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.
1. This statement describes the 2005/06 budget which was presented to Parliament on May 31, 2005 after the staff report was circulated to the Executive Board on May 16, 2005. The proposed deficit target (4 percent of GDP) for 2005/06 turned out to be much larger than the staff’s recommendation (0.9 percent of GDP), which reinforces the concerns expressed in the staff appraisal.
2. The higher deficit target reflects the large costs of restructuring the loss-making Polynesian Airlines and the public sector wage increase approved by the government, and to a lesser extent the increase in pension benefits.
Of the 2½ percent of GDP that has been allocated for the restructuring costs of Polynesian Airlines, about ½ percent of GDP is for the capital costs of the new joint venture with Virgin Blue to be paid upfront, and 2 percent of GDP is for the penalties to be imposed for the early return of the airline’s jet to the leasing company. The budget assumes that the authorities will make the full bullet payment for these penalties in 2005 instead of spreading out the costs over time. The inaugural flight of the airline for the new joint venture is expected to take place around September 2005.
The government has approved an average wage increase of about 35 percent for public servants to be phased in over a period of three years (this compares to the increase of about 40 percent recommended by the Remuneration Tribunal for 2005/06). The wage increase will cost the 2005/06 budget about 1¼ percent of GDP and about 1 percent of GDP each for the 2006/07 and 2007/08 budgets.
The government has also approved an increase of monthly pensions for senior citizens from 100 tala to 125 tala to take effect July 1, 2005 which is expected to cost the 2005/06 budget about ¼ percent of GDP.
3. The budget contained some offsetting measures:
The government will enforce the 50 percent dividend policy for all state-owned enterprises in 2005/06 which is expected to yield revenues of about ¼ percent of GDP. There were no other new revenue measures announced in the budget.
A number of cost-cutting measures were announced in the budget mainly targeted at reducing operational costs of government departments, including the removal of all vacancies and new positions except where appointments are pending, reduction of travel costs for public servants, enforcement of the policy on the use of government vehicles, and standardization of allowances for board members in public bodies. These measures could yield savings of about ¼ percent of GDP.
4. Although the impact of the 2005/06 budget on reserves and interest rates is likely to be manageable, the expanded deficit should have a non-negligible macroeconomic impact on the economy, especially on the balance of payments.
If the full payments for the restructuring of Polynesian Airlines are made in 2005, this will lower gross reserves from the current level of 4 months of imports to about 3½ months of imports. Thus, the reserve level at end-2005 would stay broadly unchanged from the end-2004 level. While a higher reserve coverage ratio is desirable, the payments do not significantly undermine Samoa’s reserve position.
The budget also announced that about 2½ percent of GDP of the deficit target would be financed domestically (through issuance of treasury bonds of 5, 10 and 15 year maturities). However, given the level of excess liquidity in the banking system as discussed in the staff report (paragraph 8), which currently stands at about 4 percent of GDP, the impact of this on interest rates is likely to be minimal.
Excluding the reform costs for the restructuring of Polynesian Airlines, the 2005/06 budget deficit target becomes 1½ percent of GDP. This compares with about ¼ percent of GDP recommended by the staff (excluding restructuring costs for the airline the staff tentatively included in its recommendation). The inflation and growth impact of the higher deficit (about 1 percent of GDP) is likely to be small, especially if a significant part of the wage increase leaks into imports. However, this implies that there would be a non-negligible impact on the balance of payments, reinforcing the staff’s concerns and strengthening the case for monetary tightening as recommended in the staff appraisal (paragraph 40).