Maintaining an adequate level of foreign reserves and promoting price stability are the main monetary policy objectives of the National Reserve Bank of Tonga (NRBT). In the past six months, the level of foreign reserves continued to remain above 4 months of import cover bolstered by extraordinary receipts while at the same time, demand for imports weakened due to falling remittances and credit constraints. Banks’ credit growth to the private sector continued to contract and inflation remained low. Reflecting the relatively weak state of the economy, monetary policy remained accommodative to help stimulate the economy.

The Monetary Policy objectives of the National Reserve Bank of Tonga (NRBT) are to maintain an adequate level of foreign reserves, and to promote monetary and price stability. Prior to June 2009, due to threats to the Bank’s objectives, the Reserve Bank adopted a tight monetary policy stance while ensuring that adequate liquidity is available to the banking system. The impact of the global crisis which has led to falling remittances, declining tourist receipts and continuing declining exports threatened the outlook for foreign reserves and the external stability of the country. However, the lower inflows from remittances and tourism also led to a sharp decline in imports of goods and lower overseas payments.

The world economy is slowing down as response to the ensuing credit crunch, bringing with it lower official interest rates, lower stock market indices and lower commodity prices. The problem for central banks is that despite many lowering interest rates in an effort to stave of the financial crisis and encourage more lending and activity, many banks are not lending to each other and wholesale rates are in many cases rising. These outcomes underline the importance of maintaining financial stability where possible. Monetary Policy is a useful tool in maintaining monetary and price stability in normal circumstances, but when the banking system becomes dysfunctional monetary policy becomes very limited in its effectiveness.

Economic activity in Tonga is likely to be contracted markedly in 2007, as the Kingdom’s economy suffered following a poor agricultural season, the large-scale reduction in civil service workers and the near-destruction of Nuku’alofa’s central business district. Reconstruction is taking a long time with only a few projects underway nearly 18 months following the civil disturbance of November 2006. The National Reserve Bank of Tonga (NRBT) was active in encouraging economic activity throughout 2007. Early in the year credit ceilings were lifted, banks required reserves were reduced and the amount of liquidity in the banking system has been left at high levels. Consequently lending growth has recovered strongly. Even with business lending growth rates of nearly 30%, business activity has not returned to early 2006 levels.