2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Nauru

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Nauru

On January 22, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Nauru.

Nauru is at a point of transition with a decline in phosphate mining and the activity associated with the Regional Processing Centre (RPC) for asylum seekers. New sources of economic growth and income are needed to support Nauru’s development agenda. Growth picked up to 5.7 percent in FY2018 boosted by RPC related activity, fisheries, and preparations for the Pacific Island Forum. However, growth slowed in FY2019. Despite improved economic performance in recent years, Nauru continues to face challenges in sustaining growth and ensuring fiscal sustainability due to its limited sources of growth and income. The country is also vulnerable to climate change, its antiquated infrastructure hampers trade and growth, and its health indicators are below those of peers due to high incidence of non-communicable diseases. The medium-term outlook depends on the level of RPC activity in the future, fishing revenues, and completion of infrastructure projects. A scaling down of phosphate mining and activities associated with the RPC will reduce budget revenues. With limited access to borrowing, fiscal spending would have to adjust accordingly. Inflation is projected to remain low, in line with the slowdown in the economy, inflation in Australia, and low commodity prices.

Executive Board Assessment2

Executive Directors welcomed the improved economic performance in recent years, but noted that significant challenges remain, including volatile revenue sources, capacity and infrastructure constraints, and climate change. To help address these challenges, Directors urged the authorities to press ahead with reforms to preserve fiscal and debt sustainability, foster economic diversification, and strengthen governance and transparency.

Directors agreed that Nauru’s medium-term fiscal outlook is vulnerable to the scaling down of the operations of the Australian Regional Processing Center (RPC) for asylum seekers, entailing a substantial decline in government revenue. They stressed the importance of a timely adjustment of fiscal plans to avoid breaching the fiscal anchor, meet the mandatory Trust Fund contributions, and prevent further accumulation of debt. Directors highlighted that maintaining adequate fiscal buffers would be critical to ensure fiscal liquidity and sustainability, and to allow flexibility in responding to shocks.

Directors urged sustained fiscal reforms, including continued tax and public financial reforms to support fiscal adjustment and help control spending. They underscored the need for continued improvement in public debt management to resolve legacy debt and contain debt accumulation, including within state-owned enterprises (SOEs). Directors urged the authorities to limit the use of supplementary budgets and to set aside windfall revenues for appropriation in the normal budget cycle to boost resources for carefully planned investment spending. They welcomed the new Public Enterprises Act, including establishment of the SOE monitoring unit.

Directors noted that Nauru faces long-term climate change challenges and emphasized the importance of a medium-term fiscal framework that enhances resilience to climate change. They welcomed recent measures in adaptation and mitigation, including the new seaport that will reduce Nauru’s carbon footprint. They encouraged the authorities to fully cost adaptation plans and incorporate the projects into a multi-year budget plan.

Directors agreed that prospects for inclusive growth and private sector development can be lifted through improvements in the business environment. They welcomed progress in financial inclusion and called for further strengthening of the anti-money laundering/combating the financing of terrorism (AML/CFT) framework. Directors urged the authorities to seek to improve the quality of health and educational outcomes, and continue to combat

non-communicable diseases. Directors strongly encouraged the authorities to improve the quality and timeliness of macroeconomic data for surveillance.

Table 1.

Nauru: Selected Social and Economic Indicators, FY2015–21 1/

article image
Sources: Nauru authorities and IMF staff estimates and projections.

Nauru uses the Australian dollar as the legal tender, and the fiscal year ends in June.

The social indicators are taken from United Nations Development Program and Secretariat of the Pacific Community.

Including the defaulted Yen bonds.

Including the estimated government liability related to Bank of Nauru’s liquidation.

1

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.