Country Report

Namibia

Namibia at a glance: 2005-06

OVERVIEW The priorities of the new administration under Hifikepunye Pohamba are to fight corruption, curb public spending and improve public services. Despite a promising start, a sustained effort will be needed to achieve a significant reduction in corruption, and the freeze on spending envisaged in the budget may cause the government some unpopularity. Slower growth of diamond output, and in 2006 a levelling-off in production by the Skorpion zinc mine and refinery, will cause GDP growth to slow to 4.2% in 2005 and 3.9% in 2006. Low food price inflation and import prices constrained by the strength of the Namibia dollar will cause overall inflation to fall to 3.5% in 2005. However, rising inflation in South Africa will push average inflation in Namibia to 4.2% in 2006. The current-account surplus is forecast to narrow to 9.1% of GDP in 2005 and to 5.2% 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 • There is no change to the political outlook. Economic policy outlook • There is no change to the economic policy outlook. Economic forecast • Following the publication of revised estimates for sectoral growth in the fourth quarter of 2004, the Economist Intelligence Unit has lowered its estimate of real GDP growth in 2004 to 4.9%!our previous estimate, based on preliminary figures from the Bank of Namibia, was 5.7%. In consequence, we have lowered our forecasts for real GDP growth for 2005 and 2006, though we continue to believe that growth will slow gradually over the outlook period. • As a result of unprecedentedly low inflation in the first five months of 2005!food prices, which have the heaviest weighting in the consumer price index, have fallen by 0.6% since December!we have lowered our forecast for inflation in 2005 from 4% to 3.5%.

July 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

12 The political scene

17 Economic policy

21 The domestic economy 21 Economic trends 23 Mining 26 Energy 28 Fishing

30 Foreign trade and payments

List of tables

9 International assumptions summary 12 Forecast summary 18 Government finances 19 Main expenditure allocations 20 Revenue and expenditure projections 20 Government financing operations 21 Central government debt 21 Gross domestic product 22 Consumer prices, 2005 27 Electricity sales 30 External debt 31 Namibia Power Corporation: foreign loans

List of figures 12 Gross domestic product 12 Consumer price inflation

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Namibia July 2005 Summary

Outlook for 2005-06 The priorities of the new administration under Hifikepunye Pohamba are to fight corruption, curb public spending and improve public services. Despite a promising start, a sustained effort will be needed to achieve a significant reduction in corruption, and the freeze on spending envisaged in the budget may cause the government some unpopularity. Slower growth of diamond output, and in 2006 a levelling-off of production by the Skorpion zinc mine and refinery, will cause GDP growth to slow to 4.2% in 2005 and 3.9% in 2006. Inflation will follow the trend in South Africa, falling to 3.5% in 2005 but rising to 4.2% in 2006. The current-account surplus is forecast to narrow to 9.1% of GDP in 2005 and to 5.2% of GDP in 2006 as the trade deficit widens and the balances on the services, income and current-transfers accounts deteriorate.

The political scene The new administration is proceeding with the main tasks it has set itself. The establishment of the Anti-Corruption Commission has overcome its last parliamentary hurdle, and a new body to regulate Namibia’s parastatal organisations is to be set up. A coalition of Church groups and NGOs is campaigning for a basic income grant. Germany has proposed the establishment of a fund to work for reconciliation with the Herero people.

Economic policy The budget for fiscal year 2005/06 (April-March) projects a deficit of just 1.2% of GDP, half the estimated budget outcome in 2004/05. The government’s medium-term economic framework projects surpluses in the two following years, leading to a reduction in government debt to well below 30% in 2007/08.

The domestic economy The government projects that real GDP growth will average 3.6% over the next three years. Average year-on-year inflation was 1.9% in the first five months of 2005, less than half the average for the same period of 2004. The introduction of royalty payments for non-diamond-mining companies has been suspended, pending consultations between the government and the industry. The government and De Beers are to begin negotiating a new contract for the marketing of diamonds. Rössing Uranium is to continue mining operations until at least 2009. Paladin Resources is to go ahead with the development of the Langer Heinrich uranium mine. Plans to develop the Kudu gasfield and build a gas-fired power station are moving forward. A package of relief measures for the fishing industry has failed to prevent further bankruptcies.

Foreign trade and payments Namibia’s foreign debt fell in local-currency terms in 2004, but rose in US- dollar terms. Nampower is responsible for 70% of parastatal debt and will have to borrow heavily to finance its proposed new gas-fired power station. Editors: Roger Boulanger (editor); Pratibha Thaker (consulting editor) Editorial closing date: July 14th 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 & forestry Nickey Iyambo Central Intelligence Service Lukas Hangula Defence Charles Namoloh Education Nangolo Mbumba Environment & tourism Willem Konjore Finance Saara Kuugongelwa-Amadhila Fisheries & marine resources Abraham Iyambo Foreign affairs Marco Hausiku Gender equality & child welfare Marlene Mungunda Health & social services Richard Kamwi Home affairs & immigration Rosalia Nghidinwa Information & broadcasting Netumbo Ndaitwah Justice Pendukeni Iivula-Ithana Labour & social welfare Alpheus Naruseb Lands & resettlement Jerry Ekandjo Mines & energy Erkki Nghimtina Minister without portfolio Ngarikutuke Tjiriange National Planning Commission Helmut Angula Presidential affairs Albert Kawana Regional & local government, housing & rural development John Pandeni Safety & security Peter Tsheehama Trade & industry Immanuel Ngatjizeko Works, transport & communications Joel Kaapanda Youth, sport & culture John Mutorwa

Central bank governor Tom Alwe end o

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Economic structure

Annual indicators 2000a 2001a 2002a 2003a 2004a GDP at market prices (N$ bn) 23.7 27.7 31.6 32.3 35.5b GDP (US$ bn) 3.4 3.2 3.0 4.3 5.5b Real GDP growth (%) 3.5 2.4 2.5 3.7 4.9b Consumer price inflation (av; %) 9.3 9.3 11.3 7.2 4.1 Population (m) 1.9 1.9 2.0 2.0 2.0b Exports of goods fob (US$ m) 1,310 1,147 1,072 1,260 1,823 Imports of goods fob (US$ m) -1,310 -1,349 -1,283 -1,726 -2,107 Current-account balance (US$ m) 255 17 79 271 624 Foreign-exchange reserves excl gold (US$ m) 260 234 323 325 345 Total external debt (US$ m) 165 427 465 1,013 1,145 Debt-service ratio, paid (%) 2.0 2.7 2.8 5.1 6.0 Exchange rate (av) N$:US$ 6.95 8.63 10.52 7.56 6.45 a Actual. b Economist Intelligence Unit estimate.

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 426 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 2003 % of total Origin of imports 2003 % of total South Africa 31.5 South Africad 80.5 Angola 24.9 Germany 2.3 Spaine 12.8 Switzerland 2.3 UKf 10.4 Spain 1.4 US 2.7 UK 1.2 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 Includes goods from countries outside the Southern African Customs Union purchased through South African suppliers. e Mainly hake. f Includes most of Namibia‘s rough diamond exports, which are exported for marketing in London by De Beers‘ Diamond Trading Company.

