Catalog

Solomon Islands

At 10% in 2007, the Solomon Islands recorded the strongest growth in the Pacific. It was driven by unsustainably high logging rates, which increased by 25% (Figure 3.34.24), and strong aid flows. Palm oil production also made a contribution, as did retailing and other services that were stimulated by demand from the presence of the Regional Assistance Mission to Solomon Islands, a partnership between the Government and 15 Pacific countries. An earthquake and tsunami that struck Gizo and Western Choiseul provinces in April 2007 caused considerable local damage and left many villagers homeless, but the economic impact was more than offset by increased aid flows.

Average inflation eased in 2007, but remained high at 7% because of higher fuel prices and a depreciation of the domestic currency against the Australian dollar. A slight tightening of monetary policy by the central bank reduced excess liquidity over the year, which led to a small increase in lending interest rates.

The current account recorded a deficit equivalent to 37% of GDP in 2007. Strong official and private inflows in the capital account raised foreign exchange reserves by about US$12 million, to US$115.8 million in the 12 months to January 2008, although reserves remained moderate at 4 months of imports of goods and nonfactor services (Figure 3.34.25). A surplus on the balance of payments contributed to strong growth in money supply. Credit to the private sector grew by 56% in 2007, mainly for personal loans and lending to the tourism, fisheries, transportation, and construction industries.

The budget moved into deficit last year to an estimated 1.2% of GDP from a surplus of 1.5% of GDP in 2006 as higher spending on wages and on goods and services outweighed an increase in domestic revenues. Public sector debt continued to decline, but debt remains at uncomfortably high levels, equivalent to approximately 55% of GDP at the end of 2007, and mostly external. This is of particular concern in view of expected medium-term budget pressures from lower logging revenues, an eventual decline in donor support, and the need to fund infrastructure spending and tsunami rehabilitation work.

Economic and public sector reforms aimed at improving the environment for private sector development and the performance of stateowned enterprises continued at a slow pace, as the Government's focus naturally shifted to post-tsunami recovery efforts. A civil aviation act was prepared that, if passed in 2008, would make Solomon Islands a partner in a Pacific air services agreement and open the aviation sector to greater competition. Comprehensive reform of commercial law was initiated and legislative drafting continued for the introduction of competition in telecommunications. However, corruption and poor governance, weak infrastructure, expensive and unreliable utilities, and land tenure issues still constrain economic growth. In 2007, the country was ranked 162 of 178 in terms of the ease of registering property according to the World Bank's Doing Business indicators.

Economic growth is expected to moderate to 6.0% in 2008 as the Government curbs the upward trend in its spending in an effort to prepare for future declines in logging revenues. Further expansion of palm oil production will contribute to growth, and development of infrastructure for the Gold Ridge gold mine will continue. The current account deficit is expected to narrow to around 28% of GDP as growth in gold mine-related imports slows. Foreign reserves will be supported by inflows of aid and foreign direct investment in palm oil and gold mining. Inflation is projected to remain high in 2008.

Years of unsustainable logging and the anticipated depletion of natural forests by 2013 are projected to force a decline in logging rates from 2009. GDP growth is expected to fall to less than 3% in 2009 (Figure 3.34.26), even though gold production is expected to start by then. Failure to implement economic reforms could then see per capita GDP decline after 2010 because annual population growth of 2.8% may outpace that of GDP. Urban unemployment, especially of youth, is a major challenge.