## _cr05365 ## Source details **Canonical URL:** [_cr05365](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05365.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05365.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05365.pdf.json) --- ### Executive summary — economic developments and challenges - Recovery continued after the Australian-led intervention-force (RAMSI) arrival in mid-2003, but structural reforms have lagged. - Growth and prices: - Real GDP growth was 5½ percent in 2004. - Real growth projected at 4½ percent in 2005 (no net contribution from logging). - Nonlogging growth projected to rise to 5 percent in 2005 from 3¼ percent in 2004. - Inflation rose to 7.8 percent by end-2004 and is projected to remain about the 2004 level in 2005. - External and reserve position: - Net international reserves (NIR) rose to US$76 million (5½ months of imports) in 2004 and are projected at about US$75 million (4.5 months of projected 2006 imports) in 2005. - Fiscal and debt outcomes: - Central government recorded a surplus of 8¼ percent of GDP in 2004; a small deficit of ½ percent of GDP is projected in 2005. - Public debt-to-GDP ratio fell to 92 percent from 122 percent in 2003. - Banking and liquidity: - Reserve money rose by 74 percent in 2004; banks’ excess reserves amounted to 39 percent of deposits in 2004 and dropped to 32 percent of deposits as real private credit growth rose to 21 percent year-on-year in May. - Structural/social vulnerabilities: - Per capita GDP is about two thirds of its preconflict level. - With current population growth, it would take about 27 years of 4½ percent annual growth to reach preconflict per capita GDP. - At current unsustainable logging rates, authorities estimate forests would be exhausted by 2015. - Several social indicators fall well short of the Millennium Development Goals, including high incidence of malaria and almost a third of the population lacking access to safe water. ### Key policy issues and short-term recommendations - Fiscal policy: - Staff recommended a 1½ percentage points of GDP adjustment in the 2006 budget. - Keep the 2005 deficit below the budgeted level by saving any revenue over-performance and any under-spending, while holding current expenditure tightly to the budget. - Contingency warrants for 2005 amount to 1 percent of GDP for recurrent outlays and 1 percent of GDP for development spending; staff projection assumes only the recurrent contingency warrant is utilized. - Potential consolidation measures: do not incorporate the 16 percent civil service bonus into base salaries (equivalent to about ¾ percent of GDP), pursue further tax administration gains, contain nonproductive outlays, and if necessary adjust excises, fees, and determined prices for logs. - Monetary and exchange rate policy: - CBSI policy to resist upward pressure on the exchange rate amid strong foreign inflows is appropriate; CBSI has de facto pegged the currency to the U.S. dollar since 2003. - Downward pressure on the exchange rate should not be resisted. - CBSI should stand ready to take appropriate measures if credit growth becomes inflationary, including moral suasion and administrative measures. - Debt and external policy: - After regularizing domestic debt, the government seeks external debt relief; staff DSA suggests debt is high and dynamics fragile. - Realization of contingent liabilities equivalent to 6½ percent of GDP is projected to raise NPV of external debt-to-GDP and to exports above thresholds. - Structural reforms: - Accelerate reforms to promote private sector development: introduce the new foreign investment regime, deepen state enterprise reform, and pursue governance reform vigorously. - Emphasize private-sector-led growth; public sector to provide enabling environment. - Financial sector and liquidity management: - Monitor rapid credit growth and banks’ excess reserve dynamics to prevent inflationary pressures. - Improve development of indirect liquidity instruments (T-bill market) though short-run contribution limited by perceived government debt risk. ### Fiscal outturn, composition, and medium-term risks - 2004–05 fiscal dynamics and composition: - Total revenue (percent of GDP): 2004 48.9; 2005 48.5 (projected). - Recurrent revenue (percent of GDP): 2004 26.8; 2005 26.6 (projected). - Grants (percent of GDP): 2004 22.1; 2005 21.8 (projected). - Total expenditure (percent of GDP): 2004 40.6; 2005 49.0 (projected). - Recurrent expenditure (percent of GDP): 2004 22.9; 2005 27.9 (projected). - Development expenditure (percent of GDP): 2004 17.7; 2005 21.1 (projected). - Recurrent balance (percent of GDP): 2004 8.4; 2005 1.0 (projected). - Overall balance (percent of GDP): 2004 8.3; 2005 -0.5 (projected). - Stock of expenditure arrears (percent of GDP, end of period): 2004 8.0; 2005 7.8 (projected). - Medium-term fiscal risks: - Spending pressures from wage demands and administrative costs. - Rising social, infrastructure, and operations and maintenance needs as donor-provided services and infrastructure are taken on by government. - Anticipated decline in aid flows and direct foreign budgetary support. - Expected falls in tax receipts from logging and imports (due to tariff reductions under the Pacific Island Countries Trade Agreement). - Substantial stock of arrears and projected increases in debt servicing costs. - Public expenditure composition and civil service reform: - Donor-provided services currently significant; spending for police and law and justice high in post-conflict situation and should decline. - Authorities working toward a medium-term fiscal framework and welcomed a combined-source budget incorporating donor flows. - Staff urged accelerating comprehensive civil service reform, rationalizing employment, decompression of the wage scale, and reallocating resources toward primary education and health care. ### Debt situation, DSA findings, and restructuring efforts - End-2004 external debt stock (US$ millions): - Total (including arrears): 159.9 - Arrears 1/: 15.8 - Total (excluding arrears): 144.1 - Multilateral: 100.1 - Asian Development Bank: 49.5 - World Bank (IDA): 46.4 - Bilateral: 37.0 - Commercial: 7.1 - 1/ Arrears are principally to bilateral and commercial creditors. - DSA summary and risks: - At end-2004, the NPV of external debt to GDP was 45 percent, exceeding the Board-endorsed indicative threshold. - Ratios of the NPV of debt to exports and revenue were below their thresholds at end-2004. - After realization of an external contingent liability worth 5 percent of GDP, ratios of the NPV of debt to both GDP and exports are projected to exceed thresholds at end-2005. - Baseline shows improvement over time but the NPV of debt to GDP still exceeds its threshold in 2010. - Contingent liabilities are currently estimated at 10 percent of GDP; realization would materially worsen debt metrics. - Staff concluded the Solomon Islands is at high risk of debt distress. - Public sector debt indicators (selected series): - Public sector debt (series): 121.9, 92.5, 88.6, 81.2, 73.5, 65.6, 59.2, 52.9, 32.5, 15.4. - NPV of public sector debt (series): 102.3, 75.3, 73.1, 66.4, 60.2, 54.1, 49.1, 44.4, 28.5, 14.4. - NPV of external debt (series): 45.0, 46.5, 43.5, 40.8, 37.6, 34.9, 32.4, 22.3, 12.6. ### Medium-term outlook and scenarios (2003–10 highlights) - Baseline medium-term scenario (assumptions: macro stability maintained, critical mass of structural reforms implemented, RAMSI and donors remain engaged): - Real GDP annual growth: 2006 4.8; 2007 4.4; 2008 4.4; 2009 4.4; 2010 4.4. - Average annual growth could plausibly be about 4½ (1½ per capita) percent in 2006–10. - CPI (period average) projected to decline gradually: 2006 6.6; 2007 7.7; 2008 7.7; 2009 7.1; 2010 6.3. - Current account (percent of GDP): 2006 -13.6; 2007 -9.1; 2008 -7.1; 2009 -4.7; 2010 -4.0. - Gross official reserves (US$ millions, end of period): 2006 83.7; 2007 77.0; 2008 70.1; 2009 70.7; 2010 70.8. - Reserves (in months of next year's imports of GNFS): 2006 3.6; 2007 4.6; 2008 4.2; 2009 4.0; 2010 4.0. - Medium-term alternative scenario (policy slippage): - Real GDP (percent change): 2006 1.6; 2007 1.4; 2008 1.4; 2009 1.4; 2010 1.3. - CPI (end of period): 2006 8.0; 2007 8.0; 2008 8.5; 2009 9.5; 2010 10.0. - Central government overall balance (percent of GDP): 2006 -4.3; 2007 -4.2; 2008 -2.1; 2009 -2.0; 2010 -1.9. - Gross official reserves (US$ millions, end of period): 2006 48.5; 2007 48.8; 2008 17.5; 2009 5.0; 2010 4.7. - Scenario drivers and assumptions: - Baseline assumes ODA declines from 20 percent of GDP in 2005 to 9 percent of GDP in 2010; logging activity is halved; critical mass of structural reforms implemented; no new borrowing; government eliminates outstanding informal expenditure arrears by 2010; contingent liabilities to NPF realized by 2015 around 1.5 percent of GDP. - Alternative assumes reforms stall, donors and investors withdraw, lower ODA and no FDI, import compression, one-fifth reduction in recurrent spending, accumulation of arrears, and debt largely unchanged in 2010 from end-2006. ### Monetary, exchange rate, and financial sector developments - Monetary aggregates and credit: - Reserve money rose by 74 percent in 2004. - Banks’ excess reserves amounted to 39 percent of deposits in 2004 and dropped to 32 percent of deposits as real private credit growth rose to 21 percent year-on-year in May 2005. - Broad money growth: 28.1 percent (2004) and 13.4 percent (2005, projected). - Credit to private sector (percent change): 10.6 percent (2004) and 40.0 percent (2005, projected). - Net domestic credit (percent change): -36.1 percent (2004) and 43.3 percent (2005, projected). - Net domestic assets (percent change): -60.4 percent (2004) and 85.1 percent (2005, projected). - Net foreign assets (percent change): 111.0 percent (2004) and 0.8 percent (2005, projected). - Exchange rate and reserves: - Solomon