At its meeting today, the Board of Directors of the National Reserve Bank of Tonga agreed to reduce the Statutory Required Reserves Ratio from 12.5% to 10% effective from April 2, 2007. The decision was made against a background of tight liquidity in the banking system. This reduction of the Required Reserves Ratio will inject an additional T$6.2 million into the banking system to assist with the anticipated pick-up in the demand for credit to support reconstruction after the events of November 16 last year.

Looking ahead, the Reserve Bank's preliminary projection suggests that the level of official foreign reserves will fall to around 3 months of import cover by June this year. While this is at the lower range of the Bank's comfort range, the Bank believes tat the economy can withstand this projected decline while macroeconomic stability is maintained. There are a lot of uncertainties at the moment with regards to the impact of 16/11, the progress made on the recovery process and the government's budge for 2007/08. These foreign reserves projections will be revised as and when new information becomes available.

The Bank believes that the injection of T$6.2 million into the banking system will enhance the efficiency of the payments system and the stability of the financial system without significantly accelerating the expected decline in the level of foreign reserves.

The Governor concluded that the Bank will continue to closely monitor economic and financial conditions to ensure the promotion of a sound financial system and macroeconomic stability.