## _cr0712

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### Executive Summary
- Namibia has enjoyed robust growth, moderate inflation, and strong external surpluses under generally prudent macroeconomic policies, but reliance on minerals has made economic performance volatile.
- Persistent structural challenges: limited progress broadening the economic base; high poverty, high unemployment, and high HIV/AIDS infection undermining human capital investment.
- Recent macro developments:
  - Recovery of diamond production in 2006 supported performance.
  - Rising oil prices and interest rates had not yet noticeably affected activity in 2006.
  - Inflation is rising but expected to remain moderate.
  - Current account running a comfortable surplus in 2006 driven by record diamond exports and a surge in SACU receipts.
  - Continued capital outflows to South African financial markets have kept international reserves relatively low.
  - Fiscal: 2005/06 fiscal deficit fell to ¾ percent of GDP, though spending on wages and subsidies exceeded budget ceilings.
  - Monetary: Bank of Namibia matched South African Reserve Bank interest rate increases, lifting rates by 2 percentage points in 2006.

### Private Sector Development
Findings
- Education reform launched to narrow skills mismatch; HIV/AIDS strategy aims for universal antiretroviral treatment coverage by 2010.
- Anti-Corruption Commission (ACC) created; effective operation requires adequate funding.
- Competitiveness and productivity:
  - Staff estimates: small REER overvaluation in 2005 largely reversed in 2006 as exchange rate depreciated.
  - Namibia’s REER relatively unchanged since independence while South Africa’s has depreciated; average annual inflation about 1 percent higher in Namibia than in South Africa.
  - Labor productivity grew 2000-05 but remains generally below South Africa’s: wholesale trade productivity estimated 40 percent lower in Namibia; government services productivity estimated 30 percent lower.
  - Namibia’s share of world trade has steadily fallen despite volatile terms of trade.
- Financial sector soundness indicators (2006 unless noted):
  - Capital to assets: 8.3 (2006).
  - Regulatory capital to risk-weighted assets: 14.8 (2006).
  - Nonperforming loans (net of provisions) to capital: 8.2 (2006).
  - Nonperforming loans to total gross loans: 2.9 (2006).
  - Return on assets: 2.9 (2006).
  - In 2005, 63 percent of total short-term debt liabilities with South Africa was owed by commercial banks.
- Regulatory reforms:
  - Bank of Namibia advancing toward Basel Core Principles: clarified market and country risk measurement; beginning consolidated and risk-based supervision.
  - Less progress on nonbank financial institutions (NBFIs); need to overhaul regulatory and supervisory framework and expedite adoption of the NAMFISA Act.

Staff recommendations
- Facilitate private sector development by:
  - Temporarily facilitating entry of skilled foreign workers to bridge skills gaps while education reforms take effect.
  - Keeping labor markets flexible and labor costs in check; commendation for not implementing 2004 Labor Law amendments; pending revisions should address excessive vacation days and cumbersome termination procedures.
  - Streamlining business licensing and property registration.
  - Modernizing the financial system to broaden access for rural and low-income customers, develop affordable financial products, reduce high banking charges, and enhance inclusion of formerly disadvantaged groups (via a proposed financial sector charter).
  - Expediting reform and strengthening supervision of NBFIs and implementing NAMFISA Act.

### International Reserves
Findings
- Namibia dollar pegged to the South African rand; current exchange rate level appears broadly appropriate.
- International reserves are low and external surpluses projected to decline significantly in the medium term as SACU revenues are expected to fall and mineral exports plateau.
- Staff equilibrium REER estimates produced through single-country regressions; interpretation should be cautious given data limitations.

Staff recommendations
- Boost reserves and create domestic investment opportunities using market-based measures.
- Advised against regulatory steps to stem capital outflows.
- Mission-recommended market-based strategies:
  - Promoting asset securitization.
  - Open market purchases of foreign exchange.
  - If needed, creating a positive interest rate differential vis-à-vis South Africa.
- BoN contracted a syndicated one-year loan of US$50 million in August 2006; mission emphasized future borrowing should have longer maturities to reduce rollover risk.
- Mission strongly advised against requiring Namibian NBFIs to invest in domestic assets.

### Fiscal Policy
Findings
- After two years of consolidation, the underlying fiscal policy stance loosened in 2006/07.
- Medium-term fiscal pressures projected from decline in customs union (SACU) revenues and increased development spending needs.
- Governance: legislation passed that, if implemented well, should improve governance and performance of parastatals.
- Fiscal performance and composition (percent of GDP, as reported):
  - Government revenue: 36.0 (2006) in the published indicators summary.
  - Fiscal deficit fell to ¾ percent of GDP in 2005/06; small surplus in 2006/07 driven by part of SACU windfall devoted to deficit reduction, while bulk earmarked for additional spending.
  - Namibia will receive a temporary SACU windfall of about 5 percent of GDP in 2006/07; residual payments phased out in 2007/08.
- Fiscal indicators and projections (percent of GDP):
  - Revenue and Grants: 33.0 (2005/06 Est.), 36.3 (2006/07 Budget Suppl.), 36.0 (2007/08 Staff Proj.), 34.7 (2008/09 Staff Proj.), 31.1 (2009/10 Staff Proj.), 31.1 (2010/11 Staff Proj.), 31.1 (2011/12 Staff Proj.)
  - SACU receipts (of which): 9.9 (2005/06 Est.), 15.2 (2006/07 Budget Suppl.), 14.9 (2007/08 Staff Proj.), 12.9 (2008/09 Staff Proj.), 8.6 (2009/10 Staff Proj.), 8.2 (2010/11 Staff Proj.), 7.8 (2011/12 Staff Proj.), 7.4 (2011/12 Staff Proj.)
  - Expenditures: 33.7 (2005/06 Est.), 36.2 (2006/07 Budget Suppl.), 35.9 (2007/08 Staff Proj.), 35.5 (2008/09 Staff Proj.), 34.8 (2009/10 Staff Proj.), 34.3 (2010/11 Staff Proj.), 33.5 (2011/12 Staff Proj.), 32.8 (2011/12 Staff Proj.)
  - Wages: 14.9 (2005/06 Est.), 14.4 (2006/07 Budget Suppl.), 15.0 (2007/08 Staff Proj.), 15.1 (2008/09 Staff Proj.), 14.9 (2009/10 Staff Proj.), 14.7 (2010/11 Staff Proj.), 14.4 (2011/12 Staff Proj.), 14.2 (2011/12 Staff Proj.)
  - Capital spending: 3.9 (2005/06 Est.), 5.4 (2006/07 Budget Suppl.), 4.7 (2007/08 Staff Proj.), 4.8 (2008/09 Staff Proj.), 4.9 (2009/10 Staff Proj.), 5.0 (2010/11 Staff Proj.), 5.0 (2011/12 Staff Proj.), 5.0 (2011/12 Staff Proj.)
  - Overall balance: -0.7 (2005/06 Est.), 0.1 (2006/07 Budget Suppl.), 0.1 (2007/08 Staff Proj.), -0.8 (2008/09 Staff Proj.), -3.6 (2009/10 Staff Proj.), -3.2 (2010/11 Staff Proj.), -2.4 (2011/12 Staff Proj.), -1.7 (2011/12 Staff Proj.)
  - Excluding revenue windfall: -5.1 (2006/07 without the windfall), -5.1 (2007/08)
  - Primary balance: 2.2 (2005/06 Est.), 3.2 (2006/07 Budget Suppl.), 3.1 (2007/08 Staff Proj.), 1.8 (2008/09 Staff Proj.), -1.2 (2009/10 Staff Proj.), -0.7 (2010/11 Staff Proj.), 0.1 (2011/12 Staff Proj.), 0.7 (2011/12 Staff Proj.)
  - Public debt: 31.7 (2005/06 Est.), 30.5 (2006/07 Budget Suppl.), 28.7 (2007/08 Staff Proj.), 26.2 (2008/09 Staff Proj.), 26.8 (2009/10 Staff Proj.), 28.9 (2010/11 Staff Proj.), 28.8 (2011/12 Staff Proj.), 28.3 (2011/12 Staff Proj.)
  - Memorandum: Revenue windfall: 5.2 (2006/07 Budget Suppl.), 5.2 (2007/08)
  - Nominal GDP (N$ billions): 39,496 (2005/06 Est.), 42,587 (2006/07 Budget Suppl.), 43,403 (2007/08 Staff Proj.), 47,840 (2008/09 Staff Proj.), 52,288 (2009/10 Staff Proj.), 56,542 (2010/11 Staff Proj.), 61,375 (2011/12 Staff Proj.), 66,622 (2011/12 Staff Proj.)

