Download Facts File – Solomon Islands

2014
FACTS FILE – SOLOMON ISLANDS
Economic Overview
KEY POINTS

In early 1999 in the Solomon Islands, economic stagnation, social tensions and political
decay erupted into ethnic conflict. This caused extensive damage to personal properties,
infrastructure, core government operations and social services delivery and the closure of
a significant number of businesses.

Real Gross Domestic Product (GDP) fell by around 24 per cent from 1998 to 2002,
reversing the growth of the preceding decade. Exports of many products collapsed and
external debt levels soared. With the country at a risk of descending into chaos, the
Solomon Islands Government sought external assistance.

The majority of the population in the Solomon Islands depends on agriculture, fishing
and forestry for at least part of its livelihood. Most manufactured goods and petroleum
products must be imported. The Regional Assistance
(RAMSI) arrived in mid-2003 and quickly
restored
Mission to Solomon Islands
law and order. Prior to the
arrival of Regional Assistance Mission to Solomon Islands (RAMSI) in 2003, an
Australian-led multinational force arrived to restore peace, severe ethnic violence, the
closing of key businesses, and an empty government treasury culminated in economic
collapse. RAMSI's efforts to restore law and order and economic stability have led to
growth as the economy rebuilt, as figure 1(GDP trend) and 2 (GDP per capita trend).
GDP: Production approach aggregates the values that are added to economy during a
given period through various economic activities within a nation’s geographical boundary
by the factors of production owned even by other nations. It is known as the Gross Domestic
Product (GDP). The GDP estimates can be adjusted to reflect the contribution by only the
nation. Such estimates are known as Gross National Product (GNP). Both GDP and GNP
can be estimated at constant and current prices for evaluations of different dimensions of
the overall economy. The main difference between nominal GDP and real GDP values is
that real values are adjusted for inflation, while nominal values are not. As a result,
nominal GDP will often appear higher than real GDP.
1
Figure 1: Solomon Islands GDP Trend 2000-2011
GDP Trend
800,000,000
700,000,000
600,000,000
500,000,000
400,000,000
GDP (Constant 2000 US$)
300,000,000
200,000,000
100,000,000
0
200020012002200320042005200620072008200920102011
Source: World Bank, Databank
Starting from 2003 Solomon Islands GDP has been increasing steadily, expect in 2009, to reach
a 9% annual growth in 2010. IMF forecasts for the following years (2012-2016) a more modest
annual growth of 4% on average.
2
Figure 2: Solomon Islands GDP per capita Trend, 2000-2011
GDP per capita Trend
3000
2500
2000
1500
GDP per capita, PPP
(Constant 2005 international
$)
1000
500
0
Source: World Bank, Databank
In most of the Pacific Islands one of the main determinants of economic fluctuations are natural
disaster such as earth quake and tsunami and the following infrastructure spending funded by
development partners. In the case of Solomon Islands also political instability played a
fundamental role. The trend of GDP per capita followed the one of the GDP reaching a 6.2%
annual growth in 2011 starting from a disastrous – 16.5% in 2000.

Economic growth moderated in 2013 as forestry, agriculture, and mining declined. A
slight pickup in growth is forecast for 2014, but rapid population growth will rule out
much improvement in gross domestic product (GDP) per capita. Slower growth in recent
years has placed pressure on the government budget and reinforced the need to control
government expenditure and improve its quality to meet the needs of an expanding
population.
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
Growth slowed to 2.9% in 2013 from 4.8% in the previous year (figure 3). This weak
outcome, which reflected mainly declines in earnings from gold and agriculture, only
slightly outpaced population growth at 2.5%. The value of gold production fell by 15% in
2013, mainly because gold prices were lower and the gold processing plant underwent
major refurbishment.
Figure 3: GDP Growth

Agricultural production fell in 2013, with most agricultural commodities recording output
declines because of poor weather in the first half of the year and lower prices.

Logging fell by 3.0% because of weather and prices but still recorded the country’s thirdlargest annual harvest (figure 4). This rate of extraction, and its heavy reliance on logging
previously harvested forests, appears unsustainable, such that production is expected to
continue to contract as forest stocks decline.

