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Samoa: Staff Concluding Statement of the 2021 Article IV Mission
January 25, 2021
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Pemba Sherpa
Phone: +1 202 623-7100Email: MEDIA@IMF.org
January 25, 2021
PRESS OFFICER: Pemba Sherpa
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Washington, DC: COVID-19 has had devastating effects on Samoa’s economy, adding to the economic shock experienced from the tragic outbreak of measles in late 2019. The authorities’ swift actions and dedicated efforts, supported by the international community, moderated the impacts which have been of historical magnitude. Nonetheless, real GDP in FY2020:Q3 fell to the level last observed in 2014. The authorities face daunting tasks ahead to navigate the economy for an inclusive, durable recovery under unprecedented uncertainty. The mission encouraged continued efforts to entrench a durable economic recovery, and recommended the following policies.
1. Samoa has shown resilience to past economic shocks, underpinned by the authorities’ strong commitment to support the economy, and financial assistance provided by the international community. Samoa was among the first countries in the world to secure its border to protect its citizens from COVID-19. The authorities’ quick response to the measles outbreak and the global pandemic has identified the policy priorities well, including safeguarding human capital, providing support to the private sector, and maintaining macroeconomic stability. With support provided by the international community, the authorities enhanced the country’s preparedness to handle the impact of COVID-19, as well as improving the quality and efficiency of the health care system. The policy response also targeted assistance to vulnerable businesses and households to ease the impact of the pandemic and safeguard livelihoods.
2. However, the prolonged effects of the global pandemic heightened the economic challenges, adversely impacting the wellbeing of many Samoans. The border closure and restrictions under the State of Emergency kept the pandemic at bay, protected the Samoan people, and avoided the collapse of the health care system. Nevertheless, a severe blow to the tourism sector and spillovers on other sectors resulted in a severe economic contraction. The 2020:Q3 GDP, released in late December, recorded a fourth consecutive quarterly decline, and the total economic fallout of the two health shocks has reached 16¼ percent since Samoa hosted the Pacific Games in July 2019. Consequently, the recession pushed the economy back to the level of real GDP last observed in 2014, leaving deep scars.
3. Based on the preliminary data, staff projects real GDP to contract by around –8.5 percent in FY2021, following −3.2 percent in FY2020. While remittance inflows proved resilient and helped moderate adverse impacts of the crisis, weak domestic demand dictates private sector developments under the State of Emergency. Most social restrictions were lifted in December with the aim of stimulating domestic economic activities, but floods around the time of the festive season dealt yet another blow to the economy, costing (based on the authorities’ estimate) at least 1½ percent of GDP. Against this background, consumer prices continue to decline, and headline inflation reached –5 percent (y/y) on average for the past twelve months through December. Declines in global commodity prices and domestic utilities (resulting from the fiscal stimulus), as well as increased agricultural production, underpin staff’s inflation projection of –2.5 percent for FY2021.
4. The economy is projected to bottom in the latter half of FY2021, and an economic recovery is expected to begin in FY2022. Given the scarring effects of the pandemic, it will take several years for the economy to reach the pre-COVID level of real GDP. The pace of recovery will depend on a number of factors, of which the most critical are procurement and rollout of effective COVID-19 vaccines, timing of the border reopening, and resumption of tourism and its related sectors. Implementation of effective macroeconomic policies facilitate job creation and mobility, help heal the scarring effects, and increase durability of the economic recovery over the medium term.
5. Downside risks to the outlook remain. Under execution and premature withdrawal of economic stimulus measures could impede the pace and durability of the economic recovery and strain financial stability. The recovery path depends on the procurement and rollout of the effective vaccines and resumption of private sector activities. Premature opening of the border poses a threat of a domestic outbreak of COVID-19. High vulnerability to natural disasters continues to threaten the economy, potentially causing widespread damage. Delays in rollout of a Know-Your-Customer (KYC) utility to address customer identification and other AML/CFT concerns could potentially hurt perceptions on remittance flows, raise pressures on correspondent banking relationships (CBRs), and adversely impact the economy as well as central bank’s reserve coverage. Global trade tensions remain headwinds, but regional trade agreements may yield a favorable outcome over the medium term.
6. The authorities’ swift actions helped orchestrate mobilization of multi-pillared financial assistance to assemble fiscal stimulus packages. The authorities introduced phase I and II stimulus packages in a timely manner, with financial support from the international community. The phase-I stimulus (3.1 percent of GDP) in FY2020 entailed support to affected businesses and households, while safeguarding human capital through health, education, food security, and essential public services. The phase-II stimulus package (4.2 percent of GDP) in the FY2021 extended some of the phase-I stimulus measures and introduced new ones for vulnerable households and businesses outside the reach of the phase I stimulus, including through the provision of community-based primary health care services and unemployment subsidies. Annual dividend payouts by the National Provident Fund (1.5 percent of GDP) were also part of the phase II stimulus package. Several state-owned enterprises (SOEs) helped the government execute the stimulus.
