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---

### The macroeconomic impact of the April 2014 flood — setting, outlook, and risks
- Context and shock:
  - After three years of strong commodity-led growth (averaging 8 percent per year), in 2013 economic performance slowed to 3 percent in Solomon Islands.
  - Flash floods (early April 2014, Guadalcanal/Honiara) caused loss of life and widespread damage to infrastructure, water and sanitation systems, housing, and agricultural output.
  - One fifth of Honiara’s population was displaced to shelters; rural areas around the capital were heavily affected.
  - The only gold mine was closed and is still not operating.
  - World Bank rapid disaster-impact-assessment: combined government and private income losses equal to 4.7 percent of GDP.
  - Solomon Islands did not qualify for payout under the World Bank’s pilot Pacific Disaster Risk Financing and Insurance Program because disbursements are linked to specific physical parameters that were not triggered during the flood.
- Outlook:
  - Economic growth in 2014 is projected at near zero despite reconstruction efforts, owing to the current closure of the mine and other flood-related income losses.
  - 2015: activity is expected to increase by 3½ percent led by large foreign-financed infrastructure projects.
  - Growth prospects depend on speed of gold production restart and whether future mining projects (such as nickel) come on stream.
  - Continued decline in logging output implies growth will need to be supported by increased productivity across agriculture, tuna processing, and tourism, and by investing in human and physical capital.
  - Decline in aid in the pipeline from Australia and other development partners poses an additional medium-term challenge.
  - Upside risks: Tina River Hydro Power project, a second tuna processing plant, and higher gains from large investments in mobile telecommunication.
  - Current account deficit forecast: nearly double to about 15 percent in 2014 and 2015 from 8 percent in 2013, reflecting long-run decline in logging exports and increase in capital imports; expected to narrow over the medium term with export recovery and winding down of import-intensive investment.
- Risks:
  - Downside risks predominate: upcoming parliamentary election (fall 2014) adds uncertainty; external environment could worsen; additional natural disasters could quickly erode policy buffers.
  - Solomon Islands remains a fragile state due to strong dependence on aid, vulnerability to frequent natural disasters, and weak institutional capacity.

### Program performance under the ECF arrangement
- Overall assessment: broadly satisfactory.
- Key achievements:
  - Reserve buffers rebuilt and at comfortable level, well above average of other small states.
  - All performance criteria (PCs) for end-December, indicative targets (ITs) for March, and continuous PCs were met with considerable margins, except the IT on government-funded recurrent spending on health and education (narrowly missed).
  - Structural progress: debt management policy, fiscal planning, and Public Financial Management (PFM).
  - Three benchmarks met ahead of time: on-lending and guarantee policies (February 2014); the 2013 budget report (April 2014); draft regulation for constituency development fund submitted to Cabinet (December 2013) — though further provincial consultation is needed.
  - Parliament approved amendments to the Income Tax Act and the Mines and Minerals Act in April implementing all but one of the Fund’s TA recommendations (March 2014 benchmark); a ministerial order on streamlining export duty on gold planned for July.
  - Strengthening tertiary scholarships: new monitoring team and improved spending control in 2014; early indications that spending will remain below budget ceiling.
- Implementation constraints:
  - Reforms have taken longer than expected due to resource constraints (bottleneck in Attorney General’s Chambers) and need for broader stakeholder consultation to build ownership.
  - Authorities requested re-phasing of existing benchmarks in the attached MEFP to better calibrate timing with capacity constraints.

### Fiscal policy: 2013 outturn, 2014 budget, flood impact and staff projection
- 2013 fiscal outturn:
  - Fiscal balance: surplus of 4.3 percent of GDP (well above program target of 0.3 percent of GDP and the September supplementary budget implying deficit of 3.7 percent of GDP).
  - Recurrent spending outturn was lower by 7 percentage points of GDP relative to the September supplementary budget.
  - Cash balance outturn: 3.2 months of recurrent spending, exceeding the two-month target.
- 2014 budget (approved December):
  - Targeted overall fiscal surplus equal to 1.2 percent of GDP.
  - Narrowing of surplus mainly reflects large increase in current spending equivalent to 4 percentage points of GDP relative to 2013, including:
    - 3½ percent increase in public servant salaries starting June 2014.
    - 320 new public administration hires starting mid-year.
    - Increase in public-sector allowances and benefits.
  - One-off election-related spending in 2014 amounting to 0.7 percent of GDP expected to be reversed in 2015.
  - Constituency funds reduced to 2 percent in 2014 from 3½ percent in 2013 (a reduction of 1½ percentage points of GDP).
  - Implementation of development spending expected to accelerate through Budget Implementation Committees.
  - Revenue-side measures in pipeline: streamlining exemption rules, enhancing IT system in tax collection, strengthening revenue collection capacity through training and recruitment.
- Flood-related fiscal risks and staff projection for 2014:
  - Staff projects a fiscal deficit of 1.6 percent of GDP in 2014 owing to combined effect of:
    - Revenue losses: 1.7 percent of GDP (or SI$150 million).
    - Additional government-funded spending to support recovery: 1.2 percent of GDP (or SI$100 million).
  - Deficit to be financed with cash reserves.
  - Supplementary budget in July expected to appropriate additional external funds and increase flood-related spending.
  - Cash balance decline noted: from SI$620 million at end-March 2014 to SI$374 million at end-2014 (staff note).

### Box 1 — Key quantified impacts of the flood (selected figures)
- GDP growth: expected to drop by 4 percentage points in 2014 relative to the pre-flood forecast.
- Inflation: will rise to 7.0 percent in 2014 because of temporary spikes in food prices, before reverting to trend (4½ percent) in the medium term.
- Total public-sector costs of the flood: amount to 4 percent of GDP in FY2014.
  - Government will meet part of these costs (about 3 percent of GDP) through draw-down of the cash balance; rest expected to be largely met by direct donor support or humanitarian aid.
- Revenue losses: Tax revenues expected to drop by SI$150 million relative to the 2014 budget.
- Government-funded spending: World Bank estimates physical damage to infrastructure and to health and education at 1.2 percent of GDP.
  - Assumed allocation: SI$60 million (0.7 percent of GDP) to recurrent spending, and SI$40 million (0.5 percent of GDP) in development spending.
- Fiscal balance could reach a deficit of 1.6 percent of GDP; program cash balance would drop to 1.8 months of current spending.
- Flood-related budget support received as of early May: SI$15 million (0.2 percent of GDP); SI$45 million (0.4 percent of GDP) in in-kind and humanitarian aid channeled via NGOs.
- Current account: could widen to 14.7 percent of GDP from pre-flood level of 13.0 percent.
- FDI: expected to drop to 6 percent of GDP from 9.8 percent of GDP pre-flood, but to recover to 9 percent of GDP in 2015.
- Reserves: Net international reserves expected to drop to US$466 million at end-2014 from US$526 million at end-March 2014 — US$40 million lower than pre-flood projection.

### Quantified pre-flood vs post-flood projections (selected macro indicators)
- Real GDP growth:
  - 2014 Pre-flood (EBS/13/168): 4.0
  - 2014 Post-flood: 0.1
  - 2015: 3.5
- CPI (Average, in percent):
  - 2014 Pre-flood: 5.9
  - 2014 Post-flood: 7.0
  - 2015: 5.5
- Revenue (percent of GDP):
  - 2014 Pre-flood: 33.2
  - 2014 Post-flood: 31.5
  - 2015: 31.9
- Grants (percent of GDP):
  - 2014 Pre-flood: 18.0
  - 2014 Post-flood: 17.2
  - 2015: 16.6
- Overall balance (percent of GDP):
  - 2014 Pre-flood: 0.3
  - 2014 Post-flood: -1.6
  - 2015: -0.8
- Current account (percent of GDP):
  - 2014 Pre-flood: -13.5
  - 2014 Post-flood: -14.7
  - 2015: -15.5
- Current account + FDI (percent of GDP):
  - 2014 Pre-flood: -3.8
  - 2014 Post-flood: -9.9
  - 2015: -6.3
- Cash balance (SI$ million):
  - 2014 Pre-flood: 407
  - 2014 Post-flood: 374
  - 2015: 444
- Cash balance (In months of recurrent spending):
  - 2014 Pre-flood: 1.9
  - 2014 Post-flood: 1.8
  - 2015: 2.0
- Net official reserves (US$ million, end of period):
  - 2014 Pre-flood: 509
  - 2014 Post-flood: 466
  - 2015: 440

### Opportunity cost of building fiscal buffers — Box 2 (concept, methodology, and findings)
- Concept and methodology:
  - Trade-off: building fiscal buffers to enhance resilience vs funding development (public capital) — raising public savings for buffers forgoes returns from public investment.
  - Staff estimated the social return of public investment under the assumption it equals the marginal productivity of capital.
  - A Cobb-Douglas production function was calibrated for a group of Pacific Island economies using Penn World Table and WEO data over 1970–2010.
- Key findings:
  - Solomon Islands faces the highest rate of return from capital spending in the region; therefore Solomon Islands would benefit from investing in capital spending.
  - The social return to capital in the PICs is in line with the return in low-income countries.
  - Capital share in income assumed at 0.3 and depreciation rate assumed at 0.07 in staff calculations.
- Illustrative staff estimates (selected figures preserved):
  - Solomon Islands: Social Return of Capital 13.9; Average Interest Rate 1.5; Social Return of Capital Net of Interest Rate Payments 12.4.
  - PICs (Pacific Island Countries) memorandum: Social Return of Capital 12.2; Average Interest Rate 3.1; Social Return of Capital Net of Interest Rate Payments 9.1.

