Abstract
The recent uptrend in Namibia’s current account surplus reflects an increase in public and private savings. Tighter domestic investment rules will not reduce capital outflows. The phasing and macroeconomic impact of regulatory changes requires careful scrutiny. Market-based incentives for investment repatriation are attractive. Namibia’s non-renewable natural resource sector is a significant contributor to Namibia’s economy and it is important to continue management of its mineral resources wisely. Faster growth in low-skill job opportunities and more flexible labor market institutions will help tackle unemployment in the short-term.
IV. Management of Non-Renewable Natural Resources 12
A. Introduction
90. Although Namibia’s mineral sector is smaller—relative to GDP—than in many African economies, the impact on income levels, exports, and the financing of the budget are important. Many mineral-rich economies have suffered a so-called “resource curse”, with stagnating or declining real incomes. The evidence so far is that Namibia has avoided this problem, achieving lower-middle income status and relatively strong real income growth. Nonetheless, it is useful to take stock of Namibia’s success in managing its mineral wealth, highlight steps that Namibia could take to further consolidate resource management, and draw lessons for other countries.
91. This paper reviews a number of issues related to Namibia’s management of non-renewable natural resources. This includes an examination of the importance of non-renewable natural resources to the Namibian economy, how Namibia’s tax and legal regime compares with international standards, and how the authorities can maintain long-term fiscal and macroeconomic sustainability in the face of volatile natural resource income. The paper finds that non-renewable natural resources are a significant contributor to Namibia’s economy, though less than in other natural resource producers. Namibia’s legal framework for resource exploitation and mineral taxation arrangements are generally in line with international standards and could be regarded as an example to other producers. With regard to the long-term fiscal and macroeconomic sustainability, this paper does not see merit in a dedicated mineral fund to accrue mineral revenues, nor does Dutch disease appear a risk.
B. Overview of Namibia’s Mineral Sector
Non-petroleum resources
92. Namibia is well endowed with non-renewable natural resources including diamonds, uranium, zinc and gold. These minerals have made an important macroeconomic contribution. Since independence in 1990, mineral exports have averaged 21 percent of nominal GDP and 57 percent of total exports. Similarly, taxes and royalties on minerals have averaged 7½ of central government revenues. However, mineral extraction is capital intensive and the direct contribution to employment has been modest. The Chamber of Mines estimates total mining sector employment in 2004 at less than 7,500 (around 2 percent of total employment).
93. Diamonds are Namibia’s most significant mineral resource, accounting for 70 percent of total mineral exports. Namibia produces more than 2 million carats of gem-quality diamonds a year. Since independence, diamond exports have averaged 14½ percent of nominal GDP and 39 percent of the value of total exports while taxes and royalties on diamonds have averaged 6½ percent of central government revenues. In recent years with the depletion of land-based mines, marine mining of diamonds has become more important. Almost half of total production was recovered at sea in 2006.
94. Over 90 percent of Namibia’s diamonds are produced by Namdeb, a 50-50 joint venture between the government and DeBeers. DeBeers has agreed that Namdeb will make 16 percent of its production available for local polishing and cutting. Aside from Namdeb, other diamond operators include Diamond Fields International and Samicor. Apart from diamonds, the most important minerals in order of importance are uranium, zinc, gold, and copper (Figure IV.1). Mining for these and other minerals is conducted by the private sector.13
Namibia: Composition of Mineral Exports, 2006
(US$ Value)
Citation: IMF Staff Country Reports 2008, 082; 10.5089/9781451828450.002.A004
Petroleum resources
95. Gas production may become important in the future. The Namibian government has plans to develop the Kudu offshore natural gas field, which holds 1.3 trillion cubic feet of proven gas reserves. This is enough gas to power a planned 800-megawatt electricity plant for more than 20 years. The total cost of the project is expected to be US$1 billion dollars. The government included N$750 million (US$125 million) in its medium-term economic framework (MTEF) to pay for infrastructure related to Kudu, and Nampower recently issued N$500 million (US$ 71 million) of a planned N$3 billion bond to pay, in part, for the Kudu project. Production is expected to begin in 2010 but due to the complexity of the project could be delayed.