Staff recommendations and strategy
- Aim to keep public debt on a downward trajectory by running primary surpluses in most years.
- Adopt medium-term strategy to:
  - Enhance tax administration (build audit capacity; establish a large taxpayer office; adopt a risk-based strategy for VAT refunds).
  - Reorient spending away from wages and subsidies toward health, education, poverty reduction, and infrastructure.
  - Implement SOE governance legislation effectively to improve performance and accountability.
- Fiscal efficiency improvements needed, notably in education.

### Civil Service, SOEs, and Social Policy
Wage bill and civil service
- Namibia’s personnel expenditure among highest in Africa: 15 percent of GDP and two-fifths of all government spending.
- Civil service grew by 8 percent in 2005/06 and has doubled since independence in 1990 due to ineffective controls.
- Mission recommendations:
  - Draw up a civil service strategy for structure, quality, and remuneration.
  - Reduce staff through attrition; eliminate redundant functions; reallocate staff; limit growth of personnel expenditures to the inflation rate.

State-owned enterprises (SOEs)
- SOE subsidies averaged 2 percent of GDP over last five years.
- SOE Governance Act adopted; staff recommended:
  - Governance Council focus on strategic vision, delegate operations to new agency.
  - Transparent selection of boards.
  - Level playing field for SOEs and private firms.
  - Consider restructuring and privatizing selected SOEs.

Basic Income Grant (BIG) and poverty reduction
- BIG proposal: cash grant to all Namibians under age 60 irrespective of income.
- Mission view: gross costs could be partly offset by income tax payments from high-income earners, but net costs would remain substantial and difficult to accommodate alongside health and education priorities.
- Mission pointed to conditional cash transfer alternatives from Latin America as lower-cost, effective examples.

### Macroeconomic Outlook and Key Indicators (selected)
- Real GDP growth (annual percent change): 3.5; 6.6; 4.2; 4.6; 4.8; 4.6; 3.7; 3.8; 4.0 (2003–11 series as presented).
- GDP at current market prices (N$ millions): 33,842; 36,181; 38,560; 42,303; 46,702; 51,252; 55,397; 59,976; 65,574.
- GDP per capita (US$): 2,253; 2,792; 2,984; 3,157; 3,373; 3,611; 3,778; 3,958; 4,188.
- Consumer price index (period average): 7.2; 4.1; 2.3; 5.0; 5.6; 5.0; 4.5; 4.5; 4.5.
- Gross official reserves (Millions of U.S. dollars): 318.9; 352.7; 315.9; 395.6; 461.9; 475.8; 520.5; 550.2; 604.2.
- Months of imports of goods and services: 2.0; 1.7; 1.4; 1.6; 1.7; 1.7; 1.7; 1.8; 1.9.
- Current account (including official transfers, Millions of U.S. dollars): 227.1; 533.3; 433.6; 900.7; 906.7; 631.0; 338.8; 168.8; 303.4.
- Exports, f.o.b. (Millions of U.S. dollars): 1,250.9; 1,823.4; 2,066.6; 2,420.1; 2,566.6; 2,623.7; 2,479.0; 2,356.6; 2,416.3.
  - Diamonds (f.o.b., Millions of U.S. dollars): 510.9; 824.5; 848.3; 962.2; 1,046.6; 1,168.3; 1,049.6; 910.9; 815.3.
- Short-term debt (US$ millions): 594.9; 685.3; 541.7; 547.3; 564.8; 657.2; 689.2; 728.4; 776.7.
- Public debt metrics (percent of GDP):
  - Public and publicly guaranteed debt outstanding/GDP: 39.6; 40.8; 40.6; 37.3; 34.5; 34.8; 36.5; 36.0; 35.1.
  - Public debt outstanding/GDP: 29.7; 34.2; 31.7; 28.7; 26.2; 26.8; 28.9; 28.8; 28.3.

Notable projection/structural point
- Namibia will become a net exporter of electricity in 2011, when electricity production related to the Kudu gas project is expected to be fully operational.

### Staff Appraisal and Board Conclusions
- Prudent macroeconomic policies supported strong growth, moderate inflation, and external surpluses, but structural reforms are needed to broaden the economic base and raise long-term growth potential.
- Addressing high poverty, unemployment, and HIV/AIDS prevalence is critical to safeguard human capital and development objectives.
- Policy mix should underpin private sector development, reserve adequacy, and medium-term fiscal sustainability.
- Executive Directors’ observations included:
  - Commendation of prudent policies; urged focus on broadening the economic base and raising long-term growth potential.
  - Recommendation to strengthen VAT administration, Inland Revenue audit capacity, and establish a large taxpayers’ office.
  - Recommendation to limit growth of public wage expenditures and develop a civil service strategy.
  - Agreement that the peg to the rand remains appropriate; recommendation to develop domestic investment opportunities and market-based strategies to strengthen reserves.
  - Most Directors counseled against regulatory measures to stem capital outflows; a few considered them useful short-term.
  - Call for further strengthening of regulatory and supervisory framework, especially for nonbank institutions, and extension of financial services to rural areas and the poor.

### Recommendation on Consultation Cycle
- Staff recommends that Namibia remain on the standard 12-month consultation cycle.

*Source: IMF staff report (Article IV Consultation) and Public Information Notice No. 07/4.*

### Executive Summary ......................................................................................................

