Samoa
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International Monetary Fund. Asia and Pacific Dept
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Publication Date:
20 Jul 2015
eISBN:
9781513568713
Language:
English
Keywords:
ISCR; CR; deficit; current account; real GDP; Samoa; authority; reconstruction effort; PFTAC TA; U.S. dollar; external shock; monetary policy transmission mechanism; Samoan authorities; monetary policy stance; growth path; exogenous Shock Facility; PFI credit; rekindling growth; Credit; Commercial banks; Natural disasters; Pacific Islands; Global; Australia and New Zealand; debt target; debt ratio; economic statistics; Bank credit
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SAMOA

Abstract

SAMOA

SAMOA

STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION

May 14, 2015

Key Issues

Outlook and risks. Growth is recovering gradually from natural disasters and inflation remains subdued. The current account deficit is expected to narrow on lower international oil prices and a planned fiscal consolidation. The main external risk is the occurrence of another natural disaster in the presence of already high public debt and vulnerabilities in financial institutions. The main domestic risks center around a delay in rebuilding macroeconomic buffers, in particular through fiscal consolidation, reforms of public financial institutions and financial oversight.

Improving financial resilience. A recent financial sector assessment program (FSAP) mission identified risks in some commercial banks and public financial institutions (PFIs). The role of PFIs needs to be refocused to reduce contingent liabilities for public finances and to support the development of private financial markets. Regulation and supervision of financial institutions needs to be improved to reduce the risk of an adverse feedback loop from banks and PFIs to the public finances in case of another external shock.

Rebuilding macroeconomic buffers. A gradual fiscal consolidation is planned to reduce public debt to the target of 50 percent of GDP by 2020, mainly through improvements in revenue and a reduction in current expenditure. While there is no significant evidence of misalignment, and reserves are adequate by standard metrics, a stronger external position with higher reserves would provide greater resilience.

Boosting growth. The authorities’ structural reform initiatives emphasize a revitalization of agriculture and food processing, tourism, and an enabling environment for business. Reforms to SOE governance are beginning to bear fruit, but the government should stay the course in planned privatizations and amendments to legislation to reduce the burden of state-owned enterprises (SOEs) on the public finances. Improvements in financial infrastructure will improve the flow and allocation of credit.

Approved By

James Daniel and Masato Miyazaki

Discussions took place in Apia during February 23 - March 6, 2015. The staff team comprised Geoffrey Bannister (head), Kazuaki Washimi (both APD), Farid Talishli (STA), Erik Lundback (MCM) and Tubagus Feridhanusetyawan (Resident Representative). Mr. Choi (OED) and representatives from the World Bank and the ADB joined the discussions.

Contents

  • CONTEXT

  • RECENT DEVELOPMENTS, OUTLOOK AND RISKS

  • A. Recent Developments

  • B. Outlook and Risks

  • POLICY DISCUSSIONS

  • A. Improving Financial Resilience

  • B. Rebuilding Macroeconomic Buffers

  • C. Boosting Growth

  • OTHER ISSUES

  • STAFF APPRAISAL

  • BOXES

  • 1. Effect of Recent Natural Disasters on Debt

  • 2. Contribution of Finance to Growth

  • 3. Public Financial Institutions

  • 4. Recent Social Developments and Challenges

  • 5. External Sector Assessment

  • FIGURES

  • 1. The economy is recovering with moderate inflation

  • 2. The current account is widening but reserves remain adequate

  • 3. Fiscal cost of reconstruction added to the public debt

  • 4. Commercial bank credit growth is sluggish and PFIs have a growing role

  • 5. Financial access is high relative to peers, but significant impediments remain

  • TABLES

  • 1. Selected Economic and Financial Indicators, 2011/12-2019/20

  • 2. Illustrative Medium-Term Baseline Scenario, 2011/12-2019/20

  • 3. Balance of Payments, 2011/12-2019/20

  • 4. Financial Operations of the Central Government, 2011/12-2019/20

  • 5. Monetary Developments, 2010/11-2015/16

  • 6. Financial Soundness Indicators, 2010-14

  • 7. Financial Access Indicators, end of 2013

  • 8. Status of Millennium Development Goals

  • APPENDICES

  • I. Risk Assessment Matrix

  • II. Key FSAP Recommendations

Context

1. Samoa is one of the most remote Pacific islands, subject to natural disasters. It is dependent on tourism, remittances and development aid. It has a strong record of macroeconomic management, and before the global financial crisis was one of the fastest growing Pacific island countries. A tsunami in September 2009 and cyclone Evan in December 2012 caused major destruction, and prompted the government to request disbursements under the Rapid-Access Component of the Exogenous Shock Facility in 2010 and the Rapid Credit Facility in 2013. Reconstruction is estimated to have cost 40 percent of GDP and added about 15 percent of GDP to Samoa’s external debt (Box 1).

2. Macroeconomic stability has been maintained in the face of external shocks and growth is recovering, but risks have accumulated. Debt (mostly external) rose rapidly from 30 percent of GDP in 2008 to 55 percent in 2014, well above the authorities’ medium-term target of 50 percent of GDP. In addition, a subsidized lending program through the public financial institutions (PFIs) and government guaranteed debt in the state-owned enterprises (SOEs) represent contingent liabilities for the public debt.

