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The Federated States of Micronesia (FSM) is located about 2,500 miles west of Hawai‘i. It is made up of 607 islands. While the total land area is only 270.8 square miles, it is scattered over more than one million square miles of ocean. FSM is divided into four states. From east to west, the states are Kosrae, with 5 islands totaling 42.3 square miles; Pohnpei with over 25 islands, over 100 coral reefs and about 130 square miles of total land area; and Chuuk with 7 major island groups and a total land area of 49.2 square miles. The westernmost state of the FSM, Yap, has 4 large and 7 small islands with a total land area of 45.6 square miles. Each state is fairly autonomous and has its own government. The FSM has an abundance of natural resources. The exclusive economic zone of the FSM covers about 2.6 million square kilometers. The area of ocean covered is among the most abundant tuna fishing ground in the world. Other commercially marketable fish include red snapper, grouper, skipjack and reef fish. There is research being done to determine the presence of minerals in the ocean bed and mining enterprises look promising. Each state has a significant amount of forest cover which is used for timber, construction, handicrafts and furniture. The climate in the FSM is tropical and there is a healthy amount of rainfall. The soil is rich and fruits indigenous to the islands include bananas, mangos, pineapples and papayas. There are also hundreds of small islands, reefs, and coral atolls. Combined with the rainforest covered mountains, the scenery in the FSM is ideal for tourism. Economic growth in the FSM is heavily influenced by changes in global and regional commodity prices and in the climate. The nation is made up of small, flat islands, which makes it difficult to support mass cultivation. The main form of agriculture is therefore subsistence production. It is difficult for these producers to create a large surplus due to the lack of storage facilities and transportation. Instead of agriculture, which only accounted for 2.1% of export earnings in 1994, the strongest areas for economic growth are tourism, fishing, manufacturing and mining. Economic growth in the FSM has been erratic over the past decade. From 1991 to 1995 real GDP growth averaged 2.2% with a high of 5.7% and a low of 2.0%. The population growth was high, as it is in most developing countries, but dropped from 3.0% in the period from 1980 to 1989 to 2.0% in the 1989 to 1994 period. The GDP per capita growth rate averaged around 1.2% and was estimated to be $1,909 a year making it one of the highest in the countries ranked 'middle income' by the World Bank. In terms of GDP components, the government's recent efforts to encourage privatization of certain industries seems to be working. The private sector's share of GDP increased from 1991 to 1995. Non-market production also dropped 4.3% as more citizens chose to work in the money economy. The FSM became fully independent in 1986. It is a member of the United Nations, the South Pacific Forum, the South Pacific Commission and the International Monetary Fund. The FSM has a unique relationship with the United States. Under the Compact of Free Association, the defense and security issues of the FSM are the responsibility of the U.S. government. The United States also extends certain economic and financial benefits to the FSM. The economy relies heavily on outside funding. The currency in the FSM is the U.S. dollar which can give investors confidence that investment will not be subject to any currency fluctuations given that the U.S. is the market or the source of supplies.
II. ECONOMIC TRENDS AND OUTLOOK Economic Trends and Potential Growth Sectors Investment opportunities vary slightly among the different states. All of the states offer investment opportunities in large scale commercial fishing ventures, fish processing, and the commercial exploration of ocean beds for mineral resources. Although opportunities in agriculture are not as great, there is potential for growth in coconut processing. The quota-free access to U.S. markets and the large work force in the FSM creates potential for development in the garment manufacturing industry. The government of the FSM has also identified several other areas for investment including agro-industries, livestock (mainly goats, swine and poultry), commercial forestry development, production of construction materials, ship repair facilities, and the development of import substitution and export based manufacturing and assembly operations. Government Role in the Economy The government of the FSM is seeking to decrease the FSM's dependence on outside funding and the dependence of the economy on government spending. The national and state governments employ over half of the country's workers. The government is looking at privatizing many of the public sectors and at reducing the number of government jobs. Currently the private sector is not as attractive as the government for employment. It offers lower pay and fewer positions for skilled and trained workers. In setting up a business in the FSM, the different state governments play different roles. In Kosrae, investors are advised to contact both the Governor's office and the Department of Conservation and Development. Both are active in economic development in the state and business promotion. The Department of Conservation and Development oversees the State's development activities. In Pohnpei development issues are the responsibility of the Department of Conservation and Resources Surveillence. The Foreign Investment Board promotes development and renews foreign investment permit applications. The Economic Development Authority serves as a contact for foreign investors. The government in Chuuk has little participation in the foreign investment process and leaves it mostly to the private sector. One of the areas the government is involved in is in the development of the dock and cold storage facilities it owns which could be used for a major fishing project. The government in Yap places a large emphasis on the importance of outside investment in the economy and actively participates in investment projects. Part of the state's budget is set aside for research for investment projects as well as loans and investment in them. In 1994 and 1995 there was a trade deficit of $15.4 million on the current account of the balance of payments.
