Regions and Countries

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Country Strategy and Program Update 2002-2004: Samoa

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I. Development Situation

A. Recent Political and Social Developments

1. General elections held on 3 March 2001 returned Samoa's ruling party, the HRPP, to government, albeit with a reduced majority. The HRRP captured 22 seats in the 49-seat parliament and, with the support of 6 independents, it gained control of a majority of seats. Six cabinet ministers lost their seats in the election and a new cabinet was formed including eight new ministers. The Prime Minister appointed a new Deputy Prime Minister and Minister of Finance. The new Minister of Finance is a senior member of cabinet having served in a number of important ministerial positions including, until prior to the recent elections as Minister of Health. He succeeds the Prime Minister who had occupied the position of Minister of Finance since 1988. The Government has confirmed its continued strong commitment to its reform program.

B. Economic Assessment and Outlook

2. A recent Article IV Consultation mission from the IMF concluded that economic developments in Samoa have been favorable. The Government has continued its extensive program of economic and financial reforms aimed at strengthening the economic base of the country while liberalizing and reforming the financial sector to facilitate private investment. The benefits of this reform program are now reflected in the country's economic performance. From a low of 1 percent in 1997, growth in the economy (GDP) accelerated to 3.4 percent in 1998 and 5.6 percent in 1999. In 2000 economic growth likely exceeded 7 percent. The construction industry was the driving force behind this strong performance with the commerce, transport and communications, and the finance and business service sectors also significantly contributing to the growth. The fishing industry, and the hotels and restaurants--both of which had been prominent in the previous two years--had slower growth in 2000 as the industry situations consolidated.

3. Major public sector projects contributed to the performance in the construction sector. These include the upgrading of Faleolo international airport; construction of bulk fuel storage facilities; and improvements to road infrastructure and water supplies throughout the country. Private sector construction included a number of new and renovated commercial buildings in Apia.

4. The restructuring of the tax and tariff systems and liberalization of the financial sector have been instrumental in stimulating growth in the tertiary sector of the economy. Domestic credit to the private sector increased by 19.8 percent in 2000, while money supply (M2) rose by 11.4 percent.

5. On the external account, merchandise exports were 17.5 percent lower in 2000 than in the previous year. There were declines in revenues from all major export commodities, with fish exports, which contributed 55 percent of total exports, falling by 24.2 percent. Exports of copra, coconut oil, and kava¹ all declined by more than 50 percent. Inflows of remittances had another year of strong growth, increasing by 20 percent, to a level equivalent to about 20 percent of GDP. Gross tourism receipts increased by 5.1 percent over 1999, and were equivalent to about 17 percent of GDP; they were exceeded by remittances for the first time.

6. In aggregate, there was no increase in imports in 2000 over 1999. However, after adjusting for the acquisition of a large ferry under Japanese grant aid in 1999, underlying imports rose by about 11 percent. Petroleum product imports rose by 31.8 percent while non-oil private sector imports increased by 10.3 percent. In aggregate, the deficit in the current account (excluding official grants) improved from 8 percent of GDP in 1999 to only about 5 percent of GDP in 2000. Overall a small surplus (0.4 percent of GDP) in the balance of payments resulted from continuing strong capital account inflows. At the end of 2000, foreign reserves were equivalent to 24 percent of GDP and approximately 6.5 months of import cover.

7. A surplus of 3.3 percent of GDP was recorded in the current budget for FY2000 compared to the projected figure of 3.2 percent. Overall there was a deficit of 0.7 percent of GDP in 2000, the first deficit since 1995, but still lower than the initially budgeted deficit of 3 percent. At the current level, no tax revenues were lower than expected, primarily due to a shortfall in expected dividends from Samoa Communications Ltd. This was partly offset by higher than expected tax collections. Overall, delays to the implementation of a few major investment projects reduced loan drawdowns and consequently reduced the overall deficit.

8. The rate of inflation moved up slightly during 2000 to 1 percent at year-end. This compares with a rate of 0.3 percent at the end of 1999. The impact of high international oil prices was the primary cause of the increase.

9. The strong GDP growth of the last two years is expected to continue in 2001 and 2002, albeit at a somewhat slower pace. The construction sector is expected to continue to perform strongly as major public investment projects enter their implementation stage. Construction in the private sector is also expected to remain buoyant. The fishing industry is expected to resume its strong growth after the consolidation in 2000. In agriculture the production of taro has begun to show signs of recovery. This could lead to a much-needed boost in the agriculture sector after years of poor performance following the disastrous effect of the taro leaf blight. Tourism is also expected to be buoyant as Samoa benefits from a better overseas marketing focus, improved international flight connections, and the displacement of regional conferences and tourism from Fiji and the Solomon Islands. The apparent slowing of the global economy and the continuing high oil price present the main constraints to continued strong growth. These negative factors notwithstanding, the economy is expected to grow by around 4 percent in both 2001 and 2002. Inflation is expected to increase to around 2 percent as increasing oil prices continue to affect domestic costs.

10. For FY2001, a current surplus of around 2.2 percent of GDP is forecast with an overall deficit of around 3.7 percent of GDP. The deficit is expected to be funded through concessionary external borrowing. Current budget expenditure is estimated to be equivalent to 21.6 percent of GDP and total expenditure, including the development budget and net lending, 33.3 percent of GDP. (See Appendix 1 for economic indicators, and Appendix 2 for social, and environment indicators.)

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