### _cr0712 - Executive Summary

### Background
- With generally prudent macroeconomic policies, Namibia has enjoyed robust growth, moderate inflation, and strong external surpluses, but reliance on minerals has made economic performance volatile.
- Persistent structural challenges: little progress broadening the economic base; high poverty, high unemployment, and high HIV/AIDS infection undermining human capital investment.
- Recent macro developments:
  - Recovery of diamond production in 2006 supported performance.
  - Rising oil prices and interest rates had not yet noticeably affected activity in 2006.
  - Inflation is rising but expected to remain moderate.
  - Current account running a comfortable surplus in 2006 driven by record diamond exports and a surge in SACU receipts.
  - Continued capital outflows to South African financial markets have kept international reserves relatively low.
  - Fiscal: 2005/06 fiscal deficit fell to ¾ percent of GDP, though spending on wages and subsidies exceeded budget ceilings.
  - Monetary: Bank of Namibia matched recent South African Reserve Bank interest rate increases, lifting rates by 2 percentage points in 2006.

### Private Sector Development
Findings
- Authorities have launched education reform aimed at narrowing the skills mismatch and are strongly implementing an HIV/AIDS strategy that envisages universal coverage of antiretroviral treatment by 2010.
- An Anti-Corruption Commission (ACC) was created; effective operation will require adequate funding.
- Competitiveness indicators give a mixed view:
  - Staff estimates suggest a small overvaluation in the REER in 2005 that was largely reversed in 2006 as the exchange rate depreciated.
  - Namibia’s REER has remained relatively unchanged since independence while South Africa’s has depreciated; average annual inflation has been about 1 percent higher in Namibia than in South Africa.
  - Labor productivity grew during 2000-05 but levels remain generally below South Africa’s: productivity in wholesale trade is estimated to be 40 percent lower in Namibia than in South Africa, and productivity in government services is 30 percent lower.
  - Namibia’s share of world trade has steadily fallen despite volatile terms of trade.
- Financial sector indicators point to a generally sound and profitable banking system but with specific concerns:
  - Capital to assets: 8.3 (2006).
  - Regulatory capital to risk-weighted assets: 14.8 (2006).
  - Nonperforming loans (net of provisions) to capital: 8.2 (2006).
  - Nonperforming loans to total gross loans: 2.9 (2006).
  - Return on assets: 2.9 (2006).
  - In 2005, 63 percent of total short-term debt liabilities with South Africa was owed by commercial banks.
- Regulatory reforms under way:
  - Bank of Namibia advancing toward Basel Core Principles: clarified market and country risk measurement, beginning consolidated and risk-based supervision.
  - Less progress on nonbank financial institutions (NBFIs); need to overhaul regulatory and supervisory framework and expedite adoption of the NAMFISA Act.

Staff recommendations
- Facilitate private sector development by:
  - Facilitating entry of skilled foreign workers temporarily to bridge skills gaps while education reforms take effect, balancing this against development of local capacity.
  - Keeping labor markets flexible and labor costs in check; the decision not to implement the 2004 Labor Law amendments (which would have raised labor costs) is commended, but pending revisions should address concerns about excessive vacation days and cumbersome termination procedures.
  - Streamlining business licensing and property registration.
  - Modernizing the financial system to broaden access to rural and low-income customers, develop affordable financial products, reduce high banking charges, and enhance inclusion of formerly disadvantaged groups (via a proposed financial sector charter).
  - Expediting reform and strengthening supervision of NBFIs and implementing NAMFISA Act.

### International Reserves
Findings
- Namibia dollar is pegged to the South African rand; current level of the exchange rate appears broadly appropriate.
- International reserves are low and external surpluses are projected to decline significantly in the medium term as SACU revenues are expected to fall and mineral exports plateau.
- Staff estimates of the equilibrium REER were produced through single-country regressions and imply cautious interpretation given data limitations.

Staff recommendations
- Boost reserves and create domestic investment opportunities using market-based measures.
- Advised against regulatory steps to stem capital outflows.

### Fiscal Policy
Findings
- After two years of consolidation, the underlying fiscal policy stance loosened in 2006/07.
- Medium-term fiscal pressures projected from a decline in customs union revenues and increased spending needs for development.
- Governance: authorities passed legislation that, if implemented well, should improve the governance and performance of parastatals.
- Fiscal performance and composition:
  - Government revenue (percent of GDP) rose to 36.0 (2006) in the published indicators summary (text table context).
  - Overall fiscal balance including grants improved to a surplus in some estimates, but fiscal slippages in wage and subsidy spending exceeded budget ceilings.

Staff recommendations
- A tighter fiscal stance would have been warranted in 2006/07 given projected medium-term pressures.
- Develop a strategy to:
  - Enhance tax administration.
  - Reorient spending away from wages and subsidies towards health, education, poverty reduction, and infrastructure investment.
- Implement parastatal governance legislation effectively to improve performance and accountability.

### Staff Appraisal (summarized judgments)
- Prudent macroeconomic policies have supported strong growth, moderate inflation, and external surpluses, but structural reforms are needed to broaden the economic base and raise long-term growth potential.
- Addressing high poverty, unemployment, and HIV/AIDS prevalence remains critical to safeguard human capital and development objectives.
- Policy mix should underpin private sector development, reserve adequacy, and medium-term fiscal sustainability.

*Source: IMF staff Executive Summary (Article IV Consultation).*

### 10.      The authorities are firmly committed to the exchange rate peg to the

### _cr0712 - 10.      The authorities are firmly committed to the exchange rate peg to the

### Exchange rate peg, trade and financial integration
- The authorities are firmly committed to the exchange rate peg to the South African rand and further economic integration in southern Africa, potentially including a monetary union under the Common Monetary Area (CMA).
- The peg is consistent with Namibia’s close trade and financial links with South Africa and enjoys strong public confidence and support.
- Text Figure 2. Namibia: Trade and Financial Ties to South Africa, 2005 (Percent of total):
  - Exports: 30% South Africa, 70% (other)
  - Imports: 17% South Africa, 83% (other)
  - Short-Term External Debt: 95% South Africa, 5% (other)
- Source: Namibian Central Bureau of Statistics.

### Reserve position and recommended reserve-strengthening measures
- Reserves are twice the monetary base but are described as uncomfortably low relative to imports and short-term debt.
- More reserves would help insure against adverse shocks to trade and capital flows.
- Limited domestic investment opportunities have led private investors (particularly NBFIs) to channel assets to South African financial markets.
- The 2005 FSAP suggested creating greater domestic investment opportunities as key to building reserves and attracting capital.
- Mission-recommended market-based strategies to strengthen reserves:
  - Promoting asset securitization.
  - Open market purchases of foreign exchange.
  - If needed, creating a positive interest rate differential vis-à-vis South Africa.
- The mission supported international borrowing to establish a market presence: the BoN contracted a syndicated one-year loan of US$50 million in August 2006, which benefited gross reserves; the mission emphasized that future borrowing should have longer maturities to reduce rollover risk.
- The mission strongly advised against regulatory measures to stem capital outflows (e.g., requiring Namibian NBFIs to invest in domestic assets) because such measures are unlikely to be effective, could carry higher risk, and undermine NBFIs’ soundness.
- Authorities concurred with the need to build reserves and welcomed mission proposals; they plan to strengthen liquidity management (aligned with Fund TA) to enable foreign exchange purchases in the market and to discuss with financial institutions means to create domestic investment opportunities, including securitization of assets such as mortgages.
- Authorities did not exclude taking regulatory steps to keep savings within the country to help finance development needs.

