## Box 1. Assessing the Fiscal Stance in Solomon Islands: The Role of the Structural Fiscal Balance

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---

### Recent developments and outlook
- Economic activity:
  - Contraction of 5 percent in 2009; rebound by 7.8 percent in 2010.
  - Growth of nearly 11 percent in 2011 driven by logs and mining (Gold Ridge reopened April 2011).
  - Private-sector credit recovery to 7½ percent growth year-on-year (y/y) in March 2012.
  - GDP growth projected at 7½ percent in 2012, reverting to 4 percent trend growth in the medium term.
- Inflation and external position:
  - Inflation: 1 percent in 2010; surged to almost 11 percent in October 2011; headline inflation at 8 percent (y/y) in April 2012.
  - Inflation expected to ease to about 5 percent in 2012 (from 9½ percent in 2011) under assumption of exchange rate appreciation.
  - Current account deficit shrank to about 6½ percent of GDP in 2011 from over 30 percent of GDP in 2010.
  - Trade surplus reached about 2 percent of GDP in Q1 2012 (staff estimate).
  - Gross international reserves: US$450 million as of April 2012 (about seven months of imports) versus US$256 million in 2010 (five months of imports) and less than US$100 million in mid-2009.
  - No disbursement under the current SCF arrangement has been made to date, nor is any expected given the strong external position.
- Risks:
  - Near-term downside risks include escalation of euro-area turmoil, higher crude oil prices from geopolitical risks, and domestic risks from a fluid political coalition and slippages in structural reform implementation.

### Downside scenario (staff analysis)
- Scenario assumptions:
  - Oil prices 50 percent above the baseline in 2012 and 2013.
  - Escalation of turmoil in the euro area.
  - Adverse growth spillovers from Emerging Asia and main regional trading partners, contraction in FDI and demand for logging, and deterioration of terms of trade.
- Key scenario figures (Baseline / Downside 1 for 2012 and 2013 as presented):
  - Real GDP growth (in percent): 7.4 3.0 4.0 3.0
  - Current account balance (in percent of GDP): -7.8 -18.1 -10.7 -19.0
  - 6.8 11.7 4.9
  - Mining exports (in percent of GDP): 18.2 17.4 19.1 18.2
  - Financing (in millions of U.S. dollars): -12.8 124.6 -61.9 134.4
  - Change in gross reserves (- = increase): -12.7 119.5 -61.8 134.5
  - IMF 1/: -0.1 5.1 -0.1 -0.1
  - Gross official reserves (in millions of U.S. dollars): 459.3 292.8 457.7 158.3
  - in months of next year's imports: 7.1 4.5 6.6 2.3
  - Overall fiscal balance (in percent of GDP): 0.9 -2.4 0.5 -2.1
- Note:
  - The downside scenario reflects disbursement under the SCF-supported program.

### Program performance and fiscal outturns
- SCF arrangement and macro buffers:
  - One-year SCF arrangement approved December 6, 2011.
  - All continuous performance criteria (PCs) met; end-December 2011 PCs and end-March 2012 indicative targets for net credit to the government (NCG), net international reserves (NIR), and net domestic assets (NDA) met with comfortable margins.
  - NIR reached US$393 million (seven months of imports) at one reporting point.
- Fiscal outturns (2011) and 2012 budget:
  - Overall fiscal surplus in 2011: 9 percent of GDP (record).
  - Program cash surplus SI$522 million at end-2011, covering 3.7 months of recurrent spending (program target was two months).
  - Central government debt estimated at 20½ of GDP in 2011 (down from 28 percent in 2010).
  - 2012 budget targets narrowing overall fiscal surplus to about 0.3 percent of GDP in 2012.
  - Total revenues excluding grants expected to reach 35 percent of GDP in 2012 (improvement of 2 percentage points of GDP compared to 2011).
  - Government-funded development spending projected to surge to 11 percent of GDP from 5 percent of GDP in 2011.
  - Authorities plan to retire SI$175 million of domestic debt (equal to 2.2 percent of GDP) later in 2012, subject to revenue and cash-balance developments.
- Revenue and spending risks (staff view):
  - Staff projects a more conservative revenue outlook with revenue lower than the budget by about 2½ percentage points of GDP.
  - Higher current expenditure expected owing to Festival of Pacific Arts and education/payroll pressures.
  - Domestically financed development spending envisioned to increase more gradually to reach 8 percent of GDP.

### Policy messages and recommendations (fiscal policy)
- Preserve and strengthen cash buffers:
  - Authorities transferred SI$80 million (1.1 percent of GDP) in January 2012 to the SIG Consolidated Deposits Account, bringing its balance to SI$140 million (1.9 percent of GDP).
  - Program will integrate the contingency fund with the program cash balance target; from end-June 2012 the floor on the program cash balance will be adjusted upward by the difference between SI$140 million and the actual account balance if the account is lower.
  - Although program cash balance target suggests decline from SI$522 million at end-2011 to SI$442 million at end-2012, cash balance including the contingency account will be maintained at SI$582 million (3.3 months of recurrent spending).
  - Staff recommended raising the minimum cash balance target to 3.3 months of recurrent spending (including contingency fund) and tightening the fiscal stance in H2 2012 by resisting additional spending pressures and cutting recurrent non-productive spending.
  - If commodity revenues continue to surprise or development under-spending persists, surpluses should be saved for future development spending or to expand fiscal space.
- Improve composition and efficiency of public spending:
  - Allocate sufficient resources to health, education, and infrastructure; government has an indicative target for spending on health and education of no less than 32 percent of government-funded recurrent spending.
  - Staff proposed a slower scaling up of development spending given capacity constraints and inflation pressures.
  - Given larger National Transport Fund spending, staff encouraged monthly reporting to the IMF on this fund.
  - Reduce unproductive recurrent spending (including public-sector allowances) to free resources for core pay adjustments and priority spending.
- Strengthen domestic revenue mobilization:
  - Finalize amendments to tax legislation and implement new resource taxation regime consistent with Fiscal Affairs Department recommendations.
  - Authorities plan to seek cabinet approval of draft tax amendments by September 2012 (benchmark).
  - Strengthen mining taxation administration and exemption rules; a comprehensive customs and excise bill is being drafted and planned for cabinet submission by end-October 2012 (revised benchmark).
  - Continue applying full market price for log exports with automatic quarterly adjustment.
- Strengthen public financial management:
  - Improvements include inclusion of output line items in 2012 budget presentation (benchmark met ahead of schedule); adoption of a new payroll system; reforms to the Public Finance Act to include fiscal responsibility provisions.
  - Staff urged submission of the draft Public Finance Act to cabinet by November 15, 2012 (benchmark) and holding a public workshop on the draft by end-September 2012 (benchmark).
- Caution on resuming concessional borrowing and strengthen debt management:
  - New debt management strategy endorsed May 10, superseding the Honiara Club Agreement; ratification meeting scheduled for early July (as noted).
  - Need for capacity building in debt management, establishment of guidelines and procedures, and strengthening project appraisal and evaluation to ensure borrowing supports high-return projects.
- Strengthen the fiscal framework medium-term:
  - Develop a multi-year budget framework to provide fiscal discipline.
  - Target the non-commodity fiscal balance (instead of the cash balance) to anchor plans as mining taxes become a large revenue source; this would reduce pro-cyclical policies driven by volatile revenues and ensure sustainable use of exhaustible resources.

