IMF Executive Board Concludes 2023 Article IV Consultation with Solomon Islands
May 12, 2023
Washington, DC : On April 26, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Solomon Islands and endorsed the staff appraisal without a meeting on a lapse-of-time basis. [2]
The economy is recovering from the shocks of civil unrest in November 2021 and a local outbreak of COVID-19 in early 2022, driven by increasing activity after the reopening of the border and preparation for the 2023 Pacific Games. But the recovery has been fragile, as Russia’s war in Ukraine has led to a decline in the terms of trade and rising inflation.
The growth rate is projected at 2.5 percent for 2023. Annual inflation is expected to moderate from 8.5 percent at end-2022 but remain at 4.2 percent at end-2023. The current account deficit and fiscal deficit are projected to widen to 12.6 percent and 6.3 of GDP in 2023, respectively, reflecting higher global commodity prices, imports for the Pacific Games, and the significant fiscal costs of the Pacific Games and the general elections scheduled for early 2024. The financial sector remains capitalized and profitable, while commercial banks’ credit to the private sector remains subdued.
Both current account and fiscal deficits are expected to persist over the medium-term. In particular, the current account deficits are projected to remain elevated, reflecting the decline in log production, slowing potential growth of China, and high imports for infrastructure projects. Foreign reserves are forecast to decline to 6.3 months of imports by 2027, although they would still be within the adequacy range at this lower level. The public debt-to-GDP ratio is projected to reach the authorities’ threshold of 35 percent in 2031, driven by concessional external borrowing for infrastructure projects and increasing domestic financing.
Executive Board Assessment
In concluding the 2023 Article IV consultation with Solomon Islands, Executive Directors endorsed the staff’s appraisal, as follows:
1.The economy is recovering from multiple shocks in the past three years, but the recovery is still fragile.The reopening of the border and infrastructure spending ahead of the 2023 Pacific Games have accelerated the recovery from civil unrest and the local outbreak of COVID-19, but rising living and business costs have been a drag. The economy remains subject to downside risks, including a potential resurgence of the COVID-19 pandemic, natural disasters, increases in global commodity prices, and recurrent political instability. Both fiscal and current account deficits are expected to persist in the medium-term, driven by large spending on infrastructure, other tangible and human capital development, and declining log exports. Reserve coverage is expected to decline as a result, although it is forecast to remain within the adequacy range under the baseline.
2.Near-term fiscal policy should focus on prudent execution of the 2023 budget, followed by rebuilding ofthe government’s cash balance.Expenditures related to the Pacific Games and the general elections need to be well controlled to minimize the risk of crowding out of other essential spending, including targeted support for the vulnerable and other investment for future growth. IMF staff welcomes the publication of the results of audits of COVID-19 related expenditures and recommends that the OAG also audit expenditures related to the Pacific Games and publish the results. Once the recovery is secured after the Pacific Games, rebuilding the government’s broad cash balance to at least two months of total spending should be prioritized.
3.Prudent management of public investment projects including their financing arrangements is an urgent priority.Public investment projects need to be phased in line with the economy’s absorptive capacity and accompanying financing arrangements should be carefully negotiated, to mitigate fiscal risks and ensure external balance and debt sustainability. Reforms to improve the quality and accountability of public expenditure, including through improving PFM and reviewing the CDF Act, need to be accelerated. Significant revenues could be mobilized through the completion of the tax administration modernization project and the planned introduction of a VAT.
4. Staff welcomes the recent decision by the CBSI to tighten the monetary policy stance, which underscores its readiness to address inflation while paying due attention to economic growth. The CBSI should stand ready to further adjust its policy stance in case inflationary pressures persisted. It should also avoid additional purchases of government bonds, to safeguard macroeconomic stability and the independence of the central bank. The central bank is encouraged to continue its efforts to improve capacity, including for economic analysis and forecasting, monetary policy communication, and the internal audit function.
5.The current exchange rate regime remains appropriate, but a timely review of the currency basket is called for, given changes in trade patterns.Solomon Islands’ external position in 2022 is assessed to be substantially weaker than the level consistent with medium-term fundamentals and desirable policies. While other policies will need to adjust to restore balance, notably on the fiscal side, maintaining external competitiveness will also be critical, especially given that Solomon Islands’ trade structure has changed materially over the past decade.
6. Increasing bank lending and enhancing financial integrity remains a challenge. Reforms to moderate credit risks for commercial banks such as reducing asymmetric information and facilitating enforcement of contracts, as well as to promote digital financial services, could spur credit growth. Strengthening legal and supervisory frameworks for AML/CFT and raising awareness of the risks are essential for ensuring integrity of Solomon Islands’ financial systems.
7. Developing new growth drivers, including by enhancing natural resource wealth management, market regulation, and addressing governance weaknesses and corruption vulnerabilities, is an urgent priority. Frequent land disputes and ineffective dispute resolution mechanisms remain long-standing obstacles to private sector development. Strengthening governance and fiscal frameworks for the mining sector including through legislation and rejoining the EITI is needed to utilize the country’s rich natural resources in a sustainable and inclusive manner. Progress in governance reforms and anti-corruption efforts would be further supported by strengthening the independence and capacity of anti-corruption institutions and by strengthening the OAG by amending its legal framework consistent with IMF technical assistance recommendations.
8.The IMF continues to support capacity development of the authorities in collaboration with development partners.Immediate CD priorities include the reporting and auditing of public spending; public investment management; review of the exchange rate basket; the central bank’s internal audit; and economic statistics such as the national accounts, government financial statistics, and household and labor force surveys.
It is proposed that the next Article IV consultation takes place on the standard 12-month cycle.[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] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
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Table 1. Solomon Islands: Selected Economic Indicators, 2018–2027 |
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