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Tonga's economy is performing strongly but faces growing headwinds, following recovery from the volcanic eruptions in the Kingdom in January 2022 and the opening of borders after the long Covid-19 lockdowns, International Monetary Fund says.
The IMF Executive Board's 2023 Article IV Consultation with Tonga report noted that the Tongan economic activity has rebounded following the border reopening in August 2022, on the back of reconstruction projects, sustained remittances, and a pickup in tourist arrivals.
The report recommends that non-urgent spending should be postponed, with government's budget focused on priority areas such as reconstruction and social protection.
This has been recommended with the IMF considering the government's limited administrative capacity and prevailing inflation pressures, pointing to the expedition of reconstruction projects..
"The current expansionary fiscal stance is appropriate, given the need to expedite reconstruction and protect the most vulnerable," the IMF said.
Bold policy helps
The IMF said the government's bold policy support measures, together with aid from the international community and the IMF's emergency financing under the Rapid Credit Facility, were instrumental in mitigating the socio-economic fallouts.
"While the economic recovery is expected to continue in the short term, the outlook is subject to significant uncertainties," the report states.
Growth of the local economy is expected to be at a rate of 2.5 percent in the 2024 Financial Year.
However, tourism-related services are recovering, tourism receipts as a share of GDP are anticipated to remain below pre-pandemic levels until FY2026 due to slow reconstruction of damaged facilities.
Severe labour shortages due to worker migration and damaged tourism facilities are becoming increasingly binding and contributing to high and persistent inflation pressures.
The report states the recovery in agricultural production is expected to proceed slowly, reflecting labour shortages and bad weather due to El Niño.
It has projected for Tonga's long-term growth to be 1.2 percent, given its exposure to increasingly frequent natural disasters, persistent loss of workers to emigration, and limited economies of scale due to geographical barriers.
Despite sizable remittances, continued grants, and a rebound in tourist arrivals, the current account deficit is estimated to have widened in FY2023 due to higher import needs for reconstruction-related capital goods.
Nevertheless, foreign exchange reserves continued to increase, supported by official capital transfers and the Rapid Credit Facility disbursement in July 2022.
Recommendations
the report said that once the near-term economic recovery is firmly established, both fiscal adjustments and additional support from development partners will be needed to meet Tonga's development goals while ensuring fiscal sustainability.
Tonga is assessed as being at high risk of debt distress without new grant commitments, and sizeable external debt repayments in the coming years would further strain its public finances.
The Tongan government is currently working on paying off debt to China for the reconstruction of Nuku'alofa following the looting in 2006.
The report said that comprehensive structural reforms aimed at enhancing climate resilience and nurturing the private sector are essential to boost Tonga's low growth potential and has also called for stricter enforcement of Building Codes which would enhance Tonga's disaster-resilience.
On tackling labour shortages the report suggests that reducing gender inequality and augmented public investment in training and education will help.
It also recommended the acceleration of the adoption of digital technologies, notably in public administration, as well as continued efforts to cut red tape and fiscal resources should be allocated to ensure production of timely and more reliable macro-economic statistics.
Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members every year.