Washington, DC: On November 17, the Executive Board of the International Monetary Fund (IMF) concluded the 2023 Article IV consultation[1]with Republic of Nauru.
Growth moderated recently due to a scale down of the Regional Processing Center (RPC). Real GDP growth is estimated at 0.6 percent in FY2023, reflecting weaker demand and service-related trade. Inflation rose amid external shocksand escalating transportation costs, reaching 6.3 percent in FY2023. The fiscal surplus declined due to a reduction in RPC-related activities but remained sizable. The fiscal balance excluding the government's contribution to the Nauru Trust Fund (NTF) was at 8.3 percent of GDP in FY2023, with debt assessed to be sustainable under current policies. The external position is assessed to be moderately weaker than the level implied by fundamentals and desirable policies in FY2022.
Growth and inflation are expected to moderate over the medium term. Given the importance of the RPC in generating fiscal revenues and employment, its planned scale down is expected to adversely affect economic activity and fiscal and external positions over the medium term. However, diversification opportunities from the climate-resilient port and the construction of the fiber-optic cable are expected to provide some offset. Inflation is expected to slow as a result of lower global inflation and a tightening of monetary policy in Australia. The fiscal surplus is expected to decline this year and narrow significantly over the medium term.
Risks to the economic outlook are tilted to the downside. Deepening geo-economic fragmentation and an abrupt global slowdown could affect Nauru's trading partners and donors. Higher commodity prices could put upward pressure on inflation and fiscal spending. Continued pressure on financial services could disrupt national and international payments, affecting essential economic activities. Delayed fiscal and structural reforms could lead to an overdependence on volatile sources of revenues, jeopardizing fiscal sustainability. Uncertainties related to activities of the RPC pose risks to the medium-term economic and fiscal outlook. Similar to other pacific island countries (PICs), Nauru remains vulnerable to extreme climate events. Upside risks include an unexpected extension of RPC activities and increased demand for fishing licenses.
Executive Board Assessment[2]
Executive Directors noted that growth is expected to moderate over the medium term and risks are tilted to the downside. Against this background, Directors underscored the importance of structural and fiscal reforms, supported by capacity development, to promote diversification, sustainable growth, and climate resilience, particularly in the context of the planned scale-down of the Regional Processing Centre.
Directors concurred that fiscal policy should be anchored by fiscal discipline, revenue mobilization, and expenditure prioritization. They stressed that maintaining sufficient fiscal surplus to meet the target value of the Nauru Trust Fund will be key to supporting long-term growth and resilience. Directors agreed that tax reforms anchored in strong policy commitment and public support are needed to generate more sustainable sources of revenue. They emphasized that expenditure policies should prioritize spending that promotes growth, resilience, and inclusion.
Directors encouraged the authorities to further strengthen the AML/CFT framework, in line with recommendations from the FATF and the ongoing APG Mutual Evaluation. Noting the planned exit from the country of the only institution providing financial services and access to cross-border payments, they underscored the importance of close cooperation with foreign counterparts to facilitate the participation of new regional financial services providers in Nauru. Directors agreed that both market and non-market solutions are needed to improve access to formal financial services and emphasized the importance of addressing infrastructure gaps that constrain the use of digital payments.
Directors concurred that structural reforms to improve human capital, climate resilience, diversification, and governance are essential for Nauru's long-term growth. They emphasized that education spending should prioritize improving participation and outcomes. Directors agreed that a detailed costing of priority projects would be critical for allowing a more strategic pursuit of climate finance. They noted that the completion of the new climate‑resilient port and the undersea cable are expected to bring new sources of growth and employment opportunities.
Directors agreed that data shortcomings remain prevalent and continued efforts to enhance statistics, with adequate support from development partners, are needed.
Table 1. Nauru: Selected Economic Indicators, FY2021-25 1/
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
[1]Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2]At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
