Activities in the primary sector took an upturn in February 2023. The secondary sector continued to show positive signs with increase in credit to the industrial sector and infrastructure funded projects, while in the tertiary sector however continued to trend downward over the month.

The Reserve Bank continues to expect the Tongan economy to recover in the FY2022/23 whilst most of the world economies are slowing down. Imports are projected to increase in line with the economic recovery, while remittance receipts and inflows from donor funds return to pre-pandemic levels. To sustain the ongoing economic recovery, prudent macroeconomic management and effective implementation of structural reforms will be critical. Meanwhile, foreign reserves is expected to remain comfortable above the optimal level of 7.3 months of imports cover, supported by inflows of development assistance for the HTHH reconstruction and the implementation of donor projects back on track. The financial system remains stable with available liquidity as credit growth improves and banks are also well capitalized to absorb further shocks. Inflation is expected to have peaked in 2022 and is expected to continue declining in the near to medium term. However, uncertainties in the movements of global oil and commodity prices, as well as domestic food supply pose a risk to this outlook. The Reserve Bank’s fight against inflation remains the priority and has started to implement some of its monetary policy measures indicated in the February 2023 Monetary Policy Statement and will continue to monitor the movements in global commodity prices to address the underlying inflation concerns to rein in inflation below its 5% reference rate in 2023. Separate measures to assit credit easing in liason with the Government to address supply shortages and accelerate recovery in agriculture, fisheries, tourism and manufacturing are crucial to avoid unnecessary economic slowdown.

The Reserve Bank continues to expect the Tongan economy to recover in the FY2022/23. Imports are projected to increase in line with the economic recovery, while remittance receipts and inflows from donor funds return to pre-pandemic levels. To sustain the ongoing economic recovery, prudent macroeconomic management and effective implementation of structural reforms including supply side measures will be critical. Meanwhile, foreign reserves is expected to remain comfortable above the optimal level of 7.3 months of imports cover, supported by inflows of development assistance for the HTHH reconstruction and implementation of donor projects back on track. Inflation is expected to have peaked in 2022 and is expected to continue declining in the near to medium term. However, uncertainties in the movements of global oil and commodity prices, as well as domestic food supply pose a risk to this outlook. The Reserve Bank February 2023 Monetary Policy Statement prioritized reducing core inflation through monetary policy measures and monitor the movements in global commodity prices to address the underlying inflation concerns to rein in inflation below its 5% reference rate in 2023. The financial system remains stable with available liquidity as credit growth improves. Banks are also well capitalized to absorb further shocks.

In light of the above, the expected recovery for the Tongan economy in FY2022/23 is to continue even with the continuing impact of the invasion of Ukraine and global slow down. Imports are projected to strengthen in line with the economic recovery, while remittance receipts and inflows from donor funds return to pre-pandemic levels. To sustain the ongoing economic recovery, prudent macroeconomic management and effective implementation of structural reforms including supply side measures will be critical. Meanwhile, foreign reserves levels is expected to remain comfortable above the optimal level of 7.3 months of imports cover, supported by inflows of development assistance for the HTHH reconstruction and implementation of donor projects back on track. Inflation is expected to have peaked in 2022 and is expected to continue declining in the near to medium term. However, uncertainties in the movements of global oil and commodity prices, as well domestic food supply pose a risk to this outlook. The Reserve Bank will continue to monitor the core inflation and the movements in global commodity prices and will address the underlying inflation concerns if inflation continues to remain high above its 5% reference rate. The financial system remains stable with ample liquidity available as credit growth improves. Banks are also well capitalized to absorb further shocks.

The economic indicators continue to be inline with the NRBTs expectations that the Tongan economy is to gradually recover in FY2022/23, supported by the reconstruction from the HTHH disaster, the implementation of development projects, and the re-opening of the international borders. Global economic growth has weakened while inflation remains elevated. This has triggered aggressive monetary policy tightening in many advanced economies resulting in volatile exchange rate markets. The high inflation in our overseas trading partners and volatile exchange rates have passed through to Tonga’s inflation. However, headline inflation is forecasted to cool off in the last quarter of 2022 then gradually ease towards the reference rate in 2023. This is based on the expectation that global oil prices will continue on its downward path, global supply demand mismatches phase out, freight rates decline, and domestic food supply recovers. Imports are projected to strengthen in line with the economic recovery, while remittance receipts and inflows from donor funds returns to pre-pandemic levels. Meanwhile, foreign reserves levels will still remain comfortable above the minimum 3 months of imports cover, supported by inflows of budget support and donor funds. The financial system remains stable with ample liquidity available as credit growth improves. Banks are also well capitalized to absorb further deteriorating asset quality from rising non-performing loans.

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.