Recent Economic Developments in the Kingdom of Tonga

PACIFIC ECONOMIC BULLETIN Economic survey

Recent economic developments in the Kingdom of Tonga

Leigh Harkness

The economy of Tonga has been growing rapidly in recent Leigh Harkness is a years and future prospects for growth are from exports of Canberra-based agricultural products and the growth of fisheries. Growth in economic consultant, the exporting sectors and the associated rise in incomes will specialising on the South create demand for services. Pacific economies. In the new millennium, Tonga is likely to see more rapid change. The challenge it faces is not so much one of production, but of distribution.

The economy of Tonga has been growing Agriculture and fisheries continues to be rapidly in recent years. Real gross domestic the largest sector, of which a large part product rose 6.1 per cent in 1999/2000, up consists of non-monetary subsistence from 4.6 per cent in 1998/99 and 2.5 per cent farming and fishing. in 1997/98 (Tonga, Statistics Department The commerce, hotels and restaurant 2000). The fastest growing sectors in 1999/ sector is the largest sector in the cash economy 2000 were electricity and water (up 22.7 per (other than government), contributing about cent), commerce, hotels and restaurants (up 13 per cent of GDP. Retail and wholesale 17.4 per cent) and agriculture, forests and industry is the largest part of the sector, and fisheries (up 9 per cent) (Figure 1). would be about the same size as government Electricity and water services have been if transport, communications, construction, the fastest growing sector over the last 20 electricity and other services provided to the years, increasing about 360 per cent since wholesale and retail industry were included. 1980/81, or by T$4.2 million in 1995/96 Government administration and prices. Government administration and community services have grown from 10 per community services made the largest cent of GDP in 1980/81 to 17 per cent in contribution to the growth of GDP, increasing 1990/91. Since then it has stayed more stable 190 per cent or T$22.5 million in 1995/96 relative to the rest of the economy, reaching prices. The agriculture, forests and fisheries 17.3 per cent in 1999–2000. However, a 20 sector grew by over 50 per cent or T$19 per cent increase in public service salaries in million in 1995/96 prices. 2000/01 may change that.

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Figure 1 Tonga GDP at constant prices, 1990–1999 (T$ million)

Entertainment, recreation & 200 personal services 180 Government administration

s & community services 160 Finance & business services 140 120 Transport & communications

100 Commerce, hotels & 80 restaurants Construction 60

T$ million 1995–96 price million T$ 40 Electricity & water 20 Manufacturing 0 Mining & quarrying

1980-81 1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99 Agriculture, forestry & fisheries

Source: Tonga, Statistics Department, Provisional Estimates of Gross Domestic Product for the Kingdom of Tonga 1993–94 to 1998–99 and forward estimates for 1999–2000, March 2000; and Minister of Finance, Budget Statement for the year 1993–94 adjusted to 1995/96 prices. The series prior to 1993–94 may be inconsistent with the later series.

Public service salaries had been higher to be closer to T$18 million1 than the T$7.5 than those in the private sector in the 1980s, million declared. but by 2000 they had fallen well below the Total exports in 1999 were officially private sector. The salaries of the employees estimated to be T$17 million, up from of corporatised or self-governing public T$11 million in 1998. By comparison, the entities were now the highest, followed by TT2000 model estimated total exports to be private enterprise and then government. T$37 million, based on 1998 export statistics Fisheries have been growing rapidly, (Box 1). stimulating the rest of the economy. Fish Out of a nominal GDP at market prices exports exceed T$10 million per annum and of about T$250 million in 1999/2000, domestic sales are estimated to exceed T$3 imports were reported to be T$116.4 million million. Investment in the industry is or equivalent to 47 per cent of GDP. About 60 growing rapidly and the industry promises per cent of private household spending is to raise national income significantly . directed to imported products. Agriculture is also a major source of The large difference in value between export income (Table 1). Agriculture exports exports and imports has not caused major were reported as T$12.5 million in the 1999 instability in the Tongan economy. trade report, up from T$7.5 million in 1998. Remittances from relatives residing overseas The value of exports declared to the Customs and aid fund the difference. As these sources Department (and used for estimating trade of finance contribute to foreign reserves, they statistics) is usually estimated at the local provide their own foreign exchange to pay market price. This causes export statistics to for the imports that they generate. be significantly understated. For example, Tonga continues to hold foreign reserves agricultural exports in 1998 were estimated in an environment where many of its trading

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Box 1 The TT2000 Model The TT2000 economic model was prepared in 2000 at the request of the Government of Tonga to assess the impact of tax reform on government revenue and on the Tongan economy. It models the flow of funds within the economy as a series of income and expenditure cycles. The model estimates the expenditure of 47 sectors of the economy on those same 47 sectors plus 68 classes of imports. Revenues of the 47 sectors together with income from foreign sources, such as export income, remittances and aid, in turn provide the funds that are spent in the next cycle. The model drew heavily on actual government revenue and expenditure accounts and on trade statistics. Other statistical data was also used, together with a matrix of income and expenditure in the Tongan economy prepareed with the assistance of Statistics Department staff. A stable benchmark of the economy with the current taxes was established. The impact of tax options on the economy could then be assessed according to the movement from the benchmark. The TT2000 model was prepared by Leigh Harkness and Marnie Griffith.

partners have large and growing levels of the market. In the 2000 season, prices were foreign debt. These reserves are very low and many smaller growers recovered important to Tonga’s monetary system. They little more than their cost of production. have come under pressure in recent years, Initially, small growers dominated however, requiring the National Reserve Bank squash production. Over time, larger of Tonga (NRBT) to implement remedial producers proved to be better organised to policies, restricting the growth of bank credit. comply with spacing, fertiliser and chemical requirements of successful squash production and the number of small producers has Agriculture and fisheries declined. As a result, demand from farmers for loans from the Tonga Development Bank The wide distribution of land in Tonga and to finance planting has been falling. the nearby reefs and ocean ensure that people Prices for squash are volatile. The cost of can be employed in agriculture or fisheries if inputs and freight has been rising. Moreover, there is no other work. Growth in other it is difficult to negotiate higher prices with sectors of the economy has meant that the Japanese importers. Negotiations for Tongan number of persons engaged in agriculture exporters are done through negotiators from and fisheries has been declining from 10,607 New Zealand. Many Tongan exporters have (49.1 per cent) in 1986 to 9,953 (33.8 per cent) foreign partners who finance their in 1996, of which 8,886 (30.2 per cent of production and purchases. workforce) were in agriculture. More than Squash growers are satisfied with the one third (6,974) of those with full-time work quarantine and quality control services of in other sectors also continue to be engaged the Ministry of Agriculture and Forests in some form of farming, fishing or handicraft. (MAF). But MAF advisory services are not meeting squash farmers’ expectations. Squash Farmers expect MAF to provide growers Squash has been Tonga’s main export crop with advice on the best method of growing for the last decade and the value and quantity crops in Tonga. Large, successful growers of squash exports doubled in 1999 (Table 1). have optimised their squash production The values shown reflect the prices paid to methods and have made that knowledge growers, not the price exporters received at available to MAF. However, MAF has been

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Table 1 Agricultural exports, 1998 and 1999

Quantity (tonnes) Declared value (T$ million) 1998 1999 1998 1999 Squash 7,248 15,306 4.35 8.95 Root Crops 306 577 0.18 0.32 Vanilla 4 36 0.16 0.91 Kava 147 39 2.39 0.53 Other n.a. n.a. 0.41 1.84 Total n.a. n.a. 7.50 12.55

Source: Tonga, Statistics Department, Annual Foreign Trade Report 1998 and Annual Trade Report 1999, Government of Tonga, Nuku’alofa.

