18 September 1998
recovery in the Solomon Islands depends on rapid implementation of comprehensive reforms Back
The Solomon Islands must implement
comprehensive economic reforms if it wants to keep serious macroeconomic imbalances and
structural weaknesses from intensifying. A new WTO Secretariat report urges the Solomon
Islands to accelerate its efforts to achieve a balanced budget, to privatize and
deregulate key service utilities, liberalize investment rules and eliminate generous tax
The WTO Secretariat report and a policy
statement prepared by the government of the Solomon Islands will provide the basis for a
review at the WTO of the Solomon Islands' trade policies and practices on 21 and 22
The WTO's report notes that the Solomon
Islands is now focusing on rehabilitating its public finances. The new government, in
place since September 1997, inherited an economy in crisis and in need of urgent
fundamental reform. Prospects for improving the economy worsened further last year in the
wake of the Asian financial crisis and the collapse of world timber prices, a main export
of the Solomon Islands.
The government sees trade-related reforms as
an important means of fostering private-sector-led growth and enhancing productivity and
competitiveness. External trade is vital to the Solomon Islands' economy. Merchandise
exports and imports averaged 51% and 47% of GDP during 1993-97. Exports consist largely of
timber, fish and traditional agricultural goods. In 1996, over three quarters of exports
went to Asian markets. Timber is sold principally to Japan and other Asian countries. Fish
exports, mainly of canned tuna, go almost entirely to the United Kingdom under
preferential EU access arrangements. The WTO report states, however, that the erosion of
these preferences, as well as their extension to other least-developed countries (LDCs)
may intensify competitive pressure on the fishing industry. Similarly, the future
viability of the logging industry depends not only on how quickly world timber prices
recover, but also on the extent to which export restrictions by other lumber suppliers,
such as Indonesia, are relaxed. Furthermore, unsustainable logging of commercial forests
is threatening the industry's survival beyond 10-15 years. By contrast, in the case of
fishing, off-shore catches of tuna are well below sustainable levels.
Trade taxes are the Solomon Islands' main
intervention measures and the government's principal source of revenue, currently
accounting for more than half of total tax income. Export taxes apply to a wide range of
primary products, especially round logs (at a rate of 35% or 38%) and uncanned fish (5% or
10%). The taxes aim to promote the development of wood and fish processing industries.
While reliance on trade taxes has been declining in recent years, thereby mitigating their
import substitution and export restraining effects, the govern-ment's continued heavy
dependence on these taxes for revenue is a major constraint on trade liberalization.
Moreover, export taxes contribute to the "high-cost" nature of the Solomon
economy. The WTO report states that a comprehensive tax reform is needed to reduce
reliance on trade taxes.
The Solomon Islands is a signatory to the
Lomé Convention and receives non-reciprocal preferences from the European Union on many
goods as well as additional financial assistance. It is also granted duty-free and
unrestricted access to Australia and New Zealand as a party to the South Pacific Regional
Trade and Economic Cooperation Agreement (SPARTECA), a non-reciprocal preferential
agreement. Furthermore, the Solomon Islands is a beneficiary of the General System of
In the Uruguay Round, the Solomon Islands
bound its entire tariff at ceiling rates (around 80%) generally well above applied rates.
The simple average applied MFN rate is 22.7%. These rates range from a minimum of 5% to a
maximum of 70%, the latter applying to many food items and consumer products. Much higher
composite duties (excluded from the estimated total average) apply to alcoholic beverages,
motor vehicles and used clothing. While tariffs are almost exclusively ad valorem, the
transparency of the past tariff system was undermined by the widespread use of
discretionary exemptions and remissions. The government has recently taken steps to remove
these exemptions and the WTO's report notes that the removal of tariff concessions
together with a move to lower, more uniform levels would further enhance the efficiency,
simplicity and transparency of the customs tariff.
The Solomon Islands has put into place
different measures to attract investment such as tax conces-sions, discretionary use of
concessions on trade and excise taxes, income tax holidays and other fiscal incentives,
whose effectiveness is dubious. The government is also reviewing its investment procedures
with the aim of making them more transparent and conducive to foreign investment. The WTO
report, however, notes that the efficient supply of basic services is essential to
attracting foreign investment and that most basic services in the Solomon Islands, such as
electricity, telecommunications, ports, water, air and maritime services, are still
provided by state-owned statutory monopolies sheltered from competition. The Solomon
Islands also limits certain economic activities - agriculture, forestry, fishing,
manufacturing, construction, wholesale and retail trade, communications and tourism - to
its indigenous population. Foreigners are allowed to lease but not to buy land.
The WTO report concludes that the Solomon Islands must take immediate action in key
areas to prevent paralysis of the reform programme or it risks jeopardizing its economic
recovery. Achieving a balanced budget in 1998 will be a critical milestone in the
government's resolve to implement reform. Liberalization of invest-ment rules,
complemented by trade reforms, is necessary to attract capital into efficient industries
that can survive without government assistance. And faster privatization and deregulation
of key utilities will also help revitalize the economy. While external aid will continue
to be essential for the Solomon Islands, aid donors and the government will have to ensure
that financial assistance is coordinated and provided in ways that encourage economic
growth and development.
Notes to Editors
The WTO's Secretariat report, together
with a policy statement prepared by the Solomon Islands Gov-ernment, will be discussed by
the WTO Trade Policy Review Body (TPRB) on 21 and 22 September 1998. The WTO's TPRB
conducts a collective evaluation of the full range of trade policies and practices of each
WTO member at regular periodic intervals and monitors significant trends and developments
which may have an impact on the global trading system. The Secretariat report covers the
development of all aspects of each of the Solomon Islands' trade policies, including
domestic laws and regulations, the institutional framework, trade policies by measure and
by sector. Since the WTO came into force, the new "areas" of services trade and
trade-related aspects of intellectual property rights are also covered.
