CENTRAL BANK OF SAMOA CONTINUES PRUDENT MONETARY POLICY AMID ECONOMIC GROWTH
Central Bank of Samoa Headquarters in Apia (Photo: Supplied)
In a recent announcement, the Central Bank of Samoa (CBS) revealed its decision to maintain its current monetary policy stance, emphasizing the need to reduce excessive liquidity in the financial system while cautiously adjusting official interest rates. This strategic move comes against the backdrop of positive economic indicators but lingering challenges in inflation management.
The decision, ratified during the CBS Board of Directors meeting on March 22nd, 2024, underscores the Bank's commitment to fostering stability and sustainable economic growth in Samoa. Key highlights from the deliberations shed light on the prevailing economic landscape and the rationale behind the chosen course of action.
Firstly, while inflation has shown signs of moderation, it remains above the medium-term target of 3.0 percent. Headline inflation has declined steadily, reaching 6.6 percent by the end of February 2024, down from its peak of 12.0 percent in June 2023. Similarly, the underlying inflation rate has also decreased to 8.8 percent, reflecting a concerted effort to address inflationary pressures. Looking ahead, the Bank anticipates further declines, projecting a headline inflation rate of 5.0 percent by the end of June 2024 as prices continue to stabilize.
Secondly, Samoa's economic growth trajectory remains positive, buoyed by robust performance across key sectors. Real GDP registered an impressive growth rate of 10.4 percent in the twelve months leading up to the September 2023 quarter, signaling a significant rebound from previous periods of volatility. Strong growth in commerce, personal services, and tourism-related activities, coupled with prudent fiscal management, has fueled this resurgence. However, the Bank anticipates a slight slowdown in growth to 6.3 percent for the fiscal year 2023/24 as initial post-COVID surges taper off.
Thirdly, foreign reserves continue to stand at healthy levels, providing a solid buffer against external shocks. With gross foreign reserves totaling $1,305.3 million as of February 2024, Samoa enjoys ample coverage equivalent to approximately 13.1 months of goods imports. The expected influx of grants, budget support, and increased visitor earnings further reinforces this position, boding well for the country's economic stability.
Lastly, while the financial sector remains sound, concerns persist over elevated liquidity levels. Despite a robust capital adequacy ratio of 33.8 percent and a decline in non-performing loans, the banking system grapples with surplus liquidity. Average liquidity, as reflected in exchange settlement accounts (ESA), has surged to $613.7 million in the seven months leading up to January 2024, indicating excess liquidity within the system.
In response to these dynamics, the CBS affirms its commitment to addressing liquidity imbalances and normalizing interest rates gradually. Through targeted open market operations and adjustments to the official interest rate, currently hovering around historic lows, the Bank aims to temper liquidity while signaling a prudent approach to monetary policy. The issuance of longer-term CBS Securities and ongoing dialogue with financial institutions will further support these efforts.
The overarching goal remains to strike a delicate balance between stimulating economic activity and safeguarding against inflationary pressures. By maintaining a vigilant stance on monetary policy, the Central Bank of Samoa endeavors to underpin sustainable growth and stability, fostering an environment conducive to prosperity for all stakeholders.