## 1. Trust Fund ## Source details **Canonical URL:** [1. Trust Fund](https://www.imf.org/-/media/files/publications/cr/2020/english/1nruea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1nruea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1nruea2020001.pdf.json) --- ### Context and structural conditions - Nauru: land area about 8 square miles; population around 12,500 in 2015. - Extensive phosphate mining left most land unusable; phosphate revenues peaked in the early 1990s when the Nauru Phosphate Royalty Trust (NPRT) fund held more than A$1 million per capita. - Declining phosphate revenue and weak public finance management led to economic decline, depletion of the NPRT, and collapse of SOEs, including the Bank of Nauru. - FY2012 boost from establishment of the Australian Regional Processing Center (RPC), higher fishing license fees, and residual phosphate mining. - New trust fund established in FY2016 aimed at providing long-term fiscal financing. ### Governance and capacity constraints - Key governance risks and capacity constraints: - Fiscal governance weaknesses (PFM controls). - Lack of accountability and monitoring of SOEs. - Weaknesses in the rule of law (investor protection and contracts). - AML/CFT framework vulnerabilities. - Mitigation requires greater transparency and a robust accountability framework for SOEs. ### Recent developments — growth, inflation, fiscal and external - Growth and inflation: - Growth picked up to 5.7 percent in FY2018. - Growth slowed to an estimated 1.0 percent in FY2019. - Inflation moderated to 0.5 percent in FY2018 and picked up to 3.9 percent in March 2019. - FY2020 growth projected to moderate to 0.6 percent assuming 300 refugees and asylum seekers remain. - Medium-term growth projected to strengthen to around 2 percent. - Fiscal and public finance: - FY2019 fiscal surplus estimated at 16.1 percent of GDP. - Fishing revenue spike contributed 12 percent of GDP to FY2019 outcomes. - Government deposits increased to 35.7 percent of GDP in FY2019. - Trust Fund stock reached 63.6 percent of GDP (A$105.2 million). - Total public debt—including SOE debt—increased to A$138.8 million (86.8 percent of GDP) in 2018 reflecting a new loan from Taiwan Province of China for secondary phosphate mining equipment. - External sector: - Current account balance (CAB) deteriorated to around -4.6 percent of GDP in FY2018 after a surplus of 12.7 percent of GDP in FY2017. - CAB estimated to have returned to a surplus in FY2019 due to spike in fishing revenue inflow. - External position in FY2018 substantially weaker than implied by medium-term fundamentals and desirable policies. - RPC arrangements and revenues: - Nauru and Australia signed a “hybrid” model for joint management of RPC commercial operations and services for the current financial year. - Authorities received an additional A$21.1 million in FY19/20 as a “hosting fee”; future hosting fee arrangements are unknown. ### Authorities’ views - Authorities acknowledge near-term uncertainty but are more optimistic on balance of risks. - Recognize RPC and phosphate wind-down as downside risks but emphasize negotiations with Australia and a larger Nauruan role under the hybrid model. - Note relatively stable demand for fishing days and review plans for secondary phosphate mining given sharp decrease in phosphate prices. ### Fiscal sustainability assessment and projections - Main threats: - Declining RPC revenues. - Mandatory Trust Fund contributions. - Rising non-priority spending. - Staff projections and implications: - Around 30 percent of revenue is linked to RPC operations and is unsustainable in the long run. - Under unchanged policies (baseline), fiscal surplus would be insufficient to make required Trust Fund contributions from FY2021 onward and public debt-to-GDP ratio would begin rising in FY2024. - Staff projects the fiscal surplus to decline through the projection period, turning to deficit in 2024. - As the surplus declines, it will no longer be available to fund committed Trust Fund contributions. - Planned Trust Fund contributions assumed to continue initially through reductions in the cash balance and later through payment arrears and increased domestic debt. ### Fiscal framework and cash buffer status - Fiscal framework comprises: - Three “fiscal responsibility ratios”: fiscal balance to GDP must not be negative; personnel costs must be less than 30 percent of current expenditure; tax revenue be maintained within 25 percent of GDP. - MOUs require Nauru to contribute 10-12 percent of domestic revenue to the Trust Fund when domestic revenue is greater than AU$100 million. (Nauru’s domestic revenue has exceeded AU$100 million since FY2016.) - Cash buffer target: at least 2 months of non-RPC recurrent spending should be held in government deposits. - Cash buffer status: - Total government deposits currently exceed 2 months of non-RPC spending. - The deposit account established as the “cash buffer account” (a fixed term account) is about 0.9 months of non-RPC spending. ### Staff recommended fiscal adjustment measures (medium-term) - Aggregate targets and sequencing: - Reduce expenditure by 5 percent of GDP on average over the medium term, compared to baseline. - Suggested measures: constant public employment; maintain public sector wages and transfers constant in real terms; eliminate unproductive spending (subsidies); better targeting of social programs. - Increase tax revenue by 1 percent of GDP on average over the medium term, compared to baseline. - Staff supports introduction of a consumption tax, strengthening revenue administration and compliance, and setting tax reform within a comprehensive medium-term revenue strategy. - Cash buffer safeguarding: - Provide guidance on use and replenishment of the cash buffer within the fiscal framework. - Establish a cash management unit (CMU) and a cash management committee (CMC) to prepare cash flow forecasts and smooth the payments profile; CMU to regularly update the CMC. - PFM and governance actions: - Continue implementing the PFM roadmap to address issues identified in the 2016 PEFA assessment. - Limit the use of supplementary budgets; set aside windfall revenues for appropriation in the normal budget cycle and use them for carefully planned investment spending. - Continue reconciling government accounts to reduce large discrepancies between recorded revenues and expenditures and government financing data. - Phase out the use of cash for tax and other payments. - Improve prioritization of expenditures in line with the National Development Strategy, and strengthen public debt management. - Tax reform design considerations: - Careful design of consumption tax (choice of tax base and rate structure), sequencing and timing of implementation, and modernization of tax administration. - Recognize need for careful communication since most Nauru citizens have limited experience paying tax. ### Risks and scenarios - Risks skewed to the downside: - Downside: faster-than-expected RPC scale-down; delays in fiscal and structural reforms; weaker-than-expected global growth and commodity price volatility affecting fishing revenue. - Upside: positive spillovers from RPC operations (small business development); higher-than-expected fishing revenue. - If fiscal adjustment cannot be fully implemented, Trust Fund contributions may need to be reduced, lowering Trust Fund revenues in future. *Source: IMF staff report excerpt — “1. Trust Fund.”* --- ### Public Enterprises, Debt, and Financial Sector Reform ### Public Enterprises and SOE reform - Poorly performing SOEs absorb large amounts of scarce capital, provide low returns, and divert government resources from other critical investments. - New Public Enterprises Act (2019): - Provides for the establishment of an SOE monitoring committee. - Requires quarterly financial reporting. - Implementation priorities: - Ensure SOEs meet the Act’s requirements, particularly submission and publication of audited financial statements. - State Owned Enterprises listed: Nauru Utilities Corporation (NUC); Nauru Air Corporation (NAC); Republic of Nauru Phosphate Corporation (RONPHOS); Nauru Rehabilitation Corporation (NRC); Eigigu Holdings Corporation (EHC); Eigigu Solutions Corporation (ESC); Nauru Port Authority (NPA); Cenpac Net Incorporated; Nauru Phosphate Royalties Trust (NPRT); and others. - Subsidies: - On average, subsidy over the past 3 years has been $9m or 5 percent of GDP. - FY2019: government transferred $9m to SOEs and borrowed $7m on behalf of Ronphos. ### Public debt and debt management - Staff emphasizes sound public debt management, reconciling and resolving old debts to ensure debt sustainability and improve access to credit markets (Annex IV, DSA). - A reasonable resolution of the yen-denominated bonds would remove a large share of total government