## _cr05220 — Executive Summary and Selected Findings

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### Economic setting and near-term outlook
- Real GDP growth:
  - picked up to 3½ percent in 2003/04 and is projected at 3 percent for 2004/05; staff and authorities project real GDP growth of 3 percent in 2005/06.
- Inflation:
  - headline inflation (12 months average) rose to 8 percent in 2003/04 (from 4¼ percent in 2002/03), reached double digits in 2004 after cyclone Heta and higher import prices, and is projected to be about 7½ percent (12 months average) in 2004/05; projected to decline to 3 percent in 2005/06.
- External sector:
  - trade deficit widened in 2003/04; remittances increased in 2003/04 and helped narrow the current account that year.
  - Based on data through end-December 2004, the current account deficit (excluding official transfers) is projected to widen to 12¾ percent of GDP in 2004/05; the current account deficit (excluding official transfers) projected at about "13 percent of GDP" in 2005/06.
- Public finances and debt:
  - public debt ratio declined from over 90 percent historically to about 50 percent; external public debt (percent of GDP) reported as "61.4", "62.0", "59.6", "51.5", "48.5", "46.9" (selected years).
- Policy stance:
  - authorities remain committed to macroeconomic stability and reform.
  - overall growth projected at 3 percent in 2005/06, underpinned by services and construction; agriculture expected to slowly recover; fishing improvements uncertain.
- Immediate fiscal pressures:
  - strong calls for a large public sector wage increase ahead of early 2006 elections; Remuneration Tribunal recommended about 40 percent; authorities proposed average wage increase of about 35 percent phased over three years.
  - restructuring costs of loss-making Polynesian Airlines likely to impose a significant burden on the 2005/06 budget.

### A decade of reform and remaining vulnerabilities
- Reform achievements:
  - comprehensive reform program launched in 1995/96 produced solid growth, lower inflation (relative to earlier periods), improved public finances and reserves, and stronger private sector expansion.
- Remaining vulnerabilities:
  - recent years show weaker macroeconomic performance, a narrow export base (mainly fish, automotive parts, tourism), heightened inflation relative to the region, and continued exposure to external shocks.
- Unfinished structural agenda (SDS 2005–2007 priorities):
  - deepen SOE reform and corporatization, privatize nonstrategic enterprises, reform land market (Land Leasing Committee assessment), improve infrastructure (energy, water, ports), and ease regulatory burdens to improve investment climate.

### Recent developments — growth, inflation, liquidity
- Growth and sectors:
  - Real GDP growth: 3½ percent in 2003/04 (from about 1¾ percent in 2002/03); slowdown in manufacturing and poor fishing and cyclone damage to agriculture offset by robust services and construction; projected 3 percent for 2004/05.
- Inflation:
  - headline inflation rose to 8 percent in 2003/04, spiked to double digits in 2004, and projected at about 7½ percent in 2004/05.
- Monetary and liquidity:
  - CBS eased policy after cyclone Heta, injecting liquidity through central bank securities; broad money grew by 13 percent and private credit grew by 17 percent to June 2004; private credit growth weakened in late 2004 and excess liquidity rose.

### Key fiscal developments and 2005/06 budget stance
- Fiscal outturns and targets:
  - Fiscal deficit outturn for 2003/04: 0.9 percent of GDP (lower than budgeted 1½ percent of GDP).
  - 2004/05 budget target: deficit of 0.9 percent of GDP; mid-year execution broadly on track.
  - Staff recommendation for 2005/06 budget: deficit target about 0.9 percent of GDP (assumes some Polynesian Airlines restructuring costs of about ¾ percent of GDP).
- 2005/06 government budget (authorities' proposals and staff concerns):
  - Proposed deficit target for 2005/06 in government budget: 4 percent of GDP (staff recommended 0.9 percent of GDP).
  - Main drivers of higher deficit target:
    - Polynesian Airlines restructuring costs: 2½ percent of GDP allocated (½ percent of GDP capital injection for joint venture; 2 percent of GDP for early lease termination penalties assumed as full bullet payment in 2005).
    - Public sector wage increase: average 35 percent phased over three years; fiscal cost about 1¼ percent of GDP in 2005/06 and about 1 percent of GDP each in 2006/07 and 2007/08.
    - Pension benefit increase: monthly pensions raised from 100 tala to 125 tala effective July 1, 2005; fiscal cost about ¼ percent of GDP in 2005/06.
  - Budget offsetting measures:
    - Enforce 50 percent dividend policy for all SOEs — expected yield about ¼ percent of GDP.
    - Vacancy hiring moratorium and operational cost cuts — expected savings about ¼ percent of GDP.
- Impact assessment:
  - If full airline restructuring payments made in 2005, gross reserves fall from "4 months of imports" to about "3½ months of imports"; reserve level at end-2005 would stay "broadly unchanged" from end-2004 level.
  - Domestic financing of about "2½ percent of GDP" via treasury bonds of "5, 10 and 15 year maturities"; with excess liquidity of about "4 percent of GDP" in banking system, impact on interest rates likely minimal, though staff recommended monetary tightening to address potential balance of payments pressures.
  - Excluding airline reform costs, the 2005/06 deficit becomes "1½ percent of GDP"; staff earlier recommended a deficit of about "¼ percent of GDP" (excluding restructuring costs tentatively included).

### Polynesian Airlines — restructuring plan and fiscal implications
- Historical burden:
  - Government support historically large: government took over airline debt of about 16 percent of 1994/95 GDP after 1994 insolvency; subsidies averaged about 1 percent of GDP in recent years; 0.9 percent of GDP provisioned in 2004/05 budget.
- Restructuring plan (announced December 22, 2004):
  - IFC-supported advisory committee recommended Virgin Blue as preferred partner for a joint-venture.
  - Joint-venture to take over long-haul operations under a low-cost model; short-haul and ground handling remain with Polynesian Airlines.
- Fiscal costs and estimates:
  - Government expected capital injection: ½ percent of GDP.
  - Potential penalty for early lease termination and assumption of government-guaranteed debts.
  - Authorities’ preliminary cost estimates range: 1½–4 percent of GDP (government plans independent review); some costs expected on 2005/06 budget with spreading of penalty costs envisaged.

### External sector, reserves, and diversification
- Remittances:
  - Remittances about 24 percent of GDP in 2004 and constitute a critical buffer for the balance of payments.
- Exports and competitiveness:
  - Fishing largest export but underperformed; export base narrow and export growth stalled.
  - Real effective exchange rate appreciation in early 2004 mainly reflects surge in food prices after cyclone Heta; regional competitiveness indicators do not signal overvaluation.
  - Structural constraints to export growth: periodic power outages, poor port facilities, obstacles to leasing communal land, lengthy foreign investment and business start-up reviews.
- Trade and regional agreements:
  - WTO accession expected by end-2005; PICTA aims to eliminate intra-regional tariffs by 2012; EPA negotiations under Cotonou Agreement expected to take effect in 2008.

### Monetary policy and financial sector supervision
- Exchange rate regime:
  - Tala pegged to a trade and payments weighted basket within a ±2 percent band; basket includes NZ, Australia, US, Fiji, and Euro countries.
  - Policy of periodic adjustments within ±2 percent band has been appropriate as a nominal anchor.
- Monetary policy guidance:
  - Near-term: staff advises monetary policy be less accommodating; readiness to tighten if fiscal or BOP pressures materialize.
  - CBS to outline monetary policy framework after 2005/06 budget announcement.
- Banking sector soundness:
  - Four commercial banks adequately capitalized and compliant with 15 percent capital adequacy requirement; two major Australian bank subsidiaries (ANZ and Westpac) hold over 75 percent of assets.
- Offshore banking and AML/CFT:
  - International banking bill (April 2005) requires offshore banks to establish physical presence and an International Financial Authority; AML/CFT bill under review (March 2005) to move Samoa toward FATF "40 + 8" recommendations.
- National Provident Fund (NPF):
  - Issues: high nonperforming loans, asset concentration in short-term loans and public projects, members may borrow up to about 50 percent of balances.
  - Government authorized NPF to invest abroad 16 million tala (1½ percent of GDP or 7 percent of NPF assets); about 2 million tala invested overseas to date.
  - Staff recommended review of NPF investment guidelines and strengthening supervisory framework.

### Public finance management and structural reform recommendations
- Fiscal policy and MTBF:
  - Annual budgets lack medium-term fiscal forecasts; government ceiling on overall deficit is 3½ percent of GDP.
  - Recommendation: include a simplified MTBF in 2005/06 budget and detailed MTBF in 2006/07; staff appraisal recommends limiting fiscal deficit to about 0.9 percent of GDP.
- Revenue and tax administration:
  - Proposed revenue measures: consider removal of VAGST exemption on electricity (except low income households) — expected yield about ½ percent of GDP; revenue sharing on betting duties; enforce dividend policy for SOEs.
  - Strengthen tax administration: amalgamate Inland Revenue and Customs, establish Large Taxpayer Unit, introduce single Tax Identification Number, modernize 1974 income tax legislation; seek PFTAC technical assistance.
- Expenditure priorities and restraint:
  - Wage policy: develop in line with civil service reform; phase-in increases and link subsequent increases to performance; moratorium on nonessential vacancies.
  - Control subsidies and transfers to SOEs; limit 2005/06 budget burden from Polynesian Airlines restructuring and spread costs over time.
  - Allow Electricity Power Corporation (EPC) to adjust tariffs in line with fuel prices; Cabinet approved a 15 percent electricity tariff increase effective May 2005 to reduce government subsidy to EPC.
- Structural reforms:
  - Accelerate SOE corporatization and divestment of nonstrategic SOEs; enact Companies Act and supporting legislation; reform land leasing to facilitate use of unused communal land while protecting constitutional constraints and community interests.
  - Improve infrastructure (energy, water, ports) and business entry processes (one-stop shop) to stimulate private investment and diversify exports.
- Data and statistical improvements:
  - Adopted GDDS in November 2003; national accounts and CPI rebased in 2003; CBS to complete BPM5 transition by end-June 2005.
  - Need improved fiscal data quality, timeliness, and disclosure; move Government Finance Statistics toward GFSM2001 with PFTAC assistance.

