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; 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 outgoing MPs retained their seats.

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: In the coming months the government's priorities will continue to be containing the coronavirus (Covid-19) and preventing community transmission in the country. The country is yet to receive any vaccine supplies, but Mr Sogavare announced recently that the first tranche of the Oxford-AstraZeneca (UK) vaccine was expected to arrive some time in March 2021. We believe that the country's vaccination programme will take off only in the second half of 2021 and that mass vaccination (which we have set at 60% of the population) is unlikely to be achieved 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. The preventive restrictions have been in place since March 2020 following the announcement of a state of emergency by the government to combat the pandemic.

INFLATION: A significant portion of the country's demand for food and fuel is met through imports. As such, consumer prices are responsive to changes in international commodity prices and movement in the exchange rate. Fuel makes up the bulk of imports, and therefore consumer prices are vulnerable to fluctuations in global crude oil prices (dated Brent Blend). We expect average global oil prices of US$57/barrel in 2021, which will rise to US$59/b in 2022. 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 increase of 3.8% in 2021, compared with an estimated 2% increase in 2020. As food prices cool gradually (but energy prices rise) in 2022, we expect consumer price inflation to average 3.5% 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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