Tonga: 2015 Article IV Consultation-Staff Report; and Press Release

KEY ISSUES Outlook and risks. Tonga is expected to revert to a moderate growth path in the coming years, after a contraction in 2012/13. Reconstruction works in the aftermath of Cyclone Ian in 2014 and the preparation for the 2019 Sixteenth South Pacific Games (the Pacific Games) should support growth over the medium term. Inflation is expected to remain low, reflecting weak global commodity prices. International reserves reached a record level in 2013/14, thanks to continued inflows of grants and remittances. The fiscal position has improved, but near-term spending pressures remain high. The main risks arise from a protracted period of slower growth in advanced and emerging economies, potential cost-overrun of the Games, and natural disasters. Challenges. Medium-term challenges center on raising Tonga's growth potential through improving the business climate to support private sector development. Ensuring external and price stability and fostering financial soundness are also important to reduce vulnerabilities. Key policy advice. Key policy recommendations are to: (i) gradually improve the primary fiscal balance to ensure fiscal sustainability; (ii) maintain international reserves at the current level to bolster resilience to shocks; (iii) replace the current inflation reference range with a lower reference rate in line with the medium-term inflation trend; (iv) address macro-financial risks by preparing tools to manage excess liquidity and avoid rapid credit growth in the future; and (v) implement business-enabling structural reforms and improve public sector performance to enhance potential growth.