On January 8, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the 2013 Article IV Consultation with Solomon Islands.¹ On the same day, the Executive Board also completed the second review under the Extended Credit Facility (ECF) arrangement with Solomon Islands, and approved US$0.23 million disbursement (Press Release No. 14/06).

Economic growth in Solomon Islands is slowly rebounding from the slowdown of the first half of 2013, when agriculture, logging, and gold production fell, owing mainly to unfavorable weather developments, lower terms of trade, and one-off factors. Real GDP growth is projected at 2.9 percent for 2013 and 4 percent for 2014. Risks are tilted to the downside, including from lower external demand and grants. Inflation has stabilized at around 6.5 percent and is expected to fall gradually as agricultural prices react to the recovery of production.

The under-execution of development spending led to a significant budget surplus in the first six months of 2013, but fiscal risks have risen. Government revenues for the year are somewhat lower than expected owing to slower economic growth and weather shocks. Spending overruns on selected program, including on tertiary scholarships, combined with the increase in constituency development spending, are putting significant pressure on the budget.

The financial system is sound, although deepening financial markets remains an important development challenge. Banks are adequately capitalized, highly liquid, and profitable. Bank credit continues to recover after the sluggish pace recorded over the last few years. Excess reserves in the banking system have declined from last year’s level but remain substantial.

The current account balance is expected to deteriorate this year, due to lower exports and higher imports—the latter on account of higher foreign direct investment—although net international reserves are expected to hold up at close to current levels. The Solomon Islands dollar was broadly stable against the U.S. dollar during the year, but fluctuations against the Australian dollar were considerably more pronounced. The central bank is gaining experience with the transition to a basket peg.

The country continues to face development challenges. Infrastructure needs are large, particularly with regard to energy supply, transportation, and telecommunications. The country has achieved significant improvements in the business climate, but still ranks lower than its regional peers in some areas, such as access to electricity and ease of registering property.

Executive Board Assessment²

Executive Directors commended the authorities’ broadly satisfactory implementation of their ECF-supported program. Economic growth is gradually recovering and inflation has stabilized since the second half of 2013. Nonetheless, the country faces significant growth and development challenges, including from diminishing donor assistance. This will require continued efforts to strengthen public finances, enhance monetary and exchange rate policies, safeguard financial stability, and address constraints to broad-based, inclusive growth.

Directors encouraged the authorities to protect policy buffers by keeping overall expenditure, including from the supplementary budget, within the original spending envelope, while addressing priority social and development needs. They stressed the importance of strengthening the quality and efficiency of public spending and the transparency and accountability of constituency funds and tertiary scholarship awards. Directors commended the approval of the Public Finance Management Act. They looked forward to its implementation, and further efforts to enact remaining tax reforms and to improve debt management.

Directors endorsed the current monetary policy stance. They welcomed the central bank’s efforts to strengthen monetary policy instruments and readiness to mop up liquidity if inflationary pressures arise. Directors agreed that the basket peg remains appropriate. They saw merit in widening the operational band against the U.S. dollar to track the currency basket more closely. They also highlighted the importance of boosting productivity to prevent real exchange rate misalignment.

Directors noted that the financial sector is sound. They supported the authorities’ pursuit of financial sector reform, including plans to strengthen the legal and oversight frameworks of the financial sector and improve access to financial services.

Directors underscored the need for new sources of growth as logging activities decline, and the importance of fostering private sector growth. They urged the authorities to prioritize investments to ensure reliable access to power, telecommunications, and transportation, and to promote a transparent tax regime and clear land-use rights. They noted that the right balance of spending on all levels of education will help meet the economy’s skills needs.