CBSI advises against borrowing from China - Solomon Star News

CBSI advises against borrowing from China
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17 September 2019
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THE Central Bank of Solomon Islands (CBSI) says the country will not be able to absorb any additional borrowing from China should it decide to switch.

CBSI produced the report at the request of Prime Minister Manasseh Sogavare as part of the review of the country’s diplomatic relations with Taiwan.

But the report, titled "Assessment of Potential Economic Impacts of Bilateral Relation Switch to China" was not included in the Taskforce Report, nor was it considered during its consultations.

The possible implications and risks highlighted in the report are:

  1. Debt- the current Debt to GDP stands at 10% and will increase to 30% of GDP once work on Tina Hydro starts. The recommended debt level/ceiling is 35% of GDP. A switch to China will see an excess over the ceiling to 45% or more depending on the size of the Project. Currently PNG's debt level is 36% and they are struggling to refinance their debt.

  2. Fiscal revenue - high debt level will affect fiscal revenue and crowd out key fiscal priorities, expecting basic services to be affected. Meaning most of the revenue collected by government will go towards servicing it's debt.

  3. Reaction by USA - One should consider the potential freezing of Foreign Reserves, about 64% of Solomon Islands Foreign Reserves are in USD, such an act by USA will cripple our economy.

These three areas are highlighted as high risks under the Risk Assessment Matrix (RAM) which need greater consideration by the government.

The report says Solomon Islands can only reduce the debt level if China is willing to refinance current debts. And in so doing China will own Solomon Islands debt which will have to be repaid, this should be a concern for all.

It also says that should Taiwan decide to withdraw its support to build the National Stadium for the Pacific Games, than the shortfall will have to come from China to through loans, another cause for concern. The offer by Taiwan is fully funded and not a loan. 

The report also stated that Pacific Island countries allied with Taiwan have higher economic growth rates than those allied with China. Their debt levels are also at acceptable levels.

This would push the country's debt to dangerous levels with a high probability of debt distress and default.

 

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