Capital outflow restricting Namibia’s GDP growth

CABINET has given approval to the Ministry of Finance to introduce or impose restrictions on the outflow of capital from Namibia out of pension funds, life insurance and commercial banks.

This follows a study conducted last year by the Ministry of Finance and the Bank of Namibia, which revealed that in the midst of relatively low economic growth in the country over the last five years there was massive capital outflow, mostly to South Africa. This capital outflow, according to the study, was mainly in the form of pension funds, life insurance and short-term investment through transactions between local commercial banks and their parent banks in South Africa.”A policy response to capital outflow is necessary with the view for Namibia to use more of its savings for domestic investment.Experience from other developing economies indicates that control of capital can be successful in reversing the outflow of capital.”The rationale for imposing capital control is to promote economic development.Namibia needs investment capital to stimulate economic growth”.With that in mind, Cabinet announced that the Ministry of Finance is to introduce a number of policy recommendations aimed at reducing the percentage of investment in dual-listed companies by institutional investors that qualifies as domestic investment to 10 per cent over five years.It will also prescribe to all institutional investors a 5 per cent minimum investment in unlisted Namibian companies like small to medium enterprises (SMEs) and new projects.Furthermore it will introduce legislation to subject unit trust management companies to a domestic asset requirement and to withdraw the tax-free status of returns on unit trusts.The release also stated that the Common Monetary Area (CMA) agreement made provision for member countries to impose measures in order to promote local industries with a view to ensuring equitable development within the CMA.Capital outflow from pension funds, life insurance and commercial banks amounted to N$2,3 billion on average per year between 1995 and 2000 up from N$1,8 billion between 1990 and 1994.This capital outflow is said to have resulted in a capital account deficit of N$404 million per year on average between 1994 and 2001, with the highest deficit of N$1,1 billion being recorded in 1999.”The low economic growth has been largely constrained by poor investment growth due to capital scarcity caused by capital outflow and not as a result of insufficient saving.”To date, the ratio of saving to GDP has consistently outstripped investments in Namibia.Gross savings in relation to gross domestic product ranged between 22,5 per cent and 27,8 per cent during the period between 1994 and 1997, yet, during the same period, gross fixed capital formation in relation to GDP averaged about 20,4 per cent, remaining virtually below the level of national savings for the entire period.This capital outflow, according to the study, was mainly in the form of pension funds, life insurance and short-term investment through transactions between local commercial banks and their parent banks in South Africa.”A policy response to capital outflow is necessary with the view for Namibia to use more of its savings for domestic investment.Experience from other developing economies indicates that control of capital can be successful in reversing the outflow of capital.”The rationale for imposing capital control is to promote economic development.Namibia needs investment capital to stimulate economic growth”.With that in mind, Cabinet announced that the Ministry of Finance is to introduce a number of policy recommendations aimed at reducing the percentage of investment in dual-listed companies by institutional investors that qualifies as domestic investment to 10 per cent over five years.It will also prescribe to all institutional investors a 5 per cent minimum investment in unlisted Namibian companies like small to medium enterprises (SMEs) and new projects.Furthermore it will introduce legislation to subject unit trust management companies to a domestic asset requirement and to withdraw the tax-free status of returns on unit trusts.The release also stated that the Common Monetary Area (CMA) agreement made provision for member countries to impose measures in order to promote local industries with a view to ensuring equitable development within the CMA.Capital outflow from pension funds, life insurance and commercial banks amounted to N$2,3 billion on average per year between 1995 and 2000 up from N$1,8 billion between 1990 and 1994.This capital outflow is said to have resulted in a capital account deficit of N$404 million per year on average between 1994 and 2001, with the highest deficit of N$1,1 billion being recorded in 1999.”The low economic growth has been largely constrained by poor investment growth due to capital scarcity caused by capital outflow and not as a result of insufficient saving.”To date, the ratio of saving to GDP has consistently outstripped investments in Namibia.Gross savings in relation to gross domestic product ranged between 22,5 per cent and 27,8 per cent during the period between 1994 and 1997, yet, during the same period, gross fixed capital formation in relation to GDP averaged about 20,4 per cent, remaining virtually below the level of national savings for the entire period.