## 1tonea2025001-source-pdf ## Source details **Canonical URL:** [1tonea2025001-source-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1tonea2025001-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1tonea2025001-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1tonea2025001-source-pdf.pdf.json) --- ### Overview and outlook - Tonga’s economy is expanding, driven by reconstruction, public investment, strong remittances, and a rebound in tourism. - Growth projections: - Real GDP: FY2025 2.7 percent (peak), FY2026 2.3 percent; medium-term long-term growth projected at 1.2 percent. - Inflation outlook: - Consumer prices (period average): FY2025 2.9; FY2026 2.2. - Consumer prices (end of period): FY2025 1.4; FY2026 3.1. - External position: - Current account deficit (percent of GDP): FY2024 3.8; FY2025 5.2; FY2026 6.4. - Gross official foreign reserves: FY2025 US$387.9 million; FY2025 coverage 10.5 months of imports. ### Recent developments and risks - Recovery drivers: - Stronger-than-expected grant inflows, elevated remittances, rebound in tourism, fiscal support for reconstruction. - Inflation dynamics: - Headline inflation declined below the 5 percent reference rate; core inflation has picked up. - Banking and financial risks: - Financial system broadly stable; banks well-capitalized and liquid but rising credit risks and NPLs warrant proactive supervision. - NPL ratio: 11.2 percent end-June 2024 → 14.7 percent by June-2025; NPL coverage ratio: ~39.3 percent end-June 2024 → 33.3 percent end-June 2025. - Capital adequacy ratio: 30.7 percent as of 2025Q2 (regulatory minimum 15 percent). - Excess reserves: T$296.5 million in July 2025. - External risks: - Natural disasters, weaker remittances, global slowdown, and possible reduction in concessional financing. - Major domestic constraints: - Geographic remoteness, small and dispersed population, high disaster vulnerability, high outward migration, governance weaknesses. ### Credit extension and financial flows (recent) - Private credit growth and composition: - Private credit rose by 9.6 percent year-on-year as of June 2025, driven by a 22.9 percent surge in business lending. - Household credit more subdued. - NBFI lending: T$90.4 million as of June 2025 (around 13 percent of total lending), down from 14.4 percent a year earlier. - Credit–remittance interactions: - Remittances tend to complement and help business credit expansion rather than household borrowing. - Monetary liquidity: - Ample bank liquidity kept credit supply responsive and interest rates stable. ### Monetary policy framework and NRBT reforms - Policy stance and instruments: - Recommendation to move monetary policy from accommodative to neutral; readiness to tighten in a data-dependent manner. - NRBT intends to transition to a mid-rate interest rate corridor. - Policy rate intended to be lifted to 2 percent by NRBT. - Proposed corridor: floor at 0 percent (remuneration on standing deposit facility) and ceiling at 4 percent (remuneration on standing lending facility). - Issuance of short-term central bank securities at a fixed rate of 2 percent through full-allotment tenders to absorb excess liquidity and establish a positive policy rate. - Legal and governance reforms: - Amendments to the NRBT Act should anchor the interest-corridor system, clarify policy objective around core inflation, and reinforce Bank autonomy. - Draft amendments stalled since mid-2025; NRBT seeks Fund support. ### Fiscal policy stance and recommendations - FY2025 outcomes and FY2026 outlook: - FY2025 overall balance: surplus 5.6 percent of GDP (supported by grants ~32.0 percent of GDP). - Staff project FY2026 overall balance: -7.7 percent of GDP, assuming only firmly committed external grants materialize. - Overall balance (excl. grants): FY2025 -26.3 percent of GDP; FY2026 -24.6 percent of GDP. - Medium-term consolidation strategy: - Gradual fiscal consolidation and additional grant financing essential to put debt on a firm downward path. - Consolidation focus: mobilize domestic revenues (including phasing out inefficient exemptions), improve tax administration, enhance spending efficiency, secure grants. - Authorities should refrain from non-concessional borrowing and strengthen PFM capacity. - Specific fiscal projections and recommended consolidation (FY2027–FY2035 series): - Baseline primary balance: -7.8, -9.2, -10.4, -12.0, -12.0, -12.9, -11.4, -11.0, -10.4. - Proposed primary balance: -6.4, -6.8, -8.0, -8.0, -7.2, -7.3, -4.6, -2.3, 0.4. - Domestic consolidation needed: 1.4, 2.4, 2.4, 2.7, 2.8, 2.8, 3.3, 4.2, 4.8. - Contribution from tax revenue: 0.8, 0.8, 0.8, 1.1, 1.2, 1.2, 1.7, 2.4, 2.8. - Less tax exemptions: 0.5, 0.5, 0.5, 0.8, 0.8, 0.8, 1.3, 1.8, 2.1. - Additional Grants: 0.0, 0.0, 0.0, 1.3, 2.0, 2.8, 3.5, 4.5, 6.0. - Consumption tax: - Consumption tax rate: 15 percent in Tonga. - Removing inefficient tax exemptions could yield at least 2.8 percent of GDP without raising statutory rates (staff estimate). ### Financial sector policies and supervision - Oversight priorities: - Expand regulatory oversight across broader financial sector, including credit unions, pension funds, and other NBFIs. - Expand macroprudential toolkit and conduct regular bank stress tests. - Strengthen prudential standards and enforce AML/CFT to preserve correspondent banking relationships. - Tonga Development Bank (TDB): - Recommend separating commercial operations from development-lending arm. - If needed, provide targeted capital injections under time-bound plan and strong oversight. - Market development: - Establish a credit registry; issue domestic government bonds to foster an interbank market; support digitalization including national digital ID. ### External sector assessment and reserves - External position: - Annex II EBA-lite: FY2025 external position broadly in line with fundamentals. - CA-Actual FY2025: -5.2; CA Norm: -6.3; Adjusted CA: -6.4; CA Gap: -0.1. - Reserves adequacy: - Gross official reserves FY2025: US$388 million (about 10.5 months of the following year’s imports). - Staff reserves adequacy optimal level between 4½ and 7½ months of imports; incorporating high disaster vulnerability raises estimated adequate level to about 7½ months. - Financing structure: - CA deficits largely financed by project support grants and grants in-kind. - FDI inflows limited; recent external borrowings limited and concessional. ### Debt sustainability, DSA findings, and stress scenarios - Debt assessment: - Tonga assessed at high risk of debt distress. - Public debt (external and domestic percent of GDP): FY2024 37.0; FY2025 31.5; FY2026 37.7. - External debt (percent of GDP): FY2024 31.7; FY2025 26.6; FY2026 31.0. - PV of public debt-to-GDP projected to breach 70 percent from FY2035 onward under baseline. - PV of external debt-to-GDP projected to breach 55 percent starting FY2035. - Key numeric DSA highlights and assumptions: - Discount rate for PV calculations: 5 percent. - External debt FY2025: 27 percent of GDP (revised down from 38 percent in 2024 DSA). - China EXIM Bank annual payments: ≈ 2.2 percent of GDP in FY2025–29 on average. - Tonga fully utilized IDA20 country allocation: SDR52.2m (US$69.8m). - Public domestic debt: USD30 million at end-June 2024 (about 5.3 percent of GDP; 16 percent of total public debt); planned TOP 30 million new domestic debt issuance in FY2026. - Stress tests: - Severely adverse global scenario: Tonga’s growth declines by 0.25 and 0.10 percentage points in FY2026 and FY2027 relative to staff baseline. - Tailored one-off natural disaster shock: a 14 percentage point increase in debt-to-GDP in FY2026; Real GDP and exports lowered by 3 and 7 percentage points respectively in the year of the shock — PV of public debt-to-GDP breaches 70 percent in FY2033 under this shock (two years earlier). - Under the most extreme growth shock, PV public debt-to-GDP crosses 70 percent in FY2032. ### Financial deepening and role of remittances - Financial deepening status: - Private credit stagnated post-2008; credit-to-firms declined from 39 percent of GDP in 2007 to ~20 percent in subsequent years; household credit rose from 13 percent of GDP in 2007 to 22 percent in 2024. - Tonga’s private credit-to-GDP underperforms compared to PIC peers (Fiji, Samoa, Vanuatu). - Remittances: - Tonga remittances roughly 47 percent of GDP; total remittances (millions USD): FY2025 265.5; FY2026 278.5. - Compensation of overseas workers (percent of GDP): FY2025 67.2; FY2026 70.4. - Empirical findings (Granger causality, annual 2001–2024): - Remittances → Credit (Firm): significant (baseline p-value 0.003; robustness p-value 0.003). - Credit (Household) → Remittances: significant (baseline p-value 0.02; robustness p-value 0.004). - Remittances → Credit (Household): not significant; Credit (Firm) → Remittances: not significant. - Impulse response: 1 percent increase in remittances → peak ~2 percent increase in private firm credit within 2–3 years. - Policy measures to leverage remittances and deepen finance: - Encourage automatic deposit of remittances into savings/investment accounts; remittance-backed microloans; integrate remittance data into credit scoring; diaspora-financed community investment schemes; expand financial literacy; strengthen supervisory oversight of NBFIs. ### Labor emigration and human capital (Annex VII) - Emigration intensity and remittances: - Emigration stock to population ratio exceeded 50 percent in 2024. - Four out of five Tongan households receive remittances. - Tonga second largest remittance-receiving country by share of GDP in 2022. - Education impacts: - LMA participation associated with lower child education enrollment: high-school enrollment over 10 percentage points lower in LMA households; PSM indicates 5 percent lower enrollment for LMA-participating families. - Skill transfer limited: >95 percent of migrant workers under LMAs perform elementary tasks. - Policy recommendations: - Improve education access/quality for LMA families; enhance training for skill upgrade; improve immigration policies to facilitate skilled recruitment and transfers; improve business environment to attract returning labor. ### Data quality, statistical capacity, and CD priorities - Data adequacy ratings (median): National Accounts C; Prices C; GFS C; External Sector Statistics C; Monetary and Financial Statistics C; Inter-sectoral Consistency C; Median Rating C. - Key data shortcomings: - GDP released only on production side and annually with >12-month lag; CPI monthly with 1–2 month lag; inconsistencies in grants between BoP and GFS. - Use of staff estimates in areas: core inflation, GDP, and credit growth by sector. - Capacity development priorities: - Increase statistical staffing, publish higher-frequency GDP and CPI components, reconcile grants between BoP and GFS, improve BOP and IIP timeliness, and implement Fund TA recommendations. - IMF and partners’ CD activities: - PFTAC, STA, FAD, and Fund support across PFM, revenue administration, macro-fiscal modelling, monetary operations, AML/CFT, and statistics. ### Staff appraisal — consolidated policy advice - Recalibrate macro policies toward neutrality as recovery solidifies and price pressures emerge. - Rebuild buffers through gradual, credible fiscal consolidation focused on domestic revenue mobilization, spending efficiency, and securing grants. - Shift monetary policy from accommodative to neutral, operationalize mid-rate interest corridor and issue short-term securities to absorb excess liquidity. - Strengthen financial sector oversight, expand supervision to NBFIs, and continue AML/CFT progress to preserve correspondent banking ties. - Advance structural reforms: financial deepening, digital adoption, improve business environment, address governance vulnerabilities, enhance disaster preparedness, and invest in statistical capacity. *IMF staff report for the 2025 Article IV Consultation with Tonga (data used in this report are as of September 5, 2025).