Issues and staff recommendations

8. The FY2012/13 budget targets a deficit of about 4 percent of GDP. This is driven by a marginal decline in the expenditure level as a share of GDP and a surge in revenues due to a windfall from SACU revenues. Excluding the cyclical component of SACU revenues, the overall deficit widens in FY2012/13, (text table) which is a continuation of the expansionary fiscal stance undertaken in FY2011/12.

Central Government Operations 2010/11 – 2015/16

(In percent of total GDP, unless otherwise indicated)

Source: Namibia authorities and Fund staff estimates and projections

Central Government Operations 2010/11 – 2015/16

(In percent of total GDP, unless otherwise indicated)

	2010/11	2011/12	2012/13	2013/14	2014/15	2015/16
Total revenue & grants	28.0	32.1	35.2	30.9	31.8	31.2
SACU revenue	7.2	7.6	13.3	9.7	9.3	8.8
Revenue excluding SACU	20.8	24.4	21.9	21.2	22.4	22.4
Total expenditure & net lending	33.7	40.7	39.1	36.3	32.5	31.3
Overall balance	−5.7	−8.6	−3.9	−5.3	−0.7	−0.1
Structural balance	−1.3	−8.6	−7.0	−4.9	−1.5	−0.6
Overall balance excluding cyclical component of SACU revenue	−2.5	−6.2	−7.3	−5.4	−0.7	0.2

Source: Namibia authorities and Fund staff estimates and projections

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Central Government Operations 2010/11 – 2015/16

(In percent of total GDP, unless otherwise indicated)

	2010/11	2011/12	2012/13	2013/14	2014/15	2015/16
Total revenue & grants	28.0	32.1	35.2	30.9	31.8	31.2
SACU revenue	7.2	7.6	13.3	9.7	9.3	8.8
Revenue excluding SACU	20.8	24.4	21.9	21.2	22.4	22.4
Total expenditure & net lending	33.7	40.7	39.1	36.3	32.5	31.3
Overall balance	−5.7	−8.6	−3.9	−5.3	−0.7	−0.1
Structural balance	−1.3	−8.6	−7.0	−4.9	−1.5	−0.6
Overall balance excluding cyclical component of SACU revenue	−2.5	−6.2	−7.3	−5.4	−0.7	0.2

Source: Namibia authorities and Fund staff estimates and projections

9. Staff stressed the need to minimize the fiscal risks associated with the TIPEEG program. After an increase in development spending in the last year driven largely by the government’s temporary TIPEEG, keeping public debt sustainable would require strict adherence to the government’s medium-term fiscal plan aimed at delivering a balanced budget by 2015/16. Spending under TIPPEG would need to be unwound at the end of this initiative as planned by the authorities in order to safeguard medium term debt and external sustainability.⁴ Staff’s analysis shows that achieving a broadly balanced fiscal position (excluding the cyclical component of SACU revenues) by 2015/16, consistent with the authorities’ medium-term fiscal plan, will bring the debt-to-GDP ratio to a broadly stable level. However, given the fixed exchange rate regime and the fact that, like other small MICs, Namibia remains susceptible to global shocks and outward spillovers amplified by an open capital account and lower buffers, beyond stabilizing the debt level, Namibia needs to rebuild its reserves buffer. In this context, staff analysis, which includes other small MICs, show that the current level of reserves is below what would be considered adequate based on various methods (Appendix I). The gap between Namibia’s reserves holdings and its adequate level is expected to widen in the future, with unchanged policies. The exchange rate peg to the rand could come under pressure if fiscal consolidation to rebuild reserve does not take place. Therefore, a more ambitious fiscal effort beyond the authorities’ medium-term expenditure framework would be advisable (Appendix I).