### Fiscal policy and structural fiscal balance (additional highlights)
- Headline measurement issues:
  - Adjusting for transitory or one-off fluctuations in commodity revenues (from logging and gold) and recurrent grants materially affects measurement of the fiscal stance.
  - Logging accounted for 5½ percent of GDP and 17 percent of total non-grant revenues in 2011.
  - Logging stocks will be exhausted later in the decade; mining revenues to date account for only 1 percent of GDP but are expected to increase to about 3½ percent of GDP over the medium term.
  - Measures that adjust the headline balance for logging revenue cycles and large one-off grant payments suggest that the headline fiscal balance overstates the improvement in the fiscal position over the past two years.
- Policy implications summarized:
  - Preserve the cash balance accumulated to maintain fiscal buffers.
  - Improve efficiency and composition of public spending; scale-up health, education, and infrastructure spending but calibrate pace of spending against capacity constraints and inflation pressures.
  - Reform mining legislation and implement a new resource-taxation regime to broaden the tax base and promote fiscal transparency.
  - Strengthen public financial management to enhance budget transparency.

*Source: Box 1. Assessing the Fiscal Stance in Solomon Islands: The Role of the Structural Fiscal Balance (from _cr12156).*

### Box 1.  Assessing the Fiscal Stance in Solomon Islands: The Role of the Structural Fiscal

### Box 1.  Assessing the Fiscal Stance in Solomon Islands: The Role of the Structural Fiscal Balance

### Recent developments and outlook
- Economic activity:
  - Contraction of 5 percent in 2009; rebound by 7.8 percent in 2010.
  - Growth of nearly 11 percent in 2011 driven by logs and mining (Gold Ridge reopened April 2011).
  - Private-sector credit recovery to 7½ percent growth year-on-year (y/y) in March 2012.
  - GDP growth projected at 7½ percent in 2012, reverting to 4 percent trend growth in the medium term.
- Inflation:
  - 1 percent in 2010; surged to almost 11 percent in October 2011.
  - Headline inflation at 8 percent (y/y) in April 2012.
  - Inflation expected to ease to about 5 percent in 2012 (from 9½ percent in 2011) under assumption of exchange rate appreciation.
- External position and reserves:
  - Current account deficit shrank to about 6½ percent of GDP in 2011 from over 30 percent of GDP in 2010.
  - Trade surplus reached about 2 percent of GDP in Q1 2012 (staff estimate).
  - Gross international reserves: US$450 million as of April 2012 (about seven months of imports) versus US$256 million in 2010 (five months of imports) and less than US$100 million in mid-2009.
  - No disbursement under the current SCF arrangement has been made to date, nor is any expected given the strong external position.
- Risks:
  - Near-term downside risks include escalation of euro-area turmoil, higher crude oil prices from geopolitical risks, and domestic risks from a fluid political coalition and slippages in structural reform implementation.

### Downside scenario (staff analysis)
- Scenario assumptions:
  - Oil prices 50 percent above the baseline in 2012 and 2013.
  - Escalation of turmoil in the euro area.
  - Adverse growth spillovers from Emerging Asia and main regional trading partners, contraction in FDI and demand for logging, and deterioration of terms of trade.
- Key scenario figures (Baseline / Downside 1 for 2012 and 2013 as presented):
  - Real GDP growth (in percent): 7.4 3.0 4.0 3.0
  - Current account balance (in percent of GDP): -7.8 -18.1 -10.7 -19.0
  - 6.8 11.7 4.9
  - Mining exports (in percent of GDP): 18.2 17.4 19.1 18.2
  - Financing (in millions of U.S. dollars): -12.8 124.6 -61.9 134.4
  - Change in gross reserves (- = increase): -12.7 119.5 -61.8 134.5
  - IMF 1/: -0.1 5.1 -0.1 -0.1
  - Gross official reserves (in millions of U.S. dollars): 459.3 292.8 457.7 158.3
  - in months of next year's imports: 7.1 4.5 6.6 2.3
  - Overall fiscal balance (in percent of GDP): 0.9 -2.4 0.5 -2.1
- Note: The downside scenario reflects disbursement under the SCF-supported program.

### Program performance and fiscal outturns
- SCF arrangement:
  - One-year SCF arrangement approved December 6, 2011.
  - All continuous performance criteria (PCs) met; end-December 2011 PCs and end-March 2012 indicative targets for net credit to the government (NCG), net international reserves (NIR), and net domestic assets (NDA) met with comfortable margins.
  - NIR reached US$393 million (seven months of imports) at one reporting point.
- Fiscal outturns (2011):
  - Overall fiscal surplus in 2011: 9 percent of GDP (record).
  - Program cash surplus SI$522 million at end-2011, covering 3.7 months of recurrent spending (program target was two months).
  - Central government debt estimated at 20½ of GDP in 2011 (down from 28 percent in 2010).
  - Drivers: stronger logging revenues, higher taxes on goods and services, increase in grants, restraint in recurrent expenditure, and lower-than-planned development spending.
- 2012 budget:
  - Targets narrowing overall fiscal surplus to about 0.3 percent of GDP in 2012.
  - Total revenues excluding grants expected to reach 35 percent of GDP in 2012 (improvement of 2 percentage points of GDP compared to 2011).
  - Government-funded development spending projected to surge to 11 percent of GDP from 5 percent of GDP in 2011.
  - Authorities plan to retire SI$175 million of domestic debt (equal to 2.2 percent of GDP) later in 2012, subject to revenue and cash-balance developments.
- Revenue and spending risks:
  - Staff projects a more conservative revenue outlook with revenue lower than the budget by about 2½ percentage points of GDP.
  - Higher current expenditure expected owing to Festival of Pacific Arts and education/payroll pressures.
  - Domestically financed development spending envisioned to increase more gradually to reach 8 percent of GDP.