### Medium-term outlook and scenarios (selected numerical projections)
- Baseline (2005/06–2009/10, selected):
  - Real GDP growth: 3.0; 3.5; 3.5; 3.5; 3.5
  - CPI inflation (period average): 3.0; 3.0; 3.0; 3.0; 3.0
  - Overall balance (including grants, percent of GDP): -0.9; -0.3; 0.0; 0.3; 0.5
  - Gross official reserves (US$ millions): 77.5; 84.1; 90.8; 100.7; 112.4
  - Gross external public debt (percent of GDP): 46.9; 44.6; 42.4; 39.7; 36.9
- Non-adjustment/external shocks scenario (selected):
  - Real GDP growth: 3.0; 2.0; 1.0; 1.0; 1.0
  - CPI inflation (period average): 3.0; 11.0; 8.0; 8.0; 5.5
  - Overall fiscal balance (including grants, percent of GDP): -0.9; -4.0; -3.1; -4.2; -5.5; -6.8 (multi-year)
  - Reserves (months of imports): 3.9; 3.6; 3.2; 3.0; 2.6; 2.3
  - External public debt (percent of GDP): 48.5; 48.4; 51.6; 55.6; 60.7; 66.8
- Debt sustainability warning:
  - Under a nonadjustment scenario combining expansionary fiscal policy and external shocks (zero growth, 30 percent devaluation of the tala, and a cyclone), debt-to-GDP could approach 100 percent.

### Key quantitative indicators (selected exact figures)
- Population (2003): 179,058; GDP per capita (2001): US$1,672; Quota: SDR 11.6 million.
- Real GDP (annual percent change, selected): "7.1", "4.4", "1.8", "3.5", "3.0", "3.0".
- Change in CPI (period average): "1.9", "7.4", "4.3", "7.9", "7.5", "3.0".
- Central government revenue and grants (percent of GDP): "31.9", "33.8", "32.8", "32.5", "40.1", "37.9".
- Overall balance (percent of GDP): "-2.3", "-2.1", "-0.6", "-0.9", "-0.9", "-0.9".
- Broad money (M2) 12-month percent change: "20.1", "3.6", "6.6", "12.7", "10.5", "8.8".
- Private sector credit (12-month percent change): "21.0", "9.9", "11.4", "17.1", "8.6", "9.0".
- Exports f.o.b. (US$ millions): "14.5", "14.4", "12.9", "14.1", "12.7", "12.3".
- Imports c.i.f. (US$ millions): "120.4", "134.3", "132.9", "149.5", "174.8", "188.4".
- Current transfers (net) (US$ millions): "64.0", "72.9", "79.6", "98.8", "125.2", "110.9".
- Official reserves (gross, US$ millions): "45.7", "54.4", "51.5", "66.8", "76.4", "77.5".
- Official reserves (months of next year's imports): "3.6", "4.2", "3.4", "3.6", "3.9", "4.0".
- External public debt (US$ millions): "143.5", "153.4", "169.1", "177.3", "190.4", "198.8".
- Nominal GDP (millions of tala): "804.2", "858.2", "913.8", "989.0", "1059.4", "1118.5".

### Priority policy recommendations (staff and Board)
- Contain fiscal deficit: limit to about "0.9 percent of GDP" in 2005/06 to reduce debt ratios toward regional average (~40 percent of GDP).
- Restrain wage growth: phase in increases, link to performance, impose moratorium on nonessential hires.
- Limit immediate fiscal burden of Polynesian Airlines restructuring; spread costs over time where possible.
- Strengthen tax administration (Large Taxpayer Unit), modernize 1974 income tax law, enforce SOE dividend policy.
- Reorient spending toward education, health, and infrastructure; pursue expenditure reprioritization and cost rationalization.
- Prepare and implement a simplified MTBF in 2005/06 budget and detailed MTBF in 2006/07 budget.
- Be ready to tighten monetary policy if fiscal and balance of payments risks materialize.
- Deepen SOE, utility, ports, and land lease reforms; enact Companies Act and supporting legislation.
- Review and strengthen NPF investment guidelines and supervisory framework.
- Improve fiscal data quality, timeliness, and disclosure; transition GFS to GFSM2001 with PFTAC assistance.

### Surveillance and mission follow-up
- Recommendation: next Article IV consultation on a 24-month cycle; authorities receptive to interim staff visit focused on 2006/07 budget and MTBF.
- Technical assistance and donor engagement:
  - PFTAC, World Bank, ADB provided ongoing technical assistance across public financial management, tax administration, banking supervision, balance of payments, national accounts, and GFSM/BPM transitions.

*Source: _cr05220 - Executive Summary and selected sections (IMF Article IV staff report).*

### Executive Summary ......................................................................................................

### Executive Summary

### Economic Setting
- Samoa’s decade of economic reforms produced several years of strong performance, but the record in more recent years has been uneven.
- Real GDP growth:
  - picked up to 3½ percent in 2003/04 and is projected at 3 percent for 2004/05, driven largely by the boom in the construction sector, but remains below levels attained through 2000/01.
- Inflation:
  - rose significantly in 2004; headline inflation (12 months average) rose to 8 percent in 2003/04 (from 4¼ percent in 2002/03) and reached double digits in 2004 following cyclone Heta’s impact and higher import prices; projected to be about 7½ percent (12 months average) in 2004/05.
- External sector:
  - the trade deficit widened in 2003/04 due to sluggish export growth and higher import growth related to the construction boom; remittances increased in 2003/04 and the external current account deficit narrowed that year.
  - Based on data through end-December 2004, the current account deficit (excluding official transfers) is projected to widen to 12¾ percent of GDP in 2004/05 reflecting continued weak export growth and higher import growth.
- Public finances and debt:
  - the level of public debt (in relation to GDP) has steadily declined from over 90 percent to about 50 percent.
- Policy commitment and near-term outlook:
  - the authorities remain committed to macroeconomic stability and reform.
  - overall growth is projected at 3 percent in 2005/06 underpinned by robust growth in the services and construction sectors; agriculture is expected to slowly recover, while improvements in the fishing sector remain uncertain.
- Immediate domestic challenges:
  - strong calls for a large public sector wage increase ahead of elections scheduled for early 2006; the Remuneration Tribunal has called for a wage increase of about 40 percent.
  - restructuring costs of loss-making Polynesian Airlines are likely to impose a significant burden on the 2005/06 budget.

### I. A Decade of Economic Transformation
- Background and achievements:
  - Samoa launched a comprehensive reform program in 1995/96 covering public and financial sectors and tax and tariff systems following major shocks and weak performance in the early 1990s.
  - With sustained reforms, Samoa became one of the best managed economies in the Pacific Island region, registering solid growth, low inflation (relative to earlier periods), improved public finances and international reserve levels, and outperformed comparator countries.
  - Private sector activity expanded faster than in other Pacific Island economies.
- Remaining vulnerabilities:
  - despite progress, recent years show weaker macroeconomic performance, a narrow export base (mainly fish, automotive parts, and tourism), and continued vulnerability to external shocks.
  - inflation has risen and is now above the regional average.
- Reform ownership and process:
  - reforms were developed and owned by the Samoan authorities and reflected policies recommended by the Executive Board in Article IV consultations.
  - political stability and broad stakeholder consultation were integral to implementation success.

### Box 1 — Recent Structural Reforms and Unfinished Agenda (summary)
- Recent progress:
  - Public sector reform: significant progress on civil service reforms, restructuring of Ministries, downsizing of some functions (notably Ministry of Public Works), gradual staff reduction via natural attrition; a major review of Ministry functions by the Public Service Commission is expected in the second half of 2005.
  - Public enterprise reform: Public Bodies Act (2001) created SOE policy framework; priority to divest minority shareholdings and privatize non-strategic enterprises; sales of minority holdings in three small companies in 2004 and announced privatizations (Samoa Shipping Services, Agriculture Store, Samoa Broadcasting Corporation); corporatization for strategic SOEs to improve commercial focus, governance and financial reporting; Telecom Bill expected parliament approval by end-June 2005 to create a more competitive telecommunications sector.
  - Tax and tariff reform: VAT introduced in 1994 at 10 percent (raised to 12½ percent in 2002); most excise taxes abolished; maximum tariff rate reduced from 60 percent to 20 percent since 1998; tariff schedule simplified to four rates; rates of 35–42 percent reduced in steps to 8 percent.
  - Financial sector reform: supervision enhanced by bringing nonbanks and insurance companies under central bank supervision; regulatory framework for offshore banks tightened.
- Unfinished agenda (SDS 2005–2007 priorities):
  - deepening SOE reform, including placing some SOEs under private operators with management contracts while retaining government ownership;
  - reforming the land market, including assessing the Land Leasing Committee to facilitate leases of unused communal land to investors;
  - improving the investment climate via better infrastructure (energy, water, ports) and easing regulatory burdens (simplifying procedures and reducing time to establish a business).

### II. Recent Economic Developments
- Growth and sectoral developments:
  - Real GDP growth rose to 3½ percent in 2003/04 from about 1¾ percent in 2002/03.
  - slowdown in manufacturing, poor fishing sector performance, and cyclone Heta’s January 2004 damage to agriculture were more than offset by robust services and construction growth.
  - based on data through end-December 2004, growth is projected to be 3 percent for 2004/05.
- Inflation dynamics:
  - headline inflation rose to 8 percent in 2003/04 (from 4¼ percent in 2002/03), spiked to double digits in 2004, but has declined in recent months and is projected at about 7½ percent in 2004/05.
- External sector and capital flows:
  - the trade deficit widened in 2003/04 due to weak exports and higher imports (construction-driven); remittances offset some effects leading to a narrower current account in 2003/04, but the current account (excluding official transfers) is projected to widen to 12¾ percent of GDP in 2004/05.
- Monetary policy and liquidity:
  - the Central Bank of Samoa (CBS) eased monetary policy after cyclone Heta (January 2004), injecting substantial liquidity via open market operations in central bank securities.
  - broad money grew by 13 percent and credit to the private sector grew by 17 percent in the year to June 2004.
  - private sector credit growth weakened in the second half of 2004, and excess liquidity in the banking system rose.

