Namibia Namibia at a Glance: 2005-06

Country Report

Namibia Namibia at a glance: 2005-06

OVERVIEW In his first public statements as president, Hifikepunye Pohamba has outlined a challenging agenda for his government: tackling corruption, curbing unnecessary public spending and improving the management of parastatals. The new cabinet includes representatives of most factions in the South West Africa People’s Organisation (SWAPO), and the party appears to be united, at least for the time being. Real GDP growth is forecast at around 5% in 2005, owing largely to higher diamond and zinc production. It will fall back to 4.6% in 2006 as output from the Skorpion zinc mine and refinery levels off and the increase in diamond recoveries slows. Inflation will follow the trend in South Africa, remaining at around 4% in 2005 but rising to 4.6% in 2006. The current- account surplus is forecast to narrow to 7.7% of GDP in 2005 and to 3.9% of GDP in 2006 as the trade deficit widens and the balances on the services, income and current-transfers accounts deteriorate.

Key changes from last month Political outlook • Mr Pohamba’s choice of ministers for his first cabinet may help to bring to an end the in-fighting that has affected SWAPO since the contest to be the party’s candidate for president in May 2004. Nahas Angula, who contested Mr Pohamba for the nomination, is the new prime minister, but the former foreign affairs minister, Hidipo Hamutenya, Mr Pohamba’s main rival, was not appointed to the cabinet.. Economic policy outlook • The Economist Intelligence expects an improved fiscal performance in fiscal years 2005/06-2006/07 (April-March), forecasting a deficit of 2% of GDP in 2005/06 and 3% of GDP in 2006/07. The improvement is due to the apparent determination of the new administration to control expenditure and to higher forecast receipts from the Southern African Customs Union than had previously been expected. Economic forecast • There is no change to our economic forecast.

April 2005

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Contents

Namibia

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2005-06 7 Political outlook 8 Economic policy outlook 9 Economic forecast

13 The political scene

18 Economic policy

20 The domestic economy 20 Economic trends 23 Agriculture 24 Mining 26 Oil and gas 27 Fishing 27 Manufacturing 28 Transport and communications

29 Foreign trade and payments

List of tables

9 International assumptions summary 12 Forecast summary 19 Central government debt 20 Central government loan guarantees 21 Gross domestic product, 2004 22 Consumer prices 23 Cereal production 25 Uranium output and earnings 29 Exports 30 Current account, Jan-Dec 31 Capital account 32 Central government external debt

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List of figures

12 Gross domestic product 12 Consumer price inflation

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Namibia April 2005 Summary

Outlook for 2005-06 The new president, Hifikepunye Pohamba, has outlined a challenging agenda of tackling corruption and curbing unnecessary public spending. The new cabinet includes representatives of most factions in the South West Africa People’s Organisation (SWAPO), and the party appears to be united, at least for the time being. Real GDP is forecast to grow by 5% in 2005 as diamond and zinc output rise. It will fall back to 4.6% in 2006 as output from the Skorpion zinc mine and refinery levels off and the increase in diamond recoveries slows. Inflation will follow the trend in South Africa, remaining at around 4% in 2005 but rising to 4.6% in 2006. The current-account surplus is forecast to narrow to 7.7% of GDP in 2005 and to 3.9% of GDP in 2006 as the trade deficit widens and the balances on the services, income and current-transfers accounts deteriorate. The political scene Mr Pohamba announced his new government after formally taking over from Sam Nujoma as head of state at the end of March. The former higher education minister, Nahas Angula, was appointed prime minister, and the former health minister, Libertina Amathila, deputy prime minister, although the former foreign affairs minister, Hidipo Hamutenya, was passed over. Mr Pohamba has pledged to tackle corruption, reduce unnecessary ministerial spending and improve the management of parastatals. A recount of the ballots cast in the legislative election produced no change in the results. Mr Pohamba has warned of revolution if commercial farmers remain unwilling to sell their land.

Economic policy The 2005/06 budget has been delayed, apparently so that the new president can review its spending proposals. In its Article IV consultation with the government, the IMF has again urged the implementation of structural reforms, including the privatisation of parastatals.

The domestic economy Real GDP growth increased to an estimated 5.7% in 2004, owing mainly to a 37% increase in mining output. Inflation fell in January-February 2005. Coarse grain output in 2005 is estimated at one-fifth higher than in 2004, although maize production is expected to be lower. Production of diamonds by Namdeb rose by 28% in 2004; output of uranium rose by almost 50%. A Chinese oil company has acquired a majority interest in the Etosha onshore concession. One of the Ramatex company’s textile plants is closing. Air Namibia is to resume direct flights to London.

Foreign trade and payments Exports increased by almost one-half in US dollar terms in 2004, as diamond exports rose by 61% owing to higher production and prices. The current-account surplus rose substantially, owing mainly to a reduced foreign trade deficit and an increase in Southern African Customs Union receipts.

Editors: Roger Boulanger (editor); Christopher Eads (consulting editor) Editorial closing date: April 15th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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Political structure

Official name Republic of Namibia

Form of state Unitary republic

Legal system Based on the constitution of 1990 and Roman-Dutch law

National legislature Bicameral; National Assembly, with 72 members elected by universal suffrage and serving a five-year term, and up to six non-voting members appointed by the president; National Council, with limited powers of review and 26 members, two of whom are nominated by each of the country’s 13 regional councils, serving a six-year term

National elections November 2004 (legislative and presidential); next elections due in November 2009

Head of state Hifikepunye Pohamba, elected president by universal suffrage in November 2004, took up his post in March 2005

National government President and his appointed cabinet; last reshuffle in March 2005

Main political parties South West Africa People’s Organisation (SWAPO), the ruling party; Congress of Democrats (CoD); Democratic Turnhalle Alliance (DTA); United Democratic Front (UDF); National Unity Democratic Organisation (NUDO); Republican Party (RP)

Prime minister Nahas Angula Deputy prime minister Libertina Amathila

Key ministers Agriculture, water & forestrya Nickey Iyambob Educationa Nangolo Mbumbab Central Intelligence Service Lukas Hangula Defence vacant Environment & tourism Willem Konjorec Finance Saara Kuugongelwa-Amadhila Fisheries & marine resources Abrahim Iyambo Foreign affairs Marco Hausiku Gender equality & child welfarea Marlene Mungundab Health & social services Richard Kamwic Home affairs & immigrationa Rosalia Nghidinwac Information & broadcasting Netumbo Ndaitwahb Justicea Pendukeni Iivula-Ithanab Labour & social welfarea Alpheus !Narusebc Lands & resettlement Jerry Ekandjob Mines & energy Erkki Nghimtinab Minister without portfolio Ngarikutuke Tjiriange National Planning Commission Helmut Angulab Presidential affairsa Albert Kawanab Regional & local government, housing & rural developmenta John Pandenic Safety & securitya Peter Tsheehamab Trade & industry Immanuel Ngatjizekoc Works, transport & communications Joel Kaapandab Youth, sport & culturea John Mutorwab

Central bank governor Tom Alweendo

a New or restructured portfolio. b Reshuffled. c New appointment.

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Economic structure

Annual indicators 2000a 2001a 2002a 2003a 2004b GDP at market prices (N$ bn) 23.7 27.7 31.6 32.3 35.7 GDP (US$ bn) 3.4 3.2 3.0 4.3 5.5 Real GDP growth (%) 3.5 2.4 2.5 3.7 5.7 Consumer price inflation (av; %) 9.3 9.3 11.3 7.2 4.1a Population (m) 1.9 1.9 2.0 2.0 2.0 Exports of goods fob (US$ m) 1,310 1,147 1,072 1,260 1,829c Imports of goods fob (US$ m) -1,310 -1,349 -1,283 -1,726 -2,107c Current-account balance (US$ m) 255 17 79 271 563c Foreign-exchange reserves excl gold (US$ m) 260 234 323 325 345a Total external debt (US$ m) 438 423 635 1,040b 1,159 Debt-service ratio, paid (%) 2.0 2.7 2.7 4.3b 3.5 Exchange rate (av) N$:US$ 6.94 8.61 10.54 7.56 6.45a a Actual. b Economist Intelligence Unit estimates. c Bank of Namibia provisional estimates.

Origins of gross domestic product 2003 % of total Components of gross domestic product 2003 % of total Agriculture & forestry 5.2 Private consumption 55.8 Fishing 5.6 Government consumption 28.8 Mining & quarrying 7.6 Gross domestic fixed investment 22.0 Manufacturing incl fish processing 12.3 Change in stocks 0.7 Wholesale & retail trade 12.8 Exports of goods & services 39.4 Financial services, real estate & business services 14.4 Imports of goods & services -46.7 Government 24.6

Main exports fob 2004a US$ m Main imports cif 2003b US$ m Diamonds 824 Transport equipment 270 Manufacturesc 431 Refined petroleum products 215 Food & live animals 239 Chemical products, rubber & plastics products 213 Other mineral products 228 Machinery & equipment 210 Food excl fish, meat, beverages & related products 130 Textiles, clothing, leather products & footwear 112

Destination of exports 2003d % of total Origin of imports 2003d % of total UKe 44 South Africaf 82 South Africa 21 US 4 Spaing 18 Germany 4 Japan 3 China 3 US 2 UK 1 a Provisional figures published by the Bank of Namibia. b Imports cif, before deduction of duties payable, addition of duties on imports other than from the Southern African Customs Union and central bank adjustments. c Include smelted copper and refined zinc. d Economist Intelligence Unit estimates. e Includes most of Namibia’s rough diamond exports, which are exported for marketing in London by De Beers’ Diamond Trading Company. f Includes goods from countries outside the Southern African Customs Union purchased through South African suppliers. g Mainly hake.

