2019 Article IV Consultation-Press release; Staff Report; Staff Statement; and Statement by the Executive Director for Samoa
2019 Article IV Consultation-Press release; Staff Report; Staff Statement; and Statement by the Executive Director for Samoa
1. Samoa faces several economic challenges but continues to show resilience and a high level of engagement with the Fund. In common with most Pacific island countries, Samoa is vulnerable to natural disasters and to the withdrawal of correspondent banking relationships (CBRs), and displays low and volatile growth. Despite these challenges, the economy has shown resilience, rebounding in the face of multiple shocks. The authorities are highly engaged with the Fund and other development partners, and given its dependence on remittances, Samoa was selected by Fund staff as a CBR pilot country.
2. Policies have been largely consistent with past Fund advice. In line with Fund Article IV recommendations, the authorities have implemented measures aimed at improving revenue collection. The authorities have also implemented measures to mitigate risks from CBR pressures, and are committed to continuing their efforts in this area, in line with Fund advice. The current accommodative monetary policy stance is consistent with staff advice. The authorities’ financial sector policies, including the focus on updating the supervisory and regulatory framework and improving access to credit, are largely in line with FSAP recommendations. Structural reforms, including enhancing the business environment, are in line with Fund advice.
Recent Developments, Outlook and Risks
3. Growth reached a five-year low in 2017/18.1 Growth is estimated to have dropped to 0.9 percent in 2017/18, from 2.7 percent in 2016/17, mainly due to the Yazaki manufacturing plant closure in August 2017, and the impact of cyclone Gita in February 2018. The agriculture and transport sectors had mixed outcomes, while the decrease in the fishing sector was largely due to the impact of climate change on fish migration. Commerce (including retail) was boosted by tourism and remittances. Construction was a key driver of growth.
4. Recent developments point to a pickup in inflation and a reversal of the current account position. Average inflation picked up to 3.7 percent in 2017/18 (compared to 1.3 percent in the previous year), exceeding the authorities’ target of 3 percent, driven by the impact of Gita on local food prices, a one-time increase in education fees, and higher price of imported fuel. In 2017/18, the current account recorded a surplus of 2.3 percent of GDP, compared to a deficit of 1.8 percent of GDP in the previous year, supported by a temporary increase in transfers in the wake of Gita. The Samoan tala depreciated against the U.S. dollar and in nominal effective terms but appreciated in real effective terms due to Samoa’s relatively higher rate of inflation.2
5. Growth is expected to recover in 2018/19 and spike in 2019/20 as Samoa hosts the 2019 Pacific Games in July.3 Growth is projected to rebound to 3.4 percent in 2018/19, driven by commerce, infrastructure spending, and the development of the transport and communication sector. Growth in 2019/20 is expected to spike to 4.4 percent due to PG-related tourism, before normalizing at about 2.2 percent in the medium term. Inflation is expected to be back below the central bank target of 3 percent in 2018/19 as temporary inflationary pressures recede. The medium-term current account is projected to revert to a deficit as transfers normalize.
6. One-off factors implied a marginally positive fiscal balance, but the fiscal position is projected to loosen. The fiscal balance reached a surplus of 0.1 percent of GDP in 2017/18 (from a 1.1 percent of GDP deficit in 2016/17), driven by a temporary increase in budget-support grants, and by a drop in capital spending due to the completion of large infrastructure projects in the previous fiscal year. The inclusion of the National Health Service into the central government budget in January 2018 largely accounted for the reduction in grant spending and the increase in other spending (compensation of employees and goods and services). The latter also increased due to various events held in Samoa. The tax revenue-to-GDP ratio slightly dropped, suggesting that recent tax policy measures—the 2017 Revenue Review aimed at broadening the tax base and increasing selected excises—have not yet been supported by progress in tax administration. Given recently-legislated increases in public servant wages for cost of living adjustment, the projected reduction in budget support grants and the need to scale up infrastructure projects, staff projects a 1.2 percent of GDP deficit in 2018/19, which will widen to close to 3 percent of GDP over the medium term. Staff’s baseline fiscal projections incorporate tax collection gains of 1 percent of GDP over the next three years, which could be larger with more decisive reforms.
