Samoa: Request for Disbursement under the Rapid Credit Facility—Press Release; Staff Report; and Statement by the Executive Director for Samoa

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Samoa

Abstract

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Samoa

Introduction: Macroeconomics of Health

1. The impact of the global COVID-19 pandemic on economic activity has triggered the urgent balance of payment (BOP) needs in Samoa. The Samoan and other governments’ travel restrictions to contain the pandemic, their impact on the global economy, as well as the heightened global risk aversion to flying are expected to dramatically cut tourism receipts for the FY2020 season by around 10.6 percent of GDP relative to pre-pandemic projections. In addition, the measures (e.g., social distancing) taken under a State of Emergency and related uncertainty are also affecting economic activity although no confirmed cases are yet reported in Samoa as of April 15, 2020. The impact of the shocks on the balance of payments, offset in part by lower global fuel prices and associated lower imports from the fall in tourism and construction, is substantive, and subject to further downside risks. A BOP financing gap is now estimated to amount to US$34.1 million.

2. The authorities have requested Fund assistance under the Rapid Credit Facility (RCF) to address the urgent BOP needs posed by the COVID-19 pandemic. The financing provided by the Fund is expected to catalyze support from other development partners (details below) through additional grants and concessional loans.

Escalation of the Global COVID-19 Pandemic Will Exacerbate the Downturn in Samoa

Citation: IMF Staff Country Reports 2020, 138; 10.5089/9781513542409.002.A001

Sources: Based on various announcements by the governments of Samoa, Australia, and New Zealand, and WHO.

Background: A Sea Change in the Global Economy

A. Prior to the Global Coronavirus (COVID-19) Outbreak

3. The Samoan economy continued to grow strongly in 2019:Q3, experienced a setback from the measles outbreak of late-2019, and was expected to rebound in 2020:H1, supported by tourism. Growth momentum continued through the Pacific Games (PG) in July 2019. Following strong growth, 4½ percent (y/y), in 2019:Q3, a measles outbreak struck the economy in 2019:Q4. The authorities declared the State of Emergency in late November and extended it through end-December. With support from the international community, the authorities successfully contained the outbreak. However, tourism and its related sectors suffered with a severe contraction in December. Nonetheless, it was expected that growth in tourism receipts would rebound with a number of international and regional events expected to be held in Samoa during 2020H1.

Sources: Central Bank of Samoa; and IMF staff calculations.

4. Samoa experienced a sea change in 2019:Q4 as preliminary GDP data indicated that quarterly real GDP growth plunged by 6.4 percent (q/q), a record decline over the last decade. The data (released in the second half of March) reflects how the measles outbreak adversely affected tourism and its related sectors more broadly. The commerce sector alone, which accounts for nearly one third of the economy, declined by a record magnitude of 8.2 percent (y/y) in 2019:Q4. Compared to the historical average of sectoral growth (about 2½ percent), the commerce sector contracted by SAT18.3 million (3½ percent of FY2019 real GDP) in the last quarter of 2019. The decline in tourism earnings through January 2020 was larger than declines registered following three past episodes of natural disasters over the last two decades. Compared to the earnings expected prior to the outbreaks of the measles and COVID-19, the total decline during November-January period was 1.8 percent of 2019 GDP, led by substantial declines in inbound tourists from New Zealand, Australia, and American Samoa.

B. Post Global COVID-19 Outbreak

Sources: Samoan authorities’ data; and IMF staff calculations.1/ The baseline (as of July 2019) assumed growth of 14½ percent (y/y) for FY2020. The revised baseline (as of April 2020) assumes contraction of 83 percent (y/y) during Feb-Jun, resulting a 32 percent (y/y) decline for the year.

5. Pronounced downside risks started materializing in March 2020, with rapid global developments of COVID-19 pandemic and associated travel restrictions. Samoa was among the first countries in the world to start requiring 14-day self-quarantine for travelers from COVID-19 affected economies, and implemented other travel restrictions. Because of the measles outbreak of late-2019, the authorities were ready to take immediate, bold actions to prevent the virus from entering the country. Following confirmation of the first COVID-19 case in New Zealand, the Samoan authorities took immediate action by restricting the number of flights to Apia by more than a half. The supply-side restrictions, as well as tighter travel restrictions imposed by Australia, New Zealand, and U.S., will further exacerbate the local downturns. The pronounced risk, emphasized during the February 2020 Article IV mission, has materialized into the baseline, and will adversely affect tourism and cause prolonged economic disruptions at least through end-FY2020.

