Namibia at a Glance: 2004-05

Country Report

Namibia

Namibia at a glance: 2004-05

OVERVIEW The candidate for the ruling South West Africa People's Organisation (SWAPO) for the presidential election in November 2004 will be nominated at a party congress in May. The foreign affairs minister, Hidipo Hamutenya, is the favourite. SWAPO's widespread popular support will enable its candidate to win a comfortable victory in the presidential election; it will also secure a large parliamentary majority. Real GDP growth is forecast to rise to 4.6% in 2004 and 5% in 2005, supported by a recovery in diamond mining output and the Skorpion zinc mine and refinery reaching full capacity. Lower food price inflation will reduce average inflation to 5% in 2004. Accelerating economic growth and mild exchange-rate depreciation will lift average inflation to 6% in 2005. The Namibia dollar will remain pegged at par to the South African rand and is forecast to average N$7.85:US$1 in 2004 and N$8.20:US$1 in 2005. The current-account surplus is forecast to widen to 6.3% of GDP in 2004, owing to higher exports of diamonds and zinc, before narrowing to 3.9% of GDP in 2005 as Southern African Customs Union (SACU) payments fall.

Key changes from last month Political outlook • The political outlook remains unchanged. Economic policy outlook • The economic policy outlook remains unchanged. Economic forecast • Year-on-year inflation has continued to rise, to 3.8% in March from 3.3% in February. This was caused by an increase in food price inflation, which rose to 2.9% in March from 1.1% in February. This was in line with the Economist Intelligence Unit's forecasts and we expect higher food prices to continue to lift inflation until around the middle of the year. Nonetheless, with inflation starting the year from such a low base, on an average basis it is forecast to fall from 7.3% in 2003 to 5% in 2004.

May 2004

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

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Contents

Namibia

2 Summary

3 Political structure

4 Economic structure 4 Annual indicators 5 Quarterly indicators

6 Outlook for 2004-05 6 Political outlook 7 Economic policy outlook 9 Economic forecast

12 The political scene

17 Economic policy

21 The domestic economy 21 Economic trends 24 Mining 26 Agriculture 28 Manufacturing 29 Transport and communications

30 Foreign trade and payments

List of tables

10 Namibia: international assumptions summary 13 Namibia: forecast summary 19 Namibia: government finances 21 Namibia: main expenditure allocations, 2004/05 22 Namibia: debt forecasts 24 Namibia: real GDP growth 25 Namibia: diamond production 27 Namibia: uranium oxide output and earnings 28 Namibia: coarse grain production 31 Namibia: exports 32 Namibia: current account 32 Namibia: capital account 33 Namibia: external debt

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List of figures

13 Namibia: gross domestic product 13 Namibia: consumer price inflation 23 Namibia: real GDP growth 24 Namibia: inflation

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Namibia May 2004 Summary

Outlook for 2004-05 The candidate for the ruling South West Africa People's Organisation (SWAPO) for the presidential election in November 2004 will be nominated at a party congress in May—the foreign affairs minister, Hidipo Hamutenya, is the favourite. SWAPO's widespread popular support will enable its candidate to win a comfortable victory in the presidential election; it will also secure a large parliamentary majority. Real GDP growth is forecast to rise to 4.6% in 2004 and 5% in 2005, owing to higher diamond production and the Skorpion zinc mine and refinery reaching full capacity. Lower food price inflation will reduce average inflation to 5% in 2004. Rising economic growth and mild exchange- rate depreciation will lift average inflation to 6% in 2005. The current-account surplus is forecast to widen to 6.3% of GDP in 2004, owing to higher exports of diamonds and zinc, before narrowing to 3.9% of GDP in 2005.

The political scene Three candidates have been selected to contest the nomination to become SWAPO's candidate at the presidential election. The elections have been set for November 2004. SWAPO has scored convincing victories in regional council elections. The government has announced that it will begin to expropriate commercial farms. The trial of Caprivi secessionists has been postponed again.

Economic policy The 2004/05 (April-March) budget has targeted an ambitious real terms cut in the civil service pay in order to reduce the fiscal deficit to 1.6% of GDP. No major tax changes were contained in the budget. Air Namibia has been allocated another large subsidy. A debt-reduction strategy has been unveiled. The finance minister has stressed that plans to end the usage of South African coinage do not threaten the peg between the Namibia dollar and the rand.

The domestic economy Recent real GDP growth rates have been revised upwards. Real GDP growth has been projected at 3.8% in 2004. A further rise in food price inflation has lifted year-on-year inflation to 3.8% in March. Diamond output fell by 4% in 2003, owing to the cessation of production by Namco. The Skorpion zinc mine and refinery is scheduled to reach full capacity by the second half of 2004. A bumper coarse grain harvest has been officially projected for 2003/04.

Foreign trade and payments According to the Bank of Namibia, higher net transfers, services and investment income inflows have caused the current-account surplus to widen in 2004. Improved data cover of private-sector debt has caused total external debt to rise substantially in 2004, to US$1.03bn. Debt-servicing costs have also risen. Editors: Paul Gamble (editor); Angus Downie (consulting editor) Editorial closing date: April 28th 2004 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

National elections December 1999 (legislative and presidential); next elections due in November 2004

Head of state President, currently Sam Nujoma, elected by universal suffrage; the constitution was amended to allow Mr Nujoma to stand for a third term of office in 1999

National government President and his appointed cabinet; last reshuffle in May 2003

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

Prime minister Theo-Ben Gurirab

Key ministers Agriculture, water & rural development Helmut Angula Attorney General Pendukeni Iivula-Ithana Basic education, sport & culture John Mutorwa Defence Erkki Nghimtina Environment & tourism Philemon Malima Finance Saara Kuugongelwa-Amadhila Fisheries & marine resources Abraham Iyambo Foreign affairs Hidipo Hamutenya Health & social services Libertina Amathila Higher education, training & employment creation Nahas Angula Home affairs Jerry Ekandjo Information & broadcasting Nangolo Mbumba Justice Albert Kawama Labour Marco Hausiku Lands, resettlement & rehabilitation Hifikepunye Pohamba Mines & energy Nicky Iyambo Minister without portfolio Ngarikutuke Tjiriange Presidential political adviser Kanana Hisboono Prisons & correctional services Andimba Toivo ya Toivo Regional & local government & housing Joel Natangwe Kaapanda Special adviser for security affairs Peter Tsheehama Trade & industry Jesaya Nyamu Women's affairs & child welfare Netumbo Nandi Ndaitwah Works, transport & communications Moses Amweelo

Central bank governor Tom Alweendo

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Economic structure

Annual indicators 1999a 2000a 2001a 2002a 2003b GDP at market prices (N$ bn) 20.7 23.7 27.3 30.7 34.3 GDP (US$ bn) 3.4 3.4 3.2 2.9 4.5 Real GDP growth (%) 3.3 3.5 2.4 3.3 3.5 Consumer price inflation (av; %) 8.6 9.3 9.3 11.3 7.3a Population (m) 1.9 1.9 1.9 2.0 2.0 Exports of goods fob (US$ m) 1,197 1,313 1,147 1,072 1,157 Imports of goods fob (US$ m) -1,397 -1,430 -1,326 -1,251 -1,376 Current-account balance (US$ m) 162 164 -6 96 123 Foreign-exchange reserves excl gold (US$ m) 305 260 234 323 325a Total external debt (US$ m) 252 438 422 635 1,040a Debt-service ratio, paid (%) 2.0 2.0 2.7 2.7 5.1 Exchange rate (av) N$:US$ 6.11 6.94 8.61 10.54 7.56a a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2002 % of total Components of gross domestic product 2002 % of total Agriculture & fishing 12.0 Private consumption 58.9 Mining & quarrying 14.5 Government consumption 25.4 Manufacturing incl fish processing 10.8 Gross domestic fixed investment 20.1 Wholesale & retail trade 12.9 Change in stocks -0.9 Financial services, real estate & business services 13.4 Exports of goods & services 45.4 Government 21.0 Imports of goods & services -46.8 GDP at basic prices incl others 100.0 GDP at market pricesa 100.0

Principal exports fob 2001b US$ m Principal imports cif 2001c US$ m Diamonds 494 Transport equipment 194 Prepared & preserved fish 295 Chemical products, rubber & plastics products 185 Metal ores, incl uranium ore 162 Refined petroleum products 143 Beverages & other food products 60 Machinery & equipment 137 Live animals & animal products 58 Food excl fish, meat, beverages & related products 101 Meat & meat preparations, hides & skins 46 Textiles, clothing, leather products & footwear 78

Main destinations of exports 2002d % of total Main origins of imports 2002d % of total UKe 48 South Africaf 80 South Africa 23 US 5 Spain 15 Germany 3 France 4 Russia 1 a Statistical discrepancy in source; does not sum to 100. b Headline export data have been revised, but a revised breakdown of principal exports has not been produced. c Imports cif, before deduction of duties payable, addition of duties on imports from countries other than the Southern African Customs Union (SACU) and central bank adjustments. d Economist Intelligence Unit estimates. e Includes all Namibian diamonds imported for marketing in London by De Beers' Diamond Trading Company. f Includes goods from third countries outside SACU purchased through South African suppliers.

