Figure 1: Real GDP growth (S)

Figures for 2010 are estimates; for 2011 and later are projections.

Table 1: Macroeconomic indicators

Figures for 2010 are estimates; for 2011 and later are projections.

The Namibian economy rebounded from the global economic downturn in 2010 due to rapid recovery in mining activities; in particular, diamond and uranium mining. The gross domestic product is expected to expand further in 2011 and 2012, due primarily to sustained improvement in global demand for mineral products and improvements in credit extension. However, the risk of a sovereign debt crisis in the euro area poses a threat to domestic mining and tourism industries; a euro area debt crisis could derail the current recovery process.

In 2010, agricultural production expanded by 1.6% due to favourable weather conditions. Namibian agricultural production has benefited from exceptionably high levels of rains during the past three years and this trend is predicted to continue during 2011 and 2012. The agriculture, fishing, forestry and hunting sectors contributed 9.4% to GDP in 2009. The recovery in the sector is driven primarily by livestock farming anchored by the Combating Bush Encroachment for Namibia’s Development (CBEND) project, or debushing programme. Good harvests are also expected in the crop farming sector mainly due to the expansion of land for crop production, the governments’ Green Scheme programme and the Millennium Challenge Account (MCA) investment to increase crop production and business capacity. However, access to land remains one of the biggest challenges to boost rural productivity and reduce the current high levels of unemployment.

The mining sector, the backbone of the economy, was hit severely by the 2008-09 global recession. In 2009, production in total mining and quarrying declined by 45%; diamond mining declined by 49.7% and other mining and quarrying by 22.5%. The mining and quarrying sector contributed 10.8% to GDP in 2009. In 2010 there was some recovery in the mining sector, which expanded by an estimated 20.3% as a whole, while diamond mining output grew by 25%. Diamond, gold and zinc production increased by 71.8%, 38.1% and 5.6% year-on-year during the third quarter of 2010, respectively, while uranium output declined by 5.4%. Namibia is the fourth largest producer of uranium in the world; an increase in uranium prices – due to increased demand from China and India – is expected to anchor economic growth in the future. Uranium is poised to overtake diamonds as the main export commodity; nonetheless, the latter still contributes 15% of the foreign exchange earnings.

Four investments, worth a total of about USD 714 million, were undertaken in the mining and exploration sector in 2010. Between 2006 and 2009, the country received several investments in the mining and exploration sector due to the discovery of significant deposits of uranium. For instance, gross fixed investment in mining and quarrying increased by 139% from NAD 1.8 billion in 2005 to NAD 4.3 billion in 2008. In spite of the recovery in global demand, a strong currency exchange rate remained a serious challenge for the sector during 2010.

Manufacturing remained resilient amid the global economic downturn in 2009, expanding by 6.5%, while the sector is likely to grow by an estimated 6.2% in 2010. The main drivers of growth in the manufacturing sector are fish processing onshore and processing of other food, excluding meat processing. The estimated growth rate for fish processing is 9.7%, while 6.5% growth is anticipated in the processing of other foodstuffs in 2010. Manufacturing contributed 14.7% to GDP in 2009 and employed approximately 6% of the total labour force.

The construction sector declined by an estimated 3.7% in 2010, following a more severe contraction of 7.2% in 2009 compared to 2008. The decline was driven mainly by the fall in residential building construction owing to a tightening of credit and high levels of household indebtedness. During the third quarter of 2010, the value of buildings completed fell by 35.5% year-on-year, compared to the corresponding quarter of 2009.

The service sector, whose growth remained resilient during the 2009 global financial and economic crises, slowed down in 2010 with the exception of hotels and restaurants, transport, storage and communications. Growth in wholesale and retail trade slowed down by an estimated 2.5% in 2010 from 3.1% in the previous year, while growth in financial intermediation declined by 5.2% in 2010 from 6.6% in 2009. Real estate and business services grew by an estimated 2.1% in 2010 compared to 6.0% in 2009.

On the demand side, private consumption expenditure, the major driver of growth, was depressed in 2010 due to lower consumer confidence arising from higher household indebtedness, credit tightening and high levels of unemployment exacerbated by job losses during the economic downturn in 2009. Growth in private consumption slowed down by an estimated 3.2% in 2010 compared to 5.8% in 2009. Government consumption slowed down to 4.5% in 2010 from 9.8% in 2009.

However, due to the global economic recovery and improved demand for commodities, investment expanded in 2010. Private investment, which accounts for more than two-thirds of the total investment, grew by an estimated 3.5% in 2010 after declining by 5.4% in 2009, while public investment grew by an estimated 4% in 2010 after slower expansion by 3.5% in 2009. About 51 new FDI projects were announced by the end of the third quarter of 2010. The MCA investments included projects in the education, agriculture and tourism sectors.

