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p. 49 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asian Republics The Pacific Cook Islands East Timor Fiji Islands Kiribati Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Tonga Tuvalu Vanuatu III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia

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Samoa

The growth rate of the Samoan economy increased substantially to about 10% in 2001 as manufacturing, construction, private services, and fishing all continued their rapid expansion.

Macroeconomic developments therefore need to be monitored closely to avoid inflationary and balance-of-payments pressures. The medium-term outlook is for economic growth to decline to the 4–5% range, avoiding overheating of the economy.

Macroeconomic Assessment

Economic performance has benefited in recent years from reforms introduced in the 1990s. In 2001, GDP growth accelerated to about 10% from 7.3% in 2000 (Figure 2.34). Manufacturing, construction, transport and communications, electricity and water, and hotels and restaurants all did well. However, agriculture declined by about 16% as sub- sistence production fell and efforts to diversify production for export remained unsuccessful. Fishing continued its expansion with the introduction of new, larger fishing vessels. In contrast, tourist arrivals were down somewhat because of the impact of the September 11th events. For example, September arrivals were nearly 12% lower than the corresponding monthly arrivals in the previous year, but because spending per tourist was higher, gross tourism earnings strengthened. The acceleration in the rate of output growth was accompanied by an increase in the inflation rate from under 1% in 2000 to 4% in 2001, above the central bank target of a maximum of 3%.

Total export revenues strengthened by about 20% in 2001 due to a surge in fresh fish exports and further growth in garment exports. Imports were about 31% higher than in 2000, with non-oil private sector imports accounting for most of the rise. The merchandise trade deficit fell to $79.8 million from $90.8 million. Despite the stronger earnings from tourism, and increased private remittances, the current account surplus as a share of GDP declined slightly. So, even with a higher surplus on the capital account, the balance of payments was in overall deficit. Foreign exchange reserves dropped and provided about 4.8 months of import cover at the end of the year, compared with 6.4 months in the previous year. As a proportion of GDP, external public debt declined from 64.8% to 60.2% at the end of fiscal year 2001 (ending 30 June). Debt service costs amounted to 18.5% of merchandise exports. During 2001, the effective exchange rate of the tala remained stable in nominal and real terms.

The budget deficit widened to 2.3% of GDP in fiscal year 2001 from 0.7% in the preceeding year. Tax revenues rose by 11.5% compared with the previous year as a result of continued rapid GDP and import growth. External grants increased by 15%. Current expenditures declined by 3%, with the wages bill falling, despite a 5% civil service salary increase from 1 January 2001. There was a reallocation away from general services toward education, pensions, and public works. A current surplus equivalent to 3.2% of GDP was recorded. Development expenditures rose by 53.6% from the fiscal year 2000 level, and the overall deficit in fiscal year 2001 was financed about 30% externally (through soft loans) and 70% domestically. This quite heavy reliance on domestic financing resulted from disbursement delays in external loans.

Broad money supply increased by about 14%. Since net foreign assets declined, an expansion in net domestic assets accounted for the growth. The Government reduced its net deposits with the banking system, while credit to the private sector and public institutions increased by almost 19%. The weighted average lending rate of commercial banks fell from 12.1% at the end of 2000 to 11.8% in September 2001, and the average deposit rate rose slightly to 4.45%, narrowing the interest rate spread. The central bank continued to use the issuance of its own securities as the main monetary policy instrument.

Policy Developments

The Government’s major short-term policy challenge is to ensure macroeconomic stability while facilitating growth-promoting structural change and investment. An expansionary fiscal policy and an accommodative monetary policy stance were major factors in the rapid economic expansion of 2001, and careful monitoring is needed to avoid undesirable pressures on the balance of payments and inflation. The central bank considered tightening the money supply in the second half of the year but deferred this step in view of the events of September 11th. It also lowered its target for foreign exchange reserves to 4 months of import cover from about 6 months in 2000.

Implementation of the economic and public sector reform program continued in 2001, and the Government’s commitment to ongoing reform was reaffirmed in the Strategy for the Development of Samoa 2002–2004, which emphasizes the theme of opportunities for all through sustained economic growth, better education and health, and revitalized cultural and traditional values.

A new Public Finance Management Act 2001 provided the legal framework for improved fiscal governance, and the Public Bodies (Performance and Accountability) Act 2001 likewise proposed a legal framework for better corporate governance of SOEs. A major issue in the latter context was the performance of Polynesian Airlines, which had begun to incur operating losses and was provided with a capital infusion of ST20 million in fiscal year 2001 and in the 2002 budget. Additionally, the first step in improving the commercial legal environment was taken with the passing of the Companies Act 2001, which replaced the outmoded Companies Act 1955. In the area of finance sector reform, the Financial Institutions Act was amended to place nonbank financial intermediaries under central bank supervision. The Government also moved to improve regulation and supervision of Samoa’s offshore financial center by introducing amendments to the Offshore Banking Act 1997.

The process of achieving full compliance with the requirements of WTO and the Pacific Island Countries Trade Agreement continued, as did that of improving delivery of public services through performance-oriented planning and management.

Outlook for 2002-2003

Provided that the economy does not receive severe external shocks, the outlook is for annual growth in 2002–2003 of 5%, driven mainly by ongoing and new construction projects. The expansion of the fishing fleet and of agricultural production will also contribute. Stronger agriculture will have a beneficial impact on the poor, who reside mainly in rural areas. Manufacturing will continue to register strong growth as garment production strengthens further, and copra-processing activity recovers somewhat. However, a slowdown in tourism-related sectors is expected. Annual inflation is forecast to be around 3% in 2002–2003. Stronger exports and private remittances are expected to prevent any deterioration in the current account balance as a result of import growth.

In fiscal year 2002, an overall deficit of 1.5% of GDP is budgeted as the Government continues to implement a strategy of current surpluses and development expenditures funded by external concessional loans. Total revenues and grants are projected to rise by 3.2% compared with 2001, while current expenditures are budgeted to be 9.7% higher. The current surplus is projected to fall to 1.7% of GDP, while development expenditures are projected to remain close to the 2001 level.

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