Public Information Notices

Solomon Islands and the IMF

Free Email Notification

Receive emails when we post new items of interest to you.

Subscribe or Modify your profile




Public Information Notice (PIN) No. 04/89
August 12, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2004 Article IV Consultation with the Solomon Islands

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2004 Article IV consultation with the Solomon Islands is also available.

On July 16, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Solomon Islands.1

Background

The Solomon Islands' economy deteriorated markedly after the outbreak of an inter-island conflict in mid-1999. The level of real GDP subsequently declined by one-quarter, exports halved, and inflation increased to 15 percent. In addition, the budget deficit increased rapidly, the government defaulted on virtually all domestic and external debt obligations, and international reserves (net of the external arrears) were fully exhausted.

The government has moved rapidly to stabilize budgetary finances since the arrival in mid-2003 of the multinational Regional Assistance Mission to the Solomon Islands (RAMSI) that has restored law and order throughout the country. The budget finished the year with a deficit of just 1½ percent of GDP, compared with 10 percent in 2002. This result was mainly attributable to the marked strengthening of tax collections aided by an amnesty on penalties, the termination of payments to the ex-militants, greater scrutiny over the wage bill, and the tightening of expenditure controls. Australia and New Zealand also provided substantial grant support to the budget, in addition to that provided for development spending, which was in part used to pay the overdue debt obligations to the World Bank and the Asian Development Bank. Taken together, these steps helped finance an increase in social and development outlays. The government's commitment to prevent new nondebt expenditure arrears from October 2003 has been strictly enforced. Improvements in revenue collections and expenditure restraint have continued in 2004, and the authorities project that the 2004 budget will be in surplus.

Economic activity has started to respond to the more favorable law and order and policy environment. Real GDP grew by an estimated 5 percent in 2003, helped by, strong fish, copra, and cocoa production. Foreign investors have renewed their interest in major natural resource projects, and private sector credit growth has increased as lending interest rates have declined. Overall credit growth, however, has remained low as the large aid flows and recurrent budget surplus have increased the level of government deposits held at the central bank. International reserves have increased sharply, reflecting higher export volumes and world commodity prices, the slow pick up in import demand, large aid flows, and the remonetization of the economy. Inflation has fallen back to single-digit levels, as the supply of food has increased and the nominal effective exchange rate has stabilized.

If appropriate macroeconomic and structural policies are implemented, growth of real GDP in the Solomon Islands during 2004-09 could average 4½-5 percent a year (around 2 percent per capita). Inflation would remain in low single digits and the level of international reserves slowly increase, assuming that fiscal and monetary discipline is maintained. The current account deficit as a share in GDP would gradually decline as exports increase and the level of project-related imports falls back. Assuming the budget deficit averages around ½ percent of GDP, the government debt ratio would decline from 100 percent of GDP in 2003 to 65 percent of GDP by 2009.

Executive Board Assessment

Executive Directors welcomed the marked improvement in economic performance in the Solomon Islands that has occurred since the arrival of the RAMSI in mid-2003. Real GDP has increased following four years of decline, inflation has fallen, exports are higher, and reserves have strengthened.

At the same time, Directors observed that the current situation and future economic prospects in the Solomon Islands remain fragile. Much physical infrastructure has been destroyed, social indicators have deteriorated, unemployment remains high, and the government debt stock is large. Against this background, the main challenge will be to implement policies to reduce the risks to the medium-term outlook and underpin a sustained improvement in per capita growth and social indicators. Key policies in this regard will be a strengthening of budget finances—in particular, tight control over expenditures—maintaining price stability, and implementing deep structural reforms to promote private sector employment and exports.

Directors commended the authorities for the prudent fiscal policies they had followed in the second half of 2003 and the rapid turnaround in budget finances. The budget deficit for 2003 was reduced sharply, reflecting higher receipts from better tax administration and firm control over payments to ex-militants and civil service allowances, as well as the resumption of donor grants. Directors endorsed the 2004 budget surplus target, which will enable the government to start to pay down the large stock of expenditure arrears, and they concurred with the plans to regularize the government's debt obligations.

Directors stressed the need for continued fiscal restraint over the medium term to reduce the debt stock and servicing burden, and to ensure that resources are available for urgent social and development requirements. Priority should be placed on reallocating spending toward basic health and education, rural infrastructure and agricultural advisory services, and operations and maintenance outlays. Directors called for further efforts to contain civil service expenditure and boost revenue collections through additional improvements in tax and customs administration. Pressures for new income-tax exemptions for foreign and domestic investment and activity should be resisted. Regarding the possibility of decentralizing a large part of the budget to the provinces under a proposed federal structure for the Solomon Islands, Directors recommended contemplating such a step only after central government finances are on a secure foundation, and an effective system for monitoring provincial government revenues and expenditures is in place.

Directors endorsed the central bank's monetary policy objectives of containing inflationary pressures and increasing the level of international reserves. The current policy of countering upward pressure on the exchange rate should continue, and particular vigilance will be necessary to ensure that inflation remains subdued. Directors welcomed the recent elimination of the remaining restrictions on current international transactions.

Directors observed that the banking system is generally sound. They encouraged the central bank to monitor banks closely to ensure that all prudential guidelines continue to be met as the economic recovery gathers pace. The recent efforts to strengthen the asset quality of the pension fund, and the initial steps taken to settle the future of the development bank, were welcomed. Directors stressed that implementation of laws against money laundering and the financing of terrorism will help safeguard the financial system and should be a priority.

