IMF Staff Completes 2023 Article IV Mission to Solomon Islands
IMF News, February 21, 2023
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- Published: February 21, 2023
Overview and preliminary assessment
- Mission led by Mr. Masafumi Yabara visited Solomon Islands during February 8 to 21 to hold discussions on the 2023 Article IV Consultation.
- “The economy is recovering from a series of shocks, including civil unrest and a local outbreak of COVID-19. The reopening of the border and infrastructure spending ahead of the 2023 Pacific Games have boosted growth but the recovery has been fragile, as Russia’s war in Ukraine has led to higher inflation and a worsening of the terms of trade.”
- Growth and inflation projections:
- Growth rate is projected at 2.5 percent for 2023.
- Inflation is expected to moderate from 8.5 percent y-o-y at end-2022 but remain at 4.7 percent y-o-y at end-2023.
- External sector and reserves:
- Current account deficit is projected to widen to 15.0 percent of GDP in 2023 and remain around 9 percent of GDP over the medium term.
- Foreign reserves are forecast to decline further to 5.8 months of imports by 2027, although they would still be within the adequacy range at this lower level.
Downside risks and shock sensitivity
- Main downside risks identified:
- Resurgence of the pandemic.
- Natural disasters.
- Lower-than-expected support from development partners.
- Unsuccessful bond issuance in the shallow domestic market, which could hinder budget implementation.
- Further increase in global commodity prices.
- Mismanagement of infrastructure projects and their financing.
- Political instability in the runup to the general elections.
- Rises in geopolitical tensions.
Fiscal outlook and public debt
- Fiscal projections and drivers:
- The fiscal deficit is projected to widen to 6.3 percent of GDP in 2023, mainly driven by exceptional expenditures for the hosting of the Pacific Games and preparation for the general elections (summing up to 5.3 percent of GDP).
- Fiscal deficits are expected to persist over the medium term due to:
- Large spending needs for improving physical and human capital.
- Costs to maintain newly built infrastructure.
- Continued weak revenue trends including from declining log exports.
- Public debt projections:
- Public debt is projected to significantly increase to 22.8 percent of GDP in 2023, from 7.9 percent of GDP pre-pandemic.
- The public debt-to-GDP ratio could reach the authorities’ threshold of 35 percent before 2030, driven by increasing concessional external borrowing.
- Fiscal balance and cash buffers:
- Once the recovery is secured, rebuilding the government’s broad cash balance to at least two months of total spending should be prioritized.
Policy recommendations — fiscal and governance
- Expenditure management:
- Expenditures related to the Pacific Games and the general elections need to be well controlled to minimize the crowding out of other essential spending, including targeted support for the vulnerable and investment for future growth.
- Public investment projects need to be phased in line with the economy’s absorptive capacity and accompanying financing arrangements should be prudently negotiated to mitigate fiscal risks and ensure external balance and debt sustainability.
- Revenue and tax reform:
- Introducing a Value Added Tax is a high priority for consolidating the fragmented tax systems and yielding additional revenues over the medium term by improving compliance and expanding the tax base in line with the economy.
- Transparency, audits, and accountability:
- IMF staff welcomes the publication of the results of an audit of COVID-19 related expenditures.
- IMF staff recommends that the government audit expenditures related to the Pacific Games once the event is over and publish the results.
- Reviewing the Constituency Development Funds (CDF) Act and establishing regulations is critically important to ensure that the funds are used effectively and transparently.
- Governance and anti-corruption:
- Modernizing legal and regulatory frameworks and strengthening anti-corruption and auditing institutions remains critical for mitigating governance vulnerabilities and corruption risks.
- Ensuring independence and increasing resources of anti-corruption and auditing institutions is essential to advancing reforms to limit corruption and enhance accountability of public spending.
- Establishing strong governance and fiscal regimes for the mining sector, including through finalizing a Mining Act and rejoining the Extractive Industries Transparency Initiative, remains a priority.
Monetary, exchange rate, and structural recommendations
- Monetary policy and central bank operations:
- “The Central Bank of Solomon Islands should phase out its accommodative monetary measures, given the ongoing recovery and high inflation.”
- Further purchases of government securities at the secondary market should be avoided to safeguard macroeconomic stability and independence of the central bank.
- Exchange rate regime:
- “The current exchange rate regime remains appropriate, but a timely review of the currency basket is called for, given changes in trade patterns.”
- Structural reforms:
- Addressing structural bottlenecks including land registration is needed to generate new sources of inclusive growth.
Closing
- “The IMF team wishes to express its deep appreciation to the authorities and other stakeholders for frank and constructive discussions.”
Press Release No. PR2349 — IMF Communications Department, February 21, 2023.