Over the past six months, Tonga’s macro-economic indicators have remained sound. Internal and external monetary stability have been maintained as the financial system remained sound, supported by adequate capital provisions and excess liquidity. The Tongan economy has recovered gradually with improvements observed in sectoral performance and aggregate demand. However, the outlook is full of uncertainties and risks have escalated.

Inflation has eased moderately, but cost of living in Tonga remains elevated, higher than our neighbouring countries. Headline inflation has moderated to 1.2 percent in December 2024, down from 5.4 percent in June 2024. Imported inflation has eased due to lower energy prices, while domestic prices have declined due to improved agricultural harvests and lower electricity tariffs. Meanwhile, accumulated high inflation from previous years has solidified into domestic cost structures, lifting the overall cost of living higher. Tonga’s accumulated inflation is much higher compared to Fiji and Samoa in the past 8 years by 25 percent and 15 percent, respectively. Over the past 4 years leading to 2024, domestic inflation outpaced imported inflation by 3 percent. This trend and elevated costs of living highlight the urgent need for supply-side fiscal intervention aimed at reducing base costs and increasing supply.

The Tonga Department of Statistics published preliminary estimates for Tonga’s GDP for financial year (FY) 2022 indicating an unexpected resilience and achieving a slight growth of 0.05% despite the impacts of the COVID-19 pandemic and the Hunga Tonga – Hunga Ha‘apai volcanic eruption.

Recovery from the double shock in 2022 is ongoing as there were several constraints that hampered a faster recovery and a stronger rebound in the economy. Supply side constraints and adverse weather conditions also added to the inflationary pressure. The Reserve Bank estimates growth at 2.2% for FY 2024, a downward revision from the 2.6% in the previous Monetary Policy Statement. The revised estimate was largely attributed to the slower than anticipated growth in the agricultural sector.

Tonga’s economy has successfully rebounded in FY 2022-23 after consecutive contractions in the last two years. The Reserve Bank estimates growth at 2.4% for FY 2022-23 and the IMF in its Article IV assessment in July 2023 estimates it at 2.6%. The Reserve Bank forecasts the economy will further grow by 2.6% in the FY 2023-24. Recovery from the double shock in 2022 is ongoing but several supply side constraints remain which are hampering a faster recovery, while also adding to the inflationary pressure.

Tonga is rebounding from the double shock in 2022 but, several supply side constraints are hampering a faster recovery. To sustain the on-going recovery, prudent macroeconomic management and effective implementation of structural reforms will be critical.

The Tongan economy suffered a double blow from the catastrophic impact of the Hunga Tonga Hunga Ha’apai (HTHH) volcanic eruption and tsunami in January 2022, and the local COVID-19 outbreak since February 2022, amid the prolonged adverse effects of global inflation due to the COVID-19 related disruptions on global supplies and shipping services, rising food and energy prices and of course the effects of the war in Ukraine. These developments have further derailed economic recovery from previous cyclones such as TC Gita and TC Harold.

The Reserve Bank reviewed Tonga’s economic growth outlook based on the latest real sector indicators available. A deeper contraction of 2.5% is anticipated for FY2021 compared to the 2.0% official forecast in the February 2021 MPS. The downgrade is mainly due to weaker than expected outturns, mostly in the primary and industry sectors. Additionally, the recent outbreak of the Delta variant in neighbouring countries further affected logistics, travel, and trade, derailing recovery in tourism and trade activities.

The Tongan economy continued to expand by an estimated 0.7% in 2019/20, a similar growth rate to that of 2018/19, according to the latest National Accounts report from the Statistics Department. This indicates some resilience in the Tongan economy in the face of the global pandemic and Tropical Cyclone Harold. Tonga’s ability to remain COVID free has also played a large role in maintaining this positive outturn.

The Tongan economy faced a double crisis in 2020 from the COVID-19 pandemic and TC Harold. Despite the remarkable effort to remain COVID free over the past six months to August 2020, the economy was not spared the global impacts of the pandemic. International border lockdowns, disruptions to supply chains, acute shocks to aggregate demand and consumption activities, and high uncertainties from the prolonged state of the pandemic has severely affected domestic activities and economic developments. Because of these extraordinary challenges, the Reserve Bank has maintained its accommodative monetary policy stance during the review period to support macro-economic fundamentals and growth.