Samoa: Staff Report for the 2017 Article IV Consultation

2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Samoa

Abstract

2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Samoa

Context

1. Among small states, Samoa is ranked most vulnerable to natural disasters.1 Although real sector activity has recovered from the devastating natural disasters in 2009 and 2012, their legacy includes elevated public sector debt and financial sector vulnerabilities. Samoa is reliant on workers’ remittances and is thus vulnerable to the withdrawal of correspondent banking relationships by global banks. More positively, largely complete reconstruction from natural disasters and healthy economic growth are contributing to a renewed focus by the authorities on structural reforms and, in turn, greater private sector confidence.

2. Policies are broadly in line with past Fund advice. Fiscal policy consolidation is under way anchored by expenditure restraint and increased revenue collection efforts. The exchange rate has remained stable and an accommodative monetary policy stance has supported private sector activity. The Central Bank of Samoa (CBS) has made significant efforts to implement key Financial Sector Assessment Program (FSAP) recommendations, although ongoing technical assistance remains critical to continued progress. The authorities are implementing Fund advice to mitigate spillovers from the withdrawal of correspondent banking relationships, including upgrades to the AML/CFT framework and enforcement efforts. Continued progress is needed towards implementing structural reforms, including privatizing state-owned enterprises (SOE), and improving access to credit.

Recent Developments, Outlook and Risks

3. Economic activity picked up during 2015/16 driven by tourism arrivals, lower fuel prices, and new fish processing facilities, further boosted by two major sporting events and infrastructure projects.2 While it is clear that growth was strong, the measured growth rate of 6.6 percent could partially reflect improved value-added tax (VAGST) compliance (tax revenue data are an important input to national accounts statistics compilation). Measured growth could thus be potentially overstated by between 1 to 2 percentage points. Inflation, at 1.1 percent remains subdued.

4. Although the trade balance improved, the current account deficit widened to 6.1 percent of GDP in 2015/2016 (from 3.0 percent). This reflects a deterioration of the services balance and lower remittances related to charities, which more than offset an improvement in tourism earnings. The Tala was little changed in nominal and real effective terms during 2015/16. Reserves recovered in December and January reversing a gradual decline during the second half of last year, due to large one-off outflows and lower capital grant and FDI inflows. Reserves were 3.2 in months of prospective GNFS imports in January 2017.

5. Credit growth has accelerated, led by the commercial banks. This represents a shift compared with the natural disaster recovery period when PFIs were the main source of credit. PFIs account for about one-third of total credit to the economy but asset quality is weaker than in the commercial banks. Non-performing loan ratios in commercial banks have declined to 5.2 percent in June 2016 from 8.3 percent in June 2014 (the peak following the natural disasters). Deposit and lending rates declined slightly in FY2016 but remain high relative to the policy rate setting. Liquidity conditions have tightened and, although aggregate liquidity remains high, excess liquidity is concentrated in one bank and is associated with a large depositor.

A01ufig1

Private Sector Credit Growth

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2017, 112; 10.5089/9781475599411.002.A001

Source: Central Bank of Samoa

6. The near-term growth outlook is moderately positive. Barring any natural disasters, GDP is expected to grow at around 2 percent per year. Growth will be driven by improvements in the business climate, tourism, and construction, including infrastructure projects. The tourism sector is currently held back by a mismatch between excess capacity in hotels and limited flight arrivals, putting downward pressure on pricing and contributing to financial sector vulnerabilities. However, there is potential for stronger growth in the medium term. The closure of the largest manufacturing employer (Yazaki Corporation automobile harness assembly plant) is estimated to reduce growth by about 0.9 percentage points for 2017/18 with a further reduction of about 0.1 percentage points in 2018/19. Average inflation is expected to pick up with increasing commodity prices but remain around 3.0 percent over the medium term. The current account deficit is expected to gradually narrow to about 4½ percent of GDP over the medium term.

7. The outlook is subject to significant downside risks (Annex I). These include:

  • Natural Disasters. Samoa faces an elevated risk of natural disasters, which have historically been very destructive with annual average damage and losses estimated at over 12 percent of GDP, compared to an average of 2.3 percent for Pacific island countries.3 Given the extent of the damage, natural disasters have been associated with increases in public debt and are driving the assessment of high risk of debt distress in the debt sustainability analysis. Current high levels of debt and financial sector vulnerabilities imply that policy space for future recovery efforts is limited which could hamper subsequent recovery efforts.

  • Spillovers from loss of correspondent banking relationships. Strains in correspondent banking relationships are contributing to a reluctance by banks to provide financial services in the remittance sector. Money transfer operators (MTOs) in Samoa and their counterparts in Australia and New Zealand face closure of bank accounts and increased difficulty in obtaining access to financial services. With over 80 percent of Samoa’s remittances channeled through MTOs, Samoa’s remittance sector risks becoming increasingly fragile; the cost of remittances could further increase, and financial access could be undermined, given the role of MTOs in remote areas.

  • Contingent liabilities associated with PFIs and SOEs. Low asset quality and strong linkages with underperforming SOEs increase the vulnerability of the PFIs. Explicit guarantees along with on-lending arrangements to SOEs amount to 18.8 percent of GDP; and there are additional implicit guarantees associated with the PFIs.

