## _cr1690

## Source details

**Canonical URL:** [_cr1690](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1690.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1690.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1690.pdf.json)

---

### The setting and medium-term outlook
- Solomon Islands: small island state, low-income country; vulnerable to external shocks (terms of trade, natural disasters, climate change), poor infrastructure, high dependency on aid, history of social unrest, and weak capacity.
- Population distribution: "80 percent" living in rural areas.
- Traditional drivers: logging and agriculture; forestry sector expected to decline medium/long term, requiring diversification (tourism, higher value-added in fisheries).
- Key needs: better infrastructure, improved public financial management (PFM), better business climate to attract FDI; continued external financing and TA from development partners.
- Medium-term growth potential lowered by staff from "4" to "3 percent".

### Recent macroeconomic performance and near-term projections
- 2015 outturns:
  - Real GDP growth: "3¼ percent".
  - Inflation: "2.9 percent" (year-on-year, December 2015).
  - Net international reserves (NIR), end-December 2015: "US$506 million" (2014: "US$496 million").
  - NIR in months of imports (end-2015): "9.8 months".
- 2016 projections and near term:
  - Growth in 2016: "3 percent".
  - Inflation: expected to stabilize around "1.5-3 percent".
  - Current account deficit (2016): expected to widen slightly to "4.5 percent of GDP".
  - NIR projected: "9.6 months of imports".
- Drivers and headwinds:
  - 2015 growth led by logging, tuna processing, construction, retail services.
  - Cyclone Raquel and El Niño reduced agricultural output in 2015; El Niño expected to continue at least until first half of 2016.
  - Low fuel prices support consumption and lower production costs.
  - China slowdown expected to reduce logging demand and weigh on near-term growth.

### Risks and scenario considerations
- Risks tilted to the downside; selected likelihood/impact assessments:
  - Upside:
    - Persistently low oil prices — Medium likelihood / Medium impact.
    - Reopening of Gold Ridge mine — Low likelihood / Medium impact.
    - Larger-than-expected spillovers from large infrastructure projects — Low likelihood / High impact.
  - Downside:
    - Sharper global growth slowdown — Medium likelihood / Medium impact.
    - Tighter/volatile global financial conditions — Medium likelihood / Low impact.
    - Sharp slowdown and financial risks in China — Medium likelihood / High impact (medium term); Low likelihood / High impact (short term).
    - El Niño undermining near-term growth — High likelihood / Medium impact.
- Estimated macro effects:
  - VECM: a one percentage point negative shock to China’s GDP growth causes Solomon Islands’ GDP to decline by "0.3 percentage point" with a cumulative response of "1.8 percentage points over 10 quarters".
  - Downside scenario: if China’s growth rate is "1.5 percentage points lower (y/y) than the current WEO baseline during 2016Q1-2020Q4," negative impact on Solomon Islands is "0.4 percentage point per year over the same period."

### ECF-supported program outcomes and structural reforms
- ECF arrangement started "December 2012"; program performance broadly satisfactory:
  - All end-December 2014 PCs, end-March 2015 ITs, end-June 2015 PCs, and end-September 2015 ITs met by considerable margins, except IT on government-funded recurrent spending on health and education narrowly missed at each test date.
- Selected fiscal and reserve indicators (exact series snapshots):
  - Net International Reserves, end-of-year (US$ million): end-2010: "256"; end-2012: "479"; end-2015: "554".
  - NIR in months of imports: end-2010: "5.1"; end-2012: "8.1"; end-2015: "9.8".
  - Cash balance (SI$ million): end-2010: "263"; end-2012: "355"; end-2015: "694".
    - Cash balance for December 2015: "SI$694 million (3.2 months of recurrent spending)".
    - Consolidated accounts deposit (SIG Deposit Account): "SI$140 million (0.7 month of recurrent spending)".
  - Public debt (percent of GDP): end-2010: "28.9"; end-2012: "17.6"; end-2015: "10.4".
  - Of which external debt (percent of GDP): end-2010: "20.1"; end-2012: "12.7"; end-2015: "9.8".
- Structural/institutional reforms achieved:
  - New Public Financial Management Act and multi-year budget framework.
  - New debt management framework strengthening debt capacity and sustainability.
  - New Central Bank of Solomon Islands (CBSI) Act enhancing central bank independence.
  - Progress on Customs and Excise bill, Credit Unions legislation, NPF bill, rebalancing of education spending (tertiary share fell from "33.3 percent" in 2014 to "30.5 percent" in 2015), and CDF audit and transparency steps.
- Financial sector / consumer protections in progress:
  - CBSI Prudential Guidelines on bank fee disclosure, complaints management; Fitness and Propriety Regulation endorsed; Prudential Guidelines on Credit Union Investments effective "1 March 2016"; Guideline on NPF investments to follow consultations.

### Fiscal outcomes 2015, 2016 budget outlook, and cash movements
- 2015 fiscal outturn:
  - Fiscal deficit estimated at "0.3 percent of GDP" vs budgeted "5.7 percent".
  - Revenue buoyancy equivalent to "2.8 percent of GDP".
  - Payroll increased by "1 percent of GDP" (4 percent COLA from July 1, 2015).
  - Government repaid "SI$100 million" of domestic debt in mid-December and scheduled amortization totaled "SI$147 million" (total amortization payments "147"; one-off domestic debt repayment "100"; other scheduled amortization payments "48").
  - Change in the cash balance in 2015 (relative to 2014): "186".
  - Change in cash balance in 2015 (relative to 2014) net of debt repayments: "39".
  - Of which: Clearance of unpresented checks "-25"; Increase in non-cash balance "43"; Financing of the deficit using cash balance "21".
  - Memorandum: Cash balance at end 2014 "880"; Cash balance at end 2015 "694".
- Capital spending:
  - Capital spending: 2014 = "5.2 percent of GDP"; 2015 = "7.8 percent of GDP"; "35 percent" of 2015 capital spending was in constituency funds.
- 2016 budget and risks:
  - 2016 budget envisages a deficit of "5.7 percent of GDP".
  - If fully implemented, cash reserve would decline to "SI$197 million".
  - Budget projects a drop in revenues of "3.3 percentage points of GDP (excluding grants)" relative to the 2015 outturn.
  - Staff illustrative scenario: with more realistic revenues and implementation rates (85 percent recurrent, 90 percent development), actual deficit likely closer to "1.5 percent of GDP", cash balance ending 2016 at "SI$544 million".

### Staff fiscal views and policy recommendations
- Overarching guidance:
  - Use fiscal space for infrastructure investment and resilience while preserving buffers; pace and scale must match absorptive capacity and realistic revenue mobilization.
  - Contain rate of drawdown in cash balance implied by the 2016 budget; improve spending quality and public financial management.
- Specific recommendations:
  - Preserve cash reserves: keep total reserves (including consolidated cash balance) at no less than two months of total spending — implying minimum total cash balance of "SI$595 million" at end 2016.
  - Improve cash management and cash flow forecasting; enhance mid-year budget review by accounting for seasonality.
  - Anchor fiscal plans to a non-commodity primary deficit target of "2.5 percent of GDP" over medium-long term.
  - Improve budget presentation to clearly identify capital spending.
  - Improve quality and accountability of Constituency Development Funds (CDFs); publish simple supplements describing planning, achievements, and future plans.
  - Strengthen revenue mobilization, including non-tax revenue; streamline exemptions.

### Fiscal governance, PFM commitments, and borrowing framework
- Authorities intend to:
  - Establish quarterly internal fiscal targets when ECF expires to preserve buffers and calibrate spending.
  - Target the broad cash balance (cash balance plus consolidated deposit account "SI140 million") at no less than two months total spending.
- PFM actions:
  - Implement PFM Roadmap; finalize draft Procurement Rules and Regulations; finalize implementing instructions for 2013 PFM Act.
  - Authorities considering PFTAC assistance to improve cash flow forecasting and management.
- Borrowing strategy:
  - Exercise caution in concessional borrowing; assess new borrowings against Debt Management Framework (Debt Management Strategy, SOE Borrowing Policy, On-lending Policy, Guarantee Policy).
  - Annual Borrowing Limit set at "SI$300 million" for 2016 (consistent with face value debt-to-GDP limit of "25 percent").

### Monetary policy, liquidity, and exchange rate framework
- Monetary indicators:
  - Credit growth reached "19 percent" in November (y/y); credit-to-GDP about "20 percent".
- Liquidity management:
  - High excess liquidity; CBSI uses Bokolo bills with amount floated at "SI$355 million" per auction; cap on outstanding Treasury bills at "SI$40 million" throughout 2015.
- Exchange rate:
  - Operational "1 percent" band removed in September/November 2014; SI dollar weakened "10 percent" vs US$ since band removal; appreciated "12 percent" vs AUD over same period; REER stable since band removal.
  - Staff recommends mopping up excess liquidity; consider using CRR ratio and combining with NPF reform; periodic review and possible one-off re-centering of basket peg; consider including the renminbi in the basket.
- Staff estimate: credit growth of "10 percent" could increase inflation by "0.6 percentage point" within a year.

### Financial sector development, stability, and inclusion
- Structure and inclusiveness:
  - Financial sector: two major foreign commercial banks, one domestic bank, a non-bank financial institution, and the National Provident Fund (NPF).
  - Financial inclusion targets: national target of opening "70,000" new bank accounts met ahead of time; revised target of "160,000" also met; NFIS for "2016–20" endorsed February 2016.
  - Credit access: "only 3.8 percent of adults currently with formal or informal credit accounts"; NFIS target "a modest 10 percent of adults having access to credit by 2020."
- Financial soundness indicators (commercial banks, end-period series presented exactly):
  - Capital adequacy (regulated capital to risk-weighted assets): "33.13, 32.53, 31.63, 31.53, 32.83, 30.93, 31.3".
  - Nonperforming loans, net of provisions to capital: "4.3, 12.3, 8.5, 8.8, 14.2, 9.4, 7.7".
  - Nonperforming loans to total gross loans: "3.7, 7.2, 4.7, 4.7, 7.0, 4.8, 4.1".
  - Return on average assets: "3.2, 2.2, 2.1, 2.7, 2.4, 2.2, 2.2".
  - Return on average equity: "19.1, 14.4, 13.4, 17.1, 14.6, 13.4, 14.2".
  - Liquid assets to total assets: "58.4, 56.7, 53.8, 53.7, 53.5, 52.4, 48.4".
  - Core liquid assets to short-term liabilities: "60.3, 54.7, 48.2, 54.0, 50.9, 51.2, 46.2".
- Market concentration:
  - October 2015: Westpac sale to Bank South Pacific (BSP); banks reduced from four to three; HHI rose from average "30 percent" to "40 percent".
  - Staff estimates market concentration increase will raise interest rate spreads by "70-90 basis points".
- Reform priorities and recommendations:
  - Introduce Credit Unions Act and Financial Institutions Act.
  - Introduce new National Provident Fund (NPF) bill to improve governance and investment framework.
  - Reduce portion of retirement savings usable as collateral; NPF to conduct regular actuarial assessments.
  - Address structural impediments (infrastructure, communal land ownership) and advance MTDP land reform to improve collateral availability and lower financing costs.
  - Channel NPF funds into higher-return assets to reduce excess liquidity.

### Debt sustainability, climate change, and extreme weather shocks
- DSA summary:
  - DSA indicates moderate risk of debt distress, consistent with 2013.
  - Under baseline, no breach of debt sustainability thresholds; alternative scenarios (permanent low growth, shocks) can breach thresholds.
  - Staff included mitigation costs in baseline: recurrent spending "0.2 percent of GDP" and development spending "0.3 percent of GDP" (total recurrent cost of climate change in baseline "0.5 percent of GDP").
- Box 1 (extreme weather adverse scenario, exact figures):
  - Losses and damage: around "15 percent of GDP".
  - Real GDP growth: fall of roughly "7.5 percentage points" in the year of the disaster.
  - Fiscal balance: deterioration of about "7.5 percent of GDP" in the year after the disaster.
  - Additional external public debt: about "15 percent of GDP".
- Tina River Hydropower Project contingent liability scenario:
  - Government guarantee estimated around "US$150 million (12 percent of GDP)".
  - Full PPA amount estimated at "US$20 million per year".
  - Scenario: PV of debt to GDP rises from "7" to "30 percent".
- Long-run projections and assumptions (highlights):
  - Growth: long-term growth "between 3 and 3½ percent".
  - Non-interest current account deficit: expected to increase to close to "7.5 percent of GDP by 2017" from around "2 percent in 2015".
  - Concessional borrowing projected to average about "2½ percent of GDP" annually over next five years, "3.2 percent of GDP" over longer term; effective interest rate on external borrowing around "1.5 percent".
  - Aid flows: expected average about "13.5 percent of GDP" over medium term; long term declines to about "10 percent of GDP".
  - Logging output expected to decline by about "4 percent per year" on average until 2025.
  - Gold Ridge Mine assumed closed until 2020; after reopening production peak "62,000 ounces per annum in 2023" with cumulative output "465,000 ounces".

