Countries and Regions

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p. 2 of 5 BACK | NEXT I. Country Strategy II. Current Development Trends and Issues III. Implementation of the Country Strategy and Program IV.Portfolio Management Issues V. Country Performance and Assistance Levels

Country Strategy and Program Update 2007-2009: Solomon Islands

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II. Current Development Trends and Issues

A. Recent Political and Social Developments

2. General elections were conducted peacefully in April 2006. However, in reaction to the announcement of the new prime minister, riots broke out in the capital Honiara, resulting in serious damage to property, especially in Chinatown. The Regional Assistance Mission to Solomon Islands (RAMSI) was reinforced with police and army personnel, and law and order was quickly restored. The Prime Minister resigned after only 8 days in power following a vote of no-confidence. A fiveparty Grand Coalition for Change government, led by new Prime Minister Manasseh Sogavare, has been in power since May 2006. RAMSI’s military component was scaled down following the ending of the riots. The political situation is still inherently volatile and social cohesion remains under stress.

3. Solomon Islands is one of the least developed of ADB‘s Pacific developing member countries (PDMCs), ranking 128 out of 177 countries covered in the 2005 Human Development Index (HDI), slightly ahead of Papua New Guinea and Timor-Leste.³ The country lacks an adequate social infrastructure and services and does not generate enough income-generating and employment opportunities for a fast-growing population, of which about 50% is below 25 years and 85% lives in rural areas. The annual population growth rate of 2.8% is among the highest in the world. There is little formal employment outside urban Honiara; unemployment is rising, particularly among the youth; there is a high incidence of malaria; and HIV/AIDS has emerged as an important issue. If poverty is to be reduced and the social fabric healed, there needs to be a substantial improvement in delivery of basic social services and economic growth that engages the rural population.

B. Economic Assessment and Outlook

1. Recent Performance and Outlook

4. Recent Performance. Supported by a strong international economic environment, economic and public sector reforms and substantial donor assistance, the economy grew by an estimated 5% in 2005, compared with 8% in 2004. Agriculture and unsustainable logging were significant drivers of growth. Annual real GDP per capita rose by about 2% to an estimated $641. Average inflation accelerated from 6.9% in 2004 to 7.2% in 2005, reflecting the flow-through effects of high oil prices and increases in local food and housing prices. The overall balance of payments recorded a surplus in 2005, equivalent to 3% of GDP. The level of foreign reserves in December 2005 provided over 5 months imports cover. Net foreign assets increased and domestic credit rose as a result of a 63% increase in private sector credit. Further progress was made in addressing the Government’s heavy debt burden during 2005. The Government initiated a Honiara Club meeting with creditors in October 2005, at which the difficult debt situation was acknowledged and the foundations laid for debt restructuring and relief. Government debt fell to about 80% of GDP as a result of principal repayment of restructured and amortized bonds, restructuring of substantial government debt to the Central Bank, and restructuring and final settlement of debt to a bilateral creditor.

5. Economic Outlook. The negative short-term macroeconomic impact of the Honiara riots in April 2006 is likely to be small, with some stimulation from construction activity expected in the second half of 2006. The damage to foreign investor confidence, and therefore to potential adverse effects on medium- to long-term growth prospects, is of greater concern. The growth rate in 2006 is forecast to be about 5%, provided that strong economic growth in commodity export markets is sustained, the government continues to implement the reform program with RAMSI and its development partners, and there is no further civil unrest. Log production is expected to stabilize at about the 2005 record level, so growth will have to come from other commodities. Palm oil production will make a significant growth contribution in 2006 for the first time since 1999. Delays in re-establishing the Gold Ridge mining operation mean that it will not make a significant contribution to economic growth until 2008. Exports are projected to rise but will again be outpaced by import growth in response to strong domestic demand and implementation of externally-funded projects. Inflation is forecast to edge towards 10%.

