Abstract
Samoa has suffered severe social and economic shocks. The outlook is challenging and subject to considerable uncertainty. Because of the tsunami’s potentially severe impact on tourism, real GDP is likely to contract this financial year. The fiscal strategy to shoulder the rebuilding costs, minimize capacity risks, and ensure fiscal sustainability is appropriate. Prudent management of monetary policy and the basket peg will be critical. The Samoan economy will have to rely on the private sector for growth. Executive Directors welcome the commitment to structural reform.
Background
1. Our Samoan authorities wish to express their appreciation to the staff for the cordiality and frankness which characterized these consultations. The consultations provided a timely opportunity for our authorities to take stock of the progress made in recent years under the Strategy for the Development of Samoa (SDS) 2008/09–2011/12 and in the wake of the 2009 tsunami which has greatly affected this small island nation and led to the granting of the ESF-RAC facility late last year. The authorities considered the exchange of views on key policy issues to be useful in supporting their ongoing efforts to preserve macroeconomic stability and to ensure long term growth. They continue to value the Fund's assessment of Samoa's policies through the Article IV consultation process and given the global risks we currently face, they welcome the next Article IV consultation in 24 months time.
2. Samoa's performance has been supported by prudent economic and financial management and the effective implementation of structural reforms over the past decades resulting in real per capita income in excess of $US 3,000 p.a. This achievement was underpinned by political stability and the extensive efforts to foster broad consensus for important reforms.
3. As a small island state, Samoa continues to be vulnerable to risks from its small size and population, geographic remoteness, narrow production base, vulnerability to terms of trade fluctuations and susceptibility to natural disasters. Given these vulnerabilities and risks, Samoa registered its worst slump for two decades - a 4.9 percent fall in GDP over 2008–2009 - as a result of the global crisis, and the poor harvests in agriculture and fishing. The effects of the September 2009 tsunami undercut the prospects of a quick recovery from the global recession and saddled Samoa with massive private and public sector rebuilding costs. Accordingly, our Samoan authorities remain committed to continuing with a framework of prudent macroeconomic policies as well as a progressive structural reform agenda for longer-term sustainable growth.
Recent Economic Developments
4. The latest real GDP statistics - for the year to December 2009 - showed a contraction of 1.8 percent over the corresponding 2008 period. As set out in the staff report, the medium-term prospects for Samoa remain sound and supported by the services sector based on tourism recovery, the implementation of the tsunami rehabilitation work program, and a brighter global outlook.
5. Core inflation indicated a decline in prices of 2.7 percent in February 2010 over the same period last year. Staff estimates headline inflation to increase to 3.0 percent in 2010/11 and 4.0 percent thereafter as tsunami rehabilitation efforts intensify and global recovery resumes.
6. These developments are expected to underpin recovery in the external sector, and the official reserve cover is likely to remain at 3.5 months of imports in the medium term. Gross external debt is expected to rise from 52.4 percent of GDP in 2009/10 to 58.3 percent in 2013/14 (38.1 percent in net present value terms). At this level, staff and authorities believe that Samoa's debt level will remain low risk.
Macroeconomic Policy
Fiscal Policy
7. Although our Samoan authorities remain committed to prudent fiscal policy, the substantial fiscal requirements for the four-year tsunami recovery framework and the fiscal stimulus to offset the global crisis derailed the meeting of the usual medium-term fiscal target. The authorities' main fiscal objective is for the budget deficit to return to the medium term target of less than 3.0 percent as set out under the SDS after the completion of the phased tsunami rehabilitation activities in 2013/14.
8. Our authorities welcome the finding in the Debt Sustainability Analysis that there is low risk of debt distress. The authorities are cautious of the fiscal risks posed by the remaining financing gap if it is not filled in a timely manner, and of the pressures on debt sustainability that would come from meeting the financing gap using loans rather than grants. Amid these risks, the World Bank and the Asian Development Bank are front loading budget support disbursements to negate the possibility of a financing gap. The authorities have a retrospective budget reimbursement arrangement with donors for funding tsunami rehabilitation activities, and this has allowed timely implementation of the planned recovery work. The authorities also have the option to effectively adjust the timing of the implementation of the current public sector investment program consistent with their administrative and implementation capacity.
9. To cover for the remaining budget financing gap, driven by the tsunami rehabilitation program, of 7.0 percent of GDP in total from 2010/11 onwards, the authorities will intensify bilateral efforts to attract new grants from donors including the European Union, Australia, New Zealand and other potential development partners. The authorities also see merit in prompt publication of the staff report to further enhance the prospects of future grants and concessional financing.
10. The Medium-Term Budget Framework has already been established with the first set of forward estimates for 2009/10–2011/12 published. The authorities will reactivate the Macroeconomic Policy Coordination Committee, which comprises of the Ministry of Finance and Central Bank, and is to support the credibility of forward estimates. The Public Finance Management Reform Plan (PFMRP) will also involve the Ministry of Revenue to assess the need of further tax and customs reforms and the PFMRP process and roles and responsibilities of institutions will be clearly articulated.
