{
  "title": "Tonga: Staff Concluding Statement IMF 2020 Article IV Consultation Mission",
  "publication": "IMF News, February 25, 2020",
  "sourceUrl": "https://www.imf.org/en/news/articles/2020/02/25/mcs022520-tongo-staff-concluding-statement-imf-2020-article-iv-consultation-mission",
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  "summary": "A mild recovery is underway after Cyclone Gita, driven by stronger consumption supported by remittances and donor-funded reconstruction boosting imports.",
  "publishDate": "2020-02-25",
  "sections": [
    {
      "heading": "Overview",
      "content": "- A mild recovery is underway after Cyclone Gita, driven by stronger consumption supported by remittances and donor-funded reconstruction boosting imports.\n- Policies have delivered low inflation, a fourth consecutive budget surplus, and financial sector stability.\n- The medium-term outlook is modest and fragile due to slower growth in remitting/partner countries, high vulnerability to natural disasters, and high debt distress with repayments set to spike from 2024 onward.\n- Main challenge: improve climate resilience and meet development goals without worsening debt dynamics by strengthening budget surpluses, improving revenue and spending quality, expediting investment, and securing large additional donor grant funding.\n- Durable long-term solution: grow the private sector; improving the operation of the land market is crucial."
    },
    {
      "heading": "Economic performance and outlook",
      "content": "- Recent performance\n  - Growth: estimated at 3 percent in FY2019, recovering from FY2018 stagnation due to Cyclone Gita.\n  - Drivers: stronger consumption from remittances, accommodative monetary policy, and credit growth.\n  - Headwinds: loss in market share for agricultural exports and slower growth in partner/remitting countries.\n  - Inflation: low, driven by weaker global commodity prices and dissipation of post-Gita local price surge.\n  - International reserves: US$214 million at end-2019 (equal to some 6½ months of import cover).\n\n- Outlook and projections\n  - Short term: recovery expected to speed up in 2020-21 to 3½ percent GDP growth as exports and investment recover.\n  - Medium term: growth expected to gradually decline to an estimated potential rate of 1.8 percent.\n  - Inflation: likely to remain well below the reference rate of 5 percent.\n  - External balances: expected to deteriorate; reserve coverage to trend down to about 4 months of imports (below desirable 6¾ months)."
    },
    {
      "heading": "Risks and vulnerabilities",
      "content": "- Debt and financing\n  - High risk of external debt distress because of an impending spike in debt repayments starting in 2024, particularly to the Exim Bank of China.\n  - Without new grant financing and additional fiscal adjustment, reserves will need to be run down and additional debt incurred.\n- Natural disasters and climate\n  - Tonga is among the world’s most exposed to climate change and natural disasters; another major cyclone could derail recovery and strain public resources.\n  - IMF CCPA estimates climate-resilience projects will cost some 140 percent of 2018 GDP, of which donor funding has been committed for about half.\n- Global factors\n  - Rising protectionism, weaker global growth, and knock-on effects of the coronavirus may temper exports, tourism, aid and remittances.\n- Institutional and capacity constraints\n  - Limited public sector capacity to prepare for and manage risks; need for stronger AML/CFT framework to reduce vulnerability to correspondent banking relationship withdrawals."
