## _cr08358

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---

### Recent developments and near-term outlook
- Real GDP grew by 10.3 percent last year.
- 2008 real GDP growth projection: 7¼ percent, reflecting a continued rise in unsustainable logging activity and strong growth in nonlogging sectors.
- Inflation:
  - Headline inflation increased to over 16 percent (3-month moving average) at end-June 2008 from 10 percent at end-2007.
  - Core inflation is up 14 percent during this period.
  - Headline inflation is projected to decline somewhat and end the year at about 15 percent (year-on-year).
- Fiscal:
  - Fiscal balance swung to a deficit of 1.5 percent of GDP from a surplus of 1.7 percent of GDP in 2006.
  - Government approved a supplementary budget, estimated at an unprecedented 5½ percent of GDP, with 2½ percent to meet payroll increases granted in May; the bulk of financing for new spending has yet to be identified.
- Banking and liquidity:
  - Private sector credit increased at an annual rate of about 60 percent during the last three years.
  - NPF allowed to invest abroad up to 30 percent of its investment portfolio (about US$20 million); standing deposit facilities introduced in July.
  - Banking system remains well-capitalized and profitable; nonperforming loans (NPLs) remain low at 3 percent.
- External accounts and reserves:
  - Official international reserves increased by US$16 million to US$120 million (about 4 months of projected imports) but have declined more recently.
  - Current account deficit projected to widen to 7 percent of GDP in 2008, financed largely by aid inflows and mining-related FDI.
  - Reserves are expected to remain at about 3 months of projected imports during the remainder of the year.
- Exchange rate and competitiveness:
  - The SI dollar depreciated by 9 percent in nominal effective terms during the year to end-May 2008; it remained fairly stable in real effective terms.
  - Combined export receipts from fisheries, palm oil, and tourism amounted to 9½ percent of GDP in 2007.
- Structural reforms:
  - SOE Act and Secured Transactions Act were passed; Civil Aviation and Telecommunications Bills expected to be approved later this year.
  - Little progress on land ownership issues and infrastructure bottlenecks.
- Risks:
  - Main short-run downside risks stem from inflationary pressures due to an expansionary fiscal stance, potential further wage demands, and negative terms of trade shocks.

### Medium-term macroeconomic outlook and risks
- Structural dependence and projections:
  - Logging currently accounts for 20 percent of government tax revenues and 65 percent of exports.
  - Logging activity is expected to decline rapidly beyond 2009 and to become negligible by 2013.
  - Gold mining operations are scheduled to start in 2010 and are critical to sustaining exports and foreign reserves once logging declines.
- Medium-term growth implications:
  - Other sectors needing stimulation: mining (gold and nickel), palm oil production, tourism, and services.
- Principal risks:
  - Delay in start of gold mining operations could reduce FX inflows, rapidly depleting reserves.
  - Lack of progress on structural reforms, especially infrastructure, could slow growth and reduce average income per capita.
  - Future donor aid inflows in excess of current commitments could mitigate some downside risks.
- Scenarios:
  - Baseline scenario:
    - Gold mining operations assumed to start in 2010 as currently scheduled; pace of structural reforms remains moderate.
    - Economy expected to “muddle along” with an average real growth rate in the range of 3–4 percent per year, allowing for a modest increase in average per capita income over time.
    - Average population growth projected at 2.8 percent.
  - Reform scenario:
    - Acceleration of structural reforms (improved infrastructure, lower cost of doing business) could unlock growth potential in agriculture, fisheries (including canning), tourism, and expedite mining production, enhancing fiscal and external sustainability.
  - Worst-case scenario:
    - Political and economic instability could delay gold mining and reverse growth momentum in fishing, agriculture, and tourism.
    - With rapid depletion of forests and negligible logging, the economy could enter a protracted period of low growth with large deficits and rapidly declining reserves, necessitating difficult adjustments.

### Policy discussions and recommendations
- Overarching focus:
  - Tighten monetary and fiscal policies to contain inflation.
  - Safeguard fiscal and external sustainability as logging declines.
  - Stimulate nonlogging sector growth through structural reforms.
- Monetary policy recommendations:
  - Continue to tighten domestic demand management policies to contain second-round inflation effects from international food and fuel price surges.
  - Continue use of standing deposit facilities.
  - Raise the liquid asset requirement (LAR) if additional tightening is needed.
  - Discouraged: adjusting the exchange rate to counter rising inflation; encouraged: allow greater exchange rate flexibility underpinned by tight monetary and fiscal policies.
- Fiscal policy recommendations:
  - Restrain fiscal spending to prevent inflation from becoming entrenched.
  - Urgent measures to strengthen the medium-term fiscal framework, pursue revenue-raising reforms, and accelerate restructuring of loss-making state-owned enterprises.
  - Authorities noted political and economic constraints to cutting spending and emphasized past measures: elimination of goods tax and import duty on rice to offset imported food price increases; accommodation of wage increases amid commodity price rises.
- External and structural policy recommendations:
  - Export diversification is critical to replace declining logging export receipts.
  - Urgent resolution of impediments to gold mine operation, including land ownership issues.
  - Permit greater exchange rate flexibility to safeguard reserves.
  - Stimulate nonlogging sector growth by fostering competition, improving basic services provision, upgrading infrastructure, and addressing land ownership issues.
  - Authorities’ medium-term development strategy focuses on competition, basic services, infrastructure, and land issues; donor reception has been lukewarm pending costing and integration with ongoing projects.

### Debt outlook and fiscal vulnerabilities
- Debt outlook and risks:
  - At end-2007, only the NPV of external debt to GDP (38 percent) breached its Board-endorsed threshold.
  - All debt indicators are projected to decline and remain below their thresholds in the medium term under the baseline scenario.
  - Historical scenarios and several stress tests cause a number of indicators to significantly exceed their thresholds.
  - Public sector debt and external debt levels are highly sensitive to:
    - temporary declines in real GDP growth (public sector debt);
    - temporary declines in export growth (external debt).
  - Medium-term outlook hinges critically on the start of gold mining operations in 2010; without this, the balance of payments and foreign reserves would come under severe pressure.
  - Classification: Solomon Islands is classified as in moderate risk of debt distress.
  - Policy implication: government should continue its nonborrowing policy, depending solely on grants until debt sustainability risks are mitigated.
  - Footnote: Thus far, authorities have honored their commitment not to incur new borrowing. In 2008, a small amount was disbursed in relation to an existing ADB loan.
- Fiscal developments and vulnerabilities:
  - Log exports have been very buoyant in the last five years and have nearly doubled as a share of GDP, driven by an unsustainable rate of logging and higher log prices.
  - Budget spending has been increasing in line with additional logging revenues instead of saving the windfall.
  - With expected sharp decline in logging contribution, gold export revenues are instrumental in alleviating downward pressure on foreign reserves.
  - Fiscal sustainability will depend on cutting expenditures unless donors provide budget support, because gold mining will contribute only marginally to improve the fiscal situation given the generous tax concessions granted to the gold mining company.
  - Government medium-term fiscal strategy envisages significant spending cuts but does not identify the specific areas for cuts.

### Fiscal policy recommendations and expenditure savings (discussed)
- Strengthen medium-term fiscal framework and restructure the budget:
  - Undertake civil service reforms to reduce the wage bill, including by eliminating vacant positions, and avoiding ad hoc increases in wages.
  - Enhance monitoring and accountability of public enterprises to raise efficiency, and restructure those that continue to incur losses (reducing contingent liabilities).
  - Enhance the transparency and accountability of spending by both the central government and line ministries.
- Expedite fiscal structural reforms to boost revenues; scope for strengthening tax administration, including by reducing exemptions and enforcing tax collection, especially in the logging sector:
  - Further raise the determined price of logs and introduce an automatic adjustment mechanism. The government deferred its plan to raise the determined price from June to October; implementing this in October as planned would signal commitment to reforms and boost tax revenues.
  - Improve monitoring of the logging sector to increase tax compliance; anecdotal evidence suggests that only 30–40 percent of log shipments are inspected, resulting in foregone tax revenues of nearly 4 percent of GDP in 2007. Mission urged authorities to enhance monitoring by employing qualified personnel.
- Accelerate SOE reforms:
  - Subject SOEs to regular disclosure of annual financial statements following completion of the current audit program.
  - Divest enterprises in commercially viable sectors (for example, Soltai Fishing Company and Solomon Airlines) to strengthen the government’s balance sheet.