7. Public debt slightly exceeded the authorities’ ceiling of 50 percent to GDP in FY2017/18 and is projected to keep growing in the medium term. Total public debt reached 50.3 percent of GDP in 2017/18, compared to 49.1 percent of GDP in the previous year, on account of a depreciating tala, continuous disbursements of external loans, and low growth. Under the staff’s baseline scenario, debt is projected to reach 54 percent of GDP in 2023/24. In staff’s assessment, Samoa remains at high-risk of debt distress, particularly given its heightened vulnerability to natural disasters.
8. Risks to the outlook are tilted to the downside (Annex I). Samoa is highly vulnerable to natural disasters and to the withdrawal of CBRs by global banks, both of which would adversely affect growth. The impact of rising protectionism on Samoa has thus far been negligible, but could increase if global and regional trade tensions continue. Commodity price volatility could result in higher and more volatile inflation, with negative consequences on economic sentiment and growth. On the upside, the growth impact of the PG could be stronger than currently anticipated.
9. The authorities broadly agreed with staff’s assessment of the outlook and risks. They shared staff’s expectation that growth will rebound in 2018/19 and peak in 2019/20, due to the PG. However, the authorities estimate Samoa’s medium-term potential growth to be above staff’s estimate of 2.2 percent, even in the absence of structural reforms. They agreed with staff that Samoa is highly vulnerable to natural disaster risk and climate change. Other downside risks include tightening global financial conditions, protectionism, and high and volatile inflation due to volatile commodity prices. On the upside, the growth impact of the PG, the positive tourism impact from expanded Samoa Airways operations, and efficiency gains from the new submarine cable, could be stronger than currently anticipated.
Macroeconomic and Financial Policies
A. Financing Development Needs While Ensuring Fiscal Sustainability
10. Fiscal policy needs to be tightened compared to the baseline. Samoa needs to build fiscal resilience and buffers against natural disasters and achieve progress towards its development goals. At the same time, Samoa needs to ensure fiscal sustainability and use fiscal policy as the principal instrument of macroeconomic management in the face of external shocks, given the exchange rate peg and the weak monetary policy transmission mechanism. Consistent with these objectives, the mission advised the authorities to target a fiscal deficit of 1 percent of GDP in 2019/20, compared to a projected deficit of 1.8 percent of GDP in the unchanged (baseline) policy scenario, and to keep the medium-term deficit close to 1 percent of GDP in normal times (when growth is at or about potential). The needed adjustment can be achieved by improving tax administration and controlling current spending.
11. The mission has advised the authorities to embark on a comprehensive fiscal strategy based on four pillars to support the needed consolidation:
Implementing vigorous tax administration reforms to fully reap the benefits of the 2017 Revenue Review, including strengthening audit capacity, encouraging voluntary compliance, and improving arrears management.
Strengthening Public Financial Management (PFM) reforms by improving forecast capacity and introducing multi-year budgeting; enhancing the monitoring and the disclosure of fiscal risks; and monitoring spending outcomes to enhance efficiency through expenditure impact analysis and independent audit.
Reducing the long-term debt target to 40 percent of GDP to reduce the risk of debt distress and create fiscal buffers to respond to natural disasters while ensuring adequate funding for development priorities.4 To achieve this debt target, the mission advised the authorities to target in normal times (when growth is about potential) a deficit of 1 percent of GDP, with a 2 percent of GDP deficit ceiling (Annex II).
Continuing to ensure that newly-contracted loans are consistent with the Medium-Term Debt Strategy (MTDS 2016–2020), with new lending on concessional terms to the extent possible (grant element above the MTDS minimum of 35 percent), and that projects being financed are properly vetted as high quality and economically viable.
12. Samoa needs to make progress in monitoring and disclosing fiscal risks from state-owned enterprises (SOEs). The coverage of public debt should be widened to include debt from SOEs, which should be properly collected, and associated fiscal risks should be estimated and noted in budget documents. Existing procedures for issuing guarantees to SOEs should be strengthened, and a formal on-lending policy should be put in place.
