Solomon Islands

Country Profile 2004

Solomon Islands

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Symbols for tables “n/a” means not available; “–” means not applicable

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Comparative economic indicators, 2003

Gross domestic product Gross domestic product per head US$ bn US$ ’000

Australia 506.8 Australia 25.5

New Zealand 78.2 New Zealand 19.5

Papua New Guinea Fiji(b)

Fiji(b) Samoa(b)

Solomon Islands(a) Tonga(b)

Samoa(b) Vanuatu(b)

Vanuatu(b) Papua New Guinea

Tonga(b) Solomon Islands(a)

012345 0.0 0.5 1.0 1.5 2.0 (a) 2001. (b) 2002. (a) 2001. (b) 2002. Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product Consumer prices % change, year on year % change, year on year

Solomon Islands Papua New Guinea

Fiji Tonga

Samoa Solomon Islands

New Zealand Vanuatu

Australia Australia

Papua New Guinea New Zealand

Tonga Samoa

Vanuatu Fiji

-6 -4 -2 0 2 4 6 -6 -3 0 3 6 9 12 15 Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

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Contents

3 Regional overview 3 Membership of organisations 5 The regional economy

8 Basic data

9 Politics 9 Political background 10 Recent political developments 11 Constitution, institutions and administration 12 Political forces 12 International relations and defence

12 Resources and infrastructure 12 Population 13 Education 13 Health 13 Natural resources and the environment 13 Transport, communications and the Internet 14 Energy provision

14 The economy 14 Economic structure 15 Economic policy 15 Economic performance

16 Economic sectors 16 Agriculture 16 Mining and semi-processing 16 Manufacturing 17 Financial services 17 Other services

17 The external sector 17 Tra d e i n go od s 18 Invisibles and the current account 18 Capital flows and foreign debt 18 Foreign reserves and the exchange rate

20 Appendices 20 Sources of information 20 Reference tables 20 Government finances 21 Money and credit 21 Real gross domestic product by industrial origin 21 Inflation 22 Output of selected products 22 Visitor arrivals 22 Main exports 22 Main imports 23 Main trading partners

23 Balance of payments, IMF series 24 External debt 24 Net official development assistance 24 Foreign reserves 25 Exchange rates

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Solomon Islands

Basic data

Land area 27,556 sq km

Population 409,042 (1999 national census); 508,000 (July 2003 Asian Development Bank estimate)

Major islands Guadalcanal, Choiseul, Santa Isabel, New Georgia, Malaita, San Cristobal

Capital Honiara (population 49,107 in 1999), on Guadalcanal

Climate Tropical, maximum temperature 31°C; cooler season April to November. From November to April higher temperatures, occasionally accompanied by cyclones

Weather in Honiara Average rainfall 2,290 mm per year

Languages English (official language), Pidgin, 87 local languages also in use

Measures Imperial and metric

Currency Solomon Islands dollar (SI$)=100 cents. Average exchange rate in 2003: SI$7.51:US$1. Exchange rate on September 6th 2004: SI$7.43:US$1

Time 11 hours ahead of GMT

Public holidays, 2005 January 1st (New Yearrs Day); March 25-28th (Easter); June 10th (Queenrs Official Birthday); July 7th (Independence Day); December 25th (Christmas Day); December 26th (National Day of Thanksgiving)

Politics

The Solomon Islands gained independence from the UK in 1978. Standards of governance were poor from the start, but mismanagement by the government of Solomon Mamaloni during the mid-1990s led to a financial crisis. This exacerbated long-simmering ethnic hostilities between the people of Guadalcanal (the largest island) and the many thousands from Malaita, who had moved to Guadalcanal, especially to the capital, Honiara, and the sur- rounding areas. Malaitans came to dominate the public service and the police and, by the end of the decade, the hostilities had developed into militia warfare. A reform-minded government, led by Bartholomew (Bart) Ulufaralu, was elected in 1997, but an armed Malaitan militia forced the government from office in June 2000 and installed an administration led by the former opposition leader, Manasseh Sogavare, who had also been finance minister in the Ulufaralu government. Threatened with the loss of international financial support unless the government was legitimised, Mr Sogavare called a general election in December 2001, in which his Peoplers Progressive Party (PPP) saw its number of seats reduced to two. A new coalition government was installed under Sir Allan Kemakeza, the leader of the Peoplers Alliance Party (PAP). Under his leadership, the Solomon Islands government began to disintegrate in the face of renewed ethnic conflict and growing lawlessness. Law and order was restored following the intervention in July 2003 by the Australian-led Regional Assistance Mission to the Solomon Islands (RAMSI), at the request of Sir Allan, and the main focus for the Solomon Islands is now on repair, rehabilitation and economic development.

