Regions and Countries

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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 Levels

Country Strategy and Program Update 2005-2006: Samoa

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II. Current Development Trends and Issues

A. Recent Political and Social Developments

2. Political Developments. In December 2003, the opposition Samoan National Development Party merged with the Samoa United Independents Party, forming the new Samoa Democratic United Party. Nevertheless, the ruling Human Rights Protection Party, under the strong leadership of Prime Minister Tuila'epa Sa'ilele Malielegaoi, retains a comfortable parliamentary majority. The next general elections will take place in early 2006.

3. A new public administration structure, legislated in early 2003, became effective in fiscal year (FY) 2004. The new structure has reduced government departments and constitutional offices from 28 to 19. While this realignment of offices has been completed, continuing reform efforts will be required to improve efficiency and efficacy of functions and processes.

4. Social Developments. With a human development index (HDI) of 0.775 (HDI rank 70) in 2001,³ Samoa scores relatively well, especially compared to other Pacific developing member countries (DMCs) of ADB. Good progress has been made toward achieving the Millennium Development Goals (MDGs). It has already achieved the target for universal primary education, and has made significant improvements in secondary enrollment and has the highest secondary enrollment ratios among Pacific DMCs. Gender disparity in education and literacy rates has essentially been eliminated. Child and maternal mortality rates have decreased and are among the lowest in Pacific DMCs. However, ADB's 2002 participatory poverty survey concluded that these generally high standards are not universal, so that further attention will be needed to ensure that all parts of the population have access to essential and high-quality basic education, health care services, and safe water supply. Lack of formal employment and/or income-generating opportunities are among the critical issues for all communities, in both urban and rural areas. Many young people are finding it difficult to get the sort of jobs to which they aspire. With around 5,000 school leavers and dropouts entering the labor market every year, a growing number of people are without jobs, leading to increased social and domestic tensions, rising crime rates, and deteriorating quality of life for those most affected. Even the traditional Samoan social structure and associated safety nets are coming under strain as external influences affect attitudes and aspirations.

5. The National Provident Fund will introduce a savings-based national healthcare insurance system in the near future. Important issues that are still to be resolved include the effective linkages of the new system to health sector institutions and the existing health care system, as well as the details in terms of insurance coverage.

B. Economic Assessment and Outlook

1. Recent Performance and Outlook

6. Recently revised national accounts show that real gross domestic product (GDP) increased by 3.5% in 2003, following 1.5% growth in 2002. The growth acceleration was driven by the manufacturing subsector (garments and automotive wiring harnesses), transport and communications, finance and business services, and agriculture, which expanded strongly after years of decline. Public administration, hotels and restaurants, and personal services also grew relatively rapidly, while construction grew at a modest rate of 2.5%. The fishing industry experienced a 10% decline due to unfavorable climatic conditions that were common to the region.

7. Inflation declined to an annual average rate of 0.1% by December 2003, compared with 8.1% in 2002, primarily because of a drop in domestic food prices. Broad money supply increased by 14% in 2003, with domestic credit to the private sector expanding by 8.1%. The central bank tightened monetary policy during the second quarter of 2003, but eased it later in the year in the context of declining inflation and increased foreign reserves, which at the end of December 2003 were ST204.2 million, equivalent to 6 months of import cover. This rise in reserves was attributable largely to a 10.4% decline in merchandise imports. Gross tourism receipts were up 4% on the 2002 level, while remittances were just 1.3% higher and the capital account surplus was more than halved. Over the course of 2003, the Tala appreciated substantially against the US dollar (15.8%) and depreciated significantly against the Australian dollar (13.8%) and the New Zealand dollar (7.4%). Nominal and real effective exchange rates remained relatively stable.

8. After recording a budget deficit of 0.6% of GDP in FY2003, the Government budgeted for an overall deficit of 1.5% of GDP in FY2004 (ST14.1 million), which notably involved an injection of ST19.6 million (2% of GDP) into Polynesian Airlines. The actual outcome in the first half of FY2004 was a cumulative deficit of ST11.6 million, which compared with an overall surplus of ST3.6 million recorded in the first half of FY2003 and largely reflected the full payment of the amount allocated for Polynesian Airlines. In consequence, the Government ran down its cash reserves for the third consecutive year. In the first quarter of 2004, the Government was experiencing a cash-flow constraint that was severe enough to cause delays in payments to the private sector. Fiscal developments will need to be monitored closely to assess whether the budget comes back on track. The Government's largely concessional external debt declined during FY2003 to ST456 million, or 51% of GDP, but remains relatively high by regional standards.

