2018 Article IV Consultation-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for Samoa

Abstract

2018 Article IV Consultation-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for Samoa

Context

1. Samoa has demonstrated resilience in the face of multiple external shocks. Real activity has recovered from the devastating impact of the 2009 tsunami and 2012 Cyclone Evan, which caused damages estimated at 22 percent and 29 percent of GDP, respectively, and the economy continues to perform well. While the damage from Cyclone Gita—which hit Samoa in February 2018—was limited, it was a reminder of the ever-present threat of natural disasters. Samoa also remains vulnerable to the partial withdrawal of correspondent banking relationships (CBRs) by global and regional banks, and was therefore selected as an IMF CBR pilot.

2. Policies have been largely in line with past Fund advice. As recommended by staff, the authorities have made efforts to reduce public debt through expenditure control and revenue mobilization. Similarly, the current accommodative monetary policy stance is consistent with staff advice. The authorities have implemented measures to mitigate spillovers from the partial withdrawal of CBRs, and are committed to continuing efforts in this area, in line with Fund advice. Progress has been made in implementing FSAP recommendations, and next steps should focus on reform of public financial institutions (PFIs). The authorities’ structural reform efforts are in line with Fund advice and concentrate on improving Samoa’s business environment, resilience to natural disasters, financial inclusion, and SOEs governance, while also exploring opportunities for privatization.

Recent Economic Developments

3. Growth has moderated after a temporary spike but remains robust. After peaking at above 7 percent in 2015/16, underpinned by temporary factors such as the completion of new hotels and two major sporting events, real GDP growth has normalized and is estimated at 2.5 percent for 2016/17.1 Commerce, services and agriculture were the key drivers.

4. Other recent developments point to some pickup in inflation, moderating credit growth, and a narrowing of the current account deficit. Average inflation picked up to 1.3 percent in 2016/17, compared to close to zero in the previous year, but remains below the authorities’ target of 3 percent. Credit growth moderated in line with slowing economic activity. The current account deficit narrowed to 2.3 percent of GDP in 2016/17 (compared to 4.7 percent of GDP in 2015/16) driven by temporary factors—one-off items in the service balance and some reduction in import growth related to the completion of large hotel projects in the previous year. The Tala appreciated against the U.S. dollar during 2016/17, although there was little change in nominal and real effective exchange rates.2

Outlook and Risks

5. Economic activity is expected to moderate further in 2017/18, but will rebound in subsequent years, boosted by infrastructure spending and preparation for Samoa’s hosting of the Pacific Games (PG) in 2019.3 Growth is projected to moderate to 1.8 percent in 2017/18, due to the negative impact of the closure of the Yazaki manufacturing plant in August 2017 and normalizing of fishing exports after two exceptionally good years, only partially offset by the impact of higher public infrastructure spending and Samoa’s hosting of regional meetings. The negative growth impact of February 2018’s Cyclone Gita is estimated to be about 0.1 percentage point. The impact of Cyclone Gita was much more limited compared to that of Cyclone Evan which devastated the country in 2012, and mainly due to the temporary closure of a major hotel and some damage to roads and other infrastructure. Given the limited impact of Gita, the authorities decided against drawing available funds (grant and concessional loans) from the ADB-funded regional disaster resilience program. Growth is expected to rebound in 2018/19, as two new businesses scale up operations at the old Yazaki plant and several infrastructure projects, including new bridges, road extensions, and a new terminal at the international airport, are completed. In 2019/20, growth is projected to accelerate to 5 percent, driven by tourism related sectors as Samoa hosts the PG in July 2019, before settling at just above 2 percent in the medium term. Inflation is expected to continue to pick up to about 3 percent in the medium term. The current account deficit is expected to widen to just above 4 percent of GDP in the next few years, driven by a rebound in imports to support investment for the PG and other large projects.

6. The risks to the outlook are tilted to the downside (Annex I). Samoa is highly vulnerable to natural disasters, which in the past have hit the country on average every five years, causing widespread damage and increasing public debt. Another major downside risk is related to spillovers from the partial withdrawal of CBRs by global and regional banks, which could disrupt the inflow of remittances to Samoa. The recent dengue fever outbreak could affect tourism, but this is a tail risk and is being mitigated by the authorities’ efforts to raise dengue awareness.4 On the upside, the impact on economic sentiment and growth of the hosting of the PG could be stronger than currently anticipated.

Authorities’ Views

7. The authorities broadly agreed with staff’s assessment of the outlook and risks. They shared the view that the current growth moderation is temporary and that growth is expected to rebound, peaking in the year of the PG. They highlighted that Samoa is a small island developing state with many challenges including the ever-present natural disaster risk. Other downside risks include greater loss of CBRs, and possible reduced access to concessional loans in the medium to long term. On the upside, they emphasized the positive impact of the PG, a possible strong pickup in tourism, and a possible increase in export opportunities.