### Fiscal policy: recent stance and SACU windfall
- After substantial fiscal consolidation in the two preceding years, authorities loosened the underlying fiscal policy stance in 2006/07.
- Namibia will receive a temporary windfall in SACU revenues of about 5 percent of GDP this fiscal year due to buoyant imports (resulting from past appreciation of the rand) and residual distributions from the transition to a new SACU revenue-sharing formula.
- A supplementary budget devotes a portion of this windfall to deficit reduction, resulting in a small budget surplus for 2006/07; the bulk of the windfall is earmarked for additional spending.
- The appreciation of the rand was reversed in 2006 and the residual payments will be phased out in 2007/08.
- While public debt is projected to fall to around 26 percent of GDP by 2007/08—within striking distance of the authorities’ long-run fiscal rule target of 25 percent of GDP—it is expected to rise again over the medium term due to a projected sharp drop in SACU receipts and substantial development needs (health, education, poverty reduction, infrastructure).

### Fiscal indicators and projections (from Text Table 3)
- Revenue and Grants: 33.0 (2005/06 Est.), 36.3 (2006/07 Budget Suppl.), 36.0 (2007/08 Staff Proj.), 34.7 (2008/09 Staff Proj.), 31.1 (2009/10 Staff Proj.), 31.1 (2010/11 Staff Proj.), 31.1 (2011/12 Staff Proj.)
- Of which: SACU receipts: 9.9 (2005/06 Est.), 15.2 (2006/07 Budget Suppl.), 14.9 (2007/08 Staff Proj.), 12.9 (2008/09 Staff Proj.), 8.6 (2009/10 Staff Proj.), 8.2 (2010/11 Staff Proj.), 7.8 (2011/12 Staff Proj.), 7.4 (2011/12 Staff Proj.)
- Expenditures: 33.7 (2005/06 Est.), 36.2 (2006/07 Budget Suppl.), 35.9 (2007/08 Staff Proj.), 35.5 (2008/09 Staff Proj.), 34.8 (2009/10 Staff Proj.), 34.3 (2010/11 Staff Proj.), 33.5 (2011/12 Staff Proj.), 32.8 (2011/12 Staff Proj.)
- Of which: wages: 14.9 (2005/06 Est.), 14.4 (2006/07 Budget Suppl.), 15.0 (2007/08 Staff Proj.), 15.1 (2008/09 Staff Proj.), 14.9 (2009/10 Staff Proj.), 14.7 (2010/11 Staff Proj.), 14.4 (2011/12 Staff Proj.), 14.2 (2011/12 Staff Proj.)
- Of which: goods and services: 5.1 (2005/06 Est.), 5.5 (2006/07 Budget Suppl.), 5.4 (2007/08 Staff Proj.), 5.3 (2008/09 Staff Proj.), 5.2 (2009/10 Staff Proj.), 5.1 (2010/11 Staff Proj.), 4.9 (2011/12 Staff Proj.), 4.8 (2011/12 Staff Proj.)
- Of which: subsidies: 6.4 (2005/06 Est.), 6.4 (2006/07 Budget Suppl.), 6.5 (2007/08 Staff Proj.), 6.4 (2008/09 Staff Proj.), 6.2 (2009/10 Staff Proj.), 6.1 (2010/11 Staff Proj.), 5.9 (2011/12 Staff Proj.), 5.8 (2011/12 Staff Proj.)
- Of which: capital spending: 3.9 (2005/06 Est.), 5.4 (2006/07 Budget Suppl.), 4.7 (2007/08 Staff Proj.), 4.8 (2008/09 Staff Proj.), 4.9 (2009/10 Staff Proj.), 5.0 (2010/11 Staff Proj.), 5.0 (2011/12 Staff Proj.), 5.0 (2011/12 Staff Proj.)
- Of which: net lending: 0.4 (2005/06 Est.), 1.4 (2006/07 Budget Suppl.), 1.4 (2007/08 Staff Proj.), 1.3 (2008/09 Staff Proj.), 1.1 (2009/10 Staff Proj.), 1.0 (2010/11 Staff Proj.), 0.8 (2011/12 Staff Proj.), 0.7 (2011/12 Staff Proj.)
- Overall balance: -0.7 (2005/06 Est.), 0.1 (2006/07 Budget Suppl.), 0.1 (2007/08 Staff Proj.), -0.8 (2008/09 Staff Proj.), -3.6 (2009/10 Staff Proj.), -3.2 (2010/11 Staff Proj.), -2.4 (2011/12 Staff Proj.), -1.7 (2011/12 Staff Proj.)
- Excluding revenue windfall: ... -5.1 (2006/07 without the windfall), -5.1 (2007/08) ................................
- Primary balance: 2.2 (2005/06 Est.), 3.2 (2006/07 Budget Suppl.), 3.1 (2007/08 Staff Proj.), 1.8 (2008/09 Staff Proj.), -1.2 (2009/10 Staff Proj.), -0.7 (2010/11 Staff Proj.), 0.1 (2011/12 Staff Proj.), 0.7 (2011/12 Staff Proj.)
- Public debt: 31.7 (2005/06 Est.), 30.5 (2006/07 Budget Suppl.), 28.7 (2007/08 Staff Proj.), 26.2 (2008/09 Staff Proj.), 26.8 (2009/10 Staff Proj.), 28.9 (2010/11 Staff Proj.), 28.8 (2011/12 Staff Proj.), 28.3 (2011/12 Staff Proj.)
- Memorandum items:
  - Revenue windfall: ... 5.2 (2006/07 Budget Suppl.), 5.2 (2007/08) ........................
  - Extrabudgetary spending: 0.4 (2005/06 Est.), 0.8 (2006/07 Budget Suppl.), 0.5 (2007/08 Staff Proj.), 0.3 (2008/09 Staff Proj.), 0.2 (2009/10 Staff Proj.), 0.2 (2010/11 Staff Proj.), 0.2 (2011/12 Staff Proj.), 0.2 (2011/12 Staff Proj.)
  - Nominal GDP (N$ billions): 39,496 (2005/06 Est.), 42,587 (2006/07 Budget Suppl.), 43,403 (2007/08 Staff Proj.), 47,840 (2008/09 Staff Proj.), 52,288 (2009/10 Staff Proj.), 56,542 (2010/11 Staff Proj.), 61,375 (2011/12 Staff Proj.), 66,622 (2011/12 Staff Proj.)

### Medium-term fiscal strategy and policy recommendations
- The mission recommended aiming to keep public debt on a downward trajectory by running primary surpluses in most years.
- This requires adopting an effective medium-term strategy to improve revenue collections sustainably and reorient spending away from personnel expenditures and subsidies to parastatals toward priority sectors.
- Small primary surpluses would be consistent with preserving macroeconomic stability while allowing Namibia to address development needs and make faster progress toward achieving the Millennium Development Goals (MDGs).
- There is room to improve the efficiency of public expenditure, notably in education where outcomes have been below expectations and education reform has been given impetus.

### Revenue administration and tax policy recommendations
- Authorities reported strong increases in income and VAT collections attributed to outsourcing audits to the private sector.
- The mission welcomed increased collections and urged development of a comprehensive strategy to durably enhance tax administration, as Fund TA recommended.
- Recommended components of the strategy:
  - Building audit capacity.
  - Establishing a large taxpayer office.
  - Adopting a risk-based strategy for VAT refunds.
- Authorities reiterated commitment to reform tax administration eventually but plan in the short run to rely on audit outsourcing to safeguard tax collections.