To this press release are attached the summary observations from the Secretariat report
and the full government policy statement. The full Secretariat report is available for
journalists from the WTO Secretariat on request (call 41 22 739 5019). It is also
available for the press in the newsroom of the WTO internet site (www.wto.org). The
Secretariat report, together with the government policy statement, a report of the TPRB's
discussion and the Chairman's summing up, will be published in hardback in due course and
will be available from the WTO Secretariat, Centre William Rappard, 154 rue de
Lausanne, 1211 Geneva 21.
Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989, 1994 & 1998), Austria
(1992), Bangladesh (1992), Benin (1997), Bolivia (1993), Botswana (1998), Brazil (1992
& 1996), Cameroon (1995), Canada (1990, 1992, 1994 & 1996), Chile (1991 &
1997), Colombia (1990 & 1996), Costa Rica (1995), Côte d'Ivoire (1995), Cyprus
(1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992), El
Salvador (1996), the European Communities (1991, 1993, 1995 & 1997), Fiji (1997),
Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991 & 1998),
Iceland (1994), India (1993 & 1998), Indonesia (1991 and 1994), Israel (1994), Japan
(1990, 1992, 1995 & 1998), Kenya (1993), Korea, Rep. of (1992 & 1996), Lesotho
(1998), Macau (1994), Malaysia (1993 & 1997), Mauritius (1995), Mexico (1993 &
1997), Morocco (1989 & 1996), New Zealand (1990 & 1996), Namibia (1998), Nigeria
(1991 & 1998), Norway (1991 & 1996), Pakistan (1995), Paraguay (1997), Peru
(1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore
(1992 & 1996), Slovak Republic (1995), South Africa (1993 & 1998), Sri Lanka
(1995), Swaziland (1998), Sweden (1990 & 1994), Switzerland (1991 & 1996),
Thailand (1991 & 1995), Tunisia (1994), Turkey (1994), the United States (1989, 1992,
1994 & 1996), Uganda (1995), Uruguay (1992), Venezuela (1996), Zambia (1996) and
Secretariats report: summary Back to top
TRADE POLICY REVIEW BODY: SOLOMON
Report by the Secretariat Summary Observations
The Solomon islands is a small archipelago in
the south pacific. Despite having relatively abundant forestry and fish resources, it is
one of the regions poorest countries; GDP per capita was us$950 in 1995, and
the islands have least-developed country status. Inept economic management by
previous governments has constrained development and often favoured vested interests at
the communitys expense. The present government, which assumed office in
September 1997, inherited an economy in crisis and in need of urgent fundamental reform.
The government's commitment to broad reforms
is clear from its policy and structural reform programme. Rapid implementation is
essential to prevent the economys chronic macroeconomic imbalances and serious
structural deficiencies from intensifying.
After gaining independence from the United
Kingdom in 1978, the Solomon Islands adopted inward-looking trade policies aimed at
promoting the processing of primary resources, such as fish and timber, as well as
encouraging manufactures. These interventionist policies were manifested in high and
disparate trade taxes on imports and exports; a heavy state role in industrial
development; a large public service; and high, unsustainable fiscal deficits
underpinned by expansionary monetary policies.
These policies resulted in the economy
becoming virtually insolvent by 1997, with the government unable to service public debt,
which escalated to over 65% of GDP in 1997. Arrears grew sevenfold to SI$184.3
million in 1997, over three times that years fiscal deficit, and equivalent to 13%
of GDP. Monetary policy has also been ineffective since August 1995 when the Central
Bank suspended new credit to the Government under rules limiting public debt to 40% of
average budget revenues.
Inflation is expected to rise from 8% to
double-digit levels in 1998. Although annual average real GDP growth of 5% has
exceeded population growth by 2% since 1991, its durability is threatened by the
unsustainability of the logging activities that have fuelled this growth. Long-term
viability of the timber and fishing industries, upon which the economy critically depends,
is a major concern.
The managed exchange rate has appreciated in
real terms during recent years, despite the recent 20% devaluation, potentially
undermining export competitiveness. A more flexible and market-determined exchange
rate system may improve international competitiveness and insulate the external balances
from outside shocks.
The history of poor fiscal and monetary
management has reduced confidence of international investors and aid donor. Foreign
direct investment has fallen to low levels and the external balance remains vulnerable.
Achieving a balanced budget in 1998 will be a
critical milestone in the Governments resolve to implement reform. Restoring
fiscal balance requires stringent controls to meet expenditure and revenue targets and
achieving other key policies, including downsizing of the public service; asset sales from
privatization to help pay off debt; and the elimination of generous tax exemptions.
However, progress has been slow and further delays need to be resisted. Action is
necessary in key areas to prevent paralysis of the reform programme, which would
jeopardize the economic recovery.
The Solomon Islands' economic difficulties
have been accentuated by recent external developments, including the Asian crisis. Its two
main exports, logs and fish, have been adversely affected by the collapse in world timber
prices in late 1997 and the reduction of EU preferences for processed fish.
The Solomon Islands in World Trade
External trade is vital to the Solomon
Islands' economy. Merchandise exports and imports averaged 51% and 47% of GDP,
respectively, during 1993-97. External balances have fluctuated considerably; at the
end of 1997, reserves provided less than two months of import cover. Deficits on
merchandise and services trade have been offset by capital and aid inflows.
Exports consist largely of timber, fish and
traditional agricultural goods of palm oil, copra and cocoa. Over three quarters of
exports in 1996 went to Asian markets Timber is sold principally to Japan and other Asian
countries; log exports have declined substantially following the collapse of world
timber markets in late 1997. Fish exports, mainly of canned tuna, go almost entirely
to the United Kingdom under preferential EU market access arrangements (Lomé Convention).
Imports are mainly of manufactures, especially
machinery and transport equipment, food, fuels and lubricants. Well over half of
imports are from Australia and New Zealand.