Macro Economic and Financial Policies

A. Strengthening the Fiscal Framework to Ensure Fiscal Sustainability

8. The authorities have made progress towards fiscal consolidation in recent years, but the fiscal deficit widened in 2016/17. Current expenditure fell from a high of 28.4 percent of GDP in 2013/14 to 23 percent of GDP in 2016/17, largely driven by across-the-board cuts in goods and services and a reduction in grants to public bodies. During the same period, total revenues (excluding grants) steadily increased, driven by improved compliance and increased collection of Value Added Goods and Services Tax (VAGST) and income and excise taxes. However, the fiscal deficit widened to 1.1 percent of GDP in 2016/17—from 0.4 percent of GDP achieved the previous year—due in part to additional spending on infrastructure.

uA01fig01

Expenditure

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 145; 10.5089/9781484359242.002.A001

Sources: Country authorities; and IMF staff calculations.

9. The fiscal position is projected to loosen further in the medium term. Despite the revenue reform measures being undertaken (Box 1), a projected rebound in current spending and increase in development expenditure is expected to widen the fiscal balance to 2 percent of GDP in 2017/18. A further deterioration of the fiscal position is anticipated in the medium term, with the deficit reaching 2.5 percent of GDP by 2021/22.

10. The impact of recently introduced revenue measures will largely depend on implementation and improved compliance. The government introduced various revenue-enhancing measures, including eliminating concessions, and raising selected taxes and charges (see Box 1). However, the overall impact of these measures will depend on implementation, and on improving tax and customs administration. The measures that have been factored into the staff’s fiscal projections represent a cumulative increase of just above 1 percent of GDP in the fiscal balance over two years. Additional efforts to improve compliance and auditing and reporting processes could raise revenues by another 0.5 percent of GDP.

11. Total public debt has fallen below 50 percent of GDP, down from close to 58 percent of GDP in 2014/15, but is projected to rise again in the medium term. Samoa’s debt management strategy is anchored on a target debt ratio of 50 percent of GDP (excluding contingent liabilities). However, the debt-to-GDP ratio is projected to start rising again in the medium term, and debt service requirements remain high. The debt sustainability analysis shows that Samoa remains at high risk of debt distress when the average annual effect of natural disasters is incorporated in medium-term projections. Contingent liabilities from government guarantees to SOEs stand at about 7 percent of GDP. The government also faces fiscal risks from on-lending to SOEs, at about 6 percent of GDP.5

Summary of Revenue Review Recommendations1

In 2016/17 the Government undertook a review of Samoa’s taxation regime and procedures, with the objective of identifying measures to broaden the tax base and improve tax collection and enforcement. The recommendations of the review were finalized in early 2017, and have been approved by Cabinet and incorporated into the FY17/18 budget.

Measures include removing various tax concessions, such as the tourism tax credit scheme and import duty exemptions; phasing out the income exemptions for churches and pastors; increasing non-tax fees and charges on a one-off basis; and raising the excise duty on tobacco, alcoholic and sweetened beverages and petroleum fuels. The review also recommended lowering export taxes to support the competitiveness of Samoan businesses, and adjusting rates for lower paid employees. The government has subsequently introduced a tax deduction for businesses that export goods and services, and has raised the tax-free threshold from Samoan Tala (SAT) 12,000 to SAT 15,000 (about USD 4,700 to USD 5,900).

While the recommended reforms are expected to raise revenue, the impact will largely depend on implementation and improved compliance, and will be conditional on boosting the audit and compliance capacity of customs and revenue officials, increasing audit requirements, and improving the efficiency of tax administration. The revenue impact of the elimination of the tourism and tax credit scheme, which provided tax breaks for hotel developments, is likely to be limited given the lack of new projects, and the fact that recent developments will continue to benefit from a five-year tax holiday.

1 Prepared byAnalisa Ribeiro Bala.
uA01fig02

Debt Service Requirements

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 145; 10.5089/9781484359242.002.A001

Sources: Country authorities; and IMF staff calculations.

12. The authorities should strengthen the fiscal framework to solidify the gains from their previous consolidation efforts. A lower public debt target of 45 percent of GDP over the medium term, and 40 percent of GDP over the longer term, would create fiscal space to respond to a natural disaster and bring Samoa’s debt closer to the average for Pacific island countries (about 34 percent of GDP), while ensuring adequate funding for development priorities. 6 Achieving a lower debt target would also change Samoa’s debt distress rating from high to moderate. The recommended lower debt targets exclude contingent liabilities, because the latter cannot be reduced through budgetary measures and need to be addressed through structural reforms. The authorities should also introduce a fiscal balance anchor by keeping the overall fiscal deficit under 2 percent of GDP on average over the medium term, which staff analysis shows to be consistent with achieving the 40 percent of GDP debt target in the long term. Achieving the new debt targets in the medium and long term is feasible, but will require additional fiscal consolidation efforts (e.g., through improved tax administration) by about 0.5 percentage point of GDP.

