Samoa's debt to hit 65 percent, World Bank forecasts

Samoa’s debt to Gross Domestic Product (GDP) ratio is expected to hit the 65 percent mark in the next fiscal year.

That’s the prediction from the World Bank on the back of years of financial management reforms undertaken by the Ministry of Finance and the Government setting a target of debt-GDP ratio of less than 50 percent.

In a report found on the internet titled “International Development Association Program Document for a Proposed Grant in the Amount of SDR 10.1 Million (US$15 million) Including SDR 6.7 Million (US $10 Million Equivalent) In Crisis Response Window Resources to the Independent State of Samoa for A Samoa Development Policy Operation,” dated June 21 2013, the Bank reported the public debt to GDP ratio has increased from 34 percent in 2007-2008 to 62 percent in 2012-2013, shifting from moderate to high risk of debt distress.

“The increase has been mainly due to rising loan-financed deficits after the 2009 tsunami,” the report reads.
“Moreover, although most debt has been engaged on highly concessional terms, this is not true in all cases.

“After TCE (Tropical Cyclone Evan), the need to increase expenditure for rebuilding purposes will lead to a further increase in the public debt to GDP ratio, which is set to reach 65.9 percent of GDP in 2014-2015.”

In the wake of the latest debt sustainability analysis conducted by the World Bank and the International Monetary Fund, Samoa's rating was shifted from moderate to high risk of debt distress.

“As a consequence of the heightened risk of debt distress, the GoS (Government of Samoa) has strengthened its MTDS (Midterm Debt Management Strategy), which has been passed by Cabinet.

“In 2010, the GoS developed its first MTDS covering FY2010-15.

“These changes will increase transparency around recently contracted loans and ensure that decisions that did not conform to the government's stated policy are set out in an open and evidence-based manner.

“For instance, the 2013 MTDS reports that, of the five loans contracted since 2010, only two met the concessionality target set out in the 2010 MTDS of at least 35 percent.

“Loans will only be considered for projects which can prove a positive economic return at least sufficient to meet the interest and repayment costs.”

The World Bank says the government has made a clear commitment to bring down the public sector debt burden following the implementation of the Recovery Framework.

“Reforms that support improved management and transparency around the use of public funds at a time of increased expenditure necessitated by the disaster response and heightened fiscal pressures,” the report reads.

“The Bank's dialogue and engagement on disaster risk reduction and public financial management predates the recent cyclone.

“The unfortunate event and its associated fiscal implications have served to highlight the importance of the required reforms.”

These latest set of reforms are to improve management and transparency in the use of public funds are expected to have an indirect impact on the well-being of the poor, the Bank’s report reads.

“These public finance reforms are designed to support Samoa's capacity to enhance fiscal discipline, better management of payments to minimize arrears, and transparency in the public procurement process,” according to the report.

“Although this set of PFM reforms will not directly benefit the poor, they will strengthen the government's capacity to use the budget effectively in response to shocks such as cyclone Evan and better deliver public services.”

However according to the Bank the Government has been implementing public finance management reforms since the 1990s.

In a 2008 report titled Public Finance Management Reform Plan the Ministry of Finance said the Government of Samoa was committed to strengthening its public financial management systems in order to promote the efficient use of resources for the public good.

“This will include improved transparency in accounting for public funds and increased availability of information on Government’s annual budgets and accountability statements,” the Ministry’s report reads.

“Public Finance Management concerns the effective management of the collection and expenditure of funds.

“As societal needs will inevitably be greater than the resources available to government, all public resources must be used as efficiently as possible with a minimum of government wastage.

“Efficient public finance management is central to creating a relationship of mutual trust and shared consensus between government and citizens.”

The report says the primary objective of the Public Finance Management Reform Strategy (PFMRS) is to improve the quality of public finance management through a coherent, holistic approach agreed and developed by the main implementing partners and stakeholders.

