Member of parliament warns against excessive government debt

MEMBER of Parliament for Small Malaita, Rick Hou, has issued a stern reminder to the Solomon Islands government, urging it to avoid a return to past financial crises.

Mr Hou’s remarks came during a debate on the Central Bank of Solomon Islands (Amendment) Bill in Parliament yesterday, with a specific focus on Clause-19 of the legislation.

Clause 19 of the Central Bank of Solomon Islands (Amendment) Bill seeks to bring about significant changes to the government’s borrowing regulations. Of particular note, it proposes to amend Section 36 (6) of the Principal Act, effectively raising the threshold for government advances from the current five percent to a new, higher threshold of 15 percent. This represents a threefold increase from the existing limit.

Additionally, this clause introduces provisions that would allow the Central Bank of Solomon Islands (CBSI) to provide additional temporary advances to the government, but only in the case of a State of Emergency. These temporary advances should not exceed five percent of the threshold, which is calculated based on the annual average government ordinary revenue for the preceding three financial years. Importantly, any such additional advances to the government must be fully repaid within a strict two-year timeframe.

Hou, in his parliamentary address, stressed the need for caution in managing government debt.
He pointed to previous instances when financial institutions and banks were reluctant to lend to the government due to excessive debt levels.

Notably, he recalled a situation in 2005 when both domestic and international banks, including the Asian Development Bank, World Bank, commercial banks, and the Solomon Islands National Provident Fund (SINPF), refused to provide further financial assistance.

Hou also referenced the “Honiara Club,” an arrangement established with creditors and banks at the time.

Under this arrangement, all creditors agreed to accept reduced repayments, a practice commonly known as taking a “haircut”.

Bilateral partners, most notably Australia, played a pivotal role in resolving the financial crisis by clearing arrears and setting the precedent for the existing five percent threshold.

In his closing remarks, Hou emphasised the paramount importance of avoiding a repeat of the dire financial circumstances experienced in the past.

He called on the government to exercise fiscal prudence and responsible financial management to prevent the nation from reaching a point where financial institutions once again refuse to lend due to unsustainable debt levels.

For the Solomon Islands, these words of caution serve as a timely reminder of the need for careful economic stewardship and debt management as the nation navigates its financial future.

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