## cr1856 ## Source details **Canonical URL:** [cr1856](https://www.imf.org/-/media/files/publications/cr/2018/cr1856.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr1856.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr1856.pdf.json) --- ### Context: Economy at a Turning Point - Growth and composition: - Between 2010–2015, Namibia’s annual GDP growth averaged 5½ percent. - Diamonds, copper, gold, uranium and zinc constitute about 40–45 percent of the country’s goods exports, and account for about 8 percent of GDP (services account for about 60 percent of GDP). - Monetary arrangement and macro vulnerabilities: - Peg with the South African rand; member of the Common Monetary Area (CMA). - Despite improved living standards, productivity deteriorated, macroeconomic vulnerabilities rose, and large fiscal deficits led to a sharp increase in public debt. - Rapid credit growth financed expansion, fueling fast-rising house prices and elevated private sector indebtedness; unemployment remained high and inequality is among the highest in the world. ### 2016–2017 Turning Point and Adjustment - Growth and external: - Real GDP growth decelerated in 2016 to 1.1 percent. - After three negative quarters, real GDP is projected to have contracted by 1.2 percent in 2017. - The 2016 current account deficit: 14.1 percent of GDP. - International reserve coverage improved to 3.7 months of projected imports. - Fiscal and debt developments: - External public and private debt increased to 60.2 percent of GDP (48.2 percent in 2015). - Public debt increased to 44.3 percent of GDP (including domestic arrears). - FY16/17 deficit increased to 11.1 percent of GDP (10⅓ percent in FY15/16). - About N$3.9 billion in domestic arrears (2.4 percent of GDP) accumulated and have been largely cleared. - Gross financing needs remained high (about 18 percent of GDP). - Financial and price indicators: - Private sector credit growth: averaged 14 percent between 2010–15; reached 4.5 percent at end 2017. - Annual house price increase slowed to 7 percent (9 percent on average over the last five years). - Banks’ holdings of government securities reached about 10 percent of banks’ assets. - Headline inflation: averaged 7.3 percent in 2016, peaked at 8.2 percent in January 2017, and declined to 5.2 percent in December 2017. - Bank of Namibia policy rate reduced in August to 6.75 percent. ### Outlook and Risks - Growth and inflation: - Growth projected to resume in 2018 and converge to a long-term rate of about 3½ percent. - Headline inflation projected to rise somewhat but remain below 6 percent as the economy recovers. - External sector: - Compared to 2016, structurally higher mineral exports and low imports would halve the trade deficit and reduce the current account deficit to around 5–6 percent of GDP by 2019. - International reserve coverage would gradually decline; external financial inflows and SACU receipts will remain critical. - Risk factors (tilted to the downside): - Main risk: fiscal slippages undermining confidence. - Domestic risks: slower mining and construction recovery; corrections in an overvalued housing market. - External risks: further declines in SACU revenue, lower demand for key exports, subdued commodity prices. - Global risk: tighter global financial conditions from rising US policy rates. - Macro-financial feedback loops: - External shocks and fiscal imbalances could reduce exports and GDP growth, deteriorate external and fiscal balances, increase public debt and reduce international reserve coverage. - Fiscal slippages could undermine consolidation credibility, intensifying negative effects and impacting private credit, house prices, banks’ asset quality, and growth. ### Authorities’ Views and Plans - Authorities broadly concurred with staff’s outlook and risks; expected 2017 GDP contraction to be somewhat less severe. - Plans and commitments: - Contain the FY17/18 deficit within budget projections while avoiding further arrears accumulation. - Press ahead with revised medium-term adjustment plans in the FY18/19 budget context, announced in the November 2017 Medium-Term Policy Statement. - Authorities concur that without policy action public debt dynamics are not sustainable. ### Fiscal adjustment need and timing - Staff baseline: "5–6 percent of GDP in measures is needed over time to reach a primary balance that can bring the public debt ratio on a declining path." - Timing and growth impact: - Adjustment should be spread over time; opportunity to spread "over the next three years, starting with the FY18/19 budget." - Given openness and relatively low fiscal multipliers, staff estimated fiscal adjustment "may negatively affect annual growth on average by 0.6 percentage points per year over the consolidation period." - Risk: uncertainty in South Africa could "dictate a more frontloaded approach at the cost of lower growth." ### Composition of recommended measures (menu of options) - Overall possible budget savings by FY20/21: "Up to 8.2" (percent of GDP). - Expenditure measures: "Up to 6.5" (percent of GDP) - Contain the wage bill: "limiting salary indexation and new hiring" — "2.5-3.5" (percent of GDP). - Reduce transfers to public enterprises (reforming large enterprises e.g., Air Namibia, Transnamib Holding) — "0.2-0.4" (percent of GDP). - Rationalize transfers to other extra-budgetary entities (e.g., sub-national governments) — "1.5-2.0" (percent of GDP). - Improve targeting of social grants, allowances and other benefits — "0.7" (percent of GDP). - Revenue measures: "Up to 1.7" (percent of GDP) - Increase domestic levies (e.g. fuel levy, luxury goods) — "0.3" (percent of GDP). - Increase SACU excises above SACU rates (e.g. alcohol, tb) — "0.8" (percent of GDP). - Remodule PIT rates — "0.3-0.6" (percent of GDP). - Strengthen corporate income tax and close tax loopholes (e.g., ringfence loss carry forward; limit interest deductions; introduce withholding tax on domestic and foreign sourced dividends) — "++". - Broaden the VAT base (e.g., eliminate zero rating and exemptions on real estate, telecommunications, fuel products) — "++". - Staff recommendation: - Aim for long-lasting measures (contain large fast-rising expenditure items such as wages and transfers while protecting social assistance programs). - Well-designed increases in domestic revenue (e.g., "¼ of the adjustment package" from revenue). ### Medium-term projections (Reform Scenario) — key statistics (percent of GDP unless otherwise specified) - Real GDP Growth (annual change): 1.1, -1.2, 0.8, 2.6, 3.2, 3.6, 3.7 (2016–2022). - Credit to the Private Sector (annual change): 8.6, 4.5, 5.5, 7.2, 8.4, 9.5, 9.5. - Fiscal Balance: -9.3, -5.2, -7.0, -6.6, -3.8, -3.1, -3.0. - Revenue (including SACU receipts): 31.2, 34.2, 32.0, 30.8, 32.2, 32.0, 32.2. - o/w additional measures (cumulative): ......, 0.4, 0.9, 1.3, 1.3, 1.3. - Expenditure: 40.5, 39.4, 39.0, 37.4, 36.0, 35.1, 35.2. - Current Expenditure: 35.4, 35.3, 34.4, 33.2, 31.8, 31.6, 31.7. - o/w additional measures (cumulative): ......, -1.3, -2.6, -3.9, -3.9, -3.9. - Capital Expenditure: 5.2, 4.1, 4.6, 4.2, 4.2, 3.5, 3.5. - Fiscal Balance (excluding SACU): -18.0, -16.6, -16.4, -14.5, -12.5, -11.6, -11.5. - Primary Balance: -6.7, -2.2, -3.5, -2.8, 0.3, 1.0, 1.3. - Primary Balance (excluding SACU): -15.3, -13.6, -13.0, -10.7, -8.5, -7.5, -7.2. - Adjustment (cumulative): ......, -1.7, -3.5, -5.2, -5.2, -5.2. - Gross Financing Needs: 18.0, 17.9, 19.2, 16.7, 15.2, 17.5, 14.4. - Public Debt (excl. guarantees): 44.3, 46.5, 50.1, 53.1, 53.0, 51.9, 50.7. - Current Account Balance: -14.1, -1.5, -2.7, -3.0, -2.3, -2.3, -2.3. - Gross International Reserves (months of imports): 3.7, 4.2, 4.3, 4.5, 4.6, 4.8, 4.9. ### Public financial management, revenue administration, and extra-budgetary entities - PFM priorities: - Strengthen commitment controls and budget execution to manage a tight budget and prevent new arrears. - Strengthen budget preparation, fiscal reporting, and macro-fiscal forecasting capacity; planned introduction of a new information system is crucial. - Improve public investment management (project appraisal) and undertake spending reviews of social programs. - Enact Public Procurement Act and extend procurement rules to extra-budgetary entities. - Approval of the PFM bill should provide legal framework for medium-term reforms. - Revenue administration: - Significant room to improve tax administration; creation of a semi-autonomous revenue authority planned for 2019. - Near-term focus: address deficiencies in business processes, taxpayer information systems, human resource management; develop capacity for in-house audits for large taxpayers; design strategy for medium-sized taxpayers; introduce presumptive regime for smaller ones. - Avoid new tax amnesties on tax arrears in absence of strong administration. - Extra-budgetary entities and public enterprises (PEs): - Public entities and enterprises "represent a significant burden for public finances and a source of significant fiscal risks." - Reforms should: (i) review scope and off-budget mandates, close/merge unneeded entities; (ii) enforce stronger control framework (creation, board appointments, business plans, performance agreements, borrowing powers); (iii) review cost structures including large wage costs; (iv) demarcate social, regulatory, commercial activities to strengthen accountability and efficiency and foster private participation. ### Fiscal risks, reporting, and monitoring - Off-budget financing (PPPs, PEs’ investment programs, special purpose vehicles) can create explicit and implicit contingent liabilities and reduce fiscal transparency. - Specific risk indicators: - By end FY17/18, "government’s loan guarantees are expected to amount to 7.5 percent of GDP." - Initial estimates suggest non-guaranteed liabilities from EBEs "could amount to about 20 percent of GDP." - Contingent liabilities from new off-budget initiatives could be large; some projects (e.g., in the energy sector) expected to cost "up to 7 percentage points of GDP." - Recommended actions: - Preserve transparency standards in fiscal accounts. - Develop a fiscal risks framework and publish a fiscal risks statement, starting with simple lists and evolving to scenario analysis. - Limit increases in domestic asset requirements and monitor sovereign-financial sector nexus. ### Monetary and financial sector stance - Policy guidance: - As the government consolidates, the Bank of Namibia (BoN) should continue supporting the peg by maintaining the policy rate "in line with the SARB." - Consider using well-targeted macroprudential tools to manage risks from a highly leveraged private sector and still overvalued real estate assets. ### Financial sector overview and vulnerabilities - Banking sector: - Assets about 75 percent of GDP. - Remains profitable and well capitalized. - NPLs have recently increased, albeit from very low levels. - Liquidity remains above regulatory requirements. - Banks’ holdings of government domestic debt: banks and NBFIs hold about 90 percent of government’s domestic debt. - Nonbank financial institutions (NBFIs) and pensions: - Large NBFIs with net assets about 138 percent of GDP. - Fully-funded government pension fund and several large insurance companies dominate the sector. - Key FSAP-identified vulnerabilities: - Interconnections: Asset managers and money market funds manage about 30 percent of pension funds’ and insurers’ assets; they provide about ¼ of banks’ funding (40 percent in some banks) and invest about 40 percent of their assets abroad. - Banking sector concentration and wholesale funding reliance pose counterparty and liquidity risks. - Elevated household indebtedness and mortgage exposures raise household vulnerability concerns. - Staff estimate average house price overvaluation at about 10 percent (down from about 18 percent three years ago). ### FSAP recommendations and policy measures to strengthen oversight and resilience - Banking oversight and supervision: - Strengthen liquidity regime to align with risks from volatile wholesale deposits. - Complete system-wide review of banks’ asset quality and enforce loan classification. - Improve consolidated supervision of financial groups. - NBFI supervision: - NAMFISA plans an extensive overhaul of the NBFI regulatory and supervisory framework; approve key legislation (NAMFISA and Financial Institutions and Market