“Improved tax administration with collection of adequate revenue is critical for effective public finance management,” the report reads.

“The realigned Ministry of Revenue was established in 2003 to ensure effective management and monitoring of tax and customs revenue combining divisions from different Ministries. “The administration and monitoring of customs duties is using the ASYCUDA (Automated SYstem for CUstoms Data) database software, which is updated on a regular basis and is currently operating under the latest available version.

“Collection of import duties is thought to be reasonably effective and transparent, though there is a need for improved monitoring and follow up of arrears, which are not captured by ASYCUDA when duty payments are deferred.

“The recent PEFA (Public Expenditure and Financial Accountability) assessment found short-comings in tax administration including inadequate monitoring systems, and limited follow-up on income tax arrears.

“In addition, taxpayers are not currently provided with adequate information to facilitate compliance. This has resulted in the growth of arrears and this is therefore a priority area for reform and capacity building.”

According to the MoF report, the Government is required to present information on total external and domestic debt.

“The current information system includes only external debt,” it reads. “There is a concern that after Samoa graduates from LDC (Least Developed Country) status in 2010, the increased cost of loans and reduced availability of grant funding could impact negatively on Public Finance Management.”

“It is therefore essential that there is a clear policy to guide the Government prior to approval of new loans.”

Samoa is set to graduate from LCD status next year.

The Ministry said then that effective oversight and monitoring are crucial to sound governance and public financial management reform.

“A well functioning system must have clear rules on transparency and reporting, together with mechanism to monitor compliance and enforceable sanctions for failure.

“This weakness in the internal control framework was highlighted as one of the main areas requiring priority action with direct linkages to the poor quality of data and delays in reconciliation of accounts.”

Despite this, the World Bank in its 2013 report states significant delays in the publication of audit reports remain.

“This is due to the fact that the reports need to be approved by Parliament before they are made available to the public, which has often been a lengthy process,” the report reads.

“Revisions to the laws governing Samoa's audit legislation have been tabled in Parliament to address this issue along with other measures to strengthen the legal framework governing the operations of the Audit Office.”

According to the Public Financial Management Act 2001 the Financial Secretary shall, as soon as practicable, but not later than four months after the end of the financial year, prepare and send to the Audit Office the financial statements for that year in the form specified in Schedule 5 (Form and content of financial statements), including statements of any such funds and accounts as are by this or any other Act required to be included in the financial statements.

“The Controller and Chief Auditor shall examine the financial statements and provide a written report to be attached to the financial statements for presentation to the Legislative Assembly,” the Act Reads.

“The report shall state whether, in the opinion of the Controller and Chief Auditor, the financial statements give a true an fair view.

“The financial statements, in such summarised form as may be authorised by the Minister, shall be published in Savali and in a newspaper circulating widely in Samoa.

“For the purpose of removal of doubt all funds, moneys, expenditure, liabilities, investments, appropriations and statutory expenditure under Parts V to XII are to be subject to examination and reporting by the Audit Office under this Part.”

Despite this, the World Bank is again providing money to help Samoa in this area.

However, it still has reservations about Samoa’s institutional capacity to handle such changes especially in the wake of events such as TCE.

“The significant demands of the recovery plan place a heavy burden on Samoa's capacity as it continues to develop its public investment and PFM systems,” it reads.

“However, thin institutional capacity in Samoa could hinder the implementation or sustainability of the reforms supported by this operation.

“As the planning, implementation and monitoring of multi-sector recovery initiatives gets underway, there are two main risks.

“That thin capacity will result in less than satisfactory implementation of the recovery framework.

“(And) there is also a risk that the recoveryrelated fiscal expansion will make it difficult to manage fiscal adjustment even in the medium-term.

This risk is particularly pertinent given some recent pre-cyclone trends toward borrowing to implement large-scale capital projects.

“In addition, further exogenous shocks, whether emerging from nature or the international economy, could pose additional risks to Samoa's growth prospects.”