## _cr0597 ## Source details **Canonical URL:** [_cr0597](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0597.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0597.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0597.pdf.json) --- ### Executive summary: key findings - Real GDP growth accelerated to an estimated 4¼ percent in 2004, after averaging about 3 percent during the preceding five years. - Namibia’s external current account surplus is estimated to have risen to 5½ percent of GDP in 2004. - Under plausible structural reforms and successful HIV/AIDS strategy implementation, growth could reach 4 percent over the medium term. - The fiscal deficit more than doubled in 2003/04 to 7¾ percent of GDP, driven mainly by tax administration problems and a collapse in mining taxes. - The fiscal deficit is projected to fall to 2 percent of GDP in 2004/05 due to: one-time windfalls from SACU receipts (equivalent to 2½ percent of GDP), improvements in tax administration, and curtailed non-priority spending. - Public debt rose to 31 percent of GDP, exceeding the fiscal rule targeting public debt at 25 percent of GDP. - Namibia’s international reserves declined to less than 2 months of imports in 2003. - External debt amounted to 17½ percent of GDP at end-2003. ### Recent economic developments - Growth and inflation - Real GDP: 3¾ percent in 2003 and projected 4¼ percent in 2004. - Inflation: year-on-year inflation declined from around 13 percent in early 2003 to 5 percent in November 2004. - Sectoral and external drivers - Growth driven by investment and private consumption; retail and construction benefited from declining interest rates. - Manufacturing, agriculture, and fishing were hurt by appreciation of the Namibia dollar. - Mining exports slumped in 2003 and recovered in 2004 due to rising world demand, a new zinc mine, and offshore diamond mining expansion. - External current account remained in surplus; services, income, and transfer receipts offset a widening trade deficit. - Diamond exports (percent of exports excluding re-exports): 46.3, 45.9, 49.7, 40.9 (2000–03). - Current account surplus (millions of U.S. dollars): 317.9, 56.2, 112.6, 171.0 (2000–03). - Reserves and capital flows - Increasing net outflows reflecting pension funds and insurance companies investing in South Africa. - International reserves below 2 months of imports in 2003; reserves-to-short-term-debt ratio slightly above 1.0 at end-2002. - International reserves (months of imports, 2000–03): Botswana 3.2; Lesotho 4.3–6.7; Namibia 1.9–2.5; South Africa 2.2–2.9; Swaziland 1.9–3.3. ### The new SACU agreement: institutional and fiscal effects - Institutional changes - Replaces 1969 treaty; provides well-defined institutional structures and joint decision-making, allowing Namibia participation in policy setting and trade negotiation framework. - Requires Namibia to enhance capacity in customs administration and statistical compilation. - Revenue-sharing formula (RSF) components - Customs component: shared based on intra-SACU imports. - Excise component: consists of 85 percent of excise collections and is shared based on GDP. - Development component: distributes the remaining excise collections based inversely on per-capita GDP. - Fiscal impact and forecasting - New RSF reduces net transfers from South Africa to other members and eliminates the two-year lag between collections and allocations, making revenue forecasting more difficult. - Namibia poised to lose revenue from the shift to the new RSF: after a windfall in 2004/05 due to the lagged RSF and transitional arrangements, Namibia’s SACU receipts are projected to fall by 4 percent of GDP by 2009/10. - SACU receipts projected to fall from 11½ percent of GDP in 2004/05 to 7½ percent of GDP by 2009/10. ### Fiscal developments and medium-term fiscal issues - Recent outcomes - Fiscal deficit: 3½ percent of GDP in 2002/03; 7¾ percent of GDP in 2003/04. - Drivers: unexpected problems in VAT and income tax administration and collapse in diamond and other mining taxes. - Expenditure: some reining in of net lending to parastatals and nonpriority current spending, but wage bill rose with increased staffing. - Public debt rose to 31 percent of GDP. - 2004/05 outlook and policy stance - Budgeted fiscal deficit: 2 percent of GDP in 2004/05. - Key supporting factors: one-time SACU windfalls equivalent to 2½ percent of GDP, improvements in tax administration, efforts to curtail subsidies to parastatals and the wage bill. - Authorities committed to reduce public debt ratio over the medium term toward fiscal rule target of 25 percent of GDP. - Authorities decided to forego a supplementary budget for this fiscal year, for the first time since independence. - Medium-term fiscal scenarios (selected outcomes) - Baseline scenario (central government operations, percent of GDP): - 2004/05: Revenue and grants 32.9; Expenditures 34.9; Additional measures 0.0; Overall balance -2.0; Primary balance 0.7; Public debt 30.1 - 2009/10: Revenue and grants 30.3; Expenditures 32.9; Additional measures 1.5; Overall balance -1.0; Primary balance 0.8; Public debt 28.3 - Alternative scenario (percent of GDP): - 2004/05: Revenue and grants 33.0; Expenditures 35.0; Additional measures 0.0; Overall balance -2.0; Primary balance 0.7; Public debt 30.1 - 2009/10: Revenue and grants 30.6; Expenditures 39.5; Additional measures 0.0; Overall balance -8.8; Primary balance -2.9; Public debt 52.8 - Policy options discussed to address gaps - Raise the VAT rate from 15 to 18 percent (yielding 1½ percent of GDP). - Review and consolidate existing tax incentives. - Negotiate increase in the SACU development component from 15 percent to 25 percent under the RSF (yielding ½ percent of GDP). - Seek additional donor support for HIV/AIDS strategy implementation. - Accelerate civil service and public enterprise reform. - Issue a Eurobond (with interest savings of 0.2 percent of GDP). ### Debt sustainability and scenario analysis - Public sector debt trajectory (percent of GDP, selected): - 1999/2000: 24.3; 2000/01: 23.1; 2001/02: 26.2; 2002/03: 25.0; 2003/04: 30.9; 2004/05: 30.1; 2009/10: 28.3. - Under baseline: public debt ratio would fall to 28¼ percent of GDP by end-decade with moderate primary surpluses. - Under inaction/alternative scenario: public debt could rise to more than twice the level targeted by the fiscal rule (public debt 52.8 percent of GDP by 2009/10 in alternative fiscal scenario). - Sensitivity and bound tests show vulnerability to shocks: - Debt/GDP could rise to 62½ percent in the most extreme bound test (real depreciation large), though two-thirds of external debt is rand-denominated and bound-test may overstate depreciation impact. - Stabilizing the public debt ratio at 31 percent of GDP would require running primary surpluses of about 0.2 percent of GDP (footnote). ### Monetary and financial sector developments - Exchange rate regime and policy - Namibia dollar pegged to the South African rand; monetary policy anchored by the peg. - Bank of Namibia reduced the Bank Rate from 12¾ percent in January 2003 to 7½ percent in July 2004. - Interest rates and reserves - Positive differential for government bonds widened recently, indicating increasing risk premium. - Interest rate differentials (Namibia rate - South Africa rate) varied with swings between -200 and +250 basis points over 2001–04. - International reserves (millions of U.S. dollars, end-of-period): 2000: 262.4; 2001: 223.0; 2002: 311.2; 2003: 280.0; 2004: 293.3. - Reserves in months of imports: 2000: 1.9; 2001: 1.7; 2002: 2.5; 2003: 1.7; 2004: 1.6. - Financial sector soundness and vulnerabilities - All banks met capital-adequacy ratio of 10 percent at end-2003. - Non-performing loans declined (nonperforming loans to total gross loans: 1999: 11.3; 2000: 9.7; 2001: 4.7; 2002: 4.0; 2003: 3.9). - Concerns about rapid consumer loans and mortgage growth, rising household indebtedness, and housing price sustainability. - BoN self-assessment: compliant with 21 of the 25 Basel Core Principles; weaknesses in country risk, market risk, consolidated supervision, and risk management. - Regulatory proposals for NBFIs: reduce limit on investments in dual-listed companies; require minimum investment of 5 percent of assets in unlisted Namibian companies — mission cautioned potential adverse effects. - Domestic market development - Preconditions for a domestic bond market developing: potential borrowers ready, large projects (e.g., Kudu gas field). - Mission recommended reporting bond transactions through the NSX to support secondary market development. - Options to strengthen reserves (alternatives to raising interest rates) - Step up outright foreign exchange purchases. - Privatize parastatals to foreign investors. - Obtain a sovereign credit rating and tap international capital markets (Eurobond) — potential interest rate lowering by an estimated 500 basis points noted as an effect. ### Structural reforms, labor, SMEs, land policy, and trade - Growth and labor-market reforms - Priorities: privatize/commercialize parastatals, raise labor skills, improve access to finance, strengthen economic flexibility to foster private sector activity and employment outside mining and agriculture. - Labor market: amendments to the 1992 Labor Act increase vacation leave from 18 to 24 days and restrict temporary workers; mission stressed need for flexible labor markets. - Consider labor-intensive public works programs. - SME support and finance - Existing credit lines and guarantee programs; evidence that ceilings are too low and institutional capacity insufficient. - Land redistribution - “Willing buyer, willing seller” program slow: about 3 million hectares redistributed of 36 million hectares of commercial farming land. - Approximately 4,000 farmers hold about half of Namibia’s arable land. - About 20 farmers have received expropriation letters under constitutional provision for expropriation “in the public interest”. - Main criticism: lack of objective and transparent criteria to identify underutilized land. - Trade policy - Simple average tariff reduced to 11.4 percent (compared with 24 percent a decade ago and sub-Saharan average of 20 percent). - Namibia engaged in bilateral trade negotiations with the United States, the EU, Mercosur, and pursuing SADC free trade area by 2008. ### HIV/AIDS implications and Vision 2030 - HIV/AIDS epidemiology and strategy - “More than one-fifth of the population is currently thought to be infected with HIV/AIDS.” - Adult life expectancy dropped from 67 years in 1991 to 45 years in 2002. - “60,000 children have been orphaned so far.” - MTP III/NSP III (2004–2009) identifies prevention, treatment, impact mitigation, legal/ethical environment, and program management; implementation planned to begin in early 2005 with donor support lined up. - Antiretroviral treatment: introduced in 19 out of 35 public hospitals; 3000 patients receiving treatment under government program; prevention of mother-to-child treatment rolled out to 25 public hospitals. - Mission baseline assumes implementation