## 1slbea2023001

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### Outlook and macroeconomic context
- Economy recovering from multiple shocks (riot in November 2021, local COVID-19 outbreak), but recovery described as fragile.
- Both current account and fiscal deficits expected to persist over the medium-term, driven by:
  - decline in log production,
  - slowing potential growth of China,
  - high imports for infrastructure projects.
- Foreign reserves forecast to decline to 6.3 months of imports by 2027, and "would still be within the adequacy range at this lower level."
- Public debt-to-GDP ratio projected to reach the authorities’ threshold of 35 percent in 2031, driven by concessional external borrowing for infrastructure projects and increasing domestic financing.
- Downside risks highlighted: potential resurgence of COVID-19, natural disasters, increases in global commodity prices, recurrent political instability.
- Staff view: recovery accelerating but fragile; rising living and business costs are a drag.

### Executive Board assessment and near-term fiscal guidance
- Executive Directors endorsed staff’s appraisal: recovery accelerating but fragile.
- Near-term fiscal policy recommendations:
  - Prudent execution of the 2023 budget.
  - Rebuild the government’s cash balance once recovery is secured — prioritize broad cash balance to at least two months of total spending.
  - Tight control of Pacific Games and general election expenditures to avoid crowding out essential spending and targeted support for the vulnerable.
  - Publish audit results: staff welcomes publication of COVID-19 related expenditures audits and recommends the OAG also audit Pacific Games expenditures and publish results.
- Public investment management guidance:
  - Phase public investment projects in line with absorptive capacity.
  - Carefully negotiate accompanying financing arrangements to mitigate fiscal risks and ensure external balance and debt sustainability.
  - Accelerate reforms to improve quality and accountability of public expenditure, including improving PFM and reviewing the CDF Act.
  - Mobilize significant revenues through completion of the tax administration modernization project and planned introduction of a VAT.

### Monetary policy, central bank guidance, and exchange rate regime
- Staff welcomes CBSI decision to tighten monetary policy; CBSI should stand ready to further adjust policy if inflationary pressures persist.
- Specific monetary guidance:
  - Phase out accommodative measures introduced during the pandemic.
  - Raise the Cash Reserve Requirement back to the pre-pandemic level (7.5 percent) with an increased stock of central bank bills in coming months, while carefully monitoring economic developments and weak monetary transmission mechanisms.
  - Avoid additional purchases of government bonds to safeguard macroeconomic stability and central bank independence.
  - Continue capacity building: economic analysis and forecasting, monetary policy communication, internal audit function.
- Exchange rate regime:
  - Current regime remains appropriate, but a timely review of the currency basket is called for given changes in trade patterns.
  - Solomon Islands’ external position in 2022 assessed to be substantially weaker than the level consistent with medium-term fundamentals and desirable policies.
  - REER appreciation in 2022 estimated by 9.5 percent; overvaluation estimates: EBA-lite CA approach 21.4 percent; REER approach 8.5 percent.

### Financial sector performance and credit conditions
- Financial sector remains capitalized and profitable.
- Commercial banks’ credit to the private sector remains subdued.
- Bank soundness indicators (2022):
  - Capital adequacy ratio: 32.9 (end-2022).
  - Non-performing Loans to Total Gross Loans: 9.4 (2022).
  - Return on Assets: 3.0 (2022).
  - Liquid Assets to Total Assets (Liquid Asset Ratio): 47.6 (2022).
- Role during COVID-19:
  - 699 loans restructured from 2019H2 to 2022H1 amounting to SI$856.9 million (6 percent of GDP).
  - Only 3 percent of restructured loans were classified as non-performing loans.
- Recommendations to spur credit growth:
  - Reduce asymmetric information and facilitate enforcement of contracts.
  - Promote digital financial services and implement the National Payment Systems Act 2022.
  - Update legal and regulatory frameworks for credit union and insurance sectors.
  - Improve CBSI supervisory capacity, including supervision of DBSI and stress testing of financial institutions.
- Financial integrity:
  - Strengthen legal and supervisory frameworks for AML/CFT and raise awareness of risks.
  - New AML/CFT legal framework consistent with FATF standards remains to be legislated.
  - Clarify supervisory responsibilities among agencies and enhance risk-based supervisory capacities.

### Structural reforms, governance, and natural resource management
- Urgent priorities:
  - Develop new growth drivers: enhance natural resource wealth management and market regulation.
  - Address governance weaknesses and corruption vulnerabilities.
  - Resolve frequent land disputes and reform dispute resolution mechanisms to unlock private sector development.
  - Strengthen governance and fiscal frameworks for the mining sector, including finalizing a Mining Act and rejoining the Extractive Industries Transparency Initiative (EITI).
  - Strengthen independence and capacity of anti-corruption institutions and the OAG; amend OAG legal framework consistent with IMF technical assistance recommendations.
- Capacity development priorities (immediate):
  - Reporting and auditing of public spending.
  - Public investment management.
  - Review of the exchange rate basket.
  - Central bank internal audit.
  - Economic statistics: national accounts, government financial statistics, household and labor force surveys.

### Key quantitative indicators (selected)
- Real GDP growth (annual percent): 2018: 2.7; 2019: 1.7; 2020: -3.4; 2021: -0.6; 2022: -4.1; 2023 Est.: 2.5; 2024 Proj.: 2.4; 2025: 3.0; 2026: 3.0; 2027: 3.0.
- CPI (period average): 2018: 3.5; 2019: 1.6; 2020: 3.0; 2021: -0.1; 2022: 5.5; 2023 Est.: 4.8; 2024 Proj.: 3.7; 2025: 3.3; 2026: 3.3; 2027: 3.3.
- Nominal GDP (in SI$ millions): 2018: 12,847; 2019: 13,234; 2020: 12,617; 2021: 12,690; 2022: 13,021; 2023 Est.: 13,980; 2024 Proj.: 14,807; 2025: 15,772; 2026: 16,761; 2027: 17,826.
- Central government: Total revenue and grants (percent of GDP): 2018: 31.7; 2019: 27.4; 2020: 30.1; 2021: 27.1; 2022: 27.7; 2023 Est.: 24.8; 2024 Proj.: 26.4; 2025: 26.9; 2026: 26.7; 2027: 26.6.
- Central government: Total expenditure (percent of GDP): 2018: 30.2; 2019: 29.0; 2020: 32.6; 2021: 30.7; 2022: 31.8; 2023 Est.: 31.1; 2024 Proj.: 30.9; 2025: 30.2; 2026: 30.0; 2027: 29.9.
- Overall balance (percent of GDP): 2018: 1.5; 2019: -1.5; 2020: -2.4; 2021: -3.6; 2022: -4.1; 2023 Est.: -6.3; 2024 Proj.: -4.5; 2025: -3.4; 2026: -3.3; 2027: -3.3.
- Foreign financing (net, percent of GDP): 2018: -0.1; 2019: 0.0; 2020: 1.4; 2021: 1.1; 2022: 0.3; 2023 Est.: 2.6; 2024 Proj.: 5.8; 2025: 5.2; 2026: 3.1; 2027: 2.9.
- Domestic financing (net, percent of GDP): 2018: -1.4; 2019: 1.5; 2020: 1.0; 2021: 2.6; 2022: 0.6; 2023 Est.: 3.2; 2024 Proj.: 2.8; 2025: 2.0; 2026: 3.1; 2027: 3.1.
- Central government debt (percent of GDP): 2018: 7.9; 2019: 7.9; 2020: 13.5; 2021: 15.4; 2022: 16.9; 2023 Est.: 22.2; 2024 Proj.: 25.7; 2025: 27.8; 2026: 29.3; 2027: 30.8.
- Credit to private sector (annual percent change, end of year): 2018: 4.1; 2019: 6.1; 2020: 0.3; 2021: -0.4; 2022: 0.8; 2023 Est.: 2.0; 2024 Proj.: 3.5; 2025: 5.0; 2026: 5.0; 2027: 5.0.
- Trade balance (goods and services, US$ millions): 2018: -67.6; 2019: -161.6; 2020: -127.4; 2021: -205.4; 2022: -335.1; 2023 Est.: -313.4; 2024 Proj.: -309.9; 2025: -319.2; 2026: -299.5; 2027: -304.4.
- Current account balance (US$ millions): 2018: -47.8; 2019: -154.0; 2020: -25.1; 2021: -78.3; 2022: -212.1; 2023 Est.: -214.9; 2024 Proj.: -183.9; 2025: -187.8; 2026: -161.1; 2027: -156.5.
- Gross official reserves (US$ millions, end of period): 2018: 613.1; 2019: 574.1; 2020: 660.6; 2021: 694.5; 2022: 641.0; 2023 Est.: 560.7; 2024 Proj.: 541.7; 2025: 498.9; 2026: 485.5; 2027: 453.8.
- Reserves (in months of next year's imports of GNFS): 2018: 9.8; 2019: 12.4; 2020: 12.8; 2021: 11.5; 2022: 9.5; 2023 Est.: 8.4; 2024 Proj.: 8.0; 2025: 7.4; 2026: 7.0; 2027: 6.3.
- Memorandum: Per capita GDP (2022): US$2,265; Population (2020): 686,878; Poverty rate (2006): 23 percent; Quota: SDR 20.8 million.

### Debt outlook, DSA findings, and financing risks
- DSA: risk of debt distress rated Moderate; substantial space to absorb shocks but liquidity challenges persist.
- Baseline projections:
  - PV of public debt-to-GDP ratio projected to rise from 16.3 percent in 2022 to 34.0 percent in 2032.
  - Nominal public debt-to-GDP projected to breach the authorities’ policy threshold of 35 percent in 2031.
- Drivers of increasing debt ratios: projected decline in external budget support grants; shift from highly concessional external debt to more expensive domestic financing; large infrastructure projects including Pacific Games.
- Stress and scenario outcomes:
  - Commodity price shock: PV of debt-to-revenue ratio highly affected.
  - Tailored natural disaster shock: would cause PV of public debt-to-GDP ratio to breach 35 percent in 2026.
  - Fiscal and financing risk scenario (contingent liability shock of 7 percent of GDP): PV of public debt-to-GDP ratio projected to breach 35 percent immediately in 2024 (16.5 in 2022; 23.9 in 2023; 36.8 in 2024; 39.4 in 2025; 41.7 in 2026; 43.1 in 2027; 44.4 in 2028; 45.2 in 2029; 46.2 in 2030; 47.1 in 2031; 47.9 in 2032).
- Policy implication: rebuild fiscal buffers, prioritize concessional financing, phase and negotiate public investment carefully, strengthen revenue mobilization (VAT, Tax Administration Act), and improve PFM to preserve debt sustainability.

### External sector assessment and reserves
- CA deficit in 2022 estimated at 13.3 percent of GDP; EBA-lite adjusted CA: -10.7 percent of GDP; CA Norm: -5.3 percent of GDP; CA Gap: -5.5 percent of GDP.
- NIIP: -6.1 percent of GDP at end-2022.
- Reserve coverage: 2022: US$641.0 million (9.5 months of prospective imports); projected 2023: 8.4 months; projected 2027: 6.3 months. Optimal reserves range suggested: between four and seven months of imports.
- Policy recommendations: improve competitiveness and export diversification; improve public investment management; explore grant financing and highly concessional loans; review currency basket.

### Sectoral notes and data innovations
- Tourism:
  - Pre-pandemic contribution: around 5 percent of GDP and less than 1 percent of total employment.
  - International arrivals in 2019: 28,907.
  - After border reopening in July 2022: 4,207 visitors in Q4 2022 (70 percent increase from Q3 2022); H2 2022 visitor arrivals recovered to 42.3 percent of the same period in 2019.
- Annex IV — AIS big-data nowcasting:
  - AIS-based port activity: port activity decreased by 27 percent in 2020 and by 42 percent in 2021 compared to 2019; 2022 activity increased but remained subdued at the 2021 level.
  - Export volumes estimated to have fallen 64 percent in 2021 and 2022 with respect to 2019 (exports volume estimate).
  - AIS indicators intended for CBSI nowcasting and IMF technical assistance.

