Solomon Islands: Staff Report for the 2011 Article IV Consultation, Third Review Under the Standby Credit Facility, and Request for Arrangement Under the Standby Credit Facility—Informational Annex
Author: International Monetary Fund
Publication Date:
19 Dec 2011
eISBN:
9781463929909
Language:
English
Keywords:
ISCR; CR; staff appraisal; debt; SCF arrangement; AsDB assistance; PFTAC TA; country assistance strategy; AsDB Sydney; Fund team; Exchange rate arrangements; Balance of payments statistics; Government finance statistics
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Solomon Islands’ economy has rebounded from the 2008–09 global financial crisis. An 18-month Standby Credit Facility has been approved in June 2010 and succeeded in restoring macroeconomic and financial stability. A new resource taxation regime is the key to reap the benefits from natural resource wealth and ensure that the government receives a fair share of mining revenue. Reforms of mining legislation should be a key part of a broader set of measures to improve the investment climate and the regulatory framework.

Abstract

Solomon Islands’ economy has rebounded from the 2008–09 global financial crisis. An 18-month Standby Credit Facility has been approved in June 2010 and succeeded in restoring macroeconomic and financial stability. A new resource taxation regime is the key to reap the benefits from natural resource wealth and ensure that the government receives a fair share of mining revenue. Reforms of mining legislation should be a key part of a broader set of measures to improve the investment climate and the regulatory framework.

ANNEX I. Solomon Islands—Fund Relations

(As of September 30, 2011)

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:

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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. Implementation of PCDR: Not applicable

X. Exchange Rate Arrangements:

  • The de jure exchange rate arrangement is a conventional peg. The exchange rate of the Solomon Islands dollar is calculated on the basis of a basket of foreign currency but further managed by the Central Bank of the Solomon Islands (CBSI) through interventions on a daily basis to determine its value vis-à-vis the U.S. dollar. At the beginning of June 2008, the Solomon Islands dollar began to depreciate, leaving the peg, before stabilizing around a new level by end-March, 2009. Because there was no discernible pattern during this period, the de facto exchange rate arrangement was classified as other managed. From April 2009 through January 2011, the Solomon Islands dollar remained pegged to the U.S. dollar at SI$8.06 per U.S. dollar. Accordingly, the de facto exchange rate arrangement was reclassified retroactively to a conventional peg from other managed, effective April 1, 2009. Even though the method of exchange rate calculation has not changed, the currency composition and weights of the basket, determined on the basis of the volume and direction of the country’s trade, have been updated, effective February 1, 2011. The exchange rate regime of pegging the Solomon Islands dollar to a basket of currency remains unchanged. After implementation of the updated basket in February 2011, the Solomon Islands dollar began to appreciate and move more freely against the U.S. dollar. Due to the increased flexibility, the de facto exchange rate arrangement has been reclassified to other managed from a conventional peg, effective February 1, 2011.

  • The CBSI determines the exchange rate of the Solomon Islands dollar against the U.S. dollar with a mandatory spread. The CBSI publishes for commercial banks the U.S. dollar/Solomon Islands dollar buying and selling rates and the mandatory spread limits. Under the Central Bank of the Solomon Islands Act, the CBSI may change the exchange rate arrangement only on written instructions from the minister of finance. Solomon Islands maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions.

XI. Safeguards Assessment:

  • Under the Fund’s safeguards assessment policy, the Central Bank of Solomon Islands is subject to a safeguards assessment with respect to the proposed Standby Credit Facility. An earlier safeguards assessment, concluded in October 2010, noted that annual financial statements prepared and audited in accordance with international standards have been timely published. However, a disjointed 2009 audit exercise led to a departure from international standards and highlighted capacity limits in the governance and audit areas. Formal reviews of monetary data are warranted and some operational controls require improvement.

XII. Last Article IV Consultation:

  • The 2009 Article IV Consultation discussions were held in Honiara during July 20–29, 2009. The staff report (IMF Country Report No. 09/309) was considered by the Executive Board and the consultation concluded on October 16, 2009.

