Namibia Namibia at a Glance: 2005-06

Country Report

Namibia Namibia at a glance: 2005-06

OVERVIEW The president, Hifikepunye Pohamba, has outlined a challenging agenda for his new government: tackling corruption, curbing unnecessary public spending and improving the management of parastatals. Much will depend on how well the new government!under Nahas Angula as prime minister and Libertina Amathila, one of the most popular figures in the ruling South West Africa People’s Organisation (SWAPO), as deputy prime minister!translates Mr Pohamba’s directives into effective policies. Speeding up the redistribution of land will be a priority of the Pohamba government, and white commercial farmers are coming under growing pressure to co-operate with the government’s policy of the compulsory purchase of selected farms. The new cabinet includes representatives of most factions in 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 robust diamond production, together with the first year of full-capacity production at the Skorpion zinc mine and refinery. It will fall back to 4.5% in 2006 as output from Skorpion levels off and the increase in diamond recoveries slows. Inflation will follow the trend in South Africa, remaining at an average rate of around 4% in 2005 but rising to 4.4% in 2006. The trade deficit will widen in 2005-06, as imports are expected to grow faster than exports. The surplus on the services account will narrow in line with increasing import-related services and slowing growth in tourism receipts, and increasing remittances of profits by mining companies will cause the income surplus to fall. Payments from the Southern African Customs Union (SACU)!the main source of current transfers!will be slightly higher in 2005, but will fall back in 2006 when SACU’s new revenue-sharing formula begins to take effect. In consequence of these factors, the current-account surplus is forecast to narrow to 7.7% of GDP in 2005 and 3.8% of GDP in 2006.

Key changes from last month Political outlook • There is no change to the political outlook. Economic policy outlook • There is no change to the economic policy outlook. Economic forecast • There is no change to our economic forecast. June 2005

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Namibia 1

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 came almost as an anticlimax. 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 has dissipated, 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 observers 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 figures, as deputy prime minister!translates Mr Pohamba’s directives into effective policies. Speeding up the redistribution of land will be a priority of the Pohamba government, and white commercial farmers are coming under growing pressure to co-operate with the government’s policy of the compulsory purchase of selected farms. It is uncertain how much influence the former president, Sam 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 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 that 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, could prove to be influential critics from the SWAPO backbenches if Mr Pohamba’s government were to run into early trouble. In the meantime, they are expected to keep a low profile. So far, those within SWAPO who reportedly orchestrated the campaign against Mr Hamutenya, with Mr Nujoma’s blessing, appear to have kept their heads down, partly in response to Mr Pohamba’s pledge to promote party unity and also because some are now constrained by having been appointed deputy ministers, as was probably the president’s intention.

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, and Mr Pohamba appears to be less strident in his support of the Zimbabwean president, Robert

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Mugabe, than was Mr Nujoma. It is significant that Mr Pohamba chose to make his first foreign visits as head of state to Angola and Botswana!with which relations have not always been at their friendliest!rather than to Zimbabwe.

Economic policy outlook

Policy trends The main aims of economic policy are set out in the second five-year national development plan (NDP2), 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 finished drafting 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 (FDI) in export-oriented manufacturing will continue to benefit from incentives under the export-processing zone regime. A privatisation programme, as advocated by the IMF, is off the agenda 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, and this is due to become fully effective in 2005.

Fiscal policy The 2005/06 budget, tabled in parliament on May 12th 2005 by the minister of finance, Saara Kuugongelwa-Amadhila, estimates the fiscal deficit for 2004/05 at N$872.4m (US$137m), or 2.4% of GDP, compared with 1.6% of GDP projected when the budget for the year was presented in March 2004. The new budget projects a reduced deficit in 2005/06 of N$448.5m (1.2% of GDP), owing mainly to increased revenue from individual and corporate taxes and external grants, and looks ahead to Namibia’s first-ever budget surplus in 2006/07 of around N$500m. To achieve these goals, the government is raising taxes and intends to place stringent controls on expenditure. Despite this, provision was made in 2005/06 for an additional N$100m in expenditure on the new State House and a further subsidy of N$116m for Air Namibia. In her budget speech, the finance minister announced the reintroduction of a special rate of value-added tax on luxury goods, higher excise duty on alcohol and tobacco, an end to the exemption from income tax of unit trusts, the introduction of an environmental tax!both to discourage activities that are harmful to the environment and to raise revenue for the government!and an amendment to the Income Tax Act to stop the offsetting of losses from certain activities, such as farming and the letting of residential property, against salary income. The new medium-term economic framework (MTEF), tabled along with the budget and setting out the government’s fiscal targets for the three-year period 2005/06-2007/08, projects an increase in revenue from N$12.4bn in the current fiscal year to some N$13.4bn in both the succeeding fiscal years. In contrast,

