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Solomon Islands : Requests for Purchase under the Rapid Financing Instrument and Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Solomon Islands »

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06/09/2020 | 03:38pm EDT

SOLOMON ISLANDS IMF Country Report No. 20/190

June 2020

REQUESTS FOR PURCHASE UNDER THE RAPID FINANCING INSTRUMENT AND DISBURSEMENT UNDER THE RAPID CREDIT FACILITY-PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR SOLOMON ISLANDS

In the context of the Requests for Purchase under the Rapid Financing Instrument and Disbursement Under the Rapid Credit Facility, the following documents have been released and are included in this package:

  • A Press Release including a statement by the Chair of the Executive Board.
  • The Staff Report prepared by a staff team of the IMF for the Executive Board's consideration on June 1, 2020, following discussions that ended on May 7 with the officials of Solomon Islands on economic developments and policies underpinning the IMF Purchase under the Rapid Financing Instrument and Disbursement under the Rapid Credit Facility. Based on information available at the time of these discussions, the staff report was completed on May 26.
  • A Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank.
  • A Statement by the Executive Director for Solomon Islands.

The documents listed below will be released.

Letter of Intent sent to the IMF by the authorities of Solomon Islands*

*Also included in the Staff Report.

The IMF's transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities' policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

International Monetary Fund Publication Services

PO Box 92780 Washington, D.C. 20090

Telephone: (202) 623-7430 Fax: (202) 623-7201

E-mail: publications@imf.orgWeb: http://www.imf.org

Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2020 International Monetary Fund

©International Monetary Fund. Not for Redistribution

PR 20/229

IMF Executive Board Approves a US$28.5 Million

Disbursement to Solomon Islands to Address the COVID-19

Pandemic

FOR IMMEDIATE RELEASE

  • The IMF Executive Board approved the disbursement of US$28.5 million in emergency financing to help Solomon Islands address urgent balance of payments needs created by COVID-19, which is having a severe impact on exports, tourism, and domestic activity.
  • To address the pandemic, the Solomon Islands' authorities have taken measures to prevent the entry of COVID-19, to increase health and containment spending, and to provide targeted support for vulnerable households and businesses.
  • IMF financing will help fill immediate financing needs and catalyze additional financing from its development partners to support the COVID-19 response.

Washington, DC - June 1, 2020. The Executive Board of the International Monetary Fund (IMF) today approved a disbursement to the Central Bank of Solomon Islands for an amount of SDR 20.8 million (about US$28.5 million, 100 percent of quota), comprising SDR 6.93 million (about US$ 9.5 million, 33.3 percent of quota) under the Rapid Credit Facility(RCF) and SDR 13.87 million (about US$ 19 million, 66.7 percent of quota) under the Rapid Financing Instrument(RFI) to help cover urgent balance of payments needs stemming from the COVID-19 pandemic.

The government has implemented strong measures to prevent the entry of COVID-19 and Solomon Islands has had no confirmed cases. Nevertheless, a sharp decline in commodities exports and tourism is expected to negatively impact the economy and weaken the external position, and necessary containment efforts will slow domestic economic activities.

The authorities' immediate policy responses have focused on strong and timely containment measures to limit the risk of a local outbreak while reprioritizing spending towards health care. The authorities have also recently adopted a fiscal stimulus package with policy measures targeted at providing social assistance, protecting jobs and incomes, and stabilizing the domestic economy. The IMF financial support will make a substantial contribution to filling immediate external financing needs that have emerged due to COVID-19. It is also expected to catalyze additional support from development partners.

Following the Executive Board discussion, Mr. Tao Zhang, Deputy Managing Director and Chair, made the following statement:

"The global and domestic measures to contain the COVID-19 pandemic are severely affecting the Solomon Islands' economy, through their impact on commodities exports, tourism, and domestic activity. These have given rise to an urgent balance of payments need. IMF support under the Rapid Financing Instrument and Rapid Credit Facility, in addition to the recent approval of debt service relief under the CCRT, will help address immediate financing needs and catalyze additional support from other development partners.

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"The authorities' immediate policy response has focused on strong and timely containment measures to limit the risk of a local outbreak while reprioritizing spending towards health care. They have also adopted a fiscal stimulus package with measures targeted at providing social assistance, protecting jobs and incomes and stabilizing the domestic economy.

"Additional assistance from development partners, beyond what has already been committed, is needed to close the remaining balance of payments gap and ease the fiscal situation. The authorities' commitment to high standards of transparency and governance in the management of financial assistance is welcome.

"Beyond the immediate response to the external shock, the authorities should remain committed to policies that promote inclusive growth and resilience while containing external pressures, protecting financial stability and preserving fiscal sustainability."

More information:

IMF Lending Tracker (emergency financing request approved by the IMF Executive Board) https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker

IMF Executive Board calendar https://www.imf.org/external/NP/SEC/bc/eng/index.aspx

IMF Factsheet: The IMF's Rapid Credit Facility (RCF) https://www.imf.org/en/About/Factsheets/Sheets/2016/08/02/21/08/Rapid-Credit-Facility

IMF Factsheet: The IMF's Rapid Financing Instrument (RFI) https://www.imf.org/en/About/Factsheets/Sheets/2016/08/02/19/55/Rapid-Financing-Instrument

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

May 26, 2020

REQUESTS FOR PURCHASE UNDER THE RAPID FINANCING INSTRUMENT AND DISBURSEMENT UNDER THE RAPID CREDIT FACILITY

EXECUTIVE SUMMARY

Context. The COVID-19 pandemic is having a severe impact on Solomon Islands' economy. The global economic slowdown has reduced demand for its commodity exports, including logging exports, and tourism. The authorities have enacted strong and timely containment measures to limit the risk of a local outbreak while orienting additional spending towards health care and support for the economy. The necessary containment measures have hampered domestic activities. The disruption of activity, together with loss in revenue from exports, are resulting in a sharp decline in foreign exchange reserves and an immediate external financing gap. The need for sufficient external buffers is urgent, particularly in the context of the basket exchange rate peg regime, a weak fiscal position, ongoing uncertainty and still large downside risks.

Request for Fund support. The authorities are seeking financial assistance under a blend of one-third of the disbursement under the "exogenous shock" window of the Rapid Credit Facility (RCF) and two-thirds from the Rapid Financing Instrument (RFI). The attached Letter of Intent (LOI) envisages a disbursement of SDR 20.8 million, equivalent to 100 percent of quota, with the full amount to become available upon Board approval. The authorities intend to use the RCF/RFI disbursement to provide balance of payment support. Staff assesses that Solomon Islands is faced with an urgent balance of payments need, meets other eligibility requirements for RCF/RFI and supports the request. Public debt is at moderate risk of distress and there is adequate capacity to repay the Fund. The IMF disbursement is expected to play a catalytic role in securing additional financing from development partners.

Macroeconomic policies. In addition to containment measures to limit the risk of a local outbreak and increasing health spending, immediate policy measures should reprioritize spending towards protecting vulnerable households and businesses. Going forward, improving budget planning in line ministries, strengthening commitment controls and procurement planning would help safeguard fiscal sustainability. Substantial new measures, including concessional external financing, will be needed to increase fiscal buffers. Comprehensive structural reforms, including improving the business environment, would help reduce the current account deficit over the medium term and foster diversification into new growth sectors. Strengthening enforcement of governance standards, improving transparency and advancing the anti-corruption agenda remain crucial.

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

Approved By

Jonathan D. Ostry

(APD) and Johannes

Wiegand (SPR)

An IMF team comprising Jarkko Turunen (Head), Piyaporn Sodsriwiboon, Vybhavi Balasundharam (all APD), Reshika Singh (Resident Representative's office, PIC) and Leni Hunter (Resident Representative, PIC) held teleconference discussions with the SolomonIslands authorities led by Central Bank Governor Luke Forau, Permanent Secretary for the Ministry of Finance and Treasury McKinnie Dentana, and other government officials during May 5-7, 2020. Ms. Laura Johnson (OED) also joined the teleconference discussions. Haopeng Xu and Connor Kinsella provided research and editorial assistance for this report.

CONTENTS

BACKGROUND___________________________________________________________________________________ 3

IMPACT OF THE PANDEMIC AND OUTLOOK __________________________________________________ 3

  1. Pre-COVID-19 Pandemic Economic Developments ____________________________________________ 3
  2. Impact of the COVID-19 Pandemic_____________________________________________________________ 3

POLICY DISCUSSIONS ___________________________________________________________________________ 7

  1. Fiscal Policy ____________________________________________________________________________________ 7
  2. Monetary, Exchange Rate and Financial Sector Policy__________________________________________ 9
  3. Structural Reforms _____________________________________________________________________________ 9

FUND SUPPORT UNDER THE RCF AND RFI __________________________________________________ 10

STAFF APPRAISAL _____________________________________________________________________________ 11

TABLES

  1. Selected Economic Indicators, 2016-2025 _____________________________________________________12 2a. Summary of Fiscal Accounts (in millions of Solomon Islands dollars)_________________________13 2b. Summary of Fiscal Accounts (in percent of GDP)_____________________________________________14
  1. Balance of Payments, 2016-2025 ______________________________________________________________15
  2. Summary of Accounts of the Banking System, 2016-21 _______________________________________16
  3. Core Financial Soundness Indicators, 2014-2019 ______________________________________________17
  4. Indicators of Capacity to Repay the Fund, 2020-2030 _________________________________________18

APPENDICES

I. Letter of Intent _________________________________________________________________________________19

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BACKGROUND

  1. The Executive Board completed the 2019 Article IV consultation on February 5, 2020. The staff report highlighted that economic activity has slowed and fiscal pressures are re-emerging.Policy discussions focused on maintaining stability, including the need for stronger fiscal management and near-termfiscal adjustment, setting a medium-termfiscal strategy, improving exchange rate management, strengthening financial stability, improving governance and building the conditions for sustainable growth.
  2. The authorities have requested financial support from the Fund to address the urgent balance of payment needs caused by the COVID-19 pandemic. Solomon Islands received debt service relief through the Catastrophe Containment and Relief Trust (CCRT) for repayment of debt service falling due to the IMF over the next six months, with potential extension up to two years, from April 14, 2020. Solomon Islands is a presumed blend country and one-thirdof the Fund disbursement is expected to be under the exogenous shock window of the Rapid Credit Facility (RCF) and two-thirdsfrom the Rapid Financing Instrument (RFI). The financing provided by the Fund is expected to help contain urgent balance of payments needs and catalyze support from other development partners.

IMPACT OF THE PANDEMIC AND OUTLOOK

A. Pre-COVID-19 Pandemic Economic Developments

3. Economic activity slowed prior to the pandemic. Real GDP growth moderated to 1.2 percent in 2019 owing to weakening logging exports and a temporary pause in economic activity around the general election period. Inflation remained subdued. The current account deficit widened as exports fell amid slowing demand for logs from China. Nevertheless, international reserves remained comfortable. Monetary conditions were accommodative. Excess liquidity overhang declined, as credit growth picked up to 5 percent. The fiscal deficit is estimated to have deteriorated sharply to 1.7 percent of GDP in 2019, as logging and other revenues declined. Public debt is low but was projected to rise over the medium term.

B. Impact of the COVID-19 Pandemic

4. The government has implemented strong measures to prevent the entry of COVID-19.Solomon Islands has no confirmed COVID-19cases as of May 21, 2020. To prevent the entry of COVID-19,the government immediately took actions including the suspension of all international flights, no entry of non-citizens,and strict mandatory quarantine for all returning passengers. In addition, the government has declared a state of emergency (extended until July 25), scaled down public services to essential services only and temporarily closed schools and some services. The government has imposed some local mobility restrictions and is actively encouraging its citizens to return to their home islands, disrupting agricultural cash crop production, business activity and consumer spending.

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5. The COVID-19 pandemic is having a severe impact on the economy. Real GDP growth is expected to decline to about -5.5percent in 2020 (compared to 2.5 percent in the pre-pandemicbaseline) as a result of a decline in logging, mining and fisheries exports, a contraction in tourism, as well as the negative impact of containment measures on domestic demand (Text Table 1 and Figure 1). The sharp fall in growth is expected to result in economic hardship, in particular for the poor and other vulnerable groups. Travel restrictions and supply-chaindisruptions are likely to delay infrastructure and mining projects and related activity. The recently enacted COVID-19economic stimulus package is expected to partly offset the contraction in demand. Despite a temporary surge in food prices in the first quarter of 2020, inflation is expected to remain muted owing to weak demand and falling energy prices. In line with the April World Economic Outlook projections for the global economy, growth is expected to rebound in 2021.

Text Figure 1. Solomon Islands: Logging Exports and Tourism

Logging Exports

Tourism Receipts

(in Million US$)

(in Million US$)

100

400

350

80

300

60

250

40

Current Baseline

20

Current Baseline

200

2019

Article IV

2019 Article IV

150

0

2018

2019

2020

2021

2022

2018

2019

2020

2021

2022

Sources: IMF staff projections.

Sources: IMF staff projections.

  1. The pandemic is expected to further weaken the fiscal position. A sharp contraction of logging exports is expected to lead to a decline in tax revenue, while health spending and containment costs are expected to rise. The bulk of expenditure compression is taking place through a cut in wage and operational costs, as funding pressures surge. The recently approved stimulus package of SI$319 million, about 2.6 percent of GDP, is expected to be financed through development partners' support and domestic sources. All in all, the fiscal deficit is projected to widen to 5.8 percent of GDP (compared to 3.7 percent in the pre-pandemicbaseline), with the cash balance falling well below the staff recommended minimum of two months of spending, and public debt rising.
  2. The current account deficit is expected to widen sharply. Exports are expected to decline by close to 25 percent, as import demand for round logs primarily from China collapses. While accounting for a relatively small share of foreign exchange receipts, both tourism arrivals and remittances are projected to plummet amid travel restrictions. The decline in oil prices will alleviate pressure on imports. The current account deficit is projected to increase to 17.8 percent of GDP in 2020 (compared to about 8 percent in the pre-pandemicbaseline). Foreign direct investment flows, especially those related to infrastructure projects, are likely to be delayed.

