Luke Forau: 2023 Annual Report Launch
Statement by Mr Luke Forau, Governor of the Central Bank of Solomon Islands, at the
Launch of the 2023 CBSI Annual Report, Honiara, 22 April 2024.
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Permanent Secretary of Finance and Treasury;
Heads of Financial Institutions;
Representatives of the Diplomatic Corps;
Senior Government officials;
Central Bank Board of Directors;
Heads of Statutory Authorities;
Representatives of Non-Governmental Organizations;
Representatives of the Private Sector;
Representatives of the Media;
Distinguished Guests;
Ladies and gentlemen
Good morning!
It gives me great pleasure to warmly welcome you all this morning to the launch of the
Central Bank's 2023 Annual Report. Thank you for accepting our invitation and for
honoring us with your presence today.
This morning, I will provide you a brief assessment on the economic performance of
our country in 2023, and offer some insights into future prospects in 2024 and beyond.
Then I'd like to focus on something that I think is relevant for the next government to
take on board for a possible path for the economy to prosper.
I will then finish off by highlighting some key operations of the Bank last year, as a way
of informing the public about what we do, as a means of being transparent and
accountable for our actions.
As you are aware, last week the country had a national general election to elect
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members of parliament for the 12 Parliament.
As I speak, counting of some ballot boxes is still continuing. We offer our hearty
congratulations to the successful candidates.
The next important one is the formation of the executive government.
With that in mind, I'd like to underscore that our economy is at the crossroad; the road
to economic prosperity is not going to be easy. Despite rebounding from the recession
caused by the pandemic, the country's current economic environment remains
precarious.
Against this background, my theme for this year is: "The Time is Now: Taking Bold
Action to Level Up Growth in Solomon Islands".
Today, the global landscape has changed from what it was in the pre-COVID19 era,
and we must adapt accordingly, or risk lagging behind. Now is the time to take critical
action to realize our growth potential, 'levelling up' the quality and inclusiveness of our
economic growth in the midst of uncertainties. There is no better time than now to
seriously address the country's dire economic situation. This is an opportune time to
start anew.
We can do that by unlocking the power of our people (human resource), laying the
foundations for a labour-market expansion that would enable us to look at our
demographic boom not as a burden, but as an opportunity. I will return to this later - but
first, let me briefly reflect on the performance of our economy over the past year.
Economic Update
Growth
In 2023, global growth slowed to 3.2 percent from 3.5% in 2022, in the wake of
considerable monetary tightening by major central banks, the winding down of COVID
related fiscal support in many large economies and an overall climate of geopolitical
uncertainty.
On the domestic front, the Solomon Islands economy returned to normalcy, growing by
an estimated 4 percent year-on-year according to CBSI estimates. This favourable
outcome was driven by a four-fold expansion in mining activity, greater output of key
agricultural commodities such as copra and cocoa, a rebound in logging exports, and
higher manufacturing outturns, which collectively outweighed a weak performance in
fishing and palm oil production. Also, many businesses in Honiara were negatively
affected by several months of power supply disruption between May and August.
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The hosting of the 17 Pacific Games in November 2023, which CBSI celebrated
through the issuance of a commemorative $10 note, was the source of important
revenue windfalls for the services sector, benefitting primarily the hospitality industry,
transport, telecommunications, and wholesale and retail industries, thanks to a surge in
visitor arrivals in the final quarter of the year.
It must be noted though, that the benefits brought by the Pacific Games came at high
opportunity costs, as the funneling of funds towards the event led to substantial
resource diversion away from other productive sectors.
Labour Conditions
In terms of employment, labour market conditions improved last year, in line with the
increased economic growth recorded. Job vacancy advertisements surged, and the
number of 'active' and 'slow-active' contributors to the Solomon Islands National
Provident Fund rose by 3 percent to more than 57,000 members. Public Service
employment also increased, from 19,800 to slightly above 20,000, and this is mainly
due to recruitment in the education sector.
Inflation
Following high inflation in the beginning of the year, the Central Bank was able to bring
down inflation to a level that is within the Bank's desirable range. By December 2023,
the headline inflation was recorded at 3.5%. This reflected the CBSI's prudent
management of the monetary and exchange rate policy, combined with easing global oil
prices.
