2010: a make or break year, says Hou

Evan Wasuka
After two years of political controversies and one-up-manship, Solomon Islands leaders have an even more difficult task ahead of them. Analysts have warned of an end to the country’s rosy economic growth of recent years.

Despite an enviable 10 percent growth in 2007, analysts say the economy is heading for a downturn with a 1.5 percent growth foretasted for the next two years.

2010, points out Rick Hou, Solomon Islands Central Bank governor, will be a decisive year for Solomon Islands—a make or break year—as the country’s main revenue earner, logging, dries up as the country’s natural forests become logged out of existence.

With the logging industry accounting for 17 percent of the country’s economy, 18 percent of government revenue and 70 percent of export earnings, the impact of this will be felt across the board, Hou told a gathering of donors in Honiara.

“Economic growth in 2008 is foretasted to be substantially lower than in 2007. In fact International Monetary Fund has put a forecast of 1.5 percent growth by 2010.

“So you go from our growth of 10 percent now to 1.5 percent in less than five years. We are actually going backwards,” said Hou.

The government says this will mean fewer jobs not only for those employed by logging companies, less income, and worse—a significant pause on Solomon Islands’ economic recovery from the ethnic tension era.

The major challenge says the head of the Central Bank is to maintain economic growth and per capita income.

Fisheries, cocoa, copra and palm oil are major contributors to the national economy but not on the same level as logging is to the country.

As for the much talked about gold production, delays at Gold Ridge Mine will see production start at around 2009 and even these will have limitations, says Hou.

Gold production will provide employment to only around 500 workers, compared to thousands employed by the various logging companies, a large proportion of export receipts will leave the country to service debt and the fact that gold production will not be a significant contributor to government revenue, Hou told donors.

He said a concerted effort from all sectors is needed to offset the impending gap caused by the decline in logging.

The government, which relies on a large percentage of logging earnings, is fully aware of how precarious its position is. The situation means serious changes to how it does business including major cuts to spending.

According to projections from the finance ministry, if government’s expenditure continues unabated over the next four years, it will increase by 20 percent while revenue minus logging’s contribution will stagnate.

“Within just a few years, the government could be facing deficits of more than $1.1 billion,” said finance permanent secretary, Shadrach Fanega.

The obvious answer, he says, is to cut government expenditure.

“The recurrent expenditure growth has to slow down from around 29 percent in 2007 to basically zero, just to keep the budget balanced.”

But that alone acknowledges Fanega, will not be the total solution. Government will need to simultaneously stimulate economic growth and deliver on policy promises.

Donor community

For the donor community, Fanega said vital help could come by way of investment.

“Donor investment can stimulate economic growth, particularly activity that is labour intensive and focused on infrastructure and markets,” he said.

Although Fanega admitted that government hadn’t finalised its medium-term strategy, he pointed out that the first step lay with the Sikua government’s policies; starting off with improved revenue collection, improved budgetary processing, increased investment in the Auditor-General’s office and an improved performance and accountability of the state-owned enterprises. These are steps the donor community would want in place before any help comes by way of an economic injection.

“Our medium-term development strategy will articulate where we think investment should be focused to keep growth going and we would appreciate your input on what you know works and doesn’t work from your experience,” he told the donors.

At the February meeting, the message was loud and clear—that this government wasn’t here to play the political games of its predecessors—it was here to talk and find a solution to an impending economic crisis.

The talks were a pre-requisite to a full-on donor summit in June aimed at dealing with major issues raised last month.

The future

With the government already ruling itself out as a stimulant for economic growth, all eyes are now on the private sector to be the nation’s economic driver.

The banks say the signs are looking good with private sector lending increasing by 54 percent in 2007 and a growth of 60 percent over the past two years.

All are promising signs of confidence but the real test will be if politicians can put national interests ahead of personal interests to allow the private sector to get to work during the remaining two years before 2010.