## Macroeconomic Developments

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### Background
- Program performance: broadly on track under the 18-month Standby Credit Facility (SCF) arrangement approved in early June 2010; all end-June performance criteria were met.
- Preliminary outcomes up to September 2010: broadly in line with achieving program targets.
- Government actions: end-June program benchmarks implemented on annual notification of tax and customs exemptions to Parliament and revisions to central bank lender of last resort provisions (SMEFP, Tables 1–2).
- Recent political change: National Coalition for Reform and Advancement (NCRA) government formed in late August 2010 following an August 4 parliamentary election; policy statement released early October 2010 prioritizes shifting from logging to tourism, agriculture, fisheries, and mining, and strengthening macroeconomic management.

### Near-term macroeconomic outlook and key projections
- Real GDP:
  - 2009 real GDP: contracted 1¼ percent.
  - 2010 projection: real GDP projected to expand by 4 percent.
  - 2011 projection: real GDP growth projected at 7½ percent in 2011 (compared to 5¼ percent in the original program) owing to a more favorable outlook for gold production—now likely to commence by mid-2011.
- Inflation:
  - Headline rate 1 percent (y/y) in August 2010.
  - Expected to reach 3 percent by year-end 2010 (owing mainly to base effects).
  - Inflation 2011: expected to be 4–5 percent in 2011 and over the medium term.
- External sector and reserves:
  - Current account deficit (including official transfers): projected at 25½ percent of GDP in 2010.
  - Log export volumes: now expected to increase by 10 percent in 2010.
  - Gross official reserves: expected to reach US$210 million by end-2010 (five months of next year’s imports of goods and nonfactor services).
  - Gross reserves end-2011: projected to increase to US$250 million (six months of imports).
- Risks:
  - Sharper-than-anticipated moderation in global growth.
  - Larger-than-projected decline in logging exports in 2011 and beyond due to rapid depletion of timber stocks.
  - Lagging pickup in domestic demand because of policy uncertainty.

### Fiscal policy — performance, measures, and 2011 budget strategy
- 2010 fiscal targets and performance:
  - 2010 fiscal target: overall surplus (including grants) of 2½ percent GDP; program cash balance targeted to increase by SI$120 million in the current fiscal year.
  - Preliminary indicators through August 2010: fiscal performance broadly on track.
  - Government cash balance: stock at end-June little changed from the beginning of the year, against a programmed decline of about SI$40 million.
  - Net credit to government (NCG): program target at end-June met by a comfortable margin.
- Revenue and expenditure details:
  - Revenue performance: overall revenue collection better than expected, mainly from logging export duties and tax administration efforts; customs duties and nontax revenue sluggish (fishing license receipts expected to pick up).
  - Nonwage recurrent spending: restrained, aided by withdrawal of spending warrants of SI$116 million in May (2 percent of GDP) and temporary reservation of additional warrants.
  - Government-financed development spending: still suppressed due to weak planning and implementation capacity.
  - Tax arrears collection: reported at around SI$7 million through June 2010; expected to reach SI$15 million in 2010.
  - Customs enforcement constraint: delay in appointing a deputy customs comptroller (now expected by year-end) has weakened customs duty collections.
- Log export taxable price benchmark and actions:
  - Benchmark: end-September benchmark called for no less than 85 percent of the formula-based price from October 1, 2010 (US$93 per cubic meter based on the government’s determined value calculator) and a quarterly phase-in thereafter to achieve full formula-based price from July 1, 2011.
  - Government action: mid-October announced price increase from US$83 to US$90 (82 percent of the October 2010 formula-based price) for Q4 2010 (with effect from October 1) and to US$98 for the first half of 2011.
  - Staff view: deviation minimal revenue impact in 2010 but reiterated need for a fully transparent regime; authorities remain committed to a new natural resource tax framework (June 2011 program benchmark) for logging, mining, and fisheries with IMF TA.
- 2011 budget strategy:
  - Target a fiscal surplus of about 2¼ of GDP in 2011 to build cash balance to a minimal cover of two months of forward recurrent spending by end-2011.
  - Timing: final passage of 2011 budget expected to be delayed until March 2011; a circular issued in late October authorizes spending for the first four months of 2011 equivalent to 2010 appropriations (prior action for first SCF review).
  - Revenue prospects: new revenues expected from gold production (expected equivalent to around ½ percent of GDP in 2011, mainly export duties and Pay-As-You-Earn (PAYE) tax); staff noted low petroleum taxation as potential revenue source though politically difficult.
  - Expenditure guidance: staff urged limiting growth of recurrent spending, especially the wage bill and parliamentary entitlements; recommended reallocating a portion of unspent 2010 development budget to the government-donor National Transport Fund.
- Supplementary budget and offsetting measures (response to September 2010 supplementary budget):
  - Supplement totaled SI$150 million (2.6 percent of GDP) compared to the original program (or SI$178 million compared to the 2010 budget).
  - Causes: upward adjustment to payroll spending by SI$65 million compared to the program level (SI$93 million compared to the original budget), and additional appropriations of SI$85 million for higher-than-expected election costs, overseas student grants, and foreign mission construction.
  - Offsetting measures:
    - Revenue increases (SI$57 million): mainly from overperformance of inland revenues; about SI$50 million in additional collections expected in 2010 (including tax arrears of around SI$15 million); remainder from higher-than-expected export duties.
    - Expenditure savings (SI$93 million): mostly from partial retention of temporary spending reservations (SI$50 million) and expected underspending of development budget (SI$29 million).

### Monetary, exchange rate, and financial sector policies
- Monetary conditions and central bank actions:
  - Monetary conditions: eased further due to strong external inflows and policy accommodation.
  - CBSI actions: Central Bank of Solomon Islands continued to accumulate foreign reserves and effectively maintain a de facto peg vis-à-vis the U.S. dollar.
  - NIR outcomes: end-June target for NIR met comfortably; estimated US$200 million at end-September against an indicative target of US$141 million.
  - Reserve money and credit: reserve money has risen dramatically; credit demand sluggish with growth less than 2 percent (y/y) in August.
  - NDA target: end-June target for NDA of the CBSI met, largely due to a sharp decline in NCG by the CBSI.
  - Broad money: growth moderate given limited multiplier effects.
  - Interest rates and spreads: bank lending rates sticky and interest spreads large—possibly due to elevated credit risks and lack of competition.
- CBSI commitments and operational strengthening:
  - Monitor conditions closely and strengthen operational framework to facilitate orderly exit from accommodative stance.
  - Agreed to adjust upward NIR targets by about US$40 million for the remainder of the program.
  - Staff urged allowing greater exchange rate flexibility as a pre-emptive move and readiness to mop up excess liquidity.
  - CBSI to refine liquidity forecasting framework and issue guidelines on auction of treasury and CBSI bills for open market operations; modified program benchmark by end-December 2010 based on recent IMF TA.
  - Plans to issue guidelines to introduce a statutory reserve requirement and new standing facilities to anchor monetary operations and avoid overshooting of interest rates.
  - Current liquid asset ratio to be replaced by a reserve requirement system by end-2010.
  - Considering easing stringent overnight foreign exchange position limits on banks and exchange controls; current ceiling on banks’ overnight foreign exchange position is SI$5 million.
- Financial sector health and supervision:
  - Financial soundness indicators: banking system well-capitalized and highly profitable; nonperforming loans (NPLs) stabilizing as a share of total bank assets after an earlier rise partly due to new loan accounting/classification standards adopted in 2009.
  - Supervisory transition: CBSI moving from compliance-based to risk-based supervision; new round of on-site examinations of commercial banks toward year-end with IMF TA.
  - National Provident Fund (NPF): on-site examination (with Australian Prudential Regulatory Authority) highlighted declining profitability and lack of managerial autonomy; reforming the NPF is a priority.
  - NPF reform timetable: government committed to Cabinet endorsement of a reform plan for the NPF by end-December 2010 (program benchmark) and parliamentary submission of amendments to the NPF Act by end-June 2011 (new program benchmark).

