Solomon Islands: Staff Report for the 2017 Article IV Consultation—Informational Annex
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
05 Mar 2018
eISBN:
9781484344583
Language:
English
Keywords:
ISCR; CR; center; government; debt; Solomon Islands government economic reform priority; TA strategy; IFC TA; governance Analytics; PFTAC support; financial asset; Government finance statistics; External sector statistics; Balance of payments statistics; Pacific Islands
Download PDF (372.5 KB)

2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Solomon Islands

Abstract

2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Solomon Islands

Fund Relations

(As of November 30, 2017)

Membership Status: Joined September 22, 1978; Article VIII

General Resources Account:

article image

SDR Department:

article image

Outstanding Purchases and Loans: SDR Million Percent Quota

article image

Latest Financial Arrangements:

article image

Projected Payments to Fund:1

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

article image

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 CCR: 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 2016 Article IV Consultation discussions were held in Honiara during January 19–28, 2016. The staff report (IMF Country Report No. 16/90) was considered by the Executive Board and the consultation concluded on March 21, 2016.

Technical Assistance:

article image
article image
article image

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 2017–18

Background

Solomon Islands has made considerable gains in establishing macroeconomic stability and strengthening institutions in the past six years. Growth has been solid and international reserves are at comfortable limits However, Solomon Islands faces numerous challenges common to many small states in the Pacific—it is remote, highly vulnerable to natural disasters and climate change, has a narrow production base, a large infrastructure gap, and administrative capacity constraints. The government is gearing up for elections in early 2019 and the fiscal position has deteriorated. The reform agenda, amongst other things, emphasizes strengthening of public financial management, revenue mobilization, financial sector supervision and macro-economic statistics.

Solomon Islands has been a significant user of PFTAC TA, being the third and fourth largest recipient of PFTAC support in FY17 and FY18 respectively. PFM focus has been on finalizing and rolling-out the PFM roadmap, with more recent emphasis on strengthening cash management. A recently launched government tax review is expected to impact significantly on future PFTAC revenue support depending on policy options considered. Financial sector assistance is focused on a prudential supervision framework. In statistics, considerable TA has been provided to build GDP compilation capacity and recent missions have supported work to rebase GDP from 2004 to 2012. Significant amounts of support have been provided to CBSI in formulating and implementing new prudential regulations for banks and in developing inflation forecasting and a macroeconomic programming framework.

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.

In the Public Financial Management area, following on the results from the 2012 PEFA, the focus of PFTAC TA in the last two years was in preparation of the PFM Roadmap and assisting with the delivery of awareness and advocacy seminars for key stakeholders. For FY18, PFTAC TA focuses on cash management reform. Assistance is also anticipated to update Finance Instructions based on the 2013 PFM Act. In the medium-term, PFTAC is ready to support other reforms such as improving fiscal oversight of state-owned enterprises, and improving budget documentation.

In the revenue area, the Finance Minister recently approved the launch of a Tax Review as part of the Government’s fiscal reforms. The tax review will be undertaken in stages over three years and includes: (1) a review of tax administration and consumption taxes; (2) a review of income tax; and (3) a review of other taxes. Stage one public consultations have already commenced and are being facilitated through a consultative committee which includes representatives from the private sector, civil society, Inland Revenue, and Customs. On the operational front PFTAC assisted in the design of a strategy aimed at strengthening on-time filing, payment of tax arrears, and securing outstanding returns. Although some progress has been made the authorities have requested additional TA to facilitate implementation. TA previously provided by New Zealand’s Inland Revenue is currently being phased out which may necessitate PFTAC playing a bigger future role in modernizing revenue administration.

In financial sector supervision, PFTAC and the CBSI recently conducted a diagnostic of the structure and operation of the CBSI’s prudential supervision framework with the intention to commence a supervision framework enhancement program to improve the operational efficiency and effectiveness of the CBSI’s supervision. The proposed program will focus TA over the next few years on key areas of supervision: prudential standards, off-site risk analysis, risk-rating and supervisory action planning. PFTAC has also assisted the CBSI in its ongoing credit union supervision work.

