## _cr08184 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [_cr08184 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08184.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08184.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08184.pdf.json) --- ### Fiscal transparency posture and recent improvements - Namibia "has the essential elements of a transparent fiscal system and meets the basic standards of the fiscal transparency code." - Recent public financial management improvements include: - Budget presentation underpinned by a comprehensive macroeconomic framework and Medium-Term Expenditure Framework (MTEF). - Implementation of an Integrated Financial Management System (IFMS). - Formulation of a comprehensive debt strategy combined with improved reporting on debt, contingent liabilities, and on-lending. - Assessment in budget documents of macroeconomic risks, policy initiatives, and fiscal sustainability. - Reduction of the backlog in external audit and initiation of internal audit in line ministries. - Steps to address audit problems of the tax administration. - Establishment of an Anti-Corruption Commission to address, inter alia, corruption among public officials. ### Key fiscal statistics and institutional facts - Revenue and grants: "30.4 percent of GDP in fiscal year 2004/05." - Spending: "34.5 percent of GDP in fiscal year 2004/05." - Fiscal year: "April 1 to March 31." - Bank of Namibia overdraft facility to Government limit: "N$200 million." - Overdraft interest rate: "the weighted average discount rate on the latest issue of 91 day treasury bills plus two percentage points." - National Assembly composition: "72 elected members and up to 6 members appointed by the President." - IMF mission discussions held in Windhoek during "June 5–19, 2006." ### Main outstanding weaknesses and priority reforms - Budget classification and reporting: - MOF urgently needs to "develop an appropriate budget classification structure by adopting a Program classification." - Improve consistency of reporting on the budget to facilitate informed policy discussion and rationalization of spending. - Public access and parliamentary scrutiny: - MOF should make publicly available its quarterly information bulletin. - MOF should present a mid-year budget review to the Parliament. - Civil society should be involved more actively in the budget process. - Budget calendar should be advanced so the budget is presented to Parliament well in advance of the end of the fiscal year. - Coverage and reporting scope: - Fiscal data should cover "general government." - Improved reporting on state-owned enterprises is needed. - Audit and enforcement capacity: - Government needs to "significantly raise the capacity for external and internal audit of its own activities and the tax administration’s ability to audit taxpayers." - Must "firmly address proven instances of wrongdoing." - Governance of public enterprises and procurement: - Ensure proper structure for Government procurement and supervision of state-owned enterprises, public banks, and subsidized enterprises. - Resource revenue transparency: - "Resource revenue provisions are clear and transparent but there is scope to clarify the treatment of royalties and reduce discretion." ### Institutional roles and legal framework (selected points) - Definition of general government: central government, 13 regional councils, local councils, and traditional authorities. - Central government components: Offices of the President, the Prime Minister, the Auditor-General, Parliament’s two chambers, Government Ministries, and various agencies, commissions, funds, and other statutory entities fully or mainly funded by the budget. - Bank of Namibia: - Established under the Bank of Namibia Act, 1990 (Act 8 of 1990) and governed by the Bank of Namibia Act, 1997 (Act 15 of 1997). - Objectives include promoting and maintaining a sound monetary, credit and financial system, acting as Government banker, financial advisor and fiscal agent, and assisting in attainment of national economic goals. - All foreign borrowing by the Government or other public entity must be approved by the Minister of Finance and done in consultation with the Bank. - The Namibian Dollar is pegged to the South African Rand. - State Finance Act and Constitution: - Constitution, Article 126, and the State Finance Act, 1991 (Act 13 of 1991) establish State Revenue Fund framework and Treasury authority. - Article 127 provides for establishment and audit role of the Auditor-General. - Planning and donor-funded resources: - National Planning Commission Act, 1994 (Act 15 of 1994) assigns NPC responsibility to prepare the development budget and coordinate external donors; NPC also responsible for national statistics. - Donor funds are sometimes kept outside the State Revenue Fund at donors’ request; NPC and MOF coordinate to ensure alignment with developmental purposes. ### Public sector composition and oversight gaps - Regional and local councils: - Regional councils: main role coordinating development planning; not assigned specific service delivery functions. - Local councils: provide utilities; finance via ratable charges, fees; Local Authorities Act 1993 (section 73) authorizes rates. - Regional council funding includes "5 percent of ratable charges on immovable property levied by local councils." - Limited borrowing power; "no legal limits on their levels of debt." - State-owned enterprises and extra-budgetary entities: - Supervised by State-Owned Enterprise Governance Council (SOEGC) and Central Governance Agency (CGA). - SOE accounts kept off budget; may receive budget support via lending, equity, and subsidies. - Some extra-budgetary institutions are funded directly through the budget (e.g., educational institutions, Namibia Broadcasting Corporation). - Distinction between commercially oriented public corporations and state-owned enterprises "is not always clear." --- ### Public specialist/policy banks and nonbank financial institutions ### Public banks (full government equity) - Four public banks with full government equity: - Development Bank of Namibia: credit at below market interest rates; Government seeking to expand capital including by tapping foreign investors. - Agricultural Bank of Namibia: credit to farmers under special schemes; has faced financial difficulties and curtailed lending. - National Housing Enterprise: credit at below market interest to fund low-cost housing projects. - NamPost Savings Bank: deposit institution part of Namibia Post Limited. - Supervision and governance: - Development Bank of Namibia and Agricultural Bank of Namibia supervised by Ministry of Finance and SOEGC. - Recommendation: public banks should be supervised like other banks and brought under Bank of Namibia supervision. - Size and scope: - Equity of these four public banks estimated to amount to less than 10 percent of banking system assets. - Nonbanking financial institution: - Namibia Reinsurance Company: government-owned, supervised by Ministry of Finance and NAMFISA. ### Other public and statutory enterprises - Numerous public nonfinancial corporations with part or full government ownership, including public utilities and Air Namibia. - Numerous statutory bodies not incorporated serving various purposes. ### Special funds and social security - Statutory funds: - National Energy Fund (MME): revenue mainly from fuel levies; stabilizes fuel prices and pays subsidies; has accumulated sizable losses due to retail prices held below market. - Road Fund Administration (Ministry of Works): funds itself with a special levy on fuel and foreign funds for road projects. - Diamond Valuation Fund and Diamond Port Fund. - Social security and pensions: - Social Security Fund: supervised by Social Security Commission; finances maternity and death benefits via 0.9 percent payroll tax (limited to a N$27 per month contribution per employee). - Government Institutions Pension Fund (GIPF): established 1989; defined benefit; employer contribution 16 percent of pensionable salary and employee contribution 7 percent of pensionable salary; fully funded; controlled by Board of Trustees. ### Government equity in private enterprises - Government equity interests include: - NAMDEB: 50 percent equity share (joint with DeBeers Diamonds). - Other mineral producers including Rossing Uranium. ### Reform of the state-owned enterprise sector and privatization - Reform priority: reforming SOE sector is a Government priority but progress slow. - State-Owned Enterprises Bill, 2005 (Bill 17 of 2005): - Would require performance agreements and enhanced investigation powers, require quarterly statements of accounts and annual budget plans, dissolve CGA and shift responsibilities to Secretariat of the Governance Council. - Leaves portfolio ministers’ role in appointing Board members largely intact; recommendation to strengthen role of Council and Minister of Finance in Board appointments. - Privatization framework: full scale privatization unlikely in near future; no comprehensive legislative framework for privatization currently exists. ### Land redistribution and expropriation - "Willing buyer, willing seller" program since mid 1990s; complemented by concessional affirmative action loan scheme. - Pace of redistribution slow due to procedural, decision-making, and pricing issues. - Expropriation: Constitution allows land acquisition “in the public interest”; Government initiated expropriations with compensation for 20 farms; two have taken place. - Concerns about objectivity/transparency of criteria; authorities state independent technical land committee assesses offers and recourse to courts provides protection. ### Private sector regulatory environment and concerns - Economy based on primary mineral extraction, farming/ranching, and financial services. - Laws and regulatory framework generally conducive to private business. - Concerns from civil society/industry: - Perceived slackening of soliciting private sector views. - Lack of implementation capacity and cumbersome procedures. - Decisions sometimes guided by social/political objectives. - Deals sometimes based on insider relationships and limited accountability for wrongdoing. --- ### Tax framework, VAT, and incentives ### Tax legislation and administration - No consolidated tax code; series of tax laws on income and consumption. - Income taxes: Income Tax Act, 1981 (Act 24 of 1981) as amended. - Minerals Act, 1992 (Act 33 of 1992) and Diamond Act, 1999 (Act 13 of 1999) apply to mining. - VAT introduced in 2000 under Value Added Tax Act, 2000 (Act 10 of 2000), amended in 2002 and 2004. - Income taxes and VAT administered by Directorate of Inland Revenue (IRD) under Ministry of Finance; Customs duties and excises by Directorate of Customs and Excises. ### Stakeholder consultation and parliamentary review - Widespread public information campaign when VAT introduced in 2000. - Stakeholders consulted during amendments; proposed tax legislation may be referred to Parliamentary Standing Committee on Economics; National Council holds regional public hearings. ### Refunds, incentives, and EPZs - VAT refunds used to be given in about a month’s time. - Directive: all refunds of more than N$15,000 subject to pre-audit normally taking three to four months; no interest paid for audit period; interest rate of 11 percent payable from date when decision given after audit completion. - Export Processing Zones (EPZs): possible exemption from customs duty, VAT and corporate taxes; subject to normal personal income taxes on employees. - Recommendation: criteria for EPZ status should be clear and transparent; active monitoring of firms receiving favorable treatment is important. ### Deferment, disputes, and administration practices - Deferment powers vested in officers of Ministry of Finance and tax/customs administrations. - Taxpayers may lodge written objection within 90 days of notice; appeal to Special Court within 30 days if objection rejected; income tax cases may be taken before a tax tribunal. - Advance tax liability rulings available. - IRD practices: - Income tax returns mailed annually without detailed instructions; forms/instructions not posted on the department’s website. - Regional tax offices focus on collection targets; each has customer service unit. - Self-assessment not fully implemented: IRD conducts 100 percent examination of returns. - DIR lacks published structure and regular reports to Legislature/public on performance; seeking assistance from U.S. Treasury to improve reporting. - No regular estimates of cost of administration or cost of compliance. --- ### Open budget preparation, execution, and reporting ### National development planning and MTEF - Vision 2030 outlines national development goals. - National Development Plans (NDPs) are five-year plans; review of second NDP completed and third NDP anticipated in fiscal year 2008/09. - MTEF introduced 2001; covers three-year rolling period; linked to Performance Effectiveness Management Program (PEMP). ### Budget documents and process - Standard annual budget submission consists of five documents: Statement for the Budget; Macro-Economic and Budgetary Framework; MTEF; Estimates of Revenues and Expenditures; Three-Year Rolling Development Budget. - Budget speech and analyses present short, medium, and long-term fiscal objectives. - Annual budget process largely open and MTEF-based; fragmentation among operational, development, and extrabudgetary budgets obscures consolidated picture. - Timeline (MOF circular): - March–June: Prepare macro-economic framework. - July–August: Determine resource envelope; present macro framework to Cabinet; issue circular requesting revenue and expenditure estimates (submission by mid-August and end-August respectively). - September–November: Determine ceilings; budget hearings; present to Treasury Cabinet Committee and Cabinet. - November–February: Finalize documents; seek comments of Bank of Namibia and NPC. - Feb. –March: Submission to Parliament; Appropriations Act passed after approval and President’s signature. ### Budget classification, chart of accounts, and reporting - Budget Estimates classification: Vote, Divisions and Sub-divisions (economic/line item). - MTEF classification: Vote and Programs; below Programs no economic classification. - Programs not linked to Divisions/Sub-divisions; IFMS chart of accounts includes Vote, Division, Sub-divisions only and does not include MTEF Program classification. - Result: expenditures not classified by Programs; no expenditure data available for Programs. - Urgent need to revise budget classification and chart of accounts and incorporate program classification. - Economic (Sub-division) classification follows GFSM 1986 standards and needs review to align with GFSM 2001. ### Fiscal risks, targets, and projections - Fiscal risks addressed mainly through discussion of debt stock and loan guarantees. - Budget documents contain medium-term projections (two or three years) but no longer-term projections. - Government fiscal targets: - Long run: limit government debt to no more than 25 percent of GDP. - Public debt projected to decline only to 32.4 percent of GDP by 2008/09 under medium-term plan. - MTEF-period targets: budget deficit should not exceed 3 percent of GDP; public expenditure should not exceed 30 percent. - Budget forecasts presented but assumptions not clearly spelled