## _cr16374

## Source details

**Canonical URL:** [_cr16374](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16374.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16374.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16374.pdf.json)

---

### Effects of Expenditure-Based versus Revenue and Expenditure-Based Fiscal Consolidation

- Overview
  - Namibia authorities adopted a three-year fiscal consolidation plan in the 2016–2018 Medium-Term Fiscal Framework (March 2016), focused on reducing current expenditure and containing capital spending growth.
  - Recent macroeconomic projections imply an additional cumulative adjustment of about 5 percent of GDP is needed over the next three years to put public debt on a declining path and secure sustainability.
  - Context: unemployment is close to 30 percent, with more than 40 percent of youth unemployed, and income inequality is the second highest in the world.

- Model and calibration
  - Analysis uses the DIGNAR model (Debt, Investment, Growth and Natural Resources), calibrated to reflect the main features of the Namibian economy.
  - DIGNAR includes policy levers on revenues (income and consumption taxes) and expenditures (current expenses and capital spending) and allows assessment of fiscal structural reforms in revenue administration and public investment management.

- Consolidation scenarios analyzed
  - Scenario 1: Expenditure-based consolidation
    - Additional permanent reduction in current expenses by 1.7 percent of GDP per year over FY17/18–FY19/20.
  - Scenario 2: Revenue and expenditure-based consolidation (balanced)
    - Same aggregate adjustment as Scenario 1 (1.7 percent of GDP per year over three years), with one quarter of the adjustment achieved by increasing indirect taxation.
    - Additional simulations consider improvements in tax collection efficiency.
  - Scenario 3: Investment-friendly consolidation
    - Starts from Scenario 2 and reallocates resources: an additional 1.0 percent of GDP reduction in current expenses is used to finance a corresponding increase in public investment.
    - Also considers structural reforms improving public investment management and efficiency.

- Simulation findings — fiscal and growth outcomes
  - Scenario 1 (spending reductions)
    - Public debt would decline and reach about 43 percent of GDP by 2021/22.
    - Cumulated negative effects on growth over the three-year consolidation period amount to almost 1.2 percent, relative to the baseline.
    - Negative effects partly contained by: significant openness (large shares of imports in government purchases) and assumption that spending reductions occur in unproductive current expenditures.
  - Scenario 2 (revenue + expenditure)
    - Public debt path similar to Scenario 1.
    - Negative impact on growth is smaller than in Scenario 1.
    - Reasons: (i) increase in revenue via consumption (indirect) taxes has lower distortionary impact than income taxation; (ii) presence of financially-constrained, “hand-to-mouth” agents who do not increase savings in response to higher taxes.
  - Impact of improving tax administration efficiency
    - Simulations consider improving tax collection efficiency to achieve a 1 percent of GDP increase in tax revenues.
    - Under Scenario 2, improving tax collection efficiency reduces the cumulative growth loss by a fifth to less than 0.8 percent (compared to the case with no revenue efficiency gains).
  - Scenario 3 (investment-friendly)
    - Increasing public investment by 1.0 percent of GDP (financed by lower current expenditures) starting from Scenario 2 mitigates the growth effects of adjustment to around 0.4 percent over 2017/18–2019/20.
    - As public capital accumulates over time, by 2021 the cumulated growth effect for Scenario 3 is positive and one percentage points higher than under the combined revenue and expenditure consolidation strategy.
    - Better growth outcomes modestly improve the public debt ratio path.
  - Impact of improving public investment efficiency
    - Illustrative simulation: if project expenditure starting from FY17/18 is 15 percent more efficient, the impact on cumulated GDP growth is about 2 percent, with a clear positive effect on the public debt ratio which declines faster.
    - Similar (but smaller) gains apply if investment efficiency improvements accompany other consolidation strategies.

- Policy implications and recommendations
  - To minimize negative growth impacts of necessary consolidation (about 5 percent of GDP over three years), combine revenue and expenditure measures together with fiscal structural reforms.
  - Specific prescriptions:
    - Combine reductions in current expenditure with increases in indirect taxes (consumption taxation) to exploit the relatively lower distortionary impact of indirect taxation on investment and labor decisions and to help sustain essential public services.
    - Reorient expenditure composition toward public investment to increase the stock of productive public capital and raise productivity of private factors.
    - Implement structural reforms in public finance management to raise public investment efficiency.
    - Improve tax collection efficiency to enlarge the tax base, raise government revenues, and reduce pressure on public debt while keeping tax rates relatively lower.

