Solomon Islands

Country Report

Solomon Islands

December 2006

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Solomon Islands 1

Contents

Solomon Islands

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2007-08

8 The political scene

10 Economic policy

11 The domestic economy

12 Foreign trade and payments

13 The region 13 Summary

13 Outlook for 2007-08

List of figures 6 Solomon Islands: foreign reserves 6 Solomon Islands: foreign trade 8 Solomon Islands: gross domestic product 8 Solomon Islands: consumer price inflation

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Solomon Islands December 2006 Summary

Outlook for 2007-08 The prime minister, Manasseh Sogavare, has upset relations with Australia. China could replace Taiwan as the Solomons! political and economic ally. Despite policy reforms, growth will not pick up until the political situation stabilises. Tourism stands to become a major industry if this can be achieved.

The political scene Anger over a series of issues has led to a breakdown in relations with Australia. Australia has been infuriated by the protection offered to a lawyer, Julian Moti, wanted in connection with an underage sex scandal, and Mr Sogavare!s offices have been raided. Two contentious clauses in the report of an inquiry into the Honiara riots of April 2006 have been removed following pressure from Australia. Mr Sogavare has expelled Australia!s high commissioner, Patrick Cole, and has tried to coerce the head of police, Shane Castles, into resigning. Despite calls for its removal, the Australian-led international security force (RAMSI) will remain in the Solomon Islands.

Economic policy Recent political instability has stalled policy reform and deterred inward foreign investment. Senior figures have acknowledged that the withdrawal of RAMSI would have serious economic implications. The government is looking to Taiwan to make up any shortfall in funding that arises from its spat with Australia. There has been some limited progress on reducing corruption, but Australia has again warned that aid could be cut.

The domestic economy An Australian company, Airservices Australia, has been implicated in a case involving the misdirection of A$2.12m (US$1.6m) in airline over-flight fees. Visitor arrivals have suffered as a result of the country!s recent political tensions, and Australia has raised its travel advisory status for the country.

Foreign trade and payments The Solomon Islands! trade deficit has worsened with Australia and New Zealand, but improved with China and Japan. The EU has provided a grant to be distributed to non-state organisations to encourage improved operational transparency.

Editors: Graham Richardson (editor); Robert Ward (consulting editor) Editorial closing date: December 1st 2006 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 Following the April 2006 election a government based around the former government, incorporating the People!s Alliance Party (PAP) and the Association of Independent Members (AIM), was installed, led by former deputy prime minister Snyder Rini of the AIM. However, rioting led to the collapse of the Rini government within the month. A new administration based around the former opposition and led by former prime minister, Manasseh Sogavare, of the Social Credit Party (Socred), was installed in May 2006

Main political parties The PAP; the AIM; Socred; the Rural Advancement Party (RAP); the Lafari Party; the Christian Alliance Party; the Democratic party; the National Party; the Liberal Party; the Labour Party

Prime minister & public service Manasseh Sogavare (Socred) Deputy prime minister Job Duddley Tausinga (RAP)

Key ministers Agriculture & livestock Toswell Kaua Commerce, industries & employment Peter Shannel Communications & aviation Patrick Vahoe Junior Culture & tourism Bently Samuel Education & human resources Derek Sikua Energy & mines Mark Kemakeza Finance & treasury Gordon Darcy Lilo Fisheries & marine resources Nollen Leni Foreign affairs Patteson Oti Forests, environment & conservation Job Duddley Tausinga 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 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 1,528 1,588 1,775b 1,990 n/a Real GDP growth (av; %)d -2.4 5.6 5.5 4.4 4.5 Consumer price inflation (av; %)c 9.3 10.0 7.1 7.4 n/a Population ('000)c 440.5 451.5 460.1 470.7 n/a Exports fob (US$ m)c 58 74 97 102 n/a Imports cif (US$ m)c 65 67 72 144 n/a Current-account balance (US$ m)c -4 27 67 n/a n/a Reserves excl gold (US$ m)e 18.25 37.20 80.58 95.42 n/a Total external debt (US$ m)c 152 161 160 n/a n/a Debt-service ratio, paid (%)c 7.8 6.4 6.4 n/a n/a Exchange rate (av; SI$:US$)e 6.749 7.506 7.485 7.530a 7.600 a Actual. b Economist Intelligence Unit estimates. c Asian Development Bank. d Central Bank of the Solomon Islands. e IMF, International Financial Statistics.

Origins of gross domestic product 2004a % of total Agriculture 7.0 Mining -0.2 Manufacturing 8.9 Electricity, gas & water 17.5 Construction 3.2 Trade 9.7 Transport, communications & finance 24.0

Principal exports fob 2005a SI$ m Principal imports cif 2005a 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 2004b % of total Main origins of imports cif 2004b % of total China 28.2 Australia 25.3 South Korea 15.7 Singapore 23.8 Thailand 15.7 New Zealand 5.3 Japan 9.7 India 4.8 Philippines 5.1 Japan 3.9 Vietnam 3.1 US 1.9 a Central Bank of the Solomon Islands. b Asian Development Bank.

