Report and Recommendation of the President to the Board of Directors

Project Number: 54178-001 June 2020

Proposed Countercyclical Support Facility Loan and Grant Solomon Islands: COVID-19 Rapid Response Program

Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance to ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS (as of 3 June 2020)

Currency unit – Solomon Islands dollar (SI$)

SI$1.00 = $0.1196

$1.00 = SI$8.3612

ABBREVIATIONS

ADB – Asian Development Bank CBSI – Central Bank of Solomon Islands COVID-19 – coronavirus disease CPRP – COVID-19 Preparedness and Response Plan ESP – Economic Stimulus Package GBV – gender-based violence GDP – gross domestic product IMF – International Monetary Fund MOFT – Ministry of Finance and Treasury MSME – micro, small, and medium-sized enterprise SOE – state-owned enterprise TA – technical assistance WHO – World Health Organization

NOTE

In this report, “$” refers to United States dollars, unless otherwise stated.

Vice-President Ahmed M. Saeed, Operations 2 Director General Leah Gutierrez, Pacific Department (PARD) Directors Lotte Schou-Zibell, Regional Director, Pacific Liaison and Coordination

Office (PLCO), PARD Emma Veve, Deputy Director General and Officer-in-Charge, Social

Sectors and Public Sector Management Division (PASP), PARD Team leader Matthew Hodge, Senior Country Specialist, PLCO, PARD Team members Tahmeen Ahmad, Financial Management Specialist, Public Financial

Management Division, Procurement, Portfolio and Financial Management Department (PPFD)

Ninebeth Carandang, Senior Social Development Specialist, PASP, PARD

Marie Miel A. de Villa, Project Analyst, PLCO, PARD Julian Alexander Doczi, Procurement Specialist, Procurement Division 2,

PPFD Oliver Domagas, Senior Financial Control Specialist, Loan and Grant

Disbursement Section, Controller's Department Haidy Ear-Dupuy, Senior Social Development Specialist (Core Labor

Standards), Safeguards Division (SDSS), Sustainable Development and Climate Change Department (SDCC)

Elmar Elbling, Infrastructure Specialist, PLCO, PARD Taniela Faletau, Safeguards Specialist, Portfolio, Results, and Quality

Control Unit (PAOD–PRQ), PARD Anna Fink, Economist (Regional Cooperation), Regional Cooperation

and Integration Thematic Group, SDCC Jan Hansen, Senior Planning and Policy Economist, Operations

Planning and Coordination Division, Strategy, Policy and Partnerships Department (SPD)

Belinda Hewitt, Disaster Risk Management Specialist, Climate Change and Disaster Risk Management Division, SDCC

Shanti Jagannathan, Principal Education Specialist, Education Sector Group, SDCC

Ki Fung Kelvin Lam, Young Professional, PASP, PARD Mairi MacRae, Social Development Specialist (Gender and

Development), PASP, PARD Christopher Morris, Principal Social Development Specialist, NGO and

Civil Society Center, SDCC Kaukab Naqvi, Senior Economist, Economic Analysis and Operational

Support Division, Economic Research and Regional Cooperation Department

Keiko Nowacka, Senior Social Development Specialist (Gender and Development), Gender Equity Thematic Group, SDCC

Roshan Ouseph, Senior Counsel, Office of the General Counsel Rommel Rabanal, Public Sector Economist, PASP, PARD Dalcy Tozaka-Ilala, Senior Country Coordination Officer, PLCO, PARD Samuel Tumiwa, Advisor (Conflict-Affected Situations), Office of the

Cluster Head, Thematic Advisory Service Cluster, SDCC Wendy Walker, Chief of Social Development Thematic Group, SDCC Jean Williams, Principal Environment Specialist, PAOD–PRQ, PARD

Geoffrey Wilson, Senior Water Resources Specialist, Water Sector

Group, SDCC Hyun Joo Youn, Senior Results Management Specialist, Results

Management and Aid Effectiveness Division, SPD Hongwei Zhang, Senior Finance Specialist (Energy), Energy Division,

South Asia Department Peer reviewer Hanif A. Rahemtulla, Senior Public Management Specialist,

Governance Thematic Group, SDCC In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page PROGRAM AT A GLANCE I. THE PROPOSAL 1 II. PROGRAM AND RATIONALE 2

A. Background and Development Constraints 2 B. The Government’s COVID-19 Preparedness and Response Plan and Economic

Stimulus Package 5 C. Proposed Program, Impact, and ADB’s Value Addition 8 D. Development Partner Coordination 9 E. Development Financing Needs, Budget Support, and Debt Sustainability 10 F. Implementation Arrangements 11

III. DUE DILIGENCE 11 IV. ASSURANCES 13 V. RECOMMENDATION 13 APPENDIXES 1. Design and Monitoring Framework 14 2. List of Linked Documents 16 3. Development Policy Letter 17 4. Assessment of Compliance with the Access Criteria for the Countercyclical Support

Facility and the COVID-19 Pandemic Response Option 20

Project Classification Information Status: Complete

PROGRAM AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 14052020105944302752 Generated Date: 16-Jun-2020 14:45:44 PM

1. Basic Data Project Number: 54178-001Project Name COVID-19 Rapid Response Program Department/Division PARD/PLCOCountry Solomon Islands Executing Agency Ministry of Finance and

TreasuryBorrower Solomon IslandsCountry Economic Indicators https://www.adb.org/Documents/LinkedD

ocs/?id=54178-001-CEIPortfolio at a Glance https://www.adb.org/Documents/LinkedD

ocs/?id=54178-001-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million)Public sector management Public expenditure and fiscal management 9.00

Reforms of state owned enterprises 3.00

Social protection initiatives 3.00

Health Disease control of communicable disease 3.00

Health system development 2.00

Total 20.00

3. Operational Priorities Climate Change InformationAddressing remaining poverty and reducing inequalities

Accelerating progress in gender equality

Strengthening governance and institutional capacity

Fostering regional cooperation and integration

GHG reductions (tons per annum) 0Climate Change impact on the Project

Low

ADB Financing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Cofinancing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Sustainable Development Goals Gender Equity and MainstreamingSDG 1.5SDG 3.3, 3.c, 3.dSDG 5.2SDG 8.1, 8.5, 8.8SDG 10.4SDG 16.6SDG 17.17, 17.4

Effective gender mainstreaming (EGM)

Poverty TargetingGeneral Intervention on Poverty

4. Risk Categorization: Low .

5. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C.