could reverse declining human capital contribution to growth. - Vision 2030 - Aim: transform Namibia into a diversified and industrialized country with a high standard of living for everybody. - Real GDP growth targeted to accelerate to 9½ percent by 2030. - Plan aims to cut in half Namibia’s Gini coefficient of 0.7 (1994) and markedly reduce unemployment. - Mission noted Vision 2030 important for ownership but lacking specificity on measures to achieve objectives. ### Data, technical assistance, and Fund relations - Data and statistics - Core monetary data available monthly; real sector and balance of payments data annual or quarterly with lags. - CPI covered only Windhoek; nationwide CPI planned for early 2005 with historical series from December 2001. - Labor market surveys not systematic; new survey conducted in 2004 pending publication. - Fiscal reporting hampered by long reporting lags; authorities intend to provide preliminary monthly data with a short delay. - Technical assistance and Fund relations - Authorities indicated interest in a fiscal ROSC and an FSAP. - Selected TA missions: VAT implementation (6/98), Monetary operations (11/98), ROSC Advisor (1/02), Financial Sector Needs Assessment (11/03), Issues in Reserves Management (07/04), Revenue Forecast Advisor (11/04). - It is proposed that Namibia remain on the standard 12-month Article IV consultation cycle. ### IMF Executive Board assessment and policy recommendations (selected) - Commended improvements: GDP growth accelerated to an estimated 4¼ percent in 2004; inflation fell from around 13 percent to less than 5 percent; external current account surplus estimated at 5½ percent of GDP in 2004. - Fiscal recommendations - Curtail nonessential expenditure given projected large decline in SACU receipts and rising HIV/AIDS-related spending. - Strengthen expenditure planning and introduce output-based budgeting. - Reduce the wage bill and support for public enterprises; implement civil service and public enterprise reforms. - Commission independent review and consider consolidation of tax incentives. - Monetary and reserve management - Maintain peg to South African rand but avoid a negative interest rate differential vis-à-vis anchor currency. - Develop domestic financial markets to provide investment opportunities for pension funds and insurance companies and contain investment outflows. - Financial sector and structural policies - Strengthen supervision of banks and NBFIs; expedite enabling legislation for NAMFISA. - Consider prudential limits on large equity exposures of pension funds and insurance companies. - Continue trade liberalization and enhance capacity for customs administration under the new SACU agreement. - Pursue broad-ranging structural reforms: improve education quality, vocational training, business environment for SMEs, access to finance, and labor market flexibility. - Implement land redistribution policy based on transparent criteria to contain negative repercussions on production and investment. *Source: IMF staff report content provided in _cr0597.* ### 1. The New SACU Agreement ..........................................................................................8 ### _cr0597 - 1. The New SACU Agreement ### Executive summary: key findings - Real GDP growth accelerated to an estimated 4¼ percent in 2004, after averaging about 3 percent during the preceding five years. - Namibia’s external current account surplus is estimated to have risen to 5½ percent of GDP in 2004. - Under plausible structural reforms and successful HIV/AIDS strategy implementation, growth could reach 4 percent over the medium term. - The fiscal deficit more than doubled in 2003/04 to 7¾ percent of GDP, driven mainly by tax administration problems and a collapse in mining taxes. - The fiscal deficit is projected to fall to 2 percent of GDP in 2004/05 due to: one-time windfalls from SACU receipts (equivalent to 2½ percent of GDP), improvements in tax administration, and curtailed non-priority spending. - Public debt rose to 31 percent of GDP, exceeding the fiscal rule targeting public debt at 25 percent of GDP. - Namibia’s international reserves declined to less than 2 months of imports in 2003. - External debt amounted to 17½ percent of GDP at end-2003. ### Recent economic developments - Growth and inflation - Real GDP: 3¾ percent in 2003 and projected 4¼ percent in 2004. - Inflation: year-on-year inflation declined from around 13 percent in early 2003 to 5 percent in November 2004. - Sectoral drivers - Growth driven by investment and private consumption; retail and construction benefited from declining interest rates. - Manufacturing, agriculture, and fishing were hurt by appreciation of the Namibia dollar. - Mining exports slumped in 2003 and recovered in 2004 due to rising world demand, a new zinc mine, and offshore diamond mining expansion. - External sector - External current account remained in surplus; strong services, income, and transfer receipts offset a widening trade deficit. - Regional export distribution (2000–03): Rand area 28.0, Spain 10.8, United Kingdom 35.2, Other EU 9.8, Other 16.3 (in percent of exports excluding re-exports). - Diamond exports: 46.3, 45.9, 49.7, 40.9 (2000–03, in percent). - Current account surplus (in millions of U.S. dollars): 317.9, 56.2, 112.6, 171.0 (2000–03). - Capital flows and reserves - Increasing net outflows reflecting pension funds and insurance companies investing in South Africa. - International reserves below 2 months of imports in 2003; reserves-to-short-term-debt ratio slightly above 1.0 at end-2002. - Text Table: International reserves (months of imports): Botswana 3.2, Lesotho 4.3–6.7, Namibia 1.9–2.5, South Africa 2.2–2.9, Swaziland 1.9–3.3 (2000–03). ### The new SACU agreement: institutional and fiscal effects - Institutional changes - Replaces 1969 treaty; provides well-defined institutional structures and joint decision-making, allowing Namibia participation in policy setting and trade negotiation framework. - Requires Namibia to enhance capacity in areas such as customs administration and statistical compilation. - Revenue-sharing formula (RSF) components - Customs component: shared based on intra-SACU imports. - Excise component: consists of 85 percent of excise collections and is shared based on GDP. - Development component: distributes the remaining excise collections based inversely on per-capita GDP. - Fiscal impact and forecasting - New RSF reduces net transfers from South Africa to other members and eliminates the two-year lag between collections and allocations, making revenue forecasting more difficult. - Namibia is poised to lose revenue from the shift to the new RSF: after a windfall in 2004/05 due to the lagged RSF and transitional arrangements, Namibia’s SACU receipts are projected to fall by 4 percent of GDP by 2009/10. ### Fiscal developments and medium-term fiscal issues - Recent outcomes - Fiscal deficit: 3½ percent of GDP in 2002/03; 7¾ percent of GDP in 2003/04. - Drivers of 2003/04 deterioration: unexpected problems in VAT and income tax administration and collapse in diamond and other mining taxes. - Expenditure: some reining in of net lending to parastatals and nonpriority current spending, but wage bill rose with increased staffing. - Public debt rose to 31 percent of GDP. - 2004/05 outlook and policy stance - Budgeted fiscal deficit: 2 percent of GDP in 2004/05. - Key supporting factors: one-time SACU windfalls equivalent to 2½ percent of GDP, improvements in tax administration, efforts to curtail subsidies to parastatals and the wage bill. - Authorities committed to reduce public debt ratio over the medium term toward fiscal rule target of 25 percent of GDP. - As a first step, authorities decided to forego a supplementary budget for this fiscal year, for the first time since independence. - Fiscal data notes - Fiscal year runs April to March. - Fiscal analysis hampered by long reporting lags and lack of monthly data; authorities intend to provide preliminary monthly data with a short delay. ### Monetary and financial sector developments - Exchange rate regime and policy - Namibia dollar pegged to the South African rand; monetary policy anchored by the peg. - Bank of Namibia reduced the Bank Rate from 12¾ percent in January 2003 to 7½ percent in July 2004; the last step aligned the Bank Rate with the South African policy rate. - Interest rate differentials and capital costs - The positive differential for government bonds widened recently, indicating an increasing risk premium for Namibia. - Interest rate differentials (Namibia rate - South Africa rate) varied across instruments (bank rate, lending rate, treasury bill rate) with swings between -200 and +250 basis points over 2001–04 (Figure 7). - Credit and domestic markets - Credit to the private sector, especially households, grew strongly. - Decline in reserves partly reflects valuation effects (reserves largely in US dollars and euros while around four-fifths of imports originate in South Africa). - Authorities are trying to strengthen domestic financial markets to contain outflows and are considering tightening domestic asset requirements. - Domestic interest rates play a key role by avoiding a negative interest rate differential vis-à-vis the anchor currency. ### Policy discussions and reform priorities - Main policy focus areas identified by the mission - Address structural impediments to growth: privatize parastatals, raise labor skills, improve access to finance and capital, and strengthen economic flexibility to foster private sector activity and employment outside mining and agriculture. - Medium-term fiscal policy stance: reduce public debt and manage SACU revenue volatility. - Impact of HIV/AIDS on growth and fiscal policy: integrate HIV/AIDS strategy implementation into medium-term planning. - Sustainability of the exchange rate peg: ensure appropriate fiscal and monetary policies and domestic market development to support the peg. - Efforts to combat inequality and poverty: address land distribution and labor market rigidities; promote labor-intensive industries. - Institutional/political context - Presidential and parliamentary elections occurred one month after discussions; SWAPO retained strong majority and Mr. Pohamba succeeded Mr. Nujoma. - General economic policy direction not expected to change. ### Vision 2030: long-term development framework - Objectives and targets - Vision 2030 aims to transform Namibia into a diversified and industrialized country with a high standard of living for everybody. - Real GDP growth targeted to accelerate steadily to 9½ percent by 2030. - Plan aims to cut in half Namibia’s Gini coefficient of 0.7 (1994) and markedly reduce unemployment. - Process and assessment - Developed through a participatory process with technical advice by UNDP. - Mission considered Vision 2030 important for ownership and momentum but noted lack of specificity regarding measures to achieve ambitious objectives. *Source: Chapter and excerpts from the IMF staff report contained in _cr0597 - 1. The New SACU Agreement.