Solomon Islands

Country Report September 2003

Solomon Islands

September 2003

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Contents

2 Summary

The region

3 Outlook for 2003-04 4 The political scene 5 Economic policy and the domestic economy

Solomon Islands

6 Political structure

7 Economic structure 7 Annual indicators 8 Quarterly indicators

9 Outlook for 2003-04

10 The political scene

11 Economic policy

12 The domestic economy

List of figures

8 Gross domestic product per head 8 Merchandise exports and imports 10 Gross domestic product 10 Consumer price inflation

Country Report September 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 2

Summary September 2003

The region

Outlook for 2003-04 Political instability and economic weakness will continue to hinder the development of the Pacific island nations, although there are hopes that greater Australian involvement in the region will provide fresh impetus to efforts aimed at dealing with some of the islands’ many problems.

The political scene In a surprise development, Greg Urwin, an Australian former diplomat, has been appointed secretary-general designate of the Pacific Islands Forum (PIF). He will be the first non-Pacific islander to hold the post.

Economic policy and the The prospect of a Pacific Economic and Political Community has raised interest domestic economy in the ideas of a regional single currency, and of Pacific Islanders being given greater rights to work in Australia. Tourist arrivals are set to rise in the second half of 2003. However, increased competition could spell trouble for some of the islands’ own airlines.

Solomon Islands

Outlook for 2003-042002-03 The Australian-led multinational peacekeeping force has raised hopes of an end to lawlessness, although rebuilding is likely to take several years.

The political scene The intervention force appears to have made a good start, with the militia that until recently controlled much of the capital, Honiara, having agreed to disarm.

Economic policy and the The central bank governor, Rick Hou, has agreed to stay on, much to the relief domestic economy of the government and aid donors alike.

Editors: Kate Allard (editor); Graham Richardson (consulting editor) Editorial closing date: August 1st 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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The region

Outlook for 2003-04

Instability and poor governance Political instability and economic weakness will continue to hinder the will hinder development development of the Pacific island nations. Poverty, racial tensions, law-and- order problems and poor governance are rife in countries such as the Solomon Islands, Vanuatu and Fiji, and will deter much-needed foreign investment. The significant differences between the islands make generalisations difficult. However, overpopulation, environmental degradation, corruption, weak or non-existent growth, vulnerability to periodic cyclone damage and a proliferation of small arms mean that many island governments are finding it increasingly difficult to protect and provide for the most disadvantaged sections of their populations. The Economist Intelligence Unit remains pessimistic about the ability of existing governments in the region to address these issues.

Greater Australian engagement Concern about instability in the region has increased since the bombing in Bali, raises hopes of progress Indonesia, in 2002 and, more recently, the bombing of a hotel in the Indonesian capital, Jakarta. This has led the Australian government, in particular, to take far more interest in the affairs of the small island states, amid fears that the breakdown of their political systems could lead to infiltration by terrorists. There are hopes that greater Australian involvement in the region, as demonstrated by the country’s newfound willingness to intervene directly to prevent the Solomon Islands from descending further into lawlessness, will provide fresh impetus to efforts to deal with some of the islands’ many problems. The Australian prime minister, John Howard, has already spoken of his belief that the island nations should pool their limited resources to provide essential services, such as policing and air travel, and he has gone as far as to suggest that they could form a federal government. The appointment of an Australian diplomat as head of the main regional body, the Pacific Islands Forum (PIF), is likely to lead to further debate on such proposals, which are not without merit. However, the success of Australia’s greater engagement will depend in part on how sensitively the Australian government pushes such issues, as any heavy- handedness is likely to be poorly received by island governments anxious not to cede any sovereignty. Indeed, while island governments gave their blessing to the Australian-led intervention in the Solomon Islands, many politicians expressed fears of an Australian takeover in the region, suggesting that the action had lowered the bar to direct intervention and could lead Australia to intervene more readily in other troublespots. This would appear unlikely, given that the levels of lawlessness and social collapse in the Solomons are so much more serious than elsewhere. However, intervention in other island troublespots cannot be ruled out, should there be a sudden flare-up in one of the other island nations.

