Unlocking Growth & Prosperity

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“Unlocking Growth & Prosperity: How Special Economic Zones (SEZs) Can Drive the Solomon Islands Economic Future”

By: Martin Baddeley Housanau (an Economist by Profession)

1 Introduction:

The SEZs Bill 2024 that was passed by the Solomon Islands Parliament several days ago can unlock significant economic growth and prosperity for Solomon Islands through several key mechanisms such as attracting foreign and domestic investment, job creation and skills development, infrastructure and provincial development, boosting exports and trade balance, economic diversification, long-term stability, and position Solomon Islands for sustainable economic growth over the next decade or so. The GNUT must ensure that the SEZ framework is a transformative policy that will bring in more growth and wealth for our rural populace. This must be the essence of the bill, and those in charge for implementation must do so with a solemn spirit to achieving greater growth and wealth creation.

2. Overview of SI Economic Growth:

The Central Bank of Solomon Islands reported that 2024 economic growth rate was 2.8%, reduced by 1.5% from the 2023 growth rate of 4.0%, which was largely due to the 2023 Pacific Games hosted in Honiara. The key drivers of the 2024 growth was the public investments in energy and transportation, national general election-related spending, and a surge in mining activities.

However, the Central Bank of Solomon Islands projection for 2025 is 3.8% growth rate, up by 1.0% from 2024, based on the impression that the productive sector growth remains’ the same or slightly increase, whilst the resource sector particularly forestry declines, with slow progress in mines and minerals sector.

The slow turnover of economic growth is predictable as policy makers and implementers are undecided on critical measures that requires urgent attention to alleviate present circumstances, otherwise, the slow growth will persist largely due to the similar challenges encountered over the years including fiscal deficits, rising public debt, and the need for fiscal discipline.

The projection for 2026 is 4.3% growth rate, surpassing pre-pandemic averages of 2.5%. The inflation is projected to average 3.6% between 2025 and 2027. However, the average economic growth rate of Solomon Islands over the past decade was 2.5%, which was described as below the population growth rate of 2.9% annually since the 2019 census.

It is a fact, that most of Solomon Islands exports over the past four decades are raw resource based such as copra, cocoa, beach der mar and others, with minimal value added exports such as canned tuna, palm oil, coconut oil and unpolished gold bars with others. It was inevitable that majority of the exports originated from foreign owned businesses and joint-ventures operating in Solomon Islands, therefore, draws less export earnings due to under-invoicing and tax-evasion.

3. Brief Introduction of the SEZ’s

An SEZ is a designated area within Solomon Islands where businesses operate under different, and more often liberal regulations compared to the rest of the country. These zones are anticipated to attract foreign investment, boost exports, provide more jobs, and stimulate economic growth by offering tax incentives, efficient customs procedures, and relaxed labor laws.

The SEZ has its own laws and regulations, but foremost requires government intervention through investments in world class facilities, water, electricity, roads, transport, storage, wharf, airports and other critical logistics and facilities to best serve the needs of the SEZ. The intention of these infrastructures is to attract quality domestic and foreign investments into the designated SEZ’s to stimulate business and economic activities throughout Solomon Islands.

However, the establishment of the SEZ’s in Solomon Islands is critical towards improving the present rate of economic growth beyond 5% over the next decade. Thus, the SEZ’s has the potential to address the Solomon Islands structural challenges, attract investment, and drive industrialization in this geographically dispersed and underdeveloped nation, that faces stagnating per capita income growth with 75% of its population reliant on subsistence agriculture and fisheries. The SEZ’s can diversify the economy and offer a pathway to break cycles of low growth, and take

advantage of its potential to boost sustainable economic growth if managed well according to best world practices.

4. History of SEZ’s in Solomon Islands

Solomon Islands will soon have its first SEZ’s established in several months from now after the passing of the SEZ’s Bill. It will be a historical moment for our developing nation when the first SEZ will be opened for business. The informal discussions on establishing SEZ’s in the Solomon’s started as early as 1998, and stage plans have emerged in recent years as far as early as 2003 during the RAMSI arrival in Honiara.

Nevertheless, the initial conversations about SEZ’s were heard in the corridors of bureaucrats and political round table discussions, primarily influenced by the ever-increasing unemployment rate across our nation, together with the increasing youth’s population that made up 45% of our total populace, and the declining economic growth and living standards after the events of the recent past unrest from 1999 – 2003, that resulted in Solomon Islands labelled as a failed state by Australia and New Zealand, which profoundly influenced the outlook of the rest of our Pacific neighbors that made up the Pacific Forum on the Solomon Islands immediate future.

It was inevitable that the Solomon Islands socio-economic-political and governance structure and institutions were at cross roads of either being failed or resurrected prior to RAMSI intervention. Thus, the Government then under the able Leadership of the Hon. Prime Minister Manasseh Sogavare in late 2000 informally brought about the concept of the SEZs as a catalyst to revive, sustain and improve the economy of Solomon Islands.

