Solomon Islands WT/TPR/S/45
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I. ECONOMIC ENVIRONMENT
(1) INTRODUCTION
1. The Solomon Islands is a large archipelago located in the South-West Pacific Ocean east of
Papua New Guinea (Table I.1).  It comprises over 900 islands, and covers an area of approximately
29,000 square kilometres.  With a current population of about 375,000, it is one of the largest and
most heavily inhabited groups of South Pacific islands.  Some 80% of the population lives on the sixmain islands.  These are Guadalcanal, where the capital city, Honiara, is located, Choiseul, Santa
Isabel, New Georgia, Malaita and San Cristobal.  Solomon Islanders are mainly Melanesian.
Table I.1
Main economic and social indicators
Area 29,000 sq. km Urban share of population 17.1%
Population (1997) 375,000 Nominal GDP (1997)
Nominal GDP at current (1995) pricesPer capita income (1995 current US$)SI$1,390.1 million
US$322.6 millionUS$950
Annual population growth 2.7% GDP at factor cost 1995 (at 1984 prices),
of which;
- Agriculture- Forestry- Fishing- Manufacturing
- ServicesUS$88.5 million
33%
9%8%4%47%
Life expectancy at birth (1995) 63 years Total formal employment (1996),
of which:- Agriculture- Forestry- Fishing- Manufacturing- Services34,207
10%
11%5%16%58%
Crude birth rate per ‘000
(1995)38 Enrolment ratio in education
- Primary- Secondary- Tertiary94
175
Infant mortality rate per ‘000
(1995)41 Energy consumption per capita 159 kg. of oil equivalent
Adult literacy (1995) 30%
Note: GDP figures include non-monetary (subsistence) production, estimated to be 16% of total GDP in 1995.
Source: Asian Development Bank, 1997 Economic Report on Solomon Islands,   1998;  International Monetary Fund, Staff Report for the
1998 Article IV Consultations, May 1998;  World Bank, Social Indicators of Development,   1995; WTO Secretariat estimates.
2. The Solomons remain one of the least-developed nations among Pacific island countries.
Annual per capita income has increased slowly, a nd was US$950 in 1995.  Population at times has
outpaced economic growth (Table I.2).  With low incomes and relatively poor social indicators, the
Solomon Islands has been classified by the United Nations as a "Low Human Development" country,
and was declared a Least-Developed Country in 1993.  Most Solomon Islanders rely heavily on
subsistence production.WT/TPR/S/45 Trade Policy Review
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Table I.2
Economic performance, 1991-97
1991 1992 1993 1994 1995 1996 1997
US$ million
GDP at current market prices
Real GDP at factor cost (1984 prices)235
87263
90269
85296
86327
88364
..373
..
Annual percentage change (in domestic currency)
Real GDP growth (at factor cost) 2.7 10.6 2.0 5.2 7.7 0.6 -0.5
Real GDP growth per capita 0.0 5.9 -1.5 2.1 5.4 .. ..
Per  cent
Inflation (CPI) 15.2 10.7 9.2 13.3 9.6 11.8 8.1
Interest ratesa9.6 9.6 8.4 7.7 7.4 4.8 1.8
Broad money growth (M3) 22.1 26.0 14.5 24.1 9.9 15.7 6.3
Per  cent
Government deficit -13.2 -7.2 -7.8 -5.5 -5.3 -4.4b-4.8b
 - Revenue (including grants) 48.2 50.5 41.3 47.1 39.9 39.2b33.7b
 - Expenditure 61.4 57.7 49.1 52.6 45.3 43.6b38.5b
Balance-of-payments
 - Current account (including grants) -20.1 -3.5 -2.8 -0.7 2.5 1.3 -6.5
 - Capital account .. .. 2.2 -0.8 -1.4 1.7 5.7
 - Overall balance .. .. -1.3 -0.9 -0.5 4.6 -0.3
External public debt 48.1 42.0 35.9 33.0 30.9 28.6b32.8b
Public savings .. .. -3.6 -2.8 -0.7 -2.0 -3.3
Public investment .. .. 18.8 21.1 15.9 17.2 12.2
Public savings-investment balance .. .. -7.8 -5.5 -5.3 -4.4 -4.8
Private savings-investment balance .. .. 5.0 4.8 8.2 5.8 -1.7
National savings-investment balance .. .. -2.8 -0.7 2.8 1.3 -6.5
Per cent of exports
D e b t  s e r v i c e  r a t i o 6 . 6 2 . 32 2 . 71 0 . 11 2 . 61 2 . 1 9 . 0
Memorandum items
International reserves
 - US$ million 7.8 21.7 20.1 17.4 15.9 32.6 31.3
 - Months of imports c.i.f. 0.5 1.5 1.3 1.0 1.0 1.9 1.7
.. Not available.
a The weighted average interest rate on savings and time deposits at commercial banks.
b Estimate.
Source: IMF, Recent Economic Developments, June, 1996; Central Bank of Solomon Islands, Quarterly Review, December 1997, Vol. 8 ,
No. 4; Asian Development Bank, 1997 Economic Report on Solomon Islands, 1998.
(2) RECENT ECONOMIC PERFORMANCE
3. Since gaining political independence from the United Kingdom in 1978, the Solomon Islands
has faced a number of complex developmental challenges.  Despite its relatively abundant forestry
and fishing resources, the Solomon Islands has not fulfilled its economic potential.  A major factorcontributing to this poor performance has been economic mismanagement by previous governments.
