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Statement by Mr. Majoro on Namibia Executive Board Meeting

Author(s):
International Monetary Fund
Published Date:
February 2012
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Introduction

1. My Namibian authorities appreciate the constructive engagement and policy dialogue with staff in their effort to address pervasive unemployment, sustain the growth momentum and preserve macroeconomic stability. They value highly the support from staff, Management, and Executive Directors, and find the staff report informative, well balanced, and a source of meaningful advice on the country’s economic program and policy challenges.

2. The authorities have demonstrated a track record of sound macroeconomic policy implementation, reflected in solid economic performance over the last decade or so. However this impressive performance was interrupted by the global financial and economic crises as the slump in external demand resulted in a contraction in domestic output and a shift in the fiscal position into a deficit. In spite of recent gradual rebound, income inequality has remained wide, the level of unemployment unacceptably high and poverty pervasive. Some official estimates place the unemployment rate as high as 51 percent comprising mostly the youths and unskilled. The authorities have responded astutely to these policy challenges as reflected in the five-year National Development Plans (NDPs) and Vision 2030 under which the country aims to be an industrial, knowledge-based society with high per capital income and near full employment by the year 2030. Notwithstanding these bold attempts to redress the situation, high unemployment and income inequality have persisted.

3. It is against this background that the authorities in 2011 launched the Targeted Intervention Program for Employment and Economic Growth (TIPEEG). TIPEEG is a specialized short-term program aimed at addressing the acute high unemployment rate, thereby laying the foundations for sustained economic development. Focusing on four strategic, high growth-enhancing sectors—agriculture, tourism, transport, and housing and sanitation—this three-year program entails fiscal expansion, estimated at about 15% of GDP in FY2011/12, its first year of implementation. It is envisaged that its successful implementation will result in the preservation and creation of over 100,000 direct and indirect job opportunities. While the authorities’ medium-term expenditure framework (MTEF) is predicated on this policy intervention, they are mindful of the macroeconomic implications of the scaling up of resources under the program and reaffirm their commitment to unwind their spending intervention at the end of the current MTEF.

Recent economic developments and prospects

4. The Namibian economy registered robust performance prior to the global financial and economic crises, with growth averaging 6.3 percent between 2004 and 2008 and inflation at single digits.. The fiscal and external positions strengthened as a result of significant improvement in tax administration, increased mineral exports, and substantial Southern African Customs Union (SACU) transfers. The strong fiscal performance allowed for considerable reduction in the public debt from 28 percent in 2004 to 16 percent in 2009.

5. This substantial macroeconomic buffer helped the authorities weather the impact of the global financial and economic crises. Growth rebounded strongly in 2010 recording a real increase of 6.6 percent supported by rising mineral production and the continued expansion in non-mining sectors. A decline in mining activities and a slowing in the secondary industries resulted in a slowdown in growth in 2011 estimated at 3.8 percent. Though gradually increasing, inflation has remained moderate with the average annual inflation rate for 2011 at 5.0 percent compared to 4.5 percent in 2010. While the current account weakened on account of lower global commodity demand, official foreign exchange reserves were boosted by the successful issuance of $US500 million Eurobonds. As at end-December 2011, the reserves position stood at around US$1.86 billion, representing over 3 months of forward-looking import cover. The economy is projected to grow by 4.2 percent during 2012.

6. The medium-term growth outlook is promising supported by potential increase in mineral production, mainly diamond and uranium, and infrastructural development owing partly to TIPEEG. The growth of the non-mining sector—manufacturing, construction, and services—and the prospects for future oil production also underpin this favorable outlook. However, downside risks remain. The sovereign debt crisis in the Euro Area and a weaker-than-anticipated global economic recovery could pull commodity prices down resulting in lower mining output and decreased export earnings.

Fiscal policy developments and outlook

7. My authorities have continued to pursue prudent fiscal policy aimed at promoting economic growth, efficient service delivery and socio-economic welfare within the ambit of macroeconomic stability and fiscal sustainability. To support real sector activity as the global economic slowdown intensified, an expansionary fiscal stance was adopted in FY2009/10 on the back of the fiscal buffers accumulated in the pre-crises period. The fiscal stimulus increased significantly in FY2011/12 in support of the TIPEEG, with the widening of the overall deficit. While the adoption of countercyclical fiscal measures has provided much-needed boost to the economy, the authorities remain mindful of the potential impacts on fiscal outcomes. The public debt is, however, expected to remain relatively low, at below 25 percent of GDP for FY2011/12, in spite of the projected increase in the fiscal deficit. The authorities, nonetheless, take particular note of staff’s debt sustainability analysis highlighting the longer-term unsustainability of the current fiscal stance and the vulnerability of the fiscal position to negative growth shock. Given their demonstrable capacity to rein in the public debt, the authorities are confident of preserving its sustainability over the medium to long term.

8. The authorities remain committed to widening the fiscal space by enhancing revenue collection and strengthening tax administration. To this end, amendments to the income tax act and the value added tax act aimed at broadening and deepening the tax base have been submitted for legislative approval. Efforts are underway to streamline tax procedures, improve computerization of tax collection and adopt a taxpayer self-assessment system. To further strengthen revenue flows, the introduction of an export levy on raw material exports and specific environmental taxes is being explored. While the near-term outlook for SACU revenues seems favorable, the authorities are aware of the downside risks. Thus, going forward, they are committed to implementing fiscal rules based on sustainable non-SACU fiscal balance and strengthening the budget framework and processes to help mitigate the risks to the fiscal framework.

