Abstract

Western Samoa, with a land area of 2,800 square kilometers, consists of nine islands that are volcanic in origin, tropical in climate, and centrally situated in the South Pacific. Virtually all of the population of 160,000 is of Polynesian origin and resides in settlements along the coastline of the two main islands. Life expectancy is 65 years and health and education standards are above the regional norm. Despite a relatively high birth rate, population growth has averaged less than 1 percent annually during the 1970s and 1980s. Slow growth of output and employment problems have resulted in steady emigration, mainly to New Zealand but also to Australia and the United States. While this emigration has forestalled serious unemployment and pressures on cultivatable land, shortages of skilled labor are evident throughout the country.

Western Samoa, with a land area of 2,800 square kilometers, consists of nine islands that are volcanic in origin, tropical in climate, and centrally situated in the South Pacific. Virtually all of the population of 160,000 is of Polynesian origin and resides in settlements along the coastline of the two main islands. Life expectancy is 65 years and health and education standards are above the regional norm. Despite a relatively high birth rate, population growth has averaged less than 1 percent annually during the 1970s and 1980s. Slow growth of output and employment problems have resulted in steady emigration, mainly to New Zealand but also to Australia and the United States. While this emigration has forestalled serious unemployment and pressures on cultivatable land, shortages of skilled labor are evident throughout the country.

The first European settlers, who came to Western Samoa in the nineteenth century, were missionaries, British and U.S. traders, and German businessmen who established large copra plantations that exist to this day. Attempts by each group to further its economic interests through political alliances with local chiefs resulted in considerable friction and the navies of the main powers gathered near the capital, Apia, in 1889. After the ships were dispersed by a hurricane, an agreement was signed under which Germany would control what is now Western Samoa; the United States gained the islands to the east, which are now American Samoa; and the United Kingdom established a protectorate over Tonga. In 1914, New Zealand occupied Western Samoa and subsequently administered the territory in various capacities, including under a trusteeship of the United Nations, until 1962 when the country became the first South Pacific nation to gain independence from colonial authority. Parliamentary elections are held every three years; the right to vote is restricted to about 20,000 village chiefs and about 2,000 registered voters in Apia.

GDP per capita, which is at present SDR 500 annually, increased little in real terms over the past two decades. Economic growth was constrained mainly by the slow growth of output in the plantation sector. As a result, exports declined steadily in relation to GDP and their coverage of imports fell from four fifths to only one fifth. The economy became heavily dependent on private transfers to finance consumption and official transfers to finance investment. Despite the growth in these receipts, severe balance of payments pressures were encountered in the late 1970s and early 1980s, principally because of a large expansion in public expenditure. In the past few years, the external position strengthened because of the adoption of less expansionary financial policies.

Economic Structure

Production and Prices

Agriculture is the mainstay of the economy, accounting for one half of GDP and the bulk of exports. The major cash crops are coconuts and cocoa, which account for about two thirds of agricultural output. Over the years, production has been adversely affected by disease and the aging of trees. Although rehabilitation is feasible, replanting at the commercial and smallholding levels has so far not been very effective. Production of bananas, which was traditionally a major export, has virtually ceased. Taro is the only crop to have shown persistent growth in recent years. Passion fruit, coffee, and mangos are grown in small quantities and mostly for domestic consumption.

A substantial portion of output originates in the traditional subsistence-oriented sector, which comprises 80 percent of the area under cultivation. Villages are normally made up of 40–50 households, presided over by a council of chiefs, who may help to organize the cultivation of land and redistribute part of the villagers’ earnings to help needy households. The land tenure system is not conducive to agricultural development. Land allocations among families may be changed at the discretion of the chief, so that the system tends to work as a disincentive for family financed capital improvement. The area outside communal ownership is held in large part by the Western Samoa Trust Estates Corporation, a statutory body that controls the main coconut and cocoa plantations. The remainder of the land, mostly located in and near the capital, is privately owned and used mainly for housing and commercial enterprises.