Country Report September 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 4 The region

The island nations will depend The support of aid donors and financial institutions will be critical to the heavily on foreign aid development of the Pacific island nations, which for the most part lack the resources to extricate themselves from their current predicaments. The Asian Development Bank (ADB) and the UN Development Programme (UNDP) will continue to provide financial and technical support for a broad range of projects and initiatives. Substantial funds will also be made available to Pacific island nations over the next few years under the Cotonou Agreement, an accord signed in June 2000 to succeed the Lomé Convention in setting out relations between the EU and the 78 African, Caribbean and Pacific (ACP) states. These funds will be channelled into projects in areas such as fisheries, tourism, investment and trade facilitation. Many of the island nations will also benefit from funding and expertise via the donor programmes of Australia and New Zealand, both of which have experience in peacekeeping and strong links with many island communities through large expatriate populations. However, aid donors can only work through conventional channels, funding projects for capacity building, rewarding efforts to improve transparency and accountability, and advocating greater fiscal discipline, private-sector development and the facilitation of foreign investment. Any progress is, therefore, likely to be slow. Moreover, there is concern that aid is feeding a culture of dependency and blunting the incentive for structural reform. Financial aid is thus likely to become increasingly conditional on the achieve- ment by recipient counties of tangible progress in areas such as law and order, standards of governance and the reform of bloated public sectors.

The political scene

An Australian has been In a surprise development and a break with tradition, Greg Urwin, an appointed as secretary-general Australian and a former high commissioner to Fiji, Samoa and Vanuatu, was appointed secretary-general designate of the Pacific Islands Forum (PIF) at the organisation’s annual summit in mid-August. Mr Urwin will replace Noel Levi, from Papua New Guinea, who has already served two terms (under PIF rules tenure is limited to two three-year terms). The post of secretary-general, the top regional position, has always been filled by a Pacific islander, and the leaders of some of the smaller PIF member states, including Nauru and the Cook Islands, were unhappy at the aggressiveness of Australian lobbying for their candidate. Indeed, at one point the sub-group of six small island nations (comprising the Marshall Islands, the Cook Islands, Kiribati, Tuvalu, Nauru and Niue) appeared to veto Mr Urwin’s appointment, suspicious of Australia’s motives in seeking the top position in the organisation. However, Mr Urwin, who is married to a Samoan, was finally appointed in a secret ballot. It remains to be seen whether differences of opinion on his appointment, which takes effect in January 2004, will reduce his effectiveness as secretary-general!although he has dismissed suggestions that he is “John Howard’s man”.

Summit hints at further areas The appointment of a new secretary-general of the PIF is likely to lead to a of co-operation review of the direction of the organisation and a re-assessment of the range of issues on which the 16 PIF members co-operate. The issues discussed during the recent PIF annual summit in Auckland give an indication of the future direction

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of debate. Central to the agenda were issues such as pooled regional governance, greater co-operation on regional air transport, security and cross- border crime and the role of foreign aid, as well as the perennial issues of climate change and the impact of globalisation and trade liberalisation on small island economies. One concrete measure agreed at the summit was the creation of a new regional police training centre, which will be based in Fiji. The initiative, to be sponsored by Australia and New Zealand, will see several hundred police officers from the Pacific islands receive training at the centre each year in an effort to improve policing skills and standards across the region.

Economic policy and the domestic economy

A single currency and labour Although not part of the summit agenda, the prospect of a Pacific Economic mobility would be contentious and Political Community, comprising the 13 island states together with Papua New Guinea, Australia and New Zealand, was hotly debated. The idea, proposed in a recent report by the Australian Senate’s Standing Committee on Foreign Affairs, Defence and trade Reference, included the possibility of a single currency within the region, based on the Australian dollar, and greater labour mobility, giving Pacific islanders increased rights to work in Australia. The ideas were coolly received by Mr Howard, Alexander Downer (the Australian foreign minister) and Michael Cullen (the New Zealand finance minister), as well as by most Pacific island leaders, with the chief concern being the possible undermining of the island states’ independence.