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Quarterly indicators 2004 2005 2006 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Consumer prices (2000=100) 139.3 140.3 142.0 145.5 152.9 152.1 154.3 n/a Consumer prices (% change, year on year) 7.0 7.2 4.9 5.6 9.8 8.4 8.7 n/a Financial indicators Exchange rate SI$:US$ (av) 7.478 7.499 7.503 7.514 7.529 7.574 7.594 7.602 Exchange rate SI$:US$ (end-period) 7.502 7.508 7.51 7.513 7.559 7.576 7.593 7.599 Deposit rate (av; %) 0.92 0.75 0.92 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 6.00 5.03 3.57 3.52 3.38 3.62 M1 (end-period; SI$ m) 397.90 374.35 401.86 433.09 486.92 540.67 555.78 557.79 M1 (% change, year on year) 36.5 12.9 24.9 21.3 22.4 44.4 38.4 28.8 M2 (end-period; SI$ m) 643.26 624.63 653.09 697.69 782.14 866.69 877.53 911.55 M2 (% change, year on year) 32.9 17.5 26.1 24.5 21.6 38.8 34.4 30.7 Foreign trade (SI$ m) Exports foba 238.28 171.01 160.15 194.97 190.10 226.41 203.16 n/a Imports fob -154.78 -214.40 -255.33 -245.00 -288.20 -294.91 -306.04 n/a Trade balance 83.50 -43.39 -95.18 -50.03 -98.10 -68.50 -102.88 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 71.6 80.6 79.0 86.3 93.5 95.4 94.7 96.4 a Includes re-exports. Sources: IMF, International Financial Statistics.

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

100 Exports (a) Imports Trade balance 90 300

80 200

70 100 60 0 50

40 -100

30 -200

20 -300 10 -400 0 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2004 05 06 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

Mr Sogavare will continue to Political volatility in the Solomon Islands is showing no signs of moderating.

cause headaches The abrasive attitude of the prime minister, Manasseh Sogavare, is proving disruptive, particularly in terms of foreign relations, but also locally, with little tolerance shown to politicians and officials who express their opposition to his actions. Mr Sogavare has managed to hold back from up-ending the country!s internal and external political situation entirely, but political relations abroad and at home are nonetheless under extreme pressure. In terms of the Solomon Islands! foreign relations, what seems key is the ongoing refusal of neighbouring Pacific Island nations to support Mr Sogavare. Laisenia Qarase, prime minister of Fiji, was particularly instrumental in defusing the stand-off between the Solomon Islands and Australia over the continued presence of the Regional Assistance Mission to the Solomon Islands (RAMSI), advising Mr Sogavare to seek a review of the force!s operations, rather than to demand an overhaul. While political relations with Australia flounder, the Solomons will seek economic solace from its northern Asian neighbours of China, Japan, Malaysia, and most significantly, Taiwan. Taiwan!s ongoing involvement in both business and politics in the Solomon Islands is a boon to Mr Sogavare. However, although Taiwan!s assistance purports to be benevolent, there are conditions, and perceptions as to the way it pursues its political agenda via the manipulation of both government officials and businesses could pose a real danger to the country!s autonomy. Increasing levels of trade between the Solomon Islands and China, which carries exponentially more significant global political and economic clout than Taiwan, could lead to an interesting trade-off in alliances somewhere down the line.

Economic development hinges If the government can survive the stresses created by Mr Sogavare!s recent on political stability actions, the country should eventually manage to implement a number of economic reforms that will benefit the domestic economy as well as serve to persuade foreign donors that standards of governance are improving. As with many of the Pacific Islands, tourism is a potentially huge market, and one that will undoubtedly take off if the country!s political situation stabilises, so allowing investment into the development of an appropriate tourism infrastructure. But, in the short term, growth is likely to be minimal. The Asian Development Bank currently estimates 5% growth in 2006, and forecasts 5% growth in 2007, but this could prove overly optimistic, particularly if the political environment further deteriorates, and externally funded projects are scaled back.

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

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

6.0 10.0

4.0 8.0

2.0 6.0

0.0 4.0

-2.0 2.0

-4.0 0.0 03 04 05 06 03 04 05 2002 2002

The political scene

Mr Sogavare antagonises After surviving an internal crisis following the sacking of the commerce Australia minister, Francis Billy Hilly, in August, the coalition government of the Solomon Islands, with the prime minister, Manasseh Sogavare, at the helm, has suffered a breakdown in its relationship with Australia. Since September Mr Sogavare has expelled Australia!s high commissioner, Patrick Cole, cancelled the appointment of an Australian judge, Marcus Einfeld, as head of the inquiry into the riots in the capital, Honiara earlier in 2006, encouraged the head of police, Shane Castles, to quit by slashing his salary, forced the country!s solicitor- general, Nathan Moshinsky (an Australian), into early retirement, charged and arrested former a prime minister, Allan Kemakaza, in relation to a 2002 robbery case and removed two ministers"Trevor Olovae and Bartholomew Ulufa!alu" from their official posts. Despite all this, a vote of no confidence, initiated by the opposition leader, Fred Fono, and undertaken at the beginning of October after a number of delays instigated by Mr Sogavare, failed to carry, so for the time being, the often inflammatory operations of the ruling Grand Coalition for Change (GCC) continue.

