## _cr0883

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### Executive Summary — Background
- Real GDP growth is in line with regional performance.
- A substantial terms of trade improvement and large receipts from the Southern Africa Customs Union (SACU) have contributed to significant external current account and fiscal surpluses.
- Official reserves have increased to a comfortable level.
- Public debt is expected to be reduced to less than 25 percent of GDP this year.
- Biggest economic problems: unemployment and poverty.
- Staff supported authorities’ strategy to broaden the economic base and reduce unemployment while preserving a solid fiscal position.
- Staff endorsed authorities’ intent to increase infrastructure spending using existing fiscal space and reprioritizing expenditures.
- Staff recommended reinvigorating domestic revenue administration given potential vulnerability of SACU receipts.
- Staff supports Namibia’s intention to ensure interest rate differentials with South Africa do not destabilize official reserves or capital flows within the common monetary area (CMA); authorities committed to the CMA.
- No clear evidence of significant currency undervaluation despite increased current account surpluses.
- To build competitiveness in the nonmining sector, measures to develop skills and enhance labor productivity will be important.
- Banking system: profitable and well-capitalized; progress in reinforcing financial sector supervision per FSAP recommendations.
- Staff recommended careful phase-in of tighter domestic investment requirements for pension and insurance sectors and efforts to broaden investment options.
- Staff supported measures to increase employment in the nonmining economy, including making labor market more flexible and continuing trade liberalization.

### Economic and Financial Backdrop — Key facts and indicators
- Terms of trade strengthened by an estimated one-third between 2005 and 2007 on high mineral export prices.
- External current account surplus estimated at 16–18 percent of GDP in 2006 and 2007.
- Fiscal surplus of 3.4 percent of GDP recorded in 2006/07 due to high SACU receipts and tight spending policies.
- Projected fiscal surplus for 2007/08: 2.6 percent (should reduce public debt to 23 percent of GDP).
- Net international reserves nearly doubled since 2005; end-September 2007 gross reserves of $850 million matched short-term external debt, were more than three times base money, and represented 3.0 months of imports of goods and services.
- Inflation declined to 6.6 percent in October 2007 from a peak of 7.2 percent in July 2007.
- Since mid-2006 interest rates increased 3.5 percentage points (to 10.5 percent).
- Treasury bill yields have edged below South African rates reflecting a declining supply with the strengthened fiscal position.
- Exchange rate stable in nominal effective terms in the 12 months through September 2007.
- Real effective exchange rate in the first nine months of 2007 was in line with the average for the preceding decade.
- Nonmining economy accounts for 85 percent of GDP.
- Shared challenges with regard to unemployment and HIV.

### Medium-Term Outlook — Projections and macro frame
- Real GDP per capita growth: projected to approach 4.0 percent by 2012.
- CPI inflation (end-period): projected 5.5 percent by 2009 and 5.5 percent in 2012.
- Gross investment (percent of GDP): 24.1 (2000–05), 27.5 (2006), 28.2 (2007), 29.8 (2008), 31.2 (2009), 31.2–32.1 (2012 range reflected in table).
- Gross national savings: 30.0 (2006), 43.4 (2007), 46.7 (2008), 42.4 (2009), 40.9 (2012).
- External current account balance (percent of GDP): 5.8 (2006), 15.9 (2007), 18.5 (2008), 12.6 (2009), 9.7 (2012).
- Private sector credit should continue to exceed nominal GDP growth, financing rising investments.
- As private savings decline from peak levels, external current account surplus projected to narrow.
- Timing and yields from exploiting the Kudu natural gas field are uncertain and could boost growth toward 2012.

### Risks and Upside risks
- Risks:
  - Mining sector volatility could lead to terms of trade declining faster than projected.
  - Business climate and public infrastructure improvements may fall short of needs to support investment and growth projections.
  - Political and social risk: baseline growth projections would reduce unemployment and income inequality only marginally at first.
  - SACU receipts projected at 11–12 percent of GDP over the medium term, financing about one-third of public spending; these receipts are vulnerable to revision of the revenue-sharing formula.
- Upside risk:
  - Decisive steps to make the labor market more flexible and eliminate business impediments could accelerate diversification and reduce unemployment more meaningfully.

### Policy Discussions — A. Use of Emerging Fiscal Space
- Context:
  - Increased SACU and mining receipts have created fiscal space.
  - 25 percent of GDP debt ceiling is likely to be undershot by 2 percentage points this fiscal year.
  - Strong primary balance positions the budget to weather declines in SACU and mining revenues over the medium term without breaching the debt ceiling.
  - Emerging fiscal space options: keep public debt below the ceiling, reduce taxes, or accommodate new spending.
  - Given relatively low public debt and credible fiscal management, maintaining a margin below the debt ceiling seen as not persuasive.
  - Reducing taxes considered risky given SACU receipt vulnerabilities.
  - Macroeconomic framework incorporates a modest expenditure increase, primarily for infrastructure, amounting to a cumulative 4½ percent of GDP over five years.

- Fiscal outlook to 2012/13 (selected figures):
  - Revenues and grants (percent of GDP): 31.5 (2005/06), 35.0 (2006/07), 36.3 (2007/08), 33.7 (2008/09), 34.6 (2009/10), 35.2 (2010/11), 34.6 (2012/13).
  - SACU transfers (percent of GDP): 9.4 (2005/06), 13.9 (2006/07), 14.2 (2007/08), 12.8 (2008/09), 12.1 (2009/10), 11.8 (2010/11), 11.4 (2012/13).
  - Mining revenues (percent of GDP): 1.5 (2005/06), 2.5 (2006/07), 2.5 (2007/08), 2.5 (2008/09), 2.3 (2009/10), 2.2 (2010/11), 2.2 (2012/13).
  - Expenditures (percent of GDP): 32.0 (2005/06), 31.6 (2006/07), 33.7 (2007/08), 34.6 (2008/09), 35.2 (2009/10), 35.1 (2010/11), 34.6 (2012/13).
  - Overall balance (percent of GDP): -0.5 (2005/06), 3.4 (2006/07), 2.6 (2007/08), 6.9 (2008/09), 7.8 (2009/10), 8.5 (2010/11), 8.0 (2012/13).
  - Public debt (percent of GDP): 30.2 (2005/06), 28.2 (2006/07), 26.8 (2007/08), 22.8 (2008/09), 22.5 (2009/10), 23.5 (2010/11), 25.0 (2012/13).

### Revenue Administration — Priorities
- Given SACU financing uncertainties, tax administration must be more ambitious.
- Inland Revenue Department (IRD) needs a strategic plan with goals and work priorities, supported by stepped-up recruitment and capacity building.
- Forensic tax audits are contracted to private accounting companies rather than IRD staff.
- No effective large-taxpayer unit currently exists.
- VAT refunds are audited in a comprehensive rather than risk-based manner.
- Staff recommended establishing a large-taxpayer office, building audit capacity, and improving VAT administration.

### Public Spending Quality — Priorities and concerns
- Public spending high by sub-Saharan African standards; better prioritization could accelerate poverty reduction and progress toward Millennium Development Goals.
- Program-based budgeting is a first priority; current expenditure data reported only by line ministry.
- Need for a modernized chart of accounts to support spending discussions.
- Public wage bill: reduced from 15 percent of GDP three years ago to 13 percent in 2006/07; strategy needed for civil service structure, performance, and remuneration.
- State-owned enterprises (SOEs) jeopardize the budget; SOE Governance Act approved in August 2006 is stalled pending an oversight secretariat.
- New MTEF offers a basis for prioritizing spending but could be more effective; spending decisions should be based on revenue outlook beyond potentially temporary SACU and mining receipts.
- Recent fiscal surpluses reflect shortfalls in capital spending and unexpectedly strong nominal income growth as much as fiscal discipline.

### Monetary Policy, Exchange Rate, and Competitiveness
- Large current account surpluses reflect temporary fiscal tightening and increased private savings.
- Public savings rose more than 6 percent in 2006, accounting for three-quarters of the rise in the current account surplus compared to the three preceding years.
- Recent diamond sector fiscal revenues: 1–2 percent of GDP, compared to estimated “permanent” fiscal income from diamonds of about 0.4 percent of GDP.
- Behavioral real exchange rate models suggest emerging undervaluation estimated at about 7–8 percent in 2006, but models predict about half would pass through to higher inflation differentials within a year.
- Inflation pickup relative to trading partners has been modest, consistent with a small undervaluation.
- Authorities underlined commitment to the CMA and agreed there is no clear evidence of significant currency undervaluation.
- Monetary policy decisions have matched South Africa since mid-2004; authorities noted diverging macroeconomic conditions and did not match a South African 50-basis-point repo increase early in December (foreshadowed decision).

