Resilience and Growth in the Small States of the Pacific
Chapter

Appendix 8. The Solomon Islands

Author(s):
Hoe Khor, Roger Kronenberg, and Patrizia Tumbarello
Published Date:
August 2016
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The Solomon Islands has the second largest land area among Pacific island countries after Papua New Guinea. Some 80 percent of the population of 615,000 lives in rural areas, and the population growth rate has been increasing at an annual rate of more than 3 percent in the past two decades, one of the fastest in the region. The capital, Honiara, has a population of about 69,000 and is the only urban center in the Solomon Islands.

The country gained independence in 1978 from the United Kingdom. It is a constitutional monarchy with Queen Elizabeth II as its head of state and a one-chamber parliament with 50 members elected for four years.

Sources of Growth and Economic Profile

Main sources of growth. Commodity production is a major component of economic activity, with agriculture, logging, and fishing collectively accounting for a third of GDP. Logging has been a major driver of growth for the last several years, although overexploitation of logging stocks is eroding the sector’s long-term prospects. Mining had emerged as a major sector with the opening in 2011 of Gold Ridge, the country’s only gold mine, which contributed more than half of economic growth in 2012. Gold Ridge’s closure following severe floods in April 2014, as well as lower gold prices, disrupted production. As of May 2016, the mine was still closed, but the further development of nickel and bauxite extraction may see the mining sector reemerge.

Production, employment, and trade. The production base is narrow. The manufacturing sector accounts for about 6 percent of GDP share and contributes little to exports. Labor market data are limited, although the International Labour Organization puts unemployment in the Solomon Islands at above 30 percent, with a major concentration among the youth. Merchandise exports include logs, fish, and, until recently, minerals, with logs accounting for around half of exports during 2006–14. The Solomon Islands is highly import-dependent and vulnerable to import price fluctuations. Imports of goods averaged about 45 percent of GDP during 2010–15. The main imported goods are manufactured goods, fuel, and food, with manufactured goods making up about 20 percent of GDP, and fuel and food imports about 9.5 percent of GDP each during 2010–15. The country’s main trading partners are China and Singapore.

External income. External income accounted for 3.7 percent of GDP in 2014, lower than for several other Pacific island countries. The main sources of external income are remittances, fishing license fees, and investment income.

Development aid. The Solomon Islands is the largest recipient of multilateral and bilateral aid among non–micro states. After a period of civil unrest, the Regional Assistance Mission to Solomon Islands, a partnership between the people and government of the Solomon Islands and 15 contributing countries of the Pacific region, arrived in the country in July 2003 at the request of the government. Since then, the mission has been helping lay the foundations for long-term stability, security, and prosperity. The mission is expected to be totally wound down in 2017. Development aid flows, in general, are expected to decline steadily to less than 11 percent of GDP in the medium term from the peak level of 30 percent of GDP in 2010. Australia and New Zealand are the largest bilateral aid providers, with assistance programs focusing on health and education. Support from the World Bank Group has focused on improving the delivery of basic public services and strengthening economic resilience by maximizing sustainable growth in mining, agriculture, and fisheries, and tackling constraints to inclusive growth. The Asian Development Bank has provided $90 million in grants and technical assistance since the Solomon Islands became a member in 1973. These have focused on structural reforms to support private-sector-led growth, particularly by improving the business environment. In 2015, the European Union approved a national grant allocation of EUR 40 million for the period to 2020, focusing on water, sanitation and hygiene (WASH), and rural development. In addition, the European Union currently provides sector budget support in rural WASH of about EUR 2.5 million a year, for the next four years. This support depends on four general eligibility criteria, among them progress in public financial management and sectoral performance indicators. In response to the 2014 flood, with damages and losses equivalent to 9 percent of GDP, the World Bank Group approved US$10 million and the Asian Development Bank US$13 million in additional financing for the Solomon Islands. IMF support in the form of two back-to-back Standby Credit Facility arrangements during 2010–12 and an Extended Credit Facility arrangement from 2012 to March 2016 have been enhancing fiscal and monetary institutions and macroeconomic stability.

Public finances. Government expenditure accounts for nearly half of GDP. After the fiscal position deteriorated during the economic downturn in 2009, the government embarked on reforms to strengthen the fiscal position, with the support of consecutive IMF programs. Using the cash balance (which captures core deposits readily available for fiscal financing) as a fiscal anchor has helped strengthen the fiscal position and enhanced the budget plan’s credibility. The government is currently implementing a multiyear budget framework, and the Public Financial Management Act, passed in October 2013, should strengthen public financial management. Public debt has fallen significantly since 2005 as a result of improved external debt management under the Honiara Club Agreement. In May 2012 the government introduced a new debt management strategy that allows the contracting of new concessional external debt within annual borrowing limits to ensure debt remains at a prudent level.

