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Samoa: Staff Concluding Statement of the 2019 Article IV Mission
March 4, 2019
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Brian Walker
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Growth is projected to rebound after recently reaching a five year low. Risks are weighted to the downside, stemming from vulnerabilities to natural disasters and loss of correspondent banking relationships (CBRs). Policy priorities are:
Tighten fiscal policy compared to the unchanged policy scenario (see Table). Embark on a comprehensive fiscal strategy, including strengthening tax administration and public financial management (PFM), and lowering the public debt-to-GDP target from 50 to 40 percent of GDP in the long term.
Implement reforms to mitigate CBRs pressures including: enhancing the effectiveness of the AML/CFT regime; establishing an IT solution for customer identification and monitoring; and reducing the risk profile of the offshore financial center.
Improve the monetary policy transmission mechanism and continue implementing the FSAP recommendations.
Focus structural reforms on building resilience to natural disasters; improving the business environment, in particular for SMEs; and supporting exports.
Recent Developments, Outlook and Risks 1. Samoa faces several challenges but continues to show resilience and a high level of engagement with the Fund. In common with most Pacific island countries, Samoa is vulnerable to natural disasters and pressures on correspondent banking relationships (CBRs). Despite these challenges, the economy has shown resilience. The authorities are highly engaged with the Fund and other development partners, and have made progress in implementing reforms in several areas, including measures to mitigate CBR pressures.
2. Growth is expected to recover in 2018/19 and spike in 2019/20 as Samoa hosts the 2019 Pacific Games (PG) in July. After reaching a five-year low due to the Yazaki manufacturing plant closure and the impact of Cyclone Gita, growth is projected to rebound to 3.4 percent in 2018/19, driven by infrastructure spending, and the development of the communication sector. Growth in 2019/20 is expected to spike to 4.4 percent driven by PG-related tourism, before normalizing at about 2.2 percent in the medium term. Inflation peaked at 3.7 percent in 2017/18, driven by the temporary impact of Cyclone Gita on local food prices, a one-time increase in education fees, and higher import prices, and is projected to be back below the central bank target of 3 percent in 2018/19. The current account, which recorded a surplus of 2.3 percent of GDP in 2017/18 driven by a temporary increase in transfers, is projected to revert to a deficit as transfers normalize.
3. One-off factors implied a marginally positive fiscal balance, but the fiscal position is projected to loosen in the medium term. The fiscal balance reached a surplus of 0.1 percent of GDP in 2017/18, driven by a temporary increase in budget-support grants and a drop in capital spending. The inclusion of the National Health Service into the central government budget in February 2018 largely drove the reduction in grant spending, and the increase in compensation of employees and spending for goods and services. The latter also increased due to various international events held in Samoa. The tax revenue-to-GDP ratio slightly dropped, suggesting that recent tax policy measures– the 2017 Revenue Review aimed at broadening the tax base and increasing selected excises—have not yet been supported by progress in tax administration. Given recently-legislated increases in public servant wages for cost of living adjustment, the projected reduction in budget support grants and the need to scale up infrastructure projects, staff projects a 1.2 percent of GDP deficit in 2018/19, which will widen to close to 3 percent of GDP in the medium term.
4. 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 slightly exceeded the authorities’ ceiling of 50 percent to GDP in 2017/18, on account of a depreciating Tala, continuous disbursements of external loans, and low growth. Debt is projected to reach 53.7 percent of GDP in 2023/24.
5. The risks to the outlook are tilted to the downside
. Samoa is highly vulnerable to natural disasters
and to the withdrawal of CBRs by global banks. The impact of rising
protectionism on Samoa has been negligible thus far, but could
increase if trade tensions continue. Commodity price volatility
could result in higher and more volatile inflation, with negative
consequences on economic sentiment and growth. On the upside, the
growth impact of the PG, increased tourism due to expanded Samoa
Airways operations, and efficiency gains from the new submarine
cable could be stronger than currently anticipated.
