## 1slbea2022002

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---

### Climate readiness, vulnerability, and institutional context
- Solomon Islands faces high vulnerability to natural disasters and climate change:
  - Generally experiences two cyclones per year.
  - Around 80 percent of the national population live in low-lying coastal areas.
  - Densely populated coastal areas with main transport network access are highly exposed to climate risks.
- ND-GAIN index places Solomon Islands among the most vulnerable countries to extreme climate events among low-income countries (LICs).
- Climate sensitivity (sea-level rise, anomalous weather, floods, storms) poses significant fiscal risks and challenges for development of education, health, and basic physical infrastructure.
- Climate readiness score has gradually improved over the past decade, reflecting progress relative to other EMDEs in Asia.
- National strategies and sector plans:
  - National Development Strategy (NDS) integrates SDG and climate adaptation objectives up to 2035.
  - National Infrastructure Investment Plan (NIIP) provides medium-term investment plan (up to 2023) and a donor-funded priority project list including climate adaptation.
  - Sector strategies highlighted:
    - Education: Education Strategic Framework (ESF) 2016–2030; NEAP 2022–2026; MEHRD monitoring and donor-supported school infrastructure project (2022–2026).
    - Health: National Health Strategic Plan (NHSP2016–2020); service delivery via one national hospital (Honiara), 11 provincial hospitals, and rural clinics.
    - Energy: National Energy Policy targeting reduction in fuel-based electricity generation from 83 percent in 2019 to 43 percent by 2030 and increase renewables from 16 percent in 2019 to 53 percent by 2030; Honiara target 90 percent renewables by 2030. Solomon Power five-year capital program of SB$ 1 billion; 19 renewable (Hydro and Solar Hybrid) projects committed, 16 Solar Hybrid projects with donor support.

### Fiscal context and current spending patterns
- Based on 2020 budget data, about 22 percent of GDP (more than half of total expenditure) was allocated to education, health, and physical infrastructure.
- Solomon Islands’ budget allocation to education is second highest among PICs next to Vanuatu.
- FAD Expenditure Assessment Tool indicates significant need to improve the quality of social spending (particularly education).
- Infrastructure spending concentrated in Guadalcanal (Honiara), producing uneven access and chronic poverty in remote areas.
- Expenditure by Functions of Government (COFOG) — In percent of GDP:
  - Education: 2016 12.0; 2017 12.1; 2018 10.8; 2019 11.1; 2020 12.8
  - Health: 2016 4.8; 2017 4.9; 2018 4.3; 2019 4.5; 2020 5.2
  - Environmental protection: 2016 0.7; 2017 0.7; 2018 0.7; 2019 0.7; 2020 0.8
  - Transport: 2016 3.3; 2017 3.3; 2018 2.9; 2019 3.0; 2020 2.8
  - Energy: 2016 0.2; 2017 0.2; 2018 0.2; 2019 0.2; 2020 0.1
  - Total: 2016 21.0; 2017 21.2; 2018 18.9; 2019 19.5; 2020 21.8
- Percent of total expenditure:
  - Education: 2016 30.1; 2017 30.1; 2018 30.1; 2019 30.1; 2020 31.9
  - Health: 2016 12.1; 2017 12.1; 2018 12.1; 2019 12.0; 2020 13.0
  - Environmental protection: 2016 1.8; 2017 1.8; 2018 1.8; 2019 1.8; 2020 2.0
  - Transport: 2016 8.2; 2017 8.2; 2018 8.2; 2019 8.2; 2020 7.0
  - Energy: 2016 0.4; 2017 0.4; 2018 0.4; 2019 0.4; 2020 0.3
  - Total: 2016 52.7; 2017 52.6; 2018 52.7; 2019 52.6; 2020 54.2

### Costing approach, scope, and caveats
- Methodology: SDG costing methodology comparing 2019 performance indicators in education, health, WASH, roads, and electricity access against best performers in a comparable peer group.
- Costing steps: (i) identify main cost drivers of each sector; (ii) set reference values consistent with best-performing peers or national policy target; (iii) calculate necessary spending level in 2030.
- Peer group: countries in same income bracket and similar levels of SDG, human development, and climate vulnerability; selection reflects sector expert views.
- Caveats:
  - Excludes other key sectors (e.g., agriculture, natural resources) and infrastructure types (maritime and digital).
  - Does not explicitly account for urban-rural disparities in service quality (except WASH); results may be conservative because remote area costs can be much higher.

