## _cr13249

## Source details

**Canonical URL:** [_cr13249](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13249.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13249.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13249.pdf.json)

---

### Macroeconomic developments and outlook
- Real GDP growth in 2012: 4.8 percent.
- Inflation at end-2012: 5 percent (down from a peak of 11 percent in late 2011).
- Gross international reserves at end-2012: US$500 million (8.5 months of imports; also cited as "above eight months of imports").
- Government debt at end-2012: 17.5 percent of GDP (external public sector debt cited as 13 percent of GDP in the Letter of Intent).
- Near- and medium-term projections:
  - Growth expected to slow in 2013 and in the medium term to 3½–4 percent as forestry output is adversely affected by depletion of logging stocks.
  - Mineral and service sectors expected to be the main drivers of medium-term growth.
  - Inflation projected to remain around 6 percent in the near term and to moderate to 4½–5 percent over the medium term (medium-term inflation projections also noted as "around 6 percent" after early-2013 disruptions).
- External sector and exchange rate:
  - Current account balance (2012): -1.3 (context shown across tables).
  - Real effective exchange rate appreciated by 2.5 percent in Q1 2013.
  - In October 2012, authorities moved from a U.S. dollar peg to a basket exchange rate peg (US dollar and Australian dollar principal components); the peg "appears to be working well" and introduced flexibility.
- Key risks:
  - Considerable exposure to external shocks due to limited economic diversification (natural disasters, food and oil price hikes, slowdown in trading partners—in particular China).
  - Logging stocks expected to be exhausted during this decade—major medium-term downside risk to growth.
- Policy emphasis:
  - Sustained reform implementation to facilitate broad based and inclusive growth and mitigate shock impacts.

### Program performance under the ECF arrangement
- Quantitative performance (end-2012 and early-2013):
  - Performance criteria (PCs) for December 2012 on net credit to the government (NCG), net international reserves (NIR), and net domestic assets of the central bank (NDA) were met with large margins.
  - PC on the cash-balance floor missed by a small amount (SI$20 million reported in Letter of Intent; "less than 5 per cent of the target"); waiver sought on grounds the deviation was minor and temporary.
  - Indicative target on health and education for December 2012 missed by the equivalent of US$1 million.
  - Preliminary data suggest all March 2013 indicative targets have been met; selected end-March 2013 actuals: NIR Act. 3/31/2013: 479 (millions of US$) — Status: Met; NDA Act. 3/31/2013: -1,366 (millions of SI$) — Status: Met; NCG Act. 3/31/2013: -196 (millions of SI$) — Status: Met; central government program cash balance Act. 3/31/2013: 355 (millions of SI$) — Status: Not met.
- Staff actions and recommendation:
  - Completion of the first review under the ECF-supported program is recommended.
  - Support for waiver of nonobservance of the cash-balance PC at end-December 2012.
  - Support for modification of June 2013 performance criteria and for new test dates for structural benchmarks.

### Fiscal policy, outcomes, and public finance reforms
- 2012 fiscal outcome:
  - Overall fiscal surplus in 2012: near 4 percent of GDP (also cited as "almost 4 percent of GDP" and "9.0 percent" appears in table contexts—refer to tables for year-specific).
  - Constituency funds (CFs) rose from 2 percent of GDP in 2011 to 3.5 percent of GDP in 2012.
- 2013 budget implications and authorities’ commitments:
  - If fully implemented, 2013 budget would lead to a fiscal deficit of 1.2 percent of GDP — nearly a 5 percent of GDP deterioration relative to 2012.
  - Weaker fiscal position driven mainly by significant increases in recurrent expenditure, including a 6 percent general increase in public wages.
  - Additional fiscal pressures not reflected in the budget include committed teachers’ salary increase (about ½ percent of GDP) and new hiring to fill vacancies (about 0.4 percent of GDP).
  - Authorities project a small fiscal surplus of about 0.8 percent of GDP for 2013 with tight control and reductions in other recurrent spending (staff previously projected a surplus of 1.2 percent of GDP).
  - Cash-balance target to remain at no less than 2 months of recurrent spending; cash-balance target modification requested.
  - Nonrecurrence: Festival of Pacific Arts expenditures (2.5 percent of GDP in 2012) will not recur in 2013.
- Public financial management reforms and timelines:
  - Parliament approved the Constituency Development Funds Act; implementing regulations proposed as structural benchmark by end-December 2013.
  - Planned new Public Finance Act (PFMA) proposed submission by end-October 2013.
  - Authorities intend to publish the Auditor General’s report on CF use (proposed end-November 2013 benchmark).
  - Draft Customs and Excise Act released for public consultation in February 2013; submission to Parliament targeted by November 30, 2013.
  - Tertiary scholarship spending to be streamlined and linked to development needs.

### Monetary policy, liquidity, and reserves
- Recent developments:
  - Credit growth accelerated to 12.6 percent in March 2013 (year-on-year), up from 4 percent in December (year-on-year); prior negative growth in 2009–10 noted.
  - Banks’ excess liquidity remained high; CBSI used Bokolo bills to mop up liquidity (stock rose to SI$512 million at end-January 2013 from SI$368 million at end-2012).
- Policy stance and commitments:
  - Monetary and exchange rate policies aimed at maintaining price and external stability.
  - CBSI committed to step up monetary operations if needed.
  - Reserve indicators (selected series from tables): NIR of CBSI projections (US$ millions): 393, 426, 458, 478, 470, 479, 477, 480, 485, 490, 495, 500.
- Monetary aggregates and indicators (selected exact figures as presented):
  - Credit to private sector (annual percent change examples): -4.7, 4.7, 6.7, 4.1, 5.0, 8.2, 10.7.
  - Broad money (year-on-year percent change examples): 13.5, 25.5, 31.1, 17.3, 3.8, 15.2, 8.4.
  - Reserve money (examples): 75.3, 32.8, 37.2, 22.0, 3.8, 14.5, 8.4.

### Financial sector soundness and reform agenda
- System health and vulnerabilities:
  - Banks are adequately capitalized, highly liquid, and very profitable.
  - Nonperforming loans to total loans declined to 3.7 percent at end-2012.
  - Private sector credit as percent of GDP in 2012: about 15 percent (Pacific Islands average: 35 percent).
  - Key barriers to credit supply: weak investor protection and property rights regimes.
  - Non-interest income (mainly foreign exchange activities) significant for bank profitability.
  - The National Provident Fund (NPF) is systemically important with supervisory and investment strategy weaknesses (high share of short-term fixed interest instruments; elevated allocation to high-risk domestic unlisted companies; moderate allocation towards offshore assets).
- Reform and supervisory actions:
  - New NPF Act to be submitted to Parliament by October 31, 2013 (proposed benchmark) to reduce NPF financial risks and improve governance.
  - Authorities intend to amend the Financial Institutions Act to strengthen banking supervision and depositor protection.
  - New Credit Unions Act (CUA) being prepared with AsDB assistance; draft to be submitted to Cabinet by end-March 2014 and to Parliament by end-June 2014 (proposed structural benchmarks).
  - Work underway to strengthen payment system legal framework with World Bank support.
  - CBSI new Act approved in November 2012; safeguards assessment update substantially completed with specific recommendations to improve Audit Committee oversight and internal audit capacity; CBSI should publish the audit opinion of the international audit firm along with audited financial statements for FY2012 (to be monitored under the program).

### Financing, donors, and program risks
- Donor financing linked to ECF implementation (expected disbursements cited):
  - Australia and New Zealand: around US$50 million in 2013.
  - AsDB: about US$38 million in 2013–16 for infrastructure and ICT (budget support and concessionary loans).
  - World Bank: US$2 million Development Policy Grant in 2013.
  - European Union: US$1¾ million expected in 2013.
- Main program risks:
  - Political fragility and fluid coalition dynamics could affect program ownership; past arrangements suggest cross-party ownership is reasonably strong.
  - Capacity constraints remain a challenge—affecting timely drafting and approval of legislation and other deliverables.
  - Natural disasters (e.g., Santa Cruz tsunami: 10 killed; 15 injured; 4,509 people affected — 37 percent of Santa Cruz population) and social stability risks highlighted.

