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© 2005 International Monetary Fund
October 2005
IMF Country Report No. 05/365
Solomon Islands: 2005 Article IV Consultation—Staff Report; and Public Information Notice on the Executive Board Discussion
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2005 Article IV consultation with the Solomon Islands, the following documents have been released and are included in this package:
the staff report for the 2005 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on July 12, 2005, with the officials of the Solomon Islands on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on September 13, 2005. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a Public Information Notice (PIN) updating information on recent developments and summarizing the views of the Executive Board as expressed during its September 28, 2005 discussion of the staff report that concluded the Article IV consultation.
The document listed below will be separately released.
Selected Issues and Statistical Appendix paper
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
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Front Matter Page
INTERNATIONAL MONETARY FUND
SOLOMON ISLANDS
Staff Report for the 2005 Article IV Consultation
Prepared by the Staff Representatives for the 2005 Consultation with the Solomon Islands
Approved by Steven Dunaway and Michael Hadjimichael
September 13, 2005
The 2005 Article IV Consultation discussions were held in Honiara during June 30–July 12. The team comprised Ms. Papi (head), Messrs. Ginting and Porter (all APD). Mr. Francis (OED) attended the policy meetings.
The team met with Deputy Prime Minister Rini, Finance Minister Boyers, Governor Houenipwela of the Central Bank of the Solomon Islands (CBSI), other senior government officials, donors, and private sector representatives.
The Solomon Islands accepted the obligations of Article VIII, Sections 2(a), 3, and 4 in 1979. Exchange restrictions reintroduced starting in 2000 were removed in 2003. The Solomon Islands now maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions.
While improving, data quality, coverage, and timeliness remain weak, hampering surveillance.
As last year, the authorities indicated their intention to publish the Article IV documents.
Contents
Executive Summary
I. Background
II. Recent Economic Developments and Near-Term Outlook
III. Policy Discussions
A. Medium-Term Outlook
B. Fiscal Policy
C. Debt
D. Exchange Rate and Monetary Management
E. Financial Sector Issues
F. Structural Reforms and Other Issues
IV. Staff Appraisal
Tables
1. Selected Economic Indicators, 2000–05
2. Balance of Payments, 2000–05
3. Central Government Operations, 2000–05
4. Summary Accounts of the Banking System, 2000–05
5. Medium-Term Baseline Scenario, 2003–10
6. Medium-Term Baseline Scenario—Balance of Payments, 2003–10
7. Medium-Term Alternative Scenario, 2003–10
8. Indicators of External Vulnerability, 2000–05
Figures
1. Selected Economic Indicators, 1978–2005
2. External Sector Developments, 1997–2005
3. Fiscal Developments, 1997–2004
4. Monetary Sector Developments, 1998–2005
Annexes
I. Medium-Term Scenario and Debt Sustainability Analysis
II. Fund Relations
III. Support from the Pacific Financial Technical Assistance Center
IV. Relations with the World Bank Group
V. Relations with the Asian Development Bank
VI. Poverty and Human Development Indicators
VII. Statistical Issues
Executive Summary
Economic Developments and Challenges
The improvement in the Solomon Islands’ economic performance registered after the arrival of the Australian-led intervention force in mid-2003 has continued.
The economy has begun to recover. Strong commodity exports and substantial donor support drove growth and strengthened the external position significantly in 2004. Inflation moderated from its conflict peak. Likewise, the budget recorded a large surplus. Although moderating, growth is supported by two major projects restarting in 2005. The projected deterioration in the external current account reflects investment-related imports, but reserve coverage should remain comfortable. The budget is projected to record a small deficit due to one-off factors and higher spending as capacity and wages rise.
Despite a positive near-term outlook, the country faces enormous challenges. With logging set to decline from its unsustainable level, much depends on new private activities coming on stream to replace lost incomes, exports, and government revenue. The Solomon Islands is the poorest country in the Pacific, with per capita GDP two thirds of its preconflict level. The key challenge is to sustain per capita income growth and broaden its base, while safeguarding macroeconomic stability.
Key Policy Issues
The discussions focused on the macroeconomic policies needed to support the reform process over the medium term. Now is a good opportunity to tackle long-standing issues, provided the forthcoming elections do not derail reforms.
A strong fiscal position should be maintained over the medium term. With expenditure pressures set to rise and revenues projected to fall, staff suggested a 1½ percentage points of GDP adjustment in the 2006 budget. This year’s deficit should also be kept below budget.
The central bank’s policy to resist upward pressure on the exchange rate is appropriate. The CBSI has de facto pegged the currency to the U.S. dollar since 2003. Downward pressure on the exchange rate should not be resisted. With the conduct of monetary policy likely to become more challenging, the CBSI should continue to stand ready to take appropriate measures, were credit growth to become inflationary.
After regularizing its domestic debt, the government is seeking debt relief from its external creditors. The staff’s debt sustainability analysis suggests that debt is high and its dynamics fragile.
Structural reforms should be accelerated to promote private sector development. The new foreign investment regime should be introduced, state enterprise reform deepened, and governance reform vigorously pursued.
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Public Information Notice (PIN) No. 05/142
FOR IMMEDIATE RELEASE
October 13, 2005
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
