Nauru's economy is dominated by the export of phosphate, a mineral used as a fertilizer. Supplies of phosphate are running out and are expected to last no more than 5 years. The government is encouraging new industries, such as offshore banking and tourism, to replace the declining phosphate industry.
Phosphate has been the basis of Nauru's economy since 1906, when the island was a German colony. The decay of marine microorganisms on an atoll (a coral island made up of a reef surrounding a lagoon), supplemented by thousands of years of bird droppings, have made Nauru into an island made almost entirely of phosphate. Phosphate has been exported mainly to Australia and New Zealand, where it improved the poor soils in those countries. After Germany's defeat in World War I, Nauru was made a trust territory by the League of Nations (and later the United Nations) and governed jointly by Australia, New Zealand, and Great Britain, although Australia effectively handled all of the administration. Nauru became independent in 1968.
During the colonial administration, a trust fund was established in which part of the income from phosphate sales was deposited. This fund was set up to provide the country with income when phosphate supplies run out. This trust fund—the Nauru Phosphate Royalties
Phosphate mining has made Nauru very rich and provides citizens with some of the highest per capita incomes in the Pacific region. But phosphate mining has also seriously damaged Nauru's environment. About 80 percent of the land consists of mined-over territory that is now un-inhabitable. Nauru's extreme dependence on phosphate means that it has to import nearly everything else, including food, fresh water, fuel, and all manufactured products.
As the country's reserves of phosphate have dwindled, the Nauruan government has encouraged other industries, especially tourism and off-shore banking, to locate in the country. Tourism is limited by Nauru's remote location and lack of major attractions. Off-shore banking has proved more successful, but has been marred by corruption and scandals involving money laundering . For example, the Russian mafia has been accused of using Nauruan banks to process its illegal revenues. Apart from Internet-based banking, there is almost no foreign investment in Nauru and no foreign investment policy.