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Text Table 1. Solomon Islands: Comparison of Macroeconomic Forecasts

Est.

Projections

2019

2020

2021

Pre 1/

Post

Diff

Pre 1/

Post

Diff

(in percent of GDP unless specified otherwise)

Real Sector

Real GDP growth (percent)

1.2

2.5

-5.5

-8.0

2.7

5.6

2.8

CPI inflation (percent, period average)

1.8

2.3

2.8

0.5

2.9

3.7

0.8

Central Government Operations

Revenue and grants

32.9

35.8

32.2

-3.5

34.8

32.3

-2.6

Of which: grants

6.8

6.6

10.9

4.3

6.8

7.3

0.5

Expenditure

34.6

39.4

38.0

-1.4

39.4

37.4

-2.0

Of which: Recurrent Expenditure

25.5

28.0

22.8

-5.2

27.2

24.3

-2.9

Of which: Development Expenditure

9.1

11.4

15.3

3.8

12.2

13.2

0.9

Overall fiscal balance

-1.7

-3.7

-5.8

-2.2

-4.6

-5.2

-0.6

Balance of Payments

Current Account Balance

-8.9

-7.9

-17.8

-9.9

-10.1

-15.9

-5.8

Merchandise exports

28.8

37.1

22.9

-14.3

33.8

27.4

-6.3

Merchandise imports

31.3

42.0

30.8

-11.1

41.3

32.6

-8.7

Gross official reserves (in millions of U.S. dollar)

574

601

466

-135

596

427

-169

(in months of next years' imports of GNFS)

10.0

7.6

7.0

-0.6

7.0

5.7

-1.3

Source: IMF Staff Projection.

1/ Pre COVID-19 forecasts are from the 2019 Article IV. Post-COVID forecasts use recently published rebased GDP series (with 2012 as the base year). Pre COVID-19 ratios have been recomputed using the new GDP series for comparability.

  1. Mounting fiscal and balance of payment pressures are projected to trigger immediate financing needs (Text Table 2). A projected large current account deficit in 2020 is expected to be only partially financed by projected capital and financial account inflows, resulting in a sharp fall in international reserves that could risk undermining confidence in the basket exchange rate peg regime. Without additional exceptional financing, international reserves are expected to fall well below the top of the reserve adequacy range (estimated as four to seven months of prospective imports in the 2019 Article IV Consultation) this year and to decline further in 2021, before stabilizing over the medium-term.The total external financing gap is projected at about US$38.8 million (about 2.5 percent of GDP). The Solomon Islands is a resource-rich,fragile, small economy and maintaining sufficient reserve buffers is warranted given the exceptional uncertainties relating to the duration of the pandemic and its impact on major sources of foreign exchange (logging exports, tourism and remittance inflows), the need to be able to respond to (frequent) natural disaster events, as well as to preserve the credibility of the exchange rate regime.
  2. Fund financing under the RCF/RFI will make a substantial contribution to filling the urgent balance of payment needs. The disbursement will cover about a fifth of the external financing needs in 2020 (with the rest covered by a significant drawdown of international reserves and financing from development partners). The authorities are actively seeking additional budget support from development partners and the Fund support is expected to play a catalytic role in this

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effort. The World Bank has approved the first Solomon Islands transition to sustainable growth development policy operation of US$15 million (US$11.8 million in grant and US$3.2 million in loan), in addition to US$5 million under the COVID-19 Fast Track Facility expected to be approved by end May. The Asian Development Bank (ADB) has released US$6 million from its Pacific Disaster Resilience Program and is processing an additional US$20 million, a policy-based operation anchored on the government's COVID-19 response plan. The financing under the World Bank's COVID-19 Fast Track Facility and ADB is expected to equally comprise grant and loan disbursements.

Text Table 2. Solomon Islands: Projected External Financing Gap in 2020 1/

2019 Article IV

Projection after COVID-

19

(in percent of GDP)

Current account

-7.9

-17.8

Trade balance

-4.8

-8.0

Logging

23.6

13.7

Service

-5.8

-10.9

Tourism

5.7

0.7

Income

-1.9

-2.0

Current transfer

4.6

3.0

Capital/Financial account

9.2

8.1

Overall Balance of payment (- deficit)

0.0

-9.7

Change in gross official reserves ( + decrease)

0.0

7.1

External financing gap

0.0

2.5

Net use of IMF credit 2/

1.9

Other foreign financing (ADB) 3/

0.7

Source: IMF Staff Projection.

1/ Forecasts for the 2019 Article IV have been recomputed using the new rebased GDP (with 2012 as the base year) series for comparability.

2/ Includes 100% of Fund quota of which 1/3 as RCF and 2/3 as RFI. 3/ Includes US$10 million from ADB for COVID-19 response.

10. Risks are skewed to the downside. External risks include a sharper-than-expected and more prolonged global slowdown that would further hamper demand for commodity exports and tourism. Containment efforts could have a stronger-than-expected impact on domestic activity. Solomon Islands plans to ramp up infrastructure development in anticipation of Pacific Games 2023, but extended travel restrictions and supply chain disruptions could cause delays. Volatility in commodity prices-both on imports (rice and oil) and exports (logs, tuna, and agricultural products) adds to the risk profile. Domestic risks, including from fiscal spending pressures, decline in logging due to implementation of the logging sustainability policy, and vulnerability to severe natural disasters, are exacerbated by the uncertainty surrounding the pandemic. Finally, given the country's geographic dispersion and isolation, managing a local outbreak would be particularly challenging. A local outbreak would lead to a significant increase in human and fiscal costs, strain the weak health infrastructure and adversely affect growth, unemployment and poverty reduction.

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POLICY DISCUSSIONS

  1. Fiscal Policy
  1. To mitigate the impact of the pandemic, immediate policy responses have focused on health and containment spending and targeted support towards vulnerable households and businesses (Text Table 3). The authorities have enacted strong and timely containment measures to limit the risk of a local outbreak while reprioritizing spending towards health care. Health and containment spending are estimated to be about SI$137 million (1.1 percent of GDP). In addition to the increase in health-relatedspending, the government recently adopted a fiscal stimulus package of SI$319 million, around 2.6 percent of GDP. Policy measures are appropriately targeted at providing social assistance, protecting jobs and incomes, and stabilizing the domestic economy. These include payroll and employment support, capital grants to businesses to prevent job losses and support investment in productive and resource sectors, tax relief for affected businesses, equity injection to government-ownedcompanies, and advancing planned infrastructure investment. An Oversight Committee has been set up to oversee the stimulus spending and prevent any abuse or misuse of the package. The authorities have also committed to publication of an audit of COVID-19related expenditures and related procurement information. In addition, the government is committed to reprioritizing and enforcing budgetary discipline in the line ministries to alleviate budget pressures resulting from the pandemic. The government has scaled down non-essentialpublic services and its employees have all been required to take emergency leave. The authorities are planning to continue payroll for public servants, but the costs and financing of the measure are yet to be announced.
  2. Beyond the immediate response to the pandemic, the weak fiscal position calls for policies to increase fiscal buffers. The fiscal deficit is projected to increase significantly in 2020 and remain elevated over the medium term, as revenues fall back with reduced logging exports. Substantial new policy measures and concessional budget support will be needed to build fiscal buffers (towards a broad cash balance of at least two months of total spending) and for debt to remain within the government's target of 35 percent of GDP. Targeted efforts to recover tax arrears and strengthen revenue administration and compliance should continue. Public financial management (PFM) weaknesses need to be addressed, including finalizing the regulations under the PFM Act and developing short-termliquidity forecasts. The Ministry of Finance and Treasury should complete its review of the payroll and allowances to better align staffing need and wage expense. Prudent spending on Constituency Development Funds, Pacific Games and tertiary scholarships would help reduce fiscal pressures. A stocktaking of arrears is needed to clear outstanding obligations and formulate a plan to prevent further accumulation.

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Text Table 3. Solomon Islands: COVID-19 Fiscal Policy Response

Amount in SI$ million

In percent of GDP

Health and Containment Spending

137

1.1

Economic Stimulus Package

319

2.6

Budget Measures:

266

2.2

Health-related spending:

Health grants allocated to all provincial health authorities

10

0.1

Social assistance:

Support the resumption of schools

5

0.0

Employment support for women and youths

5

0.1

Continued government payroll for civil servants who faced 50 percent

To be announced

n.a.

reduction in salaries due to a shutdown of public services.

Additional support:

Capital grants to targeted existing investment in productive and resource

sectors, including agriculture, forestry, fisheries and tourism, as well as

141

1.1

government-owned companies 1/

Special rental relief package to affected SMEs

5

0.0

Tax relief for affected businesses, especially tourism sector

Cost neutral

n.a.

Economic recovery:

Advancing infrastructure investment such as agriculture projects, bridges,

100

0.8

airport.

Below-the-line Measures:

Equity injections to SOEs:

  • Equity injection to the Development Bank of Solomon Islands Loans to businesses:
  • Concessional loans to SMEs and large corporates through the Development Bank of Solomon Islands

Source: Solomon Islands Government.

53

0.4

20

0.2

33

0.3

1/ Government-owned companies including Solomon Airlines, Solomon Water, Soltuna, and Commodities Export Marketing Authority.

13. A comprehensive approach to medium-term fiscal policy that safeguards debt sustainability is needed. Public debt is currently low but is expected to rise over the medium term, with the negative impact of the pandemic leading to a further buildup of debt vulnerabilities (Joint Bank-FundDebt Sustainability Analysis). The priorities for medium-termfiscal policy should include:

  • Articulating the policy intent for the new VAT, as well as other reforms, taking into account the fiscal regime for the mining sector, and building consensus will be important. The reforms should at least be revenue neutral.
  • Improving budget planning in line ministries, strengthening commitment controls and procurement planning, and prioritizing quality spending in line with the National Development Strategy would help safeguard fiscal sustainability.
  • To address risks stemming from frequent natural disasters, it is important to strengthen efforts to rebuild fiscal buffers and undertake infrastructure investment to increase resilience.

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  1. Monetary, Exchange Rate and Financial Sector Policy
  1. Monetary policy remains accommodative. To support a low inflation environment with weak growth outlook and slowing credit growth, the Central Bank of the Solomon Islands (CBSI) has adopted an easing cycle since September 2019 and reiterated its commitment to continue expansionary monetary policy. An expansionary monetary policy stance is appropriate for current conditions, although the transmission channels are weak. Excess liquidity in the banking system is structural, in part reflecting lags between donor inflows and spending. Addressing constraints on National Provident Fund investment abroad, stemming CBSI valuation losses, and tackling weak investor protection and uncertain property rights would reduce excess liquidity, enable collateralized lending, and improve monetary policy effectiveness. Additional CBSI measures could include a trade credit facility to provide businesses with opportunities for competitive financing and potential purchases of government bonds in the secondary market. The basket exchange rate peg remains an appropriate nominal anchor. Credibility of the basket exchange rate regime is preserved by maintaining an adequate level of gross official reserves.
  2. Financial support measures are expected to be part of the government's stimulus package (Text Table 3). The economic impact of the pandemic will affect borrowers' capacity to service loans and weigh on banks' earnings. The government is encouraging commercial banks to provide loan and interest relief to affected borrowers for three to six months. Financial injections to support investment in productive and resource sectors and concessional loans to large industries will be provided through the recently established Development Bank of Solomon Islands (DBSI). The National Provident Fund (NPF) is providing financial assistance to its members and eliminating surcharges and penalties to employers' contributions to the fund.
  3. Financial sector vulnerabilities persist. As of December 2019, non-performingloans increased to 10.4 percent and bank profitability declined. Credit to the private sector is expected to shrink and non-performingloans to rise further this year, owing to a sharp contraction of economic activity and delays in government payments. While banks remain profitable, a significant further deterioration could lead to an increase in contingent liability risks for the government. Financial sector reforms should continue, including to strengthen supervision and increase capacity to respond effectively to risks to the financial system. The backlog of financial legislation including a review of the Credit Union Act and the Insurance Act should be finalized, and actions should be taken to ensure the effectiveness of the AML/CMT framework to prevent future risks, including from correspondent banking pressures. The DBSI is expected to play a pivotal role in supporting the economic recovery. It is critical to ensure that DBSI is subject to rigorous supervision standards and has a strong governance structure so that it does not add to fiscal risks. The CBSI should continue to promote digital banking as it becomes integral to financial inclusion.
  1. Structural Reforms

17. Comprehensive structural reforms are needed to increase competitiveness, foster diversification and support inclusive growth over the medium-term.Progress in strengthening

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transparency and governance should continue. The government should advance the anti-corruption agenda, apply the mining fiscal regime rigorously and enforce the governance standards rigorously. This would encourage investment into new growth sectors and reduce fiscal leakages. Improving sanitation, transport, communication and energy services would facilitate diversification. Enforcement of contracts, procedures for trading across borders, insolvency resolution and access to finance are areas for improvement. Digitalization and registration could potentially improve record keeping, revenue collection, improve access to credit and help tackle property rights issues. State- owned enterprises have recorded high profits from monopoly positions- stronger regulation or other initiatives could help promote greater affordability in service provision.

