IMF says Tonga’s economy will grow, but warns of problems with international markets and climate

Tonga’s economy is predicted to grow by 3.1 percent this year, but the International Monetary Fund has warned that the government still needs to keep an eye on its spending and needs to prepare for the effects of climate change.

The warning comes after a visit to Nuku’alofa by an IMF team led by Elena Loukoianova.

Ms Loukoianaova said that agriculture and construction would drive growth in the kingdom in the 2015-16 financial year and inflation would remain low.

However, there were risks.

Markets in Australia and New Zealand are likely to be slowed by a reduction in international demand. This could lead to less aid money being provided by those countries, less money being sent to Tonga by families living overseas and less income from tourists.

On the domestic front, Ms Loukoianaova said large increases in government spending and potential cost overruns on the South Pacific Games could cause increased public debt.

She also warned that slowing the country’s economic reforms could lead to problems with donors and create gaps in the kingdom’s finances.

Natural disasters could also take a toll on the economy.

Ms Loukoianaova  said the Tongan government needed to improve the kingdom’s ability to resist the economic shocks that could be caused by climate change. The government needed to develop a way to prepare for natural disasters and ensure proper risk management.

The IMF praised the government’s initiatives in reforming the Tongan economy.

She said the IMF welcomed the government’s commitment to rein in the wage bill, to reform the civil service and to seek grant financing for the SPG.

Continued progress in improving tax and customs administrations and strengthening public finance management was also important to preserve fiscal sustainability

“The current accommodative stance of the monetary policy is appropriate in the light of low inflation and robust external position,” Ms Loukoianova said.

She said the recent rapid increase in credit growth was not yet a concern because it started from a low base.  She said the IMF welcomed the National Reserve Bank’s plans to avoid excessive credit growth and strengthen the financial sector’s regulatory framework.

Raising Tonga’s potential for economic growth would require improving opportunities for private sector development. The IMF encouraged Tonga’s financial authorities to continue improving business climate, facilitating access to external markets, improving access to finance, investing in transport, communications, human capital and developing tourism.

The Tongan economy

In the 2014-15 financial year the Tongan economy grew by 3.7 percent, supported by construction, tourism, and strong remittances.

This was despite slow growth in advanced and emerging market countries and disruptions to agriculture caused by the El Niño weather pattern.

Inflation declined in January 2016, reflecting lower global fuel and commodity prices.

The external balance and the international reserves improved substantially thanks to low oil prices and stronger remittances.

The main points

  • Tonga’s economy is predicted to grow by 3.1 percent this year, but the International Monetary Fund has warned that the government still needs to keep an eye on its spending and needs to prepare for the effects of climate change.
  • The warning comes after a visit to Nuku’alofa by an IMF team led by Elena Loukoianova.
  • Ms Loukoianaova said that agriculture and construction would drive growth in the kingdom in the 2015-16 financial year and inflation would remain low.
  • However, a slowdown in the Australia and New Zealand markets could lead to less aid money being provided by those countries, less money being sent to Tonga by families living overseas and less income from tourists.

READ MORE: 

Tonga’s economy growing, financial system sound says Reserve Bank in report to Cabinet

 

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