Economy and Trade
Nauru is a small, oval-shaped island in the Western Pacific Ocean, located just 42 kilometers south of the equator. A former British colony (Australia was the administering power from 1920 until independence in 1968), it is the world’s smallest republic. Nauru has a total area of 21 square kilometers and a population of approximately 10,000 people. This tiny island generated enormous wealth from phosphates, created from fossilized bird droppings. In the 1980s, it had one of the highest per capita incomes in the world, but the phosphates are now close to exhaustion and the economy is in deep crisis.
Since 2000, when mining on a large-scale commercial basis ended, Nauru has relied largely on payments for fishing rights within its exclusive economic zone, and on development funding, principally from Australia, New Zealand, Japan, China, and Taiwan. Past government corruption and the disastrous mismanagement of trust funds that had been expected to provide post-mining revenue have exacerbated the country’s decline.
Economic Policy over 12 Months
In August 1993, the Nauru and Australian governments signed a Compact of Settlement (NACOS), which ended litigation by Nauru against Australia in the International Court of Justice over the rehabilitation of phosphate land mined before independence. Australia agreed to pay Nauru US$57 million in cash and to provide US$50 million over a period of 20 years (paid in annual instalments of US$2.5 million indexed at 1993 values, e.g. US$3.7 million in 2008–2009). Australia and Nauru are cooperating closely on the use of NACOS funds to facilitate the mining of residual primary and, later, secondary phosphate reserves, followed by the rehabilitation of mined-out lands.
Australian officials and contracted advisers work closely with the Nauru government. An Australian finance team, comprising a secretary of finance, an economic adviser and a budget adviser, is responsible for the formulation of Nauru’s budget, and for providing technical advice on economic reforms needed to improve financial management.
With the help of Australia, Nauru has implemented key financial and governance reforms. Nauru posted its fourth successive balanced budget in 2007–2008, and was removed from the Organisation for Economic Cooperation and Development’s (OECD) Financial Action Taskforce (FATF) blacklist in October 2005, and from the US Treasury Financial Crimes Enforcement Network list of countries posing money-laundering concerns in April 2008. (A major shift into offshore financial services during the 1990s seemed promising, but it resulted in Nauru becoming a major haven for the financing of organized crime—and being blacklisted by both the US government and the OECD. The country was placed on the FATF blacklist of nations that are uncooperative in global efforts to tackle money laundering, and also on the tax-haven blacklist.)
Staff numbers and salary levels in the public service and state-owned enterprises (SOEs) have also been reduced to more sustainable levels and the Nauru Phosphate Corporation (NPC) has been reorganized into the RONPhos Corporation, which recommenced phosphate exports in September 2006.
Mining of primary phosphate reserves could continue until 2009 or 2010, and a recent study suggested that secondary phosphate reserves (beneath the currently exposed pinnacles) could be mined economically, in conjunction with the rehabilitation of mined lands, for up to 30 years. The export to neighbouring islands of gravel from crushed coral pinnacles (a by-product of secondary mining) is adding significantly to the island’s revenues.
Nauru uses the Australian dollar as its means of exchange, giving it no control over monetary policy or interest rates, and rendering it unable to issue currency to fund deficit spending. Prices are largely influenced by those prevailing in Australia.
Economic Performance over 12 Months
Economic indicators for Nauru (such as GDP, inflation and GDP growth) are not available. In a report published in October 2008, the US State Department said that Nauru had a nominal per capita GDP in excess of US$2,700. Despite the lack of statistics, it is clear that the country faces enormous economic challenges. Although phosphate production has recommenced, the country lost another source of income in February 2008, when Australia closed an offshore camp for asylum seekers, which had generated millions of dollars for the Nauruan government. Officials in Nauru have voiced concern about the economic impact of the closure. Foreign Minister Kieran Keke said that about 100 people had lost their jobs and this would affect 1,000 people, or 10% of Nauru’s population, who relied on these workers for support.
However, there were some positive developments in 2008. The government headed by President Stephens returned to office in snap elections in April, ending months of parliamentary deadlock over the budget. In November, the government announced plans to establish a private bank to fill the gap left by the collapse of the state-owned Bank of Nauru in 1998. Australian banks have declined an invitation to provide banking services to the country. There are no active financial institutions or services on the island.
The Asian Development Bank (ADB) issued a report on Nauru in November 2007, which said that phosphate exports had seen Nauru accumulate substantial offshore assets that peaked at approximately US$1 billion. However, the decline in phosphate mining that began in the late 1980s, combined with poor management of the country’s offshore assets and public expenditure, led to a dramatic deterioration in its economic and fiscal position. By 2008, the country had built up debts approaching US$1bn.
The ADB concluded: “Deep-seated governance reforms are essential requirements for Nauru’s development. The absence of accountability and transparency, particularly of public corporations, was central to Nauru’s severe economic deterioration; concerted, corrective action is required to achieve a sustainable improvement in performance.”
The ADB added that the government was addressing some of the structural problems the economy faces, and was making changes to establish a base for future economic growth. The prospects for phosphate mining and exports appeared good. Revenue from fishing licenses continued to support the budget. A small revenue base had been established and the state-owned enterprises and utility services were being reformed.
Support for Inward Investment and Imports
Nauru does not have a specific investment policy, nor does it offer investment incentives.
There is no information available on tax exemptions in Nauru. Although the country was once considered a tax haven, this is no longer the case.
GDP growth: N/A
GDP per capita: US$5,000 (2005 est.)
CPI: −3.6% (1993)
Key interest rate: N/A
Exchange rate versus dollar: Australian dollars (AUD) per US dollar—1.2059 (2008 est.)
Unemployment: 90% (2004 est.)
Current account deficit/surplus N/A
Population: 13,770 (July 2008 est.)
Source: CIA World Factbook except where stated