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IMF Country Report No. 20/49

SOLOMON ISLANDS

2019 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE SOLOMON ISLANDS

February 2020

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 2019 Article IV consultation with Solomon Islands, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its February 5, 2020 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 February 5, 2020, following discussions that ended on November 11, 2019, 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 January 21, 2020.

  • An Informational Annex prepared by the IMF staff.

  • A Debt Sustainability Analysis prepared by the staffs of the IMF and the 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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Price: $18.00 per printed copy

International Monetary Fund

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© 2020 International Monetary Fund

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SOLOMON ISLANDS

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION

January 21, 2020

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. Finding new sources of growth is becoming urgent with the decline in logging. Budget pressures are re-emerging; revenues have weakened while spending has picked up, including a sharp increase in payroll. Governance challenges stem 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 similar issues to last year— restoring fiscal buffers to build resilience, strengthening public financial management and public investment management, setting a medium-term fiscal strategy, improving governance, improving exchange rate management and building conditions for sustainable growth.

Policy Recommendations:

  • Take fiscal policy measures to sustain a fiscal cash balance at or above two months of total spending. This requires both revenue and expenditure measures, with spending prioritized in line with the National Development Plan. Pacific Games investment should be contained and should aim at delivering legacy benefits.

  • Develop a holistic approach to medium-term fiscal policy by setting a realistic spending envelope and establishing a medium-term revenue strategy. Together with strengthened budget planning and expenditure control, this would provide greater budget predictability and support natural disaster contingency planning.

  • Maintain the exchange rate basket peg but improve exchange rate management by reviewing the basket’s composition on a regular basis.

  • Strengthen enforcement of governance standards, apply the mining fiscal regime rigorously, improve transparency and advance the anti-corruption agenda.

  • Generate new sources of growth. The new undersea internet cable could open up opportunities for development with sound regulatory framework, and appropriate investment in human capital and physical infrastructure.

Approved By

Jonathan D. Ostry (APD) and Yan Sun (SPR)

Discussions took place in Honiara during October 30–November 11, 2019. The staff team comprised Alison Stuart (head), Stella Kaendera, Charlotte Sandoz, and Vybhavi Balasundharam (all APD). Leni Hunter (Resident Representative, Pacific Islands) and Michael Kikiolo (OED) joined part of the mission. Executive Director Nigel Ray (OED) attended concluding meetings. The mission met with Prime Minister (PM) Hon. Manasseh Sogavare, Minister of Finance and Treasury Harry Kuma, Central Bank Governor Luke Forau and other government officials, representatives from the private sector, civil society organizations, and development partners. Haopeng Xu, Nadine Dubost, and Kristine Laluces provided research and editorial assistance for this report.

Contents

  • CONTEXT

  • RECENT DEVELOPMENTS

  • OUTLOOK, RISKS, AND VULNERABILITIES

  • POLICY DISCUSSION: MAINTAINING STABILITY

  • A. Fiscal Management and Resilience Building

  • B. Medium-Term Fiscal Policy Strategy

  • C. Monetary and Exchange Rate Policy

  • D. Financial Stability and Financial Sector Reforms

  • PROMOTING GROWTH

  • A. Encouraging New Growth Areas and Structural Reforms

  • B. Governance

  • C. Financial Sector Development and Inclusion

  • OTHER ISSUES

  • STAFF APPRAISAL

  • 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, 2015–24

  • 2a. Summary of Fiscal Accounts, 2016–24 (In millions of Solomon Islands Dollars)

  • 2b. Summary of Fiscal Accounts, 2016–24 (in percent of GDP)

  • 3. Balance of Payments, 2015–24

  • 4. Summary Accounts of the Banking System, 2015–24

  • 5. Core Financial Soundness Indicators, 2014–18

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

  • 7. Fiscal Adjustments to Fiscal Balance, 2019–23

  • ANNEXES

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

  • II. Authorities’ Response to Fund Policy Advice

  • III. Risk Assessment Matrix

  • IV. Indicators of Public Debt Under Alternative Scenarios, 2019–29

  • V. External Sector Assessment

  • VI. TA Priorities for FY20

  • VII. Medium- and Long-Term Growth Opportunities

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SOLOMON ISLANDS

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX

January 21, 2020

Prepared By

Asia and Pacific Department

(In consultation with other departments)

Contents

  • FUND RELATIONS

  • RELATIONS WITH OTHER IFIS

  • STATISTICAL ISSUES

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SOLOMON ISLANDS

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION— DEBT SUSTAINABILITY ANALYSIS1

January 21, 2020

Approved By

Jonathan. D. Ostry (IMF) Marcelo Estevão (IDA)

Prepared by the staffs of the International Monetary Fund and the International Development Association

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The external risk of debt distress rating for Solomon Islands has been maintained at moderate, given the high uncertainty surrounding medium-term growth prospects and the possibility of debt-financed spending for the Pacific Games. All external debt indicators remain below the relevant indicative thresholds under the baseline scenario but breach thresholds under the extreme stress test scenario (export shock). In a downside scenario, with a sharper decline in logging activities in 2020 and additional loans for the Pacific Games, an export shock would cause a prolonged breach of the thresholds of both the PV of external debt-to-GDP ratio and debt-to-exports ratio. The overall risk of debt distress remains moderate, reflecting a deteriorating fiscal position. Although the PV of public debt-to-GDP ratio remains below the 55 percent threshold under the baseline scenario, it would breach the threshold under the most extreme stress test (real GDP growth) from 2025 until the end of the projection period. A tailored natural disaster shock, which uses a shock of 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, both stronger revenue mobilization measures and expenditure rationalization are needed. Although the DSA suggests there is space to absorb a shock, Solomon Islands often faces fiscal liquidity problems due to weak public financial management and the cash balance is currently at a low level.

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Press Release No. 20/55

FOR IMMEDIATE RELEASE

February 18, 2020

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