Solomon Islands - Joint Bank-Fund Debt Sustainability Analysis : 2018 Update (English)

The external risk of debt distress for Solomon Islands remains moderate. All external debt indicators remain below the relevant indicative thresholds under the baseline scenario, which incorporates the average long-term effects of natural disasters on... See More + The external risk of debt distress for Solomon Islands remains moderate. All external debt indicators remain below the relevant indicative thresholds under the baseline scenario, which incorporates the average long-term effects of natural disasters on growth, the fiscal balance, and the current account balance. However, an export shock would cause a prolonged breach of the threshold for the PV of PPG external debt-to-GDP ratio. The overall risk of debt distress is assessed as moderate, with the risk reflecting a deteriorating fiscal position. Though the PV of total public debt-to-GDP ratio remains below the 35 percent benchmark under the baseline scenario, the nominal debt-to-GDP ratio would breach the authorities’ target of 35 percent in 2028. Moreover, a shock to real GDP has the greatest impact on the PV trajectory, placing risk at moderate. A tailored natural disaster shock, which uses similar scale to the largest shock in Solomon Islands’ history, causes a significant deterioration in debt sustainability in the aftermath of the event. To rebuild fiscal buffers and to enhance resilience against shocks, including natural disaster shocks, both stronger revenue mobilization measures and expenditure rationalization are needed. While the mechanical signal of the DSA suggests there is space to absorb a shock, staff assess such space to be limited, as there are fiscal cashflow problems which are acute, with rising domestic expenditure arrears and a very low cash balance. The sharp cut in development spending for 2018 looks difficult to fully achieve given a significant infrastructure investment gap; and although the authorities made efforts to clear arrears through the Supplementary budget, staff expect pressure on domestic expenditure arrears to reemerge later in the year.  See Less -