Catalog

	Table of Contents
p. 51 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asian Republics The Pacific Cook Islands East Timor Fiji Islands Kiribati Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Tonga Tuvalu Vanuatu III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia

---

Tonga

The economy expanded by a slower rate of 3% in 2001, led by the government administration and community services subsector. Medium-term prospects are for growth to remain at around this level. Key policy issues include the need for short-term tightening of fiscal and monetary policies, and effective implementation of a public sector reform program.

Macroeconomic Assessment

GDP growth decelerated to 3% in 2001 (Figure 2.36), largely reflecting slow growth in agriculture and tourism. Although there was a sharp slowdown in primary sector growth to 1.3%, the secondary sector grew by 5.4%, largely reflecting increased handicrafts manufacture, breadfruit production, and processing of agricultural products. Activity in the construction and quarrying subsectors was also up by 9% as a result of several large aid-funded and private sector projects. The services sector as a whole expanded by 3.8% in 2001, but the performance of the subsectors displayed considerable variation. The commerce, hotels, and restaurant subsector contracted by 2%, after significant expansion in 2000 due to millennium celebrations and conferences. The government administration and community services subsector, which accounts for some 18% of GDP, increased by 10% as a result of a 20% pay rise for civil servants. Most other services subsectors recorded modest growth. The inflation rate accelerated to 6.3% due to expansionary fiscal and monetary policies and substantial currency depreciation.

The fiscal situation deteriorated in 2001, largely due to the civil servants’ pay rise, a shortfall in nontax revenues, and substantially increased spending to support certain ailing public enterprises. The wages share of current expenditures reached 57% and the current budget was in deficit at about 0.5% of GDP. The overall budget deficit was 2.6% of GDP, financed largely by advances from the domestic banking system and by some bond issues. Public domestic debt outstanding rose to T$32.5 million in 2001, to which must be added an estimated T$32 million in unfunded liabilities arising from a retirement scheme for civil servants introduced in 1999. As of mid-2001, the assets of the Tonga Trust Fund, which is held offshore and maintained separately from the budget and official foreign reserves, had fallen steeply due to weak management.

Broad money supply rose sharply by 26.5% in 2001. Domestic credit expanded by 31.3%, with private sector credit rising by 24.8% (partly reflecting a large loan for imports of telecommunications equipment), and net credit to government increasing more than fivefold in line with the financing of the fiscal deficit. Credit to nonfinancial public enterprises more than doubled. The effectiveness of monetary policy remained constrained by the weakness of the balance sheet of the central bank, which placed increased reliance on credit ceilings. The weighted average deposit rate dropped marginally to 4.7% in 2001. The base lending rate was stable at 9.0%, so that the interest rate spread widened slightly. With higher inflation, the real deposit rate became negative.

The trade deficit shrank to approximately one third of GDP in 2001 as merchandise exports, primarily squash and fish, increased by 3.7%, while imports declined by 4.3%, due to weak domestic demand. Net private transfers from Tongans living abroad continued to be the major source of foreign exchange, at about four times the value of exports. However, the services account turned negative due to payments made to Australia in connection with aircraft leasing arrangements; net investment income flows were also negative. The current account recorded a deficit equivalent to 8.2% of GDP. The capital account surplus fell further from its historically low level in 2000 due to a rise in Tongans’ overseas investments. Consequently, the level of official foreign reserves dropped to US$12 million, or equivalent to about 2 months of imports of goods. The official external debt (including that of public corporations) stood at 44.6% of GDP. The debt service ratio was 19.5% of exports of goods and services. The pa’anga depreciated by 11% in nominal effective terms and by 6.8% in real effective terms.

Policy Developments

The rise in substantial unbudgeted expenditures poses a risk of even higher inflation as well as a risk to the balance of payments. In addition, the Government needs to direct public spending away from wages toward operation and maintenance. To improve fiscal performance, the Government has already begun to consider the extensive range of tax and tariff exemptions granted under the Industrial Development Incentives Act. The issue of capturing a reasonable share of the resource rent in the fast-growing fisheries subsector also needs to be addressed. A large public enterprise sector has been a drain on the public purse and is still in need of major reform.

The most promising industry in the country is tuna fishing, primarily for export, with more modest prospects in agriculture and tourism. The major impediment to private sector growth and foreign investment is the lack of transparency and predictability in the regulatory mechanism. Other hurdles include an inefficient tax system and a costly public sector. These are being addressed through an economic and public sector reform program approved in principle by the Cabinet in early 2002.

Outlook for 2002-2003

The outlook is for marginally slower GDP expansion in 2002 of 2.9%, and higher inflation at 10%, since monetary expansion may be used to finance the fiscal deficit. A stimulus to growth is expected from a rapid rise in production of fish for export and a modest expansion in agricultural production, with the primary sector growing slightly faster at 3%. However, secondary sector growth is projected to slow to 4% as expansion in construction, mining, and quarrying decelerates. Slower tertiary sector growth of 2.5% is projected. A strong recovery in tourism-related services is unlikely given the events of September 11th 2001, which are also expected to reduce remittance flows, as about 60% of these flows were from the US, where many Tongans worked in the airline industry and faced job losses. A slowdown in the dominant government services subsector is likely as long as a hiring freeze, introduced by the Government in mid-2001, remains in place.

Growth in 2003 is projected at 2.6% as a result of slightly slower expansion in all sectors, except for commerce, restaurants, and hotels, and private services, which are forecast to pick up as the tourism sector shows additional strength. Inflation is projected to moderate to around 5% as macroeconomic policy tightens following the implementation of a major economic and public sector reform program. In late 2002 and in 2003, the current account balance is expected to improve as somewhat faster export growth combines with slower import growth. A rise in net official capital inflows and an overall improvement in the balance of payments are forecast.

The 2002 budget anticipates substantial rises in nontax revenues and in external grants. Current expenditures are projected to rise by 8%. The overall budget deficit is projected at 2.3% of GDP. However, the revenue outlook appears overoptimistic, and unbudgeted expenditures are likely to cause the actual spending level to substantially exceed estimates. An overall budget deficit of over 4% of GDP seems more likely.

______________________

Back Solomon Islands	Next Tuvalu