Namibia: Request for Purchase Under the Rapid Financing Instrument—Press Release; Staff Report; and Statement by the Executive Director for Namibia
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International Monetary Fund. African Dept.
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Publication Date:
12 Apr 2021
eISBN:
9781513576923
ISBN:
9781513576923
Language:
English
Keywords:
response plan; financial support; emergency import; procurement contract; BOP shock; COVID-19; Global
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Request for Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for Namibia

Abstract

Request for Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for Namibia

Context and Background

1. A second wave of the COVID-19 outbreak severely hit Namibia in late 2020. Namibia reported its first COVID-19 case o n March 13, 2020. The authorities swiftly adopted measures to contain the contagion, which was initially limited. A national state of emergency was declared, land and aerial borders were closed, and a strict country-wide lockdown was implemented. After the initial outbreak peaked in August, restrictions to cross-border and intra-country movements were lifted and the economy started re-opening. However, a more severe second wave hit Namibia in late 2020, with COVID-19 infection rates increasing fivefold. The number of new confirmed cases sharply increased, with the total number reaching about 36,366 (about 1 ½ percent of the population) at mid-February 2021. A national curfew was re-instated in late December 2020.

Figure 1.
Figure 1.

Namibia: Evolution of the COVID-19 Outbreak

Citation: IMF Staff Country Reports 2021, 076; 10.5089/9781513576923.002.A002

Sources: WHO Coronavirus Disease (COVID-19) Dashboard.

2. The Namibian economy was already in a weak position when it faced the COVID-19 shock. During 2017–19, Namibia’s real GDP growth was negative (-0.5 percent, on average). This reflected the impact of fiscal consolidation, decelerating private and public investment, and a severe drought. Despite the authorities’ efforts to reduce non-interest public expenditures by about 5 percent of GDP during 2017–19, weak SACU tax revenues led to large fiscal imbalances and public debt increased rapidly, reaching 60 percent of GDP at end-2019. International reserves increased to 5.3 months of import cover but remained at 15.2 percent of GDP at end-2019, below the adequacy level for market-access economies.1 Unemployment was high (a bout 20 percent), particularly among the youth (39 percent), and inequality continued to be one of the highest in the world (Figure 4).

Figure 2.
Figure 2.

Namibia: COVID-19 Crisis: Impact on Tourism

(number of flights, 7 days moving average)

Citation: IMF Staff Country Reports 2021, 076; 10.5089/9781513576923.002.A002

Sources: FlightRadar24; and IMF staff estimates.
Figure 3.
Figure 3.

Namibia: The Impact of the COVID-19 Pandemic

Citation: IMF Staff Country Reports 2021, 076; 10.5089/9781513576923.002.A002

Sources: Bank of Namibia, Ministry of Finance, INS, Haver Analytics, and IMF staff calculations.
Figure 4.
Figure 4.

Namibia: Indicators of Poverty, Inequality and Employment

Citation: IMF Staff Country Reports 2021, 076; 10.5089/9781513576923.002.A002

Sources: World Bank, ILO, Namibia Labor Force Surveys, IMF FAD Social Protection & Labor – Assessment Tool (SPL-AT), and IMF staff calculations.

Impact of the Covid-19 Pandemic and Outlook

A. The Impact of the Pandemic: Global Spillovers and the Local Outbreak

3. The economy sharply contracted due to the impact of the COVID-19 pandemic, taking a toll on employment. Real GDP plummeted by 10 and 10.5 percent (y-o-y) in the second and third quarter of 2020, respectively, owing to negative global spillovers of the pandemic and the impact of local containment measures. As Namibia’s external demand weakened, mining and tourism activities contracted. Containment measures negatively impacted non-mining economic activity, with the deepest contraction recorded in hotels and restaurants, manufacturing, retail trade, and transport. Despite an employment protection program (Box 1), close to 9,000 Namibians (1¼ percent of 2018 total employed), lost their jobs between April and September 2020. Headline inflation declined to 2.3 percent (average, y-o-y) in 2020, while food prices inflation was sustained.

4. While the pandemic has adversely affected Namibia’s external position in 2020, temporary factors have moderated the impact on international reserves. A trade deficit of 8.7 percent of GDP was recorded at end -2020. Due to a weaker external demand, diamonds and no n-mineral exports contracted by 34 and 30 percent (y-o-y). Furthermore, tourism receipts sharply declined by 61 percent (y-o-y) at end-September 2020. In parallel, imports fell by 19 percent (y-o-y) at end-2020, reflecting the domestic economic downturn and lower oil prices. Preliminary data point to a current account surplus in 2020, supported by the pick -up in SACU transfers (¶5). Negative FDI net inflows, the redemption of the JSE bond and outward financial institutions’ investment led to net financial outflows. Gross international reserves stood at US$2.16 billion at end-2020, equivalent to 4.7 months of imports coverage (5.3 months of imports coverage at end-2019), supported by large valuation gains and the Bank of Namibia’s purchase of foreign exchange. The real effective exchange rate depreciated by -4.3 percent (y-o-y) at end-2020, mostly driven by the depreciation of the South African rand against the US dollar.

5. The fiscal position has deteriorated, reflecting a shortfall in tax revenues and spending pressures due to the COVID-19 crisis. The overall fiscal deficit widened to 5.5 percent of GDP in the first half of FY20/21. Tax revenues declined by about 16 percent (y-o-y), with the negative impact of the pandemic partially offset by a 15 percent (y-o-y) increase in SACU tax revenues.2 Mining tax revenues decreased by 22 percent (y-o-y), as global spillovers weighed on production and exports (¶3 and ¶4). Furthermore, non-mining tax revenues declined by 26 percent (y-o-y), owing to the economic downturn. In parallel, public spending increased by 17 percent (y-o-y), reflecting the implementation of the authorities’ COVID-19 emergency response package (¶13). Large financing needs were covered through government deposit withdrawals, a pick-up in government domestic borrowing from the financial sector and the delayed disbursement of the 2019 African Development Bank (AfDB) budget support loan (¶11).

6. Namibia’s financial sector has been resilient so far, but risks have increased.3 The banking system entered the COVID-19 crisis with a liquid and well-capitalized position. However, the reduction in interest rates (¶16) has started to weigh on banks’ profitability (Table 5). Furthermore, the ratio of non-performing loans increased to 6.4 percent at end-December 2020 (from 4.6 percent at end-2019). Depository corporations’ lending to the government picked-up by 29 percent (y-o-y), reflecting larger budgetary financing needs, and banks’ exposure to sovereign risk increased, with government securities to total assets at 11.5 percent at end-September (11.2 percent at end-2019). Banks’ credit to the private sector increased by 0.9 percent at end-November (y-o-y). Non-bank financial institutions have so far weathered the shock as lower contributions and premiums due to the economic downturn and relief measures (Box 1) were offset by sustained investment income.

Table 1.

