Technical Assistance Reports

The IMF conducted a Technical Assistance (TA) mission to assist the National Reserve Bank of Tonga (NRBT) in determining an appropriate policy rate and in implementing an effective liquidity management and forecasting framework. This TA mission serves as a follow-up to previous IMF TA, which provided recommendations to the NRBT for modernizing its monetary policy implementation framework. The mission found that the NRBT has made commendable progress in modernizing its monetary policy implementation framework, including the establishment of an appropriately designed interest rate corridor with standing facilities and open market operations. However, the NRBT’s policy rate of 2 percent lacked analytical justification. In addition, liquidity forecasting was insufficiently robust, limiting effective liquidity management and the potential for interest rate steering. There were also gaps in the institutional arrangements for liquidity management, particularly relating to the lack of systematic daily monitoring of government account flows, which impaired forecast accuracy. To address these deficiencies, the mission recommended creating a dedicated Liquidity Forecasting Unit (LFU) to centralize data collection, forecast daily liquidity, and support policy decisions. The NRBT should utilize advanced statistical techniques provided by the mission to assist with forecasting liquidity and publish the results. In relation to the policy rate, an analytical framework was provided by the mission. A phased approach was also advised for adjusting the policy rate, which entails gradually moving towards an appropriate rate, thereby allowing market adaptation. Implementing these recommendations will enhance monetary policy effectiveness, market development, and safeguard Tonga’s exchange rate peg and financial stability.