## The 2011 Budget

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### Background and recent macroeconomic outcomes
- Program performance
  - All performance criteria for end-December 2010 were met with comfortable margins; preliminary outturns at end-March 2011 are in line with achieving the end-June program targets.
  - All program benchmarks for end-December 2010 were implemented, with some delay in Cabinet approval of amendments to the Customs and Excise and Income Tax Acts.

- Growth and output
  - Real GDP growth in 2010 is estimated at around 6½ percent.
  - Gold mining investment in 2010 is estimated at US$125 million (17½ percent of GDP), contributing about US$110 million of imports of goods and services.
  - Gold exports started in April 2011 and are projected at around 70 thousand ounces in 2011 and 120 thousand ounces annually in the medium term.

- Inflation and external sector
  - Headline inflation averaged 1 percent in 2010 but increased to almost 6 percent year/year (y/y) in April 2011.
  - Staff estimate headline inflation could reach about 8 percent in 2011, exceeding the authorities’ inflation objective of 5 percent.
  - Gross international reserves reached a record level of US$266 million, around five months of imports of goods and services.

- Near-term outlook and risks
  - Log production is projected to decline, but macroeconomic activity is expected to grow robustly with gold mining coming on stream.
  - Upside risk: logging industry sensitivity to international log prices could spur production.
  - Downside risks: a sharper-than-anticipated increase in oil and food prices and stronger domestic demand would pressure the current account and inflation; fiscal impact expected to be small due to absence of fuel subsidy.

### Policy discussions and program adjustments
- Policy focus
  - Consolidate gains in fiscal and external positions to enhance resilience to shocks.
  - Ensure 2011 budget and structural fiscal reforms are implemented in line with program commitments.
  - Strengthen monetary and liquidity management in view of excess banking system liquidity.
  - Address inflationary pressure from import prices and strengthen the financial sector.

- Program target adjustments
  - Performance criteria on Net International Reserves (NIR), Net Domestic Assets (NDA), Net Credit to Government (NCG), and government cash balances were adjusted to lock in 2010 overperformance and enhance external and internal financial stability.
  - A few structural benchmarks were updated or added to reflect new government commitments.

### Fiscal policy: performance, 2011 Budget, and reform priorities
- 2010 fiscal outturn
  - Revenue collections were stronger-than-projected; overall fiscal surplus is estimated at 6 percent of GDP against a 2½ percent target.
  - Government cash balance reached SI$263 million against the adjusted target of SI$165 million at end-2010.
  - The target on the NCG was met with a comfortable margin.

- 2011 Budget objectives and features
  - Objectives: build government cash balances while channeling resources for infrastructure development.
  - Budget allocates SI$51 million to the newly established NTF (National Transport Fund).
  - Contingency spending of about ¾ percent of GDP is fully funded.
  - New systems: consolidated recurrent and development budgets, payroll warrants to ministries, centralized payroll system, and a new financial management system.

- Key budget figures (In SI$ millions; Solomon Islands: The 2011 Budget and Fiscal Program)
  - Revenues and grants: 2,102 2,258 2,266 2,256
  - Domestic revenue: 1,626 1,758 1,860 1,969
  - Inland Revenues: 1,032 1,120 1,188 1,280
  - Customs: 431 493 498 503
  - Other ministries (incl. privatization): 163 146 175 186
  - Recurrent grants: 391 396 326 207
  - Development grants appropriated: 85 104 80 80
  - Expenditure 1/: 2,055 1,987 2,211 2,232
  - Recurrent: 1,695 1,637 1,782 1,707
  - Payrolls: 580 588 605 588
  - Debt servicing: 130 112 121 120
  - Other recurrent: 985 937 1,056 1,000
  - Development: 340 333 409 524
  - SIG funded: 255 243 329 444
  - Of which: National Transport Fund (NTF).........51
  - Donor funded: 85 89 80 80
  - Unrecorded expenditure 2018 200
  - Balance (+ = increase in saving): 462 715 524
  - Excluding NTF .........75
  - Memo items:
    - Program cash balance (flow): 120 216 75 24
    - Program cash balance (stock): 167 263 242 287
  - 1/ Includes contingency provisions of SI$53 million.

- Staff assessment and recommendations on the budget
  - Staff welcomed commitment to maintain two-month recurrent spending coverage through end-2011 while channeling resources to the NTF.
  - Revenue outlook: overall projection broadly appropriate with significant upside potential; projected logging revenue seen as conservative.
  - Key revenue/reform actions:
    - Apply full formula-based price for log exports with automatic quarterly adjustment starting in July.
    - Strengthen customs enforcement and implement amendments to Customs and Excise and Income Tax Acts to legalize and streamline exemptions.
  - Expenditure guidance:
    - Protect priority spending (health and education).
    - Consider reducing certain taxes on food and fuel items but not introducing new subsidies.
    - Prioritize high-impact development projects and save unspent resources.
    - Any supplementary budget should be fully funded by additional revenue or spending cuts; prioritize education, health, and infrastructure.

### Fiscal reform progress and next steps
- Enforcement and administration
  - Progress on enforcing collection of income tax arrears; enforcement framework functioning.
  - Incorporation of all line ministries into centralized payroll system completed.
  - New Customs Valuation Act implemented; Cabinet approval of NPF reform plan obtained.
  - Amendments to Customs and Excise and Income Tax Acts submitted for Cabinet approval at end-May with approval expected in June.

- Resource-based tax regime and fiscal responsibility
  - Fund TA missions on resource-based tax regime took place in October 2010 and March 2011.
  - Authorities seek Cabinet approval by end-June 2011 of a policy paper on a new resource-based tax regime (program benchmark).
  - Program benchmarks: obtain Cabinet approval of proposal to reform the PFAA and incorporate fiscal responsibility provisions by end-June 2011 (revised); publish proposed amendments to the PFAA including draft fiscal responsibility provisions by end-September 2011 (new).

### Risks highlighted for fiscal policy
- Comfortable cash reserves and windfalls from logging create pressure to increase spending beyond the budget.
- Logging and gold revenues are vulnerable to price declines; maintain a cash buffer above program target.
- Any supplementary budget must be consistent with program commitments and prioritize essential spending.

### Monetary, exchange rate, and financial sector policies
- Liquidity and reserves
  - End-December target for net international reserves was surpassed; level estimated at US$256 million at end-2010 (against adjusted target of US$204 million).
  - With limited sterilization, banks’ excess reserves increased rapidly; reserves-to-deposit ratio reached 50 percent compared with the Liquid Asset Ratio (LAR) of 7½ percent.
  - Ample liquidity pushed Treasury bill and Bokolo bill rates down from 4 percent to 1½ percent in May 2011.

- Credit and banks
  - Private sector credit was retrenching and credit growth to the private sector was negative through March 2011.
  - Sectoral loan distribution shows softening demand for personal loans to finance real estate investments and repayments in telecommunications and forestry.

