Solomons - Economy

Following a contraction in 2020, growth is projected to recover gradually starting with a modest uptick in activity in 2021 that was expected to gain strength as COVID-19-related restrictions are relaxed. Elevated uncertainty related to the pandemic, long-standing economic and governance challenges, and vulnerability to natural disasters pose headwinds to the economic recovery. Labor market conditions have deteriorated, and the pandemic is likely to have disrupted progress in poverty reduction and human development.

Risks to the outlook are skewed to the downside, with the main risk being community transmission of COVID-19, given low vaccination rates and weaknesses in health infrastructure. Delays to border reopening pose a key risk to the economic recovery. Vulnerabilities are exacerbated by a weaker fiscal position, owing largely to the impact of the pandemic on revenues and expenditures. Solomon Islands remains vulnerable to the impacts of climate change and natural disasters.

The government of Solomon Islands is dependent on donor support for roughly 60 percent of its development budget. With soaring international prices for timber and resumption of operations of the Gold Ridge gold mine which had been suspended because of ethnic unrest and other factors, current economic condition of Solomon Islands seems to be sound. However, it is essential to improve the monoculture economic structure which heavily dependent on exports of timber and to create self-reliant system with sufficient development budget are urgent issues of Solomon Islands. JICA is providing assistance to Solomon Islands with a focus on infrastructure as a base for economic activities, alleviating the negative effects because of rapid economic development.

The bulk of the population depends on agriculture, fishing, and forestry for at least part of its livelihood. Most manufactured goods and petroleum products must be imported. The islands are rich in undeveloped mineral resources such as lead, zinc, nickel, and gold. Prior to the arrival of The Regional Assistance Mission to the Solomon Islands (RAMSI), severe ethnic violence, the closing of key businesses, and an empty government treasury culminated in economic collapse. RAMSI's efforts to restore law and order and economic stability have led to modest growth as the economy rebuilds.

In its 2014 annual report, the Central Bank of Solomon Islands (CBSI) reported that the Solomon Islands economy showed a lot of resilience in 2014 to recover from the negative fallouts from the April 2014 floods and the closure of Gold Ridge mine in the second quarter. Therefore growth for 2014 was revised upward from 0.9% to 2.0% but was down against pre-flood projection of 3.7% as a result of improvements in key non mineral sectors combined with the swift expenditure adjustments both from the national government and its development partners. Favourable external developments in particular rising prices for major export commodities and falling energy prices later in the second half of the year also supported the economic recovery.

Domestic economic activities performed much better than previously anticipated in April 2014. Preliminary estimates from the CBSI pointed to an overall growth of 2.0% for 2014, 1.1 percentage points higher than the 0.9% that CBSI projected in April 2014. All sectors except for mineral, manufacturing and utilities sectors recorded positive growths during the year. Surprisingly, logging activities jumped up significantly to a new unprecedented level during the year. This to a great extent temporarily cushioned the contraction in the mineral sector and boosted overall growth for the year supported by positive developments in agriculture, fisheries, communication, construction, and finance sectors.

Leading indicators in the labour market showed modest growth in employment even though some industries found the year challenging. The mineral sector was the hardest hit with about 720 workers driven out of jobs after the closure of Gold Ridge Mining Limited in the second quarter. Industry consultations the Central Bank conducted earlier this year revealed most companies in the non-mineral sectors either retained their staff or employed a few more people despite the economic shocks in the second quarter. This is consistent with trends in the number of superannuation contributors that rose by 12% over the year to 53,796 people even considering the redundancy exercise in the mineral sector.

Production of key export commodities in the economy weakened further in 2014 owing in large part to the closure of the only gold mine in the country. As measured by the CBSI production index, the commodity sector fell by 4% against the previous year. The overall decline was driven by gold which plunged by 15.3% to outweigh the combined gains in the non-mineral index. The fall would have been more drastic if logging activities remained low at the same level as in the first half of 2014. Log production increased dramatically to 2,128,000 cubic meters from 1,897,000 cubic meters in 2013, a jump of 5.3 points over the year to 51.3 in the log index. Re-entry into previously logged areas, clear felling activities, and issuance of additional logging licenses contributed to the sharp escalation in the exported log volumes.

The Government suffered a major setback in 2014 following the devastation caused by the April floods and the closure of the Gold Ridge mine. Fortunately, development partners were quick to respond and the government with available fiscal space have cushioned the revenue shortfall and accommodated high unplanned expenditure pressures. These quickly restored affected infrastructures and minimised economic downtime. The Government recorded a fiscal surplus of $129 million during the year from revenue collections of $3.1 billion and $3.0 billion in expenditures. The surplus was attributed to unexpected increases in revenue particularly from fishing licenses, increased budget support, and expenditure savings most notably in the capital budget.

Despite the cessation of gold production in the Solomon Islands, total exports rose by 5.3% in the first half of 2015 over the same period in 2014, largely reflecting higher exports of bauxite and agricultural commodities.

After parliamentary elections in November 2014, passage of the 2015 budget was delayed to April to give the new coalition government time to incorporate its spending priorities. The resulting 2015 budget provides for total expenditures that is 11.8% higher than the revised 2014 budget, mostly because of higher expenditure on flood recovery. Total revenues and grants are also projected to rise, but by only 3.3%. Fishing license revenue is seen to increase but not enough to offset revenue declines from suspended operations at the gold mine. The government expects to incur a deficit, equivalent to 4.9% of Gross Domestic Product (GDP), for a second consecutive year and plans to draw down cash reserves to finance the deficit.

Consumer prices have been declining in 2015 following large flood-related price rises. Softening international food and fuel prices have contributed. Between January and July 2015, consumer prices were 2.4% lower than in the same period in 2014 driven by reductions in prices for food, drinks and tobacco, and housing and utilities declined. However, core inflation remains positive suggesting that headline inflation will rise in the latter part of the year. The forecast for 2016 remained unchanged as growth is expected to benefit from planned fiscal expansion.

The domestic economy was expected to be more buoyant in 2015 than the previous year. The interplay between key domestic sectors and global price trends is anticipated to support further recovery. Economic growth was anticipated to increase in 2015 to 3.3% from 2.0% in 2014. In the primary sector, the key drivers are fisheries and agriculture while logging was expected to subside after the significant jump in 2014. The mineral sector, in spite of positive contributions from bauxite exports, would still see a decline in 2015 with the absence of gold. External conditions were expected to improve slightly over the previous year despite expectations that the structural current account imbalance would remain in 2015. Budget support and donor capital inflows were expected to outstrip the current account deficit and boost gross foreign reserves. The export sector however could worsen on the back of anticipated declines from gold and log export receipts while imports are expected to rise modestly. Persistent falling oil prices gives temporary reprieve for the economy in terms of lower fuel import bills at least for 2015.