Namibia: Staff Report for the 2005 Article IV Consultation

This 2005 Article IV Consultation highlights that Namibia recorded robust real GDP growth, falling inflation, a strong external current account surplus, and continued low external indebtedness over the last two years. Real GDP grew by 6 percent in 2004, as new marine technologies prompted a surge in diamond production and most other sectors of the economy showed solid economic activity, aided by a decline in interest rates. Growth slowed in 2005, as diamond production fell relative to the high production base of the previous year and growth rates in other sectors moderated somewhat.

Abstract

This 2005 Article IV Consultation highlights that Namibia recorded robust real GDP growth, falling inflation, a strong external current account surplus, and continued low external indebtedness over the last two years. Real GDP grew by 6 percent in 2004, as new marine technologies prompted a surge in diamond production and most other sectors of the economy showed solid economic activity, aided by a decline in interest rates. Growth slowed in 2005, as diamond production fell relative to the high production base of the previous year and growth rates in other sectors moderated somewhat.

Executive Summary

Namibia has maintained a strong record of macroeconomic stability since independence. This record has been based on a credible peg to the South African rand, generally prudent fiscal policies, a stable political environment, a fairly developed infrastructure, and a strong legal and regulatory environment. It is also reflected in recent economic performance, with robust real GDP growth, falling inflation, a high external current account surplus, and continued low external indebtedness. However, outflows on the capital and financial accounts continued, as financial institutions invested heavily in South Africa. This has kept reserves at relatively low levels. Namibia recently received an investment grade rating on sovereign debt from Fitch.

Despite these accomplishments, major challenges-including widespread poverty, high unemployment, and HIV/AIDS-remain. One-fourth of the population does not get sufficient dietary consumption, the unemployment rate exceeds 20 percent, and the prevalence of HIV/AIDS is about 20 percent.

The authorities recognized they need to tackle these challenges and raise Namibia’s long-term growth potential. They have identified education reform as key and are examining ways to boost student enrollment and the quality of teaching and instructional materials. The discussions also focused on ways to boost the flexibility of labor markets, improve the performance of parastatals and limit their impact on the budget, clarify land reform, enhance governance, combat the HIV/AIDS pandemic, and alleviate poverty.

The authorities reiterated their commitment to reduce the fiscal deficit. The 2004/05 fiscal deficit was higher than expected, at 4 percent of GDP, due mainly to shortfalls in VAT collections and an increase in the wage bill. The public debt-to-GDP ratio rose to 33½ percent at fiscal year-end 2004/05. Nonetheless, the authorities intend to bring the budget into balance over the medium-term and maintain their fiscal rule targeting a debt-to-GDP ratio at 25 percent, without, however, specifying how the adjustment is to be achieved. The mission stressed the importance of realistic budgets and a credible fiscal policy rule. It projected a slower medium-term fiscal adjustment path in light of the authorities’ difficulties in reining in and reorienting spending and enhancing tax administration. This may require that the authorities consider raising the debt target, at an appropriate time. The mission urged the authorities to limit the fiscal deficit to 3 percent of GDP in 2005/06.

In 2005, the Bank of Namibia (BoN) continued to lower the bank rate, consistent with developments in South Africa and the peg to the rand. In doing so, the BoN eliminated the negative interest rate differential vis-à-vis the anchor currency. Discussions focused on ways to boost international reserves, including through creating greater domestic investment opportunities and sterilizing purchases of foreign exchange. Staff also urged the authorities not to rule out establishing a positive interest rate differential with respect to South Africa.

The authorities welcomed the recommendations of the recently concluded FSAP. These focused on measures to ensure compliance with the Basel Core Principles, strengthen the regulatory framework for non-bank financial institutions, expand domestic investment opportunities, and improve access to financial services.

I. Recent Economic Developments

1. Namibia’s economy recorded growth above its historical average in 2004 (Table 1). Real GDP grew 6 percent, exceeding growth in most neighbors and the average of Sub-Saharan African (SSA) countries. Diamond production increased almost 40 percent, driven by new marine mining technologies. Other mining, mineral processing, transport and communication, and subsistence agriculture also contributed to growth. However, a strengthened currency hit the fishing and commercial agriculture industries.

Table 1.

Namibia: Selected Financial and Economic Indicators, 2000-10

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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.

Figure 1.
Figure 1.

Namibia: Real Sector Developments, 2000-2005

(Annual percent change)

Citation: IMF Staff Country Reports 2006, 152; 10.5089/9781451828412.002.A001

Sources: Namibian authorities, and Fund staff estimates.
Text Table 1.