_Prepared by Giovanni Melina; DIGNAR model simulations, Namibian authorities and IMF staff estimates._

### Despite their size, NBFIs in Namibia are lightly supervised with no risk-based approach

- Supervision and regulatory framework
  - NAMFISA supervises and regulates the nonbank financial institutions (NBFIs) industry in Namibia.
  - Supervision is mostly guided by compliance and not by riskiness; NAMFISA is developing adequate databases to strengthen supervision.
  - Coordination on risk-based supervision between NAMFISA and the Bank of Namibia (BoN) is limited, despite joint publication of an annual Financial Stability Report and clear links between banks and NBFIs.

- Linkages between investment funds, domestic banks, and the economy
  - Investment funds provide about half of bank financing, including 40 percent of banks’ deposits and more than 90 percent of CDs.
  - There are four financial conglomerates in Namibia (three foreign owned with exposures to South Africa and the UK); each conglomerate holds a commercial bank, insurance businesses (long and short term), and investment funds.
  - Financial sector size and fiscal linkages:
    - The financial sector accounts for about 7 percent of GDP (up from less than 2 percent in 2001).
    - The financial sector contributes almost 3 percent of total annual government’s revenue.
    - The financial sector holds the majority of government’s debt.
  - Indirect credit channel:
    - Investment funds’ deposits in the banking system indirectly finance about 1/4 of banks’ loans.
    - Bank credit and GDP growth are highly correlated: the 2015 Article IV for Namibia estimated that a 1 percent change in real credit is associated with about 0.5 increase in long-run growth.
    - Cross-country empirical distribution (1970–2015) average: growth increases by about 0.2 percent when real credit growth rises by one percent.

- Investment funds: funding and asset allocation (Dec-2015)
  - Funding sources (% Total, Dec-2015):
    - Pension: 60 percent (institutional).
    - Insurance: 18–20 percent (institutional; source text notes 20 percent institutional and chart shows 18%).
    - Corporates: 7 percent.
    - Households: 11 percent.
    - Other: 4 percent.
    - Overall almost 80 percent of investment funds’ funds come from institutional investors: 60 percent from pension funds and 20 percent from insurance companies.
  - Geographic allocation of assets (Dec-2015):
    - About 50 percent of assets in Namibia.
    - About a third in South Africa (CMA region; mostly South Africa).
    - About 15 percent in advanced economies.
    - Charted allocation presented in source (% assets, Dec-2015).
  - Asset type composition (Dec-2015):
    - About 40 percent in short-term assets (evenly distributed between treasury bills, CDs and deposits).
    - Remaining 60 percent mostly invested in bonds and equities.
    - Detailed (% assets, Dec-2015): Tbills 10%, CDs 10%, Deposits 11%, Equities 42%, Bonds 13%, Others 13%.
  - Equity exposure:
    - Investment funds’ equity portfolio is about 60 percent of GDP; Namibia Stock Exchange capitalization dominated by dual listed South African companies; single-listed companies’ capitalization is about 20 percent of GDP.
    - JSE top 40 index annualized volatility range in 2016 has consistently been above 20 percent in 2016 (VIX measure).

- Investment funds as a conduit of shocks
  - Two salient features:
    - Funds raise almost 80 percent of their funds from institutional investors (60 percent pension funds; 20 percent insurance companies) as of 2015.
    - Funds have large and risky foreign exposures.
  - Liquidity and redemption dynamics:
    - A large redemption shock could force funds to liquidate assets; portfolio managers would likely use domestic deposits in the banking system as first line of defense.
    - Fund actions can be correlated (herding), leading to rapid propagation of shocks as funds rebalance based on past performance.
    - A shock to investment funds could become a liquidity shock for domestic banks if deposits do not return to the banking system.

