Macroeconomic and budgetary framework paper

1.1 Global economy

After experiencing a significant slowdown, the global economy is expected to improve in 2003, albeit at a relatively subdued pace. The global economic forecast for 2003 is set at 3.2 percent (see Table 1), 0.2 percentage point higher from that of 2002, but still below the potential global growth rate of 4.0 percent . With appropriate macro-economic policies conducive to growth (particularly in the US and Euro area), underpinned by reductions in geopolitical uncertainties (notably Middle East and North Korea), and an absence of any terrorist attack, the global economy is poised for a marked recovery of 4.1 percent in 2004.

According to the IMF projections, the USA economy, which is one of Namibia’s main trading partners, mainly diamond, is forecasted to grow at 2.2 percent in 2003, 0.2 percentage point lower than in 2002, however, this is still debatable. For 2004, growth prospects for the US economy seem promising with a 3.6 percent growth, aided partly by a recovery in business and investment confidence during the latter part of 2003, as well as by the fiscal stimulus of a $2.23 trillion budget plan introduced in 2002. The improved economic outlook for 2004 could be sustained provided inflation and budget deficits are maintained at a manageable level.

In the Euro area, domestic demand is still weak, coupled with fiscal policy tightening and an appreciating euro. The growth in the area is forecasted at 1.1 percent in 2003 (up by 0.3 percent in 2002). This situation is more pronounced in Germany where GDP growth is expected to be below 1 percent for the third year running, where strains on the financial sector and consumer spending are increasingly starting to be apparent. With a stimulus in domestic demand, aided by serious undertaking of labour and welfare reforms as well as a manageable movement in the Euro currency, the Euro area can expect a moderate economic growth of 2.3 percent in 2004. As EU is one of Namibia’s main trading partners, these factors have negative impacts on Namibia’s export commodities such as beef, fishery products, diamond etc. that access the European Union Market.

The Japanese economy seems to show sign of resilience to avoid sliding into a recession in 2003. Real GDP is forecasted to be 0.8 percent in 2003, which is slightly higher from 2002. Earlier indications show that deflation is still pervasive with a subdued consumer demand. The Japanese economic growth is thus forecast to grow insignificantly by 1.0 percent in 2004. This may have negative impact to the Namibian economy as Namibia exports fishery products and others to the Japanese market.

Growth in Asia has been above 6 percent, particularly in China and is expected to remain solid in 2003 and 2004. Domestic demand is still strong and most of the Asian economies continue to run trade surpluses with the rest of the world. However, the recent slowing in the global information technology (IT) sector and the recent outbreak of Severe Acute Respiratory Syndrome (SARS) poses a risk to output growth in several countries.

In conclusion, whilst there is a prediction of a continued but moderately paced recovery for 2003 and 2004, the outlook is subject to great uncertainty. On the upside, the rapid resolution to the uncertainties surrounding post war Iraq with little spill over effects in the Middle East Region could provide a major boost to global activity from the second half of 2003 than currently projected. This could hold a recovery in investor and business confidence worldwide and through lower oil prices. Continued strong productivity levels in the US may also serve as a supportive factor to put the global economy on a sustained improved economic growth.

1.2. Africa Recent Economic Performance

According to the African Development Bank economic report for Africa 2003, the slowdown of the world economy had a negative impact on economic performance in Africa in 2001, and even more so in 2002. In 2002, African economic growth rate, for the first time since 1995, was recorded below 3 percent, achieved a growth rate of 2.9 percent. The expectations for the continent in 2003 are a sluggish economic recovery, with an average growth rate of 3.3 percent.

In the Central African sub-region, some of the oil-producing economies performed reasonably well, in response to the positive orientation of the oil market in 2002. These are countries such as Chad, which grew dramatically from 1.0 percent in 2000 to 10.9 percent in 2002. The main sub-regional change concerned the Democratic Republic of Congo (DRC), where a normalisation of the political situation is taking hold. This normalisation had positive consequences on economic performance in the DRC, with growth rate of 3.0 percent registered in 2002 after six years of economic decline.

