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p. 60 of 77 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions 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 Republic of Palau Papua New Guinea Samoa Solomon Islands Democratic Republic of Timor-Leste Tonga Tuvalu Vanuatu III. Promoting competition for long-term development Statistical appendix

Asian Development Outlook 2005 : II. Economic trends and prospects in developing Asia

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Samoa

The economy expanded by more than 2% in 2004 as construction strengthened and tourism continued to grow, though the loss of agricultural production due to cyclone Heta pushed inflation up to 16% by year-end. The FY2005 budget provided for a 60% increase in expenditures and net lending, much of which is allocated to additional public works. Continuing high levels of construction activity are expected to support the economy over the medium term.

Macroeconomic assessment of 2004

The year got off to a bad start due to the widespread damage wrought by cyclone Heta in January. While the destruction was not as severe as in earlier cyclones, it had an immediate adverse effect on the supply and price of agricultural products. In the quarter to March, the overall volume of supply to the main fresh produce market fell by 52% and the overall price index at the market rose by 71%. Fishing activity was also adversely affected and the need to repair damaged infrastructure impacted the budget, requiring reallocation of funds.

The economy recovered quickly though, and GDP over the first 3 quarters of 2004 came in at 2.3% higher than in the same period of 2003. While agriculture and fishing declined by 9.2% over the period, industry expanded by 2.6% and services rose by 5.2%. Growth for the whole year is estimated at 2-3%.

Greater construction activity led growth in the industry sector in 2004, supported by several large private and public sector projects, in addition to reconstruction work required by the cyclone. New office buildings were under construction for the government-owned telecommunications operator and the Development Bank of Samoa. Preparations continued for the hosting of the 2007 South Pacific Games. Construction of roads, bridges, seawalls, and schools continued, and work was under way for a new 140-room hotel at Faleolo, a temple, and a shopping mall. The increase in construction more than offset a drop in manufacturing as output from the automotive wire harness plant fell and a garment factory closed temporarily to relocate premises. The growth in services was attributed mainly to increased output from financial and business services and from personal and other services.

Visitor arrivals continued to rise in 2004, in part due to the holding of Pacific Forum meetings in Apia. Preliminary estimates are that arrivals increased from 93,000 in 2003 to 97,000, and that total tourism revenues picked up by some 20%.

Merchandise exports declined in 2004. Preliminary data indicate that the value of fish exports, which is the main commodity export, weakened by more than 10% following a 46% fall in 2003. Exports of garments, which are the second-largest commodity export, fell by more than half over the year. International reserves remained above the Central Bank of Samoa’s target of approximately 4 months of imports (Figure 2.31). As of end-November 2004, international reserves were the equivalent of approximately 5.2 months of import cover, down from 6.0 months as of end-2003.

Despite the extra costs imposed by cyclone Heta, the budget deficit for FY2004 (ended June 2004) was less than budgeted at 0.9% of GDP. A similar deficit is targeted for FY2005. If this target is achieved, it would represent the third year of a tight fiscal position. The ratio of official government debt to GDP (excluding government guarantees) has fallen from 62% in 2001 to 46% as of end-September 2004. Debt service costs accounted for 5% of FY2004 expenditures and net lending.

Inflation rose over the course of 2004 as the full effect of the cyclone on local produce supplies fed through to retail prices, and as higher international fuel prices raised transport costs. The annual inflation rate was 11.7% as of end-September, reflecting a 26.8% increase in the price of local goods and services and a 2.7% increase in the price of imported goods.

The central bank adopted an accommodative stance in 2004 in an effort to generate economic growth. The one-time inflationary effect of the cyclone was allowed to pass through the economy without any offsetting action. The combination of a slight fall in interest rates, an easing in May 2004 of foreign exchange controls on capital transactions, and a firm economy led to a 14.2% increase in credit to the private sector in 2004. Money supply (M2) grew by 12.7% by end-September compared with the same period in the previous year.

Macroeconomic policy developments

The FY2005 budget provided for a tripling of grant-funded development spending to $259 million. Combined with an 8% increase in other expenditures, a 59% increase in expenditures and net lending is budgeted for FY2005. The additional outlays provided in the budget are very large at the equivalent of 20% of GDP. Some of the increase in development spending is due to the recording of on-budget scholarship assistance provided by bilateral donors and additional outlays on institution-strengthening projects. However, much of the additional spending is for construction.

Long-standing problems remain in implementing capital programs in line with budget schedules. Acknowledging these problems, the Central Bank of Samoa has prepared a revised forecast of development spending for FY2005 of $57 million. This alternative forecast is for a 28% increase in total expenditures and net lending during FY2005, an increase equivalent to 9% of GDP. If all currently budgeted projects are to be pursued, carryover spending would continue the high level of public expenditures in FY2006.

Although inflation rose in 2004, the underlying rate remains low and is forecast by the central bank to be 2.1% by end-FY2005. The low underlying rate, together with small budget deficits and a secured foreign reserve position, has allowed the central bank to retain its accommodative monetary policy stance. In its September 2004 monetary policy statement, the central bank advised that interest rates should be maintained at prevailing levels in FY2005, if not reduced further; it also targeted a 13% increase in bank credit to the private sector and a 9% rise in the money supply for the year.

Outlook for 2005-2007 and medium-term trends

A boom in construction is expected to support the economy through 2005 and into 2006. Most major projects under way in 2004 have continued into 2005 and construction of a new hotel at Taumesina is envisaged. The hosting of the South Pacific Games is providing an ongoing source of construction activity, including a new aquatic center to be built with assistance from the PRC Government. Also to commence in 2005 is construction at the National University of Samoa and Samoa Polytechnic, with assistance from the Government of Japan.

The economy is expected to benefit as well from an expanding tourism industry and rising remittances from the large Samoan communities in Australia, New Zealand, and US. In real terms, remittances have risen by 10% a year since 2001 and are now equivalent to 20% of GDP. Remittances provide the single largest source of foreign exchange and are expected to reflect the economic expansion of the source countries. The latest official projection for remittances is growth of 3% in FY2005.

Visitor arrivals have advanced steadily in recent years, at an average annual rate of 3.1% since 2001. The rising demand for tourism across the region and expanding hotel capacity in Samoa underlie forecasts of continued expansion in tourism. The latest official forecast is for net travel earnings to grow by 15% in FY2005. The hosting of the South Pacific Games is likely to lead to a temporary surge in visitor arrivals.

A further boon for tourism is a proposed joint venture between Polynesian Airlines and an Australian airline, Virgin Blue. The joint venture would operate as Polynesian Blue on the existing international routes of the national carrier. The new arrangements are potentially important for tourism if they help retain capacity in Samoa, as well as competition. The joint venture is also important to the budget as Polynesian Airlines has been operating at a loss since 2001 and has required subsidies to sustain operations: its FY2004 subsidy of $7 million accounted for 6% of expenditures and net lending.

An improvement in commodity exports is forecast over 2005 relative to 2004 following the reopening of the relocated garment factory in the quarter to September 2004 and the expected reopening of a desiccated coconut plant in early 2005. A new heat treatment plant for fruit such as papaya recently received its certification and will likely help expand a range of exports over the forecast period. There is also some prospect of continuing rapid growth of exports of nonu and a rebuilding of kava exports to Europe based on improved consumer sentiment there, following a positive report on the health impact of kava. Some improvement in the fishing catch is also expected, given better weather conditions. Despite these potential gains, commodity exports are likely to remain a relatively minor part of the economy.

The longer-term sustainability of the current high levels of construction is open to question. Most major developments have a substantial public sector role or, in the case of the hotel at Faleolo, rely heavily on funding from the National Provident Fund. Construction’s sustainability would be more assured if there was a larger role for the private sector, with its ability to draw on overseas capital. The presence of large government-backed projects also carries the risk of crowding out the private sector.

Inflation is expected to ease in 2005 as agricultural production returns to normal patterns. However, a slow rate of adjustment has led to official projections of inflation remaining as high as 8% in June 2005, well above the central bank’s target of 3%. The large increase in government expenditures under the FY2005 budget and the accommodative monetary policy stance present some risk that inflationary pressures will remain higher than targeted over the medium term.

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