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Quarterly indicators 2002 2003 2004 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Pricesa Consumer prices (Dec 1992=100) 226.9 234.3 241.7 244.2 245.8 249.0 249.3 253.7 Consumer prices (% change, year on year) 10.5 12.3 13.5 11.4 8.3 6.3 3.1 3.2 Domestic consumer prices (Dec 1992=100) 225.6 234.0 243.3 246.4 245.9 251.3 255.3 n/a Domestic consumer prices (% change, year on year) 9.0 11.4 13.7 12.2 9.0 7.4 4.9 n/a Imported tradeables (Dec 1992=100) 228.3 234.8 239.9 241.8 244.6 246.5 244.4 n/a Imported tradeables (% change, year on year) 12.2 13.2 13.3 10.6 7.1 5.0 1.9 n/a Financial indicators Exchange rate N$:US$ (av)b 10.455 10.437 9.745 8.341 7.773 7.418 6.727 6.794 Exchange rate N$:US$ (end-period)b 10.252 10.539 8.640 7.920 7.555 6.925 6.640 6.370 Bank of Namibia overdraft rate (av; %) 12.00 12.75 12.75 12.75 11.50 9.75 7.8 n/a Deposit rate (av; %) 7.52 8.17 8.81 9.32 9.45 8.78 7.5 n/a Govt bond yield rate (av; %) 13.00 12.96 12.96 12.96 12.96 12.96 n/a n/a Lending rate (av; %) 13.14 14.16 15.39 15.38 15.68 14.74 13.01 n/a Prime rate (av; %) 16.08 17.00 17.50 17.50 16.30 15.10 13.20 12.50 Treasury bill rate (av; %) 10.85 11.44 12.04 11.61 11.98 10.45 8.02 n/a M1 (end-period; N$ m) 7,062.8 6,970.5 6,698.2 6,834.6 7,194.2 7,969.8 7,851.4 n/a M1 (% change, year on year) 17.5 17.2 6.1 0.4 1.9 14.3 17.2 n/a M2 (end-period; N$ m) 11,217.4 10,804.9 10,698.1 10,892.4 11,284.0 12,317.5 12,913.4 n/a M2 (% change, year on year) 15.4 12.4 6.9 2.6 0.6 14.0 20.7 n/a IJG/IPPR Business Climate Index (Jan 2001=100) 103.7 102.2 103.9 99.1 98.6 101.9 106.0 106.5 IJG/IPPR BCI (% change, year on year) -2.5 -5.2 -6.1 -7.0 -4.9 -0.3 2.0 7.5 Foreign trade & reserves Goods exports fob ( N$ m) 2,944.9 2,597.1 2,740.6 1,969.0 2,454.7 2,613.1 n/a n/a Diamonds 1,735.9 1,177.3 1,454.4 729.0 1,209.7 1,189.6 n/a n/a Other mineral products 453.4 523.3 384.7 373.0 323.4 334.6 n/a n/a Food and live animals 371.6 511.8 347.9 290.1 463.6 390.8 n/a n/a Manufactured products 361.2 359.8 523.2 545.9 428.7 681.1 n/a n/a Goods imports fob (N$ m) -4,010.6 -2,829.1 -3,366.2 -3,096.7 -3,161.9 -3,308.5 n/a n/a Trade balance (N$ m) -1,065.7 -232.0 -625.6 -1,127.6 -707.2 -695.3 n/a n/a Services balance -42.3 11.3 3.0 125.5 119.6 204.3 n/a n/a Income balance -24.5 855.8 -5.4 621.0 172.5 397.9 n/a n/a Transfers balance 689.6 679.5 708.0 903.4 942.5 896.9 n/a n/a Current-account balance -444.3 1,309.3 75.0 515.5 520.6 797.0 n/a n/a Reserves excl gold (end-period; US$ m) 229.8 265.0 323.1 273.0 276.6 299.2 325.2 n/a 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 2004-05

Political outlook

Domestic politics A new era in Namibian politics is set to begin this year, following the recent confirmation by the president, Sam Nujoma, that he will definitely not be seeking a fourth five-year term of office at the November 2004 presidential election. Mr Nujoma told an early-April meeting of the central committee of the ruling South West Africa People's Organisation (SWAPO) that he will step down at the end of his current five-year term in March 2005 (his successor will be president-elect in the interregnum). The meeting approved the nomination of three contenders to be the party’s candidate for the presidential election: party vice-president and lands minister, Hifikepunye Pohamba, the foreign affairs minister, Hidipo Hamutenya, and the higher education minister, Nahas Angula. The candidate will be elected at an extraordinary party congress in May and is also likely to take over from Mr Nujoma as party leader (although this could be delayed until after the presidential election). Mr Nujoma remains in good health at 74 years of age and is likely to retain influence over the party after he steps down, probably by taking up a (yet to be created) post as party chairman. After being SWAPO's uncontested leader for almost 45 years (30 of them in exile), his retirement should result in a less top-down leadership style that favours the development of a more democratic party structure. Although there is still popular pressure for Mr Nujoma to stand for re-election (which would require an alteration of the constitution to lift the term limit), it appears that the SWAPO leadership has united behind an open leadership contest in May. There is little to choose between the candidates on ideological or ethnic grounds; all are from SWAPO's northern heartland, and both Mr Hamutenya and Mr Pohamba are Kwanyama (the largest subgroup of the dominant Oshivambo group). The present indications are that Mr Hamutenya is the favourite; he has the best-organised leadership campaign in place, has been courting minority ethnic groups, and has many allies within government and the state-controlled media. However, Mr Hamutenya, who has a low public profile but is a renowned behind-the-scenes fixer, is viewed by some colleagues as having the potential to be just as autocratic as Mr Nujoma. The issue for Mr Hamutenya's opponents is deciding which of his two rivals to back. Mr Pohamba is likely to receive the support of Nujoma loyalists (Mr Nujoma proposed his candidacy at the central committee meeting) and may gain backing from SWAPO’s more radical members owing to his central role in the new land expropriation policy. But Mr Angula, the youngest of the three at 61 years of age (Mr Pohamba is 69 and Mr Hamutenya 65), may pick up support from younger party members, although his only ministerial portfolio has been education. Whoever is elected as SWAPO’s candidate in May will easily win this year's presidential election. SWAPO is also set to retain its two-thirds majority in parliament in the concurrent legislative election. As there is little likelihood of an electoral pact, the opposition vote will be divided, and the small opposition parties may well lose seats overall, judging by the results of by-elections for regional authority

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seats held during the past six months. After the split in the Democratic Turnhalle Alliance of Namibia (DTA) in December, the Congress of Democrats (CoD), which has performed best in the recent by-elections, looks set to take over as the biggest opposition party after the elections. This will be mainly at the expense of the DTA, as, like the other parties, the CoD has made almost no inroads into SWAPO's northern political heartland.

Land reform In April the government clarified revisions to its land policy that would enable the expropriation of farms for resettlement by "previously disadvantaged" Namibians. Farms with "excessive, under-utilised or abandoned" land would be targeted for expropriation, which will be done in parallel with the existing willing-buyer-willing-seller" policy. Expropriation will be done in accordance with the constitution, which requires the payment of a "fair" price. However, the determination of what constitutes such a price will be highly contentious. Land reform is a pressing issue and the government has failed to achieve its targets for land purchases, owing to the high cost of buying farms at the market rate under the "willing-buyer-willing-seller" policy and because many of the farms offered for sale were considered unsuitable for resettlement purposes. There is still much uncertainty about the new policy, including the criteria that will be used to select farms for expropriation—Mr Pohamba indicated that any farm could be expropriated. In practice, it is likely that those farms where white owners have made black workers redundant in the past year will be among the first to be taken over. There appears to be an element of electioneering in the announcement, as expropriation is popular among much of the rural population. It would be premature to conclude that this marks the beginning of the type of large-scale land grabs that have decimated the commercial farming sector in neighbouring Zimbabwe (although the involvement of advisors from that country is potentially significant).

International relations Mr Nujoma is one of the most outspoken supporters of the Zimbabwean president, Robert Mugabe, a position that has adversely affected Namibia’s international standing. None of his potential successors is likely to change this approach, but without Mr Nujoma’s personal links to Mr Mugabe, bilateral ties will be played down—the foreign affairs minister, Mr Hamutenya has said virtually nothing in public on Zimbabwe in the past year. Given that the situation along the Angolan border has now stabilised, there are no obvious external threats to Namibia during the forecast period and this has allowed the government to commit two battalions of troops to peacekeeping duties in Liberia. Relations with the South African government will remain close.

Economic policy outlook

Policy trends Economic policy remains geared to the priorities set out in the second five-year national development plan covering fiscal years 2001/02-2005/06 (April-March), a review of which is being carried out this year. These include reducing poverty and income inequalities, creating employment, promoting economic empowerment, achieving sustained economic growth and diversification, and combating the spread of HIV/AIDS. The government will continue to provide incentives

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for investors, particularly in export-oriented manufacturing and the processing of local raw materials. Owing to black empowerment considerations, it will become increasingly necessary (although not legally required) for each foreign investor to form a partnership with a local firm. Trade union opposition and the strong reservations of some SWAPO members of parliament will impede the introduction of a full-scale privatisation programme. Instead, the government will focus on improving the performance of state-owned enterprises under the new corporate governance agency for parastatals—due to start operations later this year.

Fiscal policy The 2004/05 budget presented by the finance minister, Saara Kuugongelwa- Amadhila, on March 24th targeted a highly ambitious reduction in the fiscal deficit. Total expenditure is set at N$12.7bn (US$1.6bn), 4% higher than the revised total for 2003/04 (and equivalent to a fall in real terms), while total revenue is projected to increase by 12%, to N$12.1bn. This equates to a budget deficit of 1.6% of GDP, compared with a revised estimate of 4.2% of GDP in 2003/04. The projected jump in revenue is the result of a 39% rise in Southern African Customs Union (SACU) receipts, to N$3bn. This is likely to be reasonably accurate, as it reflects the higher local currency value of exports and imports in 2002—SACU receipts are calculated on payments made two years previously. Income tax revenue is projected to fall by 5%, to N$2.6bn, but in the absence of any tax changes and given the positive forecast for real GDP growth, it is probable that revenue from this source will rise. Diamond mining tax revenue is budgeted to fall to just N$52m, from N$220m in 2003/04, owing mainly to capital write-offs by Namdeb and De Beers Marine Namibia (DBMN). The main doubt is over whether the government can adhere to its expenditure target, particularly the projected 2% increase in the civil service wage bill, which is expected to encounter substantial resistance from trade unions. Although there is a freeze on civil-service recruitment (apart from "essential posts") and lower allocations were made for overtime and official foreign travel, there is much scope for additional spending ahead of the election. Therefore, the Economist Intelligence Unit forecasts a deficit of 3% of GDP in 2004/05. It seems unlikely that the government will be able to cut expenditure by 3% in 2005/06 to hit the target of N$12.3bn outlined in the new three-year medium- term expenditure framework (MTEF), although in a post-election year unpopular measures could be introduced. Revenue is projected to fall to N$11.7bn, owing mainly to a fall in SACU receipts. Although revenue from other sources is expected to rise, the fall in SACU receipts will outweigh the impact of any expenditure savings the government will make, so we are forecasting that the fiscal deficit will widen to 4% of GDP in 2005/06. The deficit will continue to be financed mainly through the issuance of domestic debt. As we are projecting a much larger deficit than the government, the budgeted projections of debt-servicing costs are likely to be exceeded. Disappointingly, the MTEF does not address the impact of the expected fall in SACU revenue, caused by various free-trade agreements. Although new taxes were unlikely in an election year, no reference was made to reforming the tax structure over the life of the MTEF, even though the government has had ample time to assess a range of

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new taxes (including a capital gains tax) recommended by an independent study in 2002.

