Samoa
2007 Article IV Consultation: Staff Report; and Public Information Notice on the Executive Board Discussion for Samoa

Samoa has achieved a major economic transformation over the last decade and a half. This 2007 Article IV Consultation highlights that real per capita GDP in Samoa has increased by more than 3 percent per year on average, and external public debt has fallen below 40 percent of GDP. The external position benefited from the rapid growth of remittances and tourism receipts. Executive Directors have congratulated the authorities on Samoa’s impressive growth performance and economic transformation over the past decade, with Samoa now set to graduate from least developed country status.

Abstract

Samoa has achieved a major economic transformation over the last decade and a half. This 2007 Article IV Consultation highlights that real per capita GDP in Samoa has increased by more than 3 percent per year on average, and external public debt has fallen below 40 percent of GDP. The external position benefited from the rapid growth of remittances and tourism receipts. Executive Directors have congratulated the authorities on Samoa’s impressive growth performance and economic transformation over the past decade, with Samoa now set to graduate from least developed country status.

I. Success Story of the Pacific

1. Over the last decade and a half, Samoa has achieved a major economic transformation. Real per capita GDP increased by over 3 percent per year on average, faster than that seen elsewhere in the Pacific as well as in other small island regions. This is a remarkable performance for a small and remote island. The transformation is reflected in the transition toward service activity, especially commerce and tourism.

uA01fig01

Average Real GDP Growth Per Capita, 1993-20061

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Sources: IMF, World Economic Outlook database; and staff calculations.1 Simple averages.2 Mauritius, Seychelles and Maldives.

2. This performance owes to a broad-based reform program. Since the early 1990s, Samoa has undertaken major reforms. Tax reforms, notably the introduction of a value added tax (VAT) in 1994, and civil service reform brought a sizable reduction in public debt. Structural reforms to foster competition and develop the private sector were undertaken: external tariffs were lowered and several State-owned Enterprises (SOEs) were privatized. The authorities also liberalized interest rates, eliminated credit ceilings, and moved to indirect monetary policy instruments. The success of these reforms was facilitated by Samoa’s political stability: the Human Rights Protection Party (HRPP), in power for the past 25 years, was reelected following the March 2006 Parliamentary elections.

uA01fig02

Evolution of Samoa’s Budget Deficit, 1992/93-2005/06

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: Samoan authorities; and staff calculations.

3. The external position benefited from the rapid growth of remittances and tourism receipts. A large and growing population of Samoans live in Australia, New Zealand and the United States.1 Because of a culture that emphasizes respect for elders and attachment to land, expatriates send large remittances and visit their homeland regularly. These visits have also helped kick-start the tourism industry, with Samoa now becoming a tourism destination for Australians and New Zealanders. Reflecting this, tourism is likely to contribute significantly to growth over coming years.

uA01fig03

Tourism and Remittances

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: Samoan authorities.

4. These successes are enabling Samoa to graduate from LDC status. Samoa exceeds two of the three LDC criteria set by the U.N., the Human Assets Index and the per capita Gross National Income Index, although Samoa’s economic vulnerability still remain high. As a result, the U.N. committee on LDCs decided last year to remove Samoa from its list. Following a three year transition period, the country will officially graduate in 2009.

uA01fig04

II. Recent Economic Performance and Outlook

A. Recent Developments

5. After a strong performance in 2004/05, growth decelerated to 1¾ percent in 2005/06. This mainly reflected the decline in production of the only major manufacturer in the country as this subsidiary of a Japanese company restructures to better compete with other group subsidiaries in Asia.2 The rest of the economy remained strong: growth reached 4 percent driven by the continuing dynamism of the service sector, notably the tourism and construction sectors, ahead of the South Pacific Games (SPG) in September 2007. The momentum is continuing in 2006/07.

uA01fig05

Real GDP

(Annual percentage change)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: Samoan authorities.

6. Inflation remains low. The recent pick-up in the headline and underlying measures of inflation mostly reflected changes to excise rates in July 2006 and a 2½ percentage point increase in the VAT in October. However, excluding those elements, inflation has remained muted, currently running at around 2½ percent (year-on-year).

uA01fig06

CPI Inflation

(Y/Y percent change)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: Samoan authorities and Staff calculations.

