This 2005 Article IV Consultation for Samoa reports that the combination of sound economic management and structural reform had led to robust growth, low inflation, sound public finances, and a comfortable external position. With continued commitment to sound macroeconomic and reform policies, Samoa became one of the best managed economies in the Pacific Island region. The level of public debt has steadily declined from more than 90 percent to about 50 percent. Samoa also made progress toward the Millennium Development Goals.

Abstract

This 2005 Article IV Consultation for Samoa reports that the combination of sound economic management and structural reform had led to robust growth, low inflation, sound public finances, and a comfortable external position. With continued commitment to sound macroeconomic and reform policies, Samoa became one of the best managed economies in the Pacific Island region. The level of public debt has steadily declined from more than 90 percent to about 50 percent. Samoa also made progress toward the Millennium Development Goals.

I. A Decade of Economic Transformation

1. Samoa embarked upon a remarkable economic transformation in the mid-1990s. Prior to that, Samoa was one of the weakest performers among the Pacific Island countries. A history of economic mismanagement compounded by a number of major shocks in the early 1990s, including two cyclones, had led to recurrent episodes of acute macroeconomic imbalances and a prolonged period of stagnation. These challenges prompted a major review of economic policy, culminating in the introduction of a comprehensive reform program in 1995/96 starting with important reforms in the public and financial sectors and of the tax and tariff systems.

2. With continued commitment to sound macroeconomic and reform policies, Samoa became one of the best managed economies in the Pacific Island region. The economy registered solid growth, low inflation, improved public finances and international reserve levels, and outperformed comparator countries both within and outside the region. The level of public debt (in relation to GDP) has steadily declined from over 90 percent to about 50 percent. Samoa also made progress toward the Millennium Development Goals (MDGs). Political stability, close consultation with stakeholders, and extensive efforts to foster a broad consensus for reform were integral to the program’s steady implementation and success. The reforms, while developed and owned by the Samoan authorities, also reflected policies recommended by the Executive Board in the context of Article IV consultations. The authorities’ concerted efforts at expenditure restraint, in particular the scaling back the level of public funding for major construction projects, is also consistent with staff advice during the 2003 Article IV consultation mission.

A01fig001

Real GDP per Capita, 1990–2004

(Index 1990=100)

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Source: World Economic Outlook.

Gross Domestic Product (GDP) Per Capita and Human Development Index (HDI) in Samoa and Comparator Countries

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Sources: UN Human Development Report, 2004, and IMF.

Rank out of 177 countries.

Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.

3. The 2005 Article IV consultation provides a good opportunity—at a time when Samoa has just launched the Strategy for the Development of Samoa (SDS-2005/07)—to take stock of the progress made in recent years and consider the challenges ahead.

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    Despite the notable progress over the last decade, overall macroeconomic performance weakened in recent years, the export base remains narrow (mainly fish, automotive parts, and tourism), and the economy remains vulnerable to external shocks. Real GDP growth slowed suggesting that the efficiency gains from the reforms over the last decade were neither fully sufficient to sustain a higher growth nor did they adequately diversify the economy and substantially reduce its vulnerability to shocks. Inflation has also risen (and is now above the regional average—Figure 1). Preserving a sound macroeconomic framework will be critical to reducing Samoa’s vulnerabilities to shocks.

Figure 1.
Figure 1.
Figure 1.
Figure 1.
Figure 1.
Figure 1.
Figure 1.

Samoa: Regional Comparator

(Averages, 2000-2004)

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Sources: Samoa authorities; and Fund staff estimates.
uA01fig02

Samoa’s Pre- and Post-Reform Real GDP Growth

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Sources: Fund staff estimates
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    Over the last decade, Samoa has successfully launched a wide-range of structural reforms (Box 1) that have laid the foundation for an enabling environment for private sector development. As a result, private sector activity has expanded at a faster pace than in other Pacific Island economies. Going forward, Samoa needs to tackle additional reforms (paragraphs 32–33) to consolidate the gains made over the last decade and boost long-term growth prospects.

Recent Structural Reforms and Unfinished Agenda

Recent Progress:

  • Public sector reform: The authorities have made significant progress on civil service reforms—in particular, the substantial restructuring of Ministries and downsizing of some functions have taken place, most notably in the Ministry of Public Works. A gradual reduction in staffing levels has been achieved through natural attrition. A major review of the functions of each Ministry by the Public Service Commission is expected in the second half of 2005 with a view to refocusing them on their core functions.

  • Public enterprise reform: The enactment of the Public Bodies Act in 2001 laid the groundwork for the SOE policy framework. Under this program, the government’s priority is to divest its minority shareholdings in various enterprises and privatize enterprises that are of no strategic public interest. Thus, the government sold its minority holdings in three small companies in 2004 and announced the privatization of Samoa Shipping Services, Agriculture Store and Samoa Broadcasting Corporation. For enterprises that are of strategic public interest, the government will adopt a corporatization program which aims to give these SOEs a stronger commercial focus, strengthen their corporate governance and financial reporting. These SOEs would be expected run as efficiently as similar private sector businesses and should at least achieve cost recovery and eventual self-sufficiency within a defined period, as described by their corporate plans. A Telecom Bill that is expected to be approved by Parliament by end-June 2005 aims to create a more competitive telecommunications sector underpinned by an appropriate regulatory framework.

