Countries and Regions

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p. 2 of 5 BACK | NEXT I. Country Strategy II. Current Development Trends and Issues III. Implementation of the Country Strategy and Program IV. Portfolio Management Issues V. Country Performance and Assistance Levelsl

Country Strategy and Program Update 2003-2005: Samoa

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II. Current Development Trends and Issues

A. Recent Political and Social Developments

2. The stable political environment, combined with vigorous economic growth and inclusive social development strategies, has contributed towards achieving the country's development goals. There are growing concerns about rising inequality between rural and urban areas, but overall, poverty is far from endemic in the country. With a Human Development Index (HDI) of 0.590, the country scores relatively well on the achievement of social development goals. Adult literacy rates for both genders (96%) and gross enrollment rates for the primary (94%) and secondary (70%) levels are high by Pacific Developing Member Country standards. Infant mortality (22 per 1,000 births), under-5 mortality (35 per 1,000 births) and maternal mortality (70 per 100,000 births) rates are among the lowest in the region. Gender equality is not a major issue, although women generally outscore men on both the human development and poverty indexes. A large majority of the population (90%) have access to safe water. While environmental impact assessment legislation has been drafted and is scheduled to be presented to Parliament in 2002, the increasing pressure on the country's marine, forest, and land resources will require sound environmental management.

B. Economic Assessment and Outlook

3. Real gross domestic product (GDP) growth was 6.5% in 2001 compared with 6.9% the previous year. Growth was generally broad based including rapid growth in construction, transport and communication, electricity and water, and hotel and restaurants. Fishing continued its expansion with the introduction of new, larger capacity fishing vessels. However, agricultural produce suffered a decline of 12.2%, as subsistence production fell and efforts to diversify production for export continued to prove unsuccessful. Tourist arrivals for the first 9 months of 2001 were marginally down compared with the corresponding period in 2000, this was aggravated with the tragic events of 11 September 2001. Tourism earnings however were less affected, as spending per tourist rose. The acceleration in the rate of output growth was accompanied by an increase in the inflation rate to 4.0%, which was above the central bank target of a maximum 3%.

4. Total export revenue in 2001 was 11.1% over the corresponding period in 2000 in US dollar terms because of a surge in fresh fish exports and growth in garments exports. Imports were 21.1% higher, with most of the rise accounted for by nonpetroleum private sector imports. The merchandise trade deficit consequently rose to about $113 million. Gross earnings from tourism rose, and private remittances were up, but the current account was in a deficit, reaching 3.1% of GDP in 2001. Thus, despite an increase in the capital account surplus, the balance of payments was in overall deficit. In 2001, the net foreign assets declined and provided 4.1 months cover of imports, compared with 5.7 months in 2000. In terms of percentage of GDP, the external public debt declined from 64.2% to 58.9% in 2001. Debt servicing costs were 18.5% of merchandise exports and 1.6% of total foreign exchange revenue at the same time. During 2001, the effective exchange rate of the tala remained stable in both nominal and real terms.

5. The budget deficit widened to 2.3% of GDP in FY2001 compared with 0.7% in FY2000. Tax revenue rose 11.5% as a result of continued rapid GDP and import growth, and external grants increased by 15%. Current expenditure declined by 3%, with the wage bill falling despite a 5% civil service wage rise from 1 January 2001, and with a reallocation away from general services towards education, senior citizen pensions, and public works. A current surplus equivalent to 3.9% of GDP was recorded. Development expenditure increased by 53.6%, and approximately 30% of the overall deficit was financed externally through soft loans, and 70% domestically. This relatively heavy reliance on domestic financing resulted from delays in external loans.

6. The broad money supply increased by 9.2% in 2001. Net foreign assets were down by about 6.0%, so that the growth was accounted for by an expansion in net domestic assets. The Government decreased its net deposits with the banking system, while credit to the private sector increased by 14.4%. The weighted average lending rate of commercial banks fell from 12.15% at the end of 2000 to 11.57% in December 2001, and the average deposit rate rose from 4.40% to 4.5%, thus reducing the interest rate spread from 7.75% to 7.07%. The central bank continued to use the issue of its own securities as the main monetary policy instrument.

