Tongan economy doing well, but threats remain, says IMF

     Tonga’s economic growth has been better than expected, the International Monetary Fund said this week.

    In a statement issued after a visit to the kingdom, the IMF said growth had been supported by strong recovery in agriculture and construction sectors, increased remittances, and higher domestic demand.

    The report said gross domestic product had grown by an estimated 3.5 percent in the last financial year.

    Gross international reserves increased from US$166 million in June 2016 to US$171 million in December 2016, reflecting increased public and private transfers, stronger than expected remittances and changes in the value of the US dollar.

    The IMF said money remitted to Tonga was expected to contribute about a third of GDP in the medium term.

    Tonga may benefit as a net energy and food importer, if oil and food prices remain low. Good tax administration, implementation of the foreign exchange levy and new excises contributed to strong domestic tax and other revenue. This is projected to reach 29.7 percent of GDP in the 2017 financial year, up from 24.5 percent in the previous year.

    Looking forward, growth in the 2018 fiscal year was expected to peak at four percent,  supported mainly by construction related to the preparation for the Pacific Games.

    However, despite the good news, the IMF said the kingdom’s financial sustainability would be threatened if the government was unable to control its wage bill, shortfalls in donor aid, the cost of the Pacific Games and natural disasters.

    The IMF said inflation had increased to 6.7 percent in the second half of 2016. This was mainly due to a new import tax on fatty meat and tobacco products, as well as higher global oil and commodity prices.

    Inflation was expected to gradually decline to an average four percent in the 2017-2018 financial years.

    The IMF warned that higher global oil prices would push the current account deficit to grow to three percent in the 2017 financial year.

    It also warned that the Pacific Games posed a risk if there were unforeseen costs and a need to find money to finance them.

    It also said the current account balance was expected to become worse for a period in 2018 due to an increase of imports due to the Pacific Games.

    The report said the government should think about identifying costs that could be temporarily cut if the price of the Pacific Games went up.

    Natural disasters and weather-related events were also a high risk and could take a toll on the economy. The government continues to allocate TP$5 million per year for emergency response for natural disasters.

    The main points

    • Tonga’s economic growth has been better than expected, the International Monetary Fund said this week.
    • The IMF said growth had been supported by strong recovery in agriculture and construction sectors, increased remittances, and higher domestic demand.
    • However, despite the good news, the IMF said the kingdom’s financial sustainability would be threatened if the government was unable to control its wage bill, shortfalls in donor aid, the cost of the Pacific Games and natural disasters.
    • It also warned that the Pacific Games posed a risk if there were unforeseen costs and a need to find money to finance them.

    For more information 

    IMF staff conclude visit to Tonga

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