### Performance criteria, targets, and TMU monitoring definitions
- Quantitative performance criteria and indicative targets set for periodic dates through June 30, 2014; selected targets and actuals (end-of-period unless noted):
  - NIR of the CBSI (floor, millions of US$): 12/31/2012: 470; 3/31/2013: 463; Act. 3/31/2013: 479 (Status: Met); 6/30/2013: 475; 9/30/2013: 473; Act. 9/30/2013: 477 (Status: Met); 12/31/2013: 480; 3/31/2014: 480; 6/30/2014: 485.
  - NDA of the CBSI (ceiling, millions of SI$): 12/31/2012: -1,173; 3/31/2013: -1,123; Act. 3/31/2013: -1,366 (Status: Met); 6/30/2013: -1,122; 9/30/2013: -1,104; Act. 9/30/2013: -1,655 (Status: Met).
  - Net credit to central government (NCG) (ceiling, cumulative change from beginning of year, millions of SI$): 12/31/2012: 95; 3/31/2013: 145; Act. 3/31/2013: -196 (Status: Met); 6/30/2013: 6; 9/30/2013: 24; Act. 9/30/2013: -115 (Status: Met).
  - Central government program cash balance (floor, millions of SI$): 12/31/2012: 425; 3/31/2013: 375; Act. 3/31/2013: 355 (Status: Not met); 6/30/2013: 440; 9/30/2013: 422; Act. 9/30/2013: 474 (Status: Met).
  - Indicative target for spending on health and education: no less than 32 percent of government-funded recurrent spending (recorded as actual 32 percent in memorandum items).
- TMU definitions and adjustors:
  - NIR, NDA, NCG, cash-balance and external debt ceilings defined with valuation rules (program exchange rate SI$7.36 per U.S. dollar as of end-June 2012) and donor budget support adjustors.
  - Continuous performance criteria apply to contracting/guaranteeing new nonconcessional external debt (short- and medium/long-term) and accumulation of new external payment arrears.

### Structural benchmarks: status and rescheduling
- Met benchmarks (examples):
  - New Central Bank Act: submitted and approved in November 2012 (met).
  - Multi-year budget framework: submitted with 2013 budget (met).
  - Release of draft Customs and Excise Act for public consultation: met in February 2013.
  - Financial inclusion workshop: met in February 2013.
- Delayed or rescheduled benchmarks:
  - Cabinet approval of draft amendment on the new mining tax regime (December 31, 2012 benchmark): Not met; rescheduled to June 30, 2013 due to Attorney General’s Office resource constraints.
  - Submission to Cabinet of instructions for SOE borrowing (March 31, 2013 benchmark): Not met; rescheduled to June 30, 2013.
  - Draft Credit Unions Act: Cabinet submission by end-March 2014 and Parliament by end-June 2014 (proposed new structural benchmarks).
  - Other forward-dated benchmarks include submission of PFMA by October 31, 2013; submission of NPF Act by October 31, 2013; publication of Auditor General's CF audits by November 30, 2013; implementing regulations for CF Act by December 31, 2013.

### Fund financing, disbursements, and program status
- ECF arrangement:
  - Original ECF approved December 7, 2012: SDR 1.04 million (about US$1.59 million), or 10 percent of quota.
  - Press Release (No. 13/240, June 28, 2013): Executive Board completed first review and approved waiver of nonobservance of the cash-balance PC.
  - Disbursements following first review: Solomon Islands may draw SDR 0.149 million (about US$0.22 million) immediately; total disbursements under arrangement will be SDR 0.297 million (about US$0.45 million).
  - Table-disclosed total disbursement under program: Total101,040,000 (as shown in table).
- Fund obligations and outstanding credit (selected table figures):
  - Outstanding Fund credit (millions of SDRs, selected years): 12.6; 12.9; 12.2; 10.4; 7.6; 4.9; 2.4; 0.9; 0.7; 0.5; 0.3; 0.2.
  - Outstanding Fund credit (millions of US$, selected years): 19.4; 19.8; 18.6; 15.9; 11.6; 7.4; 3.6; 1.4; 1.1; 0.8; 0.5; 0.2.
  - Memorandum: Nominal GDP (US$ millions, projection examples): 996.7; 1,099.3; 1,176.4; 1,244.0; 1,309.7; 1,378.8; 1,457.3; 1,540.6; 1,634.1; 1,691.4; 1,776.4; 1,893.6.

### Key policy messages, staff observations, and recommendations
- Staff and Board messages:
  - Sustain fiscal discipline and improve the quality of public spending given anticipated decline in logging revenues and uncertainty in mining revenue.
  - Strengthen transparency and accountability in the use of constituency funds and upgrade the public finance framework.
  - Maintain reserve buffers and continue external debt reduction to sustain macroeconomic stability.
  - Monetary and exchange rate policies to remain geared toward price and external stability; authorities should be ready to step up monetary operations if needed.
  - The new FX peg to a currency basket is working well and can help buffer external shocks.
- Authorities’ program commitments summarized:
  - Maintain the cash-balance anchor at no less than two months of recurrent spending.
  - Implement public financial management reforms (PFMA, CF Act regulations, Auditor General publication).
  - Advance tax legislation reform (Customs and Excise bill, mining tax regime) and refrain from approving new mining licenses until the new mining tax regime is in place.
  - Reform NPF and strengthen banking supervision; advance Credit Unions Act and Payment System Act.

_Italicized source: IMF country report chapter — content unit _cr13249 (Solomon Islands)._

### 1. Macroeconomic Developments and Outlook ______________________________________________________13

### 1. Macroeconomic Developments and Outlook

### Macroeconomic setting and outlook
- Economic developments in 2012:
  - Real GDP growth in 2012: 4.8 percent.
  - Inflation at end-2012: 5 percent (down from a peak of 11 percent in late 2011).
  - Gross international reserves at end-2012: US$500 million (8.5 months of imports).
  - Government debt at end-2012: 17.5 percent of GDP.
- Near- and medium-term projections:
  - Growth is expected to slow in 2013 and in the medium term to 3½–4 percent, as forestry is expected to be adversely affected by depletion of logging stocks.
  - Mineral and service sectors are expected to be the main drivers of medium-term growth.
  - Inflation is projected to remain stable in the near-term at around 6 percent, and to moderate to 4½–5 percent over the medium term.
- Key risks:
  - Overall risks have become more balanced recently, with diminished tail risks from advanced economies.
  - Considerable potential impact from external shocks persists due to limited economic diversification—possible shocks include natural disasters, food and oil price hikes, or a sharp slowdown in trading partners (in particular China).
- Policy emphasis:
  - Sustained reform implementation in line with program commitments is essential to facilitate broad based and more inclusive growth and to mitigate medium- and long-term shock impacts.

### Program performance under the ECF arrangement
- Quantitative performance:
  - Performance criteria (PCs) for December 2012 on net credit to the government (NCG), net international reserves (NIR), and net domestic assets of the central bank (NDA) were met with large margins.
  - The PC on the cash-balance floor was missed by a small amount owing to a brief delay in transferring government deposits already at the central bank to the specific government accounts that comprise the cash balance at end-2012; timely transfer would have enabled meeting the PC with a comfortable margin.
  - The indicative target (IT) on health and education for December 2012 was missed by a small amount (the equivalent of US$1 million).
  - Preliminary data suggest all March 2013 indicative targets have been met.
- Structural benchmarks:
  - Achievements: new Central Bank Act (December 2012 benchmark) submitted to Parliament and approved in November 2012; multi-year budget framework (December 2012 benchmark) submitted with the 2013 budget; draft Custom and Excise Act released for public consultation (December 2012 benchmark) in February 2013; financial inclusion workshop (March 2013 benchmark) held in February 2013.
  - Delays: Cabinet approval of draft amendment on the new mining tax regime (December 2012 benchmark) not met due to Attorney General’s Office resource constraints; drafting of borrowing instructions for state-owned enterprises (March 2013 benchmark) delayed. Authorities expect completion by end-June 2013.

