Statement by Peter Ngumbullu, Executive Director for Namibia and John Steytler, Advisor to Executive Director

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.


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.

1. The Namibian authorities appreciate the candid exchange of views during the 2004 Article IV Consultation discussions. They agree with the thrust of the staff assessment and commend staff for the report, which reflects an open dialogue between staff and the authorities, and gives a fair account of economic developments in Namibia and the challenges ahead. The Namibian authorities also find the topics for the selected papers to be well chosen, as they supplement ongoing work by the authorities in these areas.


2. Namibia has established an enviable record of macroeconomic stability since attaining independence in 1990. This has largely been due to implementation of market-oriented policies, including a credible exchange rate peg, supported by prudent fiscal policies and a stable political and legal environment. Over the period 1990-2004, the country registered an average real GDP growth rate of about 4 percent, making it one of the fastest growing economies in sub-Saharan Africa. Notwithstanding this accomplishment, the country faces enormous developmental challenges, some of which are due to the legacy of the apartheid regime, including high-income inequality, widespread poverty, a narrow economic base, and recently the high incidence of HIV/AIDS.

3. The authorities have responded effectively to these challenges and have made good progress in the context of its medium-term development plans, and their strategy going forward is sound. Building on the progress made, the country launched its long-term development strategy, Vision 2030, which is a comprehensive development plan aimed at transforming Namibia into a diversified and industrialized country, with a high standard of living for all its citizens. The plan further aims at substantially reducing income inequality and unemployment by 2030. The plan has been formulated in close collaboration and consultation with all major stakeholders, including the private sector, labour unions, and civil society and non-governmental organizations. There is, therefore, a strong degree of ownership, which is crucial for its success.

Recent Economic Developments and Prospects

4. Namibia’s economic performance improved significantly in 2004. Real GDP growth is estimated to have accelerated to over 4 percent and has been broad-based, driven by private consumption and supported by declining interest rates. The average annual inflation rate declined from 7.3 percent in 2003 to 3.9 percent in 2004, and the surplus on the external current account is estimated to have increased as a ratio of GDP in 2004, while foreign debt stock of the central government remained low. During fiscal year 2003/04, the fiscal deficit, excluding extra-budgetary spending increased to 7.5 percent of GDP. This undesirable out-turn was due to the weakening of the US dollar against other currencies that affected corporate profits margins of the export oriented industries and subsequent tax contribution. In addition, the authorities experienced temporary setbacks in computer systems that support collection of VAT and income tax.

5. Looking ahead, real GDP growth of up to 4 percent is expected for 2005, supported by an increase in mining sector activities, inflation is expected to remain at the existing single digit level, and the external current account is expected to remain in a comfortable surplus. The fiscal position is expected to strengthen markedly during 2004/05, supported by expenditure restraint measures such as freezing of civil service recruitments and traveling related expenditure.

Fiscal Policy

6. The overarching objective of fiscal policy remains fiscal sustainability aimed at keeping inflation low and to sustain the peg exchange rate. The authorities do agree with staff that most fiscal adjustment over the medium term would need to come from the expenditure side, including through freezing of further increase of the wage bill in relation to GDP, reduction of subsidies to parastatals, and spending on goods and services. In part due to larger than expected SACU receipts, the Namibian authorities were able to significantly reduce the budget deficit to 2.0 percent of GDP in 2004/05. In addition, the authorities have implemented several measures to consolidate the fiscal position during fiscal year 2004/05 and in the medium term, including, the following:

  1. The authorities recognized the urgency of fiscal adjustment and decided not to request for supplementary budget in 2004/05, the first time since independence. Instead, any additional spending needs were addressed by utilizing the contingency provision in the 2004/05 budget.

  2. Measures to improve tax administration were implemented, including employment of private audit companies to assist the Ministry of Finance to improve audit capacity. The authorities will further explore measures to broaden the tax base such as the integration of the informal sector into the formal sector.

  3. On expenditure outlays, more resources will be allocated for capital expenditure aimed at enhancing economic growth, while trying to restrain current expenditure, including freezing of civil service recruitment, as well as reduction of travel related expenditure.

  4. The Ministry of Finance agrees that tax incentives under the Export Processing Zone (EPZ) regime, especially to mining companies might have been rather generous. At the same time, they also believe that the EPZ regime did enable Namibia to attract substantial foreign direct investment. In this connection, the authorities have decided to establish a task force comprising representatives of the Ministry of Finance, the Ministry of Trade and Industry and the Bank of Namibia to review Namibia’s incentives regime with a view to streamlining and making it more efficient. The Namibian authorities also agree that an overall stable environment, including political stability, strong legal institutions, and protection of property rights, elements already well entrenched in Namibia’s policy framework, are very important for attracting foreign direct investment.

  5. Finally, the authorities intend to enhance their medium-term expenditure framework with the gradual introduction of output based program budgeting.

Monetary, Exchange Rate and Financial Sector Issues

7. Monetary policy is anchored on Namibia’s exchange rate peg to the South African Rand and membership in the Common Monetary Area (CMA). The primary long-term objective of Namibia’s monetary policy is to achieve low and sustainable inflation. The authorities believe that while the recent appreciation of the exchange rate has caused hardship to some exporters, the economy remained competitive overall. Apart from the inflationary expectations problem that is generally associated with a weak currency, there is also the concern that to rely on a depreciating exchange rate for price competitiveness runs the risk of sharp fluctuations in relative prices, and may only be beneficial in the very short-term. The authorities therefore believe that for long-term prosperity the country will be better off with exchange rate stability, and focusing on improvements of total factor productivity for enhancing external competitiveness. In this connection, they recognize the need to develop additional competitiveness indicators that will provide adequate guide to policy.

