March 2, 2020
PRESS OFFICER: Brian Walker
Phone: +1 202 623-7100Email: MEDIA@IMF.org
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
The pace of economic expansion is expected to moderate, with growth reaching around 3 percent in FY2020. While the economy remains resilient, it is subject to significant downside risks including further slowdown in tourism, vulnerability to natural disasters, and loss of correspondent banking relationships (CBRs). Policy priorities are to:
A. Recent Developments, Outlook and Risks: Economic Resilience
1. Despite multiple, compounding economic challenges confronted over the past decade, Samoa has proved its resilience by pushing through needed economic reforms. Samoa is one of the most vulnerable countries in the Pacific to natural disasters and has experienced economic setbacks from three episodes of large natural disasters during 2009–2018 and the closure of the Yazaki manufacturing plant in 2017. More recently, a measles outbreak has devastated the country and slowed the economy, with a state of emergency in place for 1½ months through end-December 2019. Amid these challenges, the Government of Samoa has actively pushed through economic reforms, and growth remains resilient.
2. The economy grew strongly in FY2019, recovering from a downturn in FY2017-FY2018, while inflation remained subdued. The authorities introduced a rebased GDP in April 2019, which better reflects the current structure of the economy and revealed a broad-based contraction in economic activities in FY2018, with growth reaching -2.2 percent. A strong recovery has since taken place, and growth reached 3.5 percent in FY2019 with strong growth in tourism and remittances that underpinned a pickup in commerce. Grant-financed infrastructure projects supported the construction industry and unlocked private investment, with growth in credit to the private sector reaching 6.1 percent (y/y) at end-FY2019. Weaker global food price inflation more than offset a pickup in local components of CPI inflation, resulting in lower headline inflation of 2.2 percent in FY2019, compared with 3.7 percent in FY2018.
3. The Pacific Games (PG) contributed to strong economic growth during the period leading up to July 2019, but the pace of expansion has since moderated in FY2020. Growth momentum continued through the PG, and real GDP growth in 2019Q3 reached 4.4 percent. Subsequently, a slowdown in the global economy began weighing on tourism, exports, and remittance inflows, which were adversely affected by the measles outbreak of late-2019. The recent novel coronavirus outbreak is expected to exacerbate downturns in tourism and related sectors. Staff projects real GDP growth will reach around 3 percent in FY2020, based on expectations of economic resilience driven by agriculture, communication, and various international conferences to be held in Samoa. Growth is expected to further moderate in FY2021 before it normalizes at around 2¼ percent over the medium term.
4. Inflation is expected to remain contained, while a sizable surplus in fiscal and current account balances in FY2019 will turn to a deficit over the medium term. Inflation averaged 1.5 percent (y/y) during the six months through December and is projected to reach 2½ percent in FY2020. Over the medium term, staff projects inflation will remain below the three percent target. Capital spending is expected to increase throughout the projection period to support growth. This is expected to turn the fiscal balance from a surplus of 2.7 percent in FY2019 to a deficit in FY2020, and a deficit of 2¾ percent of GDP is projected over the medium term. Likewise, the current account balance, which recorded a surplus of 2.3 percent of GDP in FY2019 driven by temporary, favorable growth in exports and tourism, will turn to deficit in FY2020, reaching 1½ percent of GDP over the medium term, with reserve coverage declining to 3¾ months of imports.
5. In staff’s assessment, Samoa’s debt is sustainable but remains at high-risk of distress, given the country’s high vulnerability to natural disasters. Public debt reached 48 percent of GDP in FY2019, below the authorities’ ceiling of 50 percent, with high real GDP growth and fiscal surplus, resulting from a favorable outturn of revenues and low execution of capital spending due to implementation delays. With development needs, staff projects capital spending will increase, and debt is projected to reach around 48 percent of GDP in FY2025.
