Press Release No. 17/104

IMF Staff Concludes Visit to Tonga

March 28, 2017

• Economy expanded at 3.5% in FY16, and is projected to continue at 3-4 % partly due to the 2019 Pacific Games
• Inflation reached 6.7 % in December 2016, but this increase is expected to be temporary
• Risks include weaker global growth and potential increases in fiscal expenditure

An International Monetary Fund (IMF) team led by Ms. Elena Loukoianova visited Nuku’alofa from March 22–28, to assess economic developments and discuss government policies. The team met with National Reserve Bank of Tonga (NRBT) Governor Dr. Sione Ngongo Kioa and Minister for Finance and National Planning Honorable Tevita Lavemaau, as well as development partners and private sector representatives.

At the conclusion of the visit, Ms. Loukoianova issued the following statement:

“Economic activity is expanding and is likely to remain relatively strong into the next couple of years. Growth during FY16 (fiscal year ending June 30) is estimated at 3.5 percent and is projected to continue at a rate between 3 and 4 percent over the coming years, boosted by construction and activities related to the 2019 Pacific Games (PG). Although the current account deficit is projected to widen on the back of PG related imports, the external balance remains stable with continued strong inflow of remittances and a solid level of international reserves.

“Following the introduction of a new tax on imported fatty meat and tobacco in July 2016 and higher oil prices compared to 2015, annual inflation reached 6.7 percent in December 2016. This increase is, however, expected to be temporary, with headline inflation returning at around 3 percent in FY18.

“The overall balance of risks to economic growth remains titled to the downside. The risk of weaker global growth, as well as retreat from cross-border economic integration, may weigh on Tonga’s growth and fiscal space via reduced grants, remittances, and tourism. Domestic risks stem from potential increases in fiscal expenditure related to the wage bill and the cost of the PG. On the upside, an increase in government expenditure may temporarily boost growth.

“In terms of fiscal policy, advice from the 2016 Article IV consultation remains valid. While revenues for FY16 and the first half of FY17 remained solid, expenditure is also projected to increase significantly. Staff welcomed the better than projected estimated fiscal outcome for FY16, which is however partially related to the deferment of maintenance works and lower than expected wage bill. The mission also welcomed the continued efforts by the authorities to seek grant financing for the PG to avoid cost overruns. The overall fiscal balance for FY16 is estimated at a surplus of 1.6 percent of GDP, while the projection for FY17 is a deficit of 0.7 percent of GDP providing a boost to the economy.

“The monetary policy stance has remained accommodative, boosting credit to the private sector. Private sector credit growth increased to 21.7 percent in the year to December 2016 and is projected to hover around 20 percent over the next two years. Against this backdrop, staff advised the NRBT to remain vigilant and be prepared to tackle financial stability issues that may arise from fast credit growth. Notwithstanding the faster pace of credit growth, the banking sector in Tonga remained solid and profitable.

“Staff recommended that the authorities address a weak statistical capacity as a matter of priority. The team encourages the authorities to devote sufficient human and financial resources to the Tonga Department of Statistics and to work closely with upcoming IMF Pacific Financial Technical Assistance Center (PFTAC) statistical missions. In this context, it is also essential that most recent government finance, inflation, balance of payments, and national accounts data are compiled in time for the next Article IV consultation.”