Statement by IMF Staff at the Conclusion of the 2006 Article IV Consultation Discussions to Namibia

Press Release No. 06/252
November 14, 2006

An International Monetary Fund (IMF) staff mission led by Mr. Johannes Mueller, Advisor in the African Department, today issued the following statement in Windhoek:

"An IMF mission visited Windhoek during November 6-14, 2006 for the 2006 Article IV discussions with Namibia. It reviewed economic developments and prospects and the authorities' policy intentions. The mission met with Prime Minister Nahas Angula, Minister of Finance Saara Kuugongelwa-Amadhila, Bank of Namibia Governor Thomas Alweendo, other senior government officials, members of parliament, and representatives of the private sector, NGOs, labor unions, and the diplomatic and academic communities.

"In recent years, Namibia has enjoyed robust growth, moderate inflation, and strong external surpluses, in large part due to prudent macroeconomic policies. Real GDP growth is expected to rise slightly to 4½ percent in 2006 on account of strong external demand, after 4¼ percent in 2005. Inflation is projected to increase to 5 percent, however, as higher oil prices and the depreciation of the Namibia dollar feed through to domestic prices. The external current account surplus is projected to improve to 14 percent of GDP due to the strengthening of mining exports and one-off increases in customs union (SACU) revenues. However, continued strong outflows of capital to South African financial markets will keep international reserves at relatively low levels.

"Namibia's medium-term economic outlook remains promising as long as it sustains prudent macroeconomic policies and tackles a number of challenges. These include high unemployment, widespread poverty, and a high prevalence of HIV/AIDS. The mission welcomed the authorities' recent initiatives in this regard, including in particular the launching of education reform-to narrow the skills mismatch in the economy-and the strong implementation of the national HIV/AIDS strategy. It proposed a redoubling of efforts to support private sector activity, in particular with respect to enhancing the flexibility of the labor markets, facilitating the entry of skilled foreign workers, reducing administrative obstacles to businesses, and improving access to financial services. These efforts would also be conducive to raising Namibia's external competitiveness over the medium term.

"The mission commended the authorities for the fiscal consolidation of the last two years, which reduced the fiscal deficit from 7¾ percent of GDP to close to balance. The budget is expected to record a surplus in 2006/07 because of the windfall in SACU revenues. The mission welcomed that a part of these one-off receipts, together with the bulk of the receipts from the partial privatization of the mobile phone provider MTC, would be devoted to reducing Namibia's public debt. Nonetheless, the projected medium-term fiscal pressures would have made it desirable to use a larger share of this windfall for public debt reduction. With respect to the supplementary budget for 2006/07, the mission stressed the importance of not adding additional spending during parliamentary deliberations in light of the expected significant medium-term fiscal pressures.

"Regarding medium-term fiscal policy, the mission recommended that the authorities aim to keep the public debt ratio on a downward trajectory. The mission is mindful of the projected decline in SACU receipts and Namibia's substantial development needs that require increased outlays for health, education, poverty reduction, and infrastructure investment. In particular, more determined efforts are needed to reduce poverty so as to maintain social cohesion. To achieve these objectives, there is an urgent need to adopt an effective medium-term strategy to improve revenue collections in a sustainable manner and reorient spending away from wages and subsidies toward priority sectors. To this end, the mission urged that the authorities embark on a strategy to enhance tax administration and reform the civil service. Past efforts to contain the growth of the wage bill have proven ineffective and, in the mission's view, bolder efforts are required to determine the appropriate structure, quality, and remuneration of the civil service. The mission also discussed the legal and regulatory framework for state-owned enterprises.

"The mission noted that the peg of the Namibia dollar to the South Africa rand has provided a clear anchor for policy makers and the public and has facilitated trade and financial flows within the Common Monetary Area. The peg has also helped moderate inflation by linking Namibia's monetary policy to South Africa's inflation targeting framework. Recent increases in domestic policy interest rates were appropriate within this exchange rate regime, but also in view of rising domestic inflation pressures. Finally, the mission discussed ways to create domestic investment opportunities and further strengthen international reserves.

"The mission thanks the authorities for the warm welcome and close cooperation it has received during its stay in Windhoek."



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