## _cr16373 - introduction of LTV limits for non-primary residence purchases is welcomed and could

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### Context and key figures
- Since 2010, average annual real GDP growth exceeded 5 percent, supported by the peg to the South African rand and moderate inflation dynamics.
- Key macro-financial indicators and observations:
  - Real GDP growth: 5.3 percent in 2015 (6.5 percent in 2014).
  - Current account deficit: 13.7 percent of GDP in 2015 (7.6 percent in 2014).
  - Reserve coverage: 2.8 months of projected imports after the 2015 Eurobond issuance; reserves fell to 2.2 months of imports by August 2016.
  - External debt: about 51 percent of GDP (42¾ percent in 2014).
  - Net international investment position: 4 percent of GDP in 2015 (15 percent in 2014).
  - Credit growth to the private sector: averaged 13¾ percent since 2010 (13.8 in 2015).
  - Housing prices: increased on average by 14 percent over the period mentioned.
  - Household indebtedness: about 90 percent of disposable income in 2015 (81 percent in 2013).
  - Headline inflation: averaged 3.4 percent in 2015; reached 6.9 percent in September 2016.
  - Bank of Namibia policy rate: increased to 7 percent (in line with SARB).
- Structural context: unemployment remains high and little responsive to growth; income inequality remains second only to South Africa.

### Outlook and risks
- Growth projections:
  - 2016: real GDP growth foreseen to slow to 1.6 percent.
  - 2017-2018: projected to accelerate to above 5 percent as new Husab uranium mine ramps up, then converge to about 4 percent long-term.
- Fiscal outlook:
  - Low SACU revenue over the medium term implies future fiscal deficits remain large and public debt expected to increase to above 60 percent of GDP by 2021.
  - Financing government may crowd out private sector credit through asset reallocation by domestic financial institutions.
- External adjustment:
  - Larger mining exports and tighter domestic policies would halve the trade deficit to about 12⅓ percent of GDP, with the current account deficit stabilizing at around 5 percent of GDP.
- Key risks:
  - External: further commodity price declines; accelerated fall in SACU revenue; lower demand from European partners and Angola.
  - Domestic: slower mining and construction growth; sudden correction in overvalued housing prices and domestic credit; funding risks from large government financing needs.
- Buffer constraints heighten the chance that shocks could force abrupt fiscal responses, amplifying negative impacts and risking sovereign downgrades and higher interest rates.

### Authorities’ stance
- Authorities broadly agree with staff’s outlook and risks but expect a milder 2016 slowdown due to lower fiscal multiplier assumptions.
- Authorities revised the FY16/17 budget and brought forward fiscal adjustment plans; they recognize large financing needs as a key near-term domestic risk.
- Planned initiatives include finalizing new PPP legislation by end-2016, introducing a semi-autonomous revenue agency, and improving SOE governance and reporting.

### A. Designing fiscal consolidation — staff findings (baseline)
- Authorities’ 2016 budget and medium-term strategy targets:
  - Initial aim: bring public debt below 35 percent of GDP; budget envisaged deficit of 4.7 percent of GDP.
  - October mid-year review: spending reductions of about 2.8 percent of GDP and revised deficit to 6.3 percent of GDP.
- Staff baseline projections (reflecting revised FY16/17 budget):
  - Fiscal deficit: about 7.1 percent of GDP in FY16/17, reaching 8-8½ percent of GDP by 2018/19.
  - Public debt: about 52 percent of GDP by FY18/19, rising above 60 percent of GDP over the projection period.
  - Government gross financing needs would remain large, pressuring domestic financial markets and potentially crowding out private credit.
- Staff baseline macroeconomic table (selected series):
  - Real GDP Growth (annual change): 5.3 (2015), 1.6 (2016), 5.1 (2017), 5.4 (2018), 4.3 (2019), 4.1 (2020), 3.9 (2021).
  - Fiscal Balance (percent of GDP): -8.7 (2015), -7.1 (2016), -8.0 (2017), -8.4 (2018), -7.6 (2019), -7.8 (2020), -8.2 (2021).
  - Public Debt (excl. guarantees): 39.8 (2015), 43.1 (2016), 47.4 (2017), 51.6 (2018), 54.9 (2019), 58.2 (2020), 61.6 (2021).
  - Gross Financing Needs (percent of GDP): 16.3 (2015), 15.1 (2016), 18.3 (2017), 20.0 (2018), 18.7 (2019), 18.7 (2020), 22.5 (2021).
  - Gross International Reserves (months of imports): 2.8 (2015), 2.7 (2016), 2.6 (2017), 2.5 (2018–2021).

### A. Designing fiscal consolidation — staff reform scenario and recommendations
- Scale of additional adjustment needed:
  - A further 4½-5½ percent of GDP in measures over FY17/18-19/20 likely required to place the public debt ratio on a declining path by FY19/20 and eventually below 35 percent of GDP.
  - Spreading adjustment over three years would limit negative growth impact.
- Staff recommendations:
  - Base additional adjustment on quality measures with low short-term multipliers.
  - Use combination of increases in indirect revenue (assume ¼ of adjustment) and expense reductions, while protecting capital and social spending.
  - Maintain BoN policy rate at par, or with limited positive spread, with SARB to support the peg.
- Suggested revenue measures (examples):
  - Focus on excises, VAT base, property taxation, tax incentives (preserve numeric labels where provided).
- Suggested expenditure measures:
  - Contain wage bill dynamics (constrain inflation adjustment, limit new hires to education and health, reduce allowances).
  - Curtail subsidies and transfers to SOEs and other entities via SOE reform and intragovernmental reviews.
  - Consolidate and improve targeting of key social programs.
- Staff reform scenario projections (with adjustment spread equally over three years, revenue = quarter of adjustment):
  - Real GDP Growth (annual change): 5.3 (2015), 1.6 (2016), 4.7 (2017), 4.8 (2018), 3.6 (2019), 3.7 (2020), 3.9 (2021).
  - Fiscal Balance: -8.7 (2015), -7.2 (2016), -6.4 (2017), -5.0 (2018), -2.3 (2019), -2.0 (2020), -1.9 (2021).
  - Public Debt (excl. guarantees): 39.8 (2015), 43.2 (2016), 46.0 (2017), 47.2 (2018), 45.9 (2019), 44.3 (2020), 42.7 (2021).
  - Gross Financing Needs: 16.3 (2015), 15.1 (2016), 16.7 (2017), 15.3 (2018), 11.0 (2019), 10.0 (2020), 12.6 (2021).
  - Gross International Reserves (months of imports): 2.8 (2015), 2.7 (2016), 2.8 (2017), 3.1 (2018), 3.5 (2019), 3.7 (2020–2021).
- Trade-offs:
  - Bringing public debt below 35 percent of GDP by FY19/10 (authorities’ plan) would improve debt metrics but exert significant downward pressure on short-term growth.
  - Fiscal adjustment would reduce crowding out and funding risks but could temporarily lower banks’ profitability and asset quality through reduced growth.

### Public financial management and revenue administration
- PFM reform priorities:
  - Early enactment of the 2015 Public Procurement Act (scheduled for FY2017/18) and stronger procurement processes.
  - Strengthen macro-fiscal forecasting capacity at the ministry of finance.
  - Accelerate reform of budget formulation and execution processes and the PFM legal framework.
  - Improve public investment management (project appraisal, implementation).
  - Design legal framework for PPPs to avoid excessive risk taking.
- Revenue administration findings and recommendations:
  - Significant room for improvement in organization structure, business processes, and human resource management.
  - Plans to create a semi-autonomous revenue authority possibly by 2017 are welcomed.
  - To accelerate benefits: prioritize collection of tax arrears; enhance internal business processes and IT systems.

### Possible fiscal adjustment measures, FY17/18-FY19/20 (Percent of GDP)
- Budget Savings: Total — Up to 8.0
- Revenue measures: Up to 3
  - Increase domestic levies (e.g., fuel levy, luxury good excises) — 1.2
  - Increase SACU excises above Union uniform rates (e.g., alcohol, tobacco) — 0.8
  - Reduce tax incentives — n.a.
  - Widen the VAT tax base — n.a.
  - Remodule PIT rates — 0.3-0.6
  - Improve VAT productivity — 0.4
- Expenditure measures: Up to 5
  - Limit inflation wage adjustment and new hiring — 1.3-1.9
  - Halve transfers to SOEs — 0.3
  - Reduce transfers to other extra-budgetary entities and local authorities (increase tax powers of the latter) — 1.2
  - Better targeted social transfers — 1.2
  - Reprioritize capital budget — 0.3

### State-Owned Enterprises (SOEs) — key points and reform priorities
- Coverage and role:
  - About 30 SOEs and 3 stated owned financial institutions operate in key service and network industries (examples: Telecom Namibia, NamPower, NamWater, Air Namibia).
  - SOEs often operate in monopoly positions and engage in quasi-fiscal activities.
- Financial footprint and governance:
  - Financial performance generally poor; few exceptions (NamPower, NamPort).
  - FY16/17-18/19 MTEF projects annual transfers to SOEs around 1.5 percent of GDP, mainly to transportation companies (e.g., Air Namibia).
  - SOE debt about 4.3 percent of GDP in 2015; largely guaranteed by the government.
  - Compliance with reporting requirements weak; governance and legal compliance weak.
- Reform focus:
  - Stronger oversight of financial performance of key SOEs.
  - Full implementation of legally mandated governance framework (business plans, performance agreements, reporting).
  - Clear demarcation between commercial, developmental and social activities to strengthen accountability and foster private participation.

### Financial sector structure and systemic risks
- Financial sector size and interconnections:
  - Banking system assets about 68 percent of GDP; appears well capitalized and profitable with low NPLs.
  - Large NBFIs with gross assets about 260 percent of GDP and average solvency level in 2015 exceeding statutory requirements.
  - Financial and ownership interconnections between banks and NBFIs; financial sector holds half of government debt.
- Main systemic risk sources:
  - Overvalued residential real estate and mortgage exposure:
    - Total mortgages are more than half of banks’ loans.
    - Staff estimates housing prices overvalued by about 16 percent on average.
    - Stress tests: banks resilient to moderate stress; under very severe stress some banks would need to deleverage; extreme tail-risk scenario could make compliance with capital requirements difficult for some banks.
  - Household indebtedness and balance-sheet vulnerabilities:
    - Household debt about 90 percent of disposable income in 2015.
    - Mortgage loans constituted about 85 percent of bank credit to households in 2015.
    - Debt service burden: 21 percent versus 10 percent (BIS reporting countries).
    - Average interest payments about 11¾ percent of outstanding mortgage loans.
    - Under a 300bp interest rate shock, share of vulnerable households could rise between 4¼ percent (no real growth in gross income) to 10⅓ percent (3 percent decline in real gross income).
    - Under these shocks banks’ arrears on mortgages would increase by 4-5 times up to 9 percent of total loans; could still be absorbed by banks’ capital buffers.
    - Asymmetric shocks: almost 55 percent of total mortgages are in the top two deciles; a 15 percent nominal income reduction for these households combined with a 300bp interest rate increase could raise mortgage arrears to 20-21 percent.
  - Linkages between NBFIs and banks:
    - Money and asset management funds provide about half of banks’ funding and are often part of the same financial conglomerate.
    - Investment funds are twice as large as banks; end-2015 had about 60 percent of GDP in assets invested in foreign equity markets.
    - A limited redemption shock to investment funds (less than 3 percent of their assets) forcing reallocations away from bank deposits could lead to severe liquidity shortages for banks.
    - Shocks could reduce funds’ ability to finance government new issuances and raise interest costs or financing shortages.

### Macroprudential and supervisory recommendations
- Strengthen macroprudential measures to curb housing market risks:
  - Introduce DSTI limits; recent measure: LTV limits for non-primary home purchases effective in 2017.
  - Extend limits to NBFIs engaged in real estate to avoid regulatory leakages.
  - Consider later introducing LTV limits on primary residential mortgages, designed to avoid hampering affordability for lower income groups and sudden price corrections.
- Strengthen supervision of NBFIs:
  - Enact FIM Bill to create a modern regulatory and supervisory framework.
  - Move toward risk-based supervision of systemic NBFIs and introduce consolidated supervision for financial conglomerates.
- Monitor bank–NBFI linkages:
  - BoN should lead in assessing financial stability risks and conduct stress tests of banks considering shocks to and from investment funds.
  - Accelerate improvements to financial regulatory architecture and provide BoN with powers to exercise macro-prudential controls for the whole financial sector.
- Address information and data gaps:
  - NAMFISA to improve collection of granular data and develop FSIs for NBFIs.
  - BoN to improve housing price indices and develop household wealth and debt surveys or collect borrower data to better assess household risks.

