TONGA/Staff Concluding Statement of the 2026 Article IV Mission

Tonga: Staff Concluding Statement of the 2026 Article IV Mission

FOR IMMEDIATE RELEASE

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision

Washington, DC – November 10, 2026:

Tonga’s recovery from the 2022 volcanic eruption and tsunami is being disrupted by the Middle East energy shock and an emerging severe El Niño-related drought. Growth is slowing and inflation has risen to double digits, deepening a cost-of-living crisis for households. The government has responded promptly, mobilizing support from development partners, and its strong reform commitment opens a valuable window to address long-standing vulnerabilities. Seizing this opportunity requires a well-calibrated policy mix. Fiscal support should shift from generalized subsidies to support to the most vulnerable and essential services, monetary policy should tighten before price pressures become entrenched, and financial stability should be safeguarded. Translating commitment into results will require effective implementation by a more efficient, coordinated, and digitally enabled public administration.

1. Recent Developments, Outlook, and Risks

The economy is slowing as the energy shock and El Niño weigh on activity. Growth is estimated to have eased to 2 percent in FY2026, from a reconstruction-driven 4.4 percent in FY2025, as higher fuel and freight costs, project delays, and slowing credit outweighed resilient tourism and remittances. Growth is projected at 0.5 percent in FY2027, as a severe El Niño event curtails largely subsistence agricultural output. Over the medium term, growth is expected to converge to its potential of about 1.4 percent.

Inflation has risen sharply, initially driven mainly by supply shocks, but price increases are beginning to broaden. Headline inflation rose from 2.0 percent in January 2026 to 12.1 percent in September 2026, well above the 5 percent reference rate of the National Reserve Bank of Tonga (NRBT). Price increases are spreading to other services as distributors pass on costs initially absorbed in margins, and anecdotal evidence points to rising informal-sector wages, while demand remains resilient. Inflation is projected to return to below the reference rate only in FY2028.

The fiscal stance was contractionary in FY2026, reflecting the authorities’ consolidation efforts, but is set to turn expansionary in FY2027. The overall fiscal surplus widened to 4.1 percent of GDP in FY2026, from 1.2 percent in FY2025. With only modest under-execution of capital projects and a small revenue shortfall relative to the budget, the improvement in the balance largely reflects deliberate expenditure restraint, consistent with the authorities’ commitment to fiscal consolidation. In FY2027, the support package of about T$31 million (about 1.6 percent of GDP) to mitigate the energy shock, the resumption of delayed projects, and higher spending on goods and services are expected to shift the overall balance to a deficit of about 4.4 percent of GDP, financed by grants and domestic bond issuance.

Tonga’s external position in FY2026 is preliminarily assessed to be broadly in line with the level implied by fundamentals and desirable policies. The current account deficit widened to 8.8 percent of GDP in FY2026 and is projected to reach 10.7 percent of GDP in FY2027, driven by higher fuel and food import bills and lower agricultural exports. Reserves remained adequate at about 9.7 months of prospective imports at end-FY2026 and, over the medium term, are projected to decline gradually but remain adequate as grants taper.

Credit growth has stalled, reflecting a shortage of bankable projects more than tighter financial conditions. Private-sector credit contracted by 0.6 percent year-on-year in June 2026, with banks citing limited viable projects and delays in government projects. Nonbank lending, though still small, is growing rapidly outside the supervisory perimeter, with credit risk partly mitigated by collateral.

Risks are tilted to the downside. These include more persistent energy price increases or fuel supply disruptions, lower grants and remittances, natural disasters including a more severe El Niño, a further loss of correspondent banking relationships (CBRs), entrenched second-round inflation effects, and banking-sector vulnerabilities. A faster decline in energy prices, stronger tourism, and higher grants would ease pressures.

2. Policies to Cushion the Shocks, Contain Inflation, and Turn Reform Commitment into Results

The authorities have responded promptly and decisively in exceptionally challenging times, and their commitment to reform provides a valuable window for change. The authorities have moved swiftly to protect households from higher energy prices and are actively seeking grants and engaging closely with development partners. They have reaffirmed their commitment to fiscal prudence and to avoiding non-concessional borrowing, advanced the modernization of the monetary policy framework, and addressed weaknesses in the financial sector. Initiatives to strengthen inter-agency coordination, enhance the transparency of tax expenditures and state-owned enterprises (SOEs), and modernize procurement are also welcome.

