SOLOMON ISLANDS SERVICES SECTOR ANALYSIS

SOLOMON ISLANDS SERVICES SECTOR ANALYSIS Solomon Islands Snapshot Capital: Honiara Population: 552,267 (WB 2011) Currency: Solomon Islands dollar GDP ...
Author: Cameron Eaton
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SOLOMON ISLANDS SERVICES SECTOR ANALYSIS Solomon Islands Snapshot Capital: Honiara Population: 552,267 (WB 2011) Currency: Solomon Islands dollar GDP (constant 2000 US$): 670,924,408 (WB 2011) GDP per capita: $ 2581 at PPP (WB 2011) GDP Growth: 9% (WB 2011) External Debt: 38% of GNI (WB 2011) Ease of Doing Business: 92/185 (WB 2012)

1. Overview of the Solomon Islands Economy Th e ma j ori t y of t h e p op ul at i on i n S ol o m on I sl a n d s d ep en d s on agr i cul tur e, f is hi ng , and for es tr y f or a t l ea st p art o f i t s l i v el i h o od . M o st m an ufa ct u re d g o od s an d p et r ol eu m p ro d uc t s m ust b e i mp ort ed . P ri o r t o t h e arri val of Re gi o n a l As si st a n c e M i s si on t o S ol om on I sl a n ds (R AM SI ) i n 2 0 0 3 , a n Au st ral i an - l ed m ul t i n a t i on a l fo rc e arri ve d t o re st or e p ea c e , se ve re et h n i c vi ol e n ce , t h e c l o si n g of k e y b u si n e s se s , a n d a n e mp t y go ve rn m en t t re as u r y c u l mi n at ed i n ec on omi c c ol l a p s e . R AM S I 's e ff o rt s t o r e st or e l aw a n d or der an d ec o n o mi c st ab i l i t y h a v e l ed t o gr ow t h as t h e ec on o m y r eb ui l t , as fi g ur e 1 (G D P t r en d ) an d 2 (G D P p e r c a p i t a t ren d ) s h ow : Fi gur e 1 : S ol o mo n Is l ands G D P Tr e nd 2 0 0 0 -2 0 1 1

Starting from 2003 Solomon Islands GDP has been increasing steadily, except in 2009, to reach a 9 annual % growth in 2010. IMF forecasts for the following years (20122016) a more modest annual growth of 4% on average.

Source: World Bank, Databank

Fig ur e 2 : S ol om on Is lan ds G D P p er c apit a Tr e nd , 2 0 0 0- 2 0 1 1

Source: World Bank, Databank

In most of the Pacific Islands one of the main determinants of economic fluctuations are natural disasters such as hearth 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.

S ol om on I sl an d s b el on g t o t h e L e as t D e v el op ed C oun tr i es g ro up . Th e g ov ern me n t i n t h e ef f ort t o st ren gt h en t h e c o un t r y ’ s e c on o m y i s p ri ori t i zi n g pal m oi l d ev el op men t , mi n e ral p r o sp ec t i n g , val u e add ed a ct i vi t i es i n fis h er i es an d f or es tr y a n d i s p ut t i n g emp h a si s i n t h e de vel op men t o f t our is m , t h e on l y s erv i c e t h a t se em s t o h a ve , c u rr en t l y , c h an c es t o gr ow i n t h e n ext y e ars . Th e ec on om y o f t h e S ol om on I sl an ds l ac k s of e co no mi c d yn a mis m . P o o r i n fr ast r u c t ure a n d a n on er o u s r eg ul at or y en vi r on men t i mp e de exp a n si on a n d di ve rsi fi c a t i on o f t h e p ro d uct i v e b a se . Th e fi n an c i al s yst e m r ema i n s r u di m en t a r y , l a c k i n g t h e c a p a ci t y t o p ro vi d e s uf fi ci en t c r edi t f or en t r ep r en e u ri a l a c t i vi t y . De sp i t e re fo rm ef f ort s , s yst e mi c c o rr up t i on i n cr ea se s t h e co st o f b usi n es s an d det e rs m uch- n ee ded l on g- t erm i n ve st me n t . A large gold mine, closed during the civil unrest, has reopened, and there is potential over the longer term to develop large nickel deposits. While mining projects would boost GDP, the sector would employ few people and there would be long lags before government revenue rose. The best prospects for job creation and for higher government revenue lie in large-scale palm oil developments, fishing (there is already one large fish cannery), and the smallholder tree crops of cocoa and copra. The supply of fruit and vegetables to the urban centers as a substitute for imports also offers good prospects, as does the fledgling tourism industry. Also in terms of job creation the Services Sector, except for tourism, doesn’t seem to have, currently, great potential as the following section will show. 2 . R ol e o f S er vi c es i n So lo m on Is lan ds E c on om y The evolution of the weight of the Services Sector in terms of value added (% GDP) in Solomon Islands economy, with respect to the primary and secondary sectors, is shown in Figure 3. It’s worth to highlight the specular growth path of the Services and Agriculture Sectors, in opposition to the steadily decreasing trend of the Industrial Sector. The Services Sector is now dominant in terms of value-added (see Figure 4) but its growth has been very unstable (see Figure 3) and in terms of labour it involves only the 20% of the population; the 75% of Solomon Islands population still works agriculture (see Figure 5). It would be important to understand how the Services Sector can become more labour intensive so that its growth can have a bigger impact on local population and on poverty reduction. Given that the majority of the population still works in agriculture, the Government Development Strategy still focuses mostly on the actions to undertake to strengthen this sector, neglecting the Services Sector.

