On January 29, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Namibia without a meeting.²

Namibia’s real GDP grew by a healthy 5 percent in 2012. Preliminary data for the first half of 2013 suggest that growth has moderated; the slowdown reflects weak global demand for exports, which more than offset the solid growth in the nonmineral sector, most notably in retail trade. At end-October 2013 inflation stood slightly below 5 percent.

The fiscal outturn in the FY2012/13 (starting April) was significantly better than targeted; the overall deficit was 0.3 percent compared to 3.9 percent projected in the original budget. The strong performance reflects revenue over performance and some under-execution in capital spending.

Reflecting the fiscal withdrawal in FY2012/13, the current account deficit narrowed to 2.6 percent of GDP in 2012 from 3.5 percent in 2011. This outcome was driven mainly by an increase in official transfers in the form of higher-than-projected Southern African Customs Union (SACU) revenues, and savings made in capital spending. Despite the narrowing of the current account deficit, the official reserves coverage stood at just 3 months of imports at end-2012.

Namibia’s banking system is highly profitable and well-capitalized, with relatively low nonperforming loans. Favorable credit conditions also supported domestic demand growth in recent years. The 2011–21 Namibia Financial Sector Strategy (NFSS) is sound and strikes an appropriate balance between financial inclusion and stability. The Bank of Namibia’s semi-annual Financial Stability Reports have also rightly focused on the challenges that could emanate from the high household indebtedness and recommended appropriate policy responses to minimize the associated risks.

Staff projects that output growth would further moderate to about 4 percent in 2013. Mineral exports will likely remain subdued on account of weak external demand with growth slowing in Namibia’s major trading partners. However, this factor would be partly offset by strong domestic demand growth emanating from the recent income tax reform, along with the fiscal expansion targeted in the FY2013/14 budget. The nonmineral sector, in particular construction, is expected to further rebound in the second half of 2013, on account of the development of the Swakop Uranium mine, which is expected to become the second largest uranium mine in the world.

The main near-term risks relate to the fragile and uncertain external environment, especially for emerging markets, which could constrain export demand. Further deterioration of the euro-area economies may generate significant negative spillovers through trade linkages as a large share of Namibia’s total exports—mainly diamonds, uranium, beef, unrefined copper and fish—are destined for Europe. In addition, a delay in finalizing negotiation of Economic Partnership Agreement (EPA) with the European Union may bring additional risks to some nonmineral exports.

Executive Board Assessment

In concluding the 2013 Article IV consultation with Namibia, Executive directors endorsed staff’s appraisal, as follows:

Namibia has made impressive strides in economic development since gaining independence in 1990. The positive growth record in recent years has raised overall incomes and delivered good economic outcomes.

However, the solid growth has not led to sufficient job creation and lower inequality. The government remains the largest employer in the economy and TIPEEG is yet to put a significant dent on the high level of structural unemployment.

The 4th National Development Plan (NDP4) serves as the authorities’ blueprint for structural transformation. Staff welcomes a tightly focused NPD4 that emphasizes returning to high and sustained growth, reducing income inequality and enhancing job creation through reforms that lay the foundation for greater private sector development.

The period ahead will require a delicate balancing act in the implementation of macroeconomic policies because of global spillovers and domestic policy developments. The uncertain global environment especially for emerging markets and a possible delay in finalizing negotiations of the EPA with the EU are key risks. In a more adverse global scenario than anticipated, the authorities should allow the automatic stabilizers to work on the revenue side and avoid discretionary fiscal measures to support domestic demand.

Staff recommends that the government pursue a “growth-friendly” medium-term fiscal consolidation strategy. This should aim to rein in current spending (wages and transfers and subsidies to SOEs) while preserving growth-promoting capital. Staff welcomes plans by the department of public servants management to link civil servants’ pay with performance. Staff also commends the measures being put in place by the government to improve domestic revenue generation which bodes well for a balanced fiscal consolidation. Staff advocates for a broadly balanced fiscal position by FY2015/16 to help rebuild the fiscal and reserve buffers.

Staff commends the sense of urgency shown by the government to address the state of finances of the State-owned enterprises (SOEs). Speedy implementation of SOE performance agreements is needed to put them on a financially viable footing.

The government’s emphasis on enhancing greater financial inclusion through its financial sector strategy, while preserving the stability of the financial system, is appropriate. While the level of household indebtedness has stabilized, it remains elevated. In staff’s view, this in itself does not pose imminent risk to macroeconomic and financial stability. Staff commends the authorities for the initiatives taken to strengthen their surveillance of the financial sector.

Achieving sustainable growth would require a set of reform-oriented innovative policies to reinvigorate productivity growth. These include increasing the quality of public spending, improving the business environment, implementing supportive measures to liberalize the service sectors, reducing the domestic regulatory burden on firms and the skill mismatch in the labor market. Staff commends the authorities’ efforts to strengthen public financial management including bringing Namibia’s procurement system in line with international standards.