Namibia: Selected Economic Indicators, 2015–2026

article image
Sources: Namibian authorities and Fund staff estimates and projections.

Figures are for fiscal year, which begins April 1.

Public and private external debt.

Table 2.

Namibia: Balance of Payments, 2015–20261/

(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 3a.

Namibia: Fiscal Operations of the Central Government, 2015/16–2026/27

(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; similarly, expenditures in FY19/20 include domestic arrears incurred in the year and paid in FY20/21.

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 3b.

Namibia: Fiscal Operations of the Central Government, 2015/16–2026/27

(Percent of GDP)

article image
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; similarly, expenditures in FY19/20 include domestic arrears incurred in the year and paid in FY20/21.

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 4.

Namibia: Monetary Accounts, 2015–20261/

(N$ millions, unless otherwise indicated)

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Sources: Namibian authorities and Fund staff estimates and projections.

End of period.

Including valuation.

Table 5.

Namibia: Financial Sector Indicators, 2010–20

(Percent, unless otherwise indicated)

article image
Sources: Bank of Namibia and IMF staff estimates. 2020 Q3 data is preliminary.

Before taxes.

B. The Short-Term Outlook

7. The Namibian economy is expected to have sharply contracted in 2020 and the recovery is set to remain subdued in 2021. Real GDP growth is expected to be negative at -7.2 percent in 2020, the deepest recession since the independence. Mining production is expected to have declined by 12 percent, reflecting a weaker external demand. 4 Non-mining activities are expected to also have sharply contracted, with the largest decline in hotels and restaurants, manufacturing and retail trade activities. Staff expects the economic recovery to remain subdued in 2021 as the local outbreak continues, with real GDP growth projected at 2.2 percent. This would be supported by a gradual recovery in mining and non-mining activities, as Namibia’ external demand strengthens and under the assumption that no major lockdown measures are adopted to address the second COVID-19 wave. However, the COVID-19 crisis would lead to lasting output losses as real output is expected to remain below its pre-pandemic level through 2023.

Figure 5.
Figure 5.

Namibia: Contribution to Real GDP Growth

Citation: IMF Staff Country Reports 2021, 076; 10.5089/9781513576923.002.A002

Sources: Namibian authorities, and IMF staff estimates.

8. Due to the impact of the COVID-19 shock, Namibia’s external position is expected to deteriorate in 2021, triggering an urgent balance of payments need. A current account deficit of 7 percent of GDP is expected in 2021, reflecting the continued impact of the COVID-19 shock. Emergency imports would arise to respond to the second wave of the health crisis and acquire vaccines and needed infrastructure for vaccination deployment. Exports and tourism receipts would remain below pre-crisis levels, as the second wave delays the recovery. Furthermore, SACU transfers are expected to sharply decline in 2021, as the continuation of the pandemic undermines the recovery in the region. This will be only partially offset by an anticipated improvement in net financial inflows. Staff estimates a balance of payment (BOP) financing needs of US$527 million (4.7 percent of GDP) in 2021 (Text Table 1). The purchase under the RFI would contribute to closing about 52 percent of the anticipated BOP gap in 2021. It will also help catalyze financial support from the AfDB.

Text Table 1.

Namibia: Balance of Payments: Impact of the COVID-19 Pandemic

(In millions of U.S. dollars)

article image
Source: IMF staff calculations.

9. Risks to the outlook are tilted on the downside. A stronger and more prolonged negative impact of the pandemic on Namibia’s external demand and domestic consumption and activity, could weaken growth in 2021 and beyond. A resumption of lockdown measures for a sustained period of time to contain the second wave of the outbreak, a delayed vaccine roll-out, or limited effectiveness of the vaccines to the South African variant could undermine the anticipated recovery in 2021 and add to fiscal pressures. Lower-than-anticipated SACU revenues in FY22/23 and over the medium-term would worsen the fiscal and external positions and increase financing needs. On the positive side, a rapid roll-out of vaccines could lead to a faster-than expected rebound in external demand, supporting tourism activity and the recovery of the domestic economy.

Policy Issues and Discussions

A. Fiscal Policy: Responding to the COVID-19 Emergency

10. The authorities are implementing a comprehensive Economic Stimulus and Relief Package to respond to the COVID-19 emergency and mitigate its severe socio-economic impact. Staff supports the authorities’ package to respond to the COVID-19 crisis, adopted in the FY20/21 budget, as it is well-targeted to contain the outbreak and save lives, protect the most vulnerable from the impact of the crisis, and support the private sector and protect livelihoods (Box 1). The budgetary cost of the authorities’ COVID-19 response plan is estimated at 3.6 percent of GDP and its implementation has advanced well (Box 1). Key components of the COVID-19 fiscal response are: i) emergency health and education spending (0.7 percent of GDP) to deliver COVID-19 diagnostics and treatment and improving sanitation in public schools to contain the outbreak; ii) a new targeted cash transfer program (0.4 percent of GDP)—the Emergency Income Grant—to support unemployed and low-income individuals and households; and iii) supporting firms and protecting jobs through a wage subsidy program for employers in the sectors most affected by the pandemic, accelerating the repayment of government arrears to the private sector, temporarily postponing tax payments, and setting-up public guarantee loan schemes for firms and individuals (¶20). 5

Text Table 2.

Namibia: Fiscal Costs of the COVID-19 Response Plan

(N$ million, percent of GDP)

article image

11. The authorities are taking steps for acquiring COVID-19 vaccines and deploying a vaccination campaign, for a total cost of 1 percent of GDP. The authorities have prepared a plan for the deployment of the COVID-19 vaccination campaign, targeting to cover 60 percent of the population. This is expected to generate an overall fiscal cost of US$115 million (1 percent of GDP), of which 0.4 and 0.5 percent of GDP in FY20/21 and FY21/22, respectively. The overall cost to acquire the COVID-19 vaccines is estimated at US$37 million (0.3 percent of GDP) (Text table 3), of which US$12 million (0.1 percent of GDP) to be incurred by end-FY20/21, as the vaccines under the COVAX scheme are delivered to cover 20 percent of the population.6 The remainder is expected to be incurred in FY21/22 to immunize additional 40 percent of the population. Furthermore, fiscal costs of US$77 million (0.7 percent of GDP) are expected for the deployment of the vaccination campaign, in particular for the purchase of needed infrastructure and capacity development and training of medical personnel. Out of this envelope, US$51 million (0.4 percent of GDP) are anticipated to be incurred in FY2020.

Text Table 3.

Namibia: Fiscal Costs of the COVID-19 Vaccination Campaign

(USD Millions, percent of GDP)

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Source: Namibian authorities and IMF estimates using the WHO framework and Namibia country specific data. The cost in percent of GDP is calculation based on 2021 US$GDP.

