Solomons set for economic grief: Central Bank

Updated May 19, 2009 16:20:23

The Governor of the Central Bank of Solomon Islands says his country is facing an unprecedented economic downturn, and people should prepare for a very difficult year ahead. Governor Denton Rarawa says government revenue and export earnings are expected to drop substantially, and people need to be prepared for job losses.

Presenter: Jemima Garrett
Speaker: Denton Rarawa, Governor of the Central Bank of Solomon Islands

GARRETT: The Central Bank has just released its annual report for 2008 and it's first quarter figures for 2009. Governor Denton Rarawa says revenue from all Solomons major commodities except palm oil has dropped.

RARAWA: In terms of 2009, I think the picture is looking very gloomy. I believe the economy will go some very challenging and difficult times this year.

GARRETT: So just how much of a drop in government revenue are you expecting?

RARAWA: We are expecting substantial drop in government revenue. For example, the first three months of the year, provisional figures show that government revenues are down by 20 per cent and if these trends continue, there will be a huge gap in the government's budget which needs to be filled and this will present a lot of challenges or difficulties for the government.

GARRETT: Central Bank Governor, Denton Rarawa. Solomon Islands suffered difficult times during the ethnic crisis in 2000, but in the past few years it has recovered and has been posting strong economic growth. In 2008, growth was six per cent. Preliminary estimates suggest growth for 2009 will be just one per cent.

Dento Rarawa says the situation is serious.

RARAWA: I think it is unprecedented, although we have gone through this similar scenarios during our crisis times. But I think this is much more challenging and difficult compared to our crisis period.

GARRETT: How do you expect the government to make up the short fall in revenue? How much borrowing do you see and how much cut back of government services or government spending?

RARAWA: I think the only way to move forward is to reprioritise government expenditure, delay some of the planned expenditure, and save what they can save and probably raise new revenue in certain areas. But this total is I don't think will be that huge. So the government finances will be very difficult this year. In terms of borrowing, the government is maintaining their 'no borrowing' position and I am not sure whether they will stick to that or not, but that's an issue for government, but I think if worse comes to worse, then this position will have to be reviewed and revised. But the sources of where to borrow is also an issue, and especially if the government is intending to borrow from the Central Bank, then the consequences of that, especially in this time of hardship will also be a major concern for us in the Central Bank.

GARRETT: Denton Rarawa, Governor of the Central Bank of Solomon Islands. Beyond the global economic crisis, the Solomon Islands Government is already preparing for another even bigger problem. At the moment, logging makes up well over half of all Solomon Islands export earnings. But within four to five years, the commercially viable forests will be gone. Despite that, Denton Rarawa's first message for the government is more immediate.

RARAWA: We will advise them that borrowing from the Central Bank is the most inflationary thing to do and at the moment with inflation very high, at 16 per cent if you borrow from us, that's the consequences. It will be increased the inflation again and so that is not an issue that we want to see happen, inflationary pressure growing again.

GARRETT: To what extent will the very difficult conditions that Solomons is going to face this year jeopardise its ability to prepare for the post-logging world?

RARAWA: I think it will be difficult. The crisis just sort of accelerated a problem or magnifies the problem and the urgency of taking appropriate measure, right policies is sort of just intensified. So it makes it a bit more difficult to prepare for the time when logging runs out, but I guess we have no choice. We have to just go ahead and proceed with these activities to ensure that once logging is phased out, the economy is still standing.