The Reserve Bank maintained its current accommodative monetary policy stance. This supported the monetary policy objectives of maintaining internal and external monetary stability, promoting financial stability and a sound and efficient financial system and conducting its activities in a manner that supports macroeconomic stability and economic growth. This was by ensuring adequate level of foreign reserves was maintained above 3 – 4 months of import cover, despite annual headline inflation remaining slightly above the reference rate of 5% annually up to August 2017 although it had declined from the high level 6 months ago.

The Statistics Department has yet to release its official estimates of real GDP for 2016/17, however the Reserve Bank’s outlook for a stronger real GDP growth of 3.7% in 2016/17 remains which is higher than the 2.7% growth projected by the IMF Article IV mission in September 2017. This growth outlook continues to be driven by developments in the construction, utilities, fisheries, and mining & quarry sectors. The number of events that took place during the year and partial indicators showing improvement in economic activities in 2016/17, support this overall strong growth projection.

Inflationary pressures eased in August 2017 reflecting the wind down of the hike in prices last year when the new excise tax became effective in July 2016. The annual headline inflation slowed to 5.2% in August 2017 from a high of 8.9% in February 2017 and a 5.1% increase in August 2016. This is slightly higher than the Reserve Bank’s inflation reference rate of 5% per annum.

Over the past six months to August 2017, the overall balance of OET was a surplus of $27.4 million, which contributed to a rise in the official foreign reserves to $405.0 million. This was more than double the surplus recorded for the past six months to February 2017 of $11.4 million.

Gross official foreign reserves continued to rise to another record high of $405.0 million in August 2017, compared to $377.7 million in February 2017. This was sufficient to cover imports of merchandise goods and services for 6.9 months1, which remained above the Reserve Bank’s minimum range of 3-4 months of import cover. In year ended terms, gross official foreign reserves rose by $38.8 million. The surplus in the current account balance is as a result of higher remittances, higher receipt of foreign aid from donor partners and budgetary support for the Government, which contributed to the higher foreign reserves over the past year.

Over the 6 months to August 2017, the banking system continued to remain sound. The capital position remained strong, high liquidity and strong profitability was maintained, and non-performing loans remained low. Steady growth in total lending continued, which reached a new record high of $415.6 million in August 2017. Growth in deposits climbed to new heights as well, coinciding with the high level of foreign reserves. Furthermore, the weighted average interest rate spread narrowed slightly over the period.

Despite the rise in the Statutory Required Deposit ratio from 5% to 10% in July 2017, liquidity in the banking system (reserve money) increased over the last 6 months to August 2017 by $4.9 million (1.8%) to $282.9 million. Higher deposits over the past 6 months supported the growth in reserve money. Broad money rose over the last 6 months to August 2017 by $42.1 million (8.3%) to a record high of $552.3 million compared to $510.2 million in February 2017. This was driven by a $26.8 million increase in net foreign assets and a $15.2 million growth in net domestic assets. The banks’ total loans to deposit ratio rose in August 2017 to 75.2% from 73.3% in February 2017, due to a credit growth of $31.1 million (8.1%) outweighing a $28.1 million (5.4%) increase in deposits. This ratio continued to remain below the 80% minimum requirement which indicates excess liquidity in the banking system remains and that there is capacity for further lending by banks. The Reserve Bank will continue to monitor the lending growth to avoid any overheating in the economy.

Banking system data shows the net credit to Government continued to fall by $17.2 million (18.2%) over the 6 months to August 2017. This was due to an increase in government deposits, which reflected higher Government receipts during the period.

The 2017/18 real GDP growth estimate has been revised down to 4.0% compared to the February 2017 MPS projection of 4.8%. This downward revision to the growth outlook is mainly driven by the cancellation of Tonga’s hosting of the 2019 Pacific Games which will slow down growth that was projected for the secondary and tertiary sectors of the economy. However, this growth is still above the 2017 IMF Article IV’s projection of 3.4% growth.

The Reserve Bank expects the inflationary pressure to remain in the near term due to the impact of the further increase in custom duty and excise tax effective in July 2017. However, the annual headline inflation is forecasted to gradually decline below the reference rate of 5% per annum after February 2018. The movements in global food and oil prices may pose a risk to this outlook. Additionally, the vulnerability of Tonga to natural disasters poses a risk to the local food prices and consequently the inflation outlook. The Reserve Bank will closely monitor the sources of higher inflation which include assessing the effects of exchange rates, new tax introduced and also the businesses’ profit margins.

The level of foreign reserves is also expected to remain at comfortable levels above the minimum range of 3-4 months of import cover, supported by expected higher receipts of remittances and export proceeds, and anticipated Government receipt of budget support and grant funds from development partners. This will be partially offset by the projected rise in imports. The Reserve Bank forecast the level of foreign reserves to increase to $424.3 million in June 2018 (6.6 months of import cover), which is higher than the IMF Article IV projections of $411.8 million (5.9 months of import cover).

The Reserve Bank’s credit growth forecast for 2017/18 remains at 15% as published in the February 2017 Monetary Policy Statements (MPS), which is lower than the IMF Article IV projection of 16.6% for 2017/18. The Reserve Bank’s monetary policy stance to utilize the excess liquidity to encourage lending in order to support economic activities, would support the anticipated continued growth in credit and broad money. At the same time, continued structural reforms as well as improvements to the credit environment such as the improvements to the land administrative system, a bankruptcy laws and an effective credit bureau would improve the banks confidence to lend further in a prudent manner. The Reserve Bank had issued the Credit Bureau Licencing Guidelines in early 2017 and continues to look at other options to establish a credit bureau in Tonga and ensure it is carrying out its role efficiently. The banks’ outlook for credit growth remains positive and the Reserve Bank’s projection is supported by the continuous improvements in business confidence, improving economic conditions and ongoing annual events. Non-performing loans is also likely to decline in the near future.

Net credit to the Government is also anticipated to decline as a result of expected government budgetary support and grants receipts, as well as improved Government revenue collection.

Given the recent developments and the outlook on the monetary policy objectives and macroeconomic and financial soundness indicators, the accommodative monetary policy stance is maintained however the Reserve Bank will remain vigilant and continue to closely monitor developments in the domestic and global economy for early signs of vulnerability or overheating of the economy. Furthermore, the Reserve Bank will continue to update its monetary policy setting to maintain internal and external monetary stability and to promote a sound and efficient financial system, in order to support macroeconomic stability and economic growth.