20220206-IMF-Republic_of_Nauru_2021_Article_IV_Consultation-Press_Release_Staff_Report_and_Statement_by_the_Executive_Director_for_the_Republic_of_Nauru_67页_3mb

IMF 2021 Article IV Consultation with Nauru Summary

Core Content

The International Monetary Fund (IMF) conducted the 2021 Article IV consultation with Nauru, which concluded on February 2, 2022. The consultation aimed to assess Nauru's economic performance, policy response to the pandemic, and future outlook, while offering policy recommendations to support sustainable and inclusive growth. The consultation was based on discussions held from November 15 to December 6, 2021, and the staff report was finalized on January 14, 2022.

Main Economic Indicators

Main Policy Recommendations

• Near-term Policies

  • Extend vaccinations to the under-18 population.
  • Calibrate fiscal support for food and fuel security to the pandemic's state.
  • Formulate a plan to absorb or upskill current RPC workers.

• Revenues

  • Develop a medium-term revenue strategy, including widening the tax base and increasing excise taxes on goods linked to poor lifestyle choices.
  • Introduce a consumption tax.

• Governance and Public Financial Management (PFM)

  • Ensure the SOE monitoring unit is adequately resourced.
  • Phase out subsidies for weakly performing state-owned enterprises (SOEs).
  • Formalize fiscal responsibility ratios in a rules-based framework.
  • Phase out cash transactions.
  • Formulate a new debt management strategy.

• Financial Sector Reforms

  • Align the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework with revised 2012 FATF recommendations.
  • Accelerate implementation of AML/CFT improvements.

• Economic Diversification

  • Accelerate investment in human capital and infrastructure.
  • Improve the business environment.
  • Focus on climate resilience and green financing.

Key Risks and Outlook

• Growth Outlook:

  • Real GDP growth is expected to moderate from 1.5% in FY21 to 0.9% in FY22 due to the anticipated scale-down of the Regional Processing Center (RPC).
  • Growth is projected to pick up in FY23 with the operationalization of the climate-resilient port.

• Current Account:

  • Expected to narrow to a 3.5% surplus of GDP in FY22 due to reduced RPC-related services exports, departure of expatriate workers, and increased fuel prices.

• Key Risks:

  • A local outbreak of COVID-19 could have adverse health and growth implications.
  • The transition to "enduring capability" for the RPC introduces uncertainty in revenues and employment.
  • A significant number of Nauruans could face job losses if reallocation strategies are inadequate.
  • External risks include a sharper-than-expected rise in commodity prices, natural disasters, and a delayed global recovery.
  • Upside risks include an extension of the RPC without job losses and successful commercialization of the port.

Executive Board Assessment

• The Executive Board commended Nauru for its effective measures in preventing a domestic outbreak of COVID-19 and for its supportive policies that allowed continued economic expansion during FY20 and FY21.
• They emphasized the need for structural and fiscal reforms to promote sustainable, inclusive, and greener growth.
• Directors stressed the importance of managing fiscal risks, improving public finance management, and enhancing resilience to climate change.

Structural and Fiscal Challenges

• Nauru's economy is constrained by its small size, remoteness, and limited arable land.
• The economy is heavily reliant on external sources, including the RPC and fishing license sales.
• Climate change poses significant risks to the country's infrastructure and tuna stocks.
• Nauru faces high poverty rates and a high incidence of non-communicable diseases (NCDs).

Debt Sustainability and Financial Sector

• The resolution of the sovereign debt default significantly improved Nauru's external debt sustainability.
• The settlement with Firebird reduced the external debt from 34.4% of GDP to 14.0% of GDP.
• The Bank of Nauru's liquidation contributed to the reduction of domestic debt.
• The financial sector requires continued reforms to align with international standards.

Conclusion

The IMF's consultation with Nauru highlighted the need for structural reforms, improved governance, and enhanced fiscal sustainability. While the pandemic has supported economic growth, the anticipated scale-down of the RPC poses significant challenges. The authorities are encouraged to diversify the economy, improve public financial management, and enhance climate resilience to ensure long-term development and stability.