Tourist arrivals set to recover Heightened global uncertainty before and during the US-led war in Iraq, in the second half of 2003 together with the outbreak of Severe Acute Respiratory Syndrome (SARS) in Asia, inevitably persuaded many tourists to stay at home in early 2003; the destinations most dependent on Japanese tourists were worst hit. However, the impact on tourist arrivals was not as severe as had been feared, and there were some signs of recovery towards the end of the second quarter. Bookings to most Pacific destinations are expected to pick up in the second half of the year, with the Pacific island nations, for the most part, continuing to be viewed as low-risk in terms of terrorism. Tourism in several of the island nations will receive a further boost when Virgin Blue, which operates low-cost, no-frills domestic flights in Australia, launches new services to several leading island destinations, such as Fiji and Vanuatu, later this year. However, there are fears that the increased competition and lower fares resulting from Virgin Blue’s entry into the market could spell further trouble for the islands’ own airlines, many of which are already struggling to survive.

Country Report September 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 6 Solomon Islands

Solomon Islands

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 John Ini Lapli

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 December 5th 2001; the next election is due by December 2005

National government After the armed takeover of the capital, Honiara, in June 2000 and the forced resignation of the elected government, an administration led by a former finance minister, Manasseh Sogavare, was installed by a highly questionable parliamentary vote. Pressure from lenders and aid donors forced a new election in December 2001. Sir Allan Kemakeza’s People’s Alliance Party won 16 seats and formed a coalition with 13 independents

Main political parties The People’s Alliance Party (PAP), the People’s Progressive Party (PPP), the Association of Independent Members (AIM), the Solomon Islands Alliance for Change (SIAC), the Liberal Party (LP), the Solomon Islands Labour Party (SILP)

Prime minister Sir Allen Kemakeza Deputy prime minister Snyder Rini

Key ministers Agriculture & livestock Paul Mainu Commerce & trade Trevor Olavae Economic reform & structural adjustment Daniel Fa’afunua Fisheries & marine resources Nelson Kile Finance Francis Zama Foreign affairs & trade relations Laurie Chan Forests, environment & conservation David Holosivi Health & medical services Benjamin Una Home affairs Clement Rojumana Lands & survey Siriako Uso Mines & energy Stephen Paeni National planning Nollen Leni National unity, reconciliation & peace Nathaniel Waena Police & national security Michael Maina Provincial government & rural development Walton Naezon Tourism & aviation Alex Bartlett Transport, works & communication Bernard Giro

Central Bank governor Rick Hou

Economic structure

Annual indicators 1998a 1999a 2000a 2001a 2002a GDP at current prices (SI$ m)b n/a 1,466 1,410 1,399 n/a Real GDP growth (av; %)c 0.1 -0.9 -13.3 -10.1 -4.0 Consumer price inflation (av; %)c 10.0 10.4 8.6 8.0 9.0 Population ('000)c 426 442 459 476 n/a Exports fob (US$ m)c 126 126 69 47 n/a Imports cif (US$ m)c 128 110 92 82 n/a Current-account balance (US$ m)c 16 25 -44 -32 5 Reserves excl gold (US$ m)d 49.03 51.14 32.04 19.34 18.25 Total external debt (US$ m)e 154.6 165.0 155.4 162.5 n/a Debt-service ratio, paid (%)e 6.0 4.8 6.9 n/a n/a Exchange rate (av; SI$:US$)d 4.816 4.838 5.089 5.278 6.749 a Actual. b World Bank. c Asian Development Bank. d IMF, International Financial Statistics. e World Bank, Global Development Finance.