13. The authorities agreed with staff’s advice on fiscal policy and underscored their progress in this area. They expect the benefits of the 2017 Revenue Review to materialize in the next fiscal year. They are working on removing tax exemptions, developing an electronic system to pay taxes online, and raising taxpayers’ awareness. Efforts to encourage voluntary compliance have already shown some results. An internal review of public expenditure and financial accountability, which will increase spending efficiency, is about to be finalized. The authorities expressed their commitment to a public debt-to-GDP target of 45 percent in the medium term and 40 percent in the long term, to build buffers against natural disasters, and agreed with staff’s suggestions to implement an operational fiscal deficit target. They stressed that the planned creation of a new Debt Management Unit within the Ministry of Finance will help improve debt management and monitoring of fiscal risks. A formal on-lending policy, drafted with the assistance of the World Bank, is currently under government review.
B. Monetary and Exchange Rate Policies
14. Monetary policy remains appropriately accommodative, but the transmission mechanism needs improvement. The official interest rate, which refers to the average annual yield of Central Bank of Samoa’s (CBS) securities, has remained stable at below 20 basis points for the past five years. This level is appropriate given low growth and receding inflationary pressures. High bank liquidity reflects conservative lending practices and self-insurance against liquidity squeezes, given the weak lending environment and limited interbank market activity. Limited financial literacy remains a key contributor to structural deficiencies in credit access. The mission stressed the importance of measures to increase financial inclusion as recommended by the 2015 FSAP such as re-establishing a credit bureau—for which the Asian Development Bank (ADB) recently completed a diagnostic assessment—and facilitating the use of customary land leases as collateral.5 These measures would reduce banks’ reluctance to lend by increasing available collateral and facilitating credit risk assessment. The mission advised that improving central bank liquidity management, including by better forecasting FX needs, would contribute to improving the transmission mechanism.
15. The external position is in line with fundamentals and desirable policy settings. The 2017/2018 current account surplus of 2.3 percent of GDP was adjusted to correct for the exceptionally high level of transfers in the wake of cyclone Gita, resulting in a 0.7 percent of GDP cyclically adjusted deficit (Annex III). Based on the revised EBA-Lite approach, the cyclically-adjusted norm for Samoa’s current account is a deficit of 1.7 percent of GDP. Since the gap between the cyclically-adjusted current account balance and the cyclically-adjusted norm is 1 percent, staff assess the external position to be in line with fundamentals (Annex III). In staff’s view, the deficit of 1.7 percent of GDP as a current account (CA) norm is more realistic for Samoa than the norm based on the previous EBA-Lite approach. For example, the present CA norm can be compared to the CA norm of a 6.6 percent of GDP deficit in the 2018 Article IV Staff Report, which underscores that the revised EBA-Lite approach fits Samoa better. Reserves are projected to increase from 4.5 to about 4.6 months of import cover in 2018/19. This level of reserves is adequate according to the Assessing Reserve Adequacy metric for credit-constrained economies, but is close to the lower bound of adequacy once Samoa’s heightened vulnerability to natural disasters is taken into account. Samoa’s pegged exchange rate continues to serve the country well and provides a welcome nominal anchor in the context of weak monetary policy transmission.
16. The authorities agreed with staff’s assessment of the current monetary policy and of Samoa’s external position and reserve adequacy. The Central Bank of Samoa (CBS) regards the current accommodative monetary policy stance as appropriate in the short term, particularly in the context of fiscal tightening. Going forward, the CBS intends to explore opportunities to reduce the degree of accommodation by “normalizing” the policy rate as the economy rebounds, thus creating policy space to cut rates when a negative shock hits the economy. In doing so, the CBS will maintain communication with the banks to ensure that the normalization does not translate into higher lending rates. The authorities agreed with staff on the need to improve the monetary policy transmission mechanism, including through measures that would enhance liquidity management, improve forecasting FX needs of the economy, and reduce banks’ reluctance to lend. The authorities concurred with staff that the external position is in line with fundamentals and desirable policy settings once the current account surplus is adjusted for the temporary spike in private remittances in the wake of cyclone Gita. They appreciated staff’s advice on being mindful of Samoa’s heightened vulnerability to natural disasters when assessing reserve adequacy.
C. Financial Sector, Crypto-Assets and Fintech
17. The financial sector remains healthy. Capital adequacy and liquidity ratios are trending upwards, with the liquid asset ratio exceeding its five-year average. Profitability and earnings indicators are subdued amidst a lending slowdown, but are expected to recover as economic activity picks up. NPLs have increased by 20 basis points to 4.3 percent of total loans, but remain well below their five-year average and banks are well-provisioned.