### Key aggregate spending needs and sectoral breakdown
- Overall additional spending needs to achieve SDGs with climate adaptation: about 6.9 percent of 2030 GDP per year.
- Climate-related additional costs are relatively small in education and health but significantly higher in infrastructure (mainly renewable energy).
- Annual spending needs for building climate-resilient roads and energy infrastructure could reach about 2.8 percent of 2030 GDP (of which roughly a half is to be financed by external loans).
- Comparative context: the 6.9 percent estimate is comparable to other PICs but smaller than the average for lower middle-income countries (LMIC) in Asia and Latin America.

### Sector-specific costing results and priorities
- Education:
  - Additional cost to improve education outcomes (SDG4 targets by 2030: 100 percent enrollment in primary and secondary, 50 percent enrollment in pre-primary and tertiary) and quality through smaller classroom size and better access: 0.5 percent of GDP annually.
  - Key issues: low enrollment rates despite high budget share; skewed composition toward recurrent spending (teacher payrolls, school grants, scholarships); development spending only 3 percent of education budget in 2021.
  - Recommendation: reprioritize composition of education spending from recurrent to capital to expand school infrastructure outside Honiara and reduce student-teacher ratios.
- Health:
  - Additional cost to reach SDG3 and improve health outcomes (increase numbers of doctors, clinics, particularly in rural areas): 1.4 percent of 2030 GDP annually.
  - Current total health spending: 5.2 percent of GDP (2020).
  - Goals: improve quantity and quality of services and address urban-rural service concentration.
- Energy and infrastructure:
  - Energy transition targets reiterated: reduce fuel-based generation from 83 percent in 2019 to 43 percent by 2030; raise renewable share from 16 percent in 2019 to 53 percent by 2030.
  - Solomon Power SB$ 1 billion five-year capital program; donor-supported renewable projects to expand rural electrification.
  - Climate-proofing energy projects is a major driver of infrastructure-related additional costs; annual needs for climate-resilient roads and energy infrastructure ~2.8 percent of 2030 GDP.

### Physical infrastructure (unit-cost based on committed projects)
- Aggregate additional cost for energy, road, and WASH: 4.9 percent of 2030 GDP, with the largest needs in the energy sector.
- Energy:
  - Additional spending needs: about 3.3 percent of GDP.
  - Electricity access: 21 percent of the population in 2019.
  - Electricity access projections: 50 percent by 2025 (including expansion from the Tina hydropower project) and 70 percent by 2030.
  - Planned investments: large investment plans in hydropower and several solar power projects.
  - Unit costs: based on project appraisal documents; additional climate adaptation cost estimated from total cost of climate-proofing energy projects.
- Road:
  - Additional spending needs: about 1.2 percent of GDP.
  - Climate-proofed road network expansion required: 342 km.
  - Existing roads in poor condition: 90 percent of existing roads (1,694 km in total) would need to be rehabilitated.
  - Estimate includes maintenance costs for the entire road network.
- WASH:
  - Additional spending needs: about 0.4 percent of GDP.
  - In 2019:
    - About 20 percent of the population did not have access to basic water services.
    - About 27 percent of the population did not have access to basic sanitation services.
    - More than 60 percent of population did not have access to safely managed water and sanitation services.
  - Higher capital and logistical costs in rural areas.
  - Unit-cost basis: country-specific unit cost estimates from Hutton and Varughese (2016); climate resilience cost approximated from sensitivity to extreme weather and natural hazard following Hallegatte et al (2019a,b) and Miyamoto (2019a,b).

### Infrastructure beyond energy, roads, and WASH
- Maritime transport and digital connectivity critical for long-term economic transformation.
- Coral Sea Cable System (completed in 2019) expected to unleash growth potential.
- Mobile and internet penetration rates are below the regional average; additional investments beyond those estimated would be needed to raise growth potential.

