An International Monetary Fund (IMF) mission, led by Mr. Jookyung Ree, visited Nuku’alofa during March 13–25 to conduct the 2013 Article IV consultation discussions. At the conclusion of the mission, Mr. Ree issued the following statement:
“Economic growth slowed to 0.8 percent in fiscal year (FY) 2011/12 (year ending June), from an average of about 3 percent during the previous three years. Reflecting the completion of public investment projects, Tonga’s growth is likely to remain low in FY2012/13, at about ½percent. Starting in FY2013/14, recovery of remittances and tourism—along with improved infrastructure—will lead economic growth to gradually recover to about 1¾ percent.
“Risks to the near-term outlook are tilted to the downside given fragilities of the global economy. The most imminent external risk relates to lingering concerns over fiscal policy in the United States (Tonga’s largest source of remittances) and its potential impact on the nascent recovery. Re-intensification of euro area stress, caused by stalled implementation of policy commitments or adverse developments in some peripheral countries, is also a major risk.
“The overall fiscal deficit fell from 7.4 percent to 2.7 percent in FY2011/12; and the FY2012/13 budget aimed to eliminate the remaining deficit. Monetary conditions remained accommodative.
“We support the government’s intention to consolidate the fiscal position to restore fiscal space. High external indebtedness remains an important vulnerability, and Tonga is expected to start to repay large-size Chinese loans in FY2013/14. In this regard, the government’s continued strong commitment to the No New Loan Policy, despite recent economic difficulties, is commendable. The mission recommended that the FY2013/14 budget should aim to achieve a moderate further consolidation, including to prepare for the expected repayment of the Chinese loans.
“With respect to monetary policy, the policy focus should increasingly shift to financial stability from active monetary policy. The mission recommended that the National Reserve Bank of Tonga stand ready to mop up excess reserves, once signs become clear that the credit cycle is bottoming out.
“There are indications that banks may be positioning themselves to re-grow lending. Efforts should continue to expedite the on-going repair of bank balance sheets, and overcome obstacles to renewed credit growth to support economic recovery. The mission discussed policy options with the authorities and advised that participation of international financial institutions is essential for those options that may entail fiscal risks.
“A stronger macro-financial framework is critical in building buffers against future shocks. Tongan banks’ painful efforts to clean up their balance sheets are expected to eventually lead to a more resilient banking system. Efforts should continue to expedite this process, and build a more robust regulatory and supervisory framework. The recent drawdown of fiscal space increases the importance of on-going public financial management and revenue administration reform, which will contribute to rebuilding, and to a more efficient use of, the fiscal space.
“Tonga is battling a low development trap, which is aggravated by its smallness and remoteness. Vast marine resources, the potential to grow niche tourism, and a well-educated, English speaking populace, point to a potential for Tonga to break this limit. But this will take further deepening of structural reform. Breaking away from the trap will require a big push in private investment. However, Tonga’s business environment needs to be made more conducive to attracting foreign investment.
“Reforms focusing on policy coordination and deregulation are needed to unshackle private sector initiative. The mission appreciated various initiatives and progress for nurturing a business friendly environment, particularly for foreign investors, and discussed with the authorities the way forward, including in strengthened policy coordination and a deepening of business licensing reform.”