British Solomon Islands - The economy

RESTRICTED Report No. EAP-3a This report was prepared for use. within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION THE ECONOMY OF THE BRITISH SOLOMON ISLANDS PROTECTORATE April 15, 1969 East Asia and Pacific Department CURRENCY EQUIVALENTS 1 Australian Dollar ($A) US$ 1. 12 US$ 1 $A 0. 89 On February 14, 1966 the Australian currency was changed from Australian Pound to Australian Dollar (AL 1 = $A 2). Values are expressed in Australian Dollars throughout the report. TABLE OF CONT'NTS Page No. BASIC DATA SUMMARY AND CONCLUSIONS . . . . . . . . ........... . . . . i I. INTRODUCTION. . ............ . . . . . . . . . . 1 The Country . . . . . . . . . . . . . . . . . . . . . . . . . .1 HistoryandGovernment ......... ....................1 Population and Living Conditions. ........ . . . . . . . 3 II. STRUCTURE AND GROWTH OF THE ECONOMY . . . . . . . . . . . . . . 5 The Past Pattern of Development . . . . . . . . . . . . . . . . 5 National Incane and Capital Formation . . . . . . . . . . . . . 5 Employment . . . ........................ 7 III. SECTORS. . ............. . . . . . . . . . . . 8 Agriculture, Livestock and Fishing ........ . .. . . 8 a) Copra . . . . . . . .... . . . . . . ... . . . . 8 b) Other Crops. . ......... . . . . . . . . . . . 9 c) Livestock and Fishing....... . . . . . . . . . . . 11 Forestry . ........................... 11 Land Tenure.............. ...... 12 Mining, Construction and Manufacturing Industries . . . . . . . 13 Tourism . . . . . . .. ...... . . . . . . . . . . . . 14 Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Power and Water . . . . . . . . . . . . . . ... . . . . . . . 16 Social Services.. . . . . . . . . . . . . . . . . . . . . 17 V. PUBLIC FINANCES . . . . . . . . . . . . . . .... . . . . . .. 18 Role of the Public Sector . . . . . . . . . . . . . . . . . . . 18 Structure of Revenues . . . . . . . . . . . ... . . . . . . . . 18 Government Expenditures . . . . . . . . . . . . . . . .. . . . 21 Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Forecasts of Revenues and Expenditures . . . . . . . . . . . . 24 Local Government .. ............. ........ . . 26 V. MONEY AND CREDIT . . . . . . . . . . .. . . . . . . . . . 27 VI. EXTERNAL PAYMENTS...... . . . . . . . . . . . . . . . . . . 29 VII. FUTURE PROSPECTS FOR DEVELOPMENT AND CREDITWORTHINESS . . . . . 31 TABLE OF CONTENTS (Continued) ANNEX I ESTIMATES OF GROSS DOMESTIC PRODUCT- ANNEX II' PROJECTIONS OF GOVERNMENT REVENUES ANI EXPENDITURES STATISTICAL APPENDIX MAP This report is based on ther findings of a mission to the British Solomon Islands in July 1968, consisting of Messrs. E. K. Hawkins (chief of mission), E. U. Gonella aud:G.. E. Okurume (economists) and J . Willems (agricultural. economist) of the Baink. staff.- BASIC DATA Area: approximately 11,500 square miles Population (rough estimates): Total, at the end of 1968 : 148,800 Rate of growth per annum, 1959-68: 2.0 percent Density : 13 per square mile Political status: British Protectorate with significant degree of internal self-government. Gross domestic product (preliminary estimates by IBRD staff) 1/: Total, 1967 at market prices 1/: $A 25 million Total, 1967 at factor cost 1/ : $A 23 million Rates of growth per annum (current prices), 1960-67: Monetary GDP at f.c.: about 8 percent Total GDP at f.c.:. about 5 percent Per capita values, 1967: At market prices : $A 170 US$ 190 At factor cost : $A 157 US$ 175 Monetary GDP at f.c.: $A 78 US$ 87 Rates of growth per annum Money and credit 2/ 1967 1960-67 ($A million) (percenty Currency in circulation 2.7 7.5 Demand deposits n.a. n.a. Savings deposits 1.6 13.8 1/ See Annex I for details and definitions. 2/ Australian currency is used in the country. Figures on currency in circulation are rough approximations. - ii - Rates of growth per annum Prices 1968 1960-68 ($A million) (percent) Cost of living index in the capital, Honiara 2.3 Public sector'operations. Government current receipts 3.5 9.9 Government current expenditures 5.5 13.5 Current deficit 2.0 Government development expenditure 2.9 11.3 Overall deficit 4.9 Assistance fran the U.K. 4.6 14.1 External public debt nil nil Balance of trade Exports (f.o.b*) 5) 5.1 Imports (c.d.v.) 1/ 9.4 12.3 Trade deficit 3.9 2/ Commodity concentration of exports 1960 1968 (percent) (percent) Copra 87.2 68.5 T1imber 3.3 26.5 Scrap metal 4.6 1.2 External financial assistance 1968 1963-68 (disbursements in Ui'$ million equivalent) toal Soft assistance (U.K.' grants) 5.1 23.7 Hard assistance nil nil 1/ Current domestic value at the port of shipment in the country of export. 2/ The trade balance was negligible fLn 1960 and positive in 1958-59. SUMMARY AND CONCLUSIONS i. The present position of the *British Solomon Islands Protectorate is that of a small export economy at an early stage of development. As a result of an effective administration, and a relatively large inpui of foreign aid, a rapid rate of development began in the early 1960's. This now shows signs of gaining sufficient momentum to induce structural changes in the economy, and to encourage the entry of f6reign capital. ii. The present low level of development can be explained by the late entry of the territory and its people into the worldieconomy; this entry was marred by difficulties as a result of the first contacts with the white man, and was then held up by conditions of economic depression between the two world vars. Considerable disruption then followed during World War II. iii. Additional factors contributing to the low level of development are the small size of the economy, its scattered geographical dispersion across the Pacifit and its isolation from other major economic centers. The geo- graphical features result in high costs of transportation and government and little stimulus is felt from developments in other parts of the world. The main links with other countries lie through trade and political connections with the protecting power, the United Kingdom, and trading links with Australia. iv. The basis of the money eponomy consists of copra production for export, which, together with increasing quantities of timber, provide the only major commodities which can be sold on world markets. The present level of prosperity and the standard of public services could not have been achieved on the basis of export proceeds alone. Equal weight must be given to the aid received from the United Kingdom Government. Although the amounts involved are small compared with the world flows of aid and capital, they are very large for the local economy, accounting in recent years for between 50 and 60% of total government expenditures. V. The rapid expansion of government services has been used to provide effective minimum framework for the administration of law and order. The .overnment structure is now strong enough to support an expanding monetary economy, and the success of these efforts has attracted increasing amounts of foreign capital into the Solomon Islands. This private capital inflow has gone into the development of the natural resources in the Islands, particularly in agriculture, forestry and mining. There are signs that a new area of activ- ity may be of interest to foreign capital in the field of tourism. Vi. The main resource of the Islands, the human population, is not adapted to participate fully in these developments. This is exemplified in persistent labor shortages and in an apparent desire amongst the local people to enter the wage earning labor force only on an itinerant basis. It reflects the fact that, due to favorable climatic and soil conditions,.it is possible for local people to Obtain a moderately satisfactory level of living within a primitive subsistence agriculture. The system operates at a very low level of,productivity and, therefore, cannot easily release labor for the newly de- veloping commercial opportunities and maintain sufficient food output at the same time. Vii. There are considerable barriers, both economic and institutional, to the extension of a money economy. These include the lack of an adequate - 11 - transport, distribution and marketing system. The land tenure system is linked to complicated,and as yet little understood kinship relationships which make it difficult fo individuals to expand productive facilities and make agricultural improvements. The complex nature of the social system itself and the existence of many.different languages, with no adequate lingua franca, are other important barriers to development. These features, combined with the small scale of the economy, the large areas of unoccupied and largely unusable land, and the wide geographical scatter of the islands of the Protectorate, add up to a formidable development problem. viii. Much progress has been made in creating a struct'ure of government and administration; however, it does not yet include the provision of infor- mation which can be used either to assess the rate of economic development or to carry out effective economic planning. Rough estimates of the national income made by the mission indicate that a rate of growthof about 5% has been maintained over the last seven years. This was accampanied by a high level of investment, mainly piblic,, but with increasing private participation from overseas. ix. Aid has played the primary role in the last five to .seven years when exports were not expanding at a rate fast enough to carry along the development of the economy. The Protectorate now faces a period when it can expect the rate of growth of aid from the United Kingdom to slow down, if not to become constant. However, this coming period should also see an expansion of exports, based upon the development of timber production, which will be able to carry forward the growth of the economy without the need to expand aid at the same rate. At a later period, afte'r 1975, exports should again be supplemented by an increase in exports of copra, as a result of the consid- erable investment in new plantings that has taken place in recent years. x. The development strategy of the government depends upon the creation of new local sources of income and expanded revenues which will ultimately support a government framework adequate for the economy, and which will not require a continuing subsidy from abroad. Such a development is not in sight within the period up to 1975, although significant changes in that direction have been taking placT at the margin. From 1958 to 1962 ihe growt in local revenues covered only 10% of the growth of recurrent expenditures; from 1962 to 1967, however, 48% of the increase in those expenditures was covered by rising local revenues. The experience of the last five years suggests that the government can interest foreign investors in the.country, especially the successful development of commercial rice production and the beginnings of commercial timber production for export. xi. The tax structure is broadly consistent with the development objec- tives, and the recent changes in direct taxation will offer additional in- centives for private investment. There may be scope for increased,revenues from indirect taxation, where average rates of tax are relatively low. The monetary system is baped on Australian currency and the services of Australian banks. It is convenint and provides adequate services for the economy, with- out major disadvantages, helping to link the economy to Australian trading centers. xii. The highest priority of development policy is to seek to create new sources of money incomes. This means expanding the basis for commtrcial - iii - agriculture; it also means taking every opportunity to raise the efficiency of subsistence agriculture so as to increase productivity per head and release labor badly needed elsewhere in the economy. xiii. The second priority should be to continue investments in the human resources of the community through education and training. This is largely a question ot increasing the efficiency of the system by raising the quility, reducing the wastage that now exists, and making better use of the facilities which have been created in the public sector and also through mission activ- ities in the past. xiv. The public sector, as a result of good performance, has shown an ability to absorb foreign aid largely for services connected with the general aims of government. Not much has been employed in directly productive activ- ities, as yet. The opportunities for such capital inflows now arise in the fields of power, forestry development, livestock and education. There will also be op ortunities to employ such capital in the continued development of the transport system, especially in highways and, possibly, at a later stage, in airports. xv. The position of the Protectorate as a dependency with no immediate plans for self government means that it has no easy access to the international financial institutions. The small scale of the economy also mean6 that it is not easy to generate conventional projects of the minimum size to which these institutions are accustomed. Nevertheless, the Solomon Islands Protectorate could make use of small amounts of international capital in an effective manner. So far it has incurred no foreign public debt, but has made good use of funds borrowed internally from the savings banks. lvi. A dependent country at such a low stage of economic development is no' creditworthy for lending on conventional terms. Without the assistance o" the United Kingdom it could not maintain its present, minimum level of .,blic services, let alone develop its unused resources to generate additional sources of money incomes. Such aid does not benefit the United Kingdom, because there are no economic, political or strategic advantages stemming from the pro- vision of such assistance. The metropolitan power exercises general guidance over the direction of development, but does not become involved in the de- tailed operations of government; in these circumstances the performance of the local,administration can be judged on its own merits and it has generally been satisfactory, making effective use of the available aid. Apart from its budgetary dependence upon outside aid the economy is also economically depend- ent upon world markets; the territory's ability to earn foreign exchange con- tinues to hinge upon the state of the world market for copra, although export diversification is now within reach as timber exports expand. The monetary arrangements protect the economy from short term balance of payments dif- ficulties, but they do not remove the basic problem of maintaining a capacity to import adequate for development. Given the level of performance achieved, the precarious economic situation of the country and the low level of devel- opment and per capita incomes (especially monetary incomes), most of the country's borrowing will have to be on concessionary terms.  I. INTRODUCTION The Country 1. The British Solomon Islands ?rotectorate is a scattered archipelago in the Pacific southeast of the territory of Papua and New Guinea, and outside the major ihipping and airline routes. The territory is small and fragmented into many islands, many of them distant from each other. Most of the total land area of approximately 11,500 square miles is shared by six large islands - Guadalcanal, Malaita, Santa Isabel, Choiseul, San Cristobal and New Georgia - ranging from 880 (New Georgia) to 2,180 (Guadalcanal) square miles each and stretching over an area approximately 500 miles long and 120 miles wide. A great number of other smaller islands are widely scattered over about 300,000 square miles of sea. Coral reefs delimit ext,ensive coastal lagoons around many of the islands. 2. The largest islands are of volcanic origin, very mountainous and overlaid with a considerable thickness of marine sediments. More than 90% of the land i steep and covered with dense rain forest. Guadalcanal has the only extensive level land, a coastal plain with about 75,000 acres of good soil well suited to a wide range of crops. 3. The climate of the Protectorate is tropical, without extremes of heat and humidity. There are two seasons, very little differentiated either as to rainfall or temperature. Occasionally, as in 1966, 1967, and 1968 the islands suffer from cyclones, but they are not considered to be within the main hurricane area. Water resources on the larger islands are abundant and have energy potential, but the rivers tend to flood and are not navigable. Volcanic activity is very limited. Mineral resources - gold, nickel, copper, lead, zinc and bauxite - are known to exist, but have not yet been fully ex- plored. History and Government The islands were discovered by the Spaniards in 1568, but only in ,he nineteenth century were there permanent contacts with foreigners, mostly whalers and traders. Forced labor recruiting for Queensland and Fiji planta- tions significantly affected the Solomons in the 1870's, and the experiences of that time form the basis for strong feelings of mistrust toward white people. Between 1893 and 1898 a British protectorate was declared over the Central and the Southern Solomons; sovereignty over the other islands Vas transferred by Germany in 1899, in return for the relinquishment of British claims in Samoa. 5. The British provided a bare minimum framework of law, order and admin- istration and encouraged the entry of foreign capital, alienating some 10% of the land area for this purpose. Foreign owned plantations were established (using only a fraction of this land) between 1900 and 1917 and became the basis for a money economy. The period between 1918 and 1941 saw little further development, however, and much of what had been achieved was violently disrupted in the second world war. 6. For four years, from 1942 to 1946, the Solomons were one of the most important strategic areas in the Pacific and the battle for Guadalcanal Island, where savage fighting took place for fourteen months, was oe of the turning points of the Pacific war. It was followed by a period when the islands were -2 - a major U.S. military base. These events provided a new starting point for the economy; the old'structure of government, based on an unsuitable island capital at Tulagi, was rebuilt after 1946 using much of the wartime infra- structure of roads, buildings and airfields. A new capital, Honiara, was built on the Guadalcanal battlefield, adjacent to the best agricultural land and with access to vaier (including potential hydro power), ample land for expansion and space for sea and air facilities. As a result of that decision the Protectorate now has a growing, regional economic center. 7. The second impact of the war was that of its demonstration effect upon the local people. Close contact with the high standards of living of US troops brought about discontent and resentment,amongst Solomon Islanders about the conditions under which they lived. In 1946 this resulted in a move- ment against European rule, with the aim of autonomously improving living standards. The movement, known as the "Marching Rule", was ,mostly non-violent, and lasted until 1952,,when its leaders accepted the formation of local councils as a substitute for their rather loose organizations. 8. The country..is a British dependency with a measure of self-government. A High Commissioner administers the Protectorate as well as the Gilbert and Ellice Islands Colony and the Anglo-French Condominium of the New Hebrides. The Protectorate's Government has a good deal of autonomy in its day-to-day activities, but has to seek approval of the U.K. Government in the broad out,- lines of policy. The,main metropolitan control is exercised through the ap- proval of the budget,-which is heavily subsidized by the United Kingdom. 9. Although continuous constitutional progress has taken place in recent years, Solomon Islanders' participation in government is still limited. Since 1960, the High Commissioner has been assisted by an.advisory Executive Council and a Legislative Council with the power to introduce and pass legis- lation. Elected representation ;Ln the Councils was introduced in 1964; the 1967 constitution increased the elected members in the Legislative Council fran eight to fourteen and provided for direct elections by universal adult suffrage in place of elections through electoral colleges. The Government, however, retains an official majority in both Councils: 15 of the 30 members of the Legislative Council and four of the eight members of the Executive Council are public servants. 