### Wage bill, civil service, and public employment
- Namibia has one of the highest levels of personnel expenditure in Africa: 15 percent of GDP and two-fifths of all government spending.
- Due to ineffective controls, line ministries circumvented a hiring freeze, leading to an 8 percent increase in the number of civil servants in 2005/06 and a doubling since independence in 1990.
- Text Figure 3. Namibia and Sub-Saharan Africa: Central Government Wage Bill, 2004 indicates Namibia’s wage bill is well above the sub-Saharan Africa average (Average for sub-Saharan Africa = 7.4 percent).
- Mission recommendations on civil service:
  - Draw up a strategy for the appropriate structure, quality, and remuneration of the civil service.
  - Reduce staff through attrition.
  - Eliminate redundant government functions.
  - Identify staffing needs and reallocate staff among ministries.
  - Limit growth of personnel expenditures to the inflation rate.
- Authorities consider civil service reform politically difficult given high unemployment and a narrow economic base; they emphasized private sector job creation as the long-run solution.

### State-owned enterprises (SOEs) and governance
- Authorities are determined to reform SOEs and reduce their budgetary drain; subsidies have averaged 2 percent of GDP for the last five years.
- The recently-adopted SOE Governance Act, if implemented successfully, could enhance monitoring, governance, and performance of SOEs and lessen need for subsidies.
- Staff recommended measures to make the legislation effective:
  - The new Governance Council focus on a broad strategic vision, delegating operational functions to a new agency.
  - Boards of directors be selected through a transparent process.
  - SOEs and private firms operate on a level playing field.
- Staff suggested a strategic vision for the sector, potentially including restructuring and privatizing selected SOEs to ensure more efficient use of scarce public resources and foster growth.

### Social policy: basic income grant (BIG) and poverty reduction
- Mission discussed poverty reduction with authorities and a coalition of NGOs and church leaders; agreed more determined efforts are needed but should not compromise fiscal stability.
- Coalition proposed a basic income grant (BIG) — a cash grant to be paid to all Namibians under the age of 60 irrespective of income.
- The mission accepted that BIG’s gross costs could be lowered on a net basis through income tax payments by high-income earners, but reiterated that the BIG’s net costs would remain substantial and difficult to accommodate within a sustainable fiscal framework given other public spending priorities (health and education).
- The mission pointed to alternative conditional cash grant schemes implemented in Latin America as lower-cost, effective examples for Namibia.

### Staff appraisal: macroeconomic outlook and policy priorities
- Namibia has enjoyed macroeconomic stability but faces high rates of poverty, unemployment, and HIV/AIDS infection.
- Raising growth potential and safeguarding external competitiveness are key to addressing these challenges; this is best achieved by creating an environment conducive to private sector activity and more efficient use of public resources, complemented by policies to protect the most vulnerable.
- Recent reforms (education reform, HIV/AIDS strategy implementation, Anti-Corruption Commission, SOE Governance Act, consultations on a financial sector charter) are positive first steps, but more is needed to:
  - Facilitate skills transfer from abroad.
  - Ensure labor markets are flexible and less costly.
  - Expedite licensing and registration of businesses.
  - Strengthen regulatory and supervisory framework for the financial sector, especially NBFIs.
- Namibia should preserve macroeconomic stability, including the credible link of the Namibia dollar to the South African rand, while considering market-based measures to boost international reserves and resisting regulatory means to keep large savings at home.
- To address medium-term fiscal pressures, the mission emphasized the need for determined efforts to shore up revenues and reduce personnel expenditures and subsidies to parastatals; recommended actions include strengthening audit capacity, establishing a large taxpayer office, better VAT administration, developing a strategy to reform and reduce the civil service, and developing a strategic vision for the SOE sector, potentially including restructuring and privatization of selected SOEs.

*Source: IMF staff report text provided in the content unit.*

### 26.      Staff recommends that Namibia remain on the standard 12-month consultation cycle.

### _cr0712 - 26.      Staff recommends that Namibia remain on the standard 12-month consultation cycle.

### Recommendation
- Staff recommends that Namibia remain on the standard 12-month consultation cycle.

### Macroeconomic outlook and key indicators (2003-11; annual percent change, unless otherwise noted)
- GDP at constant 1995 prices: 3.5; 6.6; 4.2; 4.6; 4.8; 4.6; 3.7; 3.8; 4.0
- GDP deflator: -0.6; 0.3; 2.3; 4.9; 5.3; 4.9; 4.2; 4.3; 5.1
- GDP at current market prices (N$ millions): 33,842; 36,181; 38,560; 42,303; 46,702; 51,252; 55,397; 59,976; 65,574
- GDP per capita (US$): 2,253; 2,792; 2,984; 3,157; 3,373; 3,611; 3,778; 3,958; 4,188
- Consumer price index (period average): 7.2; 4.1; 2.3; 5.0; 5.6; 5.0; 4.5; 4.5; 4.5
- Consumer price index (end of period): 2.6; 4.3; 3.5; 5.7; 5.5; 4.5; 4.5; 4.5; 4.5

### External sector (selected indicators, annual percent change or levels)
- Exports (US$): 16.6; 45.8; 13.3; 17.1; 6.1; 2.2; -5.5; -4.9; 2.5
- Imports (US$): 33.7; 23.1; 10.7; 9.7; 8.7; 7.0; 5.4; 3.9; 0.2
- Export volume: 6.3; 27.4; -1.5; 6.1; 7.6; 5.9; -3.9; -4.4; -2.2
- Import volume: 5.2; 6.6; 4.6; 4.8; 5.0; 4.8; 3.8; 3.9; 1.6
- Terms of trade: -13.6; -1.0; 8.7; 5.4; -4.9; -5.5; -3.2; -0.5; 6.3
- Gross official reserves (Millions of U.S. dollars): 318.9; 352.7; 315.9; 395.6; 461.9; 475.8; 520.5; 550.2; 604.2
- Months of imports of goods and services: 2.0; 1.7; 1.4; 1.6; 1.7; 1.7; 1.7; 1.8; 1.9
- External debt/GDP (percent): 23.0; 21.2; 20.9; 20.8; 20.0; 19.6; 19.6; 19.9; 19.7
- Exchange rate (Namibia dollar/U.S. dollar, end of period): 6.6; 5.6; 6.3; ..................
- Exchange rate (Namibia dollar/U.S. dollar, period average): 7.6; 6.4; 6.4; ..................