slow to pass this information on to smaller cassava (manioke) that is popular among growers. many island communities, particularly in Tongan squash is amongst the highest New Zealand. Also, taro tarus, produced in quality exported to Japan. Exporters want Tonga, is preferred by Niueans, Cook exports to Japan to be managed so as to Islanders and Tongans living in New maintain quality and regulate shipments to Zealand. Therefore, Tonga is able to obtain a avoid gluts on the market that lower prices. price for these two products sufficient to The Ministry of Labour, Commerce and offset the higher freight rates. Industries provides this regulation using export licenses. Recently, the Ministry Vanilla established a Squash Council requiring Exports of vanilla reached 18.9 tonnes in the members to pay T$10,000 to join; a fee that first quarter of 2000 at a value of T$0.54 has caused some resentment towards million, indicating that the 2000 season may government involvement. have been another good year. Vanilla bean exports in 1999 were 35.5 tonnes, valued at Root crops T$0.9 million, up from just 4.4 tonnes in 1998. Exports of root crops are rising as smaller The vanilla industry is based mainly in farmers move back from squash production the northern island group of Vava’u but new (see Table 1). Unlike squash, the initial cash plantings have been made in the southern investment is small. Production is not labour island of ’Eua. New varieties of vanilla grown intensive and the crop does not need to be from tissue cultures have been introduced harvested at a specific time. There is a local and could raise yields significantly. market for the crop as well as markets in New Zealand, Australia, Hawaii and the US Watermelons mainland. Export revenues from root crops Although Tongan watermelons are sweeter could be in the order of two to four times the than Australian watermelons exported to amount declared. New Zealand, they have suffered from poor Freight rates to markets are lower for Fiji quality attributed to bad handling. Exports than for Tonga. This gives Fiji a significant to New Zealand in 1999 were only 43 tonnes, advantage over Tonga in most root crops. about 6 containers, and 41 tonnes the However, Fiji does not produce the yellow previous year. Potential demand appears to

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be much higher. One grower reported an beverage has always been larger than the new order for 50 containers (375 tonnes) per pharmaceutical market and there will annum from one importer. The grower continue to be demand from this source. concerned is concentrating on squash and was planning to subcontract watermelon Coconuts production to other growers. Over the next ten years, MAF estimates that 40 per cent of existing coconut trees will Coffee become senile. The Ministry has embarked Coffee is a new crop in Tonga, initiated by on a program to revitalise the coconut MAF. The processing plant has been industry. It has been raising seed nuts and is privatised and the 10 acres of demonstration conducting research into the suitability of plots (20,000 trees) have been returned to hybrid varieties. growers. Coffee trees can yield between two However, the current significance of and five kilo of cherries per tree per annum. coconuts in Tonga’s agricultural landscape At a price of T$1.20 per kilo, one acre of coffee reflects historical circumstances that are no consisting of 2,000 trees can yield between longer relevant. The coconut replanting T$5,000 and T$12,000. program highlights the need for Government The South Seas Coffee Company planted to review its role in the economy. The MAF 44,000 trees in 2000, with plans to plant can be commended for its approach to 65,000 in 2001 and 50,000 each year developing the coffee industry. In that case, thereafter until they reach 500,000 trees (250 it introduced the economy to a new and acres). When the target size is reached in profitable industry. But it should be willing about ten years, the company expects to also to lead the economy out of an old produce 150 tonnes of coffee and earn US$2.5 industry that is no longer viable. million in export revenue per annum. The coffee industry is an example of Marketing what could be a successful approach for Marketing in Tonga has been seen as part of government involvement in agriculture. MAF a grower’s business. However, in 2000, initially carried the risk, testing different parliament requested the MAF and Ministry varieties to find the most suitable one for of Finance to establish a produce marketing Tonga. It planted demonstration plots on body to facilitate the marketing of produce farmers’ land and provided training in the both locally and overseas. The motion care and harvest of the crop. Also, it invested acknowledges that marketing of produce is in the necessary processing facilities and a separate business from production. established a market. Once the industry The private sector is moving to establish proved viable, it returned the demonstration its own solution to this problem. Some large plots to the farmers and sold the processing growers are forming alliances with small plant to the private sector. The industry now growers to market their produce, applying the has an opportunity to make a valuable approach adopted for squash to other crops. contribution to the future development of the For the domestic market, producers Kingdom. currently sell their products directly in the Kava retail market or on the roadside. To limit retailing costs, many growers take their Exports of kava declined in 1999 in terms of produce to market on Saturdays. However, value and volume, reflecting the downturn in this causes extensive traffic congestion, demand for kava as a pharmaceutical product particularly in Nuku’alofa, and means that (Table 1). However, the market for kava as a investment in the produce market and

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associated facilities is much larger than if Land produce were available throughout the week. A wholesale market could improve While land is limited in Tonga, large areas of productivity in the retail produce market, land appear to be poorly utilised. Part of this particularly in Nuku’alofa. In its simplest could be attributed to the large number of form, it could consist of an early morning Tongans overseas who continue to hold auction. land. Also, much land may be held by people who have full-time employment and who Quarantine farm only on a casual basis. This situation could be improved if there The Ministry’s Quarantine and Quality were greater opportunities for share farming. Control Division provides quarantine Such arrangements appear to have already services for imports and exports. On the started with coffee plantations where the import side, it is endeavouring to improve processor has been planting the coffee trees the education of the public in protecting the on private land. In this case, the processor’s local flora and fauna from imported pests investment is secure as it is the only buyer of and diseases. On the export side it aims to coffee. There may be a need to amend some facilitate exports of fruit fly-host products by laws to facilitate such arrangements. providing quarantine services to meet the needs of the importing country. Livestock Quality Livestock production in Tonga consists mainly of household farming of pigs and Exporters of produce require an export chickens. There are some commercial licence issued by the Ministry of Labour piggeries and cattle farms but most meat is Commerce and Industries (MLCI). Farmers imported. Rising pork import prices have accept that there is a need to regulate the stimulated local production and the price quality of agricultural exports, but they differential is likely to stimulate further consider current export license regulations growth in this industry. do not serves any beneficial purpose. Local commercial poultry is limited to They would prefer Government fresh egg production. In 1999, 2,771 tonnes attentions were directed at managing the of poultry meat was imported, valued at quality of exports. A shipment of poor quality T$3.85 million, mostly from the United States. produce can damage the market for all produce from Tonga. During the trade fair in Fisheries March 2001, the trademark ‘Tupu ‘i Tonga’ (originating in Tonga) was launched. This Tonga’s has control over 700,000 square was an attempt by growers to differentiate kilometres of ocean—1,000 times its land between high quality and low quality area. This vast marine resource promises to produce from Tonga. bring wealth to the Kingdom. In the 1996 That approach to the quality problem is census, 1,067 persons (3.6 per cent of the unlikely to be as effective as one ensuring workforce) classed themselves as engaged in that all exports from the Kingdom meet full-time fishing. The export market is the quality standards. Even so, any attempt at largest market for the fishing industry but regulating quality needs to ensure that it the local market is still significant. does not give arbitrary powers to Besides fresh and frozen fish, there are individuals who can exploit them for other marine products such as live fish, personal gain or unfairly discriminate lobster, mussels and sea cucumber exported. against groups or individuals. There are other marine products for local