### Fiscal policy
- 2012 fiscal outcome:
  - Overall fiscal surplus in 2012: near 4 percent of GDP, achieved through control of recurrent spending and aligning development spending with implementation and absorptive capacity; domestic revenue collection surprised on the upside late in the year.
- 2013 budget implications:
  - If fully implemented, the 2013 budget would lead to a fiscal deficit of 1.2 percent of GDP — nearly a 5 percent of GDP deterioration in the fiscal balance relative to 2012.
  - Weaker fiscal position driven mainly by significant increases in recurrent expenditure (utilities, rents, consumption of other goods and services, tertiary scholarships abroad, and payroll).
  - Payroll increase reflects a 6 percent general increase in public wages.
  - Additional fiscal pressures not reflected in the budget include: committed teachers’ salary increase (about ½ percent of GDP) and new hiring to fill vacancies (about 0.4 percent of GDP), including in the tax office.
- Authorities’ program commitments:
  - Maintain sound public finances to meet development needs and preserve buffers.
  - Commit to tight control and reduction of other recurrent spending items to offset budgeted increases and to create fiscal space for priority spending not yet in the budget.
  - With these actions, authorities project a small fiscal surplus of about 0.8 percent of GDP for 2013 (staff’s previous projection was a surplus of 1.2 percent of GDP).
  - Cash-balance target modification needed; cash-balance target nonetheless remains at no less than 2 months of recurrent spending.
  - Nonrecurrence: expenditures related to the Festival of Pacific Arts (2.5 percent of GDP) in 2012 will not recur in 2013.
  - If revenue surprises on the upside or development budget is under-executed, authorities will use fiscal space to finance priority programs, save for future development programs, and strengthen buffers.
- Public finance management reforms:
  - Constituency funds (CFs) rose from 2 percent of GDP in 2011 to 3.5 percent of GDP in 2012.
  - Parliament approved the Constituency Development Funds Act—links CF spending to national priorities, introduces audits, and expands local support offices.
  - Authorities preparing implementing regulations for the CF Act (proposed December 2013 structural benchmark).
  - Planned new Public Finance Act (PFA) (October 2013 benchmark) will apply to all public spending.
  - Authorities intend to publish the Auditor General’s report on CF use (proposed November 2013 structural benchmark).
  - Tertiary scholarship spending will be streamlined and linked to development needs.

### Monetary and exchange rate policies
- Recent monetary developments:
  - Credit growth accelerated to 12.6 percent in March 2013 (year-on-year), up from 4 percent in December (year-on-year), following negative growth in 2009–10.
  - Banks’ excess liquidity remained high, partly due to capital inflows and the buildup of foreign reserves at the Central Bank; CBSI has used Bokolo bills to mop up liquidity.
- Policy stance and commitments:
  - Monetary and exchange rate policies aim to maintain price and external stability.
  - CBSI committed to step up monetary operations if needed.
  - In October 2012, authorities moved from a U.S. dollar peg to a basket exchange rate peg using invoicing currency shares (US dollar and Australian dollar principal components); the new peg appears to be working well and is an initial step toward more exchange rate flexibility.

### Financial sector stability
- Financial system soundness:
  - Banks are adequately capitalized, highly liquid, and very profitable.
  - Nonperforming loans to total loans declined to 3.7 percent at end-2012.
  - Private sector credit as percent of GDP in 2012: about 15 percent (compared with Pacific Island countries average: 35 percent).
  - Key barriers to credit supply: weak investor protection and property rights regimes.
  - Non-interest income (mainly foreign exchange activities) is a key component of bank profitability.
  - The National Provident Fund (NPF) is systemically important and faces supervisory and investment strategy weaknesses.
- Financial reforms and program commitments:
  - New NPF Act to be submitted to Parliament later in the year (October 2013 benchmark) to reduce NPF financial risks (high share of short-term fixed interest instruments, elevated allocation to high-risk domestic unlisted companies, moderate allocation towards offshore assets) and improve governance.
  - Authorities intend to amend the Financial Institutions Act to strengthen banking supervision and depositor protection.
  - New Credit Unions Act (CUA) being prepared with AsDB assistance; draft CUA to be submitted to Cabinet by end-March 2014 and to Parliament by end-June 2014 (proposed new structural benchmarks).
  - Work underway to strengthen payment system legal framework with World Bank support.

### Other program issues and risks
- Donor disbursements linked to ECF implementation; expected main financing:
  - Australia and New Zealand: around US$50 million in 2013.
  - AsDB: about US$38 million in 2013–16 for infrastructure and ICT (budget support and concessionary loans).
  - World Bank: US$2 million Development Policy Grant in 2013.
  - European Union: US$1¾ million expected in 2013.
- Main program risks:
  - Political fragility and fluid coalition dynamics could weaken program ownership, though past arrangements suggest program ownership is strong and cross-party.
  - Capacity constraints remain a challenge; authorities are devoting more resources to drafting legislation and other pressure points.
- Other commitments and issues:
  - Safeguards assessment update substantially completed: CBSI continues good practices in financial transparency and accountability; new CBSI law enacted in 2012 provides adequate financial and legal autonomy.
  - Recommendations: improve Audit Committee oversight by including a financial expert; strengthen internal audit staff capacity to develop risk-based audit function; CBSI should publish the audit opinion of the international audit firm along with audited financial statements for financial year 2012. These recommendations will be monitored under the program.
  - Authorities will submit the National Development Strategy (launched September 2011) as an Interim Poverty Reduction Strategy Paper (I-PRSP) to the Board by end of 2013 (requirement for completing the second review of the ECF arrangement); full PRSP to be developed the following year.

_Italicized source: IMF country report chapter — "1. Macroeconomic Developments and Outlook" (Solomon Islands)._

### 17. Macroeconomic developments have been positive. Growth, while moderating, remains

### 17. Macroeconomic developments have been positive. Growth, while moderating, remains

### Macroeconomic performance
- The successful implementation of economic programs has helped consolidate macroeconomic and financial stability and facilitated donor support.
- Growth, while moderating, remains robust.

### Risks and structural challenges
- The economy is vulnerable to external shocks and natural disasters.
- Logging stocks—historically the main engine of growth—are expected to be exhausted during this decade.
- Several reforms need to be implemented to fulfill the mining sector potential and to ensure that the country as a whole benefits from its mineral wealth.

### Policy priorities
- Key priorities are to improve the economy’s resilience to shocks and to promote sustainable and inclusive growth.
- Improving the economy’s resilience will require sustained efforts to implement prudent policies that rebuild and protect policy buffers, and structural reforms to strengthen key public institutions and facilitate private sector development.
- The authorities are making progress with their ambitious and broad reform agenda, notwithstanding some delays in program commitments.

### Fiscal policy and public spending
- Sustaining fiscal discipline and improving the quality of spending are critical to meeting developmental goals.
- With logging revenues expected to decline and mining revenue still uncertain, careful control of spending is critical to maintaining sound public finances.
- Decisive implementation of the authorities’ plans is required to improve the quality of public spending, including by enhancing the transparency and accountability in the use of constituency funds and upgrading the public finance act.

### Monetary and exchange rate policy
- Monetary and exchange rate policies should continue to be geared to maintaining price and external stability.
- While inflation is projected to remain broadly stable in 2013, the central bank should be ready to step up monetary operations, if needed.
- The new FX peg to a currency basket is working well and has introduced some flexibility, which could help buffer external shocks in the future.

### Financial sector and supervision
- The financial system is sound, but efforts to strengthen supervisory and regulatory frameworks should continue.
- The new NPF act, together with the planned amendments to the Financial Institutions Act, should help strengthen the financial sector’s regulatory framework.
- Initiatives to increase access to financial services, especially in rural areas, are welcome and represent an important step toward supporting private sector development.

