Front Matter Page
IMF Country Report No. 18/12
TONGA
2017 ARTICLE IV CONSULTATION—PRESS RELEASE; AND THE STAFF REPORT FOR TONGA
January 2018
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2017 Article IV consultation with Tonga, the following documents have been released and are included in this package:
A Press Release.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on a lapse of time basis, following discussions that ended on October 5, 2017, with the officials of Tonga on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on December 19, 2017.
An Informational Annex prepared by the IMF staff.
A Debt Sustainability Analysis prepared by the staffs of the IMF and the International Development Association.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
PO Box 92780 • Washington, D.C. 20090
Telephone: (202) 623–7430 • Fax: (202) 623–7201
E-mail: publications@imf.org Web: http://www.imf.org
Price: $18.00 per printed copy
International Monetary Fund
Washington, D.C.
© 2018 International Monetary Fund
Front Matter Page
TONGA
STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION
December 19, 2017
Key Issues
Context. Over recent years, Tonga has enjoyed robust growth and macroeconomic stability, with the construction sector being the main driver of growth. Tonga’s reliance on private and official transfers poses sustainability risks, particularly given the economy’s vulnerability to external shocks and the potentially high costs of natural disasters.
Outlook. Tonga faces a favorable growth outlook driven by construction, agriculture, and tourism, albeit with risks tilted to the downside. Risks associated with weaker global economic growth and inward looking policies cause uncertainty about the future path of grant financing, private remittances, and revenues from tourism. While the government’s infrastructure strategy will provide a short-term boost to growth and enhance future growth potential, the government needs to carefully manage its expenditures and avoid fiscal slippage giving rise to non-concessional external borrowing.
Main policy recommendations:
• Tonga would benefit from a more prudent fiscal stance, notwithstanding the role of public investment in boosting growth and building resilience to natural disasters. The authorities need to prioritize own-financed capital expenditures and contain the large wage bill. Targeting a gradual adjustment of the government primary balance to approximately one percent of GDP by FY2022, through a combination of revenue and expenditure measures, would help ensure debt sustainability.
• The current monetary policy stance is appropriate. It is supporting credit growth, so far with no signs of financial sector vulnerabilities. However, the central bank should stand ready to adjust monetary policy if risks emerge. Macroprudential policies should be used to address systemic risks to financial stability; there is a need to strengthen the monitoring of financial institutions and continue financial sector reforms.
• To raise Tonga’s growth potential, continued improvements in the business climate and private sector development are needed. The authorities’ focus on expanding export market access and increasing the value added of domestic production is welcome.
Approved By
Odd Per Brekk (APD) and Johannes Wiegand (SPR)
Discussions were held in Nuku’alofa during September 25–October 5, 2017. The team comprised Elena Loukoianova (Head), Giovanni Ugazio (STA), Olena Ftomova (EUR), and Tubagus Feridhanusetyawan (Fiji Resident Representative). Mr. Machmud (OED) participated in most discussions. Mr. Edward (World Bank) and Mr. Moeaki (Asian Development Bank) joined selected meetings. Staff met care-taking Prime Minister Honorable ‘Akilisi Pohiva, care-taking Minister of Finance and National Planning Honorable Pohiva Tu’i’onetoa, Governor of the National Reserve Bank of Tonga Dr. Sione Ngongo Kioa, and other senior government officials, as well as development partners and private sector representatives. Irene Zhang and Antoinette Kanyabutembo assisted in the preparation of this report.
Contents
CONTEXT
RECENT DEVELOPMENTS
OUTLOOK AND RISKS
POLICY DISCUSSIONS
A. Maintaining Fiscal Sustainability
B. External Assessment
C. Improving Monetary Policy and Preserving Financial Stability
D. Supporting Inclusive Growth and Building Resilience to Natural Disasters
E. Strengthening Statistical Capacity
STAFF APPRAISAL
BOXES
1. Tonga’s Housing Sector
2. External Sector Assessment
FIGURES
1. Stylized Facts
2. Recent Economic Developments
3. External and Monetary Developments
4. Financial Intermediation
5. Financial Access
TABLES
1. Selected Economic Indicators, FY2013–19
2a. Summary of Government Operations, FY2013–19 (In millions of pa’anga)
2b. Summary of Government Operations, FY2013–19 (In percent of GDP)
3. Depository Corporations Survey, FY2013–19
4. Balance of Payments Summary, FY2013–19
5. Medium-Term Scenario, FY2013–23
6. Financial Soundness Indicators, FY2011–16
7. Baseline and Alternative Scenarios, FY2017–22
APPENDICES
I. Risk Assessment Matrix
II. Recent Tax Reforms
III. Structural Reforms and Infrastructure Priorities
IV. Strengthening Ex-Ante and Ex-Post Resilience to Natural Disasters
Front Matter Page
TONGA
STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX
December 19, 2017
Prepared By
The Asian and Pacific Department
(In consultation with other departments)
Contents
FUND RELATIONS
PACIFIC FINANCIAL TECHNICAL ASSISTANCE CENTRE (PFTAC) COUNTRY STRATEGY 2016–18
WORLD BANK-IMF COLLABORATION
RELATIONS WITH THE ASIAN DEVELOPMENT BANK
STATISTICAL ISSUES
Front Matter Page
TONGA
STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS
December 19, 2017
Approved By
Odd Per Brekk (IMF) and John Panzer (IDA)
Prepared by the staff of the International Monetary Fund (IMF) and the International Development Association (IDA)
The 2017 Tonga’s debt sustainability analysis (DSA) increases the external debt distress rating from moderate to high risk, as the indicative thresholds for debt-to-GDP and debt-to-exports are breached in the projection horizon, given the large expected impact on economic growth and fiscal balances posed by future natural disasters.
The new classification is due to a change in the treatment of future spending related to natural disasters.1,2 The DSA 2017 incorporates effects of natural disasters in the baseline projections with two separate projection horizons. The baseline projections assume no natural disaster until FY2023, and an alternative scenario with a disaster in FY2018 is considered separately. After FY2023, the baseline scenario assumes a permanently lower GDP growth rate and wider fiscal and current account deficits. Overall, these assumptions are the main driving factor for debt dynamics. The DSA rating is not derived from the baseline scenario but from an alternative DSA scenario that excludes remittances, because remittances finance consumption, they are very volatile, and the channels for the transmission of remittances to Tonga are fragile.
This DSA highlights the importance of preserving Tonga’s policy to cap external debt and to borrow externally only in exceptional circumstances and on highly concessional terms. At the same time, there is a need to contain fiscal expenditure to maintain fiscal buffers, which would help Tonga reduce its large reliance on donor funding to finance potential future disasters costs.
Front Matter Page
Press Release No. 18/04
FOR IMMEDIATE RELEASE
January 17, 2018
International Monetary Fund
Washington, D.C. 20431 USA
Telephone 202–623-7100
Fax 202–623-6772
