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Tonga: Staff Report for the 2016 Article IV Consultation—Informational Annex

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
June 2016
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Fund Relations 1

Membership Status

Joined September 13, 1985; Article VIII.

General Resources Account

SDR MillionPercent Quota
Quota13.80100.00
Total holdings of currency10.3675.10
Reserve position in the Fund3.4424.90

SDR Department

SDR MillionPercent Allocation
Net cumulative allocation6.58100.00
Holdings5.3781.54

Outstanding Purchases and Loans

None

Financial Arrangements

None

Projected Obligations to Fund*

(SDR million; based on existing use of resources and presenting holdings of SDRs)

Forthcoming
20152016201720182019
Principal
Charges/Interest0.000.000.000.000.00
Total0.000.000.000.000.00

Exchange Arrangement

The exchange rate arrangement is a pegged exchange rate within horizontal bands. Tonga has accepted the obligations under Article VIII, Sections 2(a), 3 and 4 and maintains an exchange control system that is free of restrictions on the making of payments and transfers for current international transactions. Since February 11, 1991, the value of the pa’anga is determined based on a weighted basket of currencies comprising the United States, Australian, and New Zealand dollars, with the U.S. dollar as the intervention currency. In July 2014, the Fijian dollar was added to the basket replacing the Japanese yen, and, in July 2010, the monthly maximum adjustment limit was raised to 5 percent from 2 percent that had prevailed since March 1998, when the allowance for adjustment was introduced.

Last Article IV Consultation

Staff discussions were held during February 2015. On April 24, 2015, the Executive Board of the IMF concluded the 2015 Article IV consultation with Tonga and endorsed the thrust of the staff appraisal (IMF Country Report No. 15/107).

Technical Assistance

The Legal Department (LEG) provided assistance on AML/CFT issues for the Pacific islands countries, including Tonga, from 2002 through 2005. LEG also provided assistance on the National Reserve Bank of Tonga Act and Financial Institutions Act from 2013 to 2014. PFTAC has, on an on-going basis, provided assistance on budgetary management; tax administration; banking legislation and supervision; and balance of payments and national accounts statistics.

Resident Representative

The Regional Resident Representative Office for Pacific Islands, including Tonga, was opened on September 2010 in Suva, Fiji. Mr. Tubagus Feridhanusetyawan is the resident representative.

Pacific Financial Technical Assistance Centre (pftac) Country Strategy 2016–171

Background

Tonga continues to face a difficult macroeconomic environment. The global economic crisis has led to a sustained period of slow growth, undermining both fiscal and financial stability. Non-performing loans in the banking system remain high, while fiscal policy options are tightly constrained by the high level of public external debt.

This has been particularly so in the public financial management (PFM) area where PFTAC and the Asian Development Bank (AsDB) have worked with the authorities to design and implement a realistic reform roadmap. The Roadmap was recently endorsed by the Cabinet. Since 2014, TA has been provided by the IMF in the compilation of National Accounts and in balance of payments (BOP) and government finance statistics (GFS). Support has also been provided to the National Reserve Bank of Tonga (NRBT) in off-site and on-site banking supervision.

Strategy 2016–17

PFTAC’s TA strategy is guided by the APD regional strategy and is planned within the results framework for current PFTAC funding cycle.

PFTAC TA aims to support the authorities sustain progress on fiscal consolidation and to improve the macroeconomic environment. PFTAC will continue to work closely with the broader development partner groups to ensure coherence and will aim to support implementation of actions in the development partners’ budget support reform matrix. Inputs are expected in all sectors, primarily at the strategic level in the fiscal and statistics sectors with detailed training and capacity building in bank supervision and macroeconomics.

In the public financial management area, the focus will be primarily to assist the authorities to implement high priority reforms identified in the Roadmap, including accounting and reporting improvements (1.7); and planning for upgrading the government’s FMIS (1.7). PFTAC will also support the Government’s efforts to develop an effective medium-term budget framework (1.6) including producing more accurate macroeconomic analysis; (5.1) and more rigorous cash/debt management (1.7). In the medium term, PFTAC would look to assist the authorities to implement a follow-up PEFA assessment, probably in 2018 (1.1).