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Quarterly indicators 2003 2004 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Pricesa Consumer prices (Dec 1992=100) 244.2 245.8 249.0 249.3 251.9 253.6 258.9 262.5 Consumer prices (% change, year on year) 11.4 8.3 6.3 3.2 3.2 3.2 4.0 5.3 Domestic consumer prices (Dec 1992=100) 246.4 245.9 251.3 253.9 258.1 259.3 267.8 272.4 Domestic consumer prices (% change, year on year) 12.2 9.0 7.4 4.4 4.7 5.4 6.6 7.3 Imported tradeables (Dec 1992=100) 241.8 244.6 246.5 244.4 245.2 247.5 249.2 251.8 Imported tradeables (% change, year on year) 10.6 7.1 5.0 1.9 1.4 1.2 1.1 3.0 Financial indicators Exchange rate N$:US$ (av)b 8.341 7.773 7.418 6.727 6.794 6.611 6.381 6.053 Exchange rate N$:US$ (end-period)b 7.920 7.555 6.925 6.640 6.370 6.270 6.450 5.630 Bank of Namibia overdraft rate (av; %) 12.75 11.50 9.75 7.75 7.75 7.75 7.50 7.50 Deposit rate (av; %) 9.32 9.45 8.78 7.47 6.47 6.34 6.32 6.27 Govt bond yield rate (av; %) 12.96 12.96 12.96 12.00 11.68 12.57 12.23 11.06 Lending rate (av; %) 15.38 15.68 14.74 13.01 11.55 11.94 11.21 10.86 Prime rate (av; %) 17.50 16.30 15.10 13.20 12.50 12.50 12.25 12.25 Treasury bill rate (av; %) 11.61 11.98 10.45 8.02 7.66 8.00 7.94 7.51 M1 (end-period; N$ m) 6,834.6 7,194.2 7,969.8 7,851.4 n/a n/a n/a n/a M1 (% change, year on year) 0.4 1.9 14.3 17.2 n/a n/a n/a n/a M2 (end-period; N$ m) 10,892.4 11,284.0 12,317.5 12,913.4 n/a n/a n/a n/a M2 (% change, year on year) 2.6 0.6 14.0 20.7 n/a n/a n/a n/a IJG/IPPR Business Climate Index (Jan 2001=100) 99.1 98.6 101.9 106.0 106.9 103.8 103.7 112.6 IJG/IPPR BCI (% change, year on year) -7.0 -4.9 -0.3 2.0 7.9 5.3 1.8 6.2 Foreign trade & reserves Goods exports fob ( N$ m) 2,007 2,493 2,677 2,285 2,501 2,645 3,948 2,701 Diamonds 729 1,210 1,190 736 1,254 1,007 2,000 1,058 Other mineral products 373 323 360 325 266 413 290 499 Food and live animals 290 464 391 287 310 429 421 384 Manufactured products 584 467 720 901 642 753 792 596 Goods imports fob (N$ m) -3,097 -3,162 -3,308 -3,377 -3,313 -3,339 -3,371 -3,567 Trade balance (N$ m) -1,089 -669 -631 -1,092 -812 -694 578 -866 Services balance 336 317 415 228 110 162 163 208 Income balance 637 187 429 506 205 107 -180 377 Transfers balance 856 929 863 819 925 1,125 1,132 1,121 Current-account balance 733 758 1,069 454 422 693 1,686 833 Reserves excl gold (end-period; US$ m) 273.0 276.6 299.2 325.2 273.9 277.1 276.3 345.1 a Windhoek. b The Namibia dollar (N$) is at par with the South African rand. Sources: Bank of Namibia, Quarterly Bulletin; IMF, International Financial Statistics; Irwin, Jacobs, Greene/Institute for Public Policy Research, Windhoek.

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Outlook for 2005-06

Political outlook

Domestic politics After months of activity within the ruling South West Africa People’s Organisation (SWAPO), as different factions vied for a place in the new government, the transition to a new political era under the presidency of Hifikepunye Pohamba took place in an atmosphere of relative calm and optimism. The formal transfer of power to Mr Pohamba took place as scheduled at the end of March. Some of the rancour that had swirled around SWAPO since the election in May 2004 of Sam Nujoma’s successor as president appears to have dissi- pated with the decision in March of the party’s central committee to promote reconciliation and with Mr Pohamba’s careful accommodation of SWAPO’s different constituencies in his first cabinet. In his initial public statements Mr Pohamba has also impressed with his specific pledges to combat corruption and curb unnecessary public spending, along with his evident intention to govern in a more collegiate manner than his predecessor. Much will depend on how well the new government—under Nahas Angula as prime minister and Libertina Amathila, one of SWAPO’s most popular leaders, as deputy prime minister—translates Mr Pohamba’s directives into effective policies. It remains to be seen how much influence Mr Nujoma will exercise behind the scenes, as he remains president of SWAPO until at least 2007. So far, Mr Pohamba shows every sign of being his own man, as he promised before he was elected president in November 2004. Mr Pohamba appointed several Nujoma loyalists to key posts in the cabinet, but they are not expected to exercise undue influence over policy. Although Hidipo Hamutenya, the former foreign affairs minister and Mr Pohamba’s main rival for election as SWAPO’s candidate for president, was not offered a post—and is reported to have told Mr Pohamba that he did not want one at this stage—Mr Pohamba is unlikely to allow the campaign of vilification against Mr Hamutenya to continue and may offer him a post in a future cabinet reshuffle. Mr Hamutenya and a former prime minister, Hage Geingob, who was unexpectedly left out of the cabinet, would prove to be influential critics from the SWAPO backbenches if Mr Pohamba’s government ran into early trouble. However, they are expected to keep a low profile for the time being. However, it is not certain whether all those who pursued the campaign against Mr Hamutenya, with Mr Nujoma’s blessing, will willingly cease their activities. This could prove to be a first test of Mr Pohamba’s authority, particularly as at least one of the new members of the government, the secretary-general of SWAPO’s Youth League, Paulus Kapia, was believed to be one of the leaders of the anti-Hamutenya campaign. Speeding up the redistribution of land will be a priority of the Pohamba government, and white commercial farmers will face growing pressure to co-operate with the policy of the selective expropriation of some farms.

International relations As the situation along the Angolan border is stable, there are no perceived external threats to Namibia during the forecast period. Relations with the Angolan and South African governments will remain close.

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Economic policy outlook

Policy trends The main aims of economic policy are set out in the second five-year national development plan, covering fiscal years 2001/02-2005/06 (April-March). These include reducing poverty and income inequalities, creating employment in the private sector, promoting black economic empowerment (BEE), achieving sustained economic growth and diversification, and combating the spread of HIV/AIDS. Progress in most areas is likely to continue to be slow, although the government has committed itself to speeding up the implementation of BEE initiatives, and has reportedly completed the drafting of a new donor- supported programme to combat HIV/AIDS, which is due to be implemented in 2005. It will become increasingly necessary (although not legally required) for every new foreign investor to form a partnership with a local BEE firm or trust. Most new foreign direct investment in export-oriented manufacturing and the processing of local raw materials will continue to benefit from incentives under the export-processing zone regime. A programme of privatising parastatals, as advocated by the IMF, is not likely to be adopted in the short term, as the government prefers to improve the performance of state-owned enterprises by commercialisation and better management. However, in line with Mr Pohamba’s pledge to manage parastatals more efficiently, a system of performance-related contracts is expected to be introduced by the new Central Governance Agency, which the IMF has urged should be given adequate powers to enable it to carry out its functions effectively.

Fiscal policy Following its Article IV consultation with the government, completed at the end of January 2005, the IMF projected a budget deficit in 2004/05 of 2% of GDP. The 2% figure assumes that the government will have met its aim of curtailing non-priority spending and of addressing tax administration problems, and that overall revenue has benefited from a sharp increase in Southern African Customs Union (SACU) payments, which the IMF describes as a one-time windfall affecting 2004/05 only. The Economist Intelligence Unit considers that the IMF may be mistaken in this, as an analysis of the impact of the new SACU revenue-sharing formula on Namibia, published by the Bank of Namibia (the central bank), suggests that receipts will increase again in 2005/06. The full picture will not emerge until the 2005/06 budget is presented after parliament resumes on May 10th, but in the light of the IMF’s projections we have lowered our estimate of the deficit in 2004/05 to 3% of GDP. The government is expected to restate its target of reducing the annual deficit to 1.6% of GDP during the period of the new medium-term economic framework (MTEF), covering the three-year period from 2005/06-2007/08 and to be presented in the forthcoming budget. A deficit of 1.6% of GDP will require rigid adherence to tight fiscal controls. However, as the projected fall in SACU revenue is not expected to materialise in 2005/06, at least to the extent anticipated, and revenue from other sources, particularly diamond mining, should recover from the contraction recorded in 2003/04, and—crucially—on the assumption that spending is held down, we expect the budget deficit to fall to 2% of GDP in 2005/06.

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In 2006/07 the current MTEF projects a rise in overall spending of 6% in nominal terms (only about 2% in real terms). This would require a substantial increase in revenue to keep the deficit on target, so spending controls will need to be tightened further, particularly as SACU receipts are expected to fall. We believe that, unless a broad range of new tax-raising measures is introduced in 2005/06 to counter the impact of reduced SACU receipts, the government will continue to have difficulty in meeting its deficit reduction target, as the political consensus does not yet exist that would enable a significant cut in the size of the public-sector wage bill; moreover, the economy is expected to grow more slowly in 2006 than in 2005. Consequently, we forecast a widening of the fiscal deficit in 2006/07 to 3% of GDP.

Monetary policy As the Namibia dollar is fixed to the rand, the bank rate set by the Bank of Namibia broadly shadows the repurchase (repo) rate set by the South African Reserve Bank (SARB). This was clearly illustrated when, on April 14th, the SARB lowered the repo rate by 50 basis points, to 7%, and the Bank of Namibia immediately lowered its bank rate to the same level. We expect the repo rate to remain relatively stable for the rest of 2005—any moderate adjustment is more likely to be downwards than upwards—and to edge up in 2006. The risks to our forecast are the prospect of sustained high or rising oil prices and a sharper than forecast depreciation of the rand. The South African government is under pressure from the unions and employers to bring the rand to a more internationally competitive level in order to prevent a further erosion of competitiveness and job losses, but is unlikely to respond to this pressure.

