IMF Executive Board Concludes 2024 Article IV Consultation with Tonga

IMF News, November 25, 2024

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Published: November 25, 2024

Key findings on recent performance

Economic activity strengthened, bolstered by consistent remittance flows, continued tourism recovery, and robust construction activities.
GDP in FY2024 (July 2023 – June 2024) is estimated to have expanded at 1.8 percent.
Agricultural output fell, and supply-side constraints including labor shortages have hindered a stronger recovery.
Inflationary pressures have substantially eased: headline inflation peaked at 14.1 percent in September 2022 and fell to 3 percent in July 2024, below the NRBT 5 percent reference rate, driven by a steady decline in core prices and moderation of global goods and commodity prices.

Executive Board assessment

Directors agreed with the thrust of the staff appraisal and welcomed authorities’ efforts to support recovery following the volcanic eruption and secure donor financing for substantive infrastructure projects.
Directors noted the firming economy and favorable near-term outlook but judged medium-term growth prospects weak with important downside risks.
Emphasized need for steadfast policy implementation, reforms, sustained international financial support, and IMF capacity development.

Fiscal stance, debt, and policy recommendations

Current fiscal stance is judged appropriate to support reconstruction and resilience building, but debt distress risk is high and financing needs are sizable.
Over the medium term, Directors stressed:
- A credible fiscal consolidation,
- Additional grant financing,
- Refraining from new non-concessional borrowing,

to place debt on a downward trajectory while achieving development goals.

Recommended revenue mobilization measures, including streamlining tax exemptions and strengthening tax administration.
Called for enhancing public financial management and spending efficiency, containing the public sector wage bill, and adhering to the fiscal rule.

Monetary policy and financial sector recommendations

Directors concurred that the current monetary policy stance is appropriate given inflation stabilized below the central bank’s reference rate; tightening would be warranted should inflation pressures resurface.
Forthcoming amendments to the central bank act present an opportunity to strengthen the monetary policy framework in line with IMF recommendations.
Noting localized banking vulnerabilities, Directors encouraged close monitoring of credit risks and ensuring adequate provisioning for loan losses.
Recommended expanding supervisory and regulatory frameworks to cover non-bank financial institutions.

Structural reforms and governance

Structural reforms are essential to enhance resilience to climate change and natural disasters and to promote private sector development.
Directors stressed enhancing anti-corruption and governance frameworks as crucial; welcomed appointment of the first anti-corruption commissioner.
Supported continued strengthening of the AML/CFT framework to reduce the risk of losing correspondent banking relationships.
Encouraged advancing digitalization, boosting financial inclusion, addressing supply-side constraints, reducing gender inequalities, and enhancing quality and timeliness of macroeconomic statistics.

Near-term outlook and risks

Near-term baseline outlook favorable, supported by expansionary fiscal and monetary policy.
Real GDP growth is projected to accelerate to 2.4 percent in FY2025, led by continued domestic demand, large public investment projects, and a rebound in agricultural output as El Nino effects dissipate.
Medium-term growth prospects are uneven; long-term growth projected at 1.2 percent due to exposure to natural disasters, persistent emigration, and limited economies of scale.
Balance of risks is tilted to the downside: a global slowdown could reduce tourism receipts and remittances; banking sector vulnerabilities pose a downside tail risk.

Tonga — Selected Economic Indicators, FY2021–FY2025 (selected items)

Population (2021): 100 thousands
Major exports: root crops, vegetables, shellfish, fish

Output and prices (Real GDP, Consumer prices)

Real GDP:
- FY2021: -1.3
- FY2022: 0.0
- FY2023: 2.0
- FY2024: 1.8
- FY2025 (proj): 2.4
Consumer prices (period average):
- FY2021: 1.4
- FY2022: 8.5
- FY2023: 10.2
- FY2024: 4.6
- FY2025 (proj): 3.2
Consumer prices (end of period):
- FY2021: 6.9
- FY2022: 11.3
- FY2023: 7.4
- FY2024: 5.4
- FY2025 (proj): 3.0

Central government finance (percent of GDP)

