Public Information Notice No. 02/13

Public Information Notice: IMF Concludes Article IV Consultation with Namibia

February 22, 2002

On February 11, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Namibia.¹

Background

Economic activity in Namibia has expanded moderately in recent years. Since the mid-1990s, real GDP growth has averaged 3½ percent a year, broadly in line with the growth rates in the region, and slightly above the annual population growth rate of about 3 percent. Unemployment has remained high, at about 35 percent of the labor force, and the recent economic growth has been insufficient to achieve gains in per capita income and a reduction in poverty.

Economic performance in 2000 was broadly in line with recent trends. Real GDP rose by 3¼ percent, and the budget deficit fell to 1½ percent of GDP, which reflected buoyant diamond receipts and underspending on capital outlays. The external current account recorded a surplus of 5 percent of GDP. The 12-month rate of inflation increased from 8 percent in 1999 to 10¾ percent in 2000, owing in part to an increase in domestic fuel prices (of 12 percent).

Developments in 2001 point to somewhat weaker growth and lower inflation. Reflecting lower agricultural growth and a possible decline in fishing output, real GDP is expected to increase by less than 3 percent. The 12-month rate of inflation fell to 8¼ percent at end-December, owing in part to lower oil prices.

For the first time since independence in 1990, the 2001/02 budget was presented in the context of a rolling three-year expenditure framework. The medium-term approach to budget preparation was intended to strengthen fiscal management, especially expenditure control. The main guiding principle for the budget was to limit the ratio of government debt to GDP to no more than 25 percent. The original 2001/02 budget envisaged a deficit of about 3¾ percent of GDP, and the budgets for 2002/03 and 2003/04 (cast in 2000/01 constant price terms) targeted deficits of 3 percent of GDP.

Preliminary information available suggests that the budget deficit in 2001/02 is likely to increase to 5¼ percent of GDP. Notwithstanding continued buoyant diamond receipts, the ratio of revenue to GDP is expected to fall from the 2000/01 outturn (although still higher than the original 2001/02 budget), as tariff revenue from the Southern African Customs Union (SACU) declined relative to GDP. Expenditure is expected to increase sharply on account of a larger wage bill than budgeted, a substantial transfer to Air Namibia, and onetime allowances for military personnel withdrawn from overseas. As a result, government debt is expected to reach 24½ percent of GDP in 2001/02.

Given the peg of the Namibia dollar to the South African rand, the scope for independent monetary policy in Namibia is limited. In line with developments in South Africa, monetary conditions eased over the course of 2001 and the central bank rate was reduced from 11¼ percent at end-December 2000 to 9¼ percent at end-October 2001. Broad money grew by about 8¼ percent in the 12 months to November, largely attributable to a strong expansion of consumer loans. Between September and December, the Namibia dollar, following the rand, depreciated by about 30 percent against the U.S. dollar.

Namibia's near-term outlook appears encouraging. Indications are that any short-term impact of the global slowdown may be limited and likely to be felt in the first half of 2002. Barring any further deterioration in the external environment, real GDP growth in 2002 could rebound to about 3 percent. The prospects for stronger growth beyond 2002 reflect the expansion of offshore mining activity, the operation of a new zinc mine expected in 2003, and foreign direct investment inflows associated with the U.S. African Growth and Opportunity Act. Namibia also has strong tourism potential, that has yet to be fully developed. However, the external current account is projected to record a smaller surplus than in recent years, as the expansion in exports of mining, fishery, and nontraditional products is likely to be offset by lower SACU receipts.

Executive Board Assessment

Executive Directors noted that, while macroeconomic conditions have remained stable in recent years, real GDP growth has been insufficient to reduce the high incidence of unemployment and poverty. They therefore stressed the need to boost economic growth through fiscal consolidation, higher investment, and more efficient utilization of resources.

Directors expressed concern over the sharp increase in the budget deficit in 2001/02 stemming from higher wage expenditure and a large transfer to Air Namibia, and warned that, unless appropriate measures are put in place soon, budget performance will likely deteriorate further in the years ahead. Therefore, they welcomed the authorities' intention to limit government debt to no more than 25 percent of GDP over the medium term, and stressed the importance of avoiding the adverse debt dynamics of high deficits and rising debt service payments.

Directors urged the authorities to develop a medium-term strategy to restrain personnel expenditure, that would include closer scrutiny of the need for new civil service positions and a restructuring of wages to achieve a sustainable wage bill without jeopardizing civil service efficiency. They emphasized the importance of further strengthening budget management and control, especially by exercising greater restraint in approving supplementary mid-year allocations. These measures would facilitate a reorientation of budgetary outlays to social and economic services, with long-term benefits for economic growth and poverty reduction.

Expressing concern over the large transfer to Air Namibia, Directors stressed the urgency of curtailing the government's financial support to public enterprises-especially by limiting government loan guarantees to public enterprises, which weaken the incentives for prudent borrowing and could have serious fiscal consequences.

Directors commended the successful introduction of the value-added tax and welcomed the proposed review of the tax system. As the tax burden is heavy, Directors recommended that reforms focus on strengthening VAT compliance, improving the efficiency of the tax system, and broadening the tax base. This would allow the reduction of high tax rates without jeopardizing fiscal sustainability.

Raising Namibia's growth potential will require higher investment and better utilization of resources, and Directors stressed that further efforts are needed to strengthen public enterprise performance, streamline labor market regulations, improve worker skills, and encourage faster private sector growth. They welcomed the newly established Cabinet Committee on public enterprise reform, and urged the authorities to formulate a time-bound privatization plan.

Directors welcomed steps being taken to reduce the high incidence of HIV/AIDS. They urged the authorities to step up efforts to increase public awareness of the disease and access to services, and to seek international assistance for this purpose more aggressively.

Directors considered that the peg of the Namibia dollar to the South African rand has served Namibia well, particularly in view of the large share of trade with South Africa, but that it needs to be backed by sound fiscal policy and structural reforms to maintain competitiveness. Fiscal restraint over the medium term is also needed to help increase the level of official reserves and strengthen Namibia's ability to respond to adverse shocks. Directors encouraged the authorities to take advantage of the U.S. African Growth and Opportunity Act to boost exports.

Directors urged the authorities to assess carefully, with Fund technical assistance, the benefits and costs of establishing an offshore financial center, as well as Namibia's capacity to effectively supervise offshore financial operations, before deciding whether to proceed.

Directors observed that Namibia's core statistics are generally adequate for surveillance, but that serious weaknesses remain, particularly with respect to labor market and public enterprise data. They encouraged the authorities to continue to improve the quality and timeliness of core statistics and, in this regard, welcomed the authorities' plan to participate in the General Data Dissemination Standards and undertake a Report on Standards and Codes data module.