The idea was tossed around for several years by successive Governments leading up to the 2010 national general elections, but no single Government made concrete steps towards formalizing the SEZ’s concept and enact its enabling policies and legislations. Thus, the SEZ’s concept discussions to drive economic growth was within government circles for nearly two decades.

However, it was not until 2016 that the Democratic Coalition for Change Government ‘s(DCCG) formally adopted and introduced the SEZ’s concept. The DCCG under the leadership of the Hon. Prime Minister Sogavare that assumed office from 2015 to 2019 announced in its Policy Statement that the SEZ’s as one of the key priority economic policies. The Cabinet formally approved an SEZ’s Cabinet Subcommittee in early February 2016, that drafted and formalized an SEZ’s Policy that was approved by Cabinet in May 2016. The Policy then sets the background for the drafting of the first SEZ’s Bill towards the end of 2016.

The drafting of the SEZ’s Bill since 2016 to 2025 involved three success governments began with the DCCG from 2015 to 2018 led by two Hon. Prime Ministers. The Hon. Manasseh Sogavare that led the DCCG from 2015 up to November 2017, and Hon. Ricky Houenipwela that led Solomon Islands Democratic Coalition for Change Government (SIDCCG) from December 2017 to December 2018. The 2019 National General Elections saw the Democratic Coalition for Advancement Government (DCGA) assumed office again led by Hon. Prime Minister Manasseh Sogavare from 2019 to 2023, and now the Government for National Unity and Transformation (GNUT) led by Hon. Prime Minister Jeremiah Manele from 2024 till now.

The long delays in the drafting of the Bill reflects the perplexing environment that surrounds the drafting of the bill to fruition. It was evident that the work of drafting the bill was hectic, challenging and in disarray due to ulterior factors ranging from internal and external influences, cumbersome with conflict of interests by several benefactors that would like to see Solomon Islands becoming more dependent on aid than trade. This is the key factor that contributed towards suppressing the drafting of the bill for the past ten years (2016 – 2025). The successive governments tried their best to pass the bill despite the challenges that they faced.

However, the Bill that was passed is the eighth draft of the Bill. This manifests the significant interest placed on our nation and its economy from foreigners to remain as a natural resource based, and raw material exporting hub to maintain their factories producing high-end value products to sustain

and grow more wealth at our own expense. This was encrypted in their trade, investment and foreign policies as seen over the past five-decades, and continuous on until we as a nation decides to deviate from the current trend on unconditional terms. We have the upper hand to command this path because we have abundant wealth of natural resources though some such as forestry, fisheries and minerals may have been exploited already over the past decades.

The successive governments were convinced that the SEZ’s is fundamental in revitalizing the Solomon Islands economy despite the long delay in the drafting of the bill. They envisioned that the SEZ’s is critical towards driving business activities, and achieving the level of sustainable growth that could significantly reshape the Solomon Islands’ economy over the next decade.

5. SEZ’s in the Asia Pacific Region, Singapore & Asian Tigers.

   5.1 The Asia Pacific Region

   It was evident that SEZ’s have been instrumental in boosting key sectors such as agriculture, fisheries and tourism across the Asia Pacific region and beyond. The following are some of the most successful SEZs in these industries;

1. 1)  SEZ Sei Mangkei SEZ in Indonesia that focuses on Palm Oil and agro-processing;

2. 2)  Kilon Progo SEZ in Indonesia that focuses iron sand mining, agriculture and agro-industry;

3. 3)  Chambishi SEX in Zambia that focuses on copper and agro-processing;

4. 4)  BitungSEZinIndonesiathatfocusesonfishprocessingandcoconutindustries;

5. 5)  Paraguana SEZ in Venezuela that focuses on shrimp farming and seafood exports;

6. 6)  Sorong SEZ in Indonesia that focuses on fisheries, marine logistics and agro-industry;

7. 7)  Mandalika SEZ in Indonesia that focuses on integrated tourism (beaches, MICE, cultural

events);

1. 8)  Morotai SEZ in Indonesia that focuses on eco-tourism and WWII heritage sites; and

2. 9)  Tortuga Island SEZ in Venezuela that focuses on luxury tourism (hotels, golf courses and

marinas).

The key success factors of the above SEZ’s is a combination of several factors such as strategic location, strong government incentives, public private partnerships, value-chain integration, and sustainable practices. However, the challenges and lessons learned are infrastructure gaps, inadequate policies and legislations, lack of skilled workforce, over reliance on foreign markets, land and labor conflicts. Nevertheless, long term success depends on political stability, quality infrastructure and sustainable policies.

