IMF Staff Completes 2017 Article IV Mission to Solomon Islands
IMF News, September 28, 2017
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- Published: September 28, 2017
Macroeconomic outlook and growth
- Growth remained solid at 3.5 percent in 2016 and is projected at 3.2 percent in 2017 and 3.0 percent in 2018, buoyed by infrastructure spending, fisheries and agriculture, although logging production is slowing down.
- Inflation is contained at an annual rate of just 1.5 percent in August 2017.
Fiscal position and risks
- The fiscal setting is challenging:
- The deficit widened to 3.3 percent of GDP in 2016 as lower revenues and grants were not matched by expenditure restraint.
- Fiscal buffers have substantially eroded: the cash balance fell from 3.6 months of recurrent spending at end-2015 to just 0.8 months projected for 2017.
- Fiscal strains have led to delays in government payments.
- The weakening fiscal position heightens the vulnerability of the economy to shocks and increases the need for fiscal adjustment in 2018.
Policy recommendations on fiscal adjustment and public financial management
- Fiscal adjustment will be needed in 2018, including:
- Revenue-raising measures.
- Expenditure control.
- A plan to eliminate arrears.
- The 2018 Budget provides an opportunity to:
- Align spending more closely to the goals of the National Development Strategy.
- Restrain spending, including through tertiary scholarships, Constituency Development Funds (CDFs) and shipping grants.
- Increase transparency of CDFs to improve accountability and to help identify remaining gaps in the provision of services to the rural population.
- Pressing ahead with public financial management reforms will improve spending efficiency and boost gains from investing in climate-proof infrastructure.
Financial sector reform and inclusion
- The authorities’ strategy to enhance financial inclusion is commendable.
- The mission urges clearing the backlog of financial sector reform, notably:
- The new Financial Institutions Act.
- The Credit Unions Act.
- The National Provident Fund Act.
- These acts fill gaps in prudential standards and would provide the basis for the Central Bank of Solomon Islands (CBSI) to strengthen its supervisory framework.
- The risk posed by the withdrawal of correspondent banking, though less of a problem than elsewhere, is non-negligible and places greater emphasis on ensuring effectiveness and enforcement of the AML/CFT Framework.
Monetary policy and exchange rate
- Exchange rate and monetary policies are broadly appropriate:
- The basket peg is working effectively.
- The monetary stance is accommodative given low inflation, an uncertain growth outlook, and moderate credit growth.
IMF support and next steps
- The IMF stands ready to support the government’s reform efforts through policy advice and capacity building, including on monetary and fiscal policies, financial sector supervision and regulation, and macroeconomic statistics.
- Based on the mission’s preliminary findings, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.
- The IMF Executive Board is expected to discuss the 2017 Article IV Consultation in December 2017.
Key statistics and dates
- 3.5 percent (growth in 2016)
- 3.2 percent (projected growth in 2017)
- 3.0 percent (projected growth in 2018)
- 1.5 percent (inflation, annual rate, August 2017)
- 3.3 percent of GDP (deficit in 2016)
- 3.6 months of recurrent spending (cash balance at end-2015)
- 0.8 months of recurrent spending (cash balance projected for 2017)
- Mission visit: September 19–28, 2017
- IMF Executive Board discussion expected: December 2017
IMF staff statement issued at the conclusion of the September 19–28, 2017 mission.