- Exchange rate and inflation
  - CBSI indicated intention to allow greater flexibility in the exchange rate vis-à-vis the U.S. dollar and to pursue greater exchange rate flexibility in a trade weighted exchange rate basket regime.
  - Nominal exchange rate appreciated by more than 2 percent against the U.S. dollar since February 2011.
  - Staff analysis suggests headline inflation could move above the 5 percent inflation objective of the CBSI in 2011 in the absence of policy action.
  - Real effective exchange rate had depreciated by about 8 percent since early 2010; adjusting the nominal exchange rate by up to a similar magnitude would be consistent with medium-term fundamentals while maintaining a comfortable reserve cushion.

- Policy recommendations
  - Given excess liquidity, CBSI needs to strengthen monetary and liquidity management and be ready to tighten conditions should banks expand credit aggressively.
  - Precautionary measures to mop up liquidity: conduct larger open market operations and, if necessary, make a calibrated adjustment to the LAR.
  - Operational change: the LAR will be replaced by a statutory cash reserve requirement starting on July 1, 2011.
  - Staff supports allowing a modest appreciation of the exchange rate to mitigate imported inflationary pressure.

### Financial sector soundness, NPF, and supervision
- Financial soundness indicators and banks
  - Recent FSIs confirm the banking system remains adequately capitalized and highly profitable.
  - Nonperforming loans (NPLs) to total loans rose from 6.1 percent at end-June 2010 to 8.3 percent at end-December 2010.
  - On-site examinations revealed weaknesses in financial reporting, resulting in a significant overstatement of capital.

- Selected Core Financial Soundness Indicators (Central Bank of Solomon Islands; selected values)
  - Regulated capital to risk-weighted assets: 22.6, 22.0, 21.4, 28.4, 32.1, 33.5
  - Tier 1 capital to risk-weighted assets: 18.3, 15.6, 24.7, 22.8, 23.8, 24.0
  - Nonperforming loans, net of provisions to capital: 7.4, 9.3, 16.3, 13.1, 13.7, 15.0
  - Nonperforming loans to total gross loans: 2.7, 3.8, 7.0, 6.1, 7.6, 8.3
  - Return on average assets: 6.7, 6.0, 5.4, 5.2, 4.8, 4.9
  - Return on average equity: 43.0, 34.4, 33.2, 31.1, 28.1, 28.5
  - Liquid assets to total assets (liquid asset ratio): 20.6, 33.4, 37.7, 40.9, 47.7, 47.7
  - Liquid assets to short-term liabilities: 26.7, 54.8, 49.9, 53.9, 66.0, 65.0

- Supervisory, regulatory, and NPF reforms
  - Authorities intend to amend the central bank law to strengthen CBSI effectiveness in monetary policy and supervision (September 2011 program benchmark).
  - CBSI to continue on-site examinations of all banks in 2011, shifting from compliance-based to more risk-based supervision.
  - Draft revisions to the NPF Act to incorporate an independent governance structure were discussed; authorities to seek Cabinet approval of drafting instructions for the revised NPF Act by end-September 2011 (new program benchmark) with World Bank assistance.
  - NPF reform plan was approved by cabinet; on-site examination of NPF by the Australian Prudential Regulation Authority suggested major weaknesses in governance and financial performance.

### Other operational and external items
- Financing: AsDB expected to disburse second tranche of US$5 million in Q3 2011; EU expected to disburse around €2¼ million in second half of 2011.
- Debt management: Review of the Honiara Club Agreement (HCA) ongoing and expected to be completed by end-2011; arrears to the European Investment Bank have been fully resolved.
- Safeguards assessment: CBSI Board fully constituted (December 2010 program benchmark); authorities preparing to publish the international audit opinion and IFRS-based financial statements (end-June 2011 program benchmark).
- Statistics: NSO published official national income account estimates for 2007–09 in February; results of the 2009 Population and Housing Census published in May; work ongoing to revise national account statistics incorporating census results.
- Successor arrangement: Authorities and donors expressed strong interest in a successor arrangement with the Fund; modalities could be discussed during the third and final review under the SCF arrangement scheduled for late September.

### Program overview, projections, and monitoring
- Staff recommendation: complete the second SCF review and release the corresponding disbursement.
- Key macroeconomic indicators and projections
  - Nominal GDP (2009): US$663 million (estimate)
  - Population (2009): 516 thousand (estimate)
  - Real GDP growth (percentage change): 2009: -1.2; 2010: 3.9; 2011 Proj.: 6.5; 2012 Proj.: 6.1
  - CPI (period average): 2009: 7.1; 2010: 1.5; 2011 Proj.: 4.0; 2012 Proj.: 5.0
  - GDP deflator (percentage change): 2009: 8.0; 2010: 2.3; 2011 Proj.: 2.8; 2012 Proj.: 3.7
  - Central government overall balance (percent of GDP): 2009: 1.6; 2010: 2.4; 2011 Proj.: 5.9; 2012 Proj.: 2.3
  - Central government debt (percent of GDP): 2009: 30.5; 2010: 25.8; 2011 Proj.: 27.1; 2012 Proj.: 22.7
  - Current account balance (US$ millions): 2009: -128.2; 2010: -179.1; 2011 Proj.: -171.0; 2012 Proj.: -185.3
  - Gross official reserves (US$ millions, end of period): 2009: 146.0; 2010: 209.9; 2011 Proj.: 250.0; 2012 Proj.: 304.6
  - Gross official reserves (in months of next year's imports of GNFS): 2009: 3.2; 2010: 5.0; 2011 Proj.: 5.1; 2012 Proj.: 6.0

- Tradeable-sector highlights (2009—2012, in US$ millions)
  - Exports of goods and nonfactor services (GNFS): 2009: 234.9; 2010: 255.3; 2011 Proj.: 458.0; 2012 Proj.: 528.9
  - Imports of GNFS: 2009: 344.2; 2010: 461.7; 2011 Proj.: 624.4; 2012 Proj.: 670.3

- Fiscal and liquidity positions
  - Cash balances: built up to around SI$260 million by end-2010, covering two months of recurrent spending.
  - Net international reserves: reached US$256 million at end-2010.
  - Selected fiscal table highlights (SI$ millions):
    - Total revenue and grants (2009–2011): 2009: 2,659; 2010 Prog./Est.: 3,139 / 3,064; 2011 Prog.: 3,434
    - Total expenditure (2009–2011): 2009: 2,574; 2010 Prog./Est.: 3,153 / 2,929; 2011 Prog.: 3,091
    - Development expenditure (2009–2011): 2009: 1,231; 2010 Prog./Est.: 1,617 / 1,313; 2011 Prog.: 1,525
    - Program cash balance (memorandum, SI$ millions): 47 (2009); 167 (2010 Prog.); 263 (2010 Est.); 242 (2011 Prog.)