10. A loose and fragmented social framework may be a major obstacle to further advancet toward self-government. Natural and linguietic obstacles restricting camunications hive resulted in an almost complete lack of a feeling of national unity. Moreover, lingering memories of the unfortunate experience of the early contacts with the developed world.make it more dif- ficult to introduce changes from the outside. All these circumstances result in a strong disinclination amongst local people to take on additional respon- sibilities in the central government. Attempts to set up political parties (m a nationwide basis failed, and at the 1967 genera elections abput one, half of the estimated electorate voted. There is no current demand for full internal self-government or independence, but there is an urgent need to prepare Solomon Islanders to take part in the,Government.'s,policy-making process. Before the next general elections in 1970 the Government plans to introduce further canstitutional changes. These proposalsa-were outlined in December, 1968. They include tle retention of direc, elections, with an -3- elected majority in a new Council which would replack the present Legislative and Executive Councils. A system of executive committees would be established which would have responsibility for pa:1ticular areas of government activity. The proposals are designed to produce a system of government in line with local customs and practices. 11. The central public administration is efficient and well organized, employing many experienced expatriates who served in former British terri- tories in senior capacities. The public service includes a growing number of Solomon Islanders (80% of th! total in 1967) though very few of them are in high positions. A total of 21 local Councilb, elected by universal adult suffrage and covering the whole country, administer a wide range of local services including communications, rural health clinics, schools, markets and water supplies. Although their performance varies greatly, the Councils are an effective means of fostering local political leadership and promoting a greater realization of common problems. Population and Living Conditions 12. Few figures on population are available and their reliability is questionable; there are no vital statistics and no adequate census has been held. Changes in the size of population apparently followed a pattern similar to that of neighboring Pacific countries. There was a decline after the first contacts with white people but this trend was probably arrested by the 1930's. It appears that mortality rates kept falling thereafter, while fertility remained at high levels. The only complete census (conducted in 1931) gave a total of about 94,000. In 1959 a sample census estimated the population at about 124 ,000, implying an average growth rate of 1.1% per year in 1931-1959. On the assumption of a 2% rate of growth of the Melanesian population since 1959, total population was estimated at 148,800 in 1968. A complete census is planned for early 1970. ]I The vast majority of the population (93% of the total) are of the lanesian race, a sturdy, intelligent and good natured people of Papuasian .tock. Some 5,000 Polynesians make up the second most important racial group. Since 1958 the Government has sponsored the resettlement of Micronesians on a limited scale from the more overcrowded of the Gilbert Islands, and 2,000 Micronesians now live in the Solomon Islands. European stock -- mostly British civil servants and Australian or New Zealander planters or business- men -- numbered 1,640 in 1968. There were 660 Chinese, mostly shopkeepers, traders, shipwrights or artisans. Relations between different communities are remarkably good although there has been some hostility expressed by Melanesians against the further settlement of Gilbertese. 14. Overall population density is low, with less than 13 persons per square mile. The geographical distribution of population, however, is very uneven and is little related to the economic potential of the various areas. More than one-third of population live on Malaita, which has limited agri- cultural potential. In contrast, only 24 persons per square mile live on the arable land of the Guadalcanal plains. The population of Malaita (about 54,000) and Guadalcanal (about 30,000), however, account for more than half of the total. Taken together, the two islands include a large share of the country's human and natural resources. The only town of any size in the Solomon Islands is the capital, Honiara; from 1959 to 1967 its population more than doubled to about 7,500. 15. Although a favorable natural environment permits standards to be higher than in many other developing countries, living conditions of most Solomon Islanders are still very primitive. There are no serious dangers of periodic food shortage or famine, and no serious health problems except malaria. A Government/WHO pre-eradication program has been underway since 1965; before 1970 a decision will be taken as to whether a full-scale eradi- cation campaign should be started. 16. The averagepage of the population is probably very low: the 1959 sample census estimated that 63% of the total were under 25 years of age. The effect of Malaria eradication campaigns elsewhere has been to reduce death rates dramatically and there is already scattered evidence that infant mortality is falling as a result of the present eradication activities. The rate of growth of popplation will certainly accelerate, possibly exceeding 3% p.a. The economic implications of a population whose numbers are doubling every 23-25 years willbe. serious; the social infrastructure. of the Islands - schools, hospitals and- basic services for government and commerce - are in- adequate for the existing population. Given the prospects for both local and foreign finance there is no hope of being able to expand such facilities pari passu with population growth rates of this kind. The existence of unused land and shortages of labor for wage employment are not indications that no population problem exists. A system of shifting agriculture over unused arable land can probably cater with a population increase of about 50%, and such an: increase could take place in some 10-15 years; overall pressure on arable land resources might develop as soon as the early 1980's unless agricultural tech- nology undergoes widespread changes. Campaigns for population control and improvement of production methods in agriculture are likely to yield results only in the long-run,,owing to difficult communications and present traditional attitudes. Early government -action in both fields is strongly advisable. 17. Local people are skilled in a very small range of. activities such as the construction of dugout eqnoes, hut building, copra cutting,,and fishing. Their most important activity, subsistence farming, relies on primitive im- plements and shifting cultivation. Because of the long fallow periods (4 to, 10 years) and the large %mounts ,of land thus needed, people live in small vil- lages distant from each other. Some 60 different languages are spoken in the Solomons, and no one of them is understood outside a very limited area. Pidgin English provides a rudimentary lingua franca, spoken by almost all Solomon Island males. 'While English is the official language, it is spoken by few. 18. The great majority of Solomon Islanders are Christians, but religion has contributed little to cultural and social integration in the past, owing to strong rivalries between the various denominations. The level of education is very low: less than one-sxtb of children in primary school age groups are enrolled in schools with ;acpptible standards; only one person has so far com- pleted a university education. On the other hand, local people appear to respond satisfactorily to incentives and training, and there is a positive attitud,t toward educatioi which 'is substantiated by significant private contri- butions to its cost. There are examples of local entrepreneurship and the traditional social framework itself is open to leadership acquired by personal merits and should be favorable to innovations if these are brought about from within the local society itself. - 5 - II. STRUCTURE AND GROWTH OF THE ECONOMY The Past Pattern of Development 19. From the beginning of,this century to the outbreak of World War II the country's pattern of development relied oh the expansion of the monetary economy through the establishment of foreign owned and managed plantations. Active Government policy to attract private foreign capital by making land available at low prices resulted in large forbign investments during the first two decades of the century. Many tropical crops were tried out, but only coconuts were successfully established. Exports of copra, (dried coconut meat), increased from 6,600 to 22,300 tons during 1917-27 and fluctuated around 21,000 tons -- a level very near to present production -- until 1939. The proceeds from such exports provided most of the cash incomes, more than 90% of the value of exports, and was the source of most Government,revenues; the latter were at a level -- $A122,000 in 1938/39 -- barely sufficient to allow a public administration to work at all. Plantation production, however, had little social and economic impact on Solomon Islanders and very small amounts of copra were produced by native farmers. 20. The second world war completely disrupted the country's economic and administrative framework. Copra production ceased and plantations were damaged by neglect and wartime activities. Until 1952 reconstruction of the economy was hampered by the "Marching Rule" movement, which caused an almost complete withdrawal of local laborers from plantations. An acute shortage of finance also slowed down the pace of reconstruction, and two major commercial groups withdrew from the country following the United Kingdom Government's decision to reject war damage claims. Only after 1954 did aid from the United KingAom start coming in significant amounts. All these difficulties notwith- standing, the Government had accomplished remarkable results in many sectors by tbe early 1960's. The copra industry had been strengthened by a successful L_uupaign for replanting and new planting by Melanesian farmers, afd an impor- ant step towards advancing local people into the cash economy had thus been made. Administrative infrastructure and basic services had reached a level adequate to attract foreign capital into forestry, mining, mechanized agri- culture and internal air services. These investments, and Government-sponsored programs of agricultural research, laid the basis for relieving the economy of its complete dependence on copra. National Income and Capital Formation 21. The absence of any estimates of the national accounts makes it dif- ficult to evaluate economic trends. On the basis of information provided by the Government, the mission has prepared tentative estimates of the gross do- mestic product for the years 1960-67 (see Annex I).1/ These estimates should 1/ These estimates have been based on the income approach, so as to make use of data available on wages, salaries and other money incomes. Given the nature of the economy it would be desirable that figures based on pro- duction estimates be used as a background for economic decision making. Unfortunately very few figures on production are available. -6- be regarded only as rough indications of the orders of magnitude involved. Particular care is required in making comparisons with other countries owing to the veight attached to subsistence incomes in the total; the valuation of such subsistence inccane in $ terms probably overstates the real standard of living in the territory, compared with those countries with a relatively larger monetised sector. 22. The mission has estimated the value of the gross domestic product (at factor cost) at about $A23 million in 1967, equivalentL to about US$175 per capita. Subsistence iroduction probably accounted for about 50%. The economy is overwhelmingly agriAcultural with limited manufacturing and service activi- ties. An important share of monetary GDP is made up by trade and transport services, owing to the geographical spread of the territory. Government ex- penditures are the most important source of money flows, having overtaken exports in this role in 1961. In addition, the government, as the main em- ployer in the Protectorate, has a dominant influence in the labor market and on the level of vages and salaries. It is also the main purchaser of domestic goods and services and, given the high import content of government expendi- tures, it exercises a leading influence over imports as well. Similarly, the government has been the main contributor to gross capital formation, accounting for 30-40% of such expenditures in recent years. Aside from the sheer quanti- tative impact of the government' s operations, the role of its influence on private investment and general business and comerce has been considerable. Imports have averaged about 70% of monetary GDP during the last five years. 23. The dependence upon foreign aid can be measured in terms of the resources made available, in comparison with estimated domestic production; in the 1960's it may have been equivalent to about 13% of domestic resources and about 30% of the value of production in the monetary sector. 24. In the period 1960-67 the size and structure of the economy under- vent significant changes. Estimates for the money economy show an increase of GDP at fator cost,of about 9% yearly. Information on price changes is very limited, but data for retail prices in Honiara show only a moderate in- crease of less than 2% per annum over the period. It is reasonable to assume that the grbwth of domestic product in the monetary sector in real terms has been about 5% p.a. On a per capita basis, money incomes (at current prices) went up by more than 6% a year from $A45 in 1960 to $A70 in 1967. The par- ticipation of Solomon Islanders in the money economy probably increased con- siderably over the same period but it is not possible to measure it. This progress resulted from a rapid growth of wages' and salaries earned by Solomon Islanders (by almost 12% yearly), while their cash incomes from individual farming probably increased by about 2% yearly. Total per capita cash incomes of Solomon Islanders probably vent up by 7-8% yearly, from about $A20 in 1960 to about $A34 in 196,7. Subsistence income, valued at about $A80 per capita, still makes up the largest share of Solomon Islanders' incomes. 25. The scant information available indicates that a high rate of iu- vestment has been maintained during the last five years; public investment has increased sharply, reaching $A2.9 million in 1968. There is little in- formation on private investment in the monetary sector. Import statistics of capital goods, however, indicate that total private and public investment may have increased from little more than $A2 million in the early 1960's to -7- about $A5-6 million in each of the last three years. Investment may be con- siderable also in the subsistence sector; possibly as much as 20% of subsistence output is represented by investment in coconut planting, community projects -- village roads and schools, expansion of community gardens, etc, -- canoe building, and housing. Employment 26. Apart from an acute shortage of skilled lbor there are difficulties in obtaining unskilled labor willing to work on an extended basis. The result is that labor turnover is high, although there are sufficient applicants for unskilled vacancies. Unfortunately, little is known about the total working population. Quantitative information is available only on employment for wages and salaries. It shows that Solomon Islander employees are a low pro- portion of the Solomon Islander'population (6-7% in 1960 and about 8% in 1968) and that they increased less rapidly than expatriate employees in 1960-68 (5%, against 12% yearly). Furthermore, labor turnover is very high among Solomon Islanders, the average period of employment being only four to six moAths. This prevents workers from acquiring new skills and employers from providing training. The main reason seems to be the traditional preference of Solomon Islanders for independent work. This results in low overall productivity of manpower, for subsistence farming accounts for most independent employment, and its technology is very primitive. Moreover, the shortage of wage labor is likely to be a serious constraint to the development of the country's po- tential in forestry and mining. Accordingly, there is wide scope for govern- ment action to improve the use of manpower, both by stimulating employment for wages and by raising productivity in local small scale agriculture. Some small scale immigration of people akin to Solomon Islanders, such as Micro- nesians and Fijians, may also help to meet the shortage of workers, both skilled and unskilled, provided that it is handled so as not to create serious interracial problems and have an adverse impact on the patterns of local life. In 1960-68 paid employment increased by about 5% yearly and its struc- Aral variations reflected basic changes in the framework of the economy. As Lhe share of plantations in the output of commercial agriculture decreased, paid employment in agriculture went down in absolute value, while its share in the total dropped from 36 to 19%. Conversely, rapid growth of private activity in forestry, manufacturing, construction and services more than doubled the share of these sectors from 12 to 30% of paid employment. As a direct effect of the growth in government, employment in public administration (including employees not defined as members of the civil service) grew more rapidly than the average -- by 7.5% yearly. Public administration's share of total paid employment went up from 26 to 31%. 28. Because of low productivity, the country has no substantial ad- vantages from the comparatively low wage rates. In 1967, monthly wages paid by the government were $A19.50 for unskilled workers and $A22.50-52.00 for artisans, on the basis of 45 hour work a week. Wages in the private sector follow quite closely the rates paid by the government. Industrial relations are good, but attempts to set up trade unions have so far failed, because of lack of interest shown by workers. - 8 - III. SECTORS Agriculture, Livestock and Fishing a) Copra 29. Copra is the basic cash product of the country and the most impor- tant internal source of public revenue; in the last five years it has made up 81% of domestic exports, accounted for almost 40% of monetary GDP and provided one-fifth ofLgovernment domestic current revenue from a 15% ad valorem export duty. N4oreover, copra production is increasingly carried out by Solomon Islandgr farmers. Soil and climate are well suited to coconut growing on the coastal fringes of most islands, and a large potential is still unused. The various stages of cultivation -- land clearing, planting, pro- tection from weed grow tand copra processing -- are well suited to the know- ledge and skills of the local people. 30. Copra production has fluctuated around 24,000 tons in the last five years, and more than half of it came from Solomon Islanders' smallholdings. The remainder was produced on commercial plantations, the largest of which are owned by Levers Pacific Plantations Pty. While production from smallholdings is steadily growing (by 5% yearly since 1960), plantation production has de- clined in recent years owing to increasing senescence of the stock of palm trees and a lack of replanting. The estimated total acreage in bearing is 110,000 acres, of which at least 25,000 acres, mostly in plantations, need replanting. Since 1961, Solomon Islander farmers have planted more than 11,000 acres, of which about 7,000 acres were planted in 1966-67. Commercial plantations, on the other hand, have planted only about 3,200 acres, nearly all of it by one major group. At current y elds and prices the relatively low returns on papItal investment are likely to discourage further commercial investment in plantations until the new high yielding varieties become more widely available. 31. Deterioration of the plantations and wartime damage have reduced productivity on the plantations to a fairly low level of about 7 cvts. of copra per acre. Coconut yields are apparently higher in some native groves, but large quantities of nuts are consumed as food and the average yield of copra is only 5 cwts.'per acre. Better disease control and the introduction of new varieties are expected to increase yields substantially in the future.. The efficiency of copra processing by smallholders is still much lower than on the plantations. Although the percentage of first grade smallholders' copra increased from 29 to 39% of their production during the last five years, there is still considerable scope for quality improvement. First grade pro- duction accounts for 77% of the total in plantations. 