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Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia

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Nauru

Recent Trends and Prospects

GDP growth in 2000 was minimal. It expanded moderately in 1999 as a result of increased phosphate exports, the start of construction of Ainabare boat harbor, and an increase in government expenditure. In 2000, profits from phosphate mining fell as the US dollar strengthened, because the impact of changes in the Australian/US dollar exchange rate was greater on the cost of inputs than on revenues. The only major construction project in 2000 was the completion of Ainabare harbor. Revenue from fishing license fees of A$8.5 million represented a 60 percent increase on the 1999 level and this was mainly due to the weaker Australian dollar.

In 2000, the budget deficit was over A$10 million (see Figure 2.24), or around 18 percent of GDP. Government debt increased in both 1999 and 2000. The level of external government debt is estimated at A$280 million. External debt service totaled A$13.3 million in 2000, or around 13 percent of exports of goods and services. However, the Government has significant loans outstanding with government-owned corporations that also have significant levels of external debt, hence the level of external debt service is effectively much greater.

Phosphate prices and volumes have deteriorated in recent years and the Nauru Phosphate Royalties Trust (NPRT), which was established to provide income in the post-phosphate era, has posted poor returns. Aid agencies continue to contribute significantly to current account transfers. It is estimated that prices rose by around 7.5 percent in 2000, in response to the weakening Australian dollar and higher world oil prices.

There is no central bank and Australian currency is the legal tender in Nauru, hence it is not possible to estimate the money supply. However, indications are that it declined in 2000 as a result of the Bank of Nauru’s poor liquidity position. During the year, the situation became so serious that it was necessary to ration withdrawals from personal accounts. Because of this problem, the Government recently advised the Nauru Phosphate Corporation (NPC) to pay dividends to the Government after each export shipment, whereas previously it paid at the end of each financial year. This change, in conjunction with the fact that the payments are made in Bank of Nauru cheques, has left NPC with its own liquidity problem, making it difficult for it to undertake necessary capital expenditure. Further, NPC is also the electricity and water supplier, and its relatively poor liquidity position has forced it to buy diesel to run generators on a monthly rather than quarterly basis. In October and November 2000, this resulted in power and water rationing because the monthly delivery of diesel was delayed due to bad weather. Quarterly supplies of diesel facilitate greater reserve storage and reduce the likelihood of such shortages occurring.

Issues in Economic Management

The three main economic problems facing Nauru are the imminent depletion of the primary phosphate deposits, the persistent fiscal difficulties including the mortgaging of assets of the NPRT, and the illiquid state of the Bank of Nauru.

It is expected that the primary phosphate deposits will be exhausted within three or four years, and this underlines the need for further progress in implementing the Government’s Fiscal and Financial Reform Program, which was started in 1998. Feasibility studies are being undertaken for mining of secondary and residual phosphate deposits, which could extend mining for an additional 10–15 years. Due to higher extraction costs though, this will not be as profitable as the mining of the primary deposits.

A major concern is that the Government continues to take out loans against future phosphate revenue, and against the assets of the NPRT at a time when the primary deposits are close to exhaustion. Many of the assets owned by the NPRT are heavily mortgaged. The capacity of the financing arm of the Government to take out loans against the earnings and assets of the NPRT represents one of the economy’s main structural problems. In addition, loans against the NPRT attract high interest rates (around 16–18 percent).

The Government embarked on the Fiscal and Financial Reform Program following a period of extremely high fiscal deficits in the mid-1990s. The Program focuses on government fiscal and financial management, operation of government-owned corporations, banking sector reform, the tax regime, and management of the NPRT. This Program, supported by an Asian Development Bank loan, has encountered some hurdles but is now being overseen by the recently formed Committee for Development Planning.

All aspects of the reform agenda need to be tackled more urgently if a satisfactory economic climate is to be created for developing the private sector and if the NPRT is to generate sufficient revenue in the post-phosphate era. The Government is considering options for banking sector reform, including reform of the banking laws. The most likely outcome appears to be closing the Bank of Nauru and replacing it with a foreign bank, though finding one that is interested may well be difficult.

Policy and Development Issues

One of the principal social problems facing Nauru is the extremely high rate of youth unemployment (estimated at 30 percent for males and 55 percent for females). Economic diversification will be required to generate employment opportunities as phosphate-related income tails off. Domestic participation in the offshore fishing industry began in 2000 with the purchase by the Nauru Fisheries and Marine Resource Authority of a long-line vessel, and approval to buy a second vessel. The opening of the Nauru Fish Market in 2000 also provided a source of employment.

Diabetes type 2, a lifestyle-related disease, remains the main health problem, and many Nauruans with the disease are referred to Australian hospitals each year, placing a large drain on the health budget. In fact, overseas referrals account for over half the health budget. The high incidence of the disease is the main reason for Nauruans’ low life expectancy: 60 years for females and 55 years for males. Greater preventive efforts, particularly in relation to health education, must be made to reduce pressure on the health budget and improve Nauruans’ quality of life.

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