Tonga—IMF Assessment Letter for the World Bank

1. Tonga’s modest recovery from Cyclone Gita will be interrupted by the Covid-19 pandemic. Following a sharp drop in FY2018 due to Cyclone Gita, economic activity began normalizing in FY2019, largely due to reconstruction activities supported by remittances, and marine exports. The post-Gita recovery was expected to gather speed due to continued improvements in exports and reconstruction. However, growth is expected to drop sharply due to spillovers from a major Covid-19-induced contraction in economic activity in remitting countries. In line with current (albeit highly uncertain) expectations about the trajectory and global impact of the pandemic, these effects are likely to persist through at least the first half of FY2021. Beyond this period, growth is expected to recover to 3–4 percent in FY2022–23 in line with current expectations of a global recovery. These forecasts are subject to considerable uncertainty regarding the evolution and impact of the pandemic. While reserves are likely to remain comfortable in the remainder of FY2020, mainly due to import compression, weak competitiveness, lower remittances, heavy debt repayments, and large import needs are likely to widen current account deficits over time, reducing reserve coverage to 3−4 months of imports by 2023, well below desirable coverage (63⁄4 months of imports) for disaster-prone countries. Inflation is forecast to remain low due to weaker global food and fuel prices.