### Key Policy Issues and Staff Recommendations
- Fiscal policy:
  - contain immediate fiscal risks from requests for large wage increases and Polynesian Airlines restructuring costs.
  - recommended wage policy: develop in line with ongoing civil service reform; phase in any upward adjustment such that after an initial moderate increase subsequent increases be linked to performance.
  - find ways to limit the burden of Polynesian Airlines restructuring costs on the 2005/06 budget.
- Financial sector:
  - strengthen the National Provident Fund’s (NPF’s) investment guidelines and supervisory framework.
- Structural reforms:
  - deepen implementation of SOE reform and tackle impediments to private sector development (including the functioning of the land market).
  - government’s initiative on land market reform to facilitate leasing of unused communal land is a significant and politically sensitive step.
- Other policy considerations:
  - careful economic management is required to limit the impact of domestic pressures (wage demands, SOE restructuring costs, calls for tax breaks) on macroeconomic stability.
  - preserve a sound macroeconomic framework to reduce vulnerability to external shocks.

*Source: _cr05220 - Executive Summary (IMF Article IV staff report).*

### 9.      Fiscal performance has been broadly stable since 2002/03 reflecting continued

### _cr05220 - 9.      Fiscal performance has been broadly stable since 2002/03 reflecting continued

### Fiscal performance (2002/03–2004/05)
- Fiscal deficit outturn for 2003/04: 0.9 percent of GDP (lower than budgeted 1½ percent of GDP).
- Revenues in 2003/04: slightly below budget; shortfall more than offset by continued expenditure restraint.
- 2004/05 budget target: deficit of 0.9 percent of GDP.
- 2004/05 mid-year preliminary figures: execution broadly on track; if confirmed, no additional measures needed to achieve the 2004/05 budget targets.

### Outlook and vulnerabilities
- Staff and authorities project real GDP growth of 3 percent in 2005/06.
- Growth drivers: tourism and continued strong construction activity (largely driven by projects for the 2007 South Pacific Games).
- Sectoral prospects:
  - Agriculture: expected to slowly recover.
  - Fishing: improvements remain uncertain.
- Medium-term growth constraints: remoteness, limited resource base, high transportation costs.
- Policy priorities to encourage private-sector-led growth:
  - Keep domestic costs low through continued macroeconomic stability and structural reforms.
  - Deeper SOE and land market reforms critical for private-sector-led growth.
  - SOE reform to raise total factor productivity and facilitate adjustment to shocks.
  - Land market reform important for tourism development (most target sites on communal land).
- Conditional medium-term growth path: assuming successful reforms, 3½ percent average growth over the medium term is achievable.
- Risks to the outlook:
  - Upside: stronger-than-expected tourism performance.
  - Downside: continued high oil prices; adverse external environment (slowdown in Australia, New Zealand, United States) could reduce remittance growth.
- Vulnerability to shocks and natural disasters:
  - Nonadjustment scenario (expansionary fiscal policy with large public sector wage increases plus external shocks including continued high oil prices) implies:
    - Worsened medium-term macroeconomic situation: lower growth, higher inflation.
    - Debt-to-GDP ratio close to 70 percent of GDP by 2009/10 (Table 5 referenced).
    - Reduced capital inflows from stalling structural reforms; significant strain on international reserves.
  - Debt sustainability analysis: isolated shocks alone would not negatively impact debt ratios, but a combination of shocks (including zero growth, a 30 percent devaluation of the tala, and a natural disaster such as a cyclone) under the nonadjustment scenario would raise the debt-to-GDP ratio close to 100 percent.
  - Current reserve target: 4 months of import cover; mission urged consideration of raising reserve target to about 5 months to mitigate external shocks and natural disasters.
- Authorities’ mitigation and diversification measures:
  - Promote diversification of exports (including the Samoa Tourism Development plan).
  - Remittances expected to remain the most stable source of balance of payments inflows and an important buffer (see Box 2).
  - Tourism regarded as promising and underdeveloped relative to some Pacific Island economies.
  - A joint venture between Polynesian Airlines and Virgin Blue expected to lower air fares and boost tourism prospects.
  - Samoa–New Zealand agreement to enhance Samoa’s market access to higher-value added goods (organic crops and processed food) to diversify exports and help fill void left by garment exports.

### Fiscal policy recommendations and measures
- Staff recommendation for 2005/06 budget: deficit target about 0.9 percent of GDP.
  - Rationale: reasonable growth prospects and need to reduce debt-to-GDP ratio to about 40 percent (regional average) over the medium term (Figure 1 referenced).
  - Assumes 2005/06 budget bears some restructuring costs of Polynesian Airlines (about ¾ percent of GDP), implying modest fiscal tightening in 2005/06.
- Revenue measures proposed:
  - Consider removal of the exemption on Value Added Goods and Services Tax (VAGST) on electricity consumption, except for low income households; expected yield: about ½ percent of GDP.
  - Additional revenue sources: revenue sharing arrangement on betting duties; enforcing current dividend policy for SOEs.
- Caution against tax breaks:
  - Mission cautioned that granting tax breaks risks eroding the revenue base.
  - Authorities have granted tax breaks to encourage private sponsorship of the 2007 South Pacific Games and face calls for further tax breaks to stimulate investment.
- Expenditure restraint priorities:
  - Wage policy restraint crucial to achieve the proposed 2005/06 deficit target.
  - Authorities noted Samoa’s wage bill is low relative to other Pacific Island countries; last public servants’ wage and salary review in 1997; no general wage increase since 2001.
  - Authorities expect a sizable wage increase is politically inevitable but indicated the Remuneration Tribunal recommendation unlikely to be fully supported; a more modest increase likely.
  - Mission recommendations on wage policy:
    - Develop wage policy in line with ongoing civil service reform.
    - Impose moratorium on filling vacancies other than essential positions to limit budgetary impact.
    - Phase in wage increases and link subsequent increases to performance.
  - Control of subsidies and transfers to SOEs needed for expenditure restraint.
    - Progress toward comprehensive restructuring of Polynesian Airlines (with IFC assistance) welcomed.
    - Mission advised limiting burden on 2005/06 budget, including spreading costs over time.
  - Electricity sector: allow Electricity Power Corporation (EPC) to adjust tariffs in line with fuel prices.
    - Cabinet approved a 15 percent increase of electricity tariffs to take effect May 2005; proceeds to reduce government subsidy to EPC.

### Polynesian Airlines: fiscal implications (Box 3)
- Historical context:
  - Polynesian Airlines experienced long-term financial difficulties; technical insolvency in 1994 following ill-designed expansion; government took over debt (about 16 percent of 1994/95 GDP).
  - Excessive budgetary burden in late 1990s led to cuts in education and health spending.
  - To keep airline operating, about 3 percent of GDP was allocated in the 2001/04 budgets; 0.9 percent of GDP provisioned in the 2004/05 budget.
  - Current debt to banks and aircraft leasing obligations are government guaranteed.
- Restructuring plan:
  - Plan announced December 22, 2004; approved by Cabinet.
  - Advisory committee supported by the IFC recommended Virgin Blue as preferred partner for a new joint-venture airline.
  - Contractual document for joint-venture expected to be signed by end-June 2005; new airline expected operational in latter part of 2005 if successful.
- Expected outcomes and costs:
  - Under proposed plan, operations divided into two entities:
    - Joint venture to take over long-haul operations (traditionally loss-making), operating within a “low-cost airline” model expected to become profitable.
    - Short-haul and ground handling operations remain with Polynesian Airlines and could benefit from synergies.
  - Restructuring fiscal costs:
    - Government expected to inject ½ percent of GDP as capital into the joint-venture.
    - Potential penalty cost for early termination of current jet lease.
    - Cost of assuming airline debts which are government guaranteed.
  - Authorities’ preliminary cost estimates range: 1½–4 percent of GDP (government considers this may be too high and plans an independent review).
  - Some costs expected to be borne by the 2005/06 budget; spreading penalty costs over a few years is envisaged (precedent in 2001 when penalty costs were spread out).

### Revenue administration and medium-term expenditure strategy
- Need to strengthen tax administration, reduce less productive spending, and reorient expenditures toward social and infrastructure sectors.
- Administrative reforms:
  - Amalgamation of Inland Revenue and Customs into a new Ministry expected to facilitate more efficient tax administration and improve tax compliance.
  - Support for establishment of a Large Taxpayer Unit (LTU) and introduction of a single Tax Identification Number (in line with the 2003 Fiscal ROSC).
  - Use reform opportunity to review and modernize the 1974 income tax legislation.
  - Authorities intend to seek technical assistance from PFTAC for these areas.
- Reprioritization:
  - Greater rationalization of expenditures to enable reorienting spending toward education, health, and infrastructure for long-term growth.

### Importance of workers remittances (Box 2)
- Remittances significance:
  - Remittances amounted to about 24 percent of Samoa’s GDP in 2004.
  - Remittances constitute a critical component of balance of payments flows; Samoa’s current account deficit would likely be unsustainable without remittances.
- Stability and channels:
  - Remittance flows are relatively stable due to cultural ties and continued migration.
  - Remittances affect households through multiple channels:
    - Potential adverse effect on labor supply if used as substitute for labor income.
    - Potential complement to labor if used for productive investments.
    - Anecdotal evidence suggests remittances in Samoa tend to finance consumption, schooling, and coping with adverse shocks.
  - Migration of skilled workers can have positive impacts via remittances and trade networks; “exporting” human capital may provide higher returns than some traditional agricultural exports.
- Policy implications:
  - Minimize transaction costs and encourage use of formal financial sector for remittance transfers (some remittances transferred via informal “hawala-type” channels); this would contribute to financial development.

*Source: IMF staff report content provided in the supplied document excerpt.*

### 22.      The mission encouraged the authorities to draw up a credible medium-term

### _cr05220 - 22.      The mission encouraged the authorities to draw up a credible medium-term

### Fiscal policy and Medium-Term Budget Framework (MTBF)
- Annual budgets do not include medium-term fiscal forecasts and there is no explicit discussion of fiscal sustainability.
- Government’s budget rule: ceiling on the overall deficit of 3½ percent of GDP.
- Recommendation: 2005/06 budget should signal intention to move toward a MTBF by laying out broad parameters of the government’s medium-term fiscal strategy.
- Authorities agreed to:
  - include a simplified MTBF in the 2005/06 budget; and
  - present a more detailed program in the 2006/07 budget.
- Staff appraisal: fiscal deficit should be limited to about 0.9 percent of GDP; prudent wage policy and a moratorium on filling vacancies other than essential positions will be required; avoid granting large scale tax breaks that would erode the revenue base.
- Recommendation: strengthen tax administration, establish a Large Taxpayer Unit, and modernize the 1974 income tax legislation.
- Recommendation: reorient expenditures toward education, health and infrastructure; include improved budget disclosure of medium-term forecasts and assumptions, tax expenditures, fiscal risks and contingent liabilities.

