Nam heading for the middle-income trap

 

Namibia has been a success story in Africa and has climbed the socio-economic ladder to emerge as a small middle-income country. But after major advances, growth in this country of [just over] 2 million appears to have stalled, as the economy reaches the limits of its infrastructure and economic plans.

Much of the growth has been driven by the mining sector, which has benefited from the liberal Foreign Investment Act of 1990 that guaranteed against nationalisation, the freedom to remit capital and profits abroad, facilitated currency convertibility and instituted a process for settling disputes equitably.

The International Monetary Fund calls Namibia's current economic lethargy as the “middle-income-trap”. 

The country broke off from South Africa in 1990, but while its economy remains tied to its southern neighbour, Namibia has also imported on some of its more sophisticated financial capital market frameworks.

“Namibia is blessed with good infrastructure, as well as political stability,” said management consultants KPMG. 

“However, contrary to its potential, the economy remains poorly diversified and restricted by a narrow economic base. Its largest challenge is to develop the non-mining sector, as mining activities employ many (skilled) foreign workers and only 3 percent of the local population.”

Minister of Trade and Industry, Calle Schlettwein, told a Namibia Chamber of Commerce and Industry (NCCI) summit last July that the country remains a “de facto colonial economy”, because of its dependence on the primary sector and resource exports. 

“We need a paradigm shift and transformation from being an economy that largely produces what it does not consume and consumes what it does not produce,” Schlettwein warned.

Growth Stalls

Namibia's central bank cuts growth estimate for 2013 from 4.6 percent to 4.4 percent, due to a poor global economic environment, although GDP is expected to grow 5 percent this year, on the back of construction projects.

The construction sector is projected to register stronger growth in 2013, supported by private sector investments in the mining sector, as well as public sector investments for construction works.

The IMF, however, projects 4.3 percent growth in 2014, fuelled by strong activity in a planned public housing programme and recovery in the mining sector through the full-capacity production of the Husab uranium mine.

A management consultancy notes that Namibia's most recent release of GDP data signals that the country could this year record its slowest growth rate since the 2009 recession, “which provides substance to the monetary policy committee (MPC) arguing recently that global challenges are increasingly presenting downside risks to domestic growth”.

The MPC recently maintained interest rates at 5.5 percent, in the hopes of spurring growth. “There are significant downside risks to the near-term outlook, both from global spillovers and domestic developments,” warns the IMF, noting that an emerging market crisis could lead to a decline in natural resource exports.

“Policy uncertainty in South Africa can also affect Namibia through the monetary exchange rate peg link. In addition, a delay in finalising negotiations of the Economic Partnership Agreement (EPA) with the European Union could pose additional risks to non-mineral exports, such as beef, grape and fish products.”

Within the primary industry, mineral production continued to show sustained momentum, the agricultural sector recorded significant increases in the value of livestock marketed, due to prevailing drought, the fund said. 

“In the secondary industry, real value for approved building plans rose, suggesting increased property developments envisaged going forward, although real value of buildings completed declined. The construction sector is projected to register a stronger growth in 2013, supported by private sector investments in the mining sector, as well as public sector investments for construction works.”

The country, which enjoys political stability, is set to see fresh elections this year. The country is set to usher in a new president after Hifikepunye Pohamba finishes his final term in office.

Investment in Infrastructure

The government has earmarked close to US$1.22 billion for infrastructure over the next three years, nearly double of funds spent in the previous three years.

These include investments in US$1.4 billion Husab uranium mining project set to start production by the end of 2015. The mine is owned and operated by Swakop Uranium, a subsidiary of Taurus Minerals Limited, an entity owned by China Guangong Nuclear Power Company (CGNPC) Uranium Resources Co, Ltd and the China-Africa Development Fund.

Namibia also signed a US$338 million sovereign guaranteed loan with the African Development Bank to finance the construction of a new container terminal at Port of Walvis Bay, which would raise the port's capacity to more than 1 million TEUs per year.

Namibia, which is keen to emerge as a regional hub, has also struck a deal with landlocked Botswana to export coal from the Walvis Bay project.

Oil companies are also examining opportunities in the country. PanContinental recently announced a farm-out deal in offshore northern Namibia with British oil explorer Tullow. 

Eco Namibia, which holds four petroleum licenses in the country, also said on February 18 that the Walvis basin may hold as much as 4.5 billion barrels of oil reserves in its Cooper project.

Gil Holzman, CEO of Eco Atlantic, said the new study triples the “potential oil that we have estimated in the leads on Cooper, thus making it an even more attractive drilling opportunity.”

The country's land distribution process is going well and is leading to a flurry of activities in the construction sector. Namibia's land program has reached 70 percent of its targets with seven years to go. By late 2012, Namibians owned 9.6 million hectares of a targeted 15 million hectares.

Despite these promising prospects, the country faces significant challenges including lack of water over the coming decades.

“[Dependence] on mineral exports for foreign revenues and state income makes the country susceptible to international developments affecting demand and prices for copper, uranium and diamonds,” KPMG said.

In order to fulfil its potential, the government must address external current account deficits and focus on a national savings programme.

“Namibia has better institutions, more developed financial markets, and labor market efficiency than other middle-income countries,” the IMF said. “However, the country lags behind peer countries in health and primary education. 

These indicators suggest that overall Namibia needs to prioritize investment in health and primary education and diversify its export base and further expand its markets.” – Zawya.com

March 2014
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