IMF Executive Board Concludes 2013 Article IV Consultation with Solomon Islands

Press Release No. 14/19
January 21, 2014

On January 8, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the 2013 Article IV Consultation with Solomon Islands.1 On the same day, the Executive Board also completed the second review under the Extended Credit Facility (ECF) arrangement with Solomon Islands, and approved US$0.23 million disbursement (Press Release No. 14/06).

Economic growth in Solomon Islands is slowly rebounding from the slowdown of the first half of 2013, when agriculture, logging, and gold production fell, owing mainly to unfavorable weather developments, lower terms of trade, and one-off factors. Real GDP growth is projected at 2.9 percent for 2013 and 4 percent for 2014. Risks are tilted to the downside, including from lower external demand and grants. Inflation has stabilized at around 6.5 percent and is expected to fall gradually as agricultural prices react to the recovery of production.

The under-execution of development spending led to a significant budget surplus in the first six months of 2013, but fiscal risks have risen. Government revenues for the year are somewhat lower than expected owing to slower economic growth and weather shocks. Spending overruns on selected program, including on tertiary scholarships, combined with the increase in constituency development spending, are putting significant pressure on the budget.

The financial system is sound, although deepening financial markets remains an important development challenge. Banks are adequately capitalized, highly liquid, and profitable. Bank credit continues to recover after the sluggish pace recorded over the last few years. Excess reserves in the banking system have declined from last year’s level but remain substantial.

The current account balance is expected to deteriorate this year, due to lower exports and higher imports—the latter on account of higher foreign direct investment—although net international reserves are expected to hold up at close to current levels. The Solomon Islands dollar was broadly stable against the U.S. dollar during the year, but fluctuations against the Australian dollar were considerably more pronounced. The central bank is gaining experience with the transition to a basket peg.

The country continues to face development challenges. Infrastructure needs are large, particularly with regard to energy supply, transportation, and telecommunications. The country has achieved significant improvements in the business climate, but still ranks lower than its regional peers in some areas, such as access to electricity and ease of registering property.

Executive Board Assessment2

Executive Directors commended the authorities’ broadly satisfactory implementation of their ECF-supported program. Economic growth is gradually recovering and inflation has stabilized since the second half of 2013. Nonetheless, the country faces significant growth and development challenges, including from diminishing donor assistance. This will require continued efforts to strengthen public finances, enhance monetary and exchange rate policies, safeguard financial stability, and address constraints to broad-based, inclusive growth.

Directors encouraged the authorities to protect policy buffers by keeping overall expenditure, including from the supplementary budget, within the original spending envelope, while addressing priority social and development needs. They stressed the importance of strengthening the quality and efficiency of public spending and the transparency and accountability of constituency funds and tertiary scholarship awards. Directors commended the approval of the Public Finance Management Act. They looked forward to its implementation, and further efforts to enact remaining tax reforms and to improve debt management.

Directors endorsed the current monetary policy stance. They welcomed the central bank’s efforts to strengthen monetary policy instruments and readiness to mop up liquidity if inflationary pressures arise. Directors agreed that the basket peg remains appropriate. They saw merit in widening the operational band against the U.S. dollar to track the currency basket more closely. They also highlighted the importance of boosting productivity to prevent real exchange rate misalignment.

Directors noted that the financial sector is sound. They supported the authorities’ pursuit of financial sector reform, including plans to strengthen the legal and oversight frameworks of the financial sector and improve access to financial services.

Directors underscored the need for new sources of growth as logging activities decline, and the importance of fostering private sector growth. They urged the authorities to prioritize investments to ensure reliable access to power, telecommunications, and transportation, and to promote a transparent tax regime and clear land-use rights. They noted that the right balance of spending on all levels of education will help meet the economy’s skills needs.


Solomon Islands: Selected Economic Indicators, 2010–14
 
  2010 2011 2012 2013 2014
    Est. Est. Prog. Rev. Proj.
 

 

      (EBS/13/81) Proj.  

