less fiscal pressure than
the State Governments, it has recognized the importance of sharing
the fiscal adjustment burden. Congress has acted to shift the
revenue-sharing formula to pass more revenues from National taxes
to the States. Starting on October 1, 1998, 70 percent of tax
revenues will go to the State in which it is collected -
an increase from the current 50 percent level. This will effectively
transfer $3-4 million from the National Government to the four
States for capital development. In order to avoid a temporary
windfall in unrestricted, recurrent revenues, we have required
that the additional 20 percent revenue-sharing be restricted
to capital expenditures in the areas of health and education.
Thus, the States will still face the same fiscal pressures on
their recurrent budgets, while having increased resources for
development priorities.
Efforts to Mitigate the Social Costs of Economic Reforms
The Public Sector Reform Programs in each of the five governments
contain objectives for the mitigation of the negative social
and economic impacts of the overall adjustment program in the
FSM. the bulk of the US$18 million in financial support from
the ADB is targeted for early retirement compensation packages.
Each of the States has begun its program and over 500 departing
employees have already benefited from the program nationwide.
In addition to financial support for departing employees and
their families the Governments have also established a variety
of outplacement counseling and training programs. Each State
is benefiting from the presence of the UNDP-sponsored entrepreneurial
training program. Ultimately, the best method of mitigating the
income losses from reductions in public sector employment levels
will be to stimulate growth in the domestic economy -
which leads me to part two of my presentation and the second
progress of our economic strategy.
II. Accelerating Reforms to the Private
Sector Economic Environment
While it is true that we have focused much of our attention
on policy measures directly impacting on the fiscal bottom line,
there is now a gathering momentum to implement reforms to our
private sector policy environment. These reforms will fulfill
our commitments to our donor partners and, more importantly,
they will stimulate the creation of jobs. I should add that the
impatience of our leaders - including
me - is also evident. We simply
must find ways to stimulate domestic and foreign investment in
our economy. The alternative of rapidly declining family income
levels followed by stagnation is not something we are willing
to accept without making every reasonable effort.
The FSM is now facing three sources of pressure to create
more jobs for our citizens in the domestic economy. First, the
decline of the Government sector leaving many retiring employees
searching for jobs in the private sector. Second, the decline
in household income due to the decline in external assistance
resulting in a desire of many currently unemployed and under-employed
citizens to seek formal employment. Finally, the continuing growth
of our population and the youthful demographics of our nation
will result in a continuously high demand for job creation.
So what are we doing in this area? First and foremost, we
are sending a loud and clear message to potential domestic and
foreign investors. That message is this:
"The Governments of the FSM have reduced -
and will continue to reduce -
their direct and dominant role in the domestic economy."
Rather, Governments are shifting already to a role of support
and facilitation for private sector development. There will be
no turning back. No matter the outcome of our negotiations for
continued economic assistance under the Compact beyond the year
2001. No matter the sacrifices we must make to achieve a private
sector-led economy.
There have been two significant outcomes that can be specifically
attributed to the FSM Financial Sector Symposium hosted by the
Bank of the FSM and the commercial banks operating in the FSM.
The Symposium was held in Guam in February 1996, and included
a broad array of Government and private sector representatives.
Among the six "consensus policy reform recommendations"
made by the participants of the Symposium, two have subsequently
been enacted and become law -
a liberalized foreign investment regime and removal of banking
restrictions. The other four policy reform recommendations are
the focus of technical assistance and/or legislative drafting
efforts.
The most notable progress with respect to reform of the economic
policy environment came with the passage of a new Foreign Investment
Act in 1997. This new and more liberal foreign investment policy
regime became effective on January 1, 1998. This fulfills a major
commitment of the FSM National Government for the PSRP. In fact,
this was a condition for release of the second tranche of the
program loan - scheduled for
June 1998. A National Government Working Committee has visited
each State to promote passage of complementary foreign investment
legislation in each of our four States. Legislation has been
drafted - along the lines of
model legislation drafted with support of FIAS and EMPAT - in each State and is scheduled
for legislative review in all four State legislatures.
