Africa > Southern Africa > Namibia > Namibia Economy Profile

Namibia: Namibia Economy Profile

2010/06/25

 

 

 

Namibia Economy Profile

...........................................ANALYSE...........................................

The economy is heavily dependent on the extraction and processing of minerals for export. Mining accounts for 8% of GDP, but provides additional than 50% of foreign exchange earnings. Rich alluvial diamond deposits make Namibia a primary source for gem-quality diamonds. Namibia is the fourth-major exporter of nonfuel minerals in Africa, the world's fifth-major producer of uranium, and the producer of large quantities of lead, zinc, tin, silver, and tungsten. The mining sector employs only about 3% of the people while about 35-40% of the people depends on subsistence agriculture for its livelihood. Namibia normally imports about 50% of its cereal requirements; in drought years food shortages are a major problem in rural areas. A high per capita GDP, relative to the region, hides of the world's most unequal income distributions, as shown by Namibia's GINI coefficient. The Namibian economy is closely linked to South Africa with the Namibian dollar pegged-to to the South African rand. Until 2010, Namibia drew 40% of its budget revenues from the Southern African Customs Union (SACU). Increased payments from SACU put Namibia's budget into surplus in 2007 for the first time since independence. SACU allotments to Namibia increased in 2009, but will drop for 2010 and 2011. Increased fish production and mining of zinc, copper, uranium, and silver spurred increase in 2003-08, but increase in recent years was undercut by poor fish catches, higher costs of producing metals, and the world recession.