32. Technical research is of the highest standard. It is jointly carried out by Lever's Pacific Plantations Pty. and the Department of Agriculture on the Russell Is3ands plantations of the former company. The chief aim is to produce improved quality seed on a commercial scale. 33. Copra produced in the Solomon Islands accounts for about 1% of world production. A government controlled board markets most of the countryls copra although Lever's Pacific Plantation Pty. sell their production abroad -9- under license from the Copra Board. F.r a long time United Kingdom and Australia have been the only export markets; in the last few years Japan has purchased a rapidly growing share but purchases have been erratic. In 1967, the three countries respectively accounted for 58, 15 and 28% of Solomon Islands' copra exports. International copra prices have fluctuated consider- ably in the last ten yea±s, ranging in the London market from a maximum of E99.17.6 per ton in May 1959, to a minimum of I52.17.6 in February 1962. The Copra Board has been fairly successful in keeping buying prices relatively stable, while following a policy of not accumulating reserves. 34. Internal costs for transport and marketing substantially reduce farmers' direct receipts. While plantations sell copra directly to Copra Board's agents at the three shipping ports of Honiara, Yandina and Gizo, Solomon Islanders sell most of their copra (about three quarters of the total in 1967) to Chinese middlemen. The quantities handled by cooperatives have been growing, but are still comparatively small (31% of natives' copra in 1967). Available estimates indicate that in 1964 local farmers received, on the average, about 45% of the buying prices (net of export duty) paid by the Board at the three shipping points. 35. Government policy for the development of the industry is substantially sound and effective. As a partial relief from the export duties Yhe government subsidises investment, thus favoring the ploughing back of profits. Since 1961, the Department of Agriculture has carried the.transport costs of selected seednuts which are distributed, at cost, to any part of the archipelago. From 1963 to 1967, the yearly distribution of these seednuts tripled to 99,000, corresponding to about 1,000 acres of planting. A replanting subsidy scheme was announced late in 1967, to cover 10,000 acres over a five-year period. A subsidy scheme for new planting of about 3,000 acres a year for ten years will begin in 1969. There is still considerable scope for improving the standards of existing plantings -- particularly in the field of disease and pest control -- and for increasing the productivity of copra processing. To this end, extension and demonstration services are efficiently carried on by the Department of Agriculture. b) Other Crops 36. Agricultural diversification has been the Government's aim since the second World War, with a view to relieving the country from its complete de- pendence on copra. The task is difficult: many tropical crops -- rubber, cocoa, kapok, oil palm, cotton -- had been tried out commercially before 1920, but only coconuts were successfully established. An ambitious but unsuccessful scheme was tried in 1948-55. It aimed at improving local agricultural practice by introducing rice cultivation, promoting settlement on the Guadalcanal Plains and encouraging the cooperative use of machinery and implements. 37. The second attempt was the introduction of cocoa in 1958, mostly among local farmers, and it was probably premature. Inadequate soil quality, diseases, and poor maintenance resulted in very low yields. In 1965, when more than 7,000 acres were under cocoa, the Government shifted the emphasis of its policy to the improvement of husbandry standards on existing plantings rather than encouraging more new planting. Meanwhile, a government agricultural station on Malaita is working on the development of the best varieties of cocoa - 10 - trees for local cultivation. In 1967, cocoa production was only 60 tons, due to serious cyclone damage, compared with 96 tons in 1966. 38. Experiments with irrigated rice production were carried out by the Commonwealth Development Corporation but gave negative results. However, in 1968, unirrigated rice (of the IR8 type) was successfully introduced on a commercial scale by an Australian company. About 2,300 acres were harvested and produced a crop of 3,000 tons of rice, which nearly covered domestic needs. The local wholesale price was $Al60 per ton, compared with a landed price of $A190 for Australian rice. The potential for increasing rice produc- tion on the Guadalcanal Plains is considerable. Exports to the neighboring -- though limited -- markets in the New Hebrides and the Gilbert and Ellice Islands might also develop. However, since highly mechanized farming is used, its contribution to local social and economic development may be very limited. Soya beans (440 tons in 1967) were tried as a rotation crop with rice; yields of 600-850 lbs. per acre were obtained which., although substantially lower than yields in the U.S.A., are in line with the averages in the Far East. Export markets in Japan exist for this product. Oil palm production trials are being carried out by the Commonwealth Development Corporation on the Guadalcanal Plains. If successful, C.D.C. plans a 5,000 acre nucleus estate, in addition to 3,000 acres under smallholders cultivation. Tobacco is grown on a very limited scale for local use. Local cash crops also include small amounts of peanuts and green vegetables for local sale, and peppers for export. 39. Subsistence farming, which accounts for more than two-thirds of agricultural production, is very primitive: digging sticks and cutlasses ae the main implements and no draft or pack animals are used; fertilizing prac- tices are unknown and almost everything is grown by shifting cultivation with long fallow periods (from 4 to 10 years). The main crops.are sweet potatoes, yams, taro and cassava. Some 50-60,000 acres are under subsistence crops every year but the total land required, including fallow areas, may be around 400,000 acres. (This compares with an area of about 130,000.acres under commercial crops, of which about 110,000 acres are under coconut trees.) Although at present there is no apparent shortage of land, pressure on the country's re- sources will emerge with accelerated populatiSn growth. A more immediate reason for concern is the wastage of labor resources inherent in the continued use of a primitive technology, while there is a rapid turnover of labor in the money economy, Long fallow periods and climatic conditiony result in thfck vege- tation growth, which requires large amounts of work in garden clearing. A further consequence of shifting cultivation is the long distance of gardens from villages. Considerable expenditures of work and time are required in travelling to and from farms and transporting the produce, in a rugged country, with paths made difficult by heavy rains. 40. The Government has made little effort to improve subsistence farm- ing practices and has concentrated most research, extension and demonstration efforts on the development of commercial crops, assuming that so long as there is land available, shifttng cultivation is acceptable. Apart from the problems which will arise with the growth of population, this policy fails to take account of the complementary nature of subsistence and commercial agriculture and underestimates the importance of raising 1abor productivity in the economy. In 1967, however, the Governent developed an agricultural station on Malaita to include, in addition to cocoa research, investigations into subsistence crops and minor cash crops. .11 - c) Livestock and Fishing 41. The country's livestock increased in recent years, but is still small compared with both the country's potential and the pre-war situation. Disease-free conditions, good natural grazing and general climatic conditions offer favorable conditions for expansion. The livestock population in 1967 probably numbered about 9,000 head of cattle (compared with about 16,000 in 1939 and 7,500 in 1966), 15,000 pigs, 200 goats and some 100,000 head of poultry. Although the existing demand, as expressed in imported products, would justify a local meat industry, the main use of cattle is to keep down undergrowth in coconut groves. The development of cattle grazing on the Guadalcanal Plains, possibly with complementary meat canning facilities, appears feasible and could substantially reduce imports. The Government plans to improve the quality and size of cattle herds by providing veterinary control and by introducing better pastures. 42. Fishing is mainly carried out in the subsistence sector but small commercial operations take placde at Honiara, Auki and Gizo. Imports amount to 630,000 lbs. per annum, $A100,000 worth, almost all made up of canned fish. Irregularity of supplies resulted in the failure of a foreign venture con- cerning crayfish exports in 1967. A local ehtrepredeur recently started proc- essing and export of trepang (dried sea cucumbers). Marine shells account for a small share of domestic exports ($A44,000 in 1968, equivalent to 0.8% of domestic exports). The country's full potential for commercial fishing has still to be assessed. Investigation will start shortly, on a small scale, with technical assistance from the South Pacific Commission. Forestry 43. Exploitation of the country's rich forests started recently on a significant scale. It increasingly piovides substantial diversification of exports while considerably augmenting Government revenues. Over 4.4 million cubic feet of logs were exported in 1968, as compared with little more than 1 million in 1966. The share of timber in domestic exports was more than one- fourth in 1968 and may become higher than 50% in the early 1970's. The country is self-sufficient in sawn timber: approximately 170,000 cubic feet were pro- duced locally to cover almost completely the domestic demand in 1967. Present logging operations are carried out by five foreign companies, respectively on Kolombangara, Santa Isabel (at Allardyce), the Shortland Islands, New Georgia (at Viru Harbour), and at Tenaru on Guadalcanal. One of the companies also plans a large scale sawmill and may start wood chipping and veneering at a later stage. 44. Climatic conditions are exceptionally well suited to a rapid growth of trees mainly because of the even distribution of rainfall throughout the year. The same feature, however, tends to make operations difficult, because heavy rainfall makes it necessary to construct access roads to high standards. Moreover, native timber varieties growing in the Solomon Islands are little known on the international markets and their characteristics have not yet been fully assessed. Despite these difficulties the potential for the exploi- tation of existing timber stands is high. Timber production is expected to reach about 10 million cubic feet p.a. by the early 1970's and at this level the presently committed areas will be worked out in about 10 years. Other tracts of exploitable size and quality have about 200 million cubic feet. - 12 - 45. The short term-life of the present forests underlines the importance that should be attached to government policy for the regeneration of the -forest resources of the Protectorate. Work by the Forestry Department on different regeneration techniques, although still incomplete, has established that the potential permanent yield of the .forest lands could be much higher than present yields. Long term regeneration,'uvith the planting -of more val- uable and faster groving species, would' be required 'andis .unlikely to appear profitable to commercial investors. aThe government's im:is to establish a public forest estate, but the investments -required for re-afforestation will be beyond the resources of the government. It would be a potential.area of interest for foreign aid, or for the international financial institutions. 46. The government is currently working out a detailed policy for forestry. 'The main features of 'such a policy are designed to facilitate present commercial -developments 'in an environment that, does :not prejudice the long term.interests -of the country.in 'the.establishmentpf .permanent industry. These features include priority for "1protectionfforestry", (to preserve soil _fertility and water catchment areas), the isetting -,up of a ,public forest estate and its management 'so -as to .attain the maximum sustained 'yield, and the stimulation of.investment in re-afforestation -by private enterprise (where possible), or with the help of international loan funds. 'This outline policy is fundamentally -sound, although further work is required 'to provideomore information 'as to the type -of 'production .most suitable for -world markets Ctechnical ;assistance from -.A.0. will be tortbeaing for this work); assistance may -also .be :needed -on the economic, aspects of re-affore- station, especially the correct :calculation of costs and benefits. Land Tenure 47. About 92% of total,land area.is under customary tenure, -a complex system of ownership :and usage rights :attaching to social groups within the tribal framework. A .general lack of documentation supporting these titles results in many land disputes. 'Most 'customary-held land, however, is steep country and only about one-third, .(roughly .2-,aillion acres), is of any value. Land under individual title, or in the 'hands of:government, totals 580,000 acres. Of these, only about one quarter have been registered. The government encourages individual ownership of land -among 'Solomon Islanders :by apportioning customary land and registering_individual titles,, when requested by a majority of the owning group. The limited capacity of the Lands -and Surveys Department is a serious constraint -on this -work. 48. Alienation of customary land to other,than Solomon Islanders may take place only through the Government. 'This provision,-.introduced to av id abuses, may result in lengthy negotiations of.land transfers. There is no evidence, however, that .land tenure has been a serious obstacle to the devel- opment of commercial -agriculture in the past, and only a small part of the alienated land has been put under .cultivation. The Government. has power to acquire customiry land for public purposes, including economic -development. The Government has used this power .only occasionally, in.most-instances being able to acquire land'through voluntary transactions. 13 - 49. The question of land ownership and government policy towards the acquisition of land is a sensitive one that will need to be handled carefully. Recent discussions concerning the establishment of public rights and ownership over land for forestry development have indicated the suspicions (and igno- rance) that exist in people's minds on these questions. Mining, Construction and Manufacturing Industries 50. Gold is the only mineral now being produced in the country. No de- tailed geological work on the gold mining areas has been done, and little is known on the size of reserves. The present production is mined on a small scale by Solomon Islanders, panning alluvial sands on Guadalcanal. In 1967, 672 oz. of alluvial metal were exported, worth $A17,300 and equal to only 0.4% of domestic exports. 51. There are fairly good prospects for the mining of considerable reserves of low grade nickel ore on Santa Isabel. I.N.S.E.L., a subsidiary of International Nickel Co., is carrying out furthef prospecting on Santa Isabel, after trial mining operations. Reserves are currently estimated at 35 million tons of low grade nickel-ferrous laterite, which would be sufficient for 25 to 30 years mining operations. Heavy rainfall will make open-cut mining and transport operations difficult and large investments of the order of $20 million are required to start operations on a commercial scale. A decision as to whether to start commercial operations will be taken by the prospecting company toward the end of 1968. 52. An aerogeophysical survey of the whole country, jointly carried out by the Geological Survey Department and a UNDP team, gave positive results concerning bauxite and copper. Preliminary estimates indicate the existence of some 31 million tons of bauxite of commercial quality, worth nearly $AlOO million, on the Rennell Islands. The Government plans to invite applications to prospect. Copper has been found on Guadalcanal's southern coast, but the size of the find has yet to be assessed. Difficult terrain and high transport costs will mean that high quality ores or large quantities will be needed to justify exploitation. Other minerals -- zinc, manganese, phosphate, silver -- are present in the archipelago but little is known about the extent and quality of deposits. Detailed geological mapping has been carried out only on Guadal- canal, but all the main islands have been covered by a preliminary mapping program. In general, the problems of providing port facilities is a major constraint to mineral exploitation, and the distance of the country from world markets tends to make exploitation economical only for relatively high grade reserves. 53. Manufacturing and co4struction are carried out on a very small scale and production is almost exclusively based on imported raw materials, even for cement. Activity in the two sectors, however, has increased rapidly in the last few years. Employment in construction in the private sector jumped from about 300 before 1965 to about 720 in the last four years. Power consumption for industrial use increased by about 20% per year (both in private and government sectors) in the last five years. The Public Works Department and the Marine Department carry out a variety of industrial ac- tivities, mostly in sectors where private enterprise is lacking: civil engi- neering, joinery workshops, boat building, vehicle maintenance and engineering work. Construction activity is largely determined by government demand. The - 11. - total value of works .undertaken by 'the Public Works Department 'in 1967 vas *Al.ß imillion , including £$A0 ;7 million of'buildingswork - -of vwhich '$AO .14 million ,as for housing. 1The a ority uofw~,k än :Hontara tad vici1ity i nov ,carried :out ,by :local c,åtractors; -inmother :locGities, wwhere ccntractors ~are not 'available , the work :tis zdone adirecty aytthe WWD. "The .Government ýgives *s ignificant 'asaistnåe to~,the -develqpment -f tprivate 2indmt_y tby "the granting -of ýduty -free ,importation tfor "most ,m=chiney,, especi'l depreciatin falloances 'and concessions , "tax "holfdays, zand4sae tafitfXprtetio. 'Constréints :on industriål .development .are,, ,however, :may Land ',aerioua., tespedilly the tabaence of:'lo al :raw 'mater±ala, the ~smU ~'deatic amarket, ow ah-bor lproductivity and:'lack :of as]ills . :Given 'the sman1 escale tof dthe seconomy ±here 'has 'theen little sacope 'for 'the -emergence cof -specin1i zeJd -anUfacturlng; -*here -it --has developedi-,t -is usalxy ha texension .o tthe tacti'mv±ites rWd lnterests ,of traders .and :importers svho saleo apro<ide 'the amaketing .outlets.. 'Their ,enter- :prise zhas :reqpconde:d -in .an encourangwa 'to ;the ineressing pace of the econo:r and "further investment can ,be exected 'ias ýexpanIon immait-nues.. The :situati<Vn should the ýkept "urder reews, khewever, to ensure that the -development of .local -production tis:not hamperedtby asystemof idtattibution lMhose maln interest -is -in -the ~sale caf '±mported egodds twfd taermieea. Tourism 54. The zcountry "s Isolated ýgeographicl position sad Lthe loV ievel of 'developmnt cof tatel _aZad tranfport fanitles ýhave gnmeented Whe teconomy :frem sharing ;in +he ,growing -tourist firdnatry ¢of the 5South mPaditie sarea. 'However, 'the -nuber zof -,visitors has ashon aaaling ±nceremse -in :reent ýyears (500 persons -in :1966, '800 in a967 mrid Yan setimated 31,00 fin ý968) zarfd rthere is ,clearly reom -for the esta¥Iishment cos amTdest itidustry.. !This -cai5dlbest be done -by ,encouraging Ifbreign investwent in hotéls eWrd r«IåtiåÅ fsdiities and ,ensuring 'that ipublic Iinveatments iin 't-rnsport Nespedial3y sáirpoxtu) -and basic services sae des igned sao ass "to agWe whe manimum tassistance.. ESuåh 'investments are needed -for ~general -econoric devclopment aidl.there .shoId .be zno :elash in these :ob ectives. 'Policy :should he i ged ,to .3ensure that kthe country shares 'in -the ,general iexpansion :of itourism-expected fin 'the Tregion. Transport 55. .One explanation for 'the 'inokation tof *the :country is -hat 'the fre- quency -of ,overseas :shipping zservices is -rather lov, idue -to the small volume ý of cargo on offer:; pas senger 'traTfic by sea 'is negli-gible.. 