The rather sharp average slow economic growth in the Eastern African sub-region from 4.7 percent in 2001 to 2.6 percent in 2002 was mainly due to the political instability in Madagascar, where growth has been around negative 10 percent in 2002. The other economies in the region maintained rather stable economic performances contributing about 4.3 percent in 2002 to the overall regional economic growth. All in all, much better performance of about 5.3 percent is expected in 2003 for Eastern Africa as a whole, which is expected to be the fastest growing sub-region in Africa.

Northern Africa has been the most affected sub-region after the September 11 shock. In particular, the tourism industry in Egypt, Morocco and Tunisia faced a decline in the number of tourist arrivals, which therefore affected these countries’ growth rates. In Morocco and Tunisia, economic growth slowed down from 6.5 percent in 2001 to 4.5 percent in 2002, and from 5.2 percent in 2001 to 1.9 percent in 2002 respectively. The region is expected to reach an average growth rate of 3.3 percent, up from 2.9 percent recorded in 2002.

Western Africa has experienced a significant economic downturn from 3.0 percent in 2001 to 1.1 percent in 2002, which is due to political instability in Cote d’Ivoire and reduction in oil production in Nigeria. Economic growth in Cote d’Ivoire was 0.5 percent during 2002, and it is expected to decline by 2.0 percent during 2003. This crisis is expected to adversely affect the northern neighbours of Mali and Burkina Faso in 2003, as Cote d’Ivoire has been their main trading partner in the sub-region, as well as their principal access to international trade routes, through the port of Abidjan. Overall the region is expected to reach an average growth rate of 2.4 percent in 2003.

In the Southern African sub-region, growth performances improved somewhat in 2002 at 3.4 percent on average. This is mainly due to enhanced business conditions in South Africa, which reaped in 2002, the competitiveness gains emanating from the depreciation of the Rand during the course of 2001.

Given the overwhelming weight of South African economy in the sub-region (77 percent of the sub-regional GDP), the rather positive outlook for South Africa explains most of the sub-regional trend. This, however, tends to mask the vastly different performances and outlooks of the other countries in the sub-region. On the one hand, some economies have maintained a strong growth in the sub-region, such as Mozambique with a growth rate of 9.9 percent in 2002, Angola with very high growth rate of 17.1 percent in 2002. Mauritius has also maintained favourable growth rates of 5.3 percent in 2002. On the other hand, the economic decline in Zimbabwe has adversely affected the overall economic performance of the region.

Table 2 – Average Growth Rates of African Regions

1.2.1South Africa: Recent Economic Performance and Outlook

The South African economy grew by 3.0 percent in 2002, up from 2.8 percent in the previous year. The growth was mainly driven by higher precious metal prices, strong tourism receipts and domestic demand. The sharp depreciation of the exchange rate at the end of 2001 mitigated the slowdown of the economy, and growth was supported by buoyant exports, domestic demand, and higher public investments. In 2002, growth of the general economy was sustained by buoyant exports, a pick-up in the demand for goods produced by import-competing industries, and public investments.

In the meantime, inflationary pressures increased dramatically in the first months of 2002 in response to the Rand’s depreciation, which moved from around R7.60 per US dollar at the beginning of 2001 to a new all time low of R13.84 to the US dollar on 21 December 2001.

The rand, however, consolidated in the first half of 2003 (reaching R7.74 per US dollar at the end of June), and it is expected to continue strengthening. This is mainly due to South African exporters repatriating export earnings in accordance with government foreign exchange regulations, the weak performance of the US dollar, as well as a more positive sentiment toward South African bonds. In addition, the Rand’s strengthening has been boosted by a persistent inflow of capital into South Africa as a result of high interest rates. In line with strict monetary policy introduced in 2002, inflation (CPIX) target during 2003 and 2004 was adjusted to 7.7 percent and 4.8 percent respectively.