- Monetary and banking sector projections (selected)
  - Reserve money (end-year percentage change): 2009: 62.5; 2010: 49.2; 2011 Proj.: 75.3; 2012 Proj.: 14.6
  - Broad money (annual percentage change): 2009: 24.7; 2010: 24.9; 2011 Proj.: 13.5; 2012 Proj.: 15.0
  - Credit to the private sector (annual percentage change): 2009: -4.2; 2010: 1.0; 2011 Proj.: -4.7; 2012 Proj.: 15.0

- Program monitoring and reporting
  - Program monitored through quantitative performance criteria, indicative targets, structural benchmarks, and semi-annual reviews.
  - Data reporting requirements include weekly monetary data, monthly fiscal and real sector data, and quarterly external sector data with specified timing.

### Staff assessment — consolidated recommendations
- Fiscal policy
  - Preserve fiscal over-performance and maintain cash reserves at over two months of recurrent spending through end-2011.
  - Improve revenue administration, reduce exemptions, and strengthen enforcement and customs administration.
  - Implement resource-based tax regime and fiscal responsibility provisions; enact transparent mining regime to attract foreign investment.
  - Prioritize education, health, and infrastructure; ensure supplementary budgets are fully funded.

- Monetary and exchange rate policy
  - Mop up excess liquidity via larger open market operations and be ready to tighten conditions if credit expands aggressively.
  - Replace LAR with statutory cash reserve requirement starting July 1, 2011.
  - Allow modest exchange rate appreciation to mitigate imported inflation while maintaining competitiveness and reserves.

- Financial sector and NPF
  - Continue on-site examinations of all banks and enforce prudential regulations and corrective actions.
  - Reform the National Provident Fund to strengthen governance and minimize political interference; seek Cabinet approval of drafting instructions to amend the NPF Act by end-September 2011 with World Bank assistance.

- Risks
  - Pressure to increase spending from windfalls; logging and gold revenue volatility; excess liquidity could lead to a credit boom; rising international fuel and food prices pose inflationary risks.

*Source: IMF staff report content unit _cr11180.*

### 1. The 2011 Budget .....................................................................................................

### 1. The 2011 Budget

### Background and recent macroeconomic outcomes
- Program performance
  - All performance criteria for end-December 2010 were met with comfortable margins; preliminary outturns at end-March 2011 are in line with achieving the end-June program targets.
  - All program benchmarks for end-December 2010 were implemented, with some delay in Cabinet approval of amendments to the Customs and Excise and Income Tax Acts (SMEFP, Tables 1–2).

- Growth and output
  - Real GDP growth in 2010 is estimated at around 6½ percent, driven by strong agricultural production and logging in H2 2010 and robust growth in transport, construction, and communication sectors.
  - Gold mining and telecommunications investment exceeded 20 percent of GDP in 2010; gold mining investment in 2010 is estimated at US$125 million (17½ percent of GDP), contributing about US$110 million of imports of goods and services.
  - Gold exports started in April 2011 and are projected at around 70 thousand ounces in 2011 and 120 thousand ounces annually in the medium term.

- Inflation and external sector
  - Headline inflation averaged 1 percent in 2010 but increased to almost 6 percent year/year (y/y) in April 2011, led by higher import prices of fuel and food.
  - Staff estimate headline inflation could reach about 8 percent in 2011, exceeding the authorities’ inflation objective of 5 percent.
  - The current account deficit was wider than expected due to large imports of mining-related construction equipment and services; nevertheless, the overall balance of payments surplus was larger than projected.
  - Gross international reserves reached a record level of US$266 million, around five months of imports of goods and services (Table 2).

- Near-term outlook and risks
  - Log production is projected to decline, but macroeconomic activity is expected to grow robustly with gold mining coming on stream.
  - Upside risk: logging industry sensitivity to international log prices could spur production.
  - Downside risks: a sharper-than-anticipated increase in oil and food prices and stronger domestic demand would pressure the current account and inflation; fiscal impact expected to be small due to absence of fuel subsidy.
  - Authorities noted strong logging production since late 2010 partly reflects reentry to existing areas to cut smaller-size trees, indicating high price sensitivity.

- Political and budget context
  - The NCRA government released strategic policy actions in January; Parliament passed the 2011 Budget in April.
  - Government policy priorities: reconciliation and social reforms, national security and foreign relations, restoring and developing infrastructure, developing economic base, and reforming the public sector.

### Policy discussions and program adjustments
- Policy focus
  - Consolidate gains in fiscal and external positions to enhance resilience to shocks.
  - Ensure 2011 budget and structural fiscal reforms are implemented in line with program commitments.
  - Take precautionary measures to strengthen monetary and liquidity management in view of excess banking system liquidity.
  - Address inflationary pressure from import prices and strengthen the financial sector.

- Program target adjustments
  - Program performance criteria on Net International Reserves (NIR), Net Domestic Assets (NDA), Net Credit to Government (NCG), and government cash balances were adjusted to lock in 2010 overperformance and enhance external and internal financial stability.
  - A few structural benchmarks were updated or added to reflect new government commitments.

### Fiscal policy: performance, 2011 Budget, and reform priorities
- 2010 fiscal outturn
  - Revenue collections were stronger-than-projected due to economic recovery, logging revenue, and improved tax compliance.
  - Recurrent spending was restrained despite election-related costs, additional wage bills, and September 2010 supplementary budget items.
  - Some donor support disbursed at end-year remained unspent.
  - Overall fiscal surplus is estimated at 6 percent of GDP against a 2½ percent target.
  - Government cash balance reached SI$263 million against the adjusted target of SI$165 million at end-2010, sufficient to cover about two months of recurrent spending (compared with less than half month at program start).
  - The target on the NCG was met with a comfortable margin.

- The 2011 Budget (Box 1: Solomon Islands: The 2011 Budget)
  - Objectives: build government cash balances while channeling resources for infrastructure development.
  - Revenue and expenditure are projected to increase significantly; a small surplus is targeted to maintain cash balance at two months of recurrent spending through end-2011.
  - Budget allocates SI$51 million to the newly established NTF (National Transport Fund) for infrastructure development; the NTF Board will manage the fund and unspent resources used for future infrastructure development.
  - Contingency spending of about ¾ percent of GDP is fully funded.
  - New systems introduced to strengthen the budget process: consolidated recurrent and development budgets, payroll warrants to ministries, centralized payroll system, and a new financial management system to monitor ministry spending.

