## Hosting the 2023 Pacific Games: Benefits and Costs

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### Context and key background
- Solomon Islands characterized as a small, low-income, and fragile state with stagnating per capita income growth and a population of "0.8 million", with three quarters living in rural areas and largely relying on subsistence agriculture and fisheries.
- Output growth averaged "2.0 percent" over the past decade, leaving real GDP per capita lower than a decade earlier.
- Recent shocks and events: civil unrest in late 2021; the pandemic in early 2022; commodity price hikes after Russia’s war in Ukraine; hosted the Pacific Games in late 2023; peaceful general elections in April 2024.
- Public debt has nearly tripled since before the pandemic; government cash reserves have been significantly depleted.
- New government took office in May 2024 prioritizing economic recovery, good governance, national unity, and human capital development.

### Box 1 — Hosting the 2023 Pacific Games: summary findings
- Event details:
  - Held November 11-December 2, 2023.
  - "5,000 athletes and officials" from "24 countries and territories" competing in "24 sports events".
- Original government multi-year budget estimate for hosting (including facilities): "SI$2.5 billion", described as "nearly one-fifth of GDP in 2019".
- Benefits:
  - Donor-funded infrastructure: new regional airport, several major roads, a new wharf, sports facilities including a new stadium, and other critical upgrades.
  - Increased construction activity supported recovery and widened the current account deficit.
  - National unity and international recognition improved.
  - Visitor arrivals: "more than 11,000 visitors" in Q4 2023, "double the number in the previous quarter", supporting nascent tourism development.
- Costs and challenges:
  - Government faced a cash crunch pre-Games and imposed strict spending controls on non-Games and non-CDF spending, crowding out other priority spending.
  - Spending controls exacerbated delays in government payments to suppliers and vendors, posing a risk to financial stability (CBSI, Financial Stability Report 2H23).
  - Government issued a significant amount of domestic bonds: public debt increased by "60 percent (2.7 percent of GDP) in 2023".
  - CBSI purchased government bonds in the secondary market in late 2023 and early 2024 to improve its income position and help markets absorb new issuance.
  - Facilities built require significant maintenance costs going forward.
- Recommendations to leverage legacy:
  - Complete and report on an audit of Pacific Games-related funds.
  - Hand over facilities to appropriate agencies with sound plans for effective use.
  - Establish a system to ensure maintenance and management costs of these facilities are continuously funded as necessary.

### Recent macroeconomic developments and indicators
- Growth:
  - Output estimated to have grown "2.7 percent" in 2023 and "2.5 percent" in 2024 (staff estimate), with the Games stimulus fading and activity slowing around elections.
  - Growth drivers in 2024: forestry, manufacturing, and construction; supported by favorable weather, global demand, and donor-funded infrastructure projects.
- Inflation and monetary policy:
  - Headline inflation slowed from "10.0 percent" y-o-y in October 2022 to "2.8 percent" in October 2024.
  - Year-end inflation expected around "3.4 percent".
  - CBSI eased monetary policy in September 2024 by reducing the Cash Reserve Requirement from "6 percent" to "5.5 percent".
- External sector:
  - Current account deficit estimated to have narrowed from "10.4 percent" in 2023 to "4.2 percent" in 2024 due to favorable fish and mineral exports and lower imports.
  - Foreign exchange reserves expected to remain adequate, covering "9 months of imports".
  - External Sector Assessment indicates the external position in 2023 was weaker than implied by fundamentals and desirable policies.
- Fiscal and public debt:
  - Staff estimates a fiscal deficit of "3.8 percent of GDP" in 2023 (lower than prior projections) due to expenditure controls and additional donor support.
  - Gross domestic debt rose "60 percent (2.7 percent of GDP) in 2023".
  - Government broader cash balance remained at "SI$200 million", or "0.4 months of total spending" in 2023.
  - In 2024, measures to save a total of "SI$250 million (1.7 percent of GDP)" were introduced; a supplementary budget of "SI$113 million (0.8 percent of GDP)" was passed.
  - Staff estimates the 2024 budget deficit at "3.1 percent of GDP".
- Government financing and market actions:
  - Central bank purchases of government bonds helped absorb issuance.
  - Tight financing conditions forced reintroduction of spending cuts.

### Outlook and risks (projections and concerns)
- Growth and inflation projections:
  - Projected growth of "2.8 percent" in 2025.
  - Inflation expected to average "3.8 percent" in 2025 and "3.3 percent" in the medium term.
  - Medium-term growth outlook around "3 percent".
- External projections:
  - Current account deficit projected to widen to "7.7 percent of GDP" in 2025 as externally financed infrastructure projects come fully on stream.
  - Deficits projected to remain elevated in the medium term; remittances and mineral exports to partly offset.
  - Reserves forecast to decline but remain within the adequacy range of "three to eight months of imports".
- Fiscal projections and risks:
  - Staff expects the fiscal deficit to be "3.3 percent of GDP" in 2025, larger than in 2024, assuming reintroduction of expenditure controls and additional donor support.
  - Public debt-to-GDP ratio projected to continue rising, reaching the authorities' "35 percent threshold in the early 2030s".
  - Debt Sustainability Analysis (DSA) indicates overall risk of debt distress remains "moderate"; external debt distress risk improved from "moderate" to "low".
  - Continued reliance on higher-cost and shorter-term domestic financing would increase debt service costs and expose government to refinancing and crowding-out risks.
- Risk balance:
  - Risks are tilted to the downside (Annex I): continued fiscal challenges, vulnerability to extreme climate events, commodity price volatility, political instability, and geoeconomic fragmentation.
  - Upside: additional donor assistance could support government priorities.

### Fiscal policy: challenges and recommended actions
- Four urgent fiscal challenges identified:
  - Rebuilding the cash balance: staff recommends restoring the broader cash balance to at least "two months of total spending".
  - Ending unfunded spending: budgets have had financing gaps since 2021, causing repeated cash shortages and mid-year spending cuts.
  - Improving the quality of public spending: fragmented implementation across government, development partners, and CDFs suggests scope to rationalize spending without sacrificing growth.
  - Imposing fiscal discipline on domestic borrowing: rapid increase in domestic borrowing is a major driver of deterioration in the government’s financial position.
- Immediate actions recommended to fill fiscal data and PFM gaps:
  - Resume publication of fiscal reporting and debt data on a monthly and quarterly basis.
  - Discuss and request training from donors for using the public finance module of D365 (the recently upgraded Financial Management Information System).
  - Strengthen cash management and forecasting by monthly reconciling accounts and obtaining cash projections from ministries.
  - Review the budget process to better estimate the budget envelope, including donor support and domestic financing, and eliminate funding gaps in budget proposals.
  - Prepare and publish budget documents in a timely manner, including the medium-term fiscal strategy, budget strategy, mid-year budget review, and budget outcomes.
- Implementation support:
  - Many actions are resumptions of previous practices and were recommended by past IMF technical assistance (TA); staff urges authorities to implement these recommendations, with IMF TA as needed.

### Fiscal framework and proposed interim guideline (debt ceiling and operational rule)
- Staff analysis: the current 35 percent debt-to -GDP ratio threshold remains broadly appropriate as a medium-term debt ceiling.
- Current operational fiscal rules (e.g., golden rule, annual borrowing limit) have not effectively guided fiscal policy due to complexity, limited transparency, and weak monitoring.
- Staff proposal: introduce a simple ex-ante guideline for annual budget formulation as an interim measure while PFM capacity is developed.
  - Guideline design:
    - Set a ceiling on the primary budget deficit financed by domestic borrowing (balance between domestic revenues and primary spending financed by these resources).
    - Staff analysis indicates the government would need to maintain the domestically financed primary deficit at around "0.3 percent of GDP" until 2029.
    - Assumption: government would borrow domestically by "0.5 percent of GDP" each year from 2025 to 2029 to rebuild the broader cash balance to "2 months of total spending", in addition to borrowing to finance budget deficits.
    - Proposed guideline is consistent with a potential fiscal rule maintaining public debt below the authorities’ threshold until 2040.
  - Implementation and accountability:
    - Guideline not intended as permanent fiscal rule; strict compliance through legislation not required.
    - Government could adopt guideline by cabinet decision.
    - Staff recommends government:
      - Assess ex-post whether the budget was implemented in line with the guideline.
      - Explain reasons for deviations in its budget outcome report.
      - Regularly assess alignment with the medium-term fiscal anchor in the medium-term fiscal strategy.
- Spending rationalization and fiscal space:
  - Staff suggests government needs to create additional fiscal space of "0.6 percent of GDP" in 2025, relative to the staff baseline.
    - Example: keeping the 2025 contribution to the CDFs at the 2024 level could save the budget "0.6 percent of GDP".
      - Government contribution to the CDFs was reduced from "SI$261 million" in the 2023 budget to "SI$200 million" in the 2024 budget.
  - Government payroll has grown by "2.5 percent of GDP" over the past five years, with further increases expected (e.g., police officers).
    - Recommendation: government, in coordination with development partners, should assess the appropriate size, allocation, and remuneration of its workforce.
  - Opportunities for efficiency gains in education and health (e.g., restructuring tertiary scholarships, integrating off-budget donor-financed health spending).

### Domestic revenue mobilization
- Revenues remain below pre-pandemic levels due to declining logging activity.
- Scope to mobilize further revenues in the medium term by:
  - Improving accuracy and coverage of taxpayer registration.
  - Ensuring compliance and tightening exemptions.
- Staff recommendations:
  - Against increasing the personal income tax exemption threshold (a proposal under government discussion).
  - Prioritize passing the VAT Bill and prepare for its implementation in early 2026.
  - Use the planned review of the Income Tax Act to strengthen the tax system in the medium term.
  - IRD should pursue comprehensive modernization focused on digital transformation and tax risk management.
  - Ensure tax compliance from mining companies and avoid further tax exemptions in mining negotiations.
  - Develop a medium-term revenue mobilization plan as a comprehensive roadmap for reforms.
- Staff baseline assumes efficiency gains from tax administration reform, introduction of VAT, and increased revenues from mining exports, offsetting the decline in revenues from log exports.

### Transparency, PFM, procurement, and auditing
- Staff welcomes adoption of the new CDFs Act and the Public Investment Management Framework and emphasizes consistent implementation.
  - The new CDFs Act 2023 (passed December 2023) intended to strengthen governance of the CDFs (e.g., committee to decide programs, procurement in accordance with PFMA 2013, ensuring two females serve as committee members).
  - Immediate challenges: establishment of implementing officers and bodies and development of data to measure results.
- Several PFMA 2013 regulations remain to be finalized.
- Last audited financial statements of the government date back to 2018; the auditor did not express an opinion due to lack of supporting documentation and non-compliance with reporting requirements under the PFMA.
- Staff commends publication of the audit report on the Economic Stimulus Package (ESP) and recommends:
  - Develop guidelines for grant programs to ensure ESP recommendations are applied to future programs.
  - Enhance capacity and resources of government officials involved in procurement.
  - Strengthen auditing, including training and improving the legal framework to ensure independence of the Office of the Auditor General.
- Government intends to improve publication and presentation of fiscal data in compliance with the PFMA and will undertake a PEFA assessment with PFTAC in 2025.