Economic forecast

International assumptions summary (% unless otherwise indicated) 2003 2004 2005 2006 Real GDP growth World 3.9 5.0 4.2 3.9 US 3.0 4.4 3.2 2.9 EU25 1.1 2.4 2.0 2.1 Exchange rates ¥:US$ 115.9 108.1 99.3 92.8 US$:€ 1.132 1.244 1.365 1.400 SDR:US$ 0.714 0.675 0.639 0.626 Financial indicators ¥ 2-month private bill rate 0.03 0.00 0.05 0.34 US$ 3-month commercial paper rate 1.10 1.48 3.29 4.38 Commodity prices Oil (Brent; US$/b) 28.8 38.5 42.0 37.0 Copper (US cents/lb) 80.3 129.5 141.8 119.0 Zinc (US cents/lb) 38.2 47.7 60.5 59.3 Uranium, US$/lb 12.6 18.2 25.4 23.0 Food, feedstuffs & beverages (% change in US$ terms) 6.6 9.1 -6.5 -1.4 Industrial raw materials (% change in US$ terms) 13.0 21.0 3.5 -6.7 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

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International assumptions The global economy is slowing, having expanded (on a purchasing power parity basis) by 5% in 2004, its most rapid pace for about 20 years. World GDP growth is forecast to decelerate to 4.2% in 2005 and 3.9% in 2006. As demand for rough diamonds—Namibia’s main export by value—and global GDP growth are normally correlated, demand in the diamond market would be expected to slow in 2005-06. However, De Beers expects demand for diamond jewellery to remain strong in 2005; at the first diamond sight of 2005 its Diamond Trading Company subsidiary raised prices by 3%, having raised them by 14% during 2004. Zinc prices are forecast to rise to an average of 60.5 US cents/lb in 2005, reflecting rising demand, then to fall back slightly, to 59.3 US cents/lb in 2006. A supply shortage will push up uranium oxide prices to US$25.4/lb in 2005, the highest level since the early 1980s, subsiding only slightly, to US$23/lb, in 2006. Owing to strong demand from Asia, the continuing risk premium built into the price and low stocks in the US, global oil prices have remained high in early 2005, and we expect them to average US$42/barrel for the year. Oil prices should fall back marginally in 2006, to average US$37/b, as the global economy slows.

Economic growth Provisional figures published by the central bank put real GDP growth at 5.7% in 2004. Growth is forecast to drop back to 5% in 2005 and to 4.6% in 2006 as diamond and uranium production slows. (In 2004 diamond output by Namdeb Diamond Corporation, the 50:50 joint-venture partnership between the government and De Beers, rose by 28% and uranium output increased by almost one-half.) Growth in 2005-06 will be driven by the continued expansion of offshore diamond production, coupled with the first year of full-capacity production at the Skorpion zinc mine and refinery. Mining-sector output is forecast to grow by 20% in 2005, about half the level of the preceding year. This will be offset by the weak performance of the manufacturing sector for the second successive year, reflecting a further contraction in fishing and fish processing output due to the worsening financial difficulties affecting the fishing industry and the prospect of little recovery in catch volumes during 2005. The planned closure of one of Ramatex’s textile factories at the end of April 2005 due to the loss of global markets will also reduce overall manufacturing output. These two negative developments will be only partly offset by the expected higher output of polished diamonds from the cutting factory opened by Israel’s Leviev Group in Windhoek in 2004, with overall manufacturing output, which barely grew in 2004, expected to record a downturn in 2005. However, the construction sector, whose real growth rate in 2004 is estimated by the central bank at 11%, is expected to continue to show strong positive growth, particularly if the development of a new uranium mine at the Langer Heinrich deposit begins in the latter part of 2005 as expected. In 2006 GDP growth will weaken because diamond production will increase only modestly, being confined mainly to the smaller offshore operators, and zinc output will rise only slightly, if at all, having reached full-capacity production in 2005. However, mining-sector output will receive a substantial boost in the final quarter of 2006 if the Langer Heinrich mine is brought into production as currently scheduled. Positive growth in the manufacturing sector

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should resume, as fish processing output is expected to stage a partial recovery, although this will depend on an improvement in fish catches on the depressed levels of 2004-05. If plans for the Kudu gas-to-power project are finalised in the latter part of 2005, as is currently expected, work on building the required gas production and pipeline facilities, along with a power plant at Oranjemund, will provide a substantial boost to construction sector growth in 2006.

Inflation Year-on-year inflation, as measured by the new Namibia Consumer Price Index, fell sharply in January 2005, to 2.5%, and was only fractionally higher the following month. The fall in overall inflation was largely due to substantially lower inflation in the housing, utilities and fuel component of the index, and to a lesser extent to lower food price inflation. The expected good cereal harvest in 2005 should help to moderate food price inflation further and, as world oil prices have probably peaked, import prices will be constrained in the short term by the continued strength of the Namibia dollar. The government is expected to raise fuel prices by mid-2005, to take account of the increase in global prices since the last increase in July 2004. Since inflation is forecast to remain low in South Africa—the source of 80% of Namibia’s imports—average inflation in Namibia is expected to be contained at just 4% in 2005. Rising inflation in South Africa in 2006 will take average inflation in Namibia to 4.6%.

Exchange rates The Namibia dollar will remain fixed at parity to the South African rand throughout the forecast period. Strong gold and platinum prices and attractive real interest rates supported the rand in 2004. The rand should remain strong in the first half of 2005 in the face of a weakening dollar, although economic fundamentals point to the likelihood of a slow depreciation from its end-2004 rate of R5.65:US$1. High world metal prices and possible capital inflows due to the proposed takeover of ABSA Bank by Barclays Bank in early 2005 will boost South Africa’s foreign reserves. This should help to support the rand and reduce its volatility over the forecast period but, like the currency of other emerging markets, the rand is still forecast to depreciate slowly, to R6.50:US$1 by end- 2005 and R7:US$1 by end-2006.

External sector Export growth over the forecast period will be more modest than the 46% increase in US dollar terms recorded in 2004, which was due to a substantial increase in the volume of diamond, uranium and zinc exports, as well as higher prices, for diamonds in particular. In 2005 exports will again rise quite strongly, owing to higher diamond production and continued strong global demand, as well as to the first whole year’s full-capacity output from the Skorpion zinc mine and refinery. In 2006 export growth will be more sluggish, owing mainly to a more modest increase in diamond output and a weakening of the global diamond market. However, the trade deficit is forecast to widen during 2005-06, as imports are expected to grow faster than exports. An increase in import-related services, combined with slower growth in tourism receipts, should cause the services surplus to narrow further in 2005 and, unless tourism picks up strongly once again, the services account is forecast to move into deficit in 2006. Income credits are likely to rise in line with improved returns on portfolio and other investment abroad, principally

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pension fund and life assurance investment in South Africa. However, income debits are also forecast to rise, owing to increased remittances of profits by mining companies, and will grow faster than credits, causing a decline in the income surplus in 2005-06. Having risen strongly in 2004, payments from SACU—the main source of current transfers—will be slightly higher again in 2005, but will fall back, possibly quite sharply, in 2006 when the new revenue- sharing formula will begin to affect Namibia’s share of receipts. The overall current-account surplus is forecast to narrow to US$484m (7.7% of GDP) in 2005 as the trade deficit widens and the surpluses on the services and income accounts narrow, and to US$237m (3.9% of GDP) in 2006 as the services account moves into deficit and the surplus on the current-transfers account falls.

Forecast summary (% unless otherwise indicated) 2003a 2004b 2005c 2006c Real GDP growth 3.7 5.7 5.0 4.6 Consumer price inflation (av) 7.2 4.1 4.0 4.6 Consumer price inflation (year-end) 2.6 4.3 6.0 4.5 Short-term interbank rate (av) 14.7 11.4 11.7 12.7 Government balance (% of GDP)d -7.5 -3.0 -2.0 -3.0 Exports of goods fob (US$ m) 1,260 1,829 2,050 2,160 Imports of goods fob (US$ m) -1,726 -2,107 -2,350 -2,500 Current-account balance (US$ m) 271 563 484 237 Current-account balance (% of GDP) 6.3 10.2 7.7 3.9 External debt (year-end; US$ m) 1,040 1,159 1,259 1,328 Exchange rate N$:US$ (av) 7.56 6.45 6.20 6.90 Exchange rate N$:¥100 (av) 6.52 5.96 6.25 7.44 Exchange rate N$:€ (year-end) 8.38 7.62 9.10 9.73 Exchange rate N$:SDR (year-end) 9.87 8.74 10.38 11.13 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Fiscal years starting April 1st.

Gross domestic product Consumer price inflation % change, year on year av; %

Namibia Sub-Saharan Africa Namibia Sub-Saharan Africa 6.0 12

5.0 10

4.0 8 3.0 6 2.0

4 1.0

0.0 2 01 02 03 04 05 06 01 02 03 04 05 06 2000 2000

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The political scene

Mr Pohamba’s first cabinet The months of speculation surrounding the composition of a new government, blends change and continuity following the victory of Hifikepunye Pohamba in the presidential election of November 2004, came to an end with the naming of a new cabinet by Mr Pohamba on March 21st (Namibia’s Independence Day). Mr Pohamba announced his new government on the day that he was formally sworn into office by Namibia’s chief justice, Peter Shivute, in succession to the outgoing president, Sam Nujoma, at a public ceremony in Windhoek’s Independence Stadium. The changes were more extensive than many had expected—a number of portfolios were restructured and several new ministries created— although the cabinet’s overall size remained unaltered at an unwieldy 27 (including Mr Pohamba), which many regard as too large for a country with a population of only just over 2m. Botswana, for example, which is of similar size and population to Namibia, manages with a cabinet of only 14 members. Mr Pohamba’s concern was evidently to accommodate the main constituencies of the ruling South West Africa People’s Organisation (SWAPO) by including representatives of the senior leadership, the different factions, women and youth. His final choice is believed to have been made only after a meeting of SWAPO’s central committee on March 8th-9th had agreed on a reconciliation process to end the in-fighting that had continued since May 2004 when Mr Pohamba was chosen as the party’s presidential candidate to succeed Sam Nujoma, Namibia’s president since 1990, defeating the former foreign affairs minister, Hidipo Hamutenya (July 2004, The political scene).

