IMF warns against legislation to halt capital outflow

THE International Monetary Fund (IMF) has advised Namibia against introducing legislation to stem capital flight, mainly to South African financial markets.

Namibia, while endowed with significant domestic savings, exports some 65 per cent of it. The IMF caution was sounded during a consultative meeting between the Executive Board of the multi-lateral Bretton Woods lending institution and Namibia held in Windhoek on January 5.The advice flies in the face of a stated intention by the Minister of Finance, Saara Kuugongelwa-Amadhila, for increased investment by particularly pension funds in the local economy.The IMF believes market forces should prevail, and also feels Namibia does not have diversified investment opportunities.In her 2006-2007 Budget speech, Kuugongelwa-Amadhila hinted at an amendment of Regulation 28, which prescribes minimum investment by pension funds in the local economy.MINIMUM INVESTMENT In terms of the regulation, pension funds are obliged to invest a minimum of 35 per cent locally.According to Kuugongelwa-Amadhila’s 2006-2007 Budget statement, amendments to Regulation 28 had been agreed to and “are aimed at slowing down capital outflows and improving (international) reserves”.While discouraging Namibia against regulatory measures to stem capital flight, the IMF expressed concern at what it termed the “continued strong outflows of capital to South African financial markets”, which “will keep the international reserves at relatively low levels”.”To strengthen foreign reserves and help keep domestic savings in the country in the long term, Directors [IMF] recommended developing domestic investment opportunities and market-based strategies – such as asset securitisation and open market purchases of foreign exchange,” the IMF says.Another concern raised by the IMF during the consultations was the high public-service wage bill – a sentiment also shared by the Finance Ministry.By the Minister of Finance’s own admission the number of civil servants has increased by six per cent over the past three years.Government is expected to spend 41,2 per cent of its total budget on personnel expenditure this financial year.Kuugongelwa-Amadhila, sharing IMF concerns, called on Government in her 2006-2007 budget speech to address “increasing personnel”, though she ruled out the possibility of mass lay-offs of civil servants.According to IMF calculations, the public-service wage bill accounts for 40 per cent of all Government expenditure.The IMF says that because of “ineffective controls” past efforts to reduce the civil service failed and Government departments had been able to circumvent a hiring freeze, leading to an increase of eight per cent in the number of civil servants in the 2005-06 financial year alone and a doubling since Independence.Namibia’s civil service wage bill is the fourth highest in Africa after Zimbabwe, Seychelles and Eritrea, according to statistics provided by the IMF.In her 2006-07 Budget speech Kuugongelwa-Amadhila alluded to cutting the wage bill by 10 per cent over the next three years.Such a move, she said, “could free up significant resources that should then be utilised for pro-growth interventions”.She, however, ruled out retrenchments as an option.The IMF further commended the Namibian Government for its efforts to reduce public debt.The IMF says that the public debt ratio to the Gross Domestic Product (GDP) “projected to come close to the authorities’ fiscal rule target of 25 per cent of GDP by 2007-08”.However, the institution warns against expected declining income from the Southern African Customs Union (SACU).This, according to the IMF, will put pressure on the country’s ability to finance vitally needed national projects.It therefore calls on Government to undertake reforms to “shore up revenues and reduce non-priority spending”.The IMF also suggested that the current revenue windfalls from SACU and increased income from diamond sales should be used to reduce public debt in view of the declining SACU revenue and to “increase development and pro-poor spending”.The IMF caution was sounded during a consultative meeting between the Executive Board of the multi-lateral Bretton Woods lending institution and Namibia held in Windhoek on January 5.The advice flies in the face of a stated intention by the Minister of Finance, Saara Kuugongelwa-Amadhila, for increased investment by particularly pension funds in the local economy.The IMF believes market forces should prevail, and also feels Namibia does not have diversified investment opportunities.In her 2006-2007 Budget speech, Kuugongelwa-Amadhila hinted at an amendment of Regulation 28, which prescribes minimum investment by pension funds in the local economy. MINIMUM INVESTMENT In terms of the regulation, pension funds are obliged to invest a minimum of 35 per cent locally.According to Kuugongelwa-Amadhila’s 2006-2007 Budget statement, amendments to Regulation 28 had been agreed to and “are aimed at slowing down capital outflows and improving (international) reserves”.While discouraging Namibia against regulatory measures to stem capital flight, the IMF expressed concern at what it termed the “continued strong outflows of capital to South African financial markets”, which “will keep the international reserves at relatively low levels”.”To strengthen foreign reserves and help keep domestic savings in the country in the long term, Directors [IMF] recommended developing domestic investment opportunities and market-based strategies – such as asset securitisation and open market purchases of foreign exchange,” the IMF says. Another concern raised by the IMF during the consultations was the high public-service wage bill – a sentiment also shared by the Finance Ministry.By the Minister of Finance’s own admission the number of civil servants has increased by six per cent over the past three years.Government is expected to spend 41,2 per cent of its total budget on personnel expenditure this financial year.Kuugongelwa-Amadhila, sharing IMF concerns, called on Government in her 2006-2007 budget speech to address “increasing personnel”, though she ruled out the possibility of mass lay-offs of civil servants.According to IMF calculations, the public-service wage bill accounts for 40 per cent of all Government expenditure.The IMF says that because of “ineffective controls” past efforts to reduce the civil service failed and Government departments had been able to circumvent a hiring freeze, leading to an increase of eight per cent in the number of civil servants in the 2005-06 financial year alone and a doubling since Independence.Namibia’s civil service wage bill is the fourth highest in Africa after Zimbabwe, Seychelles and Eritrea, according to statistics provided by the IMF.In her 2006-07 Budget speech Kuugongelwa-Amadhila alluded to cutting the wage bill by 10 per cent over the next three years.Such a move, she said, “could free up significant resources that should then be utilised for pro-growth interventions”.She, however, ruled out retrenchments as an option.The IMF further commended the Namibian Government for its efforts to reduce public debt. The IMF says that the public debt ratio to the Gross Domestic Product (GDP) “projected to come close to the authorities’ fiscal rule target of 25 per cent of GDP by 2007-08”.However, the institution warns against expected declining income from the Southern African Customs Union (SACU).This, according to the IMF, will put pressure on the country’s ability to finance vitally needed national projects.It therefore calls on Government to undertake reforms to “shore up revenues and reduce non-priority spending”.The IMF also suggested that the current revenue windfalls from SACU and increased income from diamond sales should be used to reduce public debt in view of the declining SACU revenue and to “increase development and pro-poor spending”.