Political sketch
Formerly the Friendly Islands. Independent from the United Kingdom on 4 June 1970.
Tonga was settled by 1000 B.C. by Austronesian-speaking peoples. It developed a society whose political domination extended as far as Hawaii in the 1200s A.D. The first European to visit Tonga was the Dutch navigator Jakob Le Maire, who sighted this island of Tafahi (formerly Boscawen) in 1616. In 1773 the English captain James Cook named the islands the Friendly Islands and began more regular contact by Europeans. Chief Taufa'ahau, later King George Tupou I, came to rule the entire island group in the mid 1800s. He established a limited monarchy based on a code of laws in 1862, and promulgated a constitution in 1875. In separate treaties, Germany (1876), Great Britain (1879), and the United States (1888) recognized Tonga's independence. In 1900 King George Tupou II negotiated with the United Kingdom a treaty of friendship. A 1905 amendment to the treaty gave the British consul veto power over Tongan decisions in foreign affairs and thus made Tonga a British protectorate. The protectorate was dissolved on 4 June 1970, when Tonga achieved independence. Tonga is the only Polynesian kingdom that has survived from the pre-European period. It is a constitutional monarchy. The cabinet is appointed by the king, but is required to include a minority of elected members from the Legislative Assembly. The economy is based mainly on agriculture.
Wars since 1500
None.
Convertibility
The sterling area:
On 2 August 1914, soon after the First World War began, the United Kingdom issued a proclamation imposing a one-month moratorium of payment for bills of exchange accepted before 4 August; an act of 3 August 1914 gave legislative sanction to the proclamation. The moratorium was subsequently extended for a month and ended on 4 November 1914. Legally the pound sterling remained convertible into gold and could be exported, but the risk to shipping from German submarines made the cost of shipment prohibitive, so the United Kingdom was in effect off the gold standard. The British government refused to include private shipments of gold in its war-risk insurance scheme. After the war, the export of gold was prohibited from 1 April 1919 under regulations that were given statutory form in 1920. On 28 April 1925 the government announced that the act would not be renewed when it expired on 31 December 1925. On 13 May 1925 the United Kingdom resumed the gold standard.
The United Kingdom abandoned the gold standard on 21 September 1931. The currencies of British colonies were almost all linked to the pound sterling through currency boards; being on a sterling-exchange standard rather than a gold-exchange standard, they followed the pound sterling off gold. Over the next few years, some former British colonies (Australia, New Zealand, South Africa) and other countries that had important trade links with the United Kingdom switched from gold to the pound sterling as their official or actual anchor. The result was termed the sterling area. The United Kingdom imposed exchange controls on 4 September 1939, the day after entering the Second World War. Most countries that were not current or former British colonies soon left the sterling area. Among the remaining countries, both current- and capital-account transactions were free of restrictions within the sterling area, but were restricted in dealings with outside countries. After the Second World War, the United Kingdom returned to the gold standard under the Bretton Woods system. It removed exchange controls on 15 August 1947, but reimposed them on 20 August 1947 after suffering a large loss of foreign reserves. Sterling had a dual exchange rate from 1961 until the United Kingdom abolished exchange controls. The sterling area remained in existence because sterling was not fully convertible. It began to crumble after the United Kingdom again abandoned the gold standard on 23 June 1972. By January 1973 the sterling area had shrunk to the British Isles and a few small British colonies; even Hong Kong had abandoned sterling as its anchor currency. The United Kingdom abolished exchange controls on 24 October 1979, ending the sterling area.
Other
Defaults on or restructurings of debt to the private sector (mainly from Purcell and Kaufman 1993 and Standard & Poor's 2004): None.
Banking crises (data since 1970s mainly from Caprio and Klingebiel 1999 and Frydl 1999): None.
Frankel and Rose (1996) list of currency crashes: Country not listed.
No exchange rate data in Reinhart and Rogoff (2003).
References
Primary sources:
--Laws and decrees:
Great Britain (United Kingdom). Gazette. 1665-present. Oxford Gazette (1996-1666); London Gazette (1666-present). Oxford (1665-1666); London (1666-present): His/Her Majesty's Stationery Office from 1903. Online at <http://www.gazettes.online.co.uk>; as of September 2005, gazettes since 1900 are available.