96. The National Petroleum Corporation of Namibia (Namcor) is a state-owned enterprise that imports oil. While Namibia does not currently produce natural gas or oil, private sector oil companies are required to source 50 percent of their oil from Namcor. The remaining 50 percent may be imported directly.
C. Namibia’s Institutional Framework for Resource Exploitation
97. In many countries, resource exploitation has failed to deliver improved living standards. Studies attribute this “resource curse” to rent-seeking behavior and the misallocation of natural resource revenues, with adverse consequences for productivity and growth. Moreover, as natural resources can provide a source of income independent from citizens, it can make a government less accountable to the public. Effective avoidance of rent-seeking behavior requires a rule-based, transparent legal, regulatory, and tax regime for mineral exploration and extraction, transparent operation of state-owned enterprises, inclusion of mineral revenues in the budget, and good governance in both the public and private sector.
98. In practice, Namibia has relatively strong public institutions. Minerals in Namibia are not produced in a competitive environment due to scale economies and the licensing regime. However, according to Transparency International, Namibia had the fifth lowest level of corruption among 45 countries surveyed in Africa in 2006. The 2005 World Economic Forum’s Global Competitiveness Report ranked Namibia 53 out of 131 countries on public institutions, with judicial independence ranking 34 and property rights ranking 41.
The regulatory regime for mineral exploration and extraction
99. Namibia’s legal framework for natural resource exploitation was reviewed by the Fund in 2006.14 The review concluded that Namibia’s Minerals Act and Diamond Act (Box IV.2) are in line with international best practice. Namibia was assessed to have the essential elements of a transparent fiscal system—including a transparent legal and administrative framework for budget preparation and execution—and meet the basic standards of the IMF’s fiscal transparency code. In this respect, the review concluded that Namibia could provide an example of best practice to other countries in the region. To further strengthen openness of the fiscal regime, consideration should be given to participation in the Extractive Industry Transparency Initiative (EITI), particularly given the likely growth of new investments in the uranium and natural gas sectors.15
100. Nonetheless, the review did recommend additional technical changes to Namibia’s regime for natural resources. These include recommendations that the authorities improve their budget classification structure, increase the availability of information to the public, improve audit capacity, and upgrade the supervision of parastatals. The review concurred that the Minister of Mines should have the authority to make regulations and narrow the scope of mineral agreements. It recommended, however, that royalty rates be enacted into law and not left to the discretion of the Minister. The review also found that Namibia may benefit from fiscal stability clauses in mining contracts to provide additional assurance to investors. Finally, the review argued that mineral processing that occurs in Economic Processing Zones (EPZ) should receive customs but not income tax relief to discourage abuse of the EPZ system.
The tax and royalty regime
101. Namibia has different tax rates for mining and non-mining companies. A 55 percent corporate profit tax is applied to diamond companies. This compares with a 37.5 percent profit tax for non-diamond mineral companies and 35 percent for ordinary, non-mining corporations. A 10 percent royalty is imposed on the value of rough diamond exports and the government is considering a royalty of up to 5 percent on non-diamond mining companies. For the purposes of taxation, the government does not make a distinction between local and foreign-owned companies nor among types of non-diamond minerals.
Namibia’s natural resource taxation regime was reviewed by the Fund in 2006.16 The review concluded that Namibia’s mineral tax regime is in line with international practice. It recommended that the royalty rate remain at 10 percent for diamonds and the government set at 2–3 percent royalty rate for other hard minerals. However, the 10 percent royalty for diamonds should apply to all diamonds produced in Namibia (not just to exports). With regard to taxation, the review recommended corporate tax rates remain unchanged, i.e., 55 percent for diamond mining companies and 37.5 percent for other mining companies. On transparency, the review recommended that diamond and other mining agreements be made public.
Namibia: The Legal and Regulatory Regime for Minerals
The legal basis for Namibia’s non-renewable natural resource sector is embodied in two major laws: the Minerals Act of 1992, and the Diamond Act of 1999.