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Quarterly indicators 2003 2004 2005 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Pricesa Consumer prices (Dec 2001=100) 115.2 116.0 116.0 118.9 120.1 120.7 120.8 121.6 Consumer prices (% change, year on year) 8.3 6.0 3.2 4.1 4.3 4.1 4.1 2.3 Financial indicators Exchange rate N$:US$ (av)b 7.773 7.418 6.727 6.794 6.611 6.381 6.053 5.975 Exchange rate N$:US$ (end-period)b 7.555 6.925 6.640 6.370 6.270 6.450 5.630 6.235 Bank of Namibia overdraft rate (av; %) 11.50 9.75 7.75 7.75 7.75 7.50 7.50 7.50 Deposit rate (av; %) 9.45 8.78 7.47 6.47 6.34 6.32 6.27 6.34 Govt bond yield rate (av; %) 12.96 12.96 12.00 11.68 12.57 12.23 11.06 10.29 Lending rate (av; %) 15.68 14.74 13.01 11.55 11.94 11.21 10.86 10.63 Prime rate (av; %) 16.30 15.10 13.20 12.50 12.50 12.25 12.25 12.25 Treasury bill rate (av; %) 11.98 10.45 8.02 7.66 8.00 7.94 7.51 7.61 M1 (end-period; N$ m) 7,194.2 7,969.8 7,851.4 n/a n/a n/a n/a n/a M1 (% change, year on year) 1.9 14.3 17.2 n/a n/a n/a n/a n/a M2 (end-period; N$ m) 11,284.0 12,317.5 12,913.4 n/a n/a n/a n/a n/a M2 (% change, year on year) 0.6 14.0 20.7 n/a n/a n/a n/a n/a IJG/IPPR Business Climate Index (Jan 2001=100) 98.6 101.9 106.0 106.9 103.8 103.7 112.6 112.9 IJG/IPPR BCI (% change, year on year) -4.9 -0.3 2.0 7.9 5.3 1.8 6.2 5.6 Foreign trade & reserves Goods exports fob (N$ m) 2,493 2,677 2,285 2,501 2,645 3,948 2,666 3,315 Diamonds 1,210 1,190 736 1,254 1,007 2,000 1,058 1,643 Other mineral products 323 360 325 266 413 290 499 346 Food & live animals 464 391 287 310.1 429 421 383 421 Manufactured products 467 720 901 641.7 753 792 562 610 Goods imports fob (N$ m) -3,162 -3,308 -3,377 -3,313 -3,339 -3,371 -3,567 -2,981 Trade balance (N$ m) -669 -631 -1,092 -812 -694 578 -901 334 Services balance 317 415 228 110 162 163 189 226 Income balance 187 429 506 205 107 -176 825 -60 Transfers balance 929 863 819 925 1,125 1,132 1,122 1,241 Current-account balance 758 1,069 454 422 693 1,690 1,228 1,737 Reserves excl gold (end-period; US$ m) 276.6 299.2 325.2 273.9 277.1 276.3 345.1 302.6 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 Since he formally took over as head of state at the end of March 2005, the president, Hifikepunye Pohamba, has spearheaded a campaign to root out official corruption and reduce unnecessary spending. In contrast to previous campaigns by his predecessor, Sam Nujoma, Mr Pohamba’s words have been matched by deeds, and the long-delayed Anti-Corruption Commission is finally being established. However, a culture of theft has become entrenched in many organs of state and it will take a sustained effort to achieve a significant reduction in corruption. Mr Pohamba’s more collegiate style and personal modesty!he made his first foreign trips to the region by ordinary scheduled flights!has also increased his popularity and authority. There is no prospect that Mr Pohamba will be challenged in the foreseeable future by his former rivals in the ruling South West Africa People’s Organisation (SWAPO), and the personal animosities and factional jockeying for position which plagued SWAPO for most of 2004 have subsided. Mr Pohamba has made it clear that he will not tolerate such manoeuvring and has made peace with the for me r fo rei gn affairs mi nister, Hidi po Hamute nya, who was dismissed by Mr Nujoma shortly before the election of SWAPO’s presidential candidate in May 2004. Mr Hamutenya, who came second to Mr Pohamba in the party election, remains outside the government for the time being. Mr Pohamba’s authority has been bolstered by Mr Nujoma’s graceful exit from the presidency and the low profile he has maintained since then. Mr Nujoma has rarely spoken in public since March, and his silence is seen as an endorsement of the policies being followed by his successor. However, he remains president of SWAPO until 2007, and is unlikely to stay on the sidelines should Mr Pohamba run into political trouble. The former prime minister, Hage Geingob, who was unexpectedly left out of Mr Pohamba’s cabinet, could create trouble from the SWAPO backbenches and has made it clear that he expects the government to adhere to a poverty-reduction agenda, despite the tight fiscal targets set out in the budget. Much will depend on how effectively the new government!under Nahas Angula as prime minister and Libertina Amathila as deputy prime minister!implements Mr Pohamba’s declared objectives. The freeze on spending over the next three years envisaged in the budget will be difficult to achieve and may bring the government some unpopularity. Although land redistribution is a priority and white commercial farmers are under growing pressure to co-operate with the government’s policy of the compulsory purchase of selected farms, progress is likely to remain slow.

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 has made almost no public show of support for the Zimbabwean president, Robert Mugabe, in contrast to the stance taken by Mr Nujoma. It is significant that Mr Pohamba chose to make his first foreign visits as head of state to

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Angola and to 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 remain 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 State- Owned Enterprises Council, and this is due to become fully effective in 2005.

Fiscal policy In the 2005/06 budget, presented in May 2005 by the finance minister, Saara Kuugongelwa-Amadhila, the fiscal deficit for 2004/05 was estimated at N$872.4m (US$137m), or 2.4% of GDP. The new budget projects a reduced deficit in 2005/06 of N$448.5m (1.2% of GDP), owing to increased revenue from taxes, and virtually zero growth in spending, and looks ahead to Namibia’s first ever budget surplus in 2006/07 of around N$500m (1.2% of GDP). To achieve these goals, the government is raising taxes and has introduced more stringent controls on expenditure through a programme budgeting strategy, with medium-term spending plans set for each ministry. The new taxes include a 30% rate of value-added tax (VAT) on luxury goods, ending the exemption from income tax of unit trusts, and disallowing the offsetting of losses from such activities as farming and residential letting against salary income. Higher tax revenue, including that derived from the previously announced land tax, would offset a projected fall in receipts from the Southern African Customs Union (SACU) in 2005/06. However, the tight fiscal targets are unlikely to be met, especially on the expenditure side. Revenue is projected to rise from N$12.4bn in 2005/06 to N$13.5bn (at current prices) in 2006/07, mainly because of higher SACU receipts due to transitional adjustments in Namibia’s favour. Expenditure is forecast to rise from N$12.8bn in 2005/06 to only N$13bn the following year. In real terms, after allowing for inflation, total spending would fall in 2006/07.

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As the government has yet to reduce nominal spending (let alone in real terms) from one year to the next, and as economic growth is forecast to slow, the Economist Intelligence Unit regards these targets as unrealistic. We consequently forecast a deficit of nearer 2% of GDP in 2005/06. In 2006/07 we believe that overall revenue growth will fall short of target: in particular, the projected increase in income tax revenue will not materialise because of the expected slowdown in economic growth. Moreover, the government is likely to fail to cut its spending in real terms; there is as yet no political consensus for reducing the size of the public-sector wage bill (which accounts for one-half of current expenditure). Consequently, we forecast that the budget will remain in deficit in 2006/07, but probably by no more than 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 4.2 4.0 US 3.0 4.4 3.2 2.8 EU25 1.2 2.3 1.7 2.0 Exchange rates ¥:US$ 115.9 108.1 107.4 103.0 US$:€ 1.132 1.244 1.222 1.260 SDR:US$ 0.714 0.675 0.679 0.666 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 Commodity prices Oil (Brent; US$/b) 28.8 38.5 50.5 46.5 Copper (US cents/lb) 80.3 129.5 143.0 119.0 Zinc (US cents/lb) 38.2 47.7 60.5 62.5 Uranium (US$/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 4.2 -6.2 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 4.2% in 2005 and 4% in 2006. As demand for

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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 and 62.5 US cents/lb in 2006, because of rising demand. A supply shortage will push up uranium oxide prices to US$25.4/lb in 2005, the highest level since the early 1980s, with prices subsiding only slightly, to US$23/lb, in 2006. We now expect oil prices to rise significantly in 2005, to US$50.5/barrel, because of strong demand and limited spare production capacity. Although the price should fall back in 2006 as the global economy slows, to an average of US$46.5/b, the fall will be limited by concerns over spare global capacity.

Economic growth Revised quarterly figures published by the Bank of Namibia in July indicate that real GDP grew by 4.9% in 2004, 1.2 percentage points higher than the previous year, although the bank’s Annual Report for 2004 estimates overall GDP growth to have been slightly below this, at 4.4%. We expect that the official estimate for last year will be adjusted upwards with the publication of the national accounts by the Central Bureau of Statistics (CBS) later in 2005. We forecast that real growth will drop back to around 4.2% in 2005 (close to the central bank’s forecast) as diamond and uranium production slows. 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. Mining sector output is forecast to grow by 10% in 2005, about one-third of the level of the preceding year. Agricultural output should record real growth of around 3% in 2005 (against 2% in 2004), owing to a rise in the number of cattle marketed (which fell in 2004), and higher cereal, grape and ostrich production. Catches of the main fish species are expected to increase little, and prices on the international market will remain weak. Any recovery from the fishing 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 real GDP growth will weaken to 3.9% because diamond production will increase only modestly, being confined mainly to the smaller offshore operators, and zinc output will barely increase, having reached full-capacity production in 2005. However, output will receive a substantial boost in the final quarter of 2006, when the Langer Heinrich uranium mine is scheduled to come into production; even so, mining sector growth, at around 7%, would still be below that of 2005. Growth in the manufacturing sector should pick up slightly, as a partial recovery in fish-processing output is expected, although this will depend on an improvement in fish catches over the depressed levels of 2004-05. The go-ahead for the Kudu gas-to-power project is expected in late 2005 or early 2006, and the start of the building of gas production and pipeline facilities, along with a power plant at Oranjemund, will help to keep growth in the construction sector buoyant in 2006.