- Macro-financial vulnerability: stress analysis
  - Potential shock origins:
    - Shocks could be domestic or abroad, across countries and asset classes.
    - A likely source: exposures to South African equities — idiosyncratic (e.g., political instability) or global rebalancing of risk sentiment towards emerging markets.
  - Fire-sale dynamics:
    - Redemptions could induce fire sales, depress asset prices, induce further outflows, and impair government financing (higher interest costs or deferred spending), impacting GDP growth.
  - Banks’ liquidity and capital posture (Dec-2015):
    - Liquid assets were 12 percent of monthly average liabilities to the public, compared to a 10 percent requirement.
    - About 70 percent of liquid assets are holdings of government securities; domestic secondary market turnover was 30 percent in 2015.
    - Capital was 14 percent of RWA, compared to a CAR of 10 percent.
    - Estimated system buffers (difference between current holdings and minimum requirements) are around 3.8 percent of GDP.
    - Bank’s Capital and Liquidity Buffers, Dec-2015 (N$ Millions and % GDP):
      - Qualifying Capital: 11,163; % GDP: 7.6
      - Required Capital: 7,832; % GDP: 5.3
      - Capital Buffer: 3,331; % GDP: 2.3
      - Average Liquid Assets Held: 11,332; % GDP: 7.7
      - Required Liquidity: 9,107; % GDP: 6.2
      - Liquidity Buffer: 2,225; % GDP: 1.5
      - Maximum Allowable Shock 1/: 5,556; % GDP: 3.8
      - 1/ Equivalent to 2.8 percent of investment fund's assets.
  - Vulnerability thresholds:
    - Liquidity and capital buffers of the banking system are equivalent to less than 3 percent of investment funds’ assets.
    - The banking system would have problems if investment funds had net redemptions of less than 3 percent of their assets, assuming they use bank deposits to cope with outflows.
    - In stress, banks might request short-term liquidity support from parents or the BoN, but depending on duration/severity and bank dependence on wholesale funding from investment funds, such support may be insufficient and deleveraging would occur, affecting GDP growth.

- Policy implications and recommendations
  - NBFIs, given their size, foreign exposures, and links to banks, are macro-critical.
  - The Bank of Namibia (BoN) should take the lead in assessing financial stability risks arising from bank–NBFI linkages.
  - Regulatory architecture concerns:
    - Separation of regulatory functions between BoN and NAMFISA tends to prevent proper monitoring and assessment of financial stability risks arising from cross-industry linkages.
    - To improve monitoring and assessment, the regulatory architecture needs to be improved to provide the BoN with necessary powers and instruments to assess macro-financial risks and exercise controls for the whole financial sector.
  - Recommended actions:
    - BoN should take the lead in addressing data and regulatory gaps to identify early signs of stress and reduce the likelihood that a shock translates into a crisis.

_Source: IMF staff report chapter as provided in the content unit._

### Low-labor intensive sectors have been driving growth in Namibia

- Growth and sectoral employment
  - Mining:
    - Represents more than 10 percent of GDP.
    - Absorbs about 2 percent of overall employment.
    - Has created very few new jobs.
  - Agriculture:
    - Represents less than 10 percent of GDP.
    - Has had only a minor or negative contribution to growth.
    - Absorbs more than 30 percent of total employment and employs the bulk of low-skilled workers.
  - Trade services (wholesale and retail) and construction:
    - Increasing role in GDP growth in recent years.
    - More balanced proportion between their share of GDP and employment they absorb.
  - Manufacturing:
    - Displays an imbalance between GDP and employment shares.
    - Represented only about 10 percent of GDP in 2015.

- Employment elasticities and recent trends
  - Sectoral employment elasticities (from labor surveys):
    - Agriculture, forestry and fishing: -1.87
    - Mining and quarrying: -1.51
    - Manufacturing: 3.16
    - Construction: 0.47
    - Wholesale and retail trade: 0.97
    - Financial and insurance activities: 0.40
    - Public administration and defense: 1.02
    - Education: 0.49
    - Private households: 2.68
    - Others: -0.25
  - Quarterly survey data (Bank of Namibia, 2008–2015): manufacturing and wholesale & retail trade show elasticity of employment to growth of about 1.