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consumption mostly collected by the fisheries management plan. It expects this informal sector and sold along the foreshore. number to be attained by the end of 2001 There is hope that new marine products, although the industry does not expect that such as pearls and edible seaweed, will soon number to be reached until the end of 2002. be contributing to the economy. There were 16 long-line tuna boats registered In mid 2000, the Tongan Government in Tonga in March 2001. established a fuel concession scheme Tonga has the most successful snapper whereby participating fishing vessels could fishery in the Pacific. These fishers operate obtain duty free fuel. To participate, fishing from smaller vessels, and export mainly to boats were required to meet maritime Japan and Hawaii. The vessels that were requirements and provide government with built in the 1980s under the UNDP boat information on their catches. In March 2001, building project are no longer large enough there were 27 boats in the scheme, comprising for the task. When those boats were built, they 15 local long-liners, two locally-based foreign stretched the financial capacity of most ships and 10 snapper boats. fishermen. Now, the industry has the Estimates of fish exports from Tonga vary financial capacity to buy larger vessels. • T$3 million (488 tonnes) and 1998 T$2 However, finance for the industry is still a million (400 tonnes) (Foreign Trade constraint, with financial institutions Report 1999) preferring to secure their loans with real • T$12.5 million per annum (TT2000 estate collateral, rather than the foreign model of the late 1990s) income stream generated by the fishing boats. • T$10–T$12 million f.o.b. (Fish Exporters In past years, the industry received little Association 2000/01) support from government. Even packaging • T$10 million in July 2000 to December materials for exports were subject to import 2000 (Ministry of Fisheries). duties. Alatini Fisheries invested at this time, Exports are clearly greater than establishing ice making, freezer and fish published in the trade report . The true value processing facilities in the Small Industries of the catch is difficult to determine, however. Centre, possibly under the Industrial A figure of T$12 million per annum and Development Incentives Act. But most of the growing would probably be conservative. other operators were not prepared to invest in The final value of fish exports depends onshore facilities given the economic upon market prices and exchange rates. The environment at that time. current high value of the US dollar is helping The economic environment has since to make fishing profitable at this time. improved. Fuel for fishing vessels has been However, there have been times when less made duty free and there are moves to reduce favourable exchange rates and prices caused taxes on other inputs such as bait. With this fishing to be unprofitable. For example, one support, other investors may be more willing company reported that while it earned 11 per to put their money in the industry. cent of Tonga’s export income in one year, Sea Star Fishing Company its fishing operations lost T$25,000. The Tongan tuna fishing industry aims The government corporatised and partly to supply the fresh fish market, seeking out privatised its long-line fishing enterprise, big eye and yellow fin tuna. Albacore, which contributing its long-liner, the Lofa, and was prized for the canning market, is no accumulated profits of nearly T$1 million. longer in favour. The Ministry of Fisheries is This transfer of resources, together with a planning to limit the number of long-liners loan from the Asian Development Bank, was operating from Tonga to 25 under its tuna used to establish the Sea Star Fishing

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Company. However, the fish processing Tonga is served by small jets that do not have facilities built on the wharf have been large amounts of surplus cargo capacity, inappropriate and the boats purchased limiting the amount of fresh fish that can be unsuitable. One boat has been leased to exported. The Ministry of Fisheries advised operators in Australian waters and the that 3 to 5 tonne of fish is regularly returned company has had to sell the Lofa. each month from the airport for lack of space. This enterprise, which had prospered It is clear that there are synergies to be gained with the support of government, has by the fisheries industry from an increase in floundered under private control and has tourism to the Kingdom. large debts. It has brought in Korean captains to operate the vessels. The vessels are now Red tape making a profit but the company is heavily One exporter complained about the level of in debt and the interest payments are bureaucratic intervention in the fishing crippling it. industry. They are required to advise the Other fishing enterprises in Tonga are Customs Department 24 hours in advance prospering with Tongan crew. Many of the of every shipment and pay T$60 for a former crew of the Lofa are now skippers of Customs official to watch the shipment being the growing fishing fleet. The Lofa was packed. In addition they are required to obtain purchased by a Chinese fishing enterprise an export license for every shipment. Given based in Tonga and operates in Tongan the large number of small air shipments, waters, profitably. these administrative procedures amount to a considerable amount of red tape. The Export quality procedures are inflexible and cause heated It was reported that in the early stages of the exchanges when urgent orders or other industry, Tonga exported tuna to Japan and events mean inadequate notice is given. earned prices of 5,000 to 6,000 yen per kilo. The Government has been reviewing its Prices fell to 1,000 yen per kilo when an role in the Kingdom with a view to reducing inexperienced Tongan fishing enterprise its staffing levels. The problems in the fishing entered the market and sold tuna that had not industry indicate that there is a need for the been chilled when caught. Similarly, the price Government to continue to review its of snapper was reported to have fallen in price procedures with a view to determining their from 1,500 yen per kilo to 600 yen per kilo relevance. following the export of poor quality fish from Fishing enterprises also expressed the same supplier. These actions spoiled the annoyance with the large number of business Japanese market for all Tongan fresh fish licenses they are required to hold. For suppliers, not just the offending business. example, they are required to hold a license Clearly, there is a need for some to fish, a license to engage in retailing, a monitoring of the quality of fish exported. license to engage in wholesaling, a license to This would not require every shipment to be sell ice, and so on. These licenses appeared inspected. Rather the procedures of fish to serve no useful purpose. The cost to both exporting should be assessed and certified government and to business of administering as meeting quality standards. Once the the licences is too high relative to the revenue exporter is certified, it would require only collected for these to be an efficient tax. random checks to verify that those Government may wish to maintain a procedures were being followed. register of businesses but licenses are not the The export industry is seriously best way of do so. The MLCI has been hampered by the lack of air cargo capacity. considering the abolition of both trading and

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export licenses with a view to establishing a reported that employment in manufacturing register of businesses. Such an approach in 1996 was only 840, an increase of only 43 should be supported. per cent on the 1986 census figure (MLCI and One of the fishing enterprises advised ILO 1996). Other data indicate that that they need to keep a low profile to do employment in manufacturing had doubled business in Tonga. Another, that has large from the 1986 census figure. These alternative investments in the industry, expressed data sources provide a better indication of concern that they were being penalised for the real rate of growth in the manufacturing operating a profitable enterprise. in sector. Government relies on profitable The manufacturing industry is reported businesses to pay their income taxes and to to have grown 8.4 per cent in 1999/00, pay employees, who in turn pay taxes on following growth of 16.4 per cent in 1998/ what they earn and what they buy. 99 and 11.4 per cent in 1997/98 (Tonga, Government welfare is dependent on the Statistics Department, various issues). The financial welfare of business in the Kingdom. sector contributes about 5 per cent of GDP, So it should nurture business, out of self- although its contribution to economic activity interest, if for no other reason. in the cash economy is likely to be in the order If the bureaucracy is antagonistic of 7–10 per cent, including the handicraft towards businesses that succeed, profitable industry. businesses will continue to maintain a low profile. They will not make the investments Handicrafts necessary to raise incomes, provide A large part of the increase in the employment and contribute to economic manufacturing workforce identified in the welfare in the Kingdom. 1996 census can be attributed to a change in classification. There were 6,201 female Mining and quarrying workers engaged in the manufacture of crafts and related trades. These workers are There is no mining industry in Tonga. unlikely to have been classified as being Quarries provide limestone and sand for the employed in the 1986 survey. The TT2000 construction industry. Employment in the model estimated monetary sales of traditional sector rose from 28 in 1986 to 43 by the 1996 handicrafts to be about T$8 million, of which census. Other data suggest that employment about 42 per cent is exports. Most of these in the sector is nearly double this number. exports would not have been recorded in the Activity in this industry is directly linked to trade statistics as much is supplied on a the level of activity in the construction personal or informal basis. The foreign industry. exchange transactions paying for the exports are likely to have been classified as remittances from relatives overseas. Manufacturing sector It was reported that moneylenders were exporting container loads of traditional Census data on employment in the handicraft, mostly to the United States. These manufacturing sector indicate that it has moneylenders provide credit of up to T$1,000 increased eleven-fold from 587 or 2.7 per cent using traditional handicraft as security. of the workforce in 1986 to 6,710 or 22.8 per There are some reports that money lenders cent of the workforce in 1996 (Tonga, Statistics are able to gain possession of fine mats at a Department 1996). But a survey by the MLCI fraction of their real value when the and the International Labor Organisation borrowers are unable to repay their loans