Legal and Institutional Framework
The Solomon Islands is a constitutional
monarchy with substantial devolution of powers to provincial governments. Although
responsibility for trade-related policies rests with the national Government, provincial
governments may pass ordinances affecting such policies, including the provision of
agricultural grants and protection of on-shore fishing. They must also approve forestry,
mining and fishing developments on customary land, which accounts for over 90% of land
Legislative power resides in a unicameral
national Parliament. Executive power is vested in the national Government, elected
every four years. The Prime Minister is elected by Parliament. A Cabinet of
senior ministers formulates policy.
With the aim of improving the coordination of
trade and economic policies, the Government has developed an organizational
decision-making structure involving the Ministries of National Planning and Development,
the Prime Ministers Office and Ministry of Finance, as well as the Central Bank, to
help implement the reform programme. Two new ministerial task forces one
examining economic reform and the other public sector reform report to a Cabinet
sub-committee (the Policy and Structural Reform Committee, PSRC) chaired by the Prime
Minister. The Government reform blueprint is being formulated in the Medium-Term
Development Plan (1999-2003).
The Government consults frequently with the
private sector through the Chamber of Commerce, which is represented on the PSRC. No
independent statutory body exists to advise the Government on, or to review, trade-related
policies, including the provision of tariff and other industry assistance.
Trade Policy Features and Trends
The Solomon Islands, a de facto GATT
contracting party since independence, acceded to the WTO as an original member in July
1996. Its entire tariff was bound under the Uruguay Round, mainly at a ceiling level
of 80%. It scheduled GATS commitments on professional, construction, tourism and
financial services. It is not a signatory to any of the Plurilateral Trade
The Solomon Islands' only exception to MFN
treatment concerns tariff preferences within the MSG (Melanesian Spearhead Group) Trade
Agreement of 1996. These cover imports of tea from Papua New Guinea and beef from
Vanuatu; and its canned tuna exports to these countries enter duty free. Fiji
is now a member of the Group, and more products are covered, such as fruit, nuts, coffee
As a signatory to the Lomé Convention, the
Solomon Islands receives non-reciprocal preferences from the European Union on many
goods. Additional financial assistance, totaling ECU 28 million to 1996, has been
provided under Lomé IV, mainly as grants under STABEX or EDF.
The Solomon Islands is also a party to the
South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA), a
non-reciprocal preferential agreement covering the Forum island countries (FICs) aimed at
achieving duty-free and unrestricted access for FIC exports to Australia and New
Zealand. It is also a beneficiary of the GSP schemes of most industrialized
The Governments immediate priority is
comprehensive economic reform to redress serious macroeconomic imbalances and structural
weaknesses. Great importance is attached to the rehabilitation of public
finances. Economic policy is to be export-oriented and outward looking.
Trade-related reforms are seen as an important means of fostering private-sector-led
growth and enhancing productivity and competitiveness.
The main policy priorities are tariff and tax
reforms, notably reduction of exemptions; downsizing of the public sector; more
transparent and facilitative foreign investment policies; and sustainable management of
key natural resources, especially forestry and fishing.
While the Government's intent was to commence
the main policy reforms from mid-1998 after fully reviewing existing polices, several
important decisions were taken in advance. These included the cancellation of export
tax remissions on logs in November 1997, and implementation of a moratorium on new logging
licences. This was followed by a 20% currency devaluation in December 1997. Furthermore,
the tariff was substantially revised in March 1998; this involved the compression of the
duty structure from 20 ad valorem rates, ranging from zero to 225%, into five rates of 5,
10, 20, 40 and 70%, the modal rate being 10%. Subsequently, a 10% across-the-board
import surcharge was introduced in the April 1998 Budget to raise revenue.
The Government sees meeting its multilateral
commitments as playing an essential role in its reform agenda. It intends to
implement, for example, WTO-consistent policies on customs valuation, intellectual
property protection, agriculture and quarantine, as required for least-developing
countries, with technical support from bilateral and multilateral donors.
Type and incidence of trade policy instruments
Tariffs are the main instrument of trade
policy. Applied MFN duties remain relatively high, with an unweighted average of
23%, excluding the 10% surcharge and specific duties. The top ad valorem tariff rate
of 70% is mainly on processed foods and consumer goods, such as perfume, jewellery,
electronics and furniture. However, higher composite duties, involving specific
rates, apply mainly to tobacco products; alcoholic beverages, including beer; new and used
motor vehicles; and worn clothing.
The five-rate tariff structure contains
built-in escalation, with higher duties imposed on fully processed products. Average
applied MFN tariffs 26% on these products of are two-thirds higher than for semi-processed
products. However, de-escalation exists between raw materials and semi-processed
products, reflecting much higher duties on raw materials. Although tariff
transparency is enhanced by application of ad valorem duties to 97% of all tariff lines,
it has been reduced by the widespread discretionary use by past governments of exemptions
and remissions, often for obscure reasons. The present Government estimates that
these cost 40% of collectable customs revenue, and is reviewing their use. Some were
removed recently following changes to the Customs Act.
There are no duty drawback or similar
arrangements for exporters. Removal of tariff concessions together with a move to
lower, more uniform levels, if not a single rate, would further enhance the efficiency,
simplicity and transparency of the customs tariff.
The Government aims to improve customs
efficiency and reduce tariff evasion. It is considering introducing preshipment
inspection services using a private contractor. The former Brussels Definition of
Value (BDV) is used for customs valuation, and no minimum prices are applied. No
legislation exists on safeguards nor on anti-dumping and countervailing actions.