9. In January 2004, Samoa was hit by tropical cyclone Heta. The agriculture sector suffered the most damage, with consequent shortages of local food supplies and increased reliance on imported food. This is expected to cause a decline in agricultural production in 2004. The cyclone caused relatively minor damage to physical infrastructure.

10. For calendar year 2004, economic growth in the range of 2-3% is expected. In the primary sector, agriculture's decline is likely to be matched by continued contraction in fishing. The construction industry will register strong growth as a number of private and public sector projects are begun or completed, while manufacturing is expected to grow at a modest rate. In the services sector, modest growth in commerce will be underpinned by some growth in private remittance flows and tourism, with continued strength in the Australian and New Zealand economies. The reopening of a major resort and implementation of a new tourism marketing strategy are expected to boost visitor numbers, provided that the continued financial difficulties of Polynesian Airlines can be resolved successfully. Transport and communications, finance and business services, and public administration are all anticipated to grow at modest rates of about 2%. Inflation is forecast to accelerate to over 3% in 2004, as import prices and local food and construction goods prices increase.

2. Policy Developments

11. The Government has started the process of developing the new SDS 2005-2007, which is expected to be finalized by the end of 2004. Overall, no significant changes to the current SDS in terms of general focus and direction are expected.

12. In 1994, Polynesian Airlines underwent a major restructuring and the Government assumed the airline's debt of ST80 million, paying it off in full by the end of FY2003. In addition, in the three fiscal years FY2002-2004, the Government made budget allocations to the airline totaling ST42.6 million, and additional significant allocations are expected in FY2005. Polynesian Airlines has been a major drain on the public finances and a resolution of its current difficulties is a pressing need.

13. During the process of formulating the FY2004 budget, some frustration in government circles with the economic reform process became evident, especially with regard to the sluggish private sector and foreign investor response to reforms. The Government took on a more interventionist tone and in-principle endorsement was given in the 2004 budget to a joint venture with a local business to construct a beach resort hotel near Faleolo international airport. This project is proceeding with public sector financing.

14. In the context of successful implementation of financial sector reforms since 1998, the central bank's monetary policy statement for FY2004 reaffirmed the objectives of maintaining a 3% inflation rate, subject to exogenous shocks, and maintaining net international reserves at a minimum of 4 months of goods import cover. The processes of developing prudential guidelines to govern central bank supervision of the National Provident Fund and the Development Bank of Samoa, and of building a commensurate supervisory capacity, continued into 2004. In 2003, the regulatory framework for the offshore banking sector was strengthened with the passage of a new International Banking Act, and a fourth, domestically owned commercial bank began operations.

C. Implications for the Country Strategy and Program

15. The Government's current (and, probably, subsequent) development strategy adequately reflects economic and social issues and developments, recognizes the case for community participation in development, and encapsulates the significance of private sector-led economic growth and the need to improve the access to and quality of basic social services. Following the preparation and approval of SDS 2005-2007, ADB will adjust its country strategy and program, as appropriate.

16. The Government recognizes, and is committed to address, the lack of opportunities and access to basic social services of certain vulnerable groups in the community. The relationship between the traditional value system, Fa'a Samoa, and effective development policies that reflect the country's aspirations to position itself in competitive, global markets, creates both opportunities and, to some extent, tensions. The Government, therefore, is facing the challenge of achieving harmony between the traditional and modern worlds. Participation of the community in the development of the country will be indispensable. Toward this end, ADB will continue to contribute through assistance to the Government in enhancing public participation in urban management and planning; fostering good corporate governance, especially in the SOE sector; and continuing its dialogue with the Government in relation to appropriate poverty reduction strategies. In the longer term, ADB support for education also supports effective participation and demand for good governance.

17. Exposure to SOEs is a significant risk to sound economic and financial management. Therefore, ADB should remain engaged in supporting SOE reforms, in encouraging private sector participation in the economy, and in promoting a competitive economic environment.

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