International Monetary Fund. Asia and Pacific Dept
KEY ISSUES Recent Developments and Outlook. Solomon Islands held its parliamentary elections on November 19, 2014 and elected a new government led by Prime Minister Manasseh Sogavare, representing the Democratic Coalition for Change. The country’s Gold Ridge mine, its only gold mine, remains closed and the chances of it re-opening are limited given current gold prices. At the same time, the logging industry is being adversely affected by the depletion of forestry resources. As a result, the near-term outlook has worsened. While lower oil prices constitute a windfall to consumers and producers, diversifying sources of growth and boosting the competitiveness of the economy are key to strengthening medium-term growth prospects. The risks to the outlook are to the downside. Program Performance. Performance under the Extended Credit Facility (ECF) arrangement has been broadly satisfactory. Performance criteria for end-June 2014 were met by large margins. Indicative targets (ITs) for end September 2014 were also met, except for those on health and education spending, which were both narrowly missed in June and September 2014. Despite delays, the authorities have made progress in implementing the structural reform agenda. Policy Recommendations ? In the medium term, recalibrate ambitious spending plans in line with implementation capacity, revenue envelope, financing availability, and the need to preserve fiscal buffers for resilience against shocks given the serious setback in mining prospects linked to the closure of the only gold mine. ? Strengthen the quality of public spending and fiscal management by advancing Public Financial Management (PFM) reform, including improving the transparency and accountability in the use of constituency funds. ? Maintain the current monetary stance but stand ready to tighten policy if credit growth and inflationary pressures surge. ? Strengthen financial regulation and supervision, including supervision of the National Provident Fund, and improve private sector access to credit.
International Monetary Fund. Asia and Pacific Dept
This paper discusses Solomon Islands’ First Review Under the Extended Credit Facility (ECF) Arrangement. The three-year arrangement under the ECF is on track. All December 2012 and continuous performance criteria have been met, except for the cash balance floor, which was temporarily missed by a small amount. The indicative target on health and education for December 2012 was also missed by a very small margin. The IMF staff recommends completion of the review and supports the authorities’ request for a waiver of the nonobservance of the cash balance floor at end-December, and the modification of end-June 2013 performance criteria.
Yongzheng Yang, Hong Chen, Shiu raj Singh, and Baljeet Singh
This study aims to test within a relatively homogeneous group of small states what differentiates the growth performance of Pacific island countries (PICs) from their peers. We find that PICs are disadvantaged by distance and hampered by lower investment and exports compared with other small island states, but greater political stability, catch-up effects from lower initial incomes, and slower population growth have helped offset some of these disadvantages. On balance, policy-related factors, together with geography-related disadvantages, have led to growth rates in PICs that are much lower than in other small states. We also examine how real exchange rate appreciation, unfavorable developments in the external trade environment, and rising international transport costs may have contributed to PICs’ slower growth over the past decade.
Mr. Valerio Crispolti, Ms. Era Dabla-Norris, Mr. Jun I Kim, Ms. Kazuko Shirono, and Mr. George C. Tsibouris
Low-income countries routinely experience exogenous disturbances—sharp swings in the terms of trade, export demand, natural disasters, and volatile financial flows—that contribute to higher volatility in aggregate output and consumption compared with other countries. Assessing Reserve Adequacy in Low-Income Countries presents the findings of an analysis of a range of external shocks faced by these countries, beginning with a discussion of the impact of external shocks on macroeconomic growth, volatility, and welfare. Although sound macroeconomic and prudential policy frameworks are the first line of defense for limiting vulnerability, international reserves constitute the main form of self-insurance against such shocks. The evidence suggests that low-income countries with reserve coverage above three months of imports were better able to smooth consumption and absorption in the face of external shocks compared with those with lower reserve holdings. The analysis also points to the importance of country characteristics and vulnerabilities in assessing reserve adequacy.
This paper develops a new index which provides early warning signals of a growth crisis in the event of large external shocks in low-income countries. Multivariate regression analysis and a univariate signaling approach are used to map information from a parsimonious set of underlying policy, structural, and institutional indicators into a composite vulnerability index. The results show that vulnerabilities to a growth crisis in low-income countries declined significantly from their peaks in the early 1990s, but have risen in recent years as fiscal policy buffers were expended in the wake of the global financial crisis.
The First Review Under the Standby Credit Facility (SCF) discusses Solomon Islands’ satisfactory performance under the SCF-supported program, approved in December 2011. The current arrangement is intended to be precautionary and, given the current level of reserves, the authorities do not intend to draw on the IMF's resources unless an unexpected need arises. The outlook remains favorable, but with large near-term downside risks. Substantial progress has been made toward implementing structural benchmarks.
This Tax Summary and Statistical Appendix for the Solomon Islands outlines the summary of various taxes. Residents are taxed on their worldwide income. Nonresidents are taxed on income sourced from the Solomon Islands. Both resident and nonresident investors undertaking commercial, economic, industrial or professional activity in the Solomon Islands may apply to the Commissioner of Inland Revenue for an exemption from income tax. An excise duty is levied on plugs, twist, fig, stick, cake, and coarse cut tobacco, and on beer and cigarettes produced in the Solomon Islands.
This paper presents the Tax Summary for the Solomon Islands. The paper discusses that normal business expenses are deductible against chargeable income. A $7,800 personal exemption applies to both resident and nonresident individuals. This general exemption is subject to apportionment on a pro-rata basis should the individual commence work part way through the year. In addition, the first $5,000 of interest income on deposits made with any savings bank or on fixed deposit accounts with any bank in the Solomon Islands are excluded from chargeable income.
This 2007 Article IV Consultation highlights that real GDP growth of Solomon Islands rose to an estimated 6 percent in 2006, driven by fish, palm oil production, and services. However, it is expected to ease to 5½ percent in 2007, as a further escalation in logging will be likely offset by lower growth of fish and traditional crops. With the natural forest expected to be depleted within the next few years, structural reforms are necessary to generate higher sustainable growth, raise living standards, and reduce the economy’s vulnerability to shocks.
Since the intervention of the Regional Assistance Mission to the Solomon Islands, growth has rebounded, and financial stability has been maintained. Fiscal discipline should be sustained, and a medium-term strategy developed taking into account looming pressures. The central bank’s current exchange rate policy is appropriate, but requires vigilance. Financial system soundness should be strengthened by liquidating the development bank, and raising the profitability of the National Provident Fund. Structural reforms to encourage new private sector activities should be vigorously implemented.