Impacts & Lessons from the Global Economic

CrisisTonga’s experience

Tonga an overview An archipelago

of 172 islands in the South Pacific

Population of 100,000 (in Tonga)

Medium level of development (on UN HDI)

Tonga’s economy GDP of $USD 324m

GDP per capita of USD$3,182

Tonga economic overview Main export =

agricultural exports

Economy – main income sources as a % of GDP

• 31% Remittances• 1.3% Aid• Less than 5% from

exports

Impacts of the GEC Remittances down by 13.6% as at

end of June 09 Imports down by 32.4% from 07/08

to 08/09 Revised Revenue to T$142m down

from $182m (.i.e.23% revision) or 6% of GDP

GDP forecast down from 1.7% to 0.4%

Channels of economic impact from GEC

Trade through Low exports and decline in imports resulting in a fall in trade taxes revenue

Drop in Remittances due to increase in unemployment in source countries

Fall in tourism receipts Adverse impact on contraction of domestic aggregate

demand contributed by low business confidence and decline in credit for business investment

In addition to the overall economic impacts of the GEC, the human costs implication includes:• Reduction in household disposable income • Decline in aggregate level of domestic economic activity

causing reduction in employment creation opportunities• Resort to social safety net and increase reliance on

subsistence activities • Adjustment to ways of meeting social obligations to save

cost

Impacts of the GEC-Human Cost

Policy Lessons Learnt1. Globalisation and integration of global economic activity

spares no one from global financial crisis and resulting economic downturn

2. Important to develop accurate and robust information system for monitoring of movements in global and domestic economic activities for appropriate and timely decision making

3. Maintain a sound financial system at all time with appropriate regulatory framework

4. Vital to maintain a stable economic condition with adequate level of foreign reserves, low inflation, sufficient liquidity in the banking system and in public finance to enhance resilience and ability of economy to weather serious financial and economic storms

Cont; Policy Lessons from the GEC

5. Pursue sustainable development policy through encouraging innovation and new initiatives such as investment in renewable energy measures to mitigate external shocks;

6. Prudent macroeconomic and fiscal management to facilitate corrective actions due to external shocks

7. Synchronization and coordination of monetary and fiscal policy responses to stabilize the economy and restore the patch to economic growth . E.g. relaxing of monetary policy through reduction in SDR from 10% to 5%, market operation and moral suasion to reduce interest rates for lending

8. Continuing the economic and public sector reform and investment in necessary economic infrastructure for attaining long term sustainable growth and development

9. Specific and target measures to mitigate impact on vulnerable groups10. Development of National Strategic Plan Framework to guide and coordinate the

strategies to address the short and long challenges for achieving the overarching economic and social goals and prioritization of allocation of government and donors resources

11. Important to develop a medium term budgetary framework with a responsive development programs with donors, both bilateral and multilateral, to respond quickly when circumstances warrant. E.g. front loading of ADB grant program for budgetary support, IMF special SDR allocation to prop foreign reserves, and World Bank, Australia and New Zealand programs releasing resources for economic infrastructure investment creating jobs and foundation for future growth

12. Important to establish a sufficient Emergency fund and insurance measures for natural disasters

Cont; Lessons from the GFC13. Secure fiscal resources to protect core public services

including maintaining sufficient allocation for education and health services

14. Important for coordinating the action of Ministry of Finance and other government ministries in managing the budget in current economic climate to ensure maintaining essential public services in an efficient and effective manner to control potential fiscal deficit

Immediate Challenges from the GEC include

Stabilization of the economy through implementing an appropriate mix of monetary and fiscal policy to sustain aggregate demand and avoid any further contraction

Maintain a sound fiscal policy and increase aggregate demand through increasing expenditure for investment in economic infrastructure with financial assistance from donors

Implement Fiscal stimulus through concessionary loans and aid financial assistance and ensuring value for money from fiscal stimulus package

Assistance for vulnerable group Preserve resources for social services such as education and

health Promote and encourage private sector investment through

relaxing monetary policy and regulatory reform to enhance ease and cost of doing business

Maintain an adequate level foreign reserves that support further private sector economic activities and movement in balance of payment

Useful International Policy Measures

Providing and mobilizing quick financial resources to mitigate the impact of the economic downturn ( e.g. ADB, World Bank, IMF, AusAid and NZAid) to assist stabilizing the economy

Improve local capacity for speed implementation of programs and projects to provide employment

Ease conditions for providing financial aid assistance to provide quick direct budgetary support as well as balance of payment support

Providing employment scheme ( e.g. Australia and NZ facilitating labor mobility)

Further development of trade facilitation to increase trade exports with financial and TA assistance to improve exports infrastructure (e.g. heat plant)

Commonwealth role in sustained economic growth

1. Australia and NZ continue to be the main bilateral donors

2. COM SEC to continue to provide needed technical assistance to help capacity building in areas of its comparative advantage

3. To increase provision of training for both public and private sector to accelerate economic growth

4. Providing financial and technical assistance to support continuing efforts for achieving the MDG targets

Commonwealth role in sustained economic growth

5. Conducting country specific research into opportunities and challenges for economic growth