### Monetary, exchange rate policy, and central bank governance
- Staff view: CBSI should remain vigilant while maintaining autonomy.
  - Support for CBSI's decision to notionally ease monetary policy given stable inflation outlook, below-potential growth, and ample foreign reserves.
  - CBSI should stand ready to adjust policy as conditions evolve.
  - Staff believes purchases of government bonds in late 2023 and early 2024 were not justified and highlights need for safeguards for purchase of government securities in primary and secondary markets.
- Safeguards assessment implementation: nearly half of recommendations remain outstanding.
  - External audit arrangements recently enhanced; independent oversight by Board Audit Committee requires strengthening.
  - Need to improve risk management, internal controls, internal audit capacity, and financial autonomy of the CBSI.
- Foreign exchange operations and communication:
  - Recent update of the currency basket in August 2024 welcomed.
  - Recommendation: manage regime fully in line with the basket and review periodically.
  - Improve foreign exchange operations and communication (e.g., regular meetings with market participants, introduce intraday pricing).
- Authorities’ monetary views:
  - Committed to price stability and transparent implementation of exchange rate regime.
  - CBSI does not anticipate further purchases of government bonds in current conditions but may act in exceptional circumstances to stabilize markets.
  - Committed to strengthen audit function, risk management, and conflict of interest policies; keep exchange rate regime aligned with revised currency basket; implement remaining TA recommendations.

### Financial sector stability, AML/CFT, and inclusion
- Financial sector status and risks:
  - Commercial banks: well capitalized and profitable; non-performing loan ratio rose to "10.6 percent" in the first half of 2024, partly due to delayed government payments.
  - Obstacles to lending expansion: delays in registration of collateral and lengthy court process for debt recovery.
  - Solomon Islands National Provident Fund: positive earnings and adequate liquidity, but risks from rising early withdrawal demand and undiversified asset allocation.
    - Unlisted shares accounted for "40 percent" of the fund's investment assets in the first half of 2024.
- Priorities:
  - Upgrade regulatory and supervisory frameworks for financial institutions, superannuation sector, credit unions, and the Development Bank of Solomon Islands.
  - Promote financial inclusion: finalize regulations to operationalize the National Payments Systems Act and integrate government accounting system into the Automated Transfer System.
  - Broader reforms: improve access to affordable electricity and the internet, develop a national identity platform, enhance financial and digital literacy, and strengthen consumer protection.
- AML/CFT:
  - Enhance capacity remains a priority; enact Money Laundering and Proceeds of Crime Act and regulations to address deficiencies identified in 2019 and subsequent FATF changes.
  - Introduce a risk-based supervisory tool with IMF support.
  - Planned Citizenship by Investment program adds urgency to strengthening AML/CFT capacity; without rigorous due diligence and oversight the program could create serious risks, including reputational damage, volatile revenues, and potential loss of correspondent banking relationships.
- Financial inclusion (Annex IV highlights):
  - 30.0 percent of the total population have at least one account in a financial institution (2019 Census).
  - 78.0 percent of rural dwellers did not own an account in a financial institution in 2019.
  - 15.3 percent of the population were connected to the electricity grid (62 percent of those in Honiara).
  - Less than 50 percent have access to the Internet and mobile phones.
  - 53.0 percent of those excluded from the financial sector are female, equivalent to 76.0 percent of the total female population.
- Policy recommendations to improve inclusion and growth:
  - Use digital technologies as a key enabler; implement National Payments Systems Act (2022).
  - Improve access to electricity and internet; develop a national ID system to support KYC.
  - Expand financial literacy initiatives, targeting women, rural residents, and low-education/income groups.
  - Strengthen consumer protection and data privacy laws.
  - Balance AML/CFT and inclusion objectives with risk-based measures.

### Structural reforms, governance, and anti-corruption
- Growth constraints: persistently anemic growth due to limited economic diversification necessitates urgent policy action to enhance competitiveness and boost private sector participation.
  - Reforms to promote private sector participation: promote land registration and improve access to dispute resolution mechanisms.
  - Potential income growth from emigration and financial inclusion by addressing infrastructure gaps, improving business environment, expanding digital connections, and enhancing education and training quality.
  - Significant productivity gains likely in subsistence agriculture and fisheries through targeted mechanization and improved connectivity.
- Governance and anti-corruption:
  - Launch of updated National Anti-Corruption Strategy welcomed.
  - Importance of steadily implementing the action plan and monitoring implementation, including increasing resources and strengthening independence of the Independent Commission Against Corruption.
  - No significant progress in addressing governance weaknesses in extractive industries since the 2023 Article IV Staff report.
  - Ministries lack resources to effectively oversee logging and mining; legislation to improve governance frameworks remains pending.

### Climate change: macro-critical threat and adaptation needs
- Staff estimates that the country would need additional spending of about "6.9 percent of 2030 GDP" every year to address climate adaptation needs while achieving key Sustainable Development Goals (SDGs).
- Authorities’ efforts to improve access to climate finance are welcome, but addressing fundamental gaps in PFM is a prerequisite for effective planning and implementation of climate investments.

### External Sector Assessment (Annex II) — key findings and policy implications
- Overall assessment:
  - External position of Solomon Islands in 2023 was weaker than the level implied by fundamentals and desirable policies.
  - Staff assess current account deficit (at "10.4 percent of GDP") was around "3.9 percent of GDP" below the estimated norm.
  - Assessed shortfall corresponds to a real effective exchange rate overvaluation in the range of between "12-15 percent".
- Foreign assets and liabilities (key 2023 stock figures, percent of GDP):
  - NIIP: "-13.2"
  - Gross Assets: "55.2"
  - Debt Assets: "6.0"
  - Gross Liabilities: "68.4"
  - Debt Liabilities: "21.5"
- Current account and REER:
  - CA balance series (2019–2029 extract): -9.5 -1.6 -5.1 -13.7 -10.4 -4.2 -7.7 -7.5 -7.4 -7.5 -7.4 (in percent of GDP).
  - REER estimated overvaluation: "12.1 percent" (REER approach) and around "15 percent" (CA model).
- FX reserves and adequacy:
  - Gross official reserves: US$682 million in 2023, translating to around "10 months of prospective imports".
  - Reserve adequacy assessed in range "three to eight months of imports" for the medium term.
- Policy implications:
  - Structural reforms to improve competitiveness and export diversification.
  - Prudent fiscal policies and financing mix focused on grants and highly concessional loans.
  - Regular updates of the currency basket; phase public investment projects in line with absorptive capacity.

### Debt Sustainability Analysis (DSA): public and external debt dynamics
- DSA key assessments (2024):
  - Risk of external debt distress: "Low"
  - Overall risk of debt distress: "Moderate"
  - Date: January 27, 2025
- Public debt developments:
  - Public debt stood at "20.3 percent of GDP" as of end-2023, a "4.8 percent of GDP" jump from 2022.
  - Public domestic debt jumped to "SI$1,192 million (8.6 percent of GDP)" at end-2023 from SI$751 million (5.9 percent of GDP) the year before.
  - Drivers: hosting Pacific Games, stagnant revenues, declining logging activity.
  - Development bonds: maturities ranging from 2 to 15 years and coupons ranging from "2 percent to 7 percent".
- Baseline projections and stress tests:
  - PV of public debt-to-GDP ratio forecast to keep rising; projected to exceed the "35 percent" benchmark in 2044 (nominal terms breach in 2032 in a different projection table).
  - Staff projects public debt-to-GDP ratio to reach the authorities' "35 percent threshold in the early 2030s" under staff scenario.
  - Stress tests:
    - Commodity price shock could breach the 35 percent benchmark as early as 2028.
    - Tailored natural disaster shock (largest historical damage "14 percent of GDP") would cause significant deterioration in debt service-to-revenue ratios (peak at "24 percent" in 2031 under scenario).
- Financing mix risks:
  - Shift from concessional external borrowing to domestic financing increases debt service costs and refinancing risks.
  - Approximate share: "58 percent" of public debt is external loans contracted at concessional terms.
  - T-bill yields: 91 days were "0.50 percent" at end-2023 and "0.49 percent" at end-2022.
- Policy prescriptions:
  - Maximize concessional loans, rebuild fiscal buffers, prioritize resilient and high-return public investment, develop domestic bond market and expand investor base, strengthen PFM and transparency.

### Authorities’ response to Fund policy advice
- Fiscal policy:
  - Authorities: successfully hosted Pacific Games and conducted peaceful general elections; strict expenditure controls introduced pre-Games crowded out priority spending.
  - Committed to reducing the budget deficit and rebuilding cash reserves; noted lack of a credible plan and concrete measures to implement commitment.
  - Adopted Public Investment Management Framework; need better integration with budget process.
  - Inland Revenue Division modernizing; VAT bill not yet passed, expected implementation early 2026.
  - CDFs Act passed; fundamental weaknesses remain (timely fiscal reporting, cash management, effective fiscal framework).
- Monetary and financial sector:
  - Authorities strengthened capacity for regulation and supervision; working to update AML/CFT framework and improve central bank analytical capacity.
  - Currency basket reviewed; CBSI operations adjusted and oversight recommendations under implementation.
- Structural reforms:
  - Mixed progress: CDFs Act passed; Electricity Bill passed; VAT bill pending; additional logging and mining sector legislation still drafted.
- Debt commitments:
  - Authorities agreed with staff on debt sustainability thrust; committed to 35 percent of GDP debt threshold, avoidance of non-concessional external borrowing, careful appraisal and monitoring of projects, expenditure rationalization, and mobilizing domestic revenues.
  - Intensifying efforts to develop domestic debt market: annually updating MTDS, strengthening coordination, enhancing market transparency, and improving communication with potential investors.
  - Exploring concessional climate finance to address investment needs for adaptation.

### IMF support and capacity development priorities
- Immediate CD priorities include:
  - Fiscal reporting and auditing.
  - PFM.
  - AML/CFT.
  - Statistics, especially national accounts and GFS.
- IMF to continue CD in collaboration with development partners; planned PEFA assessment with PFTAC in 2025.

*Source: 1slbea2025001-print-pdf*

### 1.    Hosting the 2023 Pacific Games: Benefits and Costs_____________________________________________5

### Hosting the 2023 Pacific Games: Benefits and Costs

### Context and key background
- Solomon Islands is described as a small, low-income, and fragile state with stagnating per capita income growth and a population of "0.8 million", with three quarters living in rural areas and largely relying on subsistence agriculture and fisheries.
- Output growth averaged "2.0 percent" over the past decade, leaving real GDP per capita lower than a decade earlier.
- The country faced civil unrest in late 2021, the pandemic in early 2022, commodity price hikes after Russia’s war in Ukraine, hosted the Pacific Games in late 2023, and conducted peaceful general elections in April 2024.
- Public debt has nearly tripled since before the pandemic; government cash reserves have been significantly depleted.
- The new government took office in May 2024 and prioritized economic recovery, good governance, national unity, and human capital development.

