But for how long?

Dev Nadkarni

Honiara, Solomon Islands... the challenge is to sustain the growth rate. Pic: Dev Nadkarni

A growth rate hovering around six percent makes the Solomon Islands economy one of the fastest growing in the Pacific Islands region.

But Central Bank Governor and ISLANDS BUSINESS 2003 MAN OF THE YEAR, Rick Hou, while happy with this growth rate, is cautious: “The economy is growing very fast, but you must remember that we are only picking up where we left off some time ago,” he says.

Better handling of the economy and consistent expansion of the tax net over the last three years has brought in a budgetary surplus of S$39 million.

Inflation, at 6.2 percent, is manageable and the country’s foreign reserves are adequate with the large external current account deficit being covered by foreign direct investments (logging, fishing, agriculture sectors) and consistent aid inflows.

DANGER

But this impressive run is in danger of a slowdown if the country fails to develop alternatives to its logging industry—the economy’s main driver—fast enough.

Rick Hou... happy with the growth rate but cautious. Pic: Dev Nadkarni

The Solomons exported S$510 million worth of forestry products in 2005. Estimates of the growth of the logging industry vary between 6 and 12 percent a year. But there is concern from several quarters–both domestic and international—that the country may be heading towards an environmental disaster.

“The extraction rate is faster than before,” says Hou. “We will get to the other end of the forest much before our earlier estimates.”

The sustainable rate as calculated by the forestry division is estimated to be about a quarter million cubic metres a year. But last year’s logging was over a million. Forest replenishment projects have not succeeded in the country except for a couple of instances in the western part of the country.   

In May, a visiting International Monetary Fund (IMF) team warned the government of the impending environmental crisis and urged it to cut back on logging urgently.

“At current felling rates, the natural forests will be depleted much sooner than earlier envisaged and within the next five to six years,”  Laura Papi, Deputy Division Chief Asia and Pacific Department of IMF, told a media conference.

LOGGING

The IMF team asked the government to ensure it obtains its fair share of revenue from logging by raising the determined price of logs (on which export duties are assessed) without further delay.

Though international prices of logging have increased over the past two years, according to the Central bank’s annual report, the benefits have not trickled down to the Solomon Islands economy.

One of the reasons for this could be the cartelisation in the logging industry, which Hou strongly suspects. “There are many companies operating but I have a gut feeling they are all owned by a few owners. They want to give an impression that they are all individual operators.  I have a gut feeling they are all selling and dealing among themselves,” he says.

By way of illustration he adds: “Instead of ten dollars, the locals get a dollar and for the government, instead of 100 dollars what accrues is just five dollars.”

Finance Minister Gordon Darcy Lilo denies there is any cartelisation in the logging industry (see his interview). But he agrees the determined prices have been low all these years, mainly due to the policies of previous governments. Efforts at encouraging downstream processing of the logs have been patchy and few logging companies have paid serious attention to this value addition—neither have governments seriously made it a condition for them to do so.

In effect, the country’s economy has hugely missed out on the buoyant prices of the commodity in the international markets these past couple of years.

AGRICULTURE

For the first time, the government has acknowledged the oncoming decline of logging by putting in place strategies for the country’s agriculture—notably palm oil, and more importantly, fisheries industries. It is also trying to put in place a model to take economic and social development across the country with a programme called the Bottom Up Approach or BUA (see box).

The Solomon Islands has the lowest tourist arrivals of any country in the South Pacific islands region and is perhaps the only country that does not have a tourism strategy that is central to its economy, despite fabulous potential. Arrivals in 2005 were below 4000—mostly from Australia.

The country lags behind in tourism infrastructure in terms of quality accommodation, efficient local and inter-island transportation.It is also expensive in relation to what it offers.

“Our tourism industry hasn’t got its costing right,” says Hou. “It’s expensive, our civil aviation has problems of connectivity and our inbound arrangements are murky. We have a long way to go.”

TOURISM

Solomon Islands Visitors Bureau general manager Michael Tokuru concurs. Despite the best efforts afforded by his bureau’s negligible budget, the country has not been able to project itself as a tourist destination in the same way as comparable players in the Pacific like Fiji, Samoa or Vanuatu have.

Meanwhile, the political climate in the country has remained stable since the RAMSI intervention in 2003.
Hou attributes much of the country’s economic stability to the assistance programmes. “The fiscal situation under RAMSI has come under good management, public finances are in good control, budgets are being monitored. Tax net has expanded and compliance improved considerably,” he says.

But there are elements among the political class and outside who are bound to be unhappy with RAMSI: “Their feeding channels have effectively been stopped,” he adds.

While there is no set exit date for RAMSI, timeframes have been brought into discussion recently. A Media Association of Solomon Islands (MASI) submission in May suggested that RAMSI exits in ten years, but the decision will ultimately come as a result of discussions between RAMSI and the government.

“It is important that there be this process of mutual agreement between RAMSI and the government on the end points we are trying to reach in terms of building up institutions in capacity here, I think,” RAMSI head Tim George told the media.

In the past year, the Sogavare government’s domestic initiatives have been all but eclipsed by the glare of its troubled international relations especially with Australia and to a lesser extent Papua New Guinea. Its diplomatic relations with Australia continue to remain strained on the Julian Moti issue, with repercussions within the country as well.

The Sogavare government has also courted controversy with the appointment of a new police chief—Fiji national Jahir Khan—after it shunted out Australian Shane Castles.

As it walks the diplomatic tightrope with its two most significant neighbours Australia and Papua New Guinea, the Sogavare government will have to work hard winning the support of the people to follow through on the initiatives —particularly on the economic and social front—that it has embarked upon; many of them firsts since the country’s independence.

The Bottom Up Approach The government’s Bottom Approach has three components as told to Islands Business by Finance Minister Gordon Darcy Lilo. 1st component: Agricultural/rural development strategy, formed as the result of a policy document from the European Union and the World Bank. The idea is to get the community to be more aware of agricultural and local developmental issues and getting them into entrepreneurship and business. Since independence it was the state that was responsible for all business, industry and investment, besides the social sector. It has been a top down approach. New initiative hopes to change the culture and the mindset. A business skills training programme has been started and 50 additional positions in public service to organise communities for economic involvement have been created. Work is still to be initiated. 2nd component: Improving governance at provincial level. Getting governance closer to the people; that can deliver basic services heath, education, law and order. A strong provincial government will back the first initiative at the implementation level. 3rd component (Sectoral): Food security, agricultural investment like palm oil in Guadalcanal and Malaita. Tourism initiatives in three provinces—plans to integrate French attractions in the Pacific into the Solomons. Financial sector initiatives—banking and financial services throughout the country. How will this be achieved? Government will fund studies first and set the ball rolling. Then get private sector investment, international funding agencies, private sector funding.