The uncertainty in the global economy and the international markets during 2011/12 continued to pose challenges to the recovery of the Tongan economy. The spillover effects of these international developments contributed to the difficulty in achieving the desired outcome of the Reserve Bank’s monetary policy. The Reserve Bank’s target was for the Kingdom’s foreign exchange reserves to remain above three to four months of import cover and for inflation to remain below 6 percent per annum. Throughout the 2012 financial year, the level of official foreign reserves remained above seven months of import cover and overall inflation remained well below 6 percent in the last 9 months of the year. The Reserve Bank therefore considered it appropriate to retain the highly accommodative policy stance that it had adopted over the 2011 financial year, and made no changes to monetary policy. A more detailed rationale behind the Reserve Bank’s monetary policy decisions is published in the Reserve Bank’s semi-annual Monetary Policy Statements.

The accommodative monetary policy was implemented mainly through leaving as much liquidity as possible in the banking system targeted at strengthening banks’ individual incentives to increase lending. This measure however, was not strong enough to outweigh other forces that have been reducing banks’ appetite to lend. At the same time demand for credit continued to be affected by the prolonged impact of the Global Financial Crisis (GFC) through reduced income.

With the Reserve Bank’s monetary policy tools at their expansionary limits, and the desired outcomes of credit growth not realized, the Reserve Bank organized an Economic Dialogue in March 2012 with a theme, “Growing the economy: a collective effort”. The dialogue engaged businesses, large and small and other stakeholders in a discussion of Tonga’s economic situation and what could help to stimulate economic activity. The key findings agreed to at the dialogue were presented in a paper to the Government through the Ministry of Finance in March 2012, published in the local newspapers, and posted on the Reserve Bank’s website. The Government has since formed a National Growth Committee to consider the strategies and specific actions agreed at this dialogue.

In terms of financial stability, Tonga’s banking system remained strong and sound throughout the year, despite subdued activity in the overall economy. Levels of capital adequacy and liquidity remained high, and earnings increased, partly through an improvement in asset performance. However, the level of non-performing loans is still considered high, and the Reserve Bank continued to discuss with the banks their credit risk management systems and recovery processes. The weak economic conditions both globally and domestically contributed to the slow recovery of non-performing loans and continued to affect the growth of credit to the private sector both on the supply and the demand sides.

A new set of prudential returns designed by the Reserve Bank, in collaboration with the Pacific Financial Technical Assistance Centre (PFTAC), was issued in November 2011 to improve the accuracy and timeliness of data reported by the banks. Training on the new prudential returns was conducted and the new reports became effective in January 2012. These new reports will be a valuable addition to Reserve Bank analysis going forward.

The Reserve Bank continued working towards maintaining the quality of notes and coins in circulation at a high standard. In nominal terms the value of notes distributed by the Reserve Bank rose over the year, to its highest level on record. The value of new notes issued rose particularly sharply, with the ‘Apifo’ou anniversary and Liahona alumni celebrations contributing to a pick-up in demand.

The Reserve Bank was able to carry out its responsibilities through the commitment and dedication of its staff and the technical assistances received throughout the year. As at the end of June 2012, the total number of staff employed at the Bank was 82, which is a record high. The Reserve Bank actively pursued policies for strengthening staff capacity, with staff receiving training on-the-job, in house, at local institutions, and, abroad. Courses covered a range of central banking functions, and served to enhance the staff’s capacity and efficiency in helping the Reserve Bank to meet its mandated goals.

The Reserve Bank financials were audited by Pricewaterhouse Coopers, Fiji and was submitted to the Minister of Finance on the 28th September 2012 together with a summary of the Bank’s operations during the year in accordance with the NRBT Act 1988. The size of the Reserve Bank’s balance sheet reached T$273.9 million at the end of June 2012, a growth of T$38.9 million over the year. The growth owed mostly to the rise in foreign reserves, reflecting the strong support from Tonga’s development partners. The rise in foreign reserves increased the Reserve Bank’s interest income at the same time the Bank’s interest expense also increased on the rise in domestic exchange settlement accounts (ESA). Since domestic banks’ lending continued to decline during the year, their banks’ balances in the Reserve Bank continued to rise. Overall, the National Reserve Bank of Tonga’s net profit available for distribution fell by $447,003 to $1,971,583 from $2,418,586 last year. Given that the Reserve Bank’s overall capital has been built up to twice the amount of paid up capital, the entire net profit for the financial year will be transferred to the Government as required by the NRBT (Amendment) Act 2007.

The domestic economy will remain vulnerable to the developments in the global economy and international markets through trade, remittances, tourism, oil and food prices, let alone natural disasters and climate change. The Reserve Bank will continue to target its policy measures towards maintaining adequate foreign reserves and promoting low inflation in the next 12 months.

The Reserve Bank has commenced a project to review its organisational structure and strategies with the aim to improve the efficiency and effectiveness in the performance of its functions and achieving its objectives. The main thrust of this project will be carried out in the next financial year.

I would like to thank the Board of Directors for their directions and support during the year. I acknowledge the support received from the Ministry of Finance, Government and the domestic banks in pursuing our common goal of promoting macroeconomic stability and economic growth. The assistance from the international organisations, development partners of Tonga and other central banks in the region is acknowledged with appreciation. Finally, I would like to thank the staff of the NRBT for their hard work during the year which contributed to the Reserve Bank achieving its objectives in 2011/2012.

Governor Siosi Mafi