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p. 48 of 68 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asia The Pacific Cook Islands Fiji Islands Kiribati Republic of the Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Democratic Republic of Timor-Leste Tonga Tuvalu Vanuatu III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia

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Nauru

The economy received support in 2002 from an Australian government financial assistance package, and in the near term, continued availability of external aid and political developments hold the key to the country's prospects. Medium- to long-term growth potential will depend on major fiscal and structural changes in the economy.

Macroeconomic Assessment

Nauru is in a long-term economic decline, resulting from prolonged economic and financial mismanagement and the progressive exhaustion of its phosphate reserves, the country's main natural resource. Against this background, the country was given support in the form of a financial assistance package from the Government of Australia. Nauru also hosted more than 1,000 asylum-seekers in 2001. The package provided funds for a range of equipment, material, and services needed for enhancing the delivery of government services, in addition to funds for the operation of two camps for the asylum-seekers. Drawdowns by Nauruans on savings held offshore and remittances from relatives overseas also helped support the economy.

Notwithstanding these revenue sources, the Government faced serious difficulties in paying the public sector wage bill and in meeting the demands of suppliers. As of early 2003, two to three government monthly payrolls had been missed and several creditors remained unpaid, some of whom had threatened to sue or cut off services to the island. In response, the Government sold remaining properties held by the Nauru Phosphate Royalties Trust (NPRT), previously the country's main financial asset. While the net market value of the NPRT is unknown, it is believed to have seriously fallen because of the financing of sustained large government deficits and poor investment of NPRT assets.

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, faces repeated difficulties due to a shortage of funds for lease payments, fuel, maintenance, and other operating costs. Prior to the provision of Australian support, fuel supplies on the island had frequently been exhausted before the next shipment arrived. Even with Australian support, the problems persisted in 2002.

Shipments from the remaining phosphate operation, estimated to be around 2001's level, were irregular in 2002. Total exports in 2001 were approximately 83,000 metric tons, compared with average annual exports of 400,000-500,000 metric tons in previous years. The decline in phosphate output is the result of a combination of factors, including a collapse in export markets linked to poor supply reliability and poor product quality, a lack of operating equipment, and financial and management difficulties. In spite of the low level of output, the Nauru Phosphate Company continues to employ approximately 1,700 people, well above the 1,200 who previously worked when production was much higher.

Nauru uses the Australian dollar as its currency. Thus, as monetary adjustment is ineffective, fiscal policy is the main instrument of macroeconomic management. The financial sector is essentially non-operational. The country's main bank, the Bank of Nauru, has operated for a number of years on a limited basis even though it is insolvent by international standards. The Government has relied heavily on the issuance of the Bank's checks to help fund its budget deficits and royalty payments to landowners, though a lack of liquidity suggests there is very little capacity for the Bank to honor these checks. Needless to say, weak fiscal management is constraining the country's ability to obtain external assistance.

Policy Developments

Attempts to achieve sound economic management are severely hampered by poor-quality planning and budget systems. Budget planning and implementation are haphazard, basic administration is impeded by the breakdown in computing capacity, and public accountability is extremely weak. Budget documents are usually treated as confidential and are not made available to the general public, while the accounts of public enterprises and trusts are typically out of date or nonexistent.

As time progresses, the Government has fewer options to fund its continuing budget deficits. In the past, loans have been acquired from official external sources, overseas corporations, the local bank, and drawdowns from the NPRT. However, the ability to secure new funds is seriously impaired by the absence of adequate collateral, local liquidity, or future revenue sources. In FY2002 (ended 30 June 2002) a deficit of as much as $20 million was budgeted, but it was unclear how this was to be funded. The actual budget outcome is unknown. In addition, the FY2003 budget was deferred with supply bills issued to cover government operations.

Both ADB and AusAID have given assistance to the Government to lay the groundwork for improved performance. More recently, assistance has been provided for economic management, the reform of the budget system, the reestablishment of banking services, and the restructuring of the NPRT. However, this assistance has had little impact due to a lack of political commitment to change and the very limited technical capacity available in the bureaucracy. The latter is mostly attributable to a shortage of Nauruans with appropriate skills, frequent and extended absence from work of senior bureaucrats, and a shortage of funding for government positions.

Outlook for 2003-2004

The medium-term outlook for the economy has recently improved. In December 2002, the Government of Australia agreed to provide a further $9.0 million in development aid. Of this amount, approximately $6.4 million is to be directed to essential infrastructure, including power and water supplies, as well as to health and education. The Government also agreed to continue activities in the camps for asylum-seekers. While the international community welcomed the installation of a new administration in January 2003, the growth path will depend on the new Government's ability to adopt major fiscal improvements and effect structural changes in the economy.

Immediate priorities for the new Government include: (i) reducing large budget deficits, principally by restructuring the public sector wage bill and containing the high cost of overseas representations; (ii) establishing a mechanism to reorganize the Nauru Phosphate Company, achieve the company's financial viability, and extract its remaining resources; (iii) improving management and restructuring the portfolio of the NPRT; (iv) introducing appropriate legislation to encourage the operation of a reputable commercial bank and to restructure Air Nauru; and (v) repaying existing arrears to government suppliers and lenders.

With a new Government, international confidence has gradually reemerged, partly because the new president was a supporter of previous reform efforts. However, his sudden death in early March 2003 has heightened uncertainties with regard to the future of the country, including the possibility of securing additional financial and technical support from external agencies. Elections for a new government are scheduled for May 2003.

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