18. Financial sector policies should focus on completing the implementation of the 2015 FSAP recommendations (Annex IV). A swift approval of the amended Financial Institutions Act to support corrective actions and resolutions would help upgrade the regulatory and supervisory framework to modern standards. Developing in-house stress testing capacity and holding regular meetings of the high-level committee on financial stability would help monitor and address financial stability risks. Formulating a coherent public financial institutions (PFI) governance framework would help mitigate contingent liability risks from PFIs. Re-establishing a credit bureau, which could be supplemented with fintech solutions in the future (Box 1), would help financial inclusion.
19. Managing new risks from crypto-assets is also a priority. Private companies have been promoting investment in crypto-assets in Samoa and have requested approval from the CBS for their businesses and products. To protect consumers, the CBS banned all trade in one prominent crypto-asset in May 2018. The CBS also issued a general warning against the risks of investing in crypto-assets in August 2018, and advised that entities promoting crypto-assets are considered financial institutions, which requires them to hold a business license and follow CBS reporting requirements. The mission supported the authorities’ cautious stance and encouraged them to consider FATF’s recommendation on oversight of crypto-assets, which are expected to be released in June 2019.
20. Financial inclusion reforms could leverage fintech solutions. The mission stressed that implementing the authorities’ financial inclusion strategy (NFIS) is important to reduce inequality, including gender inequality, and increase opportunities for all Samoans. The authorities could continue supporting private sector initiatives for mobile money and payment systems given the large number of Samoans without access to formal financial services. The authorities are encouraged to continue improving the effectiveness of financial education programs through the Small Business Enterprise Center (SBEC), the Development Bank of Samoa (DBS), and commercial banks. The NFIS could be amended to promote digital and financial literacy, including awareness of risks from crypto-assets, and the potential of fintech solutions for financial inclusion.
21. The authorities concurred with staff’s financial sector assessment and are working on the remaining 2015 FSAP recommendations, while managing new risks associated with crypto-assets. The authorities are working towards implementing the remaining FSAP recommendations, including re-establishing a credit bureau, harmonizing human resource policies and compensation across PFIs, and conducting regular onsite inspections of commercial and public sector financial institutions and insurance companies. However, they stressed that developing a unified strategy for the governance and mandate definition of all PFIs would be challenging. They argued that developing stress test analysis capacity is a prerequisite for holding regular meetings of the high-level committee on financial stability. The authorities look forward to the June 2019 FATF recommendations for the oversight of crypto-assets. They continue to explore the role of fintech solutions for financial inclusion, while building trust and confidence in these solutions among the population.
Withdrawal of Correspondent Banking Relationships
22. Samoa remains vulnerable to the withdrawal of Correspondent Banking Relationships (CBRs). CBRs play a key role in facilitating trade and providing access to finance for households. As global and regional banks withdraw their CBRs against the backdrop of a tighter regulatory landscape, the remittances sector in Pacific island countries has come under stress. The Samoan authorities have made progress in implementing key regulatory reforms. However, vulnerabilities remain, given the country’s dependence on remittances, the prominent role of money transfer operators (MTOs) in the sector, and the high cost of remittances. Some lessons relevant to other Pacific island countries can be drawn from Samoa’s experience in this area (Box 2).
23. While Samoan banks and larger MTOs have maintained and even regained CBRs, smaller MTOs have faced bank account closures. Remittance flows have been resilient, partly because they are largely denominated in Australian and New Zealand dollars (e.g., around 72 percent of incoming remittances in 2018), for which CBRs are less difficult for MTOs to maintain compared to U.S. dollar-denominated remittances. Domestic banks rely on Australian and New Zealand regional banks for their US dollar CBRs as well. Three of the bigger MTOs have successfully re-opened one bank account each with the regional banks after upgrading their AML/CFT programs and undertaking independent compliance audits. However, several of the smaller MTOs have reported termination of their Australian dollar and New Zealand dollar denominated bank accounts—without any explanation or follow up—despite investment in IT infrastructure upgrades and hiring additional compliance staff. Samoa’s recent inclusion on a draft European Union (EU) AML list (aside from its existing inclusion on the EU list of non-cooperative tax jurisdictions) could further aggravate these CBR pressures.