### Balance of payments (Millions of U.S. dollars, 2003-11; selected items and projections)
- Current account (including official transfers): 227.1; 533.3; 433.6; 900.7; 906.7; 631.0; 338.8; 168.8; 303.4
- Goods balance (selected): Goods -460.2; -283.6; -265.3; -138.7; -216.1; -353.5; -658.3; -903.4; -851.3
  - Exports, f.o.b.: 1,250.9; 1,823.4; 2,066.6; 2,420.1; 2,566.6; 2,623.7; 2,479.0; 2,356.6; 2,416.3
    - Diamonds: 510.9; 824.5; 848.3; 962.2; 1,046.6; 1,168.3; 1,049.6; 910.9; 815.3
    - Other minerals: 182.6; 227.5; 275.0; 426.4; 462.3; 392.2; 350.8; 321.5; 304.3
    - Fish: 229.5; 178.7; 155.9; 189.8; 189.8; 190.5; 189.6; 191.4; 194.2
  - Imports, f.o.b. (excluding duty): -1,711.1; -2,107.0; -2,332.0; -2,558.8; -2,782.7; -2,977.2; -3,137.4; -3,260.1; -3,267.5
    - Oil imports: -220.4; -277.2; -413.6; -545.7; -609.0; -616.4; -607.0; -600.2; -598.3
- Services: 165.4; 54.9; 43.3; 69.6; 102.0; 144.9; 194.1; 252.2; 323.0
- Income: 63.6; 94.7; -14.1; 64.1; 71.8; 83.7; 99.9; 106.7; 116.4
  - Compensation of employees: -4.1; -4.2; -3.6; -3.9; -4.1; -4.4; -4.7; -4.9; -5.2
  - Investment income: 67.7; 98.9; -10.5; 67.9; 75.9; 88.1; 104.5; 111.6; 121.6
- Current transfers: 458.3; 667.3; 669.9; 905.7; 948.9; 755.9; 703.2; 713.4; 715.3
  - Of which: SACU receipts: 386.8; 606.8; 650.1; 890.4; 930.8; 720.4; 659.5; 664.4; 668.7
- Capital and financial account: -278.4; -604.1; -455.7; -900.7; -906.7; -631.0; -338.8; -168.8; -303.4
  - Financial account (selected): Direct investment: 159.1; 248.4; 360.4; 386.1; 436.3; 567.8; 699.0; 737.7; 585.6
  - Portfolio investment: -632.3; -842.0; -1,045.7; -1,465.7; -1,462.1; -1,385.4; -1,210.3; -1,113.0; -1,057.5
  - Reserve assets (net): 16.2; -33.4; 37.5; -28.4; -65.4; -16.5; -44.6; -32.2; -54.0
- Trade balance/GDP (memorandum): -10.3; -5.1; -4.4; -2.1; -3.1; -4.7; -8.3; -10.8; -9.5
- Current account/GDP (including transfers): 5.1; 9.5; 7.2; 13.9; 13.0; 8.4; 4.3; 2.0; 3.4
- Exports of GNFS (millions): 1,662.4; 2,297.5; 2,477.5; 2,875.2; 3,072.2; 3,189.6; 3,107.8; 3,055.2; 3,191.7
- Imports of GNFS (millions): 1,957.2; 2,526.2; 2,699.6; 2,944.2; 3,186.2; 3,398.2; 3,572.0; 3,706.5; 3,720.0
- Gross International reserves (end of period): 318.9; 352.7; 315.9; 395.6; 461.9; 475.8; 520.5; 550.2; 604.2
- Short-term debt (US$ millions): 594.9; 685.3; 541.7; 547.3; 564.8; 657.2; 689.2; 728.4; 776.7
- External debt (US$ millions) from IIP: 1,028.2; 1,191.3; 1,267.5; 1,342.0; 1,395.8; 1,471.8; 1,558.5; 1,667.3; 1,760.4
- GDP at market prices (US$ millions): 4,473.7; 5,609.5; 6,060.7; 6,465.0; 6,965.3; 7,518.6; 7,932.3; 8,380.0; 8,939.3

### Central government finance (levels and percent of GDP; fiscal years)
- Revenue and grants (N$ millions, selected): 11,387.8; 12,324.5; 13,028.0; 15,243.8; 15,459.6; 15,634.6; 16,586.7; 16,272.8; 17,591.2; 19,089.3; 20,722.3
- Tax revenue (N$ millions, selected): 10,358.0; 11,196.5; 11,886.0; 14,104.5; 14,422.6; 14,597.6; 15,312.1; 14,701.0; 15,872.7; 17,219.2; 18,684.9
  - Personal income tax: 2,661.9; 3,165.7; 2,905.0; 3,286.0; 3,286.0; 3,286.0; 3,669.7; 4,089.4; 4,478.6; 4,953.6; 5,477.0
  - Corporate income tax: 1,222.2; 1,117.3; 1,573.0; 1,302.0; 1,302.0; 1,302.0; 1,530.7; 1,751.5; 1,972.3; 2,193.2; 2,434.2
  - Diamond mining corporate tax (N$ millions): 301.4; 48.3; 199.0; 45.0; 45.0; 45.0; 123.0; 123.0; 123.0; 123.0; 123.0
  - International taxes (includes SACU receipts): 4,206.8; 3,728.8; 3,892.0; 6,149.6; 6,471.4; 6,471.4; 6,164.0; 4,493.0; 4,643.0; 4,793.0; 4,943.0
- Nontax revenue (N$ millions, selected): 959.3; 974.8; 1,142.0; 1,067.3; 965.0; 965.0; 1,195.3; 1,485.1; 1,624.7; 1,768.3; 1,926.9
  - Diamond royalties: 385.4; 242.1; 405.0; 316.4; 258.3; 258.3; 397.9; 592.1; 634.2; 697.6; 767.4
- Expenditures (N$ millions, selected): 12,640.3; 12,949.0; 13,317.7; 15,300.4; 15,400.8; 15,580.3; 16,980.4; 18,171.4; 19,382.4; 20,533.9; 21,884.6
  - Current expenditure (N$ millions): 10,684.1; 11,069.7; 11,618.0; 12,364.4; 12,497.9; 12,935.7; 14,065.5; 15,011.6; 15,993.8; 16,978.4; 18,091.8
  - Personnel (N$ millions, selected): 5,445.8; 5,534.1; 5,888.4; 6,129.7; 6,139.4; 6,500.0; 7,212.2; 7,778.4; 8,298.0; 8,823.3; 9,444.3
  - Interest payments (N$ millions): 999.2; 1,109.9; 1,162.0; 1,312.7; 1,312.7; 1,312.7; 1,259.8; 1,252.6; 1,397.3; 1,498.6; 1,615.9
  - Capital expenditure (N$ millions): 1,627.1; 1,701.7; 1,524.2; 2,317.5; 2,316.5; 2,058.2; 2,316.4; 2,584.1; 2,850.9; 3,094.6; 3,359.2
- Overall balance (N$ millions): -1,252.6; -624.6; -289.7; -56.6; 58.8; 54.3; -393.7; -1,898.6; -1,791.2; -1,444.6; -1,162.3
- Overall balance excluding extrabudgetary spending (N$ millions): -1,027.0; -380.9; -143.5; 287.9; 403.3; 261.0; -235.1; -1,797.6; -1,682.0; -1,326.0; -1,033.6
- Primary balance (N$ millions): -253.4; 485.3; 872.3; 1,256.1; 1,371.5; 1,367.0; 866.1; -646.0; -393.9; 54.0; 453.6
- Financing (N$ millions): 1,452.2; 624.6; 213.1; 56.6; -58.8; -54.3; 393.7; 1,898.6; 1,791.2; 1,444.6; 1,162.3
  - Domestic financing (N$ millions): 1,254.0; 414.9; 100.9; -253.9; -1,052.7; -910.4; 269.1; 1,834.8; 1,722.1; 1,369.6; 1,080.0
  - External disbursements (N$ millions): 225.5; 243.7; 146.2; 344.5; 344.5; 206.7; 158.5; 101.0; 109.2; 118.6; 129.7
- Public and publicly guaranteed debt (N$ millions, memorandum): 14,996.7; ...; 16,037.9; ...; 16,196.3; 16,509.3; 18,180.9; 20,614.6; 22,080.4; 23,365.2

