Countries and Regions

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p. 3 of 5 BACK | NEXT I. Country Strategy II. Current Development Trends and Issues III. Implementation of the Country Strategy and Program IV.Portfolio Management Issues V. Country Performance and Lending Levels

Country Strategy and Program Update 2003-2005: Tonga

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III. Implementation of the Country Strategy and Program

A. Progress Toward a Poverty Partnership

15. The Government has been invited to conclude a poverty partnership agreement with the ADB. The poverty partnership agreement will seek the Government’s commitment to analyze the concept of poverty, design appropriate strategies to reduce it, and incorporate these strategies into the country’s strategic development plan. Both the Government’s current priorities and ADB’s proposed assistance program are broadly in line with the poverty reduction thrust. A draft of the proposed poverty partnership agreement was discussed with the Government in June 2002.

16. Tonga faces major challenges in achieving the millennium development goals (MDGs). In meeting these goals a comprehensive poverty reduction strategy is required to address pro-poor growth, improved and expanded access to social services, and creation of jobs. Assessment of progress towards achieving the MDGs (Appendix 2, Table A2.2) is made difficult by the paucity of data on selected indicators. The poverty analysis of the household income and expenditure surveys data supported by an existing small-scale technical assistance TA⁵ will be carried out in 2002. Through regional technical assistance⁶ ADB will assist Tonga in 2003 in the preparation of a country-owned national poverty reduction strategy (NPRS) involving all stakeholders in a participatory process. It is proposed that such NPRS will be based on Strategic Development Plan Eight currently being prepared by the Department of Planning. ADB’s current TA on statistics (footnote 4) will assist Tonga to derive baseline data to measure MDG achievements in the future.

B. Progress in the Country Strategy and Program Focus Areas

1. Agriculture Sector Development

17. ADB assistance in 2003–2005 will focus on (i) public sector reform, (ii) private sector-led growth, and (iii) agriculture sector development. The economic report released in April 2002, with its focus on agriculture, fisheries, and tourism development, provides the Government and its development partners with relevant information for the formulation of strategies to stimulate economic growth. The parallel implementation of public sector reforms and private sector development initiatives is expected to produce modest growth of around 3% per annum instead of the low historical rate of just over 1%. The Government indicated that agriculture is a natural candidate for assistance to ensure achievement of the expected economic growth. Given the sector’s performance in the past, assistance to conduct a review of the administrative, marketing, and policy arrangements of the sector is planned for 2004 to eliminate duplication of functions and to encourage a customer service orientation. The key objective of the proposed review is to enhance services to smallholders and to facilitate a more cooperative and effective approach to product promotion and market access. The review will also examine the feasibility of value added processing of agricultural production, and transport issues.

2. Economic and Public Sector Reform

18. The implementation of the economic and public sector reform program will continue in 2003 and subsequent years. Enactment of the proposed Public Finance Management Act in late 2002 will strengthen the authority of the minister of finance to enforce stricter fiscal discipline to ensure that the objective of balancing current costs with government revenues will be achieved by FY2004/2005. Improvement in service delivery will also depend on the successful implementation of the performance-oriented public service reform so that the expected reduction in personnel costs will enable the transfer of savings to nonpersonnel costs, which have been underfunded in recent years.

19. Some of the fiscal difficulties experienced in recent years arose from transfers and subsidies to state-owned enterprises. The Government intends to undertake a fundamental re-examination of the role of the state and its national purpose in engaging in activities and businesses that, in normal circumstances, are better left to the private sector. The outcome of the review should be clearly articulated in a policy framework that underpins a new public enterprise bill so as to ensure that only public enterprises and government investments that meet the criteria will remain in public ownership. The new bill together with the privatization of noncore public enterprises, and an appropriate regulatory framework, will go a long way towards facilitating the development of private sector businesses. The Government has indicated that reform of the public enterprise sector is its priority in the medium term. Given the lack of accounting and financial policy skills and of commercial knowledge in the Government Investment Unit of the Ministry of Finance, TA in this area will be needed to ensure that the financial status of key enterprises is ascertained, and appropriate policy measures will be formulated to achieve the best outcome for the community.

20. The urgent priority of the reform program is improved tax administration so as to increase compliance and enhance collection in the next 3 years. Assistance is expected to be forthcoming from Australia. The Government also intends to implement more comprehensive tax reform towards the end of 2004. The implementation of the tax reform agenda will create a level playing field in the area of corporate tax, exclude thousands of low income earners from personal income tax, and shift the present reliance in import levies in favor of a broad-based consumption tax. This reform measure will be important in creating an environment more conducive to economic development. The Pacific Financial Technical Assistance Centre is assisting the Government with the drafting of legislation and then its implementation towards the end of FY2004/05.

21. The Pacific Human Development Report 1999 placed Tonga fourth among the PDMCs in terms of the human development index, with a high literacy rate, high gross enrolment rate in primary and secondary schools, high life expectancy, and relatively high GDP per capita. However the lack of vocational training and of a support network for poor rural and urban youth has to be addressed before it becomes a social problem as is the case in other countries. The Government has requested ADB assistance to provide financial training to improve understanding of family financial issues, how to better manage limited monetary resources and social obligations; and to teach basic office and business skills for establishing and maintaining very small enterprises for family nonmonetary benefits as well as generating supplementary income. A training project is included in the ADB TA program for 2003. In addition the Government has received assistance from New Zealand to review the education sector to focus on the emerging needs of a more streamlined public sector and those of private businesses.

