IMF warns Tonga of weakening fiscal position

Tonga has been warned that despite government’s strong revenue collection, Tonga’s fiscal position is expected to weaken in near term.

This is due to a large increase in the wage bill, an increase in current spending, and potential cost overruns related to Tonga’s preparations to host the 2019 South Pacific Games

These factors in turn will weaken the government’s fiscal sustainability, and raise public debt, the International Monetary Fund (IMF) stated in its 2016 Article IV report on the state of the Tongan economy.

Matangi Tonga reports the preliminary findings were released at the end of an IMF mission, led by Elena Loukoianova who visited Nuku'alofa from February 29-March 11 to conduct the consultations with government.

The IMF also warns the Tongan government of possible drop of aid, remittances, and tourism receipts, particularly from Australia and New Zealand because of a protracted period of slow growth in their economies.

However, over the medium term, the fiscal position is projected to improve “provided that revenue continues to grow steadily, the wage bill is held in check, and the cost of the South Pacific Games is under control.”

On a slightly more positive side of things, Tonga’s External Balance and International Reserves have improved substantially, thanks to low oil prices and stronger remittances.

“Real GDP is projected to grow at 3.1 percent in 2015-16, driven by agriculture and construction sectors, as well as private consumption.”

Overall the reported concluded that “the balance of risks is tilted toward the downside.” and advised ” Staff welcomes the authorities' commitment to rein in the wage bill, complemented by civil service reforms, and to seek grant finance for the South Pacific Games.

“Continued progress in improving tax and customs administrations and strengthening public finance management is also important to preserve fiscal sustainability.”

Other advice to the National Reserve Bank of Tonga was to introduce “macro prudential” tools to avoid excessive credit growth.

The mission also encouraged the authorities to improve Tonga's economic resilience from climate-change shocks. PacNews