### Export diversification, mining, and nonlogging sector constraints
- Export diversification and mining:
  - External sustainability depends on offsetting the imminent decline in logging export receipts with growth in other export-oriented sectors, especially mining.
  - Mission recommendations:
    - Address bottlenecks that have repeatedly caused delays in starting gold mining operations.
    - Avoid additional tax concessions to mining firms.
  - Nickel mining has long-term potential to generate foreign exchange; if exploration shows commercial viability, negotiate an equitable profit sharing agreement with assistance from qualified consultants.
- Stimulating nonlogging sector growth — constraints and recent measures:
  - Major impediments to broad-based growth:
    - ambiguity in land ownership;
    - poor infrastructure;
    - shortage of skilled labor;
    - unreliable and costly electricity, water, and telecommunication services;
    - poor governance and relatively high cost of doing business by regional standards;
    - loss-making SOEs requiring frequent government cash injections.
  - Positive developments and measures the authorities noted:
    - Tribal Land Bill draft expected to be tabled in the November parliamentary sitting to help resolve land ownership issues.
    - Review of Telekom monopoly agreement later this year to allow competition in telecommunications.
    - Companies Act and Insolvency Act to be tabled in the November parliamentary sitting to improve business framework.
    - External managers being hired (with World Bank assistance) to improve Solomon Islands Electricity Authority financial viability and service delivery.
    - Continued commitment to work with AsDB to improve road, water transport, and port facilities.
    - Exploring alternative energy sources (hydro, solar, biomass) with World Bank and other donors to reduce dependence on diesel imports for electricity generation.

### Monetary, banking, and inflation considerations
- Inflation developments:
  - Annual consumption price inflation: peak 13.1 percent in 2006Q2; trough 5.8 percent in 2007Q3; rose to 9.7 percent in 2008Q1.
  - Import price inflation rose from 6.2 percent in 2007Q3 to 13.0 percent in 2008Q1.
  - Food weight in consumption basket: 43 percent; food price inflation increased from 3.1 percent in 2007Q3 to 11.9 percent in 2008Q1, contributing 3.7 percent to consumption price inflation over this period.
  - Domestic credit to the private sector has grown at rates of about 60 percent during the last three years, about four times the growth rate of nominal GDP.
  - Recommendation: further tighten the monetary stance, including through an increase in the LAR, and fiscal policy should minimize supplementary budget spending where possible.
- Banking sector soundness:
  - Commercial banks remain well capitalized and profitable.
  - Most lending is collateralized.
  - Risk-weighted capital asset ratios: about 20 percent as of March 2008, above the prudential norm.
  - Nonperforming loans (NPLs) remain low as a share of total loans at below 3 percent. Loans are classified as NPLs if overdue for more than 90 days.
  - Risks: rapid credit growth and expected moderation in growth could cause NPLs to rise; CBSI agreed to continue close monitoring.

### Data, statistics, and surveillance issues
- Statistical database remains poor and hampers surveillance:
  - Coverage and quality of real, public, and external sector statistics remain deficient.
  - Public sector statistics are inconsistent with the GFS methodology and do not track provincial government or SOE activities.
  - Recurrent and development budgets have yet to be integrated.
  - External sector data suffer from serious misclassification problems.
  - The latest Household Income and Expenditure Survey (HIES), completed in September 2006, has been used to revise national accounts and construct GDP by expenditure component with PFTAC assistance; these have yet to be officially published.
- Recommendation: authorities should give priority to improving data collection and quality, including by committing adequate resources.

### Staff appraisal — key points and recommendations
- Political stability remains fragile; efforts such as the Political Integrity Bill to prevent frequent party defections are welcome.
- Recent growth performance has been very strong but sustainability is questionable: real GDP growth reached a 15-year high last year driven by unsustainable logging and strong service sector growth from donor aid inflows.
- Maintaining fiscal sustainability requires concerted effort to boost tax revenues and cut expenditure growth:
  - Strengthen tax administration;
  - Raise the determined price of logs to reflect international market prices;
  - Cut ad hoc tax exemptions;
  - Rationalize civil service employment and restrain wage bill growth;
  - Enhance monitoring, restructure/privatize loss-making SOEs;
  - Improve expenditure control procedures and transparency of all government accounts.
- Structural reforms to generate nonlogging sector growth are critical: address land ownership, improve infrastructure, eliminate rent-seeking, allow competition in airlines and telecommunications, and implement reforms swiftly.
- Exchange rate and reserves:
  - Real effective exchange rate appears broadly in line with medium-term fundamentals, but risks (inflation, wage growth, failure of logging offset) could necessitate exchange rate adjustment.
  - Greater exchange rate flexibility could help avoid sudden disruptive economic adjustments.
- Recommend next Article IV consultation on the standard 12-month cycle.

### Selected statistics and fiscal/external indicators (selected)
- Real GDP growth last year: 10.3 percent.
- 2008 real GDP growth projection: 7¼ percent.
- Headline inflation (3-month moving average) at end-June 2008: over 16 percent.
- Headline inflation at end-2007: 10 percent.
- Core inflation increase over the same period: 14 percent.
- Year-end projected headline inflation (2008, y/y): about 15 percent.
- Fiscal balance 2006: surplus of 1.7 percent of GDP.
- Fiscal balance 2007: deficit of 1.5 percent of GDP.
- Supplementary budget approved: 5½ percent of GDP (2½ percent for payroll).
- Private sector credit growth (annual rate over last three years): about 60 percent.
- NPF foreign investment limit introduced: up to 30 percent of portfolio (about US$20 million).
- Official international reserves increase: US$16 million to US$120 million (~4 months of projected imports); expected to be about 3 months for remainder of year.
- Current account deficit projection for 2008: 7 percent of GDP.
- SI dollar nominal effective depreciation to end-May 2008: 9 percent.
- Combined exports from fisheries, palm oil, and tourism (2007): 9½ percent of GDP.
- Logging share: 20 percent of government tax revenues; 65 percent of exports.
- Logging activity projected to be negligible by 2013.
- Gold mining operations scheduled to start: 2010.
- Nonperforming loans (NPLs): 3 percent.
- Population growth projection used in scenarios: 2.8 percent.

### Box summaries and logging industry highlights
- Inflation and exchange rate assessment:
  - Inflation path: 13.1 percent peak in 2006Q2; 5.8 percent in 2007Q3; 9.7 percent in 2008Q1.
  - Import price inflation: 6.2 percent in 2007Q3 to 13.0 percent in 2008Q1.
  - Real effective exchange rate broadly constant; nominal depreciation offset higher domestic inflation.
  - Equilibrium real exchange rate approach yields an overvaluation estimate of 4 percent for 2008Q1.
- Foregone log revenue (Q1 2008) estimates:
  - Landed (CIF) price: 176.4 $/m3
  - freight: 64.4 $
  - insurance: 3.5 $
  - agent fee: 10.5 $
  - sub-total: 98.0 $
  - Declared FOB: 63.9 $
  - DIFFERENCE: 34.1 $
  - Log exports to China in Q1 2008: 270 thousand cubic meters
  - Foregone revenue: 9.2 $ million
  - Foregone revenue: 2.4 $ (in percent of GDP)
- Developments in the logging industry (Box 3):
  - In 2007: logging increased by about 25 percent; accounted for a quarter of real GDP growth; accounted for 65 percent of exports; accounted for almost 20 percent of tax revenue.
  - Measures passed to slow logging: cancellation of licenses for firms failing to submit acceptable public environment reports; directive to Foreign Investment Board not to approve new logging applications; reference price adjusted from US$71 to US$78 per cubic meter effective May 1, 2008.
  - Government backtracked on plans to increase reference prices to US$85 by June 1, 2008 and to reintroduce an automatic price adjustment mechanism.
  - Despite May 1 increase, reference prices remain about 72 percent below average international prices, resulting in foregone government revenues.
  - Estimated lost tax revenues due to delayed adjustment in reference prices: about 3.0 percent of GDP in 2006; 3¾ percent of GDP in 2007; rough estimates show foregone revenues would be as high as 10 percent of GDP in 2008.