In the revenue area, assistance was provided to facilitate: (a) the design and implementation of a compliance improvement strategy that guides operational activities towards mitigating major compliance risks; and (b) the implementation of a new function based organizational structure targeted towards streamlining operations and alleviating duplicated processes. Additional technical assistance to improve core tax functions is scheduled to take place in FY2017. Legal assistance to review and benchmark the Revenue Services Administration Act against international best practice has been provided with enactment of proposed amendments scheduled to take place by end-2016.

In statistics, Tonga is relatively well advanced against the overall results framework; based on PFTAC advice, it produces National Accounts on two independent measures (4.1) with production of a range of income indicators (4.3). Balance of payments statistics are now being developed according to BPM6 standards (4.9). However, the quality and range of statistics and source data need to be strengthened. Engagement with the Tonga Department of Statistics (TDS) has strengthened since 2014, when PFTAC took over the provision of national accounts TA; from 2011 to early 2013, this was led by an AusAID (now DFAT) funded resident advisor, with limited PFTAC input. Recent work has focused on the use of tax returns to estimate GDP by production, which would support a future rebase and, potentially, quarterly GDP estimation. BOP and GFS support were provided by IMF HQ until 2015 but are now to be delivered by PFTAC, within its budget envelope.

In financial sector supervision, IMF/PFTAC over the past few years assisted the NRBT with the deployment of standard prudential returns (3.1) and with establishing enhanced off-site analysis (3.3). These currently enable the NRBT to prepare regular off-site analysis and monitoring reports from the sector. Intensive support is being provided in FY2015/16 to develop on-site supervision techniques by providing technical advisory support with performing actual on-site examinations of a number of commercial banks (3.4, 3.5) which includes examination preparedness, scoping, planning, execution, and report writing. PFTAC further reviewed the NRBT’s complete set of Prudential Statements and drafted additional guidelines to ensure compatibility with the amendments made to the Financial Institution Act. 2015/16 will also see the introduction of a comprehensive credit union program aimed at overhauling the oversight of credit unions (3.9). In March 2016 the IMF Legal Department completed a desk review of the Financial Institutions Act.

In the macroeconomic area, technical assistance (TA) in 2015 was provided jointly by PFTAC and a secondee from the Reserve Bank of New Zealand, who was recruited by PFTAC and funded by the ADB, to build capacity for macroeconomic forecasting and analysis and link this analysis into budget processes. The TA focused on developing a forecasting framework for GDP (5.1) and the construction of a financial programming framework (5.2)—the Tonga Projection (TOP) Model. In October 2015 staff from the Ministry of Finance and National Planning (MFNP), the Tonga Department of Statistics (TDS) and the Ministry of Revenue and Customs (MORC) participated in a five day workshop on practical applications of the TOP Model. Subsequent collaboration by MFNP and MORC staff led to the development of a satellite revenue forecasting tool. The MORC tax tool uses the MFNP’s industry-level GDP forecasts as well as historical tax collection data and internal information on tax trends, including the effects of compliance improvement and risk management activities, to forecast tax revenues at a more disaggregated level than the TOP Model. Staff also participated in a High Level Dialogue Meeting on Enhancing Resilience to Natural Disasters in Pacific Islands (5.4) and workshops on Strengthening Fiscal Frameworks in the Pacific Islands, Medium-Term Expenditure Planning for National Sustainable Development and Forecasting Tax Revenues (5.2).

World Bank-Imf Collaboration1

The IMF team led by Ms. Elena Loukoianova (mission chief to Tonga) has a close working relationship with the Bank team led by Mr. Robert Utz (lead economist, East Asia and the Pacific region). The teams have an ongoing dialog on a range of macroeconomic and structural issues. The level of cooperation and coordination is good and includes the following:

  • Article IV Consultation. The World Bank provided support and analytical inputs to the Article IV mission, as with previous missions. In addition, Bank and Fund staffs prepared jointly the Debt Sustainability Analysis appendix to the staff report.

  • Economic Updates. IMF analysis continues to provide a vital framework to the ongoing budget support program, with IMF assessments used as the basis for decisions regarding the appropriateness of the overall macroeconomic policy framework.

  • Structural Fiscal Reforms. Bank and Fund staffs have worked successfully to provide technical assistance (TA) in public expenditure management and continue to collaborate on the ongoing analytical work on public expenditure, the medium-term macro-framework, and general structural issues.