Political background

Post-independence rulers set In the ten years following independence the Solomon Islands had three prime poor standards ministers. The first was Peter Kenilorea, who had been chief minister at the time of independence. He was succeeded in 1981 by Solomon Mamaloni, also a former chief minister, but returned to office in 1984. Mr Kenilorea resigned in 1986 after allegations that he secretly accepted French aid for repair work in his home village. He was replaced by Ezekiel Alebua, who held the post until 1989, when Mr Mamaloni became prime minister again. After the 1993 election a number of opposition parties combined to form the National Coalition Partners (NCP), with the sole aim of removing Mr Mamaloni from power. The NCP nominated Francis Billy Hilly, an independent, for the post of prime minister and he was duly elected. But he lost office in October 1994 as a result of an attempt to reduce the highly lucrative, but unsustainable and illegal, rates of logging that had developed throughout the country. Some members of his coalition shifted allegiance to Mr Mamaloni, leader of the Solomon Islands National Unity, Reconciliation and Progressive Party, who then became prime minister once again.

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Mr Mamaloni presided over a period of mismanagement that all but Mr Ulufa’alu seeks to secure bankrupted the country and caused widespread public disillusionment with aid donor support politics. The desire of the population for change led to a large number of new members of parliament being elected in the general election in August 1997. It prompted former opposition membersparty representatives and independents aliketo form a coalition called the Solomon Islands Alliance for Change (SIAC), which elected Mr Ulufaralu, leader of the Liberal Party, as prime minister. He made economic and financial management a priority, along with structural reform to secure and maintain the support of international financial institutions and aid donors.

Recent political developments

The government is forced out The reform programme was opposed by beneficiaries of the status quo, and of office by a militia struck major obstacles stemming from the long-running ethnic rivalries between the people of the two largest provinces, Guadalcanal and Malaita. The capital, Honiara, situated on Guadalcanal, had become virtually a Malaitan enclave and thousands of other Malaitans had settled on Guadalcanal outside Honiara. As violence flared up, armed militias killed dozens of people and forced thousands more to flee. In June 2000 an armed Malaita militia, supported by most of the police special force, took over Honiara, and forced the Ulufaralu government from office. The Sogavare administration was installed, declaring its intention to produce peace and national reconciliation, but it struggled to find credibility, especially when Mr Sogavare sought to scrap elections indefinitely while he considered changes to the constitution. The economy collapsed and, despite the negotiation of a peace agreement in Townsville, Australia, in late 2000, hostilities continued.

Australian-led force intervenes The prospect of losing international financial support forced Mr Sogavare to call to restore law and order a general election in December 2001, when a new coalition government was installed, led by Sir Allan. The Solomon Islands slid into deeper trouble in almost every area of governance since the general election. The Townsville Peace Agreement reached with rebel ethnic militias in 2000 provided for the integration of rebel militiamen into the police force. Although no real peace process took hold, the government increasingly found itself the pawn of armed gangs, many of them nominally employed by the government, and large parts of the country ceased to respect government authority. In the Weather Coast region of Guadalcanal, Harold Keke, the one warlord who had refused to sign the Townville agreement, entrenched his power, and government attempts to seize him proved fruitless. In August 2002 the minister for youth, sports and womenrs affairs, Augustine Geve, was assassinated by Mr Keke, but the government proved unable to investigate the killing. Attempts to demobilise the various ethnic militias hit a setback when Sir Frederick Soaki, a member of the National Peace Council, was assassinated. With the government nearing collapse, in June 2003 Sir Allan called for Australian intervention to restore order. The Australian-led Regional Assistance Mission to the Solomon Islands (RAMSI) received the backing of all 16 members of the Pacific Islands Forum at end-June 2003, and in July the Solomon Islands parliament voted unanimously to

approve the intervention. The 2,250-strong force containing Australian, New Zealand, Fijian, Papua New Guinean and Tongan contingents began to arrive in July 2003, backed by the presence of an Australian warship, HMAS Manoora. Law and order was quickly restored and all major militant leaders wanted on murder, intimidation and robbery charges were arrested, including the notorious Mr Keke. Australian advisers have led the rebuilding of the governmentrs financial systems and the general repair and reform of the public service, and by July 2004 considerable progress had been made. The military component of the RAMSI force has been scaled back, although the Australian government has indicated that it will remain in the country "as long as necessary". Under the agreement with the Solomon Islands government underpinning RAMSIrs presence, either side can give three monthsr notice of its intention to end the mission. However, according to RAMSI officials, it could take up to ten years to fully restore the countryrs public service, economy and infrastructure. The Australian government has pledged significant financial aid to help the restoration and recovery, and smaller but still significant inputs have been offered by the governments of New Zealand, Taiwan, Japan and Canada.

Constitution, institutions and administration

The Solomon Islands is a constitutional monarchy with the British sovereign as head of state, represented by a governor-general, who must be a Solomon Islander. Executive power is in the hands of a cabinet headed by the prime minister. The national legislature is a unicameral 50-seat parliament, elected for four-year terms by universal adult suffrage. There are nine provincial governments and an extensive system of area councils and assemblies.

Constitutional amendments A draft replacement for the current constitution, adopted when the Solomon are under consideration Islands became independent in 1978, was submitted to the government in July 2004. The draft, put together by a government task force assisted by UN advisors, proposes the adoption of a federal form of government. Handicapped by an acute lack of funds and skilled manpower, the countryrs weak provincial governments have for many years been pushing for greater decentralisation, and the handing over of funds and responsibilities that it implies. The draft constitution envisages a federal republic with the present head of state, the British monarch, replaced by an elected president. The national parliament would remain but a significant number of political, financial and legal powers would be transferred to state governments over a period of ten years. However, there is some concern about the costs involved in setting up a federal structure, while some critics argue that the proposed changes would not necessarily bring about a much-needed improvement in the delivery of public services. After consideration by the cabinet, the draft constitution will be referred for public consultation.

