The Minister of Finance and Treasury, Honourable Harry D. Kuma (MP) has announced today when contributing to the Motion of Sine Die in Parliament that the adverse impacts of the recent riot and looting of business and destruction of properties represent the largest man-made economic shock that Solomon Islands has experienced since 2006.
The Minister revealed that based on the Ministry of Finance and Treasury preliminary assessment, the unlawful events last week that led to the mass looting of businesses and property destruction, would drastically impact the country’s economic performance in 2021.
Prior to the unrest, government had expected a positive real economic growth of one percent (1.0%) in 2021, as a result of government policies and programs to boost economic recovery, growth and continued service delivery throughout the year.
However, preliminary data have now showed that the economy would contract by 0.2% in 2021. The damage done was immense, and would take many years to rebuild and recover from.
The Minister further reported that the forecasted economic contraction for 2021 primarily reflects the significant reduction in sectors such as the wholesale and trade, construction, manufacturers, financial intermediation, public administration and other business services.
The multiplier impact will also affect other major sectors like agriculture, transport and firms that have also cut back on business activities and investments due to decreases in domestic demand for goods and services, supply interruptions, and uncertain future earnings outlook.
The most affected sectors would include wholesale and trade sector, which is expected to decline by 2.3 percent, manufacturing to decline by 14.5 per cent and public administration to decline by 0.4 per cent. The construction and other business services are also forecast to decline by 1.4 per cent and 2.7 per cent in 2021, respectively.
In terms of contribution to GDP, construction and wholesales and trade are projected to subtract from growth by around 0.5 per cent and -0.3 per cent. This primary reflects the impact of the unrest and riots. Whilst other business service and public administration are forecast to contribute zero percent growth to GDP.
On the upside, both the agriculture and fishing sector are forecast to contribute around 0.4 percent and 0.2 per cent point to growth in 2021.
In terms of fiscal operations, the government is expected to lose out on revenues. For example, government expects to lose about $24 million in revenues from one of the major tax payers alone for the remaining two months of 2021. Other revenue sources that will also be adversely affected, include company tax, GST and PAYE, reflecting the expected loss of more than 1000 jobs. This will add more fiscal pressures to an already tight fiscal position of the government given the recovery of the country due to covid-19 pandemic related measures.
Overall, the government is expected to lose more than $84.03 million in total revenues in November and December 2021 alone, as a result of the recent riots and business destruction. This will result in a fall in overall Government’s expected fiscal revenues from $3,008.63 million to $2,924.6 million in 2021.
IMPACTS EMPLOYMENT AND TRADE
In terms of employment, labour market performance is expected to decline in 2021, as a result of the recent anti-social behavior that led to recent riots and business destruction. According to CBSI Survey, a total 1,000 employees is expected to lose their jobs from various sectors, wholesale and trade, and other services.
On the external side, the impact will be felt through higher imports to compensate for the damaged goods. This will result in widening the current account deficit. Pre-unrest Current Account Deficit is forecast to increase to 10.8 percent of GDP in 2021.
However, the impact of the recent riot and unrest is forecast to further widen the current account deficit to around 10-15 percent of GDP in 2021 and over the near term.
In terms of inflations, the recent riot is expected to increase the rate of inflation above 3.2 per cent, as a result of anticipated shortage of goods.
Before the recent riots and destruction of businesses, Solomon Islands economy was forecast to grow by 2.5 percent in 2022. However, this was now revised downward to 1.7 percent, and 2.8 percent in 2023.
The Ministry of Finance and Finance will thoroughly assess and revise the full economic impacts of the recent riots and destruction of properties and businesses.
This will form part of government’s overall efforts to revise the 2022 budget in the months ahead.
Government Communications Unit