External conditions
External conditions improved as well during the year: both the trade-balance and
current-account deficits narrowed, due to a rise in exports, inward remittances and
donor inflows. This, combined with a buoyant capital and financial account, led to a
surplus in the overall balance of payments position of $218 million. As a result, gross
foreign reserves rose by 6 percent to $5.8 billion, sufficient to cover 11.8 months of
imports. This is well above our minimum threshold of 6 months of import cover.
Fiscal
On the fiscal front, the Government's financial conditions deteriorated markedly last
year. The deficit more than doubled to 7 percent of GDP (or $950 million) from the 3
percent of GDP registered in 2022. Some financing of the deficit came largely from
borrowing. As a result, the Central Government's debt stock - domestic and external -
reached 21 percent of GDP at the end of the year, compared to 16 percent of GDP one
year prior.
The worsening fiscal balance is attributable to a noticeable rise in spending, geared
towards the hosting of the Pacific Games and the preparation for the recent
synchronized elections at the same time, as revenue collection declined during the year
[1] .
Monetary
Due to the sizeable fiscal expansion and improved external-sector performance, all
monetary aggregates (M0, M1, M3) expanded in 2023. Broad money (M3), in particular,
rose by 6 percent to $6.2 billion. Private-sector credit, an important measure of financial
development in the country, grew by 5 percent, supported by the narrowing of the
interest margin between lending and deposits rates to 8.3 percent.
This may be an indication of improving efficiency in the banking sector, and will
hopefully usher in an era of increasing affordability of financing for our people.
Meanwhile, the banking sector continued to accumulate liquidity, which once again rose
by 6 percent on an annual basis to $2.6 billion in December 2023. While excess liquidity
remains high, it is deemed of limited inflationary risk, given the supply-side nature of
inflation in the country.
Growth Outlook
Turning to the outlook for the year, 2024, the Central Bank projects the
post-PacificGames Solomon Islands' economy to grow by 2.9 percent in 2024 and 2.5% in 2025.
This growth projection is anticipated to come from a rebound in fishing and palm oil
production, further expansion in the mining sector - with an expected increase in nickel
exports - and continued infrastructure support by development partners. Modest growth
is also expected across all other sectors.
In the medium term, growth is projected to average around 2.5 percent. This is
expected to be triggered by the staggered implementation of planned development
projects and the continued prospects for global growth, as logging is forecasted to
decline.
In spite of this positive growth outlook, the state of our economy remains fragile and
susceptible to shocks. The key underlying fundamentals of the economy remain
unaddressed; this include but not limited to narrow economic base, high unemployment,
narrow tax base, continuous fiscal deficit, low production, low demand, shallow market,
shallow financial system, and weak monetary policy transmission mechanism.
In addition, domestic challenges still remain, such as rising costs of doing business,
inefficient process of accessing to land for investment, and an inefficient domestic
infrastructure including inadequate transportation system, coupled with limited access
to finance, and limited fiscal space which are further threatened by climate change risk.
As the largest employer, the largest consumer, the largest contributor to national
savings/investments, government action has a larger impact on the economy. It is one
of the two pillars of the economy, the other one being the private sector. As such, it is
crucial that management of fiscal operations is done to spur economic growth and
improve the livelihoods of our people.
That said, the fiscal outlook for 2024 entails a deficit of 4% of GDP, with a total budget
of $4.2 billion. I want to stressed that fiscal discipline and effective management of the
budget is crucial for the delivery of the budget. Until now, we are uncertain of the
incoming government's plans, but any further fiscal expansion would severely strain the
fiscal space and put the government in a very tight and strenuous debt situation. With
limited financial resources, policy priorities have to be realistic and targeted.
Theme
Let me now return to the theme of my address today:
The Time Is Now: Taking Bold
Action to Level Up Growth in Solomon Islands .
Ladies and gentlemen, we must act now!
As I alluded to earlier, the country is at the crossroad. We urgently need major
economic reform program if the economy were to prosper in the medium to long term.
In the short term, the government needs to implement the budget and address the
"lower hanging fruits" for example, review the legislations that need to be reviewed.
The ultimate goal of any economic reform program must be to grow the economy.
There is no way around this, we must grow the economy in order to support and meet
the ever-growing needs of the population. The reform program must be specific,
targeted and measurable.
