Catalog

Nauru

A sharp contraction in the public sector, which dominates this small economy, and reduced construction spending on phosphate facilities triggered a 27.3% drop in GDP in FY2007 (ended 30 June 2007) (Figure 3.34.16). Furthermore, phosphate mining, which had resumed the previous year after several years of no production, was suspended for several months because of storm damage to port infrastructure.

The contraction in the public sector involved reining in the budget deficit to 17.4% of GDP in FY2007. Deep deficits in the previous 2 years were largely funded by underpaying civil service salaries (and accumulating salary arrears). The narrower deficit in FY2007 was largely achieved by cutting pay rates. The budget for FY2008 estimates a small surplus, to be achieved through cuts in capital expenditures, with a slight surplus also budgeted for FY2009.

Inflation eased to an estimated 2.9% in FY2007. The use of the Australian dollar as the legal tender and the sourcing of about 60% of imports from that country sees inflation usually tracking the Australian trend. The merchandise trade deficit narrowed slightly to 82% of GDP in FY2007 (Figure 3.34.17) and a small current account deficit was recorded.

The economy will get some help in FY2008 by a full year of phosphate mining. Remaining primary phosphate reserves total about 1.9 million tonnes, enough to last 2–3 years. Reserves of secondary phosphate (found at a deeper level) have the potential to support mining for up to 30 years, according to a 2006 feasibility study. Against this, the closure in the second half of FY2008 of an Australian refugee processing center on the island will hurt. The center directly employs about 100 Nauruans and indirectly perhaps another 900. The Australian Government has committed to maintaining its aid program, which is worth about A$1,000 per person per year. Nevertheless, GDP is projected to decline by 2.4% in FY2008 and by a further 4.4% in FY2009 as the full effect of the center's closure is felt. After that, a slight economic recovery is foreseen.

The foremost financial management issue is the need to develop a response to the high level of public international and domestic debt (equivalent to about 30 times GDP). Attempts to repay even a small share of the external debt could place severe pressure on the budget, potentially absorbing any fiscal surplus from the renewal of phosphate mining, and compressing public expenditures on essential services.

Government reform efforts are yielding some success, with stateowned enterprises and utilities undergoing initial reforms. Government wages have been cut to more affordable levels and overstaffing in government departments has been reduced. In addition to phosphate mining, industries that offer growth potential include fisheries, smallscale agriculture, construction, finance (Nauru has been removed from the blacklist of the Financial Action Task Force on Money Laundering), and tourism. A turnaround in the performance of public utilities and the domestic airline would also help lift economic performance.