3. A recent financial sector assessment program (FSAP) mission identified vulnerabilities that could add to these risks. The mission found that commercial banks are liquid and report high capitalization, but non-performing loans are rising, and part of the banking system is vulnerable to further shocks. The mission also found that some PFIs are vulnerable to shocks due to low asset quality and weak loan portfolios. Any distress in local commercial banks could require public funds, further impacting the government debt.

4. Policies are broadly in line with past Fund advice, although implementation was interrupted by cyclone Evan in 2013. A fiscal consolidation was initiated in 2012/13, but was delayed by a rise in expenditures related to reconstruction, and the public debt rose. The authorities have now retaken plans for a fiscal consolidation to reduce the public debt. The exchange rate has remained stable and monetary policy has supported the recovery. Structural reforms have moved forward in some areas, including in the management of public finances and SOE reforms, and some progress has been made towards laying the groundwork for the use of customary lands as collateral.

Recent Developments, Outlook and Risks

A. Recent Developments

5. Growth is recovering and core inflation remains subdued. Real GDP expanded by around 2 percent in fiscal year 2013/14 (July to June), supported by reconstruction activities, a rapid expansion in commerce and transportation services related to preparations for the United Nations Small Island Developing States (SIDS) conference, which took place in September 2014, and a recovery in agriculture (Figure 1). Inflation rose recently on the back of higher food prices, but underlying inflation (excluding food, transport and communication) remains stable at around 2 percent.

Figure 1.
Figure 1.

The economy is recovering with moderate inflation

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A002

Sources: Country authorities; World bank Doing Business 2015; and IMF staff estimates and projections.

Samoa: Effect of Recent Natural Disasters on Debt1

Using a synthetic control approach indicates that the tsunami in 2009 was responsible for an increase in debt of 10 percent of GDP, while the recent cyclone in 2012 led to another 5 percent of GDP increase.

On average, Samoa has been hit by a major natural disaster once every five years.2 Recent natural disasters in Samoa required reconstruction costs of 40 percent of GDP (23 percent of GDP for the tsunami in 2009 and 17 percent of GDP for cyclone Evan in 2012).

A01ufig1

Frequency of Occurrence of Natural Disasters1

(In percent)

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A002

1/ Ratio of number of years with natural disaster to the number of years during 1960-2013.Sources: Center for Research on Epidemiology for Disasters, International Disaster Database; IMF, staff estimates.

A synthetic control approach can evaluate the impact of these natural disasters on external debt.3 This approach uses a panel of countries that have not been hit by natural disasters, but have similar observable characteristics, to create a synthetic comparator or control. By comparing changes in the external debt-to-GDP ratio between Samoa and the synthetic control, the methodology can assess the impact of natural disasters.

A01ufig2

External Debt to GDP Ratio

(In percent)

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A002

Note: In fiscal year (July/June).

The results indicate the two natural disasters added about 15 percent of GDP to Samoa’s external debt. The gap of the external debt–to-GDP ratio between Samoa and the synthetic control hovers around 10 percentage points after the tsunami in 2009 and widens to 15 percent after the cyclone. This suggests that, in order to create a cushion for another natural disaster, Samoa’s debt target should aim at 40 percent of GDP over the longer term, given the authorities’ medium-term debt ceiling of 50 percent of GDP.

1. Prepared by Kazuaki Washimi. 2. See Cabezon, Hunter, Tumbarello and Wu, “Strengthening Macro-Fiscal Resilience to Natural Disasters and Climate Change in the Small States of the Pacific,” IMF Working Paper (forthcoming). 3 For the methodology, see Abadie et al (2007).

6. The external current account deficit widened as the economy recovered, but reserves remain adequate. Following cyclone Evan, the external current account widened to 8 percent of GDP in 2013/14 as imports rose while exports lagged following damage to infrastructure and crops from the cyclone (Figure 2). At the same time tourism and remittances remained largely flat (although they have begun to pick up recently). Foreign inflows of capital grants and direct investment helped boost reserves, which rose to 4 months of prospective imports of goods and non-factor services in 2014.

Figure 2.
Figure 2.

The current account is widening but reserves remain adequate

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A002

Note: Samoa’s data is in fiscal year (July/June).Sources: Country authorities; Google; Numbeo; Worldcabfares; UN; and IMF staff calculations.

7. The authorities have run a very accommodative macroeconomic policy to cushion the effects of the global financial crisis and two natural disasters. The fiscal deficit deteriorated sharply after 2008 and has remained above 5 percent (except in 2012/13). For 2013/14, tax revenue increased by 1 percent of GDP thanks to improved administration, but expenditure remained above historical levels due to reconstruction efforts and preparations for the SIDS conference. As a result, the fiscal deficit reached 5.3 percent of GDP in 2013/14 (GFS 2001) (Figure 3). Monetary policy has also remained accommodative, with the policy rate at the zero lower bound since 2010. Samoa’s exchange rate, which is pegged against a basket of major trading partner currencies, has remained broadly stable.

Figure 3.
Figure 3.

Fiscal costs of reconstruction added to the public debt

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A002

Note: Samoa’s data is in fiscal year (July/June). Sources: Country authorities; and IMF staff calculations.

