Solomon Islands

Country Report

Solomon Islands

June 2007

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Solomon Islands 1

Contents

Solomon Islands

2 Summary

3 Political structure

4 Economic structure 4 Annual indicators 5 Quarterly indicators

6 Outlook for 2007-08

7 The political scene

10 Economic policy

10 The domestic economy

11 Foreign trade and payments

The region

12 Summary

13 Outlook for 2007-08

16 The political scene

17 Economic policy and the domestic economy

List of figures

5 Solomon Islands: foreign trade 5 Solomon Islands: foreign reserves 7 Solomon Islands: gross domestic product 7 Solomon Islands: consumer price inflation

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Solomon Islands June 2007 Summary

Outlook for 2007-08 Reconstruction efforts after the tsunami of April 2nd 2007 will lead to a net improvement in western provincial services and infrastructure over the longer term. The governments of Australia and the Solomon Islands continue to fight for control of the resources of the Regional Assistance Mission to Solomon Islands (RAMSI), but a Pacific Islands Forum review due in July should set some useful boundaries and canvass an exit strategy. Despite healthy growth, the economy rests on unsustainable receipts from logging and international aid. Gold mining and palm oil production are the most likely candidates for diversification in the medium term.

The political scene The tsunami of April 2nd killed 52 people and displaced thousands in the country’s western provinces, generating a supply of emergency aid from international donors alongside reconstruction and regeneration programmes. The relationship between RAMSI and the Solomon Islands government remains tense as the prime minister, Manasseh Sogavare, tries to limit the mission’s freedom of movement and set a clear timetable for its withdrawal from the Solomon Islands.

Economic policy A former governor of the Central Bank of the Solomon Islands has stated that the standard of economic reporting is not good enough to hold the government to account and ensure that sensible economic policies are followed. Growing tax receipts and a balanced budget are encouraging signs of credible financial management. Tax revenue in 2007 is outstripping budget estimates, and will probably be double the level of receipts in 2006, at SI$845m (US$110m).

The domestic economy GDP growth is forecast by the IMF at 6.4% in 2007, up slightly from 6.1% in 2006. Although healthy in global terms, it is the least that should be expected from an economy that is 20% smaller than it was ten years ago (before the collapse of the country’s major industries) and which relies on international aid for two-thirds of its income.

Foreign trade and payments The Solomon Islands has been deepening relations with a number of countries, such as Iceland and Cuba, that are outside the circle of its usual trade and development partners. Taiwan has agreed in principle to accept hundreds of guest workers each year, potentially constituting a valuable source of remittance income.

Editors: Hilary Ewing (editor); Duncan Innes-Ker (consulting editor) Editorial closing date: June 1st 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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Political structure

Official name Solomon Islands

Form of state Constitutional monarchy

The executive UK-style cabinet, led by the prime minister, who is chosen from and by parliament

Head of state Queen Elizabeth II, represented by a Solomon Islander governor-general, currently Sir Nathaniel Waena

National legislature Unicameral, 50-member national parliament, elected for a four-year term

Local government The islands are divided into eight provinces and one town council (Honiara)

Legal system English-style system; a series of lower courts leads to the Court of Appeal

National elections Elections were held on April 5th 2006. The next elections are due in 2010

National government In May 2006 an alliance of parties under the banner of the Grand Coalition for Change formed a government under Manasseh Sogavare, the leader of the Social Credit Party. In practice parties do not represent enduring policy positions, and have fluid membership reflecting constantly shifting political alliances

Main political parties The People’s Alliance Party (PAP); the Association of Independent Members (AIM); Socred; the Christian Alliance Solomon Islands (CASI); Lafari Party; National Party; Solomon First Party; Democratic Party; Labour Party; Liberal Party; United Party

Prime minister & minister for public service Manasseh Sogavare Deputy prime minister, minister for agriculture & livestock Toswell Kaua

Key ministers Commerce, industries & employment Peter Shanel Communications, aviation & meteorology Patrick Vahoe Culture & tourism Bentley Rogosamani Education & human resources Derek Sikua Energy & mines Mark Kemakeza Finance & Treasury Gordon Darcy Lilo Fisheries & marine resources Nollen Leni Foreign affairs, external affairs & immigration Patteson Oti Forests, environment & conservation Mark Kemakeza Health & medical services Clay Forau Soalaoi Home affairs Bernard Ghiro Infrastructure & development Stanly Festus Sofu Justice & legal affairs Samuel Manetoali Lands & survey Leslie Boseto National reconciliation & peace Sam Iduri Planning & aid co-ordination Steve Abana Police & national security Isaac Inoke Provincial government & constituency development Japhet Waipora Public service Joses Wawari Sanga

Central Bank governor Rick Hou

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Economic structure

Annual indicators 2002a 2003a 2004a 2005a 2006b GDP at current prices (SI$ m)c 1,537.3 1,737.5 1,995.7 2,244.8 n/a Real GDP growth (av; %)c -1.6 6.4 8.0 5.0 5.3 Consumer price inflation (av; %)d 7.1 10.3 9.1 7.0 7.6 Population ('000)e 440.5 451.5 460.1 470.7 n/a Exports fob (US$ m)c 58 74 97 103 n/a Imports cif (US$ m)c 65 67 72 144 n/a Current-account balance (US$ m)c -16.3 2.9 32.3 -32.3 -51.9 Reserves excl gold (US$ m)c 17.5 36.0 79.0 94.6 98.2 Total external debt (US$ m)c 152 161 161 162 164 Debt-service ratio, paid (%)c 10.3 9.3 5.9 7.2 5.2 Exchange rate (av; SI$:US$)f 6.749 7.506 7.485 7.530a 7.600 a Actual. b Economist Intelligence Unit estimates. c IMF, Country Report. d National Statistics Office.e Asian Development Bank. f IMF, International Financial Statistics.

