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January 2019 inflation rate – downward trend continues

The Namibia Statistics Agency has released the Consumer Price Index (CPI) for January 2019 on 14 February 2019. The CPI is being used to calculate the month-on-month (compared to the previous month) and year-on-year (compared to the same month in the previous year) inflation rates. The annual inflation rate dropped further to 4.7% in January from 5.1% in December and 5.6% in November 2018. It is, however, 120 basis points higher than in January 2018 (3.6%).
Here are some of the main highlights:
 The inflation rate for goods increased from 4.2% in December 2018 to 4.8% in January 2019, while the inflation rate for services remained at 4.5%.
 The prices of food and non-alcoholic beverages continued the upward trend. The inflation rate rose to 5.7% from 5.2% in December 2018. Food prices increased by 6.1% in January 2019 compared to 5.4% in December. It is the highest inflation rate since almost two years. Food price inflation stood at 6.8% in March 2017. The main drivers are price increases for bread and cereals of 8.3% in January after 7.9% in December. Meat prices rose slightly faster in January (3.6%) than in December (3.5%). These two categories contribute almost 57% to the total food price inflation. The inflation rate for vegetables increased by almost 50% from 12.8% in December to 18.8% in January 2019, while fruit price inflation accelerated from 8.1% to 8.5%. Food and non-alcoholic beverages bear the second highest weight (16.5%) in the consumption basket.
 Both, alcohol and tobacco products contributed to the increase in the inflation rate from 5.9% to 6.4% for the category ‘Alcohol and Tobacco’. Prices for alcoholic beverages rose by 6.7% (up from 6.1% in December) and for tobacco from 4.7% to 6.3% in January 2019. This categories carries the fourth highest weight in the consumption basket (12.6%).
 The inflation rate for housing, water, electricity, etc. continued to decline, reaching the lowest level since December 2015. Prices increased by 2.9% in January compared to 3.1% in December 2018 and to 2.7% in December 2015. Rental payments contribute 23.3% to the total inflation rate and 82.1% to the inflation rate for the category ‘housing, etc.’ Prices for rental payments increased by just 2.3%, while prices for the maintenance of dwellings rose by 3.3% in January 2019 up from 2.5% in December.
 The second consecutive drop in fuel prices in January 2019 resulted in a much lower inflation rate for the category ‘transport’. Transport inflation decreased from 10.9% in December to 7.3% in January – the lowest inflation rate since June 2018. The inflation rate for the sub-category ‘Operation of personal transport equipment’ that refers to fuel prices dropped to 4.8% from 10.5% in December. The cost of fuel accounts for 9% of the total consumption basket.
 The education sector was the only sector experiencing double-digit price increases. Prices for education services rose by 12.0% up from 9.9% during 2018.
 Clothing and footwear was the only category that recorded actually lower prices in January 2019 than in December 2018. Prices dropped by 0.7% in January and prices in the sub-category ‘Children clothing’ by even 6.9%. With the exception of October 2018 prices for clothing and footwear declined throughout 2018.
The drop in the inflation rate brings another relief to consumers as well as the business sector. The contraction in the economy certainly helped contain rental price increases at levels last seen in 2015. Lower global oil prices contributed further to the lower inflation rate.
However, not all households will benefit to the same extent from the slowdown in price increases. Poor households that spend most of their income on food, and a lower share than the average household on transport and rent in particular in rural areas, will struggle more to make ends meet. Due to the existing dry spell, we expect food prices to remain under pressure.
In addition, further price increases for alcoholic beverages and tobacco products can be expected this month with the annual increase in excise duties.
Despite upward price pressure in some categories, inflation is expected to remain well within the 3% to 6% band targeted by the South African Reserve Bank. Therefore, and given the economic climate, interest rate increases are unlikely this year.