13. Public financial management (PFM) reforms would also help reduce fiscal risks. The authorities should strengthen existing procedures for issuing government guarantees and proceed with plans to develop a formal on-lending policy. In the longer term, the authorities could also consider creating a contingency fund—either from unexpected increases in revenue collection or from privatization of SOEs—to meet disaster related needs, or fiscal costs from contingent liabilities. Currently an annual appropriation not exceeding 1 percent of the total budget is allocated for unforeseen expenditure.7 A more permanent fund into which an annual appropriation is made would increase buffers.

Authorities’ Views

14. The authorities agreed with staff’s advice on the need to strengthen the fiscal framework. They stressed the need to create fiscal space while being mindful of the country’s development priorities. While the authorities remain committed to fiscal consolidation, additional spending on key priority areas is anticipated, in line with the objectives of the Strategy for the Development of Samoa (SDS) 2016/17–2019/20. The authorities agreed that keeping the fiscal deficit below 2 percent of GDP on average over the medium term is desirable and consistent with the objective of reducing the debt-to-GDP ratio to a more sustainable level. They stressed that the deficit had remained below the 2 percent of GDP benchmark in 2016/17, and that further prioritizing expenditure to improve outcomes, tax compliance and administration would help in adhering to the deficit benchmark in the medium term. They also intend to improve PFM by developing a formal on- lending policy.

B. Monetary and Exchange Rate Policies

15. Monetary policy remains appropriately accommodative, but the transmission mechanism is weak. The policy rate has remained stable below 20 basis points in recent years, which is appropriate given that inflation is projected to remain below the authorities’ medium-term target of 3 percent. High excess reserves, a falling private credit-to-deposit ratio, and a still large interest rate spread reflect limited competition in the banking sector and conservative lending practices. Measures under discussion—creating a credit bureau and facilitating the use of customary land leases as collateral—could reduce banks’ reluctance to lend, and improve both financial inclusion and the monetary transmission mechanism. Samoa’s pegged exchange rate system provides a welcome nominal anchor in a context of weak monetary policy transmission.

16. The external position is assessed to be broadly in line with fundamentals and desirable policies (Annex II). Staff’s analysis point to a current account gap in the 0.8–1.7 percent of GDP range. In order to reflect the fact that the current account improvement in 2016/17 was driven by temporary factors, adjustments were made to the underlying current account in applying the EBA-lite methodology. This resulted in an adjusted current account gap of 1.2 percent of GDP. The External Sustainability Approach, based on a target of public debt at 40 percent of GDP over the long term, gives a current account gap of 0.8 percent of GDP. In staff’s judgment, the latter is the most informative methodology, since it takes into account Samoa’s need to build a fiscal cushion against natural disasters. The external position is therefore assessed to be broadly in line with fundamentals and desirable policies. At 3.7 months of imports, the level of reserves is adequate according to the ARA metric for credit-constrained economies, but is below the lower bound of the desirable range once Samoa’s vulnerability to natural disasters is taken in to account.

uA01fig03

Current Account Balance

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 145; 10.5089/9781484359242.002.A001

Sources: Country authorities; and IMF staff projections.

Authorities’ Views

17. The authorities agreed with staff’s assessment of the current monetary policy stance and of Samoa’s external position. In the near term, the Central Bank of Samoa (CBS) sees a continuation of the current accommodative policy as appropriate, in light of fiscal tightening and inflation still well below the 3 percent target. In the medium term, the CBS will seek opportunities to reduce the degree of accommodation by “normalizing” (raising) the policy rate as the economy rebounds, thereby creating policy space to cut rates when a negative shock hits the economy. The authorities agreed with staff on the need to improve the transmission mechanism, including through measures aimed at reducing banks’ reluctance to lend. They agreed with staff’s assessment that the recent narrowing of the current account deficit is driven by temporary factors, and that the external position is broadly in line with fundamentals and desirable policies. They stressed that the reserves position has significantly improved since the last Article IV, but noted that reserves are below the lower bound of the ARA metric once Samoa’s vulnerability to natural disasters is taken into account. They reiterated their intention to build additional reserves to increase resilience to external shocks.

C. Policies to Address Spillovers from the Withdrawal of Correspondent Banking Relationships

18. Samoa is vulnerable to the partial withdrawal of CBRs. CBRs, which facilitate global trade and economic activity, have been under pressure in several countries, as global and regional banks have selectively withdrawn from the business of correspondent banking since the global financial crisis. This withdrawal reflects global banks’ assessment of the balance of profitability and risk of CBRs in a tighter regulatory landscape. 8 Although pressures on CBRs in Samoa have so far not affected trade and remittances, the country is vulnerable to the partial withdrawal of CBRs (see Box 2), and was selected by the IMF as a CBR pilot country.

