Samoa: Staff Concluding Statement of the 2019 Article IV Mission

IMF News, March 4, 2019

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Samoa: Staff Concluding Statement of the 2019 Article IV Mission

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• Published: March 4, 2019

Recent developments, outlook, and risks

• Samoa faces vulnerabilities to natural disasters and pressures on correspondent banking relationships (CBRs), but the economy has shown resilience and strong engagement with the Fund and development partners.
• Growth projections:
  • Rebound to 3.4 percent in 2018/19 (driven by infrastructure spending and development of the communication sector).
  • Spike to 4.4 percent in 2019/20 (driven by Pacific Games-related tourism).
  • Normalize to about 2.2 percent in the medium term.
• Inflation:
  • Peaked at 3.7 percent in 2017/18; projected to be back below the central bank target of 3 percent in 2018/19.
• Current account:
  • Recorded a surplus of 2.3 percent of GDP in 2017/18 due to temporary transfers; projected to revert to a deficit as transfers normalize.
• Fiscal outlook:
  • Fiscal balance reached a surplus of 0.1 percent of GDP in 2017/18.
  • Staff projects a 1.2 percent of GDP deficit in 2018/19, widening to close to 3 percent of GDP in the medium term.
• Public debt and risk:
  • Public debt slightly exceeded the authorities’ ceiling of 50 percent of GDP in 2017/18.
  • Debt projected to reach 53.7 percent of GDP in 2023/24.
• Risks:
  • Tilted to the downside: natural disasters, withdrawal of CBRs, and commodity price volatility.
  • Upside risks include stronger-than-expected Pacific Games impact, increased tourism from expanded Samoa Airways, and efficiency gains from the new submarine cable.

Fiscal policy and strategy: tightening while financing development needs

• Overall recommendation: tighten fiscal policy relative to unchanged policy scenario; use fiscal policy as principal macro tool given exchange rate peg and weak monetary transmission.
• Specific targets and projections:
  • Target a fiscal deficit of 1 percent of GDP in 2019/20, versus a projected 1.8 percent of GDP deficit in the unchanged policy scenario.
  • Keep medium-term deficit close to 1 percent of GDP in normal times.
  • Reduce long-term public debt target from 50 to 40 percent of GDP.
  • Aim for a deficit ceiling of 2 percent of GDP and target deficit of 1 percent of GDP in normal times to meet the 40 percent debt target.
• Four-pillar comprehensive fiscal strategy:

i). Implement vigorous tax administration reforms to realize benefits of the 2017 Revenue Review (strengthen audit capacity, encourage voluntary compliance, improve arrears management). ii). Strengthen Public Financial Management (PFM): improve forecasting, introduce multi-year budgeting, monitor and disclose fiscal risks, strengthen procedures for government guarantees, develop formal on-lending policy, monitor spending outcomes via expenditure impact analysis and independent audits. iii). Reduce long-term debt target to 40 percent of GDP; target deficit and ceiling as above. iv). Ensure newly-contracted loans align with Medium Term Debt Strategy (MTDS 2016-2020), favor concessional terms (grant element above the MTDS minimum of 35 percent), and vet projects for high quality and economic viability.

• Adjustment measures: improve tax administration and control current spending.

Monetary and exchange rate policies

• Official interest rate (average annual yield of CBS securities) has remained stable at below 20 basis points; considered appropriate given low growth and receding inflationary pressures.
• High bank liquidity reflects conservative lending practices and self-insurance against liquidity squeezes; weak interbank activity and limited lending environment.
• Structural contributors to weak credit access: limited financial literacy.
• Policy recommendations to improve transmission:
  • Re-establish a credit bureau (recent diagnostic assessment completed).
  • Facilitate use of customary land leases as collateral.
  • Improve central bank liquidity management, including better forecasting of FX needs.
• External position assessment:
  • 2017/2018 current account surplus of 2.3 percent of GDP adjusted for high transfers gives a 0.7 percent of GDP cyclically adjusted current account deficit.
  • Cyclically adjusted norm (EBA-Lite) is a deficit of 1.7 percent of GDP; gap of 1 percent implies external position is in line with fundamentals.
  • Reserves projected to increase from 4.5 to about 4.6 months of import cover in 2018/19.
  • Reserves adequate per IMF’s ARA metric for credit-constrained economies but close to lower bound given natural disaster vulnerability.
  • Pegged exchange rate continues to serve as a nominal anchor.