Origins of gross domestic product 2000a % of total Agriculture 42.1 Mining 3.1 Manufacturing 4.9 Electricity, gas & water 1.3 Construction 2.8 Trade, finance & transport 21.1 Public administration & others 24.7

Principal exports fob 2001a SI$ m Principal imports cif 1997a SI$ m Timber 190.5 Food 108.4 Fish & fish products 37.3 Raw materials including mineral fuels 75.8 Cocoa 4.5 Machinery & transport equipment 53.3 Copra 0.4 Basic manufactures 22.6 Palm oil & kernel 0.2 Chemicals 13.7

Main destinations of exports fob 2001a % of total Main origins of imports fob 2000a % of total Japan 19.8 Australia 29.3 South Korea 17.8 Singapore 18.3 Philippines 11.3 US 7.1 China 9.6 New Zealand 4.9 Thailand 8.6 Fiji 3.7 UK 1.2 Japan 3.4 a Asian Development Bank.

Quarterly indicators 2001 2002 2003 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Financial indicators Exchange rate SI$:US$ (av) 5.238 5.301 5.455 5.876 6.528 7.257 7.335 7.481 Exchange rate SI$:US$ (end-period) 5.285 5.362 5.565 7.675 7.184 7.267 7.457 7.519 Deposit rates rate (av; %) 1.58 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Lending rate (av; %) 15.58 15.58 16.14 16.42 16.42 16.42 16.42 16.42 Treasury bill rate (av; %) 8.58 8.14 8.04 5.24 7.81 7.77 6.64 5.98 M1 (end-period; SI$ m) 245.59 246.05 247.20 238.47 224.19 230.58 255.90 252.72 M1 (% change, year on year) 2.2 1.3 -1.5 2.2 -8.7 -6.3 3.5 6.0 M2 (end-period; SI$ m) 424.51 402.75 400.15 398.19 380.67 402.49 423.99 424.09 M2 (% change, year on year) -4.2 -12.9 -13.6 -5.7 -10.3 -0.1 6.0 6.5 Foreign trade (US$ m)a Exports fobb 19.8 20.7 22.5 18.4 19.2 25.0 25.9 23.3 Imports fob -32.5 -21.6 -29.1 -30.2 -24.1 -32.6 -28.1 -26.1 Trade balance -12.7 -0.9 -6.6 -11.8 -4.9 -7.6 -2.2 -2.8 Foreign reserves (US$ m) Reserves excl gold (end-period) 22.5 24.5 19.3 24.8 13.1 16.7 18.3 19.2 a IMF estimates. b Includes re-exports. Sources: IMF, International Financial Statistics; Direction of Trade Statistics.

Outlook for 2003-04

Peacekeeping foreces raise The recent arrival and early successes of the Australian-led multinational hopes of an end to lawlessness peacekeeping force has raised hopes of an end to the lawlessness that has left the Solomon Islands on the verge of collapse. The Australian foreign minister, Alexander Downer, has nevertheless warned against over-optimistic assess- ments of how long it will take to restore relative political and economic stability to the troubled island nation. The country’s problems stem from the ethnic conflict of 2000, when rebels on the main island of Guadalcanal began forcing settlers from the island of Malaita to leave Guadalcanal. In response, Malaitan militants took over the capital, Honiara, and in mid-2000 toppled the government, leading to economic ruin. The ethnic fighting was officially brought to an end with the signing of the Townsville Peace Agreement (TPA) later that year, paving the way for the 2001 election that brought the current prime minister, Sir Allan Kemakeza, to power. However, the TPA allowed former Guadalcanal and Malaitan militia members to keep their guns, and some former militia members, including many of those employed as special police constables, used their weapons to extort money from the near- bankrupt government and commit other crimes. The restoration of law and order is just the first step in rebuilding the failing nation, and efforts to improve the barely functioning public administration, retrain the inadequate police service and rebuild the financial system are likely to last several years. The Australian and New Zealand governments have made clear their long-term commitment to rebuilding the country. However, the extent of the degradation in basic public services means that progress will be slow, and, given that illegal arms likely to remain readily available in the country, the recovery could well be threatened by fresh outbreaks of violence. The hand of the prime minister, Sir Allan Kemakeza, has been strengthened by his acceptance of the intervention force, although his political survival will depend both on the outcome of likely investigations into widespread corruption and whether he has the will, noticeably absent in recent years, to pursue the measures necessary to put the country on the road to sustainable recovery. Sir Allan also faces the prospect of dealing with the thorny issues of constitutional reform and more equal distribution of revenue from resource industries to people living in the provinces.