Political forces

Party allegiances are fluid Party allegiances in the Solomon Islands tend to be fluid, and are based more on individuals and particular issues than long-standing political or ideological

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positions. Parties include the National Action Party, the Labour Party and the National Party, all of which, together with three minor parties, were members of the SIAC coalition government ousted from power in mid-2000. The influence of Mr Sogavarers Solomon Islands National Unity, Reconciliation and Progressive Party was greatly diminished by the 2001 election, whereas that of the ruling Peoplers Alliance Party increased. There is invariably a sizeable group of independents at the beginning of each parliament.

International relations and defence

Australia’s involvement is Successive governments have followed a policy of non-alignment since likely to be long term independence. However, the governmentrs decision in 2003 to invite in an Australian-led intervention to restore order is likely to lead to greater long-term involvement by Australia in domestic affairs, particularly as the mission turns its attention to issues such as corruption. The Solomon Islands is a member of the Pacific Islands Forum (PIF) and the Melanesian Spearhead Group (MSG; see Regional overview). Relations with neighbouring Papua New Guinea were strained by the ten-year secessionist war on Bougainville island, which began in 1988. Bougainville is close to the Shortland Islands, the most north-westerly part of the Solomon Islands, and family and community ties span the border. There were recurring armed incursions in both directions until a peace agreement was signed in 1998. In July 2004, the government has signed a border agreement with PNG relating to Bougainville, providing for the setting up of police posts and exchanges of magistrates, as well as financial assistance from PNG for the Solomon Islands. The Solomon Islands has no army, but there is a well-armed police field force, which provided the weapons and many of the personnel for the overthrow of the government in 2000. Many of the Malaitan militiamen were taken into the police force as special constables; these are being demobilised as part of the current intervention. William Morrell, of the Manchester police force in the UK, took over as police commissioner in January 2003.

Resources and infrastructure

Population

At the time of the last national census held in November 1999, the population totalled 409,042, up from 286,043 in the previous census in 1986. The Asian Development Bank has estimated a population of 508,000 in 2003. According to the 1999 census, the population of Honiara was 49,107, around 12% of the total population. Provincial populations were: Malaita 122,620; Western 62,739; Guadalcanal 60,275; Makira-Ulawa 31,006; Central 21,577; Santa Isabel 20,421; Choiseul 20,008; Temotu 18,912; and Rennell-Bellona 2,377.

Education

Basic services such as Life expectancy at birth has increased from 55.6 years in 1970-75 to 69 years in education are in a poor state 2002, according to UN Development Programme (UNDP) figures. The rate of infant mortality has improved dramatically from 120 per 1,000 live births in 1960 to 20 in 2002. The adult literacy rate was estimated at 76.6% in 2002. Normally about two-thirds of children are in formal education, but with the near breakdown of public services many schools have closed for lack of funds to pay teachers and maintain facilities. The New Zealand government has offered funds to help restore primary school education services.

Health

In 2001 public health expenditure accounted for 4.7% of GDP, according to UNDP figures, but the breakdown in basic services over the past two years has also been reflected in widespread closures of health facilities. There were 15,172 malaria cases for each 100,000 people in 2000.

Natural resources and the environment

The country is composed of six large islands, 20 smaller ones and hundreds of small islets and coral reefs, giving a total surface area of 27,556 sq km. The capital, Honiara, is on the largest island, Guadalcanal. The other major islands are Choiseul, Santa Isabel, New Georgia, Malaita and San Cristobal. The most heavily populated islands are Malaita and Guadalcanal. Forests and woodland cover 84.8% of the total land area, which explains why the logging industry is the dominant sector within the economy. Around 90% of land is held under traditional community land-tenure arrangements.

Some minerals deposits exist Surveys have indicated that there are deposits of phosphates amounting to 10m on the islands tonnes on Bellona Island, and deposits of asbestos, zinc, bauxite, lead, cobalt and nickel have also been found on the islands. Gold reserves at Gold Ridge, on Guadalcanal, are estimated at 1m-1.5m oz, but the Australian-owned gold mining operation was closed in June 2000 because of the political turmoil. In 2004, another Australian company put forward proposals for some nickel mining projects.

Transport, communications and the Internet

The central and provincial governments maintain about 1,300 km of roads, of which about one-third are classified as main roads. Another 800 km of private roads are maintained mostly for plantation use. There are usually international shipping services between the Solomon Islands and Australia, New Zealand, Hong Kong, Singapore, Taiwan and a number of European ports. There is an extensive inter-island shipping system, involving more than 100 vessels. In 2004, the first of seven outer island jetties being built with money from the EU was completed and opened. According to Honiara and Noro port authorities,

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both ports met the July 2004 deadline for fulfilling new international safety and security requirements. Air services operate through one international and 25 domestic airports. International services are operated by Solomon Airlines (to Australia, New Zealand and Vanuatu), Air Nauru and a limited service by Air Niugini (Papua New Guinea). Domestic services are operated by Solomon Airlines. Internet take-up has been slow and has virtually stopped in the past two years. Most government websites are out of date, with the notable exceptions of the Central Bank of Solomon Islands.