Few formal non-tariff trade barriers
apply. Certain import prohibitions and controls apply for environmental, health,
public safety and security reasons as well as under international conventions, such as
CITES. Import licensing exists on methylated spirits and ethyl alcohol (importable
only by government pharmacies), alcoholic spirits, used clothing, arms and
ammunition. There are no import quotas or trade embargoes; nor are there
local-content requirements for domestic production. Government procurement is by
The Solomon Islands does not set or impose
standards, nor is it a member of ISO. International standards are applied
occasionally for public safety reasons, as on chemicals and hazardous fertilizers,
herbicides and construction equipment. There are no marking, labeling or packing
requirements. Quarantine provisions apply to imports of plant and animal products,
mainly meat, dairy, eggs, honey, hides and skins, unless sourced from Australia or New
Export taxes ranging between 5% and 38% apply
to many unprocessed products, especially logs, fish, gold, copra, palm oil and cocoa; some
of these taxes were increased in the 1998 Budget. Export licences are required for
logs and, from 1997, for gold and other minerals. Other export controls are mainly
for cultural, health and environmental reasons, or in accordance with international
conventions, as in the case of export prohibitions on wildlife under CITES. Exports
of war relics, bait fish, traditional artifacts, and endangered species, such as
bêche-de-mer and trochus shells, are also prohibited or controlled.
No export quotas or voluntary export
restraints apply and exports are not subsidized. However, profits from exports are
non-taxable for up to six years (with possible extensions), depending upon the level of
domestic value added.
While there are no production subsidies in the
Solomon Islands, tax concessions are granted for investment and production. In
addition to the discretionary use of concessions on trade and excise taxes, there are
income tax holidays and other fiscal incentives, such as special write-offs and
accelerated depreciation provisions. Many of these measures reflect the national
policy of attracting export-oriented investment. These incentives currently under
review, further erode the already narrow tax base. It is doubtful whether such
incentives, are effective.
There is no specific competition law.
However, the Government intends to introduce legislation to protect consumers from unfair
trade practices. Price controls apply to a range of staple items, including milk,
tinned meat and fish, sugar, soap, rice, cooking oil, bread, electricity, petroleum
products and water charges. The Government also intends to privatize and corporatize
several state-owned enterprises, including a number of holdings of the Investment
Corporation, notably Solomon Telekom, and some other utilities.
Renewed efforts are needed to ensure greater
private participation in providing key utility services. This will improve
efficiency and reduce prices. Poor, and relatively expensive, basic services by
government monopolies deter foreign investment and restrain growth.
The Government is reviewing its investment
procedures with the aim of making them more transparent and conducive to foreign
investment. Although there are no maximum foreign ownership limits, the Foreign
Investment Board examines proposed local ownership levels on a case-by-case basis.
It may stipulate some divestment of foreign ownership over the projects life.
A relatively large negative list reserves for indigenous people certain activities in
agriculture, forestry, fishing, manufacturing, construction, wholesale and retail trade,
communications and tourism. Non-Solomon Islanders can lease, but may not buy, land.
Trade taxes on imports and exports remain the
main interventionist measures. A major constraint on trade liberalization is the
Government's heavy reliance on these taxes for revenue. Although declining, they
provide over half of tax revenue; until recently, export taxes, especially on logs,
were the main revenue source. Thus, trade liberalization and tax reform are closely
intertwined. Trade taxes are a distorting means of raising government revenue.
Comprehensive tax reform is needed to reduce reliance on trade taxes, to strengthen tax
administration and broaden the base.
The Solomon Islands is heavily dependent on
agriculture and natural resources of forestry and fishing. These account for over
half of GDP, with manufacturing, excluding fish processing, representing only 3%.
Most sectoral policies relate to the
development of wood and fish industries. Trade and investment measures have been
designed to promote downstream processing of these resources. Such policies include
export taxes on unprocessed timber and fish, as well as efforts to make fishing and
logging licences largely conditional upon domestic processing. These policies, which
tax the unprocessed activity, risk creating economically and technically inefficient
downstream processing industries reliant on continued government support. The
present Government has not yet indicated whether it will uphold the previous Government's
stated policy intention of prohibiting round log exports in 1999.
Export taxes, levied on producers, compound
the anti-export bias inherent in the countrys tariff and other economic policies
that contribute to the high-cost nature of the economy. They tax
resource rents from forests and fishing inefficiently and undermine conservation by
reducing domestic prices for the unprocessed product. The Government might usefully
explore more efficient ways of securing their share of resource rents (such as the
government auctioning of logging licences or levying of stumpage fees on production).
Sectoral policies have contributed to the poor
management of these key natural resources. Unsustainable logging of commercial
forests, with licensed harvest levels running at almost three times sustainable yields,
until the current downturn in the global timber market, has threatened the industrys
survival beyond 10-15 years. By contrast, in the case of fishing, off-shore catches
of tuna are well below licensed, and much higher sustainable, levels. Both are
uneconomic outcomes that reduce the economys long-term growth prospects.
Copra, cocoa and palm oil products are
important traditional agricultural commodities. The statutory monopoly exporter of
copra and cocoa, the Commodities Export Marketing Authority, operates a copra price
stabilization scheme, involving public funds, and a similar scheme will operate for
cocoa from 1999. The Authority also markets coffee together with spices, such as
chillies, turmeric, vanilla, ginger and cinnamon. Palm oil products, such as palm
kernel and coconut oil, are the backbone of plantation agriculture. The Government
directly participates through ownership interests in Solomon Islands Plantation Limited
and the Russell Islands Plantation Estates Limited. The Government is considering
privatizing some of these interests.
Tourism is targeted for development. The
Government encourages private development by offering various tax concessions, including
five-year tax holidays and accelerated depreciation.
Efficient provision of basic business input
services is essential to improve international competitiveness and attract foreign
investment. Most basic services, such as electricity, telecommunications, ports,
water, air and maritime services are provided by as state-owned statutory monopolies
sheltered from competition. For example, the Postal Corporation, although
corporatized in 1996, retains its legislated monopoly over delivery of national and
international standard letters. Solomon Telekom, which is 58% state-owned, has a
15-year statutory monopoly over telecommunications services until 2002.
