Solomon Islands: Staff Report for the 2013 Article IV Consultation and Second Review Under the Extended Credit Facility Arrangement and Request for Modification of Performance Criterion—Informational Annex
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
22 Jan 2014
eISBN:
9781484374023
Language:
English
Keywords:
ISCR; CR; debt; ECF arrangement; government; regime; AsDB support; PFTAC mission; TA strategy; PFTAC support; program grant; Government finance statistics; External sector statistics; Balance of payments statistics
Download PDF (591.6 KB)

This 2013 Article IV Consultation highlights that economic growth in Solomon Islands is slowly rebounding from the slowdown of the first half of 2013, when agriculture, logging, and gold production fell, owing mainly to unfavorable weather developments, lower terms of trade, and one-off factors. Real GDP growth is projected at 2.9 percent for 2013 and 4 percent for 2014. Risks are tilted to the downside, including from lower external demand and grants. Inflation has stabilized at about 6.5 percent and is expected to fall gradually as agricultural prices react to the recovery of production.

Abstract

This 2013 Article IV Consultation highlights that economic growth in Solomon Islands is slowly rebounding from the slowdown of the first half of 2013, when agriculture, logging, and gold production fell, owing mainly to unfavorable weather developments, lower terms of trade, and one-off factors. Real GDP growth is projected at 2.9 percent for 2013 and 4 percent for 2014. Risks are tilted to the downside, including from lower external demand and grants. Inflation has stabilized at about 6.5 percent and is expected to fall gradually as agricultural prices react to the recovery of production.

Fund Relations

(As of October 31, 2013)

Membership Status: Joined September 22, 1978; Article VIII

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans:

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Latest Financial Arrangements:

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Projected Payments to Fund1:

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

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Implementation of HIPC Initiative: Not applicable.

Implementation of MDRI Assistance: Not applicable.

Implementation of PCDR: Not applicable

Exchange Rate Arrangements:

The exchange rate arrangement is a conventional peg. The Solomon Islands dollar is pegged to an invoice-based basket of currencies consisting of the U.S. dollar (with the weight of 58 percent), the Australian dollar (32 percent), the New Zealand dollar (5 percent), the Japanese yen (3 percent), and the British pound (2 percent). The Central Bank of Solomon Islands sets the exchange rate vis-à-vis the U.S. dollar in such a way as to maintain the value of the basket constant in Solomon Islands dollars given the movements of currencies in the basket relative to each other. However, the exchange rate of the Solomon Islands dollar against the U.S. dollar is not allowed to deviate from the “base” rate by more than one percent in either direction. This regime was introduced in October 2012, replacing a peg to the U.S. dollar. The initial base rate equaled SBD7.36 per USD, which was the parity under the U.S. dollar peg, but in June 2013 the base rate was adjusted to SBD7.28 per USD. Solomon Islands maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions.

Last Article IV Consultation:

The 2011 Article IV Consultation discussions were held in Honiara during September 29–October 12, 2011. The staff report (IMF Country Report No. 11/359) was considered by the Executive Board and the consultation concluded on November 23, 2011.

Technical Assistance:

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

Support from the Pacific Financial Technical Assistance Center1

Solomon Islands: PFTAC Country Strategy 2013–15

Background

The Solomon Islands has recovered well from a precarious position during the global economic crisis. Growth has accelerated rapidly and international and fiscal reserves increased, 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 reviewed and provided suggestions on a draft PFM law 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 2013-2015

PFTAC’s TA strategy is guided by the APD regional strategy note and is planned within the Results-Based Management (RBM) 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 the results from the 2012 PEFA, the main focus is expected to be assisting the authorities to develop a revised PFM Roadmap in the context of the Core Economic Working Group. The process will guide the need for any PFTAC support to implementation, but priorities are likely to be follow-up on accounting reform, developing implementing instructions for a PFM law approved in 2013, and development of systems to appropriately manage natural resource revenues (including fiscal responsibility provisions). The authorities have also requested assistance with training on Cash Basis IPSAS for provincial governments.

In the revenue area, the Solomon Islands receives significant revenue administration support from New Zealand Inland Revenue Department (NZID) under RAMSI TA and this assistance is expected to continue to be in place for some time. PFTAC has supported the development of natural resources administrative skills through a recent “international tax” regional workshop and is developing a more detailed program that will be carried out in 2014. It is anticipated that Solomon Islands would figure strongly in that program. The 2013 Pacific Islands Tax Administrators Association (PITAA) was held in Solomon Islands in September 2013 and a general review of Solomon Islands TA needs was carried out at that time. The authorities indicated that the development of a new revenue administration regime was under consideration and PFTAC confirmed that it would provide TA to support for this initiative. The authorities were also reminded of an existing PFTAC recommendation to implement a VAT and PFTAC re-affirmed its commitment to support Solomon Islands should it decide to adopt the recommendation.

In financial sector supervision, making use of PFTAC support, the CBSI has made great strides in improving its on-site supervision. As a result of extensive assistance over the past year, supervisors now have the skills and processes to effectively carry out on-site examinations of banking institutions with a lower level of technical assistance-probably with one visit a year from the PFTAC advisor for onsite examination. Additionally support has been provided in September 2013 to the CBSI as they act as the pilot for the implementation of the Reserve Bank of New Zealand’s information technology system to enhance supervision. Technical advisory assistance will also be provided in strengthening the oversight of credit unions.

