## _cr06362

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### Executive Summary — Economic developments and challenges
- Since RAMSI intervention, growth rebounded and financial stability maintained.
- Since 2003, per capita real GDP increased about 3.5 percent per year.
- Logging accounts for two thirds of exports, 14 percent of tax revenue, and 10 percent of GDP; expected to run out in about six years at current cutting rates.
- Current account swung into a wide deficit driven by donor-funded and new private projects and high oil prices.
- Reserves boosted by aid and FDI inflows; reserves remain above 5 months of imports.
- Inflation in the high single digits due to rising oil prices, expatriate demand pressures, and brisk private credit growth.
- 2006 budget projected to record a surplus for the third year running, driven by investment underspending and revenue overperformance, while low-priority spending is rising.
- Raising living standards requires addressing obstacles to private investment, weak institutions, and rapid population growth.

### Key policy issues and recommendations
- 2007–10 national development strategy:
  - Should translate “governance plus growth” and the Millennium Development Goals into concrete policies.
  - Should be country-led, implementable, incorporate all programs/projects, and serve as the key mechanism for aid coordination.
- Fiscal policy and medium-term framework:
  - Sustain fiscal discipline and develop a medium-term strategy to offset decline in logging and import duty revenue.
  - Strictly control the high wage bill to accommodate higher investment spending.
  - Pursue tax reforms to broaden the base and reduce cascading; reduce SOE inefficiencies; enhance public finance management.
  - Continue efforts to regularize debt; country remains at high risk of debt distress.
  - Approach fiscal decentralization carefully to avoid weakening public finances.
- Monetary and exchange rate policy:
  - Central bank’s de facto peg to the U.S. dollar is appropriate; CBSI should remain vigilant on inflation.
  - With strong foreign inflows the currency stabilized versus the U.S. dollar; allow downward pressure to be accommodated.
  - Strengthen inflation forecasting and act if inflation pressures intensify or reserves come under pressure.
- Financial system and access:
  - Liquidate the Development Bank of Solomon Islands (DBSI) and raise National Provident Fund (NPF) profitability.
  - Broaden access to financial services through commercially-oriented initiatives.
- Structural reforms:
  - Vigorously implement reforms to encourage private sector activity, prioritize governance, SOE restructuring, and infrastructure provision.

### Medium-term outlook and scenarios
- Near-term projections:
  - Real GDP growth projected to exceed 5 percent in 2006; logging makes no contribution to growth in 2006.
  - Nontimber growth boosted to 6 percent in 2006 by new investments (oil palm plantation and gold mine) and fiscal stimulus; nontimber output growth expected to remain at that level in 2007.
  - Total GDP growth projected to slow to 4¼ percent in 2007 due to lower logging.
  - Current external account deficit: 11 percent of GDP in 2005; projected to widen to 16 percent in 2006.
  - Near-term risk: higher oil prices and political instability.
- Scenario outcomes:
  - Strong reform scenario: real GDP growth could be sustained at 5 percent (2 percent per capita) over the medium term if reforms progress and RAMSI/donor engagement continue.
  - No reform scenario: growth could drop to under 2 percent; per capita income would fall; ODA and FDI would decline substantially; reserves and government deposits could be exhausted as early as 2009.
  - Baseline (intermediate) scenario: real GDP growth converges to about 3 percent, inflation declines to about 7 percent, current account deficit moderates to 9 percent of GDP, and reserve coverage remains above 4 months of imports.

### Fiscal stance, pressures, and recommended adjustments
- 2006 budget and outturn:
  - Budget envisaged shift to a deficit of ¾ percent of GDP from a 2¼ percent surplus in 2005, due to a 21 percent real increase in goods and services purchases and domestically-financed development spending.
  - Staff view: budget outturn likely about 1 percentage point of GDP better than budgeted due to revenue overperformance and investment underspending offsetting higher low-priority spending.
- Medium-term pressures identified:
  - Declining logging tax receipts; large agricultural and mining projects with tax holidays/exemptions.
  - Lower import duties because of the Pacific Island Countries Trade Agreement.
  - Lower aid flows; demands for higher wages and public employment; social and infrastructure needs.
  - SOEs’ and provincial governments’ poor finances and fiscal decentralization risks.
- Required adjustment and financing assumptions:
  - Government deposits are the only source of financing; policy projects no new borrowing.
  - If government deposits are used over five years and aid flows remain directly managed by donors, a budget surplus of about 1 percent of GDP per year is needed (a ½ percentage point of GDP adjustment compared to the projected 2006 outturn).
  - Declining revenue from logging and import tariffs: about 2½ percentage points of GDP over the next five years.
  - Current spending should be cut by about 1 percentage point of GDP over the next five years.
  - Wage bill equals 10 percent of GDP and about 40 percent of current spending.
- Suggested expenditure savings: strictly limit the wage bill; reduce representation, administration, and tertiary scholarships.

### Tax reform, PFM, and public spending composition
- Tax reform path:
  - Authorities committed to staged tax reform given capacity constraints; outgoing government’s Discussion Paper (November 2005) proposed VAT as linchpin.
  - Exemptions estimated to reduce the tax take by over a third; cascading inflates effective import tax to over 40 percent.
  - Incremental measures: rules-based transparent tax exemption guidelines issued; announced revocation of logging duty exemptions.
  - Staff encouraged refraining from granting new tax preferences; align reference prices of timber and fish with market prices immediately.
- Public financial management:
  - Improvements: local purchase orders required; Solomon Islands Accounting Services revitalized.
  - Remaining issues: underspending, routine supplementary budgets, payroll and tertiary education audit irregularities, tender processes need strengthening.
  - Staff recommendation: replace unfunded contingency warrants (1½ percent of GDP in 2006) with a smaller fully-funded contingency reserve (authorities view politically unpalatable).
  - Follow-up on audits and PFTAC-recommended Finance Instructions modifications expected to raise expenditure efficiency and governance.
- Composition of public spending:
  - Social spending high by low income country and regional standards; reallocate toward primary education and health.
  - About 40 percent of education budget goes to tertiary education (2 percent of students) compared with 30 percent to primary (80 percent of students).

### SOEs, subsidies, and rural development
- SOEs’ financial position and recommendations:
  - SIEA accumulated losses about 10 percent of GDP; debt 15 times its net worth; negative cash flow; Treasury cash injections estimated at ¼ percent of GDP for 2006.
  - Recommend implementing World Bank proposed management contract to run SIEA and SIWA jointly; compile audited accounts of all SOEs.
  - Government concurred reform needed but noted SOEs are autonomous statutory bodies and accounts have not been audited in years.
- Subsidies and rural development:
  - Authorities favor subsidies for rural development; Framework Document mentions subsidies to several sectors.
  - Staff view: non-targeted subsidies can be costly; IFC Foreign Advisory Service recommendations on investment incentives would be more effective.
- Fiscal decentralization:
  - Proceed cautiously; devolution requires good information on local governments’ operations (currently unavailable).
  - Focus on improving provincial administrative capacity and compiling provincial financial accounts and debts.

### Monetary policy, exchange rate, reserves, and inflation vigilance
- Exchange rate and reserves:
  - Staff support pragmatic de facto peg to the U.S. dollar; contributed to reserve position rise to 5½ months of imports.
  - As donor-financed projects are implemented, reserves will decline and should be allowed to do so.
  - If downward pressure materializes from other sources, allow exchange rate adjustment; address domestic policy slippages with fiscal/monetary tightening.
  - CPI-based REER remains 17 percent below its 1997–2001 average.
- Inflation and central bank instruments:
  - Inflation pressures likely to persist from rising oil prices, high private credit growth, and limited services supply response.
  - Staff recommend reassessing domestic credit expansion, consider raising the liquid asset ratio (LAR) and introducing possibly tradable credit ceilings if demand pressures or second-round effects intensify or reserves come under pressure.
  - CBSI plans: improve inflation monitoring tool kit; once national CPI available, seek technical assistance on inflation forecasting; over time develop the Treasury bill market (short-run issuance hindered by poor government credit history).
  - Note: Only deposits at CBSI qualify for the LAR.

### Financial sector reforms and access to finance
- DBSI and NPF:
  - Complete liquidation of DBSI recommended; DBSI negative net worth estimated at ½ percent of GDP; depositors likely to be repaid by year-end when CBSI court-appointed management mandate ends.
  - NPF: CBSI agreed in principle to allow NPF to invest abroad with simple conservative guidelines; NPF should improve asset quality, contain costs; approval of draft NPF bill would strengthen governance.
- Access initiatives: mobile bank; ANZ-post office partnership; enhancing secured lending framework.
- Commercial banks: adequately capitalized, highly liquid, profitable; access initiatives should be commercially oriented and not weaken banks.

