{
  "title": "Tonga: Staff Concluding Statement of the 2023 Article IV Mission",
  "publication": "IMF News, August 7, 2023",
  "sourceUrl": "https://www.imf.org/en/news/articles/2023/08/04/tonga-staff-concluding-statement-of-the-2023-article-iv-mission",
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  "summary": "The Tongan economy is rebounding strongly from a major double shock in early 2022. After an estimated contraction of 2 percent in FY2022, real GDP is estimated to have expanded by 2.6 percent in FY2023 (July 2022-June 2023).",
  "publishDate": "2023-08-07",
  "sections": [
    {
      "heading": "Key findings and recent developments",
      "content": "- The Tongan economy is rebounding strongly from a major double shock in early 2022.\n- Real GDP:\n  - FY2022: contraction of 2 percent (estimated).\n  - FY2023 (July 2022-June 2023): expansion of 2.6 percent (estimated).\n- Recovery drivers in FY2023:\n  - Bold policy support measures in response to the Hunga Tonga‒Hunga Ha’apai (HTHH) volcanic eruption-tsunami and the local COVID-19 outbreak.\n  - Aid from the international community.\n  - Strong domestic demand and a pickup in tourist arrivals after border reopening in August 2022.\n- Inflation and supply constraints:\n  - Headline inflation peaked at 14.1 percent in September 2022 and moderated to 6.6 percent in May 2023.\n  - Core inflation showed no signs of easing since September 2022.\n  - Labor shortages due to seasonal worker programs in Australia and New Zealand and slow rebuilding of damaged tourism facilities.\n- Credit developments:\n  - Bank credit growth positive since September 2022, reaching 5.9 percent (y/y) in May 2023.\n  - Bank lending to businesses: 12.5 percent (y/y) in May 2023.\n  - Household lending: 1.2 percent (y/y) in May 2023, with around 80 percent towards housing.\n  - Government Development Loan (GDL) scheme provided subsidized interest rate loans to small businesses and low-income households."
    },
    {
      "heading": "Outlook and risks",
      "content": "- Short-term outlook:\n  - Growth FY2024 projected at 2.5 percent, underpinned by public investment.\n  - Tourism receipts as share of GDP expected to remain below pre-pandemic levels until FY2026 due to slow reconstruction of damaged facilities.\n  - Remittances projected to decline from 44.2 percent of GDP in FY2023 to 39.7 percent in FY2024.\n  - Average inflation projected at 5.8 percent in FY2024—above the NRBT’s reference rate of 5 percent.\n- Medium-to-long-term prospects:\n  - Long-term growth projected at 1.2 percent.\n  - FX reserve coverage projected to stabilize at about 11 months of imports, above the NRBT’s target of 7½ months, supported by external financing.\n- Risk assessment:\n  - Risks tilted to the downside: limited productive capacity, strong foreign demand for workers, potential sharp increase in global commodity prices, frequent natural disasters, and loss of correspondent banking relationships (CBRs) affecting remittances.\n  - Upside risk: faster-than-expected recovery in tourism.\n- Debt distress assessment:\n  - Tonga assessed as being at high risk of debt distress.\n  - Without additional grant commitments to IMF staff’s baseline projection, PV of public debt-to-GDP projected to rise and remain above the 70 percent debt-distress benchmark starting in FY2033.\n  - Debt obligations largely external, with over half to China Exim Bank.\n  - Debt repayments expected to surge in FY2024 and stay elevated at over 3 percent of GDP until FY2027."
    },
    {
      "heading": "External position",
      "content": "- Current account:\n  - CAD widened from 6.3 percent of GDP in FY2022 to 7.9 percent in FY2023 (estimated).\n- Reserves and external support:\n  - FX reserves increased in FY2023; import cover strengthened to about 11 months.\n  - Supported by official capital transfers and the IMF’s Rapid Credit Facility (RCF) disbursement in July 2022."
