## 17. Monetary policy can remain (Content unit: _cr12250)

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### Context and recent macroeconomic developments
- Samoa is heavily dependent on tourism, remittances, and aid.
- Post-tsunami reconstruction: almost complete.
- Banking sector: well capitalized and mostly profitable, but NPLs rising for some banks amid weak tourism activity.
- Real GDP:
  - After two consecutive years of contraction, real GDP expanded by 2.0 percent in 2010/11 (July/June).
  - Growth slowed to 0.8 percent (year-on-year) in the last quarter of 2011.
  - Growth likely around 1½ percent for FY2012 as a whole; modest pickup in FY2013; medium-term projected around 2½ percent.
- Inflation:
  - Headline inflation peaked at 11.4 percent (4 percent excluding food) in December 2011.
  - Headline inflation fell to 4.7 percent in March and accelerated to 6.7 percent in April.
  - Inflation expected to be around 6 percent (yoy) by end-June, with annual average about 6½ percent for FY2012.
- Current account and reserves:
  - Foreign reserves declined to about US$151 million (about 4.3 months of next year’s imports) at end March.
  - Tala NEER stable; REER appreciated considerably due to inflation differentials.
- Fiscal position:
  - Fiscal deficit rose to 7½ of GDP in 2009/10 to support reconstruction.
  - Supplementary appropriations likely to result in a fiscal deficit of 6 percent of GDP for 2011/12.
  - Authorities expect a long-term growth rate of 3 percent; project a fiscal deficit of 4–5 percent of GDP for FY2013 and plan to reduce it to below 3 percent by FY2015.

### Monetary policy stance, triggers, and liquidity
- Current stance and triggers:
  - Monetary policy can remain accommodative for the time being, but would need tightening should signs of underlying inflation pressure emerge or reserve losses continue.
  - Given weak economy and declining world commodity prices, little underlying inflation pressure at present.
  - CBS should be ready to tighten pre-emptively—especially in the context of a possible realignment of the exchange rate—because of weak monetary policy transmission and high pass-through of exchange rate changes.
- Instruments and sequencing:
  - Policy tightening should begin with increases in the policy rate and open market operations, and if necessary, be complemented by hiking reserve requirements.
- Liquidity and CBS Credit Line Facility:
  - Staff suggested there should be no further increase in the CBS Credit Line Facility.
  - Initial tranche helped rehabilitate tourism after the tsunami; further expansion risks CBS balance sheet and moral hazard.
  - Facility could be converted into a fiscal operation with explicit budget allocation; designated on-lending institutions should share credit risk with government.
  - Recent diversion of PE deposits to UTOS may have raised funding costs for commercial banks and contributed to tight liquidity in some banks.
  - CBS should closely monitor the situation; no immediate need to systematically inject liquidity into banks.

### Risks from external shocks and commodity price volatility
- Short-run risks stem primarily from vulnerability to external shocks from Australia, New Zealand and the United States.
- Policy options in a severe external shock include postponing fiscal consolidation and accelerated adjustment of the tala depending on shock nature and inflation outlook.
- Commodity price shock impacts (staff estimates):
  - A 20 percent increase in food and fuel prices could increase the CPI by about 7 percentage points.
  - Current account deficit could widen by about 3 percent of GDP.
- Staff advice:
  - Allow full price pass-through should international prices surge again, while ensuring monetary policy is firm to prevent second-round effects.
  - Continue to rebuild policy buffers and improve the social safety net.

### Financial sector and structural vulnerabilities
- Key financial sector points:
  - Development Bank of Samoa NPLs rose to 29 percent of total loans, up from 8 percent in June 2010.
  - UTOS total assets less than ST40 million; UTOS business model (attracting PE deposits away from banks at higher rates and lending to PEs at lower rates) poses fiscal risks given government guarantees.
  - Total non-current PE debt: ST366 million at end-June 2010; ST54 million in default then taken over by government.
  - End-2011: defaulted loans fell to ST45 million; other guaranteed outstanding loans amounted to ST60 million.
  - Term loan holders composition: 46 percent owed to commercial banks (about 11 percent of banks’ 2011 loan portfolio), 14 percent to Samoa National Provident Fund, 24 percent to European Investment Bank, 16 percent to CBS and UTOS.
- Structural reform priorities:
  - Public enterprise (PE) reforms: privatization progress (Samoa Tel in January 2011) and plans to privatize three PEs in the next fiscal year.
  - Customary land reforms: use of customary land as collateral remains a key constraint; continued dialogue with land owners essential.
  - Financial sector reforms: Personal Property Securities Act approved; establish a credit bureau; CBS to strengthen bank supervision and supervise UTOS and SHC.
  - Social safety nets and pension issues: NPF is a defined contribution scheme; over 40 percent of members’ contributions taken out in member loans; around 28 percent of NPF's investment consists of loans to poorly performing PEs.

### Exchange rate assessment and policy options
- REER and overvaluation:
  - Standard exchange rate assessments suggest tala overvalued by 11-25 percent.
  - Specific approaches:
    - MB approach: tala overvalued by 12-25 percent.
    - ERER approach: tala overvalued by about 17 percent.
    - ES approach: tala overvalued by about 11–22 percent.
  - Box table summary: Overvaluation figure noted as 16.8 in the source table.
- Staff recommendations:
  - Prefer a steady exchange rate realignment rather than a large step-devaluation to avoid disruption.
  - CBS can use existing rules allowing exchange rate movement by 2 percent without cabinet approval; use this flexibility over time for realignment.
  - Tighten monetary policy to contain inflationary second-round effects if realignment occurs.
  - Authorities consider gradual adjustment feasible but note limited impact on exports due to supply constraints.

### Box 2 — An Exchange Rate Adjustment Scenario (selected numeric outcomes)
- Assumptions:
  - Required real exchange rate adjustment: about 12 percent over two years.
  - Target nominal adjustment: around 20 percent assuming inflation would rise by about 8 percentage points.
  - Baseline inflation: 4 percent.
  - Exchange rate adjustment assumption: adjusted by 10 percent each in FY2013 and FY2014.
  - Resulting inflation profile under assumptions:
    - Inflation would rise to 7 percent in FY2013 and FY2014.
    - Inflation would be 6 percent in FY2015.
- Selected scenario macro outcomes (fiscal years 2012–2017, presented as rows):
  - Real GDP growth (y/y percentage change): 1.5 2.2 2.5 2.8 2.9 3.0
  - Change in CPI (avg.): 6.5 7.0 7.0 6.0 4.0 4.0
  - Revenue and grants (In percent of GDP): 33.0 32.0 32.0 32.0 32.0 32.0
  - Expenditure (In percent of GDP): 39.0 36.5 35.0 33.4 33.5 33.6
  - Overall balance (In percent of GDP): -6.0 -4.5 -3.0 -1.5 -1.5 -1.5
  - CA balance (In percent of GDP): -10.9 -9.0 -8.3 -6.1 -5.6 -5.5
  - External debt (PVs) (In percent of GDP): 38.1 42.3 45.6 46.0 46.6 47.6
  - Gross reserves (In months of next years imports): 4.3 4.5 4.7 5.1 5.4 5.7
- Debt implications:
  - Samoa’s external debt in PV terms could peak at about 48 percent of GDP in 2016/17 under the adjustment scenario, then fall back below 40 percent in 2023/24.
  - Adjustment would keep Samoa at a moderate level of debt distress risk as in the baseline.