### Debt management, external arrears, and safeguards
- Debt management and external arrears:
  - World Bank’s International Development Association changed the status of the Solomon Islands from high “red light” (high risk) to “yellow light” (medium risk) in July 2010, consistent with the joint Bank-Fund Debt Sustainability Analysis.
  - Move consistent with progress under the Honiara Club Agreement (HCA) in normalizing external debt obligations.
  - In September 2010, the authorities repaid the remaining arrears to the European Investment Bank, with confirmation on final debt resolution expected by year end.
  - With World Bank assistance, a planned five-year review of the HCA has been initiated to facilitate better access to concessional borrowing over the medium term.
- Safeguards assessment:
  - The IMF Safeguards Assessment was completed in October 2010.
  - Two new program benchmarks:
    - Fully constituting the CBSI Board by end-December 2010 to improve oversight of central bank operations.
    - Publishing the opinion rendered by an international audit firm on the CBSI audit results and the IFRS-based financial statements, beginning with the 2010 accounts by end-June 2011 to increase overall transparency.
  - The CBSI has incorporated recommended changes in computing reserve money to standardize reporting of NDA of the CBSI under the IMF-supported program.

### Statistical policy, data provision, and benchmarks
- Statistical policy:
  - Authorities committed to improving macroeconomic statistics for policy formulation and monitoring.
  - Progress made in strengthening and reporting fiscal data; GFSM-compliant statistics awaiting formulation of a new chart of accounts.
  - Limited progress toward finalizing official national income account estimates for 2007–09, despite IMF TA.
  - Authorities agreed to complete and publish these estimates by end-June 2011 (new program benchmark), with support from a new technical advisor in the National Statistics Office.
- Data reporting obligations and timing:
  - Weekly data: submission to Fund staff by the end of the following week (including daily exchange rates, stock of NIR, reserve money, treasury bill auction reports).
  - Monthly and quarterly data: submission within six weeks of the end of the observation period (detailed monetary, fiscal, external sector, and real sector series specified).
- Quantitative performance criteria and indicative targets (selected program-level sequences as reported):
  - Net international reserves (NIR) of the CBSI (floor, eop stock, in millions of U.S. dollars): 146, 146, 147, 154, 178, 141, 158, 201, 160, 206, 214.
  - Net domestic asset (NDA) of the CBSI (ceiling, eop stock, in millions of Solomon Islands dollars): -367, -328, -332, -393, -424, -327, -472, -411, -447, -401, -411.
  - Net credit to central government (NCG) (ceiling, cumulative change from the beginning of the year, in millions of SI$): -77, -77, 40, 40, -83, 22, -102, -80, 31, 31, -14.
  - Central government program cash balance (floor, cumulative change from the beginning of the year, in millions of SI$): -37, -37, -8, -13, 120, 120, -33, -33, 10.
  - Memorandum item — Budget support from bilateral and multilateral donors other than IMF (cumulative change, in millions of US$): 28, 28, 17, 25, 24, 53, 59, 8, 11, 28.
- Adjustors and implementation notes:
  - Floor on NIR and ceiling on NDA to be adjusted by actual budget support flows relative to program level.
  - End-June 2010 NIR target adjusted upward by US$7.5 million; end-June NDA target adjusted downward by SI$60.6 million to reflect excess budget support received January–June 2010.
- Structural benchmarks (selected) and status:
  - Issue ministerial circular detailing new budget calendar for 2011 (Prior Action).
  - Apply full enforcement actions to collect income tax arrears (Continuous) — Status: In progress.
  - Issue annual notification to the Public Accounts Committee on tax and customs exemptions — Status: Met (June 25, 2010).
  - Issue monetary policy regulations revising lender of last resort provisions of the CBSI — Status: Met (June 30, 2010).
  - Adopt automatic adjustment mechanism for price of logs to reach 85 percent of formula-based price from October 1, 2010 and full consistency by July 1, 2011 — Status: Not fully met (price set at US$90 for Oct–Dec 2010 and US$98 for Jan–Jun 2011).
  - Amend Customs Valuation Act and issue implementation guidelines by end-2010 — Status: Amendment passed by Parliament on September 28, 2010; full implementation expected by end-2010.
  - Constitute fully CBSI Board by December 31, 2010 — Status: New benchmark.

### Staff assessments, risks, and policy recommendations
- Fiscal policy assessment:
  - Authorities’ adherence to program fiscal targets praised as main anchor to macroeconomic stability.
  - Staff call for further transparency steps in ongoing work on a new natural resource tax regime.
  - Ensuring the 2011 budget is consistent with program commitments necessary to consolidate earlier gains.
  - Longer-term fiscal sustainability to be supported by strengthening tax policy and revenue administration; cash and debt management; budget processes and expenditure prioritization.
- Monetary and exchange rate policy assessment:
  - CBSI should stand ready to act if demand-led inflationary pressures emerge.
  - Strengthening tools for liquidity management is critical.
  - Balance of payments impact of easing foreign exchange restrictions should be closely monitored.
  - Greater exchange rate flexibility should be pursued, as necessary, to cushion against exogenous shocks and maintain a comfortable level of international reserves.
- Financial sector assessment:
  - Banking sector remains well-capitalized and highly profitable.
  - CBSI should focus on improving operating efficiencies and risk management to facilitate market-based reduction in large interest rate spreads.
  - Improving governance and investment decisions of the NPF by amending the NPF Act to ensure professional, independent management is critical.
- Risks highlighted:
  - Fiscal position vulnerable to shocks given limited buildup so far in cash reserves and financing availability.
  - Maintaining reserves amid political demands and weak budget controls requires broad consensus on structural fiscal reforms.
  - Revenue and export risks include sharper-than-expected decline in logging production and weakening global recovery.
  - New mining-related activity could offset timber-related losses if consensus is reached on a strong resource tax regime.
  - Excess liquidity in the banking system and commodity price pressures pose inflationary risks.

### Program overview, disbursements, and key statistics
- Program progress and recommendations:
  - Authorities’ achievement in meeting program performance criteria and benchmarks is commendable.
  - Completion of the first review of the SCF is expected earlier than foreseen; staff support making the second disbursement under the arrangement available earlier than originally scheduled and rephasing of disbursements.
  - Based on program performance and authorities’ commitment, staff recommend completion of the first SCF review.
- SCF disbursement schedule (Table 5):
  - June 2, 2010: 30 percent of quota; 3,120,000 SDR; Approved Fund arrangement.
  - November 15, 2010: 30 percent of quota; 3,120,000 SDR; Completion of the first review and observance of end-June 2010 performance criteria.
  - May 15, 2011: 30 percent of quota; 3,120,000 SDR; Completion of the second review and observance of end-December 2010 performance criteria.
  - November 15, 2011: 30 percent of quota; 3,120,000 SDR; Completion of the third review and observance of end-June 2011 performance criteria.
  - Total: 120 percent of quota; 12,480,000 SDR.
- Selected key statistics and projections (as presented):
  - Nominal GDP (2009): US$663 million (estimate).
  - Population (2009): 518 thousand (estimate).
  - Real GDP growth: 2008: 7.3; 2009: -1.3; 2011 Prog./Proj. entries include 3.4, 3.9, 7.6 (as presented in table format).
  - CPI (period average) examples: 2008: 17.4; 2009: 7.1; 2011 entries include 1.5 and 4.0.
  - Central government operations (percent of GDP) examples:
    - Total revenue and grants: 2008: 43.8; 2009: 49.8; 2011 Prog./Proj. entries include 54.0 and 53.7.
    - Total expenditure: 2008: 44.0; 2009: 48.2; 2011 Prog./Proj. entries include 51.6 and 51.3.
    - Overall balance: 2008: -0.2; 2009: 1.6; 2011 Prog./Proj. entries include 2.4 and 2.3.
  - Central government debt (percent of GDP): 2008: 32.3; 2009: 28.7; 2011 Prog./Proj. entries include 26.8, 25.8, 22.7.
  - Current account balance (US$ millions): 2008: -124.4; 2009: -113.5; 2011 Prog./Proj. entries include -172.3 and -155.3.
  - Gross official reserves (US$ millions, end period): 2008: 89.5; 2009: 146.0; 2011 Prog./Proj. entries include 209.9, 250.0, 280.6.
  - Exchange rate (SI$/US$, end of period): examples include 2008: 8.00; 2009: 8.06; program exchange rate reference SI$8.06 per US$.

