IMF warns Solomon Islands growth to slow to 2.6% on war risks

The International Monetary Fund warned Solomon Islands faces a sharp economic slowdown as the Middle East conflict pushes inflation to 5.4% in 2026, nearly double the 2.7% average recorded in 2025, while the fiscal deficit widens to 4.1% of GDP.

"Risks to the outlook are firmly tilted to the downside, notably from prolonged geopolitical tensions, domestic political instability, and budget financing constraints," the IMF's executive board said in its assessment following the Article IV consultation completed June 29.

Growth is projected to ease to 2.6% from an estimated 3.5% in 2025, when the economy was supported by strong gold production, agricultural output, and infrastructure spending. The current account is expected to swing from a surplus of 5.6% of GDP to a deficit of 3.4%, weighed by higher fuel and food import costs. Central government debt is seen rising to 32.1% of GDP in 2026 from 29.5% in 2025, with external debt accounting for the bulk of the increase at 22.8% of GDP.

The warning comes as the IMF separately trimmed its global growth forecast to 3% for 2026 from 3.1% in April, though it removed its previous scenario that a prolonged Iran conflict could trigger a global recession. For Solomon Islands, a nation of 798,079 people with per capita GDP of $2,092, depleted cash reserves and limited investor appetite for government bonds constrain the government's ability to respond to shocks. The fund said budget implementation risks are significant.

The IMF urged the government to cap domestically financed deficits and rebuild cash balances, warning that further delays in introducing a value-added tax should be avoided. Tax enforcement needs strengthening and exemptions — particularly in extractive industries — should be rationalized, the fund said. Reallocating resources away from constituency development funds and strengthening coordination with donors would enhance spending efficiency.

Long-standing weaknesses in public financial management continue to undermine fiscal transparency, the IMF said, citing persistent delays in fiscal reporting, audits of government financial statements, and the completion of the Pacific Games audit. Immediate priorities include resuming regular inter-agency coordination meetings to facilitate fiscal reporting and completing the Financial Management Information System upgrade.

Fiscal Discipline and Monetary Policy in Focus

The fund recommended Solomon Islands begin developing a medium-term fiscal framework to manage mineral resource revenues from its expanding gold mining sector, which helped drive the 2025 growth outperformance. Effective implementation requires strengthening basic public financial management functions, including realistic budgeting and timely, reliable fiscal reporting, the IMF said.

The Central Bank of Solomon Islands should remain ready to tighten monetary policy in response to inflationary pressures from the Middle East war while avoiding ad-hoc exchange rate adjustments, the IMF said. The primary response should be to allow the exchange rate to move in line with the currency basket, which is calibrated to limit exchange rate volatility and support price stability. Near-term priorities include absorbing excess liquidity in the banking system and introducing standing facilities linked to the policy rate.

The last time the Middle East conflict escalated sharply in April 2024, Brent crude surged above $90 a barrel, raising fuel import costs across the Pacific. Solomon Islands, which relies on imports for most of its fuel needs, is particularly exposed to such price shocks. The IMF estimates the war will add more than 2 percentage points to the nation's inflation this year, with fuel and food import prices weighing on the current account.

Diversifying the economy and addressing governance weaknesses remain key to achieving sustainable growth, the IMF said, endorsing the government's focus on boosting agricultural productivity while improving the business environment and addressing infrastructure gaps. Efforts to address governance weaknesses should be accelerated, including by advancing legislation in extractive sectors and resuming the implementation of the National Anti-Corruption Strategy.

Upside risks include further expansion of gold mining if supported by robust resource management and limited fiscal incentives, as well as additional donor support. Slow-moving climate change is expected to have incremental but meaningful cumulative effects on the economy and debt trajectory over the long term, the IMF said, highlighting the need for adaptation policies particularly for populations vulnerable to sea-level rise.

This article is for informational purposes only and does not constitute investment advice.