Namibia: Staff Report for the 2004 Article IV Consultation

This 2004 Article IV Consultation highlights that Namibia’s real GDP growth accelerated to an estimated 4¼ percent in 2004, after averaging about 3 percent during the preceding five years. Growth benefited from declining interest rates, as the Bank of Namibia took advantage of declining inflation pressures and reduced its key policy rate in several steps from 12¾ percent in January 2003 to 7½ percent in July 2004. Executive Directors have welcomed the recent rise in GDP growth, decline in inflation, and strengthening of the external current account surplus.

Abstract

This 2004 Article IV Consultation highlights that Namibia’s real GDP growth accelerated to an estimated 4¼ percent in 2004, after averaging about 3 percent during the preceding five years. Growth benefited from declining interest rates, as the Bank of Namibia took advantage of declining inflation pressures and reduced its key policy rate in several steps from 12¾ percent in January 2003 to 7½ percent in July 2004. Executive Directors have welcomed the recent rise in GDP growth, decline in inflation, and strengthening of the external current account surplus.

I. Introduction and Key Issues

1. Namibia has enjoyed enviable macroeconomic stability since independence. Underpinned by a credible exchange rate peg and generally prudent fiscal policies, a market economy has been established, with a sophisticated physical infrastructure. A stable political and legal environment has been conducive to private sector activity.

2. Economic growth, however, has been insufficient to generate a reduction in unemployment and poverty. Namibia’s per-capita growth performance lags behind that of other countries in the region. The income distribution is highly skewed, reflecting an uneven land distribution and the existence of capital-intensive mining alongside a large informal sector. The lack of labor-intensive industries, together with labor market rigidities and a shortage of skilled labor, has kept the unemployment rate above 30 percent. These problems are compounded by the high incidence of HIV/AIDS, limited access to finance, and an inefficient utilization of resources by parastatals. Recent fiscal policy slippages and the erosion of international reserves have left Namibia more vulnerable to external shocks.

Text Table 1.

Growth in SACU Countries, 1998–2003

(In percent change)

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3. Against this background, the mission discussed policies to enhance Namibia’s growth potential and safeguard macroeconomic stability. The focus was on: (i) the need to address the structural impediments to growth so as to generate stronger private sector activity and employment, mainly outside mining and agriculture; (ii) the medium-term fiscal policy stance; (iii) the impact of HIV/AIDS on growth and fiscal policy; (iv) the sustainability of the exchange rate peg; and (v) the authorities’ efforts to combat inequality and poverty.

II. Recent Economic Developments

Figure 1.
Figure 1.

Namibia: Real Sector Developments, 1998-2004

(Change in percent)

Citation: IMF Staff Country Reports 2005, 097; 10.5089/9781451828405.002.A001

4. Economic activity strengthened in 2003 and 2004, following two lackluster years (Table 1). Real GDP growth accelerated by 1¼ percentage points to 3¾ percent in 2003 and a projected 4¼ percent in 2004.1 Growth has been broad-based and driven by investment and private consumption, bolstered by declining interest rates which benefited especially retail and construction activity. However, manufacturing, agriculture, and fishing have recently been hurt by the strength of the Namibia dollar which appreciated in tandem with the South African rand (to which it is pegged).

Table 1.

Namibia: Selected Financial and Economic Indicators, 2000–09

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Sources: Namibian authorities; and Fund staff estimates and projections.

Figures are for fiscal year, which begins April 1.

Data for 2003 onwards reflect new monetary data.

Deficit for 2005 onwards reflects additional measures not yet allocated to individual revenue or expenditure items.

Base year = 1995.

5. Inflation has fallen rapidly, in line with the appreciating currency and a drop in food prices. Year-on-year inflation declined from around 13 percent in early 2003 to 5 percent in November 2004.

6. The external current account has remained in surplus (Table 2). Strong services, income, and transfer receipts have offset a widening trade deficit arising from buoyant import growth. Exports have performed well overall and benefited from the 2003 opening of a large textile company. Mining exports, after slumping in 2003, recovered in 2004 as a result of rising world demand, the coming online of a new zinc mine, and an expansion of offshore diamond mining.

Table 2.

Namibia: Balance of Payments, 2000–09

(In millions of U.S. dollars)

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Sources: Namibian authorities; and Fund staff estimates.

Southern African Customs Union.

Gross foreign assets of the Bank of Namibia, converted to U.S. dollars at the end-of-period exchange rate.

Figure 2.
Figure 2.

Namibia: Trade and External Current Account, 1998-2004

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 097; 10.5089/9781451828405.002.A001

7. The strengthening of the Namibia dollar has raised concerns about external competitiveness. This appreciation has brought the exchange rate back to the level prevailing before the rand crisis in 2001, eroded profit margins, and forced some businesses to adjust, including through layoffs. At the same time, Namibia has successfully expanded its exports to the rand area. In addition, diamond exports have benefited from strong world demand countering the declining profitability of the sector emanating from the appreciation.

Figure 3.
Figure 3.

Namibia: Effective Exchange Rates, 1998-2004

(1995=100)

Citation: IMF Staff Country Reports 2005, 097; 10.5089/9781451828405.002.A001

Figure 4.
Figure 4.

