52119 DebtManagementPerf o ma r nceAssessment (DeMP A) SolomonIsa l nds September2009 TheD eMPAi s a me thodologyfora ssessingp ublicd ebtma nage men tp erf orma nce h t o r ughac omp rehensives etofindc iatorss panningth eful l a r ngeo fgov ernme ntdebt ma nageme ntfu ncti ons.I ti sad aptedf rom th eP ub i lcE xpen di turea ndF inancial Accountabl it iy( PEFA)f rame work.TheD eMPAt ool presentsthe1 5d ebt perf orma nce n id c iatorsalong with as cori ng me h t odoo l gy.TheD eMP Atoo lisco mp e lme ntedb ya guide thatp o r vd ies s upp e lme ntalinforma to in f ort he u se o ft he indicators. Forad di to inali nformati o no ntheWo r ldBanksD ’ ebtMa nagementTechnc ial Asss itanceProgram, n icluding moreontheD eMPAT ool , pe lasevisto i urwe bst iea: t htp t / :/www wo . l rdbank.org/debt Contents 1 Executive Summary ........................................................................................................................................2 1.1 Technical Assistance in Debt Management.....................................................................................2 2 Background .....................................................................................................................................................3 2.1 Country Background .............................................................................................................................3 2.2 Public Expenditure and Financial Accountability (PEFA) Assessment - 2008 .............................5 2.3 DeMPA Assessment ................................................................................................................................5 3 Summary of Performance Indicator Assessment......................................................................................6 3.1 Governance and Strategy Development.........................................................................................7 3.2 Coordination with Macroeconomic Policies ................................................................................. 12 3.3 Borrowing and Related Financing Activities .................................................................................. 14 3.4 Cash Flow Forecasting and Cash Balance Management ......................................................... 16 3.5 Operational Risk Management ........................................................................................................ 17 3.6 Debt Records and Reporting ............................................................................................................ 19 Annex 1 – Officials Involved in the Recent World Bank DeMPA Mission to Solomon Islands, 19 - 28 February 2009 ................................................................................................................................................... 22 Annex 2 – Sample of publication of the central government’s debt position in the local daily, as of 18 February 2009 ......................................................................................................................................... 23 Annex 3 – Organization Structure for Debt Management – Solomon Islands ..................................... 24 1 1 Executive Summary From February 19 to 28, 2009, a World Bank team 1 undertook a debt management performance assessment (DeMPA) mission to Honiara, Solomon Islands. The objective was to undertake a comprehensive assessment of debt management functions applying the DeMPA tool. As part of the assessment, the mission met with officials from the Ministry of Finance and Treasury (MoFT) – specifically, from the Debt Management Unit (DMU), Budget Division, Economic Reform Unit (ERU), and Accountant-General’s office – as well as officials from the Central Bank of the Solomon Islands (CBSI), the Auditor-General, representatives of the Solomon Islands' traditional development partners, and domestic market participants (see Annex 1 for a complete list of officials). The assessment reveals that the Solomon Islands meets the minimum requirements for effective debt management performance as specified by the DeMPA tool on the legal framework, coordination with monetary policy, and debt reporting. While taking note of substantial efforts to improve performance in a number of areas, the assessment also found that the Solomon Islands does not meet the minimum requirements for the indicators assessing the debt management strategy, managerial structure, coordination with fiscal policy, domestic borrowing, cash flow forecasting and cash balance management, debt records, and debt recording. The mission also identified the following areas that require improvement and could be considered priorities for capacity building and reform: evaluation of debt management operations; auditing; external borrowing; loan guarantees, on-lending and debt-related transactions; debt administration and data security, and; segregation of duties, staff capacity and business continuity. 1.1 Technical Assistance in Debt Management The Commonwealth Secretariat has provided technical assistance to the Solomon Islands Government since CS-DRMS was installed in 1989. This has been from the Debt Management Section in London and the regional advisors that were placed in Port Moresby and Suva. In addition, DMU and CBSI staff have attended regional training in Samoa (2005), Fiji (2006), Singapore (2007) and Papua New Guinea (PNG, 2007), as well as a Pan-Commonwealth workshop in South Africa (2008), the biennial forum in London in 2006 and 2008, and the CS-DRMS user-group forum. The Australian Government provided technical assistance in 2002-03 through AusAID with two advisers for the development of a comprehensive debt restructuring plan and comprehensive debt management strategy for the Solomon Islands government to address the default on debt obligations, arrears and informal debt. 2 These plans were developed further with the assistance of advisers under the Regional Assistance Mission to the Solomon Islands (RAMSI) program. A succession of four advisers have been seconded to the Debt Management Unit (DMU) from the Australian Office of Finance Management (AOFM) since August 2003 to develop and implement a comprehensive debt management plan encompassing debt restructuring, developing risk management capability, identifying trade creditors, and building capacity to prepare for the next phase of debt management. 3 1 The mission team comprised Thor-Jürgen Greve Løberg, the Economic Policy and Debt Department (PRMED and team leader) of the World Bank, Carilus Odumbe from the Debt Management Section of the Commonwealth Secretariat, and Ian Storkey, Consultant to the World Bank. Abha Prasad (PRMED) provided back-stopping from Washington and Signe Zeikate (PRMED) supplied valuable background information on the Solomon Islands. 2 The Solomon Islands Government had accumulated a large stock of ‘informal’ debt comprising explicit debt obligations in the form of guarantees and contingent liabilities (trade credits and public employee obligations). In addition, the Government had (and continues to have) a number of implicit debt obligations in the form of debts owed by state owned enterprises (SOEs) and Provincial Governments. 3 John Karatsoreos from August 2003 to January 2006, Nick Yiannakopoulos from April 2005 to April 2007, Rex Sleeman from January 2006 to June 2008, and Matthew Wheadon from June 2008 to the present. 2 DMU staff has attended the joint PNG/Solomon Islands forum hosted by the AOFM each year for the past 3 years. The head of the DMU also attended the Sovereign Debt Management Forum held at the World Bank in Washington DC in October 2008. New Zealand Aid (NZAID) provided assistance in October 2005 in the role of chair of the Honiara Club that was brought together to negotiate debt relief with external creditors. 2 Background 2.1 Country Background The Solomon Islands is part of the Melanesian island chain in the South Pacific, east of Papua New Guinea (PNG) and north of Australia, and is a member of the Commonwealth. 4 Despite rapid growth during the last five years (real GDP growth averaged 7 percent) the Solomon Islands is still the poorest among the Pacific Islands and progress towards meeting the Millennium Development Goals remains slow. 5 The country’s economy is heavily dependent on agriculture, fishing, forestry (e.g. logging) and services sectors and most manufactured goods and petroleum products must be imported. In recent years the logging and service sector have driven GDP growth, with logging currently accounting for 20 percent of the government’s tax revenues and 65 percent of exports. In the medium term, logging activities are expected to decline, reflecting unsustainably high rates of logging. 6 The islands are rich in undeveloped mineral resources, such as lead, zinc, nickel, and gold. 7 Gold mining is of particular importance since its operation is scheduled to start in 2010 and will be critical to sustain exports, growth and foreign reserves once logging declines. 8 Public sector debt and external debt levels are highly sensitive to temporary declines in real GDP growth and export growth, respectively. According to the 2008 Article IV report from the IMF, the medium term outlook depends heavily on the start of gold and nickel mining operations within the very near future, without which the balance of payments and foreign reserves are projected to come under severe pressure. 9 The increase in commodity prices during 2008 fuelled inflationary pressures; among other policy actions, the authorities tightened credit conditions and removed taxes on rice to contain inflation. The SI dollar depreciated by 9 percent in nominal effective terms during the year to end-May 2008, due to its peg to the USD. The country is highly dependent on official development assistance, estimated to represent 50 percent of overall government expenditure. The major donors include Australia and New Zealand, as well as Taiwan Province of China, Japan, the Asian Development Bank, the EU, and the World Bank, which recently opened a country office in Honiara. Within the framework of the Honiara Club Agreement of October 2005, 10 under which the Solomon Islands benefitted from substantial debt forgiveness and restructuring, the government has 4 As of July 2008, it was estimated to have 581,318 people. The capital city, Honiara, has the largest population (est. 54,000 people) and is located on the island of Guadalcanal. 