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A 20% cut in the civil service in mid-2006 and riots that destroyed a large part of the business district of the capital, Nuku'alofa, in November that year led to a 3.5% contraction in GDP in FY2007 (ended 30 June 2007). The need to cut civil service staffing and government spending on goods and services was a result of a 2005 agreement to boost civil service wages by 60–80%. As for the consequences of the riots, a range of subsectors were hurt, including commerce, hotels and restaurants, transport and communications, financial and real estate services, and manufacturing. Tourism receipts in FY2007 dropped by 10.4% (Figure 3.34.27). Production of the major merchandise export—squash—also fell. (The state of emergency declared for the main island of Tongatapu in late 2006 as a result of the disturbances was still in force in March 2008).
Inflation eased by about 2 percentage points to 5.1% in FY2007, though it then picked up to 5.8% in the first half of FY2008 on rising prices for food and oil, and currency depreciation against the Australian and New Zealand dollars.
The cuts in civil service staffing and in spending enabled the Government to run a budget surplus of T$7.3 million in FY2007. Expenditure reductions of 15.1% outweighed revenue losses of 6.6%. For FY2008, an overall fiscal deficit of T$4.4 million is targeted, with external grants projected to be more than double FY2007's level. Current expenditures are being raised by about 35%, mainly for purchases of goods and services, particularly technical assistance. Funding for internal security is also boosted.
Tonga's public debt was about 55% of GDP in FY2007, with external debt accounting for 86% of the total (Figure 3.34.28). The net present value of the public debt (excluding contingent liabilities) was an estimated 35% of GDP. An agreement in November 2007 for the Government to borrow US$50 million from the People's Republic of China to finance urban reconstruction added to concerns about debt sustainability. In addition, a planned takeover by the Government of an unprofitable and debtburdened power company involves a purchase price estimated at more than 4% of GDP.
Major accomplishments have been seen in trade liberalization and revenue reforms: in July 2007 the country joined the World Trade Organization; and in recent years reliance on trade taxes has been reduced and the income tax threshold and highest marginal rate have been raised, while the maximum customs tariff was lowered to 20% in 2007. Another achievement last year was a reduction in the time required to enforce a contract from an estimated 510 to 350 days, made possible by the computerization of all criminal, commercial, and land cases at the Supreme Court. The environment for private sector development would be further improved by reform of state-owned enterprises and by better public service delivery.
The National Reserve Bank of Tonga, acting to assist in reconstruction and business recovery after the November 2006 civil disorder, reduced the reserve ratio of commercial banks and lifted ceilings that had been imposed on bank credit after unsustainable growth in borrowing by households in late 2006. The money supply grew by 14.1% in 2007, with credit to the private sector expanding by 11.4%. New legislation passed last year strengthened the central bank's institutional capacity and its independence in conducting monetary policy. |
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