### COVID-19 impact on development agenda
- Pandemic effects: direct hit to health sector, lowered educational attainment due to school closures, significantly increased unemployment and extreme poverty.
- Government fiscal response: resources directed to health, education, social protection, COVID-related measures, and fiscal stimulus; increased budget allocation to health and education and lower infrastructure spending in 2020 and 2021 budgets.
- IMF post-pandemic SDG assessment (other country cases): estimated an additional annual financing need of 2.5 percent of GDP when extrapolated to all LIDCs.
- Conclusion: Additional spending on human and physical capital on top of pre-pandemic estimates would be needed to avoid permanent setbacks toward SDGs.

### Macro-fiscal policy implications and financing strategy
- Benefits of climate-resilient infrastructure:
  - DIGNAD model (IMF, 2018b) shows prioritizing climate-proofing capital investment significantly mitigates negative impacts of natural disasters on fiscal deficits, growth, and debt sustainability.
- Change in spending composition:
  - More than 90 percent of education and health spending is currently on recurrent items.
  - Shifting from recurrent to capital spending is expected to boost gains from climate adaptation investment.
  - PFM reforms to increase public investment efficiency contribute to larger productivity gains and moderate fiscal pressures by reducing recurrent expenditure.
- Financing sources and PPPs:
  - Key sources: concessional financing and increases in revenue driven by domestic revenue mobilization.
  - Need to offset projected decline in logging revenues via revenue administration and tax policy measures.
  - Concessional financing should remain a major source due to high cost of domestic or non-concessional external borrowing.
  - Some room to increase private financing through PPPs, but scope is limited absent a PPP regulatory framework and designated PPP unit; government technical capacity for PPPs is nascent.

### Financing scenarios to achieve SDGs by 2030
- Scenario framework (summary):
  - Baseline: SDG met = NO; Additional grants = 0.0
  - A1: Revenue measure (no additional SDG spending) — SDG met = NO; Additional grants = 0.0
  - A2: Revenue measure + Loans (with additional SDG spending) — SDG met = YES; Additional grants = 0.0
  - A3: Grants (with additional SDG spending) — SDG met = YES; Additional grants = 4.4
  - A4: Revenue measure + Front-loaded adjustment (with additional SDG spending) — SDG met = YES; Additional grants = 1.5
- Sequencing and fiscal path assumptions:
  - Rationalization of non-SDG expenditure assumed to start from 2023 with expenditure tightened to achieve overall deficit closer to authority’s target of 1.5 percent by 2026 when no additional spending is included (scenario A1).
  - Fiscal deficits assumed: -2.5 percent in 2023, -2.3 percent in 2024, and -2.1 percent in 2025 under sequencing described.
  - Gradual scaling-up in SDG investments assumed after the fiscal adjustment period.
  - No private financing assumed in all scenarios due to no concrete PPP regulatory environment currently.
- Key scenario findings:
  - Scenario A2 (loans only): public debt will follow an unsustainable path and breach the authorities’ debt target in five years.
  - Scenario A3 (grants only): 4.4 percent of GDP additional grant is needed every year, which seems infeasible.
  - Scenario A4 (mixed: loans, grants, front-loaded fiscal measures): more desirable—mitigates negative debt impacts while achieving SDG goals.
- Operational fiscal-anchor recommendation:
  - Use an effective debt-based fiscal anchor of 35 percent of public debt (in percent of GDP) to sequence operational fiscal targets each year.
  - Short-term: relax deficit target relative to 1.5 percent to support recovery through targeted support; adjust operational deficit target based on growth performance.

### Improving public financial management (PFM) for SDGs and climate adaptation
- Need to incorporate SDGs and climate adaptation into medium-term planning and annual budget allocation decisions.
- Existing elements:
  - NIIP provides a list of donor-funded projects; Budget Book provides some tags on nature of spending under each line ministry.
  - Climate-related spending is currently allocated under programs across various expenditure heads, making it difficult to trace climate adaptation investment costs in the budget.
- Recommended PFM reforms:
  - Strengthen capacity to identify priority investments at the budget planning stage, including adding a “climate budgeting” element where climate-proofing projects are clarified.
  - Develop monitoring and evaluation of climate-related financial indicators (for example, climate-related budget allocation and execution) in budget documents or separate climate reports.
  - Integrate climate-related fiscal commitments into PFM law to create stronger political support for climate adaptation objectives.