With global economic recovery expected to be sustained in the medium term, the mining sector is expected to remain the major driver of growth for 2011 and beyond. Private consumption is expected to expand further in 2011 anchored by lower interest rates, and increasing income, although the high levels of unemployment are expected to continue. Exports fully recovered and expanded by 11.7% in 2010 following a 15% decline in 2009 and are expected to foster the expansion of private sector investment. Output growth is expected to accelerate in 2012 when the global economy fully recovers and the third uranium project becomes operational.

Growth potential has been constrained by structural weaknesses associated with excessive dependency on a few mineral products, which is exacerbated by the high unemployment levels, lack of skilled labour and energy shortages. To address this challenge, Namibia must speed up structural reform to improve the private investment climate, expand access to land for the rural poor and invest in skills development.

Figures for 2010 are estimates; for 2011 and later are projections.

The fixed currency peg to the South African rand underpins Namibia’s monetary policy framework. Thus, the country does not operate monetary policy independently from the anchor country. The stance of monetary policy can deviate, however, to a certain degree from that of the anchor currency by using capital controls and prudential requirements imposed on financial institutions, including keeping the repo rate different, controlling money supply and credit extension to the private sector.

Monetary policy goals for 2010 were to address weaknesses in the real sector and boost growth on the demand side through successive monetary easing, while at the same time working to bring down the domestically generated component of inflation. According to the Bank of Namibia, over 65% of Namibia’s inflation is imported, primarily from South Africa, while the remaining 35% is domestically generated. The maintenance of the stable peg ensures that Namibia imports stable inflation from the anchor country.

The slowdown in domestic demand, low imported inflation and a strong currency led to a decline in inflation from 8.7% in 2009 to 4.5% in 2010. The subdued inflationary environment provided more space for monetary easing. Interest rates were cut by 450 basis points between December 2008 and December 2010, resulting in the rate of 6%. Falling rates have led to a revival in credit demand towards the end of 2010 with credit extension to the private sector growing by 9.6% in September 2010 year-on-year. Expansionary monetary policy is likely to continue in 2011 given the current fragile global and domestic economic recovery. Inflation is expected to remain around 6.1% and 5.5% for 2011 and 2012, respectively.

Namibia is a very open economy, with the ratio of total trade to GDP growing from 85.5% in 2000 to 97.7% in 2009. From 2000-09, nominal imports of goods and services grew by 24% per annum on average, while nominal exports of goods and services grew by 21% per annum on average, over the same period. Import growth prior to 2009 was boosted by increased domestic demand for goods, services and investment. However, the current account continued to record a surplus primarily due to current transfers from the SACU, except for 2009 when a deficit of 5% was recorded.

In 2010, the current account deficit was estimated to be 2.9% of GDP. This was due to the deteriorating trade balance and the expected decline in receipts from the SACU. The actual current account balances for the first three quarters of 2010 have indeed shown surplus, albeit declining ones. However, merchandise trade deficits deteriorated further as a stronger Namibian dollar boosted imports. Namibia is characterised by volatility and high outflows of short-term portfolio investments, both in equity and debt securities, often leading to deficits in the capital and financial accounts. However, much of the deficit is offset by increased FDI inflows. During the third quarter of 2010 alone, Namibia received FDI inflows of NAD 1.7 billion.

In 2011 and 2012, the current account deficit is projected to increase moderately with imports recovering faster than exports and with an expected further decline in SACU receipts. Imports will be boosted by increased demand for capital goods as private investment recovers in the medium term. The Millennium Challenge Account (MCA) investments in the tourism sector are expected to enhance the surplus in the service account in the future.

The share of manufactured goods in total exports has increased from 38% in 2000 to 49% in 2008 and 59% in 2009 as other commodities, particularly mineral exports, declined due to the global economic downturn. Namibia’s main manufactured exports include processed foods, such as meat and fish, beverages, copper and zinc. According to the local authorities, starting from 2011 Namibia is expected to become a net exporter of cement with Angola as a primary destination.

Imports are dominated by manufactured goods, particularly machinery and equipment, the share of which, in total goods imported, rose from 38.8% in 2000 to 44% in 2009. The machinery and equipment imported includes transport equipment, fabricated metal products, electrical machinery and apparatus, among others. The share of imported refined petroleum products in total goods imported also increased – from 2.6% in 2000 to 7.1% in 2009.

There have been no major changes in the regional distribution of trade. South Africa remains the major trading partner of Namibia. During the third quarter of 2010, South Africa accounted for 66% of imports, followed by the Netherlands, the United Kingdom and China, which accounted for 6%, 5% and 4% of imports, respectively. South Africa also remains the major destination of Namibia’s exports absorbing 28% of total exports, followed by the United Kingdom, United States and Angola absorbing 17%, 8% and 7% of total exports, respectively.

