Economic Performance and Prospects

The Namibian authorities have continued to maintain sound macroeconomic management, which coupled with favorable external conditions, has sustained the economic growth in line with that of its CMA/SACU regional partners. The economy recorded robust growth, moderate inflation and strong external surpluses in 2006. Real GDP grew by 4.1 percent in 2006 led by growth in diamond, telecommunications, retail trade and financial sectors. GDP in 2007 is projected to grow by around 4.0 percent, and is expected to hover around 4.5-5 percent in the medium-term, underpinned by continued strengthening of the nonmining sector, including tourism initiatives. Notwithstanding the good performance, key downside risks to the economy include the possibility of a more rapid decline in onshore diamond mining than projected and weather–related shocks to agricultural production. Nevertheless, the authorities are ready to take suitable measures to address these challenges.

While inflation moderated at 5.1 percent during 2006, it increased in the beginning of the first quarter of 2007 mainly due to high food prices. However, it declined to 6.6 percent in October 2007 from a peak of 7.2 percent reached in July 2007, and is expected to moderate to 6 percent in 2008, due in part to sustained tightening of monetary policy.

The external current account surplus rose to 15.9 percent of GDP in 2006 from 5.5 percent in 2005, due to strong export performance supported by high commodity prices, and significant increase in SACU revenue inflows. The exchange rate has been stable in nominal effective terms in the 12 months through September 2007, and real effective exchange rate in the first nine months of 2007 was in line with the average for the preceding decade.

Fiscal Policy

The country’s fiscal stance continues to remain prudent. Total revenue as a percent of GDP rose from 31.5 percent in 2005 to 36.3 percent in 2007. Enhanced revenue is attributed to mineral export taxes and SACU receipts that contributed to a fiscal surplus of 2.1 percent of GDP in 2006/07. However, the fiscal surplus is projected to decline to about 1.1 percent of GDP in 2007/08 fiscal year because of increased public spending to revamp key infrastructure and reduce public debt. In this respect, public debt would be reduced to an estimated 23 percent of GDP by mid-2008 from 28 percent in 2006/07. The authorities are committed to improving spending priorities, increasing fiscal space, and further reducing public debt.

The Namibian authorities are also committed to strengthening revenue collection. SACU currently accounts for more than one-third of total revenue. Given the temporary nature of SACU windfall/receipts, the authorities consider that a broad-based and effective domestic tax system capable of generating increased revenue needs further consolidation.

On the expenditure side, the authorities are taking advantage of the favorable fiscal situation to implement public expenditure reforms, aimed at accelerating growth and poverty reduction. The authorities recognize that state-owned enterprises continue to drain budgetary resources. In this regard, the adoption of the new SOE Governance Act, aimed at strengthening corporate governance in these enterprises, is an important development in the right direction. This would further strengthen SOE’s performance, reduce quasi-fiscal activities and risks to the budget, and create more fiscal space. It is also important to note that the wage bill has declined to 13 percent of GDP in 2006/07 from 15 percent three years ago.

Monetary and Exchange Rate Policy

The authorities continue to be committed to the CMA arrangement as an appropriate monetary framework. Within the CMA, the Namibian currency is pegged to the Rand (1:1), and inflation and interest rates are aligned. While the country’s macroeconomic conditions have been diverging in some instances from those of South Africa, the authorities still consider CMA as an appropriate framework for ensuring medium to long run price stability. The country’s level of reserves has reached a robust level, covers adequately short-term external debt, and represents more than 3 months of imports cover. This is a significant achievement for the country, thanks to improved export performance, better than expected SACU receipts and the authorities’ strong commitment to fiscal consolidation.

Financial Sector

The financial sector is profitable and well capitalized. In line with the FSAP recommendations, the authorities have taken steps to strengthen both banking and non-banks financial institutions. Though the sector is well regulated, a number of refinements have been issued recently, including amendments to the Banking Act mandating consolidated supervision which is expected to be promulgated by mid-2008. Furthermore, progress has been made towards risk-based supervision, with priority being given to on-site visits to potentially higher risk financial institutions to strengthen the sector.

