ADB's Work in the Federated States of Micronesia

The Federated States of Micronesia (FSM) comprises four states—Chuuk, Kosrae, Pohnpei, and Yap — in the Northwest Pacific. As a small island developing state, it experiences heightened barriers to growth due to its geographic isolation, small population, capacity constraints, and exposure to natural hazards.

Its economy relies on fisheries and development assistance, including grants under its Compact of Free Association with the United States, which have been decreasing since 2004. Negotiations are ongoing to extend the Compact beyond 2023. In 2020 and 2021, the FSM’s economy was significantly impacted by border closures linked to the coronavirus disease (COVID-19) pandemic.

To date, the Asian Development Bank (ADB) has committed 66 public sector loans, grants, and technical assistance totaling $187.8 million to the FSM. Cumulative loan and grant disbursements to the FSM amount to $98.4 million. These were financed by regular and concessional ordinary capital resources, and the Asian Development Fund, and other special funds. ADB’s ongoing sovereign portfolio in the FSM includes 2 loans and 9 grants worth $75.3 million.

ADB’s Pacific Approach, 2021-2025 serves as the country partnership strategy for the FSM, and focuses on building resilience against economic shocks, delivering sustainable services, and promoting inclusive and sustainable growth. It introduces new priorities such as more programmatic approach to climate change; more long-term capacity support, including outposting experts on a long-term basis; greater flexibility in procurement and contracting; and more emphasis on gender equality. Recognizing the need for capacity support to complement physical infrastructure, ADB is helping improve utility and public sector performance alongside infrastructure works.

In 2021, ADB committed a $5 million grant to help prepare a sustainable road investment project suitable for financing in 2023 or 2024. ADB also committed additional financing of $4 million grant for a renewable energy project, which will finance supplemental management and operations assistance to Pohnpei Utilities Corporation.

ADB has provided $21.5 million in grant assistance for the FSM’s COVID-19 response. The third phase of an ADB disaster resilience program for the Pacific provided $6 million for disaster contingent financing for early recovery and reconstruction following natural hazards or health emergencies. A $14 million health and livelihood program helped mitigate COVID-19 impacts on health, tourism, and social protection. The COVID-19 Emergency Response Project ($1.5 million grant) supported health and social services for communities affected by the pandemic, and helped provide supplies needed for disease preparedness. ADB’s Private Sector Development Initiative bolsters the FSM business environment by supporting increased access to finance.

Children playing during an educational activity at a daycare center in Chuuk, Federated States of Micronesia. Photo: Eric Sales/ADB

Operational challenges. The FSM experiences both physical and governance constraints that affect project implementation. As a federation, each state enjoys considerable autonomy, with responsibility for public services devolved from the central government. This structure can hamper development partner coordination and efficiency, and place fiscal pressure on state governments, which may be exacerbated as Compact assistance is phased out.

Further, the FSM’s small population can migrate to and work freely in the United States, contributing to capacity constraints in the public and private sectors. ADB and the FSM work to strengthen collaboration between partners, and between the state and national levels, to identify and address development priorities. Ongoing support is needed to address infrastructure gaps and strengthen governance, particularly amid the COVID-19 pandemic.

Knowledge Work

ADB brings added value beyond its role in project financing. ADB acts as a knowledge broker — engaging in regional issues, including climate change and ocean health.

ADB cohosted a webinar on achieving long-term climate change resilience for Pacific small island developing states beyond the pandemic — stressing the need to improve climate adaptation and build resilience to help the most vulnerable communities.

ADB also publishes knowledge products on macroeconomic forecasting and public sector management in its Asian Development Outlook and Pacific Economic Monitor. Recent publications discussed progress of COVID-19 vaccinations across the Pacific, impacts of pandemic-related school closures on learning outcomes and potential earning capacity, medium-term revenue strategies for fiscal sustainability, and addressing gaps to support recovery in tourism.

  ADB Projects in the FSM Project data sheets for loans, grants, TAs

Future Directions

The Government of the FSM’s Strategic Development Plan 2004–2023 provides a road map to address fiscal and economic challenges leading up to, and beyond, the expiration of Compact grants. To achieve fiscal consolidation, the plan stresses the need to mobilize revenue by reforming the country’s taxation system and strengthening tax administration, while highlighting the need for ongoing prudence in managing public expenditures.

ADB will continue to support the government’s priorities in energy, water supply and sanitation, transport, and basic education, and provide technical assistance for public administration reforms, particularly at the state level.