* ### 15. Namibia’s policies have generally been consistent with Fund advice over the ### Namibia’s policies have generally been consistent with Fund advice over the ### Policy consistency and technical assistance - Authorities adhered to a prudent fiscal policy stance prior to 2003/04 and implemented measures such as medium-term expenditure planning. - Challenges remaining: - Limited progress in reducing the high wage bill and support to parastatals. - Slow progress on structural labor market rigidities and skills enhancement. - Mission recommendations and authorities’ responses: - Consider Fund technical assistance and standards and codes assessments. - Merit in technical assistance in statistics and tax policy and administration (authorities indicated they would consider). - Authorities expressed interest in a fiscal ROSC and an FSAP. ### Economic prospects and scenarios - Authorities’ medium-term growth expectation: - Growth to accelerate to 4 percent over the medium term (vs. average growth rate of 3.8 percent since independence). - Assumptions: strong world growth, increased trade integration, buoyant domestic demand, stable macroeconomic conditions, low interest rates. - Expected sectoral drivers: manufacturing, tourism, mining; potential late‑decade benefit from Kudu gas field development. - Conditions for achieving growth targets: - Implement HIV/AIDS strategy. - Initiate structural reforms and maintain prudent fiscal policies. - Scenario projections: - Baseline: growth could reach 4 percent over the medium term. - Alternative: growth could average 1 percentage point less if authorities fall short in implementing policies. - Downside risks to short-run growth: - Further appreciation of the Namibia dollar. - Climatic factors. - Rising oil prices (note: “An increase in oil prices of US$10 per barrel raises energy imports by 1½ percent of GDP.”). - Potential social tensions and reduced agricultural output from land expropriation moves. - External position: - External sustainability analysis does not point to immediate concerns (Appendix IV). - Low international reserves remain a concern not captured by the template. ### HIV/AIDS and implications for medium-term growth (Box 3) - Epidemiological and social impact: - “More than one-fifth of the population is currently thought to be infected with HIV/AIDS.” - Adult life expectancy dropped from 67 years in 1991 to 45 years in 2002. - Child mortality has remained high. - “60,000 children have been orphaned so far.” - Authorities’ strategy: - MTP III identifies HIV/AIDS as a developmental issue; calls for prevention, treatment, improved access to health care, and some access to anti-retroviral therapy. - Implementation planned to begin in early 2005 (donor support lined up). - Growth model implications: - Implementing MTP III could reverse declining contribution of human capital to growth if the epidemic’s spread is halted (staff’s baseline assumption). - Baseline also assumes modest strengthening of TFP from reforms (skills, parastatals, SMEs, export diversification, labor market flexibility) with most gains materializing in the long run. ### Fiscal policy stance and medium-term challenges - Authorities’ commitment: - Reiterated commitment to a prudent fiscal policy stance. - Acknowledged need to curtail and reallocate spending to combat HIV/AIDS and to respond to a decline in SACU receipts beginning in 2005/06. - Political consensus not yet developed to incorporate civil service/parastatal reforms or consolidation of tax incentives into medium-term strategy. - Fiscal rule and debt objective: - Fiscal rule aiming to limit public debt to 25 percent of GDP. - Rule guided policy-making with some success during three fiscal years prior to 2003/04. - Slippages in 2003/04 mainly due to volatility of mining taxes and unexpected tax administration problems. - Mission: generating moderate primary surpluses of about 1 percent of GDP over the next few years could put public debt on a clear downward path. - Footnote: “Stabilizing the public debt ratio at 31 percent of GDP would require running primary surpluses of about 0.2 percent of GDP.” - Expenditure focus of adjustment: - Most adjustment should come from expenditure reductions: wage bill, subsidies to parastatals, goods and services. - Comparatively high tax revenue/GDP ratio noted (constraints on raising revenues): “In 2003, the tax revenue/GDP ratio amounted to less than 18 percent of GDP in Sub-Saharan African countries and 24 percent of GDP in South Africa.” - 2004/05 budget decision: - Authorities decided to forego a supplementary budget for 2004/05 and use the small contingency in the budget to address some spending needs. - Mission judged 2004/05 budget targets feasible if additional spending pressures are resisted. - Tax incentives debate: - Government debate on EPZs: some argue EPZs attract FDI and employment; others point to limited benefits and revenue loss. - Mission recommended independent review, consolidation, and enhanced transparency of tax incentives. - Medium-term expenditure framework: - Authorities intend to introduce output-based program budgeting gradually to reorient spending toward education, health (including HIV/AIDS), and infrastructure. - Civil service and parastatals: - Authorities view civil service as employment vehicle; efforts include three-year wage pacts, aiming at wage increases below inflation, hiring freeze, reductions in overtime pay and travel allowances; no retrenchment program at this stage. - Mission advocated a clear road map for civil service reform: sector staffing strategies, real-time monitoring of staffing levels, linking staffing allocations to output-budgeting priorities, and stronger performance management. - Parastatals: no comprehensive closure/divestiture strategy; emphasis to date on commercialization. Authorities open to divestiture but cautious; many large parastatals lack skilled management and clear business plans. - Central Governance Agency (CGA): enabling legislation still missing key elements, notably demarcation of supervisory authority between CGA and line ministries; mission urged prompt passage and sufficient authority for CGA. ### Medium-term fiscal issues and scenarios (Box 4 and central government operations tables) - Key fiscal pressures: - SACU receipts projected to fall from 11½ percent of GDP in 2004/05 to 7½ percent of GDP by 2009/10. - Budgetary costs of implementing national HIV/AIDS strategy, after identified donor support of ¾ percent of GDP, projected to rise to 1¾ percent of GDP by 2009/10 (not yet reflected in authorities’ medium-term framework). - Two illustrative scenarios discussed with authorities: - Baseline scenario assumptions: - Improvements in tax administration. - Steps to rein in the wage bill, improve parastatal efficiency, and limit nonessential purchases of goods and services. - Current spending falls by about 3 percent of GDP over the period. - Additional adjustment of 1.5 to 2.5 percent of GDP required to start running primary surpluses. - Under this scenario, public debt ratio would fall to 28¼ percent of GDP and be within striking range of the fiscal rule target. - Alternative scenario assumptions: - Inaction on wage bill and subsidies, failure to implement additional measures, and consequent increases in interest rates. - Public debt ratio would rise to more than twice the level targeted by the fiscal rule. - Possible policy options discussed: - Raise the VAT rate from 15 to 18 percent (yielding 1½ percent of GDP) to help finance HIV/AIDS spending. - Review and consolidate existing tax incentives. - Negotiate increase in the SACU development component from 15 percent to 25 percent under the RSF (yielding ½ percent of GDP). - Seek additional donor support for HIV/AIDS strategy implementation. - Accelerate civil service and public enterprise reform. - Issue a Eurobond (with interest savings of 0.2 percent of GDP). - Central Government Operations—Baseline Scenario (In percent of GDP) - 2004/05: Revenue and grants 32.9; Expenditures 34.9; Additional measures 0.0; Overall balance -2.0; Primary balance 0.7; Public debt 30.1 - 2005/06: Revenue and grants 30.4; Expenditures 34.9; Additional measures 1.5; Overall balance -2.9; Primary balance -0.6; Public debt 31.1 - 2006/07: Revenue and grants 30.0; Expenditures 33.8; Additional measures 2.5; Overall balance -1.4; Primary balance 0.9; Public debt 31.1 - 2007/08: Revenue and grants 30.2; Expenditures 33.7; Additional measures 2.5; Overall balance -1.0; Primary balance 1.2; Public debt 29.5 - 2008/09: Revenue and grants 30.2; Expenditures 33.2; Additional measures 2.0; Overall balance -1.0; Primary balance 1.0; Public debt 28.9 - 2009/10: Revenue and grants 30.3; Expenditures 32.9; Additional measures 1.5; Overall balance -1.0; Primary balance 0.8; Public debt 28.3 - Central Government Operations—Alternative Scenario (In percent of GDP) - 2004/05: Revenue and grants 33.0; Expenditures 35.0; Additional measures 0.0; Overall balance -2.0; Primary balance 0.7; Public debt 30.1 - 2005/06: Revenue and grants 30.6; Expenditures 35.8; Additional measures 0.0; Overall balance -5.2; Primary balance -2.5; Public debt 33.5 - 2006/07: Revenue and grants 30.2; Expenditures 36.0; Additional measures 0.0; Overall balance -5.8; Primary balance -2.5; Public debt 37.9 - 2007/08: Revenue and grants 30.5; Expenditures 37.1; Additional measures 0.0; Overall balance -6.6; Primary balance -2.5; Public debt 41.7 - 2008/09: Revenue and grants 30.6; Expenditures 38.2; Additional measures 0.0; Overall balance -7.6; Primary balance -2.7; Public debt 47.0 - 2009/10: Revenue and grants 30.6; Expenditures 39.5; Additional measures 0.0; Overall balance -8.8; Primary balance -2.9; Public debt 52.8 ### Monetary and exchange rate policies - Authorities’ stance: - Firm commitment to the exchange rate peg; view it as having maintained macroeconomic stability and anchored policymaking. - Cited robust current account surplus, close and increasing trade/financial links with South Africa, resilient diamond exports, and the rand as legal tender in Namibia. - Viewed recent rand appreciation as driven by South African factors; noted hardship to some exporters but overall competitiveness retained. - Mission assessment and recommendations: - Current exchange rate regime deemed appropriate. - Continued appreciation of the rand could have negative growth and employment implications; would call for accelerated structural reforms to increase productivity and flexibility. - Urged analysis of additional competitiveness indicators, such as unit labor costs (not available at present). - Reserves drain view: - Authorities attribute reserve decline to insufficient investment opportunities for nonbank financial institutions (NBFIs) and the resulting net export of capital from rapid NBFI growth. - Authorities favor regulatory measures and promotion of domestic financial markets to safeguard reserves. - Authorities noncommittal on mission’s recommendation to avoid a negative interest rate differential vis-à-vis South Africa. - Mission argued the decline in reserves warranted a clear signal to contain capital outflows and prioritized sustainability of the peg over efforts to support growth. *Source: IMF staff report excerpt as provided.