Finance Chief assuages debt fears

The Chief Executive Officer of the Ministry of Finance, Leasiosiofa’asisina Oscar Malielegaoi, has assured that the Government will not borrow more money to finance Samoa’s coronavirus crisis recovery response.

“We don’t have an appetite to borrow,” he said.

Leasiosio offered the assurance during an interview with the Samoa Observer after worrying predictions of surging debt levels emerged this week. 

Figures published on Friday reveal the International Monetary Fund (I.M.F.) predicts Samoa will have to borrow its way out of today’s economic crisis, and in doing so will reach debt levels higher than 70 per cent of Gross Domestic Product (G.D.P.).

But Leasiosiofa’asisina believes the debt-to-G.D.P. ratio will increase because of the national economy contracting, not because of rising debt.

He said the I.M.F. prediction assumes Samoa will be borrowing but he insists there will be no new loans at least for two years.

He is adamant Samoa does not need to go further into debt, and is unwilling go beyond the 50 per cent of G.D.P. target.

“If the G.D.P. contracts, even without borrowing new loans the ratio will go up,” he told the Samoa Observer.

“The [increase to] 70 per cent was on the notion that we would borrow more, but since we are not borrowing, we will not breach at least 55 per cent.”

I.M.F.’s prediction states that Samoa’s debt-to-G.D.P. ratio will reach 71.3 per cent in 2023 and stay there until 2025. 

Leasiosio said he could not speak for the full five years but for at least two years there are no plans to make new loans. 

So he is confident debt levels will remain closer to 50 per cent of G.D.P., its target threshold.

Today Samoa’s public debt levels amount to 48 per cent of G.D.P. The finance chief said the economic impacts of COVID-19 may see the debt ratio climb closer to 55 per cent as a result of reduced trade and a slow recovery in the tourism sector.

He believes Samoa can continue to service its current debt, which annually accounts for 11 per cent of the budget, without sacrificing essential services and development, arguing payments will not decrease and contribute to any increase in the debt-to-G.D.P. ratio.

With major infrastructure needs completed, Samoa no longer has urgent needs to borrow for, Leasiosio said.

“We have a hospital, we have an airport, we have a brand new extension at the wharf.

“In the past we had to borrow to build the hospital, to build the airport. Without borrowing we would not have that international airport to service and create an enabling environment for our tourism sector.”

On its existing loans, Leasiosio maintains Samoa will not go looking for debt relief. A debt suspension package by the Group of 20 (G20) is making its way through low income countries but he does not want to take it up. 

In early March, Leasiosio confirmed he was expecting to table a historically large budget for 2020/2021, exceeding $1 billion. 

Without divulging details, he confirmed on Wednesday that when the budget is presented at the end of May, it will show heavy priority towards the health and education sector. 

International donor partners like multilateral organisations, New Zealand, Australia, China and Japan have also granted budget support to help Government deliver on both new and existing expenses including the West Coast Road and improvements to Cross Island Road. 

“We are confident we can reprioritise our budget. There are items in our budget we can do without and we are confident we can apply cuts without compromising the quality of our budget.”

Previously the I.M.F. has recommended that borrowing and ramping up spending will be the way out of economic distress caused by the global pandemic.

Asked whether the I.M.F. is comfortable with Samoa going against its advice and declining to make more loans, Leasiosio said the organisation knows countries are entitled to make autonomous fiscal decisions.

Additionally, he said Samoa is committed to honouring its 50 per cent debt target, and is still aiming to reach 40 per cent in the medium to long term when all is well again.

“They (the I.M.F.) respect that it is entirely up to us, Samoa being a sovereign country. The I.M.F. provides the tools and advice but it’s down to the leaders of Samoa to decide what is best for us,” Leasiosio said.

He said he does not disagree with the I.M.F. predictions, which is designed to provide policy advice, but simply put Samoa can manage on its own resources, and with the grants made by donor partners. 

Macroeconomist from the Victoria University of Wellington Dr. Robert Kirkby said taking on more debt with plans to pay it off over the next decade would be a reasonable response to the economic situation both in Samoa and abroad.

“The problem will be if these kinds of one-offs are becoming regular occurrences, with measles last year and now COVID-19 this year,” he said.

“I see that a decade or two ago Samoa had a higher debt than today in terms of debt-to-G.D.P. ratio, so the increase with the I.M.F. program to around 70 per cent is a return to those times in some sense. 

“You might view it as either a setback to the debt reduction achieved over the past decade, or as that the ability to take on this debt during a crisis is the payoff to having done that work of reducing the debt over the past decade.”

Leasiosio said the Pacific Games in 2019 put the country in excellent stead, and by the end of the year Samoa had recorded excellent growth levels, which he said were sadly short-lived.

“[The Pacific Games] put us in a better position to borrow in times of crisis and enabled us to create space but we are not taking advantage of that space. Borrowing more means we will obviously have to pay more.”

After the last I.M.F. mission to Samoa in March this year, the Government had predicted to see another growth of 3.3 per cent in the economy, but that was before the full reality of COVID-19 hit, and the country’s breadwinner the tourism industry was shuttered. 

“Given that Samoa was reducing the debt until these two recent crises of measles and Covid-19 it seems reasonable to expect that [debt] will be sensibly managed in terms of returning to reducing the debt over the coming years,” Dr. Kirkby said.

“Given the size of the current hit to incomes in Samoa some form of borrowing money now to be gradually repaid over time is likely to be much less painful than taking the whole loss today. Unfortunately it will certainly leave Samoa more exposed to any future crises.”

Leasiosio said one of the ways Samoa is trying to prepare for future disasters is by expanding the purpose of its insurance fund of $4.2 to $4.5 million which previously went towards paying for insurance coverage.

As of July 2019 the government has been “self-insuring” which means it has a nest-egg for disaster.

“We are exercising prudence and caution when it comes to dealing with our economic management.”

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