IMF Executive Board Concludes 2022 Article IV Consultation with Tonga
August 26, 2022
Washington, DC
: The Executive Board of the International Monetary Fund (IMF) concluded
the Article IV consultation
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with Tonga.
Tonga’s economy was severely hit by the double blow from the Hunga
Tonga–Hunga Haʻapai volcanic eruption and the local outbreak of COVID-19 in
early 2022. The natural disaster derailed the nascent recovery from
Tropical Cyclone Harold and border closures in early 2020 and caused
substantial damages to properties and public infrastructures. Moreover,
strict mobility restrictions involving two national lockdowns to contain
the local spreads of COVID-19 brought virtually all activities to a halt in
the first quarter of 2022. Although economic activity has been gradually
normalizing since April in line with the easing of mobility restrictions
and supported by strong policy measures, real GDP is nonetheless expected
to decline by 1.9 percent in FY2022, following a significant contraction of
2.7 percent in FY2021.
The outlook is fragile and subject to significant downside risks. Annual
GDP growth is projected at 3.2 percent in FY2023, led by reconstruction and
policy support. Tourism is also expected to contribute to the growth
rebound following the planned gradual reopening of international borders
during FY2023, although a meaningful pickup will likely materialize in
FY2024 after a further progress in repairs and reconstruction. Downside
risks mainly stem from natural disasters, a faster-than-expected rise in
international food and energy prices, a new highly contagious and lethal
COVID-19 variant or a new virus, and the loss of correspondent banking
relationships.
The macroeconomic policy response since the global pandemic has focused on
protecting the vulnerable and maintaining stability. The conservation of
fiscal space in the run up to the pandemic, including by limiting the
increase in the public wage bill and raising additional tax revenues,
together with financial support from the international community, allowed
the government to deploy significant fiscal support measures to mitigate
the socioeconomic impacts of the pandemic and natural disasters, especially
in hard-hit sectors such as tourism and agriculture. Meanwhile, foreign
exchange reserves have been maintained at comfortable levels (over nine
months of import cover) since FY2020.
Executive Board Assessment
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Executive Directors agreed with the thrust of the staff appraisal. They
commended the authorities for taking swift actions to protect the
vulnerable following the volcanic eruption and the local outbreak of
COVID-19 in early 2022. Directors noted that the outlook remains fragile
and subject to downside risks related to the lingering pandemic, rising
international food and energy prices, loss of correspondent banking
relationships, and vulnerability to natural disasters. They emphasized the
need to continue supporting the recovery in the short term and to implement
structural reforms aimed at enhancing Tonga’s climate resilience and
raising its long-term growth potential. Given Tonga’s high risk of debt
distress and sizable financing needs, Directors underscored the importance
of continued financial support from the international community, including
through grants and debt relief, as well as capacity development from the
Fund.
Directors agreed that fiscal policy should focus on supporting the economic
recovery and reconstruction efforts in the short term, while providing
targeted financial assistance to low-income households and hard-hit
sectors. Once the recovery becomes entrenched, a fiscal adjustment will be
necessary to bolster public finances. Directors recommended a combination
of revenue and expenditure measures, including to rationalize tax
exemptions, strengthen tax administration, improve spending efficiency and
contain the public wage bill. They also emphasized the importance of
preserving debt sustainability and welcomed the authorities’ commitment to
avoid non-concessional financing. Directors encouraged the authorities to
enhance transparency and accountability of government operations and to
follow through on prior emergency financing governance commitments.
Directors concurred that, while the current monetary policy settings are
appropriate, the authorities should stand ready to tighten the monetary
stance if needed. While banks remain well-capitalized, Directors noted that
financial sector risks have risen. They encouraged the authorities to
closely monitor credit risks, ensure adequate provisioning for loan losses,
and remain vigilant of non-bank financial institutions. Directors supported
developing a macroprudential policy framework and welcomed the
establishment of the Financial Stability Unit in this regard.
Directors agreed that structural reforms are essential to enhance Tonga’s
climate resilience and promote private sector development. In this regard,
they encouraged the authorities to improve the regulatory framework for
foreign direct investment, expand and upgrade public infrastructure,
increase social spending, and enhance land leasehold market 2 operations.
Directors welcomed the authorities’ commitment to continue strengthening
the AML/CFT framework, which will help reduce risks to correspondent
banking relationships.
It is expected that the next Article IV consultation with Tonga will be
held on the standard 12-month cycle.
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Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.
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At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summings up can be found
here:
http://www.IMF.org/external/np/sec/misc/qualifiers.htm
.
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Population (2020): 106 thousands
Major exports: root crops, vanilla, squash, fish Quota: SDR Quota: SDR 13.2 million
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