out. ### Fiscal indicators and coverage - Main indicator: overall balance in the State Revenue Fund. - State Revenue Fund excludes some revenues/expenditures of extrabudgetary funds, statutory enterprises, and donor funds outside the budget. - Non-inclusion of donor financed capital projects is of the order of 0.5 percent of GDP. - Accounting/internal control governed by State Finance Act and Treasury Instructions; Treasury operates single bank account "State Revenue Fund" with three sub-accounts at Bank of Namibia; salaries paid centrally; TAWs used for other expenditures. --- ### IFMS implementation, cash planning, procurement, and controls ### IFMS capabilities and limitations - IFMS rolled out to all ministries and departments but "it will take some time to get the system well established and to exploit its full potential." - IFMS can produce accurate in-year reports on central government’s budget outturn, monthly fiscal reports, and reports on outstanding payment obligations. - Chart of accounts consistent with budget classification (divisions and sub-divisions) but does not include MTEF Program classification; cannot produce outturns by Programs. - Chart of accounts needs review to align with GFSM 2001; reporting formats need design in IFMS. ### IFMS timeline and implementation targets (Box 3) - IFMS pilot: October 2005 in four ministries. - Rolled out to remaining ministries and departments: April, 2006. - System fully live in all central ministries and departments in Windhoek (report time). - Expected: monthly accounts closed and consolidated within five days of month end. - Expected: first set of consolidated accounts by end-July, 2006. - Expected: real time information for all ministries by end-August, 2006. ### Major IFMS functionality and control issues - Commitment control function needs review to ensure all expenditures processed as commitments before payments and report on outstanding commitments and unpaid bills. - Chart of accounts: 8 segments with total 31 digits code; some segments (Cost Centre, I.D. code) need development. - Bank reconciliation functionality needs full testing and interface with Bank of Namibia payment system recommended. - Data transferred from previous systems were not fully verified/reconciled before transfer (e.g., payroll, ledger closing balances). - Internal audit functionality in IFMS needs development. - Budget preparation module still being developed; recommended to automate budget process including macro projections and MTEF. ### Cash planning and debt coordination - MOF and Bank of Namibia developed annual and monthly cash planning mechanism to set monthly ceilings for TAWs. - Cash Flow Working Group meets monthly comprising MOF, DIR, NPC, and Bank of Namibia. - Minister-chaired committee monitors overall government cash position. - "There is a very clear and well developed debt management strategy supported by a good monitoring system." ### Public procurement system — weaknesses and recommendations - Legal framework: Tender Board Act, 1996; Tender Board Regulations, 1996 (Act 16 of 1996); Tender Board Code of Procedures. - Central Tender Board independent entity under MOF. - Efficiency weaknesses: - Capacity/staffing constraints (half of established posts vacant); low N$10,000 threshold creates heavy workload. - Manual processes; records not computerized. - Line ministries need strengthened guidelines to screen bids. - Performance of awarded tenders not adequately monitored. - Limited sanctions and penalties; discretion in selection process. - Recommendations: - Review procurement rules and legislative framework to follow best practices. - MOF could publish completed procurement data on website (number of participants, final bids, award). ### Public service employment and wage bill - Public Service Act, 1995 (Act 13 of 1995) and Public Service Commission govern recruitment. - Namibia spent about 14.7 percent of GDP on personnel costs in 2004/05, accounting for more than half of current expenditures and about two-fifths of total spending. - High public sector employment level stabilized and may decline over time. ### Internal audit and tax administration capacity - Internal audit reforms initiated early 2004 calling for internal audit units in ministries and MOF role in standards, but implementation limited. - Recommendation: MOF to set standards, issue guidelines, train internal audit staff, and supervise compliance. - Tax administration: - DIR lacks effective assurance of staff integrity and audit capacity; outsourcing forensic audits while building internal capacity. - DIR organized into five sub-divisions: legislation and tax policy; administration and support; operations; special investigations; training. - DIR does not provide regular public reports on performance; no published costs of administration or compliance. ### Legislature reporting and audit timeliness - MOF does not conduct a mid-year review; Legislature formally receives only annual financial statements and the Auditor-General audit report. - "The audited final accounts are not normally available within twelve months of the end of the fiscal year." --- ### Audit timeliness, scope, and external scrutiny ### Auditor-General requirements and performance - Section 27 of State Finance Act: Auditor-General to submit audited final accounts and report "as soon as practicable after the end of a financial year but not later than the end of the following financial year." - Requirement not being met; backlog exists. - Typical lag in audited government accounts: 6–12 months. - Audit office audits government accounts, statutory bodies, local authorities, special funds, and other agencies; audits 31 entities and fund accounts apart from local/regional authorities and ministries. - Audit office reports are public and include scope, overview of State Revenue Fund Account, audit of ministries, financial statements, and audit observations/opinions. ### External audit independence, resources, and standards - Auditor-General appointed by President on recommendation of Public Service Commission with National Assembly approval (Article 127); five-year term, eligible for reappointment; removal requires two-third majority of National Assembly. - Budget of Auditor-General’s office prepared and approved by MOF like other ministries; new audit legislation drafting seeks to address independence and resourcing. - Auditor-General follows INTOSAI Standards and International Standards on Auditing; empowered for annual and special audits. ### Audit timeliness and capacity constraints (section 94) - Audits required to be completed within twelve months after financial year end; many reports are late due to late account submissions and limited Auditor-General staffing. - Current staff strength: 84; approved establishment: 109; vacancies due to lack of office space. - SIDA assistance since 1994 for capacity building. - Gaps remain in knowledge and technical skills; need to modernize audit to use software and reorient audit beyond narrow financial regularity focus toward systems and value-for-money audits. ### Legislative scrutiny and follow-up - Public Accounts Committee scrutinizes Auditor-General reports; hearings open to public and press. - Backlog in scrutiny and submission of PAC reports to National Assembly. - Follow-up action by executive limited and weak; penalties seldom imposed. - Mechanism for monitoring follow-up weak due to limited resources in audit office and PAC. ### Anti-Corruption Commission - Established in 2005 but still staffing and yet to engage in substantive investigations. - Needs to be made operational and given political support to carry out investigations and ensure governmental follow-up on proven wrongdoing. ### Statistics, macro assumptions, and external scrutiny - Macroeconomic framework drawn up by MOF in coordination with BON and NPC; NPCS responsible for detailed macro modeling. - No external scrutiny of macro model and assumptions; recommendation to make assumptions/model publicly available and present macro risks more quantitatively. - Central Bureau of Statistics part of NPC; Statistics Act, 1976 governs statistics; official statistics production decentralized. - New Statistical Law being drafted following independent evaluation; third National Statistical Plan expected in 2008. --- ### Fiscal aggregates, public debt, contingent liabilities, and accounting ### Public debt and guarantees (selected figures) - Government debt: 33.6 percent of GDP in fiscal year 2004/05. - Domestic debt: 28.2 percent of GDP in fiscal year 2004/05. - Foreign debt: 5.4 percent of GDP in fiscal year 2004/05. - Government-guaranteed debt: 6.5 percent of GDP in 2005/06, down from a peak of 13 percent in 2001/02. - External debt: majority concessional and maturing fairly uniformly over next 20 years. - Domestic debt: short maturity; majority treasury bills. - Fitch Ratings in 2005: long-term foreign currency risk BBB-; long-term domestic currency risk BBB. ### Contingent liabilities, quasi-fiscal activities, and tax expenditures - Contingent liabilities not estimated or presented regularly; guarantees reported without assessment of likelihood of default. - Quasi-fiscal activities not formally quantified (examples: subsidized lending, fuel price controls). - National Energy Fund incurred large losses from fuel price maintenance below market levels. - Directorate of Inland Revenue does not construct/present tax expenditure estimates but willing if MOF decides. ### Accounting basis and reporting standards - Accounting system based on cash basis. - Current reporting not in compliance with minimum requirements of cash basis IPSAS. - Revision of State Finance Act underway; opportune time to introduce IPSAS compliance requirements. - IFMS implemented April 2006 in central ministries; recent delays in reconciliation of main State Revenue Fund bank account with Bank of Namibia due to delays in bank statements and clearing house arrangements. - Main bank account reconciled up to February 2006 at report time. - No formal process reconciling aggregate fiscal data with monetary accounts; discrepancies exist between above-the-line fiscal data and below-the-line financing data partly due to scope differences. --- ### Mining sector — regulation, revenues, and transparency ### Structure and ownership - Mining sector mostly private; exceptions with government equity participation: - NAMDEB: 50 percent equity. - DMN (De Beers Marine Namibia): 30 percent equity. - Rossing Uranium: 3.37 percent equity. - Government participation limited to management, not operations. ### Legal framework and licensing - Ownership of natural resources vests in the state under Constitution and Minerals Act. - Licenses follow Minerals Act; Mining Commissioner recommends to Minister of Mines and Energy. - Mineral Register is public and available on Ministry of Mines and Energy website. - Open bids not used for mineral licensing; limited use of bids in energy licensing. ### Fiscal treatment, royalties, and levies - Ministry of Mines and Energy collects royalties under Minerals Act; natural resource taxes go to State Revenue Fund while royalties collected by MME. - Extrabudgetary funds and levies: - Diamond Valuation Fund: 3 percent of royalty. - Diamond Board Fund: 0.05 percent of amount due to producers from sales. - Oil levy: 21 cents/liter to National Energy Fund. - Motor Vehicles Accident Fund levy: 11 cents/liter. - Road user charge: 77 cents/liter to Road Fund Administration. - Main tax provisions: - Corporate income tax: normal 35 percent; 37.5 percent for mining sector; 55 percent for diamond mining. - No tax on capital gains. - No tax on dividend income received by a taxpayer in Namibia from corporate sector; dividends to non-resident face 10 percent withholding tax (NRST). - Personal income tax ranges from 17.5 percent to 35 percent with four brackets. - Royalty regime (section 114): - Precious stone group: 10 percent of "arms length" market value. - Dimension stone group: 5 percent of "arms length" market value. - For other minerals Minister determines royalty not exceeding 5 percent. - Recommendations: - Define rate of royalty where Minister currently has discretion. - Limit Minister’s discretionary power under section 116 to deferment where company faces negative cash flow. ### Reporting and budget treatment - Most natural resource revenues (except amounts to Diamond Valuation Fund, Diamond Board Fund, National Energy Fund) are fungible and go to State Revenue Fund. - Revenues from NAMDEB alone have varied between 4.5 percent and 12 percent of the total. - Corporate income tax revenues from diamond and other mining companies reported as separate line items; royalties reported under non-tax revenues; dividends reported under "Dividends and Profit Share" in "Entrepreneurial and Property Income." - On expenditure side, "Total Lending and Equity participation" reported in Ministry of Mines and Energy budget. - No system of regular reporting for Diamond Valuation Fund and Diamond Board Fund; total royalty not fully reflected in budget. --- ### Assurances of integrity, disclosure, and overall reform priorities ### Assurances of integrity and disclosure in resource sectors - "Thus the participation of the government in resource sectors is disclosed to the public through the budget document." (paragraph 140) - Natural resource companies subject to normal internal controls and audit procedures under company law; accounting standards consistent with International Accounting Standards. - Consolidated financial reports covering subsidiaries are prepared and audited; audited accounts normally completed within six months after financial year close and made publicly available annually. ### Appendix II — Overall summary and priority reforms (verbatim priorities) 1. "The budget classification structure and chart of accounts should be revised so that it can produce data by a functional and economic classification consistent with international best practice, and a classification that covers the government’s programs. This would facilitate the reconciliation of budget execution reports and MTEF." 2. "The fiscal data need to be expanded to cover the general government, particularly the extrabudgetary funds of the central government." 3. "The budget documents need to be expanded to include analysis and reporting on fiscal risks, contingent liabilities and guarantees." 4. "Civil society should be involved more actively in the budget process early on and the budget calendar advanced so that the budget is presented to Parliament well in advance of the end of the fiscal year." 5. "A mid-year review needs to be conducted and presented to the Parliament." 6. "The Ministry of Finance should make publically available its quarterly information bulletin. The fiscal data should cover general government, and there should be improved reporting on state-owned enterprises." 7. "The Ministry of Finance needs to enhance its capacity for external and internal audit and the tax administration’s ability to audit taxpayers." 