Trading more active, but deeper contraction of GDP expected with extended lockdowns [1]
Tuesday, August 17, 2021 - 15:48
Tonga’s domestic economic activities showed some improvements in May 2021, Sione Ngongo Kioa, the Governor of Tonga’s National Reserve Bank, told the National Reserve Bank of Tonga’s Board of Directors on 5 August.
Economic improvements observed during May 2021 included:
- The Primary Sector reported higher exports of cassava and taro.
- Secondary Industry varied with lower lending to the manufacturing and utilities sectors, while lending to the construction sector rose.
- The Service sector improved slightly over the months, with container and vehicle registrations rising. This aligned with a rise in import payments indicating a more active trading sector.
Meanwhile, inflation declined by 0.2% in May 2021, after increasing on a monthly basis since October 2020, due to lower domestic food prices.
However, the headline annual inflation rate rose again by 4.7% because of higher imported prices for fuel, food, and tobacco, which also drove the prices of local food and tobacco higher.
In May 2021, the official Foreign Reserves rose by $9.9 million to $689.5 million, equivalent to 12 months of imports. This was attributed mostly to receipts of donor funds to support Tonga’s recovery from COVID-19.
The Reserve Bank Governor reported that at year end the Foreign Reserves increased significantly by $199.9 million from receipts of budget support, official grants, and remittances.
The total banking system continued to maintain its soundness, supported by strong capital positions and excess liquidity. Total deposits rose by $9.5 million (1.3%) while total lending declined by $1.5 million (0.3%)
Deeper contraction of GDP
The Reserve Bank’s Gross Domestic Product (GDP) outlook projected a deeper contraction in Tonga’s economy for 2020-21.
The Foreign Reserve was still expected to remain at sufficient levels above the three months minimum threshold of import cover.
Inflation was expected to continue rising above the 5% reference rate in mid-2021, in line with the rebound in global oil and commodity prices.
However, it was expected that inflation would fall back below 5% by the last quarter of 2021.
The banking system is still sound supported by high liquidity, adequate capital and subdued credit growth, reported the National Reserve Bank of Tonga.