Addressing spillovers from Correspondent Banking Relationships (CBRs)

• Continue reforms to mitigate CBR pressures; vulnerabilities remain due to dependence on remittances, prominence of money transfer operators (MTOs), and high remittance costs.
• Key areas of action:
  • Enhance AML/CFT effectiveness:
  • Address significant deficiencies from the 2015 APG mutual evaluation report, including 2018 amendments to the Money Laundering and Prevention Act.
  • Improve risk-based AML/CFT inspections of key reporting entities (banks, MTOs, casinos).
  • Allocate further resources to the Financial Intelligence Unit.
  • Improve customer due diligence for domestic politically exposed persons, establish an asset declaration system, and align anti-corruption framework with the UN Convention against Corruption.
  • Establish an IT solution for customer identification and monitoring:
  • Short-term: adopt IT solution for faster cost-effective verification against the Office of the Electoral Commission (OEC) database (building on existing arrangements).
  • Long-term: develop IT to enhance MTO compliance (record keeping, suspicious transaction reporting) and explore synergies with national digital identity system and a credit bureau, subject to data privacy principles.
  • Reduce the offshore financial center’s (OFC) risk profile:
  • 2014 National Risk Assessment found TCSPs operating in the OFC to be high-risk due to potential misuse of IBCs.
  • Ensure ownership information of Samoan IBCs is accurate, up-to-date, and available to competent authorities.
  • Enhance supervision of TCSPs and limit reliance on third party intermediaries to instances consistent with international standards.
  • Continue international engagement:
  • Work with Pacific Islands and stakeholders on regional solutions to CBR pressures, including evaluating a regional Know-Your-Customer facility.
  • Continue engagement with the European Union on the EU list of non-cooperative tax jurisdictions and the AML list; coordinate with the APG.

Financial sector priorities

• Overall health:
  • Financial sector described as healthy; capital adequacy and liquidity trending upwards.
  • Bank profitability subdued amid lending slowdown; expected to recover as activity picks up.
  • Non-performing loans (NPLs) have increased but remain below five-year average; banks are well-provisioned.
• Reform priorities:
  • Modernize regulatory and supervisory framework.
  • Hold regular meetings of the high-level committee on financial stability.
  • Formulate framework for governance and performance of public financial institutions (PFIs).
  • Establish a credit bureau (fintech solutions could be explored).
• Crypto-assets:
  • CBS issued a general warning on crypto-assets in August 2018; entities promoting cryptocurrencies are considered financial institutions requiring a business license and CBS reporting.
  • Mission supports cautious stance and encouraged consideration of FATF’s forthcoming recommendation on oversight of crypto-assets (expected June 2019).
• Financial inclusion:
  • Implement National Financial Inclusion Strategy (NFIS) to reduce inequality and increase opportunities.
  • Support private sector initiatives for mobile money and payment systems.
  • Amend NFIS to promote digital and financial literacy, include awareness of crypto-asset risks, and harness mobile payments and other fintech for inclusion.

Structural reforms

• Focus areas to boost potential growth:
  • Build resilience to natural disasters:
  • Upgrade public and private physical infrastructure to be fully resilient; mainstream climate resilience into all sector plans.
  • Improve business environment, especially for SMEs:
  • Enhance insolvency resolution.
  • Promote access to credit, including reforming the Small Business Loan Guarantee Scheme.
  • Support formalization of the economy and increase labor force participation, including of women.
  • Facilitate exports:
  • Improve trade facilitation (advance ruling, comply with international standards, reduce time/documents to export).
  • Develop a one-stop shop for exporters.
• Minimum wage considerations:
  • Current minimum wage is less than US$1 per hour and low compared to Pacific peers.
  • Any increase should balance positive income/inclusion effects against potential adverse labor market outcomes.

Key statistics and projections (selected figures preserved exactly as presented)