8. "The monetary and fiscal data need to be reconciled on a regular and timely basis to give confidence in the accuracy of the fiscal data." 9. "The ongoing review and revision of the State Finance Act and Procurement Legislation need to ensure that they will provide an adequate legislative basis to improve the functioning and accountability of the public financial management and procurement systems." ### Key recommendations (selected) - Budget reporting: - Revise budget classification and chart of accounts to include functional and economic classification and Programs consistent with international best practice. - Publish quarterly information bulletin on a preannounced schedule. - Present a mid-year budget review to Parliament. - Expand fiscal data coverage to general government including extrabudgetary funds and regional/local councils. - Improve reporting on GIPF, public banks, and SOEs receiving large subsidies or in default on guarantees/on-lending. - Expand analysis/reporting on fiscal risks, contingent liabilities, guarantees, tax expenditures, and arrears. - Begin moving to accrual accounting and produce financial statements consistent with GFSM 2001 once cash systems are firmly established. - Budget process: - Engage civil society early, encourage external scrutiny of macro and fiscal projections, advance budget calendar, and monitor IFMS implementation closely. - Assurances of integrity: - Strengthen internal audit via MOF leadership, set standards, provide guidance/training, and supervise compliance. - Strengthen Auditor-General capacity to undertake systems and value-for-money audits and improve follow-up on recommendations. - Operationalize Anti-Corruption Commission with political support for investigations and follow-up on wrongdoing. - Strengthen tax administration audit capacity and reporting; develop a code of conduct specific to tax administration. - Reconcile monetary and fiscal data regularly and timely. - Legislation: - Revise State Finance Act to modernize legal framework and make publication of fiscal data mandatory within specified timeframes; clarify SOE roles and off-budget activities. - Draft audit legislation to strengthen Auditor-General independence and mandate systems/value-for-money audits, and enhance PAC oversight and sanctioning powers. - Revise procurement legislation and Tender Board operations to meet international standards. - Amend Minerals Act to define royalty rates precisely and limit discretionary powers of Minister of Mines and Energy. *Source: _cr08184 - EXECUTIVE SUMMARY (IMF staff assessment and summary of practices).* ### EXECUTIVE SUMMARY ### _cr08184 - EXECUTIVE SUMMARY ### Fiscal transparency posture and recent improvements - Namibia "has the essential elements of a transparent fiscal system and meets the basic standards of the fiscal transparency code." - Recent public financial management improvements include: - Budget presentation underpinned by a comprehensive macroeconomic framework and Medium-Term Expenditure Framework (MTEF). - Implementation of an Integrated Financial Management System (IFMS). - Formulation of a comprehensive debt strategy combined with improved reporting on debt, contingent liabilities, and on-lending. - Assessment in budget documents of macroeconomic risks, policy initiatives, and fiscal sustainability. - Reduction of the backlog in external audit and initiation of internal audit in line ministries. - Steps to address audit problems of the tax administration. - Establishment of an Anti-Corruption Commission to address, inter alia, corruption among public officials. ### Key fiscal statistics and institutional facts - Revenue and grants were estimated at "30.4 percent of GDP in fiscal year 2004/05." - Spending was estimated at "34.5 percent of GDP in fiscal year 2004/05." - The fiscal year runs from "April 1 to March 31." - The Bank of Namibia overdraft facility to Government should not exceed "N$200 million." - The interest rate on the overdraft is equal to "the weighted average discount rate on the latest issue of 91 day treasury bills plus two percentage points." - National Assembly composition: "72 elected members and up to 6 members appointed by the President." - The IMF mission held discussions in Windhoek during "June 5–19, 2006." ### Main outstanding weaknesses and priority reforms - Budget classification and reporting: - MOF urgently needs to "develop an appropriate budget classification structure by adopting a Program classification." - Improve the consistency of reporting on the budget to facilitate informed policy discussion and rationalization of spending. - Public access and parliamentary scrutiny: - MOF should make publicly available its quarterly information bulletin. - MOF should present a mid-year budget review to the Parliament. - Civil society should be involved more actively in the budget process. - The budget calendar should be advanced so the budget is presented to Parliament well in advance of the end of the fiscal year. - Coverage and reporting scope: - Fiscal data should cover "general government." - There should be improved reporting on state-owned enterprises. - Audit and enforcement capacity: - Government needs to "significantly raise the capacity for external and internal audit of its own activities and the tax administration’s ability to audit taxpayers." - Must "firmly address proven instances of wrongdoing." - Governance of public enterprises and procurement: - Ensure a proper structure is put in place for Government procurement and supervision of state-owned enterprises, public banks, as well as subsidized enterprises. - Resource revenue transparency: - "Resource revenue provisions are clear and transparent but there is scope to clarify the treatment of royalties and reduce discretion." ### Institutional roles and legal framework (selected points) - Definition of general government: central government, 13 regional councils, local councils, and traditional authorities. - The central government comprises Offices of the President, the Prime Minister, the Auditor-General, Parliament’s two chambers, Government Ministries, and various agencies, commissions, funds, and other statutory entities fully or mainly funded by the budget. - The Bank of Namibia: - Established under the Bank of Namibia Act, 1990 (Act 8 of 1990) and governed by the Bank of Namibia Act, 1997 (Act 15 of 1997). - Objectives include promoting and maintaining a sound monetary, credit and financial system, acting as Government banker, financial advisor and fiscal agent, and assisting in attainment of national economic goals. - All foreign borrowing by the Government or other public entity must be approved by the Minister of Finance and done in consultation with the Bank. - The Namibian Dollar is pegged to the South African Rand. - Legal framework for public funds: - The Constitution, Article 126, and the State Finance Act, 1991 (Act 13 of 1991) lay out basic legal framework, including establishment of the State Revenue Fund. - The State Finance Act provides authority to regulate receipt and payments regarding public funds and role of the Treasury in overseeing state funds. - Article 127 of the Constitution provides for establishment of the office of the Auditor-General and requires audit of the State Revenue Fund with reporting to the National Assembly. - Planning and donor-funded resources: - National Planning Commission Act, 1994 (Act 15 of 1994) assigns NPC responsibility to prepare the development budget for submission to MOF and to coordinate with external donors; NPC is also responsible for production and compilation of national statistics. - Donor funds are sometimes kept outside the State Revenue Fund at donors’ request, but NPC and MOF coordinate to ensure they serve agreed developmental purposes and are taken into account in budget formulation. ### Public sector composition and oversight gaps - Regional and local councils: - Regional councils have not been assigned specific service delivery functions; main role is coordinating development planning. - Local councils provide utilities and finance themselves by ratable charges, fees, and charges; Local Authorities Act 1993 (section 73) authorizes determination of rates. - Regional councils are mainly funded by central government appropriations, some small fees and charges, and "5 percent of ratable charges on immovable property levied by local councils." - Regional and local councils have limited borrowing power (mainly bank loans with Minister of Finance approval) and "no legal limits on their levels of debt." - State-owned enterprises and extra-budgetary entities: - State-owned enterprises are supervised by the State-Owned Enterprise Governance Council (SOEGC), a committee of Cabinet, in consultation with relevant portfolio ministers and the Central Governance Agency (CGA). - State-owned enterprises accounts are kept off budget, but may receive budget support through lending, equity participation, and subsidies. - Some extra-budgetary institutions are funded directly through the budget, including educational institutions and the Namibia Broadcasting Corporation. - The distinction between commercially oriented public corporations and state-owned enterprises "is not always clear." *Source: _cr08184 - EXECUTIVE SUMMARY (IMF staff assessment and summary of practices).* ### 15. The Government has a full equity share of four specialist or policy banking ### 15. The Government has a full equity share of four specialist or policy banking ### Public specialist/policy banks and nonbank financial institutions - Four public banks with full government equity: - Development Bank of Namibia: extends credit at below market interest rates for specified development projects; Government is seeking to expand its capital, including by tapping foreign investors. - Agricultural Bank of Namibia: extends credit to farmers under special schemes to assist communal farmers in communal areas and to resettle communal farmers on commercial land under the government’s affirmative action loan scheme; has been facing financial difficulties and has had to curtail its lending activities. - National Housing Enterprise: extends credit at below market interest to fund low-cost housing projects. - NamPost Savings Bank: a deposit institution that is part of Namibia Post Limited. - Supervision and governance: - The Development Bank of Namibia and the Agricultural Bank of Namibia are supervised by the Ministry of Finance and the State-Owned Enterprise Governance Council. - Recommendation: public banks should be supervised in the same manner as other banks and thus brought under the supervision of the Bank of Namibia, given the potential risks to the budget of lending activities by the public banks. - Size and scope: - Altogether, the equity of these four public banks is estimated to amount to less than 10 percent of banking system assets. - Nonbanking financial institution: - Namibia Reinsurance Company: a government-owned insurance company supervised by the Ministry of Finance and the Namibia Financial Institutions Supervisory Authority (NAMFISA). ### Other public and statutory enterprises - There are a large number of public nonfinancial corporations with part or full government ownership, including public utilities and Air Namibia (the national airline). - There are numerous statutory bodies that are not incorporated and serve a range of purposes. ### Special funds and social security - Statutorily created funds: - National Energy Fund (under the Ministry of Mines and Energy, MME): derives revenue mainly from fuel levies on importers; responsible for stabilizing the price of fuel and pays subsidies to producers to cover losses from below market prices; has accumulated sizable losses in past few years because retail prices were held below market levels. - Road Fund Administration (under the Ministry of Works): mainly funds itself with a special levy on fuel and the receipt of foreign funds for road building projects. - Diamond Valuation Fund and Diamond Port Fund: two diamond-related funds. - Social security and pensions: - Social Security Fund: supervised by the Social Security Commission, under the Ministry of Labor and Social Welfare; finances maternity and death benefits through a 0.9 percent tax on payroll (limited to a N$27 per month contribution per employee). - Government Institutions Pension Fund (GIPF): established in 1989; pension fund for public employees; provides a defined benefit pension and insurance benefits financed by participating parts of the Government (16 percent of pensionable salary) and employee contributions (7 percent of pensionable salary); is fully funded; controlled by a Board of Trustees with representatives of the Government, employees and labor unions; trustees have appointed a number of private managers of the assets of the fund; subject to same laws as private sector pension funds though the Government retains a strong oversight role. ### Government equity in private enterprises - Government holds equity interests in several private sector enterprises: - NAMDEB: largest diamond mining company, owned in partnership with DeBeers Diamonds; Government has a fifty per cent equity share. - Other mineral producers including Rossing Uranium. ### Reform of the state-owned enterprise sector and privatization - Reform priority: - Reforming the state-owned enterprise sector is a Government priority, but progress has been slow. - State-Owned Enterprises Bill, 2005 (Bill 17 of 2005) (awaiting final approval of Parliament): - Would strengthen legislative framework by requiring a performance agreement between the relevant portfolio minister and the enterprise and by enhancing powers of the state to investigate these enterprises. - Would improve reporting by requiring, to be spelled out in regulations, each enterprise to submit a quarterly statement of accounts and an annual budget plan for inclusion in the annual budget submission. - Would dissolve the Central Governance Agency and shift responsibilities to a Secretariat of the Governance Council. - Leaves intact portfolio ministers’ predominant role in appointing Board members and does not fully clarify the role of various government institutions in supervising state-owned enterprises. - Recommendation: the bill should strengthen the role of the Council and Minister of Finance in determining Board members and ensure the ability to effect improvements in governance and economic performance. - Privatization framework: - Full scale privatization of state-owned enterprises is unlikely in the near future. - No comprehensive legislative framework for privatization currently exists; minority stakes may be sold following the Government’s tender process, but policy framework is not fully developed. ### Land redistribution and expropriation - Land is an important public asset. - Since mid 1990s, Government relies on a "willing buyer, willing seller" program to address colonial-era land inequalities. - Program complemented by a concessional affirmative action loan scheme for purchase and modernization of farms. - Pace of land redistribution has been slow due to cumbersome decision-making, bureaucratic procedures, and reluctance of farmers to sell at acceptable prices. - Expropriation: - Constitution envisages land acquisition through expropriation “in the public interest.” - Government has initiated expropriations with compensation for 20 farms; two have already taken place. - Concerns exist that criteria for identifying land subject to expropriation may not be objective and transparent. - Authorities state existing legal framework is sufficiently transparent: an independent technical land committee assesses land offered for sale by value and potential usefulness to resettlement, and recourse to the court system provides