The Reserve Bank forecasts the economy will further grow by 2.7% in the FY 2025. However, to sustain the ongoing recovery, prudent macroeconomic management and effective implementation of structural reforms remain critical.

  • After two years above the reference rate, the headline inflation eased to 4.6 percent in July 2023 primarily supported by the favorable movement in the global energy prices, with pass-through to domestic energy prices and productions. However, the headline inflation rebounded to 6.7 percent by December 2023 before slightly easing to 6.4 percent in January 2024. The rebound was driven mainly by a strong upsurge in local food prices.
  • External stability is maintained with the foreign reserves equivalence of over 11 months of imports, well above the IMF prescribed level of 7.5 months of imports.
  • Financial conditions are sound. Credit growth is recovering at 8.5 percent in December 2023 and lending rates slowly declined, although remain high for most borrowers. Structural factors are contributing to the high level of lending rates. However, the continual rise in non-performing loans is a concern which requires the Reserve Bank’s ongoing monitoring and supervisory actions to safeguard the stability of the banking system.
  • The persistently high level of excess liquidity in the banking system undermines effective monetary policy transmission. Relatively low term deposit rates and limited trading activities in the Government bond market continue, while the interbank and repo market remain inactive.
  • Geographic constraints (remoteness and dispersion, and exposure to shocks) along with fragility from thin institutional capacities, translate to elevated cost structures in Tonga1 for both households and doing business. Our heavy reliance and dependence on imported goods significantly drives up domestic prices. For instance, electricity prices are at least twice as expensive as those in Fiji and New Zealand, and the costs of food items like chicken has experienced over 100 percent volatility within the last 12-month period.
  • Vulnerability to disasters extends to the private sector and repeated shocks to supply chains from disasters and global shocks are major constraints to investments and private sector development. The result is limited capacity and investment in the private sector, where gains can be quickly reversed by regular disasters and global shocks.

The outlook for Tonga remains uncertain, influenced by both the global and domestic economic factors as well as the country’s vulnerability to disasters and global shocks. Potential challenges include domestic inflationary pressures, capacity constraints, and impact of adverse weather conditions on economic recovery.