A moderate recovery of 3.4% is projected for the Tongan economy in FY2022/23 supported by the reconstruction from the HTHH disaster, and the resumption of international travels. Inflation is expected to soon peak and then to slowly ease in 2023. Import outflows are anticipated to increase in line with the economic recovery, while remittance receipts and official transfers slow down to pre-pandemic growth rates. This will be absorbed by the strong level of foreign reserves. Credit growth is estimated to be stronger in the near term, however non-performing loans may also increase due to the withdrawal of loan moratoriums. Nevertheless, the excess liquidity in the banks are well capitalised to absorb any further shocks.

The Tongan economy is still on track to recover moderately in FY2022/23, aided by the recovery and reconstruction from the HTHH disaster and the reopening of international borders. Global economic growth has slowed, while inflation has remained high, as a result of the fallout from the Ukraine conflict, China's lockdowns, and the lingering supply-demand mismatches from the global pandemic. Monetary policy tightening in many advanced economies have accelerated in response to the stubborn inflation. However, recent developments are showing a slow decline in global oil prices which will help ease the imported inflationary pressure. However, adverse weather conditions have worsened domestic food prices and domestic inflation. Foreign reserves levels will remain adequate at above the minimum 3 months of imports cover, while the financial system remains sound.

A moderate recovery is expected for the Tongan economy in FY2022/23 supported by the reconstruction from the HTHH disaster, and re-opening of the international borders. Global economic growth has weakened while inflation remains elevated due to the spillover effects from the war in Ukraine, the China lockdowns, and the lingering supplydemand mismatches from the global pandemic. Monetary policy in many advanced economies remains hawkish in response to the elevated inflation. However, recent developments are indicating a slow decline in global oil prices which will help ease the inflationary pressure in the coming months. Inflationary pressure is mostly supply-side and driven by external factors. The Reserve Bank projects inflation to soon peak before gradually easing to desirable levels by 2023. Imports are projected to strengthen in line with the economic recovery, while remittance receipts slows down. This will reduce foreign reserves levels but will still remain adequate at above the minimum 3 months of imports cover. The financial system remains stable with ample liquidity available. Banks are also well capitalized to absorb further deteriorating asset quality in light of further deterioration in asset quality.

Following a sharp contraction of 2.7% in GDP growth for FY2020/21, the Tongan economy is projected to contract again in FY2021/22 as a result of the HTHH disaster and the Omicron outbreak. Spillover effects from the war in Ukraine, the China lockdowns, and the supply-demand mismatches will keep inflation elevated. Foreign reserves are anticipated to remain comfortable with adequate capacity to sustain high probability shocks. The financial system remains stable with excess liquidity, and adequate capital to absorb any shocks to the system. Against this background, the Reserve Bank is keeping its accommodative monetary policy stance on hold while working in tandem with the fiscal policies to revive the economy and prevent any further contraction in growth. With regards to inflation, the Reserve Bank notes that these pressures are supply-driven and are beyond its control. Our major trading partner countries are already fighting inflation through the tightening of their monetary policies which will flow through in import prices to Tonga’s inflation. At the same time, the Reserve Bank continues to engage in discussions on exploring measures to curb inflation and stands ready to realign its monetary policy should inflation continue to increase unsustainably.

Uncertainties on the duration of the Covid-19 outbreak will continue to constrain domestic economic recovery from recent disasters in the near term. Spillover effects from the war in Ukraine, the China lockdowns, and the supplydemand mismatches will keep inflation elevated. Foreign reserves are anticipated to remain comfortable with adequate capacity to sustain high probability shocks. The financial system remains stable with adequate capital to absorb any shocks to the system, however, non-performing loans is slowly increasing. The Reserve Bank recognises that the trade-off between supporting economic recovery and countering inflation requires delicate balancing actions. Against this background, it has considered its current accommodative stance appropriate at this time to work in tandem with the fiscal policies in reviving the economy and preventing any further contraction in growth. With regards to inflation, the Reserve Bank notes that these pressures are supply-driven and are beyond its control. Our major trading partner countries are already fighting inflation through the tightening of their monetary policies which will flow through in import prices to Tonga’s inflation. The Reserve Bank adopts a wait-and-see approach on these actions to take effect and will stand ready to realign its monetary policy should inflation continue to increase unsustainably.

