I am pleased to present the 28th annual report for the financial year 2017/18. This report outlines the analysis of the economic and financial conditions, the policies adopted by the Reserve Bank, the activities of the departments as well as the audited accounts of the Reserve Bank for the year ended 30th June 2018. This is in accordance with the Principal objectives and functions outlined in the NRBT Act.

During the year, global economic activity was favorable in 2018 with the International Monetary Fund (IMF) revising up the global economic growth to 3.9%, commodity prices and oil prices have picked up compared to the previous year. However, these developments in the global economy had no notable adverse impact on the domestic economy. The domestic economy remains solid, despite the impact of Tropical Cyclone Gita, and is expected to record another year of growth for the 5th consecutive year. This growth is supported by improved performance in the construction, manufacturing, financial intermediation, trade, and transport and communication sectors.

Inflation spiked to a high of 9.8% in March 2018 reflecting the impact of Tropical Cyclone Gita and then declined to remain slightly above Reserve Bank’s 5% reference rate at the end of June 2018. This supported the positive economic sentiment. During the year, the slowdown in the rate of inflation is attributed to the wind down of the Government excise tax that was introduced in the previous year, the favorable harvest season of agricultural produce and the Government decision to hold any tariff increases in electricity prices.

Partial indicators also supported economic growth as well as positive consumer and business sentiment. This was evident in the continued increase in bank loans to private individuals for housing and personal loans as well as business loans to the retail, wholesale, manufacturing and construction sectors. This increase in lending was despite the slight increase in lending interest rates and a corresponding decline in deposit interest rates.

Furthermore, similar to other currencies in the region, the Tongan pa’anga strengthened against the Australian and New Zealand dollar but was lower against the US dollar and other trading partner currencies. This development in the exchange rates benefited those who receive remittances from the United States, our main remittance country, and supported an overall increase in private individual’s disposable income. The increase in individual’s disposable income also supported the demand and payment of imports from New Zealand, our main source country for imports.

Domestic economic growth was also evident in the increase in overseas payments for imports of goods and services. Businesses also transferred profits overseas to their head offices. These payments were offset by inflows of remittances, as well as official and travel receipts. Given these overseas transaction flows, at the end of June 2018, Tonga’s transactions with the rest of the world improved with a current account surplus of T$7.0 million. Consequently, the official foreign reserves rose to a record high of T$468 million, equivalent to 7.8 months of imports. The Reserve Bank is conscious of the vulnerabilities to natural disasters and the economy’s heavy reliance on imports such as oil and consumption goods and continued to ensure that the foreign reserves are at sufficient levels to withstand any external shocks. More importantly a sufficient level of foreign reserves supports the fixed basket exchange rate regime and the value of the Tongan Pa’anga exchange rate to maintain internal and external monetary stability.

On financial stability, the banks remained sound and well capitalized. During the year the banks continued to improve their balance sheets, credit continued to grow but at a slower rate of 10.6% with non-performing loans falling to 3.7% of total loans.

Although the risk weighted capital ratio of the banks fell due to the increase in loans and the repatriation of banks’ profits to their head offices, the banks’ profits continued to improve, and capital remains adequate and acts as a safeguard against any shock to the financial system.

Liquidity in the banking system continued to increase as a consequence of the high foreign reserves despite the increase in the statutory reserve deposit requirement in July 2017. The Reserve Bank continued to focus on maintaining financial stability and ensuring the depositors’ interest are protected. The Reserve Bank during the year ensured depositors were paid following the revocation of a bank license, onsite bank examinations were undertaken, a credit bureau guideline was issued and an application for a license to provide credit bureau services was processed, as well as 2 license applications for foreign exchange dealers.

The banks and foreign exchange dealers also reacted positively to support their customers in the aftermath of the Tropical Cyclone Gita by providing relief packages such as concessional loans and reduced fees on foreign exchange transfer services.

Against this background, the Reserve Bank continued its accommodative monetary policy stance and at the same time remained vigilant in monitoring the developments in the economy and the banking system for early signs of vulnerabilities. To enhance its role in promoting macroeconomic and financial stability, policy actions were implemented by the Reserve Bank during the 2017/18 such as the increase in the statutory reserve deposits requirement, reviewing the basket exchange rates and amendments to the exchange control policy guidelines.

On the financial performance, the Reserve bank is reporting a net profit of T$3 million for 2017/18 financial year, an increase from T$2.85 million in the previous year. The increase in net profit is attributed to investment income from the foreign reserves, numismatic sales and the receipt of the cyclone insurance claim. At the end of the financial year, the net profit available for distribution was T$2.1 million.

Throughout the year there was no change to the governance composition of the Bank. The Directors continued to carry out their functions outlined in the NRBT Act and reviewed and approved the achievement of 73% of the corporate plan targets for 2017/18 and the corporate plan targets for 2018/19.

At the end of the financial year 2017/18, the Bank has achieved its principal objectives and functions outlined in the NRBT Act of monetary and financial stability. The results outlined in this annual report would not have been possible without the support of the Board of Directors and the Staff. In this regard, I would like to thank the Chairman and the Board of Directors for their support and the staff for their commitment and dedication in delivering the mandate of the NRBT. The support of the Ministry of Finance, Government Ministries and financial institutions during the year is appreciated as well as the assistance from the international organizations, development partners and the central banks in the region.

Governor Sione Ngongo Kioa