Nahas Angula takes over as The appointment of the former higher education minister, Nahas Angula, as prime minister Namibia’s new prime minister is perhaps the clearest sign of a new era in SWAPO politics, as Mr Angula had also stood against Mr Pohamba for the party’s presidential nomination. In contrast, Mr Nujoma had always demoted or dismissed those he regarded as a challenge to his authority in the party, including not just Mr Hamutenya but, before that, the former prime minister, Hage Geingob (November 2002, The political scene). At 61 years of age Mr Angula is eight years younger than Mr Pohamba, and is now well placed as his successor, particularly should the latter decide not to seek a second five-year term as president in 2009. Although Mr Angula had been widely tipped for cabinet promotion, few had thought that he would become prime minister, particularly as his cabinet experience has been limited to the education field. His predecessor, Theo-Ben Gurirab, though no longer in the cabinet, remains an important figure as speaker of the National Assembly, succeeding Mose Tjitendero, who was not re-elected as a member of parliament (MP) in November. In naming the former health minister, Libertina Amathila, as deputy prime minister, Mr Pohamba has especially pleased the SWAPO women’s wing— although Ms Amathila is popular with all sections of the party and with Namibians in general. Given the relative inexperience of Mr Angula, she is expected to make more of the deputy premiership—which has been of largely token significance until now—than her predecessor, Hendrik Witbooi. There are

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now five women cabinet ministers, one more than previously, and Mr Pohamba has responded to party demands for greater emphasis on gender and children’s issues by establishing a new Ministry of Gender Equality and Child Welfare. Ethnically the new government is more weighted in favour of northerners, who hold the three top posts: Mr Pohamba and Ms Amathila are both Kwanyama, the biggest Oshivambo subgroup, and Mr Angula is a Ndonga, the second-biggest subgroup. This contrasts with their predecessors who were from a small Oshivambo subgroup, the Ongandjera (Mr Nujoma), from the Damara (Mr Gurirab) and from the Nama (Mr Witbooi).

Senior posts have gone to long- Mr Pohamba has retained several senior Nujoma loyalists in his cabinet, such standing Nujoma loyalists as the former justice minister, Albert Kawana, who has been put in charge of a new portfolio of presidential affairs—possibly to keep him closely under the president’s eye—and the SWAPO secretary-general, Ngarikutuke Tjiriange, who was reappointed minister without portfolio and is one of only four ministers to have retained the posts that they held in the previous cabinet. In addition, the SWAPO deputy secretary-general, John Pandeni, has entered the cabinet as the minister for regional and local government and housing, and now also has responsibility for rural development (formerly with agriculture). Mr Pohamba has put the former head of the Namibia Central Intelligence Service (CIS), Peter Tsheehama, in charge of another new portfolio, that of safety and security, which takes over responsibility for the Namibian police, which was formerly with home affairs, and prisons (the separate portfolio for which has been abolished). Mr Tsheehama was also named as acting defence minister, although Namibia’s high commissioner to India, Major-General Charles Namolo, is expected to be appointed to the post shortly, and was among the six additional non-voting MPs who are nominated by the president. Mr Tsheehama is widely considered to have been more active in sniffing out potential threats to Mr Nujoma’s leadership than in carrying out non-political national security functions—several former ministers and SWAPO members claim to have been spied on by the CIS. In this respect his appointment has been regarded with suspicion in some quarters and the reasons for the creation of the new ministry as rather obscure. In contrast, Mr Pohamba has appointed a number of new, mainly younger, ministers and deputy ministers, including some first-time MPs. Not all of these can be viewed as appointments based on merit—the former president’s eldest son, Uutoni Nujoma, has been appointed deputy justice minister, and the controversial secretary-general of the SWAPO Youth League, Paulus Kapia, is deputy minister for works. Both were on Mr Nujoma’s notorious list of ten names for inclusion in SWAPO’s list of parliamentary candidates (October 2004, The political scene), and Mr Pohamba evidently felt that they could not be left out. However, his apparent willingness to accommodate SWAPO’s different constituencies would appear to indicate that Mr Pohamba intends to govern in a more collegiate and less authoritarian manner than Mr Nujoma, particularly as Mr Pohamba does not have the iconic status—and often abrasive personality—of his predecessor.

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There were no posts for However, Mr Pohamba did not give cabinet posts to either Mr Hamutenya or, Mr Geingob or Mr Hamutenya more surprisingly, to Mr Geingob. The omission of Mr Hamutenya was not unexpected: he had apparently informed Mr Pohamba that he did not wish to be considered for a cabinet post at this stage. Mr Pohamba went some way towards mollifying his supporters by naming the former agriculture minister, Helmut Angula, who was not re-elected as an MP but who was among the president’s non-voting member nominees, as the secretary-general of the National Planning Commission, a post with cabinet status. On the other hand, the former trade and industry minister, Jesaya Nyamu, who, like Mr Angula, had not been re-elected as an MP because he was ranked too low on SWAPO’s list of candidates, was left out of the new cabinet. It is likely that Mr Nyamu earned disapproval by not resigning from the outgoing cabinet—as Mr Angula had done—and making public statements at the end of 2004 about intrigues within SWAPO and the targeting of Hamutenya supporters. Mr Geingob, who had resigned his overseas job with a Washington-based non-governmental organisation two years early to make himself available as an MP, had clearly expected to get a senior job. It is believed that he was offered a post by Mr Pohamba but the former prime minister did not regard it as senior enough, wishing to return to his old job or to a new post like that created for Mr Kawana. Both Mr Geingob and Mr Hamutenya have been among the most effective cabinet ministers since independence and, as backbench MPs, could cause problems for Mr Pohamba, particularly if the new government runs into difficulties.

Mr Pohamba pledges to Mr Pohamba has wasted little time in outlining a challenging agenda for the combat corruption next five years, including a pledge to eradicate corruption “like a sledge- hammer” and control ministerial spending. Such pledges were frequently made by Mr Nujoma, but Mr Pohamba has set out how this should be achieved in some detail, raising hopes that progress may at last be made after many years of broken promises. At the new cabinet’s first meeting on April 1st Mr Pohamba outlined several measures to address the problems of “inefficiency, corruption, negligence, abuse of government property and other forms of administrative malpractice”. Mr Pohamba said that the long-awaited Anti-Corruption Commission, which was approved three years ago (February 2002, The political scene) but has yet to start operations, would now be established and would work closely with the police, the Ombudsman’s office and the courts. Mr Pohamba also said that the 1995 Public Service Act would be amended to speed up the currently long-drawn-out disciplinary hearings of officials, one of the main obstacles to the effective prosecution of those accused of corruption. Mr Pohamba also announced that only professionally competent people would be appointed as chief executives and senior managers of parastatals—the practice has grown in recent years of appointing individuals largely because of their connections with the ruling party. The prime minister, Mr Angula, has been told to put in place “immediately effective legislative measures” for the efficient and proper management of parastatals. Mr Pohamba also told his ministers that the provision of services and the efficient use of government resources must be priorities, strict financial discipline being enforced. As a start, Mr Pohamba has directed that all ministries and government agencies must cut

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down on the number and frequency of foreign trips, political office-holders requiring his specific consent for travel abroad. In an inaugural address to the first session of the new parliament on April 6th Mr Pohamba spoke in more general terms about Namibia’s socio-economic development objectives; he also pledged that the government would work hard to ensure the provision of public services and to make progress in eradicating poverty and turning Namibia into an industrialised country, as set out in the Vision 2030 strategy adopted five years ago. At the very least, Mr Pohamba seems fully aware of the challenges faced by his government, including the scourge of HIV/AIDS, and his initial statements are an encouraging start to his presidency.

The recount of National Two opposition parties, which challenged the official results of the National Assembly votes is inconclusive Assembly election (January 2005, The political scene), won an unexpected victory in early March when the High Court in Windhoek ruled that all the ballots should be recounted. The Congress of Democrats (CoD) and the Republican Party (RP) had petitioned the court for the election to be nullified on the grounds of widespread irregularities, including the over-counting of votes in some constituencies and the failure of returning officers to mark all counted ballots properly. Although the High Court would not declare the election null and void, its judgement represented a moral victory for the two opposition parties, which had—against strenuous opposition by the Electoral Commission of Namibia (ECN)—obtained access to all relevant electoral documents, include- ing the returns from polling officers. However, it did not address the issue of an almost certainly faulty computerised electoral roll, which most dispassionate observers agree substantially overstates the number of eligible voters and was not available at polling stations to ensure that voter identity could be checked. However, the recount itself did not change anything, as, although several hundred more votes were counted and fewer ballots declared spoilt, the seat allocations for each party remained unchanged. SWAPO’s vote actually increased slightly, whereas there was no change in the number of votes for the CoD despite its claim to have received most of the 800 votes cast by Namibians abroad, which were not included in the official results originally announced by the ECN. There is a possibility of a further legal challenge, as the way in which the recount was conducted did not comply with the order of the High Court, according to both the CoD and the RP, which have said that they will campaign for a fundamental reform of existing electoral law. They were particularly unhappy not to have been consulted by ECN officials before the recount was announced, to discuss any discrepancies, although SWAPO representatives were allegedly given a chance to verify the results. It is also claimed that the ECN’s failure to announce the results of the recount by constituency has made it impossible to determine whether irregularities that had been shown up during the recount had been properly dealt with.

Mr Pohamba urges farmers to At a farewell function at the Ministry of Lands and Resettlement, which he had sell their land willingly previously headed, Mr Pohamba called on commercial farmers to co-operate with the government in its policy of land redistribution, clearly indicating that his government intends to give land reform a high priority. Pointing out that not a single farm had yet been expropriated, Mr Pohamba warned that the patience

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of black Namibians was running out. He stressed that land expropriation did not mean confiscation, but selling land to the government “at fair prices as provided for in the constitution”. However, his startling claim that the SWAPO leadership feared a “revolution” if land redistribution did not move forward should perhaps be regarded as an attempt to increase the pressure on white farmers to sell their land to the state at an acceptable price. It was also clearly an expression of frustration by Mr Pohamba, who is rapidly acquiring a reputation for plain speaking, over the slow progress in implementing land reform, which has so far involved the redistribution of some 3m ha of the total commercial farming land area of 36m ha.

