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Countries and Regions Country Assistance Plans Document
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Country Assistance Plans - Solomon Islands : I. Country Performance Assessment
I. Country Performance AssessmentA. Economic Performance Assessment1. The Solomon Islands was in economic crisis in 1998. After dropping 0.5 percent in 1997, real gross domestic product (GDP) fell an estimated 10 percent as the adjustments forced by years of economic mismanagement were compounded by the collapse of log export markets in Asia (Appendix 1, page 1). Government finances and the balance of payments position were weak, the financial system remained stressed, inflation was double-digit, and unsustainable harvesting of the forest resource continued. Business confidence remained very low. 2. The 1998 budget projected a current surplus of SI$15.8m, and a near-zero overall balance. A reduction in domestic and external arrears was planned on the assumption that necessary funds could be raised through privatization, some borrowing from the National Provident Fund, and external borrowing. In the event, domestic revenue fell well short of budget expectations and day-to-day cash availability dictated expenditure levels. Given that efforts at public service downsizing were delayed and that the wage bill increased by 6 percent on the 1997 level, and given the priority assigned to debt servicing, the enforced cuts largely fell on departmental operations expenditure. This exacerbated the acknowledged problems of the poor quality of public services and deteriorating infrastructure. Debt and non-debt arrears were reduced by a total of SI$87.1 million, primarily through external concessional borrowing from the Asian Development Bank (ADB) and securitization of arrears to the National Provident Fund. As a result, the overall public debt level increased slightly from SI$941.8 million at the end of 1997 to SI$943.1 million at the end of 1998. Domestic debt totaled SI$401.7 million, external debt SI$509.6 million, and trade creditor and other arrears SI$31.8 million. The 1999 budget aims at a current surplus of SI$17.9 million, and an overall deficit of SI$26.7 million to be financed from external borrowing. Additional public sector reform program (PSRP) expenditure on arrears settlements totals SI$92.2 million, funded by asset sales of SI$29.2 million and further external concessional borrowing of SI$63 million. 3. The performance of the Solomon Islands economy in 1999 will depend on the international economic environment, and on the extent to which government can successfully tackle the inherited fiscal crisis and implement its program of economic reform. The outlook for commodity prices in general, and fish and log prices in particular, is not encouraging. Moreover, the ethnic tensions on Guadalcanal have negatively affected the tourism industry and the operations of the country’s major export earner, Solomon Islands Plantations, Ltd. A few businesses in Honiara have closed down to avoid the threats of looting. On the positive side, the Gold Ridge gold mine will be in full production in 1999, and the Asian crisis has led to lower prices on intermediate inputs. Government has made progress in restoring macroeconomic stability by servicing its domestic debt and paying arrears, which it plans to clear entirely by the end of 1999. 4. Though there have been delays in the process of public service reform, the retrenchment/restructuring exercise is now underway, appointments of new departmental secretaries have occurred on the basis of merit, a performance orientation is to be introduced, and provincial government is to be reformed. Progress on privatization needs to be accelerated, however, and government has identified impediments to private sector development in need of attention, including difficulties in accessing land, poor infrastructure, burdensome investment approval processes, and a lack of professional skills. Most fundamentally, the policy framework and management regime essential to ensuring the sustainable and equitable development of the natural forest are yet to be put in place. In all ministries, priority needs to be given to establishing effective financial management and information systems to enable proper resource allocation and fiscal control.
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