Macro Poverty Outlook

Transcription

1 Southern African Customs Union Public Disclosure Authorized Macro Poverty Outlook Country-by-country Analysis and Projections for the Developing World Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Spring Meetings 218

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3 Southern African Customs Union Macro Poverty Outlook Spring Meetings 218

4 SOUTHERN AFRICAN CUSTOMS UNION GDP growth in the SACU region has decelerated in 216 and 217 due to combination of factors: the end of the commodity super-cycle, the slowdown of mining activity, the pursuit of fiscal consolidation efforts in most member countries, and the effects of a regional drought. In the medium-term, economic activity in the region should moderately recover as mining production, agricultural activity and their related services sectors rebound. This recovery is however not expected to be strong enough, especially in South Africa, to increase SACU transfers, which are projected to decrease gradually as a share of GDP until 22. The continuation of parallel fiscal consolidation processes will remain critical to preserving the region s macro and financial stability. Reforms to foster regional trade and increase prospects for non-commodity exports would encourage regional economic integration, product diversification and job creation. Recent developments Economic activity decelerated in all SACU member countries during In Namibia and South Africa, the average per capita income even declined during the period, as GDP growth could not catch up with the growth of the population. The regional economic slowdown was the result of the end of the commodity super-cycle, members fiscal consolidation efforts, and the impact of the drought on agricultural production. The reversal of the commodity super-cycle and subdued global demand for minerals also resulted in a sluggish mining activity, which, in turn, had spill-over effects on tertiary sector activities, exports, and government revenues. Most SACU member countries have exhausted their fiscal buffers due to previous expansionary fiscal cycles and related public debt accumulation. During , the level of total public debt in Swaziland, South Africa and Namibia increased by 13 percent, 22 percent and 26 percent of GDP, respectively. With limited external financing options, the fiscal expansion led to large domestic borrowings and crowding-out of the private sector. The lack of policy commitment to correct a deteriorating macroeconomic and fiscal situation, resulted in the sovereign credit rating downgrades of South Africa and Namibia and thus, a loss of investors confidence more broadly. By 216, most SACU members had no other choice but to reverse the course of their fiscal stance and start curbing public spending mostly through cuts in capital expenditures, which then precipitated the overall deceleration of aggregate demand and growth. The efforts of individual SACU members to raise their tax revenues have been largely thwarted by the depressed aggregate demand and subdued economic activity. Notwithstanding the positive effect of the depreciation of the South African Rand on the customs revenue collections denominated in Rands, the adjustment of the customs and tariffs at SACU level was also insufficient to offset the impact of the lower domestic demand on indirect tax collection. Even after considering the recent upward GDP revision, the poor growth performance of the South African economy resulted in lower customs and excise collections as the main sources of SACU revenue pool, for which South Africa contributes more than 95 percent. The economic deterioration in South Africa has had adverse effects on the rest of the SACU member countries through multiple channels. Given the scale of South African demand for goods and services from the region, the trade channel is the most important direct channel together with the SACU transfers. These two channels have secondary effect on government revenues and fiscal deficits in all SACU member countries but with different levels of intensity. Lesotho and Swaziland are the most vulnerable due to their high export dependence on South Africa and high reliance on SACU transfers. Namibia and Botswana are somewhat less exposed given their lower share of the SACU transfers in their total revenues and lower export dependence on South Africa. Accordingly, the recent economic deterioration in South Africa and the subdued aggregate consumption and imports in the region, resulted in moderate decline of the SACU transfers as a ratio of GDP in 217. The general economic slowdown in the SACU region and contraction of per capita GDP in Namibia and South Africa - the largest country in the region in terms of GDP and population, contributed to increase in poverty in the region. The share of population living below USD1.9 a day (in 211 PPP terms) in the region increased from 2.36 percent in 215 to 2.74 percent in 217. Outlook Economic activity in the region is expected to recover gradually in the medium-term, but to remain below the growth performance recorded during In Namibia and South Africa, GDP growth is projected to outpace the population growth and therefore to restore positive per capita income growth. The medium-term growth projection is based on a recovery of the mining and agriculture sectors as well as related services sectors. Mining production and exports are expected to benefit from further increases in global demand for minerals and international prices. With relatively subdued domestic consumption and imports, net exports of the MPO 2 Apr 18

