Home 
Countries and Regions Country Assistance Plans Document
|
Country Assistance Plans - Nauru : I. Country Performance Assessment
A. Economic Performance Assessment1. Nauru’s small economy has been dominated by phosphate mining and its impacts since 1906. With resource exhaustion looming at the turn of the twenty-first century, the economy in fiscal crisis, and the financial system in a state of collapse, the population faces a difficult future. Phosphate exports dropped from an annual average of 1.58 million tonnes in the 1980s to 0.50 million tonnes during the 1990s, primarily because of the collapse of the major Australian market. The Nauru Phosphate Royalties Trust (NPRT), which was built from phosphate royalties to generate income once mining ceased, is much diminished as a result of poor portfolio management and heavy investment in property markets. It is unclear what the unencumbered asset base of the Trust is, and therefore what future consumption levels can be sustained. 2. Although there are no national accounts, real per capita GDP is likely to have increased in 1998-1999 to A$4,900. Real government expenditure rose by 15 percent compared with 1997-1998, the volume of phosphate exports rose by 38 percent, the Japanese-funded construction of Ainabare boat harbor began, and fisheries production for the domestic market increased. Some 450, or 30 percent, of the public sector workforce was retrenched from April 1999. A rise in the inflation rate from 4 percent in 1997-1998 to 6.7 percent in 1998-1999 was consistent with a rise in the level of economic activity (Appendix 1, page 1). 3. The 1998-1999 budget projected an overall surplus, but the actual outcome was officially reported as a deficit of A$12 million. The real figure was probably larger since recorded revenue included A$4 million in dividend payments from the bankrupt Bank of Nauru, and the expenditure figure did not capture all payments made by government. The deficit was more than covered by A$26 million in net borrowing, with A$3.5 million from ADB and A$29 million from Taipei,China. Of the latter amount, A$14 million was unspent at the end of the fiscal year. During the 1999 fiscal year, NPRT raised a US$99 million loan from General Electric Capital to pay dividends to landowners, and to refinance and restructure the investments of NPRT, the Nauru Finance Corporation, and the Nauru Superannuation Board. 4. Successive governments have financed the fiscal deficits in an unplanned and largely non-transparent manner, borrowing directly from NPRT, and employing the government-owned Republic of Nauru Finance Corporation (RONFIN) as an on-lending agency that borrowed from NPRT and used NPRT assets as collateral for external commercial borrowing. The financing of the budget deficits and debt servicing created a liquidity crisis in 1996 that has continued and intensified in subsequent years. As liquid funds in NPRT and government corporations such as NPC have been depleted, government has relied on extending its overdraft with the Bank of Nauru (BON). The issuing of BON checks has drained the bank of its reserve holdings of currency (the Australian dollar), leaving it unable to effect international transfers or meet depositors’ withdrawal demands. BON has been insolvent for two years, financial intermediation has broken down, and confidence in the payments system has disappeared. The NPRT assets that were to secure sustainable consumption levels for an almost totally import-dependent society have been substantially run down. The book value of these assets has dropped significantly. Most of the properties that dominate the portfolio are mortgaged, and market valuations are needed to arrive at a true value for the assets. 5. The key features of Nauru's economic situation that were of concern in 1998 and 1999 continued to be worrisome in 2000 as the exhaustion of the phosphate resources draws even closer. In general, fiscal planning and discipline continue to be poor with the banking system remaining in a state of collapse. Attempts to establish a legitimate bank to provide banking services in the interim while Bank of Nauru (BON) is rehabilitated have yet to produce results. 6. For a brief period in FY1999, significant progress was made in achieving the first tranche conditions of the Fiscal and Financial Reform Program (FFRP) loan and then followed through with impressive expenditure cuts and substantial public service downsizing. Unfortunately, political changes and lack of a reforms’ champion, the availability of unconditional bilateral external loans, and an unwillingness to confront harsh economic realities have all combined to stall the reform process. 7. The FY2000 budget was presented to Parliament in September 1999. The accompanying budget speech clearly identified the country's current economic difficulties and outlined necessary course of action. However, the budget estimates did not represent a convincing attempt to move towards long-term fiscal sustainability. 8. There are two immediate issues that need to be addressed by the government. First, the banking sector must be revived by facilitating the establishment of a foreign bank, perhaps in a joint venture arrangement. Second, as part of a medium-term move to improved fiscal planning and a balanced budget, government expenditure must be reduced and revenue raised.
|
RSS Feeds
Back
Top of page