## _cr06152 ## Source details **Canonical URL:** [_cr06152](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06152.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06152.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06152.pdf.json) --- ### Executive summary — key findings and policy messages - Namibia maintained macroeconomic stability based on a credible peg to the South African rand, generally prudent fiscal policies, a stable political environment, a fairly developed infrastructure, and a strong legal and regulatory environment. - Recent performance: robust real GDP growth, falling inflation, a high external current account surplus, and continued low external indebtedness; however, outflows on the capital and financial accounts continued as financial institutions invested heavily in South Africa. - Social challenges: - One-fourth of the population does not get sufficient dietary consumption. - Unemployment rate exceeds 20 percent. - HIV/AIDS prevalence is about 20 percent. - Fiscal stance and outlook: - 2004/05 fiscal deficit: 4 percent of GDP. - Public debt-to-GDP ratio rose to 33½ percent at fiscal year-end 2004/05 (government target is 25 percent). - Authorities intend to bring the budget into balance over the medium-term and maintain the fiscal rule targeting a debt-to-GDP ratio at 25 percent, without specifying adjustment measures. - Mission urged limiting the fiscal deficit to 3 percent of GDP in 2005/06. - Monetary and reserves: - Bank of Namibia (BoN) reduced the bank rate from 12¾ to 7 percent since early 2003. - International reserves fell to 1¾ months of imports in 2004 and to 40 percent of short-term debt in 2003 (below standard benchmarks). - Financial sector: authorities welcomed FSAP recommendations focused on Basel Core Principles compliance, strengthening regulation of non-bank financial institutions, expanding domestic investment opportunities, and improving access to financial services. ### Recent economic developments (2004–2005) - Growth and sectoral developments: - Real GDP grew 6 percent in 2004. - Diamond production increased almost 40 percent in 2004; growth slowed in 2005 as diamond production fell relative to the 2004 base. - Solid activity remained in manufacturing, agriculture, and wholesale and retail trade. - Inflation: - Average inflation fell to 4¼ percent in 2004. - Inflation was 2¼ percent for January–November 2005. - External accounts and trade: - External current account surplus peaked at more than 10 percent of GDP in 2004. - SACU receipts increased by one-third in 2004. - Oil imports: amounted to 4¾ percent of GDP in 2002–04 and are estimated to have jumped to 6¾ percent of GDP in 2005. - Namibia fixes its currency at par to the South African rand; the rand is legal tender. - Namibia trades four-fifths of its imports and one-third of its exports with South Africa. - Capital flows and reserves: - Outflows on capital and financial accounts remained high as banks, pension funds, and insurance companies invested heavily in South African financial markets. - International reserves: 1¾ months of imports in 2004; reserves/backing stood at 190 percent at end-September 2005. - Total external debt estimated to have fallen to 23 percent of GDP at end-2004. - Credit and monetary transmission: - Credit to the private sector grew 19½ percent in 2004 and 20¼ percent year-on-year in September 2005. ### Fiscal policy assessment and recommendations - 2004/05 fiscal outturn: - Overall fiscal deficit: 4 percent of GDP (2004/05). - VAT collections were 2¼ percent of GDP lower than budgeted owing to administrative problems. - Government wage bill was ½ percent of GDP higher than budgeted as hiring freeze was not implemented consistently. - Public debt-to-GDP ratio: 33½ percent at fiscal year-end 2004/05; publicly guaranteed debt accounted for another 6½ percent of GDP in 2004/05. - Revenue drivers and one-offs: - One-time windfall in SACU receipts and increased tax revenues from personal income and diamonds improved 2004/05 outturn. - Mission recommendations and cautions: - Reduce the fiscal deficit through expenditure restraint and civil service reform. - Strengthen tax administration and realistic budgeting; consider raising the debt target at an appropriate time if adjustment proves difficult. - Urged limiting the fiscal deficit to 3 percent of GDP in 2005/06. - Recommended reorienting expenditure toward health, education, poverty alleviation, and infrastructure. - Suggested reducing the wage bill: wage bill accounted for 43 percent of spending and 14¾ percent of GDP; recommended limiting wage increases to the inflation rate and pursuing civil service restructuring (reallocation, elimination of redundant functions, staff reductions through attrition). - Suggested revisiting the rationale for the National Energy Fund (NEF) and urged its eventual termination to avoid budgetary subsidies. ### Monetary and exchange rate policy - Exchange rate arrangement: - Namibia is a member of the Common Monetary Area (CMA) and pegs the Namibia dollar at par to the South African rand; the rand is legal tender. - Bilateral agreement requires Namibia to back its currency 100 percent with foreign exchange; backing was 190 percent at end-September 2005. - Interest rate policy: - BoN reduced the Bank Rate from 12¾ to 7 percent since early 2003 in tandem with South Africa; eliminated the negative interest rate differential in 2004. - Staff urged authorities not to rule out establishing a positive interest rate differential with respect to South Africa if needed. - Reserves and liquidity management: - International reserves low (1¾ months of imports in 2004; 1.8 months in 2005 in projections). - Discussions focused on boosting international reserves by creating greater domestic investment opportunities and sterilizing foreign exchange purchases. - Advised BoN to enhance capacity for open market operations and short-term liquidity management given the new national payments system. ### Financial sector and FSAP outcomes - FSAP and related work: - Authorities requested and received an FSAP, a fiscal ROSC, and several TA missions; FSAP recommendations finalized and discussed in February 2006. - FSAP priorities identified: - Ensure compliance with the Basel Core Principles; address gaps (e.g., supervision of bank holding companies, requirements on market and country risks). - Strengthen regulatory framework for NBFIs; improve capacity of NAMFISA; consider bringing specialized financial institutions under BoN supervision. - Expand domestic investment opportunities and develop domestic money and foreign exchange markets, securitization, leasing, factoring, and private equity. - Improve access to financial services: require banks to improve transparency of fees and charges; foster competition (PostBank, credit unions); replace the Usury Act with a Consumer Credit Act. - Financial sector indicators and vulnerabilities: - Capital adequacy ratios averaging 15 percent. - Nonperforming loans at only 3 percent (stress tests showed resilience). - Identified vulnerabilities: large exposures to real estate, rapid growth of consumer and mortgage lending, spillovers from South Africa. ### Structural challenges, poverty, and social policy - Major challenges: - One-fourth of population lacks sufficient dietary consumption. - Unemployment exceeds 20 percent. - HIV/AIDS prevalence about 20 percent; mission welcomed MTP III implementation and noted anti-retroviral therapy beneficiaries could reach 50,000 by 2009 (initial target 25,000). - HIV/AIDS prevalence (2003, ages 15-49): Namibia 21.3 percent (Text Table 5). - Education and labor market: - Crucial priority: strengthen quality of education (raise enrollment, enhance teaching quality, reduce teacher absence, provide instructional materials, promote vocational training). - Labor market: mission recommended considering exemptions to immigration/Namibianization requirements for essential skills and small firms; Government held some Labor Act amendments pending review (new Labor Act passed September 2005 increases leave entitlements). - Parastatals and land reform: - More than 40 parastatals engaged in commercial activities; subsidies averaged 2¼ percent of GDP over the last five years (notably Air Namibia). - Mission recommended a clear roadmap for restructuring/divesting parastatals; State-Owned Enterprise Act adopted January 2006. - Land reform: proceed under Constitution and Land Act of 1995; mission urged objective and transparent criteria for expropriations and support for resettled farmers. - Social protection and BIG proposal: - BIG coalition proposed monthly N$100 (US$15) to all Namibians below 60 years; coalition estimates cost 2¼ to 3¾ percent of GDP and administrative costs < 10 percent. - Mission estimated financing BIG via the VAT would require increasing the tax rate by at least 15 percentage points, to 30 percent, at a cost of 5½ percent of GDP; mission cautioned BIG could compromise fiscal sustainability and recommended gradual, targeted grant schemes linked to MDGs. ### Debt sustainability, scenarios, and vulnerability analysis - Public debt overview: - Public debt rose to 33½ percent of GDP in 2004/05; publicly guaranteed debt added 6½ percent of GDP. - Baseline projection: public and publicly guaranteed debt/GDP 43.4 (2005) declining to 40.2 (2010) in the macro framework (Tabled projections). - Public debt (central government) projections (selected): public sector debt (percent of GDP) 2005/06: 35.1; 2006/07: 35.5; 2007/08: 35.1; 2010/11: 34.2 (baseline in DSA tables). - Alternative scenarios: - Alternative scenario (shock + weaker policy): assumes diamond production drops by 10 percent and weaker fiscal control. - Central government deficit including grants (percent of GDP): -3.7 (2005), -5.5 (2006), -5.5 (2007), -6.2 (2008), -6.4 (2009), -6.8 (2010). - Public and publicly guaranteed debt/GDP: 43.5 (2005), 45.6 (2006), 47.6 (2007), 51.1 (2008), 54.5 (2009), 58.0 (2010). - Mission note: increased deficit would stimulate short-term growth but crowd out private investment and raise interest rate risk premium in the medium term. - DSA stress tests: - A one-time 30 percent real depreciation in 2006 raises external debt-to-GDP to 38 percent in the bound test. - A 15 percent drop in export prices in 2006 raises debt levels approaching 36 percent of GDP. - Alternative fiscal scenario (less favorable macro and fiscal outcomes) could push public sector debt to 52 percent of GDP by 2010/11 with average primary deficits of 3 percent of GDP (2006/07–2010/11). - External debt: - Gross external debt (2003): US$1,103.5 million (24.7 percent of GDP). - Short-term debt (2003): US$719.2 million (16.1 percent of GDP). - Net external debt (2003): -1,908.5 (US$ millions). - Baseline external debt path: 22.6 (2004); 21.7 (2005); 21.7 (2006); 16.9 (2010) (percent of GDP). ### Medium-term macro framework and projections (selected indicators) - Real GDP growth (annual): 3.5 (2005), 4.5 (2006), 4.5 (2007), 3.7 (2008), 3.8 (2009), 3.9 (2010). - GDP deflator (annual percent change): 2.0 (2005), 5.0 (2006), 5.0 (2007), 4.3 (2008), 3.8 (2009), 4.5 (2010). - GDP per capita (U.S. dollars): 3,022 (2005), 3,168 (2006), 3,355 (2007), 3,537 (2008), 3,689 (2009), 3,875 (2010). - Consumer price index (period average): 2.4 (2005), 5.1 (2006), 5.0 (2007), 4.5 (2008), 4.0 (2009), 4.0 (2010). - Exports, f.o.b. (US$ millions): 1,653.1 (2005), 1,802.8 (2006), 1,875.1 (2007), 1,882.0 (2008), 1,936.2 (2009), 2,047.1 (2010). - Diamonds (US$ millions): 686.7 (2005), 754.7 (2006), 854.8 (2007), 852.0 (2008), 858.1 (2009), 847.3 (2010). - Gross official reserves (US$ millions, end-period): 377.5 (2005), 405.3 (2006), 454.5 (2007), 481.5 (2008), 513.3 (2009), 562.3 (2010). - Gross official reserves (months of imports): 