6. Financing

Modality and Sources Amount ($ million)

ADB 20.00 Sovereign COVID19 Pandemic Response Option: Asian Development Fund 10.00 Sovereign COVID19 Pandemic Response Option (Concessional Loan): Ordinary capital resources

10.00

Cofinancing 0.00 None 0.00

Counterpart 0.00 None 0.00

Total 20.00

Currency of ADB Financing: US Dollar

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan and a proposed grant, both to Solomon Islands for the COVID-19 Rapid Response Program under the Countercyclical Support Facility COVID-19 Pandemic Response Option.1 2. The program will help the Government of Solomon Islands implement its countercyclical public expenditure program, comprising its COVID-19 Preparedness and Response Plan (CPRP) and the Economic Stimulus Package (ESP) to address the impacts of the coronavirus disease (COVID-19) pandemic.2 The program will support the government to combat the entry and spread of COVID-19, provide social assistance to vulnerable groups, and deliver economic stimulus measures. The Solomon Islands economy is experiencing a significant contraction as a result of the COVID-19 pandemic, and this is beginning to feed through to lower government revenues. Without action, a continuing contraction in government revenues, coupled with increases in government expenditure, particularly for public health preparedness and response, will develop into a fiscal crisis. 3. Solomon Islands, a small island developing state, is among those classified as experiencing fragile and conflict-affected situations. The government, the private sector, and the community are not well equipped to deal with the wide-ranging implications of COVID-19. The government’s public health response to COVID-19, including closing the borders, has prevented entry of the disease into the country. However, it has come at a high economic cost. Income-generating opportunities are scarce and mostly based on natural resources. Exports have been hit hard because of COVID-19. As a small, open economy, the country is highly dependent on exports, which represent 42% of gross domestic product (GDP). The formal social protection system is limited in both programs and coverage, and therefore the government’s ability to directly support the poorest and most vulnerable through existing programs is constrained. Solomon Islands is prone to disasters caused by natural hazards. When tropical cyclone Harold struck in early April 2020, the country’s thin capacity was stretched even further by having to respond to two shocks simultaneously. The country is ranked 145th of 160 countries in the United Nations economic vulnerability index.3 These fragilities highlight the country’s nonlinear development path and need for significant support from development partners. 4. Solomon Islands meets all the access criteria of ADB’s COVID-19 Pandemic Response Option under the Countercyclical Support Facility (Table 1).4

1 ADB. 2020. Policy Paper: ADB’s Comprehensive Response to the COVID-19 Pandemic. Manila. 2 Government of Solomon Islands. 2020. Consolidated N-DOC Preparedness and Response Plan for Novel

Coronavirus (COVID-19). Honiara; Government of Solomon Islands. 2020. Solomon Islands Government Economic Stimulus Package to Address the Impacts of the COVID-19 Pandemic. Honiara.

3 United Nations. https://www.un.org/development/desa/dpad/publication/2018-vulnerability-profiles/ (accessed 21 May 2020).

4 A detailed justification is in Appendix 4.

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Table 1: Assessment of Compliance with the Access Criteria for the Countercyclical Support Facility and the COVID-19 Pandemic Response Option

Access Criterion Asian Development Bank Assessment 1. Adverse impact of

exogenous shocks

In 2020, the economy is projected to contract by 5% and the fiscal deficit is projected to increase by 4.6 percentage points to 7.3% of GDP. External debt as a percentage of GDP is expected to almost double to 17.8% in 2020 as a result of the need to finance this deficit. The current account deficit will increase by 6.4 percentage points to 15% of GDP in 2020. Poverty is projected to increase from 23.6% in 2018 to 27.5% in 2020.

2. Countercyclical development expenditures

The government has approved a total of SI$446 million ($54 million) to respond to the crisis, comprising of two components: a COVID-19 preparedness and response plan ($16.5 million) and an economic stimulus package ($37.5 million). The first component has allocations for health, education, and social protection measures. The second component has allocations for additional social protection measures, including through targeted investments in agriculture, fisheries, and tourism; support to small businesses and state-owned enterprises; and bringing forward infrastructure projects.

3. Pre-shock record of generally sound macroeconomic management

Economic growth was 3.9% in 2018 and 2.7% in 2019. Inflation was low at 1.9% in 2019. There was a fiscal surplus of 0.7% of GDP in 2018 and a fiscal deficit of 2.7% of GDP in 2019. The current account deficit was 8.6% in 2019. Foreign reserves were equivalent to 8.1 months of import cover.

4. Structural reforms (including health response)

The Governor-General declared a state of emergency on 25 March 2020 and Parliament extended it by for 4 months to 25 July. An initial amount of SI$27 million ($2.5 million) has been allocated to upgrade hospitals, particularly by building isolation units that could be used as intensive care units. Medical personnel are being trained on infectious disease issues. Testing equipment is available and medical supplies are being stockpiled. Public awareness campaigns are underway. Development partners are providing funding to supplement the government’s efforts.

5. Debt sustainability As a result of the crisis, the public debt–GDP ratio is expected to increase from 10.1% of GDP in 2019 to 17.8% in 2020 and 31.8% in 2024. Debt sustainability analyses conducted by ADB and the IMF conclude that Solomon Islands’ public debt remains sustainable.

6. Coordination with the IMF

ADB was the government’s lead development partner in preparing the economic stimulus package. ADB actively engaged with the IMF on the design of the package to ensure that the IMF’s policy advice was reflected in the final document. The IMF approved a $28.5 million program on 1 June 2020. ADB and the IMF have discussed arrangements for joint monitoring of their respective programs where feasible.

ADB = Asian Development Bank, COVID-19 = coronavirus disease, GDP = gross domestic product, IMF = International Monetary Fund, SI$ = Solomon Islands dollar. Source: Asian Development Bank.

II. PROGRAM AND RATIONALE A. Background and Development Constraints 5. Development context. Solomon Islands is ranked 153rd on the United Nations Development Programme’s human development index for 2019 and is among the least developed countries in the world. 5 Solomon Islands is predominantly rural, with 81% of the country’s population of 652,000 living in rural villages spread throughout its 9 provinces, covering 20 islands. The country’s economy is highly dependent on commodity prices and demand from the People’s Republic of China, which receives 66.8% of exports, representing 28% of Solomon Islands’ GDP.6 Government constitutes a large proportion of the economy, with government expenditure constituting 41.6% of GDP in 2019. Solomon Islands is categorized as a least

5 United Nations. https://www.un.org/development/desa/dpad/least-developed-country-category-solomon-

islands.html (accessed 21 May 2020). 6 International Monetary Fund (IMF). 2020. Solomon Islands: Staff Report for the 2019 Article IV Consultation.

Washington, DC.

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developed country, although it is scheduled to graduate in 2024.7 While poverty has declined in recent years, Solomon Islands has the second-lowest gross national income per capita among Pacific developing member countries ($2,020 in 2018).8 With the World Health Organization (WHO) declaring COVID-19 a global pandemic, the Governor-General declared a state of emergency on 25 March 2020, which gave the Prime Minister broad powers to fight the pandemic. On 27 March 2020, the government suspended all international passenger flights. On 7 April 2020, Parliament extended the state of emergency for 4 months to 25 July 2020. 6. Solomon Islands is ranked sixth in the world for vulnerability to disasters triggered by natural hazards.9 When tropical cyclone Harold hit the country, more than 30% of the population were exposed to a combination of heavy rainfall and strong winds leading to secondary impacts such as storm surges, flooding, and landslides. This resulted in some loss of life and damage to property, food and water sources, and the natural environment. 7. Pre-shock record of generally sound macroeconomic management. The government maintained a prudent approach to macroeconomic management before the pandemic, as reflected in its economic indicators (Table 2). Economic growth was a respectable 3.9% in 2018 and 2.7% in 2019, underpinned by logging, infrastructure, fisheries, agriculture, and manufacturing. ADB had revised its growth projections upward to 2.7% for 2020, mainly because construction was starting on significant infrastructure projects.10 There was a fiscal surplus of 0.7% of GDP in 2018 and a fiscal deficit of 2.7% of GDP in 2019. This reversal was driven by lower logging revenues and higher public sector payroll costs. The government, with support from ADB and other development partners, has been implementing a public financial management reform action plan across several work streams, including (i) improving budget credibility, (ii) implementing commitment controls, (iii) institutionalizing a comprehensive approach to cash management, and (iv) supporting greater accountability of discretionary funds.11 While the current account deficit was 8.6% of GDP in 2019, official reserves have more than 8 months of import cover. The country’s external public debt level was relatively low, at 10.1% of GDP, but this was projected to increase because of the government’s ambitious infrastructure construction program. Inflation was low at 1.9% in 2019.