FUND SUPPORT UNDER THE RCF AND RFI

  1. Given the urgency of the situation, an RCF/RFI disbursement is the most appropriate instrument for Fund assistance. The Solomon Islands is facing a temporary shock due to the COVID-19pandemic and the urgent balance of payments need is expected to diminish as global health and economic conditions normalize.
  2. Staff consider access at 100 percent of quota with blend of RCF and RFI to be appropriate given the scale of the urgent needs. The pandemic has created a large external financing gap of about US$38.8 million, equivalent to 2.5 percent of GDP, even after accounting for significant decline in reserves and official inflows from multilateral and bilateral partners for budgetary support of around US$44 million. Disbursements from the IMF under an RCF/RFI blend would total SDR 20.8 million (about US$28.8 million), comprising SDR 6.93 million for the RCF and SDR 13.87 million for the RFI. In addition, the expected disbursement from the ADB amounting to US$10 million will go toward filling the financing gap. Outstanding access with the IMF would increase to 103.8 percent of quota and remain below allowable limits. The Solomon Islands currently has outstanding credit to the fund equivalent to 4 percent of quota from the 2012 Extended Credit Facility (ECF).
  3. Capacity to repay the Fund under this access would remain adequate. A disbursement of 100 percent of quota would increase the Fund's exposure by 2 percent of GDP and 6.4 percent of foreign exchange reserves. Total repayments would peak in 2024 at 1.5 percent of government revenue and 1.4 percent of exports of goods and services.
  4. The Solomon Islands continues to be assessed at moderate risk of external and overall debt distress. The updated debt sustainability analysis (DSA) capturing the impact of the COVID-19pandemic shock shows that debt remains at a moderate risk of debt distress. All external debt indicators are below their respective thresholds under the baseline, but breach thresholds under the most extreme stress scenario with adverse shock to growth and exports. Public debt also remains below its indicative threshold under the baseline but breaches the threshold under the most extreme shock to real GDP growth.
  5. In line with the IMF safeguards policy, the authorities have committed to undergoing a new safeguards assessment. The authorities intend to use the RCF/RFI to provide balance of

10INTERNATIONAL MONETARY FUND

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

payments support and disbursement will be made to the CBSI. The previous safeguards assessment was concluded in 2013. The assessment is to be completed before the Board approval of any subsequent arrangement to which the safeguards policy applies. The authorities will authorize the external auditor of the CBSI to share relevant documents and hold discussions with Fund staff and have published on the CBSI website the audited financial statements for the year ended December 31, 2019.

STAFF APPRAISAL

  1. The COVID-19 pandemic is having a severe impact on the Solomon Islands economy. A sharp decline in exports and tourism is expected to negatively impact the economy and weaken the external position, and necessary containment efforts will slow down domestic economic activities.
    GDP growth in 2020 is expected to decline to about -5.5 percent, about 8 percentage points lower than the pre-pandemic projection. The current account and fiscal deficits are expected to widen and foreign reserves to fall. Given the depth and duration of the economic impact of pandemic is highly uncertain, downside risks to the already-weak baseline outlook are significant.
  2. Based on these developments, the country is facing urgent external financing needs. Estimates point to a large external financing gap of around US$38.8 million, equivalent to 2.5 percent of GDP. Maintaining sufficient reserve buffers is warranted given the exceptional uncertainties relating to the impact and duration of the pandemic, the need to be able to respond to (frequent) natural disaster events, as well as to preserve the credibility of the exchange rate regime. Fiscal financing needs are large and buffers low.
  3. Staff supports the authorities' immediate priorities to mitigate the impact of the pandemic and preserve macroeconomic stability. The authorities' immediate efforts focused on preventing the entry of the COVID-19through restricting international and domestic travel, scaling down public services to essential services only, and temporarily closing schools and some services. To mitigate the impact of the pandemic and support the recovery, the government has increased health spending and introduced a fiscal stimulus package. Beyond this immediate response, the authorities remain committed to building the conditions for sustainable growth, strengthening fiscal management, reigning in financial stability and improving governance.
  4. Against this background, staff supports the authorities' request for a disbursement under the RCF/RFI in the amount of SDR 20.8 million (about US$28.8 million, 100 percent of quota), comprising SDR 6.93 million for the RCF and SDR 13.87 million for the RFI. Staff's support is based on the urgent balance of payment needs arising from a major external shock caused by the COVID-19pandemic. While the risks to the outlook are tilted to the downside, the Solomon Islands continues to be assessed at moderate risk of debt distress and its capacity to repay the Fund remains strong.

INTERNATIONAL MONETARY FUND 11

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

Table 1. Solomon Islands: Selected Economic Indicators, 2016-2025

Per capita GDP (2017): US$2,375

Population (2017): 613,712

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Est.

Proj.

GROWTH AND PRICES

Annual percentage change unless otherwise indicated

Real GDP

5.9

5.3

3.9

1.2

-5.5

5.6

4.0

3.4

3.0

2.9

CPI (period average)

0.5

0.5

3.5

1.8

2.8

3.7

2.2

3.6

3.9

4.2

CPI (end of period)

-2.2

2.1

3.9

2.8

1.2

4.1

3.4

3.8

4.0

4.3

GDP deflator

0.0

1.4

4.2

1.3

0.8

3.6

1.8

3.4

3.6

3.5

Nominal GDP (in SI$ millions)

10,957

11,703

12,676

12,992

12,384

13,543

14,336

15,321

16,350

17,425

CENTRAL GOVERNMENT OPERATIONS

In percent of GDP

Total revenue and grants

38.6

39.2

40.0

32.9

32.2

32.3

33.4

33.5

32.6

32.1

Revenue

28.4

30.2

30.1

26.1

21.4

25.0

25.8

25.7

25.3

25.1

Grants

10.2

9.0

9.9

6.8

10.9

7.3

7.6

7.8

7.4

7.0

Total expenditure

42.7

42.7

39.1

34.6

38.0

37.4

37.4

37.7

36.8

36.2

excluding grant-funded expenditure

32.5

33.6

29.2

27.8

27.2

30.1

29.8

30.0

29.4

29.3

Recurrent expenditure

29.3

29.2

29.2

25.5

22.8

24.3

24.4

24.3

24.2

24.4

Development expenditure

13.4

13.5

9.9

9.1

15.3

13.2

13.0

13.5

12.6

11.8

Unrecorded expenditure

-1.2

-1.3

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Overall balance

-4.2

-3.4

0.8

-1.7

-5.8

-5.2

-4.0

-4.3

-4.2

-4.1

Foreign financing (net)

0.3

0.2

-0.1

0.6

3.6

3.7

3.3

3.3

2.6

2.4

Domestic financing (net)

2.7

1.9

-0.8

1.1

2.3

1.5

0.8

1.0

1.6

1.7

Central government debt

7.1

8.4

8.2

8.9

15.7

19.2

22.2

24.7

26.8

29.0

Domestic debt

0.4

1.6

1.9

2.2

3.2

4.1

4.6

5.0

5.8

6.8

External debt

6.7

6.7

6.3

6.7

12.5

15.1

17.6

19.7

21.0

22.2

MACROFINANCIAL

Annual percentage change (end of year)

Credit to private sector

12.1

6.4

4.1

5.0

-4.1

5.7

6.0

5.0

4.5

4.5

Broad money

13.4

3.5

6.8

-3.0

-15.6

11.9

2.2

6.7

1.0

3.0

Reserve money

14.5

7.5

10.6

-7.0

-13.8

10.0

6.4

3.7

2.2

3.0

BALANCE OF PAYMENTS

In US$ millions unless otherwise indicated

Current account balance

-48.8

-62.8

-47.8

-142.5

-271.1

-264.4

-230.3

-222.0

-221.8

-177.7

(percent of GDP)

-3.5

-4.3

-3.0

-8.9

-17.8

-15.9

-13.1

-11.8

-11.0

-8.3

Trade balance

-71.7

-81.7

-67.6

-160.1

-287.2

-259.2

-244.2

-240.7

-252.7

-214.3

(percent of GDP)

-5.2

-5.6

-4.3

-10.0

-18.9

-15.6

-13.8

-12.8

-12.6

-10.0

Foreign direct investment

36.0

35.9

15.9

25.4

15.2

68.5

73.3

72.4

77.1

83.0

(percent of GDP)

2.6

2.5

1.0

1.6

1.0

4.1

4.2

3.8

3.8

3.9

Overall balance

-5.9

63.2

36.2

-39.0

-147.0

-39.1

9.9

29.8

23.9

72.7

Gross official reserves (in US$ millions, end of period) 1/

513.6

576.9

613.1

574.1

465.9

426.5

436.1

460.9

475.1

541.8

(in months of next year's imports of GNFS)

9.1

9.3

9.8

10.0

7.0

5.7

5.6

5.8

5.7

6.0

EXCHANGE RATE (SI$/US$, end of period)

8.2

7.9

8.1

8.2

...

...

...

...

...

...

Real effective exchange rate (end of period, 2010 = 100)

127.8

126.4

126.5

126.7

MEMORANDUM ITEMS:

Cash balance (in SI$ millions)

412

343

311

206

47

0

0

0

0

0

in months of recurrent spending

2.0

1.5

1.2

0.8

0.3

0.0

0.0

0.0

0.0

0.0

SIG Deposit Account (In addition to cash balance, in SI$ millions)

140

140

140

140

140

140

140

140

140

140

Broader cash balance (=Cash balance+ SIG Deposit Account; in SI$

552

483

451

346

187

140

140

140

140

140

millions)

in months of total spending 2/

1.9

1.5

1.5

1.2

0.7

0.4

0.4

0.4

0.3

0.3

Public domestic debt, including arrears (in SI$ millions)

43

193

245

288

401

556

662

768

945

1,193

Sources: Data provided by the authorities; and IMF staff estimates and projections.

1/ Includes SDR allocations made by the IMF to Solomon Islands in 2009 and actual and prospective disbursements under the IMF-supported programs. 2/ Total spending is defined as total expenditure, excluding grant-funded expenditure.

12INTERNATIONAL MONETARY FUND

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

Table 2a. Solomon Islands: Summary of Fiscal Accounts

(In millions of Solomon Islands dollars)

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Act.

Act.

Act

Act

Original

Proj.

Proj.

Proj.

Proj.

Proj.

Proj.

Budget

Total revenue and grants

4,226

4,592

5,068

4,280

4,541

3,988

4,369

4,784

5,131

5,335

5,590

Total revenue

3,108

3,534

3,815

3,391

3,484

2,645

3,379

3,692

3,938

4,129

4,378

Tax revenue

2,611

2,954

3,275

2,871

2,932

2,131

2,824

3,106

3,312

3,461

3,667

Income and profits

887

1,028

1,090

1,049

1,066

882

1,080

1,144

1,222

1,298

1,393

Goods and services

762

878

1,095

937

1,102

793

958

1,015

1,085

1,156

1,232

International trade and transactions

962

1,048

1,090

886

765

456

786

948

1,004

1,007

1,042

Of which: Tax on logging

579

629

790

581

475

225

532

667

706

708

731

Other revenue

496

579

540

520

552

513

555

586

626

668

712

Grants

1,118

1,058

1,253

890

1,057

1,344

990

1,092

1,194

1,206

1,212

Development grants

423

471

590

594

713

709

685

771

852

844

827

Recurrent budget grants

695

587

663

296

344

635

305

321

342

363

385

Expenditure

4,682

4,994

4,960

4,496

4,509

4,712

5,070

5,362

5,783

6,015

6,313

Of which: excluding grant-funded expenditure

3,564

3,936

3,707

3,606

3,452

3,368

4,080

4,270

4,590

4,809

5,101

Recurrent expenditure

3,211

3,415

3,700

3,317

3,229

2,823

3,288

3,493

3,720

3,959

4,252

Of which: excluding grant-funded expenditure

2,516

2,828

3,037

3,021

2,920

2,188

2,982

3,172

3,378

3,596

3,867

Compensation of employees

1,009

1,113

1,169

1,231

1,292

944

1,284

1,359

1,452

1,550

1,652

Interest payments

82

169

70

54

22

23

35

50

62

76

95

Other recurrent expenditure

2,120

2,134

2,323

2,031

1,915

1,856

1,968

2,084

2,206

2,332

2,506

Government funded

1,425

1,547

1,661

1,736

1,606

1,221

1,663

1,762

1,864

1,970

2,121

Grant-funded

695

587

663

296

309

635

305

321

342

363

385

Development expenditure

1,472

1,579

1,261

1,179

1,279

1,889

1,782

1,870

2,064

2,057

2,061

Government funded development expenditure

1,049

1,108

670

585

775

1,180

1,098

1,099

1,212

1,213

1,234

Domestic

944

1,007

626

451

389

694

556

588

628

671

715

External loan

104

101

45

134

386

486

542

511

583

543

519

Grant funded

423

471

590

594

504

709

685

771

852

844

827

Of which: CDFs

322

374

380

220

120

286

313

331

353

376

400

Discrepancy 1/

-129

-156

0

0

0

0

0

0

0

0

0

Current balance 2/

592

705

778

370

564

457

397

521

559

533

511

Primary balance

-142

-234

178

-162

55

-701

-666

-528

-590

-604

-628

Overall balance

-456

-403

108

-215

33

-723

-701

-578

-652

-680

-723

Total financing

456

403

-108

215

-33

723

701

578

652

680

723

Net foreign financing

31

28

-10

77

86

444

499

468

503

422

427

Net domestic financing

425

219

-98

139

-119

279

202

111

150

258

296

Memorandum items:

Nominal GDP (in SI$ millions)

10,957

11,703

12,676

12,992

12,384

12,384

13,543

14,336

15,321

16,350

17,425

Public domestic debt, including arrears (in SI$ millions)

43

193

245

288

288

401

556

662

768

945

1,193

Narrow cash balance (in SI$ millions) 3/

412

343

311

206

206

47

0

0

0

0

0

in months of recurrent spending 4/

2.0

1.5

1.2

0.8

0.8

0.3

0.0

0.0

0.0

0.0

0.0

SIG Deposit Account and others (in SI$ millions)

140

140

140

140

140

140

140

140

140

140

140

Broader cash balance (in SI$ millions)

552

483

451

346

346

187

140

140

140

140

140

in months of total spending 5/

1.9

1.5

1.5

1.2

1.2

0.7

0.4

0.4

0.4

0.3

0.3

Accumulated domestic arrears (in SI$ million)

138

0

0

0

0

0

0

0

0

0

Non-commodity primary balance 6/ (in SI$ millions)

-953

-863

-612

-743

-420

-925

-1,198

-1,205

-1,311

-1,348

-1,398

Sources: Data provided by the Solomon Islands authorities; and IMF staff estimates and projections.

1/ Includes changes in the stock of unpaid payment orders and unpresented checks (+ = reduction) and the statistical discrepancy. 2/ Defined as total revenue minus recurrent expenditure, excluding grant-funded recurrent expenditure.

