Worrying future as economy shrinks

Honiara is the beating heart of the country's economy.
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THE country’s Macro Poverty Outlook shows a worrying future for the country’s populace.

According to the report, the economy is expected to shrink by -2.9 percent in 2022, reflecting the negative impact of the recent civil unrest and widespread community transmission of the coronavirus.

These events have broad-based economic impacts and create pressure on the fiscal accounts.

A further spread of the coronavirus, higher imported inflation, a return of social unrest, and climate-related disasters will double down the risk to the local economy.

The projection of growth by 2.9 percent this year reflects the impact of recent riot and lockdown in most parts of the country.

The figure represents a sharp deterioration compared to the pre-unrest projection for 2022 which was expecting to gain 4.5 percent growth.

The report states that investments to replace damaged productive capacity caused by the riots are unlikely to gain pace until later in the year.

High demand for imported construction materials and machinery will drive current account into deficit.

The report further stated that the lockdown to contain COVID-19 contributes to shrinking the output in contact-intensive sectors, including services, which represents about 55 percent of output.

“A combination of lower economic activity and elevated spending on COVID-response and business recovery will increase the fiscal deficit.

“The deficit, in turn, will be financed by a further drawdown on the cash buffers and a combination of domestic and external lending.

“Infrastructure investment, a return of business tourism and increased mining activity are expected to support growth over the medium-term.

“An expected rebound of economic activity and spending consolidation will lead to a narrowing of the fiscal deficit in 2023-2024.

“Similarly, the current account deficit will shrink over the medium term reflecting smaller fiscal deficit and reduction in construction-related imports,” the report states.

It states that COVID-19 remains a major risk to the economic outlook.

A low vaccination intake particularly among low-educated and ill-informed populations may lead to the maintenance of a closed border policy, while a further community transmission may have human capital implications and hamper economic recovery.