The deterioration in the Solomon Islands’ economy has been accompanied by a high dependency on
external aid from major institutional and bilateral donors.Solomon Islands WT/TPR/S/45
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4. Given the virtual absence of a private sector upon independence, government policies since
then have centred on a heavy state role in developing main industries, especially in natural-resource-
based sectors.  This has been associated with an expanding public sector, which has resulted in
unsustainable fiscal deficits that have been financed by an expansionary monetary policy together
with the sale of treasury bills, and more recently by arrears.  High and disparate trade taxes on imports
and exports are also a key feature of the economy. Under previous governments, the rapid expansionof government spending resulted in considerable pr essure for the use of such taxes as well as the
over-exploitation of the country's natural resources.  As a consequence of these policies, the economy
suffers from chronic macroeconomic instability and serious structural problems, including in the
development of the country's natural resources;  it is thus in need of urgent and fundamental reform.
5. Real GDP grew by an annual average rate of  almost 5% over the period 1991-96, largely
fuelled by high and unsustainable logging activities (Table I.2).  However, given the relatively high
rate of population increase of around 3% annually, per capita income growth averaged below 2%,
with a decline recorded in 1993.  Almost no gr owth has occurred since 1996.  Annual inflation,
although declining to 8% in 1997, has averaged over 11% since 1983, and returned to double-digit
levels in 1998.  The severity of these problems, which resulted from the previous Government'sconduct of macroeconomic and development policies is well recognized by the current Government.
Shortly after taking office in August 1997, its Policy and Structural Reform Programme was begun
aimed at achieving private-sector-led growth and public sector reform (section(iv) below).
6. Growth in the Solomon Islands has relied traditionally on export-led growth in agricultural
crops of copra, palm oil and cocoa, as well as fishing, and since the 1990s, especially on logging of
native forests.  In 1996, primary production (including estimated subsistence output) accounted for
half of GDP, and for more than one quarter of paid employment (Table I.1).  The non-monetary orsubsistence sector remains an important component of GDP, but is estimated to have fallen from 19%
in 1980 to 16% in 1995.
7. Merchandise trade averaged 49% of GDP over 1993-97 (Chart I.1).  The Solomon Islands'
trade is less narrowly based than other neighbouring islands, but nevertheless remains dependent upon
a limited range of products.  The three-product export concentration ratio for the Solomon Islands of76% for 1991-93 (up from 71% in 1982-84) is just below the average ratio of 80% for Pacific island
countries.
1  Primary product exports, predominantly of timber and fishery products, accounted for
over three quarters of total merchandise exports in 1996, the remainder comprising mainly traditional
tree crops of palm products, copra and cocoa.  There are few manufactured or mineral exports,
although limited gold exports commenced in 1998.  Despite attempts to diversify its export mix, theSolomon Islands remains highly vulnerable to external developments.
                                                     
1World Bank (1995), p. 15.WT/TPR/S/45 Trade Policy Review
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4042444648505254565860
1993 1994 1995 1996 1997Exports
Imports
TotalPer cent
Source : Government of Solomon Islands, 1998 Budget Speech, April, 1998; IMF, Staff Report for the 1998 Article IV 
Consultations, May, 1998.Chart I.1
Merchandise trade as a percentage of GDP, 1993-97
(i) Fiscal policy and budgetary developments
8. At the heart of the economic crisis in the Solomon Islands have been highly expansionary
fiscal and monetary policies, leading to increasingly unsustainable budget deficits.  Since 1991,
however, the Government deficit has fallen from over 13% to an estimated level of 4.4% of GDP in
1996, although the deficit increased slightly as a share of GDP in 1997 (Chart I.2).  Expenditure has
fallen from over 61 to under 40% of GDP in the same period, while revenues, including grants, have
also declined.  Nevertheless, despite these apparent improvements, the previous Governments'financial position became increasingly untenable, culminating in mounting public indebtedness and its
inability to service this debt from the mid-1990s.
9. Fiscal discipline has also suffered from a lack of budgetary checks and controls.  Budgets
premised on overly optimistic expenditure and revenue projections have rarely been adhered to in
practice.  Expenditure growth combined with inef ficient duty and tax collection, together with the
granting of major exemptions and concessions, have aggravated the fiscal problem.  The revenue base
remains narrow, being heavily dependent on trade taxes, despite some broadening in recent years(Chart I.3).  Currently around half, and substantially more in most earlier years, of government tax
receipts come from trade taxes -  import tariffs and export taxes - that have highly disparate rates as
well as numerous concessions and exemptions.
2
                                                     
2While trade taxes can be a substantial revenue source for governments, they tend to be economically
costly.  Such taxes are likely to constitute an obstac le to the efficient allocation of resources.  In a small,Solomon Islands WT/TPR/S/45
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-20-1001020304050607080
1991 1992 1993 1994 1995 1996 1997Per cent of GDP
Source: Table I.2.Chart I.2
Fiscal developments, 1991-97
Revenue with grants (inc. technical 
assistance and aid in kind )
DeficitRevenue without grants
Expenditure
10. Despite efforts to reduce the budget deficit,  the Solomon Islands faces a critical fiscal
situation.  Total public debt more than doubled  during the 1990s to reach almost SI$900 million in
1997, representing around 65% of GDP (Table I.3).  Domestic debt comprised 44% of this total,
compared to 41% in 1991. Unsustainable borrowings, funded mainly by Central Bank finance andborrowings from the National Provident Fund, culminated in the Government defaulting on interest
payments to service domestic and external loans from 1995.  By 1997, interest arrears on public debt
had escalated sevenfold, from SI$12.8 million to SI$90.7, of which less than half was owed on
domestic debt.  Moreover, the Government had difficulties repaying its creditors and meeting the
generous pay increases awarded to public servants in 1996.  These arrears amounted to an extra
SI$93.6 million in 1997.  Total interest and other arrears in 1997 of SI$184.3 million was more than
three times the estimated fiscal deficit in that y ear.  Total debt, including creditors, owed by the
Government in 1997 was almost SI$1 billion.
