Washington, DC: On January 7, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation 1 with Solomon Islands.
The authorities have enacted strong and timely measures to contain COVID-19, with no record of local transmission thus far. Measures implemented by the government include temporary suspension of all commercial international flights and ban on entry of non-citizens, and strict mandatory quarantine for all returning passengers. At the same time, progress in advancing vaccinations has been relatively slow and should be accelerated to meet the authorities target to allow timely and safe border reopening.
Solomon Islands’ economy has been hit hard by the impact of the COVID-19 pandemic. Real GDP contracted in 2020 and growth is estimated to have remained subdued at 0.4 percent in 2021, owing to lower global demand and the impact of containment measures on trade and economic activity. Labor market conditions have deteriorated, and the pandemic is likely to have disrupted progress in poverty reduction and human development. While the unrest in late November 2021 increases downside risks, economic activity is projected to recover gradually and to gain strength as containment measures are relaxed and borders re-opened. The fiscal balance is estimated to have increased to 2.9 percent of GDP in 2021, reflecting revenue loss and additional spending in response to COVID-19. Central government debt remained low, but is estimated to have increased to 16.2 percent of GDP in 2021. At end-December 2021, foreign reserves remained robust at about 11.1 months of prospective imports, reflecting inflows from development partners, subdued imports in 2020, and the new allocation of IMF Special Drawing Rights. Inflation remains low (at 2 percent in November 2021) but is expected to increase, reflecting, in part, the impact of higher commodity prices.
Risks to economic activity are tilted to the downside. Any domestic virus transmission could lead to a significant increase in human, as well as economic costs. Additional downside risks include persistent social unrest, negative impact of climate change, and volatile commodity prices. On the upside, a stronger than expected global recovery owing to a faster than expected containment of the virus, a quicker rebound in tourism driven by regional reopening and acceleration in infrastructure investment could spur a stronger recovery.
Executive Board Assessment 2
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for their strong and timely response to the pandemic, which prevented a local outbreak. However, they noted that containment measures weighed on economic activity and that pre-existing socioeconomic tensions were aggravated during the pandemic, as indicated by the recent unrest. Against this background, Directors emphasized the importance of accelerating vaccination efforts and providing targeted support to the economy in the near-term, while rebuilding fiscal buffers and accelerating structural reforms to diversify the economy as the crisis dissipates.
Directors concurred on the need to entrench a durable recovery through targeted and transparent support to vulnerable households and businesses. Once the pandemic abates, they encouraged rebuilding fiscal buffers to ensure fiscal and debt sustainability through a gradual fiscal consolidation while retaining the debt-based fiscal anchor. On fiscal reforms, Directors welcomed the progress made, and encouraged the authorities to move forward with a comprehensive tax reform, spearheaded by modernizing tax administration and introducing a value added tax. They also underscored the need to establish a medium-term revenue strategy and to prioritize public financial management reforms to maintain fiscal sustainability and improve governance. In this regard, they looked forward to the completion and publication of the audit of pandemic-related expenditures. Directors also encouraged the authorities to identify additional sources of financing, including for achieving the Sustainable Development Goals and climate resilience.
Directors considered that the accommodative monetary policy stance and the current exchange rate regime remain appropriate, and encouraged maintaining a strong reserves buffer to support macroeconomic stability. They emphasized the need to address potential financial sector vulnerabilities proactively and to continue to closely monitor non-performing loans. Directors called for the continuation of the financial sector reforms agenda to increase private sector credit growth and advance financial development and inclusion. Strengthening the AML/CFT framework to mitigate pressures on correspondent banking relationships also remains a priority.
Directors encouraged implementation of structural reforms to support economic diversification and private sector development. Efforts could focus on strengthening human capital, developing quality infrastructure, improving the business environment, and advancing the governance and anti-corruption agendas. In that context, Directors encouraged the authorities to continue to benefit from capacity development by the Fund and development partners.