The Julian Moti case causes Although relations with Australia are strained for a number of reasons, the most controversy principal current controversy centres on the case of Julian Moti, an Australian lawyer whom Mr Sogavare has nominated as his next attorney-general. Mr Moti, facing charges relating to the rape of a 13-year-old girl in Vanuatu in 1997, had fled Australia for Papua New Guinea (PNG), where the local government identified him and tentatively agreed to repatriate him, but before they could do so, he escaped to the Solomon Islands aboard a military aircraft and was granted entry owing to a special dispensation authorised by the Minister for Commerce, Industries and Employment, Peter Shannel. The fiasco has enraged the Australian government, prompting it to break off ministerial contact with PNG and to restrict Solomon Islands ministers! travel to Australia.

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The prime minister's office is Mr Moti was arrested shortly after arriving in the Solomon Islands, but has

raided since been released on bail, further riling Australia. Investigations into the orchestrators of Mr Moti!s escape led to the prime minister!s office being raided by the police while he was away in Fiji attending a Pacific Islands Forum meeting. Among other things, a fax machine that police suspect was used to send an exemption order allowing Mr Moti into the country was seized. The raid served to worsen relations between the Solomons and Australia, with Mr Sogavare describing Australia!s tactics as "bullying". Mr Shannel was also arrested on suspicion of having authorised Mr Moti!s entry to the country, but bail was granted, and he is to reappear in court in mid-November. Mr Sogavare claims that he has offered to hand Mr Moti over to Australian authorities, but says they have refused on the basis of two accompanying conditions that came with the offer, namely that he be guaranteed bail, and that he not be tortured. When questioned, Mr Sogavare refused to elaborate on what he meant by torture. Mr Sogavare!s loyalty to Mr Moti can be traced back to 2000, when Mr Moti successfully defended his friend from charges of involvement in violent riots. It is also widely believed that Mr Moti has set the direction for an inquiry into the riots that took place in April this year. The terms of the inquiry call for an investigation into the arrest and detention of two Social Credit (Socred) party members charged with incitement"Charles Dausabea and Nelson Ne!e" making it possible for them to be freed. Mr Sogavare initially gave the two men positions in his cabinet, despite the fact that they were behind bars, but reneged on his offer after they were refused bail.

The Australian High Patrick Cole, Australia!s high commissioner in the Solomon Islands, was a

Commissioner is dismissed casualty of the strong and sustained criticism of the riots inquiry. After three months of what Mr Sogavare called "patronising" interference from Australia regarding the matter, Mr Cole was asked to leave the country on September 12th. His dismissal provoked outrage, and not just in Australia. As the local representative of the EU, the British high commissioner, Richard Lyne, conveyed the EU!s strong concern as to the independence of the judicial system. Fiji and PNG sent two senior civil servants to Honiara to mediate between the Solomon Islands and Australia, and a local union, the Solomon Islands Council of Trade Unions (SICTU), called on Mr Sogavare to revoke his decision, describing it as an insult to Australia!s generosity. Australia!s immediate response was to revoke all multiple-entry visas held by Solomon Islands ministers, forcing them to apply for access to the country on a case-by-case basis.

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The police chief is pressured In May, following riots in Honiara, Mr Sogavare accused the Solomon Islands!

to quit police commissioner Shane Castles (an Australian) of negligence for failing to stem the violence. In October the government finally issued him with a letter of termination of employment. Mr Castles! position is made possible by funding from Australia, but in the letter, it was requested that this money instead be transferred to the Department of Health and Medical Services. The government then withdrew his dismissal, but instead reduced his salary to only A$20,000 (US$15,400) per year. The Australian prime minister, John Howard, conveyed his disappointment at Mr Sogavare!s actions.

Australia's involvement in In the course of his ongoing dispute with Australia, Mr Sogavare has also

RAMSI is challenged turned his attentions to Australia!s Regional Assistance Mission to the Solomon Islands (RAMSI), the security force deployed to promote peace and stability in the troubled country. Australia contributes the majority of RAMSI!s personnel, and almost all of its funding, both issues that Mr Sogavare seized on and resolved to rectify. He called for Australia!s involvement in the mission to be reduced drastically, at one point threatening to kick the force out altogether, and sought backing from other regional leaders at the summit of the Pacific Islands Forum (PIF, the region!s main political body) in Fiji at the end of October. But their support for the move was inconclusive, and the watered-down solution agreed upon by the PIF leaders was a "review" of the mission!s operations. Mr Sogavare claims that the content of this review will be determined by the Solomon Islands, a notion rejected by Mr Howard. Mr Sogavare!s rhetoric concerning RAMSI has recently subsided, but this issue could be reignited by him at any time.