5 BOX 1 SACU / World Bank projections of SACU transfers As part of the collaboration between the World Bank Group and South African Customs Union (SACU) Secretariat, the World Bank has agreed to provide regular projections of SACU transfers twice a year. This activity follows an initial engagement between the SACU Secretariat and World Bank Group on the Review of the SACU Revenue Sharing Arrangement in a workshop held in 19-2 October 217 in Johannesburg, South Africa. The aim of this exercise is to provide independent estimates of SACU transfers according to World Bank medium term macro projections. The projections of SACU transfers are done consistently within the global macro-forecasting model that the World Bank is using within the Macroeconomics, Trade & Investment Global Practice, called MFMOD. This model ensures consistency within the SACU member countries and the developments in the rest of the world in terms of GDP growth, trade, global price developments and other macro, fiscal and balance of payments aggregates. The estimates of the SACU transfers for each Member Country is based on the SACU revenue sharing formula described in the 22 agreement which has been in place since 25. The revenue share accruing to each SACU Member State is calculated from three basic components: a share of the customs pool; a share of the excise pool; and a share of a development component. These three different components are distributed as follows. The customs component is allocated according to each country s share of total intra-sacu trade, including re-exports. The excise component, net of development component, is allocated on the basis of the country s share in SACU GDP. Finally, the development component, fixed at 15 percent of the total excise pool, is distributed to all SACU members according to the inverse of each country s per capita GDP. The novelty of the World Bank approach in projecting the SACU transfers is that it projects the customs and excise collections for each country based on behavioral equations and thus, the total SACU revenue pool. Described in nontechnical terms, the excise collections of each SACU Member Country are set as a function that is mainly determined from the volume of household consumption, whereas the customs collections are set as a function that depends mostly on imports. After estimating the excise and customs collections for each Member Country, the SACU revenue sharing formula is applied where the World Bank is using its own model based projections for the major components that enter into the SACU revenue sharing formula such as: GDP, GDP per capita and intra SACU trade. The formula adjustment errors that occur after t+2 years for 216 and 217, has already been accounted for in the SACU transfer projections for 218 and 219. Accordingly, the projections of the SACU transfers can be different and even more conservative compared to the official data revealed by the Member Countries. This can especially be the case for South Africa s projections because the World Bank estimates can be more conservative compared to the ones used by the national authorities. The more conservative estimates for the South Africa s GDP growth and other macro aggregates will affect the SACU transfers to the rest of the Member Countries because South Africa is the major contributor to the SACU revenue pool (contributes by more than 95 percent of the revenue pool). As presented in this text, the SACU transfers as a share of GDP have a declining trend in each Member Country. The explanation for their declining trend in terms of GDP is for the following reasons: I) Despite the recovery of the South African economy in 217, the tax collection, including the customs and excise, has not improved. This trend is expected to continue in medium term where the pace of tax collections will not follow the pace of GDP growth. II) Although South African GDP growth is projected to accelerate until 22, it will still remain the lowest among SACU Member Countries. Consequently, it is expected that growth in the revenue pool will be lower than that of GDP in all SACU countries but South Africa. IV) The impact of the rand appreciation will have positive impact on the volume of imports in South Africa, but nevertheless, the nominal Rand appreciation will have dampening effect on the nominal amount of customs collected. The latter will partially offset the impact of higher volume of imports on the nominal value of customs collections. V) In the case of South Africa, the SACU transfers decline in 217 as a share of GDP and also in nominal terms because, as the SACU revenue sharing formula is set, South Africa received the remaining amount of excise and collections after they are spread to the rest of the Member Countries. MPO 3 Apr 18

6 SACU region are projected to contribute positively to the regional economic growth. Agricultural production should also rebound with the prospects of favorable climatic conditions, after years of drought. Services activities should indirectly benefit from the recovery of the mining and agriculture sectors. In South Africa, the expected gradual economic recovery and policy measures to improve investors confidence should help strengthen the Rand moderately. In turn, the moderate Rand appreciation should stimulate the volume of imports, although the higher volume of imports on customs revenue collections will be partially offset by Rand appreciation that will dampen the nominal value of customs revenue collections denominated in Rands. In addition, the announced increase of excise duties on alcohol and tobacco in South Africa (for which the price elasticity of demand is relatively rigid), is expected to contribute to the SACU revenue pool. Nevertheless, the aggregate demand in the SACU region will remain subdued due to the low growth prospects and this will impact the SACU revenue collections that will remain much below their level of period. The aggregate demand will be further restrained by the government spending due to the continued fiscal consolidation efforts in South Africa and Namibia, and the expected fiscal consolidations in Swaziland and Lesotho. Accordingly, the SACU transfers as a share of GDP will continue with their gradual declining trend till 22. The gradual economic recovery of the SACU region together with raising per capita income in South Africa is projected to reduce poverty in the medium term. The share of population in the SACU region living below USD1.9 a day (in 211 PPP terms) is expected to decline by.6 percentage points to 2.14 percent in 22. Risks and challenges A lack of fiscal discipline or policy credibility in South Africa is a significant risk factor for the region as a whole. In South Africa, the risk stems mainly from the fact that fiscal consolidation efforts could be compromised with the expected elections. The pursuit of the fiscal consolidation process is indeed critical to preserve macroeconomic and financial stability and restore the confidence of both domestic and foreign investors. As we have seen in the past, further intensive borrowing on the domestic markets would crowd-out private investment, deteriorate investor s confidence and eventually jeopardize the macroeconomic stability of the region. The SACU member countries are also highly vulnerable to the vagaries of the mining sector and international mineral prices. Vulnerability arises from the possible slower recovery of the global demand for minerals and volatile international prices. Furthermore, not all mineral prices are projected to rebound such as coal, iron ore and uranium. An unexpected further increase in oil prices (and related deterioration of the terms of trade), is another potential risk that would have an adverse effect for the region. Reforms to foster regional trade and increase prospects for non-commodity exports would encourage regional economic integration, product diversification and job creation. These are among the key challenges. In particular, developing the regional value chains and integrating further into global value chains, would provide significant benefit, not only in terms of specialization and productivity, but also in terms of technology transfer and know-how. These factors could contribute to boost income and reduce poverty. Over the medium term, SACU member countries would benefit from adopting fiscal stabilization mechanisms to smooth the impact of volatile SACU revenue on fiscal sustainability and public investment programs in particular. The focus on fiscal stabilization mechanisms is further warranted by the constraints on monetary and exchange rate policies in region, given the peg to the Rand. Policy options would include adopting tailored counter-cyclical fiscal rules, amending the revenue-sharing mechanism with a view to improving SACU revenue predictability and reducing their volatility, establishing a stabilization fund, and developing instruments to finance regional projects (e.g., industrial projects and regional value chains projects). FIGURE 1 SACU / Real GDP growth (3-year moving average) FIGURE 2 SACU / Net SACU transfers in the SACU Percent Percent of GDP Percent of GDP f 22f f 22f. Botswana Lesotho Namibia Swaziland South Africa Botswana Lesotho Namibia Swaziland South Africa (rhs) Sources: WDI and World Bank staff calculations. Sources: WDI, SACU Secretariat and World Bank staff calculations. MPO 4 Apr 18

