## 1slbea2020002

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---

### Executive summary — context and immediate impact
- The COVID-19 pandemic is having a severe impact on Solomon Islands’ economy.
- Global slowdown reduced demand for commodity exports (including logging) and tourism.
- Authorities enacted strong and timely containment measures and oriented additional spending towards health care and support for the economy.
- Containment measures hampered domestic activity, disrupted agricultural cash crop production, business activity and consumer spending, and contributed to a sharp decline in foreign exchange reserves and an immediate external financing gap.
- Need for sufficient external buffers is urgent given the basket exchange rate peg regime, a weak fiscal position, ongoing uncertainty and large downside risks.

### Request for Fund support
- Authorities requested financial assistance under a blend: one-third under the exogenous shock window of the Rapid Credit Facility (RCF) and two-thirds from the Rapid Financing Instrument (RFI).
- Letter of Intent envisages a disbursement of SDR 20.8 million, equivalent to 100 percent of quota, with the full amount to become available upon Board approval.
- Authorities intend to use the RCF/RFI disbursement to provide balance of payment support.
- Staff assesses Solomon Islands faces an urgent balance of payments need, meets eligibility requirements for RCF/RFI, and supports the request.
- Public debt is at moderate risk of distress and there is adequate capacity to repay the Fund.
- IMF disbursement expected to play a catalytic role in securing additional financing from development partners.

### Macroeconomic developments and outlook — findings and projections
- Pre-pandemic:
  - Real GDP growth moderated to 1.2 percent in 2019.
  - Inflation remained subdued.
  - Fiscal deficit estimated at -1.7 percent of GDP in 2019.
  - Credit growth picked up to 5 percent.
- Pandemic impact on activity:
  - Real GDP growth expected to decline to about -5.5 percent in 2020 (compared to 2.5 percent in the pre-pandemic baseline).
  - Drivers: decline in logging, mining and fisheries exports; contraction in tourism; negative impact of containment measures on domestic demand.
  - Inflation expected to remain muted despite a temporary surge in food prices in Q1 2020.
  - Growth expected to rebound in 2021 (in line with April World Economic Outlook global projections).
- Fiscal outlook:
  - COVID-19 health and containment spending estimated at about SI$137 million (1.1 percent of GDP).
  - Stimulus package of SI$319 million, about 2.6 percent of GDP, expected financed through development partners’ support and domestic sources.
  - Fiscal deficit projected to widen to 5.8 percent of GDP in 2020 (compared to 3.7 percent in the pre-pandemic baseline).
  - Cash balance expected to fall well below the staff recommended minimum of two months of spending; public debt projected to rise.
- External sector:
  - Exports expected to decline by close to 25 percent as import demand for round logs primarily from China collapses.
  - Tourism arrivals and remittances projected to plummet.
  - Current account deficit projected to increase to 17.8 percent of GDP in 2020 (compared to about 8 percent in the pre-pandemic baseline).
  - Total external financing gap projected at about US$38.8 million (about 2.5 percent of GDP).
  - Without exceptional financing, international reserves expected to fall well below the top of the reserve adequacy range in 2020 and decline further in 2021 before stabilizing.

- Comparative projections (selected):
  - Real GDP growth: 2019 est. 1.2; Pre-COVID baseline 2.5 (2020); Post-COVID projection -5.5 (2020); 2021 pre 2.7 vs post 5.6.
  - CPI inflation: 2019 1.8 percent; 2020 pre 2.3 vs post 2.8; 2021 pre 2.9 vs post 3.7.
  - Central government revenue and grants: 2019 32.9 percent of GDP; 2020 pre 35.8 vs post 32.2.
  - Overall fiscal balance: 2019 -1.7 percent of GDP; 2020 pre -3.7 vs post -5.8.
  - Current account balance: 2019 -8.9 percent of GDP; 2020 pre -7.9 vs post -17.8.
  - Gross official reserves (US$ millions): 2019 574; 2020 pre 601 vs post 466 (change -135).
  - Reserves in months of next year's imports of GNFS: 2019 10.0; 2020 pre 7.6 vs post 7.0.

### Financing and donor support
- Fund financing under the RCF/RFI will cover about a fifth of external financing needs in 2020; remainder expected from a significant drawdown of international reserves and development partners.
- World Bank support: Transition to sustainable growth DPO US$15 million (US$11.8 million grant, US$3.2 million loan) plus expected US$5 million under COVID-19 Fast Track Facility.
- ADB support: US$6 million released from Pacific Disaster Resilience Program and processing an additional US$20 million; expected as grant and loan disbursements.
- Text Table 2 (projected external financing gap in 2020) indicates:
  - Current account: pre -7.9 vs post -17.8 (percent of GDP).
  - Overall balance of payment (- deficit): pre 0.0 vs post -9.7.
  - Change in gross official reserves (+ decrease): pre 0.0 vs post 7.1.
  - External financing gap: pre 0.0 vs post 2.5.
  - Net use of IMF credit and other foreign financing (ADB) included in financing sources.

### Risks
- Risks are skewed to the downside:
  - External: sharper or prolonged global slowdown affecting commodity exports and tourism.
  - Domestic: stronger-than-expected impact of containment measures; fiscal spending pressures; decline in logging due to logging sustainability policy; vulnerability to severe natural disasters.
  - Project delays due to travel restrictions and supply chain disruptions.
  - Commodity price volatility on imports (rice and oil) and exports (logs, tuna, agricultural products).
  - A local COVID-19 outbreak would substantially increase human and fiscal costs and strain health infrastructure.

### Policy discussions and recommendations — fiscal
- Immediate measures:
  - Reprioritize spending towards protecting vulnerable households and businesses; health and containment spending and targeted support prioritized.
  - Stimulus measures targeted at social assistance, payroll and employment support, capital grants to businesses, tax relief for affected businesses, equity injections to government-owned companies, and advancing planned infrastructure investment.
  - Oversight Committee established to oversee stimulus spending; authorities committed to publication of an audit of COVID-19 related expenditures and related procurement information.
- Medium-term fiscal recommendations:
  - Improve budget planning in line ministries, strengthen commitment controls and procurement planning.
  - Substantial new measures, including concessional external financing, needed to increase fiscal buffers toward a broad cash balance of at least two months of total spending and to keep debt within the government’s target of 35 percent of GDP.
  - Targeted efforts to recover tax arrears and strengthen revenue administration and compliance.
  - Address public financial management weaknesses: finalize regulations under the PFM Act and develop short-term liquidity forecasts.
  - Complete review of payroll and allowances; prudent spending on Constituency Development Funds, Pacific Games and tertiary scholarships.
  - Stocktaking of arrears to clear outstanding obligations and prevent further accumulation.

### Policy — monetary, exchange rate and financial sector
- Need for sufficient external buffers to preserve confidence in the basket exchange rate peg regime.
- Monetary policy was accommodative pre-pandemic; excess liquidity declined as credit growth picked up to 5 percent.
- Maintain financial stability and strengthen enforcement of governance standards, transparency and anti-corruption.

