Statement by Nigel Ray, Executive Director for Nauru and Anna Park, Advisor to Executive Director January 22, 2020

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

Nauru is the world’s smallest island nation with a population of around 12,500, on an island of 21 square km, located 40 km south of the equator, in the Pacific Ocean. The nearest neighbor is 300 km away. As a result, lack of scale and remoteness pose challenges for economic growth and development. Nauru’s sources of revenue are narrow and uncertain. Phosphate mining activity has underpinned incomes since the early 1900s but is reaching the end of its economic life, while fees from fishing licenses can be volatile. The island’s central plateau has been heavily mined, and the population is concentrated around the narrow coastal fringe, increasing vulnerability to climate change. Limited land availability contributes to a reliance on imported food and high incidence of non-communicable diseases.

Despite these challenges, progress is being made with the support of development partners. The establishment of a new Nauru Trust Fund is supporting fiscal sustainability by saving windfall income and investing it in a trust that will generate revenue to support future generations. Reforms at the Nauru Utility Corporation have improved the reliability of water and electricity provision. Important infrastructure projects, like the construction of a new port and undersea cable project, will encourage increased trade and economic activity. Banking services were re-established in 2015 (after almost 15 years without a functioning bank), and almost all adults now have access to a bank account. Improving school attendance and education and health outcomes is a priority for the government.

The authorities agree with staff’s analysis and near-term outlook, and with the broad thrust of the advice. Nauru joined the IMF in 2016 and this is its second Article IV consultation. The authorities value the advice and technical assistance received from the Fund and look forward to further constructive engagement in future. They also welcome the coordination between IMF staff and the Asian Development Bank, who were invited to join relevant meetings, facilitating knowledge sharing and making best use of the authorities’ time.

Economic diversification and sustainable development

The authorities agree that broadening Nauru’s sources of income is a key policy priority. But lack of scale, remoteness, limited arable land, the physical environment and infrastructure and capacity constraints pose challenges for economic diversification. Continued progress in this area requires ongoing support and technical assistance from donors and partners. The authorities would welcome further practical policy advice from the Fund on potential avenues for diversification. The authorities agree that private sector development may have a role to play and are open to reassessing measures that act as barriers to private sector growth. Nauru faces challenges associated with climate change and, with the support of development partners, work is underway on mitigation and adaptation measures.

Prudent and sustainable fiscal management

The authorities welcome the IMF’s analysis of the fiscal position and will carefully consider the advice to ensure sustainability in the next budget. They understand that if revenues were to fall sharply, there would be a need to adjust spending. Strengthening revenues is also a priority. The authorities agree that any new revenue measures would need to be carefully designed and communicated in a context where most Nauruan citizens have not previously had to pay taxes. Strengthening revenue administration and compliance will also play a role, and ongoing IMF technical assistance in this area is appreciated.

The authorities are committed to maintaining fiscal discipline while making necessary investments in productive and social sectors. Under Nauru’s fiscal framework, the budget balance must be positive and sufficiently large to meet the annual Trust Fund contribution. The authorities are also committed to maintaining a cash buffer for liquidity management purposes. The authorities will carefully consider staff advice to limit use of supplementary budgets but note that some flexibility in the framework is appropriate to respond to large and unpredictable variations, given the narrow revenue base. On debt management, the authorities are mindful of the need to take steps towards ensuring future debt sustainability by reconciling and resolving legacy debts.

Enhancing governance

The authorities are committed to improving public financial management to enhance fiscal discipline and improve the quality of public spending. The online publication of fiscal documents has been an important step forward, and work is underway to improve the quality of fiscal data. The authorities agree that some state-owned enterprises could pose fiscal risks and plan to progress public enterprise reforms and establish a new SOE monitoring unit. The authorities are also working to strengthen Nauru’s AML/CFT framework; preparations are underway for the 2022 APG-FATF Mutual Evaluation.