Tonga economy faces slower growth, higher inflation as IMF urges policy tightening

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Tonga slower growth & inflation

Highlights

Tonga’s GDP growth slows to 2% in FY2026 and 0.5% in FY2027, as energy shocks, El Niño, and project delays offset tourism gains.
Headline inflation surges from 2.0% in January 2026 to 12.1% in September 2026, staying above the 5% target until FY2028.
Fiscal balance shifts from a 4.1% of GDP surplus in FY2026 to a 4.4% deficit in FY2027 as the government increases spending and support packages.

IMF mission flags inflation and growth risks

As reported by International Monetary Fund, preliminary findings from its 2026 Article IV mission show Tonga’s economy is slowing as the Middle East energy shock and El Niño weigh on domestic activity.

Growth is estimated to ease to 2% in FY2026 from 4.4% in FY2025, as higher fuel and freight costs, project delays and slower credit outweigh resilient tourism and remittances. IMF staff projects growth of 0.5% in FY2027, with a severe El Niño event expected to curb largely subsistence agricultural output, before medium-term growth converges to about 1.4%.

Inflation is rising sharply and is becoming more broad-based. Headline inflation increases from 2.0% in January 2026 to 12.1% in September 2026, well above the 5% reference rate of the National Reserve Bank of Tonga, and IMF staff projects it returns below that rate only in FY2028.

The fiscal position also shifts materially. After a contractionary stance in FY2026, when the overall surplus widens to 4.1% of GDP from 1.2% in FY2025, the balance is expected to move to a deficit of about 4.4% of GDP in FY2027 as the government rolls out a T$31 million support package, resumes delayed projects and raises spending on goods and services.

Policy mix targets household strain and stability

IMF staff says policy support should move away from broad subsidies and focus instead on vulnerable households and essential services, while monetary policy should tighten before price pressures become entrenched. It also says financial stability needs to be protected as nonbank lending expands rapidly outside the supervisory perimeter, even though collateral partly reduces credit risk.

Tonga’s external position in FY2026 is preliminarily assessed as broadly aligned with fundamentals and desirable policies. The current account deficit widens to 8.8% of GDP in FY2026 and is projected to reach 10.7% in FY2027, driven by higher fuel and food import bills and weaker agricultural exports, while reserves remain adequate at about 9.7 months of prospective imports at end-FY2026.

Credit growth remains weak, with private-sector credit contracting 0.6% year on year in June 2026 as banks cite a lack of bankable projects and delays in government projects. IMF staff says turning reform commitments into results will depend on more effective implementation through a more efficient, coordinated and digitally enabled public administration.

We have previously noted how rising Oil tanker rates can push up fuel and consumer costs in import-dependent markets.

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