## IMF Executive Board Concludes 2020 Article IV Consultation with Tonga _IMF News, February 1, 2021_ ## Source details **Canonical URL:** [IMF Executive Board Concludes 2020 Article IV Consultation with Tonga](https://www.imf.org/en/news/articles/2021/01/29/pr2130-tonga-imf-executive-board-concludes-2020-article-iv-consultation) ## Other formats - [Markdown version](/en/news/articles/2021/01/29/pr2130-tonga-imf-executive-board-concludes-2020-article-iv-consultation/index.md) - [Structured JSON version](/en/news/articles/2021/01/29/pr2130-tonga-imf-executive-board-concludes-2020-article-iv-consultation/index.json) - [Bundle manifest](/en/news/articles/2021/01/29/pr2130-tonga-imf-executive-board-concludes-2020-article-iv-consultation/bundle-manifest.json) ## Bibliographic details - Published: February 1, 2021 --- ### Overview and recent shocks - On January 25, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Tonga. - Tonga’s slow recovery from the 2018 Tropical Cyclone Gita has been derailed by twin shocks from the Covid-19 pandemic and Cyclone Harold. - Proactive actions (early closure of external borders and prompt economic support) helped avoid a worse outcome; there are no recorded COVID-19 cases in Tonga to date. - FY2020 GDP (ending June 2020) is expected to contract by 2½ percent, followed by a further contraction of 3½ percent in FY2021, as border closures affect Tonga’s peak tourism season and reconstruction efforts are delayed. - Delayed aid-spending has led to record high international reserves in FY2020 due to import compression; reserves are expected to be sharply reduced in FY2021 as the current account deficit worsens. ### Medium-term outlook and vulnerabilities - The medium-term outlook is modest and fragile. - Growth drivers and vulnerabilities: - Low growth potential due to heavy reliance on labor exports. - Pandemic has worsened pre-existing vulnerabilities. - Downside risks: weaker global recovery affecting exports, aid, and remittances; further disruptions in correspondent banking relations; possibility of a local COVID-19 outbreak. - High vulnerability to natural disasters and high risk of external debt distress. - Large external debt repayments begin in 2024. - Current account deficits likely to remain large, reflecting weak export competitiveness, heavy import dependence, reconstruction needs, and delayed climate-resilient infrastructure investments. - These forces are likely to reduce international reserves below desirable levels in the medium-term. ### Fiscal, external, and monetary position - Fiscal: - Fiscal consolidation continued through FY2020 due to donor support and investment delays. - A fiscal deficit is unavoidable in FY2021 to support the economy and healthcare during the pandemic. - Given limited fiscal buffers and urgent balance of payments needs, Tonga has requested IMF financial assistance under the Rapid Credit Facility. - External: - Expected deterioration in external balances from declines in tourism and remittances and higher pandemic- and reconstruction-related imports. - Monetary and financial sector: - Monetary stability has been maintained and inflation is expected to remain low. - Financial sector risks are elevated despite banks remaining profitable and well capitalized. ### Executive Board assessment and policy recommendations - Directors commended authorities for swift actions to prevent a local outbreak and for prudent policy management preserving macro-financial stability. - Key messages: - The global pandemic and recent natural disasters have amplified weak growth, worsened fiscal and external balances, and added pressure on debt sustainability. - The medium-term outlook is fragile with low growth potential and sizable financing needs. - Given Tonga’s high risk of debt distress, post-pandemic fiscal adjustment and continued international support (including grants and debt relief) are important, alongside IMF technical assistance. - Recommended policy stance: - Fiscal policy should continue to support the economy through the pandemic while improving targeting of measures and safeguarding priority spending on: - vaccine rollout, - healthcare, - infrastructure maintenance, - investment. - Once recovery is underway, implement high-quality fiscal adjustment to stabilize debt dynamics and strengthen climate resilience. - Fiscal reforms to consider: broadening the tax base, enhancing spending efficiency, expanding the social protection system, improving public financial management, improving debt management strategies, and enhancing transparency and governance in government operations. - Financial sector measures: strengthen financial sector supervision, enhance stress testing, monitor household debt, establish a macroprudential framework, and enhance the AML/CFT framework. - Structural reforms to promote private sector growth: enhance the