Origins of gross domestic product 2004a % of total Electricity, gas & water 17.5 Forestry, logging, sawmilling 15.7 Finance 14.9 Retail & wholesale trade 9.7 Transport & communications 9.1 Manufacturing 8.9 Other services 7.6

Principal exports fob 2005b SI$ m Principal imports cif 2005b SI$ m Timber 517.0 Machinery & transport equipment 386.0 Fish & fish products 67.1 Mineral fuels 324.6 Cocoa 56.8 Food & live animals 291.0 Copra 16.6 Basic manufactures 169.9

Main destinations of exports fob 2005b % of total Main origins of imports cif 2005b % of total China 41.5 Australia 25.2 South Korea 13.2 Singapore 24.8 EU 8.7 New Zealand 6.0 Thailand 6.9 Fiji 4.1 Philippines 4.5 Japan 3.7 Singapore 1.5 China 3.7 a Central Bank of the Solomon Islands. b IMF, Country Report.

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Quarterly indicators 2004 2005 2006 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Prices Consumer prices (2000=100) 140.3 142.0 145.5 152.9 152.1 154.3 159.8 n/a Consumer prices (% change, year on year) 7.2 4.9 5.6 9.8 8.4 8.7 9.8 n/a Financial indicators Exchange rate SI$:US$ (av) 7.499 7.503 7.514 7.529 7.574 7.594 7.602 7.608 Exchange rate SI$:US$ (end-period) 7.508 7.51 7.513 7.559 7.576 7.593 7.599 7.616 Deposit rate (av; %) 0.75 0.92 1.00 1.00 1.00 1.00 1.00 1.00 Lending rate (av; %) 16.08 16.08 16.08 16.08 16.08 16.08 16.08 16.08 Treasury bill rate (av; %) 6.00 6.00 5.03 3.57 3.52 3.38 3.62 3.48 M1 (end-period; SI$ m) 374.35 401.86 433.09 486.92 540.67 555.78 555.34 590.50 M1 (% change, year on year) 12.9 24.9 21.3 22.4 44.4 38.4 28.2 21.3 M2 (end-period; SI$ m) 624.63 653.09 697.69 782.14 866.69 877.53 911.60 971.52 M2 (% change, year on year) 17.5 26.1 24.5 21.6 38.8 34.4 30.7 24.2 Foreign trade (SI$ m) Exports foba 164.79 166.37 188.77 207.87 225.79 229.49 n/a n/a Imports fob -248.52 -257.44 -384.76 -360.46 -391.36 -369.27 n/a n/a Trade balance -83.73 -91.07 -195.99 -152.59 -165.57 -139.78 n/a n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 80.6 79.0 86.3 93.5 95.4 94.7 96.4 102.5 a Includes re-exports. Sources: IMF, International Financial Statistics.

Solomon Islands: foreign trade Solomon Islands: foreign reserves (SI$ m) (US$ m; end-period)

110 Exports (a) Imports Trade balance 300 100

200 90

80 100 70 0 60 -100 50

-200 40

-300 30

20 -400 10 -500 Q4 Q1 Q2 Q3 Q4 Q1 0 2004 05 06 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2004 05 06 (a) Includes re-exports. Source: IMF, International Financial Statistics. Source: IMF, International Financial Statistics.

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Outlook for 2007-08

A tsunami leaves thousands of The tsunami of April 2nd 2007 that devastated the coasts of Western and

people displaced Choiseul Provinces and killed 52 people has prompted a massive influx of emergency and development aid. Nonetheless, many thousands of residents remain displaced, sheltering in the hills from the possibility of another tsunami. As a result, the effort to import the basic necessities of life continues apace as more permanent reconstruction and development plans are made. But over the medium term the extra attention and international funding prompted by the tsunami should result in a net improvement in infrastructure and services in the remote provinces, complementing the government’s policy of concentrating on regional development. The tsunami led to a temporary rapprochement with the Regional Assistance Mission to Solomon Islands (RAMSI), a partnership between the citizens and government of the Solomon Islands and 15 regional countries, as its special co-ordinator, Tim George, toured the provinces with the prime minister, Manasseh Sogavare. But the tug-of-war between Australia and the Solomon Islands over control of RAMSI’s resources remains vigorous, and is unlikely to slacken in the next 18 months. The review of RAMSI being conducted by the Pacific Islands Forum (the main regional political organisation) should help to set some boundaries for behaviour on both sides. The review team has a mandate to address the question of RAMSI’s tenure in the Solomon Islands, but is more likely to outline an exit strategy than to set a definite date for withdrawal. Meanwhile, most Solomon Islanders believe that RAMSI is still necessary for their security four years after stability was restored in mid-2003.