Inflation Year-on-year inflation fell to only 0.9% in May 2005!the lowest level so far this year!from 1.6% in April. The decline stemmed mainly from a 1.8% fall in food

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prices. This more than offset inflation of 5.3% in the less heavily weighted transport component of the index!the impact of higher prices charged by transport operators following a 10-12% increase in domestic fuel prices. The expected good cereal harvest in 2005 should help to keep food price inflation low throughout the rest of the year. Import prices will be constrained in the short term by the continued strength of the Namibia dollar, although a sustained period of higher international oil prices and currency depreciation are 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 3.5% in 2005 (compared with 4.1% in 2004). Rising inflation in South Africa will push average inflation in Namibia to 4.2% in 2006.

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, together with significant 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. Nevertheless, like the currencies 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% rise in US-dollar terms recorded in 2004, which was caused by substantial increases 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$561m (9.1% of GDP) in 2005 as the trade deficit widens and the

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surplus on the services account narrows, and to US$319m (5.2% 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 2004a 2005b 2006b Real GDP growth 3.7 4.9c 4.2 3.9 Gross agricultural production growth 3.2 -7.5 c 0.0 1.0 Consumer price inflation (av) 7.2 4.1 3.5 4.2 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) -7.5 -2.9 c -2.1 -3.0 Exports of goods fob (US$ m) 1,260 1,823 2,050 2,160 Imports of goods fob (US$ m) -1,726 -2,107 -2,350 -2,500 Current-account balance (US$ m) 271 624 561 319 Current-account balance (% of GDP) 6.3 11.3c 9.1 5.2 External debt (year-end; US$ m) 1,013 1,145 1,154 1,185 Exchange rate N$:US$ (av) 7.56 6.45 6.20 6.65 Exchange rate N$:¥100 (av) 6.52 5.96 5.77 6.46 Exchange rate N$:€ (year-end) 8.45 7.64 7.58 9.01 Exchange rate N$:SDR (year-end) 9.96 8.77 9.28 10.48 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimate.

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

The political scene

Mr Pohamba’s policy pledges Since his inauguration as head of state at the end of March 2005, the new are being put into practice president, Hifikepunye Pohamba, has begun carrying out his pledge that the government’s top priorities would be fighting corruption, cutting unnecessary spending, and improving public services through the better management of government agencies and parastatals (April 2005, The political scene). Mr Pohamba has even carried out his promise to set a personal example, and has reduced the size of official motorcades provided for both him and the prime minister, Nahas Angula. On his first trips abroad, to Angola and Botswana in May and to the US in June, he travelled on commercial flights and

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was accompanied by a modestly sized delegation. For the first time, citizens are being encouraged to report corrupt practices, which the government has promised will be fully investigated. The impression of a government working together as a team has been reinforced by the energetic approach of Mr Angula, who has set out the government’s agenda in some detail during the past two months. Mr Angula has made his own mission statement. Apart from reiterating the government’s belief in the socio-economic goals of the Vision 2030 national development document, he has stressed that public services!for which he has overall responsibility as prime minister!must be based on efficiency, effectiveness and accountability to the people. The prime minister has also clarified the decision- making process at the top of the government, with an equal division of administrative responsibilities between himself and the deputy prime minister, Libertina Amathila. The role of the presidential affairs minister, Albert Kawana!a veteran loyalist of the former president, Sam Nujoma, whom some believed might wield considerable influence!is to act as the president’s assistant in the day-to-day running of the affairs of state, Mr Angula has said.

The Anti-Corruption The long-delayed Anti-Corruption Commission (ACC) will start operating in the Commission is established next few months, following parliamentary approval of the conditions of service for its director and deputy director, who will be appointed by Mr Pohamba. Although the act establishing the ACC was passed by the National Assembly in 2003, its actual establishment had been delayed until this year, owing to a combination of political inertia and insufficient funding. The prime minister introduced a motion in the National Assembly at the end of June which gives the ACC’s top two officials the same status as a high court judge and chief regional magistrate respectively. Mr Angula stated that this would give them the authority they needed to carry out their functions effectively and protect the public from “unscrupulous” politicians and public servants. Although the ACC will not itself have the power to bring prosecutions, it is expected to work closely with the prosecutor-general’s office. Several opposition MPs expressed concern that the N$1.5m allocated to the ACC for fiscal year 2005/06 (April- March) would be insufficient, and Mr Angula’s response that it was a starting- point would seem to imply that the government will allocate more next year.

A body to regulate parastatals Legislation establishing a new body to regulate Namibia’s 50-odd parastatal is to be set up organisations, the State-Owned Enterprises Council (SOEC), is to be submitted to the National Assembly during the current session, which ends in August 2005. The drafting of the SOEC bill is being co-ordinated by the fisheries and marine resources minister, Abraham Iyambo, who had been chairing the government committee on setting up what had previously been known as the Central Governance Agency. The new body will monitor the performance of parastatals, each of which will have to enter into a performance agreement setting out its management strategy. In practice, it would appear that the SOEC will have greater powers than previously proposed to intervene directly in the management of parastatals, as it will be able to specify the guidelines to be followed in declaring dividends, investing profits and incurring liabilities. This was a function previously exercised by the government-appointed boards of

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directors of parastatals, whose performance has suffered in recent years from the poor quality of many directors, appointed because of their connection with the ruling party, the South West Africa People’s Organisation (SWAPO), rather than on grounds of merit. Although the new approach may be necessary in the case of the badly managed and inefficient parastatals, such as the Social Security Commission, the roads authorities and the water utility, it is likely to impose an additional administrative burden on better-managed organisations such as the Namibia Power Corporation and the Namibian Ports Authority. However, Mr Pohamba has made it clear that he regards the existing management at most parastatals as not up to the job, and has pledged that only competent and skilled professionals will in future be appointed as chief executive officers and senior managers. Establishing a new body with wide powers is evidently seen as the best means of improving the efficiency of parastatals. These reforms form part of an overall strategy outlined by Mr Angula of making the whole public service an efficient and professional body, with the concept, novel for Namibia, of requiring civil servants to pass an exam before being promoted.

A campaign for a basic living A coalition of civil-society groups, including the Christian churches, non- grant has been launched governmental organisations, the National Union of Namibian Workers trade union federation and HIV/AIDS organisations, are supporting a campaign for the introduction of a basic income grant. The coalition, which formally launched its campaign in May, wants those below the pension age of 60 years who are unemployed or otherwise without a cash income to be paid a grant of at least N$100 (US$15) per month. Apart from the payment of government grants to groups with special needs, such as the disabled, orphans and old-age pensioners, social security provision is limited to those who have earned entitlement through contributions deducted from their wages, which leaves the estimated 76% of the population who live below the poverty line without any form of support. The coalition argues that the high level of unemployment and the prevalence of HIV/AIDS has created a poverty trap for most Namibians. It regards the payment of a basic grant not simply as a poverty-alleviation measure, but claims that if the poor are enabled to meet their basic needs, this would encourage them to seek financial independence. Some groups outside the coalition argue that the basic income grant would foster a culture of dependency, but the proposal appears to have considerable support within the government, although it dropped a similar scheme of its own on the grounds of cost some years ago. The prime minister has welcomed the campaign as a positive initiative in favour of the disadvantaged. However, Mr Angula has said that the idea requires further refinement and would need to be harmonised with existing social benefit schemes before it could become a practical proposition. As the government is committed to a fiscal strategy involving tight expenditure control and no provision for a basic income grant is included in spending plans for the next three years, it seems highly unlikely that one will be introduced in the near future. Indeed, in his response to the launching of the campaign for the grant, Mr Angula said that poverty reduction would best be achieved by policies aimed at overall economic growth.

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Germany offers €20m for a An offer by the German government to provide "20m (US$24m) over a ten- Herero conciliation fund year period (2006-15) for a “conciliation fund” has met with a mixed response in Namibia. The proposal to provide development assistance to all Namibian communities that suffered during the suppression of the Herero-led uprising against German colonial rule in 1904-08 was made at the end of May by Germany’s economic co-operation and development minister, Heidemarie Wieczorek-Zeul. At a commemoration of the centenary of the uprising, in August 2004, Mrs Wieczorek-Zeul had made Germany’s first formal apology for the brutal policies carried out by German military commander Lothar von Trotha (October 2004, The political scene). General von Trotha’s infamous “extermination order” resulted in the deaths of an estimated 65,000 Herero! about two-thirds of the tribe!and smaller numbers of Nama and Damara who had joined the uprising, a policy which Mrs Wieczorek-Zeul has acknowledged would today be regarded as genocide. The German government clearly wishes to resolve the issue. Although it has not seriously affected the close bilateral relations established with Namibia since independence, a mutually acceptable resolution would finally remove any grounds for future tensions.