Banking licenses must be approved by the
Central Bank. Foreign banks may operate domestically as locally incorporated
subsidiaries or as foreign branches, provided an assigned minimum level of capital is kept
within the country. The Central Bank accepts that such branches will be adequately
supervised by their own prudential regulators. Banks are prohibited from providing
Trade Policies and Foreign Trading Partners
The Solomon Islands economy is in urgent
need of large-scale economic reform. Although some significant first steps have been
taken, much more needs to be done. As a small, least-developed island economy, its
economic prosperity hinges on becoming more integrated into the world economy. Trade
measures are applied on a non-discriminatory basis, and its reliance on tariffs together
with bindings as a result of the Uruguay Round have significantly increased the
predictability of its trade regime. Preferential trading arrangements with MSG
members and proposed initiatives within the Forum to establish a Free Trade Area among
FICs should not be allowed to impede the process of non-discriminatory trade
The Solomon Islands depends heavily on log and
fish exports. However, the international competitiveness of both industries is under
threat. Processed fish exports (mainly canned tuna) rely heavily on preferential EU
access to the United Kingdom market under the Lomé Convention. Erosion of these
preferences, as well as their extension to other LDC competitors, may be expected to
intensify competitive pressure on the industry. Similarly, the future viability of
the logging industry depends not only on how quickly world timber prices recover, but also
on the extent to which export restrictions by other lumber suppliers, such as Indonesia,
Implementation of the Governments reform
programme, including prudent use of monetary and fiscal policies, should substantially
reduce the anti-export bias inherent in its trade regime and improve the efficiency of
resource use. This should enhance competitiveness on both home and export
markets. A more market-oriented economy would also benefit its trading partners.
Trade, investment and economic growth are
closely linked. Increased efforts to remove impediments to international trade and
investment can be expected to contribute to economic development. Liberalization of
investment rules, complemented by trade reforms, is necessary to attract capital into
efficient industries that can survive without government assistance. Faster
privatization and deregulation of key utilities will also help revitalize the economy.
External aid will continue to be essential for
the Solomon Islands. However, it needs to be recognized that over-dependence on aid
may obstruct the economic restructuring needed to improve the economys resilience,
and have adverse side effects, by accentuating the high cost economy and
undermining international competitiveness. The difficult challenge facing aid donors
and the Government will be to ensure that financial assistance is coordinated and provided
in ways that encourage economic growth and development. In this context, the
conditions resulting from renegotiation of Lomé IV in 2000 will be important.
The Solomon Islands will always
be vulnerable to external disturbances and their effects on trade balances. Trade
liberalization is an important means of increasing economic flexibility and the capacity
of the economy to adjust to international influences. The future pace and depth of
its trade reforms will be contingent upon the maintenance of an open, stable and
predictable global trading regime that can successfully combat protectionist pressures in
major export markets. The Solomon Islands' trading partners can greatly assist the
Government's efforts to turn the economy around by ensuring non-discriminatory and stable
access to their market.
report Back to top
TRADE POLICY REVIEW BODY: SOLOMON
Report by the Government
Solomon Islands economic performance, until
the onset of the Asian economic crisis of 1997 was characterized by strong export
receipts, modest inflation but stagnant growth in domestic credit and critical problems in
fiscal policy. GDP growth averaged around 3-4% generated largely from strong output
performance in the forestry, fishing and agriculture plantation sectors.
Positive growth was experienced since the
early 1990s. The forestry sector experienced a logging boom while developments in
the fishing sector were stronger than in the past decade. The economy, however,
became increasingly dependent on timber revenues, which by 1995 accounted for around half
of export earnings and over a third of government revenues. By 1996 the export base
was less diversified than at any time since the early 1970s. The government reached
a crisis point in fiscal management by 1995. This placed strains on the domestic
financial system and on relations with domestic and foreign creditors.
Since mid-1997, the slowdown in economic
performance was exacerbated by the Asian financial crisis. The impact of this is
being felt mainly through, the balance of payments and the exchange rate, inflation,
production and government finances. The economy experienced lower than expected
export receipts, a rise in inflation, depressed government revenues and a general slow
down in economic activity.
These trends are expected to continue
throughout the rest of 1998 and also in 1999. The short to medium term outlook for
the Solomon Islands is not encouraging as the economy is heavily dependent on
international trade with Asia, and the prolonged crisis in Asia will have a negative
impact on the demand for and prices of Solomon Islands export as well as upon
economic growth in general.
Given the resource endowment of the Solomon
Islands, the economy has the potential to grow in the long term. However, to achieve
its potential, the right mix of policies and business environment need to exist in Solomon
Islands. The government is fully aware of the adverse impact an expansionary and
unsustainable fiscal policy can have on the economy and has already taken steps to ensure
sound management of its finances as a critical prerequisite to restore economic
stability. Fiscal budgets will be in future be drawn up to ensure stability and
balance in revenues and expenditures. The government of the Solomon Islands is
committed to the full and timely payment of its public debt (and arrears). Public
policy will also be instrumental in assuring the rate of resource utilisation at
sustainable levels and to ensuring the effective use of the incomes derived from the
exploitation of national assets. The challenge in the medium term is to improve the
efficiency of public policy and administration to enable the Solomon Islanders to
contribute more effectively to, and benefit from, growth in the economy.
The government also recognizes the role played
by the private sector and will continue to provide a conducive business climate for
private sector to grow and invest. Government will therefore, concentrate on
critical areas such as infrastructure development and rehabilitation, investment in human
capital, and ensuring the existing legal framework simple and complementary to private
Prospects for 1999 and in the medium term
future therefore, depend on policy decisions related to the governments reform
program, the level of assistance received from development partners and multilateral
agencies and changes in the real economy. The Gold Ridge mine has commenced
production in the third quarter of 1997, fish and palm oil are expected to be resilient
but log exports will depressed which could result in a vulnerable balance of payments
position throughout 1999.
Recognizing the urgent need for an immediate
turnaround to salvage the current economic down-fall, the Solomon Islands Alliance for
Change (SIAC) Government in November 1997 released its statement of Policies structured
and designed to restore macroeconomic stability and initiate microeconomic reforms to
promote restructuring and improve efficiency which the Government is committed to achieve.
