Solomon Islands: Staff Report for the 2007 Article IV Consultation—Informational Annex
Author: International Monetary Fund
Publication Date:
07 Sep 2007
eISBN:
9781451951653
Language:
English
Keywords:
ISCR; CR; government; GDP; inflation; PFTAC advisor; central bank; CBSI's bank supervision department's database; PFTAC expert; GDP estimate; government capability; Balance of payments statistics; Monetary statistics; Pacific Islands
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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.

Abstract

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.

I. Solomon Islands—Fund Relations

(As April 30, 2007)

I. Membership Status: Joined September 22, 1978; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans: None

V. Latest Financial Arrangements:

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VI. Projected Payments to Fund:

(SDR Million; based on existing use of resources and present holdings of SDRs):

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VII. Implementation of HIPC Initiative: Not applicable.

VIII. Implementation of MDRI Assistance: Not applicable.

IX. Exchange Rate Arrangements:

Since November 2000, the exchange rate for the Solomon Islands (SI) dollar has been based on an undisclosed trade-weighted basket of the currencies of the Solomon Islands’ major trading partners, with the U.S. dollar as the intervention currency. During 2002, as pressures on external reserves intensified, the Central Bank of Solomon Islands (CBSI) accelerated the rate of currency depreciation, leading to a gradual real depreciation of the SI dollar. Since December 2002, the CBSI has kept the exchange rate broadly stable against the U.S. dollar, although there is no public commitment to continue to do so. The Solomon Islands now maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions.

X. Last Article IV Consultation:

The 2006 Article IV Consultation discussions were held in Honiara during June 8-June 20, 2006. The staff report (IMF Country Report No. 06/362, August 30, 2006) was considered by the Executive Board and the consultation concluded on October 4, 2006.

XI. Technical Assistance:

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XII. Resident Representative: None

II. Solomon Islands—Support From the Pacific Financial Technical Assistance Center1

(As of June 1, 2007)

Tax Administration and Policy

A mission in May 2004 designed plans to modernize and enhance the efficiency of the Customs and Tax Divisions. A further mission in May 2005 reviewed the current system, outlined a detailed strategy for the implementation of tax reforms over the next few years, and assessed the required technical assistance to support this strategy. The authorities released a tax reform proposal in conformity with PFTAC’s advice. A mission in February 2006 assisted the government further with a detailed implementation plan, including discussions on the policy and design issues in relation to the VAT, income tax, and revenue administration. With assistance from LEG, draft legislation was prepared for the VAT and Revenue Administration Acts. In December 2006, a mission assisted the authorities in the preparation of a high-level design and project plan for the implementation of the Business Revenue Reform, and a follow-up visit took place in early May 2007. However, the government’s revenue policy remains to be finalized.

Public Financial Management

In May 2006, the PFTAC adviser undertook a review of the Public Finance and Audit Act (PFAA; 1978), the Financial Instructions (FI; 1978) and the Stores Instructions (1976; SIs). The mission agreed with the authorities that the more immediate need was for a process redesign of the key accounting operations, linked to a significant redraft of the FI. In August 2006, a mission recommended measures to improve accounting operations and installed two consultants to redraft the FI. A final report was sent to the authorities in January 2007.

Financial Sector Regulation and Supervision

In September 2004, an advisor visited the CBSI to advise on the implementation of an anti-money laundering regime. A peripatetic advisor visited in January 2005 to assist with improving the CBSI’s bank supervision department’s database. In April 2005, the PFTAC advisor worked with an MCM expert to provide assistance in dealing with a failed insurance company and developing a supervisory framework for insurance companies, provided advice on the oversight of the National Provident Fund, developed supervisory guidelines on AML/CFT activities in financial institutions, and prepared a project document for the establishment of the Financial Intelligence Unit (FIU). In September 2005, the PFTAC advisor assisted CBSI staff in conducting an AML/CFT on-site examination of a domestic bank. CBSI staff also attended a seminar on monetary policy in shallow markets arranged by PFTAC/MFD in March 2005. In February 2006, the advisor participated in an AML/CFT awareness training seminar conducted by the CBSI. In November 2006, the CBSI hosted the annual meeting of the Association of the Financial Supervisors of Pacific Countries.