The offer is rejected by the However, Germany’s refusal specifically to provide compensation!a word it main Herero leadership refuses to use!for the Herero remains a stumbling-block. The tribe’s paramount chief, Kuaima Riruako, who represents most of Namibia’s Herero community and who has been demanding that Germany pay formal compensation for its actions of a century ago, has dismissed the latest offer as a gesture that did not meet his people’s demand for reparations. Chief Riruako has demanded direct negotiations between Herero representatives and the German government, but the latter has insisted that discussions should be government-to-government. Other Namibians have been less hostile to the German initiative. The chairman of the National Preparatory Committee for the Commemoration of 1904 and head of Namibia’s large Evangelical Lutheran Church, Bishop Zephania Kameeta, and Mrs Wieczorek-Zeul were jointly awarded a prize by a German Church group for their work on German-Herero reconciliation. It was at the award ceremony in Düsseldorf that the German minister announced the offer of funding. A conciliation committee is being set up to include representatives of all the Namibian communities affected by the 1904-08 events, civil-society groups from both countries and government representatives. Chief Riruako may eventually be persuaded to co-operate, especially as in December 2004 the US Supreme Court refused to reinstate a US$2bn lawsuit by the Washington DC-registered Herero People’s Reparations Corporation against two German companies alleged to have collaborated in the repression of the Herero, which had been dismissed by a US lower court earlier last year.

Germany extends its military A new agreement signed at the end of June 2005, which extends Germany’s aid programme programme of military aid to the Namibia Defence Force (NDF) until 2008, is a further indication that both governments are committed to co-operation. Under the agreement, Germany is to supply "2.5m (US$3m) of military equipment, including armoured vehicles and ammunition disposal facilities, as well as assisting with driver training and helping to upgrade the NDF’s logistics system. At the signing of the agreement in Windhoek, the permanent secretary at the

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Ministry of Defence, Petrus Shivute, stated that since 1992 the NDF had received some N$100m of German-supplied equipment and that large numbers of military personnel had undergone training in Germany.

Land redistribution is to be The lands and resettlement minister, Jerry Ekandjo, told the National Assembly speeded up at the end of June that “innovative” (but unspecified) ways would be devised to accelerate the redistribution of land from white commercial farmers to disadvantaged black Namibians. He said that more officials would be allocated to land purchasing, but made no reference to new procedures for compulsory acquisition!indeed no new expropriation notices have been issued to white commercial farmers since Mr Pohamba became president. During his visit in mid-June to the US, Mr Pohamba assured the US president, George W Bush, and members of Congress that his government was committed to a land redistribution policy that is both legal and fair. However, the budget for the purchase of farms under the willing buyer-willing seller programme, which is continuing in parallel with the policy of selective expropriation (with compensation) is small. Only N$50m is earmarked for this purpose out of the Ministry of Lands and Resettlement’s N$138m total allocation for 2005/06. According to official data, since 1990 the government has bought 134 farms and resettled 37,100 of an estimated 243,000 “land-hungry” people. Most Namibians regard this as inadequate. However, the Namibia Agricultural Union (NAU), which represents most of the country’s 4,500 white!and several hundred black!commercial farmers, denies that this is due to farmers’ reluctance to offer farms for sale. It maintains that at least three times the number of farms bought by the government have been offered for sale. In parliament Mr Ekandjo acknowledged that redistribution was only part of a strategy to enable resettled farmers to make a success of their new holdings, a point many critics of the programme have been making for a long time. In a new initiative, other ministries!mainly the Ministry of Agriculture, Water and Forestry!are to be responsible for helping resettled families with farm infrastructure, agricultural management skills, water resources and other needs.

The land tax valuation roll has A final drive by the government to persuade farmers to provide their details for been completed entry on to the commercial farmland valuation roll, which is to provide the basis for levying the new land tax (October 2004, The political scene), appears to have been largely successful. Land tax assessments have been sent out, and the first payments!backdated to fiscal year 2004/05!are to be made during 2005/06. The tax is expected to raise N$28m, which is earmarked for spending on assisting resettled farmers. In April 2005 the government had warned the owners of some 1,000 farms on the valuation list of 12,000 properties that they faced a fine and imprisonment if the required information was not submitted. In fact, changes of ownership and wrong addresses seem to have accounted for most of the non-respondents, and the government valuer-general, Nashilongo Shivute, acknowledged that there did not appear to have been any attempt to withhold information. Many of the 1,000 properties are not commercial farms in the conventional sense, being mainly smallholdings, often only around a hectare in size and located on the outskirts of towns, a high proportion of them owned by government and parastatal officials.

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Economic policy

The budget deficit is projected The budget for fiscal year 2005/06 (April-March), presented to parliament by to fall to 1.2% of GDP the finance minister, Saara Kuugongelwa-Amadhila on May 12th, represented a determined effort to get the government’s fiscal strategy back on track, following two years of weak performance. In her budget speech, the minister pledged that fiscal solvency would be attained by enforcing tighter spending controls, new tax measures and improvements in tax collection. Spending discipline is to be maintained through programme budgeting, under which expenditure ceilings for individual ministries are to be set on the basis of medium-term plans. As a result of these measures, Mrs Kuugongelwa-Amadhila forecast a reduction in the budget deficit to N$449m (US$64m; 1.2% of GDP) for the current fiscal year, down from an estimated N$872m (2.4% of GDP) in 2004/05. Despite the finance minister’s reiteration of the government’s commitment to poverty reduction, there was little in the budget for the majority of poor Namibians, who will be the hardest hit by increases in alcohol and tobacco excise duties. Because no additional budget was tabled in 2004 (January 2005, Economic policy), the documents accompanying the 2005/06 budget give only the original spending and revenue estimates for 2004/05, rather than the revised figures. Without figures for the outturn in 2004/05, which may not be published until the next budget is tabled in 2006, it is difficult to assess the 2005/06 spending and revenue estimates.

Revenue is set to rise by a Total revenue is forecast at N$12.4bn in 2005/06, an increase of only 2% in modest 2% nominal terms over the original estimate for 2004/05. After allowing for inflation at the 2% year-on-year average for January-May 2005, this represents a zero increase in real terms. But because the 2004/05 budget deficit is stated to have been higher than the original budget figure, actual revenue receipts were almost certainly less than projected. In consequence, the true revenue increase in 2005/06!to come mainly from higher income tax and value-added tax (VAT) receipts, including the additional funds provided by new taxes and the rise in excise duties!is probably higher than indicated by comparison with the 2004/05 original estimates. The new tax measures comprise the following: • the reintroduction of a 30% rate of VAT on (unspecified) luxury items; • ending the exemption from income tax of unit trusts; • disallowing the offsetting of losses, from such activities as farming and the letting of residential property, against salary income; and • the introduction of an environmental tax!both to discourage activities that are harmful to the environment and to raise revenue (though no details of this are available. Puzzlingly, diamond royalties are projected to decline by more than 50% in 2005/06. As these are collected on the gross value of sales, and as diamond output and prices rose substantially in 2004, actual receipts are likely to have been above target in 2004/05. The Economist Intelligence Unit expects them to remain around the same level in 2005/06, at N$600m-650m. However, even if

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diamond royalties come in well above the forecast, this would not fully offset the projected decline in customs receipts by some N$500m in 2005/06. The fall reflects the impact of the new Southern African Customs Union (SACU) revenue-sharing formula which came into effect in 2004, although Namibia is due to benefit from transitional adjustments to its share of receipts in 2006/07.

Government finances (fiscal years Apr-Mar; N$ m unless otherwise indicated) 2004/05a 2005/06a % change Tax revenue 10,902 11,355 4.2 Income tax on individuals 2,556 3,166 23.9 Diamond mining 52 48 -7.7 Non-mining companies 894 1,063 18.9 Value-added tax 2,678 2,820 5.3 Customs & excise 4,207 3,729 -11.4 Non-tax revenue 1,085 817 -24.7 Diamond royalties 500 242 -51.6 External grants 81 153 88.9 Total revenue incl others 12,104 12,354 2.1 Recurrent expenditure 10,589 11,006 3.9 Personnel 5,304 5,534 4.3 Capital expenditure 2,169 1,797 -17.2 Lending & equity participation 366 208 -43.2 Total expenditure 12,758 12,803 0.4 Overall balance -654 -449 -31.3 % of GDP -1.6 -1.2 – a Budget estimates. Source: Ministry of Finance, Estimate of Revenue and Expenditure for the Financial Year 1 April 2005-31 March 2006.

Expenditure is projected to fall It would be unprecedented if the government met the expenditure projections in real terms set out in the budget, both for the current fiscal year and for the following two fiscal years under the three-year Medium Term Expenditure Framework (MTEF) for 2005/06-2007/08, which was published at the same time as the budget speech. Most independent economists are sceptical that the tight spending ceilings set by Mrs Kuugongelwa-Amadhila can be met, even allowing for the benefits of the new budget-management system. The projected rise in expenditure is less than 1%, equivalent to a cut of just over 1% in real terms, although recurrent spending, which includes the public-sector wage bill, is projected to rise by 4%, or about half that in real terms. On past performance, expenditure in 2004/05 is likely to have exceeded its budget projection and, if so, the actual spending reduction proposed for 2005/06 would be an exceptionally challenging target.

