IMF Executive Board Concludes 2020 Article IV Consultation with Tonga
IMF News, February 1, 2021
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- Published: February 1, 2021
Overview and recent shocks
- On January 25, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Tonga.
- Tonga’s slow recovery from the 2018 Tropical Cyclone Gita has been derailed by twin shocks from the Covid-19 pandemic and Cyclone Harold.
- Proactive actions (early closure of external borders and prompt economic support) helped avoid a worse outcome; there are no recorded COVID-19 cases in Tonga to date.
- FY2020 GDP (ending June 2020) is expected to contract by 2½ percent, followed by a further contraction of 3½ percent in FY2021, as border closures affect Tonga’s peak tourism season and reconstruction efforts are delayed.
- Delayed aid-spending has led to record high international reserves in FY2020 due to import compression; reserves are expected to be sharply reduced in FY2021 as the current account deficit worsens.
Medium-term outlook and vulnerabilities
- The medium-term outlook is modest and fragile.
- Growth drivers and vulnerabilities:
- Low growth potential due to heavy reliance on labor exports.
- Pandemic has worsened pre-existing vulnerabilities.
- Downside risks: weaker global recovery affecting exports, aid, and remittances; further disruptions in correspondent banking relations; possibility of a local COVID-19 outbreak.
- High vulnerability to natural disasters and high risk of external debt distress.
- Large external debt repayments begin in 2024.
- Current account deficits likely to remain large, reflecting weak export competitiveness, heavy import dependence, reconstruction needs, and delayed climate-resilient infrastructure investments.
- These forces are likely to reduce international reserves below desirable levels in the medium-term.
Fiscal, external, and monetary position
- Fiscal:
- Fiscal consolidation continued through FY2020 due to donor support and investment delays.
- A fiscal deficit is unavoidable in FY2021 to support the economy and healthcare during the pandemic.
- Given limited fiscal buffers and urgent balance of payments needs, Tonga has requested IMF financial assistance under the Rapid Credit Facility.
- External:
- Expected deterioration in external balances from declines in tourism and remittances and higher pandemic- and reconstruction-related imports.
- Monetary and financial sector:
- Monetary stability has been maintained and inflation is expected to remain low.
- Financial sector risks are elevated despite banks remaining profitable and well capitalized.
Executive Board assessment and policy recommendations
- Directors commended authorities for swift actions to prevent a local outbreak and for prudent policy management preserving macro-financial stability.
- Key messages:
- The global pandemic and recent natural disasters have amplified weak growth, worsened fiscal and external balances, and added pressure on debt sustainability.
- The medium-term outlook is fragile with low growth potential and sizable financing needs.
- Given Tonga’s high risk of debt distress, post-pandemic fiscal adjustment and continued international support (including grants and debt relief) are important, alongside IMF technical assistance.
- Recommended policy stance:
- Fiscal policy should continue to support the economy through the pandemic while improving targeting of measures and safeguarding priority spending on:
- vaccine rollout,
- healthcare,
- infrastructure maintenance,
- investment.
- Once recovery is underway, implement high-quality fiscal adjustment to stabilize debt dynamics and strengthen climate resilience.
- Fiscal reforms to consider: broadening the tax base, enhancing spending efficiency, expanding the social protection system, improving public financial management, improving debt management strategies, and enhancing transparency and governance in government operations.
- Financial sector measures: strengthen financial sector supervision, enhance stress testing, monitor household debt, establish a macroprudential framework, and enhance the AML/CFT framework.
- Structural reforms to promote private sector growth: enhance the business environment, improve climate resilience and productivity, improve land market operations, strengthen female labor force participation, enact an insolvency law, and deregulate protected sectors.