- Skill mismatches and education
  - Skill Mismatch Index (average 2000–2014): Namibia scores 0.19 on a range between 0.01 and 0.41; Namibia ranks 66th out of 82 countries; the median is 0.19.
  - Nature of mismatch:
    - Excess supply of low and semi-skilled workers.
    - Low supply of high-skilled workers compared to demand.
  - Unemployment by education:
    - Unemployment rate peaks above 30 percent for individuals with secondary education.
    - Unemployment falls to below 10 percent for individuals with tertiary education.
  - Policy implications:
    - Growth in semi-skilled sectors such as manufacturing and trade services could help absorb excess labor with secondary education.
    - Increase proportion of labor force with tertiary education or vocational training.

- Rigidities in the business environment
  - Namibia’s international rankings (relative to world median):
    - Tax compliance: 1.01 points below the world median (scale 1–10).
    - Business regulations: 0.22 points below the world median (scale 1–10).
    - Corruption and licensing restriction: between the world median and the 3rd quartile.
    - Labor market flexibility: 1.6 points below the world median (scale 1–7, survey-based).
  - Biggest gaps vs. median upper-middle income country: starting a business, registering property, and ease of paying taxes.
  - Structural reforms improving business regulation indices would likely strengthen the relationship between growth and employment.

- Cross-country evidence linking environment, skills, and employment elasticity
  - Panel regression: change in employment-to-output elasticity associated to a unit increase in each index:
    - Labor market flexibility: 0.05**
    - Corruption: 0.09***
    - Licensing restrictions: 0.07**
    - Tax compliance: 0.06***
    - Business regulations: 0.17***
    - Skill mismatch index: -1.68***
    - Note: ** and *** denote significance at 0.05 and 0.01 levels, respectively.

- Simulation assumptions and unemployment scenarios (2014–2021)
  - Baseline assumptions:
    - Labor force grows with population by 2.7 percent.
    - Labor force participation rate for population over 15 years remains at 70 percent.
    - Sectoral employment growth simulated using average sectoral employment-to-GDP elasticities from latest labor surveys.
  - Baseline unemployment trajectory:
    - Unemployment rate declines slowly from about 28 percent in 2015 to about 24 percent in 2021.
  - Structural reform scenarios:
    - Business environment reforms:
      - Closing gap from world median in business regulations indicator increases employment-to-output elasticities in all sectors uniformly by 0.04 (predicted).
      - Result: unemployment declines to 21.5 percent by 2021.
      - Recommended policies: simplify regulations for registering property and starting businesses.
    - Skill mismatch reduction:
      - Reducing skill mismatch index to its median value would increase elasticities by 0.14 (predicted).
      - Result: unemployment declines to 19 percent by 2021.
      - Recommended policies: improve coverage and quality of higher education, update curricula, provide incentives to transition to tertiary education and vocational training, improve quality of primary and junior secondary education, and strengthen on-job training programs.
    - Additional manufacturing and trade growth:
      - If over 2017–2021 manufacturing and trade services growth is 5 percent points higher than baseline, unemployment would decline by another 3 percentage points to around 16 percent by 2021.

- Key takeaway
  - Structural reforms that (i) close gaps in business regulations to facilitate enterprise creation and scaling, and (ii) reduce skill mismatches through improved education and vocational training, can materially strengthen the nexus between growth and employment and place Namibia’s unemployment rate on a sustained declining path.

_Italic: Source: IMF staff estimates and analysis in IMF country report section titled “Low-labor intensive sectors have been driving growth in Namibia.”_

### 1. Effects of Expenditure-Based versus Revenue and Expenditure-Based Fiscal Consolidation 5

### Effects of Expenditure-Based versus Revenue and Expenditure-Based Fiscal Consolidation

### Overview
- Namibia authorities adopted a three-year fiscal consolidation plan in the 2016–2018 Medium-Term Fiscal Framework (March 2016), focused on reducing current expenditure and containing capital spending growth.
- Recent macroeconomic projections imply an additional cumulative adjustment of about 5 percent of GDP is needed over the next three years to put public debt on a declining path and secure sustainability.
- Contextual constraints: unemployment is close to 30 percent, with more than 40 percent of youth unemployed, and income inequality is the second highest in the world.

