Country Report September 2003

Samoa

September 2003

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Contents

2 Summary

The region

3 Outlook for 2003-04 4 The political scene 5 Economic policy and the domestic economy

Samoa

6 Political structure

7 Economic structure 7 Annual indicators 8Quarterly indicators

8 Quarterly indicators

9 Outlook for 2003-04

10 The political scene

11 Economic policy

12 The domestic economy

List of figures

8 Composition of exports, May 2003 8 Origin of imports, May 2003 10 Gross domestic product 10 Consumer price inflation

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Summary September 2003

The region

Outlook for 2003-04 Political instability and economic weakness will continue to hinder the development of the Pacific island nations, although there are hopes that greater Australian involvement in the region will provide fresh impetus to efforts aimed at dealing with some of the islands’ many problems.

The political scene In a surprise development, Greg Urwin, an Australian former diplomat, has been appointed secretary-general designate of the Pacific Islands Forum (PIF). He will be the first non-Pacific islander to hold the post.

Economic policy and the The prospect of a Pacific Economic and Political Community has raised interest domestic economy in the ideas of a regional single currency, and of Pacific Islanders being given greater rights to work in Australia. Tourist arrivals are set to rise in the second half of 2003. However, increased competition could spell trouble for some of the islands’ own airlines.

Samoa

Outlook for 2003-04 Political stability will be high by regional standards, although there is concern about the impact of economic reform on widening income disparities.

The political scene The government is to review legislation on land ownership as part of its wider reform agenda. Measures to tackle poverty in rural areas have been announced.

Economic policy and the Producers are calling for greater government support to help them compete domestic economy successfully in the region in the face of greater trade liberalisation.

Editors: Kate Allard (editor); Graham Richardson (consulting editor) Editorial closing date: August 29th 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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The region

Outlook for 2003-04

Instability and poor governance Political instability and economic weakness will continue to hinder the will hinder development development of the Pacific island nations. Poverty, racial tensions, law-and- order problems and poor governance are rife in countries such as the Solomon Islands, Vanuatu and Fiji, and will deter much-needed foreign investment. The significant differences between the islands make generalisations difficult. However, overpopulation, environmental degradation, corruption, weak or non-existent growth, vulnerability to periodic cyclone damage and a proliferation of small arms mean that many island governments are finding it increasingly difficult to protect and provide for the most disadvantaged sections of their populations. The Economist Intelligence Unit remains pessimistic about the ability of existing governments in the region to address these issues.

Greater Australian engagement Concern about instability in the region has increased since the bombing in Bali, raises hopes of progress Indonesia, in 2002 and, more recently, the bombing of a hotel in the Indonesian capital, Jakarta. This has led the Australian government, in particular, to take far more interest in the affairs of the small island states, amid fears that the breakdown of their political systems could lead to infiltration by terrorists. There are hopes that greater Australian involvement in the region, as demonstrated by the country’s newfound willingness to intervene directly to prevent the Solomon Islands from descending further into lawlessness, will provide fresh impetus to efforts to deal with some of the islands’ many problems. The Australian prime minister, John Howard, has already spoken of his belief that the island nations should pool their limited resources to provide essential services, such as policing and air travel, and he has gone as far as to suggest that they could form a federal government. The appointment of an Australian diplomat as head of the main regional body, the Pacific Islands Forum (PIF), is likely to lead to further debate on such proposals, which are not without merit. However, the success of Australia’s greater engagement will depend in part on how sensitively the Australian government pushes such issues, as any heavy- handedness is likely to be poorly received by island governments anxious not to cede any sovereignty. Indeed, while island governments gave their blessing to the Australian-led intervention in the Solomon Islands, many politicians expressed fears of an Australian takeover in the region, suggesting that the action had lowered the bar to direct intervention and could lead Australia to intervene more readily in other troublespots. This would appear unlikely, given that the levels of lawlessness and social collapse in the Solomons are so much more serious than elsewhere. However, intervention in other island troublespots cannot be ruled out, should there be a sudden flare-up in one of the other island nations.

