Monetary Policy Statement
To comply with the NRBT Act s50A, the Bank is to publish a Monetary Policy Statement at least every six months. Each statement is a review of economic developments and the conduct of monetary policy in the period since the previous statement. This statement indicates how the Bank intends to conduct monetary policy over the coming six months to achieve its objectives of maintaining sufficient foreign reserves and promoting price stability.
Monetary Policy Statement
August 2024
The Tonga Department of Statistics published preliminary estimates for Tonga’s GDP for financial year (FY) 2022 indicating an unexpected resilience and achieving a slight growth of 0.05% despite the impacts of the COVID-19 pandemic and the Hunga Tonga – Hunga Ha‘apai volcanic eruption. The Reserve Bank estimates FY2023 to have experienced a stronger rebound of 2.4% on the back of a strong service sector as the borders reopened and businesses recovered. However, growth is expected to ease to 1.6% in FY2024, a downward revision from the 2.2% in the previous Monetary Policy Statement due to impact of the El Nino on the agriculture sector and delays in major infrastructure projects. Key challenges include labour shortages and a much more persistent food supply shortage. The agriculture sector faces difficulties with labour constraints and the impact of natural disasters. The services sector is showing positive signs with increased tourism and domestic consumption but tourism infrastructure needs improvement as it still has not recovered from the tsunami and the pandemic. Looking forward, the Reserve Bank forecasts growth for FY2025 to be around 2.7% from a rebound in agricultural production and greater implementation of public construction projects before reverting towards long-term growth. Foreign reserves remain comfortable, but challenges such as debt servicing and potential capital outflows need to be managed. The Reserve Bank is monitoring inflation closely and stand ready to implement measures to address inflationary pressures should high inflation continue.
Overall, Tonga's economy is on a path of recovery but faces significant challenges that require ongoing monitoring and both monetary and fiscal policy responses.
- Inflationary pressures remain a significant concern, with headline inflation edging above the 5% reference rate in June 2024 to 5.4%. However, the increase was due mainly to domestic food prices growing by more than 24% in June 2024 on the back of a 23% annual increase in June 2023. Though inflation is analysed to be transitory in nature, it may hover above the reference rate during 2024 if supply constraints persist. The Reserve Bank stands ready to implement measures to mitigate inflationary impacts should core inflation surprise on the high end compared to Reserve Bank’s forecast and expectation.
- Foreign reserves remained at comfortable levels by the end of June 2024 at $924.3 million, which is sufficient to cover 11.9 months of imports. However, ongoing debt servicing and potential capital outflows necessitate prudent management.
- The financial sector remains stable, with adequate capital and liquidity. However, there are compliance challenges with one of the commercial banks in the banking system.
- Credit growth of 4.1% was recorded for the year to June 2024, which was slower than expected. The continual high non-performing loans remains a concern. The Reserve Bank is implementing enhanced risk-based tools to ensure further risks to banks’ asset quality are mitigated. The ongoing efforts to develop a credit registry will also help to monitor risks of household and corporate indebtedness, a tool for mitigating risks of rising non-performing loans. While the Reserve Bank is committed to promoting financial inclusion and supporting the growth of key economic sectors through greater credit accessibility, policies and controls are in place to ensure prudent lending by financial institutions is maintained.
- The persistently high level of excess liquidity in the banking system undermines effective monetary policy transmission. Relatively low term deposit rates and limited trading activities in the Government bond market continue, while the interbank and repo market remain inactive.
- Tonga's economy faces significant challenges due to its small size, geographic isolation, and susceptibility to external shocks. These factors, coupled with vulnerabilities to natural hazards, labour shortages, and data constraints, hinder economic growth and development. Additionally, the country's reliance on remittances and potential impacts from de-risking and de-banking pose further risks.
To sustain economic growth and stability, Tonga must address challenges related to labour shortages, infrastructure development, and climate change. Diversifying the economy and enhancing its resilience to external shocks are crucial for long-term prosperity.
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