7 TABLE 1 SACU / Real GDP growth and net SACU transfers as percent of GDP e 218f 219f 22 f GDP growth Botswana South Africa Swaziland Lesotho Namibia Net SACU transfers (percent of GDP) Botswana South Africa Swaziland Lesotho Namibia Nominal net SACU transfers (annual growth in percent) Botswana South Africa Swaziland Lesotho Namibia Sources: WDI, SACU Secretariat and World Bank staff calculations. Notes: e = estimate, f = forecast. MPO 5 Apr 18

8 BOTSWANA Table Population, million 2.3 GDP, current US$ billion 17.6 GDP per capita, current US$ 754 International poverty rate ($1.9) a 18.2 Lower middle-income poverty rate ($3.2) a 37.1 Upper middle-income poverty rate ($5.5) a 57.5 Gini coefficient a 6.5 Life expectancy at birth, years b 65.8 Source: WDI, M acro Poverty Outlook, and official data. Notes: (a) M ost recent value (29), 211 PPPs. (b) M ost recent WDI value (215) In 217, Botswana recorded a slow down of economic activity across the mining and non-mining sectors. In the mediumterm, the development of the mining and service sectors as well as the implementation of large public investment projects are expected to push real GDP growth above 3 percent. Poverty had already been reduced to 12.7 percent in 216 and is projected to decline further by.4 percentage point annually to reach 11.5 percent of the population by 22. Recent developments Botswana s economic growth slowed down from 4.3 percent in 216 to 1.8 percent in 217. This decline was the result of a contraction of the mining sector and a slow-down of most non-mining activities. Mining production shrank because of the closure of the Bamangwato Concessions Limited (BCL) copper, cobalt and nickel mines in October 216. Reflecting the recovery of the global demand for minerals, the production of diamond increased by more than 1 percent and the production of coal and gold also expanded, but this was insufficient to offset the impact of the closure of the BCL mines. The contraction of the mining sector had spillover effects on the services sector. The growth of the services sector was cut to 3.2 percent in 217 and impacted strongly trade, transport, real estate activities and government services. Electricity production and distribution decreased with the closure of the Botswana Power Corporation, whose main client was the BCL mine. On the upside, a limited boost to the economy was provided by the recovery of the agricultural sector after years of drought. The manufacturing production expanded at an unchanged pace. The fiscal policy in FY217/18 continues to be geared toward increased capital spending and the continuation of the implementation of the Economic Stimulus Program imposed the previous FY. With lower revenues due to lower SACU receipts, the fiscal position is projected to switch from a small surplus in FY216/17 to a small deficit of 1.3 percent of GDP in FY217/18. As a result, Bostwana s large current account surplus has narrowed to 1.2 percent of GDP, reflecting higher imports, and lower inflows on the basis of SACU receipts. Monetary policy was accommodative in 217 and the Bank of Botswana (BoB) reduced the policy rate by 5 basis points in November 217. The nominal exchange rate appreciated slightly against the US Dollar in 217 within the band of.26 point determined by the BoB. Inflation in 217 increased slightly to 3.3 percent, and is attributable to higher import prices especially oil. Economic growth in Bostwana has been pro-poor and has led to significant and rapid poverty reduction, especially in rural areas. Between 22/3 and 215/16, the share of the population living on less than USD1.9 a day at the 211 PPP exchange rate declined steadily from 29.8 percent to 12.7 percent (Figure 2). This has reflected a combination of equitable growth, demographic changes (e.g., decreasing fertility rates and dependency ratios), job creation (especially of agricultural employment in rural areas), and expansion of social assistance schemes (especially direct transfers to rural households). However, inequality in Botswana remains high with a Gini coefficient last estimated at 6.5 in 29/1. Statistics Botswana recently finished collecting new household consumption data based on the Botswana Multi-Topic Survey 215/16 and the new poverty data are expected this 218/19. FIGURE 1 Botswana / Share of each production sector in total value added FIGURE 2 Botswana / Actual and projected poverty rates and real GDP per capita Percent Agriculture Manufacturing Mining Services Poverty rate (%) GDP per capita (constant LCU) International poverty rate Lower middle-income pov. rate Upper middle-income pov. rate GDP pc Sources: Bank of Botswana financial statistics and World Bank staff calculations. Source: World Bank. Notes: see table 2. MPO 6 Apr 18