### Conclusions and strategic recommendations
- A multipronged strategy is needed to meet large development spending needs for SDG and climate adaptation objectives.
- Key priorities:
  - Largest spending needs are in the energy sector due to national priority on renewable energy and low-carbon transition.
  - Strengthen domestic revenue mobilization and continue concessional external financing as main financing options.
  - Improve efficiency of education, health, and infrastructure spending.
  - Shift spending composition from recurrent to capital expenditure and implement effective PFM reforms to unlock resources.
  - Combine additional concessional financing with front-loaded expenditure rationalization to achieve SDGs by 2030 while maintaining a sustainable debt path.
  - Integrate SDGs and climate adaptation objectives into medium-term and annual budgetary processes for better targeting of climate-proofing priority investment projects.
  - Pursue sustained efforts to introduce a PPP regulatory framework and strengthen institutional capacity to attract more private investment.

### Appendix — Priority investment highlights with climate-proofing component (selected)
- Energy projects:
  - Tina River Hydropower Project (TRHPP)
    - Donors: ADB, WB, Bilateral (Australia, Korea)
    - $233.37 mil. In PPP (Built-Operate-Transfer)
    - Loan: 66.8%, Grant: 21.2%
    - New ongoing (2019-2025)
    - Build 15 MW hydro power plant for electricity supply in Honiara; CO2 reduction (49.500 tons/year) and tariff reduction expected.
  - Solar Power Development Project
    - Donor: ADB
    - $13 mil.
    - Grant: 56%, Budget: 44%
    - Almost completed (2016-2022)
    - Generate 2 MW grid-connected solar power in Kirakira, Lata, Malu’u, Munda and Tulagi.
- Transport projects (selected)
  - Land and Maritime Connectivity project
    - Donor: ADB
    - $150 mil.
    - Loan: 50%, Grant: 50%
    - New ongoing (2021-2028)
    - Rehabilitating/upgrading of 35 km roads near Honiara and upgrading ports/wharfs in Honiara, Ahanga, and Kira Kira.
  - Road and Aviation Project (SIRAP)
    - Donor: WB
    - $51 mil.
    - Loan: 60%, Grant: 40%
    - New ongoing (2019-2024)
    - Improve air transport and strengthen the climate resilience of roads.
  - Upgrading of Kukum Highway
    - Donor: JICA
    - 3.2 bil. Yen (=$29 mil.)
    - Grant: 100%
    - New ongoing (2021-2023)
    - Improve logistics improvement, disaster prevention and traffic safety through upgrading of Kukum highway in Honiara.
- Costs of new ongoing projects (aggregate)
  - Total cost: $463.37 mil (=15.2 percent of 2030 GDP)
  - Annual average project cost: $85.02 mil (=2.8 percent of 2030 GDP); of which external loans-financed cost is $42.82 mil (=1.4 percent of 2030 GDP)

*Source: 1slbea2022002 - 12. Physical infrastructure: Building on the unit cost of development projects that the government has already committed (excerpt).*

### 1. Climate Readiness and Vulnerability Index, 2019 _________________________________________ 3

### 1. Climate Readiness and Vulnerability Index, 2019 _________________________________________ 3

### Background: climate vulnerability and fiscal risks
- Solomon Islands faces high vulnerability to natural disasters and climate change:
  - Generally experiences two cyclones per year.
  - Around 80 percent of the national population live in low-lying coastal areas.
  - Densely populated coastal areas with main transport network access are highly exposed to climate risks.
- ND-GAIN index places Solomon Islands among the most vulnerable countries to extreme climate events among low-income countries (LICs).
- Climate sensitivity (sea-level rise, anomalous weather, floods, storms) poses significant fiscal risks and challenges for development of education, health, and basic physical infrastructure.
- Climate readiness score has gradually improved over the past decade, reflecting progress relative to other EMDEs in Asia.