* ### 3.8 percent of GDP in FY2024 to 5.2 percent in FY2025, this was financed by sizable capital transfers. ### 1tonea2025001-source-pdf - 3.8 percent of GDP in FY2024 to 5.2 percent in FY2025, this was financed by sizable capital transfers. ### Overview and Outlook - Tonga’s economy is expanding, driven by reconstruction, public investment, strong remittances, and a rebound in tourism. - Growth is projected to peak at 2.7 percent in FY2025 before moderating as large projects wind down and supply-side constraints persist. - The outlook is favorable but subject to significant risks: a sharper global slowdown, weaker remittances, or natural disasters could weigh on growth. - Tonga faces long-standing structural constraints that limit potential growth, including high outward migration, a narrow economic base, and vulnerability to climate shocks. - Addressing these challenges will require sustained reforms to deepen financial markets, improve the business environment, strengthen governance—including at state-owned financial institutions—and enhance resilience to natural disasters. ### Recent developments and risks - Recovery drivers: - Stronger-than-expected grant inflows. - Elevated remittances. - Rebound in tourism. - Fiscal support for reconstruction. - Inflation dynamics: - Headline inflation has declined below the 5 percent reference rate. - Core inflation has picked up, reflecting stronger domestic demand and a spike in core prices. - Banking and financial risks: - Financial system broadly stable, with banks well-capitalized and liquid, though rising credit risks call for more proactive supervision. - Stronger oversight of credit unions and pension funds, and continued progress on AML/CFT, are critical to safeguard financial integrity and preserve correspondent banking ties. - External position: - The current account deficit is projected to widen from 3.8 percent of GDP in FY2024 to 5.2 percent in FY2025. - Foreign exchange reserves remained stable and adequate at the end of FY2025, covering 10.5 months of imports, supported by sizable capital transfers. - Major risks: - Natural disasters, weaker remittances, and global slowdown. - Persistent structural challenges: geographic remoteness, small and dispersed population, high disaster vulnerability, and governance weaknesses that discourage investment and incentivize emigration. ### Main policy recommendations - Fiscal policy: - The proposed fiscal stance for FY2026 is appropriately contractionary; the expansionary stance in FY2025 supported the recovery. - Over the medium term, gradual fiscal consolidation and additional grant financing are essential to put debt on a firm downward path. - Consolidation should focus on mobilizing domestic revenues—including phasing out inefficient exemptions—improving tax administration, enhancing spending efficiency, and securing grants. - Authorities should refrain from non-concessional borrowing and strengthen PFM capacity to ensure effective project implementation and support donor confidence. - Monetary policy: - With the economy on a firmer footing and incipient signs of demand-driven price pressures, monetary policy should shift from accommodative to neutral. - Given the spike in core prices and ample liquidity, monetary policy should begin moving toward a neutral stance, with readiness to tighten further in a data-dependent manner. - Milestone reform: transition to a mid-rate interest rate corridor monetary policy framework, including issuing short-term securities to absorb excess liquidity and establish a positive policy rate. - Financial sector policies: - Foster a stable and inclusive financial system by enhancing regulatory oversight across the broader financial sector, expanding the macroprudential toolkit, and conducting regular bank stress tests. - Strengthen prudential standards and enforce AML measures to preserve financial integrity and correspondent banking relationships. - Structural reforms: - Advance financial deepening and access to credit. - Mitigate effects of emigration through education and training. - Accelerate digital adoption and cut red tape. - Address governance vulnerabilities, including at state-owned financial institutions. - Invest in statistical capacity to support policymaking and surveillance. ### Key statistics and indicators (selected, as reported) - Real GDP (annual percent change): FY2022 -2.3; FY2023 2.1; FY2024 2.1; FY2025 2.7; FY2026 2.3. - Consumer prices (period average): FY2022 6.5; FY2023 12.6; FY2024 8.0; FY2025 2.9; FY2026 2.2. - Consumer prices (end of period): FY2022 9.9; FY2023 13.7; FY2024 6.4; FY2025 1.4; FY2026 3.1. - Central government finance (In percent of GDP): - Revenue: FY2022 44.3; FY2023 54.3; FY2024 55.5; FY2025 60.0; FY2026 43.8. - Grants (of which): FY2022 18.4; FY2023 28.0; FY2024 29.2; FY2025 32.0; FY2026 16.9. - Expenditure: FY2022 44.4; FY2023 48.2; FY2024 51.3; FY2025 54.3; FY2026 51.4. - Expense: FY2022 38.7; FY2023 40.3; FY2024 37.0; FY2025 37.5; FY2026 37.1. - Net acquisition of nonfinancial assets: FY2022 5.7; FY2023 7.9; FY2024 14.3; FY2025 16.9; FY2026 14.3. - Primary balance: FY2022 0.4; FY2023 6.8; FY2024 4.6; FY2025 6.1; FY2026 -7.3. - Overall balance: FY2022 -0.1; FY2023 6.1; FY2024 4.2; FY2025 5.6; FY2026 -7.7. - Overall balance (excl. grants): FY2022 -18.5; FY2023 -21.9; FY2024 -25.0; FY2025 -26.3; FY2026 -24.6. - Money and credit (annual percent change): - Broad money (M2): FY2022 13.4; FY2023 -0.3; FY2024 8.2; FY2025 3.7; FY2026 4.6. - Domestic credit: FY2022 -3.3; FY2023 -15.6; FY2024 14.0; FY2025 18.0; FY2026 15.9. - Private sector credit: FY2022 -1.0; FY2023 9.0; FY2024 7.3; FY2025 7.5; FY2026 4.5. - Balance of payments (In millions of U.S. dollars): - Current account balance: FY2022 -27.8; FY2023 -30.4; FY2024 -21.2; FY2025 -30.6; FY2026 -39.3. - Current account (In percent of GDP): FY2022 -5.4; FY2023 -5.9; FY2024 -3.8; FY2025 -5.2; FY2026 -6.4. - Trade balance: FY2022 -201.0; FY2023 -222.6; FY2024 -221.1; FY2025 -243.0; FY2026 -251.2. - Exports of goods, f.o.b.: FY2022 15.1; FY2023 13.1; FY2024 10.8; FY2025 12.0; FY2026 13.5. - Imports of goods, f.o.b.: FY2022 216.1; FY2023 235.8; FY2024 231.9; FY2025 255.0; FY2026 264.7. - Tourism receipts: FY2022 9.9; FY2023 44.0; FY2024 61.6; FY2025 66.7; FY2026 70.2. - Total remittances (millions USD): FY2022 215.9; FY2023 256.4; FY2024 257.0; FY2025 265.5; FY2026 278.5. - Total remittances (In percent of GDP): FY2022 41.9; FY2023 50.0; FY2024 46.0; FY2025 45.2; FY2026 45.2. - Compensation of overseas workers: FY2022 35.3; FY2023 55.4; FY2024 65.0; FY2025 67.2; FY2026 70.4. - Personal remittances: FY2022 180.6; FY2023 200.9; FY2024 192.0; FY2025 198.4; FY2026 208.1. - Official grants (millions USD): FY2022 24.6; FY2023 22.9; FY2024 21.9; FY2025 30.9; FY2026 22.2. - Capital account balance (millions USD): FY2022 73.2; FY2023 66.2; FY2024 45.9; FY2025 51.1; FY2026 10.2. - Financial account balance (millions USD): FY2022 25.0; FY2023 15.8; FY2024 -22.3; FY2025 -21.9; FY2026 38.6. - Gross official foreign reserves: - In millions of U.S. dollars: FY2022 378.5; FY2023 389.9; FY2024 386.6; FY2025 387.9; FY2026 397.4. - In months of next year's total imports: FY2022 11.7; FY2023 11.9; FY2024 10.9; FY2025 10.5; FY2026 10.2. - Debt (In percent of GDP): - Public debt (external and domestic): FY2022 43.8; FY2023 43.8; FY2024 37.0; FY2025 31.5; FY2026 37.7. - Of which: External debt: FY2022 38.2; FY2023 38.3; FY2024 31.7; FY2025 26.6; FY2026 31.0. - External debt service ratio: FY2022 1.4; FY2023 2.2; FY2024 3.8; FY2025 3.6; FY2026 3.5. - Exchange rate: - Exchange rate (National currency per US dollar): FY2022 2.3; FY2023 2.3; FY2024 2.4; FY2025 2.4. - Real effective exchange rate (2010=100; +=appreciation): FY2022 115.7; FY2023 112.7; FY2024 118.7; FY2025 119.3. - Memorandum: - Nominal GDP (millions of US$): FY2022 515.2; FY2023 513.1; FY2024 558.1; FY2025 587.5; FY2026 615.7. - Population (2023): 100 thousand. - Major exports: root crops, vegetables, shellfish, fish. *IMF staff report for the 2025 Article IV Consultation with Tonga (data used in this report are as of September 5, 2025).* ### 7. Credit extension has accelerated, with growth now elevated and supported by strong ### 1tonea2025001-source-pdf - 7. Credit extension has accelerated, with growth now elevated and supported by strong ### Credit extension and financial flows - Private credit rose by 9.6 percent year-on-year as of June 2025, driven by a 22.9 percent surge in business lending. - Household credit has remained more subdued. - Non-bank financial institution (NBFI) lending totaled T$90.4 million as of June 2025 (around 13 percent of total lending), down from 14.4 percent a year earlier. - Ample bank liquidity kept credit supply responsive and interest rates stable. - Remittances tend to complement and help business credit expansion in Tonga rather than household borrowing (Annex IX). ### Recent policy implementation and reforms - Authorities advanced tax policy reforms and operationalized short-term monetary policy instruments to enhance liquidity management (Annex V). - Structural reforms included establishment of the anti-corruption office. - Authorities continue to engage with development partners and the Fund to sustain reform momentum and secure additional grants. - Fiscal and PFM initiatives under way: - Introduction of the Medium-Term Fiscal Framework. - Passage and implementation of the Public Financial Management (PFM) Act. - Rollout acceleration needed for the Electronic Sales Register System. - Valuation and recording of government fixed assets initiated. - Evaluation of options for a new Revenue Management System (RMS) to replace RMS 7. ### Short-term outlook (FY2025–FY2026) - Real GDP: - Estimated to have grown by 2.7 percent in FY2025. - Projected to grow by 2.3 percent in FY2026. - Drivers: robust domestic demand (public investment and household consumption) and continued recovery in tourism. - Agricultural output expected to recover in FY2025 and FY2026 as weather normalizes. - Softer remittance inflows will weigh on domestic demand. - Headline inflation: - Projected to increase from 1.4 percent at end-FY2025 to 3.1 at end-FY 2026, driven by higher energy and core prices. - Expected to stabilize around historical average of 3.2 percent as fiscal policy consolidates and monetary policy better absorbs excess liquidity. ### Medium-term prospects and external accounts - Long-term growth projected at 1.2 percent. - Current account deficit expected to widen moderately over next two years before stabilizing at around 7 percent of GDP over the medium-term, reflecting normalization of remittances and heavy import dependence. ### Risks (tilted to the downside) - External risks: - Steeper slowdown in global growth could dampen tourism receipts and remittances. - Escalating geopolitical tensions could trigger a spike in energy prices—intensifying NRBT’s policy trade-off. - Medium-term risk: possible reduction in concessional financing, particularly if IDA resources shrink. - Upside: stronger-than-anticipated tourism rebound; grant inflows may exceed baseline in short term. - Domestic risks: - Natural disasters could pressure public resources and weaken bank asset quality. - Delays in reconstruction and donor-financed infrastructure projects may weigh on activity. - Accelerated outmigration of Tonga workers could reduce labor supply and amplify near-term pressures on wages and prices. - Further loss of correspondent banking relationships (CBRs) due to AML/CFT weaknesses could disrupt transfers and remittance flows. - Rising vulnerabilities in the banking sector pose a downside tail risk. ### Severely adverse global scenario (illustrative sensitivity) - Under an illustrative sensitivity analysis (calibrated based on Box 1.1 of April 2025 World Economic Outlook): - Tonga’s growth will decline by 0.25 and 0.10 percentage points in FY2026 and FY2027 relative to the staff baseline, respectively. - Transmission mainly through spillovers to remittances and tourism; limited direct tariff exposure. ### Debt sustainability and risk of debt distress - Tonga is assessed as being at high risk of debt distress (DSA). - Without additional grant commitments, staff baseline projection shows PV of external and public debt-to-GDP ratios rising and both crossing the 55 percent threshold and the 70 percent benchmark in FY2035. - Debt obligations largely external; less than half of external debt to China Exim Bank. - Debt repayments surged to 3.5 percent of GDP in FY2024, mainly to Exim Bank, and remained elevated at over 2.5 percent of GDP until FY2028. - Government’s plan to refrain from new non-concessional borrowing would help reduce risk of debt distress. ### Authorities’ views - Ministry of Finance projected GDP growth above 3 percent in FY2026–27, versus staff’s 2.3 and 1.8 percent projections. - Authorities expect stronger boost from major infrastructure projects (Fanga‘uta Lagoon Bridge and Hawaiki submarine cable), rebound in agriculture, and sustained tourism strength. - Authorities projected headline inflation to moderate to around 1 percent by end-FY2026—below staff’s forecast. - Authorities concurred on risks from uncertain grants, project delays, and global trade tensions, and agreed with staff’s downside scenario. ### Policy recommendations: rebuild buffers and enhance resilience - Overall guidance: - Recalibrate macroeconomic policies toward a more neutral stance as recovery solidifies, credit extension accelerates, and price pressures emerge. - Rebuild buffers through gradual and credible fiscal consolidation, stronger domestic revenue mobilization, spending efficiency, and additional grants. - Shift monetary policy toward neutrality; new framework to better absorb excess liquidity. - Financial sector policies to preserve stability and promote financial deepening: monitor bank asset quality, strengthen provisioning for non-performing loans, expand supervision of non-bank financial institutions. - Structural reforms to lift potential growth and resilience: enhance disaster preparedness, advance digitalization, improve business environment, address governance vulnerabilities. - Fiscal policy specifics: - FY2025 fiscal balance: surplus at 5.6 percent of GDP, supported by record-high grants of about 32 percent of GDP, increased domestic revenues, and temporary wage savings. - Staff project fiscal balance to revert to a deficit of 7.7 percent of GDP in FY2026, assuming conservatively that only firmly committed external grants materialize. - Excluding grants, the FY2025 fiscal impulse was expansionary, about 1.3 percent of GDP; expected to shift to contractionary in FY2026, about 1.7 percent of GDP. - Staff recommend consolidation of about 1.4 percent of GDP in FY2027, cumulating to 4.8 percent of GDP by FY2035 (see Text Table 1). - Priority measures: high-quality revenue measures (including removing inefficient tax exemptions, which could yield at least 2.8 percent of GDP without raising statutory rates), stronger tax administration, spending efficiency by restraining the wage bill in line with the fiscal rule, rationalizing lower-priority current outlays. - Under staff recommended fiscal adjustment scenario (domestic measures of 4.8 percent of GDP over FY2027–FY2035 and additional grants in line with historical trends), PV of public debt-to-GDP ratio would stabilize below 70 percent benchmark; PV of external debt-to-GDP would stabilize below 55 percent threshold. - Notes and references: - The consumption tax rate is 15 percent in Tonga. - IMF (SR, 2023) reference: potential revenue impact estimate about 6.2 percent of GDP (for reference). - IMF (SR, 2021) reference: removing various tax exemptions could collect