9 Outlook In the medium term, Bostwana economic growth rate is projected to recover above 3 percent and to be mainly led by the mining, services and construction sectors. The mining activity is expected to expand with the gradual recovery of the global demand for minerals. Services, which prospects are closely related to mining, are expected to remain the fastest growing sector of the economy and to contribute the most to overall value addition after 218. The construction sector is also expected to contribute significantly to growth because of the planned public investment projects in water, transport and energy. In particular, the expansion of the power supply capacities of Morupule A station is projected to reduce energy supply shortages and ease the pressures on the balance of payments from electricity imports. Fiscal expansion is expected to temporarily continue in FY218/19 with the completion of the priority projects in the 11th National Development Plan ( ) before returning to past discipline. The fiscal deficit is expected to increase to 1.6 percent of GDP in FY218/19 and to turn into surpluses starting in FY219/2. Higher expected mineral and non-mineral revenues are expected to compensate for lower SACU receipts. Budget surpluses will then contribute savings to the sovereign wealth fund (Pula Fund). Higher GDP growth and stronger domestic demand will put upward pressure on imports of goods and services and lead to a gradual narrowing of the current account surplus. Monetary policy is expected to preserve price stability within the BoB target range and the exchange rate policy to manage the exchange rate within the determined band of fluctuation. Domestic demand pressures, rising oil prices, and the policy of gradual depreciation of the Pula exchange rate, are expected to generate price pressures which are likely to lead to an acceleration of inflation to around 4 percent by 22. With such a benign outlook, poverty is projected to further decline by some.4 percentage point annually to reach 11.5 percent by 22. Achieving further poverty reduction will be challenging in the absence of more private sector job creation, particularly in urban areas, and faster agricultural productivity in rural areas. Risks and challenges Botswana remains vulnerable to external shocks because of its heavy dependence on commodity exports. A key risk to the outlook is therefore a slower than expected recovery of global demand for commodities, especially diamonds. A slowdown in major developed economies would have the effect of lowering the production and exports of diamonds and other commodities with spillover effects on government revenues and the services sector. Further delays in upgrading electricity and water infrastructure could also dampen non-mining activity, especially in the manufacturing sector. In the mediumterm, the implementation of structural reforms in the water and energy sectors, as well as in the labor market, would be critical for strengthening Botswanas capacity to manage volatility and sustainability risks. TABLE 2 Botswana / Macro poverty outlook indicators (annual percent change unless indicated otherwise) e 218 f 219 f 22 f Real GDP growth, at constant market prices Private Consumption Government Consumption Gross Fixed Capital Investment Exports, Goods and Services Imports, Goods and Services Real GDP growth, at constant factor prices Agriculture Industry Services Inflation (Consumer Price Index) Current Account Balance (% of GDP) Fiscal Balance (% of GDP) a Debt (% of GDP) Primary Balance (% of GDP) a,b International poverty rate ($1.9 in 211 PPP) c,d Lower middle-income poverty rate ($3.2 in 211 PPP) c,d Upper middle-income poverty rate ($5.5 in 211 PPP) c,d Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices. Notes: e = estimate, f = forecast. M ining is under "industry". (a) Fiscal year starts from April 1st. (b) Non-mineral primary balance. (c) Calculations based on 29-CWIS. Nowcast: Forecast are from 218 to 22. (d) Projection using neutral distribution (29) with pass-through =.87 based on GDP per capita in constant LCU. MPO 7 Apr 18

