The Tongan economy continued to be affected by the prolonged impact of the global financial crisis through the continuing fall in remittances, credit contraction and stagnant exports. Domestic economic activity has been supported by foreign aid funded construction and infrastructure projects as well as tourism activity. However, rising oil prices and the uncertainty in the global economy posed major challenges to the economic and financial condition of the country and similarly to the conduct of the Reserve Bank’s monetary policy and prudential supervision policy.

Despite these challenges, the external balance of the country continued to improve, and stability and confidence in the financial sector was maintained. The level of foreign reserves continued to increase throughout the financial year reaching 7.7 months of imports at the end of June 2011. The receipts of official foreign aid from Tonga’s development partners and private capital inflows combined with suppressed domestic demand supported the official foreign reserves over the year. Inflation picked up on the back of rising food and fuel prices which had a significant impact on the domestic economy. After peaking at 9.7 percent in May 2011, annual inflation fell to 7.9 percent at the end June. Looking ahead, the level of foreign reserves will remain at adequate levels and inflation is projected to remain below 8 percent on the back of the IMF forecast that world oil prices will fall in the next 12 months. However, downside risks remain from the global economic uncertainty and financial volatility, and the country’s debt position which would continue to affect the outlook for the Tongan economy.

The National Reserve Bank of Tonga (NRBT) monetary policy primary objectives continued to focus on maintaining an adequate level of foreign reserves and promoting low and stable inflation. In 2010/11, the monetary policy stance remained accommodative. Despite the policy measures implemented by the Reserve Bank in 2009/10 to maintain a high level of liquidity in the banking system to support credit growth and stimulate economic activity, the banks’ balance sheet consolidation, tight credit conditions, and their focus on recovering of non performing loans continued to mute the effectiveness of these policy measures. The Reserve Bank’s monetary policy stance remained unchanged in 2010/11. The basis of the monetary policy decisions of the Reserve Bank are published on its six monthly Monetary Policy Statements.

In 2010/11, the financial system remained safe and sound. As the bank regulator and supervisor, the Reserve Bank continued its effort to reduce the vulnerability of the financial system to credit and liquidity risks to protect the interests of depositors. Proactive monitoring of the banks’ capital position continued during the year to ensure that the minimum risk weighted capital ratio is maintained at all times. The Reserve Bank continued to promote transparency by enforcing compliance with its disclosure requirements under Prudential Statement No. 4. During the year, stress tests were conducted internally focusing on credit and liquidity risk to ensure banks are able to withstand any further deterioration in their operations. The Reserve Bank continued to meet with the Association of Banks Tonga (ABT) to discuss issues that would support a sound and stable financial system. Given the significance of the Retirement Fund Board (RFB) in the banking system the Reserve Bank commenced quarterly meetings with the RFB to discuss matters that could affect the stability of the financial system.

During 2010/11, the Transaction Reporting Authority (TRA) in coordination with members of the National Committee and the Sub-Committee on Money Laundering and Terrorist Financing focused on the preparation and compilation of the Strategic Implementation Plan (SIP) for addressing the recommendations from the Mutual Evaluation report which was due in May 2011. The TRA continued working closely with members of the National Committee and the APG in ensuring that Tonga complies with Tonga’s APG membership and the international requirements.

The Reserve Bank continued working towards maintaining the quality of notes and coins in circulation at a high standard. A review of the currency operations as well as public notices on counterfeit notes and consultations with the banks on maintaining a high quality of currency in circulation was conducted. During the year, the Reserve Bank continued its efforts to comply with the Information Technology (IT) Audit report recommendations in 2009, which included formalizing of the Reserve Bank’s IT Policies and changing the Bank’s network topology. The Reserve Bank continued updating the Bank’s website with its publications, authorized statistics and press releases to inform its stakeholders and the public.

During the year, the Reserve Bank continued to strengthen its capacity building through supporting staff training on the job, in-house, locally and abroad. Staff participated in courses across a range of central banking functions to enhance their skills and the effectiveness and efficiency of their performances.

The annual accounts of the National Reserve Bank of Tonga continued to comply with the requirements of the International Financial Reporting Standards, with the exception of the treatment of foreign currency gains and losses, which meets the provisions of the National Reserve Bank of Tonga Act, 1988. The Reserve Bank’s balance sheet expanded to T$235 million, an increase of 17.7 percent from the previous year mainly due to the increase in the level of official foreign reserves over the year. The Reserve Bank’s net operating profit increased by 86 percent from the previous year to T$2.4 million.

I would like to thank the Board of Directors for their continued support and guidance during the year. I acknowledge the support from the Government of Tonga and the financial sector in ensuring that the stability of the financial system was maintained. I am grateful to the International Monetary Fund, World Bank, Asian Development Bank, Pacific Technical Assistance Centre (PFTAC), the Reserve Banks of Australia, New Zealand and Fiji, other regional central banks, the Bank of England Centre for Central Banking Studies, AusAid, NZAid and APG for technical assistances provided to the National Reserve Bank of Tonga in 2010/11. Finally, I extend my appreciation to the staff of the Reserve Bank for their efforts and dedication during 2010/11.

Governor Siosi Mafi