### Monetary policy and exchange rate management
- Near-term: monetary policy needs to be less accommodating given reasonable prospects for growth and the need to support the peg.
- If 2005/06 budget risks materialize and balance of payments pressures emerge, authorities should stand ready to tighten monetary policy; government’s ability to contain the fiscal position is critical to determining whether tightening is necessary.
- CBS to outline its monetary policy framework for the coming fiscal year once the 2005/06 budget is announced at end-May 2005.
- Exchange rate regime:
  - Current pegged exchange rate regime has served well as a nominal anchor.
  - Policy of periodically making adjustments in the value of the tala within a ±2 percent band by the CBS appears to have struck an appropriate balance between maintaining external competitiveness and preserving the exchange rate peg’s role as an anchor for inflation.
  - Peg to a basket of currencies has helped avoid sharp movements in the nominal effective exchange rate of the tala.
- Staff appraisal reiterates need for less accommodating monetary policy in the near term and readiness to tighten if fiscal/balance of payments risks materialize.

### External sector, exports, and competitiveness
- Concern: stalling of export growth.
- Fishing remains the largest export industry but has underperformed in recent years due in part to unfavorable weather conditions; improvements in agriculture likely to be gradual despite shifts toward new export crops.
- Regional competitiveness indicators (including export market share) do not signal an overvaluation of the tala nor a loss of competitiveness within the region.
- Recent appreciation of Samoa’s real effective exchange rate mainly reflects surge in food prices in early 2004 (following cyclone Heta); underlying nonfood prices and costs have not risen significantly relative to major trading partners.
- Structural constraints identified as contributing to weak export volume growth:
  - periodic power outages,
  - poor infrastructure including inefficient landing and docking facilities at the ports (which has affected fish exports),
  - obstacles to leasing communal land and using such land as collateral,
  - lengthy review process for foreign investments and for starting a business.
- Authorities’ initiatives:
  - SDS (2005–2007) includes initiatives to tackle structural weaknesses and improve the investment climate.
  - Restructuring of energy, water and ports utilities aimed at improving service delivery and revitalizing key export industries such as fishing.
  - Plan to establish a “one-stop shop” for starting businesses and for foreign investors.
- Trade reforms:
  - WTO accession expected to be concluded by the end of 2005.
  - Samoa is a founding member of PICTA, which aims to eliminate all intra-regional tariffs by 2012.
  - Participation in negotiations for Economic Partnership Agreements (EPAs) under the Cotonou Agreement expected to take effect in 2008.
  - Imports from the EU to Samoa are about 1 percent; impact of EPA on tax revenues expected to be minimal.

### Financial sector and supervision
- Financial sector remains sound; significant progress in strengthening the supervisory framework.
- Four commercial banks are adequately capitalized and are in compliance with the 15 percent capital adequacy requirement.
- CBS practice: examinations through external auditors and extensive off-site monitoring (New Zealand model) remains effective; information sharing between CBS, external auditors and foreign banks reduces need for extensive on-site monitoring.
- Market structure note: Two of the four existing banks (ANZ and Westpac) are subsidiaries of major Australian banks and have a joint market share of over 75 percent of banking system’s assets.
- Offshore banking and AML/CFT:
  - International banking bill approved by Parliament in April 2005 includes provision to require all offshore banks to establish a real physical presence in Samoa and to set up an International Financial Authority as the new supervisory agency for offshore banks.
  - An AML/CFT bill was submitted to the Attorney General’s Office for review in March 2005; expected to go toward making Samoa compliant with AML/CFT requirements and the 40 + 8 recommendations of FATF.
- CBS commended for measures to strengthen supervision; approval of international banking bill and progress on AML/CFT framework are helpful.

### National Provident Fund (NPF)
- Mission recommended review of NPF’s role and investment guidelines.
- Issues identified:
  - High nonperforming loans, reflecting increasing activity in its noncore functions.
  - Assets skewed toward short-term loans to members and various public sector related projects.
  - Members can borrow an equivalent of about 50 percent of their outstanding balances (using their balances as collateral).
- Investment policy constraints: pension funds’ policies designed to confine exposure to risk-free assets; constrained by tight investment guidelines and lack of long-term domestic investment opportunities.
- Recent actions: government authorized NPF to invest abroad 16 million tala (1½ percent of GDP or 7 percent of NPF’s total assets); about 2 million tala has been invested overseas to date.
- Authorities expressed interest in technical assistance to strengthen NPF’s risk management and investment framework and enhance financial soundness.
- Staff urged CBS to strengthen NPF’s supervisory framework.
- Staff appraisal: review NPF’s investment guidelines and strengthen supervisory framework; a financially-sound pension fund will be needed for dealing with fiscal pressures when the population ages.

### Public sector, SOE, and land reforms
- Public sector:
  - Progress commended on civil service reform; Public Service Commission plans to review functions of each Ministry by end of 2005 to refocus on core functions.
- SOE reform:
  - State accounts for about 40 percent of both GDP and total employment.
  - Policy focus: corporatization of all SOEs (especially power, ports and water) and privatization of enterprises in nonstrategic sectors.
  - Mission encouraged acceleration of enactment and implementation of the Companies Act in line with the Public Bodies Act to require SOEs to be run on strict commercial principles; supporting legislation (including bankruptcy and litigation provisions) is being developed.
  - Progress toward more competition in telecom sector supported by an appropriate regulatory framework is welcomed.
- Land market reform:
  - Need to build an institutional and legal framework to sustain an efficient lease market while safeguarding local community interests and protecting investors.
  - Authorities intend to explore facilitating leasing of some unused communal land for private investment after extensive public consultations, but must proceed cautiously because the constitution bars sale of communal land for commercial purposes.

### Data, statistics, and technical assistance
- Samoa adopted the Fund’s General Data Dissemination Standards (GDDS) in November 2003.
- National accounts and CPI were rebased in 2003 based on the 2002 household income and expenditure survey (HIES).
- CBS expected to complete transition to Balance of Payments Manual 5 by end-June 2005.
- Further improvements needed in fiscal accounts to address weaknesses in quality and timeliness.
- Mission supported authorities' request to PFTAC for technical assistance in migration to the Fund’s Government Financial Statistics Manual (GFSM) 2001.
- Improved budget disclosure of medium-term forecasts and assumptions, tax expenditures, fiscal risks and contingent liabilities is encouraged.
- Staff appraisal: while data provision is adequate overall, shortcomings affected analysis; improved quality and timeliness of fiscal data is important.

### Key appraisal conclusions and priorities
- Over the last decade Samoa has transformed into one of the best managed economies in the Pacific Island region with solid growth, low inflation, improved public finances, higher official reserves, and strong human development indicators.
- Immediate challenges: limit large domestic pressures on the 2005/06 budget and prevent emerging risks to macroeconomic stability.
- Policy priorities:
  - Continue prudent fiscal stance and limit fiscal deficit to about 0.9 percent of GDP.
  - Pursue cautious wage policy and phase in any wage increases; moratorium on nonessential vacancies.
  - Find ways to limit 2005/06 budget burden from Polynesian Airlines restructuring, including spreading costs over time.
  - Strengthen tax administration, reorient expenditures toward social and infrastructure sectors, and implement simplified MTBF in 2005/06 budget.
  - Be prepared to tighten monetary policy if fiscal and balance of payments risks materialize.
  - Address structural weaknesses (utilities, ports, land leasing, business entry processes) to reinvigorate and diversify exports.
  - Review and strengthen NPF investment guidelines and supervisory framework.
  - Accelerate Companies Act enactment and supporting legislation; pursue public consultations for land lease framework.
  - Improve fiscal data quality, timeliness, and disclosure.

*Source: _cr05220 - 22.      The mission encouraged the authorities to draw up a credible medium-term*

### 46.      It is recommended that the next Article IV consultation with Samoa take place

### _cr05220 - 46.      It is recommended that the next Article IV consultation with Samoa take place

### Article IV timing and mission
- It is recommended that the next Article IV consultation with Samoa take place on a 24-month cycle.
- The authorities welcomed the possibility of an interim staff visit, which could focus on the 2006/07 budget and the medium-term budget framework.

### Key country and macroeconomic indicators
- Population (2003): 179,058
- GDP per capita (2001): US$1,672
- Quota: SDR 11.6 million

### Output and inflation (selected years and projections)
- Real GDP (annual percent change): 7.1; 4.4; 1.8; 3.5; 3.0; 3.0
- Change in CPI (end period): 1.1; 9.8; 1.6; 17.2; -2.9; 2.0
- Change in CPI (period average): 1.9; 7.4; 4.3; 7.9; 7.5; 3.0

### Central government budget (percent of GDP, selected)
- Revenue and grants: 31.9; 33.8; 32.8; 32.5; 40.1; 37.9
- Expenditure and net lending: 34.3; 35.9; 33.4; 33.4; 41.0; 38.8
- Overall balance: -2.3; -2.1; -0.6; -0.9; -0.9; -0.9
- External financing: 0.5; 1.4; 0.5; 0.0; 0.5; 0.6
- Domestic financing: 1.7; 0.7; 0.1; 0.9; 0.4; 0.3

### Money and credit (percent change, levels)
- Broad money (M2) (12-month percent change): 20.1; 3.6; 6.6; 12.7; 10.5; 8.8
- Net foreign assets (change in percent of beginning period broad money): 0.7; 1.3; -9.2; 4.0; 10.4; 3.2
- Net domestic assets (change in percent of beginning period broad money): 64.5; 56.8; 27.7; 20.9; 10.5; 13.3
- Private sector credit (12-month percent change): 21.0; 9.9; 11.4; 17.1; 8.6; 9.0
- Three-month CBS rate (percent, end period): 5.7; 5.8; 5.2; 5.2; 5.2; 5.2