The main exception is defence Education and health will continue to receive the largest spending allocations spending in 2005/06, though the education budget has been cut in real terms. However, the apparent sharp cut in the health budget is due to the transfer of responsibility for large social service payments to the new Ministry of Labour and Social Welfare: core spending on hospitals and clinics is up by 7% in nominal terms. But a reduced allocation for the police, equivalent to a 5% cut in real terms, has attracted criticism as the force is under-resourced and struggling against rising crime, especially violent crime in township areas. In contrast,

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defence spending has been raised by about 10% in real terms; the only other sizeable increase is for agriculture. The new defence minister, Charles Namoloh, who took up his post only in May 2005 as one of the six non-voting MPs appointed by Mr Pohamba, has vigorously defended the spending boost as essential for upgrading military bases and for the purchase of new equipment for the Namibia Defence Force.

Main expenditure allocations (Fiscal years Apr-Mar; N$ m unless otherwise indicated) 2004/05a 2005/06a % change Education 2,799 2,784 -0.5 Financeb 2,444 2,346 -4.0 Healthc 1,709 1,309 -23.4 Defence 1,088 1,220 12.1 Police 752 732 -2.7 Agriculture 552 669 21.2 a Budget estimates. b Includes servicing of domestic and foreign debt. c The 2004/05 allocation included a large provision for social security payments. Source: Ministry of Finance, Estimate of Revenue and Expenditure for the Financial Year 1 April 2005-31 March 2006.

A 17% decrease in capital spending is partly due to a welcome decrease in government subsidies for parastatals; the subsidy paid to Air Namibia is cut by almost two-thirds to N$116m. In contrast, a further N$100m has been provided for the large new presidential complex under construction by North Korean firms in the Aus Mountains south-east of the capital, Windhoek. This is being officially justified as a project of national importance, although it has no obvious social or economic benefits.

The first ever budget surplus is A much sharper revenue increase is projected for 2006/07, which, combined projected for 2006/07 with a minimal increase in total spending, is expected to produce Namibia’s first budget surplus. A further, though smaller, budget surplus is forecast for 2007/08. If these were achieved, the government’s budgetary position would be transformed, allowing it to borrow less, make larger net repayments of debt and reduce outstanding debt stocks by the end of the MTEF. However, there is almost no latitude for slippage in the finance ministry#s projections, particularly on the expenditure side, and external factors, such as a further period of exchange-rate volatility, could necessitate substantial revisions to the projections. The MTEF figures are at current prices, which means that the expenditure targets are even more challenging than they would appear, as in real terms, after stripping out inflation, total spending would have to fall in 2006/07 and also, more sharply, in 2007/08. The 2006/07 revenue forecast is largely dependent on the projected 15% increase in SACU receipts caused mainly by transitional adjustments in Namibia’s favour. However, in 2007/08, when customs revenue is expected to fall back again, there is virtually no such leeway as overall revenue is forecast to decline slightly. This means that even a relatively small spending overshoot would push the budget back into deficit again. Expenditure is projected at virtually the same level as in 2006/07, equivalent to at least a 2% cut in real terms. With capital spending set to rise in 2007/08, the government’s programme budgeting

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initiative will need to be exceptionally successful in controlling departmental recurrent spending if the overall target is to be met. Development spending during 2005/06-2007/08 will actually be considerably higher, as the MTEF figures exclude N$1.1bn in extra-budgetary foreign loans. Of that, N$474m is for several road improvement projects, the biggest of which is the tarring of the Aus-Rosh Pinah road; N$246m is for airport upgrading, particularly at Walvis Bay; and N$191m is for crop irrigation projects at Tandjieskoppe in the extreme south and the “green scheme” along the Okavango River in the north.

Revenue and expenditure projections (fiscal years Apr-Mar; N$ m unless otherwise indicated; current prices) 2005/06 2006/07 % change 2007/08 % change Revenue 12,354 13,484 9.1 13,390 -0.7 Income taxes 4,386 4,657 6.2 5,022 7.8 Customs revenue 3,728 4,300 15.3 3,900 -9.3 Expenditure 12,803 12,972 1.3 12,995 0.2 Current 11,214 11,378 1.5 11,359 0.2 Capital 1,589 1,594 0.3 1,636 2.6 Balance -449 512 – 394 –

Source: Ministry of Finance, Medium Term Expenditure Framework for 2005/06-2007/08.

The borrowing requirement Should the government manage to adhere to the fiscal targets in the MTEF, its would disappear present borrowing requirement would be transformed into a net surplus, enabling larger repayments of principal domestic debt and leading to a net reduction in outstanding liabilities of N$200m over the period. In 2005/06 the borrowing requirement is estimated at N$907m: nearly two-thirds to be raised by further issues of government bonds and the remainder by a net increase in external borrowing. In the following two years a negative borrowing requirement is forecast, as the projected budget surplus exceeds the value of extra-budgetary foreign loans, enabling net repayments of domestic debt, in particular bonds. Central government debt stocks, after factoring in the impact of foreign debt exchange-rate depreciation (the basis of calculation for which is not disclosed), would continue to rise, but far more slowly than in recent years.

Government financing operations (fiscal years Apr-Mar; N$ m; current prices) 2005/06a 2006/07a 2007/08a Budget balance -449 512 394 Extra-budgetary foreign loans -458 -436 -232 Borrowing requirement 907 -76 -163 Treasury billsb -65 -170 67 Bondsb 587 -244 -348 Foreign loans 385 338 119 Change in foreign debt due to exchange rate -133 194 227 Change in debt stock 774 118 64 a Projections. b – denotes reduction in stock. Source: Ministry of Finance, Medium Term Expenditure Framework for 2005/06-2007/08.

Government debt is projected If such substantial amounts of public debt are repaid over the MTEF period, the to fall below 30% of GDP central government debt/GDP ratio will fall to a more sustainable level. From a peak of 33.5% at the end of 2004/05, the debt/GDP ratio is projected to fall to

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27.6% by the end of 2007/08. However, as it seems unlikely that the MTEF’s tight fiscal targets will be fully met, we expect that the amount of debt repaid will be less than officially projected and that the debt/GDP ratio will decline more moderately, to only just below 30% by the end of 2007/08.

Central government debt (fiscal years Apr-Mar; N$ bn unless otherwise indicated; end-period) 2003/04a 2004/05b 2005/06c 2006/07c 2007/08c Domestic debt 8,606 10,013 n/a n/a n/a Foreign debt 1,607 1,986 n/a n/a n/a Total debt 10,213 11,999 12,773 12,890 12,955 % of GDP 31.0 33.5 32.8 30.2 27.6 a Actual. b Estimates. c Projections. Source: Ministry of Finance, Medium Term Expenditure Framework for 2005/06-2007/08.

The domestic economy

Economic trends

Real GDP growth is forecast to According to projections from the Ministry of Finance, published in its Medium average 3.6% in 2005-07 Term Expenditure Framework for 2005/06-2007/08 at the same time as the budget in May, real GDP growth will average just 3.6% over the next three years, below its estimate of 4.4% growth in 2004 and only just above the 3.5% average growth in 2002-04. The Economist Intelligence Unit believes that the estimate for last year, published by the Bank of Namibia (the central bank) in its recent Annual Report, and the projected growth rates are on the low side. We expect that the 2004 national accounts, which are due to be published by the Central Bureau of Statistics later this year, will show growth of nearly 5%.

Gross domestic product (% real change, year on year) 2004a 2005b 2006b 2007b Primary sector 11.2 2.1 3.3 3.5 Agriculture 1.8 3.0 3.3 3.5 Fishing -9.6 0.3 4.5 4.1 Mining 32.3 2.4 2.8 3.2 Secondary sector 3.4 5.5 5.0 4.7 Manufacturing 2.4 5.1 5.1 5.3 Construction 4.0 5.7 3.5 3.4 Electricity & water 9.2 8.2 7.5 3.1 Tertiary sector 3.5 3.9 3.5 3.8 Wholesale & retail trade 5.4 5.2 4.4 4.4 Hotels & restaurants 3.1 4.3 4.5 4.6 Transport & communications 7.5 7.2 3.6 3.6 Financial intermediation 1.9 3.0 2.5 3.7 Real estate & business services 3.8 4.5 3.0 3.0 Government services 1.5 2.0 2.5 3.2 Total GDP 4.4 3.8 3.5 3.6 a Estimates. b Projections. Sources: Bank of Namibia, Annual Report; Ministry of Finance, Medium Term Expenditure Framework for 2005/06-2007/08.

