The executive board of the International Monetary Fund (IMF) on June 20 completed the third review of the Solomon Islands’ economic performance under the Extended Credit Facility (ECF) arrangement.
An IMF team visited Honiara, in May to conduct the third review of the ECF-supported economic program and to assess the impact on the economic outlook of the severe floods that hit in April 2014.
The unprecedented floods have undermined economic activity, causing loss of life and widespread damage to key infrastructure, water and sanitation systems, housing, and agricultural output. One fifth of Honiara’s population was displaced to shelters. Rural areas around the capital were also heavily affected.
Completion of the third review enables the Solomon Islands to draw an amount equivalent to SDR 0.149 million (about US$0.23million) immediately, bringing total disbursements under the arrangement to an amount equivalent to SDR 0.594 million (about US$0.92 million).
The three-year ECF arrangement was approved December 7, 2012, in an amount equivalent to SDR 1.04 million (about US$1.59 million), or 10 percent of the country’s quota
Following the executive board’s discussion on the Solomon Islands, Mr. Min Zhu, Deputy Managing Director and Acting Chair, stated: “The severe floods that hit parts of the country in April 2014, coupled with the closure of the country’s gold mine, have adversely affected the growth outlook and aggravated the challenges that Solomon Islands faces as a small and fragile state.
“While fiscal policy should support economic activity in the near term, reviewing spending priorities is paramount to preserve fiscal discipline, particularly in view of the uncertain economic and fiscal outlook. Part of the fiscal buffer should be used for reconstruction and capital projects and to absorb cyclical revenue losses while expenditure on this year’s elections should be strictly contained.
“The authorities should sustain their efforts in building sound fiscal institutions. To this end, the forthcoming public financial management roadmap, budget strategy, and mid-year budget review, together with the recent strengthening of debt management, are key in fostering budget discipline and improve budget planning.
“The pending broader review of policies on tertiary education, in addition to containing the size of spending, is critical for signaling the government’s commitment to promote transparency and accountability in the use of public resources.
“Current inflationary pressures are expected to be short-lived. However, the central bank should stand ready to act should credit growth trigger a deterioration of credit quality and demand-driven inflation. While the basket peg is an appropriate exchange rate regime for Solomon Islands, its implementation could be improved through a gradual widening of the operational band and a better alignment of the base rate with the basket peg.
“The financial sector appears sound, and the authorities’ efforts to strengthen supervision and regulation—including the forthcoming National Provident Fund Act, Financial Institutions Act, and the Credit Union Act—will help promote financial sector stability and financial inclusion.”