IMF Executive Board Concludes 2006 Article IV Consultation with Namibia

Public Information Notice (PIN) No. 07/4
January 11, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On January 5, 2007 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Namibia.1

Background

Growth is expected to increase to 4½ percent in 2006, after 4¼ percent in 2005, due in part to a recovery in diamond production. Rising oil prices and interest rates have not yet noticeably affected activity. Though rising, inflation is expected to remain moderate. The external current account surplus is expected to double to close to 14 percent of GDP in 2006, thanks to record diamond exports and a surge in customs union (SACU) receipts. However, continued outflows of capital to South African financial markets have kept international reserves relatively low. Consistent with the peg to the rand, the Bank of Namibia has matched recent interest rate increases by the South African Reserve Bank, lifting rates by 2 percentage points in 2006.

The fiscal deficit fell by close to 7 percentage points during the last two fiscal years, to ¾ percent of GDP in 2005/06. While windfall revenues are expected to lead to a small budget surplus in 2006/07, the underlying fiscal position is set to weaken. Namibia will receive a 5 percent of GDP windfall in SACU revenues in 2006/07, the largest portion of which will be directed towards increased expenditures. As a result of the recent fiscal consolidation, Namibia's public debt ratio is projected to come close to the authorities' fiscal rule target of 25 percent of GDP by 2007/08. Nonetheless, public debt is poised to rise again over the medium term in light of an expected decline in SACU receipts and an increase in spending to address Namibia's development needs, unless reforms are undertaken to shore up revenues and reduce non-priority spending.

Namibia faces a number of economic and social challenges over the medium term. Economic growth remains volatile and depends on mining, and Namibia also has high rates of poverty, unemployment, and HIV/AIDS infection.

Executive Board Assessment

Directors commended the authorities for following prudent macroeconomic policies that had contributed to robust growth, moderate inflation, and large external surpluses. At the same time, economic and social challenges remain, and focus needs to be placed on broadening the economic base and raising Namibia's long-term growth potential. Directors welcomed the progress made in implementing reforms to reduce poverty, unemployment, and high rates of HIV/AIDS infection. A reform of the education system has been launched, a sound HIV/AIDS strategy is in place, and an Anti-Corruption Commission has been established to promote governance and private sector development. However, additional efforts are needed to ensure an efficient and more flexible labor market and to further support the business environment.

Directors stressed the importance of prudent fiscal policies and increases in international reserves to preserve macroeconomic stability, and welcomed the fiscal consolidation efforts of the past two years. In this context, they recalled the authorities' commendable efforts to reduce public debt. However, noting the loosening of the underlying fiscal stance in 2006/07, several Directors considered that a larger part of expected revenue windfalls could have been devoted to reducing public debt, especially given the projected medium-term decline in Southern African Customs Union revenues and the future plans to increase development and pro-poor spending. Directors underlined that a poverty reduction program, if established, should be targeted and not compromise hard-won fiscal sustainability.

Directors welcomed the progress made in boosting VAT and income tax receipts through private sector-led audits, but considered that further efforts to raise revenues are needed. To sustain tax collections, VAT administration and the audit capacity of the Inland Revenue Department should be strengthened, and a large taxpayers' office established.

Directors encouraged the authorities to limit the growth of public wage expenditures and develop a strategy to determine the appropriate structure, quality, and remuneration level for the civil service. They welcomed the authorities' commitment to reform state-owned enterprises (SOEs), and urged them to take the necessary steps to make the new SOE Governance Act effective.

Directors agreed that the Namibia dollar's peg to the South African rand remains appropriate. To strengthen foreign reserves and help keep domestic savings in the country in the long term, Directors recommended developing domestic investment opportunities and market-based strategies-such as asset securitization and open market purchases of foreign exchange. Most Directors counseled against regulatory measures to stem capital outflows, although a few others considered that such measures could be useful on a short-term and temporary basis.

Directors commended the authorities for implementing recommendations of the 2005  Financial Sector Assessment Program and the progress made toward complying with the Basel Core Principles on banking system supervision. They called for a further strengthening of the financial sector's regulatory and supervisory framework, especially for nonbank financial institutions, and for continued work to extend financial services to rural areas and the poor.


Namibia: Selected Economic Indicators

  2003 2004 2005 2006 Est.

  (Percent)

Change in real GDP

3.5 6.6 4.2 4.6

Change in CPI (end of period)

2.6 4.3 3.5 5.7
  (Percent of GDP)

Overall fiscal deficit 1

-7.5 -3.4 -0.7 0.1

Public debt 1

29.7 34.2 31.7 28.7
  (End of period; percent change)

Broad money

9.6 16.2 9.7 20.0

Credit to the private sector

12.4 19.4 20.1 18.0
  (Percent of GDP, unless stated otherwise)

Current account balance

5.1 9.5 7.2 13.9

International reserves (months of imports)

2.0 1.7 1.4 1.6

Exchange rate (Namibia dollar/U.S. dollar, end of period)

6.6 5.6 6.3 ...
         

Sources: Namibian authorities; and IMF staff estimates.

1 Figures are for fiscal year, which begins April 1.


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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