### External sector, reserves, and debt developments
- Current account and trade:
  - Current account balance (US$ millions) series includes -32.3 (2005) and -51.9 (2006 projection).
  - Exports, f.o.b.: 102.5 (2005); 116.3 (2006 projection).
  - Imports, c.i.f.: -143.7 (2005); -182.4 (2006 projection).
  - Net exports declined sharply in 2005 due to weaker fish exports and smaller timber contribution; imports rebounded on fuel and project-related imports.
- Reserves and vulnerability:
  - Gross official reserves (US$ millions, end-period): 94.6 (2005); 98.2 (2006 projection).
  - Reserves in months of next year's imports: 5.3 (2005); 5.3 (2006 projection).
  - Strong ODA and private FDI flows have maintained reserve coverage above 5 months of imports.
- Debt developments and DSA highlights:
  - Total government debt declined to 80 percent of GDP in 2005; NPV of external debt fell to 40 percent of GDP.
  - Public domestic debt including arrears at end-2005: 26 percent of GDP (peak 51 percent in 2003).
  - Domestic debt expected to decline to 20 percent of GDP in 2006.
  - Total public debt projected at 42 percent of GDP in 2011.
  - NPV of public sector debt to revenue ratio stays above 100 percent until 2012.
  - Recognized contingent liabilities estimated at 13.5 percent of GDP (additional contingent liabilities estimated at 10 percent of GDP elsewhere).
  - Sensitivity analyses show temporary export declines or realization of contingent liabilities would substantially raise NPV debt ratios; several stress tests push indicators above thresholds.
  - Honiara Club measures: short-term moratorium and possibility of debt forgiveness after planned 2007 review; debt relief from commercial creditors amounting to 2½ percent of GDP achieved; stock of informal arrears fell by about 2 percent of GDP to 4½ percent of GDP.

### Key macroeconomic statistics (selected exact figures)
- Nominal GDP (2005): US$298 million
- Population (2005): 482,575
- GDP per capita (2005): US$618
- Per capita GDP series (US$) 2001–2007: 637, 514, 507, 565, 618, 662, 682
- Real GDP growth (percentage change) 2001–2007: -9.0, -1.6, 6.4, 8.0, 5.0, 5.3, 4.3
  - Nontimber: -9.4, -1.9, 4.6, 5.5, 4.5, 5.9, 5.9
- CPI (period average) 2001–2007: 7.6, 9.3, 10.0, 6.9, 7.3, 8.2, 8.4
- External debt (US$ millions, end-period) 2001–2007: 134.3, 151.6, 160.8, 160.7, 161.6, 164.0, 161.8
- Central government debt (percent of GDP) 2001–2007: 94.1, 113.3, 120.1, 90.1, 80.0, 69.9, 63.6
- Broad Money (M2) levels 2001–2007: 403.2, 419.3, 528.4, 677.0, 864.6, 1,018.5, 1,144.0
- Net international reserves (US$ millions) 2001–2007: 16.3, 15.8, 33.1, 76.0, 92.3, 96.0, 92.9

### Statistics, data quality, and capacity-building
- Overall assessment: economic and financial database poor; only monetary statistics adequate for surveillance.
- NSO rebuilding commenced; NSO completing Household Income and Expenditure Survey to underpin national accounts and a national CPI.
- NSO has not produced national accounts data since 1994; CBSI took over GDP estimates.
- February 2006 PFTAC mission: unless source data shortages addressed, GDP estimate quality will remain poor.
- Planned surveys to improve external sector data in 2006–07; population census planned for late 2009 with preparations to start in 2007.
- Remedial actions: CS-DRMS installed in CBSI and MOF (March 2005); PFTAC and other TA missions ongoing.

### Staff appraisal (summary)
- Recovery and stability since RAMSI likely to persist near term, but sustaining higher living standards is a formidable challenge.
- With natural forest expected to run out in about six years, diversifying the economy and implementing structural reforms are imperative.
- Recommendations summarized:
  - Use 2007–10 national development strategy as key mechanism for policy formulation and aid coordination.
  - Set up a system to track aid delivery and donors’ multiyear projections.
  - Back the strategy with a sound medium-term macroeconomic framework linked to the budget and an evaluation framework to monitor progress and strengthen accountability.

*Source: _cr06362 - IMF staff report excerpts and appendices.*

### Executive Summary ......................................................................................................

### Executive Summary

### Economic Developments and Challenges
- Since the intervention of the Regional Assistance Mission to the Solomon Islands (RAMSI), growth has rebounded and financial stability has been maintained.
- Since 2003, per capita real GDP has increased about 3.5 percent per year.
- Logging accounts for two thirds of exports, 14 percent of tax revenue, and 10 percent of GDP, and is expected to run out in about six years at the current rate of cutting.
- Strong donor-funded and newly started private sector projects, together with high oil prices, have shifted the current account into a wide deficit.
- Reserve coverage has been boosted by aid and foreign direct investment inflows; reserves remain above 5 months of imports.
- Inflation is in the high single digits due to rising oil prices, expatriate demand pressures, and brisk private credit growth.
- For the third year running, the budget is projected to record a surplus in 2006 due to investment underspending and revenue overperformance, but low-priority spending is rising.
- Raising living standards requires addressing deep-rooted obstacles to private investment, weak institutions, and rapid population growth; progress will depend on the vigor of structural reforms and maintaining macroeconomic and political stability.

### Key Policy Issues and Recommendations
- The 2007–10 national development strategy should translate the government’s objectives of “governance plus growth” and the Millennium Development Goals into concrete policies.
  - The strategy should be country-led, implementable, incorporate all programs/projects, and serve as the key mechanism for aid coordination.
- Fiscal discipline should be sustained and a medium-term strategy developed taking into account looming pressures.
  - The expected decline in logging and import duty revenue needs to be offset.
  - The high wage bill should be strictly controlled to accommodate higher investment spending.
  - Reforms to broaden the tax base and reduce cascading, address SOEs’ inefficiencies, and enhance public finance management should be pursued.
  - Ongoing efforts to regularize debt are welcome, as the country remains at high risk of debt distress.
  - Fiscal decentralization should be approached carefully and without weakening public finances.
- The central bank’s current exchange rate policy is appropriate; the CBSI should remain vigilant on inflation.
  - With strong foreign inflows, the currency has been stabilized versus the U.S. dollar, but downward pressure on the exchange rate should be accommodated.
  - The CBSI should strengthen its inflation forecasting and take measures if inflation pressures intensify or reserves come under pressure.
- Financial system soundness should be strengthened mainly by liquidating the development bank and raising the profitability of the National Provident Fund.
  - Plans to broaden access to financial services should be commercially-oriented.
- Structural reforms to encourage new private sector activities should be vigorously implemented, with priority on strengthened governance, SOE restructuring, and infrastructure provision.

### Medium-Term Outlook and Scenarios
- Recent near-term performance:
  - Real GDP growth is projected to exceed 5 percent in 2006, with logging making no contribution to growth.
  - New investments (mainly an oil palm plantation and a gold mine) and some fiscal stimulus will boost nontimber growth to 6 percent, reflecting the start of palm oil production and a significant rise in services.
  - Nontimber output growth is expected to remain at that level in 2007.
  - Total GDP growth is projected to slow to 4¼ percent in 2007 due to lower logging.
  - The current external account swung into a deficit of 11 percent of GDP in 2005, projected to widen to 16 percent in 2006.
  - Higher oil prices are the most significant near-term risk, together with political instability.
- Scenario outcomes:
  - Strong reform scenario: With substantial progress on reforms, maintained macroeconomic stability, and continued RAMSI and donor engagement, real GDP growth could be sustained at 5 percent (2 percent per capita) over the medium term, with nontimber activities more than offsetting timber’s decline.
  - No reform scenario: Without reforms, growth could drop to under 2 percent, per capita income would fall, ODA and FDI would decline substantially, and international reserves and government deposits could be all but exhausted as early as 2009.
  - Baseline (intermediate) scenario: With financial stability and RAMSI and donor engagement but slow structural reforms, real GDP growth would converge to about 3 percent, inflation would decline to about 7 percent, the current account deficit would moderate to 9 percent of GDP, and reserve coverage would remain above 4 months of imports. This represents a downgrading of the baseline compared to the 2005 Article IV consultation.

### The 2007–10 Development Strategy and Aid Flows
- The 2007–10 national development strategy is an opportunity to translate the Framework Document’s goals into concrete, implementable, and monitorable policies.
  - The strategy should be linked to operational plans and budgets and act as the country’s poverty reduction strategy and the key mechanism for donor harmonization.
- Aid context and implications:
  - Donors have made substantial long-term commitments estimated at about 25 percent of GDP since RAMSI’s intervention, but have indicated that these flows will be reduced over time.
  - Staff estimates annual aid disbursements in the order of 25 percent of GDP (including technical assistance) in 2004–05, equivalent to 94 percent of domestic revenue, ten times the low income countries’ average, and the largest among large PICs in per capita terms.
  - At present, only New Zealand’s assistance to education is implemented through the government’s budget; the remaining aid is managed by individual donors and is not centrally recorded.
  - Australia has committed funds to RAMSI until 2009; information on other donors’ multi-year commitments is not available.
  - The absence of a system that tracks aid delivery and donors’ multiyear projections risks duplication and hampers assessment of future fiscal pressures as donors withdraw from projects/programs.
  - The staff commended recent efforts toward adopting a system that tracks aid delivery and donors’ multiyear projections of realistic aid disbursements.

