Samoa: Staff Concluding Statement of the 2020 Article IV Mission
IMF News, March 2, 2020
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- Published: March 2, 2020
A. Recent developments, outlook, and risks: economic resilience
- Growth and recent shocks:
- Growth reached -2.2 percent in FY2018 after the rebased GDP; recovery to 3.5 percent in FY2019.
- Real GDP growth reached 4.4 percent in 2019Q3.
- Staff projects real GDP growth will reach around 3 percent in FY2020, moderate in FY2021, and normalize at around 2¼ percent over the medium term.
- Risks identified: further slowdown in tourism, vulnerability to natural disasters, loss of correspondent banking relationships (CBRs), measles outbreak impacts, and the novel coronavirus outbreak.
- Inflation and prices:
- Headline inflation: 2.2 percent in FY2019 (down from 3.7 percent in FY2018).
- Inflation averaged 1.5 percent (y/y) during the six months through December and is projected to reach 2½ percent in FY2020.
- Staff projects inflation will remain below the three percent target over the medium term.
- External sector and reserves:
- Current account surplus of 2.3 percent of GDP in FY2019; projected to turn to deficit in FY2020 and reach 1½ percent of GDP over the medium term.
- Reserve coverage: almost five months of prospective imports in FY2019; projected to decline to 3¾ months of imports over the medium term.
- Public debt and sustainability:
- Public debt reached 48 percent of GDP in FY2019 (below the authorities’ ceiling of 50 percent).
- Staff projects public debt will reach around 48 percent of GDP in FY2025.
- Assessment: debt is sustainable but remains at high-risk of distress due to natural disaster vulnerability.
- Downside scenario:
- If shocks materialize, growth could fall below the trend rate of around 2 percent.
B. Financing development needs and ensuring fiscal sustainability
- Baseline fiscal assumptions and projections:
- Baseline assumes net acquisition of non-financial assets (capital spending) equivalent to 7½–8 percent of GDP annually.
- Overall fiscal deficit projected to increase to around 2¾ percent of GDP over the medium term.
- Table highlights (selected):
- Overall fiscal balance: -2.1 (2016/17), 0.1 (2017/18), 2.7 (2018/19), -1.6 (2019/20), -2.3 (2020/21), -2.6 (2021/22), -2.7 (2022/23), -2.8 (2023/24).
- Public debt: 49.7 (2016/17), 52.9 (2017/18), 47.6 (2018/19), 43.1 (2019/20), 43.8 (2020/21), 44.8 (2021/22), 45.9 (2022/23), 46.9 (2023/24), 48.1 (2024/25).
- Gross official reserves (in months of next year's imports of GNFS): 4.4 (2016/17), 4.5 (2017/18), 4.0 (2018/19).
- Policy objective and target:
- Indicative medium-term fiscal target: keep the fiscal deficit within 1 percent of GDP on average over the medium term and below an annual ceiling of 2 percent of GDP.
- Debt targets: reduce debt to 45 percent of GDP over the medium term and 40 percent of GDP over the long term.
- Fiscal consolidation and revenue/PEFM measures recommended:
- Contain growth in current spending through spending efficiency gains; strengthen social protection and appropriately budget maintenance/utilities costs.
- Continue implementing the 2017 Revenue Review; review tax exemptions; broaden VAGST base and consider increasing/introducing excises.
- Improve tax administration and audit capacity; implement Tax Invoice Monitoring System while being mindful of compliance costs for retail businesses.
- Mobilize additional revenues to compensate for expected forgone revenues from PACER Plus when it comes into effect.
- Ensure new loans are consistent with Medium-Term Debt Strategy (MTDS 2016-2020) and favor concessional terms (grant element above MTDS minimum of 35 percent).
- Public financial management (PFM) priorities:
- Strengthen medium-term fiscal framework using the Samoa Economic and Revenue Forecasting Model.
- Monitor and assess spending outcomes via expenditure impact analysis and independent audits.
- Improve budget reliability and predictability (estimates on grants, procurement efficiency, monitoring of financial flows, execution of grant-financed capital spending).
- Improve cash management (electronic lodgment, timely identification in FinanceOne, daily bank reconciliation/reporting for the main TALA account, include public bodies in Treasury Single Account, commence minimum balance target in commercial banks, utilize settlement arrangements between CBS and commercial banks).
- Enhance transparency in public finances (procedures for government guarantees, develop on-lending policy).
- Monitor and disclose fiscal risks from SOEs; expand public debt coverage to include SOE debt; increase capacity of the AID Coordination and Debt Management Unit.
C. Improving monetary policy transmission and the external position
- Monetary stance and transmission:
- Official interest rate (average annual yield of CBS securities) around 17 basis points.
- Ample liquidity in banking sector; credit growth started weakening with economic slowdown.
- Recommendation: continue improving central bank liquidity management, better forecasting of FX needs, and strengthen monetary policy transmission.
- Credit access and structural impediments:
- Private sector credit growth: 9.5 (2016/17), 1.6 (2017/18), 5.6 (2018/19), 4.8 (2019/20) [table entries].
- High lending rates constrain loans to households and SMEs; microlenders charge high interest rates with large risk premiums.
- PFIs cater to niche markets with policy lending under implicit guarantees.
- Policy recommendations to improve transmission and access:
- Re-establish a credit bureau; enhance bankruptcy laws; strengthen consumer protection; improve financial literacy.
- Strengthen regulation and supervision of credit unions, microlenders, and informal lending.