12. Staff supports a temporary widening of the fiscal deficit to respond to the crisis and welcomes the authorities’ efforts to create fiscal space for emergency spending. A drop in tax revenues (¶5), the implementation of the COVID-19 response package (¶10), the purchase of vaccines and the deployment of the vaccination campaign (¶11) are expected to widen the overall fiscal deficit to 9 percent of GDP in FY20/21. Staff welcomes the authorities’ efforts in the October 2020 mid-year budget review to reallocate non-priority spending—0.3 and 0.1 percent of GDP in goods and services and public investment—to create fiscal space for emergency spending. Despite this, a fiscal financing gap of 3.7 percent of GDP is expected in FY20/21. The RFI purchase would cover 2.3 percent of GDP and contribute to contain domestic budgetary borrowing and preserve banks’ provision of credit to the economy. It is also expected to catalyze additional financial support from development partners, with the AfDB to provide a budget support loan in the amount of ZAR 2,500 million (1.4 percent of GDP), to b e disbursed by end-March 2021 and a similar amount in FY21/22.7

Text Table 4.

Namibia: Fiscal Financing Gap in FY20/21

(Percent of GDP)

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Source: IMF staff calculations.

13. Public finance governance mechanisms will ensure the appropriate use and monitoring of resources to address the COVID-19 crisis. All COVID-19 spending was appropriately budgeted and execution progress were presented in the FY20/21 mid-year budget review. A further progress report will be published in the FY21/22 budget and a final one will be published on the website of the Ministry of Finance by September 2021. All awarded COVID-19 related procurement contracts, including the names of the entities and beneficial owners, will be published online by end June 2021 8 A full audit of COVID-19 spending (including ex-post validation of goods and services procured) will also be conducted and published online by the Auditor General, within 12 months of the end of FY20/21 (LOI ¶5). Finalizing the Public Financial Management Bill by end-2021, to be adopted it by end-2022 will further strengthen Namibia’s public financial management system.

COVID-19 Economic Stimulus and Relief Package

A comprehensive Economic Stimulus and Relief Package was approved in May 2020, in the FY20/21 budget, to respond to the COVID-19 crisis. Key elements of the COVID-19 response plan are: i) stepping- up health and education spending to address the health emergency; ii) protecting the most vulnerable from the impact of the crisis; and iii) supporting the private sector and protecting jobs. The 2020/21 mid-year budget review, approved in October 2020, points to good progress in the implementation of the COVID-19 response plan.

Emergency health and education spending were budgeted to respond to the COVID-19 outbreak. Health spending of N$727 million (0.4 percent of GDP) was budgeted to respond to the health emergency. About 96 percent of planned emergency health spending has been executed, notably to acquire protective equipment and pharmaceuticals, conduct testing and contact tracing, and set-up quarantine facilities and step-up health personnel. Furthermore, education spending in the amount of N$600 million (0.3 percent of GDP) aims at promoting sanitation and improving health facilities in public schools throughout the country. About 87 percent of the planned COVID-19 education spending was executed at end-January 2021. Finally, N$80 million (0.04 percent of GDP) was allocated to improve water provisions and infrastructure and has been fully executed.

Social safety nets were strengthened to protect the most vulnerable from the impact of the crisis. A new social program – the Emergency Income Grant (EIG) –was rolled out in April 2020 to support low- income individuals and preserve their living standards during the COVID-19 crisis. The EIG (N$772 million, equivalent to 0.4 percent of GDP) targets about 800,000 individuals (about 35 percent of the Namibian population). Under the EIG, a one-off cash transfer (N$750 per person) is provided to eligible individuals who are: i) unemployed (as of February 1 st , 2020) and are not benefitting from other social grants; or ii) operating in the informal sector and having experienced a loss of income. Access to the program is based on a self- nomination and payment is realized thorough mobile banking modalities. As of end-January 2021, about 770,000 individuals have benefited from the grant and 75 percent of the envelope was executed.

Furthermore, a comprehensive set of measures aim at supporting the private sector and protect jobs. The Employer Wage Subsidy Program aims at supporting firms and preserve jobs in the sectors most affected by the pandemic. Notably, employers in the sectors of tourism, aviation and construction are eligible to receive a subsidy to cover a share of their wage bill for a three months period. In parallel, beneficiary employers commit not to retrench staff for the same period and not to reduce salaries by more than 50 percent. The program was budgeted for N$400 million (0.2 percent of GDP) and covered about 4,000 employers and 15,600 employees at end-January 2021, for an overall cost of N$100 million. Furthermore, the repayment of arrears to the private sector (on VAT refunds and to government suppliers) for a total of N$3.8 billion (2.1 percent of GDP), was accelerated and almost the full amount has been paid. A government guarantee loan scheme for firms, notably SMEs, for a total of N$2.4 billion (1.3 percent of GDP) was introduced. Finally, banks were allowed to grant a loan payment moratorium to firms and individuals (payment holidays) from 6 up to 24 months.

In parallel, temporary financial sector measures were implemented to support liquidity and provision of credit to the economy. In parallel with a more accommodative monetary policy stance, the Bank of Namibia temporarily eased regulatory requirements for banks. Thus, the determination on liquidity risk management was relaxed. The capital conservation buffer rate was reduced to 0 percent for at least 24 months. Furthermore, the effective date of implementation of the 25 percent single borrower limit and concentration risk limit was postponed. Furthermore, NBFIs were required to grant premium and contribution holidays/reductions in most affected sectors, notably the tourism sector.

14. Staff supports the authorities’ medium-term fiscal consolidation strategy to preserve fiscal and debt sustainability. Namibia’s public debt will sharply increase to 64.6 percent of GDP in FY20/21 (from 59.9 percent of GDP in FY19/20), reflecting exceptional budgetary financing needs to respond to the COVID-19 crisis and the real output contraction. Staff underscored that a growth-supporting medium-term fiscal consolidation, which preserves social spending and the provision of essential services to the population, is pivotal to maintain debt sustainability. As the impact of the CO VID-19 crisis subsides, the authorities are committed to orient fiscal policy towards supporting debt sustainability, building on their track-record of implementing fiscal consolidation (¶2). To this end, they adopted in October 2020 a medium-term fiscal consolidation framework to stabilize and then lower the public debt-to-GDP-ratio. This builds on gradually phasing-out the exceptional COVID-19 s pending and implementing fiscal reforms to increase expenditure efficiency, strengthen tax administration, and mobilize additional tax revenues. Notably, the authorities are committed to:

  • Containing the wage bill by: i) freezing nominal wage increases (no inflation adjustment) in FY21/22; ii) allowing for natural attrition, except in priority sectors; and iii) implementing a targeted early retirement scheme during FY22/23-FY23/24. Overall, this is expected to generate cumulative fiscal savings of about 2.1 percentage points of GDP over FY21/22– FY23/24. Staff noted that frontloading the planned public sector early retirement scheme may serve as contingency measure, in case of lower-than-anticipated SACU tax revenues;

  • Improving the performance and management of state-owned enterprises (SOEs), with support from the AfDB, and divesting from selected SOEs. Notably, the Cabinet approved the liquidation of the state-owned airline in February. Preliminary estimates suggest that the SOEs reform could lead fiscal savings of about 0.7 percent of GDP over FY21/22-FY22/23 and privatization receipts of 1.7 percent of GDP in FY21/22, which will provide additional non-debt creating budgetary financing;

  • Strengthening tax administration to support mobilizing additional revenues, including through the operationalization of the Namibia Revenue Agency. In this context, staff highlighted the importance of improving filing and payment compliance, broadening the tax base, and strengthening profit shifting and base erosion regulation.