Monetary policy As the Namibia dollar is pegged at par to the rand and Namibia is a member of the Common Monetary Area, within which capital flows freely, the bank rate set by the Bank of Namibia (the central bank), broadly shadows the repurchase (repo) rate set by the South African Reserve Bank (SARB). Interest rates have remained unchanged since December, when the SARB cut its repo rate by 50 basis points, to 8%; the Namibian bank rate was reduced by the same amount, to 7.75%. Local banks passed on this reduction in full, cutting their prime lending rates to 12.5% (keeping them 1 percentage point higher than South African prime rates). Dry weather conditions in key crop-growing areas, higher fuel prices and the forecast depreciation of the rand against the US dollar are likely to increase inflationary pressure in South Africa in the coming months. As the SARB is expected to remain strongly committed to the attainment of its inflation targets, there is unlikely to be room for further rate cuts. An expected increase in US interest rates by mid- to late 2004, coupled with stronger domestic demand, will mean that South African (and therefore Namibian) interest rates will begin to edge up in early 2005.

Economic forecast

International assumptions Namibia: international assumptions summary (% unless otherwise indicated) 2002 2003 2004 2005 Real GDP growth World 2.9 3.8 4.7 4.1 US 2.2 3.1 4.5 3.2 EU 1.0 0.7 1.8 2.0 Exchange rates ¥:US$ 125.3 115.9 105.3 106.5 US$:€ 0.945 1.132 1.270 1.357 SDR:US$ 0.772 0.714 0.665 0.646 Financial indicators ¥ 2-month private bill rate 0.10 0.03 0.03 0.10 US$ 3-month commercial paper rate 1.70 1.10 1.15 2.69 Commodity prices Oil (Brent; US$/b) 25.0 28.8 27.0 22.1 Copper (US cents/lb) 70.4 80.3 114.3 98.5 Food, feedstuffs & beverages (% change in US$ terms) 12.7 6.6 6.4 2.5 Industrial raw materials (% change in US$ terms) 2.2 12.7 20.3 -2.7 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. The economic outlook for 2004 is the best since 2000, the peak of the last business cycle. World GDP growth (on a purchasing power parity basis) is forecast to accelerate to an impressive 4.7% in 2004, before moderating to a still robust 4.1% in 2005. As demand for diamonds—Namibia's main export—is closely correlated with global GDP growth, this will be beneficial to the Namibian economy. Zinc prices are forecast to rise to an average of 48.3 US cents/lb in 2004 and 48.9 US cents/lb in 2005, owing to rising demand.

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Although the price of zinc remains low on a historical basis, production costs at the new Skorpion mine and refinery are among the lowest in the world.

Economic growth Real GDP growth is forecast to increase to 4.6% in 2004 and 5% in 2005. The engine behind this growth will be the mining sector, in particular the Skorpion zinc mine and refinery, which started production in the latter part of 2003. Skorpion is scheduled to reach full output of 150,000 tonnes/year in the second half of 2004, so 2005 will be the first year of full output. Skorpion's impact will be felt most strongly in manufacturing, as greater value is added in the refining and smelting processes. Growth will be supported by an expansion in offshore diamond mining, a rebound in fishing and processed fish output, and strong performance by the construction sector. Diamond production is forecast to rise from 1.48m carats in 2003 to 1.7m carats in 2004 and 1.8m carats in 2005. This reflects higher offshore production by DBMN and production by a new company, Sakawe Mining Corporation (Samicor). With the deployment of two new mining vessels at the end of 2003, we expect DBMN to increase production by 150,000 carats in 2004, with a further incremental rise in 2005. Samicor (established by Israel's Leviev group) is scheduled to begin mining the licence areas formerly held by Namibian Minerals Corporation in May, at an initial rate of 150,000 carats per year. Rainfall was generally above average and evenly distributed between October and March, and the 2003/04 (July-June) coarse grain (maize and millet) crop is forecast at 147,000 tonnes, 62% higher than the previous season. Commercial livestock owners are likely to concentrate on restocking, but with good grazing conditions reported in most areas, a small increase in the supply of livestock to abattoirs will lift processed meat output. Normal weather conditions are assumed for 2005. There are indications that the prolonged adverse sea conditions that have affected fishing are coming to an end. However, to conserve stocks, the crucial hake total allowable catch for 2004/05 (May-April) was only increased by 15,000 tonnes to 195,000 tonnes. Manufacturing growth will rise in 2004, owing to higher output of processed meat, textiles and zinc, and the impact of lower interest rates. Higher output from Skorpion, the opening of further export-processing zone factories, and increased production of cut and polished gemstones will support robust manufacturing activity in 2005. Construction growth is expected to remain healthy, owing to large-scale government projects and the favourable impact of lower interest rates. Strong global economic growth and the forecast depreciation of the currency should lead to further growth in tourism. Growth of government services is driven mainly by increases in public-sector employment and, given the government's freeze on new appointments and other attempts to contain the fiscal deficit, this will remain sluggish during the forecast period.

Inflation Year-on-year inflation has continued on an upward trend, rising to 3.8% in March from 3.3% in February, owing to an increase in year-on-year food price inflation—to 2.9% in March from 1% in February. Higher food prices reflect the fact that the impact of the regional drought in 2002 has now fallen out of the

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annual comparison. Food price inflation will continue to rise until the second half of the year, when the high base effects drop out of the annual comparison. Nonetheless, an easing of inflation in South Africa—the source of 80% of Namibia's imports—will keep average inflation in Namibia relatively low in 2004, at 5%. Accelerating economic growth and the inflationary impact of the mild depreciation of the rand will cause inflation to pick up slightly, to an average of 6%, in 2005.

Exchange rates The Namibia dollar will remain pegged at par to the South African rand during the forecast period. After another strong performance in 2003, caused by higher gold and platinum prices and attractive real interest rates, the rand is expected to depreciate gradually against the US dollar in the forecast period. Lower real interest rates will reduce demand for the rand, while a persistent current- account deficit is expected to ensure strong demand for foreign exchange. We therefore forecast that the Namibia dollar will fall to an average of N$7.85:US$1 in 2004 and N$8.20:US$1 in 2005. The closure of the net open forward position at the end of February should help to boost foreign reserves and reduce the volatility of the rand over the forecast period. Nonetheless, the low level of foreign-exchange reserves and inadequate inflows of foreign direct investment (FDI) mean that the currency will become vulnerable should sentiment towards emerging markets deteriorate.

External sector The trade deficit is forecast to improve substantially over the forecast period, because of higher diamond exports as offshore production rises and increased zinc metal exports from Skorpion as output reaches full capacity. The substantial appreciation of the Namibia dollar in 2003 has increased the competitiveness of imports, which rose strongly in that year. Import growth will moderate in 2004-05 as the currency depreciates. An increase in import- related services will cause the services deficit to widen, despite continued growth in tourism receipts. Income credits will rise in line with improved returns on portfolio and other investment abroad, principally pension fund and life assurance investment in South Africa. Income debits are also forecast to rise, owing to increased remittances of mining company profits. With the growth in debits exceeding the growth in credits, owing to higher diamond output and production at Skorpion, the income account is forecast to move into deficit in 2005. Payments from SACU—the main source of current transfers—will move in line with the projections given in the budget, increasing in 2004 but falling back in 2005. These projections are expected to be fairly accurate as SACU receipts are calculated on payments made two years previously. Overall, the current-account surplus is forecast to widen to US$301m (6.3% of GDP) in 2004, owing to increased diamond and zinc exports, before narrowing to US$197m (3.9% of GDP) in 2005 as SACU payments fall.

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Namibia: forecast summary (% unless otherwise indicated) 2002a 2003a 2004b 2005b Real GDP growth 3.3 3.5c 4.6 5.0 Gross agricultural production growth 1.7 1.5c 3.5 3.0 Consumer price inflation (av) 11.3 7.3 5.0 6.0 Consumer price inflation (year-end) 13.6 2.0 6.5 6.0 Short-term interbank rate (av) 13.8 14.7 12.5 13.3 Government balance (% of GDP)d -2.6 -4.1 c -3.0 -4.0 Exports of goods fob (US$ m) 1,072 1,157c 1,360 1,446 Imports of goods fob (US$ m) -1,251 -1,376c -1,411 -1,511 Current-account balance (US$ m) 96 123c 301 197 Current-account balance (% of GDP) 3.3 2.7c 6.3 3.9 External debt (year-end; US$ m) 635 1,040 1,091 1,119 Exchange rate N$:US$ (av) 10.54 7.56 7.85 8.20 Exchange rate N$:¥100 (av) 8.41 6.52 7.45 7.70 Exchange rate N$:€ (year-end) 9.06 8.38 10.71 13.53 Exchange rate N$:SDR (year-end) 11.75 9.87 12.37 15.52 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates. d Calculated using GDP for fiscal year.

The political scene

Three to contest SWAPO A meeting of the central committee of the ruling South West African People’s presidential nomination Organisation (SWAPO) on April 2nd-3rd has selected three candidates to contest the nomination to become the party's candidate at the presidential election in November. The three are the SWAPO vice president, lands resettlement and rehabilitation minister, Hifekepunye Pohamba, the foreign affairs minister, Hidipo Hamutenya and the higher education minister, Nahas Angula. The party's presidential candidate, who is virtually assured of becoming Namibia’s next head of state (owing to SWAPO's overwhelming popular support), will be elected by the party membership at the SWAPO extraordinary congress scheduled for May 28th-29th. The nomination of the three appears to have finally confirmed that the current president, Sam Nujoma, will stand down at

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the state at the end of his current term of office in March 2005. (The constitution was amended to allow Mr Nujoma to stand for a third term in 1999 and there had been rumours that he was planning a fourth term— November 2002, The political scene.) The nomination of Mr Pohamba and Mr Hamutenya had been widely expected (February 2004, The political scene), but there has been some surprise at the choice of Mr Angula. It had been assumed that the prime minister, Theo- Ben Gurirab, and the agriculture minister, Helmut Angula, were more likely contenders. It is understood that both carried out soundings of their potential support some time ago and concluded that they had no chance of winning. Despite Mr Pohamba’s seniority and the strong backing of Mr Nujoma—the two have been close since the 1960s—Mr Hamutenya, who has had an unofficial leadership campaign up and running for the past year, is seen as almost unstoppable. Since both are members of the Kwanyama, the largest sub-group of the dominant Oshivambo group, and there is no detectable ideological difference, the main difference is in their style. Mr Hamutenya is regarded as the more dynamic and effective cabinet member, especially in his previous post of trade and industry minister. Mr Pohamba is 69, only five years younger than Mr Nujoma (who nominated him), and is likely to retire should Mr Hamutenya beat him. Mr Hamutenya, who was nominated by the National Assembly speaker, Moses Tjitendero (a Herero), appears to enjoy a wider support base. His election would also mark a more effective break with the past, as he is not a close to Mr Nujoma as Mr Pohamba. Mr Angula, the youngest candidate at 61 years of age and from the second-largest Oshivambo sub-group, the Ndonga, looks set to come third. He is likely to be promoted to a more senior position by the eventual winner; Mr Pohamba, in particular, would regard him as a useful counter-weight against Mr Hamutenya.