* ### 35. The mission recommended a thorough analysis of the implications of the ### _cr0597 - 35. The mission recommended a thorough analysis of the implications of the ### Regulatory proposals affecting NBFIs and capital outflows - Proposed amendments: - Reduce the limit on investments in dual-listed companies—quoted in Johannesburg and Windhoek. - Require a minimum investment of 5 percent of assets in unlisted Namibian companies. - Mission concerns and caveats: - Provision on dual-listed companies could lessen the importance of the Namibia Stock Exchange (NSX) and run counter to efforts to promote domestic capital markets. - NBFIs may find insufficient investment options of good quality in unlisted Namibian companies. - Authorities’ response: - Indicated they would reassess the regulations once comments from market participants were received. ### Short-run measures to strengthen reserves (alternatives to raising interest rates) - Options discussed: - Step up outright foreign exchange purchases. - Privatize parastatals to foreign investors. - Obtain a sovereign credit rating and tap international capital markets (e.g., a Eurobond issue). - Potential additional effects of a Eurobond (as noted): - Lowering interest rates by an estimated 500 basis points (the difference between the domestic interest rate of 13 percent and a possible Eurobond rate of 8 percent). - Providing a benchmark for private debt, helping attract FDI, and anchoring a domestic rating system. - Authorities’ response: - Appreciated the discussion and indicated they would study these options. - Caution: - Technical preparations could be demanding, and an exchange rate risk would arise. ### Financial sector policies and banking system resilience - Key indicators and recent developments: - All banks met the capital-adequacy ratio of 10 percent at end-2003. - The share of non-performing loans in total loans has steadily declined. - Competition in the banking system has been limited. - Lack of access to financing and a standard 100 percent collateral requirement have been a problem for SMEs. - Microfinance remains in its infancy. - Risks and vulnerabilities: - Declining interest rates appear to have fueled growth in consumer loans and mortgages. - Concerns about the sustainability of the strong increase in housing prices and rising household indebtedness. - Supervision and regulation: - Bank of Namibia (BoN) self-assessment on Basel Core Principles: compliant with 21 of the 25 BCP; recognized weaknesses in country risk, market risk, consolidated supervision, and risk management. - Mission encouraged work toward full compliance, potentially assessed in the context of an FSAP. - Revisions to the Banking Institutions Act initiated to enhance BoN powers to deal with pyramid schemes and banks not respecting prudential requirements. - AML/CFT and financial intelligence: - Financial Intelligence Bill approved by Cabinet assigns lead responsibility to the BoN to collect and analyze financial intelligence, forward relevant information to law enforcement agencies, and establish “Know Your Customer” rules. - CFT legislation at the drafting stage. - Nonbank financial institutions (NBFIs) and NAMFISA: - Mission urged strengthening the legal and regulatory framework for NBFIs. - Priority: adopt legislation to strengthen the effectiveness of NAMFISA; proposed amendments would close regulatory loopholes and establish reporting and sanctions procedures. - Pension funds and insurance companies: - Concern about large equity exposure. - Suggestion to introduce prudential investment limits by type of assets, including specific limitations on equity risk, in line with international best practices. - Government pension fund example: 60 percent of its assets invested in equity. - Authorities indicated they would study the proposal. ### Domestic bond market and NSX - Preconditions developing: - Several potential borrowers ready to issue instruments. - Large future investment projects, such as the Kudu gas field, may bring additional placements. - Mission recommendation: - Support an industry proposal of reporting bond transactions through the NSX to form a nucleus for the development of a secondary market for bonds. ### Structural issues: growth, labor, SMEs, and land policy - Growth and policy priorities: - Need to step up, better coordinate, and improve targeting of structural reforms to promote private sector activity, generate employment, and address income inequality. - Emphasis on education and vocational training to meet labor market demands. - Suggestion to consider a labor-intensive public works program similar to South Africa’s. - Labor market and recent amendments: - Recently adopted amendments to the 1992 Labor Act will increase vacation leave from 18 to 24 days and restrict the use of temporary workers; they also ease arbitration procedures for dismissing employees. - Mission underscored the importance of flexible labor markets to maintain competitiveness. - SME support: - Various programs exist focusing on access to finance through credit lines and guarantee programs and on skills and technology acquisition. - Evidence that credit and guarantee ceilings are too low and institutional capacity is insufficient to evaluate proposals. - Authorities intend to review existing policy. - Land redistribution policy (Box 5 key facts): - Since the mid-1990s, the “willing buyer, willing seller” program complemented by a concessional affirmative action loan scheme. - Pace slow: about 3 million hectares of the total commercial farming land of 36 million hectares have been redistributed. - Approximately 4,000 farmers hold about half of Namibia’s arable land, mainly in the south. - About 20 farmers have so far received expropriation letters under the constitution’s provision for expropriation “in the public interest” subject to “just compensation”. - Main criticism: lack of objective and transparent criteria to identify underutilized land; authorities believe existing legal framework and recourse to courts are sufficient and will work with farmers unions and donors. ### Trade policy - Commitments and negotiations: - Authorities reiterated commitment to further trade liberalization driven by Namibia’s WTO obligations. - Namibia, with SACU members, engaged in bilateral trade negotiations with the United States, the EU, and Mercosur. - Jointly with SADC partners, aiming to create a free trade area by 2008. - Tariff developments: - Namibia’s simple average tariff reduced to 11.4 percent, compared with 24 percent a decade ago and the sub-Saharan average of 20 percent. - Reduction accompanied by a simplification in the tariff structure. ### Data issues - Progress and recommendations: - Authorities have made significant progress in addressing data weaknesses. - Namibia participating in the GDDS regional project for Anglophone African countries. - Mission recommended improving timeliness of fiscal data, coverage of national accounts and the consumer price index, quality of balance of payments and IIP data, and conducting labor surveys more frequently. ### Staff appraisal: macroeconomic assessment and fiscal outlook - Macroeconomic performance: - Namibia has enjoyed moderate growth and macroeconomic stability since independence: external current account consistently in surplus, reduced inflation, and generally well-contained fiscal deficits prior to the 2003/04 fiscal year. - Public and external debt maintained at low levels. - Despite relatively high per-capita GDP, per-capita income growth slow; unemployment and poverty pervasive; income distribution highly skewed. - Prospects and policy priorities: - Promising prospects contingent on implementing HIV/AIDS strategy and addressing structural impediments to growth. - Need to boost manufacturing and services (including tourism) contribution to growth and employment. - Authorities can facilitate by strengthening flexibility of the economy (including labor market), enhancing skilled labor availability, promoting export diversification, and improving access to capital and finance. - Fiscal challenges and consolidation: - Sharp rise in the fiscal deficit in 2003/04 increased vulnerability to shocks. - Projected large decline of SACU receipts coincides with pressing spending needs to achieve the MDGs and implement the HIV/AIDS strategy. - Authorities committed to returning to fiscal consolidation: decision to forego a supplementary budget for 2004/05 and intention to place public debt ratio on a downward trajectory over the medium term. - Requirement: generation of moderate primary surpluses and curtailment of nonessential current spending given already high tax revenue/GDP ratio. - Public sector reform and expenditure quality: - Need clear roadmaps for civil service and public enterprise reform. - Namibia’s wage bill and subsidies for parastatals account for almost half of all spending, crowding out more productive expenditure. - Ongoing efforts: strengthen medium-term expenditure planning and introduce output-budgeting to identify priorities and enhance expenditure quality. - Tax incentives: - Staff recommends an independent review of existing tax incentives to assess whether they are a cost-effective way to generate employment and stimulate growth and to quantify associated revenue loss. - Exchange rate and reserves: - Exchange rate peg to the rand has provided a credible anchor and reduced inflation. - Appreciation of the Namibia dollar increases need for accelerated structural reforms to enhance flexibility and productivity. - International reserves need strengthening. - Bank of Namibia should avoid a negative interest rate differential and, if need be, establish a positive differential vis-à-vis the anchor currency. - Efforts to strengthen domestic financial markets and create investment opportunities could help contain outflows of institutional investors, but proposed tightening of domestic asset requirements for such investors may undermine these efforts and should be revisited. - Financial sector supervision priorities reiterated: - Independent external assessment of banking supervision encouraged (FSAP welcomed). - Supervision of nonbank financial institutions needs strengthening: expedite enabling legislation for regulatory agency effectiveness; address large equity exposure of pension funds and insurance companies. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 61. It is proposed that Namibia remain on the standard 12-month consultation cycle. ### _cr0597 - 61. It is proposed that Namibia remain on the standard 12-month consultation cycle. ### Article IV consultation cycle - It is proposed that Namibia remain on the standard 12-month consultation cycle. - Namibia is on the standard 12-month Article IV consultation cycle; the last Article IV consultation was concluded by the Executive Board on April 23, 2003. ### Macroeconomic overview and projections (selected indicators) - Real GDP growth rate: 2003: 3.7; 2004: 4.2; 2005: 3.6; 2006: 3.8; 2007: 3.9; 2008: 3.9; 2009: 4.0 (percent, annual). - GDP at constant 1995 prices (annual percent change): 2000: 3.5; 2001: 2.4; 2002: 2.5; 2003: 3.7; 2004: 4.2; 2005: 3.6; 2006: 3.8; 2007: 3.9; 2008: 3.9; 2009: 4.0. - GDP deflator (annual percent change): 2000: 11.0; 2001: 14.3; 2002: 11.2; 2003: -1.3; 2004: 4.7; 2005: 5.5; 2006: 4.7; 2007: 4.7; 2008: 4.7; 2009: 4.7. - Consumer price index (period average): 2000: 9.3; 2001: 9.3; 2002: 11.3; 2003: 7.2; 2004: 5.5; 2005: 5.8; 2006: 5.0; 2007: 5.0; 2008: 5.0; 2009: 5.0. - GDP per capita (U.S. dollars): 2000: 2,374; 2001: 2,389; 2002: 2,411; 2003: 2,125; 2004: 2,184. ### External sector (selected items) - Current account balance (including government transfers, percent of GDP): 2000: 9.3; 2001: 1.7; 2002: 3.8; 2003: 4.0; 2004: 5.6; 2005: 4.4; 2006: 3.6; 2007: 3.5; 2008: 3.5; 2009: 3.4. - Current account balance (excluding government transfers, percent of GDP): 2000: -2.9; 2001: -8.6; 2002: -5.0; 2003: -6.3; 2004: -7.4; 2005: -7.1; 2006: -6.6; 2007: -6.6; 2008: -6.4; 2009: -5.9. - Exports, f.o.b. (millions of U.S. dollars): 2000: 1,324.2; 2001: 1,142.3; 2002: 1,072.4; 2003: 1,249.3; 2004: 1,350.9; 2005: 1,401.9; 2006: 1,502.9; 2007: 1,591.9; 2008: 1,673.7; 2009 (proj): 1,851.7. - Of which diamonds (millions of U.S. dollars): 2000: 612.5; 2001: 523.8; 2002: 533.3; 2003: 510.9; 2004: 574.3; 2005: 599.7; 2006: 630.2; 2007: 662.8; 2008: 697.4; 2009: 734.1. - Imports, f.o.b. (millions of U.S. dollars, excluding duty): 2000: -1,317.3; 2001: -1,341.3; 2002: -1,280.0; 2003: -1,711.1; 2004: -1,875.1; 2005: -1,980.2; 2006: -2,090.1; 2007: -2,223.5; 2008: -2,349.1; 2009: -2,560.3. - Gross official reserves (millions of U.S. dollars, end-of-period): 2000: 262.4; 2001: 223.0; 2002: 311.2; 2003: 280.0; 2004: 293.3; 2005: 339.0; 2006: 380.5; 2007: 429.5; 2008: 460.2; 2009: 497.9. - Reserves in months of imports of goods and services: 2000: 1.9; 2001: 1.7; 2002: 2.5; 2003: 1.7; 2004: 1.6; 2005: 1.8; 2006: 1.9; 2007: 2.1; 2008: 2.1; 2009: 2.1. - Terms of trade (annual percent change): 2000: 12.5; 2001: -7.8; 2002: 22.1; 2003: -23.2; 2004: -8.0; 2005: -1.7; 2006: 2.0; 2007: 0.5; 2008: 1.2; 2009: 2.4. - Exchange rate (Namibia dollar/U.S. dollar, period average): 2000: 6.9; 2001: 8.6; 2002: 10.5; 2003: 7.6. - Exchange rate (Namibia dollar/U.S. dollar, end-of-period): 2000: 7.6; 2001: 12.2; 2002: 9.3; 2003: 7.6. - External debt/GDP (percent): 2000: 23.0; 2001: 26.1; 2002: 25.4; 2003: 17.5. ### Fiscal position and public debt (central government, selected) - Revenue and grants (percent of GDP): 2000: 33.3; 2001: 31.3; 2002: 30.0; 2003: 29.5; 2004: 32.9; 2005: 30.4; 2006: 30.0; 2007: 30.2; 2008: 30.2; 2009 (proj): 30.3. - Expenditure and net lending (percent of GDP): 2000: 34.7; 2001: 35.8; 2002: 36.5; 2003: 37.3; 2004: 34.9; 2005: 34.9; 2006: 33.8; 2007: 33.7; 2008: 33.2; 2009: 32.9. - Wages (percent of GDP): 2000: 15.1; 2001: 15.1; 2002: 14.8; 2003: 15.5; 2004: 14.7; 2005: 14.4; 2006: 14.2; 2007: 14.0; 2008: 13.7; 2009: 13.5. - Capital expenditure and net lending (percent of GDP): 2000: 5.3; 2001: 5.4; 2002: 6.6; 2003: 5.9; 2004: 6.0; 2005: 5.9; 2006: 5.4; 2007: 5.7; 2008: 5.6; 2009: 5.6. - Primary balance (- deficit) (percent of GDP): 2000: 0.7; 2001: -2.5; 2002: -0.9; 2003: -5.2; 2004: 0.7; 2005: -0.6; 2006: 0.9; 2007: 1.2; 2008: 1.0; 2009: 0.8. - Overall government deficit including grants (percent of GDP): 2000: -1.4; 2001: -4.5; 2002: -3.5; 2003: -7.8; 2004: -2.0; 2005: -2.9; 2006: -1.4; 2007: -1.0; 2008: -1.0; 2009: -1.0. - Public and publicly guaranteed debt outstanding/GDP (percent): 2000: 34.1; 2001: 39.5; 2002: 35.2; 2003: 41.2; 2004: 39.6; 2005: 39.9; 2006: 39.3; 2007: 37.2; 2008: 36.0; 2009: 34.8. - Public debt outstanding/GDP (percent): 2000: 23.1; 2001: 26.2; 2002: 25.0; 2003: 30.9; 2004: 30.1; 2005: 31.1; 2006: 31.1; 2007: 29.5; 2008: 28.9; 2009: 28.3. ### Central government operations (selected monetary amounts, Namibia dollars) - Revenue and grants (millions): 2002/03 Rev.: 10,469.4; 2003/04 Rev.: 10,799.7; 2005/06 Est.: 9,754.1; 2006/07 Budg.: 12,067.6; 2007/08 Proj.: 11,901.8; 2008/09 Proj.: 12,011.0; 2009/10 Proj.: 12,854.1. - Tax revenue (millions): 2002/03: 9,195.9; 2003/04: 9,629.9; 2005/06 Est.: 8,632.7; 2006/07 Budg.: 10,732.1; 2007/08 Proj.: 10,743.8; 2008/09 Proj.: 10,738.3; 2009/10 Proj.: 11,439.5. - Expenditures (millions): 2002/03: 11,572.9; 2003/04: 12,324.2; 2005/06 Est.: 12,343.8; 2006/07 Budg.: 12,786.8; 2007/08 Proj.: 12,631.8; 2008/09 Proj.: 13,752.0; 2009/10 Proj.: 14,509.4. - Overall balance (millions): 2002/03: -1,103.5; 2003/04: -1,524.4; 2005/06 Est.: -2,589.7; 2006/07 Budg.: -719.2; 2007/08 Proj.: -730.0; 2008/09 Proj.: -1,149.2; 2009/10 Proj.: -583.1. - Overall balance excluding extrabudgetary spending (millions): 2002/03: -828.8; 2003/04: -1,280.3; 2005/06 Est.: -2,345.6; 2006/07 Budg.: -538.6; 2007/08 Proj.: -549.4; 2008/09 Proj.: -925.8; 2009/10 Proj.: -491.6. - Public and publicly guaranteed debt (millions, memorandum): 2002/03: 11,182.6; 2005/06 Est.: 13,635.5; 2006/07 Budg.: 14,297.6; 2007/08 Proj.: 15,733.9; 2008/09 Proj.: 16,861.0; 2009/10 Proj.: 17,355.4. ### Monetary developments and banking sector (selected) - Broad money (end-period, millions of Namibia dollars): 2003 Dec.: 10,698.1; 2004 Dec.: 12,433.7; 2005 Dec.: 12,821.6; 2006 Dec.: 13,208.5; 2007 Dec.: 12,913.3; 2008 Dec.: 13,626.7; 2009 Dec. (proj): 14,410.8; later projections up to 30,062.3 in horizon tables. - Reserve money (end-period, millions): varied series (e.g., Dec. 2002: 991.7; Dec. 2003: 980.8; projections increase thereafter). - Private sector credit (annual percent change): 2000: 17.0; 2001: 16.3; 2002: 20.2; 2003: 12.4; 2004: 17.2; 2005: 16.3; 2006: 14.0; 2007: 15.0; 2008: 14.3; 2009: 14.0 (percent). - Bank of Namibia overdraft rate (end-of-period): shown historically (e.g., 2000: 12.8; 2001: 12.8; 2002: 11.5; 2003: 8.3; 2004: 7.8). - Financial soundness indicators (selected): Regulatory capital to risk-weighted assets (1998–2003): 1999: 13.2; 2000: 14.9; 2001: 14.8; 2002: 15.5; 2003: 14.1; 2003 (later entry): 14.8. Nonperforming loans to total gross loans: 1999: 11.3; 2000: 9.7; 2001: 4.7; 2002: 4.0; 2003: 3.9. ### Medium-term macroeconomic framework (baseline and alternative scenarios, percent of GDP) Baseline scenario (2003–09, selected): - Foreign savings 1/: 2003: -4.0; 2004: -5.6; 2005: -4.4; 2006: -3.6; 2007: -3.5; 2008: -3.5; 2009: -3.4. - Gross national savings: 2003: 26.7; 2004: 28.2; 2005: 28.0; 2006: 27.7; 2007: 28.4; 2008: 29.1; 2009: 29.7. - Gross investment: 2003: 22.7; 2004: 22.6; 2005: 23.6; 2006: 24.1; 2007: 24.9; 2008: 25.6; 2009: 26.3. - Central government deficit including grants: 2003: -7.8; 2004: -2.0; 2005: -2.9; 2006: -1.4; 2007: -1.0; 2008: -1.0; 2009: -1.0. - Public debt/GDP: 2003: 30.9; 2004: 30.1; 2005: 31.1; 2006: 31.1; 2007: 29.5; 2008: 28.9; 2009: 28.3. Alternative scenario (2003–09, selected): - Foreign savings 1/: 2003: -4.0; 2004: -5.6; 2005: -3.7; 2006: -2.7; 2007: -2.7; 2008: -2.6; 2009: -2.6. - Gross national savings: 2003: 26.7; 2004: 28.2; 2005: 26.2; 2006: 24.4; 2007: 24.3; 2008: 24.1; 2009: 23.8. - Gross investment: 2003: 22.7; 2004: 22.6; 2005: 22.5; 2006: 21.6; 2007: 21.7; 2008: 21.5; 2009: 21.2. - Central government deficit including grants 2/: 2003: -7.8; 2004: -2.0; 2005: -5.2; 2006: -5.8; 2007: -6.6; 2008: -7.6; 2009: -8.8. - Public debt/GDP 2/: 2003: 30.9; 2004: 30.1; 2005: 33.5; 2006: 37.9; 2007: 41.7; 2008: 47.0; 2009: 52.8. Notes in table: - 1/ External current account surplus. - 2/ Figures are for fiscal year, which begins April 1. ### Social and development indicators (selected) - GDP per capita (constant 1995 U.S. dollars): 2002: 2,184.0. - Population (2002): Total (in millions): 2.0; Annual rate of growth (percent): 2.1. - Life expectancy at birth (2002): 45.3 years. - Infant mortality (per 1,000 live births, 2002): 55.0. - Prevalence of HIV, female (percent ages 15-24): 2001: 24.3. - Millenium Development Goals (selected values): Population below 1 U.S. dollar a day (percent): 1995: 34.9; Poverty gap at 1 U.S. dollar a day (percent): 1995: 14.0; Net primary enrollment ratio (percent of relevant age group): 1999: 91.7; Under 5 mortality rate (per 1,000): 1990: 84; 1995: 78; 2001: 67. ### Indicators of financial and external vulnerability (selected) - Public sector debt of the central government (percent of GDP): 1998: 22.4; 1999: 24.3; 2000: 23.1; 2001: 26.2; 2002: 25.0; 2003 Est.: 30.9. - Broad money (percent change, 12-month basis): 1999: 11.3; 2000: 18.4; 2001: 13.0; 2002: 4.5; 2003 Est.: 6.9; 2004 (prel): 9.6. - Gross official reserves (millions of U.S. dollars, end-period): 1998: 260.6; 1999: 305.0; 2000: 262.4; 2001: 223.0; 2002: 311.2; 2003: 280.0. - Official reserves in months of imports of goods and services: 1998: 1.6; 1999: 2.0; 2000: 1.9; 2001: 1.7; 2002: 2.5; 2003: 1.7. - Total external debt (millions of U.S. dollars): 1999: 676.6; 2000: 630.8; 2001: 797.4; 2002: 840.5; 2003: 761.0; 2004: 817.1 (selected series). ### Namibia–Fund relations and technical assistance (selected) - Membership: Joined 9/25/90; Article VIII. - Quota (SDR million): 136.50 (100.0 percent of quota). - Fund holdings of currency: 136.45 (99.96 percent). - Reserve position in Fund: 0.05 (0.04 percent). - SDR Department holdings: 0.02 (N/A percent of allocation). - Outstanding purchases and loans: None. - Financial arrangements: None. - Projected obligations to Fund: None. - Exchange rate arrangement: The Namibia dollar is pegged at par to the South African rand, and both currencies are legal tender in Namibia. Namibia formally accepted the obligations of Article VIII, Sections 2, 3, and 4 as of September 20, 1996. - Technical assistance missions (selected entries with dates and purpose): - 6/98, 6 months, FAD, Ministry of Finance: VAT implementation Advisor. - 11/98, 1 year, MAE, Bank of Namibia: Monetary operations Advisor. - 1/02, 2 weeks, STA, Bank of Namibia: ROSC Advisor. - 11/03, 2 weeks, MFD, Bank of Namibia: Financial Sector Needs Assessment Mission. - 07/04, 2 weeks, MFD, Bank of Namibia: Issues in Reserves Management Mission. - 11/04, 1 week, FAD, Ministry of Finance: Revenue Forecast Advisor. _Source: Namibian authorities; and Fund staff estimates and projections as presented in the IMF staff report text._ ### 1. Namibia joined the World Bank, the International Finance Corporation (IFC) and the ### 1. Namibia joined the World Bank, the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) in 1990 ### World Bank engagement and operations - Namibia joined the World Bank, the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) in 1990. - Currently, the Bank has no IBRD loans to Namibia. - With a GDP per capita of about US$2,000, Namibia is not eligible for IDA assistance. - Dialogue and knowledge development and sharing interventions focus on five areas: - (i) growth and poverty reduction; - (ii) capacity building for both public and private sectors; - (iii) education sector; - (iv) support for implementing decentralization; - (v) support in environmental management and