Growth in 2013 was driven by expansion in construction, manufacturing, and services. In
particular, investment in the Gold Ridge mine and expanded production at the Noro tunaprocessing factory boosted growth.
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Figure 4: Timber Exports

Consumer price index inflation averaged 6.0%, up slightly from 5.9% in 2012 (Figure 5).
Inflation was high in the first half of 2013, largely because unusually heavy rains in the
second quarter drove up food prices, but it moderated in the second half. Falling prices
for imported goods helped subdue the inflation average for the whole year.
Figure 5: Inflation
5

After a small current account deficit in 2012, the deficit widened to 2.0% of GDP in 2013
as export earnings from gold, logging, and agricultural commodities fell and imports
expanded to support major investment projects. Despite the deteriorating current account
deficit, foreign reserves remained high, bolstered by large inflows of grants and foreign
direct investment. As of December 2013, foreign exchange reserves provided 7.8 months
of import cover, down from 8.5 months in December 2012.

In 2013, the Central Bank of Solomon Islands undertook short-term measures to alleviate
inflationary pressure, including mopping up liquidity by issuing short-term bills.
Although the central bank formally moved to peg the Solomon Islands dollar to a basket
of currencies in October 2012, it has continued in practice to intervene in currency
markets to limit fluctuations in the US dollar–Solomon Islands dollar exchange rate.

The Government of the Solomon Islands offered additional banking licenses. So far,
however, only one provisional license has been granted to a domestically incorporated
bank with ties to Sri Lanka and this bank has started its operations recently.

Growth is expected to pick up slightly, to 3.0%, in 2014. Agricultural production and
gold output are projected to increase and offset declining log production as forest
resources dwindle. Gold mining is expected to scale up as the Gold Ridge mine moves
towards full production capacity of 95,000 ounces per year, well above the production of
57,400 ounces in 2013. The recovery in agriculture output in the second half of 2013 is
predicted to continue in 2014. In 2015, growth is projected to hold steady at 3.0%, driven
by fiscal stimulus from investment projects and their spillover effects on the economy.
Modest increases in gold production are also expected as planned improvements in
production processes are implemented. Logging is expected to continue to decline in the
medium term at an average annual rate of 8.0%. Inflation is expected to moderate slightly
in 2014, falling to an average annual rate of 5.5% as the inflationary impact of poor
weather in mid-2013 dissipates. Reflecting the country’s modest growth expectations and
continued declines in import prices, inflation is expected to moderate further, to 5.0%, in
2015.
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
A balanced budget is planned for 2014, but its achievement appears uncertain. The target
assumes a 7.2% increase in recurrent revenue, but this will depend upon stronger
economic growth and improvements in revenue administration and compliance.

The current account deficit is expected to deteriorate further in 2014, widening to the
equivalent of 6.0% of GDP in 2014 and 10.0% in 2015. Rising deficits will stem
primarily from expected declines in logging exports, while import growth is seen to
continue, driven by imports of construction and mining equipment. The deficit will be
funded through continued assistance inflows from development partners and foreign
direct investment.

Policies aimed at reinvigorating infrastructure, providing suitable land tenure
arrangements, reforming the foreign investment regime and strengthening governance
and fiscal accountability will assist in attracting new investors and reopening closed
businesses. The private sector has a significant role to play in driving economic growth
and can efficiently service markets previously dominated by government enterprises.

A comparison of GDP Growth Rates of counties is given bellow. (figure 6)
Figure 6: Real GDP Growth Rate (%)
30
25
20
15
10
Real GDP Growth Rate (%)
5
0
Source: CIA World Fact book - 2013
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Public Sector Reform and Recovery
KEY POINTS

Throughout the 1980s and 1990s, the Solomon Islands faced similar obstacles to
economic growth as other small island developing countries (LDCs) in the Pacific;
namely, an over-dependence on resource extraction which benefited the few, weak state
institutions, a poor business regulatory environment, high transport costs and inadequate
infrastructure, limited competition, high communication costs and the centralisation of
banking services with little reach into the rural sector.

RAMSI (Regional Assistance Mission to the Solomon Islands) assistance, through the
Budget Stabilisation Program, is focusing increasingly on medium-term issues Including
medium-term budget plans, ongoing budget stability, and more intensive and structured
capacity building for Ministry of Finance employees.

Re-establishing formal vocational public service training on governance, as well as
operational courses on fiscal control, management and core public service functions, is
an important priority. Where possible, training should be conducted in-country to avoid
the removal of key personnel.

The urgency of providing access to basic services at the village level, combined with
budgetary pressures, necessitates public sector consolidation. Restructuring the public
service to focus on key areas is necessary to improve service delivery. This may also
increase equity between urban and rural areas and reduce urban and inter- island
migration pressures.