10. There is room for improving the quality of spending. The government’s expenditure envelope (above 40 percent of GDP), including the wage bill, is high by international standards, thus necessitating an assessment of pockets of unproductive spending.⁵ In staff’s view, the challenges of strengthening the quality of public expenditures have increased with the acceleration of spending and the associated fast tracking of procurement processes under TIPEEG. As emphasized in staff’s past recommendations (Table 1), wage restraint is warranted going forward given the size of the public sector wage bill (chart). High-quality civil service reforms are needed to enhance the efficiency of the public sector, support fiscal sustainability and reduce any associated distortions arising from wage settlement practices in the government into the broader labor market (see Section D). In addition, staff stressed the need to rein in nonwage spending most notably subsidies and transfers to state-owned enterprises.

Central Government Expenditure and Wage Bill, 2007-11

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 043; 10.5089/9781475520569.002.A001

Source: IMF World Economic Outlook and Government Finance Statistics.

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Central Government Expenditure and Wage Bill, 2007-11

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 043; 10.5089/9781475520569.002.A001

Source: IMF World Economic Outlook and Government Finance Statistics.

• Download Figure
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Central Government Expenditure and Wage Bill, 2007-11

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 043; 10.5089/9781475520569.002.A001

Source: IMF World Economic Outlook and Government Finance Statistics.

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• Download figure as PowerPoint slide

11. Staff underscored the need to address the state of finances of state-owned enterprises (SOEs) and propel them to contributing to broader national development objectives. Low productivity in SOEs remains a concern, and continuously large transfers to them place constraints on the public finances, compromise spending on more productive areas, and pose fiscal risks. In this context, staff urged speedy implementation of individual performance agreements with SOEs, which are aimed at ensuring efficient delivery of results and value for money for the public.

12. Staff also urged the authorities to expedite the implementation of tax reforms in a manner that ensures predictability and simplicity of the tax system. These include improving tax compliance, streamlining tax expenditures, and balancing revenue collection with incentives to invest in the context of authorities’ intention to tax exports of natural resources. A differentiated tax rate on export of natural resources is under consideration as part of the government’s objectives to broaden the revenue base and encourage domestic value-addition to natural resources. This would be a turnover tax of 0-2 percent (differentiated across sectors depending on value additional of each mineral product). Staff supports the government’s objective to broaden the tax base and encourage value addition but advised that the selected instrument may not be efficient to achieve these twin objectives simultaneously. Beyond that, in its current form (close to about 20 rates), the differentiated export levy does not bode well for the simplicity of the tax system. Thus, some consideration could be given to using the existing royalty regime or resource rent tax approach.

13. Caution is warranted in granting preferential tax regimes for businesses, particularly for the export processing zones (EPZs). Companies with EPZ status enjoy exemptions on corporate income tax, VAT, stamp and transfer duties and are entitled to a 75 percent refund on expenditures incurred for training Namibians. The staff’s judgment is that the effective tax rates of the VAT and corporate taxes are significantly lower than the statutory rates due to a number of tax exemptions. Since Namibia’s VAT rate of 15 percent is about the average for comparator countries, there is no strong basis for granting VAT exemptions. Staff recommended a review of incentives on VAT, particularly for EPZs and conducting a full-fledged study on tax expenditures (tax revenues forgone due to tax incentives). The ongoing work by AFRITAC South on assessing tax gap for selected countries in the region including Namibia should help.

14. There is a need to delink the fiscal stance from volatile SACU revenues. The volatility in diamond and uranium revenues and SACU receipts exposes fiscal revenues to wide swings, especially during global economic cycles. In these circumstances, and consistent with IMF advice in other natural resource-rich countries, staff recommended that the government adopts either a fiscal balance that excludes the cyclical component of SACU receipts and mining revenues or the structural fiscal balance (a la Chile), which will reinforce the past policy of paying down debt when there are SACU windfalls.⁶

Authorities’ views

15. The authorities broadly concurred with staff on the need to rein in current expenditures and address unproductive spending, when assessed. They emphasized that while the government’s expenditure envelope (as a share of GDP) remains very large, public investment remained low by international standards. They acknowledged the large government wage bill (at 14 percent of GDP), although they noted that this was a regularity for Southern Africa, thus meriting a thorough assessment of the underlying reasons for the elevated wage bill in these countries. The authorities noted that government transfers to SOEs include funding for infrastructure projects which should be viewed favorably from a broader national development objective. They reiterated their commitment to keep public debt at a sustainable level, while prioritizing expenditures, increasing government savings, and financing needed infrastructure projects. The peg to the rand has served Namibia well and merits continued support through a further buildup of reserve buffers.

