Inflation in all three North Pacific economies accelerated in FY2012,
largely because of sharp increases in fuel prices in the last quarter of
calendar year 2011. Inflation in the RMI increased slight...
ly to 5.7% from
5.4% in FY2011, while inflation in the FSM rose to 5.6% from 4.7% in the
same period, spurred by the higher availability of consumer loans. Prices
in Palau similarly experienced additional upward pressure, in this case
from robust tourism-related demand and possible capacity constraints
in peak periods, as inflation soared to 6.0% from 2.6% in FY2011
(Fig ure 3.36.3).
The North Pacific states are consolidating expenditure to achieve
long-term fiscal sustainability. This is especially important in light of
the key role that public infrastructure projects play in driving economic
growth, and because grants under their compacts of free association with the US are ebbing annually and less available to fuel government spending.
The RMI and the FSM compacts are set to expire in about a decade.
The FSM has in the past 4 years realized surpluses in its consolidated
budget, which combines the accounts of the federal government and
all four state governments. This trend continued with a consolidated
surplus equal to 1.2% of GDP in FY2012, reflecting better revenue
administration at the state level, economic growth, and more stable
public wages. In contrast, the RMI realized a fiscal deficit estimated at
1.1% of GDP in the same period, reversing the 3.7% surplus recorded in
FY2011. Unstable domestic tax collection and diminished foreign grants
reduced government revenue and exacerbated the impact of off-budget
expenditures arising from ad hoc directives. Palau recorded a fiscal
deficit equal to 3.2% of GDP in FY2012, but this was a slight improvement
from the FY2011 deficit of 3.5%, stemming mainly from higher revenue
collection related to the strong economic performance driven by tourism.
Increased tourism also drove a current account surplus in Palau,
which was equal to 6.0% of GDP in FY2012. Meanwhile, the RMI and
the FSM continued to run current account deficits, equal to 6.3% of
GDP for the RMI and 15.0% for the FSM. However, these deficits were
narrower than in previous years. as the winding down of infrastructure
projects, or delays in implementing them, cut imports of machinery and
Sources: International Monetary Fund. Republic of Marshall Islands, 2012 Staff Visit Preliminary Conclusions;
Federated States of Micronesia, 2012 Article IV Consultation
Staff Report; Republic of Palau, 2012 Article IV Consultation
Staff Report. http://www.imf.org; ADB estimate
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