*Source: Executive Summary (_cr08358).*

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

### _cr08358 - Executive Summary ......................................................................................................

### Recent developments and near-term outlook
- Real GDP grew by 10.3 percent last year.
- For 2008, real GDP growth is projected at 7¼ percent, reflecting a continued rise in unsustainable logging activity and strong growth in nonlogging sectors.
- Inflation:
  - Headline inflation increased to over 16 percent (3-month moving average) at end-June 2008 from 10 percent at end-2007.
  - Core inflation is up 14 percent during this period.
  - Headline inflation is projected to decline somewhat and end the year at about 15 percent (year-on-year).
- Fiscal:
  - The fiscal balance swung to a deficit of 1.5 percent of GDP from a surplus of 1.7 percent of GDP in 2006.
  - The government approved a supplementary budget, estimated at an unprecedented 5½ percent of GDP, with 2½ percent to meet payroll increases granted in May; the bulk of financing for new spending has yet to be identified.
- Banking and liquidity:
  - Private sector credit increased at an annual rate of about 60 percent during the last three years.
  - Excess liquidity measures: NPF allowed to invest abroad up to 30 percent of its investment portfolio (about US$20 million); standing deposit facilities introduced in July.
  - The banking system remains well-capitalized and profitable; nonperforming loans (NPLs) remain low at 3 percent.
- External accounts and reserves:
  - Official international reserves increased by US$16 million to US$120 million (about 4 months of projected imports) but have declined more recently.
  - The current account deficit is projected to widen to 7 percent of GDP in 2008, financed largely by aid inflows and mining-related FDI.
  - Reserves are expected to remain at about 3 months of projected imports during the remainder of the year.
- Exchange rate and competitiveness:
  - The SI dollar depreciated by 9 percent in nominal effective terms during the year to end-May 2008; it remained fairly stable in real effective terms.
  - Combined export receipts from fisheries, palm oil, and tourism amounted to 9½ percent of GDP in 2007.
- Structural reforms:
  - SOE Act and Secured Transactions Act were passed; Civil Aviation and Telecommunications Bills expected to be approved later this year.
  - Little progress on land ownership issues and infrastructure bottlenecks.
- Risks:
  - Main short-run downside risks stem from inflationary pressures due to an expansionary fiscal stance, potential further wage demands, and negative terms of trade shocks.

### Medium-term macroeconomic outlook and risks
- Key structural dependence and projections:
  - Logging currently accounts for 20 percent of government tax revenues and 65 percent of exports.
  - Logging activity is expected to decline rapidly beyond 2009 and to become negligible by 2013.
  - Gold mining operations are scheduled to start in 2010 and are critical to sustaining exports and foreign reserves once logging declines.
- Medium-term growth implications:
  - Other sectors needing stimulation: mining (gold and nickel), palm oil production, tourism, and services.
- Principal risks:
  - Delay in start of gold mining operations could reduce FX inflows, rapidly depleting reserves.
  - Lack of progress on structural reforms, especially infrastructure, could slow growth and reduce average income per capita.
  - Future donor aid inflows in excess of current commitments could mitigate some downside risks.
- Scenario descriptions:
  - Baseline scenario:
    - Gold mining operations assumed to start in 2010 as currently scheduled; pace of structural reforms remains moderate.
    - Economy expected to “muddle along” with an average real growth rate in the range of 3–4 percent per year, allowing for a modest increase in average per capita income over time.
    - Note: Average population growth is projected at 2.8 percent.
  - Reform scenario:
    - Acceleration of structural reforms (improved infrastructure, lower cost of doing business) could unlock growth potential in agriculture, fisheries (including canning), tourism, and expedite mining production, enhancing fiscal and external sustainability.
  - Worst-case scenario:
    - Political and economic instability could delay gold mining and reverse growth momentum in fishing, agriculture, and tourism.
    - With rapid depletion of forests and negligible logging, the economy could enter a protracted period of low growth with large deficits and rapidly declining reserves, necessitating difficult adjustments.

### Policy discussions and recommendations
- Overarching focus areas:
  - Tightening monetary and fiscal policies to contain inflation.
  - Safeguarding fiscal and external sustainability as logging declines.
  - Stimulating nonlogging sector growth through structural reforms.
- Monetary policy recommendations:
  - Continue to tighten domestic demand management policies to contain second-round inflation effects from international food and fuel price surges.
  - Continue use of standing deposit facilities.
  - Raise the liquid asset requirement (LAR) if additional tightening is needed.
  - Discouraged: adjusting the exchange rate to counter rising inflation; instead encouraged allowing greater exchange rate flexibility underpinned by tight monetary and fiscal policies.
- Fiscal policy recommendations:
  - Restrain fiscal spending to prevent inflation from becoming entrenched.
  - Urgent measures to strengthen the medium-term fiscal framework, pursue revenue-raising reforms, and accelerate restructuring of loss-making state-owned enterprises.
  - Authorities noted political and economic constraints to cutting spending and emphasized past measures: elimination of goods tax and import duty on rice to offset imported food price increases; accommodation of wage increases amid commodity price rises.
- External and structural policy recommendations:
  - Export diversification is critical to replace declining logging export receipts.
  - Urgent resolution of impediments to gold mine operation, including land ownership issues.
  - Permit greater exchange rate flexibility to safeguard reserves.
  - Stimulate nonlogging sector growth by fostering competition, improving basic services provision, upgrading infrastructure, and addressing land ownership issues.
  - Authorities’ medium-term development strategy focuses on competition, basic services, infrastructure, and land issues; donor reception has been lukewarm pending costing and integration with ongoing projects.

### Key statistics and fiscal/external indicators (selected)
- Real GDP growth last year: 10.3 percent.
- 2008 real GDP growth projection: 7¼ percent.
- Headline inflation (3-month moving average) at end-June 2008: over 16 percent.
- Headline inflation at end-2007: 10 percent.
- Core inflation increase over the same period: 14 percent.
- Year-end projected headline inflation (2008, y/y): about 15 percent.
- Fiscal balance 2006: surplus of 1.7 percent of GDP.
- Fiscal balance 2007: deficit of 1.5 percent of GDP.
- Supplementary budget approved: 5½ percent of GDP (2½ percent for payroll).
- Private sector credit growth (annual rate over last three years): about 60 percent.
- NPF foreign investment limit introduced: up to 30 percent of portfolio (about US$20 million).
- Official international reserves increase: US$16 million to US$120 million (~4 months of projected imports); expected to be about 3 months for remainder of year.
- Current account deficit projection for 2008: 7 percent of GDP.
- SI dollar nominal effective depreciation to end-May 2008: 9 percent.
- Combined exports from fisheries, palm oil, and tourism (2007): 9½ percent of GDP.
- Logging share: 20 percent of government tax revenues; 65 percent of exports.
- Logging activity projected to be negligible by 2013.
- Gold mining operations scheduled to start: 2010.
- Nonperforming loans (NPLs): 3 percent.
- Population growth projection used in scenarios: 2.8 percent.