The collapse of the Doha Round of the World Trade Organization (WTO) trade talks in August 2008 did not have a dramatic impact on Namibia’s trade patterns, but could have contributed to improved competitiveness and efficiency and increased trade flows had it been successfully completed. Namibia is currently negotiating a Trade and Investment Cooperation Agreement (TICA) with the United States. Economic Partnership Agreement (EPA) negotiations with the European Union have stalled because of several sticking issues, including the demand by the European Union for reciprocal liberalisation. Namibia and South Africa did not sign an Interim EPA agreement due to concerns over unfair advantages the interim agreement provides to the European Union. The European Union states that, based on WTO rules, EPAs allow exclusion of up to 20% on goods to protect infant industries.

One of the strategic goals of the Namibian government is for the country to become a fully industrialised nation by the year 2030. One plan for achieving this is through import substitution by creating the capacity to process raw materials and hence, become a competitive goods manufacturing nation.

The Namibian dollar (NAD) appreciated by 24.4% against the US dollar (USD) year-on-year during the first quarter of 2010. This followed increased short-term capital inflows to emerging market economies resulting from near zero yields in advanced economies. The South African rand appreciated against the US dollar nearly by one-third since May 2009. Due to the appreciation of the Namibian dollar, the export sector lost NAD 200 million in export revenues in 2010 in terms of the 2008 prices. Since Namibia follows a fixed exchange rate regime anchored to the South African rand, there is a little room in the policy for the country to counter currency volatility.

The foreign exchange reserves declined to NAD 11.6 billion at the end of the third quarter of 2010 from NAD 12.3 billion at the end of the previous quarter. As a result, import cover fell from four months and one week during the second quarter to three and one-half months during the third quarter. The three and one-half months of import cover, however, remained sufficient to maintain the currency peg to the South African rand.

The external debt stock of Namibia decreased significantly by 30.3% to NAD 12.7 billion at the end of the third quarter of 2010. The largest portion of Namibia’s external debt continued to be held by the private sector, which accounts for 65% of total external debt, while central government and parastatalshold the remaining 24.0% and 11.0%, respectively. Debt service as a ratio of export free on board (fob) declined from 20.1% in the fourth quarter of 2009 to 7.8% in the third quarter of 2010. Foreign debt stood at 4.2% of the GDP at the end of the 2009/10 fiscal year. Foreign debt is estimated to be 5.2% of GDP in 2010/11.

Figures for 2010 are estimates; for 2011 and later are projections.

Namibia’s private business regulatory environment deteriorated during 2009 and 2010. The country’s overall rank in the World Bank Doing Business report declined to 69 in 2011 from 66 in 2010. The country remains, nonetheless, the seventh-best performer in the African continent in 2011 after Mauritius (20), South Africa (34), Botswana (52), Tunisia (55), Rwanda (58) and Ghana (67).

Economic activity is constrained by several structural bottlenecks that negatively affect the efficiency and competitiveness of the private sector. The most important challenges to the private sector include: high levels of concentration in key economic sectors; regulations that undermine competitiveness; energy shortages; lack of skilled workers; non-tariff barriers imposed by non-SACU/SADC member states; high transport costs, due to the large size of the country and low population density; bureaucratic inefficiencies, which affect the time taken to start businesses and register property; and rigid labour laws. The private sector remains divided into a small number of large, profitable businesses, and a large number of very small, unproductive and low-skilled businesses.

In 2010, the government took a number of measures to improve the overall business climate, and enhance productivity and competitiveness. The government also embarked on automating the property registration system to reduce time and red tape involved in the process. Apart from this, the Namibian Competition Commission commissioned two studies to investigate the impacts of the abuse of dominance in businesses on the competitiveness of the economy and the impacts of increasing mergers and acquisitions. Mergers occur in all sectors in the Namibian economy with two to three mergers taking place per month. The study on firm dominance, to be completed in 2011, will assess how the position is used to hamper entry. The results should aid policy makers in devising appropriate strategies to promote the development of small and medium enterprises (SMEs), which are needed crucially to curb the current high level of unemployment in the economy.

In spite of the adverse impacts on the economy of the global financial crisis, the Namibian financial system remained healthy and liquid in 2010. Banks in Namibia are characterised by excess liquidity, usually in the form of savings and pension funds, which they transfer to parent companies in South Africa making Namibia a net exporter of capital. To curb the outflow of capital, the government is encouraging Namibians to invest in non-listed companies. Non-performing loans remain around 3% of the total bank credit while household debt constitutes 66% of the total bank assets. Insurance and pension funds are also well developed and competitive.