### External position, competitiveness, and external balance assessment (Box 3)
- Terms-of-trade outlook: "terms-of-trade should deteriorate" as timber prices fall (example: "50 percent fall" in global timber prices passed through).
- REER history: competitiveness lost when currency effectively pegged to US$, causing REER appreciation "exceeding 30 percent between mid-2011 and end-2014".
- External buffers: FX reserves large: "10-months of imports" vs IMF adequacy metric "3½ months".
- Model-based external balance assessment (exact table excerpts preserved):
  - Current account actual norm¹ gap
    - CA approach -2.5 -6 -12
    - With adjustment for aid dependence² ““ 15
  - REER approach n.a. n.a. 17
  - External stability approach n.a. n.a. 7
- Policy implications:
  - Strengthen competitiveness via supply-side reforms, reduce administrative costs of international trade, improve access to finance, improve infrastructure (communication, energy), and consider one-off adjustment in basket peg level if needed.
  - Caution that high foreign aid and FX reserves effects could diminish; competitiveness strengthening remains essential.

### Public financial management, statistics, and institutional reforms
- PFM progress:
  - Budget strategy document produced August 2014; Final Budget Outcome Report and mid-year Budget review produced in 2014.
  - PFM Roadmap commitments: Procurement Rules and Regulations to come into effect "July 1, 2016 or earlier".
  - Auditor-General audit of CDF 2012 spending to be submitted to Parliament during sitting of "July 2016".
- Statistical plans:
  - HIES published "last October"; HIES results to be released "by end of the first quarter 2016".
  - Update consumer basket and develop national CPI in "2017"; rebase GDP statistics in "2018".
  - National Statistics Development Strategy (2015‒35) planned for Cabinet endorsement in early 2016.
- Anti-corruption and governance:
  - Anti-Corruption Bill drafting to be completed in the first quarter of 2016; aim to table before Parliament by mid-2016.
  - Accompanied by Whistle Blower Bill and revamped Ombudsman Bill.
  - Objectives include establishing Solomon Islands Independent Commission Against Corruption (SIICAC) and giving legislative effect to UNCAC provisions.

### Donor engagement, technical assistance, and planned activities
- Major donor flows and planned support (exact figures quoted):
  - Australia annual aid: "A$35 million".
  - New Zealand bilateral ODA: "about to NZ$28 million".
  - World Bank: expect to approve "a US$2.5 million energy access project in April" and disburse "approximately US$10 million across its portfolio ... across 2016".
  - European Union: national grant allocation "EUR 40 million for the period to 2020"; sector budget support in Rural WASH "about EUR 2.5 million per year, for the next four years".
  - ADB: expected in 2016 "US$5 million of budget support as grants, and US$21 million as loans".
  - JICA: multi-year projects with direct support budgeted "around US$40 million so far for 2015-17".
- IMF and PFTAC TA timeline and planned activities:
  - Resident representative office in Suva opened September 2010.
  - Extensive TA history across tax policy, PFM, statistics, monetary operations, financial supervision (full timeline provided in source).
  - IMF planned activities in 2016: 2016 Article IV Consultation, Fifth and Sixth Reviews of ECF; TA on new banking legislation (credit union supervision) and insolvency/creditor rights (2016–17).
  - PFTAC support across PFM, financial supervision, statistics, macro frameworks; credit union program and national accounts support in January–February 2016.

### Program reviews, financing, and Article IV cycle
- Based on performance, staff recommends completion of the fifth and sixth reviews under the ECF-supported program.
  - Completion would enable release of sixth and seventh disbursements in the amount of "SDR 297,145."
- Program disbursement request (Appendix I): fifth and sixth (final) reviews and sixth and seventh disbursements each in the amount of "SDR 0.149 million (US$ 0.2 million)".
- With ECF arrangement expiring, proposed Article IV consultation on a "12-month cycle."

### Staff appraisal and conclusions — selected guidance
- Program helped achieve macroeconomic stability and strengthened fiscal and monetary institutions (PFM Act, Debt Management Framework, CBSI Act).
- Fiscal advice:
  - Budget deficits should be "not higher than 1.5 percent of GDP".
  - Cash balance should be "not lower than 2 month of total spending"; staff also urges maintaining cash reserves at minimum of two months of total spending and strict spending prioritization.
- Maintain prudent borrowing, target projects that broaden export base and strengthen potential growth, and build resilience to shocks (natural disasters, climate change).
- Forward engagement: IMF to provide continued TA and a 12-month Article IV cycle; authorities committed to consolidating gains and continuing reforms.

*Source: _cr1690 — IMF staff report excerpts provided in the supplied PDF content.*

### 1. Synergies Between the Structural Agenda under the ECF Arrangement

### 1. Synergies Between the Structural Agenda under the ECF Arrangement and Macro-Financial Stability

### The setting and medium-term outlook
- Solomon Islands is a small island state and a low-income country with development challenges: vulnerability to external shocks (terms of trade, natural disasters, climate change), poor infrastructure, high dependency on aid, history of social unrest, and weak capacity.  
- Population distribution: 80 percent living in rural areas.  
- Traditional economic drivers: logging activity and agriculture; forestry sector expected to decline over the medium and long term, requiring new sources of growth and diversification (tourism, higher value-added in fisheries).  
- Key infrastructure and institutional needs: better infrastructure, improved public financial management (PFM), better business climate to attract FDI; continued external financing and technical assistance from development partners.

### Recent macroeconomic performance and near-term projections
- 2015:
  - Real GDP growth: 3¼ percent (estimated).
  - Inflation: 2.9 percent (year-on-year) in December 2015.
  - Net international reserves (NIR), end-December 2015: US$506 million (2014: US$496 million).
  - NIR in months of imports (end-2015): 9.8 months.
- 2016 projections and near-term outlook:
  - Growth in 2016: 3 percent (expected).
  - Inflation: expected to stabilize around 1.5-3 percent in the near term.
  - Current account deficit (2016): expected to widen slightly to 4.5 percent of GDP.
  - NIR projected: 9.6 months of imports.
- Drivers and headwinds:
  - 2015 growth led by logging, tuna processing, construction, and retail services.
  - Cyclone Raquel and El Niño reduced agricultural output in 2015; El Niño forecast to continue at least until the first half of 2016 and expected to reduce fish catch and agricultural production.
  - Low fuel prices expected to support consumption and lower production costs.
  - Lower demand for logging exports due to China slowdown expected to weigh on near-term growth.
- Medium-term prospects:
  - Planned decline in aid from RAMSI (to be totally wound down by 2017) may pose medium-term challenges.
  - Weaker prospects for mining (nickel litigation) and nascent bauxite sector not expected to contribute near-term.
  - Staff lowered potential growth from 4 to 3 percent.
  - Current account deficit expected to widen to support imports related to large infrastructure projects.

### Risks and scenario considerations
- Risks tilted to the downside; selected items listed with likelihood and impact (as presented):
  - Upside
    - Persistently low oil prices boost domestic demand — Medium likelihood / Medium impact.
    - Reopening of Gold Ridge mine — Low likelihood / Medium impact.
    - Positive larger-than-expected spillovers from large infrastructure projects — Low likelihood / High impact.
  - Downside
    - Sharper-than-expected global growth slowdown — Medium likelihood / Medium impact.
    - Tighter or more volatile global financial conditions — Medium likelihood / Low impact.
    - Sharp growth slowdown and financial risks in China — Medium likelihood / High impact (medium term) and Low likelihood / High impact (short term) as presented.
    - El Niño undermines near-term growth — High likelihood / Medium impact.
- Estimated macro effects:
  - VECM analysis: a one percentage point negative shock to China’s GDP growth causes Solomon Islands’ GDP to decline by 0.3 percentage point, causing a cumulative response of 1.8 percentage points over 10 quarters (Box 2 referenced).
  - Downside scenario: El Niño estimated impact on GDP growth shown in the source’s event analysis (agricultural production and GDP impacts highlighted).

### ECF-supported program outcomes and structural reforms
- ECF arrangement started December 2012; program performance broadly satisfactory:
  - All end-December 2014 PCs, end-March 2015 ITs, end-June 2015 PCs, and end-September 2015 ITs met by considerable margins.
  - Exception: Indicative Target on government-funded recurrent spending on health and education narrowly missed at each test date due to tighter procurement process by development partners.
- Fiscal and reserve indicators (selected exact figures from program table):
  - Net International Reserves, end-of-year (US$ million): end-2010: 256; end-2012 (ECF start): 479; end-2015: 554 (reserves reported at program exchange rates noted).
  - NIR in months of imports: end-2010: 5.1; end-2012: 8.1; end-2015: 9.8.
  - Cash balance (SI$ million): end-2010: 263; end-2012: 355; end-2015: 694.
    - Cash balance for December 2015: SI$694 million (3.2 months of recurrent spending) — though outside program monitoring.
    - Consolidated accounts deposit (SIG Deposit Account): SI$140 million (0.7 month of recurrent spending).
  - Public debt (percent of GDP): end-2010: 28.9; end-2012: 17.6; end-2015: 10.4.
  - Of which external debt (percent of GDP): end-2010: 20.1; end-2012: 12.7; end-2015: 9.8.
- Structural reforms and institutional strengthening achieved under the ECF arrangement:
  - New Public Financial Management Act and introduction of a multi-year budget framework.
  - New debt management framework to strengthen debt management capacity and sustainability.
  - New Central Bank of Solomon Islands (CBSI) Act to enhance Central Bank independence.
  - Benchmarks and progress:
    - Customs and excise bill: implementation of end-September 2015 benchmarks proceeding; bill approved by cabinet in February (cabinet approval signals momentum).
    - Credit Union legislation: Policy Paper approved by cabinet (end-September 2015 benchmark); draft bill prepared with TA from ADB to be vetted by Attorney General once approved.
    - National Provident Fund (NPF) bill: policy paper for cabinet submission being prepared.
    - Education policy benchmarks: rebalancing of spending away from tertiary education met in 2015 (share of government-funded spending on tertiary education decreased from 33.3 percent in 2014 to 30.5 percent in 2015).
    - Constituency Development Funds (CDF) Act regulations: alternative commitment to increase transparency and accountability via procurement regulations under the Public Financial Management Act; audit reports on use of CDF spending completed by Auditor General and to be submitted to Parliament before public release.
- Financial sector and consumer protections (in-progress reforms):
  - CBSI has issued Prudential Guidelines in areas such as disclosure on bank fees and charges and a complaints management framework for banks.
  - CBSI Board endorsed a Fitness and Propriety Regulation for applicants for licenses to establish financial institutions (to be submitted to Minister of Finance).
  - CBSI Board endorsed a Prudential Guideline on Credit Union Investments effective 1 March 2016.
  - CBSI Board endorsed a Prudential Guideline on Investments for the NPF to come into force after consultations with NPF.

### Policy recommendations and IMF engagement beyond the ECF
- Continued IMF engagement planned after arrangement expiry:
  - 12-month Article IV consultation cycle on macroeconomic policies and structurally macro-critical reforms, in close coordination with development partners.
  - Step up IMF TA and trainings over the medium term, with emphasis on fragile states under the Financing for Development agenda.
- Priority policy and capacity development areas identified for IMF engagement in support of rural development and SDGs:
  - PFM: technical assistance on budget planning, transparency, multi-year budgeting to enhance public investment and spending effectiveness.
  - Revenue mobilization: TA to strengthen domestic revenue efforts.
  - Quality of spending and public investment: analytical work on public investment and efficiency of spending.
  - Infrastructure investment: policy advice to improve infrastructure that supports competitiveness and diversification.
  - Financial inclusion and financial stability: TA on financial stability, financial deepening, inclusive finance, consumer protection.
  - Resilience to natural disasters and climate change: policies and capacity to manage impacts on development outcomes.
- National development planning:
  - Authorities developed a five-year rolling plan — medium–term development-plan (MTDP) 2016-20 — approved by Parliament in December; MTDP submitted as the economic development document (EDD) and meets Fund requirements under the Fund’s policy for poverty reduction strategies.
  - MTDP aligns long-term objectives with operational priorities, annual budgets for line ministries, and proposes advances in land policies, governance, and anti-corruption; prioritizes disaster risk preparedness and mitigation.

