Tonga - Economy

Tonga's economy is characterized by a large non-monetary sector and a heavy dependence on remittances from the more than half of the country's population that lives abroad, chiefly in Australia, New Zealand, and the United States. Much of the monetary sector of the economy is dominated, if not owned, by the royal family and nobles. Many small businesses, particularly in the retail sector on Tongatapu, are owned by recent Chinese immigrants who arrived under a cash-for-passports scheme ended in 1998. Royal-owned and Chinese businesses were among those targeted in the November 2006 rioting.

Tonga’s GDP in real terms was projected to grow 2.7 per cent in 2016/17 with further positive growth in 2017/18 largely due to increased activity in the secondary and tertiary sectors of the economy. The primary sector was projected to experience steady growth and is expected to increase in the future given the establishment of the country’s first Fisheries and Agricultural Sector Plans outlining the priority investments planned for implementation in the coming years. The economy has maintained through its National Reserve Bank a comfortable set of monetary policy instruments to support macroeconomic stability, economic growth and to promote low inflation.

The economy is dominated by subsistence agriculture, and economic performance is heavily dependent on weather conditions and world commodity prices. However, the formal money economy has been growing as farmers have moved towards production of cash crops, some of which are exported, for example squash, which from the early 1990s was exported to Japan.

This very success, though, illustrated the vulnerability of small agricultural economies such as Tonga. In the early 1990s farmers rapidly switched to the new crop. By 1994, there was over-production, a collapse in local prices and unsold stocks. Drought in 1995 led to further falls in exports. Squash and, increasingly, fish products are, nonetheless, the most important exports, and squash remains more profitable than traditional crops such as copra and bananas.

The Tongan economy rebounded since a contraction in FY2013.2 Growth accelerated from 2.1 percent in FY2014 to 3.7 percent in FY2015, supported by construction, tourism, strong remittances, and strong private credit growth, notwithstanding weather-related disruptions to agricultural production. Inflation declined to -0.3 percent at end-February 2016, reflecting lower global food and fuel prices. The country’s external position remains strong, with reserves supported by strong remittances, donor aid, and low global fuel prices.”

The Tonga economy experienced gradual growth over the years of the post-global crises, slowly picking up with a forecast to even-off over 2016/17. Despite the somewhat sluggish growth projected, economic growth is nevertheless initiated and supported going forward by a couple of one-off events including construction activities most of which are donor funded projects, including World Bank development projects, as well as the preparation for the upcoming Pacific Games in 2019.

The Tonga Strategic Development Framework (TSDF) 2015 – 2025 launched last year sets a national vision for a “more progressive Tonga supporting a higher quality of life for all”. Specifically, there are four thematic areas upon which the Government would like to place priority focus. These are (i) good governance; (ii) inclusive and sustainable growth; (iii) poverty alleviation and; (iv) safer and better infrastructure. These priorities areas are hinged at the 2016/17 budget theme “Plan the Work and Work the Plan with Monitoring and Evaluation” chooses to encourage working the plan within the available resources so as to achieve sustainable and inclusive growth.

The main source of foreign currency is the remittances of Tongans living abroad, followed by tourism. The government has recognised the need for economic reforms to expand the private sector and diversify the economy and has worked to gain public – and especially civil service – acceptance of the need.

About 88% of the total remittances are channeled through money transfer operators’ (MTOs) and 70% of Tongan adults were reported to have received remittances over the year 2016. Although remittances have remained high, the cost of remittances from the remitting countries has increased, and in Tonga’s case, cost of remittance from New Zealand has increased to about 13%, which is above the G20 target of 5% for 2030.

The balance of risks was tilted toward the downside by 2015. A protracted period of slower growth in advanced and emerging market economies, particularly in Australia and New Zealand, could lead to lower aid, remittances, and tourism receipts. On the domestic side, a large increase in current spending and potential cost overruns related to SPG could weaken fiscal sustainability and raise public debt. Slippages in the reform process could affect donor aid and create a fiscal financing gap, while natural disasters could take a toll on the economy.”

The manufacturing sector consists of handicrafts and a few other very small-scale industries, which together contribute only about 7% of GDP. Commercial business activities are to a large extent dominated by large trading companies found throughout the South Pacific. In September 1974, the country's first commercial trading bank, the Bank of Tonga, opened. Following the destruction of the capital's commercial center in the November 2006 riots, government, business, and international donors have combined forces to support the reconstruction of Nuku'alofa.

Rural Tongans rely on plantation and subsistence agriculture. Root crops such as cassava and yams, kava, vanilla beans, and squash are the major cash crops. Pigs and poultry are the major types of livestock. Horses are kept for draft purposes, primarily by farmers working their api. More cattle are being raised, and beef imports are declining. Fisheries are also a growing export sector, with tuna, beche de mer, and seaweed being the major marine export products.