Recent Economic Developments and Prospects

 
Mining accounts for some 20% of the Namibian economy and its dependence on exports meant it was badly hit by the world financial crisis. Namibia’s copper mine closed in December 2008 but with the recovery in commodity prices, it is expected to re-open again in 2010. Onshore diamond production was suspended from April to June 2009 while offshore production was reduced.
Total diamond production for 2009 was down some 45% from 2008 at 930 000 carats (330 000 onshore and 600 000 offshore). Some 1 900 workers were laid off in the diamond mining industry with another 600 jobs lost at the copper mine. About 40% of the 1 150 jobs in the diamond cutting and polishing industry were as well lost. The market is expected to stabilise in 2010 with diamond production increasing slightly to 1 050 000 carats – still less than 50% of pre-crisis output. On the other hand, uranium production continued to increase as Namibia became the fourth major world supplier after Canada, Kazakhstan and Australia, accounting for 10% of the market.
Uranium has overtaken diamond mining as the majority significant activity in the Namibian economy. Significantly, the government set up its own mining company at the end of 2009 and it is expected to be active in 2010. A Strategic Environmental Assessment of uranium mining got underway at the start of 2009 and its recommendations on how to manage the growing industry should get to the government by March 2010. In order to maximise the benefits for the country, there will have to be significant investment in new infrastructure such as water, electricity and transport, and in health and education.
In agriculture, where most people earn their living, communal farmers faced difficult weather conditions 2009 -- heavy rain and flooding for a second consecutive year in some parts and continued drought in others. Floods caused extensive damage in the northeast and central regions but total coarse grain production increased additional than 5% to 138 800 tonnes in 2009 due to an improved harvest in the commercial farming areas. The major crops included white maize, millet and wheat. The flooding jeopardised food security in the communal farming areas with harvests of cereal crops down between 40% and 50%. The high cost of fertiliser remains a concern and limits production.
Improving distribution of high quality certified seeds and better services for small farmers in communal areas should help increase production. Commercial farming accounted for 55% of total agricultural output in 2009, helped by increased irrigation. Livestock farming as well improved as the heavy rain improved pasture. Foot and Mouth Disease in the northeast was brought under control. Domestic production of fruit and vegetables accounts for some 25% of domestic request and has the potential for further increase. The government’s Green Scheme policy and the construction of regional collection points for horticultural produce could boost investment in this sector.
The potential of crops such as legumes (as a rotational crop replacing expensive fertilisers), edible and non-edible oil seeds (such as drought-resistant sunflowers and Jatropha trees) and potatoes has not from now on been tapped. Rain for the 2009/10 growing season arrived late and well below average levels, with February, usually the wettest month, down 50%. In the significant fisheries sector, the Total Allowable Catch (TAC) for hake was increased by 5 000 tonnes to 135 000 tonnes for the 2009/10 season. In general, TACs for most species were increased slightly for 2009. The only exception was for the Orange Roughy which continues under a three-year moratorium implemented at the beginning of 2009. The lobster industry faced severe challenges due to a drop in prices. Fish catches were lower in general in 2009.
The primary sector’s contribution to GDP increased to 24.5% in 2008 from 20.7% in 2000, reflecting the steady expansion in the mining industry, especially uranium, and this trend should continue for the next few years. Manufacturing’s share expanded to 18.7% in 2008 from 15.5% in 2000 despite the end of the textile industry in early 2008 when world quotas were abolished. The major drivers were mineral processing (zinc and copper) and construction. Ongoing development projects will continue to boost construction in the near next and the expansion of the copper smelter will benefit mineral processing. Capacity at the copper smelter has doubled from 20 000 tonnes per month to 40 000 tonnes. Output of refined zinc is as well expected to increase in 2010.
In the energy sector, continuing investment in uranium adds to the request for electricity and water. Namibia’s electricity request peaked at 443 MW in 2009 and is expected to increase to 458 MW in 2010. Locally installed generation capacity stood at 381 MW in 2009 and is expected to increase to 403 MW in 2010. Total energy consumption amounted to 2 732 GWh in 2009 of which 46% was supplied locally. Consumption is expected to increase substantially to 4 785 GWh by 2012 of which Namibia will supply only 34 %. The widening gap between request and local supply is driving investment in the sector since South Africa has only limited capacity to make up the balance.
A link between Namibia and Zambia, Botswana and Zimbabwe was three quarters complete at the end of 2009 and it will increase in general transmission capacity and reduce dependence on the South African grid when finished. Additional generation capacity is planned to meet growing request not only in Namibia but as well in the region at large, with plans for an 800 MW gas-fueled power plant on the coast to exploit offshore gas deposits and a hydro-electric dam on the Kunene River in the north on the border with Angola. The 8 billion US dollar (USD) project is scheduled to start during 2010.
Attempts are being made to exploit Namibia’s renewable energy potential, in particular solar and wind, but evolution has been slow. A desalination plant to supply 20 million cubic metres of water annually to a uranium mine started trial runs in late 2009 and is expected to reach full production in 2011. The national-owned water company plans to start work on another desalination plant in early 2010 to meet growing request in particular from uranium mining companies.
The tertiary sector is dominated by wholesale and retail trade, real estate and business services and government services. The sector’s contribution to GDP declined to 50.8% in 2008 from 56.3% in 2000, mainly caused by a decline in public services. In 2009, depressed consumer spending was in part offset by private investment and public investment in transport infrastructure and offices. This trend is expected to continue in 2010. The price of building plans approved for Windhoek and Walvis Bay showed strong increase in 2009, supported by low interest and declining inflation rates.
In telecommunications, Namibia has cut charges significantly. Operators agreed on fees for mobile-to-mobile, mobile-to-fixed and fixed-to-mobile calls at 0.60 Namibian dollars (NAD) per minute, starting from July 2009. This charge fell to NAD 0.50 in January 2010 and will decline to NAD 0.30 by January 2011. Number portability has as well been introduced, helping increase competition between established operators and newcomers, and reducing costs for consumers. Investment in the sector continues in order to broaden mobile phone coverage, and a link to the undersea cable running along West Africa will increase Internet connection speeds and cut charges.
In the transport sector, the slowdown in economic activity in the first half of 2009 led to a significant decline in cargo through Walvis Bay. Deregulation of air transport in Africa has allowed Namibia’s national-owned airline to launch flights via Johannesburg to Zambia and to Ghana, using fifth freedom rights to carry passengers to a third country. Botswana, Namibia and South Africa have discussed construction of the Trans Kalahari railway, with a feasibility statement due by May 2010.
The USD 1.4 billion project would, part other benefits, transport coal from Botswana through Walvis Bay to export markets. Botswana has already signed a 50-year lease agreement for a dry dock at Walvis Bay and similar accords are under discussion with Zambia and Zimbabwe. In general, Namibia’s railway system is in dire need of rehabilitation and upgrading in order to be competitive with road transport.
Tourism, the third major foreign exchange earner after mining and fisheries, was badly hit by the world economic crisis, with revenues in general down 7%. Prospects for 2010 are better. Namibia is expected to benefit from the FIFA World Cup in South Africa either by attracting soccer fans or other tourists who want to avoid crowded facilities there.
However, a lack of transport could dampen hopes of significant gains – Namibia was unable to take much chance from the holding of the Africa Cup of Nations soccer tournament in Angola during February 2010.
The Namibian Stock Exchange major index, which includes dual listed companies on the Johannesburg Stock Exchange, closed 2009 with an in general gain of 36% but that still left it about 30% below pre-crisis levels. The index for local companies slipped 2% over the year.
The Bank of Namibia granted a license to a micro-lending bank, due to start operations in 2010, in an effort to make credit additional widely available. In addition, there are plans for a specialist bank to serve small and medium-sized enterprises (SMEs). The economic downturn led to an increase in consumer indebtedness. Non-performing loans increased to NAD 2.1 billion or 18% of the total during the first half 2009.
The Financial Intelligence Act came into force in May 2009 and the Financial Intelligence Centre was established at the Bank of Namibia with the aim of combating money laundering.
After the 1.5% contraction of 2009, Namibia should return to increase of 2.2% in 2010 and 2.6% in 2011, supported by investment in road, railway and other infrastructure to support the mining sector and the wider economy.
Gross fixed capital formation rose to 25.8% of GDP in 2008 from 22.3% in 2001 but is estimated to have fallen 7.4% in volume terms in 2009, taking 2.1 percentage points off GDP. Exports at 58.6% of GDP in 2008 fell an estimated 4.3% by volume in 2009 but should pick up by 2.5% in 2010 and by 2.7% in 2011.
 