*Source: _cr1690 - 1. Synergies Between the Structural Agenda under the ECF Arrangement_*

### 13.      In building stronger institutions and achieving the related SDG, an anti-corruption bill is

### _cr1690 - 13.      In building stronger institutions and achieving the related SDG, an anti-corruption bill is

### Anti-corruption and institutional-strengthening
- An Anticorruption Bill is being prepared, with drafting to be completed in the first quarter of 2016.
- The bill is one of the government’s top priorities and aims to put the bill before parliament by mid-2016 (MEFP, paragraph 8).
- The Anticorruption Bill is being accompanied by the Whistle Blower Bill and a revamped Ombudsman Bill.
- Expected benefits: enhance transparency in the use of public resources, could improve business climate, and boost investor confidence.
- LEG high-level comments on the anti-corruption bill and AML/CFT regimes are referenced.

### National Development Strategy (NDS) review and Medium-Term Development Plan (MTDP)
- A review of the former NDS covering 2011-20 prepared by the Ministry of Planning in February 2015 found that only 28 percent of the indicators reflected any progress towards meeting the 2020 targets.
- Real GDP growth per capita fell short of expectation after the end of the commodity super cycle.
- Progress achieved in: water and electricity supply, and communication; not in transportation.
- No progress in recent years in the human development index (HDI); youth and gender labor participation rates have not improved.
- Electricity consumption per capita remains one of the lowest among all small states despite progress in electrification.
- MTDP resource allocations:
  - SI$183 million (2 percent of GDP) allocated to poverty reduction.
  - MTDP includes investments in water supply and sanitation, a constituency renewable rural electrification program, and a national food security enhancement program.
  - SI$730 million (or 8 percent of GDP) earmarked for health, education, and human resource development under the MTDP.

### Resilience to natural disasters and climate change (policy framework and risks)
- Geographic vulnerability: location along the ring of fire of the Pacific Rim and small size heighten vulnerability to earthquakes, cyclones, tsunamis, and floods.
- Estimated damage and losses related to flash floods in 2014: 9 percent of GDP.
- IMF staff analysis:
  - A natural disaster with damages and losses equivalent to 1 percent of GDP causes a drop in GDP averaging 0.3 percentage point in the year of the disaster.
  - Given the large impact of natural disasters, potential growth in Solomon Islands is estimated to be lower by 0.3 percentage point per year.
- Authorities are setting up a contingency fund for natural disasters.
- Staff’s recommended multi-pillar ex-ante risk-management actions:
  - Undertake a risk assessment; incorporate projected fiscal costs of climate change and natural disasters into annual budgets within a medium-term framework.
  - Provide self-insurance by building policy and financial buffers. Recent budgets set aside 0.1-0.25 percent of GDP for natural disasters purposes only.
  - Accumulate buffers also in the National Transport Fund, a donor-financed infrastructure fund fully integrated in the budget.
  - Reduce risks by investing in “smart” infrastructure and enhancing debt-management capacity.
  - Transfer risk via catastrophic sovereign insurance or sub-regional schemes (e.g., “Emergency and Stabilization Fund for Melanesian Countries”).
- Ex-post disaster risk management priorities:
  - Emergency response and reconstruction; sound reconstruction should include resettlement away from coastlines (where feasible) and resilient infrastructure investment.
  - Donor financing will remain important given the scale of costs relative to country size.
- Regional instruments and recent decisions:
  - Solomon Islands withdrew from the third and final pilot of the Pacific Catastrophe Risk Insurance for the Pacific islands because payouts are linked to specific physical parameters that were not triggered during the 2014 floods.
  - Authorities are considering participation in the newly proposed Melanesian Emergency and Stabilization Fund (around US$500 million), intended to cover natural disasters and other macroeconomic shocks with balance-of-payment impact and to provide immediate liquidity ahead of support from international financial institutions.

### Fiscal outcomes in 2015 and near-term outlook
- 2015 fiscal outturn:
  - Fiscal deficit estimated at 0.3 percent of GDP relative to the 5.7 percent budgeted.
  - Smaller deficit drivers:
    - More buoyant revenues equivalent to 2.8 percent of GDP (higher fishing license fees and international taxes; forestry sector outperformance partially offset by drop in goods and services taxes due to lower value of fuel imports).
    - Lower government-funded development spending of 2 percent of GDP and donor-funded development spending of 0.6 percent of GDP relative to the original budget.
  - Payroll increased by 1 percent of GDP (reflecting a cost of living adjustment of 4 percent to all public servants, teachers and police from July 1, 2015, and use of overtime and allowance by line ministries).
  - Other recurrent spending funded by the government fell by almost the same amount as the payroll increase, due in part to limiting tertiary scholarships.
- Financing and cash balance movements:
  - The fiscal deficit was financed by a small drawdown in the cash balance (SI$21 million) and SI$2 million in external loans.
  - Decline in cash balance between 2015 and 2014 was larger than implied by the deficit because government repaid SI$100 million of domestic debt in mid-December and additional scheduled amortization totaled SI$147 million (total amortization payments 147; one-off domestic debt repayment 100; other scheduled amortization payments 48).
  - Change in the cash balance in 2015 (relative to 2014) 186
  - Change in cash balance in 2015 (relative to 2014) net of debt repayments 39
  - Of which: Clearance of unpresented checks -25; Increase in non-cash balance 43; Financing of the deficit using cash balance 21
  - Memorandum items: Cash balance at end 2014 880; Cash balance at end 2015 694.
- Fiscal composition and implementation:
  - Implementation of government-funded development spending was far higher (4 percent of GDP) than in 2014.
  - Capital spending: 2014 = 5.2 percent of GDP; 2015 = 7.8 percent of GDP; of which 35 percent was in constituency funds.
- 2016 budget and risks:
  - The 2016 budget approved in December envisages a deficit of 5.7 percent of GDP, about the same as the 2015 budget.
  - If fully implemented, the budget implies a sharp decline in cash reserve to SI$197 million.
  - Revenue projections in the 2016 budget are very conservative, showing a drop of 3.3 percentage points of GDP (excluding grants) relative to the 2015 outturn; upside surprises may occur, especially in non-tax revenues.
  - Based on more realistic revenue projections and assuming an 85 percent implementation rate of government-funded recurrent spending and a 90 percent implementation rate of government-funded development spending, the actual deficit will likely be closer to 1.5 percent of GDP, with the cash balance at SI$544 million at the end of 2016.

### Staff’s policy views and recommendations on fiscal stance and public spending
- Overarching view:
  - Given large development needs (infrastructure, health, education) and vulnerabilities, fiscal space should be used for infrastructure investment and to build resilience over the medium term, while balancing buffer-building and spending.
  - Pace and scale of spending must match absorptive capacity, revenue envelope, and financing availability; reflect realistic revenue mobilization plans.
  - The rate of drawdown in the cash balance implied by the 2016 budget should be contained.
  - Improving quality of public spending and prudent use of the cash balance are paramount given uncertain growth prospects and vulnerability to shocks.
- Specific staff recommendations (selected):
  - Preserve cash reserves as a buffer against natural disasters and other shocks; keep total reserves (including the consolidated cash balance) at no less than two months of total spending to anchor fiscal plans in the near term. This implies keeping the total cash balance at a minimum of SI$595 million at end 2016.
  - Improve cash management, particularly cash flow forecasting; enhance the analytical value of the mid-year budget review by accounting for historical seasonality in inflows and spending.
  - Use the budget as a tool to anchor fiscal planning and pursue fiscal consolidation beginning 2017; avoid unrealistic budget projections that jeopardize external financing.
  - Improve budget presentation and reporting on budget execution by continuing PFM reforms; clearly identify capital spending (currently reported under both recurrent and development spending) to better highlight government priorities.
  - Improve the quality and accountability of constituency development funds (CDFs); consider a simple supplement to the development budget describing for each constituency fund the planning processes, development achievements, and future plans for CDF use; make this information publicly available.
  - Welcome plans to scale up infrastructure investment to support higher and inclusive growth; the National Transport Fund is an important vehicle for investing in infrastructure with the authorities’ plans guiding investment.
  - Strengthen revenue mobilization (including non-tax revenue), leveraging technical assistance where possible; streamline exemptions as the revenue base will narrow with depletion of forests for logging.
  - Anchor fiscal plans over the medium-long term to a non-commodity primary deficit target of 2.5 percent of GDP to manage revenue volatility and promote fiscal sustainability.
  - Incorporate risks associated with natural disasters and climate change into the macro framework and DSA to enhance ex ante risk assessment, in line with government priorities.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 30.      The mission strongly welcomed the authorities’ intention to establish quarterly internal

### _cr1690 - 30.      The mission strongly welcomed the authorities’ intention to establish quarterly internal

### Fiscal position, debt sustainability, and fiscal space
- Solomon Islands public debt at 10.4 percent of GDP.
- Debt sustainability assessment (DSA) indicates a moderate risk of debt distress, consistent with the 2013 assessment, due to:
  - vulnerability to external shocks,
  - need to scale up infrastructure spending to finance development.
- Under the baseline, no breach of debt sustainability thresholds; under some alternative scenarios thresholds are breached, notably for the present value of government debt relative to exports and GDP.
- Total public debt rises above the threshold in the extreme permanent low growth scenario.
- Staff included mitigation costs to natural disasters in the baseline:
  - 0.2 percent of GDP as recurrent spending,
  - 0.3 percent of GDP as development spending.
- The analysis highlights:
  - ongoing vulnerability to external risks,
  - heavy reliance on imports and aid.
- Strengths noted:
  - strong debt management framework and capacity,
  - progress from PFM reforms (see MEFP paragraph 13).
- Recommendation / emphasis:
  - large fiscal spaces should be used to invest in infrastructure and human development.
- Fiscal-space methodology note:
  - fiscal space calculated as the difference between actual debt and estimated sustained debt derived from a fiscal reaction function of primary balance to public debt (model similar to Ostry and others (2010) and tailored to PICs).

### Authorities’ fiscal intentions and PFM commitments
- Authorities intend to:
  - establish quarterly internal fiscal targets when the ECF-supported program expires (to preserve fiscal buffers and better calibrate spending plans; see paragraph 33 and MEFP paragraph 11),
  - target the broad definition of cash balance (cash balance plus the reserves in the government consolidated deposit account equivalent to SI140 million) at no less than two months total spending.
- PFM strengthening actions include:
  - implementation of the PFM Roadmap,
  - finalizing the draft Procurement Rules and Regulations,
  - finalizing other implementing instructions for the 2013 PFM Act.
- Authorities are considering requesting assistance from PFTAC to improve cash flow forecasting and management.
- Authorities are open minded on using the non-commodity balance over the medium term as a fiscal anchor to manage revenue volatility and ensure smooth infrastructure spending; they requested continued discussion with the mission on the choice of a fiscal anchor in the context of disaster resilience.

### Monetary policy, liquidity, and exchange rate framework
- Monetary context and indicators:
  - credit growth reached 19 percent in November (y/y), driven by household loans (consumption and mortgages), lending for investment in manufacturing and communication, and the logging sector;
  - credit-to-GDP remains about 20 percent.
- Monetary transmission and liquidity management:
  - monetary transmission mechanism remains weak amid high excess liquidity;
  - CBSI uses Bokolo bills to manage liquidity; amount floated was kept at SI$355 million per auction throughout the year (fortnightly auctions);
  - cap on outstanding Treasury bills remained at SI$40 million throughout 2015.
- Exchange rate and basket peg:
  - removal of the operational 1 percent band around the exchange rate against the US dollar in September 2014 and widening of the bid-offer spread improved effectiveness of the basket peg;
  - SI dollar weakened against the US dollar by 10 percent since removal of the band;
  - SI dollar appreciated by 12 percent against the Australian dollar over the same period;
  - in real effective terms, the exchange rate has been stable since band removal;
  - CBSI strengthened public communication by publishing the basket rate on its website.
- Staff views on monetary and exchange rate policy:
  - excess liquidity has not fed into higher inflation, but credit growth has picked up strongly over past two years;
  - econometric analysis suggests credit growth of 10 percent could increase inflation by 0.6 percentage point within a year;
  - policy advice:
    - begin mopping up excess liquidity,
    - CBSI could use the CRR ratio to manage bank liquidity and treat excess liquidity as an explicit quantitative target,
    - increasing CRR alone will not fully mop up excess liquidity; combine with NPF reform (paragraph 51) to gain traction.
  - basket peg is working but may be somewhat overvalued; periodic review and adjustment of peg level recommended to support competitiveness and growth;
  - consider including the renminbi in the basket given China is the most important export market.
- Authorities’ views:
  - CBSI expressed concern that not all banks could shoulder a higher CRR; technical assistance on liquidity swaps being provided by the Reserve Bank of Australia;
  - authorities note that basket peg has provided flexibility to absorb shocks and reduce monetary policy burden; they noted the rise in inflation was driven by depreciation of the SI dollar;
  - authorities did not rule out devaluation in the future and will monitor competitiveness indicators; they plan to keep the composition of the basket under review and consider including the renminbi later in the year.