3/ Defined as the sum of government deposits held at the CBSI and the commercial banks minus unpaid payment orders and unpresented checks. From 2016 onward, deposits held at the CBSI and the commercial banks have used as a proxy for the narrow cash reserve

4/ Recurrent spending is defined as recurrent expenditure, excluding grant-funded recurrent expenditure.

5/ Broader cash balance=Narrow cash balance+ SIG Deposit Account; Total spending is defined as total expenditure, excluding grant-funded expenditure. 6/ Defined as nonmineral nonlogging revenue (excludes grants) minus government-funded spending excluding interest payments.

INTERNATIONAL MONETARY FUND 13

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

Table 2b. Solomon Islands: Summary of Fiscal Accounts

(In percent of GDP)

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Act.

Act.

Act.

Proj.

Original

Proj.

Proj.

Proj.

Proj.

Proj.

Proj.

Budget

Total revenue and grants

38.6

39.2

40.0

32.9

36.7

32.2

32.3

33.4

33.5

32.6

32.1

Total revenue

28.4

30.2

30.1

26.1

28.1

21.4

25.0

25.8

25.7

25.3

25.1

Tax revenue

23.8

25.2

25.8

22.1

23.7

17.2

20.8

21.7

21.6

21.2

21.0

Income and profits

8.1

8.8

8.6

8.1

8.6

7.1

8.0

8.0

8.0

7.9

8.0

Goods and services

7.0

7.5

8.6

7.2

8.9

6.4

7.1

7.1

7.1

7.1

7.1

International trade and transactions

8.8

9.0

8.6

6.8

6.2

3.7

5.8

6.6

6.6

6.2

6.0

Of which: Tax on logging

5.3

5.4

6.2

4.5

3.8

1.8

3.9

4.7

4.6

4.3

4.2

Other revenue

4.5

5.0

4.3

4.0

4.5

4.1

4.1

4.1

4.1

4.1

4.1

Grants

10.2

9.0

9.9

6.8

8.5

10.9

7.3

7.6

7.8

7.4

7.0

Development grants

3.9

4.0

4.7

4.6

5.8

5.7

5.1

5.4

5.6

5.2

4.7

Recurrent budget grants

6.3

5.0

5.2

2.3

2.8

5.1

2.3

2.2

2.2

2.2

2.2

Expenditure

42.7

42.7

39.1

34.6

36.4

38.0

37.4

37.4

37.7

36.8

36.2

Of which: excluding grant-funded expenditure

32.5

33.6

29.2

27.8

27.9

27.2

30.1

29.8

30.0

29.4

29.3

Recurrent expenditure

29.3

29.2

29.2

25.5

26.1

22.8

24.3

24.4

24.3

24.2

24.4

Of which: excluding grant-funded expenditure

23.0

24.2

24.0

23.3

23.6

17.7

22.0

22.1

22.0

22.0

22.2

Compensation of employees

9.2

9.5

9.2

9.5

10.4

7.6

9.5

9.5

9.5

9.5

9.5

Interest payments

0.7

1.4

0.6

0.4

0.2

0.2

0.3

0.4

0.4

0.5

0.5

Other recurrent expenditure

19.3

18.2

18.3

15.6

15.5

15.0

14.5

14.5

14.4

14.3

14.4

Government funded

13.0

13.2

13.1

13.4

13.0

9.9

12.3

12.3

12.2

12.0

12.2

Grant funded

6.3

5.0

5.2

2.3

2.5

5.1

2.3

2.2

2.2

2.2

2.2

Development expenditure

13.4

13.5

9.9

9.1

10.3

15.3

13.2

13.0

13.5

12.6

11.8

Government funded

9.6

9.5

5.3

4.5

6.3

9.5

8.1

7.7

7.9

7.4

7.1

Domestic

8.6

8.6

4.9

3.5

3.1

5.6

4.1

4.1

4.1

4.1

4.1

External loan

0.9

0.9

0.4

1.0

3.1

3.9

4.0

3.6

3.8

3.3

3.0

Grant funded

3.9

4.0

4.7

4.6

4.1

5.7

5.1

5.4

5.6

5.2

4.7

Of which: CDFs

2.9

3.2

3.0

1.7

1.0

2.3

2.3

2.3

2.3

2.3

2.3

Discrepancy 1/

-1.2

-1.3

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Current balance 2/

5.4

6.0

6.1

2.8

4.6

3.7

2.9

3.6

3.7

3.3

2.9

Primary balance

-1.3

-2.0

1.4

-1.2

0.4

-5.7

-4.9

-3.7

-3.9

-3.7

-3.6

Overall balance

-4.2

-3.4

0.8

-1.7

0.3

-5.8

-5.2

-4.0

-4.3

-4.2

-4.1

Total financing

4.2

3.4

-0.8

1.7

-0.3

5.8

5.2

4.0

4.3

4.2

4.1

Net foreign financing

0.3

0.2

-0.1

0.6

0.7

3.6

3.7

3.3

3.3

2.6

2.4

Net domestic financing

3.9

1.9

-0.8

1.1

-1.0

2.3

1.5

0.8

1.0

1.6

1.7

Memorandum items:

Accumulated domestic arrears (In percent of GDP)

1.2

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Public domestic debt, including arrears (In percent of GDP)

0.4

1.6

1.9

2.2

2.3

3.2

4.1

4.6

5.0

5.8

6.8

Non-commodity primary balance (In percent of GDP)

-8.7

-7.4

-4.8

-5.7

-3.4

-7.5

-8.8

-8.4

-8.6

-8.2

-8.0

Sources: Data provided by the Solomon Islands authorities; and IMF staff estimates and projections.

1/ Includes changes in the stock of unpaid payment orders and unpresented checks (+ = reduction) and the statistical discrepancy.

2/ Defined as total revenue minus recurrent expenditure, excluding grant-funded recurrent expenditure.

14INTERNATIONAL MONETARY FUND

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

Table 3. Solomon Islands: Balance of Payments, 2016-25 1/

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Est.

Proj.

(In millions of U.S. dollars)

Current account balance

-48.8

-62.8

-47.8

-142.5

-271.1

-264.4

-230.3

-222.0

-221.8

-177.7

Trade balance for goods

12.8

7.2

6.5

-39.4

-121.2

-85.6

-93.1

-105.5

-120.3

-80.9

Exports

432.1

469.3

536.0

460.1

348.3

456.6

527.8

536.9

537.7

610.0

Logs

303.7

312.4

372.9

318.6

208.4

274.0

327.4

329.9

324.1

328.0

Fish

41.8

48.7

56.2

48.7

47.3

54.6

65.1

74.4

85.0

97.1

Minerals

2.3

16.8

19.0

20.4

37.4

67.7

68.6

61.9

53.7

102.3

Other

84.4

91.4

87.9

72.4

55.2

60.4

66.6

70.6

74.9

82.5

Imports

-419.4

-462.1

-529.4

-499.5

-469.5

-542.3

-620.9

-642.4

-658.0

-690.8

Trade balance for services

-84.5

-88.9

-74.1

-120.8

-166.0

-173.5

-151.1

-135.1

-132.4

-133.4

Exports

122.6

128.9

144.7

128.1

52.4

80.0

118.4

149.5

166.6

181.1

Imports

-207.2

-217.8

-218.8

-248.9

-218.4

-253.6

-269.5

-284.7

-299.0

-314.5

Income balance

-41.6

-33.3

-20.4

-12.6

-29.9

-29.2

-28.9

-28.9

-28.5

-30.4

Current transfers balance

64.5

52.2

40.2

30.2

46.0

24.0

42.8

47.5

59.4

67.0

Of which : Official transfers, net

80.8

61.1

50.5

60.2

74.7

34.8

37.1

39.6

42.3

45.0

Capital and financial account balance

93.4

99.2

77.6

90.2

124.1

225.3

240.2

251.8

245.8

250.3

Capital account balance

53.3

59.6

60.0

73.1

87.2

84.2

94.8

104.8

103.8

101.8

Direct investment balance

36.0

35.9

15.9

25.4

15.2

68.5

73.3

72.4

77.1

83.0

Portfolio investment balance

-1.7

-2.1

0.2

-3.8

0.0

0.0

0.0

0.0

0.0

0.0

Other investment balance

5.8

5.8

1.5

-4.4

21.6

72.5

72.2

74.6

65.0

65.6

Assets

-7.5

-4.9

-6.0

1.1

-2.5

-8.5

-7.9

-12.4

-17.0

-13.5

of which, amortization of official loans

-9.2

-9.0

-6.9

-7.1

-5.2

-5.3

-5.3

-9.9

-14.8

-11.4

Liabilities

13.3

10.7

7.5

-5.5

24.1

81.0

80.1

87.0

82.0

79.1

of which, disbursement of official loans (incl. SDR)

23.5

18.0

9.0

16.5

49.8

66.7

62.8

71.7

66.7

63.9

Errors and omissions

-38.7

-99.6

-66.1

91.3

0.0

0.0

0.0

0.0

0.0

0.0

Overall balance

-5.9

63.2

36.2

-39.0

-147.0

-39.1

9.9

29.8

23.9

72.7

Financing

-5.2

-44.1

-36.2

39.0

147.0

39.1

-9.9

-29.8

-23.9

-72.7

Change in gross reserves (- = increase)

-2.2

-41.2

-32.7

41.1

108.2

39.4

-9.6

-24.8

-14.1

-66.8

Total Financing gap

0.0

0.0

0.0

0.0

38.8

0.0

0.0

0.0

0.0

0.0

Net use of IMF Credit

-3.1

-3.0

-3.5

-2.1

28.8

-0.2

-0.3

-5.0

-9.8

-5.9

Of which: IMF Disbursements 2/

0.2

0.0

0.0

0.0

28.8

0.0

0.0

0.0

0.0

0.0

Of which: Repayments to the IMF

-3.3

-3.0

-3.5

-2.1

-0.1

-0.2

-0.3

-5.0

-9.8

-5.9

Other Financing (net of IMF credit) 3/

0.0

0.0

0.0

0.0

10.0

0.0

0.0

0.0

0.0

0.0

(In percent of GDP, unless otherwise indicated)

Current account

-3.5

-4.3

-3.0

-8.9

-17.8

-15.9

-13.1

-11.8

-11.0

-8.3

Trade balance for goods

0.9

0.5

0.4

-2.5

-8.0

-5.1

-5.3

-5.6

-6.0

-3.8

Exports

31.3

32.2

33.8

28.8

22.9

27.4

29.9

28.5

26.7

28.5

Imports

30.4

31.7

33.4

31.3

30.8

32.6

35.2

34.1

32.7

32.2

Trade balance for services

-6.1

-6.1

-4.7

-7.6

-10.9

-10.4

-8.6

-7.2

-6.6

-6.2

Income balance

-3.0

-2.3

-1.3

-0.8

-2.0

-1.8

-1.6

-1.5

-1.4

-1.4

Current transfers balance

4.7

3.6

2.5

1.9

3.0

1.4

2.4

2.5

3.0

3.1

Of which: Official transfers net

5.9

4.2

3.2

3.8

4.9

2.1

2.1

2.1

2.1

2.1

Capital account balance

3.9

4.1

3.8

4.6

5.7

5.1

5.4

5.6

5.2

4.7

Direct investment balance

2.6

2.5

1.0

1.6

1.0

4.1

4.2

3.8

3.8

3.9

Of which: Inward FDI 4/

2.7

2.9

1.6

1.9

1.0

4.1

4.1

3.8

3.8

3.8

Other investment balance

0.4

0.4

0.1

-0.3

1.4

4.4

4.1

4.0

3.2

3.1

Memorandum items

Gross official foreign reserves (in US$ million) 5/

514

577

613

574

466

427

436

461

475

542

In months of next year's imports of GNFS

9.1

9.3

9.8

10.0

7.0

5.7

5.6

5.8

5.7

6.0

Gross external public debt (in percent of GDP)

6.7

6.7

6.3

6.7

12.5

15.1

17.6

19.7

21.0

22.2

Disbursement of concessional borrowing (in US$ millions)

10.3

12.6

5.6

16.5

57.6

35.5

31.3

40.8

36.6

35.4

External public debt service (in percent of exports of GNFS)

1.8

1.7

1.1

1.4

1.6

1.3

1.2

1.9

2.7

2.0

Nominal GDP (in US$ million)

1,381.1

1,457.6

1,585.4

1,598.0

1,523.2

1,665.8

1,763.4

1,884.5

2,011.1

2,143.3

Sources: Data provided by the Solomon Islands authorities; and IMF staff estimates and projections.

1/ Incorporates the authorities' revision of historical data, including a new formula for f.o.b/c.i.f conversion, new estimates of reinvested earnings and donor grants, and reclassification of current and capital transfers.

2/ Includes 100% of Fund quota of which 1/3 as RCF and 2/3 as RFI. 3/ Includes $10 million from ADB for COVID response.

4/ FDI numbers have been revised down as a result of changes to ensure the correct treatment of net losses under reinvested earnings, in line with BPM6 practice. 5/ Includes actual and prospective disbursements under the IMF-supported arrangement.

INTERNATIONAL MONETARY FUND 15

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

Table 4. Solomon Islands: Summary Accounts of the Banking System, 2016-25 1/

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Est.

Proj.