5.2 Singapore & Asian Tigers

The Singapore and the Asian Tigers SEZ’s have evidently stimulated economic growth, attracting foreign investment, boosting exports, and fostering technological advancements. These zones often feature preferential tax policies, reduced regulations, and infrastructure development, creating a highly attractive environment for businesses.

The SEZs were designed to attract Foreign Direct Investment [FDI], with many offering incentives like tax breaks, relaxed environmental regulations, and streamlined procedures. This influx of investment leads to increased production, job creation, and a surge in exports, contributing to the overall economic expansion of Singapore and the Asian Tigers.

The absorption of businesses within SEZs accelerates technology transfer and knowledge sharing, leading to innovation within the economy.Companies often work together, leading to advancements in various sectors, such as manufacturing, finance, and technology.

The SEZs are often equipped with advanced infrastructure, including transportation networks, communication systems, and energy resources. This well-developed infrastructure reduces costs for businesses, further enhancing their competitiveness. The SEZ’s also acts as catalysts for regional development, attracting investment and stimulating economic activity in surrounding areas. This can lead to job creation, increased incomes, and improved living standards in the region.

These are the classical examples of Singapore and the Asian Tigers:

Singapore: The Singapore’s SEZs, particularly its free trade zones, have played a crucial role in its economic success, attracting foreign investment and facilitating global trade.
Other Asian Tigers: Countries like South Korea, Taiwan, and Hong Kong have also utilized the SEZs effectively to boost their export-oriented economies and attract foreign investment.

Challenges and Considerations:
Coordination and Governance: Effective SEZ implementation requires strong coordination between different government agencies and departments, as well as clear and consistent policies.
Potential for Inequality: SEZs can sometimes lead to uneven development, with benefits concentrated in the zone while surrounding areas may lag behind.
Sustainability: SEZs need to be designed and managed in a sustainable manner, considering environmental impacts and social equity.

The Impact of SEZ’s on the Solomon Islands Economy:

The potential impact of the SEZ’s on the Solomon Islands Economy will be described in three parts. Firstly, the short term impacts 1 – 5 years from 2026 to 2030. Secondly, the medium term impacts 5 – 15 years from 2031 to 2046, and Thirdly, the long term impacts 15 years and above from 2047 to beyond. Below is a brief analysis of the SEZ’s potential impacts on the Solomon Islands economy across different time frames.

6.1 SEZ’s Short-Term Impact

The successful SEZ’s throughout the Asia Pacific region has positively impacted their various economies in the Short-Term from 1 to 5 years. Thus, similar positive impact on the Solomon Islands economy could be realized as well in the short term from 2026 – 2030. The first benefit will be increasing FDI inflows. The SEZs offering tax breaks, relaxed regulations, and streamlined

bureaucracy could attract Chinese, Australian, and Southeast Asian investors. The focus areas are logging, fisheries processing, light manufacturing (textiles, agro-processing), and mining.

The second benefit will be job creation in construction and early-stage industries. The Building of SEZ infrastructure (ports, roads, factories) would create short-term employment. Low-skilled jobs in fish canning, timber processing, and assembly plants could reduce urban unemployment. The third benefit will be increasing government revenue if well structured. Leasing land to SEZ developers and taxing profits (even at reduced rates) could boost state coffers.

However, the potential risks in the short-term are multiple as follows;

1. 1)  Land Disputes & Social Tensions: Customary land ownership of 87% of Solomon Islands’

land could clash with SEZ acquisitions, leading to conflicts, and lack of clear compensation

mechanisms may trigger protests (as seen in other Pacific SEZs).

1. 2)  Environmental Damage from Rapid Development: Unregulated logging, mining, or waste

discharge from factories could harm reefs, forests, and water supplies.

1. 3)  Dependence on Foreign Labor: Foreign firms may import workers, limiting local employment

benefits.

6.2 SEZ’s Medium-Term Impact

The SEZ’s potential impact on the Solomon Islands economy in the Medium-Term 5-15 Years from 2031 – 2046 would be firstly, the export diversification and value addition benefit. The SEZs trigger industrialization within the economy from exports of raw log and fish into manufactured and processed goods (furniture, canned tuna, coconut oil). With huge potential for textiles and electronics assembly if labor costs remain competitive.

The second benefit is the skills and technology transfer. Training local employees in machinery operation, quality control, and logistics could build domestic human capital, and partnerships with genuine foreign firms around the Asia Pacific region could introduce sustainable practices. The third benefit is the infrastructure spillover effects. The SEZ linked ports, roads, and electricity grids could benefit nearby communities throughout Solomon Islands. However, there are numerous potential risks in the Medium-Term as follows;

6.3

1)

2) 3)

Dutchdiseaseandover-relianceonSEZs:iftheSEZsfocusesonlyonextractiveindustries (logging, mining), other sectors (tourism, agriculture) may stagnate, and the currency appreciation from SEZ exports could hurt non-SEZ businesses throughout the Solomon’s; Debt risks from SEZ financing: if SEZs are funded by huge loans, debt distress could transpire; and

Corruption and weak governance: Special deals for foreign investors could lead to revenue leakage and elite capture.