Table 2: Pre-COVID-19 Macroeconomic Indicators Item 2015 2016 2017 2018 2019p GDP growth (%, constant prices) 2.5 3.2 3.7 3.9 2.7 Inflation (CPI period average) (0.6) 0.5 0.5 3.5 1.9 Total revenue (% of GDP) 35.1 31.8 32.8 34.3 30.1 Total revenue and grants (% of GDP) 47.9 43.2 43.1 45.3 39.0 Expenditure (% of GDP) 48.0 47.1 47.5 44.6 41.6 Overall fiscal surplus (deficit) (% of GDP) (0.0) (3.9) (4.4) 0.7 (2.7) Gross external public debt (% of GDP) 7.5 7.6 7.1 7.6 10.1 Gross official foreign reserves ($ million) 519.6 513.6 576.9 613.1 601.5 In months of imports 10.0 9.1 9.3 8.5 8.1 Current account balance (% of GDP) (3.0) (4.0) (4.9) (4.5) (8.6)

( ) = negative, COVID-19 = coronavirus disease, CPI = consumer price index, GDP = gross domestic product, p= projected. Notes: Statistics for 2019 are estimates. Source: International Monetary Fund Article IV Reports.

7 United Nations. https://unctad.org/en/Pages/ALDC/Least%20Developed%20Countries/UN-list-of-Least-Developed-

Countries.aspx (accessed 21 May 2020). 8 World Bank data. https://data.worldbank.org/country/solomon-islands (accessed 21 May 2020). 9 United Nations University, Institute for Environment and Human Security. 2016. World Risk Report. Bonn. 10 ADB. 2019. Asian Development Outlook: Strengthening Disaster Resilience. Manila. 11 IMF. 2018. Solomon Islands: Strengthening the Fundamentals of Public Finance Management. Washington, DC.

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8. Weak health system unable to cope with large numbers of COVID-19 patients. Health services are delivered through a network consisting of 1 national referral hospital in Honiara, 11 provincial hospitals, 35 area health centers, 107 rural health clinics, and 190 nurse aid posts.12 The skills mix and distribution of health workers across provinces is generally uneven. Some 84% of medical practitioners and 53% of nursing staff are based in Honiara. Many health facilities operate without adequate water and sanitation; electricity; or basic medical, diagnostic, and surgical equipment. However, Solomon Islands is served by a well-trained nursing workforce, which provides the backbone of service delivery in rural areas, and the number of doctors is increasing. 9. Compared with its peer Pacific small island states, Solomon Islands generally lags in terms of hospital beds, nurses and midwives, and physicians. There are no intensive care unit beds in the country and only two ventilators (with an additional seven on order). In late 2019, the Global Health Security Index, which benchmarks countries on pandemic preparedness, ranked Solomon Islands 183rd of 195 countries.13 10. Health impact of COVID-19. As of 2 June 2020, Solomon Islands had no reported COVID-19 cases. This is attributable to the government’s decisive containment measures to prevent people from entering the country and its relative isolation. The first travel restriction came into force on 1 February 2020. Restrictions became progressively stricter, including increased patrols between Papua New Guinea and Solomon Islands to enforce the border closure. However, Solomon Islands is at risk of the rapid spread of COVID-19 infections because of its weak public health system, insufficient testing and tracing systems, and underdeveloped water supply and sanitation services. Common noncommunicable diseases, such as diabetes and adult obesity, increase vulnerability to COVID-19. 11. Economic impact of COVID-19 and transmission mechanisms. The Central Bank of Solomon Islands (CBSI) forecasts a 5% contraction of GDP. 14 Other key macroeconomic variables are also expected to worsen in 2020. The current account deficit is projected to increase from 8.6% of GDP in 2019 to 15.0% in 2020 (footnote 6). The exogenous shock will be concentrated in the external sector. Logs account for 71.6% of all exports and 22% of government revenues. Nearly half of the workforce is thought to be directly or indirectly associated with the logging industry. Tourism, which is another important transmission mechanism, represents 5% of GDP. With no passenger arrivals, tourism has dropped to almost zero and may stay low for the remainder of 2020. The government has an ambitious infrastructure program, but this work program has stalled because of its reliance on imports of raw materials and skilled foreign labor. At 1.5% of GDP, remittances are a small, but growing, source of income for the country, and a key source of cash for poor and vulnerable households. Remittances are expected to fall because workers cannot go to Australia and New Zealand, which have dedicated labor mobility schemes for people from the Pacific. 12. Fiscal impact of COVID-19. A fiscal deficit of 2.7% of GDP was projected before the onset of the COVID-19 pandemic. As of February 2020, the government’s cash on hand was already tight at 0.6 months of monthly expenses. This caused the government to manage its cash flow carefully, with a risk of accumulation of arrears. In March 2020, the government implemented measures to contain discretionary expenditures, such as reducing public servants’ overseas travel

12 WHO. 2015. Solomon Islands Health System Review. Health Systems in Transition. 5(1). pp. 1–24. Geneva. 13 Global Health Security Index. 2019. 2019 GHS Index Country Profile for Solomon Islands.

https://www.ghsindex.org/country/solomon-islands/ (accessed 21 May 2020). 14 CBSI. 2020. http://www.cbsi.com.sb/governors-official-statement-launching-of-the-2019-annual-report/ (accessed

21 May 2020).

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and freezing public sector recruitment. With the COVID-19 pandemic, the fiscal deficit is expected to rise to 7.3% of GDP because of an expected decline in revenues and higher expenditures. Revenue declines will be led by lower logging and decreased economic activity will reduce income and consumption tax revenues. Government expenditure is increasing, especially in the health sector, but also through the Economic Stimulus Package (ESP). Fiscal deficits are projected to peak in 2020 and decline slowly during 2021–2024 but at lower levels, averaging 5.8% of GDP. 13. Socioeconomic impacts of COVID-19. The COVID-19 pandemic will have a profound socioeconomic impact on the poor and vulnerable, especially women. More than 80% of workers are employed in the informal sector. More women than men are informal workers and 75% of women are in vulnerable employment.15 Interventions to prevent the entry and spread of COVID-19 have already resulted in many women losing their livelihoods in the informal sector (such as roadside and market vendors, and microentrepreneurs). Decreases in income will impact food security and nutrition for households without produce gardens or subsistence farms. In addition, there have already been job losses for women in hotels, restaurants, and casinos, where about two-thirds of staff are women; and a loss of sales in other tourism-related businesses such as handicrafts. Key factories that predominantly employ women, such as SolTuna, where 56% of staff are women, have also announced that they will lay off workers if there is a lockdown. 14. There is no unemployment insurance to support people who lose their jobs. The suspension of nonessential procedures by public health facilities also threatens women’s continued access to maternal and reproductive health services. The loss of income suffered by many people means that they are unable to afford private doctors or medicines, and many sicknesses and chronic conditions are not being treated. This further heightens vulnerability among the elderly, people with disabilities, and those with preexisting health conditions. In addition, already high levels of gender-based violence (GBV) are expected to increase, particularly if there are restrictions on movement.16 B. The Government’s COVID-19 Preparedness and Response Plan and Economic