protection. ### Private sector regulatory environment and concerns - Namibia’s private economy is primarily based on primary mineral extraction (including diamonds, zinc, and uranium), farming and ranching, and financial services. - Laws and regulatory framework generally seen as conducive to private business development; Government viewed as relatively transparent in interactions with the private sector. - Concerns raised by civil society and industry representatives: - Perceived slackening of interest by public officials in soliciting private sector views. - Lack of implementation capacity in Government and cumbersome bureaucratic procedures. - Decisions sometimes guided too heavily by social or political rather than economic objectives. - Deals given on basis of insider relationships and Government unwillingness to hold public officials accountable for proven wrongdoing. ### Tax framework, VAT, and incentives - Tax legislation: - No consolidated tax code; series of tax laws on income and consumption. - Income taxes administered under the Income Tax Act, 1981 (Act 24 of 1981), amended several times. - Minerals Act, 1992 (Act 33 of 1992) and Diamond Act, 1999 (Act 13 of 1999) apply to mining. - Value Added Tax introduced in year 2000 under the Value Added Tax Act, 2000 (Act 10 of 2000), amended in 2002 and 2004. - Minister of Finance may issue regulations as needed. - Income taxes and VAT administered by the Directorate of Inland Revenue (IRD) under the Ministry of Finance; Customs duties and excises administered by the Directorate of Customs and Excises. - Stakeholder consultation and parliamentary review: - Widespread public information campaign when VAT was introduced in 2000. - Stakeholders consulted during legislative amendments; proposed tax legislation may be referred to the Parliamentary Standing Committee on Economics; National Council holds regional public hearings for feedback. - Tax exemptions and zero rating: - Tax exempt income and institutions are clearly defined in law. - Substantial non-tax incentives often negotiated on a discretionary basis with individual investors. - Special provisions affect non-residents and mining operations. - VAT exempt items and zero-rated goods are clearly defined in law. - VAT refunds and audit procedures: - VAT refunds used to be given in about a month’s time. - Recent directive: all refunds of more than N$15,000 are subject to pre-audit, which normally takes three to four months; no interest is paid for the audit period; an interest rate of 11 percent is payable from the date when a decision has been given after completion of the audit process. - Tax incentives and EPZs: - Some incentives targeted to specific sectors: manufacturing, farming and mining. - Export Processing Zones (EPZs): enterprises may be granted exemption from customs duty, VAT and corporate income taxes; subject only to normal personal income taxes on employees. - Recommendations: criteria for granting EPZ status should be clear and transparent; active monitoring of enterprises qualifying for favorable treatment is important to prevent undermining overall tax compliance. - Discretionary deferment of tax liability: - Law vests deferment powers in officers of the Ministry of Finance and tax and customs administrations. - Relief not commonly granted for domestic VAT; more common for income taxes facing cash flow problems. - Relief decisions are formal, granted through official notice/letter; most cases disposed of at regional office levels. - Taxpayer rights and dispute mechanisms: - Income Tax law provides for objections and appeals; similar provisions in VAT. - Taxpayers may lodge a written objection within 90 days of receiving a notice. - For VAT, Commissioner may consider an objection only if the assessed person has paid the tax due or provided sufficient security. - If objection is rejected, taxpayer may lodge an appeal to a Special Court within 30 days; income tax cases may be taken before a tax tribunal. - Advance tax liability rulings are available and provide a safe haven if the taxpayer acts in accordance with the ruling. - Tax administration practices: - Income tax returns are mailed annually but not accompanied by detailed instructions; forms and instructions are not posted on the department’s website. - Regional tax offices run tax collection and taxpayer information programs focused more on collection targets. - Each regional office has a customer service unit. - Self-assessment has not been introduced in the real sense: IRD conducts a 100 percent examination of tax returns, determining final liability; this increases workload and limits focus on large taxpayers. ### Open budget preparation, execution, and reporting - National development planning: - Vision 2030 outlines overall national development goals to transform Namibia into a higher income country and reduce income, regional, and gender inequalities. - National Development Plans (NDPs) are five-year plans that reflect Vision 2030. - Government completed review of second five-year NDP and anticipates starting third five-year plan in fiscal year 2008/09. - Medium-Term Expenditure Framework (MTEF): - Introduced in 2001 by the Minister of Finance as a central tool for budget planning and to enhance transparency; covers a three-year rolling period. - Linked to the Performance Effectiveness Management Program (PEMP), a joint product of the Office of the Prime Minister, the Ministry of Finance, and the National Planning Commission; contains targets ministries are expected to meet and is designed to focus on specific program results. - Standard annual budget submission consists of five documents: the Statement for the Budget, the Macro-Economic and Budgetary Framework, the MTEF, the Estimates of Revenues and Expenditures, and the Three-Year Rolling Development Budget. - The budget speech by the Minister of Finance, and analyses in the Macro-Economic Framework and MTEF, present the Government’s short, medium, and long-term fiscal objectives to policy makers and the public. *Source: _cr08184 - 15. The Government has a full equity share of four specialist or policy banking* ### 38. Fiscal risks in the budget documents are dealt with mainly through a discussion ### 38. Fiscal risks in the budget documents are dealt with mainly through a discussion ### Treatment of fiscal risks and sustainability - Fiscal risks are addressed mainly through discussion of trends and evolution of the public debt stock and loan guarantees. - Budget documents contain medium-term projections (either two or three years) but do not present any longer term fiscal projections. - Fiscal sustainability concerns are discussed in the budget speech with reference to the evolution of the debt to GDP ratio and assessments focused on the level of primary balance required to stay under a debt ceiling; the text notes that some additional quantitative analysis would enhance clarity. - Formal analysis of fiscal risks examines: - effect of variation in key forecasting assumptions, - level of guarantees and trends, - litigation against the Government with potential budgetary impact, - uncertainty regarding the size of specific expenditure commitments. - Information on government guarantees is provided in the MTEF and the quarterly bulletin and annual reports of the Bank of Namibia but there is no assessment of the likelihood that these guarantees will need to be assumed by the budget in the documentation. ### Fiscal targets, debt and projections - The Government has three fiscal targets. - Long run fiscal target: limit the ratio of government debt to GDP to no more than 25 percent. - In recent years the debt share has risen above this target. - The Government’s medium-term fiscal plan (through the MTEF) entails fiscal consolidation, though public debt is projected to decline only to 32.4 percent of GDP by 2008/09. - MTEF-period targets: - budget deficit should not exceed 3 percent of GDP, - public expenditure should not exceed 30 percent. - Budget forecasts are clearly presented but the assumptions underlying the budget forecast are not clearly spelled out in the fiscal documentation. - The National Planning Commission Secretariat’s forecast is based on a "no policy change scenario" but expected changes are incorporated into the forecast; since the forecast precedes the formal submission of the budget by roughly one-half year, no specific explanation of their influence on the forecast is given in this document. ### Institutional roles and macroeconomic framework - The Ministry of Finance (MOF), in coordination with the Bank of Namibia (BON) and the National Planning Commission (NPC), is responsible for drawing up the macro-economic framework underlying the budget. - The National Planning Commission Secretariat (NPCS) is responsible for detailed macroeconomic modeling; this activity is coordinated by the Macroeconomic Working Group (MOF, NPCS, BON). - The Bank of Namibia has developed two macroeconomic models; one (NAMMAC) forms the basis for discussion on the macroeconomic framework, relying on relationships between GDP growth rate, interest rates, exchange rates, inflation, savings and investment, and foreign trade. - The NPCS provides the medium-term macroeconomic framework for the budget and fiscal projections presented in the MOF’s annual publication, Macro-Economic and Budgetary Framework, which examines trends and provides historical developments looking backward three years and forecast for the coming and three subsequent fiscal years. ### Annual budget process and MTEF - The annual budget process is largely open, beginning with formulation of an aggregated macro-economic framework used by MOF to allocate resources, determine budget ceilings, and issue budgetary guidelines to line ministries. - Budget process fragmentation: operational (recurrent) budget, development budget, and budgets of special accounts, extrabudgetary funds, and other entities—this obscures a consolidated picture of public finances. - Recommendation: broaden consultation with private sector and nongovernmental organizations early in the budget process; reactivation/revision of the President’s Economic Advisory Committee is noted. - The budget is prepared and presented in the context of a three-year rolling MTEF. - Timeline and main steps (as issued annually in MOF circular): - March–June: Prepare macro-economic framework. - July–August: Determine resource envelope/obtain budget information; present macro-economic framework to Cabinet; issue circular requesting revenue and expenditure estimates (submission by mid-August and end-August respectively). - September–November: Determine budget ceilings; conduct budget hearings; compile final budget scenario; present frameworks to Treasury Cabinet Committee and Cabinet; issue Treasury circular with final ceilings. - November–February of the following year: Finalize budget documents; seek comments of the Bank of Namibia and National Planning Commission. - Feb. –March: Submission of budget to Parliament for approval; Appropriations Act passed following approval by both chambers and signature by the President. - MTEF history and features: - Strategic budget process initiated fiscal year 2001/02 when MTEF was introduced covering that fiscal year and two subsequent fiscal years. - MTPs introduced for each Vote beginning with fiscal year 2003/04 and Accountability Reports for each Vote prior to allocation announced in 2005. - MTEF sets macro-fiscal framework for three years, reviews fiscal policy objectives, provides expenditure ceilings for recurrent and development budgets by Vote, and is supported by MTPs. - Practical shortcomings of the MTEF process: - MTEF presented by Vote Programs, but detailed estimates remain by Divisions and Sub-divisions; no explicit link between Vote-level Programs and Divisions/Sub-divisions, preventing comparison of planned program spending with actual spending. - Process is largely top-down; bottom-up feedback limited. - Expenditure allocations appear incremental; out-year estimates derived by uniform growth factors rather than reprioritization or genuine costing. - Integration of recurrent and development budgets and coverage of donor funds remain incomplete. - Accounting system cannot report on Programs and PEMP indicators are not well integrated into planning, reducing scope for monitoring performance against budget targets. ### Transparency of initiatives, tax policy and reporting - Formal budget presentation in the MTEF does not provide details on costs of new spending initiatives or revenue from new initiatives; there is no clear connection between initiatives announced in the budget and their fiscal implications. - Major tax laws are not examined in the budget or other public documents on an annual basis; an overall review of tax policy objectives is presented at the time of the annual budget in context of debt, revenues/expenditures trends, economic growth and poverty alleviation programs. - New tax laws and tax amendments are brought before Parliament as separate acts when necessary. - No formal reporting on tax expenditures in budget documents. ### Budget classification, chart of accounts, and reporting - Budget classification structure in the Budget Estimates: Vote, Divisions and Sub-divisions (economic/line item classification). - MTEF classification: Vote and Programs; below Programs there is no economic classification. - Programs are not linked to Divisions and Sub-divisions; chart of accounts in the Integrated Financial Management System (IFMS) includes Vote, Division, and Sub-divisions only and does not cover Programs. - Result: expenditures are not classified by Programs and no expenditure data are available for Programs. - Urgent need to review and revise the budget classification structure and chart of accounts and incorporate program classification. - The economic (Sub-division) classification follows GFSM 1986 standards and needs review and improvement in line with GFSM 2001 classification. ### Fiscal indicators, coverage and accounting controls - The overall balance in the State Revenue Fund is the main indicator of the fiscal position and is monitored during the year. - In practice the State Revenue Fund does not include some revenues and expenditures of extrabudgetary funds, statutory enterprises performing government functions and predominantly funded by the budget, and donor funds that are channeled outside the budget. - No regular construction of an overall balance that includes these additional components; no regular calculation of a broader public sector or general government balance including subnational government. - Non-inclusion of donor financed capital projects is of the order of 0.5 percent of GDP. - Accounting and internal control procedures are regulated by the State Finance Act and Treasury Instructions; treasury has issued instructions to strengthen commitment control records to control over-commitments and payment arrears. - Internal control system is sound, with strong centralization of the payment system: Treasury operates a single bank account called the "State Revenue Fund" with three sub-accounts at the Bank of Namibia for revenue collections; balances are transferred to the main account at the end of every day. - Salaries are paid centrally from the Ministry of Finance; authority for other expenditures is given to line ministries by monthly Treasury Authorization Warrants (TAWs), with payments