### Box 1 — Hosting the 2023 Pacific Games: benefits and costs (summary findings)
- Event details:
  - Held November 11-December 2, 2023.
  - "5,000 athletes and officials" from "24 countries and territories" competing in "24 sports events".
- Original government multi-year budget estimate for hosting (including facilities): "SI$2.5 billion", described as "nearly one-fifth of GDP in 2019".
- Benefits:
  - Donor-funded infrastructure: new regional airport, several major roads, a new wharf, sports facilities including a new stadium, and other critical upgrades.
  - Increased construction activity supported recovery and widened the current account deficit.
  - National unity and international recognition improved.
  - Visitor arrivals: "more than 11,000 visitors" in Q4 2023, "double the number in the previous quarter", supporting nascent tourism development.
- Costs and challenges:
  - Government faced a cash crunch pre-Games and imposed strict spending controls on non-Games and non-CDF spending, crowding out other priority spending.
  - Spending controls exacerbated delays in government payments to suppliers and vendors, posing a risk to financial stability (CBSI, Financial Stability Report 2H23).
  - Government issued a significant amount of domestic bonds: public debt increased by "60 percent (2.7 percent of GDP) in 2023".
  - CBSI purchased government bonds in the secondary market in late 2023 and early 2024 to improve its income position and help markets absorb new issuance.
  - Facilities built require significant maintenance costs going forward.
- Recommendations to leverage legacy:
  - Complete and report on an audit of Pacific Games-related funds.
  - Hand over facilities to appropriate agencies with sound plans for effective use.
  - Establish a system to ensure maintenance and management costs of these facilities are continuously funded as necessary.

### Recent macroeconomic developments and indicators
- Growth:
  - Output estimated to have grown "2.7 percent" in 2023 and "2.5 percent" in 2024 (staff estimate), with the Games stimulus fading and activity slowing around elections.
  - Growth drivers in 2024: forestry, manufacturing, and construction; supported by favorable weather, global demand, and donor-funded infrastructure projects.
- Inflation:
  - Headline inflation slowed from "10.0 percent" y-o-y in October 2022 to "2.8 percent" in October 2024.
  - Year-end inflation expected around "3.4 percent".
  - CBSI eased monetary policy in September 2024 by reducing the Cash Reserve Requirement from "6 percent" to "5.5 percent".
- External sector:
  - Current account deficit estimated to have narrowed from "10.4 percent" in 2023 to "4.2 percent" in 2024 due to favorable fish and mineral exports and lower imports.
  - Foreign exchange reserves expected to remain adequate, covering "9 months of imports".
  - External Sector Assessment indicates the external position in 2023 was weaker than implied by fundamentals and desirable policies.
- Fiscal and public debt:
  - Staff estimates a fiscal deficit of "3.8 percent of GDP" in 2023 (lower than prior projections) due to expenditure controls and additional donor support.
  - Gross domestic debt rose "60 percent (2.7 percent of GDP) in 2023".
  - Government broader cash balance remained at "SI$200 million", or "0.4 months of total spending" in 2023.
  - In 2024, measures to save a total of "SI$250 million (1.7 percent of GDP)" were introduced; a supplementary budget of "SI$113 million (0.8 percent of GDP)" was passed.
  - Staff estimates the 2024 budget deficit at "3.1 percent of GDP".
- Government financing and market actions:
  - Central bank purchases of government bonds helped absorb issuance.
  - Tight financing conditions forced reintroduction of spending cuts.

### Outlook and risks (projections and concerns)
- Growth and inflation projections:
  - Projected growth of "2.8 percent" in 2025.
  - Inflation expected to average "3.8 percent" in 2025 and "3.3 percent" in the medium term.
  - Medium-term growth outlook around "3 percent".
- External projections:
  - Current account deficit projected to widen to "7.7 percent of GDP" in 2025 as externally financed infrastructure projects come fully on stream.
  - Deficits projected to remain elevated in the medium term; remittances and mineral exports to partly offset.
  - Reserves forecast to decline but remain within the adequacy range of "three to eight months of imports".
- Fiscal projections and risks:
  - Staff expects the fiscal deficit to be "3.3 percent of GDP" in 2025, larger than in 2024, assuming reintroduction of expenditure controls and additional donor support.
  - Public debt-to-GDP ratio projected to continue rising, reaching the authorities' "35 percent threshold in the early 2030s".
  - Debt Sustainability Analysis (DSA) indicates overall risk of debt distress remains "moderate"; external debt distress risk improved from "moderate" to "low".
  - Continued reliance on higher-cost and shorter-term domestic financing would increase debt service costs and expose government to refinancing and crowding-out risks.
- Risk balance:
  - Risks are tilted to the downside (Annex I): continued fiscal challenges, vulnerability to extreme climate events, commodity price volatility, political instability, and geoeconomic fragmentation.
  - Upside: additional donor assistance could support government priorities.

### Fiscal policy: challenges and recommended actions
- Four urgent fiscal challenges identified:
  - Rebuilding the cash balance: staff recommends restoring the broader cash balance to at least "two months of total spending".
  - Ending unfunded spending: budgets have had financing gaps since 2021, causing repeated cash shortages and mid-year spending cuts.
  - Improving the quality of public spending: fragmented implementation across government, development partners, and CDFs suggests scope to rationalize spending without sacrificing growth.
  - Imposing fiscal discipline on domestic borrowing: rapid increase in domestic borrowing is a major driver of deterioration in the government’s financial position.
- Specific immediate actions recommended to fill fiscal data and PFM gaps:
  - Resume publication of fiscal reporting and debt data on a monthly and quarterly basis.
  - Discuss and request training from donors for using the public finance module of D365 (the recently upgraded Financial Management Information System).
  - Strengthen cash management and forecasting by monthly reconciling accounts and obtaining cash projections from ministries.
  - Review the budget process to better estimate the budget envelope, including donor support and domestic financing, and eliminate funding gaps in budget proposals.
  - Prepare and publish budget documents in a timely manner, including the medium-term fiscal strategy, budget strategy, mid-year budget review, and budget outcomes.
- Implementation support:
  - Many actions are resumptions of previous practices and were recommended by past IMF technical assistance (TA); staff urges authorities to implement these recommendations, with IMF TA as needed.

*Source: 1slbea2025001-print-pdf*

### 16. The current debt ceiling remains broadly appropriate, while there is no effective

### 16. The current debt ceiling remains broadly appropriate, while there is no effective operational rule to guide fiscal policy consistently with the medium-term anchor

### Fiscal framework and proposed interim guideline
- Staff analysis: the current 35 percent debt-to -GDP ratio threshold remains broadly appropriate as a medium-term debt ceiling.
- Current operational fiscal rules (e.g., golden rule, annual borrowing limit) have not effectively guided fiscal policy due to complexity, limited transparency, and weak monitoring.
- Government-funded expenditures are budgeted on a bottom-up basis, driven by each ministry's estimates, with no effective top-down controls on aggregate spending.
- Staff proposal: introduce a simple ex-ante guideline for annual budget formulation as an interim measure while PFM capacity is developed.
  - Rationale: government not ready for a full-fledged binding operational fiscal rule because donor-supported projects are not integrated into the annual budget process and credible budget data are not available on a timely basis.
  - Purpose: force the government to prioritize expenditures within the envelope when preparing a budget proposal, rather than cutting spending during the fiscal year in the face of a cash crunch.

### Design of the proposed guideline
- The guideline would set a ceiling on the primary budget deficit financed by domestic borrowing, i.e., the balance between domestic revenues (tax and other revenues) and primary spending financed by these resources.
- Staff analysis indicates the government would need to maintain the domestically financed primary deficit at around 0.3 percent of GDP until 2029.
  - Assumption: the government would borrow domestically by 0.5 percent of GDP each year from 2025 to 2029 to rebuild the broader cash balance to 2 months of total spending, in addition to borrowing to finance budget deficits.
- The proposed guideline is consistent with a potential fiscal rule that maintains public debt below the authorities’ threshold until 2040.

### Implementation and accountability
- The guideline is not intended to be a permanent fiscal rule; strict compliance (e.g., through legislation) is not required.
- The government could adopt the guideline by cabinet decision.
- Staff recommends the government:
  - Assess ex-post whether the budget was implemented in line with the guideline.
  - Explain reasons for deviations from the guideline in its budget outcome report.
  - Regularly assess if public finances are moving in line with the medium-term fiscal anchor in its medium-term fiscal strategy.

### Spending rationalization and fiscal space
- Staff suggests the government needs to create additional fiscal space of 0.6 percent of GDP in 2025, relative to the staff baseline.
  - Example: keeping the 2025 contribution to the CDFs at the 2024 level could save the budget 0.6 percent of GDP.
    - Government contribution to the CDFs was reduced from SI$261 million in the 2023 budget to SI$200 million in the 2024 budget.
- Government payroll has grown by 2.5 percent of GDP over the past five years, with further increases expected (e.g., police officers).
  - Recommendation: government, in coordination with development partners, should assess the appropriate size, allocation, and remuneration of its workforce.
- While current spending on education and health is insufficient, opportunities exist for efficiency gains (e.g., restructuring tertiary scholarships, integrating off-budget donor-financed health spending).

### Domestic revenue mobilization
- Government revenues remain below pre-pandemic levels due to declining logging activity.
- Scope to mobilize further revenues in the medium term by:
  - Improving accuracy and coverage of taxpayer registration.
  - Ensuring compliance and tightening exemptions.
- Staff recommendations:
  - Against increasing the personal income tax exemption threshold (a proposal under government discussion).
  - Prioritize passing the VAT Bill and prepare for its implementation in early 2026.
  - Use the planned review of the Income Tax Act to strengthen the tax system in the medium term.
  - IRD should pursue comprehensive modernization focused on digital transformation and tax risk management.
  - Ensure tax compliance from mining companies and avoid further tax exemptions in mining negotiations.
  - Develop a medium-term revenue mobilization plan as a comprehensive roadmap for reforms.
- Staff baseline assumes efficiency gains from tax administration reform, introduction of VAT, and increased revenues from mining exports, offsetting the decline in revenues from log exports.

### Transparency, PFM, and public investment
- Staff welcomes adoption of the new CDFs Act and the Public Investment Management Framework and emphasizes consistent implementation.
  - The new CDFs Act 2023 (passed December 2023) is intended to strengthen governance of the CDFs (e.g., committee to decide programs, procurement in accordance with PFMA 2013, ensuring two females serve as committee members).
  - Immediate challenges include establishment of implementing officers and bodies and development of data to measure results.
- Several PFMA 2013 regulations remain to be finalized.
- Last audited financial statements of the government date back to 2018; the auditor did not express an opinion due to lack of supporting documentation and non-compliance with reporting requirements under the PFMA.
- Staff commends publication of the audit report on the Economic Stimulus Package (ESP) and recommends:
  - Develop guidelines for grant programs to ensure ESP recommendations are applied to future programs.
  - Enhance capacity and resources of government officials involved in procurement.
  - Strengthen auditing, including training and improving the legal framework to ensure independence of the Office of the Auditor General.
- Government intends to improve publication and presentation of fiscal data in compliance with the PFMA and will undertake a PEFA assessment with PFTAC in 2025.

### Authorities’ fiscal views
- Authorities agree on need to address fiscal challenges and improve transparency and accountability.
- Government commitments include:
  - Gradually reduce deficits and ensure debt sustainability.
  - Introduce a fiscal anchor and a VAT.
  - Review income taxes and non-tax revenue sources.
  - Modernize tax administration and update medium-term debt management strategy.
  - Implement ESP audit recommendations and enhance audit capacity through legislation and training.