*Source: Executive Summary (_cr08358).*

### 17.      Debt levels have fallen, but remain significant. At end-2007, only the NPV of

### _cr08358 - 17.      Debt levels have fallen, but remain significant. At end-2007, only the NPV of

### Debt outlook and risks
- At end-2007, only the NPV of external debt to GDP (38 percent) breached its Board-endorsed threshold (see Debt Sustainability Analysis).
- All debt indicators are projected to decline and remain below their thresholds in the medium term under the baseline scenario.
- Historical scenarios and several stress tests cause a number of indicators to significantly exceed their thresholds.
- Public sector debt and external debt levels are highly sensitive to:
  - temporary declines in real GDP growth (public sector debt);
  - temporary declines in export growth (external debt).
- The medium-term outlook hinges critically on the start of gold mining operations in 2010; without this, the balance of payments and foreign reserves would come under severe pressure.
- Classification: Solomon Islands is classified as in moderate risk of debt distress.
- Policy implication: the government should continue its nonborrowing policy, depending solely on grants until debt sustainability risks are mitigated.
- Footnote: Thus far, the authorities have honored their commitment not to incur new borrowing. In 2008, a small amount was disbursed in relation to an existing ADB loan.

### Fiscal developments, vulnerabilities, and medium-term prospects
- Log exports have been very buoyant in the last five years and have nearly doubled as a share of GDP, driven by an unsustainable rate of logging and higher log prices.
- Budget spending has been increasing in line with additional logging revenues instead of saving the windfall.
- With expected sharp decline in logging contribution, gold export revenues are instrumental in alleviating downward pressure on foreign reserves.
- Fiscal sustainability will depend on cutting expenditures unless donors provide budget support, because gold mining will contribute only marginally to improve the fiscal situation given the generous tax concessions granted to the gold mining company.
- Government medium-term fiscal strategy envisages significant spending cuts but does not identify the specific areas for cuts.

### Fiscal policy recommendations and expenditure savings (Discussions)
- Strengthen the government’s medium-term fiscal framework and restructure the budget:
  - Undertake civil service reforms to reduce the wage bill, including by eliminating vacant positions, and avoiding ad hoc increases in wages;
  - Enhance monitoring and accountability of public enterprises to raise efficiency, and restructure those that continue to incur losses (the latter will also reduce contingent liabilities of the government);
  - Enhance the transparency and accountability of spending by both the central government and line ministries to ensure that monies are not misspent.
- Expedite fiscal structural reforms to boost revenues; scope for strengthening tax administration, including by reducing exemptions and enforcing tax collection, especially in the logging sector:
  - Further raise the determined price of logs and introduce an automatic adjustment mechanism. The government deferred its plan to raise the determined price from June to October; implementing this in October as planned would signal commitment to reforms and boost tax revenues.
  - Improve monitoring of the logging sector to increase tax compliance; anecdotal evidence suggests that only 30–40 percent of log shipments are inspected, resulting in foregone tax revenues of nearly 4 percent of GDP in 2007. The mission urged the authorities to enhance monitoring by employing qualified personnel.
- Accelerate SOE reforms:
  - Subject SOEs to regular disclosure of annual financial statements following the completion of the current audit program;
  - Divest enterprises in commercially viable sectors (for example, Soltai Fishing Company and Solomon Airlines) to strengthen the government’s balance sheet.

### Export diversification and mining
- External sustainability depends on offsetting the imminent decline in logging export receipts with growth in other export-oriented sectors, especially mining.
- Mission recommendations:
  - Address bottlenecks that have repeatedly caused delays in starting gold mining operations;
  - Avoid additional tax concessions to mining firms.
- Nickel mining has long-term potential to generate foreign exchange; if exploration shows commercial viability, negotiate an equitable profit sharing agreement with assistance from qualified consultants.

### Stimulating nonlogging sector growth — constraints and recent measures
- Major impediments to broad-based growth:
  - ambiguity in land ownership;
  - poor infrastructure;
  - shortage of skilled labor;
  - unreliable and costly electricity, water, and telecommunication services;
  - poor governance and relatively high cost of doing business by regional standards;
  - loss-making SOEs requiring frequent government cash injections.
- Positive developments and measures the authorities noted:
  - Tribal Land Bill draft expected to be tabled in the November parliamentary sitting to help resolve land ownership issues;
  - Review of Telekom monopoly agreement later this year to allow competition in telecommunications;
  - Companies Act and Insolvency Act to be tabled in the November parliamentary sitting to improve business framework;
  - External managers being hired (with World Bank assistance) to improve Solomon Islands Electricity Authority financial viability and service delivery;
  - Continued commitment to work with AsDB to improve road, water transport, and port facilities;
  - Exploring alternative energy sources (hydro, solar, biomass) with World Bank and other donors to reduce dependence on diesel imports for electricity generation.

### Monetary, banking, and inflation considerations
- Inflation developments:
  - Annual consumption price inflation: peak 13.1 percent in 2006Q2; trough 5.8 percent in 2007Q3; rose to 9.7 percent in 2008Q1.
  - Import price inflation rose from 6.2 percent in 2007Q3 to 13.0 percent in 2008Q1.
  - Food weight in consumption basket: 43 percent; food price inflation increased from 3.1 percent in 2007Q3 to 11.9 percent in 2008Q1, contributing 3.7 percent to consumption price inflation over this period.
  - Domestic credit to the private sector has grown at rates of about 60 percent during the last three years, about four times the growth rate of nominal GDP.
  - Recommendation: further tighten the monetary stance, including through an increase in the LAR, and fiscal policy should minimize supplementary budget spending where possible.
- Banking sector soundness:
  - Commercial banks remain well capitalized and profitable.
  - Most lending is collateralized.
  - Risk-weighted capital asset ratios: about 20 percent as of March 2008, above the prudential norm.
  - Nonperforming loans (NPLs) remain low as a share of total loans at below 3 percent.
  - Loans are classified as NPLs if they are overdue for more than 90 days.
  - Risks: rapid credit growth and expected moderation in growth could cause NPLs to rise; CBSI agreed to continue close monitoring.

### Data, statistics, and surveillance issues
- Statistical database remains poor and hampers surveillance:
  - Coverage and quality of real, public, and external sector statistics remain deficient.
  - Public sector statistics are inconsistent with the GFS methodology and do not track provincial government or SOE activities.
  - Recurrent and development budgets have yet to be integrated.
  - External sector data suffer from serious misclassification problems.
  - The latest Household Income and Expenditure Survey (HIES), completed in September 2006, has been used to revise national accounts and construct GDP by expenditure component with PFTAC assistance; these have yet to be officially published.
- Recommendation: authorities should give priority to improving data collection and quality, including by committing adequate resources.

### Staff appraisal — key points and recommendations
- Political stability remains fragile; efforts such as the Political Integrity Bill to prevent frequent party defections are welcome.
- Recent growth performance has been very strong but sustainability is questionable: real GDP growth reached a 15-year high last year driven by unsustainable logging and strong service sector growth from donor aid inflows.
- Maintaining fiscal sustainability requires concerted effort to boost tax revenues and cut expenditure growth:
  - Strengthen tax administration;
  - Raise the determined price of logs to reflect international market prices;
  - Cut ad hoc tax exemptions;
  - Rationalize civil service employment and restrain wage bill growth;
  - Enhance monitoring, restructure/privatize loss-making SOEs;
  - Improve expenditure control procedures and transparency of all government accounts.
- Structural reforms to generate nonlogging sector growth are critical: address land ownership, improve infrastructure, eliminate rent-seeking, allow competition in airlines and telecommunications, and implement reforms swiftly.
- Exchange rate and reserves:
  - Real effective exchange rate appears broadly in line with medium-term fundamentals, but risks (inflation, wage growth, failure of logging offset) could necessitate exchange rate adjustment.
  - Greater exchange rate flexibility could help avoid sudden disruptive economic adjustments.
- Recommend next Article IV consultation on the standard 12-month cycle.

