We need a leader [1]
Saturday, February 27, 1999 - 12:00. Updated on Friday, January 8, 2016 - 13:20.
From Matangi Tonga Magazine Vol. 14, no. 1, January 1999.
Afu‘alo Matoto is the new General Manager of the Tonga Development Bank, taking over this year from Penisimani Vea who retired early last year.
Afu‘alo comes into the TDB with a wealth of knowledge of the Tongan economy. He worked with Tonga’s Ministry of Finance from 1971 to 1983, where he was Secretary for Finance for six years. He left government to join the management team of the Bank of Tonga, and as Manager of Credit and Lending he resigned at the end of last year to take up his new post with the Tonga Development Bank.
Afu‘alo has taken over the leadership role of the TDB at a time when the Bank is expected to play a major role in reviving the Tongan economy, by providing capital for the development of the agricultural, fisheries and tourism industries – areas that urgently need development to pull the country out of its current economic recession. But he says Tonga needs to first resolve its leadership crisis: “We need to crystallise our position and to take action.”
By Pesi Fonua
This year will be the third year in a row that we face government cuts in expenditure. Last year there was a cut of about $16 million in development funds, and the year before that it was a $13 million cut. This year it is estimated that government will cut expenditure by about $20 million including this time recurrent expenditure. What is the impact of such a cut in the flow of money in to the general economy and to the private sector?
I do not know how government is going to cut its expenditure, whether it will cut its Development or Recurrent Expenditure. If it cuts the Development Budget, it may mean that there is a cut in the amount of aid that government receives from foreign countries.
The Development Budget is funded mainly from aid donors, plus funds from the Tonga Trust Fund, but there is very little (development) funding that comes from the government’s Current Revenue.
The cutting of the Development Budget has a major impact on our development needs, and if a big portion of the Development Budget is spent here it contributes to our Foreign Currency Earnings.
With the Recurrent Budget, Government controls the revenue and the expenditure, but during this coming financial year (1999-2000), I think there will be a cut in the Recurrent Budget.
This will have a negative impact on the economy, because it will mean less money is spent by government in local businesses, and on the salaries of Civil Servants. So a cut in the Recurrent Budget, means a cut in the money supply to the community.
The question is then, should there be a cut?
The Government’s policy is to avoid a deficit budget, so a cut in its expenditure could be the only way to achieve a balanced budget. It is probably easier to cut expenditure than to try and collect more revenues or to find new sources of revenues to replace lost sources of income, say to replace the Passport Scheme.
At the same time government may cut back in some of its expenditure to subsidise some of the public services. Maybe it is time for the public to pay the full price for the service that they are getting, and for government to subsidise only community services such as education and health. Government could also cut back in its expenditure by prioritizing its spending.
The top priorities for Government Ministries are the salaries of their workers, but usually when it comes to carrying out their duties there are insufficient operational funds. I think this is an area that needs to be looked at carefully because the budget that is allocated to a particular ministry may be all spent on salaries and very little is left to carry out the work that they are there to do.
What do you think is the best for the country: for government to avoid a deficit budget, or to allow a deficit for the sake of allowing more money to flow into the community?
The problem, I think, is because government does not have enough reserves to have a deficit budget. If they had built up a reserve, then they may have been able to carry a deficit budget for two or three years, not a big deficit but something on a reasonable level. So the first problem is the insufficient reserves to meet any deficit–the other alternative is to borrow to pay for the deficit. They could either borrow locally or from overseas. That is probably what they are concerned with, that borrowing should be only to fund development programs but not to finance a deficit budget, I think that would be very difficult for government to accept.
There are a number of countries in the world that are run with a deficit budget, but in the end government ends up owing a lot to financial institutions. I think that is why government is so cautious, because the Private Sector is not strong enough to generate commercial activities in order for government to re-pay loans.
I think that is what government is so concerned with, even though our debt service ratio is still in a reasonable position with regards to loan repayments, but it can get out of hand. What are they concerned with I think is that once we do it we will become dependent on it.
For many years we have heard talk of trimming the public service in an effort to cut down the amount of money that is spent on the salaries of an over-sized public service. To maintain a balanced budget government has cut the Development Budget, and now they may cut the operational funds of ministries. Why is it that there is reluctance in government to reduce the size of the Public service?
