Solomon Islands : Requests for Purchase under the Rapid Financing Instrument and Disbursement Under the Rapid Credit Facility—Debt Sustainability Analysis

Requests for Purchase under the Rapid Financing Instrument and Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Solomon Islands

Abstract

Requests for Purchase under the Rapid Financing Instrument and Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Solomon Islands

The updated DSA after the COVID-19 shock suggests Solomon Islands remains at moderate risk of debt distress for both the external and overall public debt. All external debt indicators remain below the relevant indicative thresholds under the baseline scenario but breach thresholds under the extreme stress test scenario (combination shock for the PV of debt-to-GDP and export shock for the PV of debt-to-export and the debt services to export ratio). The PV of public debt-to-GDP ratio remains below the 55 percent benchmark under the baseline scenario, and it would remain below the benchmark under the most extreme shock (real GDP growth) till 2030. A tailored natural disaster shock of similar scale to the largest shock in Solomon Islands’ history would cause a spike in debt trajectory in the aftermath of the event. While the DSA suggests there is substantial space to absorb shocks, Solomon Islands often faces fiscal liquidity challenges due to weak public financial management and the cash balance is currently low. Going forward, stronger revenue mobilization measures and expenditure rationalization are needed to rebuild fiscal buffers and to enhance resilience against shocks.

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Table 1.

Solomon Islands: External Debt Sustainability Framework, Baseline Scenario, 2016–2039

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r – g – ρ(1+g) + Ɛα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt.3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Solomon Islands: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–2039

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The central government, central bank, government-guaranteed debt. Definition of external debt is Residency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Figure 1.
Figure 1.

Solomon Islands: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2019–2029 1/

Citation: IMF Staff Country Reports 2020, 190; 10.5089/9781513546599.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Solomon Islands: Indicators of Public Debt Under Alternative Scenarios, 2019–2029

Citation: IMF Staff Country Reports 2020, 190; 10.5089/9781513546599.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Solomon Islands: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2020, 190; 10.5089/9781513546599.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Solomon Islands: Realism tools

Citation: IMF Staff Country Reports 2020, 190; 10.5089/9781513546599.002.A002

Figure 5.
Figure 5.

Solomon Islands: Qualification of the Moderate Category, 2019–2029 1/

Citation: IMF Staff Country Reports 2020, 190; 10.5089/9781513546599.002.A002

Sources: Country authorities; and staff estimates and projections.1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.
Table 3.

Solomon Islands: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–2029

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 4.

Solomon Islands: Sensitivity Analysis for Key Indicators of Public Debt 2019–2029

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

Debt coverage has remained unchanged compared to the 2019 DSA (IMF Country Report No. 20/49).

2

The updated DSA uses the rebased GDP series with 2012 as the base year. The rebased GDP level is approximately 13 percent higher than the previous GDP series with 2004 as the base year.

3

The Composite Indicator score is 2.72, which is based on the October 2019 WEO and the World Bank’s 2018 CPIA, and the country’s debt-carrying capacity is assessed to be medium.

4

Solomon Islands has not requested participation in the G20 Debt Service Suspension Initiative (DSSI).

Solomon Islands: Requests for Purchase under the Rapid Financing Instrument and Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Solomon Islands
Author: International Monetary Fund. Asia and Pacific Dept
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    Solomon Islands: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2019–2029 1/

  • View in gallery

    Solomon Islands: Indicators of Public Debt Under Alternative Scenarios, 2019–2029

  • View in gallery

    Solomon Islands: Drivers of Debt Dynamics – Baseline Scenario

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    Solomon Islands: Realism tools

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    Solomon Islands: Qualification of the Moderate Category, 2019–2029 1/