(In millions of Solomon Islands dollars, end of period)

Central Bank of Solomon Islands (CBSI)

Net foreign assets (NFA)

4,018

4,366

4,834

4,560

3,409

3,089

3,167

3,368

3,483

4,026

Net international reserves (NIR)

4,127

4,481

4,957

4,683

3,532

3,212

3,290

3,491

3,606

4,149

Other NFA

-109

-115

-123

-123

-123

-123

-123

-123

-123

-123

Net domestic assets (NDA)

-1,429

-1,583

-1,758

-1,698

-942

-375

-280

-375

-425

-875

Net claims on central government

-850

-963

-1,026

-979

-820

-773

-773

-773

-773

-773

Claims

5

5

5

5

5

5

5

5

5

5

Deposits

855

968

1,032

984

825

778

778

778

778

778

Other items (net)

134

143

136

136

136

136

136

136

136

136

Reserve money

2,589

2,783

3,077

2,862

2,467

2,714

2,887

2,993

3,058

3,151

Currency in circulation

828

896

908

930

887

970

1,026

1,097

1,171

1,248

Bank deposits

1,748

1,875

2,158

1,921

1,569

1,732

1,848

1,883

1,873

1,888

Other deposits

13

12

11

11

11

12

12

13

14

15

Other depository corporations

NFA of commercial banks

155

217

218

249

256

263

270

278

285

293

Assets

305

323

439

470

477

484

492

499

507

514

Liabilities

150

106

221

221

221

221

221

221

221

221

NDA of commercial banks

1,999

1,909

1,949

1,975

1,569

1,826

1,750

1,967

1,947

2,007

Net claims on central government

-198

-265

-257

-217

-217

-217

-224

-235

-245

-255

Claims

19

17

25

65

65

65

57

47

37

26

Deposits

217

282

282

282

282

282

282

282

282

282

Claims on the private sector

2,221

2,363

2,460

2,583

2,479

2,622

2,779

2,918

3,050

3,187

Other items (net)

-24

-190

-253

-391

-693

-578

-805

-716

-857

-924

Reserves and vault cash

1,834

1,950

2,238

1,999

1,644

1,847

1,970

2,013

2,012

2,036

Deposits

3,988

4,076

4,406

4,223

3,469

3,937

3,990

4,258

4,245

4,337

Depository corporations survey

NFA of the banking system

4,173

4,583

5,053

4,809

3,665

3,352

3,437

3,646

3,768

4,319

Central bank

4,018

4,366

4,834

4,560

3,409

3,089

3,167

3,368

3,483

4,026

Other depository corporations

155

217

218

249

256

263

270

278

285

293

NDA of the banking system

570

326

192

277

628

1,452

1,470

1,592

1,522

1,133

Net claims on central government

-1,048

-1,228

-1,283

-1,196

-1,037

-990

-997

-1,007

-1,018

-1,028

Claims on the private sector 2/

2,229

2,372

2,469

2,593

2,486

2,629

2,786

2,925

3,057

3,194

Other items (net)

-611

-818

-994

-1,120

-822

-188

-319

-326

-517

-1,033

Broad money (M3)

4,743

4,909

5,244

5,086

4,292

4,803

4,908

5,238

5,291

5,452

M1

3,521

3,649

3,937

3,882

3,327

3,777

3,911

4,228

4,270

4,400

Currency outside banks

742

821

828

852

812

855

905

967

1,032

1,100

Demand deposits

2,779

2,828

3,109

3,029

2,514

2,922

3,007

3,261

3,238

3,300

Savings and time deposits

1,221

1,260

1,307

1,204

966

1,026

996

1,010

1,020

1,051

(Annual percentage change, unless otherwise indicated)

Reserve money

14.5

7.5

10.6

-7.0

-13.8

10.0

6.4

3.7

2.2

3.0

Credit to the private sector

12.1

6.4

4.1

5.0

-4.1

5.7

6.0

5.0

4.5

4.5

Broad money

13.4

3.5

6.8

-3.0

-15.6

11.9

2.2

6.7

1.0

3.0

Memorandum items:

Money multiplier (level)

1.8

1.8

1.7

1.8

1.7

1.8

1.7

1.8

1.7

1.7

Loan-to-deposit ratio (in percent)

55.7

58.0

55.8

61.2

71.5

66.6

69.7

68.5

71.8

73.5

Interest rates (percent per annum)

Deposit rate 3/

0.2

0.3

0.3

0.4

Lending rate 3/

10.1

10.6

10.5

10.0

NCG of financial corporations

-1,022

-1,044

-1,097

-958

-679

-632

-639

-649

-660

-670

91-day treasury bill rate

0.5

0.5

0.5

0.5

Sources: Data provided by the Central Bank of Solomon Islands; and IMF staff estimates and projections. 1/ Based on actual and projected exchange rates.

2/ Includes claims of the CBSI on other (nonbank) financial corporations. 3/ Weighted average of different maturities, period average.

16INTERNATIONAL MONETARY FUND

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

Table 5: Solomon Islands: Core Financial Soundness Indicators, 2014-2019

2014

2015

2016

2017

2018

2019

(In percent, unless otherwise indicated)

Capital Adequacy

Regulatory Capital to Risk-Weighted Assets

31.6

31.1

32.5

35.1

31.1

31.3

Non-performing Loans Net of Provisions to Capital

8.1

7.3

6.6

11.5

11.8

18.0

Asset Quality

Non-performing Loans to Total Gross Loans

4.7

4.1

3.8

6.1

7.1

10.4

Specific Loan Loss Provision to NPLs

26.0

29.5

31.2

18.7

31.2

29.4

Earnings and Profitability

Return on Assets

3.3

3.0

3.5

3.9

3.5

3.1

Return on Equity

20.0

17.6

22.7

23.1

20.4

18.3

Interest Margin to Gross Income

56.7

55.0

56.3

55.0

54.6

53.6

Non-interest Expenses to Gross Income

43.3

45.0

43.7

45.0

45.4

46.4

Liquidity

Liquid Assets to Total Assets (Liquid Asset Ratio)

38.0

33.5

38.1

38.4

40.4

37.4

Liquid Assets to Short Term Liabilities

51.7

46.2

53.3

55.4

56.2

56.3

Net open position in foreign exchange to capital

11.1

7.9

3.6

3.8

13.1

2.1

Source: Central Bank of Solomon Islands.

INTERNATIONAL MONETARY FUND 17

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

Table 6. Solomon Islands: Indicators of Capacity to Repay the Fund, 2020-30

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Proj.

Fund obligations based on existing credit (in SDR millions)

Principal

0.0

0.2

0.2

0.2

0.1

0.1

0.0

0.0

0.0

0.0

0.0

Charges and interest

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Fund obligations based on prospective credit (in SDR millions) 1/

Principal

0.0

0.0

0.0

3.5

6.9

4.2

1.4

1.4

1.4

1.4

0.7

Charges and interest

0.1

0.2

0.2

0.2

0.1

0.0

0.0

0.0

0.0

0.0

0.0

Fund obligations based on existing and prospective credit (in SDR millions) 1/

Principal

0.0

0.2

0.2

3.6

7.1

4.2

1.4

1.4

1.4

1.4

0.7

Charges and interest

0.1

0.2

0.2

0.2

0.1

0.0

0.0

0.0

0.0

0.0

0.0

Total obligations based on existing and prospective credit

In millions of SDRs

0.0

0.2

0.2

3.6

7.1

4.2

1.4

1.4

1.4

1.4

0.7

In millions of US$

0.1

0.2

0.3

5.0

9.8

5.9

2.0

1.9

1.9

1.9

1.0

In percent of gross international reserves

0.0

0.1

0.1

1.1

2.1

1.1

0.3

0.3

0.3

0.3

0.2

In percent of government revenue

0.0

0.0

0.0

0.8

1.5

0.9

0.3

0.3

0.2

0.2

0.1

In percent of exports of goods and services

0.0

0.0

0.0

0.7

1.4

0.7

0.2

0.2

0.2

0.2

0.1

In percent of debt service 2/

0.7

3.2

3.4

36.2

49.4

33.8

9.7

8.8

7.9

6.5

2.9

In percent of GDP

0.0

0.0

0.0

0.3

0.5

0.3

0.1

0.1

0.1

0.1

0.0

In percent of quota

0.2

0.9

1.0

17.5

34.0

20.3

6.8

6.7

6.7

6.7

3.3

Outstanding Fund credit 1/

In millions of SDRs

21.6

21.4

21.2

17.6

10.5

6.3

4.9

3.5

2.1

0.7

0.0

In millions of US$

29.9

29.7

29.4

24.4

14.6

8.7

6.7

4.8

2.9

1.0

0.0

In percent of gross international reserves

6.4

7.0

6.7

5.3

3.1

1.6

1.2

0.8

0.4

0.2

0.0

In percent of government revenue

6.1

5.5

5.0

3.9

2.2

1.3

0.9

0.6

0.4

0.1

0.0

In percent of exports of goods and services

7.5

5.5

4.5

3.5

2.1

1.1

0.8

0.5

0.3

0.1

0.0

In percent of debt service 2/

398.2

380.6

343.1

175.3

73.4

50.1

33.0

22.0

11.7

3.2

0.0

In percent of GDP

2.0

1.8

1.7

1.3

0.7

0.4

0.3

0.2

0.1

0.0

0.0

In percent of quota

103.8

102.9

101.9

84.5

50.5

30.1

23.3

16.7

10.0

3.3

0.0

Net use of Fund credit (in SDR millions) 1/

20.8

-0.2

-0.2

-3.6

-7.1

-4.2

-1.4

-1.4

-1.4

-1.4

-0.7

Disbursements

20.8

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Repayments and repurchases

-0.040

-0.180

-0.210

-3.630

-7.070

-4.230

-1.420

-1.390

-1.390

-1.390

-0.690

Memorandum items:

Nominal GDP (in US$ millions)

1523.2

1665.8

1763.4

1884.5

2011.1

2143.3

2282.3

2438.8

2595.9

2773.1

2966.3

Exports of goods and services (in US$ millions)

400.7

536.7

646.2

686.4

704.2

791.1

885.4

917.7

951.9

929.5

926.4

Gross international reserves (in US$ millions)

465.9

426.5

436.1

460.9

475.1

541.8

569.0

612.0

650.7

617.9

555.9

Government revenue (in US$ millions)

490.6

537.4

588.5

631.1

656.2

687.6

716.9

761.2

803.8

850.8

904.1

Debt service (in US$ millions) 2/

7.5

7.8

8.6

13.9

19.8

17.4

20.4

21.9

24.5

29.7

32.6

SI/U.S. dollars (period average)

8.1

8.1

8.1

8.1

8.1

8.1

8.1

8.1

8.1

8.1

8.1

U.S. dollars/SDR (period average)

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

Quota (in SDR millions)

20.8

20.8

20.8

20.8

20.8

20.8

20.8

20.8

20.8

20.8

20.8

Source: IMF staff estimates and projections.

1/ Prospective credit includes SDR 20.8 million (100 percent of quota) under the Rapid Credit Facility (1/3) and the Rapid Financing Instrument (2/3).

2/ Total public debt service, including IMF repayments.

18INTERNATIONAL MONETARY FUND

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Appendix I. Letter of Intent

Honiara, Solomon Islands

May 18, 2020

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Ms. Georgieva,

  1. The COVID-19 pandemic is having severe effects on both the health prospects for the general public and on the level of economic activity across the globe. The negative effects of the COVID-19 pandemic on the Solomon Islands economy are felt mainly through a decline in logging, mining and fisheries exports and a sharp contraction in tourism. Solomon Islands has no confirmed COVID-19 cases as of May 18, 2020. To prevent the entry of COVID-19, the government immediately took actions to restrict travel and has declared a state of emergency (extended until July 25) with several containment measures. The government has prepared a COVID-19 preparedness and response plan, and with support from development partners, has introduced quarantine facilities and testing capability in preparation for a possible domestic outbreak. Domestic containment measures, while necessary, are also having a temporary negative impact on economic activity.
  2. Against this backdrop, the Solomon Islands is experiencing an exceptional short-term balance of payments need. While there is a high degree of uncertainty regarding the duration and scale of the COVID-19 impact, we currently anticipate that real output growth in 2020 will decline to about -5.5 percent as per IMF estimates, compared with pre-crisis projections of 2.5 percent. Our fiscal situation will be negatively impacted by a significant shortfall in tax revenues as well as higher spending needs related to health, social assistance and support for the economy during the emergency period. As result, the fiscal deficit is estimated to widen to about 5.8 percent of GDP. Amid travel restrictions and weak external demand, the current account deficit is projected to increase sharply to about 17.8 percent of GDP in 2020. The deterioration in the balance of payments is giving rise to a projected external financing gap projected in the order US$38.8 million (about 2.5 percent of GDP).
  3. To address the immediate external financing needs, the Government of Solomon Islands requests emergency financing from the IMF in the amount of SDR20.8 million (about US$28.8 million), equivalent to 100 percent of quota, with SDR 6.93 million under the Rapid Credit Facility (RCF) and SDR 13.87 million under Rapid Financing Instrument (RFI). IMF debt relief provided under the Catastrophe Containment and Relief Trust (CCRT) will also help to close the financing gap. We are actively seeking additional budget financing from our development partners, and we are confident that IMF support will play a catalytic role. In this regard, the World Bank is processing a fast-track US$5 million COVID-19 Emergency Response and Health Systems Preparedness Project. The Asian Development Bank has approved US$6 million in funds under the Contingent Disaster

INTERNATIONAL MONETARY FUND 19

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SOLOMON ISLANDS

Financing Facility and is processing a pandemic response loan and grant under the Countercyclical Support Facility for up to US$20 million.

