Identifier
Created
Classification
Origin
06SUVA222
2006-05-24 03:11:00
CONFIDENTIAL
Embassy Suva
Cable title:  

TONGA STRUGGLES TO STABILIZE ITS ECONOMY; HOPES

Tags:  EFIN EAID TN CH 
pdf how-to read a cable
VZCZCXRO5224
RR RUEHPB
DE RUEHSV #0222/01 1440311
ZNY CCCCC ZZH
R 240311Z MAY 06
FM AMEMBASSY SUVA
TO RUEHC/SECSTATE WASHDC 3109
INFO RUEHBJ/AMEMBASSY BEIJING 0184
RUEHBY/AMEMBASSY CANBERRA 1224
RUEHML/AMEMBASSY MANILA 0168
RUEHPB/AMEMBASSY PORT MORESBY 0843
RUEHKO/AMEMBASSY TOKYO 0095
RUEHWL/AMEMBASSY WELLINGTON 1018
RHHJJAA/JICPAC HONOLULU HI
RHHMUNA/HQ USPACOM HONOLULU HI
C O N F I D E N T I A L SECTION 01 OF 03 SUVA 000222 

SIPDIS

SIPDIS

MANILA FOR ADB

E.O. 12958: DECL: 05/22/2016
TAGS: EFIN EAID TN CH
SUBJECT: TONGA STRUGGLES TO STABILIZE ITS ECONOMY; HOPES
CHINA WILL OFFER A HELPING HAND

REF: A. SUVA 139


B. SUVA 156

C. SUVA 210

Classified By: AMBASSADOR LARRY M. DINGER. SECTIONS 1.4 (B) AND (D).

C O N F I D E N T I A L SECTION 01 OF 03 SUVA 000222

SIPDIS

SIPDIS

MANILA FOR ADB

E.O. 12958: DECL: 05/22/2016
TAGS: EFIN EAID TN CH
SUBJECT: TONGA STRUGGLES TO STABILIZE ITS ECONOMY; HOPES
CHINA WILL OFFER A HELPING HAND

REF: A. SUVA 139


B. SUVA 156

C. SUVA 210

Classified By: AMBASSADOR LARRY M. DINGER. SECTIONS 1.4 (B) AND (D).


1. (C) Summary: Tonga's economy continues to feel the
impact of last year's public servant's strike settlement.
The FY 2006/7 budget deficit, even after implementation of a
planned "redundancy package" that will result in 700-1000
fewer government workers, will be in the T$16-20 million
range (about USD 8-10 million). The government hopes to fund
the redundancy package and deficit through fiscal restraint,
selling off government assets such as its share in Westpac
Bank of Tonga, and help from donors. The Prime Minister, who
politically sees merit in easing monetary policy and
softening the austerity program, has asked for a grant from
China to balance the budget and a soft loan to help
repurchase Tonga's electricity utility from the Crown Prince.
The Chinese Ambassador to Tonga warned that Tonga should not
be overly optimistic about the availability of funds from
China. It remains an open question how potential loans and
grants from China would affect the ADB economic reform
program in Tonga, and whether they would be good for Tonga's
economy in the long run. "Development Partners" intend to
meet with the Government of Tonga in June or July. End
summary.

Tonga's Plan to Get Its Fiscal House in Order
--------------


2. (C) Tonga Finance Minister Siosiua 'Utoikamanu told us
May 15 that Tonga will be able to meet its wage obligations
from last year's strike settlement and balance its 2006/7
budget by reducing the government work force, cutting
spending and selling off assets. The key step is
implementing a redundancy package that will result in the
voluntary separation of up to 1000 government workers, more
than one quarter of the work force. As of May 15, 622
employees had expressed interest in taking advantage of the
separation package. (Note: on May 16, 'Utoikamanu told
Australian and New Zealand officials that he had informally
heard the number had increased to the 700-800 range.) The
redundancy plan targets service employees such as clerical

workers and drivers, and discourages applications from
teachers and other workers in short supply. 'Utoikamanu said
older civil servants thinking of early retirement and younger
employees who had decided to emigrate were two of the main
groups of workers likely to take advantage of the plan.