Based on the above cooperation, the Bank and the Fund staff share a common view about Tonga’s macroeconomic and structural reform priorities, which mainly aims at mitigating the risks to Tonga’s external and fiscal sustainability and at promoting long-term growth. These include:

  • Sustainable fiscal management. Construction costs for the South Pacific Games (SPG) and pressures for further increases in payroll spending pose challenges to fiscal sustainability if not carefully managed. A priority for the authorities is to develop a clear policy framework to guide any new borrowing to ensure that new borrowing supports high priority investments and remains within sustainable limits. It will also be important to ensure that renewed borrowing occurs alongside broader progress towards addressing fiscal challenges, including further improvements in revenue administration and expenditure control, and tighter prioritization of expenditure, as well as structural reforms. The government’s fiscal efforts will need to be supplemented by continued provision of grants from donors.

  • Making use of the flexibility afforded by the current exchange rate arrangement. This remains critical for safeguarding external stability.

  • Promoting private drivers of growth. Given fundamental constraints of smallness and isolation, growth prospects are likely to remain concentrated in areas where premiums can be generated to cover higher costs of production. Natural resource industries, including tourism, agriculture, fisheries, and mining hold the greatest potential for private sector development. To facilitate development in these areas there is a need to: (i) improve the efficiency and regulation of services such as energy, water, and telecommunications in order to reduce costs; (ii) strengthen the institutional framework for lending—including the enforcement of creditor rights to collateral—as a means to increase access to finance and lower the cost of borrowing; (iii) improve vital tourism infrastructure, including through the commercialization of Tonga Communication Corporation; and (iv) lower regulatory barriers to foreign investment.

World Bank Group cooperation with Tonga is set out in a Country Assistance Strategy presented to the Board in October 2010. Given the depth of policy dialogue and the difficult economic and fiscal position Tonga has been facing, the Bank has significantly scaled up both analytical and financial support for Tonga. Total IDA and Trust Fund commitments to Tonga over the past six years amount to nearly US$140 million, compared to US$30 million between 1985–when Tonga became a member–and FY2010.

A key focus of engagement has been around budget support operations. There have been annual World Bank budget support operations for each of the six years FY2011 to FY2016 to provide a total of US$27.8 million to support fiscal, business-environment improving, public financial management, and energy sector reforms as part of a World Bank-led multi-donor process. A further two budget support operations are planned for FY2017 and FY2018, to complete the current programmatic series.

Other World Bank investments support connectivity for sustainable economic development, and include fiber-optic connectivity, transport sector reform, and aviation sector support, as well as support to climate change and disaster resilience-building.

The Bank and Fund teams will continue their close cooperation going forward, particularly in supporting the current program of budget support and to assist the Government in responding to ongoing economic difficulties. Table 1 details the specific activities planned by the two country teams over the February 2016–January 2017 period. It was also agreed that further details on collaboration, as necessary, will be agreed at the technical level as work progresses.

Table 1.Tonga: Bank and Fund Planned Activities in Macro-Critical Structural Reform Areas (February 2016–January 2018)
ProductsExpected Delivery Date
Bank Work Program
  • Procurement IT systems TA

  • Social protection and disaster risk management TA

  • Second inclusive growth development policy operation

  • Credit registry TA

  • Business successes and failures

  • Fiscal anchor TA

  • Tax exemptions TA

  • FY2016

  • FY2017

  • FY2017

  • FY2017

  • FY2018

  • FY2017

  • FY2017

Fund Work Program
  • External Sector Statistics (follow-up)

  • PFM Roadmap (follow-up)

  • Financial Sector Supervision (follow-up)

  • 2015 Article IV Mission

  • 2015 Article IV Staff Report/Board Meeting

  • 2016 Article IV Policy Note

  • 2016 Article IV Mission

  • 2016 Article IV Staff Report/Board Meeting

  • FY2015

  • FY2015

  • FY2015

  • February 2015

  • April/May 2015

  • February 2016

  • March 2016

  • June 2016

Relations With the Asian Development Bank1

The goal of the Asian Development Bank’s (AsDB) Pacific Approach 2010–14 (extended until 2016) of a sustained and resilient, improved standard of living aligns with the vision of the Tonga Strategic Development Framework (TSDF) II, covering the period 2015–25, to create a more progressive Tonga supporting a higher quality of life for all. AsDB’s Country Operations Business Plan 2016-18 for Tonga supports the focus of the Pacific Approach and the TSDF II.