Islands dollar depreciated by 34 percent in 2002; de facto pegged to the U.S. dollar since early 2003. - CBSI agreed reserves should cover 3½ months of imports as a minimum. - Real exchange rate level is almost 20 percent lower than pre-conflict levels and appears broadly adequate. - Banking system and institutions: - Commercial banking: two foreign banks with a combined market share of 57 percent and a local private bank. - Aggregate capital to risk-weighted assets ratio (CRAR) is over 25 percent. - Nonperforming loans declined to 1.9 percent of total from 5.5 percent at end–2003. - Return on equity averages about 20 percent; liquidity is high. - Public financial institutions: - Development Bank of the Solomon Islands (DBSI): CBSI, as court-appointed manager, has begun repaying depositors and shrinking DBSI’s balance sheet; staff advised liquidating the DBSI; estimated cost of financing the institution’s liquidation: ¾ percent of GDP. - National Provident Fund (NPF): nonperforming assets estimated at 13 percent of total; mandated annual return to contributors: 2.5 percent; staff advised conservative investment guidelines even as authorities consider allowing NPF to invest abroad. ### Structural reforms, governance, infrastructure, and social indicators - Reform priorities and SOE restructuring: - Economic Reform Unit leading reforms toward NERRDP objectives: better business environment, SOE reform, infrastructure, governance, and civil service capacity. - Foreign investment bill aims to simplify, make transparent, and nondiscretionary the registration process (awaiting parliamentary passage). - Solomon Airlines expected to be ready for privatization in late 2005; draft restructuring plan for the Solomon Islands Electricity Authority prepared. - Infrastructure and donor support: - Donor-financed road construction and other projects have commenced; AsDB assisting ministry of infrastructure and national transport plan; inter-island shipping and wharves being addressed. - AsDB resumed operations after arrears settlement in September 2003 and provided TA and limited lending approvals; lending policy: no new loans until public finances have stabilized. - Governance and AML measures: - With RAMSI’s assistance: legislation for a single ballot box, strengthening parliament, justice system, watchdogs, greater civil society oversight, and improved transparency in Ministry of Finance and NPF. - Amended anti-money laundering (AML) Act and steps to combat money laundering and financing of terrorism welcomed. - Social and human development challenges: - UN Human Development Index rank: 124 out of 175 countries. - Population growth rate about 3 percent a year; population under age 15: 43 percent. - Primary education enrollment ratio about 97 percent; secondary education enrollment ratio 30 percent. - Malaria rampant; more than a third of the rural population lacks access to safe water. - Achieving MDGs by 2015 is possible but remains a major challenge. ### Data, statistics, and capacity building - Data weaknesses: - National accounts not produced since 1994 except crude GDP estimates; CPI weights outdated; partial balance of payments data estimated from foreign exchange transactions and suspected to misstate trade. - Very limited data on donor activities; accounts of public institutions outside central government do not exist. - Macroeconomic variables (especially GDP) subject to large measurement errors. - NSO remedial actions and TA: - Household income and expenditure survey (HIES) beginning October 2005. - Preparation of complete national accounts in 2006. - Preliminary trade estimates based on customs data; PC Trade software scheduled for installation at Customs in 2006. - PFTAC and bilateral partners providing TA; new government statistician appointed in 2004; long-term adviser funded by AusAid and NZAid took post in April 2005. - Selected data vintage and coverage (Table of Common Indicators as of August 23, 2005): - Exchange Rates: Date of latest observation: July 2005; Frequency of Data: D; Frequency of Reporting: M; Frequency of publication: M. - Consumer Price Index: Date of latest observation: May 2005; Date received: July 2005; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest observation: December 2004; Date received: April 2005; Frequency: A. ### Executive Board assessment and concluding implications - Directors welcomed the continued recovery and maintenance of macroeconomic stability since RAMSI’s arrival. - Main risks: - Risks are skewed to the downside: lackluster policy implementation, political instability (parliamentary elections scheduled for early 2006), lower donor flows and international commodity prices, and disruptions in major projects. - Continued strong foreign inflows, drawdown of government deposits, and acceleration in private credit growth could challenge monetary policy and jeopardize single-digit inflation. - Even under a baseline adjustment scenario, debt dynamics remain fragile and the Solomon Islands is at high risk of debt distress. - Priority actions: - Consolidate the budget, save revenue over-performance and underspending, avoid incorporating one-off bonuses into base salaries, implement tax administration reforms, deepen SOE reform, pass the foreign investment bill, and normalize relations with creditors as soon as possible. *Source: Executive Summary and selected sections of IMF staff report content unit _cr05365.* ### Executive Summary ...................................................................................................... ### _cr05365 - Executive Summary ...................................................................................................... ### Economic developments and challenges - Recovery continued after the Australian-led intervention-force (RAMSI) arrival in mid-2003, but structural reforms have lagged. - The economy has begun to recover: - Real GDP growth was 5½ percent in 2004. - Real growth projected at 4½ percent in 2005 (no net contribution from logging). - Nonlogging growth projected to rise to 5 percent in 2005 from 3¼ percent in 2004. - Inflation rose to 7.8 percent by end-2004 and is projected to remain about the 2004 level in 2005. - Net international reserves (NIR) rose to US$76 million (5½ months of imports) in 2004 and are projected at about US$75 million (4.5 months of projected 2006 imports) in 2005. - Central government recorded a surplus of 8¼ percent of GDP in 2004; a small deficit of ½ percent of GDP is projected in 2005. - Public debt-to-GDP ratio fell to 92 percent from 122 percent in 2003. - Reserve money rose by 74 percent in 2004; banks’ excess reserves amounted to 39 percent of deposits in 2004 and dropped to 32 percent of deposits as real private credit growth rose to 21 percent year-on-year in May. - Structural and social vulnerabilities: - Per capita GDP is about two thirds of its preconflict level. - With current population growth, it would take about 27 years of 4½ percent annual growth to reach preconflict per capita GDP. - At current unsustainable logging rates, authorities estimate forests would be exhausted by 2015. - Several social indicators appear to fall well short of the Millennium Development Goals, including high incidence of malaria and almost a third of the population lacking access to safe water (Annex VI). ### Key policy issues and recommendations - Fiscal policy: - Staff recommended a 1½ percentage points of GDP adjustment in the 2006 budget. - Keep the 2005 deficit below the budgeted level. - Caution against an overly expansionary fiscal stance given limited spending capacity and one-off factors affecting 2004–05. - Monetary and exchange rate policy: - The central bank’s policy to resist upward pressure on the exchange rate is appropriate. - The CBSI has de facto pegged the currency to the U.S. dollar since 2003. - Downward pressure on the exchange rate should not be resisted. - CBSI should stand ready to take appropriate measures if credit growth becomes inflationary. - Debt and external policy: - After regularizing domestic debt, the government seeks external debt relief. - Staff debt sustainability analysis suggests debt is high and dynamics fragile; realization of contingent liabilities equivalent to 6½ percent of GDP is projected to raise NPV of external debt-to-GDP and to exports above thresholds. - Structural reforms: - Accelerate reforms to promote private sector development: introduce the new foreign investment regime, deepen state enterprise reform, and pursue governance reform vigorously. - Emphasize private-sector-led growth; public sector to provide enabling environment. - Financial sector and liquidity management: - Monitor rapid credit growth and banks’ excess reserve dynamics to prevent inflationary pressures. ### Medium-term outlook and scenarios - Baseline medium-term scenario (assumptions: macro stability maintained, critical mass of structural reforms implemented, RAMSI and donors remain engaged): - Annual growth could plausibly average about 4½ (1½ per capita) percent in 2006–10, driven mainly by private investment and exports. - Inflation projected to decline gradually. - External current account deficit would peak in 2006 due to imported capital goods and narrow over time as export capacity develops. - Reserves would fall modestly as aid moderates but stabilize at four months of imports. - Risks and alternative scenarios: - Risks are skewed to the downside: lackluster policy implementation, political instability (parliamentary elections scheduled for early 2006), lower donor flows and international commodity prices, and disruptions in major projects. - A slow reform process could undermine macro stability, reduce donor support, increase external vulnerability, lead to debt service arrears, import contraction, and fiscal strain with large reductions in public services. - Conversely, a flawless reform implementation could push growth to an annual average of about 6 percent in 2006–10. ### Political and implementation constraints - Progress on structural reforms has been mixed; legislative and institutional reforms have been slow due to the need for extensive consultations and attaining reform buy-in. - The political situation is fluid; the early 2006 parliamentary elections could make accelerating the reform agenda difficult and outcomes are unpredictable. *Source: Executive Summary of IMF staff report _cr05365.