The 2008/09 financial year was another challenging year for the Tongan economy. The global financial crisis intensified, the world economy slipped into recession and the spillover effects started to affect the Pacific region including Tonga. The Ministry of Finance estimated the Tongan economy to have contracted by 0.4 percent in 2008/09, a downward revision from the 0.4 percent growth released in the Budget Statement in May 2009. The slow down in economic activity largely reflected the impact of the global crisis which led to falling remittances, declining tourism receipts and lower imports.

To counter the adverse impact of the global crisis on the Tongan economy, the National Reserve Bank of Tonga (NRBT) played its part, ensuring that the stability of the Tongan economy and financial system was sound throughout the financial year. I am pleased to report that despite the many challenges to the Tongan economy, the internal and external stability of the country was maintained. The level of official foreign exchange reserves continued to rise reaching 5.3 months of imports at the end of the financial year and inflation continued to fall and stood at 1.2 percent in the year ended June 2009. It is anticipated that the foreign reserves would remain at adequate levels, above 4.0 months of import cover in the next financial year. Inflation is projected to rise in the next financial year in line with there bound in oil prices and the movement in the exchange rate but will remain in single digit.

Monetary policy was adjusted throughout 2008/09 to safeguard the foreign reserves position at an adequate level and curb inflation. In October 2008 the Reserve Bank issued NRBT notes to mop up excess liquidity in the system following the large foreign exchange receipt by government and a private company and the capital injection by the commercial banks in September. In June 2009 the monetary policy stance was eased to enable further reductions in interest rates in order to support credit growth and stimulate sustainable economic activity. The Reserve Bank ceased the issue of NRBT notes and reduced the Statutory Reserve Deposit (SRD) from 10 percent to 5 percent in August 2009. The Reserve Bank also reduced the interest rate on its repurchase facility for banks from 10 percent in March to 4.5 percent in May 2009. The basis of the policy decisions of the Reserve Bank was, as usual, published on the September 2009 Monetary Policy Statement together with the state of the Tongan economy and financial system.

The Reserve Bank issued six new prudential statements to further strengthen the licensed financial institutions’ understanding of the Reserve Bank’s requirements and to comply with the requirements of the Financial Institutions Act. The major challenge for the financial sector was the notable deterioration in asset quality of banks as non-performing loans increased significantly. This was largely attributed to inadequate risk management and oversight, weak lending procedures, and the impact of the slowdown in remittances and economic activity.

Correspondingly, a significant amount of provisioning was raised and banks injected additional capital to meet the Reserve Bank’s minimum capital requirements.

To combat money laundering and terrorist financing, the Reserve Bank continued to work together with the Sub-Committee on Money Laundering and Terrorist Financing in the preparation for Tonga’s mutual evaluation by the Asia Pacific Group on Money Laundering(APG) in November 2009.

The Reserve Bank successfully completed all the projects planned as part of the milestones to mark the coronation of His Majesty King George Tupou V. These projects included the production of the royal scepter, the launch of the new $100 pa’anga note, the unveiling of the new design family of notes, and the minting of the coronation numismatic coin. Another major achievement by the Reserve Bank during the year was the completion of the Staff Job Evaluation Exercise by Price Waterhouse Coopers Ltd (Fiji) which resulted in a salary increase for the Reserve Bank Staff effective from July 2009. The Reserve Bank also successfully completed the National Reserve Bank of Tonga Staff Provident Fund Scheme Rules and setup a Board of Trustee to manage the staffs’ provident fund scheme.

The Reserve Bank responded to the increased demand for its services by the public, the banks and the government during the year. The currency notes on issue to the public increased by $4 million, an increase of 18 percent from the previous year. The total turnover of foreign exchange transactions increased by 80 percent mainly due to large one off transactions carried out by the Bank during the year. The Reserve Bank continued to host the daily settlement of inter-bank transactions. The Reserve Bank carried out its function as the registrar of government bonds and sold all its $9.7 million holdings of government bonds during the year which enhanced the activity in the secondary market for government bonds.

The Reserve Bank continued developing the skills of its staff, through overseas, local and in-house training. Staff participated in courses across a range of central banking functions, including monetary policy formulation and forecasting, bank supervision, anti-money laundering, accounting, human resource management and information technology.

The Reserve Bank’s balance sheet expanded to T$167 million, an increase of 31.3 percent from the previous year attributed mainly to the increase in the level of official foreign reserves over the year. However, the Reserve Bank’s operating profit fell by 34.9 percent from the previous year to T$2.5 million attributed to the global economic and financial crisis and the significant decline in global interest rates throughout the year.

I thank the staff of the Reserve Bank for their efforts during another challenging year for the Reserve Bank and the Tongan economy. I also thank the government and members of the financial sector for their part in ensuring that confidence and stability in the system were maintained. Appreciation is also extended to the members of the Bank’s Board for their continuing support during the year. The assistance from the International Monetary Fund, Pacific Technical Assistance Centre, the Reserve Banks of Australia, New Zealand and Fiji, other regional central banks, the Bank of England Centre for Central Banking Studies, AusAID, NZAid, AUSTRAC, AMLAT and the Pacific Anti-Money Laundering Project is also gratefully acknowledged.

Governor Siosi Mafi