Regions and Countries

	Table of Contents
p. 2 of 18 BACK | NEXT I. Country Performance Assessment A. Economic Performance Assessment B. Poverty Assessment C. Assessment of Socio-Environmental Performance D. Governance: Sound Development Management E. Implementation Assessment II. Country Operational Strategy III. Sector Strategies IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Tonga : I. Country Performance Assessment

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A. Economic Performance Assessment

1. The economic recovery that began in late 1998 has continued through 1999 and into 2000. Real GDP grew by 4.6 percent in the fiscal year ending 30 June 1999 and is estimated to have grown by 6.1 percent in the fiscal year 2000, with the inflation rate rising to approximately 4 percent throughout. This growth largely has reflected expansion in construction, kava manufacturing, commerce, transport and communications, and finance and business services. Output of the agriculture, forestry and fisheries sector also appears to have grown significantly in fiscal year 2000 after the stagnation of the previous four years, which was attributable to vulnerability to climatic and international economic shocks and a lack of domestic and foreign investment.

2. The poor performance of the primary sector has been a major reason for the low long-term growth rate of around one percent per annum, and has been reflected in sluggish growth in the small number of primary product exports (squash, vanilla, and fish). The trade deficit has been substantially offset by net private and official transfers and, with the capital account in surplus, the balance of payments has been in overall surplus during fiscal years 1999 and 2000. However, the foreign reserves level is still sufficient for only 3.9 months of import cover. The burden of adjustment to any future balance of payments pressures is likely to fall primarily on the exchange rate. Fiscal deficits, as defined under the Government Finance Statistics Format of the IMF (though not as shown in the Government accounts), have been run in each of the fiscal years 1997 to 2000 (largely for infrastructure development). Monetary policy is hampered by the inability to use open market operations because of the weak income position of the National Reserve Bank; and there is room for improvement in macroeconomic policy coordination.

3. The 1999—2000 budget contained some significant initiatives, including the introduction of a new contributory pension scheme for civil servants, and a commitment to begin implementation of tax reform that would shift the balance from trade to indirect taxes. Further reforms are needed in order to improve the efficiency and effectiveness of the public service and public enterprises, to promote financial development, to improve the enabling environment for the private sector, and to ensure provision of an adequate social safety net for those affected adversely by the process of economic change. If reforms can be implemented successfully in the context of ongoing macroeconomic stability, a sustainable economic growth rate of 2—3 percent is achievable and would provide crucial employment opportunities for the unemployed and new entrants to the workforce. In the absence of reforms, a continuation of the low historic growth rate of one percent is expected.

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