Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation for Tonga[1] and considered and endorsed the staff appraisal without a meeting.[2] The authorities have consented to the publication of the Staff Report prepared for this consultation.[3]
Tonga’s economy expanded by 2.7 percent in FY2025, supported by robust reconstruction activity, strong remittance inflows, a rebound in tourism, and stronger-than-expected grants inflows. Growth is projected to moderate to 2.3 percent in FY2026 as reconstruction outlays normalize and supply-side constraints persist. Headline inflation has eased below the 5 percent reference rate of National Reserve Bank of Tonga (NRBT), but core inflation has risen to nearly 10 percent, reflecting strong domestic demand pressures. Risks in the banking sector remain contained but have increased and require continued vigilance.
Tonga’s external position in FY2025 remained solid, with ample reserves covering about 10½ months of imports. While reconstruction-related imports widened the current account deficit from 3.8 percent of GDP in FY2024 to 5.2 percent in FY2025, this was financed by sizable capital transfers.
The outlook is favorable but subject to significant risks. A sharper global slowdown, weaker remittances, or natural disasters could weigh on growth. Tonga also faces long-standing structural constraints that limit potential growth, including high outward migration, a narrow economic base, and vulnerability to climate shocks. Addressing these challenges will require sustained reforms to deepen financial markets, improve the business environment, strengthen governance—including at state-owned financial institutions—and enhance resilience to natural disasters.
Executive Board Assessment
In concluding the 2025 Article IV Consultation with Tonga, Executive Directors endorsed the staff’s appraisal, as follows:
Tonga’s economy continues to expand, driven by reconstruction, public investment, strong remittances, and rebound in tourism. Growth is projected to peak at 2.7 percent in FY2025 before moderating as large projects wind down and supply-side constraints persist. Medium-term prospects remain subdued, constrained by high disaster vulnerability, outward migration, and structural impediments from Tonga’s small size and remoteness.
The proposed fiscal stance for FY2026 is appropriately contractionary. The expansionary fiscal stance in FY2025 has supported the recovery, but with the economy on firmer footing, a shift toward rebuilding buffers in FY2026 is appropriate.
Over the medium term, gradual fiscal consolidation and additional grant financing are essential to put debt on a firm downward path. Given Tonga’s high risk of debt distress, consolidation should focus on mobilizing domestic revenues—including phasing out inefficient exemptions—improving tax administration, enhancing spending efficiency, and securing grants. The authorities should also refrain from non-concessional borrowing, while strengthening PFM capacity to ensure effective project implementation and support donor confidence.
With the economy on a firmer footing and incipient signs of demand-driven price pressures, monetary policy should shift from accommodative to neutral. Given the spike in core prices and the ample liquidity in the banking system, monetary policy should begin moving toward a neutral stance, with readiness to tighten further in a data-dependent manner.
This shift will be underpinned by a milestone reform—announced by the NRBT following IMF technical assistance—to transition to a mid-rate interest rate corridor monetary policy framework. The NRBT’s plan to issue short-term securities and transition to a corridor-type framework will help absorb excess liquidity, establish a positive policy rate, and lay the foundation for a more effective interbank market.
The financial system is broadly stable, with banks well-capitalized and liquid, though rising credit risks call for more proactive supervision. Stronger oversight of credit unions and pension funds, alongside continued progress on AML/CFT, will be critical to safeguard financial integrity and preserve correspondent banking ties.
Structural reforms remain vital to lift Tonga’s low growth potential. Priorities include advancing financial deepening and access to credit, mitigating the effects of emigration through education and training, accelerating digital adoption, cutting red tape, and addressing governance vulnerabilities. Tonga’s leadership in establishing the Pacific Resilience Facility is welcome, as is the creation of the Anti-Corruption Commission. Sustained investment in statistical capacity is also needed to support policymaking and surveillance.
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Tonga: Selected Economic Indicators, FY2022-20261/ |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
[3] Under the IMF's Articles of Agreement, publication of documents that pertain to member countries is voluntary and requires the member consent. The staff report will be shortly published on the www.imf.org/Tonga page.