'Mon.täly tor "six-veekly shipping connedtions are in :operation with Sidney, ÄJApn ard tHong 3Kong, the U.K. :and :continental Euope. -Dischge?d ~ rid :loaded :cargos tvere 62,000 -tons and '74,000 tons .respective lin 1967. "Fzriht :rates thear lheavTly 'on 'the cost of imports 'and the value -.of iexports:; in;particilar ýfre~ight urates 'to -Australia are more expensive ~than tto the -.U.K.., -oving to rhigher .1--br -and amaintenance costa sand, do ;aome 1extent., :limited "epe titen. Port -fad1Eities ýare cadequate for the,,country ts needs. -The 3=átn -tacilties are in Hoiara., -viéh ?has a .deep vater -erth ýand an ::off-sore -dil terminal... 'Emported goods care mear:y éll "landed :at Honiara;much fr ght sfor Nother ,detinations 'has 'to aarfdesgo trans-shipment. The :other ssix ports .%'Xandina., Gizo,, 1Aflhy.ce., ingi Cove, miVu an'd 'Nila -- are <us.ed -by :overseas 1veasls -motjy for -t izber varid copra ihiments,. 3An finde- pendent :statmto>y iauthorkty moöntrls "wrd "manages 'the sports «ý6f foniara mend Gizo along :commerckäl :lines-, -rhile -the :other -ports 'are -privately operated. - 15 - 56. The carriage of freight within the Protectorate is almost wholly by sea. Coastal navigation by small vessels and canoes is favored by the existence 6f extensive lagoons around many of the islands. The construction of sea going canoes, equipped with imported outboard motors, is a significant item of local capital investment. Inter-island transportation is rather costly and irregular, due to the scattered distribution of the population and the great distances between the islands. Scheduled services exist only between the few main centirs. In 1967, most of the traffic was carried by 164 pri- vately owned small vessels with a total gross tonnage of 3,700. The Govern- ment Marine Department operates a fleet of small vessels -- 41 in 1967, with a total gross tonnage of 1,400 -- for official, administrative and medical purposes, although some private cargo is also transpbrted. The large trading companies and plantations rely almost exclusively on the small shipping com- panies for their needs. Since early 1966, in order to stimulate private commercial shipping, the Government charges commercial freight rates for both private and Government cargo carried on its vessels. 57. The frequency of international airlines connections is also fairly low, owing to the small demand. Regular flights connect Honiara to the Fiji Islands, and to Papua/New Guinea. Both services use modern turbo-prop aircraft of medium size providing a total capacity of 240 passengers per week. By the end of 1968, the connection with Fiji will be operated twice weekly. The number of passengers has increased from 2,400 in 1963 to 4,80o in 1967. The airlines plan to develop the traffic further with the present type of aircraft. The five airports open to international traffic cannot handle modern jet air- craft without substantial improvements. The main airport at Honiara is a former U.S. air base with an extensive runway; it is currently being resurfaced but eventually it will need to be rebuilt to accommodate the weight of modern aircraft, at a possible cost of A2-3 million. The main improvements now planned are the installation of lighting and better navigational equipment. 58. The airport facilities are adequate for the domestic air services which have been a major factor in improving communications within the Protectorate. The small but efficient service was started in 1963 by private enterprise and operates without a government subsidy. It has become the main form of passenger transport within the country for government and business; its two small planes carried 6,700 passengers in 1967 by both scheduled and charter services, compared with 2,800 in 1964. The company plans to expand services with the use of larger aircraft which will permit a daily service between the main centers and provide capacity for air-freight. Such services may well be able to play a big part in reducing the internal costs of trans- port for high value freight. 59. There are no railways, and the road network is small, consisting of about 140 miles of main roads, of which 68 miles are on Guadalcanal and 62 on Malaita; these are all-weather roads, except for some river crossings which are closed during floods. Some 350 miles of secondary roads, (including 140 miles in Lever's Plantations in the Russell Islands), are of standards vary- ing from all-weather to jeep tracks. Existing roads run almost exclusively along the coasts, due to the rugged country in the interior. The broken nature of the ground, the existence of innumerable rivers and streams, and the heavy rainfall make road building and maintenance very expensive. The number of motor vehicles is very small, increasing from 477 in 1962 to 1,080 in 1967. - 16 - 60. The Government policy for road building is to construct new mileage! in accordance with prospective increases in production and traffic. It pro- poses to leave to local councils, plantations and villages the construction and maintenance of new roads, until their usefulness has been proved by traf- fic developments. The main government investment is the expenditure on the roads in Malaita and Guadalcanal, both of-vbich-have a development objective of stimulating economic activity. It is proposed- to build 90 more miles of the- Malaita road, at an expected construction-rate of 10-12 miles per year. The- Guadalcanal road will also be extended each- year. This is well within the building capacity of the Public Works Department-. 61. The Government recognises the key role-of transport development in an economy so small, scattered and remote from-other economic centers. It proposes- to undertake a survey of the transport sector to obtain guidance for policy. The area in which least is known is that of inter-island sea transport and such a survey might- well concentrate first on this part-of-,the industry. The organization of the industry, its cost- structure-, pricing-arrangements, and the extent to which it is linked with- general trade- and commerce are sub- jects that urgently require-study. The next-stage-should then be to evaluate the relationships between different forms of transport in -the Protectorate. Power and Water 62. The demand for electric power has- been satisfactorily met, so far, by supplies provided by small diesel plant-. The- Public Works Department formerly operated electricity- generating- facilities- in the three main centers of the country. Smaller government- plants- are in operation at- Tulagi, Kirakira, Tetere and Dala and the large plantations and companies- produce their own power. Power consumption- in Honiara rapidly-increased over- the-last five years, owing to a considerable expansion of industrial and commercial activi- ties-, and the modernization of Government, bui-ldings-. Total consumption went up by 19% yearly, while industrial, commercial and government office consump- tion increased respectively by 20, 22 and 31%. The present power production; capacity in Honiara will be adequate only until 1972, on the basis of rather conservative assumptions on the growth of the demand (17% per annum until 1970; 12% per annum thereafter). A consultant's study concluded that the expected; demand in the Honiara area justifies-a hydroelectric power project,, using the Lunga- River water resources. The project-, consisting of a dam, a tunnel, a 3,500 KW power station and transmission lines, would cost about US$6 million. A request for finance for this project-has-been made:to the Bank. It has been Government policy to establish the power supply in Honiara on commercial lines so as to be able to hand it over to an- independent- statutory authority. The Electricity Authority wap e tablished on January 1, 1969. 63. Adequate water supplies have been provided for Honiara, and piped supplies are also available in the other main centers -- Auki, Gizo., Kirakira and Tulagi. Village water sipplies are- provided by some of the. Local. Councils with the assistance of Government grants. There is a wide. disparity between revenues and the costs of water supplies in Honiara. A report prepared by a fiscal adviser appointed by the Government recommends the:establishment of commercial accounting for water supply, and that revenue and expenditure be brought into balance, as preLiminary seps to the setting up of an independent water supply authority. - 17 - Social Services 64. Medical services are provided by both Government and Missions. About 700 hospital beds were available in 1967, two-thirds of which were in six Government hospitals, the remainder in three Church hospitals. The country has one medical practitioner for every 5,500 persons. 65. Education facilities are still at a very low stage of development. Less than one-sixth of the children of primary school age attend a school of minimum acceptable standards. Most pupils are enrolled in Church or Local Council schools with few trained teachers and insufficient equipment. The drop-out rate in the seven year course of primary schooling is very high, largely due to the fact that few of the schools have classes beyond standard IV: out of about 24,400 pupils, only 3,600 were in the three top classes in 1967. Secondary education is provided by a four-year course in a Government boarding school up to Cambridge Overseas School Certificate level. There is also one Church school providing a four year secondary course on a coeduca- tional basis. Five Church schools provide only a two-year course. Two teacher training colleges provide two-year training for about 50-60 teachers a year. 66. The Government has correctly identified the deficiencies of the education system as a major cause of the low level of development of the economy. It faces a major dilemma, however, since to improve the ,system is likely to be very costly in relation to the funds at its disposal. Present plans are for the expansion and improvement of the public system (leaving less responsibility with the mission schools), in a selective way, in the hope and expectation that finance will come largely from aid. The emphasit will be on increasing the output of those trained to a secondary level who are most needed in government and commerce. A technical institute has been started, with the help of the U.K. Government, the I.L.O. and the U.N. Development program, to parallel the existing secondary school in Honiara. No attempt will be made to provide University level facilities in the Protectorate but, instead, students will be sent to institutions abroad, including the new regional University of the South Pacific, in Fiji. - 18 - IV. PUBLIC FINANCES Role of the Public Se'ctor 67. The very rapid growth :of ;government expenditures in the last five years has been the -mdln source of economic ;growth in the Pr6tectorate, -giving confidence to foreign private businessmen and -encouraging them 'to establish themselves in the Protectomate. This expansion<'of :government services,, modest as they still are, had. provided the framewopk aqgainst whidh a .modern private sector has 'been able 'to operate at all.. The predominance -of the 'government does not reflect a public .sector -which is too .large., but a private sector which :has not yet expanded to :make maximum use of the infrastructure now being provided. 68. In :as.sess1ng the economic Ampact of government revenues rand expendi- tures it is necessary to tke into: arccount -the .pecuei'akties< (Of the data available. No functional :or economdc 'analysis sof ;government expenditures has been made., .and the detailed data that 'exists .hes, been 'assembled in terms of the requirements of public zaccountability. 'There have 4alsv 'been changes in the coverage :of various items land the Tom in which aid !has 'been supplied and the .method by -which it was accounted for millitates ;against a satisfactory functional analysis. 'The ,existing data has been reclassifiked, tas far as possible., to -permit such an analysis covering the period l958 -to 1961. The latter year forms a ziatuwal break since it saw the beginnings of -a different treatment of -recurrent and capital items. In earlier years , sup to 1964, it is not possible to _distingiish -fully between xecurrent and capital expendi- tures . The tables in this :report for 1958 to 1963, therefore, where they refer to "development and capital"., 'innlude .-ome items of a -ecurrent nature. After .1964, this difficulty idisappears.. Frma -968 'onards., however., a major change occurs due to the disappearance :from the local 'budget sof salary sup- plements and other benefits paid to expatriate staff under the Overseas Service Aid Scheme.1/ Structure of Revenues 69. The size of total revenues sets a limit to total iexpenditures. The government is not able to practice .deficit finance iand whilst it has borrowed locally the sums involved are insignificant. The growth of expenditures, therefore, has depended upon the ;growth :of 'revenues.. These consist of local revenues, originating in the tax basie of local .money incomes, and external aid. Over the entire period 1958 to 1968 total revenues grew at 12% per annum, 1/ These benefits will now be paid directly to the recipient by the U.K. Government in the country of nationality. The local budget will reflect only the cost of local empiloyees. Apart from its fiscal effect this change will also alter the pattern of money incapes in ;;he Protectorate to an exte'nt which ciannot -yet be :foreseen. If these supplementary pay- ments are remitted to the Protectorate they vll still 'cntribute to money incomes, except thyt 'they will now accrue as transfers through the balance of payments instead of in the form of direct additins to wages and salaries. - 19 - with a major contribution being*made by aid, which increased nearly five times from slightly more than $Al million in 1958 to $A4.5 million in 1967. In that year aid accounted for 60% of total revenues as against 40% in 1958. 70. Aid from the U.K. is provided under three categories. There is first a basic "grant-in-aid", agreed between the donor and recipient govern- ment as the amount necessary to cover the deficit on recurrent expenditures. The mechanism of a "grant-in-aid" permits the U.K. government o review and approve of the plans and performance cf the local administration and the agree- ment on a figure in effect amounts to a stamp of approval on the local budget. Such a subsidy for recurrent expenditures is essential in the conditions of the Protectorate, to ensure the existence of even the bare minimum requirements of an effective administration. Secondly, there are the supplements to the salaries and benefits of expatriate staff paid by the U.K. under the Overseas Service Aid Scheme. These appeared as "revenues" in the Protectorate Government budget from 1962 to 1967. Finally aid under Colonial Development and Welfare was received for both recurrent and capital purposes. 71. The major part of aid has been denominated for recurrent purposes in the budget since 1958. From 1958 until 1961, when only the grant-in-aid was received for recurrent purposes, it accounted for 50-60% of total aid receipts. In later years the other two elements have become equally impor- tant; in 1967 O.S.A.S. and C.D.& W. amounted to $A1.7 million and the grant-in- aid to $Al.6 million. The grant-in-aid almost doubled between 1958 and 1962, when local revenues were stagnant; from 1962 it increased by $A480,ooo (or 40%) with most of the increase coming in 1963 and 1964. The successful use made of the aid may be judged partly by the fact that it has been possible to hold the grant-in-aid virtually constant over the last four years. Additional aid was still provided, but it was concentrated on capital and development purposes, or special current expenditures, such as O.S.A.S. From 1958 to 1962 the increment in local revenues covered 10% of the growth in recurrent expendi- tures; from 1962 to 1967, however, 48% of the growth was covered by rising local revenues, indicating at least a movement in the direction of local via- bility. 72. Local revenues can be divided into tax receipts, revenues from certain semi-commercial operations and a miscellaneous group of receipts stemming from the administrative functions of the government. These local revenues remained virtually stable at $Al.6 million from 1958 to 1962; they then increased very rapidly at the rate of 14% per annum, so that they doubled between 1962 and 1967 when they amounted to almost $A3.3 million. 73. The most important local revenues are indirect taxes on exports and imports. Copra is the single most important source of revenue in the form of an export duty. Its importance has been declining, however, as import duties have risen rapidly. Ten years ago duties on copra raised 35% of local rev- enues and about 60% of all receipts from indirect taxes,'in 1967 they accounted for only 20% of local revenues and 35% of the yield from indirect taxes. 74. Throughout this period the duty on copra has been collected at the rate of 15% ad valorem. The 1968 budget reduced this rate to 10%, adding a specific duty of $A7.00 per ton. This change will result in a variation in the tax burden with changes in world prices, since copra prices tend to fluc- tuate more than output, with the relative tax burden falling as the value of - 20 - output increases. In addition, 75% of the specific rate of duty can be set against company or personal income tax on income originating in copra pro- duction. The net effect of the new tax system, therefore, will be to reduce the total tax burden on copra producers. 75. Other export duties fall on timber and minor exports. The former will be increasingly important as timber exports expand. Together with other associated revenues, these increases represent the one major -structural change which seems certain to take place .in the revenue structure in the next ten years. It is the government's intention to replace the present timber export duty by a levy on all timber worked commercially, whether.:for export or domes- tic consumption. 76. Import duties have become the most important category of local revenues, Over the last decade the yield has grown at the compound rate of 13.5% per annum, but a definite acceleration has occurredisince 1962, when the growth rate has approached 16% per -annun. The increases in revenues have been largely the result of rapidly rising imports, although there have also been increases in the rate of duty, especially on tobacco, beer and spirits. 77. The recent review of the fiscal position of the Protectorate under- lined the relatively low incidence of import .duties. Excluding liquor and tobacco, which are taxed at relatively high rates,, the incidence of import duties was calculated to be 7.11 ,%on the "current domestic value". (The latter system of valuation, approximately equal to "f.a.b. at port 'of expor- tatian", gives much lover values than the c.L.,f. system). The fiscal com- missioner estimated that the camparable c.i...f. incidence would be 5%. 78. This low average is the result of several features of the tariff structure. Many items enter free of duty, either because of their importance to the mass of the population (food, medicines, etc.,) or because of their significance in production or investment. For similar reasons very low rates of duty apply to items of fuel and raw materials. Secondy, the operation of the Commonwealth Preference System gives a differential (imunting in most cases to I7) in favor of imports from Commonwealth countries.. In some cases this differential operates by giving free entry to such imports, whilst imports from elsewhere pay duty. The effect on revenues of these preferences is serious, because about 70% of all imports originate in Commonwealth coun- tries. 79. The spain reason for the low average incidezpce of import duties (other than on liquor and tobacco) is the desire of the Government not to add to the cost of living in the Protectorate,. Given the high import content of consumption this depends on the landed cost, plus duty, of imported goods. 