7. Fiscal outturns in FY2020 show that the overall balance recorded two-consecutive years of surplus, reaching around 6 percent of GDP. As a result, the public debt-to-GDP ratio continued to decline to 46¾ percent of GDP. Grants from the international community provided timely support, and alleviated pressures on government’s cashflow. The surplus in FY2020 was driven by a favorable outturn in tax revenue collection owing to improved tax compliance in advance of the phased rollout of the Tax Invoicing Management System (TIMS). More importantly, under execution of the capital budget largely contributed, since development projects contain a large share of import components (both goods and services) and the prolonged border closure and severe weather adversely impacted project execution.
8. The authorities need to further accommodate their expansionary fiscal policy for an inclusive recovery. The staff projects the overall fiscal balance in FY2021 to reach around –3.0 percent of GDP, if the operating budget inclusive of the phase-II stimulus and the plan to invoke the G20 Debt Services Suspension Initiative (DSSI) are fully executed, along with a reformulated capital expenditure budget that takes account of its execution capacity. Given the severe economic fallout of the pandemic, the staff recommends extending stimulus measures until end-FY2024, harnessed by a commitment to stronger medium-term fiscal consolidation that helps limit scaring effects of the pandemic, and promotes inclusive, durable recovery, while ensuring debt sustainability.
9. The strategy of further fiscal accommodation (staff’s “alternative scenario”) entails extension of temporary measures with better targeting and gradual withdrawal. The strategy would raise the deficit in FY2021-FY2024 relative to staff’s baseline projection, but the impact on the public debt trajectory would be partly offset through the stimulative impact on output with efforts to mobilize revenue over the medium term, including through:
10. The authorities need to fully execute stimulus measures. The mission welcomes the authorities’ efforts to strengthen public financial management (PFM) with the new Finance Sector Plan 2020/21-2024/25. The mission stresses the importance of:
11. The authorities need to secure adequate budget financing over the medium term, while safeguarding debt sustainability. 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. Staff projects a sizable fiscal deficit to persist over the medium term, but decline to the authorities’ deficit target of 2 percent of GDP by FY2026. The public-debt-to-GDP ratio is projected to plateau at around 57 percent under the baseline, with the deficit to be fully financed by concessional loans. The fiscal policies under the staff’s alternative scenario would raise the deficit in FY2022-FY2024 but bring the public debt trajectory downward over the medium term. With the value of outstanding government deposits amounting to around 13 percent of GDP at end-FY2020, the authorities need to formulate the size and the pace of deposit drawdown to partly offset the use of concessional loans, while maintaining an adequate buffer needed for self-insurance against losses from natural disasters. Efforts to mobilize budget support grants to fill in the financing gap will bring the public debt trajectory closer to the target of 50 percent of GDP by the end of the medium term.
12. Monetary policy is appropriately accommodative, but credit intermediation remains constrained by weak monetary transmission. The policy rate has remained at 15 basis points, signaling appropriate support in the context of low inflation. Following the onset of the global pandemic, the Central Bank of Samoa (CBS) has set up a Standby Credit Facility for commercial banks to obtain liquidity as needed. The CBS has ceased open market operations to allow the banks to use their available liquidity to meet private-sector credit demand. As of end-November 2020, domestic liquidity in the banking system remained ample, with excess reserves reaching 16 percent of GDP. However, the liquidity position varies across the banks. Given price deflation, CPI-adjusted deposit and lending rates both reached a 7-year high amid heightened credit risks. Private sector credit growth continued to decline, reaching 1.5 percent (y/y) in November 2020 (the lowest since 2013).
