An International Monetary Fund (IMF) team led by Ms. Elena Loukoianova
visited Nuku’alofa from March 22–28, to assess economic developments and
discuss government policies. The team met with National Reserve Bank of
Tonga (NRBT) Governor Dr. Sione Ngongo Kioa and Minister for Finance and
National Planning Honorable Tevita Lavemaau, as well as development
partners and private sector representatives.
At the conclusion of the visit, Ms. Loukoianova issued the following
statement:
“Economic activity is expanding and is likely to remain relatively strong
into the next couple of years. Growth during FY16 (fiscal year ending June
30) is estimated at 3.5 percent and is projected to continue at a rate
between 3 and 4 percent over the coming years, boosted by construction and
activities related to the 2019 Pacific Games (PG). Although the current
account deficit is projected to widen on the back of PG related imports,
the external balance remains stable with continued strong inflow of
remittances and a solid level of international reserves.
“Following the introduction of a new tax on imported fatty meat and tobacco
in July 2016 and higher oil prices compared to 2015, annual inflation
reached 6.7 percent in December 2016. This increase is, however, expected
to be temporary, with headline inflation returning at around 3 percent in
FY18.
“The overall balance of risks to economic growth remains titled to the
downside. The risk of weaker global growth, as well as retreat from
cross-border economic integration, may weigh on Tonga’s growth and fiscal
space via reduced grants, remittances, and tourism. Domestic risks stem
from potential increases in fiscal expenditure related to the wage bill and
the cost of the PG. On the upside, an increase in government expenditure
may temporarily boost growth.
“In terms of fiscal policy, advice from the 2016 Article IV consultation
remains valid. While revenues for FY16 and the first half of FY17 remained
solid, expenditure is also projected to increase significantly. Staff
welcomed the better than projected estimated fiscal outcome for FY16, which
is however partially related to the deferment of maintenance works and
lower than expected wage bill. The mission also welcomed the continued
efforts by the authorities to seek grant financing for the PG to avoid cost
overruns. The overall fiscal balance for FY16 is estimated at a surplus of
1.6 percent of GDP, while the projection for FY17 is a deficit of 0.7
percent of GDP providing a boost to the economy.
“The monetary policy stance has remained accommodative, boosting credit to
the private sector. Private sector credit growth increased to 21.7 percent
in the year to December 2016 and is projected to hover around 20 percent
over the next two years. Against this backdrop, staff advised the NRBT to
remain vigilant and be prepared to tackle financial stability issues that
may arise from fast credit growth. Notwithstanding the faster pace of
credit growth, the banking sector in Tonga remained solid and profitable.
“Staff recommended that the authorities address a weak statistical capacity
as a matter of priority. The team encourages the authorities to devote
sufficient human and financial resources to the Tonga Department of
Statistics and to work closely with upcoming IMF Pacific Financial
Technical Assistance Center (PFTAC) statistical missions. In this context,
it is also essential that most recent government finance, inflation,
balance of payments, and national accounts data are compiled in time for
the next Article IV consultation.”