9. The authorities will seek to strengthen public financial management, including through an integrated tax management system that will help simplify tax administration processes and improve services to taxpayers. To ensure transparency, accountability, and the efficient use of public resources, expenditure reviews and tracking will be carried out during this MTEF period and a roll-out of program-budgeting to all votes undertaken.

Monetary and exchange rate policy

10. In spite of the limited scope for independent monetary policy arising from the country’s membership of the Common Monetary Area (CMA), the Bank of Namibia (BoN) responded strongly to the global financial and economic crises by adopting an expansionary monetary policy stance. The repo rate was reduced by 300 basis points in 2009 and a further 100 basis points to 6 percent in 2010 to provide additional stimulus to the economy. Given the largely benign inflation environment and the weak recovery of the domestic economy, the BoN has maintained its policy stance and kept the rate at 6 percent.

11. The authorities continue to view the exchange rate peg to the South African rand as an appropriate monetary policy anchor. They are therefore committed to maintaining international reserves at sufficiently high levels to safeguard the peg and, at the same time, reinforce the economy’s defenses against potential external shocks. As a result, deliberate policy action is being taken to maintain the gross international reserves position well-above the threshold of 3 months of import cover. Additionally, staff’s assessment indicating that real effective exchange rate remains broadly in line with economic fundamentals provides much comfort.

Financial sector developments and reforms

12. Namibia’s financial system exhibited immense resilience in the face of the global financial and economic crises and has remained sound and well-functioning. The commercial banking sector is well capitalized, provisioned and profitable, with minimal direct exposure to foreign financial institutions. The authorities are, however, mindful of the risks from exposures of banks’ loan portfolios to the real estate sector and stand ready to institute appropriate macroprudential measures to mitigate the risk of any potential house price bubble stemming from cross-border real estate purchases.

13. Notwithstanding the smooth functioning of the financial system, the authorities recognize the need to address its inherent weaknesses, ranging from limited access to financial services to less effective regulation, if the sector is to meaningfully contribute to economic development. To this end, plans have been put in place to strengthen the Namibia Financial Institutions Supervisory Authority (NAMFISA), including its capacity to effectively supervise the growing number of nonbank financial institutions (NBFIs). The Financial Institutions and Markets Bill which has already been approved by Cabinet is expected to receive parliamentary approval in the coming months.

14. In addition to the several national initiatives in recent years, such as the NDPs and Vision 2030, a ten-year Financial Sector Strategy (FSS) was launched in December 2011 aimed at addressing the underlying shortcomings of the system with a view to building a more resilient, competitive and dynamic financial system. A key focus of the strategy is the achievement of financial inclusion by creating a favorable environment in which the financial sector would flourish and create equal access to financial services, thereby helping to narrow income inequalities, reduce poverty and foster economic growth. Other areas of intervention include consumer literacy and protection, localization of the financial sector, and financial system deepening and development. An Action Plan with clearly defined expected outcomes has been developed to aid in monitoring and evaluation of the strategy.

Structural reforms

15. My authorities are committed to implementing far-reaching structural reforms to complement their sound macroeconomic policies in order to achieve a more broad-based growth and address the endemic problem of income inequality and high unemployment. TIPEEG, discussed earlier, represents one such initiative to spur activity in strategic, high growth-enhancing sectors and create job opportunities. The authorities have also been unrelenting in improving the business climate and promoting private sector development. In this regard, a series of legislative amendments are currently underway aimed at modernizing the Foreign Investment Act, manufacturers’ incentives, Export Processing Zones (EPZ), and Exploration and Prospecting Licenses (EPLs), to name but a few. Furthermore, there is firm commitment to reducing the cost of doing business through significant investment in infrastructure and energy. Policies to foster competitiveness and enhance productivity are expected to form centerpiece of the next five-year national development plan, NDP4.

16. Finally, as staff highlighted, my authorities are concerned over the financial implications of the country’s recent reclassification as an upper middle-income country as it essentially precludes it from access to much-needed concessional financing. The authorities are of the view that the country’s significantly high income inequality and enormous development challenges are not properly reflected in the classification methodology. The results of staff’s analysis which employs the World Bank’s International Comparison Program (ICP) based on a purchasing power parity approach (staff report Box 4) clearly highlight the country’s low ranking in terms of living standards and consumption patterns relative to regional comparators. The country’s reclassification has already rendered it ineligible for renewal of assistance under the Millennium Challenge Corporation and access to EU concessional financing is now limited. Given the emerging downside impact of the global economic downturn, my authorities intend to argue for a postponement of donor actions in phasing out concessional support.

Conclusion

17. My Namibian authorities remain committed to pursuing sound macroeconomic policies and implementing far-reaching structural reforms to address the high level of unemployment, promote external competitiveness and enhance economic productivity. They are confident that judicious implementation of TIPEEG will create much-needed job opportunities and help unleash the economy’s growth potential. They undertake to unwind the fiscal expansion at the end of the initiative in order to preserve medium to long-term fiscal sustainability.

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