debt. - Reconciliation work to identify amounts owed by SOEs, including outstanding royalty payments to landowners by the Nauru Phosphate Trust Fund and RONPHOS, should be expedited. - Staff assesses public debt as unsustainable under current policies and recommends redoubling efforts to seek a reasonable resolution of the defaulted yen-denominated bonds. ### Authorities’ views on fiscal, SOE, and tax matters - Authorities committed to maintaining fiscal and debt sustainability. - Agreed on the need to adjust spending if RPC revenues fall in line with staff’s baseline projection. - Noted tax reform should not push up consumer prices and prefer any new taxes be easy to implement and monitor and preferably imposed at the border. - Commenced modernization of taxpayer records and data; welcomed PFTAC assistance. - Agreed with staff’s target cash buffer and intended to press ahead with public enterprise reform and establish the SOE monitoring unit. ### Financial sector — Bendigo Bank Agency - The Bendigo Bank Agency is the sole financial institution and provider of financial services in Nauru. - Agency highlights: - Opened in 2015; part of Bendigo and Adelaide Bank Limited of Australia. - Falls under Australian bank supervision; customers hold Australian bank accounts. - Recently opened its first U.S. correspondent bank account and is seeking others. - Financial inclusion and services: - 11,200 accounts (close to full account penetration among adults). - 11 ATMs, processing up to 36,000 transactions per month. - About 9,000 ATM cards issued. - No available credit or insurance products as of the report. - Agency starting to install POS terminals. - Regulation and compliance: - Operates under Australian financial regulation and Australian-standard AML/CFT requirements. - Transaction monitoring by Bendigo’s financial crimes department; regular contact with Nauru’s Financial Intelligence Unit. - Still faces restrictions from correspondent banks that prevent transferring funds internationally. - Staff encourages development of new credit legislation to enable micro-finance loans and other forms of credit. *Source: 1nruea2020001 — Public Enterprises and Financial Sector sections.* --- ### Economic Diversification, Social Sectors, and Climate Resilience ### Economic diversification and private sector measures - Opportunities to diversify and create jobs through private sector development. - Near-term recommended steps: - Streamline business registration requirements. - Reduce high business visa fees. - Develop a credit act. - Reintroduce an insurance product. - Review and, if necessary, amend legislation that reduces incentives for non-citizens to invest. - Open non-performing SOEs to private sector management or ownership. - Overcome barriers to land use with solutions that benefit all parties. - Regularize private-sector dialogue to identify near-term measures to improve the business environment. - Infrastructure improvements: - Reforms at Nauru Utility Corporation improved water and electricity provision. - Steady progress on new port development. - New undersea cable expected by 2020/2021 to significantly improve business conditions and public sector service delivery. ### Land rehabilitation, health, and education - Land rehabilitation: - Nauru Rehabilitation Corporation has rehabilitated 5 hectares and started work on a further 6 hectares to clear land for solar panels; plans underway to rehabilitate more land for agriculture. - Health: - Severe health challenges; one of the lowest life expectancies due to high incidence of NCDs; many patients require overseas medical referrals. - Preventative measures: campaigns for physical activity, nutrition via household gardens, digitalization of patient records, focus on primary healthcare. - Education: - Compulsory free education provided, but enrolment rates and attendance have been low. - Literacy data from 2010 signaled a very low literacy rate of 25 percent for Year 7 pupils (11 years of age). - Interventions (school lunch program, daily payments) had limited success; concerns include high student-teacher ratios, language barriers, and deficiencies in teacher qualifications. ### Climate change resilience and green investments - Mitigation/adaptation efforts: - New port expected to reduce carbon footprint by as much as 30 percent by reducing waiting time and fuel consumption. - Solar power generation work expected to generate as much as 50 percent of Nauru’s electricity needs. - Government moving to cleaner fuels for its vehicles. - Staff recommendations: - Integrate climate change plans into economic and development policies. - Cost adaptation plans and integrate into the budget and medium-term framework. - Ensure new infrastructure is climate proof. - Seek donor funds for green projects and broaden development partner relationships for agriculture and food security. - Transparent budget management to facilitate mobilization of climate finance. *Source: 1nruea2020001 — Economic Diversification, Social Sectors, and Climate Change sections.* --- ### Statistics, Capacity Development, and Technical Assistance ### Gaps in statistics and planned actions - Statistics office very small; currently limited to producing the CPI; reliance on TA experts to compile national accounts. - Plans and needs: - Implement a household survey and a business survey. - Update the last census (from 2011). - Adequate resourcing and development partner assistance required. - Capacity development aligned with the National Sustainable Development Strategy (NSDS). ### IMF capacity development and TA (selected) - IMF/TA providers, topics, and periods (listed): - PFTAC — Statistics - National Accounts — July 2018 - CDOT — Statistics - External Sector Statistics — October 2018 - PFTAC — PFM – Transition to IPSAS Cash Reporting — February 2019 - PFTAC — Revenue – Review of tax administration reforms — April 2019 - PFTAC — Statistics - National Accounts – Building independent compilation capacity — August 2019 - PFTAC — Revenue – Review organizational arrangements and core tax functions — September 2019 ### Data shortcomings and reporting - Serious shortcomings in data provision significantly hamper surveillance. - Many macroeconomic data remain unpublished though provided to staff. - Selected indicator observations and latest reporting frequencies include: - Exchange rates: Latest observation 12/04/2019. - International reserve assets and reserve liabilities: Latest observation 12/2016; Date received 01/2017. - Consumer price index: Latest observation 09/2016; Date received 01/2017. - Revenue, expenditure, balance and composition of financing – central government: FY2018; Date received 09/2019. - GDP/GNP: FY2015; Date received 10/2016. - International investment position: Latest observation 12/2018; Date received 6/2019. *Source: 1nruea2020001 — Statistics and Capacity Development sections.* --- ### Staff Appraisal — Key Findings and Recommendations ### Key findings - Main challenge: develop new sources of economic activity and income as the economy transitions with reduced RPC and phosphate activity. - Around 30 percent of budget receipts are linked to RPC operations; revenue likely to decline significantly over the medium term. - Growth exceeded expectations in 2018 but was modest in 2019. - External position in FY2018 assessed as substantially weaker than implied by medium-term fundamentals and desirable policies. ### Fiscal policy recommendations - Implement a fiscal adjustment plan to avoid breaching the fiscal anchor, meet mandatory Trust Fund contributions, and avoid further debt accumulation. - Maintain a cash buffer target of two months of non-RPC current spending. - Limit use of supplementary budgets and set aside windfall revenues for appropriation in the normal budget cycle. - Strengthen public debt management. ### Structural policy recommendations - Continue SOE reform to strengthen governance, transparency, and accountability and reduce reliance on budget financing. - Re-engage and revitalize private sector development; improve ease of doing business. - Continue efforts to strengthen AML/CFT framework and enhance financial literacy. - Renew efforts to improve education and health outcomes, including combating NCDs. - Technical assistance to continue strengthening economic statistics. ### Consultation timing - Recommendation: next Article IV consultation take place on the 24-month cycle. *Source: 1nruea2020001 — Staff Appraisal.