From Matangi Tonga Magazine Vol. 18, no. 1, March 2003.

The assessment by the International Monetary Fund of the Tongan macro-economy during the 2001-2002 fiscal year, highlighted their grave concern over the stagnating state of the economy, the depletion of the official reserves, the marked depreciation of the Pa‘anga, mounting public indebtedness, and the rapid increase in the inflation rate.

They also noted that the loss of most of the assets of the Tonga Trust Fund hampered the ability of the Tongan economy to buffer adverse shocks and left the economy in a vulnerable condition.

In a statement released on March 6, the IMF Directors stressed the need for Tonga to take rapid and decisive action to restore macroeconomic stability. They urged the authorities to adopt a number of hard fiscal measures.

These measures will reduce the spending power of the community.

The IMF Directors said that the Tonga government should resist pressures to fix the value of the Pa‘anga against the US dollar because the foreign reserves are low and the economy remains weak.

They recommended changes to the monetary policy of the kingdom to stem rapid credit growth, contain inflation and to help to restore the reserves.
 

Fiscal Measures

1.    Elimination of some exemptions on import duties for personal and household goods and petroleum products.
2.    To broaden the base and increase the rate of Sales Tax.
3.    To reduce the current expenditures, particularly the spending on the salaries of public servants.
4.    To stop the financial support given to ailing public enterprises.

Monetary Policy framework

1.    For credit ceilings to be enforced with penalties on breaches by commercial banks or otherwise replaced with alternative instruments, such as higher reserve requirements.
2.    For a prompt recapitalization of the National Reserve Bank of Tonga to restore its ability to effectively conduct open market operations.
3.    To protect the National Reserve Bank of Tonga’s financial position through strict limits on lending to government.
4.    For government to resist pressures to fix the value of the Pa‘anga against the US dollar in light of the low level of official reserves and weak macro-economic fundamentals.
5.    They endorsed the proposed tax reform, broadening the tax base and shifting the burden of taxation away from foreign trade toward domestic sources. Simplify the tax structure, reduce exemptions, and minimize loopholes.
6.    They recommended tightening single borrower limits and introducing an aggregate limit on loans to connected parties, and for the Financial Institutions Act to be amended.
7.    To improve the reliability of statistics compiled by government.

(See also: Prices Pressure page 9 and Viewpoint page 44).