Lessons

Solomon Islands: Economic Growth and Fiscal Reform Program

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Lessons

Maintaining policy dialogue and seeking stakeholder feedback is essential to ensure that governments remain committed to reforms.

In March 2009, the government of the Solomon Islands established the core economic working group (CEWG).   Consisting of officials from the government and development partners, the CEWG serves as a forum to discuss economic and financial reform priorities, which provide the basis for development partners’ assistance to the country. Agreements reached through the government led CEWG mechanism are translated into an annual policy matrix.  But as some policy items lacked political support, the CEWG matrix did not progress in 2015–2016, resulting in other development partners not providing budgetary support. This program, which drew on the previous policy matrix and included additional policy actions that ADB and the government agreed upon, contributed to the reestablishment of the CEWG process. Both the disruption and the reestablishment of the CEWG highlight the critical importance of maintaining policy dialogue and seeking stakeholder feedback in ensuring continuing government commitment to reforms. 

Project Cycle Stage: 
Preparation
Implementation
Completion and Evaluation

Consultations with development partners need to continue through all times to ensure that donor assistance for reform efforts are well coordinated and not duplicative.

This program was based on the government’s development policy letter of 23 December 2015. The design was discussed extensively with the government as well as development partners and was consistent with the government’s goals and ADB’s country partnership strategy and operations business plan for the Solomon Islands. Consultations with development partners, even in the absence of a CEWG process and policy matrix, proved essential in ensuring that the program does not duplicate any effort or initiative by partners.  Such consultations should continue through all times to strengthen donor coordination and enhance the impact of external development assistance to the country

Project Cycle Stage: 
Preparation
Implementation
Completion and Evaluation

Policy actions that include legislative reforms need to have realistic timelines.

Like ADB’s previous budget support programs in the Solomon Islands, implementation of this grant was satisfactory.  However, some reforms, particularly those involving legislative action, took longer than anticipated.  Specifically, the customs and excise bill tax, targeted by the program to be submitted to Parliament in 2016, was still being reviewed by the Attorney General’s Chambers as of project completion.  The state-owned enterprise capital structure policy, targeted for Cabinet approval in 2016, is expected to be approved in 2018.   The pattern of delayed legislation has constantly nagged the implementation of the government’s economic and fiscal reform program.  Therefore, policy actions that include legislative reform need to have realistic timelines. 

Project Cycle Stage: 
Preparation
Implementation

Continued technical assistance (TA) is essential to ensuring the successful implementation and sustainability of program-driven reforms in the Solomon Islands.

The program drew from existing regional initiatives to meet its TA needs. It tapped the existing adviser support provided to the executing agency by the Regional Assistance Mission to Solomon Islands for assistance in the design and implementation of reforms aimed at strengthening the government’s financial management processes and systems. It also leveraged ADB’s regional TA, Private Sector Development Initiative, for help with drafting a new bill that aimed to introduce transparent decision-making in customs processes and a modern border-control system. Government capacity to design and implement certain reforms remains limited because of lack of resources to attract and retain skilled staff. Expert support provided through TA will continue to be essential to ensuring that program-driven reforms in the Solomon Islands will be successfully implemented and are sustainable. 

Project Cycle Stage: 
Preparation
Implementation

Continuous policy-based budget support from development partners is necessary to ensure the uninterrupted implementation and sustainability of government reforms in the Solomon Islands.

Providing policy-based budget support every two years risks creating a pattern of the government only pursuing essential reforms during the program period. Through the CEWG mechanism, ADB has previously agreed to provide budget support in alternating years to that of the World Bank, mitigating the risk of negatively impacting the government’s reform mindset. However, because the government failed to endorse the CEWG policy matrix in 2015, this cycle was interrupted. ADB should consider reimplementing the alternating cycle with the World Bank and/or other CEWG development partners, as well as the two-tranche stand-alone grants, or programmatic grants to support continuous and sustainable government reforms. The preparation, implementation, and completion of policy-based programs are time- and resource-intensive, so increasing the frequency of such programs is not recommended.

Project Cycle Stage: 
Preparation
Implementation

The timeframes for non-tranche release conditions need to be carefully considered to limit their potential negative impact on project performance.

