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Economy

Tonga risks debt distress, says ADB report

Nuku'alofa, Tonga

TONGA is at high risk of debt distress and cannot afford to take on more borrowing, according to an Asian Development Bank report that was released this month.

Calling debt distress a key issue for Tonga, the ADB's Pacific Economic Monitor for February, points to a need for expenditure restraint by government, "particularly on personnel expenditure, as non-wage and salaries spending is already significantly over budget."

It was one of three recent assessments, including reports by the World Bank and Tonga's Minister of Finance, which concluded that the Tongan economy will remain weak during 2011 - its third consecutive year of economic contraction.

It is clear from the reports that the huge cost of reconstruction of the Nuku'alofa CBD after the riots of 2006 has forced Tonga into a high debt situation, and that a downturn in the world economy has stalled the nation's recovery on all fronts.

According to the World Bank's East Asia and Pacific Economic Update 2001:1, Tonga's public debt is projected to reach 58.5 percent of GDP in the next fiscal year.

"The loans contracted to finance the increased construction expenditure are causing a sharp increase in Tonga's level of indebtedness," the report said.

The World Bank noted that Tonga has not recovered from the combined effects of the earlier global fuel and food crisis, the global economic crisis; and a series of natural disasters, including a tsunami and cyclones, that affected the country in 2009 and 2010.

The Ministry of Finance and National Planning reported that by the end of January this year the government's total public debt stood at $303.04 million.

Core services

In an outlook statement on March 16, Tonga's Minister of Finance and National Planning, Hon. Sunia Fili, assured the public that despite the downturn for Tonga, "government . . . can deliver its core services in these difficult times."

He noted serious declines in major sources of income for Tonga, with remittances declining by $50 million pa'anga between the last two financial years while agricultural exports had declined "significantly" by 35 percent at the same time. Fish exports had also declined significantly during the same period of time, due to a depleting fish stock, particularly tuna.

But, more positively, after a year of decline in tourism, "tourist receipts started to pick up by December 2010."

Looking ahead, he said that recently government had approved a new development program for small communities (small grant scheme). "There will be consultations with donor countries to fund this project, particularly to outer islands," he said.

He noted that reconstruction of the Nuku'alofa CBD and essential road works throughout Tonga were ongoing. "These works are funded by loans from China, but the Government has designed a way to be able to repay our debts," he stated.

The way this might be achieved was not explained, but the minister remained encouraging, "In our current position government is very optimistic with our economic situation," he concluded.

But where that optimism is coming from is hard to see by looking at the Ministry's January 2011 "At a Glance" economic summary. This reports that the annual inflation rate had reached 6.9%, the highest since 7.9% in November 2008. Remittances received in January had dropped by 55% from December. Government had spent $5.88 million more than it had collected (fiscal deficit) for July 2010 to January 2011.

Budget deficit

It seems certain that aid donors will continue to be called upon to help the Tonga government meet some of its basic expenses.

The World Bank expected Tonga's budget deficit for 2010-11 to be around 4.8 percent of GDP, advising that it could be higher, "or 9.2 percent of GDP in absence of anticipated donor budget support grants."

The Asian Development Bank, meanwhile, expected economic growth for Tonga of only 0.5% for 2011 and 1.8% for 2012, also noting that growth was supported by donor-funded infrastructure activities.

They agreed that the outlook for 2011 remained weak because of a drop in remittances due to high unemployment among the Tongan communities in metropolitan centers, such as in the USA. "The key reason for the weak performance of the domestic economy has been the sharp decline in remittances that Tonga has experienced during the global economic crisis," the World Bank reported.

Remittances

Remittances, for years have been Tonga's major source of foreign earning, but were the equivalent of only 22% of Tonga's annual GDP in the 2009-10 financial year, down from 31 percent of GDP in 2007-08.

According to the World Bank Tonga's remittances fell by 13.6 percent in the year 2008-09 and a further 10.2 percent in 2009-10, and remained flat in 2011.

The loss of remittances to families in Tonga led to lower spending and lower tax revenues for government.

"As a result of falling tax revenues and increased construction expenditure financed by two loans from China's EXIM Bank, Tonga's budget deficit was 4.7 per cent of GDP in 2009-10," the report stated.

At the same time it noted that the government projection of 1.4 percent growth for 2010-11 would be difficult, "if remittances and private sector credit remain subdued."

New priorities

For the immediate future both the ADB and the World Bank are suggesting that Tonga needs budget support funding "to help create the fiscal space needed for reform."

The Minister of Finance's strategies to alleviate the country's depressed economic situation, include:

  • Village community development programs in collaboration with government.
  • Government reviews of the corporate plans and economic activities in agriculture, tourism and fisheries to "enhance their export potential."
  • Enhance private sector development.
  • Government to reprioritize its expenditure to its major functions.
  • Continue dialogue with donor partners to maintain donation grants and aid.
  • Pursue the implementation of the Tonga Submarine Cable to improve and speed up communications.
  • A development program for small communities, small grants scheme.

In the meantime, it appears that Tonga is going to rely more on aid to balance the government budget and to keep government in operation.