- Key budget figures (In SI$ millions; Solomon Islands: The 2011 Budget and Fiscal Program)
  - Revenues and grants: 2,102 2,258 2,266 2,256
  - Domestic revenue: 1,626 1,758 1,860 1,969
  - Inland Revenues: 1,032 1,120 1,188 1,280
  - Customs: 431 493 498 503
  - Other ministries (incl. privatization): 163 146 175 186
  - Recurrent grants: 391 396 326 207
  - Development grants appropriated: 85 104 80 80
  - Expenditure 1/: 2,055 1,987 2,211 2,232
  - Recurrent: 1,695 1,637 1,782 1,707
  - Payrolls: 580 588 605 588
  - Debt servicing: 130 112 121 120
  - Other recurrent: 985 937 1,056 1,000
  - Development: 340 333 409 524
  - SIG funded: 255 243 329 444
  - Of which: National Transport Fund (NTF).........51
  - Donor funded: 85 89 80 80
  - Unrecorded expenditure 2018 200
  - Balance (+ = increase in saving): 462 715 524
  - Excluding NTF .........75
  - Memo items:
    - Program cash balance (flow): 120 216 75 24
    - Program cash balance (stock): 167 263 242 287
  - Source: Solomon Islands Authorities.
  - 1/ Includes contingency provisions of SI$53 million.

- Staff assessment and recommendations on the budget
  - Staff welcomed the authorities’ commitment to preserve fiscal overperformance by maintaining two-month recurrent spending coverage through end-2011 while channeling resources to the NTF.
  - Revenue outlook: overall projection broadly appropriate with significant upside potential.
    - Projected logging revenue seen as conservative given strong Q1 collections; authorities expect logging production and revenue to decline in H2 due to scarcer supply and a projected increase in the taxable price of log exports.
    - Authorities plan to apply the full formula-based price for log exports with an automatic quarterly adjustment starting in July.
    - Scope for additional customs revenue from import recovery and new mining revenue, but strengthened customs enforcement remains necessary.
    - Implementing amendments to Customs and Excise and Income Tax Acts to legalize and streamline exemptions is critical for improving revenue collections.
  - Expenditure stance: budgeted expenditures aim to limit growth of nonessential recurrent spending and ensure resources for development needs; fully funded contingency spending signals greater fiscal discipline.
  - Staff encouraged protection of priority spending (health and education) to mitigate adverse impact of rising fuel and food prices on the poor.
  - Authorities may consider reducing certain taxes on food and fuel items but not introducing new subsidies.
  - The increase in government-funded development budget (about 1 percent of GDP excluding NTF) is ambitious given limited implementation capacity; staff advised prioritizing high-impact projects and saving unspent resources.
  - Allocation to NTF is welcomed as a means to ring-fence investment budget and improve implementation rates.
  - Any supplementary budget later in the year should be fully funded by additional revenue or spending cuts elsewhere; additional spending should prioritize education, health, and infrastructure while containing other recurrent spending.

- Fiscal reform progress and next steps
  - Progress made on enforcing collection of income tax arrears; enforcement framework functioning—staff supported removal of the corresponding benchmark for the remainder of the program.
  - End-December 2010 benchmarks implemented on schedule: incorporating all line ministries into a centralized payroll system; implementing the new Customs Valuation Act; obtaining Cabinet approval of plan to reform the National Provident Fund (NPF).
  - Amendments to Customs and Excise and Income Tax Acts took longer than expected; submitted for Cabinet approval at end-May with approval expected in June.
  - Joint Public Expenditure Review with World Bank identified challenges in budget formulation, monitoring, and accounting and provided a ten-year reform strategy.
  - Progress on a database to monitor budget execution and data collection on health and education (including recurrent budget support).

- Resource-based tax regime and fiscal responsibility
  - Fund TA missions on resource-based tax regime took place in October 2010 and March 2011.
  - Authorities seek Cabinet approval by end-June 2011 (program benchmark) of a policy paper to formulate a new resource-based tax regime based on Fund TA recommendations.
  - Legislative reforms to implement the new regime expected in 2011–12; mining regulation reform to improve transparency is also needed.
  - Authorities working on reform of the Public Finance and Audit Act (PFAA) to incorporate fiscal responsibility provisions via a consultative process.
  - Program benchmarks: obtain Cabinet approval of proposal to reform the PFAA and incorporate fiscal responsibility provisions by end-June 2011 (revised benchmark); publish proposed amendments to the PFAA including draft fiscal responsibility provisions by end-September 2011 (new benchmark).
  - Fund provided TA on drafting of fiscal responsibility provisions in April 2011.

### Monetary, exchange rate, and financial sector policies
- Liquidity and reserves
  - End-December target for net international reserves was surpassed by a wide margin; level estimated at US$256 million (against the adjusted target of US$204 million) at end-2010.
  - With limited sterilization, banks’ excess reserves increased rapidly; reserves-to-deposit ratio reached 50 percent compared with the Liquid Asset Ratio (LAR) of 7½ percent.
  - Ample liquidity pushed Treasury bill and Bokolo bill rates down from 4 percent to 1½ percent in May 2011.

- Credit and banks
  - Despite accommodative monetary conditions, private sector credit was still retrenching and credit growth to the private sector was negative through March 2011.
  - Banks were cautious due to retrenchment from the pre-2008 credit boom and political uncertainty that delayed the budget passage.
  - Sectoral loan distribution shows softening demand for personal loans to finance real estate investments (expected gradual drawdown in expatriate ODA workers) and repayments in telecommunications and forestry where investment cycles have matured.

- Policy recommendations
  - Given excess liquidity, the CBSI needs to strengthen monetary and liquidity management and be ready to tighten conditions should banks expand credit aggressively.
  - Headline inflation has risen since January due to global fuel and food prices while core inflation (nonfood nonfuel) remained relatively stable—this and weak domestic demand suggest no immediate need to tighten monetary conditions.
  - Staff encouraged precautionary measures to mop up liquidity: conduct larger open market operations and, if necessary, make a calibrated adjustment to the LAR.
  - Operational change: the LAR will be replaced by a statutory cash reserve requirement starting on July 1, 2011 to improve operational effectiveness.

*Source: IMF staff report excerpt — "1. The 2011 Budget."*

### 12.      While the policy of keeping the exchange rate stable has provided the economy with

### _cr11180 - 12.      While the policy of keeping the exchange rate stable has provided the economy with

### Exchange rate and inflation
- CBSI indicated intention to allow greater flexibility in the exchange rate vis-à-vis the U.S. dollar and to pursue greater exchange rate flexibility in the context of the trade weighted exchange rate basket regime.
- Nominal exchange rate appreciated by more than 2 percent against the U.S. dollar since February 2011.
- Staff analysis suggests headline inflation could move above the 5 percent inflation objective of the CBSI in 2011 in the absence of policy action.
- Given high import content and exchange rate pass-through, a modest appreciation of the exchange rate was estimated to be effective in curbing imported inflationary pressure and bringing headline inflation closer to the CBSI objective.
- Real effective exchange rate had depreciated by about 8 percent since early 2010; adjusting the nominal exchange rate by up to a similar magnitude would be consistent with medium-term fundamentals while maintaining a comfortable reserve cushion.
- Program net international reserves (NIR) targets adjusted upward by US$60 million for the remainder of the program in light of balance of payments overperformance.