### Box summaries — Inflation and Exchange Rate assessment; Foregone log revenue (Q1 2008)
- Box 1 — Recent Inflation Developments:
  - Inflation path and contributors restated: 13.1 percent peak in 2006Q2; 5.8 percent in 2007Q3; 9.7 percent in 2008Q1.
  - Import price inflation: 6.2 percent in 2007Q3 to 13.0 percent in 2008Q1.
  - Domestic credit growth: about 60 percent over last three years; nominal GDP growth roughly one quarter of that.
  - Policy: further tightening of monetary policy stance is needed.

- Box 2 — Exchange Rate Assessment:
  - Since 2003, Solomon Islands’ dollar depreciated by 36 percent relative to the Australian dollar, by 21 percent relative to the Singapore dollar, and by 16 percent relative to the Chinese yuan.
  - Real effective exchange rate has remained broadly constant; nominal depreciation offset higher domestic inflation.
  - Qualitative assessment: real effective exchange rate broadly in line with medium-term fundamentals, but risks are tilted to the downside if gold mining does not begin in 2010 or if further large increases in international food and fuel prices occur.
  - Quantitative assessment: equilibrium real exchange rate approach yields an overvaluation estimate of 4 percent for 2008Q1. Data constraints preclude macroeconomic balance and external sustainability approaches.

- Estimates of Foregone Revenue from Log Exports to China: Q1 2008
  - Landed (CIF) price: 176.4 $/m3 (Chinese Customs data (MIS ITTO))
  - - freight: 64.4 $ (Solomon Islands ITTO 3 month rolling average)
  - - insurance: 3.5 $ (2% of CIF price - estimated)
  - - agent fee: 10.5 $ (6% of CIF price - estimated)
  - sub-total: 98.0 $
  - Declared FOB: 63.9 $ (PNG via SGS report / SIG Customs Division data)
  - DIFFERENCE: 34.1 $ (unaccounted difference between declared & landed)
  - Log exports to China in Q1 2008: 270 thousand cubic meters
  - Foregone revenue: 9.2 $ million
  - Foregone revenue: 2.4 $ (in percent of GDP)

*Source: IMF country report text provided.*

### Box 3. Developments in the Logging Industry

### Box 3. Developments in the Logging Industry

### Recent trends and macroeconomic contribution
- Since 2003, reliance on logging has steadily increased.
- In 2007:
  - logging increased by about 25 percent;
  - logging accounted for a quarter of real GDP growth;
  - logging accounted for 65 percent of exports;
  - logging accounted for almost 20 percent of tax revenue.
- The sharp increase in logging activity reflected:
  - issuance of new licenses;
  - re-entry into former logged areas;
  - approval of tree-felling operations to allow palm oil and reforestation projects to occur;
  - favorable international prices;
  - continued strong demand from major log importers such as China.
- Experts predict that by 2013 there will be no natural commercially viable logs left.

### Government policy responses
- Measures recently passed to help slow down logging activity:
  - cancellation of licenses of logging companies who fail to submit acceptable public environment reports;
  - issuance of a directive to the Foreign Investment Board not to approve any new application for logging operations;
  - adjusting the reference prices of logs from an average of US$71 to US$78 per cubic meter effective May 1, 2008.
- The government backtracked on plans to:
  - further increase reference prices to US$85 by June 1, 2008; and
  - reintroduce an automatic price adjustment mechanism to bring reference prices in line with movements in market prices.

### Fiscal and revenue implications
- Despite the May 1 increase, reference prices of logs remain about 72 percent below average international prices, resulting in foregone government revenues.
- Estimated lost tax revenues due to delayed adjustment in reference prices:
  - about 3.0 percent of GDP in 2006;
  - 3¾ percent of GDP in 2007.
- Rough estimates show foregone revenues would be as high as 10 percent of GDP in 2008.

*Source: _cr08358 - Box 3. Developments in the Logging Industry*

### ANNEX I: SOLOMON ISLANDS—THE AUTHORITIES’ RESPONSE TO RECENT

### ANNEX I: SOLOMON ISLANDS—THE AUTHORITIES’ RESPONSE TO RECENT FUND POLICY ADVICE

### Advice from the 2007 Article IV Consultation — Actions Taken
- Formulate a medium-term national development strategy (NDS)  
  - The Ministry of Finance is currently consulting with donors on a draft NDS.
- Formulate a medium-term budget framework  
  - Medium-term fiscal strategy prepared in February 2008.
- Save revenue overperformance and limit expenditures to budgeted levels  
  - Revenue overperformance was spent to finance expenditures beyond budget levels.
- Adjust the reference prices of logs and introduce an automatic price adjustment mechanism  
  - Reference prices were adjusted effective May 1, 2008. Planned additional increase in June 2008 postponed to October 2008. An automatic price adjustment mechanism has yet to be introduced.
- Continue with preparations towards introducing a VAT  
  - The authorities have not yet decided on the exact shape of the tax reforms they wish to introduce.
- Enhance expenditure control through tighter payroll controls and avoiding generalized civil service wage increases  
  - No tangible progress on recommendations from the Special Audit Report on the Treasury Payroll. The minimum wage was raised in April 2008, which would require an increase in wages for some civil servants.
- Implementation of SIEA and SIWA management contracts  
  - These were never implemented. The authorities’ strategy has changed. Current plans to strengthen SIEA management include the hiring of external managers with the assistance of WB.
- Privatize Solomon Airlines  
  - No progress.
- Liquidate the DBSI  
  - No progress. The Central Bank’s court-appointed mandate to oversee DBSI has been extended to 2009.
- Pass the NPF Bill  
  - No progress.
- Continue to upgrade transport infrastructure  
  - ADB-supported projects to rehabilitate roads and maritime services are on track and TA is being provided to improve capacity at the Ministry of Infrastructure and Development.
- Tighten prudential measures  
  - Basel I methodology for calculating risk weighted assets was adopted and the capital adequacy ratio increased in the fourth quarter 2007. The classification of banks’ loan portfolios and provisioning requirements were tightened in December 2007.
- Improve statistical database  
  - PFTAC has provided technical assistance on improving external and national income accounts statistics in 2008, but data quality and timeliness remain poor.

### Key fiscal and policy implementation observations
- Revenue overperformance was used to finance expenditures beyond budgeted levels (no savings realized).
- Some structural reforms advised in 2007 (VAT, management contracts, privatizations, liquidation of DBSI, NPF Bill) show little or no implementation as of the actions noted.
- Prudential banking measures advanced: adoption of Basel I risk-weighted assets methodology and tightened loan classification and provisioning in December 2007; capital adequacy ratio raised in Q4 2007.

---

### ANNEX II: SOLOMON ISLANDS—FUND RELATIONS (As of July 31, 2008)

### Membership and Quota
- Membership status: Joined September 22, 1978; Article VIII.
- Quota: 10.40 SDR Million (100.00 percent).
- Fund holdings of currency: 9.85 SDR Million (94.73 percent).
- Reserve position in the Fund: 0.55 SDR Million (5.29 percent).

### SDR Department
- Net cumulative allocation: 0.65 SDR Million (100.00 percent).
- Holdings: 0.01 SDR Million (0.98 percent).

### Outstanding Purchases and Loans
- None.

### Latest Financial Arrangements
- Stand-by arrangement approved 6/22/1983, expired 6/21/1984: Amount Approved 2.40 SDR Million; Amount Drawn 0.96 SDR Million.

### Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming Charges/Interest and Total by year:
  - 2008: Charges/Interest 0.01; Total 0.01
  - 2009: Charges/Interest 0.02; Total 0.02
  - 2010: Charges/Interest 0.02; Total 0.02
  - 2011: Charges/Interest 0.02; Total 0.02
  - 2012: Charges/Interest 0.02; Total 0.02

### HIPC and MDRI
- Implementation of HIPC Initiative: Not applicable.
- Implementation of MDRI Assistance: Not applicable.

