THE banking sector in Tonga remains stable and profitable however macroprudential policies should be used to address systematic risks to financial stability.
This was a recommendation by the executive board of the International Monetary Fund (IMF) which concluded the 2017 Article IV consultation with Tonga.
A statement from IMF said the decision was made without a board meeting.
It said staff encouraged the authorities to develop macroprudential policies, such as limits to loan-to-value (LTV) ratio for property loans, loan diversification principles, and maximum loan-to-deposits (LTD) ratio.
Staff also recommended that the National Reserve Bank of Tonga should develop credit monitoring indicators to catch early signs of potential distress.
“Staff supports ongoing reforms aimed at raising Tonga’s growth potential and reducing poverty. In line with the Tonga Strategic Development Framework II, the authorities are appropriately focusing on investing in infrastructure, enabling business climate, enhancing private sector development, developing human capital, and improving access to finance.
“Bringing the informal economy into the formalised MSMEs would promote inclusiveness and help ensure economic growth benefits the broader population.
“Staff supports the focus on expanding export market access and increasing the value added of domestic production.”
Meanwhile the report also recommends that a more prudent fiscal policy would also help to bring the external position back in line with fundamentals.
It said staff supported more prudent fiscal management, while recognising the need to build capital stock in Tonga.
“The introduction of explicit fiscal anchors in the FY2018 Budget Document is welcome.
“At the same time, expected budget revenue are optimistic, even with the proposed tax revenue reforms.
“As advised in previous Article IV Consultations, the authorities should contain the large wage bill to ensure that fiscal sustainability is not compromised.”
At the authorities’ suggestion, it is proposed that the next article IV consultation with Tonga be held on the 24-month cycle. Tonga satisfies all relevant criteria to be moved to the 24-month cycle.