8. PFIs have become increasingly important suppliers of credit. Despite ample liquidity, commercial bank credit growth was negative throughout most of 2012-14, as banks were repairing their balance sheets after natural disasters. As a result, the government directed PFIs to refinance SOE loans with commercial banks. More recently, bank credit has recovered due to a number of large one-off transactions, but underlying growth remains anemic (Figure 4). PFIs have also supplied credit to the economy for reconstruction. They control about 40 percent of all credit to the economy and 42 percent of all assets in the financial system. While it is difficult to identify a relationship between growth and bank credit, when PFI credit is included there is evidence that overall credit has supported GDP growth in the period since the Global Financial Crisis (Box 2).

Figure 4.
Figure 4.

Commercial bank credit growth is sluggish and PFIs have a growing role

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A002

Sources: Country authorities and IMF staff estimates and projections.
A01ufig3

PFIs have a large and growing role

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A002

Samoa: Contribution of Finance to Growth1

A vector auto- regression analysis including real credit and growth points to the importance of PFI credit in the recovery. A financial conditions index seems to perform as a leading indicator of real activity.

A vector auto-regression (VAR) analysis is estimated to disentangle the effects of each financial variable on growth. Casual empiricism suggests that there is a relationship between total credit growth (commercial banks and PFIs) and real GDP growth. To investigate this relationship further, this analysis estimates a VAR with bank credit, PFI credit (both in real terms) and real GDP and the real effective exchange rate (REER). All the variables are in terms of the year-on-year percent change.2

A01ufig4

Total Credit Growth and Real GDP Growth

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A002

The VAR analysis suggests the PFI credit helped substitute for bank credit and support growth after a 2012 cyclone. The Granger causality test suggests both PFI credit and bank credit Granger-cause growth, while REER does not. Historical decomposition of growth indicates PFI credit has contributed to growth after Cyclone Evan, making up for weak bank credit growth.

A01ufig5

Historical Decomposion of Growth

(Year-on-year percentage)

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A002

A second approach uses a financial conditions index (FCI) to examine the relationship between finance and real GDP growth. This analysis applies principal component analysis to identify an unobservable common factor from a group of financial indicators, including bank credit, PFI credit, interest rate spreads (lending rate minus policy rate), and the nominal effective exchange rate.3 The estimated FCI clearly shows the loosening of financial conditions starting in 2008 in response to the global financial crisis and subsequent external shocks. It tracks well with GDP growth and has the largest correlation at a 6-month lead after 2006.

A01ufig6

Financial Conditions Index

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A002

1 Prepared by Kazuaki Washimi.

2 The Cholesky ordering is REER, real GDP, PFI credit and bank credit with a lag of two quarters. The results do not change qualitatively with a different ordering. Real interest rate is not included, as the impulse response does not produce economically meaningful results.

3 The choice of variables is based on Osorio et al. (IMF WP/11/170). Samoa does not have any stock market indices given there is no capital market.

B. Outlook and Risks

9. Near term growth will be supported by one-off events. Growth is expected to be 2½ percent for 2014/15, supported by the SIDS conference (which took place in the first quarter of the fiscal year), preparations for the Commonwealth Youth Games in September 2015, construction of a new airport terminal, and lower fuel prices. Lower oil prices will also contribute to benign inflation. The current account deficit is expected to narrow by about 1½ percentage points of GDP on the back of lower oil prices and a gradual rebound in agricultural exports and tourism. Consistent with this growth outlook, overall credit is expected to rise by 5½ percent, with commercial bank credit growth at 6 percent, as the entrance of a new regional bank (Bank of South Pacific - BSP) results in a drive to expand loan portfolios. PFIs are expected to continue expanding lending at around 5 percent, significantly lower than their historical growth rate, as lending resources have diminished.

10. Medium-term growth is expected to converge to 2 percent, supported by the expansion of agriculture and tourism. However, 2016/17 will see a decline as a major manufacturing employer, Yazaki corporation, closes its harness assembly operation following the exit of Toyota from auto production in Australia. Inflation is expected to remain between 2 and 3 percent as import prices remain stable and domestic agricultural supply continues to expand. A gradual fiscal consolidation and a pick-up in exports and tourism are expected to keep the current account deficit at around 5 percent of GDP. Medium-term credit growth is assumed to be in line with nominal GDP growth.

11. Risks to the outlook. The main external risk for Samoa is the occurrence of another natural disaster (Appendix I). Samoa also faces risks of slow growth in major trading partners (Australia, New Zealand and the US) and (indirectly) China. Domestic risks are centered around a delay in the policy response to vulnerabilities in the financial sector and rebuilding buffers. In particular, a delay in fiscal consolidation and further increases in public debt would reduce fiscal space to respond to natural disasters and further affect confidence and growth. Other domestic risks include financial distress in PFIs. While according to the FSAP the failure of a PFI would not have a systemic effect on banks, it would cause the public finances to deteriorate. At the same time, distress in local commercial banks could also require public funds. An external shock propagated through the financial system could thus have a large impact on public debt, undermining confidence and growth. Delays in implementing structural reforms, including policies to promote financial deepening, will result in anemic growth. The near-term outlook assumes a moderate pick-up in commercial bank credit growth, which could also constitute a downside risk to growth should it not materialize.

