IMF Executive Board Approves US$18.3 Million Standby Credit Facility Arrangement for the Solomon Islands

Press Release No. 10/223
June 2, 2010

The Executive Board of the International Monetary Fund (IMF) today approved an 18-month SDR 12.48 million (about US$18.3 million) arrangement under the Standby Credit Facility for the Solomon Islands in support of the authorities’ economic reform program. An amount equivalent to SDR 3.12 million (about US$4.6 million) is immediately available to the Solomon Islands.

The total amount of IMF resources made available under the arrangement equals 120 percent of the country’s quota of SDR10.4 million.

In view of the adverse impact of the global economic downturn, the key objective of the authorities’ economic reform program is to establish a basis for resuming solid growth and reducing external vulnerability in a low-inflation environment, while advancing poverty alleviation efforts. To this end, the program seeks to strengthen the fiscal position, enhance monetary policy operations, and safeguard the domestic financial sector. By laying a strong macroeconomic foundation, the program is also expected to help catalyze additional donor support for the country.

Following the Executive Board’s discussion on the Solomon Islands, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, stated:

“Following the global recession and the continued decline in logging output, the Solomon Islands has experienced an economic downturn, pressures on the government’s cash reserves, and increased macroeconomic vulnerabilities. The authorities’ program, supported by a Standby Credit Facility arrangement, aims to restore macroeconomic stability, reduce destabilizing imbalances, and close the financing gaps, including by catalyzing donor support. Strong ownership and steadfast implementation of the program will be important.

“Key macroeconomic reforms and stabilization measures under the program would allow solid growth to resume in a low inflation environment, thereby advancing poverty alleviation efforts. The core elements of the program are to strengthen government finances, improve monetary operations, safeguard international reserves, and contain financial sector risks.

“Fiscal discipline will continue to serve as the main anchor for macroeconomic stability. Efforts will focus on rebuilding cash reserves mainly by strengthening revenue collection and prioritizing expenditure. Adopting a fiscal responsibility law and devising a proper resource tax regime would help enhance budget discipline, improve revenue transparency, and ensure a sustainable fiscal path.

“The current monetary stance is broadly appropriate, and sufficiently accommodative to support economic recovery. The program seeks to strengthen the operational framework of monetary policy and introduce new policy instruments to help banks manage liquidity, ensuring long-term price stability.

“New prudential regulations have been introduced recently to mitigate risks facing the banking sector resulting from the economic downturn. Timely and consistent enforcement of these new regulations will be critical to financial stability. The authorities are committed to strengthening the oversight and independence of the National Provident Fund to safeguard its long-term financial viability.”

ANNEX

Recent Economic Developments

The Solomon Islands has been affected since late 2008 by the adverse impact of the global economic crisis and a sharp decline in logging output. The authorities’ estimate shows the economy contracted by 2¼ percent in 2009, compared with an expansion of 7¼ percent in 2008. The fall in activity was mainly due to declining production of fish and timber and weak commodity prices and output, which fed into domestic demand. Inflation pressures, meanwhile, eased mostly due to falling fuel and food prices, but also due to weak demand conditions. With sluggish domestic demand, bank credit also contracted. Reflecting a weak external environment, the current account deficit widened to 21 percent of GDP in 2009. Increases in mining-related foreign direct investment (FDI), reinvested earnings, and other inflows, including the SDR allocations, however, helped official foreign reserves rise to US$146 million at end-2009 (about 4¼ months of next year’s projected imports of goods and nonfactor services).

The near-term macroeconomic outlook is expected to remain challenging. Growth is projected to rebound to around 3½ percent in 2010 on a global recovery in commodity demand and prices and new investment and capacity improvements in mining, telecommunications, and fisheries. However, further declines in logging production will continue to act as a drag on economic activity. With little capacity to borrow at home or abroad, the country faces pressing needs to better safeguard its economy against vulnerability.

Program Summary

Against this background, the authorities have embarked on a program of economic reform to make the economy less susceptible to adverse shocks and strengthen its macroeconomic base. They have requested IMF financial assistance to support their efforts.