### Monetary and exchange rate policy
- Staff view: CBSI should remain vigilant while maintaining autonomy.
  - Support for CBSI's recent decision to notionally ease monetary policy given stable inflation outlook, below-potential growth, and ample foreign reserves.
  - CBSI should stand ready to adjust policy as conditions evolve.
  - Staff believes purchases of government bonds in late 2023 and early 2024 were not justified and highlights need for safeguards for purchase of government securities in primary and secondary markets.
- Safeguards assessment implementation: nearly half of recommendations remain outstanding.
  - External audit arrangements recently enhanced; independent oversight by Board Audit Committee requires strengthening.
  - Need to improve risk management, internal controls, internal audit capacity, and financial autonomy of the CBSI.
- Foreign exchange operations and communication:
  - Recent update of the currency basket in August 2024 welcomed.
  - Recommendation: manage regime fully in line with the basket and review periodically.
  - Improve foreign exchange operations and communication (e.g., regular meetings with market participants, introduce intraday pricing).
- Authorities’ monetary views:
  - Committed to price stability and transparent implementation of exchange rate regime.
  - CBSI does not anticipate further purchases of government bonds in current conditions but may act in exceptional circumstances to stabilize markets.
  - Committed to strengthen audit function, risk management, and conflict of interest policies; keep exchange rate regime aligned with revised currency basket; implement remaining TA recommendations.

### Financial sector stability and reforms
- Financial sector generally stable, but structural risks persist.
  - Commercial banks: well capitalized and profitable; non-performing loan ratio rose to 10.6 percent in the first half of 2024, partly due to delayed government payments.
  - Obstacles to lending expansion: delays in registration of collateral and lengthy court process for debt recovery.
  - Solomon Islands National Provident Fund: positive earnings and adequate liquidity, but risks from rising early withdrawal demand and undiversified asset allocation.
    - Unlisted shares accounted for 40 percent of the fund's investment assets in the first half of 2024.
- Priorities:
  - Upgrade regulatory and supervisory frameworks for financial institutions, superannuation sector, credit unions, and the Development Bank of Solomon Islands.
  - Promote financial inclusion: finalize regulations to operationalize the National Payments Systems Act and integrate government accounting system into the Automated Transfer System.
  - Broader reforms needed: improve access to affordable electricity and the internet, develop a national identity platform, enhance financial and digital literacy, and strengthen consumer protection.
- AML/CFT:
  - Enhance capacity remains a priority; enact Money Laundering and Proceeds of Crime Act and regulations to address deficiencies identified in 2019 and subsequent FATF changes.
  - Introduce a risk-based supervisory tool with IMF support.
  - The planned Citizenship by Investment program adds urgency to strengthening AML/CFT capacity; without rigorous due diligence and oversight the program could create serious risks, including reputational damage, volatile revenues, and potential loss of correspondent banking relationships.
- Authorities’ financial sector views:
  - Agree on importance of financial inclusion and safeguarding integrity and stability.
  - CBSI emphasizes leveraging digital financial technologies and digitization of government transaction processes.
  - CBSI committed to strengthening supervisory capacity for financial institutions and AML/CFT, noting importance of enabling legislation.
  - Government committed to multi-layered due diligence mechanisms for the Citizenship by Investment program.

### Structural reforms and governance
- Growth concerns: persistently anemic growth due to limited economic diversification necessitates urgent policy action to enhance competitiveness and boost private sector participation.
  - Reforms to promote private sector participation: promote land registration and improve access to dispute resolution mechanisms.
  - Potential income growth from emigration and financial inclusion by addressing infrastructure gaps, improving business environment, expanding digital connections, and enhancing education and training quality.
  - Significant productivity gains likely in subsistence agriculture and fisheries through targeted mechanization and improved connectivity.
- Governance and anti-corruption:
  - Launch of updated National Anti-Corruption Strategy welcomed.
  - Importance of steadily implementing the action plan and monitoring implementation, including increasing resources and strengthening independence of the Independent Commission Against Corruption.
  - No significant progress in addressing governance weaknesses in extractive industries since the 2023 Article IV Staff report.
  - Ministries lack resources to effectively oversee logging and mining; legislation to improve governance frameworks remains pending.

*Source: 1slbea2025001-print-pdf - 16. The current debt ceiling remains broadly appropriate, while there is no effective*

### 34. Climate change poses a macro-critical threat to Solomon Islands. Staff estimates that

### 1slbea2025001-print-pdf - 34. Climate change poses a macro-critical threat to Solomon Islands. Staff estimates that

### Climate change and adaptation needs
- Staff estimates that the country would need additional spending of about 6.9 percent of 2030 GDP every year to address climate adaptation needs while achieving key Sustainable Development Goals (SDGs).
- Authorities’ efforts to improve access to climate finance are welcome, but addressing fundamental gaps in PFM (see paragraph 15) is a prerequisite for effective planning and implementation of climate investments.

### Authorities’ views on growth, governance, and anticorruption
- The authorities are committed to unlocking growth potential inclusively by strengthening the rural economic base and addressing governance weaknesses.
- Key authority priorities and constraints:
  - Enhance productivity of the primary sector outside the main island by promoting investment, raising awareness of the rural population, and improving access to finance and connectivity to markets.
  - Address governance weaknesses in forestry and mining sectors, including through legislation; lack of resources and capacity is a bottleneck.
  - Implement the National Anti-Corruption Strategy Action Plan, including strengthening capacity of key integrity and justice institutions.

### Data issues and capacity development (CD)
- Data shortcomings that hamper surveillance:
  - GDP estimates for 2021 and 2022 and outcomes of the 2022 and 2023 budgets were not published until February 2024 and November 2024, respectively.
  - The Ministry of Finance and Treasury (MoFT) has stopped publishing fiscal data on a monthly and quarterly basis.
  - A new financial management information system introduced during the pandemic has hindered processing of granular data and the compilation of the GFS by the CBSI; the GFS compiled by the CBSI lacks information on government financing.
- IMF and development partners have provided a series of TA to address capacity constraints; continuation is recommended.
- The Country Engagement Strategy suggests continued IMF CD focusing on basic capacity of state institutions (see Annex III in the 2023 Solomon Islands Article IV Staff Report).
- Immediate CD needs include:
  - MoFT:
    - Review PFM practices and address weaknesses, in particular the budget process and fiscal data.
    - Strengthen cash management and forecasting.
    - Develop the domestic debt market.
    - Start preparing a medium-term revenue mobilization plan.
  - SINSO:
    - Continued support for compilation of basic macroeconomic statistics, in particular the national accounts.
  - CBSI:
    - Strengthen frameworks and capacity for internal audit and risk management, economic analysis and forecasting, monetary policy communication, supervision of financial institutions, and AML/CFT.
- Authorities’ response:
  - Broad agreement with staff’s data adequacy assessment and proposed CD priorities.
  - Acknowledged need to improve quality and timeliness of statistics, in particular the national accounts and the GFS, and requested IMF continuous support for SINSO and other agencies.
  - Government is committed to strengthening PFM practices and is working with PFTAC to conduct a PEFA assessment in 2025.
  - CBSI requested CD support to improve effectiveness of its monetary policy tools as part of ongoing capacity building with the IMF.

### Staff appraisal — macro outlook and vulnerabilities
- Recent achievements:
  - Authorities overcame a series of shocks, hosted the Pacific Games, and conducted peaceful general elections.
- Growth and medium-term outlook:
  - Staff expects continued modest growth after the Pacific Games.
  - Modest growth in 2025 is expected to be driven by the fishing, mining, manufacturing, and construction sectors.
  - Structural constraints: declining logging activity, undiversified economic base, and weak governance constrain growth potential.
  - Inflation projected to remain stable.
  - Fiscal and current account deficits expected to persist in the medium term, reflecting declining log exports and large infrastructure projects.
  - Solomon Islands’ external position in 2023 was assessed as weaker than the level implied by fundamentals and desirable policies.
  - Reserve coverage expected to keep declining but remain within the adequacy range, supported by continued aid inflows.

### Fiscal policy and public financial management recommendations
- Enhancing fiscal effectiveness is urgent. First steps:
  - Resume periodical reporting of fiscal and debt data by the government.
  - Strengthen cash management and forecasting.
  - Review the budget process to eliminate a financing gap in the budget proposal.
- To guide annual budget formulation:
  - Introduce a simple ex-ante guideline setting a ceiling on the primary budget deficit financed by domestic borrowing.
- 2025 budget guidance:
  - The 2025 budget should be tightened to start a gradual recovery of the cash balance, including by shifting resources away from the CDFs.
- Domestic revenue mobilization:
  - Prioritize the introduction of the VAT.
  - Scope to mobilize revenues in the medium term by improving taxpayer registration, ensuring compliance, and tightening exemptions.

### Transparency, procurement, and auditing
- Continue to improve transparency and accountability of public spending.
- Staff welcomes the adoption of the new CDFs Act and the publication of the audit report on the ESP.
- Priorities:
  - Consistent implementation of the CDFs Act and application of lessons from the audit report.
  - Strengthen capacity and resources of government officials involved in procurement and auditing through training and stronger legal framework for auditing.

### Monetary policy, exchange rate, and central bank recommendations
- Central bank should remain vigilant and maintain autonomy.
  - CBSI should continue to be ready to adjust monetary policy stance as economic conditions evolve.
  - Avoid further purchases of government bonds given current economic conditions; ensure safeguards are in place for purchases of government securities in the primary and secondary market.
- Exchange rate regime:
  - Staff welcomes the recent update of the currency basket and underlines that the exchange rate regime should be managed in line with the basket.
  - CBSI should further improve foreign exchange operations and communication with market participants, for example by initiating regular meetings with market participants and introducing intraday pricing to support price discovery.

### Financial inclusion and integrity
- Financial sector stability noted, but bank lending growth has lagged economic trends.
- Reforms to expand supply of digital financial services needed:
  - Improve access to affordable internet and electricity.
  - Upgrade digital and financial literacy.
  - Target inclusion especially among women and in rural areas.
- Strengthen legal and supervisory frameworks for AML/CFT; expedite reforms.
- Staff urges careful consideration in the introduction and implementation of the Citizenship by Investment program given limited AML/CFT capacity.

### Structural reforms and long-term growth
- Comprehensive and sustained reforms needed to bolster long-term growth prospects.
- Productivity gains potential:
  - Significant gains in agriculture and fisheries through targeted mechanization and improved connectivity in rural areas.
- Governance and anti-corruption:
  - Steadily implement the National Anti-Corruption Strategy Action Plan, including enhancing capacity of anti-corruption institutions.
  - Urgent concrete action to address governance weaknesses in forestry and mining sectors, including amending legal frameworks and increasing resources for monitoring.

### IMF support and CD priorities going forward
- IMF will continue to support capacity development in collaboration with development partners.
- Immediate CD priorities include:
  - Fiscal reporting and auditing.
  - PFM.
  - AML/CFT.
  - Statistics, especially the national accounts and GFS.

