Summary:KEY ISSUES Recent Developments. After four years of consecutive growth, the unprecedented floods that hit Honiara in early April 2014 have undermined economic activity. The flash floods caused loss of life and widespread damage to key infrastructure, water and sanitation systems, housing, and agricultural output. The only gold mine was closed and is still not operating. Outlook and Risks. As a result, economic growth prospects have worsened. Economic growth in 2014 is projected at near zero, despite reconstruction efforts, on account of the closure of the mine and other flood-related income losses. In 2015, activity is expected to increase by 3½ percent led by large foreign-financed infrastructure projects. With the continued decline in logging output, growth will need to be supported by increased productivity across a wide range of sectors, including agriculture, tuna processing, and tourism. Boosting the competitiveness of the economy is key to strengthening the medium-term growth outlook. Risks to the outlook are on the downside with the upcoming parliamentary legislative elections adding an element of uncertainty to the outlook. Program Performance. Program performance under the ECF arrangement has been broadly satisfactory. Reserve buffers have been rebuilt and are at a comfortable level, well above the average of other small states. All performance criteria (PCs) for end-December, the indicative targets (ITs) for March, and the continuous PCs were met with considerable margins, except for the IT on government-funded recurrent spending on health and education, which was narrowly missed. Despite delays, progress has been made in implementing an ambitious structural reform agenda. As in the past, reforms have taken longer than expected owing mainly to resource constraints and the need to consult more broadly with stakeholders. Policy Recommendations. • Support economic activity through fiscal policy in the short term using fiscal buffers rebuilt in recent years, but strictly re-prioritize toward capital spending. • Improve the quality of public spending by advancing PFM reform including by enhancing the transparency and accountability of scholarship and constituency funds. • Maintain the current monetary policy stance but stand ready to tighten monetary policy if credit growth surges together with inflationary pressures. • Follow the currency basket more closely.
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