25 February 2013

Namibia: IMF Warns Against Low Reserves

Photo: http://www.newera.com.na
A confident Minister of Finance Saara Kuugongelwa-Amadhila increased government spending to a record N$47.6 billion for the 2013/14 financial year.

NAMIBIA'S current level of reserves is not sufficiently strong to respond to large global shocks, the International Monetary Fund (IMF) said on Friday, calling on Government to make a "more ambitious fiscal effort" beyond its Medium-Term Expenditure Framework (MTEF).

The IMF's warning comes ahead of Finance Minister Saara Kuugongelwa-Amadhila tabling her 2013-14 Budget in Parliament tomorrow, in which, according to the existing MTEF, she is supposed to rein in expenditure to start getting Namibia out of the red and get debt levels under better control.

In its latest country report, which followed on the annual Article IV consultations with Government at the end of last year, the IMF is expecting Namibia's foreign reserves to drop to about US$1,79 billion (nearly N$16 billion) in 2013, down from an estimated US$1,88 billion last year.

This will be enough to cover three months of imports into the country, which is lower than the average 3,1 months of import coverage of 2012, the IMF said. The international benchmark for import coverage is three months.

The IMF warned that Namibia's average import coverage for 2014 might drop to 2,9 months, below the accepted international standard. For 2015 and 2016, the IMF expects the figure to pick up to three months again, before further recovering to 3,1 months in 2017.

"The gap between Namibia's reserves holdings and its adequate level is expected to widen in the future, with unchanged policies. The exchange rate peg to the rand could come under pressure if fiscal consolidation to rebuild reserve does not take place," the IMF said.

"Therefore, a more ambitious fiscal effort beyond the authorities' medium-term expenditure framework would be advisable," the IMF said, adding that the peg to the rand has served Namibia well and merits continued support through a further buildup of reserve buffers.

The IMF said Namibia's current level of reserves is not sufficiently strong to respond to large global shocks.

"If adverse shifts in global economic developments lead to a decline in mineral prices and thus a significant loss of revenues compared to the budget target ... [IMF] staff advised the Government to allow the automatic stabilisers to work on the revenue side as long as the public debt is not above the 35% of GDP [gross domestic product] target."

The IMF said this implies that the Government should not increase tax rates to compensate for the associated cyclical loss in mineral revenues or reduce expenditures to meet the Government's budget deficit target.

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