Energy provision

According to the Asian Development Bank, total energy production amounted to 58m kwh in 2003. Consumption per head of electricity stood at 55 kwh in 2003, down from 63 kwh in 1999. The recent turmoil in the country has affected all services, including power supply. The Solomon Islands Electricity Authority (SIEA) has indicated that regular disruptions to power in Honiara, the capital, would be over by the end of 2004, following 12 months of repairs to the Lungga and Honiara powers stations. There are plans to greatly increase generator capacity, to be funded by Australia and Japan.

The economy

Economic structure

Main economic indicators, 2003 Real GDP growth (%) 5.8a Consumer price inflation (av; %) 10.0 Current-account balance (US$ m) 27.2b Exchange rate (av; SI$:US$) 7.51 a Central Bank of Solomon Islands estimate. b Asian Development Bank estimate. Sources: Central Bank of Solomon Islands; Asian Development Bank; IMF, International Financial Statistics.

The population relies on Economic growth is largely determined by the performance of the agricultural subsistence agriculture sector, which accounted for 62% of GDP in 2002, a share that has risen in recent years, following years of turmoil and interruptions in the provision of many services. About 90% of the population relies on subsistence agriculture. Exports are almost entirely of agricultural commodities, of which timber is the largest category, accounting for 67% of total export earnings in 2003. Other significant exports include fish and fish products, palm oil, copra and cocoa, although all were affected by the recent political turmoil. However, copra and cocoa production and fishing are showing signs of recovery and Malaysian companies have expressed interest in taking over and replanting large oil palm plantations abandoned by the Commonwealth Development Corporation owing to the violence that began in 2000.

Economic policy

Public finances have The government has consistently run a budget deficit in recent years. The deteriorated sharply deficit appeared to peak in 1997 at SI$235m (US$63m), although the absence of data between 1993 and 1995 means that the deficit could have been even higher in those years. The overall deficit fell after 1997, and in 1998-99 a small surplus was recorded, but this was quickly reversed in 2000, when the deficit swelled to SI$144m amid the political turmoil. The lack of data caused by the rundown in the governmentrs statistical capacity suggests that national figures should be treated with caution, although latest figures from the Asian Development Bank (ADB) put the deficit (excluding grants) at SI$47.2m in 2001, rising to SI$309.4m in 2003. However, the Australian-led mission has overseen considerable progress in recent months in downsizing the public service, restoring discipline in the management of government finances and improvements in the collection of income tax and import revenues. The government has also started to repay domestic debt, (including its dishonoured cheques) much earlier than expected. Domestic debt fell to SI$491m in mid-August 2004, from SI$570.8m a year earlier, while external debt stood at SI$1,108.4m in mid-August, down slightly from SI$1,120.9m a year earlier. The Australian prime minister, John Howard, has pledged A$25m (US$16.3m) in direct budget support for the government, but at the same time has emphasised that the next phase of the intervention must focus on rooting out corruption in the government and the public services.

Economic performance

The economy contracted for Real GDP, which contracted by 0.5% in 1999, plummeted by more than 14% in four years in a row 2000 and by a further 9.1% in 2001. All figures should, however, be treated with caution as it has become increasingly difficult to compile statistics or make realistic estimates because of the lack of resources in government ministries and agencies. A further contraction of around 2% is estimated to have taken place in 2002, with foreign assistance preventing an even greater fall. However, the Central Bank of the Solomon Islands (CBSI) estimates that the economy expanded by 5.8% in 2003, thanks to the restoration of law and order, the resilience of the private sector, improving external demand and inflows of donor funds. No economic activity escaped unscathed from the conflict that followed the 2000 coup, although the export sector was probably worst hit. Exports of commodity products continued nonetheless, helping to keep the economy afloat. The formal sector of the economy faces major challenges, because of damage to plant and equipment and financial difficulties. It may, for example, be difficult to obtain insurance, particularly in mining, to begin a venture or to restart existing operations. The rebuilding of infrastructure, especially in export-oriented areas, and a firm commitment to wide-ranging economic reforms should help the economic recovery, although the cost of rehabilitation will be high.

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Economic sectors

Agriculture

The output of coconut Coconut products are traditionally the main agricultural output. In 2002, the products slumped in 2001-02 production of copra slumped to just 2,000 tonnes, compared with 19,000 tonnes in 2000 and 27,000 tonnes in 1998, but recovered strongly in 2003, to 15,000 tonnes. Commercial fish production, which in 1998 was around 49,000 tonnes, fell sharply to 18,000 tonnes in 2001, before rebounding to 29,000 tonnes in 2003. The sale of fishing licences to foreign ships has been a major source of revenue for the government in recent years.