Key aspects of expropriation Although the policy of expropriating farms in the national interest was policy remain unclear launched in February 2004 (May 2004, The political scene), no actual transfers to the state have yet taken place, apparently because the farmers concerned have failed to respond to the offers made by the government. The Ministry of Lands has now asked 14 owners, whose 24 farms had been identified for expropriation and who were sent letters in mid-2004 asking them to sell, to provide reasons why the government should not proceed with taking over their land for the price offered. Many white farmers remain reluctant to sell compulsorily, rather than through willing buyer-willing seller transactions, which ensure that the government pays the prevailing market price. It would probably require a legal case brought by a farmer objecting to the terms of his expropriation to establish a precise definition of “just compensation” as stipulated by the constitution. A proposal made in 2004 by the Namibia Agricultural Union (NAU), which represents most of Namibia’s 4,500 mainly, but not exclusively, white commercial farmers, to establish a joint negotiating team to act as mediator has so far been ignored by the government. Although the NAU accepts the expropriation of some farms as inevitable, it maintains that several matters need to be clarified, including a definition of just compensation and the national interest, to facilitate an orderly handover. Some matters may be clarified under a new national land tenure policy adopted by the government in February 2005, which covers land tenure reform in urban, communal, resettlement and commercial farming areas, while also dealing with compensation for land occupiers and owners affected by developments and expropriation in communal and commercial areas.

New Labour Act is intended to The main change in a long-delayed new Labour Act, which was passed in late streamline dispute procedures 2004, is to shift the resolution of disputes between employers and employees from a predominantly legal process to one based on conciliation and arbitration. It also for the first time outlaws discrimination against employees or job applicants with HIV/AIDS. The old act of 1992, which was drafted with the assistance of the International Labour Organisation, provided for a cumber- some process of resolving disputes by labour courts, which has proved in practice to be slow and expensive. In one recent case it took two years for a group of workers who had been unfairly dismissed to secure reinstatement. The simplified arbitration procedures should speed up the resolution of such disputes, which will also benefit employers seeking to dismiss workers. Some trade unions have criticised the government for delaying introducing all the provisions of the new act, including the dispute resolution mechanism, and the

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act itself is not expected to come fully into force until August this year. How- ever, the unions did secure some tangible benefits for employees. These include the extension of guaranteed paid leave from 18 to 24 working days and for up to five days’ paid compassionate leave (in the event of the serious illness or death of an immediate family member). Businesses claim that the changes will harm small and medium-sized firms in particular, by increasing payroll costs and inhibiting the employment of more staff. The Namibian Employers’ Federation (NEF), representing 70% of private-sector firms, calculates that the extended leave provision could raise staff holiday costs by up to one-third. During its Article IV consultation with the government in October 2004, the IMF ex- pressed the view that these changes, together with restrictions on the hiring of temporary workers, would make labour markets less flexible and raise costs.

Economic policy

The 2005/06 budget is delayed Although the budget for fiscal year 2005/06 (April-March) was due at the beginning of April, it had not been put forward for discussion in the National Assembly as this report went to press. No reason for the delay was given by the Ministry of Finance, but it was likely to have been that the president, Hifikepunye Pohamba, wished to ensure that budgetary commitments were in line with a clampdown on excessive ministerial spending, which he announced at the first meeting of the new cabinet on April 1st—in particular, his direction that all ministers and officials should drastically reduce their foreign travel (see The political scene). The budget is expected to include a commitment to tighten spending controls and to keep down the real increase in overall expenditure to virtually nil; otherwise the objective set out in last year’s budget of holding the fiscal deficit to an average of 1.6% of GDP during the current three-year medium-term economic framework, covering 2004/05-2006/07, will have to be adjusted upwards. The finance ministry has confirmed that the deficit widened to 7.5% of GDP in 2003/04, compared with a projection of 4.2% of GDP in the revised budget for the year, owing mainly to a shortfall in revenue caused by the fall in profitability of the mining sector due to the appreciation of the Namibia dollar. As both diamonds and uranium have recorded strong growth in output in 2004, mining tax revenue should show at least a partial recovery in 2005/06, which would help to limit the budget deficit, although it is virtually certain to be set above the previous 1.6% target.

The IMF calls for structural In March the IMF published the report of its latest Article IV consultation with reforms including privatisation the government. The key conclusion is that Namibia’s long-term growth prospects are promising, provided that the government implements structural reforms, including measures to privatise parastatals and strengthen the economy’s flexibility, and a recently finalised programme to combat HIV/AIDS. The IMF estimates that one-fifth of Namibia’s population is currently infected by HIV, and that the programme to combat the disease, for which it states donor support has been secured, needs to be implemented this year to avoid a progressively worsening effect on Namibia’s medium-term economic prospects. With regard to the government’s fiscal strategy, the IMF notes that policies have “generally been consistent” with Fund advice, following a prudent fiscal stance

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except in 2003/04. The government is reported to have reiterated its commitment to fiscal adjustment to sustain economic growth, and the IMF notes that the budget deficit is projected to fall to 2% of GDP in 2004/05. However, it describes the government’s stated intention of reducing the public debt ratio over the medium term to close to the target of 25% of GDP as a daunting task, because of the sharp decline in receipts from the Southern African Customs Union (SACU) projected for the second half of this decade and new spending pressure caused by the HIV/AIDS programme. On the negative side, the IMF concludes that the government has not made much headway in reducing the public-sector wage bill and parastatal subsidies and has been slow in tackling rigidities in the labour market. However, the IMF is clearly aware that a reduction in the public-sector wage bill and progress with privatisation are unlikely in the near term, in view of the government’s reported belief that “a political consensus” had to emerge before these reforms could be incorporated into the medium-term fiscal strategy. The IMF appears to be unimpressed with existing measures to promote the commercialisation of parastatals—which the government prefers to selling them off—and urges that missing elements of the enabling legislation for the Central Governance Agency (CGA) should be completed, giving the CGA sufficient power to carry out its function of improving the management and transparency of parastatals.

Government debt soars to Central government borrowing continued to grow in 2004: total outstanding 35% of GDP debt had increased to a record 35% of GDP (N$12.5bn) by the end of the year, casting further doubt on the possibility that the government will achieve its debt reduction targets (the government aims to reduce its debt to 25% of GDP by the end of 2006/07). According to the Quarterly Bulletin of March 2005 published by the Bank of Namibia (the central bank), the government’s domestic debt grew by 28%. Although external debt grew more slowly—by 16% (to N$1.9bn at end-2004)—this was double the rate at which it had increased in 2003, and was even higher in US dollar terms (see Foreign trade and payments).

Central government debt (N$ m unless otherwise indicated; end-period) 2003 2004 % change Domestic 8,369 10,673 27.5 Treasury bills 4,841 5,842 20.7 Internal registered stock 3,527 4,832 37.0 External 1,601 1,853 15.7 Total 9,970 12,526 25.6 US$ m 1,534 2,198 43.3 % of GDP 28.4 35.0 –

Source: Bank of Namibia, Quarterly Bulletin, March 2005.

Government loan guarantees In contrast, the government’s main contingent liabilities, comprising guarantees have fallen sharply on domestic and foreign loans contracted by parastatals and other state agencies, fell substantially in 2004. This was mainly because a number of foreign loans covered by guarantee were fully paid off by the borrower, chiefly during the final quarter of 2004. In consequence, outstanding foreign guarantees at end-2004 were 44% lower than a year earlier, and although domestic guarantees rose by just over one-fifth, overall guarantees declined by

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the same proportion. In US dollar terms, total guarantees fell by a more modest 10%, to US$446m, reflecting the Namibia dollar’s appreciation over the period. The total fell to 7% of GDP at end-2004, which, if maintained, would be a far more sustainable level than that of recent years, with foreign guarantees—at 46% of the total—comprising a smaller proportion than domestic ones for the first time since 1997.

Central government loan guarantees (N$ m unless otherwise indicated; end-period) 2003 2004 % change Domestic 1,136 1,380 21.5 Foreign 2,067 1,162 -43.8 Total 3,203 2,541 -20.7 US$ m 493 446 -9.5 % of GDP 9.1 7.1

Source: Bank of Namibia, Quarterly Bulletin, March 2005.

The domestic economy

Economic trends

Real GDP growth is an According to figures published by the Bank of Namibia (BoN, the central bank) estimated 5.7% in 2004 in its Quarterly Bulletin of March 2005, the economy slowed in the fourth quarter of 2004. Real GDP growth fell to 3.5% year on year, compared with 9.8% in the third quarter, 1.8% in the second quarter and 7.5% in the first quarter. Using the central bank’s figures for quarterly growth, the Economist Intelligence Unit calculates annual GDP growth in 2004 (a figure not given by the bank) at 5.7%, compared with 3.7% in the previous year. Overall GDP growth accelerated in 2004, mainly because of the strong performance of the mining sector—in particular gem diamonds, uranium and refined zinc—from January to September 2004. It is possible that actual GDP growth in 2004 may turn out to be slightly above 5.7%, since the year-on-year rate for the fourth quarter is likely to be revised upwards, as was the central bank’s preliminary estimate of growth in the previous three quarters. However, the actual GDP growth rate in 2004 may turn out to be less than we calculate. The 3.7% GDP growth rate for 2003 that we quote is the figure contained in National Accounts 1995-2003, published by the Central Bureau of Statistics in August 2004, and subsequently quoted by the BoN, whereas according to the BoN’s previously quoted quarterly GDP figures real GDP growth in 2003 would have been 4.8%.