Economic policy

Policy reform is overshadowed Any economic policy discussion within either the Central Bank of the Solomon by political troubles Islands (CBSI) or the Ministry of Finance and Treasury has been muted as a result of recent political tensions, but it is clear that political problems are already having a detrimental effect on the country!s economy, and that some changes will have to be made. The implementation of the Foreign Investment Act in July this year was followed by an influx of investors registering with the Department of Commerce. The government said that it would subsequently be pushing forward with reforms to the tax system and the development of local businesses, but all seems to have been put on hold since political troubles escalated in September. The chairman of the country!s Chamber of Commerce, Peter Goodwin, has noted that although investments are not being repatriated, new funds are not coming in. Projects are being held back as investors wait for the political situation in the country to stabilise, and Mr Goodwin has pointed out that the withdrawal of Australia!s Regional Assistance Mission to the Solomon Islands (RAMSI) would almost certainly mean a huge withdrawal of funds. The governor of the CBSI, Rick Hou, has said that a survey conducted by the bank showed that investor confidence had been irreparably damaged by

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Mr Sogavare!s threats against RAMSI. He pointed out that the current situation was particularly disappointing for the country!s domestic investors, who had been encouraged to participate in their economy, and then let down by their government.

Taiwan is approached for more In terms of financial assistance from regional neighbours, as the breakdown in

funds relations with Australia continues, the government is increasingly turning its attention to Taiwan for loans and funding. At a UN meeting in October Mr Sogavare once again called for Taiwan to be given a UN seat, and the prime minister!s secretary, Sam Alasia, is rumoured to have been dispatched to Taiwan in order to seek an alternative source for the A$200m (US$153.6m) that stands to be lost if Australia cuts ties. Taiwan has a long history of involvement in the Solomon Islands, providing funds in return for the Solomons Islands! support of Taiwan!s claims for diplomatic representation in international bodies. However, the scope of Taiwan !s political involvement in the country has led to widespread discomfort, and indeed was at the root of the violent riots that took place in April this year. In August the New Zealand foreign minister, Winston Peters, attacked Taiwan!s "chequebook diplomacy", criticising "off-budget aid, poor accountability structures, gifts and other practices that encourage corruption". (The same criticisms could, of course, be applied to Chinese aid.)

There is limited progress on The Solomons! murky relationship with Taiwan certainly undermines efforts

corruption made by Australia to insist on improved governance and transparency in the country. Before the escalation of the country!s row with Australia, Mr Hou had implemented improved controls over the distribution and allocation of funds to oblige members of parliament (MPs) to account for their expenditure of Rural Communities Development Funds (RCDF), and successful moves have been made to put a stop to the prime minister!s discretionary fund. At the height of the Julian Moti fracas, however, Mr Howard warned that, if the Solomons failed to reduce corruption and strengthen accountability, Australian aid would be cut. Mr Sogavare reacted furiously, saying that the country would refuse to bow to "bribery" by any other government. For now, it seems that Mr Sogavare and his government will remain focused on a manipulative battle for overseas funding, rather than domestic economic regeneration.

The domestic economy

Australians are implicated in Australia faces potential embarrassment after a scandal involving the alleged an airspace fees scandal misuse of around A$2.12m (US$1.6m) by the managing director of Aviation Consultants International, Hugh Ritchie, and the director-general of civil aviation in the Solomon Islands, Grant Annals, both Australian. They operated Airservices Australia, a company contracted to control airspace over the Solomon Islands and ensure the collection of fees from airlines passing through. According to the terms of the contract, all such fees should have been directed into a Solomon Islands government account, but although A$8.4m was paid in,

A$2.1m was paid directly to various government officials under the auspices of travel expenses and various other third-party payments. The terms of the contract state explicitly that authorisation must be obtained in writing if payments are to be diverted, but there is no evidence to suggest that written consent was ever obtained. Allegations suggest that the men turned a blind eye to their contractual obligations and willingly distributed the money to government officials upon request in order to ensure the continuation of the contract. The payments were all made between February 1999 and September 2003.

The tourism industry suffers Visitor arrival figures are suffering as a result of heightened tensions, both in

from political instability terms of the domestic political scene and foreign relations. A survey by the Visitors Bureau at the end of October revealed a sudden downturn in hotel bookings and visitor enquiries, with 50% of the resorts, hotels and dive operators included in the study saying that they had suffered cancellations and a dearth of new bookings. The governor of the Central Bank of the Solomon Islands (CBSI), Rick Hou, said that this was a source of concern for the country!s economy, and the general manager of the Visitors Bureau, Michael Tokuru, has sought to highlight the fact that Australia is one of the country!s most important tourism markets. Unfortunately, Australia!s foreign ministry has upgraded travel warnings to the Pacific nation to the second-highest security level.