### Household vulnerability and housing market stress tests
- Household vulnerability assumptions and results:
  - Inflation assumed to average 6.5 percent.
  - Simulated arrear increases reported for 200bp and 300bp interest shocks across income growth scenarios: Zero Real Gross Income Growth; One Percent Decline; Two Percent Decline; Three Percent Decline.
  - Stress test findings:
    - Under a 300bp interest rate shock, vulnerable households could rise by 4¼ percent to 10⅓ percent depending on income shock assumptions.
    - Arrears on mortgages could increase by 4-5 times up to 9 percent of total loans under these shocks.
    - Severe adverse scenario (three-year growth slowdown to 1.5 percent, 15 percent fall in housing prices, 300bp interest increase): banks could absorb the shock and comply with 10 percent RWA capital requirement albeit with deleveraging.
    - Tail-case scenario (10 percent GDP contraction): some banks could face difficulties complying with capital requirements and bank credit could decline by 20 percent.
- House price valuation:
  - Staff estimates house price overvaluation at national level around 16 percent in June 2016.
  - Valuation indicators (national):
    - Regression Analysis: Jun-16 = 22.2; Sep-14 = 19.8
    - Price to Income: Jun-16 = 12.6; Sep-14 = 18.0
    - Price to Rent: Jun-16 = 13.5; Sep-14 = 17.0
    - Average: Jun-16 = 16.1; Sep-14 = 18.3

### Structural reforms, unemployment and inequality
- Diagnosis of unemployment persistence:
  - Unemployment, especially youth, remains high and appears structural despite two decades of strong average growth.
  - Constraints: skills mismatches; weaknesses in business environment; growth dominated by less labor-intensive sectors.
- Structural reform priorities:
  - Reduce skill mismatches: improve access and quality of higher education and vocational training; strengthen on-job training.
  - Improve business conditions: simplify business regulations, review labor market functioning, support labor-intensive SMEs and manufacturing.
- Potential impact:
  - Staff estimate: bringing skill mismatch and business regulation to world median could reduce unemployment by a fifth over the medium term.
- Social spending and targeting:
  - Poverty headcount declined from 70 percent to 15 percent (early 1990s to 2009/10).
  - Gini coefficient: 60.7 (2009/10).
  - Social spending in 2015: about 17 percent of GDP (40 percent of total public spending).
  - Targeting shortcomings: poor targeting accuracy of direct cash transfers; suggested reforms include proxy means testing and improving education quality.

### External sector, reserves, and exchange rate assessment
- External imbalances and structural component:
  - Current account turned negative in 2009 and reached -13.7 percent of GDP in 2015.
  - Multiple methods indicate 2015 structural component of CA deficit about -8½ percent of GDP; EBA-lite CA norm for 2015 is -8.0 percent of GDP.
- International reserve adequacy:
  - Reserves peaked at US$1.9 billion (3.9 months) in 2009; fell to US$1.2 billion (1.8 months) in 2014; end-2015: US$1.6 billion (2.8 months) boosted by a US$750 million Eurobond.
  - IMF tailored metric: adequate reserves for Namibia correspond to 20.7–31 percent of GDP or 3.6–5.4 months of imports.
  - In 2015 reserves were about 73 percent of the Namibia-tailored metric; absent reserve-boosting events, reserves expected to decline to about 60 percent of the minimum adequate level.
  - Policy recommendation: aim to increase international reserves to at least 3.5 months of imports (3.8 months accounting for SACU-related risks) through gradual buffer building, fiscal restraint, and additional foreign financing (particularly FDI).
- Exchange rate assessment:
  - REER depreciated about 30 percent since end-2010 and 12 percent in 2015; REER about 10 percent below its 10-year average.
  - CA and ES models point to REER overvaluation of about 16–22½ percent depending on scenario; EBA-lite REER model suggests minor undervaluation (about 10 percent).
  - Excluding one-off mining construction imports (5.9 percent of GDP in 2015) reduces 2015 CA by about 4.7 percentage points and implies smaller REER overvaluation.
  - Nominal depreciation may not improve CA given peg to rand and 60 percent of imports from South Africa.

### Debt sustainability and stress tests
- Public debt dynamics:
  - Public debt rose from 16 percent (FY10/11) to 39.8 percent of GDP in 2015 (44.7 percent including guarantees).
  - DSA baseline: public debt remains below 70 percent distress threshold but including guaranteed debt approaches distress threshold by 2021/22.
  - Gross financing needs average about 19 percent of GDP over the projection period (above 10 percent distress threshold).
- DSA baseline selected figures:
  - Nominal gross public debt (percent of GDP): 2014: 25.6; 2015: 28.8; 2016: 44.7; 2017: 50.5; 2018: 54.6; 2019: 59.1; 2020: 62.1; 2021: 65.1; 68.2.
  - Public gross financing needs (percent of GDP): 2014: 14.1; 2015: 17.4; 2016: 15.1; 2017: 18.3; 2018: 20.0; 2019: 18.7; 2020: 18.7; 2021: 22.5.
- Stress-test outcomes (selected):
  - Macrofiscal shock: debt-to-GDP would increase to 93 percent; gross financing needs to 30 percent.
  - Contingent liability shock (default of all guaranteed debt + macro shocks): debt-to-GDP to about 80 percent; gross financing needs to about 27 percent.
  - SACU revenue shock (5 percent of GDP reduction + growth and interest shocks): debt-to-GDP to about 80 percent; gross financing needs to about 27 percent.
- Reform scenario:
  - Additional measures about 5 percent of GDP, spread over three years, would bring debt on a decline path to around 49 percent of GDP by 2021/22 and contain gross financing needs on average to about 13 percent of GDP.
- External debt sensitivity:
  - A standardized sensitivity analysis: a 30 percent exchange rate depreciation in 2017 would increase external debt to about 72 percent of GDP.
  - A non-interest CAD widening by 4.2 percent of GDP during 2017-21 would raise external debt to about 78 percent of GDP by 2021.

### Monetary and macro-financial policy implications (selected)
- Fiscal consolidation supports external adjustment and safer reserve levels while easing pressure on monetary policy.
- BoN should maintain the policy rate at par, or with limited positive spread, with SARB’s rate to support the peg and sustain healthier reserves.
- Staff welcomed introduction of LTV limits for non-primary residence purchases (effective 2017) and encourages complementing them with DSTI limits and additional macroprudential measures as needed.
- Accelerate improvements to financial regulatory architecture, enact pending legislation (NAMFISA and FIM bills), and provide BoN with macroprudential powers and consolidated supervision.

### Fund relations, TA, data, and institutional priorities
- Fund membership and operational facts:
  - Joined: September, 1990; Article VIII.
  - Quota: 191.10 (SDR million); Fund holdings of currency: 191.03 (SDR million).
  - Article IV consultations: standard 12-month cycle; last Executive Board conclusion on September 18, 2015.
- Technical assistance 2012–16 (selected):
  - FAD: Revenue Administration, Trade Facilitation, Program Budgeting, IFMIS, Budgeting.
  - MCM: Basel II/III, Stress Testing, Macroprudential Framework.
  - STA: National Accounts, CPI, PPI, GFS Statistics, Monetary Statistics.
- Statistical assessment and reporting:
  - Data provision broadly adequate but with shortcomings; monthly core data with 1–2 month lags; national accounts and fiscal/external statistics have longer lags.
  - NSA base year: 2010 (NA); CPI base year: 2012; CPI weights from 2009/10 HIES.
  - BoN reports monthly monetary statistics; plans to begin reporting OFC data in 2017.
- Joint World Bank–IMF work program (selected):
  - IMF: 2017 Article IV consultation; FSAP during 2017–early 2018; NBFI regulation; Macroprudential Policy; SOEs and local authorities.
  - World Bank: Statistical capacity TA; distributional impact of fiscal policy dissemination.

### Staff appraisal — summary of vulnerabilities and policy challenges
- Namibia has experienced strong growth but faces rising vulnerabilities: public debt on a rising path, double-digit current account deficit, reserves below safe levels, rapid credit growth, rising housing prices, and elevated household indebtedness.
- Downside risks include SACU revenue declines, commodity price falls, lower mining/construction growth, and corrections in housing prices and domestic credit.
- Key policy challenges:
  - Preserve macroeconomic stability via additional fiscal adjustment designed to minimize growth impact.
  - Manage financial sector risks through macroprudential tools, strengthened supervision (including NBFIs), and improved data.
  - Pursue structural reforms to reduce unemployment and inequality—focus on skills, education, and business environment reforms.
- Fiscal policy prescription:
  - Shift to tighter fiscal stance; additional adjustment to bring public debt on a declining path.
  - Spread adjustment over time and emphasize quality measures with low short-term multipliers.
  - Combine revenue measures and expenditure reductions while protecting capital and social spending; limit wage bill, curtail SOE transfers, and increase indirect tax revenues.
  - Advance PFM, revenue administration, and SOE reforms to create fiscal space and ensure equitable burden sharing.

*Source: IMF Namibia Article IV Staff Report and associated staff materials contained in content unit _cr16373.*

### introduction of LTV limits for non-primary residence purchases is welcomed and could

### _cr16373 - introduction of LTV limits for non-primary residence purchases is welcomed and could

### Context: Robust growth with growing vulnerabilities
- Since 2010, average annual real GDP growth exceeded 5 percent, supported by the peg to the South African rand and moderate inflation dynamics.
- Four years of expansionary fiscal policy have led to a sharp increase in public debt; the current account deficit has widened and international reserve coverage has declined below safe levels.
- Strong credit growth and supply constraints contributed to fast-growing housing prices and high household indebtedness.
- Unemployment remains high and little responsive to growth, maintaining high income inequality (second only to South Africa).

Key figures and observations:
- Real GDP growth: 5.3 percent in 2015 (6.5 percent in 2014).
- Current account deficit widened to 13.7 percent of GDP in 2015 (7.6 percent in 2014).
- Reserve coverage improved to 2.8 months of projected imports after the 2015 Eurobond issuance; reserves fell to 2.2 months of imports by August 2016.
- External debt increased to about 51 percent of GDP (42¾ percent in 2014).
- Net international investment position declined to 4 percent of GDP from 15 percent in 2014.
- Credit growth to the private sector averaged 13¾ percent since 2010 (13.8 in 2015).
- Housing prices increased on average by 14 percent over the period mentioned.
- Household indebtedness reached about 90 percent of disposable income in 2015 (81 percent in 2013).
- Headline inflation: averaged 3.4 percent in 2015; reached 6.9 percent in September 2016.
- Bank of Namibia policy rate increased to 7 percent (in line with SARB).

### Outlook and risks
- Growth outlook:
  - 2016: real GDP growth foreseen to slow to 1.6 percent.
  - 2017-2018: projected to accelerate to above 5 percent as new Husab uranium mine ramps up, then converge to about 4 percent long-term.
- Fiscal outlook:
  - Low SACU revenue over the medium term implies future fiscal deficits remain large and public debt is expected to increase to above 60 percent of GDP by 2021.
  - Financing the government would require significant shifts in asset allocations of domestic financial institutions, possibly crowding out private sector credit.
- External adjustment:
  - Larger mining exports and tighter domestic policies would halve the trade deficit to about 12⅓ percent of GDP, with the current account deficit stabilizing at around 5 percent of GDP.
- Risks:
  - External: further commodity price declines, accelerated fall in SACU revenue, lower demand from European partners and Angola.
  - Domestic: slower growth in mining and construction, sudden correction in overvalued housing prices and domestic credit, funding risks from large government financing needs.
- Buffer constraints increase the risk that shocks could force abrupt fiscal responses, amplifying negative impacts and potentially prompting sovereign downgrades and higher interest rates for the public and private sector.
- A sharp housing price reversal, given elevated household indebtedness, could deteriorate banks’ asset quality and profitability, affecting growth.

### Authorities’ views
- Authorities broadly agree with staff’s outlook and risks but expect a milder 2016 slowdown due to lower fiscal multiplier assumptions.
- Authorities have revised the FY16/17 budget and brought forward fiscal adjustment plans to mitigate risks.
- They recognize that forced fiscal adjustment could amplify negative effects and concur that large financing needs are a key near-term domestic risk.