EAN Commentary – January 2019 inflation rate

Stable fuel prices for February 2019 – another welcome relief

The Ministry of Mines and Energy (MME) announced on 31 January 2019 that fuel prices will remain unchanged with effect of 6 February 2019 midnight. 95 Octane Unleaded Petrol will cost NAD12.05 per litre and Diesel 50ppm NAD13.13 per litre at Walvis Bay and NAD12.47 and NAD13.56 respectively in Windhoek.
A brief analysis:
 Average monthly Brent Spot Oil prices increased by 2.9% from an average of USD57.36 per barrel in December 2018 to USD59.04 per litre in January 2019 (up to 28 Jan 2019) as per information from the US Energy Information Administration. Monthly average prices for January 2019 were, however, 14.5% lower than the average price of USD69.08 per barrel in January 2018.
 The Namibia dollar appreciated by 2.1% on average in January 2019 (NAD13.89 per USD) compared to December 2018 (NAD14.18 per USD). However, the NAD has depreciated against the USD by 13.8% compared to January 2018.
 The slight increase in global oil prices combined with the appreciation of the NAD against the USD has led to stable fuel prices in Namibia.
 The National Energy Fund incurred under-recoveries between April 2018 and October 2018 of a combined NAD5.20 per litre for petrol and NAD5.69 per litre for diesel. These under-recoveries were partly offset by price increases totalling NAD2.35 per litre for petrol and NAD2.85 per litre for diesel, leaving the NEF with a deficit of NAD2.85 for petrol and NAD2.84 per litre for diesel.
 In contrast, the NEF recorded over-recoveries (the actual cost of fuel was lower than the pump price at service stations) of a combined NAD3.47 per litre for petrol and NAD2.82 per litre for diesel between November 2018 and January 2019. NAD1.90 per litre for petrol and NAD1.40 per litre for diesel was passed on to the motorist over this period leaving the NEF with a surplus of NAD1.57 per litre for petrol and NAD1.42 per litre for diesel.
 Based on the under-recoveries and over-recoveries per litre, the NEF has still subsidised fuel by NAD1.28 per litre for petrol and NAD1.42 per litre for diesel. However, whether the NEF has incurred a net loss or gained a net surplus over the period April 2018 to January 2019 depends on the volume of fuel sold.
 Leaving the fuel prices unchanged despite over-recoveries per litre in January could indicate that the NEF has still incurred a loss that the Ministry of Mines and Energy is trying to recover.
 The slowdown in the global economy suggests that the demand for oil will remain suppressed. Unless OPEC and Russia agree on substantial production cuts that cannot be compensated by production increases by non-OPEC member states, in particular shale oil producers in the USA and Canada, the weak demand will prevent upward price pressure on oil. Despite output cuts agreed
upon between OPEC (Saudi Arabia) and Russia in 2018, Russia reportedly produced a record output in 2018.
 The Namibia dollar has hold ground against major currencies so far this year. Some political risks could emanate from the national elections in South Africa in May 2019. If the South African rand / NAD can hold its current position, we might see some fluctuations in the fuel price, but not to the extent experienced in 2018.
The two consecutive, substantial fuel price decreases in December 2018 and January 2019 and stable prices for February 2019 bring relief to not only motorists, but to all businesses and consumers at a time when the economy is still not gaining much momentum. In particular the fishing and transport sector will benefit from more stable fuel prices since fuel accounts for some 29% and 24% respectively of their total input costs.
Transport inflation was the main driver of the inflation rate in 2018. Fuel prices for February 2019 are 3.7% (petrol) and 12.0% (diesel) higher than in February 2018. After double-digit inflation rates for transport from September 2018 to December 2018 we can expect a return to single-digit transport inflation for January and February 2019, which will ease overall inflationary pressure. Fuel prices (operation of personal transport equipment) contribute 9% to the overall inflation rate and have, therefore, an impact on the overall inflation rate.
As said before, new technologies such as e-vehicles, can reduce the dependency on oil and hence on imports and increase the demand for locally available resources, such as renewable energies. Namibia needs to start laying the foundation for the necessary shift, even if stable fuel prices might reduce the immediate pressure to embark on the transition.

Fuel price decision February 2019 – EAN Commentary

December 2018 inflation rate – reversal of 2018 trend

The Namibia Statistics Agency has released the Consumer Price Index (CPI) for December 2018 on 15 January 2019. The CPI is being used to calculate the month-on-month (compared to the previous month) and year-on-year (compared to the same month in the previous year) inflation rates. The annual inflation rate dropped to 5.1% in December 2018 from 5.6% in November. After continuous increases during 2018 inflation ended the year on a more positive note for consumers and producers, although it remains the second highest inflation rate for 2018 and on par with October. Month-on-month, the inflation rate decreased by 0.2%.
Here are some of the main highlights:
 The inflation rate for both goods and services declined. After continuous increases in the inflation rate for goods since March 2018 from 2.8% to 6.1% in November, prices rose at a slower pace in December – 4.2%. The inflation rate for services started to rise in May 2018 from 4.2% to 4.8% in October and November 2018, before it decreased slightly to 4.5% in December. The inflation rate for services exceeded the inflation rate for goods for the first since June 2018.
 Food price inflation continued its upward trend that started in October 2018 and increased to 5.4% in December from 4.9% in November. The main driver has been bread and cereal prices that rose by 7.9% in December compared to 6.0% in November. This category contributes 32.8% to the overall food inflation rate and has therefore a strong impact on food price inflation. In contrast, meat prices increased at a slower pace of 3.5% compared to 4.7% in November. Meat accounts for 23.9% of the food basket. After price declines between May and September 2018, prices for sugar, jam, honey, etc. are on the rise again and increased by 4.7% in December (November: 4.3%). The inflation rate for vegetables etc. saw the strongest increase from 8.9% in November to 12.8% in December 2018, while fruit prices accelerated slightly stronger in December (8.1%) than in November (7.9%). Milk price increases decelerated from 2.2% in November to 0.4% in December.
 Price increases for tobacco products were the main cause for accelerated price increases in the category ‘alcohol and tobacco’. The inflation rate for this category rose from 5.7% to 5.9% in December 2018, with tobacco prices increasing by 4.7% compared to 3.1% in November. Alcohol prices increased at a slower pace of 6.1% in December than in November (6.3%).
 Prices for housing, water, electricity, etc. increased at the slowest pace since October 2014, namely by 3.1%, while they rose by 3.7% in November 2018. Both prices for the maintenance of houses as well as for water supply increased at a slower pace in December than in November. Prices for water supply rose by 4.7% as compared to 8.7%, while prices for repair and maintenance increased by 2.5% compared to 3.5%. The category ‘housing, water, etc.’ carries the highest weight in the consumption basket of 28.4%, meaning the average Namibian consumer spends 28.4% of total expenditure on these goods and services.
 The slowdown in transport inflation was the main reason behind the lower overall inflation rate in December. Transport inflation stood at 10.9% in December 2018 and was hence lower than between September and November. However it remains the fourth highest inflation rate for more than a decade. The reduction in fuel prices resulted in the drop of the inflation rate for the operation of transport equipment, which has the highest weight within the transport category and contributes 8.96% to the overall inflation rate. Prices for the operation of transport equipment rose by 10.5% in December compared to 15.4% in November. It was the slowest pace since June 2018. Transport contributes 14.3% to total consumption.
 Prices for health services increased at the same rate as in November 2018 – 4.8%. The inflation rates for both sub-categories – medical products, outpatient services – remained unchanged at 3.4% and 6.6% respectively.
 After prices for clothing and footwear increased again in October they followed the same trend since December 2017 again – falling. Prices for this category dropped by 0.2% in December 2018. Prices for girls’ clothing dropped by 12.5%, while prices for boys’ clothing increased by 0.8%. Prices for infants’ clothing decreased by 3.6%.
The drop in fuel prices by NAD1.00 per litre for petrol and NAD0.40 per litre for diesel slowed down inflation to 5.1% in December. However, despite a further drop in fuel prices in January 2019 by NAD0.90 per litre and NAD1.00 per litre for petrol and diesel respectively, fuel prices remain higher than in January 2018, and will therefore contribute to the inflation rate. We can expect oil price fluctuations influenced by changing global growth prospects and in particular by progress in trade negotiations between China and the USA, in Brexit negotiations as well as the monetary policy path pursued by the Federal Reserve Bank in the USA and the European Central Bank, among others. In addition, output targets agreed by OPEC+ (mainly Saudi Arabia and Russia), adherence to targets, as well as output responses by US and Canadian shale oil producers will further influence global oil prices, while the exchange rate will impact on domestic fuel prices. Higher fuel costs over the past months, despite some respite in December and January, could, however, result in so-called second round effects, because producers could pass on higher input costs to the end consumer.
White maize prices and wheat prices on the South African Futures Exchange (Safex) are currently 49% and 21% higher than in January 2018. This could result in further price pressure on bread and cereals, while the expected El Niño effect with below average to average rainfalls this season in the region could result in further price increases for crops, vegetable and fruits, while meat prices could decline further due to higher livestock marketing.
Overall, we expect the inflation rate in 2019 to remain within the 3% to 6% band targeted by the South African Reserve Bank through its monetary policy.