  • Tax and tariff reform: These reforms have improved the efficiency of the tax system and liberalized the trade regime. In 1994, Samoa introduced a value-added tax on goods and services at 10 percent (this was raised to 12½ percent in 2002) and abolished most excise taxes. Since 1998, the maximum tariff rate has been reduced from 60 percent to 20 percent, the tariff schedule has been simplified to four rates and rates of 35–42 percent have been reduced in several steps to 8 percent. The mission’s discussions with the private sector suggest that they welcomed the reduction in tariff rates, and tariff levels do not constitute a barrier to private investment in Samoa. There are no significant nontariff barriers.

  • Financial sector reform: Supervision of the financial sector has been enhanced by bringing nonbanks and insurance companies under the supervisory framework of the central bank. The regulatory framework for offshore banks have also been tightened.

Unfinished agenda: Going forward, the SDS (2005–2007) emphasizes:

  • Deepening of SOE reform: Over the medium term, there are plans to consider placing some SOEs under private sector operators with management contracts while retaining government ownership, as an additional avenue to improve the financial position of the large loss-making SOEs.

  • Reforming the Land market: The government plans to look at the viability of the Land Leasing Committee to facilitate negotiations between owners of unused communal land and investors that are interested in leasing such land for commercial purposes.

  • Improving the investment climate: This will require better infrastructure (including service delivery by energy, water and ports utilities) and easing the regulatory burden (by simplifying the number of procedures and the time it takes to establish a business).

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Credit to the Private Sector

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Source: IMF International Financial Statictisc and WEO. ECCU includes Antigua and Barbuda, Dominica, Grenada, St. Kitts, St. Lucia, and St. Vincent.

4. The authorities remain committed to macroeconomic stability and reform that has earned them a good reputation within the region over the past decade, but also face a number of immediate domestic challenges to sustaining that strong record. The Remuneration Tribunal (which was appointed by the Prime Minister under the Remuneration Tribunal Act of 2003 and comprises of 2 former public servants and one official from the private sector) has recently called for a large wage increase (about 40 percent) for the public sector ahead of the elections scheduled for early 2006. The costs of restructuring Polynesian Airlines are also likely to impose a significant burden on the budget. Moreover, there have been calls for tax breaks to further stimulate private sector investment. Skillful economic management will be required to limit the impact of these domestic pressures on macroeconomic stability.

II. Recent Economic Developments

5. Although growth has slowed from rates attained through 2000/01, economic activity has started to pick up. Real GDP growth increased to 3½ percent in 2003/04 from about 1¾ percent in 2002/03.1 The slowdown in the manufacturing sector, poor performance of the fishing sector and cyclone Heta’s damage in January 2004 (which hit hard the agriculture sector), was more than offset by the robust growth in the services and construction sectors. Based on data through end-December 2004, growth is projected to be 3 percent for 2004/05.

uA01fig04

Samoa: Contribution to Real GDP Growth, 1999/01–2003/04

(In percentage points of contribution to total GDP growth, unless otherwise indicated)

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Sources: Samoan authorities; and Fund staff estimates.1/ Annual percentage change, includes government sector.

6. Inflation rose in 2003/04 but has come down in recent months (Figure 2). Headline inflation (12 months average) rose to 8 percent in 2003/04, up from 4¼ percent in 2002/03 and reached double digits in 2004 following cyclone Heta’s impact on food prices and the increase in import prices (including fuel prices). However, inflation has declined in recent months and is projected to be about 7½ percent (12 months average) in 2004/05.

Figure 2.
Figure 2.
Figure 2.
Figure 2.
Figure 2.

Samoa: Selected Economic Indicators, 1999/00-2004/05

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Source: Samoa Authorities and Fund staff estimates.

7. The external trade deficit widened in 2003/04. This reflected sluggish export growth and higher import growth which was driven by the boom in the construction sector (largely externally financed). Structural weaknesses rather than exchange rate competitiveness, were the main factors behind the weak export performance (paragraph 26). The widening of the trade balance was more than offset by the increase in remittances in 2003/04 and as a result the external current account deficit narrowed. Based on data through end-December 2004, the current account deficit (excluding official transfers) is projected to widen to 12¾ percent of GDP in 2004/05 reflecting continued weak export growth and higher import growth related to the construction boom.

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Samoa: Excess Liquidity in the Banking System, 1998–2005

(In millions of Tala)

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Source: Samoan authorities.

8. The Central Bank of Samoa (CBS) eased monetary policy in order to support economic activity following cyclone Heta in January 2004.2 The CBS injected substantial liquidity into the banking system through open market operations in central bank securities. Broad money and credit to the private sector rose significantly as a result, growing by 13 percent and 17 percent respectively in the year to June 2004. In the second half of 2004, private sector credit growth weakened reflecting the slowdown in key export sectors such as fishing. As a result, the level of excess liquidity in the banking system rose.