Uncertainties on the duration of the Covid-19 outbreak will continue to restrict domestic economic recovery from recent disasters in the near term. Spillover effects from the war in Ukraine, the China lockdowns, and the supply-demand mismatches will keep inflation elevated. Foreign reserves are anticipated to remain comfortable with adequate capacity to sustain high probability shocks. The financial system remains stable with adequate capital provisions to absorb any shocks to the system. The Reserve Bank recognises that the trade-off between supporting economic recovery and countering inflation requires delicate balancing actions. As such, it has considered its current accommodative stance appropriate at this time to work in tandem with the fiscal policies in reviving the economy and preventing any further contraction in growth. With regards to inflation, the Reserve Bank notes that these pressures are supply-driven and are beyond its control. Our major trading partner countries are already fighting inflation through the tightening of their monetary policies which will flow through in import prices to Tonga’s inflation. The Reserve Bank adopts a wait-and-see approach on these actions to take effect and will stand ready to realign its monetary policy should inflation continue to increase unsustainably.

The Tongan economy has suffered multiple disasters including the HTHH volcanic eruption and the Omicron outbreak. At the same time, it is also facing extraordinary challenges of global supply chain disruptions and elevated inflation. The Reserve Bank expects these events to further derail economic recovery for the current fiscal year. Inflation is anticipated to remain above the 5% reference until 2023. Foreign reserves will continue to increase and stay well above the minimum of 3 months of import cover due to the expected inflow of budget support, relief funds, aid, grants, and private remittances in response to the HTHH disaster. The stringent Covid restrictions continue to impact businesses' operations, employment, and income. While non-performing loans are expected to rise, the financial system is well capitalised to absorb any shock to the system.

The Reserve Bank expects these events to further derail economic recovery and GDP growth to contract again in FY2021-22. Inflation is projected to remain above the 5% reference throughout 2022, and will ease once the global disruptions subside and the aggressive monetary policy of advanced economies take effect. Foreign reserves will continue to increase and stay well above the minimum of 3 months of import cover due to the expected inflow of budget support, relief funds, aid, grants, and private remittances in response to the HTHH disaster. The stringent COVID-19 restrictions negatively impact business operations, employment, and income. Borrowers who were directly affected by the HTHH disaster and Covid-19 restrictions may also risk defaulting on their loans, however, the financial system is still sound supported by high liquidity and adequate capital.

The Reserve Bank is now projecting a contraction in GDP growth for FY2021/22, in contrast to its previous forecast of a slow recovery. Inflation is anticipated to remain above the 5% reference rate for the most of 2022. Foreign reserves will continue to increase and stay well above the minimum of 3 months of import cover due to the expected inflow of budget support, relief funds, aid, grants, and private remittances triggered by the HTHH disaster. The extended national lockdown have impacted businesses through reduced operating hours, and lower take home pay for employees from lost employment or fewer working hours, this may result in higher non-performing loans that could weaken the stability of the financial system. Nevertheless, the Reserve Bank maintains its accommodative monetary policy stance in support of economic recovery. At the same time, it remains vigilant in closely monitoring financial and economic developments, internally and externally, and regularly reviews its monetary policy settings continues to maintain the stability of the financial system.

The Reserve Bank expects a further downgrade of its GDP growth outlook for the current fiscal year 2021/22. Inflation rate is now expected to persistently exceed the 5% reference rate up to mid-2022. On the other hand, foreign reserves will still be comfortable above the minimum of 3 months of import cover. The stability of the banking system is expected to be maintained supported by banks' excess liquidity and capital positions. In this regard, the current monetary policy stance is considered appropriate at this time, leaving the excess liquidity in the banking system for more prudent lending in support of economic recovery, while maintaining financial stability. Nevertheless, the Reserve Bank remains vigilant in closely monitoring financial and economic developments, internal and external, and regularly reviews its monetary policy settings as needed for macroeconomic growth.