Tonga's economic growth for 2008-09 is likely to be only around half a per cent, after a challenging year in which remittances have slowed, and lending has been cautious, according to an International Monetary Fund Report released yesterday.

The report reveals that the government borrowing for the reconstruction of Nuku'alofa increases Tonga's risk of debt distress during difficult global economic times and that some non-reconstruction budget constraints along with "continued remittances will be required to ensure debt sustainability."

Government's tax collections also decreased during the year by around 10 per cent, due to lower levels of spending in the community, less imports, and less consumption tax collected. Remittances are down by about 15% for the 2008-09 year that will end in June.

Increases in government expenditure to stimulate growth will therefore be reliant on foreign grants given "the weak revenue outlook and Tonga's already relatively high debt".

A team led by Matt Davies of the IMF's Asia and Pacific Department visited Tonga May 4-13 to conduct the annual Article IV Discussions, meeting the Minister of Finance Afu'alo Matoto and the National Reserve Bank Governor Siosi Mafi and other senior officials.

They said that the indications are that in the current year growth will not pass half a per cent and next year will not be much better.

"Looking ahead for 2009-10 the growth rate is likely to remain low as remittances fall in line with global recession and the domestic banking sector continues to consolidate," their report stated.

They believed that the reconstruction of the central business district and agriculture would "cushion downward pressures ... with a likely peak in reconstruction work and a recovery in remittances should support strong growth in 2010-11.'

Risk

But Matt said the main area of risk for Tonga is that the global economic crisis could cause a sharper than expected fall in remittances, putting further pressure on growth.

"The balance of risk is on the downside, particularly given economic conditions elsewhere in the region. If a more pessimistic scenario emerges, economic policy should ideally look to cushion the impact of the downturn. However, relatively low reserves and the high risk of debt distress limit the government's room for manoeuvre."

"Tonga's 2009-10 budget will need to take a cautious approach with respect to revenue. Despite ambitious budget targets, tax collections decreased in 2008-09 partly as a result of reductions in tax rates. Slow growth also dampened collections and this effect will continue into 2009-10 limiting the scope for growth in expenditure," they stated.

"Increases in government expenditure to stimulate growth will be reliant on foreign grants given the weak revenue outlook and Tonga's already relatively high debt. The government borrowing for the reconstruction of Nuku'alofa increases Tonga's risk of debt distress. Balanced non-reconstruction budgets into the medium term and continued remittances will be required to ensure debt sustainability."

At a press conference in Nuku'alofa yesterday, Matt commented that although there was high-risk debt the government was "managing prudently".

"The government despite difficult conditions has still managed to save funds and are in the process of establishing a Natural Disaster Fund of about $15 million pa'anga to set aside," he said.

Bad loans

In the banking sector the report noted that lending remains constrained as banks have tightened their credit policies and the reserve bank has withdrawn excess liquidity. "Stepped up banking supervision will complement monetary policy in ensuring the financial sector continues to recover from the recent increase in bad loans."

"Further private sector development is needed for sustained economic growth improved living standards and debt sustainability," the report concluded and noted that Tonga had made good progress in reducing the costs of doing business and improving the management of public enterprises.

The report recommended that, "improving the quality of public expenditure, including infrastructure investment, further reducing the presence of public enterprises in the economy and streamlining regulations will all create space for more private-sector-led growth".