The long and painful According to the Asian Development Bank (ADB), the economy contracted for economic decline may be over the fourth consecutive year in 2002, reflecting the fact that three years after the coup and the ethnic violence that went with it, several key industries remained shut. However, at 4% the contraction in real GDP last year was smaller than that seen in the previous two years, suggesting that the economy was bottoming out. Further evidence of a fragile recovery emerged in early 2003, and the relative abundance of commodities, such as logs and gold, means that the economy could rebound quite strongly if the law-and-order situation continues to improve. However, high levels of government debt and interest arrears will remain a significant drag on the economy.

The poor fiscal situation means that the Solomon Islands will remain heavily dependent on foreign aid. The government is receiving support from multilateral organisations, which have committed aid and technical assistance to help to improve living standards. However, Australia and New Zealand will remain the main aid donors: Australia recently pledged an additional A$6m (US$3.9m) in aid, taking total Australian aid to the Solomons for this year to AS$21m, while New Zealand is to increase aid for the year by 75%, to US$8m.

The political scene

A multinational peacekeeping The prime minister, Sir Allan Kemakeza, decided in early June to accept the fo rce has arrived Australian government’s offer of direct intervention to help to restore law and order, a decision unanimously approved by the Solomon Islands’ parliament and endorsed by other regional leaders. This paved the way for the deployment of an Australian-led multinational peacekeeping force of around 2,200 soldiers and police, the largest such deployment in the south Pacific since the second world war. The Australian-dominated force, which also includes 200 personnel from New Zealand and smaller numbers from Vanuatu, Papua New Guinea, Samoa, Fiji and Tonga, began to arrive on July 24th to a warm reception from most of the embattled residents of the capital, Honiara.

The intervention force scores Charged with disarming the various ethnic militias, whose actions have left some early successes many dead since the coup in 2000 and have brought the government and the country at large to the verge of collapse, the intervention force appears to have made a good start. One of the main militia groups, the Malaitan Eagle Force (MEF), which until the arrival of the peacekeeping force had controlled large parts of Honiara since it staged the 2000 coup with help from renegade police officers, has agreed to give up its weapons to the intervention force. Many of these weapons were seized illegally by the MEF from government stores during the coup and have since been used by militants to extort money from the virtually bankrupt government. Other weapons have also been handed in and destroyed under a national firearms amnesty, due to expire on August 21st. In a further positive development, Harold Keke, the Guadalcanal rebel leader, surrendered to Australian forces in mid-August. Mr Keke, a former policeman, is

thought to be responsible for the murder of a cabinet minister in mid-2002 and for many killings in his stronghold in the isolated Weather Coast region south- west of Honiara. He has also recently admitted that the six Christian missionaries taken hostage by his group in April are all dead. Mr Keke’s capture was expected to be one of the more dangerous challenges facing the intervention force, and his surrender has enabled the early establishment of a police post in the notoriously lawless Weather Coast area. However, although the law-and-order situation in the capital has improved following the deployment of overseas military personnel and police officers, who are now patrolling alongside their Solomon islander counterparts, lawlessness in the provinces will take much longer to bring under control. Moreover, many militia members and police officers are likely to prove reluctant to give up their illegal guns (two previous amnesties saw only a small proportion of the 1,000 or more weapons thought to be in the country handed in), and the task of hunting for and confiscating illegal weapons could be a dangerous one for peacekeeping forces. Australian naval boats are to patrol the waters between the Solomon Islands and Papua New Guinea’s Bougainville province to help prevent the smuggling of arms into the country.