### Exchange Rate Arrangements
- Since November 2000, the SI dollar exchange rate based on an undisclosed trade-weighted basket, with the U.S. dollar as the intervention currency.
- During 2002 the CBSI accelerated currency depreciation leading to gradual real depreciation.
- Since December 2002, CBSI has kept the exchange rate broadly stable against the U.S. dollar, although there is no public commitment to continue to do so.
- The Solomon Islands maintains an exchange system free of restrictions on payments and transfers for current international transactions.

### Last Article IV Consultation
- Discussions held in Honiara during May 11–22, 2007. Staff report considered and consultation concluded on July 16, 2007.

### Technical Assistance — Short-term and Long-term Highlights
- Extensive PFTAC, MFD, MCM, STA, LEG, FAD and other TA missions documented across 1998–2008 covering: Statistics; Tax administration and policy; Banking supervision; Public financial management; Monetary operations; AML/CFT; Financial supervision of insurance; Reserve management; Accounting; Budget and Public Expenditure Management; Business Revenue Reform; Balance of Payments Statistics; National Income Accounts; Review of Central Bank Act; Money and Banking Statistics.
- Long-term TA examples:
  - June 1995–June 1999; MAE Advisor to CBSI Governor (Five years extended in October 1999 through 2000).
  - Jan. 2001–March 2008 MFD Peripatetic Advisor to CBSI Governor (Ten six-week missions).
  - August 2006–Jan 2007 PFTAC Public Financial Management (12 weeks in five months).
  - February 2008–2009 STA Import Price Index [eight one-week missions].
  - April 2008–2009 MFD Peripatetic Advisor to CBSI Governor (Three 4-6 week missions).
- Resident Representative: None.

---

### ANNEX III: SOLOMON ISLANDS—SUPPORT FROM PFTAC (As of June 2008)

### Tax Administration and Policy
- May 2004 mission: plans to modernize Customs and Tax Divisions.
- May 2005 mission: outlined detailed strategy for tax reforms and assessed TA needs.
- Authorities released a tax reform proposal in conformity with PFTAC’s advice.
- February 2006 mission: detailed implementation plan including VAT, income tax and revenue administration design issues; draft legislation prepared for VAT and Revenue Administration Acts (with LEG assistance).
- December 2006 mission: assisted preparation of high-level design and project plan for Business Revenue Reform; follow-up in May 2007.
- Joint FAD-PFTAC mission Feb–Mar 2008 recommended strategies for future revenue needs; follow-up in May 2008.
- Government revenue policy remains to be finalized.

### Public Financial Management
- May 2006 review of the Public Finance and Audit Act (PFAA; 1978), Financial Instructions (FI; 1978) and Stores Instructions (1976; SIs); agreed need for process redesign and redraft of FI.
- August 2006 mission recommended accounting measures and installed two consultants to redraft the FI; final report sent January 2007.
- Government indicated that new AUSDAID/RAMSI advisor will review this in consultation with PFTAC.

### Financial Sector Regulation and Supervision
- September 2004 advisor on anti-money laundering regime implementation.
- 2005–2006 missions: assistance with CBSI bank supervision database, failed insurance company handling, supervisory framework for insurance, oversight of National Provident Fund, AML/CFT supervisory guidelines, and project document for Financial Intelligence Unit (FIU).
- September 2005: AML/CFT on-site examination assistance for a domestic bank.
- CBSI staff attended regional monetary policy seminar in March 2005; AML/CFT awareness training in February 2006.
- November 2006: CBSI hosted annual meeting of Association of the Financial Supervisors of Pacific Countries.
- May 2008 mission: provided training to CBSI staff on implementing Basel I and the use of regulatory reporting forms.

### Economic and Financial Statistics
- 2003 NSO restarted activity; Honiara CPI produced.
- February 2004 joint PFTAC/Secretariat of the Pacific Community mission devised recovery plan; AUSaid and NZAid funded equipment and long-term advisor to coordinate HIES.
- CBSI compiles BOP and GDP data; CBSI staff attended regional BOP training April 2005.
- Missions in August 2005 and February 2006 reviewed BOP and national accounts methodologies and suggested improvements; assistance on prototype government finance statistics.
- September 2006: NSO released 2005/06 HIES findings.
- July 2007: Monetary and Financial Statistics mission assisting move towards MFSM 2000 reporting standards.
- Feb 2007–May 2008: PFTAC assisted in improving BOP compilation and revising GDP data.
- Planned follow-up missions: CPI rebase and import price index mission in August-September 2008; BOP and IIP statistics mission in early 2009.

- Contact person: Susan Adams, Project Coordinator, sadams@imf.org.

---

### ANNEX IV: SOLOMON ISLANDS—RELATIONS WITH THE WORLD BANK GROUP (As of June 2008)

### Overall World Bank Engagement
- Since June 1978, eight IDA credits totaling US$50 million across infrastructure, education, health, finance, and agriculture.
- Following repayment of outstanding arrears in September 2003, Solomon Islands came out of nonaccrual status.
- Eligible for an IDA 14 allocation of SDR 7.3 million (indicative only) over FY 2006–08. IDA allocation for FY 07 is SDR 5.2 million.
- Bank assistance guided by government’s National Economic Reform, Recovery, and Development Plan (2003–06) and the Pacific Regional Engagement Framework (2005–2009), focusing on strengthening government capabilities and improving private sector incentives.

### Key Sector Engagements and Financial Figures
- Health Sector: IDA approved the Health Sector Support Program Technical Assistance Project worth SDR 1.0 million (US$1.5 million) in March 2008 to improve public expenditure management, monitoring, and management capacity.
- Energy Supply / SIEA reform:
  - Project scheduled for World Bank Board approval by June 17, 2008.
  - Government approved debt restructuring and cross liability adjustment: forgive SBD 196.0 million in on-lent loans and SBD 8.5 million in PAYE and customs duties arrears in return for SIEA write off of SBD 21 million in SOE and arrears of other government authorities, for a net total contribution of SBD 183.5 million (US$25.8 million).
  - Government cash contribution to SIEA: SBD 5 million (US$0.7 million).
  - Exemption of duties and taxes on goods and services financed through the project for a total of US$1.65 million.
  - Based on restructuring and project, Bank expects that by 2011 SIEA will be in a position to pay taxes and still be profitable.
  - GEF supported regional renewable energy and energy efficiency project started operations; two major commercial banks now offering long term loans for SolarPV equipment.
- Water Sector: Bank prepared Financial Restructuring Plan (FRP) for SIWA and recommended extending SIEA management contract to cover SIWA. JICA implementing technical restructuring plan at cost of US$9 million to be completed in three years.
- Rural Growth: Agriculture and Rural Development Strategy (ARDS) completed and disseminated. Solomon Islands Rural Development Program (RDP) launched February 2008, co-financed by EU and RAMSI; implementation started for four provinces and scheduled to start in 2010 for remaining provinces.
- Telecommunications Sector: Grant-funded TA to examine competitiveness, market liberalization options, preparation of new telecommunication law, and sector regulations including rural/universal access. Bank ready to assist transition from monopoly if Cabinet chooses to renegotiate the incumbent 15-year exclusive license in 2008.
- Foreign and Domestic Investment: FIAS assistance on new foreign investment legislation, review of investment incentives and administrative barriers. Preliminary discussions on participation in WBG Pacific Regulatory Simplification and Investment Policy and Promotion Program are ongoing.