19. Samoa’s recent progress in implementing measures aimed at mitigating the risks from the withdrawal of CBRs is welcome, and the authorities should push ahead with further reforms in this area. Consistent with the technical assistance and policy advice received by Samoa in the context of the CBR pilot, efforts should focus on:

  • Reforming the AML/CFT framework. The authorities have taken actions to address gaps in their AML/CFT framework, including progress with the implementation of the national AML/CFT strategy. The Samoa Financial Intelligence Unit (FIU) has trained all its staff on AML/CFT issues, introduced risk-based monitoring, and started holding quarterly compliance meetings with money transfer operators (MTOs) and financial institutions to provide feedback and training— including by explaining existing AML/CFT guidelines. Looking ahead, in addition to strengthening the legal framework to facilitate criminal prosecution of money laundering, improving the sanctioning powers of supervisory agencies for AML/CFT violations should also be a priority. Recent efforts to improve the availability and quality of CBR and remittance data should continue, and the data should be used to enable supervisory staff to perform system-and bank-level analyses.

  • Establishing a database for customer identification and monitoring. The authorities have encouraged MTOs to sign bilateral Memoranda of Understanding with the Samoa election commission (OEC), to verify the identity of their customers using the OEC’s election database. To enable faster and cost-efficient processing, an IT solution should be developed to bridge the MTOs’ targeted access to the OEC data. As a next step, other cost-effective technology solutions could be developed to enhance MTO compliance with other AML/CFT obligations (e.g., record keeping and suspicious transaction reporting) in line with their risk levels.

  • Addressing risks from the offshore sector by aligning the laws governing it with international AML/CFT standards. The new Trustee Companies Act aims to enhance the legal framework for collection and sharing of accounting records and beneficial information. The Samoa International Finance Authority (SIFA) has also strengthened its supervisory capacity by increasing the number of staff and providing training, and has started conducting on-site visits. In order to address concerns of a potential conflict between its promotional and supervisory roles, SIFA created a separate division solely focused on promotion. Further efforts in this area should focus on bringing the overall legal framework in line with international AML/CFT standards (e.g., ensuring the authorities’ timely access to accurate and up-to-date beneficial ownership information of legal entities). The offshore sector’s business model and its sustainability should be re-assessed with the goal of lowering the country’s overall risk profile.

Impact of the Withdrawal of CBRs on MTOs1

Declines in profitability and concerns over reputational risk are prompting the closure of existing money transfer operator (MTO) accounts in Samoa—particularly U.S. dollar-based CBRs. Remittances to Samoa account for over 15 percent of GDP and are primarily channeled through MTOs. Although the risk of money laundering (ML) and financing of terrorism (FT) through remittance providers to Pacific Island countries (PICs) is generally considered low (as assessed, for example, in the Australian Transaction Reports and Analysis Centre 2017 report), weaknesses in supervision and comparable shortcomings in the implementation of AML/CFT compliance obligations are contributing to pressures from global correspondent banks to heighten scrutiny or even close the accounts of their MTO customers.

uA01fig04

Share of Private Remittances, by Channel

(In percent)

Citation: IMF Staff Country Reports 2018, 145; 10.5089/9781484359242.002.A001

Note: Non Banks include money transfer operators and foreign exchange dealers.Sources: Central Bank of Samoa; and IMF staff calculations.

According to a recent survey sponsored by the Fund’s Asia and Pacific Department, of the 12 licensed MTOs operating in Samoa, 9 have lost at least one CBR since 2013. Four have also had transaction limits imposed on their accounts. Although Samoa is still far from a complete loss of CBRs in the main remittance currencies (Australian and New Zealand dollars), currently only one MTO has access to CBRs in U.S. dollars, compared for example to seven MTOs with current access to CBRs in New Zealand dollars. Consequently, the U.S. dollar-denominated share of total remittances fell from a high of 21 percent in 2012 to a low of 13 percent by the third quarter of 2014, in part reflecting the withdrawal of U.S. dollar-based CBRs. However, the overall volume of remittances being channeled through MTOs has remained resilient, reflecting the fact that a substantial share of remittances come from New Zealand and Australia, where access by MTOs to the CBRs remains stable.

uA01fig05

Share of Private Remittance, by Country of Origin

(In percent)

Citation: IMF Staff Country Reports 2018, 145; 10.5089/9781484359242.002.A001

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

Loss of CBRs could prompt further MTO market consolidation, potentially increasing the cost to remit. A number of small-sized MTOs are either partnering with or being absorbed by larger, more established MTOs with CBRs. Although the costs of sending remittances are significantly lower through an MTO than a bank, by global standards, the average cost to remit remains high in Samoa — far above the Sustainable Development Goal (SDG) target of 3 percent (see chart comparing the average costs between the Pacific and Caribbean islands). The cost of regulatory compliance not only raises the cost of sending money, but also makes entry of new MTOs in the local market difficult. Given that about 85 percent of remittances are channeled through MTOs, the closure of MTOs’ bank accounts and consolidation of the market could further raise the average cost of sending remittances. While MTO market consolidation could in principle entail some efficiency gains, the closure of smaller MTOs could also affect financial inclusion, given the financial reach of MTOs into the local community. Finally, there is a risk that an increasing share of remittances may be sent through unregulated channels, such as hand-carrying cash. Overall, the risk of a complete and abrupt loss of CBRs is very low for Samoa, particularly given the mitigation measures being undertaken by the Samoan authorities. However, Samoa does remain vulnerable to the further withdrawal of CBRs.

