With the restoration of law and order and stabilization of social conditions (largely attributable to the continued presence of the Regional Assistance Mission to Solomon Islands - RAMSI - since 2003), macroeconomic stability has been maintained and small improvements in service delivery have been made. Work on structural reforms has also started, but implementation prospects are difficult to predict in view of the political calendar. Parliament was dissolved in December 2005 and preparations are underway for national elections in April 2006. Pressure for federalization persists, especially leading up to the elections. Concerns remain regarding the viability of a federal system given the fragility of central government finances and limited capacity of provincial governments. |
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Economic growth slowed from 5.5 percent in 2004 to 4.4 percent in 2005, and is forecast to remain slightly below 5 percent in 2006, reflecting the anticipated slowdown in logging. The reopening of the palm oil plantations and the rehabilitation of the gold mine in early-2005 should support non-logging growth. Inflation in 2005 persisted at around 7 percent, largely due to higher oil prices. After enjoying a large surplus of about 8 percent of GDP in 2004, the Government budget was closer to balance, recording a deficit of 0.5 percent of GDP in 2005. A wider deficit of about 4 percent of GDP is projected for 2006, reflecting rising recurrent costs, declining donor funds for budget support and lower tax receipts from logging. Public debt has declined since 2003 but the debt situation remains fragile. Central government debt (including arrears) fell from 122 percent of GDP in 2003 to about 89 percent in 2005, and its external debt also declined from 71 to 62 percent of GDP in the same period. In mid-October 2005, the Government met with its major creditors (the Honiara Club) to renegotiate the terms of its external debt. Some bilateral and commercial creditors who attended the meeting agreed to help lower the Government’s debt burden while Government agreed to observe good budget practices and advance in implementing economic reforms. The external position weakened in 2005 as the current account recorded a deficit of 11 percent of GDP, largely reflecting higher oil prices and non-oil imports, the latter boosted by investment projects. The deficit is anticipated to widen to 14 percent in 2006. Gross reserves amounted to US$78.5 million at end-2005, nearly 5 months of projected import cover. Despite the prospective current account deficit, nominal reserves are expected to remain relatively stable, aided by an increase in FDI linked to the two major projects underway. A number of important reforms are high on the policy agenda. The proposed Foreign Investment Bill, a step towards regulatory reform aimed at promoting and facilitating private investment, was endorsed by Parliament in December 2005. A tax reform is currently being considered, and the introduction of a Value-Added Tax is envisaged. Back to top
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