*Source: IMF staff report content provided in the chapter "Macroeconomic Developments" of the referenced PDF.*

### 1.         Macroeconomic         Developments         ..................................................................

### Macroeconomic Developments

### Background
- Program performance: broadly on track under the 18-month Standby Credit Facility (SCF) arrangement approved in early June 2010; all end-June performance criteria were met.
- Preliminary outcomes up to September 2010: broadly in line with achieving program targets.
- Government actions: end-June program benchmarks implemented on annual notification of tax and customs exemptions to Parliament and revisions to central bank lender of last resort provisions (SMEFP, Tables 1–2).
- Recent political change: National Coalition for Reform and Advancement (NCRA) government formed in late August 2010 following an August 4 parliamentary election; policy statement released early October 2010 prioritizes shifting from logging to tourism, agriculture, fisheries, and mining, and strengthening macroeconomic management.

### Near-term macroeconomic outlook and key projections
- 2009 real GDP: contracted 1¼ percent.
- 2010 projection: real GDP projected to expand by 4 percent.
- Inflation: headline rate 1 percent (y/y) in August 2010; expected to reach 3 percent by year-end 2010 (owing mainly to base effects).
- Current account deficit (including official transfers): projected at 25½ percent of GDP in 2010 (somewhat smaller than originally programmed).
- Log export volumes: now expected to increase by 10 percent in 2010.
- Gross official reserves: expected to reach US$210 million by end-2010 (five months of next year’s imports of goods and nonfactor services).
- 2011 projection: real GDP growth projected at 7½ percent in 2011 (compared to 5¼ percent in the original program) owing to a more favorable outlook for gold production—now likely to commence by mid-2011.
- Inflation 2011: expected to be 4–5 percent in 2011 and over the medium term.
- Gross reserves end-2011: projected to increase to US$250 million (six months of imports).
- Risks: sharper-than-anticipated moderation in global growth; larger-than-projected decline in logging exports in 2011 and beyond due to rapid depletion of timber stocks; lagging pickup in domestic demand because of policy uncertainty.

### Policy discussions: overview
- Focus: ensuring program targets and objectives continue to be achieved.
- Main policy areas: fiscal policy to boost cash reserves; monetary and exchange rate policies given strong inflows; financial sector reforms to preserve system stability.
- Adjustments: program performance criteria on net international reserves (NIR) and net domestic assets (NDA) adjusted due to larger-than-expected inflows.
- Structural benchmarks: updated and several added to reflect NCRA commitments and IMF Safeguards Assessment recommendations.

### Fiscal policy — performance, measures, and 2011 budget strategy
- 2010 fiscal target: overall surplus (including grants) of 2½ percent GDP; program cash balance targeted to increase by SI$120 million in the current fiscal year.
- Preliminary indicators through August 2010: fiscal performance broadly on track.
- Supplementary budget: actions taken to ensure late-September parliamentary supplementary appropriations do not undermine fiscal targets.
- Revenue performance: overall revenue collection better than expected, mainly from logging export duties and tax administration efforts; customs duties and nontax revenue sluggish (fishing license receipts expected to pick up).
- Nonwage recurrent spending: restrained, aided by withdrawal of spending warrants of SI$116 million in May (2 percent of GDP) and temporary reservation of additional warrants.
- Government-financed development spending: still suppressed due to weak planning and implementation capacity.
- Government cash balance: stock at end-June little changed from the beginning of the year, against a programmed decline of about SI$40 million.
- Net credit to government (NCG): program target at end-June met by a comfortable margin (Table 3).
- Tax arrears collection: reported at around SI$7 million through June 2010; expected to reach SI$15 million in 2010.
- Customs enforcement constraint: delay in appointing a deputy customs comptroller (now expected by year-end) has weakened customs duty collections.
- Log export taxable price benchmark: end-September benchmark called for no less than 85 percent of the formula-based price from October 1, 2010 (US$93 per cubic meter based on the government’s determined value calculator) and a quarterly phase-in thereafter to achieve full formula-based price from July 1, 2011.
  - Government action: mid-October announced price increase from US$83 to US$90 (82 percent of the October 2010 formula-based price) for Q4 2010 (with effect from October 1) and to US$98 for the first half of 2011.
  - Staff view: deviation minimal revenue impact in 2010 but reiterated need for a fully transparent regime; authorities remain committed to a new natural resource tax framework (June 2011 program benchmark) for logging, mining, and fisheries with IMF TA.
- Customs and tax legislative progress: Parliament passed amendments to the new Customs Valuation Act in September with implementation expected by year-end; draft amendments to Customs and Excise and Income Tax Acts being prepared for Cabinet approval by end-December 2010 and parliamentary submission once Parliament reconvenes in early 2011.
- Payroll and PFM: teachers, police, and all line ministries incorporated into new payroll accounting system; reconciliation ongoing. Authorities preparing a stand-alone Public Finance Act with fiscal responsibility provisions.
- Public financial management (PFM) reforms: World Bank-led Public Expenditure Review ongoing; joint donor budget support review noted steady progress. UNDP installing system for aid flow recording; comprehensive reconciliation and reporting awaiting new chart of accounts and budget reporting system.
- 2011 budget strategy: target a fiscal surplus of about 2¼ of GDP in 2011 to build cash balance to a minimal cover of two months of forward recurrent spending by end-2011.
  - Timing: final passage of 2011 budget expected to be delayed until March 2011; a circular issued in late October authorizes spending for the first four months of 2011 equivalent to 2010 appropriations (prior action for first SCF review).
  - Revenue prospects: new revenues expected from gold production (expected equivalent to around ½ percent of GDP in 2011, mainly export duties and Pay-As-You-Earn (PAYE) tax); staff noted low petroleum taxation as potential revenue source though politically difficult.
  - Expenditure guidance: staff urged limiting growth of recurrent spending, especially the wage bill and parliamentary entitlements; recommended reallocating a portion of unspent 2010 development budget to the government-donor National Transport Fund.

### Monetary, exchange rate, and financial sector policies
- Monetary conditions: eased further due to strong external inflows and policy accommodation.
- Central Bank actions: Central Bank of Solomon Islands (CBSI) continued to accumulate foreign reserves and effectively maintain a de facto peg vis-à-vis the U.S. dollar.
- NIR outcomes: end-June target for NIR met comfortably; estimated US$200 million at end-September against an indicative target of US$141 million (Table 4).
- Reserve money and credit: reserve money has risen dramatically; credit demand sluggish with growth less than 2 percent (y/y) in August (latest available figure).
- NDA target: end-June target for NDA of the CBSI met, largely due to a sharp decline in NCG by the CBSI.
- Broad money: growth moderate given limited multiplier effects.
- Interest rates and spreads: bank lending rates sticky and interest spreads large—possibly due to elevated credit risks and lack of competition.
- CBSI commitments and operational strengthening:
  - Monitor conditions closely and strengthen operational framework to facilitate orderly exit from accommodative stance.
  - Agreed to adjust upward NIR targets by about US$40 million for the remainder of the program.
  - Staff urged allowing greater exchange rate flexibility as a pre-emptive move and readiness to mop up excess liquidity.
  - CBSI to refine liquidity forecasting framework and issue guidelines on auction of treasury and CBSI bills for open market operations; modified program benchmark by end-December 2010 based on recent IMF TA.
  - Plans to issue guidelines to introduce a statutory reserve requirement and new standing facilities to anchor monetary operations and avoid overshooting of interest rates.
  - Current liquid asset ratio to be replaced by a reserve requirement system by end-2010.
  - Considering easing stringent overnight foreign exchange position limits on banks and exchange controls to facilitate private foreign exchange related transactions; current ceiling on banks’ overnight foreign exchange position is SI$5 million.
- Financial sector health and supervision:
  - Financial soundness indicators: banking system well-capitalized and highly profitable; nonperforming loans (NPLs) stabilizing as a share of total bank assets after an earlier rise partly due to new loan accounting/classification standards adopted in 2009.
  - Supervisory transition: CBSI moving from compliance-based to risk-based supervision; new round of on-site examinations of commercial banks toward year-end with IMF TA.
  - National Provident Fund (NPF): on-site examination (with Australian Prudential Regulatory Authority) highlighted declining profitability and lack of managerial autonomy; reforming the NPF is a priority.
  - NPF reform timetable: government committed to Cabinet endorsement of a reform plan for the NPF by end-December 2010 (program benchmark) and parliamentary submission of amendments to the NPF Act by end-June 2011 (new program benchmark).