uA01fig06

Average casts of sending $200 of national source currency from Australia and New Zealand to the Pacific, 2011Q1 – 2017Q3

(in percent of total cost)

Citation: IMF Staff Country Reports 2018, 145; 10.5089/9781484359242.002.A001

Sources: Remittance Prices Worldwide, World Bank.
uA01fig07

Pacific and Caribbean/ Central America: Average cost to send $200 of national source currency through MTOs

(In percent of total cost)

Citation: IMF Staff Country Reports 2018, 145; 10.5089/9781484359242.002.A001

Source: Remittance Prices Worldwide World Bank.
1 Prepared by Analisa Ribeiro Bala and Chau Nguyen.

20. The IMF will continue to support the authorities’ efforts, including by promoting an industry-led and regional solution to the withdrawal of CBRs. Building on the dialogue between Pacific banks, MTOs and regulators, initiated at the Pacific Roundtable on CBRs and Remittances (held in Sydney and Auckland in early February 2018), progress on solutions will require concerted actions by all parties. Specific actions should include more intensive regional dialogue, including with Australian and New Zealand regulators; promoting information sharing; and greater transparency and communication by regulators, banks and MTOs—including development of best practice guidelines by banks for opening and maintaining CBRs. Better verification of MTOs’ adherence to standards (e.g., independent and comprehensive AML/CFT audits) and training is also needed, and could be facilitated by establishing associations of MTOs. The authorities are encouraged to engage with all relevant stakeholders on these issues.

Authorities’ Views

21. The Samoan authorities are committed to pushing ahead with further reforms to mitigate risks from the partial withdrawal of CBRs. They will continue to reform their AML/CFT framework to align it with international standards, and to hold regular on-site inspections and off- site monitoring to ensure adherence to AML/CFT legislation. They welcomed the support provided by the Fund, and are open towards promoting an industry-led and regional solution. They are committed to establish a centralized database for customer identification and monitoring, and stressed that they are working towards developing a mandatory national identification system and are exploring options for setting up a credit bureau, all of which would also help mitigate risks. The Samoan authorities expressed strong concerns about the European Union’s decision to include Samoa in its list of non-cooperative tax jurisdictions. They see this listing as a unilateral decision not based on a proper investigative process and peer review, and one which undermines their efforts to address the loss of CBRs.

D. Financial Sector

22. The banking system remains sound. Financial soundness indicators highlight that commercial banks are well capitalized and that earnings, profitability, and liquidity indicators are within historical norms. Although banks’ NPL ratio increased in the last quarter of 2017, preliminary numbers from more recent months point to a reduction in this ratio. Similarly, profitability indicators showed a dip in December 2017 but are expected to rebound as economic activity and lending pick up.

23. Samoa has made substantial progress in implementing the recommendations highlighted in the 2015 FSAP (Annex III). The CBS is producing FSIs for financial institutions— commercial banks and financial SOEs, also known as public financial institutions (PFIs)9—which are used for internal analysis; is conducting regular on-site inspections; and is gradually increasing the number of staff and providing training to improve its supervisory capacity. Looking ahead, the CBS should prioritize upgrading its regulatory and supervisory frameworks, including amending the Financial Institutions Act to support corrective actions and resolution. The recently created high-level committee on financial stability—comprising senior officials from the Ministry of Finance and the CBS—should hold regular meetings to discuss systemic financial stability issues.

24. Reform of public financial institutions (PFIs) remains a high priority. Some PFIs have expanded beyond their original mandates by engaging in lending activities that compete with commercial banks, generating public contingent liabilities. Risks from PFI activities, which could be compounded by CBR pressures, include weakening financial inclusion and increased unsupervised lending

25. In line with FSAP recommendations, the government should formulate a coherent framework for PFI governance and performance, including a clear definition of their mandates. The Development Bank of Samoa (DBS)—which currently accounts for about 80 percent of government guaranteed loans and has an NPL ratio of 12 percent—should continue its efforts to re-orient its focus back onto the agriculture sector and other development objectives for which it was originally created. The DBS should also continue working with debtors toward a resolution of the long-standing issue of poor-performing loans in the tourism sector. The Samoa National Provident Fund (SNPF) should develop a strategy to gradually reduce personal lending, including against members’ contributions, in order to better align its activities to its original mandate of securing retirement income. The Unit Trust of Samoa (UTOS), which was originally created to enable small investors to participate in privatization of SOEs but later became a leveraged financing vehicle for SOEs, should continue to reduce its leverage, with the objective of operating as an unleveraged mutual fund in the medium term.