    },
    {
      "heading": "Priority 1 — Achieving climate resilience and development goals while ensuring debt sustainability",
      "content": "- Financing needs and targets\n  - Climate-resilience projects: some 140 percent of 2018 GDP (donor funding committed for about half).\n  - Additional annual spending to meet development goals by 2030: 5 percent of 2018 GDP by 2030.\n  - National Emergency Fund target: around 1 percent of GDP.\n  - Public debt target: 35 percent of GDP to ensure stable long-term debt dynamics.\n  - Without new grants, required annual fiscal surpluses: some 4 percent of GDP on average over 2021−24 (vs. draft FY2021 surplus target of 0.8 percent of GDP).\n\n- Revenue measures (higher-quality consolidation)\n  - Review and close major consumption tax exemptions.\n  - Update excise tax rates, fees and charges, especially on property.\n  - Improve revenue administration through training and better risk management.\n  - Remove tax breaks for the electricity company and pass through full diesel generation costs to consumers (with phased protection for vulnerable households).\n  - Consider broadening the personal income tax base; close corporate income tax loopholes for multi-national companies; collect tax arrears; reduce tax avoidance; improve collection of land-related fees.\n  - Institutionalize management of resources set aside for debt repayments via legislation.\n\n- Spending measures (efficiency and capacity)\n  - Gear current spending toward capacity and value-for-money; address rising non-salary wage components.\n  - Strengthen expenditure controls on allowances and non-permanent staff costs.\n  - Conduct a systemic review to determine appropriate and fiscally sustainable public service size and structure.\n  - Centralize and strengthen hiring/staffing decisions; clarify job descriptions; prioritize critical positions; increase automation to phase out redundant positions.\n  - Carefully design planned health insurance and voluntary retirement schemes to avoid cost overruns and large staff turnover.\n  - Prioritize and publish investment pipeline; strengthen procurement and bundle contracts to attract international firms.\n\n- Debt management\n  - Continue borrowing on concessional terms and limiting external debt-to-GDP ratio below 50 percent; financing should ideally be restricted to grants if possible.\n  - Adopt a medium-term debt strategy with documentation of policies and procedures to guide borrowing and guarantees.\n  - Explore scope to expand domestic borrowing to limit foreign currency risk and improve monetary transmission.\n\n- Role of donor financing and private sector\n  - Large additional donor financing in grants will be essential to avoid worsening debt dynamics.\n  - Even with grants, capacity constraints limit ramping up spending; growing the private sector to expand the tax base is vital."
    },
    {
      "heading": "Priority 2 — Unlocking private sector potential",
      "content": "- Key constraints and reform priorities\n  - Main priorities: improve access to skilled labor, land, infrastructure, credit, and technology; ease entry barriers by strengthening official capacity and female labor force participation; reduce investment uncertainty by improving climate resilience, insolvency regimes and aligning the 2018 FEC Act with international norms.\n  - Amendments to the 2018 FEC Act are under consideration to improve repatriation requirements while ensuring investor certainty.\n\n- Land market (priority action)\n  - Leasehold market complexity, non-transparency and delays hinder Tongan and foreign investment.\n  - Legal tenures allow up to 50 years (Cabinet approval) or 99 years (Privy Council approval), but in practice tenures are much shorter (10−30 years) with unregulated renewal processes.\n  - Selling Tongan land is illegal; informal transactions function via “gifts” in exchange for land.\n  - Low liquidity and short tenures impede use of real estate as collateral for MSMEs and limit banks’ ability to finance long-term investments (e.g., private solar farms).\n  - Recommended: modernize and clarify land lease process; improve transparency and predictability; clarify ownership rights to maximize use of underutilized land and improve incentives for climate-resilient structures.\n\n- Female labor force participation\n  - Female workforce has more years of schooling but is constrained by limits to land ownership, inadequate legal protections (especially property rights), and poor government representation.\n  - Government plan to improve female participation is under-resourced and ill-defined.\n  - Employment Relations Bill (approved by Cabinet) could improve employment conditions for women once enacted.\n\n- Business formation and insolvency\n  - Improve insolvency regime for predictable, speedy, transparent resolution and better protection of secured creditors’ rights.\n  - Facilitate in and out-of-court solutions, develop non-bank financial institutions, reform land leasehold market, improve credit bureau functioning, enhance financial training and literacy for MSMEs.\n  - Deregulate restricted lists of protected sectors to allow greater foreign investment."
    },
    {
      "heading": "Other policy recommendations",
      "content": "- Monetary policy\n  - Maintain supportive stance given low inflation.\n  - Raising statutory reserve requirement from 10 to 15 percent of deposits is acceptable given excess liquidity, to allow greater room for easing if conditions worsen.\n  - NRBT should look through temporary inflation spikes and stand ready to raise interest rates on excess reserves if overheating or credit misallocation emerge.\n\n- Financial sector supervision\n  - Continue improvements: establish solvency stress testing, assess climate and remittance-related stress impacts, enhance financial sector risk management, and improve insolvency regimes.\n  - Monitor household debt closely given signs of stretched household balance sheets and large bank exposure to household mortgages.\n\n- AML/CFT\n  - Strengthen AML/CFT framework to meet international standards and address concerns likely to arise in the 2020 APG assessment to reduce risks of partial withdrawal of correspondent banking relationships."
