IMF Concludes 2021 Article IV Consultation with Nauru

Washington, DC: On February 2, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Nauru.

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

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

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

Executive Board Assessment[2]

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

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

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