IMF Executive Board Approves a US$9.03 Million Disbursement to Tonga

July 18, 2022

  • 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 IMF Executive Board approved the disbursement of US$9.03 million in emergency financing to help Tonga meet its urgent balance of payments needs for reconstruction and social protection following the double shock.
  • The authorities are taking strong policy actions, with support from the international community. Once the recovery is firmly underway, a broad-based fiscal adjustment aimed at strengthening public finances, together with continued assistance from development partners, will be critical to meet Tonga’s development and climate resilience goals.

Washington, DC : On July 15, the Executive Board of the International Monetary Fund (IMF) approved the disbursement of SDR 6.9 million (about US$9.03 million or 50 percent of quota) under the Rapid Credit Facility (RCF) [1] to Tonga to help meet its urgent balance of payments needs for reconstruction and social protection following the HTHH volcanic eruption and the COVID-19 outbreak.

At the conclusion of the Executive Board’s discussion, Mr. Bo Li, Chair and Deputy Managing Director issued the following Statement:

“Tonga was hit by a powerful volcanic eruption and the ensuing tsunami, as well as a local outbreak of the COVID-19 pandemic at the start of 2022 that disrupted Tonga’s nascent economic recovery. The authorities promptly responded to protect the vulnerable and provide fiscal support to hard-hit businesses in closely collaborating with the international community. Nevertheless, 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. Fund assistance under the Rapid Credit Facility is intended to help Tonga cope with its immediate balance-of-payments and budget financing needs and to catalyze critical donor support for the recovery and reconstruction.

“Macroeconomic and financial stability has been maintained thanks to policy buffers accumulated through prudent macroeconomic management in the run up to the global pandemic. With financial assistance from the international community, the authorities will focus on supporting recovery and reconstruction in the short term, while strengthening social protection for the poor. The authorities also 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.

“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 are needed to broaden the tax base, enhance spending efficiency, and strengthen transparency and accountability in government operations, with capacity development support from the Fund.

“Over the medium term, structural reforms to promote private sector development and reinforce climate resilience will help boost Tonga’s long-term growth potential. Continued support from the international community, through grant financing and debt relief, would be essential.”

[1] 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 under the RCF carries a zero interest rate, a grace period of 5½ years, and a final maturity of 10 years.

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