business environment, improve climate resilience and productivity, improve land market operations, strengthen female labor force participation, enact an insolvency law, and deregulate protected sectors. ### Key statistics and projections (selected) - Population (2019): 104 thousands - GDP per capita FY2018 (thousands of US$): 4.9 - Key export markets: Australia, Japan, New Zealand, and United States - Major exports: root crops, vanilla, squash, fish - Quota: SDR 13.8 million - Output and prices (Annual percent change) - Real GDP: FY2018 0.3; FY2019 0.7; FY2020 -2.5; FY2021 -3.5; FY2022 4.0; FY2023 3.0 - Consumer prices (period average): FY2018 6.8; FY2019 3.3; FY2020 0.2; FY2021 -0.9; FY2022 2.1; FY2023 2.0 - Consumer prices (end of period): FY2018 6.7; FY2019 -0.1; FY2020 -1.4; FY2021 1.8; FY2022 2.4; FY2023 1.6 - GDP deflator: FY2018 5.1; FY2019 7.7; FY2020 0.4 - Central government finance (In percent of GDP) - Total Revenue: FY2018 42.6; FY2019 41.7; FY2020 45.7; FY2021 42.0; FY2022 44.4; FY2023 (blank) - Revenue (excluding grants): FY2018 24.8; FY2019 23.4; FY2020 24.7; FY2021 22.9; FY2022 23.9; FY2023 24.3 - Grants: FY2018 17.8; FY2019 18.3; FY2020 21.0; FY2021 18.1; FY2022 20.1 - Total Expenditure: FY2018 39.7; FY2019 38.5; FY2020 41.3; FY2021 50.6; FY2022 42.3; FY2023 43.4 - Expense: FY2018 31.4; FY2019 30.3; FY2020 35.4; FY2021 35.6; FY2022 34.9 - Transactions in Nonfinancial Assets (Net): FY2018 8.3; FY2019 5.9; FY2020 6.2; FY2021 8.5 - Overall balance: FY2018 2.9; FY2019 3.2; FY2020 4.4; FY2021 -4.8; FY2022 -0.3; FY2023 1.0 - Net Acquisition of Financial Assets: FY2018 -1.8; FY2019 0.5; FY2020 1.3 - External financing (net): FY2018 -0.6; FY2019 -1.2; FY2020 -0.5; FY2021 -1.7 - Domestic financing (net): FY2018 0.1; FY2019 0.0; FY2020 1.1; FY2021 1.4; FY2022 2.2 - Money and credit - Total liquidity (M3): FY2018 7.6; FY2019 4.3; FY2020 1.2; FY2021 -8.9; FY2022 10.6 - Broad money (M2): FY2018 9.4; FY2019 3.5; FY2020 -9.4; FY2021 11.1; FY2022 8.0 - Domestic credit: FY2018 -6.5; FY2019 6.0; FY2020 -15.7; FY2021 18.4; FY2022 12.0 - Private sector credit: FY2018 3.4; FY2019 3.9 - Interest rates (end of period) - Average deposit rate: FY2018 2.3 - Average lending rate: FY2018 8.2; FY2019 8.1 - Balance of payments (In millions of U.S. dollars) - Exports, f.o.b.: FY2018 14.2; FY2019 15.8; FY2020 14.4; FY2021 17.7; FY2022 19.0 - Imports, f.o.b.: FY2018 215.3; FY2019 223.3; FY2020 213.7; FY2021 208.2; FY2022 234.6; FY2023 246.7 - Services balance: FY2018 -15.0; FY2019 -9.3; FY2020 -20.9; FY2021 -88.2; FY2022 -29.7; FY2023 -36.3 - Investment income balance: FY2018 26.4; FY2019 39.9; FY2020 42.2; FY2021 14.7; FY2022 27.4; FY2023 34.6 - Transfers balance: FY2018 158.9; FY2019 172.4; FY2020 154.4; FY2021 181.3; FY2022 168.7; FY2023 182.6 - Of which: Remittances: FY2018 137.1; FY2019 141.6; FY2020 144.9; FY2021 113.8; FY2022 122.4; FY2023 128.0 - Of which: Official grants: FY2018 28.8; FY2019 45.3; FY2020 20.3; FY2021 84.3; FY2022 64.2; FY2023 73.4 - Current account balance: FY2018 -30.7; FY2019 -4.4; FY2020 -19.6; FY2021 -85.9; FY2022 -50.5; FY2023 -46.9 - Gross official foreign reserves (In millions of U.S. dollars) - FY2018 214.9; FY2019 212.8; FY2020 241.9; FY2021 192.3; FY2022 169.1; FY2023 147.7 - In months of next year's total imports: FY2018 7.8; FY2019 9.6; FY2020 5.5 - Debt (in percent of GDP) - Public debt (external and domestic): FY2018 45.9; FY2019 46.3; FY2020 44.6; FY2021 42.7 - Of which: External debt: FY2018 40.5; FY2019 36.4; FY2020 36.2; FY2021 35.1; FY2022 31.6 - External debt service ratio: FY2018 1.7; FY2019 1.5 - Exchange rates - Nominal effective exchange rate (2005=100): FY2018 93.5; FY2019 94.6; FY2020 93.4 - Real effective exchange rate (2005=100): FY2018 101.8; FY2019 102.4; FY2020 99.9 - Memorandum items - Remittances (in percent of GDP): FY2018 28.2; FY2019 28.7; FY2020 23.2; FY2021 23.3 - Tourism (in percent of GDP): FY2018 9.0; FY2019 9.2; FY2020 7.4; FY2021 7.3; FY2022 7.5 - FDI (in percent of GDP): FY2018 4.9; FY2019 0.9; FY2020 0.8 - Nominal GDP (millions of US$): FY2018 485.9; FY2019 516.8; FY2020 504.1; FY2021 491.0; FY2022 526.1; FY2023 551.9 - GDP Growth 2018 - 2023 (Calendar Year Basis): -3.0; 2.8 *Press Release No. 21/30, February 1, 2021.* --- ## References - [https://www.imf.org/-/media/images/imf/bios/imfboard.jpg](https://www.imf.org/-/media/images/imf/bios/imfboard.jpg) - [The Executive Board](https://www.imf.org/external/np/sec/memdir/eds.aspx) - [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) - [Press Releases](https://www.imf.org/en/news/searchnews) - [PRESS CENTER](http://presscenter.imf.org/) - [http://www.IMF.org/external/np/sec/misc/qualifiers.htm](http://www.imf.org/external/np/sec/misc/qualifiers.htm) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2021/01/29/pr2130-tonga-imf-executive-board-concludes-2020-article-iv-consultation_