Budget Matters

The Minister of Finance, Ipumbu Shiimi, tabled

Namibia’s 2021/22 national budget on 17 March. His budget speech in parliament was entitled “Boosting Resilience and Recovery”, alluding to the present state of the Namibian economy and assessing the new financial year. After four long years of economic stagnation between 2016 and 2020, the COVID-19 pandemic and resultant economic turmoil plunged the Namibian economy into the deepest contraction since independence. Namibia’s real GDP is estimated to have contracted by 7.3% in 2020 and is not expected to reach 2019 levels of output before 2023. Even in 2023 real GDP will likely be lower than it was in 2015, eight years earlier. Thus, with the tabling of this budget there is much need for “Recovery” and prudent fiscal policy.

The 2021/22 national budget, thankfully, keeps the expenditure ceiling in check at roughly pre-pandemic levels. While ideally the government would have been in a position to raise this ceiling in order to stimulate economic recovery, a lack of fiscal restraint in previous years meant larger deficits and the accumulation of more government debt, something the government can ill afford after eight years of large deficits. Thus expenditure is far from stimulative at N$67.9 billion, i.e. N$4.16 billion less than in the 2020/21 fiscal year, and down by about N$600 million from 2019/20.

Government revenue for 2021/22 is expected to be N$52.07 billion, i.e. N$3.39 billion less than in the year ended March 2021 and N$6.36 billion less than in the 2019/20 fiscal year. In fact, government revenue peaked in 2017/18 at N$58.66 billion. Revenue contracting over four years is a clear indication of economic decay, more severe than stagnation. Revenue as a proportion of GDP declined from 34.2% in 2017/18 to an expected 28.2% in 2021/22, which is high by global standards but not when compared to Namibia’s expenditure profile.

The expected decline in revenue, coupled with inflated expenditure, means that the budget deficit for 2021/22 will be substantial yet again at N$15.9 billion, or 8.6% of GDP. This is down from last year’s deficit of 9.5% of GDP, but it is still one of the largest deficits on record. A substantial budget deficit needs to be funded of course, which means debt, and lots of it. The lack of fiscal restraint and reform in the previous ten years also means that there is already a large government debt stock that needs to be serviced and which makes new debt more expensive. Currently, government debt stands at N$109.5 billion, excluding the various guarantees that the government extends to public enterprises from time to time. This debt stock is expected to reach N$158.8 billion or 77.0% of GDP by the 2023/24 fiscal year which ends in March 2024. This debt costs more to service annually than the amount allocated to development in the coming year. And this growing debt burden causes some real concerns.

US President Herbert Hoover put it aptly when he said, “Blessed are the young, for they will inherit the national debt.” The Namibian debt burden, accumulated over the last eight years, is bordering on unsustainability and poses growing challenges, especially given that there is no end in sight to government’s reliance on debt. From a debt-to- GDP perspective, Namibia’s current level of around 63% is not that high by international standards. However, debtto-GDP is a very vague measure of fiscal sustainability. Of much greater importance are debt service costs. What does that N$109.5 billion cost annually and what must be sacrificed to pay those costs?

This new fiscal year will see the Namibian government pay around N$8.5 billion, or 16.3% of revenue, towards interest costs. That figure is expected to grow to N$9.8 billion, or 17.6% of revenue, by 2023/24. Thus the government will be spending a significant amount of the money it receives just on servicing debt. This obviously means that less tax revenue will be allocated to developmental projects aimed at increasing the productive capacity of the country. That, as president Hoover pointed out, should be particularly concerning to the youth who will need to generate the tax revenues necessary to service this debt in the future. And if the substantial budget commitments going forward are not spent on building Namibia’s balance sheet, and continue to be expensed on the income statement, then there will be even less government revenue to be allocated to the development of infrastructure. It is not hard to imagine where this spiral leads.

Thankfully, the budget is as conservative as is reasonably possible, meaning that the next few years may see upside surprises in terms of smaller than expected deficits and better budget allocations. It remains a bleak picture but there are signs that a lot of work has been done in the background to stabilise the expenditure profile and grow revenues. In terms of the work done by the minister of finance and his team, given the less than ideal starting point, there is reason to be optimistic and to believe that from a fiscal perspective the year may lead to improved “Resilience”.

Eric van Zyl is the head of research at IJG, an established Namibian financial services market leader. IJG believes in tailoring their services to a client’s personal and business needs. For more information, visit www.ijg.net.

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