Financial sector. The Solomon Islands has two foreign commercial banks (ANZ and Bank South Pacific) and a domestically incorporated bank (Pan Oceanic Bank). Nonbank financial institutions, including credit unions, also operate in the Solomon Islands, along with a systemically important savings and retirement fund, the National Provident Fund, which holds the country’s largest pool of savings. The country is one of the most underbanked in the Pacific. The private sector’s access to credit is constrained by, among other things, customary land practices that limit the use of land as collateral. The Central Bank of Solomon Islands (CBSI) has been very proactive in promoting financial inclusion. In 2014, together with commercial banks, the CBSI introduced mobile banking services to deepen financial access in geographically dispersed and remote areas, making mobile banking well positioned to leapfrog conventional banking in providing financial services.

Investment, business climate, and competitiveness. The environment for private sector development has been weak, although structural reforms to improve the business environment have been undertaken, including in the context of the IMF’s Extended Credit Facility arrangement. The Solomon Islands was 112th out of 189 countries in the World Bank’s Doing Business 2016 report. Private investment has often been constrained by the high cost of financing, poor infrastructure, and cumbersome regulations and procedures.

Monetary policy and exchange rate. The Central Bank of Solomon Islands has the primary objective of achieving and maintaining domestic price stability. Its monetary policy tools include statutory reserve requirements, credit control measures, and open market operations in its own securities. The monetary transmission mechanism is weak as in other Pacific islands. In October 2012 the authorities moved from a de facto peg to the U.S. dollar to a basket peg using as weights the shares of the currencies of its main trading partners.

Growth Challenges, Vulnerabilities, and Spillovers

Main growth challenges. The Solomon Islands grapples with lack of scale and high transport costs from its remoteness from major export markets, dispersed population, and low level of urbanization. Growth has also been held back by poor infrastructure. Only 14 percent of households have access to electricity, while 75 percent of rural households have no access to piped water.

Main vulnerabilities. These include a narrow economic base, dependence on donor aid, and reliance on commodity exports. The country is vulnerable to natural disasters and climate change, particularly in the absence of climate-change-proof infrastructure.

Global and regional economic spillovers. China has been the largest trading partner since 2003, accounting for about 60 percent of the Solomon Islands’ total exports. The country is closely linked with neighboring regional economies, specifically Australia and to a lesser extent New Zealand, while the European Union remains a key export market for the fishing industry. Contagion from negative external shocks would occur through a contraction in foreign direct investment, a drop in official development assistance, declining demand for commodities from Asia, and deterioration in the country’s terms of trade.

Appendix Table 8.1The Solomon Islands: Selected Economic Indicators, 2010–15
Nominal GDP (2014): US$1.15 billionGDP per capita (2014): US$1,931
Main export products: Logs and fishPopulation (2015): 562,000
Remoteness (GDP-weighted distance): 8,702 km
Sources: Solomon Islands authorities; IMF, “Solomon Islands: 2016 Article IV Consultation and Fifth and Sixth Reviews Under the Extended Credit Facility Arrangement–Staff Report” (Country Report No. 16/90); and IMF staff estimates.Note: … = data not available; SWF = sovereign wealth fund.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports. Solomon Islands start in 2007.

United Nations Development Programme; data only available for 2000 and after 2005.

1991–20002001–092010–152015
AverageAverageAverage20102011201220132014Estimate
GDP, GDP growth, employment, and prices
Real GDP (percent change)2.83.35.56.912.94.73.02.03.3
Real GDP per capita (percent change)0.00.83.24.610.52.40.7−0.31.0
Unemployment (percent)
Consumer prices (percent change, average)10.59.44.10.97.45.95.45.2−0.4
Sources: Solomon Islands authorities; IMF, “Solomon Islands: 2016 Article IV Consultation and Fifth and Sixth Reviews Under the Extended Credit Facility Arrangement–Staff Report” (Country Report No. 16/90); and IMF staff estimates.Note: … = data not available; SWF = sovereign wealth fund.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports. Solomon Islands start in 2007.

United Nations Development Programme; data only available for 2000 and after 2005.

Shares in GDP (percent)
Largest sector (agriculture and hunting)22.419.617.718.718.918.117.317.315.8
Second largest sector (forestry and logging)16.88.810.111.39.49.39.110.311.2
Third largest sector (mining and quarrying)0.76.74.85.75.75.75.55.90.1
Contributions to GDP growth (percent (over real GDP)
Largest sector (agriculture and hunting)−2.50.50.41.81.6−0.4−0.30.3−0.4
Second largest sector (forestry and logging)−0.60.60.73.1−1.20.10.01.41.0
Third largest sector (mining and quarrying)−0.20.00.10.25.10.0−0.7−2.7−1.4
Share in GDP (percent)
Private consumption69.766.266.864.665.566.367.9
Private investment
Public consumption36.129.836.828.425.328.230.0
Public investment
Exports minus imports−18.1−14.3−28.3−10.0−7.8−10.7−14.5
Contributions to GDP growth (percent) (based on real GDP)
Private consumption3.33.35.62.62.42.73.0
Private investment
Public consumption4.60.23.7−6.3−2.63.72.4
Public investment
Exports minus imports−3.2−0.3−14.017.62.0−3.2−4.1
Public finances
Central government finance (percent of GDP)
Revenue and grants20.634.753.563.559.054.451.848.046.1
Total domestic revenue16.720.833.132.432.533.634.133.234.7
Grants3.913.920.431.126.620.817.814.811.5
Expenditure and net lending18.133.649.857.750.250.647.646.346.4
Current (excluding grants)18.320.627.728.625.127.727.828.128.7
Of which: wages and salaries8.88.29.910.89.29.29.29.911.2
Sources: Solomon Islands authorities; IMF, “Solomon Islands: 2016 Article IV Consultation and Fifth and Sixth Reviews Under the Extended Credit Facility Arrangement–Staff Report” (Country Report No. 16/90); and IMF staff estimates.Note: … = data not available; SWF = sovereign wealth fund.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports. Solomon Islands start in 2007.