### Model and calibration
- Analysis relies on the DIGNAR model (Debt, Investment, Growth and Natural Resources), calibrated to reflect the main features of the Namibian economy.
- DIGNAR includes policy levers on the revenue side (income and consumption taxes) and expenditure side (current expenses and capital spending), and allows assessment of fiscal structural reforms in revenue administration and public investment management.

### Consolidation scenarios analyzed
- Scenario 1: Expenditure-based consolidation
  - Additional permanent reduction in current expenses by 1.7 percent of GDP per year over FY17/18–FY19/20.
- Scenario 2: Revenue and expenditure-based consolidation (balanced)
  - Same aggregate adjustment as Scenario 1 (1.7 percent of GDP per year over three years), with one quarter of the adjustment achieved by increasing indirect taxation.
  - Additional simulations consider improvements in tax collection efficiency (raising revenues via efficiency).
- Scenario 3: Investment-friendly consolidation
  - Follows Scenario 2 and further reallocates resources: an additional 1.0 percent of GDP reduction in current expenses is used to finance a corresponding increase in public investment.
  - Also considers structural reforms improving public investment management and efficiency.

### Simulation findings — fiscal and growth outcomes
- Scenario 1 (spending reductions)
  - Public debt would decline and reach about 43 percent of GDP by 2021/22.
  - Cumulated negative effects on growth over the three-year consolidation period amount to almost 1.2 percent, relative to the baseline.
  - Negative effects partly contained by: significant openness (large shares of imports in government purchases) and assumption that spending reductions occur in unproductive current expenditures.
- Scenario 2 (revenue + expenditure)
  - Public debt path similar to Scenario 1.
  - Negative impact on growth is smaller than in Scenario 1.
  - Reasons: (i) increase in revenue via consumption (indirect) taxes has lower distortionary impact than income taxation; (ii) presence of financially-constrained, “hand-to-mouth” agents who do not increase savings in response to higher taxes.
- Impact of improving tax administration efficiency
  - Simulations consider improving tax collection efficiency to achieve a 1 percent of GDP increase in tax revenues.
  - Under Scenario 2, improving tax collection efficiency reduces the cumulative growth loss by a fifth to less than 0.8 percent (compared to the case with no revenue efficiency gains).
- Scenario 3 (investment-friendly)
  - Increasing public investment by 1.0 percent of GDP (financed by lower current expenditures) starting from Scenario 2 mitigates the growth effects of adjustment to around 0.4 percent over 2017/18–2019/20.
  - As public capital accumulates over time, by 2021 the cumulated growth effect for Scenario 3 is positive and one percentage points higher than under the combined revenue and expenditure consolidation strategy.
  - Better growth outcomes modestly improve the public debt ratio path.
- Impact of improving public investment efficiency
  - Illustrative simulation: if project expenditure starting from FY17/18 is 15 percent more efficient, the impact on cumulated GDP growth is about 2 percent, with a clear positive effect on the public debt ratio which declines faster.
  - Similar (but smaller) gains apply if investment efficiency improvements accompany other consolidation strategies.

### Policy implications and recommendations
- To minimize negative growth impacts of necessary consolidation (about 5 percent of GDP over three years), combine revenue and expenditure measures together with fiscal structural reforms.
- Specific policy prescriptions emerging from the model results:
  - Combine reductions in current expenditure with increases in indirect taxes (consumption taxation) to exploit the relatively lower distortionary impact of indirect taxation on investment and labor decisions and to help sustain essential public services.
  - Reorient expenditure composition toward public investment to increase the stock of productive public capital and raise productivity of private factors.
  - Implement structural reforms in public finance management to raise public investment efficiency (so a larger fraction of investment spending translates into productive public capital).
  - Improve tax collection efficiency to enlarge the tax base, raise government revenues, and reduce pressure on public debt while keeping tax rates relatively lower.

*Prepared by Giovanni Melina; DIGNAR model simulations, Namibian authorities and IMF staff estimates.*

### 3.      Despite their size, NBFIs in Namibia are lightly supervised with no risk-based

### _cr16374 - 3.      Despite their size, NBFIs in Namibia are lightly supervised with no risk-based

### Supervision and Regulatory Framework
- NAMFISA supervises and regulates the nonbank financial institutions (NBFIs) industry in Namibia.
- Supervision is mostly guided by compliance and not by riskiness; NAMFISA is developing adequate databases to strengthen supervision.
- Coordination on risk-based supervision between NAMFISA and the Bank of Namibia (BoN) is limited, despite joint publication of an annual Financial Stability Report and clear links between banks and NBFIs.

