Deepening Economic Woes Predicted

At the beginning of last year, the Manila-based Asian Development Bank warned of Tonga's ballooning expenditure, especially what it termed as "unbudgeted expenditures."

In its outlook for 2002-2003, the bank said: "The rise in substantial unbudgeted expenditures pose a risk of even higher inflation as well as a risk to the balance of payments. In addition, the government needs to direct public spending away from wages towards operation and maintenance."

By the first half of last year, inflation had soared to 12.3 percent from the 10.7 percent it attained for the year ending June 2002. Final figures for last year are yet to be released by the country's Reserve Bank, but its quarterly bulletin released in mid-2003 put total government expenditure in six months at T$131.5 million.

"When compared with the initial budget estimate for 2002/2003, the estimate of expenditure and net lending for 2003/2004 represented an increase of T$19 million, or 16.9 percent," the document stated.

Up to June, the bulletin noted that the country's trade balance was in a deficit of T$67 million, a 17 percent increase over the previous six months. Foreign reserves consequently fell from T$44.7 million at the end of December 2002 to $36.9 million by June 2003. This was enough to cover 2.4 months of imports, slightly short of the national target of maintaining reserves at around 3 months to 4 months.

As in previous years and contrary to ADB's predictions, remittances from the thousands of Tongans working overseas continued to increase. By June 2003, private transfers stood at $70.6 million, somewhat lower than the $79 million received in the previous six months. But it was better than the $69.9 million received in the same period the previous year.

Many believe the high remittances are not so much that relatives are sending more money, but mainly because of the depreciating value of the local pa'anga against the currencies of Australia, New Zealand and the United States.

Early 2003, the ADB had correctly identified tuna fishing as Tonga's most promising industry. But by the first half of the year, activities in that sector actually declined, according to the National Reserve Bank of Tonga bulletin.

"Data provided by the Tonga Statistics Department indicated that exports of fish at T$3.3 million were lower than the T$5.9 million during the six months which ended December 2002 and the T$3.6 million during the same period of the previous year."

Fishing companies, the bulletin noted, believe the depressed conditions are related to the El Nino weather phenomenon. But it hoped conditions would improve by the end of 2003, but so far they have not.

There was some modest growth in the tourism sector but not for agricultural exports. Oversupply led to depressed market prices for squash in Japan, necessitating another government bail out for local growers, repeating the kind of "unbudgeted expenditures," the ADB had warned against.

The Reserve Bank gave no figures for national debt, although it did note the government's fiscal objective of keeping "the stock of outstanding public debts below 60% of GDP" and limiting "the debt service ratio to less than 50% of the proceeds from the exports of merchandise."

The World Bank had always maintained that debts be kept at no more than 40% of a country's Gross Domestic Product.

Tonga's Finance Minister Siosiua Tupou ŒUtoikamanu was not available to talk to Islands Business which made repeated requests for an interview. His personal secretary said Siosiua was "busy in meetings."

But the former chief economist of the then South Pacific Commission (SPC), now a successful businessman and member of parliament, Dr Fereti Sevele sums up the cause of Tonga's economic woes succinctly: "we are spending more than what we are earning."

"We've got a government that's too expensive to maintain. We've got a bloated civil service we can't afford to keep. It's rather bloated and rather inefficient. I reckon if you half the civil service, you can still do the job efficiently. And it's not the taxpayers' responsibility to pay people just to be pen pushers. The other thing is really in terms of fiscal policies, monetary policies, I see the government as merely tinkering with those polices with no effective policy yet."

One particular policy Sevele is not impressed by, is the new consumption tax scheduled to come on line on April 1, 2005. This new tax will replace the current sales tax, fuel sales tax and port and service tax. It will be imposed at a rate of 15 percent. Sevele feels the new tax should have been introduced immediately.

"It's far too slow. The other thing is most of us business people want this consumption tax collected at the wharf and not at the retail end because there are just too much leakage in the system. The second thing is it will create extra work for the business people in terms of having to submit returns the following month, in terms of having extra staff to do that, similarly with government. Government hasn't got the manpower to do that now."

Sevele spoke his mind about the ills in the Tongan economy and below are excerpts.

€ On tax evasion and alleged scams in Customs: "If you go around the Chinese shops, you look at the spirits being imported from Fiji, the duty on one litre of say Bounty Rum is T$52. The Chinese are selling them at about T$20 to T$30, about half of the value of the duty, now how the hell can that happen? Obviously, it's being smuggled in."

€ Interest rate and conditions impose by commercial banks: "The interest rate is rather high, the second thing is the repayment period is far too short here in Tonga. You know a loan of T$2 million or $3 million to be repaid over say 3 or 4 years. Jesus you are being stifled even before you start."

€ On the insolvent Royal Tongan Airlines: "That is a clear case of incompetence, clear case of mismanagement of national resources. It should never got into that. And the day is coming very soon when either it ceases or the government is going to go bankrupt. You cannot run an airline with no sufficient reserves. I mean look at the history of all the other airlines, the larger ones with vast resources losing money. You can't. It's a national disaster."

€ Increasing rate of unemployment: "That is not being addressed. If we don't watch it, we are going to have the likes of Raiwaqa, Vatuwaqa (Suva suburbs) here, of youths not having jobs.

€ On the increasing number of Asians in Tonga: "The pace is just too fast and you know there's only a limited amount of the cake that is available to be distributed and when one minority, ethnic group takes up the bulk of it, sure there's going to be resentment. I don't mind non-Tongans coming in but if they do come in, then they should be contributing to things that we Tongans can't do."

€ On the best economic solution for Tonga: "One of the things, of course, is the accountability of powers that be, in particular the ministers. To me, they are not accountable to the people. You know at least 50% of them are incompetent. I would not employ them in any organisation. That is the system we now have, and that is the system some of us at least those of us in the pro-democracy movement like to see changed so that people have the right to elect all the 30 members of the house from whom the King can appoint his ministers.

"It's a sharing of power and at the same time you allow the evaluation by the people who pay the taxes on the people who are performing and who are running the country. It's only that way you can get full accountability and only that way you can get good people."