### Fiscal Policy and Debt
- 2006 fiscal stance and risks:
  - The 2006 budget envisages a shift to a deficit of ¾ percent of GDP from a 2¼ percent surplus in 2005, due to a 21 percent real increase in goods and services purchases and domestically-financed development spending.
  - The staff’s view is that the budget outturn is likely to be about 1 percentage point of GDP better than budgeted, with higher spending in low-priority areas (wage bill, tertiary scholarships, and representation) likely to be more than offset by revenue overperformance (due to improved tax compliance and a reduction in logging duty exemptions) and investment underspending.
  - Given deficiencies in project planning and execution capacity constraining investment outlays, the government should refrain from spending unused funds and should save the revenue overperformance; this fiscal stance would help contain inflation.

*Source: _cr06362 - Executive Summary*

### 12.      The authorities are committed to remain within budget, but argued for the need

### _cr06362 - 12.      The authorities are committed to remain within budget, but argued for the need

### Fiscal stance, wages, and vacancies
- Civil service wages: 3 percent increase at the beginning of the year, followed by a 6 percent increase in July, retroactive to January, with much larger increases for departmental heads.
- Vacancy filling: process accelerating, but about half of vacancies expected to remain unfilled by year-end.
- Authorities expect a small budget surplus despite the wage increases, with budget overperformance dependent on the speed of implementing the new government’s policies (likely to be slow).

### Medium-term fiscal pressures and strategy
- Identified sources of medium-term pressures (difficult to estimate in size and timing):
  - declining tax receipts from logging while large agricultural and mining projects have tax holidays/exemptions;
  - lower import duties because of the Pacific Island Countries Trade Agreement;
  - lower aid flows;
  - demands for higher wages and public employment;
  - social, infrastructure, and operation and maintenance needs.
- SOEs’ and provincial governments’ poor financial situation and fiscal decentralization may also contribute.
- Authorities will continue to develop a medium-term fiscal framework, building on forward estimates presented for the first time in the 2006 budget.

### Medium-term budget envelope, financing, and adjustment requirements
- Overall budget surplus required because government deposits are the only source of financing over the next few years and the government policy is no projected new borrowing.
- Assumptions and required adjustment:
  - Assuming government deposits are used over five years and aid flows remain directly managed by donors, the budget surplus would need to be about 1 percent of GDP per year over the medium term (a ½ percentage point of GDP adjustment compared to the projected 2006 outturn).
  - Declining revenue from logging and import tariffs: about 2½ percentage points of GDP over the next five years.
  - Current spending should be cut by about 1 percentage point of GDP over the next five years, partly to create fiscal space for investment.
  - Wage bill equals 10 percent of GDP and about 40 percent of current spending.
- Suggested expenditure savings: strictly limit the wage bill; reduce outlays on representation, administration and tertiary scholarships (as suggested by recent audits).

### Tax reform and revenue measures
- Authorities committed to tax reform but expect a staged approach due to capacity constraints.
- Outgoing government’s Discussion Paper (November 2005) proposal: VAT as the linchpin to address a narrow base and cascading.
- Exemptions estimated to reduce the tax take by over a third; cascading inflates the effective import tax to over 40 percent.
- Incremental measures underway: issuance of rules-based and transparent tax exemptions guidelines; announced revocation of logging duty exemptions.
- Staff encouraged: refrain from granting any new tax preferences; bring reference prices of timber and fish in line with market prices as an immediate step.

### Composition of public spending and civil service reform
- Improving composition of public spending is desirable to create fiscal space for investment and recurrent costs of donor-funded projects.
- Comprehensive civil service reform recommended: rationalize employment, fill critical vacancies, decompress the wage scale.
- Social spending: overall level high by low income country and regional standards; greater allocations to primary education and health care warranted.
  - Current allocation detail: about 40 percent of the education budget goes to tertiary education (2 percent of students), compared with 30 percent to primary (80 percent of students).

### Subsidies and rural development
- Authorities favor introducing government subsidies to promote rural development; Framework Document mentions subsidies to several sectors and businesses in rural areas.
- Staff view: non-targeted subsidies can be costly; implementing IFC Foreign Advisory Service recommendations on investment incentives would be more effective.

### Public financial management (PFM) and audits
- Improvements noted: local purchase orders now required for procurement; revitalization of Solomon Islands Accounting Services enhancing PFM capacity across ministries.
- Remaining issues: underspending, routine supplementary budgets (reflecting poor budget planning and execution), payroll and tertiary education audit irregularities, tender processes need strengthening.
- Staff recommendation: replace unfunded contingency warrants with a smaller fully-funded contingency reserve (authorities view politically unpalatable); planned simplification in budget classification should reduce supplementary appropriations.
- Follow-up on audits and modifications to the Finance Instructions along PFTAC’s recommendations expected to raise expenditure efficiency and governance.
- Note: contingency warrants give the government the power to spend a certain amount (1½ percent of GDP in 2006) beyond approved budgetary appropriations.

### State-owned enterprises (SOEs)
- SOEs’ poor performance should be urgently addressed; risks substantial and service delivery poor.
- Solomon Islands Electricity Authority (SIEA) review:
  - accumulated losses of about 10 percent of GDP;
  - debt 15 times its net worth;
  - negative cash flow, partly due to arrears buildup by the Solomon Islands Water Authority (SIWA), requiring frequent Treasury cash injections (estimated at ¼ percent of GDP for 2006);
  - SIEA has recently borrowed commercially.
- Recommendations: implement World Bank’s proposed management contract to run SIEA and SIWA jointly urgently; compile audited accounts of all SOEs.
- Authorities concurred reform is needed but noted it will take time because SOEs are autonomous statutory bodies and accounts have not been audited in years.

### Fiscal decentralization and provincial finances
- Government supports greater provincial/community involvement but will proceed cautiously with fiscal decentralization due to potential cost and ineffectiveness until public finances and capacity strengthen.
- Devolution requires good information on local governments’ operations, currently unavailable.
- Authorities focused on improving provincial governments’ administrative capacity and ascertaining debts owed by provincial governments and compiling their financial accounts.

### Public debt status and risks
- Despite progress, public debt remains at high risk of distress and regularization efforts continue.
- Honiara Club initiative led to a short-term moratorium by one creditor and possibility of debt forgiveness after planned 2007 review.
- Debt developments:
  - Total government debt declined to 80 percent of GDP in 2005, and the NPV of external debt fell to 40 percent of GDP.
  - All debt indicators improve in the baseline scenario with continuation of the government’s policy of no new borrowing.
- Debt risks: could rise rapidly with lower export and GDP growth; SOEs and proposal to absorb provincial government debt could increase risk.
- Staff view: government absorption of provincial debt should not be done without conditionality to enforce strict financial discipline.
- Government policy: no new loans remains necessary; once debt regularized and substantially reduced, modest domestic borrowing would be appropriate.

- External debt table excerpt (as presented):
  - Total (including arrears)161.6100.0
  - Arrears 1/22.013.6
  - Total (excluding arrears)139.686.4
  - Multilateral98.360.8
    - Of which: Asian Development Bank51.031.6
    - World Bank (IDA)43.526.9
  - Bilateral35.221.8
  - Commercial6.23.9
  - Note: 1/ Arrears are principally to bilateral and commercial creditors.

### Exchange rate, reserves, and monetary policy
- Exchange rate policy: staff supported pragmatic de facto peg to the U.S. dollar; de facto peg served as nominal anchor and contributed to a rise in the reserve position to the equivalent of 5½ months of imports.
- As donor-financed projects are implemented, reserves will decline and should be allowed to do so.
- If downward pressure on the exchange rate materializes from other sources, the exchange rate should adjust; domestic policy slippages should be addressed by tightening fiscal and monetary policy rather than greater exchange rate flexibility.
- Competitiveness indicators:
  - CPI-based REER remains 17 percent below its 1997–2001 average.
  - Private sector wages appear to be below regional comparators.
- Dutch disease risk: pressures on housing and skilled labor have started appearing; deterioration in the terms of trade calls for close monitoring and structural reforms.

### Inflation outlook and central bank instruments
- Inflation pressures likely to persist due to rising oil prices, high private credit growth, and limited supply response for services.
- Staff recommendation if demand pressures or second-round effects intensify, or reserves come under pressure: reassess domestic credit expansion, consider raising the liquid asset ratio (LAR) and introducing (possibly tradable) credit ceilings.
- CBSI plans:
  - Focus on improving inflation monitoring tool kit;
  - Once national CPI becomes available, better identify inflation sources and seek technical assistance on inflation forecasting for a more forward-looking monetary policy;
  - Over time develop the Treasury bill market, though short-run issuance hindered by the government’s poor credit history.
- Note: Only deposits at the CBSI qualify for the LAR.

### Financial sector reforms and access to finance
- Strengthening the financial system: complete liquidation of the Development Bank of Solomon Islands (DBSI) and raise National Provident Fund’s (NPF) profitability.
  - DBSI: pressures to revive should be resisted; all depositors likely to be repaid by year-end when CBSI court-appointed management mandate ends; bank’s negative net worth estimated at ½ percent of GDP; largest creditor indicated willingness to write off loans if liquidated.
  - NPF: CBSI agreed in principle to let NPF invest abroad to boost profitability, with simple conservative investment guidelines and clear monitoring procedures (currently under preparation); NPF should improve asset quality and contain costs; approval of draft NPF bill would strengthen governance.
- Access initiatives: mobile bank; ANZ-post office partnership; enhancing secured lending transaction framework.
- Commercial banks: currently adequately capitalized, highly liquid, and profitable; initiatives should be commercially oriented and not weaken commercial banks.