an additional 2.5 percent of GDP (for reference). - In baseline projection, only firmly committed grants are included, leading to long-term decline to 4 percent of GDP; additional grants aim to maintain grants above 10 percent of GDP. - Fiscal costing highlights (Text Table 1 excerpted figures preserved): - Baseline primary balance (FY2027–FY2035 series): -7.8, -9.2, -10.4, -12.0, -12.0, -12.9, -11.4, -11.0, -10.4 - Proposed primary balance (FY2027–FY2035 series): -6.4, -6.8, -8.0, -8.0, -7.2, -7.3, -4.6, -2.3, 0.4 - Domestic consolidation needed (FY2027–FY2035 series): 1.4, 2.4, 2.4, 2.7, 2.8, 2.8, 3.3, 4.2, 4.8 - Contribution from tax revenue (FY2027–FY2035 series): 0.8, 0.8, 0.8, 1.1, 1.2, 1.2, 1.7, 2.4, 2.8 - Improved consumption tax (FY2027–FY2035 series): 0.3, 0.3, 0.3, 0.3, 0.4, 0.4, 0.4, 0.6, 0.7 - Less tax exemptions (FY2027–FY2035 series): 0.5, 0.5, 0.5, 0.8, 0.8, 0.8, 1.3, 1.8, 2.1 - Contribution from current spending (FY2027–FY2035 series): -0.6, -1.6, -1.6, -1.6, -1.6, -1.6, -1.6, -1.8, -2.0 - Lower G&S (FY2027–FY2035 series): -0.3, -0.9, -0.9, -0.9, -0.9, -0.9, -0.9, -1.1, -1.2 - Lower public sector wage bill (FY2027–FY2035 series): -0.3, -0.7, -0.7, -0.7, -0.7, -0.7, -0.7, -0.7, -0.8 - Additional Grants (FY2027–FY2035 series): 0.0, 0.0, 0.0, 1.3, 2.0, 2.8, 3.5, 4.5, 6.0 - Monetary and exchange rate policy specifics: - Policy stance should move from accommodative toward neutral; readiness to tighten further in a data-dependent manner. - Policy rate was stated to be intended to be lifted to 2 percent by NRBT. - New monetary framework: mid-rate interest rate corridor with floor at zero percent (remuneration rate on standing deposit facility) and ceiling announced at 4 percent (remuneration rate on standing lending facility). - Issuing short-term central bank securities at a fixed rate of 2 percent through full-allotment tenders to absorb excess liquidity and allow NRBT to lift the policy rate. - Objectives: anchor inflation expectations, contain demand-driven price pressures, strengthen banks’ liquidity management, support development of an interbank market. - NRBT working on enhanced monetary policy communication strategy and refined operational guidelines. - Financial sector and structural recommendations: - Focus on preserving stability while promoting financial deepening. - Closer monitoring of bank asset quality, stronger provisioning for non-performing loans, expanded supervision of non-bank financial institutions. - Structural reforms to enhance disaster preparedness, advance digitalization, improve business environment, and address governance vulnerabilities. - Address execution bottlenecks to accelerate implementation and realize intended growth dividends. *Source: IMF staff report excerpt (Tonga).* ### 23. Amendments to the NRBT Act should offer an opportunity to strengthen the monetary ### Amendments to the NRBT Act should offer an opportunity to strengthen the monetary ### Monetary policy framework and NRBT autonomy - Forthcoming legal changes should: - Anchor the new interest-corridor system in law. - Clarify the policy objective around core inflation. - Reinforce the Bank’s autonomy, in line with IMF safeguards recommendations. - NRBT priorities for legal reform (with Fund support): - Ensure the Bank’s mandate does not extend into quasi-fiscal operations. - Tighten conditions to provide credit to the government to safeguard the NRBT from fiscal dominance. - Enhance rules governing profit transfers, coverage of losses, and recapitalization so that sterilization costs do not undermine central bank autonomy. - Safeguards and governance progress: - Establishment of an effective internal audit mechanism. - Preparation of a business continuity plan. - Status: - Progress on the draft amendments stalled since mid-2025. - NRBT confirmed interest in Fund support to complete legal reform. ### Exchange rate and monetary operational tools - Exchange rate regime and recent moves: - The Tongan Pa'anga (TOP) is pegged to a basket of currencies. - From July 2024 to June 2025, the average nominal effective exchange rate (NEER) appreciated by 0.3 percent compared to the previous year. - The average real effective exchange rate (REER) was roughly stable during the same period. - Operationalization of policy: - NRBT announced transition to a mid-rate interest rate corridor framework. - Issuance of NRBT notes intended to operationalize the policy rate, absorb excess liquidity, and lay foundation for an interbank market. - NRBT conducting market consultations and testing investor appetite for short-term securities. ### Authorities’ views on monetary policy and communication - Shared objectives and outlook: - Authorities concurred on the need for more effective instruments to contain inflation despite viewing current risks as limited and temporary. - Recognized importance of moving toward a neutral stance under the new monetary policy framework announced in the August Monetary Policy Statement. - Messaging around NRBT notes: - Introduction of NRBT notes should be seen as building market infrastructure and supporting gradual move toward neutrality, not as a contractionary shift. - Technical assistance request: - Authorities highlighted importance of continued Fund technical assistance to strengthen monetary policy communication and clearer articulation of the central bank’s monetary policy reaction function. - Legal reform views: - Authorities view NRBT Act amendments as key to modernizing framework—clarifying objectives, enhancing communication, strengthening governance, and safeguarding operational independence. - Confirmed commitment to completing reforms with Fund support and need to clarify rules on profit transfers, coverage of losses, and recapitalization. ### Financial sector policies — stability, risks, and supervision - Banking sector buffers and liquidity: - Capital adequacy ratio of 30.7 percent as of 2025Q2 (regulatory minimum 15 percent). - Excess reserves at the NRBT T$296.5 million in July 2025. - Credit risks and asset quality: - Banking system NPL ratio increased from 11.2 percent at the end of June 2024 to 14.7 percent by June-2025. - NPL coverage ratio declined from around 39.3 percent at the end of June 2024 to 33.3 percent by the end of June 2025. - Most NPLs linked to large exposures in shipping and distribution sectors; lingering effects of the HT-HH disaster and COVID-19. - Lending by NBFIs increased from a low base, driven mainly by pension-backed loans to members. - Systemic risk assessment: - Systemic risk has increased but remains largely contained due to well-capitalized major banks that are subsidiaries of relatively sizeable foreign financial institutions. ### Tonga Development Bank and banking sector governance - Recommended reforms: - Separate commercial operations from development-lending arm to strengthen governance and transparency. - If needed, provide targeted capital injections—including replenishing the Government Development Loan Fund as planned—under a time-bound plan and strong oversight to support the transition. ### Regulatory oversight, AML/CFT, and correspondent banking - Gaps and recommended actions: - Regulatory oversight across broader financial sector remains uneven; credit unions and pension funds operate with limited supervision. - Need to finalize regulatory frameworks for NBFIs, strengthen prudential standards and provisioning requirements, and expand scope and frequency of data collection. - NRBT supervisory remit should be broadened to cover all NBFIs, including retirement funds. - AML/CFT and correspondent banking relationships (CBRs): - Stronger AML/CFT enforcement—especially for foreign-exchange dealers and remittance providers—remains critical to safeguard financial integrity and preserve CBRs. - Partial withdrawal of CBRs could depress remittance inflows, weaken private consumption, and curtail credit via lower lending and tighter conditions. - Policy actions include adopting risk-based supervision, stepping up enforcement in line with Asia-Pacific Group findings, and swiftly passing Money Laundering and Proceeds of Crime Act (MLPCA) and Regulations amendments. - Tonga’s participation in the World Bank’s regional CBR project and potential inclusion in the Fund’s Safe Payment Corridor initiative provide resilience opportunities. ### Financial deepening, inclusion, and market development - Recommended measures: - Establish a credit registry to improve credit risk assessment and facilitate lending. - Implement the National Financial Inclusion Strategy (2023–27), including training on responsible digital financial services and inclusive green finance. - Issue domestic government bonds to foster development of an interbank market and enhance liquidity management. - Support digitalization (including national digital ID) to overcome geographic barriers and expand opportunities. - Expected outcomes: - Unlock private sector credit, enhance financial stability, and broaden reach of financial services across the economy. ### Structural reforms and resilience - Private sector and growth constraints: - Limited access to credit identified as top constraint to investment in the 2024 Enterprise Survey. - Policies to support tourism, use remittances for private investment, and strengthen financial institutions recommended. - Disaster resilience and regional initiatives: - Disaster Risk Management (DRM) bill passed in August 2021. - Tonga supporting establishment of the Pacific Resilience Facility (PRF) through a Treaty-based agreement endorsed by Pacific Island Forum Members. - PRF financing targets: initial target of US$500 million and a long-term aspirational target of US$1.5 billion. - Governance and anti-corruption: - Need to address macro-relevant governance and corruption vulnerabilities, strengthen institutional capacity, and safeguard public resources. - Establishment in 2024 of Tonga’s first Anti-Corruption Commission Office noted as important; continued resourcing needed. ### Data quality and statistical capacity - Current issues: - Data shortcomings hamper surveillance: issues with consistency, frequency, and timeliness across real, fiscal, external, and monetary sectors. - Recommendations: - Timely publication of high-quality macroeconomic statistics. - Increase statistical staffing, improve knowledge management for high staff turnover, enhance data sharing among government agencies, and implement Fund TA recommendations. - Fund continues to support national accounts and external sector statistics via TA missions and desk-based support. ### Staff appraisal — key projections and policy advice - Growth and outlook: - Tonga’s economy continues to expand, driven by reconstruction, public investment, strong remittances, and rebound in tourism. - Growth is projected to peak at 2.7 percent in FY2025 before moderating as large projects wind down and supply-side constraints persist. - Medium-term prospects remain subdued due to high disaster vulnerability, outward migration, and structural impediments from Tonga’s small size and remoteness. - Fiscal policy: - Proposed fiscal stance for FY2026 is appropriately contractionary after expansionary FY2025. - Over the medium term, gradual fiscal consolidation and additional grant financing are essential to put debt on a firm downward path. - Consolidation should focus on mobilizing domestic revenues—including phasing out inefficient exemptions—improving tax administration, enhancing spending efficiency, and securing grants. - Authorities should refrain from non-concessional borrowing and strengthen PFM capacity. - Monetary policy stance: - With the economy on a firmer footing and incipient demand-driven price pressures, monetary policy should shift from accommodative to neutral, with readiness to tighten further in a data-dependent manner. - Transition to a mid-rate interest rate corridor framework and issuance of short-term securities are milestone reforms to absorb excess liquidity and establish a positive policy rate. - Financial sector oversight: - Financial system broadly stable but rising credit risks call for more proactive supervision, stronger oversight of credit unions and pension funds, and continued progress on AML/CFT. - Structural reform priorities: - Advance financial deepening and access to credit, mitigate emigration effects through education and training, accelerate digital adoption, cut red tape, and address governance vulnerabilities. - Tonga’s leadership in establishing the Pacific Resilience Facility and creation of the Anti-Corruption Commission are welcome. - Statistical capacity: - Sustained investment in statistical capacity is needed to support policymaking and surveillance. *IMF staff report excerpt.