### Reserve adequacy (Appendix I) — key figures and methodology
- Recent reserve levels and trends:
  - Foreign reserves stood at US$151 million (about 4.3 months of next year’s imports) as of end-March 2012.
  - Reserves at end-June 2010: US$175.8 million.
  - Reserves reached about US$123 million in September 2009.
- Staff optimal-reserve analysis:
  - Optimal reserve holdings for Samoa estimated at about 4½ months of imports using recent Fund methodologies for low-income countries.
  - Opportunity cost assumption proxied by average real bank lending rate of past two years: about 3.8 percent.
- Caveats:
  - Methodologies based on low-income country data exclude very small island economies; results should be treated with great caution.
  - Potential downward bias because framework assumes risk neutrality while small island economies may need higher reserves.

### Debt Sustainability Analysis — key findings and stress-test outcomes
- Risk classification:
  - Joint IMF-WB DSA: risk of debt distress rose from low to moderate.
- Debt stocks (end of 2010/2011 fiscal year):
  - Face value of public external debt estimated at 737.7 million tala (48 percent of GDP).
  - Domestic debt at 48.9 million tala (3.9 percent of GDP).
  - Multilateral creditors account for 71 percent of Samoa’s external debt.
- Baseline projections and assumptions:
  - Annual real GDP growth: 1.5 percent for fiscal year 2011/12, improving gradually to 2.5 percent over the long term.
  - Average inflation about 6.0 percent for 2011/12, falling to 2.0 percent in 2012-2013; medium-term inflation projected about 4.0 percent.
  - Fiscal consolidation assumed: fiscal deficit gradually reduced to 2½ percent of GDP over the medium term; long-run deficit at 1½ percent of GDP.
  - Revenues assumed constant at about 32 percent of GDP.
- Public sector debt signals:
  - Nominal public sector debt stock: 76 percent of GDP in FY2011 (62.8 percent of GDP in PV terms).
  - Expected to rise to 80 percent of GDP (66 percent of GDP in PV terms) in the current fiscal year.
  - PV of public debt-to-revenue ratio: 2012: 170.4 percent; 2013: 201.0 percent; 2014: 215.4 percent; 2017: 222.7 percent.
- Stress-test outcomes (extreme example):
  - A 30 percent exchange rate shock would push PV of public external debt as share of GDP from 39 percent in 2012 to significantly above 50 percent for the forecast period.
  - Debt service-to-revenue ratio could rise from 5 percent to 18 percent under this shock.
- Concluding vulnerability:
  - Debt path resilient to many shocks but very vulnerable to exchange rate shocks.
  - Without fiscal consolidation, public sector debt would keep growing; PV of public debt could exceed 100 percent of GDP toward end of forecast period.

### Executive Board and staff policy recommendations (priorities)
- Fiscal policy and debt:
  - Implement forceful but measured fiscal consolidation over the medium term; develop and implement a credible deficit-reduction plan.
  - Staff advised steady deficit reductions: target about 4½ percent of GDP in 2012/13 and 3½ percent in 2013/14; further reductions to 2½ percent in 2014/15 and about 1½ percent in the long run.
  - Spell out debt target and consolidation path in a new medium-term fiscal strategy.
  - Further improve debt management: better coordination with fiscal policy, stronger adherence to debt contracting procedures, contain contingent liabilities.
  - Closely monitor PE-incurred debt and contain contingent liability risks.
- Monetary and exchange-rate policy:
  - Monetary policy can remain accommodative short run but be ready to tighten if inflationary pressures or reserve losses emerge, and especially if exchange rate realignment occurs.
  - Prefer gradual realignment of the exchange rate using existing CBS flexibility (2 percent movements) rather than a large step-devaluation; ensure tight monetary policy to avoid second-round inflation.
- Structural reforms and financial sector:
  - Prioritize public enterprise reforms, PFM improvements, customary land reforms to improve collateral use, deepen financial intermediation, and strengthen supervision (including oversight of UTOS).
  - Establish a credit bureau and implement the Personal Property Securities Act to mobilize movable collateral.
- Social and pension reforms:
  - Tighten criteria for NPF member loans and review pension-related schemes; gradually diversify NPF investments overseas to reduce concentration in poorly performing PEs.
- Resilience and buffers:
  - Rebuild policy buffers (fiscal and external) and improve social safety nets despite traditional community support.

*Source: Samoa 2012 Article IV Report (IMF staff report — Content unit: _cr12250).*

### 1. Selected Economic and Financial Indicators, 2006/07-2012/13 .........................................................

### 1. Selected Economic and Financial Indicators, 2006/07-2012/13

### Context
- Samoa is heavily dependent on tourism, remittances, and aid.
- Last Article IV consultation: March 2010; Rapid-Access Component disbursement approved in December 2009.
- Post-tsunami reconstruction: almost complete.
- Banking sector: well capitalized and mostly profitable, but NPLs rising for some banks amid weak economic activity, especially in tourism.

### Recent developments and outlook
- Real GDP:
  - After two consecutive years of contraction, real GDP expanded by 2.0 percent in 2010/11 (July/June).
  - Growth slowed to 0.8 percent (year-on-year) in the last quarter of 2011.
  - Growth likely around 1½ percent for FY2012 as a whole; modest pickup in FY2013; medium-term projected around 2½ percent.
- Inflation:
  - Headline inflation peaked at 11.4 percent (4 percent excluding food) in December 2011.
  - Headline inflation fell to 4.7 percent in March and accelerated to 6.7 percent in April.
  - Inflation expected to be around 6 percent (yoy) by end-June, with annual average about 6½ percent for FY2012.
- Monetary policy and liquidity:
  - CBS has maintained an accommodative monetary policy; official interest rates are close to zero.
  - CBS increased direct lending to the Development Bank of Samoa and the Samoa Housing Corporation.
  - Banking sector liquidity tightened following dividend repatriation, outbound FDI, large one-off imports, and diversion of deposits to UTOS.
- Current account and reserves:
  - Current account deficit widened sharply over the past three years due to reconstruction imports, higher food and fuel prices, and slow remittances and tourism recovery.
  - Foreign reserves declined to about US$151 million (about 4.3 months of next year’s imports) at end March.
  - Tala NEER stable; REER appreciated considerably due to inflation differentials.
- Fiscal position:
  - Fiscal deficit rose to 7½ of GDP in 2009/10 to support reconstruction.
  - Implementation of 2011/12 budget broadly on target; supplementary appropriations likely to result in a fiscal deficit of 6 percent of GDP (about ½ percent of GDP higher than originally budgeted).
  - Revenue at end-March 2012 slightly below pro rata projections due to lower imports and delayed excise increases.
- Authorities’ outlook and forecasts:
  - Authorities expect a long-term growth rate of 3 percent.
  - Authorities’ inflation forecast for FY2012 similar to staff forecast.
  - Authorities project a fiscal deficit of 4–5 percent of GDP for FY2013 and plan to reduce it to below 3 percent by FY2015.