### Structural reforms
- Comprehensive structural reforms recommended to reduce the current account deficit over the medium term and foster diversification.
- Improve the business environment to help diversification and resilience.
- Strengthen enforcement of governance standards, improve transparency and advance the anti-corruption agenda.

### Fund support under the RCF and RFI — terms and expected role
- Solomon Islands is a presumed blend country; one-third of Fund disbursement expected under RCF and two-thirds from RFI.
- Disbursement of SDR 20.8 million (100 percent of quota) envisaged, to be fully available on Board approval.
- Fund financing expected to help contain urgent balance of payments needs and catalyze support from other development partners.
- Solomon Islands received debt service relief through the Catastrophe Containment and Relief Trust (CCRT) for IMF debt service due over the next six months, with potential extension up to two years, from April 14, 2020.

### Staff appraisal
- Staff supports the authorities’ request for RCF/RFI financing given urgent balance of payments need and eligibility.
- Financing expected to play a catalytic role in mobilizing additional donor support.
- Public debt assessed at moderate risk of distress with adequate capacity to repay the Fund.

---

### 13. Medium-term fiscal policy that safeguards debt — priorities
- Public debt is currently low but expected to rise over the medium term; pandemic will further build debt vulnerabilities (Joint Bank-Fund DSA).
- Priorities:
  - Articulate policy intent for the new VAT and other reforms, taking into account the fiscal regime for the mining sector; reforms should at least be revenue neutral.
  - Improve budget planning in line ministries, strengthen commitment controls and procurement planning, and prioritize quality spending in line with the National Development Strategy.
  - Strengthen efforts to rebuild fiscal buffers and undertake infrastructure investment to increase resilience to natural disasters.

### COVID-19 fiscal response — key measures and amounts
- Health and Containment Spending: 137 SI$ million; 1.1 percent of GDP
- Economic Stimulus Package: 319 SI$ million; 2.6 percent of GDP
- Budget Measures: 266 SI$ million; 2.2 percent of GDP

- Health-related spending:
  - Health grants allocated to all provincial health authorities: 10 SI$ million; 0.1 percent of GDP

- Social assistance:
  - Support the resumption of schools: 5 SI$ million; 0.0 percent of GDP
  - Employment support for women and youth: 5 SI$ million; 0.1 percent of GDP
  - Continued government payroll for civil servants who faced 50 percent reduction in salaries due to a shutdown of public services. To be announced; n.a.

- Additional support:
  - Capital grants to targeted existing investment in productive and resource sectors, including agriculture, forestry, fisheries and tourism, as well as government-owned companies 1/: 141 SI$ million; 1.1 percent of GDP
  - Special rental relief package to affected SMEs: 5 SI$ million; 0.0 percent of GDP
  - Tax relief for affected businesses, especially tourism sector: Cost neutral; n.a.

- Economic recovery:
  - Advancing infrastructure investment such as agriculture projects, bridges, airport: 100 SI$ million; 0.8 percent of GDP

- Below-the-line Measures: 53 SI$ million; 0.4 percent of GDP

- Equity injections to SOEs:
  - Equity injection to the Development Bank of Solomon Islands: 20 SI$ million; 0.2 percent of GDP

- Loans to businesses:
  - Concessional loans to SMEs and large corporates through the Development Bank of Solomon Islands: 33 SI$ million; 0.3 percent of GDP

- Note: 1/ Government-owned companies including Solomon Airlines, Solomon Water, Soltuna, and Commodities Export Marketing Authority.

### Monetary, exchange rate, and financial sector policy (details)
- Monetary policy:
  - Monetary policy remains accommodative; CBSI adopted an easing cycle since September 2019 and reiterated commitment to continue expansionary monetary policy.
  - Excess liquidity in the banking system is structural, reflecting lags between donor inflows and spending.
  - Suggested additional CBSI measures include a trade credit facility and potential purchases of government bonds in the secondary market.
  - Basket exchange rate peg remains an appropriate nominal anchor; credibility preserved by maintaining adequate gross official reserves.
- Financial support measures:
  - Government encouraging commercial banks to provide loan and interest relief for three to six months.
  - Financial injections and concessional loans via the Development Bank of Solomon Islands (DBSI).
  - National Provident Fund (NPF) providing assistance and eliminating surcharges and penalties to employers' contributions.
- Financial sector vulnerabilities and reforms:
  - As of December 2019, non-performing loans increased to 10.4 percent and bank profitability declined.
  - Credit to the private sector is expected to shrink and non-performing loans to rise further in 2020.
  - Reforms: strengthen supervision, finalize backlog of financial legislation (including Credit Union Act and Insurance Act), ensure effectiveness of AML/CFT framework.
  - DBSI must be subject to rigorous supervision and strong governance to avoid fiscal risks.
  - CBSI should promote digital banking for financial inclusion.

### Structural reforms — key areas
- Strengthen transparency and governance; advance anti-corruption agenda.
- Apply the mining fiscal regime rigorously and enforce governance standards.
- Improve sanitation, transport, communication and energy services.
- Improve enforcement of contracts, trading across borders procedures, insolvency resolution and access to finance.
- Digitalization and registration to improve record keeping, revenue collection and access to credit.
- Address monopoly positions of some SOEs through stronger regulation or other initiatives.

### Fund support under the RCF and RFI — access and capacity to repay
- Disbursements from the IMF under an RCF/RFI blend would total SDR 20.8 million (about US$28.8 million), comprising SDR 6.93 million for the RCF and SDR 13.87 million for the RFI.
- Expected disbursement from the ADB amounting to US$10 million will go toward filling the financing gap.
- Outstanding access with the IMF would increase to 103.8 percent of quota and remain below allowable limits.
- Solomon Islands currently has outstanding credit to the Fund equivalent to 4 percent of quota from the 2012 Extended Credit Facility (ECF).
- A disbursement of 100 percent of quota would increase the Fund’s exposure by 2 percent of GDP and 6.4 percent of foreign exchange reserves.
- Total repayments would peak in 2024 at 1.5 percent of government revenue and 1.4 percent of exports of goods and services.
- Solomon Islands continues to be assessed at moderate risk of external and overall debt distress.

---

### Staff appraisal — outlook, risks, and policy support
- Economic impact and outlook:
  - GDP growth in 2020 expected to decline to about -5.5 percent, about 8 percentage points lower than pre-pandemic projection.
  - Current account and fiscal deficits expected to widen and foreign reserves to fall.
  - Depth and duration of the economic impact are highly uncertain; downside risks are significant.
- External financing needs and reserves:
  - Large external financing gap around US$38.8 million, equivalent to 2.5 percent of GDP.
  - Maintaining sufficient reserve buffers is warranted given exceptional uncertainties and frequent natural disaster events.
- Policy support endorsed by staff:
  - Support for authorities’ immediate priorities to mitigate the pandemic and preserve macroeconomic stability.
  - Immediate efforts include restricting travel, scaling down public services to essential services only, and temporarily closing schools and some services.
  - Government increased health spending and introduced a fiscal stimulus package.
  - Beyond immediate response, authorities committed to building conditions for sustainable growth, strengthening fiscal management, reining in financial stability risks and improving governance.