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within the specified term of the loan. The benefits to be gained from regulating However, the Reserve Bank expressed the the price of bread should be reconsidered. view that many of the ‘borrowers’ The industry is capable of pricing other approached the moneylenders with a view popular baked products that are not to selling their handicrafts. regulated, such as buns and biscuits, without The existence of this trade gives an exploiting customers. There is sufficient indication of the value of the traditional competition within the industry to ensure handicraft industry. It also suggests that that bakers do not have monopoly power. improved marketing arrangements for the It is difficult to justify the regulation of handicraft industry could significantly raise bread prices when other necessities, such as the revenue earned by this industry. water, electricity and telecommunications Households in the outer islands are services, are produced by monopolies and four times more likely to sell handicrafts not subject to price regulation. The Tongan than households on Tongatapu. For many economy has changed dramatically since the of these households, handicrafts may be Prices of Goods and Services and Wage Rates their principal source of monetary income. Act, 1947, was enacted. If government Any improvement in the revenue of this regulation of the economy is to contribute to industry could significantly improve the the Kingdom’s economic welfare, rules and welfare of remote communities within the procedures need to be established to deal Kingdom. with problems as they arise. Also, they need to be repealed when they become no longer Bakeries relevant. The largest manufacturing industry, after handicrafts, is the bakery industry. The Other manufacturing TT2000 model estimated turnover in the Other manufacturing industries in Tonga bakery industry to over T$8 million, greater include agricultural processing (for example, than handicraft sales. However, the value kava), chemicals (such as paint and added in Tonga from bakeries is less than for pharmaceutical products), food processing handicrafts. The bakery industry produces (including beer), building materials, textiles, mainly bread, biscuits and cakes for the furniture, jewellery and printing. Retailers domestic market. About half of the biscuit observed that Tongan consumers were production is shipped to the outer islands of demanding higher quality products. For Tonga and in many cases is used instead of example, the local manufacturers of furniture bread. who were catering for this market were Price regulation continuing to succeed, while those who were not prepared to change to meet the new The MLCI regulates bread prices. Even so, demands of the market were failing. bakeries are profitable and the industry is expanding with a new bakery built on the southern island of ’Eua. Bakers expressed Electricity and water concern at the slow pace with which the price regulator responded to rising costs. For The electricity and water sector employed example, it took four months to respond to 504 persons according to the 1996 census, recent fuel price rises. Smaller bakeries could up about 60 per cent from the 316 in the 1986 avoid price regulation by using the same census. Growth in the industry was 22.7 per ingredients but make non-standard sized cent in 1999–2000 and 10.8 per cent in the loaves. previous year. The sector contributes nearly

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5 per cent of GDP. Average wages in the sector excessive demand, causing salt water are estimated to be in the order of T$5,500 contamination. per annum. If water is to be efficiently managed in the Kingdom, it may need a central authority, such Electricity as the Tonga Water Board, to be responsible Electricity in Tongatapu is generated by for village water supplies. Only a central Shoreline, a private company, using diesel authority could retain the resources necessary generators. The power is distributed by the to manage and maintain these systems. Tonga Electric Power Board (TEPB), a Government enterprise. In Vava’u, Shoreline Government enterprises is responsible for both generation and distribution. Shoreline initially priced energy The government has established an at 27 cents per kWh, down from 36 cents when investment unit within the Ministry of TEPB supplied the energy. However, this Finance to manage its ownership interests in energy price did not include the distribution the government enterprises. This begs the costs. The TEPB has since applied a T$5 per question as to what the Government month supply charge to all customers to appointees are doing on the boards of these recover the cost of its distribution services. Energy prices have increased to their former entities. levels following the rise in oil prices which The Tonga Chamber of Commerce and has been passed through to customers. Industries Inc made the following Electricity supply continues to be unreliable, observation regarding the distribution of particularly in rural areas. income within the Kingdom. Australia is currently providing about Employees of state (Government) T$3 million to install generators and owned enterprises are often overpaid distribute electricity on the four main islands in relation to what they could earn in the private sector. In addition, they are of Ha’apai and the Niuas. Diesel generators paid a dramatically different (higher) are being installed in Ha’apai while salary than civil servants with the photovoltaic cells will be used in the Niuas. same education and skills in the same role (Head of Department/Manager— Water Accountant, etc.) while both are The Tonga Water Board, a statutory authority, working for Government. Something is wrong here (Tonga Chamber of pumps and reticulates water from bores Commerce and Industry Inc 2000). within the towns of Nuku’alofa, Pangai in Ha’apai and Neiafu, Vava’u. The Nuku’alofa The Chamber clearly considers that the reticulation system is being reconstructed salaries paid to employees in government under a Japanese aid project amounting to enterprises are inequitably high. This T$18 million and is expected to be completed perception was not limited to the Chamber. in March 2002. The previous reticulation There was widespread resentment of the system in Nuku’alofa was inadequate for inequitable distribution of income from both Nuku’alofa’s requirements and leaks lost civil servants and the private sector. half the water pumped. This resentment may not have been so Water for most rural villages is provided high if those enterprises were providing the through un-metered reticulation systems or level of services that the public expected. private water tanks. The village systems are However, the same Chamber of Commerce generally poorly managed and maintained. article reveals that bribery is required to High leakage levels often mean that there is receive services from public utilities. It asks

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But why are we so willing and eager 40 per cent over the same period. The to shout the person who connects the reduction in employment reveals a change telephone line we desperately need for in the nature of the construction industry in our business or the one who puts us at Tonga. In 1986, wages were low and the top of the queue to have our power construction activities employed many reconnected after a strong wind, etc? (Tonga Chamber of Commerce and casual workers. In 1996, wages had increased Industry Inc 2000) and more machinery was being used in the The resentment extended to the industry. The productivity of construction workers improved nearly 400 per cent remuneration of the board members. For between the censuses. example, a prominent politician was reported to be circulating a document purporting to be The level of activity in the industry has a confidential board paper of Royal Tongan been volatile. Growth rates for each year from 1994–95 to 1999–2000 were 26, 15, -3, Airlines (RTA). The document was not signed, 1, 10 and 1 per cent, respectively. The so its authenticity should be questioned. However, it is a useful indicator of the public commencement and completion of aid- perception of government enterprises. funded construction projects, as well as the availability of loan funds from the banks, The paper headed ‘Retirement Award— was largely responsible for most of this RTA Board of Directors’ presents a board that is self indulgent, seeking to pay itself volatility. substantial fees, retirement awards and travel benefits. These benefits were large enough to Commerce, hotels and restaurants require a special provision in the budget and payment could only be made if the airline Wholesale/retail trade had sufficient cash flow at the time. Among the reasons given to justify the payments Employment in the commerce, hotels and were that restaurant sector has increased 65 per cent • ‘the company [was] standing to make an from 1,523 in 1986 to 2,506 in 1996 (Tonga, estimated profit of T$0.75–T$1 million’ Statistics Department 1996). According to the (not actual profits) census figures, the sector provides 8.4 per • directors and board members of other cent of employment, and according to the statutory commercial entities received national accounts it contributes about 12 per similar levels of remuneration. cent of GDP. The TT2000 model revealed that The fact that the paper was ‘leaked’ this sector was one of the largest in Tonga, reveals that the distribution of income, particularly the retail and wholesale particularly to those associated with industry, with revenue on a par with government enterprises, is clearly a major government revenue. issue with the public in the Kingdom. Other data suggests that employment in the sector is around 9,000, consisting of about 4,000 male and 5,000 female workers. While Construction the credibility of the figures cannot be fully accepted, the large discrepancy with the The construction industry contributes about 1996 census figures needs to be explained. 6 per cent of GDP. Employment in The retail and wholesale industry consists construction declined 70 per cent from 1,698 of a few large stores in the main towns and at the 1986 census to 500 at the 1996 census. hundreds of little stores scattered throughout Even so, the national accounts show that towns and villages. In addition, there are construction activity increased by more than retailers in produce markets, as well as along