9. Fiscal performance has been broadly stable since 2002/03 reflecting continued expenditure restraint. The fiscal deficit outturn of 0.9 percent of GDP for 2003/04 was lower than budget (1½ percent of GDP). Although revenues were slightly below budget in 2003/04, this was more than offset by the continued expenditure restraint. The 2004/05 budget targets a deficit of 0.9 percent of GDP and its execution is broadly on track based on preliminary 2004/05 mid-year figures. Provided these estimates are confirmed, no additional measures will be needed to achieve the 2004/05 budget targets.

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Samoa: Overall Fiscal Balance, 1998/99-2004/05

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Sources: Samoan authorities; and staff estimates.Note: 2004/05 data is budget.

III. Report on the Discussions

A. Overview

10. Discussions focused on how to contain the immediate risks to macroeconomic stability as well as on the structural policy priorities needed to rekindle growth over the medium term. The mission cautioned the authorities that the pursuit of an expansionary fiscal policy carries clear risks both to macroeconomic stability and the government’s economic reform program. The authorities concurred with the thrust of the staff’s assessment of the economic outlook, the risks and the challenges ahead. Thus, discussions focused correspondingly on how best to adapt the stance of macroeconomic policies given the risks and the immediate domestic challenges. The mission also discussed reform measures that are needed to achieve robust and sustainable private sector led growth over the medium term.

B. Outlook and Vulnerabilities

11. The staff and the authorities project real GDP growth of 3 percent in 2005/06. Growth in tourism and continued strong construction activity (largely driven by the projects for the 2007 South Pacific Games to be held in Samoa) will provide a boost to economic activity.3 Agriculture is expected to slowly recover, while improvements in the fishing sector remain uncertain.

12. Over the medium term, like other Pacific Island countries, Samoa’s remoteness, limited resource base and the high cost of transportation from key markets will continue to hamper growth. Thus, the mission noted that to encourage private sector led growth, it is essential to keep domestic costs low through continued macroeconomic stability and structural reforms. Deeper SOE and land market reforms are critical if the private sector is to serve as the engine of growth. The improvements in public sector efficiency associated with the SOE reform would raise total factor productivity and facilitate the economy’s adjustment to shocks. Land market reform is also a potential source of growth particularly for the tourism sector (most of the target sites for tourism development are on communal land). The staff acknowledges the uncertainties regarding a sustainable medium-term growth for a small island economy like Samoa where economic activity is volatile and sensitive to various shocks (including natural disasters). This said, assuming that these reform efforts are successful, 3½ percent average growth over the medium term is achievable.

13. There are, however, risks to this outlook. On the upside, stronger-than-expected performance of the tourism sector could lead to higher growth. On the other hand, continued high oil prices and more generally the external economic environment could also influence the outcome. In particular, an economic slowdown in Australia, New Zealand and the United States, the home of the majority of émigré Samoans, could reduce the growth of remittances.

14. Samoa also remains vulnerable to both external shocks and natural disasters. In the absence of policy adjustment, these shocks could pose a threat to macroeconomic stability. Under a nonadjustment scenario developed by staff (in which fiscal policy is expansionary reflecting partly large public sector wage increases coupled with external shocks including continued high oil prices), the medium-term macroeconomic situation will worsen with lower growth, higher inflation, and a debt-to-GDP ratio close to 70 percent of GDP by 2009/10 (Table 5) This weaker macroeconomic position together with reduced capital inflows reflecting the stalling of structural reforms, would put a significant strain on the international reserves. The staff’s debt sustainability analysis shows that while isolated shocks to the economy would not negatively impact the debt ratios, a combination of shocks (including zero growth, a 30 percent devaluation of the tala and a natural disaster such as a cyclone) under a nonadjustment scenario would raise the debt to GDP ratio close to 100 percent, broadly the level where it was before the macroeconomic stabilization program of the mid-1990s.4 Given its vulnerability to a number of shocks, the mission urged the authorities to consider raising the reserve target (from its current level of 4 months of import cover to about 5 months). This would help to mitigate the impact of external shocks and natural disasters on the economy.

15. The authorities noted their efforts to promote the diversification of exports (including the Samoa Tourism Development plan) and to strengthen the resilience of the economy to external shocks. They reiterated that remittances will continue to provide the most stable source of balance of payments inflows and that the continued stability of remittance flows will serve as an important buffer against adverse shocks (Box 2). 5 They also consider the tourism sector as a promising engine for growth. This sector is very underdeveloped compared to some of the Pacific Island economies, suggesting that there is large scope for growth. They noted that a successful joint venture between Polynesian Airlines and Virgin Blue, which is expected to lower the high cost of air fares (one of the main impediments to tourism in Samoa) will boost prospects for the sector. The authorities also mentioned that Samoa and New Zealand have recently reached an agreement which will enhance Samoa’s market access to the latter’s economy for higher-value added goods (organic crops and processed food) and help to diversify its export base. This could also help fill the void left by garment exports.6 The authorities expressed their intention to review the reserve target given the economy’s vulnerability to shocks.