The incoming government is in a better position to initiate this reform. Again, the
reforms must aim at growing the economy. For me, a minimum average growth rate of
5% would be an acceptable rate of growth for such a developing economy as Solomon
Islands.
We have a fast-growing population, with a population rate of growth higher than the
average economic growth rate. This is dangerously not good and is a serious concern.
We need to grow the economy faster than the growth of the population.
That said, let me highlight few areas that I think requires immediate attention of the
incoming government in order to grow the economy.
First, support and facilitate the export sector. Solomon Islands seriously needs to focus
on increasing the export volume. Often times we hear exporters complaining about
them not meeting the demand of their buyers. The government must support the
exporting companies by providing appropriate incentives in order for them to increase
their volume. This support should include the whole supply chain starting from the
farmer (if it's an agricultural commodity) right up to the exporter. Moreover, the
government needs to listen to the exporters, they know best. Important to note that the
agriculture sector hasn't reach its potential output yet. Therefore, large investments are
needed in the agricultural sector.
At the same time, it's about time that we start focusing on adding value to our exports
by down streaming our primary commodities. Again, this requires reasonable incentives
from the government. The country hasn't had any large investment in the secondary
production since the establishments of Soltuna cannery and Palm Oil. We must
seriously focus on investing in this sector to help boost our GDP.
When the export sector booms, our foreign exchange earnings also increase - good for
the country!
High exports can also cause the local currency to strengthen.
Second, the government needs to seriously institute appropriate governance
mechanisms in the management of the extractive industry. Apart from minimizing the
destruction to the environment, there is a need to strengthen the governance of the
economic returns (revenue) obtained from the extractive industry. This ensures that the
investor, government and landowners receive a fair share of the economic return from
the resource. Doing so, it would also entail striking a balance between respecting
traditional forms of land ownership and enabling economic development through
largescale infrastructure and commercial projects.
Furthermore, having in place good governance structures on these extractive resources
ensures the financial returns are saved and invested to benefit both the current and
future generations.
And if I may add, it is an opportune time for the government to explore the possibility of
establishing a Sovereign Wealth Fund or similar vehicles, to accumulate buffers and
use it during the rainy days. This fund can be reinvested to earn interest.
Third, we must make good use of the most precious resource at our disposal: our
people. Given current demographic trends, we are at the point of entering a period of
demographic dividend, in which the working-age population continues to expand
relative to the economically-inactive age groups, and is increasingly able to finance both
the education of our children and the caring for our elderly.
This demographic gift is however easily squandered: only in the presence of
appropriate employment opportunities for our youths will we be able to fully reap the
rewards of our medium-term demographic destiny. The risks, as we know, are high, for
example, an under-employed youth is a restless one. As our population continues to
increase, we are also faced with the prospect of rising tides of rural-to-urban migration,
which could easily overstretch the infrastructure in our urban centres, as currently
experienced, and drain our rural communities of vitality and economic opportunities.
The question of how best to leverage and employ our abundant labour must therefore
be paramount in our minds, and more especially the government needs to come up with
a policy to engage and cater for the working-age population as we chart a path forward.
In this regard, I'd like to thank the Australian and New Zealand Governments for
providing additional employment opportunities to our working-age population through
the Seasonal Workers Scheme, the Pacific Australia Labour Mobility (PALM) scheme
and the Recognized Seasonal Employment (RSE). This has acted as a stopgap
measure to absorb excess domestic labour, while also benefitting our country through
rising remittances [2] and productivity spill-overs. The country is happy to supply up to
100,000 workers for both Australia and New Zealand.
However, it is imperative that any sustainable growth strategy for our country must rely
on the expansion of domestic economic opportunities. Hence, the need for economic
reforms. And to do that, again it's important that the government provide a conducive
environment for businesses to thrive and attract genuine investors, at the same time
expand economic sectors to broaden the economic base in order to provide more
employment for the working-age population.
CBSI stands ready to support the Government of the day in this regard by ensuring that
macroeconomic conditions in Solomon Islands are conducive to growth and stability.
Ladies and gentlemen, during our consultation with the stakeholders in the private
sector, two factors routinely emerged as major constraints to growth and employment:
(i) a shortage of skilled labour, and (ii) the unreliability and inefficiency of domestic
infrastructure.