* ### 18. Staff advised saving any revenue over-performance and any under-spending on ### _cr05365 - 18. Staff advised saving any revenue over-performance and any under-spending on ### Fiscal outturn and short-term recommendations - Staff advised saving any revenue over-performance and any under-spending on investment projects and in other areas this year, while holding current expenditure tightly to the budget. - Tax revenue is likely to over-perform as tax administration improvements yield results, and logging and import duties are on track to exceed budget estimates. - Capacity constraints are likely to slow: - the pace of domestically-financed capital spending, - some government programs, - the process of filling vacancies. - Some current spending overruns are expected, especially in administrative and representation costs, but these should not fully offset revenue gains. - If the government resists emerging spending pressures in nonpriority areas, the budget outturn could be roughly 1 percent of GDP better than budgeted. - Contingency warrants under existing legislation for 2005 amount to: - 1 percent of GDP for recurrent outlays, and - 1 percent of GDP for development spending. - In the staff’s projection, only the recurrent contingency warrant is assumed to be utilized. ### Medium-term fiscal risks and consolidation needs - Medium-term fiscal risks identified: - Spending pressures from wage demands and administrative costs. - Rising social, infrastructure, and operations and maintenance needs as donor-provided services and infrastructure are taken on by government. - Anticipated decline in aid flows and direct foreign budgetary support. - Expected falls in tax receipts from logging and imports (due to tariff reductions under the Pacific Island Countries Trade Agreement). - Substantial stock of arrears and projected increases in debt servicing costs. - Consolidation advice for the 2006 budget: - An adjustment of about 1½ percentage points of GDP would be appropriate and is feasible. - Potential measures to achieve this include: - Ensuring this year’s 16 percent bonus to civil servants is not incorporated in base salaries (equivalent to about ¾ percent of GDP). - Further tax administration gains. - Containing nonproductive outlays. - If necessary, adjusting excises, fees, and the determined prices for logs. ### Public expenditure composition and civil service reform - Donors currently provide several basic government services; spending for police and law and justice is high in the present post-conflict situation and should decline over time. - Local provision of services is expected to cost less once staffed by local personnel. - Authorities have started work toward a medium-term fiscal framework and welcomed a combined-source budget that incorporates donor flows to: - determine the resource envelope, - avoid large swings in public service levels, - improve alignment between government priorities and donor projects, - facilitate donor coordination. - Staff recommendations on expenditure productivity: - Accelerate preparations for comprehensive civil service reform integrated within the medium-term budget framework. - Rationalize civil service employment and decompress the wage scale to create room for needed qualified professionals. - In social sectors, obtain better outcomes for existing spending and reallocate resources toward primary education and health care. ### Tax policy and administration - Widening the tax base over the medium term is imperative. - Current observations: - Tax revenue-to-GDP ratio broadly in line with other PICs. - Tax rates (except excises) are among the highest in the region. - Staff urged: - Not to grant new tax exemptions and to reduce the scope of existing ones. - Continued implementation of PFTAC-recommended tax and customs administrative reforms. - Authorities stated no future tax holidays are envisaged, but acknowledged a backlog of logging duty exemptions that will erode revenue for some time. - Proposed tax reform: - Envisages a VAT-type tax as the linchpin of the indirect taxation system. - Expected advantages: eliminate cascading distortionary effects, remove most existing exemptions, and provide alternative revenue to offset import and logging duty losses. - Later stages would simplify direct income taxes and lower rates. ### Debt situation and restructuring - Authorities described external debt as “unsustainable” and are proceeding with the Honiara Club proposal to restructure external debt and clear external arrears. - Domestic measures: having restructured domestic bonds in 2004, the government is gradually paying expenditure arrears (amounting to about 8 percent of GDP) and is formulating plans to handle the largest claims. - Staff debt sustainability analysis (DSA) findings: - Debt is high, with some indicators currently above thresholds, and dynamics are fragile. - Baseline shows improvement over time, but scenarios and shocks could cause debt ratios to deteriorate significantly. - Combined with poor credit history and likely contingent liabilities, the Solomon Islands is at high risk of debt distress. - External debt stock as at end-2004 (In millions of US$): - Total (including arrears): 159.9 - Arrears 1/: 15.8 - Total (excluding arrears): 144.1 - Multilateral: 100.1 - Asian Development Bank: 49.5 - World Bank (IDA): 46.4 - Bilateral: 37.0 - Commercial: 7.1 - 1/ Arrears are principally to bilateral and commercial creditors. ### Exchange rate and monetary management - CBSI policy supported to resist upward pressure on the exchange rate amid strong foreign inflows. - Historical movement: Solomon Islands dollar depreciated by 34 percent in 2002; de facto pegged to the U.S. dollar since early 2003. - Rationale for reserve accumulation: large aid flows are volatile; building reserves buffers against volatility and external shocks. - Staff advice on future pressures: - As aid flows diminish and imports grow, downward pressure on the exchange rate should not be resisted. - CBSI agreed reserves should cover 3½ months of imports as a minimum. - The real exchange rate level is almost 20 percent lower than pre-conflict levels and appears broadly adequate. - Inflation and monetary policy challenges: - Inflation remained below 8 percent in the past two years. - Continued strong foreign inflows, drawdown of government deposits, or rising credit could jeopardize the single-digit indicative target. - CBSI readiness to use moral suasion and administrative measures if credit growth becomes inflationary. - Improving the T-bill market could develop indirect liquidity instruments, though short-run contribution is limited due to perceived government debt risk. ### Financial sector findings and recommendations - Commercial banking system: - Two foreign banks with a combined market share of 57 percent and a local private bank. - Aggregate capital to risk-weighted assets ratio (CRAR) is over 25 percent. - Nonperforming loans declined to 1.9 percent of total from 5.5 percent at end–2003. - Return on equity averages about 20 percent; liquidity is high. - Development Bank of the Solomon Islands (DBSI): - CBSI, as court-appointed manager, has begun repaying depositors and shrinking DBSI’s balance sheet. - Staff advised liquidating the DBSI. - Estimated cost of financing the institution’s liquidation: ¾ percent of GDP. - National Provident Fund (NPF): - Poor asset quality with nonperforming assets estimated at 13 percent of total. - Mandated annual return to contributors: 2.5 percent. - Concerns over insufficient returns to cover operating costs and mandated return. - Authorities increasing transparency, improving governance, and preparing a new NPF bill. - Staff recognized benefits of allowing NPF to invest abroad but advised conservative investment guidelines. ### Structural reforms, governance, and statistics - Economic Reform Unit leading reforms to meet NERRDP objectives; priorities include: - Promoting a better business environment, - Reforming SOEs, - Enhancing infrastructure, - Improving governance, - Building civil service capacity as a prerequisite. - Business environment: a new foreign investment bill aims to simplify, make transparent, and nondiscretionary the registration process (awaiting parliamentary passage). - SOE restructuring progress: - Solomon Airlines expected to be ready for privatization in late 2005 and may serve as a model. - Draft restructuring plan for the Solomon Islands Electricity Authority prepared with World Bank assistance. - Restructuring of the Water Authority expected to start next; regulatory review and audited accounts of public enterprises under consideration. - Infrastructure: donor-financed road construction and other projects have commenced; AsDB assisting in strengthening the ministry of infrastructure and developing a national transport plan; inter-island shipping and wharves being addressed. - Governance: with RAMSI’s assistance, progress includes: - Legislation for a single ballot box to reduce vote-buying, - Strengthening parliament, the justice system, and watchdogs, - Increased participation of civil society in oversight, - Greater transparency in Ministry of Finance and NPF via regular press briefings and account publication. - Statistics and data deficiencies: - Data deficiencies are significant in real, fiscal, and external sectors. - National accounts have not been produced since 1994 except for crude GDP estimates. - Very limited data on donor activities; accounts of public institutions outside central government do not exist. - Partial balance of payments data estimated using foreign exchange transactions and suspected to misstate trade. - National Statistical Office (NSO) plans: - Household income and expenditure survey beginning this October, - Preparation of complete national accounts in 2006, - Preliminary trade estimates based on customs data. - Staff and authorities agreed on the need to collect data on aid flows and produce accounts for public institutions outside central government. *Source: IMF staff report text (content unit: _cr05365 - 18).