                                                                                                                                                                    
least-developed country like the Solomon Islands, however, where tax administration and enforcement are serious
problems, trade taxes may be seen as having some advantages.  Nevertheless, even in these cases, rates should be
as uniform as possible in order to avoid distortions in consumption patterns.  A broadly based consumption tax,such as a value added tax, would have the additional advantage of taxing consumption of domestically producedgoods and services and imports equally, thereby improving resource allocation; it would also remove the taximposed by tariffs on exports.WT/TPR/S/45 Trade Policy Review
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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%198919961997 a
a
Source : Estimates.
Government of Solomon Islands, 1998 Budget Speech, April, 1998.Chart I.3
Sources of government tax revenue, 1989, 1996 and 1997
Personal taxes
Business taxesImport & excise duties
Export dutiesTrade taxes: Income taxes:Other taxes
Table I.3
Public debt liability, 1991-97
(SI$ million)
1991 1992 1993 1994 1995 1996 1997
Domestic debt 171.4 196.8 250.8 317.9 345.4 358.5 391.4
   National Provident Fund term loans 16.7 16.1 12.5 18.7 19.4 21.3 25.1
   Treasury bills 62.5 115.2 158.2 185.0 204.8 220.9 231.2
   Development bonds 38.9 41.7 40.8 59.9 33.1 26.0 15.6
   Central Bank advances 53.3 23.8 39.3 54.3 84.6 78.5 81.1
   Interest arrears Nil Nil Nil Nil 3.5 11.9 38.4
External debt 250.7 272.4 298.9 319.9 351.1 377.2 507.5
   Debt 250.7 272.4 298.9 319.9 341.8 352.9 455.2
   Interest arrears Nil Nil Nil Nil 9.3 24.3 52.3
Total public debt 422.1 469.2 549.7 637.8 696.5 735.7 898.9
  Trade creditor & other arrears 15.0 Nil 20.0 Nil 15.0 52.4 93.6
Total debt & liabilities 437.1 469.2 569.7 637.8 711.5 788.1 992.5
Source: Government of Solomon Islands, 1998 Budget Speech, April, 1998.Solomon Islands WT/TPR/S/45
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11. High borrowings by the Government led the Central Bank to suspend dealings in government
securities in August 1995.  The statutory limit on such borrowings of 30% of budget revenues was
exceeded in 1994, and the temporary ceiling of 40% reached in May 1995.3  New lending to the
Government was halted.  Without access to Central Bank credit, the Government financed deficits
mainly by accumulating arrears on domestic and external debt, as well as by non-payment of National
Provident Fund contributions and trade creditors.  Public confidence in the Government’s ability tomeet its debt repayments declined.  Commercial banks and other major sources of public borrowings,
such as the National Provident Fund, became over-exposed to non-performing government securities.
The fiscal imbalance and subsequent suspension of trading in public debt instruments from 1995
placed enormous pressure on banking and financial markets, which reverberated throughout the
economy.
(ii) Monetary and financial sector policies
12. The previous Government's highly expansionary fiscal policy was accommodated by a loose
monetary policy, which increased liquidity and funded the budget deficits.  As a result, domestic
credit expanded rapidly, especially before the mid-1990s, and the annual growth in money supply
(M3) averaged almost 19% from 1991-96 (Table I.2).  In 1997, it is estimated to have grown by amore modest 6%.  The financing of unsustainable fiscal deficits and the previous Government’s
inability to meet its debt obligations have heavily strained the financial system, with adverse effects
on financial intermediation and the availability of private sector credit.  Some three quarters of the
Government’s domestic debt is held by the banking system.  The rest is mainly held by the National
Provident Fund.
13. The previous Government allowed the grave economic situation to develop despite contrary
advice from the Central Bank;  despite the Bank's strong concerns, monetary policy was usedinappropriately by the Government.  New Central Bank advances to the Government were, however,
eventually frozen by the Bank at the statutory ceiling in 1995.  Treasury Bills, issued by the Bank on
behalf of the Government, are no longer in demand given the previous Government’s failure to
service its securities.  Commercial banks virtually ceased dealing in government securities, and
remain heavily exposed to these non-performing assets.  In 1996, commercial bank holdings ofTreasury Bills amounted to 40% of assets, dow n from 46% in 1995 and 49% in 1994 and 1993.
4
14. Efforts by the Central Bank during 1997 to finance government borrowings through issuing
over SI$40 million of interest-bearing "Bokolo" bills met with only limited success.  The issue was
substantially under-subscribed, with only one commercial bank and the NPF purchasing them.
However, Bokolo bills have recently been made available to non-bank investors in competition withbank deposits.  In addition, rates paid on Bokolo bills and on-call deposits with the Central Bank were
increased in March 1998 to reduce liquidity.  Commercial bank profitability has nose-dived in recent
years, largely due to their high exposure to non-performing government securities.  Bank interest rate
margins have widened considerably, and interest rates on deposits remain highly negative in real
terms.
                                                     
3The statutory ceiling on short-term government borrowing from the Central Bank is 30% of average
ordinary budget revenues over the three previous years.  This limit can be temporarily raised to 40% for up to
six months (Central Bank Act, section 30).
4Commercial banks must hold a minimum liquid asset ratio set by the Central Bank;  government
securities are counted as part of this ratio.  This mini mum ratio is 40%, but actual levels had reached as much as
60% in 1997.WT/TPR/S/45 Trade Policy Review
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(iii) Exchange rate policies5
15. The Central Bank has managed the exchange rate of the SI$ - which is pegged to a
trade-weighted basket of currencies from four of its major trading partners, the United States,
Australia, Japan and the United Kingdom - with a general view to maintaining a constant real
effective exchange rate.6  In practice, given the relatively low inflation rates of trading partners, this
has resulted in steady but controlled nominal de valuations of the S.I. dollar.  Discretionary
adjustments are made each month by the Central Bank, which attempts to avoid erratic exchange rate
movements and excessive depreciations.