Stimulus Package 15. The government’s response program consists of two major components totaling 3.7% of GDP: (i) the SI$137 million ($16.5 million) CPRP, approved by the Cabinet on 26 March 2020, which aims to minimize the risk of importation and spread of COVID-19 and reduce societal disruption; and (ii) the SI$309 million ($37.5 million) ESP, announced on 4 May 2020, which is designed to ameliorate the economic impact of the pandemic, both immediately and in the short- to medium-term. 16. In February 2020, the government established a multiagency COVID-19 oversight committee, chaired by the Secretary to the Cabinet, to coordinate the whole-of-government preparedness and response to COVID-19. The COVID-19 oversight committee ensures, on behalf of Cabinet, the implementation of the CPRP. The National Disaster Operations Committee undertakes day-to-day coordination. The CPRP established eight subcommittees to monitor activities. There is also an economic stimulus oversight committee responsible for monitoring

15 Vulnerable employees are less likely to have formal work arrangements and are therefore more likely to lack decent

working conditions, adequate social security, and voice through effective representation by trade unions and similar organizations. Vulnerable employment is often characterized by inadequate earnings, low productivity, and difficult work conditions that undermine workers’ fundamental rights.

16 Fully 41.8% of Solomon Islands women reported that they experienced physical and/or sexual violence by an intimate partner in the last year. The prevalence increases to 63.5% if lifetime experience is captured. More than 30% of women reported being sexually abused before the age of 15. (ADB. 2015. Solomon Islands Country Gender Assessment. Manila.)

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activities to be delivered by the ESP. It reports directly to Cabinet and its secretariat functions are undertaken by the Ministry of Finance and Treasury (MOFT). 17. Poverty and vulnerability extend throughout the general population, with 57% of the population living on less than $3.10 per person per day, only 16% connected to the electricity grid, and nearly half of rural households without access to toilet facilities. Considering also the lack of developed social protection systems, activities targeting poor or vulnerable groups are embedded across the various sub-components of the government’s program, as described below.

1. COVID-19 Preparedness and Response Plan 18. The CPRP encompasses five areas: (i) establishing an integrated management system of preparedness and response through a whole-of-government sector approach, (ii) implementing health systems preparedness and response measures, (iii) implementing education systems preparedness and response measures, (iv) implementing livelihood preparedness and response measures, and (v) ensuring the safety and security of communities and health professionals.17 19. Scaling up the health response. Significant activities have been implemented with development partner support, including the addition of 15 isolation unit beds at the national referral hospital and installation of a COVID-19 testing machine at the national laboratory.18 However, significant challenges and gaps remain, particularly in the outer islands, including shortages of laboratory supplies and insufficient personal protective equipment for frontline workers. Laboratory staff are receiving training on the use of test kits. An outbreak of COVID-19 would require significant additional increases in health expenditure. 20. Social protection measures. Social protection measures under the CPRP are delivered under the oversight of the livelihood and protection subcommittees. Preparedness activities to ensure food security include assessing food stocks, stockpiling food rations, enhancing food production, and ensuring the adequate and timely distribution of emergency food rations. The CPRP provides 1 month’s food rations for 100,000 households, including about 10,000 households headed by women, should a COVID-19 case be identified and further restrictions imposed. People living in urban areas (19% of the population), who have less access to gardens and other subsistence sources, would be prioritized. The Protection Committee is tasked with ensuring that vulnerable groups have equal access to services and resources that meet their essential needs. This includes establishing active child protection and GBV subcommittees, ensuring counselling services are available, coordinating with counselling providers and ensuring they have access to personal protective equipment, readying public awareness campaigns to eradicate stigma or discrimination against those infected with COVID-19, and assessing quarantine facilities to ensure they cater for people with special needs and other vulnerable groups.

2. Economic Stimulus Package 21. The ESP is a combination of immediate measures to prop up aggregate demand and meet social protection needs, short- to medium-term measures to support the economy during the recovery phase, and medium-term measures to promote growth. The package contains six activities (paras. 22–28).

17 Government of Solomon Islands. 2020. Consolidated N-DOC Preparedness and Response Plan for Novel

Coronavirus (COVID-19). Honiara. 18 ADB provided a surge capacity specialist to strengthen clinical management of COVID-19 patients, infection

prevention control, and capacity building for surveillance and contract tracing.

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22. Support for farmers as a form of social protection. This activity has multiple purposes, including increasing the incomes of farmers (a vulnerable group), enhancing Solomon Islands’ food security, and supporting a pathway to greater economic diversification and growth. This new government activity has targeted 35,000 crop and livestock farmers, with at least 10,000 by June 2021, and is prioritizing subsistence farmers who lack the funds or skills to expand production. Government support will include providing planting materials, fertilizer, pesticides, and training; ensuring minimum prices; supporting compliance with food safety standards; and subsidizing freight costs. The government will conduct gender analysis to understand women’s participation throughout the value chain to ensure that female entrepreneurs and other small agricultural cooperatives can be supported. SI$70 million ($8.6 million) has been allocated. 23. Support for forestry, fisheries, and tourism as a form of social protection. The government is keen to diversify the economy and increase the incomes of fishers and tourism operators. The government has indicated that artisanal fishers and small tourism operators will be the focus. For fishers, the government will provide training and cold storage around the country, subsidize freight costs, and open niche export markets. For tourism operators, there will be training, the possibility of minor capital works, and greater marketing of Solomon Islands as a tourist destination. The government will provide support to the few sustainable forestry plantations to help these businesses expand their planting, milling, and exports. Support will be linked to attainable production targets and maintaining employment levels.19 SI$44 million ($5.5 million) has been allocated. 24. Social protection and community support measures. The government will provide SI$5 million ($0.6 million) in grants to churches and provincial authorities to support outreach, advocacy, and awareness-raising activities on social distancing, proper hygiene, available government health services, and support to the poor and vulnerable households to weather the crisis. In addition, the government will provide SI$5 ($0.6 million) million to help schools prepare to resume classes. This includes funds for hand sanitizer, face masks, and improved toilet facilities. These measures will ensure continued investment in social services and will address the direct impacts of the health crisis and recovery. Finally, the government has directed businesses to maintain their pre-crisis prices and reminded them not to distribute unsafe or low-quality goods. The government has allocated SI$5 million ($0.6 million) to contract women and youths to monitor prices according to price control regulations and report any breaches. 25. Support to micro, small, and medium-sized enterprises. The government will directly support micro, small, and medium-sized enterprises (MSMEs) by (i) creating a SI$5 million ($0.6 million) facility to enable MSMEs to pay their rent; (ii) extending deadlines to pay taxes, and giving a 5-year income tax break to businesses that are most directly affected by the pandemic, such as tourism; and (iii) providing the Development Bank of Solomon Islands with SI$20 million ($2.4 million) in equity and a further SI$15 million ($1.8 million) credit line to enable it to provide loans to MSMEs, including those owned by women. 26. Support to state-owned enterprises and large employers. Many state-owned enterprises (SOEs) provide essential services and are large employers. The government will provide support to these businesses to enable them to continue their operations, maintain employment, and recover once the crisis is over. Solomon Airlines, the primary provider of air services, has been financially devastated by international travel restrictions. To enable it to continue operating domestically and to bring in essential freight, especially for the Ministry of Health and Medical Services, the government will provide it with additional equity of SI$5 million

