## 1. Approved Budgets and Outturns

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### A. Fiscal challenges facing Solomon Islands
- Recent shocks and events deteriorating the fiscal position: pandemic response, the riot in Honiara, hosting the Pacific Games, and general elections.
- Structural revenue pressures from declines in logging activity and the pandemic.
- Cash reserves significantly depleted; public debt nearly tripled from its pre-pandemic level with a noticeable increase in expensive domestic bonds.
- Debt sustainability: latest analysis indicates a moderate risk of overall debt distress; authorities’ threshold of public debt at 35 percent of GDP is projected to be breached by the early 2030s under current policies.
- Staff estimate for SDGs and climate resilience: additional spending of about 6.9 percent of 2030 GDP every year would be needed to meet SDGs on health, education, and infrastructure while building climate resilience (IMF 2022).
- Urgent priorities:
  - Rebuilding cash reserves.
  - Improving the quality of public spending.
  - Imposing fiscal discipline on domestic borrowing.
- Staff recommendation on cash balance: restore the broader cash balance to at least two months of total spending.

### B. Existing fiscal framework in Solomon Islands
- Fiscal rule architecture:
  - Golden rule in the Public Finance Management Act (PFMA): borrowing restricted to cover planned recurrent budget deficits; borrowing permitted for high-priority infrastructure and development projects; includes an escape clause for exceptional circumstances.
  - Debt management strategy thresholds: public debt-to-GDP ratio ceiling of 35 percent and debt service-to-domestic revenue ratio ceiling of 10 percent.
  - Annual borrowing limit set in budget formulation to avoid breaching the 35 percent ceiling over a 15-year forecast period.
  - 2024 budget numerical limits: annual borrowing limit at SI$558 million and Treasury bill cap at SI$200 million.
- Effectiveness issues:
  - Golden rule not constraining spending: development expenditures reached 6 percent of GDP in 2023; inconsistent classification between recurrent and development expenditures.
  - Escape clause invoked in 2021 without comprehensive discussion of specifics or financial consequences.
  - Debt rules not constraining policy: public debt remained below the ceiling but annual borrowing limits have been raised with limited disclosure of calculations.
- Medium-term planning and monitoring:
  - Medium-term fiscal strategy was previously published but not integrated into annual budgeting and not published on the government website since 2014.
  - Public Accounts Committee (PAC) reviews budgets and expanded discussion in the 2024 budget report, but medium-term outlook discussions are limited; PAC independence is not guaranteed.
- Cash shortages and expenditure controls:
  - Recurring financing gaps led to routine supplementary budgets and strict expenditure controls (freezing discretionary spending, suspending procurement, delaying supplier payments).
  - 2021 budget example: initial financing gap SI$329.6 million → supplementary SI$479.3 million → reduced to SI$15.5 million at end, mainly due to increased donor support and decreased non-payroll and government-funded development expenditures.
  - Six ministries had underspending of more than 50 percent comparing original budget to actual in 2021.
- Consequences: across-the-board cuts undermined service delivery, quality of public spending, and private sector confidence; payment delays to providers pose a financial stability threat (CBSI 2023).

### C. Challenges in implementing the fiscal framework
- Key constraints:
  - Limited budget scope and control: a considerable portion of donor support (including externally financed infrastructure) is off-budget; off-budget external debt accumulation limits oversight.
  - Absence of reliable and timely fiscal data: unaudited outturns for 2022 and 2023 not published until November 2024; no monthly/quarterly fiscal updates or mid-year review results.
  - Unpredictable revenues and grants: revenue discrepancies over past three years within ±1 percent, whereas disparities in donor support have exceeded 50 percent.
  - Limited human resources: MoFT has a limited number of staff coordinating budget formulation and implementation.
  - World Bank estimate: potentially around 90 percent of total donor spending for Solomon Islands was off budget in 2019 (World Bank 2022).
- Implication: Solomon Islands cannot implement a full-fledged fiscal framework until basic PFM weaknesses are addressed.
- Near-term PFM roadmap priorities:
  - Budget formulation: prepare credible estimate of budget envelope including planned domestic bond issuance and donor support; enhance accuracy and comprehensiveness of expenditure estimates; publish medium-term fiscal strategy with projections.
  - Budget implementation: improve cash management and forecasting; enhance communication with donors; adhere to initial budget commitments (e.g., hiring).
  - Budget monitoring and transparency: timely release of mid-term budget review and budget outcomes; resume publication of monthly and quarterly fiscal data.

