Solomon Islands: Staff Report for the 2008 Article IV Consultation—Informational Annex
Author: International Monetary Fund
Publication Date:
14 Nov 2008
eISBN:
9781451834406
Language:
English
Keywords:
ISCR; CR; debt; price; real GDP; GDP; prototype government finance statistics system; central bank; CBSI's bank supervision department's database; PFTAC expert; PFTAC mission; Balance of payments statistics
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The 2008 Article IV Consultation with Solomon Islands discusses an economic outlook that hinges critically on developing nonlogging sources of growth and exports to offset the expected decline in logging activity. The country remains beset with poor infrastructure, land ownership issues, a shortage of skilled labor, and unreliable and costly basic services. Executive Directors recommended that the central bank seek to develop financial markets further and make greater use of interest rate mechanisms of monetary control. To avoid placing undue burden on monetary policy, fiscal policy needs to play a supportive role.

Abstract

The 2008 Article IV Consultation with Solomon Islands discusses an economic outlook that hinges critically on developing nonlogging sources of growth and exports to offset the expected decline in logging activity. The country remains beset with poor infrastructure, land ownership issues, a shortage of skilled labor, and unreliable and costly basic services. Executive Directors recommended that the central bank seek to develop financial markets further and make greater use of interest rate mechanisms of monetary control. To avoid placing undue burden on monetary policy, fiscal policy needs to play a supportive role.

Annex I: Solomon Islands—The Authorities’ Response to Recent Fund Policy Advice

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Annex II. Solomon Islands—Fund Relations

(As of July 31, 2008)

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 2007 Article IV Consultation discussions were held in Honiara during May 11–22, 2007. The staff report was considered by the Executive Board and the consultation concluded on July 16, 2007.

XI. Technical Assistance:

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XII. Resident Representative: None

Annex III: Solomon Islands—Support From the Pacific Financial Technical Assistance Center1 (As of June 2008)

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. A joint FAD-PFTAC regional mission took place in February-March 2008 and recommended strategies for addressing future revenue needs, and a follow up visit took place in May 2008. 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. The government has indicated that their new AUSDAID/RAMSI advisor will review this in consultation with PFTAC.

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. [A mission in May 2008 provided training to CBSI staff on implementing Basel I and the use of regulatory reporting forms.]

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. In July 2007, a Monetary and Financial Statistics mission visited to assist the authorities in moving towards the MFSM 2000 reporting standards. Over the February 2007-May 2008 period, PFTAC experts assisted the authorities in improving the compilation of balance of payments statistics and revising the GDP data. Future follow up missions include a CPI rebase and import price index mission in August-September 2008 and a BOP and IIP statistics mission in early 2009.

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

Annex IV: Solomon Islands—Relations with the World Bank Group

(As of June 2008)

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 Engagement Framework (2005–2009) 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 approved the Health Sector Support Program Technical Assistance Project worth SDR 1.0 million (US$1.5 million) in March 2008, which will focus on improving public expenditure management, monitoring performance, and building management capacity.

  • Education SWAp: The Bank has co-financed a study to support the development of a National Skills Training Plan. The government has yet to decide on joining the Education for All Fast Track Initiative (FTI). The Bank is not planning any other major operations in the education sector at this stage.