Importance of Workers Remittances

  • Samoa is one of the highest recipients of remittances as a share of GDP. Remittances amounted to about 24 percent of Samoa’s GDP in 2004, and constitute a critical component of the balance of payments flows. Samoa’s current account deficit would likely be unsustainable in the absence of remittances.

uA01fig07

15 Largest Recipients of Remittances as a Share of GDP (1990-2003 Average) 1/

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

1/ Source: WEO, Spring 2005, Chapter II
  • Remittance flows are relatively stable. Due to particular aspects of Samoan culture, expatriates tend to maintain very strong ties with their families, villages and churches, even in the case of second generation migrants. These strong ties combined with the continuing flow of new migrants ensure the reliability of remittances.

uA01fig08

Remittances as a Share of GDP

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Sources: Samoa authorities and Fund staff estimates.
  • Remittances affect households through a number of channels. Remittances could have an adverse effect on the labor supply of recipients if used as a substitute for labor income. On the other hand, remittances may also complement labor if used for productive investments. Anecdotal evidence suggests that remittances in Samoa tend to finance consumption. Remittances also help households to provide schooling (education) for their children and cope with adverse shocks.

  • Migration of skilled workers can have a positive impact on the economy through its effects on remittances and trade networks. It is likely that expatriate workers face higher skill-premia than those that remain in Samoa (for example, economies of scale may limit the opportunities for more skilled individuals in such a small economy). If so, additional education investments can translate into higher returns for the economy even if some of the more educated workers move abroad (through their remittances). “Exporting” human capital (as opposed to just raw labor) may well provide higher returns than investment in some of the traditional agricultural exports which are subject to terms of trade shocks and long-term cycles. High-skilled expatriates can also help build networks that facilitate international trade and investment in Samoa.

  • Efforts should be made to minimize transaction costs and encourage the use of the formal financial sector for channeling remittances as some of the remittances are transferred through informal channels (“hawala-type”). This would contribute to financial development.

C. Fiscal Policy

16. The staff recommended that the deficit target should be about 0.9 percent of GDP in the 2005/06 budget. The proposed target takes into account reasonable prospects for growth and the need to reduce the debt-to-GDP ratio to about 40 percent (the regional average) over the medium term (Figure 1). The deficit target also assumes that the 2005/06 budget will need to bear some of the restructuring costs of Polynesian Airlines (about ¾ percent of GDP) and therefore implies a modest fiscal tightening in 2005/06.

17. The authorities indicated their intention to press for a prudent 2005/06 budget. As a revenue measure, the staff proposed that the government consider the removal of the exemption on Value Added Goods and Services Tax (VAGST) on electricity consumption, except for low income households, which is expected to yield revenues of about ½ percent of GDP. The authorities noted that additional revenues to the budget could come from putting in place a revenue sharing arrangement on betting duties and enforcing the current dividend policy for SOEs.

18. The mission cautioned against granting tax breaks for the private sector since this risks eroding the revenue base. The authorities have given some tax breaks to encourage private sponsorship of the 2007 South Pacific Games. Moreover, there have been calls for tax breaks to further stimulate private sector investment. Samoa’s tax revenue (about 22½ percent of GDP), which relies largely on indirect taxes, falls just below the average for selected tourism-based island economies.

19. Expenditure restraint—in particular on wage policy—is crucial for achieving the proposed deficit target for the 2005/06 budget.

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    The authorities argued that Samoa’s wage bill is low compared to other Pacific Island countries. They mentioned that a review of public servants’ wages and salaries was last done in 1997 and public servants have not received a general wage increase since 2001. It was noted that given the political realities a sizable wage increase was inevitable. However, the authorities assured the mission that the wage increase recommended by the Remuneration Tribunal is unlikely to be supported by the government and that a more modest increase is likely to be approved.

uA01fig09

Selected Tourism Based Economies: Tax Revenue, 2003

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Sources: World Development Indicators; and Fund staff estimates.
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    The staff noted that although Samoa’s wage bill is lower than that of several other tourism-based island economies, a large wage increase is likely to have a significant demonstration effect on the private sector and would put pressures on both inflation and the balance of payments. Thus, the mission recommended that wage policy be developed in line with the ongoing civil service reform. To limit the impact of any wage increase on the budget, the mission recommended that the government put in place a moratorium on the filling of all vacancies other than essential positions. The staff noted that this could be complemented with phasing in the wage increase such that after the initial moderate increase subsequent wage increases be linked to performance.

uA01fig10

Selected Tourism Based Economies: Wage Bill, 2003

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Sources: World Development Indicators; and Fund staff estimates.
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    The authorities and the staff agreed that expenditure restraint will also require adequate control of subsidies and transfers to SOEs. Thus, the mission welcomed the progress made by the government toward a comprehensive restructuring of Polynesian Airlines (with IFC assistance). The mission advised the government to find ways to limit the burden on the 2005/06 budget including by spreading out the costs over time. The authorities noted that additional expenditure savings could be made by allowing the Electricity Power Corporation (EPC) to adjust tariffs in line with fuel prices. The cabinet subsequently approved a 15 percent increase of electricity tariffs to take effect May 2005, which will go toward reducing the need for a government subsidy to EPC.

uA01fig11

Government Spending, 2004

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Source: Fund staff estimates.

