TONGA TURNS POCKETS OUT AS FISCAL WOES MOUNT

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Seeks world donors to fill government coffers

NUKU΄ALOFA, Tonga (Matangi Tonga, July 1, 2010) - FACED with continuing drops in remittances and two years of negative growth, Tonga’s financial planners have turned to aid donors to support the national budget for the new financial year 2010-11, in order to meet a current deficit of TOP12.1 million [US$6 million], as well as multi-million pa’anga development budget needs.

The National Budget totaling TOP205.6 million [US$104 million] presented to the Tonga Legislative Assembly on June 14 and passed by the House this week on June 29, underscores the great financial difficulties that Tonga continues to face.

Funding to boost economic activity is also being sourced through borrowing and while the Budget Statement acknowledges that this pushes Tonga’s debt burden way beyond the government’s agreed sustainable debt levels it is considered to be a case of "extraordinary national need".

Tonga is in trouble because the Government’s revenue collection during the past 2009-10 financial year dropped by over 20 percent from a forecast of TOP172 million [US$87 million] to about TOP137 million.

The new 2010-11 Budget shows that the Global Financial Crisis has had a devastating impact on the Tongan economy, and it is probably for the first time ever that the government is seeking budget support funds from donor countries and organizations to finance its new Budget.

While Government revenue is expected to remain depressed over the next year, international and bilateral donors have come to Tonga’s assistance with donor grant receipts more than doubling.

Tonga’s economic growth rate has also continued to lag behind regional and global averages for developing nations.

Ministry of Finance and National Planning estimates showed that the Tongan economy has contracted by 1.2 percent over the past year. The original forecast at the time of the 2009-10 budgets was a growth of 1.7 percent.

The Minister of Finance, Hon. Afu’alo Matoto in his Budget Statement noted that the downward revision was attributed to the severe impact of domestic banking consolidation, the global economic crisis, which had been more severe than expected and natural disasters that affected all sectors of the economy.

Remittances in February 2010 were the lowest by month since 2003.

Developments that influenced the economy included:

Remittances declined by 18.0 percent due to the impacts of the GEC reducing wealth in major remitting countries (following a 12.5 percent decline the previous year.)

Tourist receipts declined by 14.8 percent with total number of arrivals declining by 13.9 percent due to a decrease in the number of cruise ships visiting, while air arrival increased by 5 percent.

Delay in some of the major construction projects.

Bank lending had been constrained due to bank’s consolidating after past high levels of loan defaults.

The sinking of the MV Princess Ashika, Niuatoputapu tsunami, drought and Cyclone Renee adversely impacted key economic sub-sectors.

Rising fuel prices, which affected all activities particularly those dependent on transportation, electricity and food.

Continued poor export performance.

"As a result of this economic downturn the Government’s revenue collection was also 22 percent lower than Budget," the Minister of Finance stated.

"The government budget for 2010-11 anticipates a deficit of TOP12.1 million.

"This is the result of total expenditure and net lending of TOP205.6 million exceeding revenue and grants of TOP193.5 million. This deficit will be financed from the TOP23.5 million budget support being sought from donors. To achieve the fiscal objective of balanced budget, the unconfirmed budget support will not be expended until the approval and receipt of the budget support from donors," he stated.

"The 2010-11 revenue projection includes Budget Support of TOP9.4 million, which has been confirmed by the Asian Development Bank. However, TOP23.5 million of the budget support, which is being processed through the internal approval mechanisms of the World Bank (TOP9.4 million) and the European Union (TOP14.1 million), is presented as a financing item in the budget.

He stated that because of the significant decline in its revenues, Government had to cutback some of its services, but with donor assistance, it had ensured that Health and Education services were protected from any cutback.

The budget support of TOP1.6 million will be received from the Australian Government in the current financial year to use for payment of salaries for Ministries of Health and Education.

Other influx of donor support was primarily focused on energy efficiency, road and infrastructure projects and capacity building.

The decline in remittances due to the economic conditions and job security of Tongans in countries from which remittances are sourced, has had a direct impact on the household disposable income resulting in a reduction in demand for goods and services in most sectors of the Tongan economy.