Development of the nonagricultural primary sector, industry, and private services has been modest. The seas surrounding Western Samoa have potential for commercial fishing, but these resources are largely untapped. Growth of the livestock industry is hampered by animal disease and the shortage of skilled management. The once-abundant forestry resources have been depleted by logging and land clearing. The industrial sector, which contributes 10 percent of GDP, includes hydroelectric power facilities, a crushing mill for the production of coconut oil and copra meal, a brewery, and processed food factories. Government policy focuses on assisting those industries that utilize local materials and have potential for exports and import substitution. The largest component of the services sector is government administration. The possibilities of increasing tourism are being exploited, following recent investment in airport and hotel facilities.

The economy is very open and consumer prices are influenced strongly by the price of imports, especially consumer goods from Australia and New Zealand. Domestic factors, including the size of wage settlements, are also important. During 1976–83, the inflation rate was higher than that in other countries of the region because of excess demand pressure. Employees in the public sector were normally compensated in full for price rises and workers in the private sector usually obtained similar wage adjustments. In this period, the value of the Western Samoa tala was depreciated considerably against the New Zealand dollar, although the change in the real effective rate was not pronounced. More recently, rates of price increase have moved closer to the regional average as a result of weaker domestic demand and greater flexibility in wage settlements, which has helped to achieve greater stability of the exchange rate in nominal terms.

Balance of Payments

The balance of payments is characterized by large foreign trade deficits. Exports fluctuate within a range of 10–15 percent of GDP, with coconut products representing about half of the total; cocoa, taro, and a range of agro-based manufactured items account for most of the other half. The largest export market is New Zealand, followed by Australia, the Federal Republic of Germany, and the United States. Developments in imports are strongly influenced by materials and capital goods associated with projects financed by external aid and by demand for consumer goods supported largely by inflows of private remittances. The sources of imports are more diversified than export markets. New Zealand and Australia account for about half of total imports; Fiji and Japan each account for about 15 percent.

The external current account (including grants) is usually in surplus. The services account shows a small surplus. The largest source of receipts is tourism, and the largest category of payments is interest on external debt. Remittances from Western Samoans living abroad, primarily used to finance consumption by relatives at home, have long been a major element in the balance of payments. They are presently equivalent to about 30 percent of GDP. Official external grant assistance, which comes mainly from Australia, China, the European Community, the Federal Republic of Germany, Japan, and New Zealand, is equivalent to about 15 percent of GDP.

Capital transactions are relatively small and approximately in balance. Inflows are mainly in the form of concessionary loans from multilateral financial institutions. Outflows are mainly repayments of principal on public sector borrowing. External debt is equivalent to 75 percent of GDP, although only a small proportion is on commercial terms. External debt service is 13 percent of exports of goods, services, and private remittances. Official international reserves are equivalent to seven months of imports. The exchange rate, which is determined in relation to a basket of currencies of Western Samoa’s major trading partners, is managed flexibly.

Public Sector

The public sector consists of the central government and 20 public enterprises. The administration is organized through eight ministries, except for a few local public services in rural areas that are carried out by the village councils. The central government budget, which covers the calendar year, includes all receipts and expenditures of departments, receipts of cash and commodity grants, and expenditures financed by project grants and loans. Budget estimates are prepared in a conservative manner, but supplementary expenditure requests are normally submitted to the Legislative Assembly during the fiscal year. The public enterprise sector receives considerable financial support from the Government in the form of advances, low interest loans, and capital transfers. Consolidated public sector accounts are not available.

The central government plays a major role in the economy, with receipts and expenditure each equivalent to about 50 percent of GDP. Tax revenue is equal to more than 30 percent of GDP, a higher ratio than in other Pacific island countries. Import duties account for over half of revenue, and their importance has increased in recent years because of tariff reforms. Income tax is the next largest source of revenue. A recently imposed indirect tax on certain services brought more tourist spending into the tax net. Nontax revenue is 7 percent of GDP, comprising mainly fees and charges, the surpluses of departmentally organized commercial undertakings, and rent on government property. External grants are 15 percent of GDP, in the form of project assistance and cash from the European Community’s STABEX facility.

The central government budget is generally in surplus. Current expenditure is about 22 percent of GDP, of which more than half represents wages and salaries. Development expenditure is about 26 percent of GDP, of which about two thirds is financed by external grants and concessionary loans. Net lending primarily reflects subsidies and capital transfers to the public enterprises. Domestic financing of the budget, when required, mainly involves transactions with the banking system and purchases of government securities by the National Provident Fund.