16. They stressed that expenditure restraint will be supported by efforts to broaden the domestic revenue base and strengthen domestic revenue collection and administration. In that regard, they noted that significant progress has been made towards establishing a large taxpayer unit in the Inland Revenue Department and migrating to the integrated tax administration system (ITAS). They emphasized that they were pragmatic in negotiating the differentiated tax rates on exports of natural resources with the private sector. They also recognized the need to ensure simplicity of the tax system. The authorities see the need to conduct a full-fledged study on tax expenditures so as to streamline tax incentives and minimize revenue losses.

Issues and staff recommendations

17. Further deterioration in the global economy may generate significant negative spillovers for the Namibian economy. Staff analysis shows that the direct immediate impact of financial stress in Europe on Namibia’s banking system, will likely be small as banks’ funding base is largely domestic. Instead, the “real economy” channel through a collapse of commodity exports will be the main transmission channel (Appendix II).

18. Near the border, recent labor disputes in South Africa, most notably the transport workers’ strike has had some spillover effects on Namibia. One key channel of the spillover impact is through the exchange rate given Namibia’s peg to the rand. Another relates to its close financial linkages with South Africa, including the fact that nonbank financial institutions invest a significant share of their external assets in the South African market. On the real sector side, so far there has not been significant demonstration effect on Namibia’s mining sector. However, this warrants close monitoring in an economy already experiencing some wage pressures.

19. Staff stressed that Namibia’s current level of reserves is not sufficiently strong to respond to large global shocks. If adverse shifts in global economic developments lead to a decline in mineral prices and thus a significant loss of revenues compared to the budget target (see the risk assessment matrix (RAM) in Table 2), staff advised the government to allow the automatic stabilizers to work on the revenue side as long as the public debt is not above the 35 percent of GDP target. This implies that the government should not increase tax rates to compensate for the associated cyclical loss in mineral revenues or reduce expenditures to meet the government’s budget deficit target. More generally, staff advised that such spillovers and the associated risk spelt out in the RAM would generally call for policy response to be measured, carefully calibrated, and proportional to risks and pressures coming from the global economic environment.

Authorities’ views

20. The authorities agreed that the direct impact of financial stress in Europe on Namibia’s banking system is limited and that Namibia is affected through the trade channel given its heavy reliance on mineral exports. That said, the authorities noted that 2012 was evolving better than expected with resilience in diamond exports (possibly surpassing 1.5 million carats) and a limited unwinding of the diamond price hikes observed in 2011. Going forward, the authorities noted the importance of evaluating the effectiveness of Namibia’s efforts to diversify the economy away from the mining sector given the continued dominance of mineral exports and the associated vulnerability to commodity prices shocks. The authorities also concurred that developments in South Africa warrant close monitoring.

Issues and staff recommendations

21. Aggregate financial indicators are broadly sound but potential sources of vulnerabilities to financial stability are emerging. The combination of the property price buildup, commercial banks’ large exposure to the property market, the growing household indebtedness, and the concentration of large institutional investors in bank funding, pose potential vulnerabilities to financial stability. Mortgage loans represent the largest portion of loans and advances, accounting for 55.1 percent of the total loan book in 2011.⁷

22. A continued build up in property prices could undermine homeowner affordability for low and middle-income Namibians, as well as, pose potential risk for financial stability. Since 2000, the Namibia residential property prices have increased significantly, with more moderate increases in 2012. Price buildup is driven by the interplay between supply and demand (Appendix III). At a time when government policies should aim to enhance inclusive growth and spread the benefits of growth among society, rapidly rising property prices will make home ownership beyond the reach of a vast majority of ordinary Namibians. Indicators of housing affordability and the profiles and income streams of the borrowers do not provide much comfort in terms of potential risks. Furthermore, NonBank Financial Institutions’ (NBFIs) are also exposed to the property market indirectly mainly through their funding of banks’ wholesale deposits (80 percent of bank’s funding comes from NBFIs).