A. Fiscal Policy—Redirect Support to the Most Vulnerable and Rebuild Buffers

Generalized subsidies should be phased out and the resources redirected to protect the most vulnerable from the cost-of-living crisis. The authorities’ recognition that support could be better targeted is welcome. Generalized electricity and transport subsidies, introduced in July as temporary support, benefit better-off households and visitors, mute price signals, and add to inflationary and external pressures by sustaining demand. Allowing them to become prolonged would also add to fiscal risks, given Tonga’s high risk of debt distress. Accordingly, subsidies should be replaced in a timely manner with targeted support building on existing social protection mechanisms, such as top-up payments for the elderly and persons with disabilities, and the electricity lifeline tariff, with eligibility criteria and thresholds determined by the authorities. The resources saved should be redirected toward households most exposed to El Niño-related food and income losses and toward essential services, including health and education. Clear communication that the reform redirects support toward those most affected by El Niño and toward essential services, rather than withdrawing it, will be critical to building public support.

Over the medium term, gradual and credible fiscal consolidation, supported by additional grants, remains essential to preserve debt sustainability. Tonga remains at high risk of debt distress. Staff estimate that a cumulative adjustment rising gradually from 1.4 percent of GDP in FY2028 to 5.2 percent of GDP in FY2036, compared to the baseline, would keep the present value of public debt about 15 percent of GDP below the 70 percent high-risk benchmark in FY2036, even under the most extreme shock. Replacing the existing fiscal rules with an anchor on total public debt, including domestic debt and guarantees, operationalized through primary-balance targets and an expenditure ceiling as recommended by IMF technical assistance (TA), would guide this path. On revenue, building on the welcome introduction of sunset clauses and tax-expenditure reporting, exemptions costing about T$55–60 million a year should be rationalized, starting with the largest. On spending, restraint on goods and services, rising from 0.3 to 0.6 percent of GDP within the adjustment path, should be complemented by rationalizing the wage bill—about 40 percent of current expenditure—while protecting frontline services.

Developing the domestic debt market requires market-based pricing, predictability, and close coordination with the NRBT. Publishing an issuance calendar, engaging with investors on terms and tenors, and coordinating issuance with NRBT operations would broaden participation and help build a yield curve. Domestic borrowing should be weighed against available concessional financing and the expected returns from the spending it finances.

Fiscal risks from SOEs call for closer monitoring and timely tariff adjustment. Higher fuel prices and lags in adjusting electricity tariffs are straining the finances of Tonga Power Limited; tariffs should move toward cost recovery, with government subsidies shielding only vulnerable households. Parliament’s scrutiny of SOE annual reports and the plan to include SOE liabilities in public debt reporting are welcome and should be complemented by a fiscal risk statement and timely audited financial statements. New government guarantees should be avoided.

Stronger public financial management (PFM) is critical to convert available financing into better development outcomes. Externally financed projects are often completed years behind schedule owing to land issues, procurement bottlenecks, and weak project planning; the Prime Minister’s direct engagement to resolve land issues is welcome. The revised PFM Act, pending for six years, should be enacted promptly, together with the Cabinet-approved procurement amendments, which would strengthen internal audit and controls while streamlining procurement. Development partners can contribute by aligning financing with project readiness and supporting projects throughout their life cycle.

B. Monetary and Exchange Rate Policies— Consider Tightening and Communicate Clearly to Prevent Inflation from Becoming Entrenched

With signs of demand pressures emerging, containing inflation requires a coordinated policy mix, including consideration of an increase in the policy rate backed by clear communication. The broadening of price increases, pressures to recover margins and wages, and resilient demand raise the risk of second-round effects. Given the limited credit channel and already weak credit growth, monetary policy cannot act alone: phasing out generalized subsidies would allow demand to respond to price signals and ease the burden on monetary policy. Nonetheless, while the strength and speed of transmission remain uncertain, an increase in the policy mid-rate from its current 2 percent, alongside continued liquidity absorption and guided by the inflation and demand outlook, would send a strong signal of the NRBT’s commitment to containing inflation. With transmission still gaining traction, clear and regular communication of the rationale for policy decisions, the inflation outlook, and the NRBT’s policy intentions would amplify this signal, help anchor inflation expectations, and build the credibility of the new framework.

Progress in absorbing excess liquidity is expected to strengthen the transmission of monetary policy. Outstanding NRBT notes have reached about T$275 million, more than 80 percent of estimated excess liquidity, and some banks indicate that the policy rate and note yields are becoming reference points for pricing. Completing the framework will require additional TA on liquidity forecasting and a central securities depository, as well as progress toward a Treasury Single Account.