16. Although this objective was largely achieved until the very early 1990s, nominal devaluations
since then, particularly against the yen, have not fully compensated for the relatively higher rates of
domestic inflation.  While the S.I. dollar nominally depreciated by some 50% during 1990-97, itappreciated in real terms by some 30% (Table I.4).  This represented a substantial loss in the country’s
international competitiveness, making its products relatively more expensive both on world and
domestic markets.  These exchange rate movements have therefore put additional competitive
pressure on the country’s export- and import-competing industries.
Table I.4
Balance of payments, 1991-97
(US$ million, unless otherwise specified)
1991 1992 1993 1994 1995 1996 1997b
Current account -37.5 -7.3 -7.4 -2.2 9.3 4.9 -24.4
  Merchandise trade balance -27.9 -7.8 -7.8 1.5 13.8 11.0 -24.9
    Exports (f.o.b.) 84.7 103.8 129.1 143.7 168.3 162.4 162.7
    Imports (c.i.f.) 112.6 111.5 136.9 142.2 154.5 151.5 187.6
  Services (net balance) -47.7 -38.0 -41.8 -59.1 -41.7 -58.7 -33.6
   Private unrequited transfers (net balance) 1.9 1.8 4.5 1.1 0.3 -1.2 -5.8
  Official unrequited transfers 36.2 36.7 37.8 54.4 36.9 53.8 39.9
Capital account 27.6 16.9 5.9 -2.4 -4.8 6.4 -24.4
  Investment (net) 14.4 14.1 22.7 0.5 1.4 0.5 18.5
Overall balance -8.2 11.2 -3.4 -2.7 -1.5 16.7 -1.2
Memorandum items percentage change
  External reserves (changes) -8.6 13.9 -1.6 -2.7 -1.5 16.7 -1.2
  Terms of trade -1.2 5.1 43.9 -3.5 -12.7 6.2 0.8
  Export price index 0.7 7.0 30.5 -0.7 2.0 .. ..
  Import price index -0.2 3.9 -5.9 4.3 6.9 .. ..
  Nominal effective exchange rate 10.7 9.3 10.9 9.9 9.1 0.5 -0.2
  Real effective exchange ratea-9.3 -2.3 -2.2 -7.6 0.0 -9.4 -2.3
.. Not available.
a Based on domestic retail prices and foreign export prices.  A negative movement indicates a real appreciation in the currency.
b Estimate.
Source: Central Bank of Solomon Islands, Quarterly Review, December 1997, Vol. 8, No. 4; Government of Solomon Islands, 1998
Budget Speech, April 1998;  IMF, Staff Report for the 1998 Article IV Consultations, May, 1998.
                                                     
5Exchange rate policy in the Solomon Islands is decided by the Government in consultation with the
Central Bank.  The Bank is responsible for managing the exchange rate system, and can make discretionaryadjustments of up to plus or minus 0.5% of the monthly rate without Cabinet approval.
6Neither the trade weighted index, nor the currency weights, are published.  The weights are fixed
using a three-year moving average, and currently reflect trading patterns for 1992-94.  The Bank sets the rate ofthe domestic currency against the U.S. dollar, the intervention currency, by providing commercial banks withdaily limits on the buying and selling rates for the U.S. dollar.  The Central Bank allows the cross rates against
other currencies to be determined by the commercial banks.Solomon Islands WT/TPR/S/45
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17. Currency pressures mounted in late 1997 as exports weakened as a result of the Asian crisis.
After initial market intervention by the Central Bank to support the currency, using a large share of its
international reserves, the S.I. dollar was devalued on 15 December 1997 by 20% against the
U.S. dollar. This decision was taken primarily to help restore the country's international competitiveness.
Since then, the S.I. dollar has stabilized against the U.S. dollar at a rate of around SI$4.80 to US$1.
18. The Solomon Islands does not maintain restrictions on payments and transfers for current
international transactions, having accepted the obligations of Article VIII, Sections 2, 3 and 4 of the
International Monetary Fund in July 1979.7  Exchange control is administered by the Central Bank
through the Exchange Control Act of 1976 and the Foreign Exchange Control Regulations 1997
(Table I.5).  Central Bank approval is also needed to issue a share certificate in a resident company to
a non-resident, and to create a debt to a non-resident in the books of a resident company.
Table I.5
Exchange controls
Item Arrangements
A. Payments and receipts
Prescription of currency
requirementsContractual commitments in a foreign currency to non-residents may be met only by payments in the
currency specified in the contract.  Export proceeds may be received in any foreign currency or in SI$
from an account of an overseas bank with a bank in the Solomon Islands.
B. Resident accounts
Foreign exchangeaccountsResident companies (but not individuals) may obtain Central Bank approval to hold these accounts in
cases where a genuine need exists.
C. Non-resident accounts
Foreign exchange
accountsCompanies and individuals may hold foreign exchange accounts, but proof of bona fide need and
approval is required.
Domestic currencyaccountsMay be held at authorized foreign exchange dealers.
Convertible into foreign
currencyBalances may be transferred abroad with Central Bank or authorized dealer approval.  Bank approval is
needed for these accounts to be credited from the Solomon Islands.
D. Imports and import payments
DocumentationrequirementsAuthorized dealers are permitted to approve release of foreign exchange for imports on most
transactions up to SI$25,000 without reference to the Central Bank.