20. The authorities noted that the cost of restructuring Polynesian Airlines remains uncertain at this stage. Preliminary estimates prepared by experts put the likely cost in the range of 1½–4 percent of GDP, although the government considers that this may be too high and plans to conduct an independent review. The estimated cost includes the required capital injection into the planned airline joint-venture, the penalty cost of an early termination of the Polynesian Airlines jet lease and the cost of taking over the airline’s debts which are government guaranteed (Box 3).

Polynesian Airlines

  • Despite some recovery in the mid-1990s, government-owned Polynesian Airlines has for a long time been experiencing financial difficulties. In 1994 following an ill-designed expansion, Polynesian Airlines became technically insolvent. In response, the government embarked on a restructuring of the airline, with a new management team brought in, and the government taking over the debt (about 16 percent of 1994/95 GDP). This plan succeeded in turning the airline around. However, following another ill-devised expansion and the decline in regional tourism after the September 11, 2001 terrorist attacks, the airline is once again experiencing financial difficulties.

  • Problems at Polynesian Airlines have been a persistent burden to the budget. During the second half of the 1990s, excessive budgetary burden by Polynesian Airlines led the government to cut back on the much needed spending on education and health. To keep the airline operating, about 3 percent of GDP was allocated in the 2001/04 budgets and 0.9 percent of GDP are provisioned in the 2004/05 budget. In addition, the government has had, in the past, to take over the airline’s debt, (current debt to banks and obligations for aircraft leasing are government guaranteed).

  • A plan for the restructuring of Polynesian Airlines was announced on December 22, 2004 and was recently approved by the Cabinet. An advisory committee supported by the IFC, recommended to the Cabinet that Virgin Blue be chosen as the preferred partner for a new joint-venture airline to be set up with the government. The contractual document for the joint-venture is expected to be signed by end-June 2005 and if successful, the new airline is expected to become operational in the latter part of 2005. Virgin Blue’s interest in Polynesian Airlines stems from its regional ambition in the South Pacific and its strategy of expanding its network, following similar deals in Fiji.

  • Under the proposed plan, Polynesian Airlines is expected to become profitable. Under this plan, the current operations of Polynesian airlines would be divided into two entities: the joint venture would take over the long-haul operations while the short-haul and ground handling operations would remain with Polynesian airlines. With the joint venture operating within a “low-cost airline,” the long-haul operations, which had been traditionally the loss-making side of Polynesian airlines, are expected to become profitable. At the same time, short-haul and ground operations could benefit from the synergies with the joint venture and the increased activity that the joint venture would bring in.

  • The restructuring of Polynesian Airlines could entail sizable costs to the budget. Under the proposed plan, the government is expected to inject ½ percent of GDP as capital into the joint-venture. In addition, it may have to bear the penalty cost of early termination of the lease of the jet it currently operates, and the costs of assuming the airline’s debts which are government guaranteed. Some of these costs will have to be borne by the 2005/06 budget, but some spreading-out of the penalty costs for the early termination of the jet lease over a few years is currently envisaged. In 2001 when Polynesian Airlines returned one of their jets prior to the expiration of the lease, they managed to spread out the penalty costs over a few years.

21. Over the medium term, there is a need to strengthen tax administration, reduce less productive spending and reorient expenditures toward social and infrastructure sectors. The authorities noted that the amalgamation of the Inland Revenue and Customs into a new Ministry is expected to facilitate a more efficient tax administration and improve tax compliance. The staff expressed its support for the authorities’ commitment to the establishment of a Large Taxpayer Unit (LTU) and the introduction of a single Tax Identification Number in line with the 2003 Fiscal ROSC. The mission also recommended this be used as an opportunity to review and modernize the 1974 income tax legislation. The authorities concurred that the areas identified by the mission for strengthening tax administration are broadly consistent with their own priority needs for technical assistance.7 The authorities also noted that greater rationalization of expenditures would enable reorienting spending toward social sectors (education and health) and infrastructure which are important for long-term growth.

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Samoa: Spending on Education and Health, 1997/98-2004/05

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Sources: Samoan authorities; and Fund staff estimates.Note: 2004/05 data is budget.

