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Public Financial Management System in Nauru: Strengths and Weaknesses

Nauru, a small Pacific island nation, has been assessed using the Public Expenditure and Financial Accountability (PEFA) framework. This report highlights the strengths and weaknesses of Nauru’s Public Financial Management (PFM) system.

Strengths of PFM in Nauru

Good progress in debt management

• Participation in budget preparation process: Nauru has made significant improvements in its debt management, including participation in the budget preparation process.
• Timely publication of in-year budget reports: The government publishes timely in-year budget reports.

Clear fiscal strategy

• A clear fiscal strategy is a key component of PFM, and Nauru has established one.

Internal controls for non-salary expenditures

• Nauru has implemented internal controls to manage non-salary expenditures effectively.

Cash flow and revenue management

• The government has established good practices in managing cash flows and revenues.

Weaknesses of PFM in Nauru

External scrutiny, audit, and annual financial reporting

• There is a lack of external scrutiny, audit, and annual financial reporting in Nauru.
• Transparency and accountability: The procurement process needs improvement to ensure transparency and accountability.

Internal audit

• The internal audit function requires strengthening to provide assurance on the effectiveness of PFM controls.

Bank reconciliation and asset management

• Attention is required to ensure accurate financial reporting, including bank reconciliation and asset management.

Progress towards PEFA indicators

The assessment shows that Nauru has made progress towards PEFA indicators, with 32% of the indicators performing above average and 68% below average.

Assessment by Pillar

Budget reliability (pillar one)

• Forecasting: The government takes a conservative approach to forecasting due to uncertainty surrounding revenues, including grants.
• Expenditure estimates: Expenditure estimates are conservative.

Transparency of public finances (pillar two)

• Some elements demonstrate good performance in transparency of public finances, namely the chart of accounts and transparency of budget documentation.
• Budget classification: The budget classification does not align with GFSM2014 standards.

Management of assets and liabilities (pillar three)

• Public enterprise reform: Public enterprise reform is ongoing, supported by the new Public Enterprise Act 2019.
• Performance on public investment management: Performance on public investment management is bolstered by involvement of development partners in appraising project proposals.
• Weaknesses remain in fiscal risk reporting, public investment, and public asset management.

Policy-based fiscal strategy and budgeting (pillar four)

This pillar scored reasonably well.