SEZ’s Long-Term Impact

The SEZ’s potential impact on the Solomon Islands economy in the Long-Term 15 Years and above from 2047 and beyond. The first benefit is there would be sustainable industrialization if managed well. The SEZs could progress into green industrial hubs (renewable energy, eco-tourism, sustainable fishing and agriculture), and the Digital SEZs (e.g., fintech, IT outsourcing) could transpire if internet connectivity improves.

The second benefit is global market integration. The SEZ exports could help the Solomon Islands join regional trade pacts (e.g., PACER Plus, RCEP), and the third benefit is reduced poverty and urban development, if SEZs create stable formal jobs, rural-urban migration could be reduced and better managed. However, there are numerous potential risks in the Medium-Term as follows;

1. 1)  Environmental Collapse from Over-Exploitation: Unsustainable logging and fishing in SEZs could deplete resources, and possibly harming future growth.

2. 2)  Geopolitical Vulnerabilities: Over-reliance on Chinese-funded SEZs may trigger tensions with Australia/US, limiting alternative partnerships;

3. 3)  Social Inequality: The SEZ benefits may concentrate in Honiara, leaving rural areas underdeveloped with increasing poverty.

7. Key Recommendations:

The Key Recommendations for considerations to achieve Successful SEZs are;

1. 1)  Prioritize Value-Added and Service Industries – Focus on fish processing, agro-industry, forestry, mining and eco-tourism, rather than raw resource extraction for exports. The government must identify the sector that it will be investing in for large scale commercial production in value adding for domestic and export markets. This will also fulfill the government import substitution policy, and at the same time to increase exports with better returns that will enhance our rural farmer’s earnings.

2. 2)  Identify, conduct feasibility studies and prepare potential sites to kick start at least one or two SEZ’s is Solomon Islands in 2025 and 2026. Several prospective sites are; Guadalcanal – GPPOL, Mamara & Manekalaku; Western – Noro, Gizo & Parakasi; Honiara – Ranadi & Henderson; Malaita – Kwaibala (Auki), Bina, Maluu, Atori, & Liwe; Isabel – Buala & Gojoruru; Choiseul – Choiseul Bay & Tarakukure; Temotu – Lata & Graciosa Bay; Central Islands – Tulagi, Russels & Yandina. These specific locations can host potential SEZs now because land is registered, basic infrastructure services are available on the ground, and close to the urban centers. All it requires is for the government to undertake several infrastructure works and upgrade to kick start any of these potential SEZ’s.

3. 3)  EnsureTransparentLandDealsandLocalParticipation-Engagecustomarylandownersin SEZ planning to avoid conflicts. The SEZ’s on customary land can be explored later on when the traditional governance and land law reform bill is ready and passed by Parliament in the near future;

4. 4)  Enforce Strict Environmental and Labor Laws – Mandate sustainable logging, waste management, and fair wages in SEZs. These laws will be amended as the SEZ;’s implementation program rolls throughout Solomon Islands.

5. 5)  Diversify Investment Sources – Attract Australian, Japanese, and ASEAN investors alongside China to avoid over-dependence. The government must also encourage domestic investment from our potential entrepreneurs and medium businesses; 6) Invest in Local Skills & Infrastructure – Train workers in SEZ-relevant skills (machinery, logistics) and improve electricity and transport links. The government must seriously invest in providing further training for its skilled manpower especially in the technical fields such as carpentry, plumbing, electrical, mechanical, engineering, surveying and other necessary areas.

Conclusion:

As evidenced throughout the Asia Pacific region including Singapore and the Asian Tigers, the SEZ’s Bill that was recently passed is an important tool that will accelerate economic growth and prosperity for Solomon Islands, by attracting foreign investment, boosting exports, creating jobs, and skills development, whilst simultaneously driving property development through infrastructure upgrades with increased demand. The SEZ’s once properly established, successfully managed and operated has huge potential to transform the Solomon Islands economy when supported by strong policies, regulations, appropriate strategic planning with transparency and accountability.

In conclusion, the SEZs has transformed developing economies into a world class industrialized nations as in the case of Asia, Singapore and the Asian Tigers. As such, it can also turn Solomon Islands into a trade and manufacturing hub in the Pacific—into becoming an industrialized nation. This can only be realized if the responsible government ministries and its Institutions avoid the pitfalls that contributed to the failure and collapse of other SEZ’s throughout the Asia Pacific region. This will determine whether SEZs becomes an economic boom or a liability to Solomon Islands.