Macroeconomic Policy

 
Namibia retained the broad thrust of its macroeconomic policies aimed at increase and job creation but had to make some adjustments to cope with the impact of the world financial crisis that hurt request for exports and pushed the economy into recession. The government did not adopt a stimulus package per se, despite calls from business for help, but it did allow the deficit to increase as revenues fell. Over the next Medium-Term Spending Framework (MTEF) (fiscal 2009/10 to 2011/12) period, the public deficit will increase to roughly 5% from 3%. The in general balance for 2009 is estimated to show an estimated deficit of 3%, widening to 6.7% in 2010 before falling back to 4.2% in 2011.

Fiscal Policy
The economic slowdown did not lead to major changes in fiscal policy. Capital spending was increased mainly for construction and renovation of office blocks and purchase of equipment. Revenue fell in line with the downturn in external request and there was as well a significant drop in transfers from the Southern Africa Customs Union (SACU) Revenue Pool. Transfers from the pool to SACU member nations are based on projections for the coming year but these were too optimistic for the fiscal years 2008/09 and 2009/10. The resulting shortfalls have to be brought forward and this is likely to reduce Namibia’s tax revenue from this source over the MTEF period. Namibia received NAD 8.6 billion from SACU in fiscal 2009/10 but expects this revenue to fall by 53% and 70% in the next fiscal years. Namibia, Botswana, Lesotho and Swaziland have amount asked South Africa to increase their revenue share in 2010/2011.
The government announced tax cuts for individuals and companies in the March 2009 budget inclunding a zero rating on milk for Price Added Tax. So far, only low income-earners have benefited.
 