Growth and prices (percentage change)

 

 

       

Real GDP

7.8 10.7 4.9 4.0 2.9 4.0

Of which: nontimber, nonmining

5.4 7.3 3.5 5.5 4.1 5.0

CPI (period average)

0.9 7.4 5.9 6.0 6.1 5.9

GDP deflator

5.9 9.1 5.7 6.3 5.8 5.6

Nominal GDP (in SI$ millions)

5,497 6,637 7,355 8,099 8,006 8,800

Of which: nonmining nominal GDP (in SI$ millions)

5,392 6,277 6,752 7,599 7,517 8,296

Per capita GDP (in US$)

1,295 1,614 1,819 1,901 1,950 2,096

Per capita GNI (in US$)

965 1,283 1,633 1,689 1,709 1,776

Central government operations (percent of GDP)

           

Total revenue and grants

62.6 60.3 53.7 53.3 53.5 49.6

Revenue

32.0 33.1 34.5 33.5 32.9 32.1

Grants

30.7 27.1 19.2 19.9 20.5 17.4

Total expenditure

56.4 51.2 49.8 52.6 53.2 49.3

Recurrent expenditure

28.2 25.6 28.4 28.2 30.4 28.5

Development expenditure

27.9 25.5 21.3 24.4 22.7 20.8

Unrecorded expenditure 1/

0.3 0.1 0.0 0.0 0.0 0.0

Overall balance

6.2 9.0 3.9 0.8 0.3 0.3

Foreign financing (net)

-1.2 -0.7 -1.2 -0.6 -0.6 1.1

Domestic financing (net)

-5.1 -8.4 -2.7 -0.2 0.3 -1.4

Privatization receipts

0.0 0.1 0.0 0.0 0.0 0.0

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

27.8 21.6 17.5  14.6 14.6 14.1

Domestic debt

8.1 6.4 4.5 3.1 3.2 2.5

External debt

19.8 15.2 13.0 11.5 11.4 11.5

(In US$ millions, end of period)

134.7 137.0 130.4 124.7 124.7 138.7

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

           

Credit to private sector

-4.7 4.7 4.1 8.2 16.0 16.0

Broad money

13.5 25.5 17.3 15.2 14.5 7.4

Reserve money

75.3 32.8 22.0 14.5 2.8 6.7

Interest rate - deposit (percent per annum)

2.6 1.4 0.9 ... ... ...

Interest rate - lending (percent per annum)

13.5 11.5 11.2 ... ... ...

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

           

Current account balance

-210.1 -58.5 2.2 -21.8 -46.2 -156.8

(Percent of GDP)

-30.8 -6.7 0.2 -2.0 -4.2 -13.0

(excluding mining-related capital imports, in percent of GDP)

-12.6 0.8 4.3 1.8 -0.5 -9.9

Exports of goods and nonfactor services (GNFS)

330.2 556.6 635.2 641.8 598.0 614.0

(Percentage change)

40.6 68.5 14.1 0.4 -5.8 2.7

Logging exports

124.7 191.4 219.2 225.9 199.9 183.9

Imports of GNFS

547.8 610.0 650.8 707.7 708.2 799.3

(Percentage change)

59.2 11.4 6.7 8.9 8.8 12.9

Foreign direct investment

235.6 140.8 65.7 27.3 49.0 112.4

(Percent of GDP)

34.6 16.2 6.6 2.5 4.5 9.3

Overall balance

119.8 146.4 87.3 51.0 20.0 8.9

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

265.8 412.3 499.6 551.1 520.0 527.8

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

5.2 7.6 8.5 8.4 7.8 7.6

(In months of next year's nonmining-related imports of GNFS)

5.9 8.1 9.0 8.9 8.2 8.0

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

8.1 7.4 7.3 ... ... ...

Real effective exchange rate (end of period, 2005 = 100)

108.6 125.0 127.6 ... ... ...

Nominal effective exchange rate (end of period, 2005 = 100)

81.1 87.6 86.7 ... ... ...
 

Sources: Data provided by the authorities; and IMF staff estimates and projections.

1/ Includes changes in the stock of unpaid payment orders and unpresented checks and the statistical discrepancy. 

2/ Includes disbursements under an IMF-supported arrangement. 

3/ Includes SDR allocations made by the IMF to the Solomon Islands in 2009 and actual and prospective disbursements under the IMF-supported arrangement.


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 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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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