15. Namibia’s debt dynamics remain sustainable, but vulnerabilities have increased due to the COVID-19 shock and risks are significant. Staff’s debt sustainability analysis (Annex I) assumes a modest recovery of the economy in 2021 and the implementation of a medium-term growth-supporting fiscal consolidation, reflecting the broad lines of the authorities’ fiscal strategy. Namibia will continue to face significant financing challenges ahead, with the repayment of the 2010 Eurobond in US$ (US$500 million) falling due and SACU tax revenues expected to sharply decline by about 3 percentage points of GDP in FY21/22 and remain subdued in FY22/23.9 Thus, gross financing needs would gradually decline but remain large over the medium-term. Public debt-to-GDP ratio is expected to peak at 70.2 percent in FY22/23 and then gradually decline. Notably, the authorities are planning to repay the 2010 Eurobond through issuance of domestic debt. A stronger and more protracted impact of the COVID-19 crisis, lower-than-anticipated SACU revenues over the medium term, or delays in the planned medium-term fiscal consolidation would worsen debt dynamics. Furthermore, the debt amortization profile carries significant rollover risks. On the other hand, a faster-than-anticipated recovery of the Namibian economy would improve the debt ratio. Active debt management, including pre-financing, could allow the authorities to take advantage of favorable international market conditions.

B. Monetary and Exchange Rate Policy: Maintaining Liquidity and Preserving the Currency Peg

16. Monetary policy will continue to ensure adequate liquidity in the financial sector to support credit to the economy while maintaining the currency peg. The Bank of Namibia (BoN) has gradually lowered the policy rate since mid-March 2020 (from 6.25 to 3.75 percent), following the South Africa Reserve Bank’s (SARB) rate cut and remaining broadly aligned with SARB’s interest rate. Staff supports the authorities’ easing of the monetary policy stance and preserving the currency peg, and the central bank’s temporary liquidity relief measures and relaxation of the capital conservation buffer rate to support banks’ liquidity and provision of credit (Box 1). Developing a liquidity forecasting framework, with the support of IMF technical assistance, will improve liquidity management by strengthening liquidity forecasting and instituting a comprehensive operational framework.

17. External buffers will be used to respond to the COVID-19 shock. Namibia has gradually strengthened its external buffers against shocks in recent years. In view of this, staff supports using part of these buffers to respond to the COVID-19 shock (Text Table 1). However, in the absence of additional financing, international reserves would fall to 3.7 months of import coverage, well below the IMF ARA metrics for market access countries (¶2). The purchase under the RFI (¶8) and (¶21) would support undertaking COVID-19 related emergency imports while rebuilding external buffers against adverse shocks and supporting the currency peg. The second tranche of the AfDB loan and recovering mining exports and tourism receipts will strengthen external buffers over the medium-term.

C . Financial Sector: Preserving Stability

18. Preserving financial stability while supporting the private sector is key. Due to the sharp economic downturn, banks’ earnings and asset quality could further deteriorate as borrowers’ capacity to service loans weakens and the loan payment moratorium is lifted (Box 1). In response, the BoN has strengthened reporting requirements by banks and is planning to conduct an assessment of asset classification, suspension of interest and provisioning for two systemic banks. Finalizing the banking act will strengthen banks’ regulatory framework and resolution framework. Recent easing of regulatory requirements (Box 1) will support liquidity and supply of credit to the economy. Staff called for those measures to be temporary and recommended to maintain appropriate loan classification and provisioning, notably in relation to the debt repayment moratorium. Staff supported introducing additional safeguards against the risk of unrecognized losses on banks’ balance sheets. Staff also noted that fiscal risks may arise from contingent liabilities entailed by the public guarantees loan schemes (Box 1), which need to be closely monitored. Strengthening supervision of non-bank financial institutions, including by increasing stress-testing capacities, will enhance monitoring of portfolio quality and credit risks. Finally, the promulgation and swift implementation of the pending regulatory bills for the non-bank financial sector (NAMFISA bill, Financial Institutions and Markets bill, and Financial Services Adjudicator) will support moving toward risk-based supervision.

Access and Capacity to Repay

A. Access Level and Modalities

19. The authorities are requesting a purchase under the RFI equivalent to 100 percent of quota (SDR 191.1 million or about US$ 273 million). The COVID-19 pandemic has sharply deteriorated Namibia’s short-term outlook, giving rise to an urgent BOP need (¶8):

  • Staff considers an RFI an appropriate instrument to support Namibia at the current juncture: (i) the urgent BOP financing need was triggered by the COVID-19 shock and it is expected to be absorbed within 12 months without major changes to the authorities’ policy plans; (ii) the authorities’ intended policies as detailed in their homegrown fiscal consolidation framework approved in October 2020 are adequate to mitigate risks to fiscal and debt sustainability; and (iii) the authorities have a track record in implementing fiscal consolidation. Thus, the RFI purchase will provide urgent support to address the short-term BOP need triggered by a sudden exogenous shock. The authorities have implemented fiscal consolidation during 2017–19 to contain the build-up of public debt. Due to the COVID-19 shock, they had to temporarily deviate from their planned fiscal stance to respond to the crisis. The authorities are committed to resume growth-supporting fiscal consolidation to preserve debt sustainability, once the COVID-19 crisis subsidies. If downside risks materialized leading to larger-than-anticipated financing needs, further support could be considered under a UCT arrangement.

  • The proposed access is calibrated to the BOP financing need, anticipated financing from development partners, and the need to rebuild external buffers against shocks. The purchase under the RFI will fill about 52 percent of the balance of payments need. It will also help catalyze financial support from the AfDB (¶11). Due to the impact of the COVID-19 shock, international reserves would sharply decline to 3.7 months of import coverage at end-2021, well-below the IMF ARA metrics for market access countries (¶8 and ¶17). The proposed purchase under the RFI will contain the decline in reserves to 4.2 months of import coverage and thus strengthen external buffers against further shocks and contribute to supporting the currency peg. Staff supports the RFI purchase to address the BOP need and to be made in the form of budget support to provide space for the needed interventions to respond to the COVID-19 pandemic and mitigate its severe socio-economic impact (¶11).

  • The timing of the RFI proposal has been tailored to the authorities’ adoption of a medium-term fiscal consolidation strategy. Given Namibia’s sizable debt vulnerabilities, the authorities sought to develop and adopt a medium-term fiscal consolidation framework to preserve debt sustainability, a key element of the policy package supported under the RFI.