made by the Ministry of Finance. *Source: _cr08184 - 38. Fiscal risks in the budget documents are dealt with mainly through a discussion* ### 53. The recent introduction of an IFMS is expected to address the problems faced ### _cr08184 - 53. The recent introduction of an IFMS is expected to address the problems faced ### IFMS implementation and capabilities - The IFMS has been rolled out to all ministries and departments but "it will take some time to get the system well established and to exploit its full potential." - The IFMS is capable of producing accurate in-year reports on the central government’s budget outturn. - The recently implemented IFMS can generate accurate and timely in-year reports including monthly fiscal reports and reports on outstanding payment obligations. - It is necessary to design the format of all reports in the reporting functionality of the IFMS. - The chart of accounts is consistent with the budget classification (divisions and sub-divisions) included in the detailed budget estimates of revenue and expenditure; however, it does not include the MTEF Program classification and cannot therefore produce budget outturn data in terms of Programs. - The chart of accounts needs to be reviewed and developed further; the IFMS should be able to use a revised economic classification in line with the GFSM 2001. ### Treasury accounting, consolidation, and limitations - The Treasury’s accounting and reporting system fully accounts for all transactions pertaining to the approved budget of the State Revenue Fund. - The central accounting system does not fully capture off-budget activities, nor consolidate central government revenue and expenditure data with that of regional and local authorities, special funds, trading accounts, and statutory bodies to generate fiscal data on general government. ### Box 3 — Key observations and required actions for IFMS (implementation history and issues) - Implementation timeline and targets: - IFMS pilot: October 2005 in four ministries (Finance, Defense, Agriculture and Forestry, and the Auditor-General’s office). - Rolled out to remaining ministries and departments: April, 2006. - System fully live in all central ministries and departments in Windhoek (current as of the report). - Expected: monthly accounts closed and consolidated within five days of the end of a month. - Expected: first set of consolidated accounts by end-July, 2006. - Expected: real time information for all ministries by end-August, 2006. - Major functionality and control issues identified: - Commitment control function needs review to ensure: - (i) supplies of goods and services regulated by a Local Payment Order generated by the system after commitment approval, with public notice to suppliers to comply; - (ii) all types of expenditure, including running expenditures like rent and utilities, processed and approved as commitments before system authorizes payments; - (iii) system generates a report on outstanding commitments and unpaid bills to monitor payment arrears. - Chart of accounts: - Consists of 8 segments with a total 31 digits code. - Some segments like Cost Centre and I.D. code still need to be developed. - Budget classification and chart of accounts should be reviewed and revised to include MTEF program classification and improve economic classification in line with GFSM 2001. - IFMS should generate reports by functional classification (currently produced using spreadsheets by Economic Policy Advisory Services). - Bank reconciliation functionality needs full testing and further development; ideal interface with Bank of Namibia payment system recommended or at minimum convenient bank statement file download functionality. - Data transferred from previous systems were not fully verified, reconciled and validated before transfer (examples: payroll data, closing balances of ledger and suspense accounts). - Internal audit function in the IFMS needs development as part of internal controls and checks. - Suitable management reports and fiscal reports need design and development within the system. - Budget preparation module still being developed; recommendation that this module automate the entire budget process including macro-economic projections and MTEF processes. ### Cash planning and debt coordination - Ministry of Finance and Bank of Namibia have developed a cash planning mechanism on an annual and monthly basis to guide setting monthly ceilings for budget releases via Treasury Authorization Warrants (TAWs). - A Cash Flow Working Group was created comprising senior officials from the Ministry of Finance, Directorate of Inland Revenue, the National Planning Commission, and the Bank of Namibia; the group meets every month to review projections developed by a cash planning unit and determines cash available for issue of TAWs. - A Minister-chaired committee monitors the overall government cash position including major inflows/outflows and deficit financing. - "There is a very clear and well developed debt management strategy supported by a good monitoring system." ### Public procurement system — legal framework, weaknesses, and recommended reforms - Legal framework: - Tender Board Act, 1996; Tender Board Regulations, 1996 (Act 16 of 1996); Tender Board Code of Procedures. - Procurement rules provide for competition with a price preference for goods produced, manufactured, or assembled in Namibia and for small and medium enterprises. - Central Tender Board is responsible for procurement; it is an independent entity under the Ministry of Finance and its Director reports directly to the Permanent Secretary. - Identified efficiency weaknesses: - (i) Capacity and professional skills of tender board staff limited; half of established posts are vacant; heavy workload due to low threshold (N$10,000) for issue of tenders. - (ii) Tender Board works in a manual mode; processes and records not computerized. - (iii) Line ministries need strengthened guidelines and capacity building to screen bids and make recommendations. - (iv) Performance of awarded tenders is not monitored sufficiently regularly; cases exist where ministries obtained goods/services from suppliers other than the successful bidder. - (v) Sanctions and penalties for non-compliance are limited. - (vi) Some discretion in selection process since overriding criteria are not strictly least cost. - Recommendations: - Conduct a review aiming to follow best practices by strengthening procurement rules and legislative framework. - For completed procurements, Ministry of Finance could publish on their website data like number of participants, final bids, and award of the tender. ### Public service employment and wage bill - Legal framework: Public Service Act, 1995 (Act 13 of 1995) and related regulations and staff rules. - Public Service Commission oversees transparency and fairness of recruitment. - Namibia spent about 14.7 percent of GDP on personnel costs in 2004/05, accounting for more than half of current expenditures and about two-fifths of total spending. - High level of public sector employment is now stabilized and may decline over time. ### Internal audit — institutional development and deficiencies - Prior to early 2004, internal audit was conducted centrally by the Treasury as inspections, not modern internal audit. - Early 2004 instructions proposed: - (i) each office/ministry/agency to have its own internal audit function (in-house, shared, or outsourced); - (ii) Ministry of Finance to set standards, monitor compliance, provide guidance and advice; - (iii) Ministry of Finance to identify training and professional qualifications for internal auditors. - Implementation over the subsequent two years was limited: - Ministries set up internal audit units, but Ministry of Finance has not set standards, issued guidelines, or monitored functioning. - Office of the Auditor-General has not guided development of the function. - Consequence and recommendation: - Development in current manner likely to be wasteful and result in inefficient audit system. - Ministry of Finance needs to take central role: set internal audit standards, develop and issue guidelines and manuals, train internal audit staff, and supervise compliance to ensure quality. ### Tax administration — audit capacity, integrity controls, and transparency - Lack of effective assurance of staff integrity in Directorate of Inland Revenue (DIR): departmental supervision and general Code of Conduct exist, but no separate Code of Conduct for DIR staff on tax administration matters; a plan exists to introduce such a code in the near future. - DIR lacks audit capacity and is outsourcing forensic audits to private auditors: - Forensic audit on northern regional tax office (Oshakati) started two years ago; terms include audits of taxpayers and possible misconduct by officials; focus also on curbing “round tripping” at border posts affecting VAT collections. - A report to Parliament on the outcome will take place soon. - Central regional office forensic audit arrangements completed; exercise estimated to be roughly five times bigger than the Oshakati audit. - Taxpayers for audit selected by region, activity, taxable income/loss, and type; multinational taxpayers focus on transfer pricing. - Directorate recognizes outsourcing is not a viable permanent solution but necessary until internal audit capacity is developed. - Organizational structure: - DIR is part of Ministry of Finance and financed by annual appropriation; no system of sharing fines or fees. - DIR organized functionally into five sub-divisions: (i) legislation and tax policy; (ii) administration and support; (iii) operations; (iv) special investigations; and (v) training. - Transparency and reporting gaps: - Structure of tax administration information is not distributed to the public and no published reports give the structure of tax administration. - DIR does not provide regular reports to the Legislature or public on performance in administering tax laws; no regular publications on revenue collection during the fiscal year although information is available on request. - DIR is seeking assistance from the U.S. Treasury to remedy reporting shortcomings. - Cost information gaps: - No efforts have been made to estimate the cost of administration and the cost of compliance. - By not estimating these costs regularly, opportunities to identify savings and make tax administration more user-friendly are being forgone. ### Legislature reporting and audit timeliness - The Ministry of Finance does not conduct a mid-year review of budget implementation; no formal mid-year reports on budget outturn are generated. - The Legislature does not request a mid-year review; National Assembly formally receives only the annual financial statements and the audit report prepared by the Auditor-General. - "The audited final accounts are not normally available within twelve months of the end of the fiscal year." *Source: _cr08184 - 53. The recent introduction of an IFMS is expected to address the problems faced (IMF country report excerpt).* ### 69. In terms of section 27 of the State Finance Act, the Auditor-General is required ### In terms of section 27 of the State Finance Act, the Auditor-General is required ### Audit timeliness, backlog, and scope - Section 27 of the State Finance Act requires the Auditor-General to submit audited final accounts and his report to the Minister of Finance "as soon as practicable after the end of a financial year but not later than the end of the following financial year." - This requirement is not being met; there is a backlog of audit reports. - Typical lag in making audited government accounts available: 6–12 months. - The Auditor-General audits: - government accounts, - statutory bodies, - local authorities, - special funds, - other agencies. - The audit office audits 31 entities and fund accounts apart from local and regional authorities and government ministries, offices, and agencies. - The audit office’s reports are public documents and generally include scope of audit, overview of State Revenue Fund Account, audit of ministries, financial statements, and audit observations and opinions. - There continues to be a backlog of audit reports and the audit function needs further strengthening. ### External audit independence, mandate, and resourcing - Constitutional provisions: - Auditor-General appointed by the President on recommendation of the Public Service Commission and with approval of the National Assembly (Article 127). - Auditor-General holds office for a period of five years and is eligible for reappointment. - Removal requires a two-third majority of all members of the National Assembly on grounds of mental incapacity or gross misconduct. - Limitations on financial independence: - The Auditor-General’s office budget is prepared and approved by the Ministry of Finance like any other ministry before submission to the National Assembly. - These issues are being addressed in drafting new audit legislation. - Audit standards and powers: - Auditor-General follows the International Organization of Supreme Audit Institutions Standards and the International Standards on Auditing. - Empowered to conduct annual and special audits, to determine nature of audits, and to obtain information. - A periodic independent audit of tax administration is undertaken as part of national external audit; there is no separate audit process for the tax department. ### Medium-Term Expenditure Framework (MTEF), Programs, and performance measurement - The Government introduced the MTEF and MTPs to strengthen budget policy and planning and improve efficiency and effectiveness of public expenditures. - MTPs for each Vote indicate resource allocation by Program and how Programs contribute to Ministries’ objectives and national development objectives. - Shortcomings: - Program objectives are usually discussed in a general manner; measurable performance indicators still need to be developed. - No explicit link between the MTEF and the budget classification. - The accounting system cannot report on Programs; no scope for monitoring financial performance of Programs. - PEMP indicators are still being embedded into budget planning and monitoring processes. - Accountability Reports are expected to support line ministries to measure performance and to report and follow up on PEMP indicators. - The objectives and expected results of government programs are discussed in the MTEF, however actual progress is not reported against these objects. ### Public availability, publication practices, and gaps in fiscal information - Government commitment to publish fiscal information through: - Statement for the Budget, - Macro-Economic and Budgetary Framework, - MTEF, - Estimates of Revenues and Expenditures, - Appropriations Act, - Three-Year Rolling Development Budget. - These documents are published and made available on the Ministry of Finance’s website and the National Planning Commission’s website. - Auditor-General reports and the annual Appropriations Act are made available through the web. - Shortcomings in provision of budgetary information: - Lack of data on budget execution on the basis of current receipts and expenditures. - Lack of data on budget execution on a Program basis. - Ministry of Finance developing a quarterly information release that, when public, will provide: - current receipts and expenditures, - budget balance quarter by