### Financial Sector — Structure, reforms, and cautions
- Banking system: very profitable, well-capitalized, few nonperforming loans.
- Private sector credit: 58 percent of GDP in 2006.
- Life insurance and pension fund sector required to invest 35 percent of portfolios domestically; industry typically invests much of the rest abroad.
- Capitalization of local companies on domestic stock market: 6 percent of GDP (only seven local companies listed).
- Pension savings have contributed to capital outflows; most middle-income countries have capital inflows.
- Policy considerations:
  - Tighter regulation of pension and insurance fund domestic investments under discussion: restricting use of foreign dual-listed holdings to meet the 35 percent requirement and requiring allocations to domestic unlisted companies.
  - Financial sector supervision being reinforced per 2006 FSAP: overhaul of NAMFISA initiated in 2006; staffing and training increased in NAMFISA and Bank of Namibia; risk-based supervision initiated; NAMFISA took a medium-sized insurance company into curatorship; a number of banking regulations issued.
  - Collection and analysis of nonbank financial sector data lagging; full prudential picture unlikely before mid-2008.
- Staff cautions:
  - International experience suggests pension funds earn higher returns when investment is not restricted.
  - Domestic development mandates can pressure funds to finance nonviable projects.
  - Investment in unlisted securities poses disclosure and liquidity risks.
  - Required repatriation of funds could amount to 10 percent of GDP or more, potentially exceeding absorption capacity.
  - Enforceability uncertainties could lead funds to sidestep rules via local banks, causing no real increase in domestic financing while lowering returns.

### Unemployment and Labor Market — Facts and implications
- Unemployment (narrow definition, excluding individuals not looking for work): 22 percent in 2004.
- Urban 20- to 24-year-old unemployment: 44 percent.
- Private nonfarm, nonmining employment: 192,000; would need to rise by almost 60 percent to absorb the 108,000 unemployed.
- Namibian Labor Force (2004, selected, ‘000s):
  - Labor force: 493
  - Total employment: 385
  - Mining employment: 8
  - Agriculture employment: 103
  - Other employment: 275
  - Public sector employment: 83
  - Private sector employment: 192
  - Unemployment: 108
- Value-added per employee (US$, 2004): Total employment $13,300; Mining $71,500; Agriculture $2,800; Other employment $15,500.
- Labor productivity and growth require forceful efforts to build skills, improve labor market flexibility, and reform education.

### Economic Geography, Business Climate, and Structural Policy
- Geographic constraints: limited domestic market, small and widely dispersed population, limited water resources, distances to advanced economies.
- Infrastructure access (rail, port, air) viewed as superior to average for lower-middle-income countries.
- Economic governance: ranked below Botswana and South Africa but above average for lower-middle-income countries; Anti-Corruption Commission became effective in 2006.
- Trade policy:
  - Staff recommended continued liberalization, including broader free trade arrangements.
  - Interim Economic Partnership Agreement (EPA) with the EU signed in mid-December preserves EU market access and lowers tariffs over time.
- Authorities’ institutional priorities:
  - New Productivity Center in Ministry of Labor.
  - Planned opening in 2009 of a National Institute of Public Administration and Management.
  - Streamline work permit process for hard-to-fill occupations; reforms under discussion.
  - Consider industry-level voluntary charters and employer efforts to recruit Namibian workers.
- Staff recommendation: permit employers to establish lower leave standards for new hires with subsequent increases based on job seniority to offset non-wage cost rises.

### Staff Appraisal — Achievements and Vulnerabilities
- Achievements:
  - Strong economic position; robust growth; declining inflation since mid-2007 peak.
  - National savings reduced public indebtedness, built official reserves, and financed new private investments at home and abroad.
  - Banking system profitable and well-capitalized.
- Vulnerabilities:
  - Mining volatility and potential declines in SACU receipts.
  - Need for success in tackling unemployment and income inequality to reinforce political support for reforms.

### Policy Recommendations — Fiscal, Financial, Structural (selected)
- Currency and monetary:
  - Little evidence of significant currency undervaluation.
  - Interest rate differentials with South Africa should be limited to avoid destabilizing capital flows or official reserves.
- Fiscal:
  - Using a good part of the surge in SACU transfers and mineral revenues to reduce public debt was appropriate.
  - Emerging fiscal space and reprioritization provide scope for modest increases for infrastructure and other programs.
- Expenditure management:
  - Adopt program classification for budget execution and reporting.
  - Strictly limit new hires and remuneration given high public wage bill but ensure adequate salaries for critical staff.
  - Implement SOE Governance Act to reduce budget risks from SOEs.
- Revenue:
  - Strengthen tax administration given SACU volatility; build IRD strategic and operational capacity; establish a large-taxpayer unit; improve VAT administration.
- Financial:
  - Enhance financial sector management per 2006 FSAP; foster bank competition cautiously.
  - Exercise caution in modifying domestic investment requirements for pension and insurance companies to avoid raising industry risk and deteriorating returns.
- Structural:
  - Foster employment growth in the nonmining economy through skill-building, labor productivity improvements, and labor market flexibility.
  - Improve business climate and further liberalize trade.

### Public Sector Debt Sustainability — Baseline, Alternatives, and Stress Tests
- Baseline outcomes:
  - Public debt-to-GDP ratio projected to fall to 22½ percent of GDP in 2008 and then stabilize around the authorities’ 25 percent target by 2012.
  - Robust nominal GDP growth projected to average 9 percent over the period (supports debt stability).
- Alternative scenarios:
  - Historical-averages scenario: public debt ratio would rise to approximately 33 percent of GDP by 2012.
  - High-primary-surplus scenario: public debt ratio would decline to less than 5 percent of GDP by the end of the forecast period.
- Vulnerability bounds:
  - Even with a half standard deviation shock to interest rates, growth, or the exchange rate, the debt-to-GDP ratio would remain at or below 31 percent of GDP.
- Selected baseline annual figures (percent of GDP and rates):
  - Public sector debt (percent of GDP): 2002 23.8; 2003 28.5; 2004 32.8; 2005 31.6; 2006 28.4; 2007 24.1; 2008 22.6; 2009 23.3; 2010 24.3; 2011 24.7; 2012 24.9.
  - Primary deficit (percent of GDP): 2002 1.2; 2003 4.0; 2004 1.7; 2005 -1.7; 2006 -5.2; 2007 -5.4; 2008 -2.9; 2009 -1.2; 2010 -0.6; 2011 -1.0; 2012 -0.9.
  - Gross financing need (percent of GDP): 2002 16.6; 2003 19.2; 2004 21.2; 2005 19.3; 2006 10.1; 2007 9.4; 2008 7.9; 2009 8.1; 2010 11.4; 2011 8.9; 2012 10.1.

### Executive Board Assessment — Judgments, risks, and priorities
- Overall assessment: sound macroeconomic management; favorable external environment; robust growth; subdued inflation; large current account surpluses; strengthened foreign reserves.
- Directors’ priorities:
  - Maintain exchange rate peg to the South African rand.
  - Keep policy interest rate differentials with South Africa limited to avoid destabilizing capital flows or reserves.
  - Commend use of SACU receipts to reduce public debt; fiscal space exists for infrastructure spending but requires improved expenditure prioritization within the MTEF.
  - Reduce personnel expenditure; pursue civil service reform.
  - Strengthen oversight of public enterprises; implement State-Owned Enterprise Act quickly.
  - Strengthen tax administration: build audit capacity in IRD, establish large-taxpayers’ office, improve VAT administration.
  - Financial sector: foster competition; implement domestic investment requirements cautiously.
  - Structural reforms: strengthen labor relations, promote labor productivity, upgrade civil service skills, liberalize trade, improve governance, and join the Extractive Industries Transparency Initiative.

### Namibian Authorities’ Statement — Policy stance and actions
- Macroeconomic stance: continued sound macroeconomic management; real GDP growth and inflation projections consistent with staff.
  - Real GDP grew 4.1 percent in 2006; 2007 projected around 4.0 percent; medium-term expected "around 4.5-5 percent".
  - Inflation: 5.1 percent in 2006; peaked 7.2 percent in July 2007; declined to 6.6 percent in October 2007; expected to moderate to 6 percent in 2008.
- Fiscal actions and positions:
  - Total revenue rose from 31.5 percent of GDP in 2005 to 36.3 percent in 2007.
  - Fiscal surplus of 2.1 percent of GDP in 2006/07; projected fiscal surplus declines to about 1.1 percent of GDP in 2007/08 due to increased public spending.
  - Public debt projected to be reduced to an estimated 23 percent of GDP by mid-2008 from 28 percent in 2006/07.
  - SACU accounts for more than one-third of total revenue; authorities aim to strengthen domestic tax system to offset projected SACU decline.
  - Wage bill declined to 13 percent of GDP in 2006/07 from 15 percent three years earlier.
  - Adoption of new SOE Governance Act to strengthen SOE corporate governance.
- Monetary, financial, and structural measures:
  - Commitment to CMA arrangement; rand peg (1:1).
  - Reserves cover more than 3 months of imports.
  - Banking sector regulatory strengthening; measures to widen financial access (mobile banking, ATMs, smart cards, lower-fee savings accounts, micro-lending).
  - Anti-money laundering: Financial Intelligence Act enacted in 2007; financial intelligence center established within the Central Bank of Namibia.
  - Considering domestic asset requirements to retain more pension/insurance funds for domestic investment; research on instruments and monitoring underway.
  - Strategies to foster employment growth in non-mining sectors including tourism, diamond cutting and polishing expansion.
  - Health: HIV prevalence declined from 22 percent in 2002 to 20 percent in 2006; ART program covers about 40,000 patients (~70 percent of those who could benefit).

