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.
March 24, 2006
1. The Namibian authorities appreciate the candid exchange of views during the 2005 Article IV Consultation discussions and the FSAP mission, and have taken note of staff’s comments and recommendations. They also find the topics for the selected papers to be well chosen, as they supplement ongoing work by the authorities in these areas. There is a broad measure of agreement between staff and the authorities on most aspects of economic policy.
Recent Economic Developments and Prospects
2. Growth is expected to have slowed to 3.2 percent in 2005, following a higher growth trend of 5.9 percent in 2004. Responsible for the moderation in growth has been diamond production, which fell relative to the high production base of the previous year. On the positive side, however, it should be noted that growth in 2005 had been broad-based as reflected by robust performance of key economic sectors such as manufacturing, agriculture, and the wholesale and retail sectors, which have been supported by a low-interest rate environment. On average, the economy grew by 4.3 percent during 2001-2005, which is in line with the authorities’ target set in their second National Development Plan (NDP2). Overall the economic fundamentals of the country remain sound. Average consumer price inflation fell to 2.3 percent in 2005, the fiscal deficit declined substantially from an all time high of over 7 percent of GDP in 2003/04 to about 4 percent of GDP in 2004/05, allowing the public debt to remain relatively low, the external current account remained in a healthy surplus, and short-term interest rates have been the lowest since independence in 1990. As a result of this excellent performance, Fitch at the end of 2005 gave Namibia an investment grade rating of BBB- for long-term foreign currency. Going forward, the economy is expected to grow at above 3.5 percent over the medium term, and inflation to remain at a low single digit level.
3. As staff note, a number of challenges and risks remain. The authorities are vigilant to these and agree with staff on the need for cautious economic policies, to which they are fully committed. In this connection, despite these good accomplishments, the authorities are aware of the enormous developmental challenges facing the country going forward. In particular, the authorities are aware that the base of the Namibian economy remains narrow with the dependence on export of raw products continuing to persist with high rates of rural poverty and income disparity. Efforts to diversify the economy will, therefore, be pursued with renewed vigor in order to achieve their target of transforming Namibia into a diversified and industrialized economy, with a high standard of living for all its citizens by 2030. In this regard, the classification of Namibia as a middle-income country creates serious challenges in accessing concessional funding. The authorities would like to point out that this classification relies exclusively on income per capita, while ignoring one of the most important yardsticks for development, namely income disparity. It cannot be right, therefore, to give low middle income countries such as Namibia the same terms for borrowing as are available to developed countries. The authorities hope that a compromised set of terms and conditions for this group of countries could be reached to help them in their endeavor to achieve the Millennium Development Goals by 2015.
Fiscal Policy
4. The overarching objective of fiscal policy remains fiscal sustainability aimed at keeping inflation low and to sustain the exchange rate peg. The authorities have set themselves a number of fiscal targets that serve as a guidance for conducting fiscal policy in a sustainable and transparent manner21. One key fiscal target is that total public debt shall be kept below 25 percent of GDP.
5. The authorities are aware that achieving these targets remains a difficult challenge as expenditure pressures have been increasing amid limited resources. As a result, the authorities were not able to meet these targets in past MTEF periods, hence staff’s concern about the credibility of these targets, especially the one on public debt is legitimate and shared by the authorities. Nevertheless, even though the targets remain ambitious goals, they are good indication of the direction of fiscal policy. The authorities, therefore, remain committed to a public debt ratio of 25 percent of GDP but realize that this will take time and in the short run will place less emphasis on this rule. They believe that debt stock can be contained through further alignment of revenue and expenditure over the medium term. In this connection, the Ministry of Finance will make use of its Revenue, Expenditure and Debt Management policies to pursue these targets and free up as much resources as possible within the given fiscal stance.
6. As a result of strict limits on expenditure growth, as well as a set of measures to improve revenue collection, the last two financial years have seen a remarkable consolidation of public finances. For instance, the budget deficit declined from a high of 7.2 percent of GDP in fiscal year 2003/04 to 3.6 percent of GDP in 2004/05 and the debt stock stabilized22. The financial year 2005/06 will, according to the authorities current projections, mark a further step on the path of fiscal consolidation. Pending closure of the financial year, the budget deficit could be as low was 1.1 percent of GDP, while a modest surplus of 0.3 percent of GDP is envisaged for financial year 2006/07. Over the medium term the average budget deficit is set to be within the authorities target ceiling of 3 percent of GDP.
7. With regard to revenue performance, total revenue increased significantly by 17 percent in 2004/05 over the out-turn of 2003/04 and is estimated to increase by 8.1 percent in 2005/06. The improvement in revenue collection was achieved without major adjustment to tax rates, but mainly through improved revenue collection and broadening of the tax base. Among the most effective measures in increasing domestic tax collection was the clamping down on tax evaders through targeted forensic audits with the help of private auditing companies. Going forward, efforts aimed at strengthening tax administration and improving collections will continue in 2006/07. The authorities have started, with the support of Fund technical assistance, to investigate how to improve Namibia’s tax system in 2006 and beyond.
8. The authorities are aware that most fiscal adjustment over the medium term would need to come from the expenditure side, including containing the growth of the wage bill, reduction of subsidies to parastatals and spending on goods and services. To strengthen fiscal discipline, government has discontinued the tradition of tabling supplementary budgets. This is a substantial improvement in the credibility and transparency of Namibia’s fiscal policy and has improved the budget as the main fiscal policy tool. Efforts are ongoing to improve expenditure monitoring capacity in the Ministry of Finance. In addition, the Integrated Financial Management System (IFMS) is set to become fully operational in 2006/07 for all transactions between the Ministry of Finance and line Ministries. The pilot phase from November 2005 to March 2006 was, in general, a success. It is expected that the IFMS will greatly improve the Ministry’s control over funds’ release. The Government is also tightening the rules under which subsidies are disbursed to State Owned Enterprises and other recipients. In future, funds will be released based on immediate need for expenditure, rather than being disbursed purely because there was provision made in the vote of expenditure allocation.
