Tonga’s economy is feeling the squeeze as inflation edges up and foreign reserves continue to fall, raising concerns for stability.
The National Reserve Bank of Tonga (NRBT) released its Monthly Economic Update for February 2025, highlighting diverging inflation trends among major trading partners and economic shifts at home.
Inflation pressures grow
While inflation in Australia and New Zealand is stabilizing, the United States saw a rise from 2.4% in December 2024 to 3.0% in January 2025. Tonga itself recorded a rise in annual headline inflation from 0.9% to 1.2% in December 2024. Higher international airfares, fuel, and imported food prices were the main drivers. The NRBT noted that core inflation surged to 7.2% due to non-food and non-energy items, reflecting an ongoing challenge for household budgets.
Foreign reserves drop, raising concerns
Tonga’s foreign reserves fell by $11.1 million in January 2025, now sitting at $878 million. This continues a year-long decline of $16.7 million, primarily driven by increasing import payments. Despite this, reserves remain above the IMF-recommended threshold of 7.5 months of imports, currently covering 10.1 months.
Strong Christmas spending fuels growth
The December holiday season brought a boost to Tonga’s services sector, with travel receipts increasing by 29.5% ($3.8 million) as more Tongans visited family. The demand for wholesale and retail imports surged by 58.6%, while vehicle registrations also rose by 12%. Electricity consumption jumped nearly 20% as festive events lit up the country.
Job market sees post-holiday rebound
The start of 2025 saw a surge in job vacancies, jumping from 29 in December to 81 in January. The majority of openings were in public administration, hotels, business services, and financial intermediation. However, total job advertisements over the past year declined by 5.3%, signaling potential long-term employment concerns.
Remittances bring seasonal relief
December saw a significant rise in remittances, increasing by 15.6% to $50.8 million as overseas Tongans sent money home for the holidays. However, annual remittances dropped by 2.5%, reflecting economic pressures in key remitting countries and a gradual return to pre-pandemic levels.
Outlook and policy moves
With inflation expected to gradually rise, the NRBT is modernizing its monetary policy framework to manage inflation risks. Despite challenges, the Reserve Bank is confident that prudent financial measures, investment in resilient infrastructure, and improved economic policies will support long-term stability.