It is very difficult, because first of all government is very concerned with the financial difficulties that the families of those public servants will encounter if they are laid off from work. It could become a big political issue, depending on the redundancy program that will be implemented by government. In addition if there will be redundancy, those redundancy packages will be an additional expenditure to government, and to add that on at this stage will be compounding the problem. We could follow the Tonga Electric Power–I think they needed about $1.5 million for their redundancy program–but the Public Service will need more money. But I think a general redundancy program is a much later option, the hardest question now is where are they going to start, and that can only be decided by the head of each ministry, the minister and his director.
Where do you think they should start?
There are a number of options, but I think they could look at some of the services that they could let go to the Private Sector. I think a starting point would be to cut down on recruitment so that the reduction in the size of the Public Service could be carried out through the process of resigning, retiring, and laying off some for various reasons, and then don’t fill those vacant posts.
Looking at the Private Sector, during the past three years, there seems to be very little happening, compared with the time when the Small Industry Centre was first set up and there was road building and the construction of the Reserve Bank and the new Talamahu Market. Most recently there seems to be little happening except for the increase in the number of fale koloas and the Tuimatamoana Fair.
That is right, and the reason is because there has been very little new big investment in the Private Sector. It is brought about by two factors, the financial situation in overseas countries is very difficult at the moment and people do not want to go out and invest overseas, they are more involved in their own economic problems.
During the 1970s and 1980s particularly in New Zealand and Australia and to a certain extent the United States, the private sectors in those countries came face to face with rationalization. One of the options that was open to them was to move their operations off shore, because it could be cheaper. There was a New Zealand scheme, the PIDS Scheme, and there was also an Australian scheme to assist their private sector to expand. And through these schemes investors in those countries looked to places like Tonga where they could invest.
In Tonga at the time, government also pushed to attract foreign investment. At the moment, the economic situation in New Zealand and Australia has been stabilized and their business people are no longer looking for expansion overseas.
I think there are a lot of things that can be done to attract investment here by foreigners and by Tongans, and the business community feels that there is a need for government to offer some incentives. Outside the Private Sector there is also a need for some improvement. So there is a need for a lot of work in these areas so that when the government decides to give it a major push to attract investment there is already a conducive business environment in the country. At the moment there is a downturn in the economy, at the same time Tonga is losing its appeal as a place for investment. We have to look carefully at what needs to be improved, and the particular sector that needs to be encouraged. We have had legislation since 1978, offering incentives to investors, but we should at that legislation to see if it is still relevant today.
With regards to investment, we have a stable government and a number of incentives such as Development Licenses, but recently there has been little investment, I wonder why?
I think it is because of our current economic situation. For investors to come in they have to make sure that they will be able to make a profit. So naturally investors are looking at the possibility of making profit.
We have to lift the standard of our economy, in order to attract investors here where they will receive reasonable return for their investment. Some people do not really want to receive huge profits, but at least to make some profit. At the moment there is doubt as to whether they will ever make any profit. The cost of living is high and the labour cost is high. Our level of education is good, but what needs to be improved is the skills, particularly managerial skills.
The land issue is one that has always been raised, and only government can deal with that issue. That is why the Small Industries Centre was established, for investors to go there so that they would not have to wrestle with the land problem. But not everyone wants to go to the SIC, and therefore they are facing the land problems.
Our exchange rate, even though (the value of the pa‘anga) has come down, but a lot of people still think it is too high. Some said that no foreign investor would come here because of our high exchange rate.
We are very proud of our stable government, peaceful life style, and educated population, but somehow we have not been able to produce people with special skills and entrepreneurs to take advantage of the number of opportunities that Tonga has. What do you think can be done to advance these areas?
Our education system is academic oriented, and we have neglected technical training, in addition we have a negative attitude toward blue collar workers and I think this is why we are lagging behind in our knowledge of the technology, and managerial skills.
We also have our own problems because despite our very high level of education, our culture and our lifestyle somehow works against the building of industries and factories. To build up these enterprises we have to become service oriented, but for Tongans we treasure our independent lifestyle and a lot of people do not want to be tied down to a job, particularly jobs that are not well paid. A lot of employers are complaining because workers come to work today, disappear for a few days then they show up again. The daily wages of around $12 a day are not attractive to some of our people. The root of the problem is because of our negative attitude toward manual jobs, which in turn work against our hope for a service oriented workforce.