7. Fiscal policy was tightened following the March 2006 election. Prior to the election, civil servants were granted a 42 percent general increase over 3 years, starting in July 2005. The first step increase, which cost 1¼ percent of GDP, contributed, in combination with the restructuring costs of Polynesian Airlines (estimated at 2½ percent of GDP), to the deterioration of the fiscal position in the first nine months of 2005/06 (July 05-March 06). After the elections, and in response to the weakening of the external position, the authorities tightened their fiscal stance. In the April-June 2006 period, the authorities ran a sizable fiscal surplus limiting the overall 2005/06 deficit to ½ percent of GDP, much lower than the 4¼ percent budget target.

uA01fig07

Overall Fiscal Balance

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: Samoan authorities.

8. Private sector credit growth was rapid in 2005/06, although it declined after some monetary tightening. Fueled by a surge in lending for construction activities, notably in the tourism sector and in anticipation of the SPG, private sector credit growth accelerated sharply. To limit pressure on the external position, the central bank tightened monetary policy.

uA01fig08

Private Sector Credit Growth

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: Samoan authorities.

Rates on CBS securities—the CBS’s main instrument—rose from 2 to 6½ percent between June and October 2006.3 However, the rise in the lending rate was relatively small. To supplement the increase in policy rates, the central bank used moral suasion to curb lending.

uA01fig09

Interest Rates

(Percent per annum)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: Samoan authorities.

9. The external position has recovered since mid-2006. The preelection stimulus, private sector credit growth, and higher oil import bill, contributed to a 23 percent surge in imports in the first quarter of 2006. Even as tourism receipts and private remittances rose, the deterioration in the trade balance led to a fall in foreign reserves to below 3 months of imports in May 2006. Since the tightening of fiscal and monetary policies, the external position has improved, with reserves rising to about 3½ months of imports by January 2007.

uA01fig10

Gross International Reserves

(In millions of U.S. dollars)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: Samoan authorities.

B. Outlook and Risks

10. Short-term prospects are good. Growth is expected to rebound to 3 percent for 2006/07. Construction activity remains buoyant thanks to the SPG and ongoing donor projects. Combined with rising tourist arrivals, this should help boost 2007/08 growth to around 3½ percent. Reflecting the recent increases in the VAT rate and excise taxes, headline inflation should remain around 5¼ percent through 2006/07. Nonetheless, core inflation remains low and headline inflation is expected to revert to 3 percent in 2007/08. The balance of payments should continue to benefit from growing tourism, foreign investment, and remittances, while import growth decelerates given the policy tightening, allowing reserves to rise to almost 3¾ months of imports by mid-2008.

11. Over the medium-term, steady real per capita growth is expected, with external debt declining. Under the baseline scenario, staff expects annual per capita growth to remain at around 3-3½ percent until 2010/11, with continued emigration limiting population growth. The service sector is likely to be the key driver of growth, boosted by the strong performance of the tourism sector. The current account should improve to a surplus of 1½ percent of GDP in 2010/11 as net export of services and remittances continue to grow. Reserves are projected to reach 5 months of imports by 2010/11. Consequently, external debt should decline from around 40 percent of GDP to 34 percent in 2010/11. Moreover, with all external debt concessional, the net present value of debt is expected to decline to 20 percent of GDP.

12. Nonetheless, given its size and remoteness, Samoa remains vulnerable to external shocks. First among them are cyclones: Samoa has been hit by 3 major cyclones since 1990. Should a cyclone hit the islands again, destroying much of the agriculture crop and slowing tourism, the outlook would worsen with lower growth, higher inflation and a short-term deterioration in the balance of payments. Other shocks affecting regional tourism or remittances could also adversely impact the economy.

13. Continued deepening of the reform program would yield a much higher real per capita growth. While Samoa’s growth performance has been impressive, the economy still faces impediments to growth. The restriction on leasing customary land for productive uses, notably for tourism and intensive agriculture, together with the cost of finance and some infrastructure services remain critical issues. Staff believes that a more forceful push to remove these impediments could raise average real per capita growth by ½ to 1 percentage point over the medium term, through additional tourism and investment activity.

