Downturn in Tonga's domestic economic growth continues … s-domestic

Saturday, April 24, 2021 - 17:13.  Updated on Saturday, April 24, 2021 - 17:18.

Nuku'alofa, Tonga

A “worse-than-expected outcome” for Tonga's GDP in the fiscal years 2019-20 and 2020-21 was forecast by the National Reserve Bank of Tonga, following its first board meeting for the year.

During the COVID-19 international crisis Tonga's annual inflation has increased and agricultural exports have fallen. Bank lending decreased, while deposits increased.

The NRBT Board met on 31 March and approved to maintain its current monetary policy measures. In a statement released in early April the NRBT said this was to encourage utilization of the excess liquidity in the banking system, through further lending to growth sectors.

“There was generally a domestic slowdown in January 2021,” stated the Governor of the Reserve Bank, Sione Ngongo Kioa.

The domestic slowdown in Tonga was discussed in the NRBT's Monthly Economic Review (MER) for January 2021, (published on March 26).

Significant impacts of the COVID-9 international crisis were reported in the review. For the year to January 2021, the downturn included:

International arrivals declined by 97,357 passengers (down 86.6%) over the year.
Travel receipts declined by $101.4 million pa'anga over the year.
Job vacancies continued to decline over the year (down 54.9%)
Agricultural exports declined over the year by over 2,012 tonnes (16.7%)
Agricultural export proceeds fell by a third over the year, $0.3 million (32.2%).
Marine export proceeds declined over the year by $5.2 million (53%).
Lending to the construction sector declined in January 2021.
The services sector continued to weaken in January 2021.
Container registrations dropped by 248 (22%) in January 2021.
Inflation rose by 1.3% over the year
Domestic prices increased.
Imported prices rose due to higher fuel prices and food items.
Major trading currencies appreciated against the Tongan Pa'anga.
Vehicle registrations declined in January.
Primary Sector

The Monthly Economic Review for January 2021 reported Tonga’s total agricultural exports decreased by 654.6 tonnes over the month, and agriculture export proceeds fell by $0.3 million.

“The decrease in agricultural exports was driven by a decline in the exports of root crops such as cassava, taro, yam, and fruit products, particularly squash.”

New government loan pushes foreign reserves higher.

The NRBT board reported that the Official Foreign Reserves rose in January 2021 by $29.7m to $705.3m and equivalent to 12 months of imports.

This was mainly attributed to the receipt of a government loan from the IMF. Funds related to COVID-19 and Tropical Cyclone Harold were also received and contributed to the monthly rise.

“Similarly, foreign reserves increased significantly in the year to January 2021 by $222.4 million. This was largely a result of budget support, official grants and remittances,”

The foreign reserves are held mostly in USD, AUD, and NZD.

The Reserve Bank stated that “the total banking system maintained its soundness supported by strong capital and excess liquidity”.

The loans to deposit ratio fell to 67.8% in January, below the 80% minimum.

“The consistent decline of this ratio continues despite the excess liquidity in the system.”

Worse-than-expected GDP forecast

“The Reserve Bank's latest GDP forecast depicts a worse-than-expected outcome for 2019/20 and 2020/21 fiscal years,” it concluded.

“However, even with the revised forecasts, the level of foreign reserves is still expected to be above the three months minimum threshold of import cover, while inflation is to remain below the 5% reference rate.”

While the expected downturn in domestic economic growth remains, the Reserve Bank stated that its Monetary Policy Stance remains accommodative, while working to mitigate the economic downturn and support recovery, stating: “The Reserve Bank continues to monitor emerging risks prompted by uncertainties surrounding he COVID-10 pandemic, which may impact economic growth and potentially impair financial stability.”