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Tonga: Staff Report for the 2016 Article IV Consultation-Debt Sustainability Analysis

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
June 2016
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Risk of external debt distressModerate

This is the second update of the debt sustainability analysis (DSA) conducted jointly by the IMF and the World Bank since 2014.1The results for external debt indicate that Tonga remains at a moderate risk of debt distress, and the highest risk to debt sustainability emanates from a combination of shocks to GDP, exports, the U.S. dollar deflator and grants. Analysis of public debt points to risks stemming from strong wage growth.

Underlying Assumptions

Compared with the DSA update in 2015, the underlying assumptions remain broadly stable (Table 1) with growth converging to 1.8 percent in the medium-term to factor in downside effects of periodic shocks from natural disasters. The following highlights the main changes:

Table 1.Tonga: DSA Update; Key Variables 1/
201220132014201520162017201820192020202520302035
(Percent of GDP, unless otherwise indicated)
Nominal GDP (US$ millions)472449443435422443462485506617752917
Real GDP (percentage change)0.9−3.12.13.73.12.32.52.91.81.81.81.8
GDP deflator (percentage change)2.40.51.01.51.10.91.63.03.02.52.52.5
Fiscal
Total revenue and grants27.425.227.528.227.327.428.628.829.728.928.628.5
Foreign grants9.45.67.56.73.63.44.04.14.43.73.53.3
Total expenditure30.226.525.729.330.429.129.529.629.829.328.628.5
Interest payments0.80.90.90.90.90.90.80.80.80.60.50.5
Overall balance−2.8−1.31.7−1.1−3.1−1.6−0.8−0.7−0.2−0.50.00.0
Primary balance−1.9−0.42.6−0.2−2.2−0.80.00.00.60.20.50.4
Net domestic financing−2.41.0−2.00.51.70.4−1.2−0.1−0.60.2−1.3−1.1
Net external financing5.10.20.30.61.41.32.10.80.80.21.31.1
Balance of payments
Exports of goods and services18.921.518.517.518.418.218.919.620.419.219.620.1
Imports of goods and services60.059.856.563.665.869.574.573.370.667.867.167.5
Workers’ remittances16.323.923.224.729.628.828.728.428.528.628.728.9
Current account−12.4−4.5−7.9−11.8−3.1−7.1−10.5−10.1−6.2−5.9−6.9−7.1
Net foreign direct investment−0.31.22.62.72.82.92.92.92.93.13.23.3
Gross offical reserves6.57.16.96.26.25.75.35.05.25.05.45.6
(In months of next year’s goods and services import)
Sources: Tonga authorities; and IMF staff estimates and projections.

Data on fiscal year basis, with fiscal year beginning in July.

Sources: Tonga authorities; and IMF staff estimates and projections.

Data on fiscal year basis, with fiscal year beginning in July.

  • With the new global price outlook, the GDP and exports deflators have been revised downward, leading to lower nominal GDP and exports during the projection period.

  • The fiscal balance deteriorates versus the previous DSA, reflecting higher wage spending and lower grants from development partners, and assuming more financing to Tonga in the form of loans.

Tonga: Key Macroeconomic Assumptions
2014 DSA2015 DSA2016 DSA
2014-19 avg2015-20 avg2016-21 avg
Real GDP2.262.442.40
GDP deflator (percent change)2.662.060.84
Overall fiscal balance (percent of GDP)−0.15−0.90−1.11
Primary balance (percent of GDP)0.770.06−0.30
Growth of exports of G&S (U.S. dollar terms)5.587.904.62
Growth of imports of G&S (U.S. dollar terms)5.866.034.76
Current account (percent of GDP)−3.63−5.16−7.28
Sources: national authorities; and IMF staff estimates.
Sources: national authorities; and IMF staff estimates.

The current account deficit also worsens, assuming larger non-debt creating inflows (capital grants cash and in-kind) in the run-up to the South Pacific Games (SPG).

External Dsa

Under the baseline scenario, all Tonga’s external debt distress indicators remain below their country-specific policy-based indicative thresholds (Figure 1). The rise in debt service ratios from 2019 to 2029 reflects mostly repayments of the two external loans from China EXIM Bank. The bound tests demonstrate that with a combined shock to GDP, exports, the U.S. dollar GDP deflator and non-debt creating inflows, three debt ratios (PV of debt-to-GDP+remittances, PV of debt-to-exports+remittances and debt service-to-revenue) breach their respective thresholds, two of which significantly and on a more sustained basis, suggesting a moderate risk of debt distress.