### Financial sector development, stability, and inclusion
- Financial development and inclusion status:
  - Solomon Islands lags small-state peers in staff’s financial development index (methodology based on Čihák and others (2012));
  - bank deposits relative to GDP are limited, placing Solomon Islands among the most underbanked small states.
- Financial sector structure and challenges:
  - sector comprises two major foreign commercial banks, one domestic bank, a non-bank financial institution, and the National Provident Fund (NPF);
  - NPF is systemically important with a large share of assets held as deposits in the banking system;
  - impediments: small domestic market, inadequate infrastructure, difficulty securing collateral due to communal land ownership, high transaction costs;
  - interest rate spreads are highest among small Pacific states.
- Recent developments:
  - introduction of mobile banking services in 2014 with commercial banks and CBSI; national financial inclusion target for 2015 of opening 70,000 new bank accounts met ahead of time, and the revised target of 160,000 also met;
  - February 2016: National Financial Taskforce endorsed National Financial Inclusion Strategy (NFIS) for 2016–20.
- Financial soundness indicators (commercial banks, end-period):
  - capital adequacy (regulated capital to risk-weighted assets): 33.13, 32.53, 31.63, 31.53, 32.83, 30.93, 31.3 (various periods presented);
  - nonperforming loans, net of provisions to capital: 4.3, 12.3, 8.5, 8.8, 14.2, 9.4, 7.7;
  - nonperforming loans to total gross loans: 3.7, 7.2, 4.7, 4.7, 7.0, 4.8, 4.1;
  - return on average assets: 3.2, 2.2, 2.1, 2.7, 2.4, 2.2, 2.2;
  - return on average equity: 19.1, 14.4, 13.4, 17.1, 14.6, 13.4, 14.2;
  - liquid assets to total assets (liquid asset ratio): 58.4, 56.7, 53.8, 53.7, 53.5, 52.4, 48.4;
  - core liquid assets to short-term liabilities: 60.3, 54.7, 48.2, 54.0, 50.9, 51.2, 46.2.
- Market concentration and consolidation:
  - October 2015: CBSI approved Westpac’s sale of Solomon Islands operations to Bank South Pacific (BSP);
  - total number of banks reduced from four to three;
  - BSP’s increased market share raised Herfindahl-Hirschman Index (HHI) from an average of 30 percent to 40 percent.
- Staff views and risks:
  - further financial development can substantially raise growth potential, but expansion must be balanced with strengthened supervision to avoid undermining stability;
  - majority of household loans are secured by housing, movable assets, or retirement savings at the NPF; pledging of retirement savings as collateral is a concern;
  - staff estimates the recent increase in market concentration will raise interest rate spreads by 70-90 basis points.
- Policy recommendations and reform priorities:
  - continue financial sector reform agenda:
    - introduce a new Credit Unions Act and a new Financial Institutions Act to promote stability and development;
    - introduce the new National Provident Fund bill promptly to improve NPF governance and investment framework and safeguard retirement savings;
    - reduce the portion of retirement savings usable as collateral against personal loans to protect retirement savings;
    - NPF should regularly conduct actuarial assessments to ensure pension system sustainability;
  - structural impediments to address to lower financing costs: infrastructure gaps, limited availability of collateral due to communal land ownership; proposed land reform under the MTDP is a key step.
- Expected effect of reforms:
  - reforms could help reduce excess liquidity in the financial system by channeling NPF funds currently held as low-yield domestic deposits into higher-return assets.

*Source: IMF staff estimates.*

### 50.      The CBSI has established good practices in financial transparency and accountability with

### _cr1690 - 50.      The CBSI has established good practices in financial transparency and accountability with

### Financial transparency, accountability, and governance
- The financial statements are prepared and audited in accordance with international standards and published on the CBSI website.
- A new law for the CBSI, enacted in 2012, provides adequate financial and legal autonomy.
- Improvements needed:
  - Oversight by the Audit Committee requires the addition of a financial expert.
  - Strengthening staff capacity in the internal audit function is needed for the development of a risk-based audit function.

### Authorities’ views on financial inclusion and NPF reform
- Financial inclusion is prioritized in the government development agenda.
- Credit access remains low: "only 3.8 percent of adults currently with formal or informal credit accounts."
- The NFIS targets "a modest 10 percent of adults having access to credit by 2020."
- Authorities view recent banking sector consolidation impacts as limited, attributing high interest rate spreads to structural factors and expecting product substitutability among banks to keep interest rates competitive.
- On NPF reform:
  - Authorities agree on need for a new National Provident Fund Act to improve long-term financial viability and reduce financial risks of the NPF.
  - The Ministry of Finance is preparing a policy paper to seek Cabinet approval of drafting instructions for a new NPF bill (paragraph 19, MEFP).
  - Authorities have endorsed recommendations of the last IMF safeguard assessment (paragraph 20 of the MEFP).

### Engagement with donors and external assistance
- Annual aid from Australia: "A$35 million."
- Annual bilateral ODA from New Zealand: "about to NZ$28 million."
- World Bank Group: anticipate approving "a US$2.5 million energy access project in April" and expect to disburse "approximately US$10 million across its portfolio (energy, rural development, environment and fisheries) across 2016."
- European Union: approved a national grant allocation of "EUR 40 million for the period to 2020" focusing on WASH and Rural Development; provides sector budget support in Rural WASH of "about EUR 2.5 million per year, for the next four years."
  - This support depends on four general eligibility criteria, among which progress in PFM, and sectoral performance indicators.
- Asian Development Bank (ADB): expected to provide in 2016 "US$5 million of budget support as grants, and US$21 million as loans" for infrastructure projects under the sustainable Transport Infrastructure Improvement Program in the second quarter of 2016.
- Japan International Cooperation Agency (JICA) and Japanese Ministry of Foreign Affairs: multi-year projects (port and road network upgrading, waste management, energy infrastructure, education, public health); JICA’s direct support budgeted "around US$40 million so far for 2015-17."
- Program financing: "Solomon Islands has adequate capacity to repay the Fund and the ECF arrangement remains fully financed."

### National statistics, CPI, HIES, and rebasing
- Recent Household Income and Expenditure Survey (HIES) published "last October" will be used to:
  - Update the composition of the consumer basket and develop a national CPI "in 2017" (current CPI reflects Honiara prices only).
  - Analyze poverty; HIES results will be released "by end of the first quarter 2016."
  - Rebase GDP statistics in "2018" to better reflect the current structure of the economy.
- National Statistics Development Strategy (2015‒35) planned for Cabinet endorsement in early 2016.

### Staff appraisal — achievements and macro-fiscal guidance
- Program objectives to enhance macroeconomic stability and fiscal and monetary institutions have been achieved.
- Reforms implemented include:
  - New Public Financial Management Act, related draft implementing instructions and draft procurement instructions.
  - New debt management framework—and related SOE borrowing and guarantee policies.
  - New Central Bank Act to enhance the effectiveness of monetary policy.
- Public debt: "10.5 percent" is stated as one of the lowest among small states.
- Long-term development planning:
  - National Development Strategy (NDS) identifies five development objectives aligned to SDGs.
  - Medium-Term Development Plan (MTDP) for "2016-20" sets out policies, projects, and public expenditure prioritization.
- Disaster resilience:
  - Staff encourages incorporating costs of natural disasters into the multi-year fiscal framework and supporting the plan to create a contingency fund for natural disasters.

### Fiscal stance and recommended targets
- 2016 budget presented an expansionary budget deficit of "5.7 percent of GDP."
- Staff assessment recommends:
  - Budget deficits should be "not higher than 1.5 percent of GDP."
  - Cash balance should be "not lower than 2 month of total spending" (staff also urges authorities to keep cash reserves at a minimum of two months of total spending and to strictly prioritize spending).
- Advice to preserve fiscal space given external vulnerabilities (terms of trade, climate change, natural disasters).
- Measures to improve quality of public spending and accelerate PFM reforms, including enhancing transparency and accountability of tertiary scholarship and constituency funds.
- Mobilize additional revenues by strengthening tax compliance and streamlining exemptions to finance infrastructure while preserving debt sustainability.

### Monetary policy, exchange rate, and financial sector
- Monetary policy assessed as appropriate but authorities should remain vigilant; with excess liquidity not yet feeding into higher inflation, but given high credit growth, authorities should start mopping up excess liquidity.
- Exchange rate regime:
  - The currency basket peg is considered appropriate; level of the exchange rate should be assessed periodically and adjusted if necessary.
  - "The inclusion of the renminbi should be considered given China is the first export market for Solomon Islands."
- Financial sector:
  - System described as sound; supervisory and regulatory strengthening should continue.
  - A new NPF Act is important for governance and investment regime to safeguard retirement savings.
  - Other reforms: introduction of a new Credit Unions Act and a new Financial Institutions Act.
  - Financial inclusion efforts commendable, especially in rural areas; Solomon Islands noted as a leader in mobile banking services among the Pacific islands.

### Program reviews and Article IV timing
- Based on program performance, staff recommends completion of the fifth and sixth reviews under the ECF-supported program.
  - Completion will enable release of the sixth and seventh disbursements in the amount of "SDR 297,145."
- With the ECF arrangement expiring, it is proposed that the next Article IV consultation take place on a "12-month cycle."

### Box 2 — Growth spillovers from China
- Integration and trade:
  - China has become the Solomon Islands’ largest trading partner; export shares between these two countries increased thirtyfold during "1998-2014."
  - PICs’ exports to emerging Asia increased sevenfold since the early 1990s; imports from emerging Asia have grown more than fourteen times.
- Empirical findings:
  - Regression analysis (controlling for natural disasters) suggests a strong and increasing co-movement between business cycles of Solomon Islands and China over the last three decades.
  - A vector error correction model (VECM) suggests growth spillovers from China to Solomon Islands are significant and persistent up to three quarters; Johansen test suggests a cointegrated relationship in the long run.
- Downside scenario:
  - If China’s growth rate is "1.5 percentage points lower (y/y) than the current WEO baseline during 2016Q1-2020Q4," the negative impact on Solomon Islands will be "0.4 percentage point per year over the same period" (based on Eri Ikeda, Patrizia Tumbarello, and Yiqun Wu, forthcoming IMF working paper: “Growth Spillovers from China to the Pacific Islands”).
- Visuals and sources noted: IMF, Directions of Trade Statistics.

*International Monetary Fund — Solomon Islands staff report content (excerpt).*

### Box 3. Solomon Islands— External Balance Assessment and Competitiveness

### Box 3. Solomon Islands— External Balance Assessment and Competitiveness

### External position and competitiveness: main findings
- Terms-of-trade outlook: "terms-of-trade should deteriorate with the global commodity price cycle as the 50 percent fall in global timber prices is passed through into local prices and timber output declines."
- Exchange rate history and effect on competitiveness:
  - "Competitiveness was lost when the currency was effectively pegged to the US dollar, which led to a REER appreciation exceeding 30 percent between mid-2011 and end-2014."
  - "The shift to a basket peg with a broader set of currencies stabilized the REER but did not reverse the appreciation."
- Structural cost factors: "the relatively high cost of doing business"—including high costs of engaging in international trade, enforcing contracts, and registering property—are noted as additional weights on competitiveness, even relative to the median of small states.
- External buffers:
  - FX reserves are large: "FX reserves (at 10-months of imports) are above the IMF’s reserve adequacy metrics (of 3½ months)."
  - High aid dependence: foreign aid allows a "much bigger CA deficit" than would otherwise be sustainable.

### Model-based external balance assessment (exact results from IMF panel regressions)
- Table excerpt (preserve values as presented):
  - Current account actual norm¹ gap
    - CA approach -2.5 -6 -12
    - With adjustment for aid dependence² ““ 15
  - REER approach n.a. n.a. 17
  - External stability approach n.a. n.a. 7
- Interpretation of model results:
  - Two of three IMF models—the REER and external sustainability approaches—imply "that the real exchange rate (RER) moderately stronger than the level consistent with external balance."
  - The CA approach initially indicates the CA norm is larger than the actual CA deficit, but this outcome "reflects several temporary factors" and when adjustments are made (see next bullets) "the model suggests competitiveness is a concern."

### Temporary factors affecting the CA approach outcome
- Delayed infrastructure investments in 2015 reduced the deficit; "the deficit was reduced by delays in infrastructure investments, in 2015, and will widen when they are undertaken."
- Large FX reserves: "Actual FX reserves are well above the IMF reserve adequacy metric (of 3½ months), so the policy parameter for desired reserve accumulation is set to zero, raising the norm."
- High foreign aid dependence: "The high dependence on foreign aid sharply increases the deficit consistent with external balance; and, when this effect is set to zero in the model a positive RER gap results instead. This is the case when the aid/GDP ratio is only cut in half."

