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Namibia’s fiscal policy at a crossroads

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19 Mar 2019

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The Namibian economy is at a difficult juncture when it comes to its fiscal policy since the country’s independence in 1990, which has seen government debt and deficit levels rise significantly over the years reaching critical levels of 50% of the gross domestic product (GDP) exacerbated by weak economic recovery.

Economic experts have been pressuring the government to re‐evaluate its fiscal position, spending levels and core strategies to strike a balance between adopting massive fiscal adjustments to reduce debt but also calling for additional fiscal stimulus to grow the economy and alleviate poverty.

The recently published report entitled ‘Namibia’s Fiscal Policy Analysis’ by First Capital Treasury Solutions has described Namibia’s fiscal policy as being at a crossroads because of the total government debts accumulated over the past 29 years, inelastic, non-progressive and volatile government tax revenue and narrow tax base; rise in default risk by local authorities, private sector, state-owned enterprises (SOEs) and households that may need bailouts.

The report analysed current and past fiscal positions since 1990, breaking it down to the three presidencies of President Sam Nujoma (1990 to 2005), President Hifikepunye Pohamba (2005 to 2015) and President Hage Geingob (2015 to 2019).

First Capital pronounced national savings levels as very low to support government while chances of foreign borrowings were diminishing.

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy and corresponding strategy to the monetary policy through which a central bank influences a nation’s money supply.

It would appear that during the review period of President Pohamba (2005 to 2015), fiscal policy practice was at its best as Namibia enjoyed a surplus economy from 2006-2009, where government revenue rose substantially and expenditure was contained, while high government spending resulted in higher GDP growth.

According to First Capital, this fiscal stimulus was also influenced by the last five years of President Nujoma’s government, which saw Pohamba’s government inherited an economy growing at a peak of 12.3% in 2004.

“It can be concluded that under President Pohamba, fiscal policy in Namibia was expansionary with the aim of spurring economic growth and providing major infrastructure especially housing and road network,” read the report.

The report states that under Pohamba, higher average GDP growth of 5.6% compared to 4.1 during Nujoma’s presidency was achieved through high government spending, however, debt to GDP increased after reaching a low of 15% in 2009/10 to 24% at the end of his term in 2014/15.

Under Nujoma’s rule (1990 to 2005), the fiscal policy also showed some successes where GDP growth increased from an average of 1.1% (during the period 1981 to 1989) to an average growth of 4.1%, inflation and interest rate (repo rate) came down significantly (from 11 and 16) to 5 and 9%, respectively for the period 1990 to 2005.

While government expenditure rose, Nujoma’s government saw deficit as a percentage of GDP remains relatively low at an average of 3% of GDP, as per the report.

However, unemployment, poverty and income inequality remained stubbornly high due to the unchanged structure of the economy and limited and appropriate complementary policies.

In spite of that, his era is said to have achieved both macroeconomic stability objective, reduced the infrastructure backlog significantly especially in education and health through additional schools, clinics and hospitals built.

During the review of President Geingob (2015-2019), the incumbent president seems to have had the most hurdles to jump over as he inherited an economy slumping down as commodity prices declined, the mining sector contracted, agricultural sector slowed down and the economy was not generating enough revenue.

Geingob took over the economy in fiscal deficit at 6%, deficit to GDP rose significantly, government expenditure and revenue declined significantly and the economy entered recession in 2017/18.

“Unlike his predecessor who took over a booming economy and a government budget entering into a surplus, president Hage Geingob took over an economy with fiscal deficit at 6% while debt to GDP was at around 24%,” read the report.

Government revenue and expenditure increased from R1.6 and R2.2 billion respectively in 1990/91 to R56.7 and R65.0 billion respectively in 2018/19.

During Geingob’s rule, the fiscal policy stance moved from expansionary to contractionary mode and government expenditure re-prioritisation.

Both deficits to GDP and debt to GDP rose significantly under president Geingob with debt to GDP reaching 43% in 2018 and the only way to ensure the government continues to deliver services to the population was to borrow.

Since 2016/17, capital expenditure allocation has declined from 16% of total expenditure in 2015/16 to 11 and 8 % in 2016/17 and 2017/18 respectively.

The 2018/19 expenditure allocations also show that only 8% was allocated for capital expenditure, a trend to be maintained during the medium-term expenditure framework period ending 2020/21.

Over the past five years, nearly half (48%) of the budget was allocated for social expenditure, which includes education, health and welfare services, which shows that Namibia could be considered a welfare nation with high public spending, especially on education, health and transfer grants.

In spite of continuing economic uncertainties, there are signs that the Namibian economy will regain growth momentum and recover over the coming years, with a positive fiscal outlook projected for both deficit and debt to GDP projected to decline to below targeted levels, reads the report.

Local economic analyst, Klaus Schade said we would need other approaches to reduce the high wage bill, including a comprehensive review of the public sector, including offices, ministries, agencies and public enterprises.

“This would support First Capital’s call in the conclusions for increased efficiency and for maintaining current expenditure levels rather than increasing expenditure when revenue is starting to pick up again,” he added.

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