IMF Country Report No. 22/28

Abstract

IMF Country Report No. 22/28

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IMF Country Report No. 22/28

REPUBLIC OF NAURU

2021 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; INFORMATIONAL ANNEX; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR NAURU

February 2022

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2021 Article IV consultation with Nauru, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its February 2, 2022 consideration of the staff report that concluded the Article IV consultation with the Republic of Nauru.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on February 2, 2022 following discussions that ended on December 6, 2021, with the officials of the Republic of Nauru on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 14, 2022.

  • An Informational Annex prepared by the IMF staff.

  • A Statement by the Executive Director for the Republic of Nauru.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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© 2022 International Monetary Fund

Press Release

PR22/29

IMF Executive Board Concludes 2021 Article IV Consultation with Nauru

FOR IMMEDIATE RELEASE

Washington, DC – February 7, 2022: On February 2, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Nauru.

Nauru was expanding moderately prior to the pandemic and continued to expand during FY2020 and FY2021 owing to a sizeable pandemic policy response. Pandemic-related measures included freight support to ensure food and fuel security, quarantine measures, securing vaccines, and a scaling-up of intensive care facilities. Notwithstanding a delay in construction projects due to supply chain disruptions, the economy expanded by 0.7 percent in FY20 and 1.5 percent in FY21. As of December 2021, Nauru has not had any COVID-19 cases on the island, the adult population is nearly fully vaccinated, and vaccination for under-18-year-olds is expected to commence shortly.

Growth is expected to moderate, and the current account to narrow, in FY22, due to the expected slowdown in Regional Processing Center (RPC) activity. Despite ongoing fiscal support, the high COVID-19 vaccination rate, and the resumption of construction activity, real GDP growth is still expected to slow from 1.5 percent in FY21 to 0.9 percent in FY22. This largely reflects the anticipated scale-down of the RPC, which is an important source of economic activity on the island. The current account is expected to narrow to a smaller surplus of 1.2 percent of GDP in FY22 resulting from lower RPC-related export of services, departure of RPC-associated expatriate workers, and a lower goods balance from the increase in fuel prices.

Risks to the outlook are tilted significantly to the downside. Given limited medical facilities and a high incidence of risk factors such as diabetes, a local COVID-19 outbreak could have adverse health and growth implications. The medium-term fiscal outlook remains exceptionally uncertain pending clarity about RPC-related revenues when the facility moves to a model of “enduring capability”. As RPC employment is about 15 percent of the local labor force, a significant number of Nauruans could be at risk of long-term job loss under enduring capability if a labor reallocation strategy is inadequately implemented. External downside risks include a sharper-than-projected rise in commodity prices, natural disasters, and a more protracted global recovery that delays infrastructure projects on the island. Upside risks include an extension of RPC with no job losses, and successful commercialization of the port project.

Executive Board Assessment2

Executive Directors commended the Nauruan authorities for their effective measures to prevent a domestic outbreak of COVID-19 and for their supportive policies, which have helped the economy continue expanding in FY2020 and FY2021. Directors also commended the authorities for the steps taken to restore debt sustainability. Noting that risks to the outlook are tilted to the downside, they underscored the importance of structural and fiscal reforms that promote sustainable, inclusive, and greener growth.

Directors agreed that near-term fiscal support should be calibrated to the state of the pandemic, and plans should be formulated to absorb or upskill workers employed in the Regional Processing Center. They concurred on the need to continue fiscal support for food and fuel security and emphasized the importance of reducing subsidies for state-owned enterprise as operations return to pre-pandemic levels. Directors also recommended shifting budget allocations away from non-transparent expenditures toward health, education, and further investments in climate resilience. Given that non-tax revenues rely on external sources, they encouraged the formulation of a medium-term tax reform strategy that widens the tax base and generates more reliable forms of revenue to help achieve fiscal self-reliance. Directors also called for further strengthening public finance management and the debt management strategy.

Directors recognized that Nauru faces many challenges common to microstates, which constrain potential growth and pose challenges for economic development. In this context, they stressed the need to identify new sources of growth to support long-term development, generate revenues, and create local employment. They recommended structural reforms to improve the business environment, address governance weaknesses, and attract private investment. To strengthen resilience to climate change, Directors called for integrating adaptation plans into a medium-term fiscal framework and continue pursuing donor support for green financing. They also encouraged sustained efforts to secure new donor commitments to address key infrastructure gaps. Directors supported the ongoing efforts to strengthen the AML/CFT framework and encouraged the consideration of regional solutions to correspondent banking relationship challenges. They recommended leveraging the Fund’s and other development partners’ capacity development assistance, including to continue improving the quality and availability of macroeconomic statistics.

Table 1.

Nauru: Selected Economic Indicators, FY2017–22 1/

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Sources: Nauru authorities and IMF staff estimates and projections.

Nauru uses the Australian dollar as the legal tender, and the fiscal year ends in June.

In FY2021 grants include debt forgiveness for Yen Bonds.

Stock of government deposits is under review by authorities and may be updated.

Including the defaulted Yen bonds (until 2021 when the debt was settled), and use of Special Drawing Rights (SDR).