6. If downside risks to the outlook materialize, growth could fall below the trend rate of around 2 percent. Downside risks to the outlook are more pronounced, when compared to 12 months ago. The coronavirus outbreak, which is the latest economic threat globally, could cause prolonged economic disruptions and adversely affect tourism in Samoa. A high vulnerability to natural disasters continues to threaten the economy. Trade tensions between the U.S. and China remain headwinds as they could lead to a slowdown in Samoa’s major trading partners (Australia and New Zealand). Geopolitical risks in the Middle East could raise oil prices and adversely affect the economy. A rollout of a Know-Your-Customer (KYC) utility to address customer identification and other AML/CFT concerns, if implemented successfully, could reduce actual and perceived risks associated with remittance flows and mitigate pressures on CBRs.
B. Financing Development Needs and Ensuring Fiscal Sustainability
7. Under the unchanged policy scenario (baseline), the associated fiscal deficit will result in an upward bend in the debt trajectory over the medium term. The baseline reflects recent and projected public sector wage increases through FY2021. Given the need to develop disaster resilient infrastructure that unlocks private investment and helps stimulate the economy, the baseline assumes net acquisition of non-financial assets (i.e. capital spending), equivalent to 7½–8 percent of GDP annually, financed by a combination of grants and external concessional loans. Given the revenue projection, the overall fiscal deficit is expected to increase to around 2¾ percent of GDP over the medium term (see Table 1), which raises the public debt-to-GDP ratio and further squeezes already-limited fiscal buffers.
8. Samoa needs to strike the right balance between financing development needs and addressing fiscal sustainability in the long run. The mission advised the authorities to mobilize revenues to help finance development needs and achieve sustainable development goals (SDGs), including through human and physical capital accumulation. At the same time, the authorities need to maintain an indicative target, which is to keep the fiscal deficit within 1 percent of GDP on average over the medium term while making sure that it is below an annual ceiling of 2 percent of GDP. Meeting the target will require fiscal consolidation (a combination of enhanced spending efficiency and revenue mobilization) and public financial management (PFM) reforms. Consistent with the government fiscal strategy that seeks to create fiscal space to respond to a natural disaster, the target wil help reduce debt to 45 percent of GDP over the medium term and 40 percent of GDP over the long term. The mission advised the authorities to use fiscal policy as the principal instrument of macroeconomic management in the face of external shocks, given the exchange rate peg and weak monetary transmission mechanism.
9. The mission advised the authorities to continue pursuing a growth-promoting fiscal strategy with structural reforms that will help revenue mobilization. The strategy entails:
· Contain growth in current spending through gains in spending efficiency, while strengthening social protection programs and safety nets, and appropriately budgeting the cost of maintenance and utilities for new and existing infrastructure.
· Continue to implement the 2017 Revenue Review to fully capture its benefits and reduce tax expenditures. For the latter, the mission advised the authorities to review existing tax exemptions and analyze if they provide justifiable economic and social benefits. Broadening the tax base of VAGST and increasing/introducing excises on goods and services can also be warranted.
· Improve tax administration by strengthening audit capacity. The government’s planned launch of a new Tax Invoice Monitoring System is a welcome development to combat tax evasion and increase compliance. The mission recommended that the authorities be mindful of compliance costs for retail businesses, as it requires acquisition of digital devices.
· Work in advance to mobilize additional revenues at a determined pace over the medium term to compensate forgone revenues, which is expected to result from a PACER Plus agreement when it comes into effect, as advised by the most recent IMF technical assistance mission.
· Continue to ensure that newly contracted loans are consistent with the Medium-Term Debt Strategy (MTDS 2016-2020), with new lending on concessional terms to the extent possible (grant element above the MTDS minimum of 35 percent) and ensure that projects being financed are properly vetted as high quality and economically viable.