The Minerals Act: This Act replaced a series of laws inherited from the pre-independence period. It vests all rights related to the exploitation of Namibia’s mineral resources in the State. The Act charges the Ministry of Mines and Energy (MME) with regulation and oversight of the mining industry. Recently, the government has proposed amendments to the Minerals Act to give the Minister the power to make regulations and set general royalty rates. However, these amendments would leave the basic framework for mining unchanged.
Rights to prospecting and extraction are provided through exclusive prospecting and mining licenses. An exclusive prospecting license gives the holder the right to prospect a designated area of up to 1000 km2 for up to three years with the possibility of two two-year extensions. A mining license gives the holder the exclusive right to develop and operate a mine for 25 years with the possibility of a 15 year extension. To obtain a mining license an applicant must show that it has the technical expertise and financial backing to develop and operate the mine. Licenses are awarded on a first come, first served basis and applications are evaluated in accordance with the Minerals Act. The MME has the power to grant or refuse mineral licenses, and is advised on this matter by a Mining Commission. Members of the mining industry are represented at the MME through a Minerals Board that advises the Minister. The Board includes representatives of the MME, the Chamber of Mines, and small scale operators.
The Diamond Act regulates the production, ownership and trade of rough and polished diamonds and establishes a system of permits and licenses. It does not replace or substitute for the Minerals Act but creates additional classes of licenses necessary for diamond mining and other value added activities. One section of the Diamond Act (Section 58) allows the Minister of Mines and Energy to require diamond producers to make rough diamonds available to Namibian diamond cutters and polishers. This provision has never been invoked. However, DeBeers recently agreed that 16 percent of Namdeb’s annual production would be made available for local polishing and cutting. Another section of the Diamond Act (Section 59) gives the Minister of Mines and Energy the power to require producers to sell up to 10 percent of annual rough diamond production on the international market. This provision is designed to allow the government to test prices of unpolished diamonds. The Diamond Act also establishes a Diamond Board headed by a Diamond Commissioner and comprised of representatives from the Ministries of Mines and Energy, Finance, and Fisheries as well as diamond producers and diamond cutters.
102. With regard to the treatment of mineral revenues, the review found the fiscal regime for the mining sector is clearly stated and comprehensive. All licensing fees, taxes and royalties go directly to the state revenue account and are included in the budget. However, a three percent royalty goes to the Diamond Valuation Fund and 0.05 percent of producer sales go to the Diamond Board Fund. Both of these funds are not reflected in the budget.
103. Going forward, the tax regime may need to be reviewed to ensure that the budget benefits appropriately from the recent high rents in the mineral sector. At the same time, some sector are of growing importance (uranium and, potentially, natural gas), and the tax regime will need to remain abreast of these changes.
Public expenditure management
104. As mineral revenues are not separated from general revenues, expenditures based on mineral revenues cannot be separated from general expenditures. Thus, effective use of mineral resources depends upon strong institutions and an accountable government. On these measures, Namibia performs relatively well. Namibia has transparent legal and administrative framework for the budget, information on the Medium Term Expenditure Framework (MTEF) is available to the public, government procurement is subject to internal and external audit, and the government is implementing a system to provide information on budget execution.
105. The last public expenditure review (PER) occurred in 1994 and covered Namibia’s budget, tax, and expenditure regimes. It found that Namibia’s tax system is relatively sound. Although some time has passed since that report, many of the issues remain relevant. The PER found that Namibia has an appropriate balance between direct and indirect taxes. However, there is a significant dependence on Southern Africa Customs Union (SACU) receipts, which make up approximately one third of total revenues. The PER recommended efforts to develop a VAT system and improve tax administration. On the budget and expenditure side, the PER found the budget system is modern and relatively comprehensive. To improve the effectiveness of public expenditures, it recommended improving financial control and accountability, strengthening the evaluation of projects, and increased coordination between the general and development budgets. The report noted that parastatals operate relatively independently and there is an argument to be made for privatization as a way to reduce their drain on the budget.
106. Going forward, implementation of program-based budgeting would improve accountability and help prioritize government expenditures. Currently, the medium-term economic framework (MTEF) uses a program classification. However, expenditure data are reported only by line ministry. Thus, there is a need to modernize the budget classification structure and chart of accounts to facilitate informed discussion of policies and to rationalize spending.
