SYDNEY, Australia (ABC News Online, April 20) - Nauru's fortunes have plummeted in the past 30 years, taking it from one of the richest nations in the world to the brink of bankruptcy.

The tiny Pacific nation is struggling to refinance a loan worth hundreds of millions of dollars, and most of its remaining assets have been taken over by receivers.

The Pacific island of Nauru is the smallest independent republic in the world.

Located to the east of Papua New Guinea, Nauru is an island of 21 square kilometers with a population of 12,500 people.

The island spent much of the 20th century under the joint control of Australia, Britain and New Zealand, before gaining independence in 1968.

Nauru was once one of the richest nations on earth because of its huge deposits of phosphate.

However, half a century of strip mining of its topsoils for use as fertilizer has left the island as little more than a wasteland.

Phosphate mining is still the island's main economic resource despite the cost of extracting the last remaining deposits.

But the life expectancy of the much-reduced industry is estimated at less than 10 years.

Apart from phosphate, fishing licenses issued to China, Japan, Korea, Taiwan and the United States are an important source of revenue for Nauru.

The people of Nauru mainly rely on imported foodstuffs and the island has limited fresh water resources, depending on one desalination plant and infrequent shipments of water from the nearby island of Kosrae.

When Nauru took control of its phosphate mining industry in 1970, it established the Nauru Phosphate Royalties Trust, whose payouts, when made, are the only cash source for most Nauruans.

In the early 1970s Nauru used its mining wealth to establish air and shipping lines and make major building investments around the world through the trust.

However, after decades of strip mining, asset exploitation by foreign interests and financial mismanagement and extravagance by Nauru's leaders, the tiny nation is facing a serious financial crisis.

In anticipation of the end of the mining operations, the Nauruan government has invested part of its revenue in long-term trust funds.

But the level of these funds has declined in recent years due to bad investment decisions and borrowings from successive governments to fund fiscal deficits.

Nauru owes about A$230 million to the General Electric Capital Corporation (GE Capital), which has a mortgage over Nauru's Australian property investments.

Nauru has confirmed receivers have taken control of its assets in Australia.

These assets include a Melbourne high-rise called Nauru House, Sydney's Mercure Hotel and Royal Randwick Shopping Centre, and the Downtowner and Savoy Park Plaza hotels in Melbourne.

General Electric has given Nauru until May 5 to pay its debts.

Leading up to Nauru's independence in 1968, the island was under Australian administration.

Following independence Australia became one of the island's key markets for its phosphate mining industry.

In August 1993 the governments of Australia and Nauru signed an agreement which ended litigation by Nauru against Australia in the International Court of Justice over rehabilitation of phosphate land mined before independence.

As part of the settlement Australia paid Nauru $A57 million in cash payments and agreed to provide $50 million over a period of 20 years for rehabilitation projects.

In 2001 a struggling Nauru accepted a request from Australia to host asylum seekers to be processed there, under the so-called "Pacific solution".

The setting up and the maintenance of the detention facilities on Nauru have been entirely funded by Australia. The agreement is worth up to $A30 million to Nauru.

Due to the dire financial difficulties experienced by Nauru, Australia provided Nauru an extra $A7 million emergency aid in May 2002, and pledged another $A22.5 million in March 2004 to help stabilise the island's economy and strengthen law and order.

However, Australia has said it will not step into the current crisis because it is of a commercial nature.

Nauru's President Rene Harris travelled to Australia when the financial crisis erupted to try to resolve the problem.

However, he is facing a political crisis on the domestic front after the recent resignation of the Speaker of Nauru's Parliament, resulting in a deadlocked Parliament.

The opposition claims President Harris should solve the deadlock by resigning. Opposition members also claim the government is operating unconstitutionally because there is no budget.

Political instability has plagued the nation in recent times, and Nauru has had five presidents since January 2003.

Nauru is seeking to renegotiate its loan with GE Capital.

If new terms cannot be agreed to, it is likely the remaining assets of the Nauru Phosphate Royalties Trust - mainly properties in Australia - will be sold off so that Nauru can clear its $A230 million debt.

If Nauru resorts to selling off its remaining assets it is thought the island will resort to reliance on an intervention or rescue package from outside donors.

Australia is planning to send a team to Nauru in May to audit and assess the country's remaining assets and liabilities and to try to come up with a way to move the tiny nation forward, perhaps by focusing on Nauru's tuna stocks.

However, the long term sustainability of a country that cannot produce anything and has little access to fresh water remains under question.

May 3, 2004

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