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The island nations will depend The support of aid donors and financial institutions will be critical to the heavily on foreign aid development of the Pacific island nations, which for the most part lack the resources to extricate themselves from their current predicaments. The Asian Development Bank (ADB) and the UN Development Programme (UNDP) will continue to provide financial and technical support for a broad range of projects and initiatives. Substantial funds will also be made available to Pacific island nations over the next few years under the Cotonou Agreement, an accord signed in June 2000 to succeed the Lomé Convention in setting out relations between the EU and the 78 African, Caribbean and Pacific (ACP) states. These funds will be channelled into projects in areas such as fisheries, tourism, investment and trade facilitation. Many of the island nations will also benefit from funding and expertise via the donor programmes of Australia and New Zealand, both of which have experience in peacekeeping and strong links with many island communities through large expatriate populations. However, aid donors can only work through conventional channels, funding projects for capacity building, rewarding efforts to improve transparency and accountability, and advocating greater fiscal discipline, private-sector development and the facilitation of foreign investment. Any progress is, therefore, likely to be slow. Moreover, there is concern that aid is feeding a culture of dependency and blunting the incentive for structural reform. Financial aid is thus likely to become increasingly conditional on the achieve- ment by recipient counties of tangible progress in areas such as law and order, standards of governance and the reform of bloated public sectors.

The political scene

An Australian has been In a surprise development and a break with tradition, Greg Urwin, an appointed as secretary-general Australian and a former high commissioner to Fiji, Samoa and Vanuatu, was appointed secretary-general designate of the Pacific Islands Forum (PIF) at the organisation’s annual summit in mid-August. Mr Urwin will replace Noel Levi, from Papua New Guinea, who has already served two terms (under PIF rules tenure is limited to two three-year terms). The post of secretary-general, the top regional position, has always been filled by a Pacific islander, and the leaders of some of the smaller PIF member states, including Nauru and the Cook Islands, were unhappy at the aggressiveness of Australian lobbying for their candidate. Indeed, at one point the sub-group of six small island nations (comprising the Marshall Islands, the Cook Islands, Kiribati, Tuvalu, Nauru and Niue) appeared to veto Mr Urwin’s appointment, suspicious of Australia’s motives in seeking the top position in the organisation. However, Mr Urwin, who is married to a Samoan, was finally appointed in a secret ballot. It remains to be seen whether differences of opinion on his appointment, which takes effect in January 2004, will reduce his effectiveness as secretary-general!although he has dismissed suggestions that he is “John Howard’s man”.

Summit hints at further areas The appointment of a new secretary-general of the PIF is likely to lead to a of co-operation review of the direction of the organisation and a re-assessment of the range of issues on which the 16 PIF members co-operate. The issues discussed during the recent PIF annual summit in Auckland give an indication of the future direction

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of debate. Central to the agenda were issues such as pooled regional governance, greater co-operation on regional air transport, security and cross- border crime and the role of foreign aid, as well as the perennial issues of climate change and the impact of globalisation and trade liberalisation on small island economies. One concrete measure agreed at the summit was the creation of a new regional police training centre, which will be based in Fiji. The initiative, to be sponsored by Australia and New Zealand, will see several hundred police officers from the Pacific islands receive training at the centre each year in an effort to improve policing skills and standards across the region.

Economic policy and the domestic economy

A single currency and labour Although not part of the summit agenda, the prospect of a Pacific Economic mobility would be contentious and Political Community, comprising the 13 island states together with Papua New Guinea, Australia and New Zealand, was hotly debated. The idea, proposed in a recent report by the Australian Senate’s Standing Committee on Foreign Affairs, Defence and trade Reference, included the possibility of a single currency within the region, based on the Australian dollar, and greater labour mobility, giving Pacific islanders increased rights to work in Australia. The ideas were coolly received by Mr Howard, Alexander Downer (the Australian foreign minister) and Michael Cullen (the New Zealand finance minister), as well as by most Pacific island leaders, with the chief concern being the possible undermining of the island states’ independence.