80. This aim has been pursued to the point where the rates of duty are yery low, c=mpared vi+h otheT eqpaable developing countries. Given the need for additional local revenues there is probably scope for raising the effec- tive rates in a selective fashion. At the present time the low (or zero) rates on some items provide no encouragement .or import substitution in fields where it may be economic to develop local proAuction (as in food production for domestic consumption). The 1968 budget introduced new duties on .rice and flour that will give !ome incentive in these directions, including slight protection for domestically produced rice. - 21 - 81. Direct taxation consists of income taxes on individuals, company taxes, estate duties and stamp duties. The first two are the most important. The yield remained relatively stable from 1958 to 1962, but has followed a steady upward trend since then. This increase has largely been the result of rising yields of tax receipts from individuals. Receipts from company taxes has teen very sluggish and the result has been a definite shift in relative burdens between individuals and corporations. In 1960, 56% of direct tax revenues was raised from individuals, and this had increased to 76% in 1967. 82. The reason for this shift lies in the advantages the present tax structure offers to companies. The company tax rate is 7%, compared with individual rates which begin at 4% (on a taxable income of $A400) and rise fairly quickly to a maximum marginal rate of 75% on income exceeding $A20,000. Once individual incomes exceed the moderate level of $A1,500 there is,a strong incentive to become incorporated in order to be taxed at the company rate. Not all individuals are free to do this (particularly government em- ployees) but it has been done extensively in the private sector; of the 85 companies making tax returns in 1967, 65 reported incomes of $A15,000 or less, and 33 of these had incomes of $A5,000 or less. (The number of companies increased five times between 1961 and 1967). 83. The recent fiscal review commented unfavorably on this situation and recommended a new income tax structure. The government's own conclusions, incorporated in the 1968 budget, followed these recommendations closely in raising the company tax from its previous level of TV4 (one of the lowest rates in the world) to 25%. At the same time the personal tax rates were changed so as to range from 5% (on the first $A600), to a maximum rate of 35% on income segments exceeding $A8,100. These rates will be applied subject to the proviso that no one will pay more than 25% of gross income in tax. Certain other changes were also made in the budget, including the introduction of a P.A.Y.E. system, with effect from January, 1969. The general effect of the changes will be a tax structure that gives no special advantages to companies, compared with individuals, while providing incentives for saving and invest- ment on the part of individuals. 84. The remaining local revenues consist of receipts from sales of Commercial Services and miscellaneous Other Revenues. The former include electricity, water, posts and telegraphs, marine services and printing serv- ices. The first of these will largely disappear from the budget when the independent electricity authority comes into existence in 1969. Amongst the remainder posts and telegraphs revenues have shown relatively large but ir- regular increases, as a result of the development of international sales of postage stamps to philatelists. Generally speaking, such commercial and mis- cellaneous revenues (which must be set against expenditures under the some heads) grow pari passu with general government activity. Government Expenditures 85. The traditional pattern of public accounting used in the Protectorate records expenditures under various budget heads corresponding to departmental responsibilities; it also distinguishes between recurrent and capital expendi- tures. The former breakdown is of little value for functional economic pur- poses, while the latter distinction has been blurred as a result of the proce- ^nl a,A + - e- n - avR4 in earlier years . In - 22 - addition, the greater part of public capital expenditures are recorded under the head of "Public Works Extraordinary", being the executive responsibility of the Public Works Department. As a result, it is not possible to make a complete allocation of capital expenditures by purposes. 86. The situation has become.easier in two respects as a result of recent changes in budgetary procedures. The government has reallocated past, expenditures from 1964 onwards to correspond as closely as possible to a breakdown between recurrent and capital. Secondly, with effect from.1968, Colonial Development and Welfare-aid funds are to be granted for capital expenditure purposes only (with minor exceptions). The other change effec- tive from 1968 onwards is the disappearance of expenditures for supplementary benefits for expatriate staff, to parallel the change made in the revenue side for this form of aid (already-mentioned above). 87. The growth of expenditures has been rapid in the last.decade, paral- leling the growth in aid and local revenues which has made such an expansion possible. Recurrent expenditures showed particularly rapid increases, with growth accelerating over the years. From 19-58 to 1961 they grew at 7% per annum; from 1961 to 1965 at 15%, and. from 1965 to 1968 at over 20% per annum. They now account for 70% of total expenditures, as against 60% ten years ago. Capital expenditures have also increased steadily at.the rate of 10% a year. Within the framework of these changes tae mission analyzed the pattern of expenditures and divided them- into broad functional categories. This has been done by taking the traditional budgetary heads and grouping them. The largest group covers the basic functions.of government under the. heading of "Law, Order and Administration". Secondly, there are the Economic Services of government, which include agriculture, forestry, cooperatives:and geological survey. The third group is called Commercial Services, since it covers those activities of government which could, in principle, be provided on a commer- cial basis (marine, posts and telecommunications and the government printing: office). The fourth group, Social Services-, covers- education and medical expenditures. Finally there are Transfer Payments:, made in the form of serv- ice payments on the public debt, pensions, and grants to local authorities. For completeness, it is necessary to distinguish expenditures on capital works by the Public Works Department and, in earlier years, expenditures on special development projects which, for accounting reasons, were charged to special revenues. 88. The greater part of all government expenditures have been made under the first of the above categories;, "Law, Order and Administration". Given the scattered nature of the Protectorate territories and the late start made on the provision of an adequate structure of government, the relatively high proportion spent on these basic government services is easily understandable. Between 1958 and 1963, 60% of all recurrent expenditures and some 15-20% of developpent and capital expenditures wcnt for these purposes:. Since 1964, (when a more accurate allocation between the current and capital items has been made) this percentage has fallen from 45% in 1964 to an estimated 4o% ixL 1968 (on recurrent items). Capital expenditures for these purposes have aver- aged 10% of the total for the last five years. The major part- of the govern- ment framework of administration has now been completed, although further expenditures will be required to give proper services to the more out-lying islands. However, the pattern of expenditure can be expected to shift away -2; from this head to give greater emphasis to economic services and social serv- ices. It should be emphasised that. defence expenditures are negligible. The government has no armed forces, and the expenditure on the Police (including prisons) azounted to less than half a million $A in 1967. 89. Economic Services now account for some 10% of total recurrent expenditures dnd 6% of capital expenditures (this latter percentage under- states the proportion of capital expenditures for these purposes, since many items are included under "capital works"). Given the need to increase local money incomes, there is a case for a further shift of emphasis towards these items of expenditure within the total budget. 90.. Social services have also increased their share of expenditures at a fairly rapid rate covering 16% of total recurrent expenditures in 1964, but increasing to the point where, in 1969, they are expected to account for almost a third of such expenditures. This increase is largely accounted for by rising expenditures on education, reflecting the recognition of the key role which must be played in the development of the economy by expanding educational and training facilities and improving their quality. Planning 91. The determination of the pattern of expenditures through the annual budget represents the main planning device available to the government. The determination of the annual budget, in collaboration with the U.K. Government, is the most single important decision bearing on the economic development of the territory. Total public expenditures exceed the value of exports, so that the budget is a more important policy variable than the choice of the producer price to be paid to domestic producers of copra. I 92. The government has issued a series of development plans, the most recent of which covers the period from 1968 to 1970. This Fifth Development Plan is a continuation of the Fourth Development Plan which covered the years 196 to 1968. These plans, however, consist of statements of items of expendi- ture which the government wishes to carry out through the budget in the years concerned. They remain subject to annual appropriation and whilst a useful way of summarizing the government intentions as regards the pattern of expendi- tures and possible sources of revenue, they are not development plans as more normally understood. Given the lack of basic information required to draw up such plans, this is understandable. It would be desirable to develop a more complete planning function within the government which would relate both pub- lic and private investment to the needs and resources of the economy. The present plan and the more important budgets which express its annual imple- mentation give only part of the story, although it is safe to assume that it covers the most important part. If the private sector continues to experience a rapid rate of development, it is all the more desirable to have adequate knowledge and planning ability to take account of such developments and their interrelationships with the public sector revenues and expenditures. In ear- lier years, the private sector was so small that this factor did not matter very much. More sophisticated planning will be essential, if only for such routine matters as making adequate estimates of revenues and expenditures. (See Annex II). -24 - Forecasts of Revenues and. Expenditures, 93. At the request of, the Misslwan the- Government preparedt a, long range forecast- (up to 1975) of revenuesi, recurrent expendltures, andt an outline of capital expenditures-. The latter-was doneionly in tms, of what might be. available for capital purposes from the farecast- re-venues<, given, the recurrent expenditures whieh ast be et first-. Given the' preponderance: of aid- in: total revenues, such projections are more; difnficult to:make2 thani for countries which are financially independent. The- diff-cuties, arise from the fact that the United Kingdom Government. has: not. stated its intentions: about the future. level of aid beyond 1970 and it is necessary to make assumptions, as to. what might happen., Given the U.K., policy of ,granting. the remaining territories under its political cantrol tte first claidmoni ai& ftndst it cen, be- assumed that, if aid continues- at all, the! Solamon Islands wfll receive same: share of it.. On: this basis7 .various- assumptions rhave' been- used- itmitest out the possible patterns of revenues and! hences, of expenditures!,. will be pos- sible up to. the: mid-19,TO's:. 94. The- essential feature: of such, proectiions is not just the fact that aid permits government expenditures:to' be higher than wouldi othqruise be pos- sible:; aid- funds. are valuable not only because- they' permit a higher level of expenditures but because- such additional expenditures have a leverage effect upon the government '. local. revenues. 95. For- the purposest of projecting, revenues wand-,expenditures it is desirable to have a methodl that. ineorporatms- the- interre:atInships: between changes in exports, aid, government expenditures: and local revenues. COne role of a planning unit within the government would be to provide- such a framework, which could also incorporate:, at a later- stage,, -the effects of inflows of private capital and the operations of the banks and- monetary system). 96. As an illustration of the need- for such an approach.the mission has prepared projections based on- such interrelationships. (The details of the methodology are given in Annex II). These can be, used- to 1ustrate, the order of magnitude of the effects- of di-ferent levels.. of' aid,, as vel as of dif- ferent rates of growth of exports, (since, the prkniples involved are identical). They can also be used to provide. a camnparison: with the official projections. 97. The official projections of expenditurest for the years 1969-75 are summarized in the attached table,,, which also shows: the mission projections of total expenditures.l/ 1/ The official projections indicate .a fal in expenditures, con.entrated largely on capital items, between 1969 and 1970. This mesUts, from. the assumption made that :aid will. remain constant from 1970. onwards at roughly the 19.68 level, whereas the. estimated aid for 1969 has. been provisionally set at a figure 15% higher than the 1968 level. - 25 - PROJECTIONS OF GOVERNMENT EXPENDITORES, 1969-1975 ($AOOOs) 1/ Mission Estimates-3/ Recurrent Capital Total Total 1968W 5,483 2,940 8,423 - 19692/ 5,787 3,162 8,949 9,636 1970 6,638 1,926 8,564 9,338 1971 7,084 1,834 8,918 9,321 1972 7,509 1,906 9,415 10,235 1973 8,168 2,006 10,176 10,570 1974 8,612 1,852 10,464 10,870 1975 9,086 2,027 11,113 11,228 Source: Government Projections and IBRD staff estimates. 1/ Contributions from recurrent revenues to capital revenues are excluded throughout. 2/ Budget estimates. 3/ Obtained as described in Annex II. 98. The official projections were drawn up on the basis of estimating the growth of individual expenditure heads in the budget, projected to grow, in total, at 6% per annum. The balance between these projections for current items and the expected total revenues from all sources gives a figure of the amount left over for capital expenditures; the disposition of these funds has not been planned as yet beyond 1970. The level of total capital expendi- tures possible on these assumptions would be roughly that achieved in the period 1965-66. 99. The official projections of revenues appear to be on the conserva- tive side (although not excessively so), possibly because they do not take account of the "feedback" effect of government expenditures upon local reve- nues. Mission estimates shown in the attached table suggest that, over the period 1970-75, revenues might be about 5% higher in total than the official projections, given the assumption that the aid inflow will be constant. This difference seems to be accounted for by the expansionary effect upon revenues of the expected increase in export earnings upon local incomes. 100. As far as development expenditures are concerned it is only pos- sible to state what is intended up to and including 1970, covering the period of the latest development plan. That envisages the expenditure of $A8.4 mil- lion in the three years 1968-70, out of a total projected government expendi- ture of $A25.9 million. The most important category of expenditures will be - 26 - for Social Services (38%), of which Education (14%) and Housing and Town Development (14%) are the largest elements. The first reflects the increas- ing importance attached to education and training facilities, the second the consequences of the growth of the capital, Honiara, as the only urban center in the Protectorate. Natural Resources accounts for 28% of the Development Plan expenditures, of which 20%.covers the start of the construction of the Lungga River Hydroelectric Scheme, for which World Bank financing has been requested. Communications accounts for a further 25%, spread between roads, ports, water transport and telecommunications. Local Government 101. It is the policy of the Protectorate Government to develop a local government structure able to take on responsibilities for local services. As yet this structure is relatively small and some difficulties have been expe- rienced in obtaining the full participation and interest of the population. Nevertheless, a complete framework of elected councils does now exist and has shown some signs of forming the basis for local political action in the absence of any national consciousness in the territory as a whole. Many of the dif- ficulties faced stem from the same problems of underdevelopment which plague the territory as a whole. This is especially true of the lack of sufficient educated and trained people to staff the local government services. 102. The revenues and expenditures of the councils are very small in relation to central government expenditures. In 1967 total revenues amounted to $A204,000 and expenditures to $A212,000. (Local councils are not able to incur deficits and the excess expenditure in 1967 corresponded to surpluses of revenues over expenditures in previous years). These figures compare with total central government revenues in 1967 of almost $A8 million. Between 60 and 70% of the revenues are raised directly by the councils in the form of rates, levied on a per capita basis and set by the local councils on the basis of their knowledge of the levels of income and wealth in their area. Such rates are the only independent tax source not levied by the central government. 103. The next most important source of revenue comes from grants and sub- sidies provided by the central government which accounted for approximately 15% of total revenues in 1967. The remainder of their revenues came from minor sources such as licenses, fees, fines and other miscellaneous receipts. 104. About a third of these revenues are spent on administrative and judicial services. Medical and education expenditures account for a further [0% with communications (mainly roads) and public works accounting for most 6f the remainder. 105. Given the small size of the territory and the likelihood that a truly representative central government (apart from its expense) may develop very slowly, the development of local government offers the most economical way to expand certain services. Expansion will be limited, however, by the extent of public participatign. Historically these councils began as a means of channelling the postwar unrest which had manifested itself in spontaneous community organization. This may indicate a basic ability of the population to respond to local needs through a local action. At the same time, these same councils do have considerable difficulty in collecting the revenues which they can levy directly in the form of rates, a difficulty which will need to be overcome if such local government services are to be strengthened. - 27 - V. MONEY AND CREDIT 106. The Protectorate has no monetary system of its own and makes use of Australian currency as a means of exchange. There is no central bank nor any provision J,or the government to exercise control over money and banking. The two foreign banks which operate in the country handle the provision of cur- rency, by supplying and redeeming it against foreign exchange. One of the banks is a branch of the Commonwealth Trading Bank Cbrporation of Australia, and has operated in the territory for many years. The other bank started operations in 1966; whilst its headquarters is in London, its sphere of oper- ations is Australasia. 107. These arrangement offers many advantages. The territory does not have to matufacture, maintain and regulate its money supply. It need.not worry about the acceptability of its currency in world markets, nor about holding reserve assets sufficient to back it. The local currency supply can only increase on a net basis if there is an overall surplus in the balance of payments. The two commercial banks are able to accommodate their customers' monetary needs to some extent by borrowing from headquarters abroad and this introduces some flexibility into the money supply, although only in the banks' specific sectors of lending. More generally, currency in circulation varies with the provision of foreign exchange and net increases reflect either a higher level of economic activity or the inward transfer of funds. The Govern- ment cannot expand the money supply by means of deficit financing, neither can it practice an independent monetary policy. However, this is not a serious limitation at the present stage of economic development. 