The prime minister tries to Mr Sogavare continues to shore up his position by wresting as much power as

wrest power from institutions he can from the independent institutions of government, particularly the Public Service Commission. He has proven both wily and determined in this aim, and although there is much public disquiet at his appointment of the notorious Julian Moti to the post of attorney-general, this is unlikely to stay his hand. Attempts by the opposition to restrict his actions have also failed, and the positive effects of economic growth (for which his government can claim little responsibility) have underpinned his strength. There is a real risk that Mr Sogavare will seriously undermine the already shaky institutions of government, undoing much of the progress made since RAMSI was deployed.

The economy is sustained by The Solomon Islands economy is not only weak, but also rests on two pillars

donor aid that are unsustainable in the medium and long term. The first is the logging industry, which experts claim cannot survive more than six years at current rates of production. The second is the enormous percentage of national income sourced from international donors. Although aid is unlikely to dry up soon, the country must find ways to diversify export earnings if it is to become self- sustaining. Gold mining and palm oil production are the two most likely candidates, but neither is proceeding at anything like the pace necessary to take the place of logging.

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Solomon Islands: gross domestic Solomon Islands: consumer price product inflation (% change, year on year) (av; %)

Solomon Islands Asia excl Japan Solomon Islands Asia excl Japan 8.0 12.0

10.0 6.0 8.0 4.0 6.0 2.0 4.0

0.0 2.0

-2.0 0.0 03 04 05 06 03 04 05 06 2002 2002

The political scene

The tsunami leaves 52 dead An earthquake of magnitude 8.1 on the Richter scale, centred between the

and many homeless Solomon Islands and Papua New Guinea, created a tsunami that struck the coasts of Western and Choiseul provinces in the north-west of the Solomon Islands shortly after dawn on April 2nd. Had the two huge waves arrived in darkness the death toll would probably have been much higher than 52. Entire villages were swept away, displacing around 5,000 coastal residents of the islands of Gizo, Simbo and Ranongga in Western province alone. International emergency assistance was swift and comprehensive, with donations in cash or in kind from every engaged development partner country and institution. Still, the lack of existing organisational and physical infrastructure made the relief effort slow and haphazard, with accusations of corruption in the distribution of aid by provincial governments and the National Disaster Council. Two months after the tsunami, its effects are still keenly felt by the people of Western and Choiseul provinces. For many the fear of another tsunami is a greater barrier to a return to normal life than the lack of housing and other infrastructure. Some are choosing to stay in the hills to which they fled immediately after the tsunami, so that their former means of living, such as fisheries and coastal gardens, remain unavailable. To sustain this self-imposed exile, basic provisions must be flown or boated in, and the risk of malaria and other diseases remains high. Although the devastation is great and the period of rehabilitation will be long and arduous, the post-tsunami period constitutes an opportunity for development that did not exist before.

Clashes between RAMSI and Relations between the Regional Assistance Mission to Solomon Islands (RAMSI)

the government continue and the government of the Solomon Islands remain tense, despite a temporary rapprochement in the aftermath of the tsunami. The prime minister, Manasseh Sogavare, is determined to increase his authority over RAMSI. In early March he banned all direct contact between RAMSI personnel and Solomon Islands citizens to prevent RAMSI from undertaking consultations with provincial authorities. He has also made a former politician, Michael Maina, special envoy to RAMSI to act as his eyes and ears and make sure that RAMSI respects the

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guidelines that he has given it. His constant refrain has been that although RAMSI is necessary and appreciated, it must respect the sovereignty of the elected government, and must be actively working towards a handover of administrative duties to local staff and agencies, with a view to leaving the country in the not too distant future. Mr Sogavare clearly hopes that an official review of RAMSI being conducted in May and June by the Pacific Islands Forum (the main regional political organisation, and the body under which RAMSI is constituted) will support his aims. According to its terms of reference, the review taskforce should “appreciate the ultimate necessity for the eventual exit of RAMSI and determine a timetable and withdrawal strategy”. So far only the Media Association of Solomon Islands has been bold enough to suggest a year (2013) in which RAMSI should be wound up, probably for two reasons. First, RAMSI still provides much of the backbone of government in the Solomon Islands, and the politicians know it. Their interest is in gaining greater control of RAMSI’s resources, not in seeing it depart. Second, there is also strong evidence, both anecdotal and in the form of responses to public surveys, that the citizens of the Solomon Islands do not want RAMSI to leave. The review will consult stakeholders in government, civil society, business, donor countries and RAMSI itself, and is being conducted by two regional statesmen, a former Fijian foreign minister, Kaliopate Tavola, and a former New Zealand diplomat, Neil Walters. They will be sympathetic to the government’s sensitivities, but also to the risk of destroying RAMSI’s effectiveness by restricting its freedom of action too much.