5 Real GDP grew by 10.3% in 2007 and was projected to grow by 7.25% in 2008. 6 Deforestation is raising the country’s risk of natural disasters, e.g. floods and mudslides. 7 Sumitomo Metal Mining Company is expected to invest about US$ 2 billion in the Solomon Islands to start the first phase of nickel production in 2014. 8The operation of the gold mine was initially scheduled for 2008, but has been significantly delayed, mainly due to land ownership issues, as well as problems with securing political risk insurance. 9 Solomon Islands: 2008 Article IV Consultation—Staff Report (November 2008, IMF Country Report No. 08/358) 10The Honiara Club is a multilateral forum established in 2005 to secure debt relief from four major creditors of Solomon Islands, namely Export Finance and Insurance Corporation, the European Commission, the European Investment Bank, and the International Fund for Agricultural Development. 3 endeavoured to improve its debt position. 11 Total public debt was reduced from 57 percent of GDP in 2006 (in NPV terms) to around 40 percent of GDP at end-2007. At end-2008, total public debt had fallen further to 32% of GDP, approximately four-fifths of which is reported to be external debt. 12 Central government domestic debt is held by the central bank, private banks and the National Provident Fund. Under the agreement, the government allocates a certain percentage of its revenues to service the debt through a Debt Service Fund 13 with the stated goal of reducing the NPV of external debt-to-GDP to 30 percent, which is the government’s stipulated “green light” for the resumption of new borrowing. 14 The banking sector is well capitalized (the aggregate capital to risk-weighted assets ratio is over 25 percent), and all three commercial banks are subsidiaries of foreign banks and are supervised both by the Central Bank of Solomon Islands (CBSI) and their parent banks. The amount of nonperforming loans is small (around 3 percent), while total assets of the financial system have been around 85 percent of GDP and are spread roughly equally between the central bank, the commercial banks, and the main non-bank institutions. However, the capital market and microfinance are underdeveloped with a large section of the population in rural areas lacking access to financial services. Recent and planned activities, such as the mobile banks from the Australian New Zealand Banking Group (ANZ) and an ANZ/Postal Service partnership to use post offices as locations for rural satellite branches for ATMs, are expected to enhance access to banking services (primarily saving services) for the rural population. Assessments of debt sustainability (domestic and external debt) were carried out since 2004 within the framework of the IMF’s Article IV consultation process as part of the analysis of ‘medium-term outlook and risks’. Since 2006, the joint World Bank/IMF LIC-DSA template has been applied. According to the most recent DSA from September 2008, the Solomon Islands is classified as being subject to a moderate risk of debt distress. However, the DSA also underscored that the country is subject to significant risks to debt sustainability. 15 The global financial crisis comes at a time when GDP growth in the Solomon Islands is slowing and macro imbalances are growing (e.g. imports outpacing exports). The key export sector and primary foreign exchange and government revenue earner – the timber/forestry sector – is in rapid decline, while the development of promising new growth sectors, in particular mining, are reported to be stalling. While the government searches for alternative growth opportunities together with its partners (a World Bank mission to explore growth/diversification potential commenced in the last week of February), there is a pressing need for fiscal policy tightening and for the tight monetary 11 In 2002, the Solomon Islands were defaulting on all their debt obligations. At end-2007, the country was in arrears to three multilateral creditors – the EU, EIB and the OPEC Fund for International Development. 12Source: Ministry of Finance and Treasury. Total public debt comprises central government debt only, with debt data unavailable for SOEs and provincial governments. 13 The Honiara Club Agreement stipulates that 15 percent of revenues be allocated to the Debt Service Fund, a debt service account that pre-dates the agreement. However, the government recently undertook to reduce the allocation to 10 percent owing to substantial growth in SIG revenue since the agreement was signed and the fact that arrears have since been paid down and repayments regularised. The end result is that debt servicing now consumes a smaller proportion of the total budget. 14 According to the latest LIC-DSA published in September 2008, the NPV of external debt-to-GDP ratio at end- 2007 stood at 32 percent, above the policy-dependent indicative threshold, and was projected to fall to 21 percent by end-2008. At the time of writing, the IMF and World Bank country teams were in the process of updating the DSA. According to the authorities, changes to the approach to compilation of national accounts data has resulting in an upward revision of the official series for nominal GDP and, in turn, lower debt- to-GDP ratios for end-2007 (about 22%) and end-2008 (about 17%), as well as a lower projection for end-2009 (approximately 15%). 15 “…vulnerabilities arising from stress tests and the downside risks to the baseline scenario from further delays in starting gold mining operations suggest that the risks to debt sustainability are still significant.” (Joint IMF/World Bank Debt Sustainability Analysis for the Solomon Islands, September 2008). In this connection, the mission was informed that gold mining operations will in fact be subject to further delays. 4 policy overseen by the CBSI over the past year to continue. The deteriorating prospects for revenue collection are further complicated by the no new borrowing policy and the fact that aid inflows, though holding steady, are not presently expected to increase in the near term. This changing context poses significant challenges for the Solomon Islands in achieving and maintaining debt sustainability, underlining the critical importance of sound debt management practices. Among other things, a prudent fiscal response to the evolving crisis is influenced by the quality of debt management. This is especially true as the government prepares for a return to new borrowing. 2.2 Public Expenditure and Financial Accountability (PEFA) Assessment - 2008 A PEFA report for the Solomon Islands was prepared in November 2008. The PEFA Assessment goes well beyond debt management operations, which is the focus of DeMPA, but there are important overlaps. Regarding areas directly related to DeMPA indicators, the report gave good ratings for scope and frequency of debt sustainability analysis (score of A, PI-12), scope and nature of external audits (Office of Auditor General), adherence to auditing standards and responsiveness (score of B, PI-26). The DeMPA assessment mirrored some of these scores; in particular the assessment corroborated the low rating in the PEFA report for contracting loans and issuance of guarantees to state owned enterprises (SOEs, scores of D), 16 and the quality and frequency of cash-flow forecasting and monitoring (scores of D and D+, respectively). Exceptions included the scope and frequency of DSAs, where it is a requirement in the DeMPA that DSAs are undertaken by the authorities; internal audits, where the DeMPA focuses on performance audits; and the quality of debt data recording and reporting and systems for contracting loans and issuing guarantees, where DeMPA delves more deeply into these aspects and also assesses the extent of public dissemination of debt information. 2.3 DeMPA Assessment The DeMPA comprises a set of 15 Debt Management Performance Indicators (DPIs) encompassing the full spectrum of government debt management (DeM) operations, as well as the overall environment in which these operations are conducted. While the DeMPA does not provide recommendations on reforms and/or capacity and institution building needs, the performance indicators do stipulate a minimum standard that should be met under all conditions. Consequently, if the assessment shows that the minimum requirements are not met, this will clearly indicate an area requiring attention or priority reform. The scope of the DeMPA is central government debt management activities and closely related functions such as issuance of loan guarantees, on-lending, and cash flow forecasting and cash balance management. Thus, the DeMPA does not assess the ability to manage the wider public debt, including implicit contingent liabilities (such as liabilities of the pension system, losses of SOEs, etc.), as well as debt of SOEs, if these are not guaranteed by the central government. The DPIs have one or more dimensions linked to the subject of the DPI. Each of these dimensions is assessed separately. An aggregate score of each indicator is then based on the assessments for the individual dimensions of the indicator. For DPIs that have two or more dimensions, an aggregate score is determined by averaging the scores for individual dimensions of an indicator. The scoring methodology assesses each dimension and assigns a score of either A, B or C based on the criteria listed. The evaluation starts by checking whether the minimum requirement for that 16The DeMPA does not assess the ability to manage the wider public debt except in the case of explicit contingent liabilities and state guarantees. In the case of the Solomon Islands, this is relevant given the government’s majority shareholding in four State Owned Enterprises (SOEs), minority shares in three companies, and public interests in eight statutory bodies. 