### Donor financing, program support, and planned projects
- Expected donor support in 2014:
  - Australia and New Zealand: up to US$35 million in combined budget support.
  - World Bank: US$2 million.
- Asian Development Bank (ADB):
  - No budget support in 2014 but plans US$5 million in 2015 under the Economic and Financial Reform Program, alongside US$40 million for transportation and ICT projects in 2015.
- Japan International Cooperation Agency (JICA): expected to provide around US$40 million in grants between 2014 and 2016 to improve port facilities and upgrade Kukum Highway.
- World Bank is considering scaling up flood-related assistance through a combination of budget support and project financing.
- Investment pipeline highlights: telecommunications (mobile network and undersea cable) and Tina River Hydropower project.

### Staff views and policy recommendations (summary)
- Near-term fiscal stance:
  - Fiscal policy should support economic activity, with re-prioritization toward capital spending needed to upgrade infrastructure, water and sanitation systems, and schools.
  - Use part of fiscal space rebuilt in recent years for reconstruction and capital projects and to absorb cyclical revenue losses.
  - Forthcoming 2014 supplementary budget should strictly contain recurrent spending relative to the 2014 budget, especially public sector allowances and benefits.
  - Resist extra election spending and any increase in constituency funds; improve transparency and strengthen regulation of constituency funds and contain their size.
- Medium-term fiscal framework:
  - Anchor medium-term fiscal plans to the non-mineral primary balance of about 2 percent of GDP to promote fiscal sustainability.
  - Include on-lending operations and government debt guarantees in anchoring borrowing decisions to provide a more accurate picture of debt position.
  - Mobilize additional revenues via tax reforms in pipeline (including new customs and excise bill) and raise non-tax revenue with technical assistance from PFTAC.
- Disaster resilience and external risk management:
  - Maintain adequate fiscal and external buffers; for large disasters, IFIs and bilateral donors will remain important.
  - Continued participation in external sovereign insurance mechanism could provide additional coverage.
- PFM and structural reforms:
  - Advance PFM reforms: PFM roadmap due by end December 2014 in line with PFM Act; complete the unfinished structural agenda and implement PFM reforms to improve execution of expenditures and timely payments.
- Monetary and financial sector:
  - Monetary policy stance broadly appropriate; central bank should be ready to tighten if credit growth becomes excessive.
  - Use all instruments including reserve requirements and Bokolo bills.
  - Basket peg appropriate; adjust bilateral operational band to follow basket peg more closely.
  - Strengthen supervisory and regulatory frameworks through enactment of a new Financial Institutions Act, revision of the NPF Act, and progress on a new Credit Union Act.

### Monitoring framework, TMU definitions, and performance criteria (selected instruments and figures)
- Monitoring and review schedule:
  - Implementation to be monitored through semiannual reviews based on performance criteria, indicative targets and structural benchmarks.
  - Fourth and fifth reviews expected on or after November 15, 2014 and June 15, 2015, respectively.
- Core quantitative program instruments (selected):
  - Floors on NIR of the CBSI; ceilings on NDA of the CBSI; ceilings on NCG; floors on the central government program cash balance; indicative target for spending on health and education at no less than 32 percent of government-funded recurrent spending.
- Selected performance target values (as reported in MEFP Table 1):
  - Net international reserves (NIR) of the CBSI (floor, end-of-period stock, US$ millions):
    - 9/30/2014: 485; 480; 495
    - 12/31/2014: 490; 473; 516
  - Net domestic assets (NDA) of the CBSI (ceiling, SI$ millions): includes values such as -1,202; -1,163; -1,693; -1,150; -1,029; -1,588; -1,268; -1,264; -1,906; -1,159; -1,576; -1,431; -1,194.
  - Net credit to central government (NCG) (ceiling, cumulative change, SI$ millions): includes values such as -6; 33; -267; 35; 157; -290; -24; -20; -46; -50; 9; 37; 40.
  - Central government program cash balance (floor, SI$ millions): 390; 352; 539; 411; 290; 603; 429; 425; 620; 440; 520; 420; 374.
- TMU definitions and adjustors:
  - NIR = gross international reserves (GIR) less international reserve liabilities; floor on NIR adjusted upward (downward) by budget support from bilateral and multilateral donors (excluding IMF) in excess (short) of program level.
  - NDA = reserve money − (NIR + other NFA of the CBSI); ceiling on NDA adjusted downward (upward) by amount of budget support in excess (short) of program level.
  - NCG defined as net claims of CBSI, commercial banks and ODCs, OFCs, insurance companies, and government treasury bills held by the public.
  - Program cash balance = gross cash balance − total amount of unpaid payment orders and unpresented checks; floor on program cash balance adjusted by specified donor support and stock of treasury bills and SIG Consolidated Deposits Account.
- Continuous PC ceilings (examples):
  - New nonconcessional external debt maturing in more than one year: 0 (end-of-period stock since beginning of program, US$ millions).
  - New nonconcessional external debt maturing in one year or less: 0.
  - Accumulation of new external payment arrears by the public sector: 0 (SI$ millions).

### Definitions, accounts, and reporting (selected items)
- Gross cash balance definition:
  - Sum of government deposits not encumbered or pledged, held in specified CBSI, ANZ, Bank of South Pacific accounts and donor funded budget support accounts under government control.
- External debt ceilings:
  - Ceiling applies to contracting/guaranteeing of new nonconcessional borrowing with original maturity > 1 year and ≤ 1 year (separate ceilings); exclusions specified (use of Fund resources, World Bank/ADB lending, concessional debts, certain SI$ instruments held by nonresidents).
  - For program purposes, a debt is concessional if it includes a grant element of at least 35 percent; discount rate used is five percent.
- Tertiary scholarships policy strengthening (minimum elements):
  - Commitment controls (Ministry of Finance certification before awards), queuing system, clearance of arrears, documentation standards, monitoring and dissemination, memoranda of understanding with tertiary institutions, allowances policy tied to student circumstances.
- Data provision and reporting timelines:
  - Weekly data: submission by end of following week.
  - Monthly and quarterly data: submission within six weeks of the end of the observation period.
  - Authorities committed to using best available data and promptly reporting revisions.

### Social and human development context (selected indicators)
- Per capita GDP (2013): US$1,931.
- Population (2013): 562,000.
- Poverty rate (2006): 23 percent.
- Credit to private sector: 20 percent of GDP in Solomon Islands versus 40 percent in Asia and Pacific small states and 70 percent in other small states.
- Flood-related bilateral external assistance to date (Box 2): roughly US$8 million (or 0.6 percent of GDP), with half reallocated from existing aid programs and the other half additional financing.

### Program recommendation and conditionality adjustments
- Staff recommends completion of the third review under the ECF-supported program.
- Staff supports:
  - Authorities’ request for modification of end-June 2014 performance criteria.
  - Setting of end-December 2014 performance criteria.
  - Modification and resetting of several structural benchmarks (MEFP, Tables 2.A and 2.B) and establishment of two new PFM-related benchmarks.
- Structural benchmark resets and new benchmarks (selected dates preserved):
  - Amend the Export Duty Schedule (Ministerial Order): Date: July 31, 2014 (modified and reset).
  - Produce and publish a mid-year Budget review: Date: August 31, 2014 (new).
  - Produce and publish a Budget strategy document: Date: August 31, 2014 (new).
  - Obtain Cabinet approval of revamped policies for tertiary scholarships: Date: September 30, 2014 (reset).
  - Release audit results of constituency funds to public: Date: September 30, 2014 (reset).
  - Submit draft Credit Unions Act to Cabinet: Date: December 31, 2014 (reset).
  - Review tertiary education policies and submit draft Credit Unions Act to Parliament: Date: March 31, 2015 (reset).