### Linkages Between Investment Funds, Domestic Banks, and the Economy
- Investment funds provide about half of bank financing, including 40 percent of banks’ deposits and more than 90 percent of CDs.
- There are four financial conglomerates in Namibia (three foreign owned with exposures to South Africa and the UK). Each conglomerate holds a commercial bank, insurance businesses (both long and short term), and investment funds.
- Financial sector size and fiscal linkages:
  - The financial sector accounts for about 7 percent of GDP (up from less than 2 percent in 2001).
  - The financial sector contributes almost 3 percent of total annual government’s revenue.
  - The financial sector holds the majority of government’s debt.
- Indirect credit channel:
  - Investment funds’ deposits in the banking system indirectly finance about 1/4 of banks’ loans.
  - Bank credit and GDP growth are highly correlated: the 2015 Article IV for Namibia estimated that a 1 percent change in real credit is associated with about 0.5 increase in long-run growth.
  - Cross-country empirical distribution (1970–2015) average: growth increases by about 0.2 percent when real credit growth rises by one percent.

### Investment Funds: Funding and Asset Allocation
- Funding sources (Dec-2015):
  - Pension: 60 percent of institutional investor funds (overall almost 80 percent of investment funds’ funds come from institutional investors: 60 percent from pension funds and 20 percent from insurance companies).
  - Insurance: 20 percent (institutional).
  - Corporates and households: remaining part roughly equally distributed.
  - Shown breakdown (% Total, Dec-2015): 60% pension, 18% insurance, 7% corporates, 11% households, 4% other.
- Geographic allocation of assets (Dec-2015):
  - About 50 percent of assets in Namibia.
  - About a third in South Africa (technically CMA region; mostly South Africa).
  - About 15 percent in advanced economies.
  - Charted allocation (% assets, Dec-2015): Namibia 55, CMA 49, Offshore 50, etc. (as presented in source).
- Asset type composition (Dec-2015):
  - About 40 percent in short-term assets (evenly distributed between treasury bills, CDs and deposits).
  - Remaining 60 percent mostly invested in bonds and equities.
  - Detailed (% assets, Dec-2015): Tbills 10%, CDs 10%, Deposits 11%, Equities 42%, Bonds 13%, Others 13%.
- Equity exposure:
  - Investment funds’ equity portfolio is about 60 percent of GDP; Namibia Stock Exchange capitalization dominated by dual listed South African companies; single-listed companies’ capitalization is about 20 percent of GDP.
  - JSE top 40 index annualized volatility range in 2016 has consistently been above 20 percent in 2016 (VIX measure).

### Investment Funds as a Conduit of Shocks
- Two salient features:
  - Funds raise almost 80 percent of their funds from institutional investors (60 percent pension funds; 20 percent insurance companies) as of 2015.
  - Funds have large and risky foreign exposures.
- Liquidity and redemption dynamics:
  - A large redemption shock could force funds to liquidate assets; portfolio managers would likely use domestic deposits in the banking system as first line of defense.
  - Fund actions can be correlated (herding), leading to rapid propagation of shocks as funds rebalance based on past performance.
  - A shock to investment funds could become a liquidity shock for domestic banks if deposits do not return to the banking system.