5 dimension has been met, corresponding to a score of C. A minimum requirement is the necessary condition for effective performance under the particular dimension being measured. If the minimum requirements set out in C are not met, then a D score is assigned. In the cases where a dimension cannot be assessed, an N/R (not rated or assessed) score is assigned. The A score reflects sound practice for that particular dimension of the indicator. The B score is an in-between score lying between the minimum requirements and sound practice. 3 Summary of Performance Indicator Assessment Performance Indicators Score Governance and Strategy Development DPI-1 Legal Framework C DPI-2 Managerial Structure D+ DPI-3 Debt Management Strategy D+ DPI-4 Evaluation of Debt Management Operations D DPI-5 Audit D Coordination with Macroeconomic Policies DPI-6 Coordination with Fiscal Policy D+ DPI-7 Coordination with Monetary Policy C Borrowing and Related Financing Activities DPI-8 Domestic Borrowing D+ DPI-9 External Borrowing N/R DPI-10 Loan Guarantees, On-lending and Debt-Related Transactions D Cash Flow Forecasting and Cash Balance Management DPI-11 Cash Flow Forecasting and Cash Balance Management D+ Operational Risk Management DPI-12 Debt Administration and Data Security D DPI-13 Segregation of Duties, Staff Capacity and Business Continuity D+ Debt Records and Reporting DPI-14 Debt Records D DPI-15 Debt Reporting C 6 3.1 Governance and Strategy Development DPI-1 Legal Framework Dimension Score 1. The existence, coverage, and content of the legal framework C The legal framework governing debt management is well-established and adequately defined, with Section 105 of the National Constitution (1978) providing the requisite mandate. The primary legislation consists of the Government Loans and Securities Act (1979), which gives Parliament the authority to approve the overall level of new borrowing and empowers the Minister for Finance and Treasury to “raise internally or externally loans” that Parliament authorizes to be “applied for such purposes as shall be specified by the resolution authorising the raising of such moneys”. 17 The Public Finance and Audit Act (1978) also provides clear authorization to the executive branch to obtain loans in accordance with Parliament’s approval, and according to Clause 33 of this Act, the Minister for Finance and Treasury is invested with the authority to issue loan guarantees. Borrowed funds are paid into and form part of the Consolidated Fund, which is used to finance budgetary expenditure and investments approved by Parliament, including guarantee payments and debt service on external loans. In addition, Parliament may approve the establishment of Special Funds for public borrowing that are independent of the Consolidated Fund and are used for specific purposes. There is clear authorization from the executive branch (MoFT and the Cabinet) to the Debt Management Unit (DMU) of the Ministry of Finance and Treasury (MoFT) to carry out borrowing and debt-related transactions. The Government Loans and Securities Act (1979) appoints the CBSI as “agent for the Solomon Islands Government for all matters relating to the issue of Treasury Bills” and authorizes the executive branch to contract the services of the Central Bank to issue securities and Treasury Bills on behalf of the central government, while the Central Bank of Solomon Islands Act (1976) authorizes the CBSI to “administer funds for and on account of Government”. Delegations for issuing debt are in the form of official “Financial Instructions” – a formal document – that is approved by the Minister for Finance and Treasury (MoFT) and which delegates authority to the Permanent Secretary of the MoFT to issue express written instructions to the CBSI to issue debt as and when required for purposes authorized by Parliament. 18 Based on the above, the minimum requirements for effective performance under the first indicator are met. However, there is a lack of procedural documentation translating legal requirements and delegations into specific tasks, assignments and formal agreements, for example specified borrowing purposes, mandatory reporting requirements, the preparation and regular updating of a formal debt management strategy, regular performance audits, and a formal agency agreement between the MoFT and the CBSI. In particular, procedures for issuing loan guarantees need to be formalized and strengthened in light of two breaches of the Honiara Club Agreement documented in 2008 (ref. assessment of the 2nd dimension of DPI-2 below). Moreover, during discussions with the CBSI and the DMU, the mission was informed that the Government (via the MoFT) breached the Central Bank of Solomon Islands Act (1976) between 1999 and 2001 by incurring loan advances from the CBSI well in excess of the statutory limit and did not repay within the specified period of 6 17 Clause 32 of the Government Loans and Securities Act specifically restricts the Executive from borrowing “except in accordance with the provisions of an Act of Parliament.” Therefore, specific purposes of borrowed funds must be stipulated in advance by Parliament. This is in conformity with the Constitution from 1978, which states that “the Government shall not borrow money nor enter into a guarantee involving any financial liability except in accordance with such provisions as may be prescribed by Parliament.” 18 The MoFT is in the process of updating the Financial Instructions, originally instituted nearly 30 years ago. 7 months. As a result, CBSI management invoked its right under the Act to revoke the Government’s access to advances. These are the key factors precluding a higher rating. DPI-2 Managerial Structure Dimension Score 1. The managerial structure for central government borrowings and debt-related C transactions. 2. The managerial structure for preparation and issuance of central government loan D guarantees. Overall Score D+ There is clear separation between the political level that sets the long-term DeM objectives and the principal DeM entity (the Debt Management Unit, DMU) responsible for its implementation. The managerial structure ensures coordination and efficient exchange of information among the various entities with responsibility for DeM functions, with the Monthly Monitoring Management Meeting (the “4Ms Committee”) representing a key coordination mechanism (see Appendix 3). 19 The DMU was established in the MoFT in 2004 with the primary purpose of restructuring the central government debt in accordance with the Honiara Club Agreement, and has since assumed the role of principal DeM entity. Its responsibilities span front-office and back-office functions, including negotiation and contracting new loans, issuing state securities, data recording and reporting, maintaining original copies of external loan agreements and loan guarantees, and payment processing. Analytical capacity is limited, although the DMU has recently undertaken the forecasting of external and domestic debt service and is in the process of operationalizing an in- house debt modelling system (ref. DPI-12). The DMU is lightly staffed with a Debt Manager presiding over a staff of three, one of whom is presently on MoFT-sponsored leave at the University of the South Pacific. In addition, the Australian Office of Finance Management (AOFM) has seconded debt management specialists since August 2003 as part of the Regional Assistance Mission to the Solomon Islands (RAMSI). There is no clear separation in the MoFT between front-, middle- and, back-office functions. The DMU interacts with other MoFT entities to carry out its responsibilities, such as the Economic Reform Unit, with responsibility for preparing the medium-term fiscal strategy; the Budget Unit, which prepares the annual Budget Strategy; the Accountant General’s Office; the Treasury Unit; and the Attorney General’s Office. Regular exchange of debt information and coordination of their respective activities takes place between the DMU and these entities. In early 2009, the DMU assumed primary responsibility for reporting (not recording) on domestic, external and guaranteed debt, and it is planned that the DMU will assume responsibility from the Debt Division of the CBSI for recording public external debt using the CS-DRMS, with the CBSI retaining primary responsibility for recording central government domestic and guaranteed debt. Currently, the Debt Division in the CBSI has responsibility for maintaining both the external and domestic debt database. The division regularly shares external and domestic debt data with the DMU, which validates the information against original records. In accordance with primary legislation, the CBSI acts as agent for domestic debt issuance and is also responsible for rolling over the Treasury bills (T-bills) that are outstanding. An auction committee, 20 with members from CBSI and DMU, and chaired by CBSI, meets each week to agree on the tender results. In light of the 19The “4Ms Committee” is the Monthly Monetary Management Meeting, a high-level coordination body chaired by the Permanent Secretary for Finance and Treasury, which meets monthly to consider the government’s financial position and cash flows, including debt service for the succeeding month. 20The committee is an informal arrangement between the CBSI and the DMU/MoFT; there are no documented procedures, nor does a clear delegation of responsibility exist for either institution. 8 above, the minimum requirements for effective performance under the first dimension are met. A higher rating is precluded by the fact that there is a policy of no new borrowing in place and it was consequently not possible to assess whether any borrowing would be undertaken without undue political interference given the past and present situation in the Solomon Islands Government. The Minister for Finance and Treasury is authorized under the Public Finance and Audit Act to issue loan guarantees. The Attorney General’s Office reviews the loan guarantees for signature by the Minister. Applications for guarantees typically originate from Parliament, line ministries or SOEs. While the DMU lacks a formal role in negotiating or issuing loan guarantees, it receives original copies for recording purposes (information on loan guarantees is supposed to be forwarded to the CBSI, but in practice this has been haphazard). As described by the PEFA Report from November 2008, two loan guarantees to State Owned Enterprises (SOEs) have been issued in breach of the Honiara Club Agreement. 