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p. 50 of 68 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asia The Pacific Cook Islands Fiji Islands Kiribati Republic of the Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Democratic Republic of Timor-Leste Tonga Tuvalu Vanuatu III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia

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Samoa

Growth slowed sharply in 2002 as fishing, agriculture, and construction contracted and impacted the rest of the economy through flow-on effects. Macroeconomic and structural policies are focused on supporting a resumption of annual economic growth to 3-4%. Maintaining macroeconomic stability and deepening reforms remain critical for the long-term sustainability of economic growth.

Macroeconomic Assessment

After recording 2 years of rapid economic growth, the Samoan economy slowed considerably in 2002, especially in the first half of the year. The full-year outturn was 1.3% growth, down from 6.2% in the preceding year (Figure 2.30). There was a sharp contraction in economic activity in the first quarter of 2002, particularly in government-funded construction activity, fish exports, tourism earnings, and agricultural production. Overall economic activity picked up in the second quarter and through the second half of 2002, when fresh fish exports recovered, remittances strengthened, tourism expanded, and construction activity turned up, assisted by an increase in credit to the private sector.

CPI inflation rose from 3.8% in 2001 to 5.5% in 2002, largely reflecting a rise in the prices of local food components, transport, beer, cigarettes, and gasoline in the first half of the year.

The budget for FY2002 (ended 30 June 2002) closed with an overall deficit of 2.1% of GDP, which was better than expected, due to delays in the implementation of some public sector infrastructure projects and higher than expected tax revenues. In FY2002, tax revenues rose by 4.5% but nontax revenues declined by 29%, mainly due to lower cost recovery. External grants increased by 15.5%.

Current expenditures rose by 11.4%, mainly due to a 16% rise in the wage bill, which reflects the upgrading of positions as part of the economic and public sector reform program and the full-year effects of the 5% civil service wage hike implemented from 1 January 2001. Development expenditures declined in FY2002 by 15.3% such that overall expenditures increased by only 3.6%. Education and health continued to be priority sectors. The overall deficit was financed approximately 66% from external, concessional loans and the rest from domestic sources.

Total exports declined by 9.4% in 2002, mainly due to a fall of about 17% in the export value of the two main export commodities, fresh fish and garments. The fish harvest was lower than normal early in the year, and export values were also lower because of weaker prices. The decline in garment exports reflected weaker demand in international markets. Imports were 4.3% higher than in 2001, causing the merchandise trade deficit to widen by 6.1%. However, the current account deficit narrowed from 3.1% of GDP in 2001 to 0.7% of GDP in 2002, reflecting strong growth in remittances.

Tourism also expanded with the participation of visitors in various sporting competitions and the 40th anniversary of Samoa's independence. Net foreign assets increased during 2002 and were sufficient to cover about 4.5 months of imports by the end of the year.

The Samoan currency, the tala, is pegged to a trade-weighted basket of currencies that was reduced from six to five currencies in August 2002 and now consists of the Australian, Fiji, New Zealand, and US dollars as well as the euro. The exchange rate may be changed within a 2% margin of the peg after approval by the central bank board. Between September 2001 and September 2002, the tala depreciated against all the currencies in the basket except the US dollar.

Broad money supply (M2) increased by 9.2% in 2002. Due to the slowdown in the domestic economy, an accommodative monetary policy stance was maintained throughout the year. With recent inflationary impulses related to local factors and expected to be temporary, this stance is appropriate. The weighted average interest rates on commercial bank loans fell by nearly 4 percentage points to 11.2%, while the average interest rate on commercial bank deposits remained at 4.5%, thus narrowing the interest rate spread. Growth rates of commercial bank lending decreased from 21% in the year ending September 2001 to 10% 12 months later.

Policy Developments

The major short-term policy challenge for the Government is to support a resumption of the high economic growth and strong inflation performance of recent years. Concerned about overheating in the economy, the Government deferred the implementation of some of its public investments in 2002, leading to a significant weakening in construction in the first half of the year. With expansionary fiscal and accommodative monetary policies, growth resumed in the second half of the year. The slight increase in the recurrent surplus and decrease in the overall deficit in FY2003 is a move in the right direction.

While still relatively vulnerable, the Samoan economy has performed strongly in recent years. This performance can be attributed to a combination of growth-enhancing policies, the level of human capital development, natural resources, and some good fortune. Reforms introduced by the Government have made Samoa a more open economy and an easier place in which to do business. Tariff and tax reform and streamlining of business regulations have directly improved international competitiveness. Financial liberalization has made it easier for businesses to access finance and has generally boosted economic activity. Macroeconomic stability has created a more predictable and secure investment climate, while public sector reforms have helped alleviate the potential burden of taxation.