Mr Nujoma plans to remain Whoever is selected by the extraordinary congress will have to accept Mr party leader Nujoma's continued strong influence over party affairs, as he seems likely to stay on as party leader for the next three years. Mr Nujoma was re-elected as party leader for a further five years at the last SWAPO ordinary congress in 2002 (November 2002, The political scene) and has given no indication as to whether he also plans to resign that post when he retires as head of state. This would create a situation unprecedented in Namibia, where the president and the head of the ruling party are different people. (This has happened elsewhere in Africa; in Tanzania Julius Nyerere stayed on as leader of the ruling party after handing over to a successor as head of state.) Nevertheless, unless Mr Pohamba wins in May, the relationship between Mr Nujoma and his successor is unlikely to be an easy one. While some political commentators have stressed that a fourth term cannot be ruled out entirely, it seems likely that Mr Nujoma will stand down. His "state of the nation" address to the National Assembly on April 21st was widely billed as his farewell address and took on a valedictory character, with leaders of the opposition parties as well as SWAPO MPs lining up to congratulate him. The speculation that Mr Nujoma has not given up hope of a fourth term remains because the party congress does have the power to overturn the central committee decision and accept a motion to mandate another term for

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the president. As SWAPO still conducts its internal affairs with a high degree of secrecy, such speculation is inevitable and though there remains a small margin of doubt, the process to select a new leader appears to have gone too far to be easily reversed.

The elections are set for According to the electoral timetable, announced on April 13th, the SWAPO November presidential candidate elected in May will have just over five months to campaign for election as Namibia’s new head of state. The presidential and the National Assembly elections are to be held concurrently, as is the usual practice, over November 15th and 16th, and will be followed on November 29th and 30th by elections for Namibia’s 13 regional authorities. The first test of the government’s standing with the electorate will come much sooner, with the local council elections being held on May 14th, just two weeks before SWAPO’s extraordinary congress. The government had originally wanted to hold the regional and local council elections simultaneously in mid-2005, mainly on the grounds that this would make the elections (and the preceding registration campaigns) cheaper to organise. However, this would have involved extending regional councillors’ terms of office by six months and the move was foiled after the opposition parties objected to this. Nevertheless, the government still intends to push through a constitutional amendment to reduce the term of office for regional councillors from six to five years, which would bring them into conformity with those for local councillors, National Assembly members and the national president. The government’s attempt to secure this change last year was blocked by the national council (upper house), which comprises two councillors nominated by each regional authority (August 2003, The political scene). The government has since been working assiduously behind the scenes to win over individual councillors (most of whom were elected as SWAPO members) and the change is expected to go through the next time it is tabled.

Selection of party list will While there is little doubt that SWAPO will win both the presidential and reveal balance of power National Assembly elections with handsome majorities, there could be quite a change in the composition of the party's MPs. Under the party list system used for the National Assembly election (but not the local and regional authority polls), MPs are elected from each party’s list of candidates in proportion to the party's share of the vote. Although votes are counted by constituency, MPs do not sit for individual constituencies and should a party need to replace an MP it appoints the person highest up its list who is not a sitting MP. Traditionally, Mr Nujoma has sought to maintain control over the candidate list, but it is inevitable that the new party presidential candidate will want some influence over it. This could prove the first test of who will have ultimate authority within the party, Mr Nujoma or the next prospective head of state.

Regional-as the opposition by-elections vote illustrate will be In addition to confirming SWAPO's domination, the results of two recent by- splitSWAPO's at least dominance four-ways- elections for regional councillors illustrate the adverse impact on the electoral standing of the Democratic Turnhalle Alliance of Namibia (DTA) caused by the defection of two of its former component parties (November 2003, The political scene). SWAPO gained 60% of the vote in the election in Grootfontein in February, well ahead of the 16% polled by the Congress of Democrats (CoD). The DTA, which came second in the previous poll in the town, won only 6% of

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the vote, equal to the percentage received by the National Unity Democratic Organisation (NUDO), which broke away from the DTA in 2003. In the Tsumeb by-election in March, the SWAPO candidate won 62% of the vote with the CoD again coming second with 19%. The DTA did not put up a candidate but its coalition partner, the United Democratic Front (UDF), gained support compared with the previous poll to garner 13% of the vote, while NUDO trailed a distant fourth with 4%. On the basis of these results, NUDO seems to have gained little support since registering as a separate party at the end of 2003 and its main role seems likely to be as a spoiler for the DTA. While SWAPO won large majorities, its share of the vote slipped in both by-elections compared with the 1999 parliamentary election, when it won 69% of the vote in Grootfontein and 64% in Tsumeb. The voting pattern of these two by-elections is likely to be broadly similar to the mid-May local authority elections, which seven political parties and nine residents’ associations are contesting. SWAPO is the only party with candidates standing in all 46 council elections, and will gain two northern local authorities without a contest as no other party has registered a candidate. There will be three-way contests in most areas, with larger contests in a minority, as the DTA is putting up candidates in 43 councils, the CoD in 36, the UDF in 17, NUDO in 16 and the Republican Party in only ten. A newly registered party, the Namibia Democratic Movement for Change, about which little is known, has nominated a candidate in one town only.

Government to begin The prime minister, Theo-Ben Gurirab, announced at the end of February that expropriating farms the government would initiate a process of expropriating commercial farms in parallel with the existing "willing-buyer willing-seller" policy. Conflicting suggestions emerged until a statement issued on April 19th by the Ministry of Lands, Resettlement and Rehabilitation said that while expropriation would be targeted at “excessive, under-utilised and abandoned land”, it could also be used to punish commercial farmers who evict or dump their workers. Previously, the government had indicated that only foreign-owned under- utilised farms or those owned by absentee foreign owners would be expropriated (November 2002, The political scene), but this process was not followed through, probably because of concern about alienating the German government, Namibia’s largest bilateral donor (most foreign owners of farms are German). The government has become increasingly exasperated over its failure to achieve its targets for land purchases and Mr Gurirab said the new policy was introduced in response to the inflated prices demanded by Namibia’s 4,000 white commercial farmers and their slowness to make farms available for purchase by the government. This has been disputed by the Namibia Agricultural Union (which represents most commercial farmers). It claims that the government has not taken up all the farms offered for sale by its members. It is uncertain how many farms will be expropriated as the government has yet to provide details and has denied claims that eight farms where the owners allegedly evicted their workers had already been targeted. The prime minister emphasised that expropriation was the only way the government could meet

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the “high public demand for agricultural land” in view of the 240,000 officially estimated to be awaiting resettlement. Fears that Namibia might be sliding towards a Zimbabwe-style land grabbing policy should not be overplayed, as Mr Gurirab stressed that farm owners would be “justly” compensated in accordance with the constitution. Mr Pohamba embellished this in parliament in early March, when he stated that farm owners can submit a claim for compensation after receiving a notice of expropriation. If an owner was unhappy with the government price reached after an evaluation by the lands, resettlement and rehabilitation ministry, which Mr Pohamba reiterated would be based on the market value of the land, the farmer would be able to appeal to the Lands Tribunal. However, Mr Pohamba again failed to specify how many farms would be targeted or any criteria for their selection. Indeed, in subsequent remarks Mr Pohamba indicated that any farm could be subject to expropriation. A further ominous development was the Zimbabwean government's dispatch of six land evaluators to assist the Namibian government to determine the level of compensation paid to farmers. Opposition parties have dismissed the expropriation policy as a pre-election gimmick to restore credibility in the government’s land reform programme.

AALS more successful at The failure of the government’s flagship land redistribution programme, the redistributing land national resettlement policy (NRP), in securing the purchase of more than a small number of farms has been highlighted by a recent report by the Institute for Public Policy Research (based in the capital, Windhoek). This concluded that at the current rate of redistribution it would take another 40 years before half of Namibia’s commercial farmland will be transferred to black Namibians, as to date the government had managed to redistribute only 1% each year since land reform began in 1992. The report notes that redistribution under the affirmative action loan scheme (AALS), administered by the Ministry of Agriculture, Water and Rural Development, had been more effective in achieving land redistribution than the NRP. While 3.1m ha costing an estimated N$106m (US$15m) had been acquired under AALS up to October 2003, the NRP had succeeded in purchasing less than one-third of that amount, just over 829,000 ha, at an estimated cost of N$120m. The report concluded that the market- based AALS, which was designed to help mainly larger communal farmers, who receive subsidised loans from the Agricultural Bank of Namibia (Agribank), was far more successful than the NRP. This was because the property rights of poor Namibians were unclear and government support for those resettled, in the form of finance and agricultural inputs, was insufficient. The AALS programme was recently resumed, having been suspended at the beginning of this year because of a failure by the agriculture, water and rural development ministry to compensate Agribank for the full cost of the latter’s loan subsidies. There have also been claims that a lack of transparency in the process has led to many Namibians who are not primarily farmers and who enjoy substantial incomes taking out subsidised loans. Mr Pohamba, whose ministerial salary and perks amount to almost N$200,000 (US$28,570) per year, revealed during a mid-April interview with the state-owned New Era newspaper that he had recently acquired a farm through the AALS programme.

