IMF Executive Board Concludes 2012 Article IV Consultation with NamibiaPublic Information Notice (PIN) No. 13/23
February 20, 2013
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 February 8, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Namibia.1
The Namibian economy bounced back strongly from the 2008–09 financial crises but growth slowed to about 5 percent in 2011 (just below the average for its peer Middle Income Countries group) compared with 6½ percent in 2010 due to contraction in the mining sector. The strong performance of the primary sector led to a rebound in growth in the second quarter of 2012. Mineral exports are, however, expected to decelerate in the last half of 2012 due to the weak external economic environment and Gross Domestic Product (GDP) growth will likely moderate to 4 percent in 2012. Inflation rose significantly to 7¼ percent (year–on-year) at end-December 2011, but declined to 6 percent at end July 2012 with an uptick in September 2012 to 6¾ percent. The increasing trend reflects the impact of high oil prices and a substantial depreciation of the South African rand caused by the on-going industrial strikes in South Africa.
Conditions in the banking sector remain favorable. Private sector credit extension remained robust at 9¾ percent (year on year) at end-December 2011, although slightly below 10¾ percent reached at end-December 2010. Credit was driven by mortgage credit and rapid expansion of installment credit and overdraft facilities to consumers, which could potentially crowd out bank funding for productive economic sectors. Nonperforming loans fell to 1½ percent of total loans at end-December 2011, down from 2 percent at end-December 2010. With overdue loans also declining, the asset quality of the banking sector has remained satisfactory. While the aggregate financial indicators are broadly sound, potential sources of vulnerabilities to financial stability are emerging from the combination of property price buildup, commercial banks’ large exposure to the property market, the growing household indebtedness and the concentration of large institutional investors in bank funding.
Fiscal policy continues to be fairly expansionary. The overall fiscal deficit in FY2011/12 increased to about 8½ percent of GDP from about 5¾ percent of GDP in FY2010/11 driven largely by the government’s temporary Targeted Intervention Program for Employment and Economic Growth (TIPEEG) and the public sector wage increase. The fiscal deficit (excluding the cyclical component of Southern Africa Customs Union revenues) deteriorated significantly from about 2½ percent in FY2010/11 to about 6¼ percent in FY2011/12. Overall public debt increased significantly from 16¼ percent in FY2010/11 to 26½ percent in FY2011/12, including through Namibia’s debut Eurobond issuance of US$500 million in November 2011. More recently, the Namibia government issued an R850 million (US$95 million) 10-year bond in South Africa with a yield of 8.26 percent.
The external position weakened in 2011. Annual exports (in US dollar terms) grew by about 9 percent in 2011 compared to about 29 percent in 2010. The moderate export growth in 2011 was supported mainly by diamond exports (benefiting from stronger prices). Nonmineral exports, notably manufactured products, and food and live animals also held up. Imports grew faster at 14 percent, driven by expansionary fiscal policy which supported growth in both public consumption and public capital expenditure and eased monetary conditions in the domestic economy which boosted private consumption. As a result, the current account recorded deficit of about 1¾ percent of GDP in 2011 from a surplus of ¼ percent of GDP in 2010.
Executive Board Assessment
Executive Directors commended Namibia’s strong macroeconomic performance following the crisis. Medium-term prospects remain favorable although subject to downside risks from external and internal developments. Directors called for continued commitment to sound policies and structural reforms to build adequate policy buffers, preserve financial stability, foster stronger and inclusive growth, and reduce unemployment.
Directors agreed on the need for a tighter fiscal stance in order to rebuild policy buffers, including reserves, and support the peg to the South African rand. They encouraged the authorities to strengthen their fiscal framework by delinking the fiscal stance from volatile Southern African Customs Union (SACU) and mining revenues. This would reinforce the past policy of paying down debt when there are SACU windfalls.
Directors emphasized that improving the quality of spending will be key to maintaining fiscal sustainability and more broadly support economy-wide competitiveness. This will require implementing a prudent public sector wage policy, strengthening the financial viability of the state-owned enterprises, and minimizing the fiscal risks associated with the TIPEEG. Directors took positive note of the authorities’ plans to unwind the program and to focus on skills development going forward. To enhance revenues, they highlighted the need for broadening the tax base, improving tax administration, and streamlining tax expenditures. These reforms should be implemented in a manner that improves the predictability and simplicity of the tax system.
Directors welcomed that Namibia’s financial system is generally sound. Nevertheless, they underscored the need for increased vigilance to monitor potential vulnerabilities stemming from a sizeable concentration of lending to mortgages, property price buildup, growing household indebtedness, and the concentration of large institutional investors in bank funding. In this respect, Directors commended the Bank of Namibia for the recent macro-prudential measures that have been put in place to strengthen financial stability and called for expeditious adoption of stress testing techniques.
Directors welcomed the authorities’ development objectives, laid out in the recent National Development Plan. Given high income inequality and unemployment, they strongly supported the focus on fostering effective investment in education and health and enhancing financial inclusion. Directors also commended the recent launch of the Human Resource Development Council to address the skills mismatch in the labor market.