Financing Development Needs While Ensuring Fiscal Sustainability
6. Fiscal policy needs to be tightened compared to the unchanged policy scenario. Samoa needs to build resilience and buffers against natural disasters, and achieve progress towards development goals. At the same time, Samoa needs to ensure fiscal sustainability and use fiscal policy as the principal instrument of macro management in the face of external shocks, given the exchange rate peg and weak monetary policy transmission mechanism. Consistent with these objectives, the mission advised the authorities to target a fiscal deficit of 1 percent of GDP in 2019/20, compared to a projected deficit of 1.8 percent of GDP in the unchanged policy scenario (see Table), and to keep the medium-term deficit close to 1 percent of GDP in normal times (when growth is at or about potential). The needed adjustment can be achieved by improving tax administration and controlling current spending.
7. The mission advised the authorities to embark on a comprehensive fiscal strategy based on four pillars to support the needed consolidation:
i). Implementing vigorous tax administration reforms to fully reap the benefits of the 2017 Revenue Review, including strengthening audit capacity, encouraging voluntary compliance, and improving arrears management.
ii). Strengthening Public Financial Management (PFM) reforms by improving forecasting capacity and introducing multi-year budgeting; enhancing the monitoring and disclosing of fiscal risks; strengthening existing procedures for issuing government guarantees; developing a formal on-lending policy; and monitoring spending outcomes to enhance efficiency through expenditure impact analysis and independent audits.
iii). Reducing the long-term debt target to 40 percent of GDP to reduce the risk of debt distress and create fiscal space to respond to natural disasters while ensuring adequate funding for development priorities. To achieve this debt target, the mission advised the authorities to target in normal times a deficit of 1 percent of GDP, with a 2 percent of GDP deficit ceiling.
iv). Continuing 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 ensuring that projects being financed are properly vetted as high quality and economically viable.
Monetary and Exchange Rate Policies
8. Monetary policy remains appropriately accommodative, but the transmission mechanism needs improvement. The official interest rate, which refers to the average annual yield of Central Bank of Samoa’s (CBS) securities, has remained stable at below 20 basis points. This level is appropriate given low growth and receding inflationary pressures. High bank liquidity reflects conservative lending practices and self-insurance against liquidity squeezes, given the weak lending environment and limited interbank market activity. Limited financial literacy remains a key contributor to structural deficiencies in credit access. The mission stressed the importance of measures to increase financial inclusion such as re-establishing a credit bureau (for which a recent diagnostic assessment was completed) and facilitating the use of customary land leases as collateral, as recommended by the FSAP. These measures would reduce banks’ reluctance to lend by increasing available collateral and facilitating credit risk assessment. The mission advised that improving central bank liquidity management, including by better forecasting of FX needs, would contribute to improving the transmission mechanism.
9. The external position is in line with fundamentals and desired policy settings. The 2017/2018 current account surplus of 2.3 percent of GDP was adjusted to correct for the exceptionally high level of transfers, which mostly reflect higher private remittances in the wake of Cyclone Gita. This adjustment resulted in a 0.7 percent of GDP cyclically adjusted current account deficit. Based on the revised EBA-Lite approach, the cyclically adjusted norm for Samoa’s current account is a deficit of 1.7 percent of GDP. Since the gap between the cyclically adjusted current account balance and the cyclically adjusted norm is 1 percent, staff assess the external position to be in line with fundamentals. Reserves are projected to increase from 4.5 to about 4.6 months of import cover in 2018/19. The level of reserves is adequate according to the IMF’s ARA metric for credit-constrained economies, but is close to the lower bound of adequacy once Samoa’s heightened vulnerability to natural disasters is taken into account. Samoa’s pegged exchange rate continues to serve the country well and provides a welcome nominal anchor in the context of weak monetary policy transmission.