Authorities’ Views

26. The authorities agreed with staff’s assessment that the banking system remains sound and are committed to continuing implementation of FSAP-recommended reforms. They stated they are in the process of amending the Financial Institutions Act to support bank corrective actions and resolution. They acknowledged the need to strengthen PFI governance and re-orient their mandates towards their original objectives, but also stressed that PFI supervision has been strengthened, and that their lending activities—which need to be seen in the context of a small island economy—have a positive role in bringing down lending rates in the context of limited bank competition.

Medium-Term Challenges

27. Increasing resilience to natural disasters would boost growth by encouraging private sector activity, and should be prioritized within the authorities’ structural reform agenda. The authorities should speedily implement measures aimed at strengthening disaster resilience, including those laid out in the SDS. The following measures should be prioritized within the authorities’ strategy:

  • Health and education facilities should be upgraded to be fully compliant with disaster and climate resilience plans;

  • Key infrastructure should be upgraded to prevent flooding, including through implementation of the Green Climate project;

  • Climate and disaster resilience should be mainstreamed and integrated into all sector plans, Ministry and implementing agencies’ corporate plans, and into transport, ICT, energy, and utility planning and systems.

The above policies will need to be consistent with the authorities’ fiscal strategy and should preferably be grant-financed.

28. Improving the business environment is key to boosting medium-term growth prospects. Efforts to create a conducive environment for private sector development include the recent completion of a submarine cable, which is expected to improve the quality and affordability of information technology services, and the rehabilitation of several hydro plants that were destroyed by Cyclone Evan in 2012, which will contribute to reducing the cost of electricity. The recent launch of a personal property online registry, together with plans to establish a credit bureau and facilitate the use of customary land leases as collateral10, should improve access to finance for both households and SMEs.

29. Current efforts to strengthen governance of SOEs and explore privatization options would improve SOE performance, raise growth prospects, and reduce fiscal risks. A Performance Management Framework for Board and Board Directors, and a Director’s Handbook outlining the roles and responsibilities of Directors and Boards of all public bodies, are under preparation. Option papers for the privatization of Samoa Post Limited (SPL), Public Trust Office (PTO) and Samoa Housing Corporation (SHC) have been prepared and approved by the government, and a review to identify further potential candidates for privatization is ongoing.

30. The authorities should push ahead with implementation of their financial inclusion strategy, which would help increase economic opportunities for all Samoans and reduce inequality. The National Financial Inclusion Strategy (NFIS) for Samoa 2017–2020 lays out a framework to improve financial inclusion, which is welcome given Samoa’s relatively large unbanked population (49 percent of Samoan adults are excluded from the formal financial sector). The following NFIS measures should be prioritized:

  • Expand financial services to underserved segments, especially Samoa’s rural and low-income population, and women and youth, through appropriate products and delivery channels;

  • Develop cost-effective, convenient and safe payment solutions for domestic and international payments, including by promoting digital financial services and institutional innovations (e.g., branchless banking and mobile money to increase access points in rural areas);

  • Promote financial education through core curriculum in schools, and by integrating financial literacy into the product design and service delivery by financial sector providers.

Authorities’ Views

31. The authorities agreed with staff recommendations on structural reform priorities. They agreed that increasing resilience to natural disasters would benefit growth, and that greater financial inclusion would reduce inequality and increase economic opportunities for all. They stressed that they are developing a Disaster Risk Financing Strategy, which would identify and quantify all resources available to respond to natural disasters, including domestic contingencies, regional catastrophe risk insurance policies, and credit lines with IFIs (see Table 8). The authorities also noted that their plans to develop a national SME policy framework—including a definition of SMEs which is currently lacking—would help policy efforts to support SMEs. They are committed to strengthening governance of SOEs and exploring privatization opportunities, but stressed that the positive economic role of SOEs also needs to be considered.

Table 1.

Samoa: Selected Economic and Financial Indicators, 2014/15 – 2022/23

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

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, 2014/15 – 2022/23

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

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

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, 2014/15 – 2022/23

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

Samoa: Monetary Developments, 2011/12 – December 2017

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

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 – December 2017

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Sources: Central Bank of Samoa; 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.
Table 8.

Samoa: Post-Disaster Finance Sources

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Source: Secretariat of the Pacific Community (2015) and CBS

Short-term: within one month; Medium-term: within two-to-four months; Long-term: beyond four months

Pacific Catastrophe Risk Assessment and Financing Initiative.

Other Issues

32. While broadly adequate for surveillance purposes, data quality remains a concern for some data (see Statistical Issues Appendix in the Informational Annex). Staff encouraged the authorities to seek further support from the Pacific Technical Assistance Center (PFTAC) on improvements to local technical capacity in data compilation and provision. Staff also recommends that the authorities ensure the allocation of adequate resources to prevent further delays in improving external sector statistics, including their quality.