XIII. Technical Assistance:

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XIV. Resident Representative:

The resident representative office for the Pacific Islands was opened in September 2010 in Suva, Fiji. Mr. Yongzheng Yang is the Resident Representative.

ANNEX II: Solomon Islands—Support From THE Pacific Financial Technical Assistance Center1

Solomon Islands: PFTAC Country Strategy 2011–13

Background

Solomon Islands has recovered well from a precarious position during the global economic crisis. Growth has accelerated rapidly and international and fiscal reserves increased, mainly on the back of increased logging and mining, but also due to better fiscal management and increased international assistance. The medium-term reform agenda under the Core Economic Working Group emphasizes, amongst other things, strengthening of public financial management in particular with regard to the management of natural resource revenues.

Solomon Islands has been a moderate user of PFTAC TA. Despite the large international presence, mainly through RAMSI which caters for much of the technical assistance needs in the government, PFTAC has made specific technical contributions in particular with regard to the fiscal regime for natural resources. In the PFM area, PFTAC has also contributed to a World Bank-led PER and provided follow up support to a revision of accounting standards. Significant amounts of support have been provided to CBSI in formulating and implementing new prudential regulations for banks and also in developing a more robust inflation forecasting regime.

Strategy 2011–13

PFTAC’s TA strategy is guided by the APD regional strategy note and is planned within the results framework for the current PFTAC funding cycle.2

The main focus of PFTAC TA will be on strengthening fiscal management, particularly with regard to natural resource management and solidifying the financial sector. In the Government area inputs will either be at the strategic/policy level or dealing with niche requirements where IMF/PFTAC has a comparative advantage. Support for implementation is expected to continue to come from other donors, in the context of RAMSI or its successor.

In the Public Financial Management area, following on from participation in the World Bank-led PER the main focus will be assisting the authorities conduct a follow-up PEFA assessment in early-2012. The assessment will lead to revised PFM reform priorities to be taken forward in the context of the CEWG. The process will guide the need for any PFTAC support to implementation, but priorities are likely to be follow-up on accounting reform and development of systems to appropriately manage natural resource revenues (including fiscal responsibility provisions).

In the revenue area, support to the implementation of the fiscal provisions for the mining sector designed with PFTAC TA will be financed by HQ-based trust funds. Solomon Islands has made significant progress in improving revenue administration—it recently was awarded one of two regional awards. The RAMSI TA that assisted in this is expected to continue to take the lead in supporting administration reforms. PFTAC will make resources available to support modernization on income tax legislation and VAT implementation should the authorities choose to pursue this.

In statistics, PFTAC has recently assisted the NSO enhance national accounts and balance of payments statistics. The main focus of follow up TA will be to complement inputs by RAMSI-funded advisors, with a particular focus on methodological improvements on the balance of payments. Support may also be available for expanding the range of aggregates available in the National Accounts. A review of the methodology and data sources for the CPI will be undertaken in early 2012.

In financial sector supervision, making use of PFTAC support, the CBSI has made great strides in improving its regulatory framework and on and off-site supervision. The skills and processes that have been built can now function effectively with a lower level of technical assistance-probably with one short review visit a year from the PFTAC advisor (at around the same time as an on-site exam). Additional support may be required if CBSI opt to implement the Reserve Bank of New Zealand information technology system to enhance supervision.

In the macroeconomic area, work will focus on building macroeconomic modeling and analysis capacity in CBSI with the aim of having better inflation and external forecasts to feed into monetary policy making. Work on developing fiscal forecasts, including for the natural resource sector will continue with the Ministry of Finance, including inputs into their financial programming framework.