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The Caprivi treason trial has There has been some progress in the drawn-out prosecution of 107 Namibians been postponed again from Caprivi region accused of involvement in the armed secessionist attack on Katima Mulilo in 1999 (4th quarter 1999, The political scene). In mid-March the defendants were formally asked to plead for the first time to the 278 charges of high treason that each of them faces. All 107 pleaded not guilty. The trial was then postponed until June 1st to allow the prosecution time to petition the chief justice for leave to appeal to an end-February ruling by the high court judge, Justice Elton Hoff, that 13 of the original 120 defendants should be discharged as the Grootfontein high court did not have jurisdiction over them. Judge Hoff found in favour of the defence’s contention that the 13—who include John Sambona, the alleged commander of the Caprivi Liberation Army which carried out the 1999 attack—could not be charged and prosecuted as they had been brought to Namibia from Botswana and Zambia through “disguised extradition”. They had been deported as illegal immigrants and handed over to the Namibian authorities without the necessary extradition procedures having been invoked, according to Justice Hoff, who also refused the prosecution’s application for leave to appeal against his ruling. However, the 13 were immediately re-arrested by the Namibian police on unrelated charges, including the alleged illegal possession of elephant tusks. When these charges were withdrawn because of insufficient evidence, they were re-arrested for a second time on the same treason charges faced by the other trial defendants. If the prosecution wins its appeal against Justice Hoff's ruling, the 13 will be added back to the main case of the other 107 before the main trial gets under way. If the state loses its appeal against the ruling then, in theory, the 13 should be freed, but this seems unlikely; instead they would probably face the same charges at the Katima Mulimo magistrates court, which the government has said is competent to try the 13 on the treason charges. In agreeing to a postponement of the main trial Justice Hoff made it clear to the prosecution that to maintain the rights of the accused—most of whom have been in custody for over four years—he would not consent to a further postponement. However, it seems unlikely, given the number and complexity of the charges, that proceedings will be completed before the end of 2004.

Economic policy

Ambitious fiscal targets In the main budget for 2004/05 (April-March) tabled on March 24th, the finance announced in budget minister, Saara Kuugongelwa-Amadhila, set out the ambitious target of reducing the fiscal deficit to 1.6% of GDP, from 4.2% in the revised budget for 2003/04. While the minister’s commitment to greater fiscal discipline is welcome, there is some doubt whether the targets will prove attainable. Ms Kuugongelwa- Amadhila stated that large savings on non-essential spending will be made in 2004/05, including reductions in expenditure on overtime, goods and services, a freezing of all civil service vacancies with the exception of “essential posts”, and a cut in provision for foreign travel payments. Among the measures she announced to tighten budgetary control was an integrated financial management system, scheduled to come into effect in April 2004. The proliferation of individual accounts within ministries, which has been a significant factor in

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unplanned expenditure, is to be limited by a reform of the existing State Finance Act to provide a clear administrative and legal framework for fiscal management. Individual ministries will now be required to meet all their foreseeable costs, including wages, from within their budget allocations, with no accommodation of additional spending requests. If this is adhered to and the government makes sufficient contingency provision to cover unforeseen events, such as drought, it would obviate the need for the tabling of an additional budget in the second half of the fiscal year, which has taken place every year since independence.

Namibia: government finances (N$ m unless otherwise indicated) 2003/04a 2004/05b % change Tax revenue 9,785 10,902 11.4 Income tax on individuals 2,705 2,556 -5.5 Diamond mining 220 52 -76.4 Non-mining companies 770 894 16.1 Value-added tax 2,550 2,678 5.0 Customs & excise 3,036 4,207 38.6 Non-tax revenue 959 1,085 -4.5 Diamond royalties 450 500 13.1 External grants 56 81 44.6 Total revenue incl others 10,836 12,104 11.7 Recurrent expenditure 10,367 10,524 1.5 Personnel 5,200 5,304 2.0 Capital expenditure 1,476 1,803 22.2 Lending & equity participation 400 366 -8.5 Total expenditure 12,243 12,693 3.7 Overall balance 1,407 589 -58.1 Overall balance (% of GDP) 4.2 1.6 - a Revised estimates. b Estimates. Source: Ministry of Finance, Estimate of Revenue and Expenditure for the Financial Year 1 April 2004-31 March 2005.

Projection of real terms The key to the reduction in the fiscal deficit in 2004/05 is restricting the growth spending cuts seems optimistic in total spending to only 4% (a cut in real terms), based on a 2% increase in the civil service wage bill. Pressure from the public-sector unions for a real-terms pay rise will make this difficult to adhere to in an election year. However, with the South West Africa People's Organisation (SWAPO) seemingly assured of an easy victory at the polls there is a chance it will have sufficient resolve to resist union demands. Robust revenue growth, of 12%, is also projected. Central to the forecast N$1.3bn (US$165m) increase in revenue is a projected N$1.2bn rise in Southern African Customs Union (SACU) receipts. This is likely to be reasonably accurate as it reflects the higher local currency value of exports and imports in 2002—SACU receipts are calculated on payments made two years previously. Income tax revenue is projected to fall by 5%, to N$2.6bn, but in the absence of any tax changes and given the positive forecast for real GDP growth, it is probable that revenue from this source will rise. Diamond mining tax revenue is budgeted to fall to just N$52m, from N$220m in 2003/04, owing mainly to capital write-offs by Namdeb and De Beers Marine Namibia (DBMN) and should therefore recover in 2005/06. The continued reliance on SACU revenue is of major concern. The finance minister acknowledged that from

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2005/06 customs receipts are expected to decline, as the new SACU revenue- sharing formulae will have the effect of reducing Namibia’s share of a customs pool that will be shrinking in response to various trade deals negotiated by the region (see Foreign trade and payments). In view of the expected imminent decline in SACU revenue tariffs, it was surprising that Ms Kuugongelwa-Amadhila made no reference to any plans to diversify sources of tax revenue in the budget speech. Indeed, the Bank of Namibia’s Annual Review 2003 stated that falling SACU receipts would have a “quite serious” impact on revenue in the medium-term and called for “early efforts” to develop additional revenue sources to ensure continued financial stability. Only minor tax changes are being introduced in 2004, including the introduction of anti-avoidance regulations to address multinational companies' use of transfer pricing and thin capitalisation. It was perhaps too much to have expected that in her first main budget, the finance minister would have proposed increases in income tax or value-added tax (VAT) rates. But her failure to mention whether the government plans to proceed with any of a range of new taxes proposed two years ago by a tax consultancy study, including capital gains tax, is puzzling and suggests there is opposition to these recommendations within the cabinet. In any event, it seems unlikely that the government will be able to avoid introducing new tax measures in 2005/06 if it is to retain any hope of meeting the deficit reduction targets in the medium- term expenditure framework (MTEF).

Air Namibia is to receive a Despite the budget’s theme of fiscal restraint, Air Namibia is to receive a further further large subsidy N$366m bailout in 2004/05, bringing total government financial support for the airline to over N$1.5bn in the past four years. Most of the money will be used to repay the airline’s accumulated debt and ongoing servicing of the lease of its Boeing 747-400 Combi aircraft, which it is trying to sub-lease. Although the airline management claims it will achieve a financial turnaround this year, its part-privatisation—intended to have taken place in 2003—has been indefinitely deferred and it is likely to remain a fiscal burden for the foreseeable future. While the education and health sectors continue to receive by far the largest share of resources (excluding debt-servicing costs), the former’s allocation has been reduced slightly for the first time owing to reduced spending on school construction. After falling slightly in 2003, defence spending is set to rise substantially this year and its share of total spending has increased to 9%, reflecting higher wages, spending on equipment and the costs of Namibia’s contribution to the UN peacekeeping force in Liberia. (The UN will reimburse the costs of the latter.) Most of the record N$600m allocation to transport and communications is for capital projects, including the upgrading of the Auas- Lüderitz road—intended to improve access to the Skorpion zinc and Rosh Pinah mines in the south—and the ongoing northern railway extension project.

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Namibia: main expenditure allocations, 2004/05 Allocation (N$ m) % of total % changea Education 2,959 23.3 -0.8 Basic education, sport & culture 2,399 18.9 -1.5 Higher education 560 4.4 2.2 Financeb 2,369 18.7 10.9 Health & social services 1,709 13.5 1.9 Defence 1,088 8.6 9.5 Police 752 5.9 0.3 Transport & communication 554 4.4 42.7 Total expenditure 12,693 - - a Compared with revised budget for 2003/04. b Includes provision for debt repayments. Source: Ministry of Finance, Estimate of Revenue and expenditure for the Financial Year 1 April 2004-31 March 2005.

TheDebt MTEF to be providesreduced tofor less a sharp than The finance minister also unveiled a comprehensive debt-reduction strategy. If 30% cutof GDP in spending within twonext years year fully-implemented, this holds out the prospect of curbing, if not reversing, the rise in government debt caused by domestic borrowing to finance budget deficits, the external borrowing for development projects outside the main budget and the uncontrolled recourse to foreign borrowing by parastatals. However, this will largely depend on the extent to which the government is able to meet its budget deficit targets, as overshoots would result in additional borrowing requirements. The measures announced in the budget speech include the introduction of a sovereign debt management strategy to ensure that national debt remains “affordable and low risk”, the establishment of a debt management office and curbs on further parastatal borrowing. Specific government authorisation is to be required for all new borrowing by parastatals, with new guidelines on the issuing of government loan guarantees to address the issue of growing contingent liabilities. The need for future government loan guarantees is expected to decline when the new Development Bank of Namibia—into which the existing Namibia Development Corporation and Development Fund of Namibia are being merged—becomes operational later this year. Total central government debt is projected to reach N$12bn (US$1.6bn), of which N$9.9bn would be domestic debt, by the end of 2004/05, equivalent to 32% of GDP, up from N$10.3bn (30% of GDP) at the end of 2003/04. While debt is forecast to continue to rise, to N$13.4bn in 2006/07, the debt/GDP ratio would show a slight decline to 29%, just within the government’s target of 30% of GDP. However, this allows for only a modest increase in foreign debt, which seems optimistic given the recent increase in foreign borrowing (see Foreign trade and payments). In addition, just under 50% of the N$17.9bn (US$2.4bn) in investment proposed under the current five-year national development plan, NDP2 (2001/02-2005/06), is supposed to be raised from foreign donor partners. It does, however, seem likely that the NDP2 investment targets will be scaled back by the mid-term review taking place this year, given that donor funding has, so far, been slow to materialise.

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Namibia: debt forecasts (N$ bn unless otherwise indicated) 2004/05 2005/06 2006/07 Domestic debt 9.9 9.9 10.5 Foreign debt 2.1 2.7 2.9 Debt stock (year-end) 12.0 12.6 13.4 Debt stock (% of GDP) 32.0 30.3 29.1

Source: Ministry of Finance, Medium Term Expenditure Framework, 2004/05-2006/07.

