Resilience and Growth in the Small States of the Pacific
Chapter

Appendix 10. Tonga

Author(s):
Hoe Khor, Roger Kronenberg, and Patrizia Tumbarello
Published Date:
August 2016
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Tonga is a Polynesian state and an archipelago comprising 176 islands with a surface area of about 750 square kilometers scattered over 700,000 square kilometers of the southern Pacific Ocean. Fifty-two of these islands are inhabited by a population of about 104,000, out of which about 70 percent live on the main island, Tongatapu. Tonga is highly vulnerable to natural disasters.

Under the 2010 constitution, Tonga is a constitutional monarchy and a parliamentary democracy with the unicameral Legislative Assembly of Tonga consisting of 26 elected members, 9 of whom are elected by and from among the country’s 33 hereditary nobles, and 17 by commoners. The prime minister is chosen by the legislative assembly and appointed by the monarch. The prime minister selects the cabinet; its members are then appointed by the monarch. The prime minister may nominate up to four ministers from outside the assembly and on appointment they become members of the assembly.

All land belongs to the monarch and large estates have been allotted to nobles. By law, every male Tongan at age 16 is entitled to a small piece of agricultural land and a small town plot. In practice, there is not enough land and the majority of men have not been allocated land. Lately, objections have been raised to the exclusion of women from this process and, as a result, reform of the land tenure system has been under discussion.

Sources of Growth and Economic Profile

Main sources of growth. From the expenditure side, growth is driven mainly by private consumption and public spending, which are bolstered by official development assistance and remittances. Tourism has also increased its contribution in recent years, as has agriculture and retail and wholesale trade. As in most small states, the contribution of the public sector to the economy remains relatively large in Tonga.

Production, employment, exports, and imports. Since 2012/13 (Tonga’s fiscal year ends on June 30), Tonga has been on a growth path supported by the reconstruction in the aftermath of Cyclone Ian in 2014, and by tourism and remittances. Tonga has also benefited from low prices globally.

As in most small island states, Tonga’s production base is narrow. The share of its manufacturing sector in GDP is less than 10 percent and that of agriculture only 14 percent. Tonga’s efforts to realize its deep-sea potential, both in fishery and mining, have not yet produced firm results. The fishing industry is surprisingly small and the extractive industry virtually nonexistent.

Although Tonga’s unemployment rate is very low (1 percent), this is largely a result of low labor market participation, a high level of emigration, and the large share of subsistence workers, who generally do not earn cash wages. The labor market participation ratio is less than 56 percent.

The total export of goods was only 4 percent of GDP in 2013/14. Agricultural products such as vanilla, zucchini, and watermelon, and fishery products such as dried sea cucumber, account for the bulk of the exports. Tonga heavily depends on a wide range of imported products and services given the country’s shallow manufacturing base, shortage of energy resources, and continued pattern of consumption diversification supported by remittances.

External income. Despite a decline relative to the previous decade, remittances remain Tonga’s largest source of external income (21 percent of GDP during 2010–15). Tourism receipts are the second largest source (9 percent of GDP), followed by official transfers (5.6 percent) over the same period.

Development aid. Tonga receives both financial aid and technical assistance from multilateral and bilateral development partners. Most aid is provided as grants and directed toward infrastructure, communication, energy, education and training, and health.

Public finances. Government expenditure accounted for about 26 percent of GDP in 2013/14 and the ratio of public debt to GDP was 42 percent, up about 10 percentage points since 2008/09 as a result of the loans by China’s EXIM Bank for reconstruction and infrastructure. While there are no explicit fiscal rules, Tonga intends to maintain usable cash balances equivalent to two months’ cover of recurrent spending. The 2015 Joint IMF/World Bank Debt Sustainability Analysis indicates that Tonga remains at a moderate risk of debt distress.

Financial sector. The banking sector comprises five banks and is dominated by the local operations of two large foreign banks (ANZ and Bank South Pacific). It has gone through significant deleveraging since the abrupt end of the credit boom in the third quarter of 2008 from shrinking loan books and accumulating excess reserves. In 2014/15, the credit cycle turned. However, so far, rapid credit growth has not been a concern, because it started from a low level.

