photo of Rick Hou supplied by Central Bank of Solomon Islands
WHEN the century turned in 2000, so did the social and political matrix of a few countries in the Pacific islands. While nations like Samoa and Cook Islands were earnestly mending the nets of their economies to better their prospects, others like Fiji, Papua New Guinea and Solomon Islands were going the other way. In particular, the meltdown of Solomon Islands towards the end of the 1990s is well documented as being linked to land-related tension between native Guadalcanal islanders and neighbouring Malaitans.
The reign of the Isatabu Freedom Movement, a group that comprised Guadalcanal islanders, saw the attacks and subsequent displacement of Malaitan settlers on Guadalcanal, finally erupting into a takeover of Honiara and Bartholomew Ulufa’alu’s government in 2000 by armed militants that belonged to the Malaita Eagle Force.
Continued standoffs resulted in the occupation of Solomon Islands by the Australian-led Regional Assistance Mission to the Solomon Islands (RAMSI) in 2003. Law and order were gradually restored and economic rebuilding began.
In those trying times, one institution that held fast to its mandate was the Central Bank of the Solomon Islands. With governor Rick Hou at the helm, the country’s economy began a slow but steady climb back to normalcy. In April this year, Solomon Islands held its first national elections since the ethnic tension.
However, the newly elected government and its prime minister drew a violent public outcry after being accused of corrupt collaboration with Asian businesspeople.
Rioters burned and looted Chinatown, a commercial section in the capital Honiara run by Asian businesspeople. While this did put a dent to progress made in rebuilding the economy, Hou remained optimistic that the country will not suffer. In an interview with ISLANDS BUSINESS Magazine, he spoke of an economy that is faced with other major challenges.
INTERVIEW
IB: You were optimistic about the Solomon Island economy before the April riot. Do you still feel that way?
Hou: Oh yes. I am still optimistic. Last year, the economy turned a 5 percent growth and our forecast this year is 6 percent. Given the persistence of the trend that we saw happening most of last year, indications are that the trend will continue so we will keep our growth forecast for this year and last year. We will not review them.
IB: So the April riot is not going to be affecting the economy so much. How is that?
Hou: Our assessment is that there is not a lot of impact in the short term. We looked at the government revenue side and felt there would not be a lot of impact there. I guess the areas where we will have negative impact are in security, property rights and investment confidence. The riot came at a very bad time when we were trying very hard to rebuild confidence and it is not a good thing to happen at a time when we are doing this. So I think we will have to work very hard again to convince not only our own people here but also most overseas investors to invest.
IB: What then has been the driver of Solomon Island’s economic growth?
Hou: Last year, the main drivers of the economy were construction, utilities and distribution or wholesale activities. That one has dramatically gone up.
IB: Is this because of RAMSI?
Hou: I think so. But generally, the economy is picking up, especially the construction sector. There’s a lot of construction going on…roads, bridges, buildings. But along with that, consumption has also gone up really dramatically.
IB: RAMSI, we have been told, will extend its stay in the Solomon Islands. How do you see that in relation to the country trying to put forth a good image for investment?
Hou: You ask the ordinary man on the street about the presence of RAMSI and they will tell you that, yes, we need RAMSI. I guess the feeling of normal Solomon Islanders here is that our institutions are still fragile and there is still a need to get on top of the issue of law and order. Our government departments need to be sorted out. So there is a lot of need for institutional building, training, skills upgrade…these are all happening at this time and I think it is not going to be a short-term thing.
I also believe that these are areas where RAMSI’s input should be - in building our confidence in our institutions and that our own people can manage them, for example, the government department, finance. I guess it is in the rebuilding process where we will need RAMSI to help us in. So I think the extension of RAMSI will be positive there. But I think what RAMSI should be careful of is giving an impression that it can fix everything because it cannot.
IB: You were saying that there is a need for rebuilding and strengthening institutions. What is the situation right now?
