Solomon Islands ‘still adjusting’ to new central bank legislation

The Central Bank of Solomon Islands (CBSI) is "still going through internal changes and adjustments" after being handed greater independence over monetary policy last year, governor Denton Rarawa said yesterday, at the launch of its annual report for 2013.

The CBSI Act 2012, which came into force on January 1, 2013, made the central bank solely responsible for monetary policy, and changed its primary objective to "achieve and maintain domestic price stability".

Under the previous legislation, the central bank had six different objectives, one of which was to "act as adviser to the [finance] minister on monetary and banking policy". It had no explicit mandate for price stability.

The new legislation also gives the central bank a secondary objective of fostering a "stable financial system" and – beyond that – asks it to support "the general economic policies of the government". Governor Rarawa welcomed the "narrowing" of the mandate.

In the wake of the new legislation, the central bank board developed a vision for making the Solomon Islands "among the top four low-inflation countries in the region, excluding Australia and New Zealand".

In the 18 months that have followed, the central bank has made efforts to "step up" its research on price stability, according to the annual report, in an effort to improve its understanding of the underlying causes of domestic inflation.

The IMF warned inflation was "high, relative to the rest of the region" in its Article IV report on the Solomon Islands, published in January. Annual CPI fluctuated around 6% throughout 2013, before slumping to 3% at the end of the year. It has since begun to rise again.

The fund also raised concerns over the value of the Solomon Islands dollar, which it described as "moderately overvalued" as a result of its "considerable appreciation" over the past two years.

Indeed, the annual report shows the central bank incurred unrealised losses of 150 million Solomon Islands dollars ($20 million) on its foreign exchange holdings. "While the economy may have benefited from an appreciating and stable Solomon Islands dollar, the Bank bore the brunt of the cost of that policy," Rarawa said.