33. The authorities are working towards improving GDP statistics and building capacity for data provision to the Fund. The Samoa Bureau of Statistics, with technical assistance from PFTAC, is working on: (i) rebasing GDP by production from base 2009 to base 2015; and (ii) developing a new measure of GDP by expenditure. Staff encourages the authorities to continue to move forward on these important initiatives.

34. Staff delivered a presentation to the authorities, at their request. The presentation catered to staff of the Ministry of Finance, the CBS, Samoa Bureau of Statistics, and Ministry of Revenue, and focused on an in-depth discussion of the conduct of debt sustainability analysis and external sector assessment.

Authorities’ Views

35. The authorities appreciated assistance from the Fund in improving statistics. They mentioned that Samoa needs more time—at least two years—to build the capacity to provide full international investment position (IIP) data to the Fund, although partial IIP data (excluding the private sector) might be provided over a shorter time horizon. They also expressed appreciation for the presentation delivered by staff during the mission, and looked forward to further technical assistance from PFTAC.

Staff Appraisal

36. Growth remains robust but it is expected to moderate before rebounding. After a temporary moderation largely reflecting the closure of the Yazaki manufacturing plant, growth is expected to rebound—supported by infrastructure spending and preparations for the 2019 Pacific Games—peaking at 2019/20, before settling just above 2 percent in the medium term. Risks to the outlook are tilted to the downside and stem from Samoa’s vulnerability to natural disasters and partial loss of CBRs.

37. The fiscal framework should be strengthened to solidify gains from previous consolidation efforts. A lower debt-to-GDP target of 45 percent in the medium term and 40 percent over the longer term would increase fiscal space to respond to natural disasters. The new debt target should be complemented with a fiscal balance anchor aimed at keeping the overall fiscal deficit under 2 percent of GDP on average over the medium term. Public financial management reforms—including strengthening guidelines for government guarantees; developing a formal on-lending policy; and creating a contingency fund for natural disasters and other unexpected fiscal costs—would also help reduce contingent liabilities and other fiscal risks.

38. The monetary policy stance is appropriately accommodative but the transmission mechanism needs to be strengthened. The monetary stance is appropriate given moderating growth, inflation below the authorities’ target, and fiscal consolidation needs. Pushing ahead with plans to create a credit bureau and facilitate the use of customary land leases as collateral could reduce banks’ reluctance to lend, thus strengthening the monetary transmission mechanism.

39. The external position of Samoa is assessed to be broadly in line with fundamentals and desirable policies. Staff’s assessment of the external position is based on an application of the external sustainability approach which takes into account Samoa’s high vulnerability to natural disasters. The level of reserves coverage is adequate according to the ARA metric for credit-constrained economies, but is below the lower bound of the desirable range once Samoa’s vulnerability to natural disasters is taken into account. Samoa’s pegged exchange rate system provides a welcome nominal anchor in a context of weak monetary policy transmission. The exchange rate is estimated to be in line with fundamentals, with little sign of a deterioration in Samoa’s competitiveness

40. Continued efforts are needed to mitigate Samoa’s vulnerability to partial withdrawal of CBRs. The authorities should fully implement their AML/CFT strategy, including by amending the legal framework to facilitate criminal prosecution of money laundering and allowing supervisory agencies to impose proportionate dissuasive functions. Efforts to improve the availability and quality of CBRs and remittances data should continue, and supervisory staff should be better trained to perform data analysis. The authorities should leverage technology solutions for customer identification and monitoring, which could be done by building on the existing Memoranda of Understanding that several MTOs have already signed with the OEC. Enhancing entity transparency in line with international standards and reassessing the sustainability of the offshore business model should contribute to mitigating the risks from the sector. The authorities are encouraged to engage with all relevant stakeholders, including banks, MTOs and regulators in the region, to make progress towards an industry-led and regional solution to the withdrawal of CBRs.

41. Financial sector policies should focus on completing the implementation of FSAP measures, including reform of public financial institutions (PFIs). The Central Bank of Samoa should prioritize upgrading its regulatory and supervisory framework to modern standards, including by amending the Financial Institutions Act to support corrective actions and resolutions. The recently created high-level committee on financial stability should meet regularly to discuss systemic financial stability issues. Formulating a coherent framework for PFI governance and performance, including a clear definition of their mandates, remains a key priority to avoid crowding out private financial institutions and minimize contingent liabilities and other fiscal risks stemming from PFI activities.

42. Structural reforms should concentrate on improving resilience to natural disasters, and enhancing financial inclusion and the business environment. Speedy implementation of the climate resilience measures included in the authorities’ strategy—aimed at mainstreaming disaster reliance plans and upgrading infrastructures—would boost growth and private sector activity. Pushing ahead with implementation of the authorities’ financial inclusion strategy would help increase economic opportunities for all Samoans and reduce inequality. The authorities should follow up on their plans to establish a credit bureau and facilitate the use of customary land leases as collateral, which should improve access to finance for households and SMEs.