108. While the country is part of the Sterling Area, its banking and monetary system is, in effect, dependent on the Australian monetary regime. Although the Solomon Islands lie outside the Australian exchange control area, the banks operating in the territory have to inform the Australian monetary authorities of any large size capital transfers from the Solomon Islands to a third country. On the other hand, exports of capital from Australia to the territory require the approval of the Australian authorities, as with any other transfer outside the Australian exchange control area. So far, Australian authorities have approved transfers to the Solomon Islands without difficulty. Were the Australian authorities to be restrictive in these matters, the economy of the territory would be adversely affected. There seems to be little danger that this will happen, in view of the relatively small sums involved, and as long as the Australian monetary authorities realize that capital exports to the Solomon Islands, or the needs of its monetary system, could never be so large as to have an impact on Australian economic affairs. 109. A serious disadvantage is the present lack of information on money and credit matters. The government has no powers to collect statistics from the banks and information is only made available on a voluntary basis; such data is incomplete and not sufficient to keep the government informed on external monetary factors and how they interact with the local situation. In the absence of other statistical data, information concerning monthly or quarterly changes in the banking system would be of great value in this respect. Apparently, there are no serious obstacles to the setting up of suitable ar- rangements for this purpose. - 28 - 110. The banking system has successfully developed savings facilities for the local population. Both ecmmerial -banks run savings banks which provide the only public form of .savings institution. Savings deposits in- creased rapidly (by 1-3.8% yearly, on the .average in,1960-67) -and the liabili- ties of the ,savings banks must now represent a usubstantial part -of the national savings. The savings banks ihve lent -to the ,government -and to the Port Authority, thus channelling small scele savings :into developmental uses. Small average deposits :and high turnover make the -operation of savings banks costly. These play, however, an essential role in the development of a 'money economy. ll. A statutory :authority,, -the Agricultural and Industrial Loans Board, :has been in !operation -since 1955 with ea.capital ofl$A300.,00. Theudadvy of the.Board is very limited. Andaig the iour years -eding September.1967 the Board made -49 loans totalling '$A310,000. dHalf of this amount was for commer- cial and industrial development, about 30 percent for agticulture and forestry, and about 20 percent :for purchase ,of vessels =nd marine -en*Lnes. Other credit institutions are the Western District "Cooperative Association., hich finances cooperative projects, uand credit societies -established -by the inRomn Catholic Mission in the Western Solomons. - 29 - VI. EXTERNAL PAYMENTS 112. The monetary arrangements of the protectorate form part of the Australian monetary and banking system. As a result balance of payments prob- lems do not emerge in the form they normally take for developing countries at this low level of development. In the absence of an independent monetary system there can be no loss of exchang, reserves and no pressures on the exchange rate. If exports fall, or the inflow of foreign capital declines, there is an immediate fall in the level of economic activity, and in imports of goods and services. There is no way by which the government or the banking system can initiate an inflationary demand for imports which could result in a balance of payments crisis. The speed with which the effective demand for imports responds to changes in the supply of foreign exchange (whether from exports, borrowing or gifts) is a consequence of the high import content of money expenditures, given that the range of products that can be produced in the territory is so narrow. While the monetary arrangements protect the economy from short term difficulties, the basic problem remains that of main- taining a capacity to import adequate for development purposes. 113. As in other fields, statistical information i limited. There are good records of exports and imports of goods, although, in the latter case an archaic system of valuation makes it difficult to estimate the correct landed cost. Exports and imports of services are not known, although exports of services are probably negligible. Imports of services, on the other hand, may well be important, even extending to such items as the services of lawyers and other professional people which are not available in the local economy. There has been a growing inflow of foreign capital in recent years, but no complete estimate of this can be obtained. The equivalent offsetting outflow of dividends and interest payments is, of course, not known in full, although company statistics suggest that it is not yet large. Once again, there is a strong case for establishing the machinery to collect data concerning external payments. Much could be done by assembling appropriate banking data, since it is through the banking mechanism that most inflows and outflows take place. 114. Figures that are available for visible exports and imports indicate the important change that took place after 1960. Before that date, it was customary for the territory to have a surplus of exports over imports. Since then, there has been a large deficit on the current basis of measurement. This deficit is the counterpart of the substantial inflow of aid and private investment that has been built up. Some concern has been expressed in the territory in both public and private statements over this adverse balance, through a failure to appreciate that it results from the increasing pace of development of the territory. It does not represent an adverse balance of payments. (The collection of statistics on a wider basis would do much to lay these false fears.) If the development of the territory is to proceed, a defi- cit of this kind can be expected as a regular element of the economy. 115. In making projections of exports and imports a conservative approach has been followed, both in terms of new export possibilities and of future in- flows of private capital. Exports have been projected to increase from the $A5 million achieved in 1967 to $A8 million in 1970-71 and to $A12 million by 1975. This represents a continuation of the rate of growth of 12% per annum estab- lished from 1966 onwards. Within this total copra will continue to be a - 30 - major commodity, but the rate of growth expected will be moderate, 5% p.a., because the increases .n exports that should follow as a result of replant- ing will not occur until the latter half of the 1970's. Timber exports, on the other hand, are expected to expand rapidly up until 1971 when they are expected to reach approximately $A5 million; by 1975, however, they could increase further to $A6-7 million. 1.16. The change in the relative importance of copra and timber in total exports is underlined"by the implication of these trends; the value of timber exports is expected to exceed copra by 1971, when timber may account for half of total exports, by value, while copra will then represent about 40% of the total, as compared with 70% in 1967. Remaining exports consist of cocoa, which may not exceed recent levels for some time to come, and a mis- cellaneous group of minor exports totalling $A200,000 in 1967. In the absence of clear indications as to possible trends it has been assumed that this group vill perhaps amount to $A500,000 by 1975. 117. The above projections are conservative in two important respects. Timber exports take no account of the possibilities of exporting processed products which would have a higher value than logs; the figure for timber could be much higher, if such processing developed successfully. Secondly, the projections assume nothing about the possibilities for mineral exports, which could well be realised in this period. These possibilities depend upon final decisions by the companies which have yet to be made. 118. Imports of goods have tended to grow much faster than exports over the last decade - 10% p.a. from 1958 to 1967, compared with 3% for exports over the same period. No detailed analysis of the structure and demand for imports exists, but they are closely associated with movements in government expenditures and in exports (see Annex II). Inflows of private capital are also an important determinant, although it is not possible to estimate their quantitative significance to !the same extent. Given the expected growth in exports and of government expenditures, imports can be expected to continue to increase rapidly, the more so if private capital inflows continue and it is decided to carry on mineral development for export. A conservative pro- jection for imports, excluding the mining possibilities, and based on a con- stant level of aid after 1970, suggests that imports would grow at the rate of 10% per annum between 1967 and 1975. In the former year the value of im- ports (c.d.v.) was $A8.2 million and exceeded the value of exports'by $A3.1 million. At the above rate of growth they would be $A18 million by 1975 and $A5-6 million larger than projected exports. - 31 - VII. FUTURE PROSPECT' FOR DEVELOPMENT AND CREDITWORTHINESS 119. The prospects for exports detailed above plus the expectqtions as to aid, determine the framework within which economic policy will have to be pur- sued over the next decade. In the absence of a dramatic breakthrough in min- eral exploitation export receipts will depend upon careful developient and expansion of the agricultural resources of the Protectorate. The major reliance will be upon copra over the next few years, by which time the development of timber exports may well have changed the situatidn from its historical. pattern of reliance upon one export crop. 120. On the side of imports it is not possible to foresee any net re- duction in the dependence of the economy upon outside supplies. All possible avenues of economical import substitution should be pursued, but, outside the area of foodstuffs and the substituion of hydroelectric power for generation based on imported fuels, there is riot much scope for net import savings. Indeed, the economy will have to proceed on the assumption that it will be dependent upon imports of goods and services for the foreseeable future. This should be reflected in economic policies which recognize the openness of the economy and do not put needless restrictions and barriers on foreign trade. 121. The key role of foreign aid in the development of the economy has been stressed repeatedly and it is not possible to forecast when this support could be dispensed with. It is clear, however, that, given the cdntinued growth of exports, the government can move in the direction of lessening this dependence provided that the aid inflow does not fall much below recent levels. It would be desirable for the U.K. to make known the level of aid likely to be available over a period long enough for proper planning to be conducted at the local level. The subsidies paid to expatriate staff will continue to be essential and these OSAS payments must be regarded, therefore, as a most impor- tant type of aid to the territory, even when they do not appear in the local budget. 122. The development problem of the territory is basically one of back- wardness in all sectors of the economy. Its solution depends upon the creation of more sources of money incomes and priority should, therefore, be given to the development of natural resources for productive purposes, together with the vital elements of transport and communications which are complementary to those developments. Secondly, the need is for more educational and training facilities, in the broadest sense, to raise the productivity of the population. The pattern of government expenditures actually proposed appears to be in line with these objectives. Similarly, the changes in the field of taxation are planned to offer encouragement to private investment, foreign and local, which is essential to the development of the country's resources. 123. An economy of this kind and dependent upon an aid inflow of this relative size, cannot be regarded as creditworthy in the normal sense. However, there are at present no external debt liabilities and no reason to think that such a government would not be able to service some external debt in moderate amounts. The program of borrowing from the local savings banks, a procedure that mobilises local savings, has shown that the local administration can make - 32 - effective use of loan funds for investment purposes. However, these resources are very small and external financez will be needed for the larger projects, such as the proposed hydro-electric scheme for Honiara, which will: be required at the next stage of development. 124. The public sector has- demonstrated an- ability to- make effective use of external funds (in the- formr of aid) and, giverr advice and assistance with project preparatiorr, a number- of projects: suitable for external loan funds: could be considered over the: next five years. In the, productive sectors. the most promising possibility is: in- forestry- development, where the needs: for finance are relatively large for- the government; but where- it- isw desirable to: establish: the industry on the basis of apermanent yield as soon-. as possible. A' second area for the employment of loan furrds would be in livestock: devel- opment, where it' will first- be necessary to identify market out-lets. Pos- sibly the most- important area for the- use- of external. finance- would be in education, where the expending education: program, is centraLto.the: develop- ment strategy of the country. Howeveri additi-onar work woul-dJ be necessary to identify projects suitable fdr--bank financing. Infra-structure proJects could. also- be- developed: in the transport, s:ector,; particularly ine the road constructiorr program-, which,,. although- small,. could become- akeyi element in the mid and late 197O's- if' commercia agriculturaL development- continues, and same attention is also paid to t1ae subsistence. sector. Finally,. at a later stage, airport. improvements may also make- profitabler- use- of- external, finance. 125'. The- territory- could not maintain. its. present,. minimu-. level- of pub- lic, services,, let alone! develop its- unused- resources, without. the assistance of the United Kingdom: Such aid does not benefit- the protecting- power, who gain no economic, political. or strategic advantagel from the, provision of such aid. The United. Kingdom exercis.e only- general guidance overther direction of development and does, not become- involved in the- detailed Management of the economy. In these circumstances- the performance of the local administration can be judged on its on- merits and it has- generally been satisfactory. 126. Apart from- its budgetary dependence- uporr outside- aid the economy is also dependent upon world markets'; the ability- to earn foreign exchange, con- tinues to hinge upon the state, of- the world- market for one main. product., although export- diversification is now underway. The morretaryl arrangements protect, the economy from- short term-balance- of payments difficultiesy, but they do not remove the basic problem. of maintaining ar adequate. capacity to import. Given the level of performarce- achieved, the-lowy stage' of development of the economy and per- capita incomes- (especially monetary-incomes-), most of the country 's borrowing- i11 have to be' on concessionary~ terms:.. ANNEX I Page 1 ESTIMATES OF GROSS DOMESTIC PRODUCT (Table 3) 1. No official estimates exist of the national income of the British Solomon Islands. The mission prepared Table 3 of the Statistical Appendix on the basis of existing data to give some orders of magnitude for the dis- cussion of development prospects. They should not be regarded as a substitute for nore firmly based estimates which should preferably make use of a pro- duction approach. The following notes indicate the sources of the data and comment on their reliability. 1. Wages and Salaries - The Labor Department provided estimates of the number of employees and average wages and salaries. They are based partly on material already available and partly on infor- mation collected for the mission by the Department, with the assistance of the Chairman of the Port Authority. 2. Rents - Timber royalties are paid to the Government by the timber companies operating in the Protectorate. The item "Other" includes rents collected by tYe Government and a mission's estimate of the rents paid in the private sector. 3. Profits - The Commissioner of Internal Revenue and other govern- ment sources provided information on the profits of companies, calculated on the basis of tax rates and revenues. The mission made an estimate of the profits of unincorporated enterprises to indicate the order of magnitude, little reliability can be attached to the figures shown for any one year. The item "Statutory Authori- ties" refers to the Port Authority, the Agricultural and Industrial Loans Board and the Copra Board; the figures for 1960-63 are no- tional estimates, since information was not available to the mission. 4. Interest Payments - The mission estimated interest payments on the basis of data on savings deposits and the assumption of a 3% rate of interest. To these were added the interest payments on loans from the Agricultural and Industrial Loans Board. The figure is likely to be understated since interest payments to commercial banks were not considered. No information was available to the mission on this point. 5. Income from Solomon Islanders' Cash Production - The figures show the estimated value of Solomon Islanders' cash production at export prices, net of export duties. The-mission assumed the value of sales as a satisfactory approximation of the value added, since Solomon Islanders generally use no wage labor or purchased inputs. The values shown for copra include farmers' revenues, middlemen's margins, and transport costs and profits, because of the valuation at export prices instead of "on farm prices". To avoid double accounting of profits, the mission took this into account when estimating item 3. (profits of unincorporated enterprises). No information was available to the mission on transport costs (mainly wages and fuel) to allow any adjustment. Values are based on an ANNEX I Page 2 "average price" -for 'each "ar, which was -estimated as the weighted nean of prices paid by the Xopra -Board for :peasant production during the year, with the :duration of leach .prkce 'as 'the ,vel-ght. For marine .;hells,, 75% of -the total eport -value (net fdf export duties) was assumed as the income Ior locdl apeogime.. 'The 'totdl value of gdld exports (net 'of export -duties) was 'assumed as ,he :income of Scil-omon Islanders.. 6.. Money Incomes - 'The :sum iof items 1. to 5. It -also ,epresents the )Net Domestic P.rodudt in the monetary 1sector (sbuit -see note '8. below,). T. Depreciation - In 'the absence :of information,, :the mission eassumed that depreciation equals about 5% of "the net domestic product in the monetary 'sector_. 8. :Export Duties - )Export Auties tare .pa:Ud to the vemnetnt out of the toteail 'value <of exports :bt-dined lby the tcountry:; export :rece'ipts -accrue :to producers 3net <,f export rdati1es.. Unless Texport .duties are added to the :sum of money Lincames iand .depreciatin5, :the value of the country's -product -oid be :understated. 9. eGross IDomestic Rroduct at 'acter C.ost 'P1us EMport "Ddtihes -- It is the isum ,of items -6. -to A. It 'is .more meaiAingftl that the inter- .nationally used ccneqpt cof "GDP (i.e.., <excluding wport 6dxtkes) to represent the "'tgeographfcal ,product'" of the Solomon tIlands (in the monetary sector). 