An enquiry into last year's The battle for control of RAMSI is only one front in the government’s war on

riots causes controversy alternative nodes of power. Another, with the Australian High Commission, is the commission of enquiry into the post-election riots that razed Chinatown in the capital, Honiara, in April 2006. The riots led to the disintegration of the newly elected government under Snyder Rini, and to its replacement by the Grand Coalition for Change government under Mr Sogavare. The Australian high commissioner, Patrick Cole, believed that the enquiry was intended to exonerate two Sogavare government politicians!Nelson Ne’e and Charles Dausabea!who were widely suspected of instigating the riots, and to blame instead poor policing by Australian members of RAMSI. Mr Cole argued publicly against the enquiry’s terms of reference, and was duly expelled from the country for “interfering in sovereign affairs”. His intervention, along with difficulties in staffing the commission, delayed the enquiry for almost a year, but it was finally launched in May, and will probably serve the government’s aims.

Australia is unhappy with the The Australian and Solomon Islands governments have also locked horns over

new attorney-general the appointment of Julian Moti to the post of attorney-general. Some outside the government have criticised Mr Moti"s character and questioned his respect for the law. In addition to designing the post-election riots enquiry, he has been accused of interfering in public institutions such as the Central Bank of Solomon Islands and the National Provident Fund. Australia cited outstanding child-sex charges against Mr Moti, an Australian citizen, in lodging a formal

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extradition request with the Solomon Islands government at the time of his appointment in October 2006. The Solomon Islands Public Service Commission duly suspended him, but the prime minister has steadfastly refused to allow Mr Moti’s extradition, and announced recently that his suspension would be lifted. Civil society groups, including the Council of Trade Unions, the Development Services Exchange, the National Council of Women, the Christian Association and Transparency Solomon Islands, have described his appointment as “a dangerous and backward step”.

The independence displayed by the Public Service Commission in the Moti affair has not endeared it to the prime minister, who has announced his intention to review its powers. The secretary to prime minister and cabinet, John Rougham, said that the commission showed “an inability to think as the government is thinking” after it objected to being excluded from having input into the appointment of a Fijian, Jahir Khan, to the post of commissioner of police. The commission’s chair, Edward Andresen, said that the correct recruitment procedures were not followed, and expressed concern that the government wanted to make the position of commissioner of police directly answerable to the prime minister.

Public opinion polls show The People’s Survey is a nationally representative survey of public opinion on mixed results the state of the nation, planned for each year under RAMSI’s auspices and first piloted in May 2006. Broadly, the pilot survey found that law and order, and also health and education services, had improved in the preceding year and that the government was primarily responsible for their delivery. Still, there was a widespread recognition of the role played by international donor countries and organisations in the improvement of services. RAMSI was extremely well known and was considered vital to basic security, and there was a high level of support for intervention by RAMSI police in situations of domestic or localised violence. A commonly held sentiment was that people wanted RAMSI to stay on and monitor what was going on in the Solomon Islands" communities. The sense is that while things have improved over the four years since RAMSI’s arrival, they have done so from a state of anarchy unprecedented in the Solomon Islands’ short history. Opinions were not universally positive. Arguments over land use continued to disrupt communities; police services were seen as unsatisfactory; serious crime rates remained high; and there was confusion over whether modern or customary law should bear on disputes between neighbours. Democratic participation was high, but so were perceptions of widespread corruption in politics and society. But some recognised the clash between Western concepts of corruption and Melanesian culture, in which gifts are traditionally given in return for favours. The pilot survey covered four main islands and 1,040 respondents, supplemented by focus-group sessions in each location. Interviews were conducted during the period of unrest following the April 2006 election and the Honiara riots.

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Economic policy

Economic reporting standards Tony Hughes, a former governor of the Central Bank of Solomon Islands, told a

are below par meeting of journalists recently that the standard of economic reporting in the Solomon Islands is not good enough to hold the government to account and ensure that sensible economic policies are followed. Addressing the same meeting, the deputy governor of the central bank, Denton Rawara, highlighted the risk posed by the effect of the presence of the Regional Assistance Mission to Solomon Islands (RAMSI), using the putative rental market bubble in the capital, Honiara, as an illustration. The "RAMSI effect" refers to the artificial inflation of local prices owing to spending by high-earning RAMSI personnel and other linked phenomena. Nevertheless, both RAMSI and other expatriate personnel are likely to remain in the Solomon Islands for the medium term, so this effect will probably not be a short-term disruption. Tax revenue is outstripping budget estimates in 2007, and is likely to be double receipts in 2006, at SI$845m (US$110m). The government says that these improvements are owing to its prudent fiscal management, its tax compliance and exemptions policies, and its “bottom-up approach” to regional and rural development.

The domestic economy

GDP growth and foreign Taken in isolation, the latest economic statistics are positive, and the govern-

investment are increasing ment has duly claimed responsibility for them. Real GDP growth stood at 6.1% in 2006, according to the IMF, and is expected to reach 6.4% in 2007. The Solomon Islands" principle export earner, the logging industry, has been tipped by the government to expand by 12.5% in 2007. Foreign investment in the palm oil and gold-mining industries, which were badly affected by the disorder preceding the arrival of the Regional Assistance Mission to Solomon Islands (RAMSI) in 2003, is rising quickly enough to offset concerns that growing imports will threaten foreign reserves.

