Use fiscal strategy to ensure sustainability — International Monetary Fund
The International Monetary Fund's Executive Board Directors have called on the Samoa Government to embark on a comprehensive fiscal strategy to ensure fiscal sustainability of its operations.
The recommendations were part of a report that the I.M.F. released at the conclusion of Article IV Consultations with the Government of Samoa. The discussions were held in Apia from February 20 to March 5 this year, and was led by a six-member delegation from the bank who met with senior Samoa Government officials.
The Minister of Finance Sili Epa Tuioti, Chief Executive Officer of the Ministry of Finance Leasiosiofaasisina Galumalemana Oscar Malielegaoi, and the Governor of the Central Bank of Samoa, Maiava Atalina Ainuu-Enari represented the Samoa Government in the discussions.
The I.M.F. Report which was released last Friday, pointed to the country’s increasing vulnerability to natural disasters and the withdrawal of correspondent banking relationships.
According to the Executive Board, Samoa’s economy faces several challenges but continues to show resilience.
The country's growth reached a five-year low of 0.9 per cent in 2017-2018, due to the closure of the Yazaki manufacturing plant in August 2017 and the impact of cyclone Gita in February last year.
Inflation also shot up to 3.7 per cent for the same period, compared to 1.3 per cent in the previous year, driven by the impact of Gita on local food prices, a one-time increase in education fees, and higher price of imported fuel.
The Samoa Government's current account recorded a surplus of 2.3 per cent in the G.D.P. for 2017/18, compared to a deficit of 1.8 per cent of G.D.P. in the previous year, largely due to a temporary increase in transfers in the wake of Cyclone Gita.
The I.M.F. Report also said the local currency Tala depreciated against the U.S. dollar in nominal effective terms, but appreciated in real effective terms due to Samoa’s relatively high inflation.
Furthermore the Directors pointed out that the financial soundness indicators highlight that commercial banks’ capital adequacy and liquidity indicators are trending upwards.
“Banks’ profitability and earnings are subdued amidst a lending slowdown. Growth is projected to rebound to 3.4 per cent in 2018/19, driven by commerce, infrastructure spending, and development of the transport and communication sector.”
However, growth is expected to peak at 4.4 per cent in 2019-2020, with an uptick in tourism related sectors as Samoa hosts the Pacific Games in July this year, before settling at just above 2 per cent in the medium term.
“Inflation is expected to be back below the central bank target of 3 percent in 2018/19 as temporary inflationary pressures recede. The current account is projected to revert to a deficit of 0.5 percent of GDP in 2018-2019 as transfers normalize.
The Executive Directors also commended the authorities for Samoa’s resilience in the face of external shocks and welcomed the expected rebound in growth.
“However, they noted that the risks to the outlook are tilted to the downside, largely due to the country’s high vulnerability to natural disasters and the withdrawal of correspondent banking relationships (C.B.R.).
“In this context, Directors highlighted the need to build fiscal buffers and continue with efforts to mitigate risks from C.B.R. pressures, while implementing structural reforms targeted at boosting potential growth and making growth more inclusive.”
They called for improving the tax administration, strengthening public financial management, lowering of the long-term debt-to-GDP target, and ensuring that newly contracted loans are consistent with the Medium-Term Debt Strategy.
Directors also stressed the need to make progress in monitoring and disclosing fiscal risks, including those from state-owned enterprises.
They also considered the current accommodative monetary policy stance as appropriate, but noted the need to strengthen the monetary transmission mechanism, including by improving liquidity management, re-establishing a credit bureau and implementing measures to reduce credit risk and promote lending.
While they noted that financial sector policies should focus on completing the implementation of the 2015 Financial Sector Assessment Program recommendations.
“They called for upgrading the regulatory and supervisory framework, improving systemic financial stability risk monitoring and continued efforts to improve access to finance, while managing risks, including from crypto-assets. Directors welcomed the measures taken to mitigate risks from C.B.R. pressures."
They also encouraged establishing I.T. solutions for customer identification and monitoring, and reducing the risk profile of the offshore center. Furthermore, they also called for continued engagement with relevant stakeholders and regulators to make progress toward a regional solution to address C.B.R. pressures.
“Directors noted that the authorities’ structural reform agenda should focus on building resilience to natural disasters and enhancing the business environment."