Namibia: Bilateral Exchange Rates, 1998-2004

Citation: IMF Staff Country Reports 2005, 097; 10.5089/9781451828405.002.A001

Text Table 2:

Namibia: Regional Distribution of Exports, 2000-03

(In percent of exports excluding re-exports, unless stated otherwise)

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8. The capital and financial accounts have been marked by increasing net outflows. This reflects insurance companies and pension funds seeking broader investment opportunities in South Africa. Namibia’s international reserves declined to less than 2 months of imports in 2003,2 while the ratio of reserves to short-term debt remained slightly above the benchmark of 1.0 at end-2002. External debt amounted to 17½ percent of GDP at end-2003, well below levels in other sub-Saharan countries.3

9. The new 2002 Southern African Customs Union (SACU) agreement came into force in mid-2004. It will imply far-reaching changes for Namibia (Box 1).4

Figure 5.
Figure 5.

Namibia: International Reserves, 1998-2004

(In months of imports, and as ratio of short-term debt)

Citation: IMF Staff Country Reports 2005, 097; 10.5089/9781451828405.002.A001

Text Table 3.

International Reserves, 2000-03

(In months of imports of goods and services)

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The New SACU Agreement

The new SACU agreement replaces the 1969 treaty which had concentrated all policy-making powers in South Africa. It provides for well-defined institutional structures and joint decision-making, allowing Namibia to participate in SACU’s policy setting and trade negotiation framework.

The agreement retains the common revenue pool (CRP), which is complemented by a new revenue-sharing formula (RSF) built on three components: (i) the customs component, shared based on intra-SACU imports; (ii) the excise component, consisting of 85 percent of excise collections and shared based on GDP; and (iii) the development component, distributing the remaining excise collections based inversely on per-capita GDP.

The new RSF reduces net transfers from South Africa to other members and eliminates the two-year lag between collections and allocations, making revenue forecasting more difficult. Namibia is poised to lose revenue from the shift to the new RSF: after a windfall in 2004/05 due to the lagged RSF and transitional arrangements, Namibia’s SACU receipts are projected to fall by 4 percent of GDP by 2009/10.

The new SACU agreement requires Namibia to enhance its capacity in various areas, such as customs administration and statistical compilation.

10. The fiscal deficit deteriorated sharply in 2003/04 to 7¾ percent of GDP, from 3½ percent of GDP a year earlier (Table 3).5 This outcome was more than double the target in the revised budget and mainly related to unexpected problems in the administration of VAT and income taxes. This revenue shortfall compounded the collapse in diamond and other mining taxes, which had been anticipated in the budget and related to pressure of the appreciating exchange rate on profits. On the expenditure side, some progress was made in reining in net lending to parastatals and some nonpriority current spending, although the wage bill rose as staffing levels increased. Public debt rose to 31 percent of GDP, exceeding the fiscal rule targeting public debt at 25 percent of GDP.

Table 3.

Namibia: Central Government Operations. 2002/03–2009/10

(In millions of Namibia dollars)

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Sources: Namibian authorities; and Fund staff estimates and projections.

This expenditure corresponds to commitments in the national HIV/AIDS strategy and is over and above any HIV/AIDS-related expenditure already embedded in the budget.

The “overall balance” reflects externally financed project spending (except for roads) that is not channeled through the state account. By contrast, the “overall balance excluding extrabudgetary spending” excludes such spending and thus corresponds directly with the GRN concept.

Table 3.

Namibia: Central Government Operations. 2002/03–2009/10 (continued)

(In percent of GDP)

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Sources: Namibian authorities; and Fund staff estimates and projections.

This expenditure corresponds to commitments in the national HIV/AIDS strategy and is over and above any HIV/AIDS-related expenditure already embedded in the budget.

The “overall balance” reflects externally financed project spending (except for roads) that is not channeled through the state account. By contrast, the “overall balance excluding extrabudgetary spending” excludes such spending and thus corresponds directly with the GRN concept.

Figure 6.
Figure 6.

Namibia: Central Government Revenue, Expenditure and Budget Balance, 1998/99-2004/05

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 097; 10.5089/9781451828405.002.A001

11. The fiscal position is expected to improve markedly in 2004/05. A fiscal deficit of 2 percent of GDP is envisaged, built on one-time windfalls from SACU receipts (equivalent to 2½ percent of GDP), improvements in tax administration,6 and efforts to curtail subsidies to parastatals and the wage bill, as outlined below.

12. Namibia’s monetary policy is anchored by the peg to the rand. In line with developments in South Africa, the BoN took advantage of declining inflationary pressures by reducing the Bank Rate in several steps from 12¾ percent in January 2003 to 7½ percent in July 2004. The last such step aligned the Bank Rate with the South African policy rate, ending several years with a negative differential maintained in an effort to support economic activity. However, the positive differential for government bonds has widened recently, pointing to an increasing risk premium for Namibia. Credit to the private sector, especially to households, grew strongly, bolstered by the stronger economic activity and declining interest rates (Table 4).

Table 4.

Namibia: Monetary Developments, 2002–09 1/

(In millions of Namibia dollars, end-of-period)

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Sources: Bank of Namibia; and Fund staff estimates and projections.

Following Fund advice, the authorities recently revised the monetary statistics, involving several reclassifications in the central bank and commercial bank balance sheets. The adjustments made are still subject to review.

Others includes local and regional government, non-financial public enterprises and other fiscal corporations.

BON overdraft rate.