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Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2018 Article IV consultation with Solomon Islands, the following documents have been released and are included in this package:

  • Press Release summarizing the views of the Executive Board as expressed during its October 29, 2018 consideration of the staff report that concluded the Article IV consultation with the Solomon Islands.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on October 29, 2018, following discussions that ended on July 31, 2017, with the officials of the Solomon Islands on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on October 4, 2018.

  • An Informational Annex prepared by the IMF staff.

  • A Debt Sustainability Analysis prepared by the staffs of the IMF and International Development Association (IDA).

  • A Statement by the Executive Director for the Solomon Islands.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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© 2018 International Monetary Fund

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Solomon Islands: Staff Report for the 2018 Article IV Consultation

October 4, 2018

Key Issues

Context. Solomon Islands has made substantial progress since the Tensions in the early 2000s but faces considerable economic and governance challenges and is highly vulnerable to natural disasters. The logging industry confronts depletion and new sources of growth are needed. Governance challenges are significant, stemming from weak oversight of the resource sectors, a lack of transparency and a need to strengthen public financial management.

Article IV Consultation. The consultation focused on restoring fiscal buffers to build resilience, strengthening public financial management, improving governance, implementing structural reforms and investing in new sources of growth to replace logging and to sustain incomes for a growing population. Staff also emphasized the need to clear the backlog of financial sector regulatory reform.

Policy recommendations:

  • Clear government expenditure arrears and rebuild fiscal buffers to enhance resilience to shocks. Once fiscal buffers are restored, adopt an operational fiscal target to guide annual budgets and maintain fiscal discipline.

  • Realign spending priorities in line with the National Development Strategy; streamline in areas that have risen sharply in recent years; and improve transparency.

  • Advance public financial management and tax reforms to improve spending and revenue efficiency. Strengthening tax compliance and reduce tax arrears.

  • Modestly tighten the monetary policy stance by mopping up structural excess liquidity. Maintain the basket exchange rate peg, with annual reviews to keep the currency basket in line with fundamentals.

  • Implement structural reforms to encourage greater private sector involvement in supporting sustained growth and generating new growth sectors. Push ahead with the anti-corruption agenda.

  • Strengthen financial stability by completing outstanding financial sector reforms and legislation.

Approved By

Odd Per Brekk and Yan Sun (SPR)

Discussions took place in Honiara during July 18–31, 2018. The staff comprised of Ms. Alison Stuart (head), Ms. Kaendera, Mr. Nishizawa (all APD), and Ms. Hunter (Resident Representative, Pacific Islands). Mr. Kikiolo (OED) joined the mission. The PFTAC coordinator, Mr. David Kloeden and staff attended some meetings and followed up on capacity development. Executive Director Mr. Jang (OED) attended concluding meetings. The mission met with Prime Minister Hon. Rick Houenipwela, Central Bank Governor Denton Rarawa, Permanent Secretary Ministry of Finance and Treasury Harry Kuma, and other government officials, donors, the private sector, Transparency Solomon Islands and CSOs. Ms. Zhang and Ms. Ibrahim provided research and editorial assistance for this report.

Contents

  • CONTEXT

  • RECENT DEVELOPMENTS

  • OUTLOOK, RISKS, AND VULNERABILITIES

  • POLICY DISCUSSION: PRIORITIES FOR STABILITY

  • A. Managing the Fiscal Position

  • B. Monetary Policy and Exchange Rate Management

  • C. Financial Stability and Governance

  • PRIORITIES TO PROMOTE GROWTH

  • A. Encouraging New Growth Areas and Structural Reforms

  • B. Governance of the Logging and Mining Sectors

  • C. Financial Inclusion in Support of Climate Change Adaptation

  • D. Other Issues

  • STAFF APPRAISAL

  • BOX

  • 1. Logging Developments

  • FIGURES

  • 1. The Cross-Country Context

  • 2. Macroeconomic Developments and Outlook

  • 3. Fiscal Indicators

  • 4. Money and Credit Developments

  • 5. Financial Access and Inclusion

  • 6. Constituency Development Fund (CDF)

  • TABLES

  • 1. Selected Economic Indicators 2014–23

  • 2a. Summary of Fiscal Accounts (in millions of Solomon Islands Dollars)

  • 2b. Summary of Fiscal Accounts (in percent of GDP)

  • 3. Balance of Payments, 2014–23

  • 4. Summary Accounts of the Banking System, 2014–23

  • 5. Indicators of Capacity to Repay the Fund, 2018–27

  • 6. Alternative Policy Action Scenario 2018–21

  • APPENDICES

  • I. Authorities’ Response to Fund to Policy Advice

  • II. SDGs Identified in the 2016–35 National Development Strategy (NDS)

  • III. Risk Assessment Matrix

  • IV. PPG External Debt Under Alternative Scenarios 2018–28

  • V. Economic Impact of the Loss of CBR

  • VI. Public Investment Management Assessment (PIMA)

  • VII. External Sector Assessment

  • VIII. Financial Inclusion and Climate Change

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October 4, 2018

Prepared By

Asia and Pacific Department

(In consultation with other departments)

Contents

  • FUND RELATIONS

  • RELATIONS WITH OTHER IFIS

  • STATISTICAL ISSUES

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October 4, 2018

Approved By

Odd Per Brekk (IMF) John Panzer (IDA)

Prepared By the staff of the International Monetary Fund and the International Development Association

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The external risk of debt distress for Solomon Islands remains moderate. All external debt indicators remain below the relevant indicative thresholds under the baseline scenario, which incorporates the average long-term effects of natural disasters on growth, the fiscal balance, and the current account balance. However, an export shock would cause a prolonged breach of the threshold for the PV of PPG external debt-to-GDP ratio.

The overall risk of debt distress is assessed as moderate, with the risk reflecting a deteriorating fiscal position. Though the PV of total public debt-to-GDP ratio remains below the 35 percent benchmark under the baseline scenario, the nominal debt-to-GDP ratio would breach the authorities’ target of 35 percent in 2028. Moreover, a shock to real GDP has the greatest impact on the PV trajectory, placing risk at moderate. A tailored natural disaster shock, which uses similar scale to the largest shock in Solomon Islands’ history, causes a significant deterioration in debt sustainability in the aftermath of the event. To rebuild fiscal buffers and to enhance resilience against shocks, including natural disaster shocks, both stronger revenue mobilization measures and expenditure rationalization are needed. While the mechanical signal of the DSA suggests there is space to absorb a shock, staff assess such space to be limited, as there are fiscal cashflow problems which are acute, with rising domestic expenditure arrears and a very low cash balance. The sharp cut in development spending for 2018 looks difficult to fully achieve given a significant infrastructure investment gap; and although the authorities made efforts to clear arrears through the Supplementary budget, staff expect pressure on domestic expenditure arrears to reemerge later in the year.

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Press Release No. 18/413

FOR IMMEDIATE RELEASE

November 8, 2018

International Monetary Fund

Washington, D.C. 20431 USA

Telephone 202–623–7100

Fax 202–623–6772

www.imf.org