### Institutional framework: national strategies on SDGs and climate
- National Development Strategy (NDS) integrates SDG and climate adaptation objectives up to 2035, with equitable access to quality health and education and building climate resilience as key targets.
- National Infrastructure Investment Plan (NIIP) provides medium-term investment plan (up to 2023) and a donor-funded priority project list including climate adaptation (appendix referenced).
- Sector strategies:
  - Education: Education Strategic Framework (ESF) 2016–2030 and NEAP translate ESF into five-year implementable actions; NEAP 2022–2026 priorities include: (i) extending school fee free access to primary and secondary for low-income households, (ii) eliminating gender disparities in school enrollment, (iii) addressing funding shortages and inadequate school infrastructure at provincial level. MEHRD monitoring and donor-supported school infrastructure project (2022–2026).
  - Health: National Health Strategic Plan (NHSP2016–2020) aims for universal coverage of basic health services, prioritizing unserved remote provinces. MHMS delivers services via one national hospital (Honiara), 11 provincial hospitals, and rural clinics. Urban-rural gap in access and COVID-19 strains capacity.
  - Energy: National Energy Policy aims to reduce reliance on imported diesel; energy infrastructure vulnerable to extreme climate events. Energy strategy target: reduce fuel-based electricity generation from 83 percent in 2019 to 43 percent by 2030 and increase share of solar and hydropower from 16 percent in 2019 to 53 percent by 2030 nationwide. Separate Honiara target: 90 percent renewables by 2030. Solomon Power five-year capital program of SB$ 1 billion for renewable investments and transmission expansion; 19 renewable (Hydro and Solar Hybrid) projects committed, 16 Solar Hybrid projects with donor support to expand outside Honiara.

### Fiscal context and current spending patterns
- Based on 2020 budget data, about 22 percent of GDP (more than half of total expenditure) was allocated to education, health, and physical infrastructure.
- Solomon Islands’ budget allocation to education is second highest among PICs next to Vanuatu.
- FAD Expenditure Assessment Tool indicates significant need to improve the quality of social spending (particularly education).
- Infrastructure spending is concentrated in Guadalcanal island (Honiara), leading to uneven access to basic or safety infrastructure services between urban and rural provinces and chronic poverty in remote areas.
- Expenditure by Functions of Government (COFOG) — In percent of GDP:
  - Education: 2016 12.0; 2017 12.1; 2018 10.8; 2019 11.1; 2020 12.8
  - Health: 2016 4.8; 2017 4.9; 2018 4.3; 2019 4.5; 2020 5.2
  - Environmental protection: 2016 0.7; 2017 0.7; 2018 0.7; 2019 0.7; 2020 0.8
  - Transport: 2016 3.3; 2017 3.3; 2018 2.9; 2019 3.0; 2020 2.8
  - Energy: 2016 0.2; 2017 0.2; 2018 0.2; 2019 0.2; 2020 0.1
  - Total: 2016 21.0; 2017 21.2; 2018 18.9; 2019 19.5; 2020 21.8
- Percent of total expenditure:
  - Education: 2016 30.1; 2017 30.1; 2018 30.1; 2019 30.1; 2020 31.9
  - Health: 2016 12.1; 2017 12.1; 2018 12.1; 2019 12.0; 2020 13.0
  - Environmental protection: 2016 1.8; 2017 1.8; 2018 1.8; 2019 1.8; 2020 2.0
  - Transport: 2016 8.2; 2017 8.2; 2018 8.2; 2019 8.2; 2020 7.0
  - Energy: 2016 0.4; 2017 0.4; 2018 0.4; 2019 0.4; 2020 0.3
  - Total: 2016 52.7; 2017 52.6; 2018 52.7; 2019 52.6; 2020 54.2

### Costing approach and scope
- Analysis follows SDG costing methodology and compares 2019 performance indicators in education, health, water and sanitation (WASH), roads, and electricity access against best performers in a comparable peer group (benchmarking approach).
- Costing steps: (i) identify main cost drivers of each sector; (ii) set reference values consistent with best-performing peers or national policy target; (iii) calculate necessary spending level in 2030.
- Peer group selected from countries in same income bracket and similar levels of SDG, human development, and climate vulnerability; selection also reflects sector expert views.
- Caveats: (i) methodology excludes other key sectors (e.g., agriculture, natural resources) and infrastructure types (maritime and digital); (ii) does not explicitly account for urban-rural disparities in service quality (except WASH). Results may be relatively conservative since remote area costs can be much higher.