*Source: _cr08358 - ANNEX I: SOLOMON ISLANDS—THE AUTHORITIES’ RESPONSE TO RECENT (IMF document content provided).*

### ANNEX V: SOLOMON ISLANDS—RELATIONS WITH THE ASIAN DEVELOPMENT BANK

### ANNEX V: SOLOMON ISLANDS—RELATIONS WITH THE ASIAN DEVELOPMENT BANK

### AsDB engagement and financing
- Since joining AsDB in 1973, Solomon Islands has received 16 loans amounting to $79.3 million, and 58 technical assistance (TA) projects amounting to $13.85 million.
- Solomon Islands is eligible for the Asian Development Fund (ADF) grants. AsDB approved ADF grant in the amount of $350,000 in 2006 and $4.95 million in 2007.
- The 2005–06 and 2006-2008 ADF allocations catalyzed bilateral grant cofinancing for rural roads and wharves:
  - an additional $16.5 million in cofinancing from Australia and New Zealand
  - an additional $4 million in cofinancing from the European Commission
- AsDB assistance is currently provided entirely on a grant basis; in line with government policy, no new lending will be provided until public finances stabilize.
- AsDB’s country assistance strategy focuses on:
  - rapid, pro-poor, private sector-led economic growth
  - improving transportation infrastructure and services
  - improving the enabling business environment
  - capacity development and promotion of good governance

### Major projects, emergency and post-conflict support
- AsDB committed ADF grant–funded Emergency Assistance Project in response to the earthquake and tsunami on April 2, 2007, which affected Choiseul and Western Provinces. The project includes:
  - repair of priority unsealed roads and watercourse crossings
  - replacement of bridges
  - reconstruction of wharves and jetties
  - reconstruction of the Gizo town water supply and sanitation system
- Ongoing TA projects cover:
  - institutional strengthening of the Ministry of Infrastructure and Development
  - inter-island transportation
  - private sector participation
  - business law reform
  - secured transactions reform
- Post-conflict Emergency Rehabilitation Project (civil conflict 1999–2002):
  - helped rehabilitate about 140km of roads and 51 bridges on Guadalcanal and Malaita
  - project was completed on 31 March 2008
- Solomon Islands Road Improvement Project (approved 2006 as an ADF grant with bilateral cofinancing) supports rehabilitation of roads and bridges to:
  - improve rural access to markets and services
  - promote private sector-led development
  - facilitate domestic and international trade and income and employment opportunities

### AsDB operations and administration
- AsDB’s Pacific Liaison and Coordination Office in Sydney is responsible for country programming, project implementation and administration, supported by the Pacific Operations Division in Manila.
- Contact person: Winfried Wicklein, Country Team Leader for Solomon Islands, AsDB Sydney (wwicklein@adb.org).

### Loans, approvals, and disbursements (1999–2007) — as presented
- Table heading: (In millions of U.S. dollars)
- Loan approvals line (as presented): --10.00--------
- Loan disbursements line (as presented): 0.000.000.000.000.000.89      2.76      4.093.75
- Cumulative loan amount approved (as of end-of-year) (as presented): 69.3179.31    79.31    79.3179.31    79.31    79.31    79.31    79.31
- Cumulative net effective loans (as of end-of-year) (as presented): 64.6554.30    64.05    64.8365.87    66.31    79.31    79.31    79.31
- Cumulative disbursements (as of end-of-year) (as presented): 53.6154.07    54.07    54.0754.30    55.16    57.91    62.00    65.75

---

*Source: ANNEX V: SOLOMON ISLANDS—RELATIONS WITH THE ASIAN DEVELOPMENT BANK (As of June 2008).*

### 2006. The introduction of the Commonwealth Secretariat Debt Recording and Management

### 2006. The introduction of the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) database in the CBSI and MOF in March 2005

### Data and statistical coverage
- The CS-DRMS database introduced in March 2005 in the CBSI and MOF has improved the quality of official debt data, but coordination problems remain.
- The MOF does not report annual or subannual GFSM 2001-based data for the Government Finance Statistics Yearbook (GFSY) and the International Financial Statistics (IFS), respectively.
- The CBSI estimates partial quarterly BOP statistics based on cash foreign exchange transactions, reported through the banking system, available with a three-month lag; these data are deficient in detail and coverage, and classification problems remain.
- An April 2008 PFTAC-TA mission found Customs trade data lacking in accuracy, helped the CBSI carry out surveys, introduced appropriate changes in methodology, and as a result the BOP data have been revised quite significantly.

### Remedial measures and institutional responsibilities
- The NSO is gradually resuming data collection and publication responsibilities, but effectiveness is hampered by weak technological skills among its staff and low survey response rates.
- The authorities agreed an action plan with the recent PFTAC-TA mission to implement measures to effectively move responsibility for national accounts statistics back to the NSO in 2009.
- Statistical issues identified for priority action include:
  - 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 area of the BOP, the need to:
  - increase the response rate to enterprise surveys to reduce reliance on FET records;
  - investigate alternative data to supplement FET data, including the use of official transfers data from the government’s financial accounts;
  - review the Customs merchandise trade data.

### Common indicators required for surveillance (As of August 20, 2008) — selected entries and frequencies
- Exchange Rates: Date of latest observation: July 2008; Date received: July 2008; 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: June 2008; Date received: Aug. 2008; Frequency of Data: W; Frequency of Reporting: M; Frequency of publication: M.
- Reserve/Base Money: Date of latest observation: May 2008; Date received: July 2008; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M.
- Broad Money: Date of latest observation: May 2008; Date received: July 2008; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M.
- Central Bank Balance Sheet: Date of latest observation: May 2008; Date received: July 2008; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M.
- Consolidated Balance Sheet of the Banking System: Date of latest observation: May 2008; Date received: July 2008; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M.
- Interest Rates: Date of latest observation: June 2008; Date received: June 2008; Frequency of Data: W; Frequency of Reporting: M; Frequency of publication: M.
- Consumer Price Index: Date of latest observation: June 2008; Date received: July 2008; 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 2007; Date received: April 2008; Frequency of Data: A; Frequency of Reporting: A; Frequency of publication: A.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation: December 2007; Date received: April 2008; Frequency of Data: A; Frequency of Reporting: A; Frequency of publication: A.
- External Current Account Balance: Date of latest observation: May 2008; Date received: Aug. 2008; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of publication: Q.
- Exports and Imports of Goods and Services: Date of latest observation: December 2007; Date received: April 2008; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of publication: Q.
- GDP: Date of latest observation: December 2007; Date received: April 2008; Frequency of Data: A; Frequency of Reporting: A; Frequency of publication: A.
- Gross External Debt: Date of latest observation: December 2007; Date received: April 2008; Frequency of Data: A; Frequency of Reporting: A; Frequency of publication: Upon Request.
- Notes and clarifications from the table:
  - Detailed BOP data derived from FET through the banking system and trade data from the Customs and Excise Division are available on a quarterly basis with a 3-month and 5-month lag, respectively.
  - The most recent official GDP data are for 1994, but the central bank has produced real production estimates through 2006.
  - Data on private sector debt is not available.
  - Definitions of reporting frequencies: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Not Available (NA).

### Executive Board Assessment — key messages
- Background and outlook:
  - Real GDP growth averaged 7 percent in the past five years (through 2007) and macroeconomic stability has been maintained, largely on account of unsustainable logging and aid flows.
  - Growth accelerated to 10.3 percent in 2007, driven mainly by logging and other emerging sectors (palm oil and services), but is expected to decline to 7 percent in 2008 as logging activity starts to fall.
  - Inflation rose to about 16 percent (3-month moving average) in June from 10 percent in end-2007, but will likely moderate towards the end of the year.
  - Reserves remained comfortable at end-2007, but the current account is projected to widen in 2008 due to deterioration in the terms of trade.
  - External sustainability relies solely on the coming on stream of gold production in 2010.
- Fiscal and monetary policy:
  - After several years of surpluses, the fiscal balance swung to a small deficit in 2007; the 2008 budget will likely remain expansionary, with a supplementary budget of nearly 6 percent of GDP passed by parliament.
  - Directors highlighted urgency of tightening fiscal and monetary policies and implementing structural reforms to maintain macroeconomic stability, safeguard fiscal and external sustainability, and accelerate non-logging growth.
  - Directors welcomed the authorities’ commitment not to undertake new external borrowing.
- Structural reform priorities:
  - Broaden the revenue base and rationalize fiscal spending; strengthen finances of state-owned enterprises.
  - Improve tax administration and widen the tax base; raise the reference price of logs and narrow ad hoc tax exemptions.
  - Rationalize civil service employment and contain the government wage bill; enhance expenditure-control procedures and budgetary transparency and accountability.
  - Further tightening of monetary policy to prevent inflation from becoming entrenched; central bank to rein in excess liquidity and develop financial markets and interest rate instruments.
  - Consider greater exchange rate flexibility to encourage export diversification.
  - Continue close monitoring of banking sector asset quality; banks are profitable, liquid, and well-capitalized but vulnerable to slower growth in logging.
  - High priority on improving infrastructure, addressing land ownership issues, enhancing competition in airline and telecommunications industries, and lowering the cost of doing business.
- Data quality:
  - Directors welcomed ongoing efforts to improve the quality and timeliness of macroeconomic data and stressed the need to allocate sufficient resources, ensure adequate staff training, and continue Fund technical assistance.

