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Budget needs to address civil service and budget deficit

2019-02-28  Edgar Brandt

Budget needs to address civil service and budget deficit

WINDHOEK – With the date of the tabling of the national budget confirmed for Wednesday, 13 March, 2019, economists have pointed out the bloated wage bill, under-performing public enterprises, including a review of the public sector, and the budget deficit as some of the most crucial aspects that Finance Minister, Calle Schlettwein, needs to address. 

“Natural attrition does not address the real issue of a bloated civil service; trade unions demand salary increments for public sector employees and economic growth projections for 2019 do not indicate a reduction in the number of public servants. State of public enterprises and fiscal risks concerning their ability to repay debts (even public enterprises that are currently regarded as doing well could come under financial pressure); how to finance major infrastructure projects such as the expansion of the Hosea Kutako International Airport; how to reduce the budget deficit and public debts; what is being done to ensure that Namibia can repay the first Eurobond in two years,” economist Klaus Schade said these are some of the major aspects of the budget that Schlettwein needs to address. 

However, Schade cautioned that reducing the wage bill cannot be done in the short-term but needs a medium-term, coherent strategy. In addition, he suggests that the privatisation or partial privatisation of public enterprises could be considered. 

Schade, a research associate at the Economic Association of Namibia, further note that if domestic liquidity allows, borrowing locally should be prioritised as it excludes any exchange rate risk and it provides income locally in the form of interest payments. “Government could issue longer-term government bonds rather than short-term Treasury Bills to improve public debt management,” Schade recommended. 

Commenting on the budget deficit, Schade noted that there might not be sufficient liquidity in the local market which would force government to borrow abroad, if the budget deficit cannot be reduced. 

This borrowing in turn could increase the country’s budget deficit which would most likely result in Namibia being downgraded by sovereign rating agencies, which would increase the cost of borrowing and hence statutory expenditure. A downgrade, Schade cautioned, could prevent some foreign investors from investing in the country.

“In the current economic climate, it is certainly not advisable to increase taxes, except for the annual increase in excise duties which is decided at the Sacu level. Hence, government needs to focus on controlling expenditure including subsidies to public enterprises,” said Schade. 

He continued that Income Tax and Value Added Tax could come under pressure due to increased unemployment and hence reduced income and spending power. 

“Revenue from diamond royalties and income tax from diamond mining companies could come under pressure due to expected subdued demand for diamonds in the two major markets - China and USA.  Likewise, Sacu transfers could come under pressure because of sluggish economic growth in South Africa compounded by recent load shedding,” Schade concluded. 

Also weighing in on the expected budget, economist and Managing Director of Twilight Capital Consulting, Mally Likukela, pointed out that Schlettwein is navigating troubled waters, not of his own making. 

“I would rather have him push back the date for a balanced budget than continue to cut his way to one as doing so continues to hurt the economy as it is the case right now. This year, more than ever before, his budget speech, which is expected mostly to focus on debt reduction strategies, will undoubtedly trigger politically polarized debates,” said Likukela.

He emphasised that, currently standing at more than 45 percent, the public debt has become unsustainable and he expects this to soon cause bond yields (higher interest payments) to rise and in the worst case, lead to a loss of confidence in the government, as already hinted by various rating agencies such as Moody’s and Fitch. 
Then, to reduce fiscal deficits, Likukela suggests using a combination of policies at its disposal, but said a key factor is the timing of deficit reduction strategies. 

“If the country is already in recession, as is the case for Namibia, it is much more difficult to reduce the deficit because fiscal consolidation can simply worsen the economic situation leading to lower tax revenues. Continuing with fiscal consolidation right now will be self-defeating. The best way to reduce the budget deficit is to aim for positive economic growth, but in the long-term evaluate government spending commitments and reduce spending to sustainable levels,” said Likukela. 

2019-02-28  Edgar Brandt

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