### Policy messages and recommendations (fiscal policy)
- Preserve and strengthen cash buffers:
  - Authorities transferred SI$80 million (1.1 percent of GDP) in January 2012 to the SIG Consolidated Deposits Account, bringing its balance to SI$140 million (1.9 percent of GDP).
  - Program will integrate the contingency fund with the program cash balance target; from end-June 2012 the floor on the program cash balance will be adjusted upward by the difference between SI$140 million and the actual account balance if the account is lower.
  - Although program cash balance target suggests decline from SI$522 million at end-2011 to SI$442 million at end-2012, cash balance including the contingency account will be maintained at SI$582 million (3.3 months of recurrent spending).
  - Staff recommended raising the minimum cash balance target to 3.3 months of recurrent spending (including contingency fund) and tightening the fiscal stance in H2 2012 by resisting additional spending pressures and cutting recurrent non-productive spending.
  - If commodity revenues continue to surprise or development under-spending persists, surpluses should be saved for future development spending or to expand fiscal space.
- Improve composition and efficiency of public spending:
  - Allocate sufficient resources to health, education, and infrastructure; government has an indicative target for spending on health and education of no less than 32 percent of government-funded recurrent spending.
  - Staff proposed a slower scaling up of development spending given capacity constraints and inflation pressures.
  - Given larger National Transport Fund spending, staff encouraged monthly reporting to the IMF on this fund.
  - Reduce unproductive recurrent spending (including public-sector allowances) to free resources for core pay adjustments and priority spending.
- Strengthen domestic revenue mobilization:
  - Finalize amendments to tax legislation and implement new resource taxation regime consistent with Fiscal Affairs Department recommendations.
  - Authorities plan to seek cabinet approval of draft tax amendments by September 2012 (benchmark).
  - Strengthen mining taxation administration and exemption rules; a comprehensive customs and excise bill is being drafted and planned for cabinet submission by end-October 2012 (revised benchmark).
  - Continue applying full market price for log exports with automatic quarterly adjustment.
- Strengthen public financial management:
  - Improvements: inclusion of output line items in 2012 budget presentation (benchmark met ahead of schedule); adoption of a new payroll system; reforms to the Public Finance Act to include fiscal responsibility provisions.
  - Staff urged submission of the draft Public Finance Act to cabinet by November 15, 2012 (benchmark) and holding a public workshop on the draft by end-September 2012 (benchmark).
- Caution on resuming concessional borrowing and strengthen debt management:
  - New debt management strategy endorsed May 10, superseding the Honiara Club Agreement; ratification meeting scheduled for early July (as noted).
  - Need for capacity building in debt management, establishment of guidelines and procedures, and strengthening project appraisal and evaluation to ensure borrowing supports high-return projects.
- Strengthen the fiscal framework medium-term:
  - Develop a multi-year budget framework to provide fiscal discipline.
  - Target the non-commodity fiscal balance (instead of the cash balance) to anchor plans as mining taxes become a large revenue source; this would reduce pro-cyclical policies driven by volatile revenues and ensure sustainable use of exhaustible resources (Box 1).

*Source: Box 1. Assessing the Fiscal Stance in Solomon Islands: The Role of the Structural Fiscal Balance (from _cr12156).*

### 13. The authorities remain committed to preserving a strong fiscal position. To this

### 13. The authorities remain committed to preserving a strong fiscal position. To this

### Fiscal policy and structural fiscal balance
- Authorities agreed that in the second part of 2012 fiscal policy will need to be tighter compared to the first few months of 2012 to achieve the fiscal targets going forward.
- Adjusting for transitory or one-off fluctuations in commodity revenues (from logging and gold) and recurrent grants materially affects measurement of the fiscal stance.
- Logging accounted for 5½ percent of GDP and 17 percent of total non-grant revenues in 2011.
- Logging stocks will be exhausted later in the decade, implying current logging revenue levels are well above long-term trend.
- Mining revenues to date account for only 1 percent of GDP but are expected to increase to about 3½ percent of GDP over the medium term.
- Measures that adjust the headline balance for logging revenue cycles and large one-off grant payments suggest that the headline fiscal balance overstates the improvement in the fiscal position over the past two years.
- Policy implications:
  - Preserve the cash balance accumulated to maintain fiscal buffers.
  - Improve efficiency and composition of public spending; scale-up health, education, and infrastructure spending but calibrate pace of spending against capacity constraints and inflation pressures.
  - Reform mining legislation and implement a new resource-taxation regime to broaden the tax base and promote fiscal transparency.
  - Strengthen public financial management to enhance budget transparency.

### Monetary policy and exchange rate policies
- Recent stance and actions:
  - Monetary conditions remained accommodative over the last few months, but authorities began mopping up excess liquidity.
  - Solomon Islands dollar was allowed to appreciate by 8.8 percent against the U.S. dollar in mid-2011 with rapid and nearly complete pass-through to headline inflation.
  - In 2010-11 rapid build-up of foreign exchange reserves led to rapid growth in reserve money; CBSI started mopping up excess liquidity in early 2011 by issuing short-term Bokolo bills and sterilization capacity has increased.
  - Lending interest rates fell from 14½ percent in January 2011 to 10.2 percent in March 2012, coinciding with private-sector credit pickup driven by construction and forestry sectors.
- Exchange rate pass-through and inflation:
  - Staff estimates indicate pass-through is near complete: a 1 percent appreciation of the nominal exchange rate against U.S. dollar lowers the imported component of the CPI by 1 percent within 12 months.
  - The pass-through is relatively immediate with more than 50 percent of the total impact occurring during the first five months.
  - A nominal appreciation of 4 percent would reduce inflation to about 5 percent in 2012 (staff estimate cited).
- Policy recommendations:
  - The central bank should stand ready to tighten monetary policy if inflation risks persist (raise reserve requirement and scale up open market operations).
  - Continue to manage the exchange rate in a flexible manner to provide a buffer against external shocks and curb imported inflation.
  - Authorities concurred with staff on the need to tighten monetary policy should inflation pressures persist.

### Financial sector stability
- System soundness and key indicators (commercial banks only, as reported):
  - Capital adequacy ratio increased from 24.6 percent at end-2011 to 28.5 percent in the first quarter of 2012.
  - Nonperforming loans (NPLs) to total outstanding loans remained flat at about 6 percent (about 2 percentage points below end-2010).
  - Return-on-assets (ROA) was 3.1 percent in the first quarter of 2012.
  - Return-on-equity (ROE) was 16.2 percent in the first quarter of 2012.
  - Banks’ profitability remains high; access to private-sector credit remains expensive and constrained by customary land practices.
- Other institutions:
  - On-site examination of the National Provident Fund (NPF) suggests continuing weakness in governance and financial performance.
- Regulatory and supervisory actions:
  - Authorities expect cabinet approval of drafting instruction to revise the NPF Act by end-June 2012 (benchmark).
  - Amendments to the Financial Institutions Act in the pipeline would include the NPF and strengthen the regulatory framework.
  - Authorities have requested IMF technical assistance to be delivered later in the year.
- Safeguards and CBSI:
  - An updated safeguards assessment is substantially complete; CBSI has implemented several recommendations (Audit Committee established, Board vacancies filled), and continues to publish audited financial statements.
  - Weaknesses remain in internal audit and controls over currency notes; draft central bank law requires staff review before finalization.