Economic and Financial Statistics

During 2003, the National Statistics Office (NSO) restarted activity, with the production of the Honiara CPI. A joint PFTAC/Secretariat of the Pacific Community mission in February 2004 devised a recovery plan, and AusAID and NZAID provided funding for equipment and a long-term advisor (a former PNG deputy statistician) to help build capacity and also to coordinate the Household Income and Expenditure Survey (HIES). The CBSI compiles balance of payments and GDP data and CBSI staff attended a regional training course on balance of payments statistics arranged by PFTAC in April 2005. Missions in August 2005 and February 2006 reviewed current methodologies for balance of payments and national accounts statistics and suggested some short-term improvements to their compilation. Assistance was also provided on a prototype government finance statistics system. In September 2006, the NSO released the findings of the 2005/06 HIES. Over the February-March 2007 period, PFTAC experts assisted the authorities in improving the compilation of balance of payments statistics and revising the GDP data.

Contact person: Susan Adams, Project Coordinator, sadams@imf.org.

III. Solomon Islands—Relations with the World Bank Group

(As of June 2007)

Since becoming a Bank member in June 1978, the Solomon Islands has received eight IDA credits totaling US$50 million in the infrastructure, education, health, finance, and agriculture sectors. Following the repayment of all outstanding arrears in September 2003, the Solomon Islands came out of nonaccrual status, and country relations have normalized. The Solomon Islands is eligible for an IDA 14 allocation of SDR 7.3 million (indicative only) over FY 2006–08. The IDA allocation for FY 07 is SDR 5.2 million.

The Bank’s assistance to the Solomon Islands is motivated by the need for re-engagement in a low capacity post-conflict country, while recognizing the abundance of donor funds. The assistance program is guided by the government’s own development priorities articulated in the National Economic Reform, Recovery, and Development Plan (2003–06), and the Bank’s broader Pacific Regional Strategy which has a focus on: (i) strengthening government capabilities, and (ii) improving incentives for the private sector. The Bank’s involvement in the Solomon Islands is in the following areas:

Strengthening Government Capabilities

  • Health Sector: The government has initiated preparatory steps to move toward a sector-wide approach (SWAp) in the health sector, consistent with the direction that AusAID, as main donor to the sector, is also moving as indicated in the recent AusAID’s White Paper on development aid. IDA is exploring options for its engagement to strengthen the health sector, including technical assistance, sector policy analysis and advice, and IDA grant funding (US$2 million), if there is a financing gap in the health program.

  • Education SWAp: The Bank has co-financed a study to support the development of a National Skills Training Plan. The government has indicated interest in joining the Education for All Fast Track Initiative (FTI) and the process to prepare the Ministry of Education for participation has begun. It is hoped that with technical assistance, a costed sector strategy will be developed by late 2007 and formal FTI participation would begin in 2008. Any funding that the Bank provides for FTI activities would become part of the ongoing SWAp, which is currently financed only by the EU and NZAID.

  • Energy Supply: The Bank is supporting the government’s decision to implement a structural reform program in the electricity sector in order to improve electricity supplies, reduce their dependence on diesel-fired electricity generation, and provide affordable rural electricity systems. The government has determined that the best way to improve the performance of the Solomon Islands Electricity Authority (SIEA) is to contract out SIEA’s management for five years through a performance based management contract. The management contract will provide the skills necessary to improve SIEA’s commercial management as well as providing SIEA with the specialist expertise it requires to implement a proposed rural electrification program and a program to convert the outer islands diesel systems to bio-diesel. A management contract will also allow local managers to receive the training they require to resume full control of SIEA by the end of the contract. The procurement process has commenced with the appointment of a procurement advisor to the government funded by AusAid. The management contract is expected to commence by end-2007. The Bank has also included the Solomon Islands in a regional renewable energy project to be financed by the GEF.

  • Water Sector: The Bank has prepared a Financial Restructuring Plan (FRP) for the Solomon Islands Water Authority (SIWA). The report provides the government and SIWA Board with an overview of SIWA’s financial position and recommends that the management contract for the SIEA be extended to cover SIWA.

  • Rural Growth: The Bank has completed the Agriculture and Rural Development Strategy (ARDS) which has been disseminated within the country. In parallel, the Bank has also started the preparation of the Solomon Islands Rural Development Project (RDP), which would be co-financed by the EU and AusAID, and implements the main recommendations of the ARDS.