### Main policy recommendations (condensed)
- Fiscal:
  - Tightly control Pacific Games and election spending; rebuild cash balance to reduce liquidity risks.
  - Phase public investment with absorptive capacity; improve PFM and review the CDF Act.
  - Complete tax administration modernization and introduce VAT; develop a Medium-Term Revenue Strategy.
- Monetary/exchange rate:
  - Phase out accommodative measures; raise Cash Reserve Requirement toward 7.5 percent; avoid additional CBSI purchases of government bonds.
  - Review currency basket weights to prevent exchange rate misalignment.
- Financial sector:
  - Reduce asymmetric information, facilitate contract enforcement, promote digital finance, update sector legal frameworks, strengthen AML/CFT.
- Structural and governance:
  - Resolve land disputes; strengthen dispute resolution; improve mining governance and rejoin EITI; strengthen OAG and anti-corruption institutions.
- Capacity development priorities:
  - Reporting and auditing of public spending; public investment management; exchange rate basket review; central bank internal audit; national accounts and labor surveys.

*SOLOMON ISLANDS: STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION (IMF).*

### 2024. The financial sector remains capitalized and profitable, while commercial banks’ credit

### 2024. The financial sector remains capitalized and profitable, while commercial banks’ credit to the private sector remains subdued.

### Outlook and macroeconomic context
- The economy is recovering from multiple shocks (civil unrest, local COVID-19 outbreak), but the recovery is fragile.
- Both current account and fiscal deficits are expected to persist over the medium-term, driven by:
  - decline in log production,
  - slowing potential growth of China,
  - high imports for infrastructure projects.
- Foreign reserves are forecast to decline to 6.3 months of imports by 2027, and "would still be within the adequacy range at this lower level."
- The public debt-to-GDP ratio is projected to reach the authorities’ threshold of 35 percent in 2031, driven by concessional external borrowing for infrastructure projects and increasing domestic financing.
- Downside risks: potential resurgence of COVID-19, natural disasters, increases in global commodity prices, recurrent political instability.

### Executive Board assessment and priority actions
- Executive Directors endorsed staff’s appraisal: the recovery is accelerating but fragile; rising living and business costs are a drag.
- Near-term fiscal policy recommendations:
  - Prudent execution of the 2023 budget.
  - Rebuild the government’s cash balance once the recovery is secured — prioritize broad cash balance to at least two months of total spending.
  - Expenditures related to the Pacific Games and the general elections need tight control to avoid crowding out essential spending and targeted support for the vulnerable.
  - Publish audit results: staff welcomes publication of COVID-19 related expenditures audits and recommends the OAG also audit Pacific Games expenditures and publish results.
- Public investment management:
  - Phase public investment projects in line with absorptive capacity.
  - Carefully negotiate accompanying financing arrangements to mitigate fiscal risks and ensure external balance and debt sustainability.
  - Accelerate reforms to improve quality and accountability of public expenditure, including improving PFM and reviewing the CDF Act.
  - Mobilize significant revenues through completion of the tax administration modernization project and planned introduction of a VAT.
- Monetary and central bank guidance:
  - Staff welcomes CBSI decision to tighten monetary policy; CBSI should stand ready to further adjust policy if inflationary pressures persist.
  - CBSI should avoid additional purchases of government bonds to safeguard macroeconomic stability and central bank independence.
  - Continue capacity building: economic analysis and forecasting, monetary policy communication, internal audit function.
- Exchange rate regime:
  - Current regime remains appropriate, but a timely review of the currency basket is called for given changes in trade patterns.
  - Solomon Islands’ external position in 2022 is assessed to be substantially weaker than the level consistent with medium-term fundamentals and desirable policies.

### Financial sector and credit
- The financial sector remains capitalized and profitable.
- Commercial banks’ credit to the private sector remains subdued.
- Recommendations to spur credit growth:
  - Reduce asymmetric information and facilitate enforcement of contracts.
  - Promote digital financial services.
- Financial integrity:
  - Strengthen legal and supervisory frameworks for AML/CFT and raise awareness of risks.

### Structural reforms and governance
- Urgent priorities:
  - Develop new growth drivers: enhance natural resource wealth management, market regulation.
  - Address governance weaknesses and corruption vulnerabilities.
  - Frequent land disputes and ineffective dispute resolution mechanisms are long-standing obstacles to private sector development.
  - Strengthen governance and fiscal frameworks for the mining sector, including through legislation and rejoining the EITI.
  - Strengthen independence and capacity of anti-corruption institutions and the OAG; amend OAG legal framework consistent with IMF technical assistance recommendations.
- Capacity development priorities (immediate):
  - Reporting and auditing of public spending.
  - Public investment management.
  - Review of the exchange rate basket.
  - Central bank internal audit.
  - Economic statistics: national accounts, government financial statistics, household and labor force surveys.

### Key quantitative indicators (selected from Table 1, Solomon Islands: Selected Economic Indicators, 2018–2027)
- Real GDP growth (annual percent): 2018: 2.7; 2019: 1.7; 2020: -3.4; 2021: -0.6; 2022: -4.1; 2023 Est.: 2.5; 2024 Proj.: 2.4; 2025: 3.0; 2026: 3.0; 2027: 3.0.
- CPI (period average): 2018: 3.5; 2019: 1.6; 2020: 3.0; 2021: -0.1; 2022: 5.5; 2023 Est.: 4.8; 2024 Proj.: 3.7; 2025: 3.3; 2026: 3.3; 2027: 3.3.
- Nominal GDP (in SI$ millions): 2018: 12,847; 2019: 13,234; 2020: 12,617; 2021: 12,690; 2022: 13,021; 2023 Est.: 13,980; 2024 Proj.: 14,807; 2025: 15,772; 2026: 16,761; 2027: 17,826.
- Central government: Total revenue and grants (percent of GDP): 2018: 31.7; 2019: 27.4; 2020: 30.1; 2021: 27.1; 2022: 27.7; 2023 Est.: 24.8; 2024 Proj.: 26.4; 2025: 26.9; 2026: 26.7; 2027: 26.6.
- Central government: Total expenditure (percent of GDP): 2018: 30.2; 2019: 29.0; 2020: 32.6; 2021: 30.7; 2022: 31.8; 2023 Est.: 31.1; 2024 Proj.: 30.9; 2025: 30.2; 2026: 30.0; 2027: 29.9.
- Overall balance (percent of GDP): 2018: 1.5; 2019: -1.5; 2020: -2.4; 2021: -3.6; 2022: -4.1; 2023 Est.: -6.3; 2024 Proj.: -4.5; 2025: -3.4; 2026: -3.3; 2027: -3.3.
- Foreign financing (net, percent of GDP): 2018: -0.1; 2019: 0.0; 2020: 1.4; 2021: 1.1; 2022: 0.3; 2023 Est.: 2.6; 2024 Proj.: 5.8; 2025: 5.2; 2026: 3.1; 2027: 2.9.
- Domestic financing (net, percent of GDP): 2018: -1.4; 2019: 1.5; 2020: 1.0; 2021: 2.6; 2022: 0.6; 2023 Est.: 3.2; 2024 Proj.: 2.8; 2025: 2.0; 2026: 3.1; 2027: 3.1.
- Central government debt (percent of GDP): 2018: 7.9; 2019: 7.9; 2020: 13.5; 2021: 15.4; 2022: 16.9; 2023 Est.: 22.2; 2024 Proj.: 25.7; 2025: 27.8; 2026: 29.3; 2027: 30.8.
- Credit to private sector (annual percent change, end of year): 2018: 4.1; 2019: 6.1; 2020: 0.3; 2021: -0.4; 2022: 0.8; 2023 Est.: 2.0; 2024 Proj.: 3.5; 2025: 5.0; 2026: 5.0; 2027: 5.0.
- Trade balance (goods and services, US$ millions): 2018: -67.6; 2019: -161.6; 2020: -127.4; 2021: -205.4; 2022: -335.1; 2023 Est.: -313.4; 2024 Proj.: -309.9; 2025: -319.2; 2026: -299.5; 2027: -304.4.
- Current account balance (US$ millions): 2018: -47.8; 2019: -154.0; 2020: -25.1; 2021: -78.3; 2022: -212.1; 2023 Est.: -214.9; 2024 Proj.: -183.9; 2025: -187.8; 2026: -161.1; 2027: -156.5.
- Gross official reserves (US$ millions, end of period): 2018: 613.1; 2019: 574.1; 2020: 660.6; 2021: 694.5; 2022: 641.0; 2023 Est.: 560.7; 2024 Proj.: 541.7; 2025: 498.9; 2026: 485.5; 2027: 453.8.
- Reserves (in months of next year's imports of GNFS): 2018: 9.8; 2019: 12.4; 2020: 12.8; 2021: 11.5; 2022: 9.5; 2023 Est.: 8.4; 2024 Proj.: 8.0; 2025: 7.4; 2026: 7.0; 2027: 6.3.
- Memorandum: Per capita GDP (2022): US$2,265; Population (2020): 686,878; Poverty rate (2006): 23 percent; Quota: SDR 20.8 million.

### Main policy recommendations (condensed)
- Fiscal: tightly control Pacific Games and election spending; rebuild cash balance to reduce liquidity risks; phase public investment with absorptive capacity; improve PFM; complete tax administration modernization and introduce VAT.
- Monetary/exchange rate: phase out accommodative measures; review currency basket; avoid additional CBSI purchases of government bonds.
- Financial sector: reduce asymmetric information, strengthen enforcement and AML/CFT frameworks, promote digital finance.
- Structural: resolve land disputes, strengthen dispute resolution, improve governance in mining, rejoin EITI, strengthen OAG and anti-corruption institutions.

*SOLOMON ISLANDS: STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION (IMF).*

### 4. The economy is recovering from the shocks. The riot in November 2021 and the

### 4. The economy is recovering from the shocks. The riot in November 2021 and the

### Recovery from shocks and real activity
- The riot in November 2021 and the community transmission of COVID-19 in early 2022 adversely affected the economy in the first half of 2022.
- Production of round logs decreased by 25 percent in the first half of 2022 compared to the same period in 2021.
- Electricity usage decreased by 3.2 percent in the first half of 2022 compared to the same period in 2021.
- Economic activity started to increase gradually in the second half of 2022 as the direct impacts of the two shocks dissipated (high frequency indicators including port activity suggested recovery).
- COVID-19 related restrictions, including at the borders, were fully removed in July 2022.
- Real GDP is estimated to have contracted by 4.1 percent in the full year 2022, marking the third consecutive year of negative growth.

### Inflation and monetary policy
- Annual inflation accelerated from -2.7 percent in March 2022 to 9.9 percent in September 2022, then declined to 8.5 percent in December 2022.
- The initial acceleration was driven by higher import prices, followed by passthrough to domestic prices.
- The Central Bank of Solomon Islands (CBSI) maintained accommodative monetary policy during 2022:
  - Cash Reserve Requirement for commercial banks maintained at 5 percent.
  - Stock of central bank bills (the Bokolo Bills) maintained at SI$430 million.
- The government temporarily cut import duty and sales tax on fuel imports to help mitigate inflationary pressures.
- Note: These monetary and fiscal pandemic-response measures were first introduced in July 2022 and expired at end-2022.

### External sector and reserves
- The deterioration of the terms of trade caused by Russia’s war in Ukraine is estimated to have widened the current account deficit to 13.3 percent of GDP in 2022.
- Gross official reserves are expected to have lowered to 9.5 months of prospective imports in 2022, above the reserve adequacy range of four to seven months of imports.
- A rise in remittance inflows (under PACER Plus labor mobility scheme) partially offset the worsening external balance.
- Continued aid inflows, albeit declining, supported reserve coverage.

