The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Namibia.1
Namibia has maintained robust Real Gross Domestic Product (GDP) growth since the global financial crisis, although in 2014 it was somewhat weaker. The GDP growth slightly moderated to 4.5 percent in 2014, largely owing to lower global demand for Namibia’s main export commodities (e.g., diamond, uranium). Inflation remained contained, due to low international commodity prices (e.g., fuel). The government’s large scale fiscal program contributed to job creation, and unemployment declined somewhat (to 28 percent in 2014).
Growth performance has been underpinned by a rapid increase in credit. Average annual growth of private sector credit has exceeded 15 percent since 2012, with strong demand from both households and corporates. This credit expansion has been boosted by historically low interest rates, following South Africa’s monetary policy. Net credit to the government has also risen to meet its large domestic financing needs.
Namibia’s fiscal policy stays expansionary, to promote growth and employment. In 2014/15, though the Southern African Customs Union (SACU) revenues and domestic revenues increased, the government increased its recurrent and capital expenditures more, resulting in an overall fiscal deficit of 3.75 percent of GDP. For 2015/16, the budget envisages a larger deficit, with increased expenditures and lower SACU revenues (declined by 1.75 percent of GDP from 2014/15). In light of the financing needs, the government has been exploring the scope for tapping international capital markets.
These developments resulted in increased pressure on external balances, while house prices also rose. With the significant increase in import demand, the current account continued to deteriorate in 2014, and international reserves declined to 1½ months of imports by May 2015. House prices have increased by 87 percent over the last five years, driven by several factors (e.g., the growth in disposable income, relatively low interest rates, purchases for short term capital gains, and structural factors).
Namibia’s growth outlook is clouded with downside risks, while facing significant policy challenges. The main near-term risks are associated with (i) highly volatile SACU revenues, (ii) rapid growth of house prices, and (iii) external environment. In addition, Namibia continues to face serious development challenges, including high unemployment and inequality. Its main policy challenges are therefore to strengthen its resilience to exogenous shocks and manage systemic risks in the financial sector, while promoting inclusive growth and job creation.
Executive Board Assessment2
Executive Directors commended Namibia’s robust macroeconomic performance following the global financial crisis. While medium-term growth prospects remain good, they noted that risks are increasing. The recent expansionary fiscal policy—while contributing to job creation—has increased pressure on external balances and put downward pressure on international reserves. Volatile revenues from the Southern African Customs Union (SACU) and rising housing prices are adding to uncertainties. Against this backdrop, Directors called for continued commitment to sound policies and structural reforms to build adequate policy buffers, preserve financial sector stability, and reduce unemployment and inequality.
Directors welcomed the authorities’ commitment to pursue growth-friendly fiscal consolidation, noting that a sustained effort will be needed with the aim to build international reserves. They stressed the importance of containing the government wage bill and reducing subsidies and transfers to state-owned enterprises, as well as strengthening revenue administration and public financial management, while safeguarding critical social and development needs. In view of the prospective decline in SACU revenues, they also suggested that tapping international capital markets could help increase buffers, but noted that the associated interest rate, rollover, and exchange rate risks need to be managed carefully. Directors commended the authorities’ plan to undertake a midyear budget review, which would incorporate their fiscal consolidation measures.
Directors acknowledged that Namibia’s financial system is generally sound, but called for vigilance on recent housing market developments. They highlighted the close macrofinancial linkages, and cautioned that accelerating real estate prices―combined with high concentration of banks’ mortgage lending―could pose risks to the financial sector and the real economy. In this respect, Directors commended the Bank of Namibia for its plan to introduce loan-to-value limits for nonprimary resident purchases, and recommended further targeted macroprudential measures to safeguard financial stability. In light of the significant size of nonbank financial institutions and their close inter-linkages, greater supervision of this sector is essential. Directors also encouraged further steps to enhance cross-border coordination.
Directors welcomed the authorities’ intention to address high unemployment and inequality. In view of high youth unemployment, Directors supported the authorities’ objective to reduce skill mismatches through improving education and job-related skills development. They also emphasized the importance of further improving business conditions and facilitating financial intermediation with proper supervisory oversight.