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From Africa Recovery, Vol.12#4 (April 1999), page 18

Stable economy, daunting challenges

Namibia promotes a thriving private sector and tackles stark social inequities

The Namibian government has embraced liberal economic policies and seeks to diversify an economy dominated by mining and the services sector. While overall output rose at the robust average rate of 5 per cent per year in the first five years after independence in 1990, growth has since slowed. With the fiscal deficit expected to widen this year, the government faces formidable challenges, including high unemployment, widespread poverty and the vast income gap between white and black Namibians, a legacy of colonialism and apartheid. Nevertheless, the medium-term outlook seems promising, with continuing efforts to support private sector growth, increase foreign investment inflows and improve the social sector.

Since Namibia secured independence from South Africa nine years ago, the government has pursued policies that aim to promote a thriving private sector, increase employment opportunities and diversify the economy. Today, Namibia has one of the most open and investor-friendly economies in Africa.

Real GDP grew at an average annual rate of 5 per cent between 1991 and 1995, keeping well ahead of an annual population growth rate of 2.6 per cent. However, growth slowed in 1996 to a rate of 2.9 per cent, dropping further to 1.8 per cent in 1997, mainly due to external factors, such as falling commodity prices and adverse climate conditions, as well as declining productivity.

Growth in 1998 is estimated at between 0 and 1.5 per cent. However, a recovery in the construction sector, increased output in the fishing sector and increased offshore diamond mining are expected to boost growth this year.

But social inequalities, high rates of poverty and unemployment pose formidable challenges, while at the same time the government seeks to maintain investor confidence and growth in an economy that is highly dependent on the private sector.

The government aims to meet these challenges by investing heavily in education and training, expanding social services, providing safety nets for the marginalized poor, implementing land reform and affirmative action policies and, above all, continuing to embrace policies that promote further economic growth.

But increased fiscal spending on education, health and social services clashes with the government's goal of progressively reducing budget deficits to 3 per cent of GDP. And over-expenditure by ministries and heavy recurrent spending on salaries for 70,000 civil service employees is forecast to have pushed nominal spending in fiscal year 1998/99 nearly 20 per cent above the level in FY 1997/98.

The budget deficit is expected to widen this year, largely due to increasing debt-servicing costs and the cost of financing Namibia's military presence in the Democratic Republic of Congo conflict. The cost of servicing the national debt in fiscal year 1998/99 is expected to take up 6.51 per cent of the budget, or N$441.7 mn compared to N$333 mn the previous fiscal year. The involvement in the Congo was allocated N$30 mn in the 1998/99 revised budget but the economic costs of the war are also expected to include reduced foreign investment and aid flows. The European Union, for example, has announced that it will review aid to Southern African countries involved in the war.

The country's external debt, however, is relatively small and Namibia, unlike many African countries, does not need to turn to the World Bank for relief. In fact, there are no World Bank loans outstanding to Namibia. The World Bank's role in Namibia is currently confined to providing technical assistance to support the government's efforts to reduce poverty, build local capacity, and enhance management of water resources.

With the private sector playing a dominant role in the economy, the medium-term outlook remains promising. The country is sparsely populated, but its investor-friendly policies have combined with political stability to make it one of the most attractive markets in sub-Saharan Africa. A foreign investment law, providing liberal investment conditions and full protection of investments, was enacted during the first year of independence in 1990. Companies which operate in the export processing zones (EPZ) enjoy a zero-tax regime while companies operating elsewhere in the country are subject to competitive tax rates. Generous tax breaks are available for firms investing in the mining and petroleum sectors.

Namibia was deemed one of the "front runners" -- a developing country that stands out for its success in attracting relatively high and growing levels of foreign direct investment (FDI) in per capita terms -- by the UN Conference on Trade and Development (UNCTAD) in its World Investment Report 1998. According to UNCTAD, Namibia was the ninth largest recipient of foreign direct investment in Africa in 1997.

Namibia's favourable economic environment has attracted commitments from donors and investors alike. Some 30 donor nations have made commitments totaling $600 mn to help fund the country's first five-year National Development Plan (NDP1), covering the 1996-2000 period. The European Union, Sweden, Norway, Finland, United States and Germany are among the largest contributors to Namibian aid. Germany, Namibia's first former colonial power, is the largest single source of development and technical aid and accounts for 7 per cent of total foreign investment.

South Africa overshadows Namibia

But Namibia has to contend with the big shadow of South Africa, which has an economy 40 times larger. This is a legacy of the country's colonial past: South Africa ruled the territory for 75 years. Today, South Africa accounts for 80-90 per cent of Namibia's foreign trade and is the source of approximately four-fifths of all investment, including investment in the key sectors of mining, banking and insurance.