Monetary Policy
Monetary policy was eased during 2009 as the economy weakened and inflation fell – from 11.6% in January to 7% by December, largely due to lower food and fuel prices. The Bank of Namibia cut its benchmark repo rate by 300 basis points to 7% in 2009 and pressed the commercial banks to reduce their spreads. They from now on followed the central bank's lead in October 2009 but appear reluctant to do additional. The Bank of Namibia changed its schedule of monetary policy meetings during 2009 from quarterly to bi-monthly in order to respond additional quickly to changes in the macroeconomic environment. This means its meetings are no longer held at the same time as those of the South African Reserve Bank. From December 2007, Namibian monetary policy was out of line with that of its giant neighbour. Namibia’s repo rate was up to 150 basis points lower than the South African repo rate at stage, but it returned to par again from July as South Africa cut rates sharply to cope with its economic problems. The before interest rate differential did not lead to an outflow of capital to South Africa.
Bank lending to business increased in 2009 on the back of lower interest rates but credit for households, mainly mortgages, was tight.
The Namibian dollar, which is pegged to the South African Rand, depreciated sharply in 2008 but recovered during 2009. Between the last quarter of 2008 and the first quarter of 2009 it appreciated by some 20% against the dollar and by 11% and 14% against the British Pound and the Euro, respectively. It then weakened slightly during the last quarter of 2009.

External Position
SACU is an significant source of revenues for Namibia and the group now faces a number of challenges, including the harmonisation of policies within SACU and the establishment of the SACU Tariff Board and National Bodies. Although a new agreement was concluded in 2002 including a new revenue sharing formula for customs and excise duties, South Africa reportedly intends to propose a change to the formula, which will most likely have profound adverse impacts on the budgets and the current account of Namibia and other SACU members. Namibia is as well an SADC member. After the formal launch of the SADC Free Trade Agreement (FTA) in 2008, an SADC Custom Union was supposed to be put in place by 2010. However, this has been postponed since member states are not from now on ready. Negotiations for an FTA between the Common Market for Eastern and Southern Africa (COMESA), the East Africa Cooperation (EAC) and SADC are ongoing and could resolve the issue of overlapping membership between these groupings. SACU signed a preferential trade agreement with MERCOSUR (Common Market of the South) in April 2009 but the accord is not expected to have a significant impact for some time since it covers only a limited number of products.
Some SACU members have signed the Interim Economic Partnership Agreement (EPA) with the EU but Namibia and South Africa have not and this poses a risk to the cohesion of the customs union if different tariffs and non-tariff regulations are applied. Namibia continues to enjoy duty-free and quota-free access to the EU market on certain products.
The World Economic Forum’s World Enabling Trade Statement found improvements in Namibia’s 2009 performance and it was ranked 60 out of 121, second to Mauritius in sub-Saharan Africa. Namibia’s score improved particularly in terms of market access – both access to the domestic market by foreign producers and access to foreign markets. However, improvements are needed in border government and cross-border procedures to speed up trade.
Namibia’s current account surplus in 2009 tumbled to an estimated 5.6% of GDP in 2009 from 22.4% in 2008. Exports were down to 31.6% of GDP from 35.7% in 2008, while imports came to 39.4% of GDP, up from 23.7%. The sharp fall in transfers from the SACU revenue pool and a significant drop in diamond exports combined with a relatively strong local currency will put pressure on the balance of payments in 2010. An increase in foreign direct many(FDI) can be expected, mainly in the mining sector, as the world economy recovers in 2010.
Government debt in relation to GDP was just below the government’s 25% target in 2009 while external debt was 5.8% of GDP. The appreciation of the Namibian dollar during 2009 contributed significantly to the decline in foreign debt. Despite a decline in debt service during the first half of 2009, the debt service to export ratio increased from 9% to 9.6% because of the sharp decline in exports. Foreign reserves fell to NAD 13 billion at the end of the 2009 first half from NAD 13.8 billion, but should increase as the economy picks up.