Including the estimated government liability related to Bank of Nauru’s liquidation.

External debt service over the projection period is through bilateral grants.

Title page

REPUBLIC OF NAURU

STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION

January 14, 2022

KEY ISSUES

Context. Early and decisive measures successfully prevented an outbreak of COVID-19 in Nauru, and as of January 2022 there have been no COVID-19 cases on the island. Strong pandemic policy measures supported the economy, which continued to expand in FY20 and FY21. Nauru’s remoteness and size constrain potential growth and it is severely exposed to the negative effects of climate change on sea levels and the ocean stock of tuna. Development challenges are exacerbated by limited capacity and a high incidence of non-communicable diseases (NCDs).

Outlook and Risks. Growth is expected to moderate in FY22 owing to the anticipated scale-down of the Regional Processing Center (RPC) for refugees and asylum seekers. Risks to the outlook are significant and tilted to the downside. With limited medical facilities and a high incidence of NCDs, a local outbreak of the pandemic remains a critical risk. The medium-term macro-fiscal outlook is uncertain, pending clarity about revenues, economic activity, and jobs as the RPC scales down operations.

Main Policy Recommendations

  • Near-term Policies. Extend vaccinations to the younger eligible population and calibrate fiscal support for food and fuel security to the state of the pandemic. Expeditiously formulate a plan to absorb or upskill current RPC workers.

  • Revenues. Formulate a medium-term revenue strategy to generate more reliable forms of revenue, including by widening the tax base, raising excise taxes on goods tied to poor lifestyle habits, and introducing a consumption tax.

  • Governance and Public Financial Management. Ensure that the SOE monitoring unit is adequately resourced, phase out subsidies to weakly-performing SOEs and enhance procurement processes in line with international standards. On PFM, formalize the fiscal responsibility ratios in a rules-based framework with mechanisms to manage deviations from those rules; phase out cash transactions; and formulate a new debt management strategy.

  • Financial Sector Reforms. Continue efforts to align the AML/CFT framework with the revised 2012 FATF recommendations, accelerate implementation of legislated improvements to the AML/CFT framework, and measures to mitigate identified risks.

  • Diversification. Diversifying the economy to obtain new sources of growth will require supporting policies to accelerate investment in human capital and infrastructure, and efforts to improve the business environment. Mitigating the effects of climate change can help the transformation required to raise potential growth and achieve fiscal self-reliance.

Approved By

Krishna Srinivasan and Stephan Danninger

Discussions took place remotely during November 15-December 6, 2021. The staff team comprised Mitali Das (head), Jermy Mudong and Natalija Novta (both APD), Nataliya Ivanyk (CDOT), Seruwaia Cagilaba (IMF Fiji Office) and Leni Hunter (Resident Representative, Pacific Islands). Heena Gupta and Jonathan Pampolina (both LEG) joined some mission meetings, and Chris Becker (OED) joined all mission meetings. Barend De La Beer (STA) provided expert statistical advice. The mission met with Minister of Finance M. Hunt, J. Petersen (Advisor, Ministry of Finance), other government officials, representatives from the private sector, development partners, and representatives of AUSTRAC and the Australian High Commission to Nauru. Hailey Ordal, Kristine Laluces, Yadian Chen and Raagini Chandra provided research and editorial assistance.

Contents

  • CONTEXT AND PRE-PANDEMIC LANDSCAPE

  • THE COVID-19 SHOCK: IMPACT, POLICY RESPONSE, OUTLOOK, AND RISKS

  • HARNESSING NEW SOURCES OF ECONOMIC GROWTH AND BUILDING FISCAL SELF-RELIANCE IN A POST-PANDEMIC WORLD

  • A. Strengthening the Post-Pandemic Recovery

  • B. Addressing Fiscal Challenges: Uncertain Revenues

  • C. Structural Reforms to Further Improve Governance and Public Financial Management

  • D. Financial Sector Reforms

  • E. Reforms Needed for More Sustainable, Inclusive and Green Growth

  • STATISTICS AND CAPACITY DEVELOPMENT

  • STAFF APPRAISAL

  • BOX

  • 1. Bendigo Bank Agency

  • FIGURES

  • 1. Recent Developments

  • 2. Recent Fiscal Developments

  • 3. Constraints to Raising Growth Potential

  • TABLES

  • 1. Selected Economic Indicators, FY2017–22

  • 2. Illustrative Medium-Term Baseline Scenario, FY2017–26

  • 3. Balance of Payments, FY2017–26

  • 4. Central Government Operations, FY2017–26

  • ANNEXES

  • I. External Sector Assessment

  • II. Debt Sustainability Analysis

  • III. An Update on the Nauru Trust Fund

  • IV. SDGs Identified in the 2019–30 National Sustainble Development Strategy

  • V. Long Term Growth Opportunities for Nauru

  • VI. Improving Resilience to Climate Change

  • VII. Risk Assessment Matrix

  • VIII. Authorities’ Response to Fund Policy Advice

  • IX. IMF Capacity Development in Nauru

1

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://0-www-imf-org.library.svsu.edu/external/np/sec/misc/qualifiers.htm.