Press Release No. 24/430

IMF Staff Completes 2024 Article IV Mission to Solomon Islands

November 21, 2024

• IMF staff expects growth at 2.5 percent in 2024 and 2.8 percent in 2025. Medium-term growth prospects appear moderate. Comprehensive and sustained reforms are needed to enhance potential growth, including better transportation in rural areas and addressing governance weaknesses in the minerals and forestry sectors.
• Strengthening fiscal policy is an urgent priority especially by improving fiscal data and public financial management. Staff recommends a tighter fiscal stance in 2025 to gradually build cash buffers. Domestic revenue mobilization is essential for accelerating investment in development priorities.
• Staff supports the decision by the Central Bank of Solomon Islands to ease monetary policy in September 2024, and monetary policy should remain data dependent.

Washington, DC: An International Monetary Fund (IMF) team led by Mr. Masafumi Yabara visited Solomon Islands during November 11 to 22 to hold discussions on the 2024 Article IV Consultation. At the conclusion of the visit, Mr. Yabara issued the following statement:

“Staff commends the landmark successes of the Pacific Games and the peaceful general elections, which have raised the country's profile and strengthened national unity. The country needs to build on these achievements to create momentum for sustainable and inclusive growth. Staff fully supports the government’s priorities of economic transformation, good governance, national unity, and human capital development.

“Staff expects modest growth at 2.5 percent in 2024 and 2.8 percent in 2025, driven by the fishing, mining, manufacturing, and construction sectors. Inflation is expected to return to 3.4 percent at end-2024 and reach 3.9 percent at end-2025. The fiscal deficit is projected at 3.1 percent and 3.3 percent of GDP in 2024 and 2025, respectively, driven by continued spending pressure, investments to advance the government’s priorities, and externally financed infrastructure projects. The government’s cash reserves have been significantly depleted, posing immediate liquidity risk to the government. The current account deficit is expected to narrow to 4.2 percent of GDP in 2024 but widen to 7.7 percent of GDP in 2025 as economic activity gains momentum. Medium-term growth prospects appear moderate, with anticipated growth of around 3 percent, constrained by declining logging activity and the undiversified economic base with weak governance. Both fiscal and current account deficits are expected to persist in the medium term, driven by declining log exports and the ongoing and anticipated infrastructure projects.

“The economy remains subject to downside risks. Under-execution of the budget due to a shortage of funding could adversely affect the economy. Solomon Islands remains particularly vulnerable to extreme climate events and commodity price volatility, including the intensification of regional conflicts.

“Strengthening the resilience and effectiveness of fiscal policy is an urgent priority. This requires rebuilding cash buffers, improving the quality of public spending, and imposing fiscal discipline on domestic borrowing. An essential first step is to fill fundamental gaps in fiscal data and public financial management, including reviewing the budget process to eliminate a financing gap in the budget proposal. Staff recommends a tighter fiscal stance in 2025 to start gradual accumulation of cash buffers. Domestic revenue mobilization is also essential, including in accelerating investment in development priorities. The government should prioritize passing the Value Added Tax Bill and prepare for its implementation from early 2026, while continuing efforts to modernize the Inland Revenue Division.

“Staff welcomes the adoption of the new Constituency Development Funds (CDFs) Act and the release of the audit report on the Economic Stimulus Package. Solomon Islands continues to face fundamental weaknesses in the transparency and accountability of public spending, which underscores the critical importance of implementing the CDF framework and audit report recommendations. Enhancing the capacity and resources of government officials involved in procurement and auditing is crucial, including through training and strengthening the legal framework for auditing.

“Staff supports the decision by the Central Bank of Solomon Islands (CBSI) to ease monetary policy in September 2024, and monetary policy should remain data dependent. The CBSI should avoid further purchases of government bonds in the secondary market under current economic circumstances. Staff notes the recent update of the currency basket.

“The financial sector remains stable, while growth of bank lending has not kept up with economic trends. Promoting financial inclusion, especially in rural areas and among women, and strengthening capacity for anti-money laundering and combating the financing of terrorism (AML/CFT) remain priorities.

“Comprehensive and sustained reform measures are needed to bolster long-term growth prospects. Upgrading transport connectivity in rural areas can augment potential growth in the agriculture and fisheries sectors. Legislation to address governance weaknesses in the minerals and forestry sectors is an urgent priority. Concrete and prompt action is needed to strengthen the resource and capacity of the Independent Commission Against Corruption.

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