The mining sector generates The latest GDP figures confirm that overall growth was underpinned by the the strongest growth strong performance of the mining sector, which, based on the average of the four quarterly year-on-year rates published by the BoN, achieved real growth of 37% in 2004. This was mainly due to the greater than expected increase in diamond output by Namdeb Diamond Corporation, the 50:50 partnership between the government and De Beers, of 28%, and a 50% rise in uranium oxide production by Rössing (see The domestic economy: Mining). Mining value added was also boosted by higher production of zinc by the Skorpion mine, although the refinery component of its operations, which produces the

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final product of high-grade zinc metal, is included in the manufacturing sector. Despite this, manufacturing barely grew in 2004, because of the sharp contraction in output by the fish processing subsector, owing to poor catches of hake and other species. A breakdown of the performance of the manufacturing subsectors is not available from the BoN’s Quarterly Bulletin, although the trend is likely to have been in line with that of the fishing sector, which includes fish processed on board vessels (mainly mackerel and some hake). Fishing output contracted by 20% in 2004, the worst performance for over five years, low catch volumes being exacerbated by mainly static prices in real terms (see The domestic economy: Fishing). In contrast, the better climatic conditions during 2004 enabled agricultural output to grow by nearly 3%. This was due to the heavier cereal harvest in 2004 and the higher number of cattle marketed, following the drought conditions of the previous two years. The performance of other main sectors was equally mixed; the construction and trade sectors recorded strong growth of 11% and 14% respectively, but hotels and restaurants, a proxy for the tourist industry, recorded growth of only 0.2%, owing to weak growth in the number of foreign tourists visiting Namibia. These averaged sectoral growth rates for 2004 need to be treated with caution at this stage, pending the likely revision of the fourth-quarter data.

Gross domestic product, 2004 (% real change, year on year; constant 1995 prices) 1 Qtr 2 Qtr 3 Qtr 4 Qtra Agriculture 2.8 -3.4 4.6 6.8 Fishing -37.4 -21.1 -5.1 -16.1 Mining 61.5 29.2 47.4 8.2 Manufacturing -0.5 -3.3 2.1 2.6 Electricity & water -0.5 -3.6 -1.8 6.0 Construction 27 11.9 3.7 0.7 Wholesale & retail trade 18.1 3.3 28.9 6.2 Hotels & restaurants 18.3 -9.3 -7.4 -0.9 Transport & communications -1.1 4.7 2.5 4.2 GDP at market prices 7.5 1.8 9.8 3.5 a Provisional estimates. Source: Bank of Namibia, Quarterly Bulletin.

Inflation has fallen sharply Year-on-year inflation, measured by the new Namibia Consumer Price Index since the start of 2005 (NCPI), fell sharply in January 2005, to 2.5%, compared with 4.3% in the previous month. In February the year-on-year rate edged up only slightly, to 2.6%, reflecting the continuing effect on imported inflation of the strong Namibia dollar and the maintenance of South Africa’s inflation rate within the current 3-6% target range of the South African Reserve bank (SARB). The main domestic factor accounting for the reduction in inflation during the first two months of 2005 was a marked slowdown in housing, utility and fuel costs, reflecting the government’s decision to keep local petrol prices unchanged. Food price inflation was only slightly lower than in December 2004, averaging just over 1% for the first two months of 2005. The NCPI does not separately tabulate the price changes in imported goods and domestic goods as the previous interim consumer price index (ICPI) did, instead showing only the

trend for domestic goods and services. This reveals that, in the four-month period November 2004-February 2005, the cost of services increased at a faster rate than the price of goods, especially in the latter month.

The fall may be partly due to However, the fall in inflation may be partly due to differences in the way the the switch to the NCPI NCPI is calculated, together with a change in the base year for the index—from December 1992 to December 2001 (January 2005, The domestic economy: Economic trends). The NCPI replaced the ICPI—which measured prices in Windhoek only—in February 2005, and revised year-on-year inflation rates have been backdated to December 2001. This enables a comparison to be made with the previously published ICPI figures, from which it can be seen that the NCPI produced significantly lower year-on-year rates than the old index during November 2004-January 2005. The differential was especially marked in January, the last month in which the ICPI was used, when it widened to almost 3 percentage points. This contrasts with our expectation that the new index, by capturing the additional transport costs involved in the distribution of goods across the country, would on balance produce a national inflation figure about 1 percentage point higher. In fact, this assumption proved correct for January- September 2004, when the average annual inflation rate was 4.2% according to the NCPI, compared with the ICPI’s 3.4%, so the subsequent turnaround may have been due to purely statistical factors. For 2004 as a whole there was no significant difference; the average annual inflation rate according to the NCPI was 4.2%, only slightly higher than the ICPI’s 3.9%.

Consumer prices (Namibia Consumer Price Index; % change, year on year) 2004 2005 Nov Dec Jan Feb Fooda 0.6 1.4 1.2 1.1 Housing, utilities & fuelb 6.4 6.5 2.7 1.5 Transport 6.4 6.3 7.2 7.5 All items incl others 4.0 4.3 2.5 2.6 Goods 3.1 3.6 2.5 0.6 Services 5.4 5.4 3.5 5.4 Interim consumer price index c 5.0 6.0 5.4 – a Includes non-alcoholic beverages. b Includes water, electricity, gas and other fuels. c Discontinued in February 2005. Source: Central Bureau of Statistics, Consumer Prices and Inflation, February 2005.

Domestic fuel prices may have The government has not raised petrol or diesel prices since July 2004, and an to be raised soon adjustment seems likely in the next month or so, given the rise in global oil prices during March 2005, and particularly as South Africa raised prices quite sharply at the start of March. The impact of the upturn in crude oil prices since the end of 2004 has been largely cushioned by the continued strength of the Namibia dollar, the fact that Namibia imports refined petroleum products (mainly from South African refineries), rather than purchasing crude for local refining, and the import parity pricing system used by the government. This price-control mechanism, which is used by all member states of the Southern African Customs Union (SACU), adjusts local wholesale prices in line with a basic fuel price (BFP), calculated according to Singapore and Mediterranean spot

market prices (50% weighting each) as reported daily by the Platts petroleum newsletter. In Namibia a national energy fund (NEF) smoothes out the impact of international price shifts by making payments to, or receiving payments from, the country’s five private-sector wholesale petroleum product distributors according to whether there has been under- or over-recovery on domestic retail pump prices in comparison with the prevailing BFP.

Agriculture

A slightly higher cereal harvest Namibia looks set to enjoy its second successive largely drought-free year, with i s forecast for thi s year a beneficial impact on the production of the main food crops, millet and sorghum, in production year 2004/05 (July-June). The Namibia Early Warning and Food Information Unit (NEWFIU) has projected this year’s coarse grain harvest at just over 129,000 tonnes, 2% higher than in 2003/04, and almost one- third above the average annual production for the past five years of 101,000 tonnes. The winter wheat harvest, grown on irrigated land around several of the country’s main dams, is projected at 10,500 tonnes, slightly down on last year’s 11,500, resulting in a total cereal harvest of 140,000 tonnes, just 1% higher than in 2003/04. Rainfall was below average during October-December 2004, but better rainfall in January-February 2005 improved growing conditions in the north-central communal farming areas, where the bulk of the rain-fed millet and sorghum crop is produced. In Namibia’s four north-central regions, NEWFIU says that the use of improved varieties of earlier-maturing pearl millet has offset delays in plantings, and the total millet and sorghum crop is forecast at 97,000 tonnes, up by one-fifth on 2003/04. However, in the north-eastern Caprivi and Kavango regions, smaller areas have been planted than last year owing to the late and subsequently sporadic rainfall, which is also expected to cut rain-fed commercial maize production from the Otavi-Grootfontein-Tsumeb maize triangle by almost one-half compared with 2003/04. The overall maize harvest is forecast to fall by almost one-third since, in addition to the sharply lower rain-fed output, yields from irrigated areas—on average accounting for some two-thirds of the commercial crop—will also be lower in 2004/05.

Cereal production (‘000 tonnes unless otherwise indicated; Jul-Jun crop years) 2003/04a 2004/05b % change Millet & sorghumc 81.6 96.8 18.6 Maize 45.4 32.5 -28.4 Commercial areas 38.6 29.5 -23.6 Irrigated 25.2 21.9 -13.1 Rain-fed 13.5 7.5 -44.4 Communal areasd 6.8 3.0 -55.9 Total coarse grain 127.0 129.3 1.8 Wheate 11.5 10.5 -8.7 Total 138.5 139.8 0.9 a Actual. b Forecast. c Rain-fed; mainly grown by communal farmers in the four north-central regions of Ohangwena, Omusati, Oshana and Oshikoto, along with smaller quantities in Caprivi and Kavango regions. d Rain-fed. e Commercial; irrigated winter wheat crop. Source: Namibia Early Warning and Food Information Unit, Ministry of Agriculture, Water and Forestry, Crop Assessment Report, March 2005.

Higher cereal imports are NEWFIU is forecasting an increase in the cereal import requirement, to projected for 2005/06 167,000 tonnes, during marketing year 2005/06 (May-April), compared with 150,000 tonnes in 2004/05. This larger requirement is due to a higher projected national cereal demand of 357,000 tonnes in 2005/06, reflecting the increased population estimate of 2.1m, which more than offsets the forecast rise in the 2004/05 harvest, and despite substantial (30,000 tonnes) on-farm stocks of millet and sorghum from last year’s good harvest. Domestic cereal availability, including opening stocks as at May 1st 2005, is calculated at 190,000 tonnes (127,000 tonnes of millet and sorghum, 43,000 tonnes of maize and 20,000 tonnes of wheat). As in previous marketing years, the 2005/06 shortfall is expected to be fully covered by commercial imports arranged by the local milling industry.

Mining

Namdeb increases output by Namdeb raised production by 28%, to 1.86m carats of rough diamonds in 2004, almost one-third in 2004 the highest level since the late 1970s (January 2005, The domestic economy: Mining). The increase was slightly higher than expected—Namdeb had previously forecast 2004 production at 1.8m carats—and was mainly due to record offshore recoveries by De Beers Marine Namibia (DBMN), which were up by 44%, to 865,000 carats. DBMN was able to expand recoveries so sharply because its two additional mining vessels deployed at the end of 2003—each with an annual production capacity of 150,000 carats—operated for a full year in 2004. Although a separate company, in which De Beers has a 75% interest and Namdeb a 25% interest, DBMN mines in Namdeb’s large Atlantic 1 offshore concession along Namibia’s southern coast, and production by both companies is treated as one. Onshore production by Namdeb rose by 23% in 2004, to 995,000 carats, owing largely to the commissioning of the US$53m resource extension project at the Elizabeth Bay mine near Lüderitz in the latter part of 2004. This has doubled output from the mine to some 220,000 carats/year.