### Recommendation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

*Source: IMF staff and Namibian authorities, Executive Summary and staff report excerpts (as provided).*

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

### _cr0883 - Executive Summary ......................................................................................................

### Background
- Real GDP growth is in line with regional performance.
- A substantial terms of trade improvement and large receipts from the Southern Africa Customs Union (SACU) have contributed to significant external current account and fiscal surpluses.
- Official reserves have increased to a comfortable level.
- Public debt is expected to be reduced to less than 25 percent of GDP this year.
- The biggest economic problems are unemployment and poverty.
- Staff supported the authorities’ strategy of broadening the economic base and reducing unemployment while preserving a solid fiscal position.
- Staff endorsed the authorities’ intent to increase infrastructure spending, using existing fiscal space and reprioritizing expenditures.
- Staff recommended reinvigorating domestic revenue administration given the potential vulnerability of SACU receipts.
- Staff supports Namibia’s intention to ensure that interest rate differentials with South Africa do not destabilize official reserves or capital flows within the common monetary area (CMA). The authorities are committed to the CMA.
- No clear evidence of significant currency undervaluation despite increased current account surpluses.
- To build competitiveness in the nonmining sector, measures to develop skills and enhance labor productivity will be important.
- The banking system is profitable and well-capitalized; progress has been made in reinforcing financial sector supervision in line with FSAP recommendations.
- Staff recommended careful phase-in of tighter domestic investment requirements for pension and insurance sectors and efforts to broaden investment options.
- Staff supported measures to increase employment opportunities in the nonmining economy, including making the labor market more flexible and continuing trade liberalization.

### Economic and Financial Backdrop
- Terms of trade strengthened by an estimated one-third between 2005 and 2007 on high mineral export prices.
- Improved diamond extraction rates and rising SACU receipts driven by South African import growth contributed to an external current account surplus estimated at 16–18 percent of GDP in 2006 and 2007.
- A fiscal surplus of 3.4 percent of GDP was recorded in 2006/07 because of high SACU receipts and tight spending policies.
- For 2007/08, a fiscal surplus of 2.6 percent is projected, which should reduce public debt to 23 percent of GDP.
- Net international reserves have almost doubled since 2005. At end-September 2007 gross reserves of $850 million matched short-term external debt, were more than three times base money, and represented 3.0 months of imports of goods and services.
- Inflation declined to 6.6 percent in October 2007 from a peak of 7.2 percent in July 2007.
- Since mid-2006 interest rates have been increased 3.5 percentage points (to 10.5 percent).
- Treasury bill yields have edged below South African rates reflecting a declining supply with the strengthened fiscal position.
- The exchange rate has been stable in nominal effective terms in the 12 months through September 2007.
- The real effective exchange rate in the first nine months of 2007 was in line with the average for the preceding decade.
- Real GDP growth matches regional peers; Namibia shares the same challenges with regard to unemployment and the prevalence of HIV.

### Medium-Term Outlook
- Real GDP growth per capita is projected to approach 4 percent, up from 3 percent a few years ago.
- The nonmining economy accounts for 85 percent of GDP.
- Timing and yields from exploiting the Kudu natural gas field are uncertain and could boost growth toward 2012.
- Inflation is projected to decline to 5.5 percent by 2009.
- A small positive differential between Namibian and South African inflation is projected because productivity in Namibia continues to grow faster; inflation is at the upper end rather than the center of South Africa’s 3–6 percent target range.
- Private sector credit should continue to exceed nominal GDP growth, financing rising investments.
- As private savings decline from peak levels, the external current account surplus is projected to narrow.

Key medium-term macroeconomic frame (selected figures as presented)
- Real GDP per capita growth: projected to approach 4.0 percent by 2012 (table shows trajectory to 2012).
- CPI inflation (end-period): projected 5.5 percent by 2009 and 5.5 percent in 2012 (table projections).
- Gross investment: 24.1 (2000–05), 27.5 (2006), 28.2 (2007), 29.8 (2008), 31.2 (2009), 31.2–32.1 (2012 range reflected in table).
- Gross national savings: 30.0 (2006), 43.4 (2007), 46.7 (2008), 42.4 (2009), 40.9 (2012).
- External current account balance: 5.8 (2006), 15.9 (2007), 18.5 (2008), 12.6 (2009), 9.7 (2012) — values taken directly from the table.

Risks
- Mining sector volatility could lead to terms of trade declining faster than projected.
- Business climate and public infrastructure improvements may fall short of what is needed to support investment and growth projections.
- Political and social risk: baseline growth projections would reduce unemployment and income inequality only marginally at first.
- SACU receipts are projected at 11–12 percent of GDP over the medium term, financing about one-third of public spending; these receipts are vulnerable to revision of the revenue-sharing formula.

Upside risks
- Decisive steps to make the labor market more flexible and eliminate business impediments could accelerate economic diversification and reduce unemployment more meaningfully.

Authorities’ stance
- Authorities concurred with the analysis.
- Preliminary Bank of Namibia projections for annual economic growth were up to 0.5 percent lower than staff projections based on more cautious assumptions about diamond extraction extensions.
- Authorities note the possibility of new mineral discoveries given large unsurveyed parts of the country.

### Policy Discussions — A. How Should the Emerging Fiscal Space be Used?
Background and context
- Increased receipts from SACU and the mining sector have created fiscal space.
- The 25 percent of GDP debt ceiling is likely to be undershot by 2 percentage points this fiscal year.
- With a strong primary balance, the budget is well-placed to weather declines in SACU and mining revenues over the medium term without breaching the debt ceiling.
- The emerging fiscal space could be used to keep public debt below the ceiling, reduce taxes, or accommodate new spending.
- Given relatively low public debt and credible fiscal management, the case for maintaining a margin below the debt ceiling is not persuasive.
- Reducing taxes is risky given SACU receipt vulnerabilities.
- The macroeconomic framework developed with the authorities incorporates a modest expenditure increase, primarily for infrastructure, that amounts to a cumulative 4½ percent of GDP over five years.

Fiscal outlook to 2012/13 (selected figures preserved exactly as presented)
- Revenues and grants (percent of GDP): 31.5 (2005/06), 35.0 (2006/07), 36.3 (2007/08), 33.7 (2008/09), 34.6 (2009/10), 35.2 (2010/11), 34.6 (2012/13) — values taken from table.
- SACU transfers (percent of GDP): 9.4 (2005/06), 13.9 (2006/07), 14.2 (2007/08), 12.8 (2008/09), 12.1 (2009/10), 11.8 (2010/11), 11.4 (2012/13).
- Mining revenues (percent of GDP): 1.5 (2005/06), 2.5 (2006/07), 2.5 (2007/08), 2.5 (2008/09), 2.3 (2009/10), 2.2 (2010/11), 2.2 (2012/13).
- Expenditures (percent of GDP): 32.0 (2005/06), 31.6 (2006/07), 33.7 (2007/08), 34.6 (2008/09), 35.2 (2009/10), 35.1 (2010/11), 34.6 (2012/13).
- Overall balance (percent of GDP): -0.5 (2005/06), 3.4 (2006/07), 2.6 (2007/08), 6.9 (2008/09), 7.8 (2009/10), 8.5 (2010/11), 8.0 (2012/13).
- Less SACU and mineral taxes (percent of GDP): -11.3 (2005/06), -12.9 (2006/07), -14.1 (2007/08), -14.1 to -15.6 (2008/09–2010/11 range), -14.9 (2012/13).
- Public debt (percent of GDP): 30.2 (2005/06), 28.2 (2006/07), 26.8 (2007/08), 22.8 (2008/09), 22.5 (2009/10), 23.5 (2010/11), 25.0 (2012/13).

Revenue administration priorities
- Given uncertainties about future SACU financing, the tax administration effort must be more ambitious.
- The Inland Revenue Department (IRD) needs a strategic plan setting out goals and work priorities, supported by stepped-up recruitment and capacity building.
- Forensic tax audits are currently contracted to private accounting companies rather than IRD staff.
- There is no effective large-taxpayer unit.
- VAT refunds are audited in a comprehensive rather than risk-based manner.

Public spending quality improvements
- Public spending is high by sub-Saharan African standards; better prioritization could accelerate poverty reduction and progress toward the Millennium Development Goals.
- Program-based budgeting is a first priority; expenditure data are currently reported only by line ministry.
- A modernized chart of accounts is needed to support informed discussion of spending priorities.
- The public wage bill in relation to GDP is one of the highest in Africa: reduced from 15 percent of GDP three years ago to 13 percent in 2006/07.
- A strategy is needed for civil service structure, performance, and remuneration.
- State-owned enterprises (SOEs) continue to jeopardize the budget; an SOE Governance Act approved in August 2006 is stalled pending establishment of an oversight secretariat.
- No significant privatizations are planned due to public opposition.
- The new medium-term expenditure framework (MTEF) offers a basis for prioritizing spending but could be more effective; spending decisions should be based on the revenue outlook beyond potentially temporary SACU, mining, and other receipts.
- Budget surpluses and debt reduction in periods of peak income would provide room to sustain spending when public revenues fall.
- Recent fiscal surpluses reflect shortfalls in capital spending and unexpectedly strong nominal income growth as much as fiscal discipline.