*Source: 1slbea2025001-print-pdf - 34. Climate change poses a macro-critical threat to Solomon Islands. Staff estimates that*

### 48. It is proposed that the next Article IV consultation takes place on the standard 12-

### 1slbea2025001-print-pdf - 48. It is proposed that the next Article IV consultation takes place on the standard 12-

### Macroeconomic developments and outlook
- The post-pandemic recovery continues, albeit at a slower pace than regional peers.
- Inflation is on a downward trend, as global food and energy prices have stabilized.
- The real effective exchange rate continues to appreciate and deviate from the nominal exchange rate path.
- The current account deficit is expected to narrow following the Pacific Games, amid strong export performance across categories and normalization of imports after the Games.
- Key charted indicators (as presented):
  - Real GDP Growth Rate (In year-on-year percent change): PICs Average and Solomon Islands series shown for 2014–Proj. 2024.
  - CPI Inflation and World Food/Fuel Price Index (Year-on-year percent change) 2016–2024 series plotted.
  - Nominal and Real Exchange Rates (Jan-2015 = 100) showing REER and NEER appreciation.
  - Current Account Balance components (In percent of GDP) for 2019–Proj.2025.
  - Total Exports (In percent of GDP) and Total Imports (In percent of GDP) for 2019–Proj.2025 with category breakdowns (Logs, Fish, Minerals, Other; Food, Fuel, Machinery and transportation, Other).

### Fiscal indicators and developments
- Revenue and expenditure patterns:
  - Solomon Islands tax revenue is relatively volatile while the share of logging revenue is declining.
  - Revenue performance was affected adversely by the pandemic and declining production in the logging sector.
  - Expenditure was under pressure due to the Pacific Games and infrastructure projects.
  - Consequently, the fiscal deficit persisted, leading to continued increases in the public debt ratio.
- Volatility metric:
  - Volatility of Tax Revenue (Standard deviation of tax revenue to GDP ratio, 2010-2024) compared across Micronesia, Tonga, Papua New Guinea, Solomon Islands, Tuvalu, Timor-Leste, Vanuatu, Marshall Islands.
- Composition and trajectories (selected tabulated series as reported):
  - Per capita GDP (2023): US$2200
  - Population (2023): 768,690
  - Quota: SDR 20.8 million
  - Key macrofiscal series (2019–2029, selected lines shown exactly as in source):
    - Real GDP1.7-3.42.62.42.72.52.82.92.93.03.0
    - CPI (period average)2.22.90.25.45.13.73.83.73.43.33.3
    - CPI (end of period) 2.6-2.64.68.74.33.43.93.53.33.33.3
    - GDP deflator1.2-1.3-5.52.03.91.31.31.31.41.41.4
    - Nominal GDP (in SI$ millions)13,23412,61712,22812,77513,91114,68515,49216,37017,31118,23519,217
    - Nominal GDP (in US$ millions)1,6191,5361,5231,5661,6611,7531,8501,9542,0672,1772,294
  - Central government operations (In percent of GDP, 2019–2029 extract):
    - Total revenue and grants34.137.935.938.336.332.732.532.632.732.832.8
    - Revenue25.824.624.823.122.923.223.023.123.223.323.3
    - Grants8.213.411.115.213.49.59.59.59.59.59.5
    - Total expenditure35.640.437.840.840.135.835.735.835.835.835.9
    - Expense29.031.928.331.429.827.927.227.327.427.427.5
    - Net acquisition of nonfinancial assets6.68.59.59.310.37.98.58.58.48.48.4
    - Net lending (+) / Net borrowing (-)-1.5-2.4-1.9-2.5-3.8-3.1-3.3-3.2-3.1-3.1-3.1
    - Central government debt1/7.812.815.915.520.322.324.426.227.929.531.0
    - Public domestic debt1.72.86.15.98.68.99.810.611.111.712.4
    - Public external debt6.110.09.89.611.713.414.515.616.717.718.6

### Money, credit, and banking sector
- Monetary conditions remain accommodative while commercial banks are gradually increasing credit to the private sector.
- Banking sector spreads are declining slowly, but remain high, and banks have accumulated reserves.
- Banks remain well capitalized and their asset quality has remained stable.
- Financial soundness indicators (selected exact series):
  - Regulatory Capital to Risk-Weighted Assets32.535.031.131.332.631.731.833.636.7
  - Non-performing Loans to Total Gross Loans3.86.47.110.410.710.49.59.410.6
  - Provisions to Non-performing Loans31.218.730.929.430.136.840.040.743.3
  - Return on Assets3.53.93.53.12.12.35.96.52.6
  - Return on Equity16.616.214.213.38.99.826.427.414.4
  - Liquid Assets to Total Assets (Liquid Asset Ratio)38.138.440.637.445.746.848.148.049.7

### Balance of payments and external sector
- Current account and trade dynamics (selected exact series):
  - Current account balance-9.5-1.6-5.1-13.7-10.4-4.2-7.7-7.5-7.4-7.5-7.4 (in percent of GDP, 2019–2029)
  - Trade balance (goods and services)-10.0-8.5-13.4-22.3-19.8-11.6-15.3-15.3-15.6-16.1-16.5 (in percent of GDP)
  - Exports36.428.526.925.832.634.633.232.832.131.430.7 (in percent of GDP)
  - Imports46.437.040.448.152.346.248.648.147.747.547.2 (in percent of GDP)
  - Gross official reserves (in US$ millions, end of period) 2/574.1660.6694.5655.2682.0679.1664.3661.0662.8663.2664.6
  - In months of next year's imports of GNFS12.112.911.19.010.19.18.58.07.77.47.0

### Fiscal accounts (tables highlights)
- Fiscal accounts in SI$ millions (selected lines from Table 2a as presented exactly):
  - Revenue4,5104,7884,3914,8875,0544,8055,0315,3355,6575,9726,304
  - Tax2,9422,6562,6812,6802,9563,1373,2733,4763,6923,9024,123
  - Grants1,0911,6851,3561,9411,8691,3951,4721,5551,6451,7321,826
  - Expenditure4,7125,0954,6185,2075,5835,2595,5365,8586,1946,5306,893
  - Net/gross acquisition of nonfinancial assets8761,0691,1621,1911,4361,1601,3171,3911,4541,5321,614
  - Net lending (+) / Net borrowing (-)-202-308-227-320-529-454-505-524-537-558-589
  - Public domestic debt2233587487511,1921,3071,5241,7321,9252,1422,382

### Risks, likelihoods, expected impacts, and recommended policy responses (Annex I: Risk Assessment Matrix)
- External risks:
  - Commodity price volatility.
    - Likelihood: High
    - Expected impacts: Medium. Solomon Islands is sensitive to increases in global prices and supply chain disruptions as it is heavily dependent on imports. Sharp commodity price rises could generate inflation and/or significant cost-of-living pressures.
    - Recommended policy responses:
      - Reprioritize fiscal policy to ramp up targeted support for those vulnerable and slow down lower priority expenditure.
      - Efforts to diversify the economy, enhance domestic agriculture productivity, and increase the use of renewable energy should be continued.
  - Deepening geoeconomic fragmentation.
    - Likelihood: High
    - Expected impacts: Medium. Higher import prices due to supply disruptions and/or rising shipping and input costs could push up inflation and affect fiscal and external sustainability.
  - Global growth surprises: Slowdown.
    - Likelihood: Medium
    - Expected impacts: Medium. Global economic slowdown particularly in main trading partners like Australia or China could negatively affect the growth prospect in Solomon Islands, particularly via the commodity export channel.
    - Recommended policy responses:
      - Provide targeted fiscal support as needed to most-affected groups, while carefully watching inflation developments and public debt sustainability.
      - Seek additional donor support.
- Domestic risks:
  - Mismanagement of fiscal policy.
    - Likelihood: High
    - Expected impacts: Medium. Under-execution of the budget would adversely affect economic activity, while delays in government payments to suppliers could pose a risk to financial stability.
    - Recommended policy responses:
      - Strengthen basic PFM functions such as budget planning, as well as cash management and forecasting.
      - Enhance coordination with donors through steady implementation of reforms committed in budget support.
      - Enhance fiscal transparency and dialogue with potential investors to develop the domestic market.
  - Climate change.
    - Likelihood: Medium
    - Expected impacts: High. Solomon Islands faces high natural disaster risk, with limited capacity to address the risk. Adverse climate events would have significant impacts on vulnerable areas/populations with knock-on effect on aggregate growth.
    - Recommended policy responses:
      - Invest in resilient infrastructure to promote climate change adaptation.
      - Enhance fiscal buffers to meet climate financing needs, including through exploring donor support.
  - Social discontent.
    - Likelihood: Medium
    - Expected impacts: High. Solomon Islands has a history of social unrest and political instability. Should the risk materialize in the form of civil unrest, it could significantly damage capital and hamper economic activity.
    - Recommended policy responses:
      - Explore inclusive growth through improving the delivery of public services and providing well-targeted support to the vulnerable.
      - Take measures to improve governance, policy transparency, job creation, and quality of public services.

*Source: IMF staff estimates and projections as presented in the provided content unit.*

### Annex II. External Sector Assessment

### Annex II. External Sector Assessment

### Overall Assessment
- The external position of Solomon Islands in 2023 was weaker than the level implied by fundamentals and desirable policies.
- Staff assess that the current account deficit (at 10.4 percent of GDP), after adjusting for cyclical and natural disasters, was around 3.9 percent of GDP below the estimated norm.
- The assessed shortfall corresponds to a real effective exchange rate overvaluation in the range of between 12-15 percent.
- The external position is expected to remain stable, with reserve coverage declining over time but remaining at an adequate level.

### Potential Policy Responses
- Structural policies to improve competitiveness and export diversification to help reduce the current account deficit over the medium term.
- Prudent fiscal policies to complement structural reforms.
- A financing mix primarily involving grants and highly concessional loans to help contain financing costs and avert debt accumulation.
- Regular updates of the currency basket to reflect the country’s trade structure.

### Foreign Assets and Liabilities: Position and Trajectory
Background and recent evolution
- NIIP deteriorated to -13.2 percent of GDP in 2023, from a small surplus of around 0.7 percent in 2018.
- Deterioration primarily driven by an increase in FDI liabilities centered around infrastructure investment; debt liabilities have also significantly increased in recent years.
- Reserve assets have remained steady at around 43 percent of GDP, equivalent to 78 percent of gross assets.
- On the liabilities side, FDI liabilities have grown to nearly 47 percent of GDP, equivalent to around 69 percent of total liabilities.
- Debt liabilities have increased to around 21 percent of GDP, nearly doubling over the past five years.

Key 2023 stock figures (percent of GDP)
- NIIP: -13.2
- Gross Assets: 55.2
- Debt Assets: 6.0
- Gross Liabilities: 68.4
- Debt Liabilities: 21.5

Assessment and outlook
- The NIIP is expected to remain broadly stable in the medium-term as reserves would remain relatively strong, supported by continued aid inflows.
- Debt liabilities account for 31 percent of total liabilities but are mostly on concessional terms with multilateral creditors.
- The large share of FDI liabilities compared to portfolio liabilities implies relatively contained external balance sheet vulnerabilities.

### Current Account
Background
- The current account (CA) deficit stood at 10.4 percent of GDP in 2023, down from 13.7 percent of GDP in 2022.
- The deficit remained wide primarily reflecting increased imports related to infrastructure development leading up to the Pacific Games.
- In 2024, the CA deficit is expected to narrow, supported by normalizing of imports related to infrastructure development.