* --- ### Boxes and Annex Highlights ### Box 1 — Trust Fund (highlights) - Trust Fund operational for three years; established to save windfall revenue over the medium term to generate long-term revenue through earnings. - Trust Fund is perpetual; charter does not provide for withdrawals during the build-up period of 2016–33 unless the Trust Fund Committee determines otherwise. - Contributors: Australia, Taiwan Province of China, the Asian Development Bank, and the Government of Nauru (GoN). New Zealand recently became a contributor. - Trust Fund values and contributions: - Reached A$84.4 million (60 percent of GDP) in FY2018, from a starting value of around A$34 million (25 percent of GDP) in FY2016. - Nauru contributed A$14.8 million to the Trust Fund in FY2016 and made a total contribution of A$47.1 million as of 30 June 2018. - Since establishment, Australia has contributed A$12.1 million, Taiwan Province of China A$10.6 million, and New Zealand A$1.9 million. - Milestones: - Nauru joined the International Forum of Sovereign Wealth Funds and completed a self-assessment in line with the Santiago Principles. - Trust Fund transitioned to Stage 2 of the investment strategy and made initial investments into illiquid asset classes in FY2019, including property and private equity. ### Box 2 — Nauru’s Superannuation Fund (highlights) - July 2018: Government introduced Nauru Super, a defined-contribution scheme managed by Superlife (New Zealand). - Coverage and contributions: - Initially available only to Nauruan government employees; from January 1, 2019, expanded to citizens residing in Nauru and government officials posted overseas, and all employers of one or more Nauruan staff. - Not applicable to contract or expatriate employees. - Enrollment compulsory; both employers and employees required to contribute 5 percent of salaries. - Government initially raised salaries by 5 percent to avoid changes to take-home pay. - Access to funds only at retirement age of 55 years or more. ### Annex II — External Sector Assessment (highlights) - Staff assess Nauru’s external position in FY2018 as substantially weaker than medium-term fundamentals and desirable policies. - Goods and services deficit worsened to 53 percent of GDP in FY2018. - Income account balance declined to 48.7 percent of GDP in FY2018; spiked to 64 percent of GDP in FY2019 due to fishing revenue. - Current account recorded a deficit of 4.6 percent of GDP in FY2018; estimated turnaround to a surplus of 5 percent of GDP in FY2019. - Staff baseline: current account expected to remain in a deficit of about 4 percent of GDP on average over the medium term. - Adjustment scenario: fiscal adjustment improves current account deficit to about 3.6 percent of GDP on average in the medium term. - Policy recommendations: - Maintain prudent fiscal policy; resolve yen bond arrears; prudent management of the Taiwan POC loan taken for Ronphos; discourage future borrowings on behalf of SOEs. - Improve seaport and power infrastructure; continue SOE reform and promote private sector development. - Continue use of the Australian dollar as legal tender. ### Annex V — Secondary Phosphate Mining (highlights) - RONPHOS estimates around 60 million tons of phosphate remains between limestone pinnacles; potential production estimate: 500,000 tons per annum in exports over the next 20–30 years. - Business case estimates a ramp up period of 15 months and a capital injection of A$20 million. - Viability uncertain and contingent on in-depth study; enumerated risks include unproven mining steps, seaport infrastructure limitations, funding difficulties, extreme water intensity, energy dependence, environmental and health risks from lower-grade ore, and threats to rehabilitation efforts. *Source: 1nruea2020001 — Boxes and Annexes.* --- ### Tax Reform, Budgets, and Data Issues ### Business Tax Act (BTA) and FY2019/20 supplementary budget - Introduction of a Business Tax Act (BTA) imposing: - a business profits tax, - small business tax, - non-residents tax, - an international transportation business tax. - Fourth supplementary budget for FY2019/20 (issued 20 December 2019) appropriated A$17.6 million (10 percent of GDP). - Composition: - A$5.3 million additional RPC hosting fees. - A$10.2 million payment for reimbursable RPC costs. - A$1.5 million dividend from a telecom company. - Most additional revenue appropriated as new spending: - A$10.9 million for operational costs at the Department of Multicultural Affairs. - A$4.2 million in SOE subsidies and a windfall payment to government workers. - A$0.6 million contribution to the Nauru Trust Fund. - A$2.0 million on other areas. - Staff treated the revenue increase as windfall revenue. - Supplementary budgets included total appropriations of A$86 million (50.5 percent of GDP) for FY2019/20, comprised of new spending (A$73.6 million) and appropriations to the Nauru Trust Fund and Fiscal Cash Buffer (A$12.4 million). - Of newly appropriated expenditure in FY2019/20: - 2 percent of GDP (A$3.6 million) spent on health. - less than 1 percent of GDP (A$0.4 million) spent on education. - Policy guidance: set aside windfall revenues for appropriation in the normal budget cycle rather than through supplementary budgets. ### Data adequacy and statistical shortcomings - Serious shortcomings in data provision significantly hamper surveillance. - Annual GDP estimates improved with PFTAC TA; rebase recommended in 2021. - CPI compiled quarterly with reference year 2015; shortcomings noted for imported motor vehicles pricing. - No producer, wholesale, or trade price indices. - GFS: MoF aiming to compile and disseminate GFS with PFTAC assistance; lack of timely, accurate data persists. - Monetary/financial statistics: none available historically; Bendigo Bank agency provides deposits but no loans and no FX transactions. - External sector statistics: annual BOP and IIP compiled for first time in 2014; June 2019 ESS TA mission found important shortcomings. - Nauru does not participate in IMF Data Standards Initiatives; no data ROSC available. ### Public financial management and governance commitments - Progress: - Financial statements for FY2016/17 submitted for audit and published. - Work to improve bank reconciliation; consultant engaged to map FMIS to support GFS reporting. - Efforts to improve internal audit, establish a Finance and Audit Risk Committee, and recruit staff for reconciliation and SOE oversight. - Authorities’ commitments: - Maintain fiscal discipline while making necessary investments. - Under fiscal framework, budget balance must be positive and sufficiently large to meet annual Trust Fund contribution. - Maintain cash buffer; limit supplementary budgets; reconcile legacy debts; progress public enterprise reforms; strengthen AML/CFT framework. *Source: 1nruea2020001 — Tax, Budgets, and Data sections.* --- *Source: 1nruea2020001 (IMF staff report material).* ### 1. Trust Fund ___________________________________________________________________________________ 17 ### 1. Trust Fund ### Context and structural conditions - Nauru is a micro-state with a land area of about 8 square miles and a population of around 12,500 in 2015. - Extensive phosphate mining has left most of Nauru’s land unusable; phosphate revenues peaked in the early 1990s when the Nauru Phosphate Royalty Trust (NPRT) fund held more than A$1 million per capita. - Declining phosphate revenue and weak public finance management led to economic decline, depletion of the NPRT, and collapse of SOEs, including the Bank of Nauru. - FY2012 economic boost from establishment of the Australian Regional Processing Center (RPC), higher fishing license fees, and residual phosphate mining. - A new trust fund was established in FY2016 aimed at providing long-term fiscal financing. ### Governance and capacity constraints - Key governance risks and capacity constraints: - Fiscal governance weaknesses (PFM controls). - Lack of accountability and monitoring of SOEs. - Weaknesses in the rule of law (investor protection and contracts). - AML/CFT framework vulnerabilities. - Mitigation requires greater transparency and a robust accountability framework for SOEs. ### Recent developments - Growth and inflation: - Growth picked up to 5.7 percent in FY2018 (higher-than-expected refugee presence, strong fishing activity, Pacific Island Forum preparations). - Growth slowed to an estimated 1.0 percent in FY2019 (lower numbers of refugees and asylum seekers). - Inflation moderated to 0.5 percent in FY2018 and picked up to 3.9 percent in March 2019. - FY2020 growth projected to moderate to 0.6 percent assuming 300 refugees and asylum seekers remain. - Medium-term growth projected to strengthen to around 2 percent. - Fiscal and public finance developments: - FY2019 fiscal surplus estimated at 16.1 percent of GDP (reflecting a 12 percent of GDP spike in fishing revenue partly offset by expenditure growth from subsidies and a wage increase related to the new superannuation fund). - Government deposits increased to 35.7 percent of GDP in FY2019. - Trust Fund stock reached 63.6 percent of GDP (A$105.2 million). - Total public debt—including SOE debt—increased to A$138.8 million (86.8 percent of GDP) in 2018 reflecting a new loan from Taiwan Province