### D. Enhancing effectiveness of the fiscal framework — tools, calibration, and objectives
- Design principles for operational rules:
  - Combine a medium-term fiscal anchor with simple, implementable, flexible, monitorable operational rules.
  - Operational rules should be simple, largely under policymakers’ control, not overly rigid to hinder shock response, and easy to monitor.
- Calibration of the debt anchor (staff stochastic simulations):
  - Debt limit used in calibration: 49 percent of GDP (benchmark for a country with weak debt carrying capacity in the DSA for Low-Income Countries).
  - Calibrated debt anchor: 35.7 percent of GDP limits the probability of debt-to-GDP reaching 49 percent within a decade to less than 5 percent.
  - Natural disaster shock assumption: probability of 13.5 percent and a loss of 7.1 percent of GDP.
  - Risk tolerance sensitivity: if government accepts a 10 percent risk of hitting the debt limit, the estimated debt anchor rises to 41 percent of GDP.
  - Policy implication: raising the ceiling above the calibrated anchor increases the government’s probability of hitting the 49 percent debt limit above 5 percent.
- Operational fiscal rule objectives and numerical paths (staff projections):
  - Objective: allow gradual rebuilding of the cash balance while financing infrastructure projects (notably Tina River Hydropower Development Project planned until 2029).
  - Projected external loan disbursements for major infrastructure: 1.8-1.9 percent of GDP per year until 2029.
  - Target primary fiscal deficit path:
    - Primary fiscal deficit of 2.1 percent of GDP from 2025 to 2029.
    - Primary fiscal deficit of 0.5 percent of GDP from 2030 onwards.
  - Domestic borrowing assumption to rebuild cash balance: domestic borrowing of 0.5 percent of GDP each year to build the broader cash balance to two months of total spending by 2029, in addition to borrowing to finance budget deficits.
  - Projection under these assumptions: public debt will remain below the 35 percent of GDP ceiling by 2040 if the government controls expenditures and externally financed projects under the rule.
  - Baseline macro assumptions: around 3 percent growth and 3.3 percent inflation in the long run; average interest rates of 1.8 percent for external debt and 4.0 percent for domestic debt.
- Broader cash balance definition: equals the sum of government deposits held at the CBSI and the commercial banks minus unpaid payment orders and unpresented checks, plus reserves in the government consolidated deposit account.
- Major holders of government bonds: about half held by the Solomon Islands National Provident Fund, about a quarter by the CBSI, and about 20 percent by two state-owned enterprises.

### E. Interim ex-ante guideline for annual budget formulation
- Rationale: weak PFM foundations, donor-supported projects not integrated into the budget, and lack of timely credible budget data make full fiscal framework implementation infeasible immediately.
- Nature and adoption:
  - A simple ex-ante guideline for annual budget formulation consistent with the suggested primary balance rule; not an operational fiscal rule and not intended for strict legal enforcement.
  - Suggested adoption mechanism: cabinet decision and reaffirmation in the budgetary strategy at the start of the budgetary process.
- Core numerical element:
  - Ceiling on the primary budget deficit financed by domestic borrowing (i.e., the balance between domestic revenues and primary spending financed by these resources).
  - Maintain domestically financed primary balance at around 0.3 percent of GDP until 2029, assuming domestic borrowing of 0.5 percent of GDP each year from 2025 to 2029 to build up the cash balance, in addition to borrowing to finance budget deficits.
- Expected effect: forces prioritization of expenditures within the envelope at budget preparation rather than mid-year expenditure cuts in response to cash shortages.

### F. Monitoring, ex-post assessment, oversight, and governance recommendations
- Ex-post assessment: government should review implementation of the guideline and explain deviations in the budget outcome report.
- Regular monitoring: monitor whether projected evolution of the financial position is consistent with the medium-term anchor and recalibrate the guideline as necessary, particularly if debt is projected to reach the 35 percent ceiling.
- Publication and transparency: resume publication of the medium-term fiscal strategy; timely release of mid-term budget review and budget outcomes; resume publication of monthly and quarterly fiscal data.
- Oversight: PAC could assess implementation of the guideline and medium-term fiscal outlook once adopted; effective oversight requires the PAC to have sufficient resources and time.
- Institutional constraint: creating an additional independent fiscal agency is not realistic given limited human resources.