E. Exports and export proceeds
Repatriation requirements Proceeds must be received within 3 months from exportation.
Surrender requirements Export proceeds must be sold promptly to an authorized dealer.
F. Payments for  invisible transactions and current transfers
Controls on payments No controls on payments for freight and insurance, unloading and storage costs, administrative
expenses, commissions, and family maintenance and alimony.  Transfers by postal order to persons
residing permanently abroad are permitted up to SI$100 per week.
Interest payments Prior approval is readily granted for the payment of loans contracted overseas.
Profit/dividends Prior approval is readily granted for payments of services and remittances of dividends, profits, and
other earnings accruing to non-residents from companies in the Solomon Islands, provided it can be
shown that they are properly due.
Payments for travel Prior approval is normally given for the purchase of foreign currency for travel, subject to appropriate
documentation.
Foreign workers’ wages Prior approval is readily given for the remittance of funds of temporary residents.
G. Proceeds from  invisible transactions and current transfers
Repatriation requirements Yes.
Surrender requirements Approval is required for the disposal of proceeds other than by sale to an authorized dealer.
Table I.5 (cont'd)
                                                     
7The Solomon Islands maintains exchange restrictions against the Federal Republic of Yugoslavia
(Serbia and Montenegro) pursuant to United Nations resolutions.  It joined the IMF in 1978.WT/TPR/S/45 Trade Policy Review
Page 10
Item Arrangements
H. Capital transactions
Controls on capital and
money market instrumentsAll outward transfers of capital require exchange control approval by the Central Bank.
On capital market
securitiesCentral bank approval required, including purchase locally by non-residents; sale or issue locally by
non-residents; purchase abroad by residents; and sale or issue abroad by residents, unless acquired
before March 1997.
On collective investmentsecuritiesCentral Bank approval required on purchase abroad by residents, and sale or issue abroad by residents.
Controls on credit
operationCentral Bank approval required on commercial credits involving borrowing of  funds from or issue of
equity capital to a non-resident.  The Solomon Islands branch of a company incorporated overseas must
have Central Bank approval for borrowing funds from a non-resident, including the branch’s overseas
head office.
Controls on directinvestmentOutward direct investment by resident individuals or by companies and other organizations operating in
the Solomon Islands is subject to certain limitations and when it is likely to be of benefit to islanders.Inward direct investment is subject to approval from Foreign Investment Board for initial or increased
foreign investment.  Approval is readily given for transfer of proceeds from liquidation of direct
investment.
Provisions specific tocommercial banks and
other credit institutionsDifferential treatment of non-resident deposit accounts and/or deposit accounts in foreign exchange –
there is a liquid asset requirement of 40 % and limits on open foreign exchange positions are set for
each commercial bank.
Source: IMF (1997), Annual Report on Exchange Arrangements and Exchange Restrictions.
19. The Central Bank has delegated extensive powers to commercial banks, which have been
appointed authorized dealers in foreign currency and may approve certain transactions up to specified
limits.  They can make forward contracts with residents in any currency.  While there are no
restrictions on the remittance overseas of dividends, profits, interest, royalties and other such
payments, amounts above SI$15,000 per customer per month and SI$100,000 per customer per
annum require Central Bank approval.  Foreign exchange sales to authorized dealers aboveUS$25,000 must also be approved by the Central Bank.  This threshold limit was reduced to
US$5,000 in December 1997 to help support the currency, but to little avail, and was subsequently
reversed in March 1998.  Overseas repatriation of capital, loan repayments and payment of trade debts
requires documentary evidence that the transaction is bona fide, and must also be authorized by the
Central Bank.  The Investment Act of 1990 enables foreign investors, subject to exchange control
regulations, to repatriate the proceeds of sale of the enterprise as well as dividends and profits.
20. The Solomon Islands' external position remains weak.  The current account was expected to
record a deficit of over 6% of GDP for 1997, and is projected to rise to almost 8% in 1998 owing
mainly to sharp declines in export receipts from logs and palm oil (Table I.4 and Chart I.4).  Although
external reserves of SI$150 million at end-1997 represented almost two months of imports (and had in
fact increased to SI$172 million in August 1998, equivalent to three months of imports), cover is
reduced by as much as half when allowance is made for accumulated interest arrears on external debt.Further deterioration in the balance of payments may occur if world log prices continue to decline
throughout 1998.  Current world log prices, at around US$60 per cubic metre, are less than half their
early 1997 levels.  This poses serious problems because logging in the Solomon Islands would appear
to be uneconomic at export prices of below US$65 per cubic metre, the estimated cost of production
(ADB, 1998a).Solomon Islands WT/TPR/S/45
Page 11
-40-30-20-1001020304050
1991 1992 1993 1994 1995 1996 1997-24-18-12-60612182430
Source: Data provided by the authorities of the Solomon Islands.Chart I.4
Balance of payments, 1991-97
US$ million Per cent of GDP
Left hand scale:                                                          Right hand scale:
Overall balanceCapital account
Terms of trade (percentage change) Current account Foreign reservesCurrent account
21. A policy of maintaining a constant real exchan ge rate may be insufficient to enhance the
country’s international competitiveness, unless substantial stabilization and structural reforms of the
kind being planned by the Government are applied quickly.  High tariffs and taxes (Chapter III), as
well as high wage rates that do not fully reflect labour productivity levels together with a dearth of
indigenous skilled labour, contribute to the characterization of the Solomon Islands as a high-costeconomy, although much of this stems from the lack of competition and scale economies.  Moreover,
the ongoing currency realignments following the As ian crisis will place further pressure on the
country’s export competitiveness, as will other developments in its main international markets of
fishing, forestry and traditional agricultural tree crops.
