IMF Executive Board Concludes 2010 Article IV Consultation with NamibiaPublic Information Notice (PIN) No. 10/116
August 25, 2010
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 July 23, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Namibia on a lapse of time basis. Under the IMF’s lapse of time procedures, the Executive Board completes the Article IV consultations without convening formal discussions.1
The global crisis led to a contraction of Namibia’s economy in 2009, following a period of relatively strong growth. Growth averaged 5.5 percent during 2006-08, supported by sound macroeconomic policies and robust mining sector output. In 2009, however, growth is estimated to have contracted by 0.8 percent, down from 4.3 percent a year earlier as mineral production, especially diamond, dropped sharply in the wake of the global economic downturn. The 12-month inflation rate, which dropped to 5 percent in April 2010, is trending down further thanks to a decline in food and fuel prices and the strengthening in the South African rand, to which the Namibian dollar is pegged at par.
The countercyclical measures implemented to support growth led to a deterioration of the fiscal position. A drop in mineral revenue and lower Southern Africa Customs Union (SACU) revenue combined with the stimulus measures shifted the fiscal position into a deficit of 2.8 percent of GDP in 2009/10, after three years of fiscal surpluses.
In light of slowing economic activity and moderating inflation, and in line with the monetary policy stance of the South African Reserve Bank (SARB), the Bank of Namibia (BoN) cut its policy rate to 7 percent in June 2009, down from 10 percent at the end of 2008. However, since April 2010, the BoN has maintained a 50 basis point positive differential with the SARB’s policy rate. The financial sector weathered the global financial crisis relatively well; commercial banks remain profitable and continue to benefit from effective supervision by the BoN.
The external position also deteriorated. The current account position is estimated to have shifted into a deficit in 2009 on account of the drop in mineral exports and higher imports associated with new mining projects. Gross international reserves remained relatively unchanged at US$1.4 billion (3.4 months of imports) in 2009, supported by the allocation of Special Drawing Rights (SDRs) that helped mitigate the impact of the decline in export earnings.
The short-term growth outlook is positive but subject to downside risks. A recovery is in the offing with growth projected at 4.4 percent in 2010, predicated on a strong rebound in the mining and continued fiscal stimulus supporting construction and the services sectors. However, a possible weakening of the recovery in the global economy and in South Africa could impact negatively commodity prices and growth in the mining sector. The fiscal deficit is projected to widen in 2010/11 as stimulus-related spending is maintained and SACU revenue drops further.
Executive Board Assessment
In concluding the 2010 Article IV Consultation with Namibia, Executive Directors endorsed staff’s appraisal, as follows:
The economic recovery is well underway, supported by timely macroeconomic stimulus. However, the outlook is subject to downside risks stemming from uncertain global economic recovery, calling for coordination in the policy mix going forward. In particular, if external demand for commodities weakens, and the thawing of financial markets is delayed, the recovery could lose steam.
The countercyclical measures have been instrumental in cushioning the impact of the global downturn, but have deteriorated the fiscal outlook. The authorities appropriately took advantage of the fiscal space available entering the crisis to stimulate the economy. However, although an expansionary fiscal stance in 2010/11 appears appropriate given the slack in economic activity and uncertainties about the global recovery, careful attention should be paid to the quality of spending and efforts need to be made to reorient spending in favor of quality capital projects while protecting critical social programs.
A more ambitious fiscal consolidation than envisaged in the current Medium-Term Expenditure Framework (2010/11–2012/13) is key to ensuring internal and external sustainability. Fiscal consolidation should start from 2011/12 by targeting a reduction in the overall budget deficit so as to preserve macroeconomic stability. Given the projected sharp drop in SACU revenue and rapid debt accumulation in the medium term, the authorities need to step up efforts at reducing public spending and mobilizing non-SACU revenue to reduce the projected fiscal deficits and public debt to sustainable levels. In this context, containing the wage bill, accelerating the reforms of state-owned enterprises (SOEs), and improving non-SACU revenue mobilization should be accorded high priority.
Fiscal risks need to be closely monitored. The measures being undertaken by the authorities need to be complemented by reforms, including strengthening the budget process, bringing into effect the SOEs Governance Act, and establishing the institutional and legal framework for Public Private Partnerships.
The exchange rate peg to the rand continues to be the main anchor of monetary policy. Despite the peg to the South African rand, the Bank of Namibia’s monetary policy stance has started since April 2010 to deviate from the interest rate policy of SARB. Staff believes that there is a scope for reducing domestic interest rates by bringing the policy rate in line with South Africa’s.
Upgrading the supervision of nonbank financial institutions (NBFIs) and addressing concerns about the tightening of the regulation on domestic investment requirements for pension funds and insurance companies are critical to ensure financial stability. Speeding up the approval of the Financial Institutions and Markets Bill, and strengthening Namibia Financial Institutions Supervisory Authority as an independent body would go a long way in addressing weaknesses in prudential regulations and supervision of the NBFIs. Regarding domestic investment requirement, short of reversing it or reducing its rate, it is of paramount importance to monitor closely the impact on pension funds with a view to mitigating risk taking by institutional investors and safeguard their long-term financial viability.