Directors underscored that structural reforms will be critical to lift private sector exports and employment over the medium term. Attention needs to be focused on policies to boost rural production, improve inter-island distribution systems, and promote efficient and ecologically sustainable management of the fisheries and forestry sectors. Regulation and licensing procedures for foreign and domestic investment and activity should be streamlined, and the corporatization and privatization of public enterprises should be considered to help improve their financial balances. Directors stressed that strengthening institutions, enhancing governance and transparency, and reducing corruption will help promote a level playing field for private sector activity.

Directors fully supported the authorities' medium-term development strategy outlined in the National Economic Recovery, Reform, and Development Plan. The success of the Plan will depend crucially on a sustained record of policy implementation to rehabilitate the economy. Continuous monitoring and evaluation of the Plan will be necessary, and in support of that effort, an improvement in the currently weak state of economic data will be essential. Directors called in particular for the rehabilitation of the National Statistical Office in order to improve the quality and timeliness of national accounts, budgetary, and balance of payments statistics.


Solomon Islands: Selected Economic Indicators, 2000-04

       

Est.

Proj. 1/

 

2000

2001

2002

2003

2004


Growth and prices (percentage change)

         

Real GDP

-14.3

-9.0

-1.6

5.1

4.2

CPI (period average)

6.9

7.6

9.4

10.1

5.6

CPI (end-of-period)

7.6

6.5

15.4

3.8

5.1

           

Central government operations (percent of GDP)

         

Total revenue

22.1

23.5

18.7

39.8

48.1

Recurrent revenue

18.3

15.3

16.1

21.5

23.5

Grants

3.7

8.2

2.6

18.3

24.6

           

Total expenditure 2/

29.7

36.1

29.7

39.6

44.1

Recurrent expenditure

25.1

27.2

26.5

23.8

26.0

Development expenditure

4.6

8.9

3.2

15.7

18.1

           

Recurrent balance 3/

-6.1

-11.7

-9.9

1.5

4.0

Overall balance 4/

-4.9

-11.9

-9.6

-1.4

4.0

Foreign financing (net)

0.6

5.0

3.8

0.4

-1.1

Domestic financing (net)

4.2

-1.4

-2.9

-6.6

-0.4

Increase in expenditure arrears

1.4

3.6

3.5

4.0

-5.0

Increase in principal arrears

-1.2

4.7

5.2

3.6

-8.9

Restructured arrears

0.0

0.0

0.0

0.0

11.4

           

Stock of expenditure arrears (percent of GDP; end-of-period)

4.7

8.5

11.5

14.4

8.1

Stock of domestic principal debt arrears (percent of GDP; end-of-period)

0.0

3.9

7.1

9.9

0.0

           

Central government debt (percent of GDP) 5/

65.4

82.2

96.2

100.2

92.5

Domestic

23.5

33.2

29.5

27.6

26.4

External

42.0

49.0

66.7

72.6

66.1

External debt (in millions of U.S. dollars; end-of-period)

125.6

134.3

151.6

163.9

159.7

External debt service to exports of GNFS (accrual basis)

3.9

8.1

10.1

8.8

6.3

           

Monetary and credit (percentage change; end-of-period)

         

Net foreign assets

-39.8

-31.8

30.2

106.4

49.7

Net domestic assets

46.8

-4.4

-4.8

-11.0

-21.6

Credit to government (net)

43.8

3.4

13.1

-17.1

-6.0

Credit to private sector

1.8

-21.8

12.2

26.1

12.0

Broad money

0.5

-13.2

4.0

26.0

15.2

           

Balance of payments (millions of U.S. dollars; unless otherwise indicated)

       
           

Exports, f.o.b.

65.1

47.1

58.2

74.2

83.0

Imports, c.i.f.

-98.1

-90.6

-62.3

-85.2

-102.0

Current account

-31.7

-35.1

-15.7

3.2

-1.4

(Percent of GDP)

-10.6

-12.8

-6.9

1.4

-0.6

Capital account

8.5

17.2

6.3

11.0

16.1

Overall balance (accrual)

-23.1

-17.9

-9.4

14.3

14.7

           

Gross official reserves (millions of U.S. dollars; end-of-period)

31.3

18.5

17.5

35.9

52.1

(In months of next year's imports of GNFS)

3.1

2.8

2.1

3.6

4.5

           

Exchange rate (SI$/US$, end-of-period)

5.10

5.56

7.46

7.49

...

Real effective exchange rate (period average; 1990=100)

122.8

133.5

111.1

96.5

...

Nominal effective exchange rate (period average; 1990=100)

65.3

67.4

52.4

41.8

...


Sources: Data provided by the Ministry of Finance; Central Bank of Solomon Islands; and IMF staff estimates and projections.

1/ Staff projections.
2/ Expenditures are presented on an accrual basis.
3/ Includes recurrent budget grant support; amortization payments are classified as budget financing.
4/ Overall balance is calculated from below-the-line financing data.
5/ Includes debt amortization arrears.

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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities and this PIN summarizes the views of the Executive Board.




IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs    Media Relations
E-mail: publicaffairs@imf.org E-mail: media@imf.org
Fax: 202-623-6278 Phone: 202-623-7100