---

### Disbursement request and staff assessment (summary)
- Staff supports disbursement under the RCF/RFI in the amount of SDR 20.8 million (about US$28.8 million, 100 percent of quota).
- Composition: SDR 6.93 million for the RCF and SDR 13.87 million for the RFI.
- Justification: urgent balance of payment needs from the COVID-19 shock.
- Risk and repayment assessment: Solomon Islands assessed at moderate risk of debt distress with strong capacity to repay the Fund.

### Selected projections (growth, prices, fiscal and external; selected years)
- Real GDP (annual % change, 2016–2025 sample): 5.9; 5.3; 3.9; 1.2; -5.5; 5.6; 4.0; 3.4; 3.0; 2.9
- CPI (period average, annual % change, sample): 0.5; 0.5; 3.5; 1.8; 2.8; 3.7; 2.2; 3.6; 3.9; 4.2
- Nominal GDP (SI$ millions, sample): 10,957; 11,703; 12,676; 12,992; 12,384; 13,543; 14,336; 15,321; 16,350; 17,425

- Central government operations (percent of GDP, selected):
  - Total revenue and grants: 38.6; 39.2; 40.0; 32.9; 32.2; 32.3; 33.4; 33.5; 32.6; 32.1
  - Overall balance: -4.2; -3.4; 0.8; -1.7; 0.3; -5.8; -5.2; -4.0; -4.3; -4.1

- Balance of payments and reserves (selected):
  - Current account balance (US$ millions, sample): -48.8; -62.8; -47.8; -142.5; -271.1; -264.4; -230.3; -222.0; -221.8; -177.7
  - Current account (percent of GDP, sample): -3.5; -4.3; -3.0; -8.9; -17.8; -15.9; -13.1; -11.8; -11.0; -8.3
  - Gross official reserves (US$ millions, end of period, sample): 513.6; 576.9; 613.1; 574.1; 465.9; 426.5; 436.1; 460.9; 475.1; 541.8
  - Reserves (months of next year's imports of GNFS, sample): 9.1; 9.3; 9.8; 10.0; 7.0; 5.7; 5.6; 5.8; 5.7; 6.0

- Banking and financial soundness indicators (selected):
  - Credit to private sector (annual % change, sample): 12.1; 6.4; 4.1; 5.0; -4.1; 5.7; 6.0; 5.0; 4.5; 4.5
  - Non-performing Loans to Total Gross Loans (2014–2019): 4.7, 4.1, 3.8, 6.1, 7.1, 10.4
  - Regulatory Capital to Risk-Weighted Assets (2014–2019): 31.6, 31.1, 32.5, 35.1, 31.1, 31.3

### Indicators of capacity to repay the Fund (selected)
- Net use of Fund credit (SDR millions, annual): 20.8; -0.2; -0.2; -3.6; -7.1; -4.2; -1.4; -1.4; -1.4; -1.4; -0.7
- Outstanding Fund credit (SDR millions, end of year): 21.6; 21.4; 21.2; 17.6; 10.5; 6.3; 4.9; 3.5; 2.1; 0.7; 0.0
- Outstanding Fund credit (percent of quota, sample): 103.8; 102.9; 101.9; 84.5; 50.5; 30.1; 23.3; 16.7; 10.0; 3.3; 0.0

---

### Appendix I — Letter of Intent (highlights)
- As of May 18, 2020, Solomon Islands has no confirmed COVID-19 cases.
- Government declared a state of emergency (extended until July 25) and implemented travel restrictions and containment measures.
- Short-term outlook:
  - Real output growth in 2020 anticipated to decline to about -5.5 percent (IMF estimate).
  - Fiscal deficit estimated to widen to about 5.8 percent of GDP.
  - Current account deficit projected to increase to about 17.8 percent of GDP in 2020.
  - Projected external financing gap around US$38.8 million (about 2.5 percent of GDP).
- Request for IMF financing:
  - SDR20.8 million (about US$28.8 million), equivalent to 100 percent of quota, with SDR 6.93 million under RCF and SDR 13.87 million under RFI.
- Fiscal and monetary commitments:
  - Increase health-related spending by US$20 million (about 1.1 percent of GDP) in 2020.
  - Adopted fiscal stimulus package of SI$319 million (about 2.6 percent of GDP).
  - Maintain expansionary monetary policy stance and preserve credibility of the basket exchange rate peg by maintaining adequate gross official reserves.
- Governance and transparency commitments:
  - Publish audit of COVID-19 related expenditures before December 2021 and documentation on crisis-related public procurement.
  - Undergo an update of the safeguards assessment of the CBSI and authorize CBSI external auditor to share relevant documents.
  - Published audited financial statements for the year ended December 31, 2019 (on CBSI website on May 13, 2020).

---

### Debt sustainability assessment — key findings
- Risk of external debt distress: Moderate
- Overall risk of debt distress: Moderate
- Composite Indicator score: 2.72
- Residual financing gap: US$38.8 million (about 2.5 percent of GDP)
- DSA results:
  - External debt indicators remain below indicative thresholds under baseline but breach thresholds under extreme stress scenarios.
  - PV of public debt-to-GDP ratio remains below the 55 percent benchmark under the baseline; may breach thresholds under extreme shocks.
  - Tailored natural disaster shock of similar scale to the largest historical shock would cause a spike in debt trajectory.
- Gross external financing need (Million of U.S. dollars, selected): 2019 = 30.9; 2020 = 36.5; 2021 = 39.3; 2022 = 124.7; 2023 = 261.5
- Nominal GDP (Million of US dollars, selected): 2019 = 1,598; 2020 = 1,523; 2021 = 1,666; 2022 = 1,763; 2023 = 1,884; 2024 = 2,011

---

*Source: EXECUTIVE SUMMARY, Chapter 13, Staff appraisal, Letter of Intent, DSA and appendices contained in 1slbea2020002.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and immediate impact
- The COVID-19 pandemic is having a severe impact on Solomon Islands’ economy.
- Global slowdown reduced demand for commodity exports (including logging) and tourism.
- Authorities enacted strong and timely containment measures to limit a local outbreak and oriented additional spending towards health care and support for the economy.
- Containment measures have hampered domestic activity, disrupted agricultural cash crop production, business activity and consumer spending, and contributed to a sharp decline in foreign exchange reserves and an immediate external financing gap.
- The need for sufficient external buffers is urgent given the basket exchange rate peg regime, a weak fiscal position, ongoing uncertainty and large downside risks.

### Request for Fund support
- Authorities requested financial assistance under a blend: one-third of the disbursement under the exogenous shock window of the Rapid Credit Facility (RCF) and two-thirds from the Rapid Financing Instrument (RFI).
- The attached Letter of Intent envisages a disbursement of SDR 20.8 million, equivalent to 100 percent of quota, with the full amount to become available upon Board approval.
- The authorities intend to use the RCF/RFI disbursement to provide balance of payment support.
- Staff assesses Solomon Islands faces an urgent balance of payments need, meets eligibility requirements for RCF/RFI, and supports the request.
- Public debt is at moderate risk of distress and there is adequate capacity to repay the Fund.
- The IMF disbursement is expected to play a catalytic role in securing additional financing from development partners.