19 The government has committed to collecting sex-disaggregated data on employment targets.

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($0.6 million) and a loan of SI$15 million ($1.8 million). Solomon Water recently started an extensive capital works program, with ADB support, and its balance sheet has weakened.20 To ensure service delivery is not compromised, the government will provide it with a SI$5 million ($0.6 million) capital injection. SolTuna, which is an important exporter and large employer, will receive SI$5 ($0.6 million) million in new equity. The Commodity Export Marketing Authority will receive SI$2 million ($0.2 million) for marketing and testing the quality of agricultural products. The government will provide SI$18 million ($2.2 million) to large private businesses to help them maintain employment and continue exporting. 27. Infrastructure projects. This activity will provide employment by financing the construction of wharves linking agriculture hubs in Kirakira and Malu’u (SI$39 million or $4.7 million), bridge building in Malaita (SI$30 million or $3.6 million), and the upgrading of airstrips in Seghe and Taro (SI$21 million or $2.5 million). To ensure that these projects bring the greatest economic benefit to these regions, local labor-intensive systems will be used where possible and materials will be sourced locally where feasible.

28. The ESP includes the following activities which, while not funded from the government’s budget, will support vulnerable people and businesses: (i) each Solomon Islands National Provident Fund member will be able to access SI$5,000, which is expected to inject SI$200 million ($24 million) into the economy; (ii) banks have offered to defer debt repayments for up to 6 months; (iii) Solomon Power lowered its May 2020 tariff by 16% (reducing its revenues by SI$6 million or $0.7 million); (iv) Solomon Islands Port Authority removed its domestic port charges for April and May 2020 (costing it SI$6 million or $0.7 million) and is providing 2 extra days of free storage for imports and exports through July 2020; (v) the wholesale supplier of internet connectivity from the recently installed submarine cable has increased bandwidth to retail telecommunications operators by 50% for 4 months at no additional cost; and (vi) the government policy, announced in late March, of halving the salaries of nonessential public servants (about 25% of public servants) starting in May is reversed, and these public servants will continue to draw their normal salaries. C. Proposed Program, Impact, and ADB’s Value Addition 29. ADB’s program will contribute to the government’s efforts in containing the pandemic and addressing its social and economic impact, particularly on the poor and vulnerable. The outcome will be adverse effects of COVID-19 on businesses and the population reduced. The program will have three outputs: (i) measures to combat the entry and spread of COVID-19 in Solomon Islands delivered; (ii) measures to provide social assistance to vulnerable groups enhanced; and (iii) economic stimulus delivered. The design and monitoring framework is in Appendix 1. 30. ADB’s value addition. A regular (often daily) dialogue between the government team and the ADB team, comprising headquarters, regional office, and Solomon Islands Pacific Country Office staff and consultants, was key in supporting the design of the government’s ESP. The policy dialogue enabled the teams to discuss and agree on the macroeconomic analysis and appropriate policy responses. Complementary to ADB’s policy advice, ADB quickly mobilized technical assistance (TA) to facilitate dialogue, support the collection of data, and give the government additional support to execute its countercyclical expenditure program. Given the government’s limited capacity, ADB is providing TA to monitor the program’s outcome and outputs, and will provide further TA to support the government in implementing the ESP.21 ADB

20 ADB. 2019. Report and Recommendation of the President to the Board of Directors for the Proposed Loan, Grant,

and Administration of Grant to Solomon Islands for the Urban Water Supply and Sanitation Sector Project. Manila. 21 ADB. 2019. Technical Assistance for Improving Pacific Public Financial Management Facility. Manila.

9

provided a surge capacity specialist to strengthen clinical management of COVID-19 patients, infection prevention control, and capacity building for surveillance and contact tracing. 31. Lessons learned. ADB has worked with the MOFT and conducted policy dialogue for policy-based operations for an extended period. This engagement has focused on public financial management and private sector development. The last program was completed in 2018.22 More recently, ADB has provided TA focusing on tax reforms and improving budget execution (footnote 21). The lessons from this experience include the need to (i) interact regularly with the government given its limited capacity, (ii) provide TA to supplement capacity, (iii) use existing mechanisms to deliver support as creating new transmission mechanisms takes time and capacity, (iv) link immediate policy responses with longer-term support, and (v) coordinate with development partners. 32. ADB’s pipeline. In meeting the government’s desire for medium-term policy responses to support higher economic growth and address gaps that became apparent during the crisis, ADB is ensuring that its future TA, project, and program pipeline is responsive to the government’s changing priorities. ADB’s current regional TA projects will support the government in its work to meet the financing needs of MSMEs and sustainable infrastructure. 23 New region-wide TA projects on social protection; MSMEs; gender; and water, sanitation, and hygiene will provide a basis for larger interventions. ADB will continue its policy dialogue on public financial management and private sector development. Building on its TA on tax reform, ADB is designing a program that will broaden the tax base and actively support economic growth (footnote 21). ADB is well advanced in drawing up detailed designs and conducting due diligence for a land and maritime transport project, which the government sees as an important component of its overall infrastructure program and provide jobs for Solomon Islanders. Future health and education projects will address gaps exposed during this crisis. 33. Alignment with Strategy 2030 and the Pacific Approach. The proposed program is aligned with ADB’s Strategy 2030, particularly the operational priorities related to addressing poverty, promoting rural development and food security, accelerating progress in gender equality, strengthening governance and institutional capacity, and strengthening regional cooperation and integration. 24 The program reflects Strategy 2030’s approach to fragile and conflict-affected situations and small island developing states, which recognizes their vulnerability to exogenous shocks and institutional capacity constraints. The program is aligned with the three strategic priorities of ADB’s Pacific Approach, 2016–2020, which serves as the country strategy for Solomon Islands, specifically reducing costs, managing risks, and enabling value creation.25 D. Development Partner Coordination 34. Government-led coordination. The government, through its oversight committees, provides strategic direction and coordination. The government has received funds and donations of medical supplies and equipment from Australia, New Zealand, the People’s Republic of China, and the United States. WHO has provided training and technical guidance on critical preparedness, readiness, and response actions for COVID-19. UNICEF has provided training for

22 ADB. 2018. Report and Recommendation of the President to the Board of Directors for the Proposed Policy-Based

Grant to Solomon Islands for the Improved Fiscal Sustainability Reform Program. Manila. 23 ADB. 2019. Technical Assistance for the Pacific Private Sector Development Initiative Phase IV. Manila; and ADB.

2019. Technical Assistance for the Pacific Region Infrastructure Facility Coordination Office—Leveraging Infrastructure for Sustainable Development. Manila.

24 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila.