Figure 1.Tonga: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2016-2036 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2026. In figure b. it corresponds to a Combination shock; in c. to a Combination shock; in d. to a Combination shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

Additional risks arise from a potential shortfall of donor grants to finance the SPG and periodic spending to respond to natural disasters. To illustrate these risks, an alternative scenario has been prepared assuming about T$100 million being borrowed to finance the capital costs of the games during FY2016–19, on the terms of China’s EXIM Bank loan (2 percent interest, 20-year maturity, and 5-year grace period).2 It is also assumed that natural disasters once every 4 years, leading to a decline in GDP by about 2 percentage points and to additional spending on recovery, amounting to about one percent of GDP in the following years. Although past recovery efforts have been generously grant-financed by donors, the assumption is that financing will diminish going forward. Compared to the baseline scenario, debt ratios will increase, narrowing their distance to thresholds significantly but not breaching them. Hence, the moderate risk rating remains under this alternative scenario.

Public Section Dsa3

Under the baseline scenario, the present value of public debt is projected to remain below the benchmark throughout the projection period (Figure 2), steadily decreasing to below 20 percent of nominal GDP. However, in the scenarios in which the primary balance remains at the level of 2016 throughout the projected period, or the public wage bill grows at an average rate of the past three years (7 percent) during the projection period, public debt becomes unsustainable.

Figure 2.Tonga: Indicators of Public Debt Under Alternative Scenarios, 2016-2036 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2026.

2/ Revenues are defined inclusive of grants.

Conclusion

Compared to the DSA update of 2015,4 the risks to debt sustainability increased somewhat as demonstrated by the results of the most extreme shock simulations. Additional risks stem from the inability of the government to contain wage growth. However, the risk of external and public debt distress continues to be classified as moderate.

Authorities’ views

The authorities broadly agreed with the staff assessment of debt sustainability risks. They strive to maintain robust debt policies. To that end, they have recently finalized the Debt Management Policy and are taking steps to alleviate debt burden, including negotiating debt forgiveness with the Bank of China (T$8 million) and refinancing debt to the Pension Fund. They are concerned, however, that a higher share of loan financing by development partners (the World Bank and the Asian Development Bank) following Tonga’s upgrade to a moderate level of risk of debt distress in 2014 could undermine debt sustainability. They agree with the staff that other risks emanate from the pressure to raise public sector wages and to finance the SPG, and that it is important to maintain fiscal buffers for contingencies, such as natural disasters.

