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- GDP (PPP):
- $0.5 billion
- 2.6% growth
- 0.9% 5-year compound annual growth
- $5,045 per capita
- Inflation (CPI):
- FDI Inflow:
Tonga’s economy remains heavily dependent on foreign aid and overseas remittances. The dominance of the public sector has contributed to a low level of economic dynamism despite a workforce that is considered the best educated among the Pacific Island nations.
The institutional capacity for long-term development remains weak. The judicial system is inefficient and lacks transparency. Although trade-weighted average tariffs have dropped significantly, a lack of commitment to fully open markets impedes investment growth. The state plays a significant role in the economy, crowding out private-sector development. Despite improved oversight of government expenditures, Tonga’s public debt poses a challenge to the sustainability of public spending.
The Kingdom of Tonga, the South Pacific’s last Polynesian monarchy, has been independent since 1970. The royal family, hereditary nobles, and a few other landholders control politics. Tonga held its first elections in November 2010 under its newly formed constitutional monarchy. The Democratic Party of the Friendly Islands won a plurality in parliament, and Lord Siale’ataongo Tu’ivakano became Tonga’s first elected prime minister. In 2014 elections, the Democratic Party of the Friendly Islands maintained power but elected a new prime minister, ‘Akilisi Pohiva. Agriculture is the principal productive sector of the economy, and remittances from abroad are a significant source of income.
Property rights are uncertain, and their enforcement is weak. The judicial system is generally independent but inadequately resourced. In 2014, public support for democratic reforms and dissatisfaction with widespread corruption among the Tongan nobility and their top associates led to the election of a reformist government that has struggled to implement policy while facing opposition from vested interests and a faction of nobles in the legislature.
The top personal income tax rate is 20 percent, and the top corporate tax rate is 25 percent. Other taxes include a value-added tax and an interest tax. The overall tax burden equals 17.0 percent of total domestic income. Government spending has amounted to 29.2 percent of total output (GDP) over the past three years, and budget deficits have averaged 0.5 percent of GDP. Public debt is equivalent to 49.0 percent of GDP.
A dynamic private sector has not emerged, partly because of inefficient implementation of a statutorily business-friendly regulatory environment. The formal labor sector is underdeveloped, and labor regulations are not enforced effectively. The foreign aid–dependent government is under pressure from international donors to scale back subsidies for electricity and loss-making state-owned enterprises that it uses to influence prices.
Trade is important to Tonga’s economy; the value of exports and imports taken together equals 71 percent of GDP. The average applied tariff rate is 5.2 percent. Foreign investment in several sectors of the economy is restricted, and foreign investors may lease but not own land. The underdeveloped financial sector’s limited ability to offer affordable credit undermines the development of a dynamic entrepreneurial sector.