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Namibia and the IMF

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Public Information Notice (PIN) No. 03/150
December 23, 2003
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2002 Article IV Consultation with Namibia

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On April 23, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Namibia.1

Background

Since 1997, production in Namibia has been shifting away from the primary and government sectors, and growth in the rest of the economy has risen to 4.6 percent a year. However, the overall growth rate of 3.2 percent a year has not been sufficient to produce significant gains in per capita income or a substantial reduction in poverty. Exports of primary commodities were relatively weak during this period because of climatic conditions and adverse developments in world markets, but nontraditional manufactures grew by 14 percent a year, albeit from a very small base.

After slowing to 2.4 percent in 2001 because of declines in the production and processing of primary commodities, real GDP growth increased slightly to 2.7 percent in 2002. Inflation exceeded 11 percent in 2002, the highest rate since 1992, reflecting regional food shortages and the weakening in 2001 of the Namibia dollar, which is pegged to the rand. Namibia's exports increased in 2002 because of improved climatic conditions and stronger world markets, and the external current account surplus remained at 2.1 percent of GDP. In the course of the year, the Namibia dollar strengthened in real effective terms, reversing part of its earlier depreciation.

After declining to less than 1 percent of GDP in 2000/01, the fiscal deficit rose to 4.5 percent of GDP in 2001/02 and the ratio of government debt to GDP rose above the government's medium-term target of 25 percent. The deficit is estimated to have declined to 4.0 percent in 2002/03, in part because government salaries were frozen in 2002/03 and the expenditure allocations for goods and services in most ministries were reduced. However, the deficit still remained above the authorities' target of 3 percent. One of the main factors behind these relatively large deficits has been the need to provide substantial support for troubled public enterprises.

Namibia has close ties with neighboring countries through the Common Monetary Area (CMA), which provides access to South African financial services and, through the tie to the rand, promotes sound macroeconomic policies. In addition, as a member of the Southern Africa Customs Union (SACU), Namibia participates in the largest market in Sub-Saharan Africa. SACU is becoming more open over time, enhancing Namibia's access to the global economy. As SACU reduces its tariff barriers, however, customs receipts are declining relative to other sources of revenue.

Given the peg of the Namibia dollar to the rand under the CMA, the scope for an independent monetary policy is limited. In line with developments in South Africa, during 2002 the bank rate (the interest rate charged by the central bank to banks for liquidity purposes) was raised to 12.75 percent in September from 10 percent at the beginning of the year, where it has remained ever since. Monetary growth increased moderately to 7.7 percent, and credit to the private sector rose by 17.5 percent.

Namibia's short-term economic prospects are broadly positive, reflecting peace in Angola, increasing access to international markets, and new mining developments. Moreover, its high rate of savings means that the availability of domestic resources is not a constraint on growth. However, HIV/AIDS is taking an increasing toll, with infection rates exceeding 20 percent of the adult population.

Executive Board Assessment

Directors welcomed the Namibian authorities' pursuit of generally sound macroeconomic policies, which has helped keep inflation relatively low and the external current account in surplus. At the same time, they noted that, although Namibia's income per capita is among the highest in sub-Saharan Africa, real GDP growth remains low, and income inequalities, widespread poverty, and high unemployment persist. Furthermore, the fiscal deficit has widened in the last two years and the public debt, while still low, has continued to rise. Nevertheless, Directors considered the macroeconomic outlook to be broadly favorable. The central policy challenge in Namibia is to achieve higher growth rates to reduce poverty and unemployment. Directors stressed that this will require acceleration of structural reforms and adherence to sound macroeconomic policies. Some Directors urged the international community to provide concessional financial resources to assist the authorities to meet their development needs.

Against this background, Directors welcomed the authorities' efforts to improve the efficiency of fiscal policy and to persevere with fiscal consolidation. The ongoing reform of the budget process, the introduction of a public finance management system to enhance expenditure control in the context of medium-term expenditure framework, and plans to improve the decentralized system of service delivery will be crucial in this regard. However, to attain their fiscal sustainability targets and help free up resources for the social spending needed to improve economic opportunities more broadly, the authorities will need to adopt stronger corrective measures. Directors considered that the recent budgetary proposals go in the right direction, but that they need to be followed up with the development of clear medium-term strategies with respect to personnel expenditure and support for public enterprises.

Directors stressed that further expenditure restraint will be crucial against the backdrop of declining revenue from the Southern Africa Customs Union (SACU). Although some progress has been made in reducing personnel expenditures, Directors saw a need for the authorities to take further steps to limit the size and remuneration of the public service—steps they acknowledged will prove challenging in the context of high unemployment. Directors also cautioned against the use of supplementary budgets, other than to meet critical unforeseen expenditure needs that exceed the budgetary contingency allocation. While the scope for increasing non-SACU revenues is limited, Directors saw merit in broadening the tax base. They welcomed the recently completed review of the tax system, which will provide a good basis for tax reform.