*Source: IMF staff report excerpt — "1. The Macroeconomic Impact of the Flood."*

### 1. The Macroeconomic Impact of the Flood ________________________________________________________6

### 1. The Macroeconomic Impact of the Flood

### The setting, outlook, and risks
- Context:
  - After three years of strong commodity-led growth (averaging 8 percent per year), in 2013 economic performance slowed to 3 percent in Solomon Islands.
  - Deceleration driven by: decline in agricultural output owing to unfavorable weather; lower gold production caused by restructuring of the Gold Ridge mine in the wake of lower world gold prices; and ongoing depletion of logging stocks.
- Floods (early April 2014, Guadalcanal/Honiara):
  - Flash floods caused loss of life and widespread damage to key infrastructure, water and sanitation systems, housing, and agricultural output.
  - One fifth of Honiara’s population was displaced to shelters; rural areas around the capital were heavily affected.
  - The only gold mine was closed and is still not operating.
  - World Bank rapid disaster-impact-assessment: combined government and private income losses equal to 4.7 percent of GDP.
  - Solomon Islands did not qualify for payout under the World Bank’s pilot Pacific Disaster Risk Financing and Insurance Program because disbursements are linked to specific physical parameters that were not triggered during the flood.
- Outlook:
  - Economic growth in 2014 is projected at near zero despite reconstruction efforts, owing to the current closure of the mine and other flood-related income losses.
  - 2015: activity is expected to increase by 3½ percent led by large foreign-financed infrastructure projects.
  - Growth prospects depend on speed of gold production restart and whether future mining projects (such as nickel) come on stream.
  - Continued decline in logging output implies growth will need to be supported by increased productivity across agriculture, tuna processing, and tourism, and by investing in human and physical capital.
  - Decline in aid in the pipeline from Australia and other development partners poses an additional medium-term challenge.
  - Upside risks: Tina River Hydro Power project, a second tuna processing plant, and higher gains from large investments in mobile telecommunication.
  - Current account deficit forecast: nearly double to about 15 percent in 2014 and 2015 from 8 percent in 2013, reflecting long-run decline in logging exports and increase in capital imports; expected to narrow over the medium term with export recovery and winding down of import-intensive investment.
- Risks:
  - Downside risks predominate: upcoming parliamentary election (fall 2014) adds uncertainty; external environment could worsen; additional natural disasters could quickly erode policy buffers.
  - Solomon Islands remains a fragile state due to strong dependence on aid, vulnerability to frequent natural disasters, and weak institutional capacity.

### Program performance under the ECF arrangement
- Overall assessment: broadly satisfactory.
- Key achievements:
  - Reserve buffers rebuilt and at comfortable level, well above average of other small states.
  - All performance criteria (PCs) for end-December, indicative targets (ITs) for March, and continuous PCs were met with considerable margins, except the IT on government-funded recurrent spending on health and education (narrowly missed).
  - Meaningful progress on structural agenda: debt management policy, fiscal planning, and Public Financial Management (PFM).
  - Three benchmarks met ahead of time: on-lending and guarantee policies to strengthen debt management (February 2014); the 2013 budget report (April 2014); submission to Cabinet of draft regulation for constituency development fund (December 2013) — though further provincial consultation is needed.
  - Progress on mining tax regime reforms: parliament approved amendments to the Income Tax Act and the Mines and Minerals Act in April implementing all but one of the Fund’s TA recommendations (March 2014 benchmark); a ministerial order on streamlining export duty on gold planned for July.
  - Strengthening management of tertiary education scholarships: new monitoring team and improved spending control in 2014, early indications that spending will remain below budget ceiling.
- Implementation constraints:
  - Reforms have taken longer than expected due to resource constraints (bottleneck in Attorney General’s Chambers) and need for broader stakeholder consultation to build ownership.
  - Authorities requested re-phasing of existing benchmarks in the attached MEFP to better calibrate timing with capacity constraints.

### Fiscal policy: impact of the flood and staff views
- 2013 fiscal outturn:
  - Fiscal balance: surplus of 4.3 percent of GDP (well above program target of 0.3 percent of GDP and the September supplementary budget implying deficit of 3.7 percent of GDP).
  - Outturn driven by underexecution in development spending funded by donors.
  - Recurrent spending outturn was lower by 7 percentage points of GDP relative to the September supplementary budget.
  - Cash balance outturn: 3.2 months of recurrent spending, exceeding the two-month target.
  - Building fiscal buffers has been part of authorities’ strategy to self-insure against natural disasters.
- 2014 budget (approved December):
  - Targeted overall fiscal surplus equal to 1.2 percent of GDP.
  - Narrowing of surplus mainly reflects large increase in current spending equivalent to 4 percentage points of GDP relative to 2013:
    - 3½ percent increase in public servant salaries starting June 2014.
    - 320 new public administration hires starting mid-year.
    - Increase in public-sector allowances and benefits.
  - One-off election-related spending in 2014 amounting to 0.7 percent of GDP expected to be reversed in 2015.
  - Constituency funds reduced to 2 percent in 2014 from 3½ percent in 2013 (a reduction of 1½ percentage points of GDP).
  - Small decline in tertiary scholarship spending envisaged.
  - Implementation of development spending expected to accelerate through Budget Implementation Committees.
  - Revenue-side measures in pipeline: streamlining exemption rules, enhancing IT system in tax collection, strengthening revenue collection capacity through training and recruitment.
- Flood-related fiscal risks and 2014 staff projection:
  - Staff projects a fiscal deficit of 1.6 percent of GDP in 2014 owing to combined effect of:
    - Revenue losses: 1.7 percent of GDP (or SI$150 million).
    - Additional government-funded spending to support recovery: 1.2 percent of GDP (or SI$100 million).
  - Deficit to be financed with cash reserves. Program targets set consistently.
  - Supplementary budget in July expected to appropriate additional external funds and increase flood-related spending.
  - Cash balance decline noted: from SI$620 million at end-March 2014 to SI$374 million at end-2014 (staff note).
- Box 1: The Macroeconomic Impact of the Flood (key quantified points)
  - GDP growth is expected to drop by 4 percentage points in 2014 relative to the pre-flood forecast, largely owing to income losses in the mining, agriculture, and transport sectors.
  - Inflation will rise to 7.0 percent in 2014 because of temporary spikes in food prices, before reverting to trend (4½ percent) in the medium term.
  - Total costs of the flood related to the public sector amount to 4 percent of GDP in FY2014.
    - Government will meet part of these costs (about 3 percent of GDP) through draw-down of the cash balance; rest expected to be largely met by direct donor support or humanitarian aid.
    - Foreign-financed infrastructure projects pre-committed before the flood (e.g., Japan International Cooperation Agency) expected to contribute to rehabilitation.
  - Revenue losses: Tax revenues expected to drop by SI$150 million relative to the 2014 budget as a result of the drop in GDP and disruption of mineral production.
  - Government-funded spending: World Bank estimates physical damage to infrastructure and to health and education at 1.2 percent of GDP.
    - Assumed allocation: SI$60 million (0.7 percent of GDP) to recurrent spending, and SI$40 million (0.5 percent of GDP) in development spending.
  - Fiscal balance could reach a deficit of 1.6 percent of GDP; program cash balance would drop to 1.8 months of current spending.
  - Flood-related budget support received as of early May: SI$15 million (0.2 percent of GDP); SI$45 million (0.4 percent of GDP) in in-kind and humanitarian aid channeled via NGOs.
  - Current account: could widen to 14.7 percent of GDP from pre-flood level of 13.0 percent.
  - FDI: expected to drop to 6 percent of GDP from 9.8 percent of GDP pre-flood, but to recover to 9 percent of GDP in 2015 driven by large pipeline projects.
  - Reserves: Net international reserves expected to drop to US$466 million at end-2014 from US$526 million at end-March 2014—US$40 million lower than pre-flood projection.
- Staff views and policy recommendations:
  - Near-term: fiscal policy should support economic activity, with re-prioritization toward capital spending needed to upgrade infrastructure, water and sanitation systems, and schools.
  - Use part of fiscal space rebuilt in recent years for reconstruction and capital projects and to absorb cyclical revenue losses.
  - Forthcoming 2014 supplementary budget should strictly contain recurrent spending relative to the 2014 budget, especially public sector allowances and benefits.
  - Welcome public sector remuneration review to revise remuneration arrangements and address payroll fiscal risk.
  - Resist extra election spending and any increase in constituency funds; improve transparency and strengthen regulation of constituency funds and contain their size to increase return on public spending.
  - Use cash balance wisely given uncertainty for 2015; anchor medium-term fiscal plans to the non-mineral primary balance of about 2 percent of GDP to promote fiscal sustainability.
  - Multi-pillar strategy for natural disasters: maintain adequate fiscal and external buffers; for large disasters, IFIs and bilateral donors will remain important; continued participation in external sovereign insurance mechanism could provide additional coverage.
  - Advance fiscal reforms: PFM roadmap due by end December 2014 in line with PFM Act; draft budget strategy and mid-year budget review (August 2014 program benchmarks) supported to foster budget discipline and planning.
  - Include on-lending operations and government debt guarantees in anchoring borrowing decisions to provide a more accurate picture of debt position.
  - Mobilize additional revenues via tax reforms in pipeline (including new customs and excise bill) and raise non-tax revenue with additional technical assistance from PFTAC.