*Source: IMF staff report excerpt.*

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

### _cr13249 - 23. Based on Solomon Islands’ strong program performance, staff recommends the

### Staff recommendation and program decisions
- Completion of the first review under the ECF-supported program is recommended.
- Support for the authorities' request for the waiver of nonobservance of cash balance target at end of December 2012, because the nonobservance was described as minor and temporary.
- Support for the authorities' request for modification of June 2013 performance criteria, and for new test dates for structural benchmarks.

### Macroeconomic developments and outlook
- Recovery drivers:
  - Resource sectors, especially logging and gold mining, have driven the recovery; logging is expected to decline over the medium term.
- Inflation:
  - Inflation has been moderating due to lower food and fuel prices.
- External sector:
  - The current account balance improved in 2012, supported by strong commodity exports and lower imports.
  - Reserve buffers have been rebuilt.
- Sectoral exports and imports:
  - Log exports leveled off in 2012; mining exports increased.
  - Imports declined in 2012 as the re-furbishing of the Gold Ridge mine was completed.
- Real effective exchange rate:
  - The real effective exchange rate appreciated by 2.5 percent in Q1 2013.

### Fiscal performance and public debt
- Fiscal balance:
  - The fiscal balance in 2012 posted a surplus of almost 4 percent of GDP.
- Public external debt:
  - Public external debt continues to decline to sustainable levels.
- Selected fiscal aggregates (Table 1 / Table 3 / Table 4 figures preserved):
  - Per capita GDP (2012): US$1,763 (estimate).
  - Quota: SDR 10.4 million.
  - Population (2011): 552,000.
  - Poverty rate (2006): 23 percent.
  - Main products and exports: logs and gold.
  - Total revenue and grants (2012, percent of GDP): 60.3 (as shown in table entries).
  - Grants (2012, percent of GDP): 27.1.
  - Overall balance (2012, percent of GDP): 9.0 (Table 3 shows 9.0 for 2011 and related entries; refer to tables for year-by-year exact values).
  - Central government debt (percent of GDP): examples across tables include 27.8, 21.6, 18.2, 17.5, 15.4, 14.6, 13.6 (year-specific).

### Monetary and banking developments
- Money and credit:
  - Rapid increase in reserve position has contributed to strong money growth.
  - Credit growth has been weak despite lower lending rates and ample liquidity of the banking sector.
- Monetary indicators (selected exact figures from tables):
  - Credit to private sector (annual percentage change examples): -4.7, 4.7, 6.7, 4.1, 5.0, 8.2, 10.7 (as presented).
  - Broad money (year-on-year percent change examples): 13.5, 25.5, 31.1, 17.3, 3.8, 15.2, 8.4.
  - Reserve money (examples): 75.3, 32.8, 37.2, 22.0, 3.8, 14.5, 8.4.
  - Interest rates (weighted average of commercial banks, percent per annum, examples): deposit rates 2.6, 1.4, 0.7, 0.9; lending rates 13.5, 11.5, 11.4, 11.2 (table entries).
- Banking system summary (Table 5 highlights):
  - NIR of CBSI projections (in US$ millions): 393, 426, 458, 478, 470, 479, 477, 480, 485, 490, 495, 500.
  - M3 (broad money, SI$ millions, end periods examples): 2,611; 2,631; 2,924; 2,978; 3,423; 3,064; 3,114; 3,225; 3,397; 3,530; 3,409; 3,628.
  - Loan-to-deposit ratio (in percent examples): 58.0, 56.8, 50.5, 49.8, 45.6, 50.2, 52.2, 52.5, 50.9, 49.9, 52.7, 48.1.

### Rebuilding policy buffers and cross-country context
- Overall buffer index and components:
  - Solomon Islands is one of two Pacific Island countries with higher policy buffers in 2012 than during 2004–07.
  - Improvements driven by lower inflation, reduced debt, and higher reserve coverage.
- Structural features and challenges:
  - Solomon Islands is among the poorest Pacific countries, faces geographical dispersion, dependence on external support to finance trade deficit and development needs, a narrow production base dominated by the public sector, and constraints to private sector development.
- Cross-country indicators (exact figures preserved in charts/tables):
  - Geographical dispersion: average sea distance between two inhabitants figures plotted across countries.
  - GDP per Capita, 2012 (US$): Solomon Islands listed among others; specific per capita value provided above.

### Balance of payments and external sector projections
- Current account and trade (Table 2 / Table 7 figures):
  - Current account balance (2012): -1.3 (in US$ millions and percent of GDP contexts shown across tables).
  - Exports of goods and nonfactor services (GNFS) examples: 330.2, 556.6, 601.4, 639.2, 624.4, 641.8, 688.5.
  - Imports of GNFS examples: 547.8, 610.0, 667.3, 650.0, 760.9, 707.7, 790.2.
  - Gross official reserves (end of period, US$ millions examples): 265.8, 412.3, 503.8, 499.6, 532.2, 551.1, 576.9, 612.7, 612.8, 609.2.
- Medium-term baseline projections (Table 4 / Table 2):
  - Real GDP growth projections examples: 3.8, 3.7, 3.6, 3.6 (as presented in the medium-term baseline scenario).
  - Current account projections examples (percent of GDP): -2.0, -6.5, -5.3, -7.6, -8.4 (year-specific in tables).

### Fund financing, reviews, and disbursements
- ECF arrangement timeline (Table 6: Reviews and Disbursements):
  - December 7, 2012: Approved Fund arrangement (1.4148,571 in percent of quota / In SDR appears in table format).
  - June 15, 2013: Completion of the first review and observance of end-December 2012 performance criteria.
  - Subsequent scheduled review completion dates listed through November 15, 2015 (table entries).
  - Total disbursement under the program: Total101,040,000 (as shown in table).
- Fund obligations and outstanding credit (Table 7 indicators of capacity to repay):
  - Outstanding Fund credit (in millions of SDRs, selected years): 12.6; 12.9; 12.2; 10.4; 7.6; 4.9; 2.4; 0.9; 0.7; 0.5; 0.3; 0.2.
  - Outstanding Fund credit (in millions of US$, selected years): 19.4; 19.8; 18.6; 15.9; 11.6; 7.4; 3.6; 1.4; 1.1; 0.8; 0.5; 0.2.
  - Total obligations based on existing and prospective credit (in millions of SDRs examples): 0.0, 0.0, 1.0, 2.1, 2.8, 2.8, 2.5, 1.5, 0.2, 0.2, 0.2, 0.2.
  - Memorandum items: Nominal GDP (in US$ millions examples across projection years): 996.7; 1,099.3; 1,176.4; 1,244.0; 1,309.7; 1,378.8; 1,457.3; 1,540.6; 1,634.1; 1,691.4; 1,776.4; 1,893.6.

### Key policy messages and considerations (as reflected in the document)
- The IMF staff supports program completion steps, waivers, and modifications requested by authorities reflecting "strong program performance."
- Maintaining reserve buffers, fiscal surpluses, and continued external debt reduction are highlighted by the data and charts as central to sustaining macroeconomic stability.
- Continued attention to rebuilding policy buffers—reserves, debt, inflation control—and measures to support private sector development are implied by the cross-country context and medium-term projections.

*Source: Extracted from the IMF staff report content provided in the supplied PDF content unit.*

### Appendix I—Letter of Intent

### Appendix I—Letter of Intent

### Recent developments and outlook
- 2012 macroeconomic outcomes:
  - Real GDP expanded by 4.8 percent.
  - Inflation fell to 5 percent in December (down from the peak of 11 percent in late 2011).
  - Gross international reserves stood at a record US$500 million (above eight months of imports).
  - External public sector debt fell to 13 percent of GDP.
- Program performance through end-2012:
  - End-December 2012 performance criteria (PCs) met with large margins for net credit to the government, net international reserves, and net domestic assets of the central bank.
  - PC on the cash balance missed by SI$20 million (less than 5 per cent of the target) due to a brief delay in transferring government deposits already at the central bank into specific government cash balance accounts.
  - Request for a waiver of nonobservance for the cash-balance PC on the basis the deviation was minor and temporary.
- Outlook and risks:
  - Growth expected to moderate further in the near and medium term—to 3½–4 percent—as forestry output is expected to be adversely affected by depletion of logging stocks well within a decade.
  - Medium-term driver of growth expected to be the service sector.
  - Planned investments in fiber-optic infrastructure and hydroelectric energy expected to boost telecommunications and energy sectors and improve business opportunities.
  - Inflation projected to remain around 6 percent in the medium-term after a rise in early 2013 due to weather-related supply disruptions.
  - Upside risks include improved global and regional prospects, greater-than-expected mining activity, and stronger impact from improved connectivity; downside risks include a bumpy global recovery.

