Abstract
KEY ISSUES Recent Developments and Outlook. Solomon Islands held its parliamentary elections on November 19, 2014 and elected a new government led by Prime Minister Manasseh Sogavare, representing the Democratic Coalition for Change. The country’s Gold Ridge mine, its only gold mine, remains closed and the chances of it re-opening are limited given current gold prices. At the same time, the logging industry is being adversely affected by the depletion of forestry resources. As a result, the near-term outlook has worsened. While lower oil prices constitute a windfall to consumers and producers, diversifying sources of growth and boosting the competitiveness of the economy are key to strengthening medium-term growth prospects. The risks to the outlook are to the downside. Program Performance. Performance under the Extended Credit Facility (ECF) arrangement has been broadly satisfactory. Performance criteria for end-June 2014 were met by large margins. Indicative targets (ITs) for end September 2014 were also met, except for those on health and education spending, which were both narrowly missed in June and September 2014. Despite delays, the authorities have made progress in implementing the structural reform agenda. Policy Recommendations ? In the medium term, recalibrate ambitious spending plans in line with implementation capacity, revenue envelope, financing availability, and the need to preserve fiscal buffers for resilience against shocks given the serious setback in mining prospects linked to the closure of the only gold mine. ? Strengthen the quality of public spending and fiscal management by advancing Public Financial Management (PFM) reform, including improving the transparency and accountability in the use of constituency funds. ? Maintain the current monetary stance but stand ready to tighten policy if credit growth and inflationary pressures surge. ? Strengthen financial regulation and supervision, including supervision of the National Provident Fund, and improve private sector access to credit.
On April 10, 2015, the Executive Board of the International Monetary Fund (IMF) completed the fourth review of the Solomon Islands’ economic performance under the Extended Credit Facility (ECF) arrangement.
Completion of the fourth review enables the Solomon Islands to draw an amount equivalent to SDR 0.149 million (about US$0.2 million) immediately, bringing total disbursements under the arrangement to an amount equivalent to SDR 0.743 million (about US$1.02 million).
The three-year ECF arrangement was approved December 7, 2012, in an amount equivalent to SDR 1.04 million (about US$1.59 million), or 10 percent of the country’s quota (see Press Release No. 12/479).
Following the Executive Board’s discussion on the Solomon Islands, Mr. Min Zhu, Deputy Managing Director and Acting Chair, stated:
“Solomon Islands has made enormous strides in strengthening its macro-financial performance and its institutions over the last few years. Fiscal and reserve buffers have been rebuilt, and important reforms, notably public financial management (PFM) and financial sector reforms, are being implemented. However, sources of growth going forward are unclear as result of setback in mining prospects and the depletion of forest resources. While the country has large development needs, fiscal space should be used wisely in 2015, given Solomon Islands’ vulnerabilities to shocks and the uncertain growth outlook.
“The authorities should sustain efforts to advancing Public Financial Management (PFM) reforms, including by improving the transparency and accountability of scholarships and constituency funds and by continuing to strengthen the quality of public spending.
“The current monetary policy stance is appropriate especially as inflationary pressures have remained subdued. The central bank should, however, be ready to tighten if inflationary pressures emerge. The basket peg is an appropriate exchange rate regime for Solomon Islands and the recent removal of the band around the U.S. dollar should help deliver a more stable effective exchange rate and minimize any further erosion of competitiveness.
“Financial soundness indicators are adequate and the authorities’ efforts to further strengthen supervision and regulation should continue. The forthcoming, new National Provident Fund Act and Credit Union Act should help enhance financial sector stability. Ongoing initiatives to promote mobile banking while ensuring adequate supervision and consumer protection will go a long way toward promoting financial inclusion.”