quarter and cumulated for the year, - cash balances, net borrowing, public debt, and contingent liabilities. - No formal release calendar of fiscal data; formal commitments for regular publication exist only for the budget submission. - Namibia participates in the GDDS regional project; fiscal data do not yet adhere to GDDS standards. ### Coverage of budget documents and extrabudgetary entities - Budget documents cover State Revenue Fund activities comprehensively but have limited coverage of: - external donor fund activities, - most state-owned enterprises, - other extrabudgetary funds including the National Energy Fund, the Road Fund Administration, and the Government Institutions Pension Fund. - Defense budget has a separate Vote included in the MTEF with detailed estimates. - State-owned enterprises’ budgets are reflected only insofar as transfers, equity injections, and on-lending are included in relevant ministry budgets; some enterprises present income or asset statements to Government (only some were presented in fiscal year 2006/07 MTEF). - Subsidies to state-owned enterprises are significant, especially to chronic loss-makers such as Air Namibia. - Ministry of Finance attempting to improve reporting under provisions of the State-Owned Enterprises Bill, 2005. ### Fiscal aggregates, public debt, and debt management - The MTEF presents main fiscal aggregates for three prior years, the current budget year, and estimates for two years beyond; however the MTEF currently presents only the budget estimates for the fiscal year that is concluding, creating a lag in outturn availability. - Specific public debt figures: - Government debt was 33.6 percent of GDP in fiscal year 2004/05. - Domestic debt was 28.2 percent of GDP in fiscal year 2004/05. - Foreign debt was 5.4 percent of GDP in fiscal year 2004/05. - Government-guaranteed debt: - 6.5 percent of GDP in 2005/06, down from a peak of 13 percent in 2001/02. - Split roughly evenly between foreign and domestic debt. - Debt characteristics and ratings: - Majority of external debt is concessional and matures in a fairly uniform manner over the next 20 years. - Domestic debt has a short maturity; majority accounted for by treasury bills. - Namibia received an investment grade rating from Fitch Ratings on long-term foreign currency risk of BBB- and on long-term domestic currency risk of BBB in 2005. - Ministry of Finance provides information on gross public debt in the MTEF; Bank of Namibia provides domestic debt tables by instrument, maturity, and holders in its quarterly bulletin and annual report. - Ministry of Finance has a Sovereign Debt Management Strategy (not yet publicly available) intending to: - lengthen maturity of Government debt to reduce rollover and liquidity risk, - diversify the portfolio, - establish clearer procedures for issuance of guarantees, on-lending agreements, and borrowing by central government and state-owned enterprises. - Ministry will soon publish External Borrowing Requirement and Funding Plan annually. ### Contingent liabilities, quasi-fiscal activities, and tax expenditures - Contingent liabilities: - Not estimated or presented on a regular basis. - Information on guarantees is given but without assessment of likelihood of default. - Realized contingent liabilities that have fallen to the budget could be quantified more precisely (e.g., list of guaranteed loans or on-lent funds for which debt service was assumed). - Quasi-fiscal activities: - Neither discussed nor quantified formally. - Examples include subsidized lending and fuel price controls leading to below-market prices. - Costs of such activities mainly reflected through subsidies or equity injections line items and forgone revenues from tax breaks. - Past maintenance of fuel prices below market prices led to large losses in the National Energy Fund. - Tax expenditures: - Directorate of Inland Revenue does not yet construct or present estimates of tax expenditures but indicated willingness to undertake the exercise if Ministry of Finance decides. ### Accounting basis, standards, reconciliation, and IFMS - Accounting system: - Based on a standard cash-based approach. - Basis of accounting and standards to be followed are not mentioned in any legislation. - Ministry of Finance could prepare final accounts in accordance with IPSAS under current legislation. - ESAAG survey findings: - Current reporting is not in compliance with minimum requirements of cash basis IPSAS. - Revision of the State Finance Act underway; opportune time to introduce requirements for standard setting and IPSAS compliance. - IFMS implementation and reconciliation: - IFMS implemented in all central ministries and departments from April 2006; expected to enhance real-time financial information and timeliness of bank reconciliation. - Recent delays in reconciliation of main State Revenue Fund bank account with the Bank of Namibia due to delays in submission of bank statements and clearing house arrangements. - Main bank account reconciled up to February 2006. - Monthly accounts reconcile budget outturns with budget appropriations and provide variances. - No formal process for reconciling and ensuring consistency between aggregate fiscal data and government’s position based on monetary accounts. - Considerable discrepancy exists between above-the-line fiscal data and below-the-line financing data, partly due to divergence in scope and coverage (fiscal data primarily central government; monetary accounts may capture special accounts and extra-budgetary funds). - Ministry of Finance and Bank of Namibia have reconciled debt and guarantee data. *Source: _cr08184 - 69. In terms of section 27 of the State Finance Act, the Auditor-General is required* ### 94. Audits are required to be completed within twelve months after the end of a ### 94. Audits are required to be completed within twelve months after the end of a ### Audit timeliness and capacity - Audits are required to be completed within twelve months after the end of a financial year, as required by section 27 (1) of the State Finance Act. - A large number of audit reports are late. This is partly due to late submissions of accounts by the Ministry of Finance and also due to the limited staffing of the Auditor-General’s office, causing further delays in the process. - Current staff strength of the audit office is 84; the Auditor-General has been unable to fill its approved establishment of 109 staff members due to a lack of office space. - The Swedish International Development Agency (SIDA) has assisted the office since 1994 with capacity building including acquisition of computer and training equipment. SIDA support is assisting the Auditor-General to achieve compliance with international audit standards and to enhance transparency, accountability and financial discipline in the government sector. - Despite these efforts, there are gaps in the knowledge and technical skills of audit staff. - With the ongoing implementation of IFMS, there is a need to modernize the audit and use software applications to perform audit. - The focus of audit is narrow; a reorientation of external audit is required. ### Audit scope and emphasis - The audit primarily focuses on compliance with financial rules and regulations, with limited emphasis on efficiency and effectiveness of expenditures. - Many countries have moved away from a narrow financial regularity audit (which dominates Namibian external audit) toward systems and value-for-money audits, which better inform the public on integrity of public operations. - Systems and value-for-money audits would assist the government in enhancing the effectiveness of performance budgeting, including the PEMP. - Difficulties in moving to new audit areas: - The Auditor-General’s office currently does not have qualified staff to perform systems and value-for-money audits. - Existing audit work is constrained by limited resources. - It is unclear there is strong support elsewhere in Government for moving in these directions. ### Legislative scrutiny, Public Accounts Committee, and follow-up - The Public Accounts Committee, established in terms of Article 59 of the Constitution, has primary responsibility to scrutinize all reports submitted by the Auditor-General to the National Assembly, through the Minister of Finance. - The Public Accounts Committee examines audit reports to determine issues requiring further attention or, if serious enough, to bring them to the attention of the National Assembly for further action. - The Committee’s hearings are open to the public and press; external audit reports are made available to the public on the audit office’s website www.oag.gov.na. - Submissions from independent experts and public are invited during hearings on specialized issues. - Follow-up action on audit findings is left to the executive; the Auditor-General’s office reviews corrective measures in subsequent audit reports. - There is a considerable backlog in the scrutiny of audit reports by the Public Accounts Committee and in submission of its reports to the National Assembly. - Follow-up action taken by the executive is limited and weak; penalties are seldom imposed on cases of financial misconduct including over-expenditures and non-compliance with financial rules and regulations. - The mechanism for monitoring follow-up action is weak, primarily due to limited resources and capacity in the audit office as well as with the Public Accounts Committee. - Footnote detail preserved exactly as in source: - The audit report on the accounts of the Government of Namibia for the financial year ended 31st March 2005 is yet to be submitted to National Assembly; the audit report on 2003/04 accounts was submitted on 29th November, 2005. Similarly, audit reports on the accounts of local bodies and funds are late. To address this backlog, the Auditor-General has been using private accounting firms to assist him with the auditing of local authorities and state-owned enterprises. ### Anti-Corruption Commission - The Anti-Corruption Commission was established in 2005 but is still staffing itself and has yet to engage in any substantive investigations. - To add meaningfully to Government’s efforts to root out corruption, the Commission needs to be made operational. ### External scrutiny of macroeconomic models and assumptions; statistics - The approved macroeconomic policy framework is used to draw up budgetary guidelines and ceilings. - There is no external scrutiny of the underlying macroeconomic model and assumptions as such; this work appears to be regarded as a technical exercise without political interference. - There are research institutes and donor-funded programs that assess the Government budget and macroeconomic forecasts; these institutes and the private sector could be formally engaged in dialogue with the Government on macroeconomic projections. - It would be preferable if underlying assumptions and model were made publicly available and if macroeconomic risks were more quantitatively presented in the budget documentation. - The Central Bureau of Statistics is formally responsible for the national statistics system and forms part of the National Planning Commission. - The Statistics Act, 1976 (Act 66 of 1976) provides for collection, compilation, processing and publication of statistics. - Production and compilation of official statistics are decentralized; main institutions involved include: the Central Bureau of Statistics; line ministries; public sector institutions like the Bank of Namibia; and research and training institutions (e.g., University of Namibia). - The Ministry of Finance is responsible for the compilation and dissemination of fiscal statistics. - The national statistical system has recently been evaluated by an independent body and a new Statistical Law is being drafted to address identified weaknesses. - A third National Statistical Plan is expected to come into operation in 2008. ### IMF Staff commentary — context and overview - Namibia has enjoyed sustained economic growth and macroeconomic stability in recent years. Fiscal policy has generally been prudent. - The Government has indicated intention to strengthen fiscal discipline, but continues to lack elements of a fiscal program to stabilize the debt ratio and redirect budgetary spending away from personnel and subsidies to state enterprises toward programs that will strengthen growth prospects and address widespread poverty and unemployment. - Namibia has put in place essential elements of a transparent fiscal system and meets basic standards of the fiscal transparency code in four general areas: - Responsibilities of different components of government are generally clearly defined; relationship between central government and central bank is clear and transparent, though some lack of clarity exists regarding the relationship of state-owned enterprises and the central government. - A transparent legal and administrative framework for budget preparation and execution is in place. - The annual budget of the central government is based on a comprehensive and consistent quantitative macroeconomic framework. - The budget documentation clearly lays out objectives of fiscal policies, specific policies and framework of the budget; provides a fiscal forecast; and addresses issues of fiscal sustainability and risk. - Once fully implemented, the IFMS will provide information on budget execution and enhance authorities’ ability to formulate fiscal policies. - Public availability of information on macroeconomic projections and MTEF is comprehensive and timely, but timely information on budget execution is still lacking. - The basic legislative and procedural basis for Government’s procurement of goods and services, for data integrity, and for internal and external audit is in place. - Namibia has been making substantial efforts to improve fiscal transparency, including development and presentation of the budget underpinned by a comprehensive macroeconomic framework, Medium-Term Expenditure Framework and Medium-Term Plans for each Vote; implementation of IFMS; formulation of a comprehensive debt strategy combined with improved reporting on debt, contingent liabilities, and on-lending; and assessment in budget documents of macroeconomic risks, policy initiatives, and fiscal sustainability. - Government has increased reporting in the budget on state-owned enterprises and extrabudgetary funds; reduced the backlog in external audit; begun establishing internal audit in line ministries; and addressed audit problems of the tax administration. An Anti-Corruption Commission has been established. - Remaining shortcomings in transparency include: absence of an appropriate budget classification system, fragmentation of the budget process, and lack of an appropriate managerial framework for public procurement and internal and external audit. ### Key recommendations — Budget reporting - The Ministry of Finance urgently needs to address absence of an appropriate budget classification structure and improve consistency of reporting on the budget. In particular, coherence is needed between the Estimates of Revenue and Expenditure and MTEF documents. - The budget classification structure and chart of accounts should be revised to produce a functional and economic classification, consistent with international best practice, and a classification that covers the Government’s Programs. This would