Public Information Notice No. 99/23

Public Information Notice: IMF Concludes Article IV Consultation with Samoa

March 12, 1999

On February 17, the Executive Board concluded the Article IV consultation with Samoa¹.

Background

In the early 1990s, Samoa’s economy was dealt severe blows from two cyclones, a taro leaf blight, and a financial crisis in the government-owned airline. Macroeconomic policies initially accommodated these shocks to support a recovery. Policies were then gradually tightened as real GDP rebounded to pre-cyclone levels in the mid-1990s. Fiscal policy was strengthened through expenditure restraint, leading to a fall in inflation to low levels, a rise in foreign reserves, and a decline in external debt.

Following strong growth in the mid-1990s, real GDP growth slowed to 1½ percent in 1997 and was negligible in the first half of 1998. The slowdown reflected the unwinding of cyclone reconstruction projects, a mild drought, and a scaling back of production by the largest private-sector employer (a Japanese owned automotive parts plant, which restructured operations).² However, delays in implementing structural reforms, especially for public enterprises, also weighed on growth.

Inflation fell to low levels. Consumer price inflation was 2¼ percent in the year to December 1998, down sharply from about 7 percent in 1997. The fall was mainly due to lower prices for domestically produced goods (as food production began to recover from a drought), while import prices rose in line with the 8 percent fall in the nominal effective exchange rate from mid-1997 to late-1998.³

The external position improved despite the Asian crisis. The overall balance of payments surplus rose in 1997, due to strong growth in exports (albeit from a low base) and an increase in transfers, contributing to a buildup in reserves to 6 months’ import cover. In 1998, export growth continued in the face of the Asian crisis led by the nascent fishing and tourism industries, and although imports picked up in late 1998, the current account surplus (including grants) improved slightly.⁴ While external debt repayments have been sizable, the strength of the U.S. dollar against the Samoan tala has kept the debt to GDP ratio at more than 70 percent.

The improved outcomes for inflation and the external position have been largely due to sound fiscal and monetary policies in recent years. Preliminary data show a fiscal surplus (including grants) of about 1¾ percent of GDP in 1997/98, primarily due to lower-than-budgeted expenditure, which followed small surpluses in earlier years. As a result, government deposits at the central bank rose significantly (the central bank has no claims on the central government). This allowed the central bank to accommodate strong growth in private sector credit while moderating the pace of broad money growth in 1997/98.

In order to encourage private sector growth, the authorities recently introduced structural reforms in line with their Statement of Economic Strategy. Import tariffs and the tax system were rationalized⁵ and the financial sector was liberalized, including by introducing indirect instruments of monetary control. Progress on public enterprise reform, however, was slower than envisaged.

Executive Board Assessment

Directors commended the authorities’ sound macroeconomic policies that have reduced inflation to low levels, increased foreign reserves, and lowered external debt. Directors considered that the main challenge facing the authorities was to lay the basis for sustained growth while diversifying the economy’s structure and reducing its vulnerability to external shocks. In this connection, Directors supported the authorities’ intentions as set forth in their updated Statement of Economic Strategy, while stressing the importance of determined implementation of the necessary reforms.

Regarding the near term, Directors noted that economic growth had slowed recently following the rebound from the shocks of the early 1990s, and that activity could be constrained by slow growth among Samoa’s trading partners. Against this background, Directors stressed that macroeconomic and structural policies should seek to maintain stability and support growth. They considered that the authorities should maintain a tight fiscal policy in 1998/99 and in the medium term in order to keep inflation low and to preserve foreign reserves. Given the absence of inflationary pressures, Directors supported the current stance of monetary policy and the authorities’ intention to gradually mop up the remaining excess liquidity in the economy. They cautioned, however, that policy would need to be tightened more quickly if inflation were to rise as the liquid assets ratio is phased out. Directors noted the current level of the exchange rate should be appropriate to support growth and maintain reserves.

Directors endorsed the authorities’ intention to reduce the level and improve the quality of government expenditure over the medium term. A reduction in expenditure as a proportion of GDP would help reduce net government debt to more prudent levels and allow monetary policy to accommodate increased private sector credit to support economic growth. Directors noted that the level of expenditure could be reduced significantly by reforming public enterprises and downsizing the public service. These reforms would also make room for increased spending on the authorities’ priority areas of education, health, and infrastructure development. Directors urged careful prioritization of foreign-financed public infrastructure spending over coming years to avoid an overheating of the economy.

Directors considered that further structural reform—in line with the authorities’ strategy to improve incentives for private sector activity—is vital to raise growth rates. They stressed that public enterprise reform, including privatization, should be given top priority, and underscored the importance of maintaining an attractive environment for foreign direct investment. Directors also believed that price controls should be eliminated. They welcomed the ongoing financial sector reforms, including the recent move away from direct controls on interest rates and credit toward a market-based financial system, and favored an extension of the central bank’s prudential supervision to nonbank financial institutions.

Directors welcomed the recent improvements in the quality of economic statistics, but noted that significant weaknesses remained, and encouraged the authorities to sustain efforts in this area.