10. The authorities need to embark on comprehensive public financial management (PFM) reforms in an appropriate sequence to safeguard fiscal sustainability. Discussions are already underway to chart the best way forward based on a PFM roadmap, which the mission encouraged the authorities to further pursue, especially in the areas of cash management, financial reporting, managing and monitoring of fiscal risks, and internal audit. The mission discussed:
· Strengthening the medium-term fiscal framework by making full, effective use of the Samoa Economic and Revenue Forecasting Model, which will help operationalize an indicative fiscal target.
· Monitoring and assessing spending outcomes to enhance spending efficiency, through expenditure impact analysis and independent audits.
· Improving budget reliability and predictability, and control in budget execution. In particular, improving estimates on grants (both cash and in-kind), procurement efficiency, monitoring of financial flows, and execution of grant-financed capital spending will help minimize the deviation of outturns from those of the budget.
· Improving cash management by adopting electronic lodgment, ensuring financial transactions be identified in FinanceOne without a time lag, executing daily bank reconciliation and reporting for the main TALA account, including public bodies as part of the Treasury Single Account, commencing the minimum balance target in the commercial banks (ideally zero), and utilizing existing settlement arrangements between the Central Bank of Samoa (CBS) and commercial banks which are completed the following day.
· Enhancing transparency of public finances and management of assets and liabilities by strengthening existing procedures for issuing government guarantees and developing a formal on-lending policy.
· Monitoring and disclosing fiscal risks from state-owned enterprises (SOEs). In particular, expanding the coverage of public debt to include SOE debt (guaranteed and non-guaranteed) and better understanding guaranteed public debt (including on-lending by public financial institutions (PFIs)) will facilitate the comprehensive assessment of both overall fiscal risks and debt sustainability. Increasing the capacity of the AID Coordination and Debt Management Unit will be conducive to achieving the above objectives.
C. Improving Monetary Policy Transmission and the External Position
11. Monetary policy remains appropriately accommodative. The official interest rate, the average annual yield of CBS securities, has remained stable and low at around 17 basis points, and it continues to provide necessary support to the economy in the context of low inflation. While ample liquidity exists in the banking sector, credit growth started weakening in commensurate with economic slowdown. The mission encouraged the authorities to continue their efforts to improve central bank liquidity management by better forecasting of FX needs and monetary policy transmission.
12. The authorities need to address impediments to credit access (for households and SMEs) in a comprehensive way to improve the transmission mechanism. Commercial banks’ loans to households and SMEs remain constrained with high lending rates, while households borrow from microlenders at high interest rates with large risk premiums. Structural issues in credit markets are intricately linked and restrain credit provision by commercial banks while public financial institutions (PFIs) cater to niche markets with policy lending under government implicit guarantees. Discussions have been underway to promote credit access conducive to improving the monetary policy transmission while ensuring consumer protection. Key recommendations are:
13. The authorities need to build external buffers to an adequate level to address vulnerabilities to climate change and external shocks. Improvement in the current account contributed to the accumulation of reserves in FY2019, reaching almost five months of prospective imports. Reserve coverage is projected to gradually decline to less than four months over the medium term, with widening current account deficits and no major improvements in the financial account. The reserve coverage—albeit adequate for credit-constrained economies—falls below the lower bound of an adequacy matrix when Samoa’s high vulnerability to natural disasters is considered, thereby requiring additional reserves. The mission advised the authorities to press ahead with fiscal consolidation and structural reforms that all lend support to building external buffers to an adequate level of around five months of prospective imports. This requires reducing the current account deficit by at least one percentage point of GDP relative to the baseline over the medium term with promotion of exports. Samoa’s pegged exchange rate remains appropriate and continues to serve as an appropriate nominal anchor in the context of weak monetary policy transmission.
