From Matangi Tonga Magazine Vol. 15, no. 3, September 2000.

Tonga’s struggle to maintain its foreign earnings at a level that will allow it to continue to trade with overseas countries, and to build up its economy so that it can be part of the so called Global Economy, remains an up-hill battle.

Now restrictive measures on Tongan migration to New Zealand, Australia, and other countries, and the termination of the sales of Tongan passports because of criticism by local politicians and some overseas countries, means that our hope for a continuing inflow of foreign earnings has become a great challenge.

Tonga’s economic development has come to a cross-road. Unless a substantial amount of foreign currency earnings is injected into our rapidly depleting Foreign Reserve soon, Tongans can expect their living standards to drop, because we will not be able to afford such things as imported fuel, building materials, cars, and supermarket foods.

Meanwhile, our hope of breaking into a new world of high tech telecommunications with the establishment of a cutting edge wireless telecommunications system that will attract foreign companies and create jobs, remains nothing but a dream.

Tongan administrators consider that the economy could be managable, if only the Foreign Reserve could remain steady at around $USD44 million, and if only most of our consumer products were  to  be manufactured locally, and if only we could export more than our imports. So far this ideal situation remains but an elusive dream.

In fact, the situation at the moment is exactly the opposite of what we would like to have. Tonga’s Foreign Reserve is at its second lowest ever at $22.6 million—enough for only 2.3 months of imports. Tonga is importing about 80 per cent of its daily consumption of food, and even water. Our exports are a pitiful gesture at only $20 million when compared with our imports of $116.5 million last year.

The combination of a very low Foreign Reserve and a widening trade deficit is suffocating the economy. But without the inflow of remittances from Tongans working overseas, which went up last year from $70 million to $90 million, Tonga would be in a far worse position.

The only short-term solution that government and the Private Sector can think of, in order to maintain the momentum of development that was built up prior to the Millennium Celebrations, is to prop up the Foreign Reserve with funds from the Tonga Trust Fund  (See: Tonga Trust Fund #37 million [2]). At the same time we are trying to improve our exports and capitalise on a massive new $26 million investment by government and the private sector in telecommunications.

The National Reserve Bank, the guardian of our Foreign Reserve, is extremely concerned about the state of the Foreign Reserve, and has only once before seen reserves this low since the bank took over the management of the Foreign Reserve in July 1989. In 1998 Tonga experienced a decline for the first time when the Reserve dropped to 2.5 months of import cover, below the bank’s minimum target of three months cover. To counter this drop the bank introduced measures to restrain bank lending by raising the minimum lending rate for banks from 7% to 9% and raising the Required Reserves Ratio from 10% to 12%. The measures worked and the Foreign Reserve bounced back to a more stable position, but not to the height of $44.1 million that it reached during the last quarter of 1994.

Tough restrictions

This time the Reserve Bank is introducing extra restrictive measures. Starting at the end of June the Reserve Bank made it mandatory for Reserve Bank approval for anyone wanting to take out of the country $50,000 or more. It also raised the statutory deposit of the commercial banks with the Reserve Bank from 12% to 15%, and increased its own minimum lending rate to the commercial banks from 9% to 12%.

Although the commercial banks appreciated these restrictive measures as an effort to do something about the critical state of the Tongan economy, they are also very concerned that the measures interfere with their own business of lending money.

Brian Harris, the General Manager of the Bank of Tonga, did not think that the mandatory permit would stop the depletion of the Foreign Reserve. “I don’t think it is going to solve the Foreign Reserve problem, because it only addresses the money that is already committed to go out of the economy, but it does not address the under-lying causes of why the Reserve is diminishing.”

Brian said that if, for example, somebody had landed several containers of goods, which had already been distributed to small shops in Tonga, “the businessman has already made a commitment and he has to pay the supplier. The Reserve Bank just can’t turn around and refuse to issue a permit. If they do, the supplier will never give the local businessman credit again, and may even stop doing business in Tonga, because they don’t know if they will be paid or not.”

Brian believed that this policy of the Reserve Bank was a data collecting exercise, which would allow the bank to know how the Foreign Reserve was being spent. “But it is still amazing to find that a country with very good fertile soil, is importing carrots, cabbages and other vegetables from New Zealand,” he said.  