23. Staff recommended a close monitoring of the financial system’s exposure to mortgage loans to minimize risks, through a combination of policy options. In particular, staff recommended that some consideration be given to the possible use of more stringent loan-to-value ratios than the current local industry norm of 100 percent financing for first time buyers that the majority of banks use. This should be done in a manner that does not unduly hamper homeowner affordability for low-income Namibians. Staff also urged the BoN to expedite—with ongoing technical assistance from the Fund—the adoption of bank stress testing techniques that allow adequate analysis of macro-financial sector linkages and associated risks.

24. NBFIs require close monitoring. It is critical for the authorities to continue strengthening supervision of NBFIs and monitor their exposure to the property market (both direct and indirect). Thus, staff commended the ongoing efforts by the regulatory authorities, Namibia Financial Institutions Supervisory Authority (NAMFISA), in preparing regulations, guidelines and standards to accompany new NBFIs sector legislation (Financial Institutions and Markets Bill) and to support capacity building for staff in the regulatory agency, all in line with the Fund’s advice (Table 2).

25. Beyond these, the central government also has a role in minimizing risks to the property market. Clearly households’ affordability of property is an important variable and the government is already contemplating taking policies to increase access to housing as part of its agenda to enhance more inclusive growth. At the same time, existing restrictions on land supply are yet to be eased. Such a combination of measures would likely increase price pressures in the property market. The Government’s Institutions Pension Fund (GIPF) is considering developing a housing scheme for fund members to use a portion of their pensions to guarantee mortgage loans. This could entail some risk without necessarily improving housing affordability. Nevertheless, if the government proceeds with this plan, staff recommended the tightening of eligibility requirements for the scheme. Policies to increase demand for housing ought to be carefully calibrated in close tandem with plans to gradually ease restrictions on land supply.

Authorities’ views

26. The authorities underscored that there are no signs of property price bubble and pointed to the moderation in property prices in recent months. They stressed that, like staff, they are concerned about the impact of the property price buildup on housing affordability for low-income Namibians. Moreover, while the large concentration of commercial banks assets in mortgage loans, the elevated level of household indebtedness and the concentration of large institutional investors (pension funds and insurance companies) in wholesale bank funding are a concern, the risks to financial stability have been reduced with several policy measures being put in place by the BoN. Further, given the limited development of local financial markets, there was no evidence of volatile wholesale bank deposits. Notable macroprudential policies in place include the requirement by the BoN for commercial banks to apply risks weights on mortgage loans above Basel II norms. They stressed that nonperforming loans continue to be low by international standards. With regards to the NBFIs exposure to the property market, they stressed that this was limited to 5 percent. They also noted that the memorandum of understanding between the BoN and NAMFISA for continuous information sharing will enable pre-emptive policy actions.

Issues and staff recommendations

27. There is an urgent need to address the phenomenon of jobless growth, as unemployment and poverty levels remain high. The country’s Gini coefficient, at 0.59 in 2009/10, is one of the highest in the world. The official unemployment rate is now estimated at 34 percent according to the most recent household income and expenditure survey (HIES). High unemployment rate reflects skills mismatch in the labor market and possibly public sector wage policies (Appendix V).

28. Staff emphasized that public works program through TIPEEG may not necessarily succeed in putting a sustainable dent on long-term or structural unemployment due to their temporary nature. The authorities’ TIPEEG aims to support job creation by easing infrastructure bottlenecks in targeted sectors of the economy. While TIPEEG’s goal of easing infrastructure bottlenecks in labor intensive sectors is appropriate, broader industrial policies to protect certain industries may not necessarily deliver the intended outcomes and could in fact create unintended distortions. In addition, implementation difficulties, due to capacity constraints, could however reduce the program’s possible impact on domestic job creation. TIPEEG should also have a skill development component in order to maximize its job creation potential on a sustainable basis. Tackling the high level of structural unemployment would also require changing the public sector employment and wage policies, and to align tertiary education and training to meet the demand for skilled labor in the broader economy. Further progress in developing downstream primary sectors and raising the effective cost of capital through rationalization of generous tax incentives to limit the current bias toward capital-intensive sectors, could also help support job creation.