South African coins no longer In accordance with the parliamentary approval of the Bank of Namibia legal tender Amendment Bill, the Ministry of Finance is going to end the use of South African coinage as legal tender in Namibia. Ms Kuugongelwa-Amadhila stated that the handling of South African coins had become an operational burden for Namibian banks and traders. Demonetisation would be phased over two years, during which rand coinage would be exchangeable for their Namibian equivalents. In response to misinformed press speculation, Ms Kuugongelwa- Amadhila confirmed that “there are no plans whatsoever” to delink the Namibia dollar from the rand, which will remain legal tender in Namibia even when the use of South African coins is ended. Namibia’s extensive crossborder trade with South Africa and the large number of South African tourists are the main reasons for the large amounts of South African coinage in circulation. In addition, most Angolan importers and traders prefer to be paid in rand rather than Namibia dollars and, as many transactions are in cash, the amount of rand circulating in Namibia has been growing much faster than the new issues of Namibian currency. In 2003 the value of rand repatriated by the Bank of Namibia (the central bank) was R338m (US$48m), a 54% rise on the previous year, compared with a 12% increase in the amount of Namibia dollars in circulation, to N$919m.

The domestic economy

Economic trends

Recent real GDP growth rates The most recent version of the 2002 national accounts includes substantial have been revised upwards revisions to recent real GDP growth rates. These have been revised upwards for each year from 2000 to 2002 (significantly so in 2002) in which real GDP growth is now recorded to have been 1 percentage point higher than the preliminary estimate, at 3.3%. According to the Central Bureau of Statistics, the upward revisions mainly reflect the positive impact of revisions to data for fishing and onboard fish processing and transport and communications—some other sectoral growth rates have also been raised. Agriculture recorded a revised growth rate of 0.7% in 2002 (compared with a 14.9% decline in 2001), owing to an improved performance by both commercial and communal farming subsectors. Fishing grew by a revised 3.1% in 2002, compared with a decline of 1.8% in 2001, mainly reflecting good catches of horse mackerel and anchovy. Mining recorded growth of 3.9% in 2002 compared with a contraction of 6.1% in 2001, owing to an increase in diamond production. Manufacturing

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growth rose to 7.4% in 2002, from 5.5% in 2001, mainly because of higher output of food products and beverages.

Real GDP growth officially The latest official estimate of real GDP growth in 2003, of 3.1%, would indicate estimated at 3.1% in 2003 that a marginal slowdown in growth took place last year. However, given that official estimates and forecasts for real growth have generally proved to be on the conservative side, the Economist Intelligence Unit regards it more likely that growth was slightly higher last year at around 3.5%. In addition, it appears that the Bank of Namibia (the central bank) may have over-estimated the decline in diamond mining output caused in 2003 by the cessation of offshore mining operations by the liquidated mining company, Namibian Minerals Corporation (February 2003, The domestic economy). In fact, a substantial increase in output by Namibia’s main diamond producer, Namdeb, partly offset this lost production. Overall diamond recoveries declined by only 4% in 2003, according to the Chamber of Mines of Namibia (see Mining), not by 11% as estimated in the central bank’s Annual Report 2003.

Growth expected to accelerate The central bank has forecast real GDP growth of 3.8% in 2004, a figure that we in 2004 also think will be exceeded. The bank is projecting growth in the diamond- mining sector of 4.4%, but we expect a rise of nearly 15%. This reflects continued expansion in offshore recoveries by De Beers Marine Namibia (DBMN) and the start of mining in mid-year by Sakawe Mining Corporation (Samicor—February 2004, The domestic economy). In addition, the central bank is assuming that the Skorpion zinc mine will not reach its full output capacity of 150,000 tonnes until 2006. But Anglo American, which owns Skorpion, has stated that it intends to reach full capacity in the second half of 2004, further increasing mining growth. This higher production from Skorpion will also cause manufacturing growth to exceed the central bank's projection (of 6%), as the greater part of its value-added contribution is through refining. We also think that agriculture will record positive growth in 2004, in contrast to the official forecast of a 1% contraction. This is because the latest crop assessment report (based on data not available at the time the central bank calculated its forecasts) projects a bumper cereal harvest for this year. Although many commercial livestock owners are expected to concentrate on rebuilding

their herds after last year’s drought, rather than supplying export abattoirs, the improved pastures should lead to a greater supply of cattle to local meat markets from communal herds. The recovery in fishing, which grew by 10% in 2003 owing to a recovery in stocks caused by favourable oceanic conditions and the allocation of a pilchard total allowable catch, is forecast to continue, albeit at a more modest pace.

Namibia: real GDP growth (% change) 2002a 2003b 2004c Agriculture 0.7 -4.8 -1.0 Fishing 3.1 10.3 3.4 Mining 3.9 -7.1 4.4 Manufacturing 7.4 5.8 5.7 Construction -22.5 4.5 4.0 Tourism 6.2 -5.1 4.5 Real estate & business services -1.7 2.4 2.4 Government 3.2 2.9 2.4 Total 3.3 3.1 3.8 a Actual. b Estimates. c Forecasts. Sources: Central Bureau of Statistics, National Accounts, 1994-2002; Bank of Namibia, Annual Report 2003.

Inflation has resumed an Year-on-year inflation has continued to rebound from its all-time low of 2.1% in upward trend December 2003 to 3.8% in March 2004, as food price inflation has accelerated. Higher food prices reflect the fact that the impact of the regional drought in 2002 has now fallen out of the annual comparison. Improved food availability in 2003 (compared with 2002) was the main cause of the fall in inflation last year, from 12.8% in January. The impact of higher food prices will drop out of the annual comparison by mid-year and prospects of a bumper Namibian coarse grain harvest this year should keep year-on-year food price inflation reasonably low. A greater short-term concern is continued high oil prices combined with a modest depreciation of the Namibia dollar against the US dollar. The cost of unleaded petrol was raised by 6% to N$3.65 (52 US cents) per litre and that of diesel by 5% to N$3.50 per litre in mid-April. Higher food prices will also add to the cost of transporting goods in from South Africa.

Mining

Diamond output fell by 4% to The suspension of mining by and subsequent liquidation of Namibian 1.48m carats in 2003 Minerals Corporation (Namco—February 2003, The domestic economy) caused a 4% fall in diamond production in 2003, to 1.46m carats. Substantially higher output by Namibia’s main diamond mining company, Namdeb Diamond Corporation (Namdeb), the 50:50 government/De Beers joint venture, prevented the fall in production from being much greater. Namdeb’s output increased by 14% to 1.46m carats (the highest level since independence). De Beers’ Annual Review 2003 reveals that the increase in Namdeb production reflected strong expansion in onshore recoveries and recoveries offshore by De Beers Marine Namibia (DBMN), which operates as Namdeb’s sole contractor in the Atlantic 1 concession along the southern coastline. The record recovery of 602,000 carats by DBMN (in which De Beers holds a 75% stake and Namdeb 25%) comprised 41% of Namdeb’s output.

Namibia: diamond production (‘000 carats unless otherwise indicated) 2002 2003 % change Namdeb 1,276 1,455 14 Onshorea 697 807 15.8 Offshoreb 513 602 17.3 Beach & marine contractors 66 46 -30.3 Other offshore producersc 274 27 -90.1 Total 1,550 1,482 -4.4 Offshore recoveries 853 675 -20.9 % recovered offshore 55 46 - a Includes Mining Area No.1, Daberas and Elizabeth Bay. b Production by De Beers Marine Namibia (DBMN). c Mainly Namibian Minerals Corporation (Namco) in 2002. Sources: Chamber of Mines of Namibia, 2003 Annual Report; De Beers SA, Annual Review 2003.

Samicor unveils production Israel’s Leviev group, which owns Sakawe Mining Corporation (Samicor), and investment plans unveiled ambitious plans for its Namibian diamond operations at a February launch in Windhoek. Samicor will begin mining the former Namco concession area, the rights to which were acquired by LL Mining, a Netherlands-based affiliate of the Leviev group, in May. A three-year US$46m investment programme was announced, including US$7m for the acquisition of a third mining vessel in 2006 and US$10m for repairing and modifying its two existing vessels. The offshore concessions taken over from Namco are estimated to contain at least 12m mainly gem-quality carats and this resource base is likely to be expanded through a resumed exploration programme by Samicor. It is unclear whether more than a small proportion of the diamonds mined by Samicor will be exported as rough goods, as the company announced its intention to supply all its output to a new diamond cutting and polishing plant due to open in Windhoek in mid-2004 (see Manufacturing). To enhance Samicor's standing with the government it announced that a 24% shareholding had been given to local partners via the transfer of 24 shares for a token payment of N$1 (US$0.15) per share. Of this, 8% was transferred to the government, 10% to a black empowerment group, Long Life Mining

Corporation, 4% to the staff pension fund and 2% to the Namibia Youth Council, which aims to involve younger people in national development.

Skorpion should achieve full Following the commissioning of the Skorpion zinc mine and refinery, zinc will capacity output this year soon become the second-largest source of mineral export revenue after diamonds. Skorpion’s effort to reach full capacity of 150,000 tonnes/year of high grade zinc metal was adversely affected by plant failures caused by faulty components and construction deficiencies in 2003. Nevertheless, just over 47,000 tonnes of zinc were produced last year, all of which was exported to world markets via the port of Lüderitz, and 75% of capacity had been achieved by the end of 2003. Under a revised programme Skorpion is scheduled to reach full capacity by the middle of this year. With refined zinc trading at an average of US$1,100/tonne in April 2004, a full year's production would be worth US$165m (15% of Namibia’s total export revenue). A further capital investment of N$667m (US$63m) was made by Skorpion's owners, Anglo American, in 2003, lifting the total cost of the project to N$3.57bn (US$339m). In a further boost to Namibia’s zinc mining sector, production at the nearby Rosh Pinah lead/zinc mine was substantially increased last year. Output of zinc concentrates rose by some 40% to a record 108,000 tonnes, most of which was shipped to South Africa for further processing at facilities operated by the owning company, Kumba Resources. This acceleration in production has had a similar impact on reserve depletion, necessitating an increase in expenditure on prospecting and drilling to delineate more mineable ore.

