Tonga Energy Development Policy Operation

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The objectives of the Energy Sector Development Policy Operation Program are to contribute to reducing Tonga's fiscal deficit and to support the Government's efforts in implementing reforms in the energy sector which will contribute to achieving steady and stable growth in the medium term. The program will provide budget support to reduce the near-term fiscal deficit. It will also reinforce the importance of implementation of energy sector reforms necessary to reduce Tonga's vulnerability to oil price rise and shocks, which otherwise will pose a significant risk to achieving stable growth in the medium term. Like other Pacific Island nations, Tonga is highly vulnerable to natural disasters and to external economic shocks because of its small size combined with a large distance from the nearest large market. The knock-on effects of the global economic crisis, in particular in remittances and tourism revenues, contributed to Gross Domestic Product (GDP) contractions of 0.4 percent in FY2008-09 and an estimated 0.5 percent in FY2009-10. As the government recognized the extent to which its tax revenues had been affected by the global economic crisis last year, it took emergency measures to limit recurrent expenditures including imposing lower ceilings on the expenditures in most ministries toward the end of FY2009-2010. It also sought budget support in the form of grants from donors. While the outlook is for growth to recover in FY2010-2011 to around 1.5 to 2 percent, downside risks remain. Containing expenditure to the level set in the budget will be challenging, even with greater attention to expenditure prioritization, given the emergency-nature of the budget cuts already instituted in FY2009-10.