### Central government finance (percent of GDP, selected)
- Revenue and grants: 31.0; 31.2; 33.0; 35.8; 36.3; 36.0; 34.7; 31.1; 31.1; 31.1; 31.1
- Expenditures: 34.4; 32.8; 33.7; 35.9; 36.2; 35.9; 35.5; 34.8; 34.3; 33.5; 32.8
- Overall balance: -3.4; -1.6; -0.7; -0.1; 0.1; 0.1; -0.8; -3.6; -3.2; -2.4; -1.7
- Primary balance: -0.7; 1.2; 2.2; 2.9; 3.2; 3.1; 1.8; -0.7; 0.1; 0.7

### Monetary and financial developments (Bank of Namibia; end of period, selected)
- Reserve money (decimals omitted for presentation): 1,172.9; 1,238.6; 1,372.5; 1,270.0; 1,330.3; 1,458.9; 1,590.8; 1,853.8; 2,165.8; 2,524.7; 2,934.2; 3,370.7
- Broad money (levels): 13,624.6; 15,828.9; 17,370.2; 18,754.2; 20,546.0; 21,511.9; 20,839.1; 24,841.5; 29,455.3; 34,840.9; 41,079.3; 47,864.5
- Deposits: 13,042.1; 15,196.2; 16,690.2; 18,061.8; 19,809.8; 20,720.4; 19,999.3; 23,847.8; 28,294.7; 33,482.1; 39,641.6; 46,189.2
- Private sector credit (annual percent change): 12.4; 19.4; 20.1; 18.0; 17.1; 16.2; 15.3; 14.4; 13.5
- Broad money (annual percent change): 9.6; 16.2; 9.7; 20.0; 19.5; 26.1; 20.0; 19.2; 18.6; 18.3; 17.9; 16.5
- Net foreign assets (US$ millions, memorandum): 189.7; 172.3; -24.7; 116.6; 208.7; 508.0; 197.8; 177.2; 145.9; 123.2; 95.6; 73.9
- Bank of Namibia net foreign assets (US$ millions): 317.8; 351.2; 313.7; 396.1; 373.5; 401.7; 342.1; 407.5; 424.0; 468.6; 500.9; 554.9
- Domestic interest rates (end of period): Deposit rate: 6.9; 6.4; 6.0; 6.1; 6.2; 6.2; .................. ; Lending rate: 12.9; 10.7; 10.8; 10.8; 10.6; 11.7; ..................

### Investment and savings (percent of GDP)
- Gross investment: 29.8; 26.4; 28.3; 29.5; 30.4; 31.0; 31.4; 31.6; 31.9
  - Public: 7.0; 7.4; 7.5; 8.5; 9.0; 9.2; 9.4; 9.4; 9.4
  - Private: 22.8; 19.0; 20.8; 21.0; 21.4; 21.8; 22.0; 22.2; 22.5
- Gross domestic savings: 23.2; 22.3; 24.7; 28.4; 28.4; 28.2; 25.5; 23.9; 26.0
- Gross national savings: 34.9; 35.9; 35.5; 43.4; 43.4; 39.3; 35.6; 33.6; 35.3
  - Public: -0.7; 1.0; 3.2; 5.6; 5.5; 3.1; 2.7; 3.3; 3.8
  - Private: 35.6; 34.9; 32.3; 37.8; 37.9; 36.3; 32.9; 30.3; 31.4

### Fiscal sustainability and debt metrics (percent of GDP)
- Public and publicly guaranteed debt outstanding/GDP: 39.6; 40.8; 40.6; 37.3; 34.5; 34.8; 36.5; 36.0; 35.1
- Public debt outstanding/GDP: 29.7; 34.2; 31.7; 28.7; 26.2; 26.8; 28.9; 28.8; 28.3

### Selected vulnerability indicators (2001-06; memorandum)
- Gross official reserves (US$ millions): 224.0; 336.2; 318.9; 352.7; 315.9; 452.6
- Months of imports of goods and services (official reserves): 1.7; 2.7; 2.0; 1.7; 1.4; ...
- Real effective exchange rate (percent change, depreciation = '-'): -5.0; -8.3; 20.0; 7.0; 0.7; -0.5
- Stock market index (end-of-period): 392.0; 305.0; 347.0; 425.9; 581.7; 806.0 (Dec 05, 2006)

### Notable projection/structural point
- Namibia will become a net exporter of electricity in 2011, when electricity production related to the Kudu gas project is expected to be fully operational.

*Sources: Namibian authorities; and Fund staff estimates and projections.*

### 1.      The Namibian authorities are grateful to staff for their constructive dialogue and

### The Namibian authorities are grateful to staff for their constructive dialogue and comments

### Economic Prospects
- Real GDP growth is expected to increase moderately to 4.5 percent in 2006, after 4.25 percent in 2005, due in part to a recovery in diamond production.
- In the medium-term, the economy is expected to expand at 3-4 percent.
- Consumer price inflation increased to 5.6 percent and is expected to remain moderate at single digit level in the medium term.
- Fiscal consolidation reduced the fiscal deficit by close to 7 percentage points during the last two fiscal years to less than one percent of GDP in 2005/06 and a small surplus in 2006/07.
- The external current account is expected to double to close to 14 percent of GDP in 2006 because of record diamond exports and a surge in customs union receipts.
- International credit rating agencies reaffirmed Namibia’s sovereign credit rating at investment grade level.

### Challenges and Risks
- Key challenges identified:
  - Broadening the economic base and raising long-term growth potential.
  - Widespread poverty and unemployment.
  - High HIV/AIDS infection rates undermining investment in human capital.
- Policy concern:
  - Authorities call for International Financial Institutions to revisit classification of Namibia as a middle income country because income per capita-based classification ignores income disparity and complicates access to concessional funding.
  - Authorities hope for a compromised set of terms and conditions for this group of countries along the lines of that for the Caribbean Island States to help achieve the Millennium Development Goals by 2015.