### Other issues — financing and donor support
- Grants and budget support 2010–11:
  - European Union intends to disburse €15 million by end-2010 under its Vulnerability-FLEX Instrument to help reconstitute government cash reserves and strengthen the fiscal position.
  - Asian Development Bank (AsDB) expected to disburse the second tranche (US$5 million) of its budget support program in the second quarter of 2011.

*Source: IMF staff report content provided in the chapter "Macroeconomic Developments" of the referenced PDF.*

### 13.      Debt management. Further steps are being taken to strengthen debt management. In

### 13.      Debt management. Further steps are being taken to strengthen debt management. In

### Debt management and external arrears
- World Bank’s International Development Association changed the status of the Solomon Islands from high “red light” (high risk) to “yellow light” (medium risk) in July 2010, consistent with the joint Bank-Fund Debt Sustainability Analysis.
- Move consistent with progress under the Honiara Club Agreement (HCA) in normalizing external debt obligations.
- In September 2010, the authorities repaid the remaining arrears to the European Investment Bank, with confirmation on final debt resolution expected by year end.
- With World Bank assistance, a planned five-year review of the HCA has been initiated to facilitate better access to concessional borrowing over the medium term.
- Footnote on HCA: Under the HCA (signed in 2005), the Solomon Islands is expected to pursue grants and other overseas development assistance until it receives “green light” status from the World Bank’s IDA.

### Safeguards assessment
- The IMF Safeguards Assessment was completed in October 2010.
- Two new program benchmarks added as signals of commitment to implementing safeguard measures:
  - (i) fully constituting the CBSI Board by end-December 2010 to improve oversight of central bank operations;
  - (ii) publishing the opinion rendered by an international audit firm on the CBSI audit results and the IFRS-based financial statements, beginning with the 2010 accounts by end-June 2011 to increase overall transparency.
- The CBSI has incorporated recommended changes in computing reserve money to standardize reporting of NDA of the CBSI under the IMF-supported program.

### Statistical policy
- Authorities committed to improving macroeconomic statistics for policy formulation and monitoring.
- Progress made in strengthening and reporting fiscal data; GFSM-compliant statistics awaiting formulation of a new chart of accounts.
- Limited progress toward finalizing official national income account estimates for 2007–09, despite IMF TA.
- Authorities agreed to complete and publish these estimates by end-June 2011 (new program benchmark), with support from a new technical advisor in the National Statistics Office.

### Staff assessment — Fiscal policy
- Authorities’ adherence to program fiscal targets praised as main anchor to macroeconomic stability.
- Stronger cash and budget management, improved inland revenue administration, and expenditure monitoring contributed to smoother fiscal operations.
- Program benchmark on logging price adjustment was not met; staff consider actions taken sufficient to meet the program’s revenue targets in 2010, but call for further transparency steps in ongoing work on a new natural resource tax regime.
- Ensuring the 2011 budget is consistent with program commitments is necessary to consolidate earlier gains.
- Longer-term fiscal sustainability best ensured by working with development partners to strengthen:
  - tax policy and revenue administration;
  - cash and debt management;
  - budget processes and expenditure prioritization.
- Staff welcome government commitment to rationalizing tax and customs exemptions and adopting fiscal responsibility provisions.
- Clearance of remaining external arrears and ongoing HCA review are important signals for future borrowing capacity and debt sustainability.

### Staff assessment — Monetary and exchange rate policies
- The CBSI should stand ready to act if demand-led inflationary pressures emerge.
- Strengthening tools for liquidity management is critical.
- Balance of payments impact of easing foreign exchange restrictions should be closely monitored.
- Greater exchange rate flexibility should be pursued, as necessary, to cushion against exogenous shocks and maintain a comfortable level of international reserves.

### Staff assessment — Financial sector policy
- Banking sector remains well-capitalized and highly profitable.
- With stability concerns easing, CBSI should focus on improving operating efficiencies and risk management to facilitate market-based reduction in large interest rate spreads.
- Improving governance and investment decisions of the NPF by amending the NPF Act to ensure professional, independent management is critical to maximizing member benefits and maintaining long-term financial viability.

### Staff assessment — Risks
- Fiscal position remains highly vulnerable to shocks given limited buildup so far in cash reserves and financing availability.
- Maintaining reserves amid political demands and weak budget controls requires broad consensus on scope and direction of structural fiscal reforms.
- Risks to revenues and export receipts include a sharper-than-expected decline in logging production and weakening global recovery.
- New mining-related activity could offset timber-related losses if consensus is reached on a strong resource tax regime.
- Excess liquidity in the banking system and commodity price pressures continue to pose inflationary risks.

### Program overview and recommendations
- Authorities’ achievement in meeting program performance criteria and benchmarks is commendable.
- Strong adherence to the program would help anchor macroeconomic policy and address structural weaknesses.
- Staff welcome the new government’s commitment to implementing the program agreed with the previous government.
- Completion of the first review of the SCF is expected earlier than foreseen; staff support the authorities’ request to make the second disbursement under the arrangement available earlier than originally scheduled and rephasing of disbursements (Table 5).
- Based on program performance and authorities’ commitment, staff recommend completion of the first SCF review.

### Selected key statistics and projections (as presented)
- Nominal GDP (2009): US$663 million (estimate)
- Population (2009): 518 thousand (estimate)
- Real GDP growth: 2008: 7.3; 2009: -1.3; 2011 Prog./Proj. entries include 3.4, 3.9, 7.6 (as presented in table format)
- CPI (period average) examples: 2008: 17.4; 2009: 7.1; 2011 entries include 1.5 and 4.0
- Central government operations (percent of GDP) examples:
  - Total revenue and grants: 2008: 43.8; 2009: 49.8; 2011 Prog./Proj. entries include 54.0 and 53.7
  - Total expenditure: 2008: 44.0; 2009: 48.2; 2011 Prog./Proj. entries include 51.6 and 51.3
  - Overall balance: 2008: -0.2; 2009: 1.6; 2011 Prog./Proj. entries include 2.4 and 2.3
- Central government debt (percent of GDP): 2008: 32.3; 2009: 28.7; 2011 Prog./Proj. entries include 26.8, 25.8, 22.7
- Current account balance (US$ millions): 2008: -124.4; 2009: -113.5; 2011 Prog./Proj. entries include -172.3 and -155.3
- Gross official reserves (US$ millions, end period): 2008: 89.5; 2009: 146.0; 2011 Prog./Proj. entries include 209.9, 250.0, 280.6
- Exchange rate (SI$/US$, end of period): examples include 2008: 8.00; 2009: 8.06; program exchange rate reference SI$8.06 per US$.
- Table 5: Standby Credit Facility disbursements and reviews:
  - June 2, 2010: 30 percent of quota; 3,120,000 SDR; Approved Fund arrangement
  - November 15, 2010: 30 percent of quota; 3,120,000 SDR; Completion of the first review and observance of end-June 2010 performance criteria
  - May 15, 2011: 30 percent of quota; 3,120,000 SDR; Completion of the second review and observance of end-December 2010 performance criteria
  - November 15, 2011: 30 percent of quota; 3,120,000 SDR; Completion of the third review and observance of end-June 2011 performance criteria
  - Total: 120 percent of quota; 12,480,000 SDR

