Tonga: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Tonga

International Monetary Fund
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KEY ISSUES Context: Tonga’s economy is rebounding, partially owing to a recovery in agricultural exports. The outlook for tourism is also improving. The reconstruction from a recent cyclone is expected to lead to both a temporary boost to growth and additional financing needs. Risks to the inflation outlook and the external position are low. Fiscal Policy: The projected fiscal cost relating to the cyclone will be largely met by confirmed funding mainly from donor agencies. In the near term, the authorities should focus on reconstruction activities, while a medium-term fiscal strategy should aim at gradually stabilizing and then reducing the debt-to-GDP ratio, in order to improve Tonga’s moderate risk of debt distress. This will require careful execution of investments related to the 2019 South Pacific Games. Monetary Policy: The deleveraging cycle of the Tongan banks appears to be ending, and thus National Reserve Bank of Tonga should prepare to gradually withdraw liquidity and tighten monetary conditions once the current signs of a recovery of credit growth are confirmed. The authorities plan to lower the cost of credit through supportive credit policies, including by commercializing the Tonga Development Bank. The successful implementation of such plan requires sound safeguards, including a robust governance structure and firm risk management and accountability frameworks. Structural Policy: Structural reforms to facilitate the functioning of credit markets need to be implemented with renewed vigor. The authorities’ intention to gradually phase out existing ad hoc tax incentives is well placed. The promotion of foreign direct investments should focus on business-enabling structural reforms, while the use of tax incentives should be minimized and well targeted.
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Publisher
International Monetary Fund
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Published on
Aug 7, 2014
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Pages
67
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ISBN
9781498356473
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Language
English
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Genres
Business & Economics / International / Economics
Business & Economics / Money & Monetary Policy
Political Science / Public Policy / Economic Policy
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In 1971, President Nixon imposed national price controls and took the United States off the gold standard, an extreme measure intended to end an ongoing currency war that had destroyed faith in the U.S. dollar. Today we are engaged in a new currency war, and this time the consequences will be far worse than those that confronted Nixon.

 

Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries' stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis worse than the panic of 2008.

Currency wars have happened before-twice in the last century alone-and they always end badly. Time and again, paper currencies have collapsed, assets have been frozen, gold has been confiscated, and capital controls have been imposed. And the next crash is overdue. Recent headlines about the debasement of the dollar, bailouts in Greece and Ireland, and Chinese currency manipulation are all indicators of the growing conflict.

As James Rickards argues in Currency Wars, this is more than just a concern for economists and investors. The United States is facing serious threats to its national security, from clandestine gold purchases by China to the hidden agendas of sovereign wealth funds. Greater than any single threat is the very real danger of the collapse of the dollar itself.

Baffling to many observers is the rank failure of economists to foresee or prevent the economic catastrophes of recent years. Not only have their theories failed to prevent calamity, they are making the currency wars worse. The U. S. Federal Reserve has engaged in the greatest gamble in the history of finance, a sustained effort to stimulate the economy by printing money on a trillion-dollar scale. Its solutions present hidden new dangers while resolving none of the current dilemmas.

While the outcome of the new currency war is not yet certain, some version of the worst-case scenario is almost inevitable if U.S. and world economic leaders fail to learn from the mistakes of their predecessors. Rickards untangles the web of failed paradigms, wishful thinking, and arrogance driving current public policy and points the way toward a more informed and effective course of action.




From the Hardcover edition.
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