Nature of Political Relationship with the United States After FSM became self governing in 1986, it kept close ties with the United States and entered into the Compact of Free Association. Under the Compact treaty and other bilateral agreements, the United States agreed to defend FSM as it would its own citizens and to provide unique packages of financial assistance and investment incentives. The national and state governments of the FSM closely resemble those in the United States. The national government has an executive, legislative and judicial branch. The legislative branch is composed of 14 senators. One senator is elected every two years from each of the ten legislative districts in the FSM. One senator is elected every four years at-large from each state. The president and vice-president are elected every four years from the four at-large senators and their seats are filled by special elections. The judicial system consists of the Supreme Court which is composed of trial and appellate divisions. The state governments are fairly autonomous and work like state governments on the U.S. mainland with individual executive, legislative and judicial systems. In each state traditional leaders work closely with the local governments to maintain cultural traditions. In this way, democracy has traditionally worked well in the FSM.
The government generally supports joint ventures between local and foreign investors. Pure foreign investments are treated equally well although it is beneficial to the foreign investor to enter into a joint venture with a local partner. Steps to Establishing an Office Before establishing an office in the FSM an investor must apply for a Foreign Investment Permit. If the investor is the sole owner or a partner in the corporation this permit is the only registration requirement. A Foreign Investment Permit is required for:
Applications carry a $250 filing fee which is non-refundable and are available for the Registration of Corporations. Decisions are usually made in three to nine weeks. Companies who wish to employ foreign workers must also apply for special work permits. Work permits for expatriate employees carry a fee of $100. The Constitution of the FSM limits the ownership of land to citizens. Domestic corporations which have non-citizen shareholders are also excluded from owning land. Non-citizen individuals and corporations may lease land from public or private sources. Land has a traditional importance and is also in short supply. Entire families or clans, which have different factions may own certain areas of land and all hold an interest in it. Leasing land can therefore be time consuming due to fractional ownership and uncertain boundaries or titles. Long-term land leases for business sites are usually inexpensive. With the help of the government or private sector personnel, however, land use can be worked out smoothly. It is advisable to contact the Secretary of the Department of Resource Development first. The government will assist investors in finding local partners and landowners interested in leasing land. Many landowners may be interested in leasing their land in exchange for equity in the venture, for a combination of equity or lease payments based on a percentage of the land's value or a share in the proceeds of the business. Newspapers which might carry advertisements in the FSM are:
Radio Stations are:
There are also commercial cable television stations on each island.
V. LEADING SECTORS FOR U.S. EXPORTS AND INVESTMENT Best Prospects for Non-Agricultural Goods and Services Tourism: One of the most viable sectors for potential growth is in the tourism industry. Since there is little data available on tourist activity in the FSM, it is difficult to estimate what tourists trends have been recently. The tourist industry is underdeveloped and the current resources for it are not being exploited. Analysis of North American and East Asian tourist activities suggest that the numbers of tourists are expected to rise. With the proper investment in the tourism industry, there is potential to attract a number of tourists to the islands of FSM. Major attractions in the FSM include:
The FSM is particularly suited to specialty and adventure tourism and other environmentally friendly tourism projects. Currently, there are relatively few hotel rooms available in the FSM. In order for the tourism industry to grow, there needs to be considerable development of infrastructure as well as in accommodations. In 1995, the Asian Development Bank cited tourism as the greatest potential growth sector in the FSM. Manufacturing: The large labor force combined with the duty-free, quota-free export allowances to the U.S. makes the garment manufacturing industry in the FSM particularly viable. Best Prospects for Agricultural Products Fishing: Marine exports from the FSM accounted for 94.3% of export earnings in 1994 and fees from foreign fisheries licensing accounted for 34.6% of budget revenues. The industry has been growing more successful in recent years and has potential for much more growth as all of the resources available in the FSM's 2.6 million square kilometer exclusive economic zone are not being used. The government in encouraging privatization of the industry. Among the numerous developments that have been made there have been several private long-lining companies established recently and there have been discussions about starting tuna canneries in the FSM. The national government is responsible for licensing foreign fishing vessels. State governments are responsible for promoting investment opportunities. Opportunities that are being promoted in each state are:
Mining: Research is currently being conducted to determine the presence of certain minerals in the ocean floor in the FSM. Government aid and assistance is available to start similar projects. As technology develops to find and process minerals, the sea mining enterprise in the FSM is becoming more promising.