*Source: IMF staff report (excerpts provided).*

### APPENDIX I—L

### APPENDIX I—L

### MACROECONOMIC PERFORMANCE AND OUTLOOK
- Growth in 2010 is expected to be around 4 percent, slightly higher than projected in the original MEFP, mainly due to log exports.
- Inflation has declined to the low single digits; a modest increase is expected by end-2010 to about 3 percent (year-on-year), reflecting recent global pressures on nonoil commodity prices.
- The external current account deficit is projected to be 25–26 percent of GDP in 2010, with a more favorable trade balance and larger grants disbursements than originally programmed.
- Combined with private inflows related to new mining and telecommunication investments, gross official reserves are expected to rise to US$210 million by end-2010 (five months of next year’s imports of goods and nonfactor services).
- Real GDP growth is projected to rise to 7½ percent in 2011, factoring in the resumption of gold production by mid-year and a moderation in logging production.
- Inflation is projected to be 4–5 percent over the medium term.
- The current account deficit is projected to narrow to 22–23 percent of GDP in 2011.
- Gross official reserves are projected to rise to US$250 million by end-2011 (six months of imports).

### PROGRAM POLICIES — FISCAL POLICY
- Overall fiscal performance in 2010 has been broadly in line with program targets; total revenue collection on track and recurrent spending restrained.
- Government net cash balance (adjusting for unpaid payment orders and unpresented checks) declined by SI$8 million in the first half of the year, against a programmed decrease of SI$40 million.
- Net credit to the central government remained well below the program ceiling.
- Cash pressures projected to ease in Q4 2010, factoring expected disbursement of large European Union budget support under its Vulnerability-Flex Instrument.
- Government target for 2010: overall fiscal surplus of 2.4 percent of GDP (including grants), consistent with increasing the net cash balance by a minimum of SI$120 million during the fiscal year.
- Actions taken:
  - Withdrew spending warrants equivalent to SI$116 million in May 2010 and temporarily reserved other expenditure warrants to conserve cash while protecting priority outlays.
  - Raised the taxable price of log export to US$90 per cubic meter (82 percent of the formula-based price) for October–December 2010 and to US$98 per cubic meter for January–June 2011.
  - Commit to developing a stable, predictable, and nondiscretionary tax regime on logging within a new natural resource tax framework under development.
- Response to a supplementary budget (passed September 2010):
  - Supplement totaled SI$150 million (2.6 percent of GDP) compared to the original program (or SI$178 million compared to the 2010 budget).
  - Main causes: upward adjustment to payroll spending by SI$65 million compared to the program level (SI$93 million compared to the original budget), and additional appropriations of SI$85 million for higher-than-expected election costs, overseas student grants, and foreign mission construction.
  - Offsetting measures:
    - Revenue increases (SI$57 million): mainly from overperformance of inland revenues; about SI$50 million in additional collections expected in 2010 (including tax arrears of around SI$15 million); remainder from higher-than-expected export duties, netting projected shortfalls in import duties and nontax revenues.
    - Expenditure savings (SI$93 million): mostly from partial retention of temporary spending reservations (SI$50 million) and expected underspending of development budget (SI$29 million).
  - Commitment to increase development spending during the program period and consideration of Cabinet contribution to the National Transport Fund (NTF) to ensure funding for transport infrastructure and leverage donor funding.
- FY2011 budget formulation:
  - Target overall fiscal surplus of 2¼ percent of GDP in 2011.
  - Build government cash balances to a minimal cover of two months of forward recurrent spending by end-2011.
  - Present final FY2011 budget passage in Q1 2011.
  - Revenue measures: fully operationalize new accounts modernization system, collect additional tax arrears, rationalize tax and customs exemptions, amended Customs Valuation Act implementation expected by year-end (a December 2010 program benchmark), Deputy Customs Comptroller expected by beginning of 2011.
  - Expected new revenue from commencement of gold exports: new export duties, PAYE collections, and withholding taxes on dividends.
  - Expenditure measures: limit growth in the government wage bill and parliamentary entitlements; prioritize donor-supported health and education outlays and high-impact capital expenditure, including NTF projects.
- Structural fiscal reforms and benchmarks:
  - Enforcement actions against several large taxpayers to collect income tax and customs-related arrears (continuous program benchmark).
  - Incorporate all line ministries into the new payroll accounting system and legalize exemption criteria and guidelines and merge exemption committees governed by the Customs and Excise and Income Tax Acts (December 2010 program benchmarks); seek cabinet approval by end-December 2010 if Parliamentary submission must wait until early 2011.
  - Continue work with the World Bank on Public Expenditure Review to improve budget formulation and spending prioritization.
  - Compile and report data on nonappropriated development expenditure and collect and monitor priority spending.
  - Strengthen cash management and budget execution by incorporating a new chart of accounts into the FMIS and ascribing to International Public Sector Accounting Standard (IPSAS) cash-based accounting standards.
- Long-term fiscal sustainability:
  - IMF technical assistance to help develop a natural resource tax regime by June 2011 (program benchmark).
  - Refrain from signing new mineral leasing agreements until the regime is in place.
  - Advance a comprehensive mining policy with World Bank assistance.
  - Prepare a stand-alone Public Finance Act incorporating fiscal responsibility provisions by June 2011 (program benchmark).
  - Work with ADB and World Bank to strengthen accounts at state-owned enterprises and produce annual audited financial statements.

### PROGRAM POLICIES — MONETARY, EXCHANGE RATE, AND FINANCIAL SECTOR POLICIES
- Rapid increase in international reserves and corresponding buildup in domestic liquidity have increased reserve money since end-2009; private sector credit growth remains sluggish and banks’ excess reserves continue to build at the CBSI.
- Authorities aware excess liquidity may create inflationary pressures once lending picks up.
- Liquidity management and monetary policy actions:
  - CBSI to monitor monetary conditions and stand ready to tighten monetary policy as necessary.
  - Issue guidelines on the auction of CBSI and treasury bills for open market operations by end-December 2010 (program benchmark).
  - Replace current liquid asset requirement with a statutory reserve requirement to give banks a more efficient means for managing liquidity.
  - Issue guidelines to introduce new standing facilities to establish an interest rate corridor to anchor monetary operations.
- Exchange rate policy:
  - Focus on maintaining adequate foreign reserves while supporting economic recovery.
  - Revise upward targets for NIR to capture overperformance as added cushion for external shocks.
  - Ease limits on commercial banks’ overnight holding of foreign exchange and reduce maximum exchange rate margins they are allowed to charge customers to facilitate foreign exchange transactions.
  - Authorities stand ready to allow greater exchange rate flexibility, as necessary, to help achieve NIR targets.
- Financial sector soundness:
  - Banking sector remains well capitalized and profitable, though new prudential guidelines indicate greater asset quality risks.
  - On-site examinations: one bank by end-December 2010; extend coverage to another by end-June 2011.
  - National Provident Fund (NPF): on-site examination conducted in September 2010; prepare a policy paper outlining proposed reforms for Cabinet endorsement by end-December 2010 (program benchmark).
  - Policy paper expected to recommend an independent governance structure for the NPF; Attorney General’s office to draft necessary amendments to the NPF Act for submission to Parliament by end-June 2011 (program benchmark).

### OTHER ISSUES
- External debt and arrears:
  - Initiated work on the five-year review of the Honiara Club Agreement with World Bank assistance to update development partners and potential creditors on progress in reducing debt levels and eliminating external arrears.
  - World Bank’s IDA inferred a “yellow light” status consistent with the medium risk of debt distress noted in the Debt Sustainability Analysis at the time of SCF approval.
- Safeguards assessment:
  - CBSI committed to implement IMF Safeguards Assessment recommendations by fully constituting the CBSI board (new December 2010 program benchmark).
  - Publish annually the opinion rendered by the international audit firm on CBSI audit results and the IFRS-based financial statements, beginning with the 2010 accounts (new June 2011 program benchmark).

