Denton Rarawa: The current state of the Solomon Islands' economy and
thoughts on the future
Paper presented by Mr Denton Rarawa, Governor of the Central Bank of Solomon Islands, to
the University South Pacific Development Dialogue in Solomon Islands, Honiara,
17 September 2009.
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Distinguished USP Personnel
Invited Guests
Ladies and Gentlemen
Good morning to you all
Introduction
First let me thank the USP Faculty of Business & Economics for inviting the Central Bank to
participate in this important gathering this morning. It is a privilege to be part of this Dialogue.
This morning I hope to provide a brief update of the current economic situation in Solomon
Islands and to share with you a few thoughts on the direction in which I think we are heading
as well as some challenges that need serious consideration by policy and decision makers.
Some of these policy challenges are potential areas that institutions like USP can assist the
country in by employing its academic research expertise. I believe this is one key goal of the
Development Dialogue this morning.
I will begin by looking at the current condition of the productive sectors of the economy
including some of the future challenges and opportunities these sectors are facing. Then I
will move to areas for which the Central Bank is directly responsible; the monetary and
financial sectors of the economy. I will also describe the actions that the Bank has taken to
influence events and discuss policies we may implement in the future. I will conclude with
some thoughts and advice for the future.
Global economic crisis
You are all aware that in the last eighteen months the global economy went through a severe
financial and economic crisis that spared no country. Earlier this year when launching the
Central Banks' 2008 annual report, I described the Solomon Islands economy then as a
small boat in the middle of a severe storm. At that time, no one knew how strong the storm
would be or how long it would last. But one thing was certain: the country has to survive the
storm otherwise our boat MV Solomon Islands will sink.
Today there is growing evidence that the storm is abating. Signs of recovery are emerging
around the world. Just yesterday, the Chairman of the Federal Reserve Ben Bernanke
claimed that "the recession in the United States was over". Despite these positive signs
however, Dominique Strauss-Kahn (the Managing Director of the International Monetary
Fund) issued a stark warning only last week "that the global economic crisis isn't over yet".
Other prominent commentators have suggested that growth will be "slow and uneven" and
"unemployment will remain a problem".
Real sector
The largest impact that the global economic crisis has had on Solomon Islands has been the
reduction in our log exports. 2008 saw record levels of production from the forestry sector
with 1.5 million cubic meters of timber being exported. This accounted for around 16% of
GDP.
The global economic crisis led to reduced demand for raw materials particularly in Asia. The
slowdown in China, the destination for around half of Solomon Islands' logs resulted in a
decline in our timber industry. For Solomon Islands, logging has not only been a major
contributor to growth but has also been our major export earner, an important source of
employment and a crucial contributor to government revenues. The decline in logging that
the crisis provoked has hurt the country.
As the global economic situation recovers so we see a clear upturn in log exports. Second
quarter results are up and the Bank predicts further increases in the third quarter. It must be
remembered however, that the contribution of forestry to the Solomon Islands economy are
numbered. We are destined to see a terminal decline in the industry due to the unsustainable
rate of harvesting that has occurred. It is predicted that non-plantation logging will be fully
exhausted in 4-5 years. In spite of any action we can take, the country will experience severe
economic challenges as this industry declines unless new sources of growth can be found to
take its place and take its place quickly.
Another industry that has declined in the first half of 2009 is copra. Copra is an important
industry in Solomon Islands because it is the major cash crop in many rural areas. Strong
world prices in 2008 generated record production in Solomon Islands. Since the third quarter
of 2008 however, world prices for copra have sharply declined resulting in substantial falls in
production. Second quarter output was 45% lower than that recorded in the same period last
year. The flooding that Solomon Islands experienced in the first half of the year has further
affected copra production. One major constraint on the growth of the copra industry in
Solomon Islands has been infrastructure weaknesses. Problems in shipping and storage
mean that even during the peak last year copra export levels have remained well below
potential.