### Growth-enhancing structural reforms and rural focus
- Government role: establish conditions for private sector-led growth; key reforms include improving governance (taxation, PFM, SOEs, NPF), upgrading service delivery, better transportation, lower telecommunication costs, cutting red tape, updating commercial laws.
- Rural development prioritized: agricultural and rural development strategy being developed with donors and World Bank assistance; land reform and better forest management important but constrained by customary land ownership.
- Near-term signals of reform commitment: gazetting of the new foreign investment bill in June; implementing the SIEA/SIWA management contract; progress in streamlining immigration and labor permits; consideration of reducing import duties and liberalizing the trade regime.

### Statistics and data improvements
- Measures underway to remedy deficiencies in the statistical database: national accounts, fiscal, and external data are weak.
- Statistics Office completing a Household Income and Expenditure Survey to produce poverty and MDGs indicators and to underpin national accounts and a national CPI.
- Surveys to improve external sector data planned for 2006–07.

### Staff appraisal (summary)
- Economic recovery and stability since RAMSI’s intervention likely to persist in the near term, but sustaining higher living standards remains a formidable challenge.
- Recent performance: growth robust; two large projects started; budget discipline maintained; inflation under control.
- With natural forest expected to run out in some six years, diversifying the economy and jump-starting structural reforms are imperative.
- Recommendation: 2007–10 national development strategy should be the key mechanism for policy formulation and aid coordination; set up a system to track aid delivery; back the strategy with a sound medium-term macroeconomic framework linked to the budget; establish an evaluation framework to monitor progress and strengthen accountability.

*Source: _cr06362 - 12.      The authorities are committed to remain within budget, but argued for the need (IMF staff report excerpt).*

### 33.      With pressures looming, the government should set fiscal policy with a medium-

### _cr06362 - 33.      With pressures looming, the government should set fiscal policy with a medium-

### Fiscal policy and consolidation (paras. 33–35)
- Paragraph 33: Given limited financing sources and the need to reduce the high public debt, consolidation is required.
- Paragraph 33: Declining revenue from logging and import duties need to be replaced with domestic taxes and current spending as a share of GDP reduced by containing the wage bill.
- Paragraph 33: The government’s commitment to budget discipline is welcome, as is its intention to continue developing a medium-term fiscal framework.
- Paragraph 33: In the short run, it should refrain from spending unutilized appropriations for investment projects and revenue overperformance.
- Paragraph 34: Fiscal reforms are critical to support fiscal consolidation and growth.
- Paragraph 34: Reorienting spending from the high wage bill towards investment, especially infrastructure, and implementing a tax reform that widens the base while reducing rates and cascading should be key elements of the fiscal reform agenda.
- Paragraph 35: Despite progress, the risk of debt distress remains high. Public debt is high, and shocks, even temporary ones, could cause it to rise significantly.
- Paragraph 35: Contingent liabilities are likely to increase due to the weak finances of SOEs and provincial governments.
- Paragraph 35: Efforts to regularize the debt situation should be sustained, and the policy of no new borrowing enforced for all public entities, including SOEs, until the debt situation improves substantially.

### Public financial management, tax, and spending reforms (para. 34)
- Paragraph 34: Public financial management reforms would help ensure better governance and allow aid flows to be brought within budget.
- Paragraph 34: SOEs’ poor performance requires urgent attention.
- Paragraph 34: Fiscal decentralization should be approached very carefully and should not involve a weakening of fiscal discipline.

### Exchange rate, monetary policy, and inflation vigilance (para. 36)
- Paragraph 36: The exchange rate policy is appropriate, and competitiveness appears adequate, but the CBSI should remain vigilant on inflation.
- Paragraph 36: The current stabilization of the S.I. dollar versus the U.S. dollar shields the economy from the effects of strong foreign inflows, but downward pressure on the exchange rate should not be resisted.
- Paragraph 36: Good prospects for nontimber exports suggest that competitiveness is reasonable.
- Paragraph 36: Efforts under way to upgrade the central bank’s inflation forecasting ability are important to ensure a timely monetary policy response, if inflation pressures intensify or if reserves were to come under pressure.

### Financial sector reforms (para. 37)
- Paragraph 37: Liquidating the DBSI, strengthening the NPF’s profitability, and widening access to banking without compromising financial stability are key financial reforms.
- Paragraph 37: The process of winding up the troubled DBSI is advanced and should be completed.
- Paragraph 37: Commercially-based mechanisms should be used to broaden access to banking services and credit to ensure their viability.
- Paragraph 37: Allowing the NPF to invest abroad could boost the institution’s profitability, but simple and conservative investment guidelines for the Fund need to be developed, and it has to be strictly supervised by the CBSI.
- Paragraph 37: The new NPF bill would also improve the institution’s governance.

### Structural reforms and governance (para. 38)
- Paragraph 38: Among structural reforms, priority should be accorded to better governance, SOE restructuring, and improving transportation infrastructure.
- Paragraph 38: The business environment, as well as rural development, will benefit from these reforms.
- Paragraph 38: The gazetting of the new foreign investment bill is commendable, but further strong signals of the government’s reform orientation are needed to bolster confidence, with the most critical being the restructuring of the utilities.

### Statistics and data quality (para. 39)
- Paragraph 39: Improving the statistical database is essential to better ground policymaking and monitor results.
- Paragraph 39: At present, the statistical database is barely adequate for surveillance.
- Paragraph 39: Measures under way should improve real and external sector data, but upgrading statistics will be a long-term process.

*Source: _cr06362 - 33.      With pressures looming, the government should set fiscal policy with a medium-*

### 40.      It is proposed that the next Article IV consultation be conducted on the 12-month

### _cr06362 - 40.      It is proposed that the next Article IV consultation be conducted on the 12-month

### Key proposal
- It is proposed that the next Article IV consultation be conducted on the 12-month cycle.

### Economic performance and structure
- Nominal GDP (2005): US$298 million
- Population (2005): 482,575
- GDP per capita (2005): US$618
- Per capita GDP (in US$) series 2001–2007: 637, 514, 507, 565, 618, 662, 682
- Per capita GDP (in US$) projections 2004–2011: 565, 618, 662, 682, 701, 718, 735, 753 (selected series also shown elsewhere)
- Real GDP growth (percentage change) 2001–2007: -9.0, -1.6, 6.4, 8.0, 5.0, 5.3, 4.3
  - Of which: Nontimber: -9.4, -1.9, 4.6, 5.5, 4.5, 5.9, 5.9
- CPI (period average) 2001–2007: 7.6, 9.3, 10.0, 6.9, 7.3, 8.2, 8.4
- CPI (end of period) 2001–2007: 6.5, 15.3, 3.7, 7.6, 8.4, 9.2, 8.5
- Observations from figures:
  - After rising markedly in 2004, logging remained at about four times its sustainable level in 2005.
  - Cocoa and copra production picked up, but fish catch was down.
  - Per capita income continued to recover, but remained two-thirds of its pre-conflict level.
  - Services and agriculture were the main drivers of GDP growth in 2005.
  - Fuel prices contributed significantly to the rise in inflation, including through transport costs and utility charges.
  - Inflation exceeded the CBSI's 10 percent indicative target in September 2005, but eased in recent months.

### Fiscal developments (1998–2005 and 2001–07 tables)
- Fiscal balance trends (1998–2005): overall and overall excl. grants shown; "The budget remained in surplus in 2005."
- Central government operations (percent of GDP) 2001–2007 (selected lines):
  - Total revenue and grants: 23.5, 18.7, 37.0, 47.5, 54.5, 53.7, 52.1
  - Total revenue: 15.3, 16.1, 19.2, 26.0, 27.7, 29.8, 29.7
  - Grants: 8.2, 2.6, 17.8, 21.5, 26.8, 23.9, 22.4
  - Total expenditure 1/: 36.2, 29.6, 39.0, 39.5, 22.2, 53.1, 51.1
  - Recurrent expenditure: 27.3, 26.4, 23.6, 22.2, 25.1, 27.9, 27.9
  - Development expenditure: 8.9, 3.2, 15.4, 17.2, 27.0, 25.2, 23.1
  - Recurrent balance 2/: -11.8, -9.9, -0.6, 8.1, 3.9, 3.1, 3.2
  - Overall balance 3/: -12.7, -10.9, -1.9, 8.0, 2.3, -0.8, 0.6, 1.0 (table shows multiple columns and projections)
- Fiscal drivers and notes:
  - Compliance gains and a reduction in logging duty exemptions boosted revenue, and grants continued to increase.
  - Expenditure picked up, but capacity constraints prevented a sharper rise in spending.
  - Public debt declined due to growth, payment of arrears, and debt forgiveness.
  - All domestic taxes rose in 2005, while import duties flattened as tobacco imports declined.
  - Goods and services spending continued to accelerate, and the wage bill also nudged up.
- Stock of expenditure arrears (end of period, percent of GDP) 2001–2007: 8.9, 12.0, 14.7, 7.8, 4.5, 2.5, 2.4
- Central government debt (percent of GDP) 2001–2007: 94.1, 113.3, 120.1, 90.1, 80.0, 69.9, 63.6
  - Domestic: 45.1, 46.7, 50.6, 29.6, 25.8, 20.0, 17.1
  - External: 49.0, 66.6, 69.5, 60.6, 54.2, 50.0, 46.5
- External debt (US$ millions, end of period) 2001–2007: 134.3, 151.6, 160.8, 160.7, 161.6, 164.0, 161.8
- External debt service to exports of GNFS (accrual basis): 8.1, 10.3, 9.3, 5.9, 7.2, 5.2, 5.1

