Solomon Islands: Improved Fiscal Sustainability Reform Program

Public sector management / Economic affairs management - Public expenditure and fiscal management

Solomon Islands is confronted with a narrow production base, remoteness and geographic dispersion, thin administrative capacity, vulnerability to natural disasters and climate change, a large infrastructure gap, and high dependence on aid and imports. Despite these constraints, its economy has continued to grow in recent years. Growth averaged 2.9% per annum during 2013-2017, which is higher than the regional average of 2.4% over the same period. But population growth of about 2.3% means there is limited per capita income growth. The government's challenges in managing and accounting for its scarce resources, combined with weak internal coordination, poor utilization of capital expenditure, and outdated business and taxation laws and regulations, has often resulted in poor public sector management and service delivery.

Although economic growth has been broadly steady, it has relied on expansionary fiscal policy, unsustainable logging, and post-flooding reconstruction. While export performance is currently strong, the longer-term prospects for sustaining growth are uncertain. The government is well aware that recent trends are not sustainable, especially as logging (which accounted for around 20% of domestic revenue and two-thirds of exports in 2017) is expected to gradually decline over the medium term. When the government was formed in late 2017, one of the first steps it took to accelerate its reform program was reactivating the Core Economic Working Group (CEWG) and adopting a policy reform matrix that would unlock budget support from development partners. In the past the CEWG has proven effective in utilizing policy financing to sustain reform momentum and efforts to strengthen fiscal sustainability.

During 2010-2014, the government streamlined the process for foreign investment, modernized company and business legislation, and liberalized the telecommunications industry in order to improve the business and investment climate. Following the global financial crisis in 2009-2010, the government implemented several important financial reforms, including adopting fiscal management targets for the budget and public debt, launching a debt management strategy, establishing a multiagency public financial management (PFM) working group, and strengthening internal auditing across government. From 2011, and working closely with the International Monetary Fund, the government also maintained a cash buffer of at least 2 months of recurrent expenditure to improve its ability to respond to shocks. However, the fiscal position deteriorated during 2015-2017, reversing earlier surpluses, because of poor fiscal management, in particular rising discretionary expenditure and changes in government priorities that resulted in limited policy dialogue and reform slippage. The government's cash buffer declined to less than 1 month of cash reserves in September 2017, well below the target of 2 months of total spending. Action is needed to restore a sustainable budget and improve PFM processes to strengthen budget credibility.

Key leadership changes in late 2017 have enabled the resumption of reform momentum. In 2018 the government made a concerted effort to reestablish macroeconomic and fiscal stability through a balanced budget and a targeted fiscal adjustment program that included budget support and rebuilding of cash buffers. This approach is closely aligned to the National Development Strategy; ADB's Pacific Approach, 2016-2020; and its three-pronged strategy to reduce costs, manage risks, and enable value creation. It is also consistent with the IMF's policy advice to the government. Achieving a fully funded budget, however, has come at the expense of substantial reductions in development expenditure. The government adopted the same prudent approach to the July 2018 supplementary budget, which was around $28.9 million. Line ministries were advised that new or additional expenditure pressures would only be accommodated if there was a commensurate increase in revenues and/or funds could be reallocated from the 2018 recurrent budget. No new or additional discretionary expenditures have been included. Consequently, the government's fiscal framework maintains a near-balanced budget.

The rate of inclusive economic growth reinvigorated and increased.

The environment for private sector development improved and investment opportunities for all Solomon Islanders increased.