12. Authorities’ views. The authorities broadly concurred with the outlook. They noted that the risk of a down-turn in 2016/17 could be mitigated by a shift of activity of Yazaki corporation to other types of business. They also saw an upside to growth from higher tourist arrivals after the completion of a new airport and the reconstruction of major hotels. The authorities were aware of the risks in PFIs and banks. They also recognize the level of public debt is high and their budget and multi-year fiscal framework calls for a gradual fiscal consolidation.

Policy Discussions

13. Discussions centered around the need to improve resilience to natural disasters and boost growth. Improving resilience requires addressing risks in PFIs and commercial banks, and rebuilding macroeconomic buffers by lowering public debt and increasing reserves. In the medium-term, structural reforms are necessary to boost growth, including to facilitate access to finance.

A. Improving Financial Resilience

Public Financial Institutions

14. Policies are needed to contain the risk of contingent liabilities to the public finances from PFIs, and to redesign their role to support private financial markets. The authorities have used PFIs to supply credit for reconstruction in the face of two major natural disasters. But in some cases PFIs compete directly with commercial banks in key sectors such as tourism, housing and consumer lending, inhibiting the development of local finance (Box 3). The asset quality of the Development Bank of Samoa (DBS) has deteriorated significantly in recent years, and failure of DBS could constitute an important risk for public debt, growth and financial stability. Staff analysis suggests that a failure of PFIs could add up to 7 percent of GDP to the public debt (mostly from liabilities in the DBS to the government or explicitly guaranteed by the government), and further defaults among SOEs could add another 17 percent of GDP, for a total of 24 percent of GDP. The FSAP identified the following recommendations to contain risks and enhance the role of PFIs (Appendix II):

  • Formulate a coherent policy framework for the PFIs. The role of PFIs should be redesigned to provide development finance that is complementary to, rather than in competition with, commercial bank products. In the process, weaknesses in asset quality and performance should be addressed. In particular,

    • Development Bank of Samoa (DBS). A large part of DBS’ loan portfolio has been restructured, and the quality of assets is uncertain. To avoid further losses, new lending outside of its original mandate should be halted, and a comprehensive restructuring of the bank should be initiated. The current range and nature of operations should be narrowed in line with its original charter to finance agricultural production and SMEs. In addition, urgent reforms need to be put in place to address its operational inefficiencies and financial weakness, including improved credit and risk management, strengthening recovery procedures and accounting practices.

    • Samoa National Provident Fund (SNPF). The risk of insolvency in the SNPF is low, as its lending is covered by member contributions. Nevertheless, the high level of borrowing by members depletes pension savings, which runs counter to the purpose of the fund. The fund should gradually reduce lending against contributions, and diversify its investment portfolio, including by increasing offshore investments. SNPF should also seek technical assistance to conduct a comprehensive review of its actuarial soundness, including the investment of its assets.

      Samoa: Public Financial Institutions

      PFIs have been growing rapidly and moving increasingly into areas where they compete with commercial banks. Asset quality has deteriorated and for some, liabilities are to government institutions (central bank) or government guaranteed.

      Public Financial Institutions (PFIs) in Samoa have been growing rapidly and make up a substantial part of the financial sector. Among the PFIs, the Samoa National Provident Fund (SNPF) and Development Bank of Samoa (DBS) are the largest in terms of assets but both Unit Trust of Samoa (UTOS) and the Samoa Housing Corporation (SHC) have been expanding rapidly.

      Development Bank of Samoa (DBS). The DBS was established in 1974 to provide development assistance to agriculture and SMEs. The DBS on-lends funds from international institutions but has recently been funded through credit lines from the central bank to make loans for reconstruction, as a policy response to natural disasters. A large part of DBS’ portfolio is concentrated in tourism, but it has loans in every sector. Most of these loans were extended with subsidized interest rates. The quality of DBS’ portfolio seems substantially impaired, and it has offered a one year moratorium on interest and principal payments to a large proportion of its clients.

      Samoa: Public Financial Institutions, FY 2014

      article image
      Source: Annual Reports of PFIs, FSAP questionnaire, and staff calculations

      For SNPF the net surplus from investment income is shown.

      Ratio of net profits to total assets.

      Ratio of net profits to capital and reserves.

      Samoa National Provident Fund (SNPF). The SNPF was established in 1972 as a compulsory retirement savings scheme in which a minimum 5 percent contribution is paid both by employees and employers. Public employees and those in private formal employment contribute, covering 78 percent of the formally employed population. The SNPF concentrates on loans to its members, for which it has natural collateral in their contributions. These loans are provided for up to 50 percent of members’ contributions. About 60 percent of its assets comprise loans to its members, and most members borrow up to the entire 50 percent allowed. The SNPF also lends to other PFIs.

      Unit Trust of Samoa (UTOS). UTOS is an open-ended private unit trust established in 2010 to provide opportunities to small investors to participate in privatized SOEs, in particular the privatization of the state telecommunications monopoly. In the absence of further privatizations, UTOS’ activities were diversified into a financing vehicle for SOEs: it issues capital notes to SOEs, who in turn borrow from the Trust, backed by a limited general government guarantee. By intermediating funds among SOEs and maintaining a leveraged position the Trust has generated high returns to unit holders.

      Samoa Housing Corporation (SHC). The SHC was established in 1989 to facilitate access to housing and is also funded by the central bank with government guarantees.

      This box is largely based on the FSAP Technical Note on Public Financial Institutions (forthcoming).