The economy is still 20% In context, however, the latest economic data loses some of its shine. GDP

smaller than ten years ago growth may be healthy by global standards, but 6% growth is the least that should be expected for an economy that is 20% smaller than it was ten years ago and which relies on international aid for two-thirds of its income. The government has proudly announced the expansion in logging, but has ignored a report by the IMF, which shows that the current production rate of 1m cu metres per year is about four times the sustainable rate and that at current rates reserves will last no more than six years. The report says that, at the very least, the government should bring forward a rise in the determined price of logs, which is used to levy export duties and might extract more value for the country before the resource becomes extinct. Meanwhile, official data (backed by anecdotal reports) show that inflation is high and remains volatile.

Foreign trade and payments

Relations with Taiwan, Japan A number of expedient relationships have been strengthened in recent months

and Iceland strengthen with countries less interested in governance than the Solomon Islands’ anglophone development partners. The prime minister, Manasseh Sogavare, travelled to Taiwan in May for a week. The Solomon Islands has recognised Taiwan diplomatically since 1983, and has been richly rewarded for it in terms of financial support. Mr Sogavare received a medal from the Taiwane president, Chen Shui-bian, and Solomon Islands voted in favour of Taiwan’s latest bid for membership of the World Health Organisation in May 2007. The two countries signed a memorandum of understanding paving the way for hundreds of Solomon Islanders to work in the manufacturing and construction industries in Taiwan, which could become a valuable source of remittance income. The Solomon Islands opened formal diplomatic relations with Iceland in April, with talks on fisheries and energy co-operation. Both countries deny that the Solomon Islands’ support for commercial whaling has any bearing on Iceland’s willingness to co-operate on fisheries and geothermal energy projects. The same cannot be said for the bilateral relationship with Japan, which has benefited in the past from the Solomon Islands" support for commercial whaling and has generously funded its delegates to the International Whaling Commission in return, as well as providing generous development assistance. Even Cuba has come in for high praise from the governor-general, Sir Nathaniel Waena, after diplomatic links were established in early April, with bilateral agreement that the US had displayed poor character in placing trade embargoes on both countries.

Post-tsunami aid has been The international response to the tsunami of April 2nd has been substantial,

extensive and should eventually result in the development of infrastructure to above pre- tsunami levels in Western and Choiseul provinces. South Korea, Japan, Taiwan, the US, France, Australia, New Zealand and the EU have contributed millions of dollars in cash and much more in emergency relief, medical supplies, and contributions of transport and other logistical services. Australia alone pledged A$3m (US$2.3m) in emergency and reconstruction assistance and an additional A$500,000 (US$379,000) in support of humanitarian organisations including Caritas, Oxfam, the Red Cross and World Vision. The Asian Development Bank has helped the government to put together an Emergency Assistance Project, which will rehabilitate damaged infrastructure including roads, bridges, wharves, and water and sewerage systems.

The region June 2007 Summary

Outlook for 2007-08 Many of the Pacific Islands" political systems will remain highly unstable, and the major underlying problems are likely to remain unresolved over the forecast period. Australia and New Zealand, in conjunction with other aid donors, will continue to push for political reform, but China"s less conditional aid will complicate matters. Fiji will remain under pressure to hold elections by 2009, but progress will not be smooth. Tonga"s government will keep on hold plans for democratic change discussed before the riots in November 2006, and land ownership will continue to be a contentious issue in Samoa. The government of the Solomon Islands will continue to clash with the Regional Assistance Mission to the Solomon Islands (RAMSI) in 2007-08. External imbalances and excessive budget deficits, compounded by political instability, will continue to plague the region"s economies over the forecast period. Growth in tourism receipts, one of the region"s main export earners, will be dependent on political stability, but should help underpin economic expansion.

The political scene Fiji"s government is responding to criticism harshly by bullying detractors and allegedly detaining and beating its critics. Tonga is still reeling from the November riots, and the state of emergency has not yet been lifted; about 1.100 people face riot-related charges, but there are insufficient lawyers to represent them in court. Clashes between two groups led to a state of emergency on Vanuatu in March, and land ownership disputes are fuelling political discontent. The French authorities have restricted voter rights in New Caledonia in an effort to appease the indigenous population and make redress for past wrongs. Samoan opposition politicians have suggested that a new party should be formed, but this idea will take time to materialise. A review of the role of RAMSI is under way in Solomon Islands, and this may provide an opportunity to improve relations between the mission and the government.