December 2018 inflation – EAN Commentary

Third quarter 2018 trade statistics – Value of domestically produced exports increased further

The Namibia Statistics Agency (NSA) has released the trade statistics for the third quarter 2018 on 13 December 2018. The trade statistics refer to trade in goods only and exclude the trade in services. Namibia usually achieves a surplus in the trade of services.
Herewith a few highlights:
 The value of exports increased by 2.1% from NAD23.8 billion in the second quarter of 2018 to NAD24.3 billion in the third quarter. The value of re-exports dropped by 9.4% from NAD12.8 billion to NAD11.6 billion over the same period. Excluding the value of re-exports from total exports, the value of goods produced in Namibia and exported rose by 15.4% from NAD11.0 billion to NAD12.7 billion. Exports remain fairly concentrated with the four major export items accounting for 70% of total exports.
 The value of imports rose by 10.8% from NAD24.9 billion to NAD27.6 billion between the second and third quarter of 2018. It is one of the highest import values over the past five years.
 The trade deficit tripled from NAD1.1 billion to NAD3.3 billion in the third quarter 2018. However, compared to the trade deficit of NAD8.4 billion in the third quarter 2017, the deficit dropped by 60.4%. The third quarter 2018 recorded one of the lowest quarterly trade deficit over the past five years. Only the first quarter 2016 (NAD448 million) and the second quarter 2018 (NAD1.1 billion) recorded lower deficits.
 Copper cathodes took the top place in exports with a value of NAD5.9 billion, up by 38.1% from NAD4.3 billion. However, only 5% of exported copper cathodes are produced locally, 95% (NAD5.7 billion) are re-exports that were imported mainly from Zambia. Re-exports grew by 43.5% from NAD3.9 billion in the second quarter. Copper cathodes account for 24.5% of total exports.
 Diamond exports rose by 9.3% from NAD5.2 billion to NAD5.7 billion. They account for 23.6% of total exports. Re-exports contribute 28% total diamond exports. The value of re-exports increased by 7.5% from NAD1.5 billion to NAD1.6 billion.
 The exports of ores and concentrates rose strongly by 42.3% from NAD2.0 billion to NAD2.8 billion to one of the highest export values over the past five years. Ores and concentrates account for 11.6% of total exports
 The value of fish exports declined by 2.6% from NAD2.6 billion to NAD2.5 billion. Despite the slight drop in value, the value of fish exports was the third strongest over the past five years only exceeded in the second quarter 2018 (NAD2.59 billion) and the second quarter 2016 (NAD2.57 billion). Fish exports contribute 10.4% to total exports.
 Copper cathodes topped also the list of imported items increasing by 0.9% to NAD4.1 billion. The value of copper cathodes has grown substantially over the past year to NAD11.7 billion so far in 2018 compared to NAD2.2 billion for the first three months in 2017. Copper cathodes account for 14.7% of total imports.
 The value of imported mineral fuels and oil more than doubled from a low of NAD1.7 billion in the second quarter to NAD3.4 billion in the third. Mineral fuels contribute 12.4% to total imports.
 The value of imported vehicles increased by 5.9% to NAD2.2 billion. While it is the highest import value since the beginning of 2017, it remains below values seen in most quarters before 2017. Imported vehicles added 7.8% to the import bill.
 Boilers & machinery occupied the fourth place on the import list. The value increased by 10.0% to NAD1.9 billion. Other import items include ores and concentrates (NAD1.8 billion), electrical machinery (NAD1.6 billion) as well as articles of iron or steel (NAD730 million) and of plastic (NAD653 million).
 SACU was the main destination for Namibia’s exports absorbing 31.1% or NAD6.8 billion. Diamonds to the value of NAD2.5 billion were exported to Botswana. BRIC countries (Brazil, Russia, India and China) followed in second place with NAD5.8 billion of goods, mainly because of exports of copper cathodes (NAD3.3 billion) and of ores and concentrates (NAD2.0 billion) to China. NAD5.6 billion worth of exports or 25.6% of total exports were destined to the EU. Belgium imported NAD1.6 billion worth of copper cathodes, while Spain imported NAD1.1 billion worth of fish. Non-SACU SADC member states accounted for 8.6% (NAD1.9 billion) and COMESA member states for 7.5% (NAD1.6 billion) of Namibia’s exports.
 Namibia sourced NAD13.2 billion of imports (or 47.8% of total imports) from SACU member states – mainly from South Africa. COMESA and non-SACU SADC member states followed on place two and three with NAD5.35 billion and NAD5.30 billion respectively. NAD4.0 billion consists of copper cathodes from Zambia. Since SADC and COMESA memberships are overlapping the import sources most likely refer to the same country. Namibia sourced NAD2.5 billion worth of imports from the EU and NAD2.3 billion from BRIC countries accounting for 8.9% and 8.2% of total imports respectively.
Almost half of Namibia’s exports are re-exports implying that no or very little value has been added. Moreover, the four main export items account for 70% of total exports, which makes Namibia very vulnerable to a drop in demand for one of these goods. The expected decline in demand for diamonds in 2019 underlines this vulnerability. Hence more efforts are required to attract investment into greenfield industries. The recent examples of car manufacturing and asparagus farming illustrate that it is possible. However, in order to succeed serious efforts are needed to improve the competitiveness and the business climate in the country. Furthermore, concerted efforts by both the private and public sectors to identify goods that can be produced and sourced locally are needed to not only reduce the import bill, but also diversify the domestic economy. The current drop in oil prices could bring some relief for the import bill, but promoting an applying new technologies to substitute energy imports with energy sources available in the country will reduce the energy import bill permanently and support domestic economic activities.