    • Unit Trust of Samoa (UTOS). In the near-term, the mandate of the Trust needs to be clarified and its increased risk to unit holders from leveraged positions needs to be fully disclosed. The government should decide whether to convert UTOS into a policy bank or deleverage it and continue as a conventional mutual fund. Going forward, credit risk management and accounting practices need to be improved.

  • Enhancing the transparency and governance of the PFIs with improved accounting and disclosure practices. An important first step will be to strengthen accounting, reporting and disclosure standards making PFIs IFRS compliant.

  • Incorporating the PFIs under the supervisory and regulatory framework of the central bank. All PFIs have recently come under the supervision of the Central Bank of Samoa (CBS), but prudential and regulatory guidelines need to be issued for UTOS and Samoa Housing Corporation (SHC), with UTOS being supervised as a bank. The CBS should improve the collection and verification of data from PFIs and deepen off-site analysis, including through stress-testing.

  • Refraining from conducting further policy lending through PFIs not financed directly through the budget. This would enhance transparency and reduce the risk for the balance sheet of the CBS.

15. Authorities’ views. The authorities recognized the risks in the public financial institutions, but see them (particularly DBS and UTOS) as instruments to supply credit for reconstruction during crisis, and to lower interest rates. The authorities agreed with the need to reorient DBS’ lending to the agricultural sector and SMEs. They also noted that there are plans to reduce the ratio of lending against contributions at the SNPF from 50 percent to 40 percent over the next two years, and to diversify its investments. The new Ministry of Public Enterprises, planned this year, will provide an opportunity to review governance and reporting of PFI operations. The CBS is moving quickly to improve financial oversight of PFIs, including through the issuance and revision of prudential regulations (particularly the SHC and UTOS) based on FSAP recommendations, and the conduct of on-site inspections this year.

Commercial Banks

16. Improving regulation and supervision of commercial banks would reduce the risk of an adverse feedback from another external shock. Banks have high and rising NPLs, and are vulnerable to shocks, according to stress-tests conducted by the FSAP. There is also significant uncertainty about the underlying data on asset quality and provisioning. These vulnerabilities could lead to a major credit squeeze on the economy and a bailout by government in the event of another natural disaster. Policies to address these vulnerabilities are thus critical for macro-financial stability. The FSAP found that financial oversight, including regulation and supervision, needs to be strengthened. The most important recommendations in this regard include (Appendix II):

  • Improving capacity for banking supervision and regulation. The CBS should hire additional staff for financial oversight, as planned, and move to implement risk based supervision.

  • Conducting regular on-site supervision. Priority should be given in the short-term to local banks. The CBS should conduct an asset quality review of potentially vulnerable banks, possibly through appointing an external assessor.

  • Upgrading off-site supervision. Improving the collection, verification and analysis of bank data for off-site supervision purposes.

17. Authorities’ views. The authorities appreciate the FSAP, and are taking steps to implement its recommendations. They took concerns about potential weakness in the banking sector seriously and are planning to conduct on-site inspections this year. The CBS is also taking steps to modernize its legal and regulatory framework for banking supervision, and reform the banking resolution and crisis management framework. A review of the legal framework was completed and a technical assistance mission was fielded in April, 2015. The authorities have also requested technical assistance for on-site supervision, prudential data collection and verification, stress testing, bank resolution and crisis management, and a program of technical assistance in these areas is being designed in coordination with the Pacific Financial Technical Assistance Center (PFTAC).

B. Rebuilding Macroeconomic Buffers Fiscal Policy

18. Samoa’s fiscal framework is anchored on a target debt ratio of 50 percent of GDP specified in its medium-term debt management strategy. Given the vulnerabilities Samoa faces, staff proposed a lower long-term public debt target of 40 percent of GDP, but supported the authorities’ stated goal of reducing public debt to 50 percent of GDP by 2020. An updated Debt Sustainability Analysis (Annex I) indicates that Samoa has moved from a high to a moderate risk of debt distress. However, including contingent liabilities from PFIs and SOEs of 24 percent of GDP mentioned above, the overall risk to public debt sustainability is higher.

19. The authorities’ budget and medium-term fiscal framework includes a fiscal consolidation to reach their debt target. The approach is based on sustaining recent improvements in revenue administration and bringing current expenditure to pre-crisis levels, mainly through the containment of personnel costs (limited to 45 percent of current expenditure), while still keeping capital spending above its historical level to support growth. For 2014/15, current expenditures related to reconstruction (required to restore public health and education services after the cyclone) will be reduced as reconstruction is completed. A significant component of capital expenditure will be investments in rebuilding the airport, financed by a loan from China of about 6 percent of GDP, which is expected to be disbursed evenly over three years. Under this scenario, the overall fiscal deficit would fall from 3½ percent of GDP in 2014/15 to around 1½ percent of GDP in 2016/17 (GFS 2001 format), and then to around ½ percent of GDP in the medium term. This would be sufficient to bring the debt ratio to 50 percent of GDP by 2020. This is also consistent with a strategy of running primary surpluses in non-disaster years to finance periodic disaster costs. Implementing further reforms identified in the recent Public Expenditure and Financial Accountability (PEFA) assessment, including non-tax revenue reform, budgeting, accounting and reporting, and managing fiscal risks from SOEs, will be important to support the authorities’ fiscal consolidation.