Building Exports

Gary Ayer, the General Manager of the ANZ Bank, Tonga, did not think that the permit policy would work, “not in isolation.” Gary said that Tonga should seriously look at building up its export industries. “Agriculture, fisheries and tourism have great potential.”

Gary said that the investment by Shoreline Communication in a new telephone service would turn Tonga into a computer centre, and it might be cheaper for overseas companies to get some of their computer operation work done here and then send it through the line to their main offices overseas. He said there was a lot of potential in that area for people to explore (See: EFTPOS cards take off [3]).

Higher interest rates

With regards to the increase in the Statutory Deposit Ratio from 12% to 15%, and the increase in the Reserve Bank lending rate from 9% to 12%, Brian Harris believed that it would only work toward further stagnating the economy.

“The reason why they are doing that is so that we have less money to lend. But we have so much surplus funds in the Bank of Tonga that the increase in SDR will have no impact in our ability to lend. It will have an impact on our profitability, because by lifting the SDR from 12% to 15% means that we have about $8.4 million sitting with them. If you are a businessman with a capital of $8.4 million that is sitting in the bank and earning no interest you will be a little bit disappointed. So for us to increase our profit we will have to increase our interest rate and that, in fact, will have an impact on the whole community. It does have an impact on people’s purchasing power, which will stem the imports, and will help the Foreign Reserve, but it seems to be not a very strong lever. But in terms of the National Reserve Bank they only have a few tools available to them so they don’t have too many levers to pull, ” he said.

“The Reserve Bank is doing their best to turn the position around, but I question whether the fiscal policy is in support of that, and whether government, in running the government side of things, are aware of how critical the position is. There have been some major transactions made, and if they had been deferred we probably would not have faced what we now face. So the Reserve Bank is enforcing a monetary policy to correct a position that has been driven by the fiscal policy of the government.”

The fiscal policy of government has been clearly spelled out in its 2000-2001 Budget, which is to maintain a balanced budget, and ensure that the public debt is within a sustainable level. Debt financing is broadly applied for vital and key strategic areas of investments for national development.

Government under its 2000-2001 Budget poured into the local economy of which about $6 million of dollars when it added on a 20% Cost of Living Adjustment COLA to the wages of public servants. The government is to borrow $15 million from the Asian Development Bank, $6 million is for the COLA, and $9 million was to purchase the Cable and Wireless Capital Assets in Tonga, when Cable and Wireless left Tonga at the end of June.

This is directly confronting the financial policy of the Reserve Bank, which has introduced restrictive measures to weaken the buying power of the public with the hope that it will slow down imports.

Major drain

The other major drain on the Foreign Reserve is the decision by government to push ahead with the development of its telecommunications and power generation. At the end of June, Tonga Telecom, which is fully owned by government, purchased the Cable and Wireless plc plant in Tonga at a cost of $6.1 million, when the franchise agreement between Cable and Wireless plc and Tonga ended.

In addition to the $6.1 million that Cable and Wireless plc has to take out of the country, a second telecommunications company Shoreline Communication, has been given the right to operate a service in direct competition to Tonga Telecom. Shoreline Communication planned to introduce a service, which is said to be the first of its kind in the world, and will cost around $20 million. The investment by Tonga of around $26.1 million in this financial year alone in Telecommunications, couldtake all our foreign reserve in one gulp, but if it means reviving the economy and taking us into the new world of computers and internet business then it might be worth the gamble.

Power plant

Shoreline Power, a sister company of Shoreline Communication will also this year invest another $1.5 million to install a brand new diesel power plant in Vava’u.

We have been told numerous times that a strong economy is the product of a happy marriage between the monetary policy of the Reserve Bank and the fiscal policy of the Ministry of Finance, but in this particular instance their marriage is on the rocks. They are on such bad terms that they neither talk to each other nor to the Press.  They are singing two different songs and are going their own separate ways, leaving us in a situation that our only hope is the Tonga National Trust Fund.

The situation is a difficult one for the new Prime Minister, Prince ‘Ulukalala Lavaka Ata, who chairs both Cabinet and the Board of the National Reserve Bank of Tonga.

The irony with the Trust Fund is that two main sources of funds, which make up the Trust Fund come from the sales of a special type of Tongan passport and the leasing of orbital slots that Tonga has laid claim for in space to satellites companies. These two sources of revenue have been, and are still, heavily criticised both locally and overseas, but realistically the Trust Fund is Tonga’s only hope at the moment to save its economy and its sovereignty.