Hou: Yes, there is that great need. Look at our police force for instance. It was badly affected during the ethnic tension. We had officers who were taking sides and as a result, the integrity of the police force was badly affected by the ethnic tension. We are now in the process of re-recruiting and retraining and in the process, we hope that the confidence that the public has in the police force will return. At the moment, it is still doubtful. So our police force is one institution that needs to be upgraded in terms of the confidence that people have in it, that it can really enforce the law. Other institutions like government departments; well, some of them are doing very well because of RAMSI’s presence in them, for example the Ministry of Finance and Treasury. They have people in there who are looking after things, for example, in treasury, things are now under control as far as government finance goes. Now they are going to have local counterparts to understudy the overseas RAMSI officials that are occupying positions there. Good things are also already happening in the judiciary. Much improvement is needed in other areas like the utilities. Our electricity and water supplies are very weak at the moment. Also in the areas of good governance, we are very weak here in the Solomon Islands so we need to revamp the governance aspect of our all institutions, whether in government, semi-government or those in the private sector.
IB: And then there is the issue of corruption…
Hou: Yes, there is a fair bit of that still happening and this is because of the absence of governance principles, rules and regulations. Some people tend to interpret rules and regulations according to how it is convenient for them and in some institutions, the checks and balances are still not there. One of the things that people have been urging RAMSI and government to do is to bring to account any corruption cases. There are a lot of speculations and allegations going on but nothing has really come to the front to prove that corruption has taken place. People have been terminated and sacked as a result of allegations for corruption and in the last government, ministers were sacked left right and centre but I don’t think there has been any case where the court has sent people to jail for their involvement in corruption.
IB: You were talking about the problems of over-logging. How much of a threat is that to your economy in your effort to gain from your natural resources?
Hou: I have three concerns when it comes to logging. The first concern is that of the environmental damage that logging is causing to our country. I am not sure about the management practices that logging operators apply in the forests. I can only see it in my own local area where – I mean I know very little about forest management - but all I know is that rivers are not flowing and what you have in the lagoon is mud and that’s all I see. So definitely, some environmental concern is there. The other concern I have is: what will happen when we run out of trees? According to the forestry experts at the Forestry department, we will run out of trees in six years’ time if we keep cutting at the rate we are cutting. Six years is not a long time and that is where my third concern is, when we will be looking for something to fill this gap.
Sadly for us, logging has now become the mainstay in terms of foreign exchange and in terms of our exports as it accounts for almost 60 percent of our exports. In terms of our exports, logs is one of our few exports and it account for more than 50 percent of our exports. It is also an important government revenue – it accounts for more than 30 percent of government revenue so it is a very important commodity at the moment. My concern is: what will happen in six years’ time?
The third concern that I have is really a question that I have been raising for a number of years that I just have this gut feeling that the local economy is not getting maximum benefits out of logs. Yes I mentioned that it is the leading export earner for us but it could be more. I am not sure about the prices that we are getting out of our logs because we do have very valuable trees here. I am not sure about the value we are getting for our exports and the value we are getting in terms of our import duties because for a number of years, these logging activities have enjoyed a lot of exemptions. I am also overly concerned about the resource owners. I am not sure whether they are getting any benefits out of this. I have my doubts.
IB: So this is mostly the private companies who are here to do logging?
Hou: At first it used to be foreign companies who come in here to do logging. The license allowed you to do logging and give you a quota, which allows you to log a certain cubic meter of logs. In the last few years, the government had moderated that project. What it did was gave resource owners the license and, in theory, these resource owners and landowners would own and run the logging operation. However, things did not happen that way. The thing that is happening now is the landowner or the license holder, usually goes out in search for a foreign company to operate the logging operations. And there’s very little government involvement in the negotiation process. And this is where I see the landowners losing. For example where I come from, some of the landowners are getting SB$40 (US$5.20 per cubic meter) and I am not sure if the landowners know exactly that they are getting the wrong end of the stick.
IB: Isn’t there a mechanism or process in place that will take care of the marketing of this commodity?