3. (C) The redundancy package will be expensive, said
'Utoikamanu, and some valuable workers will be lost. (We
hear several senior and capable civil servants in the
Ministry of Finance are among those planning to leave.)
Nevertheless, reducing the size of the civil service is
imperative for the long-term financial health of the Kingdom.
Redundancy packages for 800 workers, he said, will cost
about T$34 million (USD 17 million). Some of the costs will
be financed through an existing Asian Development Bank loan
facility that Tonga has only partially tapped up until now,
with most of the remainder coming from the sale of the
government's 40% stake in Westpac Bank of Tonga. 'Utoikamanu
said he is reluctant to part with Westpac, easily the
government's most profitable investment, but has little
choice. Discussions with Westpac management about selling
half of Tonga's stake in the bank are ongoing, he said. The
Government plans to offer the remaining half of its shares to
private Tongan citizens. After implementing the redundancy
package, Tonga will have a budget shortfall in 2006/7 of
T$16-20 million, 11-13% of the budget. This shortfall will
be covered by a mix of spending cuts, money remaining from
the Westpac sale and, Tonga hopes, external assistance.


4. (C) When the budget is stabilized, 'Utoikamanu hopes to
reverse some cuts in services. Road maintenance has been
badly neglected, he said; police vehicles frequently have no
fuel. The government cannot let this situation continue.
'Utoikamanu reaffirmed his commitment to Tonga's unpopular
15% consumption tax, which in 2005 replaced a sales tax and a
hodgepodge of import taxes. Going back to the import taxes,
he said, is not an option given Tonga's WTO accession
commitments. Moreover, those taxes were subject to numerous

SUVA 00000222 002 OF 003


special interest exemptions (read: Royal Family business
interests) and were easily avoided by those who knew how to
manipulate the system or who to bribe.

Western Donors Take Wait and See Attitude,
So PM Turns to China
--------------


5. (C) 'Utoikamanu understands why western donors have not
rushed in to bail Tonga out of a budget crisis of its own
making. Donors, he said, are waiting for greater clarity
about how political and economic reform in Tonga will play
out. This is a reasonable attitude, he said, because
economic reform won't work if the right political governance
structures are not in place. "Unfortunately," he continued,
"I cannot wait. I need to move forward on a budget package
now." 'Utoikamanu noted that PM Sevele asked China for T$12
million in budget support when he met Premier Wen during the
China-Pacific Island Countries Economic Development and
Cooperation Forum in Fiji in April (refs A and B).


6. (C) Sevele also asked Wen for a T$60 million (US$30
million) soft loan that Tonga would use to repurchase the
former national electric utility (now Shoreline) from the
Crown Prince. 'Utoikamanu insisted the latter is only a
fall-back option. Tonga still hopes to find a foreign
investor who could purchase Shoreline directly from the Crown
Prince's investment group. 'Utoikamanu acknowledged that the
government needs to accelerate steps to limit Royal Family
involvement in the economy, noting Royal involvement in
aviation, telecommunications, power generation, etc.
Unfortunately, the government doesn't have the money to buy
back most assets, and eager investors are few and far between.


7. (C) China's Ambassador to Tonga, Hu Yeshun, confirmed to
us that Tonga made the two requests for assistance. Beijing
has not yet given Tonga an answer, he said. Hu warned that
Tonga should not be overly optimistic. Up to now, he said,
all of Beijing's assistance to Tonga has been via RMB-funded
projects, such as the Tonga high school and renovation of the
Dateline Hotel. Hu questioned whether Beijing would be
willing to approve hard-currency grants or soft loans,
although it is possible Tonga could tap into the planned RMB
3 billion loan facility Wen announced during the Fiji
conference (ref B). (Note: A frequently heard rumor in
Tonga is that a Chinese entity gave the Crown Prince a
personal US$30 million soft loan a few years ago. This loan
was reportedly related to the Shoreline investment.)

