Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 56630-TO INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL FINANCE CORPORATION COUNTRY ASSISTANCE STRATEGY Public Disclosure Authorized FOR THE KINGDOM OF TONGA FY 2011 - 2014 September 17, 2010 Public Disclosure Authorized Papua New Guinea, Pacific Islands and Timor Leste Country Management Unit East Asia and Pacific Region The International Finance Corporation Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. KINGDOM OF TONGA CURRENCY EQUIVALENT 1 Tongan Pa’anga (TOP) = 0.53 US Dollar (USD) (Exchange rate effective as of September 2010) FISCAL YEAR July 1 – June 31 ABBREVIATIONS AND ACRONYMS AAA Analytic and Advisory Activities ADB Asian Development Bank AusAID Australian Agency for International Development CAS Country Assistance Strategy CPAR Country Procurement Assessment Report CPPR Country Project Portfolio Review DGF Development Grant Facility DPO Development Policy Operation DRR Disaster Risk Reduction EC European Commission EITI Extractive Industries Transparency Initiative FIAS Investment Climate Advisory Service FTI Education for All Fast Track Initiative GDP Gross Domestic Product GEF Global Environment Facility GFDRR Global Facility for Disaster Reduction and Recovery GFRP Global Food Crisis Response Program GNI Gross National Income HDI Human Development Indicators IBRD International Bank for Reconstruction and Development IDA International Development Association IEG Independent Evaluation Group IFC International Finance Corporation IMF International Monetary Fund ISN Interim Strategy Note JICA Japan International Cooperation Agency M&E Monitoring and Evaluation MDGs Millennium Development Goals MDTF Multi-Donor Trust Fund MOF Ministry of Finance NGO Non-Governmental Organizations NSPF Tonga National Strategic Planning Framework NZ New Zealand PALM Japan – Pacific Alliance Leaders’ Meeting PASAI Pacific Association of National Audit Institutions PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PFTAC IMF Pacific Technical Assistance Facility PF3 Pacific Facility III PIC Pacific Island Country PPCR Pilot Program for Climate Resilience PRIF Pacific Regional Infrastructure Facility PSD Private Sector Development QER Quality Enhancement Review REF Pacific Regional Engagement Framework RAMSI Regional Assistance Mission to the Solomon Islands RSE NZ Recognized Seasonal Employment Scheme SDR Special Drawing Rights SPREP South Pacific Regional Environment Programme TA Technical Assistance TERM Tonga Energy Roadmap TESP Tonga Education Support Project TOP Tongan Pa’anga TSCP Tonga Transport Sector Consolidation Project UNDP United Nations Development Programme UNICEF United Nations Children's Fund USAID United States Agency for International Development V-FLEX EC Swift Response Financing Instrument WFP World Food Programme WHO World Health Organization IDA IFC Vice President: James W. Adams Rashad Kaldany Country Director: Ferid Belhaj Karin Finkelston Task Team Leader: Robert Jauncey Gavin Murray KINGDOM OF TONGA WORLD BANK GROUP COUNTRY ASSISTANCE STRATEGY Contents EXECUTIVE SUMMARY…………………………………………...……...………………………………..i I. RATIONALE FOR A COUNTRY ASSISTANCE STRATEGY…………………….……………….1 II. COUNTRY CONTEXT AND DEVELOPMENT CHALLENGES………………………………...…2 Economic Geography………………………………………………………………...……………………2 Constitutional Reform……………………………………………………………………………………..4 Recent Economic Developments…………………………………………………………………………..4 Government Development Strategy: 2009-13………………………………………………………..…....7 Donor Engagement…………………………………………………………………………………...……7 III. WORLD BANK GROUP ENGAGEMENT WITH TONGA………………………………………....9 Current and Recent Engagement…………………………………………………………………………..9 Planned World Bank Group Engagement: FY11 – FY14………………………………………………..11 Encouraging Economic Reform…………………………………………………………………..….12 Generating Opportunities from Greater Global and Regional Integration…………………….……..14 Building Resilience Against Shocks………………………………………………………………....15 Implementation: Partnerships, Selectivity, New Ways of Doing Business, and Accountability….....17 Financing Envelope and Terms……………………………………………………………………....18 IV. RISKS…………………………………………………………………………………………..……..