Tourist arrivals set to recover Heightened global uncertainty before and during the US-led war in Iraq, in the second half of 2003 together with the outbreak of Severe Acute Respiratory Syndrome (SARS) in Asia, inevitably persuaded many tourists to stay at home in early 2003; the destinations most dependent on Japanese tourists were worst hit. However, the impact on tourist arrivals was not as severe as had been feared, and there were some signs of recovery towards the end of the second quarter. Bookings to most Pacific destinations are expected to pick up in the second half of the year, with the Pacific island nations, for the most part, continuing to be viewed as low-risk in terms of terrorism. Tourism in several of the island nations will receive a further boost when Virgin Blue, which operates low-cost, no-frills domestic flights in Australia, launches new services to several leading island destinations, such as Fiji and Vanuatu, later this year. However, there are fears that the increased competition and lower fares resulting from Virgin Blue’s entry into the market could spell further trouble for the islands’ own airlines, many of which are already struggling to survive.

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Samoa

Political structure

Official name Independent State of Samoa

Form of state UK-style cabinet government

The executive The prime minister, chosen by a majority in the Fono (parliament), selects 12 ministers to form a cabinet; cabinet decisions may be reviewed by the Executive Council, which consists of the cabinet and the head of state

Head of state HH Malietoa Tanumafili II until his death, when a successor will be elected by the Fono for a five-year period

National legislature Unicameral, 49-member Fono; 47 members are elected by all Samoans aged 21 or over to represent 41 constituencies. The remaining two members are elected from electoral rolls made up of non-Samoans; elections are held every five years

Legal system System of lower courts leading to the Court of Appeal

National elections March 2001; the next election is due by March 2006

National government The Human Rights Protection Party, led by Tuila’epa Sa’ilele Malielegaoi, holds 28 of the 49 seats in the Fono

Main political parties Human Rights Protection Party (HRPP); Samoa National Development Party; Samoa All People’s Party

Prime minister, minister of foreign affairs & public service, immigration, police & prisons Tuila’epa Sa’ilele Malielegaoi

Deputy prime minister & minister of finance Misa Telefoni Retzlaff

Key ministers Agriculture, forests & fisheries Tuisugaletaua Sofara Aveau Customs Faina Tino Education Fiame Naomi Mata’afa Health & labour Mulitalo Siafausa Justice Seumanu Aita Ah Wa Lands, survey & environment Tuala Sale Tagaloa Kerslake Sports & culture Ulu Vaomalo Kini Trade & industry Hans Joachim Keil Transport Palusalue Fa’apo II Women’s affairs Tuala Ainiu Iuisitino Works Faumuina Liuga

Central Bank governor Papali’i Tommy Scanlan

Economic structure

Annual indicators 1998a 1999a 2000a 2001a 2002a GDP at current prices (Tala m)b 658.7 698.9 774.8 851.5 n/a Real GDP growth (av; %)b 2.4 2.6 6.9 6.2 1.3 Consumer price inflation (av; %)c 2.2 0.3 1.0 3.9 8.1 Population ('000)b 166.9 167.7 170.7 174.1 n/a Exports fob (US$ m)c 14.6 20.4 14.2 15.5 13.7 Imports fob (US$ m)c 96.7 115.4 105.6 130.1 112.9 Current-account balance (US$ m)b 15 5 3 -8 9 Reserves excl gold (US$ m)c 61.42 68.20 63.58 56.64 63.15 Total external debt (US$ m)d 180.1 192.4 197.4 204.3 n/a Debt-service ratio, paid (%)d 3.9 5.1 10.7 n/a n/a Exchange rate (av; Tala:US$)c 2.943 3.012 3.271 3.472 3.375 a Actual. b Asian Development Bank. c IMF, International Financial Statistics. d World Bank, Global Development Finance.