Solomon Islands maintains a constant real
exchange rate in order to enhance the countrys international
competitiveness. To this end, Solomon Islands is moving quickly to apply a
comprehensive phased reform programme beginning from public sector reform, structural
reform on high tariffs and freezing high wage rates.
TRADE POLICIES AND PRACTICE
The significant changes in the global economy
towards trade liberation, economic deregulation, trade and investment promotion are key
factors influencing Solomon Islands development strategy. In October 1997, the
Government announced its Structural Reform Programme, aimed at improving Solomon Islands
current economic and a long term prospects. With this in mind, the Government is
undertaking a phased reform programme to review the existing import restrictions and
reduction of imports tariffs, tax reform, public sector reform, and export promotion and
The structural reform program announced in
October 1997 by the Government is aimed at moving the economy towards sustainable, private
sector led economic growth. The reform programme focuses on economic reform,
including macro-economic stabilization policies and microeconomic policies for enhancing
productivity and competitiveness, as well as policies aimed at redirecting and
deploying resources from the public to private sector. There is a clear need for
external and internal financial balance, appropriate monetary and fiscal policy aimed at
achieving low inflation and interest rates, increase of employment, a stable exchange rate
and a reduce on balance of payments deficit. Microeconomic reforms include trade and
investment policies, tariffs and taxes as well as sectoral policies, focused on enhancing
transparency of investment policies; accelerating tariff reductions on goods and
services traded among Forum Island Countries; and reviewing duty remission policies.
Solomon Islands trade policy objectives
include progressive removal of trade barriers. It is the Governments desires
to promote and diversify export trade as an important means of economic development.
To achieve this, the Government is undertaking a comprehensive review of the tax system,
with a view to broadening its base and reducing tax rates, focusing in particular on tax
and tariff reform. It is also moving towards the removal of administrative obstacles
to investment aimed at improving the transparency of investment policies, and to
creating a conducive environment for private sector growth and development.
A further review of the trade taxes with a view to create uniform rates to eliminate
trade distortions is also being considered. The government is also studying a
consumption based value added tax aimed at gradually removal of the tax
imposed by tariffs.
A major objective of the Governments
reform programme is the implementation of sustainable management policies over its key
natural resources, such as forest, marine, minerals and agricultural commodities and
implementing effective control over the unsustainable exploitation of such resources is
also high on the agenda.
Since the early 1990s there has been a
progressive move towards export oriented policies which is also the main trade policy
objective of the Government. Policy is aimed at developing an open outward-looking
and export oriented economic that generates rapid rates of growth and higher standards of
living. Also, a national policy is in place to encourage export related
investment. This includes a range of income and other tax concessions which are
available under the Foreign Investment Act as investment incentives.
TRADE POLICIES BY SECTOR
The Primary Sector accounted for 42% of GDP in
1995, with agriculture representing just over half of this share. The former
accounted for around a quarter of formal employment, with agriculture and forestry the
most important contributors. The primary sector is also the Solomon Islands main
source of export earnings. In 1996, timber and fish accounted for 79% of the total
exports. Traditional agriculture commodities of considerable export significance are
palm oil, copra and cocoa. These traditional agriculture commodities and other
export potential cash crops such as chillies and local fruit tress will be the primary
focus of the Governments policies on agriculture.
The Governments agriculture policies,
outlined in the 1994 Agriculture Sector Plan are to facilitate export diversification for
minor crops such as chillies, and the development of the local fruit tress like canarium
nuts. Promoting and encouraging down stream processing of traditional tropical tree
crops, such as copra, cocoa and palm oil is also high on the agenda.
Round log exports increased substantially
during the 1990s largely because of high international log prices. However,
exports fell substantially in 1997 in line with the fall in international log
prices. Although log exports fell in l997, projected log exports will remain at
600,000 cubic metres in 1998. The current harvesting rates equivalent to almost
three times the estimated sustainable yield, raises concern by the new Government, and
intends to put in place legislation aimed at sustainable manufactured of the forest
resources including a fundamental strengthening of the control mechanism governing the
harvesting of the forest resources. In 1997 the Government formally recognised the
Code of Practice for Timber Harvesting as a means of improving logging practices in
Oil palm products including copra are at
present and will continue to be the backbone of the plantation sector in the Solomon
Islands. Efforts have been made to extend the benefits of oil palm cultivation to
shareholders in the Outgrower Scheme funded by the European Union. Under this
Scheme, Solomon Islands Plantation Limited (SIPL) provides seedlings, management support,
and input including markets for end products. The programme was designed to
encourage further expansion of oil palm plantation, but close proximity to SIPLs
Copra is an important commodity in Solomon
Islands; as well as an important export earner. Commodities Export Marketing Authority
(CEMA) has exclusive export rights over copra. CEMA operates a copra price
stabilization scheme, aiming at stabilizing copra price in order to give rise to copra
production. In its development policies the Authority is embarking on a program for
all copra to be crushed domestically into coconut oil by 1999. CEMA has now
established four copra crush mills.
The fisheries sector is an important source of
foreign exchange; and contributed 8% of the total GDP in 1995, an increased from 5.5% in
1980. The fisheries export is mainly of processed chilled, frozen, canned and fresh
sashimi tuna; and other marine products such as bêche-de-mer and shark
fin. The fisheries accounted for well over 18% of total export in 1996. Given
the potential for the development of the fisheries sector, Solomon Islands has drafted a
new fisheries act, aimed at facilitating further development of the industries and the
necessary adjustments. The legislation is expected to be brought to Parliament in
Solomon Islands has maintained very high
nominal rates of export taxes on logs in order to encourage down-stream processing of
timber resources and to generate revenue. Excessive logging has created considerable
environmental concern, particularly over the control and management of countrys key
natural resources. These concerns have prompted the SIAC Government to put in place
measures geared towards improving performance in logging and other natural resource based
activities, largely to achieve sustainable economic growth. It must be noted that
the Government is committed to encouraging the private sector lead development of
down-stream processing of marine and forest products. The Solomon Islands government
will adopt Trade and Investment measures aimed at promoting down stream processing.
