March 24, 2006

1. Since issuance of the staff report, additional information has become available on the budget for 2006/07 and the authorities’ medium-term fiscal plans. The information does not alter the thrust of the staff appraisal.

2. On March 16, 2006, the Minister of Finance submitted the budget for 2006/07 and the medium-term expenditure framework (MTEF) to parliament.

3. For 2005/06, the authorities project revenue at 31 percent of GDP, consistent with the staff report. Higher tax revenues (by ¼ percent of GDP) are projected to offset lower-than-expected non-tax collections. No revised estimates for expenditure are available. However, assuming that budgetary appropriations are not exceeded as they were in 2004/05, the fiscal deficit could amount to 1½ percent of GDP (including externally financed capital spending).

4. The authorities expect a broadly balanced budget for 2006/07. This largely reflects a previously unanticipated surge of customs union (SACU) receipts to 14 percent of GDP, in light of strong imports to South Africa from outside the union and significant residual distributions related to the transition to the new SACU revenue-sharing formula. Staff has not yet been able to verify the plausibility of these projections. The authorities decided to devote this windfall to deficit reduction and a substantial expansion of spending relative to the previous MTEF. In particular, capital spending, including for infrastructure related to the Kudu gas field, and outlays for education and health are expected to rise. However, the budget also provides for subsidies to the National Energy Fund and support to parastatals. In addition, old-age pensions are to be raised from N$300 to N$370 in an effort to alleviate poverty. Some of the envisaged spending will have a permanent effect.

Namibia: Central Government Operations^{1/ 2/}

(in percent of GDP)

Source: Namibian authorities and staff projections.

^1/Presented in staff’s definition, which incorporates extra-budgetary spending financed by external loans under expenditure and the overall balance. The authorities exclude this figure in their budget presentation.

^2/Figures are based on GDP numbers consistent with the staff report’s macroframework.

Namibia: Central Government Operations^{1/ 2/}

(in percent of GDP)

	2005/06			2006/07
	Staff Proj.	Auth. Est.	Staff Proj.	MTEF from 2005	Draft budget
Revenue and grants	31.0	30.9	30.8	30.7	34.9
Expenditures	34.6	32.3	34.2	30.6	35.2
Overall balance	-3.7	-1.4	-3.4	0.1	-0.3
Primary balance	-0.9	1.4	-0.7	…	2.7
Public debt	35.1	32.0	35.5	29.4	32.6
Memorandum items:
SACU receipts	9.8	9.3	9.5	9.8	14.0
Extrabudgetary spending	0.4	0.4	0.6	1.0	0.6

Source: Namibian authorities and staff projections.

^1/Presented in staff’s definition, which incorporates extra-budgetary spending financed by external loans under expenditure and the overall balance. The authorities exclude this figure in their budget presentation.

^2/Figures are based on GDP numbers consistent with the staff report’s macroframework.

View Table

Namibia: Central Government Operations^{1/ 2/}

(in percent of GDP)

	2005/06			2006/07
	Staff Proj.	Auth. Est.	Staff Proj.	MTEF from 2005	Draft budget
Revenue and grants	31.0	30.9	30.8	30.7	34.9
Expenditures	34.6	32.3	34.2	30.6	35.2
Overall balance	-3.7	-1.4	-3.4	0.1	-0.3
Primary balance	-0.9	1.4	-0.7	…	2.7
Public debt	35.1	32.0	35.5	29.4	32.6
Memorandum items:
SACU receipts	9.8	9.3	9.5	9.8	14.0
Extrabudgetary spending	0.4	0.4	0.6	1.0	0.6

Source: Namibian authorities and staff projections.

^1/Presented in staff’s definition, which incorporates extra-budgetary spending financed by external loans under expenditure and the overall balance. The authorities exclude this figure in their budget presentation.

^2/Figures are based on GDP numbers consistent with the staff report’s macroframework.

5. The authorities’ medium-term fiscal adjustment path has become less ambitious than presented in Box 6 of the staff report and is now closer to the outlook prepared by staff. The budget documents project the fiscal deficit for 2007/08 and 2008/09 to average 2¼ percent of GDP and public debt to decline only gradually to 31 percent of GDP. As such, the MTEF has become more realistic, although it still lacks specificity on policy actions that could lead to a sustained reduction in non-priority spending, as outlined below. Subsequent to the budget speech, the authorities indicated to staff that they remain committed to achieving the public debt target of 25 percent of GDP in the long run but in the short run intend to place less emphasis on this objective.

6. The medium-term fiscal outlook is built on continued improvements in tax administration and a limited reorientation of spending toward priority sectors. The emphasis on improving tax administration is driven by the need to shore up revenue, as SACU receipts are projected to normalize from 2007/08 onwards. The authorities intend to broaden their forensic tax audits of corporations carried out by private auditors, which boosted tax collections in 2005/06. However, a recent FAD technical assistance mission urged more substantial reform to sustain tax collections. Among other things, this could include rebuilding the authorities’ audit capacity and creating a large taxpayers unit. On the expenditure side, outlays for education and health are programmed to increase noticeably. While recognizing the need for civil service reform and the restructuring and privatization of public enterprises, the budget documents contain little concrete measures in this direction. As stressed in the staff appraisal, the authorities need to address both issues to make room for a sustained reorientation of spending.