B. Capacity to Repay and Safeguards Assessment

20. Namibia’s capacity to repay its obligations to the Fund is adequate. Namibia has no outstanding credit from the Fund. Its capacity to repay the Fund is adequate, in view of the favorable medium-term growth outlook, and the authorities’ commitment to sound macroeconomic policies and a sustainable debt (Table 6). A more protracted impact of the COVID-19 crisis and delays in the implementation of the planned fiscal consolidation would worsen Namibia’s debt dynamics. Given that the financing under the RFI will be used in its entirety to provide budget support, the authorities have committed to signing a Memorandum of Understanding between the Ministry of Economy and Finance and the BoN on their respective roles and responsibilities for servicing financial obligations to the Fund.

Table 6.

Namibia: External Financing Requirements and Sources

(Millions of U.S. Dollars)

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*Includes loans, net acquisition of financial assets, currency and deposits, trade credits and advances. Sources: Namibian authorities and Fund staff estimates and projections.

21. The authorities are committed to undertake a safeguards assessment before Board approval of any subsequent arrangement to which the safeguards policy applies. The authorities will authorize Fund staff to hold discussions with the central bank’s external auditors, and to have access to the central bank’s external audit reports.

Staff Appraisal

22. The COVID-19 pandemic has sharply deteriorated Namibia’s short-term macroeconomic outlook, giving rise to urgent BOP and fiscal financing needs. The economy is expected to have sharply contracted in 2020 due to the impact of the pandemic and the recovery is set to remain subdued in 2021. Measures to contain the outbreak have negatively impacted economic activity, weighing on tax revenues. Furthermore, worsening global conditions have hindered mining production and exports, tourism receipts and investment inflows. The near -term outlook remains uncertain, with risks tilted on the downside.

23. The authorities’ policy response to address the COVID-19 emergency and mitigate its severe socio-economic impact has been timely. The authorities are implementing a comprehensive and well-targeted fiscal package to contain the local outbreak, protect the most vulnerable from the impact of the crisis, and support the private sector and protect jobs. They have also adopted a plan for the deployment of the vaccination campaign. Staff supports a temporary widening of the fiscal deficit to respond to the health emergency, including the purchase of vaccines and infrastructure for the vaccination campaign, and mitigate its socio-economic impact of the crisis. In this regard, staff welcomes the authorities’ efforts to create fiscal space for emergency spending. External buffers will be used to partially absorb the COVID-19 BOP shock. Monetary policy will continue maintaining adequate liquidity in the financial sector to support credit to the economy while supporting the currency peg. Preserving financial stability, while supporting private sector activity, will be important.

24. Public finance governance mechanisms will support an appropriate use and monitoring of resources to address the COVID-19 crisis. All COVID-19 spending was appropriately budgeted and execution progress published. An execution report will be published in the FY21/22 budget, and a final report by September 2021. Furthermore, the authorities will publish all awarded procurement contracts for COVID-19 related spending, including the names of the entities and beneficial owners, by end-June 2021. A full audit of COVID-19 spending will also be published online by 12 months of the end of FY20/21. Furthermore, the Public Financial Management bill will be finalized by end-2021.

25. Determined implementation of the authorities’ fiscal strategy to preserve medium-term fiscal and debt sustainability will be needed, as the impact of the COVID-19 crisis subsides. Staff supports the authorities’ medium-term fiscal consolidation strategy aimed at preserving fiscal and debt sustainability. A carefully designed medium-term fiscal consolidation, supporting growth and preserving social spending and adequate provision of essential services to the population, is pivotal. Exceptional COVID-19 spending will be gradually phased-out, containing the wage bill and improving the performance and management of SOEs would increase expenditures efficiency, and strengthening tax administration would support mobilizing additional revenues. Namibia’s debt dynamics remains sustainable but risks to the debt outlook are significant.

26. Against this backdrop, staff supports the authorities’ request for a purchase under the RFI in the amount of SDR 191.1 million (100 percent of quota). In view of the urgent balance of payments need triggered by the COVID-19 shock and the authorities’ existing and prospective policies to address this external shock, staff supports the purchase under the RFI, that will also catalyze additional financing from development partners. Given the large fiscal financing needs to respond to the COVID-19 emergency, staff supports the authorities’ request that the purchase be made in the form of budget support.

Table 7.

Namibia: Indicators of Capacity to Repay the IMF, 2021–26

(As of January 07, 2021; SDR millions, unless otherwise indicated)

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Source: IMF staff estimates and projections

Annex I. Debt Sustainability Analysis

The COVID-19 crisis has severely deteriorated Namibia’s short-term macroeconomic outlook, with real output expected to sharply contract in 2020 and the external and fiscal positions to worsen. The authorities had to halt the fiscal consolidation achieved in recent years to accommodate their COVID-19 policy response. As a result, public debt and financing needs are expected to sharply increase in the near term, beyond the MAC DSA benchmarks for emerging markets. In view of this, the authorities have adopted in the October 2020 mid-year budget review a medium-term fiscal consolidation framework to preserve debt sustainability. Namibia’ debt dynamics are sustainable, though vulnerabilities have increased due to the COVID-19 shock and risks to the debt outlook are significant. Gross financing needs will remain large in the short-term and then gradually decline. This assumes a gradual recovery of the Namibian economy in 2021 and the implementation of the planned medium-term growth-supporting fiscal consolidation, underpinned by containing the wage bill and a reform of SOEs. A stronger and more protracted impact of the COVID-19 crisis, delays in the implementation of the planned medium-term fiscal consolidation, or shortfalls in the planned debt swap to repay the 2010 Eurobond due in FY21/22 would increase financing needs and deteriorate debt dynamics. However, a faster-than-anticipated recovery of the Namibian economy would improve it.

A. Public Debt1

Background

1. While the public debt ratio has been rising since 2010, the pace of the increase had slowed down in the last years, reflecting the authorities’ fiscal consolidation efforts. During FY10/11–FY19/20, Namibia’s public debt-to-GDP ratio increased from 16 per cent of GDP to 59.9 percent of GDP, as the primary deficit averaged about 4.1 percent of GDP. Sharp increases in current spending, particularly the wage bill and transfers to SOEs, contributed to large fiscal deficits and to increasing debt. By FY15/16, public debt exceeded the authorities’ own debt management ceiling (35 percent of GDP). In response, the authorities started to implement in FY16/17 a medium-term fiscal consolidation plan, which reduced primary spending by about 8 percent of GDP by FY19/20. Despite the authorities’ efforts to contain public spending, large primary deficits were recorded due to subdued growth and volatile SACU tax revenues. Moody’s downgraded Namibia to Ba3 in December 2020, to account for the impact of the COVID-19 crisis.

