A major cyclone hit
Risk to the inflation outlook is low. Headline consumer price index (CPI) inflation has largely fluctuated between 1 to 2 percent since mid 2012, reflecting low global food prices, stable oil prices, and weak domestic demand. Inflation is expected to incrementally increase to 4-5 percent toward FY2018-19. The deleveraging cycle of the Tongan banks appears to be ending, with both lending and asset quality indicators substantially improving.
The projected fiscal cost relating to the cyclone will be broadly met by confirmed funding mainly from donor agencies. As a result, the budget is expected to record only small overall deficits in FY2013-14 and FY2014-15, estimated at around 0.6-0.7 percent of GDP. The external current account is projected to show a deficit of close to 3 percent of GDP in FY2013-14 and FY2014-15, largely financed by foreign direct investment (FDI) inflows. International reserves increased about threefold since 2008--to about 8 months of prospective imports. In the medium term, stronger imports and lower foreign grants will slightly decrease international reserves to 7 months of imports.
Executive Board Assessment2
Executive Directors welcomed that
Directors encouraged the authorities to maintain overall fiscal prudence while accommodating cyclone-related financing needs. They welcomed that the projected fiscal cost related to the cyclone will be broadly met by funding from development partners. Over the medium term, the fiscal strategy should aim to gradually increase the primary surplus, and to reduce the debt-to-GDP ratio. In this context, Directors underscored the need to continue with revenue reform and wage restraint, strengthen debt management, and avoid cost overruns associated with the South Pacific Games.
Directors considered the current accommodative monetary policy stance appropriate. They agreed that the
In view of challenges posed by
View table here (http://www.imf.org/external/np/sec/pr/2014/pr14386.htm)
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