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 improve operational efficiency, system reliability and financial sustainability of SIEA through: improved financial and operational management, reduction of losses, improved generator and distribution system reliability and improved revenue collection. IDA and RAMSI will support the Government by making available an IDA grant to finance the following project components: Strengthening Management. Engagement of two expatriate line managers (an expatriate General Manager with a technical background and a Commercialization Manager) and an overseas Director to be appointed to the Board; Financial Operations. Implementation of a commercialization program for the Finance Department, including new financial management and billing systems and preparation and implementation of a new finance accounting manual with a staff training program, and Technical Operations. Implementation of a loss reduction program, a planned maintenance program for generation facilities in Honiara, and a distribution reinforcement program to increase the availability of existing generation and improve system reliability. Technical project implementation support to SIEA will also be provided, with consultancy services, a technical training program for engineering staff, and establishment of a partnership with the Fiji Electricity Authority. The project is scheduled for World Bank Board approval by June 17, 2008. In preparation for the implementation of the project, the Government has approved a debt restructuring and cross liability adjustment scheme where the SIG will forgive SBD 196.0 million in on-lent loans and SBD 8.5 million in Pay-as-you-earn taxes (PAYE) and custom duties arrears in return for the SIEA to write off SBD 21 million in SOE and arrears of other government authorities, for a net total contribution of SBD 183.5 million (US$25.8 million). In addition, the Government will provide a cash contribution to SIEA of SBD 5 million (US$0.7 million) exemption of duties and taxes on goods and services financed through the project for a total of US$1.65 million. Based on the debt restructuring and the proposed project, the Bank expects that by 2011, SIEA will be in a position to pay taxes and still be profitable. The GEF supported regional renewable energy and energy efficiency project has now started operations in Solomon Islands, two of the major commercial banks are now offering long term loans for SolarPV equipment, making these accessible to a majority of the population.

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. JICA has started to implement a technical restructuring plan at a cost of US$9 million to be completed in three years time.

  • Rural Growth: The Bank has completed the Agriculture and Rural Development Strategy (ARDS) which has been disseminated within the country. The Bank launched the Solomon Islands Rural Development Program (RDP) in February 2008, co-financed by the EU and RAMSI, and implements the main recommendations of the ARDS. Implementation started for four provinces and is scheduled to start in 2010 for the remaining provinces.

Improving Incentives for the Private Sector

  • Telecommunications Sector: The Bank is providing grant-funded technical assistance to the government to examine ways to improve the competitiveness of the sector to reduce telecommunication costs and improve service quality and coverage, in particular outside Honiara. Specifically, the Bank is advising the government on: (a) strategic options for reform, including market liberalization/introduction of competition; (b) preparation of a new telecommunication law; and (c) development of new sector regulations including for rural/universal access. The Bank is ready to assist the government to manage the transition from a monopoly to competition if the Cabinet chooses to renegotiate the current 15-year exclusive license of the incumbent, Our Telekom, on the occasion of the first period review in 2008; and if management of Our Telekom is willing to renegotiate the exclusive license. The Bank is also ready to consider a longer-term program of technical support—possibly through an IDA grant if the government wishes—for development of regulatory capacity and a rural access program.

  • 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 with a review of investment incentives and administrative barriers to business. Preliminary discussions with the Government on the participation of Solomon Islands in the WBG Pacific Regulatory Simplification and Investment Policy and Promotion Program are ongoing.

Annex V: Solomon Islands—Relations with the Asian Development Bank

(As of June 2008)

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. 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. AsDB approved ADF grant in the amount of $350,000 in 2006 and $4.95 million in 2007. The 2005–06 and 2006–2008 ADF allocations for Solomon Islands succeeded in catalyzing substantial bilateral grant cofinancing for the improvement of rural roads and wharves (an additional $16.5 million in cofinancing from Australia and New Zealand and an additional $4 million in cofinancing from the European Commission).

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.2 Capacity development and the promotion of good governance are priorities. AsDB assistance is currently 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.

AsDB has committed substantial support through an ADF grant funded Emergency Assistance Project 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. The project will include the repair of priority unsealed roads and watercourse crossings; replacement of bridges; reconstruction of wharves and jetties; and reconstruction of the Gizo town water supply and sanitation system.

AsDB currently has ongoing TA projects in the areas of institutional strengthening of the Ministry of Infrastructure and Development, inter-island transportation, private sector participation, business law reform, and secured transactions reform. AsDB’s Post-conflict Emergency Rehabilitation Project, which helped rehabilitate about 140km of roads and 51 bridges on Guadalcanal and Malaita damaged during the civil conflict (1999–2002) was completed on 31 March 2008. The Solomon Islands Road Improvement Project, approved in 2006 as an ADF grant with significant bilateral grant cofinancing, helps to 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, 1999–2007

(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).

Annex VI: Solomon Islands—Poverty and Human Development Indicators

Social indicators of poverty and human development remain low in the Solomon Islands. The country ranks 129 out of 177 countries in the 2007/08 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.3

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 VI.1.