2. In response to rising gross financing needs, the authorities have been diversifying their funding sources and borrowing instruments, increasing external borrowing and extending maturities of domestic debt. During FY16/17–FY19/20, gross financing needs averaged 19.2 percent of GDP, above the 15 percent of GDP MAC DSA benchmarks for emerging markets. In 2015, they issued a US$750 million ten-year Eurobond; during 2015–2016, they issued rand-denominated bonds for about R2 million; and in 2017–20 used an AfDB’s budget support facility. At the same time, they expanded their domestic debt maturity structure with 30-year instruments. The domestic market remains the government’s main source of financing. Banks tend to buy short-term debt, while non-bank financial institutions focus on the long-term fixed rate and, to a lesser extent, inflation-indexed debt instruments. Moreover, the authorities enforced in 2018 a regulatory change increasing the minimum required investment in domestic assets for pension funds and other institutional investors from 35 to 45 percent of assets. This resulted in increased domestic market absorption and a tighter financial-sovereign nexus that are expected to continue in the near to medium term along with large projected financing needs.

3. Namibia’s public debt amortization schedule carries significant rollover risks. In FY19/20, domestic short-term debt was about 44 percent of domestic debt and 29 percent of total debt. While the recent recourse to external borrowing has reduced reliance on short-term debt and extended the average debt maturity, it has created spikes in the amortization needs, notably in FY21/22 and FY25/26 when the 2010 Eurobond (US$500 million) and 2015 Eurobond (US$750 million), respectively, will mature. This change in composition has also increased foreign exchange risks, although non-rand foreign currency debt remains low at about 17 percent of total debt in FY19/20. The authorities are planning to repay the 2010 Eurobond, while reducing exchange rate risk, through the issuance of domestic debt.

Namibia: Long-term Debt Amortization Profile

(Percent of FY GDP)

Citation: IMF Staff Country Reports 2021, 076; 10.5089/9781513576923.002.A002

Source: IMF staff estimates.

Outlook and Risks

4. Namibia’s debt dynamics are sustainable but risks to the debt outlook are significant. Public debt will sharply increase to 64.6 percent of GDP in FY20/21, reflecting the widening of the fiscal deficit to accommodate the COVID-19 crisis response and an anticipated contraction of real output by 7.2 percent. 2 Moving forward, Namibia will continue facing significant financing pressures, with the repayment of the 2010 Eurobond (US$500 million) due in FY21/22 and SACU revenues expected to sharply decline. In view of this, the authorities have adopted in the October 2020 midyear budget review a medium-term fiscal consolidation framework to preserve debt sustainability. A gradual recovery of the Namibian economy and the implementation of the planned medium-term growth-supporting fiscal consolidation will help stabilize debt over the medium term. This will be underpinned by containing the wage bill, improving the performance and management of SOEs and selected divesting. As such, the public debt-to-GDP ratio is expected to peak at 70.2 percent in FY22/23 and then gradually decline to 64.3 percent in FY26. The authorities have a track record of implementing fiscal consolidation during FY16/17–FY19/20. Gross financing needs will gradually decline but remain large over the medium-term. A stronger and more protracted impact of the COVID-19 crisis could further worsen macroeconomic outlook, increase financing needs and worsen debt dynamics.

5. Alternative scenarios and stress analysis point to additional vulnerabilities to macro and contingent liability shocks (Figures A4–A5). An extreme scenario of a combined macro-fiscal s ho ck —entailing shocks to growth and interest rates, and a temporary lower primary balance (which could be triggered by lower SACU revenue)—would result in the debt-to-GDP ratio exceeding 94 percent of GDP in FY23/24 and gross financing needs reaching 33.2 percent of GDP in FY21/22. Similarly, a contingent liability shock (with default of 80 percent on all guaranteed debt, equivalent to 5.4 percent of GDP), combined with contracting real GDP, would lead to a debt level and gross financing needs peaking at 81.6 and 34.7 percent of GDP, respectively, in FY21/22 and FY22/23.

Figure A1.
Figure A1.

Namibia: Public DSA Risk Assessment

Citation: IMF Staff Country Reports 2021, 076; 10.5089/9781513576923.002.A002

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.4/ Long-term bond spread over U.S. bonds, an average over the last 3 months, 13-Oct-20 through 11 -Jan-21.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.
Figure A2.
Figure A2.

Namibia: Public DSA – Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2021, 076; 10.5089/9781513576923.002.A002

Source: IMF Staff.1/ Plotted distribution includes program countries, percentile rank refers to all countries.2/ Projections made in the spring WEO vintage of the preceding year.3/ Not applicable for Namibia, as it meets neither the positive output gap criterion nor the private credit growth criterion.4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis
Figure A3.
Figure A3.

Namibia: Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2021, 076; 10.5089/9781513576923.002.A002

Source: IMF staff.1/ Public sector is defined as central government.2/ Based on available data.3/ Long-term bond spread over U.S. bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r – π(1 +g) – g + ae(1 + r)]/(1+g+π+gπ)) times previous period debt ratio, with r – interest rate; π – growth rate of GDP deflator; g – real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π (1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1 +r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
Figure A4.
Figure A4.

Namibia: Public DSA – Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2021, 076; 10.5089/9781513576923.002.A002

Source: IMF staff.
Figure A5.
Figure A5.

Namibia: Public DSA – Stress Tests

Citation: IMF Staff Country Reports 2021, 076; 10.5089/9781513576923.002.A002

Source: IMF staff.

6. The heat map, which summarizes the risk assessment of Namibia’s debt and gross financing needs (Figure A1), points to significant risks. All shock scenarios for the debt level and gross financing needs flash red, notably reflecting the already high debt level and financing needs under the baseline. Mitigating factors are the large domestic institutional investor base and market appetite for long maturities, the low share of foreign currency debt, and relatively favorable market conditions.

B. External Debt3

7. Namibia’s external debt has been increasing during 2013–2019. The stock of public external debt-to-GDP ratio more than doubled, reaching 20.2 percent of GDP at end-2019, due to both new external borrowing and exchange rate depreciation. Private sector external debt, mostly constituted by loans to fellow enterprises in the mining sector, also increased. Most external debt has long and medium-term maturities. Namibia’s public external debt is mostly owed to commercial creditors (international investors) and multilateral official creditors (Table A1).

Table A1.

Namibia: External Debt Sustainability Framework, 2015–2025

(In percent of GDP, unless otherwise indicated)

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Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollars, g = real GDP growth rate. e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Namibia’s External Debt

(Percent of GDP)

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Sources: BoN, and IMF staff estimates

Namibia: Structure of External Public Debt

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Sources: Namibian authorities; and IMF Staff calculations.

8. Namibia’s external debt is expected to increase in 2020, to then decline over time gradually. External debt would pick-up and reach 81.7 percent of GDP in 2020, with public external debt increasing sharply to 26.2 percent of GDP and private external debt increasing to 55.4 percent of GDP. This would reflect large public external borrowing to fill exceptional budgetary needs to respond to the COVID-19 crisis, the sizable financial outflows and the sharp real output contraction. Starting in 2021, external debt is expected to gradually decline, reaching the pre-COVID-19 crisis level by 2025, along with growth recovery and improvement in the current account position (Table A1). Gross external financing needs are expected to remain large but gradually decline over the medium-term, averaging 25 percent of GDP.