### Macroeconomic developments and outlook
Findings and projections:
- Pre-pandemic: Real GDP growth moderated to 1.2 percent in 2019; inflation remained subdued; fiscal deficit estimated at -1.7 percent of GDP in 2019; credit growth picked up to 5 percent.
- Pandemic impact on activity:
  - Real GDP growth expected to decline to about -5.5 percent in 2020 (compared to 2.5 percent in the pre-pandemic baseline).
  - Drivers: decline in logging, mining and fisheries exports; contraction in tourism; negative impact of containment measures on domestic demand.
  - Inflation expected to remain muted despite a temporary surge in food prices in Q1 2020.
  - Growth expected to rebound in 2021 (in line with April World Economic Outlook global projections).
- Fiscal outlook:
  - COVID-19 health and containment spending estimated at about SI$137 million (1.1 percent of GDP).
  - Stimulus package of SI$319 million, about 2.6 percent of GDP, expected financed through development partners’ support and domestic sources.
  - Fiscal deficit projected to widen to 5.8 percent of GDP in 2020 (compared to 3.7 percent in the pre-pandemic baseline).
  - Cash balance expected to fall well below the staff recommended minimum of two months of spending; public debt projected to rise.
- External sector:
  - Exports expected to decline by close to 25 percent as import demand for round logs primarily from China collapses.
  - Tourism arrivals and remittances projected to plummet.
  - Current account deficit projected to increase to 17.8 percent of GDP in 2020 (compared to about 8 percent in the pre-pandemic baseline).
  - Total external financing gap projected at about US$38.8 million (about 2.5 percent of GDP).
  - Without exceptional financing, international reserves expected to fall well below the top of the reserve adequacy range (estimated as four to seven months of prospective imports in the 2019 Article IV) in 2020 and decline further in 2021 before stabilizing.
- Specific comparative projections (Text Table 1 highlights):
  - Real GDP growth: 2019 est. 1.2; Pre-COVID baseline 2.5 (2020); Post-COVID projection -5.5 (2020); 2021 pre 2.7 vs post 5.6.
  - CPI inflation: 2019 1.8 percent; 2020 pre 2.3 vs post 2.8; 2021 pre 2.9 vs post 3.7.
  - Central government revenue and grants: 2019 32.9 percent of GDP; 2020 pre 35.8 vs post 32.2.
  - Overall fiscal balance: 2019 -1.7 percent of GDP; 2020 pre -3.7 vs post -5.8.
  - Current account balance: 2019 -8.9 percent of GDP; 2020 pre -7.9 vs post -17.8.
  - Gross official reserves (in millions of U.S. dollar): 2019 574; 2020 pre 601 vs post 466 (change -135).
  - Reserves in months of next year's imports of GNFS: 2019 10.0; 2020 pre 7.6 vs post 7.0.

### Financing and donor support
- Fund financing under the RCF/RFI will cover about a fifth of external financing needs in 2020; the remainder is expected to be financed by a significant drawdown of international reserves and financing from development partners.
- World Bank support: Transition to sustainable growth DPO US$15 million (US$11.8 million grant, US$3.2 million loan) plus expected US$5 million under COVID-19 Fast Track Facility.
- ADB support: US$6 million released from Pacific Disaster Resilience Program and processing an additional US$20 million; these are expected to comprise grant and loan disbursements.
- Text Table 2 (projected external financing gap in 2020) indicates:
  - Current account: pre -7.9 vs post -17.8 (in percent of GDP).
  - Overall balance of payment (- deficit): pre 0.0 vs post -9.7.
  - Change in gross official reserves (+ decrease): pre 0.0 vs post 7.1.
  - External financing gap: pre 0.0 vs post 2.5.
  - Net use of IMF credit and other foreign financing (ADB) are included in financing sources (notes indicate inclusion of 100% of Fund quota with 1/3 as RCF and 2/3 as RFI and inclusion of US$10 million from ADB for COVID-19 response).

### Risks
- Risks are skewed to the downside:
  - External: sharper or prolonged global slowdown affecting demand for commodity exports and tourism.
  - Domestic: stronger-than-expected impact of containment measures on activity; fiscal spending pressures; decline in logging due to logging sustainability policy; vulnerability to severe natural disasters.
  - Project delays: infrastructure and mining projects likely to be delayed by travel restrictions and supply chain disruptions.
  - Commodity price volatility: on both imports (rice and oil) and exports (logs, tuna, agricultural products).
  - A local COVID-19 outbreak would substantially increase human and fiscal costs, strain weak health infrastructure, and adversely affect growth, unemployment and poverty reduction.

### Policy discussions and recommendations
Fiscal policy (immediate and medium term):
- Immediate measures:
  - Reprioritize spending towards protecting vulnerable households and businesses; health and containment spending and targeted support have been prioritized.
  - Stimulus measures targeted at social assistance, payroll and employment support, capital grants to businesses, tax relief for affected businesses, equity injections to government-owned companies, and advancing planned infrastructure investment.
  - An Oversight Committee established to oversee stimulus spending; authorities committed to publication of an audit of COVID-19 related expenditures and related procurement information.
- Medium-term fiscal recommendations:
  - Improve budget planning in line ministries, strengthen commitment controls and procurement planning.
  - Substantial new measures, including concessional external financing, needed to increase fiscal buffers toward a broad cash balance of at least two months of total spending and to keep debt within the government’s target of 35 percent of GDP.
  - Targeted efforts to recover tax arrears and strengthen revenue administration and compliance.
  - Address public financial management weaknesses: finalize regulations under the PFM Act and develop short-term liquidity forecasts.
  - Complete review of payroll and allowances to align staffing needs and wage expense; prudent spending on Constituency Development Funds, Pacific Games and tertiary scholarships.
  - Stocktaking of arrears to clear outstanding obligations and prevent further accumulation.

Monetary, exchange rate and financial sector policy:
- Need for sufficient external buffers to preserve confidence in the basket exchange rate peg regime.
- The report notes accommodative monetary conditions pre-pandemic and a decline in excess liquidity as credit growth picked up to 5 percent.
- Maintaining financial stability and strengthening enforcement of governance standards, transparency and anti-corruption remain crucial.

Structural reforms:
- Comprehensive structural reforms recommended to reduce the current account deficit over the medium term and foster diversification into new growth sectors.
- Improve the business environment to help diversification and medium-term resilience.
- Strengthen enforcement of governance standards, improve transparency and advance the anti-corruption agenda.

### Fund support under the RCF and RFI
- Solomon Islands is a presumed blend country; one-third of Fund disbursement expected under exogenous shock window of RCF and two-thirds from RFI.
- Disbursement of SDR 20.8 million (100 percent of quota) envisaged, to be fully available on Board approval.
- Fund financing expected to help contain urgent balance of payments needs and catalyze support from other development partners.
- Solomon Islands received debt service relief through the Catastrophe Containment and Relief Trust (CCRT) for IMF debt service due over the next six months, with potential extension up to two years, from April 14, 2020.

### Staff appraisal
- Staff supports the authorities’ request for RCF/RFI financing given urgent balance of payments need and eligibility.
- The financing is expected to play a catalytic role in mobilizing additional donor support.
- Public debt assessed at moderate risk of distress with adequate capacity to repay the Fund.