 

Structural Issues


Private Sector Development
The Namibia Competition Commission was formally launched at the end of 2009, some years after the Competition Act was ratified by parliament. A number of merger and acquisition cases have come before the commission which it is hoped will level the playing field for businesses and help protect consumer rights.
Private sector investment slowed in 2009 due mainly to the fall in export earnings and so should pick up in 2010 as the world economy recovers. There are plans to double fixed capital formation in both agriculture and tourism over the coming years to help boost the economy and create jobs.
The government established its own mining company in 2009, aiming to reap additional benefits from Namibia’s rich natural resources. It is expected that the company will form joint ventures with foreign investors to exploit Namibia’s mineral wealth. The national-owned petroleum company entered the retail market at the end of 2009 in order to ensure the supply of diesel and petrol. There are concerns that additional public involvement could crowd out private sector investment. A new industrial policy is being drawn up. There has not been much evolution in the formulation and adoption of the Transformational Economic and Social Empowerment Framework, a programme for Black empowerment.
The World Economic Forum’s World Competitiveness Statement 2009 ranked Namibia 74 out of 133 nations, an improvement of places. It highlighted Namibia’s strengths in infrastructure, macroeconomic stability and institutions but said these gains were offset by continuing challenges in health, education and the labour market, inclunding a lack of innovative capacity that limited private sector development.

Other Recent Developments
The government launched its Green Scheme Policy and developed its dry-land crop production programme for the northern communal farming areas in 2009. The programme includes provision of subsidised ploughing and weeding services, and improved seeds and fertilisers. These initiatives are expected to increase the area under irrigation and attract private investment, provide employment and increase food security.
 


Public Resource Mobilisation

 
Namibia’s tax to GDP ratio stands at around 30%, rising from 25% in fiscal 2003/04 as the country benefited from higher commodity prices and an improvement in SACU receipts. Taxes on international trade represented about 40 % of total tax revenue in fiscal 2007/08.
Over the 10 years ending 2008, tax revenue has on average accounted for additional than 90% of total government revenue. Direct taxes, indirect taxes and trade taxes have accounted for 35%, 21% and 33% of total tax revenue, respectively. As per the 2009 budget, tax adjustments are anticipated while an environmental tax has been proposed and a capital gains tax is being examined. Namibia ranks 97 out of 183 nations in the World Bank and International Financial Corporation’s Doing Business Tax Survey.
Tax collection in Namibia is the responsibility of the Inland Revenue Office in the Ministry of Finance. It as well formulates tax legislation. Tax liabilities are calculated on a self-assessment basis. Tax exemption is granted mainly for manufacturing in any sector to promote exports. Forensic audits are outsourced to private firms, with Ministry of Finance staff working alongside to gain experience. Filing is still manual and offices have been set up across the country as part of decentralisation efforts. Tax compliance is low.
The fall in exports led to job losses in the mining sector in 2009, cutting tax revenues. The government is trying to expand the tax base by registering businesses in the informal sector whose size is unknown but believed to be quite large.
Taxpayers in Namibia complain that effective rates are high and that the tax system is cumbersome and time consuming. Key challenges for tax government are human resource issues, technical capacity inclunding institutional arrangements.
 

Social Context and Human Resource Development

 
Namibia’s Human Development Index (HDI) reading rose marginally from 0.678 in 2006 to 0.686 in 2007, ranking it 128 out of 182 nations. A high HIV/AIDS prevalence rate at 17.8% in 2008 continued to reduce life expectancy, which has stood at around at 52 years since 2006, substantially below other nations with a similar HDI. Namibia’s ranking is boosted by a high adult literacy rate of 88% and a relatively high income level, with a per capita GDP based on Purchasing Power Parity of USD 5 155.
new schools were built in fiscal 2008/09. The total number of schools has increased to 1 672 in 2008 from 1 584 in 2002. Enrolment rates for primary and secondary education in 2008 were 97% and 55%, respectively. Dropout rates, from 2007, were 15% and 13%.
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