Addressing Spillovers from Correspondent Banking Relationships (CBRs) Pressures
10. The Samoan authorities should continue to implement reforms to mitigate risks from the CBR pressures. Despite progress in this area, vulnerabilities remain, given the country’s dependence on remittances, the prominent role of money transfer operators (MTOs) in the sector, and the high cost of remittances. Discussion with the authorities focused on the following areas:
Enhance AML/CFT effectiveness. The authorities continue to address the significant deficiencies identified in the 2015 APG mutual evaluation report, including the 2018 amendments to the Money Laundering and Prevention Act. Risk-based AML/CFT inspections of key reporting entities (such as banks, MTOs and casinos) should be improved and further resources could be allocated to the Financial Intelligence Unit. The mission also advised the authorities on improving customer due diligence with respect to domestic politically exposed persons, establishing an asset declaration system, and aligning the anti-corruption framework with the UN Convention against Corruption.
Establish an IT solution for customer identification and monitoring . The mission welcomed the existing arrangement between the Office of the Electoral Commission (OEC) and a few MTOs for customer verification using the electoral database. In the short term, an IT solution should be adopted to enable speedier and cost-effective verification of identity against the OEC database. In the long-term, IT solutions could be developed to enhance MTO compliance with other AML/CFT obligations (e.g., record keeping and suspicious transaction reporting), and synergies could be exploited with plans to establish a national digital identity system and a credit bureau, subject to data privacy principles.
Reduce the offshore financial center’s (OFC) risk profile. Although the OFC does not affect the domestic financial sector directly, it causes reputational spillovers as it contributes substantially to increasing Samoa’s overall risk profile. The 2014 National Risk Assessment determined the trust and company service providers (TCSP) that operate in the OFC to be of high-risk, owing to the potential for misuse of international business companies (IBCs) that they establish. Further efforts are needed to ensure that ownership information of Samoan IBCs is accurate, up-to-date and available to competent authorities. Supervision of TCSPs need to be enhanced to ensure their compliance with AML/CFT obligations, including by ensuring that the reliance on third party intermediaries is limited to instances considered by international standards.
Continue international engagement. The authorities are encouraged to continue to work with other Pacific Islands countries and other stakeholders in the region towards developing regional solutions or alternatives to address CBR pressures, including considering the potential benefits, costs and privacy requirements of a regional Know-Your-Customer facility. Aside from intensifying efforts to enhance the effectiveness of the AML/CFT regime, staff encourages the authorities to continue engagement with the European Union with regard to the EU list of non-cooperative tax jurisdictions and the AML list. In this regard, the authorities are coordinating with the APG.
Financial Sector
11. The financial sector is healthy, and policies should focus on completing the implementation of the 2015 FSAP recommendations. Capital adequacy and liquidity are trending upwards. Bank profitability and earnings indicators are subdued amidst a lending slowdown, but are expected to recover as economic activity picks up. NPLs have increased but remain below their five-year average and banks are well-provisioned. Reform priorities should include: modernizing the regulatory and supervisory framework; holding regular meetings of the high-level committee on financial stability; formulating a framework for the governance and performance of public financial institutions (PFIs); and establishing a credit bureau, for which fintech solutions could be explored.
12. Managing new risks from crypto-assets is also a priority. The CBS issued a general warning against the risks of investment in crypto-assets in August 2018. The CBS also advised that entities promoting cryptocurrencies are considered financial institutions, which requires them to hold a business license and follow CBS reporting requirements. The mission supported the authorities’ cautious stance and encouraged them to consider FATF’s recommendation on oversight of crypto- assets, which are expected to be released in June 2019.
13. 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 could continue supporting private sector initiatives for mobile money and payment systems given the large number of Samoans without access to formal financial services. The NFIS could be amended to promote digital and financial literacy, including awareness of risks from crypto-assets, and the potential of mobile payments and other fintech solutions for financial inclusion.