Origins of gross domestic product 2001a % of total Agriculture & fishing 14.3 Manufacturing 16.1 Electricity & water 3.0 Construction 7.0 Trade, transport & communications 34.4 Government & other services 25.3

Principal exports fob 2001a Tala m Principal imports 1996b % of total Fresh fish 36.0 Intermediate goods 50.5 Garments 5.5 Industrial supplies 26.4 Coconut oil & cream 3.8 Consumption goods 38.1 Beer 2.9 Food & beverages 26.0 Copra 0.8 Capital goods 11.4

Main destinations of exports fob 2001a % of total Main origins of imports 2001a % of total Australia 64.7 US 26.6 Indonesia 11.9 Australia 21.6 US 11.7 New Zealand 16.1 Germany 2.5 Fiji 11.7 American Samoa 2.2 Japan 10.0 a Asian Development Bank. b IMF, Samoa: Statistical Appendix.

Quarterly indicators 2001 2002 2003 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Prices Consumer prices (1995=100) 118.9 126.2 122.8 126.3 130.4 136.4 130.0 127.9 Consumer prices (% change, year on year) 2.1 5.8 6.8 8.1 9.7 8.1 5.9 1.3 Financial indicators Exchange rate Tala:US$ (av) 3.486 3.471 3.527 3.520 3.369 3.340 3.279 3.126 Exchange rate Tala:US$ (end-period) 3.519 3.531 3.551 3.461 3.285 3.352 3.216 3.109 Deposit rate (av; %) 5.5 5.1 5.1 5.1 5.1 5.1 5.1 5.1 Lending rate (av; %) 9.9 9.8 9.8 9.8 9.8 9.8 9.8 9.8 M1 (end-period; Tala m) 88.67 88.65 86.84 81.75 92.29 88.33 95.61 94.44 M1 (% change, year on year) 10.0 3.8 -6.9 -17.9 4.1 -0.4 10.1 15.5 M2 (end-period; Tala m) 308.27 310.65 307.62 307.77 319.22 328.20 335.99 341.80 M2 (% change, year on year) 20.1 13.8 6.1 2.4 3.6 5.6 9.2 11.1 Foreign trade (Tala '000) Exports foba 15,783 17,215 11,689 7,973 14,260 13,702 10,266 8,515 Imports cif -110,199 -111,669 -129,371 -106,980 -48,170 -116,793 -109,092 -92,426 Trade balance -94,416 -94,454 -117,682 -99,007 -33,910 -103,091 -98,826 -83,911 Foreign reserves (US$ m) Reserves excl gold (end-period) 59.27 55.58 56.64 56.50 64.64 64.85 62.49 59.79 a Includes re-exports. Source: IMF, International Financial Statistics.

Outlook for 2003-04

Political stability will remain In comparison to its counterparts in most other Pacific island nations, the ruling high by regional standards Human Rights Protection Party (HRPP), led by the prime minister, Tuila’epa Sa’ilele Malielegaoi, will continue to enjoy a relatively smooth ride in office, helped by the opposition’s apparent inability to challenge the government effectively. Misa Telefoni Retzlaff, the strongly pro-reform deputy prime minister and finance minister, will continue to drive the process of economic reform, which is proceeding faster in Samoa than in the other island nations. Concern is growing, however, about the impact of economic and structural reform on income disparities between urban and rural areas, which have widened sharply in recent years. Recent measures aimed at helping to alleviate poverty in rural areas should bear some fruit, although growing social problems associated with drug use and drug-related crime could still mar the otherwise positive economic outlook. Drug use among more affluent young people is on the rise, and the government can no longer dismiss the problem as afflicting only the poorer sections of the population. Village councils locate marijuana plantations and take action against drug offenders, but limited resources mean that the problem is likely to worsen.

