Statement by the Minister of Planning and Aid Coordination Hon. Gordon Darcy Lilo on the current state of the National Economy, 3 October 2006.

Mr LILO: Mr Speaker, thank you for granting leave under Standing Order 24 to present a brief on the current state of the national economy.

Mr Speaker, I am delighted to report that the National Economy has continued to rebound during this year. Domestic economic growth is forecast to remain stable at nearly 6% for 2006, and more than 6% is expected for 2007 economic growth.

Mr Speaker, this is by far the fastest rate of economic growth in the South Pacific. The high economic growth is mainly attributed to growth in the forest sector. Strong growth has also been recorded in distribution and utilities sector.

Mr Speaker, the global economy by comparison is forecast to grow by around 5.1% in 2006. Nevertheless growth in the global economy is expected to slow marginally in 2007 at around 4.9%. The growth forecast for our major trading partners in the Asia/Pacific region however, are also strong. This is good news for Solomon Islands. We are a small trading nation directly affected by the world economy. In this connection Mr Speaker, I am pleased to report that all of our major export commodities have so far registered increases in 2006. In the June quarter exports of timber, fish and copra were significantly higher than the same period in 2005. This is record high export receipts, more than double export receipts in 2001.

Mr Speaker, the overall balance of payments for the first six months to June 2006 is a surplus of around 13.2million. This reflects increases in export receipts and positive outcomes in services, transfers and capital accounts. In addition donor assistance has remained strong. The gross internal reserves are currently estimated at 755million, which is equivalent to about five months of import cover. This is an increase of around 5% from the December quarter in 2005.

Mr Speaker, amidst these very encouraging and promising developments there are a number of immediate risk and shocks to our economy, most particularly oil prices and inflation. Mr Speaker, the global oil price has continued to rise over 2006 and is expected to remain high. This is mainly attributed to strength in the world economy particularly from growth in China and India as well as constraints on supply. Higher oil prices have also contributed to upward price pressures in the national economy both for our domestically produced goods and our imports.

Sir, annual inflation continued to increase throughout 2006 rising to almost 10%. Much of this is attributed to the high oil prices feeding into cost of transport and utility. Also contributing to price pressures in the economy is our recent experience of strong growth together with capacity constraints. Domestic or international pressures are expected to diminish in the near future. Accordingly inflation is expected to remain around 10% through to 2007.

Sir, in terms of medium term economic outlook, the national economy is making good progress. However, major challenges remain if we are to raise the living standards of all Solomon Islanders over the medium term. Sir, the biggest single pressure comes from our fast growing population. Currently the population is growing at around, as we all know, 2.8% per annum. This is one of the fastest population growth rates in the world and to maintain our current level of income per head the economy needs to grow by the same rate as the population.

Mr Speaker, one our biggest challenges is to generate the broad base road necessary to provide enough opportunities for our growing population, especially for our young people. A big contributor to our economy for many years has been the foreign sector. Currently it provides around two thirds of our export income and around 15% of our economy. Its contribution to national income and growth of the economy has offset weaknesses in other sectors of our economy.

Mr Speaker, presently we are exporting around 1million cubic metres of timber a year. We cannot afford to be totally dependent on this one commodity for growth of our economy. Without investment and growth in other sectors and industries any decline in incomes from forest industries will reduce incomes for our people, particularly those living in rural areas and resulted in a decline in our rate of economy growth. This situation could occur within the life of the current Parliament. Moreover sir, failing to create the conditions necessary for strong growth of all key sectors of our economy could result in a significant decline in our real annual growth rate.

Mr Speaker, if on the other hand we pursue vigorous reforms combined with prudent and physical and monetary management, the real annual growth rate in the medium term could remain high at six percent and raise the living standards of all Solomon Islanders.

Mr Speaker, we cannot afford to wait. We must act now. This is a role and responsibility the government must take head-on in order to provide an enabling environment which our economy can grow and thrive upon.

Mr Speaker, the path to achieving sustainable national development is to ensure diversified growth across the economy. Sir, the government has developed a comprehensive economic development strategy. This strategy is to maintain macro economic stability, increase the return to Solomon Islanders from our natural resources, address key barriers to growth and take a bottom up approach to rural economic development.

Mr Speaker, macro economic stability is the most important condition for economic growth. The government is committed to maintaining macro economic stability and good macro economic management. This entails working towards a low inflation environment and a stable financial system. The Central Bank of Solomon Islands has proved to be an able steward of these key elements.

The Government is also contributing to macro economic stability through its balanced fiscal policy. This means all of our spending is fully financed without borrowing. The government has been actively pursuing initiatives to help Solomon Islanders increase the return from their natural resources. During 2006 we saw the re-establishment of a number of major businesses such as the Guadalcanal Plains Palm Oil Limited and the Pacific Timbers Sawmill. Also important was the reopening of the Gold Ridge Mine.

Sir, the Government is also involved in active negotiations to develop mineral projects in Solomon Islands. There are ongoing negotiations with landowners at Mase on North New Georgia Island about a gold mine. The Government is also continuing to support the Bugotu Nickel Mine on Isabel although negotiations with landowners and the Isabel Provincial Government have been delayed because of legal proceedings. Also the Government has received a progress report from Sumitomo Corporation of its phase 2 prospecting license report at Suri on North East Choiseul of its findings which should lead to another gold mine in three years time.

