I am pleased to present the annual report for the financial year 2019/20, a challenging year after 2 major shocks to the Tongan economy from COVID-19 pandemic and Tropical Cyclone (TC) Harold. This annual 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 2020. 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) June 2020 forecast global growth was revised down to -4.9% from -3% in April due to intensifying impact of COVID-19 pandemic resulting in contraction in global trade, subdued consumption spending, and weaker investment opportunities. Advanced economies i.e. US was expected to contract by 8%, a downward revision from 6.1% previously. Tonga’s major trading partners’ economies in first quarter of 2020 also contracted. The New Zealand economy contracted by 1.6% and the Australian economy by 0.3%.

Although Tonga remains COVID-19 free, the impact on the global economy had adverse effects on the domestic economy. Following the onset of COVID-19, travel restrictions, supply disruptions and weak demand impacted economic activity. Furthermore, TC Harold also damaged infrastructure, dwellings, business and agriculture sector. The NRBT therefore projects that the Tongan economy will contract in 2019/20 by 2.7% and further contract by 3.7% in 2020/21. These projections reflect the uncertainty on the duration of COVID-19 and its impact on the services, industry, transport and trade sectors. The positive economic activity in the agriculture and fisheries sector are also incorporated into the projections.

At the end of June 2020, the annual headline inflation reflected the impact of COVID-19 at an average low of 0.3% during the 2019/20 financial year, well below the 5% reference rate. In June 2020 it recorded a deflation of 1.4%, the lowest rate since December 2015. This is due to the decline in domestic prices on the increase in supply of local food i.e. root crops, fruits and vegetables and a consistent fall in price of Kava Tonga as well as lower electricity tariffs. Imported prices also fell on lower gas and fuel prices reflecting the impact of Covid-19 on global oil prices, outweighing the rise in food, tobacco and alcoholic beverage prices.

Despite the COVID-19 pandemic, at the end of June 2020, the official foreign reserves rose to $543.8 Million equivalent to 8.2 Months of Import Cover (MOI) from $484.3 Million (7.9 MOI) last year, remaining above the minimum range of 3 MOI. The increase in the foreign reserves is mainly due to budget support from donor partners, grants for COVID-19 preparations and TC Harold relief funds. Remittance receipts also continued to increase and contributed to the increase in foreign reserves. The increase in remittances continued despite the closing of some of the foreign exchange dealers due to COVID-19. The exchange rate basket currencies also fluctuated on the COVID-19 uncertainties and at the end of the year, the Tongan pa'anga nominal and real effective exchanges rates increased.

The accommodative monetary policy stance was considered appropriate to encourage banks to lend and maintain liquidity in the banking system at high levels. Although the risks to the financial system have increased, the financial system was assessed to be safe and sound, supported by the banks’ strong capital position, excess liquidity, adequate profits, and low nonperforming loans. However, additional policy measures were introduced to mitigate the impact of the COVID-19 pandemic on the domestic economy and ensure the banks remained resilient against these risks to financial stability.

To improve the banks risk management, new prudential statements were issued, risk based onsite supervision was conducted, and projects were implemented to develop the financial infrastructure through projects such as the automated National Payment System, as well as enhancing financial intermediation by encouraging financial innovative products. The Reserve Bank continued with its functions of effectively licensing, regulating and supervising of financial institutions both banks and non-bank financial institutions (NBFIs).

In response to COVID-19, the commercial banks assisted impacted customers by providing COVID-19 loan relief packages and at the same time complied with prudent lending practices. The Banks continued to support economic growth through its loans during the year.

Bank loans increased to peak at T$504.9m in November 2019. However, credit growth slowed and total lending stood at T$492.9m at the end of June 2020, an increase of 1.4% compared to the previous year. Despite the uncertainty of COVID-19 and TC Harold, business loans increased to the communication, professional & other services, entertainment & catering, agricultural, mining & quarrying as well as public enterprises. Furthermore, individual housing loans increased, but was offset by a decline in vehicle and other personal loans, resulting in a 0.2% decline in total lending to individuals.

In line with the accommodative monetary policy, interest rates on bank loans declined mainly on individual loans for housing and other personal loans. Bank loans to businesses such as mining & quarrying, tourism and professional and other service sectors also benefited from lower interest rates. Bank deposit interest rates increased for all deposit types and the banking system saw an increase in the volume of saving and time deposits.

To promote access to finance, enhance inclusive economic growth and in anticipation of the banks becoming risk averse due to natural disasters and the recent Covid-19 pandemic, the Reserve Bank continued to develop the non-bank financial institutions to provide a viable alternative to bank loans. During the year improvements to the legal and regulatory environment for non-banks continued to protect the borrowers as well as encourage new financial solutions or products. At the end of June 2020, lending activities in the nonbank financial institutions also increased in the year to June 2020 by 3.1% ($3.2 million) to T$106.8m, largely reflecting an increase in loans to households. Similar to the banks the non-banks also provided COVID-19 relief loans to assist its customers.

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. To support a sound and safe financial system, the FIU coordinated Tonga’s mutual evaluation by the Asia Pacific Group on money laundering. Due to the Covid-19 lockdown this evaluation has been deferred. The COVID-19 pandemic also had an impact on the operations of the Reserve Bank. The Exchange Control department noted the number of exchange control applications fell coinciding with the fall in import payments as well as applications for sending of foreign cash cross border due to the border closure. The issuing of currency is one of the important functions of the Bank. Currency in circulation increased during the year and was attributed to the accelerated issuance of bank notes and coins on the uncertainty towards the COVID-19 Pandemic and the national lockdown.

On the financial performance, the Reserve Bank is reporting a net profit of T$3 million for the 2019/20 financial year, lower than T$6 million in the previous year. The lower net profit is still a notable achievement given the COVID-19 pandemic impact and the lower overseas interest rates in the US, Australia and New Zealand. This resulted in the lower income on the investment of the foreign reserves, which is the principal source of income for the Bank. COVID-19 also had an impact on the demand for numismatic bank notes and coins which is another source of income for the Bank. On the expenditures, total expenditure was only marginally higher (3% higher) than the 2018/19 level. The major expenses during the year were interest paid on government accounts and the issuing of new bank notes which are more expensive to print. Expenses also increased due to the rise in the price of some of the goods and services and the additional purchase of goods in preparation for COVID-19.

During the year, one new Director was welcomed to the Board. The Directors continued to carry out their functions outlined in the NRBT Act and reviewed and approved the achievement of 90% of the corporate plan targets for 2019/20 as well as the Corporate Plan 2020/21. Against the background of the impact of TC Harold, COVID-19 pandemic and the expected economic downturn, the Reserve Bank Corporate Plan for the year 2020/21 was set and score cards were introduced to measure outcomes in the corporate plan. Targets were also set to maintain the stable and well capitalized financial system by ensuring banks are resilient against the impact of COVID-19 and an economic downturn, at the same time continue to be an effective driver of economic growth.

At the end of this challenging financial year 2019/20, 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 and the staff for their support and commitment to deliver the mandate of the NRBT and the responses at the start of 2020 year to the challenges posed by the COVID-19 global pandemic The support of the Ministry of Finance, Government Ministries and the banks and non-bank financial institutions during this unprecedented challenging year is appreciated as well as assistance from the international organizations, development partners and the central banks in the region

Governor Sione Ngongo Kioa