### Fiscal performance, budget execution, and public finances
- The regular 2022 budget prioritized COVID-19 response and post-riot reconstruction and included an economic stimulus package estimated at 2.3 percent of GDP (temporary measures: tax relief, cash transfers for reconstruction, import duty exemptions, fast-tracking construction approvals).
- Parliamentary approval of the 2022 budget was delayed until April 2022, preventing full implementation.
- Significant revenue shortfall in early 2022 (due to the riot and COVID-19), donor support falling short of expectations, and a shallow domestic bond market constrained domestic financing, contributing to budget underexecution.
- Fiscal outcome: fiscal deficit is estimated to have become smaller than expected at the time of budget approval, amounting to 4.1 percent of GDP in 2022.
- A supplementary budget authorized additional expenditure of SI$284 million (2.1 percent of GDP).
- The 2023 budget approved in December 2022:
  - Emphasizes transformational investments in agriculture and fisheries, transportation, mining, digital communication, and tourism.
  - Prioritizes human capital investment in education and health.
  - Pacific Games and general elections account for 4.6 percent of GDP in the 2023 budget and contribute to a large fiscal deficit of 6.3 percent of GDP in 2023.
  - Donor grants expected to decline in 2023.

### Outlook and risks
- Real GDP forecast: growth of 2.5 percent in 2023, driven by activity for the 2023 Pacific Games and large infrastructure projects.
- Inflation projected to moderate but remain at 4.2 percent at end-2023.
- Medium-term growth: forecast to be around 3 percent over the medium term, weighed down by declining logging activity and slower potential growth of China.
- Current account deficit projected at 12.6 percent of GDP in 2023 due to construction activity including Pacific Games.
- Foreign reserves projected to decline to 6.3 months of imports by 2027, remaining within the adequacy range at that level.
- Public-debt-to-GDP ratio:
  - Increased from 7.9 percent in 2018 to an estimated 22.2 percent in 2023.
  - Projected to reach the authorities’ policy threshold of 35 percent of nominal-debt-to-GDP ratio in 2031.
- Debt Sustainability Analysis (DSA) indicates moderate risk of debt distress with substantial space to absorb shocks, but the country faces significant liquidity challenges due to low government cash balance and rising fiscal risks (including unfunded maintenance costs for large infrastructure projects).
- Key downside risks:
  - Resurgence of COVID-19 (including in remote provinces).
  - Natural disasters (example: 7.0 magnitude earthquake in November 2022).
  - Lower-than-expected donor support or unsuccessful bond issuance in the shallow domestic market.
  - Higher inflation from further rises in global commodity prices.
  - Delays in infrastructure projects, political instability ahead of general elections, and geopolitical tensions.
- Upside risks:
  - Stronger global recovery and acceleration of aid inflows motivated by geopolitical considerations.
- Disaster probability: staff’s work shows a probability of around 13.5 percent of a disaster each year of a magnitude of more than 3 percent of GDP or impacting 5 percent of the population.

### Sector note — Tourism
- Pre-pandemic: tourism contributed around 5 percent of GDP and less than 1 percent of total employment.
- International arrivals in 2019: 28,907 (8 percent annual growth over the past five years).
  - About half returning residents; half visitors.
  - Visitors composition in 2019: 32 percent tourists, 24 percent business.
  - Residences in 2019: Australia 38 percent, US 6.8 percent, New Zealand 6.8 percent, Fiji 6.3 percent.
- After border reopening in July 2022:
  - 4,207 visitors in Q4 2022, a 70 percent increase from Q3 2022.
  - Second half of 2022 visitor arrivals recovered to 42.3 percent of the same period in 2019.
  - In H2 2022 visitors: 29 percent for tourism purposes, 31 percent for business.
  - Visitor numbers expected to continue increasing and to recover to pre-pandemic levels, aided by the Pacific Games in November 2023.

### Policy recommendations (IMF staff)
- Near-term policy mix:
  - Provide targeted fiscal support for the vulnerable suffering from rising inflation.
  - Reverse accommodative monetary measures introduced during the pandemic once recovery is ensured.
- Fiscal policy actions:
  - Tight control of exceptional expenditures for Pacific Games and general elections to avoid slippages and cost overruns that would crowd out essential spending.
  - Carefully formulate utilization and maintenance plans for Pacific Games facilities.
  - Coordinate closely with development partners and accelerate reforms required for their budget support to secure financing and avoid payment arrears.
- Rebuild cash balance:
  - Gradual fiscal adjustment to rebuild the broad cash balance to at least two months of total spending once recovery is secure.
  - Shift expenditure composition away from inefficient and non-transparent spending (including Constituency Development Funds (CDFs)) and enhance efficiency of health and education spending.
  - If recovery falters, apply careful cash management, intensive expenditure control, and seek additional donor assistance.
- Public investment mobilization and management:
  - Mobilize public investment in physical and human capital, especially for climate resilience.
  - Strengthen institutional frameworks: centralized appraisal procedure, increase maintenance spending, improve donor coordination, prioritize, phase, and carefully negotiate financing arrangements for projects to avoid crowding out private investment and jeopardizing fiscal and external sustainability.
- Domestic revenue mobilization:
  - Continue reforms to raise revenues and address fragmented tax systems.
  - Implement the Tax Administration Act (adopted September 2022) effectively.
  - Undertake a Tax Administration Diagnostic Assessment Tool (TADAT) assessment.
  - Prepare and implement Value Added Tax (VAT) to consolidate fragmented taxes and yield additional revenues over the medium term.
  - Develop a Medium-Term Revenue Strategy (MTRS) and strengthen budgetary capacity.
- Fiscal governance and transparency:
  - Finalize regulations under the Public Financial Management Act.
  - Improve liquidity forecasting, cash management, and expenditure control to prevent payment arrears.
  - Improve budgetary process and reporting: realistic budget envelopes, consistent classification of spending, and gradual integration of donor spending.
  - Review the CDF Act and establish regulations to strengthen planning, reporting, monitoring, and governance of CDF operations.
  - Continue publication of audit results of COVID-19 related expenditures and document crisis-related public procurement.

*Source: IMF staff summary of "4. The economy is recovering from the shocks. The riot in November 2021 and the" (1slbea2023001).*

### 21.  The authorities concurred with staff’s views on increasing future fiscal challenges.

### 21. The authorities concurred with staff’s views on increasing future fiscal challenges.

### Fiscal Policy: plans, measures, and constraints
- Authorities concurred with staff that future fiscal challenges are increasing.
- Planned responses:
  - Revenue-enhancing measures and tight expenditure control.
  - Strive to secure domestic financing and donor support.
  - Put in place measures to reduce the deficit and rebuild the cash balance in the interim budget for 2024.
  - Prudent management of infrastructure projects and assessment of the terms of external borrowing to avoid undermining macroeconomic stability and debt sustainability.
- Revenue mobilization priorities:
  - Tax reform including introduction of a VAT.
  - Improvement of a taxation mechanism for mineral exports.
  - Establishment of an MTRS over the medium term, with IMF technical assistance.
- Governance and implementation constraints:
  - Documentation of crisis-related public procurement and the CDF Act review remain ongoing, reflecting capacity constraints.
  - The World Bank estimates that potentially around 90 percent of total donor spending was off budget in 2019, fragmenting implementation of development policies.
- Staff recommendations and priorities:
  - Near-term fiscal policy: prudent execution of the 2023 budget, followed by rebuilding the government’s cash balance.
  - Control expenditures related to the Pacific Games and general elections to avoid crowding out essential spending.
  - Once recovery is secured after the Pacific Games, prioritize rebuilding the government’s broad cash balance to at least two months of total spending.
  - IMF staff welcomes publication of audits of COVID-19 related expenditures and recommends OAG audit expenditures related to the Pacific Games and publish results.
  - Prudent management of public investment projects, phasing projects in line with absorptive capacity and carefully negotiating financing arrangements.
  - Accelerate reforms to improve quality and accountability of public expenditure, including improving PFM and reviewing the CDF Act.
  - Significant revenues could be mobilized through completion of the tax administration modernization project and the planned introduction of a VAT.

### Monetary and Exchange Rate Policy
- Staff recommendations for CBSI:
  - Phase out accommodative measures introduced in response to the pandemic.
  - Raise the Cash Reserve Requirement back to the pre-pandemic level (7.5 percent) with an increased stock of central bank bills in coming months, while carefully monitoring economic developments and weak monetary transmission mechanisms.
  - Avoid further purchases of government securities at the secondary market to safeguard macroeconomic stability and central bank independence.
  - Continue efforts to build capacity for better implementation of monetary policy, including improving economic analysis and forecasting capabilities and strengthening the monetary policy communication strategy.
- Exchange rate assessment:
  - Current exchange rate regime remains appropriate, but weights of the currency basket need review to prevent exchange rate misalignment.
  - The Solomon Islands dollar is anchored by a basket of trade partners’ currencies and estimated to have appreciated by around 10 percent in real effective terms in 2022, reflecting strong appreciation of the US dollar against other currencies.
  - Solomon Islands’ external position in 2022 is assessed to be substantially weaker than the level consistent with medium-term fundamentals and desirable policies on the back of the overvalued real exchange rate.
  - Weights of the currency basket have remained unchanged for more than a decade and are the highest for the US dollar, even though China has become the country’s main trade partner during the period.
  - IMF stands ready to provide technical assistance to the CBSI for the review.
- Authorities’ actions and views:
  - CBSI raised the Cash Reserve Requirement from 5 percent to 6 percent in March 2023 to contain inflationary pressures while being vigilant about economic recovery.
  - CBSI does not expect further government bond purchases, though it did not rule out measures to stabilize the market under exceptional circumstances.
  - Authorities requested IMF technical assistance to review the currency basket to prevent exchange rate misalignment.

### Financial Sector Policy and resilience
- Financial sector soundness and performance:
  - Commercial banks maintained business operations under mobility restrictions during the first half of 2022 and supported the economy through restructuring loans.
  - Capital adequacy ratio stood at 32.9 percent at end-2022, well over the regulatory requirement of 15 percent.
  - Return on assets and equity improved.
  - Ratio of non-performing loans to gross loans declined to 9.4 percent at end-2022, from its recent peak of 11.8 percent in June 2020.
  - Development Bank of Solomon Islands (DBSI) is expanding lending to SMEs and tourism and agricultural sectors; effective supervision of DBSI remains a challenge for CBSI.
- Role during COVID-19 (Box 2):
  - CBSI introduced a temporary waiver of loan loss provisions in February 2020; measures expired in August 2022 after extensions.
  - A total of 699 loans were restructured from 2019H2 to 2022H1, amounting to SI$856.9 million (6 percent of GDP).
  - Around three quarters of restructuring occurred in 2020H1; only 6 percent of the total restructuring was conducted in 2022H1.
  - Only 3 percent of restructured loans were classified as non-performing loans.
- Reform priorities:
  - Continue reforms to support financial sector development and inclusion.
  - Address high excess reserves and lending rates; constraints include dispersed terrain and low population density.
  - Reforms to reduce asymmetric information, facilitate enforcement of contracts, and promote digital financial services.
  - Update legal and regulatory frameworks for the credit union and insurance sectors.
  - Implement the National Payment Systems Act 2022 to introduce electronic payments and settlement system.
  - Improve CBSI supervisory capacity, including supervision of DBSI and stress testing of financial institutions.
- AML/CFT:
  - Effective AML/CFT implementation should remain a priority.
  - Correspondent banking relationship pressures have been relatively muted; authorities taking initiatives (e.g., SIM registration measures) but KYC framework hurdles remain.
  - A new AML/CFT legal framework consistent with FATF standards remains to be legislated.
  - Clarify supervisory responsibilities among agencies and enhance risk-based supervisory capacities.
  - IMF continues to support updating legal framework and enhancing supervisory capacities.
- Authorities’ views:
  - Authorities agreed on promoting financial sector development and strengthening AML/CFT.
  - Competition among banks has increased, reflected in declining lending rates due to entry of a new credit institution owned by SINPF.
  - CBSI is updating legal and supervisory frameworks, developing regulations to implement National Payment Systems Act and promote digital payments.
  - CBSI has made efforts to raise AML/CFT awareness and improve compliance, and is working on adopting a new legal framework and improving supervisory capacity with IMF technical assistance.