### Fiscal Policy — recent performance and medium-term stance
- Fiscal consolidation record:
  - Fiscal position turned from a deficit of close to 7 percent of GDP in 2003/04 to a small surplus in 2006/07.
  - Public debt to GDP ratio projected to fall from above 30 percent of GDP in 2003/04 to around 26 percent of GDP in 2007/08, near the authorities’ fiscal rule target of 25 percent of GDP.
- Authorities’ view:
  - More SACU windfall revenue could have been used for debt reduction, but the significant deficit reduction demonstrates commitment to prudent fiscal and debt management.
  - Committed to achieving debt target through further alignment of revenue and expenditure while freeing resources for poverty-reducing expenditure and growth-critical infrastructure.
- Revenue and SOE strategy:
  - Strengthened revenue collection, especially income tax and VAT, through targeted forensic audits by private auditing firms.
  - Recognize this is not a long-term solution; exploring alternatives including a Fund diagnostic mission on tax administration.
  - Reform of some state owned enterprises (SOEs) is part of the strategy to reduce budgetary burden; authorities appreciative of Fund TA on monitoring and governance of SOEs.
- Civil service and wage bill:
  - Reducing size of civil service is politically and practically difficult; wage bill containment seen as a long-term issue.
  - Short-term measures include cleaning up wage bill for ghost workers and over manning; outsourcing further services where possible.
- Social spending and poverty reduction:
  - Reducing widespread poverty is the key policy objective; effective poverty reduction requires accelerated growth, supported by redistribution policies.
  - Four social safety nets maintained: old age pension, pension for war veterans, support for orphans, support for people with disabilities; payments reviewed regularly.
  - Nearly half of the budget allocated to health and education, described as among the highest in the world; Namibian budget described as pro-poor.
  - Authorities note BIG coalition’s call for universal cash grant for Namibians under age 60 and agree efforts to reduce poverty should not compromise fiscal stability.

### Monetary and Exchange Rate Policy
- Exchange rate peg:
  - Authorities remain fully committed to the exchange rate peg to the South African Rand and membership in the Common Monetary Area (CMA) to anchor price expectations.
- Inflation and reserves:
  - Recent trends show success in achieving low and stable prices.
  - Authorities note staff concern about low reserves but believe current reserves are sufficient to cover currency in circulation and do not pose a risk to the peg.
- Reserve-building and capital flows:
  - Authorities note staff suggestions to build reserves via strengthened liquidity management and deepening domestic financial markets.
  - Authorities do not exclude possibility of regulatory steps to stem outflow of savings; note it is uncharacteristic for a developing country with large developmental needs to export some 65 percent of its savings.
  - Any limits on capital flows would be introduced in a balanced manner to safeguard interests of pensioners while stimulating economic growth.

### Structural Issues and Reforms
- Private sector development focus:
  - Following macro stability, authorities plan micro reforms to raise sustainable growth and achieve Vision 2030 objectives; private sector development central to plans.
- Binding constraints to growth identified:
  - Lack of skills compounded by the HIV/AIDS pandemic, lack of innovation and entrepreneurship; institutional settings relatively strong.
- Human capital and health:
  - Priority to address HIV/AIDS pandemic; coverage of antiretroviral treatment expanding with universal coverage expected by 2010.
  - Fiscal costs of HIV/AIDS will persist; economy must grow faster to absorb costs and reduce budgetary pressure.
- Education reform:
  - Education reform prioritized with World Bank assistance.
- Financial sector and labor market:
  - Need for labor market reform, modernization of the financial system, enhanced access to financial services for rural and low-income customers.
  - Further strengthening of regulatory and supervisory framework for the financial sector, especially non-bank financial sector.
  - Progress reported on complying with Basle Core Principles of Banking Supervision and restructuring supervisory agency for non-bank financial institutions.
  - Commitment to implement Financial Sector Assessment Program (FSAP) recommendations, acknowledging possible delays due to weak capacity.

### Conclusion
- Authorities reaffirm unwavering commitment to prudent and market-friendly policies aimed at accelerated growth, employment creation, and poverty reduction.
- Expect continued responsiveness from the Fund and international community in supporting macroeconomic framework strengthening and reform implementation.

### IMF Public Information Notice (PIN) No. 07/4 — Executive Board Conclusions (January 11, 2007)
- Growth and inflation:
  - Growth expected to increase to 4½ percent in 2006, after 4¼ percent in 2005, partly due to recovery in diamond production.
  - Inflation rising but expected to remain moderate.
- External and reserve developments:
  - External current account surplus expected to double to close to 14 percent of GDP in 2006 from record diamond exports and surge in SACU receipts.
  - Continued capital outflows to South African financial markets have kept international reserves relatively low.
- Monetary policy reaction:
  - Bank of Namibia matched South African Reserve Bank interest rate increases, lifting rates by 2 percentage points in 2006.
- Fiscal assessment and risks:
  - Fiscal deficit fell by close to 7 percentage points during last two fiscal years to ¾ percent of GDP in 2005/06.
  - Windfall SACU revenues expected to lead to small budget surplus in 2006/07 but underlying fiscal position set to weaken.
  - Namibia will receive a 5 percent of GDP windfall in SACU revenues in 2006/07, with the largest portion directed towards increased expenditures.
  - Public debt ratio projected to come close to 25 percent of GDP by 2007/08 but poised to rise over the medium term absent revenue reforms and reduced non-priority spending.
- Executive Directors’ recommendations and observations:
  - Commended prudent macroeconomic policies; urged focus on broadening economic base and raising long-term growth potential.
  - Welcomed reforms on poverty, unemployment, HIV/AIDS, education, and governance; called for additional labor market and business environment reforms.
  - Stressed importance of prudent fiscal policies and increases in international reserves; several Directors recommended using more windfalls to reduce public debt.
  - Urged that poverty reduction programs be targeted and not compromise fiscal sustainability.
  - Recommended strengthening VAT administration, audit capacity of Inland Revenue Department, and establishing a large taxpayers’ office.
  - Encouraged limits on growth of public wage expenditures and developing a civil service strategy.
  - Urged making new SOE Governance Act effective.
  - Agreed peg to the rand remains appropriate; recommended developing domestic investment opportunities and market-based strategies (asset securitization, open market purchases of foreign exchange) to strengthen reserves.
  - Most Directors counseled against regulatory measures to stem capital outflows; a few considered them useful short-term.
  - Commended progress on 2005 FSAP recommendations and Basel Core Principles compliance; called for further strengthening of regulatory and supervisory framework, especially for nonbank institutions, and extension of financial services to rural areas and the poor.

### Selected Economic Indicators (as reported)
- Change in real GDP:
  - 2003: 3.5
  - 2004: 6.6
  - 2005: 4.2
  - 2006 Est.: 4.6
- Change in CPI (end of period):
  - 2003: 2.6
  - 2004: 4.3
  - 2005: 3.5
  - 2006: 5.7
- Overall fiscal deficit (Figures are for fiscal year, which begins April 1):
  - 2003: -7.5
  - 2004: -3.4
  - 2005: -0.7
  - 2006: 0.1
- Public debt (Figures are for fiscal year):
  - 2003: 29.7
  - 2004: 34.2
  - 2005: 31.7
  - 2006: 28.7
- Broad money (end of period; percent change):
  - 2003: 9.6
  - 2004: 16.2
  - 2005: 9.7
  - 2006: 20.0
- Credit to the private sector (end of period; percent change):
  - 2003: 12.4
  - 2004: 19.4
  - 2005: 20.1
  - 2006: 18.0
- Current account balance (percent of GDP):
  - 2003: 5.1
  - 2004: 9.5
  - 2005: 7.2
  - 2006: 13.9
- International reserves (months of imports):
  - 2003: 2.0
  - 2004: 1.7
  - 2005: 1.4
  - 2006: 1.6
- Exchange rate (Namibia dollar/U.S. dollar, end of period):
  - 2003: 6.6
  - 2004: 5.6
  - 2005: 6.3
  - 2006: ...

*Source: IMF staff report and Public Information Notice (PIN) No. 07/4, January 11, 2007.*

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