*Source: EXECUTIVE SUMMARY (1slbea2020002).*

### 13.      A comprehensive approach to medium-term fiscal policy that safeguards debt

### 13.      A comprehensive approach to medium-term fiscal policy that safeguards debt

### Medium-term fiscal policy priorities
- Public debt is currently low but is expected to rise over the medium term, with the negative impact of the pandemic leading to a further buildup of debt vulnerabilities (Joint Bank-Fund Debt Sustainability Analysis).
- Priorities for medium-term fiscal policy should include:
  - Articulating the policy intent for the new VAT, as well as other reforms, taking into account the fiscal regime for the mining sector, and building consensus will be important. The reforms should at least be revenue neutral.
  - Improving budget planning in line ministries, strengthening commitment controls and procurement planning, and prioritizing quality spending in line with the National Development Strategy would help safeguard fiscal sustainability.
  - To address risks stemming from frequent natural disasters, it is important to strengthen efforts to rebuild fiscal buffers and undertake infrastructure investment to increase resilience.

### COVID-19 fiscal response — key measures and amounts
- Health and Containment Spending: 137 SI$ million; 1.1 percent of GDP
- Economic Stimulus Package: 319 SI$ million; 2.6 percent of GDP
- Budget Measures: 266 SI$ million; 2.2 percent of GDP

- Health-related spending:
  - Health grants allocated to all provincial health authorities: 10 SI$ million; 0.1 percent of GDP

- Social assistance:
  - Support the resumption of schools: 5 SI$ million; 0.0 percent of GDP
  - Employment support for women and youth: 5 SI$ million; 0.1 percent of GDP
  - Continued government payroll for civil servants who faced 50 percent reduction in salaries due to a shutdown of public services. To be announced; n.a.

- Additional support:
  - Capital grants to targeted existing investment in productive and resource sectors, including agriculture, forestry, fisheries and tourism, as well as government-owned companies 1/: 141 SI$ million; 1.1 percent of GDP
  - Special rental relief package to affected SMEs: 5 SI$ million; 0.0 percent of GDP
  - Tax relief for affected businesses, especially tourism sector: Cost neutral; n.a.

- Economic recovery:
  - Advancing infrastructure investment such as agriculture projects, bridges, airport: 100 SI$ million; 0.8 percent of GDP

- Below-the-line Measures: 53 SI$ million; 0.4 percent of GDP

- Equity injections to SOEs:
  - Equity injection to the Development Bank of Solomon Islands: 20 SI$ million; 0.2 percent of GDP

- Loans to businesses:
  - Concessional loans to SMEs and large corporates through the Development Bank of Solomon Islands: 33 SI$ million; 0.3 percent of GDP

- Note: 1/ Government-owned companies including Solomon Airlines, Solomon Water, Soltuna, and Commodities Export Marketing Authority.
- Source for table: Solomon Islands Government.

### Monetary, exchange rate, and financial sector policy
- Monetary policy stance and measures:
  - Monetary policy remains accommodative; CBSI adopted an easing cycle since September 2019 and reiterated commitment to continue expansionary monetary policy.
  - Excess liquidity in the banking system is structural, in part reflecting lags between donor inflows and spending.
  - Suggested additional CBSI measures include a trade credit facility and potential purchases of government bonds in the secondary market.
  - The basket exchange rate peg remains an appropriate nominal anchor; credibility preserved by maintaining an adequate level of gross official reserves.

- Financial support measures and institutions:
  - Government encouraging commercial banks to provide loan and interest relief to affected borrowers for three to six months.
  - Financial injections to support investment and concessional loans to large industries will be provided through the Development Bank of Solomon Islands (DBSI).
  - National Provident Fund (NPF) is providing financial assistance to its members and eliminating surcharges and penalties to employers' contributions to the fund.

- Financial sector vulnerabilities and reforms:
  - As of December 2019, non-performing loans increased to 10.4 percent and bank profitability declined.
  - Credit to the private sector is expected to shrink and non-performing loans to rise further this year.
  - Financial sector reforms should continue, including strengthening supervision, finalizing backlog of financial legislation (including a review of the Credit Union Act and the Insurance Act), and ensuring effectiveness of the AML/CFT framework.
  - DBSI must be subject to rigorous supervision standards and have a strong governance structure to avoid adding fiscal risks.
  - CBSI should continue to promote digital banking as it becomes integral to financial inclusion.

### Structural reforms
- Comprehensive structural reforms are needed to increase competitiveness, foster diversification and support inclusive growth over the medium-term.
- Key areas for reform and improvement:
  - Continue progress in strengthening transparency and governance; advance the anti-corruption agenda.
  - Apply the mining fiscal regime rigorously and enforce governance standards to encourage investment and reduce fiscal leakages.
  - Improve sanitation, transport, communication and energy services to facilitate diversification.
  - Improve enforcement of contracts, procedures for trading across borders, insolvency resolution and access to finance.
  - Digitalization and registration to improve record keeping, revenue collection, access to credit and help tackle property rights issues.
  - Address monopoly positions of some state-owned enterprises through stronger regulation or other initiatives to promote greater affordability in service provision.

### Fund support under the RCF and RFI
- Rationale and proposed access:
  - Given urgency, an RCF/RFI disbursement is the most appropriate instrument for Fund assistance to address a temporary shock from the COVID-19 pandemic.
  - The pandemic created a large external financing gap of about US$38.8 million, equivalent to 2.5 percent of GDP, even after accounting for significant decline in reserves and official inflows from partners of around US$44 million.
  - Disbursements from the IMF under an RCF/RFI blend would total SDR 20.8 million (about US$28.8 million), comprising SDR 6.93 million for the RCF and SDR 13.87 million for the RFI.
  - Expected disbursement from the ADB amounting to US$10 million will go toward filling the financing gap.
  - Outstanding access with the IMF would increase to 103.8 percent of quota and remain below allowable limits.
  - The Solomon Islands currently has outstanding credit to the Fund equivalent to 4 percent of quota from the 2012 Extended Credit Facility (ECF).

- Capacity to repay and risks:
  - A disbursement of 100 percent of quota would increase the Fund’s exposure by 2 percent of GDP and 6.4 percent of foreign exchange reserves.
  - Total repayments would peak in 2024 at 1.5 percent of government revenue and 1.4 percent of exports of goods and services.
  - The Solomon Islands continues to be assessed at moderate risk of external and overall debt distress.
  - Updated debt sustainability analysis shows debt remains at a moderate risk of debt distress: all external debt indicators are below thresholds under the baseline but breach thresholds under the most extreme stress scenario with adverse shock to growth and exports; public debt remains below its indicative threshold under the baseline but breaches the threshold under the most extreme shock to real GDP growth.

- Safeguards:
  - Authorities committed to undergoing a new safeguards assessment; the assessment is to be completed before Board approval of any subsequent arrangement to which the safeguards policy applies.
  - Authorities will authorize the external auditor of the CBSI to share relevant documents and hold discussions with Fund staff and have published on the CBSI website the audited financial statements for the year ended December 31, 2019.

