{
  "title": "Nauru: Staff Concluding Statement of the 2023 Article IV Mission",
  "publication": "IMF News, September 15, 2023",
  "sourceUrl": "https://www.imf.org/en/news/articles/2023/09/15/nauru-staff-concluding-statement-of-the-2023-article-iv-mission",
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  "summary": "Nauru’s external position was moderately weaker than the level implied by fundamentals and desirable policies in FY2022. Rising imports, driven by the high transportation costs, led to a current account balance (CAB) of -0.5 percent of GDP in FY2022. The reserve coverage is equivalent to 3.",
  "publishDate": "2023-09-15",
  "sections": [
    {
      "heading": "Economic context, outlook, and risks",
      "content": "- Key recent outcomes\n  - Real GDP growth: 2.8 percent in fiscal year (FY) 2022 driven by strong phosphate production and sizable fiscal support to households and State-Owned Enterprises (SOEs).\n  - Real GDP growth estimated at 0.6 percent in FY2023 as the Regional Processing Center (RPC) continued to scale down, leading to weaker demand and service-related trade.\n  - Average inflation: 3.6 percent in FY2022, driven by higher international food and fuel prices.\n  - Inflation increased to 6.3 percent in FY2023 due to persistent inflation in trading partners and reduction of transportation subsidies.\n  - Current account balance (CAB): -0.5 percent of GDP in FY2022, with rising imports driven by high transportation costs.\n  - Reserve coverage: 3.5 months of imports in FY2022, above the reserve adequacy ratio of 2.8 months, but expected to decline over the medium term.\n- Projections and medium-term outlook\n  - Growth projected at 1.4 percent in FY2024 as increased wholesale and retail trade financed by RPC revenues offsets lower transportation growth from delays in port completion.\n  - Inflation expected to slow to 5.3 percent in FY2024, consistent with lower global inflation and tighter monetary policy in Australia.\n  - CAB expected to temporarily improve in FY2024 due to RPC inflows before worsening over the medium term as RPC revenues decline.\n  - The planned scale-down of the RPC over the next few years is expected to adversely affect economic activity and fiscal revenue; diversification from a climate resilient port and a fiber-optic cable construction are expected to partly offset.\n- Risks to the outlook (tilted to the downside)\n  - Uncertainties related to RPC activities.\n  - Continued pressure on financial services that could disrupt payment systems.\n  - Delayed fiscal and structural reforms increasing dependence on volatile revenues.\n  - Deepening geo-economic fragmentation and an abrupt global slowdown affecting trading partners and donors.\n  - Higher commodity prices raising inflation and fiscal spending.\n  - Vulnerability to extreme climate events similar to other pacific island countries (PICs).\n  - Upside risks include an unexpected extension of RPC activities and increased demand for fishing licenses."
    },
    {
      "heading": "Fiscal policy",
      "content": "- Current fiscal position and outlook\n  - Fiscal surplus excluding government’s contribution to the Nauru Trust Fund (NTF): 8.3 percent of GDP in FY2023.\n  - Fiscal surplus excluding contributions to the NTF projected to moderate to 6 percent of GDP in FY2024 as higher RPC revenues offset declining tax revenues.\n  - Debt estimated at 20.2 percent of GDP in FY2023; assessed to be sustainable under current policies.\n  - Nauru Trust Fund (NTF) target: AUD 700 million by 2033; maintaining sufficient fiscal surplus to finance government contributions will be key.\n- Staff recommendations on revenue mobilization\n  - Short-term: (i) remove discretionary exemptions in import duties and ultimately replace import duties with excise duties; (ii) improve the progressivity of the personal income tax and reduce exemptions in the corporate income tax.\n  - Medium-term: implement revenue administration measures such as revenue risk management, audits, and regular review of excise rates.\n  - Long-term: consider introducing a value added tax.\n- Expenditure priorities and public financial management (PFM)\n  - Prioritize spending that promotes growth, resilience, and inclusion; improve efficiency of current spending through enhanced PFM.\n  - Formalize fiscal responsibility ratios in a rules-based framework; improve health and education spending efficiency; implement more targeted and progressive subsidies.\n  - Review SOE subsidies and grants to increase efficiency; adopt digital technologies to expand remote access to education and healthcare.\n  - Implement key recommendations from the 2022 Public Expenditure and Financial Accountability Assessment, including: (i) a single supplementary budget linked to a mid-year review; (ii) enhancing budget submission quality and frequency of publishing budget information; (iii) enhancing public asset management; (iv) improving internal and external audit.\n  - Continue engaging PFTAC in technical assistance on revenue mobilization and PFM."