Foreign trade and payments

Trade imbalances with The trade imbalance between the Solomon Islands and Australia is increasing

neighbours grow according to the latest data released by the finance and treasury ministry. The trade deficit for the second quarter of 2006 was up by S$44m (US$5.8m) on a year ago, at S$132m. The country!s deficit with New Zealand rose by 37% to S$27.4m. There was also a significant deficit in trade with Singapore, presumably reflecting high global oil prices. Despite this, the country has managed to improve its trade balance with its northern neighbours China and Japan. There was a trade surplus of S$66m in China in the second quarter, and one of S$25.4m with Japan. Major export commodities to the two countries"but China in particular"include fish, fish products and, timber and round logs. Both fish and log exports overall increased sharply in the second quarter.

EU funds aim to promote The EU has handed the Solomon Islands a loan of US$1.9m for distribution to

development non-government organisations (NGOs), local communities and the private sector in an effort to reinforce governance and the rule of law in the country. The money is to be used in project planning and capacity building, and also aims to help address the issues of environmental awareness, human rights and gender equality. The funding arrangement was agreed to by the EU director for development, Athanassios Theodorakis, at a meeting in Nadi, Fiji at the end of October.

The region December 2006 Summary

Outlook for 2007-08 Political problems are unlikely to be solved in the near future. Fiji!s government will find it difficult to distance the military from politics. Protesters in New Caledonia will use mining projects as a pretext for raising other issues. Recent actions by the prime minister of the Solomon Islands, Manasseh Sogavare, may have stretched domestic political tensions close to breaking point. Riots in Tonga could precipitate political change, but the road ahead will be bumpy. The breakdown of Samoa!s opposition party may encourage a yet more intolerant approach to dissent. Corruption scandals could end a temporary respite in political bickering in Vanuatu. Australia will review its priorities on the Pacific Islands, and China!s increasing regional economic power is likely to be felt in various ways. Recent political unrest does not bode well for economic policy reform and development, but the economic outlook is not entirely bleak. The markets for some commodities are increasing, and tourism looks particularly promising. Although dramatic expansion looks unlikely, short-term growth in certain countries could be faster than expected and attention may turn again to controlling credit growth and inflation.

The political scene Two pieces of controversial legislation in Fiji have brought the military close to staging another coup. Issues of land control also lie behind recent unrest in New Caledonia, where protests have been focused around the new Inco mine in Goro. The Solomon Islands have antagonised Australia. In Samoa a ruling on pre-election spending has annoyed the government. Tonga!s new king, Siaosi Tupou V, will have to face up quickly to growing pressures for reform; the slow pace of change has already encouraged riots, and forced foreign military interventions. Vanuatu!s prime minister, Ham Lini, has had a relatively quiet few months, but a controversial proposed free-trade zone could cause major problems. China is putting more money into high-profile construction projects.

Economic policy and the Fiji!s 2007 budget included a rise in the country!s value-added tax (VAT) rate. domestic economy Abuses of tax systems are being checked in Tonga and elsewhere. Foreign investment regulations have been revised in Fiji and the Solomon Islands, but a backlash against liberalisation is possible. Several countries have promised to cut the size of their civil services, but detailed plans have not yet been published. Tourism arrivals have increased in several countries, thanks to better air services and increased hotel investment. New Zealand has announced a scheme to admit 5,000 Pacific Islanders as temporary seasonal agricultural labourers, but Australia continues to resist letting in unskilled workers. Editors: Graham Richardson (editor); Robert Ward (consulting editor) Editorial closing date: November 20th 2006 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Outlook for 2007-08

Underlying political problems There have been several outbreaks of political unrest in the Pacific Islands in will remain unresolved recent months, and there is little reason to hope that any of the underlying problems will be solved in the near future. The Fijian government appears to have fended off a military coup, but the military!s leader, Commodore Frank Bainimarama, remains on a collision course with the elected government. In New Caledonia industrial disputes that were ostensibly focused on planned new mining projects (but also reflecting deep social disquiet) managed briefly to bring the economy to a stop in September and could easily start again. In the Solomon Islands ill-judged actions by the prime minister, Manasseh Sogavare, have deeply damaged relations with Australia and stretched domestic political tensions close to breaking point, as well as putting the brakes on political reform and inward investment. Tonga is entering a period of political uncertainty, and the new king, Siaosi Tupou V, could be forced into taking some difficult decisions on reform rather more quickly than he might like. New Zealand and Australian military intervention has reduced the possibility of further rioting, but popular protests could easily erupt again. In Samoa internal ructions in the opposition party may encourage the ruling Human Rights Protection Party to take a yet more intolerant view on dissent. In Vanuatu the recent political calm could be shattered by intra-government tensions, possibly precipitated by rows over corruption. The reasons for these political disputes are various. Some can be traced back directly to ethnic and other disputes related to colonisation; others can probably be better ascribed to the belligerence of certain individuals. Looking forward, it is difficult to find easy resolutions to any of them. In Fiji removal of persistent coup threats will require a radical redefinition of the relationship between the elected government and the military, something that the prime minister, Laisenia Qarase, has tried to do several times this year. Even if the determined Mr Bainimarama can be removed from the scene, there is no guarantee that the armed forces would withdraw from politics entirely: Fiji!s sometimes unhappy experiences with elected governments means that the army may continue to consider that it in some sense has a "duty" to intervene. In New Caledonia there is no way that the local administration can reverse or cancel planned mining projects, which should eventually ensure the French territory a degree of economic independence as the central government inches New Caledonia towards greater self-determination. But dealing with the political fall-out from the mining projects demands a more open debate about what to do about the environmental fall-out and the financial gains from the projects"something that the current political system may not be able to do. In the Solomon Islands, much as the Australian government (and most business interests) would like Mr Sogavare to depart the scene, any changeover could be accompanied by a fresh outbreak of violence, and there is little guarantee that any new regime would be much better. Tonga!s has a generally effective prime minister, Feleti Sevele, (the first appointed from outside the nobility), who may be able to help the democratisation process. But capricious or mistaken actions

