Stimulating investment in pearl farming in ... - World Fish Center

2.4 Government financeThe national government obtains just over half of its annual budget from domestic taxrevenues and the balance from external sources, almost all as grants. Domestic revenueshave grown strongly in recent years as the effectiveness of tax collection has improvedand the level of taxable income and expenditure flows in the economy has increased. Boththese factors are connected to the impact of foreign assistance under RAMSI and other aidprogrammes. No systematic analysis of the economic and fiscal impact of the upsurge inaid-funded expenditures has been published, but it has certainly been very significant,particularly in the urban sector. The other striking driver of revenue growth has been theexpansion of log exports in volume and value (along with clear evidence that both havelong been substantially understated by the exporters) roughly doubling between 2005 and2007.The government has recently released a statement of medium-term fiscal strategy whichenvisages a much tighter budgetary future. This is attributed mainly to the expectedcontraction of natural forest logging over the next five years as the remainingcommercially attractive stands of timber are exhausted, and logging-based activityshrinks. The Honiara service economy, the rural areas where logging has been takingplace and the government will all experience a fall in money income. At the same timeexpenditure pressures on the budget will increase, largely driven by population growth,government commitments to accelerate development of rural areas, and the demands ofthe political and official payrolls as the cost of living rises.Though the government budget is expected to become more stringent, an incominginvestor is not likely to be directly affected by fiscal tightening. As explained in section 7below, the current scheme of investment incentives contains no grants or other paymentsby government that might be cut back. Pressure to create and maintain an environmentconducive to investment will be kept up by domestic and external advice, and theimprovement of economic infrastructure will continue under various aid programmes.The economic and social value attributed to potential investment in pearl farming will beenhanced by the contraction of natural forest logging, which has caused immense damageto the natural environment and community relationships, while corrupting substantialelements of the political and official machinery of government.2.5 External aidSolomon Islands has increased its dependence on external assistance in recent years andthis looks set to continue. The re-emergence in SI and elsewhere of donor funding of partsof the government recurrent budget is a recognition that effective public services have tobe assured in order for investment-driven growth to occur on a sustainable basis.The Australian regional aid programme is being significantly increased in size and SI willbe a major recipient through the bilateral programme and RAMSI. New Zealand will alsomaintain and strengthen its aid to SI, directly and through regional bodies.The rivalry of China and Taiwan for the allegiance of Pacific states has enabled SIgovernments to obtain substantial untied (and only very lightly accountable) aid fromTaipei, usable for political purposes shunned by other donors. Though this rivalry is likely8