D. Mitigating Correspondent-Banking-Relationship (CBR) Pressures
14. Despite some setbacks, the Samoan authorities have made progress in implementing AML/CFT reforms to mitigate risks from the CBR pressures. The authorities’ established an ICT system for cash transaction reporting (transactions over SAT20,000) for banks and money transfer operators (MTOs), which will also be expanded to cover suspicious transactions and cross-border transactions. Progress towards the launch of the know-your-customer (KYC) utility met with delays, resulting from the outbreak of measles in Samoa and the novel coronavirus globally restricting travel. There have also been recent changes in the scope of coverage for the project. CBS and the Asian Development Bank (ADB) remain committed to rolling out the KYC utility project as soon as practicable. To leverage the progress made thus far, the authorities need to make further advances in supervising and ensuring AML/CFT compliance in the financial sector, particularly of MTOs. given the country’s dependence on remittances, the prominent role of MTOs in the sector, and the high cost of remittances (albeit the cost has declined since the peak in 2016-2017).
15. Strengthening of the AML/CFT framework is needed. Discussions with the authorities focused on:
E. Developing a Sound Financial Sector Conducive to Inclusive Growth
16. The banking sector is healthy but continued close monitoring of developments is needed. Financial soundness indicators show that the banking sector’s overall health is sound. Capital adequacy and liquidity are trending upwards, with banks’ liquid asset ratio well above the five-year average. Profitability and earnings rebounded as economic activity and credit growth picked up in FY2019. NPLs are 3.9 percent of total loans and at the lowest level in the past decade. The authorities need to develop supervisory capacity for greater vigilance to monitor new developments, including risks emanating from cryptocurrency.
17. The mission encouraged the authorities to formulate a coherent framework for PFIs’ performance and governance, that is conducive to inclusive growth. PFI reforms remain a high priority. The role and governance of PFIs should be reformulated with the aim of achieving the specific socio-economic objectives they have been set up for, which will reduce market distortions, prevent crowding-out of commercial bank activities, and create a level playing field for banks. Subsidized lending schemes with government guarantees need to be well formulated and targeted with a commercial focus and evaluated based on a sound guiding principle to contain potential fiscal risks of contingent liabilities. If possible, policy lending should be refrained without budgetary funding. Improving accounting and disclosure practices is needed to enhance transparency and governance.
18. Financial sector policies should continue to focus on completing the implementation of the 2015 FSAP recommendations. Priorities should include: (i) modernizing the regulatory and supervisory framework; (ii) making the high-level committee on financial stability operational; (iii) upgrading prudential frameworks, and reforming mandates and governance of PFIs. The mission encouraged the Samoa National Provident Fund (SNPF) to further expand the pension coverage to households in informal sector and raise financial literacy across all generations. It is also important to address a potential conflict of interest when the SNPF engages in quasi-fiscal operations. Improving the balance sheet of the Development Bank of Samoa is also needed to safeguard debt sustainability.
19. Financial inclusion reforms could leverage fintech solutions. The mission stressed that implementing the authorities’ financial inclusion strategy (NFIS) is important to reduce inequality, including gender inequality, and increase opportunities for all Samoans. The authorities should continue supporting private sector initiatives for mobile money and payment systems, given the large number of Samoans without access to formal financial services.
F. Boosting Potential Growth with Further Structural Reforms
20. The mission welcomes the new long-term economic strategy, Samoa 2040, with its vision to transform the economy to achieve higher, more-inclusive growth across all generations. The mission encouraged the authorities to implement comprehensive structural reforms to boost potential growth that would help achieve their objectives, including: (a) raising GDP growth to 4 percent on average by 2040; (b) having per capita income reach SAT20,000 by 2040; and (c) doubling formal employment by 2040, compared with current levels. Concrete measures should include:
G. Maintaining a High Level of Engagement
21. Samoa continues to show economic resilience and maintains a high level of engagement with the IMF. Despite the challenges over the past decade, Samoa's economy has been resilient. The Government of Samoa has made progress in implementing economic reforms and is highly engaged with the IMF and other development partners. The IMF stands ready to support the government’s reform efforts through policy advice and capacity development, especially in the areas of fiscal management and reform, monetary and exchange rate policy, financial sector supervision and regulation, and macroeconomic statistics.