25 ADB. 2016. Pacific Approach, 2016–2020. Manila.

10

social welfare officers. Under the Biketawa Declaration, a framework agreed to by all the leaders of the Pacific Island Forum countries for coordinating responses to regional crises, Solomon Islands is also entitled to assistance through the Pacific Humanitarian Pathway on COVID-19. This is coordinated with regional and global bodies such as WHO.26 The World Bank is preparing a $5 million health project under its fast-track facility for COVID-19 response.27 35. ADB coordination as lead development partner in preparing Economic Stimulus Package. ADB and the International Monetary Fund (IMF) have had regular bilateral meetings on macroeconomic and fiscal issues, and as part of wider development partner discussions on supporting the government during the crisis. ADB, as lead donor supporting the government in preparing the ESP, coordinated the policy advice provided by Australia, the European Union, the IMF, New Zealand, and the World Bank. E. Development Financing Needs, Budget Support, and Debt Sustainability 36. Solomon Islands’ revised fiscal deficit for 2020 is 7.3% of GDP. The government’s financing requirement is expected to reach $106.9 million, including a financing gap caused by COVID-19 of about $52.2 million. This financing gap, which is attributable to lower revenue because of lower economic activity and higher expenditure as a result of the ESP package and higher health expenditures, will be largely financed by development partners. ADB will provide $26 million in 2020, of which $20 million is from this program and $6 million was provided in April 2020 under the Pacific Disaster Resilience Program.28 The balance will be provided by other development partners and a domestic bond issuance (Table 3). There is still a small financing gap which will be resolved by finding savings in the budget or additional budget support.

Table 3: Urgent Financing Needs and Support for 2020 ($ million) Item 2020 (before COVID-19) 2020 (adjusted for COVID-19) Financing requirement 54.7 106.9 Domestic sources

Domestic bond issuance 0.0 14.5 Dividends from state-owned enterprises 0.0 1.8 Subtotal 0.0 16.3

External sources ADB COVID-19 Pandemic Response Option 0.0 20.0 ADB Pacific Disaster Resilience Programa 0.0 6.0 Australia 8.5 8.5 European Union 6.7 6.7 International Monetary Fundb 0.0 28.5 New Zealand 1.8 1.8 World Bank 10.0 15.0 Subtotal 27.0 86.5

Totals 27.0 102.8 ADB = Asian Development Bank, COVID-19 = coronavirus disease. a Comprising a $3 million concessional ordinary capital resources loan and a $3 million Asian Development Fund grant. b Financed using the Rapid Financing Instrument and Rapid Credit Facility. Source: Asian Development Bank.

26 The Humanitarian Pathway on COVID-19 supports the timely movement of medical supplies, technical experts, and

humanitarian assistance to Pacific Island Forum Members. The pathway was established following a declaration by the Pacific Islands Forum chair on 8 April 2020 calling for a regional humanitarian response. The pathway is supported by a regional taskforce made up of senior officials of Forum Members, the Council of Regional Organizations of the Pacific agencies, the United Nations Office for the Coordination of Humanitarian Affairs, WHO, regional law enforcement and legal agencies, and the forum secretary.

27 World Bank. 2020. COVID-19 Emergency Response Project. Washington, DC. 28 ADB. 2019. Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan

and Policy-Based Grants for the Proposed Pacific Disaster Resilience Program (Phase 2). Manila.

11

37. The government has requested (i) a concessional loan of $10 million from ADB’s ordinary capital resources, and (ii) a grant not exceeding $10 million from ADB’s Special Funds resources (Asian Development Fund) to help finance the program. The loan will have a 24-year term, including a grace period of 8 years; an interest rate of 1.0% per year during the grace period and 1.5% per year thereafter; and such other terms and conditions as are set forth in the draft loan agreement. The government’s development policy letter is in Appendix 3. 38. In 2019, Solomon Islands’ public debt–GDP ratio was low at 10.1%. Public external debt stood at $98 million, primarily from ADB (50%) and the International Development Association (39%). Public domestic debt stood at SI$245 million ($29.6 million), which was primarily bonds issued to the Solomon Islands National Provident Fund (SI$180 million or $21.6 million). On 25 April 2020, the government issued a SI$120 million ($14.5 million) COVID-19 domestic development bond. The current low debt levels leave space to absorb shocks such as the COVID-19 pandemic. With most development partners providing support through grants, public external debt by the end of 2020 will still be at prudent levels, with a debt–GDP ratio of 17.8%, despite the economic contraction. However, the ratio is projected to increase to 31.8% by 2024 because of significant new infrastructure projects. The debt sustainability analyses of ADB and the IMF conclude that Solomon Islands’ public debt remains sustainable and at moderate risk of debt distress despite its rising trend, and that the loan provided under the program will not aggravate the country’s debt vulnerability and risks in the medium term. F. Implementation Arrangements 39. The MOFT will be the executing agency for the program. The MOFT will monitor budget execution and the flow of funds for countercyclical measures, and will submit quarterly reports to ADB on expenditures made from the national budget to support the countercyclical measures. ADB will provide TA resources to supplement the government’s capacity in monitoring the implementation of the government’s program. In coordination with the government and other development partners, ADB will monitor outcome-level information throughout the implementation of the program using an existing TA (footnote 21). The ADB program implementation period is February 2020 to June 2021. The loan and grant will be disbursed to a government account at the CBSI in a single tranche upon loan and grant effectiveness, which is expected in July 2020. The proceeds of the loan and grant will be withdrawn in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time).29

III. DUE DILIGENCE

40. Governance. The latest public expenditure and financial accountability assessment took place in 2012. It showed that most areas of public financial management had improved since the 2008 assessment, particularly in budget credibility, budget comprehensiveness and transparency, and policy-based budgeting. ADB is providing TA to help the MOFT improve budget execution, which will also support monitoring of the government’s countercyclical program (footnote 21). ADB provided support for corporate governance reform, which contributed to a turnaround in the financial performance of SOEs. There is a lack of procurement capacity and expertise in government ministries. An anticorruption act was adopted in 2018. ADB’s Anticorruption Policy (1998, as amended to date) was explained to the government and the MOFT. 41. Poverty. Although poverty has declined considerably—from 45.6% of the population living below the international poverty line of $1.90 per day in 2006 to 23.6% in 2018—it remains

29 List of Ineligible Items (accessible from the list of linked documents in Appendix 2).

12

substantial. Two-thirds of rural households must travel to their main source of drinking water, which is usually a community standpipe (45% of households) or a river or spring (25% of households). Wood and coconut shells are the main energy source for cooking for 90% of households. Households spend 49% of their income on food—mostly on rice, bread, flour, and noodles, as 89% of households grow their own vegetables. Average household health expenditures are less than $20 per year.

42. There is no system of unemployment insurance to cushion the impact of job losses. As families cut back on food expenditures, the already high malnutrition rates for rural infants (20%) and young children aged 2–5 (40%) are likely to increase.30 An increased inability to pay school fees means that the secondary school graduation rate, which at 7% for girls is one of the lowest in the world, will fall further. The program will have a positive impact on the poor by (i) helping farmers increase their yield and incomes, (ii) providing support to industries that are most affected by the pandemic with the proviso of maintaining employment levels, and (iii) creating a small employment program targeting women and youth.