    },
    {
      "heading": "Fiscal policy recommendations and assessment",
      "content": "- Recent fiscal performance:\n  - Primary deficit declined from 0.6 percent of GDP in FY2021 to 0.2 percent in FY2022.\n  - Primary fiscal balance expected to shift to a surplus of 1.0 percent in FY2023 (driven by HTHH-related external grants more than offsetting reconstruction expenditures).\n- FY2024 budget and near-term stance:\n  - Expanded budget envelope for FY2024 appropriate to support reconstruction and strengthen social protection.\n  - Primary balance expected to revert to a deficit of 6.3 percent of GDP in FY2024 as HTHH-related grants unwind and reconstruction spending ramps up.\n  - Authorities have phased out most pandemic- and HTHH-related tax exemptions and plan gradual normalization of current spending, including limiting the public sector wage bill.\n  - Government plans to top-up the GDL fund to help vulnerable households access credit.\n- Medium-term fiscal needs and policy recommendations:\n  - Combination of domestic fiscal measures and additional donor support required to meet development spending needs while minimizing debt distress risk.\n  - Suggested fiscal adjustments:\n    - Gradual increases in tax revenues.\n    - Further reductions in the public wage bill and other current expenditures.\n    - Refrain from new non-concessional borrowing (government’s plan).\n  - Critical to secure new grants in line with historical trends to fund capital investment projects.\n- Public financial management and revenue administration reforms:\n  - Continue rollout of the Electronic Sales Register System to improve revenue compliance.\n  - Amendments to the PFM Act to improve fiscal transparency and medium-term budgeting.\n  - Reduce tax exemptions and strengthen governance for granting exemptions (clear eligibility criteria, limited timeframes, Minister of Finance authority).\n  - Publish pandemic-related procurement contracts with information on beneficial ownership as committed under IMF’s RCF."
    },
    {
      "heading": "Monetary and exchange rate policy recommendations",
      "content": "- NRBT recent actions:\n  - Increased statutory reserve deposit (SRD) ratio from 10 to 15 percent in February 2023.\n  - Maintained the policy rate (rate on excess bank reserves) at zero percent.\n  - Established a deposit facility for retirement funds in February 2023.\n  - These measures helped absorb banking system liquidity but have yet to meaningfully impact aggregate demand.\n- Policy needs to contain inflation:\n  - Under staff’s baseline with current settings, inflation would remain above the reference rate until end-FY2024.\n  - Recommendation: further tighten monetary policy to prevent high inflation expectations from becoming entrenched.\n  - Specific options:\n    - Increase the policy rate from the current zero percent level.\n    - Possibly combine with a further hike in the SRD ratio to mop up liquidity.\n  - Rationale: raising the policy rate now creates room to lower it if downside risks materialize (e.g., a major natural disaster).\n- Framework enhancements:\n  - Consider resuming issuance of NRBT notes (suspended since 2009) to provide a market-based instrument to absorb excess liquidity.\n  - Clarify operational guidelines for transfer of profits, coverage of losses, and recapitalization to avoid concerns about NRBT’s operational independence if sterilization costs rise."
    },
    {
      "heading": "Financial sector policies and recommendations",
      "content": "- Systemic soundness:\n  - System-wide capital adequacy ratio around 35 percent in 2023Q1 (regulatory requirement 15 percent).\n  - Excess reserves at 30.2 percent of GDP as of April 2023.\n  - Banks remain profitable, though average return on assets below pre-pandemic levels as of end-FY2022.\n- Asset quality:\n  - NPL ratio increased from 3.6 percent at end-2021 to 7.4 percent in 2023Q1.\n  - Business NPLs rose faster (distribution and construction leading); household NPL share declined, with housing loans accounting for over 75 percent of household NPLs.\n  - NPL coverage ratio declined from 141.3 percent at end-2021 to 99.3 percent in 2023Q1.\n  - Capacity to withstand another severe near-term shock likely weakened.\n- Recommended supervisory and regulatory actions:\n  - More intrusive oversight for banks with higher NPLs (frequent/detailed reporting, intensified on-site supervision, possible dividend restrictions).\n  - Require more conservative provisioning, including for secured loans (at least partly) and overdue non-NPL loans.\n  - Request bank NPL resolution plans with concrete operational targets (e.g., reduce NPLs to a target level over a specified time window; maintain provisioning above a minimum threshold).\n  - Streamline prudential standards and enhance data collection with IMF TA support.\n  - Broaden NRBT’s regulatory and supervisory remit to cover non-bank financial institutions (NBFIs).\n- Financial deepening and inclusion:\n  - Support NRBT initiative to set up a local credit registry and expand it to include NBFIs.\n  - Strengthen financial literacy through financial education in schools and community engagement."
