## Nauru: Staff Concluding Statement of the 2023 Article IV Mission

_IMF News, September 15, 2023_

## Source details

**Canonical URL:** [Nauru: Staff Concluding Statement of the 2023 Article IV Mission](https://www.imf.org/en/news/articles/2023/09/15/nauru-staff-concluding-statement-of-the-2023-article-iv-mission)

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## Bibliographic details
- Published: September 15, 2023

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### Economic context, outlook, and risks
- Key recent outcomes
  - 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).
  - 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.
  - Average inflation: 3.6 percent in FY2022, driven by higher international food and fuel prices.
  - Inflation increased to 6.3 percent in FY2023 due to persistent inflation in trading partners and reduction of transportation subsidies.
  - Current account balance (CAB): -0.5 percent of GDP in FY2022, with rising imports driven by high transportation costs.
  - 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.
- Projections and medium-term outlook
  - 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.
  - Inflation expected to slow to 5.3 percent in FY2024, consistent with lower global inflation and tighter monetary policy in Australia.
  - CAB expected to temporarily improve in FY2024 due to RPC inflows before worsening over the medium term as RPC revenues decline.
  - 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.
- Risks to the outlook (tilted to the downside)
  - Uncertainties related to RPC activities.
  - Continued pressure on financial services that could disrupt payment systems.
  - Delayed fiscal and structural reforms increasing dependence on volatile revenues.
  - Deepening geo-economic fragmentation and an abrupt global slowdown affecting trading partners and donors.
  - Higher commodity prices raising inflation and fiscal spending.
  - Vulnerability to extreme climate events similar to other pacific island countries (PICs).
  - Upside risks include an unexpected extension of RPC activities and increased demand for fishing licenses.

### Fiscal policy
- Current fiscal position and outlook
  - Fiscal surplus excluding government’s contribution to the Nauru Trust Fund (NTF): 8.3 percent of GDP in FY2023.
  - 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.
  - Debt estimated at 20.2 percent of GDP in FY2023; assessed to be sustainable under current policies.
  - Nauru Trust Fund (NTF) target: AUD 700 million by 2033; maintaining sufficient fiscal surplus to finance government contributions will be key.
- Staff recommendations on revenue mobilization
  - 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.
  - Medium-term: implement revenue administration measures such as revenue risk management, audits, and regular review of excise rates.
  - Long-term: consider introducing a value added tax.
- Expenditure priorities and public financial management (PFM)
  - Prioritize spending that promotes growth, resilience, and inclusion; improve efficiency of current spending through enhanced PFM.
  - Formalize fiscal responsibility ratios in a rules-based framework; improve health and education spending efficiency; implement more targeted and progressive subsidies.
  - Review SOE subsidies and grants to increase efficiency; adopt digital technologies to expand remote access to education and healthcare.
  - 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.
  - Continue engaging PFTAC in technical assistance on revenue mobilization and PFM.

### Financial sector policies
- AML/CFT and regulatory progress
  - Beneficial Ownership Act passed in 2017.
  - New Anti‑Money Laundering and Targeted Financial Sanctions Act passed in June 2023 with APG support.
  - APG mutual evaluation ongoing: on-site visit scheduled for October 2023; adoption of the report scheduled for July 2024.
  - 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.
- Staff support and recommendations
  - Continue improving the AML/CFT framework, including implementing recommended actions expected from the mutual evaluation.
  - 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.
  - Address infrastructure gaps constraining digital payments, for example through the planned undersea fiber-optic cable project.
- Specific legal provisions
  - 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).

### Structural reforms
- Human capital and social outcomes
  - Around 35 percent of the population is of school age; 55 percent of the population is under 25.
  - School enrollment rate and teacher-to-student ratio are lower than the world average; attendance rates in primary and secondary schools are low.
  - Recommendation: prioritize education spending to improve enrollment and attendance rates and increase the teacher-to-student ratio.
- Climate adaptation, mitigation, and infrastructure
  - Progress: construction of a climate resilient port and solar farms; Nauru is reviewing and updating its National Adaptation Plan including sectoral detail.
  - 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.
- Economic diversification and connectivity
  - 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.
  - Investments in refrigerated storage facilities could support containerization and eventual fish processing and generate additional government revenues.
  - Increased participation in regional labor mobility schemes could increase remittances to partially offset RPC employment losses.
  - Universal digital connectivity could improve labor force participation, access to education and healthcare, strengthen social protection, and support long-term growth potential.
  - A legal and regulatory framework that improves access to land will be needed over time to attract private sector investment.
- Governance and anti-corruption
  - 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.
  - 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.

### Closing and IMF engagement
- Staff assessment highlights
  - Nauru’s external position was moderately weaker than implied by fundamentals and desirable policies in FY2022.
  - 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.
- IMF support
  - The IMF stands ready to support the authorities to implement reforms through policy advice and continued capacity development engagement.
- Acknowledgement
  - Staff thanks the authorities for their hospitality and collaboration.

*Staff Concluding Statement of the 2023 Article IV Mission, September 15, 2023*

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## References

- [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/)
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_Source: https://www.imf.org/en/news/articles/2023/09/15/nauru-staff-concluding-statement-of-the-2023-article-iv-mission_