6. Staff projects growth will severely contract in FY2020, but expects the economy to bottom out during FY2021. Declines in tourism earnings by 32 percent (y/y) and remittance inflows by 9 percent in FY2020 are assumed in the baseline, which would generate knock-on effects to non-tourism sectors, and severely affect economic activity more broadly. Staff’s latest projections show real GDP growth is expected to decline to –5 percent in FY2020 and –1½ percent in FY2021, notwithstanding support from the fiscal stimulus (3 percent of GDP) approved in April 2020. Growth will rise to above trend growth in FY2022, supported by the tourism sector’s recovery which will likely take longer due to the severity of synchronized global economic recessions. Compared to the pre-COVID-19 baseline (discussed during the February 2020 Article IV mission), real GDP growth will be 8 and 4 percentage points lower for FY2020 and FY2021, respectively (see Text Table 1). Sizable losses in tax revenues are expected to deteriorate the overall fiscal balance, resulting in a deficit of around 7¼ percent of GDP in FY2020 and 9¾ percent of GDP in FY2021. Likewise, the current account deficit is projected to widen, reaching around 7 percent of GDP in FY2020-FY2021. The rapid and sizable deterioration of the current account balance led to precipitous falls in reserve coverage and generated urgent BOP financing needs, amounting to US$34.1 million for FY2020 alone.

Text Table 1.

Baseline: 2020 Article IV Consultation and Post COVID-19 Scenario 1/

article image
Sources: Authorities’ data; and IMF staff estimates and projections.

The 2020 Article IV consultation mission took place during February 13–24, just before the global outbreak of COVID-19.

Include external financial support by multilateral and bilateral donors to support policies to address impacts of the global COVID-19 pandemic.

Include the disbursement of SDR$16.2 million (100 percent of quota) under the Rapid Credit Facility (RCF) in FY2020.

Real GDP Growth, FY2017-FY2025

(Percent, y/y)

Citation: IMF Staff Country Reports 2020, 138; 10.5089/9781513542409.002.A001

Sources: Authorities’ data; and IMF staff projections.

Financing Needs: Paving the Way Forward

7. The resulting BOP financing need is assessed to be SDR 25.1 million (154¾ percent of quota), or 4.1 percent of GDP (about US$34.1 million, see Text Table 2). The global pandemic of COVID-19 has created material damage to the Samoan economy, which is assessed to be larger than the physical damage caused by two episodes (2009 and 2012) of natural disasters. Staff projects the current account deficit to widen to around 7 percent of GDP in FY2020–21, and gross international reserves to decline to 4.1 months and 2.8 months of import coverage in FY2020 and FY2021, respectively, if the total financing gap is left unmet. The sizable financing gap, if not addressed immediately, will cause Samoa to face severe economic disruptions, given the country’s high dependence on imports. In addition, Samoa faces high vulnerability to natural disasters, and needs reserve coverage equivalent to at least 5 months of prospective imports (GNFS) based on the ARA metric.1 With access of 100 percent of quota under the RCF, the drawdown of reserves would be limited. This assumes that Samoa finds additional sources of financing to meet the residual BOP financing gap of around US$12 million (54¾ percent of quota).

Text Table 2.

Preliminary Assessment of Balance of Payments Needs

article image
Sources: Authorities’ data; and IMF staff estimates and projections.

Include external financial assistance by multilateral and bilateral donors to support policies to address impacts of the global COVID-19 pandemic.

Include SDR$16.2 million (100 percent of quota) under the Rapid Credit Facility (RCF) in FY2020.

Include the outstanding credit under the RCF, approved in 2013.

8. The fiscal impact of COVID-19 will also be significant, though it is subject to high uncertainty. The Government of Samoa put together the second supplementary budget (approved on April 7), which incorporates an economic stimulus package in response to the impact of COVID-19. Based on the authorities’ calculations, the stimulus package (estimated to cost about 3 percent of GDP) is expected to increase the overall deficit (see Text Table 3). The authorities’ latest growth projection is -1.6 percent for FY2020 including the effects of the stimulus package (-2.2 percent growth without the package). Staff projects the fiscal deficit to widen to around 7½ percent of GDP. The main sources of uncertainty come from:

  • Revenue: Staff envisages a significant slowdown in economic activity during 2020H1 (second half of FY2020) and projects revenue performance to deteriorate. The receipt of external project grants is projected to underperform based on past experience with natural disasters.