### Financial sector soundness and Nonperforming Facilities (NPF)
- Recent financial soundness indicators (FSIs) confirm the banking system remains adequately capitalized and highly profitable.
- Ratio of nonperforming loans (NPLs) to total loans rose from 6.1 percent at end-June 2010 to 8.3 percent at end-December 2010, reflecting slightly higher delinquency among consumers and SMEs.
- On-site examinations of two major banks revealed weaknesses in financial reporting, resulting in a significant overstatement of capital.
- Banks are transitioning to prudential regulations issued in 2010, including gradually drawing down a few large loans above the single borrower limit.
- NPF reform plan was approved by cabinet; restructuring of a large nonperforming loan undertaken in 2010.
- On-site examination of NPF by the Australian Prudential Regulation Authority suggested major weaknesses in governance and financial performance.

### Core Financial Soundness Indicators (selected, Central Bank of Solomon Islands)
- Regulated capital to risk-weighted assets: 22.6, 22.0, 21.4, 28.4, 32.1, 33.5 (periods shown in table).
- Tier 1 capital to risk-weighted assets: 18.3, 15.6, 24.7, 22.8, 23.8, 24.0.
- Nonperforming loans, net of provisions to capital: 7.4, 9.3, 16.3, 13.1, 13.7, 15.0.
- Nonperforming loans to total gross loans: 2.7, 3.8, 7.0, 6.1, 7.6, 8.3.
- Return on average assets: 6.7, 6.0, 5.4, 5.2, 4.8, 4.9.
- Return on average equity: 43.0, 34.4, 33.2, 31.1, 28.1, 28.5.
- Net interest income to gross income: 50.2, 52.6, 48.3, 48.1, 47.7, 43.9.
- Noninterest expenses to gross income: 34.3, 37.5, 39.8, 40.0, 41.9, 42.0.
- Liquid assets to total assets (liquid asset ratio): 20.6, 33.4, 37.7, 40.9, 47.7, 47.7.
- Liquid assets to short-term liabilities: 26.7, 54.8, 49.9, 53.9, 66.0, 65.0.

### Supervisory, regulatory, and NPF reforms
- Authorities intend to amend the central bank law to strengthen CBSI effectiveness in monetary policy and supervision (September 2011 program benchmark).
- CBSI to continue on-site examinations of all banks in 2011, shifting from compliance-based to more risk-based supervision.
- Examinations should be followed by enforcement of new prudential regulations and corrective actions as needed.
- Draft revisions to the NPF Act to incorporate an independent governance structure were discussed; authorities to seek Cabinet approval of drafting instructions for the revised NPF Act by end-September 2011 (new program benchmark) with assistance from the World Bank.

### Other issues: financing, debt management, safeguards, statistics, successor arrangement
- Financing: AsDB expected to disburse second tranche of US$5 million in Q3 2011; EU expected to disburse around €2¼ million in second half of 2011. Delays reflected in revised program targets.
- Debt management: Review of the Honiara Club Agreement (HCA) ongoing and expected to be completed by end-2011; arrears to the European Investment Bank have been fully resolved.
- Safeguards assessment: CBSI Board fully constituted (December 2010 program benchmark). Authorities preparing to publish the opinion rendered by an international audit firm on CBSI audit results and IFRS-based financial statements (end-June 2011 program benchmark).
- Statistical policy: NSO published official national income account estimates for 2007–09 in February (June 2011 program benchmark) and results of the 2009 Population and Housing Census in May; work ongoing to revise national account statistics incorporating census results.
- Successor arrangement: Authorities and donors expressed strong interest in a successor arrangement with the Fund; modalities could be discussed during the third and final review under the SCF arrangement scheduled for late September.

### Staff assessment — Fiscal policy
- Authorities’ efforts in delivering program performance, preserving program targets, and implementing structural reforms are commendable.
- Near-term priorities: implement the 2011 Budget and any supplemental budgets consistent with the program to consolidate gains from 2010.
- Continue strengthening public finance management: revenue administration, cash and debt management, budget processes, and expenditure prioritization.
- Medium-term sustainability relies on legislative reforms to implement the resource-based tax regime and incorporate fiscal responsibility provisions.
- Authorities should move quickly to enact a transparent and predictable mining regime to attract foreign investment and ensure broader benefits.
- Review of the HCA should be finalized by end-2011 to signal borrowing capacity and debt sustainability.

### Staff assessment — Monetary and exchange rate policies
- Inflation is low but headline inflation has picked up strongly with rising imported fuel and food prices.
- Given high banks’ excess liquidity and appetite for secure interest-bearing assets, CBSI should start mopping up excess reserves by conducting larger open market operations.
- CBSI should monitor credit developments and stand ready to raise the cash reserve requirement if banks expand credit aggressively and demand-led inflation emerges.
- Staff supports allowing a modest appreciation of the exchange rate to mitigate rising fuel and food import prices while maintaining competitiveness and comfortable foreign reserves.

### Staff assessment — Financial sector policy
- Banking system remains well-capitalized and highly profitable, though on-site examinations revealed weaknesses in financial reporting.
- CBSI should continue on-site examinations of all banks in 2011 and enforce prudential regulations and corrective actions as needed.
- Reforming the NPF to strengthen governance and minimize political interference is a top priority to safeguard retirement savings and ensure adequate returns.
- Staff supports public consultations on NPF reforms and seeking Cabinet approval of drafting instructions to amend the NPF Act by end-September with World Bank assistance.

### Staff assessment — Risks
- Comfortable government cash reserves and expected windfall from larger-than-projected logging production create pressure to increase spending beyond the budget.
- Authorities must ensure any supplementary budget is consistent with program commitments, control growth of nonessential spending, and save unspent resources to build cash reserves or finance future infrastructure.
- Maintaining a cash buffer above the program target is important because logging and gold revenues are vulnerable to price declines.
- Excess liquidity in the banking system could lead to a credit boom and overheating.
- Rising international fuel and food prices continue to pose inflationary risks.

*Content derived from IMF mission report content unit _cr11180.*

### 24.      Program overview. The authorities’ achievement in meeting the program’s performance

### 24. Program overview

### Program implementation and performance
- The authorities’ achievement in meeting the program’s performance criteria and benchmarks is commendable.
- Based on the performance under the program and the authorities’ commitment to implementing the program going forward, staff recommends the completion of the second SCF review and release of the corresponding disbursement.
- Given the success of the program to date, the observance of all end-December 2010 quantitative targets, and the progress in implementing the structural benchmarks, the authorities request the completion of the second review and the release of the corresponding disbursement.