Structural Reforms
14. Structural reforms should focus on boosting potential growth by building resilience to natural disasters; improving the business environment, especially for SMEs; and facilitating exports. Concrete measures should include:
Upgrading public and private physical infrastructures to make them fully resilient to natural disasters and mainstreaming climate resilience into all sector plans;
Supporting the business environment , especially for SMEs, by enhancing insolvency resolution and promoting access to credit, including by reforming the Small Business Loan Guarantee Scheme. These reforms would also generate synergies with helping formalization of the economy and increasing labor force participation—including of women—in the formal labor market;
Improving the trade facilitation framework , including by providing advance ruling; pursuing efforts to comply with international standards conventions; reducing the time and documents needed to export; and developing a one-stop shop for exporters.
15. Plans to increase the minimum wage should be balanced. Consultations are ongoing between the government and the private sector to increase the minimum wage. At less than US$1 per hour, the Samoan minimum wage is low compared to Pacific peers. The mission advised that the increase would need to balance the positive effect on income and inclusion with limiting adverse effects on labor market outcomes.
*****
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.
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Table 1. Samoa: Selected Economic and Financial Indicators, 2015/16 – 2023/24 |
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|
Est. |
Proj. |
||||||||
|
2015/16 |
2016/17 |
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
2022/23 |
2023/24 |
|
|
(12-month percent change) |
|||||||||
|
Output and inflation |
|||||||||
|
Real GDP growth |
7.2 |
2.7 |
0.9 |
3.4 |
4.4 |
2.2 |
2.2 |
2.2 |
2.2 |
|
Nominal GDP |
5.5 |
3.8 |
3.8 |
6.3 |
7.2 |
4.9 |
5.1 |
5.2 |
5.1 |
|
Consumer price index (end of period) |
2.3 |
1.0 |
5.8 |
4.0 |
2.9 |
2.6 |
2.8 |
2.9 |
2.8 |
|
Consumer price index (period average) |
0.1 |
1.3 |
3.7 |
2.9 |
2.7 |
2.6 |
2.8 |
2.9 |
2.8 |
|
(In percent of GDP) |
|||||||||
|
Central government budget |
|||||||||
|
Revenue and grants |
36.1 |
34.2 |
34.3 |
34.0 |
33.8 |
33.6 |
33.5 |
33.5 |
33.3 |
|
Of which: grants |
9.3 |
7.2 |
7.9 |
7.0 |
6.6 |
6.2 |
6.2 |
6.2 |
6.0 |
|
Expenditure |
36.5 |
35.3 |
34.2 |
35.2 |
35.7 |
36.0 |
36.1 |
36.3 |
36.1 |
|
Of which: Expense |
24.5 |
23.0 |
23.3 |
23.5 |
23.8 |
23.9 |
23.9 |
24.0 |
24.0 |
|
Of which: Net acquisition of non-financial assets |
4.9 |
7.0 |
5.8 |
7.0 |
7.4 |
7.6 |
7.9 |
8.0 |
8.0 |
|
Net operating balance excl. grants |
2.2 |
4.0 |
3.1 |
3.5 |
3.5 |
3.6 |
3.5 |
3.4 |
3.4 |
|
Overal fiscal balance |
-0.4 |
-1.1 |
0.1 |
-1.2 |
-1.8 |
-2.3 |
-2.5 |
-2.7 |
-2.7 |
|
Overal fiscal balance excl. grants |
-9.7 |
-8.3 |
-7.8 |
-8.2 |
-8.4 |
-8.5 |
-8.7 |
-8.9 |