### Staff appraisal — outlook, risks, and policy support
- Economic impact and outlook:
  - The COVID-19 pandemic is having a severe impact on the Solomon Islands economy.
  - GDP growth in 2020 is expected to decline to about -5.5 percent, about 8 percentage points lower than the pre-pandemic projection.
  - The current account and fiscal deficits are expected to widen and foreign reserves to fall.
  - Given the depth and duration of the economic impact of pandemic is highly uncertain, downside risks to the already-weak baseline outlook are significant.

- External financing needs and reserves:
  - Estimates point to a large external financing gap of around US$38.8 million, equivalent to 2.5 percent of GDP.
  - Maintaining sufficient reserve buffers is warranted given exceptional uncertainties, frequent natural disaster events, and to preserve the credibility of the exchange rate regime.
  - Fiscal financing needs are large and buffers low.

- Policy support endorsed by staff:
  - Staff supports authorities’ immediate priorities to mitigate the impact of the pandemic and preserve macroeconomic stability.
  - Immediate efforts include restricting international and domestic travel, scaling down public services to essential services only, and temporarily closing schools and some services.
  - To mitigate impact and support recovery, the government has increased health spending and introduced a fiscal stimulus package.
  - Beyond immediate response, authorities remain committed to building conditions for sustainable growth, strengthening fiscal management, reining in financial stability risks and improving governance.

*Source: Solomon Islands Government.*

### 26.       Against this background, staff supports the authorities’ request for a disbursement

### 1slbea2020002 - 26.       Against this background, staff supports the authorities’ request for a disbursement

### Disbursement request and staff assessment
- Staff supports the authorities’ request for a disbursement under the RCF/RFI in the amount of SDR 20.8 million (about US$28.8 million, 100 percent of quota).
- Composition: SDR 6.93 million for the RCF and SDR 13.87 million for the RFI.
- Justification: urgent balance of payment needs arising from a major external shock caused by the COVID-19 pandemic.
- Risk and repayment assessment: Solomon Islands continues to be assessed at moderate risk of debt distress and its capacity to repay the Fund remains strong.

### Growth and price projections (2016–2025)
- Real GDP (annual % change): 5.9, 5.3, 3.9, 1.2, -5.5, 5.6, 4.0, 3.4, 3.0, 2.9
- CPI (period average, annual % change): 0.5, 0.5, 3.5, 1.8, 2.8, 3.7, 2.2, 3.6, 3.9, 4.2
- CPI (end of period, annual % change): -2.2, 2.1, 3.9, 2.8, 1.2, 4.1, 3.4, 3.8, 4.0, 4.3
- GDP deflator (annual % change): 0.0, 1.4, 4.2, 1.3, 0.8, 3.6, 1.8, 3.4, 3.6, 3.5
- Nominal GDP (in SI$ millions): 10,957; 11,703; 12,676; 12,992; 12,384; 13,543; 14,336; 15,321; 16,350; 17,425

### Central government operations and fiscal projections (selected)
- Total revenue and grants (percent of GDP, 2016–2025): 38.6, 39.2, 40.0, 32.9, 32.2, 32.3, 33.4, 33.5, 32.6, 32.1
- Revenue (percent of GDP): 28.4, 30.2, 30.1, 26.1, 21.4, 25.0, 25.8, 25.7, 25.3, 25.1
- Grants (percent of GDP): 10.2, 9.0, 9.9, 6.8, 10.9, 7.3, 7.6, 7.8, 7.4, 7.0
- Total expenditure (percent of GDP): 42.7, 42.7, 39.1, 34.6, 38.0, 37.4, 37.4, 37.7, 36.8, 36.2
  - Excluding grant-funded expenditure (percent of GDP): 32.5, 33.6, 29.2, 27.8, 27.2, 30.1, 29.8, 30.0, 29.4, 29.3
- Recurrent expenditure (percent of GDP): 29.3, 29.2, 29.2, 25.5, 26.1, 24.3, 24.4, 24.3, 24.2, 24.4
- Development expenditure (percent of GDP): 13.4, 13.5, 9.9, 9.1, 10.3, 13.2, 13.0, 13.5, 12.6, 11.8
- Overall balance (percent of GDP): -4.2, -3.4, 0.8, -1.7, 0.3, -5.8, -5.2, -4.0, -4.3, -4.1
- Total financing (percent of GDP): 4.2, 3.4, -0.8, 1.7, -0.3, 5.8, 5.2, 4.0, 4.3, 4.2
- Memorandum: Public domestic debt, including arrears (in SI$ millions): 43; 193; 245; 288; 840; 1,556; 627; 689; 451; 1,193 (years aligned to table rows)

### Fiscal accounts (SI$ millions) — selected annual figures (2021–2025)
- Total revenue and grants: 4,226; 4,592; 5,068; 4,280; 4,541; 3,988; 4,369; 4,784; 5,131; 5,335; 5,590 (table covers 2021–2025 columns)
- Total revenue: 3,108; 3,534; 3,815; 3,391; 3,484; 2,645; 3,379; 3,692; 3,938; 4,129; 4,378
- Grants: 1,118; 1,058; 1,253; 890; 1,057; 1,344; 990; 1,092; 1,194; 1,206; 1,212
- Expenditure: 4,682; 4,994; 4,960; 4,496; 4,509; 4,712; 5,070; 5,362; 5,783; 6,015; 6,313
- Recurrent expenditure: 3,211; 3,415; 3,700; 3,317; 3,229; 2,823; 3,288; 3,493; 3,720; 3,959; 4,252
- Development expenditure: 1,472; 1,579; 1,261; 1,179; 1,279; 1,889; 1,782; 1,870; 2,064; 2,057; 2,061
- Overall balance (SI$ millions): -456; -403; 108; -215; 33; -723; -701; -578; -652; -680; -723

### Balance of payments and reserves (2016–2025, selected)
- Current account balance (in US$ millions): -48.8; -62.8; -47.8; -142.5; -271.1; -264.4; -230.3; -222.0; -221.8; -177.7
- Current account (percent of GDP): -3.5; -4.3; -3.0; -8.9; -17.8; -15.9; -13.1; -11.8; -11.0; -8.3
- Trade balance (percent of GDP): -5.2; -5.6; -4.3; -10.0; -18.9; -15.6; -13.8; -12.8; -12.6; -10.0
- Exports of goods (US$ millions, selected): 432.1; 469.3; 536.0; 460.1; 348.3; 456.6; 527.8; 536.9; 537.7; 610.0
  - Logs (US$ millions): 303.7; 312.4; 372.9; 318.6; 208.4; 274.0; 327.4; 329.9; 324.1; 328.0
  - Fish (US$ millions): 41.8; 48.7; 56.2; 48.7; 47.3; 54.6; 65.1; 74.4; 85.0; 97.1
- Imports (US$ millions): -419.4; -462.1; -529.4; -499.5; -469.5; -542.3; -620.9; -642.4; -658.0; -690.8
- Overall balance (US$ millions): -5.9; 63.2; 36.2; -39.0; -147.0; -39.1; 9.9; 29.8; 23.9; 72.7
- Gross official reserves (in US$ millions, end of period): 513.6; 576.9; 613.1; 574.1; 465.9; 426.5; 436.1; 460.9; 475.1; 541.8
- Reserves (in months of next year's imports of GNFS): 9.1; 9.3; 9.8; 10.0; 7.0; 5.7; 5.6; 5.8; 5.7; 6.0

