CENTRAL BANK OF SAMOA ANNUAL REPORT FOR THE FINANCIAL YEAR JULY 2009 - JUNE 2010 CBS Annu al Re port 20 09/1 0 16 March 2011 The Honourable Speaker Legislative Assembly of Samoa Pursuant to section 47 of the Central Bank of Samoa Act 1984, I have the honour to submit the report of the Central Bank of Samoa on its operations for the twelve months ended 30 June 2010, together with the audited accounts for that period and the report of the Auditors on those accounts. (Papali¶itele Niko Lee Hang) MINISTER OF FINANCE CBS Annu al Re port 20 09/1 0 16 March 2011 The Hon. Niko Lee Hang Minister of Finance Ministry of Finance APIA Dear Minister of Finance I have the honour of submitting the Annual Report of the Central Bank of Samoa, for the financial year 1 July 2009 to 30 June 2010. The Report provides: (a) a review of economic performance and the formulation and implementation of monetary policy; (b) a review of the financial performance and condition of the financial system in the country; (c) a report on the Bank's operations; and (d) the Bank's annual accounts for the twelve months ended June 2010 and the auditors' report. Yours faithfully (Leasi Papali'i T. Scanlan) GOVERNOR CBS Annua l Repo rt 2 00 9/10 CBS Annu al Re port 20 09/1 0 CBS Annua l Repo rt 2 00 9/10 THE ANNUAL REPORT h e A nnual R e po r t di scloses the role, strategies and poli c y a c tion s tak e n by the Central Bank in pursuit of its key objectives of maintaining T price stability, international reserves viability and financial system stability in the financial year under review. It also reports on the impact of those actions on the Bank¶s financial position. The Report is divided into nine Sections. Sections I and II describe the Bank¶s legal mandate, functions and the manner in which it is governed. In Section III, the Governor presents an overview of the activities undertaken by the Bank in the financial year under review. Section IV discusses in detail the Bank¶s monetary policy and Samoa¶s economic performance in the financial year under review, as well as the outlook for the financial year ahead. Section V explains the implementation of monetary policy, exchange rates, foreign reserves management and exchange control. One of the key functions of the Bank ± the oversight of the financial system ± is discussed in Section VI. Sections VII and VIII highlight the main corporate issues and the financial performance of the Bank respectiv e ly . T h e la s t se c tion , Section IX, provides a list of the key events that occurred in the year under review. CBS Annu al Re port 20 09/1 0 C O N T E N T S I. CENTRAL BANK LEGAL MANDATE AND FUNCTIONS 1 II. CENTRAL BANK STRUCTURE AND GOVERNANCE 3 III. GOVERNOR¶S STATEMENT 5 IV. MONETARY POLICY FORMULATION AND THE ECONOMY 7 V. MONETARY POLICY IMPLEMENTATION AND EXCHANGE CONTROL 14 VI. FINANCIAL SYSTEM SUPERVISION 19 VII. CORPORATE SERVICES AND ADMINISTRATION 25 VIII. CENTRAL BANK FINANCIAL PERFORMANCE 31 IX. CHRONOLOGY OF IMPORT A N T M ON E T A R Y , P R UDENTIAL AND RELATED EVENTS IN 2009/10 32 X. FINANCIAL STATEMENTS i CBS Annua l Repo rt 2 00 9/10 I. THE CENTRAL BANK¶S LEGAL MANDATE AND FUNCTIONS he Central Bank of Samoa is the country¶s Reserve Bank and, as such, it acts as banker to the Government and the commercial banks. The main objective of the Central Bank is Tt o promote sustainable real economic growth by maintaining price stability, international reserves viability and a sound financial system. For practical purposes and under normal circumstances, the Central Bank has defined price stability as an inflation rate consistent with those of Samoa¶s main trading partners. Pursuant to its mandate under the Central Bank of It is also responsible for the management of the rate Samoa Act 1984, the Financial Institutions Act 1996, at which Samoa¶s Tala is exchanged with currencies Money Lau n der i n g Pre v e n t i o n A ct 2007 and the of other countries and adm i n is t e r s f o r e i gn e x ch a n g e Insurance Act 2007, the Central Bank has the control measures. The main objective of the Central following main functions: Bank¶s exchange rate policy is to ensure that export oriented industries remain competitive in overseas (i) regulating the issue, supply, availability and markets whilst at the same time minimizing imported international exchange of money; inflation. As an open economy, the exchange rate (ii) advising the Government on banking and between the Samoan Tala and other currencies play monetary matters; a vital role in the facilitation of international trade. (iii) promoting internal and external monetary However, the exchange rate is a double-edged stability; sword, having