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Namibia: 2013 Article IV Consultation – Staff Report

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Namibia: 2013 Article IV Consultation – Staff Report

Namibia: 2013 Article IV Consultation – Staff Report

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

KEY ISSUES

Setting: Namibia’s positive growth record over the years has raised overall incomes and led to positive economic outcomes. However, growth has not translated into sufficient job creation contributing to persistently high unemployment and income inequality.

Outlook and risks: Real GDP growth is expected to moderate to 4 percent in 2013 from 5 percent in 2012 reflecting weak global demand for exports partially offset by solid growth in domestic demand. The uncertain global environment and a possible delay in finalizing negotiations for the Economic Partnership Agreement (EPA) with the European Union are key risks.

Policy mix: Given the peg to the South African rand, staff urges the authorities to return to fiscal prudence through greater expenditure control. In case of more adverse shifts in the global economic environment than currently anticipated, staff advocates for allowing the automatic stabilizers to operate on the revenue side.

Medium-term: With an uncertain external environment, staff recommends the authorities pursue a “growth-friendly” fiscal consolidation reining in unproductive current spending, while protecting growth-promoting capital spending. Staff welcomes efforts by the government to look into ways to steer a gradual reduction of the wage bill which would improve labor market outcomes. Measures to enhance domestic revenue mobilization would help balance the fiscal consolidation strategy.

Financial stability and inclusion: The government’s emphasis on enhancing financial inclusion, while preserving the stability of the financial system, is appropriate. Although the level of household indebtedness has stabilized, it remains elevated. Thus, staff commends the authorities for initiatives taken to strengthen their surveillance of the financial sector and thereby help minimize the associated vulnerabilities.

Growth and diversification: Achieving higher growth would require a set of efficiency- driven reforms to reinvigorate productivity drivers. Delivering good outcomes on policies for greater diversification would require supportive measures to liberalize the service sectors and reduce the domestic regulatory burden for firms.

Past advice: There is broad agreement between the Fund and the authorities on macroeconomic policy and structural reform priorities. The authorities also view the Fund as a valuable partner for their capacity building efforts.

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