Operation of state-owned enterprises
107. No fully state-owned enterprises operate in the natural resources sector. One state-owned enterprise (Namcor) imports oil. Government involvement in the mining sector is carried out solely via equity investments in three mining companies: Namdeb (50 percent share), DeBeers Marine Namibia (30 percent share) and Rössing Uranium (3 percent share). However, government participation is limited to management with no operational involvement. All other companies in the mining sector are private. However, the government receives payments from these companies in the form of taxes and royalties (and in the case of equity participation through profit sharing and dividends). All these sources of funds are included in the central government budget.
Governance requirements for the private sector
108. Namibia’s accounting requirements for the private sector are comprehensive and in accordance with international accounting standards. Natural resource companies are subject by law to the same internal controls and auditing standards as other companies. In particular, mineral producers prepare audited accounts that are produced within six months of the close of the financial year. These accounts cover subsidiaries and are made available to the public annually. However, mining contracts, including those of Namdeb, are not available to the public.
109. In summary, Namibia has set high standards with regard to establishing a rule-based, predictable institutional framework for mineral sector. Technical experts have recommended only two small changes with respect to the revision of the Minerals Act, i.e., the Minerals Act should define the royalty rates for minerals and should limit the discretionary powers of the Minister of Mines and Energy.
D. Fiscal Management of Natural Resource Earnings
110. Natural resources pose several fiscal management issues. First, how to manage spending in the face of potentially volatile receipts. Second, issues of long-term fiscal sustainability. Third, how to set appropriate spending levels given the finite nature of resource earnings. These are considered in turn.
Managing volatility in Namibia’s resource earnings
111. Natural resource revenue volatility is commonly associated with global price changes. In Namibia’s case, however, the U.S. dollar price for rough diamond exports, its main mineral export, has been broadly stable since 1995 (Figure IV.2). For other minerals, prices have risen sharply since 2005, but output and contributions to government revenues remain relatively modest. As a result, export fluctuations have hisorically been driven by changes in output, particularly in the diamond sector (Figures IV.3 and IV.4).
Namibia: Mineral Export Prices, 1995–2006
(1995 = 100)
Citation: IMF Staff Country Reports 2008, 082; 10.5089/9781451828450.002.A004
Namibia: Mineral Production Volatility, 1990–2006
(Percent Change)
Citation: IMF Staff Country Reports 2008, 082; 10.5089/9781451828450.002.A004
Namibia: Mineral Exports and Production, 1990–2006
Citation: IMF Staff Country Reports 2008, 082; 10.5089/9781451828450.002.A004
112. The mineral sector is small in Namibia, compared to many African economies. In Angola, for example, oil and gas exports averaged 65 percent of GDP, contributing fiscal revenues of 34 percent of GDP over the last ten years (Table IV.1). Similarly, diamonds have been a much larger factor in the Botswanan economy than for Namibia. Following from this, the volatility of mineral export receipts and fiscal contributions are larger than in Namibia’s case.
Resource Sector Volatility in African Countries, 1997–2006
Resource Sector Volatility in African Countries, 1997–2006
| Country | Main mineral export |
Mineral exports (% of GDP) |
Standard deviation of exports |
Mineral revenues (% of GDP) |
Standard deviation of revenues |
|---|---|---|---|---|---|
| Namibia | Diamonds | 14.7 | 2.1 | 2.5 | 1.2 |
| Botswana | Diamonds | 32.8 | 4.2 | 20.5 | 3.4 |
| Cameroon | Oil | 8.3 | 2.0 | 4.8 | 1.3 |
| Gabon | Oil | 27.0 | 7.2 | 18.9 | 2.9 |
| Angola | Oil | 64.7 | 8.6 | 34.0 | 6.7 |
Resource Sector Volatility in African Countries, 1997–2006
| Country | Main mineral export |
Mineral exports (% of GDP) |
Standard deviation of exports |
Mineral revenues (% of GDP) |
Standard deviation of revenues |
|---|---|---|---|---|---|
| Namibia | Diamonds | 14.7 | 2.1 | 2.5 | 1.2 |
| Botswana | Diamonds | 32.8 | 4.2 | 20.5 | 3.4 |
| Cameroon | Oil | 8.3 | 2.0 | 4.8 | 1.3 |
| Gabon | Oil | 27.0 | 7.2 | 18.9 | 2.9 |
| Angola | Oil | 64.7 | 8.6 | 34.0 | 6.7 |
113. Exchange rate fluctuations have been an important source of volatility in Namibia. The peg to the South African rand has given rise to significant currency movements. Thus, depreciation of the rand boosted diamond taxes and royalties to 5 percent of GDP in 2002/03, before falling to 2 percent of GDP in 2004/05 as the currency strengthened.