24. To mitigate CBR pressures and address risks, measures to strengthen the effectiveness of the AML/CFT regime should continue. The mission recommends:
Enhance AML/CFT effectiveness. The authorities continue to address the deficiencies identified in the 2015 Asia Pacific Group (APG) mutual evaluation report, where Samoa was rated low or moderately compliant in 10 of the 11 effectiveness criteria (including on supervision, financial intelligence and money laundering (ML) investigations), and non-compliant or partially compliant in 23 of the 40 technical recommendations. In a 2018 follow up report from the APG, Samoa was positively re-rated on 3 recommendations, and progress on 8 other recommendations was noted and the required expedited follow-up reporting was shifted from twelve to six months. The 2018 amendments to the Money Laundering Prevention Act (MLPA) now requires reporting entities to verify their customer’s beneficial owner and increased the imprisonment penalties for ML offenses to 15 years. In addition to updating the 2014 National Risk Assessment (NRA) to guide risk-based AML/CFT supervision, the inspections of reporting entities for AML/CFT compliance should be improved (including enforcement actions and sanctions). Further resources (including staff and IT systems) should be devoted to the Samoan Financial Intelligence Unit (FIU) to enable effective analysis of suspicious transaction reports and conduct of AML/CFT supervision of reporting entities. The MLPA should be amended to cover high-risk domestic politically exposed persons (PEPs), their family members and close associates. Establishing a comprehensive asset declaration system for high-risk public officials and aligning the anti-corruption framework with the UN Convention against Corruption should contribute to improving customer due diligence in this area.
Establish IT solutions for customer identification and monitoring. MTOs face challenges with customer identification, owing to differences in the use of names in various government-issued identifications. A few MTOs have an agreement with the Office of the Electoral Commissioner (OEC) to validate customer’s identities with the voter database that includes biometric information, upon the payment of a fee (Annex V). In the short term, the authorities should adopt a simple IT solution to enable MTOs and financial institutions to quickly validate their customers identity electronically against the OEC database, thereby reducing costs. In the long term, IT solutions could be developed to enhance MTO compliance with other AML/CFT obligations (e.g., customer verification, record keeping and suspicious transaction reporting). The authorities should exploit synergies with plans to establish a national digital identity system and a credit bureau (Box 1). In this respect, the authorities are receiving support from the ADB for the development of a customer identification database, which will incorporate the simple IT solution mentioned above, and could also be expanded to include other customer financial information, subject to data privacy principles.
Reduce the offshore financial center’s (OFC) risk profile. Although the OFC does not affect the domestic financial sector directly, it causes reputational spillovers as it contributes substantially to increasing the country’s overall risk profile. The 2014 NRA identified trust and company service providers (TCSPs) that operate in the OFC to be of high risk, owing to the potential for misuse of Samoan international business companies (IBCs). Identifying the beneficial owner of these IBCs is also challenging, since Samoan TCSPs rely heavily on foreign intermediaries to conduct customer due diligence. Further efforts are needed to ensure that basic and beneficial ownership information of IBCs is accurate, up-to-date and available to competent authorities. AML/CFT supervision over TCSPs needs to be enhanced to ensure compliance with record keeping and suspicious transaction reporting requirements. In this regard, it is strongly recommended that the authorities only allow reliance on third party intermediaries under the conditions listed in FATF Recommendation 17.
Continue International Engagement. The mission encouraged the authorities to continue to work with all stakeholders towards developing regional solutions to address CBR pressures, including considering the potential benefits, costs and privacy requirements of a regional Know-Your-Customer facility. The mission also encouraged the authorities to continue engagement with the EU with regard to tax and AML issues. With respect to the EU AML list, the authorities are coordinating with the APG to clarify the EU’s underlying AML concerns that prompted Samoa’s inclusion on the list.
25. The Samoan authorities are committed to mitigating CBR pressures and strengthening the AML/CFT regime. They are engaging with the APG to ensure compliance with the FATF standards. They broadly agree with staff advice on measures to mitigate CBR pressures, but stressed that implementing enhanced due diligence measures on domestic PEPs is difficult in Samoa, given the perception that in a small country like Samoa almost the entire population might be related or associated to PEPs. The authorities remain engaged with the EU to find ways to be removed from their non-compliance lists. They raised concerns about the EU’s methodology for the listing, the lack of EU-Samoa consultation and transparency regarding the listing process, and the inconsistency of the EU assessment with the existing APG assessment. To enhance identification of customers, especially of MTOs, the authorities are working with the ADB on developing a decentralized platform using biometric identity data from the OEC.