### Banking system and macrofinancial indicators
- Credit to private sector (annual % change): 12.1; 6.4; 4.1; 5.0; -4.1; 5.7; 6.0; 5.0; 4.5; 4.5
- Broad money (annual % change): 13.4; 3.5; 6.8; -3.0; -15.6; 11.9; 2.2; 6.7; 1.0; 3.0
- Reserve money (annual % change): 14.5; 7.5; 10.6; -7.0; -13.8; 10.0; 6.4; 3.7; 2.2; 3.0
- Selected Core Financial Soundness Indicators (2014–2019)
  - Regulatory Capital to Risk-Weighted Assets: 31.6, 31.1, 32.5, 35.1, 31.1, 31.3
  - Non-performing Loans to Total Gross Loans: 4.7, 4.1, 3.8, 6.1, 7.1, 10.4
  - Return on Assets: 3.3, 3.0, 3.5, 3.9, 3.5, 3.1
  - Liquid Assets to Total Assets: 38.0, 33.5, 38.1, 38.4, 40.4, 37.4

### Indicators of capacity to repay the Fund (2020–2030, selected)
- Net use of Fund credit (in SDR millions, annual): 20.8; -0.2; -0.2; -3.6; -7.1; -4.2; -1.4; -1.4; -1.4; -1.4; -0.7
- Outstanding Fund credit (in SDR millions, end of year): 21.6; 21.4; 21.2; 17.6; 10.5; 6.3; 4.9; 3.5; 2.1; 0.7; 0.0
- Outstanding Fund credit (in US$ millions, end of year): 29.9; 29.7; 29.4; 24.4; 14.6; 8.7; 6.7; 4.8; 2.9; 1.0; 0.0
- Outstanding Fund credit (percent of quota): 103.8; 102.9; 101.9; 84.5; 50.5; 30.1; 23.3; 16.7; 10.0; 3.3; 0.0
- Total obligations based on existing and prospective credit (in millions of SDRs): 0.0; 0.2; 0.2; 3.6; 7.1; 4.2; 1.4; 1.4; 1.4; 1.4; 0.7
- Total obligations based on existing and prospective credit (in millions of US$): 0.1; 0.2; 0.3; 5.0; 9.8; 5.9; 2.0; 1.9; 1.9; 1.9; 1.0
- Total obligations (in percent of gross international reserves): 0.0; 0.1; 0.1; 1.1; 2.1; 1.1; 0.3; 0.3; 0.3; 0.3; 0.2

*Source: IMF staff estimates and projections contained in the provided document.*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Context and immediate impact of COVID-19
- The COVID-19 pandemic is having severe effects on health prospects and economic activity globally and in the Solomon Islands.
- Negative effects on the Solomon Islands economy are felt mainly through a decline in logging, mining and fisheries exports and a sharp contraction in tourism.
- As of May 18, 2020, Solomon Islands has no confirmed COVID-19 cases.
- The government declared a state of emergency (extended until July 25) and has taken travel restrictions and containment measures.
- The government prepared a COVID-19 preparedness and response plan and, with development partner support, introduced quarantine facilities and testing capability.
- Domestic containment measures are necessary but are having a temporary negative impact on economic activity.

### Short-term economic and balance-of-payments outlook
- Real output growth in 2020 is anticipated to decline to about -5.5 percent (IMF estimate), compared with pre-crisis projections of 2.5 percent.
- Fiscal deficit is estimated to widen to about 5.8 percent of GDP.
- Current account deficit is projected to increase sharply to about 17.8 percent of GDP in 2020.
- Projected external financing gap is in the order US$38.8 million (about 2.5 percent of GDP).

### Request for IMF and other external financing
- The Government requests emergency financing from the IMF in the amount of SDR20.8 million (about US$28.8 million), equivalent to 100 percent of quota, with:
  - SDR 6.93 million under the Rapid Credit Facility (RCF)
  - SDR 13.87 million under Rapid Financing Instrument (RFI)
- IMF debt relief provided under the Catastrophe Containment and Relief Trust (CCRT) will help close the financing gap.
- Other external support referenced:
  - World Bank: fast-track US$5 million COVID-19 Emergency Response and Health Systems Preparedness Project (processing).
  - Asian Development Bank: approved US$6 million under the Contingent Disaster Financing Facility and processing a pandemic response loan and grant under the Countercyclical Support Facility for up to US$20 million.

### Fiscal and monetary policy stance and measures
- Fiscal priorities:
  - Stabilize the domestic economy during the emergency period.
  - Build resilience by restoring fiscal buffers.
- Health-related spending:
  - Plan to increase health-related spending by US$20 million (about 1.1 percent of GDP) over the course of 2020 for measures including quarantine centers and COVID-19 testing capability.
  - Additional spending may be needed should downside risks materialize.
- Fiscal stimulus package:
  - Recently adopted fiscal stimulus package of SI$319 million (about 2.6 percent of GDP) aimed at social assistance, protecting jobs and incomes, and stabilizing the domestic economy.
  - Policy measures include payroll and employment support, capital grants to businesses, tax relief for affected businesses, equity injections to government owned companies, and advancing planned infrastructure investment.
  - An Oversight Committee has been set up to ensure outcomes, targeted beneficiary support, and prevention of abuse or misuse.
- Continued commitments:
  - Progress tax reform and strengthen tax compliance and public financial management, including tightening expenditure controls and procurement processes.
  - Maintain the current debt management framework and work with development partners on infrastructure needs transparently.
  - Maintain an expansionary monetary policy stance given low inflation, weak growth outlook, and slowing credit growth.
  - Preserve credibility of the basket exchange rate peg regime by maintaining an adequate level of gross official reserves.
  - Continue financial sector policies to reduce stability risks (including those from correspondent banking relationships) and to foster financial inclusion.
  - Rebuild fiscal buffers and undertake infrastructure investments to increase resilience to frequent natural disasters.

### Governance, transparency, and safeguards commitments
- Commit to good governance, transparency, accountability, and tackling corruption and related money laundering.
- Commitments regarding use and reporting of IMF funds:
  - Publish on the Ministry of Finance and Treasury’s website:
    - Results of an audit by the Solomon Islands Office of the Auditor General of COVID-19 related expenditures before December 2021.
    - Documentation on crisis-related public procurement, including nature of goods or services procured, contract amounts, names of entities awarded the contract and their beneficial owners, followed by documentation on ex-post validation of delivery.
- Safeguards and central bank transparency:
  - Commit to undergo an update of the safeguards assessment of the CBSI made by the Fund in 2013.
  - Authorize the external auditor of the CBSI to share relevant documents and hold discussions with Fund staff.
  - Published (on May 13, 2020) on the CBSI website the audited financial statements for the year ended December 31, 2019.