43. Gender. The program is categorized effective gender mainstreaming. It includes several proactive actions across all three outputs to support women with the immediate and medium-term impacts of COVID-19. The health response to COVID-19 ensures that (i) 150 frontline health workers (nurses and doctors), of whom 50% are women, will be trained on COVID-19 protocols and provided with appropriate personal protective equipment; 31 (ii) at least 750 women will be trained as public health advocates to support gender-responsive COVID-19 public health messages across all provinces; (iii) GBV referral pathways are incorporated into health planning; and (iv) COVID-19 health facilities are safe and accessible for women and vulnerable populations. 44. In addition, socioeconomic impacts on women will be addressed in several ways. First, to address issues relating to reduction or loss of income should a COVID-19 outbreak occur, food rations will be distributed to 100,000 households throughout the country, including to about 10,000 households headed by women. Second, capital injections into SOEs that commit to retaining staff will benefit women, who make up a large proportion of workers in companies such as SolTuna (56% of the workforce) and Solomon Airlines (36%). Third, women will be contracted to monitor prices, which will increase their income and ensure prices are affordable. Fourth, an agricultural support program will be developed, which will include support to women farmers. The development of the support will be informed by gender analysis and proactive measures will be taken to set targets to ensure women farmers benefit. Fifth, the Development Bank of Solomon Islands will be provided with funds to make loans to MSMEs, including those owned by women. Sixth, measures will be introduced to prevent and respond to GBV, including nationwide radio public awareness campaigns on GBV and COVID-19, and the development of COVID-19 referral pathways and COVID-19 telephone GBV services in all provinces. Service providers will have plans in place that will allow them to continue to provide services if COVID-19 cases are confirmed. Finally, the Protection Committee and GBV subcommittee have been activated and are ensuring that gender issues and support for the rights of vulnerable populations are being considered across COVID-19 preparedness and response activities. This committee has been allocated funding of SI$2.3 million ($0.3 million). The gender activities and outcomes of the program will be monitored using a gender monitoring matrix.32

30 Joelle Albert et al. 2020. Malnutrition in Rural Solomon Islands: An Analysis of the Problem and its Drivers.

https://doi.org/10.1111/mcn.12921. 31 Women account for 61% of nurses and 29% of doctors. 32 Gender Monitoring Matrix (accessible from the list of linked documents in Appendix 2).

13

45. Safeguards. In compliance with ADB’s Safeguard Policy Statement (2009), the program is classified category C for environment, involuntary resettlement, and indigenous peoples safeguards. The program is not expected to have any environmental or social safeguards impacts following the provisions in the Safeguard Policy Statement. 46. Risks and mitigating measures. Major risks and mitigation measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.33

Table 4: Summary of Risks and Mitigating Measures Risks Mitigation Measures The negative impact of COVID-19 on revenue collection is larger than expected, resulting in a greater shortfall in revenues.

The Ministry of Finance and Treasury has prepared a list of fiscal consolidation measures that are being implemented to reduce expenditures. ADB is providing technical assistance and policy advice to reform Solomon Islands’ tax system, and is preparing a project to implement a new revenue management system.

Poor execution of the government’s Economic Stimulus Package negatively impacts the efficiency of the program.

The Economic Stimulus Package uses existing mechanisms where available. ADB and other development partners are helping the government develop implementation plans associated with the government’s program.

A disaster triggered by natural hazards occurs, further harming the poor and vulnerable and damaging the economy.

The government has been working to strengthen policy, governance, and institutional arrangements for disaster risk management, including adopting a disaster management plan and setting up a climate and disaster finance unit in the Ministry of Finance and Treasury. ADB is preparing a program to improve disaster risk management and provide quick-disbursing funds in the event of a disaster.

ADB = Asian Development Bank, COVID-19 = coronavirus disease. Source: Asian Development Bank.

IV. ASSURANCES 47. The government has assured ADB that implementation of the program shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the loan and grant agreements.

V. RECOMMENDATION 48. I am satisfied that the proposed loan and grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve (i) the loan of $10,000,000 to Solomon Islands for the COVID-19 Rapid Response Program, from ADB’s ordinary capital resources, in concessional terms, with an interest charge at the rate of 1.0% per year during the grace period and 1.5% per year thereafter; for a term of 24 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board; and (ii) the grant not exceeding $10,000,000 to Solomon Islands, from ADB’s Special Funds resources (Asian Development Fund), for the COVID-19 Rapid Response Program, on terms and conditions that are substantially in accordance with those set forth in the draft grant agreement presented to the Board.

Masatsugu Asakawa 16 June 2020 President

33 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

14 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Country’s Overarching Development Objectives Resilient and environmentally sustainable development with effective disaster risk management, response, and recovery All Solomon Islanders have access to quality health care (National Development Strategy, 2016–2035)a

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting

Mechanisms Risks Effect of the Program Adverse effects of COVID-19 on businesses and the population reduced b

a. At least 70% of businesses still in operation as of 31 December 2020 (31 December 2019 baseline: 100% [2,415])

b. At least 100,000 individuals (of which at least 50% are women) benefit from at least one form of support under the program by 30 June 2021 with data disaggregated by sex and industry (February 2020 baseline: 0).

a. Solomon Islands Company Registry

b. Government’s

semiannual reports

Worsening economic conditions as a result of COVID-19 External shocks such as disasters triggered by natural hazards

Outputs

1. Measures to combat the entry and spread of COVID-19 in Solomon Islands delivered

1.1 By December 2020, at least

150 nurses and doctors with improved knowledge and skills in fighting COVID-19 cases (with at least 50% being women) are available for full activation if a COVID-19 case is confirmed in Solomon Islands (February 2020 baseline: 0).

1.1 National Disaster Council reports

Poor execution by the government of the economic stimulus package

1.2 By December 2020, the

government procured additional personal protective equipment for medical staff and a PCR-Polymerase Chain Reaction machine. (February 2020 baseline: 0).

1.3 By December 2020, at least 1,500 public health advocates (of which at least 50% are women) have improved knowledge and skills in public health advocacy regarding COVID-19 (February 2020 baseline: 0).

1.2 National Disaster Council reports

1.3 National Disaster Council reports

Appendix 1 15

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting

Mechanisms Risks 2. Measures to provide

social assistance to vulnerable groups enhanced

2.1 By June 2021, food security is enhanced with the ability to mobilize basic food rations to at least 80% of the population, of which at least half are women and 10% are female-headed households (February 2020 baseline: 0)

2.1 National Disaster Council reports

2.2 By December 2020, gender-based violence COVID-19 referral pathways are in place in all provinces (February 2020 baseline: 0)

2.2 Ministry of Women, Youth, Children, and Family Affairs reports

2.3 By December 2020, at least

500 public awareness messages on gender-based violence and COVID-19 are delivered on nationwide radio (February 2020 baseline: 0)

2.3 Ministry of Women, Youth, Children, and Family Affairs reports

3. Economic stimulus delivered

3.1 By June 2021, at least 10,000 farmers have been provided with some form of support, and sex-disaggregated data is collected (February 2020 baseline: 0)

3.1 Ministry of Finance and Treasury reports

3.2. By December 2020, funds

are injected into at least 4 state-owned enterprises that agree to retain staff (February 2020 baseline: 0)

3.2 Ministry of Finance and Treasury reports

3.3 By December 2020, at least 100 women, youth, and students, of which at least 60% are women, contracted to monitor prices (February 2020 baseline: 0)

3.3 Ministry of Finance and Treasury reports

Budget Support ADB: $20 million ($10 million Asian Development Fund grant; $10 million concessional ordinary capital resources loan)

ADB = Asian Development Bank, COVID-19 = coronavirus disease, CSF = Countercyclical Support Facility. a Government of Solomon Islands, Ministry of Development, Planning and Aid Coordination. 2016. National

Development Strategy 2016–2035. Honiara. b Because of uncertainties in how the outbreak will unfold, its economic effects, the need for government responses

to be flexible as the situation evolves, and because new data collection and reporting systems to monitor the crisis are being developed and evolving, it is not yet possible to set more specific and realistic effect of the program targets than those presented in the DMF. Additional indicators to measure the effects will be identified at a later stage and used to report on the program’s effectiveness as comprehensively as possible in the project completion report.