8. Downside risks for growth. There is significant uncertainty associated with the impact of the closure of the Yazaki Corporation assembly plant. The company is offering transitional support packages to prepare employees for alternative careers when the assembly plant closes at the end of 2017, which should help to mitigate the impact on employment and incomes in the near term. However, the spillovers to the rest of the macroeconomy remain uncertain. There is further downside risk from the potential closure of the tuna cannery in American Samoa where Samoan citizens make up much of the production workforce, potentially affecting remittances.

Authorities’ views

9. The authorities broadly agreed with the staff’s assessment of the outlook and risks, and highlighted that the economy remains vulnerable to natural disasters. They shared the view that despite strong growth in 2015/16, the outer years will be challenging. While they agreed that the economy will be hard-hit by the impact of the Yazaki corporation closure, they remain hopeful that the impact would be partially offset by the shift of Yazaki activity to other types of businesses. They also showed concerns about negative spillovers from the closure of Samoa’s tuna cannery in American Samoa. On the upside, increased airline connectivity could support the tourism sector.

Policy Issues

Current policy settings of fiscal restraint combined with accommodative monetary policy are appropriate. This policy mix helps support economic activity while rebuilding fiscal buffers to handle external shocks and natural disasters. Samoa is assessed to be at high risk of debt distress, taking into account extremely high vulnerability to natural disasters. High levels of external debt limit the scope for the exchange rate to smooth adjustment to external shocks, and with a weak monetary transmission mechanism, fiscal policy adjustments are the main lever to respond to shocks. This further emphasizes the importance of tighter fiscal policy during periods when not recovering from natural disasters. Policy efforts should focus on reducing vulnerabilities, rebuilding buffers, and implementing reforms to improve growth prospects.

A. Policies to Address Spillovers from the Loss of Correspondent Banking Relationships

10. Strains in correspondent banking relationships have increased the fragility of Samoa’s remittance sector. Remittances stand at 18 percent of GDP of which about 80 percent is channeled through MTOs who are facing closure of bank accounts and increased challenges in accessing financial services. Some MTOs are continuing to operate but are using personal accounts or are physically transporting money overseas. Pressure from global correspondent banks are the main drivers for the closure of MTOs’ bank accounts.4 Continued reduction in access to banking services could contribute to higher costs and could ultimately affect the flow of remittances.

11. Staff have proposed a pilot project for Samoa which involves a comprehensive and coordinated set of measures. The pilot project is anchored on a commitment by the authorities to a comprehensive set of measures, which should serve as a catalyst for donor support. The measures, which should be implemented as soon as possible, are designed to alleviate the concerns of correspondent banks in the near term to help maintain financial services, while at the same time laying the foundations for fully AML/CFT compliant and efficient remittance system for the future.

A01ufig2

Average Cost of Remittance

(In percent)

Citation: IMF Staff Country Reports 2017, 112; 10.5089/9781475599411.002.A001

12. A main priority of the pilot project is to upgrade the effectiveness of the AML/CFT regime and recent progress in this regard is welcomed. Continued implementation of the recommendations outlined in the Mutual Evaluation Report by the Asia/Pacific Group on Money Laundering (APG) is needed (Annex III). Progress and further steps include:

  • A key recommendation was the preparation and publication of a national strategy for AML/CFT, which was published by the authorities in February 2017. As a next step, a more detailed work plan that includes quantifiable implementation targets should be developed.

  • APG recommended to considerably increase the number of AML/CFT specialists throughout the financial and legal system. Recent efforts to enhance capacities of staff of the Financial Intelligence Unit (FIU) and law enforcement agencies on financial investigations should continue.

  • Ensure compliance by MTOs with AML/CFT requirements to help ease correspondent banks’ concerns over MTO remittances. On-site inspections of MTOs are an important step to improve AML/CFT compliance in this sector and should continue.

  • Further efforts are needed to address risks from the offshore sector by aligning laws governing the offshore sector with international AML/CFT standards and enhancing AML/CFT supervision, especially over international banks, insurance companies, trust companies and service providers.

  • The authorities have worked with domestic banks to ensure compliance with Foreign Account Tax Compliance Act (FATCA), which has helped lower the risk of correspondent banking relationship withdrawal.

  • Dissemination of a sanctions list by the central bank to all local financial institutions is welcomed and outreach should continue to ensure full compliance.

13. The authorities should explore the establishment of a national database—a Know Your Customer (KYC) utility—to help improve compliance screening procedures. The database could include KYC data on those sending and receiving remittances and could be hosted by the FIU, which would have the necessary legal authority to collect the data. By providing a readily available tool to verify bank customers’ information, such a database may facilitate information sharing, enhance compliance, and reduce costs. However, compliance with customer due diligence requirements is broader than KYC and should remain with financial institutions and should be risk-based in line with international standards. Further IMF technical assistance could support the authorities’ efforts in improving AML/CFT compliance. Developing such a database in tandem with a credit bureau could provide synergies.

