Economic Prospects

2. Real GDP growth is expected to increase moderately to 4.5 percent in 2006, after 4.25 percent in 2005, due in part to a recovery in diamond production. In the medium- term, the economy is expected to expand at 3-4 percent. Despite rising oil prices, consumer price inflation increased only moderately to 5.6 percent and is expected to remain moderate at single digit level in the medium term. There has been a strong effort to consolidate the fiscal position, with the fiscal deficit falling by close to 7 percentage points during the last two fiscal years to less than one percent of GDP in 2005/06 and a small surplus in 2006/07. The external current account is expected to double to close to 14 percent of GDP in 2006, because of record diamond exports and a surge in customs union receipts. Overall the economic fundamentals of the country remain strong. This has been acknowledged by international credit rating agencies, which reaffirmed Namibia’s sovereign credit rating at investment grade level.

Challenges and Risks

3. This excellent performance notwithstanding, a number of challenges and risks remain. The authorities are vigilant to these and agree with staff on the need to sustain prudent economic policies, to which they are fully committed. Some of the key challenges that the country faces going forward, include broadening the economic base and raising its long-term growth potential. In addition, poverty and unemployment remain widespread, and although significant progress was made in addressing the HIV/AIDS pandemic, high infection rates continue to undermine investment in human capital. In this regard, the authorities would like to reiterate their call to the International Financial Institutions to revisit the classification of Namibia as a middle income country. This classification, which relies exclusively on income per capita, while ignoring one of the most important yardsticks for development namely, income disparity, creates serious challenges in accessing concessional funding. The authorities hope that a compromised set of terms and conditions for this growing group of countries, along the lines of that for the Caribbean Island States, could be reached to help them in their endeavor to achieve the Millennium Development Goals by 2015.

Fiscal Policy

4. During the past three years, there has been a tremendous effort on fiscal consolidation, with the fiscal position turning from a deficit of close to 7 percent of GDP in 2003/04 to a small surplus in 2006/07. As a result, the authorities were able to reduce the public debt to GDP ratio which is projected to fall from above 30 percent of GDP in 2003/04 to around 26 percent of GDP in 2007/08, within striking distance of the authorities’ fiscal rule target of 25 percent of GDP. The authoritie’s note staffs observation that more of the SACU windfall revenue should have been devoted to debt reduction. The authorities are of the view that since they were able to reduce the public deficit significantly over a short period of time this effort should be seen as an indication of the direction of fiscal policy and their strong commitment to implementation of prudent fiscal and debt management policies. In the medium term, they are committed to achieving their debt target through further alignment of revenue and expenditure, while freeing up as much resources as possible for poverty reducing expenditure and growth critical physical infrastructure.

5. The authorities are aware of the medium-term fiscal pressures that will come from a projected fall in SACU revenue receipts and increased social and poverty reducing expenditure outlays. The authorities have been relatively successful in strengthening revenue collection, especially income tax and VAT collection through targeted forensic audits by private auditing firms. They realize that this strategy does not present a long-term solution and have already started to explore other alternatives to strengthen tax administration, including a Fund diagnostic mission on tax administration. Another element in the authorities’ strategy for improved fiscal performance is the reform of some state owned enterprises, which currently put a heavy burden on the budget. In this regard, they are thankful for Fund TA on how to improve their ability to monitor state owned enterprises and improve their governance and performance.

6. Reducing the size of the civil service is not an easy task in a country like Namibia, given the political history, the high level of unemployment and the vastness and low population density of the country. While the authorities share staffs concern about the size of the civil service, they are of the view that a reduction of the civil service may not be possible in the short-term. Focusing on the public wage bill alone may not necessarily be the right approach to understanding fiscal sustainability in a country like Namibia. The authorities believe that, if the economy can grow at an accelerated pace, and if more private sector jobs are created, then the relative size and wage bill of the public sector will decline over time. Essentially, the authorities, therefore, view the issue of containment of the wage bill as a long-term issue. In the short run, there could even be additional upward pressure on the wage bill as the authorities expand social and poverty reducing outlays. The fact of the matter is that if an extra school or clinic is built, it requires more teachers and doctors; otherwise why build the extra school or clinic. The Namibian government believes it has the duty to provide essential poverty reducing social services to all its citizens, and given the remoteness and low population it is an expensive exercise to which the government is, nevertheless, fully committed. However, the authorities are committed in the short-term also to clean up the wage bill in terms of possible ghost workers and over manning. Outsourcing of further services will also be pursued where possible.

