Tongan warning

AN interesting piece of financial news is to be found in the recently released annual report of the National Reserve Bank of Tonga (NRBT).

In the third quarter of 1989, the central bank advised the country’s commercial trading bank, the Bank of Tonga (BoT), that it was concerned about the rapid expansion of domestic lending. The BoT was asked to restore a more prudent relationship between outstanding loans and liabilities, primarily deposits.

The NRBT advised the bank to carry this out selectively, so as to minimise any adverse impact on the producing and exporting sectors of the economy it was not these sectors which had been the recipients of the BoT’s additional lend ing; much of the additional money had gone by way of personal loans to finance housing, vehicles and consumer durables.

When the NRBT was established in 1989, it faced two immediate problems: the tightening liquidity squeeze at the BoT, and Tonga’s falling overseas re serves. “The origin of both problems could be traced to a common cause, the over rapid expansion of domestic lending by the BoT during 1987-88 and 1888, 89,” the report said. During these two years, outstanding BoT loans grew by 20 per cent and 43 per cent respectively while deposit growth was stagnant.

External reserves fell from their peak level of T 540.6 million (U 5531.61 million) in December 1987 to $33.9 million by June 1989. In the first quarter of 1990 the NRBT and BoT together introduced a scheme to provide tempor ary liquidity for pre and post-export lending. The scheme will only be im plemented in times of tight liquidity in the banking system. Previously, the central bank had stepped in to provide temporary liquidity to the Tonga Devel opment Bank to enable freight to be paid on large squash shipments to Japan at the end of 1989.