These measures included downsizing of government employment, cutting outlays on goods and services, and eliminating subsidies to public enterprises, as well as efforts to increase tax revenue. The reform program is receiving the financial support of the Asian Development Bank. With a good start in FY1996, large budgetary surpluses have been generated and the external current account deficit has narrowed, but the fiscal and external imbalances continue to be unsustainable. The pace of implementation of fiscal and structural adjustment measures under the reform program has faltered in FY1998, particularly in Pohnpei but also in Chuuk. Planned expenditure and revenue measures, especially the continuation of downsizing of government employment and increases in state taxes, are being delayed.
Some states continue to face liquidity problems and the risk of incurring payment arrears.
While structural reforms have been implemented, the pace of change has been slow and has inhibited the growth and development of private sector activity and exports. Nevertheless, Directors cautioned that fiscal and external imbalances remained unsustainable and that implementation of fiscal measures has faltered. They stressed the need for sustained implementation of fiscal and structural measures to promote private sector-led growth and to attain a sustainable external position over the medium term. A consistent track record of sustained implementation of reform measures also would be important to obtain the support of the international financial community to ease Micronesia's transition to a more self- reliant economy. Directors emphasized that Micronesia would need to generate large budgetary surpluses over the next few years as part of efforts to reduce reliance on external assistance.