A special report
Stable economic growth in the Solomon Islands has given businesses confidence, despite some challenges. David James reports.
The economy of the Solomon Islands is small, but growing steadily. According to the Asian Development Bank (ADB), gross domestic product (GDP) is forecast to grow by 2.4 per cent this year, and 2.3 per cent in 2020. Inflation is steady; it is forecast to rise 2.5 per cent in both 2019 and 2020.
The Solomons is a narrowly based economy vulnerable to shocks. The country heavily depends on agriculture and raw materials – especially logging – which account for 92 per cent of exports, the ADB says.
According to Strongim Bisnis (SB), an Australian Government initiative working in partnership
economic growth has given businesses confidence.
“If you go back seven or eight years, the economy had severe peaks and troughs. One year GDP was up seven per cent, the next it was minus four per cent. Now, they can make objective decisions on what they should do with their businesses – whether they should invest. They have the confidence that the economy will continue to grow at that level.”
Wayne Morris, partner of chartered accountant firm Morris & Sojnocki, says the country relies heavily on donor funds, mainly from Australia. “The country is significantly relying on logging for its foreign exchange earnings,” he
They have the confidence that the economy will continue to grow.
with the private sector and Solomon Islands Government, copra accounts for 24 per cent of exports, almost all going to the Philippines. SB 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”, according to SB. Guadalcanal, 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 of travellers going to the Western, Malaita and Central provinces. Ninety per cent of tourism income is generated by women.
David Anderson, Bank South Pacific country manager in the Solomons, says the stable
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 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 $US200 million, mainly funded through Australia.”
One development that will undoubtedly have a transformative effect is the laying of the Coral Sea cable system 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 1000-fold. “We expect it will have a great impact on the country and the services here,” says 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.”
The Solomon Islands has many of the challenges common to 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 customarily-owned, as it is in PNG.
“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 people do not have any financial statements that will allow them 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.”