21 Beyond this, the mission determined that the guarantees were not issued with proper consultation, coordination and information exchange with the DMU, nor were minutes of the negotiations prepared. The minimum requirements for effective performance under the second dimension are, therefore, not met. 22 DPI-3 Debt Management Strategy Dimension Score 1. The quality of the debt management strategy document. D 2. The decision-making process, updating, and publication of the debt management C strategy. Overall Score D+ The Government’s DeM objectives, as set forth in Section 3.4 of the BS09, 23 originated in the Comprehensive Debt Management Plan (CDMP, 2004), which was formally approved by the Minister for Finance and Treasury and accepted by parties to the Honiara Club Agreement. The CDMP commits the Government to ensure its external debt does not again reach unsustainable levels. 24 To this end, the authorities seek to: o continue to regularise its debts with its creditors on an affordable and sustainable basis; o pursue a policy of fiscal responsibility and freeze future borrowing and the issue of guarantees until it is sustainable for it to do so; o pursue grant financing and other ODA for its financing requirements; and o commit to continue to pay down its debts in accordance with any debt restructuring agreements it signs. 21One guarantee in respect of Soltai Fishing and Processing Limited in May 2008 in the amount SBD57 million, the other in respect of Solomon Airlines Limited in January 2008 in the amount SBD18 million. 22In order to meet the minimum requirements, the MoFT would need to institute strict managerial procedures and practices for issuing loan guarantees that include close coordination with the DMU. 23 Budget Strategy 2009, Section 3.4: “Consistent with responsible fiscal management and its commitments under the Honiara Club agreement, the Government does not intend to borrow any funds to finance its recurrent or development expenditures in 2009. The Government’s longer term debt management objective is to reduce debt to the point where it is no higher than 30 percent of GDP [in NPV terms]. This target is in line with the broad policy recommendations of international financial institutions such as the IMF, and its achievement will improve the Government’s capacity to fund its activities in the future. The aim is to achieve this target by 2010.” 24 CDMP has not been updated annually as its premises and guidance are still considered applicable (since the situation has not changed) and is rigidly applied by Government. Authorities have given priority to updating the DeM objective and strategy as the Government moves closer to regularizing its debt. 9 The Medium-term Fiscal Strategy for 2008-2013 (MTFS), submitted to Cabinet during the mission, and the Budget Strategy and Outlook for 2009 (BS09), contain elements of a debt management strategy (DMS) as set out in the minimum requirements. These two documents are developed in an open and transparent manner by several MoFT departments and in consultation with the CBSI, and are approved simultaneously as a package by Cabinet before submission to Parliament. The DMU takes the lead in providing DeM-related information and analysis. The MTFS covers 100% of the debt (including projections) in a separate section on debt/debt management prepared by the DMU, and specifies the debt-to-GDP ratio of 30% as a key target indicator. The BS09 highlights the foreign exchange risks in connection with the restructured debt (at present SI continues to service its official outstanding concessional debt, the majority of which has been contracted from IDA and AsDB), and the Government’s intention not “to borrow any funds to finance its recurrent or development expenditures.” There is no external refinancing and the grant element is 100%. Interest rate risk is not directly addressed, but this may be explained by the fact that all external debt is fixed rate and there is a no new borrowing policy in effect. In addition, domestic debt is limited to rollover of T-bills (currently there is a volume cap of SBD 30 million and a 4 percent ceiling on the interest rate). 25 A Debt Service Fund (DSF), which meets the Government’s debt service obligations as they fall due, addresses refinancing and roll-over risk. 26 Assessment of measures to support domestic debt market development is not applicable in the case of the Solomon Islands as they are not included in the DeM objectives. As described above, elements of the minimum requirements for effective performance under the first dimension are present in the MTFS and the BS09. It is also worth noting that the Solomon Island’s prohibition on new borrowing is an extenuating factor. Yet, there does not exist a cohesive and deliberate debt management strategy as specified by the first dimension. Nor is it a formal strategy in the sense that it has been developed and updated in strict accordance with established or prescribed rules that would render such a strategy ‘official’ in the minds of the authorities or the public. Therefore, the minimum requirements for effective debt management under the first dimension are not met. However, the MTFS and BS09 taken together represent an important interim step on the road to the preparation of a formalized medium-term debt management strategy (MTDS) and are a solid foundation upon which to build future policy. Indeed, the mission was informed by the Permanent Secretary of the MoFT that the government has given priority this year to producing a stand-alone, formalized debt management strategy to be presented annually as part of a package – together with the MTFS and the BS – to Cabinet and Parliament. 27 25 The cap refers to the SBD 30 million volume constraints on total issuance. There is also in effect a ceiling on the interest rate of 4 percent. This rate is a policy rate approved by the Monetary Policy Committee (MPC) of the Bank (CBSI), which was set when the Auction bill was first introduced and can only be amended by the MPC after consultation with MoFT. It has never been amended. Both the volume cap and rate ceiling are being reconsidered in light of a broader cash management reform agenda being pushed by the DMU. 26 The DSF is a budget fund that allocates a percentage of the revenue received for debt service obligations (it was 15% but reduced to 10% in 2009) in order to assure creditors that debt obligations will be met. Details of the fund are provided under DPI-11. The DSF account is held at CBSI. In a formal sense, it is part of the Government’s consolidated fund and is regularly drawn on for expenditure that is unrelated to debt management (in contravention of the HC agreement). The account attracts a marginal rate of interest (2.25%) – with interest payments being used to pay down SIG’s debts to CBSI (the same is true of CBSI dividends). As far as the mission team is aware, there is nothing stopping MoFT from shifting ‘idle’ cash holdings in Government’s accounts into higher-yielding, short- term investments. At the time it was set, the interest rate was above market, but this is no longer the case. 27 There was extensive discussion around this issue, especially given the unique situation of the Solomon Islands. Ultimately, the assessment of this dimension needed to be placed in a wider context that took into consideration the critical assessments of other key performance indicators, in particular DPI 4 (‘debt management operations’) and DPI-14 (‘debt records’). 10 The second dimension is assessed as having met the minimum requirements based on the fact that the debt strategy is effectively prepared and updated by the DMU, in consultation with the CBSI, and is made public upon approval by the Cabinet and Parliament. A higher rating for this dimension is precluded by the fact that optional strategies, along with their rationale and assumptions, are not considered in determining the optimal strategy. DPI-4 Evaluation of Debt Management Operations Dimension Score 1. Level of disclosure—in an annual report or its equivalent—of government DeM D activities, central government debt, evaluation of outcomes against stated objectives, and compliance with the government’s debt management strategy. There are no disclosure procedures concerning comprehensive reporting on government debt management activities. The DMU has not submitted an annual report on the government’s debt management activities, nor does the legal framework provide for such a report. This is partly associated with the lack of a formal, cohesive Debt Management Strategy that inter alia sets out specific long-term objectives, as the existence of a DMS that is regularly updated would tend to involve an examination of compliance. While the DMU does not prepare a comprehensive annual report on DeM activities, it should be noted that the CBSI and the MoFT have taken active steps in the past to disclose debt information. The CBSI generates data on central government domestic debt on a monthly and quarterly basis in the “public debt summary” and “quarterly review”, respectively. As of 2008 the DMU has provided central government debt data (stocks and flows) in collaboration with CBSI for the annual budgetary process, the annual financial accounts and the medium-term fiscal strategy. 28 In addition, the Economics Department of the CBSI publishes limited central government debt data (domestic and external) fortnightly in the local newspaper (see attached sample from the Solomon Star in annex 2). The minimum requirement for effective performance under this indicator is not met. 29 DPI-5 Audit Dimension Score 1. Frequency of internal and external audit of central government debt D management activities, policies, and operations, as well as publication of external audit reports. 2. Degree of commitment to address the outcomes from internal and external audits. N/R Overall Score D To date, no performance audits of central government debt management activities, policies and operations have been carried out in the Solomon Islands, whether internal or external. The Public Finance and Audit Act only requires regular internal and external financial audits. The internal auditor for the MoFT carries out quarterly and annual financial audits, which encompass debt- related expenditure against budget and debt service account inflows and outflows. The Auditor General’s Office – the supreme audit institution – is tasked with conducting annual external financial audits. The first external financial audit conducted by the Auditor General’s 28 Ref. the MoFT’s Medium Term Fiscal Strategy: 2008 – 2013, December 2008 Update. 