contrasting impacts on exports and (iv) promoting a sound financial structure; inflation. When it depreciates, exports become (v) promoting credit and exchange conditions cheaper and more attractive to foreigners while conducive to the orderly and balanced imports become more expensive, increasing economic development of Samoa; domestic inflation. On the other hand, when the (vi) supervising and regulating banking business and exchange rate appreciates, exports become dearer the extension of credit; and less attractive to foreigners while imports (vii) implementing counter measures against money become cheaper, lowering domestic inflation. laundering such as to deter, detect and Because of its contrasting impacts on exports and criminalize money laundering activities, a n d do m est i c i n f l at i on, the exchange rate needs to be (viii) supervising and regulating insurance business. managed cautiously. The Central Bank undertakes the formulation and The Central Bank, in addition, is responsible for implementation of monetary policy and related the custody and management of Samoa¶s reserves measures, which include open market operations in of international currencies for debt servicing and the Central Bank Securities, to influence the level of payment of goods and services. As a small open interest rates and the availability of credit in the economy, Samoa needs to maintain sufficient financial. By and large, monetary policy decisions international reserves to withstand and recover from are channeled through the commercial banks since large unforeseeable economic shocks in the future. they play a dominant role in the financial system. On the basis of historical events and trends, the However, given the nature of the Samoan economy, Bank has adopted a level of gross official the lopsided structure of the financial system with international reserves equivalent to around 4.0 one bank dominating the deposits and lending market, months of imports of goods as adequate cover for and the relatively large size of the public sector, open maintaining the country¶s long-term international market types of monetary policy instruments are reserves viability. often supplemented with moral suasion to make monetary policy more effective. The design and issue of currency notes and coins, to meet the needs of the b u s in es s co m m u n i t y a n d the general public, is another crucial role for which the Central Bank is widely known. 1 CBS Annu al Re port 20 09/1 0 The Central Bank acts as banker for the commercial on suspicious transactions and undertakes further banks, provides a facility for the clearing and scrutiny of any information suspecting money settlement of inter-bank payments, and is also laundering taking place. custodian of the commercial banks¶ statutory minimum deposit reserves. The Insurance Act 2007 appoints the Governor as the Insurance Commissioner, and therefore As fiscal agent of Government, the Central Bank empowers the Central Bank to license insurance undertakes, when required, the issue and entities and supervise the insurance industry. administration of Treasury Bills and other Government securities. Moreover, it issues its own During the financial year under review, work began Central Bank Securities to the commercial banks on amending the Central Bank Act with a view to and t h e n o n - b a n k pu b li c a n d maintains a registry widening the tra n s m iss i o n m ec h a n i s m for service, rediscount and repurchase facilities. implementing monetary policy, harmonize the bookkeeping sections of the Act with the accounting standard that was currently adopted by the local accounting society and to extend the Bank¶s mandate to cover financial inclusion. In the event, the Board approved in January 2010 the engagement of Bank staff and resources in activities related to Financial Inclusion. Responsibility for Financial Inclusion was allocated to the Financial Markets Department, assisted by a Financial Inclusion Team comprised of staff selected from the other departments of the Bank. Fr. Spatz Silva, Mr Keith Leonard (ADB), Mr Juan Jose Daboub Financial Inclusion refers to the extension of financial (WB) and PM Tuilaepa Aiono Fatialofa Sailele Malielegaoi services to reach those that are classified as the at the official opening of the office WB/ADB Joint Samoan ³unbanked´. These people are so poor that they Liason Office on 2 November 2009. c ann o t g et access to basic financial services. Financial inclusion activities include micro credit The Central Bank is also responsible for the schemes and mobile phone banking. registration and prudential supervision of commercial banks.