### Quantified pre-flood vs post-flood projections (selected macro indicators)
- Table excerpt (Solomon Islands: Macroeconomic Impact of the Flood; In percent of GDP, unless indicated otherwise)
  - Real GDP growth:
    - 2014 Pre-flood (EBS/13/168): 4.0
    - 2014 Post-flood: 0.1
    - 2015: 3.5
  - CPI (Average, in percent):
    - 2014 Pre-flood: 5.9
    - 2014 Post-flood: 7.0
    - 2015: 5.5
  - Revenue:
    - 2014 Pre-flood: 33.2
    - 2014 Post-flood: 31.5
    - 2015: 31.9
  - Grants:
    - 2014 Pre-flood: 18.0
    - 2014 Post-flood: 17.2
    - 2015: 16.6
  - Overall balance:
    - 2014 Pre-flood: 0.3
    - 2014 Post-flood: -1.6
    - 2015: -0.8
  - Current account:
    - 2014 Pre-flood: -13.5
    - 2014 Post-flood: -14.7
    - 2015: -15.5
  - Current account + FDI:
    - 2014 Pre-flood: -3.8
    - 2014 Post-flood: -9.9
    - 2015: -6.3
  - Cash balance (SI$ million):
    - 2014 Pre-flood: 407
    - 2014 Post-flood: 374
    - 2015: 444
  - Cash balance (In months of recurrent spending):
    - 2014 Pre-flood: 1.9
    - 2014 Post-flood: 1.8
    - 2015: 2.0
  - Net official reserves (US$ million, end of period):
    - 2014 Pre-flood: 509
    - 2014 Post-flood: 466
    - 2015: 440

### Opportunity cost of building fiscal buffers (selected findings)
- Staff analysis suggests Solomon Islands stands to gain from increasing the share of the budget devoted to capital spending.
- Pacific Island Countries: Opportunity Cost of Building Fiscal Buffers and Human Development Index (HDI) — indicative metrics presented in staff estimates:
  - Social Return of Capital, Average Interest Rate (Cost of government spending), and Social Return of Capital Net of Interest Rate Payments reported for selected countries (values preserved as in source). Example entries:
    - Solomon Islands: Social Return of Capital 13.9; Average Interest Rate 1.5; Social Return of Capital Net of Interest Rate Payments 12.4.
    - PICs (Pacific Island Countries) memorandum: Social Return of Capital 12.2; Average Interest Rate 3.1; Social Return of Capital Net of Interest Rate Payments 9.1.
  - Note: Capital share in income assumed at 0.3 and depreciation rate assumed at 0.07 in staff calculations.

*Source: IMF staff report excerpt — "1. The Macroeconomic Impact of the Flood."*

### Box 2. Quantifying the Opportunity Cost of Building Fiscal Buffers

### Box 2. Quantifying the Opportunity Cost of Building Fiscal Buffers

### Concept and methodology
- Policymakers in small developing states face a choice between building fiscal buffers (to enhance resilience to shocks, including natural disasters) and funding development spending; raising public savings to increase fiscal space forgoes the rate of return of the associated public investment.
- The "opportunity cost of building fiscal buffers" is a metric to assess the optimal mix between building fiscal space and capital spending.
- Staff estimated the social return of public investment under the assumption that it equals the marginal productivity of capital.
- Following Caselli and Feyrer (2007), a Cobb-Douglas production function was calibrated for a group of Pacific Island economies using data on output and investment from the Penn World Table and WEO data over the period 1970–2010.

### Key findings
- The results suggest that Solomon Islands faces the highest rate of return from capital spending in the region; therefore Solomon Islands would benefit from investing in capital spending.
- The social return to capital in the PICs is in line with the return in low-income countries.
- A plot of the estimated cost of building buffers against the Human Development Index (HDI)—a proxy for measuring infrastructure needs—suggests Solomon Islands is among the countries that stands to gain the most from increasing the share of their budget devoted to fund capital spending.

### Contextual and macroeconomic indicators (Solomon Islands)
- Bank credit to the private sector expanded by 15 percent (y/y) last year, and by 10 percent during the first quarter of 2014.
- Inflation slowed to less than 3 percent (y/y) in December (from 6 percent in mid-2013), partly owing to lower global food prices and the 3½ appreciation of the Solomon Islands dollar against the Australian dollar.
- Inflation ticked up to 5 percent (y/y) in April 2014, owing to domestic food supply disruption and the 5½ percent depreciation of the Solomon Islands dollar vis-à-vis the Australian dollar.
- Credit to the private sector as a percent of GDP: 20 percent of GDP in Solomon Islands versus 40 percent in the Asia and Pacific small states and 70 percent in other small states.
- Flood-related bilateral external assistance to date: roughly US$8 million (or 0.6 percent of GDP), with half expected to be reallocated from existing aid programs and the other half additional financing.

### Policy recommendations and program implications
- Fiscal policy:
  - Part of the fiscal buffer rebuilt in recent years should be used for reconstruction and much-needed capital projects—and to absorb cyclical revenue losses.
  - The forthcoming 2014 supplementary budget should give priority to public spending on infrastructure, while strictly containing spending on the election and avoiding an increase in constituency funds.
  - Improve transparency and strengthen regulation of constituency funds, and contain their size, to increase the rate of return on public spending and improve spending quality—especially given the expected drawdown in cash reserves.
  - Continue to control spending on tertiary education; complete broader review of policies on tertiary education.
- Public financial management and fiscal institutions:
  - Sustain efforts in building sound fiscal institutions; forthcoming PFM roadmap, upcoming budget strategy and mid-year budget review, and recent strengthening of debt management are key.
  - Complete the unfinished structural agenda and implement PFM reforms to improve execution of expenditures and timely payments.
- Monetary and exchange rate policy:
  - Monetary policy stance is broadly appropriate; the central bank should be ready to tighten if credit growth becomes excessive and triggers deterioration in credit quality and demand-driven inflationary pressures.
  - The central bank should use all instruments, including reserve requirements and issuing Bokolo bills.
  - The basket peg is an appropriate exchange rate regime, but the bilateral rate should be adjusted to follow the currency basket more closely by gradually widening the operational band and moving the base rate so it aligns with the basket peg.
- Financial sector reform:
  - Strengthen supervisory and regulatory frameworks through enactment of a new Financial Institutions Act, revision of the NPF Act to bolster governance and investment strategy, and progress on a new Credit Union Act (program benchmarks December 2014, and March 2015).
  - Strengthening the regulatory framework and reforms (including NPF Act and Financial Institutions Act) will promote financial-sector stability and inclusion.

### Donor financing and program support
- Expected donor support in 2014:
  - Australia and New Zealand: up to US$35 million in combined budget support.
  - World Bank: US$2 million.
- Asian Development Bank (ADB):
  - Does not plan budget support in 2014 but plans to provide US$5 million in 2015 under the Economic and Financial Reform Program, alongside US$40 million to continue financing transportation and information-and-communication-technology infrastructure projects.
- Japan International Cooperation Agency (JICA): expected to provide a total of around US$40 million in grants between 2014 and 2016 to improve port facilities and upgrade Kukum Highway.
- The World Bank is considering scaling up flood-related assistance through a combination of budget support and project financing.

*Prepared by Ezequiel Cabezon. Source: IMF staff analysis as presented in the document.*

### 27.      Based on Solomon Islands’ program performance, staff recommends completion of the

### _cr14170 - 27.      Based on Solomon Islands’ program performance, staff recommends completion of the

### Program recommendation and requests
- Staff recommends completion of the third review under the ECF-supported program.
- Given program quantitative performance at end March 2014, staff supports:
  - The authorities’ request for modification of end-June 2014 performance criteria.
  - Setting of end-December 2014 performance criteria.
- Staff supports modification and resetting of several structural benchmarks (MEFP, Tables 2.A and 2.B) and a proposal for establishment of two new PFM-related benchmarks.
- The authorities request completion of the third review and modification of end-June 2014 performance criteria, and propose setting new end-December 2014 performance criteria along with modification of structural conditionality (MEFP Tables 1, 2.A, and 2.B).

### Macroeconomic developments and outlook
- Growth:
  - Growth will be zero in 2014.
  - Sources of growth (2007–15) chart indicates real GDP and sectoral contributions (logging, mining, agriculture and fisheries, etc.), with a projection through 2015.
  - Table 2 baseline projections: Real GDP growth projections include 2014: 0.1 and subsequent years 2015: 3.5, 2016: 4.0, 2017: 3.5, 2018: 3.6, 2019: 3.5.
- Inflation and prices:
  - CPI (period average) values in Table 1 and Table 2: 2012: 5.9, 2013: 6.1 (Table 1 shows 6.1), 2014: 5.4 (Table 1), 2015: 5.9 (Table 1); Table 2 lists CPI (period average) 2014: 5.5, 2015: 5.0, 2016: 4.5, 2017: 4.5, 2018: 4.5, 2019: 4.5.
  - GDP deflator examples: Table 1 shows 2014: 6.0, 2015: 5.6, 2016: 7.3, 2017: 5.1.
- Commodity sector and trade:
  - The importance of the commodity sector has declined.
  - The current account deficit is expected to widen given the severe drop in exports and an increase in imports related to post-flood reconstruction.
  - Trade and current account data (Table 5, 2012–19): Current account balance (in US$ millions) 2012: 2.2, 2013: -46.2, 2014: -91.5, 2015: -171.0, 2016: -195.8, 2017: -202.9, 2018: -179.2, 2019: -176.4, 2020: -173.7.
  - Exports of goods and nonfactor services (GNFS): Table 1 and Table 5: 2012: 635.2 (Table 1), 2013: 598.0 (Table 1), 2014: 573.9 (Table 1) / 492.8 (Table 5 shows exports 2012: 492.8, 2013: 446.8?—note different tables reflect differing series and revisions).
- External buffers and reserves:
  - Reserves, rebuilt over recent years, are expected to provide some buffer.
  - Gross official reserves (end-period, US$ millions): Table 1: 2012: 499.6, 2013: 520.0, 2014: 527.7, 2015: 527.8, 2016: 484.3, 2017: 455.7 (Table 1); Table 5 projections: 2014: 527.7, 2015: 484.3, 2016: 455.7, 2017: 430.2, 2018: 441.3, 2019: 465.2, 2020: 483.7.
  - Net international reserves (NIR) (in US$ millions, Jan. 2007–Mar. 2014 figure): Mar-14 mark shown; Table 5 NIR projections: 2014: 480.1, 2015: 500.2, 2016: 508.0, 2017: 465.7, 2018: 440.0, 2019: 418.8, 2020: 434.4, 2021: 458.2, 2022: 476.8.
- Financial conditions:
  - Credit growth has been on a broadly upward trend as lending rates decline amid greater competition.
  - Credit to private sector (Table 1): 2012: 4.1, 2013: 16.0, 2014: 15.1, 2015: 16.0, 2016: 12.9, 2017: 9.8.
  - Lending rates (period average) examples: Table 1 shows lending rate 2012: 11.3, 2014 (Jan–Mar average): 10.7, 2015: 10.4 (Table 1 remark).

