Press Release No. PR2349

IMF Staff Completes 2023 Article IV Mission to Solomon Islands

February 21, 2023

• The economy is recovering from a series of shocks, supported by the reopening of the border and infrastructure spending ahead of the 2023 Pacific Games. But the recovery has been fragile as Russia’s war in Ukraine has led to higher inflation and a worsening of the terms of trade.
• Expenditures related to the Pacific Games and the general elections need to be well controlled to minimize the crowding out of other essential spending. Public investment projects should be phased in line with the economy’s absorptive capacity and accompanying financing arrangements need to be prudently negotiated.
• Modernizing legal and regulatory frameworks and strengthening anti-corruption and auditing institutions remains critical for mitigating governance vulnerabilities and corruption risks.

Honiara, Solomon Islands: An International Monetary Fund (IMF) team led by Mr. Masafumi Yabara visited Solomon Islands during February 8 to 21 to hold discussions on the 2023 Article IV Consultation. At the conclusion of the visit, Mr. Yabara issued the following statement:

“The economy is recovering from a series of shocks, including civil unrest and a local outbreak of COVID-19. The reopening of the border and infrastructure spending ahead of the 2023 Pacific Games have boosted growth but the recovery has been fragile, as Russia’s war in Ukraine has led to higher inflation and a worsening of the terms of trade. The growth rate is projected at 2.5 percent for 2023. Inflation is expected to moderate from 8.5 percent y-o-y at end-2022 but remain at 4.7 percent y-o-y at end-2023. The current account deficit is projected to widen to 15.0 percent of GDP in 2023 and remain around 9 percent of GDP over the medium term, reflecting the decline in log production, slowing potential growth of China, the main export destination, and high imports for infrastructure projects. Foreign reserves are forecast to decline further to 5.8 months of imports by 2027, although they would still be within the adequacy range at this lower level.

“The economy remains subject to downside risks, in particular the risks of a resurgence of the pandemic and natural disasters. Lower-than-expected support from development partners or unsuccessful bond issuance in the shallow domestic market could hinder budget implementation. Further increase in global commodity prices, as well as mismanagement of infrastructure projects and their financing, would disturb the recovery. Other downside risks include political instability in the runup to the general elections and rises in geopolitical tensions.

“The fiscal deficit is projected to widen to 6.3 percent of GDP in 2023, mainly driven by exceptional expenditures for the hosting of the Pacific Games and preparation for the general elections (summing up to 5.3 percent of GDP). Expenditures related to these two events need to be well controlled to minimize the crowding out of other essential spending, including targeted support for the vulnerable and investment for future growth. Once the recovery is secured, rebuilding the government’s broad cash balance to at least two months of total spending should be prioritized.

“Fiscal deficits are expected to persist over the medium term, driven by large spending needs for improving physical and human capital, costs to maintain newly built infrastructure, and continued weak revenue trends including from declining log exports. Public debt is projected to significantly increase to 22.8 percent of GDP in 2023, from 7.9 percent of GDP pre-pandemic. The public debt-to-GDP ratio could reach the authorities’ threshold of 35 percent before 2030, driven by increasing concessional external borrowing. Public investment projects need to be phased in line with the economy’s absorptive capacity and accompanying financing arrangements should be prudently negotiated to mitigate fiscal risks and ensure external balance and debt sustainability.

“Introducing a Value Added Tax is a high priority for consolidating the fragmented tax systems and yielding additional revenues over the medium term by improving compliance and expanding the tax base in line with the economy. IMF staff welcomes the publication of the results of an audit of COVID-19 related expenditures. IMF staff recommends that the government audit expenditures related to the Pacific Games once the event is over and publish the results. Reviewing the Constituency Development Funds (CDF) Act and establishing regulations is critically important to ensure that the funds are used effectively and transparently.

“The Central Bank of Solomon Islands should phase out its accommodative monetary measures, given the ongoing recovery and high inflation. Further purchases of government securities at the secondary market should be avoided to safeguard macroeconomic stability and independence of the central bank. The current exchange rate regime remains appropriate, but a timely review of the currency basket is called for, given changes in trade patterns.

“Addressing structural bottlenecks including land registration is needed to generate new sources of inclusive growth. Establishing strong governance and fiscal regimes for the mining sector, including through finalizing a Mining Act and rejoining the Extractive Industries Transparency Initiative, remains a priority. Ensuring independence and increasing resources of anti-corruption and auditing institutions is essential to advancing reforms to limit corruption and enhance accountability of public spending.

“The IMF team wishes to express its deep appreciation to the authorities and other stakeholders for frank and constructive discussions.”