Economic policy and the The recent political crises may put additional strains on public finances in domestic economy many countries. Fiji has cut civil service wages and centralised some government departments in an effort to improve fiscal prudence, but its sugar industry is in crisis, and tourist numbers have declined since the coup there. Samoa"s tourism sector is booming, which is boosting the profitability of Polynesian Blue, the joint-venture airline set up by the government and an Australian carrier, Virgin Blue. Remittance flows from the US to Tonga fell sharply after the coup, and donors are putting more conditions on aid. Balance- of-payments management remains difficult for most countries in the region. Editors: Hilary Ewing (editor); Gerard Walsh (consulting editor) Editorial closing date: February 16th 2007 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Outlook for 2007-08

Political stability and progress Political stability will remain elusive across the region, with many ethnic and

on reforms remain elusive other problems unresolved. Several governments will struggle to make headway on political or economic policy reform, and further outbreaks of unrest are likely. Australia and New Zealand, together with other major aid donors, such as the EU, will continue to urge reform, but worries about political unrest will prevent them from pushing too hard for change. Fiji"s government has come under increasing pressure, particularly from the EU, to move towards elections by 2009. However, progress will not be smooth. Fiji will probably be pressurised into holding the elections, especially if the EU sticks to its threat to hold back aid if it does not, but ethnic and other stresses are likely to resurface in the run-up to the vote. One particular problem could be the Grand Council of Chiefs, recently suspended by the government. The government is also claiming, not wholly credibly, that it will take at least three years to hold elections, as a census needs to be held and electoral boundaries redrawn. New Caledonia is facing up to the problem of the indigenous population’s grievances, and the French authorities have approved a constitutional amendment that disenfranchises recent immigrants (largely from France). The decision, taken ostensibly to make amends for iniquities against the indigenous Kanak population, in fact reflects a move by France to protect its substantial economic interests in the country. However, even in this heavily managed political environment, stability cannot be guaranteed. The ruling Avenir Ensemble party has recently shown signs of internal division, and its stabilising role in domestic politics cannot be taken for granted. Political reform will be difficult to manage elsewhere in the region. In Tonga the slow pace of reform precipitated rioting in November 2006, but the speed of political change does not seem to have accelerated since. The arrest of a number of opposition politicians in early 2007 suggests that the government is unwilling to countenance protests. The repeated extensions of the state of emergency, established after last year’s riots, also suggest that the government still feels insecure. Plans for democratic change discussed before the rioting seem unlikely to be taken forward during the forecast period. The Samoan government will also remain resistant to change, although some window-dressing may be put in place to preserve the illusion of a functioning democracy, possibly including the formation of a new opposition party. But the ruling Human Rights Protection Party will remain in control. Vanuatu’s government has a less firm grip on power, and possibly faces more complex problems. As the street violence in March 2007 demonstrated, it may take little to upset matters in this hitherto relatively calm country. The unrest, involving hostility between people from two different islands, was ostensibly linked to allegations of sorcery; however, there are some more profound underlying problems, notably that of land ownership. The political outlook for the Solomon Islands will hinge on the government’s relationship with the Australian-led Regional Assistance Mission to the

Solomon Islands (RAMSI). There was a temporary rapprochement between the two sides after the April 2nd tsunami, which killed 52 people and devastated the coasts of the Western and Choiseul provinces, but the prime minister, Manasseh Sogavare, is likely to pick further fights with RAMSI in the coming two years. It is likely that Mr Sogavare will also continue to try to reduce the power of independent government institutions, notably the Public Services Commission. This will cause considerable disquiet, both at home and abroad. One hope is that the review of RAMSI being carried out by the Pacific Islands Forum (the region"s main political body) will suggest some boundaries that are acceptable to all sides.

China is making inroads All this uncertainty creates a regional opening for China, which has been

through aid committing large amounts of money to a number of countries!it recently pledged US$50m to aid post-riot reconstruction in Tonga. China will continue with such largesse throughout the forecast period, viewing it as a cheap way to gain regional influence. In the longer term China may want to establish military bases in the region; in the immediate future its aims will be to discomfit Taiwan (which has diplomatic recognition from several Pacific Island countries), to secure access to valuable commodities and to protect the minority Chinese communities in the region. Australia and New Zealand will find it difficult to respond to this increased Chinese involvement, but it is unlikely that either will make available more on aid for projects, as this could undermine the principles of accountability and good governance that they have long espoused. Access by Pacific Islanders to Australia and New Zealand for temporary work or other purposes will remain a tricky issue. Attempts to restrict access will cause upset, and could play into China’s hands.

Economic problems are likely The economic outlook for most countries in the region is poor over the next two years, as problems caused by external imbalances and excessive budget deficits are compounded by political problems, which could also undermine the one bright spot, tourism. Against this background of economic uncertainty, progress on economic policy reform will come only in fits and starts, although some advances will be made. Efforts to cut government spending in Fiji are taking place against a background of significant problems with the country’s main export industries and a tight monetary policy stance. The Fijian economy looks set to contract this year, owing to problems with the tourism, sugar and clothing sectors. The Asian Development Bank (ADB) is currently forecasting a fall in real GDP of 2.3%. The ADB forecast assumes that tourist numbers will fall by 5.7% this year, but the decline in the first few months of 2007 was much stronger, so that the outturn could be worse than expected. The ADB also forecasts that Fiji’s current-account deficit will reach the equivalent of 12.7% of GDP in 2007, down from over 20% in 2006, but this forecast will depend crucially on what the EU decides with regard to continuing its aid programme. Tighter fiscal and monetary policy will pull down import growth, but the external payments situation will remain rocky. Similar problems will afflict many other countries in the region. In Tonga the government’s fiscal position is under pressure from several sources, notably the

