Rebalancing the Economy


By Martin Mwinga Positives: 1. Budget surplus and declining government debt; 2. Increased infrastructure spending of close to N$1 billion; 3. Investment grade rating of BBB-; 4. Stable exchange rate; 5. Increased investment in tourism and increase in tourists visiting Namibia. Negatives: 1. Rising oil price and inflation; 2. Rising interest rates and its negative effect on the economy; 3. Tight fiscal and monetary policies that affect the economy negatively; 4. Declining disposable income and high individual indebtedness; 5. High taxes, and no tax relief expected from next year’s government budget; 6. Worsening financial position of some state owned enterprises and the resulting financial burden on government. Namibia started 2006 on a high note with an investment grade rating of BBB- allocated to the country by Fitch. The favorable rating by Fitch, lower interest rates, strong global economic growth and high international commodity prices were all positive for Namibia’s economic outlook and led the Minister of Finance to announce in her budget speech an economic growth of close to 4% for 2006. Despite the above positive factors, the government’s policy mix over the course of the year proved to be unsupportive of this growth target, as reflected in the tightening of both fiscal and monetary policy. The rebalancing of the Namibian economy that started early in the year with the announcement of a tight government budget by the Minister of Finance still continues with the Bank of Namibia raising interest rates from the middle of 2006. The Minister of Finance’s rationale for running a surplus which is an indication of tight fiscal policy was a reaction to rising government debt that threatens macroeconomic stability, and the minister has reiterated that tight fiscal policy will be implemented till government debt is tamed and brought under control. While monetary policy was accommodative of economic growth during the first half of 2006, the Bank of Namibia started tightening monetary policy by June 2006, in reaction to high credit extension and rising inflation. While these policies are intended to rebalance the economy and minimize potential economic risks, tight policies affect aggregate demand negatively and constrain economic growth. Positive economic growth in Namibia could therefore only be expected from the supply side of the economy with external demand for Namibia’s products. Although the global economy is riddled with substantial risks (economic imbalances, bubbles, and political problems), there is some good news, with China, India and other emerging markets registering high growth of above 7%, translating into strong growth for Namibian minerals. Despite a combination of tight fiscal and monetary policies, the economy continues to grow and remain healthy, so much so that tax revenues have significantly exceeded expectations. Namibia’s economy is generally vulnerable to high variances in output from year to year in several important economic sectors, displaying “boom and bust” cyclical patterns. Agriculture Sector Good rainfall throughout the country towards the end of 2005 and beginning of 2006 raised prospects for an improved harvest and excellent performance of the agriculture sector in 2006. As a result total area planted increased by 32% from 262000 hectares in 2005 to 386 700 hectares in 2006. Good harvests were recorded in many parts of the country, especially the Caprivi, Kavango, Oshikoto, Oshana and Omusati regions. Due to rise in food production, especially maize and mahangu, pressure on government for food relief was less compared to other years. Despite the high cereal production (maize and wheat), expected output from agriculture and its impact on the economy were reduced due to lower livestock production. The good rainfall and the resulting good grazing encouraged cattle farmers to restock and this therefore affected the output of the agricultural sector, and led to a poor performance of the agriculture sector in 2006. The late rainfall that Namibia is experiencing and the expected drought will encourage farmers to take advantage of high meat prices and increase the marketing of their livestock. The net result is that 2007 is likely to experience reduced cereal production such as wheat and maize, with high output of meat which has high value addition on the economy and as a result the agriculture sector will have a positive growth and make a large contribution to the economy in 2007. The Fishing Sector Namibia’s fishing industry has been an important source of economic growth and a significant contributor to the country’s export performance. However, the sector has experienced mixed fortunes, with industry reports showing that the problems faced by the industry continue with little or no improvements. Figures published by the Bank of Namibia show that the sector contracted by 9.1% in 2004 and is expected to have contracted by 6.5% in 2006. – The total embargo on fishing of white fish during October 2006 and the way it was introduced was very disruptive for the industry and had a negative impact on the profitability of these fishing companies. During the embargo some of these fishing companies with well- established markets abroad have lost their competitive edge and it might be difficult for them to recover these markets. The recent depreciation of the local currency is quite positive for the industry, and the decline in oil prices will also add to the competitiveness of the fishing industry. Despite these positive developments, the fishing sector is not expected to have a positive impact in 2007. Inflation and Interest Rates With inflation having reached 6% in November 2006 from a base low of 1% in May 2005, the expected average inflation for 2006 is 5.3%. The current higher inflation rate is driven by relatively strong increases in food, beverages, and transport prices. Inflationary pressures are still present with inflation expected to remain above 6% for the rest of the year. Although inflation in Namibia is driven by cost push factors, the Bank of Namibia is likely to respond to rising inflation by raising the interest rate by 0.5% in the first quarter. The decision in this regard will however be dictated by the inflation outlook in South Africa, which at the moment points to less inflationary pressure. The recent softer oil price will have a very positive impact on inflation and, if it continues, the inflation rate will comfortably move back within the inflation targets during the next nine months. Mining Mining remained the main source of economic growth in 2006, with increased production recorded in diamonds with NamDeb producing a record 2 million carats, uranium and metals minerals. As commodity prices are expected to remain high, the mining industry will remain the main driver of economic growth in 2007. With increased investments in the diamond and uranium industry, production in 2007 is likely to exceed 2006 production levels. RÃÆ’Æ‘Æ‘ÃÆ”šÃ‚¶ssing is expected to increase production from 3 600 tons to 4 000 tons in 2007. Langer Heinrich mine has recently started with production, and increased output of uranium in Namibia. Zinc and copper production are also expected to increase. Conclusion Source of economic growth in 2007 will mainly come from a solid performance of the mining sector, tourism and agriculture. The sectors that will negatively affect the economy are construction due to higher interest rates, fishing, and manufacturing.