IMF Staff concludes Article IV Mission to Tonga

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

An International Monetary Fund (IMF) mission led by Yasuhisa Ojima visited Nuku’alofa from February 16 – 27 to conduct the 2015 Article IV consultation discussions. The mission met with Prime Minister Honorable ‘Akilisi Pohiva, Minister for Finance and National Planning Honorable Dr. ‘Aisake Valu Eke, Governor of the National Reserve Bank of Tonga Dr. Sione Ngongo Kioa, and other senior government officials, as well as development partners and private sector representatives.

At the conclusion of the mission, Mr. Ojima issued the following statement:

“We estimate that Tonga’s economy grew by around 2 percent in fiscal year (FY) 2013/14 (year ending June), driven by agriculture and construction, following a contraction in 2012/13 mainly caused by the completion of a large capital project. Inflation has remained moderate at around 0-3 percent in recent years, reflecting low global food prices and, more recently, a sharp decline in oil prices. The external position has strengthened thanks to grants and remittance inflows, which have bolstered international reserves.

“Real GDP growth is expected to average 2-3 percent in FY2014/15 – FY2019/20. Although the progress of reconstruction in the aftermath of 2014 Cyclone Ian is slower than expected, the coronation scheduled for July 2015 and preparations for the 2019 South Pacific Games will support economic activity over the next few years. Meanwhile, inflation is projected to remain low, reflecting the weak outlook for global commodity prices.

“The balance of risks remains tilted toward the downside. Spillovers from a protracted period of slower growth in advanced and emerging economies could weigh on Tonga, mainly due to its economic ties with Australia and New Zealand. On the domestic side, potential cost overruns relating to the Games could make it necessary to mobilize additional fiscal resources.

“Fiscal spending pressures in the near term remain high, due to reconstruction work and wage increases for civil servants. Although reconstruction spending would be offset by grant inflows, moderating the share of the wage bill in recurrent spending remains important, and can best be achieved by restraining wage increases.

“The key medium-term fiscal challenge is to build sound fiscal positions to bolster Tonga’s resilience to shocks. The mission welcomes the ongoing tax reforms and the government’s adoption of a roadmap for public financial management reform. These efforts should be complemented by setting clear medium-term fiscal targets such as achieving a primary balance surplus, to ensure fiscal sustainability. The mission also recommends that the authorities closely control the spending program for the South Pacific Games to avoid any potential cost overruns.

“The mission recommends maintaining international reserves at the current level to help safeguard external stability. Since inflation has been consistently below the reference range of 6-8 percent, the mission also encourages the authorities to moderate the informal inflation range to a lower reference rate, set at the medium-term inflation trend, in order to better anchor inflation expectations over the medium term.

“Tangible progress has been made in improving commercial banks’ balance sheets and strengthening the legal framework of the financial sector. The mission encourages the authorities to manage macro-financial risks by enhancing macro-prudential measures and strengthen asset quality through increased on-site inspection.

“Raising Tonga’s potential growth remains a key challenge, and the updated Tonga Strategic Development Framework plays a pivotal role to make growth more sustainable and inclusive. Therefore, the mission underscores the importance of structural reforms to the business climate to support private sector development and raise growth prospects, including through initiatives such as revising the Foreign Investment Act.

“The IMF will continue to support Tonga’s reform efforts by providing technical assistance in the areas of public financial management, banking regulation and supervision, and macroeconomic statistics.

“The mission wishes to thank the authorities for their hospitality and constructive discussions held.”

- Courtesy of the International Monetary Fund
Press Release No. 15/73
Dated. 26 February 2015

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