* ### 48. It is recommended that the next Article IV Consultation for Tonga take place on a ### 1tonea2025001-source-pdf - 48. It is recommended that the next Article IV Consultation for Tonga take place on a ### Timing recommendation - It is recommended that the next Article IV Consultation for Tonga take place on a standard 12-month cycle. ### Real sector developments and outlook - Construction and tourism-related services are leading the recovery. - The labor market has tightened significantly. - Electricity consumption has been strong, while agricultural production was affected by El Nino. - Tourists are slowly returning towards pre-pandemic levels. - Headline inflation has declined below the NRBT’s reference rate, helped by a decline in import price. - Key projections (Table 1 / Table 5): - Real GDP: FY2022 -2.3; FY2023 2.1; FY2024 2.1; FY2025 2.7; FY2026 2.3. - Consumer prices (period average): FY2022 6.5; FY2023 12.6; FY2024 8.0; FY2025 2.9; FY2026 2.2. - Consumer prices (end of period): FY2022 9.9; FY2023 13.7; FY2024 6.4; FY2025 1.4; FY2026 3.1. ### External sector developments and outlook - Donors’ aids are expected to moderate after FY2024. - Trade deficits remain structurally large driven by imports. - The increase in travel receipts is expected to be partially offset by the moderation in official receipts, contributing to a slow narrowing of current account deficits. - The REER has appreciated recently due to both nominal appreciation and high inflation. - Reserves are expected to remain more than adequate. - Key balance of payments figures (Table 2 / Table 5): - Current account balance (In millions of U.S. dollars): FY2022 -27.8; FY2023 -30.4; FY2024 -21.2; FY2025 -30.6; FY2026 -39.3. - Current account balance (In percent of GDP): FY2022 -5.4; FY2023 -5.9; FY2024 -3.8; FY2025 -5.2; FY2026 -6.4. - Trade balance (In percent of GDP): FY2022 -39.0; FY2023 -43.4; FY2024 -39.6; FY2025 -41.4; FY2026 -40.8. - Gross official foreign reserves (millions of U.S. dollars): FY2022 378.5; FY2023 389.9; FY2024 386.6; FY2025 387.9; FY2026 397.4. - Reserves (months of next year’s total imports): FY2022 11.7; FY2023 11.9; FY2024 10.9; FY2025 10.5; FY2026 10.2. ### Monetary sector developments - Monetary policy was tightened in February 2023. - The stock of broad money is expected to remain largely unchanged, with the expected increase in net domestic assets offsetting the decrease in net foreign assets. - Liquidity in the banking system remains high. - Credit to the private sector is picking up; loan-to-deposit ratio has been low due to increase in total deposits. - Key monetary figures (Table 3): - Broad money (M2) annual percent change: FY2022 13.4; FY2023 -0.3; FY2024 8.2; FY2025 3.7; FY2026 4.6. - Domestic credit (annual percent change): FY2022 -3.3; FY2023 -15.6; FY2024 14.0; FY2025 18.0; FY2026 15.9. - Private sector credit (annual percent change): FY2022 -1.0; FY2023 9.0; FY2024 7.3; FY2025 7.5; FY2026 4.5. ### Fiscal sector developments and outlook - Primary fiscal balance is expected to deteriorate and turn into deficit in FY2026. - Tax revenues are expected to remain stable after a small uptick thanks to tax on international trade. - Development partners have stepped up grant support after the natural disaster, but temporarily. - Current expenditure is expected to stay elevated in the short term to support reconstruction. - Existing capital grants are expected to cover the increased post-HT-HH capital expenditure needs. - Public debt remains low, while external debt remains below the fiscal anchor. - Key fiscal figures (Table 1 / Table 4 / Table 5): - Revenue (percent of GDP): FY2022 44.3; FY2023 54.3; FY2024 55.5; FY2025 60.0; FY2026 43.8. - Grants (percent of GDP): FY2022 18.4; FY2023 28.0; FY2024 29.2; FY2025 32.0; FY2026 16.9. - Expenditure (percent of GDP): FY2022 44.4; FY2023 48.2; FY2024 51.3; FY2025 54.3; FY2026 51.4. - Primary balance (percent of GDP): FY2022 0.4; FY2023 6.8; FY2024 4.6; FY2025 6.1; FY2026 -7.3. - Overall balance (percent of GDP): FY2022 -0.1; FY2023 6.1; FY2024 4.2; FY2025 5.6; FY2026 -7.7. - Overall balance (excl. grants, percent of GDP): FY2022 -18.5; FY2023 -21.9; FY2024 -25.0; FY2025 -26.3; FY2026 -24.6. - Public debt (external and domestic, percent of GDP): FY2022 43.8; FY2023 43.8; FY2024 37.0; FY2025 31.5; FY2026 37.7. - Public sector external debt (percent of GDP): FY2022 38.2; FY2023 38.3; FY2024 31.7; FY2025 26.6; FY2026 31.0. ### Financial sector developments and risks - Capital buffers are similar to the PIC average. - Bank income continues to rely on net interest income: Net Interest Income 49%; Net Income from Foreign exchange 28%; Commission and Charges 5%; Other 18% (Financial Sector Operating Income Components in 2023). - Interest rate spreads remain wide; banks remain profitable. - Non-performing loans (NPLs) have increased; provision coverage declined. - Financial soundness indicators (Table 6 highlights): - Non-performing Loans to Total Gross Loans: FY2017 4.1; FY2018 3.6; FY2019 3.2; FY2020 4.1; FY2021 3.3; FY2022 6.3; FY2023 10.4; FY2024 10.9. - Non-performing Loans Net of Provisions to Capital: FY2017 8.8; FY2018 8.4; FY2019 6.2; FY2020 9.1; FY2021 6.6; FY2022 12.9; FY2023 23.8; FY2024 26.2. - Regulatory Capital to Risk-Weighted Assets: FY2017 29.4; FY2018 28.3; FY2019 30.5; FY2020 31.6; FY2021 31.4; FY2022 33.6; FY2023 32.8; FY2024 32.1. - Return on Assets: FY2017 2.7; FY2018 3.2; FY2019 2.9; FY2020 1.7; FY2021 2.4; FY2022 2.2; FY2023 4.0; FY2024 2.4. ### Medium-term baseline scenario (FY2022–FY2030) — key projections - Growth and inflation: - Real GDP: FY2027 1.8; FY2028 1.5; FY2029 1.2; FY2030 1.2. - Consumer prices (end of period): FY2027 3.3; FY2028 3.2; FY2029 3.2; FY2030 3.2. - External sector: - Current account balance (percent of GDP): FY2027 -6.3; FY2028 -6.8; FY2029 -6.9; FY2030 -6.9. - Gross international reserves (millions of U.S. dollars): FY2027 399.6; FY2028 402.3; FY2029 412.6; FY2030 436.0. - Public sector debt: - Public sector total debt (percent of GDP): FY2027 44.5; FY2028 52.7; FY2029 62.0; FY2030 72.8. - From FY2025 onwards, macroeconomic forecasts incorporate the average long-term effects of natural disasters and climate change. ### Key statistics and memoranda - Population (2023): 100 thousand. - Major exports: root crops, vegetables, shellfish, fish. - Nominal GDP (millions of US$): FY2022 515.2; FY2023 513.1; FY2024 558.1; FY2025 587.5; FY2026 615.7. - Tourism receipts (millions of US$): FY2022 9.9; FY2023 44.0; FY2024 61.6; FY2025 66.7; FY2026 70.2. - Total remittances (millions of US$): FY2022 215.9; FY2023 256.4; FY2024 257.0; FY2025 265.5; FY2026 278.5. - Remittances (percent of GDP): FY2022 41.9; FY2023 50.0; FY2024 46.0; FY2025 45.2; FY2026 45.2. _ Sources: Tonga authorities; and IMF staff estimates and projections._ ### 8. Decent Work & Economic Growth10. Reduce Inequalities ### 1tonea2025001-source-pdf - 8. Decent Work & Economic Growth10. Reduce Inequalities ### Policy objectives and constraints - Tonga faces structural challenges typical of small developing states (SDS): geographic remoteness, a small and dispersed population, and high vulnerability to natural disasters. - Narrow economic base and reliance on agriculture, remittances, and public employment constrain productivity and growth. - Recurrent climate shocks—such as cyclones and volcanic eruptions—place continued pressure on infrastructure, public finances, and development outcomes. - Outward migration exacerbates labor shortages and undermines public sector capacity. - Authorities have maintained macroeconomic stability under a fixed exchange rate regime and prudent fiscal stance, but key constraints remain: - limited fiscal space, - weak capital project execution, - financial sector vulnerabilities. - Tonga Strategic Development Framework II (2015–25) sets medium-term priorities: inclusive and sustainable growth, good governance, and climate resilience. - Over the next three years, Tonga aims to rebuild fiscal buffers, enhance financial stability, diversify the economy, and strengthen resilience to external and climate shocks. *Prepared by Shivneel Kirpal.* ### IMF engagement areas and planned reforms - Engagement focus: surveillance and capacity development (CD), coordinated with development partners (DPs), to strengthen macroeconomic stability, institutional capacity, and climate resilience. - Lifting potential growth and enhancing diversification: - Economy remains reliant on agriculture, remittances, and public employment. - Authorities seek to enhance productivity and diversification by investing in tourism, digital services, and value-added agriculture. - Key reforms: improve the business environment, reduce skills gaps from emigration, attract private investment. - Coordination: IMF with World Bank and ADB supporting digital transformation, labor market development, and business climate reform. - Anchoring a credible and growth-friendly fiscal strategy: - Robust medium-term fiscal strategy central to macroeconomic management. - Reforms: new PFM Act, revenue administration improvements (with FAD technical assistance). - PFTAC support on macro-fiscal modelling. - IMF assessed Tonga’s fiscal rule under Article IV and recommended enhancements. - Need to build fiscal buffers amid potential aid declines and rising climate-related spending. - Modernizing monetary operations: - Fixed exchange rate regime anchors inflation expectations, but monetary policy tools remain limited. - NRBT plans to transition from a floor interest rate to a mid-rate policy rate and issue NRBT Notes to improve policy transmission, following IMF (MCM) TA. - Reforms aim to strengthen financial oversight and market development. - Improving financial stability and supervision: - NRBT should strengthen financial sector oversight and supervisory capacity. - Priorities: enhance prudential standards, training in financial risk analysis, and reporting of financial institutions. - Builds on IMF/PFTAC technical assistance. - Strengthening the revenue base: - Broadening the tax base is a priority under the medium-term revenue strategy. - Authorities considering reforms to tax exemptions and administration; IMF TA supporting follow-up on earlier recommendations. - Enhancing Public Financial Management (PFM): - IMF support via PFTAC on budget formulation, debt and cash management, and climate-responsive tools. - Reforms embedding disaster risk into fiscal frameworks and addressing fiscal risks from SOEs and contingent liabilities. - Building resilience to climate risks: - Tonga is integrating climate risks into macro-fiscal planning and improving access to adaptation finance. - IMF support through CMAP and collaboration with ADB, WB, and the Green Climate Fund. - Addressing AML/CFT deficiencies: - Ahead of next APG mutual evaluation, Tonga is strengthening legal and institutional AML/CFT frameworks to help preserve correspondent banking access. - IMF CD to support risk-based supervision and financial intelligence, coordinated with APG, PFTAC, and other DPs. - Enhancing data capacity: - Gaps in national accounts, labor, balance of payments, and fiscal data hinder surveillance. - Authorities committed to strengthening data quality and dissemination. - IMF CD through STA and PFTAC will continue, including support for Tonga’s participation in the Enhanced General Data Dissemination System (e-GDDS). ### Annex II — External Sector Assessment (FY2025) - Overall assessment: Tonga's external position in FY2025 was broadly in line with the level implied by fundamentals and desirable policy settings, based on IMF's EBA-lite current account model. - Potential policy responses: - Strengthen public finances and promote private sector development. - Continued strong financial support from development partners would help preserve external sector stability amid large development spending needs. Key metrics and trajectories - Public and publicly guaranteed (PPG) external debt: - Total PPG external debt stood at about 32 percent of GDP as of end FY2024, accounting for 84 percent of total public debt. - Outstanding debt to all multilateral creditors: about 17 percent of GDP, or about 53 percent of the total external debt stock. - External debt obligations are largely external; less than half is to China. - Sharp spike in debt repayments in FY2024 and remain elevated above 2 percent of GDP until FY2028. - Tonga remains a net borrower; NIIP improved in 2024 driven by decline in international liabilities. - Near-term projection: external debt-to-GDP ratio expected to decline from 32 percent in FY2024 to 27 percent in FY2025, reflecting large repayments to China Exim Bank. - From FY2026 onwards Tonga will need to incur new external debt to finance large spending needs for SDGs and climate resilience. - Current account (CA): - From FY2014 to FY2024, Tonga’s CA deficit averaged about 6.3 percent of GDP. - For FY2025: - Remittances continued to moderate following decline in FY2024, but decline was more than offset by higher external grants. - Goods imports estimated to have increased due to economic recovery and construction activity. - Overall CA deficit widening from 3.8 percent of GDP in FY2024 to 5.2 percent in FY2025. - Projection: CA deficit projected to continue to increase in FY2026, reflecting elevated imports and decline in grants and private remittances. - EBA-lite estimates for FY2025: - CA-Actual: -5.2 - Cyclical contributions (from model) (-): 0.0 - Additional temporary/statistical factors (-): (natural disasters and conflicts) -1.2 - Adjusted CA: -6.4 - CA Norm (from model): -6.3 - Adjusted CA Norm: -6.3 - CA Gap: -0.1 - Real Effective Exchange Rate (REER): - Currency: Tonga pa’anga determined by weighted-basket of US dollar, New Zealand dollar, Fijian dollar, and Australian dollar; basket weights unchanged since 2018 and last reviewed in September 2024. - REER appreciated by about 0.1 percent on average in July 2024-June 2025; NEER depreciated by about 0.03 percent. - CA gap model implied REER gap close to 0.4 percent (applying elasticity of trade balance w.r.t REER of -0.3). - Large uncertainty due to: (i) official BOP data for FY2025 yet to be published; (ii) expected large changes in grants, tourism receipts, and remittances; (iii) low export base and limited scope for import substitution. - Capital and financial accounts: - CA deficits largely financed by capital account credits in form of project support grants and grants in-kind. - FDI inflows limited due to structural impediments: cumbersome land leasehold market operations and regulatory barriers, including restrictions on non-resident ownership in certain sectors. - Recent external borrowings limited and exclusively on concessional terms, including IMF’s RCF disbursed in FY2021 and FY2023. - Assessment: Authorities’ continued pursuit of grants and avoidance of new non-concessional external borrowing appropriate; reforms to promote FDI (reduce market entry barriers) would help strengthen reserve