Solomon Islands: Millennium Development Goals Progress

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Sources: World Bank, World Development Indicators and World Bank Human Development Indicators.
Table VI.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.

Annex VII: Solomon Islands—Statistical Issues

Data provision has serious shortcomings that significantly hamper surveillance, particularly for the real, fiscal, and external sectors. Although the National Statistics Office (NSO) is being rebuilt, the Central Bank of Solomon Islands (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

GDP estimates are currently prepared by the CBSI. Despite several TA missions by PFTAC, GDP estimates remain severely hampered by data availability and quality, and rely on limited sources (primarily commodity exports and employment estimates). 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. A 2005–06 Household Income and Expenditure Survey (HIES) was completed in September 2006. Data on production of major export commodities are reported monthly. No breakdown of GDP by expenditure categories exists.

GDP was rebased to 2004 with the help of a PFTAC advisor in February 2007. More recently, the May 2008 PFTAC mission provided further assistance in finalizing the 2003 and 2004 National Account estimates, as well as developing preliminary estimates for 2005 and 2006.

The NSO produces the CPI, which currently covers only the capital Honiara. Using the HIES results, the weights of the Honiara price index were revised in 2007; and the authorities plan to compile a national CPI measure, which will initially cover major provinces in the near future. To this end, the NSO has already constructed a list of commodities to be covered by weight, but the collection of actual price data has yet to commence. Limited data on total employment can be obtained from the National Provident Fund. Wage data are not compiled. The Ministry of Tourism, in coordination with NSO, has launched a visitors’ survey in early 2008 to measure tourism spending.

Monetary and Financial Statistics (MFS)

The CBSI publishes monthly MFS in summary form and provides more detailed data in its quarterly and annual reports. Reporting of monetary statistics to the Fund has improved recently, but still has a lag of about two months. A November 2005 expert mission, during a PFTAC monetary statistics workshop held in Fiji, reviewed the collection and 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). A July 2007 mission found that limited progress had been made in implementing the 2005 mission’s recommendations due to the high turnover rate of the CBSI’s monetary statistics team. The mission introduced the SRF for the central bank, and initiated the development of an integrated monetary database that will meet the data needs of the CBSI and the Fund. A follow-up mission is scheduled for early 2009 to introduce the SRF for the other depository corporations based on a soon to be introduced call report form to collect balance-sheet data from reporting corporations.

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 seem unreliable given the breakdown of accounting mechanisms and large expenditure arrears. 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 statistics based on cash foreign exchange transactions, reported through the banking system, which are available with a three-month lag. These data are deficient in detail and coverage, and classification problems remain. An April 2008 PFTAC-TA mission found the Customs trade data lacking in accuracy, helped the CBSI carry out surveys, and introduced appropriate changes in methodology. As a result, the BOP data have been revised quite significantly.

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. The authorities have agreed on an action plan with the recent PFTAC-TA mission to implement measures to effectively move the responsibility for national accounts statistics back to the NSO in 2009.

Looking forward, the authorities need to focus on a number of statistical issues identified by various PFTAC-TA missions, 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 trade data.

Table VII. 1.

Solomon Islands—Common Indicators Required for Surveillance

(As of August 20, 2008)

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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.

Data on private sector debt is not available.

Includes external gross financial asset and liability positions vis a vis nonresidents.

Includes data received following specific requests by Fund staff.

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

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 Country Strategy and Program Update 2007–09 can be found at www.adb.org/Documents/CSPs/SOL/2006, and the Country Operations Business Plan 2008–2010 at http://www.adb.org/Documents/CSPs/SOL/2007/COBP-SOL-2007.pdf.

3

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

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Cover IMF Staff Country Reports
Solomon Islands: 2008 Article IV Consultation-Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion
Author: International Monetary Fund
Volume/Issue:
Volume 2008: Issue 358
Publisher:
International Monetary Fund
ISBN:
9781451834406
ISSN:
1934-7685
Pages:
62
DOI:
https://doi.org/10.5089/9781451834406.002