The former is of particular importance for all of us in strategic terms. Growth will not
magically materialize from a rising number of working-age people in our country; rather,
it will depend crucially on the skill level of that workforce, and on their ability to find
suitable employment. It is therefore essential that our education system keep up with
rising domestic demand for skilled labour, and that our healthcare system ensures the
health and well-being of our people. We believe the Government can contribute to this
by continuing to step up its efforts at promoting a healthy life-style, strengthening the
fight against NCDs and ensuring that every individual has access to a healthy and
affordable diet.
For the infrastructure, the Private-sector actors are calling on the Government to step
up investment in infrastructure and its maintenance, ensuring also that it is climate
resilient, in order to forge more reliable domestic supply chains and facilitate intra- and
inter-island movement and trade. Better infrastructure would also place Solomon
Islands more firmly onto the global tourism map.
In terms of financial infrastructure, CBSI is committed to providing an ever more
enabling environment for financial development, and to actively champion financial
inclusion as we inch ever closer to reaching that 'last mile'. Recent technological
advances, especially in the fintech space, have brought us closer to that goal than ever
before, thanks to increasingly agile payment infrastructures and savings devices.
As some of you may be aware, that CBSI recently launched the go-live Solomon
Islands Automated Transfer System known as the SOLATS, which is a real time gross
settlement (RTGS) payment system. You may have recently experienced that payment
transfers are now instant.
CBSI aims to ensure every resident of Solomon Islands is finally able to access the
financial services they require and deserve at their finger-tips. We will also redouble our
efforts to improve access to credit, the lifeblood of investment. This is of vital
importance for our SMEs - the backbone of our economy - and our new start-ups, our
disruptors and innovators, who often require special care and incubation in the earliest
stages of operation.
Ladies and gentlemen, all these things cannot be done without the ceasing effort of
everyone. It needs the support of all stakeholders, including the government, the private
sector, non-state actors, NGOs, development partners, and all individuals. We all have
a role to play in this.
CBSI Operations
Let me now close by briefly reflecting on the Bank's operations last year.
The Bank recorded a net operating profit of $199.4 million, reversing the $12.8 million
loss incurred in 2022. Of the total profit, $129 million is in the form of unrealized
revaluation gains and $70 million is operational profit. Overall, CBSI's net equity
position improved significantly, rising by 64% to $531 million. Total assets stood at
$6.60 billion at the end of 2023, the majority (90%) are foreign reserves, which we aim
to maintain at a comfortable level to support the country's international trading and
transaction requirements.
In terms of governance, the Bank was able to leverage the oversight and expertise of its
full nine-member Board of Directors. Last year, the Board endorsed the Bank's
Strategic Plan 2024-2027, which charts CBSI's direction for the next four years; in it, we
aligned our shared vision of CBSI as "A Modern Central Bank Empowering
Development of Solomon Islands " with the key mandates stipulated in the CBSI Act.
The Bank currently has a dedicated workforce of 165 staff, up from 148 in 2022. We
strive to be an equal-opportunities employer, with females comprising 41 percent of the
workforce. We also continued to actively encourage capacity-development and
wellbeing programmes for our staff, with the goal of enhancing skills, enriching
knowledge, and promoting overall staff health throughout the year.
The Bank has also made good progress reviewing the laws that govern its roles and
contribution to the development of the country. In October, the National Parliament
approved an amendment of the CBSI Act 2012, following extensive consultations in
Honiara and the Provinces. We also made progress towards the implementation of the
National Payment System, with the establishment of a dedicated Department to
spearhead its implementation. The Bank further progressed policy papers to review the
Money Laundering and Proceeds of Crime (Amendment) Act, the Financial Institutions
(Amendment) Act, the Insurance Act, and the Exchange Control Act. These documents
have now been rendered to the Ministry of Finance and Treasury for Cabinet approval.
Conclusion
Finally, let me acknowledge the many contributors to this report: the Government, the
businesses houses, the development partners, the NGOs, and everyone that have
contributed directly and indirectly to our work. Thanks to our external auditors, Ernst
and Young, contracted through the Office of the Accountant General, for the timely
auditing of our accounts.
I thank the Board for providing the oversight role and my staff at the Central Bank for
the continued team work and professionalism displayed.
With that, ladies and gentlemen, I now have the pleasure to commend the 2023 CBSI
Annual Report for your reading.
Thank you, and May God Bless you all.