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By Mary Fonua

NUKUALOFA, Tonga (Matangi Tonga, Dec. 11) – Such a grim picture of the Tongan economy is forecast over the next 18 months that Tonga's Minister of Finance has come out to warn the public of the dire economic consequences of the massive salary increase given to public servants in the September strike settlement.

Even after taking stringent measures to raise revenues and cut costs the government still needs to find up to 31.7 million pa'anga [US$15.8 million] to meet a shortfall in the financial year 2006-7 to pay for salaries, leaving a huge hole in a 150 million paanga [US$75 million] budget, independent analysts are predicting.

The analysts warn that this substantial budget problem is likely to lead to the sale of government assets, a restructured government, possible redundancies, a decline in the standard of health and education, increasing pressure on the poor, a decline in jobs in both the private sector and government, increased emigration of skilled and educated Tongans, a rapid decline in the value of the Tongan pa'anga, nasty inflation, erosion of real incomes, restraints on borrowing, and bankruptcies.

At the same time taxes are going up and government services are going down.

"The current economic situation is so serious that I feel compelled to inform the public," Tonga's Minister of Finance, Hon. Siosiua 'Utoikamanu said in the press statement on 28 November. "The country must face the task of finding additional resources to settle its new wage bill while trying to sustain the rest of the economy. So far there is no prospect of new outside funding to pay for the increased public service salaries," the statement said.

The Minister called a press conference to allow three analysts employed by the Asian Development Bank (ADB) to talk about their findings after they had completed a six week investigation into the "Budgetary and Economic Consequences of the (60-70-80) Settlement and its Social Impacts"

David Sainsbury said that the team who were contracted by the ADB had done an independent assessment of the settlement. They had not attempted to come up with a solution to the problems forecast, the solution was for Tonga to decide. "The Government has to choose between some not very nice options, and the different options will hurt different people," he said.

In explaining the budgetary consequences of the settlement he said in the year 2005-6 the salary and related cost increases amounted to $21.9 million pa'anga that had to be found. Fortunately, there was already a provision of $7.1 million, and added to this were a saving from vacancies of $3.2 million, while another $5.4 million could be found from capital and program items and possibly donor funding, and some savings of $2.6 million could be made from administration costs and contingency funds. So for the current year, this left a savings shortfall of only $3.7 million.

However, the following year in 2006-07 there was a big hump of expenditure funding Only 60% of the civil servants salary increase was being paid out in the year 2005-06, and then in 2006-07 100% percent of the increase would be paid along with the 40% not paid in 2005-06.

"So in 2006-07 you get a big jump in the salary costs," he said.

"If the size of the budget pie doesn't increase then the salaries will take 67.5% of the budget, and from what's left over the government still has to pay for its loan commitments and it running expenses," David said. He thought it was totally untenable and not likely to happen, and therefore the $31.7 million increase had to be met with revenue generating measures. "If the proposed changes in tariffs take place it would leave $23.3 you have to look for - it is quite a big hole out of a budget of $150 million."

He said borrowing would add to inflationary inputs, "and we consider it imprudent to borrow more than a small sum."

He suggested that Tonga needed to look realistically at the revenue side and that the proposed income tax revision should be made without delay because it would yield something. He also suggested cuts to expenditures and scaling back of programs and services, along with a redundancy policy. The government would also need to look at asset sales, particularly those already planned. He also suggested user charges for services where the cost and usage was increasing, such as health services.

The 40% back pay was a particular problem and spreading this over a longer time could help. "The monetary loss to those concerned would be temporary but would be a good contribution if at all possible," David said.

In summing up the economic consequences of the strike, economist Patrick Spread said, "there is no escaping the fact that there is a big redistribution going on away from the private sector into public services."

"It is widely recognised that a lot of the public service increment was a catching up as it had been without increase for years and had fallen behind."

However, he said that people working in the private sector would now look for increases so that they will not fall wildly behind, and this would lead to inflation. "It is going to push up prices in the Tongan economy....If the CPI goes to 20% employees will get restless again and call for further wage increases and if that happens we will get an upward escalation."