### Program discussions, financing, and risks
- Program targets:
  - Taking into account program performance at end-2011 and updated fiscal outlook, end-June performance criteria and end-September indicative targets were revised; new performance criteria for end-June 2012 and new indicative targets for end-September 2012 have been set.
- Political commitment and implementation:
  - Political commitment to the SCF-supported program remains strong; structural reform consultations have slowed pace but strengthened ownership.
  - Authorities expressed interest in a successor arrangement with the Fund once the current one expires in December 2012.
- External financing pipeline (conditional on program continuation and implementation):
  - Australia and New Zealand: about US$50 million in 2012.
  - AsDB: US$38 million during 2012–16 to finance infrastructure projects in transport and information and communication technology (both budget support and concessionary loans).
  - World Bank: US$2 million in budget support approved in April 2012 and additional disbursements including financing of the Tina River hydro project.
  - European Union: US$1.7-3.7 million in 2012 in budget support.
- Risks to the program:
  - Delays in implementing structural reforms and political instability pose risks.
  - Political changes since August 2010 (Prime Minister changes and cabinet reshuffles) could weaken program ownership, though current evidence suggests ownership remains firm.
  - Limited capacity remains a challenge; Fund technical assistance has been effective in implementation.

### Staff appraisal and priorities
- Progress and strengths:
  - Reserves and fiscal buffers have been rebuilt and a strong commodity-based recovery is underway; implementation of reform program and political commitment contributed to rebuilding buffers and sound macro management.
- Remaining challenges:
  - Growth concentrated in commodity sector (mainly logging) with limited spillovers; vulnerability to external shocks; logging expected to be exhausted during the current decade.
  - Mineral sector has potential to be main growth driver but requires reforms to ensure broad benefits.
- Staff priorities and recommendations:
  - Enhance resilience to shocks and ensure more inclusive growth by preserving fiscal buffers and improving spending efficiency and composition.
  - Continue reform momentum: mining legislation reform, resource-taxation regime, tax collection efficiency, and public financial management strengthening.
  - Tighten monetary policy and adjust exchange rate if growth remains strong and inflation pressures persist.
  - Strengthen supervisory and regulatory framework for financial sector stability.
  - Resume concessional borrowing prudently to finance development needs while minimizing external and fiscal risks.

*Source: IMF staff report excerpt (chapter/section provided).*

### 29. Based on Solomon Islands’ strong program performance, staff recommends the

### _cr12156 - 29. Based on Solomon Islands’ strong program performance, staff recommends the

### Program review and Fund recommendation
- Based on Solomon Islands’ strong program performance, staff recommends the completion of the first review under the SCF-supported program and requests the modification of end-June 2012 performance criteria.
- Table of Standby Credit Facility arrangement:
  - Approved Fund arrangement: December 6, 2011 — 171,733,333 (In percent of quota / In SDR as shown).
  - Completion of the first review and observance of end-December 2011 performance criteria: June 25, 2012 — 171,733,333.
  - Completion of the second review and observance of end-June 2012 performance criteria: November 15, 2012 — 171,733,334.
  - Total: 505,200,000.

### Macroeconomic developments and outlook
- Growth drivers and projections:
  - The recovery has been driven by booming resource sectors, especially logging and gold mining; logging is expected to decline over the medium term.
  - Real GDP growth (selected years): 2009: -4.7; 2010: 7.8; 2011: 9.3; 2012 (Prog.): 10.7; 2013 (Est.): 7.4; 2014 (Proj.): 4.0.
  - Real GDP—"Of which: nontimber nonmining": 2009: -2.6; 2010: 5.4; 2011: 4.8; 2012 (Prog.): 7.3; 2013 (Est.): 4.2; 2014 (Proj.): 4.5.
- Inflation and prices:
  - CPI (period average): 2009: 7.1; 2010: 0.9; 2011: 6.6; 2012 (Prog.): 7.4; 2013 (Est.): 4.3; 2014 (Proj.): 4.5.
  - CPI (end of period): 2009: 1.7; 2010: 0.8; 2011: 7.1; 2012 (Prog.): 9.4; 2013 (Est.): 4.6; 2014 (Proj.): 4.5.
  - Contribution to inflation series show domestic and imported components and world food and fuel price indices through Apr. 2012.
- External sector and trade:
  - Current account balance (US$ millions): 2009: -128.2; 2010: -210.1; 2011: -97.7; 2012 (Prog.): -58.2; 2013 (Est.): -124.3; 2014 (Proj.): -81.2.
  - Current account (percent of GDP): 2009: -21.4; 2010: -30.8; 2011: -11.6; 2012 (Prog.): -6.7; 2013 (Est.): -12.7; 2014 (Proj.): -7.8.
  - Exports of goods and nonfactor services (GNFS) (US$ millions): 2009: 234.9; 2010: 330.2; 2011: 524.3; 2012 (Prog.): 558.5; 2013 (Est.): 679.6; 2014 (Proj.): 677.6.
  - Imports of GNFS (US$ millions): 2009: 344.2; 2010: 547.8; 2011: 628.3; 2012 (Prog.): 612.0; 2013 (Est.): 725.9; 2014 (Proj.): 780.2.
  - Logging exports (US$ millions): 2009: 88.1; 2010: 124.7; 2011: 187.5; 2012 (Prog.): 191.4; 2013 (Est.): 168.8; 2014 (Proj.): 133.8.
  - Minerals exports (percent of GDP series and levels highlighted, with recommencement of gold exports noted).
- Reserves and reserves dynamics:
  - Gross official reserves (US$ millions, end of period): 2009: 146.0; 2010: 265.8; 2011: 364.6; 2012 (Prog.): 412.3; 2013 (Est.): 462.0; 2014 (Proj.): 460.3.
  - Reserves (in months of next year's imports of GNFS): 2009: 3.2; 2010: 5.2; 2011: 6.5; 2012 (Prog.): 6.8; 2013 (Est.): 7.1; 2014 (Proj.): 6.6.
  - Change in gross reserves decomposition shows contributions from trade in goods and services, capital and financial account, exceptional financing, and reserve changes (US$ millions).