III. Policy Discussions: Sustaining the Strong Performance

The discussions focused on ways to sustain rapid per capita income growth, while limiting Samoa’s vulnerability to risks and pressures. Given Samoa’s stable macro-economic situation, particular attention was placed on ways to deal with possible future fiscal challenges—aging of the population and lower donor assistance—while maintaining fiscal balance, and ways to strengthen the monetary policy framework in order to better deal with possible external shocks. In addition, the staff reinforced the importance of deepening structural reforms in order to accelerate per capita income growth, in line with the authorities’ intentions.

A. Maintaining Fiscal Prudence

14. The staff and authorities agreed that continued fiscal discipline, especially in the face of coming fiscal pressures, is crucial to sustaining Samoa’s strong performance. Moreover, given Samoa’s basket peg regime and the significant impact of government operations on the balance of payments, the staff emphasized the need to maintain prudent fiscal policy. Indeed, as the episode of 2005/06 has shown, reserves can quickly evaporate if the fiscal situation deteriorates.

15. The fiscal strategy is therefore designed to ensure the sustainability of Samoa’s public and external debt, and create some fiscal space to deal with possible shocks. Currently, the public debt to GDP ratio in Samoa, at around 39 percent, is in line with other Pacific islands.4 Maintaining the overall fiscal position around balance over the medium-term would help reduce it to 34 percent by 2010/11. However, should a strong cyclone hit Samoa, public debt levels would rise again to more than 40 percent by 2010/11. If a series of unusually strong cyclones hit Samoa (as happened since 1990) Samoa’s debt profile would deteriorate further (see attached DSA annex).

uA01fig11

Public Debt

(In percent of GDP, latest available year)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: IMF staff estimates.
uA01fig12

External Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: Samoan authorities; and IMF staff estimates.

16. Staff argued that a broadly unchanged fiscal deficit from 2005/06—½percent of GDP—was appropriate. The authorities budgeted for a 1¼ percent of GDP deficit in FY2006/07, with revenue measures including a rise in some excises and in the VAT rate from 12½ percent to 15 percent. This also reflects a supplementary budget passed in December 2006 imposing cuts in Ministries’ operating budgets to finance additional SPG-related capital spending. Staff argued that maintaining a broadly unchanged deficit could be done by cutting an additional 3 percent of current spending. The staff also recommended a broadly balanced budget for FY2007/08.

uA01fig13

Overall Fiscal Deficit

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

17. Over the medium-term, Samoa could face several fiscal pressures: first, among those, the pressure from an aging population: with Samoans’ average life expectancy rising, so will public expenditures on health. Together with the authorities’ intentions to increase spending on education, the likely increase in social spending will put pressure on overall expenditures.5

uA01fig14

Samoa: Share of Over 60-Year-Old in Total Population

(Percent)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: UN.

18. Samoa’s anticipated graduation could also put pressure on the fiscal accounts by limiting both the external grants (which have averaged around 8 percent of GDP in recent years) as well as access to concessional financing for infrastructure projects. In discussions with staff, most donors did not link their assistance decisions to the LDC graduation decision, suggesting a relatively minimal impact on donors’ assistance to Samoa. However, the authorities should prepare for lower levels of assistance.

19. Reflecting these pressures, the staff argued for continued balanced budgets with overall expenditure restraint. With revenue to GDP at around 30 percent—slightly above the average for tourism-based islands—the staff argued that fiscal pressures should be handled primarily through current expenditure restraint. For instance, a halving of grants by 2010/11 would require reducing current spending from around 25 percent of GDP to 23 percent so as to keep development expenditure constant.

uA01fig15

Central Government Current Revenue

(In percent of GDP, average of 2004-06)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: APD country desks.1 2006/07 projection data for Samoa.
uA01fig16

Wage Bill, 2005

(in percent of GDP)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Sources: IMF, GFS; and Fund staff estimates.

20. This also argues for restraining the growth of public wages. The authorities noted that this was being dealt with by moving towards implementing a salary structure more closely aligned with performance over the next two years. Staff supported this initiative, noting that any general public wage increase should be consistent with budgetary constraints set by medium-term fiscal plans, and integrated with any civil service reform.