43. It is recommended that the next Article IV consultation with Samoa take place on the standard 12-month cycle.

Figure 1.
Figure 1.

Samoa: Real Sector Developments

Citation: IMF Staff Country Reports 2018, 145; 10.5089/9781484359242.002.A001

Sources: Samoan authorities; The World Bank – Doing Business (2018); and IMF staff calculations.
Figure 2.
Figure 2.

Samoa: External Sector Developments

Citation: IMF Staff Country Reports 2018, 145; 10.5089/9781484359242.002.A001

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

Samoa: Fiscal Sector Developments

Citation: IMF Staff Country Reports 2018, 145; 10.5089/9781484359242.002.A001

Sources: Samoan authorities; and IMF staff calculations.
Figure 4.
Figure 4.

Samoa: Monetary and Financial Sector Developments

Citation: IMF Staff Country Reports 2018, 145; 10.5089/9781484359242.002.A001

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

Samoa: The Role of Remittances

Citation: IMF Staff Country Reports 2018, 145; 10.5089/9781484359242.002.A001

Sources: Samoan authorities; SendMoneyPacific; and IMF staff calculations.

Annex I. Risk Assessment Matrix (RAM)1

Potential Deviations from Baseline

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Annex II. External Sector Assessment1

The external position is assessed as broadly in line with fundamentals and desirable policies. Staff’s analysis point to a current account gap in the 0.8–1.7 percent of GDP range. Although the level of reserves is adequate according to the ARA metric for credit-constrained economies, it is below the lower bound of the desirable range once Samoa’s vulnerability to natural disasters is taken into account. Building additional external buffers would help increase resilience.

Current Account Developments

The current account deficit narrowed to 2.3 percent of GDP in 2016/17, an improvement of about 2.4 percentage points of GDP compared to 2015/16. The improvement was driven by a smaller trade imbalance by 2.2 percent of GDP, underpinned by import compression of 2.4 percent of GDP. Staff expects this improvement to be temporary. In the baseline scenario, and under the assumption of no natural disasters, the current account deficit is expected to gradually widen to just over 4 percent of GDP over the medium term, as imports rebound to support investment for infrastructure projects.

For the EBA-lite current account equation, the following adjustments were made:

  • The underlying current account was adjusted by −1. 2 percent of GDP for one-off flows related to (i) payments from Virgin Australia and (ii) a popular U.S. television series shot in Samoa. These payments are not expected to be repeated in subsequent years because (i) was related to the end of Virgin Australia’s partnership with Samoa Airways and (ii) is not expected to be shot in Samoa again.

  • The underlying current account was further adjusted by −2.1 percent of GDP for a temporary reduction in imports (in percent of GDP) due to completion of some large projects. The reduced infrastructure activity in 2016/17 is unusual for Samoa, and imports are expected to rebound given the large planned infrastructure projects over the medium term. The −2.1 percent of GDP adjustment is the difference between the unusually low level of the import-to-GDP ratio observed in 2016/17 (36.7 percent) and the twenty-year historical average of the same ratio (38.8 percent).

Samoa: EBA-Lite CA Analysis

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Given these adjustments, the cyclically adjusted underlying current account is estimated at −5.4 percent of GDP compared to the estimated current account norm of −6.6 percent of GDP, resulting in a CA gap of 1.2 percent of GDP. However, the EBA-Lite does not always capture fully the characteristics of small states, hence there is significant uncertainty surrounding these estimates.

For the external sustainability approach, maintaining net foreign assets at the 2016 level suggests a current account gap of 1.7 percent of GDP. However, based on a targeted reduction in the debt-to-GDP ratio and Net International Investment Position (NIIP) to 40 percent (which is consistent with the need to build a fiscal cushion against natural disasters and reduce external sustainability concerns for Samoa, given a current NIIP of −52.5 percent of GDP), the external sustainability approach yields a current account norm of −6.2 percent and a current account gap of 0.8 percent. Staff therefore assesses Samoa’s external position as broadly in line with fundamentals and desirable policies.

External Sustainability and IREER Approach

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From EBA October 2017. Based on maintaining NFA at the 2016 level.

Based on maintaining public external debt at 40 percent.

Misalignment based on October 2017 EBA-lite.

Aid and capital transfers estimates are based on periods when economy is not recovering from natural disasters.

Keeping in mind Samoa’s high vulnerability to natural disasters, in staff’s assessment the external sustainability approach based on maintaining a target of 40 percent of GDP for public external debt is the more informative methodology.

Exchange Rate Assessment

Although the EBA-Lite REER equation suggests that the REER is moderately overvalued, the REER generally remained flat in recent years despite improvements in a tourism-based terms-of-trade index, and the appreciation of the Tala against the U.S. dollar in 2017. As such, staff assess the level of Samoa’s exchange rate to be broadly in line with fundamentals and desirable policies.

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