30 Pacific Economic Bulletin Volume 16 Number 1 May 2001 © Asia Pacific Press PACIFIC ECONOMIC BULLETIN Economic survey

the foreshore, selling fish and marine power. Like the price control on bread, the products. Furthermore, the industry includes price controls on retail and wholesale the people selling imported secondhand margins of basic imported groceries have clothing and other goods at the ‘flea markets’. long outlived their use-by date. Persons formally employed in the One of the major concerns expressed by wholesale and retail industry would have retailers was the level of avoidance of customs classed themselves as part of that industry duties and other taxes at the wharf. Part of in the census. However, many of the people this problem arises from the importing of employed in the small stores and the other ‘personal effects’ by the container load. These non-formal parts of the retail industry may products are mostly sold in the flea markets. not have recognised that they were part of One retailer admitted buying a container load that industry. of toilet paper and other household goods The census reports that 2,595 women from one such importer of personal effects, were employed as working on their own just to keep them out of the flea market. account and a further 3,551 were employed To avoid the problems of double as unpaid family workers. Many of these are invoicing, it was suggested that there should likely to have been engaged in the retail sector. be standard amounts of duty for some items. There is a high level of investment in the For example, the duty on a container full of industry, particularly in small stores, selling mutton flaps or chicken should be a fixed basic groceries and household items. amount, and not vary according to the value However, labour productivity is low declared to Customs. This approach has resulting in low wages, possibly averaging already been used, in part, for motor vehicles about T$1,700 per annum. and could be applied to other products. This inefficiency is sustained by price However, problems with customs duties controls that were initially intended to are not limited to double invoicing and the prevent a duopoly exploiting their market classification of commercial imports as

Figure 2 Cigarette imports, 1999–2000

1,200

Quantity 1,000 cif Value

0 800 Duty paid s'0 g

600

T$'000 & k T$'000 400

200

0 1st 2nd 3rd 4th 1st 1999/2000 Quarters

Source: Government of Tonga, Statistics Department (various issues). Quarterly Foreign Trade Reports, Nuku’alofa.

31 Pacific Economic Bulletin Volume 16 Number 1 May 2001 © Asia Pacific Press PACIFIC ECONOMIC BULLETIN Economic survey

personal effects. For example, about 90 per remove the 20 per cent port and service tax cent of cigarettes imported into Tonga had applied to imports. In its place it is proposing entered duty free. When the Government was a consumption tax that would largely replace alerted to this matter, it raised the rate of duty the sales tax and the port and service tax. on cigarettes and required the duty free shop The consumption tax would apply to locally to first pay duty on its imports, then obtain a produced goods and services as well as refund of duty based on sales to legitimate imports. aircraft passengers (Figure 2). Retailers prefer that taxes on goods be The rate of duty on cigarettes is about collected at the wharf, although they impinge 350 per cent. Before the change in policy the on their cash flow. They are opposed to any value of cigarettes imported exceeded the tax on local goods and services, however. amount of duty paid. Also, while government is claiming to be The new policy was implemented in the consulting the private sector, the private fourth quarter 1999, and since then the sector feels that they are not being consulted. amount of duty collected has exceeded the The wholesale and retail industry value of imports. However, the quantity of collects and pays the largest part of cigarettes imported and declared to customs government revenue in Tonga. Unless has declined by about two thirds. government works with this industry, When the price of cigarettes increases, particularly those businesses that pay the demand for them does not decrease customs duties, the avoidance industry will significantly. The reduction in the declared grow and undermine the tax base. quantity of cigarettes imported suggests that Retailers appreciate the reform that large quantities of cigarettes are not being centralised customs duty collection at the declared to Customs. wharf. The main reform that they now wish Retailers expressed the view that the to see implemented is the uniform treatment rates of duty applied are excessive. For of importers at the wharf. example, the duty payable on motor vehicles is making it prohibitive for the public to Hotels and restaurants import new vehicles. This means that secondhand motor vehicles are imported, The 1996 census reported that there were 546 mainly from Japan. These comprise a variety persons employed in the hotel and of makes and models. The maintenance of restaurant industry while other data these vehicles is difficult because of the suggested that the industry employed about limited availability of spare parts and 1,000 persons with average wages around workshop manuals. T$3,000 per annum. According to the data In many cases, these higher rates of used in the TT2000 model, restaurants were customs duties were applied to deal with a the largest part of the business with sales of situation that no longer exists. For example, T$5 million followed by bars with T$4 there were high rates of duty applied on million, accommodation with about T$3.7 poultry and toilet paper to protect local million and other services, T$0.7 million. industries. Both these industries no longer Restaurants are largely dependent on exist in Tonga, but the higher rates of duty domestic demand supplemented by foreign continue to apply. Similary, the rate of duty visitors. Some restaurants cater solely for the on motor vehicles was raised in response to local market. the fuel crisis in the late 1970s. The crisis has On the accommodation side of the long gone but the higher duty remains. industry, the hotels and resorts that cater to The Government is proposing to move niche markets appear to be prospering while towards a standard rate of customs duty and those relying on passing trade are not doing

32 Pacific Economic Bulletin Volume 16 Number 1 May 2001 © Asia Pacific Press PACIFIC ECONOMIC BULLETIN Economic survey

as well. For example, among those catering business survey reported that there were 780 for niche markets, Fafa Island catered for employed in the industry (MLCI and ILO German tourists, Ha’atufu Beach Resort 1996). The TT2000 model estimated revenues caters for surfers and the Harbour View Motel of T$36 million in transport services in Tonga caters for business visitors. These have had and T$12 million in communications higher occupancy rates than the three main services. hotels in the Nuku’afa township. In addition, there are guesthouse catering Transport for the backpacker market. There is concern Employment in the transport industry is that poor quality guesthouses are regularly estimated to be about 1,500. Average wages opening and closing and these facilities are in the industry are estimated to be about not contributing to the overall image of Tonga T$5,500. The TT2000 model estimated sales as a tourist destination and undermining the of bus and truck service to be about T$4.5 profitability of established enterprises. Tourist million, taxi services T$2.2 million, domestic operators are looking to the government to shipping T$8 million, international shipping provide some direction to the industry to T$4.3 million, domestic air T$2.6 million and improve the standard of facilities and service. international air T$14.3 million. The problem being encountered in the tourist Road transport has increased drama- industry is similar to that experienced in tically in recent years with the upgrade of agriculture and fisheries; unskilled and roads. The number of cars on the road has inexperienced operators were providing a increased sharply over the past decade and poor level of service and damaging the image traffic jams are now common in Nuku’alofa. of the whole Tongan industry. Bus numbers appear to have declined with Tourism in Vava’u is aiming at niche the growth of cars and their removal from markets such as yachting, whale watching the market precincts. It may be possible to and sports fishing. In March 2001, Royal reduce traffic congestion in Nuku’alofa if Tongan Airlines was grounded, stopping all buses were given more favourable access to air services to Vava’u. This was devastating the markets. for the industry in Vava’u, which continued Inter-island shipping consists of both to incur its normal operating costs without government and private companies. Ferries any income. Also, the failure of the air service travel to and from ‘Eua daily. This is a regular, to Vava’u has damaged the reputation of the reliable and competitive service. A government island as a tourist destination. vessel and a private vessel travel weekly to Vava’u and Ha’apai. A more frequent service Transport and communications would contribute to the economic development of the northern island groups and The transport and communications sector is reduce their reliance on air transport. The estimated to contribute over 7 per cent of GDP. government subsidises a monthly shipping In 1999–2000, it was estimated to have grown service to the remote Niuas. 8.4 per cent following 11.1 per cent growth Royal Tonga Airlines (RTA) has been the previous year. The value of production providing regular inter-island air services by the sector is estimated to be about T$18 using Twin Otters as well as an international million in 1999–2000 in current dollar terms. service with a Boeing 737. However, all aircraft According to the 1996 census, employment were grounded in March 2001 due to in the sector was 1,209, just 8 per cent higher inadequate maintenance procedures. This led than in 1986. The industry has grown 22 per to the complete withdrawal of the Boeing cent over that period. The 1996 MLCI aircraft. RTA’s international service is now