    },
    {
      "heading": "Structural reforms and capacity building",
      "content": "- Disaster resilience and climate change:\n  - Top reform priority: enhance resilience to natural disasters and climate change.\n  - Disaster Risk Management Act of 2023 shifts focus from ex-post responses to ex-ante risk mitigation and preparedness.\n  - Priorities: expand classification of climate change-related spending, strengthen social protection, enforce Building Code (especially for residential properties), facilitate relocation to safer grounds, allocate adequate fiscal resources.\n- Private sector development and human capital:\n  - Digitalization and national digital ID system are key to overcoming geographic barriers and improving public service delivery.\n  - Reinforce digital ID with government-wide move away from paper-based processes and investment in ICT and internet coverage.\n  - Other priorities:\n    - Increase government spending on education and training to reduce skill mismatch.\n    - Reduce gender inequality in the labor market; enact the Employment Relations Bill to better protect women.\n    - Cut red tape hindering private investment; improve efficiency of land leasehold administration (e.g., necessary IT systems).\n    - Strengthen AML/CFT framework; address gaps identified by Asia Pacific Group on Money Laundering (APG) in the Mutual Evaluation Report, including amendments to the AML Act.\n- Statistics and capacity constraints:\n  - Severe capacity constraints in producing timely macroeconomic statistics.\n  - Delays in publishing core macroeconomic data (national accounts, external sector statistics) have become more prolonged and frequent.\n  - Need stricter enforcement of current law on data sharing and cooperation across ministries.\n  - IMF provided extensive TA in national accounts, government finance, and balance of payments."
    },
    {
      "heading": "Key statistics (selected)",
      "content": "- Population (2021): 100 thousands\n- Major exports: root crops, vanilla, squash, fish\n\nTable 1 (selected indicators, est. and projections)\n- Real GDP growth:\n  - FY2021: -2.7\n  - FY2022: -2.0\n  - FY2023: 2.6\n  - FY2024: 2.5\n  - FY2025: 2.2\n- Consumer prices (period average):\n  - FY2021: 1.4\n  - FY2022: 8.5\n  - FY2023: 10.0\n  - FY2024: 5.8\n  - FY2025: 4.1\n- Consumer prices (end of period):\n  - FY2021: 6.9\n  - FY2022: 11.3\n  - FY2023: 6.1\n  - FY2024: 6.2\n  - FY2025: 3.2\n- Central government finance (percent of GDP):\n  - Revenue: FY2021 48.3; FY2022 45.2; FY2023 47.7; FY2024 41.6; FY2025 37.6\n  - Grants (of revenue): FY2021 22.4; FY2022 19.0; FY2023 24.4; FY2024 17.0; FY2025 12.9\n  - Expenditure: FY2021 49.3; FY2022 45.9; FY2023 47.4; FY2024 46.1; FY2025 …\n  - Expense: FY2021 41.8; FY2022 40.1; FY2023 37.3; FY2024 35.1\n  - Net acquisition of nonfinancial assets: FY2021 7.5; FY2022 5.9; FY2023 7.2; FY2024 11.0; FY2025 …\n  - Primary balance: FY2021 -0.6; FY2022 -0.2; FY2023 1.0; FY2024 -6.3; FY2025 -8.0\n  - Overall balance: FY2021 -1.0; FY2022 -0.7; FY2023 0.4; FY2024 -6.8; FY2025 -8.5\n  - Overall balance (excl. grants): FY2021 -23.4; FY2022 -19.7; FY2023 -24.0; FY2024 -23.8; FY2025 -21.4\n- Money and credit (annual percent change):\n  - Broad money (M2): FY2021 25.0; FY2022 13.4; FY2023 -0.1; FY2024 4.5; FY2025 3.4\n  - Domestic credit: FY2021 -8.2; FY2022 -3.3; FY2023 3.9; FY2024 16.1; FY2025 8.8\n- Balance of payments (millions of U.S. dollars):\n  - Current account balance: FY2021 -24.7; FY2022 -31.5; FY2023 -43.1; FY2024 -41.1; FY2025 -45.1\n  - Exports of goods, f.o.b.: FY2021 16.2; FY2022 15.1; FY2023 16.3; FY2024 18.4; FY2025 19.6\n  - Imports of goods, f.o.b.: FY2021 214.5; FY2022 214.9; FY2023 295.7; FY2024 285.7; FY2025 295.4\n  - Tourism receipts: FY2021 9.1; FY2022 