8
(iv) Policy challenges ahead
22. The urgent need for a complete turnaround from the previously disastrous economic policies
is well recognized by the current Government.  The economic policy changes needed to restore
macroeconomic stability and initiate microeconomic reforms to promote restructuring and improve
efficiency are immense and will need a strong political commitment.
23. The new Government has acted quickly to devise policies for economic reform.  Its reform
platform was outlined in its Statement of Policies by the Solomon Islands Alliance for Change,
                                                     
8For example, other Asian suppliers of forestry, fish and tree crop products, such as Indonesia and
Thailand, are likely to emerge as more efficient producer s.  Moreover, the reduction in Lomé tariff preferences
on canned tuna exported to the EU and the extension of these preferences to other LDC producers is likely toplace additional competitive pressure on the Solomon Islands’ fish industry.WT/TPR/S/45 Trade Policy Review
Page 12
released in November 1997 (Chapter II).  An integral  part of the reform programme is the formulation
of the Medium Term Development Plan 1999-2003, which will provide a blueprint for development,
based on achieving more balanced and sustainable economic development and sound management of
its natural resources.9
24. An important component of the reform policies is the Policy and Structural Reform
Programme, announced in October 1997.  This programme is aimed at restructuring the economytowards sustainable, private-sector-led economic growth.  It focuses on economic reform, including
macroeconomic stabilization policies and microeconomic policies for enhancing productivity and
competitiveness, and policies aimed at redirecting and redeploying resources from the public to the
private sector.  Macroeconomic policies are to be based on the need for external and internal financial
balance, and will harness appropriate monetary and fiscal policy to achieve low inflation and interestrates, increasing employment, a stable exchange rate, and a reduced balance-of-payments deficit.
Microeconomic reforms, covering trade and investment policies, tariffs and taxes as well as sectoral
policies, will focus on enhancing transparency of investment policies;  accelerating tariff reductions
on goods and services traded among Forum island countries in specified sectors;  and reviewing
policies on duty remissions.
25. The proposed reforms are broad and far-reaching, and will need to be supported by
fundamental institutional and bureaucratic changes, including the financial and functional relationship
between the national and the nine provincial governments. The Government has therefore
implemented an organizational and decision-making structure to handle the reform programme
(Chapter II).  It is imperative that translation of this commitment to reform into policy action takes
place as quickly as possible.
26. Upon taking office, the new Government moved fast in a number of areas, such as cancelling
export tax remissions from 10 November 1997 and placing from then a moratorium on issuing new
logging licences;  devaluing the currency in December;  and rationalizing the tariff structure.
According to the authorities, their attention in  the first half of 1998 has focused primarily on
researching and reviewing what else needed to be done and on how it could best be achieved.  It is
envisaged that implementation of the main economic policy reforms will begin from mid-1998.  Animportant area of reform will be the labour market, where rigidities impair its flexibility.  The
Government has indicated that it intends to introduce a new national wage policy to link wage
increases more closely to labour productivity improvements.
27. A major first test for the Government was its 1998 Budget, delivered on 30 April.
10
(v) The 1998 Budget
28. According to the 1998 Budget Speech, the Government's objective of balancing both the
recurrent and development budgets was achieved (Table I.6).  Total budgeted expenditure in 1998 of
SI$393.9 million -  including the Government’s contribution of SI$19.5 million to the development
budget - matches projected total revenue of SI$394 million.  Projected recurrent expenditure of
SI$374.4 million in 1998 (including debt servicing of SI$67.1 million, but no payment of arrears)represents a nominal increase of over 20% compared to the 1997 levels.
11  Total domestic revenue is
forecast to increase in nominal terms by 17% in 1998 to SI$373.9 million, largely due to increased tax
                                                     
9Solomon Islands Government, 1997 and 1998a.
10Solomon Islands Government, 1998b.
11If provision for debt servicing is excluded, the projected increase in 1998 expenditure represents a
nominal increase of less than 1%.Solomon Islands WT/TPR/S/45
Page 13
rates, including a 10% across-the-board import surcharg e.  This represents a substantial increase, at a
time when tax receipts from logging are projected to fall by over two thirds to SI$30 million in 1998.
Table I.6
Summary of expenditure and revenue, 1998 Budget
(SI$ million)
Expenditure Receipts
Item Amount Item Amount
Recurrent operations 307.3 Government earnings 47.8
Debt service 67.1 Taxation 326.1
Development expenditure 108.3 External borrowings (development) 27.2
Cash grants 81.6
Policy and structural reform 149.0 Policy and structural reform 149.0
Total funds 631.8 Total expenditure 631.8
Policy and structural reform 149.0
 - Payroll savings 9.5
 - Asset sales and investments 42.5
 - Grants 10.0
 - Domestic borrowing 52.0
 - External borrowing 35.0
Source: Government of Solomon Islands, 1998 Budget Speech, April, 1998.
29. There are no provisions in the recurrent budget for domestic or overseas loans, and
borrowings on the development budget are to be limited to external concessional aid funds frombilateral and multilateral donors.  However, the 1998 balanced budget is still based on total
government borrowings of SI$87 million to finance the clearance of arrears on domestic and external
debt as well as other creditors.
12  It is also based on the Government achieving payroll savings in the
remainder of 1998 of SI$9.5 million from its downsizing of the public service; SI$42.5 million from
asset sales; and SI$10 million from debt servicing grants provided by Papua New Guinea and China.
These additional receipts, totalling an estimated SI$149 million, have been included in the Budget
under a temporary separate item called "Policy and Structural Reform".  These amounts are to be usedto settle outstanding arrears over two years.  The 1998 Budget envisages repaying about half of the
Government’s outstanding arrears.  Some arrears, such as those with the National Provident Fund,
have already been met.