### Macroeconomic developments and outlook
- Nominal GDP (2009): US$663 million (estimate)
- Population (2009): 516 thousand (estimate)
- Real GDP growth (percentage change): 2009: -1.2; 2010: 3.9; 2011 Proj.: 6.5; 2012 Proj.: 6.1
- CPI (period average): 2009: 7.1; 2010: 1.5; 2011 Proj.: 4.0; 2012 Proj.: 5.0
- GDP deflator (percentage change): 2009: 8.0; 2010: 2.3; 2011 Proj.: 2.8; 2012 Proj.: 3.7
- Central government overall balance (percent of GDP): 2009: 1.6; 2010: 2.4; 2011 Proj.: 5.9; 2012 Proj.: 2.3
- Central government debt (percent of GDP): 2009: 30.5; 2010: 25.8; 2011 Proj.: 27.1; 2012 Proj.: 22.7
- Current account balance (US$ millions): 2009: -128.2; 2010: -179.1; 2011 Proj.: -171.0; 2012 Proj.: -185.3
- Gross official reserves (US$ millions, end of period): 2009: 146.0; 2010: 209.9; 2011 Proj.: 250.0; 2012 Proj.: 304.6
- Gross official reserves (in months of next year's imports of GNFS): 2009: 3.2; 2010: 5.0; 2011 Proj.: 5.1; 2012 Proj.: 6.0
- Tradeable-sector highlights (2009—2012, in US$ millions):
  - Exports of goods and nonfactor services (GNFS): 2009: 234.9; 2010: 255.3; 2011 Proj.: 458.0; 2012 Proj.: 528.9
  - Imports of GNFS: 2009: 344.2; 2010: 461.7; 2011 Proj.: 624.4; 2012 Proj.: 670.3

### Fiscal outcomes and cash/liquidity positions
- Fiscal outturn: The program targets for end-December 2010 were met with comfortable margins; fiscal performance in 2010 was stronger than envisaged due to greater revenue collections and expenditure restraint.
- Cash balances: Built up cash balance to around SI$260 million by end-2010, covering two months of recurrent spending.
- Net international reserves: Reached US$256 million at end-2010.
- Table highlights (selected, SI$ millions unless otherwise indicated):
  - Total revenue and grants (2009–2011): 2009: 2,659; 2010 Prog./Est.: 3,139 / 3,064; 2011 Prog.: 3,434
  - Total expenditure (2009–2011): 2009: 2,574; 2010 Prog./Est.: 3,153 / 2,929; 2011 Prog.: 3,091
  - Development expenditure (2009–2011): 2009: 1,231; 2010 Prog./Est.: 1,617 / 1,313; 2011 Prog.: 1,525
  - Program cash balance (in SI$ millions), memorandum: 47 (2009); 167 (2010 Prog.); 263 (2010 Est.); 242 (2011 Prog.)

### Monetary and banking sector
- Reserve money (end-year percentage change): 2009: 62.5; 2010: 49.2; 2011 Proj.: 75.3; 2012 Proj.: 14.6
- Broad money (annual percentage change): 2009: 24.7; 2010: 24.9; 2011 Proj.: 13.5; 2012 Proj.: 15.0
- Credit to the private sector (annual percentage change): 2009: -4.2; 2010: 1.0; 2011 Proj.: -4.7; 2012 Proj.: 15.0
- Central Bank program targets (selected):
  - NIR of CBSI (US$ millions): 146 (end-2009), 201 (end-2010 Prog.), 256 (end-2010 Est.), 206 (end-2011 Prog.), 280 (end-2012 Prog.)

### Policy commitments and priorities (from Letter of Intent and Supplemental MEFP)
- Maintain implementation of the program described in the May 14, 2010 Memorandum of Economic and Financial Policies (MEFP).
- Preserve fiscal over-performance and maintain cash reserves at over two months of recurrent spending through end-2011.
- Channel more than SI$50 million to the newly established National Transport Fund (NTF).
- Improve revenue collection by reducing exemptions, and strengthening administration and enforcement.
- Expect additional revenue from commencement of gold exports in 2011.
- Commit to applying the full amount of the formula-based price for logging exports, with a quarterly automatic price adjustment, starting on July 1, 2011.
- Restrain growth of nonessential recurrent spending, including the wage bill, while protecting priority spending and measures to mitigate adverse impacts of rising fuel and food prices on the poor.
- Ensure development budget finances high-impact infrastructure projects, especially in rural areas; save any unspent budgetary resources.
- Require that supplementary budgets and contingency warrants be funded by new revenue measures, savings measures, or updated revenue estimates; additional spending under supplementary budgets will prioritize education, health, and infrastructure (including through the NTF).

### Program monitoring and requests
- The program will continue to be monitored through quantitative performance criteria and indicative targets, structural benchmarks, and semi-annual reviews.
- The authorities request the completion of the second SCF review and the release of the corresponding disbursement, and stand ready to consult with the Fund and take additional measures as appropriate to ensure program objectives.

*Source: IMF staff report and attachments (Letter of Intent and Supplemental Memorandum of Economic and Financial Policies) as provided in the content unit.*

### 4.      We have made good progress in implementing the structural fiscal reforms under

### _cr11180 - 4.      We have made good progress in implementing the structural fiscal reforms under

### Structural fiscal reforms and revenue administration
- Progress made on implementing structural fiscal reforms under the program (Table 2).
- Income tax arrears enforcement:
  - Enforcement framework now in place; several prosecutions under way.
  - Given continued progress and a well functioning enforcement framework, the benchmark to apply full enforcement actions to collect income tax arrears is removed for the remaining period of the program (Met).
- Customs and taxation:
  - The new Customs Valuation Act was amended and the amendment was gazetted in December 2010 (Met).
  - Drafting of amendments to the Customs and Excise and Income Tax Acts to legalize and streamline exemptions took longer than expected; draft amendment to be submitted to Cabinet by end-May with approval expected in June.
- Payroll and NPF:
  - All line ministries and employees incorporated into a centralized payroll accounting system; reconciliation is underway (Met).
  - Cabinet approved a reform plan for the National Provident Fund (NPF) in November 2010 (Met).
  - Amendments to the NPF Act based on the policy paper are being drafted; submission to Parliament is not expected before end-June and the June 30, 2011 benchmark is being replaced with a new September 30, 2011 benchmark to obtain Cabinet endorsement of drafting instructions (new program benchmark).
- Resource-based taxation and fiscal responsibility:
  - Intend to obtain Cabinet approval of a policy paper on formulating the new resource-based tax regime based on IMF TA recommendations by end-June 2011 (program benchmark).
  - Until the new regime is in place, will refrain from approving mining leases that include government participation in sharing of production, revenues, profits, or equity capital of mining companies; prospecting licenses will continue under the Mines and Mineral Act.
  - Draft fiscal responsibility provisions are being prepared for incorporation into the Public Finance and Audit Act (PFAA) reform. Revised program benchmark: obtain Cabinet approval by end-June 2011 of a proposal to reform the PFAA and incorporate fiscal responsibility provisions. New program benchmark: publish proposed amendments to PFAA including draft fiscal responsibility provisions by end-September 2011.

