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IMF Executive Board Concludes 2019 Article IV Consultation with the Solomon Islands







February 18, 2020















On February 5, 2020, the Executive Board of the
International Monetary Fund (IMF) concluded the 2019 Article IV
consultation

[1]

with the Solomon Islands.

The Solomon Islands economy grew by 3.9 percent in 2018 driven by a
strong performance in logging, infrastructure spending, fisheries,
agriculture, and manufacturing. However, growth is expected to have
slowed to 2.7 percent in 2019 from weakening logging exports and the
temporary pause in economic activity around the election period.
Inflation remains subdued at an annual rate of 1.7 percent in August
2019. The current account deficit has widened with higher
infrastructure imports but international reserves remain comfortable.

Monetary conditions are accommodative. Excess liquidity overhang has
reduced, and credit growth slowed to 4.1 percent year-on-year at end of
2018.

The fiscal deficit widened to 2.7 percent of GDP in 2019 and is
expected to widen further over the medium term. Public debt is
currently low but rises over the medium term. Risks are on the downside
with weak fiscal policy, decline in logging, spending pressures
associated with the Pacific Games 2023, and spillovers from global
trade tensions.


Executive Board Assessment

[2]

Executive Directors welcomed the recent growth performance, the
improvement in the fiscal position in 2018, low inflation and a
comfortable international reserves cover. However, they noted that
growth is slowing, fiscal pressures have begun to re-emerge and risks
to the outlook are mostly on the downside. Directors urged the
authorities to maintain fiscal discipline, strengthen governance and
improve the business environment to sustain growth.

Directors emphasized that policy measures are needed to secure fiscal
sustainability and build resilience, including to natural disasters
through investment and contingency planning. They encouraged rebuilding
the government cash balance, for which it would be essential to
strengthen expenditure control and prioritize spending in line with the
National Development Strategy. Sustaining efforts to boost revenues,
increasing tax compliance, improving efficiency of the tax system and
strengthening revenue administration would also bolster the fiscal
position.

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Directors urged the authorities to press ahead with expenditure reforms
which would improve budget outcomes and the quality of spending through
strengthening procurement planning, enforcing commitment controls, and
greater transparency of the Constituency Development Funds. Directors
stressed prudent management of development partner-financed
infrastructure investments. Spending for the Pacific Games 2023 should
be contained, financing should be transparent, follow procurement and
public financial management best practices, and should be on grant or
highly concessional terms in line with debt sustainability and
implementation capacity. Directors welcomed the progress in
anti-corruption efforts and encouraged stronger enforcement.

Directors considered that the basket exchange rate peg regime remains
appropriate for Solomon Islands. They welcomed the review on the
composition of the basket. Fiscal consolidation and structural reforms
would help bring the external sector position closer to that suggested
by medium-term fundamentals.

Directors emphasized the need to generate new sources of growth and
viewed improved internet connectivity as an opportunity to foster
private-sector development and public sector service provision.
Harnessing benefits from connectivity would require improvements in the
regulatory framework, and complementary investments in infrastructure
and human capital. Progress in strengthening governance should continue
where improvements in the legislative framework, regulation and
oversight would be necessary to create a conducive environment for
mining and avoid governance problems.

Directors encouraged the authorities to sustain progress on financial
sector reforms. The strengthening of the AML/CFT framework would help
alleviate risks to correspondent banking relationships.




Table 1. Solomon Islands: Selected Economic Indicators,
2015–2024


Per capita GDP (2017): US$2,144

Population (2017): 613,712

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

Proj.

Proj.

GROWTH AND PRICES

Annual percentage change unless otherwise indicated

Real GDP

2.5

3.2

3.7

3.9

2.7

2.5

2.7

2.8

2.8

2.9

CPI (period average)

-0.6

0.5

0.5

3.5

1.9

2.3

2.9

3.5

3.7

4.0

CPI (end of period)

3.5

-2.2

2.1

3.9

2.2

2.4

3.3

3.5

3.9

4.0

GDP deflator

3.1

3.7

1.9

3.5

1.4

2.4

3.0

3.4

3.7

4.0

Nominal GDP (in SI$ millions)

