6 June 2019

Namibia: IMF Tells Govt to Rein in Spending Urge

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The government should control its spending cravings and stick to its delivered budget, or risk running into much deeper financial trouble, says the International Monetary Fund.

The IMF team made the call yesterday as it concluded its 2019 visit to Namibia.

"Avoiding excessive risk-taking from off-budget will strengthen the credibility of the adjustment and reduce fiscal risk. Immediate measures should be taken to contain the deficit within the budget as spending pressures are rising," said IMFs Geremia Palomba. Under the agreement between the IMF and member countries, reviews of policies and economic growth prospects are the norm.

Checks are also made to ensure that countries are committed to creating conducive environments for growth, price stability and exchange rate competitiveness.

Other than that, the IMF also asks member states to provide economic data, while keeping an eye on member states to identify weaknesses that could lead to financial and economic instability.

Since it is an election year, analysts have said the ruling party, through the government, is likely to increase spending, and deliver fast on services to attract votes, but this might have a negative backlash on the economy afterwards.

Led by Palomba, the IMF team said the discussions were productive, and a full report on all findings will be made available in September 2019.

Palomba said there were no serious worries on the economic side of the country, but they rather saw a country which was undergoing a needed balance after overheating during the good years.

"The economy is undergoing a rebalancing process, and has been contracting. This is normal for an economy that had a history of overheating, especially seeing that growth in the past was fuelled in part by temporary factors such as increases in government spending, and the government is now consolidating, hence the slowdown," he noted. Palomba added that the government's consolidation plans at the moment strike the right balance between stabilising public debt and supporting the economy, but several actions are still needed to deliver a much better outcome.

"Namibia's key challenges are to identify specific policies to fully deliver the authorities' fiscal consolidation plans to stabilise public debt dynamics, and roll out structural reforms to boost long-term growth," he said.

There is also a need to rationalise large spending, such as the wage bill and transfers to public entities, as well as the strengthening of the revenue administration, and improving expenditure control as these are likewise critical to delivering stability, he explained.

The IMF team leader said productivity efficiency, which is the function of all factors of production, is at its lowest since independence, and needs to be revived.

"Undertaking reforms to strengthen productivity and competitiveness is a must to lift business confidence and the long-term growth potential of the economy, with special emphasis on reducing policy uncertainty," he said. Equally important are the streamlining of business regulations, removing obstacles that contribute to high electricity and transportation costs, as well as establishing a well-structured wage policy for the public sector to better align wage dynamics and productivity.

"There is really nothing that changed from the structural issues earlier identified," he stressed.

A FURTHER CONTRACTION

According to the team, prospects are that economic recovery this year might not materialise. The central bank had projected a growth of 0,3%, but the fund assumes it's too ambitious now.

The IMF team expects the economy to recover gradually, and not just at one go, as the economic vulnerabilities stretch across many factors.

"Growth is projected to remain mildly negative in 2019, as a poor rainy season and reduced diamond production continue to weigh on a tentative recovery," Palomba stated.

He added that growth is expected to turn positive only in 2020, and gradually converge to a long-term rate of about 3%, held back by low productivity and declining competitiveness.

"Downside risks to this outlook include a lower-than-expected Southern African Customs Union (Sacu) revenue, and fiscal slippages that would undermine the government's efforts to stabilise public debt dynamics," he explained.

The IMF team also said seeing that the South African GDP figures are down, there is a possibility of a further decline in economic activity in the local market.

Reacting to the announcement on South Africa's GDP on Wednesday, Simonis Storms analyst Indileni Nanghonga expressed similar sentiments as the IMF, and expects to see the government's revenue strained for the year, mainly because Namibia's Sacu revenue projections were based on a better economic growth rate in SA. On overall financial stability, the IMF said there was nothing of concern, noting "Despite the economic slowdown, the financial sector remains sound".

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