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p. 45 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Central Asian Republics, Azerbaijan, and Mongolia People’s Republic of China Southeast Asia South Asia The Pacific Cook Islands Fiji Islands Kiribati Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Tonga Tuvalu Vanuatu III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia

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Solomon Islands

Civil unrest and ethnic tension were the major factors in the 14 percent contraction of real GDP in 2000. However, a peace accord was signed in October, paving the way for reconstruction and rehabilitation. An early return to normalcy and political stability are vital for reviving the prospects of the near-devastated economy.

Recent Trends and Prospects

Economic and social conditions deteriorated sharply in mid-1999, following an escalation of civil unrest and ethnic tension. The deterioration in the economy was further aggravated by political events in June 2000. As a result of this crisis, the economy contracted by about 14 percent in real terms in 2000. A peace agreement signed in October 2000 opened the way for reconstruction and rehabilitation.

The civil unrest of 1999 resulted in the closure of Solomon Islands Plantations Ltd., the country’s largest agricultural enterprise, in June that year. Exports of palm oil and palm oil products fell from SI$97.9 million in 1998 to SI$65.1 million in 1999 and, subsequently, to an estimated SI$6.5 million in 2000. Agricultural output dropped by over 50 percent from the beginning of 1999 to the end of 2000.

Gold and silver from the Gold Ridge mine on the main island of Guadalcanal had begun to make a significant contribution to exports in 1999 and early 2000 before the mine was closed in June 2000. The closure likewise resulted in the loss of employment and export income.

Fish export revenue, which suffered as a result of low prices and civil unrest, sank from SI$195 million in 1999 to SI$45 million in 2000. The sector’s contribution to GDP fell by an estimated 42 percent in 2000. Other important sectors in the economy, such as logs, copra, and cocoa, suffered some down-turn as a result of the disturbances, although they all continued to export in 2000. Logs are still the principal export commodity in US dollar terms, even though prices, at an average of around US$70 per cubic meter, are low. Copra and cocoa production declined on Guadalcanal, where most of the unrest occurred, but was little affected elsewhere. Copra prices, at around US$300 per ton in late 2000, were down by about 32 percent from the levels seen at the end of 1999. Finally, tourism fell to negligible levels as a result of the disorder.

The Government experienced acute cash-flow difficulties in the second half of 2000 as tax revenues plummeted and most external assistance was suspended (see Figure 2.26). Its response was to suspend public investment and ask employees to take unpaid leave. Repatriation payments to militants following the peace agreement further stretched limited resources. Total government earnings and tax revenues are estimated to have fallen short of budget estimates for 2000 by more than 30 percent, while the overall budget balance for the year is projected to be a deficit equivalent to 4.5 percent of GDP. The stock of central government debt at the end of 2000 reached about 75 percent of GDP, with about 60 percent of this in external debt.

Because of lower domestic demand, inflation has been on a declining trend since the second half of 1999. Over the whole of 2000, it was 6.6 percent, despite higher world oil prices. Total domestic credit increased by 12 percent in the nine months to September 2000; most credit to the private sector had been extended in the first half of the year. Broad money grew by 9.5 percent in 2000. Exports and imports both fell in US dollar terms, by 29.2 percent and 14.8 percent, respectively, because of disruptions to export production and low demand for imported goods. External reserves fell sharply immediately after the June 2000 crisis, but improved subsequently as receipts from log exports improved. Exchange control measures also helped. Gross external reserves were about $33.4 million at the end of 2000, sufficient to cover only about two months of imports; the external position of the country remains fragile.

While some signs of economic revival appeared after the peace agreement, major enterprises in mining, fishing, and agriculture remain closed, and the prospects in the short and medium term will largely depend on how soon the country returns to normalcy. Solomon Islands Plantations will require at least 24 months to resume production once it restarts operations, while gold and silver production will take six months to commence after startup of the Gold Ridge mine. An optimistic scenario might, therefore, suggest growth of about 3 percent in 2001 and 2002. Inflation is likely to decline slightly to 5–6 percent over these two years as the economy begins to recover and local food supplies reach precrisis levels. Debt service will continue to be a concern.

Around 8,000 workers, or 15 percent of the total workforce in the formal sector, were either made redundant or put on unpaid leave as a result of the civil unrest. While some of these workers will be reemployed, employment growth is likely to be stagnant in 2001 and 2002, with youth unemployment remaining at high levels.

Issues in Economic Management

Faced with significant reconstruction challenges, the country needs sound macroeconomic management to facilitate external assistance. In particular, fiscal management that supports price stability and an adequate level of international reserves needs to be established. This will require keeping the government deficit to a level that can be financed by concessionary borrowing. Additionally, government expenditure commitments need to be kept in check so as to avoid further borrowing from the central bank and limit borrowing from commercial banks. At the same time, the Government needs to settle remaining arrears urgently, and avoid falling into arrears with domestic and external creditors and suppliers.

In an effort to stimulate economic recovery, the Government has been granting tax exemptions to selected taxpayers on a discretionary basis. The transparency and efficiency of this policy require urgent review. As an alternative in the short term, a reduction in the goods tax deserves examination.

Policy and Development Issues

To achieve a sound fiscal position in the medium term, the Government needs to raise both expenditure efficiency and revenue, while strengthening customs and tax administration. The privatization of certain government enterprises, such as Solomon Printers and Home Finance, would also help improve the fiscal position, as would introducing a value-added tax to replace the goods tax.

Reduced individual and business incomes, along with fewer employment opportunities, are clearly having a major adverse social impact. Furthermore, the Government’s weakened capacity to support health and education services, particularly in more remote areas, has implications for the future of the country. Even prior to the recent disturbances, the Solomon Islands was one of the poorest nations in the Pacific. The crisis has exacerbated the social and economic climate. Responses, to be effective, will require major sustained efforts by the Government and its development partners.

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