1.8 (2005), 1.8 (2006), 1.9 (2007), 1.9 (2008), 2.0 (2009), 2.0 (2010). - Central government deficit including grants (percent of GDP): -3.7 (2005), -3.4 (2006), -2.6 (2007), -2.2 (2008), -1.4 (2009), -0.9 (2010). - Public and publicly guaranteed debt/GDP: 43.4 (2005), 43.3 (2006), 42.4 (2007), 42.4 (2008), 41.6 (2009), 40.2 (2010). ### Monetary developments (selected) - Broad money (end-period, N$ millions): 16,487.7 (2005), 17,190.4 (2006), 17,097.7 (2007), 18,048.9 (2008), 20,649.4 (2009), 23,737.9 (2010). - Reserve money (end-period, N$ millions): 1,213.4 (2005), 1,231.6 (2006), 1,339.5 (2007), 1,399.1 (2008), 1,579.3 (2009), 1,788.2 (2010). - Credit to the private sector (annual percent change): 18.1 (2005), 16.5 (2006), 15.3 (2007), 15.0 (2008), 14.6 (2009), 14.0 (2010). - Bank of Namibia Bank Rate: 7.5 (2004), 7.5 (2005), 7.0 (2006) (series not continued in table). ### Statistical issues and data quality - Improvements: improved national accounts coverage; nationwide CPI introduced (available from January 2002); enhanced monitoring of short-term private sector debt. - Shortcomings: timeliness and reconciliation issues for balance of payments and international investment position (IIP); labor market statistics not systematically collected (last survey 2000); fiscal intrayear data and ministry expenditure data subject to revisions. - Recommendation: reconcile IIP with South Africa, improve fiscal data timeliness, and collect labor market statistics and wages. ### IMF relations, consultations, and institutional notes - Mission composition included Mr. Mueller (head, AFR), Mr. Clausen, Mr. Dwight, Ms. Strauss (all AFR), and Mr. Ramcharan (RES); mission overlapped partially with FSAP. - Executive Board concluded the 2004 Article IV consultation on February 14, 2005; Directors commended macro stability and stressed reducing the fiscal deficit, maintaining adequate international reserves, and addressing HIV/AIDS, high unemployment, and income disparities. - Staff recommendation: Namibia remain on the standard 12-month consultation cycle. - Technical assistance: multiple STA, MFD, FAD, LEG missions between 2002 and 2/06 on ROSC, national accounts, monetary statistics, reserves management, revenue forecasts, revenue administration, and tax policy. *Source: IMF staff report and Selected Issues Paper as summarized in the provided content unit (_cr06152).* ### 2005. Staff met with Finance Minister Kuugongelwa-Amadhila and Deputy Finance Minister ### _cr06152 - 2005. Staff met with Finance Minister Kuugongelwa-Amadhila and Deputy Finance Minister ### Executive Summary — key findings and policy messages - Namibia maintained macroeconomic stability based on a credible peg to the South African rand, generally prudent fiscal policies, a stable political environment, a fairly developed infrastructure, and a strong legal and regulatory environment. - Recent performance: robust real GDP growth, falling inflation, a high external current account surplus, and continued low external indebtedness; however, outflows on the capital and financial accounts continued as financial institutions invested heavily in South Africa. - Social challenges: one-fourth of the population does not get sufficient dietary consumption; the unemployment rate exceeds 20 percent; the prevalence of HIV/AIDS is about 20 percent. - Fiscal stance and outlook: - The 2004/05 fiscal deficit was 4 percent of GDP, higher than expected. - Public debt-to-GDP ratio rose to 33½ percent at fiscal year-end 2004/05 (government target is 25 percent). - Authorities intend to bring the budget into balance over the medium-term and maintain the fiscal rule targeting a debt-to-GDP ratio at 25 percent, without specifying adjustment measures. - Mission urged authorities to limit the fiscal deficit to 3 percent of GDP in 2005/06. - Monetary and reserves: - Bank of Namibia (BoN) reduced the bank rate in steps from 12¾ to 7 percent since early 2003, in tandem with South Africa, eliminating the negative interest rate differential vis-à-vis South Africa. - International reserves fell to 1¾ months of imports in 2004 and to 40 percent of short-term debt in 2003, below standard benchmarks. - Financial sector: authorities welcomed FSAP recommendations focused on Basel Core Principles compliance, strengthening regulation of non-bank financial institutions, expanding domestic investment opportunities, and improving access to financial services. ### Recent economic developments (2004–2005) - Growth and sectoral developments: - Real GDP grew 6 percent in 2004, exceeding growth in most neighbors and the SSA average. - Diamond production increased almost 40 percent in 2004, driven by new marine mining technologies. - Growth slowed in 2005 as diamond production fell relative to the 2004 base; solid activity remained in manufacturing, agriculture, and wholesale and retail trade. - Inflation: - Average inflation fell to 4¼ percent in 2004. - Inflation was 2¼ percent for January–November 2005. - External accounts: - External current account surplus peaked at more than 10 percent of GDP in 2004. - SACU receipts increased by one-third in 2004. - Oil imports: amounted to 4¾ percent of GDP in 2002–04 and are estimated to have jumped to 6¾ percent of GDP in 2005. - Exchange rates and trade: - Namibia fixes its currency at par to the South African rand, which is also legal tender. - Namibia trades four-fifths of its imports and one-third of its exports with South Africa; the real effective exchange rate appreciation in 2004 had a muted trade impact. - Capital flows and reserves: - Outflows on capital and financial accounts remained high as banks, pension funds, and insurance companies invested heavily in South African financial markets. - International reserves: 1¾ months of imports in 2004; reserves/backing stood at 190 percent at end-September 2005 (Box 1). - Total external debt estimated to have fallen to 23 percent of GDP at end-2004. - Credit and monetary transmission: - Credit to the private sector grew 19½ percent in 2004 and 20¼ percent year-on-year in September 2005. ### Fiscal policy assessment and recommendations - 2004/05 fiscal outturn: - Overall fiscal deficit: 4 percent of GDP (2004/05). - VAT collections were 2¼ percent of GDP lower than budgeted owing to administrative problems. - Government wage bill was ½ percent of GDP higher than budgeted as hiring freeze was not implemented consistently. - Public debt-to-GDP ratio: 33½ percent at fiscal year-end 2004/05. - Revenue drivers and one-offs: - A one-time windfall in SACU receipts and increased tax revenues from personal income and diamonds contributed to improvement over 2003/04. - Mission recommendations and cautions: - Emphasized the need to reduce the fiscal deficit through expenditure restraint and civil service reform. - Stressed importance of realistic budgets and a credible fiscal policy rule. - Projected a slower medium-term fiscal adjustment path given authorities’ difficulties in reining in and reorienting spending and enhancing tax administration; mission noted this may require considering raising the debt target at an appropriate time. - Urged limiting the fiscal deficit to 3 percent of GDP in 2005/06. ### Monetary and exchange rate policy - Exchange rate arrangement: - Namibia is a member of the Common Monetary Area (CMA) and pegs the Namibia dollar at par to the South African rand; the rand is legal tender. - Bilateral agreement with South Africa requires Namibia to back its currency 100 percent with foreign exchange; backing was 190 percent at end-September 2005. - Interest rate policy and differentials: - BoN reduced the Bank Rate from 12¾ to 7 percent since early 2003 in tandem with South Africa. - The BoN eliminated a previously maintained negative interest rate differential vis-à-vis South Africa in 2004. - Staff urged authorities not to rule out establishing a positive interest rate differential with respect to South Africa. - Reserve and liquidity management: - Discussions focused on ways to boost international reserves, including creating greater domestic investment opportunities and sterilizing purchases of foreign exchange. ### Financial sector and FSAP outcomes - Authorities requested and received an FSAP, a fiscal ROSC, and several TA missions following Article IV discussions. - FSAP recommendations finalized and discussed with authorities in February 2006; authorities welcomed these recommendations. - FSAP priorities identified: - Ensure compliance with the Basel Core Principles. - Strengthen regulatory framework for non-bank financial institutions. - Expand domestic investment opportunities to reduce external outflows. - Improve access to financial services. ### Structural challenges, poverty, and social policy - Major challenges identified: - Widespread poverty: one-fourth of population lacks sufficient dietary consumption. - High unemployment: exceeds 20 percent. - HIV/AIDS prevalence: about 20 percent. - Authorities’ policy priorities and reform areas discussed: - Education reform to boost enrollment and quality of teaching and instructional materials. - Boost labor market flexibility. - Improve performance of parastatals and limit their budgetary impact. - Clarify land reform and enhance governance. - Combat HIV/AIDS and alleviate poverty. - Selected Issues Papers included studies on: - (i) the link between education and unemployment; - (ii) the dimensions of poverty and policy options to address them; - (iii) the sustainability of the pension system; - (iv) the pros and cons of Namibia joining a monetary union. ### IMF relations, consultations, and institutional notes - The mission composition included Mr. Mueller (head, AFR), Mr. Clausen, Mr. Dwight, Ms. Strauss (all AFR), and Mr. Ramcharan (RES). - The mission partially overlapped with the FSAP mission. - The Executive Board concluded the 2004 Article IV consultation on February 14, 2005. - Directors commended Namibia’s record of macroeconomic stability and welcomed the recent rise in growth, decline in inflation, and strengthening of external accounts. - Directors emphasized reducing the fiscal deficit through expenditure restraint and civil service reform, maintaining adequate international reserves under the peg, and addressing HIV/AIDS, high unemployment, and income disparities. - Namibia has accepted the obligations of Article VIII, Sections 2(a), 3, and 4 and maintains an exchange system free of restrictions on the making of transfers and payments of current account transactions. - Appendices referenced in the report: - Relations with the Fund (Appendix I) and the World Bank group (Appendix II). - Statistical issues (Section III and Appendix III). - External and fiscal debt sustainability analyses (Appendices IV and V). *IMF staff report: 2005 Article IV consultation materials and associated analytical appendices as summarized in the provided content unit.