10 LESOTHO Table Population, million 2.3 GDP, current US$ billion 2.6 GDP per capita, current US$ 116 International poverty rate ($1.9) a 59.6 Lower middle-income poverty rate ($3.2) a 78.1 Upper middle-income poverty rate ($5.5) a 89.9 Gini coefficient a 54.2 School enrollment, primary (% gross) b 15.5 Life expectancy at birth, years b 53.6 Source: WDI, M acro Poverty Outlook, and official data. Notes: (a) M ost recent value (21), 211 PPPs. (b) M ost recent WDI value (215) Economic growth improved slightly in 217 driven by mining activities. Lower SACU and domestic revenues coupled with delayed fiscal consolidation are causing increased fiscal pressures. Although the construction sector is expected to contribute to growth in the near term, narrowing fiscal space will limit the contribution of the public sector to growth. Sluggish growth, especially in the agricultural sector is expected to lead to stagnation in poverty reduction. Recent developments In 217, economic activity in Lesotho increased by 3.1 percent, driven mainly by increased diamond production. Large diamond mining investment projects were carried out by two mines. The main factors constraining growth were the poor performance of the agricultural sector which grew by.7 percent (after experiencing a strong recovery of 7. percent from El-Nino in 216) and the services sector. The inflation rate declined to 5.3 percent from 6.3 percent in 216 mainly because of the lagging effect of the 216 agricultural recovery on the price of food & nonalcoholic beverages, which accounts for 36.1 per cent of the overall inflation basket. The fiscal deficit exceeded 6 percent of GDP for the second year in a row as both revenues from the Southern African Customs Union (SACU) and domestic revenues declined. Larger exports associated with the mining sector contributed to reduce the current account deficit by 4 percentage points of GDP to 6.5 percent of GDP. Notwithstanding, the improvement in the current account, the foreign exchange import coverage declined from 5.6 months in FY15/16 to 3.6 months in FY17/18 because the fiscal deficit was largely financed through a drawdown of reserves at the central bank due to limited domestic borrowing opportunities. In early 218, liquidity shortages and arrears emerged, as the drawing down of reserves has almost reached its limit. However, the Central Bank remains committed to maintaining the net international reserves coverage. In 217, Lesotho s risk of external debt distress was revised from moderate to low. The revised rating was underpinned primarily by a rebasing of GDP, strong economic growth in 217 and a 1 percent appreciation of ZAR/USD exchange rate. However, this improvement may hide a major increase in the stock of domestic debt due to large liabilities associated with pensions fund. Two actuarial reports document a shortfall in the range of 3.8 to 5.7 billion Maloti (1-15 percent of GDP) in the Public Officer s Defined Contribution Pensions Fund (PODCPF). The economic growth Lesotho achieved over the past decades has not been shared equally, and poverty has remained widespread. Lesotho made virtually no progress in reducing extreme poverty between 22 and 21. The headcount poverty rate based on the international poverty line of USD1.9 per person per day (211 PPP) was almost stagnant during the 2s, falling slightly from 61.3 percent in 22 to 59.7 percent in 211. Estimates suggest that 57.7 percent of the population in 217 is trapped in extreme poverty. Poverty in Lesotho is concentrated in isolated rural areas, with limited income opportunities and high costs of service delivery. In addition, majority of the poor depend on the performance of the agricultural sector for their income. However, the agricultural sector has been underperforming following the drought in 216 and as a result poverty reduction has been slow. FIGURE 1 Lesotho/ Real GDP growth and contributions to real GDP growth FIGURE 2 Lesotho / Actual and projected poverty rates and real GDP per capita Percent Poverty rate (%) GDP per capita (constant LCU) Agriculture Industry Services GDP at factor cost International poverty rate Lower middle-income pov. rate Upper middle-income pov. rate GDP pc Source: WDI and World Bank staff estimates. Source: World Bank. Notes: see table 2. MPO 8 Apr 18

11 Outlook In the medium-term economic growth is expected to be driven by mining and construction activities associated with the second phase of the Lesotho highlands water project (LHWP2). However, growth is likely to be constrained by expected fiscal consolidation efforts, which are expected to include cuts in the wage bill and expenditure on goods and services. With government revenues already accounting for approximately 39.8 percent of GDP in Lesotho, the scope (and appropriateness) for raising more revenues will remain limited. The fiscal deficit is projected to decrease to less than 4 percent of GDP in the medium-term. By contrast, the current account deficit is projected to widen in the medium-term, as imported capital goods associated with the Lesotho Highlands Water Project are expected to far exceed the projected increase in diamond exports. Imports for the Lesotho highlands water project will be financed by capital grants. The government is planning to finance the fiscal deficit by borrowing on the domestic and international market. The financing will be mix of foreign development assistance and partly concessional loans (IDA, African Development Bank, EU, Saudi Fund, Abu Dhabi, BADEA and China). Given current growth projections, poverty rates are expected to remain stagnant. In the absence of specific measures to protect the poor, the expected fiscal consolidation may have a detrimental effect on the poor and vulnerable groups. However, prioritizing the delivery of poverty-targeted labor market programs and increasing the efficiency and effectiveness of government spending would lead to faster poverty reduction and reduce inequality, even in a context of fiscal consolidation. Risks and challenges The key risk to the outlook is the subdued growth prospects of South Africa and related shortfall in SACU revenue collection. Lower SACU revenue can only add pressure to Lesotho s public finance. In addition, the prospects of Lesotho s continued preferential access to the U.S. market under AGOA remain unclear and weigh heavily on the competitiveness of the domestic textiles and clothing industry. Domestically, the main risk would be a delay in the fiscal and structural reforms and consequent lack of progress in fighting poverty. If the expected fiscal consolidation is not undertaken, the deterioration in the current account would be even larger, and the pressure on foreign exchange reserve and ultimately the peg could intensify. Rising debt and arrears, and uncertainty about the government s fiscal position would adversely impact economic growth in the medium-term. Structural reforms to encourage the development of the private sector, especially improvement in business environment, are equally important to sustain growth in the medium term, create jobs and fight poverty. Indeed, although Lesotho spends a substantial proportion of its budget on social spending, social outcomes have not significantly improved. Thus, focusing policies on rapid private sector development and employment creation would lead to faster poverty reduction. TABLE 2 Lesotho / Macro poverty outlook indicators (annual percent change unless indicated otherwise) e 218 f 219 f 22 f Real GDP growth, at constant market prices Private Consumption Government Consumption Gross Fixed Capital Investment Exports, Goods and Services Imports, Goods and Services Real GDP growth, at constant factor prices Agriculture Industry Services Inflation (Consumer Price Index) Current Account Balance (% of GDP) Financial and Capital Account (% of GDP) Net Foreign Direct Investment (% of GDP) Fiscal Balance (% of GDP) Debt (% of GDP) Primary Balance (% of GDP) International poverty rate ($1.9 in 211 PPP) a,b Lower middle-income poverty rate ($3.2 in 211 PPP) a,b Upper middle-income poverty rate ($5.5 in 211 PPP) a,b Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices. Notes: e = estimate, f = forecast. (a) Calculations based on 21-CM SHBS, 214-, and 21-CM SHBS. Nowcast: Forecast are from 218 to 22. (b) Projection using point-to-point elasticity (21-214) with pass-through =.5 based on GDP per capita in constant LCU. MPO 9 Apr 18

