Namibia: Selected Issues and Statistical Appendix

This Selected Issues and Statistical Appendix paper analyzes the macroeconomic impact of the HIV/AIDS pandemic, as well as its repercussions on fiscal policy of Namibia. The paper seeks to assess the macroeconomic impact of HIV/AIDS under a successful implementation of Medium-Term Plan III (MTP III) that would lower the prevalence rate to below its 2004 level. The paper also identifies the effect of HIV/AIDS on the real GDP growth rate over the medium term through a source of growth model that estimates the impact of HIV/AIDS on the factors of production.

Abstract

This Selected Issues and Statistical Appendix paper analyzes the macroeconomic impact of the HIV/AIDS pandemic, as well as its repercussions on fiscal policy of Namibia. The paper seeks to assess the macroeconomic impact of HIV/AIDS under a successful implementation of Medium-Term Plan III (MTP III) that would lower the prevalence rate to below its 2004 level. The paper also identifies the effect of HIV/AIDS on the real GDP growth rate over the medium term through a source of growth model that estimates the impact of HIV/AIDS on the factors of production.

I. The Macroeconomic Impact of HIV/AIDS in Namibia1

A. Introduction

1. Namibia has one of the highest levels of HIV/AIDS prevalence in the world. The first cases of infection were detected in the late 1980s. By 1996, HIV/AIDS was the leading cause of death in Namibia. The growth in the number of people believed to be infected has been exponential since then. Today, one in five Namibians of ages 15 to 49 is believed to be HIV-positive, and UNAIDS estimates that 16,000 Namibians died of AIDS-related causes in 2003. As a consequence of increased mortality among young adults, the number of orphans in Namibia has also risen sharply and is expected to increase from 12 to 18 percent of the young population ages 0 to 17 by 2010. In response to the seriousness and magnitude of the epidemic, Namibia began to formulate its coordinated HIV/AIDS strategies in the early 1990s. In 2004, Namibia published its third strategic plan to fight HIV/AIDS (MTP III). This comprehensive effort showcased the depth and widespread nature of the problem, stressing that HIV/AIDS is a development issue and not just a public health issue.

2. This chapter analyzes the macroeconomic impact of the HIV/AIDS pandemic, as well as its repercussions on fiscal policy. More specifically, the chapter seeks to assess the macroeconomic impact of HIV/AIDS under a successful implementation of MTP III that would lower the prevalence rate to below its 2004 level. It identifies the effect of HIV/AIDS on the real GDP growth rate over the medium term through a sources of growth model that estimates the impact of HIV/AIDS on the factors of production. In addition to highlighting the importance of increasing the contribution of human capital to growth, it also underscores the role of total factor productivity in sustaining growth rates that would allow for a reduction in poverty and unemployment.

3. The analysis shows that a full implementation of MTP III would pose significant challenges for Namibia, but is also a necessary step to sustaining growth over the medium term. To better illustrate the comparative statics, this chapter develops two scenarios for the sources of growth model. Differences in overall growth rates between the baseline and alternative scenarios illustrate the significant role that HIV/AIDS, and its abatement, can play in Namibia’s development over the medium term when combined with prudent macroeconomic and structural policies. Under these assumptions, growth could average 4 percent over the medium term.

4. Implementation of MTP III would also require a reorientation of budgetary priorities. The estimated costs required to implement MTP III are expected to approach N$1.4 billion (about 2½ percent of GDP) by 2009. The authorities expect that about one third of the cost would be financed by grants and participating NGOs. The remaining costs, however, would need to be fully integrated into the medium-term expenditure framework in order to ensure adequate funding of HIV/AIDS programs.

5. This chapter is organized as follows. Section B discusses the targets and outcome indicators under MTP III. Section C discusses the growth expenditure framework and the baseline and alternative scenarios for growth in Namibia. Section D illustrates the fiscal impact of HIV/AIDS, while Section E presents the concluding remarks.

B. Targets and Outcome Indicators under MTP III

6. The third medium-term plan to fight HIV/AIDS (MTP III) represents a far-reaching and comprehensive strategy that aims to meet a complex set of quantitative and qualitative targets. The MTP III is built around five core components (Box I.1), which are complemented by benchmarks and quantitative targets to assess progress in the implementation of the strategy and to assign accountability to myriad actors charged with implementing MTP III. Four main targets deserve particular attention.

