In his final contribution to the recent debate on Tonga’s fiscal policy, the author of “Tonga’s Fiscal Stability Is Not the Same as Fiscal Strength” responds to Prime Minister Hon. Aisake Eke’s detailed outline of the 2025/26 budget strategy. He welcomes the Government’s new approach and identifies key assumptions and risks that will determine its success.

Prime Minister,

Thank you for this comprehensive and illuminating response. I sincerely appreciate you taking the time to outline the context, rationale, and specific policy mechanisms of the 2025/26 budget strategy. This level of detail is exactly what enriches public discourse and helps move the conversation from general critique to a focused discussion on policy choices.

You are correct in your understanding. My central critique is indeed focused on the long-term sustainability of the fiscal model, and I am grateful for the opportunity to engage with the Government’s proposed path forward.

There is much in your outlined strategy that is commendable and appears directly responsive to the challenges you have identified.

Addressing the Cost of Capital:

The initiative to provide concessional lending at 3 percent to the private sector through a government bond market is a creative and potentially powerful intervention. If the high cost of bank credit is the primary constraint on private-sector growth, as identified in the National Development Summit, then this policy directly tackles that bottleneck.

A Clear End Goal:

Your statement that the “end game” is to “generate more revenue domestically… reducing reliance on aid funding” provides a clear and welcome benchmark for future accountability. This is the kind of measurable objective that all stakeholders can unite behind.

Leveraging Partnerships:

The coordinated approach with the Asian Development Bank for local currency lending creates a larger pool of capital for businesses and mitigates exchange rate risk. This is a prudent design feature that strengthens the model’s foundation.

A Focus on Growth Levers:

Identifying specific sectors such as fisheries, tourism, and agriculture for targeted growth is a necessary step beyond general statements. These are the areas that can drive both export potential and domestic value creation.

Based on the strategy you have shared, the success of this new fiscal model appears to hinge on several critical assumptions. As an analyst, my role is to examine these assumptions, not to dismiss the plan, but to test its robustness. Three central questions arise:

1. The Growth–Debt–Revenue Nexus

The model depends on a virtuous cycle: Government borrows (TOP 30 million plus ADB 100 million) → lends to the private sector → stimulates significant economic growth → generates a substantial increase in domestic tax revenue → revenue replaces aid and services debt.

The key risk is timing and magnitude. If growth in revenue is slower or smaller than projected, the Government may successfully expand the private sector but add a significant new domestic debt burden without a corresponding reduction in aid dependence.

2. Execution and Allocation Risk

The success of this plan depends on the efficient operation of a local bond market and the careful allocation of credit to truly productive enterprises. In practice, the Government will act as a development bank, which carries inherent risks of misallocation, favouritism, and administrative cost in managing a large loan portfolio.