*Source: IMF staff and Namibian authorities, Executive Summary (as provided).*

### 9.      Ministry of Finance (MoF) officials underlined the importance of firm fiscal

### 9.      Ministry of Finance (MoF) officials underlined the importance of firm fiscal stewardship

### Fiscal stewardship and the MTEF
- Confirmed central role of the MTEF in ensuring fiscal sustainability.
- Political challenges exist in programming fiscal surpluses when revenue is growing, given the country’s unmet social and economic needs.
- Public debt limit seen as a central fiscal anchor; authorities will work to ensure it continues to be respected.

### Revenue mobilization and tax administration
- Authorities recognized the need to redouble efforts to strengthen tax administration to mobilize domestic revenue.
- Factors cited for recent measures: poor taxpayer compliance and recruitment and retention issues in IRD, prompting intensive audits of VAT returns and outsourcing of forensic tax audits.
- Government intends to seek IMF technical assistance to review the adequacy of taxation of the mining sector considering increased mining sector rents and new investments.
- Authorities are considering staff recommendations that Namibia subscribe to the Extractive Industry Transparency Initiative (EITI).
- Staff noted proposals to delegate some revenues and expenditures to subnational authorities should be crafted carefully to avoid undermining fiscal management.

### Expenditure prioritization and social spending
- Authorities confirmed need for better prioritization of spending.
- Intended use of emerging fiscal space:
  - Fund growth-promoting infrastructure: roads, rail, and rural electrification.
  - Fund sectoral programs: tourism and fisheries.
- Program-based budgeting is a high priority; authorities will continue to control the public wage bill.
- Considering use of public-private partnerships to improve public spending effectiveness.
- Staff encouraged authorities to bring the SOE Act into effect.
- On antiretroviral (ART) program:
  - Contributions from Global Fund, the United States, and other donors noted.
  - Namibia’s HIV prevalence rate declined from 22 percent in 2002 to 20 percent in 2006.
  - ART program launched mid-2003 now covers about 40,000 patients, or about 70  percent of those who could benefit from ART treatment.
  - Authorities indicated budget provisions for antiretrovirals would be increased as needed; staff suggested a progressive increase in Namibia’s own contribution to help ensure sustainability.

### Large current account surpluses: drivers and valuation
- Large current account surpluses reflect temporary fiscal tightening and an increase in private savings.
- Key quantitative points:
  - Public savings rose more than 6 percent in 2006, accounting for three-quarters of the rise in the current account surplus compared to the three preceding years.
  - Recent fiscal revenues from the diamond sector have been 1–2 percent of GDP, compared to an estimated “permanent” fiscal income from diamonds of about 0.4  percent of GDP.
- Figure 6 highlights contributions comparing 2006–07 to the previous three years (percent of GDP):
  - The increased current account surplus...10.4
  - largely reflects increased savings...10.9
  - Public savings have risen, partly due to...7.4
  - higher SACU transfers and...4.2
  - increased mining taxes.0.9
  - Larger private savings notably reflect...3.5
  - mining windfalls.5.7
- Additional points:
  - Mineral exports rose by 4 percent of GDP in 2006.
  - Much of the additional savings have been invested abroad; medium-term projections consistent with stabilization of private sector net foreign assets at a higher level.
- Competitiveness and valuation indicators:
  - Tradables sector performance (aside from mining) is weak; manufacturing growth has declined since 2003, as has real GDP growth.
  - No evidence of sustained pick up in nonmineral exports or slowing in import demand.
  - Survey-based competitiveness indicators have deteriorated on some measures since the 1990s.
  - Behavioral real exchange rate models suggest emerging undervaluation estimated at about 7–8 percent in 2006, but models predict about half of this would pass through to higher inflation differentials within a year.
  - Inflation pickup relative to trading partners has been modest, consistent with a small undervaluation.
- Authorities’ stance:
  - Underlined commitment to the common monetary area (CMA).
  - Agreed there is no clear evidence of significant currency undervaluation.
  - Main concern: need to make nonmineral exports more competitive.
- Monetary policy considerations:
  - Namibia’s policy interest rate decisions have matched those of South Africa since mid-2004, but authorities saw diverging macroeconomic conditions with evidence of slowing domestic demand and inflation in Namibia.
  - Decision not to match South Africa’s 50-basis-point repo rate increase early in December was being foreshadowed; staff noted need to monitor impact on capital outflows and official reserves.

### Financial sector reforms and intermediation
- Financial sector assessment:
  - Banking system: very profitable, well-capitalized, with few nonperforming loans.
  - Private sector credit amounted to 58 percent of GDP in 2006.
  - Bank outreach to poorer households and SMEs could be better; banks extending outreach through innovative savings and credit products.
  - Life insurance and pension fund sector required to invest 35 percent of portfolios domestically; industry typically invests much of the rest abroad.
  - Capitalization of local companies on domestic stock market is just 6 percent of GDP (only seven local companies listed); public debt is low; volume on secondary corporate debt market is low.
  - Pension savings have contributed to capital outflows; most middle-income countries have capital inflows.
- Policy considerations under discussion:
  - Tighter regulation of pension and insurance fund domestic investments is being considered:
    - Funds would no longer be able to meet the current 35 percent domestic investment requirement with holdings in foreign companies dual-listed on the Namibia stock exchange.
    - Funds would have to dedicate some portfolios to investments in domestic unlisted companies.
  - Financial sector supervision being reinforced per 2006 FSAP recommendations:
    - Overhaul of NAMFISA initiated in 2006; staffing and training increased in NAMFISA and Bank of Namibia.
    - Risk-based supervision initiated; on-site visits stepped up; NAMFISA took a medium-sized insurance company into curatorship; a number of banking regulations issued.
    - Collection and analysis of data from the nonbank financial sector lagging; full prudential picture unlikely before mid-2008.
- Authorities’ proposals and staff cautions:
  - Authorities emphasized need for further bank outreach and more domestic investments by pension and life insurance funds; a voluntary charter is being drafted for banks to meet social and economic benchmarks.
  - Authorities intend to broaden investment options via bond issues by solid public agencies (following precedent of NamPower) and will examine international experience with securitization of mortgages (which make up 40 percent of banks' loan portfolios), and factoring and leasing.
  - Staff urged caution in tightening domestic investment requirements:
    - International experience suggests pension funds earn higher returns when investment is not restricted.
    - Domestic development mandates can pressure funds to finance nonviable projects.
    - Requirements to invest in unlisted securities pose particular risk due to less disclosure.
    - Required repatriation of funds could amount to 10 percent of GDP or more, potentially exceeding the economy’s ability to absorb it.
    - Enforceability uncertainties; funds could sidestep regulations by investing in local banks, which could still invest in South African bonds, resulting in no real increase in domestic financing while lowering returns through shifts from equity to fixed-income and intermediation fees.

### Unemployment and labor market challenges
- Unemployment is a major problem:
  - Unemployment generally was 22 percent in 2004 (narrow definition, excluding individuals not looking for work).
  - Unemployment was 44 percent for urban 20- to 24-year olds.
- Labor market structure and requirements:
  - Private nonfarm, nonmining employment currently 192,000 and would need to rise by almost 60 percent to absorb the 108,000 unemployed.
- Namibian Labor Force trends, 1997–2004 (selected figures, ‘000s, 2004):
  - Labor force: 493
  - Total employment: 385
  - Mining employment: 8
  - Agriculture employment: 103
  - Other employment: 275
  - Public sector employment: 83
  - Private sector employment: 192
  - Unemployment: 108
- Productivity and growth (1997–2004):
  - Value-added per employee (US$, 2004): Total employment $13,300; Mining $71,500; Agriculture $2,800; Other employment $15,500.
  - Labor growth (1997–2004): Total employment -0.6; Mining 2.0; Agriculture -5.0; Other employment 1.5; Public sector 1.2; Private sector 1.6; Unemployment 1.5; Labor force -0.1.
  - Output growth (1997–2004): Total employment 4.0; Mining 5.7; Agriculture 1.4; Other employment 4.5.
  - Labor productivity growth (1997–2004): Total employment 4.8; Mining 3.6; Agriculture 6.7; Other employment 2.9.