* ### Chapter IV in the accompanying Selected Issues Paper discusses these issues in greater detail. ### _cr06152 - Chapter IV in the accompanying Selected Issues Paper discusses these issues in greater detail. ### Overview and Political Context - President Pohamba assumed office in March 2005 and his party, SWAPO, now holds three-quarters of the seats in parliament. - The new administration expressed determination to address corruption, reduce poverty, curb public spending, and improve public services. - A new openness in public discourse has accompanied the administration; several uncovered corruption scandals are seen as reflecting this atmosphere. - Namibia received an investment grade rating of BBB- for long-term foreign currency from Fitch in January 2006 (its first sovereign rating). The authorities have no current plans to borrow on international markets. - Authorities raised concerns that Namibia’s classification as a middle-income country hinders access to concessional financing and does not reflect widespread poverty, unemployment, and HIV/AIDS. ### Short- and Medium-Term Policy Focus (consensus areas) - Addressing Namibia’s medium-term challenges to growth. - Achieving the Millennium Development Goals (MDGs) and reducing poverty. - Pursuing a prudent fiscal policy. - Maintaining the exchange rate peg and building international reserves. - Addressing issues identified by the Financial Sector Assessment Program (FSAP). ### Economic Prospects and Risks - Authorities expect growth to moderate to 3½ to 4 percent over the medium-term. - Growth drivers for 2006 and 2007: introduction of dredging technology for diamonds, increased zinc production, and development of the Kudu gas field. - Potential downside risks: - Policy risk: insufficient attention to reducing fiscal deficits. - External risks: fall in price or demand for mineral exports; rise in the exchange rate or oil prices; shocks to South Africa affecting trade or financial flows. - Social risks: tensions related to land reform or lack of progress in reducing poverty. - Debt assessment: external and fiscal debt sustainability analyses suggest Namibia faces only moderate risks from external and public sector debt if appropriate policies are pursued. - Caution: A passive fiscal policy scenario combined with a less favorable macroeconomic environment could quickly lead to unsustainable public debt levels. - Note: An alternative scenario is presented in the lower panel of Table 5 (as referenced). ### Namibia’s Macroeconomic Context (Box 2 — key facts) - Per-capita income is among the highest in Sub-Saharan Africa but income distribution is highly skewed (dual economy: capital-intensive modern sector vs. large informal/subsistence sector). - Diamond production and investment in new mining technology have driven volatility in growth rates. - Pension funds and insurance company assets are around 100 percent of GDP; these funds have largely been channeled to South Africa’s deeper financial markets. - International reserves have been low. - With a limited ability to exercise independent monetary policy under the exchange rate peg, fiscal policy is the main macroeconomic tool. - Fiscal policy has generally been prudent, but recent slippages occurred. - Recent extended appreciation and policy constraints motivate the need for bold structural reforms to raise long-term growth and attract domestic and foreign investment. ### Medium-Term Challenges to Growth — Priorities and Reforms - Crucial reform priority: strengthen the quality of education to raise skill levels, bolster growth, and reduce unemployment. - Other important reforms: - Revisit immigration restrictions and aspects of the Labor Act to enhance labor market flexibility. - Reform/restructure parastatals and contain subsidies. - Make land reform more transparent and provide resettled farmers with skills, finance, equipment, and inputs. - Improve governance and reduce red tape to foster SMEs. - Reorient spending to priority sectors. - Promote export diversification and take a more active role in trade negotiations. - Specific education reform objectives: - Raise school enrollment rates. - Enhance quality of teaching and reduce teachers’ absences. - Provide adequate instructional materials and develop education standards. - Introduce measures to evaluate outcomes. - Promote vocational training and revise curricula to meet labor market demands. - Labor market: - Authorities tightened immigration procedures and require Namibianization; mission recommended considering exemptions for essential skills and small firms. - Government held implementation of some amendments to the Labor Act of 1992 pending review. - Key features of the new Labor Act (passed September 2005): - Streamlined procedures to dismiss employees via arbitration referral by the Labor Commissioner. - Increased leave days: minimum vacation days from 18 to 24; 30 days of sick leave; 12 weeks of paid maternity leave; 5 paid compassionate leave days. - Parastatals: - Namibia has more than 40 parastatals engaged in commercial activities; many receive substantial subsidies. - Subsidies to public enterprises, in particular Air Namibia, averaged 2¼ percent of GDP over the last five years. - Analysis indicates profitability of parastatals declines as sector competitiveness increases (2001 data: parastatals in competitive industries had negative returns to equity four times larger than positive returns in natural monopoly industries, p-value=0.06). - Mission recommended a clear roadmap for restructuring/divesting parastatals; State-Owned Enterprise Act adopted in January 2006 to harmonize the operational framework and tighten fiscal control. - Land reform: - Authorities proceed according to the Constitution and the Land Act of 1995; “willing buyer, willing seller” policy has proceeded slowly. - Recent initiation of expropriations against compensation of 20 farms; authorities await resolution through negotiations and courts. - Mission urged objective and transparent criteria (e.g., underutilization) and support for resettled farmers. - Governance: - Anti-Corruption Commission (ACC) established in June 2005 and members appointed in late 2005; mission stressed need to provide adequate resources and make ACC fully operational in 2006. - Business environment: - World Bank Doing Business rankings: Namibia ranked 33 out of 155 economies; starting a business ranked 76th; ease of registering property ranked 118th. - Mission recommended simplifying business regulations and cutting red tape to promote SMEs. - Export diversification potential: agro-industries, aquaculture, high-end tourism, electricity production, niche industries (cement, small-scale processing of diamonds, other minerals, leather products). - Authorities cautious about tax incentives after disappointing textile industry efforts; EPZ incentives review and inter-ministerial decision process introduced. ### Fiscal and Social Policy Recommendations - Staff policy recommendations highlighted in the discussions: - Pursue fiscal consolidation. - Strengthen revenue administration. - Reorient spending to priority sectors. - Contain civil service wage bill. - Build international reserves. - Implement strategy to fight HIV/AIDS. - Address regulatory and supervisory gaps in banking and NBFIs. - Improve access to the financial system and consider measures to promote export diversification. - Consider, among other options: revisiting the fiscal rule, joining a monetary union, and providing a cash grant to fight poverty (noting differing priority levels in staff recommendations). ### Reaching the MDGs and Tackling Poverty - The mission commended incorporation of the MDGs into Namibia’s long-term strategy (Table 6 referenced). - Namibia is on track to meet some targets such as environmental sustainability and gender equality ahead of schedule. - Namibia lags in poverty reduction, education, and health and, on current trends, is likely to miss key MDGs by 2015. *Source: _cr06152 - Chapter IV in the accompanying Selected Issues Paper discusses these issues in greater detail.* ### 27. The mission welcomed the successful ### _cr06152 - 27. The mission welcomed the successful ### HIV/AIDS response and MTP III - The mission welcomed the successful implementation of the third medium-term plan (MTP III) strategy to fight Namibia’s relatively high HIV/AIDS prevalence rate. - Based on current indications, the number of beneficiaries of anti-retroviral therapy could reach 50,000 by 2009, compared to an initial target of 25,000. - Accelerated implementation attributed to donor assistance, a drop in prices for drugs, and accelerated government spending. - Mission suggestions and observations: - Allocate additional resources for treatment and stepped-up efforts to reduce HIV infections. - Commended the authorities for their mass awareness campaigns. - Text Table 5: HIV/AIDS Prevalence in SACU Countries (2003, percentage of adult population, ages 15-49): - Botswana 37.3 - Lesotho 28.9 - Namibia 21.3 - South Africa 15.6 - Swaziland 38.8 - Sub-Saharan Africa 7.2 ### Basic Income Grant (BIG) proposal (Box 5) - BIG coalition proposal: - Monthly cash grant of N$100 (US$15) for all Namibians below 60 years of age, regardless of income. - Coalition claims the grant would move the majority of the population above the poverty line and improve nutrition, productivity, and effectiveness of HIV/AIDS treatment. - Administrative cost of the distribution system (smart cards, bank accounts, and fixed payout points in rural areas) would be less than 10 percent. - Coalition estimates cost at 2¼ to 3¾ percent of GDP. - Coalition contends financing could be recouped through a 7 percentage point increase in the VAT and an increase in the income tax. - Government and mission reactions: - Government had not taken a position; expressed concerns about budgetary cost and impact on incentives to work. - Mission recognized need for an adequate social safety net but considered the BIG could compromise fiscal sustainability. - Staff calculations: financing the BIG through the VAT would require increasing the tax rate by at least 15 percentage points, to 30 percent, at a cost of 5½ percent of GDP. - Mission cautioned about high distortionary costs from a large VAT increase given the narrow tax base. - Mission recommended grant schemes be implemented gradually, linked to promotion of the MDGs (conditional cash grants), and integrated with a review of existing social safety net programs to achieve synergies and free up resources. - Staff analysis indicates the cost of the non-contributory pension grant paid to all Namibians aged 60 or older is limited and the system is sustainable. ### Fiscal policy: deficits, debt, and expenditure priorities - Authorities reiterated commitment to a prudent fiscal policy and intention to correct the higher-than-expected deficit and budget monitoring problems in 2004/05 by increasing revenues (particularly from the VAT) and restraining expenditures (particularly personnel spending). - Authorities remained optimistic about achieving their deficit target of 2¼ percent of GDP for 2005/06 and moving toward a balanced budget over the medium term. - MTEF (Box 6) projections and staff view: - Authorities project balanced budgets for 2006/07 and 2007/08, reducing the public debt-to-GDP ratio from 33½ to 27 percent, on track to achieve the authorities’ target of 25 percent by the end of the decade. - Authorities plan a significant reduction in expenditure, which would decline by one-sixth in terms of GDP over three years. - Staff find MTEF targets ambitious and project the fiscal deficit will decline only gradually, from 3¾ percent of GDP in 2005/06 to 2½ percent of GDP by 2007/08. - Mission concerns and recommendations: - Deficit reduction had fallen short of objectives; fiscal adjustment necessary to support the exchange rate peg. - Projected 2005/06 budget deficit at 3¾ percent of GDP; mission urged aiming at around 3 percent of GDP by restraining spending and enhancing budget monitoring and control systems. - If deficit can be limited to 3 percent of GDP, mission supported not tabling a supplementary budget in 2005/06. - Urged more systematic strengthening of tax administration to counter projected medium-term decline in SACU receipts; Fund to provide technical assistance. - Recommended reorienting expenditure toward health, education, poverty alleviation, and infrastructure to support growth and MDGs. - Education reform could help reverse declining trend in education spending and enhance efficiency. - Urged reduction of the wage bill: - Wage bill accounted for 43 percent of spending and 14¾ percent of GDP. - Recommended limiting wage increases to