of China for secondary phosphate mining equipment. - External sector: - Current account balance (CAB) deteriorated to around -4.6 percent of GDP in FY2018 after a surplus of 12.7 percent of GDP in FY2017. - CAB is estimated to have returned to a surplus in FY2019 due to spike in fishing revenue inflow. - External position in FY2018 substantially weaker than implied by medium-term fundamentals and desirable policies. - RPC arrangements and revenues: - Nauru and Australia signed a “hybrid” model for joint management of RPC commercial operations and services for the current financial year. - Under the hybrid model, much core RPC activity remains under Australian control; Nauru will be responsible for certain activities with profit-making opportunities. - Authorities received an additional A$21.1 million in FY19/20 as a “hosting fee” which boosted spending; future hosting fee arrangements are unknown. ### Authorities’ views - Authorities acknowledge near-term uncertainty but are more optimistic on balance of risks. - Agree that RPC and phosphate wind-down pose downside risks but emphasize negotiations with Australia and a larger Nauruan role in providing services under the hybrid model. - Note relatively stable demand for fishing days and review plans for secondary phosphate mining given sharp decrease in phosphate prices. ### Fiscal sustainability assessment and projections - Main threats to fiscal sustainability: - Declining RPC revenues. - Mandatory Trust Fund contributions. - Rising non-priority spending. - Staff projections and implications: - Around 30 percent of revenue is linked to RPC operations and is unsustainable in the long run. - Under unchanged policies (baseline), fiscal surplus would be insufficient to make required Trust Fund contributions from FY2021 onward and public debt-to-GDP ratio would begin rising in FY2024. - Staff projects the fiscal surplus to decline through the projection period, turning to deficit in 2024. - As the surplus declines, it will no longer be available to fund committed Trust Fund contributions. - Planned Trust Fund contributions are assumed to continue initially through reductions in the cash balance and later through payment arrears and increased domestic debt. ### Fiscal framework and targets - Nauru’s fiscal framework comprises: - Three “fiscal responsibility ratios”: fiscal balance to GDP must not be negative; personnel costs must be less than 30 percent of current expenditure; tax revenue be maintained within 25 percent of GDP. - Commitment to Trust Fund contributions: MOUs require Nauru to contribute 10-12 percent of domestic revenue to the Trust Fund when domestic revenue is greater than AU$100 million. (Nauru’s domestic revenue has exceeded AU$100 million since FY2016.) - Cash buffer target: at least 2 months of non-RPC recurrent spending should be held in government deposits. - Cash buffer status: - Total government deposits currently exceed 2 months of non-RPC spending. - The deposit account established as the “cash buffer account” (a fixed term account) is about 0.9 months of non-RPC spending. ### Staff recommended fiscal adjustment measures (medium-term) - Aggregate targets and sequencing: - Reduce expenditure by 5 percent of GDP on average over the medium term, compared to baseline. - Suggested measures: constant public employment; maintain public sector wages and transfers constant in real terms; eliminate unproductive spending (subsidies); better targeting of social programs. - Increase tax revenue by 1 percent of GDP on average over the medium term, compared to baseline. - Staff supports introduction of a consumption tax, strengthening revenue administration and compliance, and setting tax reform within a comprehensive medium-term revenue strategy. - Cash buffer safeguarding (specific steps): - Provide guidance on use and replenishment of the cash buffer within the fiscal framework. - Establish a cash management unit (CMU) and a cash management committee (CMC) to prepare cash flow forecasts and smooth the payments profile; CMU to regularly update the CMC. - Public financial management (PFM) and governance actions: - Continue implementing the PFM roadmap to address issues identified in the 2016 PEFA assessment. - Limit the use of supplementary budgets; set aside windfall revenues for appropriation in the normal budget cycle and use them for carefully planned investment spending. - Continue reconciling government accounts to reduce large discrepancies between recorded revenues and expenditures and government financing data. - Phase out the use of cash for tax and other payments to strengthen financial controls, improve accountability, and reduce corruption vulnerabilities. - Improve prioritization of expenditures in line with the National Development Strategy, and strengthen public debt management. - Tax reform design considerations: - Careful design of consumption tax (choice of tax base and rate structure), sequencing and timing of implementation, and modernization of tax administration. - Recognize need for careful communication since most Nauru citizens have limited experience paying tax. ### Risks and scenario notes - Risks skewed to the downside (Annex III, RAM): - Downside: faster-than-expected RPC scale-down; delays in fiscal and structural reforms; weaker-than-expected global growth and commodity price volatility affecting fishing revenue. - Upside: positive spillovers from RPC operations (small business development); higher-than-expected fishing revenue. - If fiscal adjustment cannot be fully implemented, Trust Fund contributions may need to be reduced, lowering Trust Fund revenues in future. *Source: IMF staff report excerpt — “1. Trust Fund.”* ### 19. Implementation of the new Public Enterprises Act is a high priority. Poorly performing ### 1nruea2020001 - 19. Implementation of the new Public Enterprises Act is a high priority. Poorly performing ### Public Enterprises and SOE Reform - Poorly performing SOEs absorb large amounts of scarce capital, provide low returns, and divert government resources from other critical investments. - Staff welcomes the new Public Enterprises Act (2019), which: - Provides for the establishment of an SOE monitoring committee. - Requires quarterly financial reporting. - Next implementation priorities: - Ensure SOEs meet the Act’s requirements, particularly submission and publication of audited financial statements, given long-standing gaps in financial reporting. - State Owned Enterprises listed in the source include: Nauru Utilities Corporation (NUC), Nauru Air Corporation (NAC), Republic of Nauru Phosphate Corporation (RONPHOS), Nauru Rehabilitation Corporation (NRC), Eigigu Holdings Corporation (EHC), Eigigu Solutions Corporation (ESC), Nauru Port Authority (NPA), Cenpac Net Incorporated (internet services), Nauru Phosphate Royalties Trust (NPRT), and others. - On average, subsidy over the past 3 years has been $9m or 5 percent of GDP. However, FY2019 was extraordinary: the government transferred $9m to SOEs and also borrowed $7m on behalf of Ronphos. ### Public Debt and Debt Management - Staff emphasizes sound public debt management, including reconciling and resolving old debts, to ensure debt sustainability and improve Nauru’s access to credit markets (Annex IV, DSA). - A reasonable resolution of the yen-denominated bonds would remove a large share of total government debt. - Reconciliation work to identify amounts owed by SOEs, including outstanding royalty payments to landowners by the Nauru Phosphate Trust Fund and RONPHOS, should be expedited to resolve these debts. - Staff assesses public debt as unsustainable under current policies. - Staff recommends redoubling efforts to seek a reasonable resolution of the defaulted yen-denominated bonds, which would help put the public debt back on a sustainable path. ### Authorities’ Views (fiscal, SOE, tax) - Authorities are committed to maintaining fiscal and debt sustainability. - Agreed on the need to adjust spending if RPC revenues were to fall in line with staff’s baseline projection. - Noted that tax reform should not push up consumer prices and would seek to preserve government revenue at current levels. - Preference that any new taxes should be easy to implement and monitor and preferably imposed at the border. - Authorities have commenced modernization of taxpayer records and data and welcomed PFTAC assistance. - Agreed with staff’s recommended target cash buffer and intended to press ahead with public enterprise reform and establish the SOE monitoring unit, in accordance with the new Public Enterprise Act. ### Financial Sector - Bendigo Bank Agency (the “agency”) is the sole financial institution and provider of financial services in Nauru; it has helped reestablish trust in the financial sector, contributing to improvements in financial inclusion and payment services. - The agency