"The slow flow through of improved global economic activity is illustrated by the fact that in 2009-10, although there was a slight improvement in the world economy, the Tongan economy by contrast declined by 1.2 percent. This means Tonga will have experienced two consecutive years of negative growth," he stated.

"The outlook for the medium term is more positive with growth expected to average around 1.5 percent."

The Budget Statement envisaged that this growth would be driven mainly by the secondary sector with increased construction and infrastructure activities. Agricultural and Fishing activities are forecast to grow with increased varieties of export products and increases in the volume of sea cucumber being exported. Tourism and remittances would depend on the pace of economic recovery in other economies, particularly the United States of America, Australia and New Zealand.

"Our development partners have been instrumental in sustaining development projects as well as providing budget support program for this year and the next financial year," he stated.

"The Government loan from the China Export Import (EXIM) Bank to upgrade infrastructure, donor funded projects in particular from the Asian Development Bank (ADB), Australian International Development Assistance (AusAID), Japan, New Zealand International Development Assistance (NZAID), People’s Republic of China (PRC), European Union (EU) and the World Bank will all contribute to economic activities in areas related to energy, the environment, infrastructure, health and education.

Current Government initiatives to assist in stimulating the domestic economy include:

To fund revenue shortfall the Government had negotiated a program grant with ADB to bring forward an ADF grant allocation for 2010-12. This has made USTOP5m available in each of the 2009-10 and 2010-11 fiscal years. Donor funding towards Budget Support has been indicated from the European Union, the World Bank and Australia and New Zealand.

"Other funding to boost economic activity was sourced through borrowing. While this pushes Tonga’s debt burden considerably beyond the Government agreed sustainable debt levels, the Government policy explicitly recognizes the need to exceed sustainable debt levels in periods of extraordinary national need. A MOU has therefore been signed with China for a TOP63.2 million loan to undertake national road development programs," he stated

The Government introduced no new taxes and did not change the rate of any taxes in 2009-10.

"In 2010-11 the Government is anticipating that the new amendments to the Custom Tariff will come in to effect on 1 July 2010. The amendments include increasing in excise tax rates on alcohol and tobacco, inserting of new tariff lines for the detail classification of bech-de-mer, imposing a import duty rate on water, changing the import duty rate of resins for paint and a new tariff line to allow the free importation of egg trays.

"This increase in alcohol and tobacco excise rates is expected to produce a double dividend to the Government and people of Tonga. In addition to the expected full year positive revenue impact of around TOP5 million, the increased tax rates will discourage smoking and drinking with consequential health and welfare benefits for Tongan families. These amendments anticipate replacing revenue lost from the repeal of the Stamp Duty Act. The fiscal impact of these measures is already taken into consideration in calculation of tax revenue for the 2010-11 financial years," he said.

The total book value of public debt is estimated to be TOP283.4 million or 41 percent of GDP (TOP698.9 million). With the inclusion of undisbursed loans, the total public debt in Net Present Value (NPV) terms is estimated to be TOP390 million or 55.8 percent of GDP, comprising of external debt of TOP359 million (51.4 percent) and domestic debt of TOP31 million (4.4 percent).

Outstanding external loans are estimated at TOP253.9 million (or 36 percent of GDP). The significant increase in external debt is due to the disbursements on the Reconstruction and Roads projects from the EXIM Bank (China). The main creditors of loans are the EXIM Bank (China) account for 43 percent (TOP108 million) and loans to ADB account for 32 percent (TOP81 million).

The main currency of Tonga’s external debt is "Special Drawing Rights" which account for 54 percent (TOP136 million) of the outstanding loans and the Chinese Yuan which accounts for 45 percent (TOP115 million).

Outstanding domestic loans (bonds on issue) are estimated at TOP29 million (at 4 percent of GDP). Two new bonds were issued for budget support (TOP5 million in October 2009 and TOP3 million in January 2010). The majority of bonds 68 percent or TOP20 million are held by financial institutions. There are no domestic loan repayment arrears.

Outstanding guaranteed loans are estimated at TOP17 million (2 percent of GDP). The main Borrower is Tonga Power Ltd. at 97 percent (TOP16 million). There are no guaranteed loan repayment arrears.

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