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Asian Development Outlook 2004 : II. Economic Trends and Prospects in Developing Asia
Samoa The services and manufacturing sectors spurred growth in 2003, and inflation fell. Reform efforts focused on civil service restructuring and improving efficiency of the public enterprise sector, while maintaining fiscal discipline. The medium-term outlook is for economic growth in the 3-4% range. Economic Assessment GDP growth accelerated to an estimated 5.0% in 2003 from 2.8% in 2002, led by the services sector, particularly commerce, public administration, and transport and communications. Some manufacturing activities also grew strongly as the strengthening of the world economy stimulated manufacturing of automotive wiring harnesses. Tourist arrivals picked up from the 2002 levels. Remittances were up substantially, constituting close to 20% of GDP and providing a major demand-side stimulus to the economy. In the second quarter of 2003, agriculture started to grow for the first time since the last quarter of 2000. The fishing industry experienced a significant weakening due to unfavorable climatic conditions, while construction activity slowed as a result of both the completion, and deferral, of several major public sector projects. In 2003, formal sector employment growth in the commerce, hotels and restaurants, and personal services subsectors was probably sufficient to absorb a large share of new entrants into the labor force, though out-migration continued. The resident population age 15 years and above grew annually at 0.9% in 1991-2001, and those unable to find wage employment were usually absorbed into the agriculture sector. However, a relatively large number of Samoan individuals and families experience hardship in the form of inadequate access to cash income-earning opportunities and to basic services. In FY2003 (ended June 2003), Samoa posted a budget deficit of 0.6% of GDP, in contrast to the target surplus of 1.9%. Total revenues and external grants were equivalent to 32.9% of GDP, just below the budget estimate, due to a shortfall in nontax revenue. Tax revenue estimates of 22.4% of GDP were realized primarily because of the October 2002 increase in the value-added and goods and services tax (VAGST) rate from 10.0% to 12.5%, supplemented by rises in excise taxes and an extension of income tax to the commercial fishing sector from 1 January 2003. Current expenditures, at 21.9% of GDP, came in slightly below budget estimates, while development expenditures were 9.4% of GDP compared with an original budget estimate of 11.2%, since development projects were delayed. Net lending substantially exceeded the original estimate because of a shortfall in repayments of advances and interest by government-owned corporations. Official external debt was equivalent to about half of GDP at end-September 2003, and debt servicing costs were equivalent to 6.1% of exports of goods and services. Inflation declined over the course of 2003 to 0.1%, compared with 8.1% in 2002. The fall reflected the ending of the one-off impact from the late-2002 VAGST rate rise and a drop in domestic food prices, while there was little change in the import component of the CPI. In 2003, broad money supply rose by 14.0%, and credit from commercial banks to the private sector and public institutions grew by 6.5%. The central bank tightened the monetary policy stance during the second quarter of 2003, continuing its reliance on open market operations as the primary monetary policy instrument. Interest rates on all maturities of central bank securities rose. The monetary policy stance was eased later in the year to stimulate private sector growth. In October, the average commercial bank lending rate stood at 11.3%. After registering a small overall surplus in 2002, the overall balance-of-payments deficit for 2003 was about 1% of GDP. In 2003, export revenue was down by 4.3% in domestic currency terms, while imports were 10.4% lower, leading to a narrowing of the merchandise trade deficit. The export outcome reflected a substantial fall in fish exports, which was partly offset by growth in garment exports. Tourism receipts and private remittances grew significantly. Early in 2003, official loan disbursements fell, and a large one-off payment was made, associated with the early return by the state-owned Polynesian Airlines of a leased aircraft. Net foreign reserves in October were marginally above the level in October 2002, and provided increased import cover of 5.2 months partly due to the import decline. In 2003, the domestic currency, the tala, appreciated by 15.1% against the US dollar and 3.6% against the Japanese yen, but depreciated against the euro (3.9%), Australian dollar (13.9%), New Zealand dollar (8.0%), and Fiji dollar (2.4%). Overall, the nominal and real effective exchange rates of the tala remained relatively stable. Policy Developments During the FY2004 budget preparation process, some pressure to relax fiscal policy became evident. In order to sustain tourism development, the Government committed to providing further budgetary support to keep the financially troubled Polynesian Airlines operational, equivalent to about 2% of GDP. Construction of a major hotel has begun. The overall budget deficit for FY2004 is projected to be 1.5% of GDP. Total revenues and grants are expected to rise by 4.9% from the actual level in FY2003, with no major new revenue-raising measures introduced. Total expenditures and net lending are projected to increase by 7.5% from the previous year's level. Current expenditures are up by just 2.9% as ministries' budgets are held to their FY2003 levels under the new public administration structure effective in FY2004. The new structure was introduced as part of the government Institutional Strengthening Program and replaces 28 departments with 14 ministries. Development expenditures are projected to rise by 7.6% as previously delayed infrastructure projects come on stream. Under the budget, net lending to government corporations and public enterprises increases by 54.6%, underlining the importance of reducing this drain on the public purse. In this regard, attaining commercial viability of the national airline is a specific need, but a broad public enterprise reform agenda that was officially endorsed in late 2003 will also need to be implemented. The budget deficit is to be financed mostly by concessional external borrowing (92%). However, external debt, high by regional standards, will need to be contained over the medium term. In line with the current medium-term development strategy, resource allocation in the FY2004 budget aims at supporting development of human resources, agriculture, infrastructure, small businesses, and community services. In an attempt to redress widening rural-urban income disparities, the focus is on rural areas. Initiatives in agriculture include construction of a national abattoir, a sheep project, and continuation of the copra subsidization program. Additionally, the Government announced its intention to facilitate commercial agriculture and tourism development by reforming management of communal land, which accounts for 98% of the coastal areas. This policy could involve government leasing of communal land for subleasing to investors. The monetary policy statement for FY2004 reaffirms the central bank's objectives of maintaining a 3% inflation rate, and maintaining net international reserves at a minimum of 4.0 months of merchandise import cover. In 2003, the central bank was in the process of developing prudential guidelines to govern its supervision of the National Provident Fund and the Development Bank of Samoa, and of building a commensurate supervisory capacity. The regulatory framework for the offshore banking sector was strengthened with the passage of a new International Banking Bill. In 2003, a fourth and locally owned commercial bank began operations. Outlook for 2004-2005 On 5 January 2004, Samoa's two main islands were hit by tropical cyclone Heta, which generated winds of up to 170 kilometers per hour. Damage was inflicted upon the agriculture, power, and transport and communications sectors, but it was not so severe as to constitute a full-fledged disaster. Rehabilitation work in the aftermath of the cyclone will tend to stimulate economic activity in 2004, but this will be offset by the adverse impact of the cyclone on agricultural production. The outlook is for 2004-2005 growth in the 3-4% range (Figure 2.32). In contrast, garment manufacture is likely to be hurt by the ending of the MFA in 2005 unless new markets can be found and greater productivity can be achieved in the face of low-cost international competition. A slowdown in the growth of public administration is expected as fiscal restraint continues, but some acceleration in tourism-related sectors is anticipated in response to the reopening of a major resort. Inflation is forecast to rise to about 3.0% in 2004. While import prices will increase moderately in line with low world inflation, higher food prices due to cyclone damage as well as stronger prices for construction goods and imported fuel will contribute to its rise. Macroeconomic stability is expected to be maintained, with overall budget deficits remaining at around 2% of GDP over the next 2 years. Monetary policy will continue to be generally accommodative. The major threats to this scenario include a failure to resolve Polynesian Airlines' problems, a return to interventionist policies out of impatience with seemingly sluggish private investment, and a temptation to spend in the lead-up to national elections (scheduled before March 2006). The balance of payments is forecast to remain in moderate deficit and foreign reserves to drop toward 4 months of import cover. Exports are expected to grow as the fishing industry recovers, beer and nonu (Indian mulberry) product exports to American Samoa and Japan increase, and automotive harness exports remain strong. Desiccated coconut exports are also expected to recover after the recent installation of new quality control machinery. The continued strength of the Australian and New Zealand economies will underpin growth in private remittance flows. Imports will grow substantially from a low 2003 base, largely because of construction-related imports. On the capital account, increased official loan disbursements are likely to be partly offset by an expected reduction in external grants. Economic growth is expected to generate an increase in per capita average income of around 2% annually, and create jobs for those entering the labor market. However, in order to have a significant impact on increasing the access of the poorer households to basic needs, direct government interventions announced in the 2004 budget will have to be continued over the medium term. Such interventions include building and upgrading schools in rural areas, increased funding of microcredit schemes, and support to the small business enterprise center.
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This will be driven by ongoing and new construction projects in the public sector, which will peak in 2005-2006 as construction for the 2007 South Pacific Games is carried out. Private sector hotel development will provide added stimulus. Fisheries production is expected to recover from its 2003 falloff, if climatic conditions remain favorable, while agriculture is forecast to decline in 2004 as a result of the cyclone damage, before recovering in 2005. Automotive harness manufacture will benefit from expected continued strong growth in the Australian economy.
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