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International Monetary Fund. Asia and Pacific Dept

IMF Country Report No. 23/361

International Monetary Fund. Asia and Pacific Dept
The Tongan economy is performing strongly, underpinned by resilient remittance inflows and major reconstruction activities following the Hunga Tonga–Hunga Haʻapai (HTHH) volcanic eruption in January 2022. However, supply-side constraints resulting from severe labor shortages and damaged tourism facilities are impeding the recovery and have intensified inflation pressures. In this context, the authorities are confronting a challenging tradeoff between supporting reconstruction and managing inflation in the short term. In the long term, Tonga's high vulnerability to natural disasters complicates its efforts to create the fiscal space necessary to finance development spending.
International Monetary Fund. Asia and Pacific Dept

1. Tonga is rebounding strongly from a major double shock in early 2022. Following the Hunga Tonga-Hunga Ha’apai (HTHH) volcanic eruption-tsunami and the first local COVID-19 outbreak in January-February 2022, intensive reconstruction efforts have been underway, with strong support from the international community, including emergency financing under the IMF’s Rapid Credit Facility (RCF) in July 2022 (50 percent of quota, equivalent to about US$9 million). However, progress on rebuilding has been uneven, with many tourism-related facilities remaining damaged.

Mr. Sam Ouliaris and Ms. Celine Rochon
Nowcasting enables policymakers to obtain forecasts of key macroeconomic indicators using higher frequency data, resulting in more timely information to guide proposed policy changes. A significant shortcoming of nowcasting estimators is their “reduced-form” nature, which means they cannot be used to assess the impact of policy changes, for example, on the baseline nowcast of real GDP. This paper outlines two separate methodologies to address this problem. The first is a partial equilibrium approach that uses an existing baseline nowcasting regression and single-equation forecasting models for the high-frequency data in that regression. The second approach uses a non-parametric structural VAR estimator recently introduced in Ouliaris and Pagan (2022) that imposes minimal identifying restrictions on the data to estimate the impact of structural shocks. Each approach is illustrated using a country-specific example.