Fig ur e 3 : S ol om on I s lands Ser v ic es S e ct or e v olu ti on , 2 0 0 0 - 2 0 0 9

Source: World Bank, Databank

Figure 4: Solomon Islands Economy Breakdown

Source: CIA World Factbook

Figure 5: Solomon Islands Labour Force

Source: World Bank, Databank

Th e Se rvi ce s E xp ort B rea kd ow n (F i g u re 6 ) c a n h el p u n de r st a n d w h i c h a r e t h e S er v i ces , mo re r el e va n t t o S ol om on I sl an ds ec o n o m y an d w h er e t h e i n ve st me n t s sh o ul d b e di re c t ed . Figure 6: Solomon Islands Services Sector Breakdown, 2010

Source: Trade Map, ITC

E ven i f c o un t i n g f or t h e 50 % of Se rvi ce s S ect o r E xp ort , T our is m i n t h e S ol o m on I sl a n ds i s ver y sm a l l , i n c o mp a ri s on t o ot h e r P a c i fi c I sl a n ds c o u n t ri e s , a n d t h e ra t e o f gr o w t h i s p ro ce edi n g a t a v er y s lo w p ac e . I n ma n y c a se s t h e d ev el o p m en t o f vi l l a g e l e vel t o uri sm h a s r es ul t e d i n t h e b r ea k dow n of t h e l oca l c ul t ur e ; f or exa mp l e , t h e de vel op men t o f t h e ec o- l od ge s h a s re s ul t e d i n di sp ut e s ov er l a n d an d ma ri n e re s o ur c es fr om w h i c h t h e ven t ur e i s si t u a t ed an d di sp ut e s am on g t h e l oc al c o mm un i t y a n d t h e ow n er s ov er fi n an ci al b en efi t s . Th e re i s a co n t radi c t i on b et w ee n t h e i dea of s ust a i n a b l e t o u ri s m a n d t ra di t i on al a c t i vi t i es of t h e l oc a l c om m un i t y . Th e s e p ot e n t i al c on f l i c t s h av e t o b e t a k en i n t o a c c o un t i f i mp l e men t i n g a p ro j ect t o dev el op t o uri s m i n t h e I sl an ds . Tr ans p or t ati on w i t h 34 % i s t h e s ec on d mo st e xp ort e d Se rvi ces s u b - s ect o r an d t h e G ov ern me n t i s t r yi n g t o st r en gt h en i t t h ro u gh a Na t i o n a l T r a n sp o rt Pl a n (N T P ) , 20 11– 20 30 , w h i c h set s t h e st rat egi e s , p ol i ci e s , an d i mm edi at e p ri ori t i es f o r t h e de vel op men t of t h e t ra n sp ort s y st e ms . Th e N T P f or mal l y set s o ut a st rat egi c an d p ol i c y fr am ew or k t o (I ) d ev el op t r an s p or t se rvi c e s , (i i ) ma i n t a i n a n d de vel op p h y si c a l i n f ra st r uc t ure , (i i i ) i mp r o ve t h e c a p ac i t y of g ov ern me n t a gen c i e s , a n d (i v ) c rea t e o p p ort un i t i e s fo r p ri vat e p a rt i ci p at i on . 3 . Th e r ol e o f F or e ign D ir e ct In v es t me nt Figure 7: Solomon Islands FDI Trend, 2000-2011