• Real GDP growth (12-month percent change):
  • 2015/16: 7.2
  • 2016/17: 2.7
  • 2017/18: 0.9
  • 2018/19: 3.4
  • 2019/20: 4.4
  • 2020/21: 2.2
• Consumer price index (period average):
  • 2017/18: 3.7
• Central government budget (percent of GDP):
  • Revenue and grants: 36.1 (2015/16), 34.2 (2016/17), 34.3 (2017/18), 34.0 (2018/19), 33.8 (2019/20), 33.6 (2020/21), 33.5 (2021/22), 33.3 (2022/23)
  • Of which: grants: 9.3 (2015/16), 7.9 (2016/17), 7.0 (2017/18), 6.6 (2018/19), 6.2 (2019/20), 6.0 (2020/21)
  • Expenditure: 36.5 (2015/16), 35.3 (2016/17), 35.2 (2017/18), 35.7 (2018/19), 36.0 (2019/20), 36.3 (2020/21)
  • Of which: Expense: 24.5 (2015/16), 23.0 (2016/17), 23.3 (2017/18), 23.5 (2018/19), 23.8 (2019/20), 23.9 (2020/21), 24.0 (2021/22)
  • Of which: Net acquisition of non-financial assets: 7.4 (2015/16), 7.6 (2016/17), 8.0 (2017/18)
  • Net operating balance excl. grants: 3.1 (2015/16), 3.5 (2016/17), 3.6 (2017/18)
  • Overall fiscal balance: -0.4 (2015/16), -1.1 (2016/17), -1.2 (2017/18), -1.8 (2018/19), -2.3 (2019/20), -2.5 (2020/21), -2.7 (2021/22)
  • Overall fiscal balance excl. grants: -9.7 (2015/16), -8.3 (2016/17), -7.8 (2017/18), -8.2 (2018/19), -8.4 (2019/20), -8.5 (2020/21), -8.7 (2021/22), -8.9 (2022/23)
• Public debt (percent of GDP):
  • 2015/16: 52.6
  • 2016/17: 49.1
  • 2017/18: 50.3
  • 2018/19: 49.3
  • 2019/20: 48.9
  • 2020/21: 49.8
  • 2021/22: 50.8
  • 2022/23: 51.6
  • 2023/24: 53.7
• Balance of payments highlights (in millions of U.S. dollars):
  • Current account balance: -37.3 (2015/16), -14.7 (2016/17), 19.9 (2017/18), -4.2 (2018/19), -8.1 (2019/20), -6.9 (2020/21), -9.4 (2021/22), -12.3 (2022/23), -4.7 (2023/24)
  • Merchandise exports, f.o.b. (percent of GDP): 36.9 (2015/16), 38.0 (2016/17), 35.6 (2017/18), 42.9 (2018/19), 43.3 (2019/20), 44.2 (2020/21), 45.1 (2021/22), 46.0 (2022/23), 46.9 (2023/24)
  • Merchandise imports, f.o.b. (percent of GDP): 307.2 (2015/16), 308.6 (2016/17), 322.6 (2017/18), 353.1 (2018/19), 380.9 (2019/20), 396.8 (2020/21), 414.0 (2021/22), 432.7 (2022/23), 455.3 (2023/24)
  • Services (net): 119.6 (2015/16), 142.0 (2016/17), 162.1 (2017/18), 157.9 (2018/19), 171.9 (2019/20), 180.1 (2020/21), 187.4 (2021/22), 197.9 (2022/23), 208.8 (2023/24)
  • Current transfers: 132.0 (2015/16), 140.7 (2016/17), 173.8 (2017/18), 183.1 (2018/19), 186.6 (2019/20), 196.3 (2020/21), 203.2 (2021/22), 210.2 (2022/23), 218.5 (2023/24)
• External reserves and debt:
  • Gross official reserves (in millions of U.S. dollars): 111.4 (2015/16), 122.3 (2016/17), 163.0 (2017/18), 177.3 (2018/19), 170.0 (2019/20), 169.1 (2020/21), 170.7 (2021/22), 167.2 (2022/23), 158.9 (2023/24)
  • Reserves (in months of next year's imports of GNFS): 4.5 (2017/18), 4.6 (2018/19), 4.2 (2019/20), 3.9 (2020/21)
  • Public debt (in millions of tala): 1,080.7 (2015/16), 1,047.4 (2016/17), 1,113.8 (2017/18), 1,160.2 (2018/19), 1,234.6 (2019/20), 1,317.8 (2020/21), 1,411.2 (2021/22), 1,509.6 (2022/23), 1,651.9 (2023/24)
  • External debt (percent of GDP): 50.7 (2015/16), 47.7 (2016/17), 49.4 (2017/18), 48.7 (2018/19), 48.6 (2019/20), 49.6 (2020/21), 50.5 (2021/22), 51.4 (2022/23), 53.5 (2023/24)
• Exchange rates:
  • Market rate (tala/U.S. dollar, period average): 2.61 (2015/16), 2.54 (2016/17), 2.57 (2017/18)
  • Market rate (tala/U.S. dollar, end period): 2.55 (2017/18), 2.51 (2018/19)
  • Nominal effective exchange rate (2010 = 100): 111.8 (2015), 110.6 (2016), 109.8 (2017)
  • Real effective exchange rate (2010 = 100): 108.4 (2015), 110.4 (2016)
• Memorandum:
  • Nominal GDP (in millions of tala): 2,055 (2015/16), 2,133 (2016/17), 2,213 (2017/18), 2,354 (2018/19), 2,523 (2019/20), 2,646 (2020/21), 2,781 (2021/22), 2,924 (2022/23), 3,074 (2023/24)
  • GDP per capita (U.S. dollars): 4,015 (2015/16), 4,258 (2016/17), 4,323 (2017/18), 4,501 (2018/19), 4,735 (2019/20), 4,874 (2020/21), 5,027 (2021/22), 5,188 (2022/23), 5,353 (2023/24)

Source: Samoa: Staff Concluding Statement of the 2019 Article IV Mission.

References

• Samoa and the IMF
• IMF Policy Advice -- A Factsheet
• Mission Concluding Statements
• PRESS CENTER
• https://www.imf.org/en/home