*Source: IMF staff report text (chapter excerpt provided).*

### 21.      A superior business climate would compensate for difficult geographic

### 21.      A superior business climate would compensate for difficult geographic conditions

### Economic geography and business climate
- Namibia’s economic geography complicates diversification: the domestic market is limited, and the population is small and widely dispersed. Limited water resources and distances from advanced economies are further challenges.
- Infrastructure: business access to rail, port, and air facilities is viewed as superior to the average for lower-middle-income countries.
- Economic governance: ranked in most surveys below Botswana and South Africa, but above average for a lower-middle-income country. The decline in government effectiveness and control of corruption indicators over the past decade, while not statistically significant, is nevertheless indicative. An Anti-Corruption Commission became effective in 2006.
- International Governance Indicators, 2006 (Percentile ranking, 100=strongest):
  - Government Effectiveness: Sub-Saharan Africa 27.2; Lower-middle-income countries 37.8; Namibia 59.2; Upper-middle-income countries 61.5; Botswana 73.9; South Africa 76.8; Namibia (1996) 73.0; 27.4; 36.6; 57.1; 63.0; 75.6; 70.2; 46.8; 30.3; 37.7; 61.2; 60.9; 78.2; 70.9; 78.2.
  - Regulatory Quality: (values listed above in same sequence as table).
  - Control of Corruption: (values listed above in same sequence as table).
- Statistical note: The differences between Namibia and other lower-middle-income countries is significant at the 90 percent level, as are differences with Botswana and South Africa for government effectiveness, and with Botswana for control of corruption.

### Skills gaps and labor market functioning
- Education and skills:
  - At independence, Namibia inherited a poor education system.
  - The probability of employment is little higher for students with education up to grade 10 than for the uneducated.
  - An education and skills reform program has been launched with support from development partners.
- Labor market functioning:
  - Workforce management is complicated by lengthy and contentious challenges to worker dismissals in district labor courts.
  - The pending Labor Law would increase annual leave eligibility to 24 days (plus 5 days’ compassionate leave), substantially above many middle-income country peers.
  - Comparative statutory annual leave: 15 days in Botswana, Chile, and South Africa; 8-16 days in Malaysia (depending on service); and 6 days in Thailand.

### Trade policy and market access
- Staff recommended continuing liberalization of the trade regime, including through broader free trade arrangements.
- A wider free trade area across SADC would increase market access for Namibia but is unlikely to be achieved by the 2008 target date because non-SACU members are progressing slowly.
- Namibia signed an interim Economic Partnership Agreement (EPA) with the European Union in mid-December. This will preserve Namibia’s access to the EU market and lower tariffs over time.

### Authorities’ priorities and policy discussions
- Reducing unemployment is a top priority and will depend on building labor productivity and skills.
- Institutional steps:
  - A new Productivity Center is being launched in the Ministry of Labor.
  - The planned opening in 2009 of a National Institute of Public Administration and Management should make the civil service more effective.
- Staff recommendations and discussions:
  - Streamline the work permit process for hard-to-fill occupations; reforms are being discussed.
  - Authorities emphasized employers should do more to recruit Namibian workers.
  - Authorities recognized arguments for more flexible labor markets but emphasized improving working conditions since independence.
  - The pending Labor Law will promote conciliation and arbitration as an alternative to legal challenges to worker dismissals.
  - Authorities considered industry-level voluntary charters for empowerment of the previously disadvantaged.
  - Staff noted non-wage labor costs might rise due to expanded leave provisions and recommended permitting employers to establish lower leave standards for new hires, with subsequent increases based on job seniority.

### Staff appraisal — achievements and vulnerabilities
- Achievements:
  - Namibia’s economic position is strong.
  - Economic growth is robust, and inflation has declined since peaking in mid-2007.
  - National savings have reduced public indebtedness, built official reserves to a healthy level, and financed new private investments at home and abroad.
  - The banking system is profitable and well-capitalized.
- Vulnerabilities:
  - Volatility in the mining sector and declines in SACU receipts remain risks.
  - Political support for economic reforms is strong but would be reinforced by success in tackling unemployment and income inequality.

### Policy recommendations (fiscal, financial, structural)
- Currency valuation and monetary considerations:
  - Namibia’s large current account surplus partly reflects a tight fiscal position that is projected to ease over the medium term.
  - Little evidence of any significant currency undervaluation.
  - Consistent with the authorities’ commitment to the CMA, interest rate differentials with South Africa should be limited to levels that do not destabilize capital flows or official reserves.
- Fiscal policy:
  - Using a good part of the recent surge in SACU transfers and mineral revenues to reduce public debt was appropriate.
  - Emerging fiscal space and reprioritization of expenditures provide scope for modest increases for infrastructure and other programs.
- Expenditure management:
  - Adopt a program classification for budget execution and reporting to help prioritize and monitor expenditures.
  - Because the public wage bill is high, new hires and remuneration should be strictly limited, but adequate salaries for critical staff should be ensured.
  - To reduce risks to the budget from SOEs, implement the SOE Governance Act.
- Revenue policies:
  - Strengthen tax administration in case SACU receipts fall.
  - Domestic revenue reforms have been hampered by recruitment and retention issues and poor taxpayer compliance; efforts to strengthen the strategic and operational functions of the Inland Revenue Department should be redoubled.
- Financial policies:
  - Financial sector management is being enhanced consistent with the recommendations of the 2006 FSAP.
  - Continue to explore the scope for fostering competition in the banking sector.
  - Exercise caution in modifying domestic investment requirements for pension and insurance companies—especially minimum investments in unlisted securities—to avoid raising industry risk and deteriorating returns.
- Structural reforms:
  - Fostering employment growth in the nonmining economy to reduce unemployment is a central challenge.
  - Requires forceful efforts to build skills and labor productivity, especially through greater labor market flexibility.
  - Improve the business climate: build on comparatively strong economic institutions and tackle bureaucratic obstacles.
  - Further liberalization of the trade regime remains a priority.

*Source: _cr0883 - 21.      A superior business climate would compensate for difficult geographic*

### 34.      It is recommended that the next Article IV consultation take place on the standard

### _cr0883 - 34.      It is recommended that the next Article IV consultation take place on the standard

### Recommendation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### National income and prices (selected indicators, 2003–12)
- GDP at constant 1995 prices: 3.5, 6.6, 4.8, 4.1, 4.4, 4.8, 4.5, 4.8, 4.7, 4.8 (annual percent change, 2003–12).
- GDP deflator: -0.6, 1.1, 3.8, 13.7, 6.5, 6.0, 5.3, 5.2, 5.2, 5.6 (2003–12).
- GDP at current market prices (N$ millions): 33,842; 36,496; 39,711; 46,971; 52,208; 57,987; 63,777; 70,339; 77,513; 85,828 (2003–12).
- GDP per capita (US$): 2,253; 2,816; 3,073; 3,389; 3,562; 3,861; 4,077; 4,319; 4,572; 4,863 (2003–12).
- Consumer price index (period average): 7.2, 4.1, 2.3, 5.1, 6.7, 6.1, 5.5, 5.5, 5.5, 5.5 (2003–12).
- Consumer price index (end of period): 2.6, 4.3, 3.5, 6.0, 6.7, 5.7, 5.5, 5.5, 5.5, 5.5 (2003–12).

### External sector (trade and volumes, 2003–12)
- Exports (US$ percent change): 16.6, 45.8, 13.3, 28.3, 13.8, 5.4, -0.6, 1.1, 3.4, 4.0 (2003–12).
- Imports (US$ percent change): 33.7, 23.1, 10.7, 9.7, 13.2, 16.8, 5.8, 6.1, 6.0, 8.2 (2003–12).
- Export volume: 6.3, 27.4, -1.2, 17.6, -9.3, 8.4, 3.0, 3.2, 3.0, 1.8 (2003–12).
- Import volume: 5.2, 6.6, 5.2, 5.0, 4.4, 12.8, 2.5, 2.8, 2.7, 4.8 (2003–12).
- Terms of trade: 0.2, 8.5, 4.8, 11.1, 20.5, -6.1, -6.4, -5.1, -2.7, -1.0 (2003–12).
- Real effective exchange rate (period average): 20.0, 7.0, 0.7, -2.7, -6.2 (selected years shown).

### Money and credit (2003–12)
- Credit to the private sector: 12.4, 19.4, 20.1, 14.7, 11.2, 11.1, 12.0, 12.3, 12.2, 12.7 (annual percent change).
- Broad money: 9.6, 16.2, 9.7, 29.8, 18.8, 14.0, 14.2, 14.7, 14.8, 14.8 (2003–12).

### Investment and savings (percent of GDP, 2003–12)
- Gross investment: 29.8, 26.1, 26.1, 27.5, 28.2, 29.8, 31.2, 32.0, 32.3, 32.1.
  - Public: 7.0, 7.3, 6.9, 7.0, 7.7, 9.3, 10.7, 11.0, 10.3, 10.1.
  - Private: 22.8, 18.8, 19.2, 20.5, 20.5, 20.5, 20.5, 21.0, 22.0, 22.0.
- Gross domestic savings: 22.6, 22.1, 22.6, 30.3, 31.3, 27.9, 27.2, 26.6, 26.5, 24.9.
- Gross national savings: 36.5, 34.3, 31.6, 43.4, 46.7, 42.4, 40.9, 39.7, 39.3, 37.5.
  - Public: -0.7, 1.0, 3.2, 7.8, 9.4, 8.3, 7.4, 7.0, 7.0, 6.7.
  - Private: 37.2, 33.3, 28.4, 35.7, 37.3, 34.1, 33.5, 32.7, 32.3, 30.8.