    },
    {
      "heading": "Financial sector policies",
      "content": "- AML/CFT and regulatory progress\n  - Beneficial Ownership Act passed in 2017.\n  - New Anti‑Money Laundering and Targeted Financial Sanctions Act passed in June 2023 with APG support.\n  - APG mutual evaluation ongoing: on-site visit scheduled for October 2023; adoption of the report scheduled for July 2024.\n  - The newly passed AML law is expected to improve mutual evaluation outcomes; a positive outcome would be beneficial as the report will be published online by APG and FATF after adoption.\n- Staff support and recommendations\n  - Continue improving the AML/CFT framework, including implementing recommended actions expected from the mutual evaluation.\n  - Support provision of financial sector services by regional financial institutions effectively regulated and supervised by their home jurisdiction, backed by strong bilateral cooperation between Nauruan authorities and overseas counterparts.\n  - Address infrastructure gaps constraining digital payments, for example through the planned undersea fiber-optic cable project.\n- Specific legal provisions\n  - Nauru’s Anti-Money Laundering and Targeted Financial Sanctions Act 2023 includes provisions enabling certain exemptions from Nauru’s AML/CFT framework for financial institutions adequately regulated and supervised in another country, or where there is low risk of financial crime; cooperation continues between AUSTRAC and the Nauru Financial Intelligence Unit (NFIU)."
    },
    {
      "heading": "Structural reforms",
      "content": "- Human capital and social outcomes\n  - Around 35 percent of the population is of school age; 55 percent of the population is under 25.\n  - School enrollment rate and teacher-to-student ratio are lower than the world average; attendance rates in primary and secondary schools are low.\n  - Recommendation: prioritize education spending to improve enrollment and attendance rates and increase the teacher-to-student ratio.\n- Climate adaptation, mitigation, and infrastructure\n  - Progress: construction of a climate resilient port and solar farms; Nauru is reviewing and updating its National Adaptation Plan including sectoral detail.\n  - Recommendation: prepare detailed costing of priority projects and integrate costing into the budget and medium-term framework, including provisions to support the new climate change unit.\n- Economic diversification and connectivity\n  - Completion of the new port and related infrastructure could create new growth and employment opportunities, support domestic containerization, potential fish processing, and act as a regional transportation hub.\n  - Investments in refrigerated storage facilities could support containerization and eventual fish processing and generate additional government revenues.\n  - Increased participation in regional labor mobility schemes could increase remittances to partially offset RPC employment losses.\n  - Universal digital connectivity could improve labor force participation, access to education and healthcare, strengthen social protection, and support long-term growth potential.\n  - A legal and regulatory framework that improves access to land will be needed over time to attract private sector investment.\n- Governance and anti-corruption\n  - Recent PFM improvements: clearer fiscal strategy, better debt management, improved timeliness of in-year budget reports, increased transparency of budget information, and better internal controls for non-salary expenditures.\n  - Recommendation: continue strengthening fiscal governance (PFM controls) and the rule of law (investor protection and contracts) to improve resource management efficiency, reduce vulnerabilities to corruption, and support growth."
    },
    {
      "heading": "Closing and IMF engagement",
      "content": "- Staff assessment highlights\n  - Nauru’s external position was moderately weaker than implied by fundamentals and desirable policies in FY2022.\n  - Debt vulnerability reduced by resolution of external debt to Firebird in 2021 and sustained past fiscal surpluses, but reliance on volatile non-tax revenues and donor grants remains a vulnerability.\n- IMF support\n  - The IMF stands ready to support the authorities to implement reforms through policy advice and continued capacity development engagement.\n- Acknowledgement\n  - Staff thanks the authorities for their hospitality and collaboration.\n\nStaff Concluding Statement of the 2023 Article IV Mission, September 15, 2023\n\n---\n\n\n References\n\n- Republic of Naoero and the IMF\n- IMF Policy Advice -- A Factsheet\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2023/09/15/nauru-staff-concluding-statement-of-the-2023-article-iv-mission"
    }
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    "Published: September 15, 2023",
    "Key recent outcomes",
    "Projections and medium-term outlook",
    "Risks to the outlook (tilted to the downside)",
    "Current fiscal position and outlook",
    "Staff recommendations on revenue mobilization",
    "Expenditure priorities and public financial management (PFM)",
    "AML/CFT and regulatory progress",
    "Staff support and recommendations",
    "Specific legal provisions",
    "Human capital and social outcomes",
    "Climate adaptation, mitigation, and infrastructure",
    "Economic diversification and connectivity",
    "Governance and anti-corruption",
    "Staff assessment highlights",
    "IMF support",
    "Acknowledgement",
    "[Republic of Naoero and the IMF](https://www.imf.org/en/news/searchnews)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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