Authorities’ views

14. The authorities remain concerned about the financial stability risks from ongoing CBR withdrawals. They have made steadfast efforts to implement the IMF’s recommendations, including increasing capacity of the FIU, efforts to increase AML/CFT awareness throughout the banking and business community, dissemination of a sanctions list, enhancing FATCA compliance of domestic banks, and on-site inspections of MTOs, but full implementation will take time and require additional resources. The authorities welcome further support from the IMF and other agencies to help identify and implement solutions. Additional donor support is needed to support further upgrades of the AML/CFT regime, including training. The authorities are fully committed to implementing a KYC utility, however, financial and technical assistance will be needed to develop and implement the KYC utility. Outreach and support are needed to reassure overseas banks to provide services to MTOs having improved AML/CFT.

B. Macro-Financial Policies

15. Financial stability indicators suggest a generally sound banking system. Commercial banks remain profitable and report high capitalization while non-performing loan ratios have declined. Although system-wide liquidity remains high, it is concentrated in one bank and is related to institutional deposits, and over recent months some banks have faced tighter liquidity conditions. The main risk to the financial system relates to the potential for a sharp deterioration in asset quality following natural disasters: the financial cycle in Samoa is driven largely by natural disasters and recovery periods tend to be associated with very weak credit growth, especially from the commercial banks, and increases in nonperforming loan ratios due to economic damages. Further risks stem from high loan concentration and the number of borrowers with a high loan-to-capital ratio.

16. Good progress has been made in implementing FSAP recommendations (Annex III). Supervision and regulation have been strengthened, staff capacity has been enhanced, on-site inspections have increased, and prudential standards have been strengthened. Further implementation of FSAP recommendations will continue to support financial sector stability, including amendments to the Financial Institutions Act; upgrades to guidance on prudential statements for banks; increasing financial supervision staffing; additional training for supervisory staff; and updating the framework for single borrowing limits. Good progress has been made with establishing a national payments system. However, capacity constraints have limited progress in strengthening financial stability analysis. Institutional arrangements for financial stability can be strengthened by establishing the terms of reference for and holding regular meetings of the Financial Stability Committee. Financial stability analysis can be further improved with continued efforts to increase data quality and coverage, developing stress testing analysis, and preparing and publishing short notes on financial stability.

Samoa: Public Financial Institutions, FY 2016

article image
Sources: Authorities, Annual Reports of PFIs, and IMF staff calculations.

FY 2015 for DBS

For Samoa National Provident Fund (SNPF) the net surplus from investment income is shown.

Ratio of net profits to total assets.

Ratio of net profits to capital and reserves.

Latest data FY 2014

17. Reform of PFIs remains a high priority (Annex IV). PFIs’ activities should be restored to their original mandates to reduce risks from contingent liabilities and prevent crowding-out of private financial institutions. The Development Bank of Samoa (DBS) is appropriately re-orienting its focus to the agriculture sector but long-standing issues with poorly performing tourism-related loans will continue to pose a risk for some time. Costs associated with policy lending decisions should be clearly articulated. The Samoa National Provident Fund (SNPF) should gradually reduce its personal lending, including against members’ contributions. Subsidized lending by the Unit Trust of Samoa (UTOS) to underperforming SOEs increases the contingent liability risks and crowds out private sector financial institutions. In line with FSAP recommendations, UTOS could be transformed into an unleveraged mutual fund or a policy-lending bank.

Authorities’ views

18. The authorities appreciate IMF technical assistance and are committed to implement FSAP recommendations. They acknowledged PFI-related risks and underscored that they remain vigilant on this front. The CBS has stepped up supervision of the PFIs and is ensuring that PFIs adhere to reporting guidelines. The authorities emphasized that UTOS has played an important role in facilitating access to financing for SOEs and do not share staff’s concerns with its operations as UTOS fully meets the supervisory requirements of the CBS.

C. Ensuring Fiscal Sustainability

19. Expenditure rationalization and revenue collection efforts reduced the deficit to 0.4 percent of GDP during FY2015/16 from 3.9 percent in 2014/15. Reductions in operating expenditure contributed about 2.5 percentage points to the improved fiscal position. This was achieved by targeting 10 percent expenditure reductions for most ministries, apart from health and education expenditures. Revenues were buoyant and additional revenues, including from improved compliance and increased collection efforts, were saved, amounting to about 1.5 percent of GDP. These efforts to consolidate the fiscal position were appropriate, given strong growth and largely complete reconstruction from natural disasters. For 2016/17, the deficit is expected to widen to 1.9 percent of GDP largely reflecting higher expenditure (partly associated with new ministries) and less buoyant revenue projections. The public debt to GDP ratio is high at 52.5 percent of GDP and debt service requirements will increase in 2017/18 to 2.7 percent of GDP.

A01ufig3

Debt Service Requirements

(In millions of Tala)

Citation: IMF Staff Country Reports 2017, 112; 10.5089/9781475599411.002.A001

Sources: Samoa Ministry of Finance - Medium Term Debt Management Strategy 2016-2020; and IMF staff estimates.

