Mission Concluding Statement 

Washington, DC -

The government of Nauru has made significant strides in restoring economic stability over the past decade. In recent years, the government has also been working closely with development partners to improve infrastructure, ensure access to banking services, and secure multi-year donor support. Nonetheless, Nauru remains highly vulnerable to external shocks, particularly in a global environment with heightened trade policy uncertainty and potential cuts in development aid. Thus, policies should be geared towards preserving economic stability, rebuilding fiscal buffers, and pursuing structural reforms to boost long-term growth and enhance economic resilience.

I. Recent Developments, Outlook, and Risks

Growth has picked up in FY2025, mainly driven by a revival of activity in the Regional Processing Center (RPC). The economy is estimated to grow by 2.1 percent in FY2025 and moderate to 1.9 percent in FY2026, driven largely by public demand and supported by sustained donor support and the continuation of RPC operations.

Inflation remains elevated at over 6 percent in FY2025; however, it is expected to moderate to 4.5 percent in FY2026 and continue to decline below 3 percent by FY2029. While supply-side factors tied to shipments and Australian export prices have been the predominant driver of inflation in Nauru, short-term demand-side factors, which are correlated with domestic government wage bills, have also contributed to price pressures.

The expansionary fiscal stance in FY2025 has reduced the fiscal balance to 3.6 percent of GDP. The increased spending was partly financed by a large surplus carried forward from the year before. The medium-term fiscal outlook has improved relative to that in the last IMF Article IV Staff Report, following the Nauru-Australia Treaty that was concluded in late 2024 and the anticipated RPC operations in coming years.

Nauru’s external position in FY2024 is assessed to be broadly in line with the level implied by fundamentals and desirable policies. The strong current account surplus (6.2 percent of GDP in FY2024) is expected to moderate to 2.7 percent in FY2025. The moderation is largely driven by Nauru’s reliance on imports of essential products and the external monetary anchor based on the use of Australian dollar as legal tender. Gross international reserves are estimated at AU$85 million as of end-FY2025, implying a reserve coverage of 3.4 months of prospective imports.

The financial system has been broadly stable, and the transition from Australia’s Bendigo Bank to Commonwealth Bank of Australia (CBA) is on track, with CBA set to commence its banking operations in Nauru in August 2025. As of end-June, more than half of the existing customer base at Bendigo Bank has applied to open bank accounts at CBA. Onboarding of nonindividual accounts at the CBA has seen delays, and emerging bottlenecks are being addressed through increased outreach to potential CBA account holders prior to the closure of their Bendigo Bank accounts.

Risks to the outlook are tilted to the downside driven by both external and domestic factors:

• External risks to growth stem from a global slowdown and reduced foreign grants driven by growing policy uncertainty and weakened international cooperation. Nauru is also susceptible to natural disasters and rising sea levels. Inflation could be higher than expected due to volatile commodity prices and a resurgence of food prices from delayed shipments and escalatory trade tensions in the global economy.
• Domestic risks to growth arise from unexpected disruptions in banking services from the transition that may delay payments and dampen economic activity. Additionally, further wage increases in the public sector could keep inflation more protracted. Over the medium-term, growth and employment are subject to uncertainty surrounding the operations of the RPC. The economic impact of Nauru’s sponsorship on deep-sea mining is uncertain, as the initiative is still in its early stages.

II. Policies to Rebuild Buffers and Enhance Economic Resilience

A. Fiscal Policy—Pivot toward fiscal restraint to build buffers

Uncertainty around regional growth outlook and persistent inflation warrant fiscal restraint to build buffers and bolster resilience. Staff recommends a tightening of the fiscal stance—measured by slower growth in government expenditures—in FY2026. Fiscal policy should be carefully calibrated to avoid procyclical spending. If growth slows significantly, targeted and temporary support could be deployed to protect vulnerable households.

Over the medium term, fiscal policy should foster economic stability and promote sustainable growth. While the government is on track to meet the Nauru Intergenerational Trust Fund target by 2033, greater fiscal prudence is needed due to numerous vulnerabilities. Relative to the authorities’ plan, Staff recommends a cumulative adjustment of about AU$10 million by FY2030 (or 3 percentage points of GDP), which would balance the need to build buffers and meet development needs. As debt is low, the pace and size of adjustment should ensure meeting the government’s obligations on public services, while frontloading measures have merits of mitigating high inflation. This can be achieved using a blend of expenditure and revenue measures.

• High government wage bills, primarily driven by workforce expansion, should be contained. Building on the authorities’ plans, measures could include limiting non-essential hires and better linking the annual salary adjustment to performance. Enhancing workforce skills could boost productivity and reduce government job dependency. Social safety nets need to be strengthened, leveraging the support of development partners. Expenditure rationalization can support the adjustment. The broad reforms on public health services should ensure cost effectiveness for quality services and safeguard the long-term sustainability of public finances. The government should further improve public investment management to limit project delays.
• Taxes as a share of total revenues have declined since FY2022. Untapped tax potential can be unlocked by broadening the tax base, including by removing tax exemptions. Ongoing initiatives to improve compliance with business profit tax through pilot audits have the potential to raise tax revenues over the medium term.

