An International Monetary Fund (IMF) mission led by Ms. Elena Loukoianova visited Nuku’alofa during February 29–March 11, to conduct the 2016 Article IV consultation discussions. The mission met with Prime Minister Honorable Akilisi Pohiva, Minister for Finance and National Planning Honorable Dr. Aisake Valu Eke, Governor of the National Reserve Bank of Tonga Dr. Sione Ngongo Kioa, and other senior government officials, as well as development partners and private sector representatives.
At the conclusion of the mission, Ms. Loukoianova issued the following statement:
“In FY2014/15, real GDP grew by 3.7 percent, supported by construction, tourism, and strong remittances and despite slow growth in advanced and emerging market countries and El Niño-related disruptions to agriculture. Headline inflation declined to -1.2 percent in January 2016, reflecting lower global fuel and commodity prices, although domestic inflation increased to 3 percent. The external balance and the international reserves have improved substantially thanks to low oil prices and stronger remittances.
“Real GDP is projected to grow at 3.1 percent in FY2015/16, driven by agriculture and construction sectors, as well as private consumption. Over the medium term, growth would stay around 2.5–3.0 percent, supported mainly by construction activities related to the preparation for the South Pacific Games (SPG). Low inflation is projected to continue over the medium term in line with global commodity prices.
“The balance of risks is tilted toward the downside. Protracted period of slower growth in advanced and emerging market economies, particularly in Australia and New Zealand, could lead to lower aid, remittances, and tourism receipts. On the domestic side, large increase in current spending and potential cost overruns related to SPG could weaken fiscal sustainability and raise public debt. Slippages in the reform process could affect donor aids and create fiscal financing gap, while natural disasters could take a toll on the economy.
“Staff welcomes the authorities’ commitment to rein in the wage bill, complemented by civil service reforms, and to seek grant financing for the SPG. Continued progress in improving tax and customs administrations and strengthening public finance management is also important to preserve fiscal sustainability. At the same time, despite strong revenue collection, the fiscal position is expected to weaken in the near term due to a large increase in the wage bill. Over the medium term, the fiscal position is projected to improve provided that revenue continues to grow steadily, the wage bill is held in check, and the cost of SPG is under control.
“The current accommodative stance of the monetary policy is appropriate in light of low inflation and robust external position, while the recent rapid increase in credit growth is not yet a concern considering that it started from a low base. However, if the inflation were to rise and credit growth to accelerate further, a monetary tightening should be considered including by mopping up excess bank liquidity.”
“Although the financial sector has remained highly profitable and stable, the National Reserve Bank of Tonga (NRBT) should remain vigilant and closely monitor early signs of vulnerabilities. The mission welcomes the NRBT’s plans to introduce macro prudential tools to avoid excessive credit growth and encourages the authorities to continue their efforts in strengthening the financial sector supervision and regulatory framework.
“Raising Tonga’s inclusive growth potential remains an overarching goal and will ultimately require improving opportunities for private sector development. In this context, the mission encourages the authorities to continue their progress in implementing Tonga Strategic Development Framework (TSDF II) by the improving business climate, facilitating access to external markets, improving access to finance, investing in transport, communications, and human capital, and developing tourism.
“The mission also encourages the authorities to improve Tonga’s economic resilience from climate-change shocks by developing strategy to assess preparedness to natural disasters and ensuring proper risk management, including by building adequate policy buffers.
“The IMF will continue to support Tonga’s reform efforts by providing technical assistance in various areas.”
“The mission wishes to thank the authorities for their hospitality and constructive discussions held.”
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