### Ensuring internal and external balances (policy analysis and recommendations)
- Debt and fiscal consolidation:
  - Updated joint IMF-World Bank debt sustainability analysis: debt distress risk rose from low to moderate.
  - Staff advised steady deficit reductions: target about 4½ percent of GDP in 2012/13 and 3½ percent in 2013/14.
  - Further reductions: 2½ percent of GDP in 2014/15 and about 1½ percent of GDP in the long run.
  - Under this path, central government debt stabilized at 46 percent of GDP in present value (PV) terms in 2016/17 and reduced to 40 percent of GDP in 2025/26.
  - Staff considers targeting PV of debt to GDP ratio at 40 percent appropriate given remittances of some 20 percent of GDP.
- Fiscal strategy and debt management:
  - Recommendation: spell out debt target and consolidation path in a new medium-term fiscal strategy to increase credibility and political support.
  - Further improvements in debt management: better coordination with fiscal policy, stronger adherence to debt contracting procedures, contain contingent liabilities.
- Composition of expenditure:
  - Development expenditure rose to 18–19 percent of GDP in 2009/10 and 2010/11, fell to about 13½ percent in 2011/12.
  - Recommendation: rationalize development projects while restraining current/recurrent expenditure to maintain public investment.
  - Government to initiate a functional and structural review of the public service sector in FY2013 to reduce duplication and strengthen focus on core functions.
  - Staff advised generating savings in other recurrent expenditure while streamlining public service.
- Revenue administration:
  - Ministry of Revenue compliance rate reached 85 percent for both income tax and customs under the Institutional Strengthening Program (ISP).
  - Plan to implement phase two of ISP focusing on customs administration and amendments to the Income Act and Tax Administration Act.
  - Ministry of Finance to exercise greater discretion in authorizing spending given revenue uncertainty (including possible ban on non-externally funded travel).
- Public enterprises (PEs) and UTOS risks:
  - Total non-current PE debt: ST366 million at end-June 2010; ST54 million in default then taken over by government.
  - End-2011: defaulted loans fell to ST45 million; other guaranteed outstanding loans amounted to ST60 million.
  - Term loan holders composition: 46 percent owed to commercial banks (about 11 percent of banks’ 2011 loan portfolio), 14 percent to Samoa National Provident Fund, 24 percent to European Investment Bank, 16 percent to CBS and UTOS.
  - Development Bank of Samoa NPLs rose to 29 percent of total loans, up from 8 percent in June 2010.
  - UTOS total assets less than ST40 million; UTOS business model (attracting PE deposits away from banks at higher rates and lending to PEs at lower rates) poses fiscal risks given government guarantees and underwriting obligations.
  - Recommendation: closely monitor PE-incurred debt and contain contingent liability risks.

### Exchange rate policy and assessment
- Reserves and optimal level:
  - Current reserves close to estimated optimal level of about 4½ months of current year imports (sensitive to opportunity cost assumptions; see Appendix I).
- REER overvaluation and competitiveness:
  - Standard exchange rate assessments suggest tala overvalued by 11-25 percent (see Box 1).
  - REER appreciation may have contributed to weak tourism recovery and declining agricultural production.
  - Authorities agree REER probably overvalued but request TA to determine exact extent and options.
- Policy options and staff recommendations:
  - Staff recommends a steady exchange rate realignment rather than a large step-devaluation to avoid disruption.
  - CBS can use existing rules allowing exchange rate movement by 2 percent without cabinet approval; use this flexibility over time for realignment.
  - Effects of a nominal exchange rate realignment: positive impact on growth via tourism and exports but significant rise in debt stock and service and higher inflation (see Box 2 for illustration).
  - Alternative: tighten monetary policy to facilitate external adjustment and avoid reserve losses; however, this would likely cause large output losses and further strain recovery.
  - Authorities consider a gradual exchange rate adjustment feasible but note limited impact on exports due to lack of supply response.

*Source: Samoa 2012 Article IV Report (IMF).*

### 17. Monetary policy can remain

### 17. Monetary policy can remain

### Monetary policy stance and triggers for tightening
- Monetary policy can remain accommodative for the time being, but would need tightening should signs of underlying inflation pressure emerge or reserve losses continued.
- Given the weak state of the economy and the declining trends of world commodity prices, there appears to be little underlying inflation pressure at present.
- CBS should stand ready to stamp out such pressure—especially in the context of a possible realignment of the exchange rate—and should tighten monetary policy in a pre-emptive manner given the weak monetary policy transmissions.
- In view of the high pass-through of exchange rate changes, a firm monetary policy is critical to avoiding the second-round effect on inflation of a realignment.
- Policy tightening should begin with increases in the policy rate and open market operations, and if necessary, complemented by hiking reserve requirements.
- The authorities noted that the monetary policy should remain accommodative in the short run given the weak state of the economy.

### CBS Credit Line Facility and banking liquidity
- Staff suggested there should be no further increase in the CBS Credit Line Facility.
- The initial tranche appears to have helped rehabilitate the tourism industry following the tsunami.
- Given the recovery of credit growth since then and the fact the current financial difficulties with many small tourism operators appear to have largely resulted from weak external demand, any benefits of further expanding the facility are likely to be outweighed by the risk it poses to the CBS balance sheet.
- The facility could be converted into a fiscal operation, with an explicit budget allocation, to improve transparency regarding the fiscal implications of this support.
- To reduce moral hazard, designated financial institutions for on-lending should share with the government the credit risk arising from the facility.
- Recent diversion of PE deposits to UTOS may have raised the funding costs for commercial banks and contributed to tight liquidity in some banks, putting upward pressure on interest rates.
- CBS should closely monitor the situation, but there is no immediate need to systematically inject liquidity into banks.

### Managing risks: external shocks and commodity price volatility
- Short-run risks to growth and stability stem primarily from Samoa’s vulnerability to external shocks, particularly from Australia, New Zealand and the United States.
- Policy options in the event of a severe external shock include postponing fiscal consolidation, and depending on the nature of the shock (falling demand or worsening terms of trade) and the inflation outlook, accelerated adjustment of the tala exchange rate to cushion the impact.
- Further monetary easing through open market operations and lowering reserve requirements could be considered should bank liquidity tighten, although past experience suggests limited impact.
- Samoa is highly exposed to volatilities in global and domestic commodity prices because of heavy reliance on imported fuel and food.
  - A 20 percent increase in food and fuel prices could increase the CPI by about 7 percentage points.
  - Current account deficit could widen by about 3 percent of GDP.
- Staff advised, and the authorities agreed, that Samoa should continue to allow full price pass-through should international prices surge again, while ensuring monetary policy is firm to prevent second-round effects.
- Samoa should continue to rebuild policy buffers and improve the social safety net despite the cushion provided by the traditional community system.

### Risk Assessment highlights (selected quantitative points)
- A severe global “double-dip” recession could reduce GDP growth in Samoa by 1-2 percentage points and raise unemployment; inflation is likely to fall as global recession leads to lower commodity prices.
- For world commodity price increases, staff assessment: Medium; likelihood of severe realization in next 1–3 years: High.
- For continued exchange rate appreciation, staff assessment: Medium; likelihood of severe realization in next 1–3 years: Medium.

### Medium-term and sectoral risks
- The Yazaki auto part plant has shed over 1,000 workers since the onset of the global financing crisis; the plant remains the largest private employer in the formal sector but depends on a single car manufacturing plant in Australia.
- Prospects for tourism depend on the real exchange rate as well as source-country demand; further REER appreciation could dampen medium-term growth.
- Upside: increased access to Australia’s temporary workers scheme, more remittances, and recent WTO accession could improve investor confidence (impact unlikely to be large).