Prime lending rates and government bond yields fell sharply and monetary easing has resulted in real interest rates that compare well with those in other emerging market economies. The sound macroeconomic conditions are reflected in lower household debt, credit upgrade, and higher tax revenues at lower tax rates. The sustained growth is supported by the country’s consistently sound macroeconomic management policies and declining debt burden. It is expected that the continuation of sound fiscal and monetary policies, together with growth-enhancing fiscal reforms, will lead to increased economic growth for the foreseeable future.

The budget deficit is expected at 2.3 percent of GDP for 2002/03, with real increases in non-interest spending averaging 3.7 percent over the period 2002-05. Declining bond yields have reduced government borrowing costs to their lowest levels in four decades.

Real GDP growth is expected to sustain a moderate growth pattern for 2003 and 2004 of around 3 percent. The sustained but moderate growth shows that the South African economy continued to steam ahead in the face of domestic, regional, and international adversities.

1.2.2 SADC Countries

The positive growth in SADC is supported by continual improvement in macro-economic policies, fewer military conflicts and debt relief under the Heavily Indebted Poor Countries (HIPCs) initiative for some SADC economies such as Zambia and Malawi. The prices of certain international commodities (especially coffee, cotton, and metals such as gold) are expected to recover during 2003 and significantly in 2004. In addition, there are also SADC economies such as Mozambique and Angola, which are expected to have significant high growth rates during the period under review.

Table 3: SADC Economic Growth and Prospects
2001 2002 2003 2004

Source: IMF World Economic Outlook, April 2003

There are still serious problems however such as the food shortages in Southern Africa due to unfavourable climatic conditions, the HIV/Aids pandemic which affects the level of productivity and the presence of political instability in some SADC countries, which encountered low or negative growth rates.

Despite the gains made in establishing macro-economic stability in the SADC economies, there is still a need to address the above problems and improve on the overall environment for investment and growth. As put forward in the New Partnership for Africa’s Development (NEPAD), it is crucial for African economies to record positive and sustainable real growth of around 7.0 percent per annum to support and facilitate political and economic transformation. The region will also have to make itself more competitive by bringing down inflation, improve its external balance, reduce external debt and, improve savings and investment ratios as well as fiscal discipline

2.Domestic Economic Review and Outlook
2.1. Real Sector Development 2000-2002

The Namibian economy has been adversely affected by the drought occurrence in the last two years, which resulted in the low production of foodstuffs, and therefore rising food prices. According to the Preliminary National Accounts 2002 figures, the growth rate for 2001 has been revised down to 1.9 percent from the 2.4 percent reported in the National Accounts 2001 while 2.3 percent was registered for 2002, just slightly below the projected growth rate of 2.8 percent. On average, the economy has recorded growth rate of 2.5 percent during the period 2000–2002 compared to 3.6 percent during 1997–1999. This is mainly a reflection of poor rainfall that resulted in poor performance of the agricultural sector during 2001 that registered a decline of 15.1 percent. The most affected are mainly the majority of our people who are engaged in subsistence farming.

Furthermore, other factors such as unfavourable oceanic conditions and low commodity demand on the international market also negatively affected the economic performance during the period under review.

It should be noted that the country still relies more on primary commodities for export, which makes it difficult for the economy to resist the influence of the international price fluctuations and climatic changes.

Diamonds, fish, beef, are the country’s main export commodities and are some of the major contributors to the economic growth in 2002.

2.2. Industrial Analysis

The table below shows economic performance from the industrial point of view.

2.2.1 Primary Industries

The Preliminary National Accounts 2002 show that the primary industries have grown by 1.6 percent in 2002 as projected, compared to a decline of 8.3 percent in 2001 and a growth rate of 3.9 percent in 2000. This is a reflection of the sector’s vulnerability to the weather conditions and other external factors that have an effect on the industries.