Table 2.Tonga: External Debt Sustainability Framework, Baseline Scenario, 2013–36 1/(In percent of GDP, Unless Otherwise Indicated)
ActualHistorical 6/Standard 6/Projections
2013.02014.02015.0AverageDeviation2016-20212022-2036
201320142015201620172018201920202021Average20262036Average
External debt (nominal) 1/45.342.144.243.142.443.241.941.039.634.032.4
of which: public and publicly guaranteed (PPG)45.342.144.243.142.443.241.941.039.634.032.4
Change in external debt3.4−3.12.1−1.1−0.70.8−1.3−0.9−1.4−1.1−0.2
Identified net debt-creating flows5.55.99.9−1.13.36.56.02.53.22.03.3
Non-interest current account deficit3.97.211.111.16.42.46.49.89.45.56.25.37.06.1
Deficit in balance of goods and services38.338.046.147.451.355.653.750.250.248.347.5
Exports21.518.517.518.418.218.919.620.418.919.320.2
Imports59.856.563.665.869.574.573.370.669.167.667.7
Net current transfers (negative = inflow)−31.2−29.0−33.2−28.13.6−43.4−43.2−43.9−42.3−42.7−42.1−41.8−40.2−41.0
of which: official−6.3−4.0−4.9−9.1−9.9−10.7−9.5−9.9−9.2−8.8−8.5
Other current account flows (negative = net inflow)−3.2−1.8−1.7−1.6−1.7−1.9−2.0−1.9−1.9−1.1−0.3
Net FDI (negative = inflow)−1.2−2.6−2.7−4.16.1−2.8−2.9−2.9−2.9−2.9−2.9−3.1−3.5−3.2
Endogenous debt dynamics 2/2.81.41.5−0.7−0.3−0.4−0.5−0.1−0.1−0.2−0.3
Contribution from nominal interest rate0.70.70.70.80.70.70.70.60.60.40.3
Contribution from real GDP growth1.4−1.0−1.6−1.4−1.0−1.0−1.2−0.7−0.7−0.6−0.6
Contribution from price and exchange rate changes0.81.62.4
Residual (3-4) 3/−2.1−9.1−7.80.0−3.9−5.8−7.3−3.4−4.6−3.1−3.5
of which: exceptional financing0.00.00.00.00.00.00.00.00.00.00.0
PV of external debt 4/34.133.232.833.331.830.428.621.319.1
In percent of exports194.6180.9180.0175.8162.5149.1151.6110.694.6
PV of PPG external debt34.133.232.833.331.830.428.621.319.1
In percent of exports194.6180.9180.0175.8162.5149.1151.6110.694.6
In percent of government revenues159.0140.2136.3135.0128.5120.6113.185.076.1
Debt service-to-exports ratio (in percent)7.59.29.89.48.87.714.615.818.814.95.9
PPG debt service-to-exports ratio (in percent)7.59.29.89.48.87.714.615.818.814.95.9
PPG debt service-to-revenue ratio (in percent)8.28.58.07.36.75.911.512.814.011.54.7
Total gross financing need (Millions of U.S. dollars)19.327.844.15.322.938.645.529.535.932.845.2
Non-interest current account deficit that stabilizes debt ratio0.410.39.03.57.19.010.76.47.66.47.3
Key macroeconomic assumptions
Real GDP growth (in percent)−3.12.13.71.02.83.12.32.52.91.81.82.41.81.81.8
GDP deflator in US dollar terms (change in percent)−1.8−3.4−5.34.59.0−6.02.41.82.22.32.30.82.22.22.2
Effective interest rate (percent) 5/1.61.61.61.70.61.71.61.61.61.61.51.61.20.91.1
Growth of exports of G&S (US dollar terms, in percent)8.6−15.2−7.09.426.91.73.88.58.78.6−3.64.64.54.54.5
Growth of imports of G&S (US dollar terms, in percent)−5.1−6.910.57.58.60.310.811.83.40.31.94.83.84.43.9
Grant element of new public sector borrowing (in percent)52.352.352.352.352.352.352.352.352.352.3
Government revenues (excluding grants, in percent of GDP)19.620.021.423.724.124.624.725.225.325.125.125.1
Aid flows (in Millions of US dollars) 7/25.233.129.315.114.918.419.922.422.423.531.6
of which: Grants25.233.129.315.114.918.419.922.422.423.531.6
of which: Concessional loans0.00.00.00.00.00.00.00.00.00.00.0
Grant-equivalent financing (in percent of GDP) 8/4.84.55.55.76.26.05.14.34.9
Grant-equivalent financing (in percent of external financing) 8/81.081.180.079.779.279.279.582.380.5
Memorandum items:
Nominal GDP (Millions of US dollars)449.5443.4435.4422.3442.5461.9485.5505.5526.6641.5953.8
Nominal dollar GDP growth−4.8−1.4−1.8−3.04.84.45.14.14.23.34.04.04.0
PV of PPG external debt (in Millions of US dollars)137.1141.4146.1152.9153.8153.4150.6136.6182.1
(PVt-PVt-1)/GDPt-1 (in percent)1.01.11.60.2−0.1−0.60.5−0.50.70.2
Gross workers’ remittances (Millions of US dollars)107.4102.7107.7125.1127.4132.4137.7143.8149.8183.6275.6
PV of PPG external debt (in percent of GDP + remittances)27.325.625.425.824.823.722.316.614.8
PV of PPG external debt (in percent of exports + remittances)80.769.269.769.966.362.360.544.538.9
Debt service of PPG external debt (in percent of exports + remittances)4.13.63.43.16.06.67.56.02.4
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 3.Tonga: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2016–36(In percent)
Projections
20162017201820192020202120262036
PV of debt-to-GDP+remittances ratio
Baseline2625262524221715
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/2625242120181210
A2. New public sector loans on less favorable terms in 2016-2036 22626272626252325
A3. Costs of SPG + natural disasters2626293131302724
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-20182626272625241816
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/2627302928272117
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-20182627282726251816
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/2638494342413524
B5. Combination of B1-B4 using one-half standard deviation shocks2639524544423625
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/2633333231292119
PV of debt-to-exports+remittances ratio
Baseline6970706662604539
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/6969645753503530
A2. New public sector loans on less favorable terms in 2016-2036 26972737169696166
A3. Costs of SPG + natural disasters6873778380877162
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-20186970706662604439
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/6981969388866653
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-20186970706662604439
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/691291631151101109363
B5. Combination of B1-B4 using one-half standard deviation shocks691271721161111109363
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/6970706662604439
PV of debt-to-revenue ratio
Baseline1401361351281211138576
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/140134123109100916150
A2. New public sector loans on less favorable terms in 2016-2036 2140140140137133129116129
A3. Costs of SPG + natural disasters141142155166161156142128
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-20181401431461391311239283
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/14014515715014213510787
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-20181401471541461371299787
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/140186231223214206177123
B5. Combination of B1-B4 using one-half standard deviation shocks140191252244233225193134
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/140194190181170160120107
Debt service-to-exports+remittances ratio
Baseline43367862
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/43366762
A2. New public sector loans on less favorable terms in 2016-2036 243367874
A3. Costs of SPG + natural disasters43367885
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-201843367862
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/44478984
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-201843367862
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/45577885
B5. Combination of B1-B4 using one-half standard deviation shocks45577885
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/43367862
Debt service-to-revenue ratio
Baseline776121314115
A. Alternative Scenarios
A1. Key variables at their historical averages in 2016-2036 1/776111213103
A2. New public sector loans on less favorable terms in 2016-2036 2776121315148
A3. Costs of SPG + natural disasters7761214151611
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2017-2018776131415125
B2. Export value growth at historical average minus one standard deviation in 2017-2018 3/776121314126
B3. US dollar GDP deflator at historical average minus one standard deviation in 2017-2018777131516135
B4. Net non-debt creating flows at historical average minus one standard deviation in 2017-2018 4/777131416159
B5. Combination of B1-B4 using one-half standard deviation shocks7771416171710
B6. One-time 30 percent nominal depreciation relative to the baseline in 2017 5/798161820167
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/5050505050505050
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 4.Tonga: Public Sector Debt Sustainability Framework, Baseline Scenario, 2013–36(In percent of GDP, Unless Otherwise Indicated)
ActualEstimateProjections
201320142015Average 5/Standard 5/

