IMF Executive Board Concludes 2019 Article IV Consultation with Samoa
May 17, 2019
On May 8, 2019,the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Samoa.
Samoa’s economy faces several challenges but continues to show resilience. Growth reached a five-year low at 0.9 percent in 2017/18, due to the Yazaki manufacturing plant closure in August 2017 and the impact of cyclone Gita in February 2018. Inflation picked up to 3.7 percent in 2017/18, compared to 1.3 percent in the previous year, driven by the impact of Gita on local food prices, a one-time increase in education fees, and higher price of imported fuel. The current account recorded a surplus of 2.3 percent of GDP in 2017/18, compared to a deficit of 1.8 percent of GDP in the previous year, largely due to a temporary increase in transfers in the wake of Gita. The Samoan Tala depreciated against the U.S. dollar and in nominal effective terms but appreciated in real effective terms due to Samoa’s relatively high inflation. Financial soundness indicators highlight that commercial banks’ capital adequacy and liquidity indicators are trending upwards. Banks’ profitability and earnings are subdued amidst a lending slowdown.
Growth is projected to rebound to 3.4 percent in 2018/19, driven by commerce, infrastructure spending, and development of the transport and communication sector. Growth is expected to peak at 4.4 percent in 2019/20, with an uptick in tourism related sectors as Samoa hosts the Pacific Games in July 2019, before settling at just above 2 percent in the medium term. Inflation is expected to be back below the central bank target of 3 percent in 2018/19 as temporary inflationary pressures recede. The current account is projected to revert to a deficit of 0.5 percent of GDP in 2018/19 as transfers normalize.
Executive Board Assessment [2]
Executive Directors commended the authorities for Samoa’s resilience in the face of external shocks and welcomed the expected rebound in growth. However, they noted that the risks to the outlook are tilted to the downside, largely due to the country’s high vulnerability to natural disasters and the withdrawal of correspondent banking relationships (CBR). In this context,
Directors highlighted the need to build fiscal buffers and continue with efforts to mitigate risks from CBR pressures, while implementing structural reforms targeted at boosting potential growth and making growth more inclusive.
Considering Samoa’s vulnerability to natural disasters and high risk of debt distress, Directors called for embarking on a comprehensive fiscal strategy to ensure fiscal sustainability. They called for improving the tax administration, strengthening public financial management, lowering of the long‑term debt‑to‑GDP target, and ensuring that newly contracted loans are consistent with the Medium‑Term Debt Strategy. Directors also stressed the need to make progress in monitoring and disclosing fiscal risks, including from state‑owned enterprises.
Directors considered the current accommodative monetary policy stance appropriate, but noted the need to strengthen the monetary transmission mechanism, including by improving liquidity management, re‑establishing a credit bureau and implementing measures to reduce credit risk and promote lending.
Directors noted that financial sector policies should focus on completing the implementation of the 2015 Financial Sector Assessment Program recommendations. They called for upgrading the regulatory and supervisory framework, improving systemic financial stability risk monitoring and continued efforts to improve access to finance, while managing risks, including from crypto‑assets. Directors welcomed the measures taken to mitigate risks from CBR pressures.
They saw the need for further efforts aimed at enhancing the effectiveness of the AML/CFT regime and continued engagement with relevant stakeholders, including on tax cooperation issues. Directors encouraged establishing IT solutions for customer identification and monitoring, and reducing the risk profile of the offshore center. They also called for continued engagement with relevant stakeholders and regulators to make progress toward a regional solution to address CBR pressures.
Directors noted that the authorities’ structural reform agenda should focus on building resilience to natural disasters and enhancing the business environment. They stressed that measures should include upgrading infrastructure, strengthening insolvency resolution, promoting financial inclusion, and improving the trade facilitation framework. Directors also advocated for more coordination among TA providers.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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