6. The 2006 budget provides for a further substantial increase (20%) in recurrent expenditure (to SI$829.4 million) compared with 2005. Domestic revenue is forecast to rise 9.9% to SI$688.1 million, leaving the balance of expenditure to be financed by New Zealand budget support (SI$61.3 million for education) and accumulated cash reserves (SI$80.0 million). The public service wage bill absorbs 37% of expenditure, and debt repayments account for 14.6%. The budget also makes an unfunded provision for SI$40 million in contingencies which will place pressure on government finances. Other pressures arise from a post-budget increase in election funding (SI$5 million), possible public service pay increases (up to SI$35.0 million) and increased costs for tertiary education scholarships (SI$4 million). The Government also is planning a Supplementary Appropriation Bill in mid-2006.

2. Policy Developments and Issues

7. The Government has presented a wide-ranging Grand Coalition for Change Policy Framework Document,⁴ which identifies a number of policy themes⁵ that are expected to be translated by ministries into medium-term action plans. These will succeed the National Economic Recovery, Reform and Development Plan, 2003–2006. Key issues and objectives include ethical leadership; maintenance of law and order; good governance in a results-driven and well-resourced public sector; a conducive and secure environment for private-sector-led economic growth; a financial system that increases access to services for the majority of the population; an equitable justice system; pursuit of the Millennium Development Goals; and greater access to health and education services. A greater focus on rural development is a cross-cutting theme.

8. The policy framework strongly emphasizes rural development. Rural communities in Solomon Islands are poorly equipped with physical infrastructure (e.g., roads, ports and wharves), shipping services, telecommunications, and power and financial services. A careful evaluation of the best way of removing these barriers to provincial economic growth and improving poverty reduction is needed, drawing on good practice regionally and internationally and learning from past experience. An agricultural and rural development strategy and rural development program are being developed. Meanwhile, vastly improved maintenance is required to maintain connectivity for those areas that are at risk of losing access through infrastructure deterioration. The Government has also stated its intention to

• improve governance and the quality of public administration
• strengthen fiscal governance
• create a conducive environment for domestic and foreign businesses by implementing tax reform, investigating the mobilization of customary land for economic and productive uses, and increasing the reliability and price competitiveness of infrastructure services.

C. Implications for Country Strategy and Program

9. ADB’s country strategy for Solomon Islands remains highly relevant in terms of development needs, government priorities, ADB’s comparative advantage, and effective division of labor among development partners. Taking into account the public debt situation, and in line with prudent government policy and Honiara Club commitments, ADB will not provide new lending to Solomon Islands until the debt situation stabilizes. Progress will be assessed by debt indicators established by the IMF.⁶ In view of the country’s weak governance, policies and institutions, and ADB’s relatively limited resources in the absence of a lending program, ADB will continue its highly focused strategy and program, and seek to maximize impact in two priority areas:

• transportation infrastructure and services
• the enabling business environment

10. In line with principles of good international engagement in fragile states, adopted by the Organisation for Economic Co-operation and Development’s Development Assistance Committee Learning and Advisory Group and the Paris Declaration on Aid Effectiveness, in delivering its strategy and program ADB will seek to:

• focus on state building (governance, effective institutions, and business environment)
• align ADB’s core strengths with local priorities
• closely cooperate, coordinate and, to the extent possible, harmonize with other development partners
• further enhance its responsiveness within its focus areas
• remain engaged for the long term

11. Government and donors face the dilemma that, while institutions should ideally be developed with a long-term vision, the post-conflict situation requires that programs to stabilize and rehabilitate the economy (and the public service) must continue to be delivered urgently despite very limited capacities. ADB will, therefore, continue a two-track approach that aims at long-term capacity development while at the same time delivering rapid impact and reform outcomes in the focus areas. The long-term perspective is taken into account through longer-term engagement in the focus areas. Progress will be carefully monitored, and program adjustments may be undertaken as appropriate.

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