*Source: Letter of Intent and Supplemental Memorandum of Economic and Financial Policies (APPENDIX I—L).*

### 15.      Statistical issues: In view of the need to provide a broad measure of economic

### 15.      Statistical issues: In view of the need to provide a broad measure of economic activity, we will publish national income accounts for 2007–09 by June 2011 (a new program benchmark).

### Quantitative performance criteria and indicative targets
- Performance criteria and indicative targets cover:
  - Floors on net international reserves (NIR) of the Central Bank of Solomon Islands (CBSI).
  - Ceilings on net domestic assets (NDA) of the CBSI.
  - Ceilings on net credit to the central government (NCG).
  - Floors on the central government cash balance.
- Selected program-level numerical sequences reported in Table 1 (eop stocks or cumulative changes as specified):
  - Net international reserves (NIR) of the CBSI (floor, eop stock, in millions of U.S. dollars (US$)): 146, 146, 147, 154, 178, 141, 158, 201, 160, 206, 214.
  - Net domestic asset (NDA) of the CBSI (ceiling, eop stock, in millions of Solomon Islands dollars (SI$)): -367, -328, -332, -393, -424, -327, -472, -411, -447, -401, -411.
  - Net credit to central government (NCG) (ceiling, cumulative change from the beginning of the year, in millions of SI$): -77, -77, 40, 40, -83, 22, -102, -80, 31, 31, -14.
  - New nonconcessional external debt maturing in more than one year, contracted or guaranteed by the public sector (ceiling, eop stock since the beginning of the program, in millions of US$): 0, 0, 0, 0, 0, 0, 0, 0, 0.
  - New nonconcessional external debt maturing in one year or less (ceiling, eop stock since the beginning of the program, in millions of US$): 0, 0, 0, 0, 0, 0, 0, 0, 0.
  - Accumulation of new external payment arrears by the public sector (ceiling, eop stock since the beginning of the program, in millions of SI$): 0, 0, 0, 0, 0, 0, 0, 0, 0.
  - Central government program cash balance (floor, cumulative change from the beginning of the year, in millions of SI$): -37, -37, -8, -13, 120, 120, -33, -33, 10.
- Memorandum items:
  - Budget support from bilateral and multilateral donors other than IMF (cumulative change from the beginning of the year, in millions of US$), program level: 28, 28, 17, 25, 24, 53, 59, 8, 11, 28.
  - Outstanding stock of Solomon Islands government (SIG) treasury bills, excluding restructured government bonds (end-period stock, in millions of SI$), program level: 40, 40, 40.
- Adjustors specified in the TMU:
  - The floor on NIR will be adjusted upward (downward) by the amount of budget support from bilateral and multilateral donors (excluding IMF) in excess (short) of the program level.
  - The ceiling on NDA will be adjusted downward (upward) by the amount of budget support from bilateral and multilateral donors (excluding IMF) in excess (short) of the program level.
  - The floor on central government program cash balance will be adjusted downward and the ceiling on NCG will be adjusted upward by the stock amount of budget support from bilateral and multilateral donors (excluding the IMF) short of the program level.
  - The floor on the program cash balance will be adjusted upward (downward) by the stock of government treasury bills, excluding restructured government bonds, in excess (short) of the program level of SI$40 million.
- Implementation notes:
  - The end-June 2010 NIR target is adjusted upward by US$7.5 million, the amount of budget support from bilateral and multilateral donors (excluding IMF) during January-June 2010 in excess of the program level.
  - The end-June NDA target is adjusted downward by SI$60.6 million, the amount of budget support from bilateral and multilateral donors (excluding IMF) during January-June 2010 in excess of the program level.
  - Following the IMF Safeguards Assessment recommendations, the revised end-2009 NDA as well as revised program targets for end-December 2010 and end-March 2011 and new targets for end-June 2011 incorporate recommended changes in the measurement of reserve money; such changes are not applied in measuring the June 2010 NDA outcome to remain consistent with the June 2010 PC.

### Structural benchmarks, prior actions, and status
- Prior Action:
  - Issue a ministerial circular detailing the new budget calendar for 2011. Purpose: To strengthen the budgetary process.
- Benchmarks and status (selected):
  - Apply full enforcement actions to collect income tax arrears (Continuous). Purpose: To strengthen revenue administration and collections. Status: In progress, with several prosecutions under way.
  - Issue a ministerial circular authorizing annual notification to the Public Accounts Committee of the nature and cost of all tax and customs exemptions granted. Due: June 30, 2010. Purpose: To promote fiscal transparency and enhance revenue collections. Status: Met (June 25, 2010).
  - Issue monetary policy regulations revising the lender of last resort provisions of the CBSI. Due: June 30, 2010. Purpose: To safeguard the stability of the financial sector. Status: Met (June 30, 2010).
  - Adopt an automatic adjustment mechanism for the price of logs, with the determined price adjusted to no less than 85 percent of the formula-based price from October 1, 2010, and a quarterly phase-in thereafter to achieve full consistency with the formula-based price from July 1, 2011. Due: September 30, 2010. Purpose: To promote fiscal transparency, enhance revenue collections, and ensure sustained output. Status: Not fully met. Details: Price for October-December 2010 increased from US$83 per cubic meter to US$90 (equivalent to 82 percent of the formula based price), and for January-June 2011 to US$98. The tax regime for logging is expected to be embodied in a new natural resource tax framework under development.
  - Amend the Customs Valuation Act and issue new implementation guidelines by end-2010. Due: December 31, 2010. Purpose: To strengthen customs administration and revenue collections. Status: The amendment was passed by Parliament on September 28, 2010. The full act is expected to be implemented by end-2010.
  - Receive cabinet approval of amendments to the Customs and Excise and Income Tax Acts legalizing exemption criteria and guidelines, including full disclosure requirements, and merging existing exemption committees into a unified committee structure. Due: December 31, 2010. Purpose: To promote fiscal transparency and enhance the efficiency of revenue collections. Status: In progress, with draft amendments under preparation by the Attorney General's office. Cabinet endorsement instead of parliamentary submission is sought by end-December 2010.
  - Incorporate all line ministries and employees into the new payroll accounting system. Due: December 31, 2010. Purpose: To strengthen expenditure oversight and control. Status: In progress, with teachers, the police force, and all line ministries under the establishment incorporated and a reconciliation of recorded payrolls under way.
  - Issue auction guidelines for CBSI and treasury bills. Due: December 31, 2010. Purpose: To broaden monetary instruments. Status: Regulations are being drafted with IMF technical assistance (TA).
  - Constitute fully the membership of the CBSI Board of Directors. Due: December 31, 2010. Purpose: To strengthen governance of the CBSI. Status: New benchmark.
  - Obtain Cabinet endorsement of a reform plan to the National Provident Fund (NPF) strengthening governance and oversight. Due: December 31, 2010. Purpose: To improve long-term financial viability of the NPF and reduce fiscal risks. Status: A policy paper outlining proposed reforms is being prepared; wider consultations under way.
  - Submit to Parliament a revised NPF Act incorporating the reform plan endorsed by Cabinet. Due: June 30, 2011. Purpose: To improve long-term financial viability of the NPF and reduce fiscal risks. Status: New benchmark.
  - Formulate a resource tax regime, consistent with IMF TA recommendations. Due: June 30, 2011. Purpose: To broaden the tax base and increase revenue transparency. Status: IMF TA ongoing.
  - Draft fiscal responsibility provisions to be incorporated into either a Fiscal Responsibility Act or an amended Public Finance and Audit Act. Due: June 30, 2011. Purpose: To strengthen budget management and ensure fiscal sustainability. Status: The Public Finance and Audit Act is being separated into two stand-alone acts, with fiscal responsibility provisions to be built into a stand-alone public finance act.
  - Publish finalized national income accounts for 2007-09. Due: June 30, 2011. Purpose: To strengthen macroeconomic indicators. Status: New benchmark, with a technical advisor employed to assist the National Statistics Office.
  - Publish the opinion rendered by the international audit firm on the CBSI audit results and the IFRS-based financial statements, beginning with the 2010 financial statements. Due: June 30, 2011. Purpose: To improve transparency of the CBSI. Status: New benchmark.