bills) and introduce implementing regulations. - Macroprudential framework and toolkit: - Establish a Financial Stability Council (FSC) including BoN, NAMFISA and MoF with an explicit macroprudential mandate. - Interim: assign the BoN the lead in assessing financial stability risks and exercising the macroprudential mandate in consultation with NAMFISA and MoF. - Expand toolkit: introduce DSTI limits and consider extending LTV limits to primary home purchases. - Crisis management and resolution: - Grant the BoN full bank and conglomerate resolution powers. - Require banks to submit recovery and resolution plans and operationalize emergency lending assistance. - Introduce a deposit insurance scheme meeting international norms. - Data and information: - NAMFISA to improve collection of granular data; BoN to accelerate household and corporate surveys for better risk assessment. ### Demographic transition and structural policy priorities - Demographic facts and potential: - More than 65 percent of the population, or about 3 million people, expected to be in the working age group by 2050. - Potential gains: per capita income potentially 25–50 percent higher if demographic transition is successfully leveraged. - Structural impediments and policy priorities: - Low education outcomes, skill mismatches, weaknesses in the business environment, wage dynamics in excess of productivity trends, and employment concentrated in less dynamic sectors. - Policy priorities under fiscal constraints: - Improve access and quality of secondary and higher education; strengthen technical and vocational training and on-the-job training. - Reduce gap between wage and productivity dynamics (e.g., containing public wages). - Streamline business regulations and improve labor market functioning (e.g., increase labor permits for skilled workers, efficient dispute resolution). ### Debt sustainability, external sector assessment, and stress tests - Debt dynamics and DSA findings: - Public debt rose from 16 percent of GDP (FY10/11) to 44.3 percent of GDP (FY16/17). - Under staff baseline, public debt ratio would reach about 69.7 percent of GDP by FY22/23. - Under the reform scenario (additional measures of about 5–6 percent of GDP, spread over three years), debt would decline to around 51 percent of GDP by FY22/23 and gross financing needs would be contained to below 17 percent of GDP on average. - External sector and reserve adequacy: - CA gap in 2016 estimated at -8½ percent of GDP (fitted CA deficit of 5.6 percent versus actual deficit of 14.1 percent). - IMF metric: reserves of 20 to 30 percent of GDP (or 100–150 percent of the metric) are considered adequate; latest level of 17½ percent of GDP (November 2017) is below such range. - Annex sensitivity: a 30 percent exchange rate depreciation in 2018 would increase external debt to about 85 percent of GDP. - Baseline external debt (percent of GDP): 2016: 60.2; 2017: 60.6; 2018: 64.4; 2019: 66.3; 2020: 67.3; 2021: 68.5; 2022: 68.7. - Stress-test scenario outcomes (selected): - Contingent liability shock: debt level of 83 percent of GDP by FY22/23; gross financing needs of 24 percent of GDP by FY22/23. - SACU revenue shock: debt-to-GDP ratio of about 80 percent by FY22/23; gross financing needs of 241 percent of GDP by FY22/23. - Macroeconomic-fiscal shock: debt-to-GDP ratio of 91 percent of GDP by FY22/23; gross financing needs of 28 percent of GDP by FY22/23. ### Public wage bill: scale, implications, and policy options - Key figures: - Public wage costs for central government employees reached 16.4 percent of GDP in FY 16/17 (42 percent of primary spending). - Wage bill expected to reach about 17 percent of GDP in FY17/18. - Wages absorbed about 55 percent of tax revenue in FY16/17. - Drivers and implications: - About 2/3 of the increase in the wage bill reflected wage increases; new hires accounted for one third. - On average, government wages increased in real terms by about 7 percent per year. - Rapid real wage growth can increase reservation wages, appreciate the real exchange rate, and reduce competitiveness. - Policy measures to contain the wage bill: - Short-term: maintain salary increases below inflation, suspend automatic salary increases, introduce temporary hiring rules, reduce temporary/contractual positions. - Medium-term: link pay to performance, align job requirements with compensation, strengthen HR management, enhance hiring controls (e.g., biometric technologies), conduct organizational and functional reviews. ### Tax revenue mobilization and administration - Tax structure and challenges: - Namibia tax revenue-to-GDP ratio: 29.2 percent in FY16/17. - Domestic tax revenues averaged about 19 percent of GDP over the last four years. - About one third of total tax revenues are shared receipts from SACU. - Tax policy options: - Eliminate special tax regimes under corporate tax. - Remove some VAT zero-rating provisions (residential property, residential utilities, fuel products, telecommunications). - Make foreign investment income of Namibian residents taxable. - Ring-fence business losses; introduce earnings stripping rules to limit interest deductibility. - Administration reforms: - Address TADAT-identified weaknesses (data integrity, taxpayer register, documented procedures, service standards). - Semi-autonomous revenue authority planned for 2019; near-term operational improvements needed. ### Financial stability architecture, crisis preparedness, and FMI modernization - Governance and mandates: - Financial System Stability Committee (FSSC) has no decision-making authority; no institution has explicit macroprudential mandate. - Recommendation: assign macroprudential mandate to BoN until Financial Stability Council (FSC) is established. - Crisis management: - Need to develop recovery and resolution plans; grant BoN full resolution powers; operationalize emergency liquidity assistance; introduce deposit insurance aligned with international norms. - FMI and legislative priorities: - FMI is "mostly modern"; prompt enactment of Banking Institutions, BoN, Financial Institutions and Markets, NAMFISA, Financial Services Adjudicator, Deposit Insurance, and Microlending bills recommended. - Improve FMI oversight focusing on operational risk and cyber resilience. ### Data, statistics, and reporting gaps - Main shortcomings: - Government Finance Statistics: annual GFS on cash basis with poor timeliness and lack of detailed classifications and balance sheet data. - CPI weights based on 2009/10 HIES; need to update using 2015/16 HIES. - Financial Soundness Indicators suffer reporting inconsistencies and do not cover nonbank financial institutions. - Balance of Payments and IIP: quarterly with one-quarter lag; room to improve consistency with MFS. ### Staff appraisal — macroeconomic context and priorities - Summary observations: - Expansionary fiscal policy and mining-led investment during 2010–2015 masked productivity weaknesses and increased vulnerabilities. - The economy is in an adjustment phase; downside risks dominate. - Key policy challenges: - Manage adjustment and bring public debt to a sustainable path. - Address macro-financial risks from the large and interconnected financial sector. - Generate sufficient jobs to manage demographic changes, reduce income inequality and deliver more inclusive growth. ### Conclusion and policy priorities - Outlook: greater optimism about a gradual economic recovery over the medium-term. - Policy priorities: - Implement additional fiscal adjustment (cumulative 5–6 percent of GDP over next three years starting FY18/19) anchored in long-lasting measures. - Contain public wage bill dynamics; rationalize transfers to extra-budgetary entities; reduce tax exemptions; boost consumption tax revenue; better target social cash transfers. - Strengthen PFM, revenue administration, fiscal risk management, financial sector oversight, macroprudential framework, and crisis management. - Advance structural reforms to improve education, skills, business environment, labor market functioning, and harness demographic transition. - Role of the IMF: IMF analysis, advice and technical assistance remain integral to the authorities’ overall strategy. *Source: cr1856 — IMF staff report excerpts and annexes as provided.* ### 1. Reporting, Monitoring, and Managing Fiscal Risks ____________________________________________ 13 ### 1. Reporting, Monitoring, and Managing Fiscal Risks ____________________________________________ 13 ### Context: Economy at a Turning Point - Between 2010–2015, Namibia’s annual GDP growth averaged 5½ percent. - Growth during 2010–2015 was partly driven by construction of large mines and an expansionary fiscal policy that temporarily boosted investment. - Diamonds, copper, gold, uranium and zinc constitute about 40–45 percent of the country’s goods exports, and account for about 8 percent of GDP (services account for about 60 percent of GDP). - The peg with the South African rand contributed to contain inflation; Namibia is a member of the Common Monetary Area (CMA). - Despite improved living standards, productivity deteriorated, macroeconomic vulnerabilities rose, and large fiscal deficits led to a sharp increase in public debt. - The current account deficit widened and international reserve coverage fell below adequate levels during the expansion. - Rapid credit growth financed expansion, fueling fast-rising house prices and elevated private sector indebtedness; unemployment remained high and inequality is among the highest in the world. ### 2016–2017 Turning Point and Adjustment - Real GDP growth decelerated in 2016 to 1.1 percent as mining-sector construction ended and the government began consolidating. - In 2017 the economy contracted in the first three quarters as construction and retail and wholesale activities declined. - The 2016 current account deficit remained large at 14.1 percent of GDP, despite lower imports and improved exports, because SACU receipts declined and income flows deteriorated. - External public and private debt increased to 60.2 percent of GDP (48.2 percent in 2015); the net international investment position turned negative. - International reserve coverage improved to 3.7 months of projected imports, partly sustained by Bank of Namibia (BoN)’s swap operations. - The authorities implemented substantial reductions in non-wage expenses and capital outlays in FY16/17; despite a sharp decline in SACU revenue (3 percent of GDP), the FY16/17 deficit increased by about ¾ percentage point of GDP to 11.1 percent of GDP (10⅓ percent in FY15/16). - About N$3.9 billion in domestic arrears (2.4 percent of GDP) accumulated when spending reductions were introduced late in the fiscal year; arrears mainly occurred in non-wage operational and capital spending and have been largely cleared. - Public debt increased to 44.3 percent of GDP (including domestic arrears), above the median of the countries at the lowest tier of investment grade. - Gross financing needs remained high (about 18 percent of GDP); increased domestic borrowing raised yields on government debt and contributed to Moody’s and Fitch lowering the sovereign credit rating to below investment grade. - Private sector credit growth averaged 14 percent between 2010–15, declined in 2016 and reached 4.5 percent at end 2017. - Annual house price increase slowed to 7 percent (9 percent on average over the last five years). - Banks’ holdings of government securities reached about 10 percent of banks’ assets; NPLs increased albeit from very low levels. - Headline inflation averaged 7.3 percent in 2016, peaked at 8.2 percent in January 2017, and declined to 5.2 percent in December 2017. - The BoN reduced its policy rate in August to 6.75 percent, citing lower projected inflation. ### Outlook and Risks - After three negative quarters, real GDP is projected to have contracted by 1.2 percent in 2017. - Growth is projected to resume in 2018 as mining production ramps up, construction stabilizes and manufacturing recovers, before converging to a long-term rate of about 3½ percent (Annex II). - Headline inflation is projected to rise somewhat but remain below 6 percent as the economy recovers. - Compared to 2016, structurally higher mineral exports and low imports would halve the trade deficit and reduce the current account deficit to around 5–6 percent of GDP by 2019. - International reserve coverage would