Tonga’s economy expanded by 2.7 percent in FY2025, supported by robust reconstruction activity, strong remittance inflows, a rebound in tourism, and stronger-than-expected grants inflows, the International Monetary Fund reported on 10 November, after concluding its Article IV consultation with Tonga.
“Growth is projected to moderate to 2.3 percent in FY2026 as reconstruction outlays normalize and supply- side constraints persist. Headline inflation has eased below the 5 percent reference rate of National Reserve Bank of Tonga (NRBT), but core inflation has risen to nearly 10 percent, reflecting strong domestic demand pressures. Risks in the banking sector remain contained but have increased and require continued vigilance.”
The IMF report stated that Tonga’s external position in FY2025 remained solid, with ample reserves covering about 10½ months of imports. While reconstruction-related imports widened the current account deficit from 3.8 percent of GDP in FY2024 to 5.2 percent in FY2025, this was financed by sizable capital transfers.
“The outlook is favourable but subject to significant risks. A sharper global slowdown, weaker remittances, or natural disasters could weigh on growth. Tonga also faces long-standing structural constraints that limit potential growth, including high outward migration, a narrow economic base, and vulnerability to climate shocks. Addressing these challenges will require sustained reforms to deepen financial markets, improve the business environment, strengthen governance—including at state-owned financial institutions—and enhance resilience to natural disasters.
The Staff Report was prepared by a staff team of the IMF for the Executive Board’s consideration on November 6, 2025 following discussions that ended on August 22, 2025, with the officials of Tonga on economic developments and policies. Based on information available at the time of these discussions, the IMF staff report was completed on October 23, 2025.
Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
The staff report will be published on the www.imf.org/Tonga page.
Some key points noted:
- Public and donor-funded infrastructure projects drove construction activity, while wholesale and retail trade remained strong, buoyed by high remittance inflows and the continued rebound in tourist arrivals.
- Supply-side constraints—including labor shortages and logistical bottlenecks—continue to limit growth, especially in agriculture and service sectors such as retail.
- Remittance inflows remain elevated; however, goods imports are estimated to have increased in FY2025, reflecting continued economic recovery and construction activity. As a result, the current account deficit is projected to widen from 3.8 percent of GDP in FY2024 to 5.2 percent in FY2025.
- Medium-term growth prospects are weak. Tonga’s long-term growth is projected at 1.2 percent, reflecting its exposure to increasingly frequent natural disasters, persistent loss of workers to emigration, and limited economies of scale due to geographical barriers.
- Tonga is assessed as being at high risk of debt distress (DSA). Without additional grant commitments, staff’s baseline projection shows that the present value (PV) of the external and public debt-to-GDP ratios are projected to keep rising and both cross the 55 percent threshold and the 70 percent benchmark in FY2035. This reflects significant development spending needs over the long term to achieve its climate resilience goals and the SDGs.
- Debt obligations are largely external, with less than half of the external debt to China Exim Bank. Debt repayments surged to 3.5 percent of GDP in FY2024, mainly to Exim Bank, and remained elevated at over 2.5 percent of GDP until FY2028. The government’s plan to refrain from new non-concessional borrowing would further help reduce Tonga’s risk of debt distress.
- Tonga’s financial system remains broadly stable, supported by strong buffers. The banking sector is well-capitalized and highly liquid, with a capital adequacy ratio of 30.7 percent as of 2025Q2—well above the 15 percent regulatory minimum—and robust profitability. Excess reserves at the NRBT remained elevated at T$296.5 million in July 2025, reflecting ample funding and banks’ continued cautious lending stance.