Samoa: Underlying Fiscal Balance, 2008/09–2016/17

article image
Sources: Data provided by the Samoan authorities and Fund staff estimates.

20. Care should be taken to ensure that consolidation does not affect spending on social priorities. While extreme poverty is rare in Samoa, there are challenges related to basic needs poverty, non-communicable diseases and the quality of education (Box 4).

21. Authorities’ views. The authorities concurred with the 40 percent of GDP long-term debt target and the intermediate goal of bringing debt to 50 percent of GDP by 2020 through a gradual fiscal consolidation. They pointed out that personnel expenditures were already below their medium term fiscal framework’s target of 45 percent of current expenditure. Planned implementation of changes in non-tax revenue in 2015/16 (implementing fees for some public services) and a review of the VAT could also support revenue.

Monetary Policy and Exchange Rate

22. A supportive monetary policy is appropriate as long as underlying inflationary pressures are absent. The policy rate has been at the lower bound for over four years, and bank liquidity is high, but the transmission mechanism for monetary policy is weak due to a lack of competition in commercial banks, weakness in some bank balance sheets, and structural impediments to finance. As the economy recovers it will be important to improve the functioning of monetary policy by reforms in these areas, particularly improving bank regulation and supervision, and making customary lands more accessible for use as collateral (discussed below). It will also be important to mop up excess liquidity and raise interest rates.

23. Staff analysis and other indicators suggest no significant misalignment of the currency (Box 5). The current exchange rate peg against a basket of major trading partner currencies has served Samoa well, and reserves are adequate under the standard metric. There are signs that tourism and some agricultural exports are recovering, and the decline in oil and other commodity prices is expected to support the external position in the near term. Nevertheless, given Samoa’s vulnerability to natural disasters, a strong external position with higher reserve buffers would provide greater resilience. A first line of action is to support cost competitiveness in tradable goods and tourism through comprehensive structural reforms. Staff also discussed the possibility of exchange rate devaluation in case of an additional external shock, but noted this would have to take place in the context of strong domestic policies and a robust financial system. While a devaluation would improve price competitiveness, it could have adverse effects on debt sustainability, since over 90 percent of the public debt is in foreign currency.

Samoa: Recent Social Developments and Challenges

While extreme poverty is rare, basic needs poverty affects about one quarter of the population. Pressing social challenges include maintaining public services for the poor, addressing non-communicable diseases and improving the quality of education.

Samoa is in the process of updating its information on poverty. The latest estimates are from the 2008 household income and expenditure survey (HIES). The survey was updated in 2014, but the results are still in the process of being analyzed. While extreme poverty is rare, 26.7 percent of the population experienced basic needs poverty in 2008, with the incidence highest in the capital Apia and lowest in the less populated main island of Sava’i.

Samoa faces a number of important social challenges that need to be addressed to continue to reduce basic needs poverty and improve the inclusiveness of growth:

  • Promoting the quality and accessibility of public services to the poor. The poorest 40 percent of Samoa’s population rely heavily on publicly-funded health and education services, which account for about one-third of total government spending. Ensuring fiscal sustainability and rebuilding buffers will be important to ensure these social expenditures are insulated from future external shocks.

  • Addressing the growing prevalence of non-communicable diseases (NCDs). NCDs (such as diabetes, heart disease and stroke) create significant social costs and account for 70 percent of all deaths in Samoa. An effective strategy to tackle NCDs will include reorienting public expenditure towards prevention, curtailing the consumption of food and drinks linked to obesity, and scaling up the Package of Essential Non-Communicable Disease Interventions for Primary Health Care in Low Resource Settings (PEN Package), which is currently being piloted in a sample of district hospitals.

  • Improving the quality of education. Samoa has made significant gains in education. But, the government’s Education Sector Plan notes that “at all levels, the quality of provision is the major problem”. Improving the quality of education will require implementing professional standards, increasing training and on-going support to teachers, and providing incentive for teachers to improve qualifications.

The information for this box was provided by the World Bank.

Samoa: External Sector Assessment1

Staff’s overall assessment is that there is no significant indication of a misalignment of the current exchange rate and reserves are adequate. Nevertheless, a higher level of reserves would provide a valuable cushion in the case of another natural disaster.

A CGER assessment for Samoa presents mixed results. While the macro balance approach indicates 18 percent undervaluation, other approaches show a range of 1- 19 percent overvaluation. The equilibrium exchange rate approach (ERER) suggests no significant misalignment.

Exchange Rate Assessment: Baseline Results 1/

(In percent)

article image
Source: Fund staff estimates.

Staff projection over 2019

Based on a semi-elasticity of the CA/GDP with respect to the REER of -0.16. Underlying CA excludes imports related to grants.

Overvaluation is assessed relative to 2014 Q3.

Other indicators point to no significant misalignment. The medium-term current account deficit is expected to be close to 5 percent of GDP. Export growth and tourism are expected to recover as reconstruction is completed and investments in hotels and the airport mature. Samoa is a net importer of fuel and the recent decline in oil prices is expected to improve the trade balance by about 3½ percent of GDP. Capital grants associated with reconstruction will also decline in the medium-term, but foreign direct investment flows will remain at their current level.

A01ufig7

ERER Approach Real Effective Exchange Rate 1/

(2010=100)

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A002

1/ The shaded area represents the 90 percent confidence interval of the equilibrium real exchange rate estimate.