### Program implementation and requests
- Structural benchmarks and actions:
  - End-December 2012 benchmarks met: multi-year budget framework; customs and excises act (albeit with some delay); Central Bank of Solomon Islands Act.
  - End-March 2013 benchmark met: workshop on financial inclusion.
  - Delayed end-December 2012 benchmark: Cabinet approval of changes to the tax system related to the new mining tax regime (delayed due to capacity constraints, especially drafting legislation).
  - Ongoing end-March 2013 benchmark: submission to Cabinet of instructions for state-owned enterprise (SOE) borrowing.
  - Request to modify test dates for the mining tax regime and SOE borrowing instructions to end-June 2013.
- Request to IMF:
  - Waiver for the minor cash-balance PC miss.
  - Modification of end-June 2013 PCs on the cash balance, net credit to the government, and net domestic assets of the CBSI to reflect recent developments and the updated outlook.
  - Request completion of the first review under the ECF arrangement.
  - Consent to publication of the staff report and the Letter of Intent and attachments.

### Program policies — objectives and instruments
- Overarching objectives:
  - Enhance resilience to shocks and promote sustainable and inclusive growth through sound policies and reforms.
  - Strengthen fiscal framework, improve monetary operations, maintain a strong foreign exchange position, ensure debt sustainability, contain financial risks, and reform institutions to strengthen macroeconomic management and facilitate private sector development.

- Fiscal policies and commitments:
  - Fiscal anchor: use the cash balance at its current level (at least two months of recurrent spending).
  - Wage policy: increase basic public-sector wages by a cumulative 6 percent in 2013; strengthen teachers pay for length of service and qualification.
  - Consolidation of allowances: consolidate number and magnitude of public-sector allowances and benefits into base remuneration; review stricter controls on other allowances such as overtime.
  - Constituency funds and tertiary scholarships:
    - Parliament approved the Constituency Development Fund Act; implementing regulations to be issued by end-December 2013 (end-December 2013 program benchmark).
    - Publish the Auditor General’s report on constituency spending by end-November 2013 (end-November 2013 program benchmark).
    - Apply public financial procedures to tertiary scholarships; strengthen eligibility criteria for tertiary scholarships abroad.
  - Domestic revenue mobilization:
    - New comprehensive bill on customs and excise taxes being drafted; draft released for public consultation in February 2013; submit bill to Parliament by November 2013 (end-November 2013 benchmark).
    - Seek Cabinet approval of draft amendments to income, custom, excise, and goods tax legislations to implement a natural resource taxation regime by end-June 2013 (program benchmark); submit to Parliament by November 2013 (program benchmark).
    - Refrain from approving new mining licenses until the new mining tax regime is in place; enhance tax administration in the area of mining.
    - Continue applying full market price for log exports with an automatic quarterly adjustment (in place since January 2012).
  - Public financial management reforms:
    - Draft and submit the new Public Financial Management Act (PFMA) to Parliament by end-October 2013 (end-October 2013 benchmark); PFMA to come into effect on January 1, 2014.
    - Revise Financial Instructions, finance regulations, manuals and guidelines during 2013; provide training to embed reforms.
    - Continue improvements in budget presentation (include output line items; extended stakeholder consultation; new chart of accounts).
    - Seek development-partner assistance to strengthen procurement, financial management information systems, and internal audit processes.
  - Medium-term budgeting:
    - Implementing a multi-year budget framework; forward estimates for revenues and recurrent expenditure included in the current year’s budget (end-December 2012 benchmark); will expand to include Development Budget.
  - Public debt management:
    - Resume concessional borrowing prudently to finance high-priority projects (Submarine Cable System Project and potentially the Tina River Power Project).
    - Debt Management Strategy (DMS) endorsed by Cabinet in May 2012; incorporated in the Honiara Club Agreement (HCA), reviewed in July 2012.
    - Set a limit for new borrowing in the 2013 Budget including domestic, external and SOE borrowing and guarantees; limit to be revised yearly.
    - Next actions: implement instructions for SOE borrowing (proposed end-June 2013 benchmark); identify outstanding debt of SOEs; develop an on-lending policy framework; design a framework to estimate cost of guarantees.

- Monetary, exchange rate, and financial sector policies:
  - Monetary/exchange rate policy:
    - Policies geared to maintaining price and external stability.
    - CBSI issued Bokolo bills to mop up excess liquidity; stock rose to SI$512 million at end-January 2013 from SI$368 million at end-2012.
    - Exchange rate regime change in October 2012 from a de facto peg to the U.S. dollar to a basket exchange rate peg using weights based on currency denominations of largest shares of external payments (followed IMF technical assistance).
    - New CBSI Act approved by Parliament in November 2012 (end-December 2012 benchmark).
  - Financial sector and inclusion:
    - Reform National Provident Fund (NPF): Cabinet endorsed drafting instructions for the NPF Act; submit revised NPF Act to Parliament by October 2013 (end-October 2013 benchmark).
    - Financial inclusion efforts: provide financial literacy training and education in schools; financial inclusion taskforce work presented in a public workshop in February 2013 (end-March 2013 benchmark).
    - Credit unions: drafting a new Credit Unions Act (CUA) with ADB assistance; seek Cabinet approval of draft CUA by end-March 2014 (program benchmark); submit to Parliament by end-June 2014 (program benchmark).
    - Payment system: preparing a new Payment System Act with World Bank assistance to bring the payment system up to best international practices.

*Letter of Intent and Memorandum of Economic and Financial Policies, June 10, 2013.*

### 8. Facilitating private sector-led growth over the medium and long term. We plan to

### 8. Facilitating private sector-led growth over the medium and long term. We plan to

### Business climate and development strategy
- Commit to continuously improve the business climate by enacting appropriate business friendly policies and laws.
- Conditionality under the ECF arrangement will continue to be aligned with the SIG-donor program of economic and financial reforms (economic and financial reform matrix) developed under the Core Economic Working Group (CEWG)—a government-donor partnership.
- Plan to submit to the IMF a revised National Development Strategy at the time of the second review of the ECF arrangement, together with the sector strategies developed by the Ministry of Planning and Aid Coordination (MDPAC) and key development partners that will serve as the Poverty Reduction Strategy Paper.

### Safeguards assessment
- The Central Bank of Solomon Islands will take the necessary steps to implement the recommendations of the safeguards assessment update.

### Statistics and data quality
- Progress is being made in strengthening the quality of economic statistics and fiscal and monetary data for program purposes.
- Addressing delays in the timely release of national accounts data:
  - The Solomon Islands National Statistics Office (NSO) will complete the business survey data analysis in May 2013, which will form a key source of data input in the compilation of the national accounts statistics by July 2013.
- To address weaknesses of CPI data collection and compilation:
  - The SISO will ensure the timely implementation of the CPI Action Plan, which has benefited from PFTAC technical assistance recommendations.