### Monetary, exchange rate, and financial sector policies
- Exchange rate and reserves:
  - Monetary and exchange rate policies aim to maintain price and external stability.
  - In light of the comfortable level of foreign reserves, the Central Bank of Solomon Islands (CBSI) decided on a modest adjustment of the exchange rate to mitigate inflationary impact of anticipated rapid increase in imported fuel and food prices.
- Liquidity, credit, and monetary stance:
  - Monetary growth remains robust and banks’ excess reserves continue to accumulate, reflecting large external inflows from large donor support and buoyant exports.
  - Credit growth remains negative despite an economic pickup as banks remain cautious. Credit growth is expected to pick up in 2011 following passage of the 2011 Budget and general recovery in the economy.
  - The CBSI will closely monitor credit developments and tighten monetary conditions using both direct and indirect monetary instruments should banks begin to expand credit. Given high banks’ excess reserves, the CBSI will continue to mop up liquidity.
- CBSI legal and governance reforms:
  - Amendments to the CBSI Act have been drafted; Cabinet approval of the draft will be sought by end-September 2011 (new program benchmark).
  - CBSI Board fully constituted as recommended by the IMF Safeguards assessment (December 2010 program benchmark) (Met).
  - Publish annually, beginning with the 2010 accounts, the opinion rendered by the international audit firm on CBSI audit results and the IFRS-based financial statements (June 30, 2011 program benchmark) — in progress.
  - Auction guidelines for CBSI and treasury bills were issued on the CBSI website in December 2010 (Met).
- Financial soundness and supervision:
  - Banking system remains adequately capitalized and highly profitable, with a modest rise in nonperforming loans.
  - On-site examinations revealed weaknesses in accounting and classification, leading to significant overstatement of capital and underprovisioning; CBSI has requested corrective actions, imposed a fine on one bank, and will continue to enforce new prudential regulations issued in 2010.
- NPF reform process:
  - More time and consultations are needed to draft amendments to the NPF Act (June 2011 benchmark). New program benchmark: seek Cabinet approval of drafting instructions to the amendments by end-September 2011.

### Other issues
- External debt and arrears:
  - Ongoing review of the Honiara Club Agreement (HCA). Plan to finalize debt strategy by July to align with public consultation on fiscal responsibility provisions.
  - Formal meeting of the HCA review planned before the end of 2011.
  - Confirmation received that arrears to the European Investment Bank have been fully resolved.
- Statistics:
  - The National Statistics Office (NSO) published national income accounts statistics for 2007–09 in February 2011 (June 30, 2011 program benchmark).
  - Work ongoing to revise these statistics, including incorporating results of the population census; NSO plans to publish revised statistics by end-June 2011.

### Quantitative performance criteria, indicative targets, and selected numeric parameters
- Program exchange rate and valuation:
  - Foreign currency-denominated accounts valued in SI$ at the program exchange rate of SI$8.06 per U.S. dollar (as of end-2009).
- Key categories monitored (end-December 2010, end-March 2011, end-June 2011 targets and outcomes):
  - Performance criteria include floors on NIR of CBSI; ceilings on NDA of CBSI; ceilings on NCG; and floors on central government cash balance.
  - Continuous performance criteria include ceilings on new medium- and long-term nonconcessional external debt, ceilings on new short-term nonconcessional external debt, and ceilings on accumulation of new external payment arrears by the public sector.
- Selected numeric entries from Table 1 (Net international reserves (NIR) of the CBSI; floor, eop stock, in millions of U.S. dollars):
  - 141
  - 146
  - 205
  - 201
  - 204
  - 256
  - 206
  - 197
  - 280
  - 214
  - 280
  - 283
- Selected numeric entries from Table 1 (Net domestic asset (NDA) of the CBSI; ceiling, eop stock, in millions of Solomon Islands dollars (SI$)):
  - -327
  - -365
  - -435
  - -401
  - -426
  - -673
  - -401
  - -332
  - -767
  - -411
  - -700
  - -722
- Selected numeric entries from Table 1 (Net credit to central government (NCG); ceiling, cumulative change from the beginning of the year, in millions of SI$):
  - 22
  - 22
  - 30
  - -80
  - -80
  - -279
  - 31
  - 100
  - -23
  - -14
  - 17
  - -15
- Selected numeric entries from Table 1 (Central government program cash balance; floor, cumulative change from the beginning of the year, in million of SI$):
  - -13
  - -13
  - -9
  - 120
  - 118
  - 216
  - -33
  - -105
  - 34
  - 10
  - -30
  - -8
- Memorandum items (selected):
  - Central government program cash balance (floor, eop stock, in million of SI$):
    - 34
    - 34
    - 38
    - 167
    - 165
    - 263
    - 134
    - 62
    - 297
    - 177
    - 233
    - 255
  - Budget support from bilateral and multilateral donors other than IMF (cumulative change from the beginning of the year, in millions of US$), program level:
    - 24
    - 29
    - 59
    - 62
    - 11
    - 2
    - 28
    - 21
    - 39
  - Outstanding stock of Solomon Islands government (SIG) treasury bills, excluding restructured government bonds (end-period stock, in millions of SI$), program level:
    - 40
    - 39
    - 40
    - 38
    - 40
    - 40
    - 40

### Structural benchmarks and status (selected entries from Table 2)
- Ministry of Finance and Treasury
  - Apply full enforcement actions to collect income tax arrears — Continuous — In progress; benchmark removed for remainder of program (Met).
  - Amend the Customs Valuation Act and issue implementation guidelines by December 31, 2010 — The amendment was gazetted in December 2010 (Met).
  - Receive Cabinet approval of amendments to Customs and Excise and Income Tax Acts legalizing exemption criteria — December 31, 2010 — Policy paper submitted December 2010; Cabinet approval received January 2011; amendment expected to be approved by Cabinet in June (expected to be met by end-June 2011).
  - Incorporate all line ministries and employees into new payroll accounting system — December 31, 2010 — Met.
  - Obtain Cabinet endorsement of NPF reform plan — December 31, 2010 — Endorsed November 2010 (Met).
  - Formulate a resource tax regime consistent with IMF TA — June 30, 2011 — Policy paper being drafted with IMF TA inputs.
  - Draft fiscal responsibility provisions for incorporation into Fiscal Responsibility Act or amended PFAA — June 30, 2011 — Provisions being drafted with IMF TA; benchmark replaced by revised benchmark.
  - Submit revised NPF Act to Parliament — June 30, 2011 — Drafting underway; submission not expected before end-June; benchmark replaced.
  - Revised/new benchmarks:
    - Obtain Cabinet approval to reform PFAA and incorporate fiscal responsibility provisions — June 30, 2011 (Revised benchmark).
    - Publish proposed amendments to PFAA including draft fiscal responsibility provisions for public consultation — September 30, 2011 (New benchmark).
    - Obtain Cabinet endorsement of drafting instructions to revise NPF Act — September 30, 2011 (New benchmark).
- Central Bank of Solomon Islands (CBSI)
  - Issue auction guidelines for CBSI and treasury bills — December 31, 2010 — Issued December 2010 (Met).
  - Constitute fully the CBSI Board of Directors — December 31, 2010 — New members appointed and gazetted in December 2010 (Met).
  - Publish international audit opinion and IFRS-based financial statements beginning with 2010 — June 30, 2011 — In progress.
  - Obtain Cabinet approval of draft amendment to the CBSI Act — September 30, 2011 (New benchmark).
- National Statistics Office
  - Publish finalized national income accounts for 2007–09 — June 30, 2011 — NSO published national accounts in February 2011; work ongoing to revise statistics by incorporating population census results.

