The Asian Development Bank's Pacific Department principal economist, Emma Veve, says the bank is no longer loaning money to the Kingdom, but is giving it outright grants, so as not to add to its debt burden.
Presenter: Bruce Hill
Speaker: The Asian Development Bank's Pacific Department principal economist, Emma Veve
VEVE: We're expecting about one per cent growth during 2013 for Tonga.
HILL: That's not very much.
VEVE: No it's certainly not as high as you would like to see an island economy achieving. Tonga has had a difficult time economically for a number of years now, and while it's managed to post more levels of growth each year, it's a matter of lifting its growth to a new level so it can move forward.
HILL: Why is it so low because other Pacific Island countries have two and three per cent growth, why is Tonga only one?
VEVE: Well Tonga has the disadvantage that there's a very high level of government debt, and this is really eating into government's ability to spend money on public services, on capital investments, which is making it difficult for the economy to grow. And things like the regulations that are making it difficult for business for example also help to hold down the growth of the economy.
HILL: So is it part of like a culture of large government, is that what's holding the private sector back and keeping growth low?
VEVE: There certainly has been fairly large government but also high relative pay levels to those in private sector. So the skills do get pulled into the public sector and away from the private sector, which makes it more difficult for the private sector and creates a higher operating environment if they do want to attract skilled people to their businesses.
HILL: Once you get a high level of governmental involvement and obviously some high salaries, it's very difficult to ratchet that back isn't it? People get quite used to it and they quite like it and they resist attempts to shrink the size of government or certainly to reduce salaries?
VEVE: Particularly when you're in a small island where the people earning a public sector salary often help support a whole family group around them. I mean it has big social implications when you start to cut that government, and I think that's why the Tongan government has moved in a sort of a well sequenced manner on this and it's started to look at firstly restructuring of government ministries and departments to make sure that it's operating most efficiently with the people that they are employing, and people are getting the most value for money out of the government they have. Certainly cutting salaries, cutting staff numbers is an issue that Tonga will have to think about in the future.
HILL: Is there anything the ADB can do to help Tonga get on top of this government debt?
VEVE: Yes certainly, ADB is at this stage not lending to Tonga. We're providing grant financing instead of loan financing because of their high debt levels.
HILL: So instead of actually lending to them you're just giving them money?
VEVE: We're giving them money for particular projects.
HILL: Where do I apply to get that for myself because I want in on that scene, that sounds good?
VEVE: It certainly means that Tonga has access to less money than they would have were they borrowing from us, and it's not something we'd want to see happening with a country long term. So at the same time we're working with them to ensure they have good debt management structures in place. We're working with them in their budget development, discussing issues such as maintaining social expenditures, cutting some other areas that might be less of a priority area of expenditure. So it's looking at the whole gamut of are they raising the correct amounts of revenue, how can they control their expenditures, what are the priority capital investments, and with the other development partners we're engaged in an ongoing dialogue with government about these issues, so that they come up with stronger budgets and can move to a position where the debt is no longer the pressing issue that it is currently, and they can move back to borrowing for productive projects.
HILL: Well that's the spending side of the ledger, what about where Tonga actually makes its money; exports, remittances, tourism, what's the forecast for those sectors of the economy?
VEVE: Tonga's remittances really fell during the global economic crisis, and to a large extent they haven't come back as we've seen the case in other Pacific Islands like Samoa for example. So the remittances really are down and cannot be heavily relied upon as a source of financing for the country in the current situation. So that means industries such as tourism become more important. We've seen a focus on advertising for tourism, we've seen a big step-up in tourist numbers and tourist revenue, but in the case of Tonga this is from a very low base. Their new wharf is going to attract cruise ships into the town centre, which should have some positive implications for tourism revenue. But it's looking at their tax system, making sure that people are complying with it, and that's where government's focussed strongly in recent years is on compliance with tax systems. And it's showing now in the revenue figures, which have been growing strongly.