### Structural Reforms and natural resource governance
- Need for reforms:
  - Address structural bottlenecks including governance weaknesses and corruption vulnerabilities to develop new growth drivers and diversify exports.
  - Projected weakness of the external sector highlights need to enhance competitiveness.
  - Potential growth sectors: mining (gold, nickel, and bauxite), fisheries, agriculture, and tourism.
  - Private investment and FDI need to complement public investment, but frequent land disputes and ineffective dispute resolution mechanisms remain obstacles.
  - Increase resources for anti-corruption and auditing institutions to limit corruption and enhance accountability of public spending.
- Natural resource management priorities:
  - Establish strong governance framework for mining sector: clearly defined roles and powers, transparent land access negotiation and management, inclusive representation of community interests including women, adequate monitoring of mining operations, and transparent revenue generation and management.
  - Finalize a Mining Act and rejoin the Extractive Industries Transparency Initiative (EITI).
- Authorities’ views:
  - Authorities agreed developing new growth drivers and diversifying exports is urgent.
  - Government adopted policies to enhance productivity and competitiveness of agriculture, fisheries, and tourism, and to strengthen governance and licensing standards for mining.
  - Acknowledge land registration and dispute resolution issues take time to resolve due to cultural and traditional practices.
  - Committed to addressing governance vulnerabilities, strengthening independence and capacity of anti-corruption and auditing institutions, and seeking concerted efforts including the private sector.

### Capacity Development (CD)
- IMF CD has re-accelerated since border reopening and is more effective with in-person training, including via PFTAC.
- Recent CD activities: revenue administration; mineral royalties; macroeconomic analysis and forecast; financial sector supervision; macroeconomic statistics; governance and transparency.
- Emerging CD needs:
  - Reporting and auditing of public spending.
  - Management of public investment.
  - Review of the exchange rate basket.
  - Central bank’s internal audit as recommended by safeguards assessment mission.
- IMF CD role and coordination:
  - Support development of medium-term frameworks on fiscal policy, revenue mobilization, and green PFM over the medium term after capacity is built.
  - Explore role-sharing and synergies with development partners: World Bank for fiscal management, ADB for tax policy, UNDP for anti-corruption and money laundering.
- Authorities’ request:
  - Further support for compiling economic statistics and enhancing capacity of the National Statistics Office for national accounts, government financial statistics, consumer price index, and household and labor force surveys.

### Staff Appraisal: outlook, risks, and policy guidance
- Economic outlook and risks:
  - Economy recovering from multiple shocks over past three years, but recovery is fragile.
  - Reopening of the border and infrastructure spending ahead of the 2023 Pacific Games accelerated recovery, but rising living and business costs have been a drag.
  - Downside risks: potential resurgence of COVID-19, natural disasters, increases in global commodity prices, recurrent political instability.
  - Both fiscal and current account deficits expected to persist in the medium-term, driven by large infrastructure spending, other tangible and human capital development, and declining log exports.
  - Reserve coverage expected to decline though forecast to remain within adequacy range under the baseline.
- Key staff guidance reiterated:
  - Near-term focus on prudent execution of 2023 budget and rebuilding government cash balance.
  - Manage Pacific Games and election-related expenditures to protect essential spending.
  - Prioritize rebuilding cash balance to at least two months of total spending once recovery is secured.
  - Urgent priority: prudent management of public investment projects and financing arrangements to mitigate fiscal risks and ensure external balance and debt sustainability.
  - Tighten PFM and complete CDF Act review; accelerate reforms to improve quality and accountability of public expenditure.
  - Staff welcomes CBSI’s tightening of monetary stance and urges avoidance of additional purchases of government bonds to safeguard macroeconomic stability and central bank independence.
  - Encourage CBSI to continue capacity improvements: economic analysis and forecasting, monetary policy communication, and internal audit function.
  - Timely review of the currency basket is called for given changes in trade patterns; maintaining external competitiveness is critical.

*Source: 1slbea2023001 - 21.  The authorities concurred with staff’s views on increasing future fiscal challenges.*

### 40. Increasing bank lending and enhancing financial integrity remains a challenge. Reforms

### 40. Increasing bank lending and enhancing financial integrity remains a challenge. Reforms

### Challenges
- Increasing bank lending and enhancing financial integrity remains a challenge.
- Credit risks for commercial banks are elevated by asymmetric information and weak enforcement of contracts.
- Weak legal and supervisory frameworks for AML/CFT and low awareness of associated risks threaten the integrity of Solomon Islands’ financial systems.

### Reforms and policy measures
- Reduce asymmetric information to moderate credit risks for commercial banks.
- Facilitate enforcement of contracts to support credit growth.
- Promote digital financial services to spur credit growth.
- Strengthen legal and supervisory frameworks for AML/CFT.
- Raise awareness of AML/CFT risks to ensure integrity of Solomon Islands’ financial systems.

*Source: 1slbea2023001 - 40. Increasing bank lending and enhancing financial integrity remains a challenge. Reforms*

### 41. Developing new growth drivers, including by enhancing natural resource wealth

### 41. Developing new growth drivers, including by enhancing natural resource wealth

### Governance, natural resources, and anti-corruption
- Management, market regulation, and addressing governance weaknesses and corruption vulnerabilities are described as "an urgent priority."
- Long-standing obstacles to private sector development: frequent land disputes and ineffective dispute resolution mechanisms.
- Recommended governance and sector actions:
  - Strengthen governance and fiscal frameworks for the mining sector including through legislation and rejoining the EITI.
  - Strengthen independence and capacity of anti-corruption institutions.
  - Strengthen the OAG by amending its legal framework consistent with IMF technical assistance recommendations.

### Capacity development and IMF engagement
- The IMF continues to support capacity development of the authorities in collaboration with development partners.
- Immediate capacity development (CD) priorities include:
  - Reporting and auditing of public spending.
  - Public investment management.
  - Review of the exchange rate basket.
  - The central bank’s internal audit.
  - Economic statistics: national accounts, government financial statistics, and household and labor force surveys.
- Proposed timing: next Article IV consultation to take place on the standard 12-month cycle.

### Macroeconomic developments and outlook (selected indicators and trends)
- Recovery is lagging compared to neighboring countries, reflecting 2021 social unrest and a late local outbreak of COVID-19.
- Inflation significantly accelerated in 2022, driven by higher commodity prices following Russia’s war in Ukraine.
- Exchange rate has appreciated; current account deficit expected to remain sizeable as logging exports have peaked and imports are expected to increase due to higher import prices and imports related to infrastructure projects.

Key headline indicators (Table 1, annual unless otherwise indicated):
- Per capita GDP (2022): US$2,265
- Population (2020): 686,878
- Poverty rate (2006): 23 percent
- Quota: SDR 20.8 million
- Real GDP: 2.7 1.7 -3.4 -0.6 -4.1 2.5 2.4 3.0 3.0 3.0
- CPI (period average): 3.5 1.6 3.0 -0.1 5.5 4.8 3.7 3.3 3.3 3.3
- Nominal GDP (in SI$ millions): 12,847 13,234 12,617 12,690 13,021 13,980 14,807 15,772 16,761 17,826

### Fiscal position, revenue composition, and risks
- Fiscal trends and pressures:
  - Tax revenue is relatively volatile; logging revenue is declining.
  - Fiscal deficit has increased and the cash balance has declined.
  - Revenue fell due to the pandemic and declining production in the logging sector.
  - Expenditure projected to increase because of the Pacific Games and infrastructure projects, leading to continued increases in the public debt ratio.

Selected fiscal numbers (Table 2a and 2b):
- Total revenue and grants (in percent of GDP): 31.7 27.4 30.1 27.1 27.7 24.8 26.4 26.9 26.7 26.6
- Total revenue (in percent of GDP): 29.2 25.8 24.6 22.6 23.0 23.0 24.3 25.0 24.8 24.7
- Tax on logging (levels, in SI$ millions): 790 581 477 406 357 337 311 301 296 293
- Mining revenue (levels, in SI$ millions): 0 0 0 0 15 15 36 38 39 40
- Overall balance (in percent of GDP): 1.5 -1.5 -2.4 -3.6 -4.1 -6.3 -4.5 -3.4 -3.3 -3.3
- Central government debt (in percent of GDP): 7.9 7.9 13.5 15.4 16.9 22.2 25.7 27.8 29.3 30.8
- Public domestic debt, including arrears (in SI$ millions): 245 273 452 748 737 1,183 1,593 1,869 2,339 2,854
- Narrow cash balance (in SI$ millions): 311 206 206 137 137 137 137 137 137 137
- Broader cash balance (in SI$ millions): 451 346 326 257 367 367 367 367 367 367

### Money, banking, and financial sector
- Reserve coverage has decreased but remained at comfortable levels.
- Banking sector spreads are slowly declining but remain very high.
- Broad money growth is slowing while credit growth has shown some pickup as the economy reopens.
- Bank excess reserves remain high; credit to the central government has increased as the government has issued domestic bonds.

Selected monetary and banking indicators (Table 4 and Figure 3):
- Reserve money (annual percentage change): 10.3 -7.1 23.0 10.6 4.0 2.1 1.4 1.2 0.9 0.7
- Broad money (annual percentage change): 6.8 -3.1 6.6 1.9 5.3 6.3 1.4 1.2 0.9 0.7
- Credit to private sector (annual percentage change): 4.1 6.1 0.3 -0.4 0.8 2.0 3.5 5.0 5.0 5.0
- Bank Reserves (Ratio to deposits, In percent) (selected levels): Jan-15 through Dec-22 shown in figures (levels rising toward 2022).

Core financial soundness indicators (Table 5, selected):
- Regulatory Capital to Risk-Weighted Assets: 32.9 (2022)
- Non-performing Loans to Total Gross Loans: 9.4 (2022)
- Return on Assets: 3.0 (2022)
- Liquid Assets to Total Assets (Liquid Asset Ratio): 47.6 (2022)

### External sector and balance of payments
- Current account balance (in US$ millions): -47.8 -154.0 -25.1 -78.3 -212.1 -214.9 -183.9 -187.8 -161.1 -156.5
- Trade balance for goods (in US$ millions): 6.5 -36.4 -25.3 -97.0 -205.1 -222.1 -203.8 -208.5 -180.3 -176.0
- Exports (in US$ millions): 536.0 460.9 378.7 371.2 338.5 347.8 363.4 365.6 377.6 399.7
  - Logs (in US$ millions): 372.9 318.6 245.5 202.7 159.5 150.8 139.2 134.4 132.1 130.9
  - Minerals (in US$ millions): 19.0 19.8 18.1 16.9 31.5 37.9 56.5 59.7 63.4 67.9
- Imports (in US$ millions): 529.4 497.3 404.0 468.2 543.6 569.9 567.1 574.1 557.9 575.6
- Gross official reserves (in US$ millions, end of period): 613.1 574.1 660.6 694.5 641.0 560.7 541.7 498.9 485.5 453.8
- Reserves (in months of next year's imports of GNFS): 9.8 12.4 12.8 11.5 9.5 8.4 8.0 7.4 7.0 6.3
- Gross external public debt (in percent of GDP): 5.8 5.8 8.3 9.8 11.3 13.9 15.0 15.9 15.4 14.8

### Debt, IMF obligations, and capacity to repay
- Outstanding Fund credit (in millions of SDRs): 17.6 10.5 6.3 4.9 3.5 2.1 0.7 0.0 0.0 0.0 0.0 (2023–2033 table shows declining repayments)
- Total obligations based on existing and prospective credit (in millions of SDRs): 4.3 7.7 4.6 1.8 1.7 1.7 1.7 1.0 0.3 0.3 0.3
- In percent of gross international reserves: 1.0 1.9 1.2 0.5 0.5 0.6 0.6 0.4 0.2 0.3 0.6 (2023–2033 table)

### Policy recommendations and scenarios
- Governance and natural resource management:
  - Strengthen legislation and fiscal frameworks for mining; rejoin the EITI.
  - Strengthen anti-corruption institutions and the OAG consistent with IMF technical assistance.
- Fiscal policy and buffers:
  - Take advantage of upside surprises to lock in an improvement in fiscal buffers, as the recovery is firmed up.
  - Consider ways to use some of the gains to invest in resilient infrastructure and progress towards SDGs.
- Capacity development priorities to support reforms and macroeconomic management (see Capacity development and IMF engagement subsection).