Inflation will ease Real GDP growth averaged 6.5% in 2000 and 2001 as the removal of various business barriers and lower tariffs boosted economic activity. However, growth slowed to just 1.3% in 2002, reflecting a fall in public-sector construction, lower fish exports and weaker agricultural production in the first half of the year. Economic activity remained weak in the first quarter of 2003, although growth should still average around 3% in 2003. The country’s medium-term economic prospects will be boosted by new investment in the tourism industry, in the shape of a new hotel development and greater attention to marketing the country abroad. According to Mr Misa, the government will press ahead with its public-sector reform programme, keeping a close eye on inflation, which accelerated to an annual average of 8.1% in 2002. There are sharp disagreements among politicians about the cause of recent inflationary pressures. Mr Misa attributes it to the higher prices charged in 2002 by local farmers and manufacturers, whereas the opposition blames it on the rise in the rate of the value-added goods and services tax (VAGST) from 10% to 12.5% in October 2002. In reality, both of these factors have contributed to the inflationary surge, which is expected to ease during 2003 as the impact of the increase in VAGST drops out of the consumer price index.

The political scene

The government is to review The Human Rights Protection Party (HRPP) government, led by the prime legislation on land ownership minister, Tuila’epa Sa’ilele Malielegaoi, has announced plans to review legislation on traditional land ownership, a sensitive issue not only in Samoa but also in most of the other Pacific island nations. Long-standing family disputes over matai (chiefly) titles, which confer considerable prestige and land ownership rights, are common and usually go all the way to the Lands and Titles Court. Government concern over the issue stems from the belief that matai rivalries encourage emigration, which is already high. New Zealand, the most popular destination, takes 1,100 Samoans every year, but this quota has been hugely oversubscribed in the past ten years. Emigration has hit the health sector particularly hard, and the health minister, Mulitato Siafausa, recently reported that only 38 of 74 doctors’ positions at the public hospital in the capital, Apia, were currently filled. The starting pay for a doctor in Samoa is one-third of that in New Zealand and only one-fifth of that offered in American Samoa. The review of legislation on land ownership is part of the government’s wider reform agenda. A central element in this is the new Law Reform Commission, which heralds important changes to Samoa’s justice system, as envisaged by the Law Reform Commission Act 2002. The body is charged with streamlining the process of law reform, and many archaic laws dating back to colonial times could be scrapped or updated.

The government takes steps to In an attempt to stem growing criticism of the impact of economic and structural reduce poverty in rural areas reform on income disparities between urban and rural areas, the government earlier this year commissioned a report from the Asian Development Bank (ADB). The report focussed on the impact of modern life on traditional communities, where social networks and the tradition of fa’alavelave (meeting obligations to the village and church) play a major part in the culture. Somewhat predictably, the report stressed the need for poor families to have better access to jobs, education and public services, and the importance of measures to prevent unemployed young people from turning to drugs, prostitution and crime. When asked what the main priorities for government action should be, poor

communities singled out reducing the cost of living, providing access to loans, supporting agricultural development, improving access to basic services such as schools, markets, roads and water supply, and housing assistance. Some of the ADB’s recommendations have been acted on by the government in the fiscal year 2003/04 (July-June) budget, unveiled in June by the finance minister, Misa Telefoni Retzlaff. Direct assistance to rural areas in the crucial areas of health and education will continue, with the government contributing Tala3m (around US$900,000) to an existing project, sponsored by AusAID (the Australian government’s development agency), to upgrade schools, while a further Tala1m has been allocated to the purchase of school stationery. Poor families will benefit from greater funding of a number of micro-credit schemes, including a scheme run by the Housing Corporation to help the poorest families buy land. In addition, a network of Small Business Enterprise Centres have been set up to help stimulate the rural economy.

Samoa is to start producing its In a bid to improve the population’s eating habits, the government has decided own sheep meat to begin the production of mutton locally on a trial basis. Although a popular part of most Samoans’ diet, high-fat mutton flaps imported from New Zealand are widely blamed for high rates of obesity and diabetes. Samoa has long complained that New Zealand “dumps” the low-quality mutton flaps in the country, since it would be unable to sell such cuts of meat elsewhere.

