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Samoa and the IMF
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IMF Concludes Article IV Consultation with Samoa
On May 9, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Samoa.1
Recent economic developments in Samoa have been largely favorable. Since a number of mainly weather related shocks in the early 1990s, which reduced domestic output and income, a consistent policy aimed at a combination of macroeconomic stability and structural reforms has resulted in a remarkable pick-up in growth in recent years, while inflation has remained low. Real GDP growth is estimated to have risen from 3½ percent in 1998 to 5½ percent in 1999 and 6¾ percent in 20002. The strong growth performance in 1999 was fueled by a pick up in construction activity and a strong performance of the tourist sector, which benefited from celebrations of the new millennium and a number of large international meetings. The recovery in the agricultural sector and a continued sharp pick up in private and public construction activity contributed to the further acceleration of GDP growth in 2000. In spite of the strong growth in demand, consumer price inflation remained low in 1999 (¼ percent) and 2000 (1 percent). Lower prices of local agricultural produce offset higher import prices for fuel and building materials.
The external current account surplus (including transfers) declined from 7 percent of GDP in 1999 to 3¾ percent of GDP in 2000, largely on account of higher imports and lower private remittances, but the level of gross international reserves has remained fairly comfortable at 5¾ months of imports3. The worsening of the current account was partly offset by larger official loan disbursements than in 1999. External debt at end-2000 is estimated to have declined further to 62 percent of GDP, which is still high compared to other islands in the region. The debt-service ratio, which has been low given the concessionary nature of most of the debt, remained at 12½ percent of exports of goods and services in 2000.
Samoa has maintained its international competitiveness, as reflected by a real effective exchange rate that has been broadly stable over the past two years. After the small devaluation of the tala against the currency basket in the wake of the Asian crisis, the real value of the tala in terms of the U.S. dollar has moved broadly in line with other currencies in the region. The decline in export volumes in 1999 and 2000 was due to a slowdown, and finally a halt, in coconut oil exports following the closure of Samoa's coconut oil mill.
After four consecutive years of surpluses, the overall fiscal balance (including grants) moved into deficit in 1999/00. The main factor explaining the turnaround was the sizeable decline in external grants. Nevertheless, the actual deficit in 1999/00 (¾ percent of GDP) was smaller than projected in the budget (3 percent of GDP), due to the temporary delay of some development expenditure and a slight reduction in current expenditure. The 2000/01 budget envisages a further widening of the fiscal deficit to 3¾ percent of GDP, reflecting the carry-forward of development expenditures (including large co-payments on external infrastructure loans), short-run costs related to the privatization program, and conservative revenue estimates.
Monetary policy has been accommodative. Money supply increased sharply in both 1999 and 2000, while key interest rates were lowered in April 2000. The major contributor to broad money growth was domestic credit, which has risen sharply since the financial reforms of 1998. Annual growth in credit to the private sector was close to 20 percent in 1999 and 2000, with the trade and construction sectors accounting for most of the new lending. The government also contributed to the process of monetary expansion, as it drew down its deposits with the banking system for the first time since 1994.
Public sector reform has continued in 1999 and 2000, most notably with the sale of government majority shareholdings and the corporatization of the Post and Telecommunications Department. However, civil service reform—which includes the transfer of responsibilities for financial and human resource management to line departments, implementation of performance-based management, and the reduction in the number of civil servants—is progressing slower than anticipated.
Executive Board Assessment
Executive Directors noted that recent economic developments in Samoa have been favorable. High growth rates have been combined with low inflation, a broadly stable real effective exchange rate, and a current account surplus. While structural reforms and favorable weather have contributed to this performance, Directors noted that the recent economic expansion has been accompanied by relatively rapid credit and monetary expansion and by increasing fiscal deficits.
Directors considered that the main challenge facing the authorities is to combine continued structural reforms, aimed at economic development and growth, with effective and forward-looking macroeconomic stabilization policies. They welcomed the authorities' intention to contain the fiscal deficit and to tighten monetary policy promptly if signs of inflation or balance of payments pressures were to develop. An important reason for pursuing a broad-based strategy is to help reduce the vulnerability of the economy to external shocks.
For the near term, Directors welcomed the authorities' intention to prevent the fiscal deficit in the current budget year from exceeding 3 1/2 percent of GDP, and urged them to save any excess revenue in order to achieve a lower deficit if possible.