### Macro-Financial Vulnerability: Stress Analysis
- Potential shock origins:
  - Shocks could be domestic or abroad, across countries and asset classes.
  - A likely source: exposures to South African equities — idiosyncratic (e.g., political instability) or global rebalancing of risk sentiment towards emerging markets.
- Fire-sale dynamics:
  - Redemptions could induce fire sales, depress asset prices, induce further outflows, and impair government financing (higher interest costs or deferred spending), impacting GDP growth.
- Banks’ liquidity and capital posture (Dec-2015):
  - Liquid assets were 12 percent of monthly average liabilities to the public, compared to a 10 percent requirement.
  - About 70 percent of liquid assets are holdings of government securities; domestic secondary market turnover was 30 percent in 2015.
  - Capital was 14 percent of RWA, compared to a CAR of 10 percent.
  - Estimated system buffers (difference between current holdings and minimum requirements) are around 3.8 percent of GDP.
  - Table (Bank’s Capital and Liquidity Buffers, Dec-2015):
    - Qualifying Capital: 11,163 (N$ Millions)
    - % GDP: 7.6
    - Required Capital: 7,832 (N$ Millions)
    - % GDP: 5.3
    - Capital Buffer: 3,331 (N$ Millions)
    - % GDP: 2.3
    - Average Liquid Assets Held: 11,332 (N$ Millions)
    - % GDP: 7.7
    - Required Liquidity: 9,107 (N$ Millions)
    - % GDP: 6.2
    - Liquidity Buffer: 2,225 (N$ Millions)
    - % GDP: 1.5
    - Maximum Allowable Shock 1/: 5,556 (N$ Millions)
    - % GDP: 3.8
    - 1/ Equivalent to 2.8 percent of investment fund's assets.
- Vulnerability thresholds:
  - Liquidity and capital buffers of the banking system are equivalent to less than 3 percent of investment funds’ assets.
  - The banking system would have problems if investment funds had net redemptions of less than 3 percent of their assets, assuming they use bank deposits to cope with outflows.
  - In stress, banks might request short-term liquidity support from parents or the BoN, but depending on duration/severity and bank dependence on wholesale funding from investment funds, such support may be insufficient and deleveraging would occur, affecting GDP growth.

### Policy Implications and Recommendations
- NBFIs, given their size, foreign exposures, and links to banks, are macro-critical.
- The Bank of Namibia (BoN) should take the lead in assessing financial stability risks arising from bank–NBFI linkages.
- Regulatory architecture concerns:
  - Separation of regulatory functions between BoN and NAMFISA tends to prevent proper monitoring and assessment of financial stability risks arising from cross-industry linkages.
  - To improve monitoring and assessment, the regulatory architecture needs to be improved to provide the BoN with necessary powers and instruments to assess macro-financial risks and exercise controls for the whole financial sector.
- Recommended actions:
  - BoN should take the lead in addressing data and regulatory gaps to identify early signs of stress and reduce the likelihood that a shock translates into a crisis.

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

### 4.      Low-labor intensive sectors have been driving growth in Namibia. Over the last fifteen

### _cr16374 - 4.      Low-labor intensive sectors have been driving growth in Namibia. Over the last fifteen

### Growth and sectoral employment
- Mining sector:
  - Represents more than 10 percent of GDP.
  - Absorbs about 2 percent of overall employment.
  - Has created very few new jobs.
- Agriculture sector:
  - Represents less than 10 percent of GDP.
  - Has had only a minor or negative contribution to growth.
  - Absorbs more than 30 percent of total employment and employs the bulk of low-skilled workers.
- Trade services (wholesale and retail) and construction:
  - Increasing role in GDP growth in recent years.
  - More balanced proportion between their share of GDP and employment they absorb.
- Manufacturing:
  - Displays an imbalance between GDP and employment shares.
  - Likely characterized by within-sector labor intensity heterogeneity across subsectors.
  - Represented only about 10 percent of GDP in 2015.

### Employment elasticities and recent trends
- Sectoral employment elasticities (from labor surveys; interpret with caution due to limited time series):
  - Agriculture, forestry and fishing: -1.87
  - Mining and quarrying: -1.51
  - Manufacturing: 3.16
  - Construction: 0.47
  - Wholesale and retail trade: 0.97
  - Financial and insurance activities: 0.40
  - Public administration and defense: 1.02
  - Education: 0.49
  - Private households: 2.68
  - Others: -0.25
- Quarterly survey data (Bank of Namibia, sample of firms, 2008–2015):
  - Manufacturing and wholesale & retail trade show substantial co-movement between rates of growth of GDP and employment.
  - Elasticity of employment to growth in both manufacturing and wholesale & retail trade is about 1 (i.e., a 1 percent GDP growth in either sector is associated with a 1 percent growth in sectoral employment).