### Central government finance (fiscal indicators, percent of GDP, 2003–12)
- Revenue and grants: 28.3, 30.5, 31.5, 35.0, 36.3, 34.7, 33.9, 33.6, 33.6, 33.3.
  - Of which: SACU receipts: 8.8, 11.3, 9.4, 13.9, 14.2, 12.8, 12.1, 11.8, 11.6, 11.4.
- Expenditure and net lending: 35.7, 33.9, 32.0, 31.6, 33.7, 34.6, 35.2, 35.1, 34.6, 34.6.
  - Personnel expenditure: 14.8, 14.6, 14.2, 12.9, 13.0, 13.0, 13.0, 13.0, 13.0, 13.0.
  - Capital expenditure and net lending: 5.6, 5.2, 4.0, 5.7, 6.9, 7.8, 8.5, 8.5, 8.0, 8.0.
- Primary balance (deficit = –): -5.0, -0.7, 2.3, 6.0, 5.2, 2.2, 0.8, 0.5, 1.1, 0.8.
- Overall government deficit including grants: -7.5, -3.4, -0.5, 3.4, 2.6, 0.1, -1.3, -1.5, -1.0, -1.3.
- Public and publicly guaranteed debt outstanding/GDP: 39.5, 40.2, 38.6, 36.4, 30.6, 30.0, 30.6, 31.2, 31.1, 30.9.
- Public debt outstanding/GDP: 29.6, 33.7, 30.2, 28.2, 22.8, 22.5, 23.5, 24.5, 24.7, 25.0.

### External sector (balance and reserves, 2003–12)
- Current account balance (including official transfers): 6.7, 8.2, 5.5, 15.9, 18.5, 12.6, 9.7, 7.7, 6.9, 5.4 (percent of GDP, 2003–12).
- Current account balance (excluding official transfers): -3.1, -3.2, -4.9, 2.6, 3.4, -1.3, -3.4, -4.9, -5.4, -6.6 (2003–12).
- Gross official reserves (US$ millions): 318.9; 352.7; 315.9; 512.7; 791.1; 900.2; 992.7; 1,072.6; 1,147.0; 1,225.0 (2003–12).
- Months of imports of goods and services: 1.9, 1.7, 1.4, 2.1, 2.8, 2.7, 2.8, 2.9, 2.9, 2.9 (2003–12).
- External debt/GDP: 36.2, 36.4, 29.6, 30.3, 30.0, 30.8, 30.5, 29.8, 28.6, 27.7 (2003–12).
- Exchange rate (N$/US$, end of period): 6.6, 5.6, 6.3, 7.0 (selected years shown).
- Exchange rate (N$/US$, period average): 7.6, 6.4, 6.4, 6.8 (selected years shown).

### Balance of Payments highlights and projections (2003–12, US$ millions in Table 2)
- Current account (US$ millions): 299.9; 461.7; 344.4; 1,106.1; 1,357.2; 1,011.8; 826.0; 704.2; 677.6; 567.0 (2003–12).
- Goods: exports f.o.b. (US$ millions): 1,250.9; 1,823.4; 2,066.7; 2,652.3; 3,017.5; 3,180.2; 3,162.1; 3,196.4; 3,304.3; 3,437.7.
  - Of which: diamonds: 510.9; 824.5; 848.3; 1,083.8; 1,153.6; 1,286.5; 1,305.6; 1,385.0; 1,468.6; 1,557.4.
- Current transfers (US$ millions): 458.3; 667.3; 669.7; 949.9; 1,128.2; 1,141.1; 1,137.9; 1,174.2; 1,225.1; 1,279.0.
  - Of which: SACU receipts: 386.8; 606.8; 650.1; 893.9; 1,041.6; 1,054.4; 1,051.2; 1,087.6; 1,138.4; 1,192.4.
- Capital and financial account (US$ millions): -281.9; -604.7; -451.9; -1,236.8; -1,357.2; -1,011.8; -826.0; -704.2; -677.6; -567.0.
- Memorandum: Trade balance/GDP: -10.3; -5.0; -4.3; 1.4; 1.6; -2.5; -4.9; -6.6; -7.4; -8.7 (2003–12).
- Note: Namibia will become a net exporter of electricity in 2012, when electricity production from the Kudu gas project is expected to be fully operational.

### Central Government Operations (N$ millions, fiscal years 2005/06–2012/13)
- Revenue and grants (N$ millions): 13,075.3; 15,459.8; 16,892.6; 18,134.3; 19,475.5; 20,632.0; 22,181.1; 24,215.8; 26,709.7; 29,208.8 (2005/06–2012/13).
- Tax revenue (N$ millions): 11,886.7; 14,422.6; 15,734.4; 16,909.5; 17,942.0; 19,074.2; 20,442.1; 22,299.9; 24,532.6; 26,808.2.
  - Personal income tax: 2,905.3; 3,286.0; 3,373.6; 2,983.0; 3,750.0; 4,160.4; 4,611.9; 5,085.4; 5,647.1; 6,226.8.
  - Corporate income tax: 1,573.1; 1,302.0; 2,161.3; 2,070.0; 2,328.0; 2,615.1; 2,682.1; 2,921.4; 3,221.3; 3,508.1.
- Expenditures (N$ millions): 13,279.4; 15,383.1; 15,242.9; 18,040.4; 18,083.2; 20,550.6; 23,011.5; 25,326.0; 27,518.3; 30,367.7.
  - Current expenditure: 11,614.3; 12,499.0; 12,512.4; 14,052.9; 14,395.7; 15,927.6; 17,465.3; 19,210.4; 21,172.7; 23,370.7.
  - Personnel (N$ millions): 5,888.8; 6,144.9; 6,213.1; 6,725.0; 6,950.0; 7,726.5; 8,504.3; 9,377.2; 10,339.8; 11,401.2.
  - Capital expenditure: 1,489.9; 2,297.8; 2,097.2; 2,792.1; 2,492.1; 3,447.2; 4,252.1; 4,688.6; 4,772.2; 5,262.1.
- Overall balance (N$ millions): -204.1; 76.6; 1,649.7; 93.9; 1,392.3; 81.4; -830.3; -1,110.2; -808.7; -1,158.9.
- Overall balance excluding extrabudgetary spending (N$ millions): -57.8; 403.4; 1,845.7; 376.1; 1,561.6; 176.0; -726.2; -995.4; -682.1; -1,019.4.
- Primary balance (N$ millions): 958.3; 1,389.4; 2,912.3; 1,250.0; 2,771.0; 1,318.9; 542.2; 355.6; 877.5; 724.9.
- Financing (N$ millions): 213.1; -76.6; -1,716.0; -93.9; -1,392.3; -81.4; 830.3; 1,110.2; 808.7; 1,158.9.
- Memorandum: Public and publicly guaranteed debt (N$ millions): 16,037.9; …; 17,405.6; …; 16,444.4; 17,837.8; 20,032.7; 22,509.2; 24,725.2; 27,129.2.

### Fiscal operations (percent of GDP, fiscal years)
- Revenue and grants: 31.5, 35.1, 35.0, 35.9, 36.3, 34.7, 33.9, 33.6, 33.6, 33.3 (2005/06–2012/13).
- Expenditures: 32.0, 35.0, 31.6, 35.7, 33.7, 34.6, 35.2, 35.1, 34.6, 34.6.
- Overall balance: -0.5, 0.2, 3.4, 0.2, 2.6, 0.1, -1.3, -1.5, -1.0, -1.3.
- Primary balance: 2.3, 3.2, 6.0, 2.5, 5.2, 2.2, 0.8, 0.5, 1.1, 0.8.
- Public and publicly guaranteed debt (percent of GDP): 38.6; …; 36.4; …; 30.6; 30.0; 30.6; 31.2; 31.1; 30.9.
- Public debt (percent of GDP): 30.2; …; 28.2; 22.8; 22.5; 23.5; 24.5; 24.7; 25.0 (selected years).

### Monetary developments (Bank of Namibia, 2004–12; selected levels and changes)
- Reserve money (end of period, N$ millions): 1,238.6; 1,372.5; 1,532.4; 1,761.4; 1,981.8; 2,234.0; 2,529.5; 2,866.6; 3,250.3 (2004–12).
- Broad money (end of period, N$ millions): 15,828.9; 17,370.2; 22,540.2; 26,773.5; 30,519.6; 34,850.8; 39,965.4; 45,866.0; 52,655.1.
- Private sector credit (N$ millions): 19,918.7; 23,922.4; 27,436.6; 30,495.8; 33,871.4; 37,930.7; 42,592.0; 47,788.2; 53,869.8.
- Annual percent change, broad money: 16.2, 9.7, 29.8, 18.8, 14.0, 14.2, 14.7, 14.8, 14.8.
- Annual percent change, private sector credit: 19.4, 20.1, 14.7, 11.2, 11.2, 12.0, 12.3, 12.2, 12.7.
- Net foreign assets (US$ millions): 172.3; -24.7; 695.1; 1,181.6; 1,321.6; 1,411.9; 1,560.9; 1,785.9; 2,024.5 (selected years).