The Pacific Approach focuses on the need to mitigate environmental impact and strengthen climate change resilience through development of renewable energy options; enhancing connectivity via multimodal networks and new technologies; and supporting urban development. Two key drivers of change to promote the focus of the Pacific Approach include improved private sector environment and public sector management. The national outcomes of the TSDF II supported by AsDB are: a more inclusive, sustainable and dynamic knowledge-based economy; more inclusive, sustainable, and balanced urban and rural development across island groups; responsive good-governance strengthening rule of law; sustainable and successful provision and maintenance of infrastructure and technology; and, effective land and environment management, with resilience to climate change and risk.

AsDB has approved 15 loans and 14 grants2 totaling US$146.08 million from the Asian Development Fund (ADF) and other sources to Tonga since it joined AsDB in 1972. Total of 69 technical assistance (TA) projects (including supplementary financing) with a value of US$22.42 million were also provided to improve capacity and strengthen institutional development in various sectors. Past AsDB investments have focused on finance and public sector development, and infrastructure development in transport, power, information and communication technology, agriculture, and fisheries.

Active projects include five grant-financed projects in the country portfolio. The grant-financed projects support connectivity through the Tonga-Fiji Submarine Cable project; service delivery through the Nuku’alofa Urban Sector Development project (with co-financing from Australia) and the Outer Island Renewable Energy project (with co-financing from Australia, Denmark and the European Union); and climate resilience through the Climate Resilience Sector project financed by the Strategic Climate Fund. The Cyclone Ian Recovery project (with co-financing from New Zealand) approved in 2014 has climate-and disaster-proofed education and energy infrastructure on the Ha’apai Island group damaged by cyclone Ian in January 2014. There are no active country-specific TA projects but Tonga benefits from a number of regional TA projects in private sector development, economic management, energy efficiency, information and communication technology, and public financial management. The AsDB is active in the joint policy reform discourse with the Government of Tonga and other development partners, which is linked to budget support disbursements through AsDB’s policy-based lending modality.

Tonga: Loan, Grant, and Technical Assistance Approvals, 2010–15
201020112012201320142015
Loan approvals
Number000000
Amount (in millions of US$)0.00.00.00.00.00.0
Grant approvals
Number030423
Amount (in millions of US$)0.022.200.030.258.795.76
Technical assistance approvals
Number223111
Amount (in millions of US$)0.521.181.381.330.680.30

Statistical Issues

Tonga—Statistical Issues AppendixAs of April 20, 2016
I. Assessment of Data Adequacy for Surveillance
General: While economic statistics are broadly adequate for surveillance, data deficiencies continue to complicate the monitoring of economic conditions and policy formulation. The Statistics Department (SD) and the Ministry of Finance and National Planning (MOFNP) have received, on a regular basis, technical assistance (TA) on national accounts, government finance, and balance of payments (BOP) statistics from the Fund’s Statistics department (STA) as well as the Pacific Financial Technical Assistance Centre (PFTAC). Nevertheless, data provision to the Fund continues with long delays.
National Accounts: The coverage of the national accounts data has widened in the past few years as a result of enhanced TA, but there is still room for improvement With assistance from the AusAID (now DFAT)-funded resident advisor (2012-13), the 2009-10 Household Income and Expenditure Survey (HIES) results were partially incorporated in national accounts statistics. Customs data were supplemented with quarantine office data in merchandize exports and in-kind donor-funded capital projects as well as loan financed projects. Labor market statistics are weak: employment statistics have not been compiled since 2003, although population census 2011 and HIES 2009 provide point-in-time data; and average earnings statistics are not available.
Price Statistics: The Consumer Price Index is based on a basket of goods and services from the 2009-10 HIES. TA was provided in 2008 on the development of an import price index, but trade data was not of sufficient quality to produce indexes.
Government Finance Statistics: The FY2003 Central Government Budget Statement introduced a presentation of fiscal data compiled according to the methodology of the 1986 Government Finance Statistics Manual. The budget presentation was migrated to GFSM 2001 with the FY2015 budget. Improvements are still needed to ensure accurate and reliable fiscal data. Timeliness and ease and efficiency in reporting remain an issue. Source data are often available with a significant time lag and in-year sub-annual reporting requires considerable manual intervention. The financial accounting system has not been upgraded and as a result is not capable of capturing all transactions with much of the government’s financial business processes and data collection completed on a manual basis. For example, the budget is compiled manually; debt management is conducted outside of the financial accounts; aid revenue data is not included in the financial accounts; and payments and receipts are both processed and recorded on a manual basis.