Agricultural sector is one of the main contributing sectors to the economy and the biggest in terms of employment creation. The output of the sector consists mostly of cattle, sheep/goats and cereal crop such as millet and maize. The preliminary figure indicates that the sector recorded a growth rate of 4.1 percent in 2002 (compared to the projected growth rate of 2.6 percent), after a sharp decline of 15.1 percent in 2001. However, agriculture is one of the most vulnerable sectors of the economy, as it is mostly dependent on the availability of rainfall.

The Government’s commitment to economic diversification has made agriculture to be one of the sectors where diversification is most pronounced. As a result the sector now has a number of tradable goods that enjoy comparative advantage in the world market such as grapes, dates, ostrich products and cotton. Currently, 1, 315.5 hectares are under production of grapes in the southern part of Namibia with capacity of 17, 760 tons . Due to the quality of Namibia’s grapes and dates, these commodities are enjoying popularity in the European market. This situation has opened opportunities not only for these two commodities but for Namibia’s entire agricultural products to penetrate the international market.

Ostrich production has increased during the last three years from 13, 462 birds slaughtered in 2000 to 24, 323 birds in 200 . This came as a result of the Government efforts in promoting the expansion of the ostrich farming which is aimed at encouraging value addition to the ostrich products and consolidating Namibia’s position in the international market. Financial assistance has been rendered by Government to small communal ostrich farmers in southern Namibia as well as to a commercial ostrich abattoir in Keetmanshoop in order to improve their operations.

Subsistence farming plays a vital role in the agricultural sector, however, the lack of technology in the sub-sector makes it more vulnerable to the climatic conditions than the commercial farming. In the last three years, subsistence agriculture, from which majority of population derive their livelihood, declined substantially on average by 14.9 percent during the past three years due to the prolonged drought condition. The shortage of grazing areas in most parts of the country during the period under review forced most farmers to sell their livestock while in good condition.

The commercial agricultural sub-sector recorded an improvement in 2002 with the growth rate of 6.2 percent after a decline of 9.4 percent recorded in 2001. Despite this high growth, poor harvest was experienced in the rain-fed areas, while much of improvements were experienced in the irrigation areas. Like in subsistence farming, high sales of livestock were experienced in the sector during the period under review due to drought condition.

Fishing and fish processing on board. The unfavourable oceanic conditions that prevailed in 2001 resulted in a lower allocation of the Total Allowable catch for pilchard and zero allocation for TAC in the subsequent year. As demonstrated by the Preliminary National Accounts figures, the sector recorded a decline of 1.1 percent in 2001 and a deterioration of 5.9 percent in 2002.

According to the Ministry of Fisheries and Marine Resources, a zero Total Allowable Catches (TAC) was a measure to allow for the recovery of the species and to avoid the over exploitations of the resources.

The Mining sector is dominated mainly by diamond, which constitutes about 87 percent of the country’s mining output. Other minerals are uranium, copper, gold, leads and zinc. The mining sector suffered a severe consequence of weaker commodity demand and low prices in the last three years.

The mining sector is a strong pillar of our national economy. It is therefore, a great concern that we noted the closure of some of the mining projects in the country such as Otjozondu Manganese Mine and the liquidation of Namco Namibia, which is have resulted in the loss of employment opportunities. This was evidently reflected in a negative growth rate of 6.1 percent recorded in 2001.

The value added from the mining sector has registered a growth rate of 3.9 percent in 2002, slightly below 5.1 percent projected late last year. This low growth rate is a reflection of the delay in the production of the Scorpion Zinc mine. This rate however, shows an improvement from the negative rate of 6.1 percent registered in 2001.

On the other hand, new mines were opened, of which some contributed mainly to the above-mentioned growth rate, such as the diamond mine at Daberas along the Orange River, and Sepiolite project in Gobabis area.

There were some indications of commodity price recovery last year but the recent developments in the international arena/war on Iraq, might delay the recovery because of the uncertainty the developments caused in the market.

