Emerging from Ashes: Tonga’s Resilient Economic Rebound and Ongoing Challenges – IMF
Tonga has made significant strides in rebounding from the dual shocks of a volcanic eruption and tsunami that rocked the country in early 2022. The economy’s recovery has been driven by robust domestic demand and a resurgence in tourism following the reopening of borders. However, beneath this encouraging recovery lies a set of formidable challenges that must be addressed to ensure sustained and inclusive growth.
The International Monetary Fund (IMF) recently released its assessment of Tonga’s economic situation, highlighting the impressive rebound in the wake of the disaster. The policy support measures, and international aid deployed to counter the adverse effects of the volcanic eruption-tsunami duo and the local COVID-19 outbreak have been instrumental in mitigating the socio-economic fallout. This has led to strong domestic demand and a revival in tourist arrivals, positively impacting the recovery process.
Labour Shortages and Inflationary Pressures
Nonetheless, despite the recovery the country faces significant hurdles, including labour shortages due to overseas seasonal worker programs, particularly from Australia and New Zealand. This issue mirrors Samoa’s experience, where a temporary halt by the Samoan government in January of this year of workers being send to Australia and New Zealand due to concerns over skilled labour loss and social issues. Addressing this challenge is crucial for Tonga’s future.
Combined with sluggish progress in rebuilding the damaged tourism infrastructure and buoyant domestic demand fuelled by remittances, these factors have led to inflationary pressures. Core inflation remains stubbornly high at 8.3% since September 2022, despite a moderate decline from its peak.
Beyond the immediate recovery phase, Tonga grapples with crucial long-term growth challenges. The sustained outflow of workers and exposure to frequent natural disasters undermine the nation’s growth potential. The IMF underscores the necessity of developing the private sector to create a robust foundation for sustainable growth. Investment in this sector is critical to diversify the economy, create jobs, and reduce vulnerability to external shocks.
To ensure a stable economic trajectory, the Tongan government is advised to exercise fiscal prudence by postponing non-urgent spending. The IMF’s assessment reveals that the country is at high risk of debt distress. Additional grant commitments are needed to manage the public debt, which is projected to rise and remain above acceptable benchmarks without decisive action. Debt repayments, especially to China Exim Bank, are expected to strain the budget in the coming years.
The IMF presents a series of policy imperatives to guide Tonga’s path toward sustainable and inclusive growth. A delicate balance between supporting reconstruction efforts and tackling inflation is vital. The government must ensure that fiscal policies provide ample support to vulnerable populations while also safeguarding price stability through prudent monetary measures.
Structural reforms are at the forefront of Tonga’s agenda. Investing in education and training is crucial to reducing the skill mismatch in the labour market, particularly due to continuing worker outflows. Gender inequality in the labour market should be addressed through legislative measures, and obstacles hindering private sector investment must be dismantled.
Tonga’s impressive economic recovery post-disaster demonstrates the country’s resilience and potential for growth. However, the challenges of labour shortages, inflation, and long-term growth obstacles necessitate a comprehensive and strategic approach to policymaking. By focusing on private sector development, fiscal prudence, and targeted structural reforms, Tonga can pave the way for sustained and inclusive economic progress, enhancing the well-being of its citizens and ensuring a brighter future.