### Policy discussions — Overall focus
- Namibia’s key challenges: preserve macroeconomic stability and reduce high unemployment and income inequality.
- Policy priorities discussed:
  - Anchor additional fiscal adjustment in a credible medium-term plan that minimizes negative impact on growth.
  - Manage systemic risks from overvalued housing prices and the large non-bank financial sector.
  - Advance structural reforms to generate jobs and reduce unemployment and inequality.

### A. Designing fiscal consolidation — staff findings and projections
- Authorities’ 2016 budget and medium-term strategy aimed to bring public debt below 35 percent of GDP:
  - Budget envisaged nominal reductions in recurrent expenses and postponement of non-productive capital outlays to yield a deficit of 4.7 percent of GDP.
  - Medium-term strategy aimed to reduce the deficit to 2.1 percent of GDP and public debt to about 28 percent of GDP by FY18/19.
  - October mid-year budget review introduced further spending reductions of about 2.8 percent of GDP for the remainder of FY16/17 and revised the deficit to 6.3 percent of GDP.
- Staff baseline scenario (reflecting revised FY16/17 budget) projects:
  - Fiscal deficit: about 7.1 percent of GDP in FY16/17, reaching 8-8½ percent of GDP by 2018/19.
  - Public debt: about 52 percent of GDP by FY18/19, rising above 60 percent of GDP over the projection period.
  - Government gross financing needs would remain large, creating pressures on domestic financial markets, possible crowding out and funding risks.
- Staff macroeconomic projections (Baseline scenario table highlights):
  - Real GDP Growth (annual change): 5.3 (2015), 1.6 (2016), 5.1 (2017), 5.4 (2018), 4.3 (2019), 4.1 (2020), 3.9 (2021).
  - Fiscal Balance (percent of GDP): -8.7 (2015), -7.1 (2016), -8.0 (2017), -8.4 (2018), -7.6 (2019), -7.8 (2020), -8.2 (2021).
  - Public Debt (excl. guarantees): 39.8 (2015), 43.1 (2016), 47.4 (2017), 51.6 (2018), 54.9 (2019), 58.2 (2020), 61.6 (2021).
  - Gross Financing Needs (percent of GDP): 16.3 (2015), 15.1 (2016), 18.3 (2017), 20.0 (2018), 18.7 (2019), 18.7 (2020), 22.5 (2021).
  - Gross International Reserves (months of imports): 2.8 (2015), 2.7 (2016), 2.6 (2017), 2.5 (2018–2021).

### A. Designing fiscal consolidation — staff recommendations and reform scenario
- Scale of additional adjustment needed:
  - Under staff’s macroeconomic assumptions, a further 4½-5½ percent of GDP in measures (depending on multipliers) would likely be required over FY17/18-19/20 to bring the public debt ratio on a declining path by FY19/20 and eventually below 35 percent of GDP.
  - Spreading the additional adjustment over three years would limit the negative impact on growth.
- Staff recommends:
  - Base additional adjustment on quality measures with low short-term multipliers to limit negative impact on growth.
  - Use a combination of increases in indirect revenue (e.g., ¼ of the adjustment) and expense reductions, while protecting capital and social spending.
  - Maintain the BoN policy rate at par, or with limited positive spread, with the SARB’s rate to support the peg.
- Suggested revenue measures (examples): focus on measures with low multipliers such as excises, VAT base, property taxation, tax incentives.
- Suggested expenditure measures:
  - Contain dynamics of the government wage bill by constraining inflation adjustment, limiting new hires to critical areas (education and health), and reducing allowances.
  - Curtail subsidies and transfers to SOEs and other entities through SOE reform and reviewing intragovernmental arrangements.
  - Consolidate and improve targeting of key social programs.
- Staff reform scenario (with fiscal adjustment spread equally over three years starting in FY17/18 and assumed quarter from revenue) projects improved outcomes:
  - Real GDP Growth (annual change): 5.3 (2015), 1.6 (2016), 4.7 (2017), 4.8 (2018), 3.6 (2019), 3.7 (2020), 3.9 (2021).
  - Fiscal Balance: -8.7 (2015), -7.2 (2016), -6.4 (2017), -5.0 (2018), -2.3 (2019), -2.0 (2020), -1.9 (2021).
  - Public Debt (excl. guarantees): 39.8 (2015), 43.2 (2016), 46.0 (2017), 47.2 (2018), 45.9 (2019), 44.3 (2020), 42.7 (2021).
  - Gross Financing Needs: 16.3 (2015), 15.1 (2016), 16.7 (2017), 15.3 (2018), 11.0 (2019), 10.0 (2020), 12.6 (2021).
  - Gross International Reserves (months of imports): 2.8 (2015), 2.7 (2016), 2.8 (2017), 3.1 (2018), 3.5 (2019), 3.7 (2020–2021).
- Trade-offs noted:
  - Bringing public debt below 35 percent of GDP by FY19/10 (as planned by authorities) would improve fiscal outlook but put significant downward pressure on short-term growth.
  - Fiscal adjustment would reduce crowding out and funding risks but could temporarily reduce banks’ profitability and asset quality through lower growth.

*Source: IMF Namibia Article IV Staff Report, November 17, 2016.*

### 13.      Fiscal adjustment should be accompanied by structural reforms in public financial

### 13.      Fiscal adjustment should be accompanied by structural reforms in public financial management and revenue administration

### Public financial management (PFM) and revenue administration — findings and recommendations
- Improved spending efficiency and better revenue collection are critical to create space for adjustment, minimize the adverse growth impact of the consolidation, and ensure equitable burden sharing.
- PFM reforms should focus on:
  - Early enactment of the 2015 Public Procurement Act (scheduled for FY2017/18), and stronger procurement processes to reduce waste and free resources for consolidation.
  - Strengthening the macro-fiscal forecasting capacity at the ministry of finance.
  - Accelerating plans to reform budget formulation and execution processes and the PFM legal framework to enhance the preparation and implementation of consolidation plans.
  - Improving public investment management (e.g., project appraisal, implementation) to support more efficient growth-enhancing spending.
  - Designing a well-crafted legal framework for public-private partnerships (PPP) to avoid excessive risk taking as authorities plan to boost PPP efforts.
- Revenue administration findings and recommendations:
  - A recent international assessment signaled significant room for improvement in organization structure, business processes, and human resource management of the revenue administration.
  - Authorities’ plans to create a semi-autonomous revenue authority possibly by 2017 are timely and welcomed.
  - Cross-country experience suggests gains from improving revenue administration may take time; to bring forward benefits staff recommends:
    - Continue prioritizing the collection of tax arrears.
    - Enhance internal business processes and IT systems.

### Possible Fiscal Adjustment Measures, FY17/18-FY19/20 (Percent of GDP)
- Budget Savings: Total — Up to 8.0
- Revenue measures: Up to 3
  - Increase domestic levies (e.g., fuel levy, luxury good excises) — 1.2
  - Increase SACU excises above Union uniform rates (e.g., alcohol, tobacco) — 0.8
  - Reduce tax incentives — n.a.
  - Widen the VAT tax base — n.a.
  - Remodule PIT rates — 0.3-0.6
  - Improve VAT productivity — 0.4
- Expenditure measures: Up to 5
  - Limit inflation wage adjustment and new hiring — 1.3-1.9
  - Halve transfers to SOEs — 0.3
  - Reduce transfers to other extra-budgetary entities and local authorities (increase tax powers of the latter) — 1.2
  - Better targeted social transfers — 1.2
  - Reprioritize capital budget — 0.3
- Source of estimates: MOF, and IMF staff estimates

### State-Owned Enterprises (SOEs) — roles, risks, and reform priorities (Box 1)
- Role and coverage:
  - About 30 SOEs and 3 stated owned financial institutions operate in key service and network industries (examples: Telecom Namibia, NamPower, NamWater, Air Namibia).
  - SOEs often operate in monopoly positions and play a key role in service delivery and infrastructure development, funded through budget transfers often complemented by direct borrowing guaranteed by the government.
  - SOEs engage in quasi-fiscal activities (e.g., pricing services below cost or market price).
- Financial performance and fiscal footprint:
  - The financial performance of the largest SOEs is generally poor; with a few exceptions (e.g., NamPower, NamPort) most operate at a loss and have high leverage ratios (examples: Air Namibia, TransNamib, Road Contractor Company).
  - SOEs remain solvent in several cases only because of government transfers and bailouts (example: Air Namibia).
  - FY16/17-18/19 Medium-Term Fiscal Framework projects annual transfers to SOEs to be around 1.5 percent of GDP, mainly to transportation companies (e.g., Air Namibia), with only one company (co-owned with the private sector) paying dividends.
  - SOE debt was about 4.3 percent of GDP in 2015 and is largely guaranteed by the government; authorities expect the stock of guaranteed debt to increase as SOEs execute new development projects.
  - Compliance with reporting requirements is weak; most SOEs do not publish regular annual reports or financial statements; aggregate sector performance information is not available.
  - Governance remains poor and compliance with national legislation (e.g., appointment of management, remuneration, and audits) is weak.
- Recent institutional steps and reform focus:
  - In 2015 the authorities created the Ministry of Public Enterprises to oversee 98 parastatals and reform the sector; in 2016 a centralized reporting framework was set up with key SOEs responding to the new ministry.
  - Reforms should focus on:
    - Stronger and timely oversight of the financial performance of key SOEs.
    - Full implementation of the legally mandated governance framework (e.g., business plans, performance agreements, and reporting obligations).
    - Clear demarcation between commercial, developmental and social activities to strengthen accountability and foster greater private participation.

### Authorities’ views on fiscal outlook and adjustment
- The authorities concur that changes in the macroeconomic outlook have significantly worsened the fiscal position.
  - They noted that in addition to a shortfall in revenues, the sharp increase in the public debt ratio in 2015 was due to the depreciation of the currency, a low GDP deflator, and the Eurobond issuance, which was partly saved.
  - They recognize that current policies, if not recalibrated, would keep public debt on a rising path, threatening macro-economic stability.
  - As a response, they introduced significant spending reductions in the revised FY16/17 budget and plan to strengthen their fiscal consolidation strategy going forward.
- Commitment to additional fiscal adjustment:
  - The authorities affirmed commitment to undertake additional fiscal adjustment to bring public debt on a declining path.
  - They concur that significant adjustment is needed to bring the public debt ratio below 35 percent of GDP.
  - They prefer some frontloading of adjustment to ease funding pressures and bring public debt below 35 percent over the next three years.
  - They emphasized fiscal adjustment should be based on quality measures with low multipliers to contain negative growth impacts while protecting social spending.
  - Intended focus on measures with the least adverse impact on economic activity, such as inefficient current spending and capital outlays that do not directly enter into productive processes.
- Authorities’ planned initiatives:
  - Finalize new PPP legislation by end-2016.
  - Introduce a semi-autonomous revenue agency.
  - Improve and fully implement the existing Public Enterprises Governance Act and the new centralized reporting framework to improve public companies’ performance and help rationalize public transfers.