Third Quarter 2018 trade statistics – EAN Commentary

Fuel price decrease December 2018 – An early Christmas present

The Ministry of Mines and Energy (MME) announced on 30 November 2018 a fuel price decrease of NAD1.00 per litre for petrol and NAD0.40 per litre for diesel countrywide with effect of 5 December 2018 midnight.
A brief analysis:
 Increased global oil supply mainly by OPEC and shale oil producers in the USA coupled with a slowdown of the global economy that reduces the demand for oil – and other commodities – are the main factors behind the drop in global oil prices. The average Europe Brent oil price dropped by 18.4% in November compared to October to USD66.16 per barrel. Daily oil prices declined even further to below USD60 per barrel at the end of November 2018. However, prices remain 5.5% higher than in November 2017.
 Furthermore, the Namibia dollar appreciated on average by 2.8% in November to NAD14.09 per US dollar compared to the monthly average of NAD14.50 per USD in October 2018. Both factors contributed to lower landing costs of fuel in Namibia.
 This resulted in substantial over-recoveries (fuel prices at pump stations were higher than the cost of fuel) of 140.196 Namibia cents per litre for petrol 95 Octane, 60.465 Namibia cents per litre for diesel 500ppm and 59.589 Namibia cents per litre for diesel 50ppm. It was the first time since seven months that the National Energy Fund accumulated over-recoveries. Part of the over-recovery was passed on to the motorists, while the ministry uses part of the over-recovery to recover the NEF subsidy over the past months.
 Pump prices have decreased for the first time since September 2017 for petrol and since July 2017 for diesel. Petrol prices remain, however, 11.2% higher than at the beginning of 2018 and diesel prices 20.2% higher.
The decrease in fuel prices brings much needed relief to Namibian producers and consumers that have to cope with a slow economic recovery and increasing inflation. It will ease the burden on the consumer during the upcoming festive and holiday season. The drop in fuel prices is more generous than the previous under-recoveries would have suggested.
However, the current drop in oil prices highlights once more the volatility in the global oil market that is influenced not only by the performance of the global economy, but also by geopolitical factors such as the tensions in the middle east. The current declining oil prices are mainly caused by a global slowdown of the economy due to continuing uncertainties surrounding the global trade system, which is not good news for Namibia. Slower global economic growth results in lower demand for basic commodities and hence lower prices, which hits commodity exporters such as Namibia. Furthermore, lower oil prices will slow down the recovery of the Angolan economy and subsequently the Angolan demand for Namibian goods and services.
Furthermore, lower fuel prices should not result in complacency on the part of consumers, producers and policy makers to embark on more fuel-efficient transport and production equipment and, moreover, move to electric vehicles and equipment. Such a shift will not only reduce Namibia’s dependency on oil imports, but support our Growth at Home Strategy by harnessing our own natural resources such as solar, wind, biomass and wave power to generate electricity. Policy makers need to take the initiative to design a joint strategy to promote the use (and production) of electric vehicles not only in Namibia, but in the southern African region. Namibia and the southern African region at large are rich in lithium and cobalt, the main inputs into the production of lithium-ion batteries that power electric vehicles. Instead of exporting the minerals as raw materials, policy makers need to design a strategy to add value to the minerals and produce the batteries in the region.
Fuel price decrease December 2018