Samoa. Fiscal Policy: Baseline Scenario and Scenario with Revenue Measures

article image

Measures include broadening the tax base by reducing GST exemptions and streamlining tax credits and concessions.

20. Continued fiscal efforts will be needed to reduce public sector debt to 50 percent of GDP, as targeted in the medium-term fiscal framework and to reduce risk of debt distress. Reducing the fiscal deficit through a sustained increase in revenues by 0.4 percentage points relative to 2016/17 along with expenditure restraint can help achieve this goal by 2020/21 (text table). However, a projected downward trend in revenues as percent of GDP implies that additional measures are needed to meet this goal. The main elements of the fiscal strategy should include:

  • Broadening the tax base by removing exemptions, including VAGST exemptions, and continuing efforts to enhance compliance. Concessions and tax credits should be reviewed and streamlined. Consideration could also be given to increasing excise taxes and user fee charges. SOE reforms should continue, including completion of audits of annual reports, in order to facilitate collection of dividends. Furthermore, any windfall revenues such as upside surprises to revenue collection or from privatization should be saved.

  • Solidify recent improvements in expenditure control and maintain expenditure restraint. The scope for further reductions in the near term is limited, following the expenditure reductions during 2015/16. Expenditure on health, education and climate-resilient infrastructure should remain priorities and planned expenditure reviews can help improve the efficiency of expenditure in these priority areas. Looking ahead, rolling expenditure reviews should be considered to help identify further scope for improvements in efficiency and expenditure cuts, which may be needed if revenue measures are not sufficient.

  • Adherence to the authorities’ medium-term debt strategy will also support fiscal sustainability. The key elements include ensuring a minimum 35 percent grant element for new borrowing; implementation of the procedures and guidelines for contracting new loans and issuance of guarantees approved by Cabinet in 2014; annual reporting on medium-term debt strategy; implementation and debt management operations of Government; and setting of strategic indicators and targets to monitor the costs and risk exposure of the public debt portfolio, including reducing currency risk by diversifying currencies where possible.

21. The debt sustainability analysis for Samoa indicates a high risk of debt distress, taking into account the vulnerability to natural disasters. The change in rating compared with the 2015 Staff Report is driven by a methodological change that adjusts for the average impact of natural disasters on growth, the current account and, fiscal balance over the medium term. Aiming to meet the 50 percent debt target earlier than 2020/21 and targeting a public debt to GDP ratio of 40 percent over the longer term would reduce the risk of debt distress and increase space for a strong fiscal response to natural disasters. This can be achieved by sustaining a tight fiscal policy stance during periods when not recovering from natural disasters. Contingency planning in the form of pre-negotiated borrowing from multilateral lenders can also serve as a buffer to natural disasters but should be evaluated in the context of the government’s overall debt management strategy.

A01ufig4

Growth Projections with Disaster Impacts for DSA Analysis

(In percent)

Citation: IMF Staff Country Reports 2017, 112; 10.5089/9781475599411.002.A001

Sources: Country authorities; and IMF staff calculations.

22. Samoa faces sizeable fiscal risks. Historically, natural disasters have led to increased public sector debt (with the 2009 Tsunami adding 10 percent of GDP and 2012 Cyclone Evan adding a further 5 percent). The debt sustainability analysis (DSA) highlights that Samoa faces a high risk of debt distress, taking into account the average impact of natural disasters ongrowth rates and the fiscal and current account balances. There is a heightened overall risk of public debt distress, reflecting Samoa’s sizeable contingent liabilities. Public debt is denominated in foreign currency, which limits the role of adjustments in the exchange rate to facilitate the adjustment of the economy to external shocks. Contingent liabilities related to SOEs and PFIs present a significant fiscal risk. The government issues guarantees to its SOEs and has several on-lending arrangements with PFIs. Costs of policy related lending initiatives or forbearance should be clearly articulated and continued reforms of PFIs should help limit the risk of contingent liabilities.

Authorities’ views

23. The authorities recognize the risks posed by high debt levels and are committed to pressing ahead with fiscal consolidation to achieve the government’s medium-term fiscal deficit targets. The authorities agreed with the DSA findings and noted the risk to debt sustainability from natural disasters and the importance of ensuring any newly contracted debt has a minimum 35 percent concessional component. They intend to broaden the tax base and continue with more vigorous compliance measures. They emphasized the need for expenditure restraint, noting that recent efforts have set a new base, and are conducting expenditure reviews in health and education to improve efficiency.

D. Monetary and Exchange Rate Policy

24. The external position is broadly in line with fundamentals. The current level of the exchange rate is assessed to be appropriate. International reserves (in U.S. dollar terms) declined towards the end of 2016 but improved in December and January to 3.2 months of prospective GNFS imports. Careful monitoring is needed to ensure sufficient coverage. Over the medium term, the current account deficit will need to narrow further, driven by fiscal consolidation to ensure debt sustainability. The IMF’s reserve adequacy metric for credit constrained economies suggests an optimal level of reserves for Samoa between 2.7 to 4 months of imports of goods and non-factor services, depending on the assumed long-run opportunity cost of holding reserves.