*Source: 1slbea2023001 - 41. Developing new growth drivers, including by enhancing natural resource wealth*

### 1. Stronger than expected global recovery

### 1. Stronger than expected global recovery

### Risk Assessment Matrix — Key Risks and Policy Responses
- Stronger-than-expected global recovery (especially China)
  - Effect: Improve terms of trade and generate higher demands for exports.
  - Likelihood/Impact: Medium; Medium / ST, MT
- Accelerated aid inflows
  - Effect: Geopolitical considerations among donors could increase development assistance beyond the economy’s absorptive capacity.
  - Likelihood/Impact: Medium; High / ST, MT
  - Policy recommendations (Downside):
    - Raise vaccination coverage through addressing vaccine hesitancy.
    - Seek additional donor support to save people’s lives, contain the outbreak, and support economic activity.
    - Explore options to maintain economic activity to the extent possible while containing the pandemic.
- Local Covid-19 outbreaks
  - Effect: New lockdowns or inhibited commerce from slow-to-vaccinate countries or vaccine-resistant variants; extended supply chain disruptions, slower growth, capital outflows, and debt distress in some EMDEs.
  - Likelihood/Impact: High; High / ST
  - Policy recommendations:
    - Reprioritize fiscal policy to ramp up targeted support for those vulnerable and slow down the execution of public infrastructure projects.
    - Continue efforts to diversify the economy and increase the use of renewable energy.
- Commodity price shocks
  - Effect: Recurrent commodity price volatility and social and economic instability due to supply disruptions and negative demand shocks.
  - Likelihood/Impact: High; Medium / ST
  - Policy recommendations:
    - Enhance accountability of public expenditures including through auditing of fiscal outcomes.
    - Improve public investment management.
    - Make efforts to contain spending on the Constitute Development Funds and improve the accountability.
- Fiscal policy slippages (including towards the 2023 Pacific Games and the general elections in early 2024)
  - Effect: Higher fiscal spending and weak PFM could lead to increases in domestic arrears, non-performing loans, and higher debt burden.
  - Likelihood/Impact: High; Medium / ST
  - Policy recommendations:
    - Accelerate reforms that are a condition for budget support.
    - Estimate donor support realistically.
    - Reach out to potential investors in domestic bonds to develop their interests.
- Under-execution of the budget
  - Effect: Lower-than-expected donor support or unsuccessful bond issuance in the shallow domestic market could hinder budget implementation.
  - Likelihood/Impact: High; High / ST, MT
  - Policy recommendations:
    - Enhance public investments in health, education, and social protection in an inclusive and transparent manner to address youth unemployment, poverty, and uneven development.
    - Address government vulnerabilities, including through strengthening anti-corruption efforts.
- Systemic social unrest
  - Effect: Rising inflation, declining incomes, and worsening inequality amplify social unrest and political instability, causing capital outflows, slowing growth, and inducing damaging populist policies.
  - Likelihood/Impact: High; High / ST, MT
  - Policy recommendations:
    - Continue efforts to mobilize domestic revenues, improve public financial management, and diversify the economy to enhance resilience against volatile aid inflows and a global slowdown.
- Deepening geo-economic fragmentation and geopolitical tensions
  - Effect: Accelerated deglobalization, trade reconfiguration, supply disruptions, technological and payments systems fragmentation, rising input costs, financial instability, and lower potential growth.
  - Likelihood/Impact: Medium; High / ST, MT
  - Policy recommendation:
    - Invest in resilient infrastructure to strengthen climate change adaptation.
- Natural disasters related to climate change
  - Effect: More frequent disasters cause severe infrastructure damage, amplify supply chain disruptions and inflationary pressures, cause water and food shortages, and reduce medium-term growth.

### External Sector Assessment — Overall Findings
- Overall assessment: Solomon Islands’ external position in 2022 was substantially weaker than the level implied by fundamentals and desirable policy settings, based on the IMF’s EBA-lite current account model.
- Drivers of the wider CA deficit: higher global commodity and fuel prices, slowing global economic growth, and ongoing infrastructure projects.
- Real exchange rate assessment: overvalued.
- Reserve coverage: remained strong but expected to decline over time.
- NIIP vulnerabilities: limited by large share of FDI liabilities and high share of concessional liabilities in public external debt.
- Policy responses recommended:
  - Improve competitiveness and promote diversification of exports through structural reforms.
  - Improve public investment management to help moderate the CA gap.
  - Continue exploring grant financing and highly concessional loans to reduce pressure on debt accumulation and financing costs/risks.
  - Review the currency basket of the exchange rate regime given estimated overvaluation.
  - Phase public investment projects in line with the economy’s absorptive capacity and enhance productivity and competitiveness of exports.

### Foreign Assets and Liabilities — Position and Trajectory (2022)
- NIIP: -6.1 percent of GDP at end-2022.
- Drivers of change: drawdown of gross reserves on the assets side and increase in FDI on the liability side.
- Reserve assets: 76 percent of gross assets.
- Liabilities structure: FDI represents over 69 percent of gross liabilities; general government debt accounts for 18 percent.
- Assessment: NIIP-to-GDP ratio expected to weaken in the near and medium term as continued CA deficits are projected to lessen gross reserves; structure entails low vulnerabilities due to FDI share and concessionality.

Key 2022 figures (percent of GDP):
- NIIP: -6.1
- Gross Assets: 51.9
- Debt Assets: 6.9
- Gross Liabilities: 58.0
- Debt Liabilities: 11.3

### Current Account — Background and Assessment
- CA deficit in 2022: estimated at 13.3 percent of GDP, reflecting higher import prices and a drop in log exports.
- Drivers of widening deficits: decreasing log exports and increasing imports for infrastructure projects.
- Projection: CA deficit expected to stay high in 2023 as economic activity increases toward the 2023 Pacific Games.
- EBA-lite results:
  - Adjusted CA: -10.7 percent of GDP
  - CA Norm: -5.3 percent of GDP (cyclically adjusted)
  - CA Gap: -5.5 percent of GDP
  - Components considered in adjustments:
    - COVID-19 adjustors: -1.2 (includes tourism 0.9 percent of GDP and remittances 0.3 percent of GDP)
    - Additional temporary/statistical factors: -0.8 (transitory increase in imports for 2023 Pacific Games)
    - Natural disasters and conflicts: -0.5
  - Cyclical contributions (from model): (-) -0.1
  - Relative policy gap: 1.3
  - Elasticity: -0.3
  - REER Gap (in percent): 21.4 8.5

### Real Exchange Rate and Terms of Trade
- REER appreciation in 2022: estimated by 9.5 percent.
- Terms of trade decline in 2022: estimated by 12 percent, reflecting a decline in log export prices and higher import prices.
- Overvaluation estimates (2022):
  - EBA-lite CA approach: real exchange rate overvalued by 21.4 percent.
  - REER approach: overvalued by 8.5 percent compared to REER norm.
- Policy implications:
  - Review weights of the currency basket and the anchor of the exchange rate regime.
  - Phase public investment projects in line with absorptive capacity.
  - Enhance productivity and competitiveness of exports through structural reforms.

### Capital and Financial Accounts; FX Intervention and Reserves
- Capital and financial flows driven mainly by donor project-related capital grants and FDI.
- 2022 dynamics: capital balance improved reflecting increased capital grants related to infrastructure projects; FDI inflows surged reflecting higher reinvested earnings.
- Outlook: capital and financial accounts expected to remain strong, supported by incremental capital grants and FDI.
- Gross official reserves (US$ and months of imports):
  - 2021 peak: US$694.5 million.
  - 2022: US$641.0 million (9.5 months of prospective imports).
  - Projected 2023 reserve coverage: 8.4 months of imports.
  - Projected 2027 reserve coverage: 6.3 months of prospective imports.
- Assessment:
  - Optimal reserves range suggested by cost-benefit analysis: between four and seven months of imports.
  - Current level remains above adequacy range but projected to decline to 6.3 months by 2027, still within adequacy range.
  - Recommendations: foster sustainability in the forestry sector, export diversification, improve public investment management, and review currency basket weights to prevent exchange rate misalignments.
- Methodological note: External sector assessment based on staff’s estimates; Revised EBA-lite methodology (2019) does not fully capture characteristics of small states; significant uncertainty around estimates.

### Country Engagement Strategy — Fragility, Constraints, and Policy Priorities
- Fragility overview:
  - Progress since 2003 civil unrest, but economic fragility persists.
  - Poverty reduction: fraction living with less than US$1.90 per day halved from 50.6 percent in 2005 to 25.2 percent in 2022.
  - Remaining risks: underlying ethnic tensions (e.g., Honiara riot in November 2021).
- Drivers of fragility:
  - Extremely limited connectiveness across nearly one thousand islands and low population density.
  - Vulnerability to natural disasters and climate change (cyclones, heavy rainfalls, earthquakes, tsunamis) with limited coping capacity.
  - Tenuous national unity due to clan-based social structure.
  - Weak state institutions; assessed as the lowest in the Pacific for public sector management and institutions.
  - Customary land: about 85 percent of landmass is customary land regulated by unwritten laws and oral tradition, complicating land utilization and fomenting corruption.
- Translation into economic outcomes:
  - Underdeveloped private sector; large primary sector with declining logging due to overexploitation.
  - Insufficient and inequitable allocation of physical and human capital; limited access to infrastructure and public services, especially in rural areas; youth unemployment and internal migration.
  - High aid dependency: donor grants account for about a quarter of the government’s revenue and grants, plus significant off-budget donor-funded capital expenditures.
  - Governance and corruption vulnerabilities: low governance standards and insufficient accountability for public spending have prevented efficient use of budget resources and caused depletion of natural resources.

Constraints to reform:
- Weak state capacity, political instability, and governance vulnerabilities limit the government’s ability to provide public services and make necessary investments.

Policy measures to address fragility (short- to medium-term):
- Maintain macroeconomic stability: appropriate support for the vulnerable, strong fiscal discipline, robust reserve buffers to enable investments and reforms.
- Strengthen fiscal governance and transparency: improve public financial management including budget planning, cash management, and transparency of public spending.
- Improve access to public services and infrastructure: additional investment in education, health, electricity, digital services, and job opportunities, especially in rural areas.
- Develop new growth drivers: address land registration issues, ineffective dispute resolution mechanisms, and lack of responsible governance frameworks to promote private sector development.

### Fund Engagement and Capacity Development (CD) Priorities
- Recent Fund engagement: surveillance through Article IV consultations and CD; Solomon Islands is the third largest recipient of the Fund’s CD in the Pacific.
- Past support: debt service relief through the Catastrophe Containment and Relief Trust; emergency financing under the Rapid Credit Facility and Rapid Financing Instrument.
- CD focus areas and recent activities:
  - Revenue mobilization: support for a large taxpayer office, revenue administration reform program, and fiscal regime design for mining.
  - PFM: improve operations of the PFM Act, budget process, financial reporting, debt management, and monitoring of fiscal risks.
  - Monetary and financial sectors: support central bank operations and risk management; strengthen banking regulations and risk-based supervision.
  - Macro statistics: improve national accounts, government financial accounts, and balance of payments.
  - Governance: strengthen legal and institutional frameworks for auditing and AML/CFT and protection of correspondent banking relationships.
- Lessons from CD:
  - Multi-year planning and relationship-building are warranted.
  - In-person technical assistance with hands-on activities and sufficient time delivers tangible benefits; virtual sessions can be useful but face challenges.
  - Reforms should be carefully sequenced and tailored to the country’s circumstances and absorptive capacity.
  - Possible turnover of officials should be factored in.
- Near-term CD priorities:
  - Ramp up authorities’ basic capacity: reporting and accountability of public spending, public investment management, review of the exchange rate basket, central bank internal audit, and macroeconomic statistics.
  - Medium-term CD support: develop medium-term frameworks for fiscal policy, revenue mobilization, and green PFM after capacity is built.
- Program engagement:
  - If authorities are interested, an IMF-supported program would help maintain macroeconomic stability, build capacity, and catalyze donor support including for climate mitigation.