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total expenditure is forecast to rise from N$12.8bn in 2005/06 to N$13bn by 2007/08, producing a budget surplus of 1.2% of GDP in 2006/07 and 0.8% of GDP in the subsequent year. These expenditure forecasts would amount to a cut in total spending in real terms, after allowing for inflation, in both 2006/07 and 2007/08. Since the government has never succeeded in reducing its nominal spending from one year to the next, let alone in real terms, and because of the forecast slowdown in economic growth, the Economist Intelligence Unit does not believe that it is likely to meet these targets, despite the budget’s welcome recognition of the need for fiscal discipline. We consequently forecast a deficit of nearer 2% of GDP in 2005/06. In 2006/07 there would need to be a substantial increase in revenue to produce a budget surplus, particularly as receipts from the Southern African Customs Union (SACU) are expected to fall. Such an increase is unlikely, despite further increases in taxes and measures to improve tax collection, given that the economy is expected to grow more slowly in 2006 than in 2005. Moreover, we believe that the government will continue to have difficulty in limiting expenditure, as the political consensus does not yet exist that would enable a significant cut in the size of the public-sector wage bill (which accounts for one-half of current expenditure). 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 (the central bank) broadly shadows the repurchase (repo) rate set by its counterpart, 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 downward than upward!and to edge up in 2006. The risks to our forecast would be sustained high or rising oil prices and a sharper than forecast depreciation of the rand.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2003 2004 2005 2006 Real GDP growth World 3.9 5.1 4.3 4.0 US 3.0 4.4 3.2 2.8 EU25 1.2 2.4 1.8 2.1 Exchange rates ¥:US$ 115.9 108.1 103.4 94.3 US$:€ 1.132 1.244 1.320 1.395 SDR:US$ 0.714 0.675 0.653 0.628 Financial indicators ¥ 2-month private bill rate 0.03 0.00 0.00 0.17 US$ 3-month commercial paper rate 1.10 1.48 3.31 4.63

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International assumptions summary (% unless otherwise indicated) 2003 2004 2005 2006 Commodity prices Oil (Brent; US$/b) 28.8 38.5 46.0 40.0 Copper (US cents/lb) 80.3 129.5 143.0 119.0 Zinc (US cents/lb) 38.2 47.7 60.5 59.3 Uranium, US$/lb 12.6 18.2 25.4 23.0 Food, feedstuffs & beverages (% change in US$ terms) 6.6 9.2 -6.5 -1.5 Industrial raw materials (% change in US$ terms) 13.0 21.0 3.9 -7.0 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

The global economy is slowing, having expanded (on a purchasing power parity basis) by 5.1% in 2004, its most rapid pace for about 20 years. World GDP growth is forecast to decelerate to 4.3% in 2005 and 4% 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 might 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 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, before falling 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 oil prices to average US$46/barrel for the year. Oil prices should fall back marginally in 2006, to average US$40/b, as the global economy slows.

Economic growth Quarterly figures published by the Bank of Namibia indicate that real GDP grew by 5.7% in 2004, almost 2 percentage points higher than the previous year, although there is some confusion over the figure, as the bank’s recently published annual report for 2004 puts overall GDP growth lower. We forecast that real growth will drop back to around 5% in 2005 (about 1% above the central bank’s forecast) and to 4.5% in 2006 as diamond and uranium production slows. (In 2004 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 50%.) Growth in 2005 will be driven by the continued, but more modest, 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 15% in 2005, about half the level of the preceding year. Agricultural output should record real growth of around 3% in 2005 (compared with 2% in 2004), owing to an increase in the number of cattle marketed (which fell in 2004), higher cereal production and higher production of grapes and ostriches. Catches of the main fish species are expected to increase little, and prices on the international market will remain weak. Any recovery from the industry’s current financial difficulties as a result of the impact on revenue of the strong Namibia dollar is not likely until 2006.

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. Growth in the manufacturing sector should pick up, 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. The go-ahead for the Kudu gas-to-power project is expected in late 2005-early 2006, and the start of building the gas production and pipeline facilities, along with the power plant at Oranjemund, will help to keep growth buoyant in the construction sector in 2006.

Inflation Year-on-year inflation, as measured by the Namibia Consumer Price Index, eased slightly, to 1.6% in April 2005, from 1.7% in March. Although food price inflation rose to 0.7% compared with 0.2% in March, the other heavily weighted component of the index!housing, utilities and fuel!recorded slightly lower inflation of 0.6% (compared with 0.8% in March). The expected good cereal harvest in 2005 should help to moderate food price inflation. Although world oil prices have probably peaked, and import prices will be constrained in the short term by the continued strength of the Namibia dollar, higher oil prices and currency depreciation remain downside risks to the current benign inflationary environment. As inflation is forecast to remain low in South Africa!the source of 80% of Namibia’s imports!average annual inflation in Namibia is not expected to exceed 4% in 2005 (slightly down from 4.1% in 2004). Rising inflation in South Africa in 2006 will take average inflation in Namibia to 4.4%.

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 weak dollar, although a modest rate of depreciation has occurred since the start of 2005, giving an end-April rate of R6.10:US$1, compared with the end-2004 rate of R5.64:US$1. High world metal prices and capital inflows, the result of the takeover of ABSA Bank by Barclays Bank agreed in May 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 R6.40:US$1 by end-2005 and R6.75: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 caused by 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 fairly 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 lead to a further narrowing of the services surplus 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 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$483m (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 (3.8% 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 4.5 Gross agricultural production growth 3.2 -7.5 2.0 3.5 Consumer price inflation (av) 7.2 4.1 4.0 4.4 Consumer price inflation (year-end) 2.6 4.3 4.2 4.5 Short-term interbank rate (av) 14.7 11.4 11.7 12.7 Government balance (% of GDP)d -7.5 -2.9 -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) 271 563 483 237 Current-account balance (% of GDP) 6.3 10.2 7.7 3.8 External debt (year-end; US$ m) 1,013 1,133 1,143 1,173 Exchange rate N$:US$ (av) 7.56 6.45 6.20 6.65 Exchange rate N$:¥100 (av) 6.52 5.96 6.00 7.06 Exchange rate N$:€ (year-end) 8.45 7.64 8.76 9.38 Exchange rate N$:SDR (year-end) 9.96 8.77 10.03 10.74 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Fiscal years starting April 1st.

Editors: Roger Boulanger (editor); Christopher Eads (consulting editor) Editorial closing date: June 9th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule