IMF Concludes the 2016 Article IV Consultation and ECF Review Mission to Solomon IslandsPress Release No. 16/38
February 1, 2016
End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.
An International Monetary Fund (IMF) team led by Ms. Patrizia Tumbarello visited the Solomon Islands during January 19–28 to hold discussions on the 2016 Article IV consultation. The mission also conducted the fifth and sixth reviews under a three-year Extended Credit Facility (ECF) arrangement, approved on December 7, 2012 (see Press Release No. 12/479) which expires on March 31, 2016(see Press Release No. 15/575). The team met with Prime Minister Manasseh Sogavare, Governor Denton Rarawa, Permanent Secretary of Finance and Treasury Harry Kuma, and other senior officials, as well as representatives from the private sector and development partners. The mission expresses its deep appreciation to the authorities and other stakeholders for the frank and constructive discussions.
At the conclusion of the visit, Ms. Tumbarello issued the following statement:
“Solomon Islands has made considerable gains in terms of macroeconomic stability and strengthening institutions over the last few years. Strong fiscal and external reserve buffers have been rebuilt, and have fostered the resilience of the economy. Public debt is one of the lowest in the region and among all small states. Important reforms have been implemented: notably, public financial management (PFM) reforms to strengthen fiscal management; and the new Central Bank Act to enhance the effectiveness of monetary policy. The ECF program with the IMF has helped to enhance macroeconomic management and anchor structural reforms.
“The economy is estimated to have grown by 3.2 percent in 2015. The stronger-than-anticipated performance of the forestry sector supported output, and the reduced energy costs from lower oil prices had a positive impact on consumption and investment. Higher implementation of government spending in the 2015 budget relative to previous years has also sustained activity. In 2016, GDP growth is expected to remain at around 3 percent, led by investment in communication, construction, and manufacturing, with logging activity declining relative to 2015. Average inflation should stabilize at around 2 percent. The current account deficit is projected to widen slightly to around 4 percent of GDP as exports of logs are expected to decline. Risks to the short and medium-term outlook are on the downside. On the domestic front, the ongoing El Niño event will likely continue to weigh on agricultural production in the first part of 2016. The external outlook is clouded by the ongoing adjustments in the global and regional economy. Preliminary indications suggest that a generalized slowdown in emerging market economies, especially the slowdown and rebalancing of the Chinese economy, could have a negative effect on the overall activity.
“With the uncertainty regarding future sources of growth and a challenging external outlook, fiscal buffers should be preserved in implementing the 2016 budget and in the outer years. As the program with the IMF expires at end-March 2016, the progress achieved in securing macroeconomic stability should be locked in by maintaining healthy fiscal buffers and foreign reserves, given the country’s vulnerabilities to external shocks, including from changes in the terms of trade, natural disasters, and climate change. The new Medium Term Development Plan and the related National Development Strategy focus on rural development, and represent an opportunity to prioritize spending for infrastructure in line with available resources within a medium term fiscal framework. Progress in implementing PFM reform to improve the budgeting process and quality of spending will continue to be key to encouraging FDI and sustaining donor support. The new anti-corruption bill will play an important role in supporting rural development and improving the business environment.
“Monetary policy remains appropriate and has been very accommodative in an effort to support growth. The basket peg regime has worked effectively since the removal of the operational 1 percent band around the base rate against the US dollar in September 2014. The Solomon Islands dollar has depreciated against the US dollar in recent months by around 10 percent, reflecting the strong appreciation of the US dollar against the Australian dollar and other currencies.. Financial soundness indicators are healthy, and the authorities have been very proactive in efforts to increase financial depth and promote financial inclusion. Working together with commercial banks, the Central Bank of Solomon Islands introduced mobile banking services to expand financial access in geographically dispersed and rural areas, making Solomon Islands a leader in mobile banking services among Pacific small states. In this context, the upcoming National Financial Inclusion Strategy for 2016–20 will be key to supporting inclusive growth. Further progress in financial sector reforms, including the promulgation of the new National Provident Fund Bill and the Credit Union Bill, will also be critical.
“The IMF stands ready to support the government to achieve its ambitious development goals for the country through close engagement and with technical assistance on PFM, work on financial inclusion and policy advice after the ECF program expires.”