Namibia: Mineral Tax Revenues and the Exchange Rate, 1990–2006
Citation: IMF Staff Country Reports 2008, 082; 10.5089/9781451828450.002.A004
114. Mineral sector volatility has been managed in some countries through stabilization funds. Of 31 oil producing countries examined, the IMF found that 21 had established stabilization funds. Under these arrangements, a stream of mineral revenues, based on a reference export price, is contributed to the general revenue pool to fund government spending. If export prices exceed the reference price, generating a surplus in mineral revenues, this surplus is dedicated to a stabilization fund. Accumulated balances in the fund are available to sustain spending in the event of a shortfall in export prices and/or mineral revenues.
115. Stabilization funds do not guarantee fiscal smoothing, however. The discipline that they provide can be circumvented if governments borrow during periods of high mineral export prices to boost spending.17 Given this, sound fiscal management requires that expenditures be insulated from swings in mineral revenues, being based (ideally) on a medium-term evaluation of resource and fiscal sustainability.
116. Instead of using a stabilization fund, Namibia strives to smooth spending and achieve fiscal discipline directly. While there are no specific provisions to increase public savings during periods of peak mineral revenue receipts, the government’s fiscal goal of limiting public debt to 25 percent of GDP or less prevents borrowing against future mineral receipts. In addition, the use of a medium-term expenditure framework (MTEF) allows the budget to be developed in a multi-year setting, so that expenditures do not excessively reflect short-term revenues, including from the mineral sector.
117. In practice, mineral receipts do not appear to influence spending decisions. Indeed, from 1989 to 2006, increases in mineral revenues were associated, on average, with lower, not higher public spending, relative to GDP (Table IV.2). This likely reflects the role of the exchange rate. Currency depreciation boosts mineral incomes as well as overall GDP, both of which rise relative to incomes and expenditures in the non-mineral economy. Thus, currency depreciation boosts mineral incomes, and, to a lesser extent, strengthens the overall fiscal position. The limited relationship between mineral receipts and the fiscal position is evident from Figure IV.6.
Namibia: Revenues and Fiscal Impact, 1989/90–2005/06
(Percent of GDP)
Citation: IMF Staff Country Reports 2008, 082; 10.5089/9781451828450.002.A004
Namibia: Short-Term Fiscal Pass-Through, 1990–2005
(All original data in percent of GDP)
Namibia: Short-Term Fiscal Pass-Through, 1990–2005
(All original data in percent of GDP)
| Correlation with: |
Total revenues |
Non-SACU revenues |
Current spending |
Capital spending |
Fiscal balance |
|---|---|---|---|---|---|
| Mineral revenues | 0.05 | 0.58 | 0.00 | -0.37 | 0.15 |
| SACU revenues | 0.66 | -0.41 | 0.39 | 0.29 | 0.07 |
Namibia: Short-Term Fiscal Pass-Through, 1990–2005
(All original data in percent of GDP)
| Correlation with: |
Total revenues |
Non-SACU revenues |
Current spending |
Capital spending |
Fiscal balance |
|---|---|---|---|---|---|
| Mineral revenues | 0.05 | 0.58 | 0.00 | -0.37 | 0.15 |
| SACU revenues | 0.66 | -0.41 | 0.39 | 0.29 | 0.07 |
118. Mineral revenues are important but not essential to government spending. Since 1990, mineral revenues have averaged just 2½ percent of GDP (Figure IV.7), compared to total public expenditures of 32 percent of GDP. Thus, revenue administration and public expenditure management are more critical to fiscal stability than the mineral revenue regime.
