Namibia: 2019 Article IV Consultation—Press Release And Staff Report

2019 Article IV Consultation-Press Release and Staff Report

Abstract

2019 Article IV Consultation-Press Release and Staff Report

A SLOW RECOVERY AND LONG-TERM CHALLENGES

1. Among Southern Africa economies, Namibia stands out for its considerable economic and social progress, notwithstanding high unemployment and inequality. Despite being a small and commodity-dependent economy exposed to external shocks, over the last two decades annual per capita GDP growth averaged 2.6 percent, resulting in better living standards and lower poverty, and in one of most gender-equal countries in the world.1 The country’s strong institutional and governance framework, among the best-rated in Africa, underpinned these developments. Robust Southern Africa Customs Union (SACU)’s receipts contributed to economic stability and strong growth. However, growth has not benefited all Namibians. Unemployment remains high (about 33 percent), particularly for the youth (46 percent), and inequality, although declining, is one of the highest in the world (Figure 1).2 Moreover, the economy remains highly dependent on volatile SACU receipts and vulnerable to fluctuations in commodity exports.

Figure 1.
Figure 1.

Namibia: Improved Living Standards and Strong Governance, yet High Inequality and Persistent Unemployment

Citation: IMF Staff Country Reports 2019, 295; 10.5089/9781513513904.002.A001

Sources: Namibia Statistics Agency, Bank of Namibia, ILO, World Bank WDI, Worldwide Governance Indicators, D. Kaufmann (Natural Resource Governance Institute and Brookings Institution) and A. Kraay (World Bank) 2017, PRS Group: Intertional Country Risk Guide (ICRG), and IMF staff calculations.1/ Refers to the governance sub-component from International Country Risk Guide (ICRG)’s political risk index. Higher value indicates lower risk.
uA01fig01

Strong Governance and Institutions

(Scores, 2017)

Citation: IMF Staff Country Reports 2019, 295; 10.5089/9781513513904.002.A001

Sources: Worldwide Governance Indicators, D. Kaufmann (Natural Resource Governance Institute and Brookings Institution) and A. Kraay (World Bank) 2017 and IMF staff calculations.Note: Shaded areas exclude top and bottom 10% of the distribution of upper middle income countries (sample size: 53 observations). Scores are rescaled to 0–100 range. The 90% confidence interval of the Control of Corruption Estimate for Namibia ranges from 52 to 61.

2. After a period of exceptional growth and rising economic imbalances, in 2016 the economy began rebalancing and contracting, and development bottlenecks became apparent (Figure 2).

  • During 2010–15, the construction of large mines and expansionary fiscal policies temporarily boosted investment, and annual GDP growth averaged 5¾ percent. The peg with the South African rand contributed to contain inflation. However, macroeconomic imbalances built up. Large fiscal deficits led to a sharp increase in public debt. The current account deficit widened, and international reserves fell below adequate levels (Annex I). Rapid credit growth fueled fast rising housing prices, and elevated private sector indebtedness.

  • In 2016–17, the engines that temporarily boosted growth grounded to a halt. Real GDP began contracting as construction in the mining sector returned to pre-2010 levels and the government started implementing consolidation plans to stabilize the public debt-to-GDP ratio. With weak domestic demand, the economy started rebalancing. The current account deficit sharply narrowed, and credit and house price growth decelerated. In the process, it became apparent that past strong growth had masked slowing productivity growth and deteriorating competitiveness.

Figure 2.
Figure 2.

Namibia: An Economy Rebalancing

Citation: IMF Staff Country Reports 2019, 295; 10.5089/9781513513904.002.A001

Sources: Namibia Statistics Agency, Bank of Namibia, Ministry of Finance, and IMF staff calculations.
uA01fig02

Temporary Factors Boosted Investment

(Percent of GDP at constant prices)

Citation: IMF Staff Country Reports 2019, 295; 10.5089/9781513513904.002.A001

Source: NSA.

3. In 2018, the economy contracted further, although at a slower pace (Table 1). Real GDP declined by 0.1 percent (-0.9 percent in 2017), despite a sharp increase in mining production that only partially offset a weak non-mining economy. Private and public investment continued to decline, and with the protracted contraction, unemployment reached post-global crisis highs. The weak economic performance continued in recent quarters, as construction and sale activities contracted further.