In statistics, PFTAC has provided more frequent assistance to the NSO in recent years, successfully building independent, local capacity. The coverage and timeliness of data obtained from the business survey and administrative sources, including GFS and overseas aid, have also been improved. Three missions in 2016/2017 assisted with rebasing GDP from 2004 to 2012; draft results are still under review by the NSO but are due to be published by end-2017. PFTAC is sharing rebasing findings with the Australian Bureau of Statistics, which is developing broader, reweighted CPI measure. Future work will focus on improving business survey processing and expanding data sources. Through October 2015 the Solomon Islands received technical assistance on GFS under the IMF HQ Japan Administered Account. Since the completion of this program, PFTAC started to support capacity development in GFS. Improvements were made by reconciling administrative data with GFS data for the budgetary central government. PFTAC’s support aims at expanding coverage and compiling GFS for the general government in the Solomon Islands. PFTAC is funding an ESS TA mission later in FY17.

In the macroeconomic area, PFTAC is continuing to support the development and use of a macroeconomic 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 October 2017)

The Bank and the Fund teams led by Mr. Robert Utz (Lead Economist and Program Leader, World Bank Sydney Office) and Mrs. Alison Stuart (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 Mr. Guido Rurangwa (World Bank Country Representative for Solomon Islands and Vanuatu), and at headquarters.

The teams agree that the key priorities for Solomon Islands include consolidating the recent improvement in the country’s macroeconomic framework in the face of ongoing susceptibility to volatility in external conditions. The teams also agree that, in the context of continued heightened levels of realized and planned government spending, there is need to improve the quality of public spending to ensure public resources support the access to basic social services, improve the investment climate to support business development, and ensure 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 and fiscal management and reinforce protective buffers are to be supported, as are efforts to improve the transparency in the use of public funds and 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—particularly in the face of a likely decline in log output. 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, reducing hardship and increasing resilience to climate change, 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 broader development partner community. Appendix I provides a list of planned activities in the coming year.

Bank and Fund Planned Activities

(January-December, 2017)

article image

Relations with the Asian Development Bank

(As of October 2017)

Since joining the Asian Development Bank (AsDB) in 1973, Solomon Islands has received 19 loan projects amounting to $123.42 million, 15 grant projects totaling $160.52 million, and 75 technical assistance projects totaling $31.2 million.

The Pacific Approach, 2016–20 serves as the operational framework of AsDB for the Pacific region and the overall country partnership strategy for the 11 smaller Pacific island countries, including Solomon Islands (referred to by AsDB as the “PIC-11”).

The Pacific Approach outlines a three-pronged strategy that focuses on reducing costs, managing risks, and enabling value creation. These three strategic priorities are applicable to all Pacific Island countries and are especially relevant for the PIC-11. It is intended to be read in conjunction with the PIC-11 country operations business plans and associated country strategic analyses, as well as the regional operations business plan for the Pacific region.

AsDB’s country operations business plan (COBP) for 2017–19 for Solomon Islands continues AsDB’s support to three sectors: energy, public sector management, and transport. The COBP includes water and other urban infrastructure and services as a new sector for AsDB involvement.1

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

Transport. Building on AsDB’s existing Transport Sector Development Project, AsDB is continuing to support a sector-wide approach to management and development of a multimodal transport system. AsDB’s Sustainable Transport Infrastructure Improvement Program promotes transport sector development and provides funding to the national transport fund for investment and capacity development activities in line with the National Transport Plan, 2011–30.

Public sector management. In coordination with development partners, AsDB will continue supporting 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 fifth policy-based program grant has been programed by AsDB for 2018. This follows AsDB’s program grants approved in 2010, 2011, 2013, and 2016.

Energy. AsDB support will complement the efforts of other partners in the energy sector. A project to build a small hydropower plant and increase access to modern energy services was approved in 2014, but implementation has been slow due to land ownership issues. A solar power development project was approved in 2016, and a new hydropower project is proposed for approval of AsDB financing in December 2017, to supplement financing from other partners.

Water and urban infrastructure. This is a new sector AsDB is assisting in 2017. A project preparatory technical assistance was approved in 2017 to prepare an urban sector development project for approval 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 was upgraded to an AsDB Extended Mission, further strengthening 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 Regional Department in Manila.

Statistical Issues

article image

Solomon Islands—Table of Common Indicators Required for Surveillance

(As of December 2017)

article image

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.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Solomon Islands: 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Solomon Islands
Author: International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2018: Issue 057
Publisher:
International Monetary Fund
ISBN:
9781484344583
ISSN:
1934-7685
Pages:
83
DOI:
https://doi.org/10.5089/9781484344583.002