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The Bank of Namibia’s 2004 estimate does not seem to have fully captured the value-added impact of substantially higher zinc metal output by the Skorpion mine and refinery. Refined metal output is classified as a manufacturing activity by the central bank, and Skorpion produced just over 119,000 tonnes last year, more than double the 47,000 tonnes produced in 2003. Yet manufacturing output is estimated to have expanded by only 2.4% in 2004, less than half the growth rate recorded in the previous year. This seems too conservative an assumption, even allowing for the sharp fall in processed fish output.

The fastest growth is expected The secondary sector is projected to grow by an average of 5.1% in 2005-07 in the secondary sector (largely owing to 5.2% growth in manufacturing), the primary sector by 3% and the tertiary sector by 3.7%. The underlying assumptions for these forecasts have not been published, although a recovery in manufacturing output would seem probable this year, when Skorpion is expected to reach capacity production. However, as fish processing is not expected to recover until 2006 at the earliest, owing to low domestic catches and weak international markets, and as the textiles subsector will contract, following the closure of a factory in early 2005, a manufacturing growth rate lower than that projected by the government is probable. In contrast, growth in the construction sector is likely to be above the 4.2% forecast average, because of continuing work on the northern railway extension project and the prospect of two major developments, the Kudu gas- to-power project and a second uranium mine at Langer Heinrich, both starting in 2005-06. In consequence, we expect overall growth in the secondary sector to be roughly in line with the official projection. In the tertiary sector, the projected growth rates for transport and communications and wholesale and retail trade!averaging just under 5% in each case!appear rather high. On the other hand, the projection of slower, but steady growth for hotels and restaurants, a proxy for the tourist industry, would seem realistic, especially as the forecast depreciation of the Namibia dollar will make the country more attractive to foreign tourists. The government’s growth projection for the primary sector, mainly that of the mining subsector, appears too low. Demand for metals is expected to remain strong during 2005-06, and offshore diamond output is likely to continue expanding over the period. The recent formal approval for the Langer Heinrich uranium mine (see Mining) should boost mining output substantially during 2006-07. We expect mining sector growth to average 6-8% over the period, more than double the official forecast.

Consumer prices, 2005 (Namibia Consumer Price Index; % change, year on year) Jan Feb Mar Apr May Jan-May Food 1.2 1.1 0.2 0.7 -1.8 0.3 Housing & utilities 2.7 1.5 0.8 0.6 0.5 1.2 Transport 7.2 7.5 6.4 4.1 5.3 6.1 All items incl others 2.5 2.6 1.7 1.6 0.9 1.9 Goods 1.9 0.6 0.9 0.5 -0.4 0.7 Services 3.3 5.4 2.6 3.0 2.7 3.4

Source: Central Bureau of Statistics.

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Inflation continues to fall The year-on-year inflation rate fell to 0.9% in May 2005!the lowest so far this year!mainly because of a 1.8% decline in food prices. Year-on-year inflation was 1.6% in April, when food prices rose by 0.7%. As food has the heaviest weighting in the Namibia Consumer Price Index, of just under 30%, its negative inflation rate in May more than offset higher transport prices, which have a much lower weighting of 15%. The government raised fuel prices by around 11% at the end of April!the first increase since July 2004!to offset the strength of crude oil prices, which had risen well above Namibia’s import parity prices. This clearly took some time to feed through to the retail level, the main impact being on the cost of transport services. In contrast, the household sub-index, which includes the cost of electricity, gas and other fuels used for domestic purposes, recorded slightly lower inflation in May. The disparity between the inflation rate for goods and that for services has widened further. The price of goods declined by 0.4% in May and the price of services rose by 2.7%!a difference of just over 3 percentage points, compared with 1.4 percentage points in January 2005.

Inflation should remain low As year-on-year inflation averaged only 1.9% during January-May 2005 and the unless the rand depreciates South African rand, to which the Namibia dollar is pegged, has depreciated by only a modest amount against the US dollar so far this year, a sharp upturn in inflation is unlikely in the short term. The crucial equation will be the balance between crude oil prices and the rand:US dollar exchange rate. If the rand depreciates by more than the modest amount we currently forecast but oil prices reach new highs, inflation will rise in South Africa, which will quickly translate into higher inflation in Namibia. The sharp slowdown in Namibian inflation since the start of 2005 is mainly due to static or lower prices for goods imported from South Africa. This favourable situation will be significantly altered if the rand depreciates more heavily than we expect. On the domestic front, the Electricity Control Board has approved a 6% across- the-board increase in bulk electricity tariffs!far below the rises of up to 20% requested by the Namibia Power Corporation!which took effect on July 1st. The inflationary impact will depend on how much of the increase is passed on to customers: municipalities are almost bound to raise charges to householders, although industrial users are expected to absorb most of the extra cost. But the overall effect is likely to be limited and, provided the rand depreciates at only a modest rate, average inflation is unlikely to exceed 4% in 2005.

Mining

Payment of non-diamond- The government’s decision at the end of 2004 to require all non-diamond- mining royalties is suspended mining companies to pay royalties was, unsurprisingly, greeted with dismay by the industry, and their introduction was formally suspended by the mines and energy minister, Erkki Nghimtina, in May 2005, pending further consultations between the government and the Chamber of Mines of Namibia. Despite the announcement of several new tax measures in the budget (see Economic policy), the royalties issue was not mentioned, though during the budget debate in the National Assembly, the finance minister, Saara Kuugongelwa-Amadhila,

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said that it was “not unreasonable” to expect mining firms to pay additional revenue to the government. The Minerals (Prospecting and Mining) Act of 1992, which is due to be replaced by a new act with broadly the same provisions later in 2005, provides for the payment of royalties on all unprocessed mineral products. However, until now they have been levied only on diamonds. This is because there was already a 10% diamond export duty in place when the 1992 act came into force, and its replacement by a royalty at the same rate was acceptable to De Beers, which then owned 100% of Consolidated Diamond Mines (CDM), the predecessor of Namdeb Diamond Corporation, the 50:50 joint-venture partnership between the government and De Beers which was established in 1994.

Payments were aimed at The provision for non-diamond royalty payments!at an ad valorem rate of 5% encouraging beneficiation for precious metals and uranium, and 4% for all other metallic and industrial minerals!had remained dormant because, under the 1992 act, royalties would be levied only on unprocessed minerals that could be economically processed in Namibia, an encouragement to producers to consider beneficiation. When the previous mines and energy minister, Nickey Iyambo, published a regulation imposing the royalties at the end of 2004, this was understood to have been a response to the Ministry of Finance’s instruction to all ministries to look for ways of raising additional revenue. But only when Mr Iyambo sent letters to non-diamond-mining companies in early 2005, informing them that the royalties were to be levied with effect from December 1st 2004, did the industry became fully aware of the decision.

Some firms may be hard The government’s decision to require the payment of non-diamond royalties pressed to pay royalties appears to have been taken without considering the financial effect on mining companies, which have been struggling to cope with the appreciation of the Namibia dollar during the past two years. Currency appreciation has more than offset the effect of higher world commodity prices, resulting in lower earnings in local-currency terms. In fact, most non-diamond mines have paid little income tax in recent years. Rössing uranium mine made losses in 2003 and 2004, and royalty payments might jeopardise its current plans to extend mining for a further 12 years or so. Other mining firms, including the locally owned Ongopolo Mining and Processing, which operates the Tsumeb copper smelter, and Okorusu Fluorspar, a subsidiary of Belgium’s Solvay, have been operating at the margins of profitability, despite substantially increasing their production last year. Some producers, Rössing in particular, are expected to contend that, as they carry out as much processing of the minerals they extract as is economically viable, they should be exempt from royalty payments.

Negotiations will start soon on The government and De Beers are gearing up for the start of negotiations on a a new contract with De Beers new sales agreement between Namdeb and De Beers’ London-based Diamond Trading Company (DTC). Under the existing five-year contract, which is due to end later this year, all of Namdeb’s rough diamond production is sold by the DTC, which earns a 10% commission. De Beers is expected to come under pressure to change the arrangement. Draft guidelines for the negotiations adopted in 2004 (July 2004, Economic policy) include the goal of maximising

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the value added of Namibia’s diamonds by local processing, which will be strongly supported by the new mines and energy minister, Mr Nghimtina, who has stated that the government will insist on some degree of local processing when considering applications for new mining licences. The willingness of Israeli diamond magnate Lev Leviev to invest in a modern diamond-cutting and polishing plant in Windhoek (July 2004, The domestic economy: Mining), has been compared favourably with De Beers’ long-standing policy of shipping all rough diamonds produced by Namdeb for marketing in London, rather than diverting some of its output to local processing factories. During visits in April to the Leviev Group’s factory, LLD Diamonds Namibia, which opened in mid- 2004, both the president, Hifikepunye Pohamba, and the prime minister, Nahas Angula, made clear that the government views local processing of Namibia’s diamonds as the way forward for the country’s industry. The government may in fact be pushing at an open door, as De Beers appears to have embraced the concept of greater local processing by the region’s diamond producers. The negotiations completed at the end of 2004 on the renewal of the diamond-mining licences held by Debswana!the 50:50 joint venture between De Beers and the Botswana government, which is responsible for all Botswana’s rough diamond output!included provision for the establishment of a joint-venture marketing firm, DTC Botswana. Many of the DTC’s London-based diamond-buying team are being transferred to the region, and a proportion of the sales of Botswana’s diamonds will in future be held in the country’s capital, Gaborone. However, De Beers would resist any proposal by the government that a proportion of Namdeb’s output!a figure of 5-10% has been mentioned!should be reserved for local cutting factories. De Beers is expected to suggest a similar arrangement to that agreed with Botswana, with a DTC Namibia to be set up for overall marketing, while opposing direct sales of Namdeb output to the Leviev Group, a commercial rival.