However, unlike measures adopted in the past Solomon Islands will seek to develop an
industry policy that will facilitate processing that aims at achieving international
competitiveness within time-bound constraints.
Production and marketing of minerals is
regulated under the Mines and Minerals Amendment - 1996. Legislation prohibits
prospecting and mining on land without prior consent from the customary landowners.
Solomon Islands encourages foreign investment in this sector at present through geological
publications, and by providing these to potential investors. Applications for
exploration and mining leases are considered by a statutory Minerals Board, which
comprises of relevant Ministries, departments and provincial governments and
landowner. Similar arrangement also apply to petroleum mining under the Petroleum
Act - 1987, and Petroleum Regulation.
Manufacturing, other than fish processing
contributed only 4% of the Solomon Islands GDP in 1996, and accounted for just over
10% of formal employment. Solomon Islands intends to review its manufacturing
policies; to attract foreign investment by improving the labour market; and reducing trade
and production distortions, such as excessive tariff barriers as well as improving
The services sector including public
administration account for a large and growing share of production in Solomon
Islands. In 1995 it accounted for around 47% of the total GDP. Solomon Islands
recognise the importance of having a vibrant and efficient service sector for development
of its exports as well as implementation of its policies. The SIAC government has
undertaken measures assuring the right-sizing of the public sector.
Tourism is one of the Governments
priority sectors. Policies for tourism development are designed especially to
encourage eco-tourism. This has been an area in which some good progress has been
made. The Government, in its reform program to develop tourism industry, intends to
further review its policies on tourism including reviewing current international airfares
with a view to reduce them so as to further assist the development of the sector.
Given the geography of the Solomon Islands sea
transport, including an efficient port services and inter-island shipping services is an
important priority. Sea transport provides vital links to remote islands and
resources, and the Government intends to either subsidise non-commercial routes, or
through licensing tender unprofitable routes to private shipping operators.
Air transport is and will always play an
important role in Solomon Islands export of agriculture and perishable products including
fresh Sashimi tuna. The Government recognizes the advantage of creating
competition in international travel to enhance the growth in trade, tourism and the
domestic economy. The Solomon Islands government
has recently granted approval to a privately owned operator, King Solomon Airlines to
operate the route to Cairns, Australia.
Telecommunications are currently provided by
Solomon Telekom which has a monopoly in the sector. The existing legislation which
provides Solomon Telekom with a monopoly in telecommunications services is due to expire
in the year 2002. The Government is considering the possibility of deregulating this
sector to allow competition and hence to encourage quality services but at lower prices.
TRADE POLICY - INSTITUTIONAL FRAMEWORK
Formulation of trade policy in the Solomon
Islands involves cabinet approval. Laws enacted by Parliament are generally
initiated from respective Ministries; submitted to cabinet for approval before being
presented to Parliament for enactment, thereafter submitted to the Governor General for
The administration of trade policy comes under
several Ministries, Departments and Government statutory bodies. Regular reviews of
trade policies and devices long-term strategy is the responsibility of the Ministry of
Commerce, Employment and Tourism. The private sectors input is channelled
through the Chamber of Commerce, and has been regularly consulted in the trade areas.
There are laws and regulations governing the
implementation of trade policies in Solomon Islands, including sector-specific Acts.
The Government intends to closely examine and review a substantial number of these laws,
particularly those that affecting trade-related policies; and to bring them into
conformity with its WTO obligations.
This includes an update of intellectual property
Solomon Islands is a signatory to convention between the European Union (EU) and the
Pacific ACP; the MSG Trade Agreement (MSG) between Papua New Guinea (PNG), Vanuatu,
Solomon Islands and Fiji as well as SPARTECA. The Solomon Islands also benefits from
other preferences such as the GSP of Japan and the USA. Solomon Islands generally,
supports the notion of a regional free-trade area among the Pacific Island countries; as
well as the regional trade initiatives begin undertaken within the Forum Economic
TRADE POLICY IMPLEMENTATION
The continuous decline of nominal and
effective tariffs is part of Governments policy to gradually move away from dependence on
import duties as a source of revenue. Solomon Island has introduced a revised tariff
schedule which commenced from March 1998. The new tariff condensed the original
number of individual ad valoren rates which ranged from zero to 225%, down to five rates
ranging from 5%, 10%, 40% and 70%. The highest rates of 40% and 70%, apply to 34% of
tariff lines, cover mainly luxury goods for revenue reasons and to avoid
Solomon Island applies MFN tariffs on imports
from all countries, except Papua New Guinea and Vanuatu as founding members of MSG Trade
Agreement, and recently Fiji following its admission to the agreement. This will
allow Fiji eligible products to be imported duty free. Eligible imports from these
MSG member states are duty free, and recently expanded to 229 items from 3 in 1993.
Custom duties are levied on the C.I.F value of
the imported product since 1987, when the basis for duty is calculated from charge of
selling price to purchase. The method used for customs valuation is
consistent with the former Brussels Definition of value (BDV). The Government is
intending to implement the WTO customs Valuation Agreement (CVA) by 2002, and also further
decreasing the rate of customs duty, and replacing it with value added tax (VAT).
All commodities, except logs are exported
under general authority issued by the Central Bank of Solomon Islands (CBSI) provided
under the exchange control regulations. Solomon Islands exporter do not need to be
registered. However, export documentation generally required are shipping bill and a
commercial invoice. On logs, exporters must provide tally sheets, a price
certificate from the Commissioner of Forests as well as specific Authority from CBSI.
Realizing the short-fall faced in the past of
inefficient and ineffective coordination of trade policies, the present Government is
committed to introduced a more coordinated approach to trade and economic policy
formulation and implementation.
