Nauru

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Nauru’s economy is in a dismal state and the country could soon be in a crisis, the Asian Development Bank (ADB) said in its annual outlook on countries in the region.

The short-term cash inflow from Austrialia, which paid the country to house asylum-seekers has just put off the impending crisis for a short time. The ADB noted government’s lack of financial transparency and said the true situation is difficult to assess.

‘While the economy was boosted toward the end of 2001 by external financial support, the medium-term outlook is weak, given the adverse effect of declining phosphate reserves and many years of poor fiscal management,’ the ADB stated. ‘The provision of basic public services is regularly disrupted and is at serious risk over the medium term.’

Nauru’s economy is dominated by the public sector. The government also owns the country’s main on-island income-earning activity, a phosphate mining operation. The private sector is very small and consists largely of trade stores, an offshore banking sector, and some fishing operations. Phosphate output dropped off sharply in the early 1990s and is now at around a quarter of the levels seen in the late 1980s. This decline has led to economic activity becoming increasingly dependent on the government wages bill, compensation and royalty payments to landowners, and other initiatives as the main stimulus to demand, and this trend continued over 2001.

The state of government finances is difficult to assess. But it is clear that the government faced serious cash constraints in 2001. This was due mainly to the suspension of phosphate exports in the second half of the year caused by the blockade of a processing plant as landowners sought additional compensation for the land occupied by the plant.

By early 2002, government payrolls and payments to several creditors were delayed. The government continued to rely heavily on the practically insolvent Bank of Nauru to help fund its budget deficits and royalty payments. As Nauru uses the Australian dollar as its currency, inflation often follows the Australian inflation rate. However, the significant transport element (due to distances from major markets) and a lagged effect of oil price rises led to higher inflation in Nauru than Australia during the year.

In the second half of 2001, the government of Nauru agreed with the government of Australia to house and process over 1,000 asylum-seekers transferred from Australian waters.

In return, Australia has agreed to fund a range of Nauru’s equipment, material, and services needs as well as all costs of caring for the asylum-seekers.

These payments will both enhance government service delivery and provide an injection of demand into the economy that will help support economic activity in 2002 and, potentially, beyond. In total, Australia’s net contribution to Nauru’s economy is expected to be substantial.

A pressing problem for the economy is the frequent disruptions of supplies of food, fuel, equipment, and materials. Air Nauru, the only airline servicing the country, faced repeated interruptions in 2001 due to a shortage of funds for lease payments, fuel, maintenance, and other running costs. Prior to Australian support, fuel supplies on the island had frequently been exhausted before the next shipment arrived.

Public services, notably power, telecommunications, water, and health care also faced increasing problems over the year.

POLICY DEVELOPMENTS

It is expected that government revenues from phosphate mining will continue to weaken over the medium term: primary phosphate resources are largely exhausted and difficult to access; much of the mining operation’s equipment is in a poor state; there is gross overstaffing; and plans to mine secondary deposits are not well developed. This decline in revenues will place considerable pres-sure on the budget.

Over time, the government has faced fewer options to fund its continuing deficits. In the past, loans were acquired from official bilateral sources, overseas corporations, or the local bank, and deficits were also funded by draw-downs from the Nauru Phosphate Royalties Trust (NPRT). However, the ability to secure new deficit funding is seriously impaired by the absence of adequate collateral, local liquidity, or future revenue sources. For fiscal year 2002 (ending 30 June 2002), a deficit of A$40 million A$50 million is budgeted, but it is unclear how this can be fully funded.

An ADB-sponsored reform program that began in 1998 was intended to promote an orderly adjustment process through fiscal and financial reforms and a one-third reduction in the civil service headcount to around 1,200. However, the retrenchment program was largely reversed in early 2000 with the appointment of up to 500 additional employees to the mining operation.

At the same time, the net worth of the NPRT is believed to have seriously eroded due to the financing of continued large government deficits and poor investment of the Trust’s assets.

Improved fiscal discipline would require streamlining the civil service, reducing subsidies to government services, and adopting a more appropriate tax regime (few taxes are currently levied in Nauru). The government also needs to consider further reform to its offshore banking sector.

OUTLOOK FOR 2002–2003

An important step toward bottom-up reform was made in 1999 through a National Economic Summit; however, the proceedings of the Summit were not made public. There is a need to improve transparency. The true debt position of the government and its instrumentality, the net worth of the NPRT, and the reasons for the substantial decline in its value are not fully known. The economy’s eventual adjustment will be made more difficult by its limited human resources base and, as the funds to employ such labor diminish, Nauruan workers will have to seek employment in the private sector. However, their weak education background limits their ability to undertake technical tasks, or to migrate as economic conditions deteriorate. Economic adjustment is likely to exacerbate existing social problems. In the late 1990s, the unemployment rate of those aged 15–19 was esti-mated to be 33% for males and 52% for females.

This situation will worsen as employment opportunities in the public sector and the very small private sector decline; replacement jobs will be very difficult to generate. There is a high incidence of gout and diabetes, because of poor dietary habits, and the incidence of these and other health problems can be expected to rise as incomes decline and funding tightens for health care and other public services. There is a very real risk of crisis over the medium term if there is a substantial shortage of public funds.