EBA-lite model results and assessment
- The EBA-lite CA model indicates a negative gap of 3.9 percent of GDP.
  - Adjusted CA balance: -10.2 percent of GDP (accounts for natural disasters and cyclical factors).
  - Adjusted CA norm: -6.2 percent of GDP.
  - Adjustments: natural disasters (0.1 percent of GDP) and cyclical factors (0.1 percent of GDP).
- The CA is assessed to be weaker than that consistent with medium-term fundamentals and desirable policy settings.
- The CA gap of 3.9 percent of GDP is consistent with a REER overvaluation of around 15 percent.

### Real Exchange Rate
Background
- The real effective exchange rate is estimated to have appreciated by nearly 3.0 percent in 2023, continuing a long-run appreciation trend.
- Terms of trade are estimated to have declined in 2023 as prices of export commodities (logs, minerals and fish) fell more than the drop in prices of import goods (food, fuel).

Assessment
- The REER approach indicates the real exchange rate was overvalued by 12.1 percent in 2023.
- This is consistent with the CA model result of around 15 percent overvaluation and with recent developments on inflation in Solomon Islands and its main trading partners.
- Policy implications:
  - Review the currency basket to ensure that currency composition and weights reflect current trade structure.
  - Phase public investment projects in line with the economy’s absorptive capacity.
  - Enhance productivity and competitiveness of exports through structural reforms to reduce risks of exchange rate overvaluation.
- Note: This result does not automatically imply a need for nominal exchange rate adjustment but highlights the need to review policy settings.

### Capital and Financial Accounts: Flows and Policy Measures
Background
- Capital and financial accounts have helped finance the widening CA deficit and build up foreign exchange reserves in recent years.
- Donor support such as project grants and concessional borrowing has been a key source of external financing.
- FDI investment has also risen.

Assessment and outlook
- Capital and financial accounts are expected to remain stable over the medium term, supported by continued donor support and FDI inflows.

### FX Intervention and Reserves Level
Background and recent figures
- Gross official reserves increased to US$682 million in 2023, supported by donor support leading up to the Pacific Games, gold exports, and tourism.
- This level of reserves translates to around 10 months of prospective imports.
- Strong official reserves have helped preserve macroeconomic stability and maintain the fixed exchange rate regime.
- The central bank reports FX reserves in Solomon dollars and periodically intervenes against the target (USD/SBD) rate to stabilize its foreign reserve revaluation account; these interventions have caused significant deviations between announced and calculated basket spot prices.

Assessment and policy implications
- The level of reserves is expected to remain within the adequacy range of three to eight months of imports over the medium term.
- Exports diversification and reducing reliance on the mining and logging sectors will help narrow the CA deficit over the medium term and slow the decline in reserves.
- Updating the weights in the currency basket and improving transparency of FX operations can help prevent exchange rate misalignments and better align with the primary objective of price stability.

Reserve adequacy note
- Optimal reserve coverage range stated as 3-8 months of imports for Solomon Islands given its classification as a fragile, resource-rich, small developing state (SDS).
- The ARA metric range is based on an estimated marginal cost of holding reserves of 5.57 percent and selected probabilities of a large climate/natural disaster shock per referenced IMF papers.

*Prepared by Narayan Suryakumar (APD); content drawn from Annex II. External Sector Assessment*

### 11. The small size of Solomon Islands' private sector limits its ability to enjoy the full

### 1slbea2025001-print-pdf - 11. The small size of Solomon Islands' private sector limits its ability to enjoy the full

### Emigration and private sector implications
- Emigration increases remittances and incomes for those remaining and can deliver advantages such as introducing new products or ways of producing, boosting exports, and easing financial hurdles for starting businesses, but these advantages require a supportive business environment.
- Barriers that prevent private sector firms from leveraging emigration-driven opportunities:
  - High costs due to inefficient bureaucracy.
  - Poor infrastructure.
  - Difficulty starting businesses and accessing credit and trade.
- Table excerpt on differential probabilities (households receiving remittances and related outcomes):
  - 4.5 percent
  - 2.1 percent
  - -1.2 percent
  - Note: High remittances correspond to remittances above SI$1,500 a year.
- Policy implication: Improving the business environment, easing business start-up processes, and improving access to credit and trade can help the private sector benefit more from emigration.

### Human capital considerations
- Emigration can heighten incentives for higher education by increasing expected returns and household incomes, but benefits depend on education quality and affordability.
- Risks:
  - Low education quality or high costs can prevent emigration from leading to higher educational achievements.
  - Ongoing emigration may cause human capital loss if policies are not fine-tuned.
- Policy implications:
  - Fine-tune emigration policies to minimize human capital loss while enhancing access to education.
  - Encourage and facilitate the return of emigrants, particularly those with significant skills and knowledge.

### Annex IV — Digital financial inclusion: current state and findings
- Macro outcome:
  - Real GDP growth over the past decade falls short of population growth; per capita income has not risen in real terms for a decade.
- Financial inclusion headline statistics (2019 Census and related data):
  - 30.0 percent of the total population have at least one account in a financial institution.
  - 35.0 percent of accounts are within the banking sector.
  - Nearly 78.0 percent of rural dwellers did not own an account in a financial institution in 2019.
  - 15.3 percent of the population were connected to the electricity grid (of which 62 percent were in Honiara).
  - Less than 50 percent have access to the Internet and mobile phones.
  - 53.0 percent of those excluded from the financial sector are female, equivalent to 76.0 percent of the total female population.
  - Almost 95.0 percent of those without an account had not received any financial literacy training.
- Digital payments and services:
  - Volume and value of mobile and internet banking transactions have risen steadily since 2018.
  - M-Selen mobile money service was introduced in June 2023 to improve access to mobile money services in rural areas.

### Barriers to financial inclusion
- Supply-side barriers:
  - Geographical terrain (many remote islands) makes traditional financial access costly; most providers concentrated around Honiara.
  - Infrastructure gaps: low access to internet and electricity.
- Demand-side barriers:
  - Lack of proper identification requirements.
  - Absence of reliable income sources and high transaction costs.
  - Complicated land management and lack of movable collateral.
  - Poor financial literacy, including digital financial literacy, especially among women, rural adults, and lower-education/income groups.

### Evidence on financial inclusion and growth
- Cross-country and sector studies cited:
  - Increasing financial inclusion from the bottom quartile (that included Solomon Islands) to the median (Malaysia) could lead to an increase of 0.2 percent in per capita income growth over a five-year period.
  - McKinsey (2016): digital finance could increase GDP of emerging economies by 6 percent by 2025.
  - Khera and others (2021): improving digital financial inclusion in payments is found to increase annual economic growth by up to 2.2 percentage points.
- Staff regression estimates for Solomon Islands (2004–2022 analysis, small sample caveat):
  - A 1 percent improvement in the level of financial inclusion could increase output in Solomon Islands by 8 to 16 percent.
  - Financial inclusion has a positive impact on per capita income.
  - Governance is identified as a key determinant of growth in Solomon Islands.
- Composite Financial Inclusion Index (IFI Index):
  - Built with equal weights on availability of financial services, penetration of banking services, use of traditional financial services, and use of digital financial services.
  - The compiled index indicates that financial inclusion in Solomon Islands has not made much progress since 2019, while Fiji has made some improvement.

### Policy recommendations to improve financial inclusion and support growth
- Continue reforms that support financial inclusion and growth, with development partner assistance.
- Use digital technologies as a key enabler of financial inclusion given dispersed geography.
- Implement and use the National Payments Systems Act (enacted in 2022) to support accessible and affordable digital financial services.
- Address key infrastructure gaps:
  - Improve access to electricity.
  - Improve access to the internet.
- Develop a national ID system to support KYC initiatives and improve access to financial services.
- Continue and expand financial literacy initiatives, with focus on:
  - Digital financial literacy.
  - Women, rural residents, and low-education/income groups.
- Strengthen consumer protection frameworks and data privacy laws to build trust in digital financial systems.
- Strengthen collection of more granular data on financial inclusion initiatives (e.g., volume and value of digital payments by payment channel and gender).
- Balance policy priorities between financial integrity (AML/CFT) concerns and financial inclusion goals by applying risk-based AML/CFT measures.
- Develop policies specifically to address gender gaps in financial inclusion.

*Source: IMF staff analysis and Annex IV content from the provided Solomon Islands chapter.*

### Annex VI. Authorities’ Response to Fund Policy Advice

### Annex VI. Authorities’ Response to Fund Policy Advice

### Fiscal Policy
- Fund recommendation: Expenditures related to the Pacific Games and the general elections need to be well controlled to minimize the risk of crowding out of other essential spending.
  - Authorities’ response: Successfully hosted the Pacific Games and conducted peaceful general elections. Strict expenditure controls introduced before the Games in the face of a possible cash crunch crowded out other priority spending and adversely affected economic activity.
  - Policy action advised: Rebuild the government’s cash balance once the recovery is secured after the Pacific Games.
  - Authorities’ stance: Committed to safeguarding fiscal stability by reducing the budget deficit and rebuilding cash reserves, but “a credible plan and concrete measures to implement the commitment are lacking.”

- Fund recommendation: Public investment projects need to be phased in line with the economy’s absorptive capacity, and accompanying financing arrangements should be carefully negotiated.
  - Authorities’ response: Government adopted the Public Investment Management Framework to establish control and oversight for donor-financed public investment projects. The Debt Management Advisory Committee continues to assess terms of external borrowing and impacts on government’s financial position, but assessment needs better integration with the budget process.

- Fund recommendation: Promote domestic revenue mobilization including through more efficient tax administration and the introduction of a VAT.
  - Authorities’ response: Inland Revenue Division continued efforts to modernize organizational structure with development partner support. The VAT bill has yet to be passed by Parliament; VAT is expected to be implemented from early 2026.

- Fund recommendation: Reforms to improve the quality and accountability of public expenditure, including through improving PFM and reviewing the CDFs Act, need to be accelerated.
  - Authorities’ response: CDFs Act was passed to improve transparency and accountability in management of the CDFs. Fundamental weaknesses remain: lack of timely and reliable fiscal reporting, weak cash management and forecasting, and absence of an effective fiscal framework.

### Monetary and Financial Sector Policy
- Fund recommendation: Strengthen the supervisory and regulatory framework for the financial system.
  - Authorities’ response: Strengthened capacity for regulating and supervising the financial sector, including capacity development support from the IMF.

- Fund recommendation: Strengthen the AML/CFT framework.
  - Authorities’ response: Introduced a National Strategic Plan in 2021 and working to update legal and risk-based supervisory AML/CFT framework to better comply with FATF standards.

- Fund recommendation: Improve analytical and forecasting capacity of the central bank.
  - Authorities’ response: Central bank improved analytical and forecasting capacity through utilizing high frequency indicators and establishing forecasting models supported by the IMF.

### Exchange Rate Policy
- Fund recommendation: Maintain the exchange rate basket peg but improve exchange rate management by reviewing the currency basket’s composition on a regular basis.
  - Authorities’ response: Currency basket continues to move in a tight band against the U.S. dollar. Weights in the basket and the CBSI’s FX market operations were reviewed by a TA mission; several recommendations made to improve the currency basket framework and FX market operations, regulations, and communication.