- Develop disaster risk insurance or financial products to mitigate credit risks from natural disasters.
- Review linkages between commercial banks and PFIs/SOEs; explore options to place wholesale depositors on equal footing.
- External buffers:
- Gross official reserves: 122.3 (2016/17), 163.1 (2017/18), 192.8 (2018/19), 191.9 (2019/20) [millions of U.S. dollars].
- Reserve coverage reached almost five months of prospective imports in FY2019; projected to decline to less than four months over the medium term.
- Mission advised building external buffers to an adequate level of around five months of prospective imports by reducing the current account deficit by at least one percentage point of GDP relative to the baseline over the medium term.
- Exchange rate peg remains appropriate; serves as nominal anchor given weak monetary transmission.
D. Mitigating correspondent-banking-relationship (CBR) pressures and AML/CFT
- Progress and initiatives:
- ICT system established for cash transaction reporting (transactions over SAT20,000) for banks and money transfer operators (MTOs); to be expanded to suspicious and cross-border transactions.
- KYC utility development with ADB experienced delays (measles outbreak; novel coronavirus travel restrictions); launch expected in 2020 (coverage and scope changes noted).
- Strengthening AML/CFT framework—key focus areas:
- Build capacity of MTOs: KYC utility allows MTOs to verify customers electronically against the Office of the Electoral Commission (OEC) biometric database; training and maintenance of coverage and data privacy needed; explore synergies with national digital identity plans.
- Allocate resources for FIU: FIU housed in CBS will need additional resources to analyze cash transaction reports and disseminate financial intelligence; consideration to transfer AML/CFT supervisory responsibility over TCSPs to the FIU.
- Ensure coverage of domestic PEPs with enhanced customer due diligence; align anti-corruption framework with the UN Convention against Corruption; establish robust asset declaration system for PEPs.
- Reduce risk profile of the offshore financial center (OFC): 2019 legislative amendments (Trustee Companies Amendment Act; Trustee Companies Amendment Regulations); priority to make beneficial ownership information of IBCs effectively available; supervise TCSPs via risk-based offsite monitoring and onsite inspections; impose enforcement actions and sanctions for violations.
- Continue international engagement with Asia Pacific Group, European Union, and regional partners; explore regional solutions to address CBR pressures and consider benefits, costs, and privacy requirements of a regional KYC facility.
- Special note: given dependence on remittances and the prominent role of MTOs, supervising MTOs for AML/CFT compliance is critical; remittance costs have declined since the 2016-2017 peak.
E. Developing a sound financial sector conducive to inclusive growth
- Banking sector health:
- Financial soundness indicators: capital adequacy and liquidity trending upwards; banks’ liquid asset ratio above five-year average.
- Profitability and earnings rebounded in FY2019; NPLs are 3.9 percent of total loans (lowest level in the past decade).
- Total capital to risk-weighted exposures: 25.1 (2016/17), 27.3 (2017/18), 27.5 (2018/19).
- PFIs and governance:
- Need coherent framework for PFI performance and governance to achieve socio-economic objectives, reduce market distortions, avoid crowding-out commercial bank activities, and create level playing field.
- Recommendations: target and evaluate subsidized lending schemes; refrain from policy lending without budgetary funding where possible; improve accounting and disclosure practices.
- Improve the balance sheet of the Development Bank of Samoa to safeguard debt sustainability.
- Implementation of 2015 FSAP recommendations:
- Priorities: modernize regulatory/supervisory framework; operationalize high-level committee on financial stability; upgrade prudential frameworks; reform PFIs’ mandates and governance.
- Samoa National Provident Fund (SNPF) encouraged to expand pension coverage to informal sector and raise financial literacy; address conflict of interest when SNPF engages in quasi-fiscal operations.
- Financial inclusion and fintech:
- Implement National Financial Inclusion Strategy (NFIS) to reduce inequality and increase opportunities.
- Support private sector mobile money and payment system initiatives to reach Samoans without formal financial services.
F. Boosting potential growth with further structural reforms (Samoa 2040)
- Samoa 2040 vision and targets:
- Vision aims to raise GDP growth to 4 percent on average by 2040; per capita income to reach SAT20,000 by 2040; double formal employment by 2040 compared with current levels.
- Concrete measures recommended:
- Promote agriculture and MSMEs: improve credit access, facilitate insurance provision, expand successful pilot projects (Inclusive Development Projects, Anchor Businesses).
- Facilitate youth employment: active labor market policies, better education and training to reduce NEET rates among youth.
- Manage pace of minimum wage increases over the medium term to balance income/inclusion and labor market outcomes.
- Enhance business environment and export growth: review tax regime for businesses, reduce export costs, create one-stop shop for exporters, promote export diversification, introduce a foreign direct investment law.
- Upgrade and maintain disaster-resilient physical infrastructure; mainstream climate resilience into sector plans.
- Build statistical capacity: invest in human capital and technology, enhance inter-agency collaboration and legal framework for information sharing to support evidence-based policies.
G. Maintaining a high level of engagement
- Engagement and IMF support:
- Samoa remains highly engaged with the IMF and development partners.
- The IMF stands ready to support reform efforts through policy advice and capacity development, particularly in fiscal management and reform, monetary and exchange rate policy, financial sector supervision and regulation, and macroeconomic statistics.
- Acknowledgments:
- IMF team thanked the Ministry of Finance, the Central Bank of Samoa, other ministries and government agencies, and private sector interlocutors for discussions and hospitality.
IMF staff concluding statement of the 2020 Article IV mission for Samoa.