Press Release No. 18/72

IMF Executive Board Concludes 2017 Article IV Consultation with Solomon Islands

March 5, 2018

On February 16, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the 2017 Article IV Consultation with Solomon Islands.[1]

The Solomon Islands economy grew by 3.5 percent in 2016 driven by a peak in the forestry sector. Growth remained solid in 2017 and is projected at 3.0 for 2018, buoyed by infrastructure spending, fisheries and agriculture, although logging production is slowing down. Inflation is contained at an annual rate of just 1.6 percent in October 2017. The current account deficit has widened a little but international reserves levels are comfortable.

Monetary conditions are accommodative with interest rates below their long-term average. The issuance of Bokolo bills to mop up excess liquidity remains high. Credit growth has moderated from an average of around 15 percent over 2013–2016 to around 10 percent in August 2017.

The fiscal deficit is expected to have reached 4.0 percent of GDP in 2017 and to widen further in 2018. Public debt is picking up from a low level. The risks to the economy are on the downside with the weakening fiscal position heightening vulnerability to shocks.

Solomon Islands faces large medium-term development challenges. Infrastructure needs are large, particularly with regard to energy supply, transportation, and telecommunications.

Executive Board Assessment[2]

Executive Directors welcomed the recent solid growth performance, low inflation and comfortable external reserves position. However, as the fiscal position has weakened, depleting buffers and leading to an accumulation of domestic payment arrears, Directors encouraged the authorities to take timely actions to place the fiscal position on a firmer footing. Directors also noted that Solomon Islands faces long term development challenges, including from natural disasters and climate change.

Directors highlighted the need to strengthen fiscal discipline and improve the quality of public spending. They underscored the importance of tackling domestic arrears, gradually rebuilding cash reserves, and better prioritizing spending. Moreover, Directors encouraged the authorities to consider adopting an operational fiscal target to guide annual budgets. They also underscored the need to balance the pace of borrowing for critical infrastructure against debt sustainability, absorptive capacity and domestic market development.

Directors urged sustained fiscal reform efforts and commended the recently launched tax review. They highlighted the importance of introducing a Medium‑Term Fiscal Strategy to assess tradeoffs between development spending and building buffers, including for disaster risk reduction. Directors called for sustained efforts to enhance the transparency of Constituency Development Funds, strengthen revenue compliance, improve the legal framework, and strengthen the AML/CFT framework, to foster anti‑corruption efforts.

Directors considered the current monetary policy stance and the exchange rate peg broadly appropriate. However, the central bank can gradually increase the cash reserve requirement to absorb structural excess liquidity. Directors encouraged the authorities to periodically reassess the level of the exchange rate to ensure that it remains supportive of external stability and economic growth.

Director commended efforts to enhance financial inclusion and strengthen the financial sector. To this end, there is a need to clear the backlog of financial legislation including the new Financial Institutions Act, the Credit Unions Act, and National Provident Fund Act, and to strengthen the financial sector supervisory and regulatory frameworks.

Directors underlined the need to diversify the economy, generate new sources of growth and strengthen resilience. They emphasized the importance of achieving the objectives of the National Development Strategy, including significant investment in infrastructure, and legislative and policy reforms. Reforms are also needed to foster private sector development and improve the business environment.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.