Forestry output has fluctuated Forestry output has fluctuated wildly in recent years. In order to generate wildly government revenue, the felling rate was allowed to climb to unsustainable levels in 1994-97. The change of government in 1997 saw efforts made to bring logging back to sustainable levels, but many logging companies ceased operations as a result of the Asian economic downturn in 1997 and 1998 and the consequent collapse of markets for logs. Following a recovery in 1999, timber exports fell in both 2000 and 2001, although export earnings from timber rose again to SI$254m (US$38m) in 2002 and SI$371m in 2003. In March 2004, the government finally began to take steps to curb the illegal forestry which threatens the industryrs longer-term prospects.

Mining and semi-processing

Gold production was Gold production had been expected to rise rapidly, but was suspended suspended in mid-2000 indefinitely in mid-2000 because of the political situation. Initial estimates had suggested that the Gold Ridge mine on Guadalcanal, which began production in September 1998, would produce 100,000 oz of gold a year over ten years, with further exploration leading to the discovery of additional reserves. Earlier in 2004, the government was seeking foreign investors to help reopen the badly damaged mine, which was vandalised and had its equipment looted during the troubles. However, the Guadalcanal provincial premier, Waeta Ben Tabusasi, has insisted that all negotiations for the gold mine and other ventures be suspended until landowners know what benefits they can expect from the projects.

Manufacturing

The manufacturing sector has Manufacturing activity is concentrated on the processing of agricultural stagnated in recent years products, particularly fish and timber. The manufacturing sector has stagnated in recent years because of economic conditions. The change of government in 1997 brought a greater emphasis on private-sector business development and renewed interest on the part of international financial institutions in supporting it. But the coup of June 2000 brought those trends to an end and further local business failures followed as a result of political instability and debts owed by the government. Further international assistance has become available from the

EU, Japan, Taiwan, and New Zealand as part of the Australian-led intervention, but the government will need to demonstrate a commitment to reducing corruption.

Financial services

The banking sector was badly From late 1996, activity in much of the banking sector was effectively frozen by hit by the troubles the scale of government debt. Transactions in all forms of Treasury paper ceased because the government had exceeded its statutory debt ceilings, and the high level of government indebtedness to the private sector forced a reduction in the already limited branch structure of the banks. These trends were exacerbated by the events of June 2000. In 2001 broad money supply contracted by 13.6%, and credit to the private sector fell by 21.8%. By the end of 2001 the banksr liquid assets ratios were three times the statutory minimum, indicating that there was little inclination to either lend or borrow. By May 2003 the security situation had deteriorated to the point where banks, including the CBSI, had to close their doors temporarily owing to bomb threats. The Australian-led intervention has led to an improvement in conditions in the sector, with credit to the private sector rising by 26.1% in 2003, and earlier in 2004 the CBSI removed all foreign exchange restrictions imposed since 2000.

Other services

Tourism facilities are not well In 1998 there were 17,856 visitor arrivals. But tourist arrivals fell to just 6,100 in developed 2000 as tourism collapsed after the government was toppled and most expatriate residents were evacuated. It will take some time before the Solomon Islands becomes a viable tourist destination once more, although some cruise liners have resumed calls at ports. Compared with other Pacific islands, tourism facilities are not well developed, and there are problems accessing some of the islands.

The external sector

Trade in goods

China overtook Japan as the The value of goods exports fell from SI$608.3m (US$126m) in 1998 to SI$248.7m largest export market in 2003 in 2001, largely as a result of the political and economic turmoil, but recovered modestly to SI$390m in 2002. A stronger rebound, to SI$557m, was recorded in 2003. Timber, agricultural commodities, fish and fish products account for all but a fraction of total exports. Japan has traditionally been the Solomon Islandsr largest export market, mostly for fish, although it was overtaken in 2003 by China, which absorbed 25.5% of total exports that year. The Philippines and South Korea have become increasingly important markets in recent years. Merchandise imports fell from SI$616m in 1998 to SI$431.9m in 2001, but picked up to SI$507m in 2003. The most important categories are food and live animals, mineral fuels, and machinery and transport equipment. Australia is by far the most important source of imports, accounting for 28% of total imports in

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2003. According to the Asian Development Bank (ADB), the trade balance swung from a peak deficit of SI$183.3m in 2001 to a small surplus of SI$50m by 2003, reflecting the recovery in export earnings.

Invisibles and the current account

According to IMF figures, a strong rise in the value of exports helped to pull the trade balance back into surplus in 1995 and 1996, offsetting the impact of a lower surplus on transfers and the persistent deficit on services trade to produce a current-account surplus in both years. A return to deficit on the trade account dragged the current account back into deficit in 1997, although the surplus on current transfers meant the current account returned to the black in 1998 and 1999. Later estimates from the ADB point to persistent current-account deficits between 2000 and 2002, although strong aid inflows and rising export earnings resulted in a small surplus of US$27m in 2003.

Capital flows and foreign debt

Foreign debt is substantial The government has traditionally accounted for a large proportion of total foreign debt. At the end of 1997 Manasseh Sogavare, the then finance minister, told parliament that the government owed more than SI$400m (US$85m) to external creditors, although this is considerably lower than the World Bankrs estimate for total external debt at end-1997 of US$139.9m (equivalent to 39% of GNP). Total external debt has risen as a proportion of GNP since 1997, to stand at 75.3% at end-2002 (World Bank figures).