### Key estimated additional spending needs and sectoral breakdown
- Overall additional spending needs to achieve SDGs with climate adaptation: about 6.9 percent of 2030 GDP per year.
- Climate-related additional costs are relatively small in education and health but significantly higher in infrastructure (mainly renewable energy).
- Annual spending needs for building climate-resilient roads and energy infrastructure could reach about 2.8 percent of 2030 GDP (of which roughly a half is to be financed by external loans).
- Comparative context: the 6.9 percent estimate is comparable to other PICs but smaller than the average for lower middle-income countries (LMIC) in Asia and Latin America.

### Sector-specific costing results and priorities
- Education:
  - Additional cost to improve education outcomes (SDG4 targets by 2030: 100 percent enrollment in primary and secondary, 50 percent enrollment in pre-primary and tertiary) and quality through smaller classroom size and better access: 0.5 percent of GDP annually.
  - Key issues: low enrollment rates despite high budget share, skewed composition toward recurrent spending (teacher payrolls, school grants, scholarships); development spending only 3 percent of education budget in 2021.
  - Recommended focus: reprioritize composition of education spending from recurrent to capital to expand school infrastructure outside Honiara and reduce student-teacher ratios.
- Health:
  - Additional cost to reach SDG3 and improve health outcomes (increase numbers of doctors, clinics, particularly in rural areas): 1.4 percent of 2030 GDP annually.
  - Current total health spending: 5.2 percent of GDP (2020), lower than peers.
  - Goals include improving quantity and quality of services and addressing urban-rural service concentration.
- Energy and infrastructure:
  - Energy transition and climate-proofing prioritized: reduce fuel-based generation from 83 percent in 2019 to 43 percent by 2030; raise renewable share from 16 percent in 2019 to 53 percent by 2030.
  - Solomon Power SB$ 1 billion five-year capital program; donor-supported renewable projects to expand rural electrification.
  - Climate-proofing energy projects is a major driver of infrastructure-related additional costs; annual needs for climate-resilient roads and energy infrastructure ~2.8 percent of 2030 GDP.

### Policy implications and financing strategy
- Creating fiscal space for projects with climate-proofing components through budget reallocation and improving spending efficiency would raise economic returns by building climate resilience.
- An integrated financing strategy is needed with a mix of additional concessional financing and front-loaded fiscal measures, including domestic revenue mobilization, properly sequenced to achieve SDGs by 2030.
- SDG and climate commitments should be integrated into the existing public financial management (PFM) reform agenda to achieve climate-sensitive development goals.
- Emphasis on improving spending efficiency—especially in education—and rebalancing recurrent versus capital expenditures to deliver better outcomes.

*Prepared by Manabu Nose (FAD); note prepared during the 2021 Article IV Consultation and dated December 16, 2021.*

### 12. Physical infrastructure: Building  on the unit  cost of development projects that the

### 12. Physical infrastructure: Building  on the unit  cost of development projects that the government has already committed (including climate-proofing projects)

### Estimated additional spending needs (aggregate)
- Additional cost for energy, road, and water and sanitation (WASH) is estimated at 4.9 percent of 2030 GDP, with the largest needs in the energy sector.

### Sectoral breakdown and key technical assumptions
- Energy
  - Additional spending needs: about 3.3 percent of GDP.
  - Electricity access: 21 percent of the population in 2019.
  - Electricity access projections: 50 percent by 2025 (including expansion from the Tina hydropower project) and 70 percent by 2030.
  - Planned investments: large investment plans in hydropower and several solar power projects.
  - Unit costs: calculated based on project appraisal documents of existing energy investment projects; additional climate adaptation cost estimated from total cost of climate-proofing energy projects (see appendix).
- Road
  - Additional spending needs: about 1.2 percent of GDP.
  - Climate-proofed road network expansion required: 342 km (based on income and population growth projections and estimated demand elasticities of roads).
  - Existing roads in poor condition: 90 percent of existing roads (1,694 km in total) would need to be rehabilitated (according to World Bank project appraisal documents).
  - Estimate includes maintenance costs for the entire road network.
- WASH (Water, Sanitation, and Hygiene)
  - Additional spending needs: about 0.4 percent of GDP.
  - In 2019:
    - About 20 percent of the population did not have access to basic water services.
    - About 27 percent of the population did not have access to basic sanitation services.
    - More than 60 percent of population did not have access to safely managed water and sanitation services.
  - Higher capital and logistical costs in rural areas.
  - Unit-cost basis: country-specific unit cost estimates from Hutton and Varughese (2016); climate resilience cost approximated from sensitivity to extreme weather and natural hazard following Hallegatte et al (2019a,b) and Miyamoto (2019a,b).