21. Restraint on current spending, as well as additional social spending needs, also calls for cutting non priority spending. This could be done by cutting subsidies and transfers for SOEs which have cost an average of 2½ percent of GDP per annum since 2000. These measures, together with the saving of any surpluses, would also create a cushion in case of unforeseen expenditure, such as after a natural disaster.

B. Improving the Effectiveness of Monetary Policy

22. Staff and the authorities agreed that a pause in the recent monetary tightening was justified. The tightening has succeeded in slowing private sector credit growth, but given such lingering risks to the external position as the final boost in construction for the SPG and the last step in the phased public wage increases in July 2007, monetary policy should remain on hold for the time being.

23. Improving the resilience of the economy to external shocks requires a stronger monetary policy framework. When reserves fell below their four-month import coverage target, the central bank tightened its stance. Lacking open-market like instruments to inject liquidity at a time when excess reserves were very low, the central bank had difficulties steering short-term interest rates. The central bank therefore relied on moral suasion which, combined with the lack of additional liquidity in the system, succeeded in slowing lending.

24. The effectiveness of monetary policy could benefit from the development of the short-term money market.6 The staff welcomed the recent development of an active interbank market, but, as agreed with the authorities, further development requires a more active involvement of the National Pension Fund (NPF) in the CBS securities auctions and the interbank market given its structurally long cash position. Such a development could improve the functioning of monetary policy but would also be an important step in fostering financial market development in Samoa. Further developments could include the issuance of government securities. However, should these instruments be insufficient, the CBS could also rely more on the Statutory Reserve Deposit (SRD) requirement rate.

25. The staff recommended that the CBS clarify its primary policy target, and enhance its dialogue with the private sector. The staff argued that the ultimate objective is the maintenance of the exchange rate peg, which acts as a credible anchor, with the reserve-import coverage ratio as the intermediate target. Although the authorities noted that capital controls allow the CBS some influence over monetary conditions, the maintenance of the peg takes preference over the CBS’s inflation goal. In the current framework, stable inflation is an outcome provided by the basket peg and its strong credibility. The staff also suggested more regular presentations from the central bank to enhance its communication with the private sector so as to guide market expectations on interest rates. The CBS noted that it already provides extensive information on its website, and that the bimonthly Cabinet Development Committee meeting provided a forum for conveying its views.

26. The staff and the authorities agreed that raising the CBS’s target import coverage ratio to five months would be desirable. Samoa’s vulnerability to shocks that can lead to a rapid erosion of reserves has been amply demonstrated in the recent past. Consequently, the staff argued that gradually raising the import coverage ratio over the medium-term to five months would provide an important additional buffer. Samoa’s shallow markets and limited access to financial markets make this form of self-insurance particularly important.

27. The current exchange rate regime remains appropriate and should be maintained. The basket peg regime has provided a strong anchor against inflationary expectations. The basket is composed of six currencies, those of its main trading partners, and appropriately reflects tourism and remittance flows. Reflecting the recent strength of the Australian and New Zealand dollars, key currencies in the basket, the tala has appreciated vis-á-vis large Asian economies.

uA01fig17

Nominal Exchange Rate Against the Australian Dollar 1

(2002Q1=100, National currency/AUD)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: IMF, Information Notice System.1 An increase indicates an appreciation.

28. Nonetheless, staff believes that the tala is appropriately valued. In many sectors, especially tourism, Samoa’s main competitors lie with its island peers in the Pacific region. In this regard, there are no indications that the tala has deviated from other regional currencies and Samoa’s real effective exchange rate has remained relatively stable since the one-time jump of late 2003 consecutive to cyclone Heta. Moreover, given Samoa’s impressive record of structural reforms and growth, staff believes that the economy may have recorded faster productivity growth than its regional peers.

uA01fig18

REER

(January 2000=100)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: IMF, Information Notice System.

29. The recent weak performance of merchandise exports has some specific non-price causes. It is largely due to the effects of “El Nino” weather patterns on fishing, the main export industry. As El Nino effects are reversing and fishing harbor facilities in Apia are being modernized, fish exports are now rebounding. Moreover, given the improved access to Samoa and cheaper airfares following the restructuring of Polynesian Airlines, the tourism industry is expanding rapidly.

uA01fig19

Australian Tourists to Selected Pacific Islands

(’000)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: Australian authorities.