the inflation rate and pursuing a strategy on civil service structure and remuneration (reallocation across ministries, elimination of redundant functions, reducing staff through attrition). - Suggested revisiting the rationale for the National Energy Fund (NEF) and urged its eventual termination to avoid budgetary subsidies. - Public debt and targets: - Current debt level 33½ percent of GDP; mission noted difficulty in achieving the 25 percent target. - Fiscal DSA suggests ratio would stabilize at current level over medium term even with moderate revenue and spending efforts. - Mission suggested an appropriate public debt ratio could be in the range of 30-35 percent of GDP. - Authorities remained committed to 25 percent of GDP despite acknowledging near-term difficulty in meeting it. ### Monetary and exchange rate policies - Authorities committed to maintaining the peg to the rand. - Assessment and concerns: - Extended appreciation period put pressure on the economy, but indicators suggest 2002-04 appreciation has not had a major negative impact on exports, growth, or employment overall. - Mission stressed importance of monitoring competitiveness and recommended developing measures such as unit labor costs. - Reserves and liquidity: - Mission urged steps to increase international reserves to improve reserves/short-term debt ratio and import coverage. - Authorities noted other measures indicated reserves appeared sufficient; reserves stood at two times currency in circulation at end-2005. - Creating greater domestic investment opportunities seen as best way to raise international reserves. - Policy options and mission advice: - Mission urged not to rule out establishing a positive interest rate differential vis-à-vis South Africa if currency pressure occurs. - Argued foreign exchange intervention may have been ineffective because BoN had not sterilized excess liquidity. - Advised BoN to enhance capacity to manage short-term liquidity through open market operations to facilitate sterilization and develop domestic money and foreign exchange markets. - Recommended more active liquidity management given the new national payments system. ### Financial Sector Assessment Program (FSAP) recommendations (Box 7) - Upgrade the Supervisory and Regulatory Framework: - Namibia meets most requirements of the Basel Core Principles for banks, but gaps include lack of supervision of bank holding companies and financial groups, and absence of regulatory requirements on market and country risks. - For NBFIs: improve capacity of regulatory body NAMFISA; subject specialized financial institutions to BoN supervision; mandate NAMFISA to compile and analyze reliable data on NBFIs and regulate market conduct. - Develop Domestic Investment Opportunities: - Reconsider or drop proposals to compel additional investment in domestic assets and require NBFIs to invest 5 percent of assets in unlisted Namibian companies. - To make domestic investments attractive: develop domestic money and foreign exchange markets; promote securitization, leasing and factoring, and private equity investment. - Improve Access to Financial Services: - Require banks to improve transparency of fees and charges. - Foster competition by encouraging PostBank and new institutions such as credit unions. - Revisit role and rationale of specialized financial institutions. - Replace the Usury Act with a Consumer Credit Act. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06152.pdf* ### Chapter IV of the Selected Issues Paper contains a discussion of the pros and cons of joining a ### Chapter IV of the Selected Issues Paper contains a discussion of the pros and cons of joining a monetary union ### Financial Sector Policies - FSAP conclusion: Namibia has a stable and profitable financial sector, although there are signs of vulnerabilities (Table 7). - Financial intermediation is relatively high. - Banks: profitable and well capitalized. - Capital adequacy ratios averaging 15 percent. - Nonperforming loans at only 3 percent. - Stress tests: confirmed the system’s resilience to plausible macroeconomic shocks. - Identified vulnerabilities: - Large exposures to the real estate sector. - Rapid growth of consumer and mortgage lending. - Spillovers from adverse financial sector developments in South Africa. - Regulatory and supervisory frameworks: judged broadly satisfactory; weaknesses in implementation, especially for NBFIs. - Authorities’ responses and actions: - Begun to implement measures to ensure compliance with the Basel Core Principles. - Given priority to strengthening the regulatory framework for NBFIs. - Agreed to consider bringing the specialized financial institutions under the supervision of the BoN. - Supported expanding domestic investment opportunities, by developing leasing, factoring and asset securitization. - May consider abolishing or raising the usury rate provided that the Usury Act’s role in protecting consumers is safeguarded. - Authorities indicated they may request TA to help address these recommendations. ### Statistical Issues - Improvements noted: - Improved coverage of the national accounts. - Introduced a nationwide consumer price index. - Enhanced monitoring of short-term private sector debt. - Data adequacy: generally adequate for surveillance purposes. - Shortcomings affecting analysis: - Cross-border capital flows analysis affected by data shortcomings. - Recommendations and intentions: - Mission welcomed authorities’ intention to reconcile their international investment position with that of South Africa and with balance of payments data. - Recommended improvements in fiscal data and the collection of statistics on the labor market, employment, and wages. ### Staff Appraisal - Macroeconomic context: - With generally prudent macroeconomic policies, Namibia has enjoyed relatively robust growth, falling inflation, and strong external surpluses in recent years. - Significant macroeconomic challenges include high unemployment, widespread poverty, and high prevalence of HIV/AIDS. - Policy and reform priorities: - Authorities commended for engaging in public debate while reiterating commitment to macroeconomic stability. - Need to enhance the quality of education to strengthen skill levels and ensure students’ skills meet labor market needs. - Short-run measure: relaxing immigration restrictions to increase supply of skilled labor. - Evaluate key provisions in the new Labor Act and Namibianization efforts, as both may impose costs on enterprises and make labor markets less efficient. - Domestic investment, public enterprises, and land reform: - Promote domestic investment by developing financial markets and instruments and reducing impediments to entrepreneurship, including access to finance. - Public enterprises: government should not subsidize insolvent or unprofitable parastatals, especially in competitive environments; consider restructuring or privatizing them. - Land reform: current structure of land ownership is not sustainable; expropriations of commercial land should be based on objective and transparent criteria and continue to be in full accordance with the Constitution. - Option to improve plight of rural poor: improve the use of communal land. - Millennium Development Goals and social policy: - Namibia has made progress toward meeting the MDGs but stronger action is needed. - Authorities are providing HIV/AIDS treatment ahead of schedule and encouraged to persevere. - Consider new approaches to poverty reduction, including cash grants. - Caution: the BIG proposal could put macroeconomic stability at risk and compromise prudent fiscal policy. - Any cash grant program should be targeted and rolled out gradually to contain costs, gain experience, and tackle administrative obstacles. - Fiscal policy and public debt: - Progress on fiscal consolidation has been made but more is needed. - Fiscal deficit declined in 2004/05, but scope of adjustment was disappointing as revenue fell short of expectations and expenditures exceeded budgetary appropriations at some ministries. - Without stronger commitment to rein in spending, envisaged reduction in the public debt ratio and reprioritization of spending will not be possible. - Decline in interest rates has created an opportunity to address the fiscal deficit at minimum risk to economic growth. - Recommended revenue measures: continue efforts to shore up revenues, particularly through improved tax administration. - Expenditure measures: restraining personnel expenditures will be key; a comprehensive strategy is urgently needed to reorient spending toward priority sectors and bring the public debt ratio on a downward path. - Targeted public debt ratio of 25 percent of GDP earlier helped provide fiscal discipline but now has lost some credibility; government should consider moving to a higher, more credible target. - Encouraged to base medium-term expenditure framework on realistic assumptions. - Exchange rate and reserves: - Appreciation of the currency since 2002 has so far had limited economic impact; competitiveness remains broadly adequate. - Authorities encouraged to carefully monitor competitiveness and develop more refined measures, such as unit labor costs. - To strengthen the peg to the rand, authorities should consider market-oriented steps to increase international reserves. - Strengthening domestic investment opportunities is most promising. - BoN should make additional efforts to purchase foreign exchange and, if necessary, sterilize these purchases to limit offsetting flows into the South African rand. - Authorities should not rule out establishing a positive interest rate differential vis-à-vis South Africa, particularly if a crisis should occur. - Urged to implement the FSAP recommendations as soon as practicable. *Source: Chapter IV, Selected Issues Paper (IMF).* ### 54. Staff recommend that Namibia remain on the standard 12-month consultation cycle. ### _cr06152 - 54. Staff recommend that Namibia remain on the standard 12-month consultation cycle. ### Staff recommendation - Staff recommend that Namibia remain on the standard 12-month consultation cycle. ### Macroeconomic performance and projections (selected indicators) - Real GDP growth rate (annual): 3.5 (2005), 4.5 (2006), 4.5 (2007), 3.7 (2008), 3.8 (2009), 3.9 (2010). - GDP at constant 1995 prices (annual percent change): 6.7 (2002), 3.5 (2003), 5.9 (2004), 3.5 (2005), 4.5 (2006), 4.5 (2007), 3.7 (2008), 3.8 (2009), 3.9 (2010). - GDP deflator (annual percent change): 11.4 (2002), -0.6 (2003), 2.9 (2004), 2.0 (2005), 5.0 (2006), 5.0 (2007), 4.3 (2008), 3.8 (2009), 4.5 (2010). - GDP at current market prices (N$ million): 32,908 (2002), 33,840 (2003), 36,901 (2004), 38,986 (2005), 42,744 (2006), 46,882 (2007), 50,670 (2008), 54,590 (2009), 59,257 (2010). - GDP per capita (U.S. dollars): 1,591 (2002), 2,250 (2003), 2,849 (2004), 3,022 (2005), 3,168 (2006), 3,355 (2007), 3,537 (2008), 3,689 (2009), 3,875 (2010). - Consumer price index (period average): 11.3 (2002), 7.2 (2003), 4.1 (2004), 2.4 (2005), 5.1 (2006), 5.0 (2007), 4.5 (2008), 4.0 (2009), 4.0 (2010). ### External sector — levels and balances - Exports (U.S. dollars, percent change): -6.1 (2002), 16.6 (2003), 45.8 (2004), -9.3 (2005), 9.1 (2006), 4.0 (2007), 0.4 (2008), 2.9 (2009), 5.7 (2010). - Imports (U.S. dollars, percent change): -4.6 (2002), 3.7 (2003), 23.1 (2004), 8.3 (2005), 3.0 (2006), 5.6 (2007), 5.6 (2008), 5.6 (2009), 5.6 (2010). - Export volume (annual percent change): 2.1 (2002), 20.9 (2003), 8.7 (2004), -12.8 (2005), 5.3 (2006), 6.4 (2007), 2.0 (2008), 3.0 (2009), 4.5 (2010). - Import volume (annual percent change): 20.3 (2002), 5.2 (2003), 5.9 (2004), 3.9 (2005), 6.3 (2006), 6.0 (2007), 5.1 (2008), 5.3 (2009), 5.4 (2010). - Terms of trade (annual percent change): 16.0 (2002), -24.0 (2003), 15.4 (2004), -0.2 (2005), 3.6 (2006), -2.7 (2007), -3.0 (2008), 2.0 (2009), 3.3 (2010). - Exports, f.o.b. (US$ millions): 1,072.4 (2002), 1,250.9 (2003), 1,823.4 (2004), 1,653.1 (2005), 1,802.8 (2006), 1,875.1 (2007), 1,882.0 (2008), 1,936.2 (2009), 2,047.1 (2010). - Of which: diamonds (US$ millions): 533.3 (2002), 510.9 (2003), 824.5 (2004), 686.7 (2005), 754.7 (2006), 854.8 (2007), 852.0 (2008), 858.1 (2009), 847.3 (2010). - Imports, f.o.b. (excluding duty) (US$ millions): -1,280.0 (2002), -1,711.1 (2003), -2,107.0 (2004), -2,225.0 (2005), -2,349.6 (2006), -2,481.2 (2007), -2,620.1 (2008), -2,766.8 (2009), -2,921.8 (2010). - Current account balance (including official transfers, percent of GDP): 5.4 (2002), 5.1 (2003), 10.2 (2004), 5.7 (2005), 6.6 (2006), 5.4 (2007), 4.1 (2008), 3.5 (2009), 3.3 (2010). - Current account balance (excluding official transfers, percent of GDP): -3.0 (2002), -4.7 (2003), -1.0 (2004), -5.5 (2005), -4.3 (2006), -4.4 (2007), -5.5 (2008), -5.9 (2009), -5.7 (2010). - Gross official reserves (US$ millions, end-period): 336.2 (2002), 318.9 (2003), 352.7 (2004), 377.5 (2005), 405.3 (2006), 454.5 (2007), 481.5 (2008), 513.3 (2009), 562.3 (2010). - Gross official reserves (months of imports of goods and services): 2.7 (2002), 2.0 (2003), 1.7 (2004), 1.8 (2005), 1.8 (2006), 1.9 (2007), 1.9 (2008), 2.0 (2009), 2.0 (2010). - External debt/GDP (percent): 28.1 (2002), 24.7 (2003), 22.6 (2004), 21.7 (2005), 21.7 (2006), 20.9 (2007), 19.6 (2008), 18.3 (2009), 16.9 (2010). ### Fiscal accounts (central government, selected) - Revenue and grants (percent of GDP): 31.6 (2002), 28.2 (2003), 30.4 (2004), 31.0 (2005), 30.8 (2006), 31.2 (2007), 31.2 (2008), 31.6 (2009), 31.7 (2010). - Of which: SACU receipts (percent of GDP): 7.8 (2002), 8.8 (2003), 11.2 (2004), 9.8 (2005), 9.5 (2006), 8.4 (2007), 8.3 (2008), 8.0 (2009), 7.6 (2010). - Expenditure and net lending (percent of GDP): 34.9 (2002), 35.6 (2003), 34.5 (2004), 34.6 (2005), 34.2 (2006), 33.8 (2007), 33.4 (2008), 33.0 (2009), 32.6 (2010). - Personnel expenditure (percent of GDP): 14.2 (2002), 14.8 (2003), 14.8 (2004), 15.0 (2005), 14.9 (2006), 14.8 (2007), 14.7 (2008), 14.6 (2009), 14.5 (2010). - Capital expenditure and net lending (percent of GDP): 6.3 (2002), 5.6 (2003), 5.4 (2004), 5.5 (2005), 5.4 (2006), 5.3 (2007), 5.3 (2008), 5.3 (2009), 5.3 (2010). - Primary balance (- deficit, percent of GDP): -0.8 (2002), -5.0 (2003), -1.3 (2004), -0.9 (2005), -0.7 (2006), 0.1 (2007), 0.4 (2008), 1.1 (2009), 1.4 (2010). - Overall government deficit including grants (percent of GDP): -3.3 (2002), -7.5 (2003), -4.1 (2004), -3.7 (2005), -3.4 (2006), -2.6 (2007), -2.2 (2008), -1.4 (2009), -0.9 (2010). - Public and publicly guaranteed debt outstanding/GDP (percent): 33.7 (2002), 39.4 (2003), 40.1 (2004), 43.4 (2005), 43.3 (2006), 42.4 (2007), 42.4 (2008), 41.6 (2009), 40.2 (2010). - Public debt outstanding/GDP (percent): 23.9 (2002), 29.5 (2003), 33.6 (2004), 35.1 (2005), 35.5 (2006), 35.1 (2007), 35.6 (2008), 35.2 (2009), 34.2 (2010). ### Medium-term macro framework — baseline and alternative scenarios (percent of GDP) Baseline scenario (2005–10): - Foreign savings (external current account surplus): 5.7 (2005), 6.6 (2006), 5.4 (2007), 4.1 (2008), 3.5 (2009), 3.3 (2010). - Gross national savings: 31.3 (2005), 32.6 (2006), 31.6 (2007), 31.0 (2008), 30.9 (2009), 31.5 (2010). - Gross investment: 25.6 (2005), 26.0 (2006), 26.3 (2007), 26.9 (2008), 27.4 (2009), 28.2 (2010). - Central government deficit including grants: -3.7 (2005), -3.4 (2006), -2.6 (2007), -2.2 (2008), -1.4 (2009), -0.9 (2010). - Public and publicly guaranteed debt/GDP: 43.4 (2005), 43.3 (2006), 42.4 (2007), 42.4 (2008), 41.6 (2009), 40.2 (2010). Alternative scenario (shock + weaker policy): - Assumes diamond production drops by 10 percent and weaker fiscal control. - Foreign savings: 5.7 (2005), 6.3 (2006), 4.6 (2007), 3.2 (2008), 2.5 (2009), 2.4 (2010). - Gross national savings: 31.3 (2005), 31.8 (2006), 30.2 (2007), 29.1 (2008), 28.6 (2009), 28.9 (2010). - Central government deficit including grants: -3.7 (2005), -5.5 (2006), -5.5 (2007), -6.2 (2008), -6.4 (2009), -6.8 (2010). - Public and publicly guaranteed debt/GDP: 43.5 (2005), 45.6 (2006), 47.6 (2007), 51.1 (2008), 54.5 (2009), 58.0 (2010). - Note: The alternative scenario text states the increased deficit would stimulate short-term growth but crowd out private investment and raise interest rate risk premium in the medium term. ### Monetary developments (selected) - Broad money (end-period, N$ millions): 12,433.7 (2002), 13,626.7 (2003), 15,828.9 (2004), 16,487.7 (2005), 17,190.4 (2006), 17,097.7 (2007), 18,048.9 (2008), 20,649.4 (2009), 23,737.9 (2010). - Reserve money (end-period, N$ millions): 980.8 (2002), 1,172.9 (2003), 1,238.6 (2004), 1,213.4 (2005), 1,231.6 (2006), 1,339.5 (2007), 1,399.1 (2008), 1,579.3 (2009), 1,788.2 (2010). - Credit to the private sector (annual percent change): 20.2 (2002), 12.4 (2003), 19.4 (2004), 18.1 (2005), 16.5 (2006), 15.3 (2007), 15.0 (2008), 14.6 (2009), 14.0 (2010). - Money multiplier (levels): 12.7 (2002), 11.6 (2003), 12.8 (2004), 13.6 (2005), 14.0 (2006), 12.8 (2007), 12.9 (2008), 13.1 (2009), 13.3 (2010). - Bank of Namibia overdraft interest rate (Bank Rate): 12.8 (2002), 7.8 (2003), 7.5 (2004), 7.5 (2005), 7.0 (2006), (series not continued in table). ### Financial sector indicators and vulnerabilities - Public sector debt of the central government (percent of GDP, fiscal years): 23.1 (2000), 25.9 (2001), 23.9 (2002), 29.5 (2003), 33.6 (2004); latest observation Mar. 2005. - Broad money (12-month percent change): 13.0 (2000), 4.5 (2001), 6.9 (2002), 9.6 (2003), 16.2 (2004), 5.2 (latest Oct. 2005). - Private sector credit (12-month percent change): 17.0 (2000), 16.3 (2001), 20.2 (2002), 12.4 (2003), 19.4 (2004), 19.1 (latest Oct. 2005). - Nonperforming loans to total gross loans: 4.7 (2000), 4.0 (2001), 3.9 (2002), 3.9 (2003), 2.2 (2004). - Capital adequacy: Regulatory capital to risk-weighted assets 14.8 (2000), 15.5 (2001), 14.1 (2002), 14.8 (2003), 15.4 (2004). - External indicators: Gross official reserves (US$ millions) 268.5 (2000), 224.0 (2001), 336.2 (2002), 318.9 (2003), 352.7 (2004), 341.4 (latest Oct. 2005). - Exchange rate arrangement: Namibia dollar pegged at par to the South African rand; both legal tender in Namibia. ### Social and development indicators (selected / Millennium Development Goals) - Net primary enrollment ratio (percent of relevant age group): 83.2 (1990), 77.9 (1997), 77.7 (2000), 78.3 (2003). - Youth literacy rate (percent ages 15-24): 87.4 (1990), 89.3 (1994), 90.5 (1997), 91.6 (2000), 92.3 (2003). - Prevalence of HIV, female (percent ages 15-24): 21.3 (2003). - Fixed line and mobile telephones (per 1,000 people): 39.3 (1990), 45.8 (1994), 68.2 (1997), 108.0 (2000), 182.5 (2003). - Access to an improved water source (percent of population): 58.0 (1990), 80.0 (2003). ### IMF relations, Article IV consultations, and technical assistance - Membership: Joined 9/25/90; Article VIII. - Quota: 136.50 (SDR million); Fund holdings of currency 136.44 (99.95 percent of quota). - Exchange rate arrangement: Namibia dollar pegged at par to the South African rand; both currencies are legal tender in Namibia. - Article IV consultations: Namibia is on the standard 12-month Article IV consultation cycle; the Executive Board concluded the last Article IV consultation on February 14, 2005. - Executive Board observations (from the consultation): Directors commended macroeconomic stability, welcomed the rise in growth, decline in inflation, and strengthening of external accounts; emphasized the need to reduce the fiscal deficit through expenditure restraint and civil service reform; noted the importance of maintaining adequate international reserves; stressed need to address HIV/AIDS, high unemployment, and large disparities of income. - Technical assistance (selected entries with dates and purposes): - 01/02, 2 weeks, STA, Bank of Namibia, ROSC Mission. - 07/02, 2 weeks, STA, Central Bureau of Statistics, National Accounts Advisor (GDDS project). - 10/02, 2 weeks, STA, Central Bureau of Statistics, National Accounts Advisor (GDDS project). - 10/02, 2 weeks, STA, Ministry of Finance, GFS (GDDS project) Advisor. - 11/02, 2 days, STA, Country visits, GDDS Project Advisor. - 11/02, 2 weeks, STA, Bank of Namibia, Money and Banking Statistics Advisor. - 01/03, 5 weeks, STA, Bank of Namibia, First of a three part BOP mission (GDDS Project) Advisor. - 03/03, 2 weeks, STA, Ministry of Finance, GFS (GDDS project) Advisor. - 06/03, 2 weeks, STA, Bank of Namibia, Second of a three Part BOP mission (GDDS Project) Advisor. - 06/03, 2 weeks, STA, Ministry of Finance, GFS (GDDS project) Advisor. - 11/03, 2 weeks, MFD, Bank of Namibia, Issues in Monetary Policy and Reserve Adequacy Mission. - 01/04, 2 weeks, STA, Bank of Namibia, Third of a three part BOP mission (GDDS project) Advisor. - 01/04, 1 week, LEG, NAMFISA, AML/CFT Advisor. - 02/04, 3 weeks, STA, Central Bureau of Statistics, National Accounts Advisor (GDDS project). - 07/04, 2 weeks, MFD, Bank of Namibia, Issues in Reserves Management Mission at the Bank of Namibia. - 11/04, 1 week, FAD, Ministry of Finance, Revenue Forecast Advisor. - 2/06, 2 weeks, FAD, Ministry of Finance, Revenue Admin. Mission. - 2/06, 2 weeks, FAD, Ministry of Finance, Tax Policy Mission. ### Policy priorities highlighted by IMF Directors (from Article IV discussion) - Reduce the fiscal deficit through expenditure restraint. - Implement civil service reform to contain personnel expenditure. - Maintain adequate international reserves given the exchange rate peg. - Address HIV/AIDS, high unemployment, and large disparities of income. *Source: Namibian authorities; and Fund staff estimates and projections, _cr06152 - 54._* ### 1. Namibia joined the World Bank, the International Finance Corporation (IFC) and the ### _cr06152 - 1. Namibia joined the World Bank, the International Finance Corporation (IFC) and the ### World Bank, IFC, and MIGA engagement and programs - Namibia joined the World Bank, the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) in 1990. - Current financing and eligibility: - 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. - Focus areas of dialogue and knowledge sharing: - (i) growth and poverty reduction; - (ii) HIV/AIDS; - (iii) capacity building for both public and private sectors; - (iv) education; - (v) support for implementing decentralization; - (vi) support in environmental management and bio-conservation. - Grants and projects: - A Policy and Human Resource Development (PHRD) grant prepared programs for sub-national governments and service delivery through fiscal decentralization. - An Institutional Development Fund (IDF) grant supported a public expenditure tracking survey (PETS) for the Ministries of Basic Education and Health and assessed capacity to manage public spending. - A senior policy seminar in June 2005 presented recommendations and proposed an action plan. - Integrated Community-Based Ecosystem Management Project (ICEMA) — first Bank operation in Namibia (a grant from the Global Environment Facility (GEF)) to promote community based integrated ecosystem management and improve rural livelihoods. - Namibian Coast Conservation and Management (NACOMA) — second GEF project for US$4.9 million approved September 1, 2005 to promote conservation, sustainable use and biodiversity in coastal ecosystems. - An IDF grant of US$499,000 became effective in March 2005 to support the Public Private Partnership against HIV/AIDS. - The Bank is preparing a Country Economic Memorandum to address issues in Government key policy documents and to strengthen poverty diagnosis and build macro-micro simulation models for policy analysis. - A