*Source: 1slbea2023001 - 1. Stronger than expected global recovery*

### 10. Close coordination with development partners is critical, especially given the Fund’s

### 1slbea2023001 - 10. Close coordination with development partners is critical, especially given the Fund’s

### Coordination with development partners and implementation risks
- Conventional donors and partners active in Solomon Islands: Asian Development Bank (ADB), World Bank, United Nations agencies, European Union, Australia, New Zealand, Japan, and the US.
- The Fund has maintained close cooperation with those development partners, as well as non-governmental organizations.
- Roll-sharing and synergies to explore:
  - World Bank on PFM.
  - ADB on tax policy.
  - United Nations Development Program on anti-corruption and money laundering.
- Key risks to IMF engagement and reform implementation:
  - Political tensions (example: riot in November 2021) could jeopardize Fund engagement.
  - Government reforms could stall before the general elections scheduled for early 2024, as occurred in 2019.
  - External and domestic shocks: deterioration of external economic conditions, natural disasters, and rising geopolitical tensions could undermine macroeconomic stability given Solomon Islands’ limited resilience and dependence on commodities and aid inflows.
  - Turnover of officials and weak institutional capacity act as a drag on the pace of economic reforms.

*Source: IMF staff report excerpt.*

### Annex IV — Using Big Data (AIS) to fill data gaps for Solomon Islands: purpose and methodology
- Motivation:
  - Official high frequency data is scarce and often available with a lag of two to three months.
  - Many unconventional indicators (e.g., Google mobility reports) are not available for Pacific Islands countries (PICs).
  - Automated Identification System (AIS) satellite data compiles vessel-traffic data and can provide almost immediate indicators with a lag of just a couple of days and flexible aggregation.
- Rationale for AIS in Solomon Islands:
  - Good imports represent 30 percent of GDP (2017-2021 average).
  - 80 percent of merchandise imports take place by sea.
  - Annual imports have a correlation coefficient of 0.94 with GDP (measured in US dollars, 1995 to 2021).
  - Economic activity in PICs has been found to be highly dependent on ports, with up to 45 percent of activity dependent on ports (Verschuur, Koks, and Hall, 2021).
- Nowcasting approach:
  - A simplified version of Arslanalp, Koepke and Verschuur (2021) [AKV] is applied to produce trade nowcasts.
  - AIS data accessed through the UN’s Global Data Platform.
  - Port activity measured by number of monthly port calls in all Solomon Islands ports.
  - From raw AIS data, observations that only appear once within port bounds are dropped (no “exit” counterpart).
  - For trade flow estimates, further filters applied: include only container ships, vehicle carriers and bulk carriers; exclude fuel tankers and fishing vessels; exclude port calls shorter than five hours.
  - Ship utilization estimated by combining ship characteristics (length, width, cargo capacity) with change in AIS draught records as in AKV.

### Annex IV — Key empirical findings from AIS-based indicators
- Port activity dynamics:
  - Port activity decreased by 27 percent in 2020 compared to the 2019 average.
  - Port activity decreased by 42 percent in 2021 compared to the 2019 average.
  - 2022 activity, although increasing, remained subdued at the 2021 depressed level.
  - Heat maps for Honiara show clear decline in February 2021 (domestic and foreign mobility restrictions) and February 2022 (domestic COVID-19 outbreak) relative to February 2020 (pre-pandemic).
  - Time series: abrupt fall in 2020 and incipient recovery starting mid-2022.
  - Vertical event markers used: start of the COVID-19 pandemic (March 2020), the November 2021 Honiara riots, and the domestic outbreak of COVID-19 (February 2022).
- Trade flow estimates:
  - Import volumes show high dynamism and respond quickly to external and internal conditions.
  - Export volumes: decrease due to the pandemic with little to no recovery since 2021.
  - Estimated fall in exports: 64 percent in 2021 and 2022 with respect to 2019 (exports volume estimate).
  - Differences between import volume estimates and value indicators point to increases in shipping costs and global supply chain disruptions (second half of 2021) and increases in shipping costs and commodity prices in 2022 due to the war in Ukraine.
  - Imports volume estimate considers only activity from the Honiara port (main port for merchandise imports).
  - Exports volume estimate considers activity from all ports (exporting activity takes place in ports other than Honiara given the type of commodity exported).
- Data validation and operational use:
  - Fund staff will further validate AIS-based estimators through discussions with authorities.
  - Indicators to be provided for use by CBSI staff in a broader nowcasting effort under IMF Technical Assistance.
  - The exercise showcases potential for surveillance and TA integration in building capacity and filling data gaps.

### Annex V — Export diversification: current state and recent trends
- Concentration and historical role of exports:
  - Before the pandemic, around 65 percent of the country’s exports were woods products to China.
  - Exports increased from US$47 million (6.5 percent of GDP) in 2001 to US$536 million in 2018 (33 percent of GDP), an average 15 percent growth per year.
  - Timber products accounted for 70 percent of total exports in 2018.
  - Exports to China grew from US$2.4 million in 2001 to US$336 million in 2018, increasing the share of total exports to China from less than 15 percent to 62 percent.
  - 98 percent of exports to China during the period were wood products.
  - Share of exports to top five destinations increased from 84 percent in 2001 to 90 percent in 2018.
- Recent declines and drivers:
  - Export earnings of goods estimated at US$348 million in 2022, compared to US$536 million in 2018.
  - Two persistent medium-term constraints:
    - Decline in logging sector due to overexploitation; Logging Sustainability Policy adopted in 2018 implies logging activity will halve in 2023, if implemented effectively.
    - Slowing China demand for logs driven by turmoil in the real estate market.
  - Global price example: price of round logs dropped to US$209 per cubic meter in November 2022, a 23 percent reduction compared to the 2018 price of US$270.
- Estimated impact of China’s slower growth:
  - The recent -0.6 percentage point revision of China’s potential output growth (estimated by the IMF) could reduce Solomon Islands’ exports by 6 percent after four quarter and around 15 percent after two years.
  - Caveat: the estimate has a wide confidence interval and could be overestimated due to common factors historically affecting both China and Solomon Islands exports.
- Structural characteristics of exports and survivability:
  - Number of export destinations increased from 44 in 2001 to 69 in 2019.
  - Number of export products increased until 2018, then dropped thereafter.
  - Product survival rates:
    - More than 90 percent of Solomon Islands’ export products exit export markets within 5 years after entry.
    - Above 15 percent of PICs’ products are estimated to stay in their markets for the same duration.
    - Conditional persistence: there is a 67 percent chance that a Solomon Islands’ product that has stayed in the export market for 5 years will stay in the market for another one year, compared to almost 80 percent for PICs.
  - Contribution to export growth by new products:
    - Export products that survive between 5 to 8 years after entry markets account for only 1.7 percent on average of total export growth for Solomon Islands, compared to 11.5 percent for PICs.
    - Recent resilient new export products include wool, raw hides and skins, and carpets.

### Annex V — Policy implications and recommendations for export diversification
- Priority: diversify exports both by products and destinations to reduce vulnerability and enhance growth prospects.
- Potential partial offset: minerals (gold, nickel, and bauxite) may partially offset declining log exports over the medium term; mining also exposes the economy to China-driven demand shocks and environmental risks without effective governance.
- Targeted policy measures to improve survivability and scaling of new export products:
  - Create an economic environment conducive to private sector development, including greater participation of foreign companies.
  - Improve access to short and long-term credit (citing Kohn et al 2016, Manova 2013).
  - Facilitate foreign direct investment (citing Harding et al 2012).
  - Reduce the costs of border compliance and port handling (citing Djankov et al 2010).
  - Improve contract enforceability (citing Levchenko 2007).
  - Plan export promotion campaigns targeting ASEAN region and Europe to develop new markets and improve survivability of export products.
  - Re-evaluate the exchange rate basket of the exchange rate regime to ensure competitiveness of the export sector over the medium term.
- Specific operational reforms (examples cited):
  - Promote use of a greater variety of properties as collateral.
  - Codify a general law of contract based on existing rules.
  - Reduce port handling costs.
  - Allow electronic submission of information required by customs.

*Source: IMF staff report excerpt.*

### Annex VI. Priorities for FY23

### Annex VI. Priorities for FY23

### Public Financial Management
- Budget planning and reporting
  - Improved budget planning and quality of fiscal reporting.
  - The budget process needs to be improved to be better integrated with donor support.
  - Fiscal reporting should be based on consistent classification of spending.
- Public financial management laws and institutions
  - Stronger PFM laws and institutions.
  - Regulations under the PFM Act need to be reviewed and finalized.
- Cash flow forecasts
  - Better cash flow forecasts.
  - The authorities’ capacity for cash flow forecasting needs to be improved to prevent payment arrears.

### Revenue Administration and Policy
- Revenue Administration and Governance
  - Strengthened revenue administration, management, and governance arrangements.
  - Support the implementation of the Tax Administration Act including through organizational reforms.
- Revenue Policy (Tax and non-tax revenue policy)
  - Improved tax and non-tax revenue policy.
  - TA will assist the designing of mineral royalties.

### Banking Supervision and Regulation
- Regulatory & Prudential Framework
  - Formulate and implement a framework for stress testing of financial institutions.
  - TA will assist formulating a framework for stress testing of financial institutions and risk-based supervision and its implementation.

### Central Bank Operations
- Internal Audit
  - Strengthened internal audit function.
  - TA will support developing a multi-year capacity building plan for the internal audit function.
- Macroeconomic Analysis and Monetary Policy (FPAS)
  - Develop tools to improve economic analysis and forecasting capabilities, streamline the decision-making process, and strengthen the monetary policy communication strategy at the Central Bank.
  - Support the central bank to develop analytical and forecasting capacity to improve economic analysis and forecasting capacities, modernize their monetary policy framework, and strengthen the communications.

### Foreign Exchange Rate Policy
- Operation of the exchange rate regime
  - Foreign exchange rate better aligned to the fundamentals.
  - TA will support reviewing the weights of the currency basket of the exchange rate regime.

### Macroeconomic Statistics
- Statistics on the Real Sector and Government Finance
  - Strengthen compilation and dissemination of real sector statistics and Government Finance Statistics.
  - TA will continue in the compilation of the national accounts, debt statistics, and GFS.

### Governance and Anti-Corruption
- AML/CFT
  - Formulate a legal framework for AML/CFT.
  - TA will continue to help formulate a legal framework meeting the FATF standards and develop risk-based AML/CFT supervisory tools.
- Audit of public spending
  - Better audit of public spending.
  - TA will continue enhance capacity of the Auditor General’s office.