bio-conservation. - A Policy and Human Resource Development (PHRD) grant is being used to prepare programs dealing with sub-national governments and service delivery through fiscal decentralization. - An Institutional Development Fund (IDF) grant supports a public expenditure tracking survey (PETS) covering the Ministries of Education and Health, assessing the capacity of institutions in managing public spending in those ministries. - The Integrated Community-Based Ecosystem Management Project (ICEMA) is the first Bank-financed operation in Namibia (a grant from the Global Environment Facility (GEF)); its goal is to promote community based integrated ecosystem management through targeted activities that would improve rural livelihoods. - Two other GEF projects will assist the government in preparing the Namibia Coast Biodiversity project and promote environmental sustainability through improved land use planning. - The Bank is working with the Government to prepare a Country Economic Memorandum addressing issues identified in the Government’s key policy documents. - While there is no country assistance strategy (CAS) for Namibia at present, the Bank is engaged in discussions with the Government on developing a framework for Bank assistance to Namibia over the next few years to strengthen partnership and collaboration on sustainable growth and reducing poverty and inequality. - The Government has approached the Bank for assistance in designing a human resources development strategy, including establishing a national center for innovation, entrepreneurship and technology (CIET) in the rural north. - The Bank finalized economic and sector work to support decision-making for the CIET proposal. - Preliminary findings suggest the need for substantial reform of educational and the training sector in Namibia. - This analytical work will provide the basis for a possible IBRD operation to support implementation of the education sector strategic plan. - A donor round table is being planned, indicatively in February 2005. ### IFC portfolio and FIAS assistance - The IFC portfolio in Namibia is US$16.2 million in 6 projects. - The two main projects are a fishery and an insurance company. - Foreign Investment Advisory Services (FIAS) is assisting Namibia in improving their investment climate. - IFC investments and actions: - Loan investment in the fishery project (Pescanova), including an approval in November 2002 of US$7.9 million long-term financing to enhance the company’s ability to catch its full quota. - Equity investment in Namibia’s first indigenous life insurance company (Namibia Life) of US$1.6 million. - Completed investment in the Pandu Ondangwa Hotel project (the hotel is now operational) and the Namibia Investment Bank transaction during the last fiscal year. - Currently negotiating the sale of IFC’s stake in Namlife to a local Namibian group. ### MIGA activity - MIGA is currently processing a project in the agribusiness sector, with a total potential coverage of US$65 million. - The project is expected to be executed in FY 05. ### Statistical issues — data availability, quality, and plans - Core data for surveillance (exchange rate, international reserves, reserve money, and interest rates) are available on a monthly basis with reasonable promptness; reliability, quality, and coverage are generally satisfactory, but recent changes to monetary and financial statistics need clarification. - Core real sector data and balance of payments and international investment position data are reported on an annual frequency only. - Namibia is participating in the GDDS regional project for Anglophone African countries funded by DfID (UK). - The authorities prepared initial metadata with detailed short- and medium-term improvement plans; these were posted on the Fund’s DSBB on December 19, 2002, and updated in February 2004. Real sector - The authorities do not report any real sector data to STA; IFS uses publications of Namibia’s Central Bureau of Statistics (CBS). - The present consumer price index covers only Windhoek. - Two STA missions in May/June and September 2002 provided technical assistance to CBS to compile a nationwide consumer price index. - Planned publication: the new index will be published in early 2005, with historical indices starting in December 2001. - Labor market data (labor force, employment, wages) are not systematically collected; last published labor market survey was conducted in 2000. - A new labor market survey was conducted in 2004, but results have not yet been published. Government finance - After a long lag, the authorities resumed reporting of fiscal data to STA. - Central government budgetary data through 2002, in the GFSM 2001 format, were reported for publication in the 2004 GFS Yearbook and are being published in IFS. - Expenditure data of line ministries are not available in a timely manner after fiscal year end and are subject to frequent revisions. - The system for expenditure reporting to the Fund needs strengthening: - Preliminary cash expenditure information of ministries should be more quickly available. - Reconciliation exercises between above-the-line estimates and financing data should be conducted more frequently. Monetary accounts - Following introduction of an IFS page in 1994, monetary data reporting was timely and comprehensive until February 2004. - Bank of Namibia substantially revised its Monetary and Financial Accounts data after Fund TA. - There was a gap in IFS reporting for Namibia from March 2004 through October 2004. - IFS reporting resumed in November 2004, but clarification on mapping between old and new data series is still needed. - New data series are available beginning in April 2002. Balance of payments - Until 2001, Namibia reported balance of payments and international investment position data annually; since then the Bank of Namibia has reported quarterly balance of payments data with a lag of one quarter. - Quarterly data are subject to substantial revisions. - Methodology underlying Namibian balance of payments is consistent with the fifth edition of the IMF’s Balance of Payments Manual and is well documented. - Bank of Namibia received Fund TA focused on improving compilation of capital and financial transactions and international investment position statistics. ### Core statistical indicators (as of January 10, 2005) — selected timing and frequency notes - Date of latest observation for many series: Nov. 2004 (exchange rates, international reserves, central bank reserve/base/broad money, interest rates); Mar. 2004 (consumer price index, exports/imports, current account balance); 2003 (overall government balance); Mar. 2004 (GDP/GNP, external debt/debt service). - Data frequencies summarized: M = monthly; Q = quarterly; A = annually; O = other. - Sources of data: A = direct report by the authorities; N = official publication. - Mode of reporting: C = cable or facsimile; M = mail; V = staff visits. - Confidentiality: C = unrestricted use. ### External debt sustainability — key stock and structure (end-2002) - Namibia’s total gross external debt stood at an estimated US$761 million, or about 25 percent of GDP, at end-2002. - Public and publicly-guaranteed external debt accounted for about 12 percent of GDP; most was on concessional terms. - Net external debt was negative, reflecting persistent outflows of savings, mainly portfolio investment by Namibian pension funds, insurance companies, and asset management companies to South African financial markets. - Short-term debt (trade credits and credit from parent banks in South Africa to Namibian subsidiaries) accounted for about two-fifths of gross external debt. - South Africa accounted for more than four-fifths of total short-term external debt. - Table 1: External Debt Indicators, 2002 - Gross External debt (in millions of U.S. dollars) 761.0 - (in percent of GDP) 25.4 - Of which: Public and publicly-guaranteed debt 354.9 - (in percent of GDP) 11.8 - Short-term debt (in millions of U.S.dollars) 294.2 - (in percent of GDP) 9.8 - Net external debt (in millions of U.S. dollars) -88.0 - Gross official reserves (in millions of U.S. dollars) 311.2 - (ratio to short-term debt) 1.1 - (ratio to reserve money) 3.0 - Memorandum items: - GDP at current market prices (in millions of U.S.dollars) 3,000.0 - Reserve money (in millions of U.S. dollars) 105.5 ### External debt projections, baseline and stress tests (2001–2009) — key points and numbers - Baseline scenario: envisages a moderate build-up of gross external debt by about 5 percentage points to 22½ percent of GDP in 2009. - This reflects (i) a moderate decline in the external current account surplus to about 4 percent of GDP and (ii) projected new borrowing by government and private sector to fund projects. - Net external debt is expected to remain negative given continued net outflows on the financial account. - Simulations indicate external debt is sustainable over the medium term and does not give rise to immediate concerns. - Stress tests show significantly higher debt accumulation under severe shocks, but levels appear manageable. - Debt/GDP ratio rises to 62½ percent of GDP in the most extreme bound test (change in U.S. dollar GDP deflator by two standard deviations below historical average), implying a real depreciation of about 57 percent. - Note: two-thirds of Namibia’s external debt is rand-denominated; the bound test may overstate depreciation impact. - Selected projection table values (External debt in percent of GDP): - 2001: 26.1 - 2002: 25.4 - 2003: 17.5 - 2004: 17.6 - 2005: 17.9 - 2006: 18.4 - 2007: 20.0 - 2008: 21.7 - 2009: 22.4 - Identified external debt-creating flows (in percent of GDP) for 2001–2009 include current account deficits (excluding interest) ranging from -2.8 to -6.1 in early years and projected -4.2 in 2009; net non-debt creating capital inflows (negative) ranging from -11.0 in 2001 to -2.5 in 2009. - Automatic debt dynamics contributions and other detailed projection components are provided in the projection tables (2001–2009). - Gross external financing need (in billions of US dollars) projected small positive or zero amounts for 2001–2009; in percent of GDP values include -1.7 (2001), 3.2 (2002), 2.1 (2003), and other year values shown in the tables. ### Fiscal debt sustainability — recent developments and scenarios - Namibia’s public debt rose by 6 percentage points, to 31 percent of GDP, during the 2003/04 fiscal year. - Prior to that increase, public debt had hovered around 25 percent of GDP, which is the debt level under the fiscal rule chosen by the authorities. - Public debt remains moderate compared with other sub-Saharan African countries. - Authorities consider breaking the fiscal rule as undermining policy credibility and are determined to maintain the rule. - Medium-term fiscal pressures include: decline in SACU receipts and the need for increased HIV/AIDS spending. - Significant fiscal adjustment would be required to keep public debt under 30 percent of GDP by 2009/10; a business-as-usual approach could lead public debt to exceed 50 percent of GDP by the end of the decade. - Fiscal sustainability analysis (baseline in Table 1 of the fiscal section): - Under the baseline macroeconomic framework, after a modest short-run rise, the public debt ratio would start to decline to 28¼ percent of GDP by end-decade due to generation of primary surpluses and real interest rates lower than GDP growth. - The interest-growth differential implies that, if projections were extended, the public debt ratio would continue to decline even without a primary surplus. - Alternatively, it would be possible to run a small primary deficit while stabilizing the public debt ratio at its 2009/10 level. *Italic: IMF staff report content as provided in the source PDF unit.