Revenue:
- FY2021: 49.6
- FY2022: 47.3
- FY2023: 53.5
- FY2024: 52.5
- FY2025 (proj): 41.5
of which: Grants:
- FY2021: 23.0
- FY2022: 19.9
- FY2023: 27.6
- FY2024: 26.7
- FY2025 (proj): 15.8
Expenditure:
- FY2021: 50.6
- FY2022: 48.1
- FY2023: 47.4
- FY2024: 49.0
- FY2025 (proj): 49.5
Expense:
- FY2021: 42.9
- FY2022: 42.0
- FY2023: 39.6
- FY2024: 37.2
- FY2025 (proj): 38.6
Net acquisition of nonfinancial assets:
- FY2021: 7.7
- FY2022: 6.1
- FY2023: 7.8
- FY2024: 11.8
- FY2025 (proj): 10.9
Primary balance:
- FY2021: -0.6
- FY2022: -0.2
- FY2023: 6.7
- FY2024: 3.9
- FY2025 (proj): -7.5
Overall balance:
- FY2021: -1.0
- FY2022: -0.7
- FY2023: 6.0
- FY2024: 3.5
- FY2025 (proj): -8.0
Overall balance (excl. grants):
- FY2021: -24.0
- FY2022: -20.7
- FY2023: -21.5
- FY2024: -23.3
- FY2025 (proj): -23.7

Money and credit

Broad money (M2):
- FY2021: 25.0
- FY2022: 13.4
- FY2023: -0.3
- FY2024: 1.7
- FY2025 (proj): 3.6
Domestic credit:
- FY2021: -8.2
- FY2022: -3.3
- FY2023: -15.6
- FY2024: 38.5
- FY2025 (proj): 6.2
Of which: Private sector credit:
- FY2021: 1.0
- FY2022: 9.0
- FY2023: 6.8
- FY2024: 5.0

Balance of payments (selected)

Current account balance (In percent of GDP):
- FY2021: -6.8
- FY2022: -6.6
- FY2023: -7.4
- FY2024: -7.7
- FY2025 (proj): -? (Note: table lists "-44.1" above and then "(In percent of GDP)" series; the percent series shown is -6.8 to -7.7 — follow source context for percent series)
Exports of goods, f.o.b.:
- FY2021: 16.2
- FY2022: 15.1
- FY2023: 13.1
- FY2024: 12.9
- FY2025 (proj): 15.4
Imports of goods, f.o.b.:
- FY2021: 215.4
- FY2022: 216.1
- FY2023: 235.4
- FY2024: 257.6
- FY2025 (proj): 271.4
Tourism receipts:
- FY2021: 9.1
- FY2022: 9.9
- FY2023: 43.9
- FY2024: 49.9
- FY2025 (proj): 55.0
Total remittances (In millions of U.S. dollars):
- FY2021: 220.8
- FY2022: 215.9
- FY2023: 256.0
- FY2024: 263.1
- FY2025 (proj): 274.2
Compensation of overseas workers:
- FY2021: 41.3
- FY2022: 35.3
- FY2023: 55.3
- FY2024: 59.2
- FY2025 (proj): 62.3
Personal remittances:
- FY2021: 179.6
- FY2022: 180.6
- FY2023: 200.6
- FY2024: 203.9
- FY2025 (proj): 211.9
Official grants:
- FY2021: 10.5
- FY2022: 24.6
- FY2023: 22.9
- FY2024: 29.1

Capital and financial accounts

Capital account balance:
- FY2021: 69.1
- FY2022: 73.2
- FY2023: 66.1
- FY2024: 17.2
Financial account balance:
- FY2021: 0.9
- FY2022: 29.5
- FY2023: 17.6
- FY2024: -17.5
- FY2025 (proj): 44.7

Reserves and debt

Gross official foreign reserves (In millions of U.S. dollars):
- FY2021: 320.7
- FY2022: 378.5
- FY2023: 388.8
- FY2024: 386.1
- FY2025 (proj): 403.9
(In months of next year's total imports):
- FY2021: 11.7
- FY2022: 11.2
- FY2023: 10.6
- FY2024: 10.7
- FY2025 (proj): (not listed)
Public debt (external and domestic):
- FY2021: 48.8
- FY2022: 47.5
- FY2023: 43.3
- FY2024: 37.8
- FY2025 (proj): 44.0
Of which: External debt:
- FY2021: 42.3
- FY2022: 32.3
- FY2023: 38.0
- FY2024: (not listed)
External debt service ratio:
- FY2021: 0.8
- FY2022: 1.5
- FY2023: 2.2
- FY2024: 3.8

Exchange rates and memorandum items

Exchange rate (National currency per US dollar):
- FY2021: 2.3
- FY2022: ...
Real effective exchange rate (2010=100; +=appreciation):
- FY2021: 107.1
- FY2022: 115.7
- FY2023: 125.4
Nominal GDP (millions of US$):
- FY2021: 458.6
- FY2022: 475.4
- FY2023: 520.3
- FY2024: 545.4
- FY2025 (proj): 571.1

Sources: Tonga authorities; and IMF staff estimates and projections.

International Monetary Fund press release, November 25, 2024.