Events in South Africa often have ripple effects on Namibia. For example, when South Africa's currency, the rand, came under speculative attack between May and August 1998, largely due to the contagion effects of the Asian financial crisis. The Namibian dollar, which is pegged at parity to the South African rand, in turn lost some 20 per cent of its value last year. Bank interest rates were pushed significantly higher, from around 16 per cent in March to 23 per cent in December, dampening investment and consumption.

Namibia belongs to both the Common Monetary Area and the Southern African Customs Union (SACU), both dominated by South Africa. With SACU members Botswana, Lesotho and Swaziland, Namibia has been seeking renegotiation of some of the key clauses. Some economists argue that certain SACU arrangements constrain investment inflows, economic diversification and growth in these countries. Illustrating the downside of the close relationship, President Sam Nujoma said at a Cabinet meeting on 2 February this year: "If South Africa is in recession, must we also be in recession? What kind of logic is this? Our economy is, of course, linked with that of South Africa, but it has its own dynamics."

At independence in 1990, Namibia attracted the attention of foreign investors who had long shunned South Africa because of its apartheid policies. But the transformation of South Africa into a democracy in the early 1990s ended the country's status as an international pariah, bringing about a revival of foreign investor interest in the country.

"Yes, South Africa is a factor," Prime Minister Hage Geingob told Africa Recovery. "We, therefore, have to try to focus on attracting some of the smaller investors We are also telling the companies that are tired of big concrete jungles like Johannesburg to come to the oasis of peace that is Namibia. And people are coming. Some people are closing shop in South Africa and relocating to Namibia. Not in big numbers, but we are getting our fair share."

A vibrant financial centre

This is illustrated by the progress of Namibia's highly competitive financial market, which has a range of financial services and institutions that has been expanding since independence. Windhoek is a vibrant financial centre which hosts the Namibian Stock Exchange (NSX), opened in September 1992. The NSX is a robust capital market and one of Africa's fastest growing stock exchanges. The number of companies listing their shares on the exchange has jumped from just one at the launch of the NSX to some 40 now. For a long time, the NSX ranked as second largest in Africa in terms of market capitalization (total value of equities traded), just after the Johannesburg Stock Exchange. With market capitalization of some N$150 bn in 1998 and turnover of about N$1 bn annually, the NSX now ranks as Africa's fourth largest.

Linked electronically with the Johannesburg Stock Exchange, the NSX is technically advanced, with an integrated computer system which distributes pricing and volume information to a wider audience outside. Brokers in Johannesburg, for example, are able to follow trading on the NSX in real-time. Through an agreement signed last September with South Africa, Namibia is the first of the 14 member countries of the Southern Africa Development Community (SADC) to link up with the Johannesburg Stock Exchange. The landmark agreement signaled the beginning of greater cooperation and integration of bourses within the SADC region.

The NSX is one of the calmest markets in the region as it benefits from a law that requires Namibian companies to invest 35 per cent of their funds in local assets. However, billions of dollars of Namibian funds have been invested outside the country, particularly in South Africa, where there are greater investment opportunities. The outflow of capital from Namibia, mainly to South Africa, is estimated at N$200 mn per month. The government has said it will now concentrate on attracting back those funds for investment in Namibia.

Skewed income distribution

The government needs to concentrate on a host of other challenging socio-economic problems. The biggest problem, perhaps, is income distribution. Namibia's per capita income of $2,220 (1997) is more than four times the average for sub-Saharan Africa and puts it in the league of some lower middle-income East European countries. But the figure masks one of the most unequal income distribution patterns in the world. The richest 1 per cent of households consume as much as the poorest 50 per cent. A legacy of apartheid, income distribution is also divided along racial lines. The white minority, which owns most of the land and major businesses, is in the top tier, with the black majority at the bottom.

"The paramount challenge Namibia faces today is the alleviation of its high rates of poverty and inequality," says Mr. Dirk Hansohm, a senior researcher with the Namibian Economic Policy Research Unit (NEPRU). This lopsided income distribution is even more striking as Namibia is considered rich by African standards.

The government has initiated a number of programmes to address poverty and the inequality in income distribution. Some of the programmes, however, appear to deal with the symptoms rather than causes. One of the programmes provides a pension for people aged over 60 or who are disabled. With N$169 mn budgeted for the 1998/99 fiscal year, the pensions play an important part in alleviating widespread poverty. A monthly allowance of N$160 per month is provided and although this hardly covers basic necessities, a significant number of households, especially in the rural areas, depend on the pensions as their main source of income.