Main Components of the National HIV/AIDS Strategy

The third medium-term plan to fight HIV/AIDS encompasses the following five main components or areas of action:

1. Enabling environment: This component focuses on policy awareness and involvement. It details a series of actions, including the scheduling of donor conferences and the encouragement of a policy dialogue on HIV/AIDS. A key aspect of this component is that it reflects the authorities’ intent to insure mainstreaming of the HIV/AIDS epidemic across all line ministries and agencies of government, as well as throughout the Namibian society.

2. Prevention: This component focuses on capacity building and increased awareness as ways to impede the continued spread of the HIV/AIDS virus. It sets aside funding for training workshops and public awareness campaigns, as well as for the training of health professionals involved in treating at-risk populations.

3. Treatment, care and support services: This component aims at highlighting the importance of increasing the capacity of the public health system to treat and care for the large number of those infected with HIV/AIDS and related diseases, such as tuberculosis. It also provides for highly active antiretroviral therapy to be made available to 25,000 patients by 2009.

4. Impact mitigation services: This component recognizes the close link between poverty and the spread of HIV/AIDS. It calls for augmented poverty reduction efforts and assistance to AIDS orphans through grants and other services.

5. Integrated and coordinated program management: This component focuses on workshops and training to allow the authorities, NGOs, faith-based organizations, and others involved in the fight against HIV/AIDS in Namibia to coordinate and target their efforts.

7. The first and most prominent target outlined in MTP III is a reduction in the incidence of HIV infection to below the epidemic threshold. Specifically, the MTP III establishes 2007 as the benchmark year by which the level of HIV seroprevalence should begin leveling off or declining. Accomplishing this task would allow Namibia to effectively meet one of the more prominent Millennium Development Goals (MDGs) which calls for halting or reversing the spread of HIV/AIDS by the year 2015. Although in its recent MDGs monitoring report Namibia indicated that progress toward meeting this goal had been slower than expected, the most recent sentinel survey finished at the end of 2004 suggests that the incidence rate of HIV/AIDS may already have begun to level off and could begin to decline well before 2007. This would represent a significant achievement in the fight against HIV/AIDS and greatly improve the chances of meeting the other targets set forth in MTP III.

8. The second major goal of the MTP III is to increase the number of persons living with HIV/AIDS who are receiving highly active antiretroviral therapy (HAART) from the current total of 3,000 to 25,000 by 2009. The authorities estimate that even if this target is reached, only one in four of those eligible to receive HAART would be treated with antiretroviral therapies. However, these figures only include publicly funded and administered HAART and do not include the number of AIDS patients who could receive HAART through the private health care system or through donors operating outside the public health care system. The provision of HAART is crucial in terms of mitigating the potential impact of HIV/AIDS on growth. Those adults receiving HAART would in all likelihood be of working age, since most of those infected are between the ages of 15 and 49, and the ability to receive therapeutic drugs that abate the symptoms associated with infection would certainly prolong the average length of participation in the labor force and increase productivity.

9. MTP III also aims at halving the percentage of HIV-infected infants born to HIV-infected mothers from about 30 percent in 2005 to less than 15 percent in 2009. Typically, the youngest are the most vulnerable among AIDS patients, and about half of infants born HIV-positive are unlikely to survive their first year.2 This target aims at building on Namibia’s success in testing pregnant women for HIV and, taking it one step further, at ensuring that expectant mothers who are HIV-positive receive appropriate treatment during pregnancy and delivery.

10. The fourth major target is to increase the number of households with orphans receiving social welfare grants by 30 percent before 2007 and by 80 percent before 2009, relative to 2005. All Namibian orphans are entitled to a small subsistence grant of N$200 per month. However, in the past many orphans went without receiving this entitlement because they, or their caretakers, were unaware of its existence or unable to access the welfare system. MTP III calls for greater coordination among agencies, in concert with the new Ministry of Women’s and Children’s Affairs, to raise awareness and insure widespread access to the orphan grants. However, the quantitative target in MTP III would still leave one in five orphans outside the social safety net.

C. The Growth Accounting Framework

Description of Framework

11. The past decade has seen a significant increase in studies of growth and its determinants. Particularly in the case of African countries, the question of why there has been so little growth continues to remain unanswered by both economists and policymakers alike.3 As Collins and Bosworth (2003) note, there is still no consensus among policymakers about which of the factors of production contribute the most to GDP growth nor about which approach—growth accounting or growth regressions—yields the most useful analytical results.