by the new king (who has a slightly inconsistent reputation) are still possible, and this may lead to further rioting. In Samoa the government needs to unlearn how to be a dominant party, something that history suggests is always difficult. History also suggests that, despite the recent calm, politics in Vanuatu could again become unstable.

Australia may review its The Pacific Islands are also entering a new international environment, and may

priorities experience new forms of economic colonialism. The most important foreign player in the region is, by default, Australia. Australia!s wide-ranging diplomatic presence in the region gives it the impression of possessing considerable power, but this is misleading. Australia is not a populous country, and its military forces are already overstretched in other countries, such as Iraq and Afghanistan. A widespread review of its foreign military deployments looks likely after the next Australian election (which is expected to be held at the end of 2007) and this may attempt a fresh look at problems in the Pacific Islands. Australia does not gain much economically from its involvement in the region, and its intervention is driven more by a fear of what might happen if it did not (specifically, the attempted emigration of a large numbers of Pacific Islanders). But it is difficult to see what alternative approach to the region Australia can take, or how its obligations can be better shared: New Zealand has small military forces, there are problems deploying military forces from Asian countries (such as Malaysia) in the region, and the US appears to have opted out. An even greater uncertainty is posed by China. Historically, China!s political and economic involvement in the region has been focused on persuading countries to renounce their diplomatic support for Taiwan. (Just as Taiwan has offered money to the Pacific Islands to buy diplomatic support, so China has offered money or construction projects to tempt them to change loyalties.) But China!s increasing regional economic power is likely to be felt in other ways too. China appears increasingly keen on offering loans or labour for construction projects, or even certain sorts of skills (such as athletics coaching, and healthcare). Exports to China of commodities"notably timber and fish"are also increasing quickly from certain Pacific Islands, and many are in the unusual situation of running substantial merchandise trade surpluses with China. The existence of such surpluses may give some Pacific Islands governments an erroneous sense of power as regards their relationship with China: in reality, such exports are underpinned by a complex and murky set of deals, and the opacity surrounding Chinese aid flows will further undermine attempts at good governance. Relations with China could also quickly turn nasty in some countries: many populations remain distinctly uneasy about recent inflows of Chinese immigrants (whether they owe allegiance to China or Taiwan), worried that their industriousness is reducing local power over retailing and other business sectors. The anti-Chinese riots witnessed in the Solomons Islands earlier this year could be repeated elsewhere.

Commodities and tourism Recent outbreaks of political unrest have put the brakes on economic policy could boost economic growth reform in most countries, and have doubtless discouraged many foreign investors. This does not bode well for economic development over the next few years, and comes at a difficult time for many countries. Fiji, for example, has to

deal with less generous terms for sugar imports from the EU, and Tonga is squaring itself up for the rigours of World Trade Organisation (WTO) membership. Other longer-term economic issues, such as those potentially caused by global warming, also remain unresolved. But it would be a mistake to argue that the economic outlook for the Pacific Islands is unreservedly bleak. Just as the market for some commodities, such as sugar, is becoming more bleak, so markets for others, such as timber, are growing (albeit with worrying environmental consequences). Furthermore, although high energy prices create problems for the trade balances of some Pacific Islands, they may also open up the markets for new alternative agricultural crops, such as palm oils and bio-fuels. The central economic problem in future may not be finding new export markets, but rather managing the impact"environmental, political and economic"of existing ones. In addition to creating major environmental problems, an increase in exports such as timber can create serious governance and economic management issues. Despite a range of good governance initiatives, sponsored by the Pacific Islands Forum (PIF, the main regional political body) and others, it remains to be seen whether Pacific Islands! governments can cope with any such influx of wealth, although one bit of good news is the growing independence of some countries! central banks. Tourism is also a promising future sector, although this too carries a variety of potential risks. The Pacific Islands stand to benefit from the emergence of new commercial airline services, and the withering away of many of the chronically inefficient and erratic older state-run airlines. But the new system carries risks too. Islands are vulnerable to changes in services provision by commercial airlines; intra-country services, necessary for social reasons, could also suffer. Moreover, an increase in tourist numbers could cause a range of political problems, ranging from corruption (relating to land-development and hotel construction) to stirring up broader underlying controversies such as land ownership and land control. The Pacific Islands seem unlikely to enter on a period rapid expansion, as political uncertainties and agricultural ups and downs keep the lid on growth. But growth in many countries could be faster than expected, and perhaps greater attention should be focused on the problems of containing credit growth and inflation. A persistent problem, despite some export successes, will be the continuing size of many countries! merchandise trade deficits and reliance on outside funding on concessionary terms. This is likely to encourage a continued economic dependency mindset.