*****
The IMF team would like to thank the Ministry of Finance, the Central
Bank of Samoa, other ministries and government agencies, and private
sector interlocutors for their open and constructive discussions and
for their generous hospitality.
|
Table 1. Samoa: Selected Economic and Financial Indicators, 2016/17 – 2024/25 |
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|
Est. |
Proj. |
||||||||
|
2016/17 |
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
2022/23 |
2023/24 |
2024/25 |
|
|
(12-month percent change) |
|||||||||
|
Output and inflation |
|||||||||
|
Real GDP growth |
1.0 |
-2.2 |
3.5 |
3.0 |
2.5 |
2.2 |
2.2 |
2.2 |
2.2 |
|
Nominal GDP |
1.0 |
-0.2 |
5.7 |
5.5 |
4.7 |
4.9 |
5.1 |
5.1 |
5.1 |
|
Consumer price index (end of period) |
1.0 |
5.8 |
-0.1 |
2.4 |
2.2 |
2.6 |
2.8 |
2.8 |
2.8 |
|
Consumer price index (period average) |
1.3 |
3.7 |
2.2 |
2.4 |
2.2 |
2.6 |
2.8 |
2.8 |
2.8 |
|
(In percent of GDP) |
|||||||||
|
Central government budget |
|||||||||
|
Revenue and grants |
29.3 |
30.6 |
33.9 |
31.5 |
30.8 |
30.9 |
31.0 |
31.1 |
31.1 |
|
Of which: grants |
1.9 |
2.9 |
4.2 |
3.8 |
3.6 |
3.6 |
3.6 |
3.8 |
3.8 |
|
Expenditure |
31.4 |
30.6 |
31.2 |
33.1 |
33.2 |
33.5 |
33.7 |
33.8 |
33.9 |
|
Of which: Expense |
23.2 |
24.5 |
25.9 |
25.7 |
25.7 |
25.7 |
25.8 |
25.8 |
25.9 |
|
Of which: Net acquisition of non-financial assets |
8.2 |
6.1 |
5.3 |
7.4 |
7.5 |
7.8 |
7.9 |
7.9 |
7.9 |
|
Gross operating balance |
6.1 |
6.2 |
8.0 |
5.8 |
5.2 |
5.2 |
5.2 |
5.2 |
5.1 |
|
Overall fiscal balance |
-2.1 |
0.1 |
2.7 |
-1.6 |
-2.3 |
-2.6 |
-2.7 |
-2.7 |
-2.8 |
|
Overall fiscal balance excl. grants |
-4.0 |
-2.8 |
-1.5 |
-5.5 |
-6.0 |
-6.2 |
-6.4 |
-6.5 |
-6.6 |
|
Public debt |
49.7 |
52.9 |
47.6 |
43.1 |
43.8 |
44.8 |
45.9 |
46.9 |
48.1 |
|
(12-month percent change) |
|||||||||
|
Macrofinancial variables |
|||||||||
|
Broad money (M2) |
7.8 |
16.5 |
9.9 |
4.9 |
4.7 |
4.9 |
5.1 |
5.1 |
5.1 |
|
Net domestic assets |
0.7 |
0.9 |
2.1 |
… |
… |
… |
… |
… |
… |
|
Private sector credit, Commercial banks |
9.5 |
1.6 |
6.1 |
5.6 |
4.8 |
5.2 |
5.2 |
5.2 |
5.2 |
|
Total loan growth, Commercial banks |
6.6 |
1.7 |
5.8 |
… |
… |
… |
… |
… |
… |
|
Total loan growth, Public financial institutions |
12.8 |
6.0 |
17.2 |
… |
… |
… |
… |
… |
… |
|
(Ratio) |
|||||||||
|
Total capital to risk-weighted exposures |
25.1 |
27.3 |
27.5 |
… |
… |
… |
… |
… |
… |
|
Non-performing loans |
4.1 |
4.3 |
3.9 |
… |
… |
… |
… |
… |
… |
|
(In millions of U.S. dollars) |
