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IMF Executive Board Concludes 2016 Article IV Consultation with Tonga

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
June 2016
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On June 13, the Executive Board of the International Monetary Fund (IMF) concluded the 2016 Article IV consultation1 with Tonga.

The Tongan economy has been rebounding since a contraction in FY2013.2 Growth accelerated from 2.1 percent in FY2014 to 3.7 percent in FY2015, supported by construction, tourism, strong remittances, and strong private credit growth, notwithstanding weather-related disruptions to agricultural production. Inflation declined to −0.3 percent at end-February 2016, reflecting lower global food and fuel prices. The country’s external position remains strong, with reserves supported by strong remittances, donor aid, and low global fuel prices.”

Real GDP is projected to grow at 3.1 percent in FY2015/16, driven by agriculture and construction sectors, as well as private consumption. Over the medium term, growth would stay around 2.5–3.0 percent, supported mainly by construction activities related to the preparation for the South Pacific Games (SPG). Low inflation is projected to continue over the medium term in line with global commodity prices.”

The balance of risks is tilted toward the downside. A protracted period of slower growth in advanced and emerging market economies, particularly in Australia and New Zealand, could lead to lower aid, remittances, and tourism receipts. On the domestic side, a large increase in current spending and potential cost overruns related to SPG could weaken fiscal sustainability and raise public debt. Slippages in the reform process could affect donor aid and create a fiscal financing gap, while natural disasters could take a toll on the economy.”

Executive Board Assessment3

The Executive Directors welcomed Tonga’s improved macroeconomic performance and favorable outlook. However, they noted that given the country’s small size, remoteness, and exposure to natural shocks, it remains vulnerable to risks. Directors agreed that policy priorities ahead should focus on building buffers and implementing structural reforms to strengthen the economy’s resilience, safeguard macroeconomic and financial stability, and boost potential growth.

Directors emphasized the importance of addressing fiscal risks and gradually building buffers. They welcomed the authorities’ commitment to rein in the wage bill and avoid cost overruns. They also encouraged continued reliance on concessional financing for capital spending, including grant financing for the South Pacific Games. Directors saw a need for further improvements in debt management as well as broader reforms to increase revenue and raise the efficiency of public spending to create the fiscal space needed for investment in infrastructure and human capital.

Directors considered the current accommodative monetary policy stance to be appropriate. However, they encouraged the authorities to be ready to mop up excess liquidity should signs of overheating emerge. Directors also encouraged the central bank to improve its monetary policy framework by introducing a policy interest rate, developing monetary and macro-prudential policy instruments, and announcing a new lower indicative reference rate for inflation to help anchor inflation in the medium term. They underscored that maintaining gross international reserves at the current level would help safeguard external stability. Directors welcomed the continued progress made by the central bank in upgrading its supervisory, regulatory, and legal frameworks for the financial sector, and called for further steps to expand its oversight over nonbanks.

Directors emphasized that structural policies should aim at raising growth potential by expanding opportunities for private sector development. They supported the efforts to enhance financial inclusion and to promote private credit, but highlighted the need to exercise caution in the application of government lending schemes. Directors encouraged the authorities to develop a broader reform strategy to improve the business climate and to make further progress in natural disaster preparedness. They also underscored the need to improve the quality and timeliness of data and encouraged the effective use of technical assistance from the Fund and development partners.

Tonga: Selected Economic Indicators, FY2011–FY2017 1/
Nominal GDP FY2015: US$435.4 million
Population (2014): 103.8 thousands
GDP per capita FY2015: US$4182
Major exports: root crops, vanilla, squash, fish
Est.Proj.
FY2011FY2012FY2013FY2014FY2015FY2016FY2017
(Annual percent change)
Output and prices
Real GDP 2/2.70.9−3.12.13.73.12.3
Consumer prices (period average)6.03.30.72.30.1−0.2−0.4
Consumer prices (end of period)7.12.30.21.50.2−0.90.1
GDP deflator5.82.40.51.01.51.10.9
(In percent of GDP)
Central government finance
Total revenue and grants26.327.425.227.528.227.327.4
Total revenue19.518.019.620.021.423.724.1
Grants6.89.45.67.56.73.63.4
Total expenditure and net lending33.730.226.525.729.330.429.1
Of which: Current expenditure22.723.524.925.025.827.826.4
Capital expenditure9.65.61.60.92.41.71.9
Overall balance−7.4−2.8−1.31.7−1.1−3.1−1.6
External financing (net)8.45.10.20.30.61.41.3
Domestic financing (net)−1.1−2.41.0−2.00.51.70.4
(Annual percent change)
Money and credit
Total liquidity 3/3.17.05.27.39.310.38.6
Of which: Broad money (M2)3.37.26.17.29.010.68.8
Domestic credit−12.3−14.22.57.815.413.212.4
Of which: Private sector credit−9.9−5.2−7.50.78.69.412.5
Interest rates (end of period)
Average deposit rate2.52.41.982.092.35
Average lending rate12.710.09.448.668.23
(In millions of U.S. dollars)
Balance of payments
Exports, f.o.b.13.616.715.017.917.916.316.2
Imports, f.o.b.−203.4−203.4−187.4−187.6−216.5−217.2−238.1
Services (net)4.7−7.70.31.3−2.00.7−5.3
Investment income (net)12.912.111.44.74.53.84.6
Current transfers (net)96.0123.8140.3128.6144.7183.4191.0
Of which: Remittances68.377.2107.4102.7107.7125.1127.4
Current account balance−76.1−58.5−20.4−35.1−51.4−13.0−31.5
(In percent of GDP)−18.0−12.4−4.5−7.9−11.8−3.1−7.1
Overall balance34.623.12.411.2−16.216.03.4
Terms of trade (annual percent change)−4.0−3.01.1−3.3−0.82.80.0
Gross official foreign reserves
In millions of U.S. dollars122.1145.2147.6158.7142.5158.6162.0
(In months of next year’s goods and
services imports)5.26.57.16.96.26.25.7
Debt (in percent of GDP)
Public debt (external and domestic)43.648.751.445.849.048.748.2
External debt (public)36.041.845.342.144.243.142.4
Debt service ratio28.91.41.71.71.81.71.6
Exchange rates
Nominal effective exchange rate (2005=100)100.3106.5105.4103.3103.0
Real effective exchange rate (2005=100)101.9108.1105.5103.4101.7
Memorandum items:
Remittances (in percent of GDP)16.116.323.923.224.729.628.8
Tourism (in percent of GDP)7.98.39.710.08.99.810.1
FDI (in percent of GDP)1.6−0.31.22.62.72.82.9
Nominal GDP (millions of T$)774.8800.6779.3803.6846.1881.9910.7
Population (thousands)103.0103.3103.5103.9104.1104.4104.6
Sources: Tongan authorities; and IMF staff estimates and projections.

Fiscal year beginning July.

Including preliminary data.

From the Banking Survey, which includes the Tonga Development Bank.

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

Fiscal year beginning July.

Including preliminary data.

From the Banking Survey, which includes the Tonga Development Bank.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

Fiscal year in Tonga runs from July 1 to June 30.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the view of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm

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