  • External grants: The stimulus package includes budget support and program funds from multilateral donors (the World Bank and the Asian Development Bank) and official bilateral donors (New Zealand and Japan), amounting to SAT40¾ million or 1.9 percent of GDP (Table 5).

  • Expenditure: Staff projects that the government will fully execute planned current spending. In contrast, budget execution of capital spending remains highly uncertain. The outturn data from the past capital spending suggests that its execution rate is likely to be both low and lumpy.

  • Financing: During the financial year (July/June), the government can tap into its overdraft account at commercial banks with a low rate of interest. Staff anticipates a sizable revenue contraction due to COVID-19 will exacerbate the government cash flow when line ministries rush to spend their appropriated budget toward the end of financial year (i.e. June 2020). While large uncertainty exists on the size of the overall deficit, the authorities will need to prepare in advance for how best to finance the government deficit when it becomes exceptionally large.

Text Table 3.

Budget Execution and Revenue Outturns

article image
Sources: Authorities’ data; and IMF staff calculations.

Based on the “Original” budget approved in May 2019, the supplementary budgets (“Supp. 1” and “Supp. 2”) approved in December 2019 and April 2020 following the measles outbreak and the global COVID-19 pandemic, respectively. The “Revised” budget comprises both supplementary budgets.

The second supplementary budget (“Supp. 2”) includes external grants of SAT40.8 million (1.9 percent of GDP), of which about SAT29¾ million comes from multilateral donors (the Asian Development Bank, the World Bank) and the rest from official bilateral donors (New Zealand and Japan), as of April 7.

Table 1.

Samoa: Selected Economic and Financial Indicators, 2016/17 – 2024/25 1/

article image
Sources: Data provided by the Samoan authorities; and IMF staff estimates and projections.

Fiscal year beginning July.

Include re-export of fuel after 2009/10.

Include the IMF disbursement of SDR16.2 million (100 percent of quota) under the Rapid Credit Facility (RCF) and external financial assistance by multilateral and bilateral donors to support policies to address impacts of the global COVID-19 pandemic (see Table 5).

Includes domestic and external public debt.

IMF, Information Notice System.

Table 2.

Samoa: Balance of Payments, 2016/17 – 2024/25 1/

article image
Sources: Data provided by the Samoan authorities; and IMF staff estimates and projections.

The presentation follows the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6).

Including re-export of fuel after 2009/10.

Excluding reserve assets.

Including the IMF disbursement of SDR16.2 million (100 percent of quota) under the Rapid Credit Facility (RCF). The World Bank has recently approved the US$5.1 million in funding through the International Development Association (IDA), under the Catastrophe-Deferred Drawdown Option (Cat DDO).

Including financing by other external donors (not yet identified).

Including other current transfers.

Table 3a.

Samoa: Summary of Budgetary Central Government Operations, 2016/17–2024/25

article image
Sources: Data provided by the Samoa authorities; and IMF staff estimates.

Includes supplementary budget 1 in December 2019 (following measles outbreak) and supplementary budget 2 in April 2020 to support the private sector affected by COVID-19. In addition, it includes external financial assistance by multilateral and bilateral donors to support policies to address impacts of the global COVID-19 pandemic (see Table 5).

Starting January 2019, the Ministry of Health finances operations of the National Health Services (previously classified as an extra budgetary unit).

Primarily to subsidize the cost of products or production of public corporations.

Grants paid to extra budgetary units of the central government.

To meet the direct cost of social assistance related spending that are not covered by a social security fund or provident fund.

Includes current and capital transfers made to cover and meet other operational and capital costs of state owned enterprises which are not subsidies.

Table 3b.

Samoa: Summary of Budgetary Central Government Operations, 2016/17–2024/25

article image
Sources: Data provide by the Samoa authorities and IMF staff estimates.

Includes supplementary budget 1 in December 2019 (following measles outbreak) and supplementary budget 2 in April 2020 to support the primate sector affected by COVID-19. In addition, it includes external financial assistance by multilateral and bilateral donors to support policies to address impacts of the global COVID-19 pandemic (see Table 5).

Starting January 2019. the Ministry of Health finances operations of the National Health Services (previously classified as an extra budgetary unit).

Primarily to subsidze the cost of products or production of public corporations.

Grants paid to extra budgetary units of the central government.

To meet the direct cost of social assistance related spending that are not covered by a social security fund or provident fund.

Includes curent and capital transfers made to cover and meet other operational and capital costs of state owned enterprises which are not subsidies.