8. While the authorities do not see drain in international reserves as an indication of lack of confidence, they nevertheless remain concerned about the relatively low level of international reserves, and are exploring ways to build more reserves. In this regard, they welcome the exchange of views with staff on measures to strengthen reserves and will give careful consideration to these suggestions, including obtaining a credit rating and tapping international capital markets through the issuing of a Eurobond. The authorities would also explore other options to bolster reserves such as syndicated borrowing in South Africa or external markets and marketing Namibian public debt instruments in South Africa. They believe that factors contributing to the low reserves level is the large outflow of capital, supported by free flow of capital under the open capital regime under the CMA arrangement as well as lack of investment opportunities in Namibia. The authorities have taken note of staff’s advice on the recently proposed measures to stem capital outflow and will reassess the proposed regulations after full consultations with market participants. They, however, believe that the argument of interest rate differential between Namibia and South Africa cannot be blamed for outflows and that hiking interest rate may put undue pressure on the State and may stifle economic growth in Namibia.

9. The banking industry is financially sound, solvent, profitable and liquid, with banks maintaining prudential ratios in excess of statutory requirements, and low ratios of non-performing loans. A recent self-assessment shows that the Bank of Namibia is compliant with 21 of the 25 Basel Core Principles of Effective Banking Supervision. To further strengthen the financial system the authorities have requested for a Bank/Fund Financial Sector Assessment Program (FSAP). An anti-money laundering and CFT legislation is expected to be tabled before Parliament for consideration and adoption in the near future.

Structural Issues

10. The Namibian authorities agree with staff that structural reforms are critical to promoting private sector development, generating employment and addressing the problem of income inequality. In this regard, they recognize the need to strengthen and enhance development of skills, which had been neglected under the apartheid regime, due to lack of vocational training. Notwithstanding the fact that education spending exceeded 25 percent of total spending every year since independence and is among the highest in sub-Saharan Africa, the authorities continue to place this item as one of the highest priority in their agenda. They have also implemented several programs to assist development of small and medium size enterprises.

11. Progress on the trade liberalization front has been significant and Namibia has one of the most open and liberal trade regimes in sub-Saharan Africa, with a simple average tariff of only 11.4 percent compared to the sub-Saharan average of 20 percent. Namibia is committed towards further trade liberalization, and together with its SACU partners, it recently concluded a PTA with MERCOSUR. In the mean time, they are engaged in free trade discussions with the United States, the EU and EFTA. Free Trade under SADC is also progressing well. In 2005, SACU partners are going to unilaterally open their markets for non-SACU members of SADC. The authorities also welcome the US Africa Growth and Opportunity Act, which has enabled them to establish a textile industry, and export textiles and apparels into the US market.

12. The Namibian government reaffirms its commitment to an orderly process in implementing its land distribution program. It has emphasized that expropriation with “just” compensation has become necessary to speed up the land distribution program, which has not been very successful under the “willing buyer willing seller principle” and to free up land that is currently under-utilized. There is a healthy dialogue between the authorities and all stakeholders, and government will continue to make efforts to clarify its policy on this matter. The authorities would like to thank the international community, in particular the European Union and the German government for their support of the land redistribution program.

Fight against HIV/AIDS

13. The Namibian authorities are determined to take the challenge of the HIV/AIDS pandemic head on. In this regard, the government has launched its third medium-term National Strategic Plan (NSP) on HIV/AIDS, covering the period 2004-2009. The goal of NSP is to reduce the incidence of HIV infection to below the epidemic threshold, by 2007. The Namibian government recognizes that HIV/AIDS is also a developmental issue, which requires a comprehensive approach in managing the pandemic. Accordingly, the NSP is built around five core action areas: (i) prevention, (ii) treatment care and support services, (iii) impact mitigation, (iv) provision of strengthened legal and ethical environment and (v) integrated and coordinated program management.

14. Antiretroviral treatment has been introduced in 19 out of 35 public hospitals, while 3000 patients are receiving treatment under the government program. The treatment of prevention of mother-to-child transmission has been rolled out to 25 public hospitals. The authorities hope to be able to extend these services significantly to cover all public hospitals by the end of 2005, with financial assistance from the Global Fund Grant, PEPFAR and domestic resource mobilization. The authorities appreciate the assistance provided by international community in their fight against this pandemic. Thanks to the authorities determined efforts and assistance of the international community, there are currently encouraging signs that the incidence rate of HIV/AIDS may have already begun to level off in 2004, well before the target date of 2007.

Other Issues

15. The Namibian authorities are committed to strengthening the statistical system, by implementing the recommendations of the data module of the Report on Observance of Standards and Codes (ROSC) concluded in 2001. A fair number of these recommendations have already been implemented, and work is ongoing.

16. In conclusion, we believe that the continued dialogue between the authorities and the staff is fruitful. We want to reiterate the strong commitment of the authorities on the reforms and in addressing the economic challenges ahead. In this regard, we trust that the Fund will continue to be fully responsive in providing the technical assistance requested by the authorities to strengthen their ability to implement the reform agenda.