Samoaunited States Samoa Tender

Growth is projected to rebound after recently reaching a five year low. Risks are weighted to the downside stemming from vulnerabilities to natural disasters and loss of correspondent banking relationships CBRs. Policy priorities areTighten fiscal policy compared to the unchanged policy scenario see Table. Embark on a comprehensive fiscal strategy including strengthening tax administration and public financial management PFM and lowering the public debt-to-GDP target from 50 to 40 percent of GDP in the long term.Implement reforms to mitigate CBRs pressures including enhancing the effectiveness of the AMLCFT regime establishing an IT solution for customer identification and monitoring and reducing the risk profile of the offshore financial center.Improve the monetary policy transmission mechanism and continue implementing the FSAP recommendations.Focus structural reforms on building resilience to natural disasters improving the business environment in particular for SMEs and supporting exports.Recent Developments Outlook and Risks1. Samoa faces several challenges but continues to show resilience and a high level of engagement with the Fund. In common with most Pacific island countries Samoa is vulnerable to natural disasters and pressures on correspondent banking relationships CBRs. Despite these challenges the economy has shown resilience. The authorities are highly engaged with the Fund and other development partners and have made progress in implementing reforms in several areas including measures to mitigate CBR pressures.2. Growth is expected to recover in 201819 and spike in 201920 as Samoa hosts the 2019 Pacific Games PG in July. After reaching a five-year low due to the Yazaki manufacturing plant closure and the impact of Cyclone Gita growth is projected to rebound to 3.4 percent in 201819 driven by infrastructure spending and the development of the communication sector. Growth in 201920 is expected to spike to 4.4 percent driven by PG-related tourism before normalizing at about 2.2 percent in the medium term. Inflation peaked at 3.7 percent in 201718 driven by the temporary impact of Cyclone Gita on local food prices a one-time increase in education fees and higher import prices and is projected to be back below the central bank target of 3 percent in 201819. The current account which recorded a surplus of 2.3 percent of GDP in 201718 driven by a temporary increase in transfers is projected to revert to a deficit as transfers normalize.3. One-off factors implied a marginally positive fiscal balance but the fiscal position is projected to loosen in the medium term. The fiscal balance reached a surplus of 0.1 percent of GDP in 201718 driven by a temporary increase in budget-support grants and a drop in capital spending. The inclusion of the National Health Service into the central government budget in February 2018 largely drove the reduction in grant spending and the increase in compensation of employees and spending for goods and services. The latter also increased due to various international events held in Samoa. The tax revenue-to-GDP ratio slightly dropped suggesting that recent tax policy measures the 2017 Revenue Review aimed at broadening the tax base and increasing selected exciseshave not yet been supported by progress in tax administration. Given recently-legislated increases in public servant wages for cost of living adjustment the projected reduction in budget support grants and the need to scale up infrastructure projects staff projects a 1.2 percent of GDP deficit in 201819 which will widen to close to 3 percent of GDP in the medium term.4. In staffs assessment Samoas debt is sustainable but remains at high-risk of distress given the countrys high vulnerability to natural disasters. Public debt slightly exceeded the authorities ceiling of 50 percent to GDP in 201718 on account of a depreciating Tala continuous disbursements of external loans and low growth. Debt is projected to reach 53.7 percent of GDP in 202324.5. The risks to the outlook are tilted to the downside . Samoa is highly vulnerable to natural disasters and to the withdrawal of CBRs by global banks. The impact of rising protectionism on Samoa has been negligible thus far but could increase if trade tensions continue. Commodity price volatility could result in higher and more volatile inflation with negative consequences on economic sentiment and growth. On the upside the growth impact of the PG increased tourism due to expanded Samoa Airways operations and efficiency gains from the new submarine cable could be stronger than currently anticipated. Financing Development Needs While Ensuring Fiscal Sustainability6. Fiscal policy needs to be tightened compared to the unchanged policy scenario. Samoa needs to build resilience and buffers against natural disasters and achieve progress towards development goals. At the same time Samoa needs to ensure fiscal sustainability and use fiscal policy as the principal instrument of macro management in the face of external shocks given the exchange rate peg and weak monetary policy transmission mechanism. Consistent with these objectives the mission advised the authorities to target a fiscal deficit of 1 percent of GDP in 201920 compared to a projected deficit of 1.8 percent of GDP in the unchanged policy scenario see Table and to keep the medium-term deficit close to 1 percent of GDP in normal times when growth is at or about potential. The needed adjustment can be achieved by improving tax administration and controlling current spending.