33 Pacific Economic Bulletin Volume 16 Number 1 May 2001 © Asia Pacific Press PACIFIC ECONOMIC BULLETIN Economic survey

limited to seat-sharing arrangements with intermediary sector average are estimated to other airlines. The inter-island service has be about T$9,000 per annum and are high by since resumed. local standards. The airline industry is seen as a necessary The business services sector includes part of the infrastructure of the tourist legal and accounting services. There are industry. But it appears to have been a victim indications that employment in the sector of the inexperienced management that has could now be more than double the 121 plagued other industries. recorded in the census. Average salaries in this industry were estimated to be in the order Communications of T$6,000. In the field of communications, the The TT2000 model estimated the revenue Government has been seeking a foreign of the banking and finance sector to be T$23 partner for its telecommunications enterprise million. The industry includes three to provide the level of experience necessary commercial banks, the Tonga Development to manage the service well. Its search appears Bank, National Reserve Bank of Tonga to have been unsuccessful to date. (NRBT), as well as some small private In February 2001, the Government lenders. established the Tonga Communications The NRBT is responsible for managing Corporation to take over the domestic service the banking system and maintaining previously operated by Tonga Telecom and Tonga’s foreign reserves. Figure 3 shows the the international service. Cable and effect of bank lending on the foreign reserves. Wireless had provided the international As can be seen, a sudden rise in service until June 1999 when it was taken commercial bank lending in 1997/98 led to over by the government-owned Tonga a sudden drop in foreign reserves. In Telecommunications International Ltd. The response, the NRBT and Government started Government has established the Tonga a process of devaluing the pa’anga (T$). By Telecommunications Commission to manage May 2001 it had been devalued 25 per cent its telecommunications policy. against the basket of currencies to which it is 2 The government-owned broadcasting tied. Even so, the pa’anga was only 8 per service operates as a commercial operation cent below par with the Australian dollar providing both radio and television services. due to the high value of the US dollar which There is also a private television service was a large part of the basket. providing services in Tongatapu and Vava’u. The devaluation of the pa’anga Tonga has a government weekly newspaper contributed to a 11.9 per cent rise in the index as well as private newspapers and magazines. of import prices in the year to December 1999. The CPI increased only 5.8 per cent in that year due to a 0.7 per cent fall in the price of Finance and business services local products. In 2000, the CPI rose 7.1 per cent following a 5.2 per cent increase in the The finance and business services sector price of imports and 9.4 per cent in the price contributes around 8 per cent of GDP. The of local products. sector has been growing at around 8 per cent National savings rose steadily during per annum in recent years. The 1996 census the 1990s until 2000 (Figure 4). The fall in put employment in the sector at 657, savings in 2000 can be attributed to a comprising 536 financial intermediaries and drawdown of capital by one of the banks, 121 in business services, real estate and the closure of Cable and Wireless operations, renting industries. Salaries in the financial and the Government’s purchase of the Cable

34 Pacific Economic Bulletin Volume 16 Number 1 May 2001 © Asia Pacific Press PACIFIC ECONOMIC BULLETIN Economic survey

Figure 3 Foreign reserves and the effect of commercial bank credit, 1992–2000 (T$ million)

10 Change in foreign reserves

-5 T$ million

-10 Effect of commercial -15 bank lending

-20 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: National Reserve Bank of Tonga, 2000. Quarterly Bulletin, 11(2), June, Nuku’alofa.

Figure 4 National savings, lending and foreign reserves, 1991–2000 (T$ million)

160

140 National savings 120

Government loans 100 NRBT 80 Commercial bank lending T$ million T$ 60

40 Foreign reserve of banks

20 Official foreign reserves

0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: National Reserve Bank of Tonga, 2000. Quarterly Bulletin, 11(2), June, Nuku’alofa; Tonga, Ministry of Finance, 1999. Annual Report 1999, Government of Tonga, Nuku’alofa.

and Wireless assets. The Government has The NRBT has its own capital adequacy borrowed some of these savings and the problems. The cost of the NRBT buildings NRBT has used some to build its building. currently valued at T$8.3 million However, the commercial banks have been substantially exceeded the T$1 million paid- responsible for drawing down most of the up capital and general reserves of the Bank savings for loans. (Tonga, Central Planning Department 2001, The NRBT considers that foreign National Reserve Bank of Tonga 2000). This reserves should be equivalent to 4 to 5 meant that the Bank had to draw on national months of imports to be comfortable and the savings to fund its building. Also, its minimum level should be 3 months’ administration costs (T$22,000 per staff imports. The NRBT reports that foreign member) take up a large part of its income, reserves fell 24.3 per cent from T$34.1 leaving it with inadequate funds to repay the million in June 1999 to T$26.2 million in national savings used to finance its building June 2000 (National Reserve Bank of Tonga and to build up its capital. 2000). The June 2000 amount is equivalent to 2.7 months imports. At the end of March 2001, foreign reserves had fallen to T$24.5 Maintenance services million, the equivalent of 2.4 months’ imports.3 This level continues to be below The TT2000 modelling process revealed that the Bank’s stipulated minimum and maintenance services were a significant indicates that it is having difficulty industry in Tonga and should be identified managing commercial bank lending. separately. This industry extended to the It is possible to manage bank lending maintenance of motor vehicles, ships and so that it does not exceed savings and boats, housing, plumbing, home appliances, deplete foreign reserves. For example, the computers and other machinery and NRBT could require the commercial banks equipment. Revenue was estimated to be to hold a foreign exchange account with it about T$9 million per annum. There is and allow them to increase their lending by, currently little data available on the say, T$5 for every US$1 increase in their employment in the industry but it is likely foreign reserves. This would mean that the to be in the order of 1,500. Many of the banks could increase their lending only establishments are informal, operating in when there were increased foreign reserves, backyards or as a mixed business with a or national savings. If banks lent too much, retail shopfront and a rear workshop. they would deplete their foreign reserves and that would constrain them from further lending until their foreign reserves were Government administration and replenished. community services This approach is similar to the system applied in Tonga following Hurricane Isaac The government administration and in March 1982. It preserved Tonga’s foreign community services sector contributed reserves, despite the destruction of the T$38.4 million to the economy in 1999/2000, Kingdom’s main sources of export income. equivalent to 15.3 per cent of GDP. It grew 1.5 The IMF commended the Government on the per cent in 1999/2000 following growth of effectiveness and suitability of these banking 8.9 per cent in the previous year. Census data guidelines. This approach would eliminate report that employment in the industry grew the need for the NRBT to use interest rates to 43 per cent between 1986 and 1996, to a total ‘mop up the excess liquidity’. of 7,252.