ECONOMIC ENVIRONMENT AND FACTORS INFLUENCING
In 1997, the Government introduced its key
policy designed to move towards sustainable economic growth, realizing the difficulties
paused as a result of the economic situation Solomon Islands currently faced.
The new Government has devised policies for
economic reform; released in November 1997. An integral part of the reform program
is the formulation of the Medium Term Development Plan, 1999 - 2003, aimed at achieving
balanced and sustainable economic development and sound management of its natural
To enhance the implementation of the proposed
reforms, the Government has implemented an organizational and decision making structure to
administer the proposed program. The Government also, recognizes the urgency of
translating this commitment to reform into policy action.
In the 1998 Budget, the Government announced
several initiatives aimed at improving financial control. It also outlined policies
taken by the Government, in an endeavour to reduce public sector expenditures,
namely: a wage freeze on public servants and a recruitment freeze. Already the
Government has taken steps to increase revenue collection by reforming the customs tariff
and eliminating tax exemptions where this is legally possible.
Introducing fiscal discipline to improve
checks and controls; to reduce public sector expenditure and deficits is the Governments
priority policy list in order to enhance sustainable economic growth. Under its
reform program, it will review the present inefficient duty and tax collection and major
exemption and concessions.
In December 1997, the Government devalued
the Solomon Islands dollar by 20% against United State dollar. This decision
was taken primary to restore the countrys international competitiveness. Since
then the Solomon Islands dollars has stabilized against the US Dollar.
The 1998 Development Budget estimated a
total of SI$88.8 million foreign aid of which 70% occurs as grant. This is a large
inflow to Solomon Islands economy, equivalent to 15% of total exports receipts in 1996,
making it the third - largest source of foreign currency source after timber and
fisheries. The Government under its reformed macroeconomic policies is determined to
ensure that these aid inflow do not create macroeconomic instability.
One of the main objectives of SIAC
Governments reform policies is to improve the export-led growth strategy aimed at a
generation of new entrants into the Solomon Islands labour market, and to achieve an
improvement in the standard of living. The Government has noted the importance of a
flexible and competitive labour market.
The downturn in the Asian economies has
been instrumental in the current decline in the logging sector. South Korea and
Japan have been our traditional markets for South Sea logs. Solomon Islands is now
seeking alternative markets for logs stock piled in log ponds.
Solomon Islands intends to implement its
Uruguay Round obligations; by reforming legislation affecting trade. However, while
Solomon Islands wishes to begin these reforms at the earliest possible, limited resources
will affect the progress of the review of these policies. The Solomon Islands will
be seeking technical assistance from developed WTO members to assist in the preparation of
legislation to assure compatibility of WTO laws with existing obligations.
Lack of expertise, marketing skills, and
distance to markets; and venerability to natural disaster, will remain the major
constraints to the development of the Solomon Islands export sector.
Solomon Islands is strongly supportive of the
Multilateral Trading System and the liberalization of global trade bearing in mind the
special needs of least developed and highly vulnerable island states.
In its effort to liberalize trade the
Government in 1997 under its Reform Programs restructured, the Import and Export Tariffs
and reduced the number of rates from some twenty different rates to seven basic rates with
5% being the minimum and 70% the maximum. The other rates are 10%, 20% 40% and 50%.
The restructuring reflects most products now
bearing 10%-40% whereas before the reduction those commodities carried between 50%-100%
and in some cases were even as high 200%. The 70% rate in many cases is used as a
protective rate but this protection is subject to review and maybe removed if a local
manufacturer does not improve his product quality and stay competitive in the market.
In the areas of export tax, most exports are
either free of duty or carry low duty rates between 5% - 10%. The 5% rate is imposed
on major exports such as palm oil, cocoa, copra and tuna. The 10% rate is imposed on
all marine products except trocus shell which bears 30% as a protective rate. Farmed
marine products are free of export duty to encourage export of locally bred products.
There are no export taxes on manufactured
products there is no export duty levied on those. This is to encourage local
manufacturing and export of those products.
Solomon Islands has made a progress in restructuring of its import tariff by
reducing the number of duty rates and lowering the rates in may cases although a few
essential items have been increased for revenue and protective reasons.
CONCLUSION Back to top
The government has recently undertaken a
comprehensive program aimed at achieving sustainable private sector led economic
growth. It is also committed to fulfill its WTO obligation towards trade
liberalization policy measures. However, Solomon Islands will need more time to
adjust its existing laws and regulation affecting trade. Because of its small but
open economy, Solomon Islands will have to carefully monitor the pace of its import and
export liberalization, in order to allow time to enhance local efficiency productivity and
strengthen competitiveness. With this in mind, Solomon Islands will employ a phasing
reform approach towards its trade liberalization.
Solomon Islands Trade Policy Review
preparatory work which began in March 1998, has given us an opportunity to identify our
constraints and opportunities for trade development. This will enable us, to reform
our trade policies and create a trading environment for the private sector to get maximum
economic benefits from reforms and adjustments made to our trade development policies.
The government is presenting the
countrys legal framework as a priority with a view to accommodate any policy changes
for the effective development of the private sector .
It is the Government policy to continue to promote and encourage greater
transparency, harmonization of tariffs, and slowly remove trade distortions and trade
barriers. To that end the Government of the Solomon Islands intends to bring
legislation to parliament that will see all tax incentives granted to investors gazetted
and publicly notified.
Solomon Islands will continue to support
private sector lead growth through the improvement of economic infrastructure, Human
Resources Development, aimed at improving domestic labour market productivity; and the
provision of competitive market environment.
Since accession to the WTO in June 1996
Solomon Islands is committed to continue to make modifications to existing laws and
regulations, and implements various measures to assure compliance with its commitments in
the WTO, despite the complexity of the work involved.
Solomon Islands recognizes the importance of
free and open trade, and will, therefore, continue to conduct its trade policy in a
transparent and fair manner.