Monetary and Exchange Rate Policy
11. Our authorities remain strongly committed to the current pegged exchange rate basket regime, which has served Samoa well in anchoring the nominal economy, resulting in stable inflation and strong policy credibility. Despite the severe shocks from the global recession and tsunami, staff found that the exchange rate is in line with fundamentals with nominal exchange rate remaining stable while the real effective rate markedly appreciated. The authorities' view is that the Central Bank of Samoa's (CBS) discretion to adjust the exchange rate by +/−2.0 percent against the currency basket is crucial for avoiding undue fiscal tightening during the reconstruction period. This exchange rate adjustment process is controlled by an internal accountability process to ensure its effective and efficient use. The CBS will closely monitor the process to ensure that the risks to the external position and inflationary pressures are minimized. The CBS also stands ready to withdraw current monetary stimulus and move to a neutral stance as the global recovery gains traction.
12. The Samoan authorities are grateful for the staff's assessment as set out in the Selected Issues paper on the effectiveness of the credit channel and monetary transmission. The low degree of pass-through explains in part the authorities' one-off subsidized loan program to small operators in the tourism sector to aid tsunami recovery. Looking beyond the immediate term, the CBS will carefully consider staff recommendations for financial sector development and strengthening oversight and regulation of financial institutions and the system. The authorities also look forward to future engagement with staff on policy steps that might be taken to support development in the financial sector.
13. The Fund financing under the 2009 ESF-RAC was used to bolster official reserves as remittances fell short of their annual growth trend. Our authorities agree that, consistent with price and exchange rate stability, it would be prudent to maintain the reserve cover in the range of 3.5–4.0 months of imports in the medium term.
Structural Reforms
14. Consistent with the SDS and the strategy to make the private sector the engine of growth, the Samoan authorities have made varying degrees of progress in its structural reform agenda since the last Article IV consultation as follows.
Economic Use of Land
15. The Samoan authorities together with the Asian Development Bank assistance have delicately progressed the land reform program despite its sensitivities and some public opposition. The main objectives of the land reform are easing the lease of customary land and for the land lease agreements to be able to serve as collateral for borrowing. Public communication about the land reform will be fundamental to gaining community support and its ultimate success.
16. To date, the authorities have changed the land registration system and supported progress on the land reform through a necessary land legislation amendment. The authorities note that staff's practical recommendations in Box 2 are consistent with their proposed strategy on this issue. The confidence of the banks in the process of using lease agreement as financial collateral will be crucial to this development. The introduction of the Strata Titles in 2009 will provide more flexibility in terms of common ownership of a building on leased land with the purpose of attracting foreign investment.
State-Owned Enterprises
17. The authorities concur with staff that successful SOE reform will require placing SOEs on a fully commercial footing, with independence from political directives, hard budget constraints, exposure to competition, and full accountability. Consistent with good international practices, a Cabinet appointed committee is currently reviewing the feasibility of the Cabinet decision to remove all civil and public servants from SOEs' Boards by 1 July 2010. The review will consider the limited pool of directors available for Board selection and will likely involve a substantial contribution from the Institute of Directors in preparing new directors for their Board roles and responsibilities. Also under preparation is the establishment and the designing of a mechanism for creating unit trusts to assist in diversifying ownership of privatized SOEs when the momentum picks up. The authorities are also committed to enforce the Community Service Obligation (CSO) through improving SOEs' CSO awareness and ensuring effective implementation and enforcement of the CSO.
18. On privatization efforts, our authorities recognize that progress has been slow but are of the view that the delay has been fitting given the adverse effects of the global crisis on the attainable prices of SOEs for divestment/privatization. To move forward, the privatization of SamoaTel is on the card with proceeds from sale to provide for fiscal space.
Agriculture Development
19. The efforts in agricultural development have been focusing on activities such as the National Export Strategy in 2009 to promote agricultural-based export commodities and import substitutions, the strategy on fruit and vegetables sub-sector, and research on agricultural processing, in the absence of a holistic and encompassing sector planning framework to underpin all these efforts. Therefore, the proposed formulation of a sector plan which is on the pipeline will provide the framework to encapsulate agricultural policies and strategies critical for resource allocation in this sector. The timely assistance from the World Bank will concentrate on the implementation of policy requirements and the required strategies for revitalizing this key sector and identifying Samoa's comparative advantage.
Economic Statistics
20. As staff noted, Samoa is the only Pacific island that disseminates monthly and quarterly economic statistics through government website. This was only possible through substantial investments in its statistics officers through continuous training from the Fund Training institutions, provision of technical assistances from the Pacific Financial Technical Assistance Cooperation, and the Secretariat of the Pacific Community. The authorities understand the merit of timely and reliable economic statistics, hence the proposed investment to strengthen the capacity and capability of the Bureau of Statistics, including according high priority to improvements to national accounts and the coverage of BOP data.