Fiscal adjustments should be framed in a medium-term framework, adhering to fiscal responsibility ratios and vigilantly monitoring within-year developments, including cash management. This requires prudent revenue projections and strict expenditure control.

Monitoring public enterprises, especially those with financial weaknesses, is crucial for managing fiscal risks. The Public Enterprise Monitoring Unit has made good progress in this regard. Going forward, support to public enterprises should be accompanied by their efforts to achieve tangible efficiency gains and timely disclosure of financial statements. Additionally, enhancing fiscal governance and transparency, such as procurement processes, will improve spending efficiency and mitigate corruption opportunities.

Public debt is assessed to be sustainable, but vulnerabilities remain. Although debt is low, debt service burden has risen moderately following the expiry of donor support in existing debt repayment. Uncertainty surrounding donor support and materialization of contingent liabilities could affect the debt outlook, requiring sustained fiscal discipline.

B. Financial Sector Policy—Foster a stable and inclusive financial environment

Nauru’s financial system is in a nascent stage and remains generally stable, though it faces pockets of vulnerabilities. An orderly transition from Bendigo Bank to CBA is necessary for financial stability. In this regard, proactive public outreach encouraging depositors to open bank accounts with the CBA (particularly for non-individual entities), as well as greater coordination between government agencies and the banks can address bottlenecks and limit disruption in banking services. Establishing robust contingency plans will further mitigate risks associated with disruptions of services.

Nauru’s connectivity to the global payment system remains fragile. While CBA will provide access to correspondent banking relationships (CBRs) for foreign exchange transactions in major currencies, further efforts to address CBR pressures should take into account the low-risk environment of money laundering and terrorism financing (ML/TF) in Nauru and focus on the outreach to key foreign regulatory authorities, including a corridor risk assessment.

Sustained stability in the banking sector could offer a pathway to the introduction of credit services; however, fostering financial literacy is a prerequisite to harnessing this opportunity. Such a phased approach can facilitate responsible borrowing, eventually paving a way for a sustainable credit environment.

Nauru has made progress in enhancing its AML/CFT regulatory framework, which was recognized in the APG 2024 Mutual Evaluation Report regarding its technical compliance with the recommendations by FATF. The Nauru Financial Intelligence Unit should enhance efforts to monitor vulnerabilities facing Nauru, including emerging risks on AML/CFT framework that the government may encounter due to the Economic and Climate Resilience Citizenship Program and potentially new digital asset providers. The government plans to set up a digital asset regulatory to meet one of the FATF’s recommendations. As digital asset activity has broader implications for the economy and capital flows, the government should, in the process, adhere to robust licensing mechanisms and regulatory oversight, including consumer protection, with technical support from established international financial institutions.

C. Structural Reforms—Lift potential growth and broaden growth drivers

Policies should be geared towards lifting potential growth and broadening Nauru’s growth drivers, while weighing associated risk factors. While initiatives to bolster the private sector and improve infrastructure are expected to yield economic returns, it is imperative that risks associated with recent initiatives such as the economic citizenship program and deep-sea mining, are comprehensively evaluated. To boost growth, policies must focus on human capital, infrastructure, and a better business environment.

Nauru has a predominantly young population, with about 10 percent of the population expected to enter the labor force over the next five years. While this influx of young cohorts poses challenges for gainful employment, it also presents opportunities. To capitalize on the demographic dividend, Nauru should improve human capital and foster an environment with more job opportunities outside the public sector. Nauru must address school enrollment issues and teacher shortages. School attendance rates, particularly at the secondary level, are low. Incentivizing re-enrollment and aligning education with private-sector needs will increase workforce participation. Collaborations with local businesses for vocational training will further align education with labor demands. These structural impediments require close coordination on formulating strategy and sharing information among government agencies.

Improvements in infrastructure should be leveraged to promote trade and attract investment. The climate-resilient port, fully operational now and near completion to accommodate more and larger ships, presents new avenues for trade and employment. Enhanced digital infrastructure can improve public service delivery, improve global connectivity, and act as a catalyst for growth.

Strengthening governance and anti-corruption strategies will improve the investment climate. The government has recently passed a small business enterprises bill and a foreign investment bill, which aim to support small businesses and their financial independence, as well as remove entry barriers to attract foreign investments. As the government pursues policies to develop the private sector, it could also consider strengthening independent mechanisms to combat corruption when developing its National Anti-Corruption Strategy.

Accelerating climate adaptation efforts can strengthen Nauru's resilience to natural disasters. The Higher Ground Initiative presents a cost-effective adaptation measure. The expected commissioning of the solar farm in August 2025 could reduce reliance on fossil fuels. Efficient fisheries management accounting for climate change is also vital for economic stability.

Strengthening both the timeliness and quality of macroeconomic data remain priorities. Thus, resource constraints at the National Bureau of Statistics should be addressed to transition toward a self-sustained program for the compilation of macroeconomic statistics. As an important element of Fund engagement, ongoing IMF capacity development supplement the government’s efforts to improve data quality and availability.

The IMF mission team would like to express its deep appreciation to the Nauru’s authorities for their excellent engagement and strong collaboration. Our unstinting gratitude particularly goes to the officials at the Treasury for their support on the mission. The mission team looks forward to supporting the authorities through policy dialogue and continued engagement in capacity development.