  1. We remain committed to policies that promote inclusive growth, while containing external pressures, preserving fiscal sustainability, protecting financial stability and reducing poverty. As regards fiscal policy, the priority is stabilizing the domestic economy during the emergency period and building resilience by restoring fiscal buffers. We plan to increase health-related spending by US$20 million (about 1.1 percent of GDP) over the course of 2020, with key measures already underway such as setting up quarantine centers and establishing COVID-19 testing capability. However, additional spending may be needed should downside risks materialize.
  2. In addition to the increase in health related spending, to mitigate the impact of the pandemic and support the recovery, we recently adopted a fiscal stimulus package of SI$319 million (about 2.6 percent of GDP) aimed at providing social assistance, protecting jobs and incomes, and stabilizing the domestic economy. Policy measures include payroll and employment support, capital grants to businesses to support investment in productive and resource sectors, tax relief for affected businesses, equity injection to government owned companies, and advancing planned infrastructure investment. An Oversight Committee has been set up to ensure that the overall desired outcomes are achieved and the targeted beneficiaries receive the support they need, as well as to prevent any abuse or misuse of the package.
  3. We remain committed to maintaining efforts to progress tax reform and to strengthen tax compliance and public financial management, including through tightening expenditure controls and procurement processes. We are also committed to the current debt management framework and are working closely with development partners to address large infrastructure needs in a transparent manner. We confirm our commitment to maintaining an expansionary monetary policy stance in view of the low inflation environment, weak growth outlook and slowing credit growth. Credibility of the basket exchange rate peg regime is preserved by maintaining an adequate level of gross official reserves. We will continue to implement financial sector policies to reduce financial stability risks, including those stemming from correspondent banking relationships, and to foster financial inclusion. To address risks stemming from frequent natural disasters, we acknowledge the importance of rebuilding fiscal buffers and undertaking infrastructure investments to increase resilience.
  4. We recognize the importance of good governance, transparency and accountability, and tackling corruption and related money laundering. We commit to ensure that the funds provided by the IMF will be effectively used to maintain macroeconomic stability, thus safeguarding public health, saving lives, and supporting livelihoods and the economic recovery. Towards that end, we will publish on the Ministry of Finance and Treasury's website: (i) results of an audit by the Solomon Islands Office of the Auditor General of COVID-19 related expenditures before December 2021; and (ii) documentation on crisis-related public procurement, including the nature of the goods or services procured, the contract amounts, the names of the entities awarded the contract and their beneficial owners, followed by documentation on ex-post validation of delivery. In line with IMF safeguards policy, we are committed to undergo an update of the safeguards assessment of the CBSI made by the Fund in 2013. We will authorize the external auditor of the CBSI to share relevant

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documents and hold discussions with Fund staff and have published (on May 13, 2020) on the CBSI website the audited financial statements for the year ended December 31, 2019.

  1. We do not intend to introduce measures or policies that would exacerbate the current balance-of-payments difficulties. We do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance of payments purposes, or multiple currency practices, or to enter into bilateral payments agreements which are inconsistent with Article VIII of the IMF's Articles of Agreement.
  2. We are determined to meet the immense challenge we are facing due to the COVID-19 pandemic. Support from the international community will be critical, and we look forward to an early approval of financial assistance by the IMF. Beyond this much needed immediate financial assistance, we reaffirm our willingness to remain engaged with the IMF and to benefit from its policy advice and its capacity development support.
  3. We authorize the IMF to publish this letter and the staff report for the request for disbursement under the RCF/RFI.

Sincerely yours,

Mr. Harry Kuma /s

Mr. Luke Forau /s

Minister of Finance and Treasury

Governor, Central Bank of Solomon Islands

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May 26, 2020

REQUESTS FOR PURCHASE UNDER THE RAPID FINANCING INSTRUMENT AND DISBURSEMENT UNDER THE RAPID CREDIT FACILITY-DEBT SUSTAINABILITY ANALYSIS

Approved By

Jonathan D. Ostry and

Johannes Wiegand (IMF) and

Marcelo Estevão (IDA)

Prepared by the staff of the International MonetaryFund (IMF) and the International Development

Association (IDA)1/2/

The updated DSA after the COVID-19 shock suggests Solomon Islands remains at moderate risk of debt distress for both the external and overall public debt. All external debt indicators remain below the relevant indicative thresholds under the baseline scenario but breach thresholds under the extreme stress test scenario (combination shock for the PV of debt-to-GDP and export shock for the PV of debt-to-export and the debt services to export ratio). The PV of public debt-to-GDP ratio remains below the 55 percent benchmark under the baseline scenario, and it would remain below the benchmark under the most extreme shock (real GDP growth) till 2030. A tailored natural disaster shock of similar scale to the largest shock in Solomon Islands' history would cause a spike in debt trajectory in the aftermath of the event. While the DSA suggests there is substantial space to absorb shocks, Solomon Islands often faces fiscal liquidity challenges due to weak public financial management and the cash balance is currently low. Going forward, stronger revenue mobilization measures and expenditure rationalization are needed to rebuild fiscal buffers and to enhance resilience against shocks.

Risk of external debt distress

Moderate3

Overall risk of debt distress

Moderate

Granularity in the risk rating

Substantial space to absorb shocks

Application of judgment

No

  1. Debt coverage has remained unchanged compared to the 2019 DSA (IMF Country Report No. 20/49).
  2. The updated DSA uses the rebased GDP series with 2012 as the base year. The rebased GDP level is approximately
  1. percent higher than the previous GDP series with 2004 as the base year.
  1. The Composite Indicator score is 2.72, which is based on the October 2019 WEO and the World Bank's 2018 CPIA, and the country's debt-carrying capacity is assessed to be medium.

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SOLOMON ISLANDS

Macroeconomic projections

The updated DSA incorporates a new set of

macroeconomic assumptions reflecting the impacts

of COVID-19 shock. Growth is expected to fall by 5.5

percent, as a result of a decline in logging, mining

and fisheries exports, a contraction in tourism, as

well as the negative impact of containment measures

on domestic demand. Fiscal and current account

deficits are expected to widen sharply.

Financing strategy4

The RCF/RFI will help finance balance of payment

needs. The World Bank has approved the first

Solomon Islands transition to sustainable growth

development policy operation of US$15 million

(US$11.8 million in grant and US$3.2 million in loan),

in addition to US$5 million under the COVID-19 Fast

Track Facility expected to be approved by end May.

The Asian Development Bank (ADB) has released

US$6 million from its Pacific Disaster Resilience

Program and is processing an additional US$20

million, a policy-based operation anchored on the

government's COVID-19 response plan. The

financing under the World Bank's COVID-19 Fast

Track Facility and ADB is expected to equally

comprise grant and loan disbursements.

Realism tools flagged

None

Mechanical risk rating under

Moderate

the external DSA

Mechanical risk rating under

Moderate

the public DSA

4 Solomon Islands has not requested participation in the G20 Debt Service Suspension Initiative (DSSI).

2INTERNATIONAL MONETARY FUND

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Table 1. Solomon Islands: External Debt Sustainability Framework, Baseline Scenario,

2016-2039

(In percent of GDP, unless otherwise indicated)

Actual

Projections

Average 8/

2016

2017

2018

2019

2020

2021

2022

2023

2024

2029

2039

Historical

Projections

External debt (nominal) 1/

7.4

7.5

7.1

7.6

13.6

16.2

18.7

20.9

22.3

25.0

24.6

15.0

20.2

of which: public and publicly guaranteed (PPG)

6.7

6.7

6.3

6.7

12.5

15.1

17.6

19.7

21.0

23.4

22.8

10.5

18.5

Change in external debt

-2.0

0.1

-0.4

0.5

6.0

2.7

2.5

2.2

1.4

-0.1

0.6

Definition of external/domestic debt

Residency-based

Is there a material difference between the

No

two criteria?

Identified net debt-creating flows

0.5

1.5

1.4

7.2

17.2

11.1

8.3

7.3

6.6

5.5

3.2

0.3

Non-interest current account deficit

3.4

4.2

2.9

8.8

17.7

15.7

12.9

11.6

10.8

9.0

7.0

6.7

Deficit in balance of goods and services

-85.5

-87.7

-90.1

-83.6

-71.5

-80.0

-87.1

-85.6

-82.6

-77.7

-60.9

-93.9

Exports

40.2

41.0

42.9

36.8

26.3

32.2

36.6

36.4

35.0

33.5

25.2

Imports

-45.4

-46.6

-47.2

-46.8

-45.2

-47.8

-50.5

-49.2

-47.6

-44.2

-35.7

Net current transfers (negative = inflow)

-4.7

-3.6

-2.5

-1.9

-3.0

-1.4

-2.4

-2.5

-3.0

-3.4

-3.6

-9.8

of which: official

-6.3

-5.1

-3.7

-4.0

-5.1

-2.3

-2.2

-2.2

-2.2

-2.2

-2.1

Other current account flows (negative = net inflow)

93.6

95.5

95.6

94.4

92.2

97.2

102.4

99.7

96.3

90.1

71.6

110.4

Net FDI (negative = inflow)

-2.6

-2.5

-1.0

-1.6

-1.0

-4.1

-4.2

-3.8

-3.8

-3.1

-3.4

-5.2

Endogenous debt dynamics 2/

-0.4

-0.3

-0.5

0.0

0.6

-0.5

-0.4

-0.4

-0.3

-0.4

-0.4

Contribution from nominal interest rate

0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.2

0.3

0.4

Contribution from real GDP growth

-0.5

-0.4

-0.3

-0.1

0.4

-0.7

-0.6

-0.6

-0.6

-0.7

-0.8

Contribution from price and exchange rate changes

0.0

0.0

-0.3

Residual 3/

-2.4

-1.3

-1.8

-6.7

-11.3

-8.4

-5.8

-5.1

-5.2

-5.6

-2.7

-2.4

of which: exceptional financing

0.0

0.0

0.0

0.0

-1.9

0.0

0.0

0.0

0.0

0.0

0.0

Sustainability indicators

PV of PPG external debt-to-GDP ratio

...

...

5.7

5.8

9.1

10.3

11.8

13.1

13.9

15.7

16.2

PV of PPG external debt-to-exports ratio

...

...

13.2

15.7

34.5

32.1

32.1

36.1

39.8

46.7

64.2

PPG debt service-to-exports ratio

1.8

1.7

1.1

1.4

1.6

1.3

1.2

1.9

2.7

3.0

4.0

PPG debt service-to-revenue ratio

2.6

2.3

1.6

2.0

1.9

1.7

1.7

2.7

3.7

4.1

4.6

7.2

10.6

-82.6

Debt Accumulation

-2.7

16.0

70

96.0

14.0

60

-3.2

12.0

50

10.0

40

8.0

-5.4

6.0

30

4.0

20

2.0

10

0.0

0

2019

2021

2023

2025

2027

2029

3 FUND MONETARY INTERNATIONAL

Gross external financing need (Million of U.S. dollars)

30.9

36.5

39.3

124.7

261.5

201.2

162.4

159.4

159.6

193.3

269.5

Rate of Debt Accumulation

Key macroeconomic assumptions

Grant-equivalent financing (% of GDP)

Grant element of new borrowing (% right scale)

Real GDP growth (in percent)

5.9

5.3

3.9

1.2

-5.5

5.6

4.0

3.4

3.0

3.2

3.5

4.3

2.4

GDP deflator in US dollar terms (change in percent)

-0.5

0.2

4.6

-0.4

0.8

3.6

1.8

3.4

3.6

3.6

4.6

4.2

2.7

Effective interest rate (percent) 4/

1.3

1.5

1.2

1.5

1.5

1.2

1.2

1.2

1.3

1.5

1.7

2.1

1.3

External debt (nominal) 1/

Growth of exports of G&S (US dollar terms, in percent)

5.3

7.8

13.8

-13.6

-31.9

33.9

20.4

6.2

2.6

-2.4

5.9

11.9

4.9

of which: Private

Growth of imports of G&S (US dollar terms, in percent)

1.0

8.5

10.0

0.0

-8.1

15.7

11.9

4.1

3.2

4.4

9.9

8.0

4.8

30

Grant element of new public sector borrowing (in percent)

...

...

...

64.5

45.9

48.8

46.0

40.0

41.7

41.9

33.0

...

45.7

Government revenues (excluding grants, in percent of GDP)

28.4

30.2

30.1

26.1

21.4

25.0

25.8

25.7

25.3

24.5

21.9

28.5

24.9

25

Aid flows (in Million of US dollars) 5/

230.3

232.1

254.4

111.9

211.1

155.4

164.1

176.6

182.6

202.5

359.0

Grant-equivalent financing (in percent of GDP) 6/

...

...

...

7.5

13.5

9.3

9.3

9.3

8.8

7.1

6.7

...

8.8

20

Grant-equivalent financing (in percent of external financing) 6/

...

...

...

95.3

81.1

81.9

82.8

80.3

81.9

85.6

77.1

...

83.8

Nominal GDP (Million of US dollars)

1,381

1,458

1,585

1,598

1,523

1,666

1,763

1,884

2,011

2,773

5,676

Nominal dollar GDP growth

5.3

5.5

8.8

0.8

-4.7

9.4

5.9

6.9

6.7

6.8

8.2

8.7

5.1

15

Memorandum items:

10

PV of external debt 7/

...

...

6.5

6.7

10.1

11.4

12.9

14.4

15.2

17.2

17.9

In percent of exports

...

...

15.1

18.1

38.5

35.5

35.3

39.5

43.5

51.3

71.1

5

Total external debt service-to-exports ratio

3.6

1.9

1.3

1.6

1.9

1.5

1.3

2.0

2.8

3.2

4.4

PV of PPG external debt (in Million of US dollars)

89.9

92.1

138.2

172.3

207.2

247.8

280.4

434.2

919.0

0

(PVt-PVt-1)/GDPt-1 (in percent)

0.1

2.9

2.2

2.1

2.3

1.7

1.0

1.9

2019

2021

2023

2025

2027

2029

Non-interest current account deficit that stabilizes debt ratio

5.4

4.1

3.4

8.3

11.7

13.1

10.4

9.4

9.4

9.2

6.5

Sources: Country authorities; and staff estimates and projections. 1/ Includes both public and private sector external debt.

2/ Derived as [r - g - ρ(1+g) + Ɛα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt.

3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock.

5/ Defined as grants, concessional loans, and debt relief.

6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value.