cost of reconstructing the capital, Nuku"alofa, after the November 2006 riots and the payments associated with civil service redundancies made in July 2006. Rebuilding foreign investor confidence is an obvious policy priority, and specific government initiatives, rather than merely broad-brush commitments, are needed. The situation will not be helped by a sluggish start to the reconstruction process and the likelihood that there will be little or no economic growth this year. Even if reconstruction gets properly under way, growth is unlikely to be remarkable next year, owing to continuing problems in the agricultural and fisheries sectors. Consumer price inflation looks set to remain a problem in Tonga this year and next, with public-sector wage rises and post-November 2006 supply shortages likely to push it into double digits in fiscal year 2006/07 (July-June). The situation is slightly better in Samoa, and real GDP growth may exceed 4% in 2007, thanks to the fillip that the economy will receive as Samoa hosts the South Pacific Games in August-September of this year. However, inflation is also likely to be higher this year, owing to a rise in the rate of value-added tax (VAT) in October 2006, and the completion of games-related projects could lead to a slowdown in GDP growth in 2008. As in other Pacific Island countries, Samoa’s external payments position will remain precarious and highly dependent on tourist numbers, which are vulnerable to political instability. Maintaining stability is of particular concern for Vanuatu, as the tourism industry has benefited in recent years from the country’s relative political calm. The ADB estimates that Vanuatu’s real GDP growth exceeded 5% in 2006, and believes that GDP growth could remain strong over the next few years owing to increased tourist numbers, continued agricultural expansion and financing from the US’s Millennium Challenge Corporation. But the bank also notes Vanuatu"s high current-account deficit and the vulnerability of the external accounts to both external and domestic risks, including the country’s ability to impose anti- money-laundering laws. Despite the continuing political problems in the Solomon Islands, the country’s real economic growth could be above the regional average in 2007-08. The government estimates 6.1% growth for 2006, and is forecasting 6.4% growth in 2007. However, one problem is that the pegging of the currency to the US dollar has led to a substantial depreciation against the currencies of major trading partners (such as Australia), and this has encouraged a pick-up in inflation, which is now close to double-digit levels. The ADB believes that consumer price inflation will fall to 8% in 2007 and 7.5% in 2008. It is also worth noting that recent growth in the Solomon Islands has been driven by two factors: rapid growth in the logging industry, which has been heavily dependent on unsustainable illegal activity in recent years, and substantial aid from overseas donors. Although aid inflows are likely to continue for many years, it will be necessary to develop more diversified industries if the country’s economic future is to be assured. The palm oil and gold industries both look promising, but development so far has been slow. New Caledonia’s economy could yet prove to be the region"s star. However, for the next year or so progress on crucial mining projects is likely to be slow, with the Rheebu Nuu pressure group taking a high-profile stance opposing mine

development. In the short term this may hold down GDP growth, but in the longer term such pressure could be beneficial if it forces the local government to impose stricter environmental standards on the projects and to conduct a more open political debate that might strengthen popular support for mining development.

The political scene

States of emergency have In Fiji the government continues to clamp down on the opposition following

become commonplace the December 2006 coup. The state of emergency continues to be renewed every month, and the government has responded to public criticism of its actions by bullying detractors, with some alleged beatings and detentions. The government also went as far as to suspend the Great Council of Chiefs, a central pillar of the country’s democratic system, on April 12th. Although the importance of the council has waned in recent years, it provides an important link to the country’s pre-democratic origins. The council had refused to endorse the nomination of Ratu Epeli Nailatikau as vice-president by the president, Ratu Josefa Illoilo. This irritated the prime minister (who is in effect the leader of the country), Frank Bainimarama, but he may come to regret his actions if the council’s suspension becomes a focus for dissent. Many of the chiefs are already pursuing individual legal actions against the government. Tonga also has to deal with the aftermath of the November 2006 riots. The state of emergency imposed after the riots has been repeatedly extended, with the government claiming that public order remains problematic. Certainly a tough line continues to be taken towards opposition figures, with the leader of the country’s pro-democracy movement, ’Akilisi Pohiva, having been charged with sedition, along with four other members of parliament (MPs), owing to their role in the riots. In all about 1,100 people face riot-related charges, and there are not enough lawyers to represent them all in court. Vanuatu also had to impose a state of emergency, now lifted, following street disturbances in its capital, Port Vila, in early March. There was fighting between groups from two islands, Tanna and Ambrym. Unexplained deaths in a shanty town had been blamed on witchcraft learned by some Tanna people from those originating on Ambrym. The Tannese turned on those from Ambrym, and the police were slow to quell the ensuing violence. Disputes over land ownership have been a more deep-seated cause of political discontent, particularly regarding the sell-off of land to foreign investors.