The fishing industry has also seen a subdued start to the year. This probably has more to
do with domestic factors than with the global economic crisis. The first half of the year has
seen one company cease fishing activities as part of its strategy to restructure and focus on
processing. Poor fishing conditions have compounded this problem and magnified the
decline in catch. It is anticipated that catch will rebound in coming months as two new fishing
boats come into operation. Fisheries is a sector in which the Bank expects future growth with
investment into the sector remaining strong.
Cocoa production has been one success story in 2009. Due mainly to adverse weather
conditions, cocoa production in 2008 was poor. Earnings in the industry were however
sustained due to resilient international prices. Production levels for the second quarter have
been very promising. It is hoped that a combination of good harvests and a fair international
price will enable the cocoa industry to contribute more to the Solomon Islands' economy in
2009. Cocoa forms an important source of income in many rural areas.
The continued growth of the palm oil industry in the country has also been a major positive
in the last few years. 2008 saw a 28% increase in output in palm oil and further gains have
already been witnessed in 2009. Expansion in the size and yield of plantations, increases in
mill processing and improvements in worker productivity are combining to drive forward the
palm oil sector. It is anticipated that falls in the price of palm oil experienced over the last few
quarters will be only temporary as international demand for palm oil and palm oil products
remains strong. This dip in prices also does not seem to have dampened the industries plans
for expansion. Issues of security and land tenure however, remain as serious and continued
risks to development of the industry. These issues must be confronted if this sector is to grow
and increase revenues and employment in Solomon Islands.
Tourism has been identified by the Government as a key potential growth area. This sector
has seen a 16% year-on-year growth in the second quarter of 2009. This is a very positive
sign for the economy. One major contributor to this growth has been the recent entry of a low
cost carrier to the Brisbane/Honiara route. This has increased competition and dramatically
lowered fares for travelers. The upgrading of hotel facilities around Honiara and the opening
of a new hotel on Honiara's waterfront may also boost tourism in the county. Limited
infrastructure and problems with domestic air and sea travel, remains the major barrier to
developing the tourism industry across the country.
The Government has made steady progress in opening up the telecommunications sector.
This is expected to provide a boost to the economy. The granting of a second mobile license
could see new investment into the Solomon Islands economy. The experience of many
countries is that the entrepreneurial use of mobile technology can reap huge rewards
particularly in rural areas.
The last sector I will mention is mining. There are currently twelve mineral exploration
companies active in Solomon Islands. The sector, although currently small, is becoming
increasingly active. The main short term potential for the economy lies in gold production.
According to industry predictions, a major gold mining project could be in operation on
Guadalcanal by March 2010. In the longer term nickel may prove an important export for
Solomon Islands. The country possesses major proven nickel reserves. The majority of
mining projects however remain a long way from production and continued peace, stability
and patience is vital to maintain investor's confidence in such projects.
Monetary and financial developments
Let me turn to recent monetary and financial developments. It must be remembered that the
impact of the global economic crisis on Solomon Islands has not been all bad. Whilst falling
international commodity prices have had a damaging affect on our export receipts they have
reduced the cost of imports. This has been a major contributing factor in the easing of
inflation pressures. Falling world prices for oil and food in particular have been instrumental
in reducing the inflation rate from 23.5% in September 2008 to 5.9% in July 2009.
The lowering of inflation, to a more sustainable level, is a major policy goal for the
Central Bank, as set out in its 2009 monetary policy stance. Whilst international price falls
have been one major contributor to this reduction in inflation, Central Bank intervention has
also been important in increasing price stability. The CBSI intervened to reduce the level of
excess liquidity in the financial system and so slow down lending, which was fueling inflation.
In order to do this the Bank redefined the liquid asset ratio, which acted as a de facto raise in
the required level of reserve holdings by the commercial banks. We also issued central bank
backed securities and instituted a long run deposit facility to absorb liquidity from the system.
The Bank anticipates the level of inflation to remain well within target during the remainder of
the year. We will however continue to remain vigilant. An unanticipated upsurge in fuel or rice
prices could increase upward pressure on the inflation rate. Other potential threats to price
stability include public sector wage inflation and potential fiscal dominance.
