Country Report Solomon Islands July 2009

Outlook for 2009-10

Political stability is likely to remain fragile in 2009-10. The prime minister, Derek Sikua, could face further no-confidence motions in 2009, after surviving several challenges in 2008. The government has an extensive political reform agenda, but progress has stalled, and it is unlikely that the most important reforms will be implemented before the next parliamentary election, which is due in April 2010. The economy is dependent on logging, but experts claim that the industry cannot survive for more than four years at current rates of production. The Central Bank of Solomon Islands (CBSI) expects economic growth to stagnate or contract in 2009, and to remain weak in 2010. The country runs a current-account deficit in addition to its fiscal deficit, which, combined with falling foreign-exchange reserves, has raised concerns that it might face a balance-of-payments crisis. If this was to occur, it is likely that major donor countries, as well as the Asian Development Bank (ADB), would offer financial support.

The political scene

Plans to adopt a draft federal constitution have stalled, and proposals to introduce a new electoral system to replace the current first-past-the-post system have been delayed. The government has expanded the share of government expenditure at the disposal of individual members of parliament, raising concerns about the emergence of a patronage system.

Economic policy

Ballooning state expenditure in recent years has left little room for fiscal stimulus in response to the downturn in the economy. The government ran a deficit equivalent to 5.6% of GDP in 2008, and has budgeted for a deficit equivalent to 3.6% of GDP in 2009. The CBSI has expressed concern over the "haemorrhaging" of foreign-exchange reserves.

The domestic economy

According to the ADB, real GDP increased by 6.4% in 2008, but it is expected to stagnate in 2009 owing to a strong contraction in log exports. Production in the forestry sector will suffer as a result of weak demand from Asian markets. The restarting of mining operations at the Gold Ridge site in central Guadalcanal looks set to be delayed further.

Foreign trade and payments

On a quarter-on-quarter basis, imports fell by 6.1% to SI$560.3m (US$72.5m) in the first quarter of 2009. The fall in imports was surpassed by an even greater contraction in the value of exports, which fell by 32.7% to SI$283.3m. The trade deficit widened to SI$277m in the same period, representing a 58% increase in the deficit from the SI$175.2m that was recorded in the fourth quarter of 2008.

This report covers the following industry codes:
SIC Code: 10
NAICS Code: 212