### Balance of payments and external sector (in millions of U.S. dollars unless noted)
- Exports, f.o.b.: 14.5; 14.4; 12.9; 14.1; 12.7; 12.3
- Imports, c.i.f.: 120.4; 134.3; 132.9; 149.5; 174.8; 188.4
- Current transfers (net): 64.0; 72.9; 79.6; 98.8; 125.2; 110.9
- Current account balance: 0.1; -1.6; 8.3; 15.2; 8.7; -7.0
- Current account balance (in percent of GDP): 0.1; -0.6; 2.9; 4.4; 2.2; -1.6
- Current account balance excluding official transfers (in percent of GDP): -8.8; -9.6; -4.7; -2.8; -12.7; -12.9
- Overall balance: 1.5; 4.2; -5.7; 2.2; 9.6; 1.1

### External reserves and public debt
- Official reserves (gross, in millions of U.S. dollars): 45.7; 54.4; 51.5; 66.8; 76.4; 77.5
- Official reserves (months of next year's imports of goods and services): 3.6; 4.2; 3.4; 3.6; 3.9; 4.0
- External Public debt (in millions of U.S. dollars): 143.5; 153.4; 169.1; 177.3; 190.4; 198.8
- External Public debt (percent of GDP): 61.4; 62.0; 59.6; 51.5; 48.5; 46.9
- External debt-service ratio (in percent): 8.8; 9.1; 8.7; 7.9; 6.0; 5.3

### Exchange rates and competitiveness
- Market rate (tala/U.S. dollar, end period): 3.5; 3.3; 3.0; 2.9; ......
- Market rate (tala/U.S. dollar, period average): 3.4; 3.5; 3.2; 2.9; ......
- Nominal effective exchange rate (1990 = 100): 100.9; 99.7; 98.4; 98.8; ......
- Real effective exchange rate (1990 = 100): 93.4; 99.7; 97.5; 112.8; ......

### Table highlights: Balance of Payments (2000/01–2005/06)
- Merchandise trade balance: -105.9; -119.9; -120.0; -135.4; -162.1; -176.1
- Services and income balance: 42.1; 45.5; 48.7; 51.8; 45.6; 58.2
  - Services, net: 44.7; 45.8; 52.2; 52.3; 52.4; 64.6
  - Travel, net: 38.2; 39.7; 45.3; 58.5; 62.3; 66.9
  - Investment income, net: -2.6; -0.3; -3.5; -0.5; -6.7; -6.4
- Official transfers, net: 20.8; 22.3; 21.7; 24.8; 58.6; 47.7
- Private transfers, net: 43.2; 50.6; 57.9; 74.0; 66.6; 63.2
- Financial and capital account, net: 1.4; 5.8; -14.0; -13.0; 0.9; 8.1
  - Official loans, net: 1.2; 3.6; 1.7; -3.9; 1.9; 1.9
  - Disbursements: 3.8; 7.3; 5.8; 0.1; 7.0; 0.0
  - Repayments: 2.5; 3.7; 4.2; 4.0; 4.5; 5.3
- Overall balance: 1.5; 4.2; -5.7; 2.2; 9.6; 1.1

### Central government financial operations (selected fiscal year amounts, in millions of tala and percent of GDP)
- Total revenue and grants (millions of tala): 262.4; 290.8; 303.5; 318.4; 317.7; 426.3; 425.3; 424.4 (actual/proj mix)
- Total revenue (millions of tala): 197.4; 198.7; 229.3; 251.4; 246.5; 268.0; 267.0; 298.6
  - Tax revenue: 174.8; 182.7; 206.5; 224.1; 219.7; 239.5; 237.6; 267.2
  - Nontax revenue: 22.5; 16.0; 22.8; 27.3; 26.8; 28.5; 29.3; 31.3
- External grants (millions of tala): 65.1; 92.1; 74.2; 67.0; 71.2; 158.3; 158.3; 125.8
- Total expenditure and net lending (millions of tala): 281.7; 308.6; 309.1; 332.4; 326.6; 434.8; 434.8; 434.4
  - Current expenditure: 164.6; 183.3; 202.2; 208.0; 204.5; 232.2; 232.2; 252.8
  - Development expenditure: 103.1; 104.2; 86.9; 93.5; 86.6; 176.4; 176.4; 155.8
- Overall balance (millions of tala): -19.2; -17.8; -5.6; -14.1; -8.9; -8.5; -9.5; -10.1
- Overall balance (percent of GDP): -2.3; -2.1; -0.6; -1.4; -0.9; -0.9; -0.9; -0.9

### Monetary survey (end of period, in millions of tala and percent changes)
- Net foreign assets (end period): 179.9; 182.2; 165.5; 172.1; 193.3; 220.1; 205.0; 190.0
- Net domestic assets: 128.3; 137.0; 175.0; 211.5; 207.2; 198.4; 219.0; 233.8
- Domestic credit: 178.2; 197.0; 237.1; 290.4; 287.2; 279.8; 301.9; 317.7
  - Claims on private sector: 249.9; 274.7; 306.1; 358.5; 363.8; 351.4; 373.5; 389.3
- Broad money (M2, end period): 308.3; 319.2; 340.4; 383.6; 400.5; 418.5; 424.0; 423.8
- Growth of monetary aggregates (percent per annum): Broad money 20.1; 3.6; 6.6; 12.7; 12.4; 17.5; 10.6; 10.5
- Private sector credit (percent per annum): 21.1; 9.9; 11.4; 17.1; 17.0; 13.0; 14.6; 8.6

### Medium-term outlook and scenarios (Table 5, 2000/01–2009/10)
- Baseline projections (selected):
  - Real GDP growth 2005/06–2009/10: 3.0; 3.5; 3.5; 3.5; 3.5
  - CPI inflation (period average) 2005/06–2009/10: 3.0; 3.0; 3.0; 3.0; 3.0
  - Overall balance (including grants, percent of GDP) 2005/06–2009/10: -0.9; -0.3; 0.0; 0.3; 0.5
  - Current account (excluding official transfers, percent of GDP) 2005/06–2009/10: -54.6; -39.2; -31.5; -28.3; -25.6
  - Gross official reserves (millions of U.S. dollars) 2005/06–2009/10: 77.5; 84.1; 90.8; 100.7; 112.4
  - Gross external public debt (percent of GDP) 2005/06–2009/10: 46.9; 44.6; 42.4; 39.7; 36.9

- Non-adjustment/external shocks scenario (selected):
  - Real GDP growth (projected): 3.0; 2.0; 1.0; 1.0; 1.0
  - CPI inflation (period average): 3.0; 11.0; 8.0; 8.0; 5.5
  - Overall fiscal balance (including grants, percent of GDP): -0.9; -4.0; -3.1; -4.2; -5.5; -6.8 (multi-year)
  - Current account (excluding official transfers, percent of GDP): -12.7; -13.4; -9.6; -7.5; -6.5; -5.7
  - Reserves (in months of imports): 3.9; 3.6; 3.2; 3.0; 2.6; 2.3
  - External Public Debt (percent of GDP): 48.5; 48.4; 51.6; 55.6; 60.7; 66.8

### Vulnerability and financial sector indicators (selected)
- External Public and publicly guaranteed debt (percent of GDP): 61.4; 62.0; 59.6; 51.5 (2000/01–2003/04)
- Broad money (percent change, 12-month basis): 20.1; 3.6; 6.6; 12.7
- Private sector credit (percent change, 12-month basis): 21.1; 9.9; 11.4; 17.1
- Share of deposits in broad money (percent): 85.1; 88.7; 87.5; 89.4
- Share of foreign currency deposits in total deposits (percent): 8.0; 3.4; 5.2; 3.4
- Non-performing loans of the banking system (percent of total loans): 0.2; 1.8; 2.2; 3.5
- Capital adequacy ratio of the banking system: 24.8; 22.5; 26.4; 26.0
- Exports (percent change, 12-month basis in U.S. dollars): -15.5; -0.8; -10.3; 9.4
- Imports (percent change, 12-month basis in U.S. dollars): 19.2; 11.6; -1.0; 12.5
- Terms of trade (percent change): -2.9; -3.4; 0.3; 0.8
- Gross official reserves (months of next year's GNFS imports): 3.6; 4.2; 4.3; 4.0
- Debt-service ratio (percent of exports of goods and nonfactor services): 8.8; 9.1; 8.7; 7.9
- Exchange rate (tala per U.S. dollar, end of period): 3.5; 3.3; 3.0; 2.9

### IMF–Samoa relations and institutional items (as of March 31, 2005)
- Membership Status: Joined: 12/28/1971; Article VIII
- Quota and Fund holdings:
  - Quota: 11.60 (SDR Million) = 100.0 percent quota
  - Fund Holdings of Currency: 10.92 (SDR Million) = 94.12 percent
  - Reserve position in Fund: 0.69 (SDR Million) = 5.98 percent
- SDR Department:
  - Net cumulative allocation: 1.14 (SDR Million) = 100.00 percent allocation
  - Holdings: 2.43 (SDR Million) = 213.11 percent
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements (historical approvals):
  - Stand-by 07/09/1984–07/08/1985 Amount Approved 3.38 (SDR million) Amount Drawn 3.38 (SDR million)
  - Stand-by 06/27/1983–06/26/1984 Amount Approved 3.38 Amount Drawn 3.38
  - Stand-by 08/17/1979–08/16/1980 Amount Approved 0.75 Amount Drawn 0.00
- Projected Obligations to Fund: None
- Exchange Rate Arrangement:
  - The exchange rate of the tala is pegged to a trade and payments weighted basket of currencies formally within a ±2 percent band.
  - Basket includes currencies of New Zealand, Australia, the United States, Fiji, and Euro countries.
  - The period average exchange rate for March 2005 was SAT 1.00 = US$0.374.
- Article IV Consultation:
  - The 2003 Article IV consultation discussions were held in Apia during March 3–17, 2003.
  - The Executive Board discussed the staff report (IMF Country Report No. 03/195) and concluded the consultation on June 2, 2003.
- Technical Assistance:
  - PFTAC provided assistance on budgetary management, tax administration, banking supervision and balance of payments statistics.
  - MFD provided assistance on monetary policy operations, foreign reserves management, banking and insurance supervision and other central banking issues, and arranged a regional seminar in Fiji in March 2005 on indirect monetary management approach in countries with shallow bond markets.
  - STA provided help with national accounts statistics.
  - FAD provided help with tax administration.
- Resident Representative: None

*Sources: Data provided by the Samoan authorities; and Fund staff estimates.*

### ANNEX                                                                        II

### ANNEX II

### Support from the Pacific Financial Technical Assistance Centre (PFTAC)

- Since 1998, PFTAC assistance to Samoa has included 24 advisory missions.
- Samoa sent 24 officials to regional seminars and workshops.
- PFTAC organized 5 attachments.
- PFTAC is a multi-donor technical assistance institution, financed by IMF, ADB, AusAID and NZAID, with the IMF as Executing Agency. Member countries include: Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.