* ### 4. Table 1 also illustrates some alternative scenarios to analyze the baseline public debt ### _cr0597 - 4. Table 1 also illustrates some alternative scenarios to analyze the baseline public debt ### Scenario analysis of baseline public debt profile - Scenario A1 (historical-performance-based): public debt is expected to increase steadily, reaching 36 percent of GDP by the end of the period. - Baseline scenario (more optimistic): projection hinges on primary deficits that are considerably lower than their historical averages. ### Vulnerability and bound tests (Section B) - Bound tests illustrate vulnerability of the fiscal position to economic shocks. - Even with full implementation of the ambitious fiscal adjustment underlying the baseline scenario, shocks to: - interest rates, - growth, or - the exchange rate could still occur, resulting in a higher public debt, approaching 40 percent of GDP. - Note: these figures exclude publicly guaranteed debt, which accounted for another 10 percent of GDP in 2003/04. ### Alternative fiscal scenario and fiscal sustainability (Table 2 and Box 4) - Alternative fiscal scenario in Box 4 assumes the authorities undertake no adjustment whatsoever. - Under that scenario: - Namibia’s public debt stock would spiral out of control. - Primary deficits would be large and increase over time, with a concomitant increase in interest rates. - Vulnerability to shocks would be magnified, as illustrated in the stress tests. - Public debt levels would quickly reach alarming levels. *Source: _cr0597 - 4. Table 1 also illustrates some alternative scenarios to analyze the baseline public debt* ### 7. The Namibian authorities have recognized the importance of keeping their public ### _cr0597 - 7. The Namibian authorities have recognized the importance of keeping their public ### Debt outlook and fiscal stance - Authorities recognize importance of keeping public debt in check and placing the public debt ratio on a downward trajectory. - Failure to reduce the public debt ratio could quickly result in unsustainable public debt levels. - Recent fiscal deterioration: fiscal deficit more than doubled in 2003/04 to 7¾ percent of GDP; public debt ratio increased by 6 percentage points to 31 percent of GDP. - Authorities' fiscal rule target: bring public debt ratio close to 25 percent of GDP over the medium term. - Projected fiscal deficit for 2004/05: 2 percent of GDP. ### Baseline projections (Public Sector Debt Sustainability Framework, 1999/2000–2009/10) - Public sector debt (percent of GDP), selected years: 1999/2000: 24.3; 2000/01: 23.1; 2001/02: 26.2; 2002/03: 25.0; 2003/04: 30.9; 2004/05: 30.1; 2005/06: 31.1; 2006/07: 31.1; 2007/08: 29.5; 2008/09: 28.9; 2009/10: 28.3. - Change in public sector debt (percent of GDP), selected years: 1999/2000: 1.9; 2000/01: -1.3; 2001/02: 3.1; 2002/03: -1.2; 2003/04: 5.9; 2004/05: -0.8; 2005/06: 1.0; 2006/07: 0.0; 2007/08: -1.6; 2008/09: -0.7; 2009/10: -0.6. - Identified debt-creating flows (4+7+12), selected years: 1999/2000: 0.5; 2000/01: -0.9; 2001/02: 3.2; 2002/03: -1.0; 2003/04: 6.5; 2004/05: -0.5; 2005/06: 0.3; 2006/07: -1.1; 2007/08: -1.5; 2008/09: -1.4; 2009/10: -1.4. - Primary deficit (percent of GDP), selected years: 1999/2000: 0.1; 2000/01: -0.7; 2001/02: 2.5; 2002/03: 0.9; 2003/04: 5.2; 2004/05: -0.7; 2005/06: 0.6; 2006/07: -0.9; 2007/08: -1.2; 2008/09: -1.0; 2009/10: -0.8. - Revenue and grants (percent of GDP), selected years: 1999/2000: 33.8; 2000/01: 33.3; 2001/02: 31.3; 2002/03: 33.0; 2003/04: 29.5; 2004/05: 32.9; 2005/06: 30.4; 2006/07: 30.0; 2007/08: 30.2; 2008/09: 30.2; 2009/10: 30.3. - Primary (noninterest) expenditure (percent of GDP), selected years: 1999/2000: 33.9; 2000/01: 32.5; 2001/02: 33.7; 2002/03: 33.9; 2003/04: 34.7; 2004/05: 32.3; 2005/06: 31.0; 2006/07: 29.0; 2007/08: 29.0; 2008/09: 29.2; 2009/10: 29.5. - Automatic debt dynamics (percent of GDP), selected years: 1999/2000: 0.5; 2000/01: -0.2; 2001/02: 0.7; 2002/03: -1.9; 2003/04: 1.3; 2004/05: 0.2; 2005/06: -0.3; 2006/07: -0.2; 2007/08: -0.4; 2008/09: -0.4; 2009/10: -0.5. - Contribution from interest rate/growth differential (percent of GDP), selected years: 1999/2000: 0.3; 2000/01: -0.9; 2001/02: -1.3; 2002/03: -0.8; 2003/04: 2.0; 2004/05: 0.2; 2005/06: -0.3; 2006/07: -0.2; 2007/08: -0.4; 2008/09: -0.4; 2009/10: -0.5. - Of which contribution from real interest rate (percent of GDP), selected years: 1999/2000: 1.0; 2000/01: -0.2; 2001/02: -0.9; 2002/03: -0.1; 2003/04: 3.0; 2004/05: 1.3; 2005/06: 0.7; 2006/07: 0.9; 2007/08: 0.8; 2008/09: 0.7; 2009/10: 0.5. - Of which contribution from real GDP growth (percent of GDP), selected years: 1999/2000: -0.7; 2000/01: -0.7; 2001/02: -0.5; 2002/03: -0.6; 2003/04: -0.9; 2004/05: -1.1; 2005/06: -1.0; 2006/07: -1.1; 2007/08: -1.1; 2008/09: -1.1; 2009/10: -1.1. - Contribution from exchange rate depreciation (percent of GDP), selected years: 1999/2000: 0.1; 2000/01: 0.7; 2001/02: 2.1; 2002/03: -1.1; 2003/04: -0.7. - Residual, including asset changes (percent of GDP), selected years: 1999/2000: 1.4; 2000/01: -0.3; 2001/02: -0.1; 2002/03: -0.2; 2003/04: -0.6; 2004/05: -0.3; 2005/06: 0.7; 2006/07: 1.1; 2007/08: 0.0; 2008/09: 0.7; 2009/10: 0.7. - Public sector debt-to-revenue ratio (percent), selected years: 1999/2000: 72.1; 2000/01: 69.5; 2001/02: 83.8; 2002/03: 75.7; 2003/04: 104.7; 2004/05: 91.1; 2005/06: 109.6; 2006/07: 125.7; 2007/08: 136.8; 2008/09: 153.5; 2009/10: 172.3. - Gross financing need (percent of GDP), selected years: 1999/2000: 11.0; 2000/01: 11.5; 2001/02: 13.3; 2002/03: 13.6; 2003/04: 18.8; 2004/05: 16.0; 2005/06: 18.7; 2006/07: 20.1; 2007/08: 21.9; 2008/09: 24.1; 2009/10: 26.5. - Foreign-currency denominated public debt (percent of GDP), selected years: 1999/2000: 3.5; 2000/01: 3.9; 2001/02: 5.4; 2002/03: 3.8; 2003/04: 4.9; 2004/05: 4.7; 2005/06: 5.4; 2006/07: 6.3; 2007/08: 6.3; 2008/09: 7.2; 2009/10: 7.9. ### Key macroeconomic and fiscal assumptions (selected historical and projected averages) - Real GDP growth (in percent), series: historical average 3.4; 2000s values include 3.2, 2.4, 2.8, 3.8, 3.7; projected averages: 3.9, 3.6, 3.8, 3.9, 3.9, 4.0, 3.9. - Average nominal interest rate on public debt (in percent), series: historical 11.4; other entries include 10.2, 10.3, 11.0, 10.9, 8.5; projected values include 9.5, 8.4, 8.0, 7.6, 7.4, 7.0, 8.0. - Average real interest rate (percent): historical 5.2; other entries include -0.7, -4.0, -0.2, 12.2, -0.6; projections include 6.7, 4.8, 2.9, 3.3, 2.8, 2.6, 2.3, 3.1. - Inflation rate (GDP deflator, in percent), selected values: 6.2; 11.0; 14.3; 11.2; -1.3; 9.1; 4.9; projected values include 4.7, 5.5, 4.7, 4.7, 4.7, 4.9. - Growth of real primary spending (deflated by GDP deflator, in percent), selected values: 6.7; 0.0; 5.3; 0.0; 8.2; 3.7; 5.2; projected values include -3.0; -0.5; -2.9; 3.7; 4.6; 5.2; 1.2. - Primary deficit (percent of GDP) repeated in assumptions: 0.1; -0.7; 2.5; 0.9; 5.2; 1.8; 1.9; -0.7; 0.6; -0.9; -1.2; -1.0; -0.8; -0.7. ### Alternative scenarios and stress tests - Alternative A1 (key variables at historical averages in 2005-09), public debt path (percent of GDP, selected entries): 30.1; 31.4; 33.0; 33.5; 34.6; 35.8; debt-stabilizing primary balance: -1.5. - Alternative A2 (no policy change, constant primary balance in 2005-09), public debt path (percent of GDP, selected entries): 30.1; 29.9; 30.1; 29.1; 28.8; 28.3; debt-stabilizing primary balance: -0.5. - Bound tests (selected): - B1. Real interest rate = historical average + two standard deviations in 2005 and 2006: public debt path entries include 30.2; 34.0; 37.0; 35.5; 34.8; 34.1; debt-stabilizing primary balance: -0.6. - B2. Real GDP growth = historical average − two standard deviations in 2005 and 2006: public debt path entries include 30.2; 32.6; 34.7; 34.4; 35.0; 35.7; debt-stabilizing primary balance: -0.6. - B3. Primary balance = historical average − two standard deviations in 2005 and 2006: public debt path entries include 30.2; 36.3; 43.0; 41.4; 40.6; 39.8; debt-stabilizing primary balance: -0.7. - B5. One-time 30 percent real depreciation in 2005: public debt path entries include 30.2; 33.6; 33.6; 32.1; 31.4; 30.8; debt-stabilizing primary balance: -0.5. - B6. 10 percent of GDP increase in other debt-creating flows in 2005: public debt path entries include 30.2; 41.2; 41.2; 39.6; 38.8; 38.0; debt-stabilizing primary balance: -0.7. ### IMF Executive Board assessment and policy recommendations - Directors commended recent improvements: GDP growth accelerated to an estimated 4¼ percent in 2004; inflation fell from around 13 percent to less than 5 percent; external current account surplus estimated at 5½ percent of GDP in 2004. - Key vulnerabilities and social conditions highlighted: per-capita growth lags region, unemployment exceeds 30 percent, HIV/AIDS infection exceeds one-fifth of the population. - Concerns about fiscal deterioration: recent widening of the fiscal deficit increases vulnerability to shocks; need to return to fiscal consolidation and place public debt ratio on a downward path. - Recommended fiscal measures and public finance reforms: - Curtail nonessential expenditure given projected large decline in SACU receipts and rising HIV/AIDS-related spending. - Strengthen expenditure planning and introduce output-based budgeting. - Reduce the wage bill and support for public enterprises; implement decisive civil service and public enterprise reforms. - Improve management of inefficient parastatals and develop a privatization strategy. - Commission independent review and consider consolidation of tax incentives. - Authorities encouraged interest in a fiscal ROSC. - Monetary and reserve management guidance: - Peg to South African rand has served Namibia well; avoid negative interest rate differential vis-à-vis anchor currency to maintain adequate international reserves. - Develop domestic financial markets to provide investment opportunities for pension funds and insurance companies and contain investment outflows. - Reconsider proposed regulatory amendments to tighten domestic asset requirements. - Financial sector and structural reforms: - Strengthen supervision: move expeditiously to make supervisory agency for nonbank financial sector fully operational. - Consider prudential limits on large equity exposures of pension funds and insurance companies. - Continue monitoring surge in consumer lending; welcome request for an FSAP. - Continue trade liberalization and enhance capacity for customs administration and statistical compilation under new SACU agreement. - Pursue broad-ranging structural reforms to promote private sector activity and employment: improve education quality, vocational training, business environment (especially for SMEs), access to finance, and labor market flexibility. - Implement land redistribution policy based on transparent criteria to contain negative repercussions on production and investment. ### Selected economic indicators (annual / fiscal year basis) - Change in real GDP (percent): 2000: 3.5; 2001: 2.4; 2002: 2.5; 2003: 3.7; 2004: 4.2 (Est.). - Change in CPI (end-of-period, percent): 2000: 10.8; 2001: 8.3; 2002: 13.6; 2003: 2.0; 2004: 5.0. - Overall fiscal deficit (percent of GDP, fiscal year): 2000: -1.4; 2001: -4.5; 2002: -3.5; 2003: -7.8; 2004: -2.0. - Public debt (percent of GDP, fiscal year end): 2000: 23.1; 2001: 26.2; 2002: 25.0; 2003: 30.9; 2004: 30.1. - Credit to the private sector (annual change, percent): 2000: 17.0; 2001: 16.3; 2002: 20.2; 2003: 12.4; 2004: 17.2. - Current account balance (percent of GDP): 2000: 9.3; 2001: 1.7; 2002: 3.8; 2003: 4.0; 2004: 5.6. - International reserves (months of imports): 2000: 1.9; 2001: 1.7; 2002: 2.5; 2003: 1.7; 2004: 1.6. - Exchange rate (Namibia dollar/U.S. dollar, end-of-period): 2000: 7.6; 2001: 12.1; 2002: 9.3; 2003: 7.6; 2004: 5.7. *Source: IMF staff report and Public Information Notice for Namibia (Article IV consultation), February–March 2005.