On November 6, the Executive Board of the International Monetary Fund (IMF) concluded its Article IV consultation with the Kingdom of Tonga. The discussions highlighted several aspects of Tonga's economic situation and future outlook.
Tonga's economy has shown signs of improvement, supported by consistent remittance flows, a recovery in tourism, and strong construction activities. Despite a decline in agricultural output, GDP for FY2024 is estimated to have grown by 1.8 percent. However, labor shortages and other supply-side constraints have limited the potential for stronger recovery.
Inflationary pressures in Tonga have eased significantly since peaking at 14.1 percent in September 2022. By July 2024, headline inflation had decreased to 3 percent, below the National Reserve Bank of Tonga's reference rate of 5 percent.
The IMF projects that real GDP growth will accelerate to 2.4 percent in FY2025, driven by domestic demand and public investment projects. However, medium-term growth prospects remain uneven due to frequent natural disasters and other challenges like emigration and geographical barriers.
The IMF Executive Directors acknowledged the efforts of Tongan authorities to support economic recovery after a volcanic eruption and secure donor financing for infrastructure projects. They noted that while short-term economic prospects are favorable, medium-term growth remains weak due to significant risks.
"Executive Directors agreed with the thrust of the staff appraisal," said an IMF statement. They emphasized "the importance of steadfast policy implementation and reforms" for continued macroeconomic stability and sustained growth.
The current fiscal stance is deemed appropriate for supporting reconstruction efforts. However, given high debt distress risks and substantial financing needs, a credible fiscal consolidation strategy is recommended over the medium term. This includes mobilizing revenue through tax reform and enhancing public financial management.
Monetary policy was considered suitable as inflation stabilized below target levels. Directors advised that tightening might be necessary if inflation pressures return.
Directors also stressed the need for structural reforms to improve resilience against climate change impacts and promote private sector development. They welcomed initiatives like appointing an anti-corruption commissioner and strengthening anti-money laundering frameworks.
The consultation provided selected economic indicators from FY2021 to FY2025 which detail trends in GDP growth rates, consumer prices, government finance metrics, money supply changes, balance of payments components including exports and imports data, remittances figures among others relevant statistics concerning Tonga's economy.