Our second stated policy objective for 2009 was and if possible increase
to protect the level
of foreign reserves. At the beginning of the year the level of import cover provided by gross
reserves had fallen below the Banks minimum desired bench-mark of 3 months. Through a
combination of tight monetary policy, foreign currency inflows and an increase in Solomon
Islands' allocation of special drawing rights from the International Monetary Fund, our
external holdings have increased to more than four months import cover.
We must however remain cautious as large risks to our external balances persist. Whilst the
second quarter of the year saw an improvement in the overall balance of payments position
and in fact witnessed a positive overall position, this was based solely on the position of the
capital account. The trade balance of Solomon Islands remains in a structural deficit which
without action will only worsen with the decline in logging. The structural imbalance in trade
is a major concern and is a key area in which action is required.
The final goal that the Bank set itself for 2009 was to ensure the stability and robustness
of the financial sector in Solomon Islands. Given the events of the global economic crisis
and the financial meltdown across the world, it is understandable that individuals and families
in Solomon Islands are worried about their hard earned savings. In this connection, I want to
assure the public that the financial sector of Solomon Islands remains secure and well
managed. The Central Bank is in the process of bringing in further measures to ensure the
continued strength of the sector and to protect investors both now and in the future.
Issues & challenges
Let me comment on a few issues and challenges facing Solomon Islands. Given the time
constraint I have, it is not possible to cover all the issues. I have selected but a few.
The need to find new sources of growth to replace logging. is crucial. As yet this remains
the great unanswered question for the nation. Solomon Islands must keep striving to develop
the areas that it already has and to develop new economic opportunities. Many industries,
such as the cattle industry, have not retained pre-tension levels and redeveloping these
could be one potential area for growth. Other areas already exist in Solomon Islands and
with careful effort and planning could provide future growth. The country must encourage and
nurture the spirit of entrepreneurship whenever possible to help the economy to flourish.
Developments in the mobile phone market, for example, could present a range of
opportunities for local businesses.
Another challenge for our country is our high population growth. The population issue in
Solomon Islands is like the elephant in the room. We know it is there but nobody wants to
talk about it or even acknowledge its presence. Successive Solomon
Islands governments have been unable and even reluctant to address population related
issues. But rapid population growth is driving the development agenda in this country from
the demand for constitutional change, unemployment, and pressure on infrastructure and
social services. Thus it is very important and makes "development sense" to rein in on the
population growth in this country as a means of raising per capita income levels and welfare
of the people.
The final area I wish to comment on is that of education. Education is of vital importance in
driving the economy and the nation forward. In order to investigate and change the world we
live in it is vital that we have the correct information available to us and that we can correctly
interpret and understand it. For this reason events such as this one today are vital to the
economic wellbeing of the country and every organization. Every one present here today has
something which they can add in this area.
Conclusion
In concluding, 2009 has so far proved to be a challenging year for the Solomon Islands
economy. Although the situation is improving, the Bank predicts that economic growth for the
year will be around 1%. There are reasons to be hopeful for the long run prospects of the
country, in particular if managed carefully, the agricultural, mining and tourism sectors all
have potential as sources of growth. The short to medium term prospect for the economy
however look less cheerful and structural reform must be implemented now to avoid a
stagnation or worse shrinking of the economy. A warning about how far we still have to go
was issued by the World Bank last week when they ranked Solomon Islands 104th in their
"ease of doing business" rankings.
Key constraints in Solomon Islands involve weaknesses in infrastructure, insecurity of land
rights and difficulties in starting businesses. Reform to these areas is vital to ensure future
prosperity.
The Central Bank maintains its commitment to ensuring macroeconomic and financial
stability in Solomon Islands and providing an environment where we can grow in a rapid and
sustainable way. If all organizations and individuals in the country continue to pull together
and work in their own unique way towards the development of this country I am sure that we
can continue to improve the state of the economy and the lives of people across the islands.
There is certainly a lot of work to do if we are to improve the livelihood of the majority of our
people. And as I alluded to earlier, USP can assist by using its research skills and expertise
to finding solutions to these complex issues.
Thank you for your time and God bless Solomon Islands.