03/05/2021 | Press release | Distributed by Public on 03/05/2021 10:22
March 5, 2021
Washington, DC: Mr. Jarkko Turunen led a virtual staff visit to Honiara February 23-March 5 for meetings with the Minister of Finance, the central bank Governor, officials, parliamentarians and development partners to discuss recent economic developments and policy plans. At the conclusion of the virtual staff visit, Mr. Turunen issued the following statement:
'As a result of strong and timely containment measures, Solomon Islands has thus far remained one of the few countries with no record of local transmission of COVID-19. However, the economic impact of COVID-19 has been severe, with GDP growth estimated to have declined to -4.3 percent in 2020, due to a slowdown in commodity exports, tourism, and domestic activity. Growth is expected to pick up to 1.5 percent in 2021, with the initial recovery phase hampered by ongoing pandemic-related disruption. Inflation has remained muted owing to weak demand and decline in energy prices.
'Favorable donor inflows, including IMF emergency financing , have bolstered foreign exchange reserves. At the end of 2020, foreign reserves stood at about 10.2 months of prospective imports. The current account is estimated to have recorded a deficit of 1.7 percent of GDP in 2020 driven by a large drop in exports, offset by softening imports, and higher primary income and official transfers.
'The government has taken swift measures to mitigate the economic impact of the pandemic, directing resources to essential services and the COVID-19 response. Planned additional spending towards health and containment measures and fiscal stimulus amounted to about 3.6 percent of GDP in 2020, with stimulus spending targeted at providing social assistance, protecting jobs and incomes, and stabilizing the domestic economy. As a result, the fiscal deficit is estimated to have widened to 2.4 percent of GDP in 2020, with the cash balance remaining below staff's recommended minimum of two months of spending.
'In line with the government's Redirection Policy, the 2021 budget is expected to focus on COVID-19 containment, support for the domestic economy and accelerating the economic recovery, including through additional resources to the productive and resource sectors and infrastructure investment. Near-term fiscal policies should prioritize measures to safeguard health security, while securing additional financing to protect the vulnerable, underpin the economic recovery, and help reboot private sector activity. The authorities should stand ready to extend more support to the economy should conditions deteriorate and reprioritize spending as needed. Once an economic recovery is firmly underway, a gradual fiscal consolidation should aim to restore fiscal buffers.
'Monetary policy has remained appropriately expansionary, and the Central Bank of Solomon Islands (CBSI) has ensured adequate financial system liquidity, including by lowering the Cash Reserve Ratio. The central bank also purchased government bonds in the secondary market to support the recovery. The banking system was profitable in 2020, despite the challenges of COVID-19. However, the pandemic's full impact on financial sector balance sheets remains uncertain.
'Policies to strengthen fiscal governance, advance further fiscal reforms and address structural bottlenecks have become more urgent following the COVID-19 crisis. Staff welcomes progress in the areas of revenue administration. As in the 2019 Article IV consultation, staff recommends developing a medium-term fiscal strategy, with a medium-term revenue strategy (MTRS) and a realistic spending envelope, to help guide policy goals, nurture the recovery and help rebuild fiscal buffers.
'The IMF stands ready to support the government's reform efforts, including through policy advice and technical assistance, especially with respect to fiscal management and reform, supporting the environment for sustainable and inclusive growth, and maintaining macroeconomic and financial stability.
'The IMF team wishes to express its deep appreciation to the authorities and other stakeholders for frank and constructive discussions.'