Key statistics and projections (selected)
- Population (2019): 104 thousands
- GDP per capita FY2018 (thousands of US$): 4.9
- Key export markets: Australia, Japan, New Zealand, and United States
- Major exports: root crops, vanilla, squash, fish
- Quota: SDR 13.8 million
- Output and prices (Annual percent change)
- Real GDP: FY2018 0.3; FY2019 0.7; FY2020 -2.5; FY2021 -3.5; FY2022 4.0; FY2023 3.0
- Consumer prices (period average): FY2018 6.8; FY2019 3.3; FY2020 0.2; FY2021 -0.9; FY2022 2.1; FY2023 2.0
- Consumer prices (end of period): FY2018 6.7; FY2019 -0.1; FY2020 -1.4; FY2021 1.8; FY2022 2.4; FY2023 1.6
- GDP deflator: FY2018 5.1; FY2019 7.7; FY2020 0.4
- Central government finance (In percent of GDP)
- Total Revenue: FY2018 42.6; FY2019 41.7; FY2020 45.7; FY2021 42.0; FY2022 44.4; FY2023 (blank)
- Revenue (excluding grants): FY2018 24.8; FY2019 23.4; FY2020 24.7; FY2021 22.9; FY2022 23.9; FY2023 24.3
- Grants: FY2018 17.8; FY2019 18.3; FY2020 21.0; FY2021 18.1; FY2022 20.1
- Total Expenditure: FY2018 39.7; FY2019 38.5; FY2020 41.3; FY2021 50.6; FY2022 42.3; FY2023 43.4
- Expense: FY2018 31.4; FY2019 30.3; FY2020 35.4; FY2021 35.6; FY2022 34.9
- Transactions in Nonfinancial Assets (Net): FY2018 8.3; FY2019 5.9; FY2020 6.2; FY2021 8.5
- Overall balance: FY2018 2.9; FY2019 3.2; FY2020 4.4; FY2021 -4.8; FY2022 -0.3; FY2023 1.0
- Net Acquisition of Financial Assets: FY2018 -1.8; FY2019 0.5; FY2020 1.3
- External financing (net): FY2018 -0.6; FY2019 -1.2; FY2020 -0.5; FY2021 -1.7
- Domestic financing (net): FY2018 0.1; FY2019 0.0; FY2020 1.1; FY2021 1.4; FY2022 2.2
- Money and credit
- Total liquidity (M3): FY2018 7.6; FY2019 4.3; FY2020 1.2; FY2021 -8.9; FY2022 10.6
- Broad money (M2): FY2018 9.4; FY2019 3.5; FY2020 -9.4; FY2021 11.1; FY2022 8.0
- Domestic credit: FY2018 -6.5; FY2019 6.0; FY2020 -15.7; FY2021 18.4; FY2022 12.0
- Private sector credit: FY2018 3.4; FY2019 3.9
- Interest rates (end of period)
- Average deposit rate: FY2018 2.3
- Average lending rate: FY2018 8.2; FY2019 8.1
- Balance of payments (In millions of U.S. dollars)
- Exports, f.o.b.: FY2018 14.2; FY2019 15.8; FY2020 14.4; FY2021 17.7; FY2022 19.0
- Imports, f.o.b.: FY2018 215.3; FY2019 223.3; FY2020 213.7; FY2021 208.2; FY2022 234.6; FY2023 246.7
- Services balance: FY2018 -15.0; FY2019 -9.3; FY2020 -20.9; FY2021 -88.2; FY2022 -29.7; FY2023 -36.3
- Investment income balance: FY2018 26.4; FY2019 39.9; FY2020 42.2; FY2021 14.7; FY2022 27.4; FY2023 34.6
- Transfers balance: FY2018 158.9; FY2019 172.4; FY2020 154.4; FY2021 181.3; FY2022 168.7; FY2023 182.6
- Of which: Remittances: FY2018 137.1; FY2019 141.6; FY2020 144.9; FY2021 113.8; FY2022 122.4; FY2023 128.0
- Of which: Official grants: FY2018 28.8; FY2019 45.3; FY2020 20.3; FY2021 84.3; FY2022 64.2; FY2023 73.4
- Current account balance: FY2018 -30.7; FY2019 -4.4; FY2020 -19.6; FY2021 -85.9; FY2022 -50.5; FY2023 -46.9
- Gross official foreign reserves (In millions of U.S. dollars)
- FY2018 214.9; FY2019 212.8; FY2020 241.9; FY2021 192.3; FY2022 169.1; FY2023 147.7
- In months of next year's total imports: FY2018 7.8; FY2019 9.6; FY2020 5.5
- Debt (in percent of GDP)
- Public debt (external and domestic): FY2018 45.9; FY2019 46.3; FY2020 44.6; FY2021 42.7
- Of which: External debt: FY2018 40.5; FY2019 36.4; FY2020 36.2; FY2021 35.1; FY2022 31.6
- External debt service ratio: FY2018 1.7; FY2019 1.5
- Exchange rates
- Nominal effective exchange rate (2005=100): FY2018 93.5; FY2019 94.6; FY2020 93.4
- Real effective exchange rate (2005=100): FY2018 101.8; FY2019 102.4; FY2020 99.9
- Memorandum items
- Remittances (in percent of GDP): FY2018 28.2; FY2019 28.7; FY2020 23.2; FY2021 23.3
- Tourism (in percent of GDP): FY2018 9.0; FY2019 9.2; FY2020 7.4; FY2021 7.3; FY2022 7.5
- FDI (in percent of GDP): FY2018 4.9; FY2019 0.9; FY2020 0.8
- Nominal GDP (millions of US$): FY2018 485.9; FY2019 516.8; FY2020 504.1; FY2021 491.0; FY2022 526.1; FY2023 551.9
- GDP Growth 2018 - 2023 (Calendar Year Basis): -3.0; 2.8
Press Release No. 21/30, February 1, 2021.