Improving Incentives for the Private Sector

  • Telecommunications Sector: The Bank is providing technical assistance to the government to examine ways to improve the competitiveness of the sector to reduce telecommunication costs and improve the service quality and coverage. Specifically, the Bank has provided technical assistance to the government to: (i) assess the telecommunication sector and offer the government strategic options for reform; (ii) prepare and implement a new telecommunication code; and (iii) provide the government with options to change the license granted to Solomon Telekom. The Bank will continue to assist the government to pass a modern telecommunications code (a good draft has been produced) to prepare for competition in the sector and good sector regulation. The Bank is ready to assist the government to manage the transition from a monopoly to competition if the management of Solomon Telekom is willing to renegotiate the exclusive license.

  • Foreign and Domestic Investment: The Foreign Investment Advisory Service (FIAS) has provided assistance to the government for the preparation of new foreign investment legislation and is assisting with a review of investment incentives and administrative barriers to business.

Solomon Islands: IDA Lending Operations

(as of June 12, 2007)

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IV. Solomon Islands—Relations with the Asian Development Bank

(As of June 2007)

Since joining AsDB in 1973, Solomon Islands has received 16 loans amounting to $79.3 million, and 58 technical assistance (TA) projects amounting to $13.85 million. In 2006, AsDB also approved an Asian Development Fund (ADF) grant in the amount of $350,000. The last AsDB loan—Post-Conflict Emergency Rehabilitation Project (PCERP)—was approved in 2000. Solomon Islands is eligible for the Asian Development Fund (ADF) grants available to countries that are very poor, heavily indebted, or in a post-conflict situation. The 2005–06 ADF allocation for Solomon Islands succeeded in catalyzing substantial bilateral grant cofinancing for the improvement of rural roads.

AsDB’s country assistance strategy seeks to achieve rapid, pro-poor, private sector-led economic growth, and focuses on improving transportation infrastructure and services and the enabling business environment. Capacity development and the promotion of good governance are priorities. AsDB assistance is provided entirely on a grant basis and, in line with government policy, no new lending to the country will be provided until public finances stabilize. The Country Strategy and Program Update 2007–09 can be found at www.adb.org/Documents/CSPs/SOL/2006.

AsDB has committed substantial support to the country in response to a strong earthquake and consequent tsunami on April 2, 2007, which caused significant damage in Choiseul and Western Provinces. AsDB supports the recovery and rehabilitation of the affected areas through disaster risk management advisory support to the Government, and assistance for the rehabilitation of damaged infrastructure to be accommodated within existing projects and a proposed ADF grant funded emergency project.

AsDB currently has five ongoing TA projects in the areas of institutional strengthening of the Ministry of Infrastructure and Development, inter-island transportation, state-owned enterprise reform and private sector participation, companies law, trustee law, companies registration, and secured transactions reform. AsDB’s ongoing PCERP loan helps rehabilitate roads and bridges on Guadalcanal and Malaita that were damaged during the conflict. The Solomon Islands Road Improvement Project, approved in 2006 as an ADF grant with significant bilateral grant cofinancing, helps rehabilitate roads and bridges throughout the country to improve rural residents’ access to markets and economic and social services, promote private sector-led development, foster market formation, and facilitate domestic and international trade and income and employment opportunities.

AsDB’s Pacific Liaison and Coordination Office in Sydney is responsible for country programming, project implementation and administration, supported by the Pacific Operations Division in Manila.

Loans, Approvals, and Disbursements, 1999–2006

(In millions of U.S. dollars)

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Contact person: Winfried Wicklein, Country Team Leader for Solomon Islands, AsDB Sydney (wwicklein@adb.org).

V. Solomon Islands—Poverty and Human Development Indicators

Social indicators of poverty and human development remain low in the Solomon Islands. The country ranks 128 out of 177 countries in the 2006 United Nations Human Development Index, below all Pacific island countries, except Papua New Guinea. There are few recent poverty statistics, but anecdotal evidence suggests poverty remains high. However, the more extreme forms of poverty, such as malnourishment, have remained limited due to an abundant resource base, assured access to customary land tenure, and resilient social networks. This advantage is under pressure from a population growth rate that, at about 3 percent a year, is among the highest in the world.2

Results of the 2005–06 HIES indicate that majority of the population do not have access to basic services such as electricity and water. For example, 86 percent of the population uses open fire for cooking, 80 percent relies on kerosene lamps as primary source of energy, and 78 percent does not have water piped into their household.