A01ufig5

Samoa: Gross reserves

(In millions of USD)

Citation: IMF Staff Country Reports 2017, 112; 10.5089/9781475599411.002.A001

Sources: Central Bank of Samoa; IFS; and IMF Staff calculations.

25. The current monetary policy stance is appropriate given low inflation and moderate growth prospects. The need to build fiscal buffers has increased the urgency of fiscal efforts and in this context, monetary policy can remain accommodative to support private sector activity. However, if the reserve position deteriorates, macroeconomic policies will need to be adjusted. A tighter monetary policy stance would be appropriate; however, the monetary transmission mechanism is weak and therefore fiscal policy would bear most of the burden of adjustment.

Authorities’ views

26. The authorities consider the current monetary policy stance to be broadly appropriate. The authorities noted that the recent decline in reserves reflected one-off factors, but also the ending of a period of substantial grant inflows. They anticipate reserves to continue to recover but monetary policy could be tightened, if reserves were to continue to decline. However, the monetary transmission mechanism is weak and, in addition to raising the interest rate of CBS securities, the CBS would rely on moral suasion which has previously been effective. In addition, the authorities indicated that they could also consider recalling overseas investments for some institutions, if needed.

E. Structural Policies for Sustained and Inclusive Growth

27. Improving resilience to natural disasters is a high priority. This can be facilitated by continuing to focus development expenditure on increasing the resilience of infrastructure to climate change and natural disasters. This includes construction of new infrastructure to climate resilient standards and adequate maintenance of existing infrastructure. For example, a Green Climate funded project, announced in December 2016, will upgrade key infrastructure in Apia, the capital city, to prevent flooding, a main source of damage during previous natural disasters. Greater economic diversification would also improve resilience to natural disasters.

28. Better performance of SOEs would raise growth prospects, reduce drain on the budget, and alleviate financial sector vulnerabilities. SOEs control a large share of physical assets in Samoa, yet their contribution to GDP is estimated at 3 percent (Annex IV). Between 2010-2014, returns on equity and assets were negative and average government transfers to SOEs, not including subsidized loans by UTOS, amounted to 0.9 percent of GDP.5 Recent steps to improve SOE performance, accountability, and governance are appropriate and include establishment of the new Ministry of Public Enterprises, implementation of provisions of the SOE Act, and appointment of independent directors. The authorities should proceed with efforts to privatize selected SOEs over the medium-term. More broadly, improvements to SOE governance should continue in order to increase their efficiency and contribution to the economy.

29. Sustained efforts will improve the business climate and support private sector growth. Impediments to funding for SMEs continues to constrain private sector activity, however, the implementation of the Personal Properties Securities Act (amended January 2015) in February 2017 is expected to improve access to finance, as will the eventual implementation of the credit bureau. Proposed reforms to the legal framework for land leases would also facilitate access to credit. Skills shortages remain a significant impediment for businesses. Targeted efforts to improve vocational skills and accreditation could help ease these shortages, while also better preparing workers to take advantage of overseas opportunities. There is scope for further development of the tourism sector, including through improved flight availability and an enhanced tourist experience. Completion of a submarine cable in 2017 is expected to improve the quality and reduce costs of information technology services.

30. Further efforts are needed to reform and upgrade the agricultural sector, which absorbs as much as two-thirds of the potential labor force. However, productivity is low and output is projected to continue to decline. The sector is constrained by access to land and inability to use land for collateral to finance agricultural development. A more productive agriculture sector can help deliver sustainable growth and will help meet the Sustainable Development Goals (SDG).

Poverty and Inequality Indicators

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Source: Samoa Hardship and Poverty Report 2016

31. Extreme poverty is rare in Samoa and the incidence of food and basic needs poverty has declined since 2002. However, there has been only a modest decrease in the share of the population that is either poor or vulnerable; and income inequality has increased. The uptick in basic needs poverty in 2008 highlights Samoa’s vulnerability to food price shocks. The incidence of poverty is highest amongst those with the lowest level of education attainment. Samoa has achieved the Millennium Development Goals (MDG) with respect to universal primary education. Continued efforts to improve educational access will help support achieving the SDGs.

32. The Strategy for Development of Samoa 2016/17-2019/20 (SDS) was recently published. The SDS highlights the government’s priorities (Table 7) and outlines the actions put in place to achieve the key outcomes. The SDS aims to ensure increased opportunities and improved access to services and infrastructure. The government has also committed to link the annual and multiyear budgets to the strategic outcomes of the SDS, ensuring that what they commit to each year in the budget process keeps them on the path towards reaching the SDS outcomes.

Authorities’ views

33. The authorities are committed to achieving the SDGs. The authorities agree that improving the resiliency of infrastructure to natural disasters is important but noted the additional upfront costs and associated trade-offs. Efforts are ongoing to improve the operations and governance of SOEs and the authorities are committed to privatization, but progress is dependent on investor availability and interest. The authorities recognize the potential from greater access to land but are committed to protecting the rights of landowners.

