The economic outlook is challenging the fiscal position
A CONSULTANT to the Asian Development Bank (ADB) working in Solomon Islands at the request of Ministry of Finance and Treasury, Dr Kirdan Lees says a wedge is opening between declining revenue and spending that continues to grow.
He said fiscal consolidation is needed now to arrest the deteriorating fiscal position.
Presenting findings from his report at the Economics Association of Solomon Islands meeting at Heritage Park Hotel on Wednesday, Dr Lees said:
“Revenue growth is weak and yet to recover to pre-COVID levels. Both volumes and prices of key commodities are declining, and a growing services sector cannot offset the fragility in commodities. Expect flat to modest growth in revenue.”
“Ambition on spending to put in place infrastructure and programmes to lift living standards is understandably high. But without change, fiscal sustainability is put at risk.”
Without fiscal consolidation, spending plans will be compromised
Dr Kirdan Lees says: “In the absence of finding alternative sources of funding, spending needs to be curbed. Without change, this will occur in an unplanned manner.”
“Cash will not be available for planned programmes or projects. This erodes the use of the budget as the most important fiscal tool for achieving Government objectives.”
A simple fiscal anchor that ties spending to revenue would help strengthen the fiscal framework
“Choices over fiscal frameworks can assist with the decision of how much to spend. There are gains from using – and communicating – a fiscal anchor that closely ties spending to expected revenue.”
There are options for fiscal anchors. Effective fiscal anchors should
- be simple and easy-to-understand.
- include sufficient flexibility to ensure durability across shocks
- have sufficient teeth to limit spending and promote fiscal sustainability.”
Such a fiscal anchor – mapping spending to expected revenue – would help tighten the decision loop between the fiscal position and spending decisions, helping achieve medium-term fiscal sustainability.
“Collaboration – across Government, the public sector and donors – is now needed to refine the design and implementation of a fiscal anchor.”
Political will is needed to build the pathway to fiscal sustainability
Only with alignment can you achieve results. We should not expect fiscal anchors to absolve governments from commitments to sound decision-making that supports fiscal sustainability. However, the size of the prize – reducing fiscal risks and associated costs of poor fiscal settings – is worth pursuing.
“Political will and a broad commitment to consolidation is needed for fiscal sustainability that ultimately enables the government to flourish and realise Solomon Islands’ development ambitions.”
Dr Kirdan developed the report over late May and June based on a series of meetings with public sector officials across Solomon Islands.
He thanked everyone for the engagement, feedback and comments that have helped inform the report.
