World Bank Document

Document of The World Bank FOR OMCIAL USE ONLY Public Disclosure Authorized R1uutNo. P-3687-Snr- RERPO- AND REWOIUIKNDkON OF TME PRSIEn OF THEl Public Disclosure Authorized I,FNTONL D EL, ASSOCIATION TO TME EXECUTIVE DIRECTORS m A PROPSED XD& C3REDIT 3N AN AMONT EBUIV TO SDR 3.3 MILLION Public Disclosure Authorized TO SOL9ON ISLANDS FOR A RURAL SERVICES PROJECT November 14, 1983 Public Disclosure Authorized bsbcmmet Ihas iatdc dEggbetI ma hbe m..i by retip -a ely in Oh pefama of IIeoftial dum kg =my ne ethewise be dbdched W &_WM Bk mberdz.do CURRENCYEQUIVALENTS Calendar 1982 July 1983 Solomon Islands Solomon Islands Currency Unit dollar (SI$) dollar (SI$) $1.00 SI$1.03 ST$1.20 SI$1.00 US$0.971 US$0.830 The Solomon Islands Dollar was introduced in 1977. The exchange rate is determined on the basis of a weighted basket of currencies of the major trading partners of the Solomon Tslands. ABBREVIATIONS ADB - Asian Development Bank ADAB - Australian Development Assistance Bureau AIU - Agriculture Information Unit DBSI - Development Bank of Solomon Islands FTC - Farmer Training Center IFAD - International Fund for Agricultural Development HHAND - Ministry of Home Affairs and National Development KATI - National Agricultural Training Institute rIU - Project Implementation Unit RDC - Rural Development Center UNDP - United Nations Development Program FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY SOLOMONISLANDS RURALSERVICES PROJECT Credit and Project Summary Borrower: The Solomon Islands Amount: SDR 3.3 million (US$3.5million) Terms: Standard IDA terms. Project Description: The project would expand and improve the country's agricultural support services in the areas of research,education, training and extensionservices, and foster developmentof rural enterprises. The credit would finance expenditures for civil works; equipment,furniture and vehicles; salaries of expatriate and national staff; travel expenses; opera- tional expenses,such as materialsand supplies,utilities, and operation of vehicles; consultancies;and fellowships. Benefits: Benefits would accrue to some 9,000 smallholdersspread throughoutthe countrywho raise mainly coconut and food- crops. The main benefits expected from the project are: (a) increased productivityfrom investment in research, extensionand rural infrastructure;(b) an increase in cost effectivenessand operatingefficiency of government services; (c) greater availabilityof suitably trained man- power; (d) increasedparticipation of the smallholdersin the growth of the cash economy; te) expansionand diversifi- cation of agriculturalproduction and exports; (f) increased foreign exchange earnings and government revenue as a result of export ta-ration; and (g) development of off-farm skills, which would enable rural people to establishand operate small rural enterprises. Risks: Possible constraintsto timely implementationof the project are the expeditiousrecruitment of necessarystaff and close cooperationbetween the national and provincialagricultural services and other national departments. To reduce this risk, a Project ImplementationUnit would be establishedand investmentshave been phased to provide adequate lead times for staff recruitment. This doamct lss a resctwedd&tnbutkmionWn may be used by recipientsonly in the perfornanceor tbe& ofFia dutie. Its contentsmaY not otherwis be discosed'without World Ihnk authoization. - il - Project Costs: /a Foreign Local Total --i---US$ million-- (i) Rural Development Centers 1.47 1.87 3.34 (ii) Agricultural Research, Extension & 1.66 1.16 2.82 Information (iii) Agricultural Training 0.71 0.51 1.22 (iv) Project Implementation Unit 0.68 0.35 1.03 Base Cost 4.52 3.89 8.41 Physical contingencies 0.28 0.49 0.77 Price contingencies 0.98 1.34 2.32 Capitalized ADB fee/other charges 0.15 - 0.15 Total Project Cost 5.93 5.72 11.65 Financing Plan: ADB 2.95 2.20 5.15 IDA 2.06 1.44 3.50 IFAD 0.92 0.58 1.50 Government - 1.50 1.50 Total Financing 5.93 5.72 11.65 Estimated IDA FY 1985 1986 1987 1988 1989 1990 Disbursement: (US$ million equivalent) - Annual 0.6 0.8 0.9 0.9 0.2 0.1 Cumulative 0.6 1.4 2.3 3.2 3.4 3.5 Rate of Return: Given the nature of the project, no rate of return has been calculated. Appraisal Report: Asian Development Bank, dated September 1983 Map No.: IBRD 14259 /a Net of taxes and duties. REPORT AND RECOMMENDATIONOF THE PRESIDENT OF THE INTEKNATIONALDEVELOPMENT ASSOCIATION TO THE EXECUTIVEDIRECTORS ON A PROPOSED CREDIT TO SOLOMON ISLANDS FOR THE RURAL SERVICES PROJECT 1. I submit the followingReport and Recomuendationon a proposed credit on standard IDA terms to the Solomon Islands for the equivalent of SDR * 3.3 million (US$3.5million) to help finance the Rural Services Project. The projectwould be cofinancedon a parallel basis with the Asian Development Bank (ADB) as the lead institution;ADB would provide SDR 4.930 million, * (US$5.0 million) from its Special Fund resources,/lplus a technical assistancegrant of US$90,000 equivalent. The InternationalFund for AgriculturalDevelopment (IFAD) will provide $1.5 million equivalenton a parallel basis on terms