Clarity Sought Over Beijing’s $30 Million Bailout of Solomon Islands

This picture taken on April 18, 2024 shows a police patrol car provided with aid from the Chinese government in Honiara, capital city of the Solomon Islands. Solomon Islands' lawmakers elected a China-friendly former foreign minister as prime minister on May 2, choosing him over an opposition leader intent on curbing Beijing's reach in the Pacific nation. (Photo by Saeed KHAN / AFP) (Photo by SAEED KHAN/AFP via Getty Images)

Independent MPs in the Solomon Islands are demanding the country’s prime minister, Jeremiah Manele, clarify the details of a $30 million (US$20 million) bailout provided by Beijing.

Announcing the agreement yesterday, Mr. Manele referred to it as “budgetary support,” but the MPs say Parliament hasn’t been told whether this is a grant or a loan.

After talks with Chinese Communist Party leader Xi Jinping, the prime minister announced the funding, hailing Beijing’s “transformative” presence in one of the world’s poorest countries.

The Asian Development Bank said, “with persistent budget deficits and rising public debt, fiscal discipline must be a priority for the ... government.”

However, the Solomon Islands has recorded consecutive years of deficits and has faced significant economic and fiscal impacts: the pandemic, civil unrest in November, and the cost of hosting the 2023 Pacific Games.

“Cash reserves were significantly drawn down in 2023, and some invoices for the Pacific Games remained outstanding in the first quarter of 2024,” the bank notes, warning that “the government must focus on restoring fiscal discipline.”

This is despite Australia’s $16.7 million contribution to the Games.

Mr. Manele may be reluctant to impose spending cuts required to balance the budget considering the rioting that occurred in November last year, which eventually forced the resignation of his predecessor Manasseh Sogavare.

While the riots were triggered by his Mr. Sogavare’s decision to switch diplomatic recognition from Taiwan to China, they also highlighted grievances about widespread poverty and lack of economic development in the Pacific nation.

Fiscal Restraint Proving to Be a Challenge

Beijing’s $30 million offer would seem to provide the potential to restore economic stability without the risk of another outbreak of violence.

Beijing has yet to acknowledge the existence of any deal or the payment of any money, and independent Parliamentarians—led by Peter Kenilorea Jr., who is also head of Transparency Solomon Islands—say they want the details.

He has consistently criticised the Solomons’ growing closeness with Beijing, dating back to the initial rapid pivot away from Taiwan under Mr. Sogavare.

“If it’s a loan, then we could go over our borrowing limit for Solomon Islands,” he said. “If it’s a grant, then I think that’s a shift in the way China does business because that’s not what they usually do.

“Solomon Islands’ budget is in bad shape, so it’s not surprising to see the government asking for this help. But we want to understand exactly what has been offered and accepted,” Mr. Kenilorea Jr. said.

In its dealings with other Pacific nations, Beijing typically offers loans at concessional rates of interest or funds projects that Chinese companies usually deliver.

In addition to the unexplained $30 million, Beijing has also agreed to fund extensions at the Solomon Islands’ only international airport, Mr. Manele said.

A larger airport would potentially boost tourist numbers and the country’s revenues; it’s becoming a popular destination, with international visitors up 255 percent to 26,030 in 2023 compared to 2022, providing stimulus for local businesses.

China has also built a major new stadium in the capital, Honiara, state-of-the-art health facilities, cellphone towers, roads, and other infrastructure.

The Nation’s Economy Shows Signs of Recovery

The latest Asian Development Bank data shows inflation at 3.2 percent, expected to decline to 2.7 percent next year. After recording a negative 4.2 in 2022, GDP rebounded to 2.5 percent growth in 2023 and has eased only slightly to 2.2 this year.

The ADB forecasts a similar rate of growth next year. Exports have performed well, with growth across the three major categories of logs and timbers, fish, and minerals.

However, government debt has increased significantly in 2023 to help finance the fiscal deficit. Total debt increased from 14.5 percent of GDP in 2022 to 19.2 percent in 2023.

Domestic debt increased by 46 percent, mainly through the sale of government development bonds to the National Provident Fund and state-owned enterprises, while external debt rose 32 percent.

Solomon Islands Public Sector Debt

GDP = Gross Domestic Product. Sources: Central Bank of Solomon Islands; Asian Development Bank estimates. (ADB)

Despite a massive increase between 2022 and 2025, public debt should remain below the 35 percent of GDP ceiling set by the government.

In 2018, the International Monetary Fund proposed that the Solomon Islands agree to a budget deficit limit of 1.5 percent of GDP, but this has not progressed.

The ADB notes that “while the government aims to hold cash reserves sufficient to cover at least two months of spending it has proven a challenging target.”