While access to Namibia financial system remains limited, significant progress has been made over the past years to widen and deepen financial intermediation. To this end, banks and other financial institutions are making efforts to reach out to poorer households and small and medium-sized enterprises, including through innovative products like mobile banking, merchant–serviced ATMs, smart cards, lower-fee savings accounts, and micro-lending products that do not require collateral. Banks are also extending services to rural areas in the wake of road and power infrastructure connections. One of the local commercial banks established a smart partnership with the Post Savings Bank, which has widespread network in the rural areas, as a strategy to improving access to banking services by rural households. The preparation of the country’s financial sector charter that is under way and which is to be launched in the first half of 2008, is expected to add more impetus to access and intermediation efforts.

The authorities have strengthened anti-money laundering policies and enacted Financial Intelligence Act in 2007. A financial intelligence center has been established within the Central Bank of Namibia, and appropriate regulations would be finalized in due course. The authorities are now at the level of identifying and analyzing training needs and the roles of the respective government agencies in this undertaking.

Structural Challenges and Risks

The regulatory measures on domestic asset requirements, considered by the authorities, are aimed at reducing the 35 percent of domestic qualifying assets for dual-listed companies gradually over a five-year period. Even though Namibia has one of the highest gross national savings rate in sub-Saharan Africa in terms of pension funds and long term insurance, the country has not been able to fully benefit and utilize this capital for the much needed and broad-based economic development. The funds continue to flow out of the country, via dual-listed companies. In this regard, the regulatory measures being contemplated would tighten domestic investment requirements for the dual-listed companies, with the view to encouraging retention of these resources for domestic investment. The authorities, aware of possible distortionary effect of the intended measures, have already started conducting research on possible investment instruments, and are encouraging the development of appropriate market based instruments. They are considering developing a framework for monitoring the likely impact on financial sector risk and returns. As a strategy to broadening the range of investment options, the authorities have been actively encouraging SOE with financial soundness to consider issuing bonds in the local market.

Fostering employment growth in the non-mining sectors to reduce unemployment remains a key priority of the Namibian authorities, who view economic diversification from the mineral sector to non-mineral manufacturing, tourism and other services as a significant step in reducing high unemployment. In this regard, they are committed to continue to create a conducive environment and putting in place measures to increase competitiveness, through improved skills and labor productivity. The government efforts of diversification have started bearing fruits as reflected by a growing number of diamond cutting and polishing companies established over the past 3 years.

Strengthening the health sector, in particular the fight against HIV/Aids pandemic, continues to remain a priority of government. The decline in Namibia’s HIV prevalence rate from 22 percent in 2002 to 20 percent in 2006, has largely been attributed to the National Awareness Campaign run jointly by the government, private sector and international agencies. The program of public provision of antiretroviral (ART) drugs launched in 2003 currently covers about 40,000 patients or about 70 percent of those who could benefit from ART treatment. The improved fiscal space has enabled the authorities to allocate adequate resources to this priority area.

The Namibian authorities continue to put in place measures to strengthen business environment, including effective public services delivery. The World Bank’s Doing Business 2008 survey ranked Namibia 43 out of 178 countries, with the country rated positively by business in a number of areas, including licensing framework and enforcing contracts. To improve effectiveness and skill levels in the civil service, the authorities will be launching a National Institute of Public Administration and Management in 2009. Measures to improve the overall quality of education under the Government Education Sector Improvement Programme (ETSIP), have been put in place.

The authorities have launched a Third National Development Plan, which serves as a key framework for implementing the country’s development policies for sustained growth and poverty reduction. They are also of the view that criteria for concessional borrowing eligibility should be revisited to enable countries with high income inequality and widespread poverty better access to these facilities. In the new NDP3, efforts are under way to implement program-based budgeting to help improve accountability and help prioritize government expenditures.

Conclusion

The Namibian authorities remain committed to implementing prudent and sound policies, which they consider as key for accelerating growth, reducing unemployment and poverty. The authorities appreciate and continue to rely on the Fund’s advice on areas of interest to the country’s policy challenges, including better utilization of retained capital under Regulation 28 and 15¹ to promote domestic investment. They also trust that the Fund and the international community would support their request to be considered for concessional borrowing, given the country’s high income inequality and widespread poverty.