Table 1.

Namibia: Selected Economic Indicators, 2015–24

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Sources: Namibian authorities and Fund staff estimates and projections.

Figures are for fiscal year, which begins April 1.

Public and private external debt.

4. While contracting, the economy continued rebalancing and the external position adjusted. The current account deficit in 2018 narrowed further to 2.1 percent of GDP (5 percent in 2017) and the external position was broadly in line with macroeconomic fundamentals and desirable policies (Annex I). Weak imports and rising commodity exports more than offset a decline in SACU receipts, strengthening the current account. However, external vulnerabilities continued to linger. Total external debt remained around 60 percent of GDP (47¼ percent in 2015). Moreover, international reserve coverage remained about 4 months of projected imports, supported by government’s external borrowing and Bank of Namibia (BoN)’s past swap operations3 (Figure 3).

Figure 3.
Figure 3.

Namibia: A Sharp External Adjustment, yet Lingering Vulnerabilities

Citation: IMF Staff Country Reports 2019, 295; 10.5089/9781513513904.002.A001

Sources: Bank of Namibia, Namibia Statistics Agency, and IMF staff calculations.

5. The government implemented fiscal consolidation measures to stabilize the public debt ratio but faced significant headwinds, particularly from lower SACU revenue. In 2016, the government embarked on medium-term consolidation plans and, over the last three years, has reduced non-interest public expenditures by about 10 percent of GDP, largely through reductions in non-wage recurrent spending and capital outlays (Tables 23). However, spending reductions did not fully translate into lower deficit, as they were in part offset by declining domestic and SACU revenue, and increased interest payments. In FY18/19, the government continued containing public spending, but the fiscal deficit increased by about 2 percent of GDP, to 5½ percent, largely because of lower revenue.4 As the deficit remained large, public debt increased to 45¾ percent of GDP (51¾ percent including guarantees). Gross financing needs remained high (about 17 percent of GDP) and were largely financed through domestic market issuances (Figure 4). Against this background, Moody’s and Fitch confirmed Namibia’s sovereign credit rating one notch below investment grade, with a negative outlook.5

Table 2.

Namibia: Fiscal Operations of the Central Government, 2015/16–24/25

(N$ millions)

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Sources: Namibian authorities; and Fund staff estimates and projections. Fiscal year: April-March.

FY16/17 expenditures include domestic arrears incurred in the year and paid in FY17/18. The authorities record arrears at the time of payment.

Includes externally financed project spending not channeled through the state account. For 2017/18 and 2018/19, it also includes capital expenditures originally classified outside the budget (about and 0.7 percent of GDP in FY17/18 and 0.5 percent of GDP in 2018/19.

Includes short-term loans from the central bank

Table 3.

Namibia: Fiscal Operations of the Central Government, 2015/16–24/25

(Percent of GDP)

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Sources: Namibian authorities and Fund staff estimates and projections. Fiscal year: April-March

FY16/17 expenditures include domestic arrears incurred in the year and paid in FY17/18. The authorities record arrears at the time of payment.

Includes externally financed project spending not channeled through the state account. For 2017/18 and 2018/19, it also includes capital expenditures originally classified outside the budget (about and 0.7 percent of GDP in FY17/18 and 0.5 percent of GDP in 2018/19.

Includes short-term loans from the central bank

Figure 4.
Figure 4.

Namibia: Fiscal Consolidation Against Headwinds and Public Debt Still Rising

Citation: IMF Staff Country Reports 2019, 295; 10.5089/9781513513904.002.A001

Sources: Bank of Namibia, NAMFISA, Ministry of Finance, World Bank World Development Indicators, and IMF staff calculations.1/ Healthy life expectancy is a measure of health expectancy that applies disability weights to compute years of life expected.
uA01fig03

Expenditure and Budget Deficit Declining

(Percent of fiscal year GDP)

Citation: IMF Staff Country Reports 2019, 295; 10.5089/9781513513904.002.A001

Source: MoF.

