Solomon Islands WT/TPR/S/215 Page 1

Solomon Islands WT/TPR/S/215 Page 1 I. ECONOMIC ENVIRONMENT (1) OVERVIEW 1. Solomon Islands is a least developed country with per capita GDP of some US$880. The economy of Solomon Islands contracted sharply during a period of civil strife at the beginning of this decade. Economic growth resumed from 2003, and was particularly brisk in 2007 and 2008. This reflected both strong domestic demand, particularly Government expenditure, and a favourable international environment for Solomon Islands' main exports. However, with the imminent decline in logging sector activity, due to overexploitation, Solomon Islands faces major economic challenges in the medium term, as logging accounts for 18% of GDP and almost 75% of total exports. Thus, to maintain growth and external sustainability, the pace of trade and other policy reforms need to be accelerated to remove impediments to Solomon Islands making better use of its comparative advantage in mining, fisheries, and other activities. This would require Solomon Islands to address issues such as weak governance, ambiguity in land ownership, poor infrastructure, and unreliable and costly electricity and telecommunication services (see Chapters II and IV). 2. Government finances are dependent to a large extent on proceeds from logging and foreign aid flows, both of which are expected to decline in the near future. In spite of recent progress, further measures are needed to strengthen the Government's fiscal position, including broadening the revenue base, improving tax administration, and rationalizing fiscal spending. Since 2007, the Central Bank has adopted measures to counter rising inflationary pressures, for example absorbing excess liquidity and maintaining the SI dollar pegged to the U.S. dollar. 3. Trade is of increasing economic importance for Solomon Islands, with merchandise exports and imports representing almost 70% of GDP in 2006 (based on national account data). Trade flows increased by about 185% between 2000 and 2007 (WTO estimates). Virtually all exports consist of primary products, particularly logs and palm oil, while imports are diversified. During the period under review, China became the main export market, accounting for some 55% of total exports in 2007. Singapore and Australia are the main import sources, accounting for almost two thirds of the total. (2) OUTPUT AND EMPLOYMENT 4. Solomon Islands is a least developed country with a population of around 510,000, and per capita GDP (at current factor cost) of some US$880 in 2007 (Table I.1). The UNDP has ranked Solomon Islands 134th among 177 countries, based on several human development indicators.1 Life expectancy, at 63 years, is below the world average (68 years), the adult illiteracy rate is 23%, and some 30% of the population lacks access to running water. Moreover, in spite of some progress in recent years, poverty levels remain high: Solomon Islands is ranked 79th among 135 developing countries for which the UNDP human poverty index has been calculated. 5. Since the last Review of Solomon Islands, economic growth has been erratic. Real GDP contracted by around 20% during a period of civil conflict that lasted from 1999 to 2002, but began to recover from 2003, when the Regional Assistance Mission to Solomon Islands arrived to restore law and order (Chapter II(2)). Growth was particularly strong in 2007, at just over 10% (Table I.1). Annual real GDP growth averaged about 7.3% between 2003 and 2007, and was supported by strong domestic demand, particularly government spending and investment, but also by a positive international environment for logs and other export products. 1 UNDP (2008a and b). WT/TPR/S/215 Trade Policy Review Page 2 6. Based on available information for the 2003-06 period, the contribution of domestic demand to GDP has been significant, particularly since 2004 (Table I.1). Government spending has been growing rapidly, its share of GDP almost doubling between 2003 and 2006; the GDP share of consumer spending remained relatively stable during the period at around 70%. Gross fixed capital formation gathered strength in 2004, supported mainly by foreign aid inflows and rapid credit growth. As a result, the share of gross fixed capital formation in GDP rose to 13% in 2006, from around 9% three years earlier. The contribution of net exports of goods and services to growth was negative between 2003 and 2006. Table I.1 Basic economic indicators, 2000-08 2000 2001 2002 2003 2004 2005 2006 2007 2008 Nominal GDP (current market prices, 1,523.3 1,447.2 1,537.3 