30. Achieving a balanced budget in 1998 will therefore be very difficult, and the Government’s
budgetary position remains precarious.  Stringent cont rols and financial responsibility will be required
to ensure that the expenditure and revenue targets are met.  The Budget announced several initiatives
aimed at improving financial control.  The Budget Unit within the Ministry of Finance has been
mandated to ensure that non-budgeted requisitions are not approved, and budget allocations are to be
strictly adhered to.  The Budget also outlined poli cies taken by the Government in an endeavour to
restrain public sector costs, namely a wage freeze on public servants and a halt to all recruitment.  Atthe same time, it has taken steps to increase reve nue collection by reforming the customs tariff and
eliminating as many tax exemptions as possible.
31. However, despite these positive steps, the Budget also identifies several areas of concern,
where key policy reforms are progressing much slower than expected.  Public sector reform has been
hampered by labour laws and relatively generous redundancy provisions.  Consequently the
                                                     
12Domestic borrowings are projected at SI$52 million and external borrowings at SI$35 million.WT/TPR/S/45 Trade Policy Review
Page 14
downsizing programme has been delayed, and staffing reductions are unlikely before July.  This has
serious implications for the Government’s objective of reducing the annual public service payroll by
15% to SI$130 million in 1998.  According to budget estimates, the 1998 public service payroll would
be SI$136.5 million, even if the projected savings of SI$9.5 million were realized.  The Government
is also concerned that it has not been able to move more quickly on revenue reform.  The immediate
termination of some tax exemptions and remissions has proved difficult given their legally bindingnature, though the Government remains committed to their eventual phase-out and not to introducing
and further concessions.
(vi) Foreign aid
32. The Solomon Islands remains dependent on foreign aid.  A large number of bilateral donors,
especially Australia, Japan and New Zealand, as well as the European Union and most of themultilateral agencies, such as the World Bank, Asian Development Bank and the United Nations,
continue to provide large annual grants and loans to finance the development budget.  In addition,
bilateral and multilateral donors fund substantial technical assistance programmes, largely at the
request of the Solomon Islands' Government, to assist in the implementation of the reform
programme.
33. While foreign aid is essential to the future prosperity of the Solomon Islands, it is no
substitute for the fundamental economic restructuring and reform of macrostabilization policies that
are urgently needed.  Foreign aid and technical assistance programmes can facilitate these reforms,
but care is needed to ensure that external financial assistance is provided at a level and in a
coordinated manner that minimizes the potentially adverse economic effects of aid on the recipient.
Foreign aid can obstruct economic restructuring and contribute to inflationary pressures by leading to
higher wage and price levels.
13
34. The 1998 Development Budget involves total foreign aid of SI$88.8 million (up from
SI$38.3 million in 1997), of which 70% occurs as grants.  These are relatively large inflows to the
Solomon Islands' economy, equivalent to 15% of total export receipts in 1996, making aid inflows the
country’s third-largest foreign currency source after timber and fish.  The Government will have to
ensure that these aid flows do not result in macroeconomic instability.  As well as aid levels, the formit takes can be important.  Aid schemes that directly impede the efficient operation of the market, such
as STABEX, which provides financial assistance to help stabilize domestic prices to offset falls in
international levels of selected agricultural commodities, may be less desirable in the longer term.
(3) M
ERCHANDISE TRADE PERFORMANCE
(i) Commodity pattern of trade
35. The Solomon Islands' commodity trading patterns are heavily concentrated as regards both
exports and imports. Over 95% of exports continue to be primary commodities of timber, fish, palm
products, copra and cocoa.  The main change in export composition between 1983-96 - before the
current fall in timber exports - was the growing share of timber, from 28% to 61% (Chart I.5).
Timber exports are mainly unprocessed logs;  only minimal amounts of sawn timber are exported.The share of fishing exports, comprising mainly frozen and, increasingly, canned fish, contracted
from 43% to 18% over the same period, and exports of copra fell from 12% to 5%.  Manufactures
represented 3% of total exports in 1996.
                                                     
13Large amounts of foreign aid can encourage unproductive "rent-seeking" activities and affect prices,
wages and exchange rates in a manner symptomatic of the "Dutch disease" phenomenon.Solomon Islands WT/TPR/S/45
Page 15
1983Per cent
Central Bank of Solomon Islands, Quarterly Review, December 1997, Vol.8, N°4.Chart I.5
Com position of merchandise ex ports, 1983 and 1996
Palm products
12
Total value:  Fish  
43
Copra
121996
Timber
28Cocoa
3
Source :Total value:  Other
2
Palm products
11Fish  
18
Copra
5
Timber
61Cocoa
2Other
3
36. Imports continue to be dominated by manufactured products (Chart I.6).  In 1996, imports
comprised mainly the categories "machinery and transport equipment" (30%) and "manufactured
goods" (22%).  Other major import groups in that year included food (15%), and fuels and lubricants
(11%).  The main change in the composition of merchandise imports was the reduction in the share of
fuels and lubricants and the increase in the share of food.
1983Per cent
Figures may not add to 100 due to rounding.
Central Bank of Solomon Islands, Quarterly Review, December 1997, Vol.8, N°4.Chart I.6
Com position of merchandise im ports, 1983 and 1996
Machinery 
and transport 
equipment
26
Total value:  Fuel and lubricants  
251996
Manufactured goods
18Food
12
Note:
Source :Total value:  Other
9Beverages and tobacco
4
Chemicals
6
Machinery and 
transport equipment
30Fuel and lubricants  
11
Manufactured 
goods
22Food
15
Other
14Beverages and tobacco
2
Chemicals
4WT/TPR/S/45 Trade Policy Review
Page 16
(ii) Regional pattern of trade
37. Merchandise trade of the Solomon Islands is also geographically concentrated in Asia and
Oceania.  Exports have increasingly gone mainly to Asian markets, while imports are predominantly
from both Oceania and Asian markets.  Over three quarters of exports went to Asian markets in 1996,
compared to 58% in 1983 (Chart I.7).  Well over half of imports in 1996 came from Oceania, up from
40% in 1983 (Chart I.8).  Asian sources supplied 31% of imports in 1996, compared to 46% in 1983.
