Worries over widening deficit

THE Solomon Islands’ widening cur rent account deficit is not sustain able, the Central Bank of Solo mons says in its mid-year review. In re cent years the deficit has tended to rise, not only in dollars, but as a proportion of national income. “It must be reversed if the economy is to continue to expand, avoid a major crisis in the balance of payments,” the bank said.

The report followed statements by the Solomons Finance Minister, Columbus Abe, in which he described the economy as sluggish and the unemployment rate as one of the government’s main prob lems.

The Central Bank said economic activ ity continued to expand in the first half of 1989 despite tighter financial condi tions. Export earnings were up 15 per cent, mostly due to increased agricultural and fisheries production. Nevertheless, there were reduced prices for several commodities copra, palm oil, cocoa and fish. But investment in smallholder

plantings rose.

The bank said the logging and saw milling industry entered a period of un certainty as the government moved to enforce environmental standards and the requirement that 20 per cent of logs be sawn locally. At mid-year it seemed that some small operators might close down, but most logging companies would com

ply with the government’s regulations.

Mining companies were waiting to see

the government’s intentions on taxation and the new mining legislation.

The bank reported that tourist traffic remained at a low level but considerable work was done by the new Ministry of Tourism and Aviation aimed at promot

ing greatly increased private investment

in hotels and other operations.

Monetary policy was kept relatively

tight to protect overseas reserves and to minimise inflationary pressures. Interest rates remained in the 15 to 18 per cent range for loans several points below those obtaining in Australia. Since the middle of last year the Central Bank had

been giving increased emphasis in monetary and exchange rate manage ment to domestic price stability. The bank said the domestic prices had re sponded well to this. Retail prices had been much more stable: the Honiara price index for January to August rose only two per cent.

About Sslo million had been added to disposal incomes by the government workers getting a 17.5 per cent pay in crease and a rise in teachers’ pay. The bank said this extra money in the system would be both inflationary and damag ing to the balance of payments, while the financing of it put further pressure on taxation and the government’s domestic

borrowing.

The increased pressure on the govern ment budget had come, the Central Bank said, at a time when many of the pre-conditions for sustained growth were in place. Solomon Islands production had remained competitive by the mainte nance of a realistic exchange rate, monetary and incomes policies and the absence of artificial protection or sub sidy. Real gross domestic product was growing at about five per cent a year and the economy was positioned for con tinued growth in fisheries and agricultu ral output. Substantial investment was in prospect for plantation foresty, timber processing and tourism, as well as pro

cessing and manufacturing industries.

“It is important that these favourable conditions should not be undermined by adverse developments in public finance,” the Central Bank report said. The public now needed to see detailed statements from the government on practical plans for taxation, current expenditure, public sector investment, foreign aid and fore ign direct investment.

It was a matter of deciding on priori ties. “The resources available are finite, and the same resources cannot be used by both public and private sectors, or for both consumption and investment, all at the same time,” the bank said. □