## IMF Executive Board Concludes 2022 Article IV Consultation with Tonga

_IMF News, August 26, 2022_

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## Bibliographic details
- Published: August 26, 2022

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### Background and recent shocks
- 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.

### Economic impact and near-term outlook
- 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.

### Macroeconomic policy response to date
- 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.

### Executive Board assessment and priorities
- 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.

### Key statistics (selected, exact figures from Table 1)
- 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).*

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## References

- [Tonga and the IMF](http://www.imf.org/external/country/TON/index.htm)
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_Source: https://www.imf.org/en/news/articles/2022/08/26/pr22291-imf-executive-board-concludes-2022-article-iv-consultation-with-tonga_