Solomon Islands: Staff Report for the 2016 Article IV Consultation and Fifth and Sixth Reviews Under the Extended Credit Facility Arrangement—Informational Annex
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
23 Mar 2016
eISBN:
9781498371865
Language:
English
Keywords:
ISCR; CR; debt; government; ECF arrangement; deficit; TA strategy; PFTAC TA; PFM reform Roadmap; government-donor Core Economic Working Group; PFTAC support; Balance of payments statistics; Financial statistics
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Solomon Islands is a small island state, a low-income country that is severely affected by external shocks, including commodity price declines, natural disasters, and climate change.

Abstract

Solomon Islands is a small island state, a low-income country that is severely affected by external shocks, including commodity price declines, natural disasters, and climate change.

Fund Relations

(As of January 31, 2016)

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

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. Since the second half of 2014, exchange rate policy management has aimed to keep the value of the basket stable and to avoid real exchange rate misalignment stemming from inflation differentials with trading partners. Solomon Islands maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions. Commercial banks can exchange the Solomon Islands dollar against other currencies and are free to set the bid-ask spread for all currencies except the U.S. dollar and Australian dollar on which there is a spread limit of ±20 and ±25 basis points, respectively. In addition, the central bank maintains a standing facility through which it will buy and sell foreign exchange with commercial banks and the government at spot offer and sell rates.

Last Article IV Consultation:

The 2013 Article IV Consultation discussions were held in Honiara during October 21–November 1, 2013. The staff report (IMF Country Report No. 14/12) was considered by the Executive Board and the consultation concluded on January 8, 2014.

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. Tubagus Feridhanusetyawan is the current Resident Representative.

Support from the Pacific Financial Technical Assistance Centre1

Solomon Islands: PFTAC Country Strategy 2013–17

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.

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 associated implementing instructions, participated in a PEFA assessment, assisted in advocating at both political and technical level the PFM Reform Roadmap, and introductory training on international public sector accounting standards (IPSAS). . 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 2013-2017

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 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 in implementing the PFM Roadmap. Priorities are likely to be on cash management reform, and finalizing implementing instructions for a PFM law approved in 2013. The authorities have also requested assistance with improving non-tax revenue management.

In the revenue area, the Solomon Islands continue to receive significant assistance from New Zealand Inland Revenue Department (NZIRD). This technical assistance, facilitated by the New Zealand Ministry of Foreign affairs (MFAT), is expected to continue over the next few years. Recent activities include: (a) the Solomon Islands Inland Revenue Division (SIIRD) undertaking a comprehensive constraints analysis which provides recommendations to further elevate organizational performance; and (b) a business process mapping exercise geared towards streamlining internal processes. SIIRD staff regularly attend PFTAC facilitated training initiatives under the umbrella of the Pacific Island Tax Administration Association.

In financial sector supervision, making use of PFTAC support provided the CBSI with improved oversight of the financial institution sector. As a result of extensive assistance over the past years, supervisors now have the skills and processes in place to effectively carry out on-site examinations of banking institutions which will, over the next year, result in a more targeted technical assistance from PFTAC’s on-site examination advisors. Additionally support was provided, in late 2013, to the CBSI for their successful implementation of the Reserve Bank of New Zealand’s Financial Sector Information System which resulted in enhanced supervision capabilities. Technical advisory assistance was recently provided by PFTAC, with the support of the IMF Legal Department, with the revision of the Credit Union Act. Additional technical assistance will be delivered to the CBSL in 2016 for building credit union financial reporting standards including strengthening the credit union oversight at the CBSL.

