IMF Executive Board Concludes 2022 Article IV Consultation with Tonga

IMF News, August 26, 2022

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Canonical URL: IMF Executive Board Concludes 2022 Article IV Consultation with Tonga

Tonga was hit by a double shock in early 2022: the Hunga Tonga–Hunga Haʻapai volcanic eruption and a local outbreak of COVID-19.
The natural disaster and two national lockdowns in early 2022 derailed the nascent recovery from Tropical Cyclone Harold and earlier border closures.
These shocks caused substantial damages to properties and public infrastructures and brought virtually all activities to a halt in the first quarter of 2022.

Real GDP:
- FY2019–FY2024 (annual percent change): 0.7, 0.5, -2.7, -1.9, 3.2, 3.0
- Real GDP is expected to decline by -1.9 percent in FY2022, following a contraction of -2.7 percent in FY2021.
Inflation:
- Consumer prices (period average): 3.3, 0.4, 1.4, 8.4, 4.7, 3.4 (FY2019–FY2024)
- Consumer prices (end of period): -0.1, -1.4, 6.9, 9.7, 3.8, 2.9 (FY2019–FY2024)
Balance of payments and reserves:
- Gross official foreign reserves (in millions of U.S. dollars): 212.8, 237.2, 317.9, 324.1, 231.8, 132.2 (FY2019–FY2024)
- Reserves have been maintained at comfortable levels (over nine months of import cover) since FY2020.
Outlook:
- Annual GDP growth is projected at 3.2 percent in FY2023, led by reconstruction and policy support.
- Tourism is expected to contribute to the growth rebound with planned gradual reopening of international borders during FY2023, with a meaningful pickup likely in FY2024 after further progress in repairs and reconstruction.
Downside risks:
- Natural disasters.
- A faster-than-expected rise in international food and energy prices.
- A new highly contagious and lethal COVID-19 variant or a new virus.
- Loss of correspondent banking relationships.

Fiscal:
- Authorities deployed significant fiscal support measures to protect the vulnerable and sectors hard-hit by the pandemic and natural disasters, enabled by prior fiscal space and international financial support.
- Foreign exchange reserves remained comfortable (over nine months of import cover) since FY2020.
Monetary and financial:
- Current monetary policy settings judged appropriate; authorities should be ready to tighten the stance if needed.
- Banks remain well-capitalized, but financial sector risks have risen.
- Authorities encouraged to monitor credit risks, ensure adequate provisioning for loan losses, and remain vigilant of non-bank financial institutions.
- Support for developing a macroprudential policy framework and welcome for the establishment of the Financial Stability Unit.

Directors commended swift actions to protect the vulnerable after the eruption and COVID-19 outbreak.
Emphasis on continuing short-term support for recovery and implementing structural reforms to:
- Enhance Tonga’s climate resilience.
- Raise long-term growth potential.
Given Tonga’s high risk of debt distress and sizable financing needs, Directors underscored the importance of continued international financial support, including grants and debt relief, and Fund capacity development.
Fiscal medium-term guidance:
- Short term: support recovery and reconstruction; provide targeted assistance to low-income households and hard-hit sectors.
- Medium term: a fiscal adjustment will be needed once recovery is entrenched.
- Recommended measures: rationalize tax exemptions, strengthen tax administration, improve spending efficiency, contain the public wage bill.
- Preserve debt sustainability and avoid non-concessional financing.
- Enhance transparency and accountability of government operations and follow through on prior emergency financing governance commitments.
Structural reform priorities:
- Improve the regulatory framework for foreign direct investment.
- Expand and upgrade public infrastructure.
- Increase social spending.
- Enhance land leasehold market operations.
- Continue strengthening the AML/CFT framework to reduce risks to correspondent banking relationships.

Population (2020): 106 thousands
Quota: SDR 13.2 million
Major exports: root crops, vanilla, squash, fish
Real GDP (annual percent change, FY2019–FY2024): 0.7; 0.5; -2.7; -1.9; 3.2; 3.0
Consumer prices (period average, FY2019–FY2024): 3.3; 0.4; 1.4; 8.4; 4.7; 3.4
Total Revenue (in percent of GDP, FY2019–FY2024): 41.7; 44.2; 48.3; 51.5; 45.8; 39.9
Grants (in percent of GDP, FY2019–FY2024): 18.3; 19.1; 22.4; 30.2; 20.5; 14.6
Total Expenditure (in percent of GDP, FY2019–FY2024): 38.6; 38.8; 49.3; 53.6; 50.6; 45.0
Overall balance (in percent of GDP, FY2019–FY2024): 5.4; -1.0; -2.1; -4.8; -5.2
Remittances (in percent of GDP, FY2019–FY2024): 27.4; 29.3; 42.3; 37.5; 30.1
Tourism (in percent of GDP): 11.1; 8.2
Nominal GDP (millions of US$): 511.3; 490.2; 470.5; 499.7; 534.9; 569.5
Gross official foreign reserves (in millions of U.S. dollars, FY2019–FY2024): 212.8; 237.2; 317.9; 324.1; 231.8; 132.2
Gross official foreign reserves (in months of next year's total imports, FY2019–FY2021): 9.5; 10.0; 9.2
Public debt (external and domestic, in percent of GDP, FY2019–FY2024): 41.3; 43.6; 47.5; 47.6; 45.5; 47.9
Of which: External debt (in percent of GDP, FY2019–FY2024): 36.4; 37.4; 41.2; 39.3; 35.8; 32.0

IMF Executive Board Concludes 2022 Article IV Consultation with Tonga (Press Release No. 22/291).