2.2.2. Secondary Industries

Manufacturing sector: This sector currently has the potential for growth and could become a major contributor to the country’s GDP. The Ramatex, textile and clothing manufacturing company that came into the economy’s mainstream in early 2001 is expected to increase the value addition of the sector. According to the Preliminary National Accounts, manufacturing sector achieved a growth rate of 7.1 percent in 2002 compared to 5.8 percent recorded in 2001. This growth is attributed to expansion of other manufacturing sector mainly textile and garment production by the Ramatex Company as well as copper smelting at Ongopolo Mine in Tsumeb. Other sub-sectors are mainly manufacture of other food products and beverages particularly at Namib Mills and Namibia Breweries Ltd. On average, the sector recorded growth rate of 5.5 percent over the last three years.

The Government’s efforts to industrialise the Namibian economy and broaden the manufacturing base are in the initial stage of bearing fruit. To this extent, it is encouraging to see that Namibia has established a vibrant textile industry, which has created thousands of employment opportunities for many Namibians and contribute to the objectives of our Development Plans. So far, indications are that two other textile companies, namely Rhino Garments and Tai Wah Textile Company are expected to start operations during 2003 or 2004. Together, their investments is estimated at more than N$ 170 million and has a potential to employ more than 6, 000 people.

Manufacturing of other food products and beverages sub-sector performed better registering a growth rate of 9.3 percent in 2002, up from 4.4 percent recorded the previous year. Namibia Brewery Ltd (NBL) and Namib Mills also play an important role in the sub-sector. Despite the close contest from the South African brewery, NBL has secured more than 80 percent stake in the Namibian beer market and is also very successful in the South African market with its premium beers led by the flagship of Windhoek Lager. The Company also penetrated the regional market with destination to Zimbabwe, Zambia, Angola, Mauritius and others SADC Member States.

The other sub-sector that recorded a remarkable growth of 8.1 percent is meat processing. This was mainly due to the increased sales of livestock to abattoirs during the period under review that came as a result of the prevalence of drought in the country.

Water and Electricity is another important sector to the country’s economy. It is however worth to mention that water and electricity are still scarce commodities in our country due to low rainfall. Both water and electricity supplies are dependent on the availability of rainfall. The second half of the 2002/2003 rainy season i.e. January 2003 – March 2003, has recorded rainfall below average in most parts of the country. The situation has resulted in significant decline in dam levels throughout the country . This is indeed a worrying situation to all Namibian.

The Government has implemented extensive programmes to expand water supply infrastructure, thereby enhanced access to portable water by people in all corners of the country. The Government has also made efforts to determine the viability of utilising underground water resources in various parts of the country. The sector achieved a growth rate of 13.0 percent in 2002, compared to the decline of 23.8 percent recorded in 2001. The decline in 2001 was mainly due to lower rainfall recorded in that year, which resulted in low inflows in dams across the country. On the electricity side, Namibia generates hydropower electricity but supplemented by imports from South Africa.

In the last three years (2000-2002), the demand for electricity has increased drastically, due to expansion of towns as well as various infrastructure developments throughout the country. To meet the expected demand, NamPower invested N$250 million in new projects, the major one being erection of power lines importing electricity from South Africa (Eskom).

Construction sector, the performance has been unstable over the last three years. The sector registered a decline of 20.5 percent in 2002 as opposed to a growth of 50.7 percent recorded in 2001, as a result of the decline in the constructions related to civil engineering projects. However, the government’s policy to provide housing to the lower income groups contributed to the sector’s performance. The sector registered a decline of 5.4 percent in 2000 due to decline in infrastructure development projects. According to the National Accounts methodology, activities in the sector include plans approved and passed by municipalities. However, major construction projects such as construction of Hero’s Acre, Ramatex factories, construction of roads and shopping complexes throughout the country played a vital role in the sector performance especially in 2001.

