Monetary Policy Statement for August 2017

At its meeting on the 17th January 2018, the National Reserve Bank of Tonga’s Board of Directors approved to release its Monetary Policy Statement (MPS) for August 2017. This Statement reviews Tonga’s economic growth and the Reserve Bank’s conduct of monetary policy in the six months to August 2017 and its outlook. The Reserve Bank maintained its current accommodative monetary policy stance which supported the monetary policy objectives of maintaining internal and external monetary stability, promoting financial stability and a sound and efficient financial system and conducting its activities in a manner that supports macroeconomic stability and economic growth.

The Reserve Bank’s outlook for a robust domestic economic growth remains for 2016/17 at 3.7%, higher than the 2.7% growth projected by the International Monetary Fund (IMF) Article IV mission in September 2017. This growth
outlook continues to be driven by developments in the construction, utilities, fisheries, and mining & quarry sectors. The number of events that took place during the year and partial indicators showing improvement in economic activities in 2016/17, support this overall strong growth projection. The 2017/18 real GDP growth estimate has been revised down to 4.0% compared to the February 2017 MPS projection of 4.8%. This downward revision to the growth outlook is mainly driven by the cancellation of Tonga’s hosting of the 2019 Pacific Games which will slow down growth that was projected for the secondary and tertiary sectors of the economy. However, this growth is still above the 2017 IMF Article IV’s projection of 3.4% growth. Inflationary pressures eased in August 2017 reflecting the wind down of the hike in prices last year when the new excise tax became effective in July 2016. The annual headline inflation slowed to 5.2% in August 2017 from a high level of 8.9% in February 2017 and a 5.1% increase in August 2016. This is slightly higher than the Reserve Bank’s inflation reference rate of 5% per annum. The Reserve Bank expects inflationary pressures to remain in the near term due to the impact of the further increase in custom duty and excise tax effective in July 2017. However, the annual headline inflation is forecasted to gradually decline below the reference rate of 5% per annum after February 2018.

Over the past six months to August 2017, the overall balance of Overseas Exchange Transactions (OET) was a surplus of $27.4 million, which contributed to a rise in the official foreign reserves to $405.0 million. This was sufficient to cover imports of merchandise goods and services for 6.9 months1, which remained above the Reserve Bank’s minimum range of 3-4 months of import cover. The level of foreign reserves is also expected to remain at comfortable levels above the minimum range of 3-4 months of import cover, supported by expected higher receipts of remittances and export proceeds, and anticipated Government receipt of budget support and grant funds from development partners. This will be partially offset by the projected rise in imports.

Tonga’s financial system remained sound over the 6 months to August 2017 as the banking system maintained strong capital and liquidity position, supported by comfortable profitability, and non-performing loans continuing to remain low. Broad money and banking system liquidity continued to rise as total banks’ lending rose to a new level in August 2017 and deposits also rose over the 6 months to August 2017. The banks’ total loans to deposit ratio rose in August 2017 to 75.2% from 73.3% in February 2017, due to credit growth of $31.1 million (8.1%) outweighing a $28.1 million (5.4%) increase in deposits. This ratio continued to remain below the 80% minimum requirement which indicates excess liquidity in the banking system remains and that there is capacity for further lending by banks. The Reserve Bank will continue to monitor credit growth to avoid any overheating in the

Net credit to Government declined over the six months to August 2017 and anticipated to decline in the near term, as a result of expected Government budgetary support and grants receipts, as well as improved Government revenue collection. The Reserve Bank will closely monitor the implication of the fiscal policy measures on the monetary policy objectives.

Given the recent developments and the outlook on the monetary policy objectives and macroeconomic and financial soundness indicators, the accommodative monetary policy stance is maintained however the Reserve Bank will remain vigilant and continue to closely monitor developments in the domestic and global economy for early signs of vulnerability or overheating of the economy. Furthermore, the Reserve Bank will continue to update its monetary policy setting to maintain internal and external monetary stability and to promote a sound and efficient financial system, in order to support macroeconomic stability and economic growth.

1 - Method of calculation has changed in February 2017 to include both imports of goods & services (previous method used imports of goods only)


Economics Department
National Reserve Bank of Tonga
Fasi mo e Afi

Telephone: (676) 24057
Fax: (676) 24201

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