### Millennium Development Goals (selected indicators, 1990–2005)
- Malnutrition prevalence, weight for age (% of children under 5): 26.2 (1990), 24.0 (2000).
- Literacy rate, youth total (% ages 15–24): 87.0 (1990), 92.0 (2005).
- Immunization, measles (% children ages 12–23 months): 57.0 (1990), 68.0 (1995), 69.0 (2000), 73.0 (2005).
- Prevalence of HIV, total (% ages 15–49): 19.6 (latest).
- Fixed line and mobile phone subscribers (per 1,000 people): 38.0 (1990), 50.0 (1995), 101.0 (2000), 206.0 (2005).

### Financial sector indicators (2002–07, selected)
- Capital to assets: 7.5, 8.3, 8.8, 7.8, 7.5, 7.3 (Sep 2002–2007).
- Regulatory capital to risk-weighted assets: 14.1, 14.8, 15.4, 14.6, 14.2, 14.8.
- Nonperforming loans to total gross loans: 3.5, 3.9, 2.4, 2.3, 2.6, 2.9.
- Return on assets: 4.5, 3.6, 2.1, 3.5, 1.5, 3.1.
- Return on equity: 59.8, 43.2, 24.2, 45.6, 19.9, 43.0.
- Banks: number of banks 5; private commercial banks 2; foreign-owned subsidiaries 3 (2007).
- Banks' assets (N$ billions): 17.8; 20.0; 23.4; 28.2; 33.4; 36.2 (2002–07).
- Customer deposits to total (non-interbank) loans: 84.3, 87.4, 87.1, 94.6, 101.8, 104.9 (2002–07).

### Indicators of external and financial vulnerability (2001–07, selected)
- Public sector debt of the central government (percent of GDP): 25.9, 23.9, 29.6, 33.7, 30.2, 28.2 (2001–Mar.2007).
- Broad money (12-month percent change): 4.5, 6.9, 9.6, 16.2, 9.7, 29.8, 19.5 (latest Sept. 2007).
- Private sector credit (12-month percent change): 16.3, 20.2, 12.4, 19.4, 20.1, 14.7, 12.1 (Sept. 2007).
- Gross official reserves (US$ millions, end of period): 224.0, 336.2, 318.9, 352.7, 315.9, 512.7, 823.5 (Sept. 2007).
- Official reserves in months of imports: 1.7, 2.7, 1.9, 1.7, 1.4, 2.1, 3.3 (Sept. 2007).
- Nominal exchange rate (N$/US$, period average): 8.6, 10.5, 7.6, 6.4, 6.4, 6.8, 6.9 (2004–Sept.2007).

### Social and demographic indicators (2007, selected)
- Area (thousands of sq. km): 824.
- Population (2005): Total 2.0 million; annual growth rate 1.0 percent.
- Urban population (percent of total): 32.
- Life expectancy at birth (2005): 47.
- Prevalence of HIV/AIDS (total, percent ages 15–49): 19.6.
- PPP gross national income per capita (2005): 7,690.

### Informational Annex (prefatory points)
- Relations with the Fund: Describes Namibia’s membership status, exchange arrangement, and financial and technical assistance from the Fund.
- Relations with the World Bank: Describes the World Bank Group program.
- Statistical Issues: Assesses the quality of the statistical data; Namibia’s statistical coverage is generally good but some data are not timely.
- Fiscal Debt Sustainability: Examines long-run sustainability of Namibia’s public debt and finds that Namibia has moderate public debt ratios that are robust to most economic shocks.

*Source: Staff Report for the 2007 Article IV Consultation — Informational Annex (Prepared by the African Department, January 2, 2008).*

### 1. Public Sector Debt Sustainability Framework, 2002–12 .............................................10

### 1. Public Sector Debt Sustainability Framework, 2002–12

### Overview
- Namibia’s public debt is low due to substantial fiscal consolidation over the last three years.
- On a calendar-year basis, in 2006 public debt fell approximately 3¼ percentage points, to 28½ percent of GDP, due in part to receipts from privatization of a telecommunications firm.
- The 2006 decrease followed a 1¼ percentage point fall in 2005.
- On current projections, the debt-to-GDP ratio will fall to 22½ percent in 2008 before rising gradually to the authorities’ target of 25 percent by 2012, as capital spending rises.
- Robust nominal GDP growth, projected to average 9 percent over the period, helps to keep the public debt-to-GDP ratio stable.

### Baseline scenario (macroeconomic framework)
- Assumptions:
  - Central government budget balance: surplus of 2¾ percent of GDP in 2007, declining gradually to a 1¼ percent deficit by 2012.
  - Revenues decline by approximately 2½ percent of GDP over the period as customs union (SACU) revenues decline.
  - Declines in mining income are offset by increases in personal income and VAT taxes.
  - Expenditures: an increase of 1 percent of GDP in capital spending in 2009 and 2010 and increased expenditures on goods and services.
- Outcomes:
  - Total expenditures rise to 35 percent of GDP before falling back to 34½ percent by 2012.
  - Public debt declines to 22½ percent of GDP in 2008 and then stabilizes around the authorities’ 25 percent target thereafter.

### Alternative scenarios (Table 1 summaries)
- Historical-averages scenario:
  - Assumes real GDP growth, real interest rates, and the primary balance are maintained at their historical averages.
  - Outcome: because Namibia had substantial deficits in past years, the public debt ratio would rise to approximately 33 percent of GDP by 2012.
- High-primary-surplus scenario:
  - Assumes the government maintains the 5 percent of GDP primary surplus estimated for 2007.
  - Outcome: the public debt ratio rapidly declines to less than 5 percent of GDP by the end of the forecast period.

### Vulnerability analysis / Bounds tests (Figure 1)
- The bounds tests illustrate the vulnerability of the fiscal position to exogenous shocks.
- Results:
  - Even with a half standard deviation shock to interest rates, growth, or the exchange rate, the debt-to-GDP ratio would remain at or below 31 percent of GDP.

*Source: APPENDIX IV — Namibia: Fiscal Debt Sustainability (from the IMF staff report content provided).*

### 5.      To date the authorities have shown thorough commitment to fiscal prudence and to

### _cr0883 - 5.      To date the authorities have shown thorough commitment to fiscal prudence and to

### Fiscal prudence, recent drivers, and public debt outlook
- Authorities committed to achieving target public debt ratio of 25 percent of GDP.
- Positive shocks supporting this outcome: SACU revenues and diamond production.
- Expenditure containment: personnel and goods and service spending contained.
- Public debt described as "robust to most economic shocks."

- Baseline: Public sector debt (percent of GDP) by year:
  - 2002: 23.8
  - 2003: 28.5
  - 2004: 32.8
  - 2005: 31.6
  - 2006: 28.4
  - 2007: 24.1
  - 2008: 22.6
  - 2009: 23.3
  - 2010: 24.3
  - 2011: 24.7
  - 2012: 24.9

- Debt-stabilizing primary balance: -0.1 (percent of GDP) in projection horizon shown.

- Change in public sector debt (percent of GDP) by year:
  - 2002: -1.7
  - 2003: 4.7
  - 2004: 4.3
  - 2005: -1.2
  - 2006: -3.1
  - 2007: -4.3
  - 2008: -1.6
  - 2009: 0.7
  - 2010: 1.0
  - 2011: 0.5
  - 2012: 0.2

- Identified debt-creating flows (4+7+12) (percent of GDP) by year:
  - 2002: -1.6
  - 2003: 4.7
  - 2004: 1.6
  - 2005: -0.9
  - 2006: -5.5
  - 2007: -5.6
  - 2008: -3.1
  - 2009: -1.1
  - 2010: -0.7
  - 2011: -1.1
  - 2012: -1.1

- Primary deficit (percent of GDP) by year:
  - 2002: 1.2
  - 2003: 4.0
  - 2004: 1.7
  - 2005: -1.7
  - 2006: -5.2
  - 2007: -5.4
  - 2008: -2.9
  - 2009: -1.2
  - 2010: -0.6
  - 2011: -1.0
  - 2012: -0.9

- Revenue and grants (percent of GDP) by year:
  - 2002: 30.7
  - 2003: 29.4
  - 2004: 30.1
  - 2005: 31.9
  - 2006: 33.9
  - 2007: 36.1
  - 2008: 35.1
  - 2009: 34.2
  - 2010: 33.7
  - 2011: 33.7
  - 2012: 33.3

- Primary (noninterest) expenditure (percent of GDP) by year:
  - 2002: 31.8
  - 2003: 33.4
  - 2004: 31.8
  - 2005: 30.2
  - 2006: 28.8
  - 2007: 30.7
  - 2008: 32.2
  - 2009: 33.0
  - 2010: 33.1
  - 2011: 32.7
  - 2012: 32.4

- Public sector debt-to-revenue ratio (percent) by year:
  - 2002: 77.5
  - 2003: 97.1
  - 2004: 109.0
  - 2005: 99.1
  - 2006: 83.8
  - 2007: 66.9
  - 2008: 64.3
  - 2009: 68.2
  - 2010: 72.0
  - 2011: 73.5
  - 2012: 74.7