Relative calm prevails in France has taken an important step to reduce the fears of the indigenous New Caledonia population of New Caledonia regarding interlopers. The French authorities have now approved a constitutional amendment that makes it impossible for anyone who has not lived in the territory for ten continuous years, or who was not eligible to vote in 1998, to vote in the forthcoming 2009 congressional and 2014 provincial elections. The restriction has been promoted by the French government as a way to make redress for previous wrongs, but in reality it is a means of propping up French influence. More immediately, in the run-up to French national assembly elections later this year, the local ruling Avenir

Ensemble has reached partial agreement on candidates. However, the opposition Front de Libération Nationale Kanak Socialiste (FLNKS) has presented a united front, and this could win it more support. Samoan politics remains low-key. The country’s sole opposition party, the Samoa Democratic United Party (SDUP), had its recognition as the official opposition withdrawn at the end of 2006, as the number of its MPs fell below the required minimum of eight. There has been a suggestion by the former SDUP deputy leader, Aeau Peniamina Le’avai, that a new party should be formed by some SDUP members now sitting as independents, but this idea will take time to materialise. The political scene in the Solomon Islands has also been relatively uneventful in recent months, with a temporary rapprochement between the government and the Regional Assistance Mission to Solomon Islands (RAMSI) after the April 2nd tsunami. The tidal wave destroyed a large number of villages, and the lack of adequate organisational or physical infrastructure made effective distribution of aid difficult. A review of the role of RAMSI is now being undertaken by the Pacific Islands Forum (the main regional political organisation), and this may provide an opportunity to secure an improvement in relations between RAMSI and the government. However, the recent actions of the prime minister, Manasseh Sogavare, suggest that he is unlikely to be accommodating. In March he banned direct contact between RAMSI and Solomon Islands citizens, and he has further antagonised Australia by the appointment of Julian Moti, an Australian citizen facing outstanding child-sex charges, as attorney-general. A number of local groups have opposed this appointment, and the country’s independent-minded Public Service Commission initially suspended it.

Economic policy and the domestic economy

Some policy advances Economic policy approaches remain piecemeal and unco-ordinated across the

are made region, but by no means all ill conceived. Fiji’s government, for example, has made a creditable stab in recent months at resolving some long-standing economic problems. The March 2007 budget preaches fiscal prudence and industrial liberalisation; promises have already been backed up by action, with civil service wage reductions and the rationalisation and centralisation of some government departments. But this may be an inauspicious time to be embarking on such reforms: tourist numbers fell sharply after the December 2006 coup, and the country’s sugar industry is in crisis owing to the phasing of out of price support by the European Commission (and the freezing of most related EU aid in the wake of the coup). The country’s textile sector also appears to be in decline. To counteract worsening external deficits, the Reserve Bank of Fiji (the central bank) has kept interest rates high and imposed credit ceilings, and this is proving a disincentive to investment. There is no obvious way out of this dilemma, although credit ceilings are now being lifted for some industries. Samoa has also made some progress on the fiscal front in recent years. The budget deficit outturn in fiscal year 2005/06 (June-May) was much lower than forecast, and this allowed the government to pay off some external debt. Debt

to GDP ratios exceeded 100% in the mid-1990s, but had been brought down to 36.6% by September 2006. However, the government’s budget deficit is officially forecast to expand again in 2006/07, and doubts remain as to how policy would respond to external shocks. One bright spot is the tourism sector: tourist numbers were up significantly in early 2007, and this is boosting the profitability of Polynesian Blue airlines, a joint venture between an Australian carrier, Virgin Blue, and the Samoan government. Gauging the effect of the November 2006 riots on the Tongan economy is difficult, as few economic indicators are currently reported past the third quarter of 2006. However, remittance flows from the US appear to have fallen sharply after the coup, and it seems likely that economic activity has done likewise. The government has yet to come up with a clear strategy for post-riot rebuilding, despite a recent meeting of the country’s main donors and the release of a strategic plan. An indication of donors’ frustrations regarding this lack of progress is given by the conditions accompanying one Japanese loan: it is to be held in a Japanese bank account, and will be disbursed only if an appointed agent is satisfied that the government has agreed plans on what to spend it on.

Balance-of-payments Balance-of-payments management remains difficult for most countries in the

management is difficult region. The current-account deficit in the Solomon Islands is estimated by the Asian Development Bank to have expanded to almost 16% of GDP in 2006, despite rapid growth in exports last year. Imports increased by almost 26% on the back of higher spending on fuel and investment-related goods, and the situation was only kept under control by increased aid and foreign direct investment inflows. The Solomon Islands government has, however, been making steady progress on reducing its debt. The Central Bank of the Solomon Islands expects tax revenue to double this year, and this and increasing foreign investment should help to soothe worries that the external accounts position could threaten foreign reserves. Post-tsunami aid should also help matters. New Caledonia suffered a fall in tourist arrivals in the final quarter of 2006, and in recent months delays to various major mining projects are likely to have held down GDP growth. The cost of developing the Goro and Koniambo mines has escalated, and it now appears that Goro will not be operating at full capacity until 2014. However, data published by the Institut d’Emisson d’Outre- Mer (the central bank for France"s Pacific territories) for the final quarter of 2006 suggest that agriculture, industry and trade have been doing relatively well and that consumer price inflation has declined.