The nonfinancial public enterprises play an important role in the economy. The main areas of operation are tree crop plantations, manufacturing, marketing and distribution of agricultural production, construction of infrastructure, and public utilities. In recent years, strong efforts have been made to improve the financial position of this sector through management restructuring, staff reductions, flexible pricing policies, and the privatization of some construction, trading, and manufacturing activities. Privatized assets are absorbed mainly by funds made available to resident investors through the publicly owned non-bank financial institutions.

Financial Sector

The financial system consists of the central bank, two commercial banks, and several nonbank financial institutions. Western Samoa has issued its own currency through the Treasury or a commercial bank for several decades but, until recently, monetary instruments were un-developed. A Monetary Board, comprising the Minister of Finance, the Financial Secretary, and four other members appointed by the Government, carried out a very limited range of central banking functions during 1975–83, but exercised almost no role in the regulation of credit. The Central Bank of Samoa commenced operations in 1984, assuming most monetary authority functions, including the issue of currency, partial management of the foreign reserves, the regulation of commercial banks, and implementation of monetary and exchange rate policies. Monetary policy is now exercised mainly through reserve requirements, a system of credit control by which allowable increases in credit are linked to the growth of longer-term deposits and the partial regulation of interest rates. The Government issues medium- and long-term bonds, but there is no active secondary market; there are no issues of treasury bills or central bank short-term paper.

Both commercial banks are under foreign management; one is owned equally by a New Zealand bank and the Government, and the other is owned by an Australian bank, a U.S. bank, and domestic investors. The National Provident Fund, which was established in 1972, collects contributions equivalent to 10 percent of the wage and salary bill from all employers who may reclaim up to half of this amount from their employees. It is an important source of finance for the central government budget. The Development Bank of Western Samoa, which was established in 1974, is primarily a conduit for channeling external grants and concessional loans to agriculture and industry.

Developments in the 1970s

Western Samoa entered the 1970s with a typical economic structure for a small Pacific island country at an early stage of development. In the decade after independence, conservative financial policies ensured the preservation of budget balance. However, efforts to expand investment and growth were constrained by shortages of foreign exchange. The availability of external aid was limited. Exports were stagnant, reflecting the dependence on plantation agriculture, which had suffered from inadequate investment. A foreign exchange allocation system was in effect to allocate and limit private sector imports.

During 1972–75, balance of payments difficulties emerged when more expansionary expenditure policies were implemented in an attempt to accelerate growth. Increased public expenditure led to large overall budget deficits and rapid credit expansion. Inflation accelerated and most wage earners received full compensation for price rises. The external pressures were compounded after the first round of oil price increases and the subsequent international recession, when import prices increased, export prices declined, and remittances from families living abroad fell. The current account deficits were largely financed by commercial borrowing in the New Zealand market and a drawdown in official reserves from nine months’ imports in 1971 to two and a half months’ imports in 1975.

In the second half of the 1970s, a series of economic adjustment programs were adopted, supported often by Fund stand-by arrangements, but they generally fell short of their objectives. The growth in foreign exchange earnings was weak. Exports from plantations were depressed owing to the aging of trees and management difficulties. Prices paid to small copra and cocoa producers followed those in world markets. The resulting instability in incomes and low average rates of return were not conducive to increased production. With a lack of buoyancy in budget revenue and strong growth in expenditure, including wages and salaries, public sector deficits and recourse to the banking system remained large. Monetary policy instruments had little capacity to help constrain demand for imports; balance of payments pressures were fended off by tight exchange controls. Exchange rate adjustments contributed to rising domestic prices of imports, but were not supported adequately by demand management policies and thus were inadequate to strengthen the competitiveness of Western Samoan producers.

Adjustment Policies During 1975–79

The first stabilization program designed to correct domestic and external imbalances was introduced in late 1975. The program aimed to tighten fiscal policy by increased rates of taxation and improved administration of income taxes and customs duties. The tala was depreciated by 20 percent on a trade-weighted basis in order to improve export profitability. However, domestic financial policies did not support external adjustment. The targeted reduction in the budget deficit was not achieved because of shortfalls in revenue, lack of current expenditure restraint, and lower-than-projected aid disbursements. Public enterprise deficits also increased in this period. The required supply response from the traded goods sector was not forthcoming because prices rose to such a degree that there was little depreciation in real terms.