### Policy implications and recommendations
- Strengthen competitiveness through a combination of structural, fiscal and exchange rate policies:
  - Supply-side reforms to develop alternative export industries and adjust to term-of-trade shocks (notably declines in timber prices and production).
  - Reduce impediments to doing business, with specific focus on:
    - Lowering the "high administrative cost of international trade."
    - Improving access to finance (addressing factors like "registering property" and contract enforcement).
  - Improve infrastructure—particularly communication and energy—and build resilience against natural disasters to help businesses and rural areas recover rapidly.
  - Strengthen fiscal policy frameworks (i.e., PFM) to support better infrastructure investment and fiscal management.
- Exchange rate policy option: "The option of a one-off adjustment in the level of the basket peg should remain under consideration if competitiveness needs to improve and to respond to international monetary developments impacting Solomon Islands."
  - Context for consideration includes: "volatility in the US dollar as the Federal reserve exits quantitative easing, and in the renminbi, as China targets a broader currency basket and eases capital controls."
- Caution: "These contributions of high foreign aid and FX reserves could diminish in the future and should not divert attention from the need to strengthen competitiveness now."

### Supporting contextual statistics and metrics (as presented)
- REER appreciation: "exceeding 30 percent between mid-2011 and end-2014."
- FX reserves: "10-months of imports" versus IMF adequacy metric "3½ months."
- Doing Business indicators (rank among 189 countries, lower implies a more favorable environment): Solomon Islands is shown worse than Small States (median) on "Registering Property", "Trading Across Borders", "Enforcing Contracts", and "Getting Credit" (exact ranks provided in source figures).
- Footnote: "Prepared by Sean Craig (SPR)."

*Source: Box 3. Solomon Islands— External Balance Assessment and Competitiveness (from the supplied IMF content).*

### Appendix I. Solomon Islands––Risk Assessment Matrix

### Appendix I. Solomon Islands––Risk Assessment Matrix

### Major external and domestic shocks (Risk statements, likelihood, impact, and policy responses)
- Tighter or more volatile global financial conditions:
  - Likelihood: (i) Medium (ii) High
  - Impact: Medium
  - Risk summary: Sharp asset price decline and decompression of credit spreads; Surge in the US dollar.
  - Policy response:
    - Continue effective implementation of the basket currency peg in line with IMF TA.
    - Strengthen reserve management, including through Fund TA.
    - Over time, seek to realign the exchange rate with underlying fundamentals and address infrastructure bottlenecks to improve productivity and boost competitiveness.
    - Note: Continued strengthening of the US dollar may pose challenges to effective management of the basket peg, may exacerbate real exchange rate appreciation and lead to eroding competitiveness. Failure to manage non-US dollar reserves adequately may also lead to significant valuation losses.

- Sharper-than-expected global growth slowdown:
  - Likelihood: (i) Medium (ii) High/Medium
  - Impact: Medium
  - Risk summary: Significant slowdown in other large EMs/frontier economies; Structurally weak growth in key advanced and emerging economies.
  - Policy response:
    - Use policy buffers, including countercyclical fiscal policy and international reserves, to cushion the impact.
    - Over time, diversify sources of growth.
    - Note: Direct impact is limited but Solomon Islands is prone to indirect effects through regional economies, including Australia.

- Sharp growth slowdown in China:
  - Likelihood: (i) Medium (ii) Low
  - Impact: High
  - Risk summary: Insufficient progress with reforms leads to a continued buildup of vulnerabilities; Sharp slowdown in 2015-16.
  - Policy response:
    - Use policy buffers, including countercyclical fiscal policy and international reserves, to cushion the impact.
    - Over time, diversify sources of growth.
    - Note: Given increased trade linkages with China, Solomon Islands would be affected by a severe economic slowdown; indirect effects via other regional economies (e.g., Australia) would also have an impact.

- Persistently lower energy prices:
  - Likelihood/Impact label in matrix: High / Medium
  - Risk summary: Persistently lower oil prices have kept inflationary pressures in check and deflationary pressures have been limited.
  - Policy response:
    - Take advantage of favorable conditions to ease the fiscal adjustment and buy time for structural reforms to yield results.

- Adverse effects of El Niño on agriculture:
  - Likelihood/Impact label in matrix: High / Medium
  - Risk summary: Onset of an El Niño event will likely weigh on agricultural production in early 2016.
  - Policy response:
    - Financial support may be warranted for the most vulnerable.

- Reopening of Gold Ridge mine:
  - Likelihood/Impact label in matrix: Low Medium
  - Policy response:
    - Strengthen fiscal buffers and use the resulting fiscal space to invest in resilient infrastructure.

- Positive spillovers from large infrastructure projects:
  - Likelihood/Impact label in matrix: Low / High
  - Risk summary: Long-standing plans for large infrastructure projects could have positive spillovers into the economy from 2016 onwards.
  - Policy response:
    - Take advantage of favorable conditions to ease the fiscal adjustment and buy time for structural reforms to yield results.

### Recent macroeconomic developments, outlook, and risks (selected findings and figures)
- Growth and sectoral drivers:
  - Real growth: "expected to have reached 3.25 percent in 2015" (reflecting strength in forestry and lower oil prices).
  - Growth outlook: "Growth in 2016 is expected to remain at 3.2 percent".
  - Risks to growth: El Niño, Cyclone Raquel (July 2015), downside risks from regional/emerging markets, expected medium-term decline in logging, small likelihood of reopening Gold Ridge mine.
  - Policy emphasis: Need for new sources of growth (manufacturing, tourism) and investment in infrastructure to support rural and private sector development.

- External position and reserves:
  - Net international reserves rose to "9.8 months of imports in December 2015" from "7.8 months at the start of the ECF program".
  - Net international reserves: "US$506 million at the end of December" 2015 (thanks to strong log exports and donor support).
  - External public debt: dropped to "9.8 percent of GDP" from "12.7 percent" over the ECF period.

- Fiscal and cash balance developments:
  - Cash balance movements:
    - "SI$880" at end December 2014,
    - "SI$1,055 million" in June 2015 (program target was "SI$545 million"),
    - "SI$893 million" by end September 2015 (program IT was "SI $535 million"),
    - "SI$694 million" at end December 2015 after prepayment of "$99.5million" in domestic debt and "SI$48 million" of scheduled amortization.
  - Program quantitative performance: All end-December 2014 performance criteria (PCs), end-March 2015 indicative targets (ITs), end-June 2015 PCs, and end-September 2015 ITs were met by a considerable margin, except the ITs on government-funded recurrent spending on health and education, which were narrowly missed (owing to stronger procurement requirements by development partners in disbursing ODA).

### Structural, fiscal, and institutional reforms (progress, commitments, and timelines)
- Public financial management (PFM) and transparency:
  - Government produced and published a Budget strategy document in August 2014; produced a Final Budget Outcome Report (an ECF structural benchmark) and a mid-year Budget review (an ECF structural benchmark) in 2014.
  - Auditor-General conducted an audit of spending and project achievements of the constituency development funds for 2012; expected to submit audit reports to Parliament during the next sitting.
  - PFM Roadmap (2014-17) commitment: finalize draft Procurement Rules and Regulations. New procurement regulations scheduled to come into effect on "July 1, 2016 or earlier".
  - Release of Auditor General audit reports on Constituency Development Funds in 2012 expected during the Parliament sitting of "July 2016" (end-June 2015 structural benchmark).

- Fiscal policy stance and rules:
  - Commitment to maintain a strong cash reserve and fiscal discipline as ECF expires.
  - Policy anchor for 2016 onwards: "quarterly fiscal targets to limit fiscal risks by ensuring that the cash balance does not fall below two months of total expenditure in 2016 onwards as defined in the consolidated budget (government-funded development spending plus total recurrent spending)."
  - Strategy: keep expenditure flows closely in line with domestic revenue collection and assess adequacy of the anchor against shocks including climate change.

- Tax, revenue, and public debt management:
  - Amend the Export Duty Schedule (by Ministerial Order) to complete implementation of new mining tax regime in line with IMF TA recommendations (authorities’ response).
  - Authorities submitted to Cabinet the on lending and guarantees instructions under the framework of the Debt Management Strategy.

- Monetary and financial sector policy:
  - CBSI Act passed by Parliament in November 2012 to strengthen monetary policy and supervisory framework.
  - Cabinet approved drafting instructions for a new Financial Institutions Act and started process to draft a Credit Unions bill (benchmarks under the ECF).
  - National Provident Fund (NPF): Cabinet approved in July 2012 draft instructions to revise the NPF Act to strengthen governance and investment framework.
  - Monetary transmission enhancements (March 2015): CBSI announced plans—including a potential change in the cash reserve requirement ratio and introducing a forex swap facility—to increase effectiveness of the monetary transmission mechanism.

- Exchange rate policy:
  - Invoice-based basket peg regime fully implemented; the operational band was removed in November 2014. As a result, "the Solomon Islands dollar has more closely tracked the value of the basket."
  - Authorities are considering periodic re-centering, in line with recent TA recommendations.

- Legislative and structural benchmarks (timelines and status):
  - Credit Unions bill: Cabinet approval of policy paper in February; expected submission to the Attorney General by "March 2016".
  - New National Provident Fund bill: preparing submission to Cabinet seeking approval expected by "end-March 2016" for Attorney General’s Chambers to proceed with drafting; plan to table the bill before Parliament by "September 2016".
  - New Customs and Excise bill: Cabinet approval in February 2016 for Attorney General’s Chambers to vet; expected to be tabled in Parliament by "September 2016" (end-September 2015 benchmark).
  - Progress caveat: Continued capacity constraints in the Attorney General’s Chambers and legislative complexity imply a slower pace at the next stage.

- Education and social spending:
  - Efforts to rebalance tertiary and primary education financing: finalizing review of tertiary education policies; a tertiary education structure proposed (March 2015 structural benchmark) and a think tank has met and firmed up the structure.
  - Preparing a new Education bill expected to be ready in the first half of 2016 to revisit tertiary scholarship policies.

- Anti-corruption and governance measures:
  - Solomon Islands acceded to the UN Convention against Corruption (UNCAC) in 2012.
  - Government adopted an anti-corruption agenda: preparing an Anti-Corruption Bill expected to be completed by the first quarter of 2016; accompanied by a Whistle Blower Bill and a revamped Ombudsman Bill.
  - Objectives of the Anti-Corruption Bill include:
    - prohibiting corruption in the public and private sectors;
    - providing for investigation and punishment of corruption offences;
    - establishing the Solomon Islands Independent Commission Against Corruption (SIICAC) with preventive, investigative and prosecution powers;
    - giving legislative effect to certain provisions of UNCAC binding on the Government;
    - supporting publication/implementation of a national Anti-Corruption Strategy.

### Program performance and commitments under the ECF
- Program disbursement request: Request for completion of the fifth and sixth (final) reviews, and the sixth and seventh disbursements, under the ECF arrangement, each in the amount of "SDR 0.149 million (US$ 0.2 million)".
- Quantitative targets and structural benchmarks: All end-December 2014 PCs, end-March 2015 ITs, end-June 2015 PCs, and end-September 2015 ITs met by a considerable margin, except ITs on government-funded recurrent spending on health and education (narrow misses).
- Policy commitment: The government will consult with the Fund in advance of adopting additional measures or revisions to the MEFP policies, and will provide appropriate information requested by the Fund.

*Source: Appendix I. Solomon Islands––Risk Assessment Matrix; Appendix II and III excerpts from the attached Memorandum of Economic and Financial Policies (as provided).*

### 12.      We are undertaking additional measures to complement PFM reforms already in the

### _cr1690 - 12.      We are undertaking additional measures to complement PFM reforms already in the

### Public Financial Management, Budget Presentation, and Spending Quality
- Review the spending mix in the 2016 budget in the mid-year budget review and realign public spending with development priorities, including through the implementation of capital projects.
- As part of implementing the PFM Act:
  - Continue to prepare and publish a mid-year budget review.
  - Adjust spending plans in the short and medium term to make them consistent with revenues.
- Strengthen budget presentation to ensure broader understanding of the cost effectiveness of spending and better integrate budgeting and planning.
- Require in the 2017 budget a presentation that clearly identifies within the recurrent and development expenditure, the capital spending component.
- Report 2015 and 2016 budget outturns on the implementation of capital spending which has increased under the current government.
- Medium-term plan to move towards linking budget to outputs and expenditures in one budget document.