detailed Bank study of the education sector found preliminary indications of the need for substantial reform and will provide the basis for a possible IBRD operation; donors held a round table in March 2005 and a second partners’ round-table was scheduled for April 2006. - IFC activities: - IFC portfolio in Namibia is US$16.2 million in 6 projects. - Approved long-term financing of US$7.9 million for a fishery project (Pescanova). - IFC equity investment of US$1.6 million in Namibia Life; sale of stake currently being negotiated to a local Namibian group. - Foreign Investment Advisory Services (FIAS) is assisting to improve the investment climate. - MIGA: - No new MIGA projects have been executed or are planned. ### Statistical issues and data quality for surveillance - General: - Surveillance is hampered by significant lags and revisions of key macroeconomic data. - Some core data (exchange rate, international reserves, reserve money, interest rates) available monthly with reasonable timeliness, though inter-bank positions of monetary and financial statistics need improvement. - Core real sector data are reported annually only; fiscal and labor market data suffer long reporting lags. - Namibia participates in the Fund’s General Data Dissemination System (GDDS) Project for Anglophone African Countries; GDDS metadata for Namibia were posted on December 19, 2002. Metadata updates: central government debt in November 2003; financial and external sectors in May 2005. - Real sector: - National accounts coverage revised over the last three years to incorporate new mining activity and value-added of companies in Export Processing Zones (EPZs); improved surveys of textile and agricultural industries. - Authorities revised real GDP growth in 2002 upward by 4 percentage points, to 6¾ percent; growth in 2003 remained broadly unchanged. - In February 2005, a nation-wide consumer price index replaced the previous Windhoek-only index; the new index is available from January 2002. - The authorities report only consumer prices to STA; other IFS data taken from Central Statistical Bureau publications. - Labor market data (labor force, employment, wages) are not systematically collected; last labor market survey was in 2000. - Government finance: - Annual fiscal data on budgetary central government through 2003 reported to STA for the 2005 GFS Yearbook and IFS; data reported on a cash basis in GFSM 2001 format and are reasonably complete though some gaps in details; no data on outstanding debt are reported. - AFR receives actual fiscal data several months after the fiscal year end; no intrayear budget implementation data provided. - Expenditure data of line ministries are not timely and are subject to frequent revisions; AFR received preliminary general ledger data related to 2004/05 quickly but these were substantially revised later. - Needs identified: strengthen system for providing expenditure information; make preliminary cash expenditure information available regularly and timely; conduct regular reconciliation of above-the-line fiscal data with financing data. - Monetary accounts: - Bank of Namibia implemented a new framework for compiling monetary data consistent with the Monetary and Financial Statistics Manual following STA technical assistance. - Work remaining to reduce inconsistencies in inter-bank positions of other depository corporations. - Since June 2003 Namibia has been reporting monthly monetary statistics to STA using standardized reporting forms (SRF) regularly and timely; publication of these data expected in a supplement to the IFS. - Balance of payments: - Since 2001 Bank of Namibia has reported balance of payments data quarterly with a lag of one quarter; data are subject to substantial revisions. - Methodology is consistent with the fifth edition of the IMF’s Balance of Payments Manual and well documented. - International investment position (IIP) data compiled annually but dissemination subject to significant lags; IIP data not entirely consistent with balance of payments data, particularly for portfolio investment assets and other investment assets and liabilities. - Bank of Namibia received Fund TA via three missions to improve compilation of capital and financial transactions and IIP statistics. - AFR has relied on a partial reconciliation between Namibia and South Africa IIP estimates to approximate Namibia’s IIP while awaiting enhanced statistics. ### Key statistical indicator frequencies and data-quality assessments (as of February 15, 2006) — selected points - Exchange Rates: latest observation Jan. 2006; date received Jan. 2006; Frequency: Daily (D); Frequency of Reporting: D; Frequency of Publication: D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: latest observation Oct. 2005; date received Dec. 2005; Frequency: Monthly (M); Reporting: M; Publication: M. - Reserve/Base Money: latest observation Oct. 2005; date received Dec. 2005; Frequency: M; Reporting: M; Publication: M. Data quality (methodological soundness): O, O, LO, LO; (accuracy and reliability): O, O, LO, O, O. - Broad Money; Central Bank Balance Sheet; Consolidated Balance Sheet of the Banking System; Interest Rates: latest observation Oct. 2005; date received Dec. 2005; Frequency: M; Reporting: M; Publication: M. - Consumer Price Index: latest observation Nov. 2005; date received Jan. 2006; Frequency: M; Reporting: M; Publication: M. Data quality (methodological soundness): O, LNO, LO, O; (accuracy and reliability): LO, LNO, O, O, NA. - Revenue, Expenditure, Balance and Composition of Financing — Central Government: latest observation Mar. 2005; date received Nov. 2005; Frequency: I, NA (Compilation of Financing); Reporting: I, NA; Publication: I, NA. - GDP/GNP: 2004 latest observation; Sept. 2005 date received; Frequency: A; Reporting: A; Publication: A. Data quality (methodological soundness): O, O, O, LO; (accuracy and reliability): LNO, LO, LO, LO, O. - Gross External Debt: 2003 latest observation; Aug. 2005 date received; Frequency: A; Reporting: A; Publication: A. ### External debt levels, structure, and sustainability assessment - 2003 external debt stock and related indicators: - Namibia’s total gross external debt stood at an estimated US$1.1 billion, or about 25 percent of GDP, at end-2003. - Public and publicly-guaranteed external debt accounted for slightly more than 12 percent of GDP and was mostly on concessional terms. - Net external debt was negative, reflecting persistent outflows of savings mainly via portfolio investment by Namibian pension funds, banks, and insurance companies to South African financial markets. - Short-term debt accounts for about two-thirds of Namibia’s gross external debt of all maturities. - About 90 percent of Namibia’s short-term debt is with South Africa and virtually the entire increase in 2003 stems from increased credit from South African parent banks to their Namibian subsidiaries. - Table 1. External Debt Indicators, 2003 (as reported) - Gross external debt (in millions of U.S. dollars) 1103.5 - (in percent of GDP) 24.7 - Of which: Public and publicly guaranteed debt 1/ 556.1 - (in percent of GDP) 12.4 - Short-term debt (in millions of U.S.dollars) 719.2 - (in percent of GDP) 16.1 - Net external debt (in millions of U.S. dollars) -1908.5 - Gross official reserves (in millions of U.S. dollars) 318.9 - (ratio to short-term debt) 0.4 - (ratio to reserve money) 1.8 - Memorandum items: - GDP at current market prices (in million U.S.dollars) 4473.4 - Reserve money (in million U.S. dollars) 176.6 - 2004 and projection summary: - Based on the DSA template, external debt is tentatively estimated at 22.6 percent of GDP at end-2004. - Baseline scenario envisages a further slight decline in gross external debt to 17 percent of GDP by the end of the decade, reflecting: - stabilization of the external current account surplus at above 3 percent of GDP over the medium term; - sustained foreign direct investment inflows to fund investment projects (new mines, offshore Kudu gas fields). - Net financial account outflows are expected to continue but decline over time as domestic financial markets and investment opportunities develop. - DSA simulation findings and stress tests: - Simulations indicate Namibia’s external debt is sustainable over the medium term and does not give rise to any immediate concerns. - Stress tests show higher debt accumulation but levels appear manageable. - The debt/GDP ratio rises to 38 percent of GDP in the most extreme bound test that includes a one-time 30 percent real depreciation in 2006. - Note: as a large share of Namibia’s external debt is rand-denominated, the bound test may overstate the impact of a depreciation under the current exchange rate arrangement. - A stress test simulating a 15 percent drop in the price of Namibia’s key export products in 2006 shows debt levels approaching 36 percent of GDP, illustrating vulnerability to world market prices. - Selected projections and key macroeconomic assumptions (baseline, percent of GDP unless otherwise indicated): - Baseline: External debt (2004) 22.6; 2005 21.7; 2006 21.7; 2007 20.9; 2008 19.6; 2009 18.3; 2010 16.9. - Change in external debt (2004 to 2010): -2.1 (2004), -0.9 (2005), 0.0 (2006), -0.8 (2007), -1.3 (2008), -1.3 (2009), -1.4 (2010). - Identified external debt-creating flows (selected years): -19.6 (2004); -10.4 (2005); -11.5 (2006); -10.2 (2007); -8.8 (2008); -8.1 (2009); -7.9 (2010). - Current account deficit, excluding interest payments: -10.6 (2004); -6.5 (2005); -7.7 (2006); -6.4 (2007); -5.1 (2008); -4.4 (2009); -4.2 (2010). - Net non-debt creating capital inflows (negative): -3.9 for projection years 2005–2010 (each year shown as -3.9). - Automatic debt dynamics (contributions): Contribution from nominal interest rate (examples) 0.8 (2004); 1.0 (2005); 1.0 (2006); 1.0 (2007); 0.9 (2008); 0.9 (2009); 0.9 (2010). - External debt-to-exports ratio (in percent): 56.8 (2004); 61.8 (2005); 60.3 (2006); 59.4 (2007); 58.0 (2008); 54.8 (2009); 50.6 (2010). - Gross external financing need (in billions of US dollars): 0.4 (2005); 0.2 (2006); 0.3 (2007); 0.3 (2008); 0.3 (2009); 0.3 (2010). - Key macro assumptions (selected): - Real GDP growth (in percent): 3.5 (2000); 2.4 (2001); 6.7 (2002); 3.5 (2003); 5.9 (2004); 3.5 (2005); 4.5 (2006); 4.5 (2007); 3.7 (2008); 3.8 (2009); 3.9 (2010). - GDP deflator in US dollars (change in percent): -2.4 (2000); -8.0 (2001); -8.9 (2002); 38.2 (2003); 20.7 (2004); 3.3 (2005); 1.2 (2006); 2.2 (2007); 2.6 (2008); 1.3 (2009); 2.0 (2010). - Nominal external interest rate (in percent): 6.6 (2000); 3.7 (2001); 1.9 (2002); 1.2 (2003); 1.8 (2004); 3.7 (2005); 4.9 (2006); 5.0 (2007); 5.0 (2008); 5.0 (2009); 5.0 (2010). - Growth of exports (US dollar terms, in percent): 1.7 (2000); -7.3 (2001); -5.5 (2002); 23.2 (2003); 36.3 (2004); -5.4 (2005); 8.3 (2006); 4.5 (2007); 2.0 (2008); 3.9 (2009); 6.0 (2010). - Growth of imports (US dollar terms, in percent): -11.0 (2000); -1.7 (2001); -6.8 (2002); 30.1 (2003); 23.7 (2004); 5.6 (2005); 5.1 (2006); 5.2 (2007); 5.3 (2008); 5.3 (2009); 5.3 (2010). - Current account balance, excluding interest payments (in percent of GDP): 12.1 (2000); 4.1 (2001); 5.8 (2002); 5.3 (2003); 10.6 (2004); 6.5 (2005); 7.7 (2006); 6.4 (2007); 5.1 (2008); 4.4 (2009); 4.2 (2010). - Stress-test scenarios highlighted: - Interest rate shocks, current account shocks, growth shocks, export price shock (15 percent drop in export prices for diamonds and other minerals beginning in 2006), and a one-time 30 percent real depreciation in 2006. - Results show increases in external debt-to-GDP under adverse shocks (examples: up to 38 percent under 30 percent depreciation; up to ~36 percent under 15 percent export price decline). *Source: _cr06152 - 1. Namibia joined the World Bank, the International Finance Corporation (IFC) and the (IMF staff report content).