Solomon Islands is grateful to mission chief Mr. Yabara and his team for their open and constructive engagement on the recent Article IV mission. The authorities welcome staff’s report and concur with their findings and in-depth assessment of Solomon Islands’ economy, noting that it provides them with a clear roadmap to pursue economic reforms, fiscal strengthening and sound macroeconomic changes to sustainably grow the economy.
Solomon Islands is a fragile, small developing state, with a population of around 735,000 that speaks over 120 different languages. The country comprises a landmass of less than 30,000 square kilometers spread out over 1 million square kilometers of the South Pacific Ocean. The country’s dispersed population, large infrastructure needs, narrow economic base, and exposure to natural disasters pose many development challenges. Efforts by the authorities to diversify the economy, provide quality and reliable infrastructure and support private sector led growth are further constrained by political instability and weak governance.
Since the last AIV consultation, the authorities have successfully delivered the Pacific Games in November 2023 and conducted a peaceful general election in April 2024. The authorities agree with staff’s assessment that these two substantial achievements have raised the country’s profile and strengthened national unity and they intend to build from here to advance reforms to successfully address Solomon Islands’ longstanding economic and fiscal challenges.
Context and outlook
The authorities are more optimistic about the economic outlook compared to staff. While acknowledging the risks to the outlook, the Government estimates that the ongoing economic recovery following the pandemic will remain stable. In the 2025 Budget, the Government projects real GDP growth at 3.8 per cent in 2025, 4.3 per cent in 2026 and 4.0 per cent in 2027 – an upgrade from the last budget, and higher than the average 2.5 per cent growth prior to the pandemic.
The positive outlook is largely due to expected stronger mining activity and exports, as the Gold Ridge and nickel mines reach full production in 2025. Authorities expect growth in fisheries output, with increased fish catches reflecting expected good weather conditions, higher demand domestically and for exports, and additional fishing boats. The economy will also benefit from national infrastructure projects, particularly following the commencement of the Tina Hydro project. By contrast, forestry and logging activities are expected to continue to decline, as forests continue to be depleted. Output from construction and other business services is also expected to slow down.
Inflation has declined as food and fuel prices have stabilized. The Central Bank of the Solomon Islands expects headline inflation to ease to 2.5 per cent by the end of 2024 and to stay close to 2 per cent in March 2025 when the Monetary Policy Stance is next updated. In the near-term, food, housing and energy are expected to drive inflation, while the broader outlook remains modest. Improvements to transport and retail infrastructure around Honiara are expected to improve the supply of garden crops and vegetables.
Fiscal
The Government cautiously welcomes staff’s assessment that the overall risk of debt distress remains unchanged, while the risk of external debt distress has been upgraded. Given Solomon Islands’ reliance on external financing, the Government is concerned by the extent to which an upgrade to the external debt rating will trigger higher costs of borrowing from bilateral and multilateral partners in the medium term. The Government is exploring ways in which it can keep borrowing costs low and access new sources of concessional financing. Solomon Islands has high infrastructure investment needs, a fixed exchange rate, a low revenue base and under-developed capital market, and growing contingent liabilities, and remains vulnerable to shocks. The Government agrees with staff that debt-to-GDP could breach their target of 35 per cent within the next 10 years under current policy. To prevent this from happening, the Government is committed to improving public financial management and diversifying the economy to support policy settings that keep debt-to-GDP below the target. The Government is working with the Asian Development Bank to review and update fiscal targets and has requested a Public Expenditure and Financial Accountability assessment with PFTAC to review its PFM practices in 2025.
Domestic revenue collection is improving after falling during the pandemic and riots. Income tax revenues are expected to improve in 2025 as labour force participation increases and more businesses return to profitability. Tax reform continues to be a priority, and Government intends to build on the successful implementation of the Tax Administration Act so that revenue collection agencies can operate more effectively. The Government is also committed to timely passage of the bill that will introduce a Value Added Tax and allow for it to be implemented in time to commence in 2026.
The Government is committed to strengthening public financial management and improving transparency. It not only agreed to the audit of its Economic Stimulus Package for the Covid 19 pandemic, but has subsequently published the audit report, and undertaken to address the weaknesses in transparency and accountability that the report identified. The Government has also agreed to an audit of the spending associated with the Pacific Games. While there is currently limited capacity to undertake audits and implement their findings, the Government is exploring options to enhance capability through legislation and training.
Monetary and financial markets
The authorities agree with staff that the accommodative monetary policy stance remains appropriate. The CBSI will next review the monetary stance in March 2025 and is closely monitoring developments domestically and internationally. CBSI is working in close partnership with the IMF to strengthen its audit function, risk management, and conflict of interest policies, in line with the Safeguards Assessment recommendations. CBSI recently updated the currency basket for Solomon Islands foreign exchange rate management to better reflect the weight of its major trading partners. CBSI agree with the need to periodically review the currency weights and ensure timely and transparent communication with markets when updates are made.
Solomon Islands’ financial system remains sturdy despite the economically challenging environment. Banking sector liquidity is estimated to remain ample to meet short to medium-term liabilities, however, elevated levels of non-performing loans may give rise to asset quality concerns. The superannuation and insurance sectors demonstrated strong financial performances. The credit union sector overall remained stable, however, within the sector some small to medium unions are facing financial difficulties and liquidity issues. The main concern for the sector overall arises from the ongoing de-risking trend where many correspondent banking relationships (CBRs) of Pacific Island countries, including the Solomon Islands, are at risk of being terminated. The CBSI is committed to enhancing compliance with international standards, strengthening its cyber governance framework, and enhancing capacity for anti-money laundering and combating the financing of terrorism.
Structural reform
As a small and fragile state, the path for development for Solomon Islands is not straightforward. The Government recognizes that the private sector needs a more transparent environment, with reliable infrastructure, to expand. Output is heavily weighted to extractive activities such as logging, mining and fishing. There is a relatively large informal share to the economy, and the formal economy is concentrated in the capital Honiara. The theme for the 2025 Budget, which is the first budget for the Government for National Unity and Transformation that formed following the April 2024 elections, is Accelerating Transformative Investment: A Pathway Towards a Resilient and Sustainable Economy. The 2025 Budget is built on the twin pillars of: increasing investments in key infrastructure, promoting economic diversification and transformational economic growth; and strengthening and improving service delivery to its people.
The Government has announced it will establish a second tuna processing plant at Bina Harbour, which will create additional jobs and increase economic benefits outside of Honiara. In addition, spending will be targeted to deliver training and materials needed to lift the export capability of the rural economy with respect to cocoa, coconut and casava, and to improve import substitution and food security with respect to poultry and pigs. Tourism is underdeveloped and has potential to significantly drive economic activity. The Government will allocate spending for tourism development to support tourism operators and development facilities, and to support the National Tourism Product Program. Infrastructure investments will go towards roads and wharves to improve inter-island connectivity and the timely transportation of goods and services.