gradually decline; external financial inflows and SACU receipts will remain critical to guarantee macroeconomic stability. - Risks are tilted to the downside: - Main risk: fiscal slippages that could undermine confidence in the government’s ability to control public finances. - Domestic risks: slower recovery in mining and construction; sudden corrections in an overvalued housing market. - External risks: further declines in SACU revenue if growth in South Africa deteriorates; lower demand for key exports and subdued commodity prices if China addresses domestic imbalances, protectionist pressures rise, or growth in trading partners and Angola slows. - Global risk: tighter global financial conditions prompted by rising US policy rates. - Macro-financial feedback loops could amplify shocks: - External shocks and fiscal imbalances could reduce exports and GDP growth, deteriorate external and fiscal balances, increase public debt and reduce international reserve coverage. - Further fiscal slippages could undermine consolidation credibility, intensifying negative effects. - Weak demand would decelerate private sector credit, prompt house price declines, and—given elevated household indebtedness—negatively affect banks’ asset quality and financial intermediation, feeding back to growth. ### Authorities’ Views - Authorities concurred that the economy is undergoing a complex adjustment and broadly agreed with staff’s outlook and risk assessment. - They expected 2017 GDP contraction to be somewhat less severe than staff projections due to a lower decline in government activities and a stronger manufacturing recovery. - Authorities acknowledged risks from external shocks and that further fiscal slippages may undermine consolidation credibility. - They agreed that without policy action public debt dynamics are not sustainable and macro-financial loops could amplify shocks. - Plans: - Contain the FY17/18 deficit within budget projections while avoiding further arrears accumulation. - Press ahead with revised medium-term adjustment plans in the FY18/19 budget context, as announced in the November 2017 Medium-Term Policy Statement. ### Policy Discussions — Calibrating and Designing Fiscal Adjustment - The FY17/18 Budget and 2017 Medium-Term Policy Statement envisaged continuation of fiscal adjustment to stabilize public debt dynamics. - FY17/18 budget targeted deficit of 3.4 percent of GDP (5.6 percent including arrears payments). - Over the medium term, a gradual reduction in public spending of about 2 percentage points of GDP per year would reduce the fiscal deficit and stabilize public debt dynamics. - The extent and quality of measures underpinning the planned medium-term spending reduction remain to be identified. - Staff estimates under current policies: - FY17/18 fiscal deficit expected to narrow to about 5 percent of GDP despite higher revenue than authorities projected, due to rising wages and spending pressures from the previous year. - The projected FY17/18 deficit largely reflects temporarily higher SACU revenue and is not sustainable. - Over the medium term, with SACU revenues expected to decline and absent additional actions, the fiscal deficit is projected to increase to around 9–10 percent of GDP. - Public debt would continue rising and approach 70 percent of GDP by 2022. - Government’s gross financing needs would average about 21 percent of GDP per year, creating financing pressures and possible funding risks. - Main fiscal risk: larger contingent liabilities as the government plans to boost public-private partnerships (PPPs) and extra-budgetary financing of large infrastructural projects (Box 1; Annex IV). *IMF Country Report excerpt: 1. Reporting, Monitoring, and Managing Fiscal Risks, pages 13–9 (selected).* ### 13. Additional fiscal adjustment is needed to bring public debt on a declining path and ### 13. Additional fiscal adjustment is needed to bring public debt on a declining path and ### Fiscal adjustment need and timing - Staff baseline: "5–6 percent of GDP in measures is needed over time to reach a primary balance that can bring the public debt ratio on a declining path." - Adjustment should be spread over time; recent budget support from international financial institutions offers the opportunity to spread the adjustment "over the next three years, starting with the FY18/19 budget." - Given openness and relatively low fiscal multipliers, staff estimated fiscal adjustment "may negatively affect annual growth on average by 0.6 percentage points per year over the consolidation period." - Risk: uncertainty in South Africa could reduce Namibia’s financing opportunities from the South African market and "dictate a more frontloaded approach at the cost of lower growth." ### Composition of recommended measures (menu of options) - Overall possible budget savings by FY20/21: "Up to 8.2" (percent of GDP). - Expenditure measures: "Up to 6.5" (percent of GDP) - Contain the wage bill: "limiting salary indexation and new hiring" — "2.5-3.5" (percent of GDP). - Reduce transfers to public enterprises (reforming large enterprises e.g., Air Namibia, Transnamib Holding) — "0.2-0.4" (percent of GDP). - Rationalize transfers to other extra-budgetary entities (e.g., sub-national governments) — "1.5-2.0" (percent of GDP). - Improve targeting of social grants, allowances and other benefits — "0.7" (percent of GDP). - Revenue measures: "Up to 1.7" (percent of GDP) - Increase domestic levies (e.g. fuel levy, luxury goods) — "0.3" (percent of GDP). - Increase SACU excises above SACU rates (e.g. alcohol, tb) — "0.8" (percent of GDP). - Remodule PIT rates — "0.3-0.6" (percent of GDP). - Strengthen corporate income tax and close tax loopholes (e.g., ringfence loss carry forward; limit interest deductions; introduce withholding tax on domestic and foreign sourced dividends) — "++". - Broaden the VAT base (e.g., eliminate zero rating and exemptions on real estate, telecommunications, fuel products) — "++". - Staff recommendation: aim for long-lasting measures (contain large fast-rising expenditure items such as wages and transfers while protecting social assistance programs), and well-designed increases in domestic revenue (e.g., "¼ of the adjustment package" from revenue). ### Medium-term projections (Reform Scenario) — key statistics (percent of GDP unless otherwise specified) - Real GDP Growth (annual change): 1.1, -1.2, 0.8, 2.6, 3.2, 3.6, 3.7 (for years 2016–2022 as presented). - Credit to the Private Sector (annual change): 8.6, 4.5, 5.5, 7.2, 8.4, 9.5, 9.5. - Fiscal Balance: -9.3, -5.2, -7.0, -6.6, -3.8, -3.1, -3.0. - Revenue (including SACU receipts): 31.2, 34.2, 32.0, 30.8, 32.2, 32.0, 32.2. - o/w additional measures (cumulative): ......, 0.4, 0.9, 1.3, 1.3, 1.3. - Expenditure: 40.5, 39.4, 39.0, 37.4, 36.0, 35.1, 35.2. - Current Expenditure: 35.4, 35.3, 34.4, 33.2, 31.8, 31.6, 31.7. - o/w additional measures (cumulative): ......, -1.3, -2.6, -3.9, -3.9, -3.9. - Capital Expenditure: 5.2, 4.1, 4.6, 4.2, 4.2, 3.5, 3.5. - Fiscal Balance (excluding SACU): -18.0, -16.6, -16.4, -14.5, -12.5, -11.6, -11.5. - Primary Balance: -6.7, -2.2, -3.5, -2.8, 0.3, 1.0, 1.3. - Primary Balance (excluding SACU): -15.3, -13.6, -13.0, -10.7, -8.5, -7.5, -7.2. - Adjustment (cumulative): ......, -1.7, -3.5, -5.2, -5.2, -5.2. - Gross Financing Needs: 18.0, 17.9, 19.2, 16.7, 15.2, 17.5, 14.4. - Public Debt (excl. guarantees): 44.3, 46.5, 50.1, 53.1, 53.0, 51.9, 50.7. - Current Account Balance: -14.1, -1.5, -2.7, -3.0, -2.3, -2.3, -2.3. - Gross International Reserves (months of imports): 3.7, 4.2, 4.3, 4.5, 4.6, 4.8, 4.9. ### Public financial management, revenue administration, and extra-budgetary entities - Public Financial Management (PFM) priorities: - Strengthen commitment controls and budget execution to manage a tight budget and prevent new arrears. - Strengthen budget preparation, fiscal reporting, and macro-fiscal forecasting capacity; planned introduction of a new information system is crucial. - Improve public investment management (project appraisal) and undertake spending reviews of social programs. - Public Procurement Act enactment and extending procurement rules to extra-budgetary entities could reduce costs. - Approval of the PFM bill should provide the legal framework for medium-term reforms. - Revenue administration: - Significant room to improve tax administration; creation of a semi-autonomous revenue authority planned for 2019. - Near-term focus: address deficiencies in business processes, taxpayer information systems, human resource management; develop capacity for in-house audits for large taxpayers; design strategy for medium-sized taxpayers; introduce presumptive regime for smaller ones. - Authorities should avoid new tax amnesties on tax arrears in absence of strong administration. - Extra-budgetary entities and public enterprises (PEs): - With few exceptions, public entities and enterprises "represent a significant burden for public finances and a source of significant fiscal risks." - Reforms should: (i) review scope and off-budget mandates, close/merge unneeded entities; (ii) enforce stronger control framework (creation, board appointments, business plans, performance agreements, borrowing powers); (iii) review cost structures including large wage costs; (iv) demarcate social, regulatory, commercial activities to strengthen accountability and efficiency and foster private participation. ### Fiscal risks, reporting, and monitoring - Off-budget financing (PPPs, PEs’ investment programs, special purpose vehicles) can create explicit and implicit contingent liabilities and reduce fiscal transparency. - The announced increase in domestic asset requirements for NBFIs could expand domestic financing for new projects but "risks heightening the sovereign-financial sector nexus and increasing financial stability risks." - By end FY17/18, "government’s loan guarantees are expected to amount to 7.5 percent of GDP." - Initial estimates suggest non-guaranteed liabilities from EBEs "could amount to about 20 percent of GDP." - Contingent liabilities from new off-budget initiatives could be large; some projects (e.g., in the energy sector) expected to cost "up to 7 percentage points of GDP." - Recommended actions: - Preserve transparency standards in fiscal accounts. - Develop a fiscal risks framework and publish a fiscal risks statement, starting with simple lists and evolving to scenario analysis. - Limit increases in domestic asset requirements and monitor sovereign-financial sector nexus. ### Monetary and financial sector stance - As the government consolidates, the Bank of Namibia (BoN) should continue supporting the peg by maintaining the policy rate "in line with the SARB." - Consider using well-targeted macroprudential tools to manage risks from a highly leveraged private sector and still overvalued real estate assets. ### Authorities' views - Authorities agree additional fiscal adjustment is needed and have announced tight deficit targets for FY18/19. - They concur that a cumulative adjustment of "5–6 percent of GDP is needed over the next three years, starting with the FY18/19 budget." - Authorities view past year arrears as largely one-off and project the public debt ratio to peak at a significantly lower level than staff’s estimate. - Agreed policy directions: anchor adjustment in long-lasting measures and structural reforms; contain public wage bill; reform extra-budgetary entities and public enterprises; liquidate non-essential loss-making enterprises; broaden the tax base and close tax loopholes; improve targeting of cash transfers (including introduction of proxy means testing); preserve fiscal transparency and publish a fiscal risks statement. *cr1856 - 13. Additional fiscal adjustment is needed to bring public debt on a declining path and* ### 20. Namibia’s financial sector has so far weathered the economic slowdown. The banking ### 20. Namibia’s financial sector has so far weathered the economic slowdown. The banking ### Financial sector overview - Banking sector: - Assets about 75 percent of GDP. - Remains profitable and well capitalized. - NPLs have recently increased, albeit from very low levels. - Liquidity remains above regulatory requirements. - Banks’ loan books are concentrated and banks extensively rely on wholesale funding, posing concentration risks. - Nonbank financial institutions (NBFIs) and pension/insurance: - Large NBFIs with net assets about 138 percent of GDP. - A fully-funded government pension fund and several large insurance companies dominate the sector. - Interconnections and public sector links: - Presence of four large and heterogeneous financial conglomerates with close linkages to South Africa. - Significant financial and ownership interconnections between banks and NBFIs add complexity to the financial system and supervision. - Both banks and NBFIs hold about 90 percent of government’s domestic debt. - Financial inclusion and access to credit: - Despite a well-developed financial sector and levels of financial inclusion that compare well to peer economies, a significant share of the population has no access to credit services. - Banks are reticent to lend to small businesses and the low-income and rural population. ### Key macro-financial risks and vulnerabilities (as identified by the 2018 FSAP) - Interconnections among financial institutions: - Asset managers and money market funds manage about 30 percent of pension funds’ and insurers’ assets. - They provide about ¼ of banks’ funding (40 percent in some banks). - They invest about 40 percent of their assets abroad, largely in equities. - Asset managers and money market funds are almost twice as large as banks, creating potentially significant contagious channels between banks, NBFIs and foreign financial markets. - Banking sector vulnerabilities: - Highly concentrated loan books and extensive reliance on wholesale deposits point to counterparty, asset-class concentration and liquidity risks. - FSAP stress test analysis (based on balance sheet data as of June 2017 and covering the four largest banks, accounting for about 98 percent of total bank assets) suggests: - Banks can withstand significant increases in NPLs arising from an adverse macroeconomic scenario. - In a severely adverse event, some banks would have difficulty in complying with future capital requirements, with possible negative effects on credit and growth. - Liquidity risks: while the banking system on average can withstand liquidity shortfalls, banks with large non-retail funding bases are likely to experience moderate liquidity shortfalls in case of shocks. - Private sector indebtedness: - Elevated household indebtedness combined with banks’ large exposures to residential mortgages raises concerns about household vulnerabilities and banks’ resilience. - Corporate leverage is elevated, but domestic banks’ exposure to corporations is relatively limited; foreign exposures appear concentrated in a few mining companies. - Households’ estimated balance sheets suggest probability of default significantly increases with household leverage and debt service-to-income (DSTI) ratios; middle-upper income households are particularly vulnerable to income and interest rate shocks. - Banks’ balance sheets appear resilient to possible shocks to households’ balance sheets and house price corrections (subject to stress scenarios below). - Residential real estate and house price valuation: - Staff estimate that, with the economy decelerating, house prices remain on average overvalued by about 10 percent, down from about 18 percent three years ago. - FSAP sensitivity analysis: - All banks are resilient to a full correction in house price overvaluation. - In the case of an overcorrection (e.g., 20 percent price decline), some banks would be unable to comply with capital requirements, leading banks to deleverage with negative effects on credit and growth. ### FSAP recommendations and policy measures to strengthen oversight and resilience - Improving banking sector oversight: - Strengthen the liquidity regime to better align requirements to risks posed by large and potentially volatile wholesale deposits. - Complete a system-wide review of banks’ asset quality (given evidence of possible loan misclassifications) and enforce loan classification. - Improve consolidated supervision of financial groups given extensive interconnections across financial institutions. - Enhancing supervision of NBFIs: - NAMFISA plans an extensive overhaul of the NBFI regulatory and supervisory framework to address regulatory gaps and introduce risk-based supervision. - Approve key legislation, including the NAMFISA and the Financial Institutions and Market bills, and introduce implementing regulations. - Given capacity constraints, prioritize and sequence new implementing regulations in partnership with industry to preserve risk-based supervision. - Macroprudential framework and toolkit: - Establish a Financial Stability Council (FSC) including BoN, NAMFISA and MoF with an explicit macroprudential mandate and power to issue macroprudential directives. - Interim: assign the BoN the lead in assessing financial stability risks and exercising the macroprudential mandate in consultation with NAMFISA and MoF. - Expand toolkit: introduce DSTI limits and consider extending recently introduced LTV limits to primary home purchases; DSTI limits would address household vulnerabilities and counteract the tendency for LTV limits to become less binding as property prices increase. - Crisis management and resolution framework: - Grant the BoN full bank and conglomerate resolution powers. - Require banks to submit recovery and resolution plans. - Operationalize emergency lending assistance. - Strengthen cooperation with SARB in recovery and resolution planning of large groups. - Introduce a deposit insurance scheme that meets international norms. - Addressing information and data gaps: - NAMFISA should continue to improve collection of granular data critical for risk-based supervision. - BoN should accelerate development of household and corporate surveys to better gauge risks from private sector leverage and operationalize the extended macroprudential toolkit. ### Authorities’ views and actions - Authorities broadly agree with FSAP findings and are moving to address key recommendations. - Actions and intentions: - Complete a review of banks’ asset quality by mid-2018. - Reassess liquidity regulations to make them more forward looking. - Present to parliament key legislation to reform the legal and regulatory framework of the sector by early 2018. - NAMFISA intends to issue an extensive set of implementing regulations and considers sufficient consultation with industry has taken place. - Authorities committed to create a macroprudential policy framework, agree the FSC should have a macroprudential mandate, and before its creation assign such mandate to the BoN. - BoN will assess the opportunity to introduce further macroprudential limits at a later stage. - Authorities agreed to strengthen the crisis management and resolution framework, including instituting a special resolution regime under updated Banking Institutions and Bank of Namibia Acts. ### Leveraging the demographic transition (context and policy implications) - Demographic change: - More than 65 percent of the population, or about 3 million people, expected to be in the working age group by 2050. - Potential gains: per capita income potentially 25–50 percent higher if demographic transition is successfully leveraged. - Risks and structural impediments: - Low employment elasticity to growth may prevent sufficient job creation, risking rising unemployment despite sustained growth. - Structural factors limiting job creation include: - Low education outcomes, particularly for higher education skills. - Weaknesses in the business environment, including starting businesses and obtaining labor permits. - Wage dynamics in excess of productivity trends. - Employment concentrated in less dynamic sectors (e.g., agriculture). - Policy priorities to boost job creation under tight fiscal constraints: - Human capital and skill mismatches: - Improve access and quality of secondary and higher education. - Strengthen technical and vocational training programs and on-the-job training to align skills with job needs and ease school-to-work transition. - Wage dynamics and business conditions: - Reduce gap between wage and productivity dynamics (e.g., containing public wages) to boost employment elasticity to growth. - Streamline business regulations (starting businesses, registering property and land) and improve labor market functioning (increase labor permits for skilled workers, efficient dispute resolution). - Reforms could bolster labor-intensive sectors (e.g., manufacturing) and improve employment absorption. ### Staff appraisal — macroeconomic context and priorities - Recent performance and vulnerabilities: - Between 2010 and 2015, expansionary fiscal policy, construction of large mines, and buoyant credit supported growth and living standards, but masked negative productivity performance and rising vulnerabilities. - Public debt increased sharply, the current account widened, and international reserve coverage fell below adequate levels. - Rapid credit expansion contributed to fast-rising real estate prices and elevated private sector indebtedness. - Structural impediments have kept unemployment high and income inequality remains unacceptably high. - Outlook and key policy challenges: - The economy is in an adjustment phase: Real GDP expected to have contracted in 2017 and start resuming growth in 2018. - With low SACU revenue, public debt would rise, external deficit remain sizable, international reserve coverage linger below adequate levels, and overall external position moderately weaker than fundamentals justify. - Downside risks dominate: fiscal slippages, lower demand for key exports, further declines in SACU revenue; negative impacts could be amplified by macro-financial linkages. - Namibia’s key policy challenges are to: - Manage the ongoing adjustment and bring public debt to a sustainable path. - Address macro-financial risks and vulnerabilities from the large and interconnected financial sector. - Generate sufficient jobs to manage demographic changes, reduce income inequality and deliver more inclusive growth. *IMF staff compilation from the 2018 FSAP and related country analysis.* ### 30. Following recent consolidation efforts, additional fiscal adjustment is needed to bring ### Following recent consolidation efforts, additional fiscal adjustment is needed to bring public debt on a declining path ### Fiscal adjustment needs and timeline - Staff assess that a cumulative 5–6 percent of GDP in measures is needed to ensure debt sustainability. - The adjustment should be spread over the next three years, starting with the FY18/19 budget. - The adjustment is equivalent to the spending increases observed in recent years and is consistent with the authorities’ consolidation plans. - To contain negative effects on growth, measures should be carefully designed to include a combination of spending and revenue measures that support long-term growth while mitigating negative distributional effects. ### Recommended fiscal measures - Contain public wage bill dynamics. - Rationalize transfers to extra-budgetary entities. - Reduce tax exemptions. - Boost consumption tax revenue. - Better targeting of social cash transfers to protect the poor and strengthen the distributional impact of public spending. ### Fiscal governance and risk management - Reforms to improve budget formulation and expenditure controls are critical to buttress the credibility of consolidation plans. - Strengthen revenue administration and the management of extra-budgetary entities. - Prepare a fiscal risks statement to monitor and manage fiscal risks, particularly from the expanding off-budget financing of large public investment projects. ### Macroeconomic and monetary policy interactions - Additional fiscal adjustment will curb domestic demand and help reach an external position broadly in line with medium-term fundamentals. - Adjustment would facilitate the accumulation of adequate levels of international reserves. - The BoN should maintain the policy rate in line with the SARB’s rate. - The BoN should consider using well-targeted macroprudential tools to manage risks from the highly leveraged private sector and still overvalued real estate assets. ### Financial sector oversight and macroprudential framework - Early steps: review of banks’ asset quality and reassessment of liquidity regulations to improve banking sector oversight. - With a large non-bank financial sector, approve planned legislative changes to address regulatory gaps and sequence implementing regulations. - Introduce risk-based supervision and step up efforts to improve consolidated supervision of financial groups given interconnections between banks and NBFIs and cross-border linkages. - Accelerate plans to create and assign to the Financial Stability Council an explicit macroprudential mandate with directive powers. - Before the council is established, the BoN should exercise such mandate and complement the macroprudential toolkit with DSTI ratio limits and additional macroprudential measures as needed. - Develop a full crisis management and resolution framework, including granting the BoN and NAMIFISA full resolution powers and conducting recovery and resolution planning. ### Structural reforms to boost job creation and inclusive growth - Focus reforms where potential is highest: - Reduce skill mismatches in the labor market (improve access and quality of secondary and higher education, vocational and on-the-job training programs). - Better align wage and productivity dynamics (contain public wage increases). - Streamline business regulation (starting businesses, registering properties and land). - Improve functioning of the labor market (increase labor permits for skilled workers, more efficient dispute resolution processes). *Source: cr1856 - 30.