C. Promoting the Economic Use of Land and Fostering Private Sector Development

30. Samoa’s performance over the past decade has been impressive, but much of its potential remains untapped. The country is rich in fertile land, fishing resources, and attractive potential tourist locations. Samoa also has a relatively flexible labor market and high levels of investor protection. Past impediments that have inhibited Samoa reaching its potential relate to the economic use of customary land, and the pricing of some utility services.7

31. The staff and the authorities agreed that long-term growth prospects depend on the economic use of customary land. At present, 81 percent of the land in Samoa is customary, owned by extended families represented by their chiefs (“Matai”). Customary land cannot be sold, and while leases are legally possible, they are difficult and expensive to arrange. This is seen as a major impediment to further tourism development and intensive agriculture. Recognizing these constraints, the authorities intend to develop a reform plan, with the support of the AsDB, aimed at easing processes for leasing customary land and allowing the use of customary leases for collateral. Consultations with the public have already begun.

32. Recent successes have demonstrated the importance of SOE reforms. The restructuring of international services of the government-owned Polynesian Airlines into Polynesian Blue (through a joint venture with a foreign airline) has reduced airfares to Samoa by around half, resulting in a significant increase in tourist arrivals, and removed an average annual cost of one percent of GDP from the budget. Similarly, the deregulation of the mobile telecommunications sector has triggered a sizable fall in call costs. These gains have strengthened public support for further reforms. The authorities noted that remaining priorities include plans to reform the remaining domestic operations of Polynesian Airlines (which still generate losses), and a longer-term plan to reform the electricity sector, including through the introduction of competition. Further reforms should focus on removing cross-subsidies from utility prices, especially electricity.

Samoa: Private Sector Development

Facilitating the economic use of land would boost private sector development. Customary land has a central place in Samoan culture and society. Its inalienable nature limits its transfer across uses, and prevents it from being used as collateral when borrowing for investment. Although leases are legally possible, they are time consuming, expensive to arrange, and considered difficult to enforce. Consequently, less than one-fifth of customary leases are for commercial purposes, with church leases far more significant. Although leases can legally be used as collateral, no bank currently accepts them as collateral. Streamlining the leasing process and making enforcement easier, should increase the availability of both land for projects and financing.

Progress in other areas would also reduce the cost of doing business and obtaining financing:

  • Public Services: Increasing private provision and competition in public services, together with improved management of the remaining public bodies, should lower business costs. Samoa’s infrastructure compares well with some in the region, but some public services remain costly. Increased competition such as in the telecom sector would help reduce costs.

  • New Businesses: The processes for starting a business and foreign investment could be streamlined.

  • Financing Costs: Streamlining the property registry and establishing a credit bureau would reduce the cost borrowing.

Selected Investment Climate Indicators, 2006

article image
Source: World Bank, Doing Business Report (2006).

Average for Fiji, Vanuatu and Tonga.

Average for Maldives, Mauritius and Seychelles.

Average for Jamaica, Dominican Republic, and Trinidad and Tobago.

33. Staff welcomed the authorities’ renewed efforts to accelerate the privatization program and improved SOE governance. The authorities plan to privatize Samoa Broadcasting Corporation, Agriculture Store Corporation and Samoa Shipping Services this year. The staff noted that this should be followed the sale of the government’s stake in other non-strategic SOEs, with SamoaTel mentioned by the authorities as a likely candidate. Staff also recommended that the list of strategic SOEs be reviewed regularly with the objective of gradually reducing public sector involvement in the economy over time. Although the creation (with the assistance of the AsDB) of the independent Institute of Directors has helped develop the skills of directors, the government continues to be heavily represented on the boards of major SOEs. Future efforts could aim to increase the number of independent directors, make managers more accountable for their performance, and more strictly enforce the 50 percent rule on dividend payments by profitable SOEs.

D. Developing and Strengthening the Financial Sector

34. Despite the recent rapid growth in private sector credit, and a reduction in the interest margin, the banking system remains sound. Non performing loans as a share of total loans have increased to around 4 percent, but remain relatively low and the level of provisioning is adequate. Bank profitability remains high, although tight liquidity witnessed over the past year has led to an increase in the cost of funds. Consequently, some decline in profits could be expected as the lending margin has declined and credit growth decelerates. Nonetheless, this possible deterioration should be manageable as all four banks, including two subsidiaries of major Australian banks, are adequately capitalized and the supervisory framework appears adequate to deal with these potential risks.