A further program of demand restraint was planned in 1977. It emphasized the need to limit bank borrowing by the public sector in order to help contain domestic credit and improve the external position. A pronounced increase in export prices, as well as higher concessionary assistance, caused the balance of payments to strengthen. However, the external surplus contributed to a faster rate of monetary expansion and inflation. Bank deposit and lending rates that were highly negative in real terms discouraged private savings, and stimulated private sector demand for credit.

The authorities recognized that longer-term external viability depended on the growth and diversification of agricultural production and related industries. Another economic adjustment program was initiated in 1978, with the focus switched toward increased domestic public sector resource mobilization and the use of concessionary external assistance to finance an expanded public investment program. However, increased imports weakened the balance of payments, particularly since neither additional domestic nor external resources were generated on the expected scale. The use of advance accounts to prefinance projects pending the disbursement of external aid added to the borrowing needs of the public sector. The increase in imports helped hold down the rate of inflation, but external debt rose sharply and official international reserves were reduced to the equivalent of one month’s imports.

A fourth attempt was made in mid-1979 to correct the underlying domestic and external imbalances. This program used fiscal restraint to promote public savings and raised most bank interest rates to stimulate private savings. The currency was depreciated by 19 percent on a trade weighted basis to offset the appreciation in real terms that had occurred since 1976. The potential benefit of the exchange rate change was eroded by reductions in import duties and compensatory wage increases in the public sector; budget expenditure continued to grow strongly; and public enterprise finances deteriorated. With expanded commercial borrowing, external debt reached the equivalent of 45 percent of GDP at the end of 1979. In view of the difficult external position, additional restrictions on foreign exchange transactions for imports were imposed.

Developments in the 1980s

The rate of real GDP growth averaged 1–2 percent annually during 1980–87. Economic performance deteriorated further in the early 1980s, when the second round of oil price increases and the world recession had a profound impact because of the fundamental weakness of Western Samoa’s balance of payments. However, the long period of economic decline was finally reversed during 1983–85 through the firm implementation of comprehensive adjustment policies, supported by two stand-by arrangements with the Fund. The adjustment measures relied primarily on fiscal and monetary restraint, combined with the active use of the exchange rate to improve the external position, and increases in interest rates to encourage financial savings. The pursuit of restrictive demand management policies consolidated these gains during 1986–87.

Continued Imbalances in 1980–82

During 1980–82, Western Samoa experienced a sizable fall in real income together with high rates of inflation and severe external financing problems. The difficulties stemmed partly from the deterioration in the terms of trade, reflecting lower copra export prices and higher import prices, on a scale similar to that experienced by most other Pacific island economies. Adverse weather compounded this setback, leading to several poor harvests of major export commodities. The adjustment of domestic economic policies to the worsened external environment initially proved insufficient. Fiscal measures and higher bank interest rates had little impact on dampening domestic demand, and inflation remained high. With only modest increases in workers’ remittances and external grants, the external current account recorded unsustainable deficits.

During this period, the tala was held largely unchanged against the New Zealand dollar. This policy resulted in a sizable appreciation in real effective terms, mainly because of the high rate of domestic inflation. In view of the continued weak export performance, price stabilization schemes for cocoa and copra were instituted in early 1982. However, incentives for increased production in the short run remained inadequate. Demand continued to be high for imports of consumer goods, energy, and capital equipment. By the end of 1982, the external borrowing capacity had been exhausted, with debt equivalent to 80 percent of GDP and external payments arrears equivalent to one year’s exports. The lack of foreign exchange severely reduced the availability of imports, and the external current account deficit fell sharply.

The overall budget deficit averaged 15 percent of GDP during 1980–82. While total expenditure continued to rise strongly, the shortage of imports on which duties could be levied, the failure to change tax rates and government charges, the lack of measures to broaden the tax base, and weak revenue collection procedures constrained the growth of receipts. In addition, the consolidated deficit of public enterprises averaged 7 percent of GDP, reflecting in part the inflexible pricing policies. Largely because of the public sector’s financing needs, domestic credit expanded rapidly. Although low imports depressed private sector demand for bank credit for trade financing, the rate of monetary expansion contributed to high rates of inflation. Interest rates were substantially negative in real terms, and a wide differential emerged between domestic rates and those prevailing in the United States, Australia, and New Zealand.