### Fiscal developments and public finances
- Fiscal position and revenue:
  - Expected revenue losses (post-flood) will lead to a weaker fiscal position though fiscal space has been rebuilt.
  - Per Table 1 central government operations (percent of GDP): Total revenue and grants 2012: 55.8, 2013: 53.5, 2014: 52.5, 2015: 49.6, 2016: 48.8, 2017: 48.5.
  - Revenue (percent of GDP) examples: 2012: 34.8, 2013: 32.9, 2014: 34.8, 2015: 32.1, 2016: 31.5, 2017: 31.9 (Table 1).
  - Grants (percent of GDP): 2012: 21.0, 2013: 20.5, 2014: 17.8, 2015: 17.4, 2016: 17.2, 2017: 16.6.
- Expenditure and balance:
  - Total expenditure (percent of GDP) examples: 2012: 51.9, 2013: 53.2, 2014: 48.3, 2015: 49.3, 2016: 50.4, 2017: 49.4.
  - Overall balance (percent of GDP) shown in Table 2: 2012: 3.9, 2013: 4.3, 2014: -1.6, 2015: -0.8, 2016: -0.4, 2017: -0.3, 2018: 0.3, 2019: 0.6.
  - Nonmineral primary balance (percent of GDP) examples: Table 2 shows 2012: 1.2, 2013: 2.5, 2014: -1.6, 2015: 1.6, 2016: 2.0, 2017: 2.2.
- Fiscal tables (selected 2015 figures, SI$ millions, Table 3):
  - Total revenue and grants 2015 Budget: 4,543; Prog. Est.: 4,280; Prog. 4,174; Proj. 4,624; 2015 numbers across columns provided.
  - Total revenue 2015 Budget: 2,648; Tax revenue 2015 Budget: 2,396; Grants 2015 Budget: 1,896.
  - Total expenditure 2015 Budget: 4,838; Recurrent expenditure 2015 Budget: 2,789; Development expenditure 2015 Budget: 2,049.
  - Overall balance (in SI$ millions) examples: 2015 Budget: -294; Prog. Est./Prog. values shown in table.
- Public debt:
  - Central government debt (percent of GDP) Table 1: 2012: 17.7, 2013: 14.6, 2014: 14.8, 2015: 14.1, 2016: 14.6, 2017: 15.0.
  - Public external debt (Table 2): projections 2012–15 show percent of GDP, e.g., 2012: 8 (graph axis), and Table 5 shows gross external public debt 2012: 13.2, 2013: 11.4, 2014: 11.6, 2015: 11.5, 2016: 12.0, 2017: 12.9, with further increases in later years.

### Monetary, banking, and financial sector details
- Central Bank and banking system (Table 4, 2011–14 samples):
  - Reserve money (end-period SI$ millions) examples: Dec-2012: 1,685; Mar-2013: 2,055; Jun-2013: 1,763; Sep-2013: 1,804; Dec-2013: 1,839; Mar-2014: 2,038.
  - Broad money (M3) (end-period SI$ millions): Dec-2012: 2,611; Mar-2013: 3,064; Jun-2013: 2,863; Sep-2013: 3,151; Dec-2013: 3,264; Mar-2014: 3,444.
  - Money multiplier (level) examples: 2011 Dec: 1.5; 2012 Dec: 1.5; 2013 Dec: 1.6; 2014 Dec/Mar figures up to 1.9.
  - Loan-to-deposit ratio (percent) examples: 2011 Dec: 58.0; 2012 Dec: 50.2; 2013 Dec: 52.2; 2014 Mar: 49.9.
  - Program targets cited: NIR of CBSI (in US$ millions) sequence: 393, 479, 477, 494, 495, 516, 470, 475, 480, 485; NDA of CBSI (in SI$ millions) sequence: -737, -1,123, -1,094, -1,358, -1,219, -1,150, -1,268, -1,159, -1,100, -1,100.
- Interest rates:
  - Deposit rate (period averages) examples: Table 4 shows deposit rate 2012 Dec: 2.0, 2013 Dec: 0.9, 2014 Dec/Mar notes small values and ellipses for missing periods.
  - Lending rate (period averages) examples: Table 4 shows lending rate 2012 Dec: 13.3, 2013 Dec: 11.3, 2014 notes 11.0 series.

### External financing, Fund engagement, and debt-service capacity
- ECF arrangement and disbursements (Table 6):
  - Approved Fund arrangement: December 7, 2012: 1.41 in percent of quota, 48,571 in SDRs (table shows dates, conditions, and amounts).
  - Schedule of reviews and disbursements table (Table 6) lists completions and planned completions up to November 15, 2015; total disbursement under the ECF noted as Total 10.0 / 1,040,000 (table context indicates totals).
- Indicators of capacity to repay the Fund (Table 7, 2013–25 projections):
  - Outstanding Fund credit (in millions of SDRs) projected path: 2013: 12.9, 2014: 12.2, 2015: 10.4, 2016: 7.6, 2017: 4.9, 2018: 2.4, 2019: 0.9, with further small amounts through 2025.
  - Net use of Fund credit (in SDR millions) includes disbursements 2013–2025 series (e.g., 2013: 0.3, 2014: 0.3, 2015: 0.3, later projections include planned small disbursements in 2024: 1.0 and 2025: 2.0).
  - Memorandum items: Exports of goods and services (US$ millions) series 2013–25 includes 2013: 573.9, 2014: 492.0, 2015: 554.4, 2016: 638.4, etc.; Gross international reserves (US$ millions) series projects increases through 2025 (e.g., 2013: 527.7, 2014: 484.3, 2015: 455.7, through 2025: 822.2).

### Social indicators and human development context
- Per capita and social statistics:
  - Per capita GDP (2013): US$1,931 (estimate).
  - Population (2013): 562,000.
  - Poverty rate (2006): 23 percent.
- Small states comparative charts (Figure 2):
  - Indicators shown include Mortality rate under 5 years (per 1,000 live births; 2005–11), Public health expenditure (percent of GDP; 2005–11), Secondary gross enrollment rate (2005–11), Public expenditure in education (percent of government expenditure and percent of GDP), and Life Expectancy (2011).
  - Countries shown for comparison include Fiji, Kiribati, Marshall Islands, Micronesia, Palau, Samoa, Solomon Islands, Tonga, Tuvalu, Vanuatu, Papua New Guinea.

### Policy intent and contingency
- Authorities’ stated intent (Letter of Intent, June 4, 2014):
  - Continue reform agenda to enhance resilience and competitiveness, promote strong, sustainable, and inclusive growth.
  - Use part of policy buffers to absorb revenue losses and support reconstruction after the April flood.
  - Re-prioritization of public spending will be necessary.
  - Program to be monitored through quantitative performance criteria, indicative targets, and structural benchmarks.
  - Authorities authorize publication of the Letter of Intent, related attachments, and IMF staff report.

*Source: Excerpts from the IMF staff report and attached tables and letter of intent in the provided PDF content.*

### 1.      The recent flood in early April 2014 has taken its toll on the economy. The heavy rain

### The recent flood in early April 2014 has taken its toll on the economy. The heavy rain

### Impact of the April 2014 flood and immediate priorities
- The heavy rain that hit the Guadalcanal Island, especially Honiara, disrupted agricultural output, severely damaged key economic infrastructure, and resulted in the loss of lives.
- One fifth of Honiara’s population was displaced to shelters and there was disruption in other rural areas, prompting the Government to declare a state of emergency.
- The only gold mine, Gold Ridge, ceased production and looks unlikely to recommence in the near term.
- Prices of agricultural produce spiked after the flood.
- Government focus: reconstruction to rehabilitate major infrastructure, including public utilities and schools.