### Managing systemic risks in the financial sector — overview and main risks
- Financial sector structure and size:
  - Banking system assets about 68 percent of GDP; banking system appears well capitalized and profitable with high credit quality (low NPLs) and liquidity above regulatory requirements.
  - Large non-bank financial institutions (NBFIs) with gross assets of about 260 percent of GDP and average solvency level in 2015 exceeding statutory requirements.
  - Financial and ownership interconnections between banks and NBFIs and foreign linkages make the sector complex; the financial sector holds half of government debt.
- Main sources of possible systemic risks:
  - Overvalued residential real estate prices and banks’ mortgage exposure:
    - Total mortgages are more than half of banks’ loans.
    - Staff estimates housing prices are on average overvalued by about 16 percent.
    - Stress testing: banks are resilient to moderate stress; under very severe stress some banks would need to significantly deleverage to preserve capital buffers; only under an extreme tail-risk scenario some banks could face difficulties in complying with capital requirements.
    - Past analysis suggests that a 1 percent negative change in real credit is associated with 0.47 percent decline in real GDP in the long run.
  - Household indebtedness and balance sheet vulnerabilities:
    - Household debt reached about 90 percent of disposable income in 2015, higher than in South Africa and close to levels of advanced economies.
    - In 2015 mortgage loans constituted about 85 percent of bank credit to households.
    - Debt service burden compared to BIS reporting countries: 21 percent versus 10 percent.
    - Average interest payments about 11¾ percent of outstanding mortgage loans.
    - Stress testing (using estimated household balance sheets) suggests middle and upper-middle income households are particularly vulnerable to income and interest rate shocks.
    - Under a 300bp interest rate shock, the share of vulnerable households could rise between 4¼ percent (no real growth in gross income) to 10⅓ percent (with a 3 percent decline in real gross income).
    - Under these shocks banks’ arrears on mortgages would increase by 4-5 times up to 9 percent of total loans, but could still be absorbed by banks’ capital buffers.
    - Asymmetric shocks: almost 55 percent of total mortgages are in the top two deciles; lowering nominal income of these households by 15 percent combined with a 300bp increase in interest rates could increase mortgage arrears up to 20-21 percent; the system on average would be resilient, but some banks could face difficulties in complying with capital requirements.
  - Linkages between NBFIs and banks:
    - Money and asset management funds provide about half of banks’ funding and are often part of the same financial conglomerate.
    - Investment funds are twice as large as banks and, as of end-2015, had about 60 percent of GDP in assets invested in foreign equity markets, possibly exposing them to external shocks.
    - A limited redemption shock to investment funds (of less than 3 percent of their assets) that forces reallocations away from bank deposits could potentially lead to severe liquidity shortages for banks, affecting credit availability and potentially leading to a decline in growth.
    - Shocks to investment funds could reduce their ability to finance the government; in absence of well-developed secondary markets, the effect would mainly be on new issuances and possibly in terms of higher interest cost or financing shortages for the government.

*Source: Namibia country material (MOF, IMF staff estimates, companies' annual reports, and IMF staff analyses) contained in the supplied chapter.*

### Box 2. Household Vulnerability (concluded)

### Box 2. Household Vulnerability (concluded)

### Household vulnerability scenarios and assumptions
- Inflation is assumed to average 6.5 percent.
- Simulated arrear increase under interest rate shocks reported for: 200bp and 300bp shocks (percent of Total Mortgage Loans).
- Income shock scenarios presented: Zero Real Gross Income Growth; One Percent Decline in Real Gross Income; Two Percent Decline in Real Gross Income; Three Percent Decline in Gross Income.
- Charts report vulnerability by income deciles (1–10) showing Pre-Shock, 200bp, and 300bp outcomes and % of Total Mortgages (RHS).

### Strengthening financial-sector risk management (policy recommendations)
- Introduce further macroprudential measures to curb housing market risks, including debt-service-to-income (DSTI) limits.
  - Recent measure: loan-to-value (LTV) limits for non-primary home purchases to be effective in 2017.
  - DSTI limits would rely on recent reforms of credit information systems and would address LTV limits becoming less binding as property prices increase.
  - Extend limits to non-bank financial institutions engaged in real estate to avoid regulatory leakages.
  - Consider, at a later stage, introducing LTV limits on primary residential mortgages, designed and timed to avoid hampering affordability for lower income groups and sudden price corrections.
- Strengthen supervision of NBFIs.
  - NAMFISA has been strengthening capacity, but the Financial and Institutions Market (FIM) Bill needs approval and enactment to create a modern regulatory and supervisory framework.
  - NAMFISA could further move toward risk-based supervision of systemic NBFIs.
- Monitor and assess financial stability risks from bank–NBFI linkages.
  - Investment funds and linkages with banks are macro critical and warrant closer scrutiny.
  - The Bank of Namibia (BoN) should lead in assessing financial stability risks from such linkages and conduct stress tests on banks considering shocks to and from investment funds.
  - Accelerate plans to improve financial regulatory architecture and provide the BoN with powers and instruments to assess macro-financial risks and exercise macro-prudential controls for the whole financial sector.
  - Introduce consolidated supervision to account for complex ownership and financial linkages and prevent regulatory arbitrage of capital and liquidity requirements.
- Address information and data gaps.
  - NAMFISA should continue to improve collection of granular data, develop financial sector indicators (FSIs) for NBFIs, and build adequate databases to move toward risk-based supervision.
  - The BoN could accelerate efforts to improve existing housing price indices.
  - Develop wealth and debt household surveys (and/or collect borrower data from banks and credit bureaus) to better assess household-sector risks and linkages inside the financial system.

### Authorities’ view on financial risks and measures
- Authorities concur with the assessment of financial risks and are taking steps to address key vulnerabilities.
  - Note: implementation of new LTV limits and recently enacted regulations on minimum down-payments for instalment credit (2016 Credit Amendment Act) would curb credit growth and housing market risks.
  - BoN will explore options to introduce DSTI limits at a later stage, but considers macroprudential limits on primary residences undesirable at this stage given structural housing shortages and potential social implications.
- On banks–NBFIs linkages, authorities observed that a shock to investment funds might not necessarily drain system liquidity (e.g., deposits redirected from investment funds to banks).
  - Authorities finalized a Financial Stability Policy Framework to improve coordination across BoN, NAMFISA and MoF and expect enactment of new legislation to improve institutional coordination.
  - NAMFISA concurs with need to enhance regulatory capacity, including IMF technical assistance, and move toward risk-based supervision.
  - Authorities expect approval of pending bills (particularly the NAMFISA and FIM bills) will significantly strengthen the NBFI regulatory environment.

### Lowering unemployment and reducing inequality — diagnosis
- Unemployment, particularly among youth, remains high and appears structural despite one of the highest average growth rates in Africa over the past 20 years.
- Constraints on the elasticity of employment to growth include:
  - (i) skills mismatches due to lack of a well-educated labor force;
  - (ii) weaknesses in the business environment, including cumbersome regulations and difficulties in starting businesses and obtaining work permits;
  - (iii) growth dynamics dominated by less labor-intensive sectors.
- The 2011-13 Targeted Intervention Program for Employment and Economic Growth (TIPEEG) mainly led to creation of temporary jobs.
- Creation of tax-free export processing zones (EPZ) and tax incentive schemes had limited impact on export diversification and employment.
- Recent policy actions: review of tax incentive schemes, implementation of “Growth at Home” strategy, enactment of a new Investment Promotion Act, extension of free education to secondary schooling in 2016, additional funding for vocational training.

### Structural reform priorities and potential impact
- Two key reform areas that could increase the elasticity of employment to growth:
  - Reduce skill mismatches:
    - Improve access and quality of higher education, provide incentives to transition to tertiary education and vocational training.
    - Improve quality of primary and junior secondary education and strengthen on-job training programs.
  - Improve business conditions:
    - Simplify business regulations (starting businesses, registering property, buying industrial land).
    - Review labor market functioning (reduce restrictions on work permits for skilled workers, simplify labor dispute processes).
    - Support labor-intensive SMEs and manufacturing.
- Staff estimate: bringing the level of skill mismatch and business regulation to the world median could potentially reduce unemployment in Namibia by a fifth over the medium term.

### Social spending, targeting, and inequality (Box 3)
- Namibia: poverty headcount declined from 70 percent to 15 percent (early 1990s to 2009/10).
- Gini coefficient: 60.7 (in 2009/10, latest year available), the second highest in the world.
- In 2015, social spending was about 17 percent of GDP (40 percent of total public spending).
- Social spending components include direct cash transfers (old age pensions, children, disability, veteran’s grants), subsidies (housing, water), and large in-kind spending in education and health.
- World Bank findings (forthcoming):
  - Social programs such as cash transfers and subsidies reduce inequality by about 10 percent and by 25 percent once combined with in-kind spending.
  - Cash transfers reduce extreme poverty by 8 percent, although taxes and other subsidies marginally increase poverty.
- Targeting shortcomings and policy recommendations:
  - Targeting accuracy of direct cash transfers is poor; impact on inequality (Gini) is much lower than in, for example, South Africa.
  - Water subsidies appear better targeted; housing subsidies have room for improvement.
  - Despite high public spending in education, education outcomes are rather poor.
  - Reform options: introduce proxy means testing for some cash transfers (e.g., old age pensions, child support grants) and housing subsidies; enhance quality and coverage of education.
- Note on methodology: analysis based on World Bank’s “Namibia Commitment to Equity (CEQ)” study (forthcoming) using 2009/10 Household Income data and real social spending for the same period.

### Authorities’ view on unemployment and social policy
- Authorities intend to continue addressing high unemployment, income inequality and poverty with focused structural reforms and better targeting of social programs.
  - Created the Ministry of Poverty Eradication and Social Welfare.
  - Recognize reducing skill mismatches and improving business environment as priorities.
  - Harambee Prosperity Plan translates some priorities into specific actions.
  - Argue that strategic industries (agri-business, logistics, tourism, manufacturing) need support to foster domestic value-added and job creation.
  - A fifth NDP is under preparation to coordinate policies for growth and job creation.
  - With development partners, authorities have started reviewing key social programs to improve capacity to reduce income inequality and poverty.

### Staff appraisal — macro vulnerabilities and policy challenges
- Since the financial crisis Namibia experienced strong growth, but faces rising vulnerabilities and high unemployment and income inequality.
  - Public debt is on a rising path.
  - Current account deficit is in the double digits.
  - International reserve coverage is below safe levels.
  - Rapid credit growth contributed to fast-growing residential real estate prices and elevated household indebtedness.
- Risks to the outlook are tilted to the downside:
  - Growth is projected to weaken in 2016, and accelerate in 2017-18.
  - Downside risks stem from possible declines in SACU revenues and commodity prices, lower growth in mining and construction, and corrections in housing prices and domestic credit.
  - With limited buffers, shocks could be amplified by abrupt policy responses, especially if combined with sovereign credit rating downgrades.
- Key policy challenges:
  - Preserve macroeconomic stability with additional fiscal adjustment to maintain debt sustainability, while minimizing effects on growth.
  - Manage risks from the financial sector.
  - Make inroads in reducing high unemployment and income inequality.
- Fiscal policy recommendations:
  - 2016 budget shifted to a tighter fiscal stance; additional fiscal adjustment needed to bring public debt on a declining path.
  - Additional adjustment should be carefully designed to reduce impact on growth: spread over time and based on quality measures with low short-term multipliers.
  - A combination of revenue measures and expense reductions, while protecting capital and social spending, would minimize growth impact.
  - Policies should include limiting the public wage bill, curtailing transfers to SOEs and other entities, and increase indirect tax revenues.
  - Fiscal structural reforms to enhance public financial management and strengthen revenue administration would create space for fiscal adjustment and ensure equitable burden sharing.
  - Concrete progress on reforming SOEs to improve oversight, governance, and performance is essential to lower budget transfers and improve growth and public services.

*Source: Box 2. Household Vulnerability (concluded) from IMF staff report content unit _cr16373.*

### 31.      Fiscal consolidation will support external adjustment and safer levels of reserves, while

### _cr16373 - 31.      Fiscal consolidation will support external adjustment and safer levels of reserves, while

### Fiscal and monetary policy
- Fiscal consolidation will support external adjustment and safer levels of reserves, while lifting pressure on monetary policy.
- In this context, the BoN should maintain the policy rate at par, or with limited positive spread, with the SARB’s rate to support the peg, and sustain healthier international reserve levels.

### Financial stability and macroprudential measures
- Risks from fast growing housing prices, household indebtedness, and links between banks and large non-bank financial institutions should be carefully monitored and managed.
- Staff welcomed the recent introduction of LTV limits for non-primary residence purchases, and encouraged the authorities to complement the new regulation with DSTI limits and explore additional macro-prudential measures as needed.
- As investment funds and their linkages with banks are macro critical, the authorities should monitor and assess possible financial stability risks from such linkages.
- The authorities should accelerate their plans to improve the financial regulatory architecture and provide the BoN with the necessary powers to assess macro-financial risks and exercise macro-prudential control for the whole financial sector.

### Structural reforms and social programs
- A package of well-targeted structural reforms and reforms of social programs could significantly boost job creation and deliver more inclusive growth.
- Staff supports the authorities’ commitment to structural reforms and better targeting of social programs.
- Structural reforms should focus on reducing skill mismatches (e.g., improving access to higher and vocational education, on-job training) and simplifying business regulations (e.g., starting businesses, registering property, and reducing labor market restrictions) as they have the highest potential to boost employment and deliver more inclusive growth.
- Better targeting of key social assistance programs, including cash transfers and housing subsidies, could make further inroads in reducing inequality and poverty.

