With the spread of the Coronavirus (COVID-19) pandemic around the world, attention has turned to its impact on the Pacific Islands. In most cases, however, commentaries in the region have been part of the “bigger picture” such as the International Monetary Fund’s report on the Pacific Islands Threatened by COVID-19 and the Asian Development Bank on Tourism-Driven Economies in the Pacific to Feel Brunt of COVID-19 Pandemic. This commentary therefore focuses on the country case of Solomon Islands. It discusses the state of the economy before the advent of COVID-19 and thereafter the impact in first few months of 2020.
Prelude to the pandemic
Before the onset of the Pandemic in early 2020, the Solomon Islands economy was already buffeted by anaemic growth outturns in 2019. The Central Bank of Solomon Islands (CBSI) estimates for real Gross Domestic Product growth for the year was only 1.2 per cent, much slower than the 3.9 per cent in 2018 (Figure 1). This was driven by very sluggish global market conditions and weaker domestic demand. Moreover, the economy decelerated considerably in the last six months of 2019. Key macroeconomic indicators showed a significant slowdown.
From the real economy, the production index, slid by 5 per cent over the last half of 2019 as round logs and agricultural exports tumbled. The Manufacturing index declined year on year by 2 per cent in the September quarter and then a further 17 per cent in the December quarter. Inflation meanwhile picked up noticeably from 1.6 per cent in June to a peak of 2.8 per cent in December as both imported and domestic prices rose.
Other sectoral indicators were equally weak. The current account deficit widened as exports declined and led to a 7 per cent fall in the gross foreign reserves fell by 7 per cent to $4.7 billion. Fiscal conditions also deteriorated to a deficit of $331 million in the last six months of 2019 and was attributed to fiscal pressures from payroll, development and constituency spending expenses. Meanwhile, the monetary aggregates trended downwards. Reserve money, narrow money, broad money and liquidity all decreased in the last six months of the year. Broad money notably fell by 1 per cent to $5,082 million due to the fall in the foreign reserves.
These macroeconomic indicators therefore suggest that the Solomon Islands economy was already relatively weak and therefore vulnerable to significant shocks, such as the COVID-19.
Confronting COVID-19: The early numbers
In hindsight, the great uncertainty in the first few months of 2020 regarding the extent and duration of the pandemic meant that CBSI’s growth projection for this year was rather optimistic with a growth 2 per cent. However, as the impact of the pandemic engulfed the entire world, CBSI revised its forecast for 2020 to a negative growth range of between -3 per cent and -5 per cent.
Monthly data in early 2020 already indicate the stark outcomes for the economy. Aside from March, year on year analysis show the CBSI monthly production index for the first four months of the year all declining; January by -24 per cent, February by -6 per cent and April by -49 per cent (Figure 2). These were attributed to falls in almost all export commodities and in particular forestry. On a year to April basis, round log output, the main foreign exchange earner fell by 14 per cent to a cumulative total of 770 thousand cubic metres. This is an important commodity that contributes nearly 20 per cent of domestic government revenue and other spinoffs such as royalties, transport and wholesaling.
Other real indicators currently only available for the first quarter show a similarly bleak result. Year on year, the manufacturing index tumbled by 15 per cent. Tourism plunged 36 per cent in the March quarter to just 4,080 visitors and thereafter zero after the border closures. Meanwhile, headline inflation surged to 7.8 per cent in March as supply-driven domestic prices surged, although core inflation eased to 1.2 per cent, signifying very weak consumer demand. iv
With respect to the others sectors, external sector pressures were evident with year on year, January to April data showing monthly exports falling on average by 20 per cent, with a striking 48 per cent decline in April as almost all export commodities plunged. Accordingly, foreign reserves have fallen from a high of $5.09 billion (12 months of imports) in January to $4.6 billion (11 months of imports) in April. Fiscal conditions have been equally worse off with government revenues declining by an average 4 per cent. On the other hand, expenditures have increased by an average 14 per cent over the period as government prepares to mitigate the impact of COVID-19. The fiscal balance has therefore deteriorated to around a deficit of $176 million in April. Preliminary monetary data indicate broad falls over the same period for reserve money, narrow money, money supply and liquidity. With broad money falling by 4 per cent over the four months to $5,045 million in April.
These indicators provide an early barometer of the extent of the consequences of COVID-19 on the Solomon Islands economy, particularly since the negative impacts are expected to persist into most of 2020. While, the economy is generally still holding up with resilience measures such as ample foreign reserves and minimal government debt, the magnitude of COVID-19 could have dire consequences on an already vulnerable Solomon Islands economy.
Donald Kiriau is the Chief Manager, Economic, Research and Statistical Department, Central Bank of Solomon Islands.
The views and opinions expressed in this article are those of the author and do not reflect those of the Central Bank of Solomon Islands.
Reporting currency in this article is the Solomon Islands dollar, SBD. Broad currency exchange rates: USD 1 = SBD 8.2 & AUD 1 = SBD 5.5.