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Sectoral Balances, Savings and Investment in Solomon Islands Keith Wood

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Sectoral Balances, Savings and Investment in Solomon Islands Keith Wood 38 PACIFIC ECONOMIC BULLETIN Sectoral balances, savings and investment in Solomon Islands Keith Wood The Solomon Islands fiscal deficit widened to a dramatic and clearly unsustainable degree over 1989–1991. The driving force behind this Keith Wood is Economic development has been growth in current rather than capital Adviser to the Central Bank expenditures, with an increasing resort to domestic rather than foreign of Solomon Islands. financing, imposing strains (given savings) on both domestic borrowing for investment and the balance of payments. Reliable national accounts data for account deficit must be financed by a Solomon Islands have not been available capital account surplus (and if not, then by for several years. In order to provide some loss of foreign reserves), leading to an estimates of the flows and balances increase in net claims on the economy by between public, private and overseas the outside world. sectors in Solomon Islands for the years Following standard practice, the public 1985–92, use is made of the fact that sector balance is defined as a deficit (the national income flows must have their fiscal deficit) and private and overseas counterpart in changes in stocks, as balances as surpluses (the excess of private recorded by the financial system. sector savings over investment and the From the principles of national income current account respectively). Thus accounting, which require ultimately a private sector surplus–fiscal deficit–current a/c balance balanced set of double-entry accounts, a = 0 deficit in any one of the public, private and overseas sectors must be offset by a net The accounts can also be rearranged by surplus in the other two. If private savings consolidating private and public sectors to are insufficient to finance the government give the nation’s overseas sector position. deficit and private investment—that is the This gives nation as a whole spends more than it national income – absorption earns—it becomes indebted to the overseas = current a/c balance sector by running a current account deficit. = private sector surplus – fiscal deficit The current account is part of the balance where absorption represents all of payments, which also includes the expenditure by domestic residents on capital account and change in reserves, and consumption and investment goods (be the balance of payments must (by they imported or domestically produced) definition) be in balance. Thus, a current by both public and private sectors. SECTORAL BALANCES, SAVINGS AND INVESTMENT IN SOLOMON ISLANDS 39 The definitions of each sector conform The financial survey with existing approaches adopted in Solomon Islands, themselves in line with The financial survey can be considered by standard international approaches and analogy with the monetary survey which is tailored to the availability and reliability of regularly presented by the Central Bank of data on stocks and flows. The public sector Solomon Islands. The monetary survey is here defined to cover the Solomon covers the Central Bank and the three Islands Government and the Central Bank commercial banks operating in Solomon of Solomon Islands, but excludes statutory Islands. The financial survey additionally corporations. The private sector covers all incorporates the Australian Guarantee other resident organisations and resident Corporation (AGC), the National Provident individuals. The overseas sector refers to Fund (NPF), the Development Bank of any non-resident’s dealings with Solomon Solomon Islands (DBSI) and the Investment Islands. Corporation of Solomon Islands (ICSI). The balance for any sector refers to the In the following exposition, the non- difference between its expenditure and bank private sector refers to the private income—a deficit when expenditure sector other than commercial banks. The exceeds income, a surplus when non-financial private sector additionally expenditure is less than income. The excludes the Australian Guarantee consequence of a deficit (surplus) for any Corporation, the National Provident Fund, one sector must be a reduction (increase) in the Development Bank of Solomon Islands the stock of all financial assets representing and the Investment Corporation of its net claims on the other two sectors. Solomon Islands. Thus, the balance of any sector can be measured either by flows (the difference In the financial survey coverage, between expenditure and income) or by its financial intermediaries dealing principally net acquisition of financial assets (the in home finance are excluded as use and change in its net claims on other sectors). construction of residential property is Any discrepancy between these two deemed to represent consumption rather approaches, for any sector, can be thought than investment. This is because houses of as the ‘net errors and omissions’ for that are not deemed physical assets acquired for sector. If ‘net errors and omissions’ are productive purposes (and are thus treated deemed to lie ‘below the line’ (that is the as ‘consumer durables’). Consequently a line dividing flows from changes in stocks) rise in the stock of home loans extended by for any sector, then that sector’s balance is any financial intermediary represents measured by its reported flows. If net borrowing for consumption purposes and errors and omissions for any sector are does not alter savings or investment. assigned ‘above the line’ its balance is Furthermore, in the balance sheets of those measured by net acquisition of financial financial intermediaries which are included assets. Here the flow definitions are in the financial survey, an adjustment is adopted for the public sector balance (the made for changes in credit extended for fiscal deficit) and overseas sector balance home loans and other forms of personal (the current account), whilst the absence of consumption. If the stock of such credit reliable national accounts data means the rises by $X, then $X is deducted from the private sector surplus (the excess of savings change in all credit to, and all deposits over investment) must be measured by the made by, the non-financial private sector. change in stock approach. This is done by This provides one difference in means of a financial survey. methodology to the monetary survey, which makes no such adjustment. 40 PACIFIC ECONOMIC BULLETIN Credit unions are also excluded from financial system from statutory National the financial intermediaries covered by the Provident Fund contributions by financial survey. This is because data on employees and employers (changes in credit unions are relatively poor (compared deposits with the Australian Guarantee to data on the other financial intermediaries), Corporation are also included). These and also because credit union lending is contributions are deemed to represent both relatively small-scale and private sector savings (albeit ‘forced predominantly for consumption purposes savings’), that is they increase ‘deposits’ (thus affecting neither aggregate savings with the financial sector available for nor investment by the argument outlined lending, directly or via other financial above). intermediaries, to each sector. This provides the savings with financial Finally, before turning to consideration intermediaries shown on the ‘change in of the survey itself, it should be noted that liabilities’ side of the financial survey. In the methodology will understate both obtaining the final figure for savings, savings and investment to the extent that changes in public debt held by the non- current income is saved and used for investment without entering the financial financial private sector are also included system. A further underestimation of (this is usually a minor aspect, apart from investment will also arise to the extent that 1992 in which a rise of SI$6.6 million was deposits are drawn upon for informal registered). lending between non-financial agents. As For investment the monetary survey regards savings from current income the would implicitly represent borrowing for principal source will be reinvestment of investment finance by the change in credit company earnings. As regards use of to the private sector. The financial survey deposits for informal lending (for differs in three respects here. First, as investment purposes), this is likely to occur explained above, the ‘consumption loan’ between individuals and small firms (it adjustment is made. Second, in coverage, should be noted that informal lending the major non-bank sources of credit are sourced via current savings would require included—the Australian Guarantee many individuals of substantial income to Corporation, National Provident Fund, the make any sizeable macroeconomic impact). Development Bank of Solomon Islands and Data availability and the plausible extent of the Investment Corporation of Solomon such activity (remembering that it is the Islands. Finally loans by the Central Bank aggregate macroeconomic extent that is to the non-bank private sector are excluded relevant to the present analysis) are again (whereas the Central Bank’s credit to the the reasons for excluding coverage of such Investment Corporation is included in activities at the present time. credit to the private sector in the monetary In the monetary survey, savings by the survey). This is both because such loans private sector would implicitly be are principally to other financial measured by the rise in M3 (which intermediaries in the survey (the represents the increase in all non- Development Bank and the Investment government deposits
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