### Fiscal position, budget, and medium-term fiscal projections
- Central government operations (percent of GDP):
  - Total revenue and grants: 2009: 55.2; 2010: 62.6; 2011: 59.5; 2012 (Prog.): 60.2; 2013 (Est.): 57.0; 2014 (Proj.): 55.5.
  - Revenue (percent of GDP): 2009: 30.5; 2010: 32.0; 2011: 33.6; 2012 (Prog.): 33.1; 2013 (Est.): 32.5; 2014 (Proj.): 32.3.
  - Grants (percent of GDP): 2009: 24.7; 2010: 30.6; 2011: 26.2; 2012 (Prog.): 27.1; 2013 (Est.): 24.5; 2014 (Proj.): 23.2.
  - Total expenditure (percent of GDP): 2009: 53.5; 2010: 56.4; 2011: 55.9; 2012 (Prog.): 51.2; 2013 (Est.): 56.2; 2014 (Proj.): 55.0.
  - Recurrent expenditure (percent of GDP): 2009: 28.6; 2010: 28.2; 2011: 27.1; 2012 (Prog.): 25.6; 2013 (Est.): 28.0; 2014 (Proj.): 26.6.
  - Development expenditure (percent of GDP): 2009: 25.6; 2010: 27.9; 2011: 28.9; 2012 (Prog.): 25.5; 2013 (Est.): 28.2; 2014 (Proj.): 28.3.
- Cash and financing:
  - Overall balance (percent of GDP): 2009: 1.8; 2010: 6.2; 2011: 3.6; 2012 (Prog.): 9.0; 2013 (Est.): 0.9; 2014 (Proj.): 0.5.
  - Gross cash balance (SI$ millions): 2009: 106; 2010: 326; 2011: 351; 2012 (Est.): 472; 2013 (Proj.): 561; 2014 (Proj.): 451.
  - Target of program cash balance (SI$ millions) noted for program monitoring (figures shown for program periods).
- Central government debt (percent of GDP):
  - Total: 2009: 33.2; 2010: 27.8; 2011: 21.3; 2012 (Prog.): 20.6; 2013 (Est.): 14.5; 2014 (Proj.): 13.0.
  - Domestic debt: 2009: 10.0; 2010: 8.1; 2011: 6.6; 2012 (Prog.): 6.4; 2013 (Est.): 3.0; 2014 (Proj.): 2.1.
  - External debt: 2009: 23.2; 2010: 19.8; 2011: 14.7; 2012 (Prog.): 14.2; 2013 (Est.): 11.5; 2014 (Proj.): 11.0.
- Budget detail (selected 2009–13 levels in SI$ millions):
  - Total revenue and grants: 2009: 2,659; 2010: 3,442; 2011: 3,635; 2012 (Budget): 3,811; 2013 (Proj.): 4,000.
  - Total revenue: 2009: 1,467; 2010: 1,757; 2011: 1,959; 2012 (Budget): 2,150; 2013 (Proj.): 2,199.
  - Grants: 2009: 1,192; 2010: 1,685; 2011: 1,676; 2012 (Budget): 1,661; 2013 (Proj.): 1,801.
  - Expenditure: 2009: 2,574; 2010: 3,099; 2011: 3,529; 2012 (Budget): 3,583; 2013 (Proj.): 3,400.
  - Development expenditure: 2009: 1,231; 2010: 1,533; 2011: 1,914; 2012 (Budget): 1,849; 2013 (Proj.): 1,695.

### Monetary and banking sector developments
- Monetary aggregates and credit:
  - Broad money (M3) (end-period, SI$ millions): Dec 2009: 1,833; Dec 2010: 2,080; Dec 2011: 2,222; Dec 2012 (Proj.): 2,369.
  - Reserve money (year-on-year percent): Dec 2009: 62.5; Dec 2010: 75.3; Dec 2011: 53.7; Mar 2012: 15.0.
  - Credit to private sector (annual percent change): 2009: -4.2; 2010: -4.7; 2011: 2.0; 2012 (Proj.): 4.7; selected later values: 4.0; 4.8.
- Interest rates and bank liquidity:
  - Deposit rate (percent per annum, weighted average): 2009: 2.7; 2010: 2.6; 2011: ...; 2012 (selected): 1.4 (noted as series with gaps).
  - Lending rate (percent per annum, weighted average): 2009: 15.4; 2010: 13.5; 2011: ...; 2012 (selected): 11.5 (series with gaps).
  - Loan-to-deposit ratio and deposit and credit growth series shown Jul. 2007–Mar. 2012.
- Exchange rate and real effective exchange rate:
  - Per capita GDP (2011): US$1,578 (estimate).
  - Population (2010): 538 thousand (estimate).
  - Real effective exchange rate increase due to 8.8-percent currency appreciation in mid-2011.
  - Nominal exchange rate (SI$/US$, end of period): 2009: 8.1; 2010: 8.1; 2011: ...; 2012: 7.4 (series with gaps).
  - Real effective exchange rate (period average, 2005 = 100): 2009: 120.5; 2010: 112.0; 2011: ...; 2012: 115.2 (series with gaps).

### External financing, Fund obligations, and capacity to repay
- Indicators of Fund obligations and outstanding credit (2011–22 projections):
  - Outstanding Fund credit (in millions of SDRs): 2011: 12.5; 2012: 17.7; 2013: 17.7; 2014: 16.6; 2015: 14.6; 2016: 10.9; 2017: 7.0; 2018: 3.4; 2019: 0.9; 2020–22: 0.0.
  - Outstanding Fund credit (in millions of US$): 2011: 19.3; 2012: 27.3; 2013: 27.3; 2014: 25.7; 2015: 22.5; 2016: 16.8; 2017: 10.8; 2018: 5.3; 2019: 1.3; 2020–22: 0.0.
  - Fund obligations based on existing and prospective credit (in millions of SDRs): 2014: 1.1; 2015: 2.2; 2016: 3.8; 2017: 4.0; 2018: 3.6; 2019: 2.6; 2020: 0.8.
  - Net use of Fund credit — Disbursements (SDR millions) recorded: 2009–2012: 6.2; 5.2; 0.0; 0.0 respectively in the schedule shown.
- Memorandum indicators:
  - Exports of goods and services (US$ millions): 2012: 701.8; 2013 (Proj): 752.8; 2014: 800.0; 2015: 843.6; 2016: 889.2; 2017: 938.1; 2018: 990.9; 2019: 924.6; 2020: 921.7.
  - Gross international reserves (US$ millions): 2012: 494.2; 2013: 552.4; 2014: 608.5; 2015: 668.0; 2016: 747.5; 2017: 836.7; 2018: 934.0; 2019: 1,024.1; 2020: 1,100.1.
  - Debt service (US$ millions): 2012: 18.1; 2013: 20.7; 2014: 21.4; 2015: 20.8; 2016: 20.4; 2017: 20.2; 2018: 20.1; 2019–22: ~20.1–20.2.

### Key statistics and social indicators
- Per capita GDP (2011): US$1,578 (estimate).
- Population (2010): 538 thousand (estimate).
- Poverty rate (2006): 23 percent.

*Sources: Data provided by the Solomon Islands authorities; IMF staff estimates and projections; IMF (tables and figures as presented in the source content).*

### APPENDIX I–LETTER OF INTENT

### APPENDIX I–LETTER OF INTENT

### Program status and request
- Request for completion of the first review under the one-year precautionary Standby Credit Facility (SCF) arrangement and modification of the end-June 2012 performance criteria.
- Current SCF arrangement approved on December 6, 2011; previous SCF expired on December 1.
- All end-December 2011 quantitative targets met by large margins; all continuous performance criteria observed; substantial progress on structural benchmarks.
- No expected draw on IMF resources under the current arrangement given a healthy external position and comfortable reserve coverage.
- Government authorizes publication of this Letter of Intent and the attached MEFP.