101. Gross Subsistence Product -- 'There 1o ;no information avalatble with which to make <a direct festimate :of this item. The igovernment had made use of -information from ta socio-economic survey of the Gilbert and Ellice Islands, on the fassumption that the 'situatkon there is sufficiently comparable to that tof the Solomon -shands. The mission felt that this understates the lev6l 'of 'we-U- betng An the Solomon Islands and that a better approximation was obtained by taking figures from the information avaldble for Papua !and "New Guinea. It was assumed, on this basis,, that the per capita tsubsirstence product in the Solomon I'slands is of the order of $80 .per head. This figure 1s -markedly different trom those o6btaine'd iby mak(ng use of Gilbert wend Ell-kee land information. The $80 figure notionally includes the <consumption of coconuts :or food and the value of gross inveotmnt in tbe subsistence ;s,ector in land clear- ance and planting, tools and canoes building, -and 'huts and village roads construction. 1.. Per Capita Values - The last three lines of the tble igive values calculated by applying population estimates to the taggregate ob- tained as described Above. :Since the national incomes figures are necessarily -crude and the population figures fare themselves sibject to a wide (ibut unknown,) nargin of <error, per capita figures must be treated with great care. These,, however., remain for the momeit the only estimates of this kind available >and may have isome value in encouraging the 4eceasary further -work to improve -them. International comparisons are normally made in terms of GNP at factpr cost per ANNEX I Page 3 capita, but this cannot be calculated for the Solomon Islands in the absence of data on net factor payments made overseas. The table gives, instead, the GDP at factor cost per capita, which refers to the geographical product. The indicated figure of $A159 in 1967 is equivalent to US$175. Indirect taxes (net of subsidies) raise the estimated GDP per capita to about $A170, or US$190, at market prices. Not much significance 6an be attached to this figure for purposes of comparison with other countries; it is heavily in- fluenced by the weight given to subsistence income. The valuation of this income in $A terms probably overstates the standard of living of the local people. A more significant measure is the total of money incomes per capita, which gives an indication of the relative importance of the monetary sector in the economy. In 1967 this was about $A70 per capita.  ANNEX II Page 1 PROJECTIONS OF GOVERNMENT REVENUES AND EXPENDITURES 1. The absence of national accounts, balance 6f payments estimates and other statistics beans that the more conventional analyses of the pattern of development cannot be undertaken, as yet, for the Solomon Islands. This Annex outlines an alternative form of analysis that makes use of the data that is available, first to express in quantitative terms the way in which the economy functions and, secondly, to provide a consistent framework for the projection of government revenues and expenditures. The operations of the government are of such central importance to the economy as to make the projection of reveniie yields and patterns of expenditure the key to any economic planning. Conven- tional ways of making such projections will continue to be the principal method by which such estimates are obtained. The statistical methodology outlined below can be used to support such estimates and it could also be employed as the basis for the further economic analysis that would be part of the functions of a government planning unit. 2. The basis of the methodology is to break down the sources of govern- ment revenues into different categdries and then find an appropriate statis- tical explanation for each of them. These can then be used for projecting both total revenues and the separate items, provided that it can be assumed that the same explanatory mechanism will be at work in the future. The pres- ent exercise makes use of the relationships that applied over the period 1960-67 as a way of projecting over the years 1968-75. 3. The following is a brief outline of the relationships and of the results obtained.l/ Total Government expenditures, (G), depend upon total Government revenues, (R), from all sources, and it can be shown that G and R ultimately depend upon the amount of aid, (D), and the value of exports, (X), in the following manner:- R = G = -0.7231 + 0.4583 X + 0.0513 (X+G) + 1.2977 D (1) t-1 This equation can be interpreted as showing the total effects upon government revenues of exports and aid: the former creates money incomes, thus increasing tax yields. Aid inflows increase government revenues directly, permitting higher expenditures than would otherwise be possible. Government expenditures as a whole are large enough to be a major element in money incomes; hence, any increase in such expenditures itself results in some increases in tax revenues. The relationship states that $Al of aid, (D), results in revenues about 1.3 times as large, while $A1 of exports, (X), ultimately brings in revenues to the government of 46 cents. In addition, because of the way in which the tax system works, there is a further, small lagged increase in rev- enues depicted in the third term of the equation; this states that government 1/ Certain problems are not dealt with because they require extensive dis- cussion. The intention of this Annex is only to indicate the possibilities of such techniques. A more refined application of the methodology would need to pay more attention to problems that are mentioned here in a cur- sory fashion. ANNEX II Page 2 revenues in the current year will increase about 5 cents for every $Al of (X + G) in the previous year, (t-1). 4. Equation (1) is derived from individual relationships which can be established for each of the main local revenue items of goverment:- Rx - receipts from taxes on exports. Rm - receipts from taxes on imports. R - receipts from taxes on incomes (personal and company taxes) Rr - miscellaneous receipts from all other local sources. When the aid inflow, D, is added, the total revenues of government can be summed up in the following equation, expressed as an identity:- R = Rx +rm + R + Rr + D (2) Since the government neither accumulates surpluses, nor is able to spend beyond its revenues, it also follows that R = G.1/ 5. Good statistical explanations can be found for the revenue items for the period 1960-67, as follows:- (All values in $AOOOs). Export taxes, Rx, depend upon movements in the value of exports, X. Rx = 0.0618 + 0.1238 X (3) R2 = 0. 882 Import taxes, RM, depend upon the value of imports, M. Rm = 0.1088 + 0.1348 M 2 (4) B = 0.910 6. Income and company taxes, Ry, depend upon the value of Exports, X, and Government expenditures, G, in the previous year.2/ Ry = -0.1419 + 0.0395 (X + G) (5) t-1 -2 0.884 1/ Total Revenues do not exactly equal expenditures, the dfference being due to year-end discrepancies accounted for by changes in cash balances. The identity between R and G is maintained in the model by including an item RD, to cover these discrepancies. In using the model for projections it is assumed that RD will be zero in the future. 2/ This is to allow for the manner in which income tax is coliet-ad in the current year on the basis of incomes in the previous year. The intro- duction of a "pay-as-you-earn" system would make it necessary to review this relationship. ANNEX II Page 3 7. Other miscellaneous receipts, Rr, can be explained by the following relationship: Br = -o.4437 + 0.1420 (X + G) (6) R = 0.937 8. To complete the statistical determination of G and R it is neces- sary to have an explanation for the value of imports, M, which enters into equation (4). M also moves very closely with the total value of (X + G). M = -1.5464 + 0.8036 (X + G) 2 = 0.867 (7) 9. The above equations (3) to (7) can be substituted into equation (1) to determine the value of R (and G), provided that some value can be placed on aid, D, and on exports, X. The essence of the present method, therefore, is to demolistrate the manner in which G and R ultimately depend on the two key variables X and D. The above equations present a statistical model of the main features of the economy. 10. The model was tested by applying it to the period 1960-67 for which it had been estimated. The actual values of X and D were used to calculate values for the components of R and for M, these calculated results were then compared with the actual figures f6r those years. A summary of these cam- parisons is given in Table A. 11. In making projections with the model it is necessary to have esti- mates of the possible future values of X and D. The mission prepared export projections which are given in Table 24, Statistical Appendix; for aid, esti- mates were available for 1968 and 1969. Thereafter it is necessary to make assumptions about the U.K. Government intentions. (Perhaps the main value of a model of this kind is that it is possible to work out the quantitative implications of different possible amounts of aid). Obviously the best assumption to use is that employed by the local government in working out the official projections, which is that the level of aid would be constant at the 1968 level. (No account is taken of possible external borrowing from the World Bank Group). 12. Projections were made on the above basis and the results are shown in Table B. Also shown are the projections for imports, which also emerge from such calculations. (No official projections of imports have been made). It will be seen that the official projections tend to be below the projections obtained by the use of the model, with the differences being greater in the earlier years. On the whole, however, given the uncertainty involved in all such projections, the official estimates are very close in magnitude to the figures produced by the model and show the same general pattern of development. 13. There are two series of projections shown in Table B, to take account of a problem that arises from the treatment in the model of miscellaneous rev- enues, Rr. Ideally such a heterogeneous group should be broken down further and separate relationships estimated for the different components. Some of these are related to the general functions of government (licence fees, fines etc.), others are borrowed funds and an important part consists of receipts ANNEX II Page 4 from the commercial -activities carried on by government departments (printing, posts and telegraphs, etc.). 14. The main item of a commercial nature is the revenue received from the electricity operations of the P.W.D. Revenues from,this source grew very rapidly over the period 1960-67, at about 19% per annum, and the relationship in the model, equation (6), takes -account of-this growth. These activities will be handed over.to an independent -electricity authority in'1969, so that both revenues and -expenditures <on this account will no longer-appear in the government accounts. It is -necessary to remove-this influence from'the pro- jections, but to do-so-without altering the:manner,in which the'-model-operates. This is-important because the change is an institutionalone and not one that implies,-'a difference in the way the economy -works. The impact of electricity operations on money-flows in the economy must still be :taken account of in the model. This bas;,been done by projecting on the basisc6dtypast trends and then calculating -separately the rate -of,,groth cf -electtidfty -revenues, on the assumption thatthe-past-rate of -growth will .continue.l/ TThese estimates were then-subtracted from the projections of G to obtain a-series which, in principle, approximates to the concept :employed in the official projections. 15. Over-the period of which the relationships were estimated there were no major changes in the tax structure. Strictly-speaking,the projections are valid --only on -the assumption that this structure will-remain -unchanged. However, changes are under consideration both "for expoit"taxes 4and income taxes, and any further use of -this methodology would need to take -account of the possible effect of such changes on the relationships. Its present use is justified by the preliminary indications that the changes "proposed will be designed so as -not to alter the yield of the taxes concerned, at least not in the immediate future. This is one of the-reasons why no -attempt has been made to project beyond 1975. 1/ This is a satisfactory assumption for the purpose of adjusting future government revenues and Vxpenditurqs, to deal with the present problem. If the main interest was in -projecting electricity growth as such, a lower rate of growth may be more appropriate. ANNEX II Page 5 Table A: GOVERNMENT REVENUES AND IMPORTS, CALCULATED AND ACTUAL, 1960-67 ($A '000) Government Revenuec Imports Year Difference Difference Calculated Actual in 5 of actual Calculated Actual in i of actual 1960 3,443 3,238 +6.3 h,102 3,721 +10.2 1961 3,580 3,50L +2.2 4,126 h,158 -0.8 1962 4,059 3,988 +1.8 h,269 h,467 -h.L 1963 h,316 h,h77 -3.6 l,85 4,621 +5.0 196h L,999 5,089 -1.8 5,682 5,65 +h.0 1965 6,092 6,086 +0.1 7,173 6,575 +9.1 1966 6,813 7,063 -3.5 6,798 8,522 -20.2 1967 7,870 7,726 +1.9 8,725 8,198 +6.h ANNEX II Page 6 Table B: PROJECTIONS OF GOVERNMENT REVENUES, IMPORTS AND EXPORTSi 1968-75 ($A '000) Government Revenues Import6 Year Yodel Adjusted Official Difference Model Exports External Aid Projections Projections 1/ Estimates 2 / Projectiohs Projections Assumed 1968 8,537 - 8,121 9,878 5,680 4i569 1969 9,925 9,636 8,99 +7.7 11,781 6,660 5i27C 1970 9,682 9,338 836 +9io 12h46 7,730 bj630 171 9,730 9,321 8,918 +b.5 12516 9,200 4,626 1972 10,722 10,235 9,1415 +8.7 15,0h1 9,920 h,630 1973 11,1h9 10,570 10,17 +3.9 15i859 10310 1,628 197 11,559 10,870 10,466 +3.9 16,791 11,260 4,639 1975 12,048 11,228 11,113 +1.0 11,956 12,220 4,630 1/ Adjusted for electricity revenues no longer received by Govttment afty 1968. 2/ Difference between adjusted projections and official estimates in percent of official estimates. STATISTICAL APPENDIX 1. Population, 1931-68 2. Population Density, 1967 3. Gross Domestic Product, 1960-67 4. Cost of Living in Honiara, 1960-68 5. Employment by Sector, 1960-68 6. Incomes from Wages and Salaries, 1960-68 7. Company Statistics, 1960-66 8. Cooperative Societies, 1960-68 9. Copra,' 1958-68 10. Timber, 1960-68 11. Electricity Production in Honiara, 1959-68 12. Electricity Consumption in Honiara, 1962-67 13. Government Revenues and Expenditures, 1958-69 14. Government Revenues by Type, 1958-69 15. Government Expenditures by Type, 1958-69 16. Local Councils - Revenues and Expenditures, 1965-67 17. Fifth Development Plan, 1968-70 18. Money and Banking, 1958-67 19. Main Exports, 1958-68 20. Imports by S.I.T.C. Sections, 1960-68 21. Selected Imports, 1958-68 22. Direction of Trade, 1958-68 23. Balance of Trade, 1958-68 24. Export Projections, 1969-75 Signs and Symbols -- = zero not available or unknotin * = figure too small to be expressed Note: Figures may not add to totals on account of rounding. I Table 1: POPULATION, 1931-68 1/ 1931 1959 1964 1967 1968 Melanesian 89,568 117,620 128,200 136,000 138,720 Polynesian 3,847 4,625 5,100 5,340 5,42C Micronesian - 459 1,800 1,960 2,CCC European 478 781 940 1,340 1,6h0 Chinese 164 366 520 640 660 Others 9 225 200 350 360 Total 94,066 124,076 136,760 15,630 148,80C Melanesian, Polynesiah and Micronesian Population, by Age and Sex, 1959 Age Group Male Female Total 0- 4 10,821 9,927 20,748 5- 9 9,157 8,694 17,851 10-1 8,401 7,480 15,881 15-19 6,849 6,341 13,190 20-24 4,680 4,848 9,528 25-29 5,086 b,987 10,073 30-34 3,934 4,061 7,995 35-39 3,507 2,633 6,1bc 40-44 2,806 2,235 5,Ol 45-49 2,564 1,977 4,541 50-54 1,925 1,261 3,186 55-59 1,386 1,084 2,470 60 and over 3,668 2,392 6,060 All Ages 64,784 57,920 122,704 1 Population as of April 1931 (census), November 1959 (sample census) and end of 1964, 1967 and 1968 (estimates based on the assumption of a 2 percent yearly increase of Melanesian population). Sources: Report on the Population Census of 1959 and B.S.I.P. Annual Reports Table 2: POPULATION DENSITY, 1967 1/ Area Population (square Per square miles) Total mile Central District Honiara .. 7,500 Guadalcanal 2/ 2,037 22,250 10.9 Santa Isabel 1,551 8,900 5.7 Russell Islands 83 1,050 12.6 Florida Islands 150 5,550 37.0 Savo 13.5 1,350 10.0 Rennell Islands and Bellona 27.4.5 1,800 6.6 Malaita District Malaita 1,722 54"100 31.4 Ontong Java 14 840 60.0 Sikaiana 4 260 65.0 Western District Choiseut 1,207 6,930 5.7 Shortland Islands 160 1,380 8.6 Vella Lavella, Ganonga, Gizo 331.5 6,030 18.2 Kolombangara 269 900 3.3 New Georgia, Vangunu 1,345 8,060 6.0 Eastern District San Cristobal 1,172 8,095 6.9 Ulawa 33.5 1,655 49.h Santa Cruz 200 2,760 13.8 Reef Islands 35 3,975 113.6 Tikopia 10 1,820 182.0 Not included above 888 25 .. Total 11,500 145,630 12.7 1/ Rough estimates ri,ferred to the -end of the year. 2/ Excluding Honiara. Source: B.S.I.P. Secretariat Table 3: GROSS DOMESTIC PRODUCT, 1960-67 1960 1961 1962 1963 1964 1965 1966 1967 MONETARY SECTOR ($A 1000, at current prices) 1. Wages and Salaries 2.856 2JI2 3.380 4,048 4,529 5,048 5,989 7 Expatriates 1,000 1,080 1,260 1,537 1,770 1,977 2,355 3,0L Others 1,856 2,055 2,120 2,511 2,759 3,071 3,63L h,08 2. Rents 99 109 106 110 121 _1)o 19 16 Timber Royalty 15 12 6 5 11 5 6 1 Other 84 97 100 105 110 125 143 15 3. Profits (after depreciation) 120-O 910 720 700 1,100 1,060 730 1,21 Companies 1,150 730 540 490 805 1,210 830 1,03 Unincorporated Enterprises 1L0 140 140 170 197 166 187 20 Statutory Authorities hO 0 40 40 98 -316 -287 -2 4. Interest Pa,ments 26 28 _ _ 6 42 51 54 6 5. Incomes from Solomon Islanders' Cash Production 1/ 1,353 1.252 1.152 1,362 1,563 1,632 1,703 1 Copra 1,323 1,15L 1,087 1,317 1,508 1,587 1,655 1,55 Marine Shells 30 93 46 26 33 18 18 Gold -- 1 11 6 3 8 8 1 Cocoa -- 4 8 13 19 19 22 6. Money Incomes, at Factor Cost (1 to 5) 66 6,256 Ll 7.921 8,625 12,1Z: 7. Depreciation 280 270 270 310 370 400 430 51( 8. Export Duties 535 468 450 520 564 689 493 62 9. Gross Domestic Product at Factor Cost Plus Export Duties (6 to 9) 6 47 6,172 6,113 7,086 8,289 9,010 9,548 11,32 10. Total Indirect Taxes Leas Subsidies 1,030 1,035 1,002 1,232 13379 1,570 1,500 1,79' 11. Gross Domestic Product at Market Prices (9 & 10) L.Q0 7.207 7,1 8.318 %668 10.580 11.04 13,12 SUBSISTENCE SECTOR 12. Gross Subsistence Product 9-800 10000 10 300 10.570 10,810 11. 00 11,240 1L5 MONETARY AND SUBSISTENCE SECTORS 13. Gross Domestic Product at Factor Cost (9 & 12) 16,279 1617 I§IL12 1A656 19,099 20,010 20,78 22,82 14. Gross Domestic Product at Market Prices (11 & 12) 17L30 17,207 1 18,§8 20,478 21,580 22,288 24,62 PER CAPITA VALUES ($A) G.D.P. at factor cost 131 127 126 132 140 143 146 15- G.D.P. at market prices 140 135 137 142 150 154 156 17( Money Incomes 45 42 41 46 53 56 60 6, 1/ Including farmers' revenues, transport costs and profits and middlemen's margins. Source: IBRD Mission's estimates (see Appendix) Table 4: COST OF LIVING IN HONIARA, 1960-68 (Index, 4th quarter 1960 100) Higher Incomes Lower Incomes Quarters of the Year Quarters of the Year 1 2 3 1 1 2 3 1 1960 100 100 1961 102.1 102.2 102.0 102.1 102.3 102.7 102.1 103.2 1962 101.6 101.3 100.0 103.6 103.6 103.1 102.2 102.5 1963 103.1 103.9 104.2 10h.0 101.7 102.7 106.6 103.6 1961 106.3 106.9 107.1 107.1 106.8 109.2 109.2 108.8 1965 107.3 108.4 109.9 110.9 106.6 108.2 109.6 111.1 1966 110.8 110.8 111.9 111.8 110.2 109.1 111.1 110.h 1967 113.3 11h.0 114.6 116.2 106.8 111.5 113.5 11L.8 1968 116.2 I 119.8 119.1 119.3 113.7 I 119.0 1 120.7 122.1 1/ The indices were revised with effect from the second quarter of 1968 to reflect changing spending patterns. Source: B.S.I.P. Secretariat Table s EMPLOYMENT BY SECTOR, 1960-68 1/ 1960 1961 1962 1963 1964 1965 1966 1967 1q68 Agriculture 3,047 2,969 3,217 3,196 2,821 2,506 2,188 2,281 2,(C Forestry 208 273 326 220 543 432 298 550 qj Fishing -- -- -- -- -- -- 3 3 Construction 312 306 262 272 395 675 630 670 9l Mining and Quarrying 81 78 12' Manufacturing 167 608 72' Commerce 331 623 691 Transport Storage and 485 590 651 704 888 1,285 Communication 323 354 bc( Other Services (including Missions and Churches) 1,003 1,6 83( Government 2,167 2,552 2,569 2,54h 3,077 3,033 3,940 3,809 3,85, Seamen not included above 722 00 h9( Domestic Servants 2,189 2,207 1,931 3,075 2,477 2,500 700 750 78! Miscellaneous not enumerated - 1,000 59 4C Total 8,408 8,897 8,956 10,011 10,201 10,431 11,686 12,139 12,53Y 1/ Persons employed for wages and salaries, at the end of June of each year. Since 1966, the Government has adopted the International Standard Industrial Classification. Sourcess Annual Reports and Labor Department Table 6: INCOMES FROM WAGES AND SALARIES, 1960-68 1960 1961 1962 1963 1964 1965 1966 1967 1968 Employment Expatriates 4oo 4oo 450 530 590 659 785 950 99L Others 8 8,497 8,506 9,481 9.611 9,772 10,901 11,189 1112L2 Total 8,hO8 8,897 8,956 10,011 10,201 10,31 11,686 12,139 12,536 Incomes ($A '000) Expatriates 1,000 1,080 1,260 1,537 1,770 1,977 2,355 3,obo 3,180 Others 1,856 2,055 2,120 2q51 2,759 371 3,63b 4,087 L.L13 Total 2,856 3,135 3,380 h,08 4,529 5,oh8 5,989 7,127 7,393 Per Capita Incomes (:iA) Expatriates 2,500 2,700 2,800 2,900 3,000 3,000 3,000 3,200 3,20C Others 232 2L2 249 265 287 31L 333 365 365 Sources Labor Department Table 7: COMPANY STATISTICS, 1960-66 ($A '000) Asset Development Remittances Increase 1/ Expenditure Overseas 2/ 1960 147 29 156 1961 307 106 19 1962 132 128 40 1963 282 394 54 1964 651 657 57 1965 846 723 40 1966 1,469 1,094 18 1/ Plant, machinery, buildings and transport equipment. To shareholders, as dividends or interest. Source: Inland Revenue Department Table 8: COOPERATIVE SOCIETIES, 1960-68 (Values in $A '000) 1/ 1960 1961 1962 1963 1964 1965 1966 1967 1968 Number of Societies 26 33 48 61 72 85 108 111 139 Membership 1,301 1,712 3,322 3,972 4,047 4,583 5,453 .. 