Accountability institutions in the Solomon Islands have been under- resourced for several
years. Protecting and strengthening key accountability institutions is essential to restoring
governance standards.
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Policies to rejuvenate utilities, infrastructure and state-owned enterprises
KEY POINTS

Infrastructure
provision
In Solomon
Islands is inadequate.
Key infrastructure
services that provide a basis for economic development (electricity, water and sanitation,
telecommunications and transport) are erratic and generally provided only in Honiara.

Government provision of economic infrastructure has not worked. Key options for reform
are to corporatize public utilities or to involve the private sector in service delivery.

Private sector involvement in water, electricity and domestic airline service provision
through the auction of long-term concessions to use government-owned assets provides a
good model for improving service delivery. Concession contracts and privatisation of
basic infrastructure provision requires transparency and effective regulation.

Telecommunications and transport markets need to be opened to allow greater
competition.

The Solomon Islands Government cannot afford to be involved in largely loss-making
enterprises.
Many government businesses should be in the private sector. While some
smaller enterprises may attract local Interest, larger enterprises and utilities might require
appropriately resourced foreign investors.

The Government will need to engage In a concerted campaign to moderate unrealistic
demands of some landowners
which make commercial
provision
of some basic
community services untenable.

The Solomon Islands Government's economic reform program provides an opportunity
to secure new investment, strengthen management and provide better service delivery.
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Creating the right environment for business
KEY POINTS

A robust private sector is essential for economic recovery and social stability as it will
increase employment opportunities and sustain long-term growth.

The public sector has had difficulty
sector growth. A credible
In providing the basic pre-conditions for private
budget strategy,
which
allows the Solomon
Islands
Government to pay its bills, and a comprehensive debt management strategy will aid the
private sector. The restoration of law and order by RAMSI has met one of the
pre-conditions for the return of business confidence.

Improving access to finance will be an important factor in encouraging new businesses.
Re-establishing the Development Bank of Solomon Islands, or a similar body.is not likely
to lead to a sustainable solution. Other mechanisms, including the further use of credit
unions, may be the better option. Outsourcing the management of the struggling National
Provident Fund should be considered.

Uncertainty regarding land tenure affects the ability to secure finance and to use the land
for profitable enterprises outside subsistence farming. Secure and tradable property
rights are fundamental to a well-functioning market economy and economic growth.

Foreign investment inflows and the export of goods and services will play an
important role in economic growth. More open trade and investment policies are
needed to drive growth and attract private Investors into infrastructure service delivery.
Regulations should
be limited to the protection of essential public goods like the
environment and national security.

Restrictive
labour market regulations
and inadequate vocational training have
hindered growth. More flexible dismissal criteria and procedures
training
facilities
and further
could assist business. Streamlining and reforming work permits
and business licences will ease the regulatory burden on businesses.
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Business Opportunities
KEY POINTS

Several key Industry sectors including palm oil, copra, cocoa, virgin oil and fish have
contracted
substantially causing a huge fall In foreign exchange earnings and
employment.

Major businesses, such as Solomon Islands Plantation Ltd, Russell Islands Plantation
Ltd, Gold Ridge mine and Solomon Taiyo Ltd, were either forced to close or struggled
to survive
as markets
dried
up, Infrastructure and equipment
were destroyed,
landowner problems intensified and access to finance was curtailed. Russell Islands
Plantation and Solomon Talyo are operating, but with limited production capacity.

Encouraging investors to consider nucleus estate programs for agricultural plantations
may further assist palm oil, copra and cocoa production.
Strengthening of
the
Department of Agriculture and Livestock to provide more effective extension
services also could assist these industries.

Mining opportunities are closely aligned with landowner Issues. Adequate consultations
with landowners and realistic landowner expectations are required. The development of
spin-off businesses can contribute to peaceful and productive relationships between local
communities and resource developers. While mineral extraction would be a valuable
source of revenue, sustainable growth and development will require the development of
other opportunities.

Current timber production
Is unsustainable. Australia is providing assistance to
strengthen the timber licensing regime. This is necessary to develop a more sustainable
industry. To assist key productive
sectors to become internationally competitive,
a major effort needs to be undertaken to attract foreign investors
who have capital,
technology and a global marketing network and to support these investors with the
business-friendly policies recommended In Chapter 4. Government divestment of its
major businesses and plantations also would assist this process.
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