### Monetary and banking sector
- Monetary growth and liquidity:
  - Monetary growth eased in 2005.
  - Reserve money and broad money changes shown 1998–2005; broad money (M2) series 2001–2007 (end period, percent change): -13.2, 4.0, 26.0, 28.1, 27.7, 17.8, 12.3
  - Reserve money (levels and changes) and contributions from net foreign assets and net domestic assets shown.
  - Excess liquidity in percent of deposits and velocity measures included; "Inflation ended in single digit in 2005 and velocity fell further."
- Domestic credit (percent real) to government and to private sector show sharp drop in net credit to government offsetting rise in private credit.
- Commercial bank soundness indicators (1998–2005): ROA, NPL, CAR indicate "overall soundness of the banking system continued to be good."
- Domestic interest rates (deposits, loans and advances): interest margins remained high.
- Monetary summary accounts (Central Bank and Monetary Survey, selected levels, in S.I. dollars):
  - Central Bank net foreign assets (I.) 2001–2007: 91.0, 117.5, 248.3, 570.3, 699.7, 754.1, 772.3
  - Reserve money 2001–2007 (Central Bank): 147.8, 167.3, 221.7, 383.6, 462.6, 493.9, 502.1
  - Monetary survey net foreign assets: 101.6, 132.2, 273.0, 575.9, 712.5, 767.0, 785.1
  - Broad Money (M2) levels 2001–2007: 403.2, 419.3, 528.4, 677.0, 864.6, 1,018.5, 1,144.0
- Memorandum items (selected):
  - Velocity of broad money: 2.5, 2.5, 2.2, 2.0, 1.8, 1.7, 1.7
  - Money multiplier: 2.7, 2.4, 2.4, 1.8, 1.9, 2.1, 2.3
  - Excess liquidity to deposits ratio: 12.8, 17.7, 20.2, 39.5, 36.0, 29.9, 24.3
  - Net international reserves (in millions of US$) 2001–2007: 16.3, 15.8, 33.1, 76.0, 92.3, 96.0, 92.9

### External sector and balance of payments (2000–07 and projections)
- Current account balance (US$ millions) 2000–2007: -31.7, -35.1, -16.3, 2.9, 32.3, -32.3, -51.9, -55.3
  - Current account (percent of GDP) series: -12.8, -7.1, 1.3, 12.2, -10.8, -15.8, -15.9 (various table placements)
- Exports and imports (US$ millions):
  - Exports, f.o.b 2000–2007: 47.1, 57.8, 74.2, 96.7, 102.5, 116.3, 116.8
  - Imports, c.i.f. 2000–2007: -90.6, -62.3, -85.2, -98.7, -143.7, -182.4, -189.0
- Merchandise exports composition (selected years):
  - Timber (US$ millions): 44.1, 36.1, 37.7, 49.5, 62.6, 67.7, 71.5, 62.9 (various tables)
  - Fish (US$ millions): 8.1, 7.1, 10.5, 12.4, 17.6, 11.5, 13.5, 14.3
  - Palm Oil and other commodities reported with low values earlier, rising in projections
- Net exports declined sharply in 2005 principally due to weaker fish exports and a smaller contribution from timber; imports rebounded strongly as fuel and project-related imports picked up.
- Reserves and vulnerability:
  - Gross official reserves (US$ millions, end of period) 2000–2007: 31.3, 18.5, 17.5, 36.0, 79.0, 94.6, 98.2, 95.2 (selected series)
  - Reserves in months of next year's imports of GNFS: 3.1, 2.8, 2.1, 3.6, 5.5, 5.3, 5.3, 5.0 (selected)
  - NIR (excl. pending import requests and external arrears) and other reserve-related memoranda reported.
  - "Strong ODA and private FDI flows ... have maintained reserve coverage above 5 months of imports... which could provide a valuable buffer given concentrated exports and declining terms of trade."
- Balance of payments memorandum items (selected):
  - External arrears (interest plus principal) 2000–2007: 4.6, 7.1, 11.1, 13.8, 15.8, 22.0, 23.6, 23.2
  - Exports GNFS--Value Growth and Volume Growth series shown (e.g., Exports GNFS--Value Growth 33.2, 9.1, 13.2, 1.7)
  - Terms of trade (index: 1990=100) series: 117.8, 118.1, 94.4, 78.7, 69.9, 66.1, 64.6, 64.4

### Medium-term baseline and alternative scenarios (2004–11)
- Medium-Term Baseline Scenario (selected projections):
  - Real GDP growth: 8.0 (2004), 5.0 (2005), 5.3 (2006), 4.3 (2007), 3.3, 3.2, 3.0, 3.0 (2008–11 variants presented)
  - CPI (period average) projections: 6.9, 7.3, 8.2, 8.4, 8.2, 7.7, 7.2, 7.0 (various scenario tables)
  - Nominal GDP (millions of US$) projection 2004–11: 265, 298, 328, 348, 368, 387, 407, 429
  - Current account (in US$ millions) projections 2004–11 (selected): 32.3 (2004), -32.3 (2005), -51.9 (2006), -55.3 (2007), -38.1, -38.3, -37.5, -37.8
  - Gross official reserves projections (US$ millions, end of period) 2004–11: 79.0, 94.6, 98.2, 98.4, 104.1, 97.5, 89.2, 79.7 (various tables)
  - Official reserves (in months of next year's imports of GNFS) projections: 5.5, 5.3, 5.3, 5.0, 5.4, 5.0, 4.5, 4.0 (scenario-specific)
- Alternative scenario notes: Strong-Reform Scenario and No-Reform Scenario are provided in tabular form with differing macro trajectories (tables 7 and subsequent projections).

### Financial and external vulnerability indicators (2001–07)
- Government sector debt (percent of GDP) 2001–2007: 94.1, 113.3, 120.1, 90.1, 80.0, 69.9, 63.6
- Broad money (percent change, 12-month basis) 2001–2007: -13.2, 4.0, 26.0, 28.1, 27.7, 17.8, 12.3
- Private sector credit (percent change, 12-month basis) 2001–2007: -21.8, 12.2, 26.1, 10.6, 62.9, 30.2, 25.3
- 3 month T-bill yield (in percent, nominal) 2001–2006: 8.9, 8.3, 5.8, 6.0, 3.5, 3.5 (2006 column reflects end-June)
- Official reserves (in months of next year's imports of GNFS) 2001–2007: 2.8, 2.1, 3.6, 5.5, 5.3, 5.3, 5.0
- External vulnerability indicators note concentrated exports (timber share) and declining terms of trade.

### Key structural reforms status (as of end-June 2006)
- Tax reform:
  - Income Tax Amendments (PAYE): Passed by Parliament December 2005.
  - Exemption guidelines: Issued June 2006.
  - Value Added Tax Act, Revenue Administration Act, and Customs Act: Draft legislation submitted to authorities.
  - Tax Incentives Review: Discussion paper submitted to authorities.
  - Assisting institutions/donors: LEG; PFTAC/LEG; FIAS.
- Public Sector Financial Management:
  - Review of Public Finance and Audit Act: May 2006 mission proposed redraft of Finance Instructions.
  - Solomon Islands Government Accounting Service (SIGAS): Being revamped.
  - Local Purchase Orders: Introduced 2006.
  - Assisting institution: PFTAC.
- State Enterprise Reform:
  - SOE Reform and Private Sector Participation: Ongoing TA to improve SOE ownership, accountability, & performance.
  - Electricity Authority (SIEA) Restructuring and SIWA Restructuring: Financial restructuring plan (FRP) report finalized and management contract proposed; implementation requires SIWA’s FRP; FRP not started due to authorities’ delays (see SIEA).
  - Solomon Airlines & civil aviation regulation: Privatization strategy document submitted to authorities in December 2005, but not approved.
  - Assisting institutions/donors: ADB; World Bank; ADB/AusAid/RAMSI.
- Business Environment:
  - Foreign Investment Bill: Approved by Parliament December 2005, effective July 2006.
  - Administrative Barriers (licensing; immigration and labor permits): Report to be integrated with ADB work on business regulation and laws.
  - Investment Promotion Strategy and Business Law Reform: Planning and ongoing.
  - Assisting institution: FIAS; ADB.
- Infrastructure:
  - Interisland shipping & National Transport Fund (NTF): Diagnostic report submitted; reform to develop private providers and provide subsidies from NTF for nonviable routes being prepared.
  - Barriers to efficient shipping: Reduction in import duties on shipping in June 2005.
  - Roads and Bridges: Repair work 30 percent complete; completion expected by February (date not specified in excerpt).
  - Strengthening of Ministry of Infrastructure and review of telecommunication monopoly: ADB/AusAid/NZAid and WB involvement.