*Source: _cr11180 - 4.      We have made good progress in implementing the structural fiscal reforms under (IMF staff report excerpts and tables).*

### 14.      A ceiling applies to the NCG measured cumulatively from the beginning of the year.

### 14.      A ceiling applies to the NCG measured cumulatively from the beginning of the year.

### Net Claims on Government (NCG) — ceiling and definition
- A ceiling applies to the 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 is defined as the sum of net claims of:
  - (i) the CBSI,
  - (ii) commercial banks and other ODCs,
  - (iii) OFCs,
  - (iv) insurance companies,
  - (v) and government treasury bills held by the general public.

### IV. FISCAL AGGREGATES — Cash Balance of the Central Government
- 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) in 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.
- The program cash balance of the central government is defined as the gross cash balance minus the total amount of unpaid payment orders and unpresented checks.
- The gross cash balance is defined as the sum of government deposits, which are not in any way encumbered or pledged as collateral or used as a guarantee against government incurred liabilities, in the following accounts:
  - In CBSI: Solomon Islands Government (SIG) Revenue Account, SIG Funded Development Account, SIG Debt Servicing Account;
  - In Australia New Zealand Bank: SIG Creditors Account; Payroll Imprest Account, and Airport Service Fees Account;
  - In Bank of South Pacific: Provincial Revenue Holding Account, SIG Inland Revenue Account, Sub Treasury Gizo Account, and Sub Treasury Auki Account; and
  - Donor funded budget support accounts that are created by and under control of the government.

### V. EXTERNAL DEBT — Medium- and Long-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 more than one year.
- The ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received. This applies to private debt for which official guarantees have been extended and which, therefore, constitutes a contingent liability of the public sector.
- The public sector comprises the central government, the CBSI, nonfinancial public enterprises, and other official entities.
- The definition of debt, for the purposes of the program, is set out in Point 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangement Executive Board Decision No. 6230-(79/140), as revised on August 31, 2009 (see Annex I).
- Excluded from the ceiling are:
  - (i) the use of Fund resources;
  - (ii) lending from the World Bank and the Asian Development Bank;
  - (iii) 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;
  - (iv) concessional debts;
  - (v) any SI$-denominated treasury bill and bond holdings and Bokolo bonds held by nonresidents.
- For program purposes, the guarantee of a debt arises from any explicit legal obligation of the central government, the CBSI, nonfinancial public enterprises, or other official entities on behalf of the central government or the CBSI to service debt in the event of nonpayment by the main obligor (involving payments in cash or in kind).
- For program purposes, a debt is concessional if it includes a grant element of at least 35 percent, calculated as follows:
  - The grant element of a debt is the difference between the net present value (NPV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt.
  - The NPV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt.
  - The discount rates used for this purpose are the currency specific commercial interest reference rates (CIRRs), published by the Organization for Economic Cooperation Development (OECD).
  - For debt with a maturity of at least 15 years, the 10-year-average CIRR will be used to calculate the NPV of debt and, hence, its grant element.
  - For debt with a maturity of less than 15 years, the 6-month average CIRR will be used.
  - To both the 10-year and 6-month averages, the same margins for differing repayment periods as those used by the OECD would continue to be added:
    - 0.75 percent for repayment periods of less than 15 years,
    - 1 percent for 15 to 19 years,
    - 1.15 percent for 20 to 29 years, and
    - 1.25 percent for 30 years or more.

### V. EXTERNAL DEBT — 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. This 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).
- Excluded from the ceiling are:
  - (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 to be “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 requirements and timing
- Data will be provided for monitoring performance under the program based on data templates agreed with Fund staff.
- Weekly data: requested for submission to Fund staff by the end of the following week.
- Monthly and quarterly data: requested for submission within six weeks of the end of the observation period.
- The authorities committed to using the best available data, so that any subsequent data revisions will not lead to a breach of quantitative performance criteria or benchmarks. All revisions to data will be promptly reported to Fund staff.

- A. Monetary Data (CBSI)
  - On a weekly basis:
    - 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; and
    - Treasury bill auction reports.
  - On a monthly basis:
    - 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; and
    - 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))
  - On a monthly basis:
    - 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)
  - On a quarterly basis:
    - 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)
  - On a monthly basis:
    - 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)
- Point 9(a): The term “debt” is 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.
- Primary forms of debt include:
  - (i) loans (including deposits, bonds, debentures, commercial loans and buyers’ credits, repurchase agreements and official swap arrangements);
  - (ii) suppliers’ credits (deferred payments after delivery of goods or services); and
  - (iii) leases (debt equals the present value at inception of all lease payments excluding operation, repair or maintenance payments).
- Point 9(b): Under the definition, 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 that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

### Press Release No. 11/267 — IMF Executive Board Completion and Disbursement
- FOR IMMEDIATE RELEASE June 30, 2011
- The Executive Board completed the second review of Solomon Islands under an 18-month arrangement under the Standby Credit Facility (SCF).
- Completion enables immediate disbursement of an amount equivalent to SDR 3.12 million (about US$4.98 million), bringing total disbursements under the arrangement to an amount equivalent to SDR 9.36 million (about US$14.95 million).
- The SCF arrangement was approved on June 2, 2010 for an amount equivalent to SDR 12.48 million (about US$19.93 million), or 120 percent of the Solomon Islands' quota.
- Executive comments (Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair):
  - The macroeconomic outlook remains favorable, although inflation is rising due to global food and fuel prices.
  - Authorities are committed to consolidating improvements in fiscal and external positions to enhance resilience.
  - The 2011 Budget reflects commitment to strengthen public finances while promoting infrastructure development.
  - Recommended policy priorities:
    - Strengthen revenue administration, cash and debt management, budget processes, and expenditure prioritization.
    - Implement the new resource-based tax regime and adopt fiscal responsibility provisions.
    - Ensure a transparent and predictable mining regime to attract foreign investment.
    - Given high banks’ excess reserves, the central bank should mop up liquidity and stand ready to tighten monetary conditions if banks begin to expand credit aggressively.
    - Greater exchange rate flexibility can help mitigate the impact of fuel and food import prices on inflation; the decision to let the currency appreciate modestly is noted positively.
    - Continue on-site examinations and enforce prudential regulations; strengthen banking supervision and reform the National Provident Fund to ensure financial sector stability.

*Content based on the IMF staff report text provided in the source PDF.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11180.pdf_