Monetary, Exchange Rate and Financial Sector Issues
9. The Namibian authorities remain committed to the exchange rate peg to the South African Rand and membership in the Common Monetary Area (CMA). The recent appreciation of the exchange rate had put pressure on the economy to adjust, but overall the economy remained competitive. The authorities believe that for long-term prosperity, focus should be on improvements of total factor productivity for enhancing external competitiveness. They recognize the need to develop additional competitiveness indicators that will provide adequate guide to policy. The authorities believe that the current level of reserves does not pose a risk for the exchange rate peg, as it is more than sufficient to cover currency in circulation. This notwithstanding, they welcome the exchange of views with staff on measures to strengthen reserves and will give careful consideration to these suggestions.
10. The authorities are appreciative of Namibia’s Financial Sector Assessment Program and broadly agree with its main findings and recommendations. The Financial Stability Assessment shows Namibia’s financial system is sophisticated, diverse and highly developed. The performance of the financial system has, however, been shaped by the structural characteristics of the economy. In this connection, the key concern of the government has been how to translate the high level of domestic savings into productive investment and how to enhance access to finance. The authorities have already started to implement some of the FSAP recommendations. For instance, they have begun to implement measures to ensure compliance with the Basel Core Principles and a new CEO was appointed to head NAMFISA, the body responsible for regulating non-bank financial institutions. There is also agreement to bring specialized financial institutions under the supervision of Bank of Namibia and to support expanding domestic investment opportunities, by developing leasing, factoring and asset securitization. Other recommendations made by the FSAP to further strengthen the financial system will receive the authorities attention in the coming year. Namibia is in a very fortunate situation for a developing country to have significant domestic savings. It is, however, uncharacteristic for a country with large developmental needs to export some 65 percent of such savings. By and large these domestic savings constitute contractual savings from pension funds and insurance corporations. The authorities are committed to a reduction of capital outflow, through increased investment in the domestic economy with the purpose of diversifying and expanding economic activities in Namibia. In this context, the authorities will pursue a balanced approach to capital outflow reduction that will safeguard the interest of pensioners, but will stimulate economic growth at the same time. Their approach would also consider measures to deepen domestic financial markets.
Structural and other Issues
11. The authorities appreciate this year’s Article IV discussions which focused on medium term challenges to growth. They agree with staff that additional structural reforms would be necessary to raise Namibia’s long-term growth potential, boost investment and address the problems of poverty, income inequality and unemployment. Key to Namibia’s future growth strategy would be to safeguard the current macroeconomic stability, underpinned by prudent fiscal policy and the exchange rate peg that Namibia currently enjoys. It is for this reason that the authorities share staffs’ views about the proposed basic income grant to alleviate poverty in Namibia. Apart from the potential macro-imbalances that such a scheme could cause the Ministry of Finance prefers a more targeted approach to cash grants aimed at addressing poverty. In this regard, the government already runs a number of cash-grant schemes, including for the elderly and orphans.
12. Also key to Namibia’s future growth path will be to further enhance and strengthen governance and institutions necessary to support growth. In this regard, the Anti-Corruption Commission was officially inaugurated during 2005. It is noteworthy that the Minister of Finance in her budget tabled on March 16, 2006 made provision for the adequate resources of the Anti-Corruption Commission to ensure that it becomes fully operational. In addition, the State-Owned Enterprises Act was adopted in January 2006, aimed at harmonizing the operational framework for parastatals and tightening fiscal control over them.
13. Another key pillar of the authorities’ future growth strategy would be education reform, which is needed to raise skill levels while reducing unemployment. In this regard the World Bank has been assisting the Ministry of Education in developing an education sector strategy. With regard to labor reform, the authorities would like to stress that the aim of the recent amendments to the Labor Act was to develop measures to streamline the procedures for dismissal, making the labor market more flexible. They note that some of the issues raised by staff, which could make the labor market less flexible, could be reviewed. As far as land-reform is concerned, the Namibian government reaffirms its commitment to an orderly process in implementing its land distribution program. There is a healthy dialogue between the authorities and all stakeholders, and government will continue to make efforts to clarify to the public its policy on this issue.
Conclusion
14. In conclusion, the authorities would like to affirm their strong commitment to prudent and market oriented policies aimed at growth, employment creation and poverty reduction. Having achieved macroeconomic stability, the authorities are aware that the challenges going forward are immense, including the need to implement reforms at a micro level to accelerate the country’s growth potential and reduce the high levels of unemployment and poverty. The authorities’ task is further complicated with the high incidence of HIV/AIDS, which in addition to the authorities’ own efforts, will require the continued assistance from the international community to be addressed effectively. The authorities trust that the Fund will continue to be fully responsive in providing technical assistance requested to build their ability to strengthen the macroeconomic framework and ability to implement the reform agenda going forward.
To further enhance transparency of the budget, the authorities in 2004/05 adopted a programme budget, which shows how public resources are allocated to priorities and how much expenditure impact on outcomes.
The authorities budget deficit figures are slightly different from those reported in the staff report. This is because the authorities do not include financing of selected infrastructure projects through foreign loans in their definition of the budget deficit. For transparency purposes the authorities have started to publish a full list of projects benefiting from foreign financing together with disbursement amounts in the latest MTEF.