Tonga. Gazette. 1879-present. Tonga Government Gazette. Nuku'alofa: Government Printer.
--Publications of monetary authorities:
National Reserve Bank of Tonga. Annual report. 1989/1990-present. Annual Report. Nuka'alofa: National Reserve Bank of Tonga.
National Reserve Bank of Tonga. Bulletin. 1989/1990-present. Quarterly Bulletin. Nuka'alofa: National Reserve Bank of Tonga.
National Reserve Bank of Tonga. Occasional papers. Various dates (irregular). Occasional Papers. Nuka'alofa: National Reserve Bank of Tonga.
--Web site of the current monetary authority (viewed January 2005):
<http://www.reservebank.to>
--Other publications or Web sites:
Great Britain (United Kingdom). Report on Tonga. 1923/1924-1938, 1946-1970. Colonial Office, Tongan Isands Protectorate, Report for … (1923/1924-1930); Colonial Office, Annual Report on the Social and Economic Progress of the People of the Tongan Islands Protectorate (1931-1938); Colonial Office, Annual Report on Tonga for the Year … (1946-1965) Commonwealth Office, Annual Report on Tonga for the Year … (1966-1967); Foreign and Commonwealth Office, Annual Report on Tonga for the Year … (1968-1970). London: His / Her Majesty's Stationery Office. (This series was called Colonial Reports until the Second World War and Colonial Annual Reports afterwards; it was suspended during the war for most colonies.)
Main secondary sources:
Baker, John R. 1977. "Contemporary Tonga: An Economic Survey." In Neil Rutherford, editor, Friendly Islands: A History of Tonga: 228-46. Melbourne: Oxford University Press.
IMF ARER. 1950-present. International Monetary Fund. Annual Report on Exchange Restrictions (1950-1978), Annual Report on Exchange Arrangements and Exchange Restrictions (1979-1988), Exchange Arrangements and Exchange Restrictions: Annual Report (1989-present). Washington: International Monetary Fund. (Contains information on IMF member countries and some of their dependencies.)
Pick, Albert. 1996. Standard Catalog of World Paper Money: Volume 2--General Issues to 1960, 8th edition. Iola, Wisconsin: Krause Publications.
Skully, Michael T. 1987. Financial Institutions and Markets in the South Pacific: A Study of New Caledonia, Solomon Islands, Tonga, Vanuatu, and Western Samoa. New York: St. Martin's Press.
Monetary authorities: Tonga
| Dates | Type | Name | Source | Remarks |
| 1921
-1936 |
government issue | Government of Tonga Treasury (headquarters Nuku'alofa, Tongatapu, Tonga) | Pick (1996: 987) | The government issued notes bearing a starting date of 1921. In a note catalog, a £5 note of the Tonga Trading Company Limited is listed for 1897, but I have found no further information. |
| 1936
-30 June 1989 |
currency board | Tonga, Board of Commissioners of Currency (headquarters Nuku'alofa, Tongatapu, Tonga) | Tonga, Treasury Notes Act, 1935, cited in Great Britain, report on Tonga 1950 and 1951: 11 | A currency board replaced the government note issue, as was the tendency in many British colonies in the early 1900s. (Skully 1987: 163 says the minimum requirement for foreign reserves was 75%, not 100% as in an orthodox currency board. Baker 1977: 241 says foreign reserves were 100%, but does not discuss whether the legal requirement was in fact less.) A currency board was considered more solid because of the formal rules setting minimum foreign reserves of typically 100% of the monetary base. The first currency board notes were dated 19 May 1939, but the currency board seems to have taken over responsibility for existing Tonga government notes in 1936. Tonga issued its first coins in 1962 (collector's issues); before then it used Australian coins. The first bank was apparently the Bank of Tonga (headquarters Nuku'alofa, Tongatapu, Tonga), in Nuku'alofa, Tongatapu, on 1 July 1974. (At least, it was the only bank still in existence when Tonga later established a central bank.) |
| 1 July 1989
-present (2005) |
central bank | National Reserve Bank of Tonga or Panagike Pule Fakafona 'o Tonga (headquarters Nuku'alofa, Tongatapu, Tonga) | Tonga, National Reserve Bank of Tonga Act, cap. 102, 29 December 1988; Minister of Finance, decision of 21 April 1989; both cited in National Reserve Bank of Tonga annual report, 30 June 1990: 12 | Replaced the currency board with a central bank to have greater room for discretionary power in monetary policy. The second bank was Australia and New Zealand Bank (ANZ) (headquarters Melbourne, Australia), in Nuku'alofa, Tongatapu, in 1993. Tonga joined the IMF on 13 September 1985. |
Exchange rate arrangements: Tonga
| Dates | Official arrangement | Source | Unofficial arrangement, if different | Remarks |
| 1921
-1936 |
pegged; local £1 = UK£1 | Franz Pick and Sédillot (1971: 455); Albert Pick (1996: 987) | The Tonga pound was named after the pound sterling. | |
| 1936
-13 February 1966 |
fixed; Tonga £1 = Australian £1, or Tonga £1.25 = UK£1 | Tonga, Treasury Notes Act 1935, cited in Great Britain, report on Tonga 1950 and 1951: 11; Pick and Sédillot (1971: 455) | Devalued against the pound sterling and in effect switched to the Australian pound as the anchor currency during a period of depression. | |
| 14 February 1966
-30 June 1989 |
fixed; 1 Tonga pa'anga = Australian $1 | Pick and Sédillot (1971: 365) | Introduced a decimalized currency at 2 Tonga pa'anga = Tonga £1 on the same day Australia introduced a decimal currency. "Pa'anga" means money in the local language; the currency was not called the dollar because "dollar" sounds close to "tola," which in the local language means "pig's snout." As of 1985, when IMF coverage began, IMF ARER (1986: 500) noted that the Bank of Tonga, the only commercial bank, maintained a spread of approximately 2% between its buying and selling rates. For export receipts, the bank bought foreign exchange at the midpoint rate upon submission of evidence that the foreign exchange was derived from export sales. | |
| 1 July 1989
-10 February 1991 |
pegged; 1 Tonga pa'anga = Australian $1 | Tonga, National Reserve Bank of Tonga Act, cap. 102, 29 December 1988; Minister of Finance, decision of 21 April 1989; both cited in National Reserve Bank of Tonga annual report, 30 June 1990: 12 | Replaced a currency board with a central bank, so the exchange rate changed from fixed to pegged. As of 1989, IMF ARER (1990: 490) ceases to mention purchases by the Bank of Tonga at the midpoint rate. As of 1994, IMF ARER (1995: 492) ceases to mention the Bank of Tonga by name and refers instead to "commercial banks." The central banks's spread at the end of 1994 was only abot 0.2%. As of 1996, IMF ARER (1997: 851) ceases to mention the 2% spread, so apparently it narrowed. | |
| 11 February 1991
-29 June? 2001 |
peg to rigid? basket (IMF: conventional peg [to basket] from 1998, when the category began) | National Bank of Tonga, decision of February 1991 with approval of Privy Council, cited in National Reserve Bank of Tonga annual report, 30 June 1991: 7 | Switched the anchor to a basket of currencies, whose weights were related to the shares of some major currencies in Tonga's international transactions. These currencies were the Australian, New Zealand, and U.S. dollars (IMF ARER 1956: 492). The US dollar became the intervention currency. Tonga imposed a tax of 0.7% on foreign-exchange transactions on 1 July 1992 and abolished it on 17 November 1992 (IMF ARER 1993: 513). | |
| 30 June? 2001
-present (2005) |
band to rigid basket (IMF: conventional peg [to basket] from 1998, when the category began, reclassified as pegged within horizontal bands 30 June 2001) | National Reserve Bank of Tonga bulletin, September 2001: 6 (hints, nothing explicit); IMF ARER (2002: 949) | The central bank set the exchange rate daily within a band of +/-5%. This is the first year for which IMF ARER notes the existence of a band, and it is the rationale for the change in classification. Central bank reports cease mentioning a basket after 1997 (the last mention being National Reserve Bank of Tonga annual report, 30 June 1997: 16). The Japanese yen became part of the basket in 2000 (IMF ARER 2001: 930). The composition of the basket is first mentioned as of 2002: Australian dollar, 19%; Japanese yen, 6%; New Zealand dollar, 23%; US dollar, 52% (IMF ARER 2003: 947). Those were still the weights at the end of 2004 (IMF ARER 2005: 964). |