### Policy assurances regarding external constraints
- The government does not intend to introduce measures or policies that would exacerbate current balance-of-payments difficulties, specifically:
  - No intention to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions.
  - No intention to impose trade restrictions for balance of payments purposes or multiple currency practices.
  - No intention to enter into bilateral payments agreements inconsistent with Article VIII of the IMF’s Articles of Agreement.

### Closing and engagement with the IMF
- The government is determined to meet the COVID-19 challenge and seeks early approval of IMF financial assistance.
- The government reaffirms willingness to remain engaged with the IMF for policy advice and capacity development support beyond immediate financial assistance.

*Letter of Intent dated May 18, 2020 — Government of Solomon Islands*

### 10.      We authorize the IMF to publish this letter and the staff report for the request for

### 10. We authorize the IMF to publish this letter and the staff report for the request for

### Debt sustainability assessment — risk ratings and headline findings
- Risk of external debt distress: Moderate
- Overall risk of debt distress: Moderate
- Granularity in the risk rating: Substantial space to absorb shocks
- Composite Indicator score: 2.72 (based on October 2019 WEO and World Bank’s 2018 CPIA); debt-carrying capacity assessed to be medium
- Debt coverage: Unchanged compared to the 2019 DSA
- Debt coverage definition: Residency-based (no material difference between residency- and residence-based criteria)

### Key DSA findings and projections
- Updated DSA incorporates macro assumptions reflecting COVID-19 shock:
  - Real GDP growth (staff): -5.5 percent in 2020 (authorities forecast around -5.1 percent)
  - Decline driven by: logging, mining and fisheries exports; contraction in tourism; containment measures reducing domestic demand
  - Fiscal deficit expected to widen sharply; fiscal deficit forecast: 5.8 percent of GDP (authorities’ expectation for 2020)
  - Current account deficit expected to widen to about 17.8 percent of GDP in 2020
- External debt indicators:
  - All external debt indicators remain below relevant indicative thresholds under the baseline scenario
  - External indicators breach thresholds under the extreme stress test scenario (combination shock for the PV of debt-to-GDP and export shock for the PV of debt-to-exports and the debt services-to-exports ratio)
- Public debt:
  - PV of public debt-to-GDP ratio remains below the 55 percent benchmark under the baseline scenario
  - PV of public debt-to-GDP would remain below the 55 percent benchmark under the most extreme shock (real GDP growth) till 2030
  - Tailored natural disaster shock of similar scale to the largest historical shock would cause a spike in the debt trajectory in the aftermath
- Liquidity and fiscal space:
  - DSA suggests there is substantial space to absorb shocks
  - Solomon Islands often faces fiscal liquidity challenges due to weak public financial management; the cash balance is currently low

### Financing needs, donor and multilateral support
- Urgent balance of payments need and residual financing gap:
  - Residual financing gap: US$38.8 million (about 2.5 percent of GDP)
- Fund request and support:
  - Authorities’ request for emergency financing: SDR20.8 million (100 percent of quota)
  - IMF debt relief under the Catastrophe Containment and Relief Trust to help close the financing gap
- World Bank:
  - First Solomon Islands transition to sustainable growth development policy operation of US$15 million (US$11.8 million in grant and US$3.2 million in loan)
  - World Bank COVID-19 Fast Track Facility expected to approve US$5 million by end May (noted as processing)
- Asian Development Bank (ADB):
  - Released US$6 million from its Pacific Disaster Resilience Program and processing an additional US$20 million (policy-based operation anchored on the government’s COVID-19 response plan)
  - Financing under the World Bank COVID-19 Fast Track Facility and ADB expected to equally comprise grant and loan disbursements
- Role of Fund support:
  - Emergency assistance to help meet urgent balance of payments financing needs stemming from COVID-19 shock
  - Fund support expected to play a catalytic role alongside development partner financing

### Stress tests, scenarios and sensitivity analysis
- Baseline and stress test outcomes:
  - Baseline: external and public debt indicators below thresholds
  - Most extreme shock for external indicators: combination shock (PV debt-to-GDP) and exports shock (PV debt-to-exports and debt service-to-exports)
  - Tailored tests include: combined contingent liabilities, natural disaster, commodity price (n.a. where not applicable), market financing (n.a. where not applicable)
- Selected projection highlights (baseline values as presented in tables):
  - Real GDP growth series (selected): 2019 = 5.9; 2020 = -5.5; 2021 = 5.6; 2022 = 4.0; 2023 = 3.4; 2024 = 3.0; 2025 = 3.2
  - PV of PPG external debt-to-GDP (selected): 2020 = 5.7; 2021 = 5.8; 2022 = 9.1; 2023 = 10.3; 2024 = 11.8; 2025 = 13.1
  - PV of public debt-to-GDP ratio (baseline, selected): 2019 = 7.7; 2020 = 8.0; 2021 = 12.4; 2022 = 14.4; 2023 = 16.4; 2024 = 18.2; 2025 = 19.7
  - Public debt benchmark: 55 (percent of GDP)
  - Gross external financing need (Million of U.S. dollars, selected): 2019 = 30.9; 2020 = 36.5; 2021 = 39.3; 2022 = 124.7; 2023 = 261.5
  - Nominal GDP (Million of US dollars, selected): 2019 = 1,598; 2020 = 1,523; 2021 = 1,666; 2022 = 1,763; 2023 = 1,884; 2024 = 2,011

### Policy recommendations and authorities’ commitments
- Fiscal policy and public financial management:
  - Stronger revenue mobilization measures and expenditure rationalization are needed to rebuild fiscal buffers and enhance resilience against shocks
  - Authorities committed to:
    - Strengthening tax compliance
    - Progressing tax reform, including indirect tax reform
    - Tightening expenditure controls and procurement processes at the Ministry of Finance and Treasury
    - Maintaining current debt management framework and working with development partners on transparent infrastructure financing
- Monetary and exchange rate policy:
  - Central Bank of Solomon Islands to maintain an expansionary monetary policy stance given low inflation, weak growth, and slowing credit growth
  - Authorities consider the basket exchange rate peg an appropriate nominal anchor
- Crisis response and safeguards:
  - Government actions taken: State of Public Emergency since 25 March; border closures; quarantine and isolation facilities; school and non-essential business closures; stimulus package
  - Stimulus package: SBD319 million (about 2.6 percent of GDP) aimed at protecting jobs and incomes and stabilizing the domestic economy; Oversight Committee established to monitor outcomes and prevent misuse
  - Preparedness measures supported by development partners: quarantine facilities and testing capability

### Natural disaster and other tailored shock implications
- Cyclone Harold (early April): 27 fatalities; heavy damage to homes, schools and crops
- Natural disaster tailored test:
  - A shock of similar scale to the largest historical shock would produce a significant spike in the debt trajectory post-event (public debt and PV debt-to-GDP rise sharply under natural disaster tailored test)
- Liquidity vulnerability:
  - Despite room to absorb shocks on paper, Solomon Islands frequently experiences fiscal liquidity constraints due to weak PFM; cash balance is low, increasing near-term vulnerability

*Prepared by the staff of the International Monetary Fund (IMF) and the International Development Association (IDA); Approved by Jonathan D. Ostry and Johannes Wiegand (IMF) and Marcelo Estevão (IDA). May 26, 2020.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1slbea2020002.pdf_