* ### 41. The notable improvement in the Solomon Islands’ economic performance, which ### _cr05365 - 41. The notable improvement in the Solomon Islands’ economic performance, which ### Economic performance and outlook - Improvement in economic performance started after RAMSI’s arrival and has continued. - Against the backdrop of improved security, macroeconomic stability has been maintained and economic activity has rebounded. - Aid flows have risen, and donors have pledged assistance for some time to come. - Key challenge: sustain per capita growth over the medium term while logging will decline from its present unsustainable rate. - Risks are skewed to the downside. ### Fiscal policy, budget consolidation, and debt - Given limited financing sources and the need to reduce public debt, the government must consolidate its budget. - Near-term consolidation measures: - Ensure that this year’s budget outturn comes in better than budgeted by saving any revenue overperformance and any underspending, while holding current outlays tightly to the budget. - In the 2006 budget, ensure one-off bonuses paid to civil servants in 2005 do not enter base salaries. - Pursue further tax administration gains and contain nonproductive expenditure. - Over the medium term: - Efficiency of government spending must be substantially raised and revenue should be kept broadly constant in relation to GDP. - Spending decisions and civil service reform should be set within a medium-term budget framework and a combined-source budget incorporating aid flows. - Re-orient expenditure away from the wage bill and toward infrastructure, maintenance, and primary education and health care. - No new tax exemptions should be granted and the scope of existing ones curtailed. - The proposed tax reform would go a long way in improving revenue generation. - Fiscal decentralization, at least until public finances and capacity strengthen, would be imprudent and would likely weaken fiscal discipline. - Debt assessment: - Although debt indicators improve under the baseline scenario, fragile debt dynamics and the country’s credit history suggest that the Solomon Islands is at high risk of debt distress. - The authorities should normalize relations with creditors as soon as possible. ### Monetary policy and exchange rate regime - The policy of stabilizing the exchange rate in the face of strong foreign inflows is appropriate. - The CBSI has de-facto pegged the Solomon Islands dollar since early 2003 and rebuilt reserves, as large aid flows are expected to be temporary and volatile. - External competitiveness appears adequate at present. - Caution: downward pressure on the exchange rate should not be resisted given the country’s exposure to external shocks and the priority assigned to maintaining an adequate reserve level. - Monetary policy challenges ahead: - Continued strong foreign inflows combined with a drawdown of government deposits and an acceleration in private credit growth might jeopardize its indicative single digit inflation target. - The CBSI should continue to stand ready to rein in credit growth, including, if necessary, via administrative measures, given limited instruments at its disposal. ### Financial sector - Commercial banking system: - Continues to perform satisfactorily; commercial banks are well capitalized and asset quality has improved. - NPF and DBSI: - The NPF’s weak profitability is a concern; NPF continues to suffer from low profitability despite improved liquidity. - Letting the institution invest abroad could be beneficial, but strict investment guidelines should be adopted first. - The new NPF bill should be passed. - The DBSI should be liquidated; pressures to revive the DBSI should be resisted. ### Structural reforms and governance - Structural reforms are needed to promote private sector development and achieve higher per capita income. - Priority reforms and actions: - Passage of the foreign investment bill would send a signal to investors and donors about the authorities’ commitment to reform. - Deepening and extending SOE reform, in particular of the utilities, is needed to improve service delivery and reduce fiscal risks. - Infrastructure is slowly being rebuilt, which is key to boost new economic activities. - Better governance and institution strengthening are afoot in a number of areas and their continuation is critical in maintaining confidence and ensuring equal opportunities for all in society. ### Data and statistical capacity - The statistical database is barely adequate for surveillance and continues to hamper it. - Data shortcomings in the real, fiscal, and external sectors hinder the assessment of the fiscal stance and external position. - Remedial efforts are under way in a number of areas. *Source: _cr05365 - 41. The notable improvement in the Solomon Islands’ economic performance, which* ### 50. It is proposed that the next Article IV consultation be conducted on the 12- ### _cr05365 - 50. It is proposed that the next Article IV consultation be conducted on the 12- ### Overview and key macroeconomic indicators (2000–05) - Nominal GDP (2004): US$258 million - Population (2004): 469,400 - GDP per capita (2004): US$550 - Quota: SDR 10.4 million - Real GDP (percent change): 2000 -14.3, 2001 -9.0, 2002 -2.4, 2003 5.6, 2004 5.5, 2005 4.4 - Marketed output (percent change): 2000 -19.9, 2001 -13.9, 2002 -4.8, 2003 8.9, 2004 7.8, 2005 5.0 - CPI (period average): 2000 6.9, 2001 7.6, 2002 9.4, 2003 10.1, 2004 6.9, 2005 6.6 - CPI (end of period): 2000 7.6, 2001 6.5, 2002 15.4, 2003 3.8, 2004 7.8, 2005 8.0 - Nominal GDP (millions of SI$): 2000 1,523; 2001 1,447; 2002 1,527; 2003 1,710; 2004 1,932; 2005 2,151 - Nominal GDP (millions of US$): 2000 299; 2001 274; 2002 226; 2003 228; 2004 258; 2005 285 - Per capita GDP (in US$): 2000 714; 2001 637; 2002 510; 2003 499; 2004 550; 2005 591 ### Fiscal balances and public finances (2000–05) - Total revenue (percent of GDP): 2000 22.1, 2001 23.5, 2002 18.8, 2003 37.6, 2004 48.9, 2005 48.5 - Recurrent revenue (percent of GDP): 2000 18.3, 2001 15.3, 2002 16.2, 2003 19.5, 2004 26.8, 2005 26.6 - Grants (percent of GDP): 2000 3.7, 2001 8.2, 2002 2.6, 2003 18.1, 2004 22.1, 2005 21.8 - Total expenditure (percent of GDP): 2000 29.9, 2001 36.2, 2002 39.8, 2003 39.5, 2004 40.6, 2005 49.0 - Recurrent expenditure (percent of GDP): 2000 25.3, 2001 27.3, 2002 26.6, 2003 23.9, 2004 22.9, 2005 27.9 - Development expenditure (percent of GDP): 2000 4.6, 2001 8.9, 2002 3.2, 2003 15.6, 2004 17.7, 2005 21.1 - Recurrent balance 2/ (percent of GDP): 2000 -6.3, 2001 -11.8, 2002 -10.0, 2003 -0.5, 2004 8.4, 2005 1.0 - Overall balance 3/ (percent of GDP): 2000 -7.8, 2001 -12.7, 2002 -11.0, 2003 -1.9, 2004 8.3, 2005 -0.5 - Foreign financing (net, percent of GDP): 2000 0.6, 2001 5.0, 2002 3.8, 2003 0.4, 2004 -1.6, 2005 -0.6 - Domestic financing (net, percent of GDP): 2000 4.2, 2001 -1.4, 2002 -3.0, 2003 -9.0, 2004 -6.7, 2005 1.3 - Stock of expenditure arrears (percent of GDP, end of period) 4/: 2000 4.9, 2001 8.9, 2002 12.1, 2003 14.9, 2004 8.0, 2005 7.8 - Domestic principal arrears (percent of GDP): 2000 0.0, 2001 3.9, 2002 7.1, 2003 2.1, 2004 0.0, 2005 0.0 - Central government debt (percent of GDP) 5/: 2000 69.7, 2001 94.1, 2002 114.1, 2003 122.0, 2004 92.3, 2005 88.0 - Domestic: 2000 27.8, 2001 45.1, 2002 47.1, 2003 51.5, 2004 30.4, 2005 26.7 - External: 2000 42.0, 2001 49.0, 2002 67.0, 2003 70.6, 2004 62.0, 2005 61.4 - External debt (US$ millions, end of period): 2000 125.6, 2001 134.3, 2002 151.6, 2003 160.8, 2004 159.9, 2005 175.1 - External debt service to exports of GNFS (accrual basis): 2000 3.9, 2001 8.1, 2002 10.3, 2003 9.0, 2004 5.9, 2005 7.8 ### Monetary and credit (selected, end-year data) - Net foreign assets (percent change): 2000 -39.8, 2001 -31.8, 2002 30.2, 2003 106.4, 2004 111.0, 2005 0.8 - Net domestic assets (percent change): 2000 46.8, 2001 -4.4, 2002 -4.8, 2003 -11.0, 2004 -60.4, 2005 85.1 - Net domestic credit (percent change): 2000 23.0, 2001 -7.2, 2002 11.0, 2003 -0.7, 2004 -36.1, 2005 43.3 - Credit to private sector (percent change): 2000 1.8, 2001 -21.8, 2002 12.2, 2003 26.1, 2004 10.6, 2005 40.0 - Broad money (percent change): 2000 0.5, 2001 -13.2, 2002 4.0, 2003 26.0, 2004 28.1, 2005 13.4 - Interest rate (3-month t/bill rate, average): 2000 7.3, 2001 8.9, 2002 8.3, 2003 5.8, 2004 6.0, 2005 3.5 6/ ### External sector and balance of payments (2000–05) - Exports, f.o.b. (US$ millions): 2000 65.1, 2001 47.1, 2002 57.8, 2003 74.2, 2004 96.7, 2005 100.2 - Imports, c.i.f. (US$ millions): 2000 -98.1, 2001 -90.6, 2002 -62.3, 2003 -85.2, 2004 -98.7, 2005 -140.3 - Current account (US$ millions): 2000 -31.7, 2001 -35.1, 2002 -16.3, 2003 3.1, 2004 32.3, 2005 -30.8 - Current account (percent of GDP): 2000 -10.6, 2001 -12.8, 2002 -7.2, 2003 1.3, 2004 12.5, 2005 -10.8 - Capital account (US$ millions): 2000 8.5, 2001 17.2, 2002 6.3, 2003 11.1, 2004 8.1, 2005 27.5 - Overall balance (accrual, US$ millions): 2000 -23.1, 2001 -17.9, 2002 -10.0, 2003 14.2, 2004 40.4, 2005 -3.2 - Gross official reserves (US$ millions, end of period): 2000 31.3, 2001 18.5, 2002 17.5, 2003 36.0, 2004 79.0, 2005 78.5 - (in months of next year's imports of GNFS): 2000 3.1, 2001 2.8, 2002 2.1, 2003 3.6, 2004 5.7, 2005 4.7 - Exchange rate (SI$/US$, end of period): 2000 5.10, 2001 5.56, 2002 7.46, 2003 7.49, 2004 7.51, 2005 7.52 - Real effective exchange rate (period average, 2000=100): 2000 100.0, 2001 109.2, 2002 90.8, 2003 78.5, 2004 77.4, 2005 78.3 - Nominal effective exchange rate (period average, 2000=100): 2000 100.0, 2001 103.2, 2002 80.1, 2003 64.0, 2004 59.6, 2005 57.8 ### Balance of payments detail (2000–05) - Trade balance (US$ millions): 2000 -32.9, 2001 -43.5, 2002 -4.5, 2003 -11.0, 2004 -2.0, 2005 -40.1 - Merchandise exports by commodity (US$ millions, selected): - Timber: 2000 44.1, 2001 36.1, 2002 37.7, 2003 49.5, 2004 62.6, 2005 62.7 - Fish: 2000 8.1, 2001 7.1, 2002 10.5, 2003 12.4, 2004 17.6, 2005 16.6 - Petroleum (imports): 2000 18.4, 2001 14.4, 2002 11.2, 2003 11.7, 2004 23.3, 2005 37.6 - Services and income (net): 2000 13.8, 2001 -6.3, 2002 -6.3, 2003 0.7, 2004 9.0, 2005 -2.1 - Net current transfers (US$ millions): 2000 -12.6, 2001 14.7, 2002 -5.5, 2003 13.4, 2004 25.2, 2005 11.4 - Private sector transfers (US$ millions): 2000 -13.3, 2001 5.0, 2002 -12.1, 2003 4.2, 2004 14.2, 2005 6.7 - Public sector transfers (US$ millions): 2000 0.7, 2001 9.6, 2002 6.6, 2003 9.2, 2004 11.1, 2005 4.7 ### Medium-term baseline projections (2003–10) - Real GDP (percent change): 2003 5.6, 2004 5.5, 2005 4.4, 2006 4.8, 2007 4.4, 2008 4.4, 2009 4.4, 2010 4.4 - Marketed output (percent change): 2003 8.9, 2004 7.8, 2005 5.0, 2006 5.5, 2007 4.9, 2008 4.9, 2009 4.9, 2010 4.9 - CPI (period average): 2003 10.1, 2004 6.9, 2005 6.6, 2006 6.6, 2007 7.7, 2008 7.7, 2009 7.1, 2010 6.3 - Nominal GDP (millions of SI$): 2003 1,710; 2004 1,932; 2005 2,151; 2006 2,394; 2007 2,676; 2008 2,988; 2009 3,303; 2010 3,626 - Nominal GDP (millions of US$): 2003 228; 2004 258; 2005 285; 2006 307; 2007 327; 2008 350; 2009 371; 2010 394 - Per capita GDP (in US$): 2003 499; 2004 550; 2005 591; 2006 618; 2007 642; 2008 668; 2009 689; 2010 711 - Central government operations (percent of GDP): - Total revenue: 2003 37.6, 2004 48.9, 2005 48.5, 2006 42.8, 2007 40.9, 2008 40.6, 2009 39.7, 2010 37.8 - Recurrent revenue: 2003 19.5, 2004 26.8, 2005 26.6, 2006 27.0, 2007 27.0, 2008 27.1, 2009 27.0, 2010 27.0 - Grants: 2003 18.1, 2004 22.1, 2005 21.8, 2006 15.8, 2007 14.0, 2008 13.5, 2009 12.7, 2010 10.8 - Total expenditure 1/: 2003 39.5, 2004 40.6, 2005 49.0, 2006 41.6, 2007 39.8, 2008 39.4, 2009 38.6, 2010 36.6 - Recurrent expenditure: 2003 23.9, 2004 22.9, 2005 27.0, 2006 27.9, 2007 26.4, 2008 26.1, 2009 25.9, 2010 25.7 - Development expenditure: 2003 15.6, 2004 17.7, 2005 21.1, 2006 15.2, 2007 13.4, 2008 13.3, 2009 12.6, 2010 10.9 - Recurrent balance 2/ (percent of GDP): 2003 -0.5, 2004 8.4, 2005 1.0, 2006 2.7, 2007 2.6, 2008 2.9, 2009 2.9, 2010 3.0 - Overall balance 3/ (percent of GDP): 2003 -1.9, 2004 8.3, 2005 -0.5, 2006 1.2, 2007 1.2, 2008 1.2, 2009 1.2, 2010 1.2 - Stock of expenditure arrears (percent of GDP, end of period) 4/: 2003 14.9, 2004 8.0, 2005 7.8, 2006 7.0, 2007 6.4, 2008 5.9, 2009 5.6, 2010 5.3 - Domestic principal arrears (percent of GDP): 2003 12.1, 2004 0.0, 2005 0.0, 2006 0.0, 2007 0.0, 2008 0.0, 2009 0.0, 2010 0.0 - Balance of payments (US$ millions, projections): Exports, f.o.b.: 2006 116.0, 2007 120.8, 2008 128.3, 2009 136.4, 2010 143.3; Imports, c.i.f.: 2006 -170.0, 2007 -163.0, 2008 -166.3, 2009 -168.3, 2010 -174.7 - Current account (US$ millions): 2006 -41.8, 2007 -29.8, 2008 -24.9, 2009 -17.6, 2010 -15.9 - (Percent of GDP): 2006 -13.6, 2007 -9.1, 2008 -7.1, 2009 -4.7, 2010 -4.0 - Gross official reserves (US$ millions, end of period): 2006 83.7, 2007 77.0, 2008 70.1, 2009 70.7, 2010 70.8 - (in months of next year's imports of GNFS): 2006 3.6, 2007 4.6, 2008 4.2, 2009 4.0, 2010 4.0 ### Medium-term alternative scenario (policy slippage, 2003–10) - Real GDP (percent change): 2006 1.6, 2007 1.4, 2008 1.4, 2009 1.4, 2010 1.3 - CPI (end of period): 2006 8.0, 2007 8.0, 2008 8.5, 2009 9.5, 2010 10.0 - Per capita GDP in 2005 prices (SI$): 2003 4,275; 2004 4,387; 2005 4,458; 2006 4,404; 2007 4,344; 2008 4,286; 2009 4,229; 2010 4,168 - Central government operations (percent of GDP): Total revenue: 2006 28.0, 2007 25.4, 2008 24.2, 2009 22.8, 2010 21.8 - Grants decline sharply: 2006 3.9, 2007 2.7, 2008 2.3, 2009 2.0, 2010 1.8 - Overall balance 2/: 2006 -4.3, 2007 -4.2, 2008 -2.1, 2009 -2.0, 2010 -1.9 - Central government debt (percent of GDP) 3/: 2006 85.7, 2007 82.4, 2008 82.6, 2009 83.8, 2010 85.3 - Broad money (percent change, end-year): 2006 -4.5, 2007 -17.8, 2008 -11.1, 2009 3.5, 2010 5.6 - Balance of payments (selected): Exports (GNFS; percent change) 2006 -1.5, 2007 -7.5, 2008 -5.4, 2009 -4.0, 2010 -3.1 - Current account (including net transfers; percent of GDP): 2006 -12.3, 2007 -12.8, 2008 -11.3, 2009 -8.6, 2010 -4.9 - Gross official reserves (US$ millions, end of period): 2006 48.5, 2007 48.8, 2008 17.5, 2009 5.0, 2010 4.7 - (in months of next year's imports of GNFS): 2006 3.6, 2007 5.7, 2008 5.6, 2009 4.0, 2010 0.5 ### Debt sustainability and risks - Baseline debt assessment (text summary): - At end-2004, the NPV of external debt to GDP was 45 percent, exceeding the Board-endorsed indicative threshold. - Ratios of the NPV of debt to exports and revenue were below their thresholds at end-2004. - After realization of an external contingent liability worth 5 percent of GDP, ratios of the NPV of debt to both GDP and exports are projected to exceed thresholds at end-2005. - Under the baseline adjustment scenario, debt indicators improve: NPV of debt to exports is projected to fall below its threshold in 2006, but the NPV of debt to GDP still exceeds its threshold in 2010. - Debt service to both exports and revenue (text truncated in source) is noted as a key metric. ### Policy assumptions and scenario drivers (text summary) - Baseline assumptions: - RAMSI and donors remain engaged; ODA declines from 20 percent of GDP in 2005 to 9 percent of GDP in 2010. - Logging activity is halved. - A critical mass of structural reforms is implemented enabling new private activities to replace logging. - Financial stability is maintained, underpinned by fiscal adjustment; no new borrowing takes place. - Government gradually eliminates outstanding informal expenditure arrears by 2010, and realized contingent liabilities (around 1.5 percent of GDP) to the NPF by 2015. - Alternative (downside) scenario assumptions: - Reforms stall; donors and investors withdraw. - Growth slows, per capita income falls, inflation rises to about 10 percent. - Lower ODA and no FDI produce import compression; government forced to reduce recurrent spending by one fifth. - Unpaid debt service adds to arrears; government debt remains largely unchanged in 2010 from end-2006. *Sources: Data provided by the authorities; and Fund staff estimates.* ### 9.3 percent, respectively, in 2005) always remain below thresholds. ### _cr05365 - 9.3 percent, respectively, in 2005) always remain below thresholds. ### Fiscal and debt position (summary) - At end-2004, domestic debt was 30 percent of GDP (including expenditure arrears). - Total public debt (including arrears) at end-2004 was 92 percent of GDP. - Realization of external and domestic contingent liabilities worth 1.5 percent of GDP in 2005 meant public debt to GDP was projected to fall only slightly in 2005. - Under the baseline, all debt indicators decline over the medium term, but: - The NPV of public debt remains above 100 percent of government domestic revenue. - The NPV of public debt remains around 30 percent of GDP even in 2015. - Data limitations: data on private external, state enterprise, and provincial government debt are not available; analysis is limited to central government debt data. ### Key risks and uncertainties highlighted by staff - High level of domestic debt and informal expenditure arrears pose significant risks to fiscal sustainability. - Contingent liabilities are currently estimated at 10 percent of GDP; if all were realized as external debt, the NPV of debt would exceed 30 percent of GDP even in 2015. - Additional contingent liabilities are likely to be uncovered as audits of state enterprise and provincial government accounts are underway; state enterprises and provincial governments have few resources, so a large share of any contingent liabilities related to them is likely to be realized. - Macroeconomic variables (especially GDP) are subject to large measurement errors. - Data on aid flows are extremely limited; staff estimates of ODA are subject to great uncertainty. ### Stress tests and sensitivity analysis — main findings - External debt: - A return of key variables to their historical averages would see the ratio of the NPV of debt to exports and GDP rise during the projection period. - Even a temporary fall in export growth would see the NPV of debt to exports jump and exceed the threshold almost throughout the period to 2025 and result in an external debt service ratio above its threshold for two years before 2010. - A temporary fall in GDP growth would keep the NPV of debt to GDP above its threshold past 2010 and the NPV of debt to exports above its threshold to 2008. - Public debt: - Lower GDP growth, even temporarily, and a return of growth and the primary balance to their historical averages result in the ratios of the NPV of public debt to GDP and revenue rising. - Historical scenarios and temporary stress tests highlight fragility of the Solomon Islands’ debt position given concentrated and volatile exports and the nascent stage of reforms and recovery. ### Selected quantitative indicators and projections (as reported) - Contingent liabilities: - Current estimate of contingent liabilities recognition (not included in public sector debt): 10.0, 9.0, 8.1, 7.2, 6.5, 6.0, 3.9, 1.8 (series across projection years shown). - External debt (selected NPV and ratios): - NPV of external debt (series): 45.0, 46.5, 43.5, 40.8, 37.6, 34.9, 32.4, 22.3, 12.6. - NPV of debt in percent of exports (series): 91.3, 102.3, 90.3, 86.1, 80.1, 74.4, 69.6, 52.9, 32.4. - Debt service-to-exports ratio (series): 4.9, 6.2, 4.4, 5.5, 4.8, 4.6, 5.1, 4.7, 4.5, 3.3, 1.4. - Public sector debt (selected levels and ratios): - Public sector debt (series): 121.9, 92.5, 88.6, 81.2, 73.5, 65.6, 59.2, 52.9, 32.5, 15.4 (across years reported). - NPV of public sector debt (series): 102.3, 75.3, 73.1, 66.4, 60.2, 54.1, 49.1, 44.4, 28.5, 14.4. - NPV of public sector debt-to-revenue ratio (in percent) (series): 523.6, 281.5, 274.6, 245.7, 223.3, 199.7, 181.6, 164.4, 105.5, 53.6. - Debt service-to-revenue ratio (in percent) (series): 14.5, 25.0, 17.0, 10.6, 9.5, 8.5, 7.8, 7.3, 4.8, 2.3. - Macroeconomic assumptions (selected): - Real GDP growth (series/highlights): -2.4, 5.6, 5.5, -0.5, 10.8, 4.4, 4.8, 4.4, 4.4, 4.4, 4.5, 4.0, 3.8 (series across years). - GDP deflator in US dollar terms (change in percent) (series/highlights): -15.5, -4.6, 7.4, -1.0, 9.1, 5.8, 2.5, 2.3, 2.5, 1.5, 1.6, 2.7, 1.9, 1.4. - Effective interest rate (percent) (series/highlights): 3.2, 3.3, 2.0, 2.1, 1.1, 3.1, 2.0, 2.1, 2.1, 2.1, 2.2, 2.3, 2.6, 4.2. - Nominal GDP (billions of U.S. dollars) (memorandum item): 0.226, 0.228, 0.258, 0.285, 0.306, 0.327, 0.350, 0.371, 0.394, 0.526, 0.882 (series across years). ### Staff conclusion and implication - The Solomon Islands is at high risk of debt distress: - Some external debt indicators are currently above thresholds. - Domestic debt, arrears, and contingent liabilities are also high. - Although debt indicators fall over the medium term under the staff’s adjustment scenario, historical scenarios and several stress tests, even some temporary ones, lead to a deterioration in the debt burden. - These tests are especially relevant given the Solomon Islands’ volatile economic history and the nascent stage of current reforms and recovery. - The country’s poor credit history, together with the analyses above, support the assessment that the Solomon Islands is at high risk of debt distress. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05365.pdf* ### Annex I. Table 4. Solomon Islands: Sensitivity Analysis for Key Indicators of Public Debt, 2005–25 ### Annex I. Table 4. Solomon Islands: Sensitivity Analysis for Key Indicators of Public Debt, 2005–25 ### Scope and projection horizon - Coverage: Indicators of public and publicly guaranteed external debt under alternative scenarios. - Projection period: 2005–2025. - Scenarios shown: Baseline; Historical scenario (or Historical scenario/No Reform where indicated); Most extreme stress test. - Notes: - 1/ Most extreme stress test is test that yields highest ratio in 2015. - 2/ Revenue including grants. - 3/ Primary balance remains at historical average. ### NPV of debt-to-GDP ratio (charts and scales) - Chart 1 (first panel set): - Vertical axis scale: 0, 10, 20, 30, 40, 50, 60, 70, 80, 90, 100 (percent). - Time axis: 2005, 2007, 2009, 2011, 2013, 2015, 2017, 2019, 2021, 2023, 2025. - Series: Baseline; Historical scenario; Most extreme stress test. - Chart 2 (second panel set): - Vertical axis scale: 0, 20, 40, 60, 80, 100, 120, 140 (percent). - Time axis: 2005–2025 (annual ticks shown). - Series: Baseline; No Reform 3/; Most extreme stress test. ### NPV of debt-to-exports (or debt-to-exports ratio) and debt service-to-exports - NPV of debt-to-exports ratio (first panel set): - Vertical axis scale: 0, 50, 100, 150, 200, 250, 300, 350, 400 (percent). - Time axis: 2005–2025 (biennial ticks as in chart). - Series: Baseline; Historical scenario; Most extreme stress test. - Debt service-to-exports ratio (first panel set): - Vertical axis scale: 0, 5, 10, 15, 20, 25 (percent). - Time axis: 2005–2025 (biennial ticks as in chart). - Series: Baseline; Historical scenario; Most extreme stress test. ### Debt-to-revenue and debt-service-to-revenue (charts and scales) - NPV of Debt-to-Revenue Ratio 2/ (second panel set): - Vertical axis scale: 0, 100, 200, 300, 400, 500, 600 (percent). - Time axis: 2005–2025 (annual ticks shown). - Series: Baseline; No Reform 3/; Most extreme stress test. - Debt Service-to-Revenue Ratio 2/ (second panel set): - Vertical axis scale: 0, 5, 10, 15, 20, 25, 30, 35, 40 (percent). - Time axis: 2005–2025 (annual ticks shown). - Series: Baseline; No Reform 3/; Most extreme stress test. ### Interpretation and scenario design (staff projections and simulations) - Projections and scenario outcomes are based on staff projections and simulations. - The “Most extreme stress test” is defined operationally as the single test that yields the highest ratio in 2015 (see note 1/). - Revenue definitions used in the debt-to-revenue and debt-service-to-revenue charts include grants (see note 2/). - The “No Reform” scenario constrains the primary balance to remain at the historical average (see note 3/). *Source: Staff projections and simulations (Annex I Table 4, Annex I Figures 1–2).* ### 2002. The AsDB resumed its country operations after the settlement of the arrears in September 2003. ### _cr05365 - 2002. The AsDB resumed its country operations after the settlement of the arrears in September 2003. ### AsDB operations and programmatic focus - The AsDB resumed country operations after the settlement of the arrears in September 2003. - Technical assistance (TA) approvals: - 2003: one new TA grant approved for institutional strengthening of the Ministry of Infrastructure Development. - 2004: two TA grants approved in support of inter-island transportation and state-owned enterprise reforms and private sector participation. - 2005: one TA grant for interisland transport reform approved; another TA grant for business environment reforms proposed for approval in late 2005. - Lending policy: - In agreement with the Government, the AsDB will provide no new loans to the country until public finances have stabilized. - Strategic guidance and implementation: - AsDB operations guided by the Pacific Strategy 2005-2009. - Support to the Government's National Economic Recovery, Reform, and Development Plan will focus on: (i) improving inter-island transportation; (ii) reforming state-owned enterprises; and (iii) providing an enabling environment for the private sector. - The Pacific Liaison and Coordination Office (PLCO), established in early 2005 in Sydney, is responsible for country programming, project implementation and administration, supported by the Pacific Operations Division (PAHQ) in Manila. - Contact: Winfried Wicklein, Desk Officer for the Solomon Islands, wwicklein@adb.org ### Loans, approvals, and disbursements (1999–2004) — (In millions of U.S. dollars) - Loan approvals: - 1999: -- - 2000: 10.00 - 2001: -- - 2002: -- - 2003: -- - 2004: -- - Loan disbursements: - 1999: 0.32 - 2000: 0.45 - 2001: 0.01 - 2002: 0.00 - 2003: 0.23 - 2004: 0.86 - Cumulative loan amount approved (as of end-of-year): - 1999: 69.31 - 2000: 79.31 - 2001: 79.31 - 2002: 79.31 - 2003: 79.31 - 2004: 79.3 - Cumulative net effective loans (as of end-of-year): - 1999: 64.65 - 2000: 54.30 - 2001: 64.05 - 2002: 64.83 - 2003: 65.87 - 2004: 66.3 - Cumulative disbursements (as of end-of-year): - 1999: 53.61 - 2000: 54.07 - 2001: 54.07 - 2002: 54.07 - 2003: 54.30 - 2004: 55.1 ### Poverty and human development — summary findings - Human development ranking and poverty: - United Nations Human Development Index rank: 124 out of 175 countries. - Social indicators of poverty and human development are low; poverty remains high by anecdotal evidence. - Drivers limiting extreme poverty: - Abundant resource base, assured access to customary land tenure, and resilient social networks have limited extreme forms of poverty such as malnourishment. - Demographic pressures: - Population growth rate: about 3 percent a year. - Population under age 15: 43 percent. - Education: - Primary education enrollment ratio: about 97 percent (primary education is not compulsory). - Secondary education enrollment ratio: 30 percent. - Health and sanitation: - Malaria: rampant, with the highest rate of infection in the world outside of sub-Saharan Africa. - More than a third of the rural population lacks access to safe water. - Public spending context: - Prior to 1999 civil conflict, health and education expenditures were sizable at 3–5 percent of GDP each. - Conflict impact and recovery: - Positive development trends likely halted or reversed during civil conflict years; agricultural production for market sharply declined and recovered since mid-2003. - Anecdotal evidence suggests delivery of pro-poor services is improving post-2003. - Urban-rural differences: - Rural problems: lack of essential public services (health, education) and lack of cash income due to market access difficulties. - Urban conditions: better social services and higher average incomes, but urban poor face difficulties securing employment and land for residence. - Millennium Development Goals (MDGs): - Government adopted MDGs in its National Economic Recovery, Reform, and Development Plan and committed to monitoring progress. - Achieving the MDGs by 2015 is possible but remains a major challenge. - Progress in reducing malaria incidence, maternal mortality and ensuring environmental sustainability has been inadequate. ### Millennium Development Goals — selected data and targets (as presented) - Goal 1: Eradicate Extreme Poverty and Hunger - Prevalence of child malnutrition (percent of children under 5): 21 21 ... 