The International Monetary Fund (IMF) concluded its 2013 Article IV consultation with Namibia on 29 January 2014. The Fund staff’s appraisal acknowledged that Namibia managed to make significant progress in relation to the country’s economic development since it gained independence in 1990. In addition, the country has been able to record strong average economic growth rates in recent years. However, the IMF stated that the main short-term risk relates to the fragile and uncertain external environment and its impact on the demand for Namibian exports. More specifically: “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.” As a result, the multilateral organisation notes that the period ahead will require a “delicate balancing act” when implementing macroeconomic policies. In this regard, the IMF reiterated the need for medium-term fiscal consolidation: “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 State Owned Enterprises) while preserving growth-promoting capital.” In addition, the Fund proposed that the Namibian government aim to achieve a balanced fiscal position by 2015/16 in order to rebuild fiscal and foreign reserve buffers.
WHY DO WE CARE? In September 2013, the IMF raised concern about Namibia’s level of international reserves. The Fund stressed that, given the absence of the buffer provided by a flexible exchange rate, together with a high exposure to macroeconomic volatility, maintaining adequate reserves is of particular importance to the Namibian economy. The Fund estimated that Namibia would require 4.8 months of import cover during 2013-15, and proposed a more ambitious fiscal consolidation path as the means to achieve this. However, according to our estimates, Namibia’s foreign reserves would have been equivalent to 3.3 months of import cover at the end of 2013, well below the Fund’s recommended level. Also, although Namibia managed to narrow the budget deficit to 0.8% of GDP during the 2012/13 financial year (FY) ending March 31, we expect that slower economic growth in addition to increased spending requirements brought about by the persistent drought, would have resulted in a significantly larger deficit equal to 4.4% of GDP during 2013/14. Although we share the Fund’s sentiments in relation to the need for fiscal consolidation, we are less optimistic and expect the budget balance to remain in deficit territory over the next three years.
Analyst: Cobus de Hart