26. Structural reforms should focus on boosting potential growth and making it more inclusive. This can occur by building resilience to natural disasters; enhancing the business environment, especially for SMEs; encouraging female labor participation; and improving the trade facilitation framework. Concrete measures should include:
Upgrading physical infrastructures to make them fully resilient to natural disasters and mainstream climate resilience into all sector plans.
Enhancing the business environment, especially for SMEs, by promoting access to credit and strengthening insolvency resolution. The SBEC guarantee scheme could be improved through a larger stake by commercial banks in lending projects, expansion of coverage to more SMEs, and use of mobile payment systems for lending activities. These reforms would also generate synergies with helping formalization of the economy and increasing labor force participation in the formal labor market.
Encouraging female labor participation by providing access to affordable childcare facilities.
Improving the trade facilitation framework, including by pursuing efforts to comply with international standards conventions; reducing the time and documents needed to export; and developing a one-stop shop for exporters.
27. Plans to increase the minimum wage should be balanced. Tri-partite consultations are ongoing between the government, the private sector and labor unions to increase the minimum wage. At less than US$1 per hour, the Samoan minimum wage is low compared to Pacific peers. The mission advised that the increase would need to balance the positive effect on income and inclusion with limiting adverse effects on labor market outcomes (Annex VI).
28. The authorities agreed that the structural reforms recommended by staff would boost potential growth. They noted that all new construction projects are now climate change and natural disaster resilient and existing infrastructure is being upgraded. In this context, the authorities expressed interest in undertaking a Climate Change Policy Assessment. SME support is a high priority, including through the recently expanded SBEC guarantee scheme, the DBS financial inclusion program, and private sector development initiatives. The authorities are committed to improving the trade facilitation framework.
Capacity Building and Statistical Issues
29. Samoa continues to rely on capacity building to support reforms and policy implementation. With support from the Pacific Financial Technical Assistance Centre (PFTAC) Samoa has made progress on public financial management (PFM) reforms including on budget documentation, audit, and cash management. Samoa also completed the full in-country Public Expenditure and Financial Accountability (PEFA) exercise. Further PFM capacity building support from PFTAC will focus on continuous improvement of financial reporting and the monitoring of SOE risk. On the revenue side, a full review of tax administration audit programs, structure, staffing arrangements, management practices, risk analysis and case selection systems to underpin a new audit plan is underway. PFTAC also continues to assist Samoa in finalizing insurance regulatory drafts and support stakeholder consultation. As a CBR pilot country, Samoa relies on HQ-led TA missions, round tables and desk review of legislation. The IMF Capacity Development Office in Thailand (CDOT) is providing TA to help improve external sector statistics.
30. The authorities are advancing their efforts to produce and disseminate International Investment Position (IIP) data and improve GDP statistics. The authorities will receive technical assistance for the compilation of IIP data in July 2019. Once the direct investment position data of the non-financial sector becomes available through the International Investment Survey (IIS), the authorities should be able to finalize the IIP before the end of 2019. Data for offshore entities remains a major data gap in the IIP. The Samoa Bureau of Statistics is working on rebasing GDP by production and developing a new measure of GDP by expenditure.
31. The authorities expressed appreciation for ongoing IMF capacity building efforts. The authorities appreciate the current capacity building support by PFTAC, CDOT and IMF Headquarters, and reiterated their commitments to push ahead with reforms supported by capacity building, especially on PFM, tax administration, mitigating CBR pressures, and improving statistics.
Text Table 1.
Samoa: Integration Matrix of Surveillance Issues and Capacity Building
Sources: IMF; World Bank; Asian Development Bank (ADB).
IMF fiscal year.
Text Table 1.
Samoa: Integration Matrix of Surveillance Issues and Capacity Building
Sources: IMF; World Bank; Asian Development Bank (ADB).
IMF fiscal year.
32. Growth is expected to rebound. After reaching a five-year low due to the Yazaki manufacturing plant closure and the impact of Cyclone Gita, growth is expected to rebound— supported by infrastructure spending, development of the communication sector, and the impact of the Pacific Games. Growth will peak in 2019/20, before settling at the potential rate of 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 CBR pressures.