Reforming the NRBT Act is critical to strengthening monetary policy, including the new operational framework. The amendments should establish a clear mandate focused on price and financial stability, without developmental objectives. They should safeguard the NRBT’s operational independence by ensuring, among other things, that it does not extend credit to the government, and strengthen its governance and financial autonomy, consistent with the outstanding 2021 safeguards assessment recommendations and IMF legal advice. The current momentum offers an opportunity to submit the amendments to Parliament without delay.

The basket peg continues to serve Tonga well as a nominal anchor. The upcoming IMF-supported review of the basket weights and the planned easing of approvals for current international payments are welcome.

C. Financial Sector Policies—Safeguard Stability and Correspondent Banking Relationships

The banking system remains broadly sound, but pockets of vulnerability call for continued vigilance. Banks are generally well capitalized, liquid, and profitable, but nonperforming loans remain elevated and concentrated, and the energy shock is squeezing fuel-intensive borrowers. Close monitoring of asset quality, strict enforcement of provisioning and large-exposure requirements, and timely loss recognition remain essential.

Reform of the Tonga Development Bank (TDB) is advancing, and its success will depend on addressing long-standing weaknesses decisively. The renewal of the board and management, strengthened provisioning, a new business plan prepared with ADB support, and the separate identification of commercial and development lending are important steps, as is the shareholders’ commitment to recapitalize the bank, conditional on governance and operational reforms. Recapitalization should rest on a credible and sufficiently ambitious restructuring plan that resolves legacy problem loans, strengthens governance and credit-risk management, and legally separates commercial and development activities, with development lending subject to a clear mandate, transparent funding, and sound risk management.

The supervisory and macroprudential frameworks should be strengthened. Priorities include issuing the prudential standards redrafted with IMF TA, moving to risk-based supervision, streamlining overlapping regulatory reporting, and extending the supervisory perimeter to pension funds and insurers. Establishing a dedicated financial stability function and incorporating macroeconomic scenarios—including natural-disaster, climate, and energy-price shocks that can simultaneously affect most borrowers—into the NRBT’s regular stress tests would strengthen systemic risk analysis. The authorities could consider requesting a Financial Sector Stability Review (FSSR) to take stock of vulnerabilities and identify priorities for strengthening financial stability frameworks.

Safeguarding correspondent banking relationships and lowering remittance costs remain priorities, building on the authorities’ important progress. Recent withdrawal notices for Australian-dollar correspondent banking services to two domestic banks heighten the risk that remittances—about 39 percent of GDP—shift toward costlier or informal channels. The NRBT has strengthened AML/CFT supervision, while the December 2025 Money Laundering and Proceeds of Crime Act and October 2026 implementing regulations underpin Tonga’s request for reassessment of compliance with 21 FATF Recommendations, expected to conclude in 2027. However, compliance costs and limited commercial incentives in small Pacific markets compound AML/CFT concerns, so effective implementation and continued engagement with correspondent banks and foreign regulators remain essential. Building on the fintech sandbox, exploring safe and affordable fintech remittance options—with effective licensing and oversight, AML/CFT compliance, cybersecurity safeguards, and protection of customer funds—could strengthen competition and reduce costs.

D. Structural Reforms—Accelerate Implementation and Lift Growth

Translating the government’s reform commitment into results requires a step change in implementation. The leadership’s innovative approach has yet to be fully embedded in the public administration, where procedures can be complex, inter-agency coordination remains challenging, and capacity is thin. Building on welcome initiatives such as the joint MOF–NRBT cash-flow committee and the revival of the development partners’ forum, a limited set of reform priorities with clear timelines, accountable owners, and senior-level monitoring would accelerate delivery. Digital tools, including artificial intelligence, remain largely untapped and, with appropriate safeguards, could streamline revenue administration, account reconciliation, procurement, reporting, and health and education services. Capacity development should be prioritized on the most critical risks and coordinated among development partners.

Giving the Anti-Corruption Commission the means to deliver on its mandate would reinforce these efforts. The Commission has built up its systems and staff, but limited resources, released through government procedures rather than upon parliamentary appropriation, constrain its effectiveness; predictable and adequate funding would strengthen its independence in practice. The National Integrity Framework, under preparation with UNODC support, offers an opportunity to coordinate anti-corruption efforts across government and introduce asset declarations by senior officials, in line with UN Convention against Corruption recommendations. Closer cooperation with AML/CFT authorities on financial investigations would also support efforts to preserve correspondent banking relationships.

Lifting potential growth requires removing obstacles to private investment. With grants set to taper, attracting private investment and diversifying exports are essential. Investment is held back by land-tenure constraints, skills shortages compounded by emigration, limited transport links, and restricted access to finance. Transparent, time-bound investment incentives, predictable approvals, and vocational training aligned with labor-market needs would help. Prompt passage of the credit registry bill, digitizing land records, fuller use of the secured-transactions framework, and workable criteria for development-lending schemes would broaden access to credit.

