Tonga - Second Economic Reform Support Operation

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The operation is the second and final in the Tonga Economic Reform Support Development Policy Program. The operation will support reforms in public financial management, fiscal policy, and the business environment. The operation will consist of a US$ 2.5 million equivalent credit and US$ 2.5 million equivalent grant. Australia, through its Department of Foreign Affairs and Trade (DFAT) is expected to provide associated sector budget support of AU$5.0 million (US$4.4 million) for the same policy actions supported by this operation. The operation carries substantial risk due to thin capacity in the public sector, vulnerability to external economic shocks and natural disasters, and the possibility of setbacks related to the political cycle. Supported reforms will deliver direct improvements in living standards and better prospects of growth and job creation. The development objective is to: i) strengthen public financial management by improving the quality of public procurement processes and the credibility of the annual budget; ii) strengthen fiscal policy with new procedures for granting tax exemptions and reflecting health externalities in excise duty rates; and iii) enhance the business enabling environment by establishing a new policy to support foreign investment and introducing targeted reductions in the cost of electricity.