October 2018 inflation rate – transport inflation pushes up overall inflation

The Namibia Statistics Agency has released the Consumer Price Index (CPI) for October 2018 on 15 November 2018. The CPI is being used to calculate the month-on-month (compared to the previous month) and year-on-year (compared to the same month in the previous year) inflation rates. The annual inflation rate rose from 4.8% in September 2018 to 5.1% in October 2018. It is slightly below the inflation rate in October 2017 that stood at 5.2%, but it is the highest inflation rate so far for 2018. On a month-on-month basis, inflation slowed down from 0.8% in September to 0.4% in October 2018.
Herewith are some of the main highlights:
 Price increases for goods remain the main drivers behind the overall increase in the inflation rate. Price increases for goods accelerated from 4.9% in September to 5.3% in October on a year-on-year basis. It is the fastest pace since April 2017 (5.6%). Goods inflation continued to exceed the inflation rate for services that rose slightly from 4.7% in September to 4.8% in October. Prices for services rose faster in October than in any other month this year, although it remains below the inflation rates experienced in 2016 and 2017. Inflation rates for both categories are heavily influenced by transport inflation. Transport fares are up by 18.0% and costs for the operation of vehicles (mainly fuel prices) are up by 15.5%.
 Food price inflation accelerated to 3.0% in October 2018 from 2.6% in the previous month and hence reversed the trend of slower price rises seen since June 2018. The main reason is the increase in inflation for the category ‘sugar, jam, honey, etc.’ that experienced price increases of 2.8% in October, while prices actually declined in the past five months. Prices for vegetables also rose stronger in October (7.6%) than in September (5.2%). These two sub-categories account for 18% of total food inflation. Prices for dairy products declined at a slower pace in October (-0.2%) than in September (-0.6%). Meat prices (3.4%) climbed at the slowest pace since February 2016 (2.6%), while fruit prices rose by only 9.6% compared to 15.3% in September. Despite price increases announced by Namib Mills for some of their products, such as wheat flour and mahangu, price rises for the category ‘bread and cereals’ remained at the same level as in September (3.8%). However, prices increased faster than in any month between February 2017 (10.3%) and August 2018 (2.6%).
 Prices for alcohol and tobacco rose at a slower pace in October (4.9%) than in September (5.6%), because of a drop in the inflation rate for alcoholic beverages from 6.3% to 5.3%. In contrast, prices for tobacco products accelerated faster (3.2%) in October than in September (2.6%).
 The inflation rate for the category that accounts for the largest share in the consumption basket (28.4%), namely housing, electricity and water, remained at 3.8% as in September, despite higher costs for the maintenance of dwellings up from 3.4% to 3.7%) and for electricity (up from 9.0%
to 9.5%). On the other hand, there was no change in the inflation rates for rental payments (2.6%) and for water supply, etc. (5.6%).
 Transport inflation remains the main driver of higher inflation. The increase in fuel prices by NAD0.50 per litre in October resulted in an inflation rate for the operation of transport equipment by 15.5% compared to October 2017. The rise in taxi and municipal bus fares led to an increase in the cost of public transportation services by 18.0% compared to October 2017. These two categories that account for 9.0% and 2.4% respectively of the total inflation rate are the drivers of higher inflation rates for the goods and services and hence for the overall inflation rate. Vehicle prices rose by 6.0% compared to 8.5% in September.
 Prices for health services increased at the slowest pace in October 2018 (4.8%) since March 2015 (4.7%) caused by lower price increases for medical products in October (3.4%) than in September (3.8%).
 The trend of falling prices for clothing and footwear was reversed in October 2018 when prices rose slightly by 0.3% compared to October 2017. This is due to higher prices for footwear (2.6%), while prices for clothing continue to decline (-0.7%). The same trend is observed for the category ‘communications’. Prices climbed by 1.1% in October, while they dropped by 1.2% in September.
Higher fuel prices have resulted in higher transport inflation and have already led to price increases for transport services and some consumer products as mentioned above. Second round effects of higher transportation costs due to increased input costs for producers and service providers (wholesale and retail trade outlets for instance) will support higher inflation rates in the months to come. However, there could be some relief on the horizon. Global oil prices have, despite sanctions on Iran as one of the main oil exporting countries, weakened from a spike at USD86 per barrel (4 Oct. 2018) to some USD73 per barrel in recent days. Combined with a more stable exchange rate this could contain further fuel price increases even though Government will try to recover losses of the National Energy Fund of close to NAD500 million over the past months.
The inflation rate remains well within the 3% to 6% bracket that the South African Reserve Bank uses as a benchmark for its interest rate decisions.
Recent wage and salary negotiations have again highlighted the limited use of the single inflation rate as a guideline for wage increments. The increase in the minimum wage for domestic workers has been criticised as being too low. The across the board offer at other institutions will increase inequality since the absolute increase for higher income groups exceeds the absolute increase for lower income groups. Separate inflation rates for low, middle and high-income earners would provide more accurate benchmarks for wage and salary negotiations. A separate inflation rate for low-income groups will also assist Government’s decision regarding increases for social grants.