buffer. - FX intervention and reserves level: - Gross official reserves: US$388 million (about 10.5 months of the following year’s imports) in FY2025, compared to US$387 million (10.9 months of imports) in FY2024. - Reserves supported by inflows of foreign grants, remittances inflows, and tourism recovery. - Medium-term pressures: moderation in remittances towards pre-pandemic levels, lower grants after commitments are met, and continued debt repayments. - Reserve coverage projected to remain stable in FY2026 and over the medium term. - Staff reserves adequacy framework tailored to small credit-constrained economies: - Optimal level between 4½ and 7½ months of imports (cost-benefit analysis). - If probability of a large shock set at sample average of 50 percent, estimated optimal level: 4½ months of imports (above NRBT’s minimum threshold of 3 months of imports). - Incorporating Tonga’s high vulnerability to natural disasters raises estimated adequate level to about 7½ months of imports. - Additional reserve buffers may be needed to cover continued debt repayments, mostly due to China Exim Bank. - Strengthening public finances, structural reforms for climate resilience and private sector development, and new grant commitments would help enhance reserve adequacy. ### Annex III — Risk Assessment Matrix (RAM) - Purpose: RAM shows events that could materially alter the baseline path; likelihood categories: "low" (<10 percent), "medium" (10–30 percent), "high" (30–50 percent). RAM reflects staff views as of time of discussions with authorities. Key risks, likelihoods, expected impacts, and policy recommendations: - Global — Escalating Trade Measures and Prolonged Uncertainty - Likelihood: High - Expected impact: Medium. Economic slowdown of Tonga’s main trading and development partners and higher goods import prices, dampening investment and growth prospects. - Policy recommendation: - Provide temporary and timebound targeted fiscal support, especially to the vulnerable. - Prioritize public investment in the most necessary projects. - Global — Commodity price volatility - Likelihood: High - Expected impact: Medium-High. Higher commodity prices lead to larger import bill and CA deficit, lower FX reserves; higher inflation and weaker private consumption; delays in reconstruction or investment if wage inflation or construction material prices increase. - Policy recommendation: - Provide targeted fiscal support to the vulnerable. - Monetary policy should be tightened using NRBT’s usual instruments if strong second-round effects materialize. - Prioritize public investment in necessary projects and, in the long term, increase public investment to expand productive capacity. - Global — Geopolitical Tensions - Likelihood: High - Expected impact: Medium. Growth slowdown in major economies could weaken remittances, slow tourism recovery, lower demand for agricultural products, and reduce fiscal revenue. - Policy recommendation: - Improve private sector business climate and diversify the economy. - In the long term, increase public investment to expand productive capacity. - Accelerate reforms to broaden the tax base and improve spending efficiency. - Global — Decline in International Aid - Likelihood: High - Expected impact: Medium-High. Decline in international aid could delay or reduce external grants, worsening fiscal and external positions. - Policy recommendation: - Expedite donors’ commitments. - Accelerate reforms to broaden tax base and improve spending efficiency. - Implement reforms to enhance business environment and external competitiveness. - Domestic — Extreme climate events - Likelihood: High - Expected impact: High. Disruptions in economic activity; lower GDP growth; amplified inflationary pressures; infrastructure damage; larger fiscal burden and public debts. - Policy recommendation: - Prioritize ex-ante adaptation investment and ex-post expenditure to support affected households. - Strengthen monitoring of potential asset quality problems in banking sector. - Strengthen fiscal buffers by accelerating reforms to mobilize additional revenues. - Domestic — Acceleration of outward migration - Likelihood: High - Expected impact: Medium. Higher inflation pressures from tighter labor market; lower long-term growth due to difficulties expanding domestic production base; higher remittances. - Policy recommendation: - Create economic opportunities by developing small private sector, attracting FDI, and diversifying the economy. - Enhance education and skill development. - Domestic — Tighter restrictions to migration - Likelihood: Medium - Expected impact: Medium. Stricter migration policies could reduce migrant and temporary overseas workers, lowering remittances and household incomes, reducing foreign exchange though possibly increasing domestic labor supply. - Policy recommendation: - Promote private-sector job creation, strengthen social safety nets, and diversify overseas labor markets through new bilateral agreements. - Improve macroeconomic policy management and enhance competitiveness to support the current account. - Domestic — Higher or more persistent inflation - Likelihood: Medium - Expected impact: Medium-High. Loss in real purchasing power, lower consumption, potential wage-price spiral and de-anchored inflation expectations, possible social unrest. - Policy recommendation: - NRBT should stand ready to tighten monetary policy stance using usual instruments. - Provide targeted fiscal support to low-income households. - Domestic — Partial withdrawal of correspondent banking relationships (CBRs), including due to AML/CFT gaps - Likelihood: Medium - Expected impact: High. Lower remittance inflows, weaker private consumption, larger CA deficit, lower lending activity and tighter lending conditions. - Policy recommendation: - Strengthen AML/CFT framework and implementation, adopt risk-based approach to supervision, and improve enforcement per Asia-Pacific Group assessment. - Pass the MLPCA and Regulation amendments Bill. - Consider the region’s CBR Roadmap and related World Bank regional project. - Domestic — Further increase in non-performing loans (NPLs) - Likelihood: Medium - Expected impact: Medium-High. Lower lending activity and tighter lending conditions, resulting in lower GDP growth. - Policy recommendation: - NRBT should closely monitor asset quality and strengthen bank oversight, especially for banks with high NPL ratios. - Consider requesting banks prepare comprehensive plans to tackle NPLs, including minimum target provisioning levels. *Source: Tonga Country Engagement Box; Annexes I–III from the IMF staff report.* ### Annex IV. Capacity Development and ### Annex IV. Capacity Development and Surveillance Integration Matrix (CD Activities Across IFIs Which Will Support Surveillance) ### Capacity development activities (matrix highlights) - Fiscal Sector - Public Financial Management: Past√√√√√√; Planned/Ongoing (matrix indicates continued activity) - Expenditure framework: Past√√√√√; Planned/Ongoing - Revenue Framework: Past√√√√; Planned/Ongoing - Real Sector - Macroeconomic Frameworks: Past√√ - Macro-Financial Issues - Financial supervision and regulation: Past√√√√√; Planned/Ongoing - Financial market development: Past√√√√√√; Planned/Ongoing - Correspondent Banking: Past√ - Macro-Structural Issues - Infrastructure: Past√√√√ - Private sector development: Past√√√√ - Governance issues: Past√√√√√ - Poverty/Gender/Inequality: Past√√√ - Climate change: Past√√√√√ - Natural disaster management: Past√√√√√ - Financial Inclusion: Past√ - Gender: Past√√√√ - Labor markets: Past√√ - Land: Past√ - Business climate: Past√√ - AML/CFT: Past√ - Statistics - Data Enhancement: Past√√√ - Sources listed in matrix: IMF, World Bank, and Asian Development Bank (ADB). --- ### Annex V. Recommendations from the 2024 Article IV Consultation and Their Implementation Status ### Fiscal policies - Main recommendation: - Fiscal adjustments should have a three-prong approach: domestic revenue mobilization, enhancing spending efficiency, and securing additional grants. - Actions since 2024 Article IV Consultation: - Authorities pursued additional grants from development partners such as World Bank, ADB, and the government of Australia, sustaining strong grants in FY25. - Fiscal reforms will be needed, guided by Fund TA. - Authorities continued reforming tax exemptions by assessing impact of extending reforms beyond tourism and agriculture sectors, with support from Fund TA. ### Monetary policy - Main recommendation: - Strengthen the monetary policy framework. - Actions: - Authorities initiated preparations for issuing or repurchasing short-term notes to strengthen the interbank liquidity market and enable more proactive use of the policy rate. ### Financial sector policies - Main recommendations: - Strengthen financial regulation and supervision. - Promote financial inclusion. - Strengthen the AML/CFT framework. - Actions: - With support from the IMF and PFTAC, Tonga has been advancing implementation of a risk-based supervision framework, including reviewing supervisory risk rating models for banks and enhancing institutional structures and operational procedures to align with RBS principles. - NRBT launched a Fintech Regulatory Sandbox to test new products and services under regulatory supervision, aiming to foster innovation, improve payment systems, facilitate cross-border remittances, and expand financial access. - Government advanced stakeholder consultations on updates to the Money Laundering and Proceeds of Crime Act and associated regulations to better supervise DNFBPs, enhance beneficial‑ownership transparency, and improve data access for tax authorities. ### Structural policies - Main recommendations and actions: - Enhance resilience to natural disasters and climate change: Most reconstruction projects are completed; Tonga is progressing on energy security although slowly. - Address macro‑critical corruption and governance vulnerabilities: Tonga appointed the anti-corruption commissioner in 2024. - Develop the private sector to boost growth potential: Authorities seek to improve access to credit via a planned digital ID system, a secured transactions registry, strengthening credit infrastructure, and streamlining business registration and investment procedures. --- ### Annex VI. Data Issues ### Data adequacy assessment (Annex VI. Table 1 summary) - Median ratings by sector (Questionnaire Results): - National Accounts: C - Prices: C - Government Finance Statistics: C - External Sector Statistics: C - Monetary and Financial Statistics: C - Inter-sectoral Consistency: C - Median Rating: C - Detailed questionnaire results (selected data quality characteristics): - Coverage: C C C B C - Granularity: C (varied across sectors; notes on top and bottom cells distinguishing government operations vs public debt and MFS vs Financial Soundness indicators) - Consistency: C C D (sector-specific) - Frequency and Timeliness: C C C C C - Rating definitions: - A: The data provided to the Fund is adequate for surveillance. - B: The data provided to the Fund has some shortcomings but is broadly adequate for surveillance. - C: The data provided to the Fund has some shortcomings that somewhat hamper surveillance. - D: The data provided to the Fund has serious shortcomings that significantly hamper surveillance. ### Rationale for staff assessment (key points) - Overall assessment: Overall data provided to the Fund has some shortcomings that somewhat hamper surveillance, partially reflecting capacity constraints for a small island country. - National Accounts: - Data has improved in the recent release; issues surrounding nominal and real GDP discrepancies in the base year were resolved. - GDP is only released for the production side and on an annual frequency with more than 12-months of lag. - More frequent GDP releases, including expenditure components, would help assess current economic conditions. - Labor market data would complement inflation data for monetary policy advice. - Prices: - Tonga Statistics Department (TSD) provides monthly CPI data with a lag of 1-2 months. - Authorities rebased to September 2021=100 with new expenditure weights from 2021 population census. - Sub-indices of newly released CPI data are provided in contribution, not in index. New CPI data of major groups are provided back to 2021 but detailed components for 2024 only, affecting before‑2024 core CPI estimation. - Authorities are encouraged to release CPI components in index and more historical data before 2024. - Government Finance Statistics (GFS): - Potential to enhance fiscal data quality including by improving debt reporting by including SOEs liabilities. - External Sector: - Authorities continue to compile data on BoP and IIP, but with some delays. - Data has good coverage across merchandise trade, categories of services, income, capital account, and financial account. - Monetary and Financial: - Banking level data is provided; granularity can be improved on assets and liabilities data. - Delays in compilation and release of FSI data can be improved to bolster confidence in financial institutions. - Authorities are encouraged to improve weaknesses in data quality and governance and the release of NBFI level data. - Intersectoral Consistency: - Significant inconsistency in grants remains between the BoP and GFS. - Reconciling grants in the BoP with those in the Fiscal, through improved recording and inclusion of estimates for in-kind grants, is needed. ### Changes since last Article IV consultation - National accounts data improved, resolving nominal/real GDP base-year discrepancies. - Authorities publish new CPI data with September 2021=100. - Progress made in enhancing reliability and addressing delays of external sector statistics. ### Corrective actions and capacity development priorities - Continue efforts to enhance statistical capacity via training, adequate staffing, and improved data sharing among government agencies. - CD priorities include strengthening statistics on GDP, prices, GFS, and the external sector including BOP and IIP. ### Use of estimates and other data gaps - Staff used estimates in several areas: core inflation, GDP (as data releases lag), and credit growth by sector. These estimates are subject to subsequent revisions. - Other data gaps: Labor Market & Gender data (unemployment, employment, labor force participation data by gender, by age), housing market data, SOE balance sheet data, Excess Reserves at the NRBT, more granular data on tourism, private sector credit, infrastructure project execution, and climate resilience indicators. ### Data standards and indicators - Tonga participates in the Enhanced General Data Dissemination System (e-GDDS) and first posted its metadata in May 2006 but is yet to disseminate the data recommended under the e-GDDS. - Annex VI. Table 3: Table of Common Indicators Required for Surveillance — As of September 5,2025 (table referenced in source). --- ### Annex VII. Labor Emigration and Human Capital ### Key findings - Emigration intensity and remittances: - Tonga has one of the highest emigration rates globally relative to its population size. - United Nations’ emigration stock data shows emigration stock to population ratio of Tonga has exceeded 50 percent in 2024, the second highest ratio in the region. - Tonga now has a large diaspora, estimated to be larger than the population of Tongans residing in the country. - Four out of five Tongan households receive remittances from abroad. - Tonga is the second largest remittance-receiving country by share of GDP in 2022 and has the highest remittance to GDP ratio in the region. - Remittances are a main source of foreign exchange inflows and support imports, finance current account deficits, and boost foreign exchange reserves. - Skills transfer and labor mobility arrangements (LMAs): - Skill upgrade and transfers from labor mobility arrangements appears limited for Tonga. - Pacific Labor Mobility Survey (PLMS) micro-level data indicate more than 15 percent of households in Tonga have at least one member who has participated in LMAs, and most LMA participants have returned home. - Over 95 percent of migrant workers from Tonga perform elementary tasks under the LMAs, suggesting limited skill upgrade from the schemes. - Impact on child education: - LMA participation is associated with lower child education enrollment in source countries. - PLMS results show high-school enrollment rates of children in LMA participating families are over 10 percentage points lower than those in non-participating families in Tonga. - Using Propensity Score Matching (PSM), in Tonga children from LMA-participating families have 5 percent lower enrollment rate compared to those from non-participating families. - Splitting samples by parents’ skill level shows the migrant children’s education disadvantage is mainly driven by migrant families with low skill levels; migrant children whose parents have higher education level do not suffer from education disadvantage. ### Methodology note - PSM paired LMA participants with non-LMA participants with similar migration-driving characteristics using nearest neighbor matching with replacement (methodological references: Caliendo and Kopeinig (2008); Abadie and Imbens (2016)). ### Policy recommendations - Mitigate negative human capital impacts and enhance benefits from emigration: - Improve education access and quality for LMA participating families. - Enhance training to upgrade skill levels and productivity of the workforce. - Improve immigration policies to facilitate recruitment of skilled workers and promote skill transfers. - Improve the business environment to attract returning labor and create investment opportunities. ### Conclusions - Emigration provides significant economic benefits via remittances but poses challenges to domestic labor supply and human capital accumulation. - Skill upgrade from labor migration appears limited, and emigration is associated with lower child education enrollment. - Targeted policies on education, training, immigration, and business environment are needed to mitigate adverse effects and enhance long-term benefits. --- ### Annex VIII. Financial Deepening in Tonga (introduction and key context) ### Main points - Financial deepening in Tonga remains limited, constraining private sector growth and broader economic development. - Credit intermediation has stagnated since the global financial crisis despite some reforms and strong remittance inflows. - Key constraints identified: - Structural bottlenecks in credit provision. - Limited competition in the financial sector. - Underutilized potential of remittances to support investment and financial inclusion. - A deeper financial system would enhance mobilization of savings, allocation of resources, support investment in education/health/enterprises, reduce poverty and income disparities, and improve monetary policy transmission and economic stability. - Literature lessons summarized: - Enhanced financial services facilitate savings mobilization and efficient resource allocation (Lavine, 2005). - Improved access to diverse financial services enables investments in human capital and enterprises (Bretton Woods Project WBG-IMF Annual Meeting Civil Society Policy Forum, 2022). - A well-developed financial system provides instruments for risk diversification, bolstering economic stability. *Source: Annexes IV–VIII from the IMF country report content provided in the supplied PDF content.* ### 2. Tonga is striving to make progress in financial development in recent years, supported ### Tonga: Financial Development and the Role of Remittances ### Financial sector overview - The financial sector mainly comprises four commercial banks: ANZ, the Tonga Development Bank (TDB, the only domestic bank), the Bank of South Pacific (BSP), and MBf Bank—operating under NRBT supervision. - The National Reserve Bank of Tonga (NRBT) is advancing initiatives to enhance monetary operations and financial intermediation, including considering issuance of short-term central bank notes to support interbank market liquidity. - The NRBT conducts bank stress tests regularly and continues to enhance prudential regulations; efforts are underway to amend the NRBT Act to strengthen transparency and the effectiveness of monetary policy. - A large share of bank reserves remains parked at the central bank in non-remunerated excess balances, suggesting inefficiencies in the transmission of liquidity into credit. ### Trends in financial deepening (credit-to-GDP) - Prior to the 2007-08 global financial crisis (GFC), Tonga’s private credit levels were broadly in line with the average of upper-middle-income countries (UMIC) and followed a comparable upward trajectory. - Post-2008, Tonga experienced a sustained decline and stagnation in private sector credit, diverging from continued expansion among UMIC peers. - Key numeric comparisons: - In 2007, Tonga’s private sector credit lagged the UMIC average by only 6 percentage points of GDP. - By 2022, the gap had widened to 98 percentage points of GDP. - Credit to firms declined from a peak of 39 percent of GDP in 2007 to approximately 20 percent in subsequent years. - Household credit increased from 13 percent of GDP in 2007 to 22 percent in 2024. ### Cross-country empirical analysis and stylized facts - A cross-country panel analysis (unbalanced panel of 157 countries, longest data series back to 1870) estimates a relation between private credit-to-GDP and a polynomial in GDP per capita, controlling for time and country fixed effects. - Results highlight a strong positive relationship between credit-to-GDP and per capita income and support a Kuznets-curve non-linear relation (an S-curve), with credit-to-GDP levelling off and disconnecting from income growth as p.c. income crosses the 50,000 USD threshold. - Country performance: - Tonga performs better than the global average (controlling for GDP per capita) but underperforms compared to selected PIC best peers. - Compared to historical performance of other countries at the same income level, Tonga is comparable to India, Italy, and the USA when they were at the same income level. - Tonga’s level of financial deepening is lower than three PIC peers with similar GDP per capita: Fiji, Samoa, and Vanuatu. These three are tourism-based economies. ### Tourism, FDI, remittances, and peer comparison - The three best-performing PIC peers share a more developed tourism sector, which typically involves FDI inflows. - Net FDI inflows in 2024: Vanuatu 4 percent of GDP, Fiji 2 percent of GDP, Samoa 0.4 percent of GDP; Tonga experienced a net FDI outflow of 2 percent of GDP. - Remittances (average or referenced values): - Tonga: approximately 47 percent of GDP. - Samoa: 26 percent of GDP. - Vanuatu: 10 percent of GDP. - Fiji: 8 percent of GDP. - Other structural differences noted with best PIC peers: - Private sector formality: Tonga described as lower—smaller and less diversified, relying heavily on agriculture and remittances—versus higher formality in peers with more tourism and services. - Land as collateral: Difficult in Tonga (restricts transactions and inheritance primarily to men) versus less difficult in peers where foreign investors are allowed to purchase, sell, or lease freehold land for industrial or commercial purposes. - Bank competition: Low in Tonga (concentrated banking sector) versus moderate in peers. - Public sector footprint: Tonga’s public spending noted at 49.7 percent of GDP in 2024 versus Samoa’s 29 percent in the same year. ### Remittances and credit: empirical findings - Divergence after the GFC: - Following the GFC, remittances rebounded while private credit-to-GDP recovery remained subdued. - Remittances were 10 percentage points of GDP higher than the pre-GFC level, whereas private credit-to-GDP is around 15 percentage points lower than its pre-GFC level. - Tonga's country-fixed effect declined from 49 percent of GDP before the GFC to 45 percent of GDP afterward, a 4-percentage point decrease. - Granger causality (annual data 2001–2024; series expressed as percent of GDP, log-transformed, and detrended): - Credit (Household) → Remittances: baseline p-value 0.02; robustness p-value 0.004; Significant / Sig. - Remittances → Credit (Household): baseline p-value 0.12; robustness p-value 0.79; Not Significant / Not Sig. - Credit (Firm) → Remittances: baseline p-value 0.72; robustness p-value 0.87; Not Significant / Not Sig. - Remittances → Credit (Firm): baseline p-value 0.003; robustness p-value 0.003; Significant / Sig. - Interpretation: - Exogenous increases in remittance inflows Granger-cause firm credit-to-GDP, suggesting remittances ease credit conditions for firms (liquidity, collateral, deposits). - Credit to households Granger-causes remittances (but not vice versa), suggesting household credit growth may draw higher remittance flows (consumption smoothing or debt servicing). - Remittances are procyclical for firms and countercyclical for households. - Impulse response: - A 1 percent increase in remittances leads to a peak positive response of approximately a 2 percent increase in private firm credit within 2 to 3 years. ### Policy recommendations (general and Tonga-specific) - General measures to facilitate financial deepening: - Strengthen financial institutions by promoting competition in the banking sector to improve access and reduce borrowing costs; encourage banks to expand branches into underserved areas; support microfinance and cooperative institutions to extend credit to small-scale borrowers. - Enhance credit information infrastructure by modernizing credit registries and bureaus—ensuring comprehensive coverage, reliability, and secure data sharing across institutions. - Modernize legal and regulatory frameworks: improve collateral and insolvency frameworks to mitigate risks for lenders. - Enhance supervisory capacity and implement robust macroprudential policies to maintain financial stability. - Strengthen anti-money laundering and combating the financing of terrorism frameworks. - Develop capital markets, promote financial literacy, enhance financial inclusion, and ensure robust consumer protection. - Tonga-specific measures to leverage remittances: - Encourage automatic deposit of remittance inflows into savings or investment accounts. - Promote remittance-backed microloans using remittance history for credit assessment. - Integrate remittance data into credit scoring frameworks. - Support diaspora-financed community investment schemes. - Expand financial literacy initiatives to shift behavior toward productive use of remittances. - Encourage use of remittances to support private business investment, especially for small business owners. - Facilitate the use of land or other property as collateral for loans by developing a more conducive regulatory framework for lending. - Expand supervisory oversight to encompass non-bank financial institutions, including retirement funds, as a step toward greater financial system stability. ### Conclusions and implications - Tonga’s financial sector remains shallow, with credit to the private sector stagnating well below peer levels, particularly for firms. - Despite sizable and resilient remittances, these inflows have not translated into broader financial deepening or increased formal credit. - Binding constraints include weak competition, limited credit information, and risk-averse lending practices that hinder financial intermediation. - Targeted reforms to strengthen credit infrastructure, promote competition, and better leverage remittance flows could help unlock private sector growth and improve monetary policy transmission effectiveness. *Source: IMF staff calculations and analysis from the chapter on Tonga's financial development in the provided IMF PDF.