22. The mission encouraged the authorities to draw up a credible medium-term fiscal consolidation plan in the forthcoming 2005/06 budget. At present, annual budgets do not include medium-term fiscal forecasts and there is no explicit discussion of fiscal sustainability. The government’s budget rule consists of a ceiling on the overall deficit of 3½ percent of GDP. Given that a full-fledged Medium-Term Budget Framework (MTBF) will take time to develop, the mission recommended that the 2005/06 budget signal the government’s intention to move toward a MTBF by laying out the broad parameters of the government’s medium-term fiscal strategy. The authorities agreed to include a simplified MTBF in the 2005/06 budget and present a more detailed program in the 2006/07 budget.8

D. Monetary and Exchange Rate Management

23. Monetary policy needs to be less accommodating in the near term given reasonable prospects for growth and the need to support the peg. If the risks to the forthcoming 2005/06 budget were to materialize and balance of payments pressures emerge, the authorities should stand ready to tighten monetary policy. The staff noted that the ability of the government to contain the fiscal position would be a critical factor in determining whether such a tightening would be necessary. The CBS concurred noting that this advice was broadly in line with their own thinking on monetary policy stance for 2005/06. The CBS is expected to outline its monetary policy framework for the coming fiscal year once the 2005/06 budget is announced at end-May 2005.

24. The authorities noted that the current pegged exchange rate regime has served well as a nominal anchor. They emphasized that the policy of periodically making adjustments in the value of the tala within a ±2 percent band by the CBS, appears to have struck an appropriate balance between maintaining external competitiveness, and preserving the exchange rate peg’s role as an anchor for inflation. The peg to a basket of currencies has also helped to avoid sharp movements in the nominal effective exchange rate of the tala.

25. The mission noted that the stalling of export growth is of some concern. Fishing remains the largest export industry but this sector has not performed well in recent years in part due to unfavorable weather conditions. Despite successful shifts toward new export crops, improvements in the agricultural sector are likely to be gradual. The staff noted that regional competitiveness indicators including export market share (Figure 5), do not signal an overvaluation of the tala nor do they suggest that Samoa has lost its competitiveness within the region. The recent appreciation of Samoa’s real effective exchange rate mainly reflects the surge in food prices in early 2004 (following cyclone Heta); underlying nonfood prices and costs have not risen significantly relative to major trading partners.

26. The authorities (and the private sector) agreed with the staff that the underlying structural weaknesses in the economy have contributed to the stalling of export volume growth. Structural problems include periodic power outages in some parts of the country, poor infrastructure including inefficient landing and docking facilities at the ports (which has affected fish exports), obstacles to leasing communal land and using such land as collateral for loans and the lengthy review process for foreign investments and for starting a business. Thus, the staff noted that addressing the structural weaknesses is critical to reinvigorating and diversifying the export base. The authorities responded that the SDS (2005–2007) has laid out several initiatives to tackle these structural weaknesses and improve the investment climate. In particular, they noted that the restructuring of energy, water and ports utilities, if successful, would improve the quality of the service delivery to the private sector and help revitalize key export industries such as fishing. They also plan to establish a “one-stop shop” for starting businesses and for foreign investors.

Other Regional Competitiviness Indicators 1/

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Sources: World Bank, World Development Indicators, 2004; UNDP, Human Development Report, 2004;World Tourism Organization and South Pacific Tourism Organization, World Bank: Doing Business in 2004: Understanding Regulation, and Fund staff estimates.

Data for 2004, unless otherwise indicated.

Excludes effective rates from specific import duties and ad valorem rates on selected luxury items.

E. Financial Sector Issues

27. The financial sector remains sound and significant progress has been made in strengthening the supervisory framework. The four commercial banks are adequately capitalized and are in compliance with the 15 percent capital adequacy requirement. The CBS stated that the current practice of conducting its examinations through external auditors and extensive off-site monitoring, along the lines of the New Zealand model, remains effective. They also noted that the information sharing between the CBS, external auditors and the foreign banks (whose parent banks maintain strong internal controls on their subsidiaries) remains useful and reduces the need for extensive on-site monitoring.9

28. Samoa continues to make progress on the tightening of the regulatory requirements for offshore banks and strengthening the framework for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT). The international banking bill was approved by Parliament in April 2005 and includes the provision to require all offshore banks to establish a real physical presence in Samoa and to set up an International Financial Authority as the new supervisory agency for the offshore banks. In March 2005, an AML/CFT bill was submitted to the Attorney General’s Office for review and certification before tabling for Parliamentary approval. This bill is expected to go toward making Samoa compliant with the AML/CFT requirements and the 40 + 8 recommendations of the Financial Action Task Force (FATF).

29. The mission recommended a review of both the National Provident Fund’s (NPF’s) role in the economy and its investment guidelines. The NPF’s nonperforming loans are high, reflecting increasing activity in its noncore functions. Its assets are skewed in favor of short-term loans to members and various public sector related projects.10 The staff noted that investment policies of National Provident Funds are designed to confine the pension fund’s exposure to risk-free assets, and are therefore constrained by tight investment guidelines. The staff also urged the CBS to strengthen the NPF’s supervisory framework..

30. The authorities concurred that it was timely to review the NPF’s investment guidelines. They agreed with the staff’s view that the significant exposure of NPF’s assets to members’ borrowings, most of which is used to finance consumption, was less than desirable. They noted that the NPF’s investment framework is constrained by the lack of long-term investment opportunities in the domestic market. Thus, the government has recently given the NPF the authority to invest abroad 16 million tala (1½ percent of GDP or 7 percent of NPF’s total assets) and to date about 2 million tala has been invested overseas. The authorities expressed their interest in receiving technical assistance to strengthen the NPF’s risk management and investment framework and enhance its financial soundness.