### Institutional definitions and monetary aggregates (TMU)
- Central government: All units of budgetary central government and extrabudgetary funds.
- Depository corporations (DCs): CBSI and other depository corporations (ODCs). ODCs include commercial banks, the Credit Corporation of Solomon Islands, and credit unions.
- Other financial corporations (OFCs): National Provident Fund (NPF), Development Bank of Solomon Islands, Investment Corporation of Solomon Islands.
- Valuation rule for foreign currency accounts: Valued in SI$ at the program exchange rate of SI$8.06 per U.S. dollar, as of end-2009. Foreign currency accounts denominated in currencies other than the U.S. dollar and monetary gold will first be valued in U.S. dollars at actual exchange rates and gold prices used by the CBSI, respectively, before conversion to SI$.
- Reserve money: Currency issued by the CBSI (excluding CBSI holdings of currency) and all transferable deposits held at the CBSI.

### Net international reserves (NIR) and Net domestic assets (NDA)
- NIR:
  - A floor applies to the level of NIR of the CBSI.
  - The floor on NIR will be adjusted upward (downward) by the amount of budget support from bilateral and multilateral donors (excluding IMF) in excess (short) of the programmed level.
  - NIR = Gross international reserves (GIR) less international reserve liabilities.
  - GIR defined as sum of:
    - Foreign currency assets in convertible currencies held abroad and as vault cash under direct and effective control of the CBSI, readily available for intervention and of investment grade or held with an investment-grade institution.
    - The reserve position of the Solomon Islands in the IMF.
    - Holdings of SDRs.
    - Monetary gold.
  - Exclusions from GIR: Foreign currency deposits of ODCs and OFCs held at the CBSI; any foreign currency claims on residents, capital subscriptions in international institutions, foreign currency assets in nonconvertible currencies; GIR encumbered or pledged (including reserve assets used as collateral).
  - International reserve liabilities of the CBSI: Sum of all outstanding liabilities of the Solomon Islands to the IMF, excluding IMF SDR allocations; and foreign currency liabilities in convertible currencies to nonresidents with an original maturity of up to and including one year.
- NDA:
  - A ceiling applies to the level of NDA of the CBSI.
  - The ceiling on NDA will be adjusted downward (upward) by the amount of budget support from bilateral and multilateral donors (excluding IMF) in excess (short) of the programmed level.
  - NDA = Reserve money − (NIR + other NFA of the CBSI).
  - Other NFA includes foreign assets and foreign liabilities not included in NIR as specified.

### Net credit to the central government (NCG)
- A ceiling applies to NCG measured cumulatively from the beginning of the year.
- The ceiling on NCG will be adjusted upward by the amount of budget support from bilateral and multilateral donors (excluding IMF) short of the programmed level.
- NCG defined as the sum of net claims of: (i) the CBSI, (ii) commercial banks and other ODCs, (iii) OFCs, (iv) insurance companies, (v) government treasury bills held by the general public.

### Fiscal aggregates: central government cash balance
- A floor applies to the program cash balance of the central government.
- The floor on the program cash balance will be adjusted downward by the amount of budget support from bilateral and multilateral donors (excluding IMF) short of the programmed level.
- The floor on the program cash balance will also be adjusted upward (downward) by the stock of government treasury bills, excluding restructured government bonds, in excess (short) of the program level of SI$40 million.
- Program cash balance of the central government = gross cash balance − total amount of unpaid payment orders and unpresented checks.
- Gross cash balance = sum of government deposits (not encumbered) in specified CBSI and commercial bank accounts and donor funded budget support accounts created by and under control of the government.

### External debt: ceilings and concessionality
- A ceiling applies to contracting and guaranteeing by the public sector of new nonconcessional borrowing with nonresidents with original maturities of more than one year; applies to debt and commitments contracted or guaranteed for which value has not yet been received, including private debt with official guarantees.
- Public sector comprises the central government, the CBSI, nonfinancial public enterprises, and other official entities.
- Exclusions from the ceiling include:
  - Use of Fund resources.
  - Lending from the World Bank and the Asian Development Bank.
  - Debts incurred to restructure, refinance, or prepay existing debts to the extent such debt is on more favorable terms than existing debt and up to the amount of the restructured/refinanced/prepaid debt.
  - Concessional debts.
  - Any SI$-denominated treasury bill and bond holdings and Bokolo bonds held by nonresidents.
- Guarantee of a debt (for program purposes): Any explicit legal obligation of the central government, the CBSI, nonfinancial public enterprises, or other official entities to service debt in case of nonpayment by the main obligor.
- Concessionality rule:
  - A debt is concessional if it includes a grant element of at least 35 percent.
  - Grant element = (NPV of debt difference from nominal value) expressed as percentage of nominal value. NPV calculated by discounting future debt-service payments using currency-specific commercial interest reference rates (CIRRs) published by the OECD.
  - For debt with maturity of at least 15 years, the 10-year-average CIRR will be used.
  - For debt with maturity of less than 15 years, the 6-month average CIRR will be used.
  - Margins for differing repayment periods added as per OECD practice: 0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years.

*Source: _cr10359 - 15.      Statistical issues: In view of the need to provide a broad measure of economic activity (IMF document).*

### 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more).

### _cr10359 - 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more)

### B. Short-Term External Debt
- A ceiling applies to the contracting and guaranteeing by the public sector of new nonconcessional borrowing with nonresidents with original maturities of up to and including one year.
- The ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received.
- The ceiling also applies to private debt for which official guarantees have been extended and which, therefore, constitute a contingent liability of the public sector.
- For program purposes, the definition of debt is set out in Point 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangement approved by the Executive Board Decision No. 6230-(79/140), as revised on August 31, 2009 (see Annex I).
- Exclusions from the ceiling:
  - (i) debts classified as international reserve liabilities of the CBSI;
  - (ii) debts incurred to restructure, refinance, or prepay existing debts, to the extent that such debt is incurred on more favorable terms than the existing debt and up to the amount of the actually restructured/refinanced/prepaid debt;
  - (iii) SI$-denominated treasury bills and bonds and CBSI and Bokolo bills held by nonresidents; and
  - (iv) normal import financing (a financing arrangement for imports is considered “normal” when the credit is self-liquidating).

### VI. External Payment Arrears
- A continuous performance criterion applies to the nonaccumulation of external payments arrears by the public sector, comprising the central government, the CBSI, nonfinancial public enterprises, and other official entities.
- External payments arrears consist of external debt-service obligations (principal and interest) that have not been paid at the time they are due, as specified in the contractual agreements.