Nonetheless, the Solomon Islands has achieved some progress in improving living conditions since independence despite falling per capita incomes. Prior to the civil conflict in 1999, sizable health and education expenditures (at 3–5 percent of GDP each) and high per capita aid inflows had helped underpin these improvements. Providing widespread and quality education to the very young population (45 percent under age 15) is a challenge. The primary education enrollment ratio is about 95 percent, although primary education is not compulsory. The enrollment ratio is only 30 percent in secondary education. Concerning health, malaria is rampant, with the highest rate of infection in the world outside of sub-Saharan Africa, and a third of the rural population lacks access to safe water.

The paucity of data makes an assessment of human development trends since 1999 difficult, but anecdotal evidence suggests that pro-poor services delivery is improving. The positive trend was likely either halted or reversed during the civil conflict. While the conflict sharply reduced agricultural production for market (due to the lack of security and transport services), this has recovered since mid-2003 and service delivery has been enhanced.

The aggregate social indicators mask large differences between urban and rural areas. The two main problems in the rural sector are the lack of essential public services such as health and education, and cash income due to difficulties in market access for rural products. While the urban areas have better social services and average incomes are higher, the urban poor face difficulties in securing employment and land for residence.

The government has committed to monitor progress towards the Millennium Development Goals (MDGs). Achieving the MDGs by 2015 is still possible, but remains a major challenge. Progress in some areas, such as reducing malaria incidence, maternal mortality, and ensuring environmental sustainability, has so far been inadequate.

Table V.1.

Solomon Islands: Millennium Development Goals Progress

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Sources: World Bank, World Development Indicators; and World Bank Human Development Indicators.
Table V.2.

Solomon Islands: Social Indicators

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Source: World Bank, 2006 World Development Indicators.

Immunization refers to children aged 12-23 months who received vaccinations before one year of age.

VI. Solomon Islands—Statistical Issues

The economic and financial database is poor, which significantly hampers surveillance, particularly for the real, fiscal, and external sectors. Although the National Statistics Office (NSO) is being rebuilt, the central bank (CBSI) continues to publish highly summarized monetary and price data in its Monthly Economic Bulletin and data on all sectors in its Quarterly Review and Annual Report. There is a Solomon Islands page in IFS, but significant updating delays occur, particularly for the balance of payments (BOP), government finance, and national accounts statistics.

Real Sector Statistics

As the NSO has not produced national accounts data since 1994, the task of preparing GDP estimates was taken over by the CBSI. GDP estimates are severely hampered by data availability and quality, and rely on limited sources (primarily commodity exports and employment estimates). Data on production of major export commodities are reported monthly. No breakdown of GDP by expenditure categories exists. A survey of business activities for 2003 covering 1,434 businesses was published by the NSO in August 2006, including employment and financial data for NSO-registered private and government business enterprises. The 2004 business survey is still being finalized.

A 2005–06 Household Income and Expenditure Survey (HIES) completed in September 2006 should help strengthen estimation of GDP. A PFTAC advisor in February 2007 rebased the GDP to 2004 and recalculated the GDP series, but major weaknesses in measuring GDP, primarily the shortage of informal sector data, severely limit the accuracy of GDP estimates, which the authorities have not yet adopted.

The NSO resumed production of the CPI (which currently covers only Honiara, the capital) in August 2003, but the weights are outdated. Using the HIES results, the weights of the Honiara price index are scheduled to be revised in 2007, and eventually, a national CPI measure will be estimated. Limited data on total employment can be obtained from the National Provident Fund. Wage data are not compiled.

Monetary and Financial Statistics (MFS)

The CBSI publishes monthly MFS in summary form and provides more detailed data in its quarterly and annual reports. Monetary statistics had been reported every two months to STA, but now reporting has fallen behind. A November 2005 expert mission, during a PFTAC monetary statistics workshop held in Fiji, reviewed the compilation procedures and provided training and a work plan for the CBSI to comply with the methodology of the Monetary and Financial Statistics Manual and to report data using the standardized report forms (SRFs). However, limited progress has been made on the mission’s recommendations due to the high turnover rate of the CBSI’s monetary statistics team. A PFTAC mission scheduled for July 2007 will assess the progress in the implementation of the 2005 mission’s recommendations, introduce the SRFs, and develop an integrated monetary database that will meet the data needs of the CBSI and the Fund.