3. Governance

22. The Government is implementing a comprehensive reform program that rests on four pillars; it addresses many of the issues raised in the governance assessment undertaken in June 2001. First, the Government intends to promote a wide-ranging public service reform by redefining core government functions, and in the process downsizing the public service. Second, through an analysis of its commercial functions, the Government will divest itself of noncore public enterprises, and introduce financial and managerial discipline to those that are not privatized. Third, the Government will initiate policy proposals to strengthen the role and effectiveness of the National Reserve Bank of Tonga (NRBT), and to improve the transparency of transactions between the Government and NRBT. Fourth, the Government also intends to reduce barriers to private sector development, and to encourage trade and foreign direct investment. To achieve these goals, the Government will need support for institution building and capacity development. This support is forthcoming from the aid community including ADB.

23. The participation of civil society in political debates and actions is another aspect of good governance. The Government has taken steps to involve nongovernment organizations (NGOs) in the reform program as well as improving its communication with the community on important economic and social issues.

4. Private Sector Development

24. A key economic goal of SDP7 is to build a dynamic and competitive economy driven mainly by the private sector and supported by an efficient public sector. The Government is committed to this objective and is working to reduce barriers to foreign investors and to facilitate investment in the agriculture, fisheries, and tourism sectors.

25. A consultative committee was established in 1998 as a formal forum to facilitate dialogue between the Government and the private sector to (i) strengthen coordination, (ii) discuss impediments to private sector development, and (iii) comment on the impact of proposed legislation on private enterprises. General consensus about the benefits of the consultative committee includes recognition of room for improvement in terms of speed of action and the consultation mechanism in the legislative drafting process. As part of the reform program, the Government has received assistance from the Foreign Investment Advisory Service and ADB to review existing policies, regulations, and practices that impede foreign and domestic investment; propose measures to overcome the identified barriers; and assess the effectiveness of current promotional efforts.

26. As is the case with many Pacific island countries, Tonga has only a small private sector with the vast majority of its enterprises being of small or micro size, and many economic activities being carried out in the informal sector. While the reform program will remove some of the barriers, the existence of a large public enterprise sector, inadequate business regulations to ensure that equal rules apply, and lack of certain skills will need to be addressed before a viable SME sector will become a reality. The Government has undertaken initial steps to reduce the size of the public enterprise sector and to remove barriers to private investments under the reform program. These initiatives will be reinforced in the next few years as the reform program progresses.

5. Gender and Development

27. SDP7 presents a vision that includes the achievement of gender equity, defined as all men, women, and children having equal access to economic, social, political, and religious opportunities and benefits. Policy objectives and actions that aim to address gender inequities in access to productive resources, health, education, and employment are presented in the national policy on gender and development. The gender and development policy and programs are mainstreamed through integration into the strategic development planning process. The Women’s Development Centre (WDC) in the Prime Minister’s department works with line ministries and other agencies to identify and formulate projects and programs that are submitted via a Gender and Development Committee to the Central Planning Department to identify financing. WDC monitors the implementation of gender-related projects and programs by line ministries and other agencies.

28. The public service reform TA supported by ADB provides indirect support for gender mainstreaming by ensuring greater consistency between policy priorities and resource allocation, and by building a merit-based public service. The EPSRP, recognizing the likely uneven impact of any rightsizing actions on women and youth, has established a unit in the Prime Minister’s department to monitor such impact, and has earmarked funding for mitigation measures. The Government has also recognized the impact of lack of training and employment opportunities for poor rural and urban youth; it is proposing a training scheme to teach this target group basic business skills to enhance their employment prospects to meet the needs of a growing private sector.

6. Environmental Protection

29. Tonga’s limited land resources, combined with high urban population movement, are placing increasing pressures on the country’s natural resources and worsening its environmental problems. Unregulated fishing, as well as the introduction of more efficient fishing technology, has resulted in coastal and near-coastal fisheries being overexploited and traditional marine species and much of the near-shore fisheries being gradually depleted.

30. SDP7 places special emphasis on environmental conservation and careful management of natural resources for sustainable economic development and the continued welfare of all Tongans. The Government recognizes the need to develop awareness through education, and to provide adequate legislation to ensure conservation of the environment, sustainable utilization of natural resources, and protection from natural disasters.

31. The decision in July 2001 to upgrade environment to a full department rather than a division of the Ministry of Lands, Survey and Natural Resources is recognition of the importance of the environment to Tonga’s sustainable economic development. The Department of Environment (DOE) is responsible for coordinating the activities of other ministries where those activities have implications for management of the environment. A number of ministries have environmental responsibilities under various acts, and it is the role of DOE to monitor compliance with their requirements. The DOE has a range of staffing expertise including a strong environmental monitoring team. However the department’s effectiveness is currently constrained by the absence of environmental impact assessment (EIA) legislation. The delay was due to a full legislative timetable arising from the comprehensive economic and public sector reform agenda. The Government should be encouraged to enact the EIA bill as soon as possible so that new development projects can be subjected to EIA requirements and previous mistakes avoided. Social and environmental indicators are in Appendix 2, Tables A2.3 and A2.4, respectively.