6. Private sector credit and house prices growth decelerated, while private sector indebtedness remained elevated. After years of double digit increases, nominal credit growth to the private sector sharply declined in 2017 and stabilized at around 6.8 percent in 2018.6 With liquidity easing, the deceleration was mostly driven by weak demand from a highly-leveraged private sector and the implementation of some macroprudential measures (Figure 5).7 Weak credit and economic conditions contributed reducing the growth rate in residential house prices to 1.7 percent (9¾ percent average over the past five years). The economic slowdown began affecting the banking sector’s asset quality. Over the last two years, NPLs more than doubled, although from very low levels. More recently, banks have started tightening lending conditions. With government’s financing needs still high, banks’ direct exposures to the public sector continued rising and reached about 10 percent of banks’ total assets (7 percent in 2016).

Figure 5.
Figure 5.

Namibia: Resilient Banking Sector and Decelerating Credit

Citation: IMF Staff Country Reports 2019, 295; 10.5089/9781513513904.002.A001

Sources: Bank of Namibia, Namibia Statistics Agency, First National Bank, World Bank Enterprise Survey, World Bank Findex Survey, and IMF staff calculations.

7. With a still weak economy, headline inflation declined, and the central bank maintained its policy stance unchanged. After averaging 6.2 percent in 2017, headline inflation declined to 4.3 percent in 2018 mostly because of low increases in food prices. Inflation remained subdued in the first months of 2019, reflecting economic slack and limited increases in utility prices. In the context of the currency peg, the BoN left the policy rate unchanged until mid-2019 and broadly in line with the South African Reserve Bank (SARB)’s rate and did not reflect the SARB’s rate increase in November 2018, citing stable inflation and still slowing economic activity.

8. Despite the ongoing rebalancing, fiscal vulnerabilities remain high and structural impediments cloud the prospects for robust growth.

  • Fiscal vulnerabilities. Over the last four years, the public debt ratio has almost doubled and remains on a rising path. Government’s gross financing needs were largely met on the domestic market, deepening the linkages between the financial sector and the government. Moreover, large external amortizations are expected in the coming years.

  • Tamed long-term growth prospects. Strong growth early in the decade, in part due to one-off factors, masked deteriorating trends in productivity growth and in external competitiveness, and a decline in potential growth. With tamed long-term growth prospects, in the absence of policy action, the economy will be unable to generate meaningful gains to reduce unemployment and inequality.

uA01fig04

Government Debt Rising

(Percent of fiscal year GDP)

Citation: IMF Staff Country Reports 2019, 295; 10.5089/9781513513904.002.A001

Sources: BoN, MoF, and IMF staff calculations.

Outlook and Risks

9. A slow recovery, the need for fiscal adjustment to preserve debt sustainability, persistent inequalities, and structural impediments to growth point to a challenging outlook. Real GDP is projected to contract by about 0.2 percent in 2019, as a poor rainy season and a temporary reduction in diamond production weigh on a still tentative recovery. Growth is expected to turn positive in 2020 and gradually strengthen over time to converge to a long-run rate of about 3 percent that is too low to produce the improvements in per capita income experienced in the past. As the economy recovers, headline inflation is projected to rise gradually and remain below 6 percent. Under staff’s baseline scenario, which assumes that the government broadly delivers the FY19/20 budget target with no further adjustment afterward, the public debt ratio would continue rising. Government’s gross financing needs would remain large (about 18 percent of GDP), possibly crowding out private sector credit and posing funding risks. On the positive side, buoyant mineral exports and more stable SACU receipts would stabilize the current account deficit at around 4 percent of GDP, although international reserve coverage would decline as external debt coming due is assumed to be partially redeemed (Table 4). Both fiscal and external accounts will continue to heavily depend on SACU receipts, which remain critical to preserve macroeconomic stability.

Table 4.

Namibia: Balance of Payments, 2015–24 /1

(US$ millions, unless otherwise indicated)

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Sources: Namibian authorities and Fund staff estimates and projections.

Namibia adopted BPM6 in 2016 and revised BOP statistics back to 2009.

Table 5.

Namibia: Monetary Accounts, 2015–24 1/

(N$ millions, unless otherwise indicated)

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Sources: Namibian authorities and Fund staff estimates and projections.

End of period.

Including valuation.

Table 6.

Namibia: Financial Sector Indicators, 2010–2019

(Percent, unless otherwise indicated)

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Sources: Bank of Namibia and IMF staff estimates.

Before taxes.