The economy of the Solomon Islands is small, but continues to grow steadily. New nickel exports, new hydropower and greater internet connectivity look set to drive future growth, reports David James.

The Solomon Islands is made up of over 900 islands. Credit: Visit Solomon Islands

The Solomon Islands has a narrowly-based economy vulnerable to shocks but recent steady growth has improved business confidence in recent years.

According to the Asian Development Bank, gross domestic product is forecast to grow by 2.4 per cent in 2019, and 2.3 per cent in 2020.

‘If you go back a number of years the economy had severe peaks and troughs, for example, in 2007 the GDP was 11 per cent, 2009 minus two per cent and 2011 10.5 per cent. Since then it has been consistently just below or just over three per cent,’ observes David Anderson, Bank South Pacific Country Manager in the Solomons.

‘Now, businesses can make objective decisions on what they should do with their businesses—whether they should invest or not. They have the confidence that the economy will continue to grow at a relatively consistent level.’

Major sectors

The country heavily depends on agriculture and raw materials—especially logging—which account for 92 per cent of exports, according to the Asian Development Bank (ADB).

According to Strongim Bisnis (SB), an Australian Government initiative working in partnership with the private sector and the Solomon Islands Government, copra accounts for 24 per cent of exports, almost all going to the Philippines. (It notes, however, that trees are ageing, operating costs are high and the rhino beetle poses a threat.)

There are similar challenges with cocoa, with exports ‘stagnating over the last decade’. Guadacanal, Makira and Malaita produce over 97 per cent of the nation’s cocoa.

Tourism accounts for 10.8 per cent of total exports, with 82 per cent going to the Western, Malaita and Central provinces.

Future developments

Wayne Morris, Partner of Chartered Accountant firm Morris & Sojnocki, notes the country relies heavily on donor funds, mainly from Australia.

‘The country is significantly relying on logging for its foreign exchange earnings,’ he says. ‘Other major export earners are fishing and palm oil. Mining is minimal at the present moment. The first shipment of (Axiom’s) nickel mine in Santa Isabel is due to go out this month.

‘The internet at the moment is extremely slow and extremely expensive for everybody.’

‘The other major development is the Tina River Hydro Development, a power project. That is due to start at the end of this year and will be about US$200 million, funded through grants and soft loans.’

Internet

One development that will undoubtedly have a transformative effect is the laying of the Coral Sea Cable at the end of 2019. It will go from Sydney to both Papua New Guinea and the Solomon Islands. It is set to increase capacity a thousand-fold.

‘We expect it will have a great impact on the country and the services here,’ says David Anderson. ‘The internet at the moment is extremely slow and extremely expensive for everybody.

‘We have very poor usage of internet services from the consumers here. It is just too expensive. Most people will use it for Facebook but not much else. I think it will open up a world of opportunities for businesses here. They will have the confidence that they have good data, good speed and reliable service.’

Morris says the expectation is that it will bring down costs significantly, but adds that there will still be a strong reliance on satellites for communication within the country: ‘they will only have an internal cable going to three centres.’

Challenges

The Solomon Islands has many of the challenges common to other Melanesian economies. According to the Heritage Foundation’s 2019 Index of Economic Freedom, the formal labour market is ‘not fully developed’. Another issue is that most of the land in the Solomon Islands is customary-owned.

‘A lot of businesses do not have any financial statements that will allow banks to assess a lending proposal.’

‘This restricts individuals being able to borrow, or us to lend the money,’ says Anderson. ‘A lot of people here will say they do not have the ability to raise finance.

‘The second problem is that a lot of businesses do not have any financial statements that will allow banks to assess a lending proposal.’

Morris believes customary land ownership ‘holds back a whole lot of potential investment’ in the country, although he says the government has been trying to address the issue.

The top personal income tax rate is 40 per cent, and the top corporate tax rate is 30 per cent for resident corporations and 35 per cent for non-resident corporations, according to the consultancy Deloitte.

Morris believes the government should look at restructuring personal income tax rates.

‘For every dollar of PAYE (Pay-As-You-Earn) tax that the government forgoes, it picks up more than two dollars in other taxes. That money goes straight back into the economy. People aren’t going to save it.’