F. Other Issues

34. Samoa’s economic statistics are broadly adequate for surveillance. Core macroeconomic data are regularly reported to the IMF and published on official websites. Some statistical issues were raised during the mission, including potential bias in the recent national accounts data. Staff urges timely implementation of recommendations from the PFTAC national accounts mission in December 2016 to ensure appropriate transformation of VAGST data; further analysis of the household expenditure survey to estimate the informal sector; and to upgrade deflation methodology. The Samoa Bureau of Statistics (SBS) is encouraged to develop a revisions policy. Additional technical assistance with Government Finance Statistics (GFS) is also needed. The SBS has recently increased their statistical capacity and are expected to provide IIP data to the Fund during 2017.

35. Data dissemination will be enhanced through the implementation of the enhanced General Data Dissemination System (e-GDDS) (Box 1). An STA e-GDDS mission overlapped with the Article IV mission to assist the authorities in developing a national “data hub”—the National Summary Data Page (NSDP)—that features data dissemination in both human readable and machine readable SDMX formats. Implementation of the e-GDDS represents a key structural reform in statistical developments and will promote transparency and help create strong synergies between data dissemination and surveillance.

Authorities’ views

36. The authorities welcomed technical assistance to implement the eGDDS. Technical assistance is needed to improve the national accounts statistics; technical assistance and training are needed to upgrade GFS.

Staff Appraisal

37. The Samoan economy has performed well in recent years. Economic growth was strong in 2015/16 and, although the pace will moderate somewhat, is expected to remain buoyant this year. Closure of the largest manufacturing plant will drag on growth in 2017/18 and in 2018/19. Nevertheless, economic activity will continue to be supported by renewed reform momentum and increased business confidence. Growth is expected to average close to 2 percent, in the absence of natural disasters. Inflation is subdued and is expected to be close to 3 percent over the medium term. The current account widened in 2015/16 despite an improve trade balance due to lower charitable remittances and a deterioration in the services account. Over the medium term, the current account is expected to remain in deficit of about 4.5 percent of GDP.

38. The loss of correspondent relationships has increased the fragility of the remittance sector in Samoa. Some MTOs are operating without bank accounts. increasing the risk of a disruption to remittance payments on which Samoa is heavily reliant. An IMF pilot project is supporting a coordinated and comprehensive set of measures needed to address these risks. Ongoing efforts by the authorities have improved the AML/CFT framework but additional technical assistance is needed to strengthen the legislative framework and increase its effectiveness. The authorities are also encouraged to consider developing a KYC utility that may contribute to reduced costs and improve the AML/CFT compliance in the remittance sector.

39. Financial stability indicators point to a generally sound banking system, although vulnerabilities persist in the PFIs. Good progress has been made in implementing FSAP recommendations and continued efforts will support financial sector stability, including amendments to the Financial Institutions Act, upgrades to prudential statements, increased capacity, and updating the framework for single borrower limits. Enhanced data quality and coverage along with the development of stress testing analysis and preparation of notes on financial stability will sharpen financial stability analysis and help build capacity to address risks.

40. Continued efforts are needed to reduce the public sector debt to mitigate the vulnerabilities from natural disasters. Recent improvement in expenditure control should be sustained and expenditure reviews in health and education can support improved efficiency. Revenue mobilization efforts are needed to address a projected downward trend in revenues as a percent of GDP and should focus on broadening the tax base, improving compliance, and streamlining tax concessions and credits. Adherence to the medium-term debt strategy, including a minimum 35 percent concessional component for new borrowing, will support fiscal sustainability. Ongoing efforts to manage contingent liabilities, including reform of SOEs and PFIs, will reduce Samoa’s fiscal risks.

41. The monetary policy stance is appropriate and the exchange rate is broadly in line with fundamentals. However, international reserves trended downwards during 2016 and although this trend reversed in recent months, reserve developments merits close monitoring. Macroeconomic policies should be adjusted if the reserve position deteriorates, however, the weak monetary transmission mechanism implies that fiscal policy would bear most of the burden of adjustment.

42. Accelerated structural reforms will help Samoa meet its development goals, as outlined in the SDS. Continued efforts to enhance the resilience of public infrastructure to natural disasters will support sustainable growth, by reducing the costs of natural disasters and encouraging private sector activity. Private sector activity can be further boosted by sustained efforts to improve the business climate, increasing access to credit, and addressing skill mismatches and shortages. Reform of SOEs would raise growth prospects, reduce drain on the budget, and alleviate financial sector vulnerabilities.

43. The staff recommends that the Article IV consultation with Samoa be held on the standard 12-month cycle.

Implementing the Enhanced General Data Dissemination System (eGDDS)

Samoa is to be the first country in the Asia and Pacific region to implement the e-GDDS. The Samoan authorities have committed to publish in April 2017 key macroeconomic data in a new national summary data page (NSDP) under e-GDDS to support surveillance and improve data transparency.

A renewed data initiative. Introduction of new features to the General Data Dissemination System resulted in the establishment of the e-GDDS in May 2015. The e-GDDS refocuses on data dissemination to support transparency, encourage statistical development, and help create strong synergies between data dissemination and surveillance. It is designed to assist participants in improving data transparency and governance through release of key macroeconomic and financial data in a standardized format and disciplined manner. Implementation of the e-GDDS would lead to structural change in countries’ statistical system. Staff analysis has shown that data transparency reforms reduce borrowing costs and enhance resilience of the economy (Choi and Hashimoto, 2017).