29In order to meet the minimum requirements, the authorities would need to establish an accountability process, the cornerstone of which would be a comprehensive report on Government’s debt management activities updated annually, approved by Cabinet/Parliament and made publicly available. 11 Office – the Status of Audits of Solomon Islands Government Entities – was completed in June 2008 and tabled to Parliament in August of that year. It was made publicly available, with the local press swiftly becoming a prime medium for dissemination. With the support of RAMSI, the ongoing audit exercise involves a massive effort to bring all of the central government’s accounts for previous years up-to-date, including those of SOEs, to enable government entities to meet their fiduciary responsibilities. Contingent liabilities – estimated to be at least SBD85 million – are a key concern. The Auditor General’s Office does not specifically assess debt management functions and lacks training in the purpose and use of the CS-DRMS. The minimum requirements for effective performance under the first dimension are not met. 30 The second dimension is not rated on the basis that performance audits have not been conducted. The mission noted developments that may soon yield positive results. The newly formed “Anti- Corruption Task Force” meets weekly to oversee the external audit and formulate strategy. It is comprised of representatives from a broad cross-section of government and society, including the PS for MoFT, the Accountant General, the Auditor General, the Director of Public Prosecution, the Chair of the Law Reform Commission, the President of the Chambers of Commerce, and the National Ombudsman. A key subject for discussion is a proposal to substantially strengthen the powers of the Auditor General, including authorizing performance audits. 3.2 Coordination with Macroeconomic Policies DPI-6 Coordination with Fiscal Policy Dimension Score 1. Coordination with fiscal policy through the provision of accurate and timely C forecasts on total debt and debt service under different scenarios. 2. Availability of key fiscal variables and/or an analysis of debt sustainability, and the D frequency with which debt sustainability analysis is undertaken. Overall Score D+ The DMU is responsible for providing forecasts of total external and domestic central government debt service to the Budget division for inclusion in the annual Budget. These forecasts are prepared with the use of in-house, Excel-based modelling and projection tools. Interest and exchange rates used for preparing the forecasts are provided by the CBSI. The forecasts are published in the Budget Strategy and Outlook, which is published by the Minister of Finance and Treasury (MoFT) as part of the annual budget, and contains details of key fiscal variables. 31 While the forecasts do not provide sensitivity analysis in respect of interest and exchange rate shocks, the DMU is able to calculate the impact of a 10% change in the SBD (Solomon Islands Dollar) exchange rate, which would increase the debt service cost for 2009 by SBD 6.5 million (approx. US$851,000) and the stock of debt by SBD 109 million (US$14.3 million). The forecasts do not include a scenario analysis including a worst-case scenario. Given that the budgetary forecasts do not publish the sensitivity analysis in respect of exchange rates and interest rates, dimension 1 cannot be assessed higher than a C. A Debt Sustainability Analysis (DSA) was completed by the IMF in November 2008 covering both domestic and external public debt as part of the Article IV Consultation. 32 The DMU and CBSI 30In order to meet the minimum requirements, the MoFT would need to institutionalize performance audits in the context of an updated legal framework to facilitate this important function. The Auditor General did indicate that this will be addressed when the backlog of financial audits has been cleared. 31 Ref. Solomon Islands Budget 2009: Budget Strategy and Outlook (MoFT) 32Ref. Solomon Islands: 2008 Article IV Consultation—Staff Report (November 2008, IMF Country Report No. 08/358) 12 provided debt data but were not involved in the DSA exercise. The DMU is tracking the total debt- to-GDP ratio as the Government’s debt management objective is to reduce this ratio to a point when it is no higher than 30% of GDP. This is the target that was stipulated by the Honiara Club Agreement and has subsequently been incorporated in broad policy recommendations of the international financial institutions, such as the IMF. The DMU is also projecting when this target will be reached, currently projected for 2010. This exercise cannot be seen as a DSA as it does not undertake the analysis that would be expected for a DSA. As the government has not independently undertaken an analysis of debt sustainability, dimension 2 is assessed as a D. 33 DPI-7 Coordination with Monetary Policy Dimension Score 1. Coordination with monetary policy implementation through information sharing on C debt transactions and the government’s current and future cash flows. 2. Extent of a limit to direct access of resources from the Central Bank. C Overall Score C In accordance with primary legislation and written instructions, the CBSI acts as agent for the MoFT for domestic debt issuance and is also responsible for rolling over the treasury bills that are outstanding (see DPI-1 and DPI-2). The government and the market are informed by the central bank when its transactions are undertaken for monetary policy purposes, as opposed to when it is acting as the central government’s agent. Details of Treasury bill tenders and the results are posted on the CBSI website (http://www.cbsi.com). An auction committee, with members from CBSI and DMU, and chaired by CBSI, meets each week to agree on the tender results. Demand for treasury bills has fallen recently so that the amount that is outstanding is around SBD 12 million (US$1.6 million). These treasury bills are separate from the 6-month Bokolo bills and 12 to 24-month Bokolo deposits that are issued by CBSI for monetary policy purposes. Treasury bills are discount instruments issued by weekly auction for terms ranging from 7 days to 91 days. Current practice is to issue T-bills at face value, rather than at a discount, and to pay interest at maturity. Bokolo bills/ deposits are issued at face value on a yield basis with the coupon set, so that subscription is open permanently. The 4Ms Committee, a high-level coordination body chaired by the Permanent Secretary for Finance and Treasury, meets monthly to consider the government’s financial position and cash flows (forecasts of which are provided by the Accountant-General’s office of the MoFT), including debt service for the next month. Thus, the Solomon Islands meet the minimum requirement for effective performance under the first dimension. Section 38 in Chapter 49 of the Central Bank of Solomon Islands Act (1976) stipulates that “the Central Bank may grant temporary advances to the Government in respect of temporary deficiencies of current budget revenue, subject to repayment within six months following the end of the financial year in which they were granted, at such rates of interest as the Board may determine”. Section 40 (2) imposes a limit such as “the total amount of outstanding advances ... shall at no time exceed thirty per cent of the average annual ordinary revenue of the Government.” If this limit is reached, according to section 40 (5) “the Minister may direct the Central Bank to permit temporary further increases in the total of the advances, holdings and credits ... subject to an overall limitation of forty per cent of the average annual ordinary revenue of Government for a period not exceeding six months.” Up until 2003, when the government defaulted on its debt obligations, the temporary advance was permanent, the Government did not make repayments to the CBSI, and the limit imposed by the legislation was often exceeded. At this time, CBSI utilised the conditions set in the Act to suspend 33 To meet the minimum requirements, the DMU would need to develop the capacity within MoFT to undertake a DSA with the objective of moving to an annual assessment or update (the DMU does have a copy of the LIC-DSA template). 13 further advances to the government. 34 These outstanding advances were subsequently renegotiated and the government has been servicing these obligations with no further advances since 2003. During discussions with CBSI, senior management made clear that they would not resume advances. As there have been no advances since 2003, and the legislation provides clear limits on direct access to resources from CBSI with a 6-month time period, dimension 2 is assessed as a C. 3.3 Borrowing and Related Financing Activities DPI-8 Domestic Borrowing Dimension Score 1. The extent to which market-based mechanisms are used to issue debt, the D publication of a borrowing plan for T-bills and T-bonds, and the preparation of an annual plan for aggregate amount of local currency borrowing in the domestic market, divided between the wholesale and retail markets. 