7. Reducing widespread poverty remains the key policy objective of the Namibian government. The authorities believe that there is no easy solution to this problem and to effectively address it requires policy action on a wide range of fronts. Ultimately effective poverty reduction is possible only through accelerated growth, with redistribution policies playing a supportive role. In this connection, a key policy objective of the Namibian government is to maintain a stable macroeconomic environment, which is an essential precondition for accelerated growth, while having in place a number of social safety nets to protect the most vulnerable groups in society. Currently, the Namibian government maintains four such social safety nets, namely old age pension, pension for war veterans, support for orphans and support for people with disabilities. Payments to these groups are reviewed on a regular basis, and the authorities are committed to increase these in line with government’s ability to do so as they have done in the past. It should also be noted that the Namibian government has been investing aggressively in the reduction of future poverty since independence. For instance, almost half of the budget is allocated to the health and education sectors, which is among the highest in the world. We can, thus, safely say that the Namibian budget is pro-poor. The authorities took note of the BIG coalition’s call for a cash grant to be paid to all Namibians under the age of 60 years to address widespread poverty. They are encouraged that staff agree with them that efforts to reduce poverty should not compromise fiscal stability.

Monetary and Exchange Rate Policy

8. The Namibian authorities remain fully committed to the exchange rate peg to the South African Rand and membership to the Common Monetary Area (CMA) to anchor price expectations. As shown by recent trends in consumer price inflation, the authorities have been successful in achieving their objective of low and stable prices. The authorities take note of staffs concern about the low level of reserves, but 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. The authorities, nevertheless, note staff’s suggestions to build reserves, including strengthening of liquidity management to enable purchasing of foreign exchange in the market and the deepening and widening of the domestic financial markets. However, as staff stated, the authorities at this stage would like to keep all their options open and would, therefore, not want to exclude the possibility of taking regulatory steps to stem the outflow of savings. They want to reaffirm their view that it is uncharacteristic for a developing country like Namibia with large developmental needs to export some 65 percent of its savings. This situation also does not bode well for the development of domestic financial markets. Nevertheless, they would like to assure that should they decide to go ahead with the introduction of limits on capital flows, that it would be done in a balanced manner that will safeguard the interest of pensioners, while stimulating economic growth at the same time.

Structural Issues

9. The authorities welcomed this year’s Article IV Consultations which focused on private sector development. After having firmly achieved macroeconomic stability, the authorities would like to focus on micro reforms that could put the country on a higher plane of sustainable growth, necessary to achieve its Vision 2030 objectives. Development of the private sector will form a key component of the authorities’ future plans. A number of studies, both internally and externally, have shown that a key constraint to growth in Namibia is lack of skills, compounded by the HIV/AIDS pandemic, and lack of innovation and entrepreneurship, while the institutional settings are relatively strong.

10. The authorities are following a structural approach to addressing barriers to growth. A key element of the authorities’ strategy, therefore, was to address the HIV/AIDS pandemic. It is encouraging to note that with the help of the international community there are encouraging signs that the authorities are starting to win the battle against this dreadful disease. Nevertheless, even as infection rates are starting to level off and the coverage of antiretroviral treatment continues to expand, with universal coverage expected by 2010, the fiscal costs and pressure on the budget will remain. The authorities are aware that the economy will have to grow faster to absorb these costs and to reduce the pressure on the budget. Another key element in the authorities’ strategy that has been prioritized, is education reform, with the assistance of the World Bank.

11. The authorities broadly agree with staff on the need for reform in other areas, such as labor market reform, further modernization of the financial system, especially enhancing access to financial services for rural and low-income customers, and further strengthening of the regulatory and supervisory framework of the financial sector, especially the non-bank financial sector. With respect to the latter, the authorities have made good progress in complying with all Basle Core Principles of Banking Supervision, while substantial progress was made on restructuring the supervisory agency for non-bank financial institutions. The authorities are grateful for Fund TA immediately following the 2005 FSAP and are fully committed to implement all recommendations of the FSAP, although there might be delays in some areas due to weak capacity.

Conclusion

12. In conclusion, the authorities would like to affirm their unwavering commitment to prudent and market friendly policies, aimed at accelerated growth, employment creation and poverty reduction. They trust that the Fund and the international community will continue to be fully responsive in providing the necessary support to enable them strengthen their macroeconomic frame work and ability to implement reforms.