The Samoa ERSP is a program cluster of two subprogram loans totaling $26.82 million. The ERSP program cluster aims to assist Samoa's economic recovery and movement to a higher medium-term growth rate, following the double impact of the global economic crisis and the September 2009 tsunami. Subprogram 2 of the program cluster will support improved fiscal management and structural measures that will place the economy on a sustainable medium-term growth path. Budget support will help create the fiscal space to enable raised levels of capital spending over the medium term. This will be complemented by measures that enable targeting of services to protect the vulnerable and by engagement with key stakeholders.
Subprogram 2 completes the program reform agenda under the ERSP program cluster. Subprogram 2 is consistent with the strategic focus of the country partnership strategy for Samoa (2008-2012) to address binding constraints to growth, including deficiencies in access to public services and in the quality of public service delivery, and weaknesses in the private sector-enabling environment. Subprogram 2 of the ERSP program cluster supports the government's economic and financial reform program in coordination with key development partners including Australia, the European Union and the World Bank. The national elections, in March 2011, slowed the formulation and implementation of policy and as such proved a challenge to the program cluster. Subsequent to this, the government remains strongly committed to continuing dialogue with development partners.
Subprogram 2 loan financing will help meet the Government's overall budget financing needs, particularly given the adjustment costs arising from implementing an economic reform program to place the economy on a sustainable growth path. Structural and governance measures will strengthen prospects for sustaining economic growth over the medium term. Infrastructure will be upgraded and rebuilt amid constant efforts to reinforce fiscal safeguards to preserve fiscal sustainability and sustain the expansion in capital expenditure, while paying special attention to the needs of the vulnerable members of the community and ensuring widespread engagement in the program.
|Project Rationale and Linkage to Country/Regional Strategy
The weakening economic performance: Samoa's real per-capita income growth since the mid-1990s has been significantly higher than for most other countries in the region underpinned by prudent fiscal and monetary policies, and structural reforms. Its reforms, particularly in the early 1990s, resulted in a steady strengthening of the economy's resilience to external shocks. There is clear potential for sustained, and even stronger, economic performance. The economy is led by the tourism, agriculture, and fisheries sectors, which can continue to be vibrant sources of employment and economic growth given Samoa's natural beauty, well-educated labor force, and ample land and marine resources.
Despite this the Samoan economy was severely affected by the global recession commencing 2008. In particular the Yazaki automotive plant was downsized in FY2009 (ends 30 June) and offshore jobs were lost in the tuna processing industry. In addition, construction also recorded a significant decline, in part reflecting the unwinding of activity related to the South Pacific Games, while agriculture and fishing suffered from poor harvests. As a result, real GDP fell by 5.1% in FY2009, recording the worst slump in two decades; Government revenue was 4.7% below budget estimates; and a deficit of 4.3% of GDP was sustained. Adding to this, the physical cost of the late 2009 tsunami, estimated at $60 million (over 10% of GDP), weakened the economic outlook.
Government responded to the external shocks with expansionary budgets in FY2010 and FY2011. The aim was to stimulate economic activity and support the private sector. Activity generated by post-tsunami reconstruction work was largely responsible for holding the contraction to 0.2% in FY2010. Despite substantial grant funding for initial rehabilitation the budget deficit reached 11% in FY2010 and grew to 8.1% of GDP in FY2011. Growth is estimated to have been 3.0% of GDP in FY2011, due to reconstruction work and the rebound in transport, communications, tourism, remittances and manufacturing activities.
The external debt level has become a matter of concern. While the government has set a target of official external debt being not more than 40% of GDP equivalent, this ceiling was breached in FY2010, debt levels subsequently increased to 47% of GDP in FY2011, and the macroeconomic framework projects a level of 55% by FY2014. Over this same period government intends to run annual fiscal deficits of over 6% of GDP. Sustaining such a stance holds risks the government would find it hard to adjust to any external shocks, for example. Structural reforms to improve the commercial focus of state-owned enterprises and to increase access to, and economic use of, customary land are needed for the potential benefits of public investment to be realized.