Rössing is to continue mining The possible closure of the Rössing uranium mine in two years’ time appears to until 2009 have been averted, following the adoption of a new company plan for 2005-09, provided that the government’s decision to levy royalties on non-diamond- mining companies does not upset Rössing Uranium’s financial calculations (April 2005, The domestic economy: Mining). The new “Phase 1” plan was approved by Rössing’s board of directors (which includes a government representative), which means that mining at the existing open pit will continue until at least 2009, rather than ending in 2007 as had been envisaged. The decision will at least defer the redundancy of Rössing’s 800 employees. The mine is situated in a remote area of the Namib Desert, inland from Swakopmund, and the nearest town of Arandis is almost wholly dependent on it: redundant mineworkers would have had little prospect of finding new jobs. The key factor enabling operations to be extended for two years was a recent technical assessment, which determined that it would be safe to mine ore reserves within the current pit area that had previously been deemed unsafe.

There may be a further In fact, mining at Rössing may continue for an additional eight years or so, until extension 2016-17, provided that a number of technical problems can be resolved. As the Rio Tinto group, Rössing’s majority shareholder, has huge technical resources to

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call on, these are unlikely to prove insoluble. A further extension would take place under the “Phase 3” mining plan (a proposed “Phase 2” development has been abandoned because of the cost of removing a large volume of waste material to expose the uranium-bearing ore). Instead, under “Phase 3”, a higher- grade portion of the ore body located at depth within the existing pit would be mined, although as this contains a high marble content, an economical leaching process to extract the uranium-bearing material would have to be devised. Rössing also aims to improve its finances by producing more than is required to meet existing sales commitments. Although the spot price of uranium has soared in the past 18 months, reaching US$29/lb mid-May 2005, the highest level for 25 years, this has been of little direct benefit to Rössing as its uranium is sold under long-term contracts at fixed prices. According to Rössing’s managing director, Mike Leech, surplus uranium would be sold at the higher spot prices, thereby generating additional cashflow.

Paladin is to proceed with the Australia’s Paladin Resources confirmed in May 2005 that it would go ahead Langer Heinrich mine with the development of a uranium mine at the Langer Heinrich deposit, 80 km east of Walvis Bay and to the south-east of the Rössing mine (April 2005, The domestic economy: Mining). The decision followed a bankable feasibility study, which confirmed the financial and technical viability of a conventional open-pit mine producing 1,180 tonnes per year of uranium oxide with an operating life of 15 years. As Rössing is set to remain open until at least 2009, Namibia could have two uranium mines in operation for the first time by the end of 2006, producing some 4,500 tonnes per year between them. This would make Namibia the world’s fourth-largest uranium producer (after Canada, Australia and Kazakhstan), replacing Niger. Paladin expects the government to approve its application for a 25-year mining grant soon, and plans to start construction work later in 2005. The start of production is projected for September 2006. Langer Heinrich is expected to prove highly profitable; the deposit is of higher grade than that at Rössing. A uranium price of US$26-35/lb over 15 years has been assumed, compared with estimated operating costs of US$11.5-12/lb. Unlike Rössing, Paladin will benefit from the high prevailing uranium spot- market prices when negotiating long-term supply contracts with nuclear power companies. Its financial calculations include the government’s 5% mining royalty and so, if this should be enforced, there would be no impact on Langer Heinrich’s development. Paladin plans to raise the US$92m capital cost of establishing the mine by issuing equity capital and through borrowing, though as a mining junior with no producing assets it may enter into partnership with a bigger company.

Energy

Electricity consumption rises According to the Namibia Power Corporation (Nampower) in its Annual Report sharply in 2004 for 2004, electricity sales rose by a record 24% in its financial year 2003/04 (July-June). The increase stemmed mainly from a sixfold rise in consumption by the Skorpion zinc mine and refinery, which accounted for 17% of Nampower’s sales. The increase in consumption by Skorpion, which reached near-capacity

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production levels, also caused a sharp rise in the maximum hourly demand on Namibia’s national grid. Excluding Skorpion, domestic demand rose by 9% in 2003/04, almost double the increase of the previous year. In 2003/04 some 48% of Nampower’s supply was provided by imports from South Africa’s Electricity Supply Commission (Eskom), and 47% from domestic generating capacity (mainly the Ruacana hydropower station on the Kunene River). The balance was imported directly from Zambia and Zimbabwe and through the short-term energy trading market (STEM) of the Southern African Power Pool (SAPP).

Electricity sales (gwh unless otherwise indicated; financial years Jul-Jun) 2002/03 2003/04 % change Domestic consumers 2,193 2,772 26.4 Skorpion mine & refinery 76 471 519.7 Angola 10 12 20.0 Botswana 7 8 14.3 Eskom 36 3 -91.7 Total 2,246 2,795 24.4 Maximum hourly demand (mw) 371 461 24.3

Source: Nampower, Annual Report, 2004.

The sustained growth in domestic demand, combined with the higher prices expected to be introduced by Eskom in 2006 and the prospect of a regional power shortage in the next few years, has made additional domestic generating capacity an increasingly urgent necessity. Expanding Ruacana’s 240-mw capacity is not feasible as the existing reservoir cannot be enlarged. Moreover, the continuity of supply is affected by seasonal variations in river flow, as controlling weirs and dams upriver in Angola have yet to be fully repaired.

Completion of the Kudu gas- The Kudu power project!for piping gas from an offshore gasfield to an onshore to-power project is vital power station (April 2005, The domestic economy: Oil and gas)!is now considered essential for providing additional generating capacity. The Kudu gasfield, a 90% stake in which was acquired by an Irish company, Tullow Oil, in 2004 (July 2004, The domestic economy: Energy), would supply an 800-mw combined-cycle gas turbine plant at Oranjemund, and both developments are currently scheduled to come into production in 2009. The power station’s capacity would be sufficient to meet forecast domestic demand, including that of possible new industries with a high energy demand, and provide a surplus for export to South Africa. Nampower intends to operate the plant, initially with the assistance of a qualified international partner, and will need to raise new external loans to finance its share of the construction cost (see Foreign trade and payments). Seven international firms and consortia were pre- qualified by Nampower earlier this year for the power plant engineering, procurement and construction turnkey tender, including France-based Alstom, Fluor South Africa, General Electric of the US, Mitsubishi of Japan, and SNC- Lavalin of Canada. A final investment decision on developing the Kudu gasfield is due to be taken by Tullow Oil in early 2006, and in April the company commissioned Woodhill Frontier and J P Kenny, subsidiaries of the London- based John Wood Group, to carry out a full-scale design study for the production facilities and pipeline.

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Fishing

Relief measures for fishermen A package of temporary relief measures for the fishing industry announced in may prove inadequate April by the fisheries and marine resources minister, Abraham Iyambo, is likely to prove inadequate to restore financial solvency and prevent more companies from going bankrupt (April 2005, The domestic economy: Fishing). Indeed, only two months later, in mid-June 2005, one of the country’s oldest fishing firms, Namibian Fishing Industries (Namfish), a company established in 1947 and listed on the Namibian Stock Exchange in 1992, was placed under provisional liquidation. The company’s liquidation application stated that it was unable to continue operating owing to sustained losses and unpayable debts to banks. The current downturn in the industry’s fortunes is the worst since Namibia gained independence in 1990, and has arisen through a combination of low and erratic catch volumes, reduced export prices, and higher operating costs stemming from the appreciation of the Namibia dollar over the past two years. Announcing his measures, Mr Iyambo stressed that budgetary constraints meant that the government could not agree to many of the proposals made by the Confederation of Namibian Fishing Associations (CNFA) at the beginning of 2005. This left many fishing companies, especially those involved in catching and processing hake and pilchard, disappointed by the limited scope of the relief package. Mr Iyambo also emphasised that scientifically established fishing resource limits, rather than the commercial needs of fishing firms, would continue to determine the quotas imposed by the government. The chief concession comprised a 5% reduction in quota fees during the current fishing season (which varies according to fish species), although only on condition that all outstanding amounts owed since 2000 are paid, with a deferred payment scheme for the 2001-04 seasons. In addition, hake fishermen may apply to land up to 25% of their wet hake quota (which is landed for onshore processing) as frozen hake during the 2005/06 season, on condition that no job losses are incurred onshore.