The prime minister reshuffles Although a necessary precondition, the restoration of law and order is just the the cabinet first step in getting the country back on its feet, and attention is turning to the need to root out the corruption and financial mismanagement that has contributed to the country’s woes. Nick Warner, the Australian diplomat who heads the international mission, is considering setting up an independent commission to investigate the deep-rooted corruption within public depart- ments; individuals could also be charged. Growing pressure to stamp out corruption and to reform his People’s Progressive Party government is also thought to be behind Sir Allan’s decision to reshuffle his cabinet in early August. This saw the former finance minister, Snyder Rini, swap portfolios with the education minister, Francis Zama (although Mr Rini remains deputy prime minister). It also involved the replacement of Augustine Taneko, the police minister, by Michael Maina. In addition, several department heads have been removed from their posts. Experienced professionals from Australia and New Zealand are to be given positions in major ministries such as finance and the Treasury in an attempt to improve the management of their functions.

Economic policy

The central bank governor The governor of the Central Bank of the Solomon Islands (CBSI), Rick Hou, has agrees to stay on announced that he will stay on in the post, much to the relief of the government and aid donors alike. Mr Hou, who has been in the post for 12 years, is credited with maintaining sufficient foreign reserves to enable the country to continue to trade, despite the dire state of the economy, and has never shied away from criticising the government’s fiscal mismanagement. He had previously announced his intention to stand down when his current term of office ended in August, but he now intends to remain in the post during what is expected to be a difficult transition to economic recovery.

Despite higher than budgeted revenue collection, thanks to a rise in log tax The fiscal situation continues receipts and in import and excise duties, continued substantial overspending to deteriorate saw the recurrent budget deficit swell to SI$43.3m (around US$6.5m) during the first quarter. Indeed, at SI$115.6m, total expenditure was not only well above budget but was also up more than 50% on the previous quarter, reflecting unbudgeted items, many of which were dubious claims approved “under duress”, according to the CBSI. The CBSI has also expressed concern about the government’s continued use of money designated for debt servicing to finance recurrent expenditure. At least the steady rise in public debt seen in 2002 appears to have levelled off. According to the May 2003 bulletin of the CBSI, the accumulated debt stock stood at SI$1.61bn (around US$230m) at the end of that month, broadly unchanged from end-December 2002. Of this, SI$1.13bn was external debt (which the government is not currently servicing), and SI$484m was domestic debt. Nevertheless, the government’s continued inability to pay its debts meant that cumulative debt-service arrears amounted to SI$262m by end-May, up from SI$195m at end-December.

The domestic economy

Data suggest that the economy Economic data are sparse, owing to the near-breakdown in government has turned the corner services, although available figures point to an improvement in economic activity in the first quarter of 2003 after a dismal performance in 2002. According to the Central Bank of the Solomon Islands, the output of logs, the country’s main export, rose by 26% during the first quarter, a fivefold increase on the same period of 2002, as the main operators resumed production. As a result of this, and higher international log prices, export earnings from logs and timber rose by 16.4% quarter on quarter to SI$97.2m (around US$14m), a five- year high. The fish catch also almost doubled in both quarterly and year-on- year terms in the first quarter!although depressed fish prices, the result of oversupply in Japan (the main market for fish from the Solomon Islands), meant that earnings from fish exports fell by almost 50% quarter on quarter, to SI$7.4m. However, owing to the fact that lower earnings from fish were offset by a rise in the value of copra and cocoa exports, total first-quarter export earnings still rose by 2.2% quarter on quarter to SI$118.3m, a rise of more than 70% year on year. Provisional data suggest that the output of logs and fish remained strong in April and May, although it remains to be seen how severely economic activity was disrupted by the increasing lawlessness that prompted the Australian-led intervention in the country. Gross official reserves rose by 6.5% during the first quarter to stand at SI$138.4m!a 12-month high!at the end of March. This was equivalent to just 2.5 months of import cover, a worryingly low level for such an open economy! although more recent data show that reserves continued to rise over the following two months, to stand at SI$159.3m at the end of May. Year-on-year inflation, which had briefly eased to 8.2% in February, accelerated to 14.3% in March and to 14.9% in May, mainly reflecting a surge in imported inflation.