Samoa: Staff Concluding Statement of the 2021 Article IV Mission

IMF News, January 25, 2021

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Published: January 25, 2021

A. Recent developments, outlook, and risks

COVID-19 and the late-2019 measles outbreak produced economic shocks of "historical magnitude"; real GDP in FY2020:Q3 fell to the level last observed in 2014.
The border closure and State of Emergency preserved health system but caused a severe contraction; the total economic fallout of the two health shocks has reached 16¼ percent since July 2019 (Pacific Games).
Staff preliminary projection: real GDP to contract by around −8.5 percent in FY2021, following −3.2 percent in FY2020.
Inflation and prices:
- Headline inflation reached −5 percent (y/y) on average for the twelve months through December.
- Staff projects inflation of −2.5 percent for FY2021.
Floods around the festive season cost at least 1½ percent of GDP (authorities’ estimate).
Recovery outlook:
- Economy projected to bottom in the latter half of FY2021; recovery expected to begin in FY2022.
- Pace of recovery depends on vaccine procurement/rollout, timing of border reopening, and resumption of tourism.
Downside risks:
- Under-execution or premature withdrawal of stimulus could impede recovery and strain financial stability.
- Premature border reopening could trigger domestic COVID-19 outbreak.
- Natural disasters and delays in Know-Your-Customer (KYC) utility rollout could pressure remittance flows and correspondent banking relationships (CBRs).
- Global trade tensions are headwinds; regional trade agreements may help medium term.

B. Fiscal policy: promoting inclusive economic recovery

Findings and recent fiscal actions:

Phase-I stimulus in FY2020: 3.1 percent of GDP (support to businesses/households; health, education, food security, essential services).
Phase-II stimulus in FY2021: 4.2 percent of GDP (extended measures, community-based primary health care, unemployment subsidies); annual National Provident Fund dividend payouts of 1.5 percent of GDP included.
FY2020 overall balance recorded two consecutive years of surplus, reaching around 6 percent of GDP; public debt-to-GDP declined to 46¾ percent of GDP.
Under-execution of capital budget contributed to surplus; development projects contain large import components and were affected by border closure and severe weather.

Staff recommendations and alternative scenario:

Staff projects overall fiscal balance in FY2021 to reach around −3.0 percent of GDP if operating budget (inclusive of phase-II stimulus) and invocation of the G20 DSSI are fully executed, with reformulated capital expenditure.
Staff recommends extending stimulus measures until end-FY2024 while committing to stronger medium-term fiscal consolidation to limit scarring and promote inclusive, durable recovery.
Alternative scenario: extend temporary measures with better targeting and gradual withdrawal; stimulus-induced deficits in FY2021–FY2024 partially offset by stimulative output effects and medium-term revenue mobilization, including:
- Extend social protection programs and budget support to SOEs that provide stimulus; withdraw gradually by end-FY2024 as economy reaches pre-COVID level.
- Protect health with effective vaccine rollout; ADB and WB financial support to secure vaccines via UNICEF; communicate plan and progress clearly.
- Revenue mobilization measures: improve tax compliance; increase excises (e.g., alcohol and tobacco); broaden VAT base given PACER-Plus; introduce time-bound (e.g., 5 years) loss carry forward period; fully execute TIMS rollout with measured approach for small retailers; establish a large taxpayer office.
- Continue engagement with EU on tax governance to aim for removal from EU list of non-cooperative tax jurisdictions in 2021.
- Improve expenditure efficiency and governance; use NGOs and existing organizations to target support while national digital ID is completed (expected to take three years).
- Reprioritize budget towards job creation and mobility (employment subsidies, reskilling/upskilling) and implement economically-viable CAPEX that enhances climate resilience and sets aside maintenance budgets.

Public financing and debt sustainability:

Staff assessment: Samoa’s debt is sustainable but remains at high risk of distress due to natural disaster vulnerability.
Staff projects a sizable fiscal deficit persisting over the medium term but declining to the authorities’ deficit target of 2 percent of GDP by FY2026.
Public-debt-to-GDP ratio projected to plateau around 57 percent under baseline; fiscal policies under the alternative scenario would raise deficits in FY2022–FY2024 but bring public debt trajectory downward over the medium term.
Outstanding government deposits ≈ 13 percent of GDP at end-FY2020; authorities should design pace/size of deposit drawdown to partly offset concessional loans while keeping buffer for disaster self-insurance.
Mobilizing budget support grants would help bring public debt trajectory closer to 50 percent of GDP by end of medium term.
The mission stresses importance of fully executing stimulus measures and strengthening PFM via Finance Sector Plan 2020/21–2024/25, including:
- Improve budget reliability, predictability, cash management, and capital budget execution (monthly/quarterly project reviews).
- Improve procurement efficiency per new Procurement Manual; governance, transparency, beneficial ownership reporting, and ex-post audit.
- Strengthen SOE performance monitoring, coordination between Ministry of Finance and Ministry of Public Enterprises; provide adequate budget support to SOEs providing direct assistance while enhancing governance and transparency.