recently opened its first US correspondent bank account and is seeking to open correspondent bank accounts in other major currencies. - Efforts to improve financial literacy should continue. - Availability of formal credit products is needed to support private sector growth. - Staff encourages development of new credit legislation to pave the way for micro-finance loans and potentially other forms of credit such as working capital. ### Economic Diversification and Inclusive Growth - Significant opportunity exists to diversify the economy and create jobs through private sector development. - Near-term steps recommended: - Streamline business registration requirements. - Reduce high business visa fees. - Develop a credit act. - Reintroduce an insurance product. - Review and, if necessary, amend legislation that reduces incentives for non-citizens to invest. - Open non-performing SOEs to private sector management or ownership. - Overcome barriers to land use with solutions that benefit all parties. - Regularize private-sector dialogue to identify near-term measures to improve the business environment. - Infrastructure improvements will benefit business environment: - Reforms at Nauru Utility Corporation have improved water and electricity provision. - Steady progress on new port development. - A new undersea cable is expected to be in place by 2020/2021, with assistance and funding from development partners; this will significantly improve business conditions and the efficiency of public sector service delivery. - Land rehabilitation: - Nauru Rehabilitation Corporation has rehabilitated 5 hectares of land and started work on a further 6 hectares to clear land for solar panels. - Plans are underway to rehabilitate more land for agriculture. - Health and education: - Nauru faces severe health challenges, including one of the lowest life expectancies due to high incidence of NCDs; many patients require overseas medical referrals. - Preventative health measures include campaigns to encourage physical activity, improve nutrition through household gardens, digitalization of patient records, and focus on primary healthcare. - Education: compulsory free education is provided, but enrolment rates and attendance have been low. Literacy data from 2010 signaled a very low literacy rate of 25 percent for Year 7 pupils (11 years of age). Interventions to improve participation (school lunch program, daily payments) have had limited success; concerns include high student-teacher ratios, language barriers, and deficiencies in teacher qualifications. - Staff cautions that further secondary phosphate mining is economically inefficient given significant costs and decreasing phosphate prices amid increased world supply; an in-principle decision to mine secondary phosphate was made in 2019 and mining equipment has been purchased by RONPHOS. ### Governance and Transparency - Main governance risks: weaknesses in fiscal governance (PFM controls), lack of accountability and monitoring of SOEs, gaps in business legislation, and AML/CFT framework weaknesses. - These weaknesses lead to inefficient resource management, vulnerabilities to corruption, and reduced growth. - Mitigating governance risks requires improving transparency and establishing a robust accountability framework for SOEs. - Staff welcomes the “largely compliant” rating from the recent OECD peer review on transparency and exchange of information for tax purposes. - Next steps for fiscal transparency could include publication of the public sector’s assets and liabilities and more timely release of audited financial statements. - Continued effort needed to improve quality of fiscal data and extend data coverage from core government to SOEs. - Encourage stronger procurement practices and greater transparency on funds disbursed at the district level. - AML/CFT progress: - Nauru is preparing for the 2022 mutual evaluation; the Financial Investigations Unit (FIU) is reviewing AML/CFT legislation and working on an information-sharing MOU with Austrac. - Amendments to the Corporations Act, the Business Licenses Act, the Beneficial Ownership Act, the new Trusts Act (October 2018), the Partnership Act, and the Business Names Registration Act (December 2018) will improve transparency and accountability and strengthen investor protection and contract rights. - Authorities committed to implementing PFM reforms, improving SOE transparency and accountability, and strengthening the AML/CFT framework (including removing the offshore financial center). ### Climate Change Resilience - Nauru’s mitigation and adaptation efforts with development partners: - New port expected to reduce Nauru’s carbon footprint by as much as 30 percent by reducing waiting time and fuel consumption for ships using the current mooring system. - Work on solar power generation capacity that will generate as much as 50 percent of Nauru’s electricity needs. - Government moving to cleaner fuels for its vehicles. - Staff encourages: - Integrating climate change plans into economic and development policies. - Costing adaptation plans and integrating them into the budget and medium-term framework. - Ensuring new infrastructure is climate proof. - Seeking donor funds for green projects and broadening development partner relationships to access funds for agriculture and food security. - Transparent budget management to facilitate mobilization of climate change financing and technical assistance from donors. ### Statistics and Capacity Development - Gaps in statistics significantly hamper policy development and surveillance. - Nauru’s Statistics Office is very small and currently limited to producing the CPI, with reliance on TA experts to compile national accounts. - Plans welcomed by staff: - Implement a household survey and a business survey. - Update the last census (from 2011). - These efforts need adequate resourcing and development partner assistance. - Capacity development in statistics, revenue, and PFM is aligned with the National Sustainable Development Strategy (NSDS) and surveillance priorities. - Continued progress would help achieve NSDS goals, including fiscally responsible government and broadening the revenue base. - Scope exists for a gradual reduction of external capacity supplementation over time as domestic capacity is developed. ### Staff Appraisal — Key Findings and Recommendations - Key challenge: develop new sources of economic activity and income as the economy transitions given reduced RPC and phosphate activity. - Growth exceeded expectations in 2018 but was modest in 2019. - Preparing for and managing the scaling down in RPC activity is a policy priority. - Around 30 percent of the receipts of the budget are linked to RPC operations; revenue is likely to decline significantly over the medium term. - Fiscal policy recommendations: - Implement a fiscal adjustment plan to avoid breaching the fiscal anchor, meet mandatory Trust Fund contributions, and avoid further debt accumulation. - Maintain a cash buffer target of two months of non-RPC current spending to ease day-to-day cash management and provide flexibility to respond to shocks. - Limit use of supplementary budgets and set aside windfall revenues for appropriation in the normal budget cycle rather than through supplementary budgets. - Strengthen public debt management. - Structural reforms: - Continue SOE reform to strengthen governance, transparency, and accountability and reduce reliance on budget financing. - Re-engage and revitalize private sector development; improve ease of doing business. - Continue efforts to strengthen AML/CFT framework and enhance financial literacy. - Renew efforts to improve education and health outcomes, including combating NCDs. - Staff assesses Nauru’s external position in FY2018 as substantially weaker than implied by medium-term fundamentals and desirable policies; in the absence of monetary and exchange rate policies, Nauru relies on fiscal policy and structural reforms to ensure external sustainability. - Technical assistance will continue to play an important role in strengthening economic statistics. - Recommendation: next Article IV consultation take place on the 24-month cycle. ### Box 1 — Trust Fund (highlights) - Trust Fund operational for three years; established to save windfall revenue over the medium term to generate long-term revenue through earnings. - The Trust Fund is perpetual; the charter does not provide for withdrawals during the build-up period of 2016–33 unless the Trust Fund Committee determines otherwise. - Contributors: Australia, Taiwan Province of China, the Asian Development Bank, and the Government of Nauru (GoN). New Zealand recently became a contributor and will continue association through additional contributions and as a future representative on the Fund’s Committee. - Trust Fund values and contributions: - Reached A$84.4 million (60 percent of GDP) in FY2018, from a starting value of around A$34 million (25 percent of GDP) in FY2016. - Nauru contributed A$14.8 million to the Trust Fund in FY2016 and made a total contribution of A$47.1 million as of 30 June 2018. - Since establishment, Australia has contributed A$12.1 million, Taiwan Province of China A$10.6 million, and New Zealand A$1.9 million. - Milestones: - Nauru has joined the International Forum of Sovereign Wealth Funds and completed a self-assessment of the Trust Fund in line with the Santiago Principles. - Trust Fund transitioned to Stage 2 of the investment strategy, broadening its portfolio to include more illiquid assets. - In FY2019, the Trust Fund made initial investments into illiquid asset classes, including property and private equity. ### Box 2 — Nauru’s Superannuation Fund (highlights) - July 2018: Government introduced Nauru Super, a defined-contribution superannuation scheme governed by a Board of Trustees and managed by Superlife (New Zealand-based fund manager). - Payments from Nauru Super will be additional to existing pension payments for individuals over 60 years of age. - Coverage and contributions: - Initially available only to Nauruan government employees, including those of SOEs. - From January 1, 2019, expanded to citizens residing in Nauru and government officials posted overseas, and all employers of one or more Nauruan staff. - Not applicable to contract or expatriate employees. - Enrollment is compulsory; both employers and employees required to contribute 5 percent of salaries to the fund. - Government initially raised salaries by 5 percent to avoid changes to take-home pay. - Employees can make additional voluntary contributions that will not be matched by the employer. - Access to funds only at retirement age of 55 years or more. - Currently does not include options for life insurance cover or other insurance programs, but these can be evaluated and added later. *Source: 1nruea2020001* ### Box 3. Nauru’s Financial Sector ### Box 3. Nauru’s Financial Sector ### Overview of the Bendigo Bank Agency - The Bendigo Bank Agency (the “agency”) is the sole financial institution and provider of financial services. - The agency is a special project under the Ministry of Finance and Bendigo and Adelaide Bank Limited of Australia (Bendigo Bank). - When it opened in 2015, it was the first bank operation in Nauru in over a decade. - As part of Bendigo Bank, the agency falls under Australian bank supervision, and customers hold Australian bank accounts. - It is the only Australian agent bank operating outside Australia. - The agency recently opened its first U.S. correspondent bank account and is continuing efforts to open correspondent bank accounts in other major currencies. ### Financial inclusion, access, and services - Deposit accounts, ATMs, and internet banking are available to Nauru citizens; there are currently no available credit or insurance products. - The agency has contributed to improvements in financial inclusion and payment services: - 11,200 accounts, representing close to full account penetration among adults. - 11 ATMs, processing up to 36,000 transactions per month. - About 9,000 ATM cards have been issued — roughly the same as the number of smart phones in Nauru. - Although the economy remains heavily cash-based, greater use is being made of online transaction facilities; for example, most large taxpayers make online tax payments. - The agency is starting to install Point of Sale (POS) terminals, which are in strong demand. - To help improve financial literacy, the agency is offering deposit accounts to students and is working with development partners on the potential introduction of financial education in schools. ### Regulation, compliance, and operational challenges - The agency operates in accordance with Australian financial regulation. - The agency adheres to the Australian-standard AML/CFT requirements, and the parent bank in Australia carries out regular internal audits. - It implements transaction monitoring by Bendigo’s financial crimes department, which is in regular contact with Nauru’s Financial Intelligence Unit. - Despite compliance measures, the agency continues to face restrictions imposed by correspondent banks that prevent transferring funds internationally. *Source: Box 3. Nauru’s Financial Sector, Republic of Nauru — INTERNATIONAL MONETARY FUND.* ### Annex II. External Sector Assessment ### Annex II. External Sector Assessment ### Assessment and approach - Staff assess Nauru’s external position in FY2018 as substantially weaker than medium-term fundamentals and desirable policies, with high uncertainty due to data limitations and high volatility of external inflows. - Approach: analysis is mostly factual; only the EBA-Lite current account methodology is applied with some assumptions owing to volatility in RPC operations, fishing license fees, seaport capacity, and donor inflows. ### Goods and services balance - Goods and services deficit worsened to 53 percent of GDP (7 percent of GDP increase) in FY2018 compared to FY2017, driven by dwindling phosphate production and continued dependence on imports. - Estimates indicate a further decline in phosphate exports in FY2019, widening the goods and services deficit. - The deficit is expected to average around 54 percent of GDP over the medium term, amid uncertainties surrounding secondary phosphate mining. ### Other flows (income account) - Trade deficit financed by large surpluses in the income account. - Income account balance declined to 48.7 percent of GDP (10 percentage points of GDP decline) in FY2018, driven by a drop in RPC revenues. - In FY2019, an estimated 12 percent of GDP increase in fishing revenue offset declining RPC revenues, producing an income account balance spike to 64 percent of GDP. - Income account balance is expected to average 50 percent of GDP over the medium term given expected scaling down of RPC operations and normalizing fishing revenues. ### Current account and REER - Current account recorded a deficit of 4.6 percent of GDP in FY2018, weaker than fundamentals per the EBA-Lite current account model. - Cyclically adjusted current account deficit: 3.7 percent of GDP; cyclically adjusted current account balance norm: 7.1 percent of GDP; current account gap: -10.8 percent of GDP. - Estimated turnaround in FY2019 to a current account surplus of 5 percent of GDP. - REER: main transactions (phosphate exports, RPC operations) not significantly affected by REER; REER plays a limited role due to high import dependence. EBA-Lite REER model could not be used because of data limitations. - FY2018: NEER appreciated in line with the appreciation of the Australian dollar against the US; REER depreciated in line with moderation in inflation. ### External sustainability and scenarios - Nauru lacks monetary and exchange rate policy levers; relies on fiscal policy and structural reforms for external sustainability. - Strong fiscal performance and build-up in government deposits have supported external sustainability; the Trust Fund accumulation contributes to large positive IIP but cannot be drawn from until FY2033. - Staff baseline: current account expected to remain in a deficit of about 4 percent of GDP on average over the medium term due to collapsing phosphate exports, declining RPC income, and normalizing fishing revenue. - Adjustment scenario: a fiscal adjustment improves the current account deficit to about 3.6 percent of GDP on average in the medium term but does not fully offset pressures from slowing RPC operations and halted phosphate production. - Competitiveness constraints: limited exports base, infrastructure bottlenecks, remoteness, and high transport costs. - Vulnerability to global commodity prices due to heavy reliance on imported goods. - EBA-Lite external sustainability approach could not be used due to data limitations. ### Policy recommendations and priorities - Maintain prudent fiscal policy over the medium term to build fiscal buffers and preserve external balance. - Resolve long-standing arrears associated with the yen bond to maintain external debt sustainability and improve Nauru’s reputation in external credit markets. - Prudent management of the loan from Taiwan POC taken on behalf of the Nauru Phosphate Corporation (Ronphos) for equipment for secondary phosphate mining. - Discourage future borrowings on behalf of SOEs to minimize risks to external debt sustainability. - Improve seaport and power infrastructure to help expand the export base; complement infrastructure improvements with: - State-owned enterprise reform to improve competitiveness. - Promotion of private sector development. - Policies to safeguard fiscal sustainability. - Continue use of the Australian dollar as legal tender to provide a nominal anchor given close linkages with Australia, limited institutional capacity, and small economic size. *Annex II. External Sector Assessment — 1nruea2020001.