### Authorities’ Response to Fund Policy Advice (Selected themes)
- Fiscal Policy
  - Rebuild fiscal buffers as the recovery is secured and prioritize spending needs towards SDGs.
    - The authorities acknowledged their commitments to making progress towards SDGs in line with their National Development Strategy, while maintaining fiscal sustainability.
  - Promote transparency and accountability of public expenditure, including on the CDFs.
    - The Ministry of Finance and Treasury started to publish budget documents including fiscal outcomes after 2020.
    - More resources need to be allocated to the Auditor General’s office to ensure appropriate and timely audit of public expenditures.
  - Promote domestic revenue mobilization including through more efficient tax administration.
    - Tax reforms are progressing. Tax Administration Act was adopted, and authorities are working on implementing the Act.
    - The value-added tax (VAT) policy is expected to be tabled in parliament in 2023.
  - Strengthen public financial management.
    - The authorities improved financial accounting and reporting with technical assistance from PFTAC. Further efforts are needed to enhance Solomon Islands’ public financial management.
- Monetary and Financial Sector Policy
  - Strengthen supervisory and regulatory framework for the financial system.
    - The authorities have strengthened their capacity for regulating and supervising the financial sector including with capacity development support from the IMF.
  - Strengthening the AML/CFT framework.
    - The Authorities have introduced a National Strategic Plan in 2021 and are working to update its legal framework to comply with the FATF standards.
  - Improve analytical and forecasting capacity of the central bank.
    - The central bank has improved its analytical and forecasting capacity through utilizing high frequency indicators and establishing forecasting models supported by the IMF.
- Exchange Rate Policy
  - Maintain the exchange rate basket peg but improve exchange rate management by reviewing the currency basket’s composition on a regular basis.
    - The currency basket of the exchange rate regime continues to move in a tight band against the U.S. dollar. The weights in the basket have not been reviewed.
    - The central bank requested TA by the IMF to review the currency basket.
- Structural Reforms
  - Manage the transition from logging to new growth areas. A better business environment would help diversify activity and sustained growth. Strengthening the anti-corruption framework.
    - The authorities expect to finish the Enhance Integrated Framework (EIF) in 2023, supported by the World Trade Organization, to reinforce agriculture and help farmers increase their productivity and export capacity.
    - Gold Ridge reopened and restarted gold exports in 2022, but a new mining legislation is yet to be submitted to the Parliament.

### Fund Relations and Financial Position (Selected figures and dates)
- Membership Status: Joined September 22, 1978; Article VIII.
- Quota: 20.80 (SDR Million) — 100.00 percent of Quota.
- Fund holdings of currency: 31.52 (SDR Million) — 151.55 percent of Quota.
- Reserve position in the Fund: 3.15 (SDR Million) — 15.14 percent of Quota.
- Net cumulative allocation (SDR Department): 29.84 (SDR Million) — 100.00 percent of Allocation.
- Holdings (SDR Department): 20.1067.35 (SDR Million).
- Outstanding Purchases and Loans:
  - Emergency Assistance1/: 13.8766.68 (SDR Million).
  - RCF Loans: 6.93 (SDR Million) — 33.32 percent of Quota.
  - ECF Arrangements: 0.37 (SDR Million) — 1.79 percent of Quota.
- Arrangements (Latest Financial Commitments):
  - ECF Approval Date 12/7/2012; Expiration Date 3/31/2016; Amount Approved (SDR Million) 1.04; Amount Drawn (SDR Million) 1.04.
  - SCF Approval Date 12/6/2011; Expiration Date 12/5/2012; Amount Approved (SDR Million) 5.20; Amount Drawn (SDR Million) 0.00.
  - SCF Approval Date 6/2/2010; Expiration Date 12/1/2011; Amount Approved (SDR Million) 12.48; Amount Drawn (SDR Million) 12.48.
- Outright Loans:
  - RCF Commitment Date 6/1/2020; Date Drawn 6/3/2020; Amount Approved (SDR Million) 6.93; Amount Drawn (SDR Million) 6.93.
  - RFI Commitment Date 6/1/2020; Date Drawn 6/3/2020; Amount Approved (SDR Million) 13.87; Amount Drawn (SDR Million) 13.87.
- Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - 2023: Principal 3.62; Charges/Interest 0.70; Total 4.31.
  - 2024: Principal 7.05; Charges/Interest 0.71; Total 7.76.
  - 2025: Principal 4.23; Charges/Interest 0.41; Total 4.65.
  - 2026: Principal 1.42; Charges/Interest 0.34; Total 1.75.
  - 2027: Principal 1.39; Charges/Interest 0.34; Total 1.72.
- Exchange Rate Arrangement (de jure): conventional peg arrangement.
  - The Solomon Islands dollar (SBD) is pegged to an invoice-based weighted basket of currencies consisting of: US dollar (USD) weight 58 percent; Australian dollar (AUD) weight 32 percent; New Zealand dollar weight 5 percent; Japanese yen weight 3 percent; British pound weight 2 percent.
  - Since March 2022, the exchange rate increased its flexibility while still being managed. The de facto exchange rate arrangement was reclassified to “other managed” from “crawl-like”, effective March 22, 2022.
- Last Article IV Consultation: 2021 Article IV Consultation discussions held remotely during October 18-November 5, 2021. Staff report considered and consultation concluded on January 7, 2022.
- Technical Assistance: Experts from PFTAC and HQ provided support in revenue administration, minerals pricing and associated revenue risks, public financial management, macroeconomic frameworks, banking regulation and supervision, AML/CFT, and statistics (national accounts, government financial accounts, and financial soundness indicators).
- Resident Representative: Resident representative office in the Pacific Islands opened in September 2010 in Suva, Fiji. Mr. Neil Saker is the current Resident Representative.

### Statistical Issues (Data adequacy and coverage)
- General: Data provision has some shortcomings but is broadly adequate for surveillance.
- National Accounts: GDP estimates up to 2020 published in April 2022 using 2012 as the base year.
- Price statistics: Monthly CPI covering Honiara, Auki, Noro, and Gizo released within two months; weights based on the 2012/13 HIES; HIES update expected to be finished in 2024.
- Government finance statistics:
  - New FMIS—Microsoft Dynamics 365 (D365) commissioned in October 2021 with a new chart of accounts (CoA).
  - The new CoA was not designed to bridge the data to the Government Finance Statistics Manual 2014 (GFSM 2014), impacting compilation of granular annual fiscal statistics aligned to GFSM 2014.
  - No continuation of publication of monthly fiscal data for the budgetary central government on the MoFT website.
  - Donor disbursement information is collected, but data collected by CBSI’s BOP unit and MNPDC do not reconcile. Donor data collected by MNPDC are used by CBSI for fiscal statistics as they are regarded as most reliable.
  - Monthly public sector debt statistics (PSDS) are published; quality improved through better coordination between MoFT and CBSI.
  - PFTAC will continue to work to improve quality of GFS and PSDS, including solutions to bridge the new CoA to GFSM 2014 and expanding institutional coverage.
- Monetary and financial statistics:
  - CBSI publishes monthly MFS in summary form and reports central bank, other depository corporations, and other financial corporations to IMF STA using SRFs.
  - An integrated monetary database meeting CBSI, APD and STA needs is in operation.
  - CBSI reports several Financial Access Survey indicators including mobile and internet banking, mobile money, gender-disaggregated data, and two indicators adopted by UN to monitor SDG Target 8.10.
- Financial Soundness Indicators:
  - FSIs reported quarterly to STA: currently 14 core and 7 additional FSI for deposit takers (DTs) and one additional FSI for real estate markets.
  - FSIs for other financial corporations (OFCs) and non-financial corporations (NFCs) are not reported yet.
  - FSIs are in line with the IMF’s 2019 FSIs Compilation Guide.
- External Sector Statistics:
  - CBSI publishes monthly subset including total exports, imports, trade balance, exchange rates, and gross foreign reserves.
  - Quarterly BOP and IIP compiled using FET and surveys; CDIS compiled since 2014 and reported to IMF Sta.
  - Quarterly gross external debt positions compiled and disseminated through World Bank QEDS database.
  - External sector statistics are in line with BPM6 with further progress needed in scope and classifications.
- Data Standards and Quality:
  - Solomon Islands is a participant of the Enhanced General Data Dissemination System (e-GDDS) since June 2011 but has no National Summary Data Page.
  - No data ROSC is available.

### Debt Sustainability Analysis (DSA) — Key findings
- The 2023 DSA indicates the risk of debt distress in Solomon Islands remains moderate with substantive space to absorb shocks; the rating is unchanged from the 2021 DSA.
- Debt coverage has remained unchanged compared to the 2021 DSA.
- All external debt indicators remain below the relevant indicative thresholds under the baseline scenario but breach the threshold of the PV of external debt-to-exports ratio under an export shock scenario.
- The PV of public debt-to-GDP ratio remains below the indicative threshold under the baseline scenario but breaches the threshold under various alternative scenarios including a commodity price shock.
- A tailored natural disaster shock of similar scale to the largest historical shock would cause a significant deterioration in the debt trajectory.
- Risks and vulnerabilities identified:
  - Significant fiscal liquidity challenges stemming from the current low level of the government cash balance.
  - Rising fiscal risks including from mismanagement of infrastructure projects (e.g., large-scale investments to host the 2023 Pacific Games and a cell phone tower expansion project).
  - A sizable shift to domestic financing projected in the medium term could bring about serious risks in debt management.
- Policy implication:
  - Debt sustainability needs to be anchored by a prudent fiscal policy to rebuild fiscal buffers, while creating fiscal space for development spending through stronger revenue mobilization measures and expenditure rationalization.
- Additional analytical note:
  - Solomon Islands Composite Index (CI) is estimated at 2.59 based on the October 2022 World Economic Outlook and the 2021 CPIA, indicating that the debt-carrying capacity remains weak, as in the 2021 DSA.
- Risk rating summary:
  - Risk of external debt distress: Moderate.
  - Overall risk of debt distress: Moderate.
  - Granularity in the risk rating: Substantial space to absorb shocks.
  - Application of judgement: No.

*Source: Annex VI. Priorities for FY23; Annex VII. Authorities’ Response to Fund Policy Advice; IMF staff report excerpts (selected tables and text) as presented in the supplied content.*

### 1.      The coverage of public sector debt used in this report is central government debt,

### 1slbea2023001 - 1.      The coverage of public sector debt used in this report is central government debt,

### Coverage of public sector debt
- Coverage used in this report:
  - central government debt
  - central government guaranteed debt
  - central bank debt borrowed on behalf of the government
- Exclusions due to data limitations:
  - other elements in the general government
  - non-guaranteed state-owned enterprise (SOE) debt (except where noted)
  - private external debt
- Additional notes:
  - The DSA uses a residency-based definition of external debt.
  - The central government’s domestic arrears, where relevant, are included into debt coverage.
  - Authorities are continuing efforts to improve data coverage, in particular that of the general government, with support from the IMF.

### Contingent liabilities and tailored stress testing
- Standard contingent liability stress test magnitude: 7 percent of GDP, composed of:
  - 2 percent of GDP of non-guaranteed SOE debt
  - 5 percent of potential liabilities stemming from the financial system
- For the combined contingent liability shock:
  - default setting for SOE debt is used
  - there are no explicit contingent liabilities identified
- Specific incorporation into scenarios:
  - Information regarding a prospective loan by the central government for the installation of cell phone towers across the country has been incorporated into the baseline and a customized fiscal risk scenario.
- Check-box coverage highlights (as presented):
  - Central government: X
  - Guarantees (to other entities in the public and private sector, including to SOEs): X
  - Central bank (borrowed on behalf of the government): X
  - Non-guaranteed SOE debt: (listed but separate)

### Public debt levels, composition, and recent developments
- Public and Publicly Guaranteed (PPG) external debt:
  - US$148.3 million (9.5 percent of GDP) as of end-2021 (latest available full year data)
  - Decline of 0.4 percent of GDP from 2020
  - ADB and IDA account for 78 percent of total external debt
  - JICA borrowing in Q2 2021 accounted for 15 percent of total PPG external debt at end-2021
- Private sector external debt: 1.1 percent of GDP at end-2021
- Public debt:
  - 15.4 percent of GDP as of end-2021, an increase of 1.8 percent of GDP from 2020
- Public domestic debt:
  - SI$747.8 million (5.9 percent of GDP) at end-2021
  - Development Bonds stock rose from SI$360 million at end-2020 to SI$650 million at end-2021
  - CBSI purchases: initial SI$60 million in December 2020, additional SI$180 million in 2021
  - Accumulation of domestic payment arrears estimated at SI$95.8 million in 2021 (0.8 percent of GDP)
  - Government began clearing arrears in second half of 2022
- Domestic borrowing limits and outcomes:
  - Debt Management Act nominal public debt-to-GDP limit: 35 percent
  - Domestic borrowing limit raised in 2022 to SI$850 million from SI$350 million (previous year)
  - Further increased to SI$865 million under 2023 budget to accommodate Pacific Games and election preparation
  - Preliminary outcome for 2022: domestic borrowing SI$739 million (under threshold)