### Program monitoring: reviews, performance criteria, and targets
- Monitoring through performance criteria and indicative targets, structural benchmarks, and other necessary measures to complete semi-annual program reviews.
- Quantitative performance criteria and indicative targets set for June 2013, September 2013, December 2013, March 2014, and June 2014 (see Table 1). Structural benchmarks set out in Table 2.
- Second and third reviews expected to take place on or after November 15, 2013 and June 15, 2014, respectively.
- Performance criteria and select target values (end-of-period stocks unless noted otherwise):
  - Net international reserves (NIR) of the CBSI (floor, end-of-period stock, in millions of U.S. dollars (US$)):
    - 12/31/2012: 470
    - 3/31/2013: 463
    - Act. 3/31/2013: 479 (Status: Met)
    - 6/30/2013: 475
    - 9/30/2013: 473
    - Act. 9/30/2013: 477 (Status: Met)
    - 12/31/2013: 480
    - 3/31/2014: 480
    - 6/30/2014: 485
    - (Additional listed values in table: 485, 490, 495, 500)
  - Net domestic asset (NDA) of the CBSI (ceiling, end-of-period stock, in millions of Solomon Islands dollars (SI$)):
    - 12/31/2012: -1,173
    - 3/31/2013: -1,123
    - Act. 3/31/2013: -1,366 (Status: Met)
    - 6/30/2013: -1,122
    - 9/30/2013: -1,104
    - Act. 9/30/2013: -1,655 (Status: Met)
    - 12/31/2013: -1,120
    - 3/31/2014: -1,279
    - 6/30/2014: -1,102
    - (Additional listed values in table: -1,202, -1,150, -1,268, -1,159)
  - Net credit to central government (NCG) (ceiling, cumulative change from the beginning of the year, in millions of SI$):
    - 12/31/2012: 95
    - 3/31/2013: 145
    - Act. 3/31/2013: -196 (Status: Met)
    - 6/30/2013: 6
    - 9/30/2013: 24
    - Act. 9/30/2013: -115 (Status: Met)
    - 12/31/2013: -33
    - 3/31/2014: -15
    - 6/30/2014: -60
    - (Additional listed values in table: -6, -14, -24, -14)
  - New nonconcessional external debt maturing in more than one year, contracted or guaranteed by the public sector (ceiling, end-of-period stock since the beginning of the program, in millions of US$):
    - Values presented as 0 with status Met (table entries: 0 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$):
    - Values presented as 0 with status Met (table entries: 0 0 0)
  - Accumulation of new external payment arrears by the public sector (ceiling, end-of-period stock since the beginning of the program, in millions of SI$):
    - Values presented as 0 with status Met (table entries: 0 0 0)
  - Central government program cash balance (floor, end-of-period stock, in million of SI$):
    - 12/31/2012: 425
    - 3/31/2013: 375
    - Act. 3/31/2013: 355 (Status: Not met)
    - 6/30/2013: 440
    - 9/30/2013: 422
    - Act. 9/30/2013: 474 (Status: Met)
    - 12/31/2013: 420
    - 3/31/2014: 399
    - 6/30/2014: 383
    - (Additional listed values in table: 390, 411, 429, 409)
- Indicative target for spending on health and education:
  - Threshold: no less than 32 percent of government-funded recurrent spending (noted as actual 32 percent of government funded recurrent spending in memorandum items).
- Memorandum items and program-level indicators (selected):
  - Budget support from bilateral and multilateral donors other than IMF (cumulative change from the beginning of the year, in millions of US$), program level: listed values include 61, 54, 11, 9, 26, 27, 44, 48, 67, 9, 22.
  - Outstanding stock of Solomon Islands government (SIG) treasury bills, excluding restructured government bonds (end-of-period stock, in millions of SI$), program level: 40 (multiple period entries).
  - Balance of SIG Consolidated Deposits Account, millions of SI$: 140 (multiple period entries).

### Structural benchmarks and actions (selected)
- Actions, macroeconomic criticality, dates, and status (selected entries):
  - Obtain Cabinet's 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: December 31, 2012
    - Status: Not met. The benchmark was rescheduled to end-June 2013 due to limited resources in the Attorney General’s Chambers.
    - Revised date: June 30, 2013
  - Obtain Cabinet's approval to release the draft bill implementing the new Custom and Excise Act for public consultation including the clauses related to the exemptions and the draft amendments to the other revenue acts (income tax, and sales tax acts).
    - Objective: To promote fiscal transparency and enhance the efficiency of revenue collections.
    - Date: December 31, 2012
    - Status: Met in February. Cabinet approved to release the draft bill for public consultation on 15 February, 2013.
  - Submit to Parliament the final CBSI Act to strengthen the monetary policy and supervisory framework.
    - Objective: To strengthen the effectiveness of monetary policy.
    - Date: December 31, 2012
    - Status: Met in November. The new Central Bank Act was submitted to Parliament and passed in November 2012, one month ahead of schedule.
  - Submit to Parliament the multi-year budget framework on revenues and recurrent spending.
    - Objective: To strengthen the quality and monitoring of government spending.
    - Date: December 31, 2012
    - Status: Met in December in the context of the 2013 budget.
  - Submit to Cabinet the instructions for SOE borrowing.
    - Objective: To strengthen debt management and maintain public debt sustainability.
    - Date: March 31, 2013
    - Status: Not Met. The benchmark was rescheduled to end-June 2013.
    - Revised date: June 30, 2013
  - Workshop organized by the National Financial Inclusion taskforce taking stock of progress to date to better access financial services in rural areas.
    - Objective: Increase access to financial services ensure inclusive growth.
    - Date: March 31, 2013
    - Status: Met in February.
  - Submit to Parliament the revised NPF Act that strengthens its governance structure and investment framework.
    - Objective: To improve the long-term financial viability of the NPF and reduce financial risks.
    - Date: October 31, 2013
  - Submit to Parliament the draft of new Public Finance Act covers fiscal responsibility provisions, management and use of public funds, and management of public debt.
    - Objective: To promote fiscal transparency and enhance the efficiency of revenue collections.
    - Date: October 31, 2013
  - Submit to Parliament the new Customs and Excise bill, including the clauses related to exemptions and the draft amendments to other revenue acts (income tax, stamp duties, goods and sales tax acts).
    - Objective: To promote fiscal transparency and enhance the efficiency of revenue collections.
    - Date: November 30, 2013
  - Submit to Parliament 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: November 30, 2013
  - Release to public the results of the audits conducted by the office of the Auditor General on spending of constituency funds by the fifty constituencies, and project achievements in 2012.
    - Objective: To promote the transparency and accountability in the use of public funds.
    - Date: November 30, 2013
  - Submit to Cabinet the implementing regulations for the Constituency Development Funds Act.
    - Objective: To promote the transparency and accountability in the use of constituency funds.
    - Date: December 31, 2013
  - Submit to Cabinet the draft Credit Unions Act.
    - Objective: To promote financial sector development.
    - Date: March 30, 2014
  - Submit to Parliament the draft Credit Unions Act.
    - Objective: To promote financial sector development.
    - Date: June 30, 2014

