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

During 2002 inflation accelerated to about 10 per cent and price pressures increased, as Tonga’s expansionary macroeconomic policies resulted in a marked decline in net foreign assets, a weaker pa‘anga and higher inflation, according to a new IMF report.

On February 5 the executive board of the International Monetary Fund concluded its annual bilateral consultation with Tonga, and later issued a report on the state of the economy.

The report noted that Tonga’s annual budget deficits were primarily financed through bonds with the banking system, and some external borrowing.

Knock-on effects from external shocks and competing demands on the budget had exerted extensive pressure on fiscal policy in 200½. Over the past two fiscal years annual budget deficits estimated at around one per cent of GDP reflected primarily increased support to public enterprises and rapid growth in current expenditures, as public wages were adjusted by 20 per cent for cost of living in 2000/1.

Economic activity rebounded only modestly in 200½ as real GDP growth went up from zero percent in 2000/1 to one per cent in 200½. Conditions in agriculture had improved owing to record-high prices for squash and vanilla. Construction rebounded sharply with the assistance provided by the international community to rebuild structures destroyed by Cyclone Waka. Tourism and the service sector had been sluggish during the past two years, partly owing to the unwinding of the stimulus from the new millennium celebrations and the impact of September 11 events, but tourism had been recovering markedly in recent months, the report said.

Credit

Meanwhile, credit had expanded at a rapid pace, and the ratio of private sector loans to deposits had risen sharply since November 2001 and stood close to a five year high in September 2002. Credit to public sector enterprises also expanded rapidly but represented only 5 per cent of total banking credit by September 2002.

Net foreign assets of the banking system declined from US $20 million in November 2001 to US$12 million in September 2002. Reserves fell to US$13 million by the end of September 2002.