9,139

9,780

10,330

11,099

11,553

12,130

12,839

13,643

14,544

15,556

CENTRAL GOVERNMENT OPERATIONS

In percent of GDP

Total revenue and grants

47.9

43.2

43.1

45.3

39.0

36.5

36.7

37.2

38.3

37.3

Revenue

35.1

31.8

32.8

34.3

30.1

29.8

29.6

29.5

29.2

29.1

Grants

12.9

11.4

10.2

11.0

8.8

6.7

7.2

7.7

9.1

8.2

Total expenditure

48.0

47.1

47.5

44.6

41.6

40.2

41.6

42.2

43.9

42.1

excluding grant-funded expenditure

35.1

35.7

37.3

33.6

32.8

33.5

34.4

34.4

34.8

33.9

Recurrent expenditure

33.7

32.1

31.8

33.0

29.8

28.6

28.7

28.9

29.0

29.1

Development expenditure

14.3

15.0

15.8

11.6

11.8

11.7

12.9

13.3

14.9

13.0

Unrecorded expenditure 1/

0.2

-0.6

-1.6

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Overall balance

0.0

-3.9

-4.5

0.7

-2.7

-3.7

-4.8

-5.0

-5.6

-4.8

Foreign financing (net)

-0.2

0.3

0.8

0.2

0.8

2.8

3.6

3.5

3.7

2.7

Domestic financing (net)

0.4

3.0

2.1

-0.8

1.9

0.9

1.2

1.5

1.8

2.1

Central government debt 1/

7.9

9.5

9.4

11.6

14.9

18.9

22.8

26.9

30.0

33.1

MACROFINANCIAL

Annual percentage change (end of year)

Credit to private sector

16.7

12.1

6.4

4.1

4.9

5.5

5.7

6.0

5.0

4.5

Broad money

15.0

13.4

3.5

6.8

2.1

2.4

5.1

4.1

2.6

3.3

Reserve money

23.5

14.5

7.5

10.5

0.0

4.8

6.9

2.2

2.6

1.5

BALANCE OF PAYMENTS

In US$ millions unless otherwise indicated

Trade balance

-93.5

-71.7

-81.7

-69.4

-156.0

-161.6

-219.9

-280.4

-335.8

-306.3

(percent of GDP)

-8.1

-5.8

-6.4

-5.0

-11.0

-10.8

-13.9

-16.7

-18.8

-16.0

Current account balance

-35.3

-48.8

-62.8

-62.5

-121.9

-120.2

-168.4

-219.1

-264.2

-233.6

(percent of GDP)

-3.0

-4.0

-4.9

-4.5

-8.6

-8.1

-10.7

-13.1

-14.8

-12.2

Foreign direct investment

27.6

36.0

50.0

43.1

48.5

53.4

61.4

65.9

68.1

72.4

(percent of GDP)

2.4

2.9

3.9

3.1

3.4

3.6

3.9

3.9

3.8

3.8

Overall balance

5.3

-5.9

63.2

36.2

-9.5

-0.5

-4.8

-32.3

-38.0

-27.5

Gross official reserves (in US$ millions, end of period) 2/

519.6

513.6

576.9

613.1

601.5

600.8

595.7

563.1

525.1

497.6

(in months of next year’s imports of GNFS)

10.0

9.1

9.3

8.5

8.1

7.6

7.0

6.2

5.4

5.2

Net official reserves (in US$ millions, end of period)

505.6

503.5

566.7

603.0

593.5

593.0

588.2

556.0

518.0

490.5

(in months of next year’s imports of GNFS)

9.7

8.9

9.1

8.4

8.0

7.5

6.9

6.1

5.3

5.1

EXCHANGE RATE
(SI$/US$, end of period)

8.1

8.2

7.9

8.1

8.3

Real effective exchange rate (end of period, 2010 = 100)

127.3

127.8

126.3

130.8

139.5

MEMORANDUM ITEMS:

Cash balance (in SI$ millions)

694

412

343

337

240

129

-26

-238

-512

-846

in months of recurrent spending

3.6

2.0

1.5

1.3

0.9

0.5

-0.1

-0.8

-1.6

-2.5

SIG Deposit Account (In addition to cash balance, in SI$
millions)

140

140

140

140

140

140

140

141

142

143

Broader cash balance (=Cash balance+ SIG Deposit Account;
in SI$ millions)

834

552

483

477

380

269

114

-97

-370

-703

in months of total spending 3/

3.1

1.9

1.5

2.1

1.4

1.0

0.5

-0.1

-0.7

-1.5

Public domestic debt, including arrears (in SI$ millions)

43

43

193

245

502

613

768

966

1,219

1,533

Sources: Data provided by the authorities; and IMF staff
estimates and projections.

1/ Includes disbursements under the IMF-supported programs.

2/ Includes SDR allocations made by the IMF to Solomon
Islands in 2009 and actual and prospective disbursements
under the IMF-supported programs.

3/ Total spending is defined as total expenditure,
excluding grant-funded expenditure.




[1]

Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.


[2]

At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summings up can be found
here:

http://www.imf.org/external/np/sec/misc/qualifiers.htm

.


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