12 NAMIBIA Table Population, million 2.6 GDP, current US$ billion 12.6 GDP per capita, current US$ 492 International poverty rate ($1.9) a 22.6 Lower middle-income poverty rate ($3.2) a 47. Upper middle-income poverty rate ($5.5) a 67.3 Gini coefficient a 61. Life expectancy at birth, years b 63.6 Source: WDI, M acro Poverty Outlook, and official data. Notes: (a) M ost recent value (29), 211 PPPs. (b) M ost recent WDI value (215) The ongoing fiscal consolidation and the sharp contraction of the construction sector led to an overall contraction of the Namibian economy in 217. While the fiscal adjustment is expected to continue over the medium term, growth is projected to recover gradually and to reach 3 percent by 22. Yet, per capita growth is unlikely to be sufficient to significantly dent poverty in the coming years. Recent developments Namibia s ongoing fiscal consolidation, sharp contraction of the construction sector and subdued economic activity in the region, eventually triggered an economic recession in 217. The primary fiscal deficit reduction of 2 percentage point of GDP during the last two fiscal years, achieved mainly through cuts in public investment and other government expenditures, eventually stalled domestic demand and led to a 1 percent contraction of Namibia s GDP. The contraction of domestic demand had spillover effects on most sectors of the economy. The construction sector shrank by more than 3 percent as its suffers from the base effects of the completion of major mine project in 216 (Husab mine). The services sector also posted either sharp output contractions (wholesale and retail trade services) or significant economic slow-down (financial services and tourism activity). Electricity production contacted sharply with the closure of two power plants for regular maintenance. The contraction of domestic demand was compounded by weaker external demand associated with the economic deceleration in Angola that affected mostly the services sector. On the upside, mining and agricultural activities provided a welcomed boost to the economy in 217. Overall mining production was driven by the diamond and uranium production. Higher diamond production reflected partly a base effect from 216 when some of the offshore diamond extraction vessels were closed due to regular maintenance. Uranium production was boosted by the coming on stream of the Husab mine in December 216. After years of El Niño-related drought, agricultural production rebounded by 5 percent. Although the fiscal deficit decreased by almost 1 percent of GDP to 6 percent of GDP in FY217/18, it turned out to be larger than in the budget law. Unanticipated budget expenditures related to the clearance of past arrears were introduced in the mid-term budget review in November 217. The clearance of arrears, together with the budget support loan provided by the African Development Bank (AfDB), had the effect of significantly easing the liquidity shortage in the economy. Yet, this policy correction did not prevent Moody s and Fitch to downgrade Namibia s sovereign credit rating in August and November 217, respectively, based on the overall deterioration of the macroeconomic and fiscal position in recent years. Monetary policy was closely tied to policy actions by the South African Reserve Bank, according to which the policy rate of the Bank of Namibia was reduced by 25 basis points in August 217. The nominal exchange rate appreciated by 9.4 percent against the US Dollar in 217, mirroring the appreciation of the South African Rand due to the currency peg. Thus, inflation decreased from 6.6 percent in 216 to 6.2 percent in 217 and fuel and food prices inflation were particularly subdued. The current account deficit narrowed by more than 5 percentage points of GDP in 217 to 6.5 percent of GDP. The strengthening of the external position was mostly FIGURE 1 Namibia / Actual and projected current account and fiscal balances FIGURE 2 Namibia / Actual and projected poverty rates and real GDP per capita Percent of GDP Current account balance Fiscal balance Poverty rate (%) GDP per capita (constant LCU) International poverty rate Lower middle-income pov. rate Upper middle-income pov. rate GDP pc Sources: Bank of Namibia, Ministry of Finance and World Bank staff calculations. Source: World Bank. Notes: see table 2. MPO 1 Apr 18

