During the financial year 2013/14, economic growth in the global economies remained subdued, and the overseas central banks maintained expansionary monetary policies in the absence of concerning inflation pressures.

On the domestic economy, the Reserve Bank estimated the real Gross Domestic Product (GDP) growth to be slightly higher than the outcome of the previous year, owing mostly to a recovery in construction activity. At 8.9 months of imports, the foreign exchange reserves remained above the Reserve Bank’s target of three to four months of import cover. Overall inflation continued to remain well below the reference range of 6% per annum. Against this background of signs of modest economic outcomes and low inflation, the Reserve Bank continued to implement its expansionary monetary policy through leaving as much liquidity as possible in the banking system, targeted at strengthening the banks’ incentives to increase lending while reducing the interest rates further. As at the end of June 2014, the banking sector liquidity decreased compared to the previous year but still remained at high levels. The high banking sector liquidity and competition amongst banks for viable loans helped to reduce the banks’ lending rates. The total bank lending balances rose by 9.6% over 2013/14, reflecting the lower lending rates and an increase in lending mainly to the public enterprises.

The Board of Directors also convened a high level economic dialogue with relevant Cabinet Ministers to discuss measures to further stimulate economic growth. A detailed rationale behind the Reserve Bank’s monetary policy decisions is published in the Reserve Bank’s semi-annual Monetary Policy Statements.

In terms of maintaining 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 continued to streamline their more costly operations. Despite the slight 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 imperfect securities and the lack of buyers in the market.

During the year, the Reserve Bank held its regular dialogue with the banks on ways to encourage prudent lending of their surplus liquidity and to discuss with the banks their credit risk management systems and asset recovery processes. To further promote financial stability and given recent developments in the financial system, the Financial Institutions Act and the National Reserve Bank of Tonga Act were reviewed to update the legislations while reflecting the latest international standards on central banking and make necessary changes for more effective banking supervision. In addition, the amendments were to bring all non-bank financial institutions in Tonga under the supervision of the Reserve Bank.

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 continued working on the development of a new family of coins to replace Tonga’s existing coins in circulation.

The staff with the support of the Board of Directors, implemented plans for the Bank to become the employer of choice in Tonga and measures to modernize the operations of the Bank. These measures included restructuring the Banks management and reviewing staff benefits and to streamline Bank policies and procedures. To take advantage of the new fibre optic cable and high speed internet, the IT Department installed the bank’s wireless network to enhance accessibility and the provision of timely data. Presentation facilities were also upgraded not only to support a paperless environment but also to strengthen the Board Directors and staff communication as well as access to information.

In accordance with the Reserve Bank Act, the Reserve Bank financials were audited by PricewaterhouseCoopers, Fiji and were 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$313.2 million at the end of June 2014, a growth of T$18.4 million over the year. The growth is attributed 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 decreased on the decision to maintain an expansionary monetary policy. Overall, the National Reserve Bank of Tonga’s net profit available for distribution increased by $831,801 to $3,552,247 from $2,720,446 last year. The Reserve Bank’s overall capital has been built up to twice the amount of paid up capital and 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 achieving the Reserve Bank’s objectives in 2013/2014 which are presented in this Annual Report.

Finally, I would like to acknowledge the unfortunate loss to the Bank on the passing of Director James Cecil Cocker. On behalf of the Board of Directors, may I express our heartfelt gratitude to Mr James Cecil Cocker for his contribution to the Reserve Bank Board.

Governor Sione Ngongo Kioa