Aid flows remain crucial The Solomon Islands has benefited substantially from inflows of aid from abroad in recent years. Net official development assistance (ODA) was broadly unchanged at around US$40m in 1997-99, but jumped to US$68.4m in 2000, reflecting additional funds from the EU. Inflows remained substantial in 2001 at US$58.8m, but fell to US$26.3m in 2002, with donors withdrawing funds as the country descended into turmoil. However, most donors have now resumed aid. The largest bilateral donors are Australia, New Zealand and Japan, with most multilateral funds coming from the EU. Australia has announced additional budgetary aid of A$25m (US$16.3m) as part of its programme of intervention and it is likely to increase substantially other categories of aid to the Solomon Islands over the next few years.

Foreign reserves and the exchange rate

Foreign-exchange reserves After falling from US$17.4m at the end of 1994 to US$15.9m at the end of 1995, have begun to rise again foreign reserves (excluding gold) rose to peak at US$51.1m at end-1999, before dwindling to US$19.3m by the end of 2001 (IMF figures). In an attempt to halt the decline in foreign-exchange reserves, the currency was devalued by 25% in March 2002. However, the decision to devalue had apparently not received the formal endorsement of the cabinet and, amid alarm among members of the coalition government about a projected increase of 33% in the cost of living as a direct result of the devaluation, the move was reversed. More recently, the

influx of foreign aid and rising export earnings has enabled the Solomon Islands to begin building up its foreign reserves, which at end-May 2004 stood at U$56.2m. The Solomon Islands dollar has depreciated slowly but steadily against the US dollar since the early 1980s, and by the end of 2001 the unit stood at SI$5.52:US$1 (compared with SI$1.34:US$1 at the end of 1984). The Solomon Islands dollar has also depreciated against other regional currencies, such as the Australian dollar and the New Zealand dollar, in recent years. In annual average terms, the Solomon Islands dollar has depreciated from SI$4.93:US$1 in 1999 to SI$7.51:US$1 in 2003.

Regional overview

Membership of organisations

The PIF is the leading regional The Pacific Islands Forum (PIF) is the most important regional organisation. It organisation was formerly known as the South Pacific Forum, which in turn developed from the South Pacific Bureau for Economic Co-operation, established more than 40 years ago. The Forum officially adopted its new name at its annual meeting in 2000, recognising that not all of its members are in the "South" Pacific since the admission of former US trust territories north of the equator. The Forum was created in 1971 in response to the spread of self-government in the region and the need of the new states to have a political forum. The current members are Australia, the Cook Islands, the Federated States of Micronesia, Fiji, Kiribati, Nauru, New Zealand, Niue, Palau, Papua New Guinea (PNG), the Marshall Islands, Samoa, the Solomon Islands, Tonga, Tuvalu and Vanuatu. The Forum meets each year at head of state/government level, and immediately after the meeting ministers spend two days in consultation with the Forum dialogue partnersCanada, China, the EU, France, Indonesia, Japan, Malaysia, the Philippines, South Korea, Thailand, the UK and the US. A separate dialogue session is held with Taiwan by the Forum members that have diplomatic relations with it. The Forum Secretariat (based in Suva, the capital of Fiji, with a staff of about 70), administers a series of programmes aimed at promoting regional co- operation among member states through trade, investment, economic development, and political and international co-operation. It has also developed a growing portfolio of technical training programmes as part of broader initia- tives for institutional strengthening, good governance and accountability. Operations are funded by contributions from member governments and donors. Current donors are the dialogue partners, together with Australia, New Zealand, the Commonwealth Secretariat and Germany. Since October 1994 the Forum has had observer status at the UN General Assembly. Island governments have used the PIF and other regional forums to make their voices heard on other issues, such as climate change and the impact of rising sea levels, and shipments through the Pacific of radioactive materials, notably by the UK-based company, British Nuclear Fuels (BNF). An extensive sea-level monitoring network has been established by Flinders University in Australia, and the PIF secretariat has, for several years, been negotiating with BNF and the other parties involved in nuclear shipments and reprocessing, over an agreement to cover possible mishaps.

The new PIF secretary-general In a surprise development and a break with tradition, Greg Urwin, an is an Australian Australian and a former high commissioner to Fiji, Samoa and Vanuatu, was appointed secretary-general-designate of the PIF at the organisationrs annual summit in August 2003. Mr Urwin replaced Noel Levi, from PNG. The post of secretary-general, the senior regional position, had previously always been filled by a Pacific islander, and the leaders of some PIF member states were unhappy at the aggressiveness of Australian lobbying and suspicious of

