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Alison Stuart visit Solomon Islands to disscuss 2018 Article IV Consultation

An International Monetary Fund (IMF) team led by Ms. Alison Stuart visited the Solomon Islands during July 18-31 to hold discussions on the 2018 Article IV Consultation. At the conclusion of the visit, Ms. Stuart issued the following statement:

IMF Last Updated at 01 Aug 2018, 04:08 IST United States

An International Monetary Fund (IMF) team led by Ms. Alison Stuart visited the Solomon Islands during July 18-31 to hold discussions on the 2018 Article IV Consultation. At the conclusion of the visit, Ms. Stuart issued the following statement:

"Solomon Islands has made significant gains over the past fourteen years, in restoring law and order, re-establishing public institutions, and improving human development indicators. Macroeconomic and financial stability has been achieved and important structural reforms have been implemented.

"Nevertheless, Solomon Islands still confronts large economic and governance challenges. With the logging industry facing depletion, new sources of growth are needed. Challenges stem from weak management of the logging and mining sectors, a lack of transparency in the Constituency Development Funds (CDFs), and the need to strengthen public financial management.

"Growth held up well in 2017, estimated at 3.5 percent, and is projected to remain at 3.4 percent in 2018 buoyed by strong performance in logging, infrastructure spending, fisheries, agriculture, and manufacturing. Growth is expected to moderate to 2.9 percent in 2019, due to a slowdown in logging. Inflation has picked up somewhat to 2.4 percent in June 2018, following increases in domestic and global prices.

"The government budget position deteriorated further in 2017 and IMF staff project a sizeable deficit in 2018. The overall deficit widened to 3.8 percent of GDP in 2017 as revenues fell short of expectations, and spending on tertiary scholarships, shipping grants and CDFs remained high. Fiscal buffers are low with the cash balance at merely 1.5 months of spending, below the two-month target. Payment arrears have reemerged.

"Against this backdrop, the IMF staff team and the authorities discussed policies to restore fiscal buffers, strengthen public financial management, improve governance, and invest in new sources of growth. IMF staff also emphasized the need to clear the backlog of financial sector regulatory reform.

"Actions are needed to rebuild the cash balance as well as to clear domestic expenditure arrears. Strengthening revenue administration and compliance, and efforts to reduce tax arrears should continue. Reducing the scope for transfer pricing by the logging and mining sectors is also important.

"The 2019 Budget provides an opportunity to realign spending more closely to the goals of the National Development Strategy and to restrain spending in areas that have previously seen large increases—the CDFs, tertiary education scholarships, and shipping grants. Greater transparency of CDFs would improve accountability and help identify remaining gaps in the provision of services to the rural population.

"IMF staff strongly welcomes the government's continued focus on tax reform. The reform offers an important opportunity to make the tax system more efficient, fair and equitable. To yield good results, the authorities should set clear policy goals, carefully consider sequencing, and tax administration modernization as well as clientele management. Pressing ahead with public financial management reforms will improve spending efficiency.

"The basket exchange rate peg remains an appropriate nominal anchor for Solomon Islands. However, monetary conditions could be tightened a little to mop up excess liquidity and keep inflation contained.

"New sources of growth are needed to replace logging. Mining is likely to be an important growth sector but other countries' experience shows that transparency, a strong regulatory and policy environment, and a robust tax regime are needed to fully reap the benefits. The government's new emphasis on sustainable forestry will be important for the future of the sector. Over the longer term, harnessing the potential of the undersea internet cable will be important to enable the development in new sectors.

"The government's focus on anti-corruption and the passage of the Anti-Corruption bill is a positive step.

"A high priority should be given to finalizing financial legislation. We also encourage the authorities to continue to closely monitor potential macroeconomic and financial stability risks from natural disasters, domestic and external shocks, including via correspondent banking relationships. Close engagement with development partners, banks, and regulators would help with contingency planning.

"The IMF stands ready to support the government's reform efforts through policy advice and the development of better capacity for economic analysis and policy formulation, including on monetary and fiscal policies, tax reform and revenue administration, financial sector supervision and regulation, and macroeconomic statistics."

The IMF team wishes to express its deep appreciation to the authorities and other stakeholders for frank and constructive discussions.

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