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Mr. Bernardin Akitoby, Mr. Jiro Honda, and Keyra Primus
Raising revenues has been a formidable challenge for fragile and conflict-affected states (FCS), a fact confirmed once again in the COVID-19 crisis. Nonetheless, achieving sizable gains in tax collection in fragile environments is not impossible. This paper—with empirical analyses and case studies—contributes to policy discussions on tax reform in such challenging environments. Our analyses show that many FCS achieved some recovery of tax revenues, even though they found it challenging to sustain the momentum beyond three years. We also find that changes in the quality of institutions (e.g., government effectiveness and control of corruption) are a key contributory factor to their tax performance (much more so than for non-FCS). Next, we look into the tax increase episodes of four countries (Liberia, Malawi, Nepal, and the Solomon Islands). Although each FCS is unique, their experiences suggest two lessons: (i) tax reforms can be pursued even with initially weak institutions; and (ii) strong political commitment is important to sustain reform efforts and realize long-lasting, sizable gains.
International Monetary Fund. Asia and Pacific Dept
This paper presents Solomon Island’s Requests for Purchase Under the Rapid Financing Instrument and Disbursement Under the Rapid Credit Facility. In order to address the pandemic, the Solomon Islands’ authorities have taken measures to prevent the entry of coronavirus disease 2019 (COVID-19), to increase health and containment spending, and to provide targeted support for vulnerable households and businesses. IMF financing will help fill immediate financing needs and catalyze additional financing from its development partners to support the COVID-19 response. The authorities’ immediate policy response has focused on strong and timely containment measures to limit the risk of a local outbreak while reprioritizing spending toward health care. They have also adopted a fiscal stimulus package with measures targeted at providing social assistance, protecting jobs and incomes and stabilizing the domestic economy. Beyond the immediate response to the external shock, the authorities should remain committed to policies that promote inclusive growth and resilience while containing external pressures, protecting financial stability and preserving fiscal sustainability.
International Monetary Fund. Asia and Pacific Dept
This 2019 Article IV Consultation with the Solomon Islands highlights that the country has made substantial progress since the Tensions in the early 2000s but faces considerable economic and governance challenges and is highly vulnerable to natural disasters. Finding new sources of growth is becoming urgent with the decline in logging. The consultation focused on similar issues to last year—restoring fiscal buffers to build resilience, strengthening public financial management and public investment management, setting a medium-term fiscal strategy, improving governance, improving exchange rate management and building conditions for sustainable growth. The report recommends developing a holistic approach to medium-term fiscal policy by setting a realistic spending envelope and establishing a medium-term revenue strategy. Together with strengthened budget planning and expenditure control, this would provide greater budget predictability and support natural disaster contingency planning. It is also imperative to strengthen enforcement of governance standards, apply the mining fiscal regime rigorously, improve transparency and advance the anti-corruption agenda.
Ryota Nakatani
A big challenge for the economic development of small island countries is dealing with external shocks. The Pacific Islands are vulnerable to natural disasters, climate change, commodity price changes, and uncertain donor grants. The question that arises is how should small developing countries formulate a fiscal policy to achieve economic stability and fiscal sustainability when prone to various shocks? We study how natural disasters affect long-term debt dynamics and propose fiscal policy rules that could help insulate the economy from such unexpected shocks. We propose fiscal rules to address these shocks and uncertainties using the example of Papua New Guinea. Our study finds the advantages of expenditure rules, especially a recurrent expenditure rule based on non-resource and non-grant revenue, interdependently determined by government debt and budget balance targets with expected disaster shocks. This paper contributes to the literature and policy dialogue by theoretically analyzing the impact of natural disasters on debt sustainability and proposing fiscal rules against natural disasters and climate changes. Our fiscal policy framework is practically applicable for many developing countries facing increasing frequency and impact of natural disasters and climate change. Our rules-based fiscal framework is crucial for sustainable and countercyclical macroeconomic policies to build resilience against devastating natural hazards.
Hidetaka Nishizawa, Mr. Scott Roger, and Huan Zhang
Pacific island countries (PICs) are vulnerable severe natural disasters, especially cyclones, inflicting large losses on their economies. In the aftermath of disasters, PIC governments face revenue losses and spending pressures to address post-disaster relief and recovery efforts. This paper estimates the effects of severe natural disasters on fiscal revenues and expenditure in PICs. These are combined with information on the frequency of large disasters to calculate the rate of budgetary savings needed to build appropriate fiscal buffers. Fiscal buffers provide self-insurance against natural disaster shocks and facilitate quick disbursement for recovery and relief efforts, and protection of spending on essential services and infrastructure. The estimates can provide a benchmark for policymakers, and should be adjusted to take into account other sources of financing, as well as budget risks from less severe as well as more frequent disasters.
International Monetary Fund. Strategy, Policy, &, Review Department, International Monetary Fund. Western Hemisphere Dept., and International Monetary Fund. Asia and Pacific Dept
This paper discusses how countries vulnerable to natural disasters can reduce the associated human and economic cost. Building on earlier work by IMF staff, the paper views disaster risk management through the lens of a three-pillar strategy for building structural, financial, and post-disaster (including social) resilience. A coherent disaster resilience strategy, based on a diagnostic of risks and cost-effective responses, can provide a road map for how to tackle disaster related vulnerabilities. It can also help mobilize much-needed support from the international community.