Australiars motives in seeking the top position in the organisation. Nevertheless, Mr Urwin, who is married to a Samoan, was finally appointed in a secret ballot, and he took office in January 2004. The issues agreed at the 2003 and 2004 annual summits give an indication of the future direction of debate. Central to the agenda are issues such as pooled regional governance, greater co-operation on regional air transport, security and crossborder 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. A specially convened meeting of the PIFrs 16 government leaders in Auckland, New Zealand in April 2004 agreed on a "Pacific Plan" to achieve closer political and economic co-operation between PIF members and to intensify the efforts of the Fiji-based PIF secretariat in implementing leadersr wishes. For the first time the PIF secretary-general has the authority, in consultation with the incumbent PIF chair, to call meetings of leaders or foreign ministers for speedy action in dealing with a crisis. Some regional officials had hinted before the meeting that the PIF could be turned into an EU-style institution, although the idea was quickly dismissed by several island leaders as premature and probably unworkable given the regionrs huge geographic spread, the small size and weakness of most of the island economies, scant resources, and barriers such as high transport and energy costs and cultural differences. Apart from a mandate empowering the secretary-general to initiate a speedy response to a crisisa move influenced by the near-collapse last year of the Solomon Islandsthe Pacific Plan does little more than reaffirm existing PIF priorities and instruct the secretariat to become more active in executing them. Key goals are as before: to promote economic growth, sustainable development, good governance and security. However, Mr Urwinrs arrival does seem to have breathed some fresh air into an organisation rendered somewhat stagnant under the former leadership. Details of the grand vision floated by the leaders in April, and confirmed by the PIF annual summit in Apia, Samoa in August, will be devised in the coming months by a task-force.

The Pacific Community A second regional organisation is the Pacific Community (formerly the South Pacific Commission), formed in 1947 by Australia, France, the Netherlands, New Zealand, the UK and the US. They were then the colonial powers in the region and insisted that the organisation be non-political, dealing only with technical issues and matters of practical co-operation. It now has 26 members and continues as a non-political body, offering technical advice, assistance, training and research. Its headquarters are in Nouméa, New Caledonia, with a substantial presence in Suva. It is a bilingual organisation (English and French), with a staff of around 175 and a limited budget, augmented by special funding for particular projects. It has an integrated work programme based around the development of the regionrs land-based, marine-based and human resources.

Other regional organisations The secretary-general of the Forum Secretariat chairs the Council of Regional Organisations of the Pacific (CROP), which brings together the Forum and the Pacific Community, as well as six other regional organisations: the Forum Fisheries Agency (based in Honiara, Solomon Islands); the Pacific Islands Development Programme (based in Hawaii); the South Pacific Regional

Environment Programme (based in Apia); the South Pacific Applied Geoscience Commission (based in Suva); the South Pacific Tourism Organisation (also based in Suva); and the University of the South Pacific (based in Suva, but with campuses and centres throughout the region). A further regional organisation, although narrower in membership than either the PIF or the Pacific Community, is the Melanesian Spearhead Group (MSG), which brings together the Solomon Islands, Papua New Guinea, Vanuatu, Fiji and the New Caledonia independence coalition, the Front de Libération Nationale Kanak Socialiste (FLNKS). The MSG aims to promote co-operation between members in economic, political and cultural matters, and is implementing a free-trade agreement (FTA) between its members.

The EU-ACP Convention The 14 island members of the PIF are also members of the 78-state ACP (Africa, Caribbean and Pacific) group within the Cotonou Agreement. This agreement, which was ratified in February 2003, is the successor to the Lomé Convention and gives the ACP nations preferential trading access to the EU market and a share in EU aid programmes and other assistance. The secretariat of the PIF prepared a joint position for negotiations between the PIF members and the EU provided for under the agreement. Negotiations opened in September 2004 and are scheduled for completion before the end of 2007. The Cotonou Agreement, which is to last 20 years, has a strong political dimension. As well as respect for human rights, democratic principles and the rule of law, which were all essential components of the Lomé Convention, the ACP countries have also agreedreluctantlyto promote good governance and to combat corruption and illegal immigration into the EU. Under previous conventions, ACP products, whether agricultural or industrial, entered the EU duty-free, but four agricultural productsbeef, sugar, bananas and rumwere subject to a more restrictive system of tariff quotas. The new agreement offers a negotiating framework for tailor-made regional free-trade agreements (RFTAs), under which ACP countries, preferably within existing economic groupings, will gradually open their domestic markets to European products. Given the adjustment costs involved, a preparatory period of eight years has been agreed, during which the old system of preferences will continue to apply. In any event, Kiribati, Samoa, the Solomon Islands, Tuvalu and Vanuatu, which are classified as least developed countries (LDCs), will still be given the option of entering the EU generalised system of preferences (GSP). Unlike the Lomé Convention, the GSP, which benefits all developing countries, complies with the rules of the World Trade Organisation (WTO), because it is based on the dual principles of non-reciprocity and non-discrimination.

The regional economy

The region is diverse The 22 island countries of the Pacific region are spread across more than 30m sq km, but occupy less than 2% of that area. Although almost all of the countries are politically independent and have their own governments and

heads of state, aid from the former colonial powers, and from other bilateral and multilateral donors, remains important.

