The International Monetary Fund (IMF) has said that Tonga’s economy is rebounding strongly from a major double shock in early 2022, but that the country is still facing important challenges to long-term growth.
The IMF’s Tonga: Staff Concluding Statement of the 2023 Article IV Mission, released on August 7, 2023, said that Tonga’s post-Hunga-Tonga Hunga-Ha‘apai (HTHH) volcanic eruption-tsunami recovery in FY2023 has been driven by strong domestic demand and a pickup in tourist arrivals following the border reopening in August 2022.
However, the IMF warned that this recovery has been accompanied by emerging supply-side bottlenecks and inflation pressures.
“Tonga is experiencing significant labour shortages resulting from increased demand from seasonal worker programs in Australia and New Zealand,” the IMF said. “Combined with slow progress in rebuilding damaged tourism facilities (e.g., hotels and resorts) and buoyant domestic demand supported by remittances, underlying inflationary pressures remain elevated, with core inflation showing no signs of easing since September 2022.”
The IMF also said that Tonga’s long-term growth prospects are weak. Tonga’s long-term growth is projected at 1.2 percent, reflecting its exposure to increasingly frequent natural disasters, persistent loss of workers to emigration, and limited economies of scale due to geographical barriers.
The IMF warned that Tonga is also at high risk of debt distress. Without additional grant commitments, the present value (PV) of public debt-to-GDP ratio is projected to rise and remain above the 70 percent debt-distress benchmark starting in FY2033.
The IMF recommended a number of policies to promote sustainable and inclusive growth in Tonga. These include:
- Macroeconomic policy settings should be aimed at simultaneously supporting reconstruction and tackling inflation in the near term.
- Beyond the near term, a combination of domestic fiscal measures and additional donor support is required to meet Tonga’s development spending needs while minimizing the risk of debt distress.
- Reforms to improve revenue administration, spending efficiency, and transparency are essential to achieve the necessary fiscal adjustments.
- Further actions are needed to contain underlying inflation pressures.
- The banking sector remains well capitalized and liquid.
- Enhancing resilience to natural disasters and climate change is a top structural reform priority.
- Developing the private sector is critical to boost Tonga’s growth potential.
- A national digital ID system is a significant measure, but it should be reinforced by a government-wide drive to make public administration less paper-based and greater investment in information and communication infrastructure to improve the coverage and quality of internet connection.
- Other important reform priorities include:
- Increasing government spending on education and training, especially to reduce the skill mismatch in the domestic labour market in the context of continuing worker outflows.
- Reducing gender inequality in the labour market, including by enacting the Employment Relations Bill, which would help better protect women in vulnerable work environments.
- Cutting red tape hindering private sector investment, especially by improving the efficiency of land leasehold administration (e.g., adoption of necessary IT systems).
- Strengthening the Money Laundering framework.
The IMF also noted that delays in publishing core macroeconomic data, like national accounts and external sector statistics, have become more prolonged and frequent in recent years. The IMF said that the requirements under the current law on data sharing and cooperation by relevant ministries need to be more strictly enforced.