ANNEX III: Solomon Islands—Relations With THE World Bank Group

(As of October 2011)

1. The Bank and the Fund teams led by Mr. Vivek Suri (Lead Economist, World Bank Sydney Office) and Ms. Patrizia Tumbarello (IMF Mission Chief for Solomon Islands) maintain a regular dialogue on macroeconomic and structural issues. In recent years, collaborative efforts have focused on the joint Bank-Fund Debt Sustainability Analysis and regular discussions during missions and at headquarters. IMF missions regularly meet Bank staff in the World Bank Honiara office, led by Ms. Edith Bowles (World Bank Country Manager), and at headquarters. Bank staff joined the 2011 IMF Article IV discussions.

2. The teams agree that the key priorities for Solomon Islands include consolidating the recent improvement in the country’s macro-fiscal framework in the face of ongoing volatility in external conditions, improving the quality of public spending to ensure the public resources support the provision of basic social services, and ensuring state owned enterprises can sustainably provide public services.

3. The risks to the economy from slippages in domestic policy decisions or a deterioration in external conditions remain considerable. Ongoing efforts to strengthen Solomon Islands’ economic management and reinforce protective buffers are to be supported. Some policy areas continue to present short-term challenges, particularly regarding the solvency and urgent maintenance needs of the main public utilities.

4. The Bank and Fund teams agree that the focus has shifted to the medium-term reform agenda. Priority issues include developing a more coordinated and prioritized approach to address the weaknesses in public financial management systems, developing new budget allocation baselines that better reflect actual spending patterns and bringing these closer to the priority of improving delivery of social services, and of strengthening the investment climate and improving mining regulation. The Bank agreed to take the lead in public expenditure management framework and structural reform issues and the Fund will continue to take the lead on macro issues.

5. The Banks and Fund teams agree to continue close collaboration, mainly with regular contact through the Bank’s Honiara and Sydney offices, the IMF regional resident representative office in Suva, and at headquarters. The Fund will also continue to collaborate with the government-donor Core Economic Working Group convened regularly in Honiara by the Ministry of Finance and Treasury with World Bank support. Appendix I provides a list of planned activities in the coming year.

Appendix I. Solomon Islands: Bank and Fund Planned Activities, October 2011–September 2012

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ANNEX IV: Solomon Islands—Relations WITH THE Asian Development Bank

(As of October 2011)

Since joining the Asian Development Bank (AsDB) in 1973, Solomon Islands has received 16 loans amounting to US$79.3 million, six grants amounting to US$51.3 million and 65 technical assistance (TA) projects amounting to US$20.55 million. Including cofinanced amounts, AsDB’s ongoing program in Solomon Islands totals $96.1 million. Solomon Islands is eligible for Asian Development Fund (ADF) grants available to countries that are very poor, heavily indebted, or in a post-conflict situation. The AsDB approved ADF grants of US$15.0 million and US$17.0 million in 2009 and 2010, respectively. The 2009–10 ADF allocations for Solomon Islands succeeded in catalyzing substantial grant cofinancing from the governments of Australia and New Zealand, the European Commission, and the Regional Assistance Mission to Solomon Islands (RAMSI).

The AsDB’s country assistance strategy seeks to reduce poverty by promoting equitable private-sector-led economic growth through improved transportation infrastructure and services and a stronger business-enabling environment.1 A new Country Partnership Strategy (2011–15) is being prepared for approval in February 2012. Capacity development and the promotion of good governance are guiding priorities. In light of the global economic turbulences, the AsDB is adjusting its operations to support the government in terms of mitigating the impacts, currently through analytical support and adjustments in the design and delivery of investment projects to increase local content. In line with the improvements in its public debt situation, AsDB assistance is currently provided in a 45:55 ratio mix of grants and concessionary loans, effective 1 January 2011. The government is currently developing the new debt strategy and reviewing the Honiara Club Agreement, aiming to facilitate better access to external borrowing to support much needed infrastructure development.