Economies dependent on aid The importance of aid reflects the relative weakness of most of the economies and external conditions in the region, as well as problems of poverty, law and order, and poor governance. Agriculture, in particular the export of agricultural commodities, is central to the economies of many of the Pacific islands. Other important industries are fishing and tourism. Fiji, PNG and New Caledonia have important mining industries, but none of the other small island communities has significant natural resources. The high degree of dependence on such sectors renders the islands vulnerable to external shocks, the weather (most island countries are vulnerable to cyclones, among other things) and the vagaries of commodity markets. The economic performance of trading partners also has a direct and usually rapid impact on the island economies. Tourist arrivals fell in the wake of the terrorist attacks on the US on September 11th 2001, although not to the extent initially feared. Inbound tourism rose once again in 2002, partly as a result of the October bombings in Bali, Indonesia, which had the effect of diverting some tourists to the Pacific. Tourist arrivals rebounded in 2003 and in the first half of 2004, with Fiji benefiting most from the recovery, and the pick up in tourism is expected to continue, thanks to perceptions of the region as being safe and peaceful, the increase in air capacity and the expansion of low-cost airline services. The recent recovery in world gold and nickel prices has also benefited Fijirs small gold production industry and New Caledoniars nickel industry, which is attracting a high level of new investment. However, political instability within the region, and in some cases the difficulties in obtaining secure titles to land, are serious obstacles to investment and growth.

Islands struggle with problems Regional governments, including those of Australia and New Zealand, have for such as crossborder trade some time been intensifying their efforts to deal co-operatively with a range of new problems arising from organised crime and the impact of globalisation, but the smaller states lack the ability and resources to deal effectively with issues such as the smuggling of drugs, arms and people through and into the region, overpopulation, environmental degradation, money-laundering and corruption. The governments of Australia and New Zealand have been reluctant to be seen to be intervening in their neighboursr affairs in a "neo- colonialist" fashion. Although some in the region view greater intervention by Australia in the region with suspicion, most island leaders are now more accepting of the countryrs higher profile in the region. This is largely thanks to the successful intervention in July 2003 of an Australian-led force in the troubled Solomon Islands and the tact with which the new head of the PIF, Mr Urwin, has so far handled the key issues of reform, improved governance and co-operation since his controversial appointment. Island governments are now largely resigned to the fact that flows of aid are conditional on the implementation of reforms to their government and economic systems. The island states generally depend on patrol and surveillance operations carried out by Australia, New Zealand and France (from New Caledonia). Regular meetings are held between law enforcement, customs, immigration and

legal officials to review developments and exchange information. However, the joint implementation of a modernised legislative framework and co-ordinated border control systems has been slow. Six island jurisdictions have offshore financial centres (tax havens) to augment their meagre revenue. Most of these have implemented new laws following the threat of sanctions, made in 2000 by the Paris-based Financial Action Task-Force (FATF), which operates under OECD auspices, unless regulatory regimes were strengthened to minimise opportunities for money-laundering and other criminal activities.

A Pacific free-trade area has The Pacific Island Countries Trade Agreement (PICTA), first envisaged at the been established inaugural meeting of the Pacific Islands Forum in 1971, came into force on April 13th 2003. The FTA, which will be phased in over the next ten years, aims to remove gradually trade barriers such as import duties, quotas and tariffs between the 14 PIF island nations, to help to boost trade, promote regional integration and improve the economic efficiency of the island economies. There are, however, some concerns about the benefits of a free-trade area relative to the costs, especially given the low level of intra-island trade (which accounts for just 3% of total trade within the region) and the impact on government revenue of lower export taxes and import duties, which represent the main source of income for most island governments. The main beneficiary of the FTA is likely to be Fiji, which has the most developed economy and is the biggest trader with the other islands. Closely connected with PICTA is the Pacific Agreement on Closer Economic Relations (PACER), which provides a framework for the future development of trade relations between the 16 PIF countries. Under this agreement, the two developed PIF members, Australia and New Zealand, have agreed to provide technical assistance to and preferential market access for products from the developing PIF members, which in return have assured Australia and New Zealand that they will not be disadvantaged by any trade arrangements the developing PIF members may enter into with other developed countries.

Appendices

Sources of information

National statistical sources Central Bank of Solomon Islands, Annual Report Central Bank of Solomon Islands, Economic Indicators Central Bank of Solomon Islands, Quarterly Review

International statistical sources Asian Development Bank, Asian Development Outlook Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries (annual) IMF, International Financial Statistics (monthly) OECD, Geographical Distribution of Financial Flows to Aid Recipients (annual) World Bank, Global Development Finance (annual)

Internet site Central Bank of Solomon Islands, http://www.cbsi.com.sb/

Reference tables

These reference tables provide the most up-to-date statistics available at the date of publication.

Government finances (SI$ m) 1999 2000 2001 2002 2003 Current revenue 402.0 314.0 215.7 262.8 373.4 Taxes 356.0 277.0 206.1 243.4 340.4 Non-taxes 46.0 37.0 9.6 19.4 33.0 Current expenditure 458.0 428.8 247.7 302.6 564.2 Current balance -56.0 -114.8 -32.0 -39.8 -190.8 Capital receipts 79.0 0.0 0.0 0.0 0.0 Capital expenditure 21.0 30.0 15.2 99.3 118.6 Overall budget balance 2.0 -144.8 -47.2 -139.1 -309.4 Memo item: Grants 78.0 135.9 38.2 25.6 205.5