RISKS REMAIN…But CBSI boss predicts recovery

Central Bank of Solomon Islands. Photo by CBSI
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The Governor of the Central Bank of Solomon Luke Forau predicts the economy will emerge from the COVID-induced economic recession next year, but warns that there are many risks ahead and challenges for government finances – including its cash flow crisis.

In an update to the media yesterday on the economy in the year to May 2021 ahead, Dr Forau congratulated the government for its success in containing the pandemic but warned of revenue and expenditure pressures.

‘It’s not yet over until it’s over!” Dr Forau said

As part of supporting the Government to promote businesses to recover, the Central Bank has relaxed some of its capital control.

“This became effective as of yesterday, Thursday 8th July,” Dr Forau said

“Later this 3rd quarter, the Central Bank will introduce an export finance facility to support small exporters once the export finance facility guidelines are finalized,” he added.

Latest CBSI figures show in the year to May the economy contracted by 4.3% and that a small turnaround is expected this year.

“This year we are projecting a recovery of a 1.5% growth on the back of key national infrastructure projects and recovery of some sectors such as the fishing and agriculture,” Dr Forau said.

Economic growth in 2022 to 2023 of around 5% and 6%.

“This will come mainly from the anticipated booming construction activities for the Pacific Games and other key national projects such as Tina Hydro.

“Despite this positive outlook, risks are skewed to the downside and remain highly uncertain.” Dr Forau said

The pain of the recession is still being felt in the job market.

The Central Bank Governor said labour market conditions have been slow, particularly in the construction sector and transport due to continued border closure and weakened exports.

The trade deficit widened with most export commodities, in particular round logs down as expected.

Despite slowdown in the economy in the year to May, the country’s gross foreign reserves remained high at 13.9 months of import cover- well above the 3-month minimum set by the bank.

“These high reserves are driven largely by donor inflows,” Mr Forau said.

The Governor said the Central Bank will continue to work closely with and support the Government as the country moves into the recovery phase.

On the economic front he warned that the government’s successful COVID containment measures have taken a toll on its finances.

Tax collections remain weak due to depressed economic conditions and non-tax revenue, particularly from fishing license fees, was significantly lower than expected.

Pressures for more government spending has led to cash flow challenges and in turn, payment rationing.

“If this trend persists into the second half of 2021, the fiscal deficit of 3% of GDP envisaged in this year’s budget could widen further,” the Governor warned.

“This calls for a closer scrutiny and warrant more on priority spending, the need for increased budget support or additional borrowing to finance the development budget.

The Governor said he sees two immediate fiscal risks:

  • depletion of cash reserves and
  • the potential adverse knock-on effect from government’s non-payment of service providers to our financial system.

“Late payments of service providers most of whom have mortgages (or loans) with the financial institutions leads to building up of non-performing loans, which could potentially destabilize the financial system if it becomes systemic.

“Over the medium term, fiscal pressures are expected to abound.

“More social services and physical infrastructures will be needed to sustain the country’s growing population. With fiscal position continuing to deteriorate and the economy growing at a slower pace, this could potentially lead to more debt financing.

“Although the nation takes pride in hosting the 2023 Pacific Games, it is a commitment that could put huge pressure on government finances if not managed well,” Mr Forau said

The Country’s outstanding debt balance rose to 1.6 billion dollars as of May-  an increase from $1.4 billion recorded in December 2020.

Although the debt-to-GDP ratio remains low (at 13%), it is expected increase once planned domestic borrowing to finance the National Government’s budget shortfalls and funding for Tina Hydro kicks in.