### Revenue Mobilization and Tax Policy
- Seek to mobilize revenues by strengthening tax compliance and streamlining exemptions.
- Submit to Parliament the new Customs and Excise bill (an end-September 2015 structural benchmark), which includes clauses related to exemptions and the draft amendments to other revenue acts (i.e., income tax, stamp duties, and goods and sales tax).
- Process facilitated by prompt Cabinet approval to send the bill to the Attorney General’s Chambers for vetting.

### Borrowing Strategy and Debt Management
- Exercise caution in resuming concessional borrowing to preserve domestic and external stability.
- Assess all proposed new Government borrowings against the Government’s Debt Management Framework (DMF), which comprises:
  - a Debt Management Strategy,
  - SOE Borrowing Policy,
  - On-lending Policy,
  - Guarantee Policy.
- Legal aspects of the DMF are incorporated in the PFM Act.
- An Annual Borrowing Limit of SI$300 million has been set for 2016.
- This borrowing level is consistent with the debt sustainability threshold imposed under the DMF (i.e. face value of debt to GDP of 25 percent).

### Policies to Enhance Resilience to Natural Disasters and Climate Change
- Treat enhancing resilience to natural disasters and climate change as a high priority.
- More clearly identify in the budget document total resources budgeted for natural disasters adaptation and mitigation and integrate them in the DSA.
- Accumulate a specific contingency for natural disasters either in the natural transport fund or another government contingency fund.
- Reduce risks by:
  - enhancing preparedness,
  - investing in resilient infrastructure,
  - enhancing debt-management capacity.
- Discuss regional solution (Melanesian fund) that could provide limited although immediate liquidity within one week after the disaster.
- Explore catastrophic insurance schemes.

### Emergency Response and Data Collection Challenges
- Major post-disaster issue: collection of data from outer remotest islands due to limited infrastructure connectivity.
- Improvements in housing income and expenditure surveys have relieved this issue for immediate emergency disbursements.
- Recognized need for effective emergency response through training and awareness between the National Disaster Council and the Ministry of Finance for immediate payment processing.

### Monetary, Exchange Rate, and Financial Sector Policies
- Maintain accommodative monetary policy stance in light of contained inflationary pressures amid low global commodity prices.
- Pursue measures to:
  - reduce excess liquidity in the financial sector,
  - deepen the foreign exchange market,
  - develop the domestic interbank market,
  - create an environment in which monetary policy becomes an effective tool for macroeconomic management.
- Continue to view the basket peg exchange rate regime as important for anchoring inflation and maintaining competitiveness.
  - Removal of the operational 1 percent band around the base rate in September 2014 allowed more flexibility of bilateral exchange rates and ensured that the currency basket remains more stable.
  - Since then, the Solomon Islands dollar has depreciated against the US$ by around 10 percent.
  - Increased the buy-sell margin in foreign exchange trading to allow greater flexibility in exchange rate management.
  - Started to announce the bilateral rate every day to help keep the peg constant.
  - Will periodically review the appropriateness of the level of the peg.
- Strengthen financial regulation and supervision to preserve financial stability and foster financial sector development to promote growth.
  - CBSI has been proactive in promoting financial inclusion.
  - In the last two years, together with commercial banks, introduced mobile banking services to deepen financial access in geographically dispersed and remote areas.
  - Seeking Cabinet approval to allow the Attorney General’s Chambers to proceed with drafting the revised National Provident Fund (NPF) Act to strengthen NPF governance and investment framework, and the draft Credit Unions Act to promote financial sector stability and development.
  - Both items included in the government’s legislative agenda for 2016.
- Implement recommendations of the latest IMF safeguard assessment:
  - CBSI will continue to recruit and train Internal Audit Unit staff to strengthen its internal audit function.
  - CBSI will have an independent quality assurance review of the Unit within five years.

### Inclusive Growth and Development Planning
- Sustain rural development as a high reform priority.
- New Medium-term Development Plan for 2016-20, approved by Parliament in December 2015, sets out objectives in the National Development Strategy (NDS) for (2016-2035) and details specific policies and projects.
- NDS identifies selected sustainable development goals (SDGs): sustained and inclusive economic growth; poverty alleviation; access to quality social services; resilient and environmentally sustainable development; stable and effective governance and public order.
- Submitted the Medium-Term Development Plan to the IMF Executive Board; alongside the NDS it provides the basis for an Economic Development Document.

*Source: Extract from IMF staff report informational annex (March 8, 2016) contained in the provided content.*

### 2013. The staff report (IMF Country Report No. 14/12) was considered by the Executive Board and

### _cr1690 - 2013. The staff report (IMF Country Report No. 14/12) was considered by the Executive Board and the consultation concluded on January 8, 2014.

### Technical Assistance Timeline and Areas
- January 2005 — PFTAC: Financial reporting system
- February 2005 — PFTAC: Financial supervision of insurance
- April 2005 — PFTAC: Financial supervision
- May, August, and October 2005; and February 2006 — MFD: Financial supervision of insurance
- May 2005 — PFTAC: Tax policy and administration
- August 2005 — MFD: Reserve management
- August 2005, February and April 2006 — PFTAC: Statistics
- September 2005 and February 2006 — PFTAC: AML/CFT
- October 2005 — LEG: AML/CFT
- November 2005 and July 2005 — STA: Monetary and Financial Statistics
- January 2006 — PFTAC and LEG: Tax policy
- April and June 2006 — MFD: Central Bank Accounting
- May, August, and October 2006 and January 2007 — PFTAC: Public Financial Management and Accounting
- October 2006 — MCM: TA program monitoring
- October 2006 — MCM: Financial sector supervision
- October 2006 — MCM: Reserve Management
- December 2006 — PFTAC: Business Revenue Reform
- February 2007 — PFTAC: Balance of Payments Statistics
- February and November 2007 and May 2008 — PFTAC: National Income Accounts
- March 2007 and March 2008 — MCM: Accounting
- February 2008-February 2009 — STA: Peripatetic Export and Import Price Index Statistics
- February-March 2008 — PFTAC and FAD: Tax Policy
- April 2008, February 2009 — PFTAC: Balance of Payments Statistics
- June 2008 — LEG: Review of Central Bank Act
- April 2008-April 2009 — MCM: Peripatetic Advisor to CBSI
- June 2008, September 2008, June 2009 — MCM: Monetary Operations and Liquidity Management
- July 2008 — STA: Money and Banking Statistics
- January 2009, April 2010, April 2011 — STA: Monetary and Financial Statistics
- April 2009 — MCM: Insurance Supervision
- June 2009 — LEG: Insurance Sector Law
- June 2009 — MCM: Central Bank Law
- April 2010 — PFTAC: Balance of Payment Statistics
- April 2010, May 2011 — PFTAC: National Account Statistics
- September 2010 — PFTAC: Government Finance Statistics
- June 2010, October 2010, March 2011 — PFTAC: Financial Supervision
- October 2010, March 2011 — FAD, PFTAC: Natural Resource Tax Policy
- October 2010, June 2011 — MCM: Monetary Operation and Liquidity Management
- July 2010, October 2010, January 2011 — PFTAC: Public Financial Management
- April 2011 — FAD: Budget Law
- April 2011 — PFTAC: Macroeconomic Advisor Visit
- April 2011 — STA: GDDS Metadata Development
- July 2011 — PFTAC: Customs Administration
- September 2011 — LEG: Tax Legislations
- November 2011 — MCM: Exchange Rate Flexibility and Foreign Exchange Market Development
- February 2012 — STA: Consumer Price Index
- June 2012 — FAD: Public Finance and Audit Act
- September 2012 — STA: Monetary and Financial Statistics
- January 2013 — LEG: Financial Institutions Act
- March 2013, September 2013 — STA: External Sector Statistics
- May 2012, May 2013 — MCM: National Provident Fund
- February 2013, August 2013 — PFTAC: National accounts
- November 2013 — PFTAC: PFM law and the Constituency Development Fund Law
- December 2013 — PFTAC: PFM Roadmap Development Guidance – Phase I
- March 2014 — STA: Balance of payments statistics
- March 2014 — PFTAC: Non Tax Review and National Accounts
- July and October 2014 — PFTAC: Develop Macro Framework
- August 2014 — PFTAC: National Accounts
- September 2014 — MCM: Enhancing the effectiveness of monetary policy and exchange rate regime
- September 2014 — PFTAC: PFM Roadmap Implementation
- October 2014 — FAD: Implementing the new mining tax regime
- October 2014 — PFTAC: Non Tax Review introductory mission
- November 2014 — STA: External sector statistics
- March 2015 — MCM: Improving the monetary transmission mechanism
- April 2015 — STA: Monetary and financial statistics
- May 2015 — PFTAC: Support 5th ECF Review
- June 2015 — PFTAC: Training on FP Framework to assess debt sustainability
- August 2015 — MCM: Evaluation of TA needs on banking supervision
- August 2015 — PFTAC: Financial Supervision
- May 2015 — STA: Government finance statistics
- August, September 2015 — STA: Government finance statistics
- October 2015 — STA: Balance of payments statistics
- January 2016 — PFTAC: Support the 2016 Article IV Consultation and 5th and 6th ECF Reviews
- February 2016 — PFTAC: Credit Union Program
- February 2016 — PFTAC: National Accounts

### Resident Representative
- The resident representative office in the Pacific Islands was opened in September 2010 in Suva, Fiji.
- Mr. Tubagus Feridhanusetyawan is the current Resident Representative.

### Support from the Pacific Financial Technical Assistance Centre (PFTAC) — Strategy 2013–2017 and Activities
Background and recent outcomes:
- The Solomon Islands recovered well from a precarious position during the global economic crisis.
- Growth accelerated rapidly and international and fiscal reserves increased on the back of increased logging and mining, better fiscal management, and increased international assistance.
- The medium-term reform agenda under the Core Economic Working Group emphasizes strengthening of public financial (text truncated in source).
- Solomon Islands has been a moderate user of PFTAC TA; RAMSI caters for much of government TA needs, but PFTAC contributed specifically on the fiscal regime for natural resources.
- In PFM, PFTAC reviewed and provided suggestions on a draft PFM law and associated implementing instructions, participated in a PEFA assessment, assisted advocacy of the PFM Reform Roadmap, and provided introductory training on international public sector accounting standards (IPSAS).
- PFTAC provided significant support to CBSI in formulating and implementing new prudential regulations for banks and developing a more robust inflation forecasting regime.

Strategy 2013–2017 (PFTAC focus and priorities):
- PFTAC’s TA strategy is guided by the APD regional strategy note and planned within the Results-Based Management (RBM) framework for the current PFTAC funding cycle.
- Main focus: strengthening fiscal management and solidifying the financial sector.
- Government-area inputs: strategic/policy level tasks or niche requirements where IMF/PFTAC has comparative advantage; implementation support expected from other donors (RAMSI or successor).
- Public Financial Management priorities:
  - Assist authorities in implementing the PFM Roadmap (following 2012 PEFA results).
  - Focus likely on cash management reform and finalizing implementing instructions for a PFM law approved in 2013.
  - Assistance requested to improve non-tax revenue management.
- Revenue area:
  - Continued significant assistance from New Zealand Inland Revenue Department (NZIRD), facilitated by New Zealand MFAT, expected to continue.
  - Recent activities: SIIRD comprehensive constraints analysis with recommendations to elevate organizational performance; business process mapping to streamline internal processes.
  - SIIRD staff participation in PFTAC-facilitated training under Pacific Island Tax Administration Association.
- Financial sector supervision:
  - PFTAC-supported improvements gave CBSI enhanced oversight and on-site examination capacity for banking institutions.
  - Late 2013: assistance to CBSI for implementation of the Reserve Bank of New Zealand’s Financial Sector Information System, resulting in enhanced supervision capabilities.
  - PFTAC and IMF Legal Department assisted with revision of the Credit Union Act.
  - Additional TA planned in 2016 for building credit union financial reporting standards and strengthening credit union oversight at the CBSL.
- Statistics:
  - Increased assistance to the NSO improved local capacity to compile GDP estimates.
  - January 2016: NSO’s unaided publication of annual GDP estimates, by production and expenditure, for 2014.
  - Improvements in coverage and timeliness of business survey and administrative sources, including GFS and overseas aid.
  - Future TA tasks: rebasing GDP from 2004 to 2012, further improvements to sources and methodologies, and enhancing analytical capabilities of local compilation staff.
  - PFTAC will liaise with an Australian Bureau of Statistics advisor assisting NSO in rebasing and improving the CPI, as recommended by an IMF HQ mission in 2012.
- Macroeconomic area:
  - Continued support for development and use of a financial programming framework involving Ministry of Finance and CBSI staff.
  - Ongoing tasks: progress debt sustainability analysis; assist in construction of quarterly GDP and an output gap measure to gauge inflationary pressures.