* ### 1. Namibia’s public debt is still moderate in comparison to other sub-Saharan African ### _cr06152 - 1. Namibia’s public debt is still moderate in comparison to other sub-Saharan African ### Overview - Public debt rose by 4 percentage points, to 33½ percent of GDP, during the 2004/05 fiscal year. - The increase in 2004/05 was smaller than the increase of 5½ percentage points in 2003/04. - The public debt-to-GDP ratio is trending upwards and away from 25 percent of GDP, the target debt level under the fiscal rule chosen by the authorities. - Publicly guaranteed debt is excluded from the above figures and accounted for another 6½ percent of GDP in 2004/05. ### Baseline scenario (Table 1) - Assumptions: central government deficit declines gradually while the economy maintains moderate growth and inflation (see Table 5). - Projected path: - Public debt ratio rises modestly until 2008/09 then declines slightly to 34 percent of GDP by 2010/11. - Outcome driven by generation of primary surpluses and real GDP growth that surpasses real interest rates in many years. - It would be possible to run a small primary deficit while stabilizing the public debt ratio at its 2010/11 level. - Key baseline time-series (selected): - Public sector debt (percent of GDP): 2000/01: 23.1; 2001/02: 25.9; 2002/03: 23.9; 2003/04: 29.5; 2004/05: 33.6; 2005/06: 35.1; 2006/07: 35.5; 2007/08: 35.1; 2008/09: 35.6; 2009/10: 35.2; 2010/11: 34.2. - o/w foreign-currency denominated (percent of GDP): 2000/01: 3.9; 2001/02: 5.4; 2002/03: 3.7; 2003/04: 4.6; 2004/05: 5.4; 2005/06: 5.3; 2006/07: 6.1; 2007/08: 6.0; 2008/09: 6.8; 2009/10: 7.6; 2010/11: 8.4. - Primary deficit (percent of GDP): 2000/01: -0.7; 2001/02: 2.4; 2002/03: 0.8; 2003/04: 5.0; 2004/05: 1.3; 2005/06: 0.9; 2006/07: 0.7; 2007/08: -0.1; 2008/09: -0.4; 2009/10: -1.1; 2010/11: -1.4. - Revenue and grants (percent of GDP): 2000/01: 33.3; 2001/02: 30.9; 2002/03: 31.6; 2003/04: 28.2; 2004/05: 30.4; 2005/06: 31.0; 2006/07: 30.8; 2007/08: 31.2; 2008/09: 31.2; 2009/10: 31.6; 2010/11: 31.7. - Primary (noninterest) expenditure (percent of GDP): 2000/01: 32.5; 2001/02: 33.4; 2002/03: 32.4; 2003/04: 33.1; 2004/05: 31.7; 2005/06: 31.9; 2006/07: 31.5; 2007/08: 31.1; 2008/09: 30.8; 2009/10: 30.5; 2010/11: 30.2. - Public sector debt-to-revenue ratio (percent): 2000/01: 69.5; 2001/02: 83.8; 2002/03: 75.7; 2003/04: 104.7; 2004/05: 110.3; 2005/06: 113.2; 2006/07: 115.0; 2007/08: 112.5; 2008/09: 114.0; 2009/10: 111.3; 2010/11: 108.1. - Gross financing need (percent of GDP): 2000/01: 11.5; 2001/02: 13.1; 2002/03: 13.0; 2003/04: 17.9; 2004/05: 17.5; 2005/06: 17.7; 2006/07: 16.3; 2007/08: 14.8; 2008/09: 13.7; 2009/10: 12.2; 2010/11: 11.0. - Gross financing need (in billions of U.S. dollars): 2000/01: 0.4; 2001/02: 0.4; 2002/03: 0.4; 2003/04: 0.8; 2004/05: 1.0; 2005/06: 1.1; 2006/07: 1.1; 2007/08: 1.0; 2008/09: 1.0; 2009/10: 1.0; 2010/11: 0.9. - Baseline macro assumptions (selected): - Real GDP growth (percent, fiscal year basis): 2000/01: 3.2; 2001/02: 3.5; 2002/03: 5.8; 2003/04: 4.1; 2004/05: 5.3; 2005/06: 3.8; 2006/07: 4.5; 2007/08: 4.3; 2008/09: 3.7; 2009/10: 3.8; 2010/11: 3.9. - Average nominal interest rate on public debt (percent): 2000/01: 10.2; 2001/02: 10.3; 2002/03: 11.0; 2003/04: 10.9; 2004/05: 10.2; 2005/06: 8.8; 2006/07: 8.4; 2007/08: 8.1; 2008/09: 8.0; 2009/10: 7.6; 2010/11: 7.2. - Inflation rate (GDP deflator, percent): 2000/01: 10.7; 2001/02: 14.1; 2002/03: 11.4; 2003/04: -0.6; 2004/05: 2.9; 2005/06: 2.0; 2006/07: 5.0; 2007/08: 5.0; 2008/09: 4.3; 2009/10: 3.8; 2010/11: 4.5. - Average real interest rate (percent): 2000/01: -0.4; 2001/02: -3.8; 2002/03: -0.5; 2003/04: 11.5; 2004/05: 7.3; 2005/06: 6.8; 2006/07: 3.4; 2007/08: 3.1; 2008/09: 3.7; 2009/10: 3.8; 2010/11: 2.7. ### Historical-average and no-policy-change scenarios (Table 1) - Scenario with key variables at their historical averages: - Public debt would increase steadily to 42 percent of GDP by the end of the forecasting period. - Reported series: 2005/06: 35.1; 2006/07: 36.0; 2007/08: 37.1; 2008/09: 38.7; 2009/10: 40.3; 2010/11: 42.0. - Scenario with no policy change (constant primary balance at 2005/06 level): - Public debt ratio would reach 40 percent of GDP by 2010/11. - Reported series: 2005/06: 35.1; 2006/07: 34.9; 2007/08: 35.5; 2008/09: 37.2; 2009/10: 38.8; 2010/11: 40.3. ### Alternative scenario (Table 2) — less favorable macro and fiscal outcomes - Assumptions: authorities are unable to systematically improve tax administration and fail to rein in personnel expenditure, subsidies, and net lending to parastatals; real GDP growth consistently lower than baseline; inflation rises to 5 percent. - Projected path: - Public debt could increase to 52 percent of GDP in 2010/11. - Primary deficits would increase over time and average 3 percent of GDP during 2006/07 to 2010/11. - Namibia’s vulnerability to shocks would be magnified; public debt levels could exceed 60 percent of GDP under some shocks. - Key alternative time-series (selected): - Public sector debt (percent of GDP): 2005/06: 35.1; 2006/07: 37.7; 2007/08: 40.3; 2008/09: 44.2; 2009/10: 48.1; 2010/11: 52.0. - Primary deficit (percent of GDP): 2005/06: 0.9; 2006/07: 2.8; 2007/08: 2.6; 2008/09: 3.1; 2009/10: 3.1; 2010/11: 3.4. - Public sector debt-to-revenue ratio (percent): 2005/06: 113.3; 2006/07: 128.8; 2007/08: 136.1; 2008/09: 150.6; 2009/10: 162.3; 2010/11: 176.4. - Gross financing need (percent of GDP): 2005/06: 17.7; 2006/07: 18.5; 2007/08: 17.8; 2008/09: 17.8; 2009/10: 17.2; 2010/11: 17.0. - Gross financing need (in billions of U.S. dollars): 2005/06: 1.1; 2006/07: 1.2; 2007/08: 1.2; 2008/09: 1.3; 2009/10: 1.3; 2010/11: 1.4. ### Vulnerabilities and bound tests (Figures 1 and 2) - Bound tests illustrate vulnerability to exogenous shocks (interest rates, growth, exchange rate). - Even under the baseline, shocks to interest rates, growth, or the exchange rate could raise public debt approaching 40 percent of GDP. - Under the alternative scenario, shocks could push public debt well above 60 percent of GDP. - Specific shock illustrations include: - Permanent one-half standard deviation shocks to individual variables. - Combined shocks and a one-time real depreciation of 30 percent coupled with a 10 percent of GDP contingent liabilities shock in 2006. ### Policy considerations and authorities’ stance - Authorities recognize importance of keeping public debt in check. - Trade-offs: - Moving forcefully to the 25 percent of GDP debt target may require an unnecessarily restrictive fiscal policy given wage-bill inflexibility, pressing expenditure needs in priority sectors, and revenue collection constraints. - Stabilization of public debt ratios may be advisable in the near term. - Failure to contain the debt-to-GDP ratio at current levels could quickly lead to unsustainable public debt. - Budget developments (staff statement, March 24, 2006): - For 2005/06, authorities project revenue at 31 percent of GDP; fiscal deficit could amount to 1½ percent of GDP (including externally financed capital spending) assuming budgetary appropriations are not exceeded. - For 2006/07, authorities expect a broadly balanced budget, reflecting projected SACU receipts of 14 percent of GDP. - Authorities plan to devote the SACU windfall to deficit reduction and a substantial expansion of spending (capital spending, education, health), alongside subsidies to the National Energy Fund, support to parastatals, and an increase in old-age pensions from N$300 to N$370. - The MTEF projects fiscal deficits for 2007/08 and 2008/09 averaging 2¼ percent of GDP and public debt declining only gradually to 31 percent of GDP. - Authorities remain committed to the long-run public debt target of 25 percent of GDP but intend to place less emphasis on this objective in the short run. ### Key statistics and fiscal balances (selected snapshot) - Public debt: 2004/05: 33½ percent of GDP; 2005/06 baseline: 35.1 percent of GDP. - Publicly guaranteed debt (excluded): 6½ percent of GDP in 2004/05. - Primary deficits (selected): 2004/05: 1.3 percent of GDP; 2010/11 baseline: -1.4 percent of GDP. - Revenue and grants (2005/06 staff projection): 31.0 percent of GDP. - SACU receipts projected by authorities for 2006/07: 14 percent of GDP. - MTEF projected fiscal deficit for 2007/08–2008/09: average 2¼ percent of GDP. - Alternative-scenario average primary deficits (2006/07–2010/11): 3 percent of GDP. *Source: IMF staff report and associated tables and figures contained in the provided content.* ### 6. The medium-term fiscal outlook is built on continued improvements in tax ### _cr06152 - 6. The medium-term fiscal outlook is built on continued improvements in tax ### Medium-term fiscal outlook - Built on continued improvements in tax administration and a limited reorientation of spending toward priority sectors. - Emphasis on improving tax administration is driven by the need to shore up revenue, as SACU receipts are projected to normalize from 2007/08 onwards. - Authorities intend to broaden their forensic tax audits of corporations carried out by private auditors (these audits boosted tax collections in 2005/06). - A recent FAD technical assistance mission urged more substantial reform to sustain tax collections, including: - rebuilding the authorities’ audit capacity; and - creating a large taxpayers unit. - On expenditure: outlays for education and health are programmed to increase noticeably. - Budget documents contain little concrete measures on civil service reform and restructuring/privatization of public enterprises; staff appraisal stresses authorities need to address both issues to make room for sustained reorientation of spending. ### Recent macroeconomic developments and outlook - Real GDP growth: 6 percent in 2004; growth slowed in 2005 (diamond production fell relative to 2004). - Inflation: - Average inflation fell to 4¼ percent in 2004. - 2¼ percent for January-November 2005. - External current account: - Surplus peaked at more than 10 percent of GDP in 2004. - Surging diamond exports and buoyant SACU receipts (which increased by one-third in 2004) more than offset a large increase in imports. - International reserves fell to below 2 months of imports as banks, pension funds, and insurance companies invested heavily in South African financial markets. - Total external debt estimated to have fallen to 23 percent of GDP at end-2004. - Authorities expect economy to grow at above 3.5 percent over the medium term; inflation expected to remain at a low single digit level. - Authorities’ growth target: transform Namibia into a diversified and industrialized economy with high standard of living by 2030. ### Fiscal position, targets, and recent consolidation - Fiscal deficit and public debt trends: - Fiscal deficit for 2004/05: 4 percent of GDP (improving but higher than expected). - Public debt rose to 33½ percent of GDP (above government target of 25 percent). - Authorities’ key fiscal target: total public debt shall be kept below 25 percent of GDP. - Drivers of recent fiscal performance: - One-time windfall in SACU receipts and increased tax revenues from personal income and diamonds contributed to improvement over 2003/04. - VAT collections were 2¼ percent of GDP lower than budgeted owing to continued administrative problems. - Government wage bill was ½ percent of GDP higher than budgeted as the hiring freeze was not implemented consistently across ministries. - Authorities’ view and projections: - Budget deficit declined from 7.2 percent of GDP in fiscal year 2003/04 to 3.6 percent of GDP in 2004/05. - For financial year 2005/06, pending closure, the budget deficit could be as low was 1.1 percent of GDP. - A modest surplus of 0.3 percent of GDP is envisaged for