* ### 6. The authorities broadly agreed with the staff’s assessment on debt. They expressed ### 6. The authorities broadly agreed with the staff’s assessment on debt. They expressed ### Authorities’ response and fiscal stance - The authorities broadly agreed with the staff’s assessment on debt. - They expressed their commitment to a prudent fiscal policy stance. - The authorities acknowledge that continuing on the same trajectory could prove harmful to the economy and have agreed to take steps to reign in the debt levels, especially with respect to increasing debt taken on by SOEs. - The authorities highlighted the role of financial support from bilateral and multilateral donors in meeting infrastructure needs. ### External Debt Sustainability Framework (2014–2024) — baseline projections and flows (In percent of GDP, unless otherwise indicated) - Baseline: External debt (2014–2024): 42.0, 45.8, 34.0, 33.6, 30.6, 34.6, 34.3, 33.8, 33.2, 32.5, 31.8, 2.5 - Change in external debt (2014–2024): -10.8, 3.8, -11.8, -0.4, -3.0, 4.0, -0.3, -0.5, -0.5, -0.8, -0.7 - Identified external debt-creating flows (4+8+9) (2014–2024): -93.5, 33.4, -5.2, -15.2, 1.6, -2.8, 5.6, 6.7, 6.8, 6.8, 7.0 - Current account deficit, excluding interest payments (2014–2024): -25.9, 20.6, -2.3, -12.7, 4.4, -5.0, 3.0, 4.1, 4.0, 3.8, 3.8 - Deficit in balance of goods and services (2014–2024): 13.8, 73.4, 42.6, 46.4, 53.3, 59.3, 59.3, 58.1, 55.9, 53.8, 51.4, 50.1 - Exports (2014–2024): 79.2, 52.5, 52.5, 35.8, 26.0, 20.0, 19.9, 20.1, 20.4, 20.7, 20.6 - Imports (2014–2024): 92.9, 125.9, 95.1, 82.2, 79.3, 79.3, 77.9, 76.1, 74.2, 72.1, 70.6 - Net non-debt creating capital inflows (negative) (2014–2024): -64.9, 3.5, 2.8, 0.4, 1.0, 2.3, 2.6, 2.9, 3.2, 3.5, 3.8 - Automatic debt dynamics (2014–2024): -2.6, 9.3, -5.6, -2.9, -3.8, -0.1, 0.1, -0.3, -0.4, -0.5, -0.6 - Contribution from nominal interest rate (2014–2024): 0.7, 0.8, 0.3, 0.0, 0.1, 0.3, 0.3, 0.1, 0.1, 0.1, 0.0 - Contribution from real GDP growth (2014–2024): -13.5, -1.7, -1.2, 1.7, -1.7, -0.3, -0.2, -0.4, -0.5, -0.6, -0.6 - Contribution from price and exchange rate changes (2014–2024): 10.2, 10.3, -4.7, -4.7, -2.2, .......... - Residual, incl. change in gross foreign assets (2-3) (2014–2024): 82.6, -29.6, -6.6, 14.8, -4.6, 6.8, -6.0, -7.2, -7.4, -7.6, -7.6 - External debt-to-exports ratio (in percent) (2014–2024): 53.1, 87.3, 64.8, 93.9, 117.7, 173.0, 172.4, 167.7, 162.8, 157.0, 154.7 - Gross external financing need (in billions of US dollars) (2014–2024): -0.0, 20.0, 20.0, -0.0, -0.0, 10.0, -0.0, -0.0, 10.0, 10.0, 10.0, 10.0 - Gross external financing need (in percent of GDP) — various year labels present including -22.1, 23.5, -0.4, -12.7, 6.1, 10-Year, 10-Year, -4.5, 3.5, 4.4, 4.3, 4.2, 3.8 - Scenario with key variables at their historical averages: 34.6, -1.7, -33.8, -61.8, -86.0, -107.1, 11.1 Notes on definitions in the table: - Automatic debt dynamics derived formula provided in source (variables r, g, e, a defined). - Contribution from price and exchange rate changes defined in the table notes. - Gross external financing need defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period. - Key variables for scenarios include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP. - Debt-stabilizing non-interest current account long-run constant balance definition provided in table notes. ### Public Sector Debt Sustainability Analysis (DSA) — Baseline, composition, and alternative scenarios - Figures present Gross Nominal Public Debt (in percent of GDP), Public Gross Financing Needs (in percent of GDP), composition by maturity (medium and long-term), and by currency (local currency-denominated) with historical and projection series (2017–2024). - Underlying assumptions (Baseline Scenario, in percent): - Real GDP growth (2019–2024): 1.0, 0.6, 1.1, 1.5, 1.8, 2.0 - Inflation (2019–2024): 2.3, 2.3, 1.9, 1.6, 2.0, 2.0 - Primary Balance (2019–2024): 15.0, 14.5, 3.7, 2.4, 1.2, -0.7 - Effective interest rate (2019–2024): 0.0, 0.1, 0.1, 0.1, 0.1, 0.1 - Constant Primary Balance Scenario assumption: Primary Balance = 15.0 (2019–2024); other macro assumptions same as baseline. - Historical Scenario: Real GDP growth reported as 1.0, 10.6, 10.6, 10.6, 10.6 (presented in figure as historical comparisons). ### Stress tests, realism, and risk assessment - Stress test scenarios illustrated include: Interest rate shock, Current account shock, Combined shock, Real depreciation shock (one-time real depreciation of 30 percent occurs in 2010 per figure notes), Growth shock, and others. - Figure box values (examples from Bound Tests): - Baseline values shown at 32–33 (External debt in percent of GDP series across 2014–2024). - Individual shocks are permanent one-half standard deviation shocks; combined shocks and historical scenarios use ten-year historical averages. - Public DSA stress-test underlying assumptions (selected): - Real GDP growth under shocks: baseline 1.0; scenario values include -10.4, -9.9 for early years in some scenarios. - Primary balance under stress: baseline 15.0; scenario values include -4.0, -28.9 in combined macro-fiscal scenario. - Effective interest rate under combined shock: 0.0, 0.16, 6.6, 13.4, 15.9, 18.3 (in percent across years in Combined Macro-Fiscal Shock). - Risk assessment heat map and indicators: - External financing requirement defined as sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at end of previous period. - Benchmarks for risk assessment specified (e.g., gross financing needs benchmark of 15%; external financing requirement benchmarks 5 and 15 percent of GDP; bond spread band 200 and 600 basis points; other numeric thresholds listed in figure notes). - Forecast track record statistics (Figure 4): - Real GDP growth: Nauru forecast error 1.66; percentile rank 94%; Nauru median forecast error, 2010-2018 noted. - Primary Balance: Nauru forecast error 15.10; percentile rank 100%. - Inflation (Deflator): Nauru forecast error 2.32; percentile rank 91%. ### Annex V — Secondary Phosphate Mining - Context and RONPHOS estimates: - RONPHOS estimates around 60 million tons of phosphate remains between the island’s limestone pinnacles. - Potential production estimate: 500,000 tons per annum in exports over the next 20–30 years. - Business case estimates a ramp up period of 15 months and a capital injection of A$20 million. - Viability remains uncertain and contingent on further in-depth study; risks explicitly acknowledged by RONPHOS. - Global landscape: - USGS 2018 estimates: world consumption of phosphate expected to increase to 48.9 million tons in 2020 from 44.5 million tons in 2016. - Key exporters: Morocco, Jordan, Russia, Peru, and Egypt together account for 80 percent of all phosphate exports. - Nauru held about 5 percent of the global export share in 1985 and now constitutes <1 percent. - World resources of phosphate rock exceed 300 billion tons. - Recent studies show global concentrations of high-grade phosphate rock declining; lower P2O5 content ores are more water and energy intensive and contain higher impurities. - Outlook and risks for Nauru (enumerated): 1) Proposed backfilling and drilling of limestone pinnacles are new, unproven steps. 2) Seaport infrastructure is at the end of its design life and not suited for shipping phosphate. 3) Funding for equipment and infrastructure is difficult to obtain; loan repayments vulnerable to global phosphate price changes, impurities, and operational cost pressures. 4) Secondary mining will be extremely water intensive; Nauru lacks groundwater supplies. 5) Nauru is an oil importer and vulnerable to global commodity market fluctuations; energy needs of mining may not be sustainable. 6) Processing lower grade phosphate poses health and environmental risks (toxic heavy metals such as cadmium and uranium; additional air, water, and noise pollution). 