Reserves are adequate by the standard metric. Reserves are slightly above the optimal level of 4 months of imports of goods and services estimated by the optimal reserve approach. The results depend on the long-term opportunity cost of holding reserves, which is assumed conservatively at 3.8 percent based on the long-term average real bank lending rate.

A01ufig8

Samoa’s reserves are slightly above estimated optimal levels

(In months of imports)

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A002

1 This box was prepared by Farid Talishli.

24. Authorities’ views. The authorities consider that current monetary policy is broadly appropriate, and stand ready to adjust interest rates and liquidity as necessary. They broadly agreed that structural impediments to finance affected the transmission of monetary policy, but noted that high concentration in banking posed a particular challenge. They viewed the current level of reserves as adequate, and noted the countercyclical role of grants and remittances during past crises. They were willing to consider adjustments in the exchange rate if conditions warranted, but agreed that a devaluation could have adverse effects on debt sustainability.

C. Boosting Growth

25. The government’s structural reform agenda appropriately emphasizes agriculture and tourism, revitalized exports and an enabling environment for business. In agriculture, the government should continue to move forward with the World Bank to introduce import substituting varieties of fruits and vegetables and light agricultural processing, as has been done in the coconut industry. In tourism, efforts to negotiate new flights are welcome, but the government also needs to concentrate on reforms to lower the cost of doing business, particularly the very high cost of electricity. Reforms to SOE governance are beginning to bear fruit in the form of better performance and oversight, but the government should stay the course in planned privatizations and amendments to the Public Bodies Act.

26. Structural improvements in the financial sector will also be important to support private sector development, financial inclusion and growth. Samoa has a high level of access to financial services by individuals and lower interest margins than most Pacific Island countries (Figure 5). Nevertheless, its remoteness and small scale lead to a lack of competition and a high cost of financial services, particularly for small and medium-sized enterprises. Financing to SMEs is provided by commercial banks and the DBS. There is also one microfinance institution which is beginning to make loans to SMEs and a government guarantee scheme for SME loans (with funds of 0.4 percent of GDP). However, the high level of collateralization of loans, and the large share of customary land that cannot be used as collateral are the main obstacle to credit, including for SMEs. The absence of a credit bureau or movable collateral registry, and the absence of standard accounting practices among SMEs, are also significant impediments. While recent data is limited, the latest enterprise survey from 2009, and a SME market assessment from 2012, confirm that a majority of SMEs experience financing constraints. It will thus be important to address these constraints to credit to allow better financial access for SMEs and to support growth.

Figure 5.
Figure 5.

Financial access is high relative to peers, but significant impediments remain

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A002

Note: Samoa’s data is in fiscal year (July/June).Sources: Country authorities; World Bank Enterprise Surveys 2009; World Bank FinStat; and IMF staff calculations.

27. Authorities’ views. The authorities noted that they are pursuing diversification of agricultural production and processing for export with the help of development partners, including for niche markets (for example organic certification or gluten free products) where Samoa’s lack of scale economies is less of a disadvantage. They also noted that there are solar and wind energy investments poised to come on line which would help lower the cost of electricity. The authorities agreed that development of essential financial infrastructure is a priority. While they see the establishment of a credit bureau as a private sector investment, they noted that personal property registry legislation is in place and implementation will be forthcoming, and agreed that the lack of financial literacy among SMEs is an obstacle to credit.

28. The authorities have been working with the Asian Development Bank (ADB) to make customary land more accessible for business transactions. A policy framework will be discussed in Cabinet in the first half of 2015, with the aim of revising legislation before 2016 (after consultation with major stakeholders) so that leases of customary lands can be used more easily and securely as collateral for loans, while safeguarding the rights of customary land holders.

Other Issues

29. Samoa’s economic statistics are broadly adequate for surveillance. Core macroeconomic data are regularly reported to the IMF and published on official websites, including monthly and quarterly statistics not often available in small island countries. The authorities recently rebased their GDP series to 2009 (from 2002) and introduced public accounting on a GFSM 2001 basis. Nevertheless there are shortcomings in national accounts, financial sector indicators and external statistics. There is an ongoing program of technical assistance to improve statistics in these areas.

Staff Appraisal

30. The authorities should be commended for maintaining macroeconomic stability and restoring growth in the face of multiple external shocks, but risks have accumulated. For the current fiscal year, growth is expected at around 2½ percent, boosted by reconstruction and the hosting of a major conference. But it is expected to decline in the medium-term as the effects of one-off events dissipate and a major manufacturing plant closes. The external current account deficit is expected to narrow on lower oil prices and the recovery of agricultural exports and tourism. The main external risks to this outlook come from another natural disaster. On the domestic side, with high public debt and the accumulation of contingent liabilities in PFIs and SOEs, another external shock could result in pressures on debt sustainability. At the same time, the FSAP identified potential weaknesses in the banking sector that could also lead to an increase in public debt should another external shock materialize.

31. In the face of these vulnerabilities, Samoa needs to improve the resilience of its economy. This requires addressing weaknesses in the financial sector, rebuilding macroeconomic buffers, and pursuing structural reforms to increase growth.

