Via IMF (Den Internationale Valutafond)

IMF Staff Completes 2020 Article IV Mission to Tonga

February 24, 2020

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision.

  • Tonga’s economy is slowly recovering but the growth outlook is modest and fragile due to slower global growth, weaker than expected agricultural exports, and significant downside risks including from natural disasters.
  • Authorities commendable policy management has delivered low inflation, a fourth consecutive budget surplus and financial sector stability.
  • Ambitious fiscal consolidation is needed to ensure debt sustainability while boosting climate resilience. Strong reforms to support private sector growth would also help improve growth potential and increase fiscal buffers over time.

An International Monetary Fund (IMF) staff team led by Angana Banerji
visited Nuku-alofa from February 10−20, 2020 to conduct the 2020 Article IV
consultations for Tonga.

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

“Tonga’s economy is gradually recovering after stagnating in FY2018 due to
the effects of Cyclone Gita. Growth is estimated at 3 percent in FY2019,
driven by stronger consumption due to remittance inflows, supportive
monetary policy and credit growth. Although the recovery has been slower
than expected due to a loss in market share for agricultural exports and
slower growth in partner/remitting countries, commendable policy management
has delivered strong macro financial outcomes: low inflation, a fourth
consecutive budget surplus; and financial sector stability.

“Tonga’s growth potential, however, is below what it could be. The economy
has been growing well below the regional average for the past two decades
and is constrained by a narrow production base, a lack of economies of
scale and high vulnerability to natural disasters. The loss of skilled
workers to emigration or seasonal worker programs and the social and
economic limitations on the ability of women (who have more years of
schooling) to contribute effectively to the economy, also hurt growth
prospects. Remittances are a mixed blessing—while they help to reduce
poverty and finance Tonga’s heavy import dependence, remittances are
keeping the economy caught in a low-growth equilibrium.

“The economic outlook is, therefore, modest and fragile due to slower
growth in remitting/ partner countries, and high vulnerability to natural
disasters. Tonga is also in high debt distress with repayments set
to spike from 2024 onward. In the medium-term, growth is expected to
gradually decline to an estimated potential rate of 1.8 percent, unless
there is a concerted effort to remove bottlenecks hampering private sector
development. Weak export competitiveness, large debt repayments, and high
import bills due to large infrastructure needs will keep current account
deficits high and rising for the foreseeable future. Inflation, however, is
likely to remain well below the reference rate of 5 percent, due to lower
global food and fuel prices.

“The budget will need to deliver higher surpluses to allow a sufficient
buildup of fiscal buffers for debt repayment and emergency funds for
climate-related shocks. High-quality consolidation measures include:
reducing tax exemptions; updating excise tax rates, fees and charges;
strengthening revenue administration and reorienting current spending
policies toward improving public sector capacity and value-for- money,
including by rationalizing civil service functions; identifying and
staffing critical positions; and gradually aligning compensation with
market pay levels to reduce turnover. Faster implementation of investments
requires careful and consistent prioritization, improved cross-governmental
coordination, and more effective use of procurement regulations.

“However, larger fiscal surpluses alone will not be sufficient to achieve
climate resilience goals. The IMF’s recent Climate Change Policy Assessment
(CCPA) estimates that climate-resilience projects will cost some 140
percent of 2018 GDP, of which donor funding has been committed for about
half. Meeting Tonga’s development goals by 2030 will require an additional
annual spending of 5 percent of 2018 GDP by 2030. There is also a need to
increase the national Emergency Fund to around 1 percent of GDP, and set
aside sufficient funds for infrastructure maintenance. Donor financing—in
the form of grants—will be essential to fill the gap without worsening debt

“A more durable solution to overcoming financing and capacity constraints
would be to grow the private sector to expand the tax base over time, and
support government efforts to achieve resilience. Reform needs are manifold
in several key areas: (i) improving access to skilled labor, land,
infrastructure, credit, and technology; (ii) easing barriers to entry by
strengthening official capacity and female labor force participation; and
(iii) reducing investment uncertainty by improving climate resilience and
insolvency regimes. In particular, improvement of the operation of the
Tongan land market is critical. The complexity, non-transparency and delays
in the operation of the leasehold market are a major hurdle for domestic
and foreign investors. Land-related concerns have also stalled the approval
of high-priority regulations, such as the insolvency law, which further
deters investment. Modernizing and clarifying the land lease process by
improving transparency and predictability in the land-lease market, and
clarity regarding ownership rights, could help maximize the use of vacant
or underutilized land. Such modernization and enhanced clarity would
provide greater confidence for both domestic and foreign investors
regarding their rights and improve incentives to ensure that structures
built on such land are climate resilient.

“Given the importance of remittances for the economy, the AML/CFT framework
should be strengthened as a matter of priority. Efforts to improve
financial sector supervision should also continue.

“The IMF team expresses its sincere gratitude to the Government of Tonga
and the National Reserve Bank of Tonga for their warm hospitality and
constructive discussions.”

IMF Communications Department


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