### Relations with the World Bank Group (As of January 2016)
- Bank and Fund teams (led by Mr. Robert Utz, Lead Economist and Program Leader, World Bank Sydney Office, and Mrs. Patrizia Tumbarello, IMF Mission Chief for Solomon Islands) maintain regular dialogue on macroeconomic and structural issues.
- Collaborative efforts recently focused on joint Bank-Fund Debt Sustainability Analysis and regular discussions during missions and at headquarters.
- Visiting IMF missions regularly meet Bank staff in Honiara (led by Ms. Anne Tully, World Bank Country Representative) and at headquarters.
- Agreed key priorities for Solomon Islands:
  - Consolidate recent improvement in the country’s macro-fiscal framework amid ongoing volatility in external conditions and heightened planned government spending.
  - Improve quality of public spending to ensure public resources support access to basic social services.
  - Improve investment climate to support business development.
  - Ensure state-owned enterprises can sustainably provide public services.
- Risks identified:
  - Considerable risks from slippages in domestic policy decisions or a deterioration in external conditions.
  - Need to strengthen economic management and reinforce protective buffers; improve quality of spending.
- Shift in focus:
  - From post-conflict recovery to the medium-term reform and growth agenda.
  - Priority issues: coordinated and prioritized approach to PFM weaknesses; sustain reforms as regular practice; identify policy reform priorities for inclusive growth and reducing hardship; align budget allocations with needs for social services delivery; strengthen investment climate, particularly in the mining sector.
- Role division:
  - World Bank leads on public expenditure management framework and structural reform issues.
  - IMF will continue to lead on macro issues.
- Continued collaboration:
  - Regular contact through Bank’s Honiara and Sydney offices, IMF regional resident representative office in Suva, and at headquarters.
  - IMF will continue collaboration with the government-donor Core Economic Working Group convened in Honiara by the Ministry of Finance and Treasury with World Bank support.
- Appendix I (in the source) provides a list of planned activities in the coming year.

*Source: IMF staff report excerpt (IMF Country Report No. 14/12), consultation concluded on January 8, 2014.*

### Appendix I. Solomon Islands: Bank and Fund Planned Activities

### Appendix I. Solomon Islands: Bank and Fund Planned Activities

### World Bank and IFC Planned Activities (January–December, 2016)
- Line Ministry Public Expenditure Analyses (subject to government request) (analytic and TA) — FY 16 (ongoing)
- Programmatic support for mining sector governance (TA) — FY 16 (ongoing)
- Advisory and analytical support to the Solomon Islands Statistics Office for the 2013 HIES — FY 16 (concluded)
- Supporting Solomon Islands EITI implementation (TA) — FY 16 (ongoing)
- Health sector public financial management support (Analytic and TA) — FY 16 (ongoing)
- Solomon Islands Public Sector Governance Analytics (TA) — FY 16 (ongoing)
- National Education Action Plan Costing (TA) — FY16 (ongoing)
- Core Economic Working Group policy dialogue, supporting a new series of Development Policy Operations — FY 16 (ongoing)
- Pacific Tuna Advisory project IFC TA — FY 16 (ongoing)
- Pacific Credit Bureau Phase 2 IFC TA — FY16 (ongoing)
- Pacific Investment Climate Rapid Response IFC TA — FY 16 (ongoing)
- BSP/ANZ Solomon Rural Banking IFC TA — FY 16 (ongoing)

### IMF Planned Activities (January–December, 2016)
- 2016 Article IV Consultation, Fifth and Sixth Reviews of the ECF-supported program — January 2016
- Technical assistance on new banking legislation on credit union supervision, including support in legal expertise in handling the public comments on the draft act, and finalizing the draft — 2016–17
- Technical assistance on legal issues pertaining to insolvency and creditor rights — 2016–17

### Relations with the Asian Development Bank (AsDB) — As of January 2016
- Historical engagement since 1973:
  - 19 loans amounting to US$102.42 million
  - 11 Asian Development Fund grants amounting to US$81.41 million
  - 73 technical assistance projects amounting to US$25.82 million
- Country Partnership Strategy (2012–16) endorsed March 2012; preparation of new Country Partnership Strategy for 2017–21 beginning in 2016.
- Borrowing status change as of 1 January 2011: from grant-only to a 50:50 mix of grants and concessionary loans.
- Sectoral engagement and planned activities:
  - Transport: Continued support for sector-wide management of a multimodal transport system; proposed Sustainable Transport Infrastructure Improvement Program aligned with National Transport Plan, 2011–30.
  - Information and communication technology: Broadband for Development Project (sovereign and nonsovereign financing) with additional financing proposed for 2016 pending government project design decisions.
  - Public sector management: Continued policy-based program support through Core Economic Working Group; a fourth policy-based program grant programmed for 2016 following grants in 2010, 2011, and 2013; technical assistance for commercial legal reform, state-owned enterprise reform, improving access to finance, and preparation of a new national development strategy.
  - Energy: Support for sustainable off-grid power services; small hydropower plant project approved in 2014; solar power development project planned for 2016; further energy project in 2018.
- Institutional presence: Development coordination office in Honiara established in 2008 to be upgraded to an AsDB Extended Mission in 2016.

### Statistical Issues — Assessment and Data Availability
- General assessment: Data provision has some shortcomings, but is broadly adequate for surveillance.
- National Accounts:
  - Recent TA from PFTAC led to improvements in national accounts at constant and current prices.
  - GDP estimates through 2014 on the production side and the expenditure side were released in January 2016.
  - PFTAC to provide TA to assist with rebasing the constant price accounts to 2012.
- Price statistics:
  - Monthly consumer price index (CPI) produced with a short lag (about a month) but only covers Honiara; authorities expanding coverage to compile a nationwide CPI with assistance from the Australian Bureau of Statistics.
  - Index weights to be revised using results of the 2012/13 Household Income and Expenditure Survey.
  - A core inflation index was released in December 2013.
- Government finance statistics:
  - Monthly fiscal data for the central government published by the Ministry of Finance and Treasury (MOFT).
  - Authorities have started collecting disbursement information on donors’ grants, including those nonappropriated in the budget.
  - Monthly public debt data published; quality improved via better coordination between MOFT and the Central Bank of Solomon Islands (CBSI).
  - MOFT does not report revenue, expenditure, balance and composition of financing for the general government because it currently does not have the capacity to compile such statistics.
- Monetary and financial statistics:
  - CBSI publishes monthly monetary and financial statistics (MFS) in summary form and reports data for central bank, other depository corporations and other financial corporations to IMF STA using the SRFs.
  - An integrated monetary database meeting needs of CBSI, APD and STA is in operation.
  - Financial soundness indicators are reported quarterly.
- External sector statistics:
  - CBSI has compiled quarterly balance of payments statistics (BPS) using its own survey since 2006, improving coverage and accuracy relative to prior foreign exchange transaction-based methods.
  - Quarterly BPS data have not yet been reported to IMF STA.
  - Solomon Islands benefited from the Japan Administered Account (JSA) Project on improvement of external sector statistics; a TA mission under this project was conducted in 2013 with more missions planned.
  - CBSI does not report the international investment position (IIP) due to lack of capacity.
- Data Standards and Quality:
  - Solomon Islands has participated in the General Data Dissemination System (GDDS) starting in 2011.
  - No data ROSC available.
- Reporting to STA:
  - No data are currently reported to STA for publication in the Government Finance Statistics.

### Table of Common Indicators Required for Surveillance (As of February 2016) — Selected entries
- Exchange Rates — Date of latest observation: Jan-16; Date received: Feb-16; Frequency of Data/Reporting/Publication: D / W / D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Dec-15; Feb-16; M / M / M
- Reserve/Base Money — Dec-15; Feb-16; M / M / M
- Broad Money — Dec-13; Feb-16; M / M / M
- Central Bank Balance Sheet — Dec-15; Feb-16; M / M / M
- Consolidated Balance Sheet of the Banking System — Dec-15; Feb-16; M / M / M
- Interest Rates — Dec-15; Feb-16; M / M / M
- Consumer Price Index — Dec-15; Feb-16; M / M / M
- Revenue, Expenditure, Balance and Composition of Financing — General Government — NA; NA; NA / NA / NA
- Revenue, Expenditure, Balance and Composition of Financing — Central Government — Dec-15; Jan-16; M / M / Q
- Stocks of Central Government and Central Government-Guaranteed Debt — Dec-15; Jan-16; M / M / M
- External Current Account Balance — Dec-15; Jan-16; Q / Q / Q
- Exports and Imports of Goods and Services — Dec-15; Jan-16; Q / Q / Q
- GDP/GNP (GDP production) — 2014 (Production 2014); 2015 (Production 2014); A / A / A
- Gross External Debt — Dec-15; Jan-16; Q / Q / Q
- International Investment Position — NA; NA; NA / NA / NA

### Main Websites of Data (listed in source)
- Central Bank of Solomon Islands (www.cbsi.com.sb) — central bank survey; depository corporation survey; financial corporation survey; monetary aggregates; Treasury bills and Bokolo bills; exchange rates; interest rates; balance of payments; government budget accounts; public domestic and external debt; export and imports.
- National Statistics Office (www.spc.int/prism/country/sb/stats/Index.htm) and Ministry of Finance (www.mof.gov.sb) — budget documents; medium-term fiscal strategy; central government revenue and expenditure; central government cash balance; national accounts; consumer price statistics; exports and imports.

### Debt Sustainability Analysis — Key Findings and Assumptions
- Overall DSA result:
  - Debt sustainability analysis indicates that Solomon Islands faces moderate risk of external debt distress, consistent with the last assessment in 2013.
  - Under the baseline scenario, all external and public debt indicators remain below the relevant sustainability thresholds.
  - Alternative scenarios suggest the baseline is subject to significant risks, particularly a shock to financing terms and one where growth is permanently lower.
  - The DSA has been extended to incorporate risks from natural disasters and climate change, drawing on cost estimates from recent events in the region.
  - Under an alternative scenario of a single extreme weather event, debt remains sustainable. However, such events occur on average every 10 years and multiple events could pose a risk to debt sustainability over the 20-year DSA horizon.
  - This risk can be mitigated by infrastructure investment and a buildup of cash reserves.
- Recent debt developments:
  - Public debt fell to 17 percent of GDP at end-2012 from about 60 percent in 2005 under the Honiara Club Framework.
  - Government external borrowing limit set in May 2012 at SI$300 million (3 percent of GDP) annually; government external borrowing remained well below this limit.
  - External debt fell to about 10 percent of GDP by end-2015, reflecting delays in planned investment projects including the undersea cable project and the electricity network upgrade.
  - In December 2015, the government repaid the entire stock of domestic debt worth SI$99.5 million (US$12.2 million) using cash reserves, reducing total public debt to 10.4 percent of GDP at the end of 2015.
  - Debt sustainability benefits are expected from improvements in public financial management (PFM), enhancing revenue mobilization and quality of spending.
- DSA macroeconomic assumptions (projections start in 2016 and run for 20 years; discount rate for NPV of external debt: 5 percent):
  - Growth: Long-term growth maintained at between 3 and 3½ percent under cautious assumptions; somewhat lower than authorities’ development plans. Positive growth spillovers assumed from planned increases in development investment (capital spending) to counteract long-term falls in forestry and minerals.
  - Non-interest current account deficit: Expected to increase to close to 7.5 percent of GDP by 2017 from around 2 percent in 2015, reflecting import-intensive projects (Tina River Hydropower Project (TRHP), the undersea cable and Soltuna) and lower exports from delayed Gold Ridge Mine reopening until 2020. An assumed fall in fuel imports of 25 percent as TRHP comes on line in 2020 contributes to an improvement after 2020.
  - External borrowing: External borrowing in 2015 helped finance the electricity network upgrade; borrowing expected in 2016 and 2017 partly to finance the undersea fiber optic cable. Concessional borrowing projected to average about 2½ percent of GDP annually over the next five years and 3.2 percent of GDP over the longer term. The effective interest rate on external borrowing is around 1.5 percent.
  - Fiscal anchor and outlook: The non-commodity primary fiscal balance is used as the fiscal anchor, set at a 2.5 percent deficit over the medium and long term. This results in a rising primary fiscal surplus that peaks at 2.6 percent of GDP in 2025 and then declines, turning into a small deficit by the end of that decade as commodity revenues decline. This contributes to a buildup in cash reserves (reflected in the DSA residual) that is then run down. Grant-funded development expenditure projected to decline and only be partially substituted by external borrowing. Revenues (excluding grants) are forecast to fall to about 30 percent of GDP over the medium and long term.
  - Aid flows and FDI: Aid flows expected to average about 13.5 percent of GDP over the medium term—down from the 19 percent of GDP assumed in 2013. In the long term, aid declines to about 10 percent of GDP even though the level continues to rise in nominal and real terms. Net FDI is now projected to be around 3½ percent of GDP over the medium to long term.
  - Logging and mining: Logging output expected to decline by about 4 percent per year on average until 2025 and then stabilize. Gold Ridge Mine expected to remain closed until 2020; after reopening, production assumed to peak at 62,000 ounces per annum in 2023 and then run down gradually. It is assumed to run for 10 years with a cumulative output of 465,000 ounces.