Education to expand the opportunities for education to provide more trade and technical education The 1996 census reports that 1,721 persons to provide a better mix of skills for the were employed in education. Other data economy. The demand for qualified skilled indicates that about 1,200 were employed in workers in Tonga exceeds supply, and private sector education with average wages foreign workers are often recruited to provide in the order of T$4,000. Within this group the skills that are lacking. there is a wide disparity in wages between Part of the problem of the lack of skills in the church schools. Many secondary teachers Tonga is that skilled people can emigrate in church schools would earn in the region readily to other countries. Given the low of T$2,000 to T$3,000 per annum. Low wages salaries, poor working conditions, and the in private schools has implications for inadequate education and health services in resource allocation. Some church schools Tonga, many skilled and qualified people have difficulty attracting and retaining have chosen to migrate. qualified staff, particularly when teachers There is a range of tertiary educational employed by government are paid institutions in Tonga. The University of the substantially higher salaries. South Pacific has an extension centre in The government now provides an Tonga. There are also private institutions annual grant of T$100 per secondary student providing tertiary education. The in private schools, up from T$50 per student Government tertiary institutions include the in previous years. The increased grant means Queen Salote Nursing School, the Teachers that the government is providing in the order Training College, the Marine Training School of 50 per cent of private school revenue. and the Royal School of Science operated by Besides school fees, private schools also rely the Ministry of Defence. The Ministry of on donations and fundraising activities to Education is looking at bringing the recover their expenses. Teachers College and Marine Training The Government provides the bulk of School together to form a nucleus for a new primary education. It also provides some university that would cater for other students secondary education. Government secondary undergoing distance education. schools are considered to be the élite schools and are heavily subsidised. Education is the Health largest item in the government budget. Even The health sector employed 510 people so, government schools have limited according to the 1996 census, of which only resources and most need to engage in about 40 were employed in the private sector. fundraising activities to finance their The Government’s health budget is second operating expenses. Aid funds have been only to education with an annual allocation used to build new government schools in of about T$8.4 million in 2000/01. The cost outer islands. However, the operating costs of staff leaves about T$1 million for of these new facilities is putting further operational costs and T$1 million for strains on Government finances. medicines and other medical supplies. These The Government is reviewing its funds are grossly inadequate to enable commitment to education. Its obligation hospitals to provide patients with even the under the Constitution is to provide free most basic standards. For example, there have education for children between the ages of been no funds for hospital linen for four 5 to 14 years. This is interpreted to mean years, and at times the hospital does not have free primary school education. Yet the money to buy basic cleaning materials or Ministry of Education is aware of the need stationery to keep patient records. A revolving

fund was established in the 2000/01 Budget widespread acceptance of tax evasion that so that the hospitals could sell medicines and is undermining the government’s revenue use the proceeds to replenish their stocks. base and starving the government of funds The Government is aware of the to provide a better service. inadequacy of its hospitals and provides It is beyond the scope of this paper to funds in the Budget to transfer patients explore the roots of this problem. But put overseas for treatment. However, these simply, the Government has been under Government provisions are available only to pressure from both domestic and foreign public servants and members of parliament. sources to constrain its spending. In its efforts The general public must rely on aid funds to constrain expenditure, ministries and from New Zealand and a private charity for departments have been required to absorb this purpose.Medical insurance is available some of the salary increases within their to cover the cost of obtaining medical care budget allocation. This has deprived them overseas. However, not everyone can afford of the funds to buy the resources they need to this form of cover. undertake their responsibilities efficiently Ten doctors have joined the Ministry in and effectively. Also, public service salaries the last two years and another ten doctors have not kept pace with salaries in the private are undertaking further study overseas and sector and have been far below the wages hopefully will return. Again, salaries and being paid by their colleagues in the conditions are far below what these doctors autonomous public enterprises. could expect overseas and this makes it The low salaries have reduced the difficult to retain them. morale of the public service making it open The nursing school is looking to upgrade to establishing other ways and means of its courses from a certificate level to a supplementing their salaries. These can diploma level. The upgrading has two sides: increase government expenditure or reduce while it will improve the standard of nursing government revenue, thereby undermining in Tonga, it also qualifies the nurses to leave government’s ability to rectify the situation. Tonga and work overseas. This is already a Charges have been introduced recently problem, as in recent years the hospital has for medicines and hospital patients are been losing up to 20 nurses and training only required to pay a small fee. However, the 12 new nurses each year. To help reduce this Ministry of Health generally provides free loss of staff, the 2000–01 Budget provided medical, dental and surgical services. This nurses with a 20 per cent duty allowance; has led to a situation where doctors feel the that is, a bonus on top of the normal salary system is abused by people coming for minor paid only on days worked, giving them a 40 ailments. There has been consideration given per cent pay increase over the year. Doctors to charging for medical services so that and dental officers already have a 35 per cent people value the service, but at the same time duty allowance. there is a concern that this might discourage There is widespread public concern poor people with genuine medical conditions about the standard of care at the hospital. from seeking treatment. Even the new Minister of Health is considering Other community and personal services inviting a private hospital to establish in Tonga to provide a higher level of service. Other community personal services include This issue is fuelling public perceptions that the churches, sport and recreation. The the government is using public funds to look churches are the largest part of this industry after its own welfare and not public welfare. with about 1,300 employed. Average salaries In turn, this attitude is contributing to the in this group are in the order of T$2,000 per

annum. It is common for the churches to Government fiscal policy provide accommodation for their employees. This sector has large investments in non- In recent years, the Ministry of Finance has residential buildings. sought a balanced current expenditure budget and has largely been successful in Government administration attaining it. In 2000/01 it budgeted for a According to the 1996 census there were 3,701 surplus on current revenue and expenditure people employed in public administration of T$0.5 million with revenue of T$87.7 and defence, equivalent to 12.6 per cent of million and current expenditure of T$87.23, the workforce. This number excludes public including current revenue and expenditure servants employed in health and education. of revolving funds (Tonga, Ministry of The Government is clearly of the view that Finance 2000). these numbers are excessive. Early in 2001, Details of recurrent revenue and it imposed a freeze on the hiring of staff expenditure since 1989/90 are shown in pending a review of the role of Government. Table 2. Improved tax collection was Following an AusAID-funded report expected to have raised revenues in into the role of Government, the Government 1999/00 and 2000/01. The 20 per cent established three committees to increase in public service salaries plus the • examine the legal framework in Tonga doubling of the grant to secondary schools with a view to streamlining the legal was expected to significantly raise system and public administration. It expenditure in 2000/01. The estimates sought to remove irrelevant law. shown are only indicative for the purposes • examine the role of Government, of appreciating the changes in Government’s particularly looking at government revenue and commitments. activities, identifying core and non-core The freeze on public service employment activities with a view to corporatising or confirms that Government has a shortage of privatising them, and to consider the funds in the last half of the 2000/01 financial regulatory framework. year. Revenue may have been less than • implement the recommendations of the anticipated because of the poor squash other committees and define the level of season and the downturn in the United States, resources required by government, both Australian and New Zealand economies. human and material. There are indications that the government is preparing for a major tax reform in Legal framework 2001/02. This had been mooted in a public discussion paper that proposed In relation to trading licenses, export licenses, • removal of the industrial development customs inspection of exports, price controls, incentives Tonga has a large number of laws that are no longer relevant. For example, all drivers’ • abolition of ports and services taxes licenses are renewable in January each year. • introduction of a progressive rate This may have been appropriate when there structure for individual income tax, were only a few drivers. However, now that redefining the tax threshold and there are thousands of drivers, it creates abolition of many of the deductions administrative congestion. Similarly, there are • introduction of Final Withholding Tax no on-the-spot fines for minor traffic offences. for salary and wage earners thus Even a parking offence requires a court removing the need to lodge tax returns appearance, thus wasting the time of the court • abolition of income tax on dividends and the police, as well as the offender’s. and interest