A Development Partners Meeting Planned
for June or July
--------------


8. (C) At an informal Development Partners Meeting
regarding Tonga held via video conference May 16,
representatives from the United States, Australia, New
Zealand, the EU, Asian Development Bank (ADB),IMF and the
World Bank agreed that future donor assistance should be
predicated on the government's acceptance and adoption of the
strategic development plan drawn up with the help of the ADB,
as well as progress on political reforms. Participants
agreed that Development Partners should meet again soon
face-to-face to review Tonga's economic and political
environment and consider next steps. The meeting is expected
to take place in Nuku'alofa in late June or July. An Embassy
representative will attend.

PM and Finance Minister at Odds Over Economic Policy?
-------------- --------------


9. (C) Participants in the meeting expressed concern about
Prime Minister Sevele's purported attempts to influence
monetary policy set by the Reserve Bank of Tonga (RBT). IMF
officials later told us that Sevele put pressure on the Bank
to lower its statutory reserves level, apparently at the
request of the commercial banks. 'Utoikamanu reportedly had
to convince the RBT Governor not to resign over the PM's
interference. 'Utoikamanu has inquired about getting a loan
from the ADB to strengthen the RBT, thinking loan
conditionalities could force politicians to accept the Bank's
independence. Donors suggested instead that technical
assistance from the IMF would be more appropriate.

SUVA 00000222 003 OF 003




10. (C) As noted Ref C, PM Sevele and FM 'Utoikamanu have
different approaches to economic policy. According to New
Zealand High Commissioner to Tonga Michael McBryde, Sevele is
far more focused on social issues than the Finance Minister,
and is therefore reluctant to cut services or implement
radical reforms which could negatively impact the poor. Some
donors suggest Sevele is primarily focused on facilitating
business, given his own supermarket interests. McBryde
insists, however, that Sevele and 'Utoikamanu have learned to
work together. Tonga, he said, is moving forward on economic
reform, though at a pace slower than 'Utoikamanu would have
liked.

The Public Has Its Say
--------------


11. (C) The East-West Center's Sitiveni Halapua, Deputy
Chairman of the National Committee for Political Reform, told
us economic issues are raised at every community meeting the
Committee holds. The most vociferous comments are usually
directed at the recently-instituted 15% consumption tax.
Halapua said that while Sevele appears to understand the
public's concerns about the difficult economy, 'Utoikamanu is
widely considered detached and tone-deaf to complaints.
'Utoikamanu needs to do a better job explaining his policies
to the public, said Halapua. Halapua believes the government
will eventually have to lower or otherwise modify the
consumption tax to assuage public opinion.

Comment - Plenty of Economic Challenges Ahead
--------------


12. (C) The Government of Tonga appears to have done a
reasonably good job maintaining a stable economy since the
strike settlement. Despite the higher wages and increased
budget deficits that resulted from the wage deal, inflation
has remained under control and the Tonga pa'anga has kept
most of its strength. Inflation in March 2006 was 7%, up
from 5% in February, but down from 12% in February 2005. The
pa'anga has depreciated about 3% from pre-strike levels.
This performance contrasts with repeated warnings from the
ADB that the wage settlement could spark inflation rates of
20% or higher.


13. (C) Tonga is not close to being out of the woods,
however. Civil service wages, which increased 46% in the
2005/2006 budgetary year, will increase a further 42% in
2006/7 as the second tranche of the wage agreement is
implemented. Tight fiscal and monetary policy, along with
implementation of 'Utoikamanu's reform package, will be
deeply unpopular but appear to be economic necessities.
Steps needed to limit the Royal Family's role in the economy
are unlikely to take place until far-reaching political
reforms are put into effect.


14. (C) Tonga's effort to obtain Chinese financial
assistance has an interesting ADB twist. We are told China
is the ADB's biggest borrower. If China should provide a
loan or grant to help Tonga climb out of its self-imposed
fiscal mess, that could, in effect, work to frustrate Western
donor, including ADB, efforts to press Tonga to implement
important political and economic development goals.
Bail-outs from China or other donors might ease Tonga's
economic pain, but would do little to solve the economic
problems created by the strike settlement or resolve the
inherent conflicts caused by pervasive Royal involvement in
the economy. Easing the economic pain without meaningful
restructuring could also reduce the impetus for real
political reform. It remains to be seen whether PM Sevele
will be willing to persevere with the difficult and often
unpopular actions needed to keep Tonga's economy on a solid
footing.





DINGER