### Selected economic indicators, 2003–09 (highlights)
- Nominal GDP (2007): US$388 million
- Population (2007): 508,420
- GDP per capita (2007): US$764
- Quota: SDR 10.4 million
- Real GDP growth (percent): 2003: 6.5; 2004: 8.0; 2005: 5.0; 2006: 6.1; 2007: 10.3; 2008 (Est.): 7.3; 2009 (Proj.): 4.0
- CPI (period average, percent): 2003: 10.0; 2004: 6.9; 2005: 7.4; 2006: 11.2; 2007: 7.7; 2008 (Est.): 15.1; 2009 (Proj.): 8.8
- CPI (end of period, percent): 2003: 3.7; 2004: 7.6; 2005: 8.6; 2006: 9.9; 2007: 10.9; 2008 (Est.): 14.6; 2009 (Proj.): 6.5
- Per capita GDP (US$): 2003: 503; 2004: 560; 2005: 609; 2006: 676; 2007: 764; 2008 (Est.): 905; 2009 (Proj.): 966
- Central government operations (percent of GDP):
  - Total revenue: 2003: 39.2; 2004: 48.1; 2005: 66.2; 2006: 64.7; 2007: 69.0; 2008 (Est.): 61.6; 2009 (Proj.): 60.7
  - Recurrent revenue: 2003: 21.2; 2004: 26.3; 2005: 29.7; 2006: 32.3; 2007: 36.8; 2008 (Est.): 33.0; 2009 (Proj.): 32.4
  - Grants: 2003: 18.0; 2004: 21.8; 2005: 36.6; 2006: 32.5; 2007: 32.2; 2008 (Est.): 28.6; 2009 (Proj.): 28.3
  - Total expenditure (1/): 2003: 37.4; 2004: 39.1; 2005: 63.6; 2006: 63.0; 2007: 70.4; 2008 (Est.): 65.2; 2009 (Proj.): 59.3
  - Recurrent expenditure: 2003: 21.9; 2004: 21.6; 2005: 26.7; 2006: 30.7; 2007: 33.0; 2008 (Est.): 35.3; 2009 (Proj.): 30.1
  - Development expenditure: 2003: 15.5; 2004: 17.4; 2005: 36.9; 2006: 32.3; 2007: 37.5; 2008 (Est.): 29.8; 2009 (Proj.): 29.2
  - Overall balance (2/): 2003: 1.8; 2004: 9.0; 2005: 2.6; 2006: 1.7; 2007: -1.5; 2008 (Est.): -3.6; 2009 (Proj.): 1.4
  - Foreign financing (net): 2003: 0.8; 2004: 0.0; 2005: 4.7; 2006: 2.1; 2007: 3.2; 2008 (Est.): -1.0; 2009 (Proj.): -1.7
  - Domestic financing (net): 2003: -9.3; 2004: -6.7; 2005: -2.3; 2006: -1.8; 2007: -1.1; 2008 (Est.): 4.2; 2009 (Proj.): 0.1
  - Other: 2003: 9.9; 2004: -2.3; 2005: -3.0; 2006: -0.3; 2007: -0.5; 2008 (Est.): 0.3; 2009 (Proj.): 0.1
  - Discrepancy (neg. are net expenditures): 2003: -3.3; 2004: 0.0; 2005: -2.0; 2006: 1.8; 2007: 0.1; 2008 (Est.): 0.0; 2009 (Proj.): 0.0
- Central government debt (percent of GDP) (3/): 2003: 120.4; 2004: 88.6; 2005: 72.6; 2006: 63.5; 2007: 52.3; 2008 (Est.): 41.9; 2009 (Proj.): 36.1
  - Domestic: 2003: 51.5; 2004: 30.1; 2005: 24.0; 2006: 18.1; 2007: 14.4; 2008 (Est.): 11.6; 2009 (Proj.): 10.0
  - External: 2003: 68.9; 2004: 58.4; 2005: 48.6; 2006: 45.4; 2007: 37.9; 2008 (Est.): 30.3; 2009 (Proj.): 26.1
  - External debt (US$ millions, end of period): 2003: 157.7; 2004: 153.1; 2005: 142.6; 2006: 151.7; 2007: 147.3; 2008 (Est.): 143.1; 2009 (Proj.): 135.5
  - External debt service to exports of GNFS (accrual basis): 2003: 5.0; 2004: 3.5; 2005: 5.3; 2006: 2.5; 2007: 5.2; 2008 (Est.): 2.9; 2009 (Proj.): 4.2
- Monetary and credit (percentage change, end-year data):
  - M3: 2003: 25.4; 2004: 19.5; 2005: 38.9; 2006: 26.4; 2007: 24.0; 2008 (Est.): 16.1; 2009 (Proj.): 14.6
  - Base Money: 2003: 26.5; 2004: 75.7; 2005: 20.0; 2006: 8.1; 2007: -2.0; 2008 (Est.): -5.0; 2009 (Proj.): 11.6
  - Interest rate (3-month t/bill rate, average): 2003: 5.8; 2004: 6.0; 2005: 4.5; 2006: 3.4; 2007: 3.2; 2008 (Est.): ...; 2009 (Proj.): ...
- Balance of payments (US$ millions):
  - Current account: 2003: 20.9; 2004: 61.5; 2005: -28.7; 2006: -18.8; 2007: -10.8; 2008 (Est.): -32.2; 2009 (Proj.): -49.9
    - (Percent of GDP): 2003: 9.1; 2004: 23.5; 2005: -9.8; 2006: -5.6; 2007: -2.8; 2008 (Est.): -6.8; 2009 (Proj.): -9.6
  - Overall balance (accrual): 2003: 18.8; 2004: 43.4; 2005: 16.0; 2006: 9.4; 2007: 17.0; 2008 (Est.): -19.3; 2009 (Proj.): -8.8
- Gross official reserves (US$ millions, end of period): 2003: 36.3; 2004: 79.5; 2005: 94.6; 2006: 103.5; 2007: 119.8; 2008 (Est.): 100.5; 2009 (Proj.): 91.7
  - (in months of projected imports of GNFS): 2003: 4.0; 2004: 5.5; 2005: 5.3; 2006: 4.2; 2007: 4.1; 2008 (Est.): 3.1; 2009 (Proj.): 2.8
- Exchange rate (SI$/US$, end of period): 2003: 7.49; 2004: 7.51; 2005: 7.58; 2006: 7.62; 2007: 7.66; 2008 (Est.): ...; 2009 (Proj.): ...
- Real effective exchange rate (period average, 2000=100): 2003: 78.5; 2004: 77.1; 2005: 79.5; 2006: 85.5; 2007: 84.7; 2008 (Est.): ...; 2009 (Proj.): ...
- Nominal effective exchange rate (period average, 2000=100): 2003: 64.4; 2004: 60.3; 2005: 59.1; 2006: 58.5; 2007: 55.0; 2008 (Est.): ...; 2009 (Proj.): ...

*Source: IMF staff report content provided in the supplied PDF excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08358.pdf_