Diamond production rises to Namdeb currently accounts for around 95% of Namibia’s total diamond almost 2m carats production, and we estimate overall output last year at just under 2m carats, including some 90,000 carats recovered offshore by the other main operators. The joint venture between Canada’s Diamond Fields International (DFI) and the Sakawe Mining Corporation (Samicor), part of the Leviev Group of Israel, produced 53,000 carats from the former’s Marshall Fork concession, using Samicor’s mining vessel. Since the joint venture ended in October 2004—two months earlier than planned—Samicor has been mining its own concession areas offshore Lüderitz at a rate of some 15,000-20,000 carats/month, although detailed figures have yet to be published by the company. Total diamond production is set to increase less strongly in 2005, to some 2.2m carats, with an increase in Namdeb’s output, to around 1.9m carats, and with DFI and Samicor producing around 250,000 carats. DFI planned to resume mining with its own newly purchased mining vessel in March 2005, and Samicor is expected to increase recoveries in order to supply sufficient rough stones to the diamond-cutting and -polishing factory that was opened

in May 2004 by another Leviev Group company, LLD Diamonds Namibia (July 2004, The domestic economy: Mining). The Windhoek factory is currently producing some 4,000 carats/month of cut stones, well below its 25,000-30,000 carats/month capacity; the training of the initial 400 Namibian diamond cutters is due to be completed in June 2005.

Uranium output increases by Output of uranium oxide by the Rössing mine hit a 13-year record of almost one-half in 2004 3,600 tonnes in 2004, up by almost one-half on the preceding year. This was due to increased throughput after the installation of new equipment in 2004 and additional sales contracts. However, because the price escalation clauses in carried-forward contracts are based on the weaker global uranium market conditions prevailing at the time they were negotiated, Rössing has not fully benefited from the strong rise in the spot market prices during the past year. Although gross turnover rose by 44%, to US$124m, in 2004, owing mainly to the higher output, the operating company, Rössing Uranium, recorded a further net loss, albeit substantially lower than in 2003, according to the 2004 annual report of Rio Tinto, the UK-based global mining group that is Rössing’s majority shareholder. The Namibia dollar’s continued strength has been the main factor placing pressure on Rössing’s finances, as it has significantly reduced local currency earnings from US dollar-denominated exports. For this reason, a decision by Rössing on whether to close the mine in 2007 in line with the present company plan or extend mining until 2017 under a development programme involving substantial new capital investment has been further postponed. Although a technical study of the mine’s extension shows that it would be achievable, the project is understood not to be financially viable at the current Namibia dollar:US dollar exchange rate.

Uranium output and earnings 2003 2004 % change

Uranium oxide (U308; tonnes) 2,401 3,582 49.2 Gross turnover (US$ m) 86 124 44.2 Net earningsa -28 -6 – a Economist Intelligence Unit calculation based on Rio Tinto’s declared net attributable earnings from Rössing corresponding to its 68.6% equity interest. Sources: Rio Tinto, Annual Review; Economist Intelligence Unit.

The Langer Heinrich mine The development of a second Namibian uranium mine at Langer Heinrich, to looks set to go ahead the south-east of Rössing, by Australia’s Paladin Resources is expected to be confirmed with the publication of the final report of a bankable feasibility study at the end of April 2005 (October 2004, The economy: Mining). Paladin released the preliminary findings of the study in February, which confirm that a profitable mining operation is achievable, based on a uranium oxide price of US$25/lb. Langer Heinrich’s measured resource (the most definitive category used in quantifying mineral deposits) is estimated to be sufficient for uranium oxide output of 1,150 tonnes/year for ten years, about 10% higher than previously indicated, with the potential for extending the mine’s life through the proving-up of additional reserves. The start of production has been provisionally scheduled for September 2006, which would require construction work to begin later this year. Paladin’s confidence in what it calls Langer Heinrich’s “robust prospects”—including a forecast 24% internal rate of return—

are underpinned by the continued strength of uranium prices. In mid-March 2005 the spot market price had moved up to US$22/lb, the highest level for over 20 years, and long-term delivery prices, at which Paladin would negotiate contracts with nuclear power utilities, had increased to US$27/lb. Most of Langer Heinrich’s estimated US$80m capital cost, including the construction of an 80-km water pipeline to Swakopmund, will be financed by international bank loans.

Oil and gas

The Kudu gas-to-power project Progress is being made in preparing the way for implementing the large-scale is moving forward project to bring the Kudu offshore gasfield into production to supply, initially, a 400-mw onshore combined cycle gas-fired power station at Oranjemund. This will help to meet expanding domestic demand for electricity and provide surplus power for export to South Africa under the terms of a development agreement signed in mid-2004 (July 2004, The domestic economy: Energy). An Irish company, Tullow Oil, which in 2004 acquired the South African-based Energy Africa and its 90% stake in the Kudu concession, and is the operator of the project, announced in February 2005 that a preliminary study on the financing options for the project had been completed by a merchant bank, N M Rothschild. Tullow expects the financing to be completed within the next 12 months, in line with the agreed timetable. On the technical side, a pre-front- end engineering design concept selection study was completed at the end of 2004 by Tullow, and two development options were selected: a direct subsea tie-back to an onshore gas production facility and a subsea tie-back to a floating production facility. A contract to carry out the full-scale design study for the Kudu production facilities and pipeline was due to have been awarded in the first quarter of 2005. If all goes to plan, the aim is to start work during 2006, and for gas production to begin three years later, along with completion of the Oranjemund power station. The Kudu project’s current estimated cost is N$6bn (US$1bn), to be financed mainly by loans for both the main private-sector element (Tullow) and the public-sector element—the government’s share of the cost of the power station.

China snaps up the Etosha China’s efforts to secure overseas exploration acreage with the potential to onshore oil concession provide its future oil and gas supplies, in the absence of known domestic resources, has extended to Namibia, where one of its state-owned firms, China Shine, has signed up for a majority stake in the promising onshore Etosha concession in the north of the country (January 2005, The domestic economy: Oil and gas). Under an agreement signed at the end of January 2005 with an Irish-based oil exploration company, Circle Oil, China Shine can earn a 72% interest in the 146,000-sq-km concession covering the area around Etosha Pan, in which Circle’s subsidiary, First African Oil Corporation, currently holds 90% and is operator, in partnership with the state-owned National Petroleum Corporation of Namibia (Namcor, which has a 10% stake). China Shine’s earn- in commitment involves spending a minimum of US$50m on exploration, including drilling at least three wells to a depth of 5,000-7,000 metres to test

prospects delineated during previous exploration programmes, and the acquisition of 3,000 line km of 2D seismic data. However, the exploration programme could eventually prove to be on a much larger scale, as China Shine is reportedly willing to spend up to US$1bn on exploration, development and infrastructure on completion of the initial earn- in requirement. Circle will retain an 18% interest in the concession and, although the company received no upfront payment from China Shine, if the latter succeeds in locating commercially exploitable oil or gas deposits it will share in the profits at no cost to itself.

Fishing

A rescue package for the One of the first major economic problems that the new Pohamba government industry may be necessary will have to grapple with is how to help the fishing industry to overcome the current severe downturn in its fortunes, which is otherwise expected to result in large-scale factory closures and employee lay-offs throughout 2005. Although a committee of officials from the Ministry of Fisheries and Marine Resources and the Ministry of Labour has met several times since the start of 2005, it has taken no action pending the inauguration of Hifikepunye Pohamba as president and the announcement of a new cabinet. The industry’s difficulties have grown over the past year owing to the strength of the Namibia dollar, the hake sector, which makes the biggest contribution to fishing output, being the worst affected. On top of this, soaring operational costs, including high fuel prices, and poor catches of generally smaller-sized fish have pushed some companies to the brink of insolvency.

The decline in the industry’s fortunes has already adversely affected the local economy in Walvis Bay, and widespread lay-offs could have a serious effect throughout the country, as cash earnings by seasonal fish factory workers are an important source of income for many rural families. Poor labour relations have also exacerbated their problems, and when two firms announced the lay- off of 200 employees at the end of 2004 there was a rash of unofficial strikes. The larger of the two firms, Blue Ocean, a subsidiary of the South African- based Oceana Group, has already closed its hake-processing factory. In February 2005 trading on the Namibia Stock Exchange in the shares of one of Namibia’s biggest fishing firms, Namibian Fishing Industries (Namfish)—in which the Frans Indongo Trust owned by the country’s leading black businessmen is a major shareholder—were suspended at the company’s request. Sustained losses caused by poor catches and adverse market conditions were the reasons given by Namfish, which subsequently applied for the provisional liquidation of its two main operating subsidiaries.

Manufacturing

The closure of a textile factory In a serious setback for the government’s strategy of promoting foreign will cause 1,600 job losses investment in export-orientated manufacturing activities, it has been announced that the Rhino Garments factory in Windhoek, a subsidiary of the Malaysian-owned Ramatex textile company, is to close by the end of

April 2005. This was confirmed on April 5th by the Namibia Food and Allied Workers’ Union (Nafau), following formal notification by the company, with which it is negotiating redundancy terms for the 1,600 employees expected to lose their jobs. Some may be redeployed to the main Ramatex plant, although Nafau’s general secretary, Kiros Sakarias, has said that many of the 7,000 workers there are concerned that their jobs may also be under threat. Rhino Garments did not issue its own statement on the closure, but in its letter to Nafau said that it had become necessary because of “the lack of buyers”. The letter blamed this situation on “negative statements” by the union, which it claimed was behind an alleged campaign by the Brussels-based International Textile, Garments and Leather Workers’ Federation (ITGLWF) for a boycott of the company’s products by its mainly US buyers. Although the union had informed the ITGLWF of labour problems at Ramatex, it denies ever having sought a boycott (October 2004, The domestic economy: Manufacturing). In fact, no boycott call actually appears to have been issued by the ITGLWF. In January 2005 it confirmed writing to Ramatex’s buyers asking them to bring pressure on the company to improve labour relations, but did not call for any further action at that stage.