The implementation of the economic and public sector reform program continued making good progress in 2002. After several years of impressive overall economic growth, most policy makers now recognize the need to make greater efforts in redressing widening imbalances between the income levels of people in urban and rural areas. This concern is addressed in the Strategy for the Development of Samoa (SDS) 2002-2004, which emphasizes the theme of "opportunities for all". However, the achievement of macroeconomic stability and sustained economic growth still remains the primary strategic goal, and includes keeping the overall deficit to no more than 3.5% of GDP and the recurrent surplus to no less than 1.0% of GDP. Given the recent budget outcomes and likely prospect of more modest growth than seen in recent years, this will require rigorous control over expenditures, especially current expenditures, and a greater focus on the core functions of government.

In keeping with the Government's commitment to phase out tariffs and widen the tax base, many tax changes were announced in the budget for FY2003 (approved in May 2002). The changes include an increase in the value-added goods and services tax from 10.0% to 12.5%, reducing the import tariff on goods subject to a 10.0% duty rate to 8.0%, increasing excise rates and motor vehicle registration and license fees, and making the commercial fishing sector (above a certain scale) subject to corporate income tax. However, all commercial agriculture, small-scale commercial fishing, and ministers of religion are still exempt from tax, and the commercial fishing sector still does not pay any resource rent. The 2003 budget also announced that there would be duty exemptions for certain business inputs for hotels and for manufacturing. A budget deficit of 1.9% of GDP has been approved for FY2003, consistent with the target and strategies set out in the SDS.

In the area of financial sector reform, the central bank continued to develop its capacity to implement market-based monetary policy through the issue of new securities and improvements in forecasting liquidity in the banking system. With the introduction of 14-day paper in January 2002, six maturity options up to 365 days are now available. The central bank also created two facilities in 2002 that the commercial banks can use to borrow on a short-term basis direct borrowing against collateral and a repurchase agreement facility.

To promote exports, a government export guarantee scheme, applying initially to goods, was established in 2002 to make it easier for exporters to obtain working capital from the local commercial banks and the Development Bank of Samoa.

The Government's vision of how to proceed with economic and social development goals emphasizes factors that will enhance short- and long-term international competitiveness. Key factors include macroeconomic stability, public sector efficiency, investment in human capital and relevant public goods, and specific interventions to address market failures that constrain key export activities. The Government is particularly concerned in the short to medium term with the role and efficiency of SOEs. Some have been a drain on public finances without providing commensurate benefits and some have high-cost operations that adversely impact the competitiveness of business. The effort launched in the second half of 2002 to develop and implement a program of corporatization and privatization for SOEs is likely to be continued. The Government will continue to develop a policy framework and implement an accountability framework to make a widespread and long-term impact on competitiveness.

Outlook for 2003-2004

Economic activity looks set to grow moderately in 2003-2004, largely reflecting continuing expansionary fiscal and accommodative monetary policies. Ongoing structural reforms and improvement in world economic conditions are also expected to support modest GDP growth in the medium term. Tourism and remittance income should continue to expand in line with expected economic growth in the main source countries. Tourism should also benefit from the perception of the Pacific region as a relatively safe tourist destination.

Agricultural production is expected to improve and the fishing sector should continue to expand as capacity increases. Further growth in construction activity will likely be seen, reflecting public infrastructure investment activity and private housing and other construction activities. All these should ensure the achievement of the SDS growth target of 3-4% in 2003-2004.

The central bank expects that bank credit to the private sector will grow less quickly than in recent years. The increase in VAT is also expected to be more than offset by lower tariffs, an increase in local food supplies, and the ongoing impact of low inflation in trading partners. Accordingly, inflation is forecast to decline to 3-4% in 2003. A small current account deficit of 1.4% of GDP is forecast for 2003, with the growth in imports outstripping the continued growth in commodity exports, tourism revenues, and remittances. The overall balance is expected to weaken slightly in 2003, reflecting lower private capital flows with foreign reserves declining slightly to less than 4.5 months cover for import goods. The main risk to the 2003 forecasts arises from possible deterioration in global conditions and higher oil prices.

In 2004, inflation is expected to rise to about 5% in light of the outlook at home and among the main trading partners. The current account deficit is forecast to remain below 4.0% of GDP and the overall balance of payments in surplus in light of the SDS commitments of the Government and the forecast for continued growth in remittances and tourism.

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