11 - Goal 2: Achieve Universal Primary Education - Net enrollment ratio in primary education: 39 74 79; Target: 100 - Goal 3: Promote Gender Equality - Ratio of girls to boys in primary education (percent): 81 86 ...; Target: 100 - Ratio of girls to boys in secondary education (percent): 58 70 .. ; Target: 100 - Proportion of seats held by women in national parliament (percent): ...20... - Goal 4: Reduce Child Mortality - Under 5 mortality rate (per 1,000): 36 30 22; Target: 12 - Infant mortality rate (per 1,000 live births): 76 68 19; Target: 25 - Goal 5: Improve Maternal Health - Maternal mortality ratio (per 100,000 live births): ...130... - Births attended by skilled health staff (percent of total): ......87... - Goal 6: Combat HIV/AIDS, Malaria and Other Diseases - Incidence of tuberculosis (per 100,000 people): 392 8160... - Incidence of malaria (per 100,000 people): 45,000 15,172 19,600 less than 8000 - Goal 7: Ensure Environmental Sustainability - Forest area (percent of total land area): 92 90.687... - Nationally protected areas (percent of total land area): ...0 1.3... - CO2 emissions (metric tons per capita): 0.5 0.4...... - Access to an improved water source (percent of population): ...71 70; Target: 100 - Access to improved sanitation (percent of population): ...30...... - Goal 8: Develop a Global Partnership for Development - Fixed line and mobile telephones (per 1,000 people): 16...19... - Personal computers (per 1,000 people): ...25 44... (Note: data as presented in the source table, preserving formatting and values exactly.) ### Social indicators — selected values (Latest Single Year / Same Region/Income Group) - Population: - Total population, mid-year (millions): 0.2 0.3 0.5 1,855 2,312 - Growth rate (Percent annual average for period): 3.4 3.2 2.8 1.0 1.9 - Urban population (percent of population): 10.5 14.6 21.4 39.1 30.4 - Total fertility rate (births per woman): 7.1 5.9 5.3 2.1 3.7 - Income: - GNI per capita (US$): 480 730 560 1,070 440 - Public expenditure: - Health (% of GDP): 4.5 1.9 1.5 - Education (% of GDP): 3.4 3.2 3.2 - Education enrollment (Net primary school enrollment rate, percent of age group): - Total: ...83...93 77 - Male: ...89...93 82 - Female: ...77...94 72 - Access to improved water source (percent of population): - Total: ...70 70 78 75 - Urban: ...94 92 89 - Rural: ...65 69 70 - Immunization rate (Percent under 12 months): - Measles: ...70 78 82 65 - DPT: 46 77 71 86 67 - Child malnutrition (percent under 5 years): ...21 21 15 44 - Life expectancy at birth (Years): - Total: 58 64 70 70 58 - Male: 57 64 68 68 57 - Female: 59 65 71 71 59 - Mortality: - Infant (per 1,000 live births): 43 29 19 32 80 - Under 5 (per 1,000 live births): 56 36 22 41 123 - Maternal (modeled, per 100,000 live births): ...130 116 689 - Births attended by skilled health staff (percent): ......85 87 38 (Sources: World Bank, 2005 World Development Indicators CD-ROM; notes and formatting preserved as in source.) ### Statistical issues — main weaknesses and remedial actions - General data environment: - Economic and financial database is poor; data shortcomings significantly limit staff analysis for real, fiscal, and external sectors. - Only the Central Bank of the Solomon Islands (CBSI) regularly provides monetary statistics adequate for surveillance; data are barely adequate overall. - NSO rebuilding has commenced; CBSI publishes summarized monetary and price data in Monthly Economic Bulletin and Quarterly Review and Annual Report. - Real sector statistics: - NSO has not produced national accounts data since 1994; CBSI produced annual estimates based on limited source data (primarily commodity exports and employment estimates) with no GDP expenditure breakdown. - Monthly production data for major export commodities are reported; limited employment data from National Provident Fund; no wage data. - NSO reclaimed CPI production (Honiara-only) from CBSI in August 2003, but CPI weights are outdated. - Monetary and financial statistics: - CBSI compiles monthly monetary statistics; summary data in Monthly Economic Bulletin; detailed data in Quarterly Review and Annual Report. - Monetary and financial statistics provided to the Fund are considered adequate for surveillance purposes. - Direct reporting to STA was suspended but recently resumed; CBSI fails to utilize the standardized report forms (SRFs) for reporting monetary statistics introduced in October 2004. - Government finance statistics: - MOF began disseminating monthly press releases on budget realizations in August 2003. - Expenditure and financing data provided by MOF are not consistent with GFS methodology; reliability of historical data is doubtful due to breakdown of accounting mechanisms and large expenditure arrears during the crisis. - No separate data for provincial government finances; financial data for state enterprises not compiled for several years. - Except for direct budget support, authorities do not collect information on disbursements of grants or grant-financed development spending. - Installation of the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) database in the CBSI and MOF in March improved official debt data quality. - MOF has not reported annual GFS data for publication in the Government Finance Statistics Yearbook (GFSY). - External sector statistics: - Partial quarterly balance of payments data estimated by CBSI from cash foreign exchange transactions through the banking system; available with a three-month lag. - In absence of supplementary surveys (e.g., on FDI and aid inflows), data are deficient in detail and coverage. - Remedial measures and capacity building: - NSO rehabilitation underway; PFTAC GDDS mission (February 2004) concluded rebuilding statistical system requires extensive TA over at least two years and external funding. - New government statistician appointed in 2004; long-term adviser funded by AusAid and NZAid took post in April 2005. - NSO activities and schedule: - Conducting a business survey. - Preparing for a household income and expenditure survey (HIES) expected to take place over a six month period beginning in October 2005. - HIES results to be used to construct new bases for national accounts and CPI weights. - Work on producing 2005 national accounts estimates expected to commence in April-May 2006. - Started work on a construction price index; plans for national headline and underlying CPIs following HIES. - Population census planned for late 2009, with preparations expected to commence in 2007. - Other recommendations and planned technical support: - Increase response rate to balance of payments surveys to reduce reliance on foreign exchange transaction records. - Resume use of customs data for estimation of imports and exports; PC Trade software scheduled for installation at the Customs Division in 2006 to facilitate trade estimates. - NSO hampered by weak technological skills and low survey response rates; addressing through tougher penalties under the Statistics Act. - NSO prepared a prototype of government finance statistics tables based on recurrent revenue and expenditure data from MOF; work is preliminary and hampered by lack of aid and development spending information. - Audits of state enterprise accounts underway and expected to improve picture of public sector finances. - PFTAC planning to provide technical assistance to NSO in government finance statistics compilation. ### Table of Common Indicators Required for Surveillance (As of August 23, 2005) — selected entries - Exchange Rates: - Date of latest observation: July 2005; Date received: July 2005; Frequency of Data: D; Frequency of Reporting: M; Frequency of publication: M - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: - Date of latest observation: July 2005; Date received: July 2005; Frequency of Data: W; Frequency of Reporting: M; Frequency of publication: M - Reserve/Base Money: - Date of latest observation: July 2005; Date received: August 2005; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M - Broad Money: - Date of latest observation: July 2005; Date received: August 2005; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M - Central Bank Balance Sheet: - Date of latest observation: July 2005; Date received: August 2005; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M - Consolidated Balance Sheet of the Banking System: - Date of latest observation: July 2005; Date received: August 2005; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M - Interest Rates: - Date of latest observation: July 2005; Date received: August 2005; Frequency of Data: W; Frequency of Reporting: M; Frequency of publication: M - Consumer Price Index: - Date of latest observation: May 2005; Date received: July 2005; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M - Revenue, Expenditure, Balance and Composition of Financing – Central Government: - Date of latest observation: December 2004; Date received: April 2005; Frequency: A; Frequency of Reporting: A; Frequency of publication: A - Stocks of Central Government and Central Government-Guaranteed Debt: - Date of latest observation: December 2004; Date received: March 2005; Frequency: A; Frequency of Reporting: A; Frequency of publication: A - External Current Account Balance: - Date of latest observation: December 2004; Date received: May 2005; Frequency: Q; Frequency of Reporting: Q; Frequency of publication: Q - Exports and Imports of Goods and Services: - Date of latest observation: March 2005; Date received: July 2005; Frequency: Q; Frequency of Reporting: Q; Frequency of publication: Q - GDP/GNP: - Date of latest observation: December 2004; Date received: May 2005; Frequency: A; Frequency of Reporting: A; Frequency of publication: A - Gross External Debt: - Date of latest observation: December 2004; Date received: March 2005; Frequency: A; Frequency of Reporting: A; Frequency of publication: Upon Request ### IMF Article IV consultation (Public Information Notice No. 05/142, October 13, 2005) — key macro developments and projections - Context: - IMF Executive Board concluded the 2005 Article IV consultation with the Solomon Islands on September 28, 2005. - Recovery began after arrival of RAMSI in mid-2003 and continued with restoration of law and order and extensive donor assistance. - Real activity and growth: - Growth in past three years was about 2½ percentage points above the Pacific Island Countries’ average. - Real GDP