Solomon Islands

Solomon Islands, as a small open economy vulnerable to commodity price swings, put weight throughout on exchange rate stability pursued in different ways and with frequent parity adjustments, as well as growth. Financial development allowed some move towards indirect monetary instruments, but the development and the move remain limited.

Years

Targets and attainment

Classification

1978-2017

independence July 1978 (self-government from 1976) preceded by establishment of Solomon Islands Monetary Authority (SIMA) with full central bank powers in 1976 and Solomon Islands dollar late 1977, fixed to Australian dollar which it displaces as legal tender late 1978; May 1979 revaluation, peg switched to currency basket from October 1979; initially SIMA sets interest rates on banks’ deposits with it, but uses no other instruments; limited, mostly state- or foreign-owned, banking and financial system; 1981 SIMA introduces discount window and sets reserve requirements for first time, Treasury bills introduced; currency devalued and basket revised 1981; 1982 further devaluation and revised basket, SIMA authorised to make small adjustments of exchange rate at its own discretion, mainly for competitiveness reasons; 1983 SIMA becomes Central Bank of Solomon Islands with ability to set rates on bank deposits and loans and to offer refinancing to support lending to priority sectors; liquid asset ratio replaces reserve requirement 1983; rising problem of effects on monetary growth from fiscal deficits and balance of payments, with rising government debt ratio; 1985 currency basket revised, faster depreciation; 1985-6 commodity price fall and severe cyclone; 1988 ceilings on interest rates; 1989 central bank’s scope for varying exchange rates and ongoing depreciation reduced; main monetary instruments continue to be liquid assets ratio and rediscount facilities, but OMOs (in Treasury and central bank bills with banks and National Provident Fund) are becoming more important, while main policy concerns include foreign reserves, inflation and growth; 1989 and 1991 interest rate ceilings removed; 1991 liquid assets ratio replaced by cash reserve requirement but (additional) liquid assets ratio imposed 1992; continuing problem of very large fiscal deficits requiring central bank funding; 1995 central bank lending to government hits ceiling and is frozen, treasury securities market effectively closed with adverse effects on stability of financial system; end-1997 shift to stabilisation and reform, with large devaluation and temporary peg to USD, before reversion to basket in 1998; debt restructuring agreement early 1999, cut in liquid assets ratio but narrowing of definition of liquid assets, further temporary USD peg 2000 plus tighter exchange restrictions and forex rationing, depreciation faster 2002; 1999-2003 conflict between peoples of two main islands, through attempted coup 2000 and despite peace agreement 2000, with adverse effects on GDP, fiscal deficits and financial stability (government defaults on domestic and external debt, which sets back securities market development), leading to arrival mid-2003 of Australian-led force invited by government which restores and keeps peace, and facilitates stabilisation and revival of external assistance; de facto peg to USD from early 2003 to mid-2008, then interspersed with periods of limited movement in either direction; late 2012 return to trade-weighted basket arrangement, removal of 1% operational band late 2014; more intensive use of central bank bills as monetary instrument (though transmission mechanism remains weak) and aid to financial market development; 2012 law increases central bank independence; statistical database poor, in some periods very poor

loosely structured discretion LSD

Selected IMF references: RED 1979 pp33-6, 42; RED 1980 pp22-3; RED 1982 pp22-5, 31-2; RED 1983 pp24 34; RED 1985 pp40, 64; RED 1986 pp47-8; SR 1988 p12; RED 1990 pp18, 31; SR 1990 p10; SR 1991 pp9-12; RED 1994 pp15-18; RED 1996 pp20-2; SR 1998 pp4, 9-10, 12, 23-4; SR 1999 pp5-6, 11-12; RED 2001 pp15-18; SISA 2003 pp5, 7; SR 2003 pp4-7 10-11; SISA 2005 pp21-4; SR 2009 pp7, 9-10 14-16; SR June 2011 pp7-9; SR November 2011 pp10-13; SR June 2013 p6; SR December 2013 pp9-11; SR 1016 pp8, 18-20; SR January 2018 pp7, 15-17; SR October 2018 pp12-13.

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