I am pleased to present the annual report for the financial year 2020/21, another challenging year as the COVID-19 pandemic continues to impact the Tongan economy. 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 2021.

The International Monetary Fund (IMF) World Economic Outlook update in July 2021 forecasts global growth to rebound by 6% in 2021 from a negative growth of 3.2% in 2020. This sharp recovery in 2021 reflects the impacts of sizeable fiscal support in major economies, particularly the US and the Euro area. In addition, the COVID-19 vaccine roll-out across countries is expected to strengthen business confidence, underpinned by expansionary policy actions supporting overall growth for 2021. Tonga’s major trading partners’ economies in the first quarter of 2021 also showed recovery. The New Zealand economy rose by 1.6% and the Australian economy by 1.1%.

During the 2020/21 year, the COVID-19 pandemic’s impact on the global economy had adverse effects on the domestic economy. The extension of the travel restrictions resulted in the weak performance in the service sector as well as lower primary sector exports. The Reserve Bank therefore projects that the Tongan economy will contract in 2020/21 by 2.9% then recover with a positive 2.1% growth in 2021/22. These projections reflect the assumption that the borders will open in 2022 and exports via air cargo and activities within the service sector, particularly tourism-related activities, thrive. The positive economic activities in the agriculture and fisheries sectors are also incorporated into the projections.

At the end of June 2021, the annual headline inflation remained low at 1.2%, well below the 5% reference rate. This is due to the decline in domestic prices reflecting the recovery efforts of growers, government assistance following Tropical Cyclone Harold, and households engaging in subsistence farming, resulting in abundance of food supply in the market. Imported prices rose substantially reflecting the rise in the prices of oil, food items and gas and other fuel. The impact of COVID-19 and the increase in food prices in Tonga’s major trading partners contributed to the increase. Higher shipping costs and delays in shipments due to the COVID-19 restrictions across borders and additional quarantine requirements affected the availability of imported goods and are estimated to have contributed to higher imported prices.

The official foreign reserves rose to $715.2 million at the end of June 2021, equivalent to 12.5 Months of Import Cover (MOI), from $543.8 million (9.2 MOI) last year, remaining above the minimum level of 3 MOI. The increase in the foreign reserves is mainly due to receipts of budget support from donor partners, loan drawdown, and grants for COVID-19 preparations and TC Harold relief funds. Private remittances also rose strongly over the year by 31.5% further supporting the high foreign reserves. The exchange rate basket currencies also fluctuated on the more robust economic outlook amid the COVID-19 vaccination roll outs. At the end of the year, the Tongan pa’anga nominal and real effective exchange rates decreased compared to the June 2020 levels reflecting an improvement in Tonga’s trade competitiveness and further supporting foreign currency receipts. At the same time, inflationary pressure may result from the decline in the nominal effective exchange rate through higher import prices.

The accommodative monetary policy stance was maintained throughout the year to encourage banks to lend while maintaining liquidity in the banking system at high levels. Although the risks to financial stability have elevated, the financial system was assessed to be safe and sound, supported by the banks’ strong capital position, excess liquidity, adequate profits, and an improvement in the banks’ overall assets with non-performing loans decreasing over the year. The additional policy measures to mitigate the impact of the COVID-19 pandemic on the domestic economy were maintained while ensuring the banks remained resilient against the emanating risks to financial stability.

During the year, the Reserve Bank continued to strengthen its supervisory framework and modernise the financial infrastructure through developing the automated National Payment System, Know Your Customer System and the credit registry system. The Reserve Bank continued with its functions of effectively licensing, regulating and supervising of financial institutions both banks and non-bank financial institutions (NBFIs) and issued 3 new prudential statements.

In response to COVID-19, the commercial banks assisted impacted customers by extending the COVID-19 loan relief packages while maintaining compliance with prudent lending practices. Over the year, bank loans decreased by 2.1% to T$482.4 million as at June 2021. The contraction in credit growth reflects the 4.8% decline in lending to businesses, which offset the 0.1% growth in household loans. Total lending stood at T$492.9 million at the end of June 2020, an increase of 1.4% compared to the previous year. In line with the accommodative monetary policy, interest rates on bank loans declined mainly those offered to businesses in the construction, utilities, agriculture, fisheries, and the services sectors. Similarly, interest rates offered on individual personal loans also fell contributing to the decline in lending rates. Bank deposit interest rates also declined for all deposit types and the banking system saw a significant increase in the volume of deposits.

To promote access to finance, enhance inclusive economic growth and in anticipation of the banks becoming risk averse due to the ongoing high vulnerability to natural disasters and the recent COVID-19 pandemic, the Reserve Bank continued to develop the non-banks financial institutions to provide a viable alternative to bank loans. During the year improvements to the legal and regulatory environment for NBFIs continued to protect the borrowers while also encouraging the development of new financial solutions or products. Lending activities in the NBFIs also declined in the year to June 2021 by 1.5% ($1.6 million) to T$105.2 million, largely reflecting the repayments of loans during the year.

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. During the year, the FIU ensured the foreign exchange dealers were compliant with their anti-money laundering obligations, engaged with law enforcement agencies, contributed to the review of the National Risk Assessment report as well as Tonga’s mutual evaluation by the Asia Pacific Group on money laundering. Due to the COVID-19 travel restrictions this evaluation process resumed in November 2020.

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 continued to fall coinciding with the fall in Overseas Exchange (OET) payments as well as applications for sending of foreign cash across the 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 which was attributed to an increase in demand for notes and coins for Christmas spending, end of year celebrations and development groups’ savings distributions.

On the financial performance, the Reserve Bank is reporting a net profit of T$0.2 million for the 2020/21 financial year, lower than T$4.27 million in the previous year. The lower net profit is attributed to the COVID-19 pandemic’s 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 Reserve Bank. On the expenditure side, total expenditure declined by 10% compared to the 2019/20 level. The decline in expenses was attributed to the COVID-19 border restrictions resulting in the deferment of overseas official meetings and training as well as technical assistance for the annual maintenance services of the building, plant and equipment.

During the year, the Chairman of the Board Mr. Steve Edwards retired after serving the bank for 10 years. The Directors continued to carry out their functions outlined in the NRBT Act and reviewed and approved the achievement of 93% of the corporate plan targets for 2020/21 as well as the Corporate Plan for 2021/22. Targets were also set to maintain the stable and well capitalised financial system by ensuring banks are resilient against the impact of COVID-19 and an economic downturn, while at the same time continue to be an effective driver of economic growth.

At the end of another challenging financial year 2020/21, the Bank has achieved its principal objectives and functions outlined in the NRBT Act of maintaining 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 Reserve Bank and the responses to the challenges posed by the COVID-19 global pandemic The support of the Ministry of Finance, Government Ministries and the banks and nonbank financial institutions during this 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