facilitate reconciliation of budget execution reports and MTEF, enabling linkage to performance indicators via the PEMP. - The quarterly information bulletin should be made publicly available, once its format is settled on, and published according to a preannounced schedule, using a consistent dissemination format. - The Ministry of Finance should present a mid-year budget review to Parliament. - Fiscal data need to be expanded to cover the general government, including regular coverage of extrabudgetary funds of the central government (Social Security Fund, National Energy Fund, Road Administration Fund), and the regional and local councils. - Better reporting is needed on the Government Institutions Pension Fund, public banks and state-owned enterprises receiving large subsidies or in default on obligations guaranteed or on-lent by the Government. - Analysis and reporting in the budget documentation on fiscal risks, contingent liabilities, and guarantees should continue to be expanded. Longer-term sustainability analyses should take into account potential exhaustion of mineral resources. - The budget should clearly discuss new fiscal policies and their cost or revenue implications, and provide information on tax expenditures, and tax and spending arrears. - There should be expanded reporting on assets and liabilities of the Government and the broader public sector, given the predominant role of state-owned enterprises. - Once the cash accounting and control system is firmly in place, the Government should begin moving to an accrual system and produce financial statements consistent with GFSM 2001. ### Key recommendations — Budget process - Civil society should be more actively engaged in the budget process early on. - The Government should encourage outside scrutiny of macroeconomic and fiscal projections included in budget documents by explaining methods and assumptions and soliciting more input. - The start of the budget process should be advanced and the budget presented to Parliament sufficiently early to ensure adoption of the Appropriations Bill before the beginning of the year, while allowing ample opportunity for Parliamentary debate. - The implementation of IFMS needs to be closely monitored in its early phases to ensure its full potential is realized. ### Key recommendations — Assurances of integrity - Internal audit should be strengthened to ensure line ministries comply with good standards of financial management. The Ministry of Finance needs to assume responsibility to develop a modern internal audit function by setting up standards in line with internationally accepted standards, provide guidance and advice to line ministries, and monitor their performance regularly. It should develop separate regulations on internal audit, according to international best practices. - The capacity of the Auditor-General’s office should be strengthened to allow it to move to systems and value-for-money auditing. There needs to be more follow-up on the Auditor-General’s recommendations. - The Anti-Corruption Commission needs to start full operations as soon as possible and should be given political support to carry out investigations, with appropriate governmental follow-up on proven instances of wrongdoing by public officials. - The audit capacity of the tax administration and its reporting on performance to Parliament and public needs to be strengthened. The tax administration should develop a code of conduct specific to tax administration issues. - Monetary data and fiscal data need to be reconciled on a regular and timely basis to give confidence in accuracy of fiscal data. ### Key recommendations — Specific legislation now being drafted or before Parliament - State Finance Act: - Ongoing review and revision presents opportunity to draft a more modern State Finance Act entailing comprehensive review and strengthening of the legal framework and practices on financial management in line with international best practices. - Review has identified areas where the Act needs strengthening including enhancing accountability and transparency in roles of the Minister of Finance; Treasury; Permanent Secretary, Finance; and Permanent Secretaries/Accounting Officers of line ministries. - The draft bill could make publication of fiscal data mandatory and an obligation of the Government, within specified timeframes and modalities. - The draft bill could add clarity to role of state-owned enterprises and reporting of off-budget activities, guarantees and other contingent liabilities. - The draft bill should cover budgetary and accounting reforms undertaken in recent years: (i) implementation of Medium-Term Expenditure Framework, Medium-Term Plans, and Program budgeting in the MTEF for measuring performance; (ii) implementation of an IFMS for budget and accounting processes; and (iii) role of internal audit in line ministries. - Audit Legislation: - New audit legislation is being drafted to strengthen independence of the Auditor-General from the executive branch, empower modernization of the external audit function, and discharge responsibilities effectively and efficiently. - The Act should move away from audit based on financial performance only toward systems and value-for-money audits. - It should include provisions for enhanced oversight by the Public Accounts Committee and strengthen the Committee’s ability to impose sanctions and penalties in cases of financial misconduct and non-compliance with financial rules. - Procurement Legislation: - Procurement system and the Tender Board of Namibia are being reviewed to increase efficacy; a new bill is expected to be submitted by the end of this year. Assistance may be useful to bring this bill and operating procedures up to international standards. - State-Owned Enterprises Bill (Bill 17 of 2005): - Now before Parliament after National Council recommended changes to the bill passed by the National Assembly in December 2005. - Aims at strengthening the legal framework for supervision and financial management of these enterprises but does not go far enough in ensuring professionalization of Board members or strengthening authority of central government (through State-Owned Enterprises Governance Council and Ministry of Finance) to oversee financial management and payment of dividends to the budget. - Minerals Act: - Ongoing revision should: (i) define the rates of royalty for all types of minerals, and (ii) limit discretionary powers of the Minister of Mines and Energy. *Source: _cr08184 - 94. Audits are required to be completed within twelve months after the end of a (IMF PDF).* ### 104. The mining of rough diamonds, and their polishing and trade, are regulated by the ### _cr08184 - 104. The mining of rough diamonds, and their polishing and trade, are regulated by the ### Structure of the mining industry - The mining sector in Namibia is mostly a private sector operation where the government acts as a regulator. - Exceptions are three joint ventures with government equity participation: - NAMDEB with 50 percent equity participation. - DMN (De Beers Marine Namibia) with 30 percent equity share. - Rossing Uranium with 3.37 percent equity share. - In these joint ventures, government participation is limited to management and there is no involvement at the operational level. ### Ownership of natural resources and legal framework - According to the Namibian Constitution and the Minerals Act, ownership of natural resources vests in the state and all mining activities are prohibited except in accordance with the provisions of the Minerals Act. - A license and the agreement flowing from it cannot override the provisions of the Minerals Act. - Landowners have only surface rights and are limited to receiving compensation for loss of those rights; compensation is a matter of negotiation between the mining licensee and the landowner. - Mining agreements (section 49 (b)) may include terms on: - reconnaissance, prospecting, and mining operations and timetable; - minimum expenditures on these activities; - processing of minerals and basis for determining market value; - utilization of profits, formation of joint venture, operation of production sharing arrangement; - participation including acquisition of equity share by an individual or the state; - financial and insurance arrangements, application of fiscal laws, and arbitration. ### Roles of government, regulatory bodies, and advisory board - The relative roles of the Government, the Mining Commissioner (regulator), and the rights of mining companies are defined in the Minerals Act. - The Act envisages establishment of a “Minerals Board” to advise the Minister of Mines and Energy on policy matters and implementation; the board’s constitution would include representatives of the chamber of mines, small-scale prospectors and miners, and trade unions. - The Minerals Board was never constituted. ### Licensing procedures and transparency - Licenses are generally awarded on a first come first serve basis and applications are examined strictly under the provisions of the Minerals Act. - All licenses from exploration to mining follow the process prescribed under the Act with no scope for negotiations; applications are made to the Mining Commissioner who makes recommendations to the Minister of Mines and Energy. - Processing of applications is confidential; outcomes are noted in the Mineral Register which is public: - Anyone can inspect the register free of charge and obtain copies on payment of nominal photocopying fees. - The mineral register is available on the Ministry of Mines and Energy website. - Press conferences are often held at issuance of major licenses. - Open bids are not used in mineral licensing and there is no tendering process. - In energy licensing for prospecting and potential oil and hydrocarbon discovery, bids are sometimes invited but these cases are limited; bidders are informed individually and often a press conference is held. ### State-owned enterprises and sector participation - There are no state-owned enterprises engaged in the mining sector. - The National Petroleum Corporation of Namibia (NAMCOR) is the state-owned enterprise dealing with oil. - All private sector oil companies are obliged to take fifty percent of their requirement from NAMCOR while they directly import the other fifty percent. - The arrangement aims to help NAMCOR develop downstream activities in the petrochemical sector. ### Fiscal management, taxes, royalties, and budgetary treatment - The Ministry of Finance exercises fiscal authority over the mining sector regarding taxes in accordance with the State Finance Act, the income tax act of 1981, and the exports processing act of 1995. - The Ministry of Mines and Energy is responsible for collection of royalties under the Minerals Act; natural resource taxes go directly to the state revenue account while royalty is collected by the Ministry of Mines and Energy as provided in section 114 (1) of the Minerals Act. - Changes in taxation and royalty are made either as part of the annual budget process or through separate legislation for general policy change. - Natural resource companies awarded mining rights can borrow domestically and externally; they cannot borrow on behalf of the Government unless there is a joint venture. - Government can sometimes extend guarantees when local companies lack sufficient collateral, but this is not common and such borrowings are approved by the Ministry of Finance with Parliament informed. - Government equity participation in joint ventures is reported in the annual budget; dividends are received as and when declared. ### Extrabudgetary funds, levies, and quasi-fiscal activities - The Minerals Act provides for Namibian employment and training provisions for natural resource companies but costs of such training programs are hard to estimate. - No requirements exist for companies to provide housing or local infrastructure, though many companies do so voluntarily. - Extrabudgetary funds: - 3 percent of the royalty amount goes to the Diamond Valuation Fund. - 0.05 percent of the amount due to the producers from sales goes to the Diamond Board Fund. - There is no system of regular reporting for these funds; thus total royalty from the mining sector is not reflected in the budget. - Oil-related levies: - A levy at the rate of 21 cents/liter is imposed on oil importing companies; revenues go to the National Energy Fund (an extra-budgetary fund maintained by the Ministry of Mines and Energy) used to stabilize domestic petrol and diesel prices and pay transport costs to remote areas. - Some partial accounting for the National Energy Fund appeared in the most recent MTEF; the amendment act of 2003 provides for issuing regular reports but a regular fund manager has yet to be appointed. - A levy of 11 cents/liter on oil goes to fund the Motor Vehicles Accident Fund. - A levy at the rate of 77 cents/liter is collected as road user charges for maintenance of national roads; these funds are maintained by the Road Fund Administration. ### Tax provisions applicable to the mining sector - Main tax provisions: - Corporate income tax rate: normal rate is 35 percent; 37.5 percent for the mining sector; 55 percent for diamond mining. - Taxable income determination: exploration charges are expensed when the mine goes into operation; capital development expenditures are depreciated over three years from date of incurring expenditures or starting of production whichever is later; rehabilitation expenditures deducted for tax purposes when expenditures are actually incurred or assigned to a trust fund and deducted from current taxable income. - There is no tax on capital gains. If a business sells a capital good on which full write off has been given and there is recovery of depreciation allowance, that income would be taxed. - No tax on dividend income received by a taxpayer in Namibia from the corporate sector, including mining. Dividends paid to a non-resident face a 10 percent withholding tax, called non-resident shareholder tax (NRST), reducible or refundable under double taxation treaties. - Interest is part of normal income and taxed accordingly; there is no withholding tax at source. A new policy announced in the last budget expects introduction of a withholding tax for individual taxpayers (natural persons) at the rate of 10 percent as the final tax on interest income for those taxpayers. - Personal income tax for individuals varies from 17.5 percent to 35 percent with four tax brackets; acts as a Pay As You Earn system for salaried persons. ### Royalty regime and ministerial discretion - Main royalty rates (section 114): - On any rough and uncut mineral in the precious stone group won or mined by a license holder and sold or disposed of by the holder, a rate of 10 percent on the “arms length” market value applies. - On any rough or unprocessed mineral of the dimension stone group won or mined by a license holder, a rate of 5 percent of the “arms length” market value applies. - For any other mineral or group of minerals, the minister determines and imposes royalty under conditions where: (i) value can be increased by a practical and economic process available in Namibia; (ii) amount received in an “arms length” sale was not in conformity with international prices; and (iii) fees, charges or levies deducted from sales value were not in conformity with international markets. Such royalty