* ### 34. It is proposed that the next Article IV consultation with Namibia be held on the standard ### cr1856 - 34. It is proposed that the next Article IV consultation with Namibia be held on the standard ### Living standards, unemployment, and inequality - Growth and living standards - Namibia experienced a prolonged period of strong growth and improving living standards; real income per capita (2000=100) outperformed many peers. - GDP at constant prices (percent change): 6.4, 6.0, 1.1, -1.2, 1.2, 3.3, 3.8, 3.5, 3.5 (2014–2022 Est/Proj from Table 1). - Poverty and unemployment - Poverty has declined, but unemployment is persistently high, especially for youth (ILO estimates shown graphically). - Inequality - Income inequality has been decreasing slowly but remains among the highest in the world (Gini values shown in figures). ### Growth deceleration, productivity, and inflation - Growth drivers and deceleration - Until 2015, large mining construction and expansionary fiscal policy temporarily boosted growth; thereafter mining construction halted and fiscal consolidation began, investment collapsed and growth decelerated. - Growth decomposition (2009–2016) shows weak contributions from TFP and capital in recent years. - Inflation and monetary policy - Inflation (end of period consumer prices): 4.6, 3.7, 7.3, 5.2, 5.7, 5.8, 5.8, 5.7, 5.8 (2014–2022 Est/Proj from Table 1). - BoN lowered its repo rate for the first time since 2012 following SARB; repo rate (end-period) listed in monetary tables (e.g., BoN repo rate 6.0, 6.5, 7.0... in Monetary Accounts). ### External sector vulnerabilities - Current account and reserves - Current account balance (percent of GDP): -9.4, -14.1, -14.1, -1.5, -3.6, -5.1, -5.7, -5.7, -5.7 (2014–2022 Est/Proj, Table 1). - Despite low capital inflows, international reserve import coverage increased partly due to BoN swap operations; gross official reserves (US$ millions): 1,198; 1,580; 1,791; 2,193; 2,158; 2,155; 1,799; 1,588; 1,579 (2014–2022, Table 4). - Months of imports of goods and services: 2.0, 3.0, 3.7, 4.1, 3.8, 3.5, 2.8, 2.4, 2.3 (2014–2022, Table 1/4). - External financing and NIIP - Net international investment position turned negative; gross external financing needs remained high (figures shown). - External debt (US$ millions from IIP): 5,497; 5,575; 6,584; 7,644; 8,567; 9,329; 10,059; 10,787; 11,390 (2014–2022, Table 4). ### Fiscal consolidation and public debt dynamics - Fiscal adjustment to date - After years of expansionary policy, FY16/17 fiscal deficit narrowed despite a sharp reduction in SACU revenue, via large reductions in non-wage recurrent and capital spending. - Key fiscal aggregates (percent of GDP, Table 3) - Total revenue and grants: 35.4, 34.6, 31.2, 34.2, 31.6, 30.0, 30.9, 30.6, 30.6 (2014/15–2022/23 Est/Proj). - Expenditure and net lending: 42.1, 43.2, 40.5, 39.4, 40.1, 39.9, 39.9, 39.4, 39.9. - Overall balance: -6.7, -8.7, -9.3, -5.2, -8.5, -9.9, -9.0, -8.8, -9.3. - Primary balance: -5.2, -6.9, -6.7, -2.2, -5.1, -5.9, -4.5, -3.9, -3.6. - Public debt - Public debt/GDP: 24.8, 39.4, 44.3, 46.5, 51.4, 57.3, 61.9, 65.7, 69.7 (2014/15–2022/23 Est/Proj, Table 1). ### Financial sector, credit, and inclusion - Credit growth and bank soundness - Domestic credit to the private sector (percent change): 17.9, 13.8, 8.6, 4.5, 4.9, 5.4, 5.8, 6.3, 6.4 (2014–2022, Table 1/5). - Private sector credit growth decelerated for corporates and households; mortgages and non-mortgage credits slowed. - Banks are well capitalized; regulatory capital to risk-weighted assets has been in double digits (see Table 6 series); NPLs have increased recently but remain moderate (Nonperforming loans to total gross loans: around 1.5–2.2 percent in recent observations). - Financial inclusion and access to credit - Account at a financial institution compares well with peers, but borrowing from banks is concentrated among top income groups; access to credit remains unequal. ### Macrofinancial risks and exposures - Private leverage and corporate debt - Household debt to disposable income and corporate borrowing (percent of GDP) are elevated relative to many emerging market peers (figures shown). - Borrowing of non-financial corporations (percent of GDP, 2016) places Namibia among higher levered countries in the sample. - Bank funding and concentration - Banks’ funding is highly dependent on wholesale deposits and funding from other financial institutions. - Banks’ loan books show concentration (loan composition: mortgages, overdrafts, instalments, personal). - Interconnectedness and foreign exposures - Financial system is highly interconnected with significant foreign exposures across institutions; asset exposures by institution include Rest of the World, South Africa, and Namibia components. ### Public spending efficiency and human capital outcomes - Spending profile - Public spending is higher than in most peers; current spending more than doubled over the last fifteen years. - Change in total spending (2002–16, percent of GDP) shows increases driven primarily by current spending. - Infrastructure and social outcomes - Physical infrastructure quality is relatively good. - Despite high social spending, education outcomes are poor, particularly at higher education levels; health outcomes are below peers in the region. - Education spending per student (PPP$) and net enrollment rates displayed in comparative charts. ### Demographic transition and structural constraints - Demographic outlook and potential dividend - Namibia is undergoing demographic transition: declining fertility and mortality rates; more than 60 percent of the population expected to be working age by 2050 (figures and projections shown). - Historical comparisons suggest countries that completed transitions enjoyed significant increases in per capita GDP; potential gains are illustrated for Namibia under scenarios that convert working-age growth into employment. - Structural impediments that could limit benefits - Secondary and tertiary enrollment low relative to other upper-middle income countries; high skill mismatches are observed. - High skill mismatches are associated with higher unemployment; disconnect between wage and productivity growth is keeping unemployment high (figures on wage-productivity gaps). - Business conditions and labor market functioning indicators (Global Competitiveness values) show weaknesses: higher education and training, labor market efficiency, flexibility of wage determination, access to loans, and infrastructure quality are areas of concern. ### Key tables and indicators (selected exact series) - GDP at constant prices (percent change): 6.4, 6.0, 1.1, -1.2, 1.2, 3.3, 3.8, 3.5, 3.5 (Table 1). - Consumer prices (end of period): 4.6, 3.7, 7.3, 5.2, 5.7, 5.8, 5.8, 5.7, 5.8 (Table 1). - Current account balance (percent of GDP): -9.4, -14.1, -14.1, -1.5, -3.6, -5.1, -5.7, -5.7, -5.7 (Table 1). - Gross official reserves (US$ millions): 1,198; 1,580; 1,791; 2,193; 2,158; 2,155; 1,799; 1,588; 1,579 (Table 1 / Table 4). - Public debt/GDP (percent): 24.8, 39.4, 44.3, 46.5, 51.4, 57.3, 61.9, 65.7, 69.7 (Table 1). - Domestic credit to the private sector (percent change): 17.9, 13.8, 8.6, 4.5, 4.9, 5.4, 5.8, 6.3, 6.4 (Table 1 / Table 5). *Source: Namibian authorities and Fund staff estimates, as presented in the IMF staff report (figures, tables, and text excerpts).* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### A. Recent Trends - Namibia’s current account (CA) and net international investment position (NIIP) deteriorated further in 2016. - The CA turned from positive to negative since 2006, reaching a deficit of 14.1 percent in 2016. - Main drivers of CA deterioration: - Surge in imports as a share of GDP during the global financial crisis. - An expansionary fiscal stance and the construction of new mines. - Trade balance in 2016 improved due to: - Higher exports (recovery in global diamond markets and higher production from some new mines). - Lower imports as construction of new mines came to an end and the economy sharply deteriorated. - Offsetting factors in 2016: - Abrupt decline in SACU receipts. - Larger income and service deficits. - Savings and investment decomposition: - Main driver of CA deterioration has been the decline in the public balance resulting from an expansionary fiscal stance. - NIIP dynamics: - NIIP has been deteriorating since 2009. - In 2016, the NIIP turned negative to -14½ percent of GDP (1 percent of GDP in 2015). - Deterioration attributed to a sharp increase in external liabilities from both the government and non-bank corporates. - Financing composition and needs: - CA deficit mostly financed with FDI and other investments; portfolio investments have generally registered net outflows. - Early 2000s: positive net portfolio investment due to large investments abroad by non-bank financial institutions, mostly the public pension fund. - Eurobond issuance in 2011 and 2015 generated large offsetting portfolio inflows. - In 2015 FDI increased while other investments fell as loans from parent mining companies were transformed into equity. - In 2016, financial flows returned to pre-2015 composition. - Gross external financing requirements increased to about 32 percent of GDP, with about half corresponding to short term debt. - Exchange rate and reserves: - Namibian dollar pegged at par to the South African rand; REER largely follows the rand. - REER movements: depreciated by 30 percent between 2010–2015, then appreciated by 20 percent thereafter; in June 2017 REER returned to its ten-year average, then depreciated by about 5 percent in the second half of the year. - International reserves fluctuated around 10–15 percent of GDP over the past ten years. - At end 2016 reserves stood at 14.7 percent of GDP (3.7 months of projected imports). - In November 2017 reserves increased to about 4.1 months of imports reflecting an AfDB budget support loan disbursement and an improving current account. ### B. External Position Assessment - Methodology: - Assessment uses two IMF panel regression-based methodologies: the CA and REER External Balance Assessment (EBA)-lite models. - These models treat CA and REER as endogenous and simultaneously determined functions of domestic and external variables, policy variables, cyclical conditions, and global environment. - CA gap = observed CA − fitted CA from the CA-EBA-lite regression; gap decomposed into deviations of policy variables from adequate levels and regression residuals; gap converted into REER misalignment using estimated trade elasticities. - Model findings (2016 data unless otherwise stated): - CA gap estimated at -8½ percent of GDP (fitted CA deficit of 5.6 percent versus actual deficit of 14.1 percent in 2016). - Estimated elasticity of the trade balance to changes in the REER is -0.38. - CA-EBA-lite implies REER would need to depreciate by 23 percent for the CA deficit to be reduced to the fitted value. - The CA gap reflects large one-off events (mine construction) that affected 2016 figures. - Preliminary 2017 developments: - Based on preliminary data for the first