VI. TRADE REGULATIONS AND STANDARDS Products that are imported for resale in the FSM are generally subject to import taxes which vary with the product. The rates are as follows:
Import tax is charged on cigarettes, other tobacco products, beer, wine, other malt beverages and other distilled alcoholic beverages regardless of whether they are imported for resale or personal use. There are exemptions to this rule for those who are importing the following products and quantities for their own personal use and that State Law permits them to posses and consume the goods:
Import taxes are assessed on the 'free on board' value of a product. There are import tax exemptions available, with an application, for goods 'damaged or not received' and goods exported. All goods must be cleared within 15 days of arrival or they will be subject to a penalty fee of 10% plus an additional 10% for each month the tax is not paid. All items are subject to physical inspection. Products which are imported into the FSM for processing for re-export or transshipment are subject to duty cutbacks. All goods that are wholly produced in the FSM can enter the United States duty-free. Exceptions to this rule are:
Products produced in the FSM are also free from quota restrictions. Membership in Trade Agreements Under treaty agreements, the FSM has no quota restrictions to U.S. markets for domestic of value-added products. Several U.S. programs have been extended to FSM. These include:
The FSM is a member of the South Pacific Regional Trade Economic Cooperation Agreement (SPARTECA). Under this non-reciprocal trade agreement, the FSM has unrestricted, duty-free access to Australia and New Zealand. There is also potential for duty-free access to Japan and other Asian Markets. There are no current laws regulating exchange control or currency transfer in the FSM.
VII. INVESTMENT CLIMATE Openness to Foreign Investments The FSM welcomes foreign investment as it is aware that it is necessary for its development. It seeks to encourage investment from abroad which brings in foreign capital, management, and technology. Investment in FSM should:
The development plan for the FSM emphasizes the development of the private sector. The objectives set forth in the plan for manufacturing and industrial sectors reinforce this emphasis. The plan states that the government will work to:
A foreign investor may have full ownership of a business or enterprise. While they are not required to invest in joint ventures with local partners, it is preferred and is often beneficial to the foreign investor. Gross Receipts Tax: The Gross Receipts tax is the major tax which all businesses in the FSM pay. The tax is assessed on the gross revenues of the business, which includes all receipts without deductions. The rate is $80 on the first $10,000 of gross revenues and 3% of any excess for the calendar year. Business with less than $2,000 gross revenue in a year are eligible for a refund of the taxes paid for that year. All businesses must file for a gross revenue tax return for each calendar quarter. The returns are due January 31st, April 30th, July 31st and October 31st of each year. The tax must be paid when the return is filed. There is a penalty fee of 10% for late payment plus and additional 10% for each month that the payment is late. Wages and Salaries Tax: The Wages and Salaries Tax is assessed on an employee's income. Employers must withhold the tax from wages and salaries paid to employees. Wages and salaries include nearly everything of value that an employee is given for his services including some non-cash wages. Withholding is based on gross wages and salaries at rates set by the Revenue Division of the Department of Finance, with no deductions. Social Security Taxes: The social security tax in the FSM has the employer pay half of the tax and the employee pay the other half through withholding by the employer. The current rate is 4% of wages paid by each the employee and the employer. The tax is not to exceed $4,000 per quarter. U.S. Tax Considerations: The U.S. Internal Revenue Code section 936 is extended to the FSM. Section 936 provides special tax credits for U.S. Corporations operating in the FSM. OPIC and Other Investment Insurance Programs The Overseas Private Investment Corporation (OPIC) is extended to the FSM and provides political risk insurance, finance, direct loans and loan guarantees. The labor force in the FSM is growing with the population. More people are moving away from the traditional subsistence farming way of life and into the money economy. Unfortunately there still is a shortage of skilled labor. When a foreign investor wishes to bring in expatriate employees, he must apply for work permits with the Division of Labor at the Department of Resources and Development. Preferences for open positions is given to local employees and before a permit will be granted to a foreign employee, it must be determined whether any locals are available and qualified for the position. In practice, however, it is not difficult for a permit to be granted to an expatriate employee. There is a fee of $100 for each expatriate work permit. Minimum wage in the FSM is $1.35. Four percent of an employee's salary or wage must be paid to the FSM social security system. Foreign Trade Zones/Free Ports The Exclusive Economic Zone (EEZ) of the FSM includes some of the richest tuna fishing areas in the world. In recent years, the FSM has earned $18 to $24 million a year in licensing fees paid by foreign vessels.