29. Given the negative impact of income inequalities on the duration of growth, staff recommended policies to target inequality at the sources. These include fostering targeted investment in health and education as well as supporting financial inclusion. The latter could draw upon measures outlined in the authorities’ 2011–2021 Financial Sector Strategy plan on encouraging financial access to a broader part of the population, while limiting the associated regulatory risks, including money laundering. This would complement current redistributive aspects of fiscal policy including targeting a direct redistribution of income. Staff’s analysis of household survey data for Namibia and other MIC countries suggest that despite the expansion of social programs and their beneficiaries, they have been relatively less effective in targeting the very poor when compared with other upper MIC countries (Appendix V). Thus, in staff’s view, while Namibia is an upper middle income on the basis of per capita GDP, some consideration could be given in treating it as a “special case” for donor funding given the enormous social challenges it faces.

Authorities’ views

30. The authorities reiterated that enhancing job creation and more inclusive growth are the key pillars of their tightly focused fourth National Development Plan (NDP4). The FY2012/13 Budget is unrelenting in its resource allocation to priority economic and infrastructure sectors, with the objective of placing the economy on a high and inclusive growth trajectory.

31. They concurred that TIPEEG should have a skill development component to help make workers more competitive for private sector jobs. In this context, they noted the recent creation of a Human Resource Development Council and Productivity Centre, which aim at addressing the skills mismatch in the labor market. The Ministry of Labor is also working on a jobs search program to create a platform for linking the availability of job vacancies to relevant skills to reduce frictional unemployment. Despite these efforts, the authorities maintained that there are no easy fixes to these daunting socio-economic challenges and therefore there is a need to respond with several policy initiatives to enhance faster job creation.

Issues and staff recommendations

32. Despite its upper middle income status, Namibia like other small middle-income countries in sub-Saharan Africa has capacity that is unevenly distributed across the government. According to the World Bank’s government effectiveness indices, for Namibia, the private sector’s perception of the quality of public services and civil service bureaucracy are less positive than in Botswana, Mauritius, South Africa and Seychelles.

33. The Public Expenditure and Financial Accountability (PEFA) report of 2008 provides some practical sequence of reforms to Namibia’s public expenditure, procurement, and financial accountability systems. Staff commended the government for announcing plans to take action across the board, including the public financial management (PFM) framework, given the low-ranking areas identified in the PEFA report, especially when compared with ratings assigned to other middle-income countries.

34. Data quality is broadly adequate for surveillance, although there is room for improvement. In this regard, staff urged the authorities to take further steps to improve the quality of its key macroeconomic statistics as recognized in the FY2012/13 Budget. Staff welcomed the authorities’ decision to conduct a labor force survey on an annual basis, so that the government can monitor progress toward its employment goals and more generally labor market conditions. The 2009/10 HIES should also provide a good basis for updating the weights in the national consumer price index, which dates back to the early 1990s. In this respect, staff welcomed recent technical assistance visit by IMF experts in the area of consumer price statistics. There is also room for improvement in the compilation of the balance of payments statistics, most notably on the large errors and omissions. These efforts should be accelerated to help propel Namibia towards subscribing to the IMF’s Special Data Dissemination Standard (SDDS).

Authorities’ views

35. The authorities acknowledged the need for fostering institutional and capacity development and strengthening the quality of statistics. The government noted that they are pursuing a PFM reform agenda assisted by IMF and the European Union. After a somewhat successful pilot, the government plans to roll-out program budgeting to all ministries and government agencies in the coming years. To enhance government’s capacity to collect and compile high quality statistics, Namibia Statistics Agency (NSA) has been transformed to a fully autonomous agency. The publication of the recently completed 2009/10 Household Income and Expenditure Survey in a fully transparent manner on the NSA’s website, as well as details of the national accounts and price statistics, are significant milestones.