Growth in Sub-Saharan Africa, SACU, and Namibia, 2000-05

(Annual percent change)

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Source: African Departmental database and United Nations Populations Division.

2. Growth slowed in 2005. Diamond production fell relative to the high production base of the previous year, while growth rates in other mining moderated somewhat. Higher oil prices affected the transportation sector in particular. However, solid activity occurred in manufacturing, agriculture, and the wholesale and retail trade sectors, aided by a decline in interest rates (see below).

3. Inflation moderated in 2004 and 2005, due to good rains and an appreciated currency. Average inflation fell to 4¼percent in 2004 and only 2¼percent for January-November 2005.

4. Namibia’s external current account remained solidly in surplus, peaking at more than 10 percent of GDP in 2004 (Table 2). Surging diamond exports and buoyant customs union (SACU) receipts, which increased by one-third in 2004, more than offset a large increase in imports, including oil imports.1

Table 2.

Namibia: Balance of Payments, 2002-10

(In millions of U.S. dollars)

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

Southern African Customs Union.

Gross foreign assets of the Bank of Namibia, converted to U.S. dollars.

Figure 2.
Figure 2.

Namibia: Trade and External Current Account, 2000-2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 152; 10.5089/9781451828412.002.A001

Source: Namibian authorities, and Fund staff estimates.
Text Table 2.

Namibia: Regional Distribution of Exports, 2000-04

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

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Source: Central Bureau of Statistics

5. In tandem with the South African rand, the Namibia dollar appreciated in 2004 before depreciating somewhat in 2005. The impact on effective exchange rates was muted as Namibia trades four-fifths of its imports and one-third of its exports with South Africa.

Figure 3.
Figure 3.

Namibia: Effective Exchange Rates, Monthly, 2000-2005 (1995=100)

Citation: IMF Staff Country Reports 2006, 152; 10.5089/9781451828412.002.A001

Source: IMF (INS).
Figure 4.
Figure 4.

Namibia: Bilateral Exchange Rates, Monthly, 2000-2005 (1995=100)

Citation: IMF Staff Country Reports 2006, 152; 10.5089/9781451828412.002.A001

Source: Thomson Datastream.

6. Outflows on the capital and financial accounts remained high as banks, pension funds, and insurance companies invested heavily in South African financial markets. International reserves fell to 1¾ months of imports in 2004 and 40 percent of short-term debt in 2003, below standard benchmarks.2 Total external debt is estimated to have fallen to 23 percent of GDP at end-2004, as parastatals in particular reduced their borrowing.

Text Table 3.

SACU: International Reserves, 2000-04

(In months of imports of goods and services)

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Source: African Departmental databases.
Figure 5.
Figure 5.

Namibia: International Reserves, 2000-2004

Citation: IMF Staff Country Reports 2006, 152; 10.5089/9781451828412.002.A001

Source: Namibian authorities, and Fund staff estimates.

7. Although improving significantly over the previous year, the fiscal deficit for 2004/05 was 4 percent of GDP, higher than expected and higher than the deficits of Namibia’s southern African neighbors (Table 3). A one-time windfall in SACU receipts and increased tax revenues from personal income and diamonds contributed to the improvement over 2003/04. By contrast, VAT collections were 2¼ percent of GDP lower than budgeted owing to continued administrative problems. Similarly, the government wage bill was ½ percent of GDP higher than budgeted as the hiring freeze was not implemented consistently across all ministries. These developments pushed the public debt ratio to 33½ percent of GDP, well above the government’s target of 25 percent.

Table 3.

Namibia: Central Government Operations 2003/04-2010/11

(In millions of Namibia dollars)

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

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.

Text Table 4.

SACU: Overall Fiscal Balances, 2000-05

(In percent of GDP, including grants)

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Source: African department databases and Fund staff estimates.

Figures refer to fiscal years.

Figure 6.
Figure 6.

Namibia: Central Government Revenue, Expenditure, and Budget Balance, 2000/01-2005/06

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 152; 10.5089/9781451828412.002.A001

Source: Namibian authorities, and Fund staff projections.

8. Namibia’s monetary policy is determined by the peg to the South African rand (Box 1). Since early 2003, the BoN has reduced the Bank Rate in steps from 12¾ to 7 percent in tandem with reductions in South Africa’s policy rate. In the process, the BoN removed the negative interest rate differential vis-à-vis South Africa. Reflecting lower interest rates, credit to the private sector grew 19½ percent in 2004 and 20¼ percent year-on-year in September 2005 (Table 4).

Table 4.

Namibia: Monetary Developments, 2002-10

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

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

Others includes local and regional government and non-financial public enterprises.

BON overdraft rate.