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Tonga’s Fiscal Performance: A Mixed Bag

The Kingdom of Tonga’s fiscal performance for the 2022-2023 financial year has been a mixed bag, with some positive trends and others that raise concerns.

Revenue and Expenditure

According to the latest budget report, Tonga’s total revenue stood at TOP 246.5 million (USD 99.6 million), an increase of 3% compared to the previous year. This was driven by higher investment revenue and dividends from the Reserve Fund for Economic Recovery (RERF).

However, the country’s expenditure also increased significantly, reaching TOP 309.4 million (USD 124.7 million), up 1% from the previous year. This was mainly due to higher departmental expenditure and debt servicing.

Budget Balance

As a result, Tonga’s budget balance stood at TOP 38.8 million (USD 15.6 million), representing 14% of its GDP. While this is an improvement compared to previous years, it still raises concerns about the country’s fiscal sustainability.

Importance of RERF Dividends

The report also highlights the importance of RERF dividends in supporting the government’s expenditure. In 2022-2023, RERF dividends accounted for TOP 26.8 million (USD 10.9 million), or 11% of total revenue. However, if the rate of return on RERF investments does not exceed the 5% benchmark, this could impact the government’s ability to withdraw dividends.

Cash Reserves

Furthermore, the report notes that Tonga’s cash reserves are sufficient to cover its expenditure for approximately 11 months, assuming a 3% fiscal responsibility ratio. This provides some comfort, but also highlights the need for prudent financial management to ensure long-term sustainability.

Conclusion

In conclusion, while Tonga’s fiscal performance has shown some positive trends, there are still concerns about the country’s dependence on RERF dividends and its ability to manage debt servicing. The government will need to continue to prioritize fiscal discipline and sustainable revenue growth to ensure a stable financial future for the kingdom.

Sensitivity Analysis

The report also includes sensitivity analysis to assess the impact of various scenarios on Tonga’s budget balance and cash reserves. These scenarios include:

  • Low-case Fisheries Revenue Scenario: A reduction in fisheries revenue would reduce the budget balance by TOP 31.7 million (USD 12.9 million) and shorten the cash reserve period by three months.
  • No-Donor Budget Support Scenario: The absence of donor budget support would reduce the budget balance by TOP 16.1 million (USD 6.5 million) and extend the cash reserve period by one month.
  • No-RERF Dividend Scenario with Rate of Return Below 5%: A rate of return on RERF investments below 5% would reduce the budget balance by TOP 21.7 million (USD 8.9 million) and shorten the cash reserve period by two months.
  • High-case Expenditure Scenario: An increase in expenditure would increase debt servicing and reduce the budget balance by TOP 13.5 million (USD 5.5 million).

These scenarios highlight the importance of prudent financial management and diversification of revenue streams to ensure Tonga’s fiscal sustainability in the face of uncertainty.