*Source: _cr16373 - 31.      Fiscal consolidation will support external adjustment and safer levels of reserves, while*

### 34.      It is proposed that the next Article IV consultation with Namibia be held on the

### 34. It is proposed that the next Article IV consultation with Namibia be held on the standard 12-month cycle.

### Macroeconomic performance and projections
- GDP at constant prices:
  - 2013: 5.7
  - 2014: 6.5
  - 2015: 5.3
  - 2016 (Est): 1.6
  - 2017 (Proj): 5.1
  - 2018 (Proj): 5.4
  - 2019 (Proj): 4.3
  - 2020 (Proj): 4.1
  - 2021 (Proj): 3.9
- GDP deflator:
  - 2013: 8.7
  - 2014: 6.8
  - 2015: -0.2
  - 2016 (Est): 6.6
  - 2017–2021 (Projs): 6.0, 5.7, 5.7, 5.7, 5.8
- GDP at market prices (N$ billions):
  - 2013: 123
  - 2014: 140
  - 2015: 147
  - 2016 (Est): 159
  - 2021 (Proj): 263
- Consumer prices (end of period):
  - 2013: 4.9
  - 2014: 4.6
  - 2015: 3.7
  - 2016 (Est): 7.3
  - 2017–2021 (Projs): 6.0, 5.7, 5.8, 5.7, 5.7
- GDP per capita (US$, constant 2000 exchange rate):
  - 2013: 8,060
  - 2014: 8,988
  - 2015: 9,270
  - 2016 (Est): 9,957
  - 2017–2021 (Projs): 11,001; 12,158; 13,301; 14,522; 15,822

### External sector and vulnerabilities
- Current account balance (percent of GDP):
  - 2013: -4.0
  - 2014: -7.6
  - 2015: -13.7
  - 2016 (Proj): -9.7
  - 2017–2021 (Projs): -5.0, -4.9, -4.7, -4.8, -4.9
- Trade balance (US$ millions and percent of GDP):
  - Trade balance (US$ millions): 2013: -1,984; 2014: -2,578; 2015: -2,917; 2016 (Proj): -1,756
  - Trade balance (percent of GDP): 2013: -15.6; 2014: -20.0; 2015: -25.4; 2016 (Proj): -16.9
- Exports (US$ millions):
  - 2013: 4,649
  - 2014: 4,607
  - 2015: 4,073
  - 2016 (Proj): 4,058
  - 2021 (Proj): 5,878
  - Diamonds component examples (US$ millions): 2013: 1,212; 2014: 1,291; 2015: 1,163; 2016 (Proj): 1,179
- Imports (US$ millions):
  - 2013: -6,632
  - 2014: -7,185
  - 2015: -6,989
  - 2016 (Proj): -5,813
- Terms of trade (2000 = 100):
  - Series provided; recent deterioration noted (e.g., 2015: negative)
- Financial flows and reserves:
  - Non-FDI flows surged with Eurobond issuance and long-term loans for mining companies.
  - Gross international reserves (US$ millions):
    - 2013: 1,505
    - 2014: 1,198
    - 2015: 1,580
    - 2016 (Proj): 1,604
    - 2021 (Proj): 1,912
  - Reserves as percent of GDP:
    - 2013: 12.9
    - 2014: 9.9
    - 2015: 16.8
    - 2016 (Proj): 16.2
    - 2021 (Proj): 13.9
  - Months of imports of goods and services:
    - 2013: 2.2
    - 2014: 1.8
    - 2015: 2.8
    - 2016 (Proj): 2.7
    - 2021 (Proj): 2.5
- Net International Investment Position (NIIP) rapidly deteriorated due to increased liabilities and currency depreciation (series shown in figures).

### Fiscal developments and projections
- Central government revenue and grants (N$ millions):
  - Total revenue and grants:
    - 2013/14: 42,355
    - 2014/15: 49,950
    - 2015/16 (Est): 52,200
    - 2016/17 (Proj): 51,090
    - 2021/22 (Proj): 84,422
  - Domestic revenue (2015/16 Est): 52,049; (2016/17 Proj): 50,927
  - Tax revenue (2015/16 Est): 48,903; (2016/17 Proj): 48,339
  - SACU receipts (included in taxes on international trade):
    - 2013/14: o/w SACU receipts implicit in table (see SACU lines in tables)
- Expenditure and net lending (N$ millions):
  - Expenditure and net lending:
    - 2013/14: 47,408
    - 2014/15: 59,334
    - 2015/16 (Est): 65,262
    - 2016/17 (Proj): 62,721
    - 2021/22 (Proj): 106,409
  - Current expenditure (2015/16 Est): 55,205; (2016/17 Proj): 56,619
  - Interest payments (N$ millions):
    - 2013/14: 1,796
    - 2014/15: 2,066
    - 2015/16 (Est): 2,633
    - 2016/17 (Proj): 5,037
    - Foreign interest payments increasingly significant in 2016/17 (2,043)
  - Subsidies and transfers (2015/16 Est): 17,817; (2016/17 Proj): 16,852
  - Capital expenditures (2015/16 Est): 10,050; (2016/17 Proj): 6,097
- Fiscal balances (percent of GDP; Table 3b):
  - Total revenue and grants:
    - 2013/14: 33.4
    - 2014/15: 35.4
    - 2015/16 (Est): 34.9
    - 2016/17 (Proj): 31.3
    - 2021/22 (Proj): 31.3
  - Expenditure and net lending:
    - 2013/14: 37.3
    - 2014/15: 42.0
    - 2015/16 (Est): 43.6
    - 2016/17 (Proj): 38.4
    - 2021/22 (Proj): 39.5
  - Overall balance (percent of GDP):
    - 2013/14: -4.0
    - 2014/15: -6.6
    - 2015/16 (Est): -8.7
    - 2016/17 (Proj): -7.1
    - 2021/22 (Proj): -8.2
  - Primary balance (percent of GDP):
    - 2013/14: -2.6
    - 2014/15: -5.2
    - 2015/16 (Est): -7.0
    - 2016/17 (Proj): -4.0
    - 2021/22 (Proj): -3.6
- Public debt dynamics:
  - Public debt / GDP:
    - 2013: 24.2
    - 2014: 25.5
    - 2015: 39.8
    - 2016 (Proj): 43.1
    - 2017–2021 (Projs): 47.4, 51.6, 54.9, 58.2, 61.6
  - Gross public and publicly guaranteed debt / GDP:
    - 2013: 27.9
    - 2014: 28.8
    - 2015: 44.7
    - 2016 (Proj): 50.5
    - 2021 (Proj): 68.2
- Government financing needs and investor base:
  - Gross financing needs (percent of GDP, fiscal year):
    - 2011–2015 series shown with 2015 elevated (table/figure)
  - Security issuances have been mostly absorbed by the non-bank financial sector (figures).

### Inflation, monetary policy, and banking sector
- Inflation:
  - Headline and non-food inflation series shown with a rapid rise since late 2015.
  - Inflation drivers include housing costs and food prices and drought-related effects.
- Monetary policy:
  - The Bank of Namibia (BoN) increased its repo rate following South Africa’s tightening; real rates remain low (figure annotation).
- Monetary accounts (N$ millions):
  - Broad money (M2):
    - 2013: 68,958
    - 2014: 74,366
    - 2015: 81,945
    - 2016 (Proj): 88,754
    - 2021 (Proj): 146,985
  - Net foreign assets (Monetary survey):
    - 2013: 23,332
    - 2014: 19,516
    - 2015: 30,081
    - 2016 (Proj): 25,274
    - 2021 (Proj): 36,834
  - Domestic credit:
    - 2013: 62,866
    - 2014: 77,065
    - 2015: 83,315
    - 2016 (Proj): 99,529
    - 2021 (Proj): 177,061
  - Credit to the private sector (percent change):
    - 2013: 14.5
    - 2014: 16.5
    - 2015: 13.8
    - 2016 (Proj): 8.4
- Banking sector indicators (Table 5, selected):
  - Regulatory capital to risk-weighted assets:
    - 2010: 15.3
    - 2011: 14.0
    - 2012: 14.2
    - 2013: 14.4
    - Mar-16: 15.3
  - Nonperforming loans to total gross loans:
    - 2010: 2.0
    - 2011: 1.5
    - Mar-16: 1.6
  - Return on assets (before taxes):
    - 2010: 3.5
    - 2015: 4.8
    - Mar-16: 3.3
  - Liquid assets to total assets:
    - 2010: 10.7
    - Mar-16: 10.8
- Financial inclusion:
  - Improvements noted; bank access for lower income deciles close to neighboring countries (figures).

### Growth composition, labor market, and structural issues
- Growth drivers and sector contributions:
  - Recent robust growth driven by strong construction activity and expansionary fiscal policy; domestic demand offset negative net exports (figure annotations).
  - Mining dominated growth in recent years but contributes little to employment; agriculture and wholesale & retail trade contribute more to employment.
  - Manufacturing growth shows strong correlation with GDP growth; wholesale and retail trade also correlated with employment growth.
- Labor market:
  - Unemployment remains high, particularly for youth (ages 15–24).
  - Unemployment shows little responsiveness to GDP growth (figures).
  - Unemployment rate (ILO estimate, percent labor force) series shown with youth unemployment significantly higher than total.
- Structural impediments:
  - Education and skills:
    - Tertiary enrollment (2015) in Namibia is significantly lower than upper middle-income countries (figure).
    - Quality of higher education and training index (2007–2015) for Namibia is below upper middle-income country average; high skill mismatch index observed.
  - Business regulation gaps constrain starting businesses, registering property, and paying taxes (figure comparison with median upper middle-income country).
  - Infrastructure: overall good, but gaps remain particularly in access to electricity and internet services (Electric power consumption and Internet users series).

### Macrofinancial risks and housing market
- Housing market and household leverage:
  - House Price Index (Dec-2007 = 100) shows rapidly rising housing prices through 2015/2016 (series).
  - Private sector leverage:
    - Corporates: Debt to GDP series (rising 2011–2015)
    - Households: Debt to income series (rising 2011–2015)
  - Banks’ loan composition (2015):
    - Mortgages: 52%
    - Installment sale: 16%
    - Overdrafts: 13%
    - Fixed-term: 11%
    - Personal: 5%
  - Large concentration of banks’ loans in mortgages; macrofinancial risks mounting (figure annotations).
- Non-bank financial institutions and linkages:
  - Investment funds are twice as large as commercial banks (financial sector gross assets percent of GDP series).
  - Investment funds hold large and volatile foreign exposures and account for 50 percent of banks’ funding; significant linkages shown between investment funds and banks (figures).

### Social indicators and development outcomes
- Poverty and income distribution:
  - Per capita income has greatly improved and poverty has significantly reduced (figure highlights).
  - Income inequality has improved but remains high; Namibia ranks second highest among listed countries for Gini (latest available Gini since 2007).
- Millennium Development Goals and social statistics (selected):
  - Population (million):
    - 2013: 2.2
    - 2014: 2.2
    - 2015: 2.3
  - Unemployment, total (% of total labor force) (MDG table):
    - 2010: 22.1
    - 2011: 19.8
    - 2012: 16.7
    - 2013: 16.9
  - Life expectancy, infant and under-5 mortality, HIV prevalence, and other MDG indicators presented in Table 6 (series 1995–2015).

### Key projections and risks (from tables and figures)
- Growth projection:
  - After an estimated 1.6 in 2016, growth rebounds to 5.1 in 2017 and moderates to 3.9 by 2021.
- Fiscal trajectory and debt risks:
  - Public debt projected to rise from 24.2 (2013) to 61.6 (2021) percent of GDP.
  - Overall fiscal deficits remain elevated through the projection period (overall balance percent of GDP: -8.7 in 2015; -7.1 in 2016; -8.2 in 2021).
- External liquidity and reserve adequacy:
  - Gross international reserves remain below IMF’s adequacy metric despite temporary increases; months of imports around 2.5–2.8 in projections.
- Financial stability risks:
  - Rapid house price increases, high mortgage concentration in bank portfolios, rising private sector indebtedness, and large NBFI sector with volatile foreign exposures imply mounting macrofinancial risks.