9.6; FY2023 35.6; FY2024 50.9; FY2025 58.5\n  - Total remittances: FY2021 220.6; FY2022 218.5; FY2023 242.1; FY2024 230.9; FY2025 227.9\n  - Remittances (percent of GDP):\n    - Est./Proj: FY2021 46.9; FY2022 43.9; FY2023 44.2; FY2024 39.7; FY2025 37.5\n  - Compensation of overseas workers: FY2021 41.0; FY2022 37.9; FY2023 47.1; FY2024 51.9; FY2025 56.9\n  - Personal remittances: FY2021 179.6; FY2022 180.6; FY2023 195.0; FY2024 179.0; FY2025 171.0\n  - Official grants: FY2021 10.5; FY2022 26.4; FY2023 85.4; FY2024 75.1; FY2025 78.4\n  - Capital account balance: FY2021 69.1; FY2022 84.6; FY2023 53.1; FY2024 29.0; FY2025 5.4\n  - Financial account balance: FY2021 1.1; FY2022 23.7; FY2023 -6.6; FY2024 25.3\n  - Gross official foreign reserves (millions of U.S. dollars): FY2021 317.9; FY2022 375.5; FY2023 388.1; FY2024 401.4; FY2025 409.1\n  - Reserves (months of next year's total imports): FY2021 11.7; FY2022 10.3; FY2023 10.9; FY2024 10.8; FY2025 …\n- Debt and external indicators:\n  - Public debt (external and domestic): FY2021 47.8; FY2022 45.4; FY2023 41.2; FY2024 51.6\n  - Of which: External debt: FY2021 39.4; FY2022 37.2; FY2023 38.0\n  - External debt service ratio: FY2021 0.7; FY2022 1.5; FY2023 2.1; FY2024 3.8; FY2025 3.5\n- Nominal GDP (millions of US$): FY2021 470.5; FY2022 497.6; FY2023 547.2; FY2024 581.1; FY2025 607.5\n- Real effective exchange rate (2010=100; +=appreciation): FY2021 107.1; FY2022 115.7\n\nSource: IMF staff concluding statement of the 2023 Article IV mission for Tonga.\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- IMF-World Bank 2021 Climate Change Policy Assessment Report\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2023/08/04/tonga-staff-concluding-statement-of-the-2023-article-iv-mission"
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    "Published: August 7, 2023",
    "The Tongan economy is rebounding strongly from a major double shock in early 2022.",
    "Real GDP:",
    "Recovery drivers in FY2023:",
    "Inflation and supply constraints:",
    "Credit developments:",
    "Short-term outlook:",
    "Medium-to-long-term prospects:",
    "Risk assessment:",
    "Debt distress assessment:",
    "Current account:",
    "Reserves and external support:",
    "Recent fiscal performance:",
    "FY2024 budget and near-term stance:",
    "Medium-term fiscal needs and policy recommendations:",
    "Public financial management and revenue administration reforms:",
    "NRBT recent actions:",
    "Policy needs to contain inflation:",
    "Framework enhancements:",
    "Systemic soundness:",
    "Asset quality:",
    "Recommended supervisory and regulatory actions:",
    "Financial deepening and inclusion:",
    "Disaster resilience and climate change:",
    "Private sector development and human capital:",
    "Statistics and capacity constraints:",
    "Population (2021): 100 thousands",
    "Major exports: root crops, vanilla, squash, fish",
    "Real GDP growth:",
    "Consumer prices (period average):",
    "Consumer prices (end of period):",
    "Central government finance (percent of GDP):",
    "Money and credit (annual percent change):",
    "Balance of payments (millions of U.S. dollars):",
    "Debt and external indicators:",
    "Nominal GDP (millions of US$): FY2021 470.5; FY2022 497.6; FY2023 547.2; FY2024 581.1; FY2025 607.5",
    "Real effective exchange rate (2010=100; +=appreciation): FY2021 107.1; FY2022 115.7",
    "[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/)",
    "[IMF-World Bank 2021 Climate Change Policy Assessment Report](https://www.imf.org/en/Publications/CR/Issues/2020/06/30/Tonga-Technical-Assistance-Report-Climate-Change-Policy-Assessment-49537)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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