As for GDP and GDP per capita, starting from 2003 also FDI has started to increase sharply. In 2011 FDI net inflows (% of GDP) was 17.5% far above the average for LDCs, 2.8%

Source: World Bank, Databank

M o st of t h e f o rei g n i n ve st m en t s a re di re ct ed t ow ard lo ggin g a nd f or es tr y indus tr y , n egl ec t i n g t h e Se rvi ces Sect or . E ven i f c on t i n u o u sl y i n c r ea si n g , t h e i n h ere n t st r u c t u ra l a n d org a n i s a t i on a l i mp edi m en t s c o mp o un d ed b y p o or ec on o mi c , s o c i a l a n d p ol i t i c a l c o n di t i on s c o n t i n u e t o p o se si gn i fi can t ch all e ng e s t o attr ac t FD I , in pa r tic ular t o war d ne w s ec tor s . Al s o l an d p ol i c y i s a fac t or , w h i c h g rea t l y a ff ec t s t h e fl ow o f f or ei gn di r ec t i n ve st men t (F DI ) i n t h e So ut h P ac i fi c . Wh er e l a n d p ol i c y i s t ra n sp a ren t a n d sec u ri t y of t e n u re i s gu ara n t eed , FDI fl o w s i n at a h i gh er rat e . Th e op p osi t e s ee ms t o h ol d t r u e f or co un t ri es w h ere l an d p ol i c y i s c l o u de d a n d w h er e t h ere i s un c ert a i n t y a b o ut t h e s ec uri t y o f t en ur e . Th i s g en e ral r ul e a p p l i es t o t h e S ol o m on I sl a n d s j u st a s i t d o es t o a n y ot h er S o ut h Paci fi c I sl a n d c o un t r y . Th e l an d t en ur e an d p ol i c y i n t h e S ol o m on I sl a n d s h a s h i n de re d t h e fl ow of FDI t o a gr eat e xt en t . Ac c o rdi n g t o t h e I n dex of E c on omi c Fr ee do m (s e e Fi g u r e 8 ) Sol o m on I sl an ds i s a r epr es s e d ec on om y .

Figur e 8: De gr e e o f S ol om on Is la nds E c on om ic Fr e ed om

Source: 2013 Index of Economic Freedom

Th e S ol om on I sl an ds ’ ec on o mi c f re ed o m sc or e i s 4 5 , m ak i n g i t s e c on om y t h e 1 65t h f re est i n t h e 2 01 3 I n de x . I t s sc or e i s 1 .2 p oi n t s l o w er t h a n l a st ye a r d ue t o de c l i n e s i n h al f of t h e 10 ec on omi c f re ed o ms , i n c l u di n g t h e c on t r ol of g ov ern me n t sp en di n g , l a b or fr eed o m , an d fr ee d om fr o m c or r up t i o n , t h at o ut w ei gh ga i n s i n t ra de a n d b u si n e ss f re ed o m . Th e S ol om on I sl an d s i s r an ke d 3 7t h o ut o f 41 c o u n t ri e s i n t h e As i a– Paci fi c regi o n , an d i t s ov er a l l sc or e i s far b el ow t h e w orl d a ver age . Th e f o un dat i o n s o f e c on o mi c fr eed o m i n t h e S ol o m on I sl a n ds re ma i n se ve rel y w e ak en e d b y st r uct u ral an d i n s t i t ut i on al p r o b l e ms . T h e r ul e of l a w i s n ot eff ec t i v el y en f orc ed ac r os s t h e c o un t r y , an d w e ak p r o p ert y ri gh t s a n d a l a c k of t ra n sp a r en c y i n t h e l e ga l s y s t em a re a w ei gh t y dra g on p r i vat e- sect or d ev el o p men t . 4 . Tr ad e in Ser v ic es and Tr a din g P ar tn er s The share of Trade in Services for Solomon Islands is above the average for the LDCs (around 32%), in 2011: 39.7% However, as the Services Account shows, Services exports are very low and for 2010 (latest data available) the balance was negative, meaning that the country was importing more than exporting. The only Services subsector with a positive balance is again Travel/Tourism (see Figure 9) The Products Account Balance is instead positive; the country continues to rely heavily on the export of few primary export commodities (logs, fish, copra, palm oil and mineral, see Figure 10 and 11). As key export revenue earners, these commodities are highly volatile and vulnerable due to both domestic and external factors (natural disasters, price volatility and low demand). Figure 9: Services Account (BoP) Service label Total services Government services, n.i.e. Financial services Personal, cultural and recreational services