8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

©International Monetary Fund. Not for Redistribution

ISLANDS SOLOMON

FUND MONETARY INTERNATIONAL 4

Table 2. Solomon Islands: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016-2039

(In percent of GDP, unless otherwise indicated)

Actual

Projections

Average 6/

2016

2017

2018

2019

2020

2021

2022

2023

2024

2029

2039

Historical

Projections

Public sector debt 1/

7.1

8.4

8.2

8.9

15.8

19.2

22.2

24.7

26.8

35.4

46.3

14.1

25.4

of which: external debt

6.7

6.7

6.3

6.7

12.5

15.1

17.6

19.7

21.0

23.4

22.8

10.5

18.9

of which: local-currency denominated

Change in public sector debt

-1.9

1.3

-0.2

0.7

6.9

3.4

2.9

2.6

2.1

1.4

2.1

Identified debt-creating flows

3.2

1.4

-1.7

1.2

6.2

4.1

3.0

3.1

3.0

2.1

2.7

-3.5

3.0

Primary deficit

3.4

2.0

-1.4

1.2

5.7

4.9

3.7

3.9

3.7

3.0

3.8

-2.1

3.6

Revenue and grants

38.6

39.2

40.0

32.9

32.2

32.3

33.4

33.5

32.6

30.7

27.6

44.0

32.1

of which: grants

10.2

9.0

9.9

6.8

10.9

7.3

7.6

7.8

7.4

6.2

5.7

Primary (noninterest) expenditure

42.0

41.2

38.6

34.2

37.9

37.2

37.1

37.3

36.3

33.7

31.4

41.9

35.7

Automatic debt dynamics

-0.3

-0.6

-0.3

-0.1

0.6

-0.9

-0.7

-0.7

-0.7

-0.8

-1.1

Contribution from interest rate/growth differential

-0.5

-0.3

-0.4

-0.1

0.6

-0.9

-0.7

-0.7

-0.7

-0.8

-1.1

of which: contribution from average real interest rate

0.0

0.0

0.0

0.0

0.1

0.0

0.1

0.0

0.0

0.2

0.4

of which: contribution from real GDP growth

-0.5

-0.4

-0.3

-0.1

0.5

-0.8

-0.7

-0.7

-0.7

-1.0

-1.5

Contribution from real exchange rate depreciation

0.3

-0.2

0.1

...

...

...

...

...

...

...

...

Other identified debt-creating flows

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

-0.1

0.0

Privatization receipts (negative)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Recognition of contingent liabilities (e.g., bank recapitalization)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Debt relief (HIPC and other)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other debt creating or reducing flow (please specify)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Residual

-5.1

-0.1

1.5

-0.5

0.7

-0.6

-0.1

-0.6

-0.9

-0.7

-0.6

1.2

-0.5

Sustainability indicators

PV of public debt-to-GDP ratio 2/

...

...

7.7

8.0

12.4

14.4

16.4

18.2

19.7

27.6

39.7

PV of public debt-to-revenue and grants ratio

19.3

24.2

38.4

44.8

49.1

54.2

60.4

90.1

143.8

Debt service-to-revenue and grants ratio 3/

3.0

2.8

2.2

3.4

4.0

3.8

4.0

4.7

5.5

6.5

10.6

Gross financing need 4/

4.5

3.0

-0.5

2.4

6.9

6.1

5.0

5.4

5.5

5.0

6.8

Key macroeconomic and fiscal assumptions

Real GDP growth (in percent)

5.9

5.3

3.9

1.2

-5.5

5.6

4.0

3.4

3.0

3.2

3.5

4.3

2.4

Average nominal interest rate on external debt (in percent)

1.0

1.2

0.7

1.1

1.0

0.9

0.9

1.0

1.0

1.2

1.4

1.1

1.1

Average real interest rate on domestic debt (in percent)

-0.7

-0.3

-0.8

-0.5

-0.5

-0.7

-0.6

-0.6

-0.5

-0.3

-0.1

-0.3

-0.5

Real exchange rate depreciation (in percent, + indicates depreciation)

3.3

-3.9

0.8

...

...

...

...

...

...

...

-2.5

...

Inflation rate (GDP deflator, in percent)

0.0

1.4

4.2

1.3

0.8

3.6

1.8

3.4

3.6

3.6

4.6

4.4

2.9

Growth of real primary spending (deflated by GDP deflator, in percent)

5.9

3.5

-2.7

-10.3

4.7

3.6

3.6

4.2

0.2

2.3

2.9

4.2

1.2

Primary deficit that stabilizes the debt-to-GDP ratio 5/

5.3

0.7

-1.2

0.5

-1.2

1.5

0.7

1.3

1.6

1.6

1.7

1.6

1.1

PV of contingent liabilities (not included in public sector debt)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Sources: Country authorities; and staff estimates and projections.

1/ Coverage of debt: The central government, central bank, government-guaranteed debt. Definition of external debt is Residency-based.

2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.

4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.

6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Definition of external/domestic

Residency-

debt

based

Is there a material difference

No

between the two criteria?

Public sector debt 1/

of which: local-currency denominated

of which: foreign-currency denominated

40

35

30

25

20

15

10

5

0

2019 2021 2023 2025 2027 2029

of which: held by residents

of which: held by non-residents

40

35

30

25

20

15

10

5

0

2019 2021 2023 2025 2027 2029

ISLANDS SOLOMON

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

Figure 1. Solomon Islands: Indicators of Public and Publicly

60

PV of debt-to GDP ratio

50

40

30

Most extreme shock is Combination

20

10

0

-10

-20

2019

2021

2023

2025

2027

2029

25

Debt service-to-exports ratio

20

Most extreme shock is Exports

15

10

5

0

-5

2019

2021

2023

2025

2027

2029

Baseline

Historical scenario

Natural Disaster shock

Customization of Default Settings

Size

Interactions

Guaranteed External Debt under Alternatives Scenarios, 2019-2029 1/

350

PV of debt-to-exports ratio

300

250

200

150

Most extreme shock is Exports

100

50

0

-50

2019

2021

2023

2025

2027

2029

20

Debt service-to-revenue ratio

15

Most extreme shock is Combination

10

5

0

-5

2019

2021

2023

2025

2027

2029

Most extreme shock 1/

Threshold

Borrowing Assumptions for Stress Tests*

Default

User defined

Standardized Tests

Yes

No

Tailored Tests

Combined CLs

Yes

Natural Disasters

Yes

Yes

Commodity Prices

2/

n.a.

n.a.

Market Financing

n.a.

n.a.

Note: "Yes" indicates any change to the size or

interactions of the default settings for the stress tests.

"n.a." indicates that the stress test does not apply.

Shares of marginal debt

External PPG MLT debt

100%

Terms of marginal debt

Avg. nominal interest rate on new borrowing in USD

1.2%

1.2%

USD Discount rate

5.0%

5.0%

Avg. maturity (incl. grace period)

29

29

Avg. grace period

7

7

  • Note: All the additional financing needs generated by the shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA. Default terms of marginal debt are based on baseline 10-year projections.

Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches are also presented (if any), while these one- off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one- 2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.

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SOLOMON ISLANDS

Figure 2. Solomon Islands: Indicators of Public Debt Under Alternative Scenarios, 2019-2029

60

PV of Debt-to-GDP Ratio

50

40

30

20

10

0 Most extreme shock is Growth

-10

2019

2021

2023

2025

2027

2029

200

PV of Debt-to-Revenue Ratio

Debt Service-to-Revenue Ratio

17

150

100

12

50

7

0

2

Most extreme shock is Growth

Most extreme shock is Growth

-50

-3

2019

2021

2023

2025

2027

2029

2019

2021

2023

2025

2027

2029

Baseline

Most extreme shock 1/

Public debt benchmark

Historical scenario

Natural Disaster shock

Borrowing Assumptions for Stress Tests*

Default

User defined

Shares of marginal debt

External PPG medium and long-term

62%

62%

Domestic medium and long-term

26%

26%

Domestic short-term

13%

13%

Terms of marginal debt

External MLT debt

Avg. nominal interest rate on new borrowing in USD

1.2%

1.2%

Avg. maturity (incl. grace period)

29

29

Avg. grace period

7

7

Domestic MLT debt

Avg. real interest rate on new borrowing

3.6%

3.6%

Avg. maturity (incl. grace period)

15

15

Avg. grace period

14

14

Domestic short-term debt

Avg. real interest rate

-1%

-1%

  • Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections.

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.

6INTERNATIONAL MONETARY FUND

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

Figure 3. Solomon Islands: Drivers of Debt Dynamics - Baseline Scenario

Gross Nominal PPG External Debt

External debt

Unexpected Changes in Debt 1/

Debt-creating flows

(in percent of GDP; DSA vintages)

(percent of GDP)

(past 5 years, percent of GDP)

80

Current DSA

Previous DSA

proj.

70 DSA-2013

60 50 40 30 20 10 0

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

Residual

60

20

40

15

Interquartile

Price and

range (25-75)

exchange rate

10

20

Real GDP

0

5

Change in PPG

growth

debt 3/

0

Nominal

-20

interest rate

-5

-40

Median

Current

-10

account + FDI

Change in

-60

-15

Distribution across LICs 2/

5-year

5-year

Contribution of

PPG debt 3/

historical

projected

-20

unexpected

changes

change

change

Public debt

Gross Nominal Public Debt

Debt-creating flows

(in percent of GDP; DSA vintages)

(percent of GDP)

Current DSA

Residual

30

Previous DSA

proj.

80

DSA-2013

Other debt

70

creating flows

20

60

Real Exchange

rate depreciation

50

10

Real GDP growth

40

30

Real interest rate

0

20

10

Primary deficit

0

-10

5-year

5-year

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

Change in debt

historical

projected

change

change

1/ Difference between anticipated and actual contributions on debt ratios.

2/ Distribution across LICs for which LIC DSAs were produced.

3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt

dynamics equation.

Unexpected Changes in Debt 1/

(past 5 years, percent of GDP)

20

Interquartile

15

range (25-75)

10

5

Change in debt

0

-5

-10

Median

Contribution of

Distribution across LICs 2/

-15

unexpected

should be largely explained by the drivers of the external debt

INTERNATIONAL MONETARY FUND 7

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SOLOMON ISLAND

Figure 4. Solomon Islands: Realism tools

Three-Year Adjustment in Primary Balance

Fiscal Adjustment and Possible Growth Paths 1/

14

Distribution 1/

10

0

Projected 3-yr adjustment

9

12

8

3-year PB adjustment greater than 2.5

7

percent of GDP in approx. top quartile

-1

6

GDP

10

5

4

of

8

percentIn

3

-2

pointspercentage

4

2

6

1

0

-3

-1

-2

-3

-4

In

-4

2

-5

-6

0

-2.5-2.0-1.5-1.0-0.5 0.0 0.5 1.0 1.5 2.0

2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 More

-7

Baseline

Multiplier = 0.2

-5

-4.5-4.0-3.5-3.0

2013

2015

2016

2019

Multiplier = 0.4

2014

2017

2018

2020

Multiplier = 0.6

Multiplier = 0.8

1/ Data cover Fund-supported programs for LICs (excluding emergency financing) approved since 1990. The

1/ Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show possible real

size of three-year adjustment from program inception is found on the horizontal axis; the percent of sample is

GDP growth paths under different fiscal multipliers (left-hand side scale).

found on the vertical axis.

8INTERNATIONAL MONETARY FUND

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

Figure 5. Solomon Islands: Qualification of the Moderate Category, 2019-2029 1/

45

PV of debt-to GDP ratio

200

PV of debt-to-exports ratio

40

180

35

160

30

140

120

25

100

20

80

15

60

10

40

5

20

0

20192020202120222023202420252026202720282029

0

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

16

Debt service-to-exports ratio

20

Debt service-to-revenue ratio

14

18

16

12

14

10

12

8

10

6

8

6

4

4

2

2

0

0

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

20192020202120222023202420252026202720282029

Threshold

Baseline

Limited space

Some space

Substantial space

Sources: Country authorities; and staff estimates and projections.

1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.

INTERNATIONAL MONETARY FUND 9

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

Table 3. Solomon Islands: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019-2029

(In percent)

.

Projections 1/

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

PV of debt-to GDP ratio

Baseline

5.8

9.1

10.3

11.8

13.1

13.9

14.7

15.2

15.5

15.7

15.7

A. Alternative Scenarios

A1. Key variables at their historical averages in 2019-2029 2/

5.8

-0.2

-4.1

-6.4

-7.9

-9.5

-9.5

-9.8

-9.8

-9.7

-10.8

B. Bound Tests

B1. Real GDP growth

5.8

9.7

11.7

13.3

14.9

15.8

16.7

17.2

17.6

17.8

17.7

B2.

Primary balance

5.8

10.2

12.7

14.3

15.7

16.4

17.2

17.7

18.0

18.1

18.0

B3.

Exports

5.8

21.9

38.7

40.0

41.2

41.6

42.0

42.1

42.1

41.3

39.5

B4.

Other flows 3/

5.8

15.8

23.5

24.7

25.7

26.2

26.7

26.9

27.0

26.6

25.7

B6. One-time 30 percent nominal depreciation

5.8

11.5

23.2

24.8

26.3

27.0

27.8

28.2

28.4

28.5

27.7

B6. Combination of B1-B5

5.8

21.8

43.9

45.3

46.5

46.9

47.3

47.4

47.3

46.5

44.4

C. Tailored Tests

C1. Combined contingent liabilities

5.8

11.2

12.7

14.1

15.5

16.2

17.0

17.4

17.8

18.0

17.9

C2. Natural disaster

5.8

14.4

16.3

18.1

19.7

20.8

21.8

22.5

23.0

23.4

23.5

C3. Commodity price

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

C4. Market Financing

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Threshold

40

40

40

40

40

40

40

40

40

40

40

PV of debt-to-exports ratio

Baseline

15.7

34.5

32.1

32.1

36.1

39.8

39.8

39.1

41.3

42.9

46.7

A. Alternative Scenarios

A1. Key variables at their historical averages in 2019-2029 2/

15.7

-0.7

-12.7

-17.4

-21.7

-27.1

-25.6

-25.3

-26.2

-26.4

-32.3

0

15.7

48.5

48.2

42.0

39.4

42.4

41.3

39.1

39.9

39.4

40.2

B. Bound Tests

B1. Real GDP growth

15.7

34.5

32.1

32.1

36.1

39.8

39.8

39.1

41.3

42.9

46.7

B2.

Primary balance

15.7

38.8

39.5

39.0

43.0

47.0

46.6

45.5

47.8

49.5

53.6

B3. Exports

15.7

144.4

287.8

262.1

271.2

285.0

273.2

260.6

268.1

270.4

282.8

B4.