• redefining of income for tax purposes to majority of the external debt is at interest rates that earnt from operations in Tonga of between 1 per cent and 3 per cent and for • removal of the current two-rate structure terms averaging 30 to 40 years. In addition, for Corporate Income Tax, replacing it by it had guaranteed loans of T$13.9 million, a single rate set at the maximum rate mainly for the Tonga Development Bank. At applicable to individuals that time the Government had assets of • removal of the current distinction T$48.5 million held as the Tonga Trust Fund, between resident and non-resident mostly in fixed deposits in the United States. taxpayers • rationalising the customs tariffs to a International transactions single rate whilst removing most exemptions, and subjecting alcoholic Estimates of international receipts must be beverages, tobacco products, petroleum viewed with the understanding that the products and jewellery to excise tax export receipts are understated (Figure 5). • expanding the current sales tax base to They are based on returns given to the cover all services with minor exceptions, Customs Department and in many cases it and amending the legislation to a form is unlikely that exporters would know what suitable for administration they are paid for their exports. The value • providing sufficient administrative given usually reflects the local cost rather power to the tax and customs admin- than the anticipated revenue. The under- istrations to ensure compliance with the statement in exports means that other law whilst also protecting the rights of receipts are overstated. For example, current taxpayers (Walker 1999). transfers or remittances were relatively Government debt outstanding in June stable until 1997/98. They are unlikely to 1999 comprised T$89.5 million of external vary significantly. The sudden increase in debt and T$13.4 million in domestic debt. The 1998/99 and 1999/2000 is uncharacteristic

Table 2 Government recurrent revenue and expenditure, 1989–2001 (T$ million)

Revenue Expenditure Surplus/(deficit) 1989/90 40.9 44.5 -3.6 1990/91 47.4 47.4 0.0 1991/92 46.2 51.1 -4.9 1992/93 52.3 49.9 2.4 1993/94 54.7 50.4 4.4 1994/95 58.2 55.5 2.7 1995/96 64.6 62.8 1.9 1996/97 61.5 62.3 -0.8 1997/98 62.7 62.4 0.3 1998/99P 68.3 70.9 -2.6 1999/00E 72.1 72.1 - 2000/01E 76.0 79.0 -3.0

P provisional E estimate Source: Tonga, Ministry of Finance, 2000. Budget Statement 2000/2001, Nuku’alofa; International Monetary Fund data.

Figure 5 International receipts, 1994–2000 (T$ million)

200 180 160 140 Financial account 120 Capital account 100 Current transfers Income T$ million 80 Services 60 Exports 40 20 0 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00

Source: Tonga, Ministry of Finance, 1999. Annual Report 1999, Government of Tonga, Nuku'alofa; author’s estimates

and more likely to reflect an increase in export Conclusion income associated with increased fisheries and agricultural exports. This paper has reviewed production and The international services revenue distribution systems in Tonga for both the shown includes receipts from transport, private and government sectors. It has also tourism, business travel, telecommunications considered the role of government as a services, leases and so on. The income manager of the economy. That role has been includes interest and dividends from reviewed at a policy level for each of the investment overseas. The current transfers economic sectors and in relation to its own are mainly personal remittances from operations and that of its business enterprises. relatives. The capital account includes Also, the role of the National Reserve Bank of foreign aid and the financial account covers Tonga was considered together with a brief financial investments in Tonga. review of the government’s fiscal position and Imports represent more than half of polices. More details of the Government’s Tonga’s international payments. Food is the fiscal policy and finances are available in the largest item imported, followed by budget statement and IMF documents. manufactured goods, machinery and The major concern in fiscal policy is for transport equipment, and fuels and government to identify its priorities and lubricants. Service payments are mainly for provide those areas with sufficient funds to transport and travel. Current transfers are perform their responsibilities effectively. Its mostly remittances from relatives, such as to current financial problems should be children studying overseas. addressed in the 2001/02 Budget.

Figure 6 International payments, 1994–2000 (T$ million)

200 180 160 Financial account 140 Capital account 120 Current transfers 100 Income

T$ million T$ 80 Services 60 40 Imports 20 0 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00

Source: Tonga, Ministry of Finance, 1999. Annual Report 1999, Government of Tonga, Nuku’alofa; author’s estimates.

Following the review underway of the heavy-handed and need not be provided by role of government, a review of public service government. It could be done cooperatively remuneration could alleviate some tensions within the industry. Government could within the public service. This review could cooperate with the industry to facilitate include the remuneration of government enforcement of industry standards. boards and corporate entities and should Essentially, Tonga’s monetary system is consider ways of linking remuneration to structurally sound. It could be improved by performance. the NRBT developing a means of effectively Many instances of needless and excessive managing the growth of commercial bank regulation should be resolved in the review lending so as to preserve foreign reserves. of the role of government. It would be Although foreign reserves have been low in desirable if government worked with the Tonga, its trading partners, such as private sector to smooth the administrative Australia, New Zealand and the United paths in the same way the streets of Tonga States, have structural problems in their have been smoothed. economies that are causing them to The main desire of the private sector accumulate large foreign debts. Tonga does regarding taxes is for equity and simplicity. not have these problems and does not need They are not calling for the major changes to implement the policies that these that Government is envisaging. In particular, economies have been putting in place to deal there is uniform opposition to a tax on local with their problems. goods and services. Tonga appears to be moving rapidly Tonga’s private sector is calling for towards forming a wealthy middle class. greater regulation of the quality of products Accompanying the rising incomes are rising and services. Such regulation should not be expectations of standards of service. Some

business are paying and treating their staff 3 It should be noted that the foreign assets of well and staff are responding well, taking the Tonga Trust Fund are not included in the responsibility and using initiative in their Kingdom’s official foreign reserves. work. However, there are still many businesses with low-paid staff. Typically, References they will have more staff and they are poorly motivated. National Reserve Bank of Tonga (NRBT), Unemployment is not considered an 1999. Annual Report 1998–99, issue in Tonga. The main concern about Nuku’alofa. labour is the shortage of skilled labour. When National Reserve Bank of Tonga, 2000. pressed, the only unemployment that people Quarterly Bulletin, 11(2), June. were aware of was youth unemployment, immediately after leaving school. Possibly the Tonga, Central Planning Department, 2001. Strategic Development Plan Seven 2001– most significant labour issue was the 2003, Nuku’alofa, March (Consultation underemployment of labour; a matter related Draft). to the low wages. Prospects for economic growth in Tonga Tonga Chamber of Commerce and Industry Inc, 2000. The Lali Buzz, 4(5), August. lie mainly in exports of agricultural products and the growth of fisheries. With up to 25 Tonga, Ministry of Labour, Commerce and long-liners and 10 snapper boats operating Industries and International Labor from Tonga, fishing will have a significant Organisation (ILO), 1996. A Report on Employment and Business Issues, effect on the economy. Fish processing and Nuku’alofa. the operation and maintenance of the fishing vessels will create many new jobs in an Tonga, Ministry of Finance, 1999. Annual industry that pays well. Report 1999, Government of Tonga, Nuku’alofa. The growth in the exporting sectors and the associated rise in incomes will create ——, 2000. Budget Statement 2000/2001, demand for other services within the Government of Tonga, Nuku’alofa. Kingdom. This demand will raise incomes Tonga, Statistics Department, various in other sectors and create employment. issues. Provisional Estimates of Gross In the new millennium, Tonga is likely Domestic Product for the Kingdom of to see more rapid change than it has in the Tonga, Government of Tonga, recent past. The challenge it faces is not one Nuku’alofa. of production, but of distribution. Can it Tonga, Statistics Department, 1996. ensure that the whole Kingdom shares Population Census 1996: administrative equitably in its growing wealth? report and general tables, Government of Tonga, Nuku’alofa. Notes Walker, Colin, 1999. Public Discussion Paper on a Suitable Tax Policy, T$1 (pa’anga)=A$0.92 (at May 2001) Nuku’alofa. 1 The estimate used in the TT2000 economic model to assess the impact of tax changes in Tonga (see Box 1). 2 The Tongan Pa’anga was held at par to the Australian dollar up until 1991 when it was pegged to a basket of US, Australian and New Zealand currencies. In July 2000, the Japanese yen was added to the basket.