An International Monetary Fund (IMF) team led by Mr. Luis Breuer visited the Solomon Islands during October 21–November 1 to hold discussions on the 2013 Article IV consultation and to conduct the second review under a three-year Extended Credit Facility (ECF) arrangement, approved on December 7, 2012 (see Press Release No. 12/479).The team met with Prime Minister Gordon Darcy Lilo, Minister of Finance and Treasury Rick Houenipwela, Central Bank of the Solomon Islands Governor Denton Rarawa, and other senior officials, as well as representatives from the private sector and international development partners. The mission expresses its deep appreciation to the authorities and other stakeholders for the frank and constructive discussions.

At the conclusion of the visit, Mr. Breuer issued the following statement:

“The implementation of economic reform programs supported by the international community has helped consolidate macroeconomic and financial stability in the Solomon Islands and facilitated donor support. Improved economic fundamentals, including low public debt, ample international reserves, and a track record of fiscal discipline have increased the economy’s resilience to adverse shocks. Quantitative targets under the ECF arrangement for June 2013 were all met and progress has been achieved with economic reforms.

“Economic growth is starting to rebound 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 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.

“Fiscal risks have risen in recent months. Government revenues are expected to fall somewhat in 2013 owing to slower economic growth and weather shocks. Large spending overruns, including on tertiary scholarships, are putting significant pressure on the budget. The latter, combined with the increase in constituency development spending in recent years, could undermine fiscal discipline and is likely to crowd-out other priority programs. The authorities are planning to take decisive actions to protect fiscal discipline and improve the quality of public spending. In particular, the supplementary budget that was recently approved by Parliament will be implemented within the current spending envelop. In addition, the authorities intend to adopt regulations to strengthen the transparency and accountability of public spending, including on constituency development funds and tertiary scholarships, while ensuring that budget ceilings are not exceeded.

“Fiscal reforms are advancing, even if some have suffered delays. The recent approval of the Public Finance Management Act (PFMA) by Parliament constitutes an important benchmark in the process of strengthening fiscal institutions—the Act contains many elements of a sound public financial management law. In addition, the government adopted an enhanced tax exemptions regime. However, several other important reforms, including the changes to the tax system to allow for a mining regime and the new Customs and Excise Law have been delayed. Moreover, the publication of the Office of Auditor General’s report on 2012 constituency development fund spending has been delayed to February 2014. The authorities reaffirmed their commitment to these reforms and have proposed a revised timetable for implementation under the IMF-supported program.

“Monetary policy has been broadly appropriate and inflation pressures have eased somewhat. Excess liquidity in the banking sector has not led to inflationary pressures, but the central bank should continue to strengthen monetary instruments, and stand ready to take any actions to mop up liquidity, if inflationary pressures were to rise. Preliminary analysis suggests that the Solomon Islands dollar is moderately overvalued.

“The financial system is sound, although deepening financial markets remains an important development challenge. The authorities are continuing their efforts to strengthen the financial supervisory and regulatory frameworks and improving access to financial services. To this effect, the central bank is working with other stakeholders on revamping the Financial Institution Act and on new legal frameworks for credit unions and the payment system. The drafting of the revised National Provident Fund legislation has suffered some delays and is now scheduled to be sent to Parliament before June 2014. The central bank has granted an interim banking license to a firm, although it has indicated that the firm will not be allowed to carry out any banking operations until the due diligence is completed and only when a full license is granted.

“The authorities continue to work toward creating conditions conducive to sustained and inclusive growth. 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. Particular focus is required on diversifying the sources of growth and developing key areas of infrastructure, including reliable access to power, telecommunications, and transportation. Improving the operation of the National Transportation Fund, which is currently under review, is important to expand public investment in infrastructure.

“The mission and the authorities have reached staff-level agreement on the quantitative targets and policies for the completion of the second review under the ECF arrangement, which is subject to review by the management and Executive Board of the IMF. Discussions and understandings centered on policies to safeguard achievements so far and put the economy on a sound footing for continued growth and resilience. Key understanding included maintaining an overall fiscal balance in 2013 and 2014, improving the quality of spending, in particular constituency fund and tertiary scholarship spending, ensuring that budget ceilings are not exceeded, issuing implementing regulations for the PFMA, and strengthening the financial sector including with the preparation of a revised Financial Institutions Act.”