13 due to lower imports associated with the contraction of domestic demand. Foreign exchange reserves increased with the strengthening of the current account and the disbursement of the first tranche of a budget support loan by the AfDB to cover the equivalent of 1 month of import of goods and services at the end of 217. With the economic recession, poverty at the international USD1.9 (in 211 PPP terms) increased by.8 percentage point to 17.8 percent in 217. The agricultural recovery could not compensate the effects of the recession in other sectors on the poor. Namibia s economic growth has tended to be structurally jobless. The combination of high unemployment (28.1 percent in 214) and relatively low labor force participation means that progress in the fight against poverty has been slow. With a consumption Gini coefficient of.6 in 21, high inequality has also been a drag on poverty reduction. Outlook Economic growth is projected to recover to 1.5 percent in 218 and to gradually accelerate to 3 percent over the mediumterm. The 218 recovery will be driven by the increase in mining production and recovery of domestic demand. Over the medium term, the uranium production is expected to increase as the Husab mine ramps-up its operation and reaches its full production capacity by 22. Diamond production will also increase gradually consistent with the prospects for recovery in the global demand for minerals. Furthermore, as both domestic demand, including planned infrastructure projects, and the regional trading partners recover, the services sector is also expected to pick-up. Fiscal consolidation is foreseen until FY219/2 when the fiscal deficit is projected to narrow to 3 percent of GDP. After the sharp adjustment in 217, the current account deficit is projected to widen moderately with the economic recovery. Inflation is projected to decelerate further in medium term due to the subdued domestic demand and stable food prices. The monetary and exchange rate policies will continue to reflect the developments in South Africa. Risks and challenges Namibia remains highly vulnerable to external shocks. As an economy heavily dependent on commodity exports, major risks stem from a weaker-than expected global recovery and lower international prices for minerals. Low uranium prices may alter production decisions of the Husab mine and keep production below full capacity. It remains also unclear how the recent sovereign credit rating downgrades will affect investors confidence. A more sluggish recovery of countries in the region would result in even lower than expected SACU revenues and complicate fiscal consolidation, especially in an environment of limited public-sector borrowing space. Finally, adverse weather conditions remain a constant threat to the economic prospects of the poor, whose livelihoods depend on low productivity subsistence farming. In that regard, the recent weather and infestation warning issued by the Southern African Development Community (SADC) does not bode well for the agricultural season, particularly with regard to the maize crop. Food and nutrition insecurity can only slow progress toward poverty reduction. TABLE 2 Namibia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) e 218 f 219 f 22 f Real GDP growth, at constant market prices Private Consumption Government Consumption Gross Fixed Capital Investment Exports, Goods and Services Imports, Goods and Services Real GDP growth, at constant factor prices Agriculture Industry Services Inflation (Consumer Price Index) Current Account Balance (% of GDP) Financial and Capital Account (% of GDP) Net Foreign Direct Investment (% of GDP) Fiscal Balance (% of GDP) a Debt (% of GDP) Primary Balance (% of GDP) a International poverty rate ($1.9 in 211 PPP) b,c Lower middle-income poverty rate ($3.2 in 211 PPP) b,c Upper middle-income poverty rate ($5.5 in 211 PPP) b,c Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices. Notes: e = estimate, f = forecast. (a) Fiscal year starts from April 1st. (b) Calculations based on 23-NHIES and 29-NHIES. Nowcast: Forecast are from 218 to 22. (c) Projection using annualized elasticity (23-29) with pass-through = 1 based on GDP per capita in constant LCU. MPO 11 Apr 18

14 SOUTH AFRICA Table Population, million 56.6 GDP, current US$ billion GDP per capita, current US$ 6163 International poverty rate ($1.9) a 18.9 Lower middle-income poverty rate ($3.2) a 37.6 Upper middle-income poverty rate ($5.5) a 57.1 Gini coefficient a 63. Life expectancy at birth, years b 61.9 Source: WDI, M acro Poverty Outlook, and official data. Notes: (a) M ost recent value (214), 211 PPPs. (b) M ost recent WDI value (215) Confidence is up in South Africa and a cyclical rebound is expected to further lift GDP growth in 218. The new political leadership has stepped up efforts to fight corruption, further strengthen confidence, and relaunch the structural reform process to reduce poverty and inequality South Africa is still the most unequal country in the world. Recent developments The South African business cycle is expected to have bottomed out in 216, when the economy slowed to.6 percent (revised upwards by StatsSA from.3 percent). In 217, the economy grew at 1.3 percent, barely faster than the population but beating consensus. Growth in 217 was mainly driven by agriculture. Although the sector only accounts for under 3 percent of GDP, it recovered at a fast pace from an historical drought in 215/16, which continues to linger on in some parts of the country, including Cape Town. Mining also provided some support to growth due to relatively strong commodity prices. Other sectors have been weaker, although business cycle indicators suggest a pick-up in economic momentum. On the expenditure side, private consumption was the main driver of growth, partly supported by lower inflation. Exports contracted by.1 percent while imports grew by 1.9 percent. Investor sentiment has been low for years in South Africa, explaining low investment, including low FDI. Poverty increased significantly in the aftermath of the 28 global financial crisis and remains high for a middle-income country. Unemployment stood at 26.7 percent at the end of 217. The share of the population living below USD1.9 a day (in 211 PPP terms) increased from 16.5 percent in 211 to an estimated 19.3 percent in 217. And, with a GINI index of 63, South Africa has the highest level of income inequality in the world. In light of weak economic growth and low inflation expectations, the South African Reserve Bank took a more dovish policy stance and, in July 217, cut the policy rate by 25 basis points to 6.75 percent. Weak growth also contributed to poor fiscal revenue collection, which the government acknowledged in the October 217 Medium-Term Budget Policy Statement (MTBPS). In addition, the bailing-out of poorly performing State-Owned Enterprises put additional pressure on expenditures. The MTBPS did not announce new policy measures to address the fiscal slippages, thereby jeopardizing the longstanding debt stabilization target. This resulted in further downgrades in South Africa s credit rating, after Standard and Poors had already downgraded South African debt to sub-investment grade following a controversial cabinet reshuffle earlier in the year. The 218 Budget put the country on a stronger footing again. In early 218, the South African economy is off to a good start: the rand strengthened by 12 percent and business confidence indices are ticking up (Figure 1). A change in political leadership translated into immediate steps to tackle the erosion of institutional quality exposed in the Public Protector report on the State of Capture. The 218 Budget, tabled in February, reassured markets by restoring a commitment to debt-stabilization. While policy certainty is expected to strengthen in mining it weakened in agriculture after the ruling African National Congress (ANC) and opposition Economic Freedom FIGURE 1 South Africa / Business confidence in South Africa FIGURE 2 South Africa / Actual and projected poverty rates and real GDP per capita Index: 215= Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Poverty rate (%) GDP per capita (constant LCU) International poverty rate Lower middle-income pov. rate Upper middle-income pov. rate GDP pc Source: South African Chamber of Commerce and Industry. Source: World Bank. Notes: see table 2. MPO 12 Apr 18