12. The growth accounting approach to analyzing economic growth is used to allocate historical levels of output between three main contributing factors: physical capital, human capital, and total factor productivity (TFP). In the standard growth accounting framework, physical and human capital contributions to growth may be calculated from largely observable sets of variables and with minimal additional assumptions. TFP is then calculated as the residual between the projected growth rate based on the calculated contributions of physical and human capital and the observed rate of economic growth. TFP captures the largely unobservable contribution of factors such as technological progress and overall gains in the efficiency of production. An increase in the contribution of TFP can signal an improvement in the overall efficiency of the economy or the assimilation of new technologies into production, such as more widespread use of information technology. However, as Hulten (2001) notes, because TFP is calculated as the residual of the growth equation, it captures all residual factors affecting growth, not just those related to technological progress. In countries such as Namibia, factors such as climatic and political shocks could also affect the residual.

13. The growth accounting framework uses a simple macroeconomic model based on a Cobb Douglas production function with constant returns to scale. The production function takes the following form:

Y=AKα(LH)1α(1)

where A represents total factor productivity, K represents physical capital and LH represent human capital, defined by the size of the labor force and calibrated for the overall level of educational attainment. While there is still not an absolute consensus in the economic literature on how to measure the contributions of capital and labor, there is increasing research to suggest that the capital and labor functions should each include certain essential features in the case of developing countries. As suggested in Bosworth and Collins (2003), the elasticity of output with respect to capital is assumed to be 35 percent. Physical capital in the framework is derived from a simple perpetual inventory model, where physical capital is a function of the capital stock in the previous year adjusted for depreciation4 and of fixed capital formation5 in the current year:

K=Kt1(1d)+It(2)

The elasticity of output with respect to human capital (LH) is assumed to be 65 percent. The contribution of human capital to growth in this framework is a function of the size of the labor force (L) and of educational attainment (H). Additionally, educational attainment is itself a function of average years of schooling (s) as follows:

H=(1.07)s(3)

14. In this equation, estimated returns to schooling are such that an additional year of schooling raises education attainment by 7 percent. This is in keeping with the findings of most cross country studies.6

Past Sources of Growth in Namibia

15. In the past, physical and human capital have been important sources of growth in the Namibian economy. Over the last decade, growth averaged about 3.8 percent. The estimated contributions of physical capital and human capital to growth were roughly equal at around 1.0 and 1.2 percentage points, respectively. During the initial years after independence, Namibia aimed to build a high level of human capital in its labor force by drawing heavily on expatriate workers, but the country also recognized the need to build up the stock of human capital among its own native labor force. Today, Namibia has one of the highest average years of schooling in sub-Saharan Africa (almost 12 years), and mandates at least 10 years of schooling for every child. Many of those now entering the labor force benefited from increased investment in education following independence in the early 1990s, and over a quarter of government expenditure is currently earmarked for the education sector. Progress could still be made in increasing the efficiency of education expenditure, as highlighted by a public expenditure tracking survey conducted by the World Bank (2004).

16. TFP outpaced human and physical capital in its contribution to growth over the past few years, averaging 1.6 percentage points. This goes against the regional trend, but is not surprising given Namibia’s relatively sophisticated and well-maintained infrastructure and its high degree of openness, factors which could be assumed to facilitate technological transfer.

Two Scenarios to Project Future Growth

17. The framework as discussed above was applied to project two different growth scenarios. A baseline scenario is built on the assumption that the MTP III would be implemented successfully, complemented by the initiation of structural reforms and the pursuit of prudent macroeconomic policies. An alternative scenario would assume that the authorities fall short of expectations in all of these areas.

18. In order to quantify the growth impact of a successful MTP III implementation, the model makes some simplistic assumptions about the impact of MTP III on the contribution of human capital to growth (Box I.2).

The Impact of MTP III on the Contribution of Human Capital to Growth

The model assumes that HIV/AIDS affects the mortality and population growth rates, as well as the number of AIDS orphans. In order to quantify the impact of HIV/AIDS on the size of the general population and on the number of AIDS orphans, the following additional assumptions are made, in line with the quantitative targets discussed:

  • The HIV/AIDS seroprevalence rate is assumed to level off by 2007 and to be declining slightly in 2008 and 2009.

  • The number of HIV-infected infants born to HIV-infected mothers would decline from 30 percent in 2005 to 15 percent in 2009.