financial year 2006/07. - Over the medium term the average budget deficit is set to be within the authorities target ceiling of 3 percent of GDP. - Authorities remain committed to a public debt ratio of 25 percent of GDP but acknowledge this will take time and place less emphasis on this rule in the short run. - Ministry of Finance will use Revenue, Expenditure and Debt Management policies to pursue targets. ### Revenue and tax administration - Need to shore up revenues given SACU volatility; staff and Directors emphasized strengthening tax administration. - Recommended measures: - Enhance internal auditing functions with a focus on large taxpayers. - Make good use of technical assistance. - Rebuild audit capacity and establish a large taxpayers unit (as suggested by FAD mission). ### Expenditure policy, public enterprises, and civil service - Authorities plan to reorient spending toward priority areas: health, education, poverty reduction, and infrastructure. - Directors stressed the need for: - Specific measures to contain the civil service wage bill (noted as well above levels in other sub-Saharan African countries in terms of total spending and share of GDP). - Progress on a roadmap for restructuring and/or divesting public enterprises (subsidies contributed to past fiscal deficits and diverted resources from higher return projects). - Consideration of well-targeted cash grants to alleviate poverty, as appropriate. - Budget documents lack concrete measures on civil service reform and public enterprise restructuring; staff appraisal calls for action to create fiscal space for priority spending. ### External sector, exchange rate, and reserves - Peg of Namibia dollar to South African rand has served the country well given large trade and capital flows; it anchored policymaking and helped reduce inflation. - Directors urged authorities to monitor competitiveness closely following rand appreciation. - Directors reiterated importance of ensuring adequate international reserves. - Recommended increasing international reserves through sterilized foreign exchange purchases. - Creation of domestic investment opportunities recommended to retain Namibia’s sizable savings at home. - Elimination of the negative interest rate differential with respect to South Africa was welcomed; most Directors urged not to rule out establishing a positive differential if necessary. ### Financial sector, governance, and structural reforms - Directors welcomed: - Conclusion of a review under the Financial Sector Assessment Program (FSAP). - Authorities’ intention to act on recommendations, including upgrading supervisory and regulatory framework and improving access to financial services. - Advice and cautions: - Address regulatory gaps, especially for nonbank financial institutions. - Exercise caution with domestic investment requirements that could lower returns and raise risks for pension funds and insurance companies. - Put in place an appropriate AML/CFT framework as soon as possible. - Structural priorities: - Strengthen quality of education to address poverty and unemployment. - Enhance labor market flexibility; caution about regulations that could increase labor costs (e.g., envisaged increase in leave days under the new Labor Act). - Avoid unduly restricting immigration of skilled labor. - Improve business climate: simplify business regulations, remove impediments to entrepreneurship, and continue trade liberalization and free trade agreements. - Ensure any changes in land ownership are based on objective, transparent criteria and consistent with the Constitution. ### Selected economic indicators (as reported) - Change in real GDP: 2002: 6.7; 2003: 3.5; 2004: 5.9; 2005: 3.5. - Change in CPI (end-of-period): 2002: 12.5; 2003: 2.6; 2004: 4.3; 2005: 4.0. - Overall fiscal deficit (in percent of GDP, fiscal year): 2002: -3.3; 2003: -7.5; 2004: -4.1; 2005: -3.7. - Public debt (in percent of GDP, fiscal year): 2002: 23.9; 2003: 29.5; 2004: 33.6; 2005: 35.1. - Broad money (end-of-period changes, percent): 2002: 6.9; 2003: 9.6; 2004: 16.2; 2005: 14.0. - Credit to the private sector (end-of-period changes, percent): 2002: 20.2; 2003: 12.4; 2004: 19.4; 2005: 18.1. - Current account balance (percent of GDP): 2002: 5.4; 2003: 5.1; 2004: 10.2; 2005: 5.7. - International reserves (in months of imports): 2002: 2.7; 2003: 2.0; 2004: 1.7; 2005: 1.8. - Exchange rate (Namibia dollar/U.S. dollar, end-of-period): 2002: 8.6; 2003: 6.6; 2004: 5.6; 2005: 6.3. - Growth expectations and other projections noted by authorities: - Growth expected to have slowed to 3.2 percent in 2005 (authorities’ statement). - Average economy growth 2001-2005: 4.3 percent. - Average consumer price inflation in 2005: 2.3 percent. - Fitch rating at end-2005: BBB- for long-term foreign currency. - Authorities’ medium-term growth expectation: above 3.5 percent; inflation: low single digit. *Public Information Notice (PIN) No. 06/46 — IMF Executive Board Concludes 2005 Article IV Consultation with Namibia (April 28, 2006).* ### 7. With regard to revenue performance, total revenue increased significantly by 17 ### 7. With regard to revenue performance, total revenue increased significantly by 17 percent in 2004/05 over the out-turn of 2003/04 and is estimated to increase by 8.1 percent in 2005/06 ### Revenue performance and tax administration - Total revenue increased by 17 percent in 2004/05 over the out-turn of 2003/04. - Total revenue is estimated to increase by 8.1 percent in 2005/06. - Improvement achieved mainly through improved revenue collection and broadening of the tax base, not major tax rate adjustments. - Effective measure: clamping down on tax evaders via targeted forensic audits with the help of private auditing companies. - Ongoing and planned actions: - Continued efforts to strengthen tax administration and improve collections in 2006/07. - Authorities have started, with Fund technical assistance, to investigate how to improve Namibia’s tax system in 2006 and beyond. ### Expenditure-side adjustment and fiscal discipline - Authorities recognize that most medium-term fiscal adjustment must come from expenditure-side measures, including: - Containing growth of the wage bill. - Reducing subsidies to parastatals. - Reducing spending on goods and services. - To strengthen fiscal discipline: - Government discontinued the tradition of tabling supplementary budgets, enhancing credibility and transparency and improving the budget as the main fiscal policy tool. - Ongoing efforts to improve expenditure monitoring capacity in the Ministry of Finance. - The Integrated Financial Management System (IFMS) is set to become fully operational in 2006/07 for all transactions between the Ministry of Finance and line Ministries. - Pilot phase from November 2005 to March 2006 was, in general, a success. - Expected outcome: greatly improved Ministry control over funds’ release. - Tightening rules for disbursing subsidies to State Owned Enterprises and other recipients: - Future funds released based on immediate need for expenditure rather than solely because provision existed in the vote of expenditure allocation. ### Monetary, exchange rate, and financial sector issues - Exchange rate and reserve stance: - Authorities remain committed to the exchange rate peg to the South African Rand and membership in the Common Monetary Area (CMA). - Recent exchange rate appreciation had put pressure on adjustment, but overall competitiveness remained. - Authorities emphasize improving total factor productivity to enhance external competitiveness and developing additional competitiveness indicators to guide policy. - Current level of reserves believed not to pose a risk to the exchange rate peg; reserves are more than sufficient to cover currency in circulation. - Authorities welcome staff suggestions to strengthen reserves and will give careful consideration. - Financial Sector Assessment (FSAP) and financial system development: - Authorities appreciative of Namibia’s Financial Sector Assessment Program and broadly agree with its main findings and recommendations. - FSAP: Namibia’s financial system is sophisticated, diverse and highly developed, shaped by structural characteristics of the economy. - Key government concerns: - Translating high level of domestic savings into productive investment. - Enhancing access to finance. - Implementation actions and intentions: - Begun implementing measures to ensure compliance with the Basel Core Principles. - New CEO appointed to head NAMFISA (regulator for non-bank financial institutions). - Agreement to bring specialized financial institutions under supervision of Bank of Namibia. - Support to expand domestic investment opportunities by developing leasing, factoring and asset securitization. - Other FSAP recommendations will receive attention in the coming year. - Domestic savings and capital outflow: - Namibia exports some 65 percent of domestic savings. - Domestic savings largely contractual savings from pension funds and insurance corporations. - Authorities committed to reducing capital outflow through increased domestic investment to diversify and expand economic activities. - Approach: balanced reduction of capital outflow that safeguards interests of pensioners while stimulating economic growth; will consider measures to deepen domestic financial markets. ### Structural reforms, governance, and human capital - Macro framework and poverty policy: - Authorities agree additional structural reforms are necessary to raise long-term growth potential, boost investment, and address poverty, income inequality and unemployment. - Key strategy elements: safeguard macroeconomic stability underpinned by prudent fiscal policy and the exchange rate peg. - On basic income grant: authorities share staff concerns about potential macro-imbalances and prefer a more targeted approach to cash grants aimed at addressing poverty. - Existing government cash-grant schemes include programs for the elderly and orphans. - Governance and institutional strengthening: - Anti-Corruption Commission officially inaugurated during 2005. - Minister of Finance, in her budget tabled on March 16, 2006, made provision for adequate resources for the Anti-Corruption Commission to become fully operational. - State-Owned Enterprises Act adopted in January 2006 to harmonize operational framework for parastatals and tighten fiscal control. - Education, labor, and land reform: - Education reform is a key pillar to raise skill levels and reduce unemployment; World Bank assisting Ministry of Education in developing an education sector strategy. - Labor reform aims: recent amendments to the Labor Act intend to streamline dismissal procedures to make the labor market more flexible; authorities note some staff-raised issues could be reviewed. - Land reform: government reaffirms commitment to an orderly land distribution program; healthy dialogue with stakeholders and continued efforts to clarify policy to the public. ### Conclusion and priorities - Authorities affirm strong commitment to prudent and market-oriented policies aimed at growth, employment creation and poverty reduction. - Recognize challenges ahead despite macroeconomic stability, including: - Need to implement micro-level reforms to accelerate growth potential. - Need to reduce high levels of unemployment and poverty. - High incidence of HIV/AIDS complicates efforts and will require continued international assistance. - Authorities request continued Fund responsiveness in providing technical assistance to strengthen the macroeconomic framework and implement the reform agenda going forward. *IMF staff summary of Namibian authorities' responses and policy intentions as presented in the source text.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06152.pdf_