There has been a lot of foreign aid given to this country but somehow we are not able to carry out repair and maintenance of the facilities, which have been built. Apparatus has been given to the hospital but there are complaints that we are unable to keep this equipment clean, so there is a need for a major change in our thinking and our way of life. To find a solution to these problems I think we have to come from the homes and the schools. Look at how parents are raising their children, if they teach them to take pride in the work they are doing and to be diligent, and in the schools to reinforce those values. It can be done, but it needs a concerted effort to make it work.
If we look at the banks today we can see that they have moulded their workers to become conscious about the service they offer. If other businesses and government departments will follow suit, then it will show to the rest of the people that this is the standard of service that we should have.
All these changes to save the economy realistically should come with a big bang but because we are talking here about changing an attitude, it could mean a very slow evolution.
I think it can be speeded up, and we don’t have to rely entirely on the parents and the schools, even though it should be re-enforced by these institutions. I think the one factor that can speed it up is our need. Our need has forced all these changes to take. If you look at the banks, you can see that these changes are taking place and it is our need that is forcing these changes to take place. If we will continue to put emphasis on the training of managerial skills, managers should be able to move their operation in that direction. Our need for cash and our need for a job will push us to do all these things.
What is happening now is that the need is not there. A lot of people still have not got to the stage where they have to change their lifestyle. Our culture and our tradition of helping each other is fine but some are abusing these privileges, and they tend to be just sitting around waiting to be assisted by their relatives.
Remittances from Tongans working overseas have brought in the most Foreign Earnings, and Tonga has looked at the possibility of training a skilled work force with an eye on the possibility of getting them into well paid jobs when they go overseas, and then keeping the remittances flowing into the country. On the other hand is the idea of developing manufacturing and industries in Tonga to offer employment, to provide import substitutions and to bring in foreign earnings. Which of the two do you think we should concentrate on?
At the moment the economy relies heavily on remittances, and looking to the future remittances will remain a major component of our economy. There is a lot of concern about the younger generation of Tongans overseas, and whether or not they will continue to maintain their connection with Tonga and keep the flow of remittances into the country. People who grow up in a foreign country naturally look for their roots and then decide to make their first visit to Tonga, it still means a lot to them. There will always be the few who would like to sever all connections with Tonga, but all in all the connection is very active and warm. On the other hand, more people are leaving for overseas every day, which continues to reinforce the connection.
But here in Tonga it is very important for us to set up our own manufacturing and industrial enterprises, and in order for those enterprises to be profitable there are a number of obstacles that have to be overcome.
The exporting of squash has proven to us the importance of having a niche market, which demands a quality product, and a consistency of supply. Unless we can meet the requirements of the market place it will be difficult for us to export.
All we have been hearing lately is that growers can’t export their produce, and if they are exported the price is very poor. We do not know if this is true but we have heard of complaints that they have been cheated by the exporters who promise good returns, but in the end they could barely meet their expenses.
The growers are so desperate to make sales that if another exporter comes along with a new proposal, the same group of growers will sell him their produce, and again may not receive a good return for their efforts.
It is a pitiful situation, and I don’t think individual exporters will ever be able to meet their obligation to the growers, because they are more concerned with making a profit for themselves and in their rush to make profits they put the growers in a very disadvantaged position. I have been looking at this problem for a number of years and I think the solution is for Tonga either to have a big exporting company, or for government to establish an exporting entity or a marketing board, that will try and solve the problem that I was talking about. One of the problems is the fluctuation of market prices. There should be a stabilization fund, it is an old practice but it is something for exporters to think about.
The drop in the price of vanilla has left the growers holding on to their stock of vanilla. A big exporting company should be able to subsidize the price of vanilla when the price is low.
One of the main problems with agricultural production is because there is no reliable marketing entity that can confirm a market and a price, therefore growers are just drifting from one exporter to another looking for where they could get a better price for their products. Because of this feeling of uncertainty among the growers it is difficult for us at this point of time to say that we have a staple export product, even with squash it is not our staple crop compared to say copra, which was our staple crop.
The process of privatization was set rolling with the demise of the Commodities Board, the former sole exporter of Tonga’s produce, and the birth of a number of small exporters. The situation now appears that we want to go back to only one big exporter instead of a lot of small ones.
