Nauru: Tiny, Rich Island Lurches Toward Bankruptcy
5/25/99
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Title: Nauru: Tiny, Rich Island Lurches Toward Bankruptcy
Source: Inter Press Service
Status: Copyright 1999, contact source for permission to reprint
Date: May 25, 1999
SYDNEY, AUSTRALIA, (May 25) IPS - The phosphate-rich South Pacific
island of Nauru used to be the world's richest country in terms of
per capita income. Today, a decade later, it is drifting toward
bankruptcy.
In a nationwide broadcast last month, President Bernard Dowiyogo
warned the country of 10,000 people that the island republic faces
massive debts and said its citizens will have to rein in their
excessive lifestyles.
In short, he said that Nauruans, used to the windfall from its
phosphate resources, were living beyond their means.
A few days later, Nauru's parliamentarians decided to "shoot the
messenger" who brought bad news, by passing a no-confidence motion
that voted him out of office.
Dowiyogo was replaced by Rene Harris, a former chairman of Nauru
Phosphate Corporation and manager of the defunct Nauru Pacific Lines
(NPL), one of the firms Dowiyogo had described as one of the excesses
of the 1970s and the 80s.
The change in Nauru's presidency on April 27 was the seventh in the
last 3 years.
These changes come at a time when Nauru has been trying to grapple
with a variety of problems, most of it not exactly its own making.
Nauru is most known for its phosphate, a chemical compound used as
fertilizer, but this is expected to run out within the next eight to
12 years.
Nauru's phosphate is regarded as of the highest grade in the world
and for almost 50 years this century, Australia, New Zealand and
Britain exploited these resources to its fullest.
But intensive phosphate mining has made 80 percent of Nauru's 21
square km land mass unusable. A study by the Nauru and Australian
governments in 1994 put the cost of rehabilitation at $210 million,
and will take more than 20 years to complete.
This ecological damage had prodded Nauru to file a $72 million damage
claim at the World Court in The Hague. In 1993, Australia reached an
out-of-court settlement with Nauru, agreeing to pay compensation that
included a $37 million lump-sum payment, plus $1.6 million a year
over the next 20 years.
But after decades of environmental damage from the exploitation of
phosphate, Nauru does not seem to have much to show for it.
At independence in 1968, the Nauru Phosphate Royalties Trust (NPRT)
was created to invest royalties received for its exports and ensure
longer benefits from its natural wealth, to support its population
beyond the last phosphate shipment.
By 1991, NPRT had accrued assets in excess of $800 million, including
real estate investments in Australia, the U.S., Britain, a national
shipping line, an airline and other "high yielding" investments.
But today, the value of these investments are believed to have
dwindled to under $130 million.
"It's doubtful that anyone really knows how much is left," an
Australian diplomat told the Bulletin magazine recently. "Nauruans
have suffered from a lack of financial expertise and an institutional
inability to handle very large amounts of money."
The Nauruans' experience in the last few years is a lesson for many
small countries which have to depend on foreign -- and sometimes
dubious -- financial advisers who have caused more trouble for the
country.
A few years ago, the Nauru government accepted the advice of one of
its London-based financial advisers and poured millions of dollars
into a West End musical which was a huge flop.
Another of its London advisers, Adrian Powles of the Sydney-based law
firm, Allen Allen and Hemsley, is now awaiting trial on charges of
allegedly stealing $60 million from NPRT.
In December 1997, the trust had to fork out $26 million to an
Australian property developer, after two failed court actions, over
the purchase of a controversial old hospital site in the Central
Melbourne Business District.
The property developer, David Marriner, sold the site to the Nauru
government six months after he buying the land from the Victorian
State Government for just $8.2 million.
To refinance its troubled overseas investments, Nauru obtained two
loans earlier this year totaling $100 million from the Taiwanese
government and the U.S. General Electric Corporation.
These loans are to be used to pay external creditors who have
financed NPRT purchases of shopping complexes, office blocs and
hotels in Australia and the U.S. It will also help pay Nauru
citizens' education and medical bills in Australia.
The loans will also be used to pay debts owed by Air Nauru, whose
Boeing 737-400 plane was impounded at the Manila airport in February
under a Philippine court order, following claims of more than
$680,000 filed by a creditor.
To diversify its income and provide a more stable revenue base for
its economy, Nauru has been developing an off-shore banking industry.
But now, that too is under threat, as Nauru has been accused of
facilitating money laundering by the Russian mafia.
In February, the Paris-based Financial Action Task Force (FATF) named
Nauru as one of four Pacific nations which were the focus of a
Russian crime syndicate moving money around the world.
The Organization of Economic Cooperation and Development (OECD) is
said to have warned Nauru about its offshore banking laws and
threatened to cut it out of the world monetary system.
An off-shore (non-resident) banking license can be obtained in Nauru
for only $19,800, with an initial capital of $100,000 which can be
subscribed over two years. There is no need to have local directors
or any local presence, apart from a registered office and a
secretary.
The government says it has ordered a complete review of the off-shore
banking sector. "My government does not condone registered off-shore
Nauruan companies or banking licenses being exploited by unscrupulous
people for fraudulent or money laundering purposes," Dowiyogo had
said.
The Nauru government recently obtained a soft loan of $5 million from
the Asian Development Bank (AsDB) to help reform its economy.
But the loan comes with a price: the government has slashed its
budget by 60 percent and cut its public service. Nauruans will have
to pay some taxes and duties in the future, and their medical and
education expenses in Australia will no longer be fully paid by the
state.
In a recent interview with BBC Radio, Nauru's Melbourne-based public
affairs consultant, Helen Bogdan, said the recent change in
leadership reflects the people's lost confidence with the government
as their fortunes dwindled.
Still, the mood in Nauru is one of "cautious optimism," she says.