### Macroeconomic conditions and outlook
- Recent performance and buffers:
  - GDP: contracted by 5 percent in 2009; rebounded to 6¾ percent in 2010; more than 10 percent in 2011.
  - Gross international reserves: reached almost US$ 450 million (about 10 months of this year’s imports of goods and services) as of April 2012, compared with less than US$100 million in early 2009.
  - Growth remains concentrated in the commodity sector with limited spill-over to the rest of the economy.
- Near- and medium-term projections and risks:
  - Growth expected at just over 6 percent in 2012, with gold production taking over logging as the main driver.
  - Medium-term growth expected in the 4 percent range as logging output declines and gold, transport, construction and services support activity.
  - Headline inflation likely to revert to about 5 percent over the medium term as commodity prices stabilize.
  - Balance of payments position expected to remain strong.
  - Main downside risks identified:
    - Escalation of financial turmoil in Europe affecting emerging Asia.
    - Large increase in oil prices triggered by geopolitical risks.
    - Channels of contagion: deterioration in terms of trade; contraction in demand for logging from Asia—especially China; financial linkages.
    - Resilience of Australian banks should minimize a funding shock risk.

### Fiscal policies (objectives and measures)
- Overall objective: preserve a strong fiscal position while providing adequate resources for critical social spending to ensure inclusive growth.
- Cash and contingency arrangements:
  - Transferred SI$80 million of savings in January 2012 from the cash balance to a contingency fund (SIG Consolidated Deposits Accounts) kept at the CBSI but not part of the program cash balance.
  - Contingency fund balance was SI$140 million in January.
  - Revised cash balance targets for 2012 reflect this account and assume the contingency fund balance would not be lower than SI$140 million.
  - Commit to make necessary fiscal adjustments, pending further global deterioration, to meet the cash balance target.
  - Policy to save commodity revenue windfalls or underspent development budget resources for future development spending or to increase fiscal buffers.
  - Medium-term move toward targeting the non-commodity fiscal balance rather than the cash balance.
- Social and infrastructure spending:
  - Indicative target: spending on health and education at no less than 32 percent of government-funded recurrent spending.
  - Increase contribution to the National Transport Fund (NTF) in 2012; report monthly to the IMF on NTF accounts, including sources of funding, expenditures by project, and changes in NTF accounts at the CBSI and commercial banks.
  - Pacific Arts Festival provides opportunity for roads and infrastructure investment.
- Public financial management and budget transparency:
  - Revised budget presentation in February 2012 to include output line items (attained a program benchmark ahead of schedule).
  - Continue consultations with non-government organizations and ministries; seek assistance to strengthen procurement and internal audit processes.
- Expenditure containment and public service reforms:
  - Contain growth of non-essential recurrent spending, including streamlining spending on public sector allowances and benefits.
  - Continue resolving payroll and establishment problems; address appropriate levels of remuneration and pay adjustments to attract and retain personnel.
- Revenue mobilization and tax reform:
  - Strengthen compliance and streamline exemptions.
  - New comprehensive draft bill on customs and excise tax being drafted (revised benchmark) with ADB assistance and AusAID co-financing; submit to Cabinet by end-October 2012 (redrafted benchmark date) together with required amendments to income tax, stamp duties, goods and sales tax acts.
  - Draft bill incorporates strengthened exemption rules, making original IMF benchmark on exemptions redundant.
  - Implement a new resource taxation regime:
    - Seek Cabinet approval by September 2012 of draft amendments to income tax, custom and excise tax, and goods tax legislations to implement a new mining taxation regime (program benchmark), in line with IMF technical assistance recommendations.
    - Consultation meeting with stakeholders to be held in June.
    - Refrain from approving new mining leases until the new tax regime is in place.
    - Adopt interim measures to enhance mining taxation administration.
- Public Finance Act (PFA) reform:
  - Aim to submit draft Act to Cabinet by mid-November (redrafted benchmark date).
  - New PFA to include fiscal responsibility, management and use of public funds, and management of public debt.
  - Process involves production of four discussion papers; discussion paper released in February with public consultation; second and third papers expected late May or early June.
- Borrowing and debt management:
  - Exercise caution in resuming concessional borrowing while financing priority projects (e.g., submarine internet cable, Tina River Power Project).
  - Debt Management Strategy (DMS) endorsed in May by the Cabinet; DMS supersedes the Honiara Club Agreement (HCA) review (program benchmark).
  - Review completion includes presenting the DMS bilaterally to HCA signatories and observers.

### Monetary, exchange rate, and financial sector policies
- Monetary and exchange rate stance:
  - Policies geared to maintaining price and external stability.
  - CBSI allowed the currency to appreciate by 8.8 percent against the U.S. dollar in the second half of 2011 to mitigate imported inflation.
  - Recent reemergence of inflation pressures driven by sustained domestic demand and high oil prices.
  - Monetary tightening measures: raise the reserve requirement and scale up open-market operations, including issuance of Bokolo bills.
  - Exchange rate policy to remain flexibly managed to buffer external shocks.
- CBSI institutional reform:
  - Drafted a new CBSI Act; seek Cabinet approval of the draft act by June 10, 2012 (program benchmark).
  - Process took longer to allow stakeholder consultations and Attorney General’s amendments.
- Financial sector supervision and access to credit:
  - Strengthen supervisory and regulatory frameworks; improve access to credit.
  - Prudential guidelines on single borrower limits revised by end-2011 to facilitate large project financing.
  - Amend the Financial Institutions Act of 1990 to reflect structural changes and best practices; IMF technical assistance requested for delivery later in the year.
  - Explore options to enhance small business finance scheme administrated by the CBSI and Secured Transactions Act to encourage small enterprise access to finance.
- National Provident Fund (NPF) reform:
  - Seek Cabinet approval of drafting instructions to amendments to the NPF Act by end-June 2012 (program benchmark).
  - Reform objectives: improve governance, reduce political influence on investment decisions, maximize returns to members, and support financial stability.
  - Request IMF technical assistance on strengthening on-site supervision of NPF, insurance companies, and pension funds.

### Other issues
- Safeguards assessment:
  - Government agreed to ensure completion of the Safeguards Assessment update by the time of the IMF Board meeting at the end of June.
  - Understanding from IMF Finance Department that schedule for finalizing the assessment is on track.

*Letter of Intent, Ref: RF457/5/5, June 7, 2012.*

### 10. Statistics and data monitoring provisions. Progress has been made in strengthening

### _cr12156 - 10. Statistics and data monitoring provisions. Progress has been made in strengthening

### Statistics and data monitoring provisions
- Progress has been made in strengthening the quality of national account statistics and fiscal and monetary data, but timely reporting of program relevant data will continue to be improved.
- Authorities will devote more resources to improving the collection and the quality of national accounts statistics; quality is dependent on input data from the wider national statistical system.
- The authorities request IMF technical assistance on statistical sampling techniques related to conducting business and employment surveys.
- The authorities will continue to encourage staff, including from the national statistics office, to apply to the IMF economic and financial programming courses as part of capacity building.