Investment and business climate. Tonga is the best performer among Pacific island countries rated by the World Bank’s Doing Business 2016 report, ranking 78th out of 189 economies. However, Tonga’s geographic disadvantage (long distance to the nearest key markets), small domestic market, and inadequate infrastructure have curtailed private investment.

Exchange rate and competitiveness. The pa’anga is the local currency. Tonga has accepted the obligations of Article VIII of the IMF’s Articles of Agreement and maintains an exchange system that is free of restrictions on payments and transfers for current international transactions. The real effective exchange rate is broadly in line with Tonga’s medium-term fundamentals.

Growth Challenges, Vulnerabilities, and Spillovers

Main growth challenges. As in other Pacific island countries, remoteness, a small population, and a narrow production base constrain growth. More recently, Tonga’s trend growth has significantly weakened with the remittance-driven model of income convergence appearing to have reached its limit. The protracted balance sheet repair of Tongan banks is also an important challenge, as is enhancing resilience to climate change.

Main vulnerabilities. The devastation following Cyclone Ian in January 2014, which caused damage and losses equivalent to 10 percent of GDP, is a reminder of the country’s vulnerability to natural disasters. The country’s high dependence on Australia, New Zealand, and the United States as the major source of external income, particularly through remittances and tourism receipts, is another source of vulnerability.

Global and regional economic spillovers. The global financial crisis spilled over to Tonga mainly through weaker remittances and trade.

Appendix Table 10.1Tonga: Selected Economic Indicators, 2010–15
Nominal GDP (FY2014): US$443.4 millionGDP per capita (FY2014): US$4,272
Main export products: Root crops, vanilla, squash, fishPopulation (2014): 103,802
Remoteness (GDP-weighted distance): 9,390 km
Sources: Tonga authorities; and IMF staff estimates as of April 2016.Note: … = data not available; SWF = sovereign wealth fund.

Data only available for the average of 1995–2000.

Data only available for the average of 1996–2000.

Data only available for the average of 1994–2000.

Data only available for the average of 1998–2000.

Current balance excludes grants and development (capital expenditure).

Due to limited data availability, the average of 2006–11 only refers to data for 2009–11.

Due to limited data availability, the average of 1991–2000 only refers to data for 1999–2000.

Due to limited data availability, the average of 2001–05 only refers to data for 2004–05.

Index, 2005 = 100.

Due to limited data availability, the average of 2001–05 only refers to data in 2005.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports.

Due to limited data availability, the average of 2006–11 refers to data for 2007–11. The average of 2006–11 for “Getting electricity” only refers to the year 2011.

United Nations Development Programme.

Due to limited data availability, the average of 1991–2000 refers to data for 2000 and the average of 2001–05 to data for 2005.

1991–20002001–092010–152015
AverageAverageAverage20102011201220132014Estimate
GDP, GDP growth, employment, and prices
Real GDP (percent change)12.31.11.73.62.70.9−3.12.13.7
Real GDP per capita (percent change)12.00.81.43.32.50.6−3.41.73.4
Unemployment (percent)
Consumer prices (percent change, average)22.58.62.31.76.03.30.72.30.1
Shares in GDP (percent)3
Largest sector (agriculture)17.413.811.613.313.913.614.614.4
Second largest sector (public administration)11.811.910.112.511.811.712.112.6
Third largest sector (trade services)7.68.98.59.810.110.110.610.4
Tourism5.15.38.57.07.98.39.710.0
Contributions to real GDP growth (percent)1
Largest sector (agriculture)0.10.50.81.41.70.20.60.3
Second largest sector (public administration)0.40.60.51.10.40.30.10.8
Third largest sector (trade services)0.10.70.3−0.11.10.30.20.1
Share in GDP (percent)3
Private consumption93.698.380.797.291.493.4100.1101.9
Sources: Tonga authorities; and IMF staff estimates as of April 2016.Note: … = data not available; SWF = sovereign wealth fund.