F. Structural Reform Policies

31. Public sector reform: The mission commended the authorities for the progress made on civil service reform in recent years (Box 1). The staff expressed its support for the plans by the Public Service Commission to review the functions of each Ministry by the end of 2005 with a view to refocusing them on their core functions.

32. Public enterprise reform: The public sector still dominates the economy with the state accounting for about 40 percent of both GDP and total employment. The mission expressed its support for the general thrust of the government’s SOE policy framework, which focuses on the corporatization of all SOEs, in particular those that are of strategic public interest (power, ports and water), and privatization of enterprises in the nonstrategic sectors (Box 1). The mission encouraged the government to accelerate the enactment and the implementation of the Companies Act in line with the Public Bodies Act which requires SOEs to be run on strict commercial principles. The authorities agreed and noted that supporting legislation for the Companies Act (which includes bankruptcy and litigation provisions) is being developed. The staff welcomed the progress made by the authorities toward the introduction of more competition in the telecom sector supported by an appropriate regulatory framework.11

33. Land market reform: The authorities and the staff agreed that land market reform is important for private sector development. The staff emphasized the need to find ways to build an institutional and legal framework capable of sustaining an efficient lease market, which safeguards the interests of the local community while ensuring protection to the investor. The authorities expressed their intentions to explore the possibility of facilitating the leasing of some unused communal land for private investment purposes after extensive public consultations. However, they noted that the constitution bars the sale of communal land for commercial purposes. Therefore, they would need to proceed cautiously on land market reform given the political sensitivity.

34. Trade liberalization: The mission commended the authorities for the progress made on trade reform as well as toward WTO accession which is expected to be concluded by the end of 2005. Samoa is a founding member of the Pacific Island Countries Trade Agreement (PICTA), which aims to eliminate all intra-regional tariffs by 2012. Samoa is also a participant in the negotiations currently under way for new access to the European Union (EU) market through reciprocal Economic Partnership Agreements (EPAs) under the Cotonou Agreement, expected to take effect in 2008. The authorities noted that Samoa stands to benefit from EPAs although it may face supply constraints and challenges in meeting the strict EU standards. They also argued that given the very low level of imports from the EU to Samoa (about 1 percent), the impact of the EPA on tax revenues is expected to be minimal.

G. Other Issues

35. While Samoa has made important progress in strengthening the reporting of economic statistics, further improvements in their timeliness and quality would allow for more comprehensive economic analysis and surveillance. Samoa formally adopted the Fund’s General Data Dissemination Standards (GDDS) in November 2003. The national accounts and the consumer price index were rebased in 2003 based on the 2002 household income and expenditure survey (HIES). The CBS is expected to complete its transition to Balance of Payments Manual 5 by end-June 2005. Further improvements are needed in other areas, notably the fiscal accounts to address weaknesses in terms of the quality and timeliness of available data. Thus, the mission supported the authorities’ request to PFTAC for technical assistance in the migration to the Fund’s Government Financial Statistics Manual (GFSM) 2001. Improved budget disclosure of medium-term forecasts and assumptions, tax expenditures, fiscal risks and contingent liabilities would also be beneficial.

IV. Staff Appraisal

36. Over the last decade, Samoa has transformed itself into one of the best managed economies in the Pacific Island region. The economy has registered solid growth with low inflation, public finances have improved significantly and official reserves have been raised to more comfortable levels. Human development indicators are also amongst the highest in the region. The authorities deserve to be commended for good macroeconomic management.

37. Despite this notable progress, the record in more recent years has been uneven and the authorities also face immediate challenges to sustaining that strong record. Decisive action is needed to limit the large domestic pressures on the 2005/06 budget and prevent the emerging risks to macroeconomic stability which could threaten the hard-won gains made over the last decade. Skillful economic management will be required to limit the impact of these pressures on macroeconomic stability.

38. Prudent fiscal policy stance should be continued in the forthcoming 2005/06 budget. The fiscal deficit should be limited to about 0.9 percent of GDP given the need to reduce the debt level. Prudent wage policy is crucial to achieving this deficit target. To limit the impact of any wage increase on the budget, a moratorium on the filling of all vacancies other than essential positions will be required and any wage increase phased in. Further progress needs to be made by the government toward a comprehensive restructuring of Polynesian Airlines. Given that the restructuring costs are likely to be large, ways should be found to limit the burden on the 2005/06 budget including by spreading out the costs over time. The granting of large scale tax breaks for the private sector which would erode the revenue base should be avoided.

39. Strengthening tax administration and reorienting expenditures toward social and infrastructure sectors remain a policy priority over the medium term. The authorities’ commitment to strengthening tax administration especially the establishment of a Large Taxpayer Unit should be pursued and it would be desirable to modernize the 1974 income tax legislation. Greater rationalization of expenditures would enable reorienting spending toward education, health and infrastructure sectors which are important for medium-term growth. The intention to include a simplified medium-term budget framework in the 2005/06 budget is welcome.

