Press Release No. PR17/375

IMF Staff Completes 2017 Article IV Mission to Solomon Islands

September 27, 2017

• IMF staff projects growth to remain solid at 3.2 percent in 2017 and 3.0 percent in 2018.
• The weakening fiscal position heightens the need for fiscal adjustment in 2018 and for public financial management reforms.
• Exchange rate and monetary policies are broadly appropriate. Efforts to enhance and extend financial inclusion are commendable.

An International Monetary Fund (IMF) team led by Ms. Alison Stuart visited the Solomon Islands during September 19–28 to hold discussions on the 2017 Article IV Consultation. At the conclusion of the visit, Ms. Stuart issued the following statement:

“Solomon Islands has made considerable gains in terms of macroeconomic stability and strengthening institutions over the past six years. Policy buffers were built up and important institutional reforms have been completed. The Regional Assistance Mission to Solomon Islands withdrew on June 30 2017 having succeeded—together with the authorities—in restoring law and order and re-establishing public institutions.

“Growth remains solid at 3.5 percent in 2016 and is projected at 3.2 percent in 2017 and 3.0 percent in 2018 buoyed by infrastructure spending, fisheries and agriculture, although logging production is slowing down. Inflation is contained at an annual rate of just 1.5 percent in August 2017.

“The fiscal setting is challenging. The deficit widened to 3.3 percent of GDP in 2016 as lower revenues and grants were not matched by expenditure restraint. Fiscal buffers have substantially eroded with the cash balance down from 3.6 months of recurrent spending at end-2015 to just 0.8 months projected for 2017. Fiscal strains have led to delays in government payments.

“Against this backdrop, the staff team and the authorities discussed policies to restore fiscal buffers and strengthen public financial management. Staff also emphasized the need to clear the backlog of financial sector regulatory reform.

“The weakening fiscal position heightens the vulnerability of the economy to shocks. Though some steps have been taken recently, fiscal adjustment will be needed in 2018—including revenue raising measures, expenditure control and a plan to eliminate arrears.

“The 2018 Budget also provides an opportunity to align spending more closely to the goals of the National Development Strategy and to restrain spending, including through tertiary scholarships, Constituency Development Funds (CDFs) and shipping grants. Greater transparency of CDFs is also needed to improve accountability and to help identify remaining gaps in the provision of services to the rural population. This would also be in line with the welcome focus of the government on tackling corruption.”

“We support the tax review. It should aim at broadening the tax base and reducing revenue volatility. Pressing ahead with public financial management reforms will improve spending efficiency, and boost the gains from investing in climate-proof infrastructure.

“Exchange rate and monetary policies are broadly appropriate. The basket peg is working effectively. The monetary stance is accommodative given low inflation, an uncertain growth outlook, and moderate credit growth.”

“The authorities’ strategy to enhance financial inclusion is commendable. The mission urges the authorities to clear the backlog of financial sector reform: the new Financial Institutions Act, the Credit Unions Act, and National Provident Fund Act. These acts fill important gaps in prudential standards and would provide the basis for the CBSI to strengthen its supervisory framework. The risk posed by the withdrawal of correspondent banking, though less of a problem than elsewhere, is non-negligible and places greater emphasis on ensuring effectiveness and enforcement of the AML/CFT Framework.

“The IMF stands ready to support the government’s reform efforts through policy advice and capacity building, including on monetary and fiscal policies, financial sector supervision and regulation, and macroeconomic statistics.

“The mission expresses its deep appreciation to the authorities and other stakeholders for the frank and constructive discussions. The IMF Executive Board is expected to discuss the 2017 Article IV Consultation in December 2017.”