### VII. Data Provision
- Reporting cadence and responsibilities:
  - Weekly data: submission to Fund staff by the end of the following week.
  - Monthly and quarterly data: submission within six weeks of the end of the observation period.
  - Authorities committed to using the best available data; subsequent revisions will be promptly reported and will not lead to breaches of quantitative performance criteria or benchmarks.
- A. Monetary Data (CBSI)
  - Weekly:
    - Daily exchange rates, both buying and selling rates, of the Solomon Islands dollar against the U.S. dollar, including the official, interbank, and parallel market exchange rates;
    - Stock of NIR and sales and purchases by the CBSI in the foreign exchange markets;
    - Stock of reserve money and its components;
    - Treasury bill auction reports.
  - Monthly:
    - Financial corporations’ survey, including the balance sheet of CBSI, the consolidated balance sheet of ODCs, and the consolidated balance sheet of OFCs;
    - Liquid asset ratios and/or reserves requirement of the commercial banks;
    - Interest rates, including average interbank rate, bank deposit rates, and bank lending rates;
    - A detailed breakdown of NCG from the CBSI, commercial banks and other ODCs, and OFCs;
    - Foreign exchange cash-flow of the CBSI, including donor disbursements;
    - Balances of each central government account specified in Section IV. A., as recorded or collected by the CBSI.
- B. Fiscal Data (Ministry of Finance and Treasury (MoFT))
  - Monthly:
    - Consolidated accounts of the central government, including detailed data on:
      - Revenue, including tax and nontax revenues, and recurrent and development grants included in the consolidated budget;
      - Recurrent expenditure, including payroll, goods and services, and other recurrent outlays, including those funded by donor support;
      - Other recurrent charges of the Ministry of Education and Ministry of Health, separating spending funded by donor support;
      - Debt service payments, classified into amortization and interest payments on (i) domestic debt, (i) external debt, (iii) domestic arrears, and (iv) external arrears;
      - Development expenditure funded by (i) central government of the Solomon Islands, and (ii) foreign grants and loans included in the consolidated budget.
    - Detailed financing components of central government’s accounts, classified into foreign and domestic sources:
      - Foreign financing includes (i) disbursement and amortization of project and program loans, and (ii) changes in external debt arrears, classified into principal and interest arrears.
      - Domestic financing includes (i) borrowing from and repayment to the CBSI, commercial banks and other ODCs, and OFCs; (ii) changes in deposits at the CBSI, commercial banks and other ODCs, and OFCs; and (iii) privatization receipts and changes in domestic debt arrears, classified into principal and interest arrears.
    - Stock of domestic debt, including the outstanding balance of government securities, treasury bills, cash advances, and other debt instruments.
    - Balances of each central government account specified in Section IV. A., as recorded by the MoFT.
    - Stock of unpaid government payment orders and unpresented checks.
- C. External Sector Data (CBSI and MoFT)
  - Quarterly:
    - New external debt obligations contracted and/or guaranteed by the government of the Solomon Islands, CBSI, and other official entities, including details on the amounts, terms, and conditions of each obligation.
    - Stock of outstanding external debt at end-month and disbursement, amortization, and interest payments for short-term external obligations contracted or guaranteed by the government or the CBSI by creditor in original currency and U.S. dollars.
    - Stock of external debt at end-month and disbursement, amortization, and interest payments for medium- and long-term external obligations contracted or guaranteed by the government or the CBSI by creditor in original currency and U.S. dollars.
    - Stock of arrears on the external debt contracted or guaranteed by the government or the CBSI by creditor in original currency and in U.S. dollars at end-month.
    - Balance of payment data, including detailed components of current accounts and capital and financial accounts.
- D. Real Sector Data (MoFT, National Statistical Office)
  - Monthly:
    - The monthly consumer price index and a detailed breakdown by major categories of goods and services included in the consumer basket.

### Annex I. Guidelines on Performance Criteria with Respect to Foreign Debt (excerpt)
- Definition of “debt” (Point 9):
  - Debt means a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.
  - Primary forms:
    - (i) loans, including deposits, bonds, debentures, commercial loans and buyers’ credits, repurchase agreements and official swap arrangements;
    - (ii) suppliers’ credits, where the supplier permits the obligor to defer payments until some time after delivery or service provision;
    - (iii) leases, where debt is the present value (at inception) of all lease payments expected to be made during the period of the agreement excluding payments covering operation, repair or maintenance.
  - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
  - Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

### Statement by Christopher Legg and Mario Di Maio (November 17, 2010) — Key Findings and Projections
- Program performance and macro outlook:
  - The Solomon Islands met the performance criteria for June and September and there was strong progress on the structural benchmarks in the program.
  - After beginning recovery during 2010, the pace of growth is expected to accelerate sharply in 2011 to 7½ percent.
  - The early resumption of gold mining will provide a substantial boost to growth.
  - Underlying growth will strengthen as investment and consumption rebound with stable macroeconomic policy and with the successful transition to the new government.
- Political and policy context:
  - A new government was formed in late August; priorities include poverty alleviation through a dynamic private sector, fair reward from natural resource use, and close cooperation with development partners.
  - The government renewed the Solomon Islands’ commitment to prudent macroeconomic management and the structural reforms supported by the Fund program.
- Monetary and financial sector:
  - The authorities will continue a prudent approach to monetary policy; inflation is projected to remain low and stable.
  - International reserves exceeded program targets and now are around seven months of imports.
  - Reserves are programmed to cover at least six months of imports in 2011.
  - Private credit growth expected to pick up modestly from a very low base.
  - Authorities will continue developing liquidity management tools to manage substantial excess liquidity.
  - Financial system remains stable; banks are well-placed to withstand potential shocks.
  - Reforms to strengthen governance and independence of the National Provident Fund remain on track, though timetables pushed back slightly for additional consultation and approval.
- Fiscal performance and adjustments:
  - Fiscal targets were met for June with revenue exceeding program projections.
  - Spending increases in 2010 (wages, election-related spending, contractual commitments) required adjustments to maintain targeted buildup in cash reserves.
  - Measures taken to reinforce fiscal prudence and exceed cash surplus targets for 2010:
    - Budget for remainder of 2010 based on conservative revenue assumptions.
    - Authorities committed to reducing spending by more than initially programmed in the remainder of 2010.
    - Revenue measures including greater collection of land tax, an increase in the determined value of log exports, and the forfeit of a performance bond by the new mobile telecoms operator.
  - The authorities committed to a prudent 2011 budget to achieve the cash buffer established in the program; the budget to be finalized early in 2011.
- Structural reforms and tax policy:
  - Structural program progressed well; adjustment of determined value of log export in September was 82 percent of the world log price rather than 85 percent (impact marginal: less than 1 million Solomon Islands dollars or around 0.15 percent of GDP).
  - Government adjusted the December 2010 determined value to exceed the programmed adjustment of 90 percent of the world price based on current projections.
  - Authorities emphasize strengthening the tax system and providing a firmer legislative basis for fiscal and budget management improvements.
  - Timely Fund technical assistance on the resource tax regime is critical given substantial pipeline of mining projects.
  - A public expenditure review with World Bank assistance will inform plans to improve public spending effectiveness.
- Overall assessment:
  - Program remains firmly on track; new Government demonstrated commitment to prudent macroeconomic management.
  - Economic recovery during 2010 is expected to strengthen and preparations are in place to meet December benchmarks.
  - Program risks have receded substantially since approval.

### Press Release No. 10/444 (November 17, 2010) — Executive Board Action and Remarks
- Executive Board completed the first review under the 18-month Standby Credit Facility (SCF) arrangement with Solomon Islands and approved a disbursement of an amount equivalent to SDR 3.12 million (about US$4.83 million).
- Total disbursements under the arrangement now amount to SDR 6.24 million (about US$9.66 million).
- The SCF arrangement was approved on June 2, 2010 for an amount equivalent to SDR 12.48 million (about US$19.3 million) or 120 percent of the Solomon Islands' quota.
- Deputy Managing Director and Acting Chair Naoyuki Shinohara emphasized:
  - Sound macroeconomic policies underpinning the reform program.
  - Program performance generally good; improved prospects with pickup in exports and lower inflation.
  - Need for continued adherence to the program and structural reforms to anchor macroeconomic stability and support diversification.
  - Fiscal recommendations: ensure 2011 budget is consistent with program commitments; strengthen revenue administration, cash and debt management, budget processes, and expenditure prioritization; develop a transparent and predictable tax regime for natural resources; adopt fiscal responsibility provisions.
  - Monetary recommendations: central bank remain vigilant and ready to exit accommodative stance if inflationary pressures intensify.
  - Financial sector recommendations: enhance oversight and risk management of financial institutions; reform the National Provident Fund to maintain financial stability.

*Source: IMF staff report and associated statements and press release, November 17, 2010.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10359.pdf_