The external risk of debt distress in the Solomon Islands remains moderate, consistent with the 2016 assessment. Under the baseline scenario—adjusted for the average long-term effects of natural disasters on growth, the fiscal balance, and the current account balance— all external debt indicators remain below the relevant policy-dependent indicative thresholds. The baseline is subject to significant risks with sizable and protracted breaches of thresholds from a shock to financing terms. Adding domestic debt to the analysis does not alter the overall risk of debt distress, although the baseline rapidly approaches the indicative threshold under the public debt-to-GDP ratio towards the end of the projection period. That said, public debt is on an upward trajectory and could rise above the authorities’ nominal public debt limit of 30 percent of GDP by 2028. A shock to real GDP growth would cause a significant breach of the public debt-to-GDP threshold.
Since Solomon Islands is highly vulnerable to natural disasters, the analysis has been complemented with a stress test of a single severe natural disaster occurring in 2018—of similar scale to the largest shock in Solomon Islands’ history. Debt sustainability deteriorates in the aftermath of the event and growth declines with public debt to GDP ratio rising close to the threshold.
Solomon Islands fiscal performance has deteriorated recently, adding to prospective vulnerability. Fiscal buffers have been eroded and domestic arrears are accumulating. Both revenue raising measures and expenditure control measures are required to place the fiscal position on a firmer footing and to enable Solomon Islands to respond to shocks.