The International Monetary Fund says Tonga is battling a low development trap, which is aggravated by its smallness and remoteness.
The agency, which has just sent a team to the Kingdom, says it can break out of this because of its vast marine resources, tourism potential and its well-educated, English speaking population.
But it says deregulation reforms are needed to attract private investment.
It says the economy is only likely to grow about point eight of one percent this year after an average of 3 percent over the past 3 years, which had been due to infrastructure projects that have now ended.
The IMF says there are significant external risks to the economy - from Europe and the United States which is Tonga's largest source of remittances.
It says high external indebtedness remains an important vulnerability and it backs the Tonga government's No New Loan Policy.