- Gross financing need (percent of GDP) by year:
  - 2002: 16.6
  - 2003: 19.2
  - 2004: 21.2
  - 2005: 19.3
  - 2006: 10.1
  - 2007: 9.4
  - 2008: 7.9
  - 2009: 8.1
  - 2010: 11.4
  - 2011: 8.9
  - 2012: 10.1

- Gross financing need (US$ billions) by year:
  - 2002: 0.5
  - 2003: 0.9
  - 2004: 1.2
  - 2005: 1.2
  - 2006: 0.7
  - 2007: 0.7
  - 2008: 0.6
  - 2009: 0.7
  - 2010: 1.0
  - 2011: 0.9
  - 2012: 1.1

### Key macroeconomic and fiscal assumptions (baseline)
- Real GDP growth (percent) by year:
  - 2002: 6.7
  - 2003: 3.5
  - 2004: 6.6
  - 2005: 4.8
  - 2006: 4.1
  - 2007: 4.4
  - 2008: 4.8
  - 2009: 4.5
  - 2010: 4.8
  - 2011: 4.7
  - 2012: 4.8

- Average nominal interest rate on public debt (percent) by year:
  - 2002: 10.8
  - 2003: 10.9
  - 2004: 10.0
  - 2005: 9.4
  - 2006: 9.9
  - 2007: 10.1
  - 2008: 10.1
  - 2009: 10.2
  - 2010: 9.7
  - 2011: 9.6
  - 2012: 9.6

- Average real interest rate (nominal rate minus change in GDP deflator, percent) by year:
  - 2002: -0.6
  - 2003: 11.6
  - 2004: 8.9
  - 2005: 5.6
  - 2006: -3.8
  - 2007: 3.6
  - 2008: 4.1
  - 2009: 5.0
  - 2010: 4.5
  - 2011: 4.3
  - 2012: 4.0

- Inflation rate (GDP deflator, percent) by year:
  - 2002: 11.4
  - 2003: -0.6
  - 2004: 1.1
  - 2005: 3.8
  - 2006: 13.7
  - 2007: 6.5
  - 2008: 6.0
  - 2009: 5.3
  - 2010: 5.2
  - 2011: 5.2
  - 2012: 5.6

- Growth of real primary spending (deflated by GDP deflator, percent) by year:
  - 2002: 1.6
  - 2003: 8.4
  - 2004: 1.6
  - 2005: -0.4
  - 2006: -0.9
  - 2007: 11.4
  - 2008: 9.9
  - 2009: 7.2
  - 2010: 5.2
  - 2011: 3.3
  - 2012: 4.0

### Stress tests and scenarios (selected results)
- Scenario with key variables at their historical averages: 24.1, 25.9, 28.0, 29.9, 31.7, 33.2, -0.2 (series shown in table).
- No policy change (constant primary balance) in 2007–12 scenario: sequence shown leading to debt outcomes 24.1, 20.2, 16.7, 12.8, 8.9, 4.6, 0.0 (table values).
- Bound tests (selected entries, public debt in percent of GDP):
  - B1. Real interest rate at historical average plus one standard deviation: 24.1, 23.1, 24.4, 26.0, 27.1, 27.8, 0.6
  - B2. Real GDP growth at historical average minus one standard deviation: 24.1, 22.9, 24.3, 26.2, 27.8, 29.3, 0.1
  - B3. Primary balance at historical average minus one standard deviation: 24.1, 23.8, 25.8, 28.1, 29.8, 31.2, -0.1
  - B4. Combination of B1-B3 using 1/2 standard deviation shocks: 24.1, 23.6, 25.3, 27.3, 28.9, 30.1, 0.3
  - B5. One time 30 percent real depreciation in 2006: 24.1, 25.4, 26.2, 27.2, 27.6, 27.8, -0.1
  - B6. 10 percent of GDP increase in other debt-creating flows in 2006: 24.1, 32.6, 33.4, 34.4, 34.9, 35.0, -0.1

### Executive Board assessment — judgments, risks, and priorities
- Overall assessment: sound macroeconomic management; favorable external environment; robust growth; subdued inflation; large current account surpluses; strengthened foreign reserves.
- Main risks:
  - Uncertainties in the global environment.
  - Slow progress in economic diversification; mining sector vulnerability to terms-of-trade deterioration.
  - High unemployment and poverty rates; economy vulnerable to shocks (e.g., decline in onshore diamond mining, weather-related agricultural shocks).
- Directors' views and priorities:
  - Exchange rate peg to the South African rand remains appropriate.
  - Keep policy interest rate differentials with South Africa limited to avoid destabilizing capital flows or reserves.
  - Fiscal: commend use of SACU receipts to reduce public debt via fiscal surpluses; fiscal space exists for additional infrastructure spending but requires improved expenditure prioritization within the medium-term expenditure framework.
  - Reduce personnel expenditure and pursue comprehensive civil service reform.
  - Strengthen oversight of public enterprises; implement State-Owned Enterprise Act quickly.
  - Strengthen tax administration: build audit capacity in Inland Revenue Department, establish a large-taxpayers’ office, improve VAT administration.
  - Financial sector: foster competition; implement domestic investment requirements for pension and insurance industries cautiously to preserve safe, productive investments and favorable returns.
  - Structural reforms to reduce unemployment and poverty: strengthen labor relations, promote labor productivity, upgrade civil service skills, liberalize trade, improve business environment, speed education reform, improve governance, and join the Extractive Industries Transparency Initiative.

### Namibian authorities’ statement — policy stance and actions
- Macroeconomic stance: continued sound macroeconomic management; robust growth matching regional peers.
- Growth and inflation projections:
  - Real GDP grew by 4.1 percent in 2006; GDP in 2007 projected around 4.0 percent; medium-term expected "around 4.5-5 percent".
  - Inflation: 5.1 percent in 2006; peaked 7.2 percent in July 2007; declined to 6.6 percent in October 2007; expected to moderate to 6 percent in 2008.
- Fiscal policy actions:
  - Total revenue rose from 31.5 percent of GDP in 2005 to 36.3 percent in 2007.
  - Fiscal surplus of 2.1 percent of GDP in 2006/07; projected fiscal surplus declines to about 1.1 percent of GDP in 2007/08 due to increased public spending.
  - Public debt projected to be reduced to an estimated 23 percent of GDP by mid-2008 from 28 percent in 2006/07.
  - SACU accounts for more than one-third of total revenue; authorities aim to strengthen domestic tax system to offset projected decline in SACU receipts.
  - Expenditure reforms underway; wage bill declined to 13 percent of GDP in 2006/07 from 15 percent three years earlier.
  - Adoption of new SOE Governance Act to strengthen corporate governance of state-owned enterprises.

- Monetary and exchange rate policy:
  - Commitment to the CMA arrangement; rand peg (1:1).
  - Reserves cover more than 3 months of imports.

- Financial sector and structural measures:
  - Banking sector profitable and well capitalized; regulatory strengthening (including consolidated supervision amendments expected by mid-2008).
  - Measures to widen financial access: mobile banking, merchant–serviced ATMs, smart cards, lower-fee savings accounts, micro-lending, rural outreach partnerships.
  - Anti-money laundering: Financial Intelligence Act enacted in 2007; financial intelligence center established within the Central Bank of Namibia.
  - Consideration of domestic asset requirements to retain more pension/insurance funds for domestic investment; research on investment instruments and monitoring frameworks underway.
  - Strategies to foster employment growth in non-mining sectors including tourism, diamond cutting and polishing expansion.
  - Health sector: HIV prevalence declined from 22 percent in 2002 to 20 percent in 2006; ART program covers about 40,000 patients (~70 percent of those who could benefit).

### Key selected indicators (as reported)
- Change in real GDP:
  - 2004: 6.6
  - 2005: 4.8
  - 2006: 4.1
  - 2007 Est.: 4.4
- Change in CPI (end of period):
  - 2004: 4.3
  - 2005: 3.5
  - 2006: 6.0
  - 2007 Est.: 6.7
- Overall fiscal deficit/surplus (fiscal year):
  - 2004: -3.4
  - 2005: -0.5
  - 2006: 3.4
  - 2007 Est.: 2.6
- Public debt (percent of GDP):
  - 2004: 33.7
  - 2005: 30.2
  - 2006: 28.2
  - 2007 Est.: 22.8
- Credit to the private sector (end of period growth rates shown): 19.4, 20.1, 14.7, 11.2 (years aligned with table).
- Current account balance (percent of GDP):
  - 2004: 8.2
  - 2005: 5.5
  - 2006: 15.9
  - 2007 Est.: 18.5
- International reserves (months of imports):
  - 2004: 1.7
  - 2005: 1.4
  - 2006: 2.1
  - 2007 Est.: 2.8
- Exchange rate (Namibia dollar/U.S. dollar, end of period):
  - 2004: 5.6
  - 2005: 6.3
  - 2006: 7.0
  - 2007 Est.: 6.8

*Italic: IMF Executive Board conclusions and related data as presented in the document.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0883.pdf_