Work on the non-tranche release conditions associated to two of this program’s policy actions – the customs and excise bill and the state-owned enterprise capital structure policy – was still ongoing as of program completion.  It is expected to wrap up only after the Parliament or Congress acts on them in 2018−2019.  While the non-tranche release conditions associated to each of the tranche release policy actions may be useful for monitoring purposes and would help ensure that the government continues to pursue the reform agenda after it achieves the policy actions linked to disbursement, their time frames must be carefully considered, especially to avoid their undue prolonged implementation.  The long-drawn implementation of these conditions could limit and eventually erode their contribution to the success of the reform programs.

Project Cycle Stage: 
Preparation
Implementation
Background

On 27 May 2016, the Asian Development Bank (ADB) approved a single-tranche policy-based grant to the Solomon Islands for the Economic Growth and Fiscal Reform Program. The program was designed to continue ADB’s support for the government of Solomon Islands’ ongoing economic and fiscal reform program, in coordination with development partners.  Its intended impacts were (i) to provide an enabling environment to stimulate economic growth, especially in rural areas, and (ii) to pursue public sector reforms and commit resources to enable private sector-led growth.  Its expected outcome was a strengthened economic and fiscal position to deliver improved opportunities and living standards.

The program’s envisaged impact and outcome were to be achieved through three outputs: (i) public service delivery and economic management improved, (ii) enabling environment for private sector-led growth created, and (iii) drivers of economic growth enabled.   The government and ADB, through the core economic working group (CEWG), agreed on 10 policy actions to deliver the intended outputs.  The policy actions on outputs 1 and 2 built on progress achieved since the government established the CEWG in 2009, while those on output 1 reflected the CEWG’s refocus on the drivers of economic growth, following the recommendations of the 2014 CEWG review mission. Consisting of officials from the government and development partners, the CEWG is a forum to discuss economic and financial reform priorities, monitor their implementation, coordinate government and development partner support around these priorities, and assess their impact. 

All the policy actions linked to grant disbursement were completed during the program period.  However, work on the non-tranche release policy conditions associated to two of them – the customs and excise bill, and the state-owned enterprise capital structure policy –  is still ongoing and expected to wind up only after the Parliament or Congress acts on them in 2018−2019.  The non-tranche release policy conditions associated to each of the tranche release policy actions ensure that the government continues to pursue the reform agenda after it achieves the policy actions linked to disbursement.

Notwithstanding the unfinished business, the program achieved its two outcome targets.  Firstly, total revenue (excluding grants) was maintained above 30% of the gross domestic product (GDP), in line with government forecast.  Total revenue was 33.2% of GDP in 2014, and had since been maintained above 30%, reaching 37.4% of GDP in 2017. While the fiscal balance in 2016 was a deficit equivalent to 3.1% of GDP, this was not caused by domestic revenue shortfalls.  This first budget deficit since 2009 stemmed from (i) increased spending, and (ii) delayed development-partner-funded projects.  Secondly, company registrations, an indication of a growing private sector, had increased steadily.  From 354 in 2014, the number of new companies that registered in 2017 reached 522. A growing private sector and increased formalization of businesses also has positive implications for government revenue.

Following the appointment of a new Minister of Finance in October 2017, the CEWG met to discuss development partner support to design a new joint policy matrix for the government’s economic and fiscal reform program.  In early 2018, the cabinet approved the new joint policy matrix for policy-based budget support from CEWG members.  The reestablishment of the CEWG process, halted by lack agreement between the government and development partners on an EFRP policy matrix in 2015, is a positive step for program sustainability.  It is expected that the preparation of an annual policy matrix aligned through the CEWG mechanism will continue.

The program had the Ministry of Finance and Treasury (MOFT) as both the executing and implementing agency.

Project Information
Project Name: 
Economic Growth and Fiscal Reform Program
Report Date: 
July, 2018
Main Sector: 
Public Sector Management
Country: 
Solomon Islands
Project Number: 
48479-001
Report Type: 
PCR
Project/Modality: 
policy-based program
Themes: 
Inclusive Economic Growth
Gender Equity and Mainstreaming
Governance and Capacity Development
Partnerships
Private Sector Development
SDG: 
Goal 16: Peace, Justice, and Strong Institutions
Sub Sector: 
Economic affairs management
Public expenditure and fiscal management
Loan Number: 
0478
Source of Funding: 
COL/ADF
Date Approved: 
27 May 2016
Report Rating: 
Successful

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