2. The availability and quality of documented procedures for local currency C borrowing in the domestic market. Overall Score D+ As the Honiara Club Agreement of October 2005 bars the Government from contracting new borrowing, domestic debt market issuance has been limited to Treasury Bills, which are issued in volumes ranging up to SBD 30 million (US$3.9 million) through weekly auctions. The amount issued in any given week is dependent on the volume of T-bills being rolled over. Tender invitations and results are regularly published on the CBSI website. Recent auctions have averaged only SBD 13 million (US$1.7 million), however. The purpose of this activity is exclusively to roll over T-bills held by retail investors and to maintain the auction mechanism pending the resumption of Government borrowing from the domestic market. The CBSI is responsible for recording debt issuance details in an in-house system; a team from the Commonwealth Secretariat overlapped with the DeMPA mission in order to inter alia update the Central Bank’s version of the CS-DRMS and operationalize a domestic debt module. Due in part to the current freeze on new borrowing, there is no publicly accessible borrowing plan. The minimum requirement for effective performance under the first dimension is therefore not met. The Central Bank has documented procedures for the issuance and redemption of T-bills that are available upon request (these procedures were undergoing review at the time of the mission), meriting a score of C under the second dimension. A higher rating is precluded by the fact that this information is not publicly available on the CBSI website or in print media. 34 According to the DMU, between 1999 – 2001 CBSI loan advances totaling around SBD174 million were made to the Government. No repayments were made to CBSI, and interest arrears of around SBD45 million were accrued on the advances, with the total debt to CBSI subsequently reaching approximately SBD219 million. In 2001 CBSI had to make a large provision of around SBD177 million in their accounts due to the non-repayment by Government. This provision reduced the asset value on the CBSI balance sheet by approximately 55%. As a result, CBSI was placed in a negative net equity position since the value of assets was less than the liability value. Consequently, the Government was compelled to issue CBSI an annual security note equal to the negative net equity position to ensure that the CBSI remained technically solvent. The Government continued this practice up until the CBSI returned to a positive net equity position in 2004. The deed for restructuring the Government’s debts to CBSI was signed in February 2006. 14 DPI-9 External Borrowing Dimension Score 1. Degree of assessment of the most beneficial/cost-effective borrowing terms and N/R conditions (lender or source of funds, currency, interest rate, and maturity). 2. Availability and quality of documented procedures for borrowing in foreign N/R markets. 3. Availability and degree of involvement of legal advisors. N/R Overall Score N/R The MoFT has never undertaken to prepare an annual borrowing plan, either in recent years or prior to the Honiara Club commitments. As such, there is no basis to assess the first dimension, meriting an N/R. The MoFT does not have formal, documented procedures or policies for external borrowing that set out the basis for selecting the source, roles and responsibilities, how terms and conditions are set (e.g. with the use of a term sheet), 35 or the decision-making and approval process to contract or issue external debt, a situation that pre-dates the current freeze on external borrowing. However, as no borrowing currently takes place, there is no need for any documented procedures, meriting an N/R. Reportedly, the Attorney General must be involved in any negotiation for contracting external loans. However, as no external debt has been contracted for an extended period of time it was not possible to assess the degree of legal involvement. As a result, the mission determined that it was not possible to rate the third dimension. 36 DPI-10 Loan Guarantees, On-lending and Debt-related Transactions Dimension Score 1. Availability and quality of documented policies and procedures for approval and D issuance of central government loan guarantees. 2. Availability and quality of documented policies and procedures for on-lending of D borrowed funds. 3. Availability of a debt management system with functionalities for handling N/R derivatives, as well as availability and quality of documented procedures for the use of derivatives. Overall Score D There are no documented policies, procedures or operational guidelines for the approval and issuance of loan guarantees, or for on-lending borrowed funds. As a result, there is no basis for control and monitoring, in particular for monitoring credit risk and the impact that loan guarantees or on-lending may have on the central government’s financial position. Dimensions 1 and 2 therefore do not meet the minimum requirement for effective performance. As derivative operations are not carried out by the central government, the need for a debt management 35 The CBSI has responsibility for recording external debt and maintaining the debt management and recording system (CS-DRMS). The DMU validates the transaction data entries. 36 In order to meet the minimum requirements for effective performance under DPI-9, the DMU would need to put in place comprehensive practices and documentation for risk and debt sustainability analysis in preparation for the resumption of external borrowing (subject to the terms of the Honiara Club Agreement and the program with the IMF). 15 system with functionality to enable trading derivatives does not arise. Consequently, there is no basis upon which to assess the third dimension. The overall score this DPI-10 is D. 37 3.4 Cash Flow Forecasting and Cash Balance Management DPI-11 Cash Flow Forecasting and Cash Balance Management Dimension Score 1. Effectiveness of forecasting the aggregate level of cash balances in government C bank account(s). 2. Effectiveness of managing the aggregate cash balance in government bank D account(s), including the integration with the domestic debt borrowing program. 3. Where the Principal DeM Entity (or the DeM entities) operate(s) its (their) own bank N/R accounts, the frequency of reconciliation of these bank accounts. Overall Score D+ The Accountant General’s office of the MoFT is responsible for forecasting cash flows and cash balances in government bank accounts operated by the MoFT. Significant improvements in forecasting cash flows have been made since completion of the PEFA assessment in November 2008, to a certain extent addressing identified shortcomings. 38 Revenue forecasts for the fiscal year (January to December) by month are obtained from the Inland Revenue Division (IRD) and Customs Division (CD) of the MoFT. Performance against budget is reviewed on a monthly basis through internal MoFT management reports, which are also used to inform regular meetings of Permanent Secretaries and Cabinet meetings. The overall fiscal position for the Government is provided for the information of the CBSI through the monthly 4Ms Committee. The aggregate cash position in central government accounts is reported to the Prime Minister on a weekly basis. Determinations of the end-year position, taking into account economic developments, are factored into the medium-term fiscal strategy, which is prepared by the Economic Reform Unit in the MoFT. IRD and CD revenue forecasts are phased monthly forecasts, whereas for the purposes of developing a monthly forecast, expenditures are pro-rated on the basis of 1/12th of the annual budget for each month. Contingency funding for unexpected expenditures is provided by the Parliament in the annual and supplementary appropriations and warrants are issued as required by the Minister for Finance and Treasury to meet urgent unbudgeted expenditures. Monthly debt service forecasts are provided by the DMU. While cash flow forecasts are produced on a monthly basis, cash management occurs through close daily monitoring of bank account balances and payment requests on hand, as well as through careful management of disbursements from bank accounts (one technique applied is to slow down cheques production for large supplier payments to take advantage of generally accepted terms of trade until sufficient funds are available). This approach is designed to ensure that large payments can be met in conjunction with meeting expenditure requirements related to the delivery of essential public services. As reasonably reliable forecasts of daily cash flows are prepared on a monthly basis and are reviewed each month by the 4Ms Committee, and as balances on the two main accounts managed by treasury (revenue and debt service accounts) are calculated and monitored very closely daily to ensure that the cash balance is maintained at a minimum level, the first dimension is assessed as C. 37In order to meet the minimum requirements for effective performance under dimensions 1 and 2, the DMU would need to institutionalize and document procedures for approval and issuance of loan guarantees and on-lending. 38 The Accountant General’s expressed a strong interest in building capacity within the unit – primarily through training and a twinning scheme with a government entity in Australia – and implementing better cash flow forecasting systems. 16 The Accountant General’s office manages the aggregate cash balance in government bank accounts (i.e. the accounts operated by the MoFT comprising the Government’s main revenue and expenditure accounts). The government maintains a revenue account at CBSI in addition to commercial bank accounts held with four regional branches of the Bank of South Pacific (BSP), which are utilized for the collection of taxes and other revenues. The government also maintains a disbursement (cheque) account with the ANZ Bank used as the primary expenditure account. Whereas public service salaries are paid electronically, most other payments are made by cheque. Funds are moved by the Treasury Division from the revenue holding account to the transaction account as required ensuring funds in the transaction account are sufficient to meet un-presented cheques. The government also maintains a Debt Service Fund (DSF) with CBSI where a mandatory 10% of revenue is credited (15% prior to 2009). The balance in the DSF is currently around SBD 23 million (US$3.0 million). Bank balances are monitored by the Treasury Division daily through phone contact with the bank. The cash book and the bank accounts in the general ledger are reconciled to bank statements regularly. The government receives interest on the surplus balance in the revenue account at CBSI at a rate of 2.5% calculated on a daily basis and paid monthly (the government has not given priority to the investment of surplus balances). As this is not considered to be a market rate, the minimum requirements for effective performance under the second dimension are not met. As the DMU does not operate any bank accounts, the third dimension is not rated. 