It came about because of dissatisfaction, and that is why growers are even attempting to export their own produce, which is having a negative impact on our agriculture production in general, because while the grower is away trying to market his container of produce overseas his farm is neglected. This approach has also been found to be impractical and unprofitable. He goes over there with a a container of food and lives with his family and it is a difficult situation and usually results in him getting very little for his container of food. On the other hand if he concentrates on growing, and leaves marketing to someone else, I think it will be better. It is a very difficult situation. Looking back at the former Commodities Board, I think the problem was not the Board but how the Board was run. I think in a small country like Tonga there is a need for one big company to carry out marketing.
With regards to agricultural production, the growers are exempt from income tax, their farming equipment is duty free, but still there is just not enough produce for export, not enough manioke, pawpaws and even coconuts, what do you think is wrong?
I think it goes back to what I said before, that until we have a strong marketing entity we can’t stabilize production. At the moment if there is a need for manioke, the manioke growers are no longer growing manioke, they have left and are growing something else, because they grew manioke before and they lost, so they vowed never to grow manioke again and so on. Pawpaw is another good example. The growers were encouraged to grow pawpaws before the hot air treatment plant was ready, but now the plant is ready there are no pawpaws. Because when there is uncertainty there will be problem with production.
The vanilla will be the same, some will destroy their vanilla and grow kava, and that is why I believe a good strong marketing company will play a major role in improving our exports.
There has been a notion for the Reserve Bank to implement a policy for commercial banks to allocate a certain amount to lend to agriculture and fisheries, instead of just the Tonga Development Bank, because they feel that the TDB can’t give them the amount they need.
That is going to be difficult for the Reserve Bank to step in and enforce such a policy, because if they run into problems then they will come back and blame the Reserve Bank.
With the advent of privatization we now have the possibility of about four or five exporters who because of the problem with agricultural production are branching out and becoming farmers themselves, leasing big areas of land and employing hundreds of people, who are no longer small land owners but employees.
We will then get into a situation, which we have been trying to avoid, the widening of the gap between the rich, and the poor. With the small land-holding system, it was intended to secure a fair distribution of wealth within the community.
If we look at the trend today, with globalization, it seems that we are drifting into the kind of system as you have said where the rich will get richer and the poor will get poorer.
We are moving to what is called a user-pay system of collecting revenue for government. It will then come to the point that in an area where a service is no longer economical to provide then it is terminated in that area. It has become noticeable in the postal service overseas, where post offices in some small towns have been closed down. It also happens to banks, and small towns end up establishing their own post offices and banks.
Once we get into profit-driven services then some people will suffer, because only the people who can afford to pay will get the service. I don’t think our country will go that way, but that is the trend at the moment, the principal of user-pays.
Our land tenure has been picked on as an obstacle to attract foreign investment and to encourage the establishment of other commercial projects. Should there be any amendment to our land tenure?
If we were to dismantle our existing land tenure, it would probably be better for our development but it would be a blow to the ordinary folks, and people will become destitute and live in extreme poverty because they have been very short sighted. They will sell their land and if they can’t look after their money within a very short time they will become destitute.
What is your view on the issue regarding the Tonga Development Bank and its relationship with the big borrowers in the tourism industry who are unable to repay their loans?
The bank will do whatever it can to recover its money. The procedure of legal action, repossession of property and the sale of mortgage are last resorts, and we are only going to action to those if every thing else fails. The TDB, and I am sure it goes for other banks, that when there is a problem, the borrower and the bank should become closer and work together. But unfortunately, the nature of this case is that when the borrower is in trouble he is keeping as far away from the bank as he possibly can, and it creates a bad relation between the borrowers and the bank. But they should be working together on how to repay their loans to the bank. The most important thing is for the two parties to work together to find a solution.
It is also important for the public to understand the position of the bank. Some people are led to believe that their loans from the bank were for a particular project and because that project failed and did not make any profit therefore they can’t repay their loan, but that is not the view of the bank. Even though the money was lent for a specific project but if that project can’t make profit to repay the loan, the bank knew at the time that the person had other sources of income from which the loan could be repaid, either the whole loan or part of it.