A focus on dissemination of data for surveillance. The e-GDDS recommends dissemination of 15 data categories that are considered essential for the analysis and monitoring of macroeconomic and financial conditions. In particular, these data categories are aligned with those as listed in the Table of Common Indictors Required for Surveillance (TCIRS). Such alignment helps to integrate and leverage e-GDDS and data provision for TCIRS and create synergies given the central role of TCIRS in surveillance activities. The Samoan authorities committed to publish 13 of the 15 core e-GDDS data categories in April 2017. The remaining two core data categories (external debt and international investment position) will be published later in 2017. The authorities have also opted to disseminate supplementary datasets, including direction of trade, labor market, population, financial soundness indicators (FSIs), sectoral financial statements for FSIs, and financial access survey.

NSDP’sfeaturesandbenefits. The NSDP is a national “data portal” that assembles links for e-GDDS recommended data categories and supplementary datasets for a country. The links provide access to time series in formats readable by humans and computers. These data are usually compiled by multiple agencies, but their dissemination and regular updating are coordinated by one designated agency.

  • The NSDP lets data users: (i) browsedata via link to online datasets that can be easily viewed in time series format or as graphics; (ii) downloaddatainSDMX, a format used for machine-to-machine data sharing; and (iii) accessmetadata, which describes a country’s practice for data compilation and dissemination.

The NSDP (i) reduces reporting burden for datareporters to multiple agencies via posting data in one data portal in a standardized format that can be accessed by different agencies; (ii) allows datamanagers to control data updating processes; (iii) makes processing easier for international/regionalorganizations and other institutional data users due to data dissemination in machine readable format; and (iv) provides links to data in a format that thegeneralpublic can easily browse as time series, view as graphs, or download.

Figure 1.
Figure 1.

Samoa: Real Sector Developments

Citation: IMF Staff Country Reports 2017, 112; 10.5089/9781475599411.002.A001

Sources: Country authorities; World Bank Doing Business; and IMF staff calculations.
Figure 2.
Figure 2.

Samoa: External Sector Developments

Citation: IMF Staff Country Reports 2017, 112; 10.5089/9781475599411.002.A001

Sources: Country authorities; and IMF staff calculations.
Figure 3.
Figure 3.

Samoa: The Role of Remittances

Citation: IMF Staff Country Reports 2017, 112; 10.5089/9781475599411.002.A001

Sources: Country authorities; SendMoneyPacific; and IMF staff calculations.
Figure 4.
Figure 4.

Samoa: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2017, 112; 10.5089/9781475599411.002.A001

Sources: Country authorities; and IMF staff calculations.
Figure 5.
Figure 5.

Samoa: Monetary and Financial Sector Developments

Citation: IMF Staff Country Reports 2017, 112; 10.5089/9781475599411.002.A001

Sources: Country authorities; and IMF staff calculations.
Figure 6.
Figure 6.

Samoa: Financial Access

Citation: IMF Staff Country Reports 2017, 112; 10.5089/9781475599411.002.A001

Sources: Country authorities; IMF Financial Access Survey; and IMF staff calculations.
Table 1.

Samoa: Selected Economic and Financial Indicators, 2013/14-2021/22

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

Includes re-export of fuel after 2009/10.

Includes domestic and external public debt.

IMF, Information Notice System (calendar year).

Latest data available.

Table 2.

Samoa: Balance of Payments, 2013/14-2021/22 (In millions of U.S. dollars, unless otherwise indicated)

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

Including re-export of fuel after 2009/10.

Including other current transfers.

Including other service credits.

Table 3.

Samoa: Financial Operations of the Central Government, 2013/14-2021/22

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

Samoa: Monetary Developments, 2011/12-January 2017

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Sources: Central Bank of Samoa; and IMF staff estimates.

Ratio of GDP to broad money.

Ratio of broad money to monetary base.

Includes commercial bank credit only.

Weighted average.

Table 5.

Samoa: Financial Soundness Indicators, 2013/14-September 2016

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Sources: CBS, Financial Soundness Indicators database, and IMF staff calculations. Note: For fiscal year ending in June.

Change in methodology in 2015/16.

Table 6.

Samoa: Status of Millennium Development Goals

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Sources: Pacific Islands Forum Secretariat, and 2013 and 2015 Pacific Regional MDGs Tracking Reports.
Table 7.

Samoa: Strategy for the Development of Samoa and Sustainable Development Goals

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Source: Strategy for the Sustainable Development of Samoa.