Balance in value in 2010,US Dollar thousand -81000 -5350 4140 -2480

Travel

6610

Royalties and license fees

-730

Construction services

-38890

Insurance services

-6730

Transportation

-9450

Communications services Computer and information services

360 -760

Other business services

-27710

Personal remittances

-60050

Source: ITC Trade Map

Figure 10: Products Account (BoP) Product label

Balance in value in 2010,US Dollar thousand

All products

103067

Wood and articles of wood, wood charcoal

318013

Pearls, precious stones, metals, coins, etc Animal,vegetable fats and oils, cleavage products, etc

330 20388

Fish, crustaceans, molluscs, aquatic invertebrates nes

23869

Meat, fish and seafood food preparations nes Cocoa and cocoa preparations Oil seed, oleagic fruits, grain, seed, fruit, etc, nes

8117 16807

Live animals Products of animal origin, nes

7428 85 1169

Source: ITC Trade Map

Figure 11: Solomon Islands main exports

M a i n tr a de p ar tn er s f or Sol o m on I sl a n d s a r e t h e f ol l ow i n g : E xp o rt s : China 52.4%, Australia 12.1%, Thailand 4.5% (CI A World Factbook 2011) I mp ort s : Australia 27%, Singapore 26.1%, China 6.4%, Malaysia 5.8%, NZ 5% (CI A World Factbook 2011)

5 . R egi on al I nt egr a ti on Th e g ov er n m en t o f S ol om on I sl an d s a n d i t s b i l a t e ra l , m ul t i l a t era l a n d r egi on a l p art n er s , s uc h a s t h e Un i t ed Nat i on s , t h e i n t e rn a t i on al fi n an ci al i n st i t ut i on s an d t h e C o un ci l o f Re gi on al O rga n i z at i on s i n t h e Pa c i fi c (C R O P ) a gen ci e s , d ev el o p an d co o p er a t e on a c t i vi t i es t o at t ai n d ev el o p m en t r es ul t s . I n c reasi n gl y , i n l i n e w i t h t h e Pa ri s a n d Pa c i fi c Dec l a ra t i on s on Ai d E f fe c t i ven es s , dev el op men t p a rt n er s h av e an d ar e dev el op i n g c o un t r y st rat egi e s t h at ar e c l os el y a l i gn e d t o k e y de vel op men t p ri ori t i e s art i cul at ed b y t h e g o ve rn m en t . Un d er t h e fr a m ew or k of t h e R egi on al As si st an ce M i ssi on t o t h e S ol o m on I sl an d s ( R AM SI ) , se ve ral b i l at e ral p a r t n ers h av e an d w i l l c on t i n u e t o p r o vi d e t h e m uc h n ee ded t e ch n i cal c a p aci t y an d c a p ac i t y s up p l e me n t at i on t o en a b l e S ol o m on I sl an ds t o un de rg o a sm o ot h ec on omi c rec o ve r y an d i mp l em en t a re st r uc t u ri n g p r ogr a m me t h a t sh o ul d d el i ver t h e de si r ed de vel op me n t re s ul t s .

A k e y s ub - re gi o n al u n i on fo r Sol o m on I sl a n d s i s t h e M el an es i an S pe ar h ea d Gr oup (M S G ) , w h ere t h er e i s ag re e men t t o p r o m ot e a n d st r en gt h en i n t e r- m emb er sh i p t r a d e ; ex ch an g e of M el a n esi a n c ul t ur e s , t ra di t i on s an d val u es ; s o ve rei g n eq ual i t y ; ec on o mi c a n d t ec h n i cal c o op e rat i on b et w een st at es ; a n d t h e a l i gn m en t o f p ol i c i es i n o rd er t o f urt h er M S G m emb er s ’ sh a red g oal s o f e co n omi c gr ow t h , s ust ai n ab l e d ev el op men t , g o od go ve rn a n c e a n d s ec uri t y .