### Quantitative performance criteria and indicative targets (selected figures)
- Table header context: Performance criteria (PC), Indicative targets (IT), Estimates (Est.), Revised PC (Rev. PC), Revised IT (Rev. IT) (CR/11/359) with adjustors.
- Net international reserves (NIR) of the Central Bank of Solomon Islands (CBSI) (floor, end-of-period stock, in millions of U.S. dollars (US$)) 2/:
  - 345
  - 341
  - 396
  - 351
  - 347
  - 424
  - 357
  - 421
  - 364
  - 428
- Net domestic asset (NDA) of the CBSI (ceiling, end-of-period stock, in millions of Solomon Islands dollars (SI$)) 3/:
  - -767
  - -737
  - -1,118
  - -870
  - -836
  - -1,331
  - -869
  - -1,253
  - -875
  - -1,256
- Net credit to central government (NCG) (ceiling, cumulative change from the beginning of the year, in millions of SI$) 4/:
  - -58
  - -27
  - -561
  - 27
  - 61
  - -143
  - 19
  - -28
  - 4
  - -26
- New nonconcessional external debt maturing in more than one year, contracted or guaranteed by the public sector (ceiling, end-of-period stock since the beginning of the program, in millions of US$) 5/:
  - 000   000   00   0 0
- New nonconcessional external debt maturing in one year or less, contracted or guaranteed by the public sector (ceiling, end-of-period stock since the beginning of the program, in millions of US$) 5/:
  - 000   000   00   0 0
- Accumulation of new external payment arrears by the public sector (ceiling, end-of-period stock since the beginning of the program, in millions of SI$) 5/:
  - 000   000   00   0 0
- Central government program cash balance (floor, end-of-period stock, in million of SI$) 4/:
  - 287
  - 254
  - 522
  - 287
  - 233
  - 402
  - 292
  - 342
  - 313
  - 392
- Indicative targets (cumulative) — Government funded recurrent spending on health and education:
  - 273
  - 409
- Memorandum items:
  - Budget support from bilateral and multilateral donors other than IMF (cumulative change from the beginning of the year, in millions of US$), program level:
    - 50...4614...9 30384447
  - Outstanding stock of Solomon Islands government (SIG) treasury bills, excluding restructured government bonds (end-of-period stock, in millions of SI$), program level:
    - 40
    - 38
    - 60
    - 40
    - 60
    - 60
    - 60
    - 60
    - 60
  - Balance of SIG Consolidated Deposits Account, millions of SI$.6/:
    - 60
    - 140
    - 140
    - 140

### Structural benchmarks and status of actions (selected entries)
- Submit to Parliament the amendment to the Customs and Excise and Income Tax Acts to strengthen exemption rules and clarify the role of exemption committee
  - Objective: To promote fiscal transparency and enhance the efficiency of revenue collections.
  - Date: December 31, 2011
  - Status: Not met, but superseded by a more comprehensive reform. A new comprehensive draft bill on customs and excise tax, including reforming exemption rules, is being drafted with the assistance of the ADB co-financed by Ausaid.
- Obtain Cabinet approval of a draft amendment to income tax, customs and excise tax, and goods tax legislations related to the new mining tax regime in line with IMF TA recommendations.
  - Objective: To broaden the tax base and increase revenue transparency.
  - Date: March 31, 2012
  - Status: Not met, but in progress; reform taking longer due to wider consultation process.
- Obtain Cabinet approval of draft amendment to the CBSI Act to strengthen the monetary policy and supervisory framework.
  - Objective: To strengthen the effectiveness of monetary policy.
  - Date: March 31, 2012
  - Status: Not met, but expected to be met with delay by June 10, 2012. Public consultation held on April 23.
- Complete the Honiara Club Agreement (HCA) review and reach agreements on amendments to the HCA.
  - Objective: To strengthen debt management and maintain public debt sustainability.
  - Date: April 30, 2012
  - Status: Met. The Debt Management Strategy (DMS), endorsed by Cabinet on May 10, supersedes the HCA review.
- Obtain Cabinet approval of the drafting instructions to revise the NPF Act incorporating the reform plan approved by the Cabinet to strengthen its governance structure and investment framework.
  - Objective: To improve the long-term financial viability of the NPF and reduce fiscal risks.
  - Date: June 30, 2012
  - Status: On track. TA from Australian Treasury secured; drafting instruction expected by June 2012.
- Revise the budget presentation from input line items to functional/output line items.
  - Objective: To strengthen the quality and monitoring of government spending.
  - Date: September 30, 2012
  - Status: Met. The revised presentation provided in the 2012 Budget paper approved in February 2012.
- Obtain Cabinet approval of the draft of new Public Finance and Audit Act that covers fiscal responsibility provisions, management and use of public funds, and management of public debt.
  - Objective: To strengthen budget management and ensure fiscal sustainability.
  - Date: September 30, 2012
  - Status: In progress; replaced by a new benchmark and an intermediate benchmark introduced.

- Revised and New Benchmarks (selected):
  - Obtain Cabinet approval of draft amendment to revenue and mining-related tax legislation (September 30, 2012).
  - Discussion papers and draft legislation of the new Public Finance Act to be presented at a public workshop (September 30, 2012).
  - Submit to Cabinet the new Customs and Excise bill, including exemptions clauses and draft amendments to other revenue acts (income tax, stamp duties, goods and sales tax acts) — Date: October 31, 2012.
  - Submit to Cabinet the draft of new Public Finance Act — Date: November 15, 2012.