### Technical Memorandum of Understanding (TMU): monitoring definitions and adjustors
- Monitoring instruments: quantitative performance criteria, indicative targets, structural benchmarks, and reviews.
- Performance criteria and indicative targets established with respect to:
  - Floors on NIR of the CBSI;
  - Ceilings on NDA of the CBSI;
  - Ceilings on NCG;
  - Floors on the central government cash balance;
  - Indicative target (cumulative) for spending on health and education at no less than 32 percent of government-funded recurrent spending.
- Performance criteria applicable on a continuous basis:
  - Ceilings on contracting and guaranteeing by the public sector of new medium- and long-term nonconcessional external debt;
  - Ceilings on contracting and guaranteeing by the public sector of new short-term nonconcessional external debt;
  - Ceilings on accumulation of new external payment arrears by the public sector.
- Institutional definitions:
  - 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.
  - Financial corporations include DCs and other financial corporations (OFCs). OFCs are the National Provident Fund (NPF), the Development Bank of Solomon Islands, and the Investment Corporation of Solomon Islands.
- Monetary aggregates and valuation:
  - Foreign currency-denominated accounts will be valued in SI$ at the program exchange rate of SI$7.36 per U.S. dollar, as of end-June 2012.
  - Foreign currency accounts denominated in currencies other than the U.S. dollar and monetary gold will first be valued in U.S. dollars at actual exchange rates and gold prices used by the CBSI, respectively, before conversion to SI$.
- Reserve money definition:
  - Currency issued by the CBSI (excluding CBSI holdings of currency) and all transferable deposits held at the CBSI.
- Net International Reserves (NIR):
  - Floor applies to NIR; floor adjusted upward (downward) by amount of budget support from bilateral and multilateral donors (excluding the IMF) in excess (short) of programmed level.
  - NIR = gross international reserves (GIR) less international reserve liabilities.
  - GIR defined as sum of: foreign currency assets in convertible currencies held abroad and as vault cash under CBSI control and readily available for intervention and of investment grade or held with an investment-grade institution; the reserve position of the Solomon Islands in the IMF; holdings of SDRs; and monetary gold.
  - Excluded from GIR: foreign currency deposits of ODCs and OFCs held at the CBSI; any foreign currency claims on residents, capital subscriptions in international institutions, and foreign currency assets in nonconvertible currencies; GIR encumbered or pledged.
  - International reserve liabilities defined as sum of: all outstanding liabilities of the Solomon Islands to the IMF, excluding IMF SDR allocations; and foreign currency liabilities in convertible currencies to nonresidents with original maturity up to and including one year.
- Net Domestic Assets (NDA):
  - Ceiling applies to NDA; ceiling adjusted downward (upward) by amount of budget support from bilateral and multilateral donors (excluding the IMF) in excess (short) of programmed level.
  - NDA = reserve money minus the sum of NIR and other NFA of the CBSI.
  - Other NFA includes foreign assets related to holdings of foreign currency deposits and securities not included in NIR, loans, shares, financial derivatives, or accounts receivable with nonresidents; and foreign liabilities related to IMF SDR allocations, deposits, securities, loans, financial derivatives, and other accounts payable with nonresidents.
- Net Credit to Central Government (NCG):
  - Ceiling applies to NCG measured cumulatively from the beginning of the year; ceiling adjusted upward by amount of budget support from bilateral and multilateral donors (excluding the IMF) short of the programmed level.
  - NCG defined as the sum of net claims of: (i) the CBSI, (ii) commercial banks and other ODCs, (iii) OFCs, (iv) insurance companies, (v) government treasury bills held by the general public.
- Cash balance of the central government:
  - Floor applies to program cash balance; floor adjusted downward by budget support shortfalls and adjusted upward (downward) by stock of government treasury bills excluding restructured government bonds in excess (short) of program level of SI$40 million.
  - Floor on program cash balance adjusted upward by difference between SI$140 million (program level) in the SIG Consolidated Deposits Account and its actual balance, should the actual balance be lower than SI$140 million.
  - Program cash balance = gross cash balance minus unpaid payment orders and unpresented checks.
  - Gross cash balance defined as sum of government deposits in specific CBSI and commercial bank accounts and donor funded budget support accounts under government control.
- External debt (medium- and long-term):
  - Ceiling applies to contracting and guaranteeing by the public sector of new nonconcessional borrowing with nonresidents with original maturities of more than one year.
  - Ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received, and includes private debt with official guarantees that constitute contingent liabilities of the public sector.
  - Public sector comprises the central government, the CBSI, nonfinancial public enterprises (government owns more than 50 percent), and other official entities.

*Source: _cr13249 - 8. Facilitating private sector-led growth over the medium and long term. We plan to (PDF chapter)._

### 20.      The definition of debt, for the purposes of the program, is set out in Point 9 of the Guidelines

### 20.      The definition of debt, for the purposes of the program, is set out in Point 9 of the Guidelines

### Definition of debt
- The definition of debt for program purposes 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.
- This definition is referenced repeatedly for program monitoring and ceilings (see Annex I in the source).

### Exclusions from debt ceilings (general)
- 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.

### Guarantees
- 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).

### Concessional debt: definition and NPV calculation
- A debt is concessional if it includes a grant element of at least 35 percent.
- Grant element definition: 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.
- NPV calculation: discount the future stream of payments of debt service due on the debt at the time of contracting.
- Discount rates: currency specific commercial interest reference rates (CIRRs), published by the Organization for Economic Cooperation Development (OECD).
- CIRR averaging rules:
  - For debt with a maturity of at least 15 years, the 10-year-average CIRR will be used.
  - For debt with a maturity of less than 15 years, the 6-month average CIRR will be used.
- Margins for differing repayment periods (added to both the 10-year and 6-month averages as used by the OECD):
  - 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;
  - 1.25 percent for 30 years or more.

### Short-term external debt ceiling (Section B)
- 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 includes private debt for which official guarantees have been extended and which constitute a contingent liability of the public sector.
- The public sector comprises the central government, the CBSI, nonfinancial public enterprises (i.e., enterprises in which the government owns more than 50 percent of the shares), and other official entities.
- Excluded from the short-term 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;
  - (iv) concessional debts;
  - (v) normal import financing (a financing arrangement for imports is considered “normal” when the credit is self-liquidating).

### External payment arrears (continuous performance criterion)
- A continuous performance criterion applies to the non-accumulation 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 agreement, subject to any applicable grace period.

### Data provision and reporting timetables
- Authorities will provide monitoring data based on templates agreed with Fund staff; reporting responsibilities are indicated under each section.
- Timetables:
  - Weekly data: submitted by the end of the following week.
  - Monthly and quarterly data: submitted within six weeks of the end of the observation period.
- Authorities commit to using the best available data; subsequent revisions will be promptly reported to Fund staff and will not lead to a breach of quantitative performance criteria or benchmarks.

#### A. Monetary Data (CBSI)
- Weekly:
  - Daily exchange rates, both buying and selling rates, of the Solomon Islands dollar against the U.S. dollar, including the official, interbank, and parallel market exchange rates;
  - Stock of NIR and sales and purchases by the CBSI in the foreign exchange markets;
  - Stock of reserve money and its components;
  - Treasury bill auction reports.
- Monthly:
  - Financial corporations’ survey, including the balance sheet of CBSI, the consolidated balance sheet of ODCs, and the consolidated balance sheet of OFCs;
  - Liquid asset ratios and/or reserves requirement of the commercial banks;
  - Interest rates, including average interbank rate, bank deposit rates, and bank lending rates;
  - A detailed breakdown of NCG from the CBSI, commercial banks and other ODCs, and OFCs;
  - Foreign exchange cash-flow of the CBSI, including donor disbursements;
  - Balances of each central government account specified in Section IV. A., as recorded or collected by the CBSI.

#### B. Fiscal Data (Ministry of Finance and Treasury (MoFT))
- Monthly consolidated accounts of the central government, including detailed data on:
  - Revenue, including tax and nontax revenues, and recurrent and development grants included in the consolidated budget;
  - Recurrent expenditure, including payroll, goods and services, and other recurrent outlays, including those funded by donor support;
  - Other recurrent charges of the Ministry of Education and Ministry of Health, separating spending funded by donor support;
  - Debt service payments, classified into amortization and interest payments on (i) domestic debt, (i) external debt, (iii) domestic arrears, and (iv) external arrears;
  - Development expenditure funded by (i) central government of the Solomon Islands, and (ii) foreign grants and loans included in the consolidated budget.
- Detailed financing components of central government’s accounts, classified into foreign and domestic sources:
  - Foreign financing includes (i) disbursement and amortization of project and program loans, and (ii) changes in external debt arrears, classified into principal and interest arrears.
  - Domestic financing includes (i) borrowing from and repayment to the CBSI, commercial banks and other ODCs, and OFCs; (ii) changes in deposits at the CBSI, commercial banks and other ODCs, and OFCs; and (iii) privatization receipts and changes in domestic debt arrears, classified into principal and interest arrears.
- Stock of domestic debt, including the outstanding balance of government securities, treasury bills, cash advances, and other debt instruments.
- Balances of each central government account specified in Section IV. A., as recorded by the MoFT.
- Stock of unpaid government payment orders and unpresented checks.

#### C. External Sector Data (CBSI and MoFT)
- Quarterly:
  - New external debt obligations contracted and/or guaranteed by the government of the Solomon Islands, CBSI, and other official entities, including details on the amounts, terms, and conditions of each obligation.
  - Stock of outstanding external debt at end-month and disbursement, amortization, and interest payments for short-term external obligations contracted or guaranteed by the government or the CBSI by creditor in original currency and U.S. dollars.
  - Stock of external debt at end-month and disbursement, amortization, and interest payments for medium- and long-term external obligations contracted or guaranteed by the government or the CBSI by creditor in original currency and U.S. dollars.
  - Stock of arrears on the external debt contracted or guaranteed by the government or the CBSI by creditor in original currency and in U.S. dollars at end-month.
  - Balance of payment data, including detailed components of current accounts and capital and financial accounts.

