Economic outlook for Solomon Islands bleak: CBSI

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Central Bank of Solomon Islands. Photo by CBSI
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BY CHARLES KADAMANA

THE Economic outlook of our country is quite bleak and likely will go into recession by the second quarter of this year.

This was highlighted by the Governor of Central Bank of Solomon Islands (CBSI) Dr Luke Forau during a soft launch of its 2019 annual report on Wednesday 13th May.

“Looking ahead, the outlook for the Solomon Islands economy this year is quite bleak.

“Although the country is still COVID-19 free, the impact of our preparedness against this pandemic on our economy, has taken a toll on our projected growth for this year. 

“As a result, for 2020, economic growth is projected to contract to around minus five percent,” Mr Forau said.

He said given the uncertainty surrounding the COVID-19 pandemic, the country’s external and domestic environments will continue to be affected by the health containment measures and the weak consumer demand.

He said already some sectors like tourism, transport, wholesale, retail, manufacturing, agriculture and forestry have been affected and will continue to be affected significantly.

He also adds that the economy will go into recession by the second quarter of this year. 

He said the uncertainty surrounding the duration and magnitude of the covid-19, let alone our continuous preparedness and containment measures, will continue to have negative impact on the economy.    

However, over the medium term, growth is expected to return to an average rate of 3.5 percent, as key infrastructure and development projects are implemented.

In addition, the positive flow on effects of the post-covid-19 recovery and stimulus are expected to persist over the next couple of years.

He said for last year the country economy was slowed down with real Gross Domestic Product (GDP) growth estimates at 1.2 percent.

He said this is lower than the 3.9 percent growth in 2018.

He said this outcome was attributed to very sluggish global market conditions and weaker domestic demand. 

On the domestic front he said the slowdown was seen in almost all sectors.

“There were falls in the commodities sector, particularly from agriculture and logs, a very flat secondary sector related to the decline in manufacturing, and a slowdown in the services sector. 

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“It is worth noting that most of our primary commodities declined in 2019, except for fish catch and cocoa.

“As anticipated, total (natural and plantation) log production dropped by 2 percent to 2.68 million cubic metres due to weak demand from China. Similarly, output for palm oil, copra and coconut oil also declined, owing mainly to fallen international prices during the year.   

“The fall in commodities ultimately affected the country’s external sector. As a result, the trade in goods and services balance decreased to a deficit, resulting from declining exports, coupled with a rise in services payments,” Dr Forau said.

He said this has led to a deterioration in the current account deficit.

He said to finance this deficit, the gross foreign reserves declined by six percent to $4,706 million. At this level of reserves, it is equivalent to around 11 months of import cover.   

He said reflecting the subdued economic environment, monetary conditions weakened in 2019.

“Broad money declined by three percent to $5 billion due to the fall in net foreign assets. Total liquidity, along with excess liquidity both fell, although both remain at elevated levels. On the other hand, credit offered by banks increased by five percent to $2,557 million driven by borrowings to the personal, transport, distribution and construction sectors. 

“Fiscal conditions likewise, saw a reversal in the fiscal outcome, with the fiscal balance turning to a deficit of $202 million from the $191 million surplus recorded in 2018. Government revenue declined by 11 percent, stemming mainly from the downturn in logs, donor grants, as well as declines across most tax categories reflecting the weaker business conditions. Government expenditure however, fell by only one percent, reflecting mainly underspending in the development budget. 

“Government debt level, on the other hand, remained at a sustainable level of around 11% of GDP,” Forau said.

He said despite the weaker macroeconomic conditions, employment indicators remained positive during 2019.

Proxy indicators from the Solomon Islands National Provident Fund showed contributors grew by three percent to 60,643 members. Similarly, public service positions also rose by two percent to around 18,000 employees.

Moreover, there were also temporary employment opportunities for the national elections and the national census.

There was also an increase in seasonal workers to Australia and New Zealand, and contracted nurses to work in Vanuatu.

In terms of inflation he said the consumer prices remained at an acceptable level during the year.

The end period headline inflation for December 2019 was 2.8 percent compared to the 4.2 percent in December 2018.

The drop was driven by the falls in both the import and domestic prices, especially price falls for food, fuel, clothing and restaurants, while prices for betel nuts and utilities picked up. Meanwhile, annual average core inflation in 2019 levelled off at 1.6 percent as in 2018; this indicated that demand side pressures on consumer prices were minimal.

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