Following a contraction in 2020, real GDP growth is projected to improve to 0.4 percent this year, commencing a gradual recovery underpinned by relaxation of COVID-19 related restrictions and construction activity, the World Bank says today.
Last year’s GDP was at -4.3 as the country’s economy was hit hard by the pandemic.
An International Monetary Fund (IMF) team led by Mr. Jarkko Turunen conducted a virtual mission to Solomon Islands during October 19 to November 5, 2021 to undertake discussions for the 2021 Article IV Consultation. At the conclusion of the visit, Mr. Turunen issued the following statement.
“Strong and timely containment measures have successfully prevented a domestic COVID-19 outbreak. The Solomon Islands’ economy has nevertheless been hit hard by the pandemic. Following a contraction in 2020, real GDP growth is projected to improve to 0.4 percent this year, commencing a gradual recovery underpinned by relaxation of COVID-19 related restrictions and construction activity. The fiscal deficit is expected to widen this year, from 2.4 percent of GDP in 2020. Foreign reserves remained robust at about 11.5 months of prospective imports (US$708 million) as of end-October 2021, reflecting inflows from development partners, subdued imports, and the new allocation of IMF Special Drawing Rights (SDRs). Inflation has been muted but is expected to increase. Labor market conditions have deteriorated, and the pandemic is likely to have disrupted progress in poverty reduction and human development.
“Risks to the outlook are skewed to the downside, with the main risk being community transmission of COVID-19, given low vaccination rates and weaknesses in health infrastructure. Delays to border reopening pose a key risk to the economic recovery. Vulnerabilities are exacerbated by a weaker fiscal position, owing largely to the impact of the pandemic on revenues and expenditures. Solomon Islands remains vulnerable to the impacts of climate change and natural disasters.
“The authorities took swift measures, directing resources to essential services and the COVID-19 response. Going forward, efforts to accelerate vaccinations should continue. Economic policies should focus on ensuring a durable recovery in the short term through transparent and well-targeted support to the most vulnerable households and businesses and further efforts to avoid any delays in government payments. To make room for fiscal support to the economy and to address large development spending needs, expenditures in areas with weak transparency and governance practices, including Constituency Development Funds, should be contained. Progress in advancing the Tax Administration Bill, National Payment System and introduction of procurement regulations is welcome, but timely and effective implementation are critical for success.
“Post-pandemic policies should focus on rebuilding fiscal buffers to enhance resilience to shocks and address spending needs for progress towards Sustainable Development Goals over the medium term. Further reforms are needed to improve fiscal governance, advance public financial management and establish a comprehensive medium-term revenue strategy to maintain fiscal sustainability. Modernizing tax administration and introducing a Value Added Tax are important first steps towards comprehensive tax reforms.
“Maintaining a strong reserves buffer will continue to support macroeconomic stability. Financial sector reforms should be aimed at increasing private sector credit growth, as well as continued improvements in financial development and inclusion. Strengthening the AML/CFT framework and implementation would help safeguard financial stability.
“Generating new sources of growth requires effective investment in human capital and infrastructure, structural reforms and efforts to improve the business environment. Accelerating digital and green growth can foster longer-term economic transformation and improve resilience. Strengthening enforcement of governance standards, improving transparency, including for pandemic-related spending, and advancing the anti-corruption agenda remain crucial.
“The team had extremely constructive discussions with the Governor of the Central Bank of the Solomon Islands, the Permanent Secretary of the Ministry of Finance and Treasury, other government officials, development partners, civil society and private sector representatives. The team would like to thank the Solomon Islands’ authorities for their excellent cooperation.”