The Tongan economy is growing at a solid pace but remains highly vulnerable to external shocks including natural disasters, global trade policy uncertainty, and the risk of reduced concessional financing, says the International Monetary Fund (IMF) in its latest statement on the Tongan economy on 25 August 2025.
The report highlights Tonga's steady economy is strengthening by reconstruction, robust remittances, and a rebound in tourism, following the double shock of the COVID-19 pandemic and the 2022 Hunga Tonga–Hunga Ha‘apai volcanic eruption and tsunami.
Tonga’s GDP growth in FY2025 was revised upward to 2.7 percent on account of stronger-than-expected grant inflows, elevated remittances, a rebound in tourism, and fiscal support for reconstruction. The near-term outlook remains favorable, with growth projected to moderate to 2.3 percent in FY2026, supported by robust domestic demand from major infrastructure projects.
Meanwhile, positive indicators from the IMF include headline inflation easing to 1.4 percent in June 2025, well below the National Reserve Bank of Tonga (NRBT) reference rate of 5 percent, attributed to lower food and energy prices.
The fiscal balance remains in a surplus of 5.6 percent of GDP in FY2025, supported by record-high grants of about 32 percent of GDP, increased domestic revenues due to solid economic performance, and temporary wage savings from slower public-sector vacancy refilling.
High risk of debt distress
Despite these positive notes, the report indicates that the balance of risks is more likely to deteriorate than improve.
It says that external risks stem from a steeper slowdown in global growth, escalating geopolitical tensions, and a possible reduction in concessional financing, while the domestic risks include natural disasters, delays in ongoing reconstruction and donor-financed infrastructure projects, accelerated outmigration, which could exacerbate domestic price pressures, and a further loss of correspondent banking relationships (CBRs).
Tonga is assessed as being at high risk of debt distress, with long-term debt ratios projected to rise above key thresholds under baseline assumptions, reflecting significant development and climate-related spending needs.
To address these challenges, the IMF suggests the government should refrain from contracting new non-concessional borrowing.
The IMF also emphasizes the need for continued reforms to promote financial deepening and stability, fostering private sector development to lift Tonga’s long-term growth.
Priorities include channeling remittances into investment, strengthening financial institutions, promoting growth sectors like tourism, and leveraging digitalization.
The report added better education, training, and immigration policies are needed to counter the impact of emigration on labor and skills.
Meantime, easing regulatory hurdles and attracting foreign direct investment (FDI) would further boost investment and job creation.
Tonga also needs to prioritize enhancing resilience to natural disasters, with the Pacific Resilience Facility (PRF) identified as a mechanism for predictable and regionally governed access to funding for vulnerable communities.
Addressing governance and corruption vulnerabilities is also critical for Tonga’s sustainable development, the report noted.