39 3.5 Operational Risk Management DPI-12 Debt Administration and Data Security Dimension Score 1. Availability and quality of documented procedures for the processing of debt D service. 2. Availability and quality of documented procedures for debt data recording and D validation, as well as storing of agreements and debt administration. 3. Availability and quality of documented procedures for controlling access to the D central government debt recording/management system and payment system. 4. Frequency and off-site, secure storage of debt recording/management system D backups. Overall Score D There are DMU instructions for making payments to the various creditors but these are deemed to be insufficient to meet the criteria for a procedures manual for processing debt service. In the past, payment notifications from creditors were not checked with internal records. Prior to the mission, the DMU had initiated a formal process to verify all billing statements and payment notifications. The payment orders are prepared and separately checked by the DMU, authorised by the Permanent Secretary for Finance and Treasury and submitted to the Accountant General’s office. Payment requests are then prepared, authorised and sent to CBSI for payment, which are made using the S.W.I.F.T. system. These steps in combination are sufficient to meet the minimum two- person authorization process. Payments are normally made by the due date, though there have been late payments either due to settlement errors or failure to process payments in time. As not all of the minimum requirements are met, the first dimension is assessed as a D. 39 In order to meet the minimum requirements for effective performance, the MoFT would need to revise arrangements with CBSI and develop a framework to more actively manage the aggregate cash balance in government banks accounts with a market return on surplus balances. 17 There is no procedures manual for debt data recording in either the DMU or the CBSI. While these entities possess a CS-DRMS user manual, this cannot be considered a substitute for a procedures manual. The CBSI operates a system wherein one staff enters and another staff validates the debt data entries. Given that there are only two staff, with an additional two members currently on study leave, data validation may be difficult and therefore not always fulfilled. A Commonwealth Secretariat mission undertaken at the time of the DeMPA mission was tasked with training CBSI staff on inter alia utilising the user permitted roles functionality within the CS-DRMS. The CBSI constantly validates debt data against payment notifications, although this has not prevented an error in recording the debt outstanding for ADB loans due to the recording of the loan currency rather than the currency of disbursement. The Commonwealth Secretariat mission is also expected to resolve this issue. The DMU have begun to reconcile against information requests sent to each creditor. All original signed copies of loan agreements are kept in the DMU and CBSI. However, the location does not fulfil the criteria set out under dimension 2. Debt administration records are kept in folders and filing cabinets that are in secure buildings. As not all of the minimum requirements for this dimension are met, the second dimension is assessed as a D. There are no documented procedures for controlling access to CS-DRMS and the Bill/Bond Access database system in CBSI, or the in-house debt module developed and maintained by DMU. 40 The IT department in CBSI is responsible for assigning permissions but this was deemed to be informal in that instructions would be conveyed orally or by email. Therefore, dimension 3 does not meet the minimum requirements for effective performance and is assessed as a D. As CS-DRMS is on the CBSI network, the database is backed-up daily by the IT Department. The mission was informed that these backups were stored off-site at a recovery site nearby. Operational staff in CBSI and DMU were not aware of where the recovery site was located, what the backup procedures were and whether these were being adhered to, whether the backups are stored in a location that meet the criteria set out for dimension 4, and whether they could restore the data at the recovery site. The DMU has undertaken to examine this situation as it presents a significant operational risk. Consultations with the IT staff in CBSI revealed that the transfer of backups to the off-site storage locations are sporadic; the staff could not confirm how many copies are kept either locally or off-site; and there is no strategy in place concerning restoration of the system in the event of system failure or a disaster (see DPI-13 for details on disaster recovery). The CBSI sends a backup of the debt data to the DMU by flash-drive each month, for which there is no formal access control in place. Backups to the Debt Management Section of the Commonwealth Secretariat in London have also been sent sporadically in the past, but by the end of the mission the DMU enacted procedures for sending a system copy to the Commonwealth Secretariat at the end of each month. The minimum requirements for the fourth dimension are not met. 41 40 The DMU has developed an Excel-based macroeconomic modeling program in collaboration with the Economic Reform Unit of the MoFT. The debt module is designed to facilitate regular monitoring debt service costs and the debt stock and is considered a first analytical step to integrating the debt and fiscal strategy. While the module contains DSA indicators, it is not a replacement for the LIC-DSA (e.g. the module operates with nominal, not NPV values and lacks functionality for sensitivity and stress testing analysis). 41To meet the minimum requirements for DPI-12, the DMU would need to (a) develop a comprehensive and detailed procedures manual for processing debt service; (b) develop a comprehensive and detailed procedures manual for debt data recording; (c) document procedures for controlling access to CS-DRMS and the Bill/Bond Access database system in CBSI, as well as the in-house debt module developed and maintained by DMU; and (d) document and implement procedures to ensure that backups are taken at least once a month and stored in the CBSI backup site and/or with the Commonwealth Secretariat in London. 18 DPI-13 Segregation of Duties, Staff Capacity, and Business Continuity Dimension Score 1. Segregation of duties for some key functions, as well as the presence of a risk- D monitoring and compliance function. 2. Staff capacity and human resource management. C 3. Presence of an operational risk management plan, including business-continuity D and disaster-disaster recovery arrangements. Overall Score D+ While there has been no new borrowing for over 5 years, the renegotiation of the debt restructured under the Honiara Club Agreement and with domestic creditors suggests that there is clear segregation of duties. The DMU is responsible for negotiation and contracting, as well as preparation of payment vouchers for debt-related expenditure; the Accountant General’s office is responsible for arranging payment through CBSI; and CBSI is responsible for entering and checking entries in CS-DRMS (which are then validated by the DMU). However, as there is no person responsible for risk monitoring and compliance function in DMU or CBSI, dimension 1 is assessed as a D. To meet the minimum requirements for effective performance, the MoFT would need to formally establish terms of reference for risk monitoring and compliance, and fill that position. Formal job descriptions for individual DMU staff exist and have been recently reviewed and updated (copies were provided to the assessors during the mission). There is sufficient staff in the DMU and CBSI to meet current activities, i.e. under a no new borrowing scenario. The DMU staff attend numerous training courses, conferences and workshops as set out under the section on Technical Assistance for Debt Management above. Guidelines for code-of-conduct and conflict- of-interest are lacking for debt management staff in the DMU and the CBSI. While there are standard government guidelines that apply to all public employees, these are not deemed sufficient to meet the requirements for a B. The minimum requirements for effective performance under the second dimension are met on the basis that the DMU comprises sufficient staff with formal job descriptions, skills suitably matched with positions, and benefitting from a comprehensive and on-going training program. As the MoFT and CBSI lack business continuity/disaster recovery plans, the third dimension does not meet the minimum requirements. 