### Country classification and thresholds
- Debt-carrying capacity:
  - Composite Indicator (CI) index: 2.59 — assessed as weak under the LIC-DSF (unchanged from 2021)
- Applicable thresholds based on CI rating:
  - Benchmark PV of public debt-to-GDP ratio: 35 percent
  - PV of PPG external debt-to-GDP ratio threshold: 30 percent
  - PV of PPG external debt-to-exports ratio threshold: 140 percent
  - PPG external debt service-to-exports ratio threshold: 10 percent
  - PPG external debt service-to-revenue ratio threshold: 14 percent

### Baseline macroeconomic and fiscal assumptions
- Discount rate for NPV of external debt: 5 percent
- Key macro assumptions:
  - Real GDP: decline of 4.1 percent in 2022; projected recovery to 2.5 percent in 2023; average 2.3 percent during 2022–3 2
  - Inflation (GDP deflator): rise to 7.7 percent in 2022; average 3.8 percent during 2022–3 2
  - Non-interest current account deficit: projected 13.2 percent of GDP in 2022 (from 4.9 percent in 2021); average 8.4 percent of GDP over 2022–3 2
  - Official grants: projected decline to 5.5 percent of GDP in 2022 from 6.7 percent in 2021; average 2.4 percent of GDP over 2022-32
  - FDI inflows: projected average 2.4 percent of GDP over 2022-32
- Fiscal outlook:
  - Primary deficit widened to 3.8 percent of GDP in 2022
  - Government accumulated payment arrears of around 0.8 percent of GDP in 2020-21; about a quarter cleared in 2022
  - Primary deficits projected to remain elevated at a ten-year average of 2.9 percent of GDP (historical ten-year average: 0.3 percent of GDP surplus)
  - Policy measures to improve domestic resource mobilization include planned VAT introduction and implementation of the Tax Administration Act
- External and domestic financing assumptions:
  - New on-budget external loan disbursements: around 2 percent of GDP over 2022–27; declining to average 1.1 percent of GDP over 2028-32
  - Average grant element of new borrowing assumed at least 36.6 percent
  - Government will increase annual T-bill issuance and gradually shift domestic debt profile to Development Bonds in line with the Medium-term Debt Management Strategy
  - A shift from external concessional borrowing to domestic financing is expected to increase debt service costs and pose risks to the domestic bond market and government financing

### Realism tools, risks, and tailored stress tests
- Realism tools indicate macroeconomic and fiscal assumptions are reasonable and largely in line with the previous DSA, but with faster transition to a larger share of domestic debt
- Tailored natural disaster shock:
  - Solomon Islands classified as a small developing natural disaster-prone state; subject to the standard natural disaster shock with modified parameters
  - EM-DAT-based historical largest damage during 1980–2016 estimated at 14 percent of GDP
  - Tailored shock captures a one-off shock to public debt-to-GDP ratio on a similar scale to the largest historical shock
  - Associated reductions: real GDP growth and exports lowered by 2.7 and 8.1 percentage points, respectively
  - Staff estimate: probability of around 13.5 percent of a disaster each year of magnitude more than 3 percent of GDP or impacting 5 percent of the population
- Customized fiscal and financial risk scenario:
  - Assumes materialization of a contingent liability in 2024 from some recent infrastructure loans
  - Size of shock presumed to be 7 percent of GDP (same as built-in contingent liability shock)
  - Assumes increased public spending over 2023-28 driven by cost overruns and surges in maintenance costs
  - Additional financing needs assumed to be covered through a shift to a combination of non-concessional external and domestic financing, implying:
    - further shortening of maturities
    - increases in borrowing costs
    - some decumulation of government cash reserves

### Debt sustainability findings
- External debt sustainability:
  - Under the baseline, all external PPG debt indicators remain below policy relevant thresholds for the next ten years
  - PV of PPG external debt-to-GDP ratio expected to peak at 13.0 percent in 2025, then trend down to 10.5 percent in 2032
  - Main driver of debt dynamics: deterioration of the current account balance and increase in FDI, largely offset by declining foreign reserves
  - Standardized stress test: export shock has the largest negative impact; PV of PPG external debt-to-exports ratio expected to breach the indicative threshold in 2024
  - Tailored natural disaster shock causes upward shifts in all debt indicator trajectories; multiple disasters within a 10-year timeframe would have larger cumulative effects on debt sustainability through lower long-term growth and higher borrowing needs
- Public sector debt:
  - Public debt is forecast to significantly increase driven by persistent primary deficits, while increases in external debt would be mostly offset by the drawdown of foreign reserves
  - Projected fiscal adjustment over 2022-24 lies in the middle of the distribution of LIC’s past adjustment episodes
  - Transition to a larger share of domestic debt raises risks: higher debt service costs, crowding out of private investment, destabilized economic and financial environment, and elevated government financing risks

*Source: 1slbea2023001 - 1.      The coverage of public sector debt used in this report is central government debt,*

### 18.      Under the baseline scenario, the PV of public debt-to-GDP ratio is forecast to get close

### 1slbea2023001 - 18.      Under the baseline scenario, the PV of public debt-to-GDP ratio is forecast to get close

### Baseline projections for public debt
- PV of public debt-to-GDP ratio is projected to rise from 16.3 percent in 2022 to 34.0 percent in 2032.
- Nominal public debt-to-GDP is projected to breach the authorities’ policy threshold of 35 percent in 2031.
- Both the PV of public debt-to-revenue and grants ratio and debt service-to-revenue and grants ratio are forecast to more than double in the coming decade.
- Major driver: projected decline in external budget support grants coupled with shifts from highly concessional external debt to more expensive domestic borrowing.
- Table 2 baseline series (selected):
  - Public sector debt: 7.9 (2019), 13.5 (2020), 15.4 (2021), 16.9 (2022), 22.2 (2023), 25.7 (2024), 27.8 (2025), 29.3 (2026), 30.8 (2027), 36.8 (2032)
  - PV of public debt-to-GDP ratio: 15.7 (2021), 16.3 (2022), 20.2 (2023), 23.2 (2024), 24.9 (2025), 26.7 (2026), 28.3 (2027), 34.0 (2032)
  - PV of public debt-to-revenue and grants ratio (selected): 58.1 (2021), 59.0 (2022), 81.5 (2023), 88.1 (2024), 92.6 (2025), 99.9 (2026), 106.5 (2027), 158.9 (2032)
  - Debt service-to-revenue and grants ratio: 3.1 (2019), 3.6 (2020), 4.9 (2021), 4.6 (2022), 3.1 (2023), 4.7 (2024), 6.0 (2025), 6.1 (2026), 7.9 (2031), 17.2 (2032)

### Sensitivity analysis and stress scenarios
- 35 percent PV-of-debt-to-GDP benchmark would be breached under various shock scenarios.
- Commodity price shock:
  - PV of debt-to-revenue ratio is most affected by the commodity price shock.
  - Country is highly exposed to international price fluctuations for multiple commodities including gold and demand for logs.
- Natural disaster shock:
  - PV of public debt-to-GDP ratio would breach the 35 percent benchmark in 2026 under the natural disaster shock scenario.
- Fiscal and financing risk scenario:
  - PV of public debt-to-GDP ratio is projected to breach the 35 percent benchmark immediately in 2024 under the alternative fiscal and financing risk scenario (see Table 5).
  - Table 5 highlights (PV of public debt-to-GDP ratio under the scenario): 16.5 (2022), 23.9 (2023), 36.8 (2024), 39.4 (2025), 41.7 (2026), 43.1 (2027), 44.4 (2028), 45.2 (2029), 46.2 (2030), 47.1 (2031), 47.9 (2032).

### Debt vulnerabilities, composition, and financing risks
- Risk rating:
  - 2022 debt sustainability analysis: risk of external debt distress is moderate.
  - All debt indicators remain below relevant thresholds in 2022-32 under the baseline scenario, but several shocks cause significant deterioration.
- Debt composition and refinancing/interest-rate risks:
  - About 76 percent of public debt is external loans contracted at highly concessional terms.
  - T-bills account for about 17 percent of domestic debt; rollover risk exists but is limited by excess market liquidity and high market demand for government securities.
  - Yields for one-year T-bills have amounted to around 1.1 percent.
  - Weighted average interest rate: 1 percent for external loans; borrowing costs for domestic debt relatively low and stable at 4.9 percent.
  - Average Time To Maturity (ATM) for external (domestic) debt is 13.6 (6.2) years.
- External debt indicators (selected from Table 1):
  - External debt (nominal): 8.7 (2019), 13.1 (2020), 12.7 (2021), 16.6 (2022), 20.7 (2023), 23.5 (2024), 25.9 (2025), 26.6 (2026), 26.4 (2027), 21.6 (2030), 12.9 (2031), 11.1 (2032)
  - PV of PPG external debt-to-GDP ratio (selected): 10.0 (2022), 10.6 (2023), 11.8 (2024), 12.5 (2025), 13.0 (2026), 12.7 (2027), 12.3 (2028), 10.5 (2029), 6.3 (2032)
  - Gross external financing need (Million of U.S. dollars): 132.8 (2019), 25.5 (2020), 60.5 (2021), 177.8 (2022), 178.4 (2023), 146.0 (2024), 149.9 (2025), 120.0 (2026), 112.5 (2027), 163.0 (2031), 188.5 (2032)

### Policy implications and recommendations
- Rebuild fiscal buffers against external shocks including natural disasters.
- Economic diversification and fostering growth of the non-commodity private sector over the medium term to reduce commodity-price vulnerability.
- Public investment management:
  - Phase public investment projects in line with the economy’s absorptive capacity.
  - Carefully negotiate accompanying financing arrangements to mitigate fiscal risks and ensure debt sustainability.
  - Prioritize investment projects that build resilience to natural disasters.
- Maximize concessional loans and consider bringing more off-budget donor financing on budget to increase fiscal space and improve debt sustainability indicators.
- Authorities’ stated intent:
  - Commitment to the Medium-term Debt Management Strategy, increasing share of financing from the domestic debt market, and managing public debt within the 35 percent of GDP threshold in the medium-term.
  - Aim to gradually rebuild the cash balance and lower fiscal deficits while addressing investment needs through improving spending efficiency and advancing domestic revenue mobilization.
  - Commitment to prudent management of infrastructure projects and assessment of terms of external borrowing to ensure macroeconomic stability and debt sustainability.

### Key statistics and assumptions (selected)
- PV of public debt-to-GDP ratio: 16.3 percent (2022) → 34.0 percent (2032).
- Nominal public debt-to-GDP breaches 35 percent in 2031.
- Share of public debt that is external: about 76 percent.
- T-bills share of domestic debt: about 17 percent.
- One-year T-bill yields: around 1.1 percent.
- Weighted average interest rate on external loans: 1 percent.
- Borrowing costs for domestic debt: 4.9 percent.
- Average Time To Maturity (ATM): external 13.6 years; domestic 6.2 years.
- Selected macro assumptions (Table 1 / Table 2):
  - Real GDP growth: 1.7 (2019), -3.4 (2020), -0.6 (2021), -4.1 (2022), 2.5 (2023), 2.4 (2024), 3.0 (2025), 3.0 (2026), 3.0 (2027), 3.1 (2028), 3.3 (2029), 1.9 (2030), 2.3 (2031)
  - Nominal dollar GDP growth (selected): 0.2 (2019), -5.1 (2020), 0.6 (2021), 3.3 (2022), 6.6 (2023), 5.9 (2024), 6.5 (2025), 6.3 (2026), 6.4 (2027), 6.8 (2030), 8.6 (2031), 4.1 (2032)
  - Government revenues (excluding grants, in percent of GDP): 25.8 (2019), 24.6 (2020), 22.6 (2021), 23.0 (2022), 23.0 (2023), 24.3 (2024), 25.0 (2025), 24.8 (2026), 24.7 (2027), 24.1 (2028), 23.1 (2029)

*Source: Country authorities; and staff estimates and projections.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1slbea2023001.pdf_