and conditions to be agreed. PART I - THE ECONOMY 2. The Bank Group-s first report since the country's independence(The Solomon Islands: An IntroductoryEconomic Report, No. 2553-SOL) is dated December 18, 1979. Basic country data are given in Annex I. In June 1983, the world Bank and the UNDP issued an energy assessment report (Solomon Islands: Issues and Options in the Energy Sector; No. 4404-SOL). The followingsections incorporateinformation obtained by ADB and IMF during recent missions. An economic mission visited the country in October 1983. Structureof the Economy 3. The Solomon Islands, which constitutesa scatteredarchipelago east of Papua New Guinea, a British protectoratesince 1893, gained its independence in July 1978. The countryhad a populationof 241,000 and a per capita GNP of US$660 in 1982. Six main islands account for most of the population and the land area of some 29,000 sq km. Although the population is racially homogeneous(about 93% Melanesian),at least 87 vernacular languages are spoken. Most of the population reside in small, widely dispersed settlements along the roasts; 60% of the people live in localitieswith fewer than 100 inhabitantsand more than 8O% in localitieswith fewer than 200. The capital city of Honiara, situated on Guadalcanal,the largest island, has 16,000 inha- * bitants; other urban centers have less than 2,000 inhabitantseach. Inter- island shipping is the main mode of transportation. 4. Solomon Islands is a predominantlyagricultural economy. Subsis- tence (nonmonetary)production is an important componentof total output. It contributes40% of GDP, and nine out of ten householdsare engaged in subsistence food production to some extent. As is typical of the islands of the Pacific, the basic needs of the populationare reasonablywell met from /1 ADB Appraisal Report refers to this as Part A of Loan. -2- subsistenceactivities. Reflecting the size of the subsistencesector, the proportion of the labor force engaged in paid employment is limited. Between 1978 and 1982, only about 20% of the labor force was employed as full-time salary and wage earners, and an additional27-28% derived some cash income from copra and market gardening. Thus only about 48% of the labor force was engaged in cash earning occupations. Recent Developments 5. After an impressivegrowth performancein the 19709 (8% p.a. growth of real GDP), the Solomon Islands' economy recorded a sharp downturn In the 1980s, with real GDP estimatedto have declined by 2.5% p.a. between 1980 and 1982. The continuedworld economic recessionand the deterioratingterms of trade more than offset favorablesupply conditions,i.e. new investmentsin the timber industry and new planting of palm oil and coconut trees in the mid- to late 70s, causing a decline in real domestic income. The weak external demand in turn led to a weak domestic aggregate demand; domestic inflation slowed down considerablyto 10% in 1982 from 16% in 1980, in large part because of lower import prices while investment also declined because of the lower level of overall economic activity, especiallythe lower profitability in the export sector. The noncash sector of the economy, which contributes over one-thirdof GDP, seems to have withstood the economic downturn well as basic needs are reasonablymet from subsistence. 6. Between 1980 and 1982, the growth in total revenue and grants did not keep pace with that in total expenditures. Current expenditureson the newly decentralizedadministrations and an 8% increase in salaries and wages in the public sector accounted for the growth in expenditures.-As a result of the depressed level of economic activity,revenue was less buoyant than in previous years. Thus, in spite of a slowdown in developmentexpenditures, owing to project preparationand implementationdifficulties at provincial levels, the overall budgetarydeficit increased to 6.8% in 1982 from 2.8% of GDP in 1980. Financing of the budgetary deficitwas almost equally divided between borrowings from the National Provident Fund and the domestic banking system. The latter, for the first time, became an important source of financingas there was some slack in the demand for credit by the domestic private sector. 7. In spite of the weakened external demand for most of the country's export commodities,the external current account deficit in the balance of payments improved in 1982 to 132 of GDP from 27% in 1981. However, this improvementreflects the lower level of economic activity, the associated lower imports of consumer and capital goods, the lower freight and insurance charges and the lower external prices. To shore up its short-term balance of payments difficulties,the country resorted to judiciousexternal borrowing from commercial sources and multilateralinstitutions in the 1980-82 period, includinga recent SDR 2.4 million standby credit from the IMF in 1983. More- over, in August 1982, the Governmentdepreciated the SI$ by 10% to ensure the country's competitivenessin export markets, which was eroding because of a somewhat overvalued exchange rate.

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