### Infrastructure beyond energy, roads, and WASH
- Maritime transport and digital connectivity are critical for long-term economic transformation in an island economy.
- Coral Sea Cable System (completed in 2019) expected to unleash growth potential similar to findings in other low-income countries.
- Solomon Islands’ mobile and internet penetration rates are below the regional average; additional investments beyond those estimated in this analysis would be needed to raise growth potential.

### COVID-19 impact on development agenda
- Pandemic effects: direct hit to health sector, lowered educational attainment due to school closures, significantly increased unemployment and extreme poverty.
- Government fiscal response: directed resources to health, education, social protection, COVID-related measures, and fiscal stimulus; resulted in increased budget allocation to health and education and lower infrastructure spending in 2020 and 2021 budgets.
- IMF post-pandemic SDG assessment (other country cases): estimated an additional annual financing need of 2.5 percent of GDP when extrapolated to all LIDCs.
- Conclusion: Additional spending on human and physical capital on top of pre-pandemic estimates would be needed to avoid permanent setbacks toward SDGs.

### Policy discussions — Macro-fiscal assessment: Fiscal adjustments and financing for a green and inclusive growth
- Benefits of climate-resilient infrastructure:
  - DIGNAD model (IMF, 2018b) shows prioritizing climate-proofing capital investment significantly mitigates negative impacts of natural disasters on fiscal deficits, growth, and debt sustainability.
  - Natural disaster shocks affect public and private capital, productivity, and public investment efficiency; adaptation capital reduces disaster damages.
- Change in spending composition:
  - More than 90 percent of education and health spending is currently on recurrent items.
  - Shifting from recurrent to capital spending is expected to boost gains from climate adaptation investment.
  - PFM reforms to increase public investment efficiency contribute to larger productivity gains and moderate fiscal pressures by reducing recurrent expenditure.
- Financing sources and PPPs:
  - Key sources: concessional financing and increases in revenue driven by domestic revenue mobilization.
  - Need to offset projected decline in logging revenues via revenue administration and tax policy measures.
  - Concessional financing should remain a major source due to high cost of domestic or non-concessional external borrowing.
  - Some room to increase private financing through PPPs, but scope is limited absent a PPP regulatory framework and designated PPP unit; government technical capacity for PPPs is nascent.

### Financing scenarios and calibration to achieve SDGs by 2030
- Scenario framework (main assumptions summarized in text table):
  - Baseline: SDG met = NO; Additional grants = 0.0
  - A1: Revenue measure (no additional SDG spending) — SDG met = NO; Additional grants = 0.0
  - A2: Revenue measure + Loans (with additional SDG spending) — SDG met = YES; Additional grants = 0.0
  - A3: Grants (with additional SDG spending) — SDG met = YES; Additional grants = 4.4
  - A4: Revenue measure + Front-loaded adjustment (with additional SDG spending) — SDG met = YES; Additional grants = 1.5
- Sequencing and fiscal path assumptions:
  - Rationalization of non-SDG expenditure assumed to start from 2023 with expenditure tightened to achieve overall deficit closer to authority’s target of 1.5 percent by 2026 when no additional spending is included (scenario A1).
  - Fiscal deficits assumed: -2.5 percent in 2023, -2.3 percent in 2024, and -2.1 percent in 2025 under sequencing described.
  - Gradual scaling-up in SDG investments assumed after the fiscal adjustment period.
  - No private financing assumed in all scenarios due to no concrete PPP regulatory environment currently.
- Key findings from scenario analysis:
  - If additional SDG spending is financed only by loans (scenario A2), public debt will follow an unsustainable path and breach the authorities’ debt target in five years.
  - If financed only by grants (scenario A3), 4.4 percent of GDP additional grant is needed every year, which seems infeasible.
  - An integrated financing strategy combining additional loans, grants, and front-loaded fiscal measures (scenario A4) is more desirable: mitigates negative debt impacts while achieving SDG goals.
- Operational fiscal-anchor recommendation:
  - Use an effective debt-based fiscal anchor of 35 percent of public debt (in percent of GDP) to help sequence appropriate operational fiscal targets each year.
  - Short-term: relax deficit target relative to 1.5 percent to support recovery through targeted support; adjust operational deficit target based on growth performance.