growth: 5½ percent in 2004 (boosted by logging) for the second year running. - 2005 projection: growth projected to moderate to 4½ percent absent a net contribution from logging; nonlogging growth should accelerate due to pickup in investment and significant fiscal stimulus. - Inflation: - Inflation rose to 7.8 percent in 2004 due to increased nontradable demand by expatriates and rising fuel prices. - Inflation projected to be broadly unchanged in 2005 due to continued pass-through of persistently high oil prices and pickup in economic activity. - Fiscal outcomes: - Central government recorded a large surplus of 8¼ percent of GDP in 2004 due to higher budget support grants, improved tax collection, eliminating militia payments, tighter expenditure controls, and limited spending capacity. - 2005 projection: small deficit of ½ percent of GDP projected, as capacity and the wage bill rise and budget support falls. - About half of the deterioration between 2004 and 2005 is due to exceptional factors: Australia’s withdrawal of budget support; one-off revenue from a tax amnesty and payment of back taxes in 2004; one-off civil servants bonus in 2005. - External sector and reserves: - 2004 current account: surplus of 12½ percent of GDP owing to strong recovery of timber and other primary commodity exports, low imports, and an almost doubling of current transfers. - Net international reserves (NIR) rose to US$76 million, equivalent to 5½ months of 2005 projected imports. - 2005 projection: current account projected to post a large deficit mainly due to the high import content of investment projects, rising oil import bill, and recovery from a low import base. - Despite wide current account deficit projected for 2005, with development grants expected to be strong and FDI to rise considerably, NIR are projected to decline only marginally. - Monetary developments: - Soaring net foreign assets at the central bank led to a 74 percent rise in reserve money in (text ends at this point in source). *Source: IMF staff report material compiled in _cr05365 - 2002. The AsDB resumed its country operations after the settlement of the arrears in September 2003.* ### 2004. However, a large buildup of banks’ excess reserves prevented strong money growth ### _cr05365 - 2004. However, a large buildup of banks’ excess reserves prevented strong money growth ### Monetary conditions and banking sector developments - Banks’ caution limited real private credit growth to 2.5 percent (2004). - Banks accumulated excess reserves equivalent to 39 percent of deposits (2004). - Real private credit growth rose to 21 percent year-on-year in May 2005 as banks’ excess reserves dropped to 32 percent of deposits. - Broad money growth: 28.1 percent (2004) and 13.4 percent (2005, projected). - Credit to private sector (end-year changes): 10.6 percent (2004) and 40.0 percent (2005, projected). - Net domestic credit: -36.1 percent (2004) and 43.3 percent (2005, projected). - Net domestic assets: -60.4 percent (2004) and 85.1 percent (2005, projected). - Net foreign assets: 111.0 percent (2004) and 0.8 percent (2005, projected). - Directors noted the banking system is generally sound but emphasized the need for strong risk management given the pick up in credit growth. - Directors called on the central bank to continue to develop monetary policy instruments and to be ready to rein in credit growth if inflationary pressures emerge. ### Inflation, exchange rate, and external position - CPI (period average): 6.9 percent (2004) and 6.6 percent (2005, projected). - CPI (end of period): 7.8 percent (2004) and 8.0 percent (2005, projected). - Directors considered the policy of stabilizing the exchange rate in the face of strong foreign inflows appropriate; they advised avoiding intervention if downward pressures arise and some Directors suggested reviewing the possibility of allowing some appreciation if warranted. - Gross official reserves (US$ millions, end of period): 79.0 (2004) and 78.5 (2005, end-July data). - Reserves in months of next year's imports of GNFS: 5.7 (2004) and 4.7 (2005, projected). - Exchange rate (SI$/US$, end of period): 7.51 (2004) and 7.52 (2005, end-July data). ### Fiscal developments and public finances - Total revenue (percent of GDP): 48.9 percent (2004) and 48.5 percent (2005, projected). - Recurrent revenue: 26.8 percent (2004) and 26.6 percent (2005, projected). - Grants: 22.1 percent (2004) and 21.8 percent (2005, projected). - Total expenditure (percent of GDP, accrual basis): 40.6 percent (2004) and 49.0 percent (2005, projected). - Recurrent expenditure: 22.9 percent (2004) and 27.9 percent (2005, projected). - Development expenditure: 17.7 percent (2004) and 21.1 percent (2005, projected). - Recurrent balance: 8.4 percent of GDP (2004) and 1.0 percent of GDP (2005, projected). - Overall balance: 8.3 percent of GDP (2004) and -0.5 percent of GDP (2005, projected). - Foreign financing (net): -1.6 percent of GDP (2004) and -0.6 percent of GDP (2005, projected). - Domestic financing (net): -6.7 percent of GDP (2004) and 1.3 percent of GDP (2005, projected). - Stock of expenditure arrears (percent of GDP, end of period): 8.0 percent (2004) and 7.8 percent (2005, projected). - Domestic principal arrears (percent of GDP): 0.0 percent (2004) and 0.0 percent (2005, projected). - Central government debt (percent of GDP, includes arrears): 92.3 percent (2004) and 88.0 percent (2005, projected). - Domestic debt: 30.4 percent (2004) and 26.7 percent (2005, projected). - External debt: 62.0 percent (2004) and 61.4 percent (2005, projected). - External debt (US$ millions, end of period): 159.9 (2004) and 175.1 (2005, projected). - External debt service to exports of GNFS (accrual basis): 5.9 percent (2004) and 7.8 percent (2005, projected). - Directors welcomed the marked improvement in the fiscal position in 2004 and the increased focus of spending on priority sectors in the 2005 Budget, but stressed the need for continued fiscal consolidation. - Directors emphasized implementing a medium-term fiscal framework and adopting a combined-source budget that would include all aid flows. - Directors urged saving any revenue overperformance and underspending to keep the 2005 deficit below budget and advised spending plans to consider limited absorptive capacity. ### Structural reforms, governance, and public institutions - Progress on structural reforms has been mixed; tax administration has improved and work has started on a medium-term fiscal framework. - Structural reform progress, especially on the legislative front, has been slow due to extensive consultations required to attain reform buy-in. - Directors stressed the need to step up the pace of structural reform to promote private sector development and mitigate the impact of declining logging activity over the medium term. - Specific reform priorities highlighted by Directors: - Passage of the foreign investment bill. - Streamlining regulation and licensing procedures. - Deepening state-owned enterprise reform and strengthening the regulatory environment for utilities. - Broad-based civil service reform to reorient spending toward primary education and health, infrastructure, and maintenance. - Strengthening governance and institutions to enhance confidence, promote a level playing field, and ensure effective management of aid flows. - Directors recommended liquidation of the troubled Development Bank of the Solomon Islands. - Directors expressed concern about the continued poor profitability of the National Provident Fund (NPF) and associated fiscal risks; they welcomed efforts to introduce greater transparency and planned legislation to improve NPF governance. - Directors welcomed the amended anti-money laundering (AML) Act and steps to combat money laundering and the financing of terrorism. ### Executive Board assessment and key risks - Directors welcomed the continued recovery of the Solomon Islands’ economy and the maintenance of macroeconomic stability. - Outlook and risks noted: - Inflation expected to remain in single digits. - Strong commodity exports and substantial aid flows have strengthened the external position; reserve coverage is comfortable. - Logging is expected to decline from its current unsustainable level over the medium term; unless growth in other sectors picks up, living standards will likely fall. - Continued strong foreign inflows, a drawdown of government deposits, and acceleration in private credit growth could pose challenges for monetary policy. - Solomon Islands’ debt situation will remain fragile even if sound policies are implemented; Directors welcomed plans to normalize relations with creditors and emphasized tackling arrears. - Data and statistics: - Directors urged authorities to step up efforts to improve the reliability, coverage, and timeliness of data, noting shortcomings in the statistical database that hamper surveillance. ### Selected economic indicators (highlights) - Real GDP growth: 5.5 percent (2004) and 4.4 percent (2005, projected). - CPI (period average): 6.9 percent (2004) and 6.6 percent (2005, projected). - Nominal GDP (millions of US$): 258 (2004) and 285 (2005, projected). - Exports, f.o.b (US$ millions): 96.7 (2004) and 100.2 (2005, projected). - Imports, c.i.f. (US$ millions): -98.7 (2004) and -140.3 (2005, projected). - Current account (US$ millions): 32.3 (2004) and -30.8 (2005, projected). - Current account (percent of GDP): 12.5 percent (2004) and -10.8 percent (2005, projected). - Overall balance (accrual, US$ millions): 40.4 (2004) and -3.2 (2005, projected). - Real effective exchange rate (period average, 2000=100): 77.4 (2004) and 78.3 (2005, end-May data). - Nominal effective exchange rate (period average, 2000=100): 59.6 (2004) and 57.8 (2005, end-May data). *Source: IMF staff report content provided in the supplied document.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05365.pdf_