Overall, the secondary industries registered a slow growth rate of 1.7 percent in 2002, compared to 8.8 percent achieved in 2001. This situation is a bit worrisome, because these are industries that should be the backbone of our economy and therefore important to economic development. On average, the industries achieved an average growth rate of 4.5 percent during the period 2000-2002.

2.2.3 Tertiary Industries

Wholesale and retail trade, repairs: A number of shopping complexes have been constructed throughout our country in the past three years. The stability and conducive environment that the Government created contributed to the sector growth, recorded at 4.4 percent in 2002, up from 2.8 percent achieved previous year. On average, the sector has achieved an average growth of 4.2 percent over the last three years.

Hotels and Restaurant sector plays a vital role in Namibia’s economic development. The sector’s growth reflects the importance of tourists to the country who mostly make use of the hotel facilities. Tourism continues to play an important role in our economy. The sector has registered a growth of 7.1 percent in 2002 despite the recent developments in the world that seemed to have threatened the tourism industries. This followed a significant growth of 8.4 percent in 2001. On average the sector grew by 7.6 percent in the past three years.

Transport and Communication sector, which is mainly dominated by the state-owned enterprises, has performed well recently, in term of both transport and communication facilities. Transport of materials and goods to some of major projects in the country also played a bigger role in the sector performance.

Telecommunication in Namibia has reached a milestone in recent years covering almost the whole country. The proposal to bring in the second mobile phones operator is expected to enhance and improve the current service provision and therefore contribute to the performance of the sector.

The sector has recorded a growth rate of 6.4 percent in 2002 slightly higher than 6.2 percent recorded in 2001. This makes the average growth rate of 6.1 percent during 2000-2002.

Real Estate and Business Services sector’s recent performance has slowed down resulted mainly from the high interest rates emanated from the exchange rate pressure on the Namibia dollar. However, the stable demand for business infrastructure contributed to the sector’s performance. In 2002, a decline of 1.2 percent was recorded, compared to 4.1 percent recorded in the previous year. On average, the sector has achieved a growth rate of 1.5 percent over the last three years.

Community, social and personal service sector’s activities are basically municipal oriented services such as sewerage charges, sale and service of plots etc. In 2002, a growth rate of 1.0 percent has been recorded, comparing to 0.2 percent and 8.7 percent registered in 2001 and 2000 respectively. The slow growth especially in 2001 could be attributed mainly to the low demand of properties due to increased interest rates during that year.

Producer of government services sector includes the volume change in the number of civil servants. The government policy to outsource some of the Government functions and the effort to diversify the economy caused the sector growth to slow down. However, this is a positive trend as more resources will be allocated to other priority programmes and projects. The sector recorded a growth rate of 0.7 percent in 2002 just below 1.6 percent registered in 2001.

Overall, tertiary industries achieved a growth of 2.3 percent in 2002, lower than growth rate of 3.0 percent achieved in 2001, and 3.6 percent in 2000.

3. Investment (Gross Fixed Capital Formation)

Growth in the investment has been unstable in the last three years. The preliminary figures indicate that investment declined by 10.6 percent after an exceptional performance of 26.3 percent recorded in 2001 and a decline of 9.0 percent in 2000. The decline in investment during 2002 was induced by decreased demand for properties due to rise in interest rates.

As a proportion to GDP, investment stands at 18.4 percent in 2002 a decrease of 3.7 percent from 22.1 percent of GDP in 2001. Major construction works undertaken throughout the country, including road constructions, shopping centres as well as residential dwelling have played a crucial role in the sector’s performance especially during 2001. Furthermore, investment in machinery and equipment by major companies that just entered the market in the same year has also driven the performance of the sector.

The efforts to attract more investments to our country remain in top priority. The country has achieved good results just in the last three years. During the year 2002, Namibia recorded an inflow of more than N$1.9 billion into the economy as foreign direct investments. Companies such as Scorpion Zinc, Ramatex and several Diamond Cutting Companies brought in the large amount of capital investment.