Using a demographic modeling software package1 the model is able to project trends in mortality and population growth as affected by differences in HIV/AIDS prevalence rates. The model assumes that under both scenarios, the labor force in Namibia is a fixed percentage of the population and thus, as mortality rates change, so should the size of the labor force and its corresponding contribution to human capital. Other studies (see Haacker 2004) have also attempted to link HIV/AIDS to declining educational attainment or worker productivity, but have been unable to quantify the impact. Given data constraints, it is not possible to make any quantifiable estimate of what the impact of HIV/AIDS on educational attainment and worker productivity might be. Thus, so as not to overstate the impact of MTP III on the contribution of human capital, the model adjusts only for the impact of HIV/AIDS seroprevalence and mortality rates on demographic trends, as projected by the simulations. The potential impact of MTP III on human capital is broadly in line with projections for strategies in neighboring countries such as Botswana.2

1 The software package is called SPECTRUM and is widely used by UNAIDS and others to project the epidemiological impact of the pandemic.2 For a detailed assessment of Botswana’s AIDS strategy, see Masha (2004).

19. The baseline scenario assumes that growth would average about 4 percent over the medium term. This is the assumption underlying the macroeconomic framework in the accompanying staff report (1/27/05, www.imf.org) and is in line with the authorities’ own targeted rate.

20. The baseline scenario predicts that the contribution of human capital to growth would begin to increase, after being just 0.6 percentage point in 2004. This is consistent with the assumption that the labor force would continue to grow again as the number of workers infected with HIV/AIDS begins to level off and decline. Another potential source of sustained human capital accumulation could result from enhanced vocational training programs which would in effect keep more Namibians in school longer, raise the level of educational attainment, and more closely cater to the demands of the labor market. However, the average contribution of human capital to growth over the medium term, would still be just under 1 percentage point in the baseline scenario which is somewhat lower than its historical level. The baseline scenario projects that the contribution of TFP to growth would be around 2 percentage points. This is higher than the historical average but below the estimates for the two most recent years. Such a TFP contribution could result from the authorities’ efforts to enhance skills, reform parastatals, promote SMEs, diversify exports, and increase labor market flexibility.

Figure I.1.
Figure I.1.

Namibia: Sources of Growth

(Baseline Scenario)

Citation: IMF Staff Country Reports 2005, 096; 10.5089/9781451828399.002.A001

Figure I.2.
Figure I.2.

Namibia: Sources of Growth

(Alternative Scenario)

Citation: IMF Staff Country Reports 2005, 096; 10.5089/9781451828399.002.A001

21. The alternative scenario shows a much different outlook over the medium term, with growth averaging just 3 percent. The change in the growth prospects for Namibia is quite stark when considering that only two assumptions have changed between scenarios. First, it is assumed in the alternative scenario that the MTP III is not fully implemented, and that there is therefore no recovery in the contribution of human capital to growth over the medium term. Instead, the contribution of human capital to growth is declining as the mortality rate continues to rise; as a result, the contribution of human capital to growth averages just about 0.4 percentage points. And second, it is also assumed that there is no increase in the rate of growth of TFP, reflecting that the structural reforms necessary to foster a sustained increase in productivity over time are not undertaken by the authorities. As the labor force gets sicker, productivity also declines. Thus, in the alternative scenario, the contribution of TFP to growth is held constant and set equal to its historical average. This formulation of the model is in keeping with other projections of the growth accounting framework for Africa such as Young (2000) and Masha (2004). The result is that growth averages nearly 1 percentage point lower over the next five years compared to the growth rate under the baseline scenario. This scenario means that without a successful implementation of MTP III, Namibia would struggle to maintain even a modest rate of growth over the medium term, and the average growth rate would be noticably below the targeted growth rate of 4 percent.

D. Fiscal Impact of HIV/AIDS

22. While a successful implementation of MTP III is essential for Namibia’s economic growth, such a comprehensive program also requires careful consideration and planning in order to assure that it is adequately funded. The MTP III presents a rough breakdown of costs by component and projects that the total cost of implementing the strategy would be about N$3.7 billion in the next five years.

Text Table I.1.

Namibia: Cost by Component as Estimated in MTP III

(In millions of Namibia dollars, unless otherwise indicated)

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23. However, the actual cost of implementing MTP III is likely to be higher if the quantitative targets set out in the strategy are to be met. This mainly reflects (i) the substantially higher levels of funding needed for HAART treatment; and (ii) care and subsistence grants to HIV/AIDS orphans. To this end, two revisions to the cost as estimates in MTP III are incorporated into the projections and used in the baseline scenario.