### Raising long-term growth: structural reform priorities
- Continued structural reforms are required to restore strong growth; the growth impact of mid-1990s reforms appears to be tapering off.
- Fiscal consolidation will dampen aggregate demand but, with an imports-to-GDP ratio of 74 percent, the impact of reduced public spending would be moderate given gradual consolidation.
- Exchange rate realignment would help competitiveness but benefits require simultaneous structural reforms to raise efficiency and alleviate supply constraints.
- Public enterprise (PE) reforms are a top priority:
  - Progress includes privatization of Samoa Tel in January 2011 and establishment of the Independent Selection Committee for PE board directors.
  - Authorities plan to privatize three PEs in the next fiscal year.
- Customary land reforms:
  - Considerable progress has been made in tapping customary land for productive use, but the use of customary land as collateral for bank loans remains a key constraint.
  - Continued dialogue and consultation with land owners and communities is critical.
- Public financial management (PFM):
  - A second phase of PFM reforms is planned following a PEFA assessment in early 2010 to strengthen budget processes, procurement, accounting, tax administration, debt management and aid cooperation.
- Financial sector reforms:
  - Cabinet approved the proposed Personal Property Securities Act to allow moveable assets as credit security.
  - Establishing a credit bureau would help reduce credit risk and boost private-sector credit.
  - CBS should strengthen bank supervision (especially on-site examinations) and be assigned responsibility for supervising UTOS and Samoa Housing Corporation (SHC).
  - UTOS should move away from subsidizing PEs by extending loans at below-market rates and build risk management capacity as it diversifies.

### Social safety nets and pension fund issues
- Samoa National Pension Fund (NPF) is a defined contribution scheme; almost all members take lump-sum withdrawals rather than an annuity.
- Over 40 percent of members’ contributions to the Fund have been taken out in member loans, reducing NPF’s role in providing retirement incomes for members close to retirement at age 55.
- Senior Citizens Benefits Scheme for permanent residents aged 65 years and over and generous government medical care may have diminished incentives to save for retirement.
- Staff recommended tightening criteria for member loans and reviewing the various schemes.
- Around 28 percent of NPF's investment consists of loans to poorly performing public enterprises; gradual portfolio diversification via greater investments overseas was advised.

### Statistics and data improvements
- Samoa disseminates monthly and quarterly economic statistics through government websites; weaknesses remain in national accounts and balance of payments statistics.
- With technical assistance, including through PFTAC, progress is being made; transition to GFSM2001 format data is expected before the next staff visit.

### Staff appraisal: growth and macro outlook (selected projections and fiscal/external scenario)
- Real GDP growth is expected to be around 1½ percent for FY2012 and rise to about 2 percent in FY2013.
- Medium-term outlook: moderate growth rate of around 2½ percent.
- Risks to growth are tilted to the downside in the short run due to global uncertainty.
- Decisive actions are needed to reduce the fiscal deficit and bring public debt to a more sustainable level over the medium term; fiscal consolidation should be measured and steady in the short run.
- Authorities’ fiscal plans for FY2013 are broadly appropriate; to achieve a deficit target of 4-5 percent of GDP would require firm control over recurrent expenditure and reprioritization of development expenditure.
- Samoa needs to examine export competitiveness and adjust the exchange rate as necessary; the tala has appreciated substantially in real effective terms and is assessed to be overvalued.
- Monetary policy stance can remain accommodative for the time being, but would need tightening when exchange rate adjustment takes place.

### Exchange rate assessment and an exchange rate adjustment scenario (selected numbers)
- Assessments indicate the tala is likely to be about 11–25 percent above its equilibrium level.
  - Macroeconomic Balance (MB) approach: tala overvalued by 12-25 percent based on a range of elasticities; current account norm about -4.3 percent of GDP; projected underlying CA/GDP in 2016/17 shown as -4.3-8.4 12.4 - 24.7 in the source table formatting.
  - Equilibrium Real Exchange Rate (ERER) approach: tala overvalued by about 17 percent.
  - External Stability (ES) approach: tala overvalued by about 11–22 percent; current account deficit that stabilizes net foreign liabilities estimated at 76 % of GDP.
- Box summary: Overvaluation figure noted as 16.8 in the source table.
- An Exchange Rate Adjustment Scenario, 2011/12–2016/17 (selected row values as presented):
  - Real GDP growth: 1.5 2.2 2.5 2.8 2.9 3.0 (y/y percentage change for fiscal years 2012–2017)
  - Change in CPI (avg.): 6.5 7.0 7.0 6.0 4.0 4.0 (for fiscal years 2012–2017)
  - Revenue and grants (In percent of GDP): 33.0 32.0 32.0 32.0 32.0 32.0
  - Expenditure (In percent of GDP): 39.0 36.5 35.0 33.4 33.5 33.6
  - Overall balance (In percent of GDP): -6.0 -4.5 -3.0 -1.5 -1.5 -1.5
  - CA balance (In percent of GDP): -10.9 -9.0 -8.3 -6.1 -5.6 -5.5
  - External debt (PVs) (In percent of GDP): 38.1 42.3 45.6 46.0 46.6 47.6
  - Gross reserves (In months of next years imports): 4.3 4.5 4.7 5.1 5.4 5.7

*Source: IMF staff report — Samoa 2012 Article IV (Content unit: _cr12250 - 17. Monetary policy can remain).*

### Box 2. An Exchange Rate Adjustment Scenario

### Box 2. An Exchange Rate Adjustment Scenario

### Scenario overview
- Presents a scenario of gradual exchange realignment for Samoa intended to illustrate effects and trade-offs.
- Rationale: gradual approach allows time for businesses and consumers to adjust and is less disruptive to economic activities.
- Risk: gradual approach could invite one-way bids on exchange rate movements; this risk is mitigated somewhat by the fact that Samoa’s capital inflows are almost entirely in the forms of foreign direct investment and official grants and loans.
- Alternative: risk could be avoided through a well-planned one-off surprise adjustment.
- Note: the scenario is purely for illustration purposes.

### Assumptions and inflation impact
- Required real exchange rate adjustment: about 12 percent over two years.
- Target nominal adjustment: around 20 percent assuming inflation would rise by about 8 percentage points.
- The ballpark estimate of inflation impact assumes full price pass-through and is broadly in line with the fact that just over 40 percent of Samoa’s CPI basket is imported.
- Price-control caveat: a number of products are under price control, so full price pass-through may not take place over two years; some price increases, say 2 percentage points, would spill over to the third year.
- Baseline inflation: 4 percent.
- Exchange rate adjustment assumption: adjusted by 10 percent each in FY2013 and FY2014.
- Resulting inflation profile under these assumptions:
  - Inflation would rise to 7 percent in FY2013 and FY2014.
  - Inflation would be 6 percent in FY2015.

### Macroeconomic effects
- Real appreciation resulting from the adjustment would provide a boost to tradables, such as tourism and agricultural products.
- The adjustment would reduce imports and encourage production of import substitutes.
- Expected outcomes over time:
  - Growth would likely increase.
  - Current account deficits would decline.
  - Foreign reserves levels would be helped to rise.
  - It is possible that foreign direct investment would increase.

### Policy interaction and recommendations
- Key to securing competitiveness gains: exercise firm control on inflation through appropriately tight monetary policy.
- Fiscal stance in scenario: assumed fiscal consolidation would be somewhat faster than in the baseline while the exchange rate is being adjusted, to lend support to monetary policy.

### Debt and fiscal risks
- Negative consequence: increase in debt stock and service because most of Samoa’s public debt is external and denominated in foreign currencies.
- Estimated debt dynamics:
  - Samoa’s external debt in PV terms could peak at about 48 percent of GDP in 2016/17.
  - External debt PV would then fall back below 40 percent in 2023/24.
- Implication: Samoa would remain at moderate level of debt distress risk as in the baseline.

