Made up of 992 islands and covering a sea area of more than 1.35 million square kilometres, Solomon Islands is the third largest archipelago in the South Pacific. It is located just east of Papua New Guinea, its islands mostly rugged mountains with some low coral atolls.
In total, the land area of Solomon Islands is 27,540 square kilometers. Over 90% of the population of about 500,000 is Melanesian, with Polynesians and Micronesians making up most of the remainder.
The United Kingdom established a protectorate over Solomon Islands in the 1890s. Due to its strategic location on sea routes between the South Pacific Ocean, the Solomon Sea, and the Coral Sea, some of the bitterest fighting of World War II occurred on these islands. Self-government was achieved in 1976 and independence two years later. Ethnic violence, government malfeasance, and endemic crime undermined stability and civil society in 2000.
In June 2003, the Government sought the assistance of Australia and international intervention in reestablishing law and order. The following month, the Australian-led Regional Assistance Mission to the Solomon Islands (RAMSI) arrived to disarm ethnic militias, restore peace and law and order, and assist in rehabilitating the economy and rebuilding government institutions.
Solomon Islands is rich in undeveloped mineral resources such as lead, zinc, nickel, bauxite, phosphates, and gold. Potentially rich fishery and forestry resources have been overexploited, and run risk of depletion. From 1985 to 2002, annual growth of the Solomon Islands ' economy averaged 1.7%. However, the population growth rate of 2.8% is among the highest in the world which, combined with slow economic growth, exacerbates poverty.
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Solomon Islands is one of the least developed among ADB‘s Pacific developing member countries (PDMCs), ranking at the lowest among all Pacific Islands in the United Nations Human Development Index (HDI). The country is unlikely to meet the majority of the Millennium Development Goals (MDGs) by 2015. It lacks adequate social infrastructure and services, especially in rural areas, and income-generating opportunities. Job opportunities are in short supply, with little formal employment outside Honiara. The situation is aggravated by rising unemployment, especially among the youth, high population growth, and the emergence of HIV/AIDS. While data on Solomon Islands is generally scarce, the social conditions are very likely to have deteriorated as a result of the tensions.
 Loading copra on interisland ships, Point Cruz, Honiara |
Economic growth continued at about 5% in 2004, driven by logging of the natural forest at an unsustainable rate and expansion in copra production, fishing and cocoa. Notable growth contributions also came from the construction and trade sectors, with the former stimulated by externally-funded infrastructure development and the latter stimulated by the Government's payment of domestic arrears and granting of public servant pay rises.
Production data for the first two months of 2005 suggest a slowdown in growth of agriculture, forestry and fishing (although this may be partly caused by seasonal factors particularly in fishing). The official budget forecast of 4.5% growth in 2005 may turn out to be optimistic, especially since logging has been declining compared to 2004 (and will substantially decline once the new forestry legislation is passed and effectively enforced). The recently initiated rehabilitation of palm oil production on Guadalcanal and the planned reopening of the Gold Ridge mine are encouraging developments. However, these projects cannot be expected to provide major boosts to GDP growth until late 2006 and 2007.
Inflation was reduced substantially in 2004 to 6.9%, and continued to trend downwards to 5% in March 2005 as price rises for both domestic and imported goods and services decelerated. Exchange rate stability contributed to this outcome, with the domestic currency depreciating by 0.4% against the US dollar and 4.1% against the Australian dollar in the 12 months to April 2005. The improved 2004 balance of payments position that resulted from merchandise export growth and inflows on services and income and transfer accounts associated with RAMSI and other donor assistance was reversed slightly in early 2005 largely because of a slowdown in export growth.
However, gross external reserves in February 2005, at US$78.7 million, were still more than double the level in January 2004, providing about 7 months of import cover. Growth in net foreign assets between April 2004 and April 2005 more than offset a decline in domestic credit, which resulted from a fall in net credit extended to government, with broad money supply rising 18% during this period. Credit to the private sector rose by 22%, most of the increase occurring in telecommunications, distribution, forestry and professional services. The interest rate spread remained high, at 13.9% in February 2005, despite substantial excess liquidity in the banking system, reflecting the risk premium attached to doing business in Solomon Islands and the lack of bankable projects.
 Government Office Building and staff quarters at Marau Government Station |
Total official public sector debt in February 2005 stood at about SI$1700 million (94% of GDP), with external and domestic debt equivalent to 66% and 28% of GDP, respectively. Additionally, other debt obligations in the form of contingent liabilities and guarantees, and informal debt obligations (unpaid superannuation contributions, debts to trade creditors and public enterprises, payments to the National Provident Fund), totaled SI$447 million, or 25% of GDP. Total debt was thus approximately 119% of GDP.
In 2004, progress was made in domestic debt restructuring and payment of some informal debt arrears, but achieving fiscal sustainability remains the major medium- to long-term macroeconomic policy challenge. A government financial restructuring initiative is under way involving negotiations over debt forgiveness, and debt restructuring. Given the unsustainability of the debt situation, the Government has decided not to borrow externally in the short to medium term.
While law and order has been restored, financial discipline reinstated, and major reforms initiated, it is crucial to address the underlying causes of tension and conflict, if the social fabric is to be sustainably healed—equitable distribution of resources, and access to opportunities and basic social services should shape the development agenda.
While the Government has pronounced a substantial number of economic reform activities, achievement of substantial policy-related reform progress is still to come to fruition, however. While the Government has successfully reinstated financial discipline, it now needs to achieve the transition from stabilization towards management of a sustainable development process.
Rural and provincial development needs more attention—with the majority of Solomon Islanders outside of towns, rural economic activity needs to be revitalized to create jobs and improve provision of basic services. Considerable and long-term capacity building and transfer of skills is needed in order for national and provincial governments to be able to fulfill their core functions effectively.