The political scene

Political problems have After the May election Fiji!s prime minister, Laisenia Qarase, surprised many by

multiple roots creating a multiracial cabinet, with nine members of the Indian-based Fijian Labour Party (FLP), which was sworn into office at the end of May. Despite some tensions, the cabinet has at least managed to hold together, and both Mr Qarase!s People!s Unity Party (SDL) and the FLP have agreed to form a body to finalise ground rules for cabinet operations. However, two particularly

controversial pieces of legislation have unfortunately brought the military back to centre stage. Mr Qarase put forward a Reconciliation, Tolerance and Unity Bill, which proposed granting pardons to some who were involved in the failed coup of 2000 (led by Fijian nationalists, and foiled by the military). A separate piece of legislation also proposed restoring coastal ownership to indigenous Fijians, something that the military also thought would exacerbate ethnic divides. Anticipating such protests, Mr Quarase had already tried to force Mr Bainimarama from his post earlier this year, but the military has presented a united front, and Mr Bainimarama seems likely to be a part of the political scene for some time yet. Recent political developments in New Caledonia would appear to centre on different problems, but issues of land control exist beneath the surface. The new Inco mine in Goro remains the focus of protest for the indigenous Kanak population, who are worried about the development!s environmental implications. But the range of groups involved in the most recent protests, including the newly formed Confederation of New Caledonian Workers Union (CSTNC), suggest that the Inco dispute is serving as a proxy for the expression of a number of other grievances, most obviously the perceived marginalisation of the indigenous population. A general strike at the end of September managed to paralyse the territory for a few days, but was non-violent. In the Solomon Islands protests have been more anarchic. The central antagonist here is the prime minister, Manasseh Sogavare, who has attempted to derail relations with Australia by denigrating local Australian figures, and by giving sanctuary to a prominent Solomon Islander wanted by Australia on rape charges. Mr Sogavare has tried to present his protests as part of more general objections to Australian involvement in the country. (Australia instigated, and leads, the Regional Assistance Mission to the Solomon Islands, or RAMSI, which initially intervened to stop violence in 2003.) So far, Mr Sogavare!s attempts to whip up anti-Australian feeling"to compensate, perhaps, for policy fail ings at ho me"appear to have elicited little domestic sympathy. Fiji!s leader, Mr Qarase, appears to have persuaded Mr Sogavare to tone down his rhetoric, and a more pragmatic attitude to RAMSI and Australia may re-emerge. With the death of King Tupou IV on September 10th Tonga enters a new political era. The death of the elderly king, though not unexpected, comes at a difficult time for the country. There has been widespread discussion on political reform, and proposals have recently been put before parliament. The danger is that the frustrated aspirations of part of the population will result in further riots: riots in November have already led to the arrival of a New Zealand-led security force. The attitude of the new king, Siaosi Tupou V, to constitutional reform may be key. On the one hand, he is keen to appear as a bulwark of the current constitution; on the other, he appears willing to make changes when necessary. He was, for example, behind the appointment of the non-noble Mr Sevele as prime minister last year. One worry is that the new king, who has in the past made a number of misdirected comments, could unintentionally stir up further dissent.

Elsewhere in the region, political protests have been more muffled, but unsettling nonetheless. In Samoa the opposition Samoa Democratic United Party (SDUP) appears to have fragmented, following bitter infighting among its leadership. This allowed the prime minister, Tuila!epa Sa!ilele Malielegaoi, to try to prop up the SDUP, saying that Samoa needed an opposition party; his comments may have elicited some wry smiles, as the ruling Human Rights Protection Party (HRPP) is not known for a relaxed attitude towards dissent. Another example of this emerged recently, when the government tried to dismiss the assistant attorney-general, Daryl Cooke, after he had found some members of parliament (MPs) guilty of accepting pre-election bribes, ruling that the traditional 'o'o' system of largesse was illegal. The situation in Vanuatu remains unnaturally calm, but a number of major disputes may soon come to the fore. Several of these centre on land ownership. The number of land disputes has escalated in recent years, and there is particular controversy surrounding a proposed free-trade zone, which some ministers appear to have agreed to without consulting their colleagues. Corruption remains a potential source of unrest.