Directors considered that steps to reform the public enterprises—whose financial problems have weighed unduly on public resources and have had an adverse impact on service delivery in key sectors of the economy—will be crucial for fiscal restraint and improved economic performance. Accordingly, they urged the authorities to push ahead quickly with the ongoing reforms introduced in selected enterprises, and looked forward to further reforms following the establishment of high-level governance and divesture subcommittees. They also stressed the urgency of pressing ahead with privatization—including efforts to build political support for it—and with legal and institutional reforms aimed at creating a sound basis for private sector development.

Directors observed that membership in SACU is serving Namibia well, especially in view of SACU's shift towards more outward-looking policies. In addition, the peg of the Namibia dollar to the South African rand under the Common Monetary Area has allowed Namibia to share in the broad stability fostered by South Africa's macroeconomic policies. At the same time, Directors emphasized that Namibia's own prudent fiscal and monetary policies remain essential supports for the Namibia dollar. Directors generally agreed that maintenance of lower interest rates relative to those in South Africa could discourage domestic saving and contribute to unsustainable credit expansion and capital outflows. The resulting pressure on Namibia's international reserves could be risky, since their current level in relation to imports is quite modest. Directors therefore saw merit in a further tightening of credit conditions to help protect foreign reserves.

Directors welcomed the strengthening of Namibia's banking system in recent years and the increase in efficiency associated with financial innovation. They also welcomed plans to further strengthen financial supervision, as well as proposals for promoting competition in the financial sector. They urged the authorities to continue to monitor bank lending closely in light of the recent increases in credit to the private sector. Directors encouraged the authorities to submit anti-money laundering and anti-corruption legislation for consideration by Parliament as soon as possible.

Directors considered that labor market reforms remain an essential element in the policy framework for achieving broad-based economic growth and reducing unemployment and poverty. This will require steps to increase labor market flexibility and additional efficient investment in human capital, in particular education, to alleviate the severe shortage of technical skills in Namibia. Directors considered that implementation of land reform—a sensitive issue in Namibia—will be important for promoting growth and reducing poverty and income inequality. In this context, they praised the authorities for their efforts in promoting an orderly process. They also welcomed recent legislation for the empowerment of farmers in the communal areas through the enhancement of property rights.

Directors regretted the suffering and erosion of existing human capital caused by the HIV/AIDS epidemic, and urged the authorities to move quickly to stem the spread of the disease and to treat existing victims. They noted that Namibia's resources for this purpose are very limited, and called for additional donor support to fight the epidemic.

Directors observed that Namibia's core statistics are generally adequate for surveillance purposes, but noted that substantial weaknesses remain in some areas. They welcomed Namibia's participation in the General Data Dissemination System, and encouraged the authorities to continue efforts to improve core statistics in the light of the recommendations made in the recent Report on Standards and Codes.

           
           

Namibia: Selected Economic and Financial Indicators, 1997 - 2001


 

 

 

 

 

Est.

 

1998

1999

2000

2001

2002


(Annual percentage change)

           

Real GDP

3.3

3.3

3.3

2.4

2.7

GDP deflator

8.6

6.5

12.3

10.8

11.1

Consumer price index (period average) 1/

6.2

8.7

9.3

9.3

11.3

Real effective exchange rate 1/

-5.3

0.8

2.9

-1.7

-4.9

           

(In millions of U.S. dollars)

           

Exports, f.o.b.

1,208.5

1,195.9

1,313.2

1,141.9

1,205.4

Imports, f.o.b.

1,488.8

1,396.2

1,431.8

1,324.5

1,367.7

Current account balance

129.8

138.2

227.3

65.8

61.7

(in percent of GDP)

3.8

4.1

6.6

2.1

2.1

Capital and financial account balance

-124.3

-159.4

-238.8

-80.8

-62.6

Gross official reserves (end-period)

         

(in millions of U.S. dollars)

260.6

305

262.4

223

297.6

(in months of imports of goods and services)

1.6

2.0

1.7

1.6

2.1

         

(In percent of GDP)

           

Central Government operations 2/

         

Revenue (including grants)

31.8

33.6

33.1

31.8

31.8

Expenditure and net lending

35.9

35.6

34.0

36.3

35.8

Fiscal balance

-4.1

-2.0

-0.9

-4.5

-4.0

 

 

 

 

 

 

           

Sources: Namibian authorities; and IMF staff estimates and projections.

           

1/ Period average

         

2/ Fiscal year figures.

         

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.




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