Economy is experiencing a strong recovery driven by the return of tourism

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After a three-year recession, driven by the Covid-19 pandemic, the local economy is experiencing a strong recovery driven by the return of tourism. 

This is according to a statement released following the latest review by the International Monetary Fund for Samoa. 

The IMF team held discussions with the Samoa authorities and relevant stakeholders in Apia from January 16th to February 1st, 2023.

An expansionary fiscal stance remains appropriate if directed toward higher public investment, which will help the economy return to pre-pandemic activity levels.

With the economy recovering, a gradual normalization of the Central Bank of Samoa’s highly accommodative monetary stance is appropriate, to contain further increases in private borrowing and build up policy space to respond to future shocks.

The economy is being boosted by the return of tourism, rising remittances, and increased public investment. As a result, the team projects real economic growth of 5.0 per cent in FY2023. 

“The recent spike in the cost of living has started to ease. Inflation was driven to over 15 per cent y/y in August-September 2022, mainly due to a surge in import prices. However, lower food and energy prices in recent months have brought down inflation to 7.5 per cent y/y in December, and the team expects inflation to ease further, at a gradual pace.

“The team expects economic growth to remain above trend in FY2024 and FY2025 as tourism inflows and the domestic economy normalize. 

“The financial system has remained resilient despite the increase of systemic risks during the pandemic, and risks are abating as the economic recovery improves borrower repayment capacity. 

With the economy recovering and inflation still high, the team sees it as an opportune time for the Central Bank of Samoa to begin normalizing its highly accommodative monetary stance. 

This would contribute to financial stability by containing further increases in private borrowing and building up policy space to respond to future shocks. Removal of accommodation could be gradual, with the pace dependent on the strength of the economic recovery.

“Recent central government surpluses despite the pandemic have helped maintain Samoa’s fiscal sustainability. Buoyant tax revenue—including due to improvements in tax administration—and grant inflows helped the central government run a surplus of 5.4 per cent of GDP and lowered debt to 43.7 per cent of GDP in FY2022. However, the under-execution of public investment was a headwind to growth.

“In the medium term, Samoa needs sizable investments in infrastructure resilient to natural disasters and in development-related spendings like health and education. This underscores the importance of pursuing increased grant financing given Samoa’s limited fiscal space.

Fiscal space can also be created by raising revenue through further gains in tax administration and reducing tax exemptions, and through continued improvements to public financial management.

“The team welcomes the authorities’ efforts to pursue inclusive growth through their five-year Pathway for the Development of Samoa plan. Further developing human capital is a key priority, as it would help meet demands for skilled labour arising from the economic recovery. 

Progress continues to be made on other initiatives with broad-based benefits for growth and inclusion, notably the national digital ID and the credit registry.