EAN Commentary – NCPI October 2018

Fuel price increase November 2018 – The upward trend continues

The Ministry of Mines and Energy (MME) announced on 5 November 2018 a fuel price increase of NAD0.50 per litre for petrol and NAD0.70 per litre for diesel countrywide with effect of 7 November 2018 midnight.
According to the MME statement, the price of refined petrol and of refined diesel remained stable compared to September at USD86 per barrel and USD95 per barrel. However, the Namibia dollar weakened from NAD14.40 in September to NAD 14.50 vis-à-vis the US dollar causing the cost of fuel in NAD to rise. In addition, the industry margin will be increased by 2 Namibia cents per litre.
A brief analysis:
 Pump prices for diesel have been increased since May 2018 and for petrol since June 2018. Higher oil prices and a weaker Namibia dollar have been the main reasons, but adjustments in the transport costs from Walvis Bay to inland destinations as well as the increase in the fuel tax added to price rises in previous months.
 Petrol prices in Windhoek will be 19.6% and diesel prices 23.5% higher than at the beginning of the year and 24.7% and 28.9% higher than in November 2017.
 However, the pump price increases cover only 78% of under-recoveries per litre for petrol and 61% of under-recoveries per litre for 50ppm diesel. Under-recoveries occur when the actual costs of fuel landed in Walvis Bay plus the various additional costs such as dealer margin, industry margin, fuel levy and fuel tax remain above the pump price at service stations. Under-recoveries are absorbed by the National Energy Fund (NEF). The NEF has subsidised fuel prices since May 2018, because the first under-recoveries were experienced in April. The NEF spent a total of NAD470 million so far to cushion the higher cost of fuel. The under-recoveries peaked in September at NAD1.32 per litre for petrol and NAD1.45 per litre for diesel. The drop in under-recoveries in October indicate that motorists carried a stronger burden of the fuel cost increases.
 The industry margin increased from NAD0.91 to NAD0.93 per litre accounting for some 6.7% of the total pump price at Walvis Bay.
 Average monthly Europe Brent oil prices – based on daily spot market prices published by the Energy Information Administration – increased to USD81.58 per barrel in October, the highest level since October 2014 (USD87.43). The price increased by 41.9% compared to October 2017. Using the average exchange rate of the NAD versus the USD for October 2018, the price of oil in NAD increased by 50.4% to NAD1,182.86 per barrel, which is the highest price since July 2014.
The re-imposition of sanctions against Iran by the US Government beginning of November 2018 that target the financial, shipping and oil sectors are likely to exert further pressure on oil prices, since other OPEC
member states might not be in a position to cover the shortfall. Furthermore, the winter in the Northern hemisphere will lead to rising oil demand for heating purposes. On the other hand, the Namibia dollar is currently stabilising against other major currencies, which could ease the price pressure.
The rising fuel prices will lead to higher transportation costs and over time to price adjustments for consumer products. The inflation rate will therefore continue to rise. On the other hand, local producers competing with imported products could gain a competitive edge due to shorter transport distances. Therefore, sourcing inputs and final products locally could help containing the upward price pressure.

EAN Commentary-Fuel price increase Nov18

Mid-year Budget Review – Fiscal consolidation on course despite economic headwinds