*Source: Box 2, "An Exchange Rate Adjustment Scenario," IMF staff report content provided in the source PDF.*

### APPENDIX I: SAMOA—RESERVE ADEQUACY

### APPENDIX I: SAMOA—RESERVE ADEQUACY

### Recent reserve levels and trends
- Foreign reserves stood at US$151 million (about 4.3 months of next year’s imports) as of end-March 2012.
- Reserves at end-June 2010: US$175.8 million.
- Reserves reached about US$123 million in September 2009 during the 2006–08 upward trend.
- Drivers of reserve increases:
  - Increased aid flows after the tsunami.
  - An IMF SDR allocation.
  - A disbursement of emergency assistance under the Rapid-Access Component of the Fund’s Exogenous Shocks Facility.
- Drivers of recent reserve decline:
  - Rising food and fuel prices.
  - Large one-off imports.
  - Profit repatriation by banks and outbound investment.
  - Continued reconstruction activities (albeit on a declining scale).
  - Sluggish recovery of remittances and tourism.
- Expected continuing pressures on reserves:
  - Increases in debt repayments.
  - Continuation of weak tourism and remittances.

### Reserve adequacy relative to benchmarks and peers
- Samoa’s reserves have generally been:
  - Lower than the regional median.
  - Mostly above three-month import coverage (the traditional rule of thumb).
- Recent declines have put Samoa’s reserves well below the regional median (the regional median is more than one-month higher than Samoa’s).
- Central Bank of Samoa (CBS) target: 4 months of current year’s imports.
  - Further reserve declines could lead reserves to fall below this CBS target.

### Staff optimal-reserve analysis and methodology
- Staff analysis using recent Fund methodologies for low-income countries suggests:
  - Optimal reserve holdings for Samoa are about 4½ months of imports.
- Methodological framework:
  - A cost-benefit analysis where optimal reserves balance:
    - Crisis prevention and mitigation benefits from smoothing absorption.
    - Net financial cost of reserves measured by foregone investment opportunities (marginal product of capital).
  - Optimal reserve holdings depend on country characteristics and policy fundamentals, including:
    - Fiscal balance
    - CPIA
    - Exchange rate regime
    - Fund program
    - Terms of trade
    - External demand
    - FDI to GDP ratio
    - Aid to GDP ratio
- Opportunity cost assumption used:
  - Proxied by the average real bank lending rate of the past two years, estimated at about 3.8 percent.

### Uncertainty, caveats, and biases
- Methodologies are based on parameters derived from data on low-income countries; small countries such as Samoa were excluded from the underlying data.
  - Results should be treated with great caution.
- Great uncertainty over the opportunity cost of holding reserves; the analysis used a number toward the lower end of available estimates for low-income countries (3-6 percent).
- Potential downward bias in optimal-reserve estimates because:
  - The framework assumes risk neutrality.
  - Samoa is much smaller than a typical low-income country; small island economies are more vulnerable to exogenous shocks and may need higher reserves, other things being equal.

### Country input variables used in the reserve calculation
- Government balance, % of GDP (5-year average): -3.8
- CPIA: 4.0
- Flexible exchange rate regime: No
- External demand growth, percent: 3.8
- Terms of trade growth, percent: 0.96
- Change in FDI to GDP, percentage point of GDP: -5.2
- Change in aid to GDP, percentage point of GDP: -0.01

*Source: APPENDIX I: SAMOA—RESERVE ADEQUACY (IMF staff report).*

### ANNEX V. SAMOA––STATISTICAL ISSUES

### ANNEX V. SAMOA––STATISTICAL ISSUES

### Statistical coverage and data quality
- Data provision is broadly adequate for surveillance.
- Core economic and monetary data are updated regularly and published on official websites.
- Balance of payments data are limited and subject to frequent revisions.
- Expenditure-based national account data are under development.
- Samoa participated in the Pacific Regional General Data Dissemination System (GDDS) Project in November 2003.
- Metadata is undergoing review prior to web-posting consultations with country authorities.
- On-going technical assistance has been provided by STA and PFTAC to improve national account statistics and financial sector indicators.
- The standardized report forms (SRFs) for reporting monetary data to the IMF and an integrated monetary database became effective in January 2009.

### Table of Common Indicators Required for Surveillance (As of April 20, 2012)
- Exchange Rates: Latest Observation 02/12; Date Received 04/3/12; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D
- Gross International Reserves: Latest Observation 03/12; Date Received 04/20/12; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Reserve/Base Money: Latest Observation 02/12; Date Received 03/30/12; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Broad Money: Latest Observation 02/12; Date Received 03/30/12; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Central Bank Balance Sheet: Latest Observation 02/12; Date Received 03/30/12; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Consolidated Balance Sheet of the Banking System: Latest Observation 02/12; Date Received 03/30/12; Frequency of Data M; Frequency of Reporting M; Frequency of Publication NA
- Interest Rates: Latest Observation 02/12; Date Received 03/30/12; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Consumer Price Index: Latest Observation 02/12; Date Received 03/30/12; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Revenue, Expenditure, Balance and Composition of financing – Central Government: Latest Observation Q2 2011; Date Received 04/12; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q
- Stocks of Central Government Debt: Latest Observation Q3 2011; Date Received 04/12; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication NA
- External Current Account Balance: Latest Observation Q4 2011; Date Received 04/12; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q
- Exports and Imports of Goods: Latest Observation Q4 2011; Date Received 04/12; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- GDP: Latest Observation Q4 2011; Date Received 04/12; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q
- Gross External Debt: Latest Observation Q3 2011; Date Received 04/12; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q

(Notes in source: 1 Data obtained directly from the Central Bank of Samoa. 2 Officially-determined rates (yields on central bank securities) and commercial banks’ deposit and lending rates. 3 Domestic and external financing. 4 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).)

### Authorities' statistical developments and actions
- Standardized report forms (SRFs) adopted; integrated monetary database effective January 2009.
- STA and PFTAC providing technical assistance to improve national accounts and financial sector indicators.

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### Debt Sustainability Analysis — Key Background and Findings

### Background
- This joint IMF-WB debt sustainability analysis (DSA) shows that Samoa has shifted to moderate from low risk of debt distress.
- Compared to the previous DSA, this analysis assumes a slightly lower medium- and long-term growth rate of GDP in the baseline.
- Large and protracted breach of the present value of debt to GDP threshold occurs in an exchange rate shock scenario.
- Forceful policy actions, especially on the fiscal front, would be needed to ensure medium- and long-term debt sustainability.
- At end of 2010/2011 fiscal year:
  - Face value of public external debt estimated at 737.7 million tala (48 percent of GDP).
  - Domestic debt at 48.9 million tala (3.9 percent of GDP).
  - Multilateral creditors account for 71 percent of Samoa’s external debt (32.3 percent owed to the World Bank, 35.3 percent to ADB, and 3.4 percent to OPEC, IFAD, EEC and EIB).
  - Bilateral creditors (JICA, China, and France) account for approximately 29 percent of the external debt.
- Non-concessional loans from OPEC attract interest rates ranging from 2.75 percent to 4.5 percent; other loans range from 0.45 percent to 2.5 percent.
- Central government net domestic debt is small: Treasury bonds outstanding worth 0.4 million tala with interest rates ranging from 5 percent to 7 percent.
- Government assumed responsibility for repaying defaulted public enterprise (PE) loans with outstanding balance of 48.5 million tala at end of FY 2011.
- Total current liabilities reported at 100.9 million tala at end of 2010 fiscal year and non-current liabilities at 267.9 million tala.
- Not all PE balance sheets were available as of end of 2011 fiscal year.