Data only available for the average of 1995–2000.

Data only available for the average of 1996–2000.

Data only available for the average of 1994–2000.

Data only available for the average of 1998–2000.

Current balance excludes grants and development (capital expenditure).

Due to limited data availability, the average of 2006–11 only refers to data for 2009–11.

Due to limited data availability, the average of 1991–2000 only refers to data for 1999–2000.

Due to limited data availability, the average of 2001–05 only refers to data for 2004–05.

Index, 2005 = 100.

Due to limited data availability, the average of 2001–05 only refers to data in 2005.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports.

Due to limited data availability, the average of 2006–11 refers to data for 2007–11. The average of 2006–11 for “Getting electricity” only refers to the year 2011.

United Nations Development Programme.

Due to limited data availability, the average of 1991–2000 refers to data for 2000 and the average of 2001–05 to data for 2005.

Private investment
Public consumption17.818.016.221.917.318.919.719.4
Public investment
Exports minus imports−33.6−38.7−33.6−43.7−43.0−40.5−36.7−38.0
Contributions to GDP growth (percent)1
Private consumption1.75.63.10.21.84.35.14.3
Private investment
Public consumption0.51.10.73.3−2.92.20.30.4
Public investment
Exports minus imports−0.9−3.0−0.3−2.1−2.91.14.9−2.6
Public finances
Central government finance (percent of GDP)
Revenue and grants413.925.626.927.026.327.425.227.528.2
Total domestic revenue413.723.719.820.119.518.019.620.021.4
Grants40.22.07.16.86.89.45.67.56.7
Expenditure and net lending414.126.029.632.333.730.226.525.729.3
Current (excluding grants)413.923.124.625.822.723.524.925.025.8
Of which: wages and salaries47.511.411.411.611.810.410.811.512.0
Development (capital)40.71.33.82.69.65.61.60.92.4
Current balance4,5−0.30.1−4.9−5.7−3.4−5.4−5.4−5.0−4.3
Overall balance4−0.3−0.3−2.7−5.3−7.4−2.8−1.31.7−1.1
Financing40.30.32.75.37.42.81.3−1.71.1
Assets (SWF, trust fund)000000000
Debt63.03.58.45.10.20.30.6
Of which: external63.03.58.45.10.20.30.6
Of which: concessional000.10.00.00.00.00.00.6
Other (government deposits)4−0.31.9−1.1−2.41.0−2.00.5
Public-debt-to-GDP ratio (percent)76.531.540.231.836.041.845.342.144.2
Sovereign wealth/trust fund (per capita ratio in real terms)
Balance of payments (percent of GDP, unless otherwise indicated)
Current account including official transfers−3.9−5.5−12.5−20.2−18.0−12.4−4.5−7.9−11.8
Current account excluding official transfers3−6.1−6.4−18.0−23.6−23.4−20.3−11.3−12.4−17.2
Overall balance87.63.05.38.24.90.52.5−3.7
Sources: Tonga authorities; and IMF staff estimates as of April 2016.Note: … = data not available; SWF = sovereign wealth fund.

Data only available for the average of 1995–2000.

Data only available for the average of 1996–2000.

Data only available for the average of 1994–2000.

Data only available for the average of 1998–2000.

Current balance excludes grants and development (capital expenditure).

Due to limited data availability, the average of 2006–11 only refers to data for 2009–11.

Due to limited data availability, the average of 1991–2000 only refers to data for 1999–2000.

Due to limited data availability, the average of 2001–05 only refers to data for 2004–05.

Index, 2005 = 100.

Due to limited data availability, the average of 2001–05 only refers to data in 2005.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports.

Due to limited data availability, the average of 2006–11 refers to data for 2007–11. The average of 2006–11 for “Getting electricity” only refers to the year 2011.

United Nations Development Programme.

Due to limited data availability, the average of 1991–2000 refers to data for 2000 and the average of 2001–05 to data for 2005.

