IMF Executive Board Approves a US$9.03 Million Disbursement to Tonga
IMF News, July 18, 2022
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Bibliographic details
- Published: July 18, 2022
Event and context
- Date of press release: July 18, 2022
- Press Release No. 22/264
- Press officer: Pemba Sherpa
- Phone: +1 202 623-7100
- Email: MEDIA@IMF.org
- Situation:
- Tonga suffered a double blow from the Hunga Tonga–Hunga Haʻapai (HTHH) volcanic eruption and the first local outbreak of COVID-19 at the start of 2022, which derailed Tonga’s recovery from Tropical Cyclone Harold and closure of international borders in 2020.
- The shocks created urgent balance of payments needs for reconstruction and social protection.
IMF decision and financing details
- The IMF Executive Board approved the disbursement of SDR 6.9 million (about US$9.03 million or 50 percent of quota) under the Rapid Credit Facility (RCF) to Tonga.
- Purpose of financing:
- To help meet Tonga’s urgent balance of payments needs for reconstruction and social protection following the HTHH volcanic eruption and the COVID-19 outbreak.
- To catalyze critical donor support for recovery and reconstruction.
Macroeconomic outlook and risks (from IMF Statement by Mr. Bo Li)
- Near-term outlook:
- The current account balance is expected to deteriorate substantially in FY2023 (July 2022‒June 2023), driven by increased imports of food and reconstruction-related materials, leading to a large external financing gap.
- Policy buffers and stability:
- Macroeconomic and financial stability has been maintained thanks to policy buffers accumulated through prudent macroeconomic management in the run up to the global pandemic.
- Authorities remain vigilant given risks to inflation and credit quality in the banking sector and stand ready to take necessary policy actions to preserve stability.
- The authorities are committed to developing a macroprudential policy framework and enhancing the AML/CFT framework.
Short-term policy focus and international support
- Immediate priorities:
- Supporting recovery and reconstruction.
- Strengthening social protection for the poor.
- Role of international community:
- Financial assistance from the international community is expected to support short-term recovery and reconstruction.
- Continued assistance from development partners will be critical to meet Tonga’s development and climate resilience goals.
- Continued support through grant financing and debt relief would be essential over the medium term.
Medium-term policy recommendations and structural reforms
- Fiscal policy:
- Once the recovery becomes entrenched, a comprehensive fiscal adjustment will be important to reduce the risk of debt distress while achieving climate and development goals.
- Continued efforts needed to broaden the tax base, enhance spending efficiency, and strengthen transparency and accountability in government operations, with capacity development support from the Fund.
- Structural reforms:
- Promote private sector development.
- Reinforce climate resilience to help boost Tonga’s long-term growth potential.
Rapid Credit Facility (RCF) terms (as described in the release)
- The RCF provides rapid financial support in a single, up-front payout for low-income countries facing urgent financing needs.
- Financial assistance under the RCF is provided as an outright disbursement to Poverty Reduction and Growth Trust (PRGT)-eligible members that face an urgent balance of payments need, and where a full-fledged economic program is either not necessary or not feasible due to the urgency of the need.
- Financing characteristics for the RCF:
- Zero interest rate.
- Grace period of 5½ years.
- Final maturity of 10 years.
IMF press release: IMF Executive Board Approves a US$9.03 Million Disbursement to Tonga (Press Release No. 22/264), July 18, 2022.