Other flows 3/

15.7

60.1

72.9

67.3

70.7

74.9

72.4

69.4

71.7

72.6

76.6

B6. One-time 30 percent nominal depreciation

15.7

34.5

56.9

53.5

57.1

61.1

59.6

57.5

59.8

61.5

65.4

B6. Combination of B1-B5

15.7

84.8

98.2

142.8

147.5

154.8

148.2

141.2

145.1

146.6

153.1

C. Tailored Tests

C1. Combined contingent liabilities

15.7

42.6

39.3

38.4

42.5

46.4

46.0

44.9

47.2

49.0

53.3

C2. Natural disaster

15.7

59.2

55.0

53.5

58.8

64.3

63.9

62.8

66.4

69.4

76.2

C3. Commodity price

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

C4. Market Financing

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Threshold

180

180

180

180

180

180

180

180

180

180

180

Debt service-to-exports ratio

Baseline

1.4

1.6

1.3

1.2

1.9

2.7

2.0

2.1

2.2

2.4

3.0

A. Alternative Scenarios

A1. Key variables at their historical averages in 2019-2029 2/

1.4

1.4

0.7

0.3

0.7

1.2

0.6

0.7

0.7

-0.1

-0.4

0

1.4

2.0

1.8

1.6

2.1

2.8

2.2

2.2

2.2

2.6

3.6

B. Bound Tests

B1.

Real GDP growth

1.4

1.6

1.3

1.2

1.9

2.7

2.0

2.1

2.2

2.4

3.0

B2.

Primary balance

1.4

1.6

1.4

1.3

2.0

2.8

2.2

2.3

2.3

2.7

3.4

B3.

Exports

1.4

3.5

5.5

6.9

8.9

11.2

9.0

9.1

9.2

12.9

20.4

B4.

Other flows 3/

1.4

1.6

1.7

1.9

2.5

3.3

2.6

2.7

2.7

3.8

5.4

B6.

One-time 30 percent nominal depreciation

1.4

1.6

1.3

1.6

2.3

3.1

2.4

2.5

2.5

2.7

4.5

B6.

Combination of B1-B5

1.4

2.2

2.8

3.7

4.7

6.0

4.8

4.8

4.9

6.6

11.1

C. Tailored Tests

C1. Combined contingent liabilities

1.4

1.6

1.4

1.3

2.0

2.8

2.1

2.2

2.3

2.5

3.1

C2. Natural disaster

1.4

1.8

1.8

1.6

2.4

3.3

2.6

2.7

2.8

3.0

3.7

C3. Commodity price

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

C4. Market Financing

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Threshold

15

15

15

15

15

15

15

15

15

15

15

Debt service-to-revenue ratio

Baseline

2.0

1.9

1.7

1.7

2.7

3.7

3.0

3.3

3.3

3.6

4.1

A. Alternative Scenarios

A1. Key variables at their historical averages in 2019-2029 2/

2.0

1.7

0.9

0.5

1.0

1.7

0.9

1.1

1.1

-0.1

-0.6

0

2.0

1.7

1.7

2.0

3.0

3.9

3.2

3.4

3.3

3.8

5.0

B. Bound Tests

B1.

Real GDP growth

2.0

2.1

1.9

1.9

3.0

4.2

3.4

3.8

3.8

4.0

4.6

B2.

Primary balance

2.0

1.9

1.8

1.9

2.8

3.9

3.2

3.5

3.5

3.9

4.7

B3.

Exports

2.0

2.5

3.0

4.1

5.2

6.5

5.5

5.9

5.8

8.0

11.6

B4.

Other flows 3/

2.0

2.0

2.2

2.7

3.6

4.6

3.9

4.1

4.1

5.6

7.4

B6.

One-time 30 percent nominal depreciation

2.0

2.5

2.1

2.9

4.1

5.4

4.4

4.8

4.8

5.1

7.7

B6.

Combination of B1-B5

2.0

2.7

3.1

4.6

5.8

7.2

6.1

6.5

6.4

8.5

13.1

C. Tailored Tests

C1. Combined contingent liabilities

2.0

1.9

1.8

1.9

2.8

3.8

3.1

3.5

3.5

3.7

4.2

C2. Natural disaster

2.0

1.9

2.1

2.1

3.1

4.1

3.4

3.8

3.8

4.0

4.6

C3. Commodity price

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

C4. Market Financing

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Threshold

18

18

18

18

18

18

18

18

18

18

18

Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the threshold.

2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 3/ Includes official and private transfers and FDI.

10INTERNATIONAL MONETARY FUND

©International Monetary Fund. Not for Redistribution

SOLOMON ISLANDS

Table 4. Solomon Islands: Sensitivity Analysis for Key Indicators of Public Debt 2019-2029

Projections 1/

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

PV of Debt-to-GDP Ratio

Baseline

8.0

12.4

14.4

16.4

18.2

19.7

21.5

23.1

24.6

26.1

27.6

A. Alternative Scenarios

A1. Key variables at their historical averages in 2019-2029 2/

8.0

5.7

3.3

1.5

-0.5

-2.4

-2.9

-3.8

-4.6

-5.2

-6.5

0

#N/A

#N/A

#N/A

#N/A

#N/A

#N/A

#N/A

#N/A

#N/A

#N/A

#N/A

B. Bound Tests

B1. Real GDP growth

8.0

14.2

19.8

24.3

28.6

32.5

36.7

40.5

44.2

47.9

51.5

B2. Primary balance

8.0

14.8

19.1

20.8

22.5

24.0

25.7

27.2

28.6

30.0

31.5

B3. Exports

8.0

20.4

34.3

35.9

37.2

38.3

39.7

40.9

41.9

42.7

42.8

B4. Other flows 3/

8.0

19.1

27.6

29.3

30.8

32.0

33.6

34.8

36.1

37.0

37.6

B6. One-time 30 percent nominal depreciation

8.0

12.1

12.5

12.8

13.1

13.3

13.8

14.2

14.5

15.0

15.6

B6. Combination of B1-B5

8.0

13.9

16.1

16.2

18.0

19.5

21.3

22.9

24.4

25.9

27.4

C. Tailored Tests

C1.

Combined contingent liabilities

8.0

16.9

18.6

20.4

22.1

23.6

25.3

26.8

28.2

29.7

31.1

C2.

Natural disaster

8.0

23.3

25.0

27.2

29.3

31.2

33.3

35.2

36.9

38.8

40.5

C3.

Commodity price

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

C4.

Market Financing

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Public debt benchmark

55

55

55

55

55

55

55

55

55

55

55

PV of Debt-to-Revenue Ratio

Baseline

24.2

38.4

44.8

49.1

54.2

60.4

67.2

73.5

78.8

84.4

90.1

A. Alternative Scenarios

A1. Key variables at their historical averages in 2019-2029 2/

24.2

18.4

10.6

4.6

-1.4

-7.6

-9.4

-12.6

-15.3

-17.6

-22.5

0

3.4

4.5

7.7

6.9

9.3

10.8

10.4

10.7

10.4

11.2

12.3

B. Bound Tests

B1. Real GDP growth

24.2

43.2

59.6

70.7

82.8

96.7

111.2

125.6

137.9

150.7

163.4

B2. Primary balance

24.2

45.8

59.1

62.3

67.1

73.4

80.1

86.6

91.7

97.1

102.5

B3. Exports

24.2

63.4

106.4

107.6

111.0

117.3

123.7

130.1

134.3

137.9

139.7

B4. Other flows 3/

24.2

59.3

85.5

87.8

91.8

98.1

104.6

110.9

115.5

119.6

122.7

B6. One-time 30 percent nominal depreciation

24.2

38.7

39.3

39.1

39.9

41.5

43.8

45.8

47.4

49.4

51.8

B6. Combination of B1-B5

24.2

43.3

49.9

48.6

53.7

59.9

66.6

72.9

78.2

83.7

89.4

C. Tailored Tests

C1.

Combined contingent liabilities

24.2

52.4

57.5

61.1

66.0

72.2

78.9

85.4

90.4

95.9

101.5

C2.

Natural disaster

24.2

71.7

77.0

81.1

87.0

95.0

103.3

111.4

117.7

124.5

131.4

C3.

Commodity price

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

C4.

Market Financing

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Debt Service-to-Revenue Ratio

Baseline

3.4

4.0

3.8

4.0

4.7

5.5

5.1

5.6

5.7

6.0

6.5

A. Alternative Scenarios

A1. Key variables at their historical averages in 2019-2029 2/

3.4

3.6

0.2

-0.1

0.3

0.4

-0.4

2.3

2.3

2.1

2.1

0

3.4

4.5

7.7

6.9

9.3

10.8

10.4

10.7

10.4

11.2

12.3

B. Bound Tests

B1. Real GDP growth

3.4

4.1

4.9

5.9

7.2

8.5

8.3

9.2

9.6

10.2

11.3

B2. Primary balance

3.4

4.0

5.3

5.8

5.5

6.2

5.7

6.2

6.3

6.7

7.5

B3. Exports

3.4

4.0

4.3

5.1

5.8

6.6

6.2

6.6

6.6

8.1

10.5

B4. Other flows 3/

3.4

4.0

4.2

4.7

5.4

6.3

5.8

6.3

6.3

7.6

9.2

B6. One-time 30 percent nominal depreciation

3.4

4.0

4.0

4.1

5.0

6.0

5.3

5.8

5.8

5.9

6.3

B6. Combination of B1-B5

3.4

3.9

3.8

3.9

4.7

5.5

5.1

5.6

5.7

6.0

6.5

C. Tailored Tests

C1.

Combined contingent liabilities

3.4

4.0

6.6

4.7

5.2

6.1

5.6

6.1

6.2

6.4

7.0

C2.

Natural disaster

3.4

4.0

10.4

6.0

6.5

7.4

7.0

7.5

7.6

7.9

8.5

C3.

Commodity price

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

C4.

Market Financing

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Sources: Country authorities; and staff estimates and projections.

1/ A bold value indicates a breach of the threshold.

2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

3/ Includes official and private transfers and FDI.

INTERNATIONAL MONETARY FUND 11

©International Monetary Fund. Not for Redistribution

Statement by Mr. Ray and Ms. Johnson on Solomon Islands

Executive Board Meeting

June 1, 2020

On behalf of our Solomon Islands authorities, we thank staff, management and the Executive Board for their continued support to the Solomon Islands, especially during these challenging times.

The COVID-19 pandemic and its economic impact

Despite there being no confirmed cases in the Solomon Islands, the Solomon Islands government has taken swift action to prepare for and respond to the threat of a COVID-19 outbreak and has been operating under a State of Public Emergency since 25 March.

The Solomon Islands is a small and vulnerable economy, with a limited public health capacity, particularly on outlying islands. An outbreak of COVID-19 could very quickly reach beyond the capacity of the public health system.

Under the State of Public Emergency, the government closed borders and imposed a number of containment measures to ensure social distancing, such as closing schools and non- essential businesses, as well as setting up mandatory quarantine and isolation facilities.

The Solomon Islands was also affected by cyclone Harold in early April, when 27 people lost their lives and heavy rain and strong winds caused destruction to homes, schools and crops.

The negative impact on the Solomon Islands of the containment measures and the cyclone is likely to be considerable, affecting individuals, households and businesses throughout the country. The authorities are forecasting economic growth will fall to around -5.1 percent in 2020 (compared to staff estimates of -5.5 percent). The government has additional COVID-19 related spending pressures, coupled with lower revenue trends as the economy has seen declines in logging, mining and fishery exports as well as a sharp contraction in tourism. As a result, the fiscal deficit is expected to widen to 5.8 percent of GDP and public debt is expected to rise this year and into the medium term.

The current account balance is expected to widen significantly to about 17.8 percent of GDP in 2020, given weak external demand and travel restrictions. The COVID-19 pandemic has led to an urgent balance of payments need and a sizeable residual financing gap of around US$38.8 million (about 2.5 percent of GDP), after taking account of international reserve drawdown and donor support from the Asian Development Bank and World Bank.

Policy response to the crisis

Because of the Solomon Islands' vulnerabilities, the government has been proactive in preventing the spread of COVID-19, isolating the country and imposing strict quarantine.

The government has prepared a COVID-19 preparedness and response plan, and with support from development partners, has introduced quarantine facilities and testing capability in preparation for a possible domestic outbreak.

©International Monetary Fund. Not for Redistribution

The government also announced a stimulus package of SBD319 million (about 2.6 percent of GDP) to support the recovery, aimed at protecting jobs and incomes and stabilizing the domestic economy. An Oversight Committee has been set up to ensure that the overall desired outcomes are achieved and the targeted beneficiaries receive the support they need and to prevent any abuse or misuse of the package.

The government remains committed to stabilizing public finances and understand the importance of rebuilding fiscal buffers to address potential risks from natural disasters. The authorities are maintaining their efforts to strengthen tax compliance, to progress tax reform - including indirect tax reform, and to tighten expenditure controls and procurement processes at the Ministry of Finance and Treasury.

The authorities remain committed to the current debt management framework and are working closely with development partners to address large infrastructure needs in a transparent manner.

The Central Bank of Solomon Islands will maintain an expansionary monetary policy stance in view of the low inflation environment, the weak growth outlook and slowing credit growth. The authorities consider that the basket exchange rate peg remains an appropriate nominal anchor for Solomon Islands.

Fund support

Against this background, the Solomon Islands is facing an urgent balance of payments need, which has triggered the authorities' request for emergency financing in the amount of SDR20.8 million (100 percent of quota, around one fifth of the external financing gap). The Fund's emergency assistance will help meet the urgent balance of payments financing needs stemming from the adverse impact of the ongoing shock on the economy as a result of COVID-19.

The IMF debt relief provided under the Catastrophe Containment and Relief Trust will also help to close the financing gap.

The authorities are continuing to actively seek additional financing from development partners and Fund support will play a catalytic role. In this regard, the World Bank is processing a fast-track US$5 million COVID-19 Emergency Response and Health Systems Preparedness Project. The Asian Development Bank has approved US$6 million in funds under the Contingent Disaster Financing Facility and is processing a pandemic response loan and grant under the Countercyclical Support Facility for up to US$20 million.

The authorities are thankful to the Fund for their advice and ongoing technical assistance (particularly support from PFTAC) and look forward to further constructive engagement in the future.

©International Monetary Fund. Not for Redistribution

Disclaimer

IMF - International Monetary Fund published this content on 04 June 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 09 June 2020 19:37:01 UTC


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