* ### Annex VIII. Appendix I. Financial Deepening in Tonga ### Annex VIII. Appendix I. Financial Deepening in Tonga ### Model Specification - The estimated model: - CCit = β0 + β1 yit + β2 yit2 + β3 yit3 + γt + αi A_i + εit - Variable definitions as used in the model: - CCit represents the domestic credit to private sector in percent of GDP for country i and year t. - yit represents the logarithm of GDP per capita in 2011 USD. - γt is the time effect dummy. - A_i is the country fixed-effect dummy. - For identification, the first year in the sample, 1870, and the first country, Aruba, are excluded. - εit is the error term. ### Data Sources and Construction - GDP per capita: - Primary dataset: Maddison dataset for GDP per capita in 2011 USD (as employed by Bogmans et al. (2020) and Schularick and Taylor (2012)). - For countries not represented in Maddison (including Tonga), World Bank’s GDP per capita in 2015 USD is used and converted to 2011 USD to ensure comparability, using U.S. data as the reference point because it encompasses both Maddison and World Bank datasets. - Private credit to GDP: - Reference: Schularick and Taylor (2012) for long-horizon series for advanced countries starting around GDP per capita ≈ 2,500 USD. - For country-years not covered by Schularick and Taylor (2012), domestic credit to the private sector (% of GDP) are sourced from the World Bank. - Dataset assembly: - The two credit-to-GDP variables (Schularick and Taylor and World Bank) are merged into a single dataset for analysis. *Italic line: Source: 1tonea2025001-source-pdf - Annex VIII. Appendix I. Financial Deepening in Tonga* ### 4. Tonga's domestic debt obligations are relatively small (Figure 5). Public domestic debt stood at ### 1tonea2025001-source-pdf - 4. Tonga's domestic debt obligations are relatively small (Figure 5). Public domestic debt stood at ### Domestic debt and monetary operations - Public domestic debt stood at USD30 million (about 5.3 percent of GDP) at end-June 2024, accounting for 16 percent of total public debt. - Domestic financial institutions hold about half of the total domestic debt; the rest is held mainly by domestic pension funds. - Authorities plan to issue TOP 30 million new domestic debt in FY2026 to support development. - Following IMF technical assistance on monetary policy operations, the NRBT plans to issue notes with positive yield to support interbank market liquidity, enabling the NRBT to raise the policy rate from its current zero level; the dollar value issuance is expected to be modest. - Domestic debt is composed of treasury bonds with tenors ranging from 3 to 6 years. ### Baseline macroeconomic assumptions and growth projections - Real GDP growth is projected at 1.5 percent on average during FY2025–35. - Over the medium to long term, GDP growth is projected to gradually converge to a potential rate of 1.2 percent. - The baseline reflects commitments under Tonga Strategic Development Framework (TSDF) 2015–2025, including: enhancing trade facilitation and access to credit; building more climate-resistant public infrastructure; boosting domestic revenues (tax administration reforms, rationalization of tax exemptions); and containing the public sector wage bill within the fiscal target while strengthening social protection. ### Risks and disaster assumptions - Risks to growth are tilted to the downside: external (global slowdown, geopolitical tensions, reduction in concessional financing) and domestic (natural disasters, delays in reconstruction and donor-financed infrastructure, accelerated outmigration, loss of correspondent banking relationships, banking sector vulnerabilities). Upside risks include stronger tourism recovery and higher-than-expected grants. - Natural disaster treatment in baseline: - Years FY2025–FY2026 are assumed to be disaster-free. - From FY2027 onwards, baseline incorporates average long-term effects of natural disasters by lowering annual GDP growth by 0.16 percentage points. - Tailored one-time stress test: DSA assumes a one-off shock of 14 percentage points (ppts) to the debt-to-GDP ratio in FY2026; Real GDP growth and exports are lowered by 3 and 7 ppts, respectively, in the year of the shock. - The Emergency Events Database (EM-DAT) shows the country’s largest damage from natural disasters during 1980–2016 was 28.2 percent of GDP. ### Inflation, current account, and FDI - Inflation is projected to average 3.0 percent during FY2025–35. - Inflation expected to decrease to 2.2 percent of GDP in FY2026, then increase and converge to 3.0 percent. - The non-interest current account deficit is estimated to be 5.0 percent of GDP in FY2025. - The non-interest current account deficit is projected to average 6.2 percent of GDP over FY2025–FY2035. - Net FDI inflows are expected to stand at 0.3 percent of GDP over FY2025–35. ### Investment, external borrowing, and reserves - Baseline net investment in nonfinancial assets averages about 12 percent of GDP over FY2026–FY2035. - New external debt is assumed to finance needs not covered by revenue and grants in the baseline. - External debt in FY2025 is expected to be 27 percent of GDP, revised down from 38 percent of GDP in the 2024 DSA. - New external borrowing is expected to commence in FY2026 and gradually increase to refinance repayments and address primary deficits projected to reach double digits over FY2029–FY2035. - Level of international reserves is currently estimated at 10.5 months of next year’s imports at end-FY2025 and is expected to remain stable despite large repayments to China EXIM Bank (annual payments of about 2.2 percent of GDP in FY2025–29 on average). ### Domestic borrowing strategy and banking system capacity - Domestic borrowing is assumed to gradually increase to meet financing needs and achieve MTDS target of 70 percent external concessional financing and 30 percent domestic financing in the long run. - Domestic financing is projected to double from around 5 percent of GDP at end-FY2025 to 10 percent of GDP in FY2029. - The authorities plan to issue an additional TOP 30 million government bonds to replenish Government Development Loans managed by TDB. - Banking system assets are about 100 percent of GDP. - The projected increase in domestic debt financing would raise government securities by roughly 25 percent of bank assets over the long term. ### Fiscal outlook and public finances - The primary fiscal balance in FY2025 has been revised to a surplus of 6.1 percent of GDP, from a deficit of 7.5 percent of GDP in DSA 2024. - The fiscal deficit is expected to widen to 7.3 percent of GDP in FY2026, and then to double-digit during FY2029–FY2035. - The upward revision to a FY2025 surplus was mainly driven by stronger-than-expected grant inflows and increased tax revenues. - Grants are projected to decline after current commitments are met, contributing to long-term deterioration in fiscal balance. - Public sector wage bills are estimated to temporarily drop below the fiscal target of 53 percent of domestic revenue in FY2025, then rise and approach the threshold in FY2026. - Fiscal deficit as a share of GDP is expected to narrow after FY2034 as capital spending needs moderate following completion of multi-year reconstruction and accumulation of climate-resilient capital. ### Debt-carrying capacity, DSA classifications, and stress tests - Tonga’s Composite Indicator (CI) index is 3.09 based on April 2025 WEO and the 2023 CPIA, implying “strong” debt-carrying capacity (CI must be greater than 3.05 to be assessed as strong). - Applicable external debt burden thresholds: - PV of debt in % of Exports: 240 - PV of debt in % of GDP: 70 - Debt service in % of Exports: 21 - Debt service in % of Revenue: 23 - Applicable total public debt benchmark (PV of total public debt in percent of GDP): threshold provided but specific benchmark number listed under table headings. - Judgment applied to reflect long-run climate-related risks; threshold breaches beyond the ten-year horizon reflect vulnerability to natural disasters and climate change. - Under the baseline scenario: - External debt-to-GDP ratio declines from 32 percent in FY2024 to 27 percent in FY2025. - External debt-to-GDP ratio will breach the authorities’ fiscal anchor of 50 percent in FY2029. - PV of external debt-to-GDP ratio is expected to breach the threshold of 55 percent starting from FY2035. - Grants’ upside in FY25 shifted the breaching of the threshold by one year from FY2034 (2024 Staff Report) to FY2035. - Under an export shock (most extreme scenario), PV of external debt-to-GDP ratio would breach the threshold earlier in FY2033. - The DSA assumes a discount rate of 5 percent to calculate net PV of external debt. - Tonga is classified as an IDA-only small island economy at high risk of debt distress and receives all IDA financing as grants; Tonga has fully utilized its IDA20 country allocation of SDR52.2m (US$69.8m). ### Realism checks and forecasting tools - Realism tools indicate primary balance projections are reasonable; fiscal forecasts FY2025–FY2027 are not overly optimistic. - Projected three-year adjustment lies in the left section of the distribution of past adjustments of the primary fiscal deficit, driven by elevated grants in FY2025. - Realism of projections for public and private investment rates could not be calculated due to unavailability of private investment data. - Main drivers: external debt changes driven by current account and FDI; public debt changes driven by primary balance. ### Key numeric highlights (as stated) - USD30 million = public domestic debt at end-June 2024 (about 5.3 percent of GDP; 16 percent of total public debt) - TOP 30 million = planned new domestic debt issuance in FY2026 - Real GDP growth projected = 1.5 percent average FY2025–35 - Potential growth convergence = 1.2 percent - Long-term disaster growth drag = 0.16 percentage points per year from FY2027 onwards - Inflation projection = 3.0 percent average FY2025–35; 2.2 percent in FY2026 - Non-interest current account deficit = 5.0 percent of GDP in FY2025; 6.2 percent average FY2025–FY2035 - Net FDI = 0.3 percent of GDP over FY2025–35 - Net investment in nonfinancial assets ≈ 12 percent of GDP over FY2026–FY2035 - External debt FY2025 = 27 percent of GDP (revised down from 38 percent in 2024 DSA) - International reserves = 10.5 months of next year’s imports at end-FY2025 - China EXIM Bank annual payments ≈ 2.2 percent of GDP in FY2025–29 on average - Banking system assets ≈ 100 percent of GDP - Projected domestic debt financing rise = from ~5 percent of GDP end-FY2025 to 10 percent of GDP in FY2029 - Projected increase in government securities = roughly 25 percent of bank assets over long term - CI Score = 3.09 (classified as Strong) - Largest recorded disaster damage (1980–2016) = 28.2 percent of GDP - One-off DSA disaster shock assumed = 14 percentage points to debt-to-GDP in FY2026; real GDP and exports lowered by 3 and 7 ppts respectively in year of shock - PV of external debt-to-GDP breaches threshold of 55 percent starting FY2035 - Under export shock, breach occurs in FY2033 - Tonga fully utilized IDA20 country allocation of SDR52.2m (US$69.8m) - Discount rate for PV calculations = 5 percent *International Monetary Fund — content unit from 1tonea2025001-source-pdf* ### 11. The tailored natural disaster shock would significantly worsen the external debt path (Table ### 11. The tailored natural disaster shock would significantly worsen the external debt path (Table ### External debt impact - The PV of external debt-to-GDP ratio would jump up in FY2026 when the one-off shock is assumed, breaching the threshold two years earlier in FY2033. - Multiple severe natural disasters within a ten-year timeframe could have a larger cumulative negative effect on external debt sustainability due to larger reconstruction needs (which may require additional debt financing) and by lowering the long-term growth. ### Public debt sustainability (baseline and projections) - Under the baseline scenario, the PV of the public debt-to-GDP ratio would breach 70 percent from FY2035 onwards. - Compared to the previous DSA, nominal public debt-to-GDP ratio is lower from FY2025 onward due to higher-than-expected grants received in FY2025. - Domestic debt is expected to increase to help finance large spending needs to achieve SDGs and climate resilience, and to move toward the MTDS long-term domestic debt financing target share of 30 percent. - Note: net financing flows are calculated as grants plus new debt disbursement minus repayment. ### Standardized sensitivity analysis and tailored shocks - The most extreme shock scenario is the growth shock, where growth rate is one standard deviation below the baseline for two years starting from 2026. - Under the multi-year GDP growth shock, the PV of the public debt-to-GDP ratio would cross 70 percent of GDP in FY2032. - Under an exports shock, the PV of the public debt-to-GDP ratio would breach the 70 percent threshold in FY2033. - The tailored one-time natural disaster shock worsens public debt: the PV of the public debt-to-GDP ratio would cross 70 percent of GDP in FY2033, two years earlier than in the baseline scenario. - A tailored stress test for the combined contingent liability shock shifts the PV public debt-to-GDP trajectory upwards by 4 percentage points in FY2035 from the baseline. ### Risk rating and vulnerabilities - Tonga's risk of external debt distress is assessed as high. - The LIC DSF indicates a “moderate” mechanical risk rating for external debt distress, but staff judgment upgraded to “high” because the PV of external debt-to-GDP is expected to breach its indicative threshold from FY2035 