Uranium production at A 13% decline in uranium oxide production from the Rössing mine near Rössing declined last year Swakopmund last year was the result of the closure of the main plant during the first quarter of 2003 while a new tailings disposal unit was installed. Although in the second half of 2003 production was running at a higher level than a year earlier, the reduced annual output resulted in a 23% decline in gross turnover last year. Combined with the appreciation of Namibia dollar, this resulted in Rössing incurring a hefty loss in 2003, almost equivalent to the previous year’s profit. Although the uranium spot market price has recovered strongly in the past year, more than doubling to US$18/lb as of April 2004, this is of little benefit to Rössing as most of its current sales are made under long- term contracts negotiated when the uranium market was weaker. Provided Rössing can weather its current financial difficulties, it should start to benefit from higher prices as existing contracts come up for renewal and new ones are obtained as long-term contract prices are influenced by prevailing conditions in the spot market. A decision by Rössing’s main shareholder, Rio Tinto, on whether to invest in extending the mine’s life into the next decade or to proceed with closure in 2007, as provided for under the current mining plan (November 2003, The domestic economy), is due by the end of the year.

Namibia: uranium oxide output and earnings 2002 2003 % change Production (tonnes; U308) 1,887 1,647 12.7 Gross turnover (US$ m) 112 86 23.2 Net profit/lossa 34 -28 - a Economist Intelligence Unit calculation based on Rio Tinto’s declared net attributable earnings/loss from Rössing in line with its 68.6% equity interest. Source: Rio Tinto, Annual Review 2003.

Feasibility study of Langer An Australian company, Paladin Resources, is optimistic on the prospects for Heinrich deposit is proceeding developing a profitable commercial mining operation at the Langer Heinrich uranium deposit, located to the south of Rössing in the Namib desert. Paladin, which in 2002 acquired 100% ownership of the company holding the mineral rights to Langer Heinrich (first discovered in the 1970s) from fellow Australian company Aztec Resources, is conducting a 12-month feasibility study, based on positive results from a pre-feasibility study completed in 2003. This had indicated a 10m-tonne mineable resource grading 0.11% uranium, sufficient for the production of 1,000 tonnes/year of uranium oxide for a minimum of ten years. Paladin regards the costings and potential returns from Langer Heinrich as “very robust” at a uranium price of US$15/lb, and unless there is a renewed collapse in prices, which looks unlikely, development of a mine could be under way by the end of 2005.

Exploration spending set a A record N$264m was spent on prospecting for diamonds and other minerals new record in 2003 by members of the Chamber of Mines of Namibia in 2003, up by 81% on 2002 and slightly above the previous record annual spend of N$249m in 2001. In US dollar terms, exploration spending recorded an even more impressive increase, more than doubling to US$35m. Offshore diamond exploration accounted for N$213m (81%) of total spending in 2003. More than 50% of all onshore expenditure was in southern Namibia, mainly for zinc and other base metals in the Sperrgebiet, the restricted diamond area which the government opened up to non-diamond prospecting three years ago. The Chamber of Mines currently has 63 corporate members, and its 30 full members include virtually all Namibia’s operating mining companies, together with foreign and local firms actively engaged in exploration.

Agriculture

A bumper cereal harvest is The Namibia Early Warning and Food Information Unit (Newfiu) has projected fo recast fo r this year a total coarse grain harvest for the 2003/04 (July-June) season of 147,000 tonnes in its March crop assessment report. This would be the biggest harvest since the record 166,000 tonnes of 1996/97 and an almost two-thirds increase over last year’s drought-affected output. Above average and generally well distributed rainfall in Namibia’s main communal and commercial crop growing districts during the first half of the 2003/04 wet season (October-April) is the reason for the jump in production. Newfiu qualified its forecast as being tentative and subject to the results of a final crop assessment mission to the six northern crop-producing regions to be conducted in May 2004. It was also based on the assumption of adequate rainfall from March until mid-April, which occurred in

most areas—a prolonged dry spell in January and February did not seriously affect crop development as sufficient moisture was retained in the soil. In contrast to recent crop seasons, there have been only minor instances of plant disease and pest infestations this year, with a shortage of seeds, especially in Kavango region, the main problem affecting subsistence farmers. Extensive flooding of Caprivi region’s crop-growing areas in late March/early April will have ruined some crops and Newfiu’s maize forecast for the region is likely to be revised downwards. Nonetheless, communal millet and sorghum production, 90% of which takes place in the four north-central regions of Ohangwena, Omusati, Oshana, Oshikoto, is projected to almost double to 100,000 tonnes, while communally-grown maize in Caprivi and Kavango regions is forecast to quadruple. The commercial maize crop is expected to be almost one-third higher than in 2002/03 at 40,000 tonnes, almost entirely owing to a substantial increase in rain-fed crops grown in the Otavi-Tsumeb- Grootfontein “maize triangle”, with the highest-ever area of 13,700 ha planted this year. In contrast, production of irrigated maize is expected to be almost unchanged although it will still account for two-thirds of the commercial crop, owing to much higher yields (averaging 6,700 kg/ha compared with 1,500 kg/ha for dryland maize, and about one-third of that for communally grown maize).

Namibia: coarse grain production (‘000 tonnes) 2002/03 2003/04a % change Millet/sorghumb 58.5 99.8 70.6 Caprivi 1.3 2.4 84.6 Kavango 3.0 5.3 89.3 North-central areasc 54.1 91.3 68.8 Maize 32.7 46.9 43.4 Commercial 31.0 40.3 30.0 Irrigated 26.3 26.8 1.9 Rain-fed 4.7 13.5 187.2 Communald 1.7 6.6 288.2 Total coarse grain outpute 91.1 146.8 61.1 a Forecasts. b All rain-fed; also includes small quantities (under 1,000 tonnes) grown commercially. c Ohangwena, Omusati, Oshana, Oshikoto regions. d Caprivi and Kavango regions. e Totals do not sum precisely owing to rounding. Source: Ministry of Agriculture, Water and Rural Development, Crop Assessment Report March 2004.

Including an irrigated winter wheat crop of 8,300 tonnes, this year’s total cereal harvest is projected at just over 155,000 tonnes, which, combined with estimated opening stocks of 50,000 tonnes, would provide a supply of 205,000 tonnes for the 2004/05 (May-April) marketing year. This results in a 97,000- tonne shortfall (55,000 tonnes of maize and 42,000 tonnes of wheat) compared with the estimated national requirement—43,000 tonnes (31%) lower than the shortfall in 2002/03—which should easily be covered by normal commercial imports. However, the shortage of maize on the regional market caused by the South African drought is likely to make procurements more expensive this year.

Drought relief measures A substantially higher production of millet, the food staple in northern rural likely to be phased out areas, along with a recovery in livestock pastures, will improve household food security and should obviate the need for a further large-scale food relief

programme this year. However, until the crops are harvested in June, most rural households will remain dependent on food distributed by the government’s emergency management unit as part of the N$275m national drought relief programme for 2003/04 (November 2003, The domestic economy; Agriculture and fishing). After a slow start, food distribution to 640,000 drought-affected people had begun in most areas by the beginning of 2004. For reasons that have never been publicly explained, a donor conference planned for late 2003 to raise funds for the drought-relief programme appears never to have taken place, obliging the government to cover most of the cost itself. However, if there is no need to finance additional relief measures this year, existing contingency provisions should be sufficient for the current programme, and further amounts will not need to be allocated from the 2004/05 budget.

A large-scale irrigation scheme A major expansion of irrigated crop production is in prospect, with the is due to start this year scheduled launch this year of the Tandjieskoppe “green valley” project along the north bank of the Orange river, in the south of the country. The scheme, providing for the growing of table grapes, melons and citrus fruit, will extend from Aussenkehr, where the majority of Namibia’s table grapes are grown, to the border town of Noordoewer. The government expects to secure N$87m (US$12.4m) in external loans for the project in 2004/05, with the same amounts pencilled in for the following two fiscal years. Although the source of the loans has not been disclosed, China is likely to be a major backer, as the country has already provided several loans for smallholder irrigation schemes in the Aussenkehr area. Production of table grapes for the European market has expanded rapidly in recent years, reaching 200,000 cartons in 2002, and officially estimated at 310,000 cartons in 2003.

Manufacturing

Diamond cutting and polishing The government’s hopes of securing an expansion of downstream processing activity set to expand of Namibia’s natural resources have received a boost from the Leviev group’s commitment to supply its new diamond cutting and polishing plant in Namibia with rough diamonds mined by its Samicor subsidiary (see Mining). Although Namibia’s existing gem cutting and polishing factories only make a small contribution to manufacturing output at present, this would be significantly increased if the new Leviev group plant fulfils current expectations. Exports by the biggest current operation, Namdeb’s NamGem, should also expand under a two-year technical and marketing partnership signed with the leading US diamond firm, Lazare, Kaplan International (LKI) in January. The Leviev group plant, owned by LL Diamonds, another subsidiary of the Samicor parent company, LL Mining, is designed to process up to 25,000 carats per month, and is due to be completed this May. It will take some time for it to achieve full capacity as the training of its 550 cutters and polishers is expected to take up to a year. Most of these will be Namibians although the company may be tempted to import trained personnel from China and India to speed up the process. The availability of local rough diamonds for the new plant should enable it to operate more profitably than existing cutting plants, which have to purchase rough diamonds from outside

Namibia. The Leviev group’s global operations and widespread expertise in cutting and selling polished gemstones should provide the operation with the necessary distribution network to be competitive. The new plant will provide competition with NamGem, whose cutting plant in Okahandja began operations in the late 1990s. Although it has proved successful in producing a range of cut diamonds acceptable to the global market, with 30,000 polished stones exported last year, financial viability has proved elusive, not helped by the Namibia dollar’s strong appreciation and higher rough diamond prices in 2003. NamGem does not obtain any diamonds from Namdeb, which exports all its production as rough goods. The partnership with LKI is intended to reposition the company to gain access to the premium end of the market, following changes to the marketing system which have taken place since De Beers rolled out its “supplier of choice” strategy last year. For the present, Namdeb has retained full ownership of NamGem, which will be paid on an arms-length “fee for service” basis by LKI. Should the partnership prove a success, the US firm seems likely to become an equity partner.