The Government has continued to support our tuna industry. Earlier this year the Government announced an agreement with SOLTAI to stabilize its debt situation. Without this agreement SOLTAI would have had to cease trading, but now SOLTAI can move ahead as a major employer in the Western Province of this country.

The Government has also continued to show commitment to the Auluta Basin Palm Oil Project in East Malaita. We are currently engaging landowners and the Malaita Provincial Government to discuss the strategy of this project. As stated earlier during question time the groundbreaking ceremony will be done in December this year. Mr Speaker, in addition to all these initiatives the key to unlocking the economic potential of this nation is to address barriers to growth in particular rural Solomon Islands.

Mr Speaker, there are three main areas to growth in our economy. First, is the distance – our rural areas are disadvantaged by isolation and distance from markets. They also lack access to telecommunication services, electricity, water and sanitation and reliable transportation.

The second key barrier to growth is our regulatory and tax environment. Businesses in our economy are strangled by high tax rates, excessive regulatory costs and uncertainty when dealing with the government.

The third key barrier to growth is inadequate business skills and entrepreneurship among our people. The Government is committed to removing these barriers to growth through the strategic framework for rural development and other related economic initiatives. To remove the barriers of distance that hinder the growth of our economic and living standards of our people, we have put in place comprehensive reforms to the transport and communication sectors.

Mr Speaker, transport is at the centre of the government’s economic development strategy. The Government’s objective under the National Transport Plan is to provide effective transport infrastructure and efficient services and to support, sustain economic growth and social development. This will include regular reliable and privately operated shipping services to all areas. Shipping services will be supported by both improved roads and air services. These initiatives will help our people access markets for their produce.

Mr Speaker, the Government has an ongoing agenda to improve affordable access to telecommunication services by introducing competition. The Government looks forward to working productively with Solomon Telekom on this matter for the benefit of our people.

The Government is also forging ahead with moves to improve the regulatory and taxation environment facing business in the country. The Government has recently gazetted the Foreign Investment Act on the 26^th June of this year and since then I am delighted to report that there has been serge of new investment registrations across almost all sectors of our economy.

Mr Speaker, I am also happy to report that the Business Law Reform Project launched this week is part of the Government’s commitment to create a better business legal, regulatory environment to ensure our people participate in business and contribute to the national economy.

The National Tax System has become outdated to the point that it works against business development. The Tax System increases business input cost for local business operators. Worse still, some businesses and families have to pay high rates of tax while others get special deals through exemption and remission. We need a simpler system where everyone pays the fair share. A number of steps have already been taken including exemption guidelines and cessation of round log export duty exemption. Soon the Government will announce reforms that will reduce the cost of import duties for local businesses. Over the coming months the government will further progress the tax reform agenda by pursuing its commitment to abolish the Goods and Sales Tax and substitute it with a better tax system.

Sir, the Government is also committed to providing support to local businesses particularly in the rural communities. We have been concerned that assistance currently provided is not well targeted and not supporting businesses that need it most.

Sir, the Government is working on a range of measures to provided effective assistance to local people to start and run a business including business skills training with focus on rural areas and provincial centres.

Mr Speaker, action is also being taken to expand access to financial services for those in rural areas. The government recently announced a new credit guarantee scheme to help people with robust business proposals to access commercial bank loans.

Sir, steps are also been taken by commercial banks to expand their services to rural areas. More automatic teller machines or ATM machines are now being installed; mobile banking is reaching rural villages with savings and micro credit products; the post office is offering banking services; and new bank branches are operating in rural commercial centres. The government is seriously looking at options for supporting the spread of these services.

Mr Speaker, the final element of our economic development strategy and the key pillar of our strategic framework for rural development is the government’s constituency development model. This model will mobilize local communities in planning and development. This will provide a basis for better targeting government and donor support for our rural communities, and thus building private sector culture in our rural communities.

In summation, Mr Speaker, our economy has continued to rebound. However, our future growth will very much depend on unlocking the economic potentials of our nation. It will depend on helping our people particularly our rural people to actively participate in growing our economy. It will depend on raising the incomes and standards of living of us all and not just a few.

This government has an economic strategy for our economy and people, particularly our rural people. The strategy will remove the barriers to growth.

This strategy will help our people to access greater opportunities in an environment that encourages participation in the economy rather than being mere spectators. This strategy will also help to provide the transport links our people need to access opportunities and markets. It will help to provide better communications. It will help our local entrepreneurs access finance and build the skills necessary to run successful businesses. It will provide a regulatory and tax environment that encourages business and investment.

Mr Speaker, this government’s strategy is for us all. We will not leave anyone behind. Our rural development strategy will make sure of this. Our strategy and vision is for every Solomon Islander, from the biggest town and cities to the most far flung villages to enjoy improved services, better infrastructure, greater opportunities and a higher standard of living.

Mr Speaker, this government’s strategy will help Solomon Islanders to work and invest for the future – for the good of us all.

Thank you Mr Speaker.