C. Monetary policy transmission and external position

Monetary policy and transmission:

Policy rate has remained at 15 basis points.
CBS actions: Standby Credit Facility for commercial banks; ceased open market operations to allow bank liquidity use.
As of end-November 2020, excess reserves reached 16 percent of GDP; liquidity position varies across banks.
CPI-adjusted deposit and lending rates reached a 7-year high amid heightened credit risks.
Private sector credit growth declined to 1.5 percent (y/y) in November 2020 (lowest since 2013).

Recommendations to improve transmission:

Continue holistic reforms: implement financial sector master plan, re-establish credit bureau, enhance bankruptcy laws and consumer protection, improve financial literacy.
Mobilize budget for technology and capacity to operate a credit bureau; eliminate regulatory gaps that hamper bureau operations.
Strengthen regulatory and supervisory frameworks for credit unions, microlenders, and informal lending arrangements; bring other financial institutions under CBS oversight and implement FSAP recommendations for supervisory capacity.
Mitigate credit risks from natural disasters via disaster risk insurance for farmers or financial products addressing such risks.
CBS implemented a cap on deposit interest rates at 3 percent for 12 months starting December 2020 to address market distortions in wholesale deposit rates.

External buffers and reserves:

At end-November, reserves cover about 8 months of prospective imports; adequate but expected to decline closer to lower bound of desirable range (4.1 to 6.4 months) over medium term when disaster vulnerability is considered.
Mission advises building reserve buffers to at least 5 months of import cover, including via donor support.
Mission welcomes authorities’ commitment to more frequent reviews to ensure pegged exchange rate remains appropriate.

D. Financial sector soundness and stability

Banking sector health and risks:

Commercial banks hold capital well in excess of minimums; need to maintain sound liquidity positions.
Loan-to-deposit ratio continued to fall; NPL ratio declined overall but loan quality concerns led banks to increase provisions.
Concentration in commercial real estate exposure has increased.
Profitability declined in 2019:Q4 and 2020:Q3; variation across banks depends on profit base and exposure to tourism.

PFIs and governance:

Mission encourages coherent framework for PFIs’ performance and governance to achieve socio-economic objectives, reduce market distortions, and avoid crowding out commercial banks.
Subsidized lending with government guarantees should be well targeted and evaluated to contain contingent fiscal liabilities; PFIs should refrain from policy lending unless budgetary funding exists.
Improve DBS balance sheet and continue NPL write-offs; improve accounting and disclosure practices for transparency and governance.

Implementation of FSAP recommendations and inclusion:

Continue completing 2015 FSAP recommendations: upgrade prudential regulations and supervisory framework; conduct asset reviews and sensitivity analyses; upgrade resolution framework; enhance capacity for supervision; enhance risk-based AML/CFT supervision.
Financial inclusion reforms should leverage fintech and mobile money/payment systems to reduce inequality (gender focus) and increase opportunities.

E. Mitigating correspondent-banking-relationship (CBR) pressures

Two domestic banks received notice of termination of their U.S. dollar CBR with a correspondent bank by end-March 2021; CBS monitoring alternatives and impacts on remittances.
CBS engaged consultants to review Asia Pacific Group recommendations and update national risk assessment.
Recommendations to mitigate CBR pressures:
- Enhance AML/CFT supervision to upgrade compliance in banks, MTOs, and TCSPs, focusing on customer due diligence and suspicious transaction reporting.
- Develop national digital identification to facilitate customer identification for remittances.
- Ensure TCSPs verify beneficial ownership information and facilitate international exchange of such information to enhance transparency of IBCs established in Samoa.
- Continue engagement with Pacific island countries and partners for regional solutions, including a regional digital KYC facility.