### Recent macroeconomic performance and outlook
- Growth decelerated to 3 percent in 2013, compared with an average 6½ percent during 2010–12.
- Drivers of the slowdown: agricultural output decline owing to unfavorable weather; weaker gold production and lower world gold prices; and commercial forest decline due to ongoing depletion of stocks.
- Closure of the only gold mine will imply a substantial decline in GDP growth in 2014.
- Growth prospects depend on: speed of gold production restart; whether future mining projects such as nickel come on stream; and increased activity and productivity across sectors including agriculture and tuna processing.
- Investment projects in the pipeline that should support private sector development and increase FDI: telecommunications (mobile network and undersea cable) and energy-related infrastructure (Tina River Hydropower project).
- Inflation: after spiking in April 2014, inflation is likely to revert to about 4½ percent over the medium term.
- Balance of payments: expected to remain solid, but expected decline in aid from Australia and other development partners (including eventual wind-down of RAMSI) and uncertain mining prospects imply lower reserve buffers in the medium term.

### External and reserve position; fiscal buffers
- Gross international reserves stood at around US$538 million at end-March (about 9.4 months of 2014 imports of goods and services).
- Face value of public and publically guaranteed debt was reduced to 13 percent of GDP at end-2013.
- The government rebuilt fiscal buffers to absorb shocks.

### Program performance and structural reforms
- On the ECF program, the December 2013 and March 2014 program targets and PCs were met with comfortable margins.
- Indicative targets and all continuous PCs were met except the indicative target on government-funded recurrent spending on health and education, which was narrowly missed.
- Structural benchmarks met since last review:
  - Draft regulations on Constituency Development Funds (CDF) submitted to Cabinet in December (end-December 2013 benchmark).
  - On-lending and Guarantees Policies endorsed by Cabinet in December 2013 (end-February 2014 benchmark) and incorporated into the Debt Management Framework.
  - The 2013 Final Budget Outcome Document published in April 2014 (end-April 2014 benchmark).
- Structural benchmarks not yet met:
  - Audit of CDFs (end-March 2014 benchmark).
  - Submission to Cabinet of draft Credit Unions Act (end-March 2014 benchmark).
  - Cabinet approval of revamped policies for tertiary scholarships (end-January 2014 benchmark).
  - Review of tertiary education policies (end-March 2014 benchmark).
- Substantial progress on benchmarks related to the new mining tax regime (end-January and end-March 2014 benchmarks) expected to be completed in the second half of this year.
- Constraints: capacity limitations in the Attorney General’s Chambers and need for broad stakeholder consultation; forthcoming general election expected in the last quarter of 2014 may break Parliamentary activity.

### Fiscal policy stance and measures
- Fiscal balance remained strong in 2013 due to buoyant revenues from improved tax compliance and increased fishing license fees, and under-execution of public spending.
- Fiscal outlook deteriorated due to the flood and mining developments causing revenue and output declines.
- Government will balance re-prioritizing planned spending and using part of fiscal buffers built under the IMF-supported program to finance reconstruction and priority social spending; donor assistance remains key.
- New fiscal deliverables: produce and publish a budget strategy document (newly proposed end-August 2014 benchmark) and a mid-year budget review (newly proposed end-August 2014 benchmark).
- Fiscal anchor: continue to use the cash balance as fiscal anchor and preserve its level according to quantitative targets and performance criteria reported in Table 1.
- Mobilizing additional revenues: strengthen tax compliance and streamline exemptions; draft customs and excise bill being finalized before legislative vetting (end-June 2014 benchmark).
- Mining tax regime: Parliament approved amendments to the Income Tax Act and the Mines and Minerals Act in April implementing all but one of the 2011 IMF technical assistance recommendations; plan to issue a Ministerial Order to streamline rates of export duty on gold by end-July 2014 and request reset of test date to end-July 2014.
- Sales Tax Act: amend to eliminate loopholes.
- 2014 Supplementary Budget: review and reprioritize public spending, increase capital projects (roads and bridge rehabilitation, water and sanitation, reconstruction of schools); maintain spending on education and health at no less than 32 percent of Government-funded recurrent spending.
- Constituency Development Funds (CDFs): introduce centralized evaluation process, accountability system for MPs to report to Cabinet and Parliament; regulations submitted to Cabinet (end-December 2013 benchmark) and under review.
- Audit of the 2012 constituency funds completed in December 2013; plan to submit report to Parliament at next sitting in late July and request structural benchmark reset for publication to end-September 2014.
- PFM reforms: PEFA assessment in 2012; PFM Act passed in September 2013; PFM Reform Roadmap (2014-17) with four priority areas: full implementation of the 2013 PFM Act; further development of delivery systems; compliance with controls on budget, expenditure, and debt; and stronger revenue collection.
- Tertiary education scholarships: Cabinet paper prepared on revamp (details in TMU); revising paper to reflect new policy on in-service scholarships; plan to submit to Cabinet (former end-January 2014 benchmark) and request resetting test date to end-September 2014.
- Review of tertiary education policies: request test date reset to end-March 2015.
- Concessional borrowing: exercise caution in resuming to preserve domestic and external stability while tapping resources for investment.
- Debt Management Framework: Cabinet endorsement of new On-lending and Guarantee Policies (end-February benchmark); Framework includes PFM Act, Debt Management Strategy, and SOE Borrowing Policy.
- Annual borrowing limit for 2014 set at SI$250 million, covering all borrowing and guarantees, based on Debt Management Unit’s debt sustainability analysis.
- All new Government borrowing proposals must be evaluated by an advisory committee.
- Current proposals in the pipeline include the submarine internet cable project and the Tina River Hydropower Project.

### Monetary, exchange rate, and financial sector policies
- CBSI shifted to a neutral monetary policy stance in the pre-flood environment of declining inflation and lower global food and fuel prices.
- With temporary inflationary pressures from post-flood domestic food supply disruptions, CBSI stands ready to review its monetary policy stance to support economic activity.
- Further IMF technical assistance requested to improve the monetary transmission mechanism in 2014.
- Exchange rate policy: CBSI reviewed operational implementation of the basket-peg regime and will adjust the formula to ensure the peg is followed more closely; CBSI will widen the current band of ± 1 percent around the base parity of the bilateral SI/US$ exchange rate to maximize gains from the basket peg.
- Financial sector: strengthen regulation and supervision and improve access to credit.
  - CBSI issued a banking license to a new bank in April 2014; once operational, total number of operating banks will increase to four.
  - Cabinet endorsed recommendations for a draft National Provident Fund Act in December 2013; plan to submit a bill to Parliament (end-June 2014 benchmark).
  - Following endorsement of Policy Framework for Amending the Credit Union Act, a draft expected to be submitted to Cabinet in the second half of this year; request reset of test date to end-December 2014.
  - Request modification of the test date for submission of a draft Credit Union Act to Parliament from end-June 2014 to end-March 2015.
  - Seeking Cabinet approval of a policy paper on drafting a new Financial Institutions Act (end-June 2014 benchmark), in line with January 2013 IMF TA recommendations.

### Competitiveness and inclusive growth
- Priority: raise productivity growth and develop new exports.
- Exchange rate is one of the variables affecting competitiveness.
- By end of 2014, complete a hardship and vulnerability assessment with World Bank support to provide foundations for a new comprehensive Poverty Reduction Strategy Paper (PRSP) by the first quarter of 2015.
- Use PRSP to focus reform efforts on fostering more inclusive growth and shared prosperity.

*Source: IMF staff report (excerpts) as provided in the supplied content.*

### 20.      Implementation of the program will continue to be monitored through semiannual

### _cr14170 - 20.      Implementation of the program will continue to be monitored through semiannual

### Monitoring framework and schedule
- Implementation will be monitored through semiannual reviews based on performance criteria, indicative targets and structural benchmarks.
- Performance criteria for end-June 2014 and end-December 2014, and indicative targets for end-September 2014 are set as per Table 1; structural benchmarks are set as per Tables 2.A and 2.B.
- The fourth and fifth reviews are expected to take place on or after November 15, 2014 and June 15, 2015, respectively, on the basis of the performance criteria and structural benchmarks indicated in Tables 1, 2.A, and 2.B, and further detailed in the TMU.

