Future projections for Tonga’s current debt crisis are not looking good, with an ever-rising tide of debt repayments visible over the next three years, leading to concerns that the government will be unable to maintain basic services.

According to a recent report by the Asian Development Bank’s Pacific Economic Monitor, Tonga’s debt repayments are expected to increase by 34.5% in the 2014 financial year and to increase further by 38.5% in FY2015, and continue to increase by 13% in FY2016.

The report stressed the seriousness of the situation, stating, “Without further budget support, the government will be unable to maintain current levels of basic services. The large wage bill, which makes up around 51% of the national budget, limits flexibility to relocate expenditure”.

The report was advisory, and frank about the role of government stating, “The Tonga government needs to maintain its implementation of structural reforms. These are central to the joint policy reform matrix for budget support agreed to with development partners.”

Recovery of loans

“Reforms to Tonga’s financial sector and business regulatory environment, [including the] parliamentary submission of receivership and bankruptcy legislation in 2013 and 2014 that will allow smoother recovery of nonperforming loans and reduce the risk of lending in the future. If implemented, these reforms would have a lasting positive impact and stem the decline in private sector lending.”

The ADB report stated that growth slowed considerably in FY2012 and that remittances totalled $67 million, a severe drop from previous yearly remittances, which were as high as $107 million in FY2008.

The projection for 2013 was a “low growth outlook”.

“GDP growth is projected at 0.5% in FY2013 and 0.3% in FY2014. The completion of public investment projects, weak business activity, and slow recovery in remittances and private sector credit are expected to continue to drive low growth.

“Inflation is expected to moderate to 2.7% in FY2013 and to stabilize at that level through FY2014”.

The report also described planned fiscal consolidation efforts aimed at reducing public debt “given Tonga’s high risk of debt distress , the consolidation needs to be appropriately paced to avoid further contraction in an already weakened economy”.