Hou: There have been suggestions and discussions and proposals on this but unfortunately the way the whole process has been managed is so murky and disorganised that everyone is doing their own thing. And as long as you can get a license, a concession and landowner agreement, you go ahead and log. At the end of the day, I think the landowners are the ones who are losing out the most.
IB: Solomon Island’s foreign reserves situation looks attractive with an average seven months import cover, mostly from aid monies as you’ve mentioned. Would you expect this situation to continue in the immediate future?
Hou: Solomon Island’s external reserves position has been relatively high since 2004. In fact, over the last 18 months, the foreign reserves represent an average of six months of import cover. This is quite an achievement given that the Solomon Island’s external reserves have, historically speaking, been always below three months of import cover. So for the moment, our external position could not be better. We are very mindful however, that much of this was derived from donor assistance and other RAMSI related activities in the Solomon islands. However, since last year, we have seen some improvement in long-term sustainable sources of foreign exchange, for example in exports and foreign direct investment. I believe the favourable situation would continue for some time yet. Much of the economic reforms and physical infrastructure rehabilitation work has barely started and hence with government commitment and donor assistance, it should still continue for the foreseeable future. These reforms and the rehabilitation process will take time and commitment, but when pursued consistently, economic activity is expected to pick up further.
IB: Inflation is at around 10 percent. Could the economy sustain such high rates and what is being done to mitigate inflationary pressures?
Hou: Historically, double-digit inflation is not new to the Solomon Islands. However in the last two years, it has been maintained in single digits. More recent numbers released by the Statistics department show inflation has declined to 8.5 percent by the end of 2005. This is within the central bank’s policy objective, which is to keep inflation below 10 percent per annum. Prolonged inflation of over 10 percent would pose a threat to economic growth. Current monetary conditions however pose potential risks to this policy objective. The banking system is highly liquid and the government has built substantial deposits with the banking system. Higher oil prices, accelerated lending by commercial banks, a draw down of government balances and the RAMSI spending could all add to inflationary pressures. In a small open economy like the Solomon Islands, price stability is vulnerable to all these movements. The previous government had acted sensibly and responsibly to help ease this pressure and the new government should do the same. The central bank is poised to take appropriate action to lessen any inflationary pressure by mopping up excess liquidity to influence domestic credit growth. We may also use administrative measures where necessary and of course, use moral suasion. We do however encourage financial institutions to provide greater access to financial services in the rural areas.
IB: What about exports, how is that faring?
Hou: Solomon Island’s export base is very narrow and is mainly in raw materials. Production levels of our main commodities – round logs, fish, copra and cocoa – have rebounded since the restoration of law and order. Log production has been running at record high, although unsustainable, levels. Production levels in other commodities are already close to pre-crisis levels. There is still capacity to increase production and to broaden the economic base. The Oil Palm project, which has been taken over by a PNG-based investor, is expected to start production this year. Given the high level of interest in this commodity, it may in future become a major source of employment, foreign exchange and general economic activity for the Solomons. In the mineral sector, although its production schedule has been pushed back by about a year, plans to restart the Gold Ridge mine is already a source of confidence building.
IB: What is your view on the progress of the global economy and how Solomon Island’s economy can benefit from it?
Hou: The positive growth indications in the global economy are encouraging as it will be helpful to us. More particularly in Japan and some of the Asian countries, which are important destinations for our exports, we are hopeful that these positive trends will continue. However, the consistent rise in oil prices will seriously undermine these hopes. For Solomon Islands, oil accounts for about 40 percent of our total imports and is an important component in local production. The increasing oil price therefore poses potential risks to this positive outlook. And for a small open economy like Solomon Islands, we are extremely vulnerable.
---
NOTE: This is the original transcript of a Rick Hou interview, published in the Islands Business Magazine as: Interview: Rick Hou, GOVERNOR OF THE CENTRAL BANK OF SOLOMON ISLANDS, pp 34,35, September 2006 edition.
Islands Business is the flagship publication of Islands Business International.
***
No comments:
Post a Comment