7,000 / Turnover 66.3 125.4 124.4 214.8 253.4 348.8 h2O.2 436.0 630.0 Funds Invested 28.9 4.7 59.5 73.1 89.1 125.7 159.3 163.0 of which: External Borrowing and Members Deposits 7.4 6.8 10.3 11.4 12.9 18.2 24.2 Equity 21.5 37.9 49.3 61.7 76.2 107.5 135.1 1/ At the end of the year. 2/ Estimate. Sources B.S.I.P. Annual Reports and Department of Cooperative Development Table 9 1 COPRA, 1958-68 Production ('000 tons) Deliveries to Copra Board ('000 tons) Exports Planta- Small- Planta- Coopera- Small- Price 2/ Quantity j Value Unit V tions holdings tions 1/ Traders tives holders ($A/tonT (1000 tons) ($A '000) ($A/t 1958 12.0 8.4 ... .... ... ... 108.63 20.4 2,963 145. 1959 11.5 10.5 ... .... ... ... 152.83 21.0 4,394 209. 1960 11.5 9.7 ... .... ... ... 141.72 19.5 3,126 160. 1961 12.3 11.6 ... .... ... ... 104.58 24.3 3,138 129. 1962 11.8 11.9 ... .... ... ... 96.67 22.2 2,823 127. 1963 12.4 12.8 7.6 10.0 0.6 2.3 108.17 23.1 3,338 1U8. 1964 12.1 13.2 7.0 10.h 0.7 2.4 120.00 23.h 3,52h 150. 1965 11.9 12.7 7.0 9.4 0.8 2.5 133.33 24.5 L,4L2 181. 1966 10.7 12.6 6.3 9.1 1.0 2.4 140.00 20.3 3,027 149. 1967 9.7 13.8 6.0 10.2 1.5 2.1 120.00 24.h 3,629 118. 1968 9.8 10.8 6.5 7.5 1.3 2.0 140.00 16.1 3,625 225. 1/ Excluding the quantities directly exported by Lever's Pacific Plantations Pty. under license of the Copra Boi 2/ Average price of first grade copra, net of export duty, paid by the Copra Board at Honiara, Yandina and Gizo 3/ Quantities exported differ from those produced due to shrinkage and carry over. 1/ Decline due to extensive cyclone damage. Sources: Copra Board and BSIP Annual Reports. Table 10 a TIMafR, 1960-68 ('000 cubic feet) 1960 1961 1962 1963 1964 1965 1966 1967 1%68 :xports, Total 181.8 152.6 124.5 302.7 946.o 687.9 1,146.7 2,822.3' 4,h45.7 Logs, total 181.8 152.6 123.0 298.6 944.0 687.9 1,143.5 2,819.1 4,!,38.3 Softwood 139.8 142.9 119.7 152.3 64.9 -- -- -- Hardwood 42.0 9.7 3.3 146.3 879.1 687.9 1,163.5 2,819.1 Sawn timber (all hardwood) -- * 1.5 4.1 -- -- 3.2 3.2 7.h mports, Total Sawn timber 28.0 30.7 13.7 8.9 39.8 31.2 3.9 1.8 h.2 Softwood -- 16.9 4.4 5.2 33.1 30.8 2.8 1.6 Hardwood 28.0 13.8 9.3 3.6 6.6 0.4 1.1 0.2 ocal Production 1/ Sawn timber, all hardwood 67.0 87.9 112.1 120.9 128.6 133.6 180.5 170.0 200 ocal Consumption Sawn timber, softwood 1/ and hardwood 95.0 118.5 125.8 129.7 168.4 166.8 181.3 179.0 200- 1/ Estimate. ;ource: B.S.I.P. Annual Reports Table 11: ELECTRICITY PRODUCTION IN HONIARA, 1959-68 Installed Capacity Maximum Demand Production (KVA) (KVA) (MWH) 1959 600 360 1,430 1960 1,000 370 1,667 1961 1,000 440 1,829 1962 1,400 494 2,003 1963 1,400 580 2,429 1964 1,400 666 2,901 1965 1,765 819 3,410 1966 1,765 915 4,079 1967 2,065 1,084 4,715 1968 2,065 1,373 5,6 Source: B.S.I.P. Annual Reports Table 12: ELECTRICITY CONSUMPTION IN HONIARA, 1962-67 Consumption Category of Number of Percentage Yearly consumers Consumers MWh composition Growth Rate 1T2 1967 1962 1967 1962 1967 1962-67 1. Private industrial 20 27 13 363 8.2 8.7 20.8 2. Government industrial 23 26 402 992 23.0 23.7 19.7 3. Commercial 77 101 299 807 17.2 19.2 22.0 Total commercial and industrial 120 154 844 2,162 48.4 51.6 20.8 L. Government offices 14 21 130 50411 7.4 12.0 31.2 5. Hospitals, schools, churches, clubs 28 Ub 282 548 16.2 13.1 lh.3 6. Residential 452 755 489 972 28.0 23.3 16.8 Total 61h 974 1,7h5 4,186 100.0 100.0 19.1 - Increase mainly due to installation of air conditioners. Source: Public Works Department Table 11: GOVERNDM REVENUMS AND xPNDITURES, 1958-69 ($A '000) 1955 1959 1960 1961 1962 1963 1964g 1965 1966 1967 1966a 1969 Revised Esti- EBIMAt&Ies Metes Expenditures 22748.5 2,978.6 3,237.6 30 3 4,476.8 5,089.4 6,086.5 7,0627 7,725.8 8,423.0 8,94 Recurrent 1,67h.3 1,822.2 1,991.4 2,165.2 2,561.8 3,046.4 3,569.0 4,109.1 5,236.5 5,392.9 5,483.1 5,786.9 Development and CapitalL 1,074.2 1,156.5 1,246.2 1,338.9 1,426.1 1,430.4 1,520.4 1,977.4 1,826.2 2,332.9 2,939.9 3,161.9 Financed by Local Revenues 1,615.7 1,661.7 1,628.0 1,692.0 1,702.8 2,166.3 2,402.1 2,809.5 2,905.7 3,163.5 3,457.5 3,641.3 Sxternal Aid/2 1,093.3 1,346.0 1,585.6 1,741.6 2,285.1 2,536.9 2,475.2 3,280.9 3,763.5 4,476.0 4,568.6 5,269.5 Local Borrowing - - - - - - 1.6 58.5 36.1 85.1 94.7 38.0 Total Revenues 28709. 3.007.7 38213.6 3,433.6 3,987.9 4,703.2 4,878.9 6,148.9 6,725.3 7,724.6 8,120.8 8,948.8 Plus: Balancing Ite 39.5 -29.1 24.0 70.5 - -226.4 210.5 -62.4 337.4 1.2 302.2 - 27148.5 2,978.6 3,237.6 3,504.1 3,987.9 4476.8 5,089.4 6,086.5 7062.7 7,725.8 8 o 8,948.8 / Prior to 1964 it is not possible to distinguish fully between recurrent and capital expenditures. / After 1967 0.S .A.S. payments to expatriate staff are excluded from revenues and expenditures. 1 The difference between recorded revenues and expenditures for each year and accounted for by changes in government cash balances. N.B. The Budget item "contribution to capital revenues" is excluded from both revenues and expenditures. Source: Staff Estimates and Government Accounts Table 1),: GOVERNMENT BSVENUES BY TYPE, 1958-69 ($A '000) 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 Revised Esti- Estimates mates Current Revenues Direct Taxes 130.0 160.3 159.7 129.3 131.0 149.8 174.0 216.8 244.9 325.9 258.0 336.5 Individuals .. .. .2.5 103.5 1.2 1.7 15.1 179.7 n.a. n.a. n.a. Companies .. .. 5L.3 34.4 25.4 20.3 37.8 57.0 62.5 n.a. n.a. n.a. Stamp Duties 50.0 57.3 15.9 12.5 2.1 1.3 1.5 1.7 2.8 3.8 4.0 4.2 Indirect Taxes 836.14 10o86.9 10o29.6 190314.6 1900214 1 232.0 1 378.8 1 569.8 1 500.1 1 676.o 17L0 l96 Export Dutie 45. 70. '535:2 466. 44. 1 9 5~: 688~6008 Copra (427.2) (679.4) (503.0) (451.0) (023.8) (497.0) (528.6) (666.2) (453.6) (544.3) (539.7) (571.7) Timber ( ..) ( ..) ( ..) ( ..) ( 9.6) ( 9.2) ( 25.0) ( 15.5) ( 29.2) ( 71.0) (103.0) (150.0) Other ( 38.0) ( 27.4) ( 32.2) ( 17.0) ( 16.2) ( 13.4) ( 10.0) ( 7.1) ( 10.4) ( 14.7) ( 15.9) ( 12.8) Import Duties 371.0 379.8 494.2 566.4 552.8 712.5 809.4 874.1 1,000.3 1,030.5 1,055.0 1,083.0 Other 0.2 0.3 0.2 0.2 -- -- 5.8 6.9 6.6 15.5 79.4 89.0 Commercial ServicesL 78.2 70.9 92.6 86.1 81.3 103.1 273.0 378.6 647.1 580.4 738.0 539.3 ___ _________ 273.7 2 _9 . 3-13 369- 470 797 390.7 1.~3 Tf. ". a89. 63. Total Local Revenues 1,320.4 1,614.4 1,595.2 1,619.3 1,615.5 1,953.2 2,216.6 2,626.5 2,782.2 3,012.0 3,278.4 3,545.3 External Aid 670.5 615.0 909.9 1 1o8.6 11477.4 1 68614 1 804.2 1 988.8 2 411.8 2 779.0 2 181.6 2,3. G-r-ant-in-Aid 670.5 U57 9059.9 1110. 1',140. i1 TJ 1,213.83 1,21.4 1,371.0 IT 9 '18. 2,351.6 0.s.A.S.Zj -- -- -- -- 337.2 552.3 423.8 519.1 696.8 734.8 - - C.D. and W. -- -- -- -- -- -- 166.7 252.3 341.0 438.3 - - Total Current 1,990.9 2,229.4 2,5o5.1 2,727.9 3,092.9 3,639.6 4020.8 4615.3 5,194.0 5,791.0 5,460. 5,876.9 Capital Revenues Local 295.3 47.3 32.8 72.7 87.3 213.1 185.5 183.0 123.5 151.5 179.1 96.0 External Aidb 422.8 731.0 675.8 633.0 807.7 850.5 671.0 1,292.1 1,371.7 1,697.0 2,387.0 2,937.9 Local Borrowing -- -- -- -- -- -- 1.6 58.5 36.1 85.1 94.7 38.0 Total Capital 718.1 778.3 708.5 705.7 895.0 1,063.6 858.1 1,533.6 1,531.3 1,933.6 2,60. 1.9 TOTAL REVENUES 2,709.0 3,007.7 3,213.6 3,433.6 3,987.9 4,703.2 1878.9 8.120 8 Marine, posts and telecommunications, printing office and public utilities (most electricity revenues will be transferred to a new public authority from 1969). 2 Licenses, administration, income from government property and miscellaneous receipts. From 1969 includes some items previously included under "Capital Revenues - Local". Overseas service aid scheme. This will not appear in the budget after 1967. Colonial Development and Welfare. Prior to 1964, this appears as Capital Revenue; after 196L it is a recurrent item as well. After 1967 this will cover only capital items (with minor exceptions). Sourcest Estimates, Annual Reports and Income Tax Statistics. Table 15: GOVERXMENT EXPENDITURES BY TYPE, 1958-69 .($A '000) 1955 1959 1960 1961 1962 1963 19664 1965 1966 1967 1968 1969 Revised Esti- Estimates mates Recurrent Expenditures Law, Order and Administration 1,002.8 1,03.7 1,193.4 1,263.7 1,488.0 1,786.8 1,592.8 1,888.2 2,133.3 2,230.8 2,349.2 2,333.1 Economic Services 72.6 95.0 112.8 146.0 184.1 243.5 299.7 328.5 587.1 380.7 530.0 9A.9 Commercial Services 243.1 234.0 257.1 270.0 343.0 397.4 406.0 468.8 603.0 664.0 770.7 794.5 Social Services 274.7 293.4 31.7 364.6 395.6 454.5 578.8 668.0 904.0 997.7 1,416.3 1,650.5 Transfers 81.2 156.1 113.4 121.0 151.2 164.3 173.9 165.3 257.5 296.9 416.9 463.9 Supplementary Payments to Expatriate Staff (O.S.A.S.) - - - - - - 517.8 590.4 751.6 822.8 - - Total 1,674.3 1,822.2 1,991.4 2,165.2 2,561.8 3.o46.4 3,569.o 4,109.1 5,236.5 5,392.9 5483.1 5,786.9 DevelopEnt and Capital Expenditues Law, Order and Administration 148.0 14.9 221.5 178.0 213.1 154.1 150.9 178.4 135.5 350.4 166.2 188.4 Econcic Services 90.5 127.1 89.3 174.5 303.4 305.2 308.0 443.4 104.3 298.9 189.8 186.9 Commercial Services 66.2 75.3 257.9 294.2 117.9 166.7 189.8 236.9 151.3 330.8 363.9 334.5 Social Services 140.7 234.6 152.4 134.2 163.2 221.9 94.7 114.0 84.4 183.6 177.0 235.1 Capital Works 424.9 542.3 518.3 502.0 567.4 518.8 777.0 1,001.7 1,350.7 1,169.2 1,994.0 2,216.1 Special Development Projects 204.0 32.3 6.6 56.1 61.1 63.8 - - - - - Capital Grants to Local Authorities - - - - - - - 9*0 1.0 Total 1,o74.2 1,156.5 1,246.2 1,338.9 1,426.1 1,430.4 1,520.4 1,977.4 1826.2 2.332.9 2,939.9 3,161.9 GRAND TOTAL 2,748.5 2,978.6 3,237.6 3,5o4.1 3,987.9 4,476.8 5,089.4 6,086.5 7,02. ia8 2 /1 Prior to 1964 it is not possible to distinguish fully between recurrent and capital expenditures. N.B. Items may not add to totals, because of rounding. Budget item "contribution to capital revenues" is excluded from both revenues and expenditures. Source: Government Accounts and Estimates Table 16: LOCAL COUNCILS - REVENU AND EXPENDITURES, 1965-67 1965 1966 1967 1965 1966 1967 ($A '000) (percentages) Revenues Rates 110.3 120.3 132.4 64.3 69.9 64.9 Court Fees and Fines 3.4 3.3 2.2 2.0 1.9 1.1 Licences 20.2 26.4 26.8 11.8 15.4 13.2 Investments 5.8 3.0 5.6 3.4 1.8 2.7 Grants and Subsidies 26.4 11.8 29.2 15.4 6.9 14.3 Miscellaneous .4 7.1 7.8 3 .1 4.1 .8 Total 171.5 172.0 204.0 100.0 100.0 100.0 Expenditures Administration and Judicial 46.6 50.4 71.9 33.3 30.7 33.9 Medical 13.2 23.9 454. 9.4 14.6 21.4 Education 16.8 13.9 37.3 12.0 8.5 17.6 Communications 20.9 13.9 35.1 14.9 8.5 16.5 Public Works 40.0 58.6 12.8 28.6 35.8 6.0 Miscellaneous 2.5 3.1 9.8 1.8 1.9 4.6 Total 140.0 163.8 212.3 100.0 100.0 100.0 Source: B.S.I.P. Annual Reports Table 17. FIFTH DEVELOPMENT PLAN, 1968-70 Distribution of Proposed Expenditures Financed by $AOOO % Local Funds External Aid Administration and 356.0 4.2 149.0 207.0 Organization Physical Planning Survey and Census 170.0 2.0 - 170.0 Communications 2,116.0 25.1 50.0 2,066.0 Civil Aviation 377.0 4.5 - 377.0 Ports, Harbors and Wate/ Transport 380.0 4.5 - 380.0 Roads- 815.0 9.7 - 815.0 Telecommunications 544.0 6.5 50.0 494.0 Natural Resources 2,328.3 27.6 319.1 2,009.2 Agriculture 461.1 5.5 195.6 265.5 Forestry 134.0 1.6 63.5 70.5 Land Settlement 15.0 0.2 - 15.0 Electricity and Power 1,650.0 19.6 60.0 1,590.0 Industrial Develop- ment 68.2 0.8 - 68.2 Social Services 3,209.8 38.1 131.0 3,078.8 Education 1,156.6 13.7 2.0 1,154.6 Medical 580.5 6.9 - 580.5 Housing and Town De- velopment 1,154.0 13.7 129.0 1,025.0 Water Supply and Sanitation 304.5 3.6 304.5 Broadcasting and Information 14.2 0.2 - 14.2 Miscellaneous2/ 249.8 2.8 2.0 238.8 TOTAL 8,420.9 100.0 651.1 7,769.8 1/ Including equipment for roads and airfields. 2/ Includes an amount of $A161,300 of C.D. & W. funds regarded as uncommitted particular projects. Source: Fifth Development Plan 1968-1970 (1968) Table 18 : MONEY AND BANKING, 1958-67 ($A '000) 1/ Money Supply Savings Deposits Demand No. of Total Average Currency Deposits Accounts Deposits Balance ($A) 1958 1,330 .. 3,008 439 146 1959 1,513 3,8h1 547 13 1960 1,650 .. 4,956 664 13h 1961 1,660 .. 6,607 689 104 1962 1,798 .. 7,028 812 116 1963 1,878 .. 7,918 916 116 1964 1,924 .. 8,810 1,112 126 1965 2,334 .10,489 1,236 118 1966 2,494 .. 11,279 1,522 135 1967 2,727 .. 14,929 1,640 110 1/ Except for average balance which is in $A; values at the end of the year. Sources: 1958-65, B.S.I.P. Reports 1966-67, B.S.I.P. Secretariat Table 19 ' MAIN EXPORTS, 1958-68 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 Values f.o.b. ($A '000) Copra 2,963 h,394 3,126 3,138 2,823 3,338 3,524 4,442 3,027 3,629 3,625 Timber 180 118 120 100 167 142 301 196 401 1,079 1,L12 Scrap Metal 287 117 16h 62 63 60 40 32 42 57 63 Marine Shell 200 83 45 138 68 39 48 27 26 55 hh Cocoa -- -- -- 4 8 13 19 19 22 22 50 Gold -- -- -- 1 12 6 3 8 9 17 18 Crocodile Skins 22 23 37 33 28 48 5L 20 10 6 h Others -- 139 95 1 9 3 6 15 3h 16 81 Total Domestic Exports 652 4,834586 3 3.178 3,649 3,996 4,758 3,570 4,912 5,9 Re-exports 179 138 133 93 92 78 76 81 187 190 25 Total , 5,012 3,719 JkZ1 3,271 326 4,072 4,839 _ 5,102 5,551 Percentages of Total Domestic Exports Copra 81.1 90.1 87.2 90.2 88.8 91.5 88.2 93.3 81.8 73.8 68.5 Timber 4.9 2.4 3.3 2.9 5.3 3.9 7.5 1.1 11.2 22.0 26.7 Scrap Metal 7.9 2.4 4.6 1.9 2.0 1.6 1.0 0.7 1.2 1.2, 1.2 Marine Shell 5.5 1.7 1.2 4.0 2.1 1.1 1.2 0.6 0.7 1.1 0.8 Cocoa -- -- -- 0.1 0.2 0.4 0.5 0.4 0.6 0.5 0.9 Gold -- -- -- * 0.4 0.2 0.1 0.2 0.2 0.4 0.3 Crocodile Skins 0.6 0.5 1.0 1.0 0.9 1.3 1.3 0.4 0.3 0.1 0.1 Others -- 2.8 2.6 * 0.3 0.1 0.2 0.3 0.9 0.9 1.5 Source, B.S.I.P. Annual Reports Table 20: IMPORTS BY S.I.T.C. SECTIONS, 1960-68 SITC Section 1960 1961 1962 1963 1964 1965 1966 1967 1968 Values ($A '000) 1/ 0 Food 937 1,122 1,031 1,203 1,471 1,414 1,580 1,769 1,860 1 Beverages 309 359 305 403 421 426 446 .35 416 2 Crude Materials 69 68 39 27 90 56 17 16 33 3 Mineral Fuels 279 314 264 228 279 423 413 532 820 4 Animal and Vegetable Fats 4 4 6 17 32 26 53 51 21 5 Chemicals 222 283 259 293 332 376 504 521 598 6 Manufactured Goods 768 862 752 820 1,108 1,365 1,370 1,388 1,897 7 Machinery and Transport Equipment 724 607 1,211 930 1,120 1,529 2,806 2,396 2,864 8 Miscellaneous Manufac- tured Articles 390 450 469 545 596 782 855 987 836 9 Miscellaneous Transac- tions and Commodities 20 88 131 154 118 179 480 102 76 Total Imports 3,721 4,158 4,467 4,620 5,465 6,575 8,522 8,198 9,1421 Percentage Composition 0 Food 25.2 27.0 23.1 26.0 26.9 21.5 18.5 21.6 19.6 1 Beverages 8.3 8.6 6.8 8.7 7.2 6.5 5.2 5.3 4.3 2 Crude Materials 1.8 1.6 0.9 0.6 1.6 0.8 0.2 0.2 C.3 3 Mineral Fuels 7.5 7.6 5.9 4.9 5.1 6.4 4.8 6.5 8.6 )I Animal and Vegetable Fats 0.1 0.1 0.1 0.4 0.6 0.4 0.6 0.6 0.2 5 Chemicals 6.0 6.8 5.8 6.3 6.1 5.7 5.9 6.4 6.3 6 Manufactured Goods 20.6 20.7 16.8 17.7 20.3 20.8 16.1 16.9 20.1 7 Machinery and Trans- port Equipment 19.5 14.6 27.1 20.1 20.5 23.3 32.9 29.2 31.3 8 Miscellaneous Manufac- tured Articles 10.5 10.8 10.5 11.8 10.9 11.9 10.0 12.0 8.7 9 Miscellaneous Transac- tions and Commodities _0. 2.1 2.9 3.3 2.2 2.7 5.6 1.2 0.7 Total Imports 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.C 1/ Current domestic values at the port of shipment in the country of export. Sources: B.S.I.P. Trade Reports and Annual Reports by the Collector of Customs Table 21: SELECTED IMPORTS, 1958-68 Values ($A '000) 1/ 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 Food Items 630.0 660.8 692.8 863.3 884.8 863.7 1,067.0 1,033.5 1,190.3 1,297.7 1,324 Rice 276.2 295.0 288.2 357.5 335.0 346.7 437.6 420.5 437.1 503.5 492 Meat 236.8 223.8 2"4.2 284.8 331.8 267.8 323.4 326.6 403.0 378.9 447 Flour 58.2 60.0 72.2 98.8 97.2 115.6 142.2 137.8 154.1 235.4 184 Fruits and Vegetables 40.4 39.2 45.8 65.2 56.0 62.2 68.6 79.4 82.0 90.8 89 Fish 18.4 42.8 42.4 57.0 64.8 71.4 95.2 69.2 114.1 89.1 112 Non-food Item Related to the Melanesian Econo .. .. 293.7 322.9 359.3 367.6 432.5 485.1 533.4 544.4 519 Clothing and Cotton Fabric .. .. 202.8 212.8 235.2 221.5 289.6 353.6 352.8 358.7 321 Beer .. .. 72.9 96.2 109.2 115.4 104.4 86.0 110.5 112.1 113 Radios .. .. 0.5 0.6 0.6 7.3 9.1 10.2 13.1 22.9 40 Seving Madines .. .. 13.7 10.1 8.7 11.6 15.3 19.3 24.0 19.9 20 Bicycles .. .. .. .. 2.7 7.5 10.4 12.0 26.0 19.1 11 Watches and Clocks .. .. 3.8 3.2 2.9 4.3 3.7 4.6 7.0 11.7 14 Items Related to General Development 54.8 177.8 317.9 319.7 357.0 463.8 534.7 795.9 1,438.9 1,566.8 1,714 Tractors and Agricultural Machinery .. 85.4 93.9 82.2 113.5 210.6 171.6 265.5 912.9 958.2 916 Motor Vehicles .. 59.4 90.4 124.2 139.4 139.6 171.2 283.8 280.5 377.7 464 Galvanized Sheets .. .. 84.5 60.4 45.4 54.7 90.1 87.4 102.7 90.8 126 Cement 54.8 33.0 31.8 31.8 41.8 36.2 74.4 100.2 87.8 75.2 96 Insecticides .. .. 11.7 14.4 12.3 15.9 16.6 45.9 35.1 47.3 71 Fertilizers .. .. 5.6 6.7 4.6 6.8 10.8 13.1 19.9 17.6 41 1/ Current domestic value at the part of shipment in the country of export. Source: B.S.I.P. Annual Reports and Trade Reports Table 22 : DIRECTION OF TRADE, 1959-68 Exports Imports Britain Japan Australia Others Total Australia Britain U.S.A. Hongkong Japan Others Total Values ($A '000) 1/ Values ($A '000) 2/ 1959 3,890 55 942 125 5,012 1,772 438 143 252 87 417 3,109 1960 2,663 231 736 89 3,719 2,155 540 182 283 231 331 3,721 1961 2,628 111 732 100 3,571 2,287 632 220 251 175 590 4,158 1962 2,021 232 785 132 3,271 2,167 1,108 138 281 165 607 L,4L67 1963 2,172 656 801 97 3,726 2,172 1,021 268 263 328 568 4,620 196 2,150 1,026 831 65 4,072 2,678 1,088 273 333 355 738 5,465 1965 2,763 1,113 876 87 4,839 2,900 1,64h 362 349 270 1,052 6,575 1966 1,946 1,08 695 68 3,757 3,409 1,347 1,159 452 545 1,611 8,522 1967 2,183 2,011 770 107 5,102 3,656 1,640 8id h43 118 1,197 8,198 1968 3,025 1,366 1,021 139 5,551 L,236 1,842 88h 107 h8 1,6CU 9,b21 Percentages Percentages 1959 77.6 1.1 18.8 2.5 100.0 57.0 1L.1 4.6 8.1 2.8 13. 100.0 1960 71.6 6.2 19.8 2.1 100.0 57.9 1h.5 4.9 7.6 6.2 8.9 100.0 1961 73.6 3.1 20.5 2.8 100.0 55.0 15.2 5.3 6.1 1.2 1L.2 100.0 1962 61.8 7.1 24.0 7.1 100.0 48.5 24.8 3.1 6.3 3.7 13.6 100.0 1963 58.3 17.6 21.5 2.6 100.0 7.0 22.1 5.8 5.7 7.1 12.3 100.0 196 52.8 25.2 20.4 1.6 100.0 49.0 19.9 5.0 6.1 6.5 13.5 100.0 1965 57.1 23.0 18.1 1.8 100.0 4L.1 25.0 5.5 5.3 4.1 16.0 100.0 1966 51.8 27.9 18.5 1.8 100.0 L0.0 15.8 13.6 5.3 6.6 18.9 100.0 1967 42.8 40.0 15.1 2.1 100.0 14.6 20.0 10.3 5.1 5.1 14.6 100.0 1968 51.5 2h.6 18.b 2.5 100.0 b1.9 19.6 9.L [.3 4.7 17.1 10c.0 1/ P VP.o.b. Current domestic value at the port of shipment in the country of export. Source: B.S.I.P. Annual Reports Table 23: BALANCE OF TRADE, 1958-68 ($A '000) Domestic Total Surplus (+) Exports 1/ Re-exports Exports 1/ Imports 2/ or Deficit (-) 1958 3,652 179 3,831 3,292 +539 1959 4,874 138 5,012 3,109 +1,903 1960 3,586 133 3,719 3,721 -2 1961 3,478 93 3,571 4,158 -587 1962 3,178 92 3,271 4,467 -1,197 1963 3,649 78 3,726 4,620 -894 1964 3,996 76 4,072 5,465 -1,393 1965 4,758 81 4,839 6,575 -1,736 1966 3,570 187 3,757 8,522 -4,765 1967 4,912 190 5,102 8,198 -3,097 1968 5,297 254 5,551 9,421 -3,870 1/ F.o.b. 2/ Current domestic value at the port of shipment in the country of export. Source: B.S.I.P. Annual Reports Table 24: EXPORT PROJECTIONS, 1969-75 ($A 1000) Copra Timber Cocoa Otheril/ Total?/ 1969 3,700 2,700 25 235 6,660 1970 3,845 3,600 25 260 7,730 1971 3,885 5,000 25 290 9,200 1972 4,060 5,500 25 335 9,920 1973 4,215 5,900 25 370 10,510 1974 L,620 6,200 25 415 11,260 1975 5,120 6,600 25 475 12,220 Projected at 2 percent per annum. Excluding nickel and other minerals now being prospected. Source: IBRD Mission's estimates BRITISH SOLOMON ISLANDS GILBERT IS INE- SOLOMON 1OUGAINVILLE ELLIOE IS S O u T H P A C / F 1 C NER°7 - ~~HEBRIDES eFJII rr HEp O C E A N AURaat -niL( CHOISEUL . " "Shortlandse orlandSOO., N,lo Is lands' STIRLING VELA LAVEL,LA KOLOMBANGARA All.dyceS G~~ W. GF'Rffi bes, SNORGE v,r - VANGUNU Fou.b dG -o n o r u u K ' ,r Florida MALAITA M a j s r o d sI s l a n d s Russellogh Islands ikd 9 nni LoyorHauhui Henderson .t. Rortn MARAMIASIKE Main roads ALTITUDES IN FEET ------ Secondary roads Avu-uocr Over 3DIDo @ Administrative headquarters GUADALCANAL Mbl 1000- 33000 Hospitals · _Secondary schoolIs * Airfields Pw Ports uoNg.oR KNRA 0 20 40 60 80 |00 LL ' ''SAN CRISTOBAL MILES IEBR..RO 1009 IBRD-2361R