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Economy

ADB cautions wage increases with Budget constraints

Nuku'alofa, Tonga

By Finau Fonua

An August completion report by the Asian Development Bank (ADB) has indicated challenges facing privatization and fiscal sustainability in Tonga.

The report details a $4.5 million ADB funded development program known as the “Strengthening Public Financial Management Program” that was initiated late last year 2013.

According to the report the program has been effective in pushing reforms and stimulating private investment in the Tongan economy. At the same time however the report noted budget constraints as a result of aid dependency, wage increases and Cyclone Ian.

The report stated “The government revenue base is small. Government finances are heavily dependent on budget support to supplement the recurrent budget, aid funding to finance nearly all investment and most reform projects….This dependency is likely to continue for some time.”

Risks and constraints were associated with wage increases.

“The results of the Tonga program were adversely affected by a government wage increase and by the damage from Cyclone Ian…The wage bill is high and rising. Over 53% of the national budget is spent on staff costs (compared to the government’s target of 45%), and many ministries spend 70%–80% of their budget on staff. This makes it difficult to move funds from lower to higher priority areas, which is essential if fiscal stability and effective public service delivery are to be accomplished. The rise in the wage bill in FY2014 and the expected increase in FY2015 will make it difficult for the government to reduce the wage bill to a level making more resources available in the budget for necessary public services.”

The report also warned that there could be a lack of interest from foreign investors.

“Moreover, there may not be much legitimate appetite for foreign investment into distressed State Owned Enterprises….the risk that there may not be many legitimate foreign investors for poorly performing SOEs needs to be factored into program design to ensure longer lead time for implementation of reforms.”

Despite the concerns, the ADB report was pleased with the outcomes of the program. It stated that “program measures have helped put Tonga on a more sustainable fiscal path” and that reform measures have improved fiscal performance.