The authorities’ program includes the following key elements:

Strengthening fiscal operations: To bolster the fiscal position and improve budget discipline, the program includes policy measures to build cash reserves, principally by strengthening revenue administration, including in the resource sector, and better prioritizing expenditures. These measures also aim at creating additional fiscal space to meet social and development needs. To improve budget discipline, the authorities envisage establishing a stronger budgetary and institutional framework by adopting a fiscal responsibility law that would better ensure sound fiscal management.

Improving monetary operations: While the current monetary stance is broadly appropriate, with monetary targets sufficiently accommodative, the program envisions further steps to strengthen the operational framework and introduce new instruments for conducting monetary policy. In light of the vulnerability to shocks, the authorities intend to take necessary measures to maintain an adequate level of foreign reserves.

Safeguarding the financial sector: The program envisions maintaining a sound financial system by tightly enforcing new prudential regulations. The authorities also intend to strengthen the oversight and independence of the National Provident Fund to ensure its long term financial viability.

The Solomon Islands became of member of the IMF on September 22, 1978.

For additional background on the IMF and the Solomon Islands, see: http://www.imf.org/external/country/SLB/index.htm


Solomon Islands: Selected Economic Indicators, 2007-11

 
        Est.   Proj.
  2007 2008   2009   2010 2011
 

Growth and prices (percentage change)

             

Real GDP

10.7 7.3   -2.2   3.4 5.2

CPI (period average)

7.7 17.4   7.1   4.8 6.2

CPI (end of period)

10.9 18.1   1.8   6.5 6.0

Per capita GDP (in US$)

1,184 1,274   1,268   1,269 1,296

Central government operations (percent of GDP)

             

Total revenue and grants

42.1 45.2   45.3   51.8 51.2

Revenue

24.8 27.3   27.1   27.9 29.6

Grants

17.3 17.9   18.2   23.9 21.6

Total expenditure

40.8 45.5   43.1   49.4 49.0

Recurrent expenditure

21.8 23.8   23.2   26.7 25.8

Development expenditure

18.1 19.7   19.1   22.4 22.9

Unrecorded expenditure 1/

0.9 1.9   0.8   0.4 0.3

Overall balance

1.3 -0.3   2.2   2.4 2.2

Foreign financing (net)

-0.4 -1.4   -1.6   -1.0 -1.0

Domestic financing (net)

-0.9 1.7   -1.5   -1.8 -1.3

Privatization receipts

0.0 0.0   0.8   0.4 0.0

Central government debt (percent of GDP, unless otherwise indicated) 2/

36.8 32.1   28.3   26.8 24.9

Domestic debt

10.1 9.1   8.0   6.7 5.2

External debt

26.8 23.0   20.2   20.2 19.7

(In US$ millions, end of period)

156.6 143.6   132.8   133.1 136.0

Monetary and credit (percentage change, end-year data)

             

Credit to private sector

53.3 26.5   -4.2   12.2 18.8

Broad money

23.3 6.9   22.0   7.0 12.5

Reserve money

-6.0 -2.3   53.5   -0.5 12.3

Interest rate - deposit (percent per annum)

0.7 2.0   2.7   ... ...

Interest rate - lending (percent per annum)

14.2 17.0   15.4   ... ...

Balance of payments (in US$ millions, unless otherwise indicated)

             

Current account balance

-48.0 -106.1   -138.7   -202.5 -193.7

(Percent of GDP)

-8.2 -16.4   -21.1   -30.1 -27.6

Overall balance

16.2 -31.0   56.4   11.8 10.2

Gross official reserves (in US$ millions, end of period) 3/

120.5 89.5   146.0   167.5 187.3

(In months of next year's imports of goods and nonfactor services)

3.9 3.5   4.2   4.8 5.2

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

7.66 8.00   8.06   ...

Real effective exchange rate (period average, 2005 = 100)

106.5 114.2   119.9   ... ...

Nominal effective exchange rate (period average, 2005 = 100)

93.1 88.7   88.5   ... ...
 

Sources: Data provided by the authorities; and IMF staff estimates and projections.
1/ Includes the change in stock of unpaid payment orders and unpresented checks.
2/ Includes disbursements under an IMF-supported arrangement.
3/ Includes SDR allocations made by the IMF to the Solomon Islands in 2009 and prospective disbursements under an IMF-supported arrangement.



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