The end of MFA is the The true reason for the closure would seem to be (at least partly) increased probable reason for closure competition on the global textile market following the expiry at the beginning of 2005 of the 40-year-old quota system provided under the Multi-Fibre Arrangement (MFA). The World Trade Organisation ended all quotas on textile exports on January 1st, exposing Africa’s textile industries to competition from cheaper, mainly Asian, producers in their main markets of the US and the EU. There have already been widespread job losses in Lesotho, and it would hardly be surprising if Namibia’s fledgling textile industry, which was established only three years ago, has also been affected. The government initially claimed that ending the quotas would have little impact because Namibian firms would still enjoy a competitive edge in the US market owing to the duty-free access for their products provided by the African Growth and Opportunity Act (AGOA), whereas non-African exporters would continue to be liable to import duties. However, during a visit to Africa at end-2004, the US trade representative, Robert Zoellick, warned that Africa’s textile firms would need to establish integrated operations to ensure that they obtained raw materials such as cotton from within Africa, as the AGOA exemption allowing these to be sourced from elsewhere would expire in 2007.

Transport and communications

Air Namibia is to resume After a three-year gap, Air Namibia is to resume direct flights between flights to London Windhoek and London on July 1st 2005, as part of the airline’s recovery strategy being implemented by its new managing director, Kosmos Egumbo (October 2004, The domestic economy: Transport and communications). A second McDonnell Douglas MD-11 (one is already in use on the Windhoek- Frankfurt route) is to be leased to operate the London flights initially. Air Namibia’s flights to Frankfurt are 74% full, which the airline says would be difficult to improve owing to the competition from two larger airlines also

operating the route—Germany’s LTU International Airways and South African Airways. The UK is Namibia’s second biggest foreign tourist market after Germany, and Air Namibia hopes to achieve a load factor higher than 74% on the London flights, as there will be no direct competition from other carriers. The London–Windhoek journey time will be reduced from around 14 hours to ten, with no need to change flights as at present.

Foreign trade and payments

Higher diamond sales boost The combination of continued strong demand on the global diamond market, exports by almost half in 2004 higher prices and the sharp rise in output of rough diamonds by Namibia’s main producer, Namdeb, caused a substantial increase in exports in 2004. These rose by 25% in local currency terms, to N$11.8bn, although in US dollar terms they grew by 46%, to US$1.9bn. Since sales of Namibia’s main export commodities—diamonds, uranium, copper and zinc—are made in US dollars, this provides a better guide to overall export performance, especially as the Namibia dollar’s strength in 2004 had a flattening impact on the real growth of exports. Diamond exports increased by 61%, to a record US$824m, 45% of total exports by value, reflecting both higher export volume and improved prices. According to De Beers, its Diamond Trading Company (DTC) marketing arm raised rough diamond prices three times during 2004, by a total of 14%. An increase in uranium production was largely responsible for a 25% increase in other mineral exports (to US$228m) in 2004, and the first full year’s output by the Skorpion zinc mine and refinery mainly accounted for an expansion in manufactured exports by 25% (to US$428m). Skorpion is understood to have operated at around 80% of design capacity last year, exporting some 100,000 tonnes of high-grade zinc metal (classified as a manufactured, not a mineral, product), more than double its 2003 output, and worth some US$120m. This more than offset a fall in processed fish, beer and other exports (excluding textiles). The strong growth in food and live animal exports last year was due to increased sales of live cattle, ostrich meat and table grapes, which offset lower unprocessed fish and small stock sales.

Exports (N$ m unless otherwise indicated) 2003a 2004a % changeb %changec Diamonds 3,865 5,318 37.6 60.7 Other minerals 1,381 1,468 6.3 24.2 Food & live animals 1,431 1,544 7.9 26.6 Manufactured productsd 2,672 2,782 4.1 21.6 Total incl others 9,463 11,796 24.7 – US$ m 1,252 1,829 – 46.1 a Provisional. b In Namibia dollars. c In US dollars. d Includes refined zinc. Source: Bank of Namibia.

Exports and SACU receipts The current account strengthened considerably in 2004, recording the highest boost current-account surplus surplus for over five years, owing mainly to a sharp reduction in the trade deficit but also to a substantially increased surplus on the current transfers account. The current-account surplus rose by 21%, to N$3.6bn, and more

strongly in US dollar terms, by 41%, to US$563m. The substantial increase in exports, coupled with a much weaker rise in imports, reduced the merchandise trade deficit in 2004 by 48%, to N$1.8bn, and in US dollar terms by 40%, to US$278m. Although the surplus on both the services and income accounts fell quite substantially in 2004, this was more than offset by the smaller trade deficit and an increase in the net inflow of current transfers. On the services account, net inflows from travel rose only modestly, to N$2.6bn, up from N$2.5bn in 2003, and this was more than offset by net outflows on other items, transport in particular. Net investment income fell because outflows in the form of retained earnings, dividends and interest payments to foreign direct investors rose much faster (from N$308m in 2003 to N$1.8bn) than income receipts from investments abroad (mainly South Africa), particularly pension and insurance funds. The increased net inflow on current transfers was caused by a substantial rise in Southern African Customs Union (SACU) receipts to a new record level of N$3.9bn (US$600m). However, these receipts are not expected to continue to increase at such a rate in the coming years owing to the impact of the revised revenue-sharing formula under the new SACU agreement, which came into effect last year (May 2004 and November 2003, Foreign trade and payments). The expansion in SACU receipts in 2004, which may continue in 2005, was due mainly to what the Bank of Namibia (the central bank) refers to as “residual entitlements”—upward adjustments to compensate for the switch from a two- year lag in payments to a current-year cycle. In a study published in 2003, the central bank concluded that SACU receipts would continue to rise in 2006 and 2007, but at a slower rate than would have been the case if the previous revenue-sharing formula had still been in force.

Current account, Jan-Dec (N$ m unless otherwise indicated) 2003a 2004a % change Exports fob 9,463 11,796 24.7 Imports fob -12,944 -13,590 5.0 Trade balance -3,481 -1,794 -48.5 US$ m -460 -278 -39.6 Services (net) 1,295 643 -50.3 Income (net)b 1,731 481 -72.2 Current transfers (net)c 3,467 4,303 24.1 Current-account balance 3,013 3,633 20.6 US$ m 399 563 42.2 a Provisional. b Includes compensation of employees. c Mainly receipts from the Southern African Customs Union. Source: Bank of Namibia, Quarterly Bulletin, March 2005.

The capital account deficit An encouraging increase in net direct investment inflows in 2004, up by 64%, to widens N$2bn (in US dollar terms, up by 92%, to US$305m), in contrast with the decline seen in each of the two preceding years, and very little change in the level of portfolio investment net outflows, was more than offset by a further steep rise in net outflows of other long-term investment and a sharp reduction in short- term investment inflows. In consequence, the capital account deficit widened in 2004 by 14%, to N$3.7bn (in US dollar terms, by 34%, to US$574m. However,

after allowing for errors and omissions and the higher current-account surplus, the deficit on the overall balance of payments fell substantially, to N$133m (US$21m), compared with N$788m (US$104m) in 2003. The largest component of direct investment inflows in 2004 was reinvested earnings (US$141m), which had recorded a net outflow in the previous year; equity capital inflows rose moderately, to US$128m. The net outflow of portfolio investment continued to be mainly due to investment by Namibian individuals and companies in South African securities. Likewise, the substantially greater net outflow in other long-term investment—which reached a record N$4bn (US$621m) in 2004—mainly comprised Namibian pension fund and life insurance premiums invested in South African assets. With the local capital markets too small to absorb the substantial sums involved in these transactions, it is likely that both portfolio investment and other long-term investment will continue to record substantial net outflows for the foreseeable future, and for this reason the persistent deficit on the capital account is essentially structural.

Capital account (N$ m unless otherwise indicated) 2003a 2004a % change Capital transfers (net)b 510 498 -2.4 Direct investment (net) 1,198 1,966 64.1 Portfolio investment (net) -2,220 -2,171 -2.2 Other long-term investment (net) -3,142 -4,035 28.4 Short-term investment (net) 406 42 89.7 Capital-account balance -3,247 -3,700 14.0 US$ m -427 -569 33.3 Errors & omissions -554 -67 -87.9 Overall balance -788 -133 -83.1 US$ m 104 21 -79.8 a Provisional. b Mainly foreign aid receipts for capital projects. Source: Bank of Namibia, Quarterly Bulletin, March 2005.

External debt grew faster Central government external debt expanded by 16% in 2004, to N$1.9bn, but in 2004 grew by almost one-third in US dollar terms (to US$325m). In Namibia dollar terms, outstanding external debt grew twice as fast as in 2003, although the growth rate of US dollar-denominated debt slowed from 50%, since the Namibia dollar appreciated less strongly in 2004 than in the previous year. The ratio of foreign debt to exports increased to 15% at end-December 2004, up from 13% a year earlier, although this rather high percentage is partly because the central bank calculation appears to be based on exports of goods only, rather than the more usual measure of debt to exports of goods and services (January 2005, Foreign Trade and payments). Even so, Namibia’s outstanding external debt remains comparatively low, and the foreign currency risk is less than for many other African states, whose external debt is predominantly in US dollars or special drawing rights (SDRs). In contrast, 22% of Namibia’s outstanding debt at end-December 2004 was in rand-denominated loans, which involves no exchange-rate risk, as the Namibia dollar is pegged to the South African currency. The euro accounted for 54% of total debt, two-thirds of which comprised borrowing from the German development agency,

Kreditanstalt für Wiederaufbau. US dollar debt comprised only 7%, less than the 13% share of debt denominated in yuan. The low US dollar share is mainly because Namibia currently has no outstanding loans from the World Bank and is not eligible for concessional lending from the International Development Association because its GDP per head is above the qualifying threshold. Bilateral debt continued to account for the major proportion of outstanding external debt; its share was virtually unchanged at end-December 2004 on a year earlier, as the faster growth in multilateral debt during 2003 was not maintained in 2004.

Central government external debt (N$ m unless otherwise indicated; end-period) 2003 2004 % change Bilateral 899 1,046 16.4 % of total 56.1 56.4 – US$ m 138 183 32.6 Multilateral loans 702 807 15.0 % of total 43.9 43.6 – US$ 108 142 31.5 Total 1,601 1,853 15.7 US$ 246 325 32.1 % of exports 12.6 14.6 –

Source: Bank of Namibia, Quarterly Bulletin, March 2005.