Tongan economy rebounds
THE Tongan economy has been rebounding since a contraction in its financial year 2013.
The International Monetary Fund (IMF) recorded the country's growth accelerated from 2.1 per cent in 2014 to 3.7 per cent in 2015, supported by construction, tourism, strong remittances, and strong private credit growth, notwithstanding weather-related disruptions to agricultural production.
This comes after IMF concluded its 2016 Article IV consultation with Tonga.
"Inflation declined to -0.3 per cent at end-February 2016, reflecting lower global food and fuel prices," the fund noted.
"The country's external position remains strong, with reserves supported by strong remittances, donor aid, and low global fuel prices.
"Real GDP is projected to grow at 3.1 per cent in financial year 2015/16, driven by agriculture and construction sectors, as well as private consumption.
"Over the medium term, growth would stay around 2.5-3 per cent, supported mainly by construction activities related to the preparation for the South Pacific Games (SPG).
"Low inflation is projected to continue over the medium term in line with global commodity prices."
It says the balance of risks is tilted toward the downside.
"A protracted period of slower growth in advanced and emerging market economies, particularly in Australia and New Zealand, could lead to lower aid, remittances, and tourism receipts.
"On the domestic side, a large increase in current spending and potential cost overruns related to SPG could weaken fiscal sustainability and raise public debt.
"Slippages in the reform process could affect donor aid and create a fiscal financing gap, while natural disasters could take a toll on the economy."
The executive directors of the fund welcomed Tonga's improved macroeconomic performance and favourable outlook.
However, they noted that given the country's small size, remoteness, and exposure to natural shocks, it remains vulnerable to risks.
The fund has also agreed that policy priorities ahead should focus on building buffers and implementing structural reforms to strengthen the economy's resilience, safeguard macroeconomic and financial stability, and boost potential growth.
It emphasised the importance of addressing fiscal risks and gradually building buffers.
They (directors) welcomed the authorities' commitment to rein in the wage bill and avoid cost overruns.
They also encouraged continued reliance on concessional financing for capital spending, including grant financing for the South Pacific Games.
The fund saw a need for further improvements in debt management as well as broader reforms to increase revenue and raise the efficiency of public spending to create the fiscal space needed for investment in infrastructure and human capital.