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p. 46 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Central Asian Republics, Azerbaijan, and Mongolia People’s Republic of China Southeast Asia South Asia The Pacific Cook Islands Fiji Islands Kiribati Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Tonga Tuvalu Vanuatu III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia

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Tonga

The economy recorded robust growth of over 5 percent in 2000, led by tourism. However, the medium-term outlook for growth is modest. Maintenance of an external balance, public enterprise reforms, and support to private sector development are some of the key factors in the growth outcome.

Recent Trends and Prospects

Economic growth is estimated at 5.3 percent in 2000. It was led by a large increase in the trade and services sector related to millennium celebrations, together with the income effect from increased workers’ remittances. Growth was also supported by a recovery in agricultural production, which had declined significantly in 1999 as a result of cyclone Cora in December 1998. Inflation rose to 5.3 percent in 2000 due to drought and higher world prices for the country’s imports.

Following fiscal deficits in recent years, a surplus of 0.8 percent of GDP was recorded in 2000. The improvement resulted from lower capital expenditure and, to some extent, increased tax revenues due to higher imports. Wages accounted for about 53 percent of current expenditures in 2000, equivalent to 14.4 percent of GDP. Foreign trade taxation accounted for more than 64 percent of tax revenues, or about 50 percent of total revenues. The Government follows an implicit fiscal rule that requires recurrent expenditure to equal recurrent revenue. Consequently, the variation in deficits largely reflects the availability of foreign financing for capital expenditure. Domestic bank financing represented only 0.3 percent of GDP in 2000.

Broad money increased by 8.5 percent in 2000, after 15.0 percent growth in 1999. Monetary conditions were tightened in 1999 and 2000 in response to official reserve losses. The reserve requirement ratio was raised to 15 percent in September 2000, the minimum lending rate was put up to 12 percent, and the Government formalized the imposition of a credit ceiling. The tight policy slowed private sector credit growth to 2 percent in 1999 and 6 percent in 2000 from 18 percent in 1998. Total external debt in 2000 was estimated at US$62.2 million, or 41 percent of GDP, and consists largely of concessionary loans. Domestic debt was equivalent to 6 percent of GDP and is held in the form of bonds, mainly by banks and, to some extent, by the nonfinancial public and private sector. The debt-service ratio in 2000 was 12 percent.

The principal exports in 2000 were squash, fish, root crops, vanilla, and copra, all of which faced increasing international competition. Consumer and intermediate goods accounted for more than 80 percent of imports. Merchandise imports in 2000 increased faster than the growth of GDP as a result of a pickup in imports after the millennium celebrations (see Figure 2.27). A small number of large, one-off imports, including an electricity generator for Vava’u and two fishing boats contributed to this rise, leading to a trade deficit of US$51.7 million for the year. The current account recorded a deficit equivalent to 6.7 percent of GDP. Net current inward transfers improved significantly in 2000 due to an increase in private remittances. Net inward private transfers were recorded at US$40.4 million, while official transfers were US$1.2 million. Outward private transfers also rose, due to increased remittances to meet the living costs of children studying abroad. The capital account deteriorated substantially in 2000, mainly due to declining net private capital inflows. Private capital and investment outflows increased as a result of a number of Tongan business operators making offshore investments. The balance of payments recorded a small deficit. Consequently, foreign reserves declined from US$21.4 million or 3.5 months of import cover by mid-1999, to US$15.5 million or 2.5 months of import cover by mid-2000.

The exchange rate of the pa’anga is pegged to a basket of currencies comprising the Australian, New Zealand, and US dollars and the Japanese yen. Since July 2000, the currency has been allowed to deviate from the rate set by the currency basket by up to 5 percent.

The economy is expected to grow at quite modest rates of around 2 percent in 2001 and 2002. Growth will be supported by continued recovery in agriculture and further expansion of fishing operations. In line with government policy, the budget is expected to remain in balance over the next two years, with small surpluses of around US$0.2 million to US$0.5 million. Inflation is expected to remain at around 5 percent in 2001, mainly as a result of increasing world prices and some further devaluation of the pa’anga. Remittances will continue to make an important contribution to the economy.

Issues in Economic Management

The public enterprise sector is both large and diverse, with more than 35 enterprises. However, only four pay dividends to the Government. No timetable has been set for their privatization or corporatization, although the Government has signaled its intention to sell some of them. In the meantime, public enterprises need to be more accountable, and this requires the development and implementation of performance guidelines.

The returns from fishing grew steadily throughout the 1990s to a value of US$4.1 million in 2000. Currently, fish exports are mostly high-value products transported by commercial airlines to Japan, Korea, and the US. Although fish exports are held back by a lack of transport facilities, they have the potential for significant expansion with further infrastructure development. The long-line tuna catch can be expanded considerably and still remain an environmentally sustainable industry. However, large investments are required to convert the potential into reality.

The Government has made significant efforts to develop manufacturing over the years. The sector grew steadily in the three years to 2000, but exports reached only US$0.8 million in value. The prospects for manufacturing are limited because of the small domestic market, high operating (including labor) costs, steep duty rates, and shortage of skilled labor.

Policy and Development Issues

While the Government has been promoting tourism and sees it as a promising industry, both the quality and quantity of accommodation are limiting factors to expansion. The prospects for continued growth in tourism are modest in the short to medium term, with the sector likely to be dominated by expatriate Tongans visiting friends and relatives.

Agriculture has also been identified by the Government as an industry with growth potential. However, exports of agricultural commodities are modest (squash exports were valued at US$5.5 million in 2000, with root crop and vanilla exports each worth US$0.5 million). Demand and prices for squash and vanilla have been affected by growing international competition. Root crops rely on sales to Pacific islanders living abroad and are constrained by transport problems as such crops constitute high-volume, low-value commodities. While attempts are being made to diversify into other agricultural commodities, such as kava for the international pharmaceutical market, problems with quality and reliability of supply limit their potential. These commodities may make a useful contribution to exports but the overall outlook for them as exports is unexciting.

The reform of public enterprises has not really begun. This is an important policy issue that the Government should address, given the likely future pressure on fiscal balances due to inefficiencies in the public enterprise sector.

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