Annex I. Risk Assessment Matrix1

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Annex II. Anti-Money Laundering and Counter-Terrorist Financing Measures1

Overview. Samoa has significantly improved its AML/CFT framework since the 2006 assessment, including through the Money Laundering Prevent Act 2007 and subsequent regulations in 2009. These better align Samoa’s framework with the FATF’s recommendations under the third round of mutual evaluations. The FATF recommendations were revised for the fourth round in 2012 and, in 2015, Samoa’s AML/CFT regime was assessed by the Asia Pacific Group on Money Laundering (APG) under the revised 2012 FATF standard. APG assessors found significant shortcomings in Samoa’s AML/CFT regime, rating it low or moderately effective in 10 out of 11 immediate outcomes assessing effectiveness, and non-compliant or partially compliant with more than half of the 40 FATF Recommendations. Hence, the authorities were encouraged to work toward substantial improvements of the AML/CFT framework, both on the strategic and operational level.

Money laundering risks. Samoa faces a range of money laundering risks but terrorist financing risks appear relatively low. Money laundering risks are related mainly to its international (offshore) sector, although domestic risks include the large remittance sector, cross-border movement of cash, and the domestic banking sector.

  • The international (offshore) sector presents the main money laundering risk, given its relative anonymity, concerns regarding transparency of ownership and control information, complexity, and tax-exempt status. At the end of 2014, there were 34,000 international business companies (IBCs), along with 155 international trusts and 7 international banks. Samoan IBCs are created only through Samoan trust and company service providers (TCSPs), which capture beneficial ownership information when the IBC is created. The international trusts are domiciled in Asia, including Hong Kong SAR, China, and Singapore, primarily for asset protection and tax advantages. Samoa’s TCSPs have limited ability to detect and report suspicious transactions and supervision of TCSPs is limited in depth and scope. Information on beneficial ownership is not publicly available, except with the permission of the client. While there is little evidence of the proceeds for foreign predicate crimes being laundered through Samoa or its offshore sector, lack of evidence may be reflective of a system unable to detect money laundering, rather than the absence of money laundering itself. Steps have been taken to mitigate risks; strengthened provisions implemented at the end of 2015 should significantly increase the capacity of TCSPs to conduct ongoing due diligence.

  • The MTO sector is largely responsible for channeling remittances, which, from a global perspective, are generally viewed as a high-risk area for money laundering and terrorism financing. Nevertheless, the MTO sector is reasonably aware of money laundering/terrorist financing risks. Large MTOs have implemented reasonably robust measures to identify and verify customer identity, obtain originator and beneficiary information, and scrutinize transactions. The level of suspicious-transaction-reporting is lower than expected given the size of the sector. The government does not require financial institutions to include full beneficiary information with cross-border wire transfer messages; ordering financial institutions are however, required to obtain and retain the originator information with the wire transfer.

  • Cross-border movement of cash has also been identified as an area of risk. Customs is primarily responsible for enforcing the border declaration regime, which is broadly sound in technical terms. The FIU, Customs, and Immigration coordinate on border currency reports (BCRs) but further coordination—including with police—would improve monitoring and the ability to investigate and prosecute predicate crimes and money laundering.

  • Money laundering risks associated with the domestic banking system arise mainly because of its materiality. Domestic proceeds-generating crimes appear to be low.

The high-priority recommended actions include:

  1. Offshore Sector. Amend International Companies Act, Trust Act, Companies Act, Money Laundering Prevention Act and regulations to address the technical deficiencies and issue additional, updated guidance; Increase the scope and intensity of AML/CFT supervision of the offshore sector, including international banks and insurance companies and TCSPs; Enhance the accuracy and timeliness of beneficial ownership information held by TCSPs for IBCs.

  2. AML/CFT Supervision. Ensure that AML/CFT supervision of financial institutions (i.e., banks and MTOs) and DNFBPs is based on risk; Strengthen the frequency and intensity of on-site inspections of key financial sectors; Increase engagement by supervisors with financial institutions and Designated Non-Financial Business Professions (DNFBP)s.

  3. Enhanced Implementation. Strengthen resources of the CBS and FIU to undertake AML/CFT supervision; Pursue ML investigations as a matter of policy and pursue confiscation action in more serious/complex cases; Improve the effectiveness of the cross-border declaration system.

Annex III. Implementation of Key FSAP Recommendations

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Annex IV. Public Financial Institutions

Following the natural disasters in 2009 and 2012, Samoa’s PFIs grew rapidly and moved increasingly into areas where they compete with commercial banks. Asset quality deteriorated and, in some cases, liabilities are government guaranteed or are to government institutions, including the central bank.

Public Financial Institutions (PFIs) make up a substantial part of the financial sector. Among the PFIs, the Samoa National Provident Fund (SNPF) and Development Bank of Samoa (DBS) are the largest in terms of assets but both Unit Trust of Samoa (UTOS) and the Samoa Housing Corporation (SHC) have been expanding rapidly.

PFIs’ asset quality deteriorated following the natural disasters in 2009 and 2012 and has not yet fully recovered. Lending by the PFIs was concentrated in the tourism sector, which was hard hit by the natural disasters, however, policy directed lending likely contributed to a further deterioration in asset quality.

Samoa National Provident Fund (SNPF). The SNPF was established in 1972 as a compulsory retirement savings scheme in which a minimum 5 percent contribution is paid both by employees and employers. Public employees and those in private formal employment contribute, covering 78 percent of the formally employed population, however, most Samoans do not contribut