### Main macroeconomic outlook and risks
- Samoa faces slow growth and high volatility from exogenous shocks; economy exposed to tourism, remittances and aid.
- Growth projections:
  - Around 1½-2 percent in the short term.
  - Rise to 2½ percent over the medium term.
  - Historical 10-year average close to 2½ percent.
- Economic environment: not fully recovered from global financial crisis and 2009 tsunami; tourism declining; reconstruction activity winding down.

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### Methodology and Assumptions

- Debt sustainability assessed relative to policy-dependent debt burden thresholds for a “strong performer” (three-year average CPIA rating 4.06).
- DSA prepared by IMF and IDA staffs in accordance with standard methodology for low-income countries; uses non-reconciled debt data and a single discount rate of 4 percent.
- Coverage: borrowings by the central government and public enterprises (including defaulted PE loans repaid by government).
- Key baseline assumptions:
  - Annual real GDP growth projected at 1.5 percent for fiscal year 2011/12, improving gradually to 2.5 percent over the long term.
  - Average inflation about 6.0 percent for 2011/12, falling to 2.0 percent in 2012-2013.
  - Over the medium term, inflation projected about 4.0 percent, falling to 3.0 percent over the long term, in line with CBS target.
  - A constant real effective exchange rate is assumed for the medium term; constant real exchange rate against the U.S. dollar over the long run.
  - Annual goods and services export growth assumed at about 4 percent in nominal US dollar terms.
  - External non-interest current account deficit projected at about 10½ percent of GDP in 2011/12, falling to about 8 percent by 2016/17.
  - Annual average current account balance of slightly lower than 8 percent of GDP assumed over 2018-32.
  - Current account deficit expected to be largely financed by grants and concessional loans.
  - Fiscal consolidation assumed: fiscal deficit gradually reduced to 2½ percent of GDP over the medium term; over the longer term deficit reduced and maintained at 1½ percent of GDP.
  - Revenues assumed constant at about 32 percent of GDP.
  - Development expenditure reduced to about 11 percent of GDP, financed by grants, concessional loans and domestic resources (7 percentage points below post-tsunami reconstruction period).
  - Current expenditure in long run assumed about 22 percent of GDP, declining from 25 percent over the medium term.
  - Samoa’s interest expenditure is not large as most borrowing is on concessional terms.
  - New external borrowing required, largely available on concessional terms; central government domestic debt about 3 percent of GDP and PE debt about 27 percent of GDP (excluding defaulted loans).
  - PE borrowing assumed to be on commercial terms; continued eligibility for concessional borrowing from IDA assumed.
  - For PEs with missing 2011 balance sheets, assume no change in debt levels from 2010 fiscal year; PE debt assumed constant as percentage of GDP for projection period.

---

### External Debt Sustainability — Findings and Stress Tests

- Under baseline scenario, all initial debt ratios are below policy-dependent thresholds for a strong performer, but:
  - Ratios projected to exceed the authorities' PV of debt to GDP target of 40 percent.
- Stress test results and vulnerability:
  - Samoa faces a moderate risk of debt distress (upgrade from low risk).
  - Increase in risk reflects weaker output growth and slower fiscal consolidation versus last DSA.
  - Extreme stress test: a 30 percent exchange rate shock would have the following effects (over the forecast period):
    - PV of public external debt as share of GDP: from 39 percent in 2012 to significantly above 50 percent for the entire forecast period.
    - PV of debt-to-revenue ratio: from 157 percent to 246 percent.
    - PV of debt-to-exports ratio: from 132 percent to 199 percent.
    - Debt service-to-revenue ratio: from 5 percent to 18 percent over a number of years.
  - Over time, all but the PV of debt-to-exports measure improve as one-off effects dissipate.
- Historical scenario replicating past performance yields debt ratios below current baseline projections.

---

### Public Sector DSA — Findings

- Public sector debt analysis supports external debt conclusions.
- Nominal value of public sector debt stock:
  - Estimated at 76 percent of GDP in FY2011 (62.8 percent of GDP in PV terms).
  - Expected to rise to 80 percent of GDP (66 percent of GDP in PV terms) in the current fiscal year.
- Scenario analysis:
  - If fiscal consolidation is not undertaken, public sector debt would keep growing over entire forecast period.
  - PV of public debt would exceed 100 percent of GDP toward the end of the forecast period.

(Definition in source: Public sector debt includes all external debt of central government, including on-lent amounts, domestic debt of central government, defaulted loans of PEs, and PE current and non-current liabilities (excluding government on-lending and inter-PE loans).)

---

### Conclusion and Staff Assessment — Risks and Policy Recommendations

- Risk assessment:
  - Samoa now faces a moderate risk of debt distress despite reliance on concessional external borrowing and continued donor support.
  - Underlying risk rose due to slower-than-anticipated recovery and less favorable growth prospects.
  - Debt path generally resilient to shocks but very vulnerable to exchange rate shocks.
  - Vulnerability would increase if fiscal deficit is not reduced to a more sustainable level over the medium term.
- Policy recommendations and priorities:
  - Implement forceful fiscal consolidation over the medium term; develop a credible deficit-reduction plan.
  - Further improve debt management to support fiscal consolidation.
  - Maintain macroeconomic stability.
  - Continue investment in and maintenance of infrastructure.
  - Pursue structural reforms to improve the investment climate and increase economic efficiency, particularly of public enterprises.
  - Rebuild policy buffers against future shocks through sustained efforts.

*Source: ANNEX V. SAMOA––STATISTICAL ISSUES; 2012 ARTICLE IV REPORT—DEBT SUSTAINABILITY ANALYSIS (International Monetary Fund and International Development Association), June 1, 2012.*

### 16.      The authorities recognize the risks posed by the high and rising debt burdens and are

### 16.      The authorities recognize the risks posed by the high and rising debt burdens and are

### Authorities' assessment and policy commitments
- The authorities "recognize the risks posed by the high and rising debt burdens and are committed to bringing them down to more sustainable levels."
- Agreed policy priorities:
  - Formulate and implement a credible fiscal consolidation plan.
  - Strengthen debt management.
  - Undertake structural reforms to boost growth.

### Debt stock and trajectory (selected indicators)
- External debt (nominal):
  - 2009: 45.3
  - 2010: 53.6
  - 2011: 49.3
  - 2012: 53.2
  - 2017: 64.1
  - 2018-2032 average (memorandum): 51.8
- PV of external debt (PPG basis):
  - 2012: 36.7
  - 2013: 39.2
  - 2014: 41.7
  - 2015: 44.0
  - 2016: 45.2
  - 2017: 45.6
  - 2018-32 average (selected): 45.9 (peak), falling to 35.7 by 2032
- PV of PPG external debt in percent of exports:
  - 2012: 115.9
  - 2013: 131.7
  - 2014: 146.9
  - 2015: 150.5
  - 2016: 150.2
  - 2017: 147.2
  - 2018-32 average (selected): 144.0
- Public sector debt (gross):
  - 2009: 75.9
  - 2010: 82.9
  - 2011: 76.4
  - 2012: 80.3
  - 2017: 91.2
  - 2018-32 average (selected): 88.1
- PV of public sector debt (selected years):
  - 2012: 63.8
  - 2013: 66.3
  - 2014: 68.8
  - 2015: 71.1
  - 2016: 72.3
  - 2017: 72.7
  - 2018-32 average (selected): 73.0
- Debt service indicators (selected):
  - Debt service-to-exports ratio (percent): 2009: 1.7; 2010: 2.4; 2011: 3.9; 2012: 4.5; 2017: 9.4
  - PPG debt service-to-revenue ratio (percent): 2009: 2.1; 2010: 3.0; 2011: 4.3; 2012: 5.4; 2016: 10.2; 2017: 11.0
  - Debt service-to-revenue ratio (public sector, percent): 2012: 13.6 (projection context), rising in projection years (see Table 2a series)