There are people with ventures that collapsed, who go on to do other business ventures, thinking that the creditors will not care about the other project because it has collapsed, but that is not how it should be. If those loans are not repaid they are depriving others who are waiting to borrow some money, so in real terms by not repaying their loans they are holding on to money that should be lent out to other people.
With the case of the hotels that can’t repay loans, and are calling for a government handout, where have you got to with those cases?
It was presented to government, then it was referred back to the TDB, and our view was presented to government by the Minister of Labour, Commerce and Industries, then it was presented to the Governor of the Reserve Bank for his comment, and I don’t know where is it at the moment.
Unfortunately these companies presented their case straight to government. But there are a number of important factors that need to be looked at…because the information that they based their appeal on was not entirely correct and secondly, there should have been a wider implication of what they are seeking.
With regards to the Tonga Development Bank, and presumably the same with the view of the Governor of the Reserve Bank, it is something that we have to discuss with the Reserve Bank.
From our side we have assisted them in the past. If we accept their request, will it improve their trading position?
Our belief is no. It will not improve the financial position of those companies, to a situation where they will make profit, and it will not improve tourism at all. The tourism industry is in a very depressed situation, and it is virtually impossible for them to trade out. What ever concession we offer will have to go hand in hand with the development of the tourist industry, and we do not think they will ever be able to be trade out.
Those businesses are actually presenting us with the problem of trying to find a solution to their problems, and I presume it is the same with the owners of these businesses.
What we are thinking about is to try and minimize losses to both parties, if we were to liquidate and to sell out there would be big losses to both parties.
The loan restrictions that were enforced by the Reserve Bank, how long should such measures remain?
Loans for export-oriented projects are exempted. I think this policy will all depend on the state of our Foreign Reserve. There are two parts, fiscal policy and monetary policy, the Reserve Bank looks after the monetary policy and the Treasury looks after the fiscal policy.
The Reserve Bank has no tool to increase production in agriculture; the only tool they have is to make sure that the Foreign Reserve is at an adequate level in order for business transactions in the country to run smoothly. The only institutions that come under the control of the Reserve Bank are the banks, so the only means left for them to control the level of the Foreign Reserve is to control the lending of the banks.
The situation was very serious in September when the Foreign Reserve was the equivalent of only two months of imports. Since October it has improved, and at the moment it is the equivalent of four months of imports. I think the Reserve Bank at the moment is monitoring this trend to confirm that it is not just a temporary improvement. I think once they can confirm that the Foreign Reserve is in a stable position then they will lift the 30 per cent deposit requirement on loans. Really, the 30 per cent deposit policy should go together with an increase in production for export.
Where are we with our economy, market driven, profit oriented-how would you describe our system of economy?
We are still in transition, and that is one of the reasons why it appears that our economy is on a down-turn, because the transition is taking us too long, because we have not made the necessary decisions to confirm where we are. It is now almost certain that we are moving toward a market driven economy, but we are still not too sure about it. We are in a position where we are undecided. If we take a mix, a mix of what, and I think that is our problem, we have not made up our minds and until those decisions are made we will remain in a state of transition for a while.
What do you think?
I think we will go for a mixed system. But it is important to make a definite decision so that everyone will set their bearings for that system.
We all know that we have had leadership crisis for quite some time, and until we solve that problem it is going to be difficult to affirm anything.
How long before we come out of this recession?
It is very hard to predict how long. I think that if we can resolve our leadership crisis then we should be able to resolve these other issues. We will just plod along, there will be some improvement but it will be a while before we reach the situation where we should be, until we resolve our leadership crisis. It is unfortunate, because it has an impact on a lot of other things.
We need to crystallise our position and to take action.
With due respect to the Pro Democracy Movement, I think they have done a lot of damage economically for all of us, and at very little political gain for themselves. Their approach has made people unwilling to act or to do anything and that is the sad thing about it because while people have been caught up in it during the past five years nothing has been done.
It is natural that if you confront someone with criticism, it is natural for people to build up defences, and take a more protective inward look. I think that is what the Pro Democracy has done, it has given government a protective attitude.
Whereas if they had worked for changes by providing support and then seeking concessions as they went on, maybe the other party would feel sufficiently confident to try out some of these new ideas.
Two things could happen now either people will abandon them or there will be a use of force because government has been building up a defensive mechanism.