15 Fighters voted to amend the Constitution to allow for expropriation without compensation to accelerate land reform. Outlook In light of StatsSA s GDP revisions as well as much improved confidence, the World Bank revised its 218 forecast from 1.1 percent to 1.4 percent. This estimate acknowledges that scope for structural reforms may be limited ahead of the 219 general elections, and relatively low prices for South Africa s commodities as projected by the World Bank. In addition, the 218 Budget introduced additional revenue measures (raising revenue-to-gdp by 1.1 percentage points) including higher VAT, likely slowing consumption. Potential growth is only estimated at 1.4 percent. South Africa is currently expected to close its output gap by 22. Rising per capita GDP is projected to bring poverty to 19. percent in 219 and 18.8 percent in 22), still 2.3 percentage points higher than the level seen in 21/11. Inflation is expected to remain benign, given low supply-side pressures and a relatively stable rand. Further monetary policy easing is possible in 218 and the medium term, which may provide support to credit extension, private investment and household consumption. South African exports will continue to be dominated by commodities and related products and, given commodity price forecasts, expectations on an export rebound are modest. Agribusiness products into Africa and cars may provide some stimulus to exports. Imports are expected to rise with stronger consumption and investment. Rising interest rates globally will help reduce the long-standing savingsinvestment imbalance. Overall, a current account deficit is expected around 2.2 percent of GDP. While FDI is expected to pick up, portfolio investment will remain an important source of financing for South Africa s external position. Risks and challenges In the short term, a key challenge is to keep the new confidence momentum. High market expectations for reform may be difficult to meet, especially ahead of the 219 elections. Notwithstanding the strong commitment to discipline SOEs, their contingent liabilities remain a fiscal risk in the short- to medium-term. The drought in the south of the country and the scarcity of water are putting pressure on people and businesses and eventually on the budget. The 218 Budget has demonstrated enough commitment to fiscal consolidation to avert a downgrade by Moody s to sub-investment grade in March. To boost South Africa s low growth potential and make a dent to the triple challenge, a new compact is required, as acknowledged by President Ramaphosa. From the World Bank Group s perspective, five priority constraints to be tackled were identified in the recent Systematic Country Diagnostic: (i) insufficient skills, (ii) the skewed distribution of land and productive assets and weak property rights; (iii) low competition and limited integration in regional and global value chains; (iv) limited or expensive connectivity and under-serviced historically disadvantaged settlements; and (v) C2 emissions and water insecurity. TABLE 2 South Africa / Macro poverty outlook indicators (annual percent change unless indicated otherwise) e 218 f 219 f 22 f Real GDP growth, at constant market prices Private Consumption Government Consumption Gross Fixed Capital Investment Exports, Goods and Services Imports, Goods and Services Real GDP growth, at constant factor prices Agriculture Industry Services Inflation (Consumer Price Index) Current Account Balance (% of GDP) Financial and Capital Account (% of GDP) Net Foreign Direct Investment (% of GDP) Fiscal Balance (% of GDP) Debt (% of GDP) Primary Balance (% of GDP) International poverty rate ($1.9 in 211 PPP) a,b Lower middle-income poverty rate ($3.2 in 211 PPP) a,b Upper middle-income poverty rate ($5.5 in 211 PPP) a,b Source: World Bank, Poverty & Equity and M acroeconomics, Trade & Investment Global Practices. Notes: e = estimate, f = forecast. (a) Calculations based on 214-LCS. Nowcast: Forecast are from 218 to 22. (b) Projection using neutral distribution (214) with pass-through =.87 based on GDP per capita in constant LCU. MPO 13 Apr 18