three quarters of 2017, the CA deficit is expected to sharply improve to about -1½ percent of GDP as imports compress due to lower construction activity and economic deceleration. - With the 2017 CA decline, the REER would no longer be overvalued but rather undervalued by about 11 percent according to the CA model. - Given that the collapse in imports in 2017 likely reflects some overshooting while the increase in real commodity exports is largely structural, projected recovery in imports suggests the CA deficit will converge to a value implying the REER to be moderately overvalued. - REER-based assessment: - Using 2016 data, the REER is estimated to be undervalued by about 21 percent, mainly due to large depreciation since 2010. - Using 2017 data, the REER undervaluation would be about 11 percent since the average real exchange rate recovered. - Methodology comparison: - The two methodologies (CA model and REER model) lead to different assessments; the CA model accounts for policy stance and is often considered more reliable. - Table of key modeled values (as presented): - Model: CA; Observed: -14.1%; Fitted: -5.6%; Gap: -8.5%; Overvaluation: 23% - ln(REER): Observed: 4.34; Model Fitted: 4.55; Gap: n.a.; Overvaluation: -21% ### C. International Reserve Adequacy - Traditional adequacy measures: - Months of imports, cover of short-term debt plus debt service, and percent of broad money are partial indicators and may provide conflicting signals; they focus on specific aspects of vulnerability and omit other sources of crisis risk. - IMF metric for reserve adequacy (market access countries): - Employs a risk-weighted measure incorporating four vulnerabilities: - (i) export earnings to capture potential losses from terms of trade shocks; - (ii) short term debt at remaining maturity (short term debt plus debt service) to reflect rollover risk; - (iii) portfolio investments plus medium and long-term debt to account for drains from non-residents’ investment; - (iv) broad money as a proxy for resident’s capital flight. - Weights computed based on drains at the tenth percentile of annual distributions of percentage changes during periods of exchange market pressures. - Separate distributions estimated for countries with fixed exchange rates or capital controls. - Weights for countries with a fixed exchange rate are (as displayed): - Short-term Debt: 30% - Other liabilities: 20% - Broad Money: 10% - Exports: 10% - Adequacy assessment for Namibia: - Based on the IMF metric, reserves of 20 to 30 percent of GDP (or 100–150 percent of the metric) are considered adequate. - Latest level of 17½ percent of GDP (November 2017) is below such range. - Over the past fifteen years, reserves have been sub-optimal most of the time; reserve coverage was adequate only between 2007 and 2010 due to temporarily higher SACU transfers and mining revenues, and some fiscal restraint. - Noted special item: August 2009 Namibia received US$200 million from an additional SDR allocation. ### D. Conclusions - Namibia’s current account deteriorated over the past decade but is expected to: - Improve in 2017 and, over time, stabilize at a deficit of about 6 percent of GDP. - Despite expected improvement, international reserves coverage is below adequate levels and projected to decline over the coming years under baseline assumptions. - Policy recommendation and staff scenario: - Implementation of advised fiscal consolidation would help curb domestic demand and reduce the external imbalance, bringing the CA closer to fundamentals and increasing international reserves to adequate levels. - Under staff’s reform scenario: - The current account deficit would stabilize at about 2 percent of GDP, largely due to lower imports from fiscal consolidation. - International reserves would reach 20 percent of GDP by the end of the projection. *Annex I. External Sector Assessment — IMF Staff Report content.* ### 6. The production function approach highlights that trend growth was boosted by ### cr1856 - 6. The production function approach highlights that trend growth was boosted by ### Production function approach and estimation - Potential GDP estimated using a Cobb-Douglas production function: Y_t = A_t K_t^0.4 L_t^0.6. - Definitions and methods: - Y denotes real GDP. - K is the actual capital stock estimated using the perpetual inventory method. - L indicates employment estimated using an HP filter. - A is total factor productivity (TFP). - TFP is estimated in two steps: (1) actual TFP = observed real GDP divided by actual capital and labor (each input elevated to its respective share as expressed in the production function); (2) TFP is HP-filtered to extract its trend component. - Capital and labor share coefficients reflect parameters commonly used in the literature on growth accounting for non-advanced economies. - Empirical findings: - Capital accumulation underpinned an increase in long-term growth between 2011–14. - Productivity contribution to growth declined during that period. - Real investment growth in 2016 declined 25 percent, with mining investment accounting for most of this decline. - The approach points to a recent return of long-term growth to pre-boom levels (about 3½ percent). ### Conclusions on trend growth and productivity - Central estimates of long-term trend growth after the temporary early 2010s boost: - Growth rates between 3.2–3.7 percent across the different methodologies used. - trend growth is estimated to return to its previous norm of about 3–4 percent following the temporary increase during 2010–15. - Interpretation: - Long-term trends in growth appeared to have been little affected by the temporary increase in capital because productivity gains have receded at the same time. - Recent studies show similar declines in productivity in the region and across emerging market economies (examples cited: South Africa, IMF Country Report 14/339; Latvia; Turkey; Brazil; IMF 2015). - Policy recommendation: - Given high-growing wages and declining productivity in Namibia, it is key to put a premium on structural reforms to improve productivity. ### Risk Assessment Matrix — selected macro risks and recommended policy responses - Weaker global growth (Medium /High, ST, MT) - Expected impact: Medium. Current account and fiscal balance deterioration through lower commodity prices, depressed exports, and lower SACU revenues as South Africa growth deteriorates; rising public debt ratio and declining international reserve coverage. - Recommended policy response: Accelerate structural reforms to promote growth and private sector development. If government’s financing becomes problematic or debt dynamics unsustainable, further fiscal consolidation would be required. - Tighter global financial conditions (High, ST) - Expected impact: Medium. Higher interest rates, reduced financial inflows, and costly and tighter sovereign financing; possible rand depreciation and inflationary pressures. - Recommended policy response: Increase policy rate in line with the South African Reserve Bank. Seek additional external financing in rand to support reserves. Provide liquidity as needed. Tighten fiscal policy if financing becomes problematic, while protecting social spending. - Incomplete or weak policy implementation (Medium, MT) - Expected impact: High. Fast rising public debt, tighter budget financing; declining international reserves; possible disorderly fiscal adjustment and deterioration in financial sector’s asset quality. - Recommended policy response: Tighten fiscal policy over the next three years through long-lasting measures. Accelerate reforms to improve extra-budgetary entities’ performance. Monitor and manage key fiscal risks and financial sector vulnerabilities. - Accelerated adjustment in real estate prices and credit growth (Medium, ST, MT) - Expected impact: Medium. Increase in nonperforming loans, erosion of banks’ capital buffers and deleveraging. Lower growth as private sector credit and construction activity slow down. - Recommended policy response: Monitor building up of systemic risks. Accelerate plans to create an effective resolution framework. Provide emergency liquidity if needed. In case of a banking crisis, limit the fiscal costs and support the declining demand. - Weaker than anticipated domestic growth (Medium, ST, MT) - Expected impact: Medium. Larger fiscal and current account deficits. Increasing public financing requirements and public debt. - Recommended policy response: Step up structural reforms to promote growth and private sector development. ### Debt sustainability: public debt outlook, scenarios, and recommendations - Historical and background facts: - Between FY10/11 and FY16/17, the public debt to GDP ratio increased from 16 percent of GDP to 44.3 percent of GDP. - The average primary deficit exceeded 6 percent of GDP over that period. - In FY16/17 public debt exceeded the authorities’ own debt management ceiling (35 percent of GDP). - Between FY14/15 and FY16/17, gross financing needs averaged 16 percent of GDP, slightly above the typical 15 percent of GDP debt distress risk threshold. - Domestic short-term debt has averaged about 42 percent of domestic debt and 27 percent of total debt since FY11/12. - Non-rand foreign currency debt averaged about 32 percent of total debt at the end of FY16/17. - DSA baseline projections and risks: - Under staff’s baseline, the public debt ratio would reach about 69.7 percent of GDP by FY22/23. - The primary deficit would exceed 4 percentage points of GDP during most of the projection period. - Gross financing needs would reach 23 percent of GDP by FY21/22. - Financing assumptions: additional bond issuances (domestic and JSE), T-bills; replacement of the Eurobond coming due in FY21/22 by more expensive bond financing; reliance on long-term bond financing from non-bank financial institutions would roughly double by FY22/23. - Alternative scenarios / stress-test outcomes (selected figures): - Contingent liability shock (default of all guaranteed debt, equivalent to 21 percent of FY17/18 noninterest expenditures, combined with real GDP and interest rate shocks) would lead to: - Debt level of 83 percent of GDP by FY22/23. - Gross financing needs of 24 percent of GDP by FY22/23. - SACU revenue shock (additional 3 percent of GDP reduction in SACU revenue, a temporary 2 percentage points real GDP growth shock and 225bps increase in interest rates) would result in: - Debt-to-GDP ratio of about 80 percent by FY22/23. - Gross financing needs of 241 percent of GDP by FY22/23. - Macroeconomic-fiscal shock (shocks to growth and interest rates, and a temporary lower primary balance) would result in: - Debt-to-GDP ratio of 91 percent of GDP by FY22/23. - Gross financing needs of 28 percent of GDP by FY22/23. - Note: Exchange rate and temporary real GDP shocks have smaller effects but could still push debt above the high risk of debt distress threshold given the initially high baseline debt ratio. - Reform scenario - Under staff’s reform scenario, additional measures of about 5–6 percent of GDP, spread over three years, would: - Bring debt on a declining path to around 51 percent of GDP by FY22/23. - Contain gross financing needs on average to below 17 percent of GDP over the projection period. - External debt highlights: - External debt (percent of GDP): Total 2013: 37.1; 2014: 43.0; 2015: 48.2; 2016: 60.2. - Public (without guarantees): 2013: 7.9; 2014: 8.0; 2015: 13.1; 2016: 17.1. - Private: 2013: 29.2; 2014: 35.0; 2015: 35.1; 2016: 43.0. - By maturity (percent of GDP): Short-term 2013: 8.1; 2014: 8.0; 2015: 5.9; 2016: 5.9. Long and medium-term 2013: 29.0; 2014: 35.0; 2015: 42.3; 2016: 54.2. - In 2016, the stock of public external debt increased by 4 percentage points of GDP, reaching 17 percent of GDP at end-2016. - Private sector external debt (about 70 percent of total external debt) increased by 8 percentage points of GDP. - About 90 percent of total external debt has long and medium-term maturities. - External debt projections: - External debt-to-GDP ratio projected to increase from 60 percent of GDP to about 69 percent as the non-interest current account deficit is expected to only gradually approach the debt-stabilizing level. - Gross external financing needs (GEFN) projected to average about 23 percent of GDP over the projection period, with short-term debt amortization amounting to about a third of the GEFN. *Source: IMF staff analysis as presented in the supplied content.