* ### 1. The Namibian authorities appreciate the candid exchange of views during the 2004 ### 1. The Namibian authorities appreciate the candid exchange of views during the 2004 Article IV Consultation discussions ### Background - Namibia has maintained macroeconomic stability since independence in 1990 through market-oriented policies, a credible exchange rate peg, prudent fiscal policy, and a stable political and legal environment. - Over 1990-2004, the country registered an average real GDP growth rate of about 4 percent. - Structural challenges noted: high-income inequality, widespread poverty, a narrow economic base, and a high incidence of HIV/AIDS—partly legacies of the apartheid regime. - The authorities launched Vision 2030: a long-term development strategy aiming to transform Namibia into a diversified and industrialized country with a high standard of living for all citizens, and to substantially reduce income inequality and unemployment by 2030. Vision 2030 was formulated in consultation with major stakeholders. ### Recent Economic Developments and Prospects - 2004 outcomes and near-term outlook: - Real GDP growth in 2004 is estimated to have accelerated to over 4 percent, broad-based and driven by private consumption and declining interest rates. - Average annual inflation declined from 7.3 percent in 2003 to 3.9 percent in 2004. - The external current account surplus is estimated to have increased as a ratio of GDP in 2004. - Foreign debt stock of the central government remained low. - During fiscal year 2003/04, the fiscal deficit, excluding extra-budgetary spending, increased to 7.5 percent of GDP. - Causes cited: weakening of the US dollar affecting corporate profit margins of export-oriented industries and resulting tax contributions; temporary setbacks in computer systems supporting VAT and income tax collection. - Outlook for 2005: - Real GDP growth of up to 4 percent is expected for 2005, supported by increased mining sector activities. - Inflation expected to remain at the existing single digit level. - External current account expected to remain in a comfortable surplus. - Fiscal position expected to strengthen markedly during 2004/05, supported by expenditure restraint measures (freezing civil service recruitments and travel-related expenditure). ### Fiscal Policy - Overarching objective: fiscal sustainability aimed at keeping inflation low and sustaining the peg exchange rate. - Authorities agree most medium-term fiscal adjustment should come from the expenditure side (freeze further increases of the wage bill in relation to GDP, reduce subsidies to parastatals, and cut spending on goods and services). - Due in part to larger than expected SACU receipts, the budget deficit was reduced to 2.0 percent of GDP in 2004/05. - Measures implemented to consolidate fiscal position during 2004/05 and in the medium term: - (i) No supplementary budget request in 2004/05; additional spending needs addressed by utilizing the contingency provision in the 2004/05 budget. - (ii) Tax administration improvements, including employment of private audit companies to assist the Ministry of Finance to improve audit capacity; further exploration of measures to broaden the tax base such as integrating the informal sector into the formal sector. - (iii) Reallocation toward capital expenditure to enhance economic growth while restraining current expenditure (freezing civil service recruitment and reducing travel-related expenditure). - (iv) Review of the Export Processing Zone (EPZ) incentives regime: recognition that tax incentives, especially to mining companies, might have been rather generous; decision to establish a task force (Ministry of Finance, Ministry of Trade and Industry, Bank of Namibia) to review and streamline the incentives regime. Authorities emphasize the importance of a stable environment (political stability, strong legal institutions, protection of property rights) for attracting FDI. - (v) Intention to enhance the medium-term expenditure framework with the gradual introduction of output-based program budgeting. ### Monetary, Exchange Rate and Financial Sector Issues - Monetary policy anchored on the exchange rate peg to the South African Rand and membership in the Common Monetary Area (CMA). - Primary long-term objective: achieve low and sustainable inflation. - Authorities’ views: - Recent appreciation of the exchange rate caused hardship to some exporters, but overall economy remained competitive. - Reliance on a depreciating exchange rate for competitiveness risks sharp fluctuations in relative prices and may be beneficial only short-term; therefore, exchange rate stability and improvements in total factor productivity are preferred for long-term competitiveness. - Need to develop additional competitiveness indicators to guide policy. - International reserves and capital flows: - Authorities concerned about relatively low level of international reserves and are exploring ways to build reserves. - Will consider staff suggestions including obtaining a credit rating and issuing a Eurobond; will also explore syndicated borrowing in South Africa or external markets and marketing Namibian public debt instruments in South Africa. - Factors cited for low reserves: large outflow of capital under the open capital regime of the CMA and lack of investment opportunities in Namibia. - Authorities will reassess proposed regulations to stem capital outflow after full consultations with market participants; they do not attribute outflows to interest rate differentials with South Africa and caution that hiking interest rates may put pressure on the State and stifle growth. - Banking sector and supervision: - Banking industry described as financially sound, solvent, profitable and liquid, with banks maintaining prudential ratios in excess of statutory requirements and low ratios of non-performing loans. - Recent self-assessment shows Bank of Namibia compliant with 21 of the 25 Basel Core Principles of Effective Banking Supervision. - Authorities have requested a Bank/Fund Financial Sector Assessment Program (FSAP). - Anti-money laundering and CFT legislation expected to be tabled before Parliament for consideration and adoption in the near future. ### Structural Issues - Authorities agree structural reforms are critical for private sector development, job creation, and reducing income inequality. - Emphasis on strengthening skills development and vocational training, noted as neglected under apartheid despite education spending exceeding 25 percent of total spending every year since independence. - Programs implemented to assist development of small and medium-size enterprises. - Trade policy and market openness: - Namibia has one of the most open trade regimes in sub-Saharan Africa with a simple average tariff of only 11.4 percent compared to the sub-Saharan average of 20 percent. - Commitment to further trade liberalization: concluded a PTA with MERCOSUR with SACU partners; engaged in free trade discussions with the United States, the EU and EFTA; Free Trade under SADC progressing; in 2005 SACU partners will unilaterally open markets for non-SACU members of SADC. - Authorities welcome the US Africa Growth and Opportunity Act, which enabled establishment of a textile industry exporting textiles and apparels to the US market. - Land redistribution: - Government reaffirms commitment to an orderly land distribution program. - Emphasis that expropriation with “just” compensation has become necessary to speed up the land distribution program, which has not been very successful under the “willing buyer willing seller principle,” and to free up under-utilized land. - Ongoing dialogue with stakeholders; government thanked the European Union and the German government for support of the land redistribution program. ### Fight against HIV/AIDS - Government launched the third medium-term National Strategic Plan (NSP) on HIV/AIDS covering 2004-2009. - NSP goal: reduce the incidence of HIV infection to below the epidemic threshold by 2007. - NSP built around five core action areas: (i) prevention, (ii) treatment care and support services, (iii) impact mitigation, (iv) provision of strengthened legal and ethical environment, and (v) integrated and coordinated program management. - Treatment and program rollout: - Antiretroviral treatment introduced in 19 out of 35 public hospitals; 3000 patients are receiving treatment under the government program. - Prevention of mother-to-child transmission treatment rolled out to 25 public hospitals. - Authorities hope to extend these services to cover all public hospitals by the end of 2005 with financial assistance from the Global Fund Grant, PEPFAR and domestic resource mobilization. - Authorities report encouraging signs that the incidence rate of HIV/AIDS may have begun to level off in 2004, ahead of the 2007 target. ### Other Issues and Conclusion - Statistical system: commitment to strengthen statistics by implementing recommendations of the data module of the Report on Observance of Standards and Codes (ROSC) concluded in 2001; several recommendations already implemented and work is ongoing. - Conclusion: - Authorities view the dialogue with Fund staff as fruitful and reiterate strong commitment to reforms and addressing economic challenges. - They request continued Fund responsiveness in providing technical assistance to strengthen capacity to implement the reform agenda. *Namibian authorities' response to the 2004 Article IV Consultation* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0597.pdf_