Press Release No. 18/74

IMF Staff Completes a Visit to Solomon Islands

March 6, 2018

• Growth remains relatively buoyant, inflation is contained, and exchange rate and monetary policies are broadly appropriate.
• The weak fiscal position heightens the need for fiscal adjustment in 2018 and for public financial management reforms.
• The authorities’ fiscal consolidation goal in the 2018 Budget is commendable, though it will be important to adopt expenditure restraint in non-priority areas.

An International Monetary Fund (IMF) team, led by Ms. Alison Stuart, visited Honiara February 27-March 2 on a staff visit to discuss recent economic developments and policies, including the 2018 Budget strategy. At the conclusion of the visit, Ms. Stuart issued the following statement:

“Growth has been relatively buoyant, inflation is contained, and exchange rate and monetary policies are broadly appropriate. However, the fiscal position remains fragile, fiscal buffers have eroded since 2016, and domestic arrears have built up. There is a need to strengthen fiscal discipline and improve the quality of public spending.

“The team therefore welcomes the authorities’ commitment to address fiscal vulnerabilities and rebuild fiscal buffers in the context of the 2018 budget. Anchoring the budget on realistic revenue projections is a good step forward. Aligning spending with the available resource envelope, taking steps to eliminate arrears, and including a contingency reserve in the budget are all measures which will help to strengthen fiscal discipline.

“Rebuilding a fiscal buffer in 2018 will require a temporary slowdown in government‑financed development spending. This will help raise the cash balance to an adequate level and restore the authorities’ ability to respond to shocks, including from natural disasters. However, in pursuing expenditure restraint, consideration should be given to maintaining expenditures in priority areas and curbing expenditures in areas which have expanded recently, for example: tertiary scholarships, constituency development funds and shipping grants. Looking forward, we encourage the government to continue to seek concessional external financing for critical infrastructure in line with debt sustainability and implementation capacity.

“We support the ongoing tax review to improve revenue mobilization. It should aim at broadening the tax base, reducing revenue volatility, improving compliance, eliminating ad hoc exemptions and simplifying the tax laws.

“Pressing ahead with public financial management reforms will also improve spending efficiency. Combining public financial management reform with natural disaster mitigation measures would also help raise the benefits of public investment. Efforts to improve the accountability and transparency of the constituency development funds are also important.

“We encourage the authorities to closely monitor potential macroeconomic and financial stability risks from natural disasters, domestic and external shocks, including via correspondent banking relationships. Close regional engagement with development partners, banks, regulators and supervisors could help with contingency planning.

“The IMF stands ready to support the government’s reform efforts through policy advice, technical assistance and capacity development.

“The team would like to underscore the excellent, cooperative relationship between Solomon Islands and the IMF, and would like to thank the authorities for their warm hospitality and productive discussions.”