until FY2045, with breaches that are large and persistent. - The overall risk of debt distress is also assessed as high. The LIC DSF gives a “moderate” mechanical rating, but staff judged “high” because the PV of public debt-to-GDP is projected to breach its indicative benchmark from FY2035 until FY2045. - Cash and in-kind grants averaged 16.0 percent of GDP annually over FY2011–2019. Under the baseline, staff assume continued budget support in line with historical levels and capital grants falling to zero from FY2036 onwards. ### Policy recommendations and fiscal adjustment scenarios - Fiscal policy should focus on building fiscal buffers while supporting vulnerable households; contain current spending, especially recurrent portions such as public sector wages and use of goods and services, to preserve fiscal buffers. - A medium-term credible fiscal consolidation and new grant commitments are essential to put Tonga’s debt on a sustainable path. - Under an illustrative fiscal adjustment scenario, the PV of public debt-to-GDP ratio could stabilize below the 70 percent threshold over the long term, even with the natural disaster or the most extreme shock. - Fiscal adjustments could include: - An improvement in consumption tax collection compliance. - Reductions in tax exemptions. - Reductions in current spending. - New grant commitments consistent with historical trends are essential under this fiscal path to fund capital investment projects for SDGs and climate resilience. - Government strategy elements aligned with the fiscal adjustment path: - Further improve revenue administration. - Streamline tax exemptions. - Collect tax arrears. - Improve spending efficiency including containing public wage bill within the fiscal target. - Pursue additional grants from development partners and avoid any new non-concessional borrowing from external creditors, supported by development partners. ### Quantitative and contextual notes - The tailored one-time natural disaster shock shifts the timing of breaches: external debt breach occurs two years earlier (FY2033 vs baseline breaching in FY2035 for public debt). - The tailored combined contingent liability shock shifts the PV public debt-to-GDP ratio upward by 4 percentage points in FY2035 from the baseline. - The most extreme shock scenario (growth shock) implies continued public debt rise until FY2045. - The additional grants under the illustrative adjustment are to maintain grants above 10 percent of GDP, which is below the FY2011–2019 average of 16.0 percent of GDP annually. *Sources: IMF Staff Projections.* ### 20. The authorities concurred the need for fiscal adjustment to build buffers and emphasized ### 20. The authorities concurred the need for fiscal adjustment to build buffers and emphasized ### Fiscal policy stance and authorities' priorities - Authorities concurred on the need for fiscal adjustment to build buffers and emphasized the importance of sustained support from development partners. - Highlighted progress in revenue mobilization and tax administration: - Removal of consumption tax exemptions for the tourism sector. - Continued implementation of the Electronic Sales Register System. - Enhanced compliance through third-party data verification. - Savings in the wage bill relative to the originally budgeted amount are mainly attributable to slower-than-expected vacancy refilling. - Authorities committed to securing new grant financing from development partners to support climate resilience and development objectives while ensuring that debt remains on a sustainable trajectory. ### Fiscal consolidation projections and composition (FY2027–FY2035) - Baseline primary balance (FY2027–FY2035): - -7.8, -9.2, -10.4, -12.0, -12.0, -12.9, -11.4, -11.0, -10.4 - Proposed primary balance (FY2027–FY2035): - -6.4, -6.8, -8.0, -8.0, -7.2, -7.3, -4.6, -2.3, 0.4 - Domestic consolidation needed (FY2027–FY2035): - 1.4, 2.4, 2.4, 2.7, 2.8, 2.8, 3.3, 4.2, 4.8 - Contribution from tax revenue (FY2027–FY2035): - 0.8, 0.8, 0.8, 1.1, 1.2, 1.2, 1.7, 2.4, 2.8 - Improved consumption tax 1/ (FY2027–FY2035): - 0.3, 0.3, 0.3, 0.3, 0.4, 0.4, 0.4, 0.6, 0.7 - Less tax exemptions 2/ (FY2027–FY2035): - 0.5, 0.5, 0.5, 0.8, 0.8, 0.8, 1.3, 1.8, 2.1 - Contribution from current spending (FY2027–FY2035): - -0.6, -1.6, -1.6, -1.6, -1.6, -1.6, -1.6, -1.8, -2.0 - Lower G&S (FY2027–FY2035): - -0.3, -0.9, -0.9, -0.9, -0.9, -0.9, -0.9, -1.1, -1.2 - Lower public sector wage bill (FY2027–FY2035): - -0.3, -0.7, -0.7, -0.7, -0.7, -0.7, -0.7, -0.7, -0.8 - Additional Grants 3/ (FY2027–FY2035): - 0.0, 0.0, 0.0, 1.3, 2.0, 2.8, 3.5, 4.5, 6.0 ### External Debt Sustainability — Baseline Scenario (FY2022–2045) key figures - External debt (nominal) historical and projections (selected years): - 2022: 38.2 - 2023: 38.3 - 2024: 31.7 - 2025: 26.6 - 2026: 31.0 - 2027: 36.9 - 2028: 44.0 - 2029: 52.0 - 2030: 61.3 - 2035: 103.9 - 2045: 154.7 - Change in external debt (selected): 0.8, 0.1, -6.6, -5.0, 4.4, 6.0, 7.0, 8.1, 9.3, 7.0, 4.4 - Identified net debt-creating flows (selected): 6.2, 6.8, -1.7, 4.2, 5.5, 5.5, 6.0, 6.1, 6.0, 5.7, 3.9, 6.1, 5.7 - Non-interest current account deficit (selected): 5.0, 5.4, 3.5, 5.0, 6.1, 6.0, 6.5, 6.5, 6.4, 6.0, 4.2, 5.8, 6.2 - Deficit in balance of goods and services (selected): 52.2, 56.6, 49.0, 50.7, 50.1, 50.0, 50.0, 49.7, 49.3, 48.6, 47.9, 46.1, 49.5 - Exports (selected): 11.6, 18.8, 21.4, 21.8, 22.0, 22.3, 22.5, 22.8, 23.1, 24.0, 25.6, 19.0, 23.0 - Imports (selected): 63.8, 75.4, 70.4, 72.5, 72.1, 72.3, 72.6, 72.5, 72.4, 72.6, 73.4, 65.1, 72.5 - Net current transfers (negative = inflow) (selected): -41.0, -40.9, -35.4, -36.0, -34.4, -34.6, -34.4, -34.2, -34.0, -33.3, -34.1, -34.3, -34.1 - of which: official (selected): -4.8, -4.5, -3.9, -5.3, -3.6, -3.9, -3.9, -3.9, -3.9, -3.9, -5.0, -5.6, -4.0 - Net FDI (negative = inflow) (selected): 0.5, 0.7, -2.4, -0.2, -0.2, -0.3, -0.3, -0.3, -0.3, -0.3, -0.3, 0.6, -0.3 - Endogenous debt dynamics (selected): 0.7, 0.7, -2.8, -0.6, -0.3, -0.2, -0.2, -0.1, -0.1, -0.1, 0.0 - Contribution from nominal interest rate (selected): 0.3, 0.5, 0.3, 0.2, 0.3, 0.3, 0.4, 0.4, 0.5, 1.1, 1.7 - Contribution from real GDP growth (selected): 0.9, -0.8, -0.7, -0.8, -0.6, -0.5, -0.6, -0.5, -0.6, -1.1, -1.8 - Residual 3/ (selected): -5.4, -6.7, -4.9, -9.3, -1.2, 0.5, 1.1, 2.0, 3.3, 1.4, 0.5, -7.2, 0.9 - Sustainability indicators (selected): - PV of PPG external debt-to-GDP ratio (selected): 21.5, 17.9, 18.8, 20.4, 22.9, 26.3, 30.9, 55.6, 89.8 - PV of PPG external debt-to-exports ratio (selected): 100.5, 82.4, 85.3, 91.6, 101.5, 115.4, 134.0, 231.7, 351.1 - PPG debt service-to-exports ratio (selected): 12.2, 11.7, 17.9, 16.2, 15.7, 15.8, 15.1, 11.5, 8.2, 7.4, 17.2 - PPG debt service-to-revenue ratio (selected): 5.4, 8.3, 14.6, 12.6, 12.9, 13.1, 12.6, 9.8, 7.1, 6.3, 15.3 - Gross external financing need (Million of U.S. dollars) (selected): 35.7, 42.9, 27.4, 49.2, 57.3, 59.4, 64.0, 61.0, 57.2, 63.5, 98.6 - Key macro assumptions (selected): - Real GDP growth (percent): -2.3, 2.1, 2.1, 2.7, 2.3, 1.8, 1.5, 1.2, 1.2, 1.2, 1.5, 1.5 - GDP deflator in US dollar terms (change in percent) (selected): 1.5, -2.4, 6.6, 2.5, 2.4, 2.9, 2.3, 2.2, 2.2, 2.2, 2.2, 1.0, 2.3 - Effective interest rate (percent) 4/ (selected): 0.9, 1.3, 0.9, 0.7, 1.1, 1.1, 1.0, 1.0, 1.1, 1.2, 1.2, 1.4, 1.1 - Growth of exports of G&S (US dollar terms, percent) (selected): 3.2, 61.6, 24.3, 6.9, 6.0, 6.1, 5.1, 4.7, 4.5, 4.1, 4.0, 8.6, 4.9 - Growth of imports of G&S (US dollar terms, percent) (selected): 9.8, 17.8, 1.6, 8.3, 4.3, 5.0, 4.2, 3.3, 3.3, 3.5, 3.5, 4.7, 4.1 - Grant element of new public sector borrowing (percent) (selected): 20.1,...,51.6,50.8,50.3,50.9,50.5,50.4,49.2,...,50.6 - Government revenues (excluding grants, percent of GDP) (selected): 25.9, 26.3, 26.3, 28.0, 26.9, 26.9, 26.9, 26.9, 27.0, 28.1, 28.8, 24.5, 27.3 - Aid flows (Million of US dollars) 5/ (selected): 269.6, 305.7, 303.4, 307.9, 243.0, 222.9, 198.3, 176.8, 158.4, 124.0, 132.7 - Grant-equivalent financing (percent of GDP) 6/ (selected): 18.4, 28.0, 29.2, 32.0, 21.5, 20.5, 19.2, 17.8, 16.1, 11.9, 10.9,...,17.6 - Nominal GDP (Million of US dollars) (selected): 515, 513, 558, 587, 616, 645, 670, 693, 717, 846, 1,183 - Nominal dollar GDP growth (selected): -0.9, -0.4, 8.8, 5.3, 4.8, 4.8, 3.9, 3.4, 3.4, 3.4, 3.4, 2.5, 3.9 - Memorandum: PV of external debt (in percent of exports) (selected): ......100.5, 82.4, 85.3, 91.6, 101.5, 115.4, 134.0, 231.7, 351.1 - PV of PPG external debt (Million of US dollars) (selected): 120.2, 105.4, 115.7, 131.7, 153.3, 182.5, 221.7, 470.6, 1,061.6 - (PVt-PVt-1)/GDPt-1 (in percent) (selected): -2.6, 1.7, 2.6, 3.3, 4.4, 5.7, 6.3, 6.1 ### Public Sector Debt — Baseline Scenario (FY2022–2045) key figures - Public sector debt (selected years): 43.8, 43.8, 37.0, 31.5, 37.7, 44.5, 52.7, 62.0, 72.8, 121.5, 179.9, 44.4, 74.4 - of which external debt (selected): 38.2, 38.3, 31.7, 26.6, 31.0, 36.9, 44.0, 52.0, 61.3, 103.9, 154.7, 38.6, 62.9 - Change in public sector debt (selected): 0.8, 0.0, -6.9, -5.4, 6.2, 6.8, 8.1, 9.4, 10.8, 8.2, 5.0 - Identified debt-creating flows (selected): 1.4, -6.3, -7.9, -7.4, 6.5, 7.0, 8.3, 9.6, 11.0, 8.7, 8.2, -3.4, 7.8 - Primary deficit (selected): -0.4, -6.8, -4.6, -6.1, 7.3, 7.8, 9.2, 10.4, 12.0, 10.4, 8.4, -3.0, 8.9 - Revenue and grants (selected): 44.3, 54.3, 55.5, 60.0, 43.8, 42.1, 40.4, 38.8, 36.8, 34.5, 33.8, 44.3, 39.7 - of which: grants (selected): 18.4, 28.0, 29.2, 32.0, 16.9, 15.3, 13.5, 11.9, 9.9, 6.4, 5.0, 19.9, 12.4 - Primary (noninterest) expenditure (selected): 43.9, 47.5, 50.9, 53.9, 51.0, 49.9, 49.6, 49.3, 48.8, 44.9, 42.2, 41.4, 48.7 - Automatic debt dynamics (selected): 1.8, 0.5, -3.3, -1.3, -0.8, -0.8, -0.9, -0.9, -1.0, -1.7, -0.2 - Contribution from interest rate/growth differential (selected): 0.8, -0.8, -1.4, -1.3, -0.8, -0.8, -0.9, -0.9, -1.0, -1.7, -0.2 - Contribution from average real interest rate (selected): -0.2, 0.1, -0.5, -0.3, -0.1, -0.2, -0.2, -0.2, -0.2, -0.3, 1.9 - Contribution from real GDP growth (selected): 1.0, -0.9, -0.9, -1.0, -0.7, -0.7, -0.7, -0.6, -0.7, -1.4, -2.1 - Residual (selected): -0.6, 6.4, 1.1, 1.9, -0.3, -0.2, -0.2, -0.2, -0.2, -0.5, -3.2, 2.3, -0.1 - Sustainability indicators (selected): - PV of public debt-to-GDP ratio (selected): ......26.9, 22.9, 25.5, 28.1, 31.7, 36.5, 42.6, 73.4, 115.3 - PV of public debt-to-revenue and grants ratio (selected): ......48.5, 38.1, 58.3, 66.7, 78.4, 93.9, 115.7, 212.7, 341.3 - Debt service-to-revenue and grants ratio (selected): 6.8, 6.6, 8.8, 6.1, 10.3, 11.5, 12.0, 18.7, 13.0, 25.1, 40.0 - Gross financing need (selected): 2.6, -3.2, 0.2, -2.4, 11.8, 12.7, 14.1, 17.7, 16.8, 19.0, 21.9 - Key macro and fiscal assumptions (selected): - Real GDP growth (percent): -2.3, 2.1, 2.1, 2.7, 2.3, 1.8, 1.5, 1.2, 1.2, 1.2, 1.5, 1.5 - Average nominal interest rate on external debt (percent): 0.9, 1.3, 0.9, 0.7, 1.1, 1.1, 1.0, 1.0, 1.1, 1.2, 1.2, 1.4, 1.1 - Average real interest rate on domestic debt (percent) (selected): 0.7, 3.0, -4.9, -0.9, 0.7, 0.0, 0.0, 0.1, 0.2, 0.5, 0.5, -0.9, 0.2 - Inflation rate (GDP deflator, percent) (selected): 2.1, 0.0, 8.0, 2.9, 2.2, 3.2, 3.2, 3.2, 3.2, 3.0, 2.9, 3.6, 3.0 - Growth of real primary spending (deflated by GDP deflator, percent) (selected): -3.2, 10.6, 9.3, 8.9, -3.2, -0.3, 0.9, 0.5, 0.3, -0.3, 3.6, 7.1, 0.4 - Primary deficit that stabilizes the debt-to-GDP ratio 5/ (selected): -1.2, -6.8, 2.2, -0.6, 1.1, 0.1, 0.1, 1.1, 2.2, 2.3, 3.4, -1.9, 1.3 - PV of contingent liabilities (not included) (selected): 0.0 across reported periods. ### Sensitivity analysis and stress tests (high-level) - Table 3 and Table 4 present sensitivity analyses for key indicators of public and publicly guaranteed external debt and public debt under alternative scenarios, bound tests, and tailored tests across FY2025–2045. - Baseline and scenario values reported for PV of Debt-to-Revenue Ratio, Debt Service-to-Revenue Ratio, PV of Debt-to-GDP Ratio across years FY2025–2045. - Examples from Table 4 (PV of Debt-to-GDP Ratio and related tests): - Baseline (selected years): 22.9, 25.5, 28.1, 31.7, 36.5, 42.6, 49.0, 56.0, 61.9, 67.9, 73.4, 79.8, 84, 88, 92, 96, 100, 104, 108, 112, 115 - A1. Key variables at their historical averages in 2025-2035: scenario values reported in table (mixed positives and negatives). - Bound tests B1–B6 and tailored tests C1–C2 show elevated debt outcomes under adverse shocks (e.g., Natural disaster scenario values escalate substantially). - A bold value in the tables indicates a breach of the benchmark. ### Drivers of debt dynamics (Figure 3 summary) - Debt dynamics are decomposed into contributions from: - Nominal interest rate - Real GDP growth - Price and exchange rate changes - Current account + FDI - Other debt-creating flows - Residual (unexpected changes) - Charts compare 5-year historical changes and 5-year projected changes for external and public debt, showing the relative importance of primary deficit, real interest rate, real exchange rate depreciation, and residuals. ### Realism tools and fiscal adjustment plausibility (Figure 4 summary) - Fiscal adjustment and possible growth paths: - Charts show annual projected fiscal adjustment (right-hand side scale) and possible real GDP growth paths under different fiscal multipliers (left-hand side scale). - Fiscal multipliers shown: Multiplier = 0.2, 0.4, 0.6, 0.8 and baseline. - Distribution of Fund-supported LICs’ 3-year adjustment in primary balance since 1990: - Projected 3-year adjustment and the percentile distribution; note that a 3-year PB adjustment greater than 2.5 percentage points of GDP falls in approximately the top quartile. - Time series (2019–2026) shown of baseline and growth under multipliers. *Source: Country authorities; and staff estimates and projections.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1tonea2025001-source-pdf.pdf_