I am pleased to present the annual report for the financial year 2018/19. This annual report marks the 29th year of service and 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 2019. This is in accordance with the Principal objectives and functions outlined in the NRBT Act.

During the year, according to the International Monetary Fund (IMF), global economic growth was further downgraded to 3.3%, commodity prices have been volatile, headline inflation was subdued, while average oil prices increased compared to the previous year. Slower growth was also observed amongst Tonga’s major trading partners. On the domestic economy, the official statistics recorded growth of 0.2% in 2017/18. The Reserve Bank also revised its growth projections down to 3.4% in 2018/19 on the delays in the implementation of some projects, the Tropical Cyclone Gita reconstruction, new government infrastructure projects, and private house construction. This growth is also supported by improved performance in the fishing sector, construction, and the service sector. Agriculture is estimated to record lower growth this year as it recovers from the Tropical Cyclone Gita.

At the end of June 2019, the annual inflation rate was at 1.8%, although it peaked at a high of 6.5% in November 2018, reflecting the impact of Tropical Cyclone Gita on local food prices coupled with the new Customs excise tax on unhealthy food, beverages, and tobacco. Rising global oil prices also contributed to the increase in imported inflation. However, the annual inflation has declined and remains well below the Reserve Bank’s 5% reference rate at the end of June 2019. The slowdown in the rate of inflation is attributed to the improvement in the supply of local food products and fall in kava tonga prices. Global food and fuel prices, as well as the stable exchange rates, contributed to keeping imported inflation low.

The financial sector continued to play a role in financing economic activity, with bank loans rising to a record high level in May 2019. Loans to individuals for house construction remained a sizeable portion of the loan portfolio Bank loans were mainly to private businesses in the transport, professional & other services, retail, wholesale, and tourism sectors as well as private individuals housing and personal loans, reflecting positive business confidence and active investment throughout the year. Loans by non-bank financial institutions also increased mainly reflecting an increase in lending to households. Over the year, bank loans continued to grow despite the slight rise in lending interest rates and a corresponding decline in deposit interest rates.

Furthermore, similar to other currencies in the region, the US dollar strengthened against Tongan pa’anga while the Australian and New Zealand dollar weakened against the Tongan pa’anga. 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 to finance imports. These remittance receipts, mostly personal transfers from friends and family abroad remained above $346.6 million at the end of June 2019.

Domestic economic growth was also evident in the increase in overseas payments for imports of goods and services, which outweighed the steady level of receipts. These payments were attributed to higher imports and service payments. These payments were offset by inflows of remittances, as well as travel and official receipts for budget support, grants, and cyclone relief funds. Consequently, at the end of June 2019, the Overseas Exchange Transactions (OET) balance recorded a lower surplus, and the official foreign reserves rose to T$484.3 million, equivalent to 8.1 months of imports. This is well above the Reserve Banks 3 months of import threshold. The Reserve Bank is conscious of the vulnerabilities to natural disasters and the economy’s heavy reliance on imports and continued to ensure that the foreign reserves are at sufficient levels to meet the foreign exchange needs of the country as well as withstand any external shocks.

As a consequence of the high foreign reserves and the Reserve Bank’s accommodative monetary policy to encourage banks to lend, liquidity in the banking system continued to remain at high levels.

During the year, the Reserve Bank continued to monitor developments in the domestic economy to asses any impact on financial stability, particularly after Tropical Cyclone Gita. Over the year, the overall performance of the banks was satisfactory, the banks remained sound and well-capitalized, supported by the capital injection by new shareholders to one of the banks. This increase in the risk-weighted capital ratio of the banks continued to increase and to act as a safeguard against any shock to the financial system. During the year the banks continued to improve their balance sheets, credit continued to grow but at a slower rate of 9.3% with nonperforming loans falling to 3.2% of total loans. Banks also introduced new financial access points such as eftpos terminals and ATM’s as well as agents in the 17 electoral constituencies, to better serve the people of Tonga. As such, financial inclusion indicators to promote inclusive economic growth showed a marked improvement. The financial intelligence unit (FIU) also contributed to the stability of the financial system by carrying out its functions under the Money Laundering and Proceeds of Crime Act. The FIU met with the members of the working group on serious financial crime to prepare for Tonga’s upcoming Mutual Evaluation of its anti-money laundering and terrorist financing regime.

The Reserve Bank continued to focus on maintaining financial stability and ensuring the depositors’ interest are protected through onsite bank examinations, spot checks on compliance, and technical meetings with the banks. A credit bureau license is being considered to provide credit bureau services and to further strengthen the credit environment. Besides, to also support financial development and growth in the economy, the Reserve Bank commenced work on developing a national payment system to better facilitate the circulation of money, and that is suitable for Tonga’s financial system and the number of transactions to maintain low transaction costs.

Against this background, the Reserve Bank continued its accommodative monetary policy stance and at the same time, remaining vigilant in monitoring the developments in the economy and the banking system for early signs of vulnerabilities. The Reserve Bank to promote macroeconomic and financial stability, implemented policy actions such as the proclamation and implementation of the Microfinance and Foreign Exchange Act, the annual review of the basket exchange rates, and the implementing of the exchange control policy guidelines.

Furthermore, to address new risks to macroeconomic and financial stability such as de-risking of foreign exchange dealers accounts and correspondent banks, as well as climate change issues, cybersecurity and anti-money laundering, the reserve bank invested in building the capacity of its staff through the attendance at meetings and overseas training.

On the financial performance, the Reserve Bank is reporting a net profit of T$6 million for the 2018/19 financial year, the highest profit the Reserve Bank has recorded, and an increase from T$3 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$4.2 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 82% of the corporate plan targets for 2018/19 and the corporate plan targets for 2019/120.

At the end of the financial year 2018/19, the Bank has achieved its principal objectives and functions outlined in the NRBT Act of monetary and financial stability. In this regard, I take this opportunity to thank the Chairman and the Board of Directors for their support and the staff for their dedication and commitment and 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 assistance from the international organizations, development partners and the central banks in the region.

Governor Sione Ngongo Kioa