China offers more assistance Regional relations over the last few months have been characterised by Australian outspokenness and Chinese financial diplomacy. Australia has been increasingly annoyed by the actions of the Solomon Island!s prime minister, Mr Sogavare, as outlined above, and it is possible that this irritation backfires into its relations with other Pacific Islands states too. The recent near-coup in Fiji may also not have increased Australian confidence in the Pacific Islands. Much as many Pacific Islands dislike Australia!s perceived interventionism, this is not a relationship that they can afford to mess up. As well as its military role, Australia continues to supply large amounts of aid, and remains the leading external power in the region. Australia!s willingness to admit migrant or seasonal workers from the Pacific Islands, still under discussion, may also be crucial to future prosperity of many Pacific Islands countries, particularly if there is significant climate change. China!s diplomatic approach has been different. The focus of efforts seems to be changing from just persuading Pacific Islands to give it diplomatic recognition, rather than Taiwan (so undermining Taiwan!s claims to legitimacy in multilateral organisations). China is also now putting money into certain high-profile construction projects, and also appears keen to provide medical and other services. But such aid is not provided with the checks and safeguards that now accompany most aid from developed countries, and may encourage further corruption. It is also unclear if such Chinese aid can offset growing anti- Chinese sentiment among some Pacific Islands populations.

Economic policy and the domestic economy

Public finances remain Various sets of economic problems continue to confront Pacific Island countries.

problematic First, there are the problems of distinctly shaky public finances, and (in most cases) external accounts that are heavily in deficit, and which tend to slip further into the red if growth picks up. These problems are often the result of ineptitude, corruption, or an over-reliance on agricultural products Second,

there are medium-term issues relating to the development of new, often service- based sources of revenue"for example, inward tourism, or the outward movement of seasonally based Pacific Island workers to Australia or New Zealand. Thirdly, there are policy conundrums relating to longer-term problems such as climate change. Substantial progress on public finances and the external accounts remains elusive. However, there are indications of greater realism. Fiji!s 2007 budget, presented in early November, announced an increase in the rate of value-added tax from 12% to 15%, effective from January 1st. Fiji has also said that it will halve the total cost of its civil service, but no firm plans have been unveiled as to how it plans to do this. Tonga and other countries also face major problems in bringing such public spending under control. Extra indirect taxes will help to fund more spending on health and education. Some action is also being taken to stop ways in which the tax system can be abused: in Tonga, for example, Mr Sevele, has proposed the abolition of bonded warehouses, and his government will set up an anti-corruption commission. Foreign investment restrictions are being reduced. The Solomon Islands managed to pass new foreign investment legislation in July, before its latest political troubles erupted. But a reaction against liberalisation is possible. A lax approach to property ownership in Vanuatu, for example, has resulted in growing protests about foreign land ownership. Furthermore, over-reliance on individual private-sector firms to underwrite development can cause its own problems: in New Caledonia, the uncertainty of the Swiss-based mining company, Xtrata, as to whether it will go ahead with a nickel project in the northern province of the territory has caused Kanak groups to become increasingly impatient.

Tourism will remain There has been some good news, however, on tourism and migrant workers.

vulnerable to political unrest Visitor arrivals to many countries have been rising, helped by increased air services from independent airlines, notably Polynesian Blue, a joint venture with Australia. However, any revival in tourism can quickly be undermined by political unrest, as has been evident in Fiji over the last few months. New Zealand appears to be taking a more relaxed approach to Pacific Islands workers: in November a new scheme was announced allowing such workers to fill seasonal horticulture and viticulture jobs when no locals are available. In the first year of the scheme, 5,000 such visas are to be available to citizens of Fiji, Kiribati, Samoa, Tonga, Tuvalu and Vanuatu, and there are plans to eventually extend it to all members of the PIF. Any change in Australian policy towards migrant workers would be even more important, but Australia!s difficult relations with a number of Pacific Islands countries may hinder such a development. The PIF itself has recently been struggling to cope with political problems in countries such as the Solomon Islands; progress on long-term issues as proposed by its Pacific Plan, approved in October 2005, appears to have been limited.

Official growth projections are Despite some signs that the tourism industry is reviving, and the expectation of

modest continued high prices for some export commodities, official growth projections for 2007 tend to be modest. Fiji!s 2007 budget, for example, assumes GDP growth of just 2.6% in 2007, after an estimated 3.6% for 2006. Samoa!s central bank also forecasts slower growth in the current fiscal year, warning that monetary policy may need to remain tight in order to preserve economic stability"worries about inflation and credit growth remain close to the surface in many Pacific Island countries. The Asian Development Bank (ADB) also forecasts slower growth this year in Fiji and Tonga, although it remains relatively upbeat about the Solomon Islands, Samoa and Vanuatu. Growth in some countries could be faster than is generally forecast, owing in part to tourism-related investments in construction, although this risks creating some investment bubbles. Political stability, as ever, remains the key to sustained growth throughout the region.