The Minister of Finance presented the fourth Mid-year Budget Review on 24 October 2018. The review serves two purposes, namely to propose internal re-allocation of approved funds and to provide some first hints about the next Medium-term Expenditure Framework. It is not a proposal for the allocation of additional funds.
Herewith a few highlights.
Revenue
 Mid-year revenue outturn amounted to 51% of projected revenue for the Financial Year 2018/19 despite declining SACU transfers, a drop in VAT and increasing tax arrears.
 Tax arrears still amount to NAD3 billion despite a tax amnesty that was offered.
Expenditure: Initial teething challenges with the new Public Procurement Act resulted in delays in the implementation of planned programmes and projects. Hence, the so-called execution rate for development expenditure stood at 27%. This resulted in underspending of the development budget amounting to NAD1.79 billion that is being reallocated to various ministries.
Deficit
 The budget deficit as a percentage of GDP increased in the last FY 2017/18 from a projected 3.6% to finally 5.0% owing to increased expenditure in order to settle outstanding invoices.
 Deficit has been continuously reduced from 8.1% in FY2015/16 to 4.4% in the current FY 2018/19 and is projected to remain at 4.4% in the FY2019/20.
 The deficit is expected to average 3.6% in the next Medium-term Expenditure Framework.
Debt
 Total public debt as a percentage of GDP was slightly below the projection of 42.1% at 40.4% in FY 2017/18.
 Public debt is expected to peak at 48.7%.
 The cost of debt servicing stood at 8.9% of revenue and hence remained below the threshold of 10%.
Economic growth: Government projects the economy to contract for the second consecutive year, but at a lower rate than in 2017. After contractions of 0.2% in the first and second quarter 2018, the economy is expected to contract by 0.2% for the whole of 2018. This would be the first time that for Namibia that economic growth contracts in two consecutive years. Growth is expected to pick
up in 2019 to 0.9%, which will still result in a decline of per-capita income since population growth exceeds economic growth.
Proposed measures to improve the fiscal balance include:
 Alternative forms of financing such as Public Private Partnerships
 Reforms of Public Enterprises
 Partial listing of state assets
 Curbing growth of the public wage bill by limiting salary increments to inflation
 Proposed tax amendments including phasing out of ineffective tax incentives
 Increased threshold of tax-deductible pension and annuity contributions.
A few comments:
Despite continuous economic headwinds that impact on revenue collection, Government stayed on course to rein in the fiscal deficit and total public debt. According to the Bank of Namibia, private sector activities expanded, while the contraction in public sector activities resulted in an overall contraction of the economy. The private sector expansion has helped stabilising Government’s income from income tax revenue.
While there are a number of factors that are beyond our control, there are others that we can influence and that we have to address more forcefully. The Minister of Finance made repeatedly reference to the need to improve our competitiveness. The recently released Global Competitiveness Report and the Doing Business Report both clearly indicate that there is room for improvement. Although becoming the most competitive economy in Africa has been a national priority since some time, very little has actually happened and consequently, Namibia is losing ground. Decisive action has to be taken to address issues that have been on the table since years. Improving the business and investment climate can attract domestic and foreign direct investment, create jobs and income for the employed in terms of salaries and for Government in terms of taxes.
In order to reduce or even eliminate over-pricing for large infrastructure projects, Government could consider contracting experts from the region that thoroughly review tender specifications and assist in the evaluation of tenders.
A clear prioritisation of expenditure needs to include an evaluation of the Ministry of Defence’s contributions to the economic and social development. The Ministry received the fifth highest reallocation in the Mid-Year Budget Review and 2.5 times more than the Ministry of Safety and Security.
There are additional measures Government could consider in consolidating the budget. They will not only cut expenditure or increase revenue, but also address issues such as inequality:
The cost of the Public Sector Employee Medical Aid Scheme amounts to about NAD2.5 billion this year, while contributions from public employees amount to some NAD378 million resulting in a subsidy of NAD2.2 billion. Moving over time to a cost-recovery percentage contribution instead of the current flat rate that burdens low-income earners more than the better off would provide additional funds in the short term of at least NAD1.5 billion for vital programmes.
A number of basic food items are zero-rated for Value Added Tax in order to protect low income earners and the poor. A review of the food items included is necessary, since the zero rating most likely benefits better-off households more than the intended beneficiaries that often do not have access or cannot afford these food items.
Government could consider to raise the tax threshold and reduce the tax rate for the lowest income brackets and to adjust these tax brackets for inflation (fiscal drag), while ensuring that these measures remain tax neutral for the highest income brackets. In addition, withholding taxes on interests earned on the Basic Bank Account could be abolished, since this bank account caters for persons earning less than NAD 2,000 per month. Both measures would bring some relief for low-income earners.
The reform of Public Enterprises should include a review of the fees for non-executive directors that are, according to media reports, often several times the monthly salary of, for instance, a teacher.
It is necessary to thoroughly review the structure of the public sector that consists of more than 600 entities including Offices, Ministries, Agencies, Public Enterprises, Traditional Authorities, Councils, Appeal Committees, Boards, etc. There is most likely room to streamline the structure and reduce the financial burden. Natural attrition alone will not address these structural issues.
Finally, strengthening regional cooperation and align responses to the current economic challenges could result in synergies and stimulate regional and domestic economic growth

EAN Commentary-Mid-year Budget review

Private sector credit extension September 2018 – demand by businesses remains strong

The Bank of Namibia has released selected statistical data for September 2018 that cover among others the extension of credit to the private sector (PSCE).
Herewith some of the highlights:
 Total credit extended to the private sector rose by 7.3% compared to September 2017- the fastest pace on an annual basis since May 2017 –to NAD95.3 billion in September 2018. Compared to August 2018, PSCE increased by 0.6%, which was below the increase in August (1.5%), but the fourth strongest this year.
 Credit extended to the business sector increased on an annual basis (compared to September 2017) to 6.0% from 5.2% in August, while credit extended to individuals slowed down slightly from 7.0% in August to 6.9%. On a month-on-month basis (September compared to August) credit extension slowed down from 0.8% to 0.5% (for individuals) and from 2.4% to 0.8% for businesses.
 Compared to the beginning of 2018, credit extended to businesses expanded faster (5.2%) than credit extended to individuals (4.0%). At the same time in 2017, credit extended to the private sector had increased by only 2.2% compared to the beginning of 2017, while credit extended to individuals had grown slightly stronger (4.3%) than so far this year.
 Individuals continue to absorb most of total credit extended (58.6%), while businesses absorbed 40.2%. The remaining 1.2% are extended to the non-resident private sector.
 Individuals have borrowed a total of NAD55.8 billion, up by NAD279 million compared to August, while businesses borrowed NAD38.3 billion, up by NAD308 million.
 Mortgages accounted for 52.1% of total PSCE, the same share as in August, totalling NAD49.7 billion. Mortgage accounted for 68.3% of total funds for individuals (NAD38.1 billion), while they accounted for 30.3% of total funds borrowed by businesses (NAD11.6 billion).
 The total amount of mortgages extended to individuals increased stronger (5.0%) than mortgages extended to businesses (3.1%) since the beginning of 2018. Compared to September 2017, mortgages extended to individuals rose by 7.9% and mortgages extended to businesses by 4.9%. Both increases are some of the lowest year-on-year increases during 2018.
 While mortgages extended to individuals rose slightly stronger since the beginning of 2018 (5.0%) than between the beginning of 2017 and September 2017 (4.9%), mortgages extended to businesses could not keep pace so far this year compared to the first nine months in 2017 – 3.1% compared to 4.3%.
The stronger growth in credit extended to the private sector compared to credit extended to individuals is in general a welcome sign since households (individuals) are already highly indebted. Furthermore, they often use loans for non-productive purposes. However, other loans and overdrafts advanced to businesses
have increased more rapidly – by 20.0% and 3.7% respectively – since the beginning of the year than mortgage loans. At the same time, leasing transactions dropped by 6.9% since the beginning of 2018. These figures are indicative of the economic headwinds businesses are facing in general and the cash flow challenges in particular that result in increasing overdrafts.

