The developments in the global and domestic economy during 2012/13 continued to contribute 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 the inflation to remain below 6% per annum. Throughout the 2012/13 financial year, the level of official foreign reserves remained above 8.5 months of import cover and the overall inflation remained well below 6%. The Banking sector liquidity continued to increase and have helped to reduce the banks’ lending rates, but more recent increases have been less effective. To help reduce the interest rates further while strengthening the banks’ incentive to lend, the Reserve Bank removed all interest payments on the banks’ Exchange Settlement Accounts (ESA) in November 2012. Since then some banks have indeed offered loans at lower rates. A detailed rationale behind the Reserve Bank’s monetary policy decisions is published in the Reserve Bank’s semi-annual Monetary Policy Statements.

On the domestic economy, the Reserve Bank estimated that the real Gross Domestic Product (GDP) growth during the 2012/13 financial year to be similar or slightly lower than the outcome of the previous year, owing mostly to a fall in construction activity. Against this background of subdued economic outcomes, the Reserve Bank continued to implement its expansionary monetary policy through leaving as much liquidity as possible in the banking system targeted at strengthening banks’ individual incentives to increase lending. The level of the liquidity in the banking system continued to be very high by international standards and remained significantly in excess of the banks’ actual and precautionary liquidity needs during the year.

The lending rates fell over the 2012/13 financial year and growth in bank lending fell reflecting the settlement of major loans as banks continued to clean up their loan portfolio. Increased competition between banks, as a result of the excess liquidity in the financial system and the decline in deposit rates, resulted in lower cost of funds as well as the anticipated competition from a new bank. This contributed to the decline in lending rates. The decline in interest rates has not resulted in a corresponding increase in the banks’ lending and economic activity as anticipated. Ongoing domestic and global economic uncertainties continued to weigh on the bank’s appetite to lend and the Reserve Bank will continue its regular dialogue with the banks on ways to encourage prudent lending of their surplus liquidity.

In terms of financial stability, Tonga’s banking system remained strong and sound during the year. Levels of capital adequacy and liquidity remained high and earnings increased, partly through an improvement in asset performance and cost savings as some banks ceased their more costly operations. Despite, the improvement in the level of non-performing loans, the main risk to the banking system continued to be the credit exposures and the slow rate of recovery in non-performing loans which were affected by the weak domestic and global economic conditions. While the banks showed adequate profits during the financial year, the increased competition between banks may exert downward pressures on the banks’ profits in the medium term. The Reserve Bank will continue to discuss with the banks their credit risk management systems, credit strategies and asset recovery processes.

The Reserve Bank continued working towards maintaining the quality of notes and coins in circulation at a high standard. During the year, the Reserve Bank issued new currency notes and coins, and progressed on the development of a new family of coins to replace Tonga’s existing coins in circulation.

The Reserve Bank was able to carry out its responsibilities through the commitment and dedication of its 83 staff and the technical assistance received throughout the year. The Reserve Bank embarked on a major organisational change program throughout the year and actively pursued policies to 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 while assisting the Reserve Bank to carry out its core responsibilities effectively.

In accordance with the Reserve Bank Act, the Reserve Bank financials were audited by Pricewaterhouse Coopers, Fiji and to be submitted to the Minister of Finance together with a summary of the Bank’s operations during the year. The size of the Reserve Bank’s balance sheet reached T$295 million at the end of June 2013, a growth of T$20.2 million over the year. The growth owed mostly to the rise in foreign reserves, reflecting the continued 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 decreased on the decision to maintain an expansionary monetary policy. Overall, the National Reserve Bank of Tonga’s net profit available for distribution rose by $748,863 to $2,720,446 from $1,971,583 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.

I would like to thank the Board of Directors for their direction 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. I would also like to thank the staff of the Reserve Bank for their commitment and hard work during the year which contributed to the Reserve Bank in achieving its objectives in 2012/2013 which are presented in this Annual Report.

Finally, I would like to thank the former Governor Mrs. Siosi C. Mafi, for her 20 years of commitment, devoted service and contribution to the Reserve Bank.

Governor Sione Ngongo Kioa