|||||||||
|
Balance of payments |
|||||||||
|
Current account balance |
-16.6 |
6.8 |
19.4 |
-6.6 |
-11.3 |
-12.7 |
-14.6 |
-15.7 |
-16.8 |
|
(In percent of GDP) |
-2.0 |
0.8 |
2.3 |
-0.7 |
-1.2 |
-1.3 |
-1.4 |
-1.5 |
-1.5 |
|
Merchandise exports, f.o.b. 1/ |
38.0 |
36.3 |
50.0 |
51.1 |
52.1 |
53.1 |
54.2 |
55.3 |
56.4 |
|
Merchandise imports, f.o.b. |
308.6 |
328.9 |
349.4 |
369.4 |
387.9 |
404.3 |
422.4 |
442.1 |
464.5 |
|
Services (net) |
140.6 |
158.4 |
174.8 |
161.0 |
165.1 |
171.7 |
180.9 |
190.1 |
204.2 |
|
Income (net) |
-26.6 |
-30.0 |
-37.3 |
-36.9 |
-36.1 |
-35.7 |
-35.7 |
-36.1 |
-36.9 |
|
Current transfers |
140.0 |
171.1 |
181.3 |
187.5 |
195.6 |
202.4 |
208.4 |
217.1 |
224.0 |
|
External reserves and debt |
|||||||||
|
Gross official reserves |
122.3 |
163.1 |
192.8 |
191.9 |
190.7 |
188.6 |
190.2 |
191.7 |
185.3 |
|
(In months of next year's imports of GNFS) |
3.5 |
4.4 |
4.9 |
4.7 |
4.5 |
4.2 |
4.1 |
4.0 |
3.8 |
|
Public debt (in millions of tala) 2/ |
1,047.4 |
1,113.8 |
1,059.8 |
1,020.8 |
1,082.6 |
1,160.5 |
1,247.2 |
1,339.6 |
1,442.4 |
|
(In percent of GDP) |
49.7 |
52.9 |
47.6 |
43.5 |
44.0 |
45.0 |
46.0 |
47.1 |
48.2 |
|
External debt (in percent of GDP) |
48.3 |
52.0 |
47.0 |
43.1 |
43.8 |
44.8 |
45.9 |
46.9 |
48.1 |
|
Exchange rates |
|||||||||
|
Market rate (tala/U.S. dollar, period average) 3/ 4/ |
2.54 |
2.52 |
2.62 |
2.67 |
… |
… |
… |
… |
… |
|
Market rate (tala/U.S. dollar, end period) 3/ 4/ |
2.51 |
2.60 |
2.63 |
2.70 |
… |
… |
… |
… |
… |
|
Nominal effective exchange rate (2010 = 100) 3/ 4/ |
110.1 |
106.3 |
109.1 |
109.3 |
… |
… |
… |
… |
… |
|
Real effective exchange rate (2010 = 100) 3/ 4/ |
104.3 |
102.4 |
105.3 |
106.3 |
… |
… |
… |
… |
… |
|
Memorandum items: |
|||||||||
|
Nominal GDP (in millions of tala) |
2,109 |
2,106 |
2,225 |
2,348 |
2,458 |
2,578 |
2,709 |
2,847 |
2,993 |
|
GDP per capita (U.S. dollars) |
4,211 |
4,193 |
4,227 |
4,428 |
4,573 |
4,731 |
4,898 |
5,073 |
5,252 |
|
Sources: Data provided by the Samoan authorities; and IMF staff estimates and projections. |
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|
1/ Includes re-export of fuel after 2009/10. |
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|
2/ Includes domestic and external public debt. |
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|
3/ IMF, Information Notice System. |
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|
4/ Latest data available. |
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