There was also important progress in the policy regime facing
the financial sector institutions. Following years of recommendations
from the donor community - specifically
in the Annual IMF Article IV consultations -
and even more frequent calls from the commercial banking institutions,
the FSM has liberalized interest rate controls. The former "Usury
Law" has been amended to eliminate the complicated lending
rate ceilings on commercial loans. The banking sector now faces
only a true usury ceiling of 24% per annum. Consumer loan interest
rates remain capped at 15% through September 1998 -
after which they will also be liberalized with the same usury
ceiling of 24%. It should be noted that technical assistance
to our FSM Banking Board from the IMF was instrumental in achieving
implementation of this important reform.
At all levels of society there is an acknowledgment that Government
has, throughout much of the lifetimes of our current leaders,
contributed unintentionally to the disappointing rate of private
sector development. There are numerous examples where Government
has competed with private enterprises -
usually with special advantages for the Government office or
agency involved. Government has also created regulatory burdens
that add to the already high cost structure of private enterprises
in the FSM. Government has acted in ways that have distorted
the markets for labor and capital to the detriment of private
sector development. Recognizing and acknowledging the problem
has been an important first step. The policy measures needed
to unwind the complicated policy, regulatory and market distortion
constraints on private sector productivity and efficiency are
numerous. The FSM National Government is taking the lead in this
area. In addition to a handful of legislative actions already
taken, the Congress of the FSM also has a bold legislative agenda
to tackle additional reform needs.
The basic principles to be applied in this reform agenda are:
Reducing the role of the Government and public enterprise
sectors in productive activities;
Creating a legal and regulatory environment which is transparent,
predictable and internationally competitive -
including reforms improving the efficiency of markets for land,
labor and capital;
Eliminating unfair advantages held by public sector entities
engaging in commercial activities -
including a shift from implicit subsidies only where justified
to fulfill social, cultural or economic objectives;
Developing a broad-based taxation system which minimizes
distortions and does not create disincentives for activities
which earn dollars from abroad; and
Creating a level playing field for domestic and foreign investors.
III. Needs for Further Donor Support
Mr. Chairman, we continue to look toward our CG donor partners
for support in the form of technical assistance and project or
program finance. As the first two years of serious reform implementation
have proven, there needs to be a successful balance of three
critical elements to achieve our overall economic adjustment
goals and objectives. These three elements are:
political will and a commitment to rigorous reform;
technical expertise and human resources to complete the design,
implementation and monitoring aspects of the reforms, and
financial support to mitigate the negative social and economic
costs of adjustment and to accelerate development to meet the
growing need for private sector employment creation.
We are pleased that, as a result of our CG collaborations,
we have achieved a healthy balance of these three elements. We
have utilized the strong endorsement and promise of support from
the CG to further strengthen the resolve of our leaders in committing
to and then implementing rigorous reforms. I trust our presentation
makes clear our ability to fulfill our commitments and to stick
to a rigorous reform path.
We continue to benefit from technical assistance support from
nearly every donor involved in the CG process. In fact, much
of what we have outlined in the first two CG meetings in terms
of technical assistance requirements is being met by one or more
donor partners. And, we have received financial support, most
directly in the form of the $18 million PSRP program loan, but
also in the form of grant and scholarship support to meet our
physical and human capital development priorities.
Let me say that in the area of technical assistance, no effort
in the past years has been more critical to our success than
the provision of a team of highly competent and experienced economists
to work with our Governments. The EMPAT team is, I believe a
model of successful donor collaboration and support. The team
provides a critical focus on economic policy coordination and
a long-missing established presence to see policy proposals and
plans through to implementation. Their role is seen to be even
more critical in our newly restructured National Government as
they provide a core of expertise in the Department of Economic
Affairs and an institutional development role in training at
least five of our best and brightest young Micronesian economists.
