Government of Tonga Budget Statement for year ending 30th June 2022 2021/22 Ministry of Finance (MOF) 2 Government of Tonga Budget Statement for year ending 30th June 2022 2021/22 1. FOREWORD _______________________________________________________________________ 5 2. INTRODUCTION ___________________________________________________________________ 7 3. MACROECONOMIC AND FISCAL OUTCOMES AND OUTLOOK________________________ 8 3.1 Global and Regional Highlights _____________________________________________________________ 8 3.2 Domestic Economy and Outlook for Tonga ___________________________________________________ 10 3.3 Economic Impacts of COVID-19 ____________________________________________________________ 15 3.4 Fiscal Policy Framework _________________________________________________________________ 18 3.4.1 Overview of Fiscal Outlook (GFS) __________________________________________________________________ 18 3.4.2 Medium-Term Fiscal Strategy _____________________________________________________________________ 20 3.4.3 Debt Position ___________________________________________________________________________________ 22 3.5 Monetary Policy Actions __________________________________________________________________ 24 3.6 Social Development ______________________________________________________________________ 26 3.7 Risks __________________________________________________________________________________ 27 4. TSDF II: 2015-2025 AND GOVERNMENT PRIORITY AGENDA (GPA) 2022-2024 __________ 29 4.1 Tonga Strategic Development Framework II (TSDF II): 2015-2025 _______________________________ 29 4.2 Government Priority Agenda (GPA) FY 2021 Highlights ________________________________________ 29 4.3 Government Priority Agenda (GPA) 2022-2024 ________________________________________________ 32 5. BUDGET ESTIMATE AT A GLANCE FY 2022 _________________________________________ 44 5.1 Summary of Government Budget by Priority Areas ____________________________________________ 44 6. GOVERNMENT BUDGET: FUNDING ALLOCATION __________________________________ 46 6.1 RECURRENT BUDGET__________________________________________________________________ 46 6.1.1 Recurrent Budget Performance in FY 2020 __________________________________________________________ 46 6.1.2 Recurrent Budget Performance in FY 2021 __________________________________________________________ 47 6.1.3 Recurrent Budget projections for medium term (FY 2022 – FY 2024) _____________________________________ 50 6.1.4 Recurrent Expenditure by Ministry_________________________________________________________________ 51 6.1.5 Recurrent Expenditure by Category ________________________________________________________________ 52 6.1.6 Recurrent Revenue by Category ___________________________________________________________________ 53 6.1.7 Recurrent Expenditure by Location ________________________________________________________________ 54 6.2 DEVELOPMENT BUDGET ______________________________________________________________ 55 6.2.1 Aid Funded Project Expenditure by Ministry _________________________________________________________ 55 6.2.2 Development Expenditure by Location ______________________________________________________________ 56 6.3.3 Development Expenditure by Development Partners ___________________________________________________ 57 7. CONCLUSION _____________________________________________________________________ 64 8. ANNEX I: MACROECONOMIC AND FISCAL OUTCOMES AND OUTLOOK________________ 66 8.1 Medium Term Fiscal Framework (GFS Format) _______________________________________________ 66 8.2 Debt Performance _______________________________________________________________________ 74 8.3 Monetary Policy Outcomes ________________________________________________________________ 77 8.4 Social Development and Challenges ________________________________________________________ 90 8.5 Tonga Selected Indicators ________________________________________________________________ 95 9. ANNEX II: BUDGET CONTRIBUTION TO THE GPA FY 2022 ____________________________ 99 10. ANNEX III: DEVELOPMENT AID CLASSIFICATION _________________________________ 103 10.1 Aid Funded Project Expenditure by Development Aid Classification (DAC) _______________________ 103 10.2 Development Expenditure by Location ____________________________________________________ 104 11. ANNEX IV: TROPICAL CYCLONE GITA AND TROPICAL CYCLONE HAROLD ________ 105 12. ACRONYMS ______________________________________________________________________ 106 Ministry of Finance (MOF) 3 Government of Tonga Budget Statement for year ending 30th June 2022 2021/22 List of Tables: Table 1: Real GDP Growth ________________________________________________________________ 11 Table 2: Development funds for COVID-19 related activities ___________________________________ 18 Table 3: Government Financial Statistics (GFS) Summary Table (provisional) ____________________ 20 Table 4: Fiscal Anchor and Position ________________________________________________________ 22 Table 5: Total Budget Estimate for FY 2022 (T$m) ___________________________________________ 44 Table 6: Summary of Government Budget by Priority Areas ___________________________________ 45 Table 7: Recurrent Performance in FY 2021 (T$m) ___________________________________________ 47 Table 8: Total Recurrent Payments Budget by Ministry (T$m) _________________________________ 51 Table 9: Total Recurrent Payments Budget by Category (T$m) _________________________________ 52 Table 10: Total Recurrent Revenue Budget by Category (T$m) _________________________________ 53 Table 11: Recurrent Expenditure by Location ________________________________________________ 54 Table 12: Total Development Budget (Aid Funded Project Expenditure) by MDAs ($m) ____________ 55 Table 13: Total Development Budget (Expenditure) by Location ($m) ____________________________ 56 Table 14: Total Development Budget (Expenditure) by Development Partners ($m) ________________ 58 Table 15: Government Finance Statistics (GFS) _______________________________________________ 66 Table 16: On lent Loans as at 30th June 2021 _________________________________________________ 76 Table 17: Sovereign Debt Sustainability Indicators of IMF/Tonga _______________________________ 77 Table 18: Tonga Selected Indicators, FY 2013– FY 2020 _______________________________________ 95 Table 19: Aid Funded Project (Expenditure by DAC) ($m) by location __________________________ 104 List of Figures: Figure 1: GDP Growth and share by sector __________________________________________________ 10 Figure 2: Tonga’s Debt Service Projections for the next 10 years ________________________________ 23 Figure 3: Total Public Debt ($m) FY 2021 – FY 2026 (including actual and projected)______________ 24 Figure 4: External Disbursed Outstanding Debt (DOD) by Creditor _____________________________ 24 Figure 5: Recurrent Budget for FY 2020 (T$m) ______________________________________________ 46 Figure 6: FC/TOP Exchange rate Fluctuations as at 30th June 2021 _____________________________ 74 Figure 7: Government Bond Holders as at 30th June 2021(%)___________________________________ 74 Figure 8: Aid Funded Project Expenditure by Development Aid Classification (DAC) _____________ 103 Ministry of Finance (MOF) 4 Government of Tonga Budget Statement for year ending 30th June 2022 2021/22 1. FOREWORD The FY 2022 budget is guided by the theme: ‘By God’s grace we are saved through faith’. The rationale behind this theme is a proclamation that only through God’s grace that Tonga has survived the great adverse impact of the pandemic and is amongst the few countries in the globe that is COVID free. Government will continue to prioritise prevention and protection against the COVID-19 pandemic, as the first and foremost priority considering the context of the Tongan economy including vulnerability and limited resources. Although Tonga is fortunate to remain COVID- 19 free hitherto, Government needs to remain vigilant especially in a situation where the virus enters our shore. These include close monitoring of the border and the extension of quarantine to 21 days for repatriated passengers albeit the revolving cost implications and negative impacts on the economy. The virus continues to have a profound impact on all societies and economies with many disruptions to everyday life. It is pleasing to note the availability of vaccines against COVID- 19 which are slowly being rolled out across the world. This significant development is expected to gather momentum in 2021 and continue to strengthen further in 2022. FY 2019 recorded an actual positive growth of 0.7 percent while FY 2020 is projected at negative 0.8 percent mainly due to the prolonged impacts of COVID-19. This is an improvement from the initial projection of negative 2.9 percent for FY 2020 which is attributed to the TC Gita and TC Harold reconstruction and other major infrastructure development activities. The medium term (FY 2022 to FY 2024) is projected at an average growth of 2.6 percent, reflecting the impacts of the Government Stimulus Package, TC Gita and TC Harold reconstruction activities and other major development projects scheduled to be implemented in 2022. Government has approved a policy to commence preparatory works to establish a Land Transport Authority (LTA) to be responsible for road infrastructure maintenance and development in Tonga. A road maintenance fund has been created under the Road Act 2020 which will contribute to the operation of the LTA once it comes into existence. On the fiscal