7. Provided the economy is not subject to severe external shocks, the outlook is for growth in 2002 and 2003 at rates in the 4-5% range. This expansion will be driven by ongoing and new construction projects, and by fisheries expansion, with some support from a limited revival in agricultural production. Manufacturing will also continue to register strong growth as garment production expands further, and copra processing activity revives. However, a slowdown in tourism-related sectors is expected. The greater challenge to sustaining growth in the longer-term will depend on the possibility for further mobilization of domestic factors of production including land. Inflation is forecast to be around 2-3%. Growth in exports and private remittances is expected to prevent a blowout in the current account deficit as a result of import growth.

8. In FY2002, an overall deficit of 2.6% of GDP is budgeted as the Government continues to implement a strategy of current surpluses and development expenditure funded by external concessional loans. Total revenue and grants are projected to rise by 3.2% over the 2001 level, while current expenditure is budgeted to be 9.7% higher, with a freeze on all salary increments imposed in order to contain the wage bill and permit greater nonpersonnel expenditure. The current surplus is projected to fall to 1.7% of GDP. Development expenditure is projected to remain close to the 2000 level.

9. The outlook for the Samoan economy following the events of 11 September 2001 and their impact on sectors engaged in exports and tourism is mixed. The Central Bank of Samoa (CBS) is adopting a cautious approach by not changing its policy settings for the moment and is closely monitoring the situation. The expansionary government budget for FY2001, combined with the continuation of an accommodative monetary policy, is expected to generate further growth in the economy. On the other hand, the resultant growth in domestic demand and the anticipated increase in the price of petroleum products are expected to continue to raise the annual rate of inflation as well as reducing the level of international reserves.

10. The major policy challenge for the Government is to ensure the maintenance of macroeconomic stability while promoting structural change and private investments to generate economic growth. An expansionary fiscal policy and an accommodative monetary policy stance contributed to the rapid economic expansion in 2001, and careful monitoring is needed to avoid undesirable balance of payments and inflationary pressures. The central bank considered tightening the money supply in the second half of the year, but this was deferred in view of the events of 11 September. The central bank also lowered the target for foreign exchange reserves to the level of 4 months compared with 6 months import cover in the previous year.

11. The process of achieving full compliance with requirements of the World Trade Organization and the Pacific Island Countries Trade Agreement continues. Improving delivery of public services also continues through performance-oriented planning and management. The key activity in furthering public service reform in 2001 was the beginning of a comprehensive functional review of all departments.

C. Implications for Country Strategy and Program

12. The ADB strategy for Samoa supports the Government's recently released Strategy for the Development of Samoa, 2002-2004 (SDS)¹ under the theme of Opportunity for All. The vision of the Government expressed in the SDS recognizes the socioeconomic conditions and challenges facing the country and emphasizes the need to maintain a competitive economic environment with sustained economic growth, to continue to improve education and health, and to strengthen cultural and traditional values. In support of this vision, the SDS has identified a number of key strategic areas. The strategies aim to maintain macroeconomic stability, promote private sector development and employment generation, improve education and health standards, improve opportunities for the development of tourism and the agriculture sector, improve infrastructure and services, and enhance public sector efficiency.

13. The Public Finance Management Act of 2001 (PFMA) was passed in September 2001 and became effective in October 2001. The PFMA adopts many modern public finance principles and practices. However, a quick perusal of the PFMA discloses some key issues that need to be further considered prior to its full implementation to ensure that its objectives are realized, particularly reconciliation of budget and financial reporting processes, and the role of the auditor general in internal control. Assistance in these areas is needed and has been included in the ADB program of assistance for 2003 to support the effective implementation of the PFMA, and therefore to foster good governance.

14. Samoa's transition to a more liberalized, more efficient financial market in 1997 has enabled the creation of a sound and stable macroeconomic framework.² This was accomplished by giving market forces and the private sector an enhanced role in financial sector development. Significant progress and improvements have been made within the domain of both the public and private sectors. Commercial banks are experiencing unprecedented growth in their lending portfolio and business transactions.³ Both the Development Bank of Samoa (DBS) and the Samoa National Provident Fund (SNPF) are working towards improved financial performance and are reporting improved operational efficiencies and higher service levels. The establishment of another insurance company (Colonial Mutual Life Assurance) is also reflective of the strong economic growth and opportunities that exist. Continued assistance through ongoing capacity building of financial and business advisory intermediaries, and implementation of state-owned enterprise reforms,⁴ as well as the loan for small business development,⁵ are important to maintain the momentum of the reforms, and support private sector-led growth.

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