### Identified debt-creating flows and financing
- Change in external debt (year-on-year examples):
  - 2009: 45.3 (level); 2010 change: 8.3; 2011 change: -4.2; 2012 change: 3.9
- Identified net debt-creating flows (examples):
  - Non-interest current account deficit (percent of GDP): 2009: 2.6; 2010: 6.5; 2011: 7.4; 2012: 8.3; 2013 onward series shown (e.g., 2017: 7.2)
  - Deficit in balance of goods and services (percent of GDP): 2009: 24.2; 2010: 26.6; 2011: 27.2; 2012: 28.8
  - Net current transfers (negative = inflow), percent of GDP: 2009: -24.4; 2010: -22.5; 2011: -23.3; 2012: -22.5
  - Net FDI (negative = inflow), percent of GDP: 2009: -1.6; 2010: -0.2; 2011: -1.5; 2012: -1.7
- Aid flows (Millions of U.S. dollars):
  - 2012: 93.8
  - 2013: 82.1
  - 2014: 84.6
  - 2015: 81.5
  - 2016: 81.8
  - 2017: 80.9
  - 2022: 96.0
  - 2032: 146.6
  - Of which: Grants (Millions of U.S. dollars) — 2012: 58.1; 2013: 53.0; 2014: 54.6; 2015: 56.4; 2016: 58.2; 2017: 60.1; 2022: 74.6; 2032: 114.8
- Grant-equivalent financing (in percent of GDP) (selected projection years):
  - 2018: 11.4; 2019: 9.9; 2020: 9.8; 2021: 9.2; 2022: 8.9; 2023: 8.8; 2024: 8.5; 2025: 8.5; 2026: 8.6

### Stress tests and sensitivity analysis (high-level)
- The DSA includes alternative scenarios and bound tests up to 2032:
  - Alternative scenarios include: "Key variables at their historical averages in 2012-2032" and "New public sector loans on less favorable terms in 2012-2032".
  - Bound tests include shocks to real GDP growth, export value growth, US dollar GDP deflator, net non-debt creating flows, combinations of shocks, and a one-time 30 percent nominal depreciation in 2013.
- The "most extreme stress test" is defined as the test that yields the highest ratio in 2022 and varies by indicator (examples: One-time depreciation shock; Terms shock).
- Sensitivity outcomes (examples from Table 1b and Figure 2):
  - PV of debt-to-GDP, PV of debt-to-exports, and PV of debt-to-revenue ratios rise under adverse scenarios and specific bound tests (tables present year-by-year trajectories to 2032).
  - Debt service-to-revenue and debt service-to-exports ratios increase materially under adverse scenarios (tables and figures provide year series and scenario comparisons).

### Macroeconomic assumptions underpinning projections (selected)
- Real GDP growth (percent):
  - 2009: -5.1
  - 2010: 0.4
  - 2011: 2.0
  - 2012: 2.7
  - 2013: 3.4
  - 2014: 1.5
  - 2015–2017: 1.9, 2.3, 2.5 (series)
  - 2018-32 average projections include 2.5 (common projection values)
- GDP deflator in U.S. dollar terms (change in percent):
  - 2009: 20.0
  - 2010: 8.3
  - 2011: 0.1
  - 2012: 6.2
  - 2013: 9.1
  - 2014: 10.9
  - 2015 onward: series includes 2.3, 0.8, 0.8, 0.7, 0.7...
- Effective interest rate (percent) (selected series):
  - 2012: 2.0
  - 2013: 2.5
  - 2014: 2.2
  - 2015: 0.3
  - 2016: 0.9
  - 2017: 1.3
  - 2018-32 average values around 1.2–1.6 in different years
- Growth of exports of G&S (U.S. dollar terms, percent):
  - 2009: 19.0
  - 2010: 2.4
  - 2011: 1.1
  - 2012: 7.0
  - 2013: 9.9
  - 2014: 5.7
  - Subsequent years: 6.3, 6.3, 6.3, 6.3, then moderating to 5.0, 4.4, 4.4, 3.9
- Growth of imports of G&S (U.S. dollar terms, percent):
  - 2009: 22.9
  - 2010: 9.5
  - 2011: 2.6
  - 2012: 9.3
  - 2013: 13.3
  - 2014: 12.0
  - Subsequent years include 2.6, 3.5, 3.5, 3.8, 3.9, 4.9, 4.4, 4.4, 3.9
- Government revenues (excluding grants, percent of GDP):
  - 2009: 26.7
  - 2010: 25.6
  - 2011: 28.0
  - 2012: 24.8
  - Projection baseline keeps 24.8 as a steady assumption in projection years shown

### Fiscal dynamics and sustainability signals
- Primary balance and automatic dynamics:
  - Primary deficit (percent of GDP) shows improvement in some projection years; series indicates primary balances and primary deficit that stabilizes debt-to-GDP ratios (table values).
  - Automatic debt dynamics contribution is negative in projection years (reducing debt), with detailed decomposition showing contributions from interest-rate growth differential, real GDP growth, and exchange rate changes.
- Gross financing needs (percent of GDP and USD millions):
  - Gross financing need (percent of GDP): 2009: 4.2; 2010: 13.9; 2011: 13.1; 2012: 11.6; later projection years trending down toward single digits (e.g., 8.4)
  - Total gross financing need (Millions of U.S. dollars) (selected series): 2009: 8.7; 2010: 43.9; 2011: 45.2; 2012: 86.9; 2017: 87.8; 2022: 105.5; 2032: 162.2
- PV of public sector debt-to-revenue (percent):
  - 2012: 170.4 (PV of public sector debt-to-revenue and grants ratio)
  - Subsequent years rise (e.g., 2013: 201.0; 2014: 215.4; 2017: 222.7) before moderating in later projections

### Policy implications and recommended priorities (as reflected in text)
- Implement credible fiscal consolidation to reduce high and rising debt burdens.
- Strengthen debt management to improve terms and composition of borrowing.
- Undertake structural reforms to boost potential growth and improve debt dynamics.
- Monitor vulnerabilities via stress testing (real GDP shocks, export shocks, exchange rate shocks, and less favorable financing terms), and prepare contingent policy responses.

*Sources: Country authorities; and IMF staff estimates and projections (2012 Article IV Report — Debt Sustainability Analysis).*

### 0.8 percent, and is expected to remain subdued for the rest of the year as

### _cr12250 - 0.8 percent, and is expected to remain subdued for the rest of the year as

### Growth and outlook
- Real GDP growth:
  - 2010/11: 2.0 percent
  - 2011/12 (expected): 1.5 percent
  - 2012/13 (proj.): 1.9 percent
- Growth is described as sluggish and is expected to remain moderate, subject to downside risks from global economic uncertainty and vulnerability to exogenous shocks as a small island economy.
- Reconstruction activity is winding down, contributing to subdued growth (opening line notes "0.8 percent, and is expected to remain subdued for the rest of the year as reconstruction activity continues to subside and the growth of external demand remains moderate").