13. The authorities need to continue with a holistic approach to improve the transmission mechanism. Structural issues in credit markets restrain credit provision by commercial banks while public financial institutions (PFIs) cater to niche markets with policy lending under implicit government guarantees. The mission welcomes the CBS’s review, in consultation with the commercial banks, of the linkage between the banks and the PFIs/SOEs. Some banks had been paying much higher deposit rates to wholesale depositors (including PFIs/SOEs) than retail counterparts. The implementation by the CBS to cap deposit interest rates at 3 percent for 12 months, starting December 2020, was intended to address market distortions and reduce volatility in the wholesale deposit rate that pushed up banks’ cost of funds. Whether it becomes conducive to cutting lending rates rests on a commercial decision by the banks. To improve monetary transmission and help facilitate credit intermediation, the CBS would need to implement its financial sector master plan in a measured approach, including:
14. The authorities need to build external buffers to an adequate level to address vulnerabilities to climate change and external shocks. The support by the international community helped build foreign exchange reserves at the CBS to a comfortable level during the height of the pandemic, which contributed to external stability. At end November, reserves cover about 8 months of prospective imports, and remain adequate for credit-constrained economies. But they are expected to decline closer to the lower bound of the desirable range (4.1 to 6.4 months of prospective imports) over the medium term once Samoa’s vulnerability to natural disasters is considered. The mission advises the authorities to build reserve buffers to an adequate medium-term import cover of at least 5 months, including through donor support. Given continued external volatility, the mission welcomes the authorities’ commitment to more frequent reviews to ensure Samoa’s pegged exchange rate continues to serve as an appropriate nominal anchor in the context of weak monetary policy transmission.
15. Commercial banks hold capital well in excess of minimum requirements but need to maintain sound liquidity positions for financial stability . Financial soundness indicators through 2020 Q3 show that the banking sector’s overall health has held up. The loan-to-deposit ratio continued to fall with slowdowns in credit growth. While the NPL ratio continued to decline overall, concerns of deteriorating loan quality prompted the banks to set aside appropriately additional provisions. Separately, the concentration of banks’ exposure to commercial real estate sector has increased recently against limited supplies of available customary land for commercial use. Declines in profitability during 2019:Q4 and 2020:Q3 are consistent with the economic fallout of the shocks. However, the experience among the banks varied, and it depends on their profit base, exposure to the tourism sector, and the type of borrowers. Careful monitoring and assessment of the banks cash flows, liquidity positions, and balance sheets are needed to maintain financial stability.
16. The mission encouraged the authorities to formulate a coherent framework for PFIs’ performance and governance. 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, and prevent crowding-out of commercial bank activities. 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. PFIs should refrain from policy lending, unless budgetary funding is in place. To ensure debt sustainability, the policy can aim to improve the balance sheet of the Development Bank of Samoa (DBS), catering important services to the development of MSMEs for inclusive growth. Recent efforts by the DBS to write-off existing NPLs are a step in the right direction, and need to continue in order to manage fiscal risk from the DBS. Improving accounting and disclosure practices is also needed to enhance transparency and governance.
17. Financial sector policies should continue to focus on completing the implementation of the 2015 FSAP recommendations. The mission acknowledges the efforts made by the CBS which has made continuing progress in a number of areas, including upgrading prudential regulations and the supervisory framework to meet the changing financial sector landscape, conducting onsite inspections of insurance companies, and drafting legislation to bring other financial institutions under the CBS oversight. Moving forward, the priorities include closely monitoring activities by financial institutions for financial stability, building further capacity to conduct asset reviews and sensitivity analyses, upgrading the resolution framework that entails correction actions, further enhancing regulatory and supervisory capacity to prepare for the changing ecosystem, and continuing with efforts to enhance risk-based AML/CFT supervision (see below).
18. Financial inclusion reforms could leverage fintech solutions. The mission stressed that implementing the authorities’ financial inclusion strategy (NFIS) is important to reduce inequality (particularly pertaining to gender inequality), and increase opportunities for all Samoans. The authorities should continue supporting private sector initiatives for mobile money and payment systems.
19. Correspondent banking relationship (CBR) pressures remain a concern, which need to be mitigated with ongoing reforms towards enhanced AML/CFT effectiveness. Two domestic banks have received notice of termination of their U.S. dollar CBR with a correspondent bank by end-March 2021. The CBS is monitoring the affected banks in identifying alternatives as well as the impact on financial and remittance flows. Consultants have been engaged by the CBS to take stock of the country’s implementation of the Asia Pacific Group’s recommendations in the 2015 Mutual Evaluation Report and update its national risk assessment. Enhancing AML/CFT supervision should contribute to upgrading compliance in higher risk institutions, namely banks, money transfer operators (MTOs), and trust and company service providers (TCSPs), including customer due diligence and suspicious transaction reporting obligations. Development of a national digital identification system should facilitate customer identification, especially for citizens receiving remittances. Ensuring that TCSPs are verifying the accuracy of beneficial ownership information and that authorities are facilitating international exchange of such information will contribute to enhancing transparency of international business companies established in Samoa. The mission encourages that the authorities continue to engage other Pacific island countries and international partners in developing regional solutions to address CBR pressures, including a regional digital Know-Your-Customer facility.