Namibia: Mineral and Other Revenue Contributions, 1991/92–2005/06
(Percent of GDP)
Citation: IMF Staff Country Reports 2008, 082; 10.5089/9781451828450.002.A004
119. In practice, Namibia’s budget is more at risk from volatility in SACU revenues. These averaged more than 9 percent of GDP over the past ten years compared with 2-3 percent of GDP for mineral revenues. Moreover, they have been more closely correlated with government expenditures, with a one percentage point of GDP increase in SACU revenues correlated with a 0.68 percentage point of GDP increase in total spending (Table IV.2). This underlines the importance of caution when projecting SACU revenues and the expenditures which they would finance.
Ensuring long-term fiscal sustainability
120. Namibia’s non-petroleum mineral extraction is projected to remain robust at least through 2020, supplemented thereafter by natural gas reserves. Namibia’s diamond production is expected to continue at about 2¼ million carats per year through the year 2010 and then decline gradually to about 1.9 million carats by the year 2020, when land-based resources are expected to be depleted. Marine-based diamonds are only beginning to be exploited and the long-term prospects are particularly uncertain at this stage. With stable international prices, diamond exports are expected to contribute 12-13 percent of real GDP in the medium-term, but gradually decline to about 11 percent of GDP by 2020 (see Appendix).18
121. The permanent annuity value of Namibia’s diamonds to the budget is small—about one-half of one percent of GDP per annum. Since the projected fiscal revenues of about 1-1½ percent of GDP from the diamond sector over the next decade (see Appendix) exceed this annuity value, a case can be made for saving the difference (equivalent to 1 percent of GDP or less). However, this “optimal” saving is small, and does not merit a separate mineral fund. Indeed, the projected public saving rate of more than 5 percent of GDP Figure II.3 adequately encompasses this specific savings goal. (In practice, under government proposals, these savings will finance domestic infrastructures).
E. The Macroeconomic Impact of Resource Extraction
122. Several authors have found that countries endowed with plentiful natural resources experience slower growth. Sachs and Warner (1995) find that in a sample of 97 developing countries for the period 1970 to 1989, those with a high value of resource based exports to GDP experience lower subsequent growth. Collier (2007) studies the experiences of commodity exporting countries from 1960 to 2004. He finds that booms in the prices of nonagricultural natural resources have a negative effect on growth, with the level of real GDP lowered by 26 percent after 25 years. Economists have proposed several possible causes for this negative impact of natural resource endowments on growth, including Dutch disease, increased volatility of growth, increased debt, corruption, and large economic rents. These risks are reviewed below.
Dutch disease
123. Dutch disease is a lesser concern for Namibia than other raw material exporters for several reasons. First, mineral exports have been a relatively moderate share of GDP (20-25 percent), with a general downward trend (Figure IV.8). Moreover, this overstates the domestic expenditures by the mineral sector. Much of the capital equipment is imported, and labor costs are low (mining accounts for about 2 percent of national employment). At the same time, fiscal revenues from the mining sector have averaged just 2-3 percent of GDP. To this extent, the domestic pricing pressures from the mineral sector are relatively modest. Equally, with high unemployment, wage pressures are unlikely to be large, except for certain pools of skilled personnel.
Namibia: Mineral Exports as a Share of GDP, 1990–2006
(Percent)
Citation: IMF Staff Country Reports 2008, 082; 10.5089/9781451828450.002.A004
Growth volatility issues
124. Mineral sector volatility has not been an excessive concern for Namibia. Its mineral sector is smaller than in many resource-rich countries, and the volatility in export and fiscal proceeds is correspondingly more modest. As noted above, the pass-through from mineral incomes to spending has been limited, damping any tendency for stop-go spending patterns in the budget. Thus, while the contributions of the diamond sector to overall GDP growth has been unpredictable, this has not prevented sustained, albeit modest growth in the non-diamond economy (Figure IV.9).
