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APIA, Samoa (Samoa Observer, Dec. 28) – Government’s right hand drive (RHD) switch proposal would place Samoa’s already low foreign exchange reserves in double jeopardy, [a top economist says].

Buying right hand drive vehicles will drain foreign exchange reserves, the Governor of the Central Bank of Samoa (CBS), Leasi Papali’i Tommy Scanlan has warned.

Meanwhile, relatives overseas who are expected to buy vehicles will have less money to send as a result, Leasi said.

With less remittances sent over, the flow of funds to our foreign exchange reserves will be slower, he said.

In a letter to Prime Minister Tuilaepa Lupesoli’ai Sa’ilele Malielegaoi titled "Macro-economic performance in the first four months of 2007/2008," obtained by the Sunday Samoan, Leasi expressed concerns about the implications of switching to RHD.

"It is highly likely that there will be a sharp increase in the imports of RHD vehicles once the policy becomes effective," Leasi wrote.

"The concern is that a large sector of the community will be seeking credit financing for importing RHD vehicles to replace their current LHD vehicles.

"This, unfortunately, is going to cause a run on the banks’ liquidity and the country’s foreign exchange reserves.

"At the moment, international reserves are barely above the benchmark target of 4.0 months of imports."

The Central Bank Governor said remittances, in the form of cash, are also likely to be affected by the new motor vehicles policy, as Samoans abroad spend their limited excess financial resources to purchase cars for families in Samoa.

"This expected decline in remittances will further adversely impact on the level of our foreign exchange reserves."

Leasi said a decline in "overseas reserves will require a further tightening of monetary policy. In the event, interest rates will most likely go up further.

"Similarly, an adjustment to the exchange rate may be required to safeguard our balance of payments position."

Foreign exchange reserves consist of overseas money, which the country spends overseas to buy goods.

Meanwhile, in the local scene, Leasi is concerned risks posed by the switch "due mainly to the expected diminishing value of LHD vehicles that banks and other non-bank financial institutions accept as loan collaterals from both the business sector and members of the public.

"Recent data obtained from the banking system showed that the bank’s total exposure to loans secured by motor vehicles, at end October 2007, amounted to $56 million."

Apart from continuing its tight monetary policy to restrain demand on foreign reserves, Leasi recommends that to soften the "potentially adverse impact on the financial system and the economy" Government carry out the switch over a longer period of time.

"This way, the cost of the switch would be spread out (over a longer period) giving the community, particularly the business sector, sufficient time to make the necessary adjustments to their future financial plans."

"There is great uncertainty in business decision making at the moment, arising out of the RHD proposal," Leasi says.

Allowing RHDs into the country takes effect in February, the Prime Minister has announced.

Samoa Observer: www.samoaobserver.ws/

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