* ### 9. Sensitivity tests suggest that the external debt is vulnerable to current account and ### 9. Sensitivity tests suggest that the external debt is vulnerable to current account and real depreciation shocks ### Sensitivity analysis — key findings - A 30 percent exchange rate depreciation in 2018 would increase external debt to about 85 percent of GDP, as only about 20 percent of external debt is denominated in a foreign currency different from the South African rand. - If the non-interest current account deficit (CAD) widened by 3.5 percent of GDP (1/2 standard deviation shock) during 2018–22, external debt would increase to about 106 percent of GDP by 2022. - The impact of real interest rate shocks is small due to the sizeable share of fixed-rate debt. ### External debt baseline projections and indicators (selected figures from the External Debt Sustainability Framework, 2012–2022) - Baseline: External debt (percent of GDP) by year: - 2012: 36.7 - 2013: 37.1 - 2014: 43.0 - 2015: 48.2 - 2016: 60.2 - 2017: 60.6 - 2018: 64.4 - 2019: 66.3 - 2020: 67.3 - 2021: 68.5 - 2022: 68.7 - Change in external debt (percent of GDP) by year: - 2012: 1.2 - 2013: 0.4 - 2014: 5.9 - 2015: 5.2 - 2016: 12.0 - 2017: 0.5 - 2018: 3.8 - 2019: 1.9 - 2020: 1.0 - 2021: 1.2 - 2022: 0.3 - Identified external debt-creating flows (4+8+9) (percent of GDP): - 2012: -4.6 - 2013: -1.7 - 2014: 5.7 - 2015: 9.1 - 2016: 8.8 - 2017: -1.8 - 2018: -0.9 - 2019: 0.0 - 2020: 0.3 - 2021: 0.3 - 2022: 0.3 - Current account deficit, excluding interest payments (percent of GDP): - 2012: 5.4 - 2013: 3.8 - 2014: 10.5 - 2015: 12.3 - 2016: 13.5 - 2017: 0.6 - 2018: 2.1 - 2019: 2.9 - 2020: 3.2 - 2021: 3.4 - 2022: 3.5 - External debt-to-exports ratio (in percent) by year: - 2012: 87.5 - 2013: 85.0 - 2014: 97.0 - 2015: 112.3 - 2016: 161.5 - 2017: 170.4 - 2018: 175.9 - 2019: 178.4 - 2020: 181.1 - 2021: 186.6 - 2022: 190.0 - Gross external financing need (in billions of US dollars) by year: - 2012: 2.3 - 2013: 1.8 - 2014: 3.4 - 2015: 3.5 - 2016: 3.4 - 2017: 2.2 - 2018: 2.9 - 2019: 3.3 - 2020: 3.6 - 2021: 3.9 - 2022: 4.2 - Key macro assumptions underlying baseline (selected): - Real GDP growth (in percent): 2017: 1.1; 2018: -1.2; 2019: 1.2; 2020: 3.3; 2021: 3.8; 2022: 3.5 - Nominal external interest rate (in percent): 2017: 1.7; 2018: 2.6; 2019: 3.6; 2020: 4.1; 2021: 3.7; 2022: 3.4 ### Stress tests and scenario results (selected) - Bound and scenario tests reported: - Permanent one-half standard deviation shocks to interest rate, growth, and current account balance are considered. - One-time 30 percent real depreciation in 2018 is modeled (see sensitivity finding above). - Combination shocks and historical-average scenarios were also examined; the 30 percent real depreciation raises external-debt-related stress markedly (external debt near 85 percent of GDP in the depreciation scenario). - Boxed scenario averages mentioned in the DSA heat maps and figures: - Baseline external debt average projection referenced as 69 (percent of GDP) in several figures; the 30 percent depreciation scenario shows an average projection of 85 (percent of GDP) in the relevant figure. ### Public wage bill: findings and implications (Annex V) - SACU countries, and especially Namibia, have some of the highest public wage bills in the world. - Worldwide (2016) average public wages: about 8 percent of GDP, with wage costs increasing with countries’ income levels. - In sub-Saharan Africa, East African countries record the lowest wage bill while Southern African countries, particularly SACU countries, register much higher wage spending (about 14 percent on average). - Public wages absorb a significant share of budget revenue: - Countries worldwide spend on average about a 1/3 of their revenues in wages. - In sub-Saharan African countries the share increases to 35 percent of revenues. - In Southern Africa the share is 40 percent of revenues. - In SACU countries the share is 45 percent of revenues. - Implications noted: - A public-sector wage premium can raise workers’ reservation wages, appreciate the real exchange rate, and reduce the economy’s ability to absorb foreign shocks. - Except for South Africa, the public sector premium in SACU countries falls along the income distribution, which might exacerbate the brain drain for highly skilled labor. ### Analytical implications and policy considerations (drawn from the DSA and Annex findings) - Exchange rate and current account shocks pose the largest amplification risk to external debt ratios; monitoring currency exposure and current account dynamics is critical. - Because only about 20 percent of external debt is denominated in a foreign currency different from the South African rand, currency depreciation scenarios materially affect debt metrics through valuation and external financing channels. - The limited impact of real interest rate shocks reflects the sizeable share of fixed-rate debt; debt composition (currency and interest-rate structure) matters for shock transmission. - High public wage bills and elevated wage premia in SACU/Namibia imply fiscal rigidity and potential vulnerabilities to shocks; containing wage bill dynamics can be an important element of fiscal consolidation efforts to reduce debt vulnerabilities. *International Monetary Fund staff summary of the Namibia DSA and related annex material (as presented in the provided content).* ### 2. Within SACU and small-middle income ### 2. Within SACU and small-middle income ### Public wage costs and dynamics in Namibia - Public wage costs for central government employees reached 16.4 percent of GDP in FY 16/17 (42 percent of primary spending). - The wage bill was almost 5 percentage points of GDP higher than in FY12/13. - Wages absorbed about 55 percent of tax revenue in FY16/17, 10 percentage points of GDP higher than in FY12/13. - The wage bill absorbed 80 percent of its domestic revenue (excluding SACU) on its wage bill. - The public wage spending bill is expected to further increase and reach about 17 percent of GDP in FY17/18. - Decomposition over FY12/13–16/17: - About 2/3 of the increase in the wage bill reflected wage increases; new hires accounted for one third. - On average, government wages increased in real terms by about 7 percent per year. - Average inflation rate over the period: 5.2 percent. - Number of employees increased by about 4 percent per year. - Total factor productivity (TFP) growth for the whole economy: about 0.5 percent. - Table-like cumulative and average changes (as presented): - Cumulative Increase: 18.6% (Employment?), 92.0% (Wage Bill N$ million?), 22.7% (Change?), 31.9% (Change?) - Average annual increase: 4.4%, 17.7%, 5.2%, 7.2% - (Sources: Ministry of Finance and IMF staff estimates.) ### Efficiency of spending and public services - Namibia’s elevated wage bill reflects relatively high spending in health and education as a share of GDP compared to other middle-high income countries and countries in the region. - Key health and education outcomes in Namibia (examples given) are substantially below middle-high income country standards, although better than in countries in the region. Examples listed in the source: - Public wage bill (percent of GDP): Namibia 16.3 - Education expenditure (percent of GDP): 10.2 - Health expenditure (percent of GDP): 5.4 - Under-five mortality rate (per 1,000 live births): 62 - Maternal mortality rate (per 100,000 live births): 730.4 (presented as 730.4 in table) - Physicians (per 1,000 people): 0.41 - Expected years of schooling (for children entering school): 11.3 - Comparison group figures presented in the source (selected): - High Income: Public wage bill 9.9; Education 5.0; Health 5.3; Under-five mortality 9; Maternal mortality 2.9; Physicians 15.5 - Upper Middle Income: Public wage bill 9.0; Education 4.1; Health 3.3; Under-five mortality 19; Maternal mortality 49.1; Physicians 13.0 - Low Middle Income: Public wage bill 6.9; Education 4.1; Health 2.3; Under-five mortality 44; Maternal mortality 164; Physicians 0.5; Expected years of schooling 11.1 - Sub-Saharan Africa and Southern Africa aggregates also shown in source. - Conclusion: room to improve efficiency of public spending in health and education and make savings without affecting quality or access. ### Public-sector wage premia and distributional patterns - Estimated public-sector wage premia across SACU countries (lower-bound estimates): - South Africa: about 10 percent - Namibia: about 15 percent - Swaziland: about 40 percent - Lesotho: about 50 percent - Botswana: about 50 percent - Premia estimates do not account for public workers’ greater job stability or non-cash benefits. - Quantile regression results: - In BLNS (Botswana, Lesotho, Namibia, Swaziland), public sector wage premia are particularly high for low-skilled workers and fall along the income distribution. - In South Africa, the premium tends to increase along the income distribution. - Implication: high premia for low-skilled workers in BLNS may contribute to brain drain of skilled workers to South Africa. ### Macroeconomic links: wages, productivity, and unemployment - Empirical evidence for low and middle income countries suggests wage increases above productivity gains are associated with higher unemployment (IMF, 2013). - In Namibia, public sector wage dynamics, and likely private sector wage increases, have widely exceeded changes in labor productivity, associated with high unemployment. - Creating public jobs does not necessarily reduce unemployment and may increase it in some cases (IMF, 2013). - Controlling public wage dynamics could bring wage increases closer to productivity trends, potentially boosting long-term growth and reducing unemployment. ### Policy measures to contain the wage bill - Short-term measures (to correct expected increase and contain real salary dynamics): - Maintain salary increases below inflation trends and suspend automatic salary increases (e.g., “notch” increases). - Introduce temporary hiring rules to reduce public employment (e.g., retirement replacement ratios). - Reduce temporary and contractual positions as feasible. - Medium-term measures (to improve wage-bill management and deliver long-term savings): - Link pay to indicators of performance. - Align job requirements with compensation and ensure public and private sector compensation for similar skills is comparable. - Strengthen human resource management (e.g., review presence of ghost workers). - Improve wage bill controls (e.g., biometric technologies, enhanced controls for hiring of low-skilled workers). - Conduct comprehensive organizational and functional reviews of ministries, departments, and agencies to identify overlap or duplication. - Rationale: short-term measures can be effective but are often not sustainable; permanent policies are needed to preserve gains (IMF, 2016). ### Macro effects of uncontrolled real wage growth - Rapid rise in real wages tends to: - Increase workers’ reservation wages. - Appreciate the real exchange rate. - Reduce competitiveness and the economy’s ability to absorb foreign shocks. - Recommendation: better link pay dynamics to productivity and ensure comparable compensation across public and private sectors for similar skills. ### Technical note on estimating public sector wage premia - Methodology: - Traditional Mincer equations using log of income per capita controlling for education and age plus a dummy for public sector workers. - Robustness checks: restrict to formal sector, urban areas, exclude agricultural sector, and use propensity score matching. - Additional controls: region, household size and composition, number of employed persons in the household. ### Annex VI — Mobilizing Tax Revenue: challenges and reforms - Namibia tax revenue-to-GDP ratio: 29.2 percent in FY16/17. - Domestic tax revenues averaged about 19 percent of GDP over the last four years. - About one third of total tax revenues are shared receipts from SACU. - Concerns: - Narrowed tax bases and dependency on volatile SACU revenue expose the budget to significant shocks. - SACU revenues expected to remain low in coming years as growth in South Africa is expected to remain sluggish; long-term decline likely as regional trade liberalization deepens. - Tax base broadening measures suggested: - Eliminate special tax regimes under