Press Release No. 16/132

Press Release: IMF Executive Board Concludes 2016 Article IV Consultation with Solomon Islands

March 23, 2016

On March 21, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the 2016 Article IV Consultation with Solomon Islands.¹

The Solomon Islands economy is estimated to have grown by 3.25 percent in 2015 led by logging activity, tuna processing, construction, and retail services. The impact of Cyclone Raquel and El Niño has caused a reduction in agricultural production. After experiencing deflation earlier in the year, inflation remained contained at 2.9 percent (year-on-year) in 2015, driven by higher food prices due to the depreciation of the Solomon Island dollar vis-à-vis the US dollar and the effects of El Niño-related drought on the domestic food supply.

Near-term prospects are favorable but risks to the outlook are tilted to the downside. In 2016, growth is expected to remain solid at 3 percent, driven by investment in construction, communications, and manufacturing. Weaker growth in emerging Asia—especially China—could worsen Solomon Islands’ growth prospects, including through lower-than-expected demand for log exports. The El Niño phenomenon will likely continue to weigh on agriculture and fisheries in the early part of 2016.

In 2015, fiscal policy was much less expansionary relative to the budget. The fiscal deficit is estimated at 0.3 percent of GDP, much smaller than 5.7 percent budgeted. The fiscal deficit was financed by a small drawdown in the cash balance. Although the decline in cash balance in 2015 was much larger than implied by the deficit, the drawdown also reflected the repayment of SI$100 million of domestic debt in mid-December 2015. Public debt at 10.4 percent of GDP is one of the lowest in the region and across small states.

The monetary policy stance has been very accommodative in an effort to support growth and this has been reflected in strong credit growth. The financial system is sound, and progress on financial inclusion has been remarkable, although further financial deepening represents important growth and development opportunities. The domestic financial sector has undergone significant consolidation in 2015, and overall, banks are adequately capitalized, liquid, and profitable. Net international reserves remained flat at US$506 million at end-December 2015 relative to end-2014 (US$496 million), equivalent to 9.8 months of imports, the highest coverage in the Pacific islands. The current account deficit will widen slightly to 4.5 percent of GDP in 2016, but the external position should remain strong with net international reserves projected at 9.6 months of imports. In the medium term, the current account deficit is expected to widen somewhat to support imports related to big infrastructure projects.

Executive Board Assessment²

Executive Directors welcomed Solomon Islands’ satisfactory performance under the program and commended the authorities for their considerable achievements in enhancing macroeconomic stability owing to a prudent fiscal policy and the implementation of structural reforms, including notable progress in building core institutions.

Directors noted that, while the economic outlook is favorable, it is subject to downside risks from the country’s vulnerabilities to external shocks, including natural disasters. They emphasized the importance of preserving fiscal buffers, enhancing resilience to natural disasters, and stepping up the structural reform agenda to foster inclusive and diversified growth. In this regard, Directors welcomed the new Medium-Term Development Plan (2016–20), which contains a comprehensive growth and development strategy that is aligned with the Sustainable Development Goals. They looked forward to the authorities’ continued close engagement with the Fund and development partners to support its implementation.

Directors supported the design of a multi-pillar strategy at the national, regional, and multilateral levels to enhance resilience to natural disasters. They welcomed the plan to create a contingency fund for natural disasters.

Directors stressed the importance of preserving fiscal space and adequate buffers. They encouraged the authorities to keep cash reserves at a minimum of two months of total spending and to prioritize infrastructure and social spending. They also welcomed the authorities’ intention to set quarterly targets on cash reserves in their budgeting process. Directors encouraged the authorities to sustain their efforts to build sound fiscal institutions in order to finance infrastructure spending while preserving debt sustainability. These include public financial management reforms by enhancing the transparency and accountability of tertiary scholarship and constituency funds; improvements in budget planning and presentation; and the mobilization of additional revenues by strengthening tax compliance and streamlining exemptions.

Directors considered the current monetary policy stance to be appropriate. They encouraged the central bank to stand ready to tighten policy should inflationary pressures emerge, and consider appropriate measures to absorb excess liquidity to improve monetary transmission. Directors welcomed the full implementation of the basket peg. They encouraged the authorities to reassess periodically the level of the exchange rate to ensure that it remains supportive of competitiveness, and to consider including the renminbi in the basket.

Directors noted that the financial sector is generally sound, and called for continued efforts to strengthen the supervisory, regulatory, and legal frameworks. They welcomed the forthcoming new National Provident Fund and Credit Union Acts to help safeguard financial stability. Directors encouraged the authorities to build on the progress achieved to improve financial inclusion and access, and welcomed the recently adopted National Financial Inclusion Strategy for 2016–20.

Directors supported the authorities’ agenda aimed at achieving inclusive growth and diversifying the sources of growth. This will involve reforms to improve the business and investment climate, infrastructure development, as well as investments in health, education, and human resource development.