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.

To sustain the ongoing recovery, prudent macroeconomic management and effective implementation of structural reforms will be critical.

  • Headline inflation has eased from its peak of 14% in September 2022 to 4.8% in July 2023 for the first time since May 2021, in line with forecast to be below the 5% reference rate in the second half of 2023. Although imported inflation has eased to 1.9% in July 2023, domestic inflation has surprised on the upside and has remained relatively high at 8.8%.
  • Price stability remains at risk if domestic inflation at 8.8% becomes entrenched and will contribute towards persistently high inflation affecting the purchasing power of both households and businesses especially those who are poorer and more vulnerable.
  • External stability is maintained with the foreign reserves remaining well above the optimum level of 7.5 months of imports.
  • Financial conditions are sound. Credit growth continue to increase and is expected to be in line with the projected economic recovery. At the same time, the excess liquidity in the banking system remains high which weakens monetary policy transmission.
  • The outlook is subject to large uncertainties in both the global and domestic economy weighing on growth and inflation. Domestic economic recovery could be hindered by capacity constraints, rising domestic inflation, and adverse and extreme weather conditions. Vulnerabilities to financial stability are therefore on the rise, and should be vigilantly managed.

Over the next six months, the Reserve Bank’s monetary policy will continue to focus on reducing domestic inflation to make sure headline inflation stays within the reference rate for a longer period of time, and managing the risks of another sharp resurgence in inflation. At the same time, targeted support for accessing financing by vulnerable businesses, households and needed private sector investments will continue, to support economic recovery, address supply-side shortages and contribute towards a stronger economic outlook in the short term.