In its latest state of the economy report, the International Monetary Fund (IMF) has called on Tonga to improve its debt management, make broader reforms to increase revenue, and to effectively manage public spending.

In the IMF's 2016 Article IV report on the state of the Tongan economy released this week, Tonga was also encouraged to continue to seek concessional and grant financing for the South Pacific Games, while the report welcomed Tonga's efforts in curbing the wage bill and avoiding cost overruns.

The IMF was satisfied with Tonga’s central bank’s current accommodative monetary policy to stimulate economic growth although it urged the National Reserve Bank to “improve its monetary policy framework” and take further steps to expand its supervision over non-banks.

The IMF also emphasized that more opportunities need to be provided for private sector development, but advised that caution needed to be exercised with government-lending schemes.

Tonga was also advised to develop broader reform strategies to improve the business climate and improve natural disaster preparedness. This included preparing and using better quality and timeliness of data and to request technical assistance from the IMF and development partners.

Positive growth

On a positive note, Tonga’s economy recorded a growth from 2.1 percent in 2014 to 3.7 percent in 2015, supported by construction, tourism, strong remittances, and strong private credit growth even though agriculture production was disrupted by natural disasters.

The outlook for 2015-16 is that GDP is expected to grow by 3.1 percent, driven by agriculture and construction sectors as well as private consumption.

In the medium term however, growth is expected to remain around 2.5 – 3.0 percent because of the Pacific Games construction activities. Low inflation is also expected to continue in line with global commodity prices.

The reported concluded, however, that “the balance of risks is tilted toward the downside” as a protracted period of slow growth in Australia and New Zealand economies could lead to a possible drop in aid, remittances and tourism receipts.

Domestically, large increases in current spending and cost overruns related to the South Pacific Games would weaken fiscal sustainability and increase public debt. Other risks are ‘slippages in the reform process’ that could affect donor aid, which would “create a fiscal financing gap” and natural disasters could take a toll on the economy.