Reconciliation with monetary and balance of payments data requires enhancement and published data are often subject to significant revisions. Consolidated financial statistics for the general government are not published due to lack of source data and capacity and up until now, no data are reported for publication in the GFS Yearbook (GFSY). Tonga is participating in the three-year GFS-IMF project for the Asia-Pacific region funded by the government of Japan, and is committed to commence reporting for the GFSY.
Financial Sector Surveillance: Tonga compiles FSIs but has not reported them to the Fund yet.
Monetary and Financial Statistics: NRBT reports data for the central bank, other depository corporations, and monetary aggregates using the standardized report forms (SRFs). These data were published for the first time in the March 2008 issue of IFS and IFS Supplement on Monetary and Financial Statistics. Beginning with January 2012 data, the NRBT updated the data collection forms for other depository corporations. The new forms are fully aligned with the recommendations of the Monetary and Financial Statistics Manual with minor exceptions.
External Sector Statistics: There are several issues with the external sector statistics that need to be improved (in particular the coverage and timeliness), where the SD could play a more proactive role. The SD compiles balance of payments (BOP) and international investment position (IIP) statistics on a quarterly basis in BPM6 format. These statistics are reported to the Fund annually. Monthly trade figures, derived from customs data, are available with a three-month lag. The NRBT compiles monthly foreign exchange transactions statistics based on the Overseas Exchange Transactions Reporting System (OET) with a six-week lag.



OET have presented shortcomings in its classification. Large net errors and omissions have remained in the balance of payments due to under-reporting of components such as current and capital transfers and direct investment. To address those issues, new OET codes consistent with BPM6 have been implemented by the NBRT since May 2014 and the International Investment Survey (IIS) has been carried out by the SD since 2014.



The challenges to improve external sector statistics faced with the SD and the NRBT are 1) to improve coverage of items in financial account by enhancing IIS response rate and gathering more accurate banks’ financial transactions data, 2) to obtain not captured data e.g. compensation of employees, remittances and acquisition of goods and services by overseas workers to improve the BOP statistics, 3) to capture capital transfers accompanied by main construction projects and incorporate them into BOP statistics, and 4) to maintain adequate staff resources for compiling and disseminating balance of payments and IIP in accordance with the international standards, and 5) provision of sufficient resources for undertaking the IIS regularly.
II. Data Standards and Quality
The country has been participating in the GDDS since May 30, 2006.No data ROSC is available.
Tonga: Table of Common Indicators Required for SurveillanceAs of April 20, 2016
Date ofDateFrequencyFrequency ofFrequency of
latestreceivedof data 6/reporting 6/publication 6/
observation
Exchange RatesMar-16Apr-16MMM
International Reserve Assets andMar-16Apr-16MMM
Reserve Liabilities of the Monetary
Authorities1
Reserve/Base MoneyFeb-16Mar-16MMM
Broad MoneyFeb-16Mar-16MMM
Central Bank Balance SheetFeb-16Mar-16MMM
Consolidated Balance Sheet of theFeb-16Mar-16MMM
Banking System
Interest Rates2Feb-16Mar-16MMM
Consumer Price IndexFeb-16Mar-16MMM
Revenue, Expenditure, Balance and2014/15Mar-16AAA
Composition of Financing3 – General Government4
Revenue, Expenditure, Balance and Composition of Financing3 – Central Government2014/15Mar-16AAA
Stocks of Central Government and Central Government-Guaranteed Debt52014/15Mar-16AAA
External Current Account BalanceQ2/2015Mar-16QQQ
Exports and Imports of Goods andNov-2015Jan-16MMM
Services
GDP/GNP2014/15Mar-16AAA
Gross External Debt2014/15Mar-16AAA
International Investment PositionQ2/2015Mar-16QQA

Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

As of April 20, 2016.

As of April, 2016.

As of March 2016.

As of March 2016.

Includes financing from other sources including bilateral contributions, which are counted separately from AsDB financing in the number of grant approvals.

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