GAO says both countries have no clear fiscal plans for 2023 transition
Achieving fiscal stability will likely be a challenge for the Federated States of Micronesia and the Republic of Marshall Islands once they wean from the grants under the Compacts of Free Association.
While Compact grants are set to expire in 2023, neither of the two nations has established a clear fiscal strategy that would prepare them for transition toward self-sufficiency, according to the U.S. Government Accountability Office.
At this point, GAO said, FSM and RMI display complacence as they continue to operate within the comfort of the Compact funds that subsidize a significant portion of their governments expenditures as well as social programs and services.
Compact grants focus on education, health, infrastructure, public sector capacity building, private sector development and the environment. RMI and FSM will have to pick up the tab for these sectors when the stream of U.S. aid stopped flowing in.
In FSM, compact sector grants and the supplemental education grant support about one-third of all national and state government expenditures. In fiscal year 2016, U.S. grants backed 8 percent of national government expenditures and 50 percent or more of each state’s government expenditures, GAO said.
Among the FSM states, Chuuk — the state with the lowest per capita income — has the highest percentage of its expenditures supported by U.S. grants.
In RMI, Compact sector and supplemental education grants covered 25 percent of the nation’s $123.5 million in government expenditures in fiscal year 2016, while other U.S. grants supported an additional 8 percent. Kwajalein-related grants, which will not end in 2023, currently supports an additional 3 percent.
Health and education programs are also heavily dependent on Compact sector and supplemental education grants, which supported 25 percent of health expenditures and 59 percent of RMI education expenditures.
The United States provides the Pacific nations over $130 million in direct assistance every year, along with a variety of federal grants and services. The last grants to be released in 2023 will be much smaller. Based on the Department of Interior’s estimates, the FSM would receive $82 million while the RMI would receive $36 million, including Kwajalein-related assistance.
“The actual amount of annual grant assistance in fiscal year 2023 will depend on actual inflation rates in the years preceding 2023,” GAO said. “Different assumptions about the inflation rates will result in different estimates of the amount of fiscal year 2023 annual grant assistance.”
The FSM and RMI, however, did not implement planned budget reductions to address decreasing Compact grants because they rely on increased revenues from other sources that offset the grant decreases, GAO said.
Besides the Compact funds, RMI and FSM also receive foreign assistance from other countries. FSM, RMI and Palau are the recipients of Australia’s $7.9 million North Pacific grant for 2018-2019. This will include an estimated $5.0 million in bilateral funding to the North Pacific.
Last year, FSM and RMI received three grants worth $16.8 million from the Asian Development to improve the quality of basic education in the two Pacific island countries. The grant agreements include $1.8 million in cofinancing from the Australia’s Department of Foreign Affairs and Trade and $1 million each in contribution from RMI and FSM, respectively.
As for the Compact trust grants, GAO’s analysis found that after fiscal year 2023 the funds are “unlikely to provide maximum annual disbursements, may provide no disbursements at all in some years, and are unlikely to sustain the funds’ fiscal year 2023 value.”
The Compacts create an alliance that is characterized by co-dependency. The treaty provides FSM and RMI with annual funding assistance for economic startups and sustainability and grants its citizens visa-free entry to any U.S. jurisdictions. In exchange, FSM and RMI are obligated to free up some of their important resources, allowing the U.S. to maintain unlimited and exclusive access to its land and waterways for strategic purposes.
“Current U.S. law enables U.S. agencies to continue providing some programs and services now provided under the agreements after they end in 2024,” GAO said. “However, under current law, some programs and services provided in the programs and services agreements will end and would require the FSM and RMI to bear additional costs.”
Taking over responsibility for the currently U.S.-funded programs and services will likely entail budget shortfalls for FSM and RMI, GAO said.
“Disbursements from the compact trust funds face risks that the trust fund committees have not addressed,” GAO said.
The risks, GAO said, can be managed by adopting strategies such as reduced trust fund disbursements or additional contributions from the countries or other sources.
“Changing the trust fund disbursement policies could also address these risks but may require revising the trust fund agreements with each country,” GAO said. “However, the trust fund committees have not prepared distribution policies, required by the agreements, which could assist the countries in planning for the 2023 transition to trust fund income.”