A new financial sector regulation, the Namibia Banking Institutions Amendment Act 2010, became law in November 2010. The law gives more powers to the Namibian Central Bank and the Ministry of Finance to enforce changes in the ownership structures of banking institutions or controlling companies, among other things. The main objective of the government is to increase local ownership in the banking and other financial sectors. The law will allow the Bank of Namibia to issue licences to set up new branches, allow more entrants into the sector and enhance competition in a sector that is dominated by foreign ownership.

Namibia has the second biggest stock exchange in the southern African region. However, the stock exchange is dominated by the secondary listings with companies based mostly outside Namibia. The stock exchange, therefore, faces the challenge of few locally listed companies and low liquidity. During the third quarter of 2010, both the overall index and local index recorded positive movements. During 2010, the local index increased by 11.6% to 172.72 index points, the highest level in the last 10 years. The movements in the overall index closely track the developments on the Johannesburg Stock Exchange (JSE) due to a large number of JSE dual listings.

Public sector reforms have progressed in some areas, but are slow in others. The government introduced the Public Finance Management (PFM) reform programme during the 2005/06 fiscal year in order to improve efficiency and effectiveness of public finance management. Since the introduction of the PFM, significant progress has been made in a number of areas. These include: the enhancement of measures previously introduced in the three-year Medium-Term Expenditure Framework (MTEF) (2003/04); the implementation of the Integrated Financial Management System(since 2006/07); the institution of accountability reporting (since 2006/07), as a mandatory performance measure of budget execution and outcomes; and the expansion of the forensic tax audit to all regions. Since the introduction of PFM, efficiency in revenue collection has improved significantly. In spite of the economic crisis, tax revenue increased by 2.4% in 2009/10 compared to the preceding fiscal year.

A process of administrative decentralisation has also been a part of government reform; however it has not been implemented sufficiently. Namibia is a unitary state with 13 regions; each of these has a regional council and a local authority. Local authorities are more autonomous than regional councils are, as the latter have minimal autonomy and power. However, there is no effective devolution of financial management to regional and local administrations.

In spite of increased pressure for the privatisation of poorly performing state-owned enterprises (SOEs), progress has been slow. Towards the end of 2010, the government ruled out privatisation of the SOEs, in spite of significant losses suffered by some of these enterprises. The government has a major role in the Namibian economy and is likely to continue its intervention in the economy to tackle rising unemployment and extreme inequalities in income distribution.

The development of infrastructure is crucial for the competitiveness of an economy. Investment in infrastructure in Namibia increased in recent years; nevertheless, challenges still abound. Namibia still imports most of its electricity supply from South Africa; consequently, it could face severe power shortages in the event of grid failures or other unforeseen and uncontrollable situations. Namibia’s national power authority, NamPower, has therefore intensified investments in several power generation projects. These include plans to build an 800-megawatt coal-fired plant at Walvis Bay, and the Kudu gas project being developed by a consortium of Russian gas giant Gazprom, Namcor, Tullow oil and Itochu Corporation worth NAD 14 billion. Moreover, in 2010, Nampower commissioned the NAD 3.2 billion Caprivi Inter-connector project, which is part of the Southern Africa Power Pool, and jointly financed by the European Union, Nampower and the Development Bank of Namibia (DBN). Further, the construction of a NAD 375 million Anixas diesel power plant with a generating capacity of 22.5 megawatts is on track with commissioning set for early 2011. The installation of the fourth unit at Ruacana hydro power station worth NAD 750 million is also on track with commissioning planned for March 2012. The country also plans to supply growing demand for electricity from nuclear sources using its rich uranium resources.

Other infrastructure projects currently under construction include Rundu-Elundu road upgrading financed by Japan and Namibia with NAD 214 million in allocations for each of the fiscal years of 2010/11 and 2011/12 and a rural gravel road linking Namibia and Angola; the Ondangwa-Oshikango railway extension with a planned budget of NAD 125 million will commence during the 2010/11 fiscal year. Namibia established a public-private partnership (PPP) to promote the Walvis Bay port and this has been going on for nearly a decade. The Ministry of Trade, together with the DBN, is currently working on a PPP framework for wider segments of the economy.

Total public investment as a proportion of GDP has increased only marginally from 7% in 2000 to 7.6% in 2009. The government invested NAD 1.88 billion or 7.8% of the total budget on infrastructure in the 2009/10 fiscal year. The infrastructure investment is expected to decline slightly to NAD 1.77 billion in 2010/11 and NAD 1.75 billion in 2011/12.

Improved access to land is an important means of reducing the high level of unemployment and raise agricultural productivity. Current land ownership is dual; the state owns communal land, while private individuals own other lands. The “willing buyer, willing seller” model applied in South Africa guides land reform, but the pace of the reform has been slow. This has constrained the development of the agriculture sector. Moreover, the budget allocated to the Ministry of Agriculture, Water and Forestry is relatively small, comprising 6% to 7% of the total budget.