*Source: Data provided by the authorities; and Fund staff estimates (tables and figures as supplied in the content).*

### 2007. Another project to be

### _cr06362 - 2007. Another project to be

### Medium-term baseline scenario: macro outlook
- Real GDP growth projected to converge to about 3 percent.
- Inflation eases but remains around 7 percent.
- Real effective exchange rate assumed constant.
- Export growth falls to about 1.0 percent due to logging winding down to about half of its current harvest rate by 2011.
- Current account deficit stays at about 9 percent of GDP.
- Reserve coverage falls as ODA and exports ease, but remains adequate at above 4 months of imports.
- Budget position: small surplus maintained to reduce high public debt and avoid abrupt fiscal retrenchment.
- Risks: history of political instability and volatile growth pose downside risks; potential upside if reforms boost nontimber private sector activity.

### Recent debt developments and arrears resolution
- Honiara Club measures: short-term moratorium on principal payments and forgiveness of interest payments during the moratorium (0.2 percent of GDP) from one creditor; possibility of debt forgiveness and arrears settlement after a planned review in 2007.
- Analysis does not assume debt forgiveness but incorporates short-term moratorium and related interest forgiveness.
- Successful negotiations with external commercial creditors achieved debt relief amounting to 2½ percent of GDP.
- Stock of informal arrears fell by about 2 percent of GDP to 4½ percent of GDP.
- Agreement in February 2006 with the Central Bank of the Solomon Islands (CBSI): 25 percent of interest arrears to the CBSI amounting to 0.4 percent of GDP was settled, the rest was forgiven, and outstanding advances were converted into long-term bonds carrying a 2¼ percent interest rate.

### Debt levels and projections
- Total public debt reduced to 80 percent of GDP in 2005 (down from 92 percent of GDP in 2004).
- Public domestic debt including arrears at end-2005: 26 percent of GDP (peak 51 percent in 2003).
- Domestic debt expected to decline to 20 percent of GDP in 2006.
- Total public debt projected at 42 percent of GDP in 2011.
- NPV of public sector debt to revenue ratio stays above 100 percent until 2012.

### Debt sustainability indicators (baseline and thresholds)
- At end-2005, the NPV of external debt to GDP at 40 percent was higher than its Board-endorsed threshold, but expected to fall below it by 2009.
- Other indicators (NPV of debt to exports and revenue, debt service ratios) were below thresholds and expected to decline over time, assuming no new debt.

### Sensitivity and stress test results — principal risks quantified
- Historical-average shocks to key variables set the NPV of external debt to exports on a rising path.
- Even a temporary export growth decline increases the NPV of debt to exports to over twice its threshold.
- If all recognized contingent liabilities are realized (13.5 percent of GDP), the NPV of external debt to GDP would exceed 30 percent of GDP until 2015.
- Lower GDP growth, even temporarily, and a return of growth and the primary balance to historical averages cause the NPV of public debt to GDP and revenue ratios to rise dramatically.
- Recognized contingent liabilities currently estimated at 13.5 percent of GDP (with remaining contingent liabilities estimated at 10 percent of GDP elsewhere in the analysis).

### Key numeric assumptions and memoranda (selected)
- Real GDP growth assumptions (projections): 3.0 percent (2011), 3.7 percent (2006-11 Average shown as 3.7 in one table), baseline convergence to about 3 percent.
- Inflation (GDP deflator) assumptions: e.g., 2006–11 projections include rates around 2.2 percent (in US dollar terms table) and GDP deflator inflation around 6.9 percent in one public debt table sequence.
- Export and import growth assumptions: export growth forecast falls to about 1.0 percent; growth of exports of G&NFS (US dollar terms, in percent) projection includes 1.0 percent (2011) and 5.5 percent (2006-11 average in one table).
- Nominal GDP (billions of U.S. dollars) memorandum item: 0.328 (2006), 0.348 (2007), 0.368 (2008), 0.387 (2009), 0.407 (2010), 0.429 (2011), 0.556 (2016), 0.950 (2026).

### Summary assessment
- The medium-term baseline would achieve only small increases in living standards and leave the Solomon Islands at high risk of debt distress unless reforms and donor support are sustained and contingent liabilities are contained.
- Historical scenarios and several stress tests—even temporary ones—can lead to a significant rise in the debt burden, underscoring vulnerability to shocks and measurement uncertainties (notably in GDP), uncertain ODA plans, and potential increases in contingent liabilities as audits proceed.

*Prepared jointly with World Bank staff; source: Appendix I, SOLOMON ISLANDS—MEDIUM-TERM BASELINE SCENARIO AND DEBT SUSTAINABILITY ANALYSIS.*

### Appendix I

### Appendix I

### Debt service ratio — Sensitivity Analysis (Table I.4)
- Table title: Solomon Islands: Sensitivity Analysis for Key Indicators of Public Debt 2006–26
- Note: The DSA exercise was conducted jointly with the World Bank. Assumes real GDP growth shock definition as in footnote 2.
- Baseline NPV of debt-to-GDP ratio (concise sequence as presented): 565146423834217
- Baseline NPV of debt-to-exports ratio (concise sequence as presented): 1891731551391261137023
- Baseline Debt service-to-exports ratio (concise sequence as presented): 12.16.25.54.74.34.22.90.6

### Alternative scenarios and bound tests (labels and numerical sequences as shown)
- A. Alternative scenarios
  - A1. Real GDP growth and primary balance are at historical averages: 5656565656566278
  - A2. Primary balance is unchanged from historical average: 5654525048474441
  - A3. Permanently lower GDP growth 2/: 56524946444348107
  - A1 (for exports series): 189190188186186186205262
  - A2 (for exports series): 189182173165161156147139
  - A3 (for exports series): 189177164154148143160359
  - A1 (for debt service-to-exports): 12.16.56.66.46.67.08.520.0
  - A2 (for debt service-to-exports): 12.16.26.15.75.75.96.110.4
  - A3 (for debt service-to-exports): 12.16.35.85.25.05.36.519.8
- B. Bound tests
  - B1. Real GDP growth is at historical average minus one standard deviation in 2007-2008: 566169707273903132 (first series), 189206230233239245298444 (second series), 12.17.07.77.98.49.212.230.9 (third series)
  - B2. Primary balance is at historical average minus one standard deviation in 2007-2008: 565963585454360619 (first series), 18920020919217816511963 (second series), 12.16.27.27.66.86.55.05.7 (third series)
  - B3. Combination of B1-B2 using one half standard deviation shocks: 566166585145225 (first series), 189206220193170149733 (second series), 12.16.77.77.66.45.83.17.5 (third series)
  - B4. One-time 30 percent real depreciation in 2007: 5668635854503413 (first series), 18923021119317916511344 (second series), 12.16.86.75.95.45.33.21.2 (third series)
  - B5. 10 percent of GDP increase in other debt-creating flows in 2007: 5661555147432913 (first series), 1892041851691551429742 (second series), 12.16.27.46.15.65.54.13.4 (third series)

- Footnotes (as given):
  - 1/ The DSA exercise was conducted jointly with the World Bank.
  - 2/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).
  - 3/ Revenues exclude grants.

### Figures — Indicators under alternative scenarios (Figures I.1 and I.2)
- Figure I.1: Solomon Islands: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2006–26 (In percent). Source: Staff projections and simulations.
  - Panels shown:
    - NPV of debt-to-GDP ratio: vertical scale 0 to 70; series plotted for 2006–2026 for Baseline, Historical scenario, Most extreme stress test.
    - NPV of debt-to-exports ratio: vertical scale 0 to 300; series plotted for 2006–2026 for Baseline, Historical scenario, Most extreme stress test.
    - Debt service-to-exports ratio: vertical scale 0 to 20; series plotted for 2006–2026 for Baseline, Historical scenario, Most extreme stress test.
- Figure I.2: Solomon Islands: Indicators of Public Debt Under Alternative Scenarios, 2006–26 1/ (In percent). Sources: Staff projections and simulations.
  - Notes shown in figure:
    - 1/ Most extreme stress test is test that yields highest ratio in 2016.
    - 2/ Revenue includes grants.
    - 3/ Primary balance remains at historical average.
  - Panels and scales indicated in the figure:
    - NPV of Debt-to-GDP ratio: vertical scale 0 to 140 for 2006–2026; series for Baseline, Most extreme stress test, No Reform 3/.
    - NPV of Debt-to-Revenue Ratio 2/: vertical scale 0 to 500 for 2006–2026; series for Baseline, Most extreme stress test, No Reform 3/.
    - NPV of Debt-to-Revenue Ratio 2/ (another panel): vertical scale 0 to 35 for 2006–2026; series for Baseline, Most extreme stress test, No Reform 3/.

### Sources and metadata shown on the page
- Sources: Data provided by the authorities; and Fund staff estimates.
- Additional note on figures: Staff projections and simulations.