Building resilience to climate shocks and securing energy supply are pressing priorities. El Niño preparations should prioritize food and water security, drawing on contingency resources and parametric insurance. Given Tonga’s very limited fuel-storage capacity, a fuel-security strategy, including expanded storage capacity, is needed alongside continued investment in renewable energy. Implementing the Disaster Risk Management Act and operationalizing the Pacific Resilience Facility would further strengthen resilience.

Better and more timely data are needed to calibrate policies. The forthcoming National Statistical Summit should translate the Data ROSC recommendations into a sequenced roadmap, prioritizing GDP rebasing, interagency data sharing, and the transfer of balance of payments compilation to the NRBT.

The IMF team thanks the Honorable Minister of Finance, the Governor of the NRBT, other officials, development partners, and private sector counterparts for their warm hospitality and candid and constructive discussions.

Tonga: Selected Economic Indicators, FY2023 -FY2027¹
Population (2023): 100 thousand
Major exports: root crops, vegetables, shellfish, fish
			Est.			Proj.
	FY2023	FY2024		FY2025	FY2026		FY2027
Output and prices	(Annual percent change)
Real GDP	3.4	1.4		4.4	2.0		0.5
Consumer prices (period average)²	12.6	8.0		3.1	3.8		10.7
Consumer prices (end of period)²	13.7	6.4		1.0	7.1		8.3
Central government finance	(In percent of GDP)
Revenue	46.5	47.8		49.0	49.4		42.3
of which: Grants³	24.0	25.2		25.8	26.3		19.5
Expenditure	41.3	44.2		47.8	45.2		46.6
Expense	34.5	31.9		32.7	29.7		31.8
Net acquisition of nonfinancial assets	6.8	12.3		15.1	15.6		14.9
Primary balance	5.8	4.0		1.6	4.5		-4.0
Overall balance	5.3	3.6		1.2	4.1		-4.4
Primary balance excluding grants	-18.1	-21.2		-24.2	-21.8		-23.5
Money and credit	(Annual percent change)
Broad money (M2)	-0.3	8.2		4.3	5.8		11.3
Domestic credit	-15.6	14.0		33.6	-10.5		21.5
Of which: Private sector credit	9.0	7.3		8.6	0.0		4.0
Balance of payments	(In millions of U.S. dollars)
Current account balance	-47.3	-43.5		-30.1	-64.3		-83.1
(In percent of GDP)	-7.9	-6.7		-4.3	-8.8		-10.7
Trade balance	-222.6	-221.1		-245.6	-276.5		-310.3
Exports of goods, f.o.b.	13.1	10.8		11.6	13.3		10.0
Imports of goods, f.o.b.	235.8	231.9		257.2	289.8		320.3
Tourism receipts	44.0	61.6		74.3	86.9		97.4
Total remittances	254.0	253.9		267.4	281.0		308.1
(In percent of GDP)	42.4	39.2		38.7	38.6		39.5
Compensation of overseas workers	53.1	61.9		72.6	66.9		76.9
Personal remittances	200.9	192.0		194.8	214.1		231.2
Official grants	27.1	26.0		36.3	50.7		45.2
Capital account balance	123.9	126.2		55.1	73.5		58.2
Financial account balance	12.8	-53.3		-13.0	-1.1		-15.4
Gross official foreign reserves
In millions of U.S. dollars	399.5	403.4		401.3	437.3		422.5
(In months of next year’s total imports)	12.2	11.1		9.8	9.7		9.1
Debt	(In percent of GDP)
Public debt (external and domestic)	36.9	31.0		27.0	23.9		27.2
Of which: External debt	32.6	27.1		22.7	18.8		21.4
External debt service ratio	1.9	3.3		3.1	3.0		3.0
Exchange rates
Exchange rate (National currency per US dollar)	2.3	2.4		2.4	2.4		…
Real effective exchange rate (2010=100; +=appreciation)	112.7	118.7		119.3	120.8		…
Memorandum items:
Nominal GDP (millions of US$)	599.3	647.5		691.7	728.4		780.0
Sources: Tonga authorities; and IMF staff estimates and projections.
¹Fiscal year ending June 30.
²CPI basket and methodology changed in September 2021.
³The lower grants in the projection year mainly reflect a conservative assumption on grant recognition: only firmly
committed and highly likely grants that do not affect the risk rating are included (LIC DSF Guidance Note, ¶37).