*Source: IMF staff estimates, projections, and figures as provided in the document.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### A. External Sector Imbalances and Long-Term Vulnerabilities
- Current account (CA) trends and drivers:
  - CA balance turned negative in 2009 and reached a deficit of 13.7 percent in 2015.
  - Trade deficit was 25 percent of GDP in 2015.
  - Deterioration mainly driven by widening trade deficit despite REER depreciation; partially offset by higher SACU transfers.
  - Larger CA deficits financed largely by increased FDI and lower portfolio outflows.
- Volume versus price effects (2009–15):
  - Import volumes grew on average 7 percentage points faster than export volumes over 2012-15.
  - Changes in terms of trade averaged 1 percent per year and played a minor role.
  - Exception: 2012 when SACU transfers temporarily increased, absorbing part of the trade deficit.
- Saving-investment dynamics:
  - Private investment rose on average 0.9 percentage points of GDP per year over 2010-15, driving CA deterioration (notably in 2012 and 2014).
  - Public savings declined on average 1.3 percentage points of GDP per year, reaching a low in 2015 as fiscal deficit peaked.
- Structural versus cyclical components:
  - Multiple methods (HP filter, Band-Pass filter, and identification of one-off imports) indicate the 2015 structural component of the CA deficit was about 8½ percent of GDP.
  - The IMF’s EBA-lite CA norm for 2015 is -8.0 percent of GDP.
  - Conclusion: a sizable component of the trade deficit appears structural; SACU transfers and financial flows will continue to play a key stabilizing role.

### B. International Reserve Adequacy
- Recent trends and levels:
  - Reserves peaked at US$1.9 billion (3.9 months of imports) in 2009.
  - Reserves declined to US$1.2 billion in 2014 (1.8 months of imports).
  - At end-2015, reserves were US$1.6 billion, 16.8 percent of GDP or 2.8 months of imports (boosted by a US$750 million 10-year Eurobond).
  - By June 2016, reserve coverage fell to around two months of imports.
  - Import coverage expected to recover to 2.7 months by end-2016 due to currency swaps with GIPF and NamPower; under staff baseline, import coverage would decline to 2.5 months in coming years as financial account returns to long-term average.
- IMF composite metric and tailoring for Namibia:
  - IMF metric captures risks from: (i) terms of trade shock (export earnings), (ii) low rollover rates of short-term debt, (iii) non-resident capital outflows (portfolio + medium/long-term debt), and (iv) resident capital flight proxied by broad money.
  - SACU transfers averaged about 11 percent of GDP over the last five years and exhibit large volatility; IMF metric can be adjusted by adding a SACU risk component (SACU revenues introduced with a 20 percent risk weight).
- Adequacy assessment and projections:
  - Adequate reserves correspond to 100-150 percent of the composite metric: for Namibia, 20.7–31 percent of GDP or 3.6–5.4 months of imports.
  - In the past fifteen years reserves were sub-optimal about 80 percent of the time; adequate only in 2008, 2009, and 2011.
  - In 2015, reserves rose to about 80 percent of the minimum adequate level (73 percent of the Namibia-tailored metric) largely because of the Eurobond issuance.
  - Looking ahead, absent reserve-boosting events, reserves expected to decline to about 60 percent of the minimum adequate level.
- Policy recommendations:
  - Aim to increase international reserves to at least 3.5 months of imports (3.8 months accounting for SACU-related risks).
  - Gradually build buffers given bleak prospects for SACU revenue and the fixed exchange rate.
  - Sufficient fiscal restraint and additional foreign financing (particularly FDI as structural reforms take place) would help avoid future reserve decline and build buffers.

### C. Exchange Rate Assessment
- Background and recent CA outlook:
  - CA registered a deficit of 13.7 percent of GDP in 2015; expected to shrink and stabilize at about 5.5 percent of GDP in the medium-term as new mining projects reach full production.
  - Gross external financing requirements rose to about 32 percent of GDP in 2015 and were mostly covered by FDIs and long-term loans; net portfolio investments turned positive in 2015 due to the Eurobond.
  - Net FDI increased by about 5 percent of GDP in 2015 due to a one-off bond equity swap, reducing other investments by roughly the same amount.
- REER dynamics:
  - Namibia’s REER depreciated by about 30 percent since end-2010, and 12 percent in 2015 (with some recovery in 2016).
  - REER is about 10 percent below its 10-year average as of document date.
  - Peg to South African rand: depreciation has largely followed rand developments; in real terms depreciation slightly lower than in South Africa.
- Methodologies used:
  - Three approaches: EBA-lite CA model, EBA-lite REER model, and External Sustainability (ES) EBA-lite approach (NFA sustainability).
  - EBA-lite uses annual data for 146 countries for 1995−2015 and assesses CA and REER in a multilateral consistent manner.
  - ES approach analyzes desired NFA-to-GDP stabilization scenarios.
- Assessment results (selected exact figures):
  - Actual CA (2015): -13.7
  - Structural CA deficit (average of three methods): -8.5
  - Remove mining-related imports: -7.5
  - Hodrick-Prescott filter: -9.7
  - Band-Pass filter: -8.2
  - CA norm (EBA-lite): -8.0
  - EBA-lite CA model: CA gap = -5.7 percent of GDP (fitted CA deficit 8.2 percent vs observed -13.7 percent in 2015); REER gap = 22.6 (positive numbers indicate overvaluation; elasticity of CA to REER gap is -0.25).
  - ES approach scenarios: targeting NFA-to-GDP at 5 percent (scenario 1) implies REER overvalued by about 18 percent; targeting NFA-to-GDP at 8.7 percent (scenario 2) implies REER overvalued by about 16-18 percent.
  - EBA-lite REER model suggests REER gap = -10.4 (implying about 10 percent undervaluation).
- Interpretation and caveats:
  - CA and ES models point to REER overvaluation of about 16–22½ percent depending on scenario and assumptions.
  - REER model suggests minor undervaluation (about 10 percent appreciation needed), but may not capture recent structural changes (new uranium, gold, copper mines; fast-growing real estate) which could bias results.
  - If recent CA deterioration is driven by temporary import needs for mine construction (estimated overall investment for major projects was 5.9 percent of GDP in 2015 and 2.1 percent in 2016), excluding these one-off construction imports reduces the 2015 CA deficit by about 4.7 percentage points of GDP and implies an estimated REER overvaluation of about 4 percent.
  - A nominal depreciation would not necessarily improve the CA given the fixed exchange rate with the rand and that about 60 percent of imports come from South Africa.
- Policy implications:
  - Overvaluation assessments depend crucially on assumptions about temporary import needs and the role of FDI-financed mining projects.
  - Fiscal consolidation would help correct overvaluation if successfully implemented.

*Source: IMF staff estimates.*

### Annex III. Debt Sustainability Analysis

### Annex III. Debt Sustainability Analysis

### A. Public Debt — Background
- Namibia’s public debt has been rising since 2010, driven by large primary deficits.
- Between FY10/11 and FY15/16, the debt to GDP ratio has more than doubled from 16 percent to 39.8 percent of GDP (44.7 percent of GDP including guarantees).
- The primary deficit averaged 4½ percent of GDP over FY10/11–FY15/16.
- In 2015 public debt exceeded the authorities’ own debt limit (35 percent of GDP).
- The authorities have diversified funding sources and borrowing instruments:
  - 2015 issuance of a new US$750 million ten-year Eurobond (previous issuance was in 2011).
  - 2015 rand-denominated bonds for R1,550 million.
  - Introduction of three new fixed-rate domestic bonds extending the maturity structure to 30 years, and new inflation-linked bonds.
- Composition and risk profile as of end-2015:
  - About 42 percent of public debt was denominated in non-rand foreign currencies (mainly US dollar).
  - Short-term treasury bills accounted for about 43 percent of government’s domestic debt, about 1 percentage points higher than last year.
  - Note: Rand-denominated debt is classified as external debt, but it does not carry foreign exchange risk under the CMA’s exchange rate arrangements.

### A. Public Debt — Outlook and Risks
- DSA baseline assumptions and funding strategy:
  - Baseline reflects staff macroeconomic projections and modifications to the authorities’ funding strategy to account for large financing needs.
  - Gross financing needs under staff baseline are larger than projected by the government in its medium-term fiscal framework.
  - To fill the gap, projections assume additional bond issuances in the domestic market and Johannesburg Stock Exchange (JSE), and T-bills; they also assume the rollover of the November 2011 Eurobond coming due in 2021.
  - Guaranteed debt is expected to remain on the high side to reflect the authorities’ intention to provide SOEs with guarantees for financing new capital projects (see MTEF 2016/17-2018-19).
  - Based on recently available data, the likelihood of materialization of these liabilities has averaged 6 percent over 2005/06-2012/13.
- Debt trajectory and financing needs:
  - Under the baseline scenario, public debt will remain below the debt stress threshold of 70 percent of GDP, but including guaranteed debt would approach the distress threshold by 2021/22.
  - With the primary deficit remaining below the debt stabilizing level, and considerable reliance on short-term debt, gross financing needs are expected to average about 19 percent over the projection period, above the distress threshold (10 percent of GDP).
- Stress-test outcomes (selected scenarios and impacts):
  - Macrofiscal shock (shocks to growth and interest rates, and a temporary lower primary balance):
    - Debt-to-GDP ratio would increase to 93 percent.
    - Gross financing needs would increase to 30 percent.
  - Contingent liability shock (default of all guaranteed debt, equivalent to 20 percent of non-interest expenditures, combined with real GDP and interest rate shocks):
    - Debt-to-GDP ratio would increase to about 80 percent.
    - Gross financing needs would increase to about 27 percent of GDP.
  - SACU revenue shock (5 percent of GDP reduction in SACU revenue, a temporary 2 percentage points real GDP growth shock and 225bps increase in interest rates):
    - Debt-to-GDP ratio would increase to about 80 percent.
    - Gross financing needs would increase to about 27 percent of GDP.
  - Exchange rate and real GDP shocks:
    - Slightly smaller effect on debt, with limited impact on gross financing needs.
- Reform scenario:
  - Additional measures of about 5 percent of GDP, spread over three years, would:
    - Bring debt on a decline path to around 49 percent of GDP by 2021/22.
    - Contain gross financing needs on average to about 13 percent of GDP over the projection period.

### B. External Debt — Recent Developments
- In 2015, gross external debt increased as the public sector returned to the international market.
- Stock of public and publicly guaranteed (PPG) external debt (including SOEs) increased by 6 percent of GDP, reaching 15.6 percent of GDP at end-2015, due to new rand-denominated issuances in the JSE and the November 2015 Eurobond.
- Private sector external debt (about 70 percent of total external debt) rose little.
- About 85 percent of total external debt has long and medium-term maturities.

- Breakdown of Namibia's External Debt, 2012–2015 (In percent of GDP; As of end-June 2016)
  - Total: 2012 — 35.5; 2013 — 39.1; 2014 — 42.8; 2015 — 50.8
  - Public and publicly guaranteed: 2012 — 9.1; 2013 — 10.1; 2014 — 9.6; 2015 — 15.6
  - Private: 2012 — 26.5; 2013 — 29.0; 2014 — 33.2; 2015 — 35.2
  - By maturity — Short-term: 2012 — 5.8; 2013 — 8.1; 2014 — 7.8; 2015 — 8.0
  - By maturity — Long and medium-term: 2012 — 29.7; 2013 — 31.0; 2014 — 34.9; 2015 — 42.8
  - Source: BoN, and IMF staff estimates

### B. External Debt — Outlook and Risks
- Projection summary:
  - External debt-to-GDP ratio is expected to rise from 51 percent in 2015 to about 60½ percent of GDP in 2016, and stabilize over the projection period around this level.
  - The non-interest current account deficit (CAD) is expected to be close to the debt-stabilizing level, supporting a slightly declining debt ratio (Table 1).
  - Gross external financing needs (GEFN) are projected to average about 26 percent of GDP over the period 2016-2021.
  - Short-term debt amortization is projected to amount to about 30 percent of the GEFN.
- Vulnerabilities:
  - The profile of external debt indicates vulnerability to exchange rate depreciation and current account shocks.

*Source: _cr16373 - Annex III. Debt Sustainability Analysis*

### 10. Sensitivity tests suggest that Namibia’s external debt is particularly vulnerable to a

### 10. Sensitivity tests suggest that Namibia’s external debt is particularly vulnerable to a current account and real depreciation shocks

### Key sensitivity-test findings
- A standardized sensitivity analysis indicates that a 30 percent exchange rate depreciation in 2017 would increase external debt to about 72 percent of GDP, as about 20 percent of the external debt is denominated in foreign currency.
- Assuming the non-interest CAD would widen by an additional 4.2 percent of GDP (one-half standard deviation shock) during 2017-21, external debt would increase to about 78 percent of GDP by 2021.
- The impact of real interest rate shocks is contained due to the sizeable share of fixed-interest-rate debt.

