Solomon Islands: Country outlook

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Economist Intelligence Unit
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Economy, Outlook, Forecast, Overview
Political Geography
Solomon Islands

Solomon Islands: Country outlook

FROM THE ECONOMIST INTELLIGENCE UNIT

POLITICAL STABILITY: The government is headed by the prime minister, Manasseh Sogavare, who leads the Democratic Coalition for Advancement, a four-party grouping comprising the Democratic Alliance Party, Our Party (a new party led by Mr Sogavare), the Kadere Party and the Peoples First Party. The country's political situation tends to be volatile owing to fluid loyalties; there have been eight changes of leadership since 2006. Mr Sogavare's position will also be vulnerable. He served three times as prime minister prior to his present term; during his last term (2015-17) he was ousted from office by a vote of no confidence less than halfway through his four-year tenure. The Economist Intelligence Unit does not expect him to last a full term in office (until 2023) this time either.

ELECTION WATCH: The most recent general election was held in April 2019. Independent candidates won 21 of the 50 seats, down from 32 in the previous election, and the other 29 members of parliament (MPs) came from eight of the 15 registered political parties. Nearly three-quarters of MPs were re-elected.

INTERNATIONAL RELATIONS: In February 2021 five Micronesian members of the Pacific Islands Forum (PIF) quit en masse over the appointment of a Polynesian, Henry Puna, as the regional body's new secretary-general. The fallout within the PIF will not have a direct impact on our outlook for the Solomon Islands. However, the disunity could weaken the region's international clout on issues such as climate change and security, and the consequences of that will affect the archipelago.

POLICY TRENDS: For most of the remainder of 2021, the government will continue to prioritise the containment of the coronavirus and prevention of community transmission in the country. The Solomon Islands started its vaccination programme in late March, after receiving 24,000 doses of the Oxford University-AstraZeneca (UK/Sweden) vaccine under the World Health Organisation (WHO)-led COVAX Facility. The country is also administering China's Sinopharm vaccine, of which it received 50,000 doses in April. As at June 8th 17,000 people (2.5% of the population) had received at least one dose. We believe that additional vaccine supply commitments from Australia, New Zealand and China notwithstanding, the country's vaccination programme will continue to move at a tepid pace owing to supply constraints, coupled with vaccine hesitancy among Solomon Islanders. As such, the country will not be able to achieve mass vaccination (which we have set at 60% of the population) during our forecast period. Once the effects of the pandemic start to wane in late 2021, the government will continue to pursue its prior economic and development policy agenda.

ECONOMIC GROWTH: We estimate that real GDP contracted by 6% in 2020 as a consequence of the prolonged disruption to economic activity from the coronavirus control measures. We expect a modest economic recovery in 2021. Exports of agricultural products such as copra and coconut oil, palm oil, logs and fish will rebound on account of a pick-up in Chinese demand (China accounts for about 65% of the archipelago's total exports). That said, the performance of these sectors is subject to weather conditions, and therefore output is variable. Household spending will rise on the back of a recovery in inflows of remittances to the Solomon Islands from citizens working overseas in countries such as Australia and New Zealand. Overall, we forecast that real GDP will grow by 3.4% in 2021.

INFLATION: The country is heavily reliant on imports to meet the bulk of its demand for food and fuel. Therefore, consumer price inflation is responsive to changes in international commodity prices and movements in the exchange rate. Fuel makes up the bulk of imports, and therefore consumer prices are vulnerable to fluctuations in global crude oil prices. In addition to the higher fuel prices, increases in prices of food, alcohol, tobacco and other agriculture products, possibly due to a shortfall in production and disruption to supply chains during the pandemic, will lead to a pick-up in consumer price inflation in 2021. We forecast an average consumer inflation of 4.2% in 2021, which will decelerate slightly to 3.8% in 2022 as food prices cool gradually (but energy prices rise) in that year.

EXCHANGE RATES: The Central Bank of Solomon Islands (CBSI) operates a managed exchange-rate system, and we expect this to remain in place in 2021-22. The Solomon Islands dollar is pegged to a basket of currencies of the country's major trading partners. The country runs a sizeable structural current-account deficit (relative to GDP) that exerts depreciatory pressure on the local currency. In 2020 the Federal Reserve (Fed, the US central bank) cut interest rates to zero, thereby further widening the differential between interest rates in the US and those in the Solomon Islands. We believe that interest rates in the US will remain at this level until 2022, which will help to offset the depreciatory pressure on the Solomon Islands dollar. These factors will allow the local currency to appreciate to an average of SI$8.04:US$1 in 2021. As the US dollar regains strength in late 2021 and 2022 on the back of a robust economic recovery in the US, the local currency will depreciate to average SI$8.16:US$1 in 2022.

EXTERNAL SECTOR: The current account will remain in deficit in 2021-22, owing to shortfalls on the services, trade and primary income accounts. Mineral exports will remain subdued because of the ongoing reconstruction of the Gold Ridge mine, and are unlikely to pick up during the forecast period. The Solomon Islands will continue to receive funds from donors. Although inflows of workers' remittances will fall in 2021-22 compared with 2019-20, coupled with donor support, they will be sufficient to ensure a surplus on the secondary income account.

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