### Public Financial Management

- A Report on the Observance of Standards and Codes (ROSC) against the Fund’s Code of Good Practice on Fiscal Transparency was completed in consultation with the authorities in May 2004 and published on the Fund Website.
- In November 2004, PFTAC sponsored a week long delegation of three officials from the Samoa Ministry of Finance, together with officials from Fiji and Tonga, to the Australian Commonwealth Government Departments of Finance and Treasury to discuss public financial management framework and practices and establish ongoing professional contacts.

### Tax Administration and Policy

- In early 2002, the advisor undertook an introductory visit to Samoa to discuss tax policy and administration issues.
- The authorities expressed interest in PFTAC advice on establishing a large taxpayer unit and introduction of a single tax identification number.
- The adviser will travel to Samoa in June 2005 for this purpose.
- Samoa is an inaugural member of the Pacific Islands Tax Administrators Association (PITAA) and will host the second annual meeting scheduled for October 2005.

### Financial Sector Regulation and Supervision

- PFTAC advisor and a legal consultant from the Fund’s Legal Department visited the Central Bank of Samoa (CBS) in September 2003 to follow up on matters from the Offshore Financial Center assessment conducted in 2002.
- The mission reviewed proposed legislation affecting financial institutions, including a new Insurance Act.
- An MFD expert visited the CBS in November 2004 to review draft insurance prudential statements and provide training in financial analysis of insurance operations.
- An MFD consultant visited the International Companies Office in late 2003 to assist with implementing anti-money laundering measures.

### Economic and Financial Statistics (PFTAC support)

- The CBS started working on a BPM5 basis for Balance of Payments estimates in 2003.
- In June 2004, the PFTAC Statistics advisor visited to review implementation progress and assisted with pilot testing of business surveys.
- More work is required to compile the international investment position but transition to BPM5 by end 2005 is on target.
- Samoa joined the GDDS Project in November 2004.
- Plans are under way to move Government Finance Statistics, produced by the Ministry of Finance, towards GFSM2001 in early 2005.

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### ANNEX III — Relations with the World Bank Group

### Overview of World Bank engagement

- Since Samoa became a Bank member in June 1974, 13 IDA credits totaling US$70.5 million have been made covering agriculture, power, telecommunication, finance, transport, and health sectors.
- The Bank’s Pacific Regional Strategy focuses on: public expenditure management (social sectors, infrastructure and natural hazard management) and private sector development.

### Current Bank lending activities and objectives

- Health Sector Management: support for government reform to ensure equitable access to modern, effective, efficient, and environmentally friendly health services; implementation within a sector coordination framework involving other donors (AusAID).
- Infrastructure Asset Management Phase 2: two phases over eight years to assist Samoa in achieving economically, environmentally, and socially sustainable transport and coastal infrastructure assets managed by effective stakeholder partnerships.
- Infrastructure Emergency Recovery: assistance to recover from Cyclone Heta and reduce vulnerability through (a) recovery of coastal resilience to erosion, flooding, and landslide hazards; (b) nurturing recovery of fragile coastal ecosystems through sustainable practices; and (c) rehabilitation of damaged land transport communications.
- Telecommunications and Postal Sector Reform: improve performance by increasing competition and private sector participation; strengthening institutional and regulatory capacities; enhancing provision of services, particularly in rural areas.
- The Bank is developing a broader program for private sector development, including potential follow-up to the ‘Costs of Doing Business’ report and support for regulatory reform; the Government has requested assistance and the Bank is mobilizing support.

### IBRD/IDA Lending Operations (Table 1 highlights)

- Completed projects (IDA) — Available Value and Balance (In millions of U.S. dollar equivalent):
  - First highway 1975: 4.4 — 0
  - Agricultural development 1979: 8.0 — 0
  - Second agricultural development 1980: 2.0 — 0
  - Development Bank 1985: 2.0 — 0
  - Multiproject 1986: 2.5 — 0
  - Afulilo hydroelectric dam (ADB) 1987: 3.0 — 0
  - Telecommunications (ADB) 1989: 4.6 — 0
  - Emergency road rehabilitation 1990: 14.0 — 0
  - Afulilo hydroelectric dam supplement (ADB) 1993: 1.0 — 0
  - Emergency road rehabilitation supplement 1993: 5.1 — 0
  - Infrastructure asset management 1999: 14.4 — 0
- Projects underway (IDA) — Available Value and Balance:
  - Health sector management 2000: 5.0 — 4.8
  - Telecommunications and Post Reform 2002: 4.5 — 4.6
  - Second Infrastructure Asset Mgmt. 2004: 12.8 — 13.7
  - Cyclone ERP 2004: 4.5 — 4.5
- Totals:
  - Total Available Value: 87.8
  - Total Balance: 27.6
  - Total debt outstanding: 61.7
- Source: Data provided by the World Bank.

---

### ANNEX IV — Relations with the Asian Development Bank (AsDB)

### AsDB engagement and strategy

- AsDB operations in Samoa started in 1969.
- Up to 2004, 30 loans totaling US$120.9 million for 27 projects and technical assistance totaling US$22.0 million for 79 projects have been provided.
- AsDB’s operational strategy for Samoa supports the Government's Strategy for the Development of Samoa (SDS) 2003-2005 and AsDB’s Poverty Reduction Strategy and new Pacific Strategy.
- Strategy aims:
  - Enhance access to, and quality of, basic social services by (i) improving access to, and quality of, education; (ii) enhancing the environment and public health of Apia (water and sanitation); and (iii) meeting growing power demand with improved efficiency, viability, and reliability.
  - Improve the environment for the private sector by (i) ensuring sound fiscal and macroeconomic policies; (ii) rationalizing state-owned enterprises (SOEs), and enhancing their efficiency and effectiveness; and (iii) improving the institutional and policy framework for the private sector.

### Recent AsDB approvals and activity

- One loan approved in 2003 for the Sanitation and Drainage Project amounting to US$8.0 million.
- Four TA grants approved in 2003 for a total of US$1.725 million.
- No loan planned for 2004; three TA grants processed in 2004 totaling US$700,000 in areas of privatization support, preparation of an education policy and strategy for 2006–2013, and strengthening SOEs corporate governance.

### Samoa: AsDB Loan Approvals and Disbursements, 2000–2005 (highlights, In millions of U.S. dollars)

- Loan approvals:
  - 2000: 10.5
  - 2001: 6.0
  - 2002: 0.0
  - 2003: 8.0
  - 2004: 0.0
  - Mar-2005: 0.0
- Loan disbursements:
  - 2000: 0.3
  - 2001: 3.6
  - 2002: 0.8
  - 2003: 1.9
  - 2004: 2.8
  - Mar-2005: 0.09
- Cumulative loan amount available (Balance as of March 2005, cumulative since 1969):
  - 2000: 104.4
  - 2001: 109.8
  - 2002: 111.0
  - 2003: 120.8
  - 2004: 121.6
  - Mar-2005: 121.1
- Cumulative disbursements:
  - 2000: 90.9
  - 2001: 94.5
  - 2002: 95.3
  - 2003: 97.2
  - 2004: 100.0
  - Mar-2005: 100.09
- Net loan amount undisbursed:
  - 2000: 13.5
  - 2001: 15.3
  - 2002: 15.7
  - 2003: 23.6
  - 2004: 21.0
  - Mar-2005: 21.01

---

### ANNEX V — Statistical Issues

### Recent improvements and institutional responsibilities

- Technical assistance from the Fund (including PFTAC), the Secretariat for the Pacific Community, and the Asian Development Bank has led to significant improvements in basic macroeconomic data compilation.
- National accounts and government finance statistics (GFS) are the responsibility of a special statistics unit within the Treasury.
- Balance of payments and financial statistics are the responsibility of the Central Bank.
- The Statistics Department compiles the CPI and will soon start publishing monthly merchandise trade statistics based on Customs records (currently published by the Central Bank on a nonstandard basis).

### Real sector statistics

- IFS publishes: consumer price index (CPI), values of exports and imports, index of manufacturing production, and GDP volume at 1995 prices.
- Quarterly and annual GDP estimates developed on a production basis (broken down by SIC) compiled in nominal and real terms; estimates available within two to three months after quarter end.
- 2002 Household Income and Expenditure Survey (HIES) completed.
- Annual Agriculture Census initiated in 2002; results to be used to revise agriculture production estimates.
- Authorities intend to report expenditure–side national accounts within the next two years; experimental estimates of gross capital formation are available.
- Data consistency issues: activities of the automotive parts plant and merchandise trade (especially fishing exports) are inconsistent across sources.
- CPI rebased in 2003 on 2002 HIES results; CPI now released monthly rather than quarterly.
- Work in progress on an underlying inflation index excluding local food and other erratic items.
- Quarterly employment statistics and average earnings from 1994 onwards compiled and published annually using National Provident Fund data; more work needed to ensure consistency with national accounts classification.

### Government finance statistics (GFS)

- GFS based on the 1986 Manual are published quarterly within three months by the Treasury Statistics Unit.
- Improvements made in recent years, but data quality hampered by misclassification of accounts, particularly net lending and external grants, and current and development expenditure.
- Underlying budgetary system is not coded to GFS headings.
- A transition plan for moving to GFSM 2001 over the next two years (on a cash basis) has been developed with PFTAC assistance.
- Further technical assistance and training in GFS compilation needed.
- Samoa does not report government finance data to either the GFS Yearbook or the International Finance Statistics (IFS).

### Monetary statistics

- Comprehensive monetary sector data published monthly in Selected Economic Indicators and quarterly in the Central Bank of Samoa Bulletin.
- Data for accounts of the CBS and deposit money banks and interest rates are reported to the Fund for IFS publication regularly and timely.
- Broad monetary aggregate recently extended to include foreign currency deposits held by residents due to relaxation of exchange control regulations.
- Monthly data collected and published on lending activities of other credit institutions.
- No published data on offshore financial institutions; supervised at arms length by the Central Bank.
- Staff encourages CBS to start reporting the banking survey data to the Fund as soon as technically possible.