9. Sensitivity tests suggest that the external debt is vulnerable to current account shocks. If the non-interest current account deficit widened by 2.5 percent of GDP (1/2 standard deviation shock) during the projection period (e.g. due to a persistent shock to the terms of trade or SACU revenues), external debt would increase to about 89 percent of GDP by 2025. The impact of real interest rate shocks is small due to the sizeable share of fixed-r ate debt. The sensitivity of external debt to exchange rate depreciation is limited. A 30 percent exchange rate depreciation in 2021 would increase external debt by about 9 percent of GDP compared to the baseline.

Figure A6.
Figure A6.

Namibia: External Debt Sustainability – Bound Tests 1/ 2/

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 076; 10.5089/9781513576923.002.A002

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 2/3 standard deviation shocks applied to real interest rate, growth rate, and current account balance.4/ One-time real depreciation of 30 percent occurs in 2019.

Appendix I. Letter of Intent

Windhoek, Namibia

February 12, 2021

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Managing Director,

1. Our country has been severely hit by the COVID-19 pandemic, with a severe second wave of the local outbreak starting in late 2020. After the first COVID-19 case was reported in Namibia in March 2020, we swiftly adopted measures to contain the outbreak. We declared a national state of emergency, closed land and aerial borders, and implemented a country-wide lockdown. After the initial outbreak peaked in August, a more severe second wave has hit our country in late 2020. The infection rate sharply increased, with the number of cases reaching 33,500 at end-January 2021.

2. The COVID-19 pandemic has sharply weakened Namibia’s short-term macroeconomic outlook and led to urgent balance of payments needs. The deterioration in global conditions due to the pandemic and the local outbreak have under mined our short-term growth prospects and put additional pressure on the external and fiscal position. Thus, the weakening in external demand has hindered our mining production and exports, tourism receipts, and investment inflows. Furthermore, needed measures to contain the spread of the COVID-19 contagion have severely impacted domestic consumption and economic activity, weighing on our tax revenues. We estimate our real GDP to have sharply contracted by 7.2 percent in 2020 and we expect the economic recovery to be subdued in 2021, as the local outbreak continues. After deteriorating in 2020, we expect our external position to worsen in 2021, reflecting the continued impact of the COVID-19 shock and emergency imports to acquire the COVID-19 vaccines and needed infrastructure for the deployment of our vaccination campaign. Furthermore, as the pandemic continues to undermine the recovery in our region, a sharp decline in revenues, particularly in SACU revenues, is expected to put additional pressure on our external and fiscal position, along with the repayment of an Eurobond issued by Namibia falling due this year. This is expected to trigger an urgent balance of payments financing need of US$527 million (4.7 percent of GDP) in 2021. The shortfall in tax revenues due to the impact of the pandemic, the implementation of our COVID-19 response plan to respond to the health emergency and mitigate its socio-economic impact on our population, and the deployment of our vaccination campaign are expected to widen the overall fiscal deficit to 9.0 percent of GDP in FY20/21, leading to a fiscal financing gap of 3.8 percent of GDP.

3. Against this backdrop, we request emergency financial support from the IMF under the Rapid Financing Instrument (RFI) in the amount of SDR 191.1 million (100 percent of our quota), in the form of budget support. We consider that a purchase under the RFI will be key to address our urgent balance of payments needs triggered by the COVID-19 shock. We are also confident that IMF financial support to Namibia will help catalyze additional support from development partners to respond to the crisis. We request the RFI purchase to be made in the form of budget support to address our urgent financing needs in the health sector and provide the needed fiscal space to implement our targeted measures to respond to the health crisis and mitigate the severe socio-economic impact of the pandemic, especially on the most vulnerable, and implement our COVID-19 vaccination campaign.

4. We are re-orienting our economic policies to respond to the COVID-19 emergency and mitigate its severe socio-economic impact. We are executing our comprehensive response plan – the Economic Stimulus and Relief Package – to address the COVID-19 emergency and mitigate its severe impact on our people and our economy. Thus, we have geared our fiscal policy towards responding to the COVID-19 emergency by scaling-up health and education spending, strengthening social safety nets to protect vulnerable households, implementing a set of measures to support the private sector and protect jobs, and starting the acquisition of vaccines and the deployment of our vaccination campaign. To this end, we have re-allocated non-priority spending in goods and services and public investment to create needed fiscal space for emergency spending. Further more, we are using our external buffers to absorb the COVID-19 shock on the balance o f payments while preserving the currency peg. In parallel, our monetary policy aims at maintaining liquidity in the financial sector and preserving the currency peg. Thus, the Bank of Namibia (BoN) has gradually lowered the policy rate from 6.25 to 3.75 percent, following the South Africa Reserve Bank’s rate cut. In parallel with a more accommodative monetary policy stance, the BoN has temporarily eased regulatory requirements for banks to support liquidity and credit provision to the economy. We are committed to preserving financial stability while supporting the private sector.

5. In line with our public finance governance mechanisms, we will ensure the appropriate use, monitoring and reporting of COVID-19 related spending. All COVID-19 spending was appropriately budgeted, and we have presented a progress report on the execution of COVID-19 spending as of end-October 2020 in the FY20/21 mid-year budget review. Furthermore, we will publish a further progress report on the execution of COVID-19 spending in the FY21/22 budget and a final execution report of COVID-19-related spending on the website of the Ministry of Finance by the beginning of September 2021. We will also publish online, on the website of the Ministry of Finance, all awarded COVID-19 related procurement contracts, including the names of awarded entities and their beneficial owners, in accordance with Namibia’s Financial Intelligence Act of 2012. Furthermore, the Auditor General will conduct an independent audit of COVID-19 spending, including ex-post validation of goods and services procured, as a part of our annual auditing of budgetary spending, within 12 months of the end of FY20/21. We will further strengthen our public financial management system by finalizing the draft Public Financial Management bill by end-2021 and adopting it by end-2022.

6. As the impact of the COVID-19 crisis subsides, we are committed to implement a growth-supporting medium-term fiscal consolidation to preserve debt sustainability. We implemented a sustained fiscal consolidation during FY2017–19, from which we had to temporarily deviate to respond to the COVID-19 crisis. Due to the exceptional budgetary needs to respond and mitigate the impact of the crisis and the severe contraction in our economy, our public debt is expected to sharply increase in FY20/21. In view of this, as the impact of the COVID-19 crisis subsides, we will re-orient our fiscal policy towards preserving debt sustainability. To this end, we adopted a medium-term fiscal consolidation framework in the FY20/21 mid-year budget review. We are committed to implementing a growth-supporting fiscal consolidation, which preserves social spending and the provision of essential services to the population, to stabilize and then lower public debt-to -GDP-ratio. Thus, we are planning to implement fiscal reforms to increase expenditures efficiency in FY21/22 and gradually phase out exceptional COVID-19 spending. Notably, we will contain the wage bill through a wage freeze in FY21/22, allowing for natural attrition, except in priority social sectors, and implementing a targeted and phased early retirement scheme. Furthermore, we aim at improving the performance and management of state-owned enterprises and conduct selected divestments. Finally, we will strengthen tax administration to mobilize additional revenues, including through the operationalization of the Namibia Revenue Agency and broadening the tax base.