Their first young counterpart economist worked with them from
the beginning of the EMPAT project and has just taken up a much
appreciated graduate scholarship at Monash University sponsored
by the Government of Australia. Their second counterpart is eagerly
awaiting word on her application for World Bank sponsorship in
a graduate program at Columbia University. I believe the shift
of EMPAT from External Affairs to the Department of Economic
Affairs in our new Government structure represents an appropriate
evolution of this project. This will enable our advisors to shift
an even greater share of their efforts to strengthening capacity
within the FSM in the areas of policy formulation and economic
management.
I wish to thank the ADB for field the EMPAT TA and I must
also thank the Governments of Japan and the US for providing
crucial financial support. I am hopeful that both governments
will, if they have not already done so, pledge their continued
support for an extension of this effort for three more years.
I trust the ADB will do everything in its power to move ahead
with the internal mechanisms to assure the FSM of uninterrupted
support for first-rate economic management and policy advice.
Mr. Chairman, let me shift from technical assistance to financial
assistance. The primary focus of development expenditure in the
FSM is now the consolidated Public Sector Investment Program
(PSIP) which incorporates the highest priority development projects
and programs of the four States of the FSM. This was presented
at the Second CG Donor Meeting. The highest priority in all States
was funding for their Public Sector Reform programs. The ADB
has released $10 million and is scheduled to review progress
against second tranche conditions in an upcoming mission.
We are asking our donor partners to work with us to address
many of the other priority areas from the PSIP, such as tourism
infrastructure, water supply and sanitation. Donors are encouraged
to use the PSIP to direct their support to meet high priority
needs. Some of these are highlighted in our report to the CG
donors. Before concluding, I want to highlight one new and critical
component of our long-term plans -
that is the proposed FSM Trust Fund.
The FSM Trust Fund is an idea which has its genesis in trust
funds implemented by some of our Pacific Island neighbors, including
Tuvalu, Kiribati and Palau. The main purposes of the fund as
proposed in legislation submitted by FSM President Jacob Nena
to the Congress of the FSM would be to contribute to the long-term
financial stability of the FSM by:
Assisting our Governments to achieve greater financial autonomy
in the management of our recurrent budgets;
Enabling the FSM to meet long-term maintenance and operating
costs of our social and economic infrastructure; and
Enabling the Governments of the FSM to improve existing levels
of social and economic infrastructure.
Our donor partners should be aware that we intend to set aside
our own funds into this Trust Fund irrespective of the participation
of any of our donor partners. The Trust Fund will become an increasingly
important part of our long-term strategy to achieve financial
self-sufficiency. As such, we hold out hope that our donor partners
will seriously consider participation in our Trust Fund initiative.
I suggest, Mr. Chairman, that this be an important topic of our
dialogue during today's meeting.
Mr. Chairman, in conclusion, I would like to once again thank
you for organizing and participating in this CG meeting. The
FSM has a high regard for the expertise in the development process - especially with respect to structural
adjustment - which is made available
to us through our collaboration with the CG donors. We anticipate
being able to maintain our reform momentum with the assistance
of the international community. We look forward to a fruitful
discussion today on the points I have highlighted and any other
issues that may be of interest to our donor partners.
PSRP Workforce and Wage Reform Commitments and
Progress Six Months after PSRP Loan Drawdown (1/1/98) |
|
Chuuk |
-29%
(2800Ù 2000) |
-13%
(2800Ù 2440) |
-20% |
-20% |
+20% |
|
Kosrae |
-13%
(794Ù 690) |
-17.6%
(794Ù 654) |
-12.5% |
-12.5% |
+5% |
|
Pohnpei |
-25%
(1633Ù 1255) |
-13%
(1633Ù 1416) |
-12.5% |
-10% |
+20% |
|
Yap |
-28%
(1069Ù 769) |
-23%
(1069Ù 827) |
|
|
+30% |
|
National |
-20%
(750Ù 600) |
-5%
(750Ù 710) |
|
|
+40% |
|
FSM Total |
-25%
(7046Ù 5314) |
-14%
(7046Ù 6047) |
|
|
|
|