35. Staff and the authorities agreed that improving credit information and facilitating the leasing of customary land would boost access to financing for entrepreneurs. Streamlining the process by which customary land leases can be used as collateral would unlock significant funds for investment. Without a credit information bureau, banks rely on informal networks and customer relationships to inform their lending decisions. The recent establishment of a nascent credit information and debt collection firm is welcome. Future efforts should focus on a credit bureau reporting positive information.

uA01fig20

Credit to the Private Sector

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Source: IMF, International Financial Statistics.1 Comprises Fiji, Papua New Guinea, Samoa, Solomon Islands, Tonga and Vanuatu.

36. Staff welcomes the recent improvements in the management of the NPF. The authorities stressed that overall lending guidelines have been strengthened, and thanks to the establishment of a debt management unit, the NPF has improved its management of non-performing assets. In addition, the Fund has started investing a portion of its assets in foreign safe assets. Staff suggested that the NPF also invest in domestic risk-free assets such as CBS securities. More generally, the financing of consumption should not be the NPF’s primary activity. Presently NPF members can borrow up to half of their accumulated funds for any purpose, with many taking up this opportunity. Staff recommends that the 50 percent borrowing cap gradually be lowered, and/or that this borrowing be restricted to housing, education or other investment projects.

37. Regulation and supervision of both the domestic and international (offshore) banking sectors have significantly improved since the offshore center assessment of 2002. An update concluded prior to the Article IV mission found that compliance with Basel Core Principles for domestic and international banking supervision has improved compared with the previous assessment.8 On-site examinations of two key areas—credit risk management and AML/CFT—have been conducted at all domestic banks. For the international banks, which remain small, supervisory arrangements were strengthened by the requirement that banks establish a physical presence in Samoa and maintain records there, and on-site inspection was introduced. The Samoa International Finance Authority (SIFA) was also established in 2005 as an autonomous supervisory agency for the offshore sector.

38. Nonetheless, areas for improvement remain. For the domestic sector, the supervision of banks’ credit policies, connected lending, and large exposures could be strengthened, and the CBS still has to implement the new AML/CFT legislation. For international banks, SIFA’s operational independence could be improved by transferring the Minister of Finance’s remaining powers to SIFA and the supervisory system should be strengthened further through the introduction of prudential guidance on banks’ lending and other risk taking activities.

E. Further Integrating Samoa into the Global Economy

39. Staff welcomes recent efforts to conclude negotiations on WTO accession. The mission believes that Samoa’s integration into the global economy and a further opening up of its economy could yield significant benefits. Securing a rapid conclusion of the negotiations would be important, especially at a time when graduation from LDC status could affect Samoa’s current preferential access treatment to some major markets. Discussions with the EU on an Economic Partnership Agreement (EPA) are ongoing, with the hope that negotiations will be completed early next year.

40. Remaining barriers to foreign investment should be eased. Despite some recent pick up, Samoa has traditionally received relatively little foreign direct investment compared with its peers in the Caribbean and the Indian Ocean. In addition to easing structural impediments to investment at home, the mission believes that the Samoan economy would benefit greatly by easing access for foreign investors to do business in Samoa.9 The coming review of the Foreign Investment Act of 2000 and Regulations of 2003 supported by the World Bank could lead to concrete measures.

uA01fig21

Net Foreign Direct Investment

(In percent of GDP, average of latest 3 years)

Citation: IMF Staff Country Reports 2007, 185; 10.5089/9781451840742.002.A001

Sources: IMF, World Economic Outlook; and staff estimates.1 Samoa refers to 2006/07 data.

IV. Staff Appraisal

41. Samoa’s economic transformation over the past decade has been impressive. This period has seen significant development of the service sector, and growth fast enough to make Samoa a middle-income country. While Samoa remains a small, isolated and vulnerable economy, its transformation clearly demonstrates the benefits of its broad-based and ongoing reform program, and sound macroeconomic policy, as well as its stable political environment.

