From left: Jisung Moon, Jookyung Ree and Jones Morco

The Tongan economy is stuck in a "development trap", according an International Monetary Fund (IMF) report on the current state of the Tongan economy that was released on Monday, March 25.

Tonga's "development trap", according to the report is aggravated by Tonga being so small and its remote location in the Pacific, making it difficult for Tonga to capitalize on its potential, a vast area of marine resources, an undeveloped niche tourism industry, and a well-educated English speaking population.

For Tonga to break out of this "development trap" the IMF recommended that Tonga encourage private investment and try to attract foreign investment.

Monetary policy

With regards to Tonga's Monetary Policy, the IMF suggested a shift from an active monetary policy to financial stability.

Jookyung Ree, the leader of the IMF Consultation Mission, explained that the shift would enable the private sector to access financial capital, to enable them to invest more in the economy than they are at present.

At the moment banks hold an abundance of capital funds, but because of the unstable state of the economy they are very strict in their lending policy, and the borrowers are very conscious that they may not be able to repay their loans.

Slower and slower growth

Tonga's economic growth was reported to have slowed down to 0.8% in 2011-12, from an average of about 3% during 2008-10; this growth was attributed to the completion of the multi-million public investment in the reconstruction of Nuku'alofa.

Tonga's economic growth during 2012-13 is expected to drop to about 0.05% or ½%, but it is anticipated that starting in 2013-14 the world economy will bounce back, and remittances will start to pick up as well as the earnings from the tourism sector.

The IMF mission considered the Tongan monetary condition to be accommodative. The overall fiscal deficit fell from 7.4% to 2.7% during 2011-12 and the 2012-13 national budget aims at eliminating any deficit.

Broader tax base

Meanwhile, the IMF is supportive of a move by the Tongan government to broaden its tax base, and at the same time introducing a new procedure, making it easier for taxpayers to pay their taxes.

The IMF 2013 Article IV Consultation Mission to Tonga was led by Jookyung Ree, assisted by Jisung Moon, economist, Data Dissemination and Review Division Statistics Department; and Jones Morco, senior board operations officer secretary's department. They were in Tonga from 13-25 March.