IMF Staff Concludes Visit to Solomon Islands

IMF News, June 27, 2022

Source details

Press Release No. 22/233; mission conducted virtually during 14 to 24 June 2022.
End-of-Mission statement reflects preliminary IMF staff views; the mission will not result in a Board discussion.
IMF team led by Mr. Jarkko Turunen.
Key shocks: social unrest in Honiara in late 2021, a significant outbreak of COVID-19 in early 2022, and the indirect impact of the war in Ukraine.

Real GDP:
- Estimated contraction of 0.2 percent in 2021.
- Projected to fall by 4.5 percent in 2022 — the third year of contraction in a row.
- Expected to start recovering in the second half of 2022 and rebound further in 2023, supported by relaxation of COVID-19 related restrictions, activity related to the 2023 Pacific Games, and large donor-funded infrastructure projects.
Growth drivers and risks:
- Recovery contingent on acceleration in vaccinations (from the current low rate of about 26 percent) to allow safe border reopening.
- Uncertainty about the economic outlook remains high.

Fiscal:
- Fiscal deficit expected to widen further to over 6 percent of GDP in 2022, reflecting a domestic revenue shortfall and large spending needs stemming from the negative shocks.
- Budget financing depends crucially on continued donor support.
External:
- Trade deficit likely to deteriorate as imports are expected to outpace exports.
- Current account deficit projected to widen to 10.6 percent of GDP in 2022.
- Foreign reserves remain at a comfortable level at about 11 months of future imports, supported by donor inflows and the new allocation of the IMF’s Special Drawing Rights.

Inflation:
- Inflation has been low reflecting subdued domestic economic activity but is expected to increase in the months ahead on the back of higher global fuel and food prices, increased shipping costs and the economic recovery.
Monetary policy stance:
- Accommodative monetary policy remains appropriate for now given low inflation and subdued economic activity.
- The Central Bank of Solomon Islands needs to closely monitor inflation pressures and stand ready to adjust its accommodative policy stance to avoid global inflationary pressures from becoming entrenched domestically.
- Remedial steps by the government to reduce inflation, such as lower taxes on fuel, should be temporary to mitigate fiscal costs.

Banking sector resilience:
- Liquidity and capital ratios remain high.
- Elevated non-performing loans constrain lending to the private sector.
Policy priorities:
- Financial sector reforms should be aimed at increasing lending to the private sector and improving financial development and inclusion.
- Strengthening the AML/CFT framework would help safeguard financial stability.

Near-term policy stance:
- Accommodative monetary and fiscal policy remain appropriate to mitigate negative impacts on vulnerable households and firms.
Medium-term fiscal strategy:
- As recovery is secured, fiscal adjustment should aim to gradually rebuild fiscal buffers and create space for spending on achieving the Sustainable Development Goals and improving resilience to climate change shocks.
- Boosting revenues is crucial and should include:
- A comprehensive medium-term revenue strategy to maintain fiscal sustainability.
- On-going efforts to modernize tax administration.
- Introduction of a Value Added Tax.
- Further fiscal reforms needed to refocus expenditures to enhance growth and improve public financial management and governance.
Structural and governance reforms:
- Effective investment in human capital and infrastructure, structural reforms, and efforts to improve the business environment are crucial for sustainable and inclusive medium-term growth.
- Accelerating digital and green growth can foster longer-term economic transformation and improve resilience.
- Strengthening enforcement of governance standards, improving transparency (including publication of audit of pandemic-related spending and procurement information), and advancing the anti-corruption agenda remain crucial.

The team had constructive discussions with the Governor of the Central Bank of Solomon Islands, the Permanent Secretary of the Ministry of Finance and Treasury, other senior government officials, development partners, civil society and private sector representatives.
The team thanked the Solomon Islands’ authorities for their excellent cooperation.

IMF Staff statement issued June 27, 2022.