Successful Adjustment in 1983–85

The economic and financial programs adopted during 1983–85, which coincided with a change in government, were the first stage of a medium-term adjustment process intended to achieve a sustainable balance of payments. Domestic spending was brought into line with available resources and the critical external financing position was eased, primarily through curbing public and private consumption. Measures to improve resource allocation and mobilize domestic savings laid the foundation for a resumption of growth. Actions were taken to strengthen public finances, reduce the growth of credit, dismantle the foreign exchange allocation system, and pursue flexible interest and exchange rate policies. The programs helped to moderate the rate of price increase and move the internal terms of trade in favor of the traded goods sector.

The country achieved an impressive degree of fiscal adjustment. The overall central government budget deficit moved into surplus by 1985. Revenue measures yielded the equivalent of 4 percent of GDP in 1983 and nearly 2 percent of GDP in 1984, including an import surcharge, increased excise duties, the collection of income tax arrears, and higher government fees and charges. A change in the basis of assessment of customs duties facilitated collection, and revised rates provided more uniform levels of effective protection within the import competing sector. Public sector imports were made subject to duty, and most excise duties were converted from a specific to an ad valorem basis.

Curbs on the growth of public sector employment, wages, and salaries, the postponement of lower priority projects, and the transfer of other projects to the private sector reduced current expenditure in relation to GDP. The Government also introduced an improved system of expenditure control, with intensified monitoring and quarterly discussions between the Treasury and departments to review trends in revenue and expenditure and, if necessary, impose reductions on future spending. The overall deficit of the public enterprises was reduced by the equivalent of 5 percent of GDP during 1983–85 by controlling costs and adjusting prices more frequently. This resulted in a considerable reduction in the rate of growth of domestic credit.

Interest and exchange rate adjustments were implemented early in the adjustment process. The Government raised bank deposit rates by 5–6 percentage points and lending rates by an average of 4 percentage points in early 1983, thereby establishing positive real rates on deposits of one year and longer and on commercial and personal loans, and eliminating the interest differential with neighboring countries. It maintained positive real interest rates and depreciated the tala on a trade-weighted basis by 18 percent in mid-1983, reversing the appreciation that had occurred since 1979. However, the rate of price increase accelerated to 24 percent during 1983. The erosion of competitiveness that occurred as a result of the rise in inflation was more than offset by a further depreciation of 12 percent in mid-1984. The rate of inflation slowed to 7 percent during 1984. With exchange rate flexibility subsequently maintained, international competitiveness continued to improve.

The external current account recorded surpluses in 1983–85 for the first time in more than ten years. A strong recovery in international commodity prices, which enabled the copra and cocoa marketing boards to raise procurement prices, recover earlier losses, and accumulate reserves for use in future price support operations, aided the adjustment effort. Manufactured exports benefited from the completion of a copra crushing mill and timber and tropical fruit processing facilities. A surge in workers’ remittances followed the improvement in the world economy and the depreciation of the tala. Aid flows benefited from the restoration of confidence of foreign donors. The restrictive policies brought import demand under control, and the dismantling of the foreign exchange allocation system proceeded without disruption. More entrepreneurs were encouraged to participate in importing, thus generating greater price competition in this sector. The rate of inflation dropped steadily.

The Government gave priority to the elimination of external payments arrears, because of their negative impact on the country’s ability to attract capital and service its debt; it achieved this goal by the end of 1985. Commercial arrears, which represented two thirds of the total and had been incurred largely on oil imports, were repaid over 18 months. Arrears of interest and principal on government and government-guaranteed debt were partly repaid within six months and the remaining amount was rescheduled in agreement with major creditors over a three-year period. At the request of one foreign creditor government, part of the debt was converted into equity investment. The external debt service ratio, including repayments of arrears, declined; gross official reserves were restored to three months of imports by the end of 1985.

Consolidation of Gains in 1986–87

The overall budget remained in surplus during 1986–87, despite measures providing lower corporate and personal income tax rates, some exemptions from excise taxes, and the temporary suspension of gift and estate duties. The Government controlled current spending and limited development spending to the availability of external assistance. Net lending increased, reflecting budgetary support for the restructuring of plantations and the financing of the commodity marketing boards. The Government undertook further repayment of indebtedness to the domestic banking system.