*Source: Data provided by the authorities; and Fund staff estimates.*

### Appendix VI

### Appendix VI

### Goal-level Millennium Development Goals Progress (Table VI.1)

- Goal 1: Eradicate Extreme Poverty and Hunger
  - Prevalence of child malnutrition (percent of children under 5): 1990: 21; 2000: 21; 2001–05: ...; Latest Data 2015 Target: 11

- Goal 2: Achieve Universal Primary Education
  - Net enrollment ratio in primary education: 1990: ...; 2000: 74; 2001–05: 80; Latest Data 2015 Target: 100

- Goal 3: Promote Gender Equality
  - Ratio of girls to boys in primary school (percent): 1990: 86; 2000: 92; 2001–05: 91; Latest Data 2015 Target: 100
  - Ratio of girls to boys in secondary school (percent): 1990: 63; 2000: 78; 2001–05: 81; Latest Data 2015 Target: 100
  - Proportion of seats held by women in national parliament (percent): 1990: 0; 2000: 2; 2001–05: 0; Latest Data 2015 Target: ...

- Goal 4: Reduce Child Mortality
  - Under 5 mortality rate (per 1,000): 1990: 63; 2000: 60; 2001–05: 56; Latest Data 2015 Target: 12
  - Infant mortality rate (per 1,000 live births): 1990: 38; 2000: 36; 2001–05: 34; Latest Data 2015 Target: 25

- Goal 5: Improve Maternal Health
  - Maternal mortality ratio (per 100,000 live births): 1990: ...; 2000: 130; 2001–05: 142; Latest Data 2015 Target: ...
  - Births attended by skilled health staff (percent of total): 1990: ...; 2000: 85; 2001–05: 87; Latest Data 2015 Target: ...

- Goal 6: Combat HIV/AIDS, Malaria and Other Diseases
  - Incidence of tuberculosis (per 100,000 people): 1990: 134; 2000: 73; 2001–05: 93; Latest Data 2015 Target: ...
  - Incidence of malaria (per 100,000 people): 1990: 45,000; 2000: 15,172; 2001–05: 19,600; Latest Data 2015 Target: less than 8,000

- Goal 7: Ensure Environmental Sustainability
  - Forest area (percent of total land area): 1990: 99; 2000: 90.6; 2001–05: 78; Latest Data 2015 Target: ...
  - Nationally protected areas (percent of total land area): 1990: ...; 2000: 0; 2001–05: 0.3; Latest Data 2015 Target: ...
  - CO2 emissions (metric tons per capita): 1990: 0.5; 2000: 0.4; 2001–05: 0.4; Latest Data 2015 Target: ...
  - Access to an improved water source (percent of population): 1990: ...; 2000: 71; 2001–05: 70; Latest Data 2015 Target: 100
  - Access to improved sanitation (percent of population): 1990: ...; 2000: 30; 2001–05: 31; Latest Data 2015 Target: ...

- Goal 8: Develop a Global Partnership for Development
  - Fixed line and mobile telephones (per 1,000 people): 1990: 15; 2000: 21; 2001–05: 17; Latest Data 2015 Target: ...
  - Personal computers (per 1,000 people): 1990: ...; 2000: 38; 2001–05: 43; Latest Data 2015 Target: ...

- Sources listed: World Bank, World Development Indicators and World Bank Human Development Indicators (http://devdata.worldbank.org/data-query/).

### Social Indicators (excerpts from Table VI.2)

- Population and demographic indicators
  - Total population, mid-year (thousands): 193; 300; 364; 466; 1,870; 2,343 (columns reflect different reference regions/periods in table)
  - Growth rate (Percent annual average for period): 3.6; 3.4; 2.6; 3.1; 0.8; 1.8
  - Urban population (percent of population): 9.1; 12.4; 15.0; 17.0; 38.2; 30.6
  - Total fertility rate (births per woman): 7.1; 6.2; 5.0; 4.1; 2.0; 3.7

- Income and prices
  - GNI per capita (US$): 290; 530; 880; 560; 1,416; 507
  - Consumer price index (1995=100): 82; 206; 4139; ...... 
  - Food price index (1995=100): ...; 33; ...; 158; ......

- Public expenditure (percent of GDP)
  - Health: .........; 4.5; 1.9; 1.5
  - Education: 5.3; 4.5; 3.8; 3.3; 3.0; ...
  - Social security and welfare: .........

- Education and access
  - Net primary school enrollment rate (Percent of age group) — Total: ......; 83.2; 79.6; ...; 79
    - Male: ......; 89.1; 80.0; ...... 
    - Female: ......; 76.9; 79.0; ...... 
  - Access to an improved water source (Percent of population) — Total: .........; 70; 78; 75
    - Urban: .........; 94; 92; 89
    - Rural: .........; 65; 69; 69

- Health and mortality
  - Immunization rate 1/ (Percent under 12 months) — Measles: ......; 68.0; 78; 82; 66
  - Immunization rate 1/ — DPT: ...; 46.0; 69.0; 71; 86; 67
  - Child malnutrition (percent under 5 years): 21; ......; 21; 1644
  - Life expectancy at birth (Years) — Total: 57; 62; 61; 63; 69; 59
    - Male: 56; 61; 60; 62; 68; 57
    - Female: 58; 63; 62; 63; 71; 59
  - Mortality
    - Infant (per 1,000 live births): 71; 43; 37; 34; 29; 79
    - Under 5 (per 1,000 live births): 99; 56; 63; 56; 37; 122
    - Adult (15-59) Male (per 1,000 population): .........; 260; 179; 317
    - Adult (15-59) Female (per 1,000 population): .........; 237; 122; 266
    - Maternal (modeled, per 100,000 live births): .........; 142; 117.0; 681.0
  - Births attended by skilled health staff (percent): ......; 85; 85; 91; ...

- Sources: World Bank, 2005 World Development Indicators.
  - Note: 1/ Immunization refers to children aged 12-23 months who received vaccinations before one year of age.

### Statistical Issues and Data Quality (Appendix VII excerpt)

- Overall assessment
  - The economic and financial database is poor, significantly limiting staff analysis, particularly for the real, fiscal, and external sectors.
  - Only the monetary statistics are adequate for surveillance purposes.
  - The National Statistics Office (NSO) rebuilding has commenced.
  - The Central Bank of Solomon Islands (CBSI) continues to publish highly summarized monetary and price data in its Monthly Economic Bulletin and data on all sectors in its Quarterly Review and Annual Report.
  - There is a Solomon Islands page in IFS, but significant updating delays occur, particularly for balance of payments (BOP), government finance, and national accounts statistics.

- Real sector statistics
  - NSO has not produced national accounts data since 1994; CBSI took over GDP estimates.
  - GDP estimates rely primarily on commodity exports and employment estimates and lack breakdown by expenditure categories.
  - A February 2006 PFTAC mission reviewed 2005 GDP estimates and 2006 projections and concluded that unless the shortage of source data for GDP estimates is addressed, the quality of estimates would remain poor.
  - NSO reclaimed the task of producing the CPI in August 2003 (currently applies only to Honiara); the weights are outdated.
  - Data on production of major export commodities are reported monthly.
  - Limited data on total employment available from the National Provident Fund.
  - Wage data are not produced.

- Monetary and financial statistics
  - CBSI publishes monthly monetary statistics in summary form and more detailed data in quarterly and annual reports.
  - Monetary and financial statistics from CBSI are used to update the IFS country page.
  - After disruption during the civil conflict, CBSI recently resumed direct reporting to STA.
  - A November 2005 expert mission during a PFTAC monetary statistics workshop reviewed monetary statistics compilation procedures and provided training and a work plan for CBSI to comply with the Monetary and Financial Statistics Manual methodology and to report data using the standardized report forms (SRFs), introduced in October 2004.

- Government finance statistics
  - The Ministry of Finance (MOF) started monthly press releases on budget outturns in August

*Source: _cr06362 - Appendix VI (excerpts as provided).*

### 2003. However, its expenditure and financing data are not consistent with the GFS

### _cr06362 - 2003. However, its expenditure and financing data are not consistent with the GFS

### Data quality and government finance statistics (GFS)
- Expenditure and financing data are not consistent with the GFS methodology; historical data are unreliable due to the breakdown of accounting mechanisms and large expenditure arrears during the crisis.
- The NSO is developing a prototype GFS system, but coverage problems persist for the general government sector:
  - Data for provincial governments are unavailable.
  - Data for state enterprises are currently being compiled.
- Except for direct budget support, the authorities do not collect disbursement information on grants or grant-financed development spending.
- The MOF does not report annual GFS data for the Government Finance Statistics Yearbook (GFSY).
- The installation of the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) database in the CBSI and MOF in March 2005 has improved the quality of official debt data.
- The NSO has prepared, with PFTAC’s assistance, a prototype of government finance statistics tables based on recurrent revenue and expenditure data provided by the Ministry of Finance; this work is still preliminary and hindered by the dearth of aid and development spending information.
- Audits of state enterprise accounts are currently under way and, once completed, should provide a better picture of public sector finances.
- The February 2006 PFTAC mission identified statistical issues requiring attention, including:
  - Ensuring that compilation methodologies are applied consistently for GDP and BOP data.
  - Collecting prices for additional items in the CPI, particularly on diesel fuel and telecommunications products.
  - In the BOP: (i) increase the response rate to enterprise surveys to reduce reliance on FET records; (ii) investigate alternative data to supplement FET data, including use of official transfers data from the government’s financial accounts; and (iii) review the Customs merchandise data for use in the BOP.
- PFTAC planned to send a short-term BOP expert in the second half of June 2006 to address these issues.
- The effectiveness of the NSO continues to be hampered by weak technological skills among its staff and low survey response rates; the NSO is seeking to address this through tougher penalties under the Statistics Act.

