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Annual Report 2001

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Tonga

Economic performance

Real GDP growth in Tonga slowed to 3.0% in FY2001 (ending 30 June)—largely due to subdued agriculture sector growth and stagnant tourism, following the sharp rise in the latter in the preceding year. Annual average inflation rose 6.3% during the same period. This was associated with a sharp rise in money supply and domestic credit expansion by 26.5% and 31.3%, respectively. Overall budget deficit increased to 2.6% of GDP in FY2001, reflecting lower-than-expected revenues and higher expenditures. The rise in the expenditure reflected two payments of cost of living allowance to civil servants in FY2001. Total official external debt, including that of public corporations, stood at 44.6% of GDP at the end of FY2001. Exports increased by 3.7%, compared with a 4.3% decline in imports in FY2001. However, the current account deficit increased to 8.2% of GDP due to deterioration in service balance. The overall balance of payments was also in deficit, reducing the gross international reserves in FY2001 to $12 million, equivalent to about 2 months of imports. During FY2001, the central bank devalued its currency by about 19.0% against the US dollar.

ADB operations

Operational strategy: ADB continues to assist in building capacity for governance, economic management, and public service delivery; strengthening the financial sector; and supporting the role of civil society. This strategy is supported by the recently completed ADB-financed economic report.

ADB’s assistance for Tonga is expected to strengthen economic and public sector management, thereby creating an enabling environment for private sector development and improving living standards for all Tongans. The public sector, including financial and nonfinancial public enterprises, has a dominant role in the Tongan economy. To encourage private sector development as the basis of economic growth, the demands of the public sector will be curtailed by carrying out reforms of core government departments and public enterprises. A strategy for public sector reforms and its successful implementation will achieve several benefits such as reduced government demand on financial and human resources, thus leaving room for the private sector to develop and grow; decreased current fiscal deficit by improving public sector operational efficiency without impacting on government services; improved governance in the public sector and human resource management practices based on merit; and greater access of women to finance and business opportunities through private sector development initiatives in agriculture, fisheries, and tourism where women traditionally play a significant role.

Policy dialogue: Important issues for policy dialogue in relation to the Economic and Public Sector Reform Program include preparing a private sector development strategy; implementing public enterprise and civil service reform; and undertaking reforms in the financial sector. The Government has indicated the need for comprehensive reforms. However, strong political commitment and direction need to be sustained during the long implementation phase to ensure that the benefits of the reform program are delivered.

Loans and technical assistance: No loans were approved in 2001. ADB approved one advisory technical assistance grant of $650,000 in 2001 for the economic and public sector reform program.

Project implementation: Since joining ADB in 1972, Tonga has received 13 loans; none was active at the end of 2001. Contract awards totaled $20,000, bringing the cumulative figure to $47.1 million. The contract award ratio was 94.4%, higher than the ADB-wide average of 14.8%. Disbursements during the year totaled $220,000, bringing cumulative disbursements to $41.2 million. The disbursement ratio was 96.0%, much higher than the ADB-wide average of 20.5%.

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