The Central Bank played an active role in containing the expansionary impact of the balance of payments surpluses. Direct credit controls to limit bank lending were supplemented by the introduction of reserve requirements in early 1986. High positive real interest rates were maintained, although nominal rates were reduced to reflect the lower rate of inflation. Banks were permitted to negotiate their own rates on deposits of 12 months and longer from late-1986. However, in order to encourage competition for funds among banks and to alleviate the rigidities inherent in credit ceilings, the permitted growth in each bank’s lending was linked to their deposit growth from early 1987.

Despite the difficulties created by the sharp decline in world prices of coconut products, the external current account continued to register surpluses in 1986–87. Underlying the further improvement was a drop in imports that resulted from lower petroleum prices, increased domestic energy production, and restrained domestic demand. Although real GDP growth was small, the rate of inflation continued to decline. With the substantial gains in competitiveness and the strengthening of the external position in recent years, the gradual depreciation of the exchange rate was halted. Using a cautious external borrowing policy, Western Samoa continued to reduce the debt service ratio, while gross official reserves rose further in relation to imports.

Table 1.

Western Samoa: Gross Domestic Product by Expenditure, 1983–871

(In millions of tala)

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Sources: Data provided by the Western Samoan authorities; and Fund staff estimates.

There are no official national accounts. Total GDP is derived from available data for agricultural production, industrial production, central government expenditure, and information on the construction and services sectors. The expenditure components incorporate balance of payments data for exports and imports of goods and services and available information on investment spending and government consumption; private consumption is derived as a residual.

Goods and nonfactor services.

Table 2.

Western Samoa: Output of Main Commodities, 1980–87

(In thousands of long tons)

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Source: Data provided by the Western Samoan authorities.
Table 3.

Western Samoa: Consumer Price Index, 1975–87

(Annual average percentage change)

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Source: Data provided by the Western Samoan authorities.

Weights for 1979–87 are derived from the Household Expenditure Survey, 1976–77. Estimates for 1975–78 are based on slightly different weights.

Table 4.

Western Samoa: Central Government Budget, 1975–87

(In millions of tala)

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Sources: Data provided by the Western Samoan authorities; and Fund staff estimates.

Including net loans and advances to public enterprises, capital subscriptions, and land purchases.

Table 5.

Western Samoa: Central Government Revenue and Grants, 1975–87

(In millions of tala)

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Sources: Data provided by the Western Samoan authorities; and Fund staff estimates.
Table 6.

Western Samoa: Central Government Expenditure, 1975–87

(In millions of tala)

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Sources: Data provided by the Western Samoan authorities; and Fund staff estimates.

Derived as a residual. Includes mostly purchases of goods and services.

Data for 1984 onward include government payments of import duties.

Table 7.

Western Samoa: Monetary Survey, 1975–87

(In millions of tala; end of period)

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Sources: Data provided by the Western Samoan authorities; and Fund staff estimates.
Table 8.

Western Samoa: Interest Rate Structure, 1975–87

(In percent per annum; end of period)

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Source: Data provided by the Western Samoan authorities.

Includes lending to public enterprises.

On loans of 6 years’ maturity.

On loans of 5–7 years’ maturity.

On loans of 8 years’ maturity.

Table 9.

Western Samoa: Balance of Payments, 1975–87

(In millions of SDRs)

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Sources: Data provided by the Western Samoan authorities; and Fund staff estimates.

Includes private capital flows, errors and omissions, and valuation adjustments.

Table 10.

Western Samoa: Exports by Commodity, 1975–87

(Value in millions of SDRs, volume in thousands of metric tons, unit value in SDRs per metric ton)

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Sources: Data provided by the Western Samoan authorities; and Fund staff estimates.

In millions of board feet.

Table 11.

Western Samoa: External Grants, 1980–87

(In millions of SDRs)

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Sources: Data provided by the Western Samoan authorities; and Fund staff estimates.

Mainly technical assistance in the form of scholarships for Western Samoans to study abroad and that part of the salaries for foreign experts that is not spent in Western Samoa.