#### D. Real Sector Data (MoFT, National Statistical Office)
- Monthly:
  - The monthly consumer price index and a detailed breakdown by major categories of goods and services included in the consumer basket.

*Source: provided IMF document excerpt.*

### ANNEX I. GUIDELINES ON PERFORMANCE CRITERIA WITH RESPECT TO FOREIGN DEBT

### ANNEX I. GUIDELINES ON PERFORMANCE CRITERIA WITH RESPECT TO FOREIGN DEBT

### Definition of "debt" (point 9 (a))
- 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 (point 9 (a) (i)–(iii))
- Loans:
  - Advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits).
  - Temporary exchanges of assets equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements).
- Suppliers’ credits:
  - Contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided.
- Leases:
  - Arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property.
  - For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.

### Arrears, penalties and non-debt obligations (point 9 (b))
- Under the definition of debt in point 9 (a), arrears, penalties, and judicially awarded damages arising from the 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: Executive Board Completes First Review Under the Extended Credit Facility Arrangement for Solomon Islands (Press Release No. 13/240, June 28, 2013)
- Executive Board completed the first review of Solomon Islands' performance under the Extended Credit Facility (ECF) arrangement.
- Approved waiver of nonobservance of the performance criterion on the floor on the central government program cash balance.
- Disbursements:
  - Solomon Islands may draw an amount equivalent to SDR 0.149 million (about US$ 0.22 million) immediately.
  - Total disbursements under the arrangement will be an amount equivalent to SDR 0.297 million (about US$ 0.45 million).
- Original ECF arrangement:
  - On December 7, 2012, the Executive Board approved the three-year ECF arrangement for Solomon Islands in the amount of SDR 1.04 million (about US$1.59 million), or 10 percent of the country’s quota.
- Macroeconomic indicators cited by Mr. Min Zhu, Deputy Managing Director and Acting Chair:
  - Economic growth in 2012: an estimated 4.8 percent.
  - Inflation as of end-2012: 5 percent.
  - Gross international reserves as of end-2012: US$500 million.
  - Government debt as of end-2012: 17.5 percent of GDP.
- Policy observations and recommendations from Mr. Min Zhu:
  - Sustain fiscal discipline and improve the quality of public spending.
  - Anticipated decline in tax revenues from logging and uncertainty in mining revenue imply careful control of spending is essential.
  - Implement authorities’ plans to strengthen transparency and accountability in the use of constituency funds and upgrade the public finance act.
  - Monetary and exchange rate policies have maintained price and external stability; authorities ready to step up monetary operations if needed.
  - New exchange rate peg to a basket of currencies has worked well and could help buffer external shocks.
  - Key challenges ahead: bolstering resilience to shocks, strengthening institutional capacity, deepening broad-based and more inclusive growth.

### Statement by Mr. Jong-won Yoon and Ms. Leni Hunter (June 28, 2013)
- Role of the ECF program:
  - Program provides critical support to macro-economic reform efforts and addresses deep institutional and structural issues central to improving living standards and alleviating poverty.
  - Program is complementary to work by other development partners.
- Program performance and capacity constraints:
  - Authorities remain strongly committed; performance criteria met with large margins except for a brief delay on the cash balance target.
  - Progress on structural benchmarks has occurred albeit with some delays due to lack of institutional capacity.
  - Example: new Central Bank of Solomon Islands (CBSI) Act achieved through persistent effort under severe capacity constraints.
  - Mining tax regime benchmark delayed; authorities hope to increase resources and will not agree to new licenses until new mining tax regime is in place.
- Natural disasters and social stability:
  - Tsunami in February affected Santa Cruz island: 10 people killed, 15 injured.
  - Damage affected the lives of 4,509 people, or 37 percent of the Santa Cruz population.
  - Recovery progress good but limited resources available to address extensive damage.
  - Maintaining stability post-"tensions" (1998–2003) remains a primary concern.
  - RAMSI transition: military component to withdraw from July 2013; RAMSI police presence maintained until 2017; remaining aid development work to transfer to bilateral and multilateral aid programs.

### Growth and development overview
- 2011 rebound followed by slowdown in 2012 reflecting stabilization in logging and mining activity and weaker commodity prices.
- Reopening of the Goldridge mine after ten years provided a significant boost to growth that appears to have stabilized.
- Logging:
  - Logging comprised nearly 20 percent of GDP in 2011; anticipated decline will weigh on future growth.
- Agriculture:
  - Rural farm incomes affected by price volatility and lower production for copra, cocoa, and palm oil.
- Upside opportunities:
  - Proposals for new fish canning operations could boost growth and employment.
  - Significant proposed investments in nickel mining, contingent on clarity of mining tax and land access regimes.
- Infrastructure constraints:
  - Poor infrastructure and lack of reliable and affordable power supply constrain private sector investment and living standards.
  - Tina River Hydro project (first hydro power scheme) could greatly improve electricity in Honiara but has faced lengthy delays.
  - Submarine fiber optic cable project has encountered difficulties due to higher project costs; ADB working with authorities to resolve issues.

### Fiscal performance and debt management
- Fiscal performance in 2012 was strong but development under-spending is a concern.
- Authorities aim for a balanced budget in 2013, while staff project a 1.2 percent deficit.
- Spending pressures include:
  - Additional domestic and overseas university student scholarships.
  - Increases to public sector wages after a long period of significant real wage decline.
  - Strong demand for Rural Constituency Development Funds; governance around funds a concern.
  - Regulatory guidelines for Constituency funds to be aligned with the new Public Financial Management Act.
- Debt Management Strategy (DMS) and Honiara Club Agreement (HCA):
  - Declines in government debt allowed the HCA to be revised in 2012.
  - Cabinet endorsed a new DMS allowing prudent concessional borrowing with a yearly borrowing limit set as part of the annual budget, based on a debt sustainability assessment.
  - Debt limit covers external borrowing by the Government and all forms of SOE borrowing and guarantees (both domestic and external).
  - Government approved its first loan under the revised HCA late in 2012 for ADB financing of the planned submarine fiber optic cable.
- SOE borrowing guidelines:
  - New borrowing guidelines for State Owned Enterprises recently endorsed by Cabinet.
  - DMS amended to allow commercial borrowing by SOEs under certain circumstances.
  - SOE Borrowing Policy aims to balance SOE commercial operations and managing total debt levels.
  - Safeguards put in place to ensure SOE borrowing is fit for purpose and does not pose unacceptable risks to Government.
  - SOE borrowing will count towards the Government’s annual limit on new borrowing.

### Financial sector and inclusion
- Bank-intermediated credit generally weak despite a recent uptick; banks relying on non-interest income.
- Increase in lending year to March 2013 from several sources, including a large loan taken by Solomon Airlines.
- Credit unions:
  - Authorities working on a new Credit Unions Act with ADB assistance to promote sector performance.
- Structural benchmarks underway for:
  - National Provident Fund Act.
  - Financial Institutions Act.
- Central Bank of Solomon Islands (CBSI):
  - New Act includes improving financial inclusion as part of the central bank’s mandate.
  - Authorities aim to increase access to financial services in the relatively near term and focus on financial education.
  - CBSI highlighting the need to address customer empowerment and protection and investigating potential demand for a micro-insurance industry.
- Financial service access innovations:
  - Banks investing in branchless and mobile phone banking.
  - Measures to facilitate customer identification and verification.
  - Introduction of “pay as you go” accounts by commercial banks where customers do not pay monthly account keeping fees but pay only when they transact.

*Source: ANNEX I. GUIDELINES ON PERFORMANCE CRITERIA WITH RESPECT TO FOREIGN DEBT; Press Release No. 13/240; Statements and program documents excerpted in the supplied content.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13249.pdf_