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.

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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

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

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 7

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. 10

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. 11