7. In line with IMF Safeguards Policy, we commit to undertake a safeguards assessment conducted by the Fund. We will authorize Fund staff to hold discussions with the central bank’s external auditors and have access to the BoN external audit reports. Furthermore, as we request the RFI’s purchases to be made available as budget support, we will sign a Memorandum of Understanding between the Minis try of Finance and the BoN on their respective responsibilities for servicing financial obligations under the RFI. Moreover, we do not intend to introduce or intensify exchange and trade restrictions, multiple currency practices, and other measures or policies that would exacerbate balance of payments difficulties.

8. Moving ahead, we will continue to closely engage with the IMF. We will remain engaged with the IMF, to benefit from its policy advice, its technical assistance and, if needed, further financial support. Notably, we will engage with IMF staff to calibrate our post-pandemic policies to preserve macroeconomic stability and promote growth.

9. In line with our commitment to transparency and accountability, we authorize the IMF to publish this letter and the staff report for the request for a purchase under the RFI.

Sincerely yours,

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1

The IMF’s reserve adequacy metrics for market access economies is estimated at 18–27 percent of GDP and 5 months of imports (IMF, 2019).

2

SACU revenues payments in FY20/21 reflect the SACU custom and excises revenues pool as expected at end-2019, before the outbreak of the COVID-19 pandemic.

3

Some COVID-19 relief measures, notably the payment moratorium ranging from 6 to 24 months, may delay the recognition of asset quality deterioration. Thus, prudential returns’ data on banks’ NPLs, profitability and capital ratios at end-September 2020 may not fully reflect the impact of the COVID-19 crisis.

4

Mining output had contracted by 11 percent in 2019.

5

Arrears to the private sector were accumulated in the previous year and have recently been verified.

6

A first installment of US$1.3 million was paid in December 2020 to acquire the vaccines under the Covax scheme.

7

The AfDB is finalizing a two-year budget support operation with Namibia- the Governance and Economic Support Recovery Program – for an anticipated total amount of ZAR 5 billion, to be disbursed evenly in FY20/21 and FY21/22. The baseline also incorporates budget support of ZAR 2 billion (US$125 million) from the AfDB disbursed in April 2020, a delayed disbursement related to the 2017–2019 operation, which is not related to the COVID-19 emergency.

8

Beneficial ownership information is already collected by the Registrar of Companies and Close Corporations in Namibia, as well as banks in the context of their customer due diligence measures.

9

The SACU revenue sharing formula adjusts for forecast errors with a two-year lag. The SACU revenue sharing formula adjusts for forecast errors with a two-year lag. Staff expects a large negative adjustment to SACU revenues in FY22/23 to reflect the much-lower than-anticipated SACU customs and excises revenues collected in FY20/21, due to the impact of the pandemic on SACU members’ imports and economic activity, notably South Africa’s. Thus, staff’s SACU revenue projections for FY22/23 include the anticipated adjustment for forecasting errors for FY20/21.

1

The analysis of public debt is based on fiscal year (April 1–March 31).

2

About half of the residual in FY20/21 is explained by the exchange rate appreciation at end-March 2020 and the rest on the withdrawals on government deposits to finance budgetary needs.

3

The analysis of external debt is based on the calendar year.

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Cover IMF Staff Country Reports
Namibia: Request for Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for Namibia
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2021: Issue 076
Publisher:
International Monetary Fund
ISBN:
9781513576923
ISSN:
1934-7685
Pages:
47
DOI:
https://doi.org/10.5089/9781513576923.002
  • Figure 1.
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    Figure 1.

    Namibia: Evolution of the COVID-19 Outbreak

  • Figure 2.
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    Figure 2.

    Namibia: COVID-19 Crisis: Impact on Tourism

    (number of flights, 7 days moving average)

  • Figure 3.
    View in gallery
    Figure 3.

    Namibia: The Impact of the COVID-19 Pandemic

  • <sup><xref ref-type="fig" rid="RA02fig04">Figure 4.</xref></sup>
    View in gallery
    Figure 4.

    Namibia: Indicators of Poverty, Inequality and Employment

  • Figure 5.
    View in gallery
    Figure 5.

    Namibia: Contribution to Real GDP Growth

  • View in gallery

    Namibia: Long-term Debt Amortization Profile

    (Percent of FY GDP)

  • <sup><xref ref-type="fig" rid="RA02fig06">Figure A1.</xref></sup>
    View in gallery
    Figure A1.

    Namibia: Public DSA Risk Assessment

  • Figure A2.
    View in gallery
    Figure A2.

    Namibia: Public DSA – Realism of Baseline Assumptions

  • Figure A3.
    View in gallery
    Figure A3.

    Namibia: Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

    (In percent of GDP, unless otherwise indicated)

  • <sup><xref ref-type="fig" rid="RA02fig09">Figure A4.</xref></sup>
    View in gallery
    Figure A4.

    Namibia: Public DSA – Composition of Public Debt and Alternative Scenarios

  • <sup><xref ref-type="fig" rid="RA02fig10">Figure A5.</xref></sup>
    View in gallery
    Figure A5.

    Namibia: Public DSA – Stress Tests

  • Figure A6.
    View in gallery
    Figure A6.

    Namibia: External Debt Sustainability – Bound Tests 1/ 2/

    (Percent of GDP)

Figure 1.

Namibia: Evolution of the COVID-19 Outbreak
Figure 2.

Namibia: COVID-19 Crisis: Impact on Tourism

(number of flights, 7 days moving average)
Figure 3.

Namibia: The Impact of the COVID-19 Pandemic
Figure 4.

Namibia: Indicators of Poverty, Inequality and Employment
Figure 5.

Namibia: Contribution to Real GDP Growth

Namibia: Long-term Debt Amortization Profile

(Percent of FY GDP)
Figure A1.

Namibia: Public DSA Risk Assessment
Figure A2.

Namibia: Public DSA – Realism of Baseline Assumptions
Figure A3.

Namibia: Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

(In percent of GDP, unless otherwise indicated)
Figure A4.

Namibia: Public DSA – Composition of Public Debt and Alternative Scenarios
Figure A5.

Namibia: Public DSA – Stress Tests
Figure A6.

Namibia: External Debt Sustainability – Bound Tests 1/ 2/

(Percent of GDP)