Tonga's high inflation rate of 12 per cent, is a stumbling block for economic recovery, and a major cause of misery for ordinary Tongans, and urgently needs to be reduced.

Martin Cerisola, the leader of an International Monetary Fund delegation, winding-up their annual visit to Tonga on April 2, said that high inflation had the most adverse affect on low income earners. "It affects the poor the most, and I emphasised that inflation should be brought down to a sustainable level.

"Certainly we see that the economy is weak, partly because inflation is high and that puts pressure on the exchange rate. For a small open economy like Tonga, which has a relatively narrow production and export base, that puts a lot of emphasis on reducing demand on imports, and that affects economic activities."

Martin said that part of the reason for the high inflation rate is because it is foreign inflation that Tonga imports and that is why the price of imported goods keeps going up. "It is very difficult for Tonga because the fiscal deficit has also been increasing during the past few years, and that is putting additional pressure on domestic prices."

Martin said that an increasing budget deficit also put pressure on the value of the pa'anga, and the pa'anga had to be depreciated because of domestic demand. "There is very limited room for raising taxes and cutting spending, domestic financing puts pressure on the pa'anga and that complicates the price of imports, and it adds to the high cost of imports."

"The underlying problem is the problem of financing a high budget deficit, and that is part of the problem in Tonga."

Martin believed that for Tonga to get out of its current economic depression, "It must work immediately on its taxation system, and tax administration system. In order for the tax reform system to work, Tonga must first reform its tax administration system."

Martin said that for the Tongan economy to bounce back government must be able to, "Collect more revenue, collect more taxes from companies and at the same time resist the pressure on spending so that it can restore macroeconomic stability." He said that the economy is weak and there are areas where government can't collect revenue, "but there are areas where government can collect more, and there is room to improve the collection in those areas. There are some corporations where there is room to collect taxes as well," he said.