### Inflation and prices
- Headline inflation developments:
  - Peaked at 11.4 percent (4 percent excluding food) in December 2011
  - Fell to 6.7 percent in April (year not specified in excerpt)
  - Expected to be around 6 percent by end-June (year not specified in excerpt)
- CPI changes in table:
  - Change in CPI (end period): 2010/11: 2.9; 2011/12 (proj.): 6.0; 2012/13 (proj.): 4.0
  - Change in CPI (period average): 2010/11: 2.9; 2011/12 (proj.): 6.5; 2012/13 (proj.): 2.0
- Recent rise in inflation largely attributed to drought conditions in late 2011 affecting the supply of agricultural products.
- Inflation outlook remains subject to imported-price shocks due to high dependence on imports, especially food and fuel.

### Fiscal position and public debt
- Fiscal balances and composition (percent of GDP):
  - Revenue and grants: 2010/11: 37.5; 2011/12 (proj.): 33.0; 2012/13 (proj.): 31.9
  - Grants component: 2010/11: 9.5; 2011/12 (proj.): 8.1; 2012/13 (proj.): 7.1
  - Expenditure and net lending: 2010/11: 43.9; 2011/12 (proj.): 39.0; 2012/13 (proj.): 37.0
  - Development expenditure: 2010/11: 18.0; 2011/12 (proj.): 13.4; 2012/13 (proj.): 12.9
  - Current balance: 2010/11: 3.2; 2011/12 (proj.): -0.3; 2012/13 (proj.): 1.6
  - Overall balance: 2010/11: -6.4; 2011/12 (proj.): -6.0; 2012/13 (proj.): -5.0
- Fiscal developments:
  - Fiscal deficit fell to 6½ of GDP in 2010/11 after increasing to 7½ of GDP in 2009/10 to support post-tsunami reconstruction.
  - Implementation of the 2011/12 budget broadly on target, but supplementary appropriations likely to result in a fiscal deficit of 6 percent of GDP (about ½ percent of GDP higher than originally budgeted and slightly lower than the level achieved last year).
  - Increased deficits largely financed by external borrowings on concessional terms.
- Public indebtedness:
  - External debt (percent of GDP): 2010/11: 49.3; 2011/12 (proj.): 53.2; 2012/13 (proj.): 57.1
  - Public external debt-service ratio (percent of exports): 2010/11: 3.8; 2011/12 (proj.): 4.5; 2012/13 (proj.): 7.0
  - Statement: public indebtedness expected to peak in coming years before gradually declining; much donor support is in soft loans which adds to debt stock, but servicing burden is relatively benign because most debt is concessional.
- Policy emphasis:
  - Authorities committed to reduce the fiscal deficit; Directors stressed decisive actions to achieve consolidation goals and bring public debt to a more sustainable level.
  - Consolidation should be measured and steady in the short run; restrain current expenditure and prioritize development and infrastructure projects.
  - Call for a credible medium term fiscal consolidation plan with a corresponding debt management strategy.
  - Monitor debt incurred by public enterprises and minimize fiscal risks.

### External sector and reserves
- Current account:
  - Levels (in millions of U.S. dollars): 2010/11: -54.7; 2011/12 (proj.): -81.5; 2012/13 (proj.): -87.8
  - In percent of GDP: 2010/11: -8.6; 2011/12 (proj.): -11.4; 2012/13 (proj.): -11.8
  - Widening over past three years due to increased imports for post-tsunami reconstruction, rising world food and fuel prices, and slow recovery of remittances and tourism.
  - As reconstruction winds down, current account deficit expected to trend downward (as percent of GDP).
- Reserves:
  - Gross official reserves (millions of U.S. dollars): end-March level cited as about US$151 million (about 4.3 months of next year’s imports).
  - Table: Gross official reserves: 2010/11: 157.6; 2011/12 (proj.): 151.5; 2012/13 (proj.): 146.8
  - Reserves measured in months of next year’s imports of GNFS: 2010/11: 4.5; 2011/12 (proj.): 4.2; 2012/13 (proj.): 4.0

### Monetary policy, exchange rate, and financial sector
- Monetary policy:
  - The Central Bank of Samoa has maintained an accommodative monetary policy to support economic activity since the global financial crisis.
  - The Central Bank has lowered interest rates to near zero to stimulate the economy, but transmission is weak due to banks' risk concerns and an underdeveloped financial market.
  - Banking sector liquidity has tightened following dividend repatriation, outbound FDI, and large one-off imports.
  - Banks generally well capitalized and profitable, but non-performing loans are rising for some banks amid weak activity in tourism.
  - Directors agreed monetary policy could remain accommodative given weak activity but should be ready to tighten in the event of an exchange rate adjustment.
- Exchange rate and competitiveness:
  - Nominal and real effective exchange rate indicators (2000 = 100, IMF Information Notice System):
    - Nominal effective exchange rate: 2006: 97.3; 2007: 94.9; 2008: 97.6; 2009: 97.9; 2010: 98.0
    - Real effective exchange rate: 2006: 101.0; 2007: 105.6; 2008: 116.1; 2009: 111.6; 2010: 112.5
  - Staff exchange rate assessment indicates an overvaluation of the real effective exchange rate in the order of 10 to 25 percent.
  - Directors noted the tala has appreciated substantially in real effective terms over the past decade and is assessed to be overvalued.
  - Most Directors considered that a gradual realignment of the exchange rate could help prevent further reserve losses and strengthen export competitiveness; a few Directors were not convinced.
  - Authorities are open to a gradual devaluation should conditions deteriorate substantially but express concern about timing, implementation issues, foreign currency–denominated external debt, heavy reliance on imports, and the need to tighten monetary policy to contain imported inflation.
  - Staff and authorities highlighted need for technical assistance to design and implement any exchange rate realignment, including consideration of the currency composition of a devaluation.

### Structural and financial sector reforms
- Directors called for continued efforts to strengthen financial sector supervision, including bringing the Unit Trust of Samoa under central bank oversight.
- Structural reform priorities encouraged by Directors:
  - Increase efficiency of public enterprises
  - Further improve public financial management
  - Make customary land more accessible for productive use
  - Deepen financial intermediation
- Land and credit:
  - About 85 percent of land is subject to traditional/communal entitlements, limiting use of customary land as collateral; government consultations ongoing to create a framework to accept leases of customary land as collateral.
- Unit Trust of Samoa (UTOS):
  - New unit trust open to deposits from residents to provide diversified investment options and channel deposits into domestic and eventually overseas investments.
  - UTOS deposits are guaranteed by the government for the initial 5 year period.
  - UTOS is currently not subject to prudential supervision and is guided by directives from the Ministry of Finance; authorities are working on integration into the financial system.

### Executive Board assessment and recommendations
- Executive Directors commended authorities’ management of shocks from the global financial crisis and the 2009 tsunami and welcomed the economic recovery while noting growth will likely remain moderate.
- Agreed focus: rebuild fiscal and external buffers while supporting recovery and fostering sustainable longer-term growth.
- Key recommendations and views:
  - Fiscal consolidation is required; actions should be decisive but measured given fragile recovery.
  - Prioritize restraint in current expenditure and prioritize development and infrastructure projects.
  - Credible medium term fiscal consolidation plan and debt management strategy needed.
  - Closely monitor public enterprise debt and minimize fiscal risks.
  - Consider gradual realignment of the exchange rate to address overvaluation, with careful management of pace and timing and further analytical work supported by Fund technical assistance.
  - Monetary policy may remain accommodative currently but readiness to tighten if exchange rate adjusted.
  - Strengthen financial sector supervision (including oversight of UTOS).
  - Undertake bold structural reforms to restore Samoa’s strong growth record.

*Source: IMF staff report and Executive Board discussions as presented in the supplied excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12250.pdf_