Can Samoa Control Inflation and Unlock Bank Lending? IMF Calls for a Major Policy Rethink

The IMF has urged Samoa to shift toward interest-rate-based monetary policy, warning that excess banking liquidity, unstable money demand and weak financial markets are undermining inflation control. The proposed reforms aim to strengthen financial stability, improve borrowing conditions for businesses and consumers, and support sustainable economic growth.

The International Monetary Fund (IMF), through its Asia and Pacific Department, has recommended major reforms to Samoa's monetary policy framework, warning that the country's traditional money-supply targeting system is becoming increasingly ineffective in controlling inflation and maintaining financial stability. In its November 2026 study, The Monetary Policy Operational Framework in Samoa: Moving to an Interest-Rate-Based Target, IMF economist Diaa Noureldin highlights unstable money demand, excess liquidity in commercial banks and underdeveloped financial markets as major challenges. The report recommends that the Central Bank of Samoa (CBS) gradually adopt an interest-rate-based system to improve monetary management, strengthen banking stability and support sustainable economic growth.

Samoa's Monetary System Struggles as Inflation Risks Return

Samoa currently operates a monetary policy framework in which its currency, the Samoan tala, is pegged to a basket of currencies representing major trading partners, including Australia, New Zealand, the United States and the euro area. The central bank aims to maintain medium-term inflation around 3%, using broad money supply as an intermediate target.

However, the IMF finds that money supply frequently differs from official forecasts, making it difficult for policymakers to influence economic conditions. Samoa's heavy dependence on tourism earnings, remittances and foreign assistance creates unpredictable financial inflows that weaken the effectiveness of traditional monetary controls.

The country experienced a strong economic recovery following the COVID-19 pandemic, supported by reopened international borders and rising tourism activity. Economic growth reached 4.2% in the 2024–25 financial year, while average headline inflation declined to approximately 1.4% in 2025–26. Core inflation averaged 1.9%, reflecting improved price stability.

Nevertheless, rising global energy prices pushed year-end inflation to 5.8% in June 2026, highlighting Samoa's vulnerability to international economic shocks. The IMF expects inflation to move closer to the central bank's target by 2027–28, although uncertainty surrounding global commodity prices remains a concern.

Excess Bank Liquidity Creates New Financial Stability Challenges

One of the report's most significant findings concerns the large amount of unused money accumulating in Samoa's commercial banks. Foreign aid, tourism revenues, government deposits and delays in public investment have increased banking liquidity without generating corresponding growth in lending.

Commercial banks have struggled to identify enough commercially viable investment projects, leaving substantial funds unused. By May 2026, excess liquidity had reached approximately 565 million Samoan tala.

The IMF warns that persistent surplus liquidity weakens the central bank's influence over short-term interest rates and reduces activity in the interbank lending market. It could also encourage banks to relax lending standards to expand credit, creating potential financial stability risks.

The report identifies a sharp decline in Samoa's money multiplier, which measures how central bank money translates into broader money supply. The multiplier fell from an average of 5.3 during 2002–2007 to approximately 2–2.3 since early 2023.

Comparisons with Fiji, Tonga, Seychelles, Cabo Verde and São Tomé and Príncipe show that monetary volatility is common among small island economies. However, Samoa faces additional difficulties because its financial markets remain shallow and investment instruments are limited.

IMF Calls for Interest-Rate Reforms to Strengthen Monetary Control

The IMF's analysis of economic data covering 2013–2025 finds little evidence of a stable long-term relationship between money demand, economic output and interest rates.

Money balances remained below estimated equilibrium levels during much of 2013–2017 before exceeding those levels between 2017 and 2022. These prolonged deviations suggest that controlling money supply is an unreliable way to manage inflation and economic activity.

The report therefore recommends gradually shifting toward an interest-rate-based operational framework. Under this approach, the central bank would guide short-term market interest rates more directly instead of relying primarily on monetary aggregates.

Key proposals include establishing an interest-rate corridor, introducing seven-day central bank securities, strengthening liquidity forecasting and improving access to overnight lending facilities.

The IMF also recommends adjusting statutory reserve requirements and developing more active interbank and securities markets. These measures could improve the transmission of monetary policy decisions to commercial bank lending and deposit rates while maintaining Samoa's existing currency peg.

Banking Reforms Could Reshape Borrowing Costs and Economic Growth

The proposed transition would involve financial costs and institutional challenges. The IMF estimates that absorbing existing excess liquidity could cost approximately 15.6 million tala annually, equivalent to 0.4% of projected GDP for 2026–27.

Although significant, the Fund considers this cost manageable because the central bank earns income from its international reserves.

Another challenge is the limited development of Samoa's financial markets. The country lacks an established government bond market, while interbank lending remains weak. Public financial institutions account for nearly 45% of outstanding private-sector credit, potentially limiting the influence of monetary policy changes on borrowing conditions.

For businesses and traders, stronger monetary management could eventually create more predictable financing conditions. Consumers could benefit from improved inflation control and greater stability in borrowing and savings rates. However, these benefits would depend on effective banking reforms and stronger financial-market development.

Samoa has an opportunity to modernize its monetary system without abandoning its exchange-rate arrangement. A gradual transition supported by improved liquidity monitoring, stronger financial institutions and clearer central bank communication could strengthen financial stability, improve economic resilience and support sustainable long-term growth.