VIII. TRADE AND PROJECT FINANCING Brief Description of Banking System There are three commercial banks in the FSM all of which are FDIC insured:
There is also a FSM Development Bank which has branches in all of the states. It makes low-interest, long-term loans, primarily to local investors. Due to capital restrictions, loans made by the FSM Development Bank can not be more than $200,000. Export Financing and Insurance The Export-Import Bank of the United States (EXIM) covers public and private sector risks. It covers short-term transactions, for which discretionary credit limits are withdrawn, medium-term transactions, and long-term transactions. Coverage is only available if it is specified in a Special Buyer Credit Limit or Issuing Bank Credit Limit endorsement, or Country Limits of Liability endorsement. The International Development Fund (IDF) provides funding for projects which require more than $500,000 financing. Approved loans can be repaid over a period of 25 years and carry a 5% interest rate. Companies and citizens eligible for IDF loans are:
In order to promote broadly based economic growth, the International Bank for Reconstruction and Development (IBRD), a member of the World Bank group, makes long-term loans at market related prices. They usually focus on structural adjustment, sector reform and individual project lending. Instead of financing a whole project, the IBRD normally finances parts of project purchases with foreign exchange, which are on typically 40% of the total project cost. Projects may cover a variety of sectors and can involve many separate contracts. In turn, these will provide export business opportunities for suppliers worldwide. The Asian Development Bank (ADB) is an international financial development bank which has its headquarters in the Philippines. In order to promote social and economic progress in its developing member countries, the ADB lent $5.5 billion in 1995. There are 56 member countries in the ADB with the United States and Japan being the largest shareholders. The largest portion of funds were lent to the energy sector followed by social infrastructure, transport, communications, agriculture and agro-industry, finance, industry and non-fuel minerals. The ADB's aims in its medium-term strategy are to reduce poverty, improve the status of women, aid in population planning, and environmental protection. The bank is taking the role of a catalyst for development and will use its financial resources along with co-financing and other techniques to attract private capital in funding the development needs of its member countries. There is a Commercial Liaison Office (CLO) in Manila at the U.S. Embassy. The CLO reports directly to the Office of Multilateral Development Banks at the U.S. Department of Commerce. It assists American suppliers and consultants in winning contracts for projects and activities funded by the Bank. The CLO includes a Senior Commercial Officer and two Commercial Specialists, one of which represents the U.S. Agency for International Development's United States-Asia Environmental Partnership. Further information is available from the U.S. Department of Commerce.
IX. BUSINESS TRAVEL Few business customs greatly affect foreign investors' ability to do business in the FSM. Several traditions and the way of life do influence the economy. One of the main influences is the desire of many FSM citizens to enter the money economy. Economic wealth collected by families is shared with the extended family. This tradition of shared wealth is mirrored in land traditions where one will find that most land is communally owned making it difficult to determine land rights when attempting to lease. The official language spoken in the FSM is English. Chuukese, Kosraen, Yapese and Pohnpeian are also spoken. For U.S. citizens to travel to the FSM passports are not necessary. They only need proof of citizenship and an onward or return ticket. Entry is granted for up to 30 days which is extendible for up to 60 days after arrival in FSM. Those wishing to stay longer or who are coming for reasons other than tourism or visiting must apply for a working permit before arriving in FSM. The crime rate in the FSM is low. The Federal holidays in the FSM are:
State holidays in the FSM are:
Under the provisions of the Compact Free Association Treaty between the FSM and the United States, in addition to the existing infrastructure base, the FSM is to receive an average of $23 million dollars a year for its capital improvement program. Advances have been, and will be, made in airports, harbors and telecommunications.
X. APPENDICES
U.S. and Country Contacts
Multilateral Development Bank Contacts
Government Offices (country code is 691)
Other Offices
State Governments
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