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 global economy expects to record positive growth in 2021 of 6.0%, driven by a strong recovery in advanced economies as a result of large fiscal stimulus and accommodative monetary policies. This is following a contraction of 3.3% in 2020 as reported in the April 2021 International Monetary Fund World Economic Outlook.

During the six months to February 2021, the NRBT has continued to maintain its accommodative monetary policy stance given the global pandemic's negative impacts on the economy. In reviewing the current monetary policy measures, the NRBT considers the monetary policy outcomes to be adequate.

The annual headline inflation remained relatively low over the six months to February 2021, averaging at 0.1%, below the Reserve Bank’s reference rate of 5%. The fall in global oil prices and the excess supply of domestic food were the main drivers of the low inflation in 2020. However, due to the rebound in global oil and commodity prices, inflation has slowly crawled up in early 2021.

Gross official foreign reserves continued to grow strongly, reaching $692.4 million, equivalent to 11.7 months of imports cover, well above the minimum threshold of 3 months. Receipts of official budget support and relief funds from development partners and a loan from the IMF’s Rapid Credit Facility were the main drivers of the strong growth in official reserves. This is in addition to higher private remittances from Tongan diaspora overseas.

The banking system remained sound and stable during the review period, supported by strong capital positions, excess liquidity, and low levels of nonperforming loans. Broad money has expanded by $78.7 million to $703.4 million, largely corresponding to the strong growth in foreign reserves. Similarly, liquidity (reserve money) rose by $84.9 million to $421.2 million, mostly driven by higher commercial banks’ exchange settlement account balances.

Commercial banks’ lending slightly rose by 0.9% owing to a pick up in business lending mostly to the construction, services and forestry sectors. Deposits also increased by 11.2%, reflecting higher demand, time and saving deposits. Consequently, the banks’ total loans to deposit ratio fell further to 68.2%, below the Reserve Bank’s minimum threshold of 80% and reflecting the relatively higher growth in total deposits. The weighted average interest rate spread slightly widened as the decrease in deposit rates more than offset the fall in lending rates.

Outlook

The GDP growth outlook for the Tongan economy for 2020/21 is a contraction of 2.0% (revised up from -4.4% in the August 2020 MPS), owing mostly to the prolonged global pandemic and the extended border lockdown. A moderate recovery of 1.6% is expected for 20201/22 on the assumption that the international border would reopen in early 2022, with much stronger recovery projected for the outer years.

The inflation rate is expected to pick up close to the 5% reference rate in the near term, as oil prices continue to rise in line with economies reopening borders and resuming normal activities.

Foreign reserves will remain in comfortable levels above the minimum 3 months of import cover in the near term, despite an expected rise in imports of goods and services. More budget support and grants from development partners is expected for the end of the 2020/21 fiscal year, and the suspension of the EXIM principal loan repayments also supports this outlook. Credit growth is anticipated to remain subdued in the coming months as borrowers remain cautious of the COVID-19 related uncertainties. Non-performing loans are also expected to be contained as some commercial banks extend their COVID-19 relief packages for their affected clients. However, the Reserve Bank continues to closely monitor banks’ asset quality and ensure adequate provisions are in place to absorb shocks in the banking system.

Fiscal policy remains expansionary with the Government’s ongoing efforts to mitigate the economic impacts of COVID-19 on businesses and vulnerable groups. Vaccination rollouts will also boost consumer confidence and will likely lead to the safe reopening of the international border and the resumption of international travel.

Nevertheless, uncertainties remain on the evolution of the pandemic coupled with the outbreak of new variants in various countries tilting the outlook mostly to the downside. This is in addition to Tonga’s vulnerability to natural disasters and other external shocks.

Given the above developments and outlook, the Reserve Bank considers its current accommodative monetary policy stance to be appropriate in the medium term. The Reserve Bank will maintain its current monetary policy measures to support macroeconomic growth while maintaining financial stability. The Reserve Bank remains vigilant in closely monitoring economic and financial developments and stands ready to adjust its monetary policy settings to achieve its monetary policy objectives.