33. The authorities should tighten fiscal policy compared to the baseline and embark on a comprehensive fiscal strategy to ensure fiscal sustainability, build fiscal buffers against natural disasters, and achieve progress towards development goals. The authorities should target a fiscal deficit of 1 percent of GDP in 2019/20 and keep the medium-term deficit close to 1 percent of GDP in normal times (when growth is at or about potential). Samoa needs to increase fiscal buffers to respond to natural disasters while ensuring funding of development priorities. This can be achieved by implementing vigorous tax administration reforms to fully reap the benefits of the 2017 Revenue Review, strengthening public financial management reforms to improve multi-year budget planning and improve efficiency of spending, and reducing the long-term debt-to-GDP target to 40 percent. The new debt target should be complemented by a fiscal balance anchor aimed at keeping the overall fiscal deficit close to 1 percent in normal times with a 2 percent of GDP deficit ceiling. Newly contracted loans should be on concessional terms to the extent possible. Samoa needs to make progress in monitoring and disclosing fiscal risks, including from state-owned enterprises.
34. The monetary policy stance is appropriately accommodative but the transmission mechanism needs improvement. The monetary stance is appropriate given low growth and receding inflationary pressures. The authorities should seek to improve the transmission mechanism by increasing credit access and reducing banks’ reluctance to lend. Measures to achieve this should include raising financial literacy, re-establishing a credit bureau, facilitating the use of customary land leases as collateral, and improving central bank liquidity management.
35. The external position of Samoa is assessed to be broadly in line with fundamentals and desired policy settings. Based on the revised EBA-Lite methodology and taking into account the exceptionally large transfers received in the aftermath of Cyclone Gita, staff assess the external position of Samoa to be in line with fundamentals and desired policy settings. The level of reserves coverage is adequate according to the ARA metric for credit-constrained economies, but is close to the lower bound of adequacy once Samoa’s heightened 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.
36. The authorities should continue to implement reforms to mitigate risks from the correspondent banking relationship (CBR) pressures. Risk-based AML/CFT inspections of key reporting entities (such as banks, MTOs and TCSPs) should be improved and further resources could be allocated to the Financial Intelligence Unit. IT solutions should be adopted to enable speedier and cost-effective customer identification in the short term and enhance MTO compliance with other AML obligations (e.g., record keeping and suspicious transaction reporting) in the long term. To reduce the risk from the offshore financial center, further efforts are needed to ensure that ownership information of Samoan international business corporations is accurate, up-to-date and available to the competent authorities. The authorities are encouraged to continue to work with all relevant stakeholders towards developing regional solutions to address CBR pressures, and to continue engagement with the EU with regard to the EU list of non-cooperative tax jurisdictions.
37. Financial sector policies should focus on completing the implementation of FSAP measures, especially with regards to the regulatory and supervisory framework, systemic financial stability risk monitoring, and public financial institutions (PFI) governance. Legislation should be approved to upgrade the regulatory and supervisory framework to modern standards. Stress testing capacity should be strengthened and the high-level committee on financial stability should become operational. Formulating a coherent PFI governance framework would help mitigate contingent liability risks. The authorities should also continue their efforts to improve access to finance, for which fintech solutions could be explored. The authorities’ cautious stance on cryptocurrencies and crypto-assets is appropriate.
38. Structural reforms should focus on boosting potential growth and making it more inclusive by building resilience to natural disasters, enhancing the business environment, and improving the trade facilitation framework. Concrete measures should focus on upgrading infrastructure for full resilience to natural disasters and mainstreaming climate resilience into all sector plans. The business environment could be supported by strengthening insolvency resolution, promoting SMEs access to credit, and improving the trade facilitation framework. The framework would benefit from streamlining export requirements, and developing a one-stop shop for exporters. The planned increase in the private sector minimum wage would need to balance the positive effect on income and inclusion against adverse effects on labor market outcomes.
39. Strengthening capacity will facilitate the implementation of needed policies and reforms. Priority should be given to reforms to improve tax administration and public financial management (PFM) systems, mitigate CBR pressures, and improve statistics. The IMF stands ready to provide further TA and training to assist the authorities.
