Recent economic developments and outlook

4. Slow regional growth, particularly in Angola and South Africa, coupled with a severe drought and subdued commodity prices, depressed GDP growth from over 5 percent annually in the years following the global financial crisis to 1.1 percent in 2016. The authorities estimate that GDP contracted by about 0.6 percent in 2017, owing to weak performance in the construction, wholesale and retail trade, and the real estate sector. At the same time, the ongoing fiscal consolidation measures weighed negatively on growth. This notwithstanding, the authorities take note of staff’s estimate of a 1.2 percent contraction in 2017. They, however, consider that recovery in the mining sector has been underway for some time and that agricultural production rose significantly, and this will partially offset the overall negative trend. Updated projections for the medium-term will be presented during the tabling of the 2018/19 Budget.

5. Regional dynamics have continued to contribute to the complexity of the current adjustment, with declining SACU revenue receipts leading to higher fiscal deficits and a simultaneous widening of the current account deficit in 2016, amplified by weaker export prices and high imports. During 2017, however, the current account balance improved significantly, due to the narrowing of the trade deficit and the temporary rise in SACU revenues. At the same time, the slowing economic activity led to a deceleration in private sector credit extension.

6. Meanwhile, inflation continued to decline due to lower food prices resulting from the recovery in agriculture, and economic slack. As a result, inflation slowed to 5.2 percent in December 2017, compared to 7.8 percent in the comparative period in 2016, and has slowed further to 3.6 percent in January 2018. Given these developments, the Monetary Policy Committee (MPC) of the Bank of Namibia (BON) maintained its policy rate at 6.75 percent in February 2018 to support economic growth and simultaneously safeguard the one-to-one exchange rate between the Namibia Dollar and the South African Rand.

Fiscal policy

7. The deterioration of the fiscal position underscores the need to reduce over-reliance on SACU revenues, and to address inefficiencies in government spending. The authorities have thus taken steps to curb the decline in buffers by focusing on targeted spending cuts, as well as a revenue strategy geared to close leakages and strengthen tax administration. Taken together, these policy actions should deliver a cumulative adjustment of around 6 percent of GDP over the medium term, which is consistent with the recommendations of staff.

8. On the revenue side, the authorities are already implementing several measures, including improving the capacity of the revenue service and the establishment of an independent revenue authority in 2019. The legislation for establishing the revenue authority was enacted in December 2017, paving the way for a smooth transition over 2018. Meanwhile, revenue performance has improved, from around 31 percent of GDP in 2016 to an estimated 34 percent of GDP in 2017.

9. Noting that spending inefficiencies were largely due to poor commitment control, the authorities have created a Central Procurement Board (CPB), which began operations in April 2017. The CPB was established in terms of legislation as an independent body to manage all government procurement and contracting. It is expected to curb the practice of some departments entering into contractual obligations without sufficient funds in their budgets. Further, in January 2018, Cabinet issued directives to all departments to reduce spending on specific items. These measures were augmented by stricter controls on public service recruitment, including through freezing staffing levels in most government departments.

10. The Namibian authorities are firmly committed to a stable level of public debt and consider that the recent increase in the debt ratio is in part due to the sudden deceleration in growth. Nevertheless, they will continue to implement measures to prevent further debt build-up, including through addressing inefficiencies in spending and revenue management. While the rise in arrears in 2017 was unexpected, the range of measures taken to improve commitment control and spending levels are set to prevent recurrence of arrears of such magnitude in future.

11. Overall, fiscal policy is likely to be less pro-cyclical in the coming years compared to 2017, supported by regional economic recovery, improvements in commodity prices and a rise in global demand. Meanwhile, the authorities recognize inherent risks to measures which are designed to crowd-in private investment, such as private-public partnerships (PPPs) and reliance on the balance sheets of state-owned enterprises (SOEs). They are also committed to publishing a comprehensive fiscal risk statement during the coming budget period.

Monetary Policy and Financial Stability

12. The peg to the South African rand has served Namibia well, and the authorities remain committed to maintaining it. They also continue to seek long-term stability and robustness in the level of international reserves.

13. To curb the high private sector debt, more stringent macro-prudential measures have been implemented. The Credit Agreement Amendment Act, which was passed in June 2016, includes regulations stipulating minimum down-payments and maximum repayment periods for loans extended to finance movable goods such as motor vehicles. In March 2017, the authorities also implemented loan-to-value (LTV) limits for secondary mortgages. A full report on the impact of these measures will be published by the Financial Stability Unit (FSU) of the BON during 2018. Nevertheless, high-frequency data indicates a significant slow-down in bank credit to the private sector, from an annual average of 14.2 percent between 2012 and 2016, to 6.6 percent in 2017.

14. The authorities agree with most of the FSAP recommendations, and some of the measures are already being implemented, including the building of the technical capacity of the Namibia Financial Institutions Supervisory Authority (NAMFISA). They are fully committed to the implementation of a risk-based supervision framework for non-banks. Legislation clarifying the role of NAMFISA has been approved by the Executive and is awaiting completion of the Parliamentary process, together with the accompanying regulations. In this regard, the constitutional and legal authority of the BON will remain unchanged, while a new Financial Stability Council (FSC), chaired by the BON and comprising representatives of NAMFISA and the Ministry of Finance, will be established.

15. The authorities also concur with the FSAP recommendation to assign the overall mandate for financial stability to BON and have included an enabling provision in the BON Amendment Bill, which is awaiting Parliamentary approval. The FSC will be responsible for monitoring the stability of the financial system, including the contagion among financial institutions, asset exposure to capital markets, and Namibia Stock Exchange (NSX) asset price inflation amongst other responsibilities. The FSC will also initiate action to deal with adverse developments having a significant bearing on financial stability.

Structural reforms

16. The authorities are committed to addressing structural challenges, including high unemployment and poor labor absorption rates, inequality, and inadequate infrastructure in rural areas. In the context of the development objectives outlined in the 2016 Harambee Prosperity Plan (HPP), the authorities estimate that a growth rate of around 7 percent is necessary to address poverty and unemployment. Further, the Fifth National Development Plan (NDP5), launched in May 2017, provides details for addressing these challenges over the next five years. It outlines four pillars for sustainable development, namely economic progression, social transformation, environmental sustainability and good governance.

17. In terms of these plans, the authorities are undertaking alternative approaches for achieving their development goals. They consider that fiscal policy has played a critical role in meeting development challenges, but inefficiencies therein need to be addressed, while limiting any harm to medium-term growth prospects. Accordingly, a framework for PPPs is currently being implemented, and the authorities have sought the advice of experts from the Fund to help them create robust institutional frameworks. In this regard, they have stepped up efforts to improve conditions for doing business, including by simplifying company registration, and by investing in more vocational and on-the-job-training programs.

Conclusion

18. There is greater optimism about a gradual economic recovery over the medium-term. Nevertheless, the authorities will continue to be focused on resolving the current macro-economic imbalances, and have taken strong action in this regard, including through tougher fiscal measures, improving the management of financial sector risks, and addressing structural impediments to inclusive growth. Namibia continues to strive to widen economic opportunities by anticipating the demographic transition, including through the empowerment of women, investment in basic and high-level education, and infrastructure development. The analysis, advice and technical assistance provided by the IMF remain integral to the authorities’ overall strategy and are highly appreciated.