would not exceed the rate of 5 percent of the “arms length” market value. - Recommendations noted in the text: - It may be advisable to define the rate of royalty in precise terms for the category where the minister currently has discretion. - Under section 116 the Minister has power to remit, defer or refund wholly or in part any royalty or penalty payment; it may be advisable to limit this discretionary power only to deferral where the company faces a negative cash flow situation. ### Differences from standard tax system, incentives, and rules under consideration - Differences between mining taxation and other sectors: - Higher rates of taxation for minerals and diamonds compared with normal corporate income tax rate. - Special depreciation rules for exploration, development, and rehabilitation expenditures. - Special incentives for manufacturing, exporters and industries in export promotion zones (exemptions from customs duty and VAT on inputs and from corporate income tax). - No special tax incentives applied specifically to natural resource companies or individuals; tax rates are higher for the sector. - Indirect taxes (VAT, excises, import tariffs) apply to the natural resource sector as in other sectors. - No fiscal stability clauses are included in agreements with natural resource companies. - Ring-fencing: A proposal to prevent offset of assessed losses of certain activities from taxable income of other activities is under consideration by the Ministry of Finance. - Transfer pricing and thin capitalization: - Present law: transfer pricing rules apply to international transactions only and not to domestic transactions. - The act is being amended to provide for thin capitalization rule to limit debt-equity ratio for domestic and foreign companies and to adopt OECD guidelines for transfer pricing. ### Budget treatment, collection, and public reporting - Most natural resource revenues, except amounts going to the Diamond Valuation Fund, Diamond Board Fund and National Energy Fund, are fully fungible with other resources in the State Revenue Fund and spent through the standard appropriation process. - Revenues from NAMDEB alone have varied between 4.5 percent and 12 percent of the total depending upon exchange rate volatility and its impact on exports. - Directorate of Inland Revenue is responsible for assessment and collection of all tax revenue arrears from the mining sector and depositing them in the State Revenue Fund. - Reporting in the budget: - Corporate income tax revenues from diamond and other mining companies are reported as separate line items in the budget as estimates of revenue to be received on the State Revenue Fund. - Royalties are reported as a separate line item under non-tax revenues. - Dividends payment to the government are reported in the budget under “Dividends and Profit Share” in the category “Entrepreneurial and Property Income” under non-tax revenue. - On the expenditure side, “Total Lending and Equity participation” are reported as a separate line item in the Ministry of Mines and Energy budget. *Source: _cr08184 - 104. The mining of rough diamonds, and their polishing and trade, are regulated by the* ### 140. Thus the participation of the government in resource sectors is disclosed to the public ### _cr08184 - 140. Thus the participation of the government in resource sectors is disclosed to the public ### Assurances of Integrity — Overview - "Thus the participation of the government in resource sectors is disclosed to the public through the budget document." (paragraph 140) - Natural resource companies are subject to the normal internal controls and audit procedures as per the provisions of the company act. (paragraph 141) - Accounting standards for natural resource companies are consistent with International Accounting Standards. (paragraph 141) - Consolidated financial reports covering all subsidiaries are prepared and audited; audited accounts are normally completed within six months after the close of the financial year. (paragraph 142) - These financial accounts are made available to the public annually. (paragraph 142) ### Accounting and Audit of Mining Companies — Findings - Natural resource companies: - Are subject to the same standards in terms of audit and accounts as the rest of the private sector. (paragraph 141) - Have accounting standards consistent with International Accounting Standards. (paragraph 141) - Consolidation and publication: - A consolidated financial report covering all subsidiaries is prepared and audited. (paragraph 142) - Audited accounts are normally completed within six months after the close of the financial year. (paragraph 142) - Financial accounts are made available to the public annually. (paragraph 142) ### Appendix II — Overall summary of fiscal transparency and key reform priorities - Overall summary: Namibia "has the essential elements of a transparent fiscal system and meets the basic standards of the fiscal transparency code." Recent improvements include: - Development and presentation of the budget underpinned by a comprehensive macroeconomic framework and Medium-Term Expenditure Framework (MTEF). - Implementation of an Integrated Financial Management System (IFMS). - Formulation of a comprehensive debt strategy combined with improved reporting on debt, contingent liabilities, and on-lending. - Assessment in the budget documents of macroeconomic risks, policy initiatives, and fiscal sustainability. - Priority areas for improvement (listed verbatim): 1. "The budget classification structure and chart of accounts should be revised so that it can produce data by a functional and economic classification consistent with international best practice, and a classification that covers the government’s programs. This would facilitate the reconciliation of budget execution reports and MTEF." 2. "The fiscal data need to be expanded to cover the general government, particularly the extrabudgetary funds of the central government." 3. "The budget documents need to be expanded to include analysis and reporting on fiscal risks, contingent liabilities and guarantees." 4. "Civil society should be involved more actively in the budget process early on and the budget calendar advanced so that the budget is presented to Parliament well in advance of the end of the fiscal year." 5. "A mid-year review needs to be conducted and presented to the Parliament." 6. "The Ministry of Finance should make publically available its quarterly information bulletin. The fiscal data should cover general government, and there should be improved reporting on state-owned enterprises." 7. "The Ministry of Finance needs to enhance its capacity for external and internal audit and the tax administration’s ability to audit taxpayers." 8. "The monetary and fiscal data need to be reconciled on a regular and timely basis to give confidence in the accuracy of the fiscal data." 9. "The ongoing review and revision of the State Finance Act and Procurement Legislation need to ensure that they will provide an adequate legislative basis to improve the functioning and accountability of the public financial management and procurement systems." ### Clarity of roles and responsibilities — Key points (from Table 1) - "General government is generally well defined, but is not well covered in the budget process. A move to consolidated presentation of general government fiscal data is warranted." (1.1.1) - "The roles of the executive, legislative and judicial branches are clearly defined in the Constitution." (Medium-term priority / 1.1.2) - "The expenditure responsibilities of different levels of government are clearly defined. The regional and local councils play a relatively small fiscal role." (1.1.2) - "The Bank of Namibia is the Central Bank of Namibia and serves as the State’s principal instrument for monetary policy and supervision of banking institutions." (1.1.4) - "The relationship between the central government and the state-owned enterprises and other statutory bodies varies and roles and responsibilities lack some clarity." (1.1.4) - "The legal framework for privatization is not fully developed." (1.1.5) ### Public availability of information — Key findings and gaps (from Table 1 and Table 2) - Fiscal information is reasonably comprehensive but public availability is still limited; "Making available the quarterly bulletin would improve the availability of information." (2.1.1) - Budget documents: - Cover the State Revenue Fund’s activities comprehensively, but provide relatively little coverage of other parts of the public sector. (2.1.1) - Provide the main fiscal aggregates for the past and a forecast of the fiscal data. (2.1.2) - Include statements on government guarantees; tax expenditures and quasi-fiscal activities are not included. (2.1.3) - Public debt and assets: - Information on gross public debt is published. (2.1.4) - Information on government assets is not published nor is it readily available. "Given Namibia’s high dependence on minerals, a statement of government assets would be useful." (2.1.4) - Formal commitments for regular public publication of fiscal data are made only for the budget submission. (2.2.1, 2.2.2) ### Open budget preparation, execution, and reporting — Findings (from Table 1) - "A statement on fiscal policy objectives is included in the budget document, and fiscal sustainability issues are discussed." The treatment of sustainability could be expanded, including "the potential exhaustion of natural resources." (3.1.1, 3.2.2) - No legislated fiscal rules are used in the budget process; however, the Government has three fiscal targets. (3.1.2) - Budget forecasts are clearly presented but "the assumptions underlying the budget forecast are not clearly spelled out in the fiscal documentation." (3.1.3) - The budget is prepared and presented in the context of a three-year rolling MTEF. (3.1.3) - "Estimates of new initiatives and ongoing costs of government policies are not clearly distinguished in the budget documents." (3.1.4) - "The sensitivity of budget estimates to changes in economic variables is assessed and fiscal risks are discussed with the budget." (3.1.5) - The MTEF program classification is not incorporated into the budget classification and chart of accounts and thus is not incorporated into budget execution reports. (3.2.1) - The overall balance of the central government is the main indicator of the fiscal position and is monitored during the year. (3.2.3, 3.2.4) ### Public financial management systems — Findings and weaknesses - IFMS and accounting: - Basic accounting and internal control procedures are in place; the new accounting system will require additional time to become well established. (3.3.1) - "The IFMS is capable of producing accurate in-year reports on the central government’s budget outturn." The IFMS has recently been rolled out successfully but its full capabilities are not yet in use. (3.3.1) - "The Treasury’s accounting and reporting system fully accounts for all transactions pertaining to the approved budget of the State Revenue Fund." (3.3.1, 2.1.1) - Coordination and reporting: - A systematic coordination between budget execution and financial management is being developed. (3.3.1, 2.1.4) - The public procurement system needs to be modernized. (3.3.2) - Internal audit and tax administration: - "The internal audit is weak, and this function in line ministries is still evolving. The lack of effective internal audit is a major weakness." (3.3.3) - "The tax administration lacks effective internal monitoring and control mechanisms. The lack of effective internal control is a major weakness." (3.3.3) ### Parliamentary scrutiny and external audit — Findings - "The parliament does not receive in-year reports on budget outturn, and does not undertake a mid-year review." More frequent reporting to the parliament would enhance public discourse. (3.4.1) - "The audited final accounts are not normally available within twelve months of the end of the fiscal year." (3.4.2) - "The objectives and expected results of government programs are discussed in the MTEF, however actual progress is not reported against these objects." (3.2.2, 3.4.2) - External audit: - "The external audit function and its independence from the executive branch are enshrined in the Constitution." (4.2.1) - "There continues to be a backlog of audit reports and the audit function needs further strengthening." (4.2.1) - "The focus of audit is narrow; a reorientation of external audit is required." (4.2.1) - "The Legislature discusses external audit reports, however, delays in the submission of audit reports has hindered the timely review and follow-up action." (4.2.1) - "The Anti-Corruption Commission is yet to make an impact. This Commission needs to demonstrate its ability to take on government corruption." (4.2.1) - "External scrutiny of macroeconomic models and assumptions underlying the budget is not carried out." (4.2.2) ### Public availability matrix — Selected items from Table 2 (verbatim entries) - Central government (CG) budget estimates: Included in budget/report documents — "Yes." Available to the public — "Yes." Paragraph reference 37, 71 Code reference 2.1.1 - CG extrabudgetary funds: Included — "Some." Available — "Some." Paragraph reference 71 Code reference 2.1.1 - CG budget outturns: Included — "Yes. In budget documents but with long lag" Available — "Yes." Paragraph reference 72 Code reference 2.1.2 - CG contingent liabilities: Included — "Partly. The budget documents include guarantees, but not all contingent liabilities." Available — "Yes." Paragraph references 77, 78 Code reference 2.1.3 - CG tax expenditures: Included — "No." Available — "No." Paragraph references 47, 80 Code reference 2.1.3 - CG quasi-fiscal activities: Included — "No." Available — "No." Paragraph reference 81 Code reference 2.1.3 - Macroeconomic assumptions: Included — "Yes. In budget documents but lacking specificity." Available — "Yes." Paragraph reference 40 Code reference 3.1.3 - Analysis of fiscal risks/sensitivity analysis: Included — "Yes. In budget documents but could be further developed." Available — "Yes." Paragraph references 38, 48 Code reference 3.1.5 - CG debt: Included — "Yes. In reports of the Ministry of Finance." Available — "Yes. In budget documents and the bulletin of the Bank of Namibia." Paragraph reference 83 Code reference 2.1.4 - CG financial assets: Included — "Some. In reports of the Ministry of Finance." Available — "Not yet." Paragraph reference 85 Code reference 2.1.4 - General government budget estimates: Included — "No. Budgetary elements of local governments are included in the CG budget." Available — "No." Paragraph reference 73 Code reference 2.1.5 - CG monthly/quarterly reports on fiscal outturn: Included — "Yes. In reports of the Ministry of Finance. Central Bank produces their own and reconciles the data." Available — "Only in the bulletin of the Bank of Namibia." Paragraph references 71, 72 Code reference 3.4.1 - CG final accounts: Included — "Yes. Budget documents include but with a long lag." Available — "Yes." Paragraph reference 96 Code reference 3.4.2 - Consolidated general government final accounts: Included — "No." Available — "No." Paragraph reference 3.4.2 *Source: _cr08184 - 140. Thus the participation of the government in resource sectors is disclosed to the public* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08184.pdf_