corporate tax. - Remove some VAT zero-rating provisions (examples in source: residential property, residential utilities, fuel products, telecommunications). - Make foreign investment income of Namibian residents taxable. - Measures to curb base erosion and strengthen integrity: - Ring-fence business losses (curtail offsetting losses and profits across different types of businesses). - Avoid treating construction workers as self-employed rather than employees. - Eliminate exemptions for real property companies from capital gains taxation. - Introduce earnings stripping rules to limit deductibility of interest expense (no limit currently). - Tax administration weaknesses identified by TADAT (2016): - Inadequate data integrity and inaccurate taxpayer register. - Absence of documented processes and procedures. - Lack of service delivery standards. - Limited control over taxpayer compliance. - Semi-autonomous revenue authority: - Planned to be operative in 2019. - Near-term operational improvements still required: - Develop in-house audit capacity for large taxpayers. - Design strategy to manage medium-sized taxpayers. - Introduce presumptive regime for smaller taxpayers. - Avoid new tax amnesties on tax arrears absent a strong administration. ### Annex VII — FSAP main findings and recommendations (selected) - Key risks and vulnerabilities identified: - High loan and asset concentration. - Liquidity risks from significant wholesale funding of banks. - Extensive domestic and external interconnections of financial institutions. - High household indebtedness. - Banking sector oversight: - Progress made (market risk, country risk, consolidated supervision, AML/CFT). - Remaining shortfalls include: - Liquidity risk framework not tailored to specific bank needs and not reflecting risks from volatile wholesale deposits. - Need to approve mismatch limits ahead of Basel III LCR and NSFR introduction in early 2019 and agree on behavioral adjustments to short-term cash projections. - Possible misclassification issues in asset quality; need for strengthened forward-looking assessment. - Non-bank financial institutions (NAMFISA): - Major regulatory gaps and supervisory deficiencies; no risk-based supervision in place yet. - Legislation upgrades underway to align with global norms (unit trusts supervision, risk-based insurance solvency requirements, pension fund governance, market conduct, risk-based supervision). - NAMFISA needs to build technical competency and tools to contribute to consolidated supervision; capital requirements for pension funds and insurers are not risk-based; stress tests are not used. *Source: cr1856 - 2. Within SACU and small-middle income* ### 4. The financial stability and macroprudential architecture needs to be updated. The ### 4. The financial stability and macroprudential architecture needs to be updated. The ### Financial stability and macroprudential architecture - The Financial System Stability Committee (FSSC), with members from the BoN, MoF and NAMFISA, has no decision-making authority. - No institution has an explicit macroprudential mandate. - The macroprudential toolkit is limited and only includes so far LTV limits for non-primary house purchases despite elevated household indebtedness and banks’ large mortgage exposures. ### Crisis Management and Preparedness - A formal crisis management and resolution framework is required. - The BoN and NAMFISA have not developed recovery and resolution plans for financial groups. - Special resolution powers of the BoN and NAMFISA to close and liquidate failing institutions are limited. - Fiscal backstop arrangements for resolution, emergency liquidity assistance (ELA) and deposit insurance funding in the event of major crisis should be considered and operationalized. - A new deposit insurance scheme should be aligned with international norms. ### Development, Infrastructure and the Role of the State - (No substantive text provided in the source excerpt.) *Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1856.pdf* ### 6. The financial market infrastructure (FMI) is mostly modern, but new legislation on ### 6. The financial market infrastructure (FMI) is mostly modern, but new legislation on ### FMI modernization and legislative priorities - The financial market infrastructure (FMI) is described as "mostly modern," but prompt enactment of new legislation is recommended to strengthen oversight and legal foundations. - Recommended bills to ensure alignment with international norms: - Banking Institutions, BoN, Financial Institutions and Markets (FMI), NAMFISA, Financial Services Adjudicator, Deposit Insurance, and Microlending bills. - Timing: I (immediate action — within one year). - FMI oversight focus: - Focus the scope of FMI oversight on systemic risk management and implement the oversight framework with special attention to operational risk and cyber resilience. - Timing: I. ### Financial sector oversight, supervision, and crisis preparedness - Key recommendation highlights (from FSAP Key Policy Recommendations): - Finalize the Joint Prudential Supervisory Engagement Framework between the BoN and NAMFISA. Timing: I. - Assign an explicit macroprudential mandate, including the power to issue macroprudential directives to regulators, to the BoN Board until the Financial Stability Council is set up, and address data gaps. Timing: I. - Strengthen the existing liquidity regime ahead of implementation of the LCR and NSFR. Timing: I. - Enforce proper classification of loans; undertake independent asset quality review to determine the scale of under-provisioning across the sector. Timing: I. - Strengthen the accountability and transparency framework of NAMFISA. Timing: NT. - Introduce electronic central securities deposit (CSD), repo operations, and reporting of government bond OTC trades. Timing: I. - Introduce a special resolution regime for banks and nonbanks to ensure effectiveness and consistency with international best practice. Timing: I. - Initiate recovery and resolution planning for the four largest banks and their holding companies, in collaboration with SARB. Timing: NT. - Establish the Deposit Guarantee Scheme in line with international best practice. Timing: NT. - Take steps to operationalize ELA on short notice. Timing: I. ### Financial inclusion, microfinance, and market development - Despite a sophisticated financial system, a large share of the poor and rural population is excluded from formal financial services. - Recommended measures to promote inclusion: - Promote digitization of social transfers. - Improve regulatory framework for microfinance institutions. - Timing: (implicit within Development Issues recommendations) I. - Capital markets and nonbank development: - Introduce electronic CSD, repo operations, and reporting of government bond OTC trades. Timing: I. - Strengthen accountability and transparency of NAMFISA. Timing: NT. ### Access to finance: credit information, secured transactions, insolvency - Recommended reforms to facilitate financial access: - Improve credit information system for MSMEs. - Establish a secured transactions framework for movable assets. - Modernize the insolvency regime. - Timing: (listed under Development Issues) I. ### State-owned financial institutions and development issues - Severe problems at state-owned financial institutions require attention. - Recommendation: - Re-assess state-owned financial institutions’ mandates and business rationale and restructure Agribank. - Timing: I. ### Data, statistics, and reporting issues relevant to oversight - Data adequacy: broadly adequate for surveillance but with important shortcomings, notably government finance statistics. - Specific statistical issues cited: - National accounts: base year 2010; QNA at constant prices disseminated; need to improve source data and coverage. - Price statistics: CPI weights based on 2009/10 HIES; NSA should update using 2015/16 HIES. - Government Finance Statistics: annual GFS reported on a cash basis in GFSM 2001 format with poor timeliness and lack of detailed classifications and balance sheet data. - Monetary and Financial Statistics: BoN reports monthly monetary statistics; Other Financial Corporations (OFCs) data included since December 2017 but timeliness and coverage need improvement. - Financial Soundness Indicators: reported quarterly for deposit takers but suffer reporting inconsistencies and do not cover nonbank financial institutions. - Balance of Payments and IIP: quarterly with one-quarter lag; submitted BPM6 series in July 2017; room to improve consistency between BOP, IIP, and MFS. - Authorities implemented the e-GDDS NSDP in June 2016 and committed to the data dissemination schedule on the IMF DSBB. ### Recent macroeconomic and financial context (select numbers preserved exactly) - Growth and output: - GDP growth declined from "over 5 percent" annually after the global financial crisis to 1.1 percent in 2016. - Authorities estimate GDP contracted by about 0.6 percent in 2017. - Staff’s estimate for 2017: a 1.2 percent contraction. - Current account and fiscal adjustment: - Authorities expect policy actions to deliver a cumulative adjustment of around 6 percent of GDP over the medium term. - Revenue performance improved from "around 31 percent of GDP in 2016" to an estimated "34 percent of GDP in 2017." - Inflation and monetary policy: - Inflation slowed to 5.2 percent in December 2017, compared to 7.8 percent in the comparative period in 2016, and slowed further to 3.6 percent in January 2018. - The Monetary Policy Committee of the Bank of Namibia maintained its policy rate at 6.75 percent in February 2018. - Credit dynamics and macroprudential measures: - High-frequency data indicate a slowdown in bank credit to the private sector from an annual average of 14.2 percent between 2012 and 2016, to 6.6 percent in 2017. - Credit Agreement Amendment Act (passed June 2016) includes regulations stipulating minimum down-payments and maximum repayment periods for loans to finance movable goods such as motor vehicles. - In March 2017, authorities implemented loan-to-value (LTV) limits for secondary mortgages. - Public debt and arrears: - Authorities committed to preventing further debt build-up and noted that the recent increase in the debt ratio is in part due to the sudden deceleration in growth. - Authorities reported a rise in arrears in 2017 and have taken measures (Central Procurement Board, staffing freezes, Cabinet directives) to prevent recurrence. ### Institutional arrangements and commitments - Authorities agree with most FSAP recommendations and are implementing measures including capacity building at NAMFISA and a risk-based supervision framework for non-banks; legislation clarifying NAMFISA’s role is awaiting Parliamentary completion. - A new Financial Stability Council (FSC) will be established, chaired by BoN, comprising NAMFISA and Ministry of Finance representatives. - Authorities included an enabling provision in the BoN Amendment Bill to assign the overall mandate for financial stability to BoN; Bill is awaiting Parliamentary approval. - Authorities plan to publish a comprehensive fiscal risk statement during the coming budget period and to establish an independent revenue authority in 2019 (legislation enacted December 2017). *Source: Staff Report — Namibia: Staff Report for the 2017 Article IV Consultation — Informational Annex, February 9, 2018.* ### Conclusion ### Conclusion ### Outlook - 18. There is greater optimism about a gradual economic recovery over the medium-term. ### Policy actions to resolve macroeconomic imbalances - The authorities will continue to be focused on resolving the current macro-economic imbalances. - Actions taken include: - tougher fiscal measures - improving the management of financial sector risks - addressing structural impediments to inclusive growth ### Human capital, inclusion, and infrastructure - Namibia continues to strive to widen economic opportunities by anticipating the demographic transition through: - the empowerment of women - investment in basic and high-level education - infrastructure development ### Role of the IMF - The analysis, advice and technical assistance provided by the IMF remain integral to the authorities’ overall strategy and are highly appreciated. - 4 *Source: cr1856 - Conclusion* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1856.pdf_