### Quantitative performance criteria and indicative targets (selected figures from MEFP Table 1)
- Performance criteria and indicative targets include floors on NIR of the CBSI, ceilings on NDA of the CBSI, ceilings on NCG, floors on the central government program cash balance, and an indicative target for spending on health and education (no less than 32 percent of government-funded recurrent spending).
- Selected end-of-period and cumulative figures shown in the table (values preserved as reported):
  - Net international reserves (NIR) of the CBSI (floor, end-of-period stock, in millions of U.S. dollars (US$)):
    - 9/30/2014: 485; 480; 495 (Act./Status entries shown)
    - 12/31/2014: 490; 473; 516
    - Additional values within table: 470; 469; 526; 470; 490; 470; 450
  - Net domestic assets (NDA) of the CBSI (ceiling, end-of-period stock, in millions of Solomon Islands dollars (SI$)):
    - Values include: -1,202; -1163; -1,693; -1,150; -1029; -1,588; -1,268; -1264; -1,906; -1,159; -1,576; -1,431; -1,194
  - Net credit to central government (NCG) (ceiling, cumulative change from the beginning of the year, in millions of SI$):
    - Values include: -6; 33; -267; 35; 157; -290; -24; -20; -46; -50; 9; 37; 40
  - New nonconcessional external debt maturing in more than one year (ceiling, end-of-period stock since the beginning of the program, in millions of US$): 0; 0; 0; 0; 0; 0; 0; 0; 0; 0; 0; 0; 0
  - New nonconcessional external debt maturing in one year or less (ceiling, end-of-period stock since the beginning of the program, in millions of US$): 0; 0; 0; 0; 0; 0; 0; 0; 0; 0; 0; 0; 0
  - Accumulation of new external payment arrears by the public sector (ceiling, end-of-period stock since the beginning of the program, in millions of SI$): 0; 0; 0; 0; 0; 0; 0; 0; 0; 0; 0; 0; 0
  - Central government program cash balance (floor, end-of-period stock, in millions of SI$): 390; 352; 539; 411; 290; 603; 429; 425; 620; 440; 520; 420; 374
  - Indicative targets (cumulative) and memorandum items shown in the table include:
    - Indicative target thresholds and outcomes: 449; ...; 486; Met; 599; ...; 668; Met; 179; ...; 163; Not met; 359; 345; 520; 710
    - Budget support from bilateral and multilateral donors other than IMF (cumulative change from the beginning of the year, in millions of US$), program level: 48; ...; 43; ...; 67; ...; 51; ...; 11; 11; ...; 26; 29; 37; 48
    - Outstanding stock of Solomon Islands government (SIG) treasury bills, excluding restructured government bonds (end-of-period stock, in millions of SI$), program level: 40; ...; 40; ...; 40; ...; 40; ...; 40; 40; ...; 40; 40; 40; 40
    - Balance of SIG Consolidated Deposits Account, millions of SI$: 140; ...; 140; ...; 140; ...; 140; ...; 140; 140; ...; 140; 140; 140; 140

- Footnotes and adjustments (as reported):
  - 5/ These performance criteria are applicable on a continuous basis.
  - 6/ An indicative target for spending on health and education at no less than 32 percent of government-funded recurrent spending.
  - 4/ The adjustors are specified in the TMU and include: the floor on the central government program cash balance will be adjusted downward and the ceiling on NCG will be adjusted upward by the stock amount of budget support from bilateral and multilateral donors (excluding the IMF) short of the program level; the floor on the program cash balance will be adjusted upward (downward) by the stock of the government treasury bills, excluding restructured government bonds, in excess (short) of the program level; the floor on the program cash balance will be adjusted upward by the balance in the SIG Consolidated Deposits Account short of the program level.
  - 7/ The SIG Consolidated Deposits Account functions like a contingency fund for the government and transfers to and from this account can affect the program cash balance. Negative deviations from the projected balance in this account will therefore be used to adjust the program cash balance targets upward.
  - 1/ Evaluated at the program exchange rate.
  - 2/ The adjustors are specified in the Technical Memorandum of Understanding (TMU) and include: the floor on NIR will be adjusted upward (downward) by the amount of budget support from bilateral and multilateral donors (excluding IMF) in excess (short) of the program level.
  - 3/ The adjustors are specified in the TMU and include: the ceilings on NDA will be adjusted downward (upward) by the amount of budget support from bilateral and multilateral donors (excluding the IMF) in excess (short) of the program level. Following the recommendations of the IMF Safeguards Assessment, the program targets starting from end-December 2010 incorporate the recommended changes in the measurement of reserve money.

### Structural benchmarks (selected entries from MEFP Tables 2.A and 2.B)
- Benchmarks, objectives, dates and status (selected):
  - Submit to Cabinet the implementing regulations for the Constituency Development Funds Act (provide guidelines for selection/prioritization, transparency, reporting, control, audit, evaluate constituency funds spending in line with the new Public Finance Act).
    - Macroeconomic criticality: To promote the transparency and accountability in the use of constituency funds.
    - Date: December 31, 2013
    - Status: Met in December 2013.
  - 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: January 31, 2014
    - Status: Not met. (Details: Cabinet approved draft legislative amendments to the Income Tax Act and the Mines and Minerals Act in February 2014; authorities indicate those amendments plus a related Ministerial Order implement IMF TA recommendations; a ministerial order reducing export duty rates on gold will be issued in July 2014.)
  - Submit to Cabinet the onlending and guarantees instructions under the framework of the Debt Management Strategy.
    - Objective: To promote public debt management.
    - Date: February 28, 2014
    - Status: Met in December 2013.
  - Submit to Cabinet the draft Credit Unions Act.
    - Objective: To promote financial sector development/stability.
    - Date(s): March 30, 2014 (Not met; policy paper endorsed in February and consultations underway); Reset to December 31, 2014 and subsequently to March 31, 2015.
  - Release to public the results of the audits conducted by the office of the Auditor General on spending of constituency funds by the 50 constituencies, and project achievements in 2012.
    - Objective: To promote the transparency and accountability in the use of public funds.
    - Date(s): March 30, 2014 (Not met; audit completed in December 2013 but publication delayed); Reset to September 30, 2014.
  - Review the policies on tertiary education and ensure an adequate balance of spending between primary and tertiary education.
    - Objective: To promote transparency and accountability in the use of public funds.
    - Date(s): March 30, 2014 (Not met; reset to March 31, 2015).
  - Produce a Final Budget Outcome Report.
    - Objective: To increase fiscal openness, transparency and planning.
    - Date: April 30, 2014
    - Status: Met in April 2014.
  - Submit to Parliament the new Customs and Excise bill, including clauses related to exemptions and draft amendments to other revenue acts.
    - Objective: To promote fiscal transparency and enhance the efficiency of revenue collections.
    - Date: June 30, 2014
  - 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: June 30, 2014
  - Obtain Cabinet's approval of drafting instructions of a new Financial Institutions Act.
    - Objective: To promote financial sector stability and development.
    - Date: June 30, 2014
  - Modified and new benchmarks (selected resets and new items):
    - Amend the Export Duty Schedule (by Ministerial Order) to complete implementation of the new mining tax regime in line with IMF TA recommendations.
      - Date: July 31, 2014 (Modified and reset from March 30, 2014.)
    - Produce and publish a mid-year Budget review.
      - Date: August 31, 2014 (New benchmark.)
    - Produce and publish a Budget strategy document.
      - Date: August 31, 2014 (New benchmark.)
    - Obtain Cabinet approval of revamped policies for tertiary scholarships as specified in TMU.
      - Date: September 30, 2014 (Reset from January 31, 2014.)
    - Release to public the results of the Auditor General audits on constituency funds.
      - Date: September 30, 2014 (Reset from March 30, 2014.)
    - Submit to Cabinet the draft Credit Unions Act.
      - Date: December 31, 2014 (Reset from March 30, 2014.)
    - Review policies on tertiary education and submit draft Credit Unions Act to Parliament.
      - Date: March 31, 2015 (Resets from earlier dates).

### Technical Memorandum of Understanding (TMU) — key definitions and program rules
- Monitoring instruments:
  - The program will be monitored through quantitative performance criteria, indicative targets, structural benchmarks, and reviews. The TMU sets definitions for quantitative performance criteria and indicative targets and specifies monitoring procedures and reporting requirements.
- Quantitative variables covered (as established in paragraph 2):
  - Floors on NIR of the CBSI.
  - Ceilings on NDA of the CBSI.
  - Ceilings on NCG.
  - Floors on the central government cash balance.
  - An indicative target (cumulative) for spending on health and education at no less than 32 percent of government-funded recurrent spending.
- Continuous performance criteria (paragraph 3):
  - Ceilings on contracting/guaranteeing by the public sector of new medium- and long-term nonconcessional external debt.
  - Ceilings on contracting/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.
  - Other financial corporations (OFCs) include the National Provident Fund (NPF), the Development Bank of Solomon Islands, and the Investment Corporation of Solomon Islands.
- Monetary aggregates and reserve definitions:
  - Reserve money consists of currency issued by the CBSI (excluding CBSI holdings of currency) and all transferable deposits held at the CBSI.
  - A floor applies to the level of NIR of the CBSI. The floor on NIR will be adjusted upward (downward) by the amount of budget support from bilateral and multilateral donors (excluding the IMF) in excess (short) of the programmed level.
  - NIR = gross international reserves (GIR) less international reserve liabilities. For program monitoring, foreign assets and liabilities of the CBSI will be reported in U.S. dollars and valued at the program exchange rates (TMU Table 1).
  - GIR of the CBSI are defined as the sum of: foreign currency assets in convertible currencies held abroad and as vault cash under the direct and effective control of the CBSI 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.
  - Exclusions from GIR: foreign currency deposits of ODCs and OFCs held at the CBSI; any foreign currency claims on residents, capital subscriptions in international institutions, foreign currency assets in nonconvertible currencies; GIR encumbered or pledged.
  - International reserve liabilities of the CBSI: 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):
  - A ceiling applies to NDA. The ceiling on NDA will be adjusted downward (upward) by the amount of budget support from bilateral and multilateral donors (excluding the IMF) in excess (short) of the programmed level.
  - NDA = reserve money − (NIR + other NFA of the CBSI). Other NFA includes foreign assets/liabilities not in NIR as specified.
- Net Credit to the Central Government (NCG):
  - A ceiling applies to NCG measured cumulatively from the beginning of the year. The ceiling on NCG will be adjusted upward by the amount of budget support from bilateral and multilateral donors (excluding the IMF) short of the programmed level.
  - NCG is defined as the sum of net claims of: (i) the CBSI, (ii) commercial banks and other ODCs, (iii) OFCs, (iv) insurance companies, and (v) government treasury bills held by the general public.
- Cash balance of the central government:
  - A floor applies to the program cash balance. The floor on the program cash balance will be adjusted downward by the amount of budget support from bilateral and multilateral donors (excluding the IMF) in short of the programmed level.
  - The floor on the program cash balance will also be adjusted upward (downward) by the stock of government treasury bills, excluding restructured government bonds, in excess (short) of the program level of SI$40 million.
  - The floor on the program cash balance will be adjusted upward by the difference between SI$140 million (program level) in the SIG Consolidated Deposits Account and its actual balance, should the actual balance in the SIG Consolidated Deposits Account be lower than SI$140 million.
  - The program cash balance = gross cash balance − total amount of unpaid payment orders and unpresented checks.