### Skill mismatches and education
- Namibia’s position on skill mismatches:
  - Skill Mismatch Index (average 2000–2014) ranks Namibia 66th out of 82 countries.
  - On a range between 0.01 and 0.41, Namibia scores 0.19; the median is 0.19 and Namibia is above the median (i.e., large skill mismatch).
- Nature of mismatch:
  - Excess supply of low and semi-skilled workers.
  - Low supply of high-skilled workers compared to demand.
  - Primary enrollment comparable to upper middle income countries (above 80 percent), but gaps widen at tertiary and vocational levels.
- Unemployment by education level:
  - Unemployment rate peaks above 30 percent for individuals with secondary education.
  - Unemployment falls to below 10 percent for individuals with tertiary education.
- Policy implications:
  - Growth in semi-skilled sectors such as manufacturing and trade services could help absorb excess labor force with secondary education.
  - Increasing the proportion of the labor force with tertiary education or vocational training would better meet demand for highly-skilled workers.
  - Closing the mismatch requires policies on both supply (education, vocational training) and demand (skills-relevant job creation).

### Rigidities in the business environment
- Namibia’s international rankings (relative to world median):
  - Tax compliance: 1.01 points below the world median (scale 1–10).
  - Business regulations: 0.22 points below the world median (scale 1–10).
  - Corruption and licensing restriction: between the world median and the 3rd quartile.
  - Labor market flexibility: 1.6 points below the world median (scale 1–7, survey-based).
- Business regulation areas with largest gaps vs. median upper-middle income country:
  - Starting a business, registering property, and ease of paying taxes.
- Observed implication:
  - Structural reforms improving business regulation indices would likely strengthen the relationship between growth and employment.

### Cross-country evidence linking environment, skills, and employment elasticity
- Panel regression findings (selected results summarized):
  - Change in employment-to-output elasticity associated to a unit increase in each index:
    - Labor market flexibility: 0.05**
    - Corruption: 0.09***
    - Licensing restrictions: 0.07**
    - Tax compliance: 0.06***
    - Business regulations: 0.17***
    - Skill mismatch index: -1.68***
  - Notes: ** and *** denote significance at 0.05 and 0.01 levels, respectively.
  - Interpretation: improvements in business environment and lower skill mismatches increase employment responsiveness to growth; higher skill mismatches reduce it.

### Simulation assumptions and unemployment scenarios (2014–2021)
- Baseline assumptions:
  - Labor force grows with population, growing by 2.7 percent (as in the past).
  - Labor force participation rate for population over 15 years remains at 70 percent.
  - Sectoral employment growth simulated using average sectoral employment-to-GDP elasticities from latest labor surveys.
- Baseline unemployment trajectory:
  - Unemployment rate declines slowly from about 28 percent in 2015 to about 24 percent in 2021 (blue line).
- Structural reform scenarios:
  - Business environment reforms:
    - Assume gap from world median in the business regulations indicator is closed.
    - Employment-to-output elasticities in all sectors uniformly increase by 0.04 (predicted by panel regression).
    - Result: unemployment declines to 21.5 percent by 2021.
    - Recommended policies: simplify regulations for registering property and starting businesses.
  - Skill mismatch reduction:
    - Reduction in the skill mismatch index to its median value would (alone) cause a predicted increase in elasticities by 0.14.
    - Result: unemployment declines to 19 percent by 2021.
    - Recommended policies: improve coverage and quality of higher education, update curricula, provide incentives to transition to tertiary education and vocational training, improve quality of primary and junior secondary education, and strengthen on-job training programs.
  - Additional manufacturing and trade growth:
    - If over 2017–2021 manufacturing and trade services growth is 5 percent points higher than baseline, unemployment would decline by another 3 percentage points to around 16 percent by 2021 (red line).

### Key takeaway
- Structural reforms that (i) close gaps in business regulations to facilitate creation and scaling of enterprises, and (ii) reduce skill mismatches through improved education and vocational training, have the potential to materially strengthen the nexus between growth and employment and put Namibia’s unemployment rate on a sustained declining path.

_Italic: Source: IMF staff estimates and analysis in IMF country report section titled “Low-labor intensive sectors have been driving growth in Namibia.”_

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16374.pdf_