42. Near-term growth is set to rebound. Following the manufacturing slowdown in 2005/06, growth is expected to accelerate over the near term reflecting increased activity in construction leading up to the SPG and associated tourism. Core inflation is expected to remain muted in the near term. Continued remittance flows and strong tourists arrivals should result in a further accumulation of reserves.

43. Nonetheless, Samoa remains a vulnerable economy, highlighting the importance of prudent policy. Natural disasters, such as cyclones, remain an ongoing risk, as do sudden swings in commodity prices. Moreover, given the aging of the population and prospective LDC graduation, Samoa is expected to face rising fiscal pressures over coming years.

44. Continuation of prudent fiscal policy is essential. With revenue collections already relatively high, expenditure restraint is the most appropriate way to deal with fiscal pressures. Spending restraint will sharpen the need for government to prioritize expenditure into areas that would boost growth opportunities (infrastructure and education), and address the needs of an aging population.

45. Samoa’s vulnerabilities also argue for additional reserves and a stronger framework for monetary policy instruments. The episode of 2005/06 showed how quickly reserves can evaporate. Consequently, Samoa should aim to maintain reserves to cover around 5 months of imports over the medium-term. Moreover, deepening money markets would help enhance the effectiveness of monetary policy.

46. The basket peg exchange rate regime remains appropriate. This regime has provided a credible nominal anchor, and has contributed to low inflation. The basket weights are appropriately based on foreign trade, tourism and remittance flows. The recent weakness of merchandise exports reflects specific non-price factors.

47. The benefits of structural reform have been clearly demonstrated. The restructuring of air services has resulted in a sharp increase of tourists, and the introduction of competition in the telecommunications sector has generated a fall in call costs. Similar benefits are likely to result from reforms in other utility and infrastructure areas, such as electricity provision. Efforts to strengthen management and accountability of SOEs and promoting the transparency of SOE pricing are likely to significantly improve the business environment.

48. Expected continuation of the wide-ranging structural reform efforts will be important to maintain high and sustainable medium-term growth. In particular, making the leasing of customary land easier promises significantly higher growth as it remains the most binding constraint to further development. The government’s reform process holds the promise of improving both the allocation of land as well as prospects for project financing if leases can be accepted as effective collateral.

49. The quality of statistics is continuing to improve. Fund staff, including PFTAC, will continue to assist in this area.

50. It is recommended that the Article IV consultation with Samoa take place on a 24-month cycle. The authorities would welcome an interim staff visit in early 2008.

Table 1.

Samoa: Selected Economic and Financial Indicators, 2003/04-2007/08 1/

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

Fiscal year beginning July 1.

Excluding the increase in VAGST, excise tax and fuel surcharge on electricity tariffs.

Change in percent of beginning period broad money.

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.

Table 2.

Samoa: Financial Operations of the Central Government, 2003/04-2007/08

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

Samoa: Balance of Payments, 2003/08

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

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Sources: Data provided by the Samoan authorities and Fund staff estimates.
Table 4.

Samoa: Medium-Term Baseline Scenario, 2003/04-2010/11

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

Total credit growth (including credit extended by nonbank financial institutions).

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

Includes publicly guaranteed debt.

In percent of GNFS exports.

Official reserves only (CBS and Treasury).

Table 5.

Samoa: Vulnerability Indicators, 2002/03–2005/06

(In percent of GDP, unless otherwise indicated)

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

End of period.

Goods and services.

1

The number of expatriate Samoans is estimated at around Samoa’s current population of 179,000.

2

The Samoan entity is specialized in automotive electrical systems, which are exported to Australia under concessional market-access arrangements.

3

As Samoa maintains capital controls, the central bank has some influence over domestic interest rates.

4

All of Samoa’s public debt is external.

5

Health and education spending amount to around 40 percent of current expenditures.

6

See Chapter I of the accompanying Selected Issues Paper.

7

See Box I and Chapter II of the accompanying Selected Issues Paper.

8

The update was undertaken by an MCM OFC mission that visited Samoa during February 27-March 8, 2007.

9

Among other measures, the authorities should ease work permits for foreign workers and managers.

Samoa: 2007 Article IV Consultation: Staff Report; and Public Information Notice on the Executive Board Discussion for Samoa
Author: International Monetary Fund