40. It is recommended that the next Article IV consultation with Samoa take place on the standard 12-month cycle.
In most Pacific island countries (PICs), public credit registries are either absent or underdeveloped. For most PICs, data on the total number of adults cove red by public or private credit registries and bureaus is unavailable. Financed by the International Finance Corporation (IFC) and managed by the Fiji Data Bureau, Samoa established a credit bureau in 2015 to promote greater transparency and efficiency in the money lending market. However, the credit bureau was closed by the Fijian authorities for domestic reasons in 2016. Despite the limited success of this project, a credit bureau is important for reducing the cost of lending and broadening access to finance. In Samoa, around 50 percent of the population have no access to formal finance.
The credit bureau should be built on a secure data information system accompanied by robust data governance and risk management frameworks, which would help address privacy concerns. The information system should be robust and secure to shield collected data from breaches and misuse, while at the same time facilitating access to digital financial profiles and credit information by banks and MTOs. It is important to establish a governance framework on how data is stored, protected and utilized. A comprehensive risk management framework should comprise risk mitigation measures that ensure operational resilience in case of outages and cyber-attacks. These measures include business continuity plans, contingency arrangements, and industry-wide cyber-security standards.
Leveraging technology to establish financial profiles and assess credit worthiness can support the credit bureau function, once a robust data governance and risk management framework are operational. In cases where traditional identity and credit information is scarce, customer data from various sources can be consolidated to provide digital financial profiles and assess borrowers’ credit worthiness. These data sources can serve as a starting point for building a credit bureau function or they can be integrated into the credit bureau once it becomes operational. The rising number of internet users in Samoa will provide more online data, especially given the completion of the Tui Samoa cable in early 2018. Data from mobile phones, utility and invoice payments, online merchant activity, and tax or corporate registries can be pulled into a centralized database and used for credit modelling purposes. Payment history data generated through mobile money solutions such as Digicel Mobile Money or the M-Tala and lending history through the micro-lending programs of the Small Business Enterprise Centre (SBEC) and the South Pacific Business Development can also be included.
International and regional collaboration could help the authorities devise effective regulation and build capacity. Samoa should leverage its membership in regional and international bodies to help devise effective regulation. Sharing experience and best practices with other member countries in regional fora can also support capacity building efforts. In this context, the 2018 Bali Fintech Agenda is a useful reference document for policymakers as it highlights policies aimed at enabling countries to harness the potential of fintech, while managing the inherent risks.
Lessons from Samoa’s Experience With Risk of CBR Withdrawal1
Samoa’s vulnerability to CBR withdrawal reflects factors which are common to other Pacific island countries—high dependence on remittances, and heavy use of money transfer operators (MTOs). Despite CBR pressures, Samoa’s remittance flows have thus far shown resilience. This box sets out key lessons from Samoa’s resilience and ongoing CBR-related challenges.
The authorities’ efforts to strengthen the AML/CFT framework and improve its effectiveness are key factors in mitigating CBR pressures. The authorities are working with APG to strengthen the AML/CFT framework. They are also working with MTOs and ADB to establish a customer identification facility. They remain highly engaged with the Fund in the context of the CBR pilot, and with other stakeholders in the region in search of a regional solution.
Samoa’s risk of CBR loss is mitigated by the banking system. Banks account for only 20 percent of remittance flows (see Figure 5), and have been a higher cost option for remittances. However, the foreign banks in particular help to reduce the risk of CBR loss to the country, though also increasing Samoa’s vulnerability to the operational decisions of those banks.
MTOs remain macro-critical in Samoa, but face a difficult and changing environment. MTOs remain dominant in remittance transfers and have provided a tailored and often lower-cost service to their customers, assisting financial inclusion. MTOs have decreased in number from about 30 five years ago, to 12 today. Increased compliance costs and reduced market share in smaller MTOs will continue to pose challenges for the sector.
MTOs with more stable CBRs attribute CBR retention to heavy investment in compliance and longstanding bank relationships. However, some MTOs expressed concern that they lacked sufficient clarity from correspondent banks on compliance needs, complicating their business decisions.
Samoa is seeing increased technology-based options for remittance flows, but these may take time to gain popularity. Internet-based and mobile-based transfer options are available, and will help to lower remittance costs. However, customers may need time to change practices and gain familiarity with these options.