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Samoa: IMF Executive Board Concludes 2015 Article IV Consultation

Press Release No. 15/345 July 20, 2015

The Executive Board of the International Monetary Fund (IMF) has concluded the 2015 Article IV consultation1 with Samoa on June 1.

The Samoan economy is recovering from two natural disasters. A tsunami in September 2009 and a cyclone in December 2012 caused major destruction in agriculture and tourism, the mainstays of the economy, resulting in growth well below the average of the previous decade. The reconstruction effort is estimated to have cost about 40 percent of GDP, aided in part by grants and loans from development partners, including disbursements from the Rapid-Access Component of the IMF’s Exogenous Shock Facility in 2010, and the Rapid Credit Facility in 2013.

Real GDP growth rebounded to around 2 percent in fiscal year 2013/14 (July to June), supported by a recovery in agriculture, construction and an expansion of commerce and transportation services. Consumer price inflation, which was negative for most of 2014, rose to around 6 percent towards the end of the year (yoy) on the back of higher domestic food prices, but underlying inflation (excluding food, transport and communication) remained stable at around 2 percent. The current account deficit, which had narrowed considerably as economic activity contracted after the cyclone, widened again to around 8 percent of GDP as imports recovered while exports lagged. Gross international reserves rose to 4 months of prospective imports of goods and services, an adequate level according to standard metrics, although low in comparison to other Pacific island countries.

The banking system and public financial institutions were affected by the natural disasters. Credit growth collapsed in 2012, but has recently recovered to around 6 percent as public financial institutions extended loans to aid in the recovery and banks positioned themselves for the entrance of a large regional competitor into the market. A recent financial sector assessment program (FSAP) mission found that commercial banks are liquid and report high capitalization, but non-performing loans are rising, and part of the banking system may be vulnerable to further shocks. The mission also found that some public financial institutions are vulnerable to shocks due to low asset quality and weak loan portfolios.

Real GDP growth is expected to rise further to 2.6 percent in fiscal year 2014/15, supported by the hosting of the Third United Nations Conference on Small Island Developing States (SIDS) which took place in Apia in September 2014. The rebuilding of the national airport, and the decline in oil prices are also expected to support economic activity. Higher growth will support the government’s efforts to begin to consolidate its fiscal position after years of reconstruction. Higher revenues and a gradual containment of current expenditure are expected to bring the fiscal deficit down to 3.6 percent of GDP from 5.3 percent of GDP in 2013/14. The current account deficit is expected to narrow again, mainly due to a recovery in tourism and lower oil import payments. A loose monetary policy has supported the recovery, and the nominal exchange rate has been stable.

In the medium-term, the economy is expected to grow at around 2 percent, supported by an expansion of agriculture and tourism. However, 2016/17 may see a contraction, as a major manufacturing employer plans to close its harness assembly operation. The government is expected to continue gradually reducing the fiscal deficit to around 0.5 percent of GDP, to bring the public debt down from its current level of 55 percent of GDP to the target of 50 percent of GDP by 2020. Fiscal consolidation and a pick-up in exports and tourism are expected to keep the current account deficit at around 5 percent of GDP. The main risk to this scenario is another natural disaster, but slower growth of Samoa’s main trading partners could also materially affect the medium-term growth path. Failure to deal with vulnerabilities in public financial institutions and banks could also lead to financial distress, especially in the event of another natural disaster. Delays in implementing structural reforms could also lead to anemic growth in the medium term.

Executive Board Assessment2

Executive Directors commended the authorities for maintaining macroeconomic stability and rekindling growth in the aftermath of two large natural disasters. Directors noted, however, that growth is likely to remain moderate and subject to downside risks from Samoa’s susceptibility to natural disasters and slower trading partner growth. Rising contingent liabilities in some public financial institutions (PFIs) also pose a risk to fiscal and debt sustainability. Directors underscored the need to bolster economic resilience and mitigate vulnerabilities by strengthening the financial sector, boosting fiscal and external buffers, and implementing growth-enhancing structural reforms.

Directors welcomed the authorities’ commitment to reduce the fiscal deficit, and called for decisive actions to achieve consolidation and reduce the public debt to a more sustainable level, in line with the target of 50 percent of GDP by 2020. They encouraged the authorities to restrain current expenditure and to sustain recent improvements in revenue administration, with care taken to safeguard priority health, social, and investment spending. Maintaining the reform momentum to improve the performance of PFIs and state-owned enterprises should also help to mitigate fiscal risks posed by sizeable contingent liabilities.

Directors considered the current monetary policy stance to be appropriate, but stressed that the central bank should stand ready to adopt a tightening stance, if warranted. They noted that the exchange rate is consistent with economic fundamentals, and that reserves appear to be adequate according to standard metrics, although lower than in peer countries. Directors advised that a higher reserve level would enhance economic resilience, achieved primarily through competitiveness-enhancing structural reforms.

Directors were encouraged by the ongoing implementation of the recommendations of the recent Financial Sector Assessment Program (FSAP), and supported the request for Fund technical assistance in this regard. Reforms aim to improve on-site supervision, prudential regulations and oversight, and bank resolution and crisis management. Efforts to strengthen the AML/CFT framework should also continue.

Directors acknowledged the important role played by PFIs in the economic recovery, but cautioned that past lending had compromised asset quality in some institutions, while also contributing to government contingent liabilities. They agreed that as the economy strengthens, the mandate of PFIs should more narrowly focus on key sectors of the economy, consistent with their existing mandates. The governance and transparency of PFI operations should also be improved to facilitate the development of private financial markets.

Directors emphasized that continued structural reforms would be vital to fostering private sector development and economic diversification, and lifting Samoa’s growth potential. They welcomed the authorities’ reform agenda, which focuses on developing agriculture, facilitating business activity and tourism, and improving access to finance. Directors noted the particular importance of making customary land more accessible for collateral use, and deepening financial intermediation.