### Public DSA — baseline projections and debt dynamics (selected figures, in percent of GDP unless otherwise indicated)
- Nominal gross public debt: 2014: 25.6; 2015: 28.8; 2016: 44.7; 2017: 50.5; 2018: 54.6; 2019: 59.1; 2020: 62.1; 2021: 65.1; 68.2.
- Public gross financing needs: 2014: 14.1; 2015: 17.4; 2016: 15.1; 2017: 18.3; 2018: 20.0; 2019: 18.7; 2020: 18.7; 2021: 22.5 (in percent of GDP).
- Real GDP growth (in percent): 2014: 4.1; 2015: 6.5; 2016: 5.3; 2017: 1.6; 2018: 5.1; 2019: 5.4; 2020: 4.3; 2021: 3.9.
- Inflation (GDP deflator, in percent): 2014: 8.1; 2015: 6.8; 2016: -0.2; 2017: 6.6; 2018: 6.0; 2019: 5.7; 2020: 5.7; 2021: 5.8.
- Effective interest rate (in percent): 2014: 8.5; 2015: 6.7; 2016: 7.3; 2017: 8.5; 2018: 8.6; 2019: 8.7; 2020: 8.2; 2021: 8.5; 8.6 (table shows repeated values across years).
- Change in gross public sector debt (cumulative): projection to 2021: 23.4 (cumulative).
- Identified debt-creating flows (cumulative to 2021): 19.1.
- Primary (noninterest) revenue and grants (cumulative to 2021): 190.1.
- Primary (noninterest) expenditure (cumulative to 2021): 214.5.

### Composition and alternative scenarios (selected assumptions and scenario outputs)
- Baseline underlying assumptions (selected, in percent):
  - Real GDP growth (2016–2021): 1.6; 5.1; 5.4; 4.3; 3.9.
  - Inflation (2016–2021): 6.6; 6.0; 5.7; 5.7; 5.7; 5.8.
  - Primary Balance (2016–2021 baseline): -4.0; -4.7; -4.7; -3.8; -3.6; -3.6.
- Alternative scenarios illustrated: Historical Scenario and Constant Primary Balance Scenario (with Primary Balance fixed at -4.0 in the latter).
- Composition trends (charts summarized):
  - Gross nominal public debt and public gross financing needs are shown rising in baseline and scenario projections through 2021.
  - By maturity, debt composition shows medium and long-term and short-term shares by year (historical and projections).
  - By currency, local currency-denominated and foreign currency-denominated shares are shown (historical and projections).

### Stress-test outcomes (selected results)
- Stress tests presented include: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock; Contingent Liability Shock; SACU Revenue Shock; Combined Macro-Fiscal Shock.
- Selected stress-test parameterizations (examples):
  - Real Exchange Rate Shock scenario: inflation shows a jump in 2017 to 18.2 (from 6.6 in baseline), with effective interest rates and primary balance held as specified in the scenario table.
  - SACU Revenue Shock scenario: primary balance path includes a large deterioration in 2018 and 2019 (e.g., primary balance in 2018: -9.7; 2019: -8.8).
- Stress-test results (illustrative outcomes shown in figures):
  - One-time 30 percent real depreciation in 2017 increases external debt to about 72 percent of GDP.
  - Non-interest current account shock (one-half standard deviation, widening by 4.2 percent of GDP during 2017-21) raises external debt to about 78 percent of GDP by 2021.
  - Bound tests (B1–B5) produce alternative external-debt-to-GDP paths; for example, B3 (Non-interest current account at historical average minus one standard deviation) shows external debt rising to 78.3 percent under that scenario.

### External debt sustainability table (selected lines, 2001–2021 framework, in percent of GDP unless otherwise indicated)
- Baseline: External debt (selected years): 2014: 42.8; 2015: 50.8; 2016: 60.4; 2017: 60.8; 2018: 60.9; 2019: 61.4; 2020: 62.0; 2021: 59.5.
- Change in external debt: 2015: 8.0; 2016: 9.6; 2017: 0.3; 2018: 0.1; 2019: 0.5; 2020: 0.6; 2021: -2.5.
- Current account deficit, excluding interest payments (selected): 2014: 10.5; 2015: 12.3; 2016: 9.0; 2017: 4.2; 2018: 3.6; 2019: 2.8; 2020: 2.7; 2021: 2.8.
- Exports and imports (selected): Exports 2016: 47.5; 2017: 50.7; Imports 2016: 64.5; 2017: 65.0.
- Residual, including change in gross foreign assets (selected): 2016: 4.7; 2017: 2.0; 2018: 2.0; 2019: 2.1; 2020: 1.9; 2021: -1.3.
- External debt-to-exports ratio (in percent): 2016: 127.2; 2017: 119.9; 2018: 118.3; 2019: 119.9; 2020: 123.6; 2021: 121.2.
- Gross external financing need (in billions of US dollars): 2016: 3.0; 2017: 2.6; 2018: 2.8; 2019: 3.0; 2020: 3.2; 2021: 4.5.
- Gross external financing need (in percent of GDP): 2016: 30.8 (table shows earlier years as well).

### Additional macro-financial note (housing boom)
- Real estate price trends (FNB house price index): trend growth in real estate prices in Namibia declined to 14.5 percent in June 2016, compared to 16.3 percent at its peak in mid-2014.
- Regional price growth: prices are increasing by about 16 percent in the central area of Windhoek compared to 12 percent in the coastal area.
- On average, prices have doubled over the past five years.
- Structural drivers: acute supply shortages and urbanization trends continue to drive upward pressure on prices, despite moderating growth rates.

*Source: IMF staff (Namibia Public DSA and related sensitivity and stress-test analysis, as presented in the supplied content).*

### 2.      On average, house prices remain overvalued, raising risks of possible price corrections.

### 2.      On average, house prices remain overvalued, raising risks of possible price corrections.

### House price valuation and recent evolution
- Staff estimates that in June 2016 the house price overvaluation at national level was on average around 16 percent.
- The June 2016 overvaluation estimate is "slightly lower than estimated in the 2015 Article IV."
- The reduction in estimated overvaluation is attributable to both the recent slowdown in price growth and revisions to the historical values of the housing index.
- Valuation indicators (national):
  - Regression Analysis: Jun-16 = 22.2; Sep-14 = 19.8
  - Price to Income: Jun-16 = 12.6; Sep-14 = 18.0
  - Price to Rent: Jun-16 = 13.5; Sep-14 = 17.0
  - Average: Jun-16 = 16.1; Sep-14 = 18.3
- Residential Housing Price Index trend shown through Jan-08 to Jun-16 (trend y/y growth), with staff estimates and First National Bank as sources.

### Banking sector exposure and resilience
- Mortgages represent about half of bank’s assets.
- Residential mortgages account for about ¾ of total outstanding mortgages.
- Despite large exposure, banks remain resilient to large house price corrections under standard stress scenarios; pressures arise only under tail risk scenarios.
- Severe adverse risk scenario parameters (as described in text):
  - Real growth slowdown to 1.5 percent over three years
  - 15 percent fall in housing prices
  - 300 bps interest rate increase
- Under the severe adverse scenario:
  - All banks could be able to absorb the shock and comply with the capital requirement (10 percent of RWA), albeit with some deleveraging.
- Tail-case (extreme) scenario outcomes:
  - Prolonged recession of 10 percent contraction in real GDP.
  - Some banks could face difficulties in complying with capital requirements.
  - The system would go through substantial deleveraging and bank credit could potentially decline by 20 percent.
- In both adverse and tail scenarios, deleveraging could be lower if banks use part of their profits to offset losses.

### Stress test calibration: macroeconomic assumptions (Table 1)
- Baseline notes:
  - House prices are assumed to grow in line with nominal GDP. GDP and credit growth rates are as in the staff baseline scenario. Interest rate increases based on South Africa’s market implied interest rates forecasts (using forward rate agreements).
- Baseline yearly assumptions:
  - 2017: House Price Growth = 11.4% ; Real GDP growth = 5.1% ; Policy rate = +75bp ; Credit Growth = 10.0%
  - 2018: House Price Growth = 11.5% ; Real GDP growth = 5.4% ; Policy rate = +75bp ; Credit Growth = 9.8%
  - 2019: House Price Growth = 10.3% ; Real GDP growth = 4.3% ; Policy rate = Stable ; Credit Growth = 9.8%
- Adverse Scenario notes:
  - Construction, real estate, and mining growth rates for 2017 projected at –1.0%, -1.0%, and -32% (maximum historical drop), respectively. For 2018 at -4.9%, -4.9%, and -16%; for 2019 at -10.2%, -10.2%, and 8%. Credit growth is assumed to stall in 2017-18 and to decline in 2019 due to some banks’ need to deleverage to face losses.
- Adverse Scenario yearly assumptions:
  - 2017: House Price Growth = -9.3% ; Real GDP growth = -1.2% ; Policy rate = +300bp ; Credit Growth = 0%
  - 2018: House Price Growth = -6.2% ; Real GDP growth = 1.0% ; Policy rate = Stable ; Credit Growth = 0%
  - 2019: House Price Growth = 0% ; Real GDP growth = 1.7% ; Policy rate = Stable ; Credit Growth = -13.0%
- Tail-Case Scenario notes:
  - GDP growth forecasts based on the average in countries that experienced boom/bust in housing and construction in the year of the bust and two years after. Credit growth estimates based on Hardy et al. (2013) rules of thumb for EM (severe stress).

### Additional contextual points from staff analysis
- The annex updates and extends analysis and results of the 2015 Selected Issues Paper: “Namibia: Macro-Financial Risks Associated with Housing Boom” (IMF Country Report No. 15/277), which provides methodology and stress test details.
- Anecdotal evidence suggests commercial real estate prices are also rapidly increasing.
- The 2013 Mass-Housing Program (to ameliorate supply side shortages) was halted in May 2015 after the SOE in charge failed to raise funding; it resumed on a smaller scale in the summer 2016 and focuses on supporting low income individuals without access to credit.

*Source: Staff estimates and IMF staff analysis (June 2016).*

### 2017. Credit is assumed to stall in 2018 and to drop

### _cr16373 - 2017. Credit is assumed to stall in 2018 and to drop

### Credit and Capital Adequacy Post-Shock
- 2017. Credit is assumed to stall in 2018 and to drop severely in 2019.
- 2017 -12.7% 0.9% +300bp -8.3%
- 2018 -8.5% -7.0% Stable 0.0%
- 2019 0% -4.0% Stable -20.0%
- Figure 1. Namibia: Average Capital Adequacy Ratio Post-Shock
  - Source: Commercial banks’ data and staff’s estimates

### Fund Relations and Membership Status (As of October 31, 2016)
- Joined: September, 1990; Article VIII
- General resources account (SDR (million); Percent of Quota)
  - Quota         191.10    100.00
  - Fund holdings of currency      191.03        99.97
  - Reserve position in Fund          0.08            0.04
- SDR Department (SDR (million); Percent of Quota)
  - Net cumulative allocation      130.39     100.00
  - Holdings            4.78           3.67
- Outstanding Purchases and Loans           None
- Financial Arrangements            None
- Projected Obligations to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Forthcoming
    - 2017 2018 2019 2020
    - Principal
    - Charges/Interest   0.17 0.17 0.17 0.17
    - Total   0.17 0.17 0.17 0.17
- Implementation of HIPC Initiative         None
- Exchange Rate Arrangements
  - The Namibian dollar is pegged to the South African rand.
  - Namibia accepted the obligations of Article VIII, Section 2, 3, and 4 of the Fund’s Article of Agreement, as of September 20, 1996.
  - In December 2015, the Bank of Namibia suspended an agreement with the Bank of Angola on mutual currency conversion in effect since June 2015 (that exchanged Angolan kwanzas or Namibian dollars to US dollars).
  - Namibia maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions.
- Article IV Consultation
  - Namibia is on a standard 12-month consultation cycle.
  - The last Article IV consultation was concluded by the Executive Board on September 18, 2015.