40. Monetary policy needs to be less accommodating in the near term. If the risks to the 2005/06 budget were to materialize and balance of payments pressures emerge, the authorities should stand ready to tighten monetary policy. The ability of the government to contain the fiscal position would be a critical factor in determining whether such a tightening would be necessary.

41. The current pegged exchange rate regime has served well as a nominal anchor. The policy of periodically making small adjustments in the value of the tala appears to have struck an appropriate balance between maintaining external competitiveness, while preserving the exchange rate peg’s role as an anchor for inflation. Structural weaknesses such as poor infrastructure services by key utilities, rather than exchange rate competitiveness appear to have largely contributed to the weak export performance. Addressing these structural weaknesses is critical to reinvigorating and diversifying the export base.

42. The Central Bank is commended for recent measures taken to strengthen the supervision framework. The approval of the international banking bill which includes a provision to require all offshore banks to establish a real physical presence in Samoa and to set up an International Financial Authority as the new supervisory agency for offshore banks is helpful. The progress made in strengthening the AML/CFT framework is also welcome.

43. The National Provident Fund’s role in the economy and its investment guidelines should be reviewed. Given its high level of nonperforming loans, reflecting increasing activity in its noncore functions, there is a need to review its investment guidelines as well strengthen its supervisory framework. A financially-sound pension fund will be needed for dealing with the fiscal pressures which can arise when the population ages.

44. It is important that Samoa continues to carry forward its public sector reforms and move ahead to tackle the other impediments to private sector development. The authorities are commended for the progress made on civil service reform in recent years. Progress toward the creation of a more competitive telecommunications sector underpinned by an appropriate regulatory framework, and WTO accession which is expected to be concluded by the end of 2005, is commendable. Deeper SOE and land reform are critical for private sector development. Thus, the government should accelerate the enactment and implementation of the Companies Act and of the supporting legislations which will strengthen the corporatization program for SOEs. The government should engage in consultations with the public in order to find ways to build an institutional and legal framework capable of sustaining an efficient lease market for unused communal land, which safeguards the interests of the local community while ensuring protection to the investor.

45. While data provision for surveillance purposes is still adequate overall, staff’s analysis was affected by shortcomings in certain areas. Samoa’s formal adoption of the IMF’s General Data Dissemination Standards (GDDS) is welcome. Improved quality and timeliness of fiscal data and disclosure of medium-term budget forecasts and assumptions and fiscal risks are encouraged.

46. It is recommended that the next Article IV consultation with Samoa take place on a 24-month cycle. The authorities welcomed the possibility of an interim staff visit, which could focus on the 2006/07 budget and the medium-term budget framework.

Table 1.

Samoa: Selected Economic and Financial Indicators, 2000/01–2005/06 1/

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

Fiscal year beginning July 1.

Change in percent of beginning period broad money.

Excludes reserve accumulation by commercial banks

Includes publicly guaranteed debt. The government took over Polynesian Airlines debt in August 1994.

In percent of exports of goods and services.

IMF, Information Notice System Index; end of period.

Table 2.

Samoa: Balance of Payments, 2000/01–2005/06

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

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

Excludes trade data for Yasaki Samoa Limited and imports by foreign diplomatic missions located in Samoa.

Imports in 2001/02 include exceptional capital imports (8 shipping vessels and machinery for the extension of the port) amounting to $8.6 million.

Excludes reserve accumulation by commercial banks.

Estimated on the basis of calendar-year data.

As a percent of exports of goods and nonfactor services.

Table 3.

Samoa: Financial Operations of the Central Government, 2000/01–2005/06

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

The jump in external grants in 2004/05 is attributed to several projects in connection with the organization of the 2007 South Pacific Games.

Table 4.

Samoa: Monetary Survey, 2000/01–2004/05

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Source: Central Bank of Samoa.

Includes Treasury’s monetary accounts.

For quarterly data, the annual change is calculated relative to the respective quarter of the previous year.

Table 5.

Samoa: Medium-Term Outlook, 2000/01–2009/10

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

Baseline projections include the cost of settling Polynesian Airlines’ external obligations which are government guaranteed.

Excludes the import of a ferry in January 1999 (US$11.5 million), and the import of an airplane in November 2000.

Includes publicly guaranteed debt. The reduction in the debt-toGDP ratio from 2005/06 to 2009/10 is almost entirely driven by the higher nominal GDP.

In percent of GNFS exports.

Table 6.

Samoa: Vulnerability Indicators, 2000/01–2003/04

(In percent of GDP, unless otherwise indicated)

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Sources: Data provided by the Samoan authorities; and Fund staff estimates.
Figure 3.
Figure 3.
Figure 3.
Figure 3.
Figure 3.

Samoa: External Sector Developments, 1999/00-2004/05

Citation: IMF Staff Country Reports 2005, 220; 10.5089/9781451840711.002.A001

Sources: Samoa authorities, and Fund staff estimates.
Figure 4.
Figure 4.
Figure 4.