### Program exchange rates (TMU Table 1; Rates as of September 30, 2013)
- Solomon Islands (Program) Exchange Rates for the ECF Arrangement:
  - Australian dollar: 6.8310.932
  - British pound: 11.8201.612
  - Euro: 9.9011.350
  - Japanese yen 1/: 13.35297.890
  - New Zealand dollar: 6.0680.827
  - SDR: 11.2361.533
  - Singapore dollar: 5.8380.796
  - U.S. dollar: 7.3311.000
- Note: 1/ Currency unit per Solomon Islands dollar and U.S. dollar.

*Source: _cr14170 - 20.      Implementation of the program will continue to be monitored through semiannual (MEFP Tables 1, 2.A, 2.B and Attachment II: Technical Memorandum of Understanding).*

### 18. The gross cash balance is defined as the sum of government deposits, which are not in any

### 18. The gross cash balance is defined as the sum of government deposits, which are not in any way encumbered or pledged as collateral or used as a guarantee against government incurred liabilities, in the following accounts:

### Gross cash balance — definition and accounts
- The gross cash balance is the sum of government deposits that are not encumbered, pledged as collateral, or used as a guarantee against government-incurred liabilities, held in the following accounts:
  - In CBSI: Solomon Islands Government (SIG) Revenue Account, SIG Funded Development Account, SIG Debt Servicing Account;
  - In Australia New Zealand Bank: SIG Creditors Account; Payroll Imprest Account, and Airport Service Fees Account;
  - In Bank of South Pacific: Provincial Revenue Holding Account, SIG Inland Revenue Account, Sub Treasury Gizo Account, and Sub Treasury Auki Account; and
  - Donor funded budget support accounts that are created by and under control of the government.

### V. External Debt — Medium- and Long-Term External Debt
- A ceiling applies to contracting and guaranteeing by the public sector of new nonconcessional borrowing with nonresidents with original maturities of more than one year.
- The ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received, including private debt for which official guarantees have been extended and which therefore constitutes a contingent liability of the public sector.
- The public sector comprises the central government, the CBSI, nonfinancial public enterprises (i.e., enterprises in which the government owns more than 50 percent of the shares), and other official entities.
- The definition of debt for the program is set out in Point 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangement Executive Board Decision No. 6230-(79/140), as revised on August 31, 2009 (see Annex I).
- Exclusions from the ceiling:
  - (i) the use of Fund resources;
  - (ii) lending from the World Bank and the Asian Development Bank;
  - (iii) debts incurred to restructure, refinance, or prepay existing debts, to the extent that such debt is incurred on more favorable terms than the existing debt and up to the amount of the actually restructured/refinanced/prepaid debt;
  - (iv) concessional debts;
  - (v) any SI$-denominated treasury bill and bond holdings and Bokolo bonds held by nonresidents.
- For program purposes, a guarantee of a debt arises from any explicit legal obligation of the central government, the CBSI, nonfinancial public enterprises, or other official entities on behalf of the central government or the CBSI to service debt in the event of nonpayment by the main obligor (involving payments in cash or in kind).
- For program purposes, a debt is concessional if it includes a grant element of at least 35 percent, calculated as follows:
  - The grant element of a debt is the difference between the net present value (NPV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt.
  - The NPV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt.
  - The discount rate used for this purpose is five percent.

### V.B. Short-Term External Debt
- A ceiling applies to 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, including private debt for which official guarantees have been extended and which therefore constitute a contingent liability of the public sector.
- The public sector composition is the same as for medium- and long-term debt (central government, the CBSI, nonfinancial public enterprises, and other official entities).
- 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 short-term 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) concessional debts; and
  - (v) normal import financing — defined as financing for imports when the credit is self-liquidating.

### VI. External Payment Arrears
- A continuous performance criterion applies to the non-accumulation of external payments arrears by the public sector (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 agreement, subject to any applicable grace period.

### VII. Tertiary Education — policy strengthening to be sought from Cabinet
- The strengthened policy for granting tertiary scholarships will contain at least the following elements:
  - Commitment controls:
    - The Ministry of Finance will certify the availability of budget allocation before any new award letters can be granted to ensure budget ceilings are abided by and no new arrears are incurred.
    - Commitment information will be entered into the Ministry of Finance’s Financial Management Information System to record commitments made for each individual scholarship awardee.
    - The Ministry of Education will ensure timely provision to the Ministry of Finance of documentation relating to identification and eligibility, expected length of studies, and due dates for tuition and stipend payments.
  - Queuing system:
    - If more candidates apply for scholarships than resources available in a fiscal year, a queuing policy for eligible applicants based on timing of application will be established.
  - Arrears:
    - All arrears will be cleared and no new arrears allowed.
  - Documentation:
    - In consultation with the Ministry of Finance, the Ministry of Education will establish standards for eligibility documentation and documentation retention for each application. Required documentation should include at least the application form, high school transcript, receipt for payment of the application fee, copy of Ministry award letter, signed declaration letter, transcripts of results in each semester from tertiary institutions and qualifications attained by the scholarship holders.
  - Monitoring and dissemination:
    - The Ministry of Education will produce regular reports on total number of applicants for scholarships, number granted scholarships, current number of students classified by gender and educational institutions, and number of terminations or fails in the last 12 months.
    - The Ministry of Education will publish the guidelines for obtaining scholarships and publish their periodic reports.
  - Tuition and Fee Rates:
    - The Ministry of Education will sign memoranda of understanding with the USP and other tertiary institutions, including to establish the basis of the financial commitment of the Solomon Islands Government.
  - Allowances:
    - The Ministry of Education, in consultation with the Ministry of Finance, will recommend an allowances policy with specific allowance amounts that vary for students depending on the institutions where they study, the course they are undertaking, employment status, travel requirements, whether studies are full-time or part-time, the length of the program in which they are enrolled and the number of years they have received the grant.

### VIII. Data Provision — reporting timelines and responsibilities
- General:
  - Data listed will be provided for monitoring performance under the program based on data templates agreed with Fund staff.
  - Weekly data: submission to Fund staff by the end of the following week.
  - Monthly and quarterly data: submission within six weeks of the end of the observation period.
  - Authorities committed to using the best available data; subsequent data revisions will not lead to a breach of quantitative performance criteria or benchmarks. All revisions will be promptly reported to Fund staff.

- 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; and
    - 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; and
    - Balances of each central government account specified in Section IV. A., as recorded or collected by the CBSI.

- B. Fiscal Data (Ministry of Finance and Treasury (MoFT))
  - 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; and
      - Development expenditure funded by (i) central government of 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: _cr14170 - 18. The gross cash balance is defined as the sum of government deposits, which are not in any way encumbered or pledged as collateral or used as a guarantee against government incurred liabilities, in the following accounts:*

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

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

### Scope and purpose
- Excerpt from Executive Board Decision No. 6230-(79/140), as revised on August 31, 2009.
- Defines the term “debt” for the purposes of the guideline as 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.

### Forms of debt (point 1(a), primary types)
- (i) 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.
  - Includes deposits, bonds, debentures, commercial loans and buyers’ credits.
  - Includes 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).
- (ii) 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.
- (iii) 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 1(b))
- Under the definition of debt set out in point 9 (a) above, 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.

*ANNEX I. GUIDELINES ON PERFORMANCE CRITERIA WITH RESPECT TO FOREIGN DEBT — Excerpt from Executive Board Decision No. 6230-(79/140), as revised on August 31, 2009.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14170.pdf_