Debt alarms I.M.F., cautions govt. again

“Public debt has risen rapidly in recent years, raising risks to sustainability and leaving little fi scal space to address future disasters. It is thus necessary to begin a process of gradual fiscal consolidation, once the recovery has taken hold” - I.M.F Senior Economist, Geoffrey Bannister

Samoa’s “rising debt” continues to alarm the International Monetary Fund (I.M.F) to the point the bank has given yet another warning to curtail the accumulation of any more. The warning was issued in a statement by the bank yesterday, following a visit by an I.M.F delegation to Samoa last week, led by Senior Economist, Geoffrey Bannister.

The delegation met with government officials and relevant stakeholders.

At the end of the meeting, the I.M.F called on the government to consider its debt level. While the exact figure of the debt could not be ascertained at press time yesterday, reports say the country’s foreign debt has climbed well over the one billion tala mark.

“The Samoan government has reacted appropriately to increase expenditure for recovery and reconstruction in the face of recent external shocks, including the global financial crisis, the tsunami and cyclone,” Mr. Bannister says.

“However, public debt has risen rapidly in recent years, raising risks to sustainability and leaving little fiscal space to address future disasters.

“It is thus necessary to begin a process of gradual fiscal consolidation, once the recovery has taken hold.”

Fiscal consolidation refers to strategies that are aimed at minimizing debt carried by a government or a business. The caution from Mr. Bannister yesterday is not the first time I.M.F has warned Samoa.

Last year, I.M.F also cautioned the government against resorting to further "external loans" as part of the post Cyclone Evan recovery effort.

The Bank instead urged the government to secure "grant financing as much as possible." Now, the latest warning from I.M.F follows a World Bank prediction that Samoa’s debt to Gross Domestic Product (G.D.P) ratio is expected to hit the 65 per cent mark in the next fiscal year.

According to the World Bank, public debt to G.D.P ratio has increased from 34 per cent in 2007-2008 to 62 per cent in 2012-2013, shifting from moderate to high risk of debt distress. I.M.F has also cautioned against a number of initiatives put in place by the government to facilitate the flow of credit to the economy.

Such initiatives include the establishment of the Unit Trust of Samoa and subsidized lending through the Development Bank of Samoa and the Samoa Housing Corporation.

“While these initiatives have provided resources and breathing space to the private sector and state owned enterprises, they may also result in the transfer of risk to the government’s finances and subsequent contingent liabilities that could increase the public debt in the future,” the bank said.

“Enhanced financial sector supervision by the CBS, covering all financial institutions, will thus be important to minimize a of Finance, Afualo Dr. Wood Salele said the government should heed the warnings from the I.M.F and the World Bank.

“Tautua believes that the warning issued by the World Bank is very important and more so because of the fact that they issued the same warning just last year,” Afualo said during a previous interview.

“The Tautua Party is very worried. The total loan debt has exceeded half of the country’s income and although the income is increasing, half of that is the amount we owe in loans and foreign debt.

“The last time I checked I think the gross total of Samoa’s revenue is about 1.5 billion and increasing and so fifty per cent of that total is how much we owe in debts.” Afualo suggested that other funding options need to be explored.

“There are ways to get money that we do not have to pay back,” he said.

“We need to look at areas we need to develop and find the right funding because there are funds available for specific areas that our government can tap into and not have to pay back the money.

“The reason we are saying this, is because Samoa still has a lot of developments in the pipeline especially since the cyclone last year.

“We may have bigger projects down the line and soon we would have maxed out on loans and then what would we be left with?”

This is the statement from the IMF in verbatim: SAMOA: S TATEMENT AT THE CONCLUSION OF THE IMF MISSION An International Monetary Fund (IMF) team led by Mr. Geoffrey Bannister visited Samoa during March 31- April 4 to hold discussions with the Samoan authorities and other stakeholders in advance of the 2014 Article IV Consultation mission, which will be held during September 29 – October 10, 2014.

The team met with CEO of the Ministry of Finance Tupa'imatuna Iulai Lavea, Central Bank of Samoa (CBS) Governor Atalina Ainuu Enari, and other senior officials, as well as representatives from the private sector and development partners. Staff from the Asian Development Bank joined the mission.

The team expresses its appreciation to the authorities and other stakeholders for the open and constructive discussions. Mr. Bannister issued the following statement today in Apia: “The Samoan economy is recovering from the effects of Cyclone Evan, helped in part by IMF emergency assistance disbursed under the Rapid Credit Facility (RCF) last year (see Press Release 13/178).

After a slight decline in fiscal year 2012/13, real GDP is expected to grow at around 1½ percent in fiscal year 2013/14, led by a strong recovery in agriculture, reconstruction activity and preparations for the United Nations Third International Conference on Small Island Developing States (SIDS), which will be held in Apia from September 1-4, 2014. Over the medium-term, growth could rise to around 2½ percent as tourism investments mature.

However, this outlook is subject to downside risks related to the protracted slow growth in the global economy, uncertainty over the revival of agriculture, and diminished prospects for the manufacturing export sector.

Plentiful agricultural supply and a stable exchange rate have led to subdued inflation, and prices are expected to remain stable in the medium-term.

“The Samoan government has reacted appropriately to increase expenditure for recovery and reconstruction in the face of recent external shocks, including the global financial crisis, the tsunami and cyclone.

However, public debt has risen rapidly in recent years, raising risks to sustainability and leaving little fiscal space to address future disasters.

It is thus necessary to begin a process of gradual fiscal consolidation, once the recovery has taken hold.

The mission welcomes the government’s intention to gradually reduce the fiscal deficit to 3½ percent of GDP in the medium-term, but cautions that further consolidation may be necessary if growth potential over the medium-term is lower than expected.

“The government has developed a number of initiatives to facilitate the flow of credit to the economy, including the establishment of the Unit Trust of Samoa and subsidized lending through the Development Bank of Samoa and the Samoa Housing Corporation.

While these initiatives have provided resources and breathing space to the private sector and state owned enterprises, they may also result in the transfer of risk to the government’s finances and subsequent contingent liabilities that could increase the public debt in the future.

Enhanced financial sector supervision by the CBS, covering all financial institutions, will thus be important to minimize a potential build up of risk in the financial system.

“The Central Bank of Samoa has maintained an appropriately accommodative monetary stance to support the recovery of the economy, while maintaining exchange rate stability.

As economic growth takes hold, the CBS should stand ready to review its policy stance at regular intervals and make the necessary policy adjustments to ensure export competitiveness and maintain an adequate level of foreign reserves.

“Continued structural reforms will be critical to restore Samoa’s strong growth record of the past.

The mission welcomes the government’s continued efforts to increase the accountability and efficiency of public enterprises, improve public financial management, strengthen the soundness and accessibility of the financial sector, and increase the use of customary land for more productive purposes.”

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members.

A staff team visits the country (typically on an annual basis) to collect economic and financial information and hold discussions with officials on the country's economic developments and policies.

On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.