Namibia: Contributions to Real GDP Growth, 1991–2006
(Percent)
Citation: IMF Staff Country Reports 2008, 082; 10.5089/9781451828450.002.A004
Government borrowing
125. A third possible cause of the negative impact of natural resource endowments on growth is through government debt. Since natural resources provide a revenue stream in foreign currency, countries with large natural resource endowments may find it easier to borrow abroad and fall into a debt trap. In Namibia’s case, the government aims at keeping public debt to GDP at or below 25 percent. While public debt to GDP has risen as high as 34 percent, government debt is still much lower than in many other African countries. In addition, external debt of the government has also been low, measuring only 5¾ percent of GDP as of June 2007.
Overall assessment
126. In conclusion, while mineral production comprises a large portion of value added in the economy, it has so far had minimal impact on the level and volatility of growth. Namibia should be relatively immune from Dutch disease effects. In addition, the Namibian government has been relatively prudent in borrowing, establishing a goal that public debt should be no more than 25 percent of GDP. For these reasons, mineral production has had a relatively benign impact on Namibia’s growth.
F. Conclusion
127. Namibia’s non-renewable natural resource sector is a significant contributor to Namibia’s economy, comprising 21 percent of GDP, 57 percent of exports, and 7½ percent of government revenues. Namibia’s regime for mining and processing is in line with international best practice and the IMF has recommended only minor changes. Namibia does appear to have suffered from a resource curse and public institutions rank well in international comparisons. As to shocks, most volatility arises from changes to diamond output and the exchange rate. Since mineral revenues are relatively small compared to GDP (only 1–2 percent) there does not appear to be an argument to create a stabilization/savings fund. In addition, Namibia is able to achieve its fiscal targets through an appropriate set of fiscal rules such as the requirement that public debt remain at or below 25 percent of GDP. As far as macroeconomic impact, Namibia’s mineral income has remained relatively stable as a percent of GDP and exports and contributed about one percent of GDP on average to growth since independence. Thus, economic management of the impact of mineral income has not been difficult.
128. Looking forward, it will be important for Namibia to continue manage its mineral resources wisely. In this regard, the government may want to examine ways to improve the tax regime for mining. This could help to deal with projected decline in customs union revenues over the medium-term. The government may also want to consider ways to use its mineral wealth to diversify the economy to deal with economic shocks and the eventual exhaustion of its mineral resources.
Appendix Assessment of Long-Run Diamond Income and the Permanent Income Hypothesis
To maintain long-run fiscal sustainability some countries have instituted mineral stabilization/savings funds with strict rules on how such funds can be spent. The idea is to save a portion of mineral revenues in order to create a sustainable source of long-run income for the government. A savings fund can cushion the impact of fluctuations in other sources of revenues. This appendix examines the rationale for such a fund in Namibia. The general conclusion is that a savings fund in Namibia would generate only small amounts of income relative to GDP and thus would probably not be needed.
Various assessments of Namibia’s diamond resources indicate that they can be exploited at close to current levels out to 2020. In 2006, Namdeb’s total diamond output (more than 90 of Namibia’s total) was 2.2 million carats. Namdeb has stated that it believes it can achieve annual output at or above 2 million carats out to 2010, and this exercise assumes production of 2.3 million carats out to 2012. The outlook beyond 2012 is uncertain and this appendix examines three scenarios. The baseline scenario assumes output falls gradually to 1.9 million carats in 2020 at which point diamond production begins to decline as resources are depleted. Diamonds are exhausted by 2035. The optimistic scenario assumes marine mining of diamonds is more successful, producing a higher level of output, and diamond resources are not exhausted until 2040. In the pessimistic scenario output declines to zero by 2030.
Namibia: Diamond Production
(Millions of Carats)
Citation: IMF Staff Country Reports 2008, 082; 10.5089/9781451828450.002.A004
Under the permanent income hypothesis of consumption, individuals attempt to smooth consumption in the face of income shocks. They do this by saving income in good years to pay for consumption in bad years.
Formally, individuals maximize a lifetime utility function:
Subject to the budget constraint:
Where:
Ct = period consumption
Yt = period income
W0 = initial wealth
Solving this equation gives the first order condition:
With
To apply this to the case of Namibia’s mineral wealth we make a number of simplifying assumptions:
Initial wealth is zero, W0 = 0
Individuals want consumption to rise over time at the rate of GDP growth, g, so that
The government maximizes utility on behalf of individuals so that
The government only smooths consumption from mineral income. Moreover, because mineral resources will eventually be depleted, income stops after year T.