F. Structural reforms to boost potential growth

Key priorities and recommendations:

Address structural issues predating the pandemic; realign sectoral strategies to post-pandemic realities with focus on tourism sector and sequenced reforms.
Promote agriculture, fishery, and MSMEs for inclusive growth; MSMEs and agriculture employ large shares of workforce and women.
- Update MSME strategy accounting for pandemic effects; improve credit access and insurance for these sectors.
Boost human capital: enhance health capital, ensure food security, promote nutritious diet, improve access/quality of education with technology, and align education/training with labor market needs.
Upskill/reskill labor force; facilitate skill transfer from returned Samoans under SEPs; establish apprentice programs; pace training in tourism consistent with sector resumption.
Upgrade business environment to leverage PACER-Plus (in effect December 2020): engage private sector, address regulations/standards, establish PACER Plus Implementation Unit within Ministry of Foreign Affairs and Trade in 2021, review tax regime for businesses, improve trade facilitation via Samoa Trade Information Portal, promote export diversification and foreign direct investment, and develop business-friendly investment platform.
Upgrade and maintain infrastructure to be climate-resilient and mainstream climate resilience into sector plans.

G. Building statistical capacity

COVID-19 increased need for granular, timely, reliable data.
Authorities should invest in human capital and technology, promote inter-agency collaboration and information sharing, and support production of timely and quality statistics with legal framework.
Integrate statistical capacity efforts with national digital identification to improve public administration efficiency, service delivery, and targeting of social protection.
Enhanced statistics will help monitor progress, adjust strategies, and support inclusive, durable recovery and SDGs.

H. Engagement with the IMF and donors

Samoa remains highly engaged with IMF and development partners; IMF stands ready to support through policy advice and capacity development in fiscal management and reform, monetary and exchange rate policy, financial sector supervision and regulation, and macroeconomic statistics.
IMF team thanks Ministry of Finance, Central Bank of Samoa, other ministries/agencies, and private sector interlocutors for open and constructive discussions.

Key quantitative indicators (selected, as reported)

Real GDP growth: −3.2 (2019/20); −8.5 (2020/21 proj.); 2.9 (2021/22 proj.); 3.0 (2022/23 proj.); 3.5 (2023/24 proj.); 2.5 (2024/25 proj.); 2.1 (2025/26 proj.).
Nominal GDP: −2.8 (2019/20); −10.6 (2020/21 proj.); 5.6 (2021/22 proj.); 5.1 (2022/23 proj.); 5.9 (2023/24 proj.); 5.2 (2024/25 proj.); 4.8 (2025/26 proj.).
Consumer price index (period average): 1.5 (2019/20); −2.5 (2020/21 proj.); 2.7 (2021/22 proj.).
Central government revenue and grants (% of GDP): 38.5 (2019/20); 37.2 (2020/21 est.); 32.2 (2021/22 proj.); 33.8 (2022/23 proj.); 35.3 (2023/24 proj.); 35.8 (2024/25 proj.).
Central government expenditure (% of GDP): 40.3 (2019/20); 38.8 (2020/21 est.); 39.0 (2021/22 proj.); 38.0 (2022/23 proj.); 37.8 (2023/24 proj.).
Overall fiscal balance: −6.7 (2019/20); −5.2 (2020/21 est.); −2.7 (2021/22 proj.); −2.2 (2022/23 proj.); −2.0 (2023/24 proj.).
Overall fiscal balance excl. grants: −12.2 (2019/20); −10.7 (2020/21 est.); −8.3 (2021/22 proj.); −7.9 (2022/23 proj.); −7.6 (2023/24 proj.).
Private sector credit, commercial banks: 5.4 (2019/20); 5.3 (2020/21 est.); total loan growth, commercial banks: 3.9 (2019/20).
Non-performing loans: 4.3 (latest reported).
Gross official reserves (in months of next year's imports of GNFS): 7.3 (2017/18); 6.4 (2018/19); 4.7 (2019/20); 4.0 (2020/21 est.).
Public debt-to-GDP ratio: 46.7 (2019/20); 51.0 (2020/21 est.); 55.5 (2021/22 proj.); 58.1 (2022/23 proj.); 57.7 (2023/24 proj.); 57.2 (2024/25 proj.); 56.8 (2025/26 proj.).
External reserves and debt notes:
- Gross official reserves include IMF disbursement of SDR16.2 million (100 percent of quota) under the Rapid Credit Facility (RCF) and donor external financial assistance to address COVID-19 impacts.
Exchange rate (market tala/U.S. dollar, period average): 2.67 (2019/20); market rate end period: 2.70 (2019/20).
Memorandum: Nominal GDP (millions of tala): 2,168 (2019/20); 1,938 (2020/21 est.); 2,047 (2021/22 proj.); GDP per capita (U.S. dollars): 3,961 (2019/20); 3,646 (2020/21 est.); 3,780 (2021/22 proj.).

Source: IMF staff concluding statement of the 2021 Article IV mission to Samoa (January 25, 2021).