### Structural Reforms
- Fund recommendation: Manage the transition from logging to new growth areas; improve business environment to diversify activity and sustain growth; strengthen the anti-corruption framework.
  - Authorities’ response: Mixed progress:
    - CDFs Act passed to improve transparency and accountability in management of the CDFs.
    - Electricity Bill passed Parliament to separate regulatory and pricing powers from the utility provider.
    - VAT bill has yet to be passed by Parliament.
    - Additional legislation to strengthen regulations and enforcement in the logging and mining sectors is still being drafted.

### Debt Sustainability Analysis (DSA) — Key Findings
- 2024 DSA overall assessment:
  - Risk of external debt distress: Low
  - Overall risk of debt distress: Moderate
  - Application of judgement: No
  - Granularity in the risk rating: Tool not applicable
  - Date: January 27, 2025

- Main DSA findings:
  - DSA indicates overall risk of debt distress remains moderate; risk of external debt distress improved to low from moderate in 2023 DSA.
  - Debt coverage unchanged compared to 2023 DSA.
  - All external debt indicators remain below relevant indicative thresholds under the baseline and alternative scenarios, reflecting better-than-expected export performance.
  - PV of public debt-to-GDP ratio remains below the indicative threshold under the baseline but breaches the threshold under a commodity price shock scenario.
  - A tailored natural disaster shock would cause deterioration in the public debt service-to-revenue ratio.
  - Significant fiscal liquidity challenges stemming from depleted government cash balance after hosting the 2023 Pacific Games.
  - Sizable increase in domestic borrowing in 2023 and continued shift to domestic financing projected in the medium term could bring serious risks in domestic debt management, given limited investor base and underdeveloped market.
  - Policy prescription: Debt sustainability needs to be anchored by prudent fiscal policy to rebuild fiscal buffers, while creating fiscal space for development spending through stronger revenue mobilization measures and expenditure rationalization.

- Composite Indicator (CI):
  - CI estimated at 2.65 based on October 2024 World Economic Outlook and 2023 Country Policy and Institutional Assessment (CPIA), indicating debt-carrying capacity remains weak (minor improvement from 2.61 CI in 2023).

### Public Debt Coverage and Contingent Liabilities
- Debt coverage used in the report: Central government debt, central government guaranteed debt, and central bank debt borrowed on behalf of the government. Coverage unchanged since 2023 DSA.
- Exclusions due to data limitations: Other elements of the general government, non-guaranteed SOE debt, and private external debt are not included.
- Central government’s domestic arrears, where relevant, are included in debt coverage.
- Standard contingent liability stress test:
  - Default setting amounts to 7 percent of GDP, comprising:
    - 2 percent of GDP: non-guaranteed SOE debt
    - 5 percent of GDP: potential liabilities stemming from the financial system
  - Text Table entries:
    - Other elements of the general government not captured in 1.: 0 (in percent of GDP)
    - SoE's debt (guaranteed and not guaranteed by the government): 1/2 percent of GDP
    - PPP: 35 percent of PPP stock (PPP capital stock data is not available)
    - Financial market (default minimum): 5 percent of GDP
    - Total (2+3+4+5) (in percent of GDP): 7.0

### Background on Debt — Key Statistics and Developments
- Public and Publicly Guaranteed (PPG) external debt:
  - US$193 million (11.7 percent of GDP) as of end-2023 (latest available full year data), an increase of 2.1 percent of GDP from 2022.
  - ADB and IDA accounted for 75 percent of total PPG external debt; share roughly unchanged from 2022.
  - Total PPG external debt rose by approximately US$45 million; US$33 million from ADB and IDA; remainder from a new China Exim Bank loan for the cell phone tower project.
  - All new external borrowing remained concessional.

- Public debt:
  - Public debt stood at 20.3 percent of GDP as of end-2023, a 4.8 percent of GDP jump from 2022.
  - Public domestic debt jumped to SI$1,192 million (8.6 percent of GDP) at end-2023 from SI$751 million (5.9 percent of GDP) the year before.
  - Drivers: Large spending needs associated with hosting the Pacific Games, stagnant revenues since the pandemic, and declining logging activity.
  - Most domestic debt increase via new issuance of Solomon Islands Development Bonds purchased by the Solomon Islands National Provident Fund (NPF), the Electricity Authority, and the Port Authority; CBSI purchased additional bonds in the secondary market.
  - By end-2023, government cleared pandemic-related stock of domestic payment arrears.
  - Recent development bonds: maturities ranging from 2 to 15 years and coupons ranging from 2 percent to 7 percent.
  - Commercial banks' holdings of development bonds: 3 percent of total outstanding.

- Policy and limits:
  - Medium-Term Debt Management Strategy (MTDS) limit: public debt-to-GDP ratio at 35 percent in nominal terms; used as anchor for annual borrowing limit and guidance for Debt Management Unit operations.
  - Government borrowing limit progression: raised from SI$300 million in 2020 to SI$865 million in 2023, lowered to SI$558 million in the 2024 budget.
  - Solomon Islands adhered to a zero ceiling for non-concessional external borrowing in 2024 (one of the Performance and Policy Actions under World Bank’s FY24 Sustainable Development Finance Policy).
  - Solomon Islands issued a Ministerial Order to develop annual borrowing plans in 2024 (also a PPA under World Bank’s FY24 SDFP).

- Data and revisions:
  - SINSO released GDP estimates for 2021 and 2022 in February 2024 indicating significantly better performance than preliminary estimates; nominal GDP remains broadly the same with lower-than-expected inflation (GDP deflator).
  - Fiscal data substantially revised since previous DSA; CBSI extended coverage of GFS grants revenue to include some off-budget donor grants, enhancing consistency between fiscal and BOP statistics.
  - No significant changes in fiscal balance up to 2020 since expenditures revised to account for off-budget donor grants; past external and public PPG debt trajectories largely unchanged from previous DSA.

### Country Classification and Thresholds
- Debt-carrying capacity: Assessed as weak (CI = 2.65).
- Thresholds applicable under LIC-DSF for Solomon Islands:
  - PV of public debt-to-GDP ratio benchmark: 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

*Prepared by the staff of the International Monetary Fund (IMF) and the International Development Association (IDA); Approved By Nada Choueiri (IMF), Manuela Francisco and Lalita Moorty (IDA).*

### 2.4 percent in 2022.

### 2.4 percent in 2022.

### Baseline macroeconomic assumptions and outlook
- Real GDP growth:
  - Output is estimated to grow by 2.7 percent in 2023, boosted by the stimulus from the Pacific Games.
  - Real GDP growth is projected to soften to 2.5 percent in 2024, with the slowdown partially attributed to reduced economic and government activity surrounding the general elections.
  - Growth is expected to average 2.9 percent over 2024-34.
- Inflation (GDP deflator):
  - Expected to soften to 3.0 percent in 2024.
  - Average 2.3 percent during 2024-2034.
- Current account and external flows:
  - Non-interest current account deficit projected to narrow to 4.0 percent of GDP in 2024, down from 10.2 percent of GDP in 2023.
  - Non-interest current account projected to average 6.9 percent of GDP over 2024-2034.
  - Official grants projected to decline from 13.3 percent of GDP in 2023 to 9.5 percent of GDP in 2024 and average 9.5 percent of GDP over 2024-34.
  - FDI inflows spiked to 4.3 percent of GDP in 2023 with Pacific Games infrastructure investments; projected to decline to 0.9 percent of GDP in 2024 and remain steady at average 2.6 percent of GDP over 2024-34.
- Drivers and constraints:
  - Medium-term growth constrained by structural impediments, declining logging activity due to dwindling reserves, and an undiversified economic base.
  - Outlook based on expansion of mining and tourism, productivity gains in agriculture and fisheries, and an increasing young population entering the labor force, including in foreign markets.

### Fiscal outlook and public finances
- Fiscal balances and expenditures:
  - Primary deficit estimated at 3.5 percent of GDP in 2023 (reflecting expenditure controls and additional donor support leading up to the Pacific Games).
  - Fiscal deficits expected to persist over the medium term with primary deficits at around 2.2 percent of GDP during 2024-2034.
  - Drivers of persistent deficits: substantial expenditure needs to advance government priorities, maintenance costs for infrastructure, and weak revenue trends due to declining log exports.
- Revenue and grants, primary expenditure (Text Table 5 snapshots for 2022-32 comparisons preserved as presented):
  - Revenue and grants: 26.5, 26.4, 34.2, 33.6, 7.7, 7.2 (as presented in table columns).
  - Primary expenditure: 30.1, 29.3, 36.8, 36.0, 6.7, 6.7 (as presented).
  - Primary balance: -3.6, -2.9, -2.6, -2.4, 0.9, 0.5 (as presented).
- Fiscal management risks:
  - Low government cash balance, undiversified economic base, and vulnerability to natural disasters and climate change.
  - Donor support has diminished; pressure on recurrent spending persists.

### External and domestic financing
- New external loan disbursements for projects in the pipeline:
  - Expected to remain around 2.3 percent of GDP over 2024–28, gradually declining to around 1.7 percent of GDP in 2029-33.
  - All external financing from multilateral institutions and development partners assumed to be concessional.
- Domestic financing strategy:
  - Government assumed to increase annual T-bill issuance while gradually shifting domestic debt profile to Development Bonds in line with the Medium-term Debt Management Strategy.
  - Redemption profile reflects rollover of medium- and long-term debt as well as T-bills every year.
- Risks from financing mix shift:
  - Shift from external concessional borrowing to domestic financing expected to significantly increase debt service costs.
  - Risks from low absorptive capacity of the domestic bond market: crowding out of private investment, destabilized economic and financial environments, elevated government financing risks.

### Debt sustainability — external debt analysis
- Baseline external debt trajectory:
  - Under the baseline scenario, 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 trend up from 9.3 percent in 2024 to 11.1 percent in 2034.
- Key drivers:
  - Persistent current account deficit and FDI inflows tied to continued infrastructure projects financed by donors are main drivers of debt dynamics.
- Stress test outcomes:
  - Strong export performance improved external debt profile under standardized stress tests.
  - Exports shock is the most extreme shock to external debt indicators but indicators remain below thresholds under the export shock scenario.
  - Other shocks (real GDP growth, primary balance, other flows, commodity prices) do not lead to threshold breaches in external debt indicators.
- Tailored natural disaster shock:
  - Historical largest damage during 1980–2016 estimated at 14 percent of GDP.
  - Tailored stress test captures a one-off shock to public debt-to-GDP ratio in a similar scale to the largest historical shock, associated with reductions in real GDP growth and exports by 1.5 and 3.5 percentage points, respectively.
  - Tailored natural disaster shock causes all debt trajectories for debt indicators to move upward.

### Debt sustainability — public sector analysis
- Baseline public debt trajectory:
  - PV of public debt-to-GDP ratio forecast to keep rising under the baseline.
  - Projected to exceed the 35 percent benchmark in 2044 (compared to 2034 in the previous DSA).
  - In nominal terms, public debt-to-GDP projected to breach the authorities’ policy threshold of 35 percent in 2032.
  - Public debt service-to-revenue and grants ratio projected to increase in the coming decade, driven by shifts from concessional external debt to more expensive domestic borrowing.
- Sensitivity and scenario impacts:
  - 35 percent PV of public debt-to-GDP benchmark would be breached in 2028 under the commodity price shock scenario.
  - PV of debt-to-revenue ratio would be severely affected by the commodity price shock.
  - Natural disaster shock scenario: debt service-to-revenue ratio would peak at 24 percent in 2031.
- Structural vulnerabilities:
  - High exposure to commodity price fluctuations (now including gold and nickel).
  - Need for economic diversification and fostering non-commodity private sector growth.

### Realism checks, stress tests, and tailored analysis
- Realism tools:
  - Realism tools suggest macroeconomic and fiscal assumptions are reasonable.
  - Projected five-year increases in external and public debt stocks align with historical increases; public debt increase driven by persistent primary deficits while increases in external debt would be mostly offset by drawdown of foreign reserves.
  - Projected fiscal adjustment over 2024-26 lies within reasonable distribution of LIC’s past adjustment episodes.
- Tailored stress test specifics:
  - IMF standard natural disaster shock default parameter: one-off shock of 10 percentage points of GDP to debt-GDP ratio in second year (2025 in this case), with real GDP growth and exports lowered by 1.5 and 3.5 percentage points in the year of the shock.
  - Customized parameter settings reflect Solomon Islands-specific findings; largest historical disaster damage 14 percent of GDP used for tailoring.

### Risk rating and vulnerabilities; policy implications
- Risk ratings:
  - Overall risk of debt distress remains moderate.
  - Risk of external debt distress improved from moderate to low.
  - All indicators of both external and overall debt projected to remain below relevant thresholds during 2024-34 under baseline.
- Emerging risks:
  - Debt service indicators currently below thresholds, but increased reliance on domestic borrowing will raise refinancing and interest rate risks.
  - Approximately 58 percent of public debt is external loans contracted at concessional terms.
  - Yields for government securities: T-bills 91 days were 0.50 percent at end-2023 and 0.49 percent at end-2022.
  - Reliance on domestic borrowing could lead to higher interest rates and refinancing risks.
- Policy recommendations and priorities:
  - Maximize concessional loans to keep debt burden manageable.
  - Rebuild fiscal buffers against external shocks, including natural disasters.
  - Enhance medium-term potential growth and prioritize investment projects that strengthen resilience to natural disasters.
  - Prudent public investment management, including careful consideration of financing terms.
  - Initiate gradual fiscal adjustment while ensuring prudent debt management and prioritizing highly concessional external borrowing.
  - Develop the domestic bond market and expand investor base in line with authorities’ Medium Term Debt Strategy to mitigate risks from rising domestic debt.

*Source: 1slbea2025001-print-pdf - 2.4 percent in 2022.*

### 23.      The authorities agreed with the thrust of staff’s analysis of Solomon Islands' debt

### 1slbea2025001-print-pdf - 23.      The authorities agreed with the thrust of staff’s analysis of Solomon Islands' debt

### Authorities' assessment and commitments on debt sustainability
- Authorities agreed with the thrust of staff’s analysis of Solomon Islands' debt sustainability.
- Commitment to a debt threshold of 35 percent of GDP and to ensuring a sustainable debt position through prudent debt management under the revised Medium-Term Debt Strategy (MTDS).
- Specific policy commitments:
  - Avoidance of non-concessional external borrowing.
  - Careful appraisal and monitoring of infrastructure projects under the Public Investment Management Framework.
  - Expenditure rationalization underpinned by a fiscal anchor.
  - Continued efforts to mobilize domestic revenues.
- Domestic financing risks recognized; authorities are intensifying efforts to develop the domestic debt market:
  - Annually updating the MTDS.
  - Strengthening coordination among relevant agencies.
  - Enhancing market transparency.
  - Improving communication with potential investors.
- Government exploring other sources of concessional financing, such as climate finance, to address substantial investment needs, particularly for climate adaptation.

### Key macroeconomic outlook and fiscal positions (selected figures and projections)
- Government 2025 Budget projected real GDP growth:
  - 2025: 3.8 per cent
  - 2026: 4.3 per cent
  - 2027: 4.0 per cent
- Staff Key macroeconomic assumptions (selected):
  - Real GDP growth (in percent): 2.6, 2.4, 2.7, 2.5, 2.8, 2.9, 2.9, 3.0, 3.0, 3.0, 2.0, 2.9 (series shown across projection periods).
  - GDP deflator in US dollar terms (change in percent): -3.3, 0.4, 3.3, 3.0, 2.6, 2.6, 2.7, 2.3, 2.3, 2.1, 2.3, 0.6, 2.3 (series shown across projection periods).
  - Effective interest rate (percent): 0.5, 0.6, 0.6, 0.9, 1.1, 1.1, 1.3, 1.1, 1.3, 0.9, 1.0, 1.2, 1.1 (series shown across projection periods).
- Nominal GDP (Million of US dollars) (selected years from table):
  - 2021: 1,523
  - 2022: 1,566
  - 2023: 1,661
  - 2024: 1,753
  - 2025: 1,850
  - 2026: 1,954
  - 2027: 2,067
  - 2028: 2,177
  - 2029: 2,294
  - 2034: 2,938
  - Long-run entry: 4,922
- Gross external financing need (Million of U.S. dollars) (selected):
  - 2021: 91.0
  - 2022: 232.8
  - 2023: 165.2
  - 2024: 111.9
  - 2025: 155.1
  - 2026: 149.5
  - 2027: 150.6
  - 2028: 155.9
  - 2029: 161.3
  - 2034: 188.7
  - Long-run: 185.4

### Debt stock and sustainability indicators (selected figures)
- External debt (nominal), percent of GDP (selected entries):
  - 2021: 27.6
  - 2022: 27.5
  - 2023: 28.4
  - 2024: 29.2
  - 2025: 29.5
  - 2026–2027: 29.8–30.1 (table shows series up to 2034 and beyond)
- Public and publicly guaranteed (PPG) external debt (percent of GDP) (selected):
  - 2021: 9.8
  - 2022: 9.6
  - 2023: 11.7
  - 2024: 13.4
  - 2025: 14.5
  - 2026–2027: 15.6–16.7
- PV of PPG external debt-to-GDP ratio (selected): entries around 8.8, 9.3, 9.9, 10.2, 10.5, 10.7, 11.1, 10.6 (table series).
- PV of PPG external debt-to-exports ratio (selected): 26.9, 27.0, 29.1, 30.3, 31.9, 33.5, 34.7, 37.5, 37.7 (series shown).
- PPG debt service-to-exports ratio (selected): 1.6, 1.7, 1.4, 1.5, 1.9, 1.7, 1.8, 1.9, 2.4, 2.0, 2.6 (series shown).
- PPG debt service-to-revenue ratio (selected): 1.8, 1.9, 2.0, 2.3, 2.7, 2.5, 2.6, 2.6, 3.2, 2.5, 2.9 (series shown).

### Public sector debt dynamics and fiscal metrics (selected)
- Public sector debt (percent of GDP) (selected):
  - 2021: 15.9
  - 2022: 15.5
  - 2023: 20.3
  - 2024: 22.3
  - 2025: 24.4
  - 2026: 26.2
  - 2027: 27.9
  - 2028: 29.5
  - 2029: 31.0
  - 2034: 37.2
  - 2044: 44.4 and other long-run entries include 11.5 and 30.5 in table context.
- Change in public sector debt (selected): 3.1, -0.4, 4.8, 2.0, 2.1, 1.9, 1.6, 1.6, 1.5, 1.1, 0.7 (series shown).
- Primary deficit (percent of GDP) (selected): 1.6, 2.2, 3.5, 2.6, 2.7, 2.6, 2.4, 2.3, 2.3, 1.7, 1.1, 1.2, 2.2 (series shown).
- Revenue and grants (percent of GDP) (selected): 35.9, 38.3, 36.3, 32.7, 32.5, 32.6, 32.7, 32.8, 32.8, 33.4, 33.8, 37.7, 32.9 (series shown).
- Grants (percent of GDP) (selected): 11.1, 15.2, 13.4, 9.5, 9.5, 9.5, 9.5, 9.5, 9.5, 9.3, 8.8 (series shown).
- PV of public debt-to-GDP ratio (selected projections): 17.4, 18.3, 19.6, 20.6, 21.5, 22.4, 23.2, 28.0, 35.6 (series shown).
- Debt service-to-revenue and grants ratio (selected): 1.2, 4.3, 4.7, 9.8, 5.0, 5.7, 5.7, 5.9, 6.5, 11.7, 18.2 (series shown).
- Gross financing need (percent of GDP) (selected): 2.1, 3.8, 5.2, 3.8, 4.4, 4.5, 4.3, 4.3, 4.4, 5.6, 7.3 (series shown).

### Stress tests, scenarios, and risks
- Authorities acknowledge upgraded assessment of external debt distress risk and are concerned about potential higher borrowing costs from bilateral and multilateral partners.
- Staff analysis indicates debt-to-GDP could breach the 35 percent target within the next 10 years under current policy; Government committed to PFM improvements and diversification to keep debt-to-GDP below the target.
- Sensitivity analyses and bound/tailored stress tests are presented in the DSA (tables and figures) including shocks for:
  - Real GDP growth
  - Primary balance
  - Exports
  - Other flows (official and private transfers and FDI)
  - Depreciation
  - Combination shocks
  - Combined contingent liabilities and natural disaster shocks
  - Commodity price shocks
- Example stress-test signals (from tables/figures):
  - Total public debt benchmark: 35 (benchmark used across projections).
  - Baseline PV of Debt-to-GDP ratio and breaches shown in sensitivity tables and figures; specific scenario series and bolded breaches are presented in the underlying DSA tables and figures.

### Policy actions and structural agenda
- Fiscal policy:
  - Work with Asian Development Bank to review and update fiscal targets.
  - Requested a Public Expenditure and Financial Accountability assessment with PFTAC in 2025.
  - Tax reform priority: implement Tax Administration Act improvements and timely passage of VAT bill intended to commence in 2026.
  - Publish and act on audits: Economic Stimulus Package audit published; Pacific Games spending audit agreed.
- Monetary and financial sector:
  - CBSI retains accommodative stance; next review in March 2025.
  - CBSI updated the currency basket weights on August 21, 2024; de facto arrangement reclassified to “crawl-like” effective March 31, 2023.
  - Strengthen internal audit, risk management, conflict of interest policies, cyber governance, AML/CFT capacity.
  - Monitor banking sector liquidity and asset quality; address elevated non-performing loans and credit union sector vulnerabilities.
- Structural reforms and public investment:
  - Focus on economic diversification, private sector environment, reliable infrastructure.
  - 2025 Budget theme: Accelerating Transformative Investment: A Pathway Towards a Resilient and Sustainable Economy.
  - Infrastructure and diversification initiatives: Tina Hydro project commencement; second tuna processing plant at Bina Harbour; support for cocoa, coconut, cassava, poultry and pigs; tourism development spending; roads and wharves to improve inter-island connectivity.

*Source: 1slbea2025001-print-pdf (IMF).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1slbea2025001-print-pdf.pdf_