### Improving PFM for SDGs and climate adaptation agenda
- Need to incorporate SDGs and climate adaptation into medium-term planning and annual budget allocation decisions.
- Existing elements:
  - NIIP provides a list of donor-funded projects; Budget Book provides some tags on nature of spending under each line ministry (including budget items tagged to climate-related expenditure).
  - Climate-related spending is currently allocated under related programs across various expenditure heads, making it difficult to trace climate adaptation investment costs in the budget.
- Recommended PFM reforms:
  - Strengthen capacity to identify priority investments at the budget planning stage, including adding a “climate budgeting” element where climate-proofing projects are clarified.
  - Develop monitoring and evaluation of climate-related financial indicators (for example, climate-related budget allocation and execution) in budget documents or separate climate reports.
  - Integrate climate-related fiscal commitments into PFM law to create stronger political support for climate adaptation objectives.

### Conclusions and strategic recommendations
- A multipronged strategy is needed to meet large development spending needs for SDG and climate adaptation objectives.
- Key priorities:
  - Largest spending needs are in the energy sector due to national priority on renewable energy and low-carbon transition.
  - Strengthen domestic revenue mobilization and continue concessional external financing as main financing options.
  - Improve efficiency of education, health, and infrastructure spending.
  - Shift spending composition from recurrent to capital expenditure and implement effective PFM reforms to unlock resources.
  - Combine additional concessional financing with front-loaded expenditure rationalization to achieve SDGs by 2030 while maintaining a sustainable debt path.
  - Integrate SDGs and climate adaptation objectives into medium-term and annual budgetary processes for better targeting of climate-proofing priority investment projects.
  - Pursue sustained efforts to introduce a PPP regulatory framework and strengthen institutional capacity to attract more private investment.

### Appendix — Currently identified priority investment list with climate-proofing component (selected highlights)
- Energy sector projects:
  - Tina River Hydropower Project (TRHPP)
    - Donors: ADB, WB, Bilateral (Australia, Korea)
    - $233.37 mil. In PPP (Built-Operate-Transfer)
    - Loan: 66.8%, Grant: 21.2%
    - New ongoing (2019-2025)
    - Build 15 MW hydro power plant for electricity supply in Honiara; CO2 reduction (49.500 tons/year) and tariff reduction expected.
  - Solar Power Development Project
    - Donor: ADB
    - $13 mil.
    - Grant: 56%, Budget: 44%
    - Almost completed (2016-2022)
    - Generate 2 MW grid-connected solar power in Kirakira, Lata, Malu’u, Munda and Tulagi.
- Transport sector projects (selected)
  - Land and Maritime Connectivity project
    - Donor: ADB
    - $150 mil.
    - Loan: 50%, Grant: 50%
    - New ongoing (2021-2028)
    - Rehabilitating/upgrading of 35 km roads near Honiara and upgrading ports/wharfs in Honiara, Ahanga, and Kira Kira.
  - Road and Aviation Project (SIRAP)
    - Donor: WB
    - $51 mil.
    - Loan: 60%, Grant: 40%
    - New ongoing (2019-2024)
    - Improve air transport and strengthen the climate resilience of roads.
  - Upgrading of Kukum Highway
    - Donor: JICA
    - 3.2 bil. Yen (=$29 mil.)
    - Grant: 100%
    - New ongoing (2021-2023)
    - Improve logistics improvement, disaster prevention and traffic safety through upgrading of Kukum highway in Honiara.
- Costs of new ongoing projects (aggregate)
  - Total cost: $463.37 mil (=15.2 percent of 2030 GDP)
  - Annual average project cost: $85.02 mil (=2.8 percent of 2030 GDP); of which external loans-financed cost is $42.82 mil (=1.4 percent of 2030 GDP)

*Source: 1slbea2022002 - 12. Physical infrastructure: Building  on the unit  cost of development projects that the government has already committed (excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1slbea2022002.pdf_