Source: Asian Development Bank.

16 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=54178-001-3

1. Loan Agreement 2. Grant Agreement 3. Development Coordination 4. Country Economic Indicators 5. International Monetary Fund Assessment Letter 6. Summary Poverty Reduction and Social Strategy 7. Risk Assessment and Risk Management Plan 8. List of Ineligible Items 9. Debt Sustainability Analysis

Supplementary Documents 10. Gender Monitoring Matrix 11. Safeguards Assessment Matrix

Appendix 3 17

DEVELOPMENT POLICY LETTER

18 Appendix 3

Appendix 3 19

20 Appendix 4

ASSESSMENT OF COMPLIANCE WITH THE ACCESS CRITERIA FOR THE COUNTERCYCLICAL SUPPORT FACILITY AND THE COVID-19 PANDEMIC RESPONSE

OPTION

Access Criterion Asian Development Bank Assessment

1. Adverse Impact of Exogenous Shocks

There has been a sharp decline in growth and revenue forecasts for 2020 as a result of the pandemic. The final magnitude of the economic losses will depend on how the outbreak evolves in both Solomon Islands and the rest of the world. For the past 5 years, growth in Solomon Islands has averaged 2.5% of GDP. With the onset of the pandemic, growth is projected to contract from between 0.2% and 12.3%. The wide range of projections reflect when the forecasts were made, the assumptions on trading partner growth, particularly the People’s Republic of China, how long borders will stay closed in Solomon Islands and key neighbors like Australia and New Zealand, and the underlying fragilities in the economy. The fiscal deficit is projected to increase from 2.7% of GDP in 2019 to 7.3% of GDP in 2020. Government external public debt is projected to increase from 10.1% of GDP to 17.8% in 2020. The current account deficit will increase by 6.4 percentage points to 15% of GDP in 2020. Poverty, as measured by the international poverty line of $1.90 per day, is expected to increase from 23.6% of the population in 2018 to 27.5% in 2020. The economic deterioration is a result of three primary causes: (i) lower exports, which are concentrated in logging, agriculture, and tourism; (ii) significant infrastructure projects are stalled as skilled labor and raw materials cannot be imported; and (iii) falling remittances as additional workers cannot travel to the key Australian and New Zealand markets.

2. Countercyclical Development Expenditures

The government has approved a SI$446 million ($54 million) countercyclical development program to respond to the crisis consisting of two major components. The first component, costed at SI$137 million ($16.5 million), is for implementing the COVID-19 Preparedness and Response Plan focused on preventing the virus from entering the country and getting the country ready if the virus enters, particularly the health sector. The preparedness and response plan contains an initial SI$27 million ($2.5 million) for health, social protection measures including food rations for the entire population for a month, increased gender-based violence measures, and more supplies to schools such as hand sanitizer. The second component, costed at SI$309 million ($37.5 million), is an Economic Stimulus Package. The Economic Stimulus Package includes social protection measures through support for farmers; the forestry, fisheries, and tourism sectors; grants to churches, provincial authorities, and schools; and contracting women and youth to monitor prices. There is rental relief and more credit through the development bank for micro, small, and medium enterprises, equity injections in state-owned enterprises, and bringing forward infrastructure projects. The Economic Stimulus Package also provides each Solomon Islands National Provident Fund member the ability to access SI$5,000. Banks are deferring loan repayments. Power tariffs and Port Authority charges have been reduced. And the furloughed public servants will continue to receive full pay.

3. Pre-shock Record of Generally Sound Macroeconomic Management

The government has a pre-shock record of generally sound macroeconomic management, with low deficits. Economic growth was respectable at 3.9% and 2.7% in 2018 and 2019, respectively. This was driven by strong performance in logging, infrastructure, fisheries, agriculture, and manufacturing. Inflation was low at 1.9% in 2019. There was a fiscal surplus of 0.7% of GDP in 2018, but the fiscal deficit was manageable at 2.7% of

Appendix 4 21

Access Criterion Asian Development Bank Assessment

GDP in 2019. Although the current account deficit was 6.4% in 2019, there were plenty of official reserves, with over 8 months of import cover. Public external debt levels were low—rising from 7.5% of GDP in 2015 to 10.1% of GDP in 2019—but were projected to double to 21.7% of GDP in 2024, which is driven by the government’s comprehensive infrastructure investment program, which would positively impact growth, particularly in rural areas.

4. Structural Reforms (including Health Response)

Solomon Islands has zero COVID-19 cases. With a fragile health system which would quickly be overwhelmed if the virus arrived and spread rapidly, the government implemented strong measures to prevent entry of the virus and prepare the country, particularly the health system, for an outbreak. A State of Emergency was declared on 25 March 2020 and extended by Parliament for 4 months to 25 July 2020. International passenger flights were suspended on 27 March. On 26 February 2020, the government approved the COVID-19 Preparedness and Response Plan which aims to minimize the risk of importing COVID-19 to Solomon Islands, limit the spread and impact of the disease if it enters the country, and reduce societal disruption and social impacts of the pandemic. An initial SI$27 million ($2.5 million) has been allocated to the health response. Hospitals are being upgraded, particularly isolation units which could be used as intensive care units; medical personnel are being trained on infectious disease issues; testing equipment and medical supplies are being procured; public awareness campaigns are underway. Development partners have provided funding to supplement the government’s efforts.

5. Debt Sustainability As result of the crisis, the public debt–GDP ratio is now expected to increase from 10.1% of GDP in 2019 to 17.8% of GDP in 2020 and 31.8% of GDP in 2024. Persistent budget imbalances and an ambitious infrastructure construction program are expected to continue exerting significant upward pressure on the debt–GDP ratio, even after the impacts of the pandemic have faded and economic growth has recovered. Debt granted on concessional terms constitutes 80% of total debt, with ADB and the International Development Association as the major creditors. The high degree of concessional lending keeps borrowing costs low. Debt sustainability analyses conducted by ADB and the IMF conclude that Solomon Islands’ public debt remains sustainable despite its rising trend and both with or without the $10 million loan from this program.

6. Coordination with the IMF

ADB and the IMF collaborate closely on policy issues in Solomon Islands. ADB has participated in IMF Article IV missions. The two organizations recently agreed to support the government in preparing a medium-term revenue strategy. During COVID-19, ADB and the IMF have had regular bilateral meetings on macro and fiscal issues, and as part of wider development partner discussions on supporting the government during this crisis. ADB, as lead development partner supporting the government in preparing the economic stimulus package, actively engaged with the IMF on the design of the package to ensure their policy advice was reflected in the final document. The IMF approved a $28.8 million program on 1 June 2020, to be financed from its Rapid Credit Facility and Rapid Financing Instrument. ADB and IMF have discussed joint monitoring arrangements from our respective programs where feasible. The latest IMF Article IV report was made public in February 2020 and an IMF Assessment Letter was received on 20 April 2020.

ADB = Asian Development Bank, COVID-19 = coronavirus disease, GDP = gross domestic product, IMF = International Monetary Fund. Source: Asian Development Bank staff.