Press Release No. 19/223

IMF Staff Completes a 2019 Staff Visit to Solomon Islands

June 17, 2019

• Growth has been buoyant but there are signs of a slowdown in 2019, as logging activity is weakening. Inflation is contained, and exchange rate and monetary policies are broadly appropriate.
• Fiscal problems remain, but adjustment can be achieved by containing spending in non-priority areas, improving budget prioritization, and establishing a cohesive medium-term strategy for revenue reform. Containing the fiscal risks associated with hosting the Pacific Games in 2023 will be an important challenge.
• The new government is at an early stage of developing its policy priorities. Creating an environment for sustainable growth will require reforms to strengthen the regulatory and policy environment for business, increased transparency, and fiscal discipline. A continued focus on tax reform offers an opportunity to make the tax system more efficient, fair and equitable.

Ms. Alison Stuart visited Honiara June 12-18 on a staff visit to meet the new government, central bank Governor and officials, to discuss recent economic developments and policy plans, including the 2019 Budget.[1] At the conclusion of the visit, Ms. Stuart issued the following statement:

“Solomon Islands is at a transition point with logging activity slowing down and new sources of growth needed. The policy setting is fragile, as fiscal problems remain and adjustment is needed to place policy on a sounder footing, provide a buffer to respond to shocks, including natural disasters, and to create space to pursue economic development goals.

“The recent election of a new government provides an opportunity to gain buy-in to pursue a concerted effort to restore fiscal discipline and address the economic and governance challenges to provide a platform for sustainable growth.

“Growth picked up to 3.9 percent in 2018, boosted by a strong performance in logging, infrastructure spending, fisheries, agriculture, and manufacturing. However, growth is expected to moderate to 2.9 percent in 2019, as logging activity wanes, resulting in slower consumption growth, and the temporary pause in economic activity around the election subtracts from growth. Inflation has been more volatile than usual in the past twelve months but has slowed to 0.5 percent in April. The current account deficit remained relatively high at 5 percent of GDP in 2018.

“The government budget deficit is estimated to have narrowed in 2018 due to slower than expected execution of major infrastructure projects, but spending on tertiary scholarships, shipping grants and Constituency Development Funds were high. Although efforts to strengthen cash management are underway and domestic arrears have been eliminated, fiscal buffers are low.

“Fiscal revenues have weakened in January-April 2019 with the slowdown in logging activity, as well as temporary effects around the election period. The softer outlook for revenues makes it even more important to contain recurrent spending and ensure that development expenditures are prioritized in line with the National Development Strategy.

“Good progress is being made on strengthening revenue administration, compliance, and reducing tax arrears which can help improve the fiscal position. Reducing the scope for transfer pricing by the logging and mining sectors would also contribute.

“IMF staff strongly welcomes the new government’s continued focus on tax reform. This offers an important opportunity to make the tax system more efficient, fair and equitable. To yield good results, the authorities should set clear policy goals, carefully consider sequencing and tax administration modernization as well as clientele management. Pressing ahead with public financial management reforms will improve spending efficiency.

“Investments ahead of hosting the Pacific Games in 2023 and other projects will need to be carefully managed so they do not substantially add to fiscal risks and debt. It will be important to make sure that all external financing is transparent, is on grant or concessional terms, and is in line with debt sustainability and implementation capacity.

“The basket exchange rate peg remains an appropriate nominal anchor for Solomon Islands. The recent small tightening of monetary conditions was appropriate to mop up excess liquidity. Since then inflationary pressures have dissipated.

“The IMF stands ready to support the government’s reform efforts through advice and technical assistance, especially with respect to fiscal management and reform, creating the environment for sustainable growth, and maintaining macroeconomic and financial stability.

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