### Technical Memorandum of Understanding — monitoring definitions and adjustors (selected provisions)
- The program is monitored through quantitative performance criteria, indicative targets, structural benchmarks, and reviews. Definitions for quantitative performance criteria and indicative targets are specified.
- Monitoring instruments established (paragraph 2):
  - Floors on NIR of the CBSI.
  - Ceilings on NDA of the CBSI.
  - Ceilings on NCG.
  - Floors on the central government cash balance.
- Continuous performance criteria (paragraph 3):
  - Ceilings on contracting/guaranteeing new medium- and long-term nonconcessional external debt.
  - Ceilings on contracting/guaranteeing new short-term nonconcessional external debt.
  - Ceilings on accumulation of new external payment arrears by the public sector.
- Institutional definitions (paragraphs 4–5):
  - Central government includes all units of budgetary central government and extra budgetary funds.
  - Depository corporations (DCs) include the CBSI and other depository corporations (ODCs); ODCs include commercial banks, the Credit Corporation of Solomon Islands, and credit unions.
  - Other financial corporations (OFCs) include the National Provident Fund (NPF), the Development Bank of Solomon Islands, and the Investment Corporation of Solomon Islands.
- Valuation and exchange rate (paragraph 6):
  - Foreign currency-denominated accounts valued at program exchange rate of SI$7.42 per U.S. dollar, as of end-June 2011.
- Reserve money (paragraph 7):
  - Consists of currency issued by the CBSI (excluding CBSI holdings of currency) and all transferable deposits held at the CBSI.
- NIR adjustments and definitions (paragraphs 8–11):
  - Floor on NIR adjusted upward (downward) by amount of budget support from bilateral and multilateral donors (excluding IMF) in excess (short) of programmed level.
  - NIR calculated as gross international reserves (GIR) less international reserve liabilities; valuation at program exchange rate.
  - GIR defined as sum of foreign currency assets in convertible currencies held abroad and as vault cash under CBSI control and investment-grade or held with investment-grade institution; reserve position in the IMF; holdings of SDRs; and monetary gold.
  - Exclusions from GIR: foreign currency deposits of ODCs and OFCs held at the CBSI; foreign currency claims on residents, capital subscriptions in international institutions, foreign currency assets in nonconvertible currencies; and any encumbered or pledged GIR.
  - International reserve liabilities defined as outstanding liabilities to the IMF (excluding SDR allocations) and foreign currency liabilities in convertible currencies to nonresidents with original maturity up to and including one year.
- NDA definitions and adjustors (paragraphs 12–13):
  - Ceiling on NDA adjusted downward (upward) by amount of budget support from bilateral and multilateral donors (excluding IMF) in excess (short) of programmed level.
  - NDA = reserve money − (NIR + other NFA of the CBSI). Other NFA includes foreign assets and foreign liabilities not included in NIR per Section III.B.
- Net credit to central government (NCG) (paragraphs 14–15):
  - Ceiling applies cumulatively from beginning of year; adjusted upward by amount of budget support short of programmed level.
  - NCG defined as 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.
- Cash balance of the central government (paragraphs 16–18):
  - Floor on program cash balance adjusted downward by amount of budget support short of programmed level.
  - Floor adjusted upward (downward) by stock of government treasury bills, excluding restructured government bonds, in excess (short) of program level of SI$40 million in 2011 and SI$60 million in 2012.
  - Starting with end-June 2012 target, floor adjusted upward by difference between January 2012 level of SI$140 million in the SIG Consolidated Deposits Account and its actual balance if actual balance is lower than SI$140 million.
  - Program cash balance defined as gross cash balance minus unpaid payment orders and unpresented checks.
  - Gross cash balance defined as sum of government deposits not encumbered or pledged in specified CBSI, Australia New Zealand Bank, Bank of South Pacific accounts, and donor funded budget support accounts under government control.
- External debt definitions and exclusions (paragraphs 19–23, partial):
  - Ceiling applies to contracting/guaranteeing by public sector of new nonconcessional borrowing with nonresidents with original maturities > one year; applies to debt/commitments where value not yet received and to private debt with official guarantees.
  - Public sector includes central government, the CBSI, nonfinancial public enterprises (>50 percent government ownership), and other official entities.
  - Exclusions from ceiling: use of Fund resources; lending from World Bank and Asian Development Bank; debts to restructure/refinance/prepay existing debts on more favorable terms up to amount of restructured/refinanced/prepaid debt; concessional debts; any SI$-denominated treasury bill and bond holdings and Bokolo bonds held by nonresidents.
  - Guarantee of a debt arises from explicit legal obligation of central government, CBSI, nonfinancial public enterprises, or other official entities to service debt in event of nonpayment by main obligor.
  - Concessional debt defined as grant element of at least 35 percent; NPV calculations use OECD CIRRs with specified averaging and margin rules.

*Source: _cr12156 - 10. Statistics and data monitoring provisions. Progress has been made in strengthening*

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

### _cr12156 - 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more)

### 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;
  - (iv) normal import financing (a financing arrangement for imports is considered “normal” when the credit is self-liquidating).

### External Payment Arrears (Performance Criterion)
- 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 are defined as external debt-service obligations (principal and interest) that have not been paid at the time they are due, as specified in the contractual agreements.

### Data Provision — Reporting Timetable and Commitments
- Reporting responsibilities indicated in parentheses under each section; weekly data are requested for submission to Fund staff by the end of the following week.
- Monthly and quarterly data are requested for submission within six weeks of the end of the observation period.
- The authorities have 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.

### Monetary Data (CBSI)
- Weekly data to be provided:
  - 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 data to be provided:
  - 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.

### Fiscal Data (Ministry of Finance and Treasury (MoFT))
- Monthly data to be provided:
  - 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.

### External Sector Data (CBSI and MoFT)
- Quarterly data to be provided:
  - 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.

### Real Sector Data (MoFT, National Statistical Office)
- Monthly data to be provided:
  - 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, excerpt from Executive Board Decision No. 6230-(79/140), as revised on August 31, 2009):
  - 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; these payments will discharge the principal and/or interest liabilities incurred under the contract.
  - Primary forms of debt include:
    - (i) loans (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets equivalent to fully collateralized loans (such as repurchase agreements and official swap arrangements);
    - (ii) suppliers’ credits (contracts where the supplier permits the obligor to defer payments until sometime after delivery of goods or services);
    - (iii) leases (debt is the present value at inception of all lease payments expected to be made during the agreement, excluding payments that cover operation, repair or maintenance).
  - Arrears, penalties, and judicially awarded damages arising from failure to make payments 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 Highlights and Executive Statements (June 25, 2012)
- The Executive Board completed the first review under the Standby Credit Facility and approved a request for modification of end-June 2012 performance criteria, based on strong program performance.
- Deputy Managing Director and Acting Chair Mr. Naoyuki Shinohara:
  - Noted that firm program implementation has succeeded in restoring macroeconomic and financial stability.
  - Identified that the economy remains vulnerable to commodity price and demand shocks and global uncertainty.
  - Emphasized priorities: bolstering resilience to shocks and pursuing a more inclusive growth model.
  - Fiscal priorities: maintain accumulated cash balance to strengthen fiscal buffers while improving efficiency and composition of public spending; manage resource revenues and anchor fiscal policy to the non-commodity balance.
  - Structural agenda: mining legislation, a new resource taxation regime, greater efficiency of tax collection, and strengthening public financial management and debt management.
  - Monetary policy: authorities ready to tighten if inflation risks continue; exchange rate should act as external shock absorber.
  - Financial sector: banking system remains profitable and adequately capitalized; central bank efforts should focus on strengthening supervisory and regulatory framework.
- Executive Director Christopher Legg (statement):
  - Noted the program’s role in rebuilding policy buffers and progress on structural reform while managing RAMSI withdrawal.
  - Reported growth recovery driven by the resources sector and trade links; external position improved with increased aid flows; gross international reserves now provide approximately seven months of import cover.
  - Emphasized preserving and bolstering fiscal buffers and the opportunity to strengthen focus on long term development objectives, including health, education, and transportation infrastructure.
  - Discussed measured exploration of loan financed investments in key infrastructure, conditioned on building capacity and project appraisal/evaluation procedures.
  - Stressed the importance of structural reforms for domestic revenue mobilization and public financial management, and realistic prioritization given limited capacity and complex political environment.
  - Monetary authorities committed to tightening policy if inflationary pressures re-emerge; CBSI tools include reserve requirements and sales of Bokolo bonds.
  - Noted amendments to the CBSI Act and strengthening the National Provident Fund Act as part of supervisory and regulatory improvements.
  - Highlighted external events as significant downside risks and the fragility of gains made to date.

*Source: Excerpted content from the IMF staff report and press materials provided in the supplied PDF content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12156.pdf_