The global economy grew 3.3% in 2013, slightly higher than the estimate published in the March Monetary Policy Statement.

The NRBT estimated a much stronger real GDP growth, of 2.5% in 2013-14, an upward revision from the March MPS estimate of 2.0% growth. The upward revision reflects a much stronger than expected second half to the year owing to availability of data for the agricultural and tourism sectors which were offset slightly by a softer growth in the construction sector.

The balance of overseas exchange transactions was in surplus T$27.7 million over the year to August 2014, wider than the surplus of T$23.1 million recorded over the year to February 2014. Remittances, which account for the major portion of current account receipts, have changed only slightly over the past six months. Over the year ended August, total remittances is around T$210.7 million.

Credit growth has picked up and interest rate spreads continue to narrow. In line with banking system liquidity, foreign reserves continue growing and remain well above the minimum range.

Net credit to government fell by more than 15% over the year to August 2014. The outcome reflects an increase in government deposits more than offsetting an increase of banks’ holdings of government bonds.

Outlook

Global growth has been lower than expected in the first half of 2014, leading the IMF to downgrade growth expectations to 3.3%.

The NRBT’s outlook for Tonga is positive with GDP growth around 2.9% in 2014-15 and 3.1% in 2015-16. The expected drivers of the growth are construction, agricultural and tourism sectors.

The NRBT projects that headline inflation will fall to around 1.3% at the end of this year. This is firmer than the 0% projected in the last statement. Global economic uncertainties and weather patterns pose large risks to the inflation outlook.

Foreign reserves are projected to remain well above the NRBT minimum range into early 2015. Despite the expected strong credit growth and associated deterioration in the trade balance, the receipts of government budget support are expected to maintain the foreign reserves at high levels. Remittances are also expected to rise, although the growth will be slow. Growth in travel receipts are likely to pick up.

Broad money is expected to increase as a result of a projected increase in credit growth. The NRBT will continue to liaise with the banks to encourage prudent lending. Low interest rate spread is expected to continue and support lending growth.

Continued coordination of fiscal policy and monetary policy between NRBT and Ministry of Finance and National Planning is of great importance to ensure the relevant objectives are achieved and at the same time, contribute to the stimulation of economic activity.

As foreign reserves levels are expected to remain high, inflation within the reference range and the economy is likely to be operating with excess capacity for some time, the NRBT expects to continue implementing a monetary policy setting that is as supportive as possible for economic activity over the near term.