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North Pacific economies : Inflation
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 capital inputs.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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