Inserting these assumptions into the budget constraint gives:
where
Or
Thus the mineral wealth,
Projections were made based on the following assumptions, with 2006 corresponding to year zero:
| Variable | Value |
|---|---|
| Nominal interest, i | 12.0 % |
| Real GDP growth | 5.0 % |
| Inflation | 5.5 % |
| Nominal GDP growth, g | 10.8% |
| Variable | Value |
|---|---|
| Nominal interest, i | 12.0 % |
| Real GDP growth | 5.0 % |
| Inflation | 5.5 % |
| Nominal GDP growth, g | 10.8% |
In the baseline forecast, the annuity value of Namibia’s diamond tax revenues is only 0.40 percent of GDP per year. Because the result varies with the interest rate assumption, a sensitivity analysis was carried out. If (i-g) rises from its historical average of 1.2 percent to 2.0 percent, the annuity value rises to 0.54 percent of GDP per annum.
Namibia: Diamond Revenues
(Percent of GDP)
Citation: IMF Staff Country Reports 2008, 082; 10.5089/9781451828450.002.A004
Under the optimistic scenario with (i-g) at 1.2 percent the annuity value of Namibia’s diamond tax revenues is 0.48 percent of GDP.
Namibia:Pessimistic Scenario
(Percent of GDP)
Citation: IMF Staff Country Reports 2008, 082; 10.5089/9781451828450.002.A004
Under the pessimistic scenario the annuity value falls to 0.33 percent of GDP.
Namibia:Pessimistic Scenario
(Percent of GDP)
Citation: IMF Staff Country Reports 2008, 082; 10.5089/9781451828450.002.A004
In conclusion, the annuity value of Namibia’s diamond tax revenues is relatively small, measuring 0.6 percent of GDP or less per annum, under all scenarios. This compares with recent tax revenues from the diamond sector of 1½–3½ percent of GDP. By implication, the government should save the difference between the actual and the annuity value of revenues to smooth revenues, amounting to one percent or more of GDP per annum. This is relatively modest and broadly in line with actual average public saving of 1½ percent of GDP during 1½ percent of GDP during 1990–2005 (see Chapter 1). Given the modest size of the implied savings, there appears to be little justification for separating diamond revenues from the general budget for a savings fund.
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Collier, Paul. Managing Commodity Booms: Lessons of International Experience. Centre for the Study of African Economies, Department of Economics, Oxford University. January 2007.
Insight Magazine. Mining in Namibia: Past Performance and Future Prospects. August 2006.
International Monetary Fund, Africa Regional Outlook, April 2007.
Sachs, Jeffrey D. and Andrew M. Warner. Natural Resource Abundance and Economic Growth. NBER Working Paper 5398, 1995.
Prepared by Lawrence Dwight (AFR).
The six major producers are: Rössing Uranium, which operates the Rössing mine; Anglo American, which operates the Skorpion zinc mine; Namzinc, a zinc refinery; Rosh Pinah Zinc, which operates the Rosh Pinah zinc and lead mine; Ongopolo, which operates three copper mines and a copper smelter; AngloGold Ashanti Namibia, which operates the Navachab gold mine; and Okorusu Fluorspar, which operates the Okorusu mine.
Emil Sunley, Taimur Baig, and Philip Daniel. “The Fiscal Regime for Mining and Processing”, FAD TA Report, April 2006.
Namibia currently participates in the Kimberley Process diamonds initiative.
Ibid.
See The Role of Fiscal Institutions in Managing the Oil Revenue Boom. IMF Policy Paper, March 5, 2007.
Prospects for the smaller part of mineral production in the non-diamond sector are more difficult to assess. Uranium production at the Rössing mine was initially expected to last until 2009 but due to high international prices, the life of the mine has been extended to 2021, and a large number of new uranium investments are in train. The Skorpion zinc mine is expected to remain in production for a period of 15 years, to 2020. While Namibia does not currently produce oil or gas, the development of the Kudu gas fields beginning in 2010–12 may offset declining production of other minerals.