High levels of inflation are a danger to the stability of the economy, he said, and a standard response to inflation is the constriction of money supply to restrain borrowing.

"Some retailers will get higher sales from the increased spending power of the civil servants, but how long that goes on depends on inflation. Some companies will have lower sales and a lot of people will find that prices will rise faster than incomes, and this is because of higher taxes, higher wage costs and higher interest costs. There will be a general deterioration in trade conditions."

He said it would become more difficult for companies to find credit to bail them out over the period. "It is possible that some private companies will not be able to survive," Patrick said. The companies most likely to be in trouble from rising costs and lower sales would go bankrupt and this would reduce opportunities for school leavers to find jobs. "It is going to be very tough for school leavers," he said.

"Everyone is going to experience inflation, possibly nasty inflation, and everyone will have their income eroded by price increases."

There were possibilities of jobs overseas and if people had that opportunity they should take it, he said.

Patrick said the unemployed are going to find themselves in a very tough situation.

"Remittances may save many from hardship, they are a remarkable saving factor in the Tongan economy and will save many families from hardship. It also saves the foreign reserve and will diminish the deterioration of the Tongan pa'anga."

"We hope that aid donors will continue with monetary support.

Patrick said that measures to give assistance to the private sector and the unemployed were needed.

He also said it was important to establish legislation regarding the conduct of labour disputes. "If it was in place it might have been possible to make a less damaging settlement"

It was also necessary to proceed with structural reform programs and for macro-economic committees to get going and monitor the inflationary impacts and improve the local economic environment to reduce the migration of skilled and educated people.

"When the most educated, brightest and energetic go overseas we feel it inhibits the vitality of the Tongan economy," Patrick said.

In speaking on the social implications of the settlement, Kiri Evans, said that it was fortunate that Tonga had always had good social, health and educational outcomes because there had been good levels of investment in health and education for many years.

"At a national level this looks good. Poverty is not obvious but it does exist and some 23% of Tongan households live in poverty on less than US$2 per day," she said.

The poverty manifests itself in terms of hardship where people have to decide between food or electrity or church donations or schools but could not afford them all. "These vulnerable groups increasingly have no wage earner and they cannot meet their needs. There is no mechanism for identifying or supporting vulnerable groups, beyond traditional measures that are gradually weakening," she said.

Kiri also pointed out that because of changing health patterns, where an estimated 18% of adult Tongans have diabetes, and the fact that health campaigns had not been fully effective in changing diet and lifestyle, was going to lead to a massive increase in health costs in the future.

Kiri said that the settlement so far had had a dramatic impact in eduction and health. Government staff vacancies had been frozen since the strike settlement but unfortunately 25% of doctors positions and 20% of nurses positions were vacant and could not now be now filled.

Meanwhile an outflow of teachers from private schools was evident where the salaries had not kept up with the high government increase.

"It is going to be difficult to avoid increases in fees for education and health," she said.

The Minister of Finance, Hon. Siosiua 'Utoikamanu, said the press conference was the beginning of a series of presentations regarding the economic situation and some of the challenges. "Because if the community is to face up to the challenge we need to have proper dialogue and facts placed before you."

"In the past it has not been our practice to be open with the media and the community but things have changed and the series of presentations will be our contribution to a more educated dialogue," he said.

When asked, given the seriousness of the situation, what chances were there of revisiting the MOU with the Public Service Association on the salary issue, the minister replied that was not happening at the moment. "It is difficult because the decision was made by government and until another decision is made to review it we just have to work with that."

"Redundancy is an option but have to treat it with great sensitivity and reluctance. It has to be carefully managed. We are working on a series of policy initiatives but there are costs involved and it will take time," the Minister said.

"We are running out of time and need to start preparing next year's budget... trying to balance that budget is going to be a tough one for us and trying to ensure that we have a stable economy."

He also said there was need for support for the private sector. "We cannot ignore what's happening and we need to put in place measures to encourage the private sector to take off some of the pressure that will come with new revenue measures."

He also said that the groups who are distressed in the community and left to their own resources without any help from government "we are going to give high priority".

December 12, 2005

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