Recent Developments and Outlook

The Samoan economy was hit hard by two consecutive disease outbreaks in 2019 and 2020 respectively—an unprecedented epidemic of measles, followed by the Covid-19 pandemic. In response, the authorities introduced swift measures, including border closures between 2020 and 2022. While deemed necessary from a public health perspective, these closures came at significant economic cost given Samoa’s heavy reliance on cross-border trade, most notably tourism earnings (normally about 20 percent of GDP). A severe reduction in the flow of tourists into Samoa and shipment disruptions resulted in significant delays in major construction projects. As a result, Samoa experienced a sharp and appreciable decline in economic growth.

Remittances, which normally contribute about 20 percent of GDP, slowed during the early stage of the Covid-19 pandemic but started to recover soon afterwards. The authorities believe that this occurred as Samoan nationals working abroad, mainly in New Zealand and Australia, focused on supporting families in Samoa during the pandemic.

A new government came into office in 2021 with a vision for growth that involves broad community inclusion and improving labor force skills, while laying foundations for Samoa to adapt to increasingly elevated climate change risks. The Government’s ’Pathway for the Development of Samoa’ (PDS) 2021/22-2025/26 document outlines five areas of focus to achieve this. These are: pursuing improved social development; a diversified and sustainable economy; security and trusted governance; a secure environment and climate change; and structured public works and infrastructure.

The border re-opening in August 2022 facilitated a much-needed pickup in domestic economic activity. A gradual resumption in tourism provided spillovers to the domestic sector generally, but in particular supported the service sector. Border opening also paved the way for a resumption of, and increased activities in, capital projects. The authorities generally concur with staff’s outlook projections, including the main risks to growth from possible further supply chain disruptions, another uplift in commodity prices, and the prospect of a globally tighter environment that could impact Samoa’s main trading partners and in turn hinder the performance of key economic activities in Samoa. They agree that a recovery to a pre-pandemic level will take several years; this being due to a number of factors; however, the authorities believe that continued structural reforms will provide noticeable support for the recovery.

Like many Pacific Island Countries, Samoa’s remoteness from the major international markets, its limited resources and small population continue to hinder its efforts to advance growth and diversify production.

Fiscal Policy

In response to three consecutive fiscal years of contraction, with the sharpest in 2020-2021 at 7.1 percent, the authorities implemented expansionary fiscal policies to stimulate the economy and support vulnerable communities.

The 2022-2023 budget is centered on expanding capital development, and supporting the private sector and communities (through local development projects). These projects will highlight the authorities’ commitment to implementing PDS priorities while exercising appropriate restraint through pursuing fiscal sustainability. Budget targets include limiting the deficit to not more than 3.5 percent of GDP and maintaining the ratio of ordinary receipts (spending) to total current payments to at least 70 percent. Furthermore, personnel costs are targeted to remain under 35 percent of total current expenditure, and debt servicing costs to ordinary receipts will be at 20 percent or lower; this will be achieved while maintaining public debt within 50 percent of GDP

Among the priority areas in the budget is the $51 million (Samoan currency) for community developments in 51 electoral constituencies. The authorities remain committed to a general strengthening of public financial management and undertaking reforms to reinforce the underlying Budget position and restore the flexibility required to manage future challenges.

Reduced utility tariffs are acknowledged as adding indirectly to current Budget pressures (through reduced revenue); however, the authorities believe it is too soon to remove this form of support while cost of living pressures are elevated for households and operational expenses are a source of pressure for recovering businesses. Opportunities to restore tariffs in line with utility costs will be closely monitored.

Monetary and Financial Sector Policies

Monetary policy continues to supplement fiscal policy in supporting the economic recovery. However, the Central Bank of Samoa (CBS) has been closely monitoring inflation and its interaction with the current policy stance. Inflation reached over 15 percent in the third quarter of 2022, mainly due to import prices. This high cost of living has now started to ease and something the CBS is carefully monitoring, as are global developments that could trigger further increases in inflation, mostly through commodity prices.

For the outlook, the authorities indicated that persistent inflation could force the CBS to resort to a tightening monetary stance. However, the greater concern at present is low levels of private business credit growth (to support the recovery) and undue pressure that would be brought to bear on current loans outstanding. The CBS is monitoring the situation closely to identify an appropriate point at which to begin the process of rate normalization; it is clear as to how this process can be managed smoothly. CBS’s forecasts highlight that current monetary policy settings should boost growth to a 1.0 percent increase in real GDP, whereas tightening monetary policy at this stage could lead to a decline of -3 percent. Given this wide margin (and the downside risk to tightening too soon) the CBS believes current settings, but under close scrutiny, offer the most prudent path to supporting the recovery underway.

The CBS is also mindful that as a small open economy, monetary policy rates in Samoa are less likely to influence its inflation experience. That said, the CBS can implement increased volumes of securities tendered to commercial banks to reduce local liquidity (though OMOs) if required.

The authorities highlighted that the banking and financial sectors have remained broadly stable during the pandemic. The number of NPLs remain within manageable levels and banks are well capitalized.

Structural Reforms

The authorities emphasized the importance of a sound structural reform policy to facilitate growth and enhance Samoa’s development opportunities. Developing human capital through skill training and experience (including looking for ways to leverage the experience brought back by workers from other economies) are priorities. There will be a focus on uplifting local skills in the hotel and tourism-related industry, healthcare services and education. The trend for seasonal employment schemes in New Zealand and Australia to provide job opportunities for Samoans, which started in the agricultural sector and expanded to other sectors including hospitality, healthcare and ICT (information and communication technology), has emerged as a challenge—having reduced the local labor pool of semi-skilled workers. It is something that will need to be managed carefully given the reliance on remittances while facing the need for a larger and better trained local workforce.

The authorities introduced the Samoa National Employment Policy 2021-22 – 2025-26 (SNEP) in November of 2022. The policy outlines key areas of improvement in enhancing participation from women, youth, and people with disabilities. Furthermore, improvements in public sector financial management underpinned by IMF CD programs and other development partners has led to better monitoring and management of SOEs.

Climate change continues to be a major threat and climate-related events further exacerbated the economic challenges the authorities faced during the time of the pandemic. Some resilience focused infrastructure projects are underway, but authorities encountered substantial delays due to the border closure. Mainstreaming climate change resilience (through adaption and mitigation measures) into sector plans includes incorporating climate change into school curriculums. The authorities also introduced new policies on Disaster Risk Financing and Multi-Hazard Early Warning System (especially regarding the tsunami threat). Due to constrained fiscal space, the authorities have been relying on grants from development partners to finance their climate-resilient projects. The Climate Macroeconomic Assessment Program (CMAP) from the IMF has helped the authorities identify policy areas of improvement.

Conclusion

Finally, the Samoan authorities remain committed to implementing IMF recommendations where practical. They thank development partners for continued support and look forward to further constructive engagements with the IMF. The authorities broadly agree with the staff team’s assessment and therefore support the publication of the 2023 Samoa Article IV Consultation reports.