20. Structural issues predating the pandemic require urgent attention, and sectoral strategies need to be realigned to the post pandemic. COVID-related job losses are concentrated in the tourism and supporting sectors that employ a large fraction of women and youths. Some Samoans under seasonal employment programs (SEPs) abroad have also returned home. Job creation and mobilization must be addressed to reduce high unemployment, underemployment, and those who are “not in education, employment or training (NEET)” among the youth. Multifaceted structural reforms—well-aligned with key outcomes expected in each sector to achieve sustainable development goals (SDGs)—will help women and young generations acquire relevant job skills, fortify the recovery, and minimize scarring. Formulating reform priorities and sequencing, with particular attention to the tourism sector, is indispensable to fully execute the strategies. Focuses are:
21. The mission encourages the authorities to continue building statistical capacity and interagency collaboration that facilitate evidence-based policy making. The COVID-19 crisis has increased the need for granular, relevant, and reliable data in a timely manner. International organizations have stepped in and helped the authorities gather necessary information during the pandemic, and analyze its impacts for Samoan households and businesses. Moving forward, the authorities need to make further investment in human capital and technology, promote comprehensive inter-agency collaboration, and enhance information sharing for the production of timely and quality statistics, supported by the legal framework. These efforts will help promote sound policy management and structural reforms to underpin inclusive, durable economic recovery and address SDGs. The authorities can also integrate their efforts into the establishment of national digital identification, which can go a long way towards improving efficiency of public administration, services delivery, and targeting of social protection programs. The enhanced statistical capacity will help monitor the progress , adjust the strategy if needed, and build a prosperous economy for all Samoan citizens.
22. Samoa is addressing economic challenges and maintains a high level of engagement with the IMF. The Samoan people have steered economic challenges over the past decades and shown resilience, with support from their communities, their government, and the international community. It is the time again for the country to turn adversity into opportunity as the Government of Samoa continues to strive to make progress in implementing economic reforms. The government is highly engaged with the IMF and other development partners, and 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.
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Table 1. Samoa: Selected Economic and Financial Indicators, 2017/18 – 2025/26 |
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|
Est. |
Proj. |
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|
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
2022/23 |
2023/24 |
2024/25 |
2025/26 |
|
|
(12-month percent change) |
|||||||||
|
Output and inflation |
|||||||||
|
Real GDP growth |
-2.1 |
3.6 |
-3.2 |
-8.5 |
2.9 |
3.0 |
3.5 |
2.5 |
2.1 |
|
Nominal GDP |
-0.1 |
5.8 |
-2.8 |
-10.6 |
5.6 |
5.1 |
5.9 |
5.2 |
4.8 |
|
Consumer price index (end of period) |
5.8 |
-0.1 |
-3.3 |
3.1 |
1.9 |
2.4 |
2.4 |
2.6 |
2.6 |
|
Consumer price index (period average) |
3.7 |
2.2 |
1.5 |
-2.5 |
2.7 |
2.1 |
2.4 |
2.6 |
2.6 |
|
(In percent of GDP) |
|||||||||
|
Central government budget |
|||||||||
|
Revenue and grants |
32.1 |
35.7 |
38.5 |
37.2 |
32.2 |
33.8 |
35.3 |
35.7 |
35.8 |
|
Of which: grants |
4.4 |
6.0 |
9.4 |
11.3 |
5.5 |
5.5 |
5.6 |
5.6 |
5.6 |
|
Expenditure |
32.1 |
32.9 |
32.3 |
40.3 |
38.8 |
39.0 |
38.0 |
38.0 |
37.8 |
|
Of which: Expense |
24.5 |
25.8 |
28.8 |
