On February 26, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Namibia.
Since 2010, Namibia has experienced a period of exceptional growth. Growth was partly attributable to temporary factors. An expansionary fiscal policy, the construction of large mines and buoyant credit supported growth and better living standards. However, robust growth masked rising macroeconomic vulnerabilities and deteriorating productivity performance. Moreover, structural impediments have contributed to keep unemployment and income inequality unacceptably high.
With temporary expansionary factors ending, the economy has reached a turning point. GDP sharply decelerated in 2016 and contracted in 2017 as construction in the mining sector came to an end and the government began consolidating. With the economy contracting and Southern Africa Customs Union (SACU)’s receipts temporarily increasing, the current account balance improved significantly. However, despite significant fiscal adjustment, the public debt ratio continued to increase and almost doubled over the last four years, exceeding in 2017 the median of the countries at the lowest tier of investment grade. Credit growth to the private sector has slowed down reflecting both banks’ tight funding constraints and low demand from highly leveraged households. Headline inflation declined to 5.2 percent in 2017, from 7.3 at end 2016 and, in the context of the currency peg, the Bank of Namibia has followed the South African Reserve Bank (SARB) and reduced its policy rate.
The outlook remains positive with considerable vulnerabilities and risks. Growth is projected to resume in 2018, as mining production ramps up, construction activity stabilizes and manufacturing recovers, before converging to a long-term rate of about 3½ percent, below the average of recent years. Inflation is anticipated to remain below 6 percent. However, as SACU revenues are expected to decline, in the absence of policy action, the fiscal deficit would remain large and public debt would continue rising and approach 70 percent of GDP by 2022. On the positive side, the current account deficit is expected to narrow on average to around 6 percent of GDP on the back of larger mining exports, but international reserve coverage is projected to gradually decline.
Downside risks dominate the outlook. They stem mainly from possible fiscal slippages that could undermine policy credibility, lower demand for key exports, further declines in SACU revenue, and slower recovery in mining and construction activities. Extensive macro-financial linkages could amplify the negative impact of shocks.
Executive Board Assessment
Directors commended the authorities for Namibia’s rapid growth, rising living standards, and macroeconomic stability achieved over the past years. Directors noted, however, that the country faces significant economic challenges and structural issues. Factors that temporarily boosted growth have come to an end, public debt is rising, reserve coverage is low, and risks and vulnerabilities in the financial sector remain. In addition, unemployment and inequality remain elevated. Against this backdrop, Directors emphasized the need for sound policies and structural reforms to ensure fiscal sustainability, strengthen the financial sector, and generate sufficient jobs to manage the upcoming demographic changes and reduce income inequality.
Directors welcomed the authorities’ fiscal adjustment efforts and emphasized that additional consolidation is needed to ensure debt sustainability. They broadly agreed that efforts should be spread over the next years and include expenditure and revenue measures that support long‑term growth, while addressing distributional concerns. In this regard, Directors saw merit in containing public wage growth, rationalizing transfers to extra‑budgetary entities, and reducing tax exemptions. They welcomed the recent increase in social assistance programs while calling for better targeting to protect the poor and strengthen the distributional impact of public spending. To buttress the credibility of the adjustment, the authorities should improve budget formulation, tighten expenditure controls, and strengthen revenue administration and the management of extra-budgetary entities. Directors underscored the need to monitor and manage fiscal risks, particularly from off‑budget financing of large investment projects.
Directors noted that the additional fiscal adjustment will support the ongoing macroeconomic adjustment process and contribute to bring the external position broadly in line with fundamentals. They agreed that, in the context of the peg with the South African rand, the Bank of Namibia (BoN) should maintain the policy rate in line with the South African Reserve Bank, and use macroprudential tools to manage risks from the leveraged private sector.
Directors commended the early steps taken in implementing the FSSA recommendations. They underscored the importance of monitoring and managing risks from banks’ concentrated balance sheets, financial institutions’ interconnections, and public and private sector indebtedness. Directors encouraged the authorities to address the existing supervisory and regulatory gaps in the non‑bank financial sector. They also saw merit in the development of an explicit macroprudential mandate for the BoN, as well as a crisis management and resolution framework.
Directors emphasized the importance of implementing structural reforms to boost job creation to reap the benefits of the upcoming demographic changes and achieve more inclusive growth. They called for measures to focus on reducing skill mismatches through improving access and quality of secondary and higher education and training; better aligning wage and productivity dynamics; and enhancing the business environment.