38. Japan, the main destination for logs, remains the most important export market, accounting
for 40% of total merchandise exports in 1996.  The next most significant destination was the
United Kingdom, mainly due to fish exports.  Other Asian countries as a group have also increased
their relative importance as export markets.  Imports are increasingly being supplied by Australia,
followed by New Zealand;  together, they accounted for well over half of imports in 1996.  Japan andSingapore have declined in relative importance, accounting for 20% of imports in 1996.
1983Per cent
Figures may not add to 100 due to rounding.
Central Bank of Solomon Islands, Quarterly Review, December 1997, Vol.8, N°4.Chart I.7
Merchandise ex ports b y destination , 1983 and 1996
United Kingdom
11
Total value:  Japan  
431996
Other Asia
15
Netherlands
2
Note:
Source :Total value:  Other
27Australia
2United 
Kingdom
18Japan  
40
Other Asia
36Other
4
Australia
2Solomon Islands WT/TPR/S/45
Page 17
1983Per cent
Figures may not add to 100 due to rounding.
Central Bank of Solomon Islands, Quarterly Review, December 1997, Vol.8, N°4.Chart I.8
Merchandise im ports b y destination , 1983 and 1996
Singapore
19
Total value:  Australia 
331996
New Zealand
7Other Asia
8
Note:
Source :Total value:  Other
11
Japan
19United Kingdom
3
Singapore
7Australia 
44
New Zealand
15Other Asia
11Other
8
Japan
13United 
Kingdom
2
(4) OUTLOOK
39. The Solomon Islands is facing an economically difficult outlook as a result of the combined
effects of poor economic policies of the previous government and the Asian crisis.  The current
Government has inherited a grave situation.  Both macroeconomic and microeconomic conditions
appear weak.  Inflation is expected to rise further above the present double-digit levels as the fullprice effects of the December 1997 currency devaluation and the tax increases implemented in the
Budget flow through.
40. The country’s external position also remains precarious.  Central Bank projections suggest
that total export receipts will decline by 24%, from SI$649 million in 1997 to SI$494 million in 1998;
even after allowing for the beneficial effects of the currency devaluation.  The main factor behind theexpected fall is the slump in world log prices following the Asian crisis.  Imports are also expected to
fall, in line with lower real GDP and the higher import prices resulting from the devaluation, but the
deficit on the balance in trade is expected to widen considerably.  As a result, external reserves, which
at the end of 1997 were SI$150 million (representing almost two months import cover) are expected
to fall to SI$140 million at the end of August 1998 after  payment of arrears, and may fall further inline with the expected rise in the current account deficit.
41. It has been estimated that, as a direct result of the Asian crisis, the Solomon Islands' GDP
could fall by as much as 15-25%.  Economic growth could fall by as much as 13% in 1998 (ADB,
1998a).
14  The Solomon Islands is thought to be the worst affected of all Pacific island nations
because of its heavy dependence on logging for export receipts and government revenue (Table I.7).The slump in world log prices caused by the Asian crisis is expected to cut log export receipts in 1998
                                                     
14The Central Bank believes that these growth projections are overly pessimistic.WT/TPR/S/45 Trade Policy Review
Page 18
by around two thirds, as export prices and volumes fall by over 50%.  International log prices are
expected to be depressed for some time, in line with weak demand in Japan, the Republic of Korea
and the European market.  The possibility of increased competition from log exports from Indonesia,
should it reduce export restrictions, and also from Papua New Guinea, will have a major bearing on
the Solomon Islands’ future prospects.
Table I.7
Key effects of Asian crisis on Solomon Islands' economy
Type of effect Assessment
Commodity export exposure Highly exposed because of the importance of log exports.
Tourism effects Not important.
Other net external income effects Not important.
Import effects Recent depreciation will offset any benefit from lower import prices.
Investment effects No discernible impact other than in logging.
Overall impact on GDP It could decline by 15-25%.
Price effects The devaluation will impart a significant inflationary impact continuing a long-term trend.
Employment effects Employment prospects are bleak because of the collapse in logging and a tight budgetary situation.
Government budget The budget will come under considerable pressure as the collapse in exports means a direct decline
of 25% in government revenues.
Source: Asian Development Bank, Impact of the Asian Financial Crisis on PDMC Economies, Draft Report presented at the Ninth
Pacific Developing Member Countries Governors Meeting, Geneva, 28 April 1998.
42. Prices of traditional agricultural commodities, such as copra and cocoa, are also expected to
decline further in the wake of the Asian crisis, although the effects on export receipts will be temperedby increased production of these products in 1998.  Rising palm oil prices (30% since late 1997) may
also be unsustainable, given increased international supply.  Fish exports are expected to be the least
affected by recent international developments.
43. Economic policies need to be turned around quickly to restore fiscal discipline and confidence
among domestic and international investors and donors.  Ongoing policy reforms will be necessary toensure sustainable economic growth and increased living standards for Solomon Islanders.  An
important focus of these reforms will need to be on improving management of its natural resources,
including especially fish and timber.  Past logging rates were unsustainable, and the current drop in
log exports in response to depressed world prices provides the possibility of again harvesting forests
at sustainable levels.