IMF Executive Board Concludes 2010 Article IV Consultation with SamoaPublic Information Notice (PIN) No. 10/85
July 12, 2010
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On May 17, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Samoa.1
After more than a decade of strong economic performance, the global recession and 2009 tsunami dealt Samoa major setbacks. Real per-capita income growth since the mid-1990s has been significantly higher than for most comparator countries. Prudent fiscal and monetary policies and structural reforms underpinned this performance. However, the global recession hit parts of the economy severely, notably manufacturing. In addition, construction also recorded a significant decline, in part reflecting the unwinding of activity related to the South Pacific Games, while agriculture and fishing suffered from poor harvests. As a result, real GDP fell 5 percent in FY 2008/09, recording the worst slump in two decades.
Nevertheless, Samoa’s external position remained comfortable. The current account deficit narrowed in FY 2008/09 (on provisional data) as remittances and tourism receipts, Samoa’s main foreign exchange earners, continued to grow. Official reserves remained stable, well above the central bank’s target.
The tsunami in September 2009 caused human suffering and damage to physical infrastructure, including tourism, of an unprecedented scale. Beyond the human cost, the physical damage is estimated by the UNDP and the World Bank at US$60 million (over 10 percent of GDP), but the cost of infrastructure rehabilitation, strengthening social safety nets, investing in disaster protection, resettlement, and lost tourism earnings is expected to be significantly higher.
The authorities responded early in the global recession with monetary and fiscal stimulus. The Central Bank of Samoa (CBS) has lowered policy rates (CBS securities overall rate) by nearly 500bps since mid 2008 to ¼ percent. The government also started to increase development spending in 2008 and the pre-tsunami fiscal deficit was budgeted to double to over 10 percent of GDP in FY 2009/10, largely financed by grants and concessional loans.
A massive humanitarian relief effort was mounted within days after the September 2009 tsunami and attention is now shifting toward implementing a recovery framework that focuses on maintaining access to basic health and education services, infrastructure rehabilitation, resettlement and investments in disaster risk reduction. Given the poverty implications of the disaster, the framework is integrated with the Strategy for the Development of Samoa 2008–12, Samoa’s blue-print for poverty reduction and growth.
A strong initial response from private overseas remittances and donor support, including the Fund’s emergency assistance, have helped offset balance of payments pressures so far, with official reserves rising to US$130 million at end February 2010 (4 months of prospective import cover).
Executive Board Assessment
Executive Directors agreed with the thrust of the staff appraisal. They commended the Samoan authorities for their swift response to a series of severe shocks, including the global recession of 2008 and the September 2009 tsunami. They welcomed the adoption of a comprehensive recovery plan, which would help safeguard the social and economic progress achieved by Samoa in recent years. Directors noted, however, that Samoa’s prospects for a quick recovery remain challenging and subject to considerable risks, given the scale of the shocks, a still fragile global recovery, and the island’s susceptibility to natural disasters.
Directors commended the authorities for their prudent fiscal policy, which has significantly strengthened the fiscal position in recent years, and welcomed their commitment to return to their deficit target over the medium-term once tsunami-related reconstruction is completed. They noted that stabilizing public debt at a comfortable level would be particularly important for a small open economy, such as Samoa, that is vulnerable to external shocks.
They also noted that the significant fiscal cost of emergency relief and rehabilitation had resulted in sharply higher fiscal deficits in the next few years. Directors supported the prioritization of spending in the supplementary budget, which favors basic social services and areas that are key to revive the economy, and were encouraged by the progress made in securing concessional donor support. To further reduce fiscal risks and minimize remaining tsunami-related financing needs, Directors recommended re-directing some development spending under existing plans to tsunami-related infrastructure rehabilitation. Directors underscored that timely implementation of the government’s public financial management reform plan will also be important to ensure efficiency of spending.
Directors supported the authorities’ commitment to the exchange-rate basket peg as an effective anchor of sound macroeconomic policies. They noted staff’s finding that the exchange rate did not appear out of line with economic fundamentals. Directors stressed that prudent monetary and exchange rate policy will be critical during the reconstruction period and called on the CBS to remain vigilant in detecting early signs of balance of payments pressures. The authorities should stand ready to make exchange-rate adjustments as necessary, and raise policy interest rates to a more neutral level as the domestic recovery gains traction and regional central banks withdraw stimulus.
Directors also encouraged further structural reform to enhance prospects for private sector-led growth, including by building on recent progress in state-owned enterprise reform, and increasing access to and economic use of customary land.