1,737.5 1,961.1 2,207.5 2,542.3 2,971.3 .. SI$ million) Real GDP (1985 factor cost, 291.1 267.9 260.5 277.4 299.7 314.7 333.9 368.2 395.1a SI$ million) Real GDP growth rate (%) -14.2 -8.0 -2.8 6.5 8.0 5.0 6.1 10.3 7.3a Per capita GDP (current factor cost, 679 629 509 522 588 641 707 880 .. US$) GDP by sector (% of total) Agriculture, forestry and fishing 44.2 46.4 49.9 55.3 56.8 56.9 56.6 57.0 .. Mining 3.2 -0.2 -0.2 0 0 0 0.0 0.0 .. Manufacturing 4.8 4.2 4.1 3.4 3.2 3.1 3.0 2.8 .. Electricity, gas and water 1.7 1.7 1.8 1.7 1.5 1.7 1.6 1.7 .. Construction 0.8 0.7 0.4 0.8 0.9 1.0 1.3 1.5 .. Services 45.3 47.2 44.0 38.9 37.6 37.3 37.5 37.0 .. Trade 9.5 9.3 10.4 10.2 9.7 9.4 8.9 8.6 .. Transport and communications 4.2 3.8 4.3 4.3 4.1 4.0 4.8 5.2 .. Finance 5.4 5.7 5.8 5.4 5.1 4.9 4.7 4.7 .. Others services 26.2 28.4 23.5 19.0 18.7 19.0 19.1 18.5 .. GDP by expenditure (% of GDP) Final consumption .. .. .. 96.1 100.5 110.1 113.6 .. .. Household final consumption .. .. .. 69.7 67.1 69.1 69.2 .. .. Private non-profit institutions serving .. .. .. 5.4 4.8 5.0 5.2 .. .. households Government consumption .. .. .. 21.0 28.5 36.0 39.2 .. .. Gross fixed capital formation .. .. .. 9.1 10.0 12.5 13.4 .. .. Durable equipment .. .. .. 3.8 2.4 6.8 7.4 .. .. Construction .. .. .. 5.3 7.7 5.7 6.0 .. .. Change in inventories .. .. .. 0.3 1.4 1.3 1.2 .. .. Exports of goods and services .. .. .. 26.4 30.9 34.1 36.1 .. .. Merchandise, f.o.b. .. .. .. 20.0 22.8 25.3 24.5 .. .. Services .. .. .. 6.4 8.1 8.8 11.6 .. .. Imports of goods and services .. .. .. 31.7 42.4 54.6 57.2 .. .. Merchandise, f.o.b. .. .. .. 27.1 36.3 41.5 45.1 .. .. Services .. .. .. 4.6 6.1 13.1 12.1 .. .. Statistical discrepancy .. .. .. -0.2 -0.5 -3.3 -7.1 .. .. .. Not available a IMF projection. Source: WTO Secretariat, based on Solomon Islands National Statistics Office (2008); IMF (2008b, 2007b, and 2006); Asian Development Bank Statistical Database System Online [https://sdbs.adb.org/sdbs/index.jsp]; and data provided by the authorities. 7. The sectoral composition of the economy shows an increasing dependence on the primary sector, particularly logging, which expanded rapidly during the period under review. However, logging production at the current pace is unsustainable (see Chapter IV(4)). The agriculture, forestry, and fishery sectors represented 57% of GDP in 2007, compared with 44% in 2000 (Table I.1). Solomon Islands WT/TPR/S/215 Page 3 Services is the second largest sector in terms of GDP share, accounting for 37%. The manufacturing sector is small, with slightly less than 3% of GDP in 2007. 8. There are no complete data on unemployment, but Central Bank estimates suggest that formal-sector employment totaled just 44,350 at the end of 2007, compared with a population of around 510,000. The Central Bank reports that the shortage of adequately skilled workers is a constraint on employment creation.2 9. According to the IMF, Solomon Islands must intensify structural reform efforts to develop alternative sources of growth, given the imminent decline in logging-sector activity.3 Among the major impediments to broad-based growth are ambiguity in land ownership, poor infrastructure, and unreliable and costly electricity, water, and telecommunications services (Chapter II(4) and Chapter IV(6) and (8)). In addition, weak governance remains a serious concern. (3) FISCAL POLICY 10. Solomon Islands' principal fiscal objective is to maintain balanced budgets in line with its commitment under the Honiara Club initiative, a multilateral forum convened by Solomon Islands in October 2005 to seek debt relief from its official creditors.4 11. Data on central Government accounts differ depending on the source. According to data provided by the Central Bank in the context of this Review, the overall fiscal balance was in deficit every year between 2000 and 2007 except in 2004 (Table I.2). However, IMF data show a positive 5 overall balance between 2003 and 2006 (negative for 2000-02, and 2007). Table I.2 Central Government accounts, 2000-08 (Millions of SI$ unless otherwise specified) 2000 2001 2002 2003 2004 2005 2006 2007 2008a Total revenue and grants 449.9 272.8 365.0 578.9 710.9 784.6 948.7 1,181.3 647.6 Current revenue 314.0 219.9 256.3 373.4 509.9 621.1 849.9 1,093.2 635.4 Taxes 277.0 206.4 243.5 340.4 472.1 564.9 692.9 938.8 551.8 Nontaxes 37.0 13.5 12.8 33.0 37.8 56.1 157.0 154.4 83.6 Grants 135.9 52.9 108.7 205.5 201.0 163.5 98.8 88.1 12.2 Total expenditure 458.8 378.5 674.1 682.8 608.8 806.5 1,054.7 1,198.3 .

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