32. The role of PFIs needs to be reviewed. PFI credit has played a role in the economic recovery, but at the expense of higher contingent liabilities for the government. In addition, subsidized credit from PFIs has crowded out private credit and inhibited the development of local financial markets. While the role of PFIs in providing credit is justified in times of crisis, as the economy recovers they should be brought back to their original mandates, and governance and transparency of their operations improved. In particular, DBS should not provide any further policy lending outside of its original mandate and a comprehensive restructuring should be initiated.

33. Minimizing risks in the financial sector will also improve resilience. The CBS is cognizant of the risks identified in the recent FSAP, and is moving to improve banking supervision and regulation in line with recommendations. The CBS is also working to improve the legal framework for the financial sector, and banking resolution and crisis management with technical assistance from the IMF and PFTAC.

34. The authorities recognize that rising public debt has to be addressed. Their budget for 2014/15 and their multiyear fiscal framework envisage a gradual consolidation consistent with the goal of reducing the debt to GDP ratio to 50 percent by 2020. They plan to maintain recent gains in tax revenue administration and improve non-tax revenue, while limiting current expenditure mainly by containing personnel costs. Maintaining reform momentum on public financial management in areas identified in the recent PEFA assessment will be important to support fiscal consolidation. In addition, safeguarding public expenditures to maintain public services for the poorest of the population, addressing the epidemic of non-communicable diseases, and improving the quality of education, will be important for equitable and inclusive growth.

35. Monetary and exchange rate policies are broadly appropriate, but foreign reserves, while adequate, could be higher to enhance resilience. The authorities should stand ready to tighten monetary policy if inflation begins to accelerate or external conditions weaken. CGER-type analysis suggests no significant misalignment of the exchange rate, and reserves are adequate by standard metrics. Nevertheless, they are low compared to many of Samoa’s peers, and a higher level would enhance resilience against natural disasters. The first line of action should be aggressive structural reforms. A managed adjustment of the exchange rate could help strengthen the external position further.

36. Decisively moving to implement structural reforms will help boost medium-term growth. For Samoa to recover its growth potential will require concentrating on reforms in agriculture, facilitating business activity, particularly in tourism, and improving access to finance. The authorities are well aware of these constraints and are moving to address them. The inability to use customary lands as collateral for business loans is a long-standing impediment to financial deepening in Samoa, and the authorities should concentrate on reforms in this area.

37. It is recommended that the next Article IV consultation take place on the current 24-month cycle.

Table 1.

Samoa: Selected Economic and Financial Indicators, 2011/12-2019/20

article image
Sources: Data provided by the Samoan authorities and Fund staff estimates.

Includes re-export of fuel after 2009/10.

Includes domestic and external public debt.

IMF, Information Notice System (calendar year).

Table 2.

Samoa: Illustrative Medium-Term Baseline Scenario, 2011/12-2019/20

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Sources: Data provided by the Samoan authorities and Fund staff projections.
Table 3.

Samoa: Balance of Payments, 2011/12-2019/20

(In millions of U.S. dollars, unless otherwise indicated)

article image
Sources: Data provided by the Samoan authorities and Fund staff estimates.

Including re-export of fuel after 2010.

Including other current transfers.

Including other service credits.

Table 4.

Samoa: Financial Operations of the Central Government, 2011/12–2019/20

article image
Sources: Data provided by the Samoan authorities and Fund staff estimates.
Table 5.

Samoa: Monetary Developments, 2010/11-2015/16

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Sources: Central Bank of Samoa; and Fund staff estimates.

Ratio of GDP to broad money.

Ratio of broad money to monetary base.

Includes commercial bank credit only.

Weighted average.

Table 6.

Samoa: Financial Soundness Indicators, 2010–14 1/

article image
Source: Central Bank of Samoa.

For commercial banks.

Table 7.

Samoa: Financial Access Indicators, end of 2013

article image
Source: IMF FAS database.
Table 8.

Samoa: Status of Millennium Development Goals

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Sources: Pacific Islands Forum Secretariat, and 2013 Pacific Regional MDGs Tracking Reports.

Appendix I. Samoa: Risk Assessment Matrix1/

Potential Deviations from Baseline

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Appendix II. Samoa: Key FSAP Recommendations

article image

Short-term (ST), Medium-term (MT)
1/

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

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Cover IMF Staff Country Reports
Samoa: 2015 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Samoa
Author:
International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2015: Issue 191
Publisher:
International Monetary Fund
ISBN:
9781513568713
ISSN:
1934-7685
Pages:
68
DOI:
https://doi.org/10.5089/9781513568713.002
Figure 1.

The economy is recovering with moderate inflation

Frequency of Occurrence of Natural Disasters1

(In percent)

External Debt to GDP Ratio

(In percent)
Figure 2.

The current account is widening but reserves remain adequate
Figure 3.

Fiscal costs of reconstruction added to the public debt
Figure 4.

Commercial bank credit growth is sluggish and PFIs have a growing role

PFIs have a large and growing role

Total Credit Growth and Real GDP Growth

(Year-on-year percent change)

Historical Decomposion of Growth

(Year-on-year percentage)

Financial Conditions Index

(Year-on-year percent change)

ERER Approach Real Effective Exchange Rate 1/

(2010=100)

Samoa’s reserves are slightly above estimated optimal levels

(In months of imports)
Figure 5.

Financial access is high relative to peers, but significant impediments remain