In statistics, PFTAC has provided more frequent assistance to the NSO in recent years. This has been successful in improving local capacity to compile GDP estimates, exemplified in January 2016 by the NSO’s unaided publication of annual GDP estimates, by production and expenditure, for 2014. The coverage and timeliness of data obtained from the business survey and administrative sources, including GFS and overseas aid, have also been improved. The main tasks for future TA will be to assist in rebasing GDP from 2004 to 2012, make further improvements to sources and methodologies and enhance the analytical capabilities of local compilation staff. PFTAC will also liaise with an advisor from the Australian Bureau of Statistics who is assisting the NSO in rebasing and improving the CPI, as had been recommended by an IMF HQ mission in 2012.

In the macroeconomic area, PFTAC is continuing to support the development and use of a financial programming framework involving staffs from both the Ministry of Finance and CBSI. Going forward, the task is to progress debt sustainability analysis, which is an important tool for evaluating and assessing the long-run impact of government policies. Support is also being provided to assist in the construction of quarterly GDP and an output gap measure to gauge inflationary pressures in the economy.

Relations with the World Bank Group

(As of January 2016)

The Bank and the Fund teams led by Mr. Robert Utz (Lead Economist and Program Leader, World Bank Sydney Office) and Mrs. Patrizia Tumbarello (IMF Mission Chief for Solomon Islands) maintain a regular dialogue on macroeconomic and structural issues, as do their respective technical teams. 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.

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 and heightened levels of planned government spending, improving the quality of public spending to ensure public resources support the access to basic social services, improving the investment climate to support business development, and ensuring state-owned enterprises can sustainably provide public services.

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.

The Bank and Fund teams agree that the focus has shifted from post-conflict recovery to the medium-term reform and growth 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 aligned with needs to achieve the priority of improving delivery of social services, and of strengthening the climate for investments, particularly in the mining sector. 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.

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 (January–December, 2016)

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Relations with the Asian Development Bank

(As of January 2016)

Since joining the Asian Development Bank (AsDB) in 1973, Solomon Islands has received 19 loans amounting to US$102.42 million, 11 Asian Development Fund grants amounting to US$81.41 million, and 73 technical assistance projects amounting to US$25.82 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 four core areas: transport; 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 2016, the AsDB is beginning the preparation of a new Country Partnership Strategy which will cover AsDB’s engagement for the 2017–21 period.

In line with 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. Building on AsDB’s existing Transport Sector Development Project, AsDB will continue to support a sector-wide approach to management and development of a multimodal transport system. A proposed Sustainable Transport Infrastructure Improvement Program will promote transport sector development and provide funding to the national transport fund for investment and capacity development activities according to the National Transport Plan, 2011–30.

Information and communication technology. The Broadband for Development Project, 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. The original project was approved in 2012, with additional financing proposed for 2016, once final decisions around project design are made by the government.

Public sector management. 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. A fourth policy-based program grant has been programed by AsDB for 2016. This follows AsDB’s program grants approved in 2010, 2011, and 2013. AsDB will continue to provide technical assistance to support public sector management reforms, including commercial legal reform, state-owned enterprise reform, improving access to finance, and support for the preparation of a new national development strategy.

Energy. AsDB support will complement the efforts of other partners in energy sector reform through sustainable off-grid power services. A project to build a small hydropower plant and increase access to modern energy services was approved in 2014. A solar power development project is planned for 2016, and a further energy project in 2018.

In 2008, AsDB established a development coordination office in Honiara, to strengthen partnerships with the government, and to facilitate coordination with other stakeholders. In 2016, the office will be upgraded to an AsDB Extended Mission, which will further strengthen AsDB’s presence on the ground.

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 February 2016)

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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

The Pacific Financial Technical Assistance Centre 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 2016–18 at <http://www.adb.org/documents/solomon-islands-country-operations-business-plan-2016–2018>.

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Cover IMF Staff Country Reports
Solomon Islands: 2016 Article IV Consultation and Fifth and Sixth Reviews Under the Extended Credit Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for Solomon Islands
Author: International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2016: Issue 090
Publisher:
International Monetary Fund
ISBN:
9781498371865
ISSN:
1934-7685
Pages:
94
DOI:
https://doi.org/10.5089/9781498371865.002