In statistics, PFTAC has recently assisted the NSO enhance national accounts by incorporating historical business survey results back to 2003 and improving the methodology for the compilation of GDP estimates by production and by expenditures. The main focus of follow-up TA will be to complement inputs by the resident statistics advisor funded by donors, with a particular focus on expanding the range of aggregates available in the national accounts and on future rebase of GDP estimates by production and by expenditures. Methodological improvements and support to further develop external sector statistics and government finance statistics are supported by HQ TA. PFTAC also supported the implementation of the recommendations made by an IMF HQ mission in 2012 to improve the methodology and data sources for the CPI.

In the macroeconomic area, work in previous years has focused 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. In 2012, this was complemented by development of a financial programming framework involving staffs from both the Ministry of Finance and CBSI, based on the macroeconomic framework. Going forward, the task is to provide training in the effective use of this framework as well as deepen skills in macroeconomic analysis and forecasting.

Relations With the World Bank Group

(As of December 2013)

1. The Bank and the Fund teams led by Mr. Robert Utz (Lead Economist, World Bank Sydney Office) and Mr. Luis Breuer (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. Visiting IMF missions regularly meet Bank staff in their Honiara office, led by Ms. Anne Tully (World Bank Country Representative), and at headquarters.

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 public resources support the access to basic social services, improvements in the investment climate to support business development, 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, as are efforts to improve the quality of spending.

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 weaknesses in public financial management systems and ensuring that the reforms achieved to date are sustained and become regular practice, identifying policy reform priorities for fostering inclusive growth and reducing hardship, ensuring budget allocations are better achieve the priority of improving delivery of social services, and of strengthening the climate for investments and including mining regulation. Between the Bank and the Fund, the Bank takes 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 1.

Solomon Islands: Bank and Fund Planned Activities, November 2013–October 2014

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Relations with the Asian Development Bank

(As of November 2013)

Since joining the Asian Development Bank (AsDB) in 1973, Solomon Islands has received 17 loans amounting to US$89.81 million, 9 Asian Development Fund grants amounting to US$68.80 million, and 66 technical assistance (TA) projects amounting to US$23.50 million.

The AsDB’s Country Partnership Strategy (2012–16) was endorsed in March 2012. The strategy seeks to reduce poverty in line with the government’s national development strategy, 2011–20, by promoting equitable private sector-led economic growth through assistance in three core areas: transport, and information and communication technology; public sector management; and energy. Private sector development, capacity development, and the promotion of good governance are thematic priorities.1

In line with the improvements in its public debt situation, Solomon Islands’ borrowing status was changed by the AsDB from grant-only to a 50:50 mix of grants and concessionary loans, as of 1 January 2011.

Transport, and information and communication technology. Building on AsDB’s Transport Sector Development Project, AsDB will continue to support a sector-wide approach to management and development of a multimodal transport system. A proposed Phase 2 of the Transport Sector Development Project will support maintenance and improvement of the national integrated transport network including land (roads and bridges), marine (wharves and ports), and aviation (airport runways and airports) in line with the implementation framework of the national transport plan. Complementary to the transport initiatives, the ongoing Solomon Islands Broadband for Development Project approved in September 2012 also helps improve rural connectivity. The submarine cable system, which will be financed by both sovereign and nonsovereign investments, will deliver good-quality, high-speed internet services at affordable prices to Solomon Islanders in both urban and rural areas.

Public sector management. Fiscal stability and a competitive business environment are essential to fostering private sector-led growth and development. In coordination with development partners and operating through the Core Economic Working Group, AsDB will continue supporting the government-led public sector management reforms with policy-based programs. The main goal of AsDB’s assistance in public sector management is to improve the enabling environment for private-sector led, inclusive growth and development. In line with the Core Economic Working Group medium-term economic and financial reform program, a fourth policy-based program grant has been programed for 2015. This follows AsDB’s program grants approved in 2010, 2011, and 2013. AsDB will continue to provide TA to support public sector management reforms, including commercial legal reform, state-owned enterprise reform, improving access to finance, and implementation of the national development strategy, and support to the government audit functions.

Energy. Access to clean and affordable power is needed to allow producers of commodities and other goods on the outer islands to diversify production and improve livelihoods. AsDB support will complement the efforts of other partners in energy sector reform through sustainable off-grid power services. A pilot project to build small hydropower generators and increase access to modern energy services in selected growth centers is planned for 2014. A power sector development project is planned for 2016, with a preparatory TA project in 2015.

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

Statistical Issues

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Table of Common Indicators Required for Surveillance

(As of November, 2013)

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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 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); and not available (NA).

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

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

Budget documents

Medium-term fiscal strategy

Central government revenue and expenditure

Central government cash balance

National accounts

Consumer price statistics

Exports and imports

1

When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

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 Country Partnership Strategy 2012–16 can be found at <http://www.adb.org/documents/solomon-islands-country-partnership-strategy-2012-2016>, and the Country Operations Business Plan 2014–16 at <http://www.adb.org/documents/solomon-islands-country-operations-business-plan-2014-2016>.

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Cover IMF Staff Country Reports
Solomon Islands: Staff Report for the 2013 Article IV consultation and Second Review Under the Extended Credit Facility Arrangement and Request for Modification of Performance Criterion
Author: International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2014: Issue 012
Publisher:
International Monetary Fund
ISBN:
9781484374023
ISSN:
1934-7685
Pages:
99
DOI:
https://doi.org/10.5089/9781484374023.002