…19 Attachments Attachment 1: Pacific Islands – Overview of World Bank Engagement………………………………...20 Attachment 2: Tonga Results Matrix……………………………………………………………………..36 Attachment 3: Tonga: Country at a Glance………………………………………………………………39 Attachment 4: Tonga: Selected Economic Indicators…………………………………………………….42 Attachment 5: Selected Indicators of IDA Portfolio Performance and Management……………………43 Attachment 6: IDA program Summary…………………………………………………………………..44 Attachment 7: IFC Portfolio……………………………………………………………………………...46 Attachment 8: Map of the Kingdom of Tonga…………………………………………………………...48 KINGDOM OF TONGA WORLD BANK GROUP COUNTRY ASSISTANCE STRATEGY FY11 – FY14 EXECUTIVE SUMMARY i. Development outcomes in the remote island archipelago of Tonga are relatively strong compared with other Pacific island member countries – but progress has been volatile. Absolute poverty is rare, health and education indicators are relatively strong, and Tonga has made good progress against most MDG indicators. Like many other small and remote island economies, however, Tonga’s development prospects are shaped by it economic geography. The economy is highly vulnerable to external shocks. Because of its narrow economic base and heavy reliance on remittances from citizens living overseas, Tonga has been hard hit by the slowdown in the US and other OECD countries, as well as by the food and fuel price shocks of 2008. ii. Renewing economic reform momentum will be vital for Tonga to bounce back more strongly from current economic difficulties. Policy reform is a necessary although not always sufficient condition for progress in many small and remote island states. While the Pacific island states are at the margins of the global economy and highly reliant on relationships with metropolitan countries, experience also shows that those countries that have done best have been those able attract new private investment to promote growth. Tonga made a strong start on economic reforms, particularly associated with WTO entry in 2007. More recent political reform has also marked Tonga’s continuing transition to a Constitutional Monarchy. Still, significant challenges remain to further strengthen public expenditure policy and management, particularly in light of emerging fiscal pressures, and to reinvigorate structural economic reforms. iii. The World Bank Group is committed to increasing its support for Tonga, in close collaboration with other development partners. World Bank Group engagement will be structured around the themes of supporting economic reform; generating opportunities through greater global and regional integration; and building resilience against shocks. There is potentially room for the Bank to provide $50 million in grant funds to Tonga over the next 4 years, significantly more than the $33 million has been provided in the period since Tonga joined the Bank in 1985 until now. There is also scope for the Bank to provide flexible budget support to meet needs emerging from recent economic shocks, although this will depend on the development of a credible reform program by a new Government after elections in November 2010. The Bank anticipates working in close cooperation with other partners to undertake analytical work to help provide a new Government with the detailed information on which they can make policy choices. iv. Coordinated IDA and IFC engagement will also focus on encouraging opportunities for the private sector and on strengthening service delivery through the transparent and competitive contracting of functions to the private sector. New World Bank Group engagement with Tonga will build on the successes that have been achieved to date, such as the coordinated Bank Group support for the telecoms revolution that has swept the Pacific in the past few years, increasing the number of Tongans with access to mobile phone services from 6% to 60% of the population. Just as IDA and IFC were able to play complementary roles in encouraging the opening of the telecoms market, strengthening regulation, and supporting new private investment, there is considerable scope to exploit synergies across both institutions to make greater room for the private sector to generate opportunities. I. RATIONALE FOR A COUNTRY STRATEGY FOR THE KINGDOM OF TONGA 1. The World Bank Group is significantly scaling up analytical and financial support to help the Kingdom of Tonga and other small and remote Pacific island countries reduce the constraints of economic geography and make the most of opportunities. Reflecting this scale up, this is the first country strategy prepared for Tonga, as well as the first for any of the smaller Pacific island countries. The Bank’s strategy for the Pacific island countries (PICs) was previously set out in a single Regional Engagement Framework (REF) covering the period 2006 to 2009. As Bank Group engagement intensifies, however, Pacific island clients are increasingly demanding individual “custom-tailored” strategies to reflect their individual circumstances, and to incorporate the support that can be provided from across the Bank Group, including both IDA and IFC. Of course, given the importance