BEWARE THE OIL CURSE
Namibia is sitting on more than $300bn worth of oil at present prices. But unless the state plays smart, this find may be more curse than blessing
Receiving the news that your backyard may hold the world’s largest untapped offshore oil reserves can be a confidence boost par excellence. Not only would it draw the attention of energy-hungry economies such as the US and China, but it would also raise the prospect of rapidly filling state coffers.
Namibia, a nation of just 2.4-million people, recently learnt that exploration for hydrocarbons off its southwest coast may well yield this sizeable bonanza. Norwegian specialist energy and oil publication Upstream Oil & Gas Technology reported on April 26 that UK-based consultancy Wood Mackenzie estimates the recoverable oil reserves at more than 3billion barrels. At an oil price of $106 on May 3, that relates to a resource worth $318bn — or almost 30 times the size of Namibia’s nominal 2020 GDP in dollars.
And for a country that relies on its big neighbour SA through the Southern African Customs Union for as much as 28% of its government tax revenue this year, the find may just be the knife needed to cut a historical economic umbilical cord — albeit at least 10 years away.
But the potential of such largesse for a relatively small economy also raises the prospect of the dreaded double D: Dutch disease — negative fallout from a sudden revaluation of a country’s currency.
Still, with oil production at least a decade away, Namibian society and government should seriously consider how they can lay the groundwork to build a diversified economy before the arrival of all those petrodollars.
The composition of Namibia’s trade basket shows the country relies heavily on the export of minerals: in 2021, diamonds contributed 19.4% of total exports, followed by uranium (15.2%), fish (14.8%), gold (9.5%) and blister copper (7.9%), according to the Namibia Statistics Agency. On the import side, oil accounted for 12.7% of total shipments, followed by copper ores (5.4%), trucks (3.1%), diamonds (2.8%) and sea vessels (2.4%). Most of the nation’s imports originated in SA (49.1%), followed by China (7%) and India (4.7%), according to the agency.
Against this backdrop, the Namibian government has been pushing import substitution to reduce its trade reliance on SA. Horticultural products such as vegetables have been targeted, with the government demanding that fresh produce importers source a certain percentage of products locally before buying them in SA.
Yet the reality is that Namibia “relies heavily on SA”, Prof Jacob Nyambe, executive dean of the faculty of commerce, management & law at the University of Namibia, tells the FM. “Most of [its] imports come from SA. It would really be very difficult for Namibia to have a manufacturing sector that emerges quickly.”
One of the reasons is that Namibia suffers from a paralysing skills shortage, as revealed by a report published last
WHAT IT MEANS:
With oil production at least a decade away, Namibia should seriously consider laying the groundwork to build a diversified economy before the arrival of the petrodollars
month titled “A Growth Diagnostic of Namibia”, commissioned by President Hage Geingob and undertaken by the Harvard Growth Lab. “It is very difficult to import skills into the country,” Malcolm Husselmann, portfolio manager at Ninety One in Windhoek, tells the FM. “Once the skilled workers are here, there are numerous stories about how those skilled workers are kicked out of the country.” Over many years, Namibian businesses have called for the introduction of something similar to “golden visas ”— or residency based on skills or investment — from the Namibian government, he says.
According to the Harvard report, easing visa regulations would have multiple spillover effects. “The evidence we have gathered suggests that high-skill foreign
ers tend to function as complements — rather than substitutes — to Namibian workers: industries with larger shares of high-skill workers tended to pay lowerskill workers significantly higher wages.” In addition, “easing the existing restrictions to labour laws and incentivising inflows of high-skill foreigners will likely trickle down into the rest of the labour force and enhance the know-how agglomeration of the Namibian productive ecosystem”.
Husselmann adds that the Namibian government, with its sticky immigration policy, missed a great opportunity to lure scarce skills from SA during the Zuma years.
In addition to the skills shortage, and the Namibian government’s lax attitude to addressing it, red tape paralyses the setting up of businesses. According to the World Bank’s ease of doing business index, Namibia slipped from 66th position in 2010 to 104th place in 2020, when the index was discontinued. That compares with SA slipping from 34th place to 84th place over the same period.
“We’ve become less competitive,” says Tuyeni Akwenye, investment analyst at Allan Gray covering Namibia. “They can cut red tape on things like opening a business.”
Husselmann shares this sentiment. “A lot of the criticism lobbed against the government is that there are many impediments to attracting investment,” he says. Yet right now, the Namibian government is on the cusp of raising the business compliance burden through a new set of empowerment laws. “It’s been waiting in the wings for five years,” says Husselmann. “Even though the intent behind the legislation is noble, it will add to the already bloated regulatory burden. They’ve been trimming and tweaking the legislation over the past three to four years in consultation with the private sector.”
With Namibia’s reliance on SA for most of the goods its people consume, the question is at what pace the country is diversifying away from the primary mining sector to less cyclical output, such as manufacturing. In this regard, the government’s collaboration with Harvard is a move in the right direction, believes Husselmann. “There seems to be an effort from the government to diversify away from minerals, as it has acknowledged that even though they contribute to investment and GDP growth, they do not have a meaningful impact on the country’s unemployment problem.”
In a March 2022 report, the Harvard Growth Lab offered options for diversification in the Namibian economy. Strategic resources the country can focus on include various chemicals (such as aldehydes, esters, ketones and lubricating preparations), plastics and rubbers, agricultural machinery, steel manufacturing, radar equipment and various pumps, among other items. But, with one of the highest corporate tax rates in the region, at 35%, Akwenye is sceptical. “It will be a
challenge to diversify the economy,” he says. Nyambe believes “it will be a very long time before industrialisation” takes place in Namibia. “We have a small population with a low income base.”
That may yet change. Though production of oil is at least a decade away, the Namibian government set up a sovereign wealth fund late last year to mop up excess tax and royalty income. Finance minister Iipumbu Shiimi said in October the fund will consist of two parts: a stabilisation fund and an intergenerational fund. About 2.5% of the latter will be invested in infrastructure projects.
But the intent of such a fund highlights the main problem with Namibia’s small economy: the government’s large share of it. “The government dominates this economy too much,” says Husselmann. “It is crowding out the private sector.”
In 2021, government expenditure on GDP reached 26%, according to the statistics agency. Worryingly, gross fixed capital formation an indicator of physical investment in the country shrank during six of the past eight years. Even in nominal terms, this measure declined from N$36.5bn in 2013 to N$26bn last year.
The country’s imports, at N$89.2bn in 2021, compare with exports of N$57.7bn. Namibia hasn’t had a trade surplus in decades. And were it not for the currency’s one-to-one peg to the rand, inflation would have wreaked havoc.
“The peg has benefited Namibia more than harmed it,” says Husselmann. “It led to lower inflation and gave clout to the Bank of Namibia’s monetary policy.” Akwenye agrees: “The official position by the government is that the peg will remain. Namibia’s largest trading partner is SA and the peg gives stability.”
During the height of the pandemic in 2020, when the rand blew out to about R19 to the dollar, calls were made for the peg to be dropped and the Namibian dollar to be floated. Against this backdrop, the question is whether the economy would suffer from Dutch disease. Yet Husselmann believes that the oil finds, and subsequent production, will actually solve Namibia’s persistent current account deficit.
As for the risk of Dutch disease, he says Namibia has strong institutions that will ensure this oil discovery will be more of a blessing than anything else. “It seems like the Namibian government has recognised the pitfalls of the oil curse,” says Akwenye.