In transport infrastructure, the AsDB supports the institutional strengthening of the Ministry of Infrastructure Development. Investment projects, all grant funded, include a second Solomon Islands Road Improvement Project (approved in 2009) that is rehabilitating roads and bridges; and a Transport Sector Development Project (approved in 2010). Building on the progress made in earlier transport projects, TSDP has set the stage for a comprehensive transport sector-based approach by implementing and building project management capacities and improving government systems, including procurement and safeguards. The TSDP presents an important step in harmonization and alignment has been the passage, with AsDB assistance, of the National Transport Fund Act in 2009.

Following the 2009 global economic crisis, AsDB provided support for an Economic Recovery Support Program (ERSP)2 in 2010, with the first and second subprogram grants of $5 million each released in April 2010 and September 2011, respectively. The formulation and implementation of the ERSP has been carried out through a joint government-development partner Core Economic Working Group (CEWG) mechanism.3 The ERSP supported reforms aimed at strengthening fiscal management, restoring macroeconomic and fiscal stability to aid economic recovery, enhancing structural reforms, ensuring that the budget accords priority to vulnerable groups, and public consultation. Structural reforms include long-standing areas of ADB business environment support such as improved SOE oversight, telecommunications deregulation, enactment of the Companies Act and an electronic Companies Registry, a Secured Transactions Act and establishment of the Secured Transactions Registry, submission of the national transport fund regulations.

The 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.

Solomon Islands: Loans, Approvals, and Disbursements, 2000–10

(In millions of U.S. dollars)

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Contact person: Eugenue Zhukov, Regional Director, Pacific Liaison and Cooperation Office, AsDB Sydney (ezhukov@adb.org).

ANNEX V. Solomon Islands—Statistical Issues

(As of October 2011)

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Solomon Islands: Table of Common Indicators Required for Surveillance

(As of October 2011)

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Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

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

Foreign, domestic bank, and domestic nonbank 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.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

ANNEX VI. Solomon Islands—Main Websites OF Data

Central Bank of Solomon Islands (www.cbsi.com.sb)

Central bank survey

Depository corporation survey

Financial corporation survey

Monetary aggregates

Treasury bills and Bokolo bills

Exchange rates

Interest rates

Balance of payments

Government budget accounts

Public domestic and external debt

Export and imports

Ministry of Finance (www.mof.gov.sb) and National Statistics Office (www.spc.int/prism/country/sb/stats/Index.htm)

Budget documents

Medium-term fiscal strategy

Central government revenue and expenditure

National accounts

Public domestic and external debt

Consumer price statistics

Exports and imports

Population and housing census

1

The Pacific Financial Technical Assistance Center 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, Timor Leste, Tokelau, Tonga, Tuvalu, and Vanuatu.

2

See PFTAC program document, available at: www.pftac.org. The specific result in the framework that activities target is identified in italics in the section, for example cash management is referred to as (1.6), where 1.6 is the code in the result framework in the program document.

1

The Interim Country Partnership Strategy 2009–11 can be found at <http://www.adb.org/documents/CPSs/SOL/CPS-SOL-2009–2011.pdf>, and the Country Operations Business Plan 2012–2014 at <http://www.adb.org/Documents/CPSs/SOL/2012–2014/cobp-sol-2012–2014.pdf>.

2

ADB. 2010. Report and Recommendation of the President to the Board of Directors on a Proposed Program Cluster and Grant for Subprogram 1, Solomon Islands: Economic Recovery Support Program. Manila (Grant 197-SOL).

3

CEWG development partners include ADB, Australia, the European Union, New Zealand, the Regional Assistance Mission to Solomon Islands, and the World Bank.

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Cover IMF Staff Country Reports
Solomon Islands: 2011 Article IV Consultation, Third Review Under the Stand-by Credit Facility, and Request for Arrangement Under the Stand-by Credit Facility: Staff Report; Staff Supplements; Public Information Notice and Press Releases; and Statement by the Executive Director for Solomon Islands
Author: International Monetary Fund
Volume/Issue:
Volume 2011: Issue 359
Publisher:
International Monetary Fund
ISBN:
9781463929909
ISSN:
1934-7685
Pages:
95
DOI:
https://doi.org/10.5089/9781463929909.002