### External sector statistics and balance of payments (BOP)
- The CBSI estimates partial quarterly BOP data based on cash foreign exchange transactions (FET) reported through the banking system, available with a three-month lag.
  - Such data are deficient in detail and coverage.
  - A February 2006 PFTAC mission noted a significant deterioration in the net errors and omission item.
  - “Other items” in several categories have increased significantly, indicating deterioration of data quality.
- Surveys of enterprises on service and financial flows are conducted for supplementary information, but response rates are very low.
- The Customs Department has recently started to publish merchandise trade data; initial analysis shows missing records remain.
- A New Zealand mission in February 2006 began to install PCTrade software in the Customs Department to facilitate the NSO’s use of Customs data to prepare trade statistics.
- The CBSI has requested PFTAC assistance to improve the quality of their BOP and national accounts.
- The NSO has requested PFTAC’s assistance to enhance government finance statistics, and SPC’s assistance to rebase the CPI.

### Remedial measures and statistical capacity building
- A PFTAC GDDS mission in February 2004 concluded that rebuilding the statistical system will require extensive technical assistance and external funding.
- Following recommendations, a new government statistician was appointed in 2004 and a long-term adviser (18 months)—funded by AusAid and NZAid—took up his post in April 2005.
- Ongoing and planned surveys and statistical activities:
  - The NSO is conducting a Household Income and Expenditure Survey (HIES); after which it plans to rebase the CPI, and construct national headline and underlying CPIs, national accounts and poverty data by early 2007.
  - Business surveys on employment and financial data covering 2003 and 2004 have been conducted; results expected in the second half of September 2006.
  - Preparations for a Demographic and Health Survey started in mid-2006.
  - The Ministry of Tourism, in coordination with NSO, has started a project to measure tourism spending.
  - A population census is planned for late 2009, with preparations expected to commence in 2007.

### Economic context, Executive Board assessment, and policy recommendations
- Recent macroeconomic performance:
  - Real GDP growth was 5 percent in 2005.
  - Real GDP growth projected to exceed 5 percent in 2006, driven by agriculture (mainly the start of palm oil production) and services; logging is not anticipated to contribute in 2006.
  - Inflation: ended in the high single digits in 2005; expected to be broadly unchanged in 2006, remaining about 2 percent above the Pacific Islands Countries’ (PICs) average.
  - International reserves climbed to US$95 million (5¼ months of projected 2006 imports).
- 2006 central government budget envisaged a shift to a deficit of ¾ percent of GDP from a 2¼ percent surplus in 2005, owing to a 21 percent real increase in goods and services purchases and domestically financed development spending.
  - Outturn projected to be about 1 percentage point of GDP better than budgeted due to revenue overperformance and investment underspending offsetting higher spending in low-priority areas.
- Current account developments:
  - The current account swung into an 11 percent of GDP deficit in 2005.
  - Current account deficit projected to widen in 2006 due to higher oil prices and investment-related imports; but strong ODA and FDI flows expected to keep reserves above 5 months of imports.
- Monetary and financial sector:
  - Reserve money growth eased in 2005; broad money increased by 28 percent as remonetization continued.
  - Private sector credit grew 50 percent in real terms (rebounded strongly from a low base), reducing banks’ excess reserves to 36 percent of deposits from 40 percent at end-2004.
  - Growth of monetary aggregates expected to moderate in 2006.
- Executive Board recommendations and assessments:
  - Commended authorities for maintaining macroeconomic stability; noted near-term growth prospects reasonably favorable.
  - Emphasized need to promote new sources of growth to raise living standards and address unsustainable logging activities.
  - Urged acceleration of structural reforms in governance, state-owned enterprises, infrastructure, and business environment.
  - Recommended crafting the 2007–10 national development strategy as the main vehicle for policy formulation and aid coordination; incorporate all projects and programs and set up a system to track aid delivery.
  - Advised budget discipline in 2006; refrain from spending unutilized investment project appropriations and revenue overperformance.
  - Over the medium term, recommended budget consolidation to reduce high public debt and replace declining logging and import revenues with domestic taxes, improve expenditure quality, and reorient spending from the wage bill toward infrastructure (transport and communications).
  - Urged accelerating tax reform to widen the base and reduce cascading, and public financial management reforms to ensure better governance in the use of public funds and aid flows.
  - Recommended comprehensive restructuring of SOEs, especially utilities, to improve service delivery and their financial position; cautioned fiscal decentralization should be approached very carefully.
  - Welcomed progress in regularizing debt and the government’s policy of no new borrowing, which should apply to all public entities, including SOEs, until the public debt profile has improved substantially.
  - Endorsed current exchange rate policy; agreed that downward pressure on the exchange rate should not be resisted and viewed competitiveness as adequate.
  - Supported development of the central bank’s inflation forecasting ability.
  - Recommended liquidation of the troubled Development Bank of Solomon Islands and encouraged commercially-based mechanisms to broaden access to banking services and credit.
  - Recommended development of conservative investment guidelines to enable the National Provident Fund (NPF) to improve profitability by investing abroad and noted approving the new NPF bill would enhance governance.
  - Regretted weak statistical database hampers surveillance but were encouraged by measures underway to improve real and external sector data.

### Key statistics and indicators (selected figures from the document)
- Nominal GDP (2005): US$298 million
- Population (2005): 482,575
- GDP per capita (2005): US$618
- Quota: SDR 10.4 million
- Real GDP growth: 2005 = 5 percent; 2006 (Proj.) = 5.3 percent
  - Nontimber growth: 2005 = 4.5 percent; 2006 (Proj.) = 5.9 percent
- CPI (period average): 2005 = 7.3; 2006 (Est.) = 8.2
- CPI (end of period): 2005 = 8.4; 2006 (Proj.) = 9.2
- Central government operations (percent of GDP, 2005 / 2006 Proj.):
  - Total revenue: 54.5 / 53.7
  - Recurrent revenue: 26.0 / 27.7 / 29.8 (table shows multiple columns)
  - Grants: 26.8 / 23.9
  - Total expenditure 1/: 52.2 / 53.1
  - Recurrent expenditure: 22.2 / 25.1 / 27.9 (table shows multiple columns)
  - Development expenditure: 17.2 / 27.0 / 25.2 (table shows multiple columns)
- Recurrent balance 2/: 2005 = 3.9; 2006 (Proj.) = 3.1
- Overall balance 3/: 2005 = 2.3; 2006 (Proj.) = 0.6
  - Foreign financing (net): 2005 = 2.0; 2006 (Proj.) = 1.2
- Stock of expenditure arrears (percent of GDP, end of period): 2005 = 4.5; 2006 (Proj.) = 2.5
- Central government debt (percent of GDP): 2005 = 80.0; 2006 (Proj.) = 69.9
  - Domestic: 2005 = 25.8; 2006 (Proj.) = 20.0
  - External: 2005 = 54.2; 2006 (Proj.) = 50.0
  - External debt (US$ millions, end of period): 2005 = 161.6; 2006 (Proj.) = 164.0
  - External debt service to exports of GNFS (accrual basis): 2005 = 7.2; 2006 (Proj.) = 5.2
- Monetary and credit (percentage change, end-year data):
  - Net foreign assets: 2005 = 23.7; 2006 (Proj.) = 7.6
  - Net domestic assets: 2005 = 50.5; 2006 (Proj.) = 65.4
  - Net domestic credit: 2005 = 37.5; 2006 (Proj.) = 30.2
  - Credit to private sector: 2005 = 62.9; 2006 (Proj.) = 30.2
  - Broad money: 2005 = 27.7; 2006 (Proj.) = 17.8
  - Interest rate (3-month t/bill rate, average) 6/: 2005 = 3.5; 2006 (end-June) = 3.5
- Balance of payments (US$ millions):
  - Exports, f.o.b: 2005 = 102.5; 2006 (Proj.) = 116.3
  - Imports, c.i.f.: 2005 = -143.7; 2006 (Proj.) = -182.4
  - Current account: 2005 = -32.3; 2006 (Proj.) = -51.9
    - (Percent of GDP) 2005 = -10.8; 2006 (Proj.) = -15.8
  - Capital account: 2005 = 46.3; 2006 (Proj.) = 54.7
  - Overall balance (accrual): 2005 = 14.1; 2006 (Proj.) = 2.8
- Gross official reserves (US$ millions, end of period): 2005 = 94.6; 2006 (Proj.) = 98.2
  - (in months of next year's imports of GNFS): 2005 = 5.3; 2006 (Proj.) = 5.3
- Exchange rate (SI$/US$, end of period): 2005 = 7.58; 2006 (end-June) = 7.60
- Real effective exchange rate (period average, 2000=100): 2005 = 83.1; 2006 = 83.1

*Source: IMF staff report excerpts and Public Information Notice (PIN) on the 2006 Article IV consultation with the Solomon Islands (as of July 31, 2006 / October 23, 2006).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06362.pdf_