### G. Conclusion — recommended policy package (summarized)
- Immediate fiscal priorities: rebuild cash reserves, improve the quality of public spending, and impose fiscal discipline on domestic borrowing.
- Interim measure recommended: introduce a simple ex-ante guideline for annual budget formulation that sets a ceiling on the domestically financed primary deficit.
- Medium-term anchor validation: staff analysis suggests the current 35 percent debt-to-GDP threshold remains broadly appropriate as a medium-term debt ceiling.
- Numerical recommendations reiterated:
  - Ceiling on domestically financed primary budget deficit at around 0.3 percent of GDP until 2029.
  - Government to borrow domestically by 0.5 percent of GDP until 2029 to build up the cash balance, in addition to borrowing to finance budget deficits.
- Governance actions: explain deviations ex post in the budget outcome report, recalibrate the guideline as necessary, resume medium-term fiscal strategy publication, and use PAC oversight to bolster credibility and transparency.

*Source: sipea2025063 — "Solomon Islands has a medium-term fiscal anchor, but no effective operational rules" (IMF staff analysis).*

### 1. Approved Budgets and Outturns ________________________________________________________ 5

### 1. Approved Budgets and Outturns

### A. Fiscal challenges facing Solomon Islands
- Recent crises and events have significantly deteriorated the fiscal position: pandemic response, the riot in Honiara, hosting the Pacific Games, and general elections.
- Revenue pressures from structural declines in logging activity and the pandemic have contributed to fiscal deterioration.
- Cash reserves have been significantly depleted; public debt has nearly tripled from its pre-pandemic level with a noticeable increase in expensive domestic bonds (Figure 1).
- Latest debt sustainability analysis indicates a moderate risk of overall debt distress; authorities’ threshold of public debt at 35 percent of GDP is projected to be breached by the early 2030s under current policies.
- Staff estimate: additional spending of about 6.9 percent of 2030 GDP every year would be needed to meet SDGs on health, education, and infrastructure while building climate resilience (IMF 2022).
- Urgent priorities identified:
  - Rebuilding cash reserves.
  - Improving the quality of public spending.
  - Imposing fiscal discipline on domestic borrowing.

### B. Existing fiscal framework in Solomon Islands
- Fiscal rule architecture:
  - Golden rule in the Public Finance Management Act (PFMA): restricts borrowing to cover planned recurrent budget deficits; borrowing permitted for high-priority infrastructure and development projects; includes an escape clause for exceptional circumstances.
  - Debt management strategy thresholds: public debt-to-GDP ratio ceiling of 35 percent and debt service-to-domestic revenue ratio ceiling of 10 percent.
  - Annual borrowing limit set in budget formulation to avoid breaching the 35 percent ceiling over a 15-year forecast period.
  - 2024 budget figures: annual borrowing limit at SI$558 million and Treasury bill cap at SI$200 million.
- Effectiveness issues:
  - Golden rule has not constrained spending: development expenditures reached 6 percent of GDP in 2023; inconsistent classification between recurrent and development expenditures.
  - Escape clause invoked (2021) without comprehensive discussion of specifics or financial consequences.
  - Debt rules have not constrained policy; public debt has remained below the ceiling but annual borrowing limits have been raised with limited disclosure of calculations.
- Medium-term planning and monitoring:
  - Medium-term fiscal strategy was previously published but not integrated into annual budgeting and not published on the government website since 2014.
  - Public Accounts Committee (PAC) reviews budgets and has expanded discussion in the 2024 budget report, but medium-term outlook discussions are limited; PAC independence is not guaranteed.
- Cash shortages and expenditure controls:
  - Recurring financing gaps led to routine supplementary budgets and strict expenditure controls (freezing discretionary spending, suspending procurement, delaying supplier payments).
  - Example 2021 budget: initial financing gap SI$329.6 million → supplementary SI$479.3 million → reduced to SI$15.5 million at end, mainly due to increased donor support and decreased non-payroll and government-funded development expenditures.
  - Six ministries had underspending of more than 50 percent comparing original budget to actual in 2021 (Text Figure 2).
- Consequences: across-the-board cuts undermined service delivery, quality of public spending, and private sector confidence; payment delays to providers pose a financial stability threat (CBSI 2023).

