AUSTEO (AUSTRALIAN EYES ONLY) REPORT: EXCERPT NO. 6

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Australian Delegation Brief Prepared for the July 11, 1997 Forum Economic Ministers' Meeting in Cairns, Australia

NAURU

"Nauru faces a severe drop in living standards even if it adopts reform, and may be incapable of sustaining its sovereignty."

Governments in the last eighteen months have been groping for a strategy for solving Nauru's financial crisis -- marked by chronic cash shortages, drying up of imports and hand-to-mouth existence as funds flow from phosphate shipments. Nauru has barely kept creditors at bay and still faces the risk of a major loan being called in, a run by other creditors and financial collapse. Its leaders have run down estimated financial assets from over $A1.2 billion in 1991 to around $A200 million. Financial collapse is imminent -- the only question is timing.

Nauru had large endowments at independence which together with phosphate earnings gave it a per capita GDP amongst the highest in the world. Ever-confident of a comfortable future assured by trust funds, Nauruans rejected resettlement in Australia. But Nauru mismanaged its finances with bad investments, instances of fraud and excessive Government spending funded by heavy borrowing, either from the trust funds or using them as collateral. National pride led Nauru to buy symbols of sovereignty and wealth such as a television station, an airline and ships. The Government has now cut these losses, but they did long-term and continuing damage to national finances.

Short-term measures will only delay the inevitable severe fall in living standards -- which has already begun. Nauru lacks a large subsistence sector to fall back on, and has poor infrastructure, health and education, no tourist attractions and no industry other than phosphate: unlikely to last much beyond 2010.

Had it adopted radical measures at the start of 1996, Nauru could have hoped at best for per capita income in 2006 of $A2,000, around one-third of 1995 levels. Now the outlook is bleaker and will become more so without urgent reform. Nauru is looking down the barrel of being an impoverished and desperate entity unable to sustain its sovereignty. That could create dilemmas for Australia, including renewed pressures for resettlement or for re-opening the International Court of Justice case. Many Nauruans claim that Australia as the former trustee was exploitative and shares responsibility for Nauru's predicament.

Nauruan leaders have prevaricated on radical reform because of parliamentary and electoral incomprehension and resistance. The reform-minded Harris Government fell in November 1996 after little more than a year in office despite barely having begun to implement reform plans. When Kinza Clodumar took office in February 1997 with a parliamentary majority of one, he was the fifth president in five months.

Clodumar came to power complicit in the mistakes of the past and exploiting discontent with hard times. He now espouses reform but has yet to deliver. Government continues to borrow and mortgage assets, though more slowly than in the past, and put off decisions about its asset portfolio. Clodumar has raised taxes but his new budget is unlikely to balance as he predicts, and he is still delaying the restructuring of government operations.

 

FORUM ECONOMIC MINISTERS' POLICY AGENDA

Implementing reform: The Government has signed a Memorandum of Understanding for an economic reform program with the ADB but has yet to take up the offer.

Institutions: Public institutions in Nauru are extremely weak owing to the reliance on overseas skilled-workers which the Government can no longer afford; and chronic political interference in the running of Government-owned firms. The Nauru Phosphate Royalties Trust is the only sizable remaining asset yielding positive returns. Air Nauru was corporatized, including the appointment of external managers, to raise its performance and independence.

Foreign investment: Nauru has no foreign direct investment and does not encourage it. Given the bankruptcy of the Bank of Nauru, the Government has unsuccessfully approached foreign banks (including Australian banks) to set up a branch in Nauru.

Tariffs: Nauru does not have taxes or tariffs.

 

GENERAL IMPEDIMENTS TO GROWTH/REFORM

Nauru, and the government in particular, is finding it very difficult to come to terms with its predicament and possible solutions.

Chronic political instability, mismanagement and corruption by elected officials and fraudsters seriously undermine prospects for economic growth and reform.

 

KINZA CLODUMAR President of Nauru and Minister for Finance and External Affairs since February 1997

An experienced back-room actor in Nauru, Clodumar has long harbored leadership ambitions but has achieved them only when Nauru is in financial crisis. The fifth president in five months when he came to office, Clodumar owes his election to discontent with austerity and anxiety about the future. He exploited worry about the reform plans of the Harris government in 1996 but is now being forced into similar measures.

Few can rival Clodumar's knowledge of Nauru's byzantine finances, in which he has been involved for many years as a minister or adviser. He was party to the mismanagement under the long-serving inaugural president Hammer DeRoburt and under his successor Bernard Dowiyogo.

Clodumar has personal business interest, has taken a close interest in Nauru's overseas investments and is confident of his capacities as a wheeler-dealer. He embarrassed Dowiyogo internationally by persuading him to back a musical about Leonardo which flopped on its first-night in London and lost millions. Clodumar has taken a close interest in aviation, long a heavy loss-maker, and attracted suspicions of corruption for his dealings when responsible for Air Nauru in the 1980s.

 

CHANGING TACK?

Politically canny, Clodumar does not display deep political convictions and has shifted ground since coming to office because he realizes that Nauru, already insolvent, cannot avoid restructuring. But he will be cautious, fearing the effect of retrenchment on his political fortunes, and could look for quick fixes. He has shown signs of still preferring his own instincts to professional advice in rationalizing Nauru's overseas property portfolio, but recently has agreed to sell properties in Melbourne and Auckland.

Clodumar should be generally receptive to Australian messages at the FEMM, but may differ on some issues because of Nauru's troubled circumstances. He may want to raise tariffs as an emergency revenue measure rather than lower them, and restrict labor mobility so that expatriate Pacific island workers rather than Nauruans bear the brunt of retrenchment.

Clodumar is pragmatic in his dealings with Australia. He does not harbor the grudges of other leaders -- though he shares his predecessors' reluctance to come clean with Australia about Nauru's finances. He took little interest in the ICJ case for compensation from Australia -- though he could be tempted to press for more from Canberra if he becomes desperate. He has high-level business and political contacts in Melbourne, the center of Nauruan investment in Australia.

 

BACKGROUND

Like many Nauruans, Clodumar, 52, attended school in Australia. He took a degree in economics at the ANU and commenced, but did not complete, postgraduate study before returning to Nauru to begin a career in government, business and politics, entering parliament in 1977. He has previously held the finance portfolio on several occasions between 1977 and 1992 and was principal financial adviser to President Dowiyogo from 1992 to 1995.

Clodumar's wife Miroslawa ('Mirka") and children are Australian citizens. His brother, Vinci, an Australian-trained engineer, is also prominent in politics.

 

TOMORROW: NEW ZEALAND AND ECONOMIC REFORM IN THE SOUTH PACIFIC

"New Zealand is now more supportive of Australia on the the need for economic reform, having been shaken by the financial crisis in the Cooks But (Winston) Peters (Deputy Prime Minister and Treasurer),a loose canon, could adopt a soft approach at the FEMM if it served his domestic interests."

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