Samoa’s “high-risk rate” continues to be a concern for the International Monetary Fund of external debt distress due to the expected negative impact of climate change and natural disasters.
The 62-page report released last month by the IMF says Samoa’s high exposure to climate change and natural disasters is expected to lower growth and increase financing needs for repeated post-disaster reconstruction.
As a result, the present value of Samoa’s public debt-to-GDP ratio is projected to breach the 70 percent threshold from 2034 onward under the DSA baseline in the latest Article IV and even earlier if a natural disaster strikes in the near term.
Another issue pointed out by the IMF is that Samoa has, appropriately, no dedicated disaster emergency fund.
This is in line with best PFM practices to avoid fragmented extra-budgetary funds. Samoa’s resilience to meet short-term disaster relief has improved over time through build-up of reserves and other ex-ante contingent financing instruments, which can be supplemented by donor financing for reconstruction.
Given its limited fiscal space, elevated debt level, and capacity constraints, the opportunity cost of establishing a dedicated fund is likely to outweigh its benefit.
The report says expected negative impacts from climate change and repeated natural disasters put Samoa at high risk of debt distress over the long term.
Additional ex-ante adaptation investment financed by grants would improve the long-term economic outlook and reduce debt vulnerabilities.
Given limited fiscal space, grants and/or concessional loans are needed to support additional ex-ante investment.
“Without grants, Samoa’s debt would likely become unsustainable over the medium-term.
Though Samoa has been relatively successful in accessing global and regional concessional climate funds, the government would benefit from taking a strategic view in matching its climate project pipeline to those financing sources that can be accessed with reasonable effort and at an acceptable cost, given its capacity constraints and administrative requirements associated with climate funds.”
The potental impact of Climate Change on the Economy with more frequent disasters are expected to lower growth and widen fiscal and current account deficits.
Samoa’s experience with natural disasters shows that the impact of a single event can be substantial. On average, Samoa’s economic damage, including property, crops, and livestock, are estimated to be about 30 percent of GDP per disaster over the past four decades.
Samoa could be trapped in a repeated disaster-recovery cycle, losing fiscal space and missing time windows for development.
For example, due to repeated natural disasters, the 2021 Article IV for Samoa projects GDP growth to be lower by 1.3 percentage points in the long run and fiscal and current account deficits to widen by 3.5 percent of GDP compared to a counterfactual without natural disasters.
Natural disaster shocks also threaten Samoa’s debt sustainability. Although Samoa’s debt-to-GDP ratio was 49 percent of GDP in FY2020/21, based on the above-mentioned assumptions, it is expected to trend upwards over the next twenty years and cross the applicable DSA threshold of 70 percent of GDP by 2034.
An additional near-term natural disaster comparable to historical magnitudes would accelerate these trends and could permanently increase the debt-to-GDP ratio by up to 20-25 percentage points in the absence of grant financing for reconstruction.
