Fiscal Prudence Key For Tonga Growth Prospects

Tonga’s economic framework remains structurally and heavily influenced by external inflows, a dependence confirmed by the recent IMF Article IV Consultation. Remittances from the large diaspora continue to be a primary economic pillar, estimated to contribute approximately 48.0% of Gross Domestic Product (GDP) in FY2025, while foreign grants, mainly tied to large public investment projects, account for another significant portion (projected at 15.8% of GDP).

Real GDP growth is projected to accelerate to 2.4% in FY2025, reflecting a moderate recovery in the tourism sector post-pandemic and continued strength in domestic demand driven by public works. However, private sector investment remains constrained. Mechanistically, Tonga faces limited fiscal space. While the overall fiscal balance in FY2025 is projected to be in surplus (driven by strong grants), the underlying balance excluding grants projects a substantial deficit of 7.7% of GDP for FY2026, and public debt remains high at an estimated 44.0% of GDP for FY2025 (mainly external), constraining non-concessional domestic credit expansion.

Inflation remains contained; the average consumer price inflation for FY2025 is projected at 2.9%, supported by stable global prices, though core inflation is showing slight upward pressure from domestic demand. The National Reserve Bank of Tonga (NRBT) maintains its monetary policy stance to preserve foreign reserves and support stability.

Sectoral implications indicate that service sectors, particularly tourism and hospitality, are the primary drivers of employment and recent growth. Conversely, agriculture and fisheries remain structurally constrained by recurrent climatic risks and the persistent loss of workers due to outward migration. Financial markets remain shallow and illiquid. Tongan Government Bonds (TGB5) yields are indicative of this shallow market, trading at an estimated 5.8% (reflecting both low domestic interest rates and a sovereign risk premia tied to external debt and climate vulnerability).

The Article IV assessment underscores Tonga’s structural reliance on external inflows and the need for immediate fiscal prudence. It highlights the necessity of strengthening credit sector development and building resilience against increasingly frequent natural disasters. Forward-looking, GDP growth could approach 2.7% over the next year if remittances remain stable, tourism continues its recovery path, and the government adheres to prudent debt management and fiscal discipline targets.

Key indicators to monitor include TGB yields, remittance inflows, tourism receipts, and fiscal balance execution, all of which will determine institutional credibility and continued access to concessional financing from multilateral partners.