24. The revised cost estimates indicate that a full implementation of MTP III would require nearly N$5 billion over the next five years. In the first revision, the estimated cost of the treatment and care services component is revised upwards largely so as to meet the quantitative target of providing HAART to 25,000 patients by 2009. The average estimated cost of providing HAART to patients in Namibia is currently N$12,000 per year,7 and it is projected that the cost would rise slightly over time by about N$1,000 per year. In addition, the remaining estimated cost of providing non-HAART treatment and care services to people living with HIV/AIDS is assumed to rise slightly over time as well to keep pace with inflation. In keeping with the underlying assumptions of the MTP III cost projections, overhead and administrative costs are assumed to be 20 percent of the total cost of the component. In the second revision, the cost estimates published in the MTP III are increased to reflect funding for direct subsistence grants to HIV/AIDS orphans, as such grants are an entitlement under the law and providing such grants to at least 80 percent of orphans is one of the quantitative targets set in MTP III. Since these grants are an entitlement, the revised costs estimates assume that the target would be surpassed and that 100 percent of AIDS orphans would be receiving N$200 a month grants by 2009. Currently, Namibia has close to 90,000 orphans, and approximately one-third of those are AIDS orphans. The demographic projections indicate that the number of AIDS orphans can be expected to more than triple over the next five years, meaning that over 100,000 AIDS orphans would be eligible for grants at an estimated cost of N$240 million per year by 2009.

Text Table I.2.

Namibia: Revised Estimates of Cost by Component

(In millions of Namibia dollars, unless otherwise indicated)

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25. Despite donor support, the full implementation of MTP III would still require significant additional budgetary expenditure—which should be accommodated. Namibia has received approval for funding request from the two major international donors in the fight against HIV/AIDS: the Global Fund to Fight HIV/AIDS and the President’s Emergency Program for AIDS Relief (PEPFAR). Combined the Global Fund and PEPFAR grants should amount to over N$1.7 billion in grant-funded expenditure for HIV/AIDS. Additionally, MTP III envisions that domestic NGOs already active in the fight against HIV/AIDS would directly contribute about 5 percent of the direct financial cost of implementing the strategy, or roughly N$250 million. Despite these significant contributions, total annual budgetary expenditure required for HIV/AIDS would increase from about N$350 million in 2005 to over N$900 million by 2009. This means that up to 1.7 percent of GDP in additional expenditures would need to be accommodated by the budget by 2009 if full implementation of the MTP III is to occur.

Text Table I.3.

Namibia: HIV/AIDS Expenditure Financing

(In millions of Namibia dollars, unless otherwise indicated)

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26. The additional resources needed to win the fight against HIV/AIDS require a reorientation of budgetary spending priorities. However, as the sources of growth model illustrates, a successful implementation of MTP III is essential to growth over the medium term.

E. Conclusions

27. The MTP III is a comprehensive and ambitious strategy to address the challenges posed by the HIV/AIDS epidemic. Full implementation of MTP III as envisioned would significantly improve Namibia’s growth prospects, by increasing the contribution of human capital to growth over the medium-term. However, in order to sustain an average growth rate of 4 percent over the medium term, an increase in the contribution of TFP to growth would also be necessary.

28. Given its track record of relatively good governance and sound macroeconomic management, Namibia could significantly improve the contribution of total factor productivity to growth. Namibia’s overall favorable business climate, relatively good infrastructure and the initiation of structural reforms should facilitate technological transfer and enhanced efficiency.

29. Despite significant donor support, the full implementation of MTP III would require significant additional public expenditure which should be accommodated. By 2009, an estimated 1.7 percent of GDP would need to be set aside to fund MTP III. This would require a reorientation of budgetary spending priorities in order to ensure adequate funding for MTP III, particularly in terms of orphan grants and treatment and care services, including for the provision of HAART.

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1

Prepared by Irene Yackovlev (AFR).

2

U.S. Bureau of the Census.

3

See O’Connell and Ndulu (2001).

4

Depreciation of the capital stock is assumed to be 8 percent per year.

5

Historical time series of fixed capital formation provided by the Bank of Namibia.

6

See Barro and Lee (1993).

7

Estimated cost of HAART therapy provided by the Ministry of Health, Republic of Namibia.

Namibia: Selected Issues and Statistical Appendix
Author: International Monetary Fund