New Zealand is to increase its The New Zealand government has praised the Samoan government’s efficient bilateral aid package management of various projects initiated by NZAid (the New Zealand government’s development agency), and has announced that it will increase its bilateral aid to Samoa by NZ$500,000 (US$290,000) to NZ$8.29m (US$4.9m) in 2003/04. Of this amount, NZ$6m will be spent on improving educational infrastructure and resources, mainly in rural areas. NZAid spent NZ$4.5m on education and training in Samoa in 2002/03. Also on the international front, around 40 Samoan police officers (some of whom have experience of serving in East Timor) will join the Australian-led multilateral peacekeeping force sent recently to the Solomon Islands to help restore law and order there.

Economic policy

Producers request help to cope Samoa has signed up to the Pacific Island Countries Trade Agreement (PICTA), with reduced trade protection which aims gradually to remove trade barriers such as import duties, quotas and tariffs between the 14 island nations of the Pacific Islands Forum (PIF). Local exporters accept that they will need to become more flexible to adapt to the new PICTA (and existing World Trade Organisation) rules, but they are calling for greater government support to help them compete successfully within the region. Some measures to support local producers were outlined in the recent budget, including an export guarantee scheme, although the finance minister, Misa Telefoni Retzlaff, has indicated that Samoan exporters should focus on markets where they have a comparative advantage and aim to compete on quality rather than price. By way of example, Mr Misa cites Samoan coconut cream, which is sold in New Zealand delicatessens (as opposed to supermarkets) as a high-quality product.

The government approves The tourism industry is the second largest source of foreign exchange (after plans for a new hotel remittances), and generated income of Tala152.6m (around US$45) in 2002. However, at 88,970, tourist arrivals last year were little changed from 2001, when 88,260 visited the country, while visitor numbers fell in the first three months of 2003 as the US-led war in Iraq and the Severe Acute Respiratory Syndrome (SARS) outbreak discouraged people from travelling. Tourist arrivals picked up in April-May, and tourism chiefs are confident that figures will rise further in the second half of the year as the Samoan Tourism Authority embarks on a US$2.4m new marketing strategy. In a bid to support stronger growth in tourist arrivals in the longer term, the government has approved plans to build a new four-star, 140-room hotel, to be run by a local hotelier, La’auli Alan Grey. The project, which will benefit from generous tax incentives, represents a significant investment in the capacity of the tourist industry, given that there are currently only 817 hotel rooms in Samoa.

Government support for The importance of the tourism industry is reflected in the government’s Polynesian Airlines continues decision to continue to support Polynesian Airlines financially, in the face of criticism from the opposition benches. Polynesian Airlines made a Tala$37m loss in the year ending in June 2001 (latest available figures). However, the government believes that the company is crucial to the future development of the tourist industry, and granted the airline Tala19.5m in the recent budget. Some of the money will be used to pay a penalty for the early return of one of the airline’s two leased Boeing 737s. The struggling airline, which has 375 staff, has negotiated across-the-board pay cuts and called for voluntary redundancies.

The domestic economy

Economic activity was weak in Real GDP expanded by just 1.3% in 2002, down sharply on the growth rates of the first quarter of 2003 over 6% seen in preceding years, and the latest data suggest that economic activity remained weak in the first quarter of 2003. This reflected lower private remittances, weak exports, sluggish tourism and a drop in both public- and private-sector investment projects, following the completion of recent projects. In contrast, there was a notable rebound in agricultural output, which helped dampen food price rises and led to an easing in the year-on-year rate of consumer price inflation from 8.1% in December 2002 to 6.3% in March 2003. The most recent data reveal a further fall in inflation, to 5.1%, in May. According to the Central Bank of Samoa (CBS), first-quarter export earnings were down by 18% on the previous quarter, although export earnings were still up by 7% year on year. The quarterly decline was attributed to lower earnings from fresh fish, the country’s main export, after unfavourable weather con- ditions linked to the El Niño phenomenon decimated the fish catch. Earnings from the export of beer and coconut cream also fell during the first quarter (the fall in earnings from coconut cream being the result of quality issues raised by New Zealand customs authorities), and more recent data suggest that total export earnings fell further in April and May, on both a monthly and a yearly basis. The import bill for the first quarter fell compared with the previous quarter and also with the year-earlier period, reflecting a drop in the value of petrol imports and other private-sector imports.