7) Much of the island is already uninhabitable from past mining; further mining threatens remaining areas and land rehabilitation work. - Case example: Christmas Island halted further phosphate mining given biodiversity and environmental concerns; Phosphate Resources Limited’s exploratory drilling request was rejected by the federal government. ### Annex VI — IMF Capacity Development in Nauru - IMF/TA providers, topics, and periods (tabulated in source): - PFTAC — Statistics - National Accounts — July 2018 - CDOT — Statistics - External Sector Statistics — October 2018 - PFTAC — PFM – Transition to IPSAS Cash Reporting — February 2019 - PFTAC — Revenue – Review of tax administration reforms — April 2019 - PFTAC — Statistics - National Accounts – Building independent compilation capacity — August 2019 - PFTAC — Revenue – Review organizational arrangements and core tax functions — September 2019 ### Fund relations, membership, and exchange arrangements (as of December, 2019 / January 6, 2020 documents) - Membership status: joined April 12, 2016; Article VIII. - General Resources Account (SDR Million / Percent Quota): - Quota 2.80 100.00 - IMF’s Holdings of Currency 2.12 75.71 - Reserves Tranche position 0.68 24.32 - SDR Department (SDR Million / Percent Allocation): - Net cumulative allocations 0.86 100.00 - Holdings 0.18 20.96 - Outstanding Purchases and Loans: None - Financial Arrangements: None - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDR) — Charges/Interest (2019–2023): 0.01, 0.01, 0.01, 0.01, 0.01; Total 0.01, 0.01, 0.01, 0.01, 0.01 - Exchange arrangements: - De jure and de facto exchange rate arrangements classified as no separate legal tender. - Nauru’s legal tender is the Australian dollar. - There is no central monetary institution. - Nauru has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions. *Source: IMF staff report material supplied in content unit 1nruea2020001.* ### introduction of a Business Tax Act (BTA). The new BTA imposes a business profits tax, small business ### 1nruea2020001 - introduction of a Business Tax Act (BTA) ### Tax reform and revenue measures - Introduction of a Business Tax Act (BTA) that imposes: - a business profits tax, - small business tax, - non-residents tax, - an international transportation business tax. - A fourth supplementary budget for FY2019/20 was issued on 20 December 2019 to appropriate A$17.6 million (10 percent of GDP) in additional revenue. - Composition of the A$17.6 million: - A$5.3 million in additional RPC hosting fees. - A$10.2 million payment for reimbursable RPC costs. - A$1.5 million dividend from a telecom company. - Most additional revenue appropriated as new spending: - A$10.9 million for operational costs at the Department of Multicultural Affairs. - A$4.2 million in SOE subsidies and a windfall payment to government workers. - A$0.6 million contribution to the Nauru Trust Fund. - A$2.0 million on other areas. - Staff treatment and fiscal context: - Staff treated the revenue increase as windfall revenue. - Revenue gain over the four supplementary budgets increased revenue in FY2019/20 by 60 percent above the initial Approved Budget. - Supplementary budgets have included total appropriations of A$86 million (50.5 percent of GDP) for FY2019/20, comprised of new spending (A$73.6 million) and appropriations to the Nauru Trust Fund and Fiscal Cash Buffer (A$12.4 million). - Of the newly appropriated expenditure in FY2019/20: - 2 percent of GDP (A$3.6 million) was spent on health. - less than 1 percent of GDP (A$0.4 million) was spent on education. - Policy guidance highlighted: - Advice to set aside windfall revenues for appropriation in the normal budget cycle rather than through supplementary budgets. - Windfall revenues should be used to boost resources for carefully planned spending. ### Statistical issues and data adequacy (As of December, 2019) - General assessment: - Data provision has serious shortcomings that significantly hamper surveillance. - Nauru became an IMF member in April 2016. - Most macroeconomic data remain unpublished even though they are provided to staff. - Capacity of the National Bureau of Statistics (NBS) is limited despite additional recruitment; reliance on PFTAC technical assistance and donor support continues. - National accounts: - Annual GDP estimates have improved with PFTAC TA. - Latest TA mission in May 2019 assisted NBS with implementation of new data sources for annual GDP compilation. - TA recommended increasing the number of staff and improving data sources during the next rebase of national accounts in 2021. - Price statistics: - The NBS compiles the quarterly CPI with the reference year 2015. - Latest PFTAC TA in 2019 found shortcomings related to prices of imported motor vehicles. - No producer, wholesale, or trade price indices exist. - Government finance statistics (GFS): - MoF with contractual expatriates currently aim to compile and disseminate GFS. - Nauru reported budgetary central government GFS for the first time in 2018 with significant PFTAC assistance. - Lack of timely, accurate and quality data continues to hamper GFS compilation; MoF relies on PFTAC TA. - Monetary and financial statistics: - No monetary and financial data statistics available since financial sector is in early stage of development. - Nauru uses the Australian dollar as legal tender and does not have a central bank. - No bank in Nauru over the past decade until Bendigo Bank agency opened in June 2015; the agency provides deposits but no loans and no foreign exchange transactions. - External sector statistics (ESS): - Annual balance of payments and international investment position statistics were compiled for the first time in 2014 with PFTAC support. - June 2019 ESS TA mission found important shortcomings in data sources, especially custom data formatting and coverage of private sector corporations and the Nauru Super Pension (NSP) scheme transactions and positions. - Data Standards and Quality: - Nauru does not participate in any of the IMF’s Data Standards Initiatives. - No data ROSC are available. - Selected indicator observations and reporting frequencies (as listed): - Exchange rates: Latest observation 12/04/2019; Date received 12/04/2019; Frequency D; Reporting: NA; Publication: NA. - International reserve assets and reserve liabilities of the monetary authorities: Latest observation 12/2016; Date received 01/2017; Frequency M; Reporting Q; Publication NA. - Consumer price index: Latest observation 09/2016; Date received 01/2017; Frequency Q; Reporting Q; Publication Q. - Revenue, expenditure, balance and composition of financing – central government: FY2018; Date received 09/2019; Frequency M; Reporting Q; Publication NA. - GDP/GNP: FY2015; Date received 10/2016; Frequency A; Reporting A; Publication NA. - International investment position: Latest observation 12/2018; Date received 6/2019; Frequency A; Reporting A; Publication A. ### Public financial management and governance reforms - Progress reported: - Financial statements for FY2016/17 submitted for audit and published on the official website. - Efforts to improve bank reconciliation; consultant engaged to map the financial management information system (FMIS) to support GFS reporting. - Work continuing to improve internal audit, establish a Finance and Audit Risk Committee, and recruit new staff for reconciliation and SOE performance oversight. - Authorities’ commitments: - Maintain fiscal discipline while making necessary investments in productive and social sectors. - Under Nauru’s fiscal framework, the budget balance must be positive and sufficiently large to meet the annual Trust Fund contribution. - Maintain a cash buffer for liquidity management. - Limit use of supplementary budgets while recognizing some flexibility is appropriate given narrow revenue base. - Reconcile and resolve legacy debts to ensure future debt sustainability. - Progress public enterprise reforms and establish a new SOE monitoring unit. - Strengthen Nauru’s AML/CFT framework; preparations underway for the 2022 APG-FATF Mutual Evaluation. ### Economic context, development priorities, and international engagement - Country profile and constraints: - Nauru population of around 12,500 on an island of 21 square km, located 40 km south of the equator; nearest neighbor is 300 km away. - Lack of scale and remoteness constrain growth; limited arable land and heavily mined central plateau; reliance on imports and high incidence of non-communicable diseases. - Phosphate mining approaching the end of its economic life; fishing license fees can be volatile. - Development progress and priorities: - Establishment of a new Nauru Trust Fund to save windfall income and invest for future generations. - Reforms at the Nauru Utility Corporation improved water and electricity reliability. - Infrastructure projects (new port and undersea cable) expected to encourage trade and economic activity. - Banking services re-established in 2015; almost all adults now have access to a bank account. - Improving school attendance, education and health outcomes is a government priority. - International and regional presence: - Regional Resident Representative Office for Pacific Islands based in Suva, Fiji opened on September 13, 2010; covers Fiji, Kiribati, Marshall Islands, Micronesia, Nauru, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu. - Ms. Leni Hunter is the current resident representative. - Relations with IFIs: activities of other institutions in Nauru include World Bank Group, Asian Development Bank, and Pacific Financial Technical Assistance Center (PFTAC). *Source: 1nruea2020001 - introduction of a Business Tax Act (BTA).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1nruea2020001.pdf_