Tonga’s economy recovering but key risks remain, says IMF

Tonga’s economy recovering but key risks remain, says IMF

Tonga’s economy is set for a modest revival, with an estimated GDP growth of 1.25 percent this financial year, according to International Monetary Fund (IMF) experts.

Senior Economist at the IMF’s Asia and Pacific Department Mr Papa M’b. P. N’Diaye, along with fellow economists Ms Nan Geng and Mr Justin Matz presented their preliminary findings from the 2011 Article IV Consultation discussions with Tonga at the Ministry of Finance and National Planning on Tuesday 29th March.

Mr N’Diaye said the growth projected for FY 2010/2011 is due to stronger tourism activity and pro-growth fiscal policy supported by donor aid and previously contracted loans.

Remittance inflows have also stabilised in recent months.

However, he added that this growth momentum “will likely be limited” due to tough lending standards from banks after the rise of nonperforming loans in the past two years.

Mr N’Diaye added that the IMF predicts another upcoming year of positive GDP growth, reaching 1.75 percent.

“Looking ahead, activity is expected to strengthen further in the 2011/2012 financial year but the risks are tilted to the downside,” he said.

The growth is expected from strong construction activity – such as renovation work taking place at the Vuna Wharf, the Nuku’alofa CBD and various road projects – as well as increased tourism and remittance inflows as the world recovers from the global economic crisis.

But risks remain high due to external factors such as a weaker global economy and high commodity prices.

Locally, Tonga is also at threatened by high debt distress, leaving it vulnerable to shocks, including natural disasters.

At the same time, while much of construction activity is tied to loans from China’s EXIM Bank, long term benefits are expected from the investment.

The IMF findings recommended that Government avoid new borrowing, reduce current spending, improve tax administration and promote transparency. The report also urged more private sector activity – already a key objective in the Government’s National Strategic Planning Framework.

The IMF consultations were held with staff of the National Reserve Bank of Tonga, government officials, and private sector representatives.

For more information, read the full Press Statement from the IMF, attached.

ENDS

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