### Technical Assistance, 2012–16 (by Department and purpose)
- Fiscal Affairs Department (FAD) — examples of missions and purposes:
  - March 2012  Revenue Administration Tax
  - June 2012  Trade Facilitation
  - November 2012 Tax Administration
  - December 2012 Program Budgeting: Cash and Debt Management
  - February 2013  Customs Administration
  - April 2013  Public Financial Management
  - January 2015  Diagnostic on Revenue Administration
  - July 2016  IFMIS
  - October 2016  Budgeting
- Monetary and Capital Markets Department (MCM) — examples:
  - April 2012  Implementation of Basel II
  - May 2012  Stress Testing
  - November 2012 Payment Systems
  - July 2013  Stress Testing
  - April 2016  Basel III
  - June 2015  Macroprudential Framework
- Statistical Department (STA) — examples:
  - May 2012  Quarterly and Annual National Accounts (DFID)
  - Nov. 2012  Consumer Price Index
  - April 2013  Standardized Reporting Monetary Data
  - April 2015  Producer Price Index
  - January 2016  GFS Statistics
  - April 2016  e-GDDS
  - September 2016 Monetary Statistics

### Joint World Bank and IMF Work Program (December 2016-17; as of November 2016)
- World Bank Work program (selected items)
  - Southern Africa TA on Financial Inclusion — April 2017
  - Statistical Capacity TA (household survey data collection and analysis) — October 2016, March 2017
  - Distributional Impact of Fiscal Policy in Namibia (dissemination) — October 2016, February 2016
  - Poverty update note — February 2016
- IMF Work Program (selected items)
  - 2017 Article IV consultation — Late 2017, Early 2018
  - FSAP — During 2017, Early 2018
  - SOEs and local authorities — Early 2017
  - Producer Price Index — Early 2017
  - National Accounts — Early 2017
  - PBB Implementation — Early 2017
  - NBFI regulation — During 2017
  - Macroprudential Policy — During 2017
- Fund requests to Bank
  - Periodic updates on progress with domestic structural reform agenda, including in context of NDP5, the Industrial Policy Strategy, and the Financial Sector Strategy.
  - Periodic updates on macroeconomic/fiscal developments and policies in Namibia and Fund analytical and technical assistance reports provided to the authorities.

### Statistical Issues — Assessment and Reporting
- General
  - Data provision has shortcomings but is broadly adequate for surveillance.
  - Monthly core data provided with a lag of one to two months, except national accounts, fiscal data, external sector statistics, and trade data (quarterly and annually with longer lags).
  - NSA transformed into a fully autonomous agency in 2011.
- National Accounts
  - Base year for NA is 2010.
  - QNA estimates at constant prices are disseminated; need to improve source data and coverage.
  - NSA assessing integration of VAT data in NA compilation framework.
  - NA produced bi-annually and revised for the past three years.
- Price Statistics
  - Base year for CPI is 2012.
  - CPI weights from the 2009/10 Household Income and Expenditure Survey.
  - Labor market data collected annually (latest annual labor force survey is for 2014).
  - AFRITAC South assisted NSA to develop a PPI.
- Government Finance Statistics
  - Aggregated annual budgetary central government data reported on a cash basis in the GFSM 2001 format, lacking detailed classifications and balance sheet data.
  - No fiscal statistics for extra budgetary institutions, consolidated central government, consolidated general government.
- Monetary and Finance Statistics
  - BoN reports monthly monetary statistics based on SRFs for the BoN balance sheet and Other Depository Corporations.
  - Concepts broadly in line with the MFS manual.
  - TA mission in September 2016 to prepare SRF 4SR for OFCs; BoN expected to begin reporting OFC data covering pension funds, insurance companies and the Development Bank in 2017.
- Financial Soundness Indicators
  - BoN reports FSIs for commercial banks quarterly; banks classified as “specialized institutions” not covered.
  - Improvements needed for historical data; BoN to submit by early 2017.
  - No FSIs provided for non-bank financial institutions.
- Balance of Payments and IIP
  - BoN reports BOP and IIP quarterly with a lag of one quarter.
  - BOP methodology consistent with the fifth edition of the IMF’s BOP Manual.
  - Room to improve external sector statistics, reduce errors and omissions, and shorten publication time.
- Data Standards and Quality
  - Namibia has participated in GDDS /e-GDDS since 2002.
  - A ROSC (Data Module) was published in 2002 and updated in 2005.
  - In June 2016 Namibia launched a National Summary Data Page (NSDP) implementing e-GDDS recommendations.
- Reporting to STA
  - MOF regularly reports annual data for GFS Yearbook.
  - BoN regularly reports MFS, BOP and IIP data for IFS and BOP Yearbook.

### Common Indicators Required for Surveillance (As of October 2016) — selected entries
- Exchange rates 9/11/2016 9/11/2016 D D D
- International reserve assets and liabilities of monetary authorities — July 2016 Sept 2016 M M M
- International investment position — June 2016 Sept 2016 Q Q Q
- Reserve/base money — July 2016 Sept 2016 M M M; Data Quality—Methodological Soundness: O, O, LO, LO; Data Quality—Accuracy and Reliability: O, LO, O, O, O
- Broad money — July 2016 Sept 2016 M M M
- Central bank balance sheet — July 2016 Sept 2016 M M M
- Consolidated balance sheet of the banking system — July 2016 Sept 2016 M M M
- Consumer price index — Aug 2016 Sept 2016 M M M
- Revenue, expenditure and balance—central government — Dec 2015 Mar 2016 A A A
- Composition of financing—central government — Mar 2015 Sept 2016 Q Q Q
- Stocks of central government and central government-guaranteed debt — Mar 2016 Sept 206 Q Q Q
- External current account balance — June 2016 Sep 2016 Q Q Q
- Exports and imports of goods — June 2016 Sept 2016 Q Q Q
- GDP/GNP — June 2016 Sept 2016 Q Q Q; Data Quality—Methodological Soundness: O, O, O, LO; Data Quality—Accuracy and Reliability: LNO, LO, LO, LO, O
- Gross external debt — Mar 2016 Sept 2016 Q Q Q

### Statement by the Namibian Authorities (December 2, 2016) — Key Messages
- Authorities broadly agree with staff’s assessment and emphasize urgency of addressing fiscal and external vulnerabilities and implementing structural reforms.
- Fiscal consolidation strategy reflected in the 2016 mid-year budget and the Medium-Term Budget Policy Statement for the 2017/18 – 2019/20 MTEF.

### Recent Economic Developments and Outlook
- Growth and sector performance
  - Real GDP growth: 5.3 percent in 2015, compared to 6.4 percent in 2014.
  - Main contributors to growth: construction sector and the public sector.
  - Agriculture and mining declined due to drought and lower commodity prices.
- Inflation
  - Inflation rate rose to 6.9 percent in September 2016, compared to 3.4 percent over the same period in 2015.
  - Drivers: rising housing costs, currency depreciation and higher food prices.
- Current account and external position
  - Current account deteriorated to around 13 percent of GDP in 2015.
  - SACU revenues amounted to around 12 percent of GDP in recent years, but expected to decline to 9 percent of GDP in 2015/16.
  - Completion of large infrastructure projects (including Husab uranium mine) envisaged to increase export earnings.
- Short-term GDP performance and projections
  - Q1 2016 GDP increased by 3.4 percent; Q2 2016 contracted by 1.2 percent.
  - Real GDP is expected to grow by 2.5 percent in 2016.
  - Medium-term growth projected to rebound to around 4.5 percent and 4.9 percent in 2017 and 2018, respectively.
- Exports projected to grow by 4.5 percent in 2016, compared to a contraction of 11.4 percent in 2015.

### Fiscal Policy and Public Debt
- Sovereign debt management strategy caps public debt-to-GDP at 35 percent.
- Revised deficit of over 8 percent of GDP and stock of debt rose to 40.1 percent at the end of 2015/16.
- Debt stabilization strategy envisages public debt peaking at 42.4 percent in 2016/17, then reduced to under 35 percent by 2019/20 via front-loaded fiscal adjustment.
- Recent fiscal measures
  - Spending cuts amounting to 2.8 percent of GDP enacted for the current year.
  - Further cuts of around 6 percent of GDP over the next three years beginning in 2017/18.
  - Measures include suspension of non-essential government capital projects not yet commenced, freezing civil service recruitment, reductions in spending ceiling for national defense.
  - Spending on materials and supplies for social service departments and employer’s contribution to social security protected.
- Revenue mobilization measures
  - Implementation of a new carbon tax.
  - Increase in the fuel levy.
  - Program for recovery of tax arrears from VAT.
  - Namibia Revenue Agency Bill to establish an autonomous Revenue Agency (tabling in February 2017).

### Monetary and Exchange Rate Policy
- Repurchase rate raised by 100 basis points in the last two years.
- Inflation expected to moderate in the first half of 2017 as drought conditions subside and housing supply improves.
- Credit growth slowed to 12 percent in the first nine months of 2016, from 15.6 percent in the corresponding period of 2015.
- Exchange rate peg to the South African rand has contributed to lower inflation.
- Risks: lower growth in neighboring economies and monetary tightening in the US; potential weaker rand and Namibian dollar counteracting inflation moderation.
- Reserves and Eurobond
  - Issuance of a USD750 million Eurobond in December 2015 contributed to higher debt stock.
  - USD300 million of the proceeds used to supplement reserves.
  - Import cover of 2.9 months in October 2016, compared to a 2.1 months of prospective imports earlier in the year.

### Financial Sector Stability
- Overall assessment
  - Namibia’s financial sector is stable; banks can absorb moderate shocks arising from the residential market.
  - NPLs currently at only 1.6 percent, well below the 4 percent trigger level.
  - Provisions have been adequate, generally moving in line with NPLs.
- Non-bank financial institutions (NBFIs)
  - Authorities committed to improved monitoring and supervisory action over NBFIs.
  - Majority of NBFIs are dual-listed companies that are subsidiaries of South African banks and NBFIs.
  - Financial Stability Policy Framework finalized; BON to lead monitoring of systemic risks between banks and non-banks.
  - NAMFISA focused on building technical capacity.
  - Financial Institutions and Markets (FIM) bill likely to be enacted during the current financial year; will de-mutualize NSX.
  - Financial System Stability Committee (BON, NAMFISA, Ministry of Finance) monitoring contagion, asset exposure to capital markets, and NSX asset price inflation.
- Household debt risks
  - Ratio of household debt to disposable income rose to 89.1 percent at the end of 2015.
  - Credit Agreement Act (passed June 2016) includes regulations on loan-to-value (LTV) limits for secondary mortgages and minimum down-payments for motor vehicles.
  - Authorities will consider housing supply constraints and social impacts before further measures.

### Structural Reforms and Institutional Developments
- Focus: addressing unemployment, inequality and poverty through the National Development Plan (NDP) and the Harambee Prosperity Plan (HPP).
  - HPP medium-term objectives: promoting inclusive growth and job creation; development and investment in priority infrastructure; ensuring macro-economic stability and growth-friendly fiscal policy; implementing targeted measures to reduce poverty and vulnerability.
- Crowding-in private investment via public-private partnerships
  - New Public-Private Partnership bill passed into law in November 2016.
  - New structure within the Ministry of Finance to facilitate PPP financial and legal processes.
  - Establishment of an inter-sectoral committee to approve bids for infrastructure projects (affordable housing, irrigation, energy, logistics, manufacturing, tourism).
  - Feasibility studies for some projects already completed.
  - Special economic zones provided for in a new Investment Act recently enacted by Parliament.
- Institutional reforms
  - Creation of Namibian Training Authority (NTA) to address skills mismatches.
  - Ministry of Poverty Eradication and Social Welfare established.
  - New Ministry of Public Enterprises formed to implement Public Enterprises Governance Act, ensure compliance with SOE reporting framework, rationalize fiscal transfers, and pursue partial listing of some SOEs on the NSX.

*Source: NAMIBIA — STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (November 16, 2016).*

### Conclusion

### Conclusion

### Headwinds to industrial development and inclusive growth
- Namibia faces significant headwinds in the pursuit of industrial development and inclusive growth.

### Authorities' stance and commitment
- The authorities fully recognize the challenges and are determined to ensure that macro-economic stability and fiscal sustainability remain the bedrock of future growth and public policy.

### Fiscal sustainability and investments
- They are confident that the focus on fiscal sustainability, and the investments undertaken in recent years to improve transportation infrastructure and increase mining production, will yield positive results.

### Financial sector stability
- Furthemore, a more assertive approach to managing financial sector risks will maintain financial system stability going forward.

### Relationship with the Fund
- They express their appreciation to staff for the policy advice and the contribution that the Fund has made toward the country’s structural reform agenda.

*Source: _cr16373 - Conclusion*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16373.pdf_