*Prepared jointly by the International Monetary Fund and the World Bank Group (March 8, 2016).*

### Box 1. Solomon Islands: Incorporating Climate Change and Extreme Weather Shocks into

### Box 1. Solomon Islands: Incorporating Climate Change and Extreme Weather Shocks into the DSA

### Context and analytic approach
- Pacific Island states are particularly exposed to climate change and vulnerable to extreme weather events; these long term costs and risks are quantified and incorporated into the DSA.
- Assessment draws on research that estimates both the recurrent cost of climate change and the frequency and cost of natural disasters.
- DSA baseline reflects an assumed recurrent mitigation/adaptation cost of climate change and a separate adverse scenario captures an extreme natural disaster shock.

### Assumptions and baseline cost estimates
- Recurrent cost of mitigating the effects of climate change: 0.5 percent of GDP per year (reflected in the DSA baseline).
  - Assumed financed from government resources (not additional borrowing).
  - Divided between:
    - Recurrent budget: 0.2 percent of GDP.
    - Development budget (ongoing capital expenditures for adaptation): 0.3 percent of GDP.
- DSA time horizon for extreme weather scenario: 20 year horizon (DSA includes only one extreme weather natural disaster as a scenario over its 20 year horizon).

### Extreme natural disaster adverse scenario (DSA)
- Losses and damage: around 15 percent of GDP.
- Real GDP growth: fall of roughly 7.5 percentage points in the year of the disaster.
- Fiscal balance: deterioration of about 7.5 percent of GDP in the year after the disaster.
- Additional external public debt: about 15 percent of GDP.
- Note: More than one extreme weather event is possible over 20 years; multiple events could produce a significantly larger cumulative effect on debt sustainability than the DSA results show.

### Tina River Hydropower Project (TRHP) contingent liability scenario
- Government guarantee to cover a power purchase agreement (PPA): around US$150 million (12 percent of GDP).
- Guarantee is not recorded on the government balance sheet or in the DSA baseline because PPAs are not typical financial instruments.
- Customized “worst-case” scenario assumptions:
  - Full materialization of contingent liability if SIEA is unable to make the PPA payment and government steps in.
  - Full PPA amount estimated at US$20 million per year.
  - Fiscal effect: higher public expenditure, larger fiscal deficit over the 30-year contract period, and higher public debt.
- Scenario results:
  - PV of debt to GDP rises from 7 to 30 percent (about 7 percentage points above the baseline), but stays below the 38 percent benchmark.
  - Relatively small effects on PV of debt to GDP, revenue, and debt service to revenue indicators (impact described as manageable).

### External debt sustainability findings
- Under baseline:
  - Total external debt projected to increase from 13 percent in 2015 to 36 percent of GDP over the long term.
  - PPG external debt projected to rise to around 34 percent of GDP.
  - Rise driven largely by financing of infrastructure investment, with an increasing share financed by concessional debt rather than grants.
  - Improvement from the last DSA reflecting a lower-than-expected resumption in external concessional borrowing since 2013.
- Indicators:
  - All external PPG debt indicators remain below policy relevant thresholds under baseline.
  - PV of PPG debt in terms of export ratios remains below the indicative threshold of 100 percent, but rises from around 16 to 67 percent owing to the declining trend in commodity exports.
- Sensitivity risks:
  - Shock to financing terms: a rise in interest rates on new borrowing of 2 percentage points leads to a breach in the threshold for ratios of PV of PPG external debt to GDP (threshold of 30 percent).
  - Negative export shock is identified as a risk.

### Public debt sustainability findings
- Baseline:
  - Public debt remains below the threshold for debt sustainability (benchmark PV debt-to-GDP threshold = 38 percent).
- Vulnerabilities (sensitivity analysis):
  - Extreme shock of permanently lower growth and the fix-primary deficit scenarios both lead to breaches of the PV debt-to-GDP 38 percent benchmark by the end of the next decade.
  - In the extreme shock scenario, the PV of debt to revenue ratio rises to 169 percent of GDP by 2036.
- Natural disaster shock:
  - Produces a sharp near-term rise in the PV of debt to GDP that diminishes as growth rebounds and remains below the 38 percent benchmark.

### Policy implications and preparedness recommendations
- Countries need capacity to mobilize large resources quickly at infrequent intervals; options include building up a substantial cash buffer over time to draw down when needed.
- Infrastructure investment to build resilience is more important given potential higher frequency of extreme weather events.
- Design of a medium term fiscal framework and anchor is discussed in the Article IV Staff Report to support these efforts and contain risks to debt sustainability from climate change and extreme weather.

*Source: Box 1, Solomon Islands: Incorporating Climate Change and Extreme Weather Shocks into the DSA (IMF).*

### CONCLUSIONS

### _cr1690 - CONCLUSIONS

### Debt sustainability assessment and risks
- The DSA suggests that the Solomon Islands continue to face a moderate risk of debt distress, consistent with the 2013 DSA.
- There is no breach of thresholds under the baseline, but external debt does rise above the debt-to-GDP and exports thresholds in the long run under some scenarios.
- Analysis demonstrates vulnerability of public debt sustainability to external financing, fiscal and growth shocks; and the contribution of donor funding and FDI to debt sustainability.
- CPIA classification: three-year average CPIA score of 2.94 (slight improvement from 2013 average score of 2.89), remaining below the 3.25 threshold for medium policy performer.

### Climate change and natural disasters in the DSA
- Baseline now includes recurrent fiscal costs of climate change estimated at 0.5 percent of GDP per year, including infrastructure investment to protect against adverse weather.
- Natural disaster shock scenario assumes losses of 15 percent of GDP, involving a sharp, temporary fall in GDP and large, one-off reconstruction outlays.
- The DSA finds external and public debt remains sustainable under a single natural disaster shock over the 20 year horizon, but:
  - The DSA includes only one instance of each shock over its 20 year horizon; multiple extreme weather events are possible given their 10 year average frequency.
  - Policy needs to prepare for the possibility of multiple extreme weather events that could have a significantly larger cumulative effect on debt sustainability than the DSA results show.

### Key quantitative indicators (selected)
- External debt (nominal) historical and projection snapshots include values such as 19.6, 19.5, 12.9, 12.1, 15.5, 18.7, 21.2, 23.9, 25.8, 32.3, 36.4 (as presented).
- PV of external debt series includes values such as 10.2, 9.9, 12.7, 15.1, 16.9, 18.8, 19.7, 22.7, 24.3 (as presented).
- PV of PPG external debt and related ratios include values such as 7.1, 6.2, 6.6, 7.1, 7.9, 8.8, 10.2, 16.0, 21.8 (as presented).
- Debt service-to-exports ratio examples: 2.7, 2.9, 3.6, 3.2, 3.4, 3.6, 3.5, 3.3, 3.3, 3.0, 4.7 (as presented).
- Government revenues (excluding grants) examples: 34.1, 33.2, 34.7, 31.6, 31.6, 31.8, 31.7, 31.6, 31.9, 33.5, 31.1 (as presented).
- Aid flows (Millions of US dollars) examples: 197.3, 170.2, 131.4, 146.2, 175.0, 180.0, 186.9, 196.4, 201.6, 236.5, 296.0 (as presented).
- Nominal GDP (Millions of US dollars) examples: 1110.5, 1153.6, 1147.2, 1202.1, 1263.8, 1325.4, 1399.3, 1484.0, 1535.6, 2016.3, 3686.6 (as presented).
- Key macro assumptions excerpts:
  - Real GDP growth (in percent): 3.0, 2.0, 3.3, 4.5, 4.5, 3.0, 3.3, 3.0, 3.0, 3.0, 3.2, 3.1, 3.4, 3.8, 3.5 (as presented).
  - Effective interest rate (percent) examples: 2.7, 2.7, 2.9, 2.5, 0.4, 1.9, 2.3, 2.7, 2.9, 2.9, 2.6, 2.3, 1.7, 2.1 (as presented).
  - Grant element of new public sector borrowing (in percent): series including 30.9, 44.3, 44.3, 44.3, 44.3, 44.3, 42.0, 44.3, 44.3, 44.3 (as presented).

### Policy recommendations and fiscal stance
- Maintain a prudent fiscal policy; borrowing that leads to a buildup in debt should remain cautious and target projects that:
  - broaden the export base,
  - strengthen potential growth (e.g., infrastructure investment),
  - increase resilience of debt sustainability to shocks.
- Authorities will target the cash balance to not fall below two months of total expenditure and will:
  - put in place quarterly fiscal targets,
  - align expenditure flows with revenue collection,
  - seek additional TA from the Fund to strengthen management of consolidated funds, including cash balances.
- Annual Borrowing Limit for 2016 set at SI$300 million, consistent with Debt Management Framework threshold (face value of debt to GDP of 25 percent).
- Consideration of medium-term fiscal anchors, including staff’s recommendation to use a non-commodity primary balance target.

### Recent fiscal and macro performance
- Fiscal outturn: fiscal deficit of 0.3 percent of GDP in 2015 (near-balance), better than the budgeted deficit of 5.5 percent of GDP in 2015.
- Net international reserves rose to 9.8 months of imports in December 2015.
- External public debt dropped to 9.8 percent of GDP.
- Government cash reserves for December 2015 were 3.2 months of recurrent spending (SI$694m).
- Early repayment of SI$100m (approx 1.1 percent of GDP) of domestic debt in 2015.
- Economic growth estimated at 3¼ percent in 2015; growth expected around 3 percent in 2016.
- Key downside risks: slowing in key trading partners (notably China), ongoing El Niño event, and natural disasters.

### Institutional and structural reforms
- Progress and priority reforms:
  - Public Financial Management (PFM) Act and Central Bank of Solomon Islands (CBSI) Act enacted and implementation steps taken.
  - Comprehensive Debt Management Framework established (Debt Management Strategy, SOE borrowing policy, On-lending policy, Guarantee policy).
  - New Procurement Rules and Regulations to come into effect by 1 July 2016.
  - Development of a Capital Structure policy for SOEs over the medium term.
  - Strengthening of Constituency Development Fund planning, procurement and reporting; constituency offices resourced with accountants; new project database system.
  - Control of tertiary education spending: new Education Bill expected before Parliament later in the year; scholarship allocation process improved.
  - Anti-corruption agenda: Anti-Corruption Bill expected shortly to establish the Solomon Islands Independent Commission Against Corruption (SIICAC); complementary Whistle Blower Bill and revised Ombudsman Bill planned.
- Legislative developments in the financial sector:
  - Credit Unions Act policy endorsed; model Credit Union Bill prepared.
  - Revised National Provident Fund (NPF) Act to strengthen governance and investment framework.
  - Financial Institutions Act to modernize and strengthen supervision; CBSI has prepared supporting financial instructions and Prudential Guidelines.

### Monetary, exchange rate, and financial sector policy
- Monetary policy remains accommodative; authorities are watchful for inflationary pressures.
- Authorities note deflation in first half of 2015 and low inflation in second half of 2015.
- Excess liquidity hampers monetary policy effectiveness; TA from Reserve Bank of Australia on liquidity swaps is being received.
- Exchange rate: basket exchange rate regime operating well; operational 1 percent band removed and buy-sell margin increased; bilateral exchange rates published daily.
- Authorities are considering inclusion of the renminbi in the currency basket and open to periodic reviews of the peg level.
- CBSI is implementing final recommendations from the Safeguards assessment.
- Financial inclusion: CBSI chairs the National Financial Inclusion Taskforce (NFIT); NFIT endorsed the medium-term National Financial Inclusion Strategy (NFIS2); Solomon Islands is a leader in mobile banking services among Pacific small states.

### Conclusions and forward engagement
- The ECF program helped achieve macroeconomic and financial stability and strengthened core institutions.
- Authorities are committed to consolidating gains, maintaining buffers, continuing reform agenda, and building resilience to shocks, especially natural disasters.
- The IMF remains an important partner; authorities look forward to continued engagement including technical assistance and a 12 month Article IV cycle.

*Source: IMF staff conclusions as presented in the document _cr1690 - CONCLUSIONS.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1690.pdf_