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- GDP (PPP):
- $0.5 billion
- 2.3% growth
- 1.1% 5-year compound annual growth
- $4,883 per capita
- Inflation (CPI):
- FDI Inflow:
The small island of Tonga has a very narrowly based economy that depends primarily on agricultural exports. However, the nation also has a relatively open trading environment that makes it well developed compared to many of its South Pacific island neighbors. The government relies heavily on foreign aid to balance the books.
Economic Freedom Snapshot
- 2016 Economic Freedom Score: 59.6 (up 0.3 point)
- Economic Freedom Status: Mostly Unfree
- Global Ranking: 95th
- Regional Ranking: 18th in the Asia–Pacific Region
- Notable Successes: Business Freedom and Labor Freedom
- Concerns: Investment Freedom and Financial Freedom
- Overall Score Change Since 2012: +2.6
Although Tonga’s judicial system is based on British common law and relatively independent, it also is inefficient and frequently subject to delays. Foreign investment is highly regulated by the government and is even prohibited in some sectors.
The island 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’ataonga 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. Tonga boasts a 99 percent literacy rate, but more than half of the population lives abroad, mostly in New Zealand. Agriculture is the principal productive sector of the economy, and remittances from abroad are a significant source of income.
Public support for democratic reforms and dissatisfaction with widespread corruption among the Tongan nobility and their top associates spurred a strong voter turnout in November 2014 elections, but the opposition pro-democracy party failed to win a majority. The judicial system is generally independent, although a shortage of judges has led to long case backlogs. Property rights are uncertain, and their enforcement is weak.
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 percent of total domestic income. Government spending amounts to 28.1 percent of GDP, and budget deficits have been declining in recent years. Public debt amounts to around 43 percent of total domestic output.
Regulatory codes are relatively sound, but implementation of regulations remains ineffective. There is no minimum capital requirement for establishing a business, but the process can be time-consuming. Informal labor activity remains substantial. The foreign aid–dependent government influences prices through subsidies for electricity and to loss-making state-owned enterprises but is under pressure from international donors to reduce them.
Tonga’s average tariff rate is 5.2 percent. Land can be leased but not owned. Foreign investment in some sectors of the economy is restricted. State-owned enterprises include six government-owned airports and Tonga Power Limited. The poorly developed legal system continues to impede the emergence of a modern financial sector. There are no capital markets. Much of the population operates financially outside of the formal banking system.