Deviation
2016201720182019202020212016-21

Average
202620362022-36

Average
Public sector debt 1/51.445.849.048.748.248.747.146.044.438.135.2
of which: foreign-currency denominated45.342.144.243.142.443.241.941.039.634.032.4
Change in public sector debt2.7−5.53.2−0.3−0.50.5−1.6−1.1−1.6−1.2−0.3
Identified debt-creating flows3.4−3.36.40.5−0.5−0.7−1.7−1.7−1.8−1.3−1.2
Primary deficit0.4−2.60.20.82.92.20.80.0−0.1−0.6−0.60.3−0.3−0.1−0.4
Revenue and grants25.227.528.227.327.428.628.829.729.628.828.5
of which: grants5.67.56.73.63.44.04.14.44.23.73.3
Primary (noninterest) expenditure25.624.928.429.528.228.628.829.129.028.528.3
Automatic debt dynamics4.0−1.45.7−1.8−1.3−0.7−1.6−1.1−1.2−1.0−1.0
Contribution from interest rate/growth differential1.7−0.9−1.4−1.1−0.8−1.2−1.6−1.0−1.0−1.0−1.0
of which: contribution from average real interest rate0.10.10.20.40.30.0−0.2−0.2−0.2−0.3−0.3
of which: contribution from real GDP growth1.6−1.0−1.6−1.5−1.1−1.2−1.4−0.8−0.8−0.7−0.6
Contribution from real exchange rate depreciation2.3−0.57.1−0.7−0.50.4−0.1−0.1−0.2
Other identified debt-creating flows−0.90.80.50.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.80.50.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities−0.90.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)0.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes−0.7−2.2−3.3−0.8−0.11.20.10.60.20.10.8
Other Sustainability Indicators
PV of public sector debt38.938.838.538.837.035.433.425.521.9
of which: foreign-currency denominated34.133.232.833.331.830.428.621.319.1
of which: external34.133.232.833.331.830.428.621.319.1
PV of contingent liabilities (not included in public sector debt)
Gross financing need 2/3.20.02.94.83.52.23.64.54.53.81.9
PV of public sector debt-to-revenue and grants ratio (in percent)138.1142.2140.5135.5128.3119.4112.988.577.0
PV of public sector debt-to-revenue ratio (in percent)181.5163.7160.2157.4149.5140.3131.8101.487.2
of which: external 3/159.0140.2136.3135.0128.5120.6113.185.076.1
Debt service-to-revenue and grants ratio (in percent) 4/11.19.69.49.69.77.512.517.017.114.37.1
Debt service-to-revenue ratio (in percent) 4/14.313.112.411.111.18.714.620.020.016.38.0
Primary deficit that stabilizes the debt-to-GDP ratio−2.32.9−2.92.61.3−0.51.60.51.00.90.2
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)−3.12.13.71.02.83.12.32.52.91.81.82.41.81.81.8
Average nominal interest rate on forex debt (in percent)1.61.61.61.70.61.71.61.61.61.61.51.61.20.91.1
Average real interest rate on domestic debt (in percent)2.81.92.8−1.04.82.92.61.40.00.00.21.20.50.50.5
Real exchange rate depreciation (in percent, + indicates depreciation)5.3−1.117.4−0.910.6−1.6
Inflation rate (GDP deflator, in percent)0.51.01.54.35.41.10.91.63.03.02.72.02.52.52.5
Growth of real primary spending (deflated by GDP deflator, in percent)−15.6−0.918.50.28.17.1−2.24.13.42.81.42.80.82.51.7
Grant element of new external borrowing (in percent)52.352.352.352.352.352.352.352.352.3
Sources: Country authorities; and staff estimates and projections.

Central government; gross debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Sources: Country authorities; and staff estimates and projections.

Central government; gross debt.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 5.Tonga: Sensitivity Analysis for Key Indicators of Public Debt 2016–36
Projections
20162017201820192020202120262036
PV of Debt-to-GDP Ratio
Baseline3939393735332522
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages3939404039383438
A2. Primary balance is unchanged from 20163939414040393846
A3. Permanently lower GDP growth 1/3939393837363142
A4. High Wage Growth39383939393955159
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2017-20183941444343413844
B2. Primary balance is at historical average minus one standard deviations in 2017-20183940424139372924
B3. Combination of B1-B2 using one half standard deviation shocks3940434241393537
B4. One-time 30 percent real depreciation in 20173952524946433024
B5. 10 percent of GDP increase in other debt-creating flows in 20173944444241383026
PV of Debt-to-Revenue Ratio 2/
Baseline1421411361281191138977
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages142142140137131127116131
A2. Primary balance is unchanged from 2016142143142139135133132160
A3. Permanently lower GDP growth 1/142142138132125120109144
A4. High Wage Growth142140137134131134193558
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2017-2018142148152148141138132153
B2. Primary balance is at historical average minus one standard deviations in 2017-201814214614814113112410086
B3. Combination of B1-B2 using one half standard deviation shocks142147149144137132120129
B4. One-time 30 percent real depreciation in 201714219018116915514510583
B5. 10 percent of GDP increase in other debt-creating flows in 201714216015414613713010690
Debt Service-to-Revenue Ratio 2/
Baseline10108131717147
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages101081318181611
A2. Primary balance is unchanged from 2016101081318181612
A3. Permanently lower GDP growth 1/101081317181611
A4. High Wage Growth1010712171834127
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2017-2018101081419191711
B2. Primary balance is at historical average minus one standard deviations in 2017-201810108131818148
B3. Combination of B1-B2 using one half standard deviation shocks101081318191610
B4. One-time 30 percent real depreciation in 20171011101722221910
B5. 10 percent of GDP increase in other debt-creating flows in 201710108141818158
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

The last full DSA was prepared in June 2014 (SM/14/173, Sup.2). In line with the Staff Guidance Note on the Application of the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries in April 2016, Factsheet URL: http://www.imf.org/external/np/exr/facts/jdsf.htm, a full DSA is expected to be prepared every three years, or whenever circumstances have changed significantly since the previous DSA, such as a change in the external risk rating or overall risk assessment. Light updates should be prepared in intervening years. With the latest three-year average score of 3.47, Tonga is classified as a medium performer according to the World Bank Country Policy and Institutional Assessment (CPIA).

The most recent projections of the costs of the SPG range from T$80 million to T$100 million. This is down from previous estimates to reflect the authorities’ decision to utilize existing facilities rather than construct new accommodations.

The public sector comprises the central government and there is no local government in Tonga. The Country Policy and Institutional Assessment (CPIA) rating for Tonga remains at a medium level with a three-year average score of 3.47. The Tonga fiscal year starts in July.

See IMF Staff Report of the 2015 Article IV Consultation – Debt Sustainability Analysis Update.

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