-8.7 |
|
Public debt |
52.6 |
49.1 |
50.3 |
49.3 |
48.9 |
49.8 |
50.8 |
51.6 |
53.7 |
|
(12-month percent change) |
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|
Macrofinancial variables |
|||||||||
|
Broad money (M2) |
7.1 |
7.8 |
3.8 |
6.3 |
4.7 |
4.9 |
5.1 |
5.2 |
5.2 |
|
Net domestic assets |
19.2 |
-0.7 |
-3.8 |
… |
… |
… |
… |
… |
… |
|
Private sector credit, Commercial banks |
13.6 |
7.2 |
6.0 |
7.4 |
7.5 |
6.9 |
7.0 |
6.5 |
6.5 |
|
Total loan growth, Commercial banks |
7.7 |
4.8 |
1.7 |
… |
… |
… |
… |
… |
… |
|
Total loan growth, Public financial institutions |
3.3 |
4.4 |
6.0 |
… |
… |
… |
… |
… |
… |
|
(Ratio) |
|||||||||
|
Total capital to risk-weighted exposures |
24.5 |
25.1 |
27.3 |
… |
… |
… |
… |
… |
… |
|
Non-performing loans |
5.2 |
4.1 |
4.3 |
… |
… |
… |
… |
… |
… |
|
(In millions of U.S. dollars) |
|||||||||
|
Balance of payments |
|||||||||
|
Current account balance |
-37.3 |
-14.7 |
19.9 |
-4.2 |
-8.1 |
-6.9 |
-8.4 |
-9.4 |
-12.3 |
|
(In percent of GDP) |
-4.7 |
-1.8 |
2.3 |
-0.5 |
-0.8 |
-0.7 |
-0.8 |
-0.9 |
-1.1 |
|
Merchandise exports, f.o.b. 1/ |
36.9 |
38.0 |
35.6 |
42.9 |
43.3 |
44.2 |
45.1 |
46.0 |
46.9 |
|
Merchandise imports, f.o.b. |
307.2 |
308.6 |
322.6 |
353.1 |
380.9 |
396.8 |
414.0 |
432.7 |
455.3 |
|
Services (net) |
119.6 |
142.0 |
162.1 |
157.9 |
171.9 |
180.1 |
187.4 |
197.9 |
208.8 |
|
Income (net) |
-18.6 |
-26.8 |
-28.9 |
-35.0 |
-29.1 |
-30.7 |
-30.1 |
-30.8 |
-31.1 |
|
Current transfers |
132.0 |
140.7 |
173.8 |
183.1 |
186.6 |
196.3 |
203.2 |
210.2 |
218.5 |
|
External reserves and debt |
|||||||||
|
Gross official reserves |
111.4 |
122.3 |
163.0 |
177.3 |
170.0 |
169.1 |
170.7 |
167.2 |
158.9 |
|
(In months of next year's imports of GNFS) |
3.4 |
3.6 |
4.5 |
4.6 |
4.2 |
4.0 |
3.9 |
3.7 |
3.6 |
|
Public debt (in millions of tala) 2/ |
1,080.7 |
1,047.4 |
1,113.8 |
1,160.2 |
1,234.6 |
1,317.8 |
1,411.2 |
1,509.6 |
1,651.9 |
|
(In percent of GDP) |
52.6 |
49.1 |
50.3 |
49.3 |
48.9 |
49.8 |
50.8 |
51.6 |
53.7 |
|
External debt (in percent of GDP) |
50.7 |
47.7 |
49.4 |
48.7 |
48.6 |
49.6 |
50.5 |
51.4 |
53.5 |
|
Exchange rates |
|||||||||
|
Market rate (tala/U.S. dollar, period average) 3/ 4/ |
2.61 |
2.54 |
2.57 |
… |
… |
… |
… |
… |
… |
|
Market rate (tala/U.S. dollar, end period) 3/ 4/ |
2.55 |
2.51 |
2.57 |
… |
… |
… |
… |
… |
… |
|
Nominal effective exchange rate (2010 = 100) 3/ 4/ |
111.8 |
110.6 |
109.8 |
… |
… |
… |
… |
… |
… |
|
Real effective exchange rate (2010 = 100) 3/ 4/ |
109.8 |
108.4 |
110.4 |
… |
… |
… |
… |
… |
… |
|
Memorandum items: |
|||||||||
|
Nominal GDP (in millions of tala) |
2,055 |
2,133 |
2,213 |
2,354 |
2,523 |
2,646 |
2,781 |
2,924 |
3,074 |
|
GDP per capita (U.S. dollars) |
4,015 |
4,258 |
4,323 |
4,501 |
4,735 |
4,874 |
5,027 |
5,188 |
5,353 |
|
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 (calendar year). |
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|
4/ Latest data available. |
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