Enhancing Effectiveness of Solomon Islands' Fiscal Framework

Solomon Islands faces the immediate fiscal challenges of rebuilding cash reserves, improving the quality of public spending, and imposing fiscal discipline on domestic borrowing. To address these challenges while financing necessary investments, it is an urgent priority to improve the effectiveness of the fiscal framework, in parallel with the efforts to strengthen basic public financial management (PFM) functions. Staff analysis indicates that the current debt ceiling of 35 percent of GDP remains broadly appropriate as a medium-term debt anchor. Given the weak PFM foundation and the absence of effective operational fiscal rules, staff proposes the introduction of a simple ex-ante guideline for annual budget formulation, as an interim measure. The proposed guideline sets a ceiling on the domestically financed primary budget deficit, to be consistent with a potential fiscal rule covering both domestic and external sources. The government should assess ex post whether the budget was implemented in line with the guideline and whether the fiscal outlook is consistent with the medium-term anchor.