The economy of Nauru is tiny, based on a population in 2014 of only 11,000 people. The economy is primarily based on phosphate mining, offshore banking, and processing of coconut products. Mining of phosphate ceased after the exhaustion of the primary phosphate reserves, but in 2006–07 mining of a deeper layer of "secondary phosphate" began. It is hoped that this economic activity might lift Nauru from the bottom rung of global GDP per capita. The only other major source of government revenue is sale of fishing rights in Nauru's territorial waters.
In the years after independence in 1968, Nauru possessed the highest GDP per capita in the world due to its rich phosphate deposits. In anticipation of the exhaustion of its phosphate deposits, substantial amounts of the income from phosphates were invested in trust funds aimed to help cushion the transition and provide for Nauru’s economic future. However, because of heavy spending from the trust funds, including some wasteful foreign investment activities, the government is now facing virtual bankruptcy. To cut costs the government has called for a freeze on wages, a reduction of over-staffed public service departments, privatization of numerous government agencies, and closure of some of Nauru's overseas consulates. Economic uncertainty caused by financial mismanagement and corruption, combined with shortages of basic goods, has resulted in some domestic unrest. In 2004 Nauru was faced with chaos amid political strife and the collapse of the island’s telecommunications system. Moreover, the deterioration of housing and hospitals has continued.
Few comprehensive statistics on the Nauru economy exist, with estimates of Nauru's GDP varying widely. According to the U.S. State Department, Nauru’s GDP volume was US$1 million in 2004. Nauru receives about US$20 million foreign aid a year from Australia.
The most recent 2017/2018 Nauru Budget indicates modest economic growth, with $128.7 million in revenues and $128.6 million in expenditures estimated.
Phosphate is Nauru’s only export product, although the government also receives relatively significant foreign exchange income from licensing its rich skipjack tuna fishing grounds to foreign fishing vessels, which land an annual average of 50,000 tonnes of Nauru zone-caught tuna overseas. In 2004 income from phosphate export was US$640,000, with Australia, New Zealand and Japan serving as the country's major export markets. In the same year the Nauru government budget shows that income from licensing foreign fishing vessels was over US$3,000,000.
Nauru needs to import almost all basic and capital goods, including food, water, fuel, and manufactured goods, with Australia and New Zealand as its major import sources. In 2004 Nauru’s imports totaled about US$19.8 million.
Nauru has been a cash economy since at least 2004, after the Bank of Nauru and the Republic of Nauru Finance Corporation went bankrupt and ceased operations in the early 2000s and the licences of all offshore banks were revoked by the Nauru government in 2004. Nauru uses the Australian dollar for its currency. Deposit-taking institutions do not exist on the island, and community savings are required to be held in the form of cash, and all transactions are conducted using cash. The government is required to periodically fly in Australian currency to maintain liquidity.
The Australian government shut down Nauru’s banking system in 2006. Nauru’s government has been talking with Bendigo & Adelaide Bank Ltd., Australia’s fifth-largest lender, to set up a branch on the island and move to a system where the entire population uses a bank. Effective from the end of April 2016, Westpac, one of Australia's largest banks, ceased having any dealings with the Nauru government. On 21 April 2016, it was announced that the Bendigo Bank was facing pressure to also close its operation in Nauru. There are indications that the Australian banks have legal problems in Australia over efforts to combat money laundering.
On October 1, 2014, an income tax was imposed in Nauru for the first time, with high income earners paying a flat rate of 10%. The government spending in 2015 was forecast to be under US$92 million. Taxes include an airport departure tax and a bed tax at the Meneñ Hotel. The 2007–08 Budget saw the increase of existing excises on cigarettes and duty on imports. A tax on sugary foods was also introduced, chiefly to help combat Nauru's diabetes epidemic.
Historically Nauru was regarded as a tax haven due to the operation of its international financial centre, which offered amongst other things offshore banking services. In 2001, Nauru was blacklisted internationally over concerns it had become a haven for money laundering. Amendments made in 2004 abolished Nauru's Offshore Banking sector and, as recognised in Nauru's latest anti money laundering and countering the financing of terrorism (AML/CFT) review, Nauru's offshore sector is now limited to a small offshore company register.
In July 2017 the Organisation for Economic Co-operation and Development (OECD) upgraded its rating of Nauru's standards of tax transparency. Nauru had been listed alongside fourteen other countries that had failed to show that they could comply with international tax transparency standards and regulations. The OECD subsequently put Nauru through a fast-tracked compliance process and the country was given a "largely compliant" rating.
Currently, Nauru is heavily dependent on Australia as its major source of financial support. In 2001 Nauru signed an agreement with Australia to accommodate asylum seekers (mostly from Iraq and Afghanistan) on the island, in return for millions of dollars in aid. This agreement, referred to as the "Pacific Solution", came to an end in 2007, prompting Nauruan concerns about the future of the island's revenue. Australia has also sent financial experts to Nauru to help the tiny nation overcome its economic problems. However, serious questions remain about the long-term viability of Nauru’s economy, with uncertainties about the rehabilitation of mined land and the replacement of income from phosphates.
In 2008, talks began between Australia and Nauru regarding the future of the former's economic development aid to the latter. Nauruan Foreign and Finance Minister Dr. Kieren Keke stated that his country did not want aid handouts. One possible solution currently being explored would be for Australia to assist Nauru in setting up a "boat repair industry" for regional fishing vessels.
The Nauru detention centre was established by the Australian government, with Nauruan agreement, in 2001 to cater for up to 800 refugees and asylum seekers under Australia's Pacific solution. The centre is seen by Nauruans as an important source of employment opportunities, in addition to the pledge of A$20 million for development activities.
The fiscal year runs from July 1 to June 30.