    },
    {
      "heading": "Key statistics (selected)",
      "content": "- Population (2018): 101 thousand\n- Quota: SDR 13.8 million\n- Real GDP growth (annual percent change)\n  - FY2017: 5.4\n  - FY2018: 0.2\n  - FY2019: 3.0\n  - FY2020: 3.5 (projection)\n  - FY2021: 2.6 (projection)\n  - FY2022: 2.3 (projection)\n- Consumer prices (period average)\n  - FY2017: 7.2\n  - FY2018: 7.0\n  - FY2019: 4.1\n  - FY2020: 1.3 (projection)\n  - FY2021: 2.2 (projection)\n  - FY2022: 1.2 (projection)\n- Consumer prices (end of period)\n  - FY2017: 9.8\n  - FY2018: 6.7\n  - FY2019: 1.6\n  - FY2020: 1.7 (projection)\n  - FY2021: -0.4 (projection)\n  - FY2022: 3.2 (projection)\n- Central government finance (percent of GDP)\n  - Revenue and Grants\n    - FY2017: 43.6\n    - FY2018: 42.9\n    - FY2019: 44.2\n    - FY2020: 40.5 (projection)\n    - FY2021: 39.5 (projection)\n    - FY2022: 39.1 (projection)\n    - FY2023: 35.3 (projection)\n  - Revenue (excluding grants)\n    - FY2017: 24.2\n    - FY2018: 25.0\n    - FY2019: 28.2\n    - FY2020: 23.8 (projection)\n    - FY2021: 24.0 (projection)\n  - Grants\n    - FY2017: 19.5\n    - FY2018: 17.9\n    - FY2019: 16.0\n    - FY2020: 16.7 (projection)\n    - FY2021: 15.7 (projection)\n    - FY2022: 15.1 (projection)\n    - FY2023: 11.1 (projection)\n  - Expenditure\n    - FY2017: 40.0\n    - FY2018: 41.5\n    - FY2019: 39.2\n    - FY2020: 38.8 (projection)\n    - FY2021: 38.2 (projection)\n  - Expense\n    - FY2017: 29.6\n    - FY2018: 31.6\n    - FY2019: 32.5\n    - FY2020: 31.1 (projection)\n    - FY2021: 30.9 (projection)\n    - FY2022: 30.6 (projection)\n  - Transactions in nonfinancial assets (net)\n    - FY2017: 10.4\n    - FY2018: 8.4\n    - FY2019: 9.0\n    - FY2020: 9.4 (projection)\n    - FY2021: 8.3 (projection)\n    - FY2022: 8.2 (projection)\n    - FY2023: 7.6 (projection)\n  - Overall balance\n    - FY2017: 3.6\n    - FY2018: 2.9\n    - FY2019: 2.7\n    - FY2020: 0.0 (projection)\n    - FY2021: 0.3 (projection)\n    - FY2022: -2.9 (projection)\n- Public debt (external and domestic)\n  - FY2017: 46.0\n  - FY2018: 45.6\n  - FY2019: 41.6\n  - FY2020: 39.7 (projection)\n  - FY2021: 37.7 (projection)\n  - FY2022: 36.0 (projection)\n  - FY2023: 38.7 (projection)\n- External debt\n  - FY2017: 34.1\n  - FY2018: 30.7\n  - FY2019: 27.6\n  - FY2020: 28.0 (projection)\n- Debt service ratio\n  - FY2017: 1.1\n  - FY2018: 1.9\n  - FY2019: 1.8\n- Total liquidity (M3) annual change\n  - FY2017: 13.7\n  - FY2018: 4.3\n  - FY2019: 5.6\n  - FY2020: 5.7 (projection)\n  - FY2021: 4.2 (projection)\n- Domestic credit\n  - FY2017: 4.8\n  - FY2018: -6.5\n  - FY2019: 6.0\n  - FY2020: 28.1 (projection)\n  - FY2021: 18.0 (projection)\n  - FY2022: 15.6 (projection)\n  - FY2023: 10.6 (projection)\n- Exports, f.o.b. (annual percent change)\n  - FY2017: 4.6\n  - FY2018: 5.0\n- Imports, f.o.b. (annual percent change)\n  - FY2017: -45.2\n  - FY2018: -44.9\n  - FY2019: -49.9\n  - FY2020: -52.5 (projection)\n  - FY2021: -52.9 (projection)\n  - FY2022: -53.6 (projection)\n  - FY2023: -54.1 (projection)\n- Services (net)\n  - FY2017: -3.4\n  - FY2018: -3.1\n  - FY2019: -5.5\n  - FY2020: -5.9 (projection)\n  - FY2021: -6.1 (projection)\n  - FY2022: -7.0 (projection)\n  - FY2023: -6.8 (projection)\n- Current transfers (net)\n  - FY2017: 33.6\n  - FY2018: 33.0\n  - FY2019: 35.0\n  - FY2020: 34.4 (projection)\n  - FY2021: 33.3 (projection)\n  - FY2022: 30.4 (projection)\n  - Of which: Remittances\n    - FY2017: 27.4\n    - FY2018: 29.4\n    - FY2019: 30.0\n    - FY2020: 28.5 (projection)\n    - FY2021: 29.5 (projection)\n    - FY2022: 27.8 (projection)\n  - Of which: Official grants\n    - FY2017: 7.8\n    - FY2018: 5.2\n- Current account balance\n  - FY2017: -11.8\n  - FY2018: -12.6\n  - FY2019: -15.2\n  - FY2020: -18.1 (projection)\n  - FY2021: 4.7 (projection)\n  - FY2022: -1.3 (projection)\n  - FY2023: -4.4 (projection)\n- Gross official foreign reserves (millions of U.S. dollars)\n  - FY2017: 192.2\n  - FY2018: 214.9\n  - FY2019: 212.8\n  - FY2020: 212.3 (projection)\n  - FY2021: 205.2 (projection)\n  - FY2022: 179.5 (projection)\n  - FY2023: 158.3 (projection)\n- Memorandum: Nominal GDP (millions of US$)\n  - FY2017: 455.9\n  - FY2018: 481.9\n  - FY2019: 503.8\n  - FY2020: 529.4 (projection)\n  - FY2021: 560.4 (projection)\n  - FY2022: 588.6 (projection)\n  - FY2023: 619.6 (projection)\n\nIMF Staff Concluding Statement, Tonga: Staff Concluding Statement IMF 2020 Article IV Consultation Mission (February 25, 2020).\n\n---\n\n\n References\n\n- Tonga and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2020/02/25/mcs022520-tongo-staff-concluding-statement-imf-2020-article-iv-consultation-mission"
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    "Published: February 25, 2020",
    "A mild recovery is underway after Cyclone Gita, driven by stronger consumption supported by remittances and donor-funded reconstruction boosting imports.",
    "Policies have delivered low inflation, a fourth consecutive budget surplus, and financial sector stability.",
    "The medium-term outlook is modest and fragile due to slower growth in remitting/partner countries, high vulnerability to natural disasters, and high debt distress with repayments set to spike from 2024 onward.",
    "Main challenge: improve climate resilience and meet development goals without worsening debt dynamics by strengthening budget surpluses, improving revenue and spending quality, expediting investment, and securing large additional donor grant funding.",
    "Durable long-term solution: grow the private sector; improving the operation of the land market is crucial.",
    "Recent performance",
    "Outlook and projections",
    "Debt and financing",
    "Natural disasters and climate",
    "Global factors",
    "Institutional and capacity constraints",
    "Financing needs and targets",
    "Revenue measures (higher-quality consolidation)",
    "Spending measures (efficiency and capacity)",
    "Debt management",
    "Role of donor financing and private sector",
    "Key constraints and reform priorities",
    "Land market (priority action)",
    "Female labor force participation",
    "Business formation and insolvency",
    "Monetary policy",
    "Financial sector supervision",
    "AML/CFT",
    "Population (2018): 101 thousand",
    "Quota: SDR 13.8 million",
    "Real GDP growth (annual percent change)",
    "Consumer prices (period average)",
    "Consumer prices (end of period)",
    "Central government finance (percent of GDP)",
    "Public debt (external and domestic)",
    "External debt",
    "Debt service ratio",
    "Total liquidity (M3) annual change",
    "Domestic credit",
    "Exports, f.o.b. (annual percent change)",
    "Imports, f.o.b. (annual percent change)",
    "Services (net)",
    "Current transfers (net)",
    "Current account balance",
    "Gross official foreign reserves (millions of U.S. dollars)",
    "Memorandum: Nominal GDP (millions of US$)",
    "[Tonga and the IMF](http://www.imf.org/external/country/TON/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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