### Balance of payments

- Annual and quarterly BOP data regularly published in the quarterly CBS Bulletin and annual data reported for publication by the Fund in IFS and Balance of Payments Statistics Yearbook.
- Old BPM4 standards broadly followed; transition to BPM5 expected to be completed by June 2005 with PFTAC help.
- Current account: exports thought to be underestimated; duty free imports are excluded; activities of a major automotive parts plant reported net under services; direct investment income flows are excluded; official grants not included under current transfers.
- Financial account: published data limited to elements of Other Investment (government and monetary authorities loan liabilities), and incomplete data on bank transactions and repayments on long–term loans received by the private sector.
- No published data on Direct Investment, Portfolio Investment, and other private sector financial transactions.
- Expected BPM5 modifications include reclassification of official grants from capital account to current account and transition to merchandise trade statistics based on Customs data.
- Official reserves are currently defined as net foreign assets of the central bank, the Treasury and commercial banks (nonstandard). Authorities are urged to consider switching to a more standard definition comprising the gross foreign assets of the central bank and the Treasury.

### Cooperation and recommendations

- Recent PFTAC mission in June 2004; SPC and ADB have provided assistance with surveys, national accounts and CPI.
- Staff and PFTAC recommend closer coordination between the CBS, the Statistics Department and the Treasury Department (agency responsible for compiling external debt statistics, grant aid, and other international transactions of the government) to improve the quality and accuracy of all economic statistics.

### Samoa: Table of Common Indicators Required for Surveillance (As of May 4, 2005) — Selected entries

- Exchange Rates — Date of latest observation: 02/05 — Date received: 03/05 — Frequency of Data: M — Frequency of Reporting: M — Frequency of publication: M
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Reserve/Base Money — Date of latest observation: 02/05 — Date received: 04/05 — Frequency: M, M, M
- Broad Money — Date of latest observation: 02/05 — Date received: 04/05 — Frequency: M, M, M
- Central Bank Balance Sheet — Date of latest observation: 02/05 — Date received: 04/05 — Frequency: M, M, M
- Interest Rates — Date of latest observation: 03/05 — Date received: 04/05 — Frequency: M, M, M
- Consumer Price Index — Date of latest observation: 01/05 — Date received: 03/05 — Frequency: M, M, M
- External Current Account Balance — Date of latest observation: 9/04 — Date received: 01/05 — Frequency: Q, Q, Q
- GDP/GNP — Date of latest observation: 12/04 — Date received: 03/05 — Frequency: Q, A, Q
- Gross External Debt — Date of latest observation: 2004 — Date received: 03/05 — Frequency: Q, A, Q

- Notes included in the table:
  - 1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
  - 2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
  - 3 Foreign, domestic bank, and domestic nonbank financing.
  - 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
  - 5 Including currency and maturity composition.
  - 6 Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA).

*Prepared by IMF staff using material provided by PFTAC, World Bank, and AsDB.*

### ANNEX                                                                        VI

### ANNEX VI — SAMOA: SOCIAL AND DEMOGRAPHIC INDICATORS

### Social and demographic indicators (selected statistics)
- Population
  - Total population, mid–year (millions): 0.16 0.17 0.18 1,855 2,655
  - Growth rate (percent annual average): 0.0 0.6 1.1 1.0 0.9
  - Urban population (percent of population): 21.1 21.9 22.3 37.9 49.7
  - Total fertility rate (births per woman): 5.2 4.5 4.0 2.1 2.1
- Income and prices
  - GNI per capita (US$): 660 1,390 1,600 1,080 1,480
  - Consumer price index (1995=100): 57 113 131 .. ..
- Public expenditure (percent of GDP)
  - Health: .. 4.0 4.8 1.9 2.6
  - Education: 3.2 .. 4.5 3.2 4.0
- Education
  - Gross primary school enrollment rate (percent of school-age population)
    - Total: 100 103 111 .. 112
    - Male: 101 104 112 .. 113
    - Female: 100 101 111 111
- Access to services and immunization
  - Access to safe water (percent of population): 80 .. 99 76 81
  - Immunization rate (percent aged 12-23 months)
    - Measles: 81 99 99 70 78
    - DPT: 89 96 96 78 84
- Life expectancy at birth (years)
  - Total: 63.9 68.6 69.4 69.4 69.3
  - Male: 62.6 65.4 66.5 67.7 67.1
  - Female: 65.2 71.9 72.5 71.3 71.7
- Mortality
  - Infant (per thousand live births): .. 22 20 32 32
  - Adult (15–59)
    - Male (per 1,000 population): .. 23 52 42 184 214
    - Female (per 1,000 population): .. 17 01 51 129 135

Source: 2004 World Development Indicators, World Bank.
Note: 1/ Data corresponds to 2003 or to the latest year for which it is available.

### Progress on Millennium Development Goals (selected entries)
- Indicators and selected values (1990 / 1995 / Latest Data 2001-03 / Target 2015) — values shown as given in source
  - Goal 1: Prevalence of child malnutrition (percent of children under 5): 6
  - Goal 2: Net primary enrollment ratio (percent of relevant age group): 112.3 / 112.5 / 0.0
  - Goal 3: Ratio of girls to boys in primary and secondary education (percent): 42.0 33.0 / 35.0 76.0
    - Proportion of seats held by women in national parliament (percent): ...
  - Goal 4: Under 5 mortality rate (per 1,000): 46.1 / ... / 0.8 / ...
    - Infant mortality rate (per 1,000 live births): 25.6 / ... / 17
  - Goal 5: Maternal mortality ratio (per 100,000 live births): 97.0 / 106.9 / 4.1
    - Births attended by skilled health staff (percent of live births): 29.0 24.0 / 15.0 95.0
  - Goal 6: HIV prevalence rate among 15-24 old pregnant women: ... / 42 / 3.5 4.0 0.8 90.0 97.0
    - Incidence of tuberculosis (per 100,000 people): 46.4 0.6 / 4.2
  - Goal 7: Forest area (percent of total land area): 94.9 / 103.6 / 6.1
    - Nationally protected areas (percent of total land area): 24.0 19.0 / 30.0 100
    - CO2 emissions (metric tons per capita): 0.0 30.4 / 37.1 4.1 0.8 99.0 99.0
    - Access to an improved water source (percent of population): 130.5 6.7 / 1/
    - Access to improved sanitation (percent of population): 100.0 / 100.0
  - Goal 8: Fixed line and mobile telephones (per 1,000 people): ...
    - Personal computers (per 1,000 people): 14.0 11.0 / 2/ ...

Source: World Bank; World Development Indicators Database, April 2004.
Notes in source:
- 1/ Goal is to halve 1990 rate.
- 2/ Goal is to reduce 1990 ratio by three-quarters.
- 3/ Goal is to have it halted by 2015 and begun to reverse.
- 4/ Goal is to reverse the loss of environmental resources.

### IMF staff statement — 2005/06 budget (Summary of key points and fiscal impacts)
- Context
  - Statement date: June 17, 2005
  - The 2005/06 budget was presented to Parliament on May 31, 2005 after the staff report was circulated to the Executive Board on May 16, 2005.
  - Proposed deficit target for 2005/06: 4 percent of GDP (staff recommendation was 0.9 percent of GDP).
  - Staff concern: the larger deficit target reinforces concerns in the staff appraisal.
- Main drivers of the higher deficit target
  - Polynesian Airlines restructuring costs: 2½ percent of GDP allocated
    - About ½ percent of GDP for the capital costs of the new joint venture with Virgin Blue to be paid upfront.
    - 2 percent of GDP for penalties imposed for the early return of the airline’s jet to the leasing company; the budget assumes full bullet payment in 2005 rather than spreading costs over time.
    - The inaugural flight for the new joint venture is expected around September 2005.
  - Public sector wage increase: average wage increase of about 35 percent for public servants to be phased in over three years.
    - Fiscal cost: about 1¼ percent of GDP in 2005/06; about 1 percent of GDP each in 2006/07 and 2007/08.
    - Comparative benchmark: Remuneration Tribunal recommended about 40 percent for 2005/06.
  - Increase in pension benefits: monthly pensions for senior citizens raised from 100 tala to 125 tala effective July 1, 2005.
    - Fiscal cost: about ¼ percent of GDP for 2005/06.
- Budget offsetting measures and expected yields
  - Enforce 50 percent dividend policy for all state-owned enterprises in 2005/06.
    - Expected yield: about ¼ percent of GDP.
  - No other new revenue measures announced.
  - Cost-cutting measures aimed at reducing operational costs of government departments:
    - Removal of all vacancies and new positions except where appointments are pending.
    - Reduction of travel costs for public servants.
    - Enforcement of policy on the use of government vehicles.
    - Standardization of allowances for board members in public bodies.
    - Expected savings: about ¼ percent of GDP.

*Source: IMF staff statement, June 17, 2005; World Bank, World Development Indicators, 2004.*

### 4.      Although the impact of the 2005/06 budget on reserves and interest rates is likely

### 4.      Although the impact of the 2005/06 budget on reserves and interest rates is likely to be manageable, the expanded deficit should have a non-negligible macroeconomic impact on the economy, especially on the balance of payments.

### Impact on reserves and interest rates
- If the full payments for the restructuring of Polynesian Airlines are made in 2005, gross reserves will fall from the current level of "4 months of imports" to about "3½ months of imports".
- The reserve level at end-2005 would stay "broadly unchanged" from the end-2004 level.
- The budget announced that about "2½ percent of GDP" of the deficit target would be financed domestically through issuance of treasury bonds of "5, 10 and 15 year maturities".
- Given excess liquidity in the banking system of about "4 percent of GDP", the impact of this domestic financing on interest rates is likely to be minimal.
- The staff recommended monetary tightening (paragraph 40) to address potential balance of payments pressures.