EAN Commentary – PSCE Sep2018

Doing Business Report – Namibia down one place to 107

The World Bank has released its annual Doing Business Report 2019 on 31 October 2018. The World Economic Forum’s Global Competitiveness Report, released just a fortnight ago, and the World Bank’s Doing Business Report provide among others governments, investors and financial institutions with information on factors crucial for investors. The Doing Business Report covers ten areas, such as the ease of starting a business, dealing with construction permits, getting electricity or registering property, with a total of 45 indicators. The country receives a score for each of the indicators. The total score determines the ranking of the country compared to other countries.
The highlights:
 Namibia scored slightly better in the latest report than last year. The score improved by 0.24 to 60.53. However, the country dropped one rank from 106 to 107 out of a total of 190 countries.
 Namibia ranks seven out of 14 member states of the Southern African Development Community like last year. While five SADC member states improved the ranking by up to five places (Mauritius) and one country maintained the ranking (South Africa), most SADC countries dropped by up to seven places (Tanzania).
 Mauritius remained the top performer within SADC moving up five ranks to rank 20. Two other countries outside SADC, but in the region, showed impressive improvements, namely Kenya and Rwanda. Kenya moved up by 19 ranks to place 61 and Rwanda by 12 ranks to place 29. Rwanda is the second most competitive economy in Africa after Mauritius, a ranking it achieved over a relative short period of time.
 Namibia improved the ranking in three out of the ten indicators, namely in dealing with construction permits (up by 24 places to rank 83), enforcing contracts (up by one to rank 58) and in registering property (also up by one to rank 174). The country maintained the ranking regarding starting a business at 172 out of 190 countries.
 In contrast, Namibia lost ground in six categories: Getting electricity (down by three to 71), getting credit (down by five to 73), paying taxes (down by 2 to 81), protecting minority investors (down by ten to 99), resolving insolvency (down by two to 125) and trading across borders (down by four to 136).
 Namibia scored better in five out of the 45 indicators and slipped in one. The score in the indicator ‘ease of shareholder suits index’ dropped from seven out of ten to six. The time to register property decreased from 52 days to 44 and the quality of land administration improved from 8.5 to 9.5 out of 30. Likewise the score for the quality of judicial processes increased from 9.5 to 10.5 out of 18. The
building quality control index rose by two points to 8.5 out of 15. Finally, the cost of getting electricity as a share of per capita has continuously improved over the years to 304.4%.
 The improved scores in some indices, however, resulted in a better ranking in only three indicators, while despite declining costs for getting electricity Namibia dropped three ranks in this category.
Since NDP 4 in 2012, Namibia aims at being the most competitive economy in Africa. This target is repeated in the Harambee Prosperity Plan and NDP5. We have missed the target again by a wide margin. Even though Namibia maintained the score in most indicators, the country slipped ranks again, which clearly indicates that other countries have made more progress over the years. The number of days to start a business remains unchanged at 66 since 2010 despite the establishment of the Business and Intellectual Property Authority (BIPA). Despite the launch of the NamBizOne portal there is no progress with the single window facility, which would accelerate business registrations. New technologies are hardly used to ease business registrations. Registration applications cannot be submitted by email, neither proof of payment. Furthermore, opening hours at BIPA, for instance, are business unfriendly.
Namibia also aims at becoming a logistics hub for southern Africa. Although the country improved the ranking in trading across borders from 151 in 2010 to 136 now, the ranking has deteriorated from 123 out of 189 in 2016. The declining ranking is another example for progress by other countries, since Namibia maintained the scores in all indicators since 2016. The administrative processes that result in long times and high cost to comply with export requirements compared to import requirements need to be reviewed, not only to support the ambition to become the logistics hub, but in order to ease access to foreign markets for Namibian businesses.
Although the score in the quality of land administration improved, it remained in the lowest 30%. The speedy implementation of resolutions taken at the land conference concerning urban land reform and related matters could improve the access to urban land as well as the time and cost of registration.
Namibia performs better regarding paying taxes than in 2010 (rank 97), but the trend reversed since 2016 (rank 74). The roll-out of the integrated tax administration system and the establishment of the Namibia Revenue Agency could result in a better ranking for this indicator.
Overall, the results of both the Global Competitiveness Report and the Doing Business Report need to be analysed thoroughly and decisive steps need to be taken to address the poor performance. As the Minister of Finance stressed several times in his Mid-Year Budget Review Speech, improving competitiveness is vital to attract domestic and foreign direct investment that will create jobs and generate income. We cannot afford to continue with business as usual.

EAN Commentary – Doing Business Report 2019