Government Finance Statistics (GFS)

The Ministry of Finance (MOF) started monthly press releases on budget outturns in August 2003. However, its expenditure and financing data are not consistent with the GFSM 2001 methodology, and historical data seems unreliable given the breakdown of accounting mechanisms and large expenditure arrears during the conflict. The NSO has developed a prototype GFS system, but problems exist in the coverage of the general government. In particular, data for provincial governments are unavailable and ongoing audits of state enterprises have yet to be completed. The authorities started collecting disbursement information on donors’ grants in 2006. The introduction of the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) database in the CBSI and MOF in March 2005 has improved the quality of official debt data, but coordination problems remain. The MOF does not report annual or subannual GFSM 2001-based data for the Government Finance Statistics Yearbook (GFSY) and the International Financial Statistics (IFS), respectively.

External Sector Statistics

The CBSI estimates partial quarterly BOP data based on cash foreign exchange transactions (FET) reported through the banking system, which are available with a three-month lag. These data are deficient in detail and coverage. A February 2006 PFTAC mission noted a significant deterioration in the net errors and omission item. In addition, “other items” in several categories have increased significantly, indicating a deterioration of data quality. Surveys of enterprises on service and financial flows are conducted to collect supplementary information, but the response rates are very low. The NSO started publishing merchandise trade data in 2005 but there are still coverage issues. A mission from New Zealand in February 2006 began to install PCTrade software in the Customs Department to facilitate the NSO’s use of Customs data to prepare trade statistics. A February 2007 PFTAC mission assisted the authorities in further improving compilation of the BOP and international investment position statistics. The key recommendations were: (i) improve the balance of payments report forms, (ii) maintain regular contact with the most important respondents, (iii) improve coverage and classification in the foreign exchange transactions system, and (iv) further develop the international investment position, including integrating it with other external sector statistics.

Remedial Measures

The NSO is gradually resuming data collection and publication responsibilities, but its effectiveness continues to be hampered by weak technological skills among its staff and low survey response rates. A PFTAC GDDS mission in February 2004 concluded that rebuilding the statistical system will require extensive technical assistance and external funding. Following its recommendations, a new government statistician was appointed in 2004 and a long-term social statistics advisor (18 months)—funded by AusAid and NZAid—took up his post in April 2005. In addition, the NSO and CBSI supported the February 2007 PFTAC mission’s advice to engage an economic statistics advisor to further strengthen compilation. The CBSI is planning to host a STA/PFTAC mission in July 2007 to further develop the monetary statistics.

Preparations for a Demographic and Health Survey started in mid-2006. The Ministry of Tourism, in coordination with NSO, has started a project to measure tourism spending. A population census is planned for late 2009, with preparations expected to commence in 2007. The NSO has requested PFTAC’s assistance to enhance the GFS, and the Secretariat of the Pacific Community’s (SPC) assistance to rebase the CPI.

The February 2006 PFTAC mission identified a number of statistical issues that require attention, including: (i) ensuring that compilation methodologies are applied consistently for GDP and BOP data; and (ii) collecting prices for additional items in the CPI, particularly on diesel fuel and telecommunications products. In the area of the BOP, there is a need to: (i) increase the response rate to enterprise surveys to reduce reliance on FET records; (ii) investigate alternative data to supplement FET data, including the use of official transfers data from the government’s financial accounts; and (iii) review the Customs merchandise data.

Table VI. 1.

Solomon Islands—Common Indicators Required for Surveillance

(As of June 22, 2007)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on Treasury bills, notes and bonds.

Foreign, domestic bank, and domestic non-bank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Detailed BOP data derived from FET through the banking system and trade data from the Customs and Excise Division are available on a quarterly basis with a 3-month and 5-month lag, respectively.

The most recent official data are for 1994, but the central bank has produced real production estimates through 2006.

Includes data received following specific requests by Fund staff.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); and Not Available (NA).

Data on private sector debt is not available.

1/

The Pacific Financial Technical Assistance Centre (PFTAC) in Suva, Fiji, is a regional technical assistance institution operated by the IMF with financial support of the Asian Development Bank, Australia, Japan, Korea, and New Zealand. The Center’s aim is to build skills and institutional capacity for effective economic and financial management that can be sustained at the national level. Member countries are: Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.

2/

The 2005–06 HIES estimates the average population growth rate at 4.4 percent, but the authorities are disputing this.

Same Series

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Cover IMF Staff Country Reports
Solomon Islands: 2007 Article IV Consultation: Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion
Author: International Monetary Fund
Volume/Issue:
Volume 2007: Issue 304
Publisher:
International Monetary Fund
ISBN:
9781451951653
ISSN:
1934-7685
Pages:
72
DOI:
https://doi.org/10.5089/9781451951653.002