United Nations Development Programme; data only available for 2000 and after 2005.

Development (capital)4.613.821.928.325.022.919.817.817.8
Unidentified−4.7−0.90.20.80.10.00.00.00.0
Current balance1−1.02.09.711.211.010.29.97.18.7
Overall balance2.51.24.05.98.83.84.21.7−0.3
Financing
Assets (SWF, trust fund)
Debt
Of which: external
Of which: concessional
Other (privatizations)
Public-debt-to-GDP ratio (percent)44.453.217.928.921.717.615.513.310.4
Balance of payments (percent of GDP, unless otherwise indicated)
Current account including official transfers−6.3−6.6−8.4−33.4−8.71.8−3.5−4.3−2.6
Current account excluding official transfers−8.7−15.1−21.9−58.5−27.2−9.5−13.4−13.0−9.6
Overall balance3.07.617.816.58.52.5−1.11.6
External debt service (percent of exports of goods and services)3.89.03.24.92.62.52.72.93.6
Foreign direct investment−0.14.88.024.413.12.14.51.82.0
External debt39.944.921.732.425.121.419.519.212.6
Main sources of external income4.23.63.13.23.63.13.74.6
Remittances3.02.01.81.72.11.81.72.7
Investment income0.70.60.50.60.80.60.60.4
Fishing rent rights0.51.00.80.90.70.71.41.5
Contributions to external income growth (percent)
External Income growth−0.914.1−8.432.129.5−9.721.020.3
Remittances−1.74.8−20.79.523.6−6.1−1.323.6
Investment income−0.62.00.711.310.0−5.80.1−4.4
Fishing rent rights1.47.411.611.3−4.12.322.11.1
Exchange rate (local currency to U.S. dollar period average)3.87.37.68.17.67.47.37.48.1
Real effective exchange rate (period average)2111.198.1115.9100.0103.1112.6121.1128.2130.1
(percent change)−0.6−0.23.4−7.13.19.27.65.81.5
Sources: Solomon Islands authorities; IMF, “Solomon Islands: 2016 Article IV Consultation and Fifth and Sixth Reviews Under the Extended Credit Facility Arrangement–Staff Report” (Country Report No. 16/90); and IMF staff estimates.Note: … = data not available; SWF = sovereign wealth fund.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports. Solomon Islands start in 2007.

United Nations Development Programme; data only available for 2000 and after 2005.

Money, credit, and financial sector
Broad money (percent change)23.014.913.525.517.312.45.615.0
Credit to private sector (percent of GDP)16.319.221.518.016.918.020.020.8
(percent change)29.37.4−4.74.74.115.116.416.7
Bank assets (percent of GDP)38.848.543.644.145.949.549.958.0
Short-term treasury bill interest rate4.61.53.72.51.40.40.20.5
Nonperforming loan ratio2.15.67.95.93.77.24.74.1
Foreign bank market share (percent)3
Business climate indicators
Business environment rankings4
Doing business (overall)7398908988100109112
Construction permits3639302830305858
Getting electricity1051131101081228790
Enforcing contracts105148138139142150160160
Getting credit14174646874887179
Human development index50.50.50.50.50.50.50.5
Memorandum:605.0745.0769.0807.0607777
Nominal GDP (local currency)1,6603,2857,5535,4166,7747,5408,1098,5308,948
Nominal GDP (US$ million)4144459996728871,0251,1111,1541,147
Sources: Solomon Islands authorities; IMF, “Solomon Islands: 2016 Article IV Consultation and Fifth and Sixth Reviews Under the Extended Credit Facility Arrangement–Staff Report” (Country Report No. 16/90); and IMF staff estimates.Note: … = data not available; SWF = sovereign wealth fund.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports. Solomon Islands start in 2007.

United Nations Development Programme; data only available for 2000 and after 2005.

Sources: Solomon Islands authorities; IMF, “Solomon Islands: 2016 Article IV Consultation and Fifth and Sixth Reviews Under the Extended Credit Facility Arrangement–Staff Report” (Country Report No. 16/90); and IMF staff estimates.Note: … = data not available; SWF = sovereign wealth fund.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports. Solomon Islands start in 2007.

United Nations Development Programme; data only available for 2000 and after 2005.

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