### Fiscal stance and macroeconomic effects
- Excluding the reform costs for the restructuring of Polynesian Airlines, the 2005/06 budget deficit target becomes "1½ percent of GDP".
- Staff had recommended a deficit of about "¼ percent of GDP" (excluding restructuring costs for the airline the staff tentatively included in its recommendation).
- The higher deficit (about "1 percent of GDP" above staff recommendation) is likely to have a small inflation and growth impact, especially if a significant part of the wage increase leaks into imports.
- The higher deficit implies a non-negligible impact on the balance of payments, reinforcing staff concerns and supporting monetary tightening.

### Executive Board and staff assessments (summarized)
- Samoa registered solid growth, low inflation (outside the cyclone-related spike), improved public finances and international reserve levels, and progress toward the MDGs.
- Real GDP growth: rose to "3½ percent" in 2003/04 from "1¾ percent" in 2002/03; projected "3 percent" for 2004/05 and "3 percent" in 2005/06.
- Inflation (12 months average) projected at "7½ percent" in 2004/05 and projected to decline to "3 percent" in 2005/06.
- The current account deficit (excluding official transfers) projected at about "13 percent of GDP" in 2005/06.
- Directors expressed concern about the increase in the 2005/06 deficit target to about "4 percent of GDP" from about "0.9 percent of GDP" in 2004/05, noting that the increase reflects Polynesian Airlines restructuring costs and a large public sector wage increase.
- Directors welcomed plans to phase in the wage increase over three years and consideration of a performance-based system in lieu of automatic wage increases.
- Directors welcomed tightening of monetary policy to contain balance of payments pressures from the large budget deficit.
- Directors urged strengthening tax administration (including establishing a Large Taxpayer Unit and modernizing the 1974 income tax legislation), rationalizing expenditures toward education, health, and infrastructure, and including a medium-term budget framework in the 2006/07 budget.
- Directors noted the need to deepen reforms of state-owned enterprises and land reform, enact the Companies Act and supporting legislation, and build an institutional framework for an efficient lease market for communal land.
- Directors commended progress in banking supervision, approval of the international banking bill, AML/CFT improvements, and interest in strengthening NPF investment guidelines given high nonperforming loans.

### Key statistics and projections (selected exact figures from the report)
- Real GDP growth: "7.1", "4.4", "1.8", "3.5", "3.0", "3.0" (2000/01–2005/06 row).
- Change in CPI (end period): "1.1", "9.8", "1.6", "17.2", "-2.9", "2.0".
- Change in CPI (period average): "1.9", "7.4", "4.3", "7.9", "7.5", "3.0".
- Central government revenue and grants (percent of GDP): "31.9", "33.8", "32.8", "32.5", "40.1", "37.9".
- Central government expenditure and net lending (percent of GDP): "34.3", "35.9", "33.4", "33.4", "41.0", "38.8".
- Overall balance (percent of GDP): "-2.3", "-2.1", "-0.6", "-0.9", "-0.9", "-0.9".
- External financing (percent of GDP): "0.5", "1.4", "0.5", "0.0", "0.5", "0.6".
- Domestic financing (percent of GDP): "1.7", "0.7", "0.1", "0.9", "0.4", "0.3".
- Broad money (M2) 12-month percent change: "20.1", "3.6", "6.6", "12.7", "10.5", "8.8".
- Net foreign assets (change in percent of beginning period broad money): "0.7", "1.3", "-9.2", "4.0", "10.4", "3.2".
- Private sector credit 12-month percent change: "21.0", "9.9", "11.4", "17.1", "8.6", "9.0".
- Three-month CBS rate: "5.7", "5.8", "5.2", "5.2", "5.2", "5.2".
- Exports f.o.b. (US$ millions): "14.5", "14.4", "12.9", "14.1", "12.7", "12.3".
- Imports c.i.f (US$ millions): "120.4", "134.3", "132.9", "149.5", "174.8", "188.4".
- Current transfers (net) (US$ millions): "64.0", "72.9", "79.6", "98.8", "125.2", "110.9".
- Current account balance (US$ millions): "0.1", "-1.6", "8.3", "15.2", "8.7", "-7.0".
- Current account balance (percent of GDP): "0.1", "-0.6", "2.9", "4.4", "2.2", "-1.6".
- Current account balance excluding official transfers (US$ millions): "-20.7", "-23.8", "-13.4", "-9.6", "-49.9", "-54.6".
- Current account balance excluding official transfers (percent of GDP): "-8.8", "-9.6", "-4.7", "-2.8", "-12.7", "-12.9".
- Overall balance (US$ millions): "1.5", "4.2", "-5.7", "2.2", "9.6", "1.1".
- Official reserves (gross) (US$ millions): "45.7", "54.4", "51.5", "66.8", "76.4", "77.5".
- Official reserves (months of next year's imports): "3.6", "4.2", "3.4", "3.6", "3.9", "4.0".
- External public debt (US$ millions): "143.5", "153.4", "169.1", "177.3", "190.4", "198.8".
- External public debt (percent of GDP): "61.4", "62.0", "59.6", "51.5", "48.5", "46.9".
- Nominal GDP (in millions of Tala): "804.2", "858.2", "913.8", "989.0", "1059.4", "1118.5".

### Policy recommendations and authorities' intentions
- Contain the fiscal deficit at "0.9 percent of GDP" for the 2005/06 budget to gradually reduce the debt level; prudent wage policy is crucial.
- Tighten monetary policy to contain balance of payments pressures from the larger deficit.
- Phase in wage increases over three years and consider a performance-based system rather than automatic increases.
- Strengthen tax administration (establish a Large Taxpayer Unit; modernize the 1974 income tax legislation).
- Rationalize expenditures to reorient spending toward education, health, and infrastructure.
- Deepen reforms of state-owned enterprises and pursue land reform; enact the Companies Act and supporting legislation; build framework for an efficient lease market for communal land.
- Strengthen the supervisory framework for the National Provident Fund and improve NPF investment guidelines.

*IMF Public Information Notice (PIN) No. 05/80; IMF Executive Board Concludes 2005 Article IV Consultation with Samoa (June 17, 2005).*

### 3.      Noting the risks to this favorable outlook, the authorities remain committed to the

### _cr05220 - 3.      Noting the risks to this favorable outlook, the authorities remain committed to the

### Fiscal performance and public debt
- Fiscal performance up to 2004 has been encouraging: the overall deficit declined to less than 1 percent of GDP since 2002/03.
- Public debt declined from 60 percent of GDP in 2001 to 48.5 percent in 2004/05.
- The administration’s budget submitted to the parliament represents an increase in the target fiscal deficit but is considered manageable by the authorities.
- The wage increase and the cost of restructuring Polynesian Airlines will result in a slightly higher debt-to-GDP ratio, but will not lead to an unsustainable debt outlook.
- Authorities are aware that the vulnerabilities of a small island economy require a safer debt outlook.
- One-off cost to the 2005 budget of restructuring Polynesian Airlines will end costly budgetary subsidies and transfers to the airline, which have averaged 1 percent of GDP over the last few years.

### Public sector wages and wage policy
- Authorities have requested a wage increase of 35 percent in the 2005/06 budget (instead of 40 percent recommended by the Remuneration Tribunal).
- The 35 percent increase will be phased in over three years to minimize the impact in one given year.
- Public sector wages have remained the same since 2001; the authorities view the increase as long overdue.
- Samoa’s public wage bill as a share of GDP is significantly lower than the regional average.
- Authorities are considering staff’s advice to develop a performance-based system, which would see future wage increases based on productivity.

### Monetary policy and financial sector soundness
- The reserve position is expected to remain at comfortable levels, even taking into account the impact of the higher budgetary deficit for 2005/06.
- The monetary authorities signaled their intention to tighten monetary policy to contain the budgetary risks to macroeconomic performance.
- Samoa’s financial system is sound and well-supervised.
- Authorities are interested in strengthening the investment guidelines of the National Provident Fund, consistent with staff recommendations.
- Market size and remoteness make sound policies insufficient for attracting private foreign capital; securing sufficient capital to support productive activities remains a real concern.

### Structural reforms to strengthen private sector-led growth
- The reform program launched in the early 1990’s laid much of the groundwork for economic development.
- The authorities face the challenge of enhancing the environment for private sector-led growth, as outlined in the SDS 2005-07.
- The SDS outlines the need to promote the investment climate, improve the availability of land for private investment, and deepen reform of state-owned enterprises.
- Programs underway to improve the investment climate include reform of key utilities and improving the regulatory regime.
- Establishment of a one-stop shop facility is viewed as important.
- Land reform is recognized as important to improve capacity to use land for collateral and investment; the government’s initiative to facilitate leasing of unused communal land for productive uses is noted as important progress.
- Significant progress in public enterprise reform under the SOE policy framework includes divestment of the government’s minority interest in a number of enterprises and the announcement of privatization of Samoa Shipping Services, the Agriculture Store, and the Samoa Broadcasting Corporation.
- Enterprises of strategic public interest will be subjected to the corporatization program to give them a stronger commercial focus; authorities will continue efforts to further improve the operations of remaining SOEs, including contracting private operators for management.

### Transport, Polynesian Airlines, and regional implications
- High transport costs due to remoteness are one of the most important obstacles to development for Pacific island countries; highly subsidized state-owned airlines are common in the Pacific.
- Subsidies and transfers to Polynesian Airlines averaged 1 percent of GDP over the last few years.
- The joint venture with Virgin Blue holds promise of improving the operations and finances of Polynesian Airlines.
- Samoa’s approach to addressing airline subsidies could serve as an example for parts of the region where transport bottlenecks remain and subsidies to state-owned airlines still burden the budget.
- A recent push to shift to a more regional approach for coordination in addressing chronic transport problems could benefit from this model.

### Tourism sector
- The tourism sector offers great potential, especially as a means of providing employment.
- The authorities’ efforts to develop the tourism sector are bearing fruit: the sector’s share of GDP grew from 4 percent in 2001 to 17 percent in 2003.

### Institutional engagement and surveillance
- Authorities value the objective and quality assessment of their policies provided in the context of the Fund’s Article IV consultations process.
- Authorities expressed strong interest in a staff interim visit, as the next Article IV is not expected to take place until 2007.
- On behalf of Pacific Island authorities, thanks were expressed to staff for the paper on Pacific Island Regional Issues, which was viewed as meriting substantive consideration by the Executive Board in efforts to strengthen regional surveillance.

*Source: _cr05220 - 3.      Noting the risks to this favorable outlook, the authorities remain committed to the*

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