Tonga Economic Recovery Operation II

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The development objective of the Second Economic Recovery Operation Program is to assist the Government of Tonga (GoT) to implement key aspects of its medium-term reform agenda, while providing a predictable flow of resources in a challenging fiscal environment. The operation is the second in a programmatic series of two development policy operations. The operation will be financed by International Development Association (IDA) resources of US$1.8 million and Australian Agency for International Development (AusAID) is expected to provide associated sector budget support of AUD 5.0 million (US$5.3 million) for the same policy actions and dependent on the Bank's operation being approved. The operation will help the Government of Tonga manage severe economic challenges that have coincided with historic political reforms. It supports a focused program of Government reform priorities in public financial management, fiscal policy, and business environment reforms while providing a vital fiscal buffer in the context of sustained revenue contraction. The series of operations coincide with the term in office of Tonga's first Government to be selected by a majority-elected parliament and provide an opportunity for the Bank to support Tonga at a critical juncture in its development process. The programmatic series of economic recovery operations focuses on three reform areas. Areas of focus reflect Government's concern to support short-term recovery and mitigate continuing impacts of the crisis on the poorest households while maintaining progress against longer-term structural reforms to deal with ongoing fiscal and economic challenges. Areas of focus include: i) strengthening public financial management; ii) strengthening fiscal policy; and iii) promoting structural reforms relating to the business regulatory environment. The first Tonga Economic recovery operation also supported reforms to strengthen social protection. The Second Tonga economic recovery operation will build on the gains achieved to date. In the area of public financial management, priorities reflect the importance of embedding transparency and solid Public Financial Management (PFM) foundations following recent political reforms. Actions in this area include introduction of a treasury single account, publication of in-year budget reports, and the tabling in Parliament of audited Annual Financial Statements of Government. Under fiscal policy, the agenda focuses on strengthening revenue effort to maintain delivery of public services following substantial revenue declines. Actions in this area include policy decisions to introduce small business and natural resource tax regimes and measures to increase transparency of the costs of tax exemptions.