Transport and communications

The feasibility of a third port is The government has announced plans to evaluate the potential of a new being evaluated harbour at Cape Fria on the northern Skeleton Coast, about 120 km south of the border with Angola. The government believes that a northern harbour would enhance the existing port facilities at Walvis Bay and Lüderitz by providing a new base for the fishing industry, and potentially a more direct route for trade with neighbouring countries. The works, transport and communications minister, Moses Amweelo, announced in March that a N$1.3m pre-feasibility study would be completed by the end of this year, to be followed by a full feasibility study if the preliminary assessment is favourable. A considerable proportion of Namibian fish stocks, including both hake and pilchard, is increasingly concentrated in the northern part of Namibia’s fishing grounds, making an alternative to Walvis Bay—currently the main base for the onshore fish processing industry—viable, according to Mr Amweelo. However, a new harbour is not included in the current five-year national development plan and creating a new port from scratch would be prohibitively expensive, especially as there are currently no main roads or other infrastructure in the area. The construction of a harbour at Mowe Bay, 130 km south of Cape Fria, was considered in the early 1990s, prior to the transfer of Walvis Bay and its surrounding enclave from South African to Namibian control in 1994. Since then the government has invested large sums on improving port infrastructure there, including a new container terminal, while a public-private partnership, the Walvis Bay Corridor Group is actively promoting the harbour as a regional hub for cargo shipments to and from Zambia and other landlocked African states.

Foreign trade and payments

Increased manufacturing Despite lower diamond production and the weakness of most metal prices output lifted exports in 2003 until the latter part of 2003, overall exports increased by 18% to US$1.3bn in 2003 (though in local currency this equates to a 16% decline, to N$9.5bn). (The data on foreign trade and the balance of payments published in the Bank of Namibia’s Annual Report 2003 for both last year and 2002 are provisional and are likely to be revised in line with IMF reporting standards, which is the basis of the Economist Intelligence Unit's estimates and forecasts—February 2004, Foreign trade and payments). This increase in export revenue reflected higher manufactured exports, which nearly doubled to US$357m, resulting from the start of zinc metal exports from the Skorpion mine and refinery, along with higher volumes of smelted copper and processed fish exports. Diamond exports fell by 3%, to US$516m, reflecting the positive impact of higher rough diamond prices on the global market in 2003, which almost offset the reduction in export volume. Exports of other minerals declined by 7% to US$185m, mainly owing to a fall in sales by the Rössing uranium mine to US$112m.

Namibia: exports (N$ bn unless otherwise indicated) 2002a 2003a % change % changeb Diamonds 5.6 3.9 -30.4 -2.1 Other mineral products 2.1 1.4 -33.3 -5.0 Food & live animals 1.6 1.4 -12.5 15.8 Manufactured productsc 2.0 2.7 58.8 87.1 Total incl others 11.3 9.5 -15.9 12.4 US$ bn 1.1 1.3 18.2 – a Provisional. b US dollar terms. c Includes smelted copper and refined zinc. Source: Bank of Namibia, Annual Report 2003.

Higher transfers boost current- Imports rose strongly in US dollar terms in 2003 owing to higher international account surplus oil prices and increased food imports, necessitated by the poor harvest, causing the trade deficit to more than double. Despite this, the current-account surplus widened to US$344m, from US$134m in 2002, largely owing to a substantial increase in net current transfers—mainly Southern African Customs Union (SACU) revenue—and higher net inflows on the services and investment income accounts. The increased inflow of customs revenue reflected a sizeable increase in Namibia’s imports in 2001, as under the existing SACU agreement payments are made with a two-year lag. The services account, which until 2001 had consistently recorded a deficit, further strengthened in 2003 as a result of the continued expansion of the travel surplus, reflecting an increase in tourism expenditure from N$1.7bn in 2002 to N$2bn. The investment income account also recorded a substantially higher surplus than last year, attributable to greater income from pension funds and life insurance.

Namibia: current account (N$ bn unless otherwise indicated) 2002 2003 % change Exports fob 11.3 9.5 15.9 Imports fob -13.5 -12.9 -6.7 Trade balance -2.2 -3.5 37.1 US$ m -209 -463 121.5 Services (net) 0.4 0.9 125.0 Income (net) 0.3 1.6 433.3 Current transfers (net)a 2.9 3.6 24.1 Current-account balance 1.4 2.6 85.7 US$ m 134 344 156.0 a Mainly Southern African Customs Union receipts; includes compensation of employees. Source: Bank of Namibia, Annual Report 2003.

Capital outflows cause overall The widening of the current-account surplus in 2003 was insufficient to offset a balance-of-payments deficit sharp deterioration in the capital account, resulting in an overall balance of payments deficit last year, compared with a small surplus in 2002. The deterioration was because of a decline in net direct investment and increased outflows of both portfolio and other long-term investment, mainly because pension funds and insurance companies continued to invest large amounts on the South African financial markets. The net outflow on other long-term investment, mainly pension funds and insurers, totalled N$3.1bn in 2003, up by 55% on the previous year. Foreign direct investment in Namibia fell last year from the high levels recorded in 2001-02 because financing of the Skorpion zinc mine and refinery was completed, with equity capital inflows declining from N$1.4bn in 2002 to only N$200m last year.

Namibia: capital account (N$ bn unless otherwise indicated) 2002 2003 % change Capital transfers (net) 1.2 1.2 3.7 Direct investment (net) 2.0 0.7 -65.0 Portfolio investment (net) -1.6 -1.9 18.8 Other long-term investment (net) -2.0 -3.1 55.0 Pension funds & insurance firms -2.9 -3.3 13.8 Short-term investment (net) 0.4 0.3 -21.1 Banks 0.6 0.4 -33.3 Capital-account balance -0.1 -2.8 2,700.0 US$ m -14 -365 2,507.0 Errors & omissions -1.1 -0.6 -45.5 Overall balance of payments 0.2 -0.8 - Total (US$ m) 18 -103 -

Source: Bank of Namibia, Annual Report 2003.

External debt jumped in 2003 Namibia’s total outstanding foreign debt increased to a record N$6.8bn at the end of 2003, largely because of a trebling of private-sector debt stock. It is not clear to what extent this reflects new borrowing by the private sector, as the Bank of Namibia (the central bank) attributes the increase to improved data coverage. In contrast, central government foreign debt rose only slightly year on year, owing to newly contracted loans, while the foreign debt liabilities of

parastatals decreased. However, the data for 2003 are distorted by the strong appreciation of the Namibia dollar last year, which moderated the upward trend in local-currency terms. In US dollar terms, outstanding foreign debt increased by 64% to US$1.03bn as at end-2003, compared with a year earlier— private debt surged from US$144m to US$451m, while central government debt increased by 41% to US$241m and parastatal debt rose by 8% to US$333m. Debt-service costs, while still relatively affordable, have increased substantially, to N$614m at end-2003, up by two-thirds compared with two years earlier, and almost doubling over the same period in US dollar terms, to US$81m. This was mainly owing to the expiry of grace periods for some of the loans made to parastatals in previous years, whose debt-servicing obligations increased by half to N$400m, two-thirds of the total. Despite the jump in private-sector debt stock there was not a commensurate increase in private-sector debt service, suggesting that this may be under-recorded. The debt-service ratio now exceeds 6% for the first time, indicating that further increases in foreign borrowing— especially by parastatals—will need to be carefully managed to ensure repayment obligations remain affordable. However, in US dollar terms, the position is more favourable as the US dollar value of exports increased in 2003, compared with a decline in local-currency terms.

Namibia: external debt (N$ bn unless otherwise indicated) 2001 2002a 2003a % changeb Central government 1.6 1.5 1.6 0.0 Parastatals 2.3 2.7 2.2 -4.3 Private sector 1.1 1.2 3.0 172.7 Total 5.0 5.4 6.8 36 (US$ m 413 623 1,025 148.2 Debt service 366 421 614 67.8 US$ m 43 40 81 88.4 Debt (% of GDP) 18.3 17.9 20.6 - Debt-service ratioc 3.7 3.7 6.6 - a Total outstanding foreign debt. b Provisional. c 2003 compared to 2001. d As a percentage of exports of goods and services Source: Bank of Namibia, Annual Report 2003.

Full details of new SACU Details of the impact of new Southern African Customs Union (SACU) structure revealed revenue-sharing agreement, signed in August 2002 in Botswana, between the member states of Botswana, Lesotho, Namibia, South Africa and Swaziland, have emerged in the IMF's Lesotho: Selected Issues and Statistical Appendix that accompanies the publication in February 2004 of the 2003 Article IV consultation. The agreement was the culmination of talks that had started in 1994. The new SACU secretariat has been established in Windhoek, headed by an executive secretary, Connie Moremi, who took up her post early in 2004. The 2002 agreement introduces a structure with six new institutions. • Council of Ministers: the highest decision-making body, responsible for policy direction. • Customs Union Commission: responsible for implementing the agreement.

• Secretariat: responsible for the day-to-day administration of the agreement and keeping records of all transactions into and out of the common revenue pool. • Tariff Board: responsible for recommending tariff changes to the Council of Ministers. • Four technical liaison committees: responsible for advising and assisting the Customs Union Commission in its work related to agriculture, customs, trade and industry, and transport. • Tribunal: the body that will pass judgement upon issues relating to the application or interpretation of the agreement, at the request of the Council of Ministers; its decision is final and binding. The new formula differs from the old in several ways. Probably the most important difference is that the current agreement guarantees an effective duty rate of around 17% to Botswana, Lesotho, Namibia and Swaziland, which means that they are insulated from the trend decline in actual duty rates. This was a strong reason why South Africa did not like the old formula, since in principal it could have led to South Africa making a net payment into the SACU revenue pool. The 2002 agreement includes a new formula for sharing customs and excise duties. It consists of three parts. • Customs component: total customs duties collected in all member states will be distributed to each country in proportion to its share of intra-SACU imports. • Excise component: of the total excise duties collected in all member states, 85% will be distributed to each country in proportion to its share of SACU GDP. According to the IMF, in 1998/99 the shares were: South Africa 92.6%; Botswana 3.4%; Namibia 2.4%; Swaziland 0.9%; and Lesotho 0.6%. • Development component: of the total excise duties collected in all member states, 15% will be set aside for redistribution of revenue. In the first step of the calculation, each member state will be allocated 20% of the development component. In the next step, each share will be adjusted for differences in GDP per head in order to make an additional redistribution from high- to low-income members. The net effect of this second step is small. Each year, in October or November, member states will meet to agree upon the size of the revenue pool that will be allocated over the following fiscal year, starting in April, and the share that each member will receive. Although the trade regime remains generally unchanged, the new agreement is more democratic than the existing 1969 agreement. All member states will now be able to take part in the management of the customs union, which has historically only been a function of South Africa's Board on Tariffs and Trade.