Directors recommended that it would be prudent to bring the fiscal balance down gradually over the medium term to zero. This would ensure that public debt—which is quite high by regional standards—remains on a declining path relative to GDP so as to leave sufficient room for private sector development, and to reduce dependency on foreign aid over time. Directors considered that some of the necessary adjustment should be sought through stricter expenditure prioritization. They noted that a leaner civil service would help reduce costs and create more room for expenditure on health, education, and infrastructure development, which would facilitate private sector expansion. Directors also advised the authorities to consider a moderate increase in the value-added goods and services tax rate and a broadening of the tax base.
Directors noted that the current exchange rate regime has served the economy well, by providing a broadly stable real effective exchange rate and an appropriate degree of competitiveness. Directors noted Samoa's progress in tariff reduction, and encouraged the authorities to move further in this direction in the context of Samoa's evolving international economic relations, while taking account of any budgetary implications.
Directors encouraged the authorities to move ahead forcefully with their structural reform program. They acknowledged that the pace of reform in Samoa should be seen in light of the limited absorptive capacity of domestic institutions in a small island economy. They also acknowledged the steps taken so far, including in the privatization of state enterprises. Looking forward, Directors considered that privatization should continue, that remaining state-owned enterprises should be subject to performance-based management, and that remaining price restrictions should be removed.
Directors noted the importance for development of ensuring adequate availability of free hold land. They recognized that government-owned land is increasingly being made available to the private sector. At the same time, they suggested that the impact on land availability of limitations on using customary land as collateral for bank loans merited serious consideration, taking into account the social aspects of the issue.
Directors recommended a strengthening of financial sector oversight to keep pace with the ongoing structural changes in this sector. In particular, they stressed the need for the Central Bank of Samoa to rigorously implement its new authority to supervise and regulate the activities of the nonbank financial institutions, problems in which could have major implications for the financial system at large. They considered that regional cooperation and technical assistance could help in building the necessary supervisory capacity.
Directors welcomed the recent steps to improve the oversight of the Offshore Financial Center and to bring the regulatory and supervisory system more into line with
Directors noted the substantial progress in improving the quality of economic statistics and welcomed the authorities' intention to submit data to the Fund according to the General Data Dissemination System. They encouraged the authorities to address remaining deficiencies in the areas of government finance and balance of payments statistics.
|Samoa: Selected Economic and Financial Indicators, 1997-2000|
|(12-month percent change)|
|Output and inflation|
|Real GDP growth||1.0||3.4||5.6||6.8|
|Change in CPI (period average)||6.9||2.2||0.3||1.0|
|(In percent of GDP)|
|Central government budget 1/|
|Revenue (excluding grants)||28.2||27.5||26.3||24.2|
|Expenditure and net lending||36.8||37.5||36.3||34.0|
|Of which: Current expenditure||23.2||23.5||23.2||21.9|
|Overall balance (including grants)||2.2||1.2||-0.2||-2.2|
|Overall balance (excluding grants)||-8.6||-10.0||-10.0||-9.9|
|Domestic financing, net||-2.7||-1.7||-0.1||1.1|
|(12-month percent change)|
|Money and credit|
|Net foreign assets||20.6||15.7||0.0||1.4|
|Net domestic assets||-7.8||-35.1||95.6||45.6|
|Private sector credit||17.5||18.8||17.6||19.7|
|Broad money (M2)||13.2||5.0||12.5||11.4|
|(In millions of U.S. dollars)|
|Balance of payments|
|Services and income (net)||21.1||19.0||18.6||19.3|
|Private remittances (net)||42.0||37.3||41.6||38.6|
|Official transfers (net)||26.1||22.3||24.5||24.5|
|(In percent of GDP)||7.5||6.7||7.0||3.7|
|Debt and reserves|
|Gross international reserves (end-period)||60.4||63.1||68.2||63.5|
|(In months of imports of goods and services)||5.9||5.9||6.3||5.7|
|Gross external public debt 2/||154.9||156.9||155.1||151.3|
|(In percent of GDP)||65.6||71.1||65.0||62.3|
|External debt-service ratio 3/||13.1||12.9||12.4||12.6|
|Market rate (tala/U.S. dollar, period average)||2.56||2.95||3.01||3.28|
|Real effective exchange rate (1990 = 100; end of period)||101.0||93.3||91.0||91.6|
|Sources: Data provided by the Samoan authorities and Fund staff estimates as of end-March 2001. Updated data has since become available.|
|1/ Calendar year based on averages of fiscal year data; 2000 reflects budget data.|
|2/ Includes publicly guaranteed debt.|
|3/ In percent of exports of goods and services.|
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the May 9, 2001 Executive Board discussion based on the staff report.
2 Data as at the end of March 2001. Updated data has since become available.
3 Figures for the year 2000 are estimates.
IMF EXTERNAL RELATIONS DEPARTMENT