Most of the industry’s requests Relief measures proposed by the industry included a full exemption from quota for assistance are rejected levies during the current and next fishing seasons for both caught and uncaught hake, monk, small and large pelagic fish, rock lobster and crab, the waiving of outstanding levies on uncaught fish, and a small fuel rebate. The industry’s annual fuel consumption is 164m tonnes, and a general increase in the price of petroleum products announced at the end of April, after the announcement of the relief package, has put further pressure on company margins. Mr Iyambo justified the retention of levy payments on uncaught quotas!long a bugbear of the industry!on the grounds that quota-holding firms could avoid these by surrendering uncaught quota entitlements before the end of the relevant season. However, this is regarded by fishing companies as impractical as shoals often suddenly appear towards the end of the season, enabling the quota to be filled during the season’s last few weeks. Allowing 25% of a wet hake quota to be converted to frozen hake is also seen as of only limited benefit, as most wet hake quota holders do not have access to the more costly freezer trawlers. To take advantage, a company would have to sell part of its quota to another firm, a practice that Mr Iyambo has said is unacceptable.

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The minister criticises fishing Mr Iyambo coupled his relief package announcement with trenchant criticism companies of the industry’s performance. Much of this would appear to be justified, in particular the failure by most firms to take full account in their business plans of the sector’s cyclical nature and its exceptional vulnerability to environmental and external factors, as well as inadequate marketing. Mr Iyambo attributed the age of the fishing fleet and resulting high maintenance costs to “inadequate investments by some in the industry when times were more profitable”. He also criticised some common practices by the 38 current hake quota holders, especially the deliberate over-catching by some and under-catching by others, and also the practice of selling on quotas for “usage” fees. It seems inevitable that there will be considerable restructuring by firms that survive the crisis. It has become evident that many of the industry’s problems relate to more fundamental weaknesses, including inadequate capital, top-heavy management and paying excessive dividends to shareholders rather than retaining profits for investment. No figures for the 2004 fish catch have yet been published, but it is certain to have fallen from the 631,000 tonnes caught in 2003.

“Namibianisation” of the Some of these weaknesses may have been exacerbated by the way the industry is a mixed blessing “Namibianisation” (localisation) policy pursued by the government since the early 1990s, an early form of black economic empowerment, has been put into practice. The policy has been a success in many respects, notably in expanding employment by promoting investment in shore-based processing facilities and by widening ownership through the establishment of joint ventures between local partners and existing, mainly South African, fishing companies, as well as with new, mainly Spanish, investors. This has brought into the sector a number of small “new entrant” firms, a larger proportion of vessel crews are now locals, and most of the fishing fleet has been reflagged as Namibian. But, in some instances, the role of Namibian partners in fishing joint ventures appears to be limited to securing the allocation of quotas, some of which, as Mr Iyambo has acknowledged, are then sold on to third parties. In addition, several legal disputes between competing groups of “new entrant” shareholders in recent years have uncovered a welter of irregular payments, many of which are to individuals who are not formally registered as shareholders.

The total allowable catch for Although the total allowable catch (tac) for hake in the 2005/06 season (May- hake is cut by 10,000 tonnes April) has been cut by 10,000 tonnes to 180,000 tonnes, the reduction is less than some fishing companies had expected. Industry sources estimate that as much as 20% of the 190,000-tonne tac for 2004/05 went uncaught, as so many firms had halted operations because of financial difficulties; in addition, much of the catch consisted of smaller fish than normal. The Ministry of Fisheries and Marine Resources is conducting studies on new hake fishery management policies. Among the options being considered are a closed period of two to three months when catches are traditionally low; closing off areas where small hake shoals congregate; and zones reserved for wet-fish trawling only. Despite its problems, the fishing sector is continuing to attract investment. In May 2005 Corvima Fishing, a subsidiary of Spain’s Corvima Group, opened a new N$10m (US$1.7m) hake-processing plant for long-line fish in Walvis Bay. According to provisional official figures, Namibia remained the top supplier of

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hake to the EU!mainly to Spain!in 2004, exporting some 80,000 tonnes, worth N$1.2bn (US$186m).

Foreign trade and payments

Foreign debt increases Namibia’s medium- and long-term foreign debt in all categories!government, modestly in 2004 parastatal and private!totalled US$1.13m at end-December 2004, 13% higher than a year earlier, according to provisional figures published in the Bank of Namibia’s Annual Report for 2004, with revisions to government debt in the bank’s Quarterly Bulletin for June 2005. The increase was much smaller than the massive 224% expansion in foreign debt (in US-dollar terms) recorded in 2003, which arose largely from improved recording of private-sector debt, and was in any case entirely due to the Namibia dollar’s appreciation against the US currency over the period!from an average of N$7.56:US$1 in 2003 to N$6.45:US$1 in 2004. In Namibia-dollar terms, outstanding foreign debt fell by almost 5% to N$6.4bn at end-2004. As only a small part of Namibia’s foreign debt is denominated in US dollars, the trend in local-currency terms may be a better indicator of the change in foreign debt stock. A breakdown of all three external debt categories by currency composition is not available, but at end- 2004 the euro accounted for 54% of central government foreign debt, the rand (which carries no exchange-rate risk) 22%, the Chinese renminbi 13% and the US dollar only 6%. Although a larger proportion of total foreign debt is likely to be held in US dollars, the share is unlikely to exceed 20-25%, as most private and parastatal debt comprises loans from European, South African and African regional financial institutions.

External debt (N$ m unless otherwise indicated) 2003a 2004a % change Total debtb 6,693 6,378 -4.7 US$ m 999 1,131 13.1 Central government 1,601 1,917 19.7 Parastatals 1,491 1,341 -10.1 Private sector 3,600 3,120 -13.3 Debt/GDP (%) 20.7 17.9 -15.0 Debt service 739 1,042 41.0 US$ m 98 162 65.3 Central government 88 113 28.4 Parastatals 400 448 12.0 Private sector 251 481 91.6 Debt service/exports ratio (%) 7.8 9.0 15.4 a Provisional. b Excludes short-term debt Sources: Bank of Namibia, Annual Report; Quarterly Bulletin.

Non-government debt falls in In 2004 parastatal and private foreign debt rose by 4% in US-dollar terms to local-currency terms US$791m. However, in local-currency terms, outstanding liabilities owed by both sectors decreased by 12%, which the central bank attributed to larger repayments of principal debt following the expiry of the grace period of a number of loans. This brought their combined share of total foreign debt down to 70%, from 76% in 2003. In contrast, new borrowing and drawdowns from

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existing loans caused an increase in central government foreign debt, by 42% in US-dollar terms, although the increase in Namibia dollars was only 20%. Because of the higher level of debt repayments in 2004, debt service (which includes both principal and interest payments) increased by 41% in local- currency terms (65% in US-dollar terms). As a ratio of GDP, foreign debt fell to 17.9% at end-2004, down by almost 3 percentage points on a year earlier, though the debt-service ratio, at 9%, was just over 1 percentage point higher.

Nampower borrowing will On the assumption that the upward trend in the central government’s foreign increase parastatal debt debt stock is reined in, as envisaged under the sovereign debt management strategy for public debt approved by the cabinet earlier this year (May 2004, Economic policy), the main shift over the coming years will be in parastatal debt, some 70% of which comprises long-term foreign borrowings by the Namibia Power Corporation (Nampower). Nampower, which has an excellent record in servicing its debt, is currently paying down three of its six outstanding foreign loans, representing 55% of its total debt portfolio, with principal repayments on two other loans due to start in 2006. However, Nampower will need to secure new external lending to finance the construction of the planned gas-fired power station at Oranjemund, its share of the Kudu power project, due to be completed in 2009. Parastatal debt is hence likely to expand in 2006-09.

Namibia Power Corporation: foreign loansa (N$ m unless otherwise indicated) Amount outstanding 2003b 2004b Repaymentc African Development Bank 63.0 58.8 May 2003 Agence française de développement 46.0 41.6 Jun 2006 Development Bank of Southern Africad 155.0 155.0 Mar 2012 European Investment Bank 429.6 367.5 Jun 2002 European Investment Bank II 239.3 224.6 Sep 2006 Swedish Export Credit Corporation-Swedish International Development Agency 90.6 88.3 Jun 2002 Total 1,023.5 935.8 - US$ m 135.5 149.2 - a Long-term liabilities; loans guaranteed by the government unless otherwise indicated. b End- June. c Date when principal repayments began, or are due to begin. d Loan secured by a pledge of investments. Source: Namibia Power Corporation, Annual Report, 2004.

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