### C. Challenges in implementing the fiscal framework
- Key constraints identified:
  - Limited budget scope and control: a considerable portion of donor support (including externally financed infrastructure) is off-budget; off-budget external debt accumulation limits oversight.
  - Absence of reliable and timely fiscal data: unaudited outturns for 2022 and 2023 not published until November 2024; no monthly/quarterly fiscal updates or mid-year review results.
  - Unpredictable revenues and grants: revenue discrepancies over past three years within ±1 percent, whereas disparities in donor support have exceeded 50 percent.
  - Limited human resources: MoFT has a limited number of staff coordinating budget formulation and implementation.
  - World Bank estimate: potentially around 90 percent of total donor spending for Solomon Islands was off budget in 2019 (World Bank 2022).
- Implication: Solomon Islands cannot implement a full-fledged fiscal framework until basic PFM weaknesses are addressed.
- Near-term PFM roadmap priorities:
  - Budget formulation: prepare credible estimate of budget envelope including planned domestic bond issuance and donor support; enhance accuracy and comprehensiveness of expenditure estimates; publish medium-term fiscal strategy with projections.
  - Budget implementation: improve cash management and forecasting; enhance communication with donors; adhere to initial budget commitments (e.g., hiring).
  - Budget monitoring and transparency: timely release of mid-term budget review and budget outcomes; resume publication of monthly and quarterly fiscal data.

### D. Enhancing effectiveness of the fiscal framework — practical policy tools and objectives
- Immediate fiscal priorities reiterated:
  - Rebuild the cash balance with a concrete plan; pace should be gradual given growth below potential, limited fiscal space, and a shallow domestic market.
  - Staff recommendation: restore the broader cash balance to at least two months of total spending.
  - Improve quality of public spending compromised by repeated cash shortages and controls.
  - Impose fiscal discipline on domestic borrowing due to rapid increase in domestic borrowing, narrow investor base, and underdeveloped financial market.
- Design principles for operational rules:
  - A well-designed fiscal framework combines a medium-term fiscal anchor and simple, implementable, flexible, monitorable operational rules.
  - Operational rules should be simple, largely under policymakers’ control, not overly rigid to hinder shock response, and easy to monitor (IMF 2018b, IMF 2024).
- Interim proposal (described in the broader chapter):
  - Given weak PFM and absence of effective operational rules, staff proposes introducing a simple ex-ante guideline for annual budget formulation as an interim measure.
  - The proposed guideline would set a ceiling on the domestically financed primary budget deficit, consistent with a potential fiscal rule covering both domestic and external sources.
  - Government should assess ex post whether the budget was implemented in line with the guideline and whether the fiscal outlook is consistent with the medium-term anchor.
- Purpose: help the government rebuild cash, improve spending quality, and constrain domestic borrowing while preserving fiscal space for priority investments.

*Source: sipea2025063 — https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025063.pdf*

### 14.      Solomon Islands has a medium-term fiscal anchor, but no effective operational rules

### 14.      Solomon Islands has a medium-term fiscal anchor, but no effective operational rules

### Current fiscal framework and weaknesses
- Medium-term fiscal anchor: debt-to-GDP ratio set at 35 percent.
- No effective framework to ensure annual budget consistency with the medium-term debt anchor.
- The golden rule has not been binding partly because of inconsistent classification of expenditures and because the rule is not linked to the anchor.
- The annual borrowing limit is derived from the debt ceiling but has failed to control the budget due to complexity, lack of transparency, and ease of circumvention.
- Broader cash balance definition (footnote): equals the sum of government deposits held at the CBSI and the commercial banks minus unpaid payment orders and unpresented checks, plus reserves in the government consolidated deposit account.
- Major holders of government bonds: about half held by the Solomon Islands National Provident Fund, about a quarter by the CBSI, and about 20 percent by two state-owned enterprises.

### Calibration of the debt anchor (simulations and risk tolerance)
- Debt limit used in calibration: 49 percent of GDP (benchmark for a country with weak debt carrying capacity in the DSA for Low-Income Countries).
- Resulting calibrated debt anchor: 35.7 percent of GDP limits the probability of debt-to-GDP reaching 49 percent within a decade to less than 5 percent (stochastic simulations incorporating macroeconomic shocks, fiscal shocks, and natural disasters).
- Natural disaster shock assumption: probability of 13.5 percent and a loss of 7.1 percent of GDP.
- Risk tolerance sensitivity: if the government accepts a 10 percent risk of hitting the debt limit, the estimated debt anchor rises to 41 percent of GDP.
- Policy implication: raising the ceiling above the calibrated anchor increases the government’s probability of hitting the 49 percent debt limit above 5 percent.

### Proposed operational fiscal rule objectives and numerical paths
- Operational objective: allow gradual rebuilding of the cash balance while financing infrastructure projects and other investments (notably Tina River Hydropower Development Project planned until 2029).
- Projected external loan disbursements for major infrastructure: 1.8-1.9 percent of GDP per year until 2029.
- Target primary fiscal deficit path (staff analysis):
  - Primary fiscal deficit of 2.1 percent of GDP from 2025 to 2029.
  - Primary fiscal deficit of 0.5 percent of GDP from 2030 onwards.
- Domestic borrowing assumption to rebuild cash balance: domestic borrowing of 0.5 percent of GDP each year to build the broader cash balance to two months of total spending by 2029, in addition to borrowing to finance budget deficits.
- Projection under these assumptions: public debt will remain below the 35 percent of GDP ceiling by 2040 if the government controls expenditures and externally financed projects under the rule.
- Baseline macro assumptions informing analysis: around 3 percent growth and 3.3 percent inflation in the long run; average interest rates of 1.8 percent for external debt and 4.0 percent for domestic debt.
- Assumption on natural disaster modeling referenced in simulations (Lee, Zhang, and Nguyen 2018).

### Interim ex-ante guideline for annual budget formulation
- Rationale: weak PFM foundation, donor-supported projects not integrated into the budget, and lack of timely credible budget data make full fiscal framework implementation infeasible immediately.
- Nature of the proposal: a simple ex-ante guideline for annual budget formulation consistent with the suggested primary balance rule; not an operational fiscal rule and not intended for strict legal enforcement.
- Suggested adoption mechanism: cabinet decision and reaffirmation in the budgetary strategy at the start of the budgetary process.
- Core numerical element of the guideline:
  - Ceiling on the primary budget deficit financed by domestic borrowing (i.e., the balance between domestic revenues and primary spending financed by these resources).
  - To follow the primary balance path given external financing as in staff baseline, maintain domestically financed primary balance at around 0.3 percent of GDP until 2029.
  - This assumes domestic borrowing of 0.5 percent of GDP each year from 2025 to 2029 to build up the cash balance, in addition to borrowing to finance budget deficits.
- Expected effect: forces prioritization of expenditures within the envelope at budget preparation rather than mid-year expenditure cuts in response to cash shortages.

### Monitoring, ex-post assessment, and oversight
- Ex-post assessment: government should review implementation of the guideline and explain deviations in the budget outcome report.
- Regular monitoring: government should monitor whether the projected evolution of its financial position is consistent with the medium-term anchor and recalibrate the guideline as necessary, particularly if debt is projected to reach the 35 percent ceiling.
- Publication: government should resume publication of the medium-term fiscal strategy.
- Oversight body: the PAC (Public Accounts Committee) could assess implementation of the guideline and medium-term fiscal outlook once the guideline and medium-term strategy are adopted; effective oversight requires the PAC to have sufficient resources and time.
- Institutional constraint noted: creating an additional independent fiscal agency is not realistic given limited human resources.

### Conclusion and policy recommendations (summarized)
- Immediate fiscal priorities: rebuild cash reserves, improve the quality of public spending, and impose fiscal discipline on domestic borrowing.
- Interim measure recommended: introduce a simple ex-ante guideline for annual budget formulation that sets a ceiling on the domestically financed primary deficit.
- Medium-term anchor validation: staff analysis suggests the current 35 percent debt-to-GDP threshold remains broadly appropriate as a medium-term debt ceiling.
- Numerical recommendation reiterated:
  - Ceiling on domestically financed primary budget deficit at around 0.3 percent of GDP until 2029.
  - Government to borrow domestically by 0.5 percent of GDP until 2029 to build up the cash balance, in addition to borrowing to finance budget deficits.
- Governance recommendation: explain deviations ex post in the budget outcome report, recalibrate the guideline as necessary, resume the medium-term fiscal strategy publication, and use PAC oversight to bolster credibility and transparency.

*Source: IMF staff analysis in "Solomon Islands has a medium-term fiscal anchor, but no effective operational rules" (sipea2025063).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025063.pdf_