Abstract
This 2015 Article IV Consultation highlights that Namibia's GDP growth slightly moderated to 4.2 percent in 2014, largely owing to lower global demand for Namibia's main export commodities. Inflation remained contained, owing to low international commodity prices. The government's large-scale fiscal program contributed to job creation, and unemployment declined somewhat. Namibia's growth outlook is clouded with downside risks, while facing significant policy challenges. Its main policy challenges are therefore to strengthen its resilience to exogenous shocks and manage systemic risks in the financial sector, while promoting inclusive growth and job creation.
My authorities appreciated the candid and productive engagement during the Article IV consultation and are broadly in agreement with the analytical thrust of the reports. They share similar assessments and concerns, especially on the outlook and risks to the fiscal and financial sectors. It is on this basis that authorities have already commenced half-yearly reviews of the budget and the medium-term expenditure outlook.
My authorities’ execution of sound macroeconomic policies coupled with a focused development agenda has supported economic growth and augured well for macroeconomic stability and growth. These efforts have borne fruit; Namibia attained upper middle income status and has made significant achievements in improving the welfare of the people of Namibia through better access to health, potable water, education and financial services. Despite the positive developments made thus far, challenges remain including housing pressures, unemployment and income inequality. In this regard, they are committed to pursuing policies that will help alleviate these socioeconomic challenges, while safeguarding macroeconomic stability.
Recent economic developments and outlook
The revised full national statistics data released on September 10, 2015 indicate that the economy, supported by strong construction activity and wholesale and retail trade, GDP grew by 6.4 percent in 2014 from 5.7 percent in 2013. This number is higher than the April 2015 preliminary estimate of 4.5 percent indicating stronger than anticipated growth in the secondary and tertiary sectors which account for 17.7 percent of GDP and 57.7 percent of GDP respectively.
Buoyant construction activity and a recovery in the utilities sector contributed to the strong performance in the secondary sector, while wholesale and retail trade, transport and communication and education sectors were the major contributors to the strong growth in the tertiary sector. Mining activity on the other hand performed poorly, due to decreases in uranium and other mining and quarrying activity.
Inflationary pressures remained benign despite the exchange rate depreciation. Annual inflation rate averaged 5.4 percent in 2014, having fallen from 5.6 percent in 2013 due to transportation cost, a consequent of lower oil prices and a tighter monetary policy stance. The annual inflation rate continued to slow down on average during the first half of 2015. However, annual inflation rose to 3.3 percent in July 2015 from 3.0 percent in June 2015. Inflation is expected to rise slightly but remain within manageable levels.
The current account deficit continued to narrow to N$580 million during the first quarter of 2015, compared to the previous quarter (N$1.1 billion) and corresponding quarter of 2014 (N$3.3 billion). The narrowed deficit was primarily due to a lower merchandise trade deficit, decreased outflows in investment income and sustained high current transfers. As a percentage of GDP, current account deficit reduced to 0.4 percent in the first quarter of 2015. The stock of international reserves rose substantially by 20.2 percent to N$14.8 billion during the second quarter of 2015 compared to the previous quarter, mainly due to the issuance of a new JSE bond worth N$800 million. The favorable exchange rate also supported the positive developments in international reserves.
The economic outlook is positive with the anticipation of a recovery in global demand and new mines coming on stream. Real GDP growth is expected to increase on account of continued robust construction activity, an expected increase in mining production and activities in the wholesale and retail trade. However there are important downside risks, in particular the falling commodity prices, slow recovery in the country’s main trading partner economies and adverse weather conditions. Furthermore, the projected decrease in SACU receipts is expected to negatively affect the economy and public finances.
Fiscal and debt policies
Fiscal policy remains accommodative in line with the authorities’ objective to support economic growth and job creation. The authorities are still committed to their consolidation objective that they announced in 2012 evidenced by the winding down as scheduled in 2013/14 budget, the Targeted Intervention Program for Employment and Economic Growth (TIPEEG) launched three years earlier. Strong revenue mobilization, higher SACU receipts and low debt allowed the authorities to increase spending, especially on infrastructure, goods and services and wages.
However, going forward, the projected fall in SACU receipts will exert pressure on fiscal revenues and negatively impact gross official reserves. In this respect, the authorities will pursue a fiscal consolidation path that is in line with fiscal and debt sustainability. They have already implemented cuts on recurrent spending such as travel and other related costs and these cuts will continue into the medium term. Further expenditure recalibration will entail postponement of non-priority and least productive capital spending associated with public administration infrastructure.
The public debt policy is underpinned by the country’s 2005 Sovereign Debt Management Strategy which sets out fiscal limits. Though public debt has risen in the past few years, it remains low and sustainable. This is a consequence of the authorities’ prudent management of public debt and a conservative benchmark of 35 percent of GDP.
Monetary and exchange rate policies
The Bank of Namibia pursed a tighter monetary policy stance in 2014, in response to the acceleration in credit extension and rising property prices. Consequently, credit extended to the private sector has slowed, due to decreased demand by the corporate and household sectors for overdraft, mortgage and other loans and advances.
On the exchange rate policy, the authorities continue to view the exchange rate peg to the South African rand as an appropriate monetary policy anchor. They recognize that if gross official international reserves’ continue to decline will compromise the credibility of the peg. At present, the stock of international reserves is 3.9 times higher than the currency in circulation therefore adequate to maintain the peg between the Namibia dollar and the rand. Going forward, the authorities will continue to safeguard the peg and build adequate buffers to buttress the economy’s defenses against potential external shocks. In this regard, they are considering other options and a fiscal consolidation path that will boost the level of reserves in the medium-term.
Financial sector policies
The banking sector remained sound, profitable and adequately capitalized. Asset quality improved as shown by the decrease in the non-performing loans (NPL) ratio during second half of 2014. However, the banking sector remains highly leveraged in the mortgage sector. The rapid increase in credit extension experienced in previous years, especially to the mortgage sector along with the rising household indebtedness have created vulnerabilities in the financial system. The possible threat to financial sector stability is a concern for the authorities. Given that the rapid growth in housing prices has been fueled to a larger extent by supply constraints, the authorities are considering options to speed up the process to facilitate the supply of serviced land. Additionally, the authorities appreciate staff’s analysis of the macro-prudential risks in the selected issues paper and they concur on the need to consider macro prudential measures to curb speculative behavior. Nonetheless, going forward the banking sector’s financial condition is expected to remain sound and healthy.
Structural reforms
My authorities recognize that Namibia’s success has raised the aspirations and expectations of Namibians which, makes urgent the need for them to ensure that the economic benefits are shared by the broader population. In this regard, they will continue to promote employment creation through economic diversification. To address youth unemployment they will promote development of functional technical skill through increased access to tertiary and vocational training.
Conclusion
My Namibian authorities are committed to pursuing sound macroeconomic policies and implementing structural reforms to ensure more inclusive economic growth, address the high level of unemployment and reduce vulnerabilities while locking in the progress they have made so far to promote inclusion and accelerate convergence with SADC targets. They will continue to pursue a fiscal consolidation path that will restore and preserve medium to long-term fiscal sustainability.