The government is also focusing on small and medium enterprises (SMEs) to create jobs, improve income distribution and contribute to private sector growth. A sum of N$13 mn was initially earmarked in 1997 to support SMEs, which typically face legal, financial, marketing, technical and managerial problems. Already, there are some 160,000 SMEs, half of which are in retailing. "It is micro economic industries, as well as self-employment, that will create jobs. So we are aiming small," Prime Minister Geingob told Africa Recovery.

Another route that the government is taking to create jobs and promote export-led growth is through export processing zones. The EPZs are tax havens that provide many incentives for manufacturing industries that target export markets. The regime allows investors, local or international, to operate free of taxes and certain labour law restrictions in any part of the country. "We regard the whole country as an EPZ," says Mr. Geingob.

Overcoming urban bias in health care

The government is also investing heavily in education, training and health -- up to 40 per cent of its annual budget -- to correct the imbalances of the colonial past and alleviate poverty and hardship.

Since independence, the government has aimed to improve health services by shifting resources from curative to preventive care, with emphasis on community-based clinics and primary health care. It now spends 13.5 per cent of its budget on health -- the second largest allocation after education in the 1998/99 budget- and it is trying to overcome the urban bias in favour of rural areas and the poor. This has brought significant improvements in health care.

The country's major health problems include childhood diseases such as diarrhoea and respiratory infections, high rates of maternal and infant mortality, pneumonia, malaria and tuberculosis. But HIV/AIDS has become the leading cause of death, taking as many lives as malaria and tuberculosis combined. It may also be the country's greatest development threat says the UNDP Namibia Human Development Report 1998. Already, life expectancy in the 1995-2000 period is 52.4 years with the AIDS factor, compared with 61.3 years without, says the Joint United Nations Programme on HIV/AIDS (UNAIDS). Worse still, life expectancy may plunge to 40.6 years (with AIDS), in 2000-2005, it adds.

Prime Minister Geingob told Africa Recovery the government is doing everything to educate the people about the danger posed by AIDS. But, he emphasized, it is up to the people to change their lifestyles. "They don't seem to want to. What do we do? It's terrible," he said, adding that part of the problem is that doctors, for whatever reasons, do not say anybody ever died of AIDS. "It's always of other complications, such as tuberculosis. So maybe if we can say 'died of AIDS', it may help." The Namibia Human Development Report 1998 also calls for more openness, saying the silence that still surrounds AIDS in Namibia is a dangerous obstacle in meeting the challenge.

Highest priority for education

But it is in the field of education and training that Namibia is exerting the greatest efforts, at least in financial terms. And rightly so, as education badly needs reform. Some 15 per cent of Namibians have never been to school, 54 per cent never went beyond primary school, and only 2 per cent reach university or college.

The government spends more than 25 per cent of its budget on education -- nearly twice as much as on health. However, critics say, the effectiveness and efficiency of spending could be improved by distributing resources more equitably and spending more on education materials and less on teachers' salaries.

Still, educational opportunities have increased dramatically since independence. The number of pupils entering secondary school, for example, has quadrupled to more than 12,000 today. And a commission, set up in 1998 to examine proposals for educational reforms, began work in January this year.

Unemployment is another burning social problem, having increased sharply in recent years, from 19 per cent in 1991 to 32.9 per cent in 1993 and 34.8 per cent in 1997. Most of the unemployed have little education and poor skills, according to 1998-2010 National Human Resource Plan and 38 per cent of them are aged 15-24. According to H&E Labour Consultants, by 1996 combined adult unemployment and underemployment had reached 60 per cent of the labour force, with new entrants to the labour market estimated at 20,000 people per year.

The problem of unemployment among the ex-combatants who fought for Namibia's independence has been particularly explosive. Efforts to rehabilitate them through a number of Development Brigade Corporation companies, set up specifically for the purpose, failed to alleviate the problem as some of the companies went bankrupt and, according to Prime Minister Hage Geingob, many of the ex-combatants "want to be just in the army." A total of 9,511 have been registered for possible recruitment by the government or government-affiliated bodies.

In addition to unemployment, the country has an acute shortage of skilled manpower. According to the National Human Resource Plan, Namibia's labour force was characterized at independence by considerable skills shortages on the one hand, and a large army of unskilled and unemployed people on the other. Rapid population growth since independence has made the situation worse.

Clearly, Namibia has a long way to go in building an equitable society. But all factors considered, Namibians can look back with satisfaction on the first nine years of independence in which they have built a nation from the ashes of war, fostered a peaceful democracy and generated a robust private sector. In the circumstances, the tasks that remain, including correcting the glaring inequities inherited from more than a 100 years of brutal colonialism and apartheid, are formidable but not insurmountable.

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