36.2 |
32.6 |
31.6 |
30.4 |
29.9 |
29.6 |
|
Of which: Net acquisition of non-financial assets |
7.6 |
7.1 |
3.5 |
4.1 |
6.3 |
7.4 |
7.7 |
8.0 |
8.2 |
|
Gross operating balance |
7.7 |
9.8 |
9.7 |
1.0 |
-0.4 |
2.2 |
5.0 |
5.8 |
6.2 |
|
Overall fiscal balance |
0.1 |
2.7 |
6.2 |
-3.0 |
-6.7 |
-5.2 |
-2.7 |
-2.2 |
-2.0 |
|
Overall fiscal balance excl. grants |
-4.3 |
-3.3 |
-3.2 |
-14.3 |
-12.2 |
-10.7 |
-8.3 |
-7.9 |
-7.6 |
|
(12-month percent change) |
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|
Macrofinancial variables |
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|
Broad money (M2) |
16.5 |
9.9 |
-0.9 |
1.8 |
6.7 |
6.0 |
5.9 |
4.9 |
4.8 |
|
Net domestic assets |
-2.8 |
2.1 |
-5.5 |
… |
… |
… |
… |
… |
… |
|
Private sector credit, Commercial banks |
1.6 |
6.1 |
5.8 |
3.5 |
5.6 |
6.0 |
5.4 |
5.3 |
5.2 |
|
Total loan growth, Commercial banks |
1.7 |
5.8 |
3.9 |
… |
… |
… |
… |
… |
… |
|
Total loan growth, Public financial institutions |
6.0 |
17.2 |
9.0 |
… |
… |
… |
… |
… |
… |
|
(Ratio) |
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|
Total capital to risk-weighted exposures |
27.3 |
27.5 |
27.5 |
… |
… |
… |
… |
… |
… |
|
Non-performing loans |
4.3 |
3.9 |
3.9 |
… |
… |
… |
… |
… |
… |
|
(In millions of U.S. dollars) |
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|
Balance of payments |
|||||||||
|
Current account balance |
7.2 |
25.9 |
9.3 |
-46.0 |
-79.6 |
-53.3 |
-31.6 |
-17.5 |
-15.1 |
|
(In percent of GDP) |
0.9 |
3.0 |
1.2 |
-6.2 |
-10.2 |
-6.5 |
-3.7 |
-1.9 |
-1.6 |
|
Merchandise exports, f.o.b. 1/ |
36.3 |
50.0 |
46.3 |
41.1 |
40.2 |
40.5 |
42.7 |
45.2 |
48.0 |
|
Merchandise imports, f.o.b. |
328.9 |
349.4 |
316.3 |
288.3 |
299.1 |
325.5 |
352.1 |
388.7 |
423.8 |
|
Services (net) |
158.4 |
179.8 |
113.9 |
-25.7 |
17.8 |
61.6 |
106.7 |
137.3 |
167.8 |
|
Income (net) |
-29.7 |
-35.8 |
-23.5 |
-17.2 |
-15.1 |
-16.1 |
-17.6 |
-19.6 |
-23.1 |
|
Current transfers |
171.1 |
181.3 |
188.9 |
244.0 |
176.5 |
186.3 |
188.7 |
208.3 |
216.0 |
|
External reserves and debt |
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|
Gross official reserves 2/ |
163.1 |
192.8 |
230.6 |
208.3 |
166.9 |
156.8 |
168.3 |
182.8 |
189.1 |
|
(In months of next year's imports of GNFS) |
4.4 |
5.6 |
7.3 |
6.4 |
4.7 |
4.1 |
4.1 |
4.1 |
4.0 |
|
Public debt (in millions of tala) 3/ |
1,113.8 |
1,058.6 |
1,012.3 |
988.6 |
1,135.9 |
1,249.8 |
1,313.5 |
1,370.6 |
1,425.8 |
|
(In percent of GDP) |
52.8 |
47.4 |
46.7 |
51.0 |
55.5 |
58.1 |
57.7 |
57.2 |
56.8 |
|
External debt (in percent of GDP) |
51.9 |
46.8 |
46.3 |
50.7 |
55.3 |
58.0 |
57.6 |
57.1 |
56.8 |
|
Exchange rates |
|||||||||
|
Market rate (tala/U.S. dollar, period average) 4/ |
2.52 |
2.62 |
2.67 |
… |
… |
… |
… |
… |
… |
|
Market rate (tala/U.S. dollar, end period) 4/ |
2.60 |
2.63 |
2.70 |
… |
… |
… |
… |
… |
… |
|
Nominal effective exchange rate (2010 = 100) 4/ |
106.3 |
109.1 |
109.3 |
… |
… |
… |
… |
… |
… |
|
Real effective exchange rate (2010 = 100) 4/ |
102.4 |
105.2 |
106.3 |
… |
… |
… |
… |
… |
… |
|
Memorandum items: |
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|
Nominal GDP (in millions of tala) |
2,108 |
2,231 |
2,168 |
1,938 |
2,047 |
2,151 |
2,278 |
2,396 |
2,510 |
|
GDP per capita (U.S. dollars) |
4,198 |
4,238 |
3,961 |
3,646 |
3,780 |
3,930 |
4,116 |
4,278 |
4,425 |
|
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 the IMF disbursement of SDR16.2 million (100 percent of quota) under the Rapid Credit Facility (RCF) and external financial assistance by |
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multilateral and bilateral donors to support policies to address impacts of the global COVID-19 pandemic. |
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3/ Includes domestic and external public debt. |
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4/ IMF, Information Notice System. |
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