External debt service (percent of exports of goods and services)70.31.36.11.228.91.41.71.71.8
Foreign direct investment32.75.93.312.31.6−0.31.22.62.7
External debt76.531.540.231.836.041.845.342.144.2
Main sources of external income (total)19.133.834.729.329.432.640.337.739.0
Remittances15.127.720.518.816.116.323.923.224.7
Tourism receipts3.55.38.67.07.98.39.710.08.9
Official transfers0.40.95.63.45.47.96.84.55.4
Contributions to external income growth (percent)
External income growth4.67.68.61.115.023.617.8−7.81.6
Remittances4.05.13.2−6.8−1.27.119.7−2.63.0
Tourism receipts0.81.91.6−1.66.74.82.70.5−3.5
Official transfers−0.10.63.89.69.511.7−4.6−5.72.1
Exchange rate (local currency/U.S. dollar period average)1.42.01.81.91.81.71.71.81.9
Real effective exchange rate (period average)989.388.4103.398.9101.9108.1105.5103.4101.7
(percent change)−3.01.30.60.83.16.1−2.4−2.1−1.6
Money, credit, and financial sector
Broad money (percent change)48.812.26.45.63.37.26.17.29.0
Credit to private sector (percent of GDP)40.40.30.40.30.30.30.30.3
(percent change)45.012.8−4.8−15.6−9.9−5.2−7.50.78.6
Bank assets (percent of GDP)
Short–term treasury bill interest rate
Nonperforming loan ratio10
Foreign bank market share (percent)11
Business climate indicators
Business environment rankings12,13
Doing business (overall)66585862647478
Construction permits17161515132222
Getting electricity42343133356061
Enforcing contracts63444445489797
Getting credit62986874523642
Human development index14,150.690.700.710.7090.7090.7100.706
Memorandum:
Nominal GDP (T$ million)3283.5521.1786.2712.6774.8800.6779.3803.6846.1
Nominal GDP (US$ million)3205.1257.5432.2369.4422.9472.3449.5443.4435.4
Sources: Tonga authorities; and IMF staff estimates as of April 2016.Note: … = data not available; SWF = sovereign wealth fund.

Data only available for the average of 1995–2000.

Data only available for the average of 1996–2000.

Data only available for the average of 1994–2000.

Data only available for the average of 1998–2000.

Current balance excludes grants and development (capital expenditure).

Due to limited data availability, the average of 2006–11 only refers to data for 2009–11.

Due to limited data availability, the average of 1991–2000 only refers to data for 1999–2000.

Due to limited data availability, the average of 2001–05 only refers to data for 2004–05.

Index, 2005 = 100.

Due to limited data availability, the average of 2001–05 only refers to data in 2005.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports.

Due to limited data availability, the average of 2006–11 refers to data for 2007–11. The average of 2006–11 for “Getting electricity” only refers to the year 2011.

United Nations Development Programme.

Due to limited data availability, the average of 1991–2000 refers to data for 2000 and the average of 2001–05 to data for 2005.

Sources: Tonga authorities; and IMF staff estimates as of April 2016.Note: … = data not available; SWF = sovereign wealth fund.

Data only available for the average of 1995–2000.

Data only available for the average of 1996–2000.

Data only available for the average of 1994–2000.

Data only available for the average of 1998–2000.

Current balance excludes grants and development (capital expenditure).

Due to limited data availability, the average of 2006–11 only refers to data for 2009–11.

Due to limited data availability, the average of 1991–2000 only refers to data for 1999–2000.

Due to limited data availability, the average of 2001–05 only refers to data for 2004–05.

Index, 2005 = 100.

Due to limited data availability, the average of 2001–05 only refers to data in 2005.

Share in total loans, not including small loan scheme.

World Bank, Doing Business reports.

Due to limited data availability, the average of 2006–11 refers to data for 2007–11. The average of 2006–11 for “Getting electricity” only refers to the year 2011.

United Nations Development Programme.

Due to limited data availability, the average of 1991–2000 refers to data for 2000 and the average of 2001–05 to data for 2005.

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