The following on the Marshall Islands, the Federated States of Micronesia and Palau is a compilation of each location’s Graduate School USA annual Economic Brief for fiscal 2017. The annual reviews provide a comprehensive update to the islands’ finance and economic statistics, including such indicators as gross domestic product, GDP per capita, employment, inflation, external debt ratios, consolidated revenues and expenditures and outmigration estimates. The full briefs were first published in July and August by the Pacific & Virgin Islands Training Initiatives, Graduate School USA (www.pitiviti.org).

Marshall Islands
The Marshall Islands economy performed well in fiscal 2017 with 3.6% growth in GDP, improving on the 2.0% attained in fiscal 2016 and the two previous years of negative growth. During the last two years the major driver of the improved performance was an increase in construction activity following a resumption in disbursements of the Compact infrastructure grant after the moratorium placed in the use of the grant in fiscal 2014 and fiscal 2015. In fiscal 2017 fisheries production improved with increase in the fish catch. However, regulatory issues in conforming to international shipping requirements, which affected production in fiscal 2016 and fiscal 2017, have now been put in abeyance, while suitable measures to ensure compliance are put in place. Without the impact of fisheries GDP in the underlying economy grew by 2.9% and 2.8% in fiscal 2016 and fiscal 2017, respectively. Public administration also had a significant impact on growth during the last two years with the expansionary fiscal policy pursued by government.

Employment
During the amended Compact employment growth averaged 0.7% annually, but the majority of the growth was in the initial years through fiscal 2010. Since that time, employment levels have remained little changed. While employment at the central government has grown modestly by 0.6% since fiscal 2010, that in the public sector at large has grown by 1.8% per annum reflecting increased employment opportunities in the SOE sector, government agencies and local government. Meanwhile private sector employment has fallen by 1.9% offsetting the increase in the public sector. Clearly, employment generation in recent years has been unable to provide an increasing source of job opportunities for a growing labor force.

Inflation
After a period of negative inflation in fiscal 2015 to fiscal 2016 with falling world oil prices, inflation in fiscal 2017 stabilized recording a 0.0% change. This follows on from negative inflation of 1.5% and 2.2% in the previous two years. Food prices fell by 0.5% in fiscal 2017 with a small rise in transportation costs of 0.2%. Overall the reductions in prices over the last three years has helped moderate the cost of living.

Wages
Wages have grown modestly in the Marshall Islands by 2.5% and 1.4% per annum in the private and public sectors, respectively in the amended Compact since fiscal 2003. However, once inflation has been taken into account real wages have fallen in the two sectors by 0.2% and 1.3%, indicating declining standards of living. Only at the Kwajaleine Military base have wages managed to maintain their real levels.

Federated States of Micronesia
After experiencing strong growth in fiscal 2015 of 5.0%, economic growth weakened in fiscal 2016 recording 0.7%, but improved in fiscal 2017 growing by 3.2%. The component of FSM GDP resulting from domestic purse seine fishing operations adds considerably to the volatility of year-to-year growth rates. Excluding those domestic purse seine fishing operations, and despite continuing issues with the use of the Compact infrastructure grant, the FSM’s domestic economy grew by a respectable 2.3% in fiscal 2015, 2.4% in fiscal 2016 and 3.5% in fiscal 2017.
During the first six years of the amended Compact, economic performance was weak in the FSM due to difficult adjustments to the new Compact. However, the following four years saw improvement, in large part resulting from the strong demand for infrastructure. The poor results in the following period (fiscal 2012 to fiscal 2014), reflect management issues with the use of the Compact infrastructure grant. With agreement on construction management and procurement procedures in mid-2017, it was hoped that the large backlog of infrastructure funds remaining under the amended Compact would spur investment spending and would underpin a sustained higher growth trajectory. However, despite a large number of approvals of infrastructure projects by the Joint Economic Management Committee, ground breaking of the new projects has yet to take place.

Employment
After a period of declining and stagnant employment conditions since fiscal 2011, the improved conditions in the FSM’s domestic economy led to employment growth of 2.1% and 1.4% in fiscal 2016 and fiscal 2017. Private sector employment was the driving force, which grew by 3.6% over the period — although job prospects in the public sector also improved by 1.8%. Since the start of the amended Compact private sector employment has remained flat while that in the public sector has declined by 14% as the FSM governments have downsized reflecting reductions in the real value of Compact funding. Overall, jobs have fallen by 6% since fiscal 2003.

Inflation
With the prior decline in world oil prices coming to a halt and with oil prices rising modestly in fiscal 2017 inflation stagnated recording a 0.1% increase, helping to moderate the cost of living. The main contributing factor to inflation continued to be food prices, which fell by 1.6% offsetting rises in alcohol, tobacco and other prices.

Wages
Wages have grown modestly in the FSM by 1.6% and 1.9% per annum in the private and public sectors, respectively in the amended Compact since fiscal 2003. However, once inflation has been taken into account real wages have fallen in the two sectors by 1.5% and 1.3%, indicating declining standards of living.

Palau
In fiscal 2014 and fiscal 2015 the tourism economy boomed, and GDP recorded a growth of 4.6% and 9.3%, respectively. In fiscal 2016 the economy continued to grow by 0.3% despite a large drop-off in tourism as the forward momentum in the economy maintained growth from strong household demand in an election year. In fiscal 2017 the economy contracted by a large 4.7% reflecting a drop in visitors from 146,629 to 122,050 — a 17% reduction. While household demand added a positive 1.0% to the overall result, investment activity contracted resulting in a loss of -1.7% and the fall in tourism contributed -4.7%. GDP has risen by 1.1% per annum since fiscal 2000.

Population and income levels
The population of Palau consists of Palauans and a large number of foreign workers, mostly Filipinos. Since 1986 the Palauan component of the population has grown by 0.2%, after allowing for external migration, reaching 12,890 in fiscal 2015. The number of foreign residents has grown from 1,550 to 4,771 over the same period, reflecting the increased need for tourism-industry workers. GDP per capita has risen by 1.4% per annum since fiscal 2000. Gross national income attained a level of $16,197 in fiscal 2016, placing Palau in the World Bank’s high-income group by breaching their $12,236 threshold.

Employment and wages
The labor market in Palau is close to full employment, and Palauan employment has risen by 0.3% annually since fiscal 2000. Nominal wages in the public and private sectors in Palau have grown by 2.4% and 2.7%, respectively, since fiscal 2000 with public sector wages being 76% above those in the private sector. Real wages have declined marginally in the public sector, by -0.1% per annum but grown by an average of 0.2% per annum in the private sector. Citizen wages are 61% above non-citizens with a majority of Palauan workers in the public sector and non-Palauans in the private sector.

In January 2017, the president submitted a bill to the OEK to raise the minimum wage from the current level of $3.50 an hour by 50¢ effective Oct. 1, 2017, and to raise it by a further 50¢ until reaching $8.50 10 years hence. Since the introduction of the bill there has been no further action; however, if passed by the OEK the law would apply to all wage earners, Palauan and foreign. Currently the minimum wage in Guam is $8.50, and the intent in the law is to attract Palauans working in the United States to return to Palau. However, the new wage policy would likely have a significant negative impact on the cost of doing business in Palau.

Inflation
At the start of fiscal 2015 the world economy entered a period of rapidly falling fuel prices, resulting in moderation in inflation in Palau to 2.2% for the year. In fiscal 2016 these trends continued, but food prices were also declining resulting in negative inflation of 1.3%. However, these trends reversed in fiscal 2017 with both food and fuel prices returning to positive territory, and the CPI recorded 0.9% for the year. Overall the trends during the last three years helped moderate the cost of living.