42 3.6 Debt Records and Reporting DPI-14 Debt Records Dimension Score 1. Completeness and timeliness of central government debt records. D 2. Complete and up-to-date records of all holders of government securities in a D secure registry system. Overall Score D Beginning with the Honiara Club Agreement in late 2005, the CBSI has had primary responsibility for recording and reporting on central government domestic, external and guaranteed debt. The Commonwealth Secretariat’s debt management system – the CS-DRMS – was installed in the CBSI and the MoFT in 1989 and 2005, respectively, for recording and managing the central 42 To meet the minimum requirements, the DMU would need to develop a business continuity & disaster recovery plan that could focus on the assessed high probability and high impact incidents and with the recovery site designated as CBSI or the designated CBSI recovery site. 19 government’s debt. In early 2009, the DMU assumed primary responsibility for reporting (not recording) on domestic, external and guaranteed debt, and is currently in the process of taking over responsibility for recording public external debt using the CS-DRMS. 43 It is expected that the CBSI will retain primary responsibility for recording central government domestic and guaranteed debt. The CBSI maintains an in-house registry – a Bill/Bond database system developed with MS- Access – to record all holders of government securities, and a separate Excel-based system for recording loan guarantees. The CBSI provides the DMU with monthly reports of the government’s external debt position, which is verified by the DMU (CBSI reports from its registry system have not been regularly provided to the DMU). The DMU uses an in-house, Excel-based database to reconcile this data against original loan agreement documentation archived by the MoFT. The mission verified that the external data reconciled by the DMU in this way is complete, accurate and up-to-date. Central government domestic debt balances are also validated in this manner. External debt relief and restructured debt emanating from the Honiara Club Agreement are also reconciled and recorded in the CS-DRMS by CBSI. Procedures for reconciliation of external debt have been in place since June 2008 and data has since been available for reporting/analysis within a two-month time lag. However, neither the CBSI nor the DMU have documented procedures for debt data recording, processing debt service, or for controlling access to the CS-DRMS, resulting in lax control and security. Records of government loan guarantees are not complete and up-to-date (the mission was informed that, although physical records are complete, approximately SBD85 million in loan guarantees have not been captured by the system). Based on the above, the minimum requirements for effective performance under the first dimension are not met. 44 The CBSI, which acts as agent for the MoFT for domestic debt issuance and is responsible for rolling over T-bills, maintains complete and up-to-date records of holders of government securities in an in- house database/registry developed with MS Access. Records in the registry are evidence of title, as are stock certificates issued by CBSI. Records are complete, accurate and up-to-date within a three-month lag. However, reconciliation is not carried out according to a fixed schedule. The CBSI has arranged with the Commonwealth Secretariat to update its version of the CS-DRMS and operationalize a domestic debt module to replace the in-house system. The CBSI also tracks private sector debt through the Foreign Exchange Department, but this information is not considered up-to-date or complete (latest report is from June 2008). There are no documented procedures for recording and managing government securities, or for preserving the security and integrity of data (ref. assessment of DPI-12). Based on the above, the minimum requirements for effective performance under the second dimension are not met. DPI-15 Debt Reporting Dimension Score 1. Meeting statutory and contractual reporting requirements of central government B debt to all domestic and external entities. 2. Meeting statutory and contractual reporting requirements for total nonfinancial N/R public sector debt and loan guarantees to all domestic and external entities. 3. Quality and timeliness of the publication of a debt statistical bulletin (or its D equivalent) covering central government debt. Overall Score C 43The Commonwealth Secretariat has been requested by the MoFT to assist the authorities with the process of migrating data from the CBSI-managed database to the newly updated CS-DRMS in the DMU. 44 In order to fulfill the minimum requirement, the authorities would need to establish clear control procedures to ensure data integrity / security and the completeness, accuracy and timeliness of debt data. 20 Until recently, the CBSI had responsibility for reporting on central government debt to domestic and external entities; as of early 2009, however, the DMU has assumed this responsibility. The latest report of the World Bank Debtor Reporting System (December 2008) confirms that statutory and contractual reporting requirements are met in a timely manner indicating compliance with international reporting standards. 45 As total central government debt data (domestic and external) provided to domestic and external entities are within two months of the reporting period, the requirement for a B score under the first dimension is met. 46 Data on nonfinancial public sector debt and loan guarantees are not reported; however, such reporting is not statutorily required. At the time of the mission, a comprehensive financial audit of all SOEs and local governments was being undertaken with assistance from AusAID. As a basis for assessment of the second dimension does not exist, it is rated N/R. There is currently no requirement to prepare and update a debt statistical bulletin or an equivalent report containing comprehensive and detailed information on inter alia debt stocks, debt flows, debt ratios and risk measures. Thus the minimum requirements for effective performance under the third dimension is not met. 47 It should be noted, however, that the government has taken steps to make debt information publicly available. The CBSI generates data on central government domestic debt (both stock and flows) on a monthly and quarterly basis in the “public debt summary” and “quarterly review”, respectively. Reporting on external debt was sporadic in the past and essentially provided on a demand basis, but as of 2008 the DMU has provided central government debt data (stocks and flows) in collaboration with CBSI for the annual budgetary process, the annual financial accounts and the medium-term fiscal strategy. 48 In addition, the Economics Department of the CBSI publishes limited central government debt data (domestic and external) on a weekly basis in the local newspaper (see attached sample from the Solomon Star in annex 2). 45The 2008 DRS report indicates that there are no problems with debt data reporting from the Solomon Islands and that the trend in the quality of reporting is stationary. Annex VII of the IMF’s most recent Article IV report (Sept. 2005) states that the quality of official debt data has improved since the introduction of CS-DRMS in March 2005, although coordination problems remain. The DeMPA mission noted, however, that coordination between the DMU and the CBSI has strengthened since the DMU assumed responsibility for reporting on external debt in January 2009. The IMF report further notes that, due partly to capacity constraints, the provision of statistical data by the National Statistics Office (NSO) – incl. real sector, monetary and BOP – has “serious shortcomings that significantly hamper surveillance.” 46This dimension is related to the performance indicator for ‘debt recording’ (DPI-14). However, there is an important distinction: Dimension 1 of DPI-15 assesses process (i.e. reporting requirements), whereas DPI-14 assesses substance (i.e. completeness and timeliness of debt data). 47 In order to meet the minimum requirement under these dimensions, the authorities would need to (i) upgrade capacity and procedures to reliably report on total nonfinancial public debt and loan guarantees, and (ii) establish a policy for the preparation and annual updating of a ‘debt statistical bulletin’ that subscribes to international standards for data compilation and dissemination (ref. the IMF’s Data Quality Assessment Framework). 48Ref. the MoFT’s Medium Term Fiscal Strategy: 2008 – 2013, December 2008 Update, and the Budget Strategy and Outlook for 2009. These two documents are approved simultaneously as a package by Cabinet and presented to Parliament. In the past, the CBSI provided both domestic and external debt data, but the DMU undertook to verify it. 21 Annex 1 – Officials Involved in the Recent World Bank DeMPA Mission to Solomon Islands, 19 - 28 February 2009 Name Title Organisation 1 Honorable MP. Mr. Snyder Rini Minister for Finance and Treasury Ministry of Finance and Treasury 2 Mr. Shadrach Fanega Permanent Secretary Ministry of Finance and Treasury 3 Mr. Mark Wiggins Under Secretary Ministry of Finance and Treasury 4 Mr. Mckinnie Dentana Director, Economic Reform Unit Ministry of Finance and Treasury 5 Mr. Shaun D. Anthony Senior Adviser, Economic Reform Unit Ministry of Finance and Treasury 6 Mr. Haggai Arumae Acting Assistant Accountant General, Financial Ministry of Finance and Treasury Reporting Section 7 Mr. Bernie Philbrick Adviser, Budget Unit Ministry of Finance and Treasury 9 Mr. David Saywell Senior Adviser, Budget Unit Ministry of Finance and Treasury 8 Mr. Eric Haro Chief Finance Officer, Budget Unit Ministry of Finance and Treasury 10 Mr. Geoff Kavanagh Accountant General, Treasury Ministry of Finance and Treasury 11 Mr. Eric Muir Acting Auditor General Office of the Auditor General 12 Mr. Mark Corcoran General Manager Bank South Pacific (SI) Limited 13 Mr. Brian Robb General Manager ANZ Banking Group (SI) Limited 14 Mr. Michael Wate Investment Manager, Solomon Islands National Provident Fund 15 Mr. Denton Rarawa Governor Central Bank of Solomon Islands 16 Mr. Gane Simbe Deputy Governor Central Bank of Solomon Islands 17 Mr. Joe Vasuni Assistant Manager Currency & Banking Central Bank of Solomon Islands Operations 18 Ms. Doreen Lai Supervisor Domestic and External Debt Unit Central Bank of Solomon Islands 19 Mr. Matthew Wheadon Senior Adviser, Debt Management Unit Ministry of Finance and Treasury 20 Mr. Stevenson M. Belakame Senior Finance Officer, Debt Management Unit Ministry of Finance and Treasury 21 Mr. Cyrillus Teboua Director, Debt Management Unit Ministry of Finance and Treasury 22 Ms. Judy Anii Supervisor, Banking Unit, CBO Dept Central Bank of Solomon Islands 23 Mr Tom Coward ODI Consultant, Economics Research & Central Bank of Solomon Islands Statistics (ERS) Dept 24 Mrs Hilda Aruhane Supervisor, Government Financial Sector, ERS Central Bank of Solomon Islands Dept 22 Annex 2 – Sample of publication of the central government’s debt position in the local daily, as of 18